Federal Tax Research 10th Edition by Steven Gill, Gerald Whittenburg, Roby Sawyers, Debra Sanders, William Raabe

Exercise 41

Phred Phortunate won his state lotto two years ago. His lotto ticket was worth $10 million, which was payable in 20 annual installments of $500,000 each. Phred paid $1 for the winning ticket. The lotto in Phred's state does not allow winners to receive their payout in a lump sum. Phred wanted all his money now, so he assigned his future lotto winnings to Happy Finance Company for a discounted price of $4.5 million. Assignment of lotto winnings is permitted by Phred's state lotto. Phred filed his tax return and reported the assignment of the lotto winnings as a capital gain ($4.5 million-$1 basis) taxable at a 15 percent rate.
After appropriate research to determine if Phred correctly reported his lotto winnings assignment, prepare (in good form) a research memorandum to the file. (See Chapter 2 for an illustration of the structure of a tax memo.) Then write a letter to Phred explaining your findings. His address is 2345 Ecstatic Street, White River Junction, VT 05001.