Use Certified Mail With The IRS

I am looking at Baldwin v U.S., at least as much as I can between the September and October 15^th due dates.

In the blog equivalence of cinematic foreboding, the case comes out of the Ninth Circuit.

The Baldwins filed a 2007 joint tax return showing an approximate $2.5 million loss from a movie production business.

They filed to carry the loss back to 2005 for a refund.

They had three years to file the refund claim. The three years started with the filing of their 2007 return – that is, the year that showed the loss. They filed their 2007 return on extension, so three years later would be October 15, 2011.

They filed the refund claim on June 21, 2011.

Seems plenty of time.

They filed using regular mail.

The IRS said they never received the refund claim.

Problem.

The three years expired. Sorry about your luck, Baldwins, purred the IRS.

You know this went to court.

It went to a California district court.

And we get to talk about the mailbox rule.

There is a provision in the tax Code that timely-mailing-equals-timely filing with the IRS. That is the reason you hear (not as much now in the era of electronic filing) of people heading to the post office on April 15^th. Folks want to get that “April 15” stamped on the envelope, as that stamp means the return is considered timely filed with the IRS.

By the way, that provision did not enter the Code until 1954.

What did folks do before 1954?

They relied on common law.

Common law allows one to presume that a properly-mailed envelope will arrive in the ordinary time required to get from here to there. One would have to prove that one mailed the envelope, of course, but once that was done the presumption that the mail arrived in normal time would kick-in.

In 1954 Congress added the following:

§ 7502 Timely mailing treated as timely filing and paying.

(a)  General rule.

(1)  Date of delivery.

If any return, claim, statement, or other document required to be filed, or any payment required to be made, within a prescribed period or on or before a prescribed date under authority of any provision of the internal revenue laws is, after such period or such date, delivered by United States mail to the agency, officer, or office with which such return, claim, statement, or other document is required to be filed, or to which such payment is required to be made, the date of the United States postmark stamped on the cover in which such return, claim, statement, or other document, or payment, is mailed shall be deemed to be the date of delivery or the date of payment, as the case may be.

Section (c) is important here:

(c)  Registered and certified mailing; electronic filing.

(1)  Registered mail.

For purposes of this section , if any return, claim, statement, or other document, or payment, is sent by United States registered mail-

(A)  such registration shall be prima facie evidence that the return, claim, statement, or other document was delivered to the agency, officer, or office to which addressed; and

(B)  the date of registration shall be deemed the postmark date.

Section (c) is why accountants encourage the use of certified mail with tax returns.

But the Baldwins did not certify their mailing.

They instead argued that they met the common-law standard for timely filing.

Seems a solid argument.

The IRS went low.

There are Court cases out there (Anderson, for example) that decided that the common law standard continued to exist even after the codification of Section 7502. It makes sense – at least to me - as that is what common law means.

The IRS argued that Section 7502 did away with the common-law standard, and the cases deciding otherwise were decided erroneously.

Sounds like a truckload of fine-cut bull manure to me.

Let’s load the truck.

There was a case in 1984 called Chevron. From it came the Chevron doctrine, an administrative law principle that a government agency’s interpretation of an ambiguous or unclear statute should be respected by a court.

I get the concept.

The first thing the agency has to do is show that the statute is ambiguous or unclear.

Does Section 7502 appear ambiguous or unclear to you?

We are going to need a jump to get this truck going.

Let’s introduce National Cable & Telecommunications Association v Brand X. That case has to do with the internet and whether it is an information service or a telecommunication service.

Sounds boring.

Let’s look at the Ninth Circuit’s take-away from Brand X:

But [a] court’s prior judicial construction of a statute trumps an agency construction otherwise entitled to Chevron deference only if the prior court decision holds that its construction follows from the unambiguous terms of the statute and thus leaves no room for agency discretion.”

Let me translate that word salad:

Since the prior Court decisions (let’s use Anderson as an example) did not specifically say that the statute was unambiguous, the statute is therefore ambiguous.

Huh?

So, if I do not make clear that I am not a Robert Howard sword-and-sorcery, skilled, powerful and fearless giant weapon-wielding barbarian, then it can be deduced that I am that very said barbarian?

Cool!

Brand X lets me say that Section 7502 is ambiguous, at which point Chevron kicks-in and allows me to argue that the underlying statute means anything I want it to say.

There is an aisle for this at Borders. It is called “Fiction.”

The Baldwins did not get to rely on common-law. Since they could not meet requirements of Section 7502(c), they lost out altogether. No carryback refund for them.

Excess Business Loss Problems

To a tax accountant, October 15 signifies the extended due date for individual tax returns.

As a generalization, our most complicated returns go on extension. There is a reason: it is likely that the information necessary to prepare the return is not yet available. For example, you are waiting on a Schedule K-1 from a partnership, LLC or S corporation. That K-1 might not be prepared until after April 15. There is only so much work an office of accountants can generate within 75 days, irrespective of government diktats.

More recently I am also seeing personal returns being extended because we are expecting a broker’s information report to be revised and perhaps revised again. It happens repetitively.

Let’s talk about a new twist for 2018 personal returns. There are a few twists, actually, but let’s focus on the “excess business loss” rule.

First, this applies only to noncorporate taxpayers. As noncorporate taxpayers, that could be you or me.

Its purpose is to stop you or me from claiming losses past a certain amount.

Now think about this for a moment.

Go out there, sign a sports contract for big bucks and Uncle Sam is draped all over you like a childhood best friend.

Get booted from the league, however, and you get a very different response.

How can losses happen?

Easy. Let me give you an example. We represent a sizeable contractor. The swing in their numbers from year-to-year can gray your hair. When times are good, they are virtually printing money. When times are bad, it feels like they are taking-on the national debt.

I presume one does not even know the meaning of risk if one wants to be an owner there.

To me, fairness requires that the tax law share in my misery when I am losing money if it also wants me to cooperatively send taxes when I am making money. Call me old-fashioned that way.

The “excess business loss” rule is not concerned with old-fashioned fairness.

Let’s use some numbers to make sense of this.

          Dividends                      100,000

 Capital gains                  400,000

          Schedule K-1                (600,000)

The concept is that you can offset a business loss against nonbusiness income, but only up to a point. That point is $250,000 if you are nonmarried and twice that if you are. Using the above numbers, we have:

 Dividends                       100,000

          Capital gains                  400,000

          Schedule K-1                (600,000)

                                                   (100,000)

          Excess business loss     100,000

         

Interest, dividends and capital gains are the classic nonbusiness income categories. You are allowed to offset $500,000 of nonbusiness income (assuming married) but you are showing $600,000 of business losses. The excess business loss rule will magically adjust $100,000 into your income tax return to get the numbers to work.

It is like a Penn and Teller show.

Let’s tweak our example:

Wages                            100,000

Dividends                       100,000

         Capital gains                  400,000

         Schedule K-1                (600,000)

What now? Do you get to include that W-2 as part of your business income, meaning that you no longer have a $100,000 excess business loss?

Believe it or not, tax professionals are not certain.

Here is what sets up the issue:

The Joint Committee of Taxation published its “Bluebook” describing Congress’ intention when drafting the Tax Cuts and Jobs Act. In it, the JCT states that “an excess business loss … does not take into account gross income, or gains or deductions attributable to the trade or business of performing services as an employee.”        

The “trade or business of performing services as an employee” is fancy talk for wages and salaries.

However, the IRS came out with a shiny new tax form for the excess business loss calculation. The instructions indicate that one should add-up all business income, including wages and tips.

We have two different answers.

Let’s get nerdy, as it matters here.

Elsewhere in the Code, we also have a new 20% deduction for “qualified business income.” The Code has to define “business income,” as that is the way tax law works. The Code does so by explicitly excluding the trade or business of “being an employee.”

There is a concept of statutory construction that comes into play. If one Code section has to EXPLICITLY exclude wages (that is, the trade or business of being an employee), then it is reasonably presumable that business income includes wages.

Which means foul when another Code section pops up and says “No, it does not.”

Of course, no one will know for certain until a court decides.

Or Congress defies all reasonable expectations and actually works rather than enable the Dunning-Kruger psychopaths currently housed there.

Why does this “excess business loss” Code section even exist?

Think $150 billion in taxes over 10 years. That is why.

To be fair, the excess is not lost. It carries over to the following year as a net operating loss.

That probably means little if you have just lost your shirt and I am calling you to make an extension payment on April 15 – you know, because of that “excess business loss” thing.

Meanwhile tax professionals have to march on. We cannot wait. After all, those noncorporate returns are due October 15.

A Horse Activity And Owning A Horse

Her story has been out there for a while.

I did a quick search and found that she appeared before the Tax Court in 2013. She was back in 2015 and now again in 2019.

Her name is Denise Celeste McMillan (McMillan), and she has to do with horses.

In the tax world, horses have to do with hobby losses.

Let’s take a moment on what that term means.

Let’s say that you take on a side gig. It is arguable how serious you are about the gig, but there is no argument that you are losing money doing it.

And you keep losing money … year after year.

The first thing you or I would ask is: why? The second question would be: how are you affording to do this?

There you have the two issues at the heart of a hobby loss challenge:

(1) Are you running your gig as a business? If the gig is lagging, a business owner would do something: market more effectively, swap-out products offered for sale, move to another location with better traffic, maybe even close the business and try something else.

(2) How can you afford this? Maybe you sold your business for huge bucks and are now following your lifelong dream of collecting every Ukrainian comic title printed from the 1950s through the 1970s. It is not a lucrative business, but it has a loyal following. You can afford to live the dream because of that big-bucks thing.

McMillan definitely loves horses. She started riding at age four and started formal lessons at age nine. She won numerous awards. She started a specialized business, taking difficult horses on consignment. She would retrain them and later sell them at a profit.

Sounds interesting.

She normally kept between one and six horses.

The more the better, methinks.

She went through a difficult stretch (ten years) owning just own horse (Goldrush).  Goldrush had issues and did not compete, show or breed.

Not good.

In 2007 she sent Goldrush to Australia to stand at stud.

That should get the revenues going again, hopefully.

In 2008 and two months after arriving in Australia, Goldrush died.

Wow.

I guess she will have to get another horse or few and restart.

She did not.

What she did however is keep deducting horse-related expenses.

And now we have her third trip to Tax Court.

She says she has a business.

The IRS says she does not.

What do you think?

Here is the Court:

We believe Ms. McMillan when she says that she’s been continuously involved with horses since the 1970s. But her last horse died in 2008, at which point she hadn’t shown or bred in a decade. We therefore find that if her horse activity was ever a trade or business, that trade or business ended before 2010, and in that year she was at most looking at starting anew.”

The Court is being diplomatic here. It is saying that her previous activity had ended, but perhaps another had taken its place.

So the question is: had she started a new activity after the death of Goldrush?

Remember that in tax-speak, an activity requires “regular and continuous” involvement. It does not have to be a 24/7 thing, but it does have to be more than “someday isle” dreamweaving over beers with a friend.

Ms. McMillan’s ‘horse breeding/showing’ business hadn’t actually commenced or resumed by the end of 2010.”        

Guess not. The best she could get would be start-up expenses, to be deducted over time once that business in fact started.

The moral of story seems clear: if you want to say that you are in the horse business, you may want to own a horse.

Dog The Bounty Hunter And The IRS

The IRS has a form just to inform them that you moved.

Many, many years ago I was asked why this form existed, as the IRS would automatically update its files when you filed your next tax return.

After decades of practice, I have a very good idea why this form exists.

Let’s talk about Duane Chapman, whom you may know as Dog the Bounty Hunter. You may also remember that his wife – Beth – recently passed away from throat cancer.

The series Dog the Bounty Hunter aired from 2003 to 2012; the show took Duane and Beth to Hawaii and Colorado.

In 2012 the IRS was looking at their 2006 and 2007 tax returns.

COMMENT: You may be wondering why the statute did not close on the tax returns after 3 years. The IRS will – especially if there is complexity to the return – usually ask one to extend the statute period. I tend to accept such requests, as the alternative is for the IRS to disallow everything and issue a Notice of Deficiency before the statute expires.

Let’s highlight several dates.

Duane and Beth used their CPA’s address for their 2010 tax return.

Their favorite accountant left that CPA firm to start his own. Duane and Beth followed.

Duane and Beth then used this CPA’s new address for their 2011 return.

We therefore have two addresses in Los Angeles.

Mind you, the television show was in Honolulu.

And they also had a home in Colorado.

It was 2012 and the IRS was preparing a Notice of Deficiency, also known as the 90-day letter.  One has 90 days to appeal to the Tax Court.

The IRS was required to send the Notice to their “last known address.”

That presents a problem.

What address do you use?

The Appeals Officer had an IRS employee search for addresses, but eventually he sent copies of the Notice to both CPAs in Los Angeles.

The story now goes wonky.

The old CPA received the Notice but did not see fit to forward it to Duane and Beth, or at least to place a call or send an e-mail to either – you know, for old time’s sake.

I am thinking he may want to contact his insurance carrier, just in case.

The new CPA said he never received the Notice, but Post Office records show that it had been delivered. What makes this doubly peculiar is that the CPA had previously contacted the Appeals Officer explaining that he would soon be filing a power of attorney. And he did – but after delay and after the Officer had closed the file.

I am thinking he may want to contact his insurance carrier also.

The IRS assessed taxes, interest and penalties.

Duane and Beth challenged whether the IRS used their last known address. If the IRS did not, then the Notice of Deficiency was not properly served and any tax or penalty could not be reduced to assessment. Both parties would be back to square one.

Duane and Beth argued that any IRS notice should have gone to their address in Hawaii, as that is where they were. The IRS knew that the Los Angeles addresses were for their CPAs and not for them personally.

The Court had to address the meaning of “last known address.”

And it means pretty much what you would think.

The last known address was for their old CPA. The IRS had extended a courtesy by sending a copy to the new CPA, especially considering his delay in sending a power of attorney. Granted, the IRS knew – or should have known – that they were in Hawaii, but that is not what “last known address” means.

The taxpayer decides that address. By filing a return. Or by filing that change-of-address form noted at the beginning of this post.

Duane and Beth had decided it would be their CPA’s address.

They had filed with the Tax Court long after 90 days had expired.

So their filing was dismissed as untimely.

Our case this time was Chapman v Commissioner, TC Memo 2019-110.

The IRS Does Not Believe You Made A Loan

The issue came up here at command center this past week. It is worth discussing, as the issue is repetitive and – if the IRS aims it your way – the results can be brutal.

We are talking about loans.

More specifically, loans to/from yourself and among companies you own.

What’s the big deal, right? It is all your money.

Yep, it’s your money. What it might not be, however, is a loan.

Let’s walk through the story of James Polvony.

In 1996 he joined his wife’s company, Archetone Limited (Limited) as a 49% owner. Limited was a general contractor.

In 2002 he started his own company, Povolny Group (PG). PG was a real estate brokerage.

The real estate market died in 2008. Povolny was looking for other sources of income.

He won a bid to build a hospital for the Algerian Ministry of Health.

He formed another company, Archetone International LLC (LLC), for this purpose.

The Algerian job required a bank guaranty. This created an issue, as the best he could obtain was a line of credit from Wells Fargo. He took that line of credit to a UK bank and got a guarantee, but he still had to collateralize the US bank. He did this by borrowing and moving monies around his three companies.

The Algerian government stopped paying him. Why? While the job was for the Algerian government, it was being funded by a non-Algerian third party. This third party wanted a cut of the action. Povolny did not go along, and – shockingly – progress payments, and then actual job progress, ceased.

The deal was put together using borrowed money, so things started unravelling quickly.

International was drowning. Povolny had Limited pay approximately $241,000 of International’s debts.

PG also loaned International and Limited approximately $70 grand. PG initially showed this amount as a loan, but PG amended its return to show the amount as “Cost of Goods Sold.”

COMMENT: PG was making money. Cost of goods sold is a deduction, whereas a loan is not, at least not until it becomes uncollectible. I can see the allure of another deduction on a profitable tax return. Still, to amend a return for this reason strikes me as aggressive.

Limited also deducted its $241 grand, not as cost-of-goods-sold but as a bad-debt deduction.

Let’s regroup here for a moment.

• Povolny moved approximately $311 grand among his companies, and
• He deducted the whole thing using one description or another.

This caught the IRS’ attention.

Why?

Because it matters how Polvony moved monies around.

A loan can result in a bad debt deduction.

A capital contribution cannot. Granted, you may have a capital loss somewhere down the road, but that loss happens when you finally shut down the company or otherwise dispose of your stock or ownership interest.

Timing is a BIG deal in this area.

If you want the IRS to respect your assertion of a loan, then be prepared to show the incidents of a loan, such as:

• A written note
• An interest rate
• A maturity date
• Repayment schedule
• Recourse if the debtor does not perform (think collateral)

Think of yourself as SunTrust or Fifth Third Bank making a loan and you will get the idea.

The Court made short work of Povolny:

·       The $241 thousand loan did not have a written note, no maturity date and no required interest payments.

·       Ditto for the $70 grand.

The Court did not find the commercially routine attributes of debt, so it decided that there was no debt.

Povolny was moving his own capital around.

He as much said so when he said that he “didn’t see the merit” in creating written notes, interest rates and repayment terms.

The Polvony case is not remarkable. It happens all the time. What it does, however, is to tentpole how important it is to follow commercially customary banking procedures when moving monies among related companies.

But is it all your money, isn’t it?

Yep, it is. Be lax and the IRS will take you at your word and figure you are just moving your own capital around.

And there is no bad debt deduction on capital.

Our case this time was Povolny Group, Incorporated et al v Commissioner, TC Memo 2018-37.

A BallPark Tax

I am a general tax practitioner, but even within that I set limits. There are certain types of work that I won’t do, if I do not do enough of it to (a) keep the technical issues somewhat fresh in my mind and (b) warrant the time it would require to remain current.

Staying current is a necessity. The tax landscape is littered with landmines.

For example, did you know there is a tax to pay for Nationals Park, the home to the Washington Nationals baseball team?

I am not talking about a sales tax or a fee when you buy a ticket to the game.

No, I mean that you have to file a return and pay yet another tax.

That strikes me as cra-cra.

At least the tax excludes business with gross receipts of less than $5 million sourced to the District of Columbia.

That should protect virtually all if not all of my clients. I might have a contractor go over, depending on where their jobs are located in any given year.

Except ….

Let’s go to the word “source.”

Chances are you think of “source” as actually being there. You have an office or a storefront in the District. You send in a construction work crew from Missouri. Maybe you send in a delivery truck from Maryland or Virginia.

I can work with that.

I am reading that the District now says that “source” includes revenues from services delivered to customers in the District, irrespective where the services are actually performed.

Huh?

What does that mean?

If I structure a business transaction for someone in D.C., am I expected to file and pay that ballpark tax? I am nowhere near D.C. I should at least get a courtesy tour of the stadium. And a free hot dog. And pretzel.

COMMENT: My case is a bad example. I have never invoiced a single client $5 million in my career. If I had, I might now be the Retired Cincinnati Tax Guy.

I can better understand the concept when discussing tangible property. I can see it being packaged and shipped; I can slip a barcode on it. There is some tie to reality.

The concept begins to slip when discussing services. What if the company has offices in multiple cities?  What if I make telephone calls and send e-mails to different locations? What if a key company person I am working with in turn works remotely? What if the Browns go to the Super Bowl?

The game de jour with state (and District) taxation is creative dismemberment of the definition of nexus.

Nexus means that one has sufficient ties to and connection with a state (or District) to allow the state (or District) to impose its taxation. New York cannot tax you just because you watched an episode of Friends. For many years it meant that one had a location there. If not a location, then perhaps one had an employee there, or kept inventory, or maybe sent trucks into the state for deliveries. There was something – or someone – tangible which served as the hook to drag one within the state’s power to tax.

That definition doesn’t work in an economy with Netflix, however.

The Wayfair decision changed the definition. Nexus now means that one has sales into the state exceeding a certain dollar threshold.

While that definition works with Netflix, it can lead to absurd results in other contexts. For example, I recently purchased a watch from Denmark. Let’s say that enough people in Kentucky like and purchase the same or a similar watch. Technically, that means the Danish company would have a Kentucky tax filing requirement, barring some miraculous escape under a treaty or the like.

What do you think the odds are that a chartered accountant in Denmark would have a clue that Kentucky expects him/her to file a Kentucky tax return?

Let’s go back to what D.C. did. They took nexus. They redefined nexus to mean sales into the District.  They redefined it again to include the sale of services provided by an out-of-District service provider.

This, folks, is bad tax law.

And a tax accident waiting to happen.

You Sell Your Lottery Winnings

I was looking at a case where someone won the New York State Lottery.

I could have worse issues, methinks.

But there was a tax issue that is worth talking about.

Let’s say you won $17.5 million in the lottery.

You elect to receive it 26 years.

          QUESTION: How is this going to be taxed?

Easy enough: the tax Code considers lottery proceeds to be the same as gambling income. It will be taxed the same as a W-2 or an IRA distribution. You will pay ordinary tax rates. You will probably be maxing the tax rates, truthfully.

Let’s say you collected for three years and then sold the remaining amounts-to-be-received for $7.1 million.

          QUESTION: How is this going to be taxed?

I see what you are doing. You are hoping to get that $7.1 million taxed at a capital gains rate.

You googled the definition of a capital asset and find the following:

            § 1221 Capital asset defined.

(a)  In general.

For purposes of this subtitle, the term "capital asset" means property held by the taxpayer (whether or not connected with his trade or business), but does not include-

(1)  stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year, or property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business;

(2) property, used in his trade or business, of a character which is subject to the allowance for depreciation provided in section 167 , or real property used in his trade or business;

(3) a patent, invention, model or design (whether or not patented), a secret formula or process, a copyright, a literary, musical, or artistic composition, a letter or memorandum, or similar property, held by-

(A)  a taxpayer whose personal efforts created such property,

(B)  in the case of a letter, memorandum, or similar property, a taxpayer for whom such property was prepared or produced, or

(C)  a taxpayer in whose hands the basis of such property is determined, for purposes of determining gain from a sale or exchange, in whole or part by reference to the basis of such property in the hands of a taxpayer described in subparagraph (A) or (B) ;

(4) accounts or notes receivable acquired in the ordinary course of trade or business for services rendered or from the sale of property described in paragraph (1) ;

(5) a publication of the United States Government (including the Congressional Record) which is received from the United States Government or any agency thereof, other than by purchase at the price at which it is offered for sale to the public, and which is held by-

(A)  a taxpayer who so received such publication, or

(B)  a taxpayer in whose hands the basis of such publication is determined, for purposes of determining gain from a sale or exchange, in whole or in part by reference to the basis of such publication in the hands of a taxpayer described in subparagraph (A) ;

(6) any commodities derivative financial instrument held by a commodities derivatives dealer, unless-

(A)  it is established to the satisfaction of the Secretary that such instrument has no connection to the activities of such dealer as a dealer, and

(B)  such instrument is clearly identified in such dealer's records as being described in subparagraph (A) before the close of the day on which it was acquired, originated, or entered into (or such other time as the Secretary may by regulations prescribe);

(7) any hedging transaction which is clearly identified as such before the close of the day on which it was acquired, originated, or entered into (or such other time as the Secretary may by regulations prescribe); or

(8) supplies of a type regularly used or consumed by the taxpayer in the ordinary course of a trade or business of the taxpayer.

Did you notice how this Code section is worded: a capital asset is property that is not …?

You don’t see anything there that looks like your lottery, and you are thinking maybe you have a capital asset. The sale of a capital asset gets one to capital gains tax, right?

You call me with your tax insight and planning.

If tax practice were only that easy.

You see, over the years the Courts have developed doctrines to fill-in the gaps in statutory Code language.

We have spoken of several doctrines before. One was the Cohan rule, named after George Cohan, who showed up at a tax audit long on deductions and short on supporting documentation.  The Court nonetheless allowed estimates for many of his expenses, reasoning that the Court knew he had incurred expenses and it would be unreasonable to allow nothing because of inadequate paperwork.

Congress felt that the Cohan rule could lead to abuses when it came to certain expenses such as meals, entertainment and travel. That is how Code section 274(d) came to be: as the anti-Cohan rule for selected expense types. No documentation means no deduction under Sec 274(d).

Back to our capital gains.

Look at the following language:

We do not see here any conversion of a capital investment. The lump sum consideration seems essentially a substitute for what would otherwise be received at a future time as ordinary income."

The substance of what was assigned was the right to receive future income. The substance of what was received was the present value of income which the recipient would otherwise obtain in the future. In short, consideration was paid for the right to receive future income, not for an increase in the value of the income-producing property."

This is from the Commissioner v PG Lake case in 1958.

The Court is describing what has come to be referred to as the “substitute for ordinary income” doctrine.

The easiest example is when you receive money right now for a future payment or series of future payments that would be treated as ordinary income when received.

Like a series of future lottery payments.

Mind you, there are limits on this doctrine. For example, one could argue that the value of a common stock is equal to its expected stream of future cash payments, whether as dividends or in liquidation. When looked at in such light, does that mean that the sale of stock today would be ordinary and not capital gain income?

The tax nerds would argue that it is not the same. You do not have the right to those future dividends until the company declares them, for example. Contrast that to a lottery that someone has already begun collecting. There is nothing left to do in that case but to wait for the mailman to come with your check.

I get the difference.

In our example the taxpayer got to pay ordinary tax rates on her $7.1 million. The Court relied on the “substitute for ordinary income” doctrine and a case from before many of us were born.

Our case this time was Prebola v Commissioner, TC Memo 2006-240.