IN THE REGULAR DIVISION OF THE

OREGON TAX COURT

J. Michael MAGINNIS

and Janet Y. Maginnis

v.

DEPARTMENT OF REVENUE

(TC 4310)

In order to clarify the basis for its decision, which held that proceeds from the assignment of a state lottery prize are exempt, the court granted Defendant's Motion for Reconsideration. While maintaining its decision, the court also awarded attorney fees to Plaintiffs for expenses in connection with the motion for reconsideration.

Income taxation-Taxation of sales and prizes-Case law interpretation

1. Federal cases where taxpayers have purchased capital assets or investments from the government are not applicable to cases where taxpayers have been awarded a lottery prize.

Income taxation-Taxation of sales and prizes

2. It is presumed that the state exempted the prize from taxation in order to encourage the purchase of lottery tickets.

Income taxation-Taxable gain

3. Taxing the income of one who purchases a lottery prize to the extent that the gain is greater than the purchase price imposes no burden on the government and does not discourage anyone from playing the lottery.

Allowance of attorney fees and costs and disbursements

4. Although generally an attorney's overhead or expenses of operation are not recoverable as costs of prosecuting an action, to the extent that they are separately billed as part of the attorney's fee and directly associated with the case, they are recoverable as part of that fee.

Allowance of attorney fees and costs and disbursements

5. Because they vary so widely and create unacceptable consequences in the litigation process itself, those costs and disbursements associated with the case but not directly required by it are not recoverable; i.e., travel and meals, copies of documents, investigators, expert witnesses, and similar expenses.

Submitted on Defendant's (the department) Motion for Reconsideration.

Joseph J. Hanna, Jr., Hanna, Kerns & Strader, Portland, represented Plaintiffs (taxpayers).

Jerry Bronner, Assistant Attorney General, Department of Justice, represented Defendant (the department).

Decision affirming Plaintiffs' Motion for Summary Judgment rendered April 12, 1999.

CARL N. BYERS, Judge

This matter is before the court on Defendant's (the department) Motion for Reconsideration and Plaintiffs' (taxpayers) response thereto. After considering the department's arguments, the court finds it appropriate to clarify the basis for its decision.

The department contends that the amount taxpayers received from the sale of a lottery prize is taxable. As authority for this position, the department relies on federal cases dealing with exempt state and municipal bonds, primarily Willcuts v. Bunn, 282 US 216, 2 USTC ¶ 640 (1931). In that case, the court held that although interest on municipal bonds is tax exempt, the gain realized on the sale of those bonds is not exempt. The Supreme Court reasoned:

"The sale of the bonds by their owners, after they have been issued by the State or municipality, is a transaction distinct from the contracts made by the government in the bonds themselves, and the profits on such sales are in a different category of income from that of the interest payable on the bonds." Id. at 226.

In that case, the taxpayer was unable to show how a tax on gains realized from the sale of the bonds cast any burden on the government. The court pointed out that the statutory exemption from income tax was only for the interest paid by the government on the bonds. Other federal cases cited by the department are consistent with this view.

1. Those federal cases are not applicable here. Taxpayers purchasing government bonds are purchasing capital assets or investments. When those assets are disposed of in private transactions, they result in gain or loss that is recognized for income tax purposes. In contrast, taxpayers did not purchase the lottery prize. The prize was awarded. ORS 461.560(1) places the prize in the winner's hands entirely free of state and local taxes. Whatever the taxpayer holds and whatever its value, he holds it entirely exempt from taxation.

The department contends:

"ORS 461.560 exempts from taxation the lottery prize, consisting of the right to receive the twenty annual prize installments. When that right is transferred, the purchaser becomes entitled to the exemption." (Def's Motion for Reconsideration at 4.)

2. ORS 461.560 exempts only a prize "awarded," not a prize "purchased." The person or persons to whom the prize is awarded receives it exempt from taxation. This is consistent with the rationale of Willcuts in that the exemption looks to the relationship between the government and the person who purchased the lottery ticket. Presumably, the state exempted the prize in order to encourage people to purchase lottery tickets. Clearly, it did not exempt the prize in order to encourage people to purchase lottery prizes from prize winners.

3. The department errs in assuming the purchaser of the prize "becomes entitled to the exemption." (Def's Motion for Reconsideration at 4.) There is no reason or policy why the purchaser of a prize should be exempt. When someone purchases a lottery prize from a lottery prize winner, the transaction is between private parties. The purchaser obtains an asset. To the extent that the income or gain from that asset is greater than the purchase price, the purchaser has taxable income. Taxing that income imposes no burden on the government and does not discourage anyone from playing the lottery.

Having reconsidered its decision, the court finds it is appropriate to award taxpayers their reasonable attorney fees incurred in connection with the department's Motion for Reconsideration.

4. The department has also filed objections to taxpayers' proposed statement of costs on the grounds that computerized research, photocopies, postage, and "transerv exp" are not recoverable under TCR 68. Taxpayers' response asserts that such expenses are "reasonable and necessary expenses" incurred in prosecuting this case.

The department is correct in that expenses that are generally thought of as an attorney's overhead or expenses of operation are not recoverable as costs of prosecuting an action. However, as indicated by Robinowitz v. Pozzi, 127 Or App 464, 872 P2d 993 (1994), to the extent that such expenses are separately billed as part of the attorney's fee, they are recoverable as part of that fee. The costs and disbursements that TCR 68 contemplates are those directly associated with the case such as filing fees, statutory witness fees, and fees for the service or publication of summons. Other expenses that may be associated with prosecuting a case but not directly required by it, such as travel and meals, copies of documents, investigators and expert witnesses, and similar expenses, are not recoverable as costs and disbursements. It appears that these latter expenses can vary too widely and create an unacceptable consequence of the litigation process itself. See Johnson v. Dept. of Rev., 14 OTR 15 (1996).

In light of the above, the court will exercise its discretion and allow all of the claimed expenses as attorney fees to the extent that those expenses were separately accounted for and billed to the client as such. If they were not so billed, the court will allow only the filing fee. Taxpayer shall resubmit its cost bill in accordance with this ruling. Now, therefore,

IT IS ORDERED that Defendant's Motion for Reconsideration is granted, and

IT IS FURTHER ORDERED that the granting of Plaintiffs' Motion for Summary Judgment is affirmed and judgment will be issued in accordance therewith, and

IT IS FURTHER ORDERED that Plaintiffs shall recover reasonable attorney fees in connection with the filing of the Motion for Reconsideration and costs as set forth above.


1. All references to the Oregon Revised Statutes are to 1991.

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