(2)You drive up to one of those casinos in Oklahoma and decide to play the slot machines for fun. Wow!, you won $5 million !!!

The casino bosses first say "Congratulations!" Then they say: "Oh, btw, jackpots this large we only pay out in equal annual installments over five years."

You're not too happy about that but nothing you can do about it. So you take home a check for your first $1M and think happy thoughts about receiving another $1M every year for the next four years.

(a)What amount of gross income should you include on your tax return for the year of your win -

• $0?
• $1M?
• $5M?
• $1M plus the present value of the future $4M?

Explain and defend your answer.

(b)If, in Year 2, you sold your right to the remaining four installment payments for $3,000,000 cash, would you report that amount on your tax return as capital gain or as ordinary income, and why?