Abstract
In Long v. Commissioner, the Eleventh Circuit determined that the substitute for ordinary income doctrine was inapplicable to a situation in which the taxpayer had assigned his position as plaintiff in a lawsuit which he had won at trial but was being appealed. The article examines the methodologies advanced for determining when the doctrine should be utilized and evaluates the decision in Long in light of these theories.
The Eleventh Circuit correctly rejected the application of the doctrine in Long. The taxpayer had transferred a vertical slice of his property, i.e., he didn't retain a temporal interest in it. The right transferred was an appreciated equitable interest in property. Furthermore, he hadn't sold "the future right to earned income" but rather "the future right to earn income." By any reasonable methodology for determining if the substitute for ordinary income doctrine should apply, it is clear that in Long it shouldn't.
In general, the substitute for ordinary income doctrine should not be utilized in circumstances where there has been a transfer involving a vertical slice (in contrast with a horizontal slice) of an appreciated equitable interest in property conferring a future right to earn income (and not a future right to earned income). Where it is clear that the above criteria have been met, as was the case in Long, the government should generally eschew arguing for the doctrine's application.