1

RECOMMENDED FOR FULL-

Pursuant to Sixth Circ

ELECTRONIC CITATION: 2000 F

File Name: 00a0

UNITED STATES COU

FOR THE SIXTH 

____________

ROY V. THOMAS; ELOISE F.THOMAS,

Plaintiffs-Appellants,

v.

UNITED STATES OF AMERICA,

Defendant-Appellee.

Appeal from the United St

for the Southern District of 

No. 96-00369—Algenon L. M

Argued: April 2

Decided and Filed: M

Before: KENNEDY, SILER, and 

Judges.

____________

COUNSE

ARGUED: Arnold O. Zacks, Columbus, Ohio, for AppellantsDEPARTMENT OF JUSTICE, TAX DIVISION, WashingtonON BRIEF: Arnold O. Zacks, 
2 Thomas, et al. v. United States No. 99-3532

1Eloise Thomas is identified as a plaintiff in this action because she

filed a joint tax return with Roy Thomas.Columbus, Ohio, Nathan A. Durst, Columbus, Ohio, forAppellants. Paula K. Speck, Frank P. Cihlar, U.S.DEPARTMENT OF JUSTICE, APPELLATE SECTIONTAX DIVISION, Washington, D.C., for Appellee. 

_________________

OPINION

_________________

KENNEDY, Circuit Judge. Plaintiffs1, Roy V. Thomas and

Eloise F. Thomas, appeal the district court’s decision to grantsummary judgment in favor of the defendant, United States ofAmerica, in this tax refund action. Plaintiffs raise one issueon this appeal: (1) whether the district court erred indetermining that the plaintiffs’ lottery income did not fallwithin the economic benefit doctrine under 26 U.S.C. § 61.We believe that the district court was correct in finding thatthis doctrine did not apply; thus, we affirm the decision of thedistrict court.

I. Facts

On December 11, 1992, plaintiff Roy Thomas purchased

ten Ohio Super Lotto tickets at $1 each and selected the CashOption method of payment. The following evening, plaintiffwon the Super Lotto Jackpot prize pool when the six numberson one of the plaintiff’s tickets were drawn. The prize poolfor a cash option winner was worth $8,890,597. OnDecember 14, 1992, plaintiff presented his ticket to a lotteryemployee and received a receipt for a winning 6/6 SuperLotto ticket.

While the Ohio state lottery commission issued a news

release on December 14, 1992, declaring plaintiff as thewinner of the Super Lotto, it took approximately six weeks toprocess his claim. On January 4, 1993, the lottery produced

No. 99-3532 Thomas, e

lottery winners. Instead, all of theeither in the Gross Revenue Fund Fund. Should the commission becpay all of the claims made against iwould be entitled to the same prioron the monies in these funds. Pplaced in an irrevocable fund becclaims of other lottery winners. In Ptaxpayers had rights in the same futo a fixed sum in that fund that was the other taxpayers. Plaintiffs’ r“constructive trust” were subject to winners; therefore, the “constirrevocable.

We do not believe that the plain

in which they obtained an irrevoentitle them to apply the economiincome taxes. Because the plaintifare entitled to a tax refund we belwas correct in granting summary government.

III. Conclu

For the foregoing reasons, we a

district court.
10 Thomas, et al. v. United States No. 99-3532

7“An Ohio Administrative Code section is a further arm, extension,

or explanation of statutory intent implementing a statute passed by theGeneral Assembly. It has the force and effect of a statute itself.” Meyersv. Ohio State Lottery Comm’n, 517 N.E.2d 1029, 1031 (1986). 

8This requirement was satisfied six months after the state lottery

began operating, thus, the lottery winners have first priority to the fundsmaintained by the state lottery commission.

Section 3770:1-5-10(A) of the Ohio Administrative Code7

provides

The moneys in the lottery fund shall be appropriated inthe following order, and only for the following purposes:(1) repayment into the General Revenue Fund of theamount appropriated for the implementation of the Statelottery;8(2) payment of prize awards to holders of winning lotterytickets . . . (3) payment of expenses . . .(4) payment into the General Revenue Fund of all netrevenues.

Plaintiffs argue that this section establishes that lotterywinners have priority over the state’s other creditors, thus, thefund is protected from the state’s creditors. Although we donot agree with the plaintiffs’ contention that the economicbenefit doctrine applies even when the fund is subject to thepayor’s creditors, if the beneficiary is a senior creditor, ourresolution of that issue is not necessary because the fundremains subject to the payor’s creditors – other lotterywinners. Plaintiffs concede that state law does notdifferentiate among lottery winners in terms of priority to themonies in these funds, but plaintiffs assert that the economicbenefit doctrine does not require that a fund be established forthe sole benefit of a taxpayer, citing the fund in Pulsifer as an

example. The Pulsifer court applied the doctrine to a fundmaintained for the benefit of three minors. 64 T.C. at 246.The “fund” in this case differs significantly from the oneconsidered in Pulsifer. Because this fund is a “constructivetrust” it is not separated from the “trusts” belonging to other

No. 99-3532 Thomas, ea pay ticket with respect to plaintifa warrant to the plaintiff, the claims and summary voucher to the Offic[“OBM”] for approval. The OBM monies were available in the staclaim and transferred the summary to prepare a warrant for the paymeplaintiff. Plaintiff presented this wNational City Bank on January 28

Plaintiffs filed joint income tax 

using the cash receipts and daccounting. They reported the grosticket on their 1993 tax return. On filed an administrative claim for a income should have been repacknowledged that if their claim wobligated to pay the tax in 1992 and due on their 1992 tax liability wo1993 tax refund resulting in a totaIRS denied their claim. On Aprithis complaint in district court requtaxes paid for the calendar year of the district court granted the gsummary judgment, denied the summary judgment, and dismissed Plaintiffs timely appeal. 

II. Discuss

This court reviews a district 

summary judgment de novo. ThAmerica, 166 F.3d 825, 828 (6th Cthe district court’s decision if wmaterial factual disputes and that thto judgment as a matter of law. SThe moving party has the burden of no genuine issues of material fCatrett, 477 U.S. 317, 322-23, 10L.Ed.2d 265 (1986), and we mus
4 Thomas, et al. v. United States No. 99-3532

2In 1993, Congress instituted higher tax rates for taxpayers with

income over $250,000.light most favorable to the non-moving party. See Adickes v.S.H. Kress & Co., 398 U.S. 144, 157, 90 S.Ct. 1598, 1608, 26L.Ed.2d 142 (1970). Both parties agree that there are noissues of material fact; therefore, we can resolve this case bydetermining whether the economic benefit doctrine isapplicable. Because the plaintiffs have not proven that theyqualify for a tax refund we affirm the judgment of the districtcourt.

Plaintiffs report their income for federal income tax

purposes under the cash receipts and disbursements methodof accounting. See 26 U.S.C. § 446(c)(1). Under thismethod, they report income in the year of receipt and deductexpenses in the year of payment. See 26 U.S.C. § 451 (a).

While the plaintiffs did not receive their lottery winnings until1993, they argue that the winnings constituted income in1992.2 Plaintiffs’ argument in support of their contention that

they are entitled to a refund for income taxes paid in 1993 isbased on the economic benefit doctrine. The economicbenefit doctrine was developed in response to the use ofdeferred compensation plans for employees. See Sproull v.

Commissioner, 16 T.C. 244 (1951), aff’d per curiam, 194F.2d 541 (6th Cir. 1952). It was intended “to include intaxable income any economic or financial benefit conferredon the employee as compensation, whatever the form or modeby which it is effected.” Commissioner v. Smith, 324 U.S177, 181, 65 S.Ct. 591, 593, 89 L.Ed. 830 (1945). Thedoctrine provides for the taxation of financial benefits that are(1) fixed; (2) located in an irrevocable fund; and (3) notsubject to the payor’s debtors. See Sproull, 16 T.C. at 247-48.“It is based on the theory that the promise to pay deferredcompensation in the future in and of itself under certaincircumstances may constitute an economic benefit or theequivalent of cash to be taxed currently at present value, if itcan be valued currently with some exactness.” McDonald,

No. 99-3532 Thomas, e

had not completed the verificatconfirm that the plaintiffs were the jackpot. This verification procesplaintiffs’ receipt of the lottery completed this verification proceentitled to the monetary award. Acorrect in saying that the owner of had an absolute right to the award oclaim, the issue before the court is an absolute right to the award. Becwere not considered to be the ownticket until the state completed its did not have an absolute right to plaintiffs received no present finanaward until 1993; therefore, they abased on the economic benefit doc

Plaintiffs’ “constructive trust” ar

the economic benefit doctrine besecure from the claims of the traditional cases where courts habenefit doctrine, this case does nfunds to a third party and beyond creditors. See, eg., Anastasio v. C

817 (1977); Pulsifer, 64 T.C. at 2448. Plaintiffs argue that the dotransfer to a third party, but instepayor relinquish control over the fthat state law governs the use of thelottery commission’s use of these numerous provisions of Ohio law winners’ awards should be paid froRevenue Fund and/or the State LoOhio Rev Code. § 3770.06(A); se

§ 3770:1-5-10. These same provisifor the payment of the state’s crWhile plaintiffs are correct in therestricts the use of these funds, sufficient to secure the plaintiffs’ winners.
8 Thomas, et al. v. United States No. 99-3532

6The government contends that the plaintiffs, in their administrative

challenge to the IRS’s refusal to award them a refund, argued that theirwinnings were maintained in the State Lottery Gross Revenue Fund whichconstituted the irrevocable fund to which the doctrine should be applied.Before the district court, the plaintiffs asserted that the fund was theamount of the lottery award generated from the sales of tickets for theSuper Lotto drawing of December 12, 1992. The government argues thatthe plaintiffs waived their right to argue that the Lottery Fund and/or the“prize pool” constitute an irrevocable fund because the plaintiffs did notraise these claims in the administrative proceeding. See Salyersville Nat’lBank v. United States, 613 F.2d 650, 651 (6th Cir. 1980). In response tothis variance defense, the plaintiffs state that the government waived itsright to assert this defense by its failure to raise it before the district court.See id.; see also Tucker v. Alexander, 275 U.S. 228, 230-31, 48 S.Ct. 45,46, 72 L.Ed. 253 (1927). Because we believe the plaintiffs’ argument

fails regardless of which fund this court attributes the plaintiffs’ award wedo not think it is necessary to resolve this issue.

Plaintiffs argue that this trust was created in the State LotteryGross Revenue Fund and then transferred to the State LotteryOperating Fund from which the plaintiffs were paid. It is tothis “constructive trust” that the plaintiffs believe this courtshould apply the elements of the economic benefit doctrine.Even if we accept the plaintiffs’ definition of the fund,6 we do

not believe they have shown that the economic benefitdoctrine applies. The plaintiffs cannot establish that they hadan irrevocable right to this fund or that this fund was notsubject to the lottery’s creditors.

The “constructive trust” fund fails to satisfy the economic

benefit doctrine because the plaintiffs’ right to the monies inthis fund was contingent as of the end of 1992. Plaintiffscontend that once they filed their claim as the owners of thewinning lottery ticket, they had done all that was necessaryfor them to be entitled to the lottery award; therefore, as ofDecember 14, 1992, they received a present financial benefitfrom their lottery award. Contingency, however, does notturn simply on the taxpayer’s action. Rather, to satisfy thiselement of the doctrine the plaintiffs must show that theirreceipt of the award was conditioned only upon the passageof time. See Stiles v. Commissioner, 69 T.C. 558, 569 (1978).This, they cannot do. As of the end of 1992, the commission

No. 99-3532 Thomas, e

Deferred Compensation: ConceptRev. 201, 204 (1969).

In Pulsifer v. Commissioner, 64 

court extended this doctrine to sPulsifer, the court held that three Irish lottery were taxable in the yedeposited with the court. Id. at 247were not entitled to lottery winniage of majority. Pending the winnings were placed in a fund aThe taxpayers argued that they shon these winnings until they receivof majority. Id. at 246. The court deconomic benefit doctrine was app

[u]nder the economic-benefit thecash receipts and disbursements currently taxable on the economderived from the absolute right ta fund which has been irrevocatrust and is beyond the reach of 

Id. The court found that the lottery irrevocable trust for the benefit osubject to the lottery’s creditors. Icourt held that it was appropriate year in which the fund was created an economic benefit on the minor

In analyzing whether the plaint

refund based on the economic becourt considered whether the plainelements of the doctrine: (1) the exmoney has been placed; (2) that is ireach of creditors; (3) in which trights to the money, with receipt passage of time. The district couwere not entitled to the applicatiodoctrine because the lottery award 
6 Thomas, et al. v. United States No. 99-3532

3Lottery awards are funded by a portion of the ticket sales for each

week’s lottery drawing. The winning ticket number is announced onSaturday evening. The following Tuesday, the revenue generated byticket sales from the previous week is swept into a Gross Revenue Fundwhich is separate from the state treasury. From this fund, the commissionpays smaller cash lottery prizes and certain lottery expenses, such ascredits to banks and commissions to licensed sales agents. The next day,the remaining moneys in the Gross Revenue Fund are transferred to thestate treasury. For bookkeeping purposes, the lottery monies areaccounted for in three funds: the Lottery Operating Fund, the DeferredPrizes Fund, and the Unclaimed Prizes Fund. elements of the doctrine. We believe that the district court’sanalysis was correct.

The primary difficulty with this case is the identification of

the fund in which the plaintiffs claim to have an irrevocableright. In their administrative claim, the IRS construed theplaintiffs’ claim as contending that they were entitled to applythe economic benefit doctrine to their lottery winningsbecause the State Lottery Gross Revenue Fund3 constituted

the fund in which they had an irrevocable right to a fixed sum.The Gross Revenue fund is a custodial account, which isunder the control of the State Treasurer but not part of theState Treasury, and its assets are not commingled with theassets of the State Treasury. See Ohio Rev. Code§ 3770.06(A). It is funded by the transfer of monies fromlottery sales agents. See Ohio Admin. Code § 3770:1-4-04.Plaintiffs stated that once they claimed their prize onDecember 14, 1992, they had an unconditional entitlement tothe fixed sum of $8,980,597 maintained in this fund. Becausethis fund was a custodial fund and separate from the state’sother accounts, plaintiffs argued that it was not subject to thestate’s general creditors. Plaintiffs contended that this fundsatisfies all the elements of the economic benefit doctrine;therefore, they were entitled to a tax refund.

We agree with the IRS that if the plaintiffs’ claim is

identified as an irrevocable right to money contained in theGross Revenue fund, it must fail because the plaintiffs’ lotteryaward was not funded by the State Lottery Gross Revenue

No. 99-3532 Thomas, e

4The commission pays awards gr

because it is required to deduct withholdinU.S.C. § 3402(q).

5In addition, this argument fails beca

state’s creditors. Although this fund is saccount and not subject to the state’s genestate’s lottery creditors. Ohio law providshould be used to pay not only lottery wbonuses, commissions, and reimbursem

§ 3770.06(A). The agents are state creditthe reach of the payor’s creditors. Also, uGross Revenue Fund does not set forth Any right the plaintiffs had to the monies subject to the claims of the other crediagents, and the plaintiffs did not have prio

Fund. The commission requires t$5,000 be paid from warrants issuand Management from the state general revenue account.4 This vopayment from the Lottery OperatiOhio General Revenue Fund. The distinct bank account separate frFund bank account. The plaintiffpayment for their award from ththerefore, the argument that this fuwhich the plaintiffs’ lottery winninwhich they received a present persuasive.5

The plaintiffs, however, state t

construe their claim as an entitlemin the Gross Revenue Fund or any state. Instead, plaintiffs argue tharight to a fixed sum, the amount of a “constructive trust” maintained trust was funded by the ticket sdrawing on December 12, 1992, that they gained an irrevocable rigpresented the winning ticket o