1RECOMMENDED FOR FULL-TEXT PUBLICATIONPursuant to Sixth Circuit Rule 206ELECTRONIC CITATION: 2000 FED App. 0179P (6th Cir.)File Name: 00a0179p.06UNITED STATES COURT OF APPEALSFOR THE SIXTH CIRCUIT_________________ROYV.THOMAS;ELOISEF.THOMAS,Plaintiffs-Appellants,v.UNITEDSTATES OFAMERICA,Defendant-Appellee.;>1No. 99-3532Appeal from the United States District Courtfor the Southern District of Ohio at Columbus.No. 96-00369—Algenon L. Marbley, District Judge.Argued: April 27, 2000Decided and Filed: May 26, 2000Before: KENNEDY, SILER, and BATCHELDER, CircuitJudges._________________COUNSELARGUED:Arnold O. Zacks, ZACKS LAW GROUP,Columbus, Ohio, for Appellants. Paula K. Speck, U.S.DEPARTMENT OF JUSTICE, APPELLATE SECTIONTAX DIVISION, Washington, D.C., for Appellee.ON BRIEF:Arnold O. Zacks, ZACKS LAW GROUP,2Thomas, et al. v. United StatesNo. 99-35321Eloise Thomas is identified as a plaintiff in this action because shefiled 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 andEloise 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. FactsOn December 11, 1992, plaintiff Roy Thomas purchasedten 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 newsrelease 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 producedNo. 99-3532Thomas, et al. v. United States11lottery winners. Instead, all of these funds are commingled,either in the Gross Revenue Fund or the Lottery OperatingFund. Should the commission become financially unable topay all of the claims made against it, all of the lottery winnerswould be entitled to the same priority in making their claimson the monies in these funds. Plaintiffs’ award was notplaced in an irrevocable fund because it was subject to theclaims of other lottery winners. InPulsifer, although the threetaxpayers had rights in the same fund, they were each entitledto a fixed sum in that fund that was not subject to the rights ofthe other taxpayers. Plaintiffs’ rights to the money in the“constructive trust” were subject to the rights of other lotterywinners; therefore, the “constructive trust” was notirrevocable.We do not believe that the plaintiffs have identified a fundin which they obtained an irrevocable right which wouldentitle them to apply the economic benefit doctrine to theirincome taxes. Because the plaintiffs have not shown that theyare entitled to a tax refund we believe that the district courtwas correct in granting summary judgment in favor of thegovernment.III. ConclusionFor the foregoing reasons, we affirm the judgment of thedistrict court.10Thomas, et al. v. United StatesNo. 99-35327“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 lotterybegan 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 Code7providesThe 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 inPulsiferas anexample. ThePulsifercourt 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 inPulsifer. Because this fund is a “constructivetrust” it is not separated from the “trusts” belonging to otherNo. 99-3532Thomas, et al. v. United States3a pay ticket with respect to plaintiff’s claim. Prior to issuinga warrant to the plaintiff, the claims department sent a pay-listand summary voucher to the Office of Budget Management[“OBM”] for approval. The OBM confirmed that sufficientmonies were available in the state lottery fund to pay theclaim and transferred the summary to the office of the Auditorto prepare a warrant for the payment of the funds owed to theplaintiff. Plaintiff presented this warrant for payment to theNational City Bank on January 28, 1993.Plaintiffs filed joint income tax returns for 1992 and 1993using the cash receipts and disbursements method ofaccounting. They reported the gross winnings on their lotteryticket on their 1993 tax return. On December 27, 1994, theyfiled an administrative claim for a refund contending that theincome should have been reported in 1992. Theyacknowledged that if their claim was allowed they would beobligated to pay the tax in 1992 and that the taxes and interestdue on their 1992 tax liability would be offset against their1993 tax refund resulting in a total refund of $778,496. TheIRS denied their claim. On April 12, 1996, plaintiffs filedthis complaint in district court requesting a refund of incometaxes paid for the calendar year of 1993. On March 30, 1999,the district court granted the government’s motion forsummary judgment, denied the plaintiffs’ motion forsummary judgment, and dismissed the plaintiffs’ complaint.Plaintiffs timely appeal.II. DiscussionThis court reviews a district court’s decision to grantsummary judgment de novo.Thomas v. United States ofAmerica, 166 F.3d 825, 828 (6th Cir. 1999). We will affirmthe district court’s decision if we find that there are nomaterial factual disputes and that the United States is entitledto judgment as a matter of law.SeeFed. R. Civ. P. 56(c).The moving party has the burden of establishing that there areno genuine issues of material fact,see Celotex Corp. v.Catrett, 477 U.S. 317, 322-23, 106 S.Ct. 2548, 2552-53, 91L.Ed.2d 265 (1986), and we must view all evidence in the4Thomas, et al. v. United StatesNo. 99-35322In 1993, Congress instituted higher tax rates for taxpayers withincome 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 taxpurposes under the cash receipts and disbursements methodof accounting.See26 U.S.C. § 446(c)(1). Under thismethod, they report income in the year of receipt and deductexpenses in the year of payment.See26 U.S.C. § 451 (a).While the plaintiffs did not receive their lottery winnings until1993, they argue that the winnings constituted income in1992.2Plaintiffs’ argument in support of their contention thatthey 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.SeeSproull 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. 99-3532Thomas, et al. v. United States9had not completed the verification process necessary toconfirm that the plaintiffs were the winners of the Super Lottojackpot. This verification process was a condition on theplaintiffs’ receipt of the lottery award. Until the statecompleted this verification process, the plaintiffs were notentitled to the monetary award. Although the plaintiffs arecorrect in saying that the owner of the winning lottery tickethad an absolute right to the award once the individual filed hisclaim, the issue before the court is whether the taxpayer hadan absolute right to the award. Because the plaintiff taxpayerswere not considered to be the owners of the winning lotteryticket until the state completed its verification process theydid not have an absolute right to the award in 1992. Theplaintiffs received no present financial benefit from the lotteryaward until 1993; therefore, they are not entitled to a refundbased on the economic benefit doctrine.Plaintiffs’ “constructive trust” argument also fails to satisfythe economic benefit doctrine because the award was notsecure from the claims of the state’s creditors. Unliketraditional cases where courts have applied the economicbenefit doctrine, this case does not involve the transfer offunds to a third party and beyond the reach of the payor’screditors.See, eg., Anastasio v. Commissioner, 67 T.C. 814,817 (1977);Pulsifer, 64 T.C. at 247;Sproull,16 T.C. at 247-48. Plaintiffs argue that the doctrine does not require atransfer to a third party, but instead, only requires that thepayor relinquish control over the funds. The plaintiffs assertthat state law governs the use of these monies and restricts thelottery commission’s use of these funds. Plaintiffs point tonumerous provisions of Ohio law which state that lotterywinners’ awards should be paid from the State Lottery GrossRevenue Fund and/or the State Lottery Operating Fund.SeeOhio Rev Code. § 3770.06(A);see alsoOhio Admin. Code§ 3770:1-5-10. These same provisions, however, also providefor the payment of the state’s creditors from these funds.While plaintiffs are correct in their assertion that state lawrestricts the use of these funds, these restrictions are notsufficient to secure the plaintiffs’ award from other lotterywinners.8Thomas, et al. v. United StatesNo. 99-35326The government contends that the plaintiffs, in their administrativechallenge 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’ argumentfails 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,6we donot 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 economicbenefit 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 commissionNo. 99-3532Thomas, et al. v. United States5Deferred Compensation: Conceptual Astigmatism, 24 Tax L.Rev. 201, 204 (1969).InPulsifer v. Commissioner, 64 T.C. 245 (1975), the taxcourt extended this doctrine to sweepstakes winnings. InPulsifer, the court held that three minors’ winnings from anIrish lottery were taxable in the year in which the funds weredeposited with the court.Id. at 247. Under Irish law, minorswere not entitled to lottery winnings until they reached theage of majority. Pending the minors’ majority, thesewinnings were placed in a fund administered by the court.The taxpayers argued that they should not have to pay taxeson these winnings until they received the winnings at the ageof majority.Id. at 246. The court disagreed and held that theeconomic benefit doctrine was applicable. The court stated[u]nder the economic-benefit theory, an individual on thecash receipts and disbursements method of accounting iscurrently taxable on the economic and financial benefitderived from the absolute right to income in the form ofa fund which has been irrevocably set aside for him intrust and is beyond the reach of the payor’s debtors.Id. The court found that the lottery winnings were held in anirrevocable trust for the benefit of the minors that was notsubject to the lottery’s creditors. In these circumstances, thecourt held that it was appropriate to tax the winnings in theyear in which the fund was created because the fund conferredan economic benefit on the minors.Id. at 247.In analyzing whether the plaintiffs were entitled to a taxrefund based on the economic benefit doctrine, the districtcourt considered whether the plaintiffs had satisfied the threeelements of the doctrine: (1) the existence of a fund in whichmoney has been placed; (2) that is irrevocable and beyond thereach of creditors; (3) in which the beneficiary has vestedrights to the money, with receipt conditioned only on thepassage of time. The district court held that the plaintiffswere not entitled to the application of the economic benefitdoctrine because the lottery award did not satisfy any of the6Thomas, et al. v. United StatesNo. 99-35323Lottery awards are funded by a portion of the ticket sales for eachweek’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 ofthe 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 Fund3constitutedthe 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.SeeOhio Rev. Code§ 3770.06(A). It is funded by the transfer of monies fromlottery sales agents.SeeOhio 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 isidentified 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 RevenueNo. 99-3532Thomas, et al. v. United States74The commission pays awards greater than $5,000 by warrantbecause it is required to deduct withholding taxes for these prizes.See26U.S.C. § 3402(q).5In addition, this argument fails because this fund was subject to thestate’s creditors. Although this fund is separate from the state’s generalaccount and not subject to the state’s general creditors, it is subject to thestate’s lottery creditors. Ohio law provides that the Gross Revenue Fundshould be used to pay not only lottery winners, but also sales agents’bonuses, commissions, and reimbursements.SeeOhio Rev. Code§ 3770.06(A). The agents are state creditors, thus, the fund is not beyondthe reach of the payor’s creditors. Also, unlike the State Lottery Fund, theGross Revenue Fund does not set forth a priority order for payments.Any right the plaintiffs had to the monies in the Gross Revenue Fund wassubject to the claims of the other creditors, lottery winners and salesagents, and the plaintiffs did not have priority over any of these creditors.Fund. The commission requires that all lottery awards over$5,000 be paid from warrants issued by the Office of Budgetand Management from the state lottery fund in the state’sgeneral revenue account.4This voucher entitles the owner topayment from the Lottery Operating Fund maintained in theOhio General Revenue Fund. The Gross Revenue Fund is adistinct bank account separate from the General RevenueFund bank account. The plaintiffs could not have receivedpayment for their award from the Gross Revenue Fund;therefore, the argument that this fund constitutes the fund inwhich the plaintiffs’ lottery winnings were maintained and inwhich they received a present economic benefit is notpersuasive.5The plaintiffs, however, state that this court should notconstrue their claim as an entitlement to monies maintainedin the Gross Revenue Fund or any other fund defined by thestate. Instead, plaintiffs argue that they have an irrevocableright to a fixed sum, the amount of their lottery award, held ina “constructive trust” maintained by the state of Ohio. Thistrust was funded by the ticket sales for the Super Lottodrawing on December 12, 1992, and the plaintiffs contendthat they gained an irrevocable right to the award when theypresented the winning ticket on December 14, 1992.