Roy V. Thomas; Eloise F. Thomas v. United States of America

1
RECOMMENDED FOR FULL-TEXT PUBLICATION
Pursuant to Sixth Circuit Rule 206
ELECTRONIC CITATION: 2000 FED App. 0179P (6th Cir.)
File Name: 00a0179p.06
UNITED STATES COURT OF APPEALS
FOR THE SIXTH CIRCUIT
_________________
R OY V. THOMAS; ELOISE F.
THOMAS,
Plaintiffs-Appellants,
v.
UNITED S TATES OF AMERICA ,
Defendant-Appellee.
;>

1
No. 99-3532
Appeal from the United States District Court
for the Southern District of Ohio at Columbus.
No. 96-00369—Algenon L. Marbley, District Judge.
Argued: April 27, 2000
Decided and Filed: May 26, 2000
Before: KENNEDY, SILER, and BATCHELDER, Circuit
Judges.
_________________
COUNSEL
ARGUED: Arnold O. Zacks, ZACKS LAW GROUP,
Columbus, Ohio, for Appellants. Paula K. Speck, U.S.
DEPARTMENT OF JUSTICE, APPELLATE SECTION
TAX DIVISION, Washington, D.C., for Appellee.
ON BRIEF: Arnold O. Zacks, ZACKS LAW GROUP,

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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, for
Appellants. Paula K. Speck, Frank P. Cihlar, U.S.
DEPARTMENT OF JUSTICE, APPELLATE SECTION
TAX 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 grant
summary judgment in favor of the defendant, United States of
America, in this tax refund action. Plaintiffs raise one issue
on this appeal: (1) whether the district court erred in
determining that the plaintiffs’ lottery income did not fall
within the economic benefit doctrine under 26 U.S.C. § 61.
We believe that the district court was correct in finding that
this doctrine did not apply; thus, we affirm the decision of the
district court.
I. Facts
On December 11, 1992, plaintiff Roy Thomas purchased
ten Ohio Super Lotto tickets at $1 each and selected the Cash
Option method of payment. The following evening, plaintiff
won the Super Lotto Jackpot prize pool when the six numbers
on one of the plaintiff’s tickets were drawn. The prize pool
for a cash option winner was worth $8,890,597. On
December 14, 1992, plaintiff presented his ticket to a lottery
employee and received a receipt for a winning 6/6 Super
Lotto ticket.
While the Ohio state lottery commission issued a news
release on December 14, 1992, declaring plaintiff as the
winner of the Super Lotto, it took approximately six weeks to
process his claim. On January 4, 1993, the lottery produced
No. 99-3532 Thomas, et al. v. United States 11
lottery winners. Instead, all of these funds are commingled,
either in the Gross Revenue Fund or the Lottery Operating
Fund. Should the commission become financially unable to
pay all of the claims made against it, all of the lottery winners
would be entitled to the same priority in making their claims
on the monies in these funds. Plaintiffs’ award was not
placed in an irrevocable fund because it was subject to the
claims of other lottery winners. In Pulsifer, although the three
taxpayers had rights in the same fund, they were each entitled
to a fixed sum in that fund that was not subject to the rights of
the other taxpayers. Plaintiffs’ rights to the money in the
“constructive trust” were subject to the rights of other lottery
winners; therefore, the “constructive trust” was not
irrevocable.
We do not believe that the plaintiffs have identified a fund
in which they obtained an irrevocable right which would
entitle them to apply the economic benefit doctrine to their
income taxes. Because the plaintiffs have not shown that they
are entitled to a tax refund we believe that the district court
was correct in granting summary judgment in favor of the
government.
III. Conclusion
For the foregoing reasons, we affirm the judgment of the
district court.

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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 the
General Assembly. It has the force and effect of a statute itself.” Meyers
v. 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 funds
maintained 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 in
the following order, and only for the following purposes:
(1) repayment into the General Revenue Fund of the
amount appropriated for the implementation of the State
lottery;8
(2) payment of prize awards to holders of winning lottery
tickets . . .
(3) payment of expenses . . .
(4) payment into the General Revenue Fund of all net
revenues.
Plaintiffs argue that this section establishes that lottery
winners have priority over the state’s other creditors, thus, the
fund is protected from the state’s creditors. Although we do
not agree with the plaintiffs’ contention that the economic
benefit doctrine applies even when the fund is subject to the
payor’s creditors, if the beneficiary is a senior creditor, our
resolution of that issue is not necessary because the fund
remains subject to the payor’s creditors – other lottery
winners. Plaintiffs concede that state law does not
differentiate among lottery winners in terms of priority to the
monies in these funds, but plaintiffs assert that the economic
benefit doctrine does not require that a fund be established for
the sole benefit of a taxpayer, citing the fund in Pulsifer as an
example. The Pulsifer court applied the doctrine to a fund
maintained for the benefit of three minors. 64 T.C. at 246.
The “fund” in this case differs significantly from the one
considered in Pulsifer. Because this fund is a “constructive
trust” it is not separated from the “trusts” belonging to other
No. 99-3532 Thomas, et al. v. United States 3
a pay ticket with respect to plaintiff’s claim. Prior to issuing
a warrant to the plaintiff, the claims department sent a pay-list
and summary voucher to the Office of Budget Management
[“OBM”] for approval. The OBM confirmed that sufficient
monies were available in the state lottery fund to pay the
claim and transferred the summary to the office of the Auditor
to prepare a warrant for the payment of the funds owed to the
plaintiff. Plaintiff presented this warrant for payment to the
National City Bank on January 28, 1993.
Plaintiffs filed joint income tax returns for 1992 and 1993
using the cash receipts and disbursements method of
accounting. They reported the gross winnings on their lottery
ticket on their 1993 tax return. On December 27, 1994, they
filed an administrative claim for a refund contending that the
income should have been reported in 1992. They
acknowledged that if their claim was allowed they would be
obligated to pay the tax in 1992 and that the taxes and interest
due on their 1992 tax liability would be offset against their
1993 tax refund resulting in a total refund of $778,496. The
IRS denied their claim. On April 12, 1996, plaintiffs filed
this complaint in district court requesting a refund of income
taxes paid for the calendar year of 1993. On March 30, 1999,
the district court granted the government’s motion for
summary judgment, denied the plaintiffs’ motion for
summary judgment, and dismissed the plaintiffs’ complaint.
Plaintiffs timely appeal.
II. Discussion
This court reviews a district court’s decision to grant
summary judgment de novo. Thomas v. United States of
America, 166 F.3d 825, 828 (6th Cir. 1999). We will affirm
the district court’s decision if we find that there are no
material factual disputes and that the United States is entitled
to judgment as a matter of law. See Fed. R. Civ. P. 56(c).
The moving party has the burden of establishing that there are
no genuine issues of material fact, see Celotex Corp. v.
Catrett, 477 U.S. 317, 322-23, 106 S.Ct. 2548, 2552-53, 91
L.Ed.2d 265 (1986), and we must view all evidence in the

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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, 26
L.Ed.2d 142 (1970). Both parties agree that there are no
issues of material fact; therefore, we can resolve this case by
determining whether the economic benefit doctrine is
applicable. Because the plaintiffs have not proven that they
qualify for a tax refund we affirm the judgment of the district
court.
Plaintiffs report their income for federal income tax
purposes under the cash receipts and disbursements method
of accounting. See 26 U.S.C. § 446(c)(1). Under this
method, they report income in the year of receipt and deduct
expenses in the year of payment. See 26 U.S.C. § 451 (a).
While the plaintiffs did not receive their lottery winnings until
1993, they argue that the winnings constituted income in
1992.2 Plaintiffs’ argument in support of their contention that
they are entitled to a refund for income taxes paid in 1993 is
based on the economic benefit doctrine. The economic
benefit doctrine was developed in response to the use of
deferred compensation plans for employees. See Sproull v.
Commissioner, 16 T.C. 244 (1951), aff’d per curiam, 194
F.2d 541 (6th Cir. 1952). It was intended “to include in
taxable income any economic or financial benefit conferred
on the employee as compensation, whatever the form or mode
by which it is effected.” Commissioner v. Smith, 324 U.S
177, 181, 65 S.Ct. 591, 593, 89 L.Ed. 830 (1945). The
doctrine provides for the taxation of financial benefits that are
(1) fixed; (2) located in an irrevocable fund; and (3) not
subject to the payor’s debtors. See Sproull, 16 T.C. at 247-48.
“It is based on the theory that the promise to pay deferred
compensation in the future in and of itself under certain
circumstances may constitute an economic benefit or the
equivalent of cash to be taxed currently at present value, if it
can be valued currently with some exactness.” McDonald,
No. 99-3532 Thomas, et al. v. United States 9
had not completed the verification process necessary to
confirm that the plaintiffs were the winners of the Super Lotto
jackpot. This verification process was a condition on the
plaintiffs’ receipt of the lottery award. Until the state
completed this verification process, the plaintiffs were not
entitled to the monetary award. Although the plaintiffs are
correct in saying that the owner of the winning lottery ticket
had an absolute right to the award once the individual filed his
claim, the issue before the court is whether the taxpayer had
an absolute right to the award. Because the plaintiff taxpayers
were not considered to be the owners of the winning lottery
ticket until the state completed its verification process they
did not have an absolute right to the award in 1992. The
plaintiffs received no present financial benefit from the lottery
award until 1993; therefore, they are not entitled to a refund
based on the economic benefit doctrine.
Plaintiffs’ “constructive trust” argument also fails to satisfy
the economic benefit doctrine because the award was not
secure from the claims of the state’s creditors. Unlike
traditional cases where courts have applied the economic
benefit doctrine, this case does not involve the transfer of
funds to a third party and beyond the reach of the payor’s
creditors. 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 a
transfer to a third party, but instead, only requires that the
payor relinquish control over the funds. The plaintiffs assert
that state law governs the use of these monies and restricts the
lottery commission’s use of these funds. Plaintiffs point to
numerous provisions of Ohio law which state that lottery
winners’ awards should be paid from the State Lottery Gross
Revenue Fund and/or the State Lottery Operating Fund. See
Ohio Rev Code. § 3770.06(A); see also Ohio Admin. Code
§ 3770:1-5-10. These same provisions, however, also provide
for the payment of the state’s creditors from these funds.
While plaintiffs are correct in their assertion that state law
restricts the use of these funds, these restrictions are not
sufficient to secure the plaintiffs’ award from other lottery
winners.

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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 their
winnings were maintained in the State Lottery Gross Revenue Fund which
constituted the irrevocable fund to which the doctrine should be applied.
Before the district court, the plaintiffs asserted that the fund was the
amount of the lottery award generated from the sales of tickets for the
Super Lotto drawing of December 12, 1992. The government argues that
the plaintiffs waived their right to argue that the Lottery Fund and/or the
“prize pool” constitute an irrevocable fund because the plaintiffs did not
raise these claims in the administrative proceeding. See Salyersville Nat’l
Bank v. United States, 613 F.2d 650, 651 (6th Cir. 1980). In response to
this variance defense, the plaintiffs state that the government waived its
right 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 we
do not think it is necessary to resolve this issue.
Plaintiffs argue that this trust was created in the State Lottery
Gross Revenue Fund and then transferred to the State Lottery
Operating Fund from which the plaintiffs were paid. It is to
this “constructive trust” that the plaintiffs believe this court
should 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 benefit
doctrine applies. The plaintiffs cannot establish that they had
an irrevocable right to this fund or that this fund was not
subject to the lottery’s creditors.
The “constructive trust” fund fails to satisfy the economic
benefit doctrine because the plaintiffs’ right to the monies in
this fund was contingent as of the end of 1992. Plaintiffs
contend that once they filed their claim as the owners of the
winning lottery ticket, they had done all that was necessary
for them to be entitled to the lottery award; therefore, as of
December 14, 1992, they received a present financial benefit
from their lottery award. Contingency, however, does not
turn simply on the taxpayer’s action. Rather, to satisfy this
element of the doctrine the plaintiffs must show that their
receipt of the award was conditioned only upon the passage
of 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, et al. v. United States 5
Deferred Compensation: Conceptual Astigmatism, 24 Tax L.
Rev. 201, 204 (1969).
In Pulsifer v. Commissioner, 64 T.C. 245 (1975), the tax
court extended this doctrine to sweepstakes winnings. In
Pulsifer, the court held that three minors’ winnings from an
Irish lottery were taxable in the year in which the funds were
deposited with the court. Id. at 247. Under Irish law, minors
were not entitled to lottery winnings until they reached the
age of majority. Pending the minors’ majority, these
winnings were placed in a fund administered by the court.
The taxpayers argued that they should not have to pay taxes
on these winnings until they received the winnings at the age
of majority. Id. at 246. The court disagreed and held that the
economic benefit doctrine was applicable. The court stated
[u]nder the economic-benefit theory, an individual on the
cash receipts and disbursements method of accounting is
currently taxable on the economic and financial benefit
derived from the absolute right to income in the form of
a fund which has been irrevocably set aside for him in
trust and is beyond the reach of the payor’s debtors.
Id. The court found that the lottery winnings were held in an
irrevocable trust for the benefit of the minors that was not
subject to the lottery’s creditors. In these circumstances, the
court held that it was appropriate to tax the winnings in the
year in which the fund was created because the fund conferred
an economic benefit on the minors. Id. at 247.
In analyzing whether the plaintiffs were entitled to a tax
refund based on the economic benefit doctrine, the district
court considered whether the plaintiffs had satisfied the three
elements of the doctrine: (1) the existence of a fund in which
money has been placed; (2) that is irrevocable and beyond the
reach of creditors; (3) in which the beneficiary has vested
rights to the money, with receipt conditioned only on the
passage of time. The district court held that the plaintiffs
were not entitled to the application of the economic benefit
doctrine because the lottery award did not satisfy any of the

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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 on
Saturday evening. The following Tuesday, the revenue generated by
ticket sales from the previous week is swept into a Gross Revenue Fund
which is separate from the state treasury. From this fund, the commission
pays smaller cash lottery prizes and certain lottery expenses, such as
credits to banks and commissions to licensed sales agents. The next day,
the remaining moneys in the Gross Revenue Fund are transferred to the
state treasury. For bookkeeping purposes, the lottery monies are
accounted for in three funds: the Lottery Operating Fund, the Deferred
Prizes Fund, and the Unclaimed Prizes Fund.
elements of the doctrine. We believe that the district court’s
analysis was correct.
The primary difficulty with this case is the identification of
the fund in which the plaintiffs claim to have an irrevocable
right. In their administrative claim, the IRS construed the
plaintiffs’ claim as contending that they were entitled to apply
the economic benefit doctrine to their lottery winnings
because 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 is
under the control of the State Treasurer but not part of the
State Treasury, and its assets are not commingled with the
assets of the State Treasury. See Ohio Rev. Code
§ 3770.06(A). It is funded by the transfer of monies from
lottery sales agents. See Ohio Admin. Code § 3770:1-4-04.
Plaintiffs stated that once they claimed their prize on
December 14, 1992, they had an unconditional entitlement to
the fixed sum of $8,980,597 maintained in this fund. Because
this fund was a custodial fund and separate from the state’s
other accounts, plaintiffs argued that it was not subject to the
state’s general creditors. Plaintiffs contended that this fund
satisfies 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 the
Gross Revenue fund, it must fail because the plaintiffs’ lottery
award was not funded by the State Lottery Gross Revenue
No. 99-3532 Thomas, et al. v. United States 7
4The commission pays awards greater than $5,000 by warrant
because it is required to deduct withholding taxes for these prizes. See 26
U.S.C. § 3402(q).
5In addition, this argument fails because this fund was subject to the
state’s creditors. Although this fund is separate from the state’s general
account and not subject to the state’s general creditors, it is subject to the
state’s lottery creditors. Ohio law provides that the Gross Revenue Fund
should be used to pay not only lottery winners, but also sales agents’
bonuses, commissions, and reimbursements. See Ohio Rev. Code
§ 3770.06(A). The agents are state creditors, thus, the fund is not beyond
the reach of the payor’s creditors. Also, unlike the State Lottery Fund, the
Gross Revenue Fund does not set forth a priority order for payments.
Any right the plaintiffs had to the monies in the Gross Revenue Fund was
subject to the claims of the other creditors, lottery winners and sales
agents, 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 Budget
and Management from the state lottery fund in the state’s
general revenue account.4 This voucher entitles the owner to
payment from the Lottery Operating Fund maintained in the
Ohio General Revenue Fund. The Gross Revenue Fund is a
distinct bank account separate from the General Revenue
Fund bank account. The plaintiffs could not have received
payment for their award from the Gross Revenue Fund;
therefore, the argument that this fund constitutes the fund in
which the plaintiffs’ lottery winnings were maintained and in
which they received a present economic benefit is not
persuasive.5
The plaintiffs, however, state that this court should not
construe their claim as an entitlement to monies maintained
in the Gross Revenue Fund or any other fund defined by the
state. Instead, plaintiffs argue that they have an irrevocable
right to a fixed sum, the amount of their lottery award, held in
a “constructive trust” maintained by the state of Ohio. This
trust was funded by the ticket sales for the Super Lotto
drawing on December 12, 1992, and the plaintiffs contend
that they gained an irrevocable right to the award when they
presented the winning ticket on December 14, 1992.

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