        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
                 _________________


                                  ;
                                   
 ROY V. THOMAS; ELOISE F.
                                   
 THOMAS,
                                   
         Plaintiffs-Appellants,
                                   
                                      No. 99-3532

                                   
           v.                       >
                                   
 UNITED STATES OF AMERICA, 
          Defendant-Appellee. 
                                   
                                  1
      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,

                            1
2       Thomas, et al. v. United States                    No. 99-3532        No. 99-3532              Thomas, et al. v. United States      11

Columbus, Ohio, Nathan A. Durst, Columbus, Ohio, for                          lottery winners. Instead, all of these funds are commingled,
Appellants. Paula K. Speck, Frank P. Cihlar, U.S.                             either in the Gross Revenue Fund or the Lottery Operating
DEPARTMENT OF JUSTICE, APPELLATE SECTION                                      Fund. Should the commission become financially unable to
TAX DIVISION, Washington, D.C., for Appellee.                                 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
                            OPINION                                           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
  KENNEDY, Circuit Judge. Plaintiffs1, Roy V. Thomas and                      the other taxpayers. Plaintiffs’ rights to the money in the
Eloise F. Thomas, appeal the district court’s decision to grant               “constructive trust” were subject to the rights of other lottery
summary judgment in favor of the defendant, United States of                  winners; therefore, the “constructive trust” was not
America, in this tax refund action. Plaintiffs raise one issue                irrevocable.
on this appeal: (1) whether the district court erred in
determining that the plaintiffs’ lottery income did not fall                    We do not believe that the plaintiffs have identified a fund
within the economic benefit doctrine under 26 U.S.C. § 61.                    in which they obtained an irrevocable right which would
We believe that the district court was correct in finding that                entitle them to apply the economic benefit doctrine to their
this doctrine did not apply; thus, we affirm the decision of the              income taxes. Because the plaintiffs have not shown that they
district court.                                                               are entitled to a tax refund we believe that the district court
                                                                              was correct in granting summary judgment in favor of the
                                I. Facts                                      government.
  On December 11, 1992, plaintiff Roy Thomas purchased                                               III. Conclusion
ten Ohio Super Lotto tickets at $1 each and selected the Cash
Option method of payment. The following evening, plaintiff                      For the foregoing reasons, we affirm the judgment of the
won the Super Lotto Jackpot prize pool when the six numbers                   district court.
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

    1
      Eloise Thomas is identified as a plaintiff in this action because she
filed a joint tax return with Roy Thomas.
10       Thomas, et al. v. United States                   No. 99-3532        No. 99-3532              Thomas, et al. v. United States       3

  Section 3770:1-5-10(A) of the Ohio Administrative Code7                     a pay ticket with respect to plaintiff’s claim. Prior to issuing
provides                                                                      a warrant to the plaintiff, the claims department sent a pay-list
  The moneys in the lottery fund shall be appropriated in                     and summary voucher to the Office of Budget Management
  the following order, and only for the following purposes:                   [“OBM”] for approval. The OBM confirmed that sufficient
  (1) repayment into the General Revenue Fund of the                          monies were available in the state lottery fund to pay the
  amount8appropriated for the implementation of the State                     claim and transferred the summary to the office of the Auditor
  lottery;                                                                    to prepare a warrant for the payment of the funds owed to the
  (2) payment of prize awards to holders of winning lottery                   plaintiff. Plaintiff presented this warrant for payment to the
  tickets . . .                                                               National City Bank on January 28, 1993.
  (3) payment of expenses . . .
  (4) payment into the General Revenue Fund of all net                           Plaintiffs filed joint income tax returns for 1992 and 1993
  revenues.                                                                   using the cash receipts and disbursements method of
                                                                              accounting. They reported the gross winnings on their lottery
Plaintiffs argue that this section establishes that lottery                   ticket on their 1993 tax return. On December 27, 1994, they
winners have priority over the state’s other creditors, thus, the             filed an administrative claim for a refund contending that the
fund is protected from the state’s creditors. Although we do                  income should have been reported in 1992.                  They
not agree with the plaintiffs’ contention that the economic                   acknowledged that if their claim was allowed they would be
benefit doctrine applies even when the fund is subject to the                 obligated to pay the tax in 1992 and that the taxes and interest
payor’s creditors, if the beneficiary is a senior creditor, our               due on their 1992 tax liability would be offset against their
resolution of that issue is not necessary because the fund                    1993 tax refund resulting in a total refund of $778,496. The
remains subject to the payor’s creditors – other lottery                      IRS denied their claim. On April 12, 1996, plaintiffs filed
winners. Plaintiffs concede that state law does not                           this complaint in district court requesting a refund of income
differentiate among lottery winners in terms of priority to the               taxes paid for the calendar year of 1993. On March 30, 1999,
monies in these funds, but plaintiffs assert that the economic                the district court granted the government’s motion for
benefit doctrine does not require that a fund be established for              summary judgment, denied the plaintiffs’ motion for
the sole benefit of a taxpayer, citing the fund in Pulsifer as an             summary judgment, and dismissed the plaintiffs’ complaint.
example. The Pulsifer court applied the doctrine to a fund                    Plaintiffs timely appeal.
maintained for the benefit of three minors. 64 T.C. at 246.
The “fund” in this case differs significantly from the one                                            II. Discussion
considered in Pulsifer. Because this fund is a “constructive
trust” it is not separated from the “trusts” belonging to other                 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
     7                                                                        the district court’s decision if we find that there are no
     “An Ohio Administrative Code section is a further arm, extension,        material factual disputes and that the United States is entitled
or explanation of statutory intent implementing a statute passed by the       to judgment as a matter of law. See Fed. R. Civ. P. 56(c).
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).                   The moving party has the burden of establishing that there are
                                                                              no genuine issues of material fact, see Celotex Corp. v.
     8
     This requirement was satisfied six months after the state lottery        Catrett, 477 U.S. 317, 322-23, 106 S.Ct. 2548, 2552-53, 91
began operating, thus, the lottery winners have first priority to the funds   L.Ed.2d 265 (1986), and we must view all evidence in the
maintained by the state lottery commission.
4       Thomas, et al. v. United States               No. 99-3532       No. 99-3532               Thomas, et al. v. United States       9

light most favorable to the non-moving party. See Adickes v.            had not completed the verification process necessary to
S.H. Kress & Co., 398 U.S. 144, 157, 90 S.Ct. 1598, 1608, 26            confirm that the plaintiffs were the winners of the Super Lotto
L.Ed.2d 142 (1970). Both parties agree that there are no                jackpot. This verification process was a condition on the
issues of material fact; therefore, we can resolve this case by         plaintiffs’ receipt of the lottery award. Until the state
determining whether the economic benefit doctrine is                    completed this verification process, the plaintiffs were not
applicable. Because the plaintiffs have not proven that they            entitled to the monetary award. Although the plaintiffs are
qualify for a tax refund we affirm the judgment of the district         correct in saying that the owner of the winning lottery ticket
court.                                                                  had an absolute right to the award once the individual filed his
                                                                        claim, the issue before the court is whether the taxpayer had
   Plaintiffs report their income for federal income tax                an absolute right to the award. Because the plaintiff taxpayers
purposes under the cash receipts and disbursements method               were not considered to be the owners of the winning lottery
of accounting. See 26 U.S.C. § 446(c)(1). Under this                    ticket until the state completed its verification process they
method, they report income in the year of receipt and deduct            did not have an absolute right to the award in 1992. The
expenses in the year of payment. See 26 U.S.C. § 451 (a).               plaintiffs received no present financial benefit from the lottery
While the plaintiffs did not receive their lottery winnings until       award until 1993; therefore, they are not entitled to a refund
1993,2they argue that the winnings constituted income in                based on the economic benefit doctrine.
1992. Plaintiffs’ argument in support of their contention that
they are entitled to a refund for income taxes paid in 1993 is             Plaintiffs’ “constructive trust” argument also fails to satisfy
based on the economic benefit doctrine. The economic                    the economic benefit doctrine because the award was not
benefit doctrine was developed in response to the use of                secure from the claims of the state’s creditors. Unlike
deferred compensation plans for employees. See Sproull v.               traditional cases where courts have applied the economic
Commissioner, 16 T.C. 244 (1951), aff’d per curiam, 194                 benefit doctrine, this case does not involve the transfer of
F.2d 541 (6th Cir. 1952). It was intended “to include in                funds to a third party and beyond the reach of the payor’s
taxable income any economic or financial benefit conferred              creditors. See, eg., Anastasio v. Commissioner, 67 T.C. 814,
on the employee as compensation, whatever the form or mode              817 (1977); Pulsifer, 64 T.C. at 247; Sproull,16 T.C. at 247-
by which it is effected.” Commissioner v. Smith, 324 U.S                48. Plaintiffs argue that the doctrine does not require a
177, 181, 65 S.Ct. 591, 593, 89 L.Ed. 830 (1945). The                   transfer to a third party, but instead, only requires that the
doctrine provides for the taxation of financial benefits that are       payor relinquish control over the funds. The plaintiffs assert
(1) fixed; (2) located in an irrevocable fund; and (3) not              that state law governs the use of these monies and restricts the
subject to the payor’s debtors. See Sproull, 16 T.C. at 247-48.         lottery commission’s use of these funds. Plaintiffs point to
“It is based on the theory that the promise to pay deferred             numerous provisions of Ohio law which state that lottery
compensation in the future in and of itself under certain               winners’ awards should be paid from the State Lottery Gross
circumstances may constitute an economic benefit or the                 Revenue Fund and/or the State Lottery Operating Fund. See
equivalent of cash to be taxed currently at present value, if it        Ohio Rev Code. § 3770.06(A); see also Ohio Admin. Code
can be valued currently with some exactness.” McDonald,                 § 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
    2
                                                                        sufficient to secure the plaintiffs’ award from other lottery
     In 1993, Congress instituted higher tax rates for taxpayers with   winners.
income over $250,000.
8        Thomas, et al. v. United States                        No. 99-3532          No. 99-3532              Thomas, et al. v. United States      5

Plaintiffs argue that this trust was created in the State Lottery                    Deferred Compensation: Conceptual Astigmatism, 24 Tax L.
Gross Revenue Fund and then transferred to the State Lottery                         Rev. 201, 204 (1969).
Operating Fund from which the plaintiffs were paid. It is to
this “constructive trust” that the plaintiffs believe this court                        In Pulsifer v. Commissioner, 64 T.C. 245 (1975), the tax
should apply the elements of the economic benefit doctrine.                          court extended this doctrine to sweepstakes winnings. In
Even if we accept the plaintiffs’ definition of the fund,6 we do                     Pulsifer, the court held that three minors’ winnings from an
not believe they have shown that the economic benefit                                Irish lottery were taxable in the year in which the funds were
doctrine applies. The plaintiffs cannot establish that they had                      deposited with the court. Id. at 247. Under Irish law, minors
an irrevocable right to this fund or that this fund was not                          were not entitled to lottery winnings until they reached the
subject to the lottery’s creditors.                                                  age of majority. Pending the minors’ majority, these
                                                                                     winnings were placed in a fund administered by the court.
  The “constructive trust” fund fails to satisfy the economic                        The taxpayers argued that they should not have to pay taxes
benefit doctrine because the plaintiffs’ right to the monies in                      on these winnings until they received the winnings at the age
this fund was contingent as of the end of 1992. Plaintiffs                           of majority. Id. at 246. The court disagreed and held that the
contend that once they filed their claim as the owners of the                        economic benefit doctrine was applicable. The court stated
winning lottery ticket, they had done all that was necessary
for them to be entitled to the lottery award; therefore, as of                         [u]nder the economic-benefit theory, an individual on the
December 14, 1992, they received a present financial benefit                           cash receipts and disbursements method of accounting is
from their lottery award. Contingency, however, does not                               currently taxable on the economic and financial benefit
turn simply on the taxpayer’s action. Rather, to satisfy this                          derived from the absolute right to income in the form of
element of the doctrine the plaintiffs must show that their                            a fund which has been irrevocably set aside for him in
receipt of the award was conditioned only upon the passage                             trust and is beyond the reach of the payor’s debtors.
of time. See Stiles v. Commissioner, 69 T.C. 558, 569 (1978).
This, they cannot do. As of the end of 1992, the commission                          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
     6                                                                               court held that it was appropriate to tax the winnings in the
       The government contends that the plaintiffs, in their administrative          year in which the fund was created because the fund conferred
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               an economic benefit on the minors. Id. at 247.
constituted the irrevocable fund to which the doctrine should be applied.
Before the district court, the plaintiffs asserted that the fund was the                In analyzing whether the plaintiffs were entitled to a tax
amount of the lottery award generated from the sales of tickets for the              refund based on the economic benefit doctrine, the district
Super Lotto drawing of December 12, 1992. The government argues that                 court considered whether the plaintiffs had satisfied the three
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           elements of the doctrine: (1) the existence of a fund in which
raise these claims in the administrative proceeding. See Salyersville Nat’l          money has been placed; (2) that is irrevocable and beyond the
Bank v. United States, 613 F.2d 650, 651 (6th Cir. 1980). In response to             reach of creditors; (3) in which the beneficiary has vested
this variance defense, the plaintiffs state that the government waived its           rights to the money, with receipt conditioned only on the
right to assert this defense by its failure to raise it before the district court.   passage of time. The district court held that the plaintiffs
See id.; see also Tucker v. Alexander, 275 U.S. 228, 230-31, 48 S.Ct. 45,            were not entitled to the application of the economic benefit
46, 72 L.Ed. 253 (1927). Because we believe the plaintiffs’ argument
fails regardless of which fund this court attributes the plaintiffs’ award we        doctrine because the lottery award did not satisfy any of the
do not think it is necessary to resolve this issue.
6       Thomas, et al. v. United States                  No. 99-3532        No. 99-3532                   Thomas, et al. v. United States               7

elements of the doctrine. We believe that the district court’s              Fund. The commission requires that all lottery awards over
analysis was correct.                                                       $5,000 be paid from warrants issued by the Office of Budget
                                                                            and Management from the       state lottery fund in the state’s
   The primary difficulty with this case is the identification of           general revenue account.4 This voucher entitles the owner to
the fund in which the plaintiffs claim to have an irrevocable               payment from the Lottery Operating Fund maintained in the
right. In their administrative claim, the IRS construed the                 Ohio General Revenue Fund. The Gross Revenue Fund is a
plaintiffs’ claim as contending that they were entitled to apply            distinct bank account separate from the General Revenue
the economic benefit doctrine to their lottery         winnings             Fund bank account. The plaintiffs could not have received
because the State Lottery Gross Revenue Fund3 constituted                   payment for their award from the Gross Revenue Fund;
the fund in which they had an irrevocable right to a fixed sum.             therefore, the argument that this fund constitutes the fund in
The Gross Revenue fund is a custodial account, which is                     which the plaintiffs’ lottery winnings were maintained and in
under the control of the State Treasurer but not part of the                which they5 received a present economic benefit is not
State Treasury, and its assets are not commingled with the                  persuasive.
assets of the State Treasury. See Ohio Rev. Code
§ 3770.06(A). It is funded by the transfer of monies from                      The plaintiffs, however, state that this court should not
lottery sales agents. See Ohio Admin. Code § 3770:1-4-04.                   construe their claim as an entitlement to monies maintained
Plaintiffs stated that once they claimed their prize on                     in the Gross Revenue Fund or any other fund defined by the
December 14, 1992, they had an unconditional entitlement to                 state. Instead, plaintiffs argue that they have an irrevocable
the fixed sum of $8,980,597 maintained in this fund. Because                right to a fixed sum, the amount of their lottery award, held in
this fund was a custodial fund and separate from the state’s                a “constructive trust” maintained by the state of Ohio. This
other accounts, plaintiffs argued that it was not subject to the            trust was funded by the ticket sales for the Super Lotto
state’s general creditors. Plaintiffs contended that this fund              drawing on December 12, 1992, and the plaintiffs contend
satisfies all the elements of the economic benefit doctrine;                that they gained an irrevocable right to the award when they
therefore, they were entitled to a tax refund.                              presented the winning ticket on December 14, 1992.
  We agree with the IRS that if the plaintiffs’ claim is
identified as an irrevocable right to money contained in the                    4
Gross Revenue fund, it must fail because the plaintiffs’ lottery                 The commission pays awards greater than $5,000 by warrant
award was not funded by the State Lottery Gross Revenue                     because it is required to deduct withholding taxes for these prizes. See 26
                                                                            U.S.C. § 3402(q).
                                                                                5
    3                                                                             In addition, this argument fails because this fund was subject to the
      Lottery awards are funded by a portion of the ticket sales for each   state’s creditors. Although this fund is separate from the state’s general
week’s lottery drawing. The winning ticket number is announced on           account and not subject to the state’s general creditors, it is subject to the
Saturday evening. The following Tuesday, the revenue generated by           state’s lottery creditors. Ohio law provides that the Gross Revenue Fund
ticket sales from the previous week is swept into a Gross Revenue Fund      should be used to pay not only lottery winners, but also sales agents’
which is separate from the state treasury. From this fund, the commission   bonuses, commissions, and reimbursements. See Ohio Rev. Code
pays smaller cash lottery prizes and certain lottery expenses, such as      § 3770.06(A). The agents are state creditors, thus, the fund is not beyond
credits to banks and commissions to licensed sales agents. The next day,    the reach of the payor’s creditors. Also, unlike the State Lottery Fund, the
the remaining moneys in the Gross Revenue Fund are transferred to the       Gross Revenue Fund does not set forth a priority order for payments.
state treasury. For bookkeeping purposes, the lottery monies are            Any right the plaintiffs had to the monies in the Gross Revenue Fund was
accounted for in three funds: the Lottery Operating Fund, the Deferred      subject to the claims of the other creditors, lottery winners and sales
Prizes Fund, and the Unclaimed Prizes Fund.                                 agents, and the plaintiffs did not have priority over any of these creditors.
