Fisher v. Neusser

• Decision Date: 14 February 1996
• Docket Number: No. 94-1907,94-1907
• Parties: FISHER, Appellee, v. NEUSSER, Tax Commr., et al., Appellants.
• Court: Ohio Supreme Court

Page 506

74 Ohio St.3d 506

660 N.E.2d 435

FISHER, Appellee, v. NEUSSER, Tax Commr., et al., Appellants.

No. 94-1907.

Supreme Court of Ohio.

Submitted Dec. 5, 1995.

Decided Feb. 14, 1996.

SYLLABUS BY THE COURT

Lottery winnings arise from gambling and are not "intangible income" as that term is defined in R.C. 718.01(A)(4), and, therefore, municipal corporations are not precluded from levying an income tax thereon by virtue of R.C. 718.01(F)(3).

In August 1991, appellee Duane N. Fisher, a resident of appellant city of Akron, won the Ohio Super Lotto and received a lump sum cash prize of $8,480,597. Pursuant to Section A.1.b. (4), Article III of the Akron Tax Code Rules and Regulations, the city imposes upon its residents an annual income tax of two percent on "lottery winnings." Accordingly, on November 15, 1991, the city's Deputy Tax Commissioner informed Fisher that "[t]he city income tax assessed on these winnings is $169,611.94." Fisher paid the tax under protest and requested reconsideration of its imposition. Appellant, James A. Neusser, Tax Commissioner for the city of Akron, confirmed the imposition of the tax and Fisher appealed to the Income Tax Board of Review. On May 21, 1992, the board of review upheld the decision of the tax commissioner and Fisher appealed to the Summit County Court of Common Pleas.

The trial court reversed the decision of the board of review, finding that "lottery proceeds are intangible income and precluded from taxation by any municipality pursuant to [R.C.] 718.01(F)(3)." In particular, the trial court found that "the nature of a state lottery ticket and the rights which accrue to its purchaser" fall within the definition of "investment" set forth in R.C. 5701.06(C) and hence are intangible income under R.C. 718.01. The court of appeals affirmed the decision of the trial court.

The cause is now before the court pursuant to the allowance of a discretionary appeal.

Christoff, Slater, Haskins & Zurz and Richard V. Zurz, Jr., Akron, for appellee.

Thompson, Hine & Flory, Leslie W. Jacobs and Stephen L. Buescher; Cleveland, Akron Law Department, Max Rothal, Director of Law, and David A. Muntean, Assistant Director of Law, Akron, for appellants.

John E. Gotherman, Columbus, urging reversal, for amicus curiae, Ohio Municipal League.

Cleveland Law Department, Sharon Sobol Jordan, Director of Law, and Debra D. Rosman, Assistant Director of Law, Cleveland, urging reversal, for amici curiae City of Cleveland and Central Collection Agency.

ALICE ROBIE RESNICK, Justice.

The issue is whether an Ohio municipality has the power to levy an income tax on lottery winnings received by its residents.

Ohio municipalities "have the right to exercise all powers of local self-government and may adopt and enforce such local regulations that are not in conflict with the general law. Sections 3 and 7, Article XVIII, Ohio Constitution. Included within the above grant of authority is the power of taxation. See State ex rel. Zielonka, City Solr. v. Carrel, Aud. [1919] 99 Ohio St. 220." Thompson v. Cincinnati (1965), 2 Ohio St.2d 292, 294, 31 O.O.2d 563, 564, 208 N.E.2d 747, 749-750.

That power, however, is subject to "pre-emption by the General Assembly of the field of income taxation and subject to the power of the General Assembly to limit the power of municipalities to levy taxes under Section 13 of Article XVIII or Section 6 of Article XIII of the Ohio Constitution." Angell v. Toledo (1950), 153 Ohio St. 179, 41 O.O. 217, 91 N.E.2d 250, paragraph one of the syllabus.

In 1971, the General Assembly enacted R.C. Chapter 5747 to provide for an annual individual state income tax. Effective July 1, 1989, the General Assembly enacted Am.Sub.H.B. No. 111, 143 Ohio Laws, Part II, 2330, 2615, which amended R.C. 5747.02 to provide for an annual income tax "on every individual and estate earning or receiving lottery winnings, prizes or awards pursuant to Chapter 3770. of the Revised Code." However, R.C. 5747.02 specifically disclaims any intent to preempt income taxation by municipalities.

R.C. 5707.03 and 5707.04 imposed a state property tax on intangibles, measured by income yield. In Ohio Fin. Co. v. Toledo (1955), 163 Ohio St. 81, 83, 56 O.O. 74, 75, 125 N.E.2d 731, 732, the court held that "[i]t is apparent therefore that the General Assembly has occupied a field which includes taxation of the income yield from intangibles." Subsequent legislation, however, in effect repealed these sections. As explained by the court of appeals in Columbus Div. of Income Tax v. Boles (1992), 78 Ohio App.3d 617, 624-625, 605 N.E.2d 981, 986:

" * * * The state property taxes on intangibles in R.C. 5707.03 and 5707.04 were phased out by enactment of Am.Sub.H.B. No. 291 in 1983. The last year for such taxes was 1985. Thus, the door was then opened for this type of income taxation.

"Because of this, the Uniform Municipal Income Tax Act was amended in 1986 by Am.Sub.S.B. No. 238. By this enactment, division (C) [now division (F)(3) ] was added to R.C. 718.01 to prevent taxation [by municipal corporations] of 'intangible' income."

Thus, although the power of municipalities to levy an income tax is not impliedly preempted, it is limited, as relevant here, to the extent that R.C. 718.01(F)(3) precludes municipalities from taxing intangible income.

R.C. 718.01(A)(4) defines "intangible income" as "income of any of the following types: income yield, interest, dividends, or other income arising from the ownership, sale, exchange, or other disposition of intangible property including, but not limited to, investments, deposits, money, or credits as those terms are defined in Chapter 5701. of the Revised Code."

R.C. 5701.06(C) ¹ defines "investments" as including, among other things, "Annuities, royalties, and other contractual obligations for the periodical payment of money and all contractual and other incorporeal rights of a pecuniary nature from which income is or may be derived, however evidenced," excepting five categories not relevant here.

The lower courts found that lottery winnings constitute intangible income under R.C. 718.01(A)(4) and are precluded from taxation by any municipality pursuant to R.C. 718.01(F)(3). The courts' basis for this conclusion was twofold. First, the lower courts found that lottery winnings result from the disposition of intangible property, i.e., the lottery ticket. A lottery ticket is intangible property because it is an asset that represents valuable legal rights to the holder, but has no physical substance or intrinsic value; and since the language of R.C. 718.01(A)(4) is inclusive, and not limiting, it can be read to encompass income arising from a lottery ticket.

Second, "the nature of a state lottery ticket and the rights which accrue to the purchaser establish that it is a contractual relationship for value given with the right to payment from the State of an indefinite sum upon the happening of a condition subsequent, i.e. [,] the correct identification of randomly selected numbers." By this characterization, the courts were able to pigeonhole lotteries into the investment classification of R.C. 5701.06(C), and bring lottery winnings within R.C. 718.01(A)(4)'s definition of "intangible income."

A lottery is a game of chance and is gambling. "[A] lottery is a species or form of gambling." Westerhaus Co. v. Cincinnati (1956), 165 Ohio St. 327, 339, 59 O.O. 428, 434, 135 N.E.2d 318, 327. It is "a scheme for the distribution of prizes by lot or chance." Troy Amusement Co. v. Attenweiler (1940), 64 Ohio App. 105, 116, 17 O.O. 443, 448, 28 N.E.2d 207, 213; see Stevens v. Cincinnati Times-Star Co. (1905), 72 Ohio St. 112, 73 N.E. 1058. The essential elements of a lottery are prize, chance and consideration. Finster v. Keller (1971), 18 Cal.App.3d 836, 843, 96 Cal.Rptr. 241, 245. See, generally, 51 Ohio Jurisprudence 3d (1984) 429, Gambling, Section 5; 54 Corpus Juris Secundum, Lotteries (1987) 485-488, Sections 3 through 6.

A lottery ticket is a chance. United States v. Baker (C.A.3, 1966), 364 F.2d 107, 111. It is " 'merely the evidence or token of the holder's participation in the lottery and the number which determines his right to share in the distribution resolved by chance after the sale.' " Silbert v. State (1971), 12 Md.App. 516, 533, 280 A.2d 55, 65, quoting State v. Friedman (1947), 135 N.J.L. 419, 420-421, 52 A.2d 416, 418, affirmed State v. Friedman (1948), 136 N.J.L. 634, 57 A.2d 390.

The scope of the term "investment" is ultimately determined by how it is defined in R.C. 5701.06. However, since R.C. 5701.06 is inclusive in nature, and makes no specific reference to lottery winnings, of necessity, for legal construction, we are required to consult the common definitions to ascertain whether lottery winnings can fairly be classified as investments within the language of R.C. 5701.06(C). The term "investment" is defined in Webster's Third New International Dictionary (1986) 1190, as "the expenditure of money for income or profit." Black's Law Dictionary (6 Ed.1990) 825, defines "investment" as "[a]n expenditure to acquire property or other assets in order to produce revenue; the asset so acquired. The placing of capital or laying out of money in a way intended to secure income or profit from its employment." Similarly, "investment" has been judicially defined as "the laying out of money with the view of obtaining an income or profit from the thing bought, whether it be an interest in a business, a farm, stocks or bonds; to place money so that it will be safe and yield a profit." State v. Gibbs (1908), 18 Ohio Dec. 694, 696, 7 Ohio N.P. (N.S.) 371, 372-373.

In State ex rel. Atty. Gen. v. Interstate Savings Invest. Co. (1901), 64 Ohio St. 283, 60 N.E. 220, paragraph one of the syllabus, the court held:

"Contracts of investment security, debentures or certificates, which by the device of a 'numeral-apart,' may be called in and redeemed at any period before ...