Thomas v. United States, C2-96-369.

• Decision Date: 31 March 1999
• Docket Number: No. C2-96-369.,C2-96-369.
• Citation: 45 F.Supp.2d 618
• Parties: Roy V. THOMAS, et al., Plaintiffs, v. UNITED STATES, Defendant.
• Court: U.S. District Court — Southern District of Ohio

Page 618

45 F.Supp.2d 618

Roy V. THOMAS, et al., Plaintiffs, v. UNITED STATES, Defendant.

No. C2-96-369.

United States District Court, S.D. Ohio, Eastern Division.

March 31, 1999.

Arnold Owen Zacks, Columbus, OH, for plaintiffs.

Brenda L. Dodrill, United States Attorney's Office, Columbus, OH, S. Robert Lyons, U.S. Dept. of Justice, Washington, DC, for defendant.

OPINION & ORDER

MARBLEY, District Judge.

Plaintiff Roy V. Thomas won the Ohio Lottery Super Lotto Jackpot, worth almost nine million dollars, in the December 12, 1992 drawing. The State of Ohio took about six weeks to process his claim, and Mr. Thomas received his money on January 28, 1993. Until 1993, the IRS taxed prize-winnings at a rate of twenty percent, but beginning in January, 1993, it instituted a rate of twenty-eight percent. Plaintiffs Roy Thomas and his wife Eloise¹ now argue, under the "economic benefit" doctrine, that the prize should have been included as income for 1992, rather than 1993. Due to the peculiar economic circumstances presented by this case, the parties have advanced doctrinal positions opposite from those typically adopted by taxpayers and the government in tax cases. Usually, the taxpayer wants to defer the recognition of income as long as possible, while the government normally invokes doctrines like economic benefit in order to collect taxes on such income as soon as it can. Both Plaintiffs and the government take contrary positions in this case. Here, Plaintiffs invite the Court to extend the economic benefit doctrine further than it has ever been stretched. This Court now declines to do so.

I.

On December 11, 1992, Plaintiff Roy Thomas purchased ten Ohio Super Lotto tickets at one dollar each and selected the "cash option" method of payment. The Super Lotto is a parimutuel game generally known as a "number match" game, wherein the prizes are funded with "prize pools" created from a portion of the monies derived from ticket sales. The Ohio Lottery conducted a Super Lotto drawing on Saturday, December 12, 1992. All six numbers drawn matched the six numbers chosen on the play identified as "D" on Mr. Thomas' bet slip. The drawing that night had an annuity value of twenty million dollars and a net present value of $8,980,597. Mr. Thomas was the only six-number winner of that draw.

The following Monday, December 14, Mr. Thomas went to the Columbus regional office of the Ohio Lottery Commission, where he filled out a claim form, turned in the ticket and received a receipt. At that point, Mr. Thomas had done all he was required to do in order to be entitled to payment of the Super Lotto Jackpot prize pool. That day, the Ohio State Lottery issued a news release, and the Columbus Dispatch later reported that Mr. Thomas had won the Super Lotto. Some time later in December of 1992, Mr. Thomas' attorney contacted the Lottery Commission and attempted to have the prize paid in 1992 rather than in 1993.

Mr. and Mrs. Thomas filed a joint 1993 federal income tax return, and reported the jackpot as income in 1993, using the "cash receipts and disbursement" method of accounting. With the return, the Thomases included a statement that they believed the prize was income in 1992, not 1993. On December 27, 1994, Plaintiffs filed an administrative claim for refund of the 1993 taxes. They acknowledged that if the IRS accepted their claim, they would be obligated to pay the taxes and interest due on their 1992 tax liability. The difference between these two rates would be $778,496. The IRS disallowed the claim, and Plaintiffs filed this lawsuit on April 12, 1996, claiming a refund of $3,293,063. This action is now before the Court on the parties cross-motions for summary judgment.

II.

Fed.R.Civ.P. 56(c) provides that summary judgment is appropriate "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show there is no genuine issue as to any material fact and the moving party is entitled to judgment as a matter of law." The movant has the burden of establishing that there are no genuine issues of material fact, which may be accomplished by demonstrating that the nonmoving party lacks evidence to support an essential element of its case. See Celotex Corp. v. Catrett, 477 U.S. 317, 322-23, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986); Barnhart v. Pickrel, Schaeffer & Ebeling Co., L.P.A., 12 F.3d 1382, 1388-89 (6th Cir.1993). The nonmoving party must then present "significant probative evidence" to show that "there is [more than] some metaphysical doubt as to the material facts." Moore v. Philip Morris Cos., Inc., 8 F.3d 335, 339-40 (6th Cir.1993). "[S]ummary judgment will not lie if the dispute is about a material fact that is `genuine,' that is, if the evidence is such that a reasonable jury could return a verdict for the non-moving party." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986); see also Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986) (summary judgment appropriate when the evidence could not lead a trier of fact to find for the non-moving party).

In evaluating such a motion, the evidence must be viewed in the light most favorable to the non-moving party. See Adickes v. S.H. Kress & Co., 398 U.S. 144, 157, 90 S.Ct. 1598, 26 L.Ed.2d 142 (1970). The mere existence of a scintilla of evidence in support of the non-moving party's position will be insufficient; there must be evidence on which the jury could reasonably find for the non-moving party. See Anderson, 477 U.S. at 251, 106 S.Ct. 2505; Copeland v. Machulis, 57 F.3d 476, 479 (6th Cir.1995). Here, both parties agree on all material issues of fact; the case is appropriately decided by an evaluation of the legal questions.

III.

Like most individual taxpayers, the Thomases used the "cash and disbursements" method of reporting their income. See 26 U.S.C. § 446(c). Under the cash method, a taxpayer reports income in the year of "receipt" and deducts expenses in the year of "payment." See 26 U.S.C. § 451(a). "Receipt" is thus the essence of the cash method. In contrast, "earning" is the focus of the "accrual" method of accounting. See 26 U.S.C. § 446(c)(2). Under the accrual method, a taxpayer is required to include income in the taxable period when "all the events have occurred which fix the right to receive such income and amount thereof can be determined with reasonable accuracy." See Treas. Reg. § 1.451-1(a). While the accrual method more accurately reflects income, the cash method is simpler and easier to administer, and most individuals use the cash method of accounting.

Distortion of income reporting can result from the cash method's reliance on the concept of "receipt." For example, the cash method permits income earned but not received in the reporting year to be deferred to future years. Thus, the time of receipt can be adjusted by taxpayers, and "the cash method is viewed as more susceptible to manipulation than the accrual method." See John F. Cooper, The Economic Benefit Doctrine: How an Unconditional Right to a Future Benefit Can Cause a Current Tax Detriment, 71 Marq. L.Rev 217, 218 (1988). To remedy abuses occasioned by cash basis taxpayers deflecting income into future years through the manipulation of "receipt," the government has developed a number of doctrinal devices. One of these devices is the "economic benefit doctrine." It is upon this doctrine that Plaintiffs rely in arguing that their Super Lotto prize should be included in their 1992 income.

A. The Economic Benefit Doctrine

The economic benefit doctrine normally involves situations in which a cash method taxpayer elects to defer income he has a right to receive by arranging to have the money deposited in a third-party account. See id. To account properly for such situations, courts have developed the doctrine to require the inclusion in income of such amounts in the taxable period in which the fund was created. The economic benefit doctrine requires a cash method taxpayer to include in gross income items not actually received during the reporting period when the following elements are present:

(1) There must be some fund in which money or property has been placed;

(2) The fund must be irrevocable and beyond the reach of the creditors of the party who transferred the funds to the escrow or trust; and

(3) The beneficiary must have vested rights to the money, with receipt conditioned only on the passage of time.

See id. at 232-33; see also Sproull v. Commissioner, 16 T.C. 244, 1951 WL 302 (1951), aff'd, 194 F.2d 541 (6th Cir.1952). A "fund" is created when an amount is irrevocably placed with a third party; a taxpayer's interest in such fund is "vested" if it is nonforfeitable. See Gen. Couns.Mem. 33733 (Nov. 21, 1966). Thus, in order for this doctrine to apply, an individual must unconditionally transfer money beyond the reach of the transferor's creditors and place that money in a fund in which the taxpayer to be benefitted has vested rights. See Cooper, 71 Marq. L.Rev. at 222.

The economic benefit doctrine was created and developed in the context of employer/employee relationships. The traditional situation is exemplified in Sproull v. Commissioner, 16 T.C. 244, 1951 WL 302 (1951), aff'd, 194 F.2d 541 (6th Cir. 1952), the seminal case in economic benefit jurisprudence. In Sproull, the employer-corporation irrevocably transferred $10,500 into a trust in 1945 for taxpayer Sproull's sole benefit, in consideration for prior services he had performed during the Depression, for which the company had not been able to pay then. The trust was structured such that, in the event of Sproull's death, the funds would have been paid to his estate. In 1946 and 1947, the corpus was paid in its entirety to Sproull, pursuant to the trust agreement.

The Sproull Court held that the entire $10,500 was taxable in 1945 because Sproull derived an...