Clever, but not clever enough! How Ohio almost avoided municipality income tax on Lottery winnings.

Kyle Greene, Associate Member, University of Cincinnati Law Review

Have you ever won the lottery and wished you didn’t have to pay any pesky income taxes on the luckiest day of you life? Everyone knows that a substantial portion of big lottery winnings goes towards taxes, but in 1996, a clever attorney out of Akron almost successfully fattened the wallets of Ohio lottery winners by invalidating municipality income tax on lottery winnings.[1] That is until the Ohio Supreme Court took up the case and read right through the legal gamesmanship.

In Fisher v. Neusser[2], Duane Fisher won the Ohio Super Lotto winning $8,480,597.[3] Under the Akron Tax Code the city imposed a two percent tax on lottery winnings. Fisher paid under protest and requested reconsideration from a board of review. The board upheld the tax, and Fisher appealed to the Summit County Court of Common Pleas.[4] The trial ruled that “lottery proceeds are intangible income and precluded form taxation by any municipality pursuant to O.R.C. § 718.01(F)(3).”[5] The court found that the rights of a lottery ticket holder amount to what the statute considers an “investment.” Investments under the statute are “intangible income”[6], therefore, precluded from municipality income tax. The court reasoned that the nature of a lottery ticket is contractual. The State promises an indefinite sum upon the occurrence of correctly selected random numbers.[7] Contractual relationships are one of the named circumstances that meet the definition of an “investment” under the statute, and are precluded from taxation.

As clever of an argument as it may be, the Ohio Supreme Court remained unconvinced. The Court cited several cases defining the lottery as merely a gamble in the form of chance in a scheme for prizes, as well as the basic elements for a lottery: prize, chance, and consideration.[8] Whereas an “investment” is “the laying out of money with the view of obtaining an income . . . whether it be an interest in business, a farm, stocks, or bond; to place money so that it will safe and yield and profit”[9] the Court further contrasts the difference between gambling and investments by reasoning that in an investment, “the prize is not determinable by, or dependent upon, chance or lot. It is dependent upon the life of a man, and . . . the law of nature.”[10] An investment may depend upon industrial growth or the value of real estate whereas gambling Is only dependent on having your name picked out of a hat.[11] For that reason, the Ohio Supreme Court determined that a gambling investment should not be afforded the same level protection from taxation as stocks, bonds, credits, etc..[12]

In the end, The Ohio Supreme Court probably got it right for some common sense reasons. The law wants to give protection to certain calculated risks that come with investing in property, buying stock, and entering contracts. The same protection is harder to justify when you throw a dollar towards a lottery ticket and wake up a millionaire. Nonetheless, I appreciate the effort Fisher made on behalf of lottery participants everywhere to “pigeonhole” lottery winnings as an investment under the broad language of Akron’s statutory tax scheme.[13] So close, yet so far away.

[1] Fisher v. Neusser, 660 N.E.2d 435, 436 (Ohio 1996).

[2] Id.

[3] Id.

[4] Id.

[5] Id.

[6] 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.”

[7] Id at 438.

[8] See Id.

[9] Id at 439.

[10] Id citing U.S. v. McDonald, 59 F. 563 (N.D. Ill. 1893).

[11] Id at 439.

[12] Id at 440.

[13] Id at 438.


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