Rev. Rul. 64-163

Advice has been requested whether the wagering taxes imposed by sections 4401 and 4411 of the Internal Revenue Code of 1954 apply to a sweepstakes operation conducted by the State of New Hampshire under the New Hampshire Sweepstakes law (Laws of 1963, Chapter 52; New Hampshire, RSA 284: 21-a to 21-n).

According to information available to the Internal Revenue Service, the New Hampshire Sweepstakes law created a State Sweepstakes Commission for the primary purpose of conducting sweepstakes races to raise revenue for the benefit of public education. Sweepstakes tickets are sold only in the State of New Hampshire within the enclosure of licensed race tracks and in State-operated liquor stores. All personnel connected with the operation of the sweepstakes are State employees, and all funds from the operations are at all times in the custody of authorized agents of the State. No individual or private person has any financial interest in the operation except as the purchaser of a ticket.

At a specified time prior to the running of the sweepstakes race, a public drawing will be held to select the holders of the winning tickets. There will be at least as many winners as there are horses nominated for the race. Persons holding tickets on the horses that finish first, second, and third will win the major prizes.

After deducting amounts paid as cash prizes, purses to owners of the horses, expenses incurred with respect to conducting the race and selling the tickets, and other expenses, the net proceeds from the operation will be turned over to the State Treasurer by the Sweepstakes Commission. The Treasurer will keep the proceeds in a separate fund to be paid out each year to the school districts of the State, on a flat-grant per-resident-pupil basis, for educational purposes.

Section 4401 of the Code imposes on wagers an excise tax equal to ten percent of the amount thereof. Section 4411 of the Code imposes a special tax of $50 per year to be paid by each person who is liable for tax under section 4401 or who is engaged in receiving wagers for or on behalf of any person so liable.

For purposes of these taxes, section 4421(1) of the Code defines the term `wager' to include, among other things, any wager placed in a lottery conducted for profit. Section 4421(2) of the Code excludes from the term `lottery' any game of a type in which usually the wagers are placed, the winners are determined, and the distribution of prizes or other property is made, in the presence of all persons placing wagers in such game; and any drawing conducted by an organization exempt from income tax under sections 501 and 521, if no part of the net proceeds derived from such drawing inures to the benefit of any private shareholder or individual.

Section 44.4421-1(b)(1) of the Wagering Tax Regulations defines the term `lottery' in general as including any scheme or method for the distribution of prizes among persons who have paid or promised a consideration for a chance to win such prizes, usually as determined by the numbers or symbols on tickets as drawn from a lottery wheel or other receptacle, or by the outcome of an event, provided such lottery is conducted for profit.

Under the facts available it is concluded that the purchase of a sweepstakes ticket is a wager placed in a lottery conducted for profit. The exclusions provided in section 4421(2) do not apply to the sweepstakes operation. Moreover, the applicable court decisions support the conclusion that when a State engages in a business that involves transactions subjected to a Federal excise tax, as in this case, the implied prohibition in the Constitution that prevents one government from taxing the means or instrumentalities of another government does not afford immunity. See South Carolina v. United States , 199 U.S. 437 (1905); Ohio v. Helvering, Commissioner of Internal Revenue, et al. , 292 U.S. 360 (1934), Ct. D. 836, C.B. XIII-1, 531 (1934); Allen, Collector of Internal Revenue , v. Regents of the University System of Georgia , 304 U.S. 439 (1938), Ct. D. 1344, C.B. 1938-1, 530; and New York v. United States , 326 U.S. 572 (1946).

Accordingly, it is held that the State of New Hampshire, as operator of the lottery, is liable for the ten percent excise tax on wagers, computed on the gross amount of wagers accepted and for the $50 per year special occupational tax. Likewise, each person who, on behalf of the State, accepts wagers in the sweepstakes is liable for the $50 special occupational tax.