Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 56-72

1956-1 C.B. 532

IRS Headnote

Applicability of the taxes on wagering, imposed by sections 4401 and 4411 of the Internal Revenue Code of 1954, to the operation of a `Calcutta' or similar wagering pool in connection with a golf tournament.

Full Text

Rev. Rul. 56-72

Advice has been requested whether the taxes on wagering apply to the operation of a `Calcutta' or similar wagering pool by a hotel corporation in connection with a golf tournament which it sponsors, where a portion of the receipts from the pool are retained by the hotel for use in promoting the next year's tournament.

The tournament is held annually, primarily for the favorable publicity that is derived from such an affair. The pool is operated in the following manner: After the qualifying play for the tournament has been completed and a certain number of golfers have advanced to the championship flight, tickets are sold to persons who then participate in a drawing conducted by the hotel for the names of those golfers who have reached the championship flight. The hotel retains a percentage of the proceeds from the sale of the tickets and places the balance in a pool. Each player whose name is drawn is then `auctioned' to the highest bidder. The ticket holder who had drawn that golfer's name receives a percentage of the price for which the golfer is auctioned. The hotel retains a portion of the remainder of the proceeds from the auction and places the balance in the pool. Upon completion of the tournament, the pool is divided on a percentage basis among those persons to whom the winning golfers have been auctioned. The portion of the proceeds of the drawing and the auction retained by the hotel is used by it to defray the expenses of operating the pool and the balance is held for expenses in connection with a similar tournament to be held the following year.

Section 4401 of the Internal Revenue Code of 1954 imposes on wagers an excise tax equal to 10 percent of the amount thereof. Section 4421 defines the term `wager' as including any wager placed in a wagering pool with respect to a sports event or a contest, if such pool is conducted for profit.

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.

Under the circumstances described, the portion of the proceeds from the pool which is retained by the hotel to be applied to the expenses of a subsequent tournament constitutes a profit from the operation of the pool for purposes of the wagering tax. Furthermore, even if the hotel did not retain any portion of the proceeds from the pool, it must be assumed that in the operation of such a pool there is an expectancy of other benefits, such as advertising the establishment or increasing attendance at a tournament to which there are charges for admission.

It is considered that this expectancy of indirect benefits constitutes `profit' for purposes of the wagering tax. For a similar conclusion relating to lotteries operated by merchants as trade stimulators, see Revenue Ruling 54-256, C.B. 1954-2, 401.

Accordingly, it is held that the drawing and auction conducted by the hotel constitute a wagering pool conducted for profit. The hotel corporation, as the operator of the pool, is liable for the wagering excise tax imposed by section 4401 of the Code, computed at 10 percent of the total of the amount for which the tickets for the drawing are sold and the amount for which the players are auctioned. Likewise, the corporation is liable for the $50 special tax imposed by section 4411 of the Code. Liability for the $50 special tax is incurred also by each individual, including any officer of the corporation, who receives wagers for or on its behalf.