Rev. Rul. 85-46

1985-1 C.B. 334, 1985-15 I.R.B. 7.

EXEMPT ORGANIZATIONS; WITHHOLDING ON PROCEEDS FROM LOTTERY

Published: April 15, 1985

Section 3402.-Income Tax Collected At Source, 26 CFR 31.3402(q)-1: Extension of withholding to certain gambling winnings.

  Exempt organizations; withholding on proceeds from lottery. In addition to the normal information reporting requirements of section 6041 of the Code, an organization exempt from tax under section 501 (c)(3) is also subject to the withholding requirements of section 3402(q)(1) if the organization pays lottery winnings of more than $1,000.

ISSUE

  Is X, an organization exempt from income tax under section 501(a) of the Internal Revenue Code by reason of section 501(c)(3), required to withhold tax in the situation described below?

FACTS

  A purchased a $1 ticket for a lottery conducted by X, an organization exempt from income tax as an organization described in section 501(c)(3) of the Code. On October 15, 1983, the drawing was held, and A won $2,000.

LAW AND ANALYSIS

  Section 3402(q)(1) of the Code provides the general rule that every person, including federal, state, and local governments, that makes payment of winnings subject to withholding must deduct and withhold a tax equal to 20 percent of the payment.

  Section 3402(q)93)(C)(i) of the Code defines 'winnings which are subject to withholding' to include proceeds of more than $1,000 from a wager placed in a sweepstakes, wagering pool, or lottery (other than a state-conducted lottery).

  Under section 3402(q)(4) of the Code, proceeds from a wager must be determined by reducing the amount received by the amount of the wager. Proceeds which are not money shall be taken into account at their fair market value.

  Under section 31.3402(q)-1(b) of the Employment Tax and Collection of Income Tax at Source Regulations, if proceeds from the wager qualify as winnings subject to withholding, then the total proceeds, and not merely the amount in excess of $1,000, are subject to withholding.

  Section 6041(a) of the Code provides that all persons engaged in a trade or business and making payments in the course that trade or business of $600 or more to another person that include fixed and determinable gains, profits, and income, and must make a true and accurate return under such regulations and in the form and manner and to the extent the Secretary may prescribe, setting forth the amount of the gains, profits, and income, and the name and address of the recipient of the payment.

  Section 1.6041-1(b) of the Income Tax Regulations provides that the term 'all persons engaged in a trade or business' as used in section 6041(a) of the Code includes not only those so engaged for gain or profit, but also organizations the activities of which are not for the purpose of gain or profit. Thus, the term includes the organizations referred to in section 501(c). A prize won in a lottery conducted by a charitable organization as a fund-raising activity is subject to the reporting requirements of section 6041(a).

  Similarly, the term 'every person' in section 3402(q)(1) of the Code include any organization exempt from income tax under section 501(c)(3) of the Code, such as a church. Such an organization is not exempt from the withholding requirements described above.

HOLDING

  In addition to the normal information reporting requirements of section 6041 of the Code, X is also subject to the withholding requirements of section 3402(q)(1). Since the proceeds of the wager are greater than $1,000 ($2,000-$1 wager) C must withhold $399.80 ($1,999 x 20 percent) from A's winnings.

Rev. Rul. 85-46, 1985-1 C.B. 334, 1985-15 I.R.B. 7.