CCA 1242011: Alaska municipalities are subject to wagering and occupational taxes

Plain-English summary

This Chief Counsel Advice concludes that Alaska municipalities are not agencies of a state for purposes of the wagering exemption in IRC § 4402(3). As a result, Alaska municipalities that engage in taxable wagering activities are subject to the wagering tax under IRC § 4401 and the related occupational tax under § 4411. The advice assumes that the activities at issue are wagering and does not decide whether any particular lottery, raffle, pull-tab game, race, or contest qualifies as wagering. The conclusion rests in part on Alaska law treating municipalities and other qualified organizations similarly for gaming permits and administration.

Ruling snapshot

• Question: Are Alaska municipalities state agencies eligible for the IRC § 4402(3) exemption from wagering and occupational taxes?
• Outcome: Advice
• Key authorities: IRC §§ 4401, 4411, 4402(3), and 4421; Alaska Stat. §§ 05.15.020, 05.15.100, and 05.15.690(39); Rev. Rul. 64-163

Full text (IRS public release)

Office of Chief Counsel
Internal Revenue Service
Memorandum
Number: 201242011
Release Date: 10/19/2012
CC:PSI:B07:CLangley
PRESP-129276-11

UILC: 4401.00-00, 4411.00-00

date: April 11, 2012

 to:   Shelley T. Van Doran
       Area Counsel (Gulf Coast Area)
       (Tax Exempt & Government Entities)

from: Stephanie Bland
Senior Technician Reviewer, Branch 7
(Passthroughs & Special Industries)

subject: Taxability of Wagering Conducted by Certain Municipalities

       This Chief Counsel Advice responds to your request for assistance, dated March 11,
       2011, regarding the taxability of wagering conducted by certain municipalities. This
       advice may not be used or cited as precedent.

       ISSUE

       Whether municipal governments in Alaska are subject to the wagering and occupational
       taxes imposed by §§ 4401 and 4411 of the Internal Revenue Code (Code), or whether
       such governments fall within the exemption set forth in § 4402(3) for wagers placed in a
       sweepstakes, wagering pool or lottery conducted by an agency of a state.

       CONCLUSION

       Municipal governments in Alaska are not agencies of a state acting under authority of
       state law for purposes of § 4402(3). Therefore, Alaska municipalities that engage in
       taxable wagering activities are subject to tax under §§ 4401 and 4411.

       BACKGROUND AND FACTS

       Certain Alaska municipalities currently conduct various types of wagering activities,
       including lotteries, raffles, pull-tab games, and various types of races and contests of
       skill. A question arose concerning whether these municipalities are liable for tax under
       §§ 4401 and 4411, or whether they fall within the exemption set forth in § 4402(3). This

advice does not address whether any one particular type of activity is considered
wagering for purposes of the Code. Rather, this advice assumes an activity is wagering
for purposes of the Code, and only addresses whether an Alaska municipality are
subject to the wagering and occupational taxes imposed by §§ 4401 and 4411.

LAW AND ANALYSIS

Section 4401(a) imposes a tax on wagers authorized under state law.

Section 4421 provides the definition of the term “wager.” Under § 4421, the term
“wager” includes any wager placed in a lottery conducted for profit.

Section 4402(3) provides that no tax shall be imposed on any wager placed in a
sweepstakes, wagering pool, or lottery that is conducted by an agency of a state acting
under authority of state law, but only if such wager is placed with the state agency
conducting such sweepstakes, wagering pool, or lottery, or with its authorized
employees or agents.

Section 4411 imposes an occupational tax on each person who is liable for the tax
imposed under § 4401, or who is engaged in receiving wagers for or on behalf of any
person so liable.

Alaska Stat. § 05.15.020 provides generally that a municipality or qualified organization
may conduct an activity permitted under Alaska’s wagering laws, if the municipality or
qualified organization applies for a permit, pays the appropriate permit fee, and receives
an annual permit issued by the Alaska Department of Revenue.

Alaska Stat. § 05.15.100 provides generally that the Alaska Department of Revenue
may issue a permit to a municipality or qualified organization to conduct bingo, raffles
and lotteries, pull-tab games, ice classics, race classics, rain classics, goose classics,
mercury classics, deep freeze classics, canned salmon classics, salmon classics, king
salmon classics, dog mushers' contests, snow machine classics, fish derbies, animal
classics, crane classics, cabbage classics, Calcutta pools, and contests of skill.

Alaska Stat. § 05.15.690(39) provides generally that the term “qualified organization”
means a bona fide civic or service organization or a bona fide religious, charitable,
fraternal, veterans, labor, political, or educational organization, police or fire department
and company, dog mushers' association, outboard motor association, or fishing derby or
nonprofit trade association in the state, that operates without profits to its members and
that has been in existence continually for a period of three years immediately before
applying for the license or permit.

The exemption under § 4402(3) was enacted as part of the Excise Tax Reduction Act of
1965, Pub. L. No. 89-44, § 813(a), in response to Rev. Rul. 64-163, 1964-1 C.B. 403,
which held that New Hampshire was subject to the wagering and occupational excise

taxes for a sweepstakes run by the state. The New Hampshire sweepstakes was based
on the results of a horse race. As originally enacted, § 4402(3) exempted only wagers
placed in a sweepstakes, wagering pool, or lottery (i) conducted by an agency of a state
acting under authority of state law, and (ii) the ultimate winners of which are determined
by the results of a horse race. Other states subsequently began to have their own
lotteries that were not tied to horse racing. In response to these new state lotteries,
Congress removed the horse race requirement from § 4402(3) as part of the Tax
Reform Act of 1976, Pub. L. No. 94-455, § 1208(a).

The lotteries at issue here are not conducted by Alaska or one of its agencies, but
rather by certain municipalities in Alaska. As the legislative history of § 4402(3) amply
demonstrates, Congress intended an exemption for state-conducted wagering activities.
There is no evidence, however, that Congress intended to expand the § 4402(3)
exemption to anything other than state-conducted wagering activities.

Alaska law puts municipalities in the same category as any other “qualified organization”
for purposes of wagering activities. Municipalities and other qualified organizations both
have to apply for a gaming permit using the same application. Both have to designate
natural persons who are in charge of the gaming activity and both have similar
restrictions on who such person can be. Therefore, the fact that Alaska law does not
distinguish between a municipality and a qualified organization for purposes of wagering
activities demonstrates that Alaska municipalities are not agencies of a state acting
under authority of state law for purposes of the wagering tax under § 4401 and the
related occupational tax under § 4411. Accordingly, Alaska municipalities that engage
in taxable wagering activities do not qualify for the § 4402(3) exemption, and are subject
to the §§ 4401 and 4411 wagering and occupational taxes.

This writing may contain privileged information. Any unauthorized disclosure of this
writing may undermine our ability to protect the privileged information. If disclosure is
determined to be necessary, please contact this office for our views.

Please call (202) 622-3130 if you have any further questions.