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Who’s up for a thread on the IRS Memo regarding daily fantasy sports contests and whether #DFS entry fees should be treated as “wagers” subject to a federal excise tax? Or should I save it for the next episode of @ConDetrimental? Either way, I’ll explain why the IRS got it wrong.
Thread on IRS Memo re: daily fantasy sports
The core issues are two-fold: (1) are DFS entry fees "wagers"? and (2) are DFS contest operators engaged in "the business of accepting wagers" through their acceptance of entry fees to compete in contests? The answer to both questions is "no" (IMO), and I will explain why below.
First, there is no independent definition of "wager" under the Internal Revenue Code. And to confuse matters, the Treasury Regs provide a completely meaningless circular definition of the word "wager," essentially defining a "wager" as a "wager." Essentially meaningless.
So, how, then, does the IRS attorney arrive at a definition of the word "wager"? She relies entirely on a single Random House dictionary definition, ignoring more than one century of case-law on that issue. This is the linguistic equivalent of forum-shopping. You'll soon see why.
The sine qua non of a "wager" (as stated by numerous courts) is the "risk of loss" on both sides of the transaction. It's a contract where one side stands to win and the other to lose based on the outcome of the sporting event. DFS companies are indifferent to the result.
"In a wager or a bet, there must be two parties, and it is known, before the chance or uncertain event upon which it is laid or accomplished, who are the parties who must either lose or win."
Las Vegas Hacienda, Inc. v. Gibson, 77 Nev. 25, 29, 359 P.2d 85, 87 (1961)
Las Vegas Hacienda, Inc. v. Gibson, 77 Nev. 25, 29, 359 P.2d 85, 87 (1961)
See also:
Brown v. Bd. of Police Comm'rs of City of Los Angeles, 58 Cal. App. 2d 473, 477, 136 P.2d 617, 619 (1943)
Coors Brewing Co. v. Stroh, 86 Cal. App. 4th 768, 777, 103 Cal. Rptr. 2d 570, 577 (2001)
Alvord v. Smith, 63 Ind. 58, 62–63 (1878)
(same). Many more cases too.
Brown v. Bd. of Police Comm'rs of City of Los Angeles, 58 Cal. App. 2d 473, 477, 136 P.2d 617, 619 (1943)
Coors Brewing Co. v. Stroh, 86 Cal. App. 4th 768, 777, 103 Cal. Rptr. 2d 570, 577 (2001)
Alvord v. Smith, 63 Ind. 58, 62–63 (1878)
(same). Many more cases too.
The “risk of loss” on both sides of the transaction is essential to the finding of a “wager” and being “engaged in the business of wagering.” House-banked sports betting fits this paradigm, but DFS does not since contest operators are indifferent to result of the sporting event.
To be deemed in the "business of accepting wagers," the company must "assume the risk of profit or loss" tied to the outcome of the sporting event. That's explicit in the Treasury Regs. Unlike bookmakers, DFS contest operators have no stake the outcome of the sporting event
It's also expressed in the legislative history of the statute, as recognized by #SCOTUS:
"A person is considered to be in the business of accepting wagers if he is engaged as a principal who, in accepting wagers, does so on his own account."
US v. Calamaro, 354 U.S. 351 (1957)
"A person is considered to be in the business of accepting wagers if he is engaged as a principal who, in accepting wagers, does so on his own account."
US v. Calamaro, 354 U.S. 351 (1957)
"[The] unambiguous legislative history show[s] that the excise tax applies only to one who is ‘engaged in the business of accepting wagers' as a ‘principal . . . on his own account.'
United States v. Calamaro, 354 U.S. 351, 360, 77 S. Ct. 1138, 1144, 1 L. Ed. 2d 1394 (1957)
United States v. Calamaro, 354 U.S. 351, 360, 77 S. Ct. 1138, 1144, 1 L. Ed. 2d 1394 (1957)
“This language is clear and unambiguous. A person is considered to be engaged in the business of accepting wagers if he is engaged as a principal who accepts wagers “on his own account.”
Hayes & Conigliaro, 57 Drake L. Rev. 445, 455–56 (2009)
Hayes & Conigliaro, 57 Drake L. Rev. 445, 455–56 (2009)
“A 1958 Senate Report offered the same interpretation: “A person is considered to be in the business of accepting wagers only (1) if he is engaged as a principal who, in accepting wagers, does so on his own account; or (2) if he assumes the risk of profit or loss." Id.
"This language also demonstrates Congress's view that a person is engaged in the business of accepting wagers for federal taxation purposes if the person has a stake in the wager." Id.
In the context of #DFS contests, the companies do not stand to win or lose anything based on the outcome of any particular sporting event. Thus, the entry fees should not be considered "wagers" under this well-settled definition. And there is case-law support for that. See below.
