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Rev. Rul. 1957-521 Document Info Printer

Revenue Rulings
Internal Revenue Service
 Revenue Ruling

Rev. Rul. 57-521

1957-2 C.B. 779

IRS Headnote

A puzzle contest in which the element of skill rather than that of chance
determines the winners is not a wagering pool or lottery within the meaning
of section 4421 of the Internal Revenue Code of 1954. 

Full Text

Rev. Rul. 57-521 

Advice has been requested concerning the applicability of the taxes on
wagering to the puzzle contest described below. 

The contest consists of 48 series of puzzles and each series contains three
puzzles. Each puzzle in the series represents the name of a person, place,
or material thing and has a specific point value. The correct solution to
each puzzle must be produced by the addition or subtraction of letters in
the correct names of the various objects used in the puzzle. There is only
one correct solution for each puzzle. 

To enter the contest the entrant solves three puzzles in series number one
and submits them to the operator with 25 cents. Upon receipt of the
solutions, the operator registers the contestant in the contest and mails
him the remaining 47 series. Thenceforth, the solutions are submitted at
the rate of four series a month, with payment of 25 cents for each series.
Contestants who tie with the highest total scores on the 48 series of
puzzles will be sent 10 additional puzzle charts for completion. Each
puzzle chart contains an assortment of illustrated objects and letters of
the alphabet, each with a designated point value. From the illustrated
objects and letters in each of the ten puzzle charts, the tied contestants
are required to construct an original puzzle similar in construction to the
puzzles contained in the 48 series of puzzles. Original puzzles are judged
on total points earned by contestants for each correctly identified object
and each allowable letter of the alphabet used in the construction of the
original puzzle and for letters of the alphabet comprising the solution to
the original puzzle. No contestant can earn any points whatsoever on an
original puzzle which is not constructed in exact accordance with
specifications on each puzzle chart. If, after completing all ten original
puzzles, ties still exist, the tied contestants continue the construction
of original puzzles. However, a time limit is set for the completion of
each puzzle. This process is repeated until the final winners are
determined on the basis of accumulated point values for the 48 series
puzzles, plus the originally constructed puzzles. The contest offers 1,000
cash prizes. For the 25 cents paid for each series, or a total of $12 for
48 series, the contestant also receives an illustrated annual reference
book for three years. 

Section 4401 of the Internal Revenue Code of 1954 imposes an excise tax on
wagers. Section 4411 of the Code imposes an occupational tax to be paid by
each person who is liable for tax under section 4401 of the Code, or who is
engaged in receiving wagers for or on behalf of any person so liable.
Section 4421(1) of the Code defines the term `wager' to mean (A) any wager
with respect to a sports event or a contest placed with a person engaged in
the business of accepting such wagers, (B) any wager placed in a pool with
respect to a sports event or a contest, if such pool is conducted for
profit, and (C) any wager placed in a lottery conducted for profit. Section
4421(2) of the Code provides that the term `lottery' includes the numbers
game, policy, and similar types of wagering. 

Section 325.21(c) of Regulations 132,  made applicable to the 1954 Code by
Treasury Decision 6091, C.B. 1954-2, 47, states that a wagering pool
conducted for profit includes any scheme or method for the distribution of
prizes to one or more winning bettors based upon the outcome of a sports
event or a contest, or a combination or series of such events or contests,
provided such wagering pool is managed and conducted for the purpose of
making a profit. Section 325.21(f) of the regulations provides, in part,
that, in general, a lottery conducted for profit includes 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. 

The rules and general system of operation of this contest clearly indicate
that it is a game of mental skill rather than chance. Facility and judgment
in the identification and use of symbols and words are required to win, and
chance is not a factor. As a general rule, contesting for a prize offered
by another in a contest of mental or physical skill of the contestant,
which the one offering the prize must award in any event, is not gaming;
and, the fact that each contestant is required to pay an entrance fee does
not make the payment a bet or gaming transaction unless the entrance fees
alone comprise the prize to be won by the successful contestant. Under the
rules of this contest, the operator has obligated himself to pay a sum
certain in prizes which is in no way contingent upon the number of entrance
fees received by him. It is concluded, therefore, that the successful
contestants are not `winning bettors' so as to bring the contest within the
scope of a wagering pool as defined in section 325.21(c) of the

Further consideration is given as to whether this contest constitutes a
`lottery.' The three necessary elements of a lottery are the offering of a
prize, the awarding of the prize by chance, and the giving of a
consideration for an opportunity to win a prize. While two of these
elements are present here, i.e. , (1) consideration and (2) a prize, the
element of chance is missing; therefore, this contest does not constitute a

In view of the foregoing, it is held that the operation of this type of
contest is not considered to be the operation of a wagering pool or lottery
within the meaning of section 4421 of the Code. Accordingly, the operator
of such a contest is not liable for the excise tax or the occupational tax
imposed by sections 4401 and 4411 of the Code, respectively.

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