Internal Revenue Service
 Revenue Ruling

Rev. Rul. 79-146

1979-1 C.B. 361

Section 4401 -- Tax on Wagers

IRS Headnote

Wagering; keno games. The operation of Two Game Parlay Keno is a lottery
and is subject to the wagering and occupational taxes imposed by sections
4401 and 4411 of the Code. The operation of basic Nevada Keno, Five Race
Keno, or Four Way Express Keno is not a lottery and is not subject to the
wagering and occupational taxes. 

Full Text

Rev. Rul. 79-146 

ISSUE 

Is the casino operation of basic Nevada Keno, Five Race Keno, Four Way
Express Keno, and Two Game Parley Keno, as described below, the operation
of a "lottery" subject to the wagering and occupational excise taxes? 

FACTS 

Basic Nevada Keno involves the betting on numbers that appear on a keno
ticket. Eighty numbers appear on the ticket and a player selects from 1 to
15 of the numbers on which to wager. The casino "caller" draws 20 of 80
possible numbers from a casino cage, and if enough of the "called" numbers
correspond to the numbers selected by the player, the player wins. The bets
are placed on the premises of the casino, and they are placed immediately
before the "calling" of the numbers. A player can bet on only one game at a
time. The payoffs vary depending on the amounts wagered by a player, the
amount of numbers selected by a player, and the amount of numbers "called"
that correspond to the numbers selected by the player. Players are required
to collect their winnings on any game immediately after the completion of
the game. 

Unlike basic Nevada Keno, the games of Five Race Keno, Four Way Express
Keno, and Two Game Parlay Keno all involve more than one drawing of 20 of
80 possible numbers. 

In Five Race Keno the casino issues a player one ticket for one specific
game of five consecutive drawings, called races. After purchasing a ticket
a player selects a number or numbers from 80 numbers on the ticket. If the
player wagers on less than five races on one ticket, the wagers are placed
for consecutive races starting with the first race. The casino's caller
then draws 20 numbers from a cage for each race and if the player has bet
on the race and enough of the called numbers correspond to the numbers
selected on the ticket, the player wins. A player who has not bet on a
given race may still win on the race if the numbers 1-2-3-4-5-6-7 are drawn
by the caller, in which case the player wins a stated amount. 

The ticket is not valid unless issued on the casino premises to the player
immediately before the start of the first race in the game, and the ticket
states that it is void if the player leaves the casino premises between the
time a wager is placed and the time that the last race shown on the ticket
has been played. A game (the five races) lasts about eight minutes. The
player may not collect any winnings before the fifth race is completed, and
if the player does not collect winnings on a ticket immediately after the
fifth race, the ticket is void. 

In Four Way Express Keno a player can bet at the same time on any
combination of numbers in four individual keno drawings. Each drawing is
operated independently on a separate board of 80 numbers. The four drawings
are operated simultaneously and the player maintains a uniform bet whether
the player bets on one drawing, two drawings, or on all four. The fact that
the player can bet on four simultaneous drawings at the same time is the
only difference between Four Way Express Keno and basic Nevada Keno. Bets
must be placed immediately before the game and winnings must be collected
immediately thereafter. 

Two Game Parlay Keno is similar to Four Way Express Keno in that it allows
a player to place a single bet on more than one drawing of 20 numbers. The
player selects any combination of numbers on the keno ticket and pays a
price for the ticket that allows the player to participate in two drawings.
However, in Two Game Parlay Keno, the drawings on which the player bets are
operated consecutively. Bets in Two Game Parlay Keno are placed on the
premises of the casino, and they are placed immediately before the first
drawing of the parlay. A player can bet on only one parlay (two drawings)
at a time. 

The player can win on either drawing. The player who wins on the first
drawing collects the winnings immediately after that drawing. The player
who wins on both drawings is awarded a bonus that is collected immediately
after the completion of the second drawing. 

LAW AND ANALYSIS 

The applicable sections of the Internal Revenue Code are 4401, which
imposes a percentage tax on taxable wagers to be paid by persons in the
business of accepting such wagers, 4411, which provides for a yearly
occupational tax to be paid by certain persons engaged in an operation
accepting wagers, and 4421, which defines a taxable wager in part as a
wager placed in a lottery conducted for profit. 

Under section 4421(2) of the Code and section 44.4421-1(b)(2) of the
Wagering Tax Regulations, keno games are excluded from the definition of a
taxable "lottery" if they are a type of game in which usually the wagers
are placed, the winners are determined, and the distribution of prizes is
made in the presence of all persons participating in the game. 

In order for the exclusion to apply, the statute and regulations require
that the operations be conducted in the presence of all participants. Thus,
for the purpose of the exclusion where a casino operates a game, the
players would have to be on the premises of the casino rather than
dispersed in adjacent swimming pools, motel or hotel rooms. Also, a game
played in the presence of other participants is played by placing wagers
(purchasing tickets) immediately before the beginning of each game and
presenting winning tickets for payment immediately after the game and
before the starting of the next game. Therefore, an advance payment game,
such as one which allows a player to place a wager on a game to take place
after a game which is immediately to take place, would not qualify for
exclusion from the tax. Winners must also be selected in the presence of
all players, meaning that players must usually remain on the casino
premises during the drawing or drawings which make up a game. 

Basic Nevada Keno meets the requirements for exclusion from the term
"lottery" within the meaning of section 4421(2) because tickets are
purchased on the casino premises immediately before the game, winnings are
required to be collected on the casino premises immediately after the game,
and the time needed to play one game is of short enough duration (the time
needed to draw 20 numbers) so that players will usually not leave the
casino premises during the game. 

The five consecutive races in Five Race Keno are one game. A player would
consider the 5 races as constituting one game because the player places all
wagers before the first race, the player has a chance of winning in all 5
races (none of which chances are clearly infinitesimal), and the player can
collect winnings on any of the races only after the completion of the fifth
race. The game meets the requirements for exclusion from the term "lottery"
within the meaning of section 4421(2) because tickets are purchased on the
casino premises immediately before the game, winnings are required to be
collected on the casino premises immediately after the game, and the game,
though consisting of five consecutive drawings, is of sufficiently short
duration (eight minutes) that it may be expected the players will usually
not leave the casino premises during the game. 

The only difference between Four Way Express Keno and basic Nevada Keno is
that a player in Four Way Express Keno can bet at one time on four
simultaneous drawings of numbers, whereas in basic Nevada Keno, a player
can bet at one time on only one drawing. Because this is the only
difference between basic Nevada Keno and Four Way Express Keno, Four Way
Express Keno will also be considered to meet the requirements for exclusion
from the term "lottery" within the meaning of section 4421(2). The
characteristics that allow basic Nevada Keno to satisfy the requirements
are also present in Four Way Express Keno. 

In Two Game Parlay Keno each ticket entitles its holder to play two games.
A player would view each drawing as a game because the winnings are
collected after each drawing. Each ticket entitles its holder to play more
than one game and thus involves advance wagering. Since the exclusionary
tests are not met if a player can bet on a game that is not to take place
immediately, this game is a "lottery" within the meaning of section 4421(2)
of the Code. 

HOLDINGS 

The operation of Two Game Parlay Keno, as described above, is a lottery and
is subject to the wagering and occupational taxes imposed by sections 4401
and 4411 of the Code. 

The operation of basic Nevada Keno, Five Race Keno, or Four Way Express
Keno, as described above, is not a lottery and is not subject to the
wagering and occupational excise taxes imposed by sections 4401 and 4411 of
the Code.