There has been some speculation in the gambling world on (1) why did the IRS memo on Daily Fantasy Sports (DFS) suddenly appear, and (2) is the IRS correct about the non-precedential memo?
Chris Krafcik on Twitter asked, ” Has anybody gotten to the why of the IRS DFS memo? Working backwards from the targets (DFS companies [i.e., DK [DraftKings] and FD [Fanduel]]), and having observed what I have of gambling industry lobbying skullduggery, fair to ask, imo, whether IRS was lobbied by a DK-FD competitor.”
The reality is far more mundane. John Brennan, who often writes on gambling, has an article today on the DFS memo. He quotes Jason Robins, CEO of DraftKings, from his conference call with gaming analysts last week:
“We have been involved in [an] audit with the IRS for many years, and this was a memo that has no force of law and is non-binding,” Robins said. “In our view, the analysis is deeply flawed. …” [Emphasis added]
Let’s assume that DraftKings raised the issue in the audit that DFS wagers are not gambling for purposes of federal tax law because of the Unlawful Internet Gambling Enforcement Act (UIGEA) (which is a near certainty). The UIGEA contains a carve-out for DFS specifically exempting it. The IRS auditor did not know whether the UIGEA carve-out applied to the wagering excise taxes, and his or her manager didn’t know. They did what they were supposed to do: They asked the IRS Chief Counsel Office how this should be treated. This memo is the response to that inquiry. (It’s highly unlikely this memo is the result of a competitor’s actions.)
The next question is whether or not the IRS memo reaches the correct conclusion. As I previously noted, I think it does. As noted in the memo, wagering is not defined in the Tax Code. But Court decisions are unanimous in what to do when a term isn’t defined. From Tschetschot v Commissioner (T.C. Memo 2007-38):
When a term is not defined, we must apply the term’s “plain, obvious, and rational meaning.” Liddle v. Commissioner, 103 T.C. 285, 293 n.4 (1994), affd. 65 F.3d 329 (3d Cir. 1995); see also Boyd v. United States, 762 F.2d 1369, 1373 (9th Cir. 1985). According to the dictionary, a “wager” is defined as “something risked or staked on an uncertain event” or “a bet”. Random House College Dictionary (1968). Similarly, “to wager” is defined as: (1) Something risked or staked on an uncertain event; bet; (2) the act of betting. Random House College Dictionary (1973).
We can also look to the UIGEA for a definition of wagers. Indeed, DraftKings argues that because of the UIGEA, DFS is not wagering (gambling). Let’s look at the definition from 31 U.S.C. § 5362 (1):
(1) Bet or wager.—The term “bet or wager”— (A) means the staking or risking by any person of something of value upon the outcome of a contest of others, a sporting event, or a game subject to chance, upon an agreement or understanding that the person or another person will receive something of value in the event of a certain outcome; …(E) does not include— … (ix) participation in any fantasy or simulation sports game or educational game or contest in which (if the game or contest involves a team or teams) no fantasy or simulation sports team is based on the current membership of an actual team that is a member of an amateur or professional sports organization (as those terms are defined in section 3701 of title 28)….
First, I agree that DFS companies (such as DraftKings) are exempt from the UIGEA. 31 U.S.C. § 5362 (1)(E)(ix) is quite clear about that.
However, this has nothing to do with how wagering is treated under the Tax Code (aka the Internal Revenue Code); that’s a different section of the United States Code (Title 26). But we can look at the overall definition of what wagering is from the UIGEA, even though the UIGEA doesn’t apply to DraftKings, to see how the definition of wagering does apply to them under Title 26 of the U.S.C. As I wrote back in 2014,
…[T]here are plenty of IRS and Tax Court rulings on this, and all say basically the same thing. For something to be gambling, three elements must be present:
1. A prize;
2. Chance; and
3. Consideration.
The IRS memo and common sense tells us that DFS has at least an element of chance. No rain is predicted for a football game, and it rains impacting play. Or a pitcher pulls his hamstring and only pitches two innings. Or, well, you get the idea. The examples are too numerous to mention and all of them back the IRS’s view that there is an element of chance to DFS.
I do agree that DFS is an activity where skill predominates. As I have written many times, poker is also a game where skill predominates over luck. But that’s irrelevant for the Tax Code; legally, poker is a form of skillful gambling. So is DFS. But it’s gambling no matter what the DFS companies may want to say.
The conclusion I reached last week still holds: The DFS companies have little chance of prevailing on this issue. I reached that conclusion in 2015, and nothing has changed. They would be far better off trying to lobby Congress for an exclusion in the Tax Code than fighting the IRS on this.
Tags: daily.fantasy.sports