IRS memorandum provides guidance on scope of ‘wagering’

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August 2020

Overview

The IRS Office of Chief Counsel released a legal advice memorandum on August 7 opining that the excise tax on wagers under Section 4401 applies to daily fantasy sports (DFS) operators. While it may not be used or cited as precedent, this guidance represents one of the first IRS interpretations of the excise tax on wagering in the internet age and provides insight into the IRS’ thinking on wagering excise tax. [Office of Chief Counsel Memorandum, AM 2020-009, 8/7/20]

The takeaway

The memorandum suggests the wagering excise tax could apply to value risked on activities and applies a broad interpretation to the definition of ‘wager.’  Further, the memorandum states that an activity could fall under one or multiple definitions under Section 4421.  Additionally, the memorandum finds that federal law declaring fantasy sports are not wagers is not relevant to the determination of excise tax and narrowly interprets prior guidance as to whether games of skill are excluded from the definition.

These interpretations should be considered when any party is accepting cash or equivalents from their customers for the chance to win further cash or property.

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Peter Michalowski

State and Local Tax Leader, PwC US

Kevin Brown

Principal, Tax Controversy and Regulatory Services Leader, PwC US

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