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 regulations.

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 lottery.

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.