Standard flash game income does not qualify for the bingo exception

Plain-English summary

A tax-exempt charity raised money through a game called standard flash, in which players opened pull-tab cards that could be instant winners, instant losers, or cards allowing later number-matching play. The IRS concluded that the game was not bingo under section 513(f), so its income did not qualify for the bingo exception to unrelated business taxable income. The pull-tab feature made the game resemble a lottery because card outcomes were fixed when the deck was manufactured, outside the presence of the people placing wagers. The IRS also rejected splitting the game's income between its instant and later-play components. Each card purchase bought participation in the entire game, creating one income stream with no legal or factual basis for allocating part of the payment to qualifying bingo.

Ruling snapshot

• Question: Is standard flash a bingo game under section 513(f), in whole or in part, and can its income be split so the hold-card component qualifies?
• Outcome: advice given, the game is not qualifying bingo and cannot be bifurcated
• Key authorities: IRC §§ 501, 511, 512, and 513(f); Treas. Reg. §§ 1.513-1 and 1.513-5; Julius M. Israel Lodge of B'nai B'rith No. 2113 v. Commissioner

Full text (IRS public release)

                       INTERNAL REVENUE SERVICE
             NATIONAL OFFICE TECHNICAL ADVICE MEMORANDUM

                                       October 09, 2019




                                               Third Party Communication: None
                                               Date of Communication: Not Applicable


Number:             202002010
Release Date:       1/10/2020
Index (UIL) No.:    513.05-00, 512.01-00
CASE-MIS No.:       TAM-100554-19

Director, Exempt Organizations Examinations

      Taxpayer's Name:                         -----------------------------
      Taxpayer's Address:                      -------------------
                                                -------------------------------
      Taxpayer's Identification No             -----------------------
      Year(s) Involved:                        -----------------------
      Date of Adverse Conference:              ----------------


LEGEND:

Taxpayer     =      ------------------------------
City         =      ----------------------
State        =      --------------


ISSUE(S):

  1) Does the game of standard flash, as described below, qualify as a bingo game
      within the meaning of Section 513(f) of the Internal Revenue Code (the Code) in
      whole or in part?
TAM-100554-19                                 2

  2) May the game of standard flash be divided or bifurcated so that a part of the
      game may be classified as bingo within the meaning of 513(f) of the Code?


CONCLUSION(S):

   1) The game of standard flash, as described below, does not qualify as a bingo
       game within the meaning of section 513(f) of the Code.


   2) The game of standard flash may not be divided or bifurcated so that a part of the
       game may be classified as bingo within the meaning of section 513(f) of the
       Code.


FACTS:

Taxpayer is an organization described in section 501(c)(3) of the Code with public
charity classification as described in section 509(a)(2). Taxpayer was incorporated as a
State nonprofit public benefit corporation in --------and was recognized as a tax-exempt
organization by the Internal Revenue Service (IRS) in -------.


In ------- and -------, Taxpayer engaged in two activities:
1) Conducting two sessions per day at a gaming hall operated by Taxpayer in which
certain games of chance were played for fundraising purposes and constituted
Taxpayer’s sole source of income, and
2) Making grants to nonprofit entities in City.


Taxpayer’s games of chance included a bingo game played on a paper or electronic
5x5 grid (“traditional bingo”), the game of “lightning flash” and the game of “standard
flash.” In the audit years, only a small amount of net income remained after overhead
and expenses associated with making grants were considered.
TAM-100554-19                                       3

In addition to traditional bingo, two additional games of chance are played: “lightning
flash”1 and “standard flash”. At issue in this memorandum is only the tax treatment of
standard flash.


Description of Standard Flash


A “flash” game consists of a box of cards (usually called a “deck or a “deal”). The
number of flash cards included in a box typically ranges between 500 and 2,000 and
may be separated into smaller decks or deals (hereinafter, “decks”). Each card is made
of cardstock or thin cardboard. The size of each card varies from approximately the size
of a business card to the size of two business cards placed end to end. Flash cards are
sold for $-------on the floor of the bingo hall during traditional bingo sessions. All cards
in a deck must be sold and played in a single bingo session.2


Each standard flash deck contains individual cards. Each card in a standard flash deck
has one or more tabs or flaps that must be lifted to reveal the face of the card. When a
player at a bingo session buys a standard flash card, the player first opens the card and
removes the tab or flap that conceals the face of the card to reveal whether they
possess an “instant” winning card (as occurs on average approximately ----% of the
time), an “instant” losing card (as occurs on average approximately ------% of the time)
or a “hold” card (as occurs on average approximately ------% of the time). 3




1
  “Lightning flash” is a game sold from a deck during bingo sessions which does not include any instant
win cards.
2
  It is unclear whether during “one bingo session” refers to during the playing of one bingo game or, for
example, during a 2 hour “bingo session” in which multiple bingo games are played.
3
  These percentages are calculated using manufacturer’s game description sheets, which were provided
by Taxpayer.
TAM-100554-19                                       4

If the player has an “instant” card, the player may immediately compare the numbers
and/or symbols on the face of the card to the winning combinations of numbers and/or
symbols preprinted on the back of the card to determine if they have won or lost.4


If the card is a “hold” card, the player waits until all the cards in a deck are sold5 and the
bingo caller announces that the numbers for a particular game of standard flash6 will be
called. Hold cards typically depict a grid printed with numbers and may include a “free”
spot. The caller then calls numbers from balls randomly selected by a bingo blower or
bingo machine. The standard flash players with hold cards mark or dab the
corresponding numbers on their cards until the first players to mark or dab a series of
numbers and call “bingo” win the game. A hold card may include one or more
opportunities to win and each winner receives a pre-determined amount ranging from $-
------to $-----.

LAW AND ANALYSIS:

Section 501(a) of the Code provides, in part, for exemption from federal income tax for
organizations described under section 501(c).


Section 501(c)(3) of the Code describes, in part, organizations that are organized and
operated exclusively for religious, charitable, scientific, testing for public safety, literary,
or educational purposes, or to foster national or international amateur sports
competition … or for the prevention of cruelty to children or animals, no part of the net
earnings of which inures to the benefit of any private shareholder or individual.



4
  The manufacturer’s game description sheets provided by Taxpayer indicate that instant prize winners
may collect from $-- to $------for an instant winning card, depending on the deck.
5
  This memorandum addresses only standard flash games in which all cards in the deck are sold and
played in a single bingo session.
6
  Standard flash cards from multiple decks can be for sale at a time, so that standard flash games are
started throughout the session. Once all the cards from a particular game/deck, identified by name or
image, are sold numbers for that particular game may be called.
TAM-100554-19                                5

Section 511(a)(1) of the Code provides for a tax to be imposed for each taxable year on
the “unrelated business taxable income” (as defined in section 512) of most
organizations described in section 501(c).


Section 512(a)(1) of the Code provides that the term “unrelated business taxable
income” means the gross income derived by any organization from any “unrelated trade
or business” (as defined in section 513) regularly carried on by it, less certain
deductions and computed with the modifications provided in subsection 512(b).


Section 513(a) of the Code provides that the term “unrelated trade or business” means,
in the case of any organization subject to the tax imposed by section 511, any trade or
business the conduct of which is not substantially related (aside from the need of such
organization for income or funds or the use it makes of the profits derived) to the
exercise or performance by such organization of its charitable, educational, or other
purpose or function constituting the basis for its exemption under section 501.


Section 513(c) of the Code provides that the term “trade or business” includes any
activity which is carried on for the production of income from the sale of goods or the
performance of services.


Treas. Reg. Section 1.513-1(a) provides that the term "unrelated business taxable
income" means the gross income derived by an organization from any unrelated trade
or business regularly carried on by it, less the deductions and subject to the
modifications provided in section 512 of the Code. Therefore, unless one of the specific
exceptions of sections 512 or 513 is applicable, gross income of an exempt organization
subject to the tax imposed by section 511 is includible in the computation of unrelated
business taxable income if: (1) it is income from a trade or business; (2) such trade or
business is regularly carried on by the organization; and (3) the conduct of such trade or
business is not substantially related (other than through the production of funds) to the
organization's performance of its exempt functions.
TAM-100554-19                                  6


Section 513(f)(1) of the Code provides that an unrelated trade or business does not
include any trade or business which consists of conducting bingo games.


Section 513(f)(2) of the Code provides that, for purposes of section 513(f)(1), the term
“bingo game” means any game of bingo—
(A) of a type in which usually—
(i) the wagers are placed,
(ii) the winners are determined, and
(iii) the distribution of prizes or other property is made, in the
presence of all persons placing wagers in such game,
(B) the conducting of which is not an activity ordinarily carried out on a
commercial basis, and
(C) the conducting of which does not violate any State or local law.


Treas. Reg. Section 1.513-5(a), in part, provides that under section 513(f), the term
“unrelated trade or business” does not include any trade or business that consists of
conducting bingo games (as defined in §1.513-5(d)).


Taxpayer and the IRS agree that the game of standard flash is an unrelated trade or
business under section 513 subject to the tax imposed by section 511 unless the game
is a bingo game described under section 513(f).


   1) Does the game of standard flash, as described below, qualify as a bingo game
   within the meaning of section 513(f) of the Code, in whole or in part?


Treas. Reg. Section 1.513-5(d) defines a bingo game as a game of chance played with
cards that are generally printed with five rows of five squares each. Participants place
markers over randomly called numbers on the cards in an attempt to form a preselected
pattern such as a horizontal, vertical, or diagonal line, or all four corners. The first
TAM-100554-19                                   7

participant to form the preselected pattern wins the game. As used in this section, the
term “bingo game” means any game of bingo of the type described above in which
wagers are placed, winners are determined, and prizes or other property is distributed in
the presence of all persons placing wagers in that game. The term “bingo game” does
not refer to any game of chance (including, but not limited to, keno games, dice games,
card games, and lotteries) other than the type of game described in this paragraph.


In Julius M. Israel Lodge of B’nai B’rith No. 2113 v. Comm’r, 98 F.3d 190 (5th Cir.
1996), the Fifth Circuit upheld the Tax Court’s conclusion that the income derived from
“Instant Bingo” did not qualify for the exception under Section 513(f) of the Code and,
therefore, constituted unrelated business taxable income. Instant Bingo involved the
selling of tickets which were preprinted with patterns and then covered with pull-tabs.
Individuals purchased the tickets, pulled back the sealed tabs on the front of the card,
and then compared the patterns under the tabs with the winning patterns printed on the
back of the card. The circuit court held that:

  (T)he plain language of the code creates two predicates to determining whether any
  bingo game qualifies as the type of "bingo game" to which the paragraph (1)
  exclusion applies. First, a "bingo game" must qualify under the definition of "any
  game of bingo" (paragraph (2)). Only after we have determined that a "bingo game"
  is "any game of bingo" must we then look to the limiting factors upon such "game of
  bingo" outlined in subsection (2) (A) (i), (ii) and (iii).

  Julius M. Israel at 192.


On that basis, the court held that Instant Bingo was not “any game of bingo.”

  In its ordinary, everyday sense, “any game of bingo” refers to a specific game of
  chance in which numbers corresponding to preprinted numbers on a card are called
  out by random selection, the participants place markers over the corresponding
  numbers on their cards, and the first person to form a preselected pattern on his card
TAM-100554-19                                8

  wins the game. See, e.g., The American Heritage Dictionary 180 (2d College ed.
  1985) (defining bingo as “a game of chance in which players place markers on a
  pattern of numbered squares according to numbers drawn and announced by a
  caller”); Webster's Seventh New Collegiate Dictionary (1963 ed.) (defining bingo as
  “a game like lotto played usually by many players all at once for prizes;” defining lotto
  as “a game of chance played with cards having numbered squares corresponding
  with numbered balls drawn at random and won by covering five such squares in a
  row”).

  Julius M. Israel at 192.



Instant Bingo involved “only the player's purchase of a prepackaged card from a series
of similarly situated cards, and winning cards are those in which the preprinted
appearance of numbers on the front of the card—which appearance is determined by
the player's removing pull-tabs from the card—matches the preprinted winning
arrangements indicated on the reverse side of the card.” Julius M. Israel at 192-193.

Instant Bingo involved no random selection of numbers by a caller, nor did it require the
player to participate in the game by covering the squares on his card that correspond to
randomly drawn numbers. The court held that “an Instant Bingo player's participation in
the game was wholly independent of any other's and required only that he remove a
pull-tab to determine whether he has a winning card. A bingo game by any other name
is not a bingo game. As the Commissioner contends, Instant Bingo is, for all practical
purposes, a lottery. Thus, we find that Instant Bingo does not comport with even the
preliminary requirement under § 513(f) that it be ‘any game of bingo.’” Julius M. Israel at
193.


The court held that Instant Bingo also failed “to meet the secondary requirement of
subsection (A)(ii)—that the winners be determined in the presence of all persons
placing wagers in such games…. the taxpayer's Instant Bingo fails to satisfy subsection
(A)(ii) under any reasonable definition of the ‘in the presence’ phrase.”
TAM-100554-19                                        9

The winners in the Instant Bingo games were “determined at the time the deck of cards
is manufactured, and thus the winners are already predetermined outside the presence
of any persons placing wagers in such game. … Although one must wait until the actual
bingo session to determine which player will select and purchase which specific card,
the cards already have been vested with independent significance... much as they are
in any other instant-win lottery game under any other name.” See Julius M. Israel, at
193.

The court stated that “[i]n contrast, in a traditional bingo game, the bingo cards that the
player purchases are not predetermined as winners or losers, but rather are the conduit
by which the winners may be determined in the presence of all others placing wagers in
such game… See H.R. Rep. No. 1608, 95th Cong., 2d Sess. 4, reprinted in 1978
U.S.C.C.A.N. 3716, 3718.” Julius M. Israel, at 193.


Although standard flash may include a prize that entitles the winner to further play of the
hold cards, standard flash, similar to the game in Julius M. Israel, is a game of chance
in which cards are purchased for a chance of uncovering a prize (either an instant cash
prize or a hold card) by removing a tab. Instant cards are determined immediately by
comparing the numbers and/or symbols on the face of the card to the winning
combinations of numbers and/or symbols preprinted on the back of the card. Therefore,
standard flash does not qualify as “any game of bingo” within the meaning of section
513(f) of the Code.7


Even if we assume arguendo, as assumed in regard to the game in Julius M. Israel, that
standard flash satisfies the threshold definition of “any game of bingo” for purposes of
section 513(f)(2) of the Code, standard flash fails to meet the secondary requirement of
section 513(f)(2)(A)(ii), that the winners be determined in the presence of all persons
placing wagers in such games. The face of every standard flash card sold is obscured

7
  We also note that hold cards from certain standard flash games, displaying only a single line of 3 to 4
numbers, as some of the manufacturers’ game description sheets supplied by Taxpayer depict, do not
“generally” resemble a 5x5 card on which a pattern may be formed as described in § 1.513-5(d).
TAM-100554-19                                 10

by a tab or flap. The player does not know what type of card they will win when they
purchase the card. When a player opens his or her card, the type of card is revealed to
the player he or she has, whether the player has instantly won an instant cash prize (as
occurs on average about ----% of the time) , won an opportunity for further play of hold
cards (as occurs on average about ------% of the time), or has a card with no value, i.e.,
an instant loser (as occurs on average about ------% of the time).


Like the Instant Bingo cards in Julius M. Israel, instant winning cards in standard flash
were determined at the time the deck of cards was manufactured, thus winners were
already predetermined outside the presence of any persons placing wagers in such
game, and, therefore standard flash fails to satisfy section 513(f)(2)(A)(ii).


Accordingly, the game of standard flash, as described above, is not “any game of bingo”
within the meaning of section 513(f)(2) of the Code, fails to satisfy section
513(f)(2)(A)(ii) of the Code, and, therefore, does not qualify as a bingo game within the
meaning of section 513(f) of the Code.


   2) May the game of standard flash be divided or bifurcated so that a part of the
   game may be classified as bingo within the meaning of section 513(f) of the Code?


As discussed above, standard flash is not bingo as defined under section 513(f) and the
regulations thereunder. Standard flash generates a single undivided income stream.
Every receipt is attributable to the sale of a card, which represents an opportunity for an
instant win, a hold card, or an instant lose, to be revealed by the player after purchase.
None of the dollars received are demonstrably allocable to the instant aspect of the
game versus allocable to the hold aspect of the game. All of the dollars are necessarily
allocable to the full game.


There is no provision in section 511 through 513, related regulations, or in case law that
addresses the Taxpayer’s claim that a single stream of income from a game of chance
TAM-100554-19                                11

must be bifurcated to exclude a portion of that income from unrelated business income.
On the contrary, “[s]tatutory exclusions from income are matters of legislative grace and
are narrowly construed. Consequently, taxpayers bear the burden of proving that they
are entitled to any exclusion claimed.” Bussen v. C.I.R., 108 T.C.M. (CCH) 267 (T.C.
2014) (citing Commissioner v. Schleier, 515 U.S. 323, 328 (1995) and Robertson v.
Commissioner, T.C. Memo.1997–526 (citing Interstate Transit Lines v. Commissioner,
319 U.S. 590, 593 (1943)), aff’d, 190 F.3d 392 (5th Cir.1999)).


Income from standard flash comes from one stream of income—specifically, from the
sale of a deck that makes up the game. Each sale or wager is a dollar received for a
card that is part of the full game--both the removal of the tab or flap that reveals whether
the card is an instant winner, instant loser or a hold card and the subsequent play of any
hold card. There is no legal basis for bifurcating either the total game income or
individual dollars between the opportunity to win a cash prize revealed as the player
opens a tab on the one hand and the opportunity to play a hold card on the other hand.
Accordingly, standard flash may not be divided or bifurcated so that any part of the
game may be classified as bingo within the meaning of section 513(f).

CAVEAT(S):

A copy of this technical advice memorandum is to be given to the taxpayer(s). Section
6110(k)(3) of the Code provides that it may not be used or cited as precedent.