Julius M. Israel Lodge of B'Nai B'Rith No. 2113 v. Commissioner

United States Court of Appeals,

Fifth Circuit.

No. 96-60087.

JULIUS M. ISRAEL LODGE OF B'NAI B'RITH NO. 2113, Petitioner-Appellant,

COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.

Oct. 25, 1996.

Appeal from the United States Tax Court.

Before WISDOM, SMITH and PARKER, Circuit Judges.

JERRY E. SMITH, Circuit Judge:

The Julius M. Israel Lodge of B'nai B'rith No. 2113 (the "taxpayer"), a non-profit

organization enjoying a tax exemption under 26 U.S.C. § 501(c)(8), appeals the Tax Court's decision

that the taxpayer's Instant Bingo games do not qualify for the "bingo game" exception to the

unrelated business taxable income provision of 26 U.S.C. § 511. Finding no error, we affirm.

From 1987 through 1989, the taxpayer conducted traditional bingo games ("Bingo") to raise

funds for its charitable activities. In July 1987, it also began conducting Instant Bingo. Both Bingo

and Instant Bingo1 are authorized under the Texas Bingo Enabling Act, TEX.REV.CIV.STAT.ANN. art.

179d (West 1987), and both were conducted in full accordance with the Act. For each of the taxable

years, the taxpayer filed a Return of Organization Exempt from Income Tax (Form 990) but did not

file any Exempt Organization Business Income Tax Returns (Form 990T).

Upon audit, the Commissioner of Internal Revenue determined that the Instant Bingo

activities generated unrelated business income subject to tax under § 511(a)(1). In the

Commissioner's view, Instant Bingo, in contrast to regular Bingo, does not constitute "bingo games"

1
The parties stipulated to the definition of Instant Bingo: a game of chance in which an
individual places a wager by purchasing an Instant Bingo card that is preprinted with bingo card
patterns and is covered with sealed pull tabs. To determine whether a prize is payable, the player
pulls tabs from the front of the card and compares the preprinted patterns that have been revealed
with those preprinted on the reverse. If the card is a winner, the player takes the card to a cashier
or usher and collects his prize.
within the meaning of § 513(f), which excepts the sponsorship of certain bingo games from the

definition of "unrelated trade or business." The taxpayer petitioned the Tax Court, which sustained

the Commissioner's findings.

We review de novo the Tax Court's statutory construction of the § 513(f) bingo game

exclusion from § 511(a)(1). Findings of fact are reviewed for clear error. See McKnight v.

Commissioner, 7 F.3d 447, 450 (5th Cir.1993).

The st arting point for interpreting the meaning of § 513(f) is the plain language of the

statute.2 See Louisiana Credit Union League v. United States, 693 F.2d 525, 541 (5th Cir.1982).

The words of the statute must be construed in their "ordinary, everyday" sense. Crane v.

Commissioner, 331 U.S. 1, 6, 67 S.Ct. 1047, 1050, 91 L.Ed. 1301 (1947). The "default rule of

statutory interpretation [is] that exclusions from income must be narrowly construed." Commissioner

v. Schleier, --- U.S. ----, ----, 115 S.Ct. 2159, 2163, 132 L.Ed.2d 294 (1995) (citation omitted).

The statute provides,

(f) Certain bingo games.—

(1) In general.—The term "unrelated trade or business" does not include any trade or
business which consists of conducting bingo games.

(2) Bingo game defined.—For purposes of paragraph (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,

2
As a threshold matter, we dismiss the taxpayer's contention that we must look to Texas state
law in determining whether Instant Bingo is exempt from federal taxation under the federal tax
code. The taxpayer is correct that United States v. Irvine, 511 U.S. 242, ----, 114 S.Ct. 1473,
1481, 128 L.Ed.2d 168 (1994), permits us to review federal tax provisions under state law or
limitations where "the language or necessary implication of the section involved makes its
application dependent on state law" (quoting United States v. Pelzer, 312 U.S. 399, 402-03, 61
S.Ct. 659, 661, 85 L.Ed. 913 (1941)), but such is not the case here. That § 513(f) expressly
directs us to consult state law under paragraph (C) (and arguably under paragraph (B)) does not
require us to look to Texas law under paragraph (A).
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

26 U.S.C. § 513(f).

The taxpayer has focused much of its attention on the subsection (2)(A) limiting definitions

of qualified bingo games, but we turn first to the predicate paragraph (2) definition of "any game of

bingo." The 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).

On this basis, the taxpayer's Instant Bingo is not "any game of bingo." In its ordinary,

everyday sense, "any game of bingo" refers t o 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 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").

The Commission's descript ion of a bingo game is in accord: "A bingo game is 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." 26 C.F.R. § 1.513-5(d) (emphasis added).3

The taxpayer's Instant Bingo is devoid of the critical element of bingo that runs through these

ordinary, everyday definitions—that players place markers over randomly called numbers in an

attempt to form a preselected pattern. Instant Bingo involves only the player's purchase o a
f

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. See Bingo Tax Rules § 3.554(a)(3) (Tex. Comptroller of Pub.

Accounts 1987).

Instant Bingo involves no random selection of numbers by a caller, nor does it require the

player to participate in the game by covering the squares on his card that correspond to randomly

drawn numbers. Rather, an Instant Bingo player's participation in the game is wholly independent

of any other's and requires 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."

Even if we assume arguendo that Instant Bingo satisfies the threshold definition for purposes

of § 513(f), it fails 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. Much of the argument in

3
The taxpayer's contention that we are unable to look to the Treasury Regulation's definition of
bingo game is unfounded. It is fundamental that Treasury Regulations must be sustained and may
be relied upon unless they are unreasonable or plainly inconsistent with the statute. See Cottage
Sav. Ass'n v. Commissioner, 499 U.S. 554, 560-61, 111 S.Ct. 1503, 1507-08, 113 L.Ed.2d 589
(1991); Louisiana Credit Union League, 693 F.2d at 530 n. 14. Where, as here, the regulation's
definition of the term "bingo game" is consistent with both ordinary parlance and the plain
meaning of the statute, we are within our province to consult it. We also note that a regulation
has "particular force if it is a substantially contemporaneous construction of the statute by those
presumed to have been aware of congressional intent." National Muffler Dealers Ass'n v. United
States, 440 U.S. 472, 477, 99 S.Ct. 1304, 1307, 59 L.Ed.2d 519 (1979). This regulation, written
only eighteen months after the statute's enactment, comports with these guidelines. See Zemurray
Found. v. United States, 687 F.2d 97, 100 n. 6, 101 (5th Cir.1982).
the Tax Court and by the taxpayer in this appeal has centered on the scope of the phrase "in the

presence of all persons placing wagers in such games." We need not reach that issue, however, as

we find that the taxpayer's Instant Bingo fails to satisfy subsection (A)(ii) under any reasonable

definition of the "in the presence" phrase.

This conclusion is compelled by the fact that the winners in the Instant Bingo games are

determined at the time the deck of cards is manufactured, and t hus the winners are already

predetermined outside the presence of any persons placing wagers in such game. The winning of the

game is completely independent of any other external events, such as the random calling of numbers

in a traditional bingo game. Although one must wait until the actual bingo occasion to determine

which player will select and purchase which specific card, the cards already have been vested with

independent significance under Texas state law, much as they are in any other instant-win lottery

game under any other name.

In contrast, in a traditional bingo game, the bingo cards that the player purchases are not

predetermined as winners or losers, but rather are t he conduit by which the winners may be

determined in the presence of all others placing wagers in such game. The mechanism by which the

winners are determined is the random draw of numbers, which drawing forms the part and parcel of

the traditional bingo experience. It is only by playing the bingo game in the presence of all others,

and by listening to the random calling of numbers corresponding to squares on the bingo card, that

the player can transform what is otherwise a card with a series of numbers and letters into a valuable

card with the winning combination. It is the very essence of the game of bingo that the random call

of numbers—not a deck of cards containing pre-designated winners—determines the player's success

in the presence of all other participants; indeed, the purpose of the traditional bingo game is to select

a winner from among the participants. See H.R. REP. NO. 1608, 95th Cong., 2d Sess. 4, reprinted

in 1978 U.S.C.C.A.N. 3716, 3718.

The taxpayer raises a host of other policy objections to the Tax Court's findings. First, the

taxpayer contends that the Tax Court's reading of "in the presence of all others placing wagers"
contravenes the Commission's reading of the phrase in connection with 26 U.S.C. § 4421(2)(A) (the

wagering tax). We need not reach that issue, however, as we affirm the Tax Court's ultimate holding

on grounds wholly independent of the definition of such phrase.

Second, the taxpayer argues that, because Texas law does not allow Instant Bingo to be

played on a commercial basis, it gains no competitive advantage over others by withholding taxes on

the proceeds of its Instant Bingo, and thus the Commissioner has no valid public policy reason to

deny the exemption. We agree with the taxpayer that avoidance of unfair competition was one of the

congressional objectives in enacting the tax on unrelated business income, see Louisiana Credit

Union League, 693 F.2d at 539-40, but we have also recognized that the need to stem a substantial

loss of revenue, among others, was among the objectives. See id. Similarly, we disagree that the

Commissioner's distinction between traditional bingo and Instant Bingo is artificial; the distinction

is as tenable as that between traditional bingo and any other instant-win lottery that is taxable as an

unrelated business or trade.

Finally, the taxpayer asserts that if it is required to pay federal taxes on the proceeds of its

Instant Bingo activities, it will be denied, under Texas law, a corresponding federal income tax

deduction unless it can trace its charitable expenditures specifically to those proceeds, as distinct from

its tax-exempt proceeds from traditional bingo. The taxpayer's statement of the law is entirely

correct. But, under 26 U.S.C. § 6001, it is already required to keep the necessary books and records

to allocate its income and expenses between taxable and tax-exempt activities. See 26 C.F.R. §

1.265-1. Thus, the taxpayer believes that the Commissioner's ruling places it "between a rock and

a hard place." It can either pay federal income tax where little or none is due or employ professionals

to negotiate with the Internal Revenue Service to increase the percentages of expenses attributable

to Instant Bingo. While this may be unfortunate, it does no t provide us any basis upon which to

reverse the Tax Court.

AFFIRMED.