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referred to “Lucky Keno”, not to the site organizations, as the
provider of the Keno lotteries.
The computer equipment and software provided by Lucky for
the Keno lotteries produced wager tickets for the Keno players,
recorded the wagers of the players, randomly drew 20 numbers,
displayed the winning numbers on a display board, produced a
record of the date, time, and amount of the wagers, and generated
daily summaries of each lottery.
For 1995 and 1996, petitioners timely filed their joint
Federal income tax returns and reported their share of the income
of Lucky. Petitioners, however, reported no self-employment tax
with regard to their respective share of Lucky’s income.
In the notices of deficiency sent to petitioners, respondent
determined that the Keno lotteries constituted a trade or
business of Lucky and that petitioners’ respective share of
Lucky’s income was subject to self-employment tax under section
1401.
Discussion
Section 1401 imposes a tax on self-employment income. Self-
employment income includes gross income less allowable deductions
from a taxpayer’s trade or business and income derived from a
trade or business carried on by a partnership in which the
taxpayer is a partner. Sec. 1402(a). For purposes of the self-
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Last modified: May 25, 2011