SECTION 3. LEGAL BACKGROUND

.01. Withholding under section 3402 . Section 3402(q)(1) provides that every person who makes any payment of winnings which are subject to withholding

shall deduct and withhold from the payment an amount equal to the product of the third lowest rate of tax applicable under section 1(c) and such payment. Section 3402(q)(3) provides that the term “winnings which are subject to withholding” means, in part, proceeds from a wagering transaction, if the proceeds are more than $5,000 from a wager placed in any sweepstakes, wagering pool, or lottery. The term “wagering pool” includes “all pari-mutuel betting pools, including on- and off-track racing pools, and similar types of betting pools.” H.R. Conf. Rep. No. 94–1515, at 488 (1976) (relating to the enactment of § 3402(q)). “In common usage the term ‘pool’ connotes a particular gambling practice, an arrangement whereby all bets constitute a common fund to be taken by the winner or winners.” United States v. Berent, 523 F.2d 1360, 1361 (9 ^th Cir. 1975). Section 3402(q)(4)(A) provides that proceeds from a wager shall be determined by reducing the amount received by the amount of the wager.

.02. Information reporting un- der section 31.3402(q)–1(e) . Section 31.3402(q)–1(e) of the Employment Tax Regulations provides that each person who is to receive a payment of winnings subject to withholding shall furnish to the payer a statement on Form W–2G or Form 5754 (whichever is applicable) made under the penalties of perjury containing certain required information, including the name, address, and Taxpayer Identification Number of the winning payee. Section 31.3402(q)–1(f)(1) provides that every person making a payment of winnings for which withholding is required shall file a Form W–2G with the IRS on or before February 28 (March 31 if filed electronically) of the calendar year following the calendar year in which the payment of winnings is made and shall furnish a copy of the Form to the payee.