Transcript Legal Issues of Fundraising via Charitable Raffles, Poker, Auctions

Legal Issues of Fundraising
via Charitable Raffles,
Poker, Auctions, and Other
Gaming
Tyree Collier
Thompson & Knight L.L.P.
Dallas, Texas
Charitable Raffles
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Charitable Raffles in Texas

Default: Raffles are illegal gambling
– Criminal Act for participant and promoter

Exception: Texas Charitable Raffle
Enabling Act
– Promoter must comply with Act
– Participant must reasonably believe conduct is
permitted by Act
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Texas Charitable Raffle Enabling Act

Qualified Organizations can hold raffles

Four types of Qualified Organizations
– Qualified nonprofit organization
– Religious society
– Volunteer fire department
– Volunteer emergency medical service
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Texas Charitable Raffle Enabling Act

Qualified Organizations cannot distribute
income to members, officers, governing
body
– Reasonable compensation allowed
– Reimbursement of expenses allowed
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Texas Charitable Raffle Enabling Act
Qualified Nonprofit Organization
– Has existed for at least three preceding years
– No political intervention
– No substantial lobbying
– Has IRS exemption letter ruling organization
is I.R.C. § 501(c) organization
– Satisfies formation requirement
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Texas Charitable Raffle Enabling Act
Qualified Nonprofit Organization Formation
Requirement: 4 types
– Formed or authorized under TNPCA/TBOC
– Legal entity serving as local chapter or unit of
parent formed or authorized under
TNPCA/TBOC
– Local chapter or unit of a grand lodge
– Unincorporated local organization affiliated for
at least 3 years with state or national
organization
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Texas Charitable Raffle Enabling Act

Qualified religious society
– Existed in Texas at least 10 years

Qualified volunteer EMS or qualified
volunteer fire department
– Can pay members only nominal compensation
– Organized primarily to provide EMS service or
fire-fighting service
– Actively provides EMS service or fire-fighting
service
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Texas Charitable Raffle Enabling Act
Requirements

Single drawing among single ticket pool

No more than 2 non-overlapping raffles
per calendar year

Must have ownership or possession of
prize(s) or post bond for full value

Special rules for “reverse raffles”
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Texas Charitable Raffle Enabling Act
Requirements (Continued)

No paid advertising in mass media

No statewide promotion or sale

No compensation for raffle workers

No sales by unauthorized persons
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Texas Charitable Raffle Enabling Act
Requirements (Continued)

Information printed on each ticket:
– Name of organization
– Address of organization or of a named officer
of organization
– Price of the ticket
– General description of each prize valued at
more than $10
– Date when prize(s) will be awarded
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Texas Charitable Raffle Enabling Act
Requirements (Continued)

Prize Limitations:
– Money not offered or awarded as prize (but
prepaid credit cards are not money)
– Prize value limited to $50K ($250K if a
residence) if organization provides any
consideration for prize
– No limit on prize value if organization provides
no consideration for prize
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Texas Charitable Raffle Enabling Act
Requirements (Continued)

Net proceeds must be used for authorized
charitable purposes:
– Religious or educational enhancement
– Relief of disease, suffering, distress
– Contributing to physical well-being
– Establishing needy or deserving people as
worthy and useful citizens
– Increasing patriotism and government loyalty
– Public works and public structures
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Charitable Raffles in Texas

Sales Tax
– No sales tax due on ticket sales
– Cannot issue exemption certificate when
purchasing prizes

Motor Vehicles as prizes
– Sales tax on vehicle if charity pays for vehicle
– $10 gift tax from charity and/or raffle winner
if vehicle donated for raffle
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Federal Income Tax Rules for Raffles

Charitable Contribution Deductions
– No deduction allowed for purchase of raffle
ticket: chance to win equals price paid
– Normal I.R.C. § 170 rules for persons who
donate prizes for raffles
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Federal Income Tax Rules for Raffles

Unrelated Business Income Tax (“UBIT”)
– Raffle is unrelated trade or business
– No UBIT if raffle not regularly carried on
– No UBIT if substantially all work performed by
volunteers
– No UBIT if raffle is sale of donated
merchandise (questionable)
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Federal Income Tax Rules for Raffles
Reporting and Withholding Rules
– Winner includes prize in gross income
– Form W-2G required if raffle prizes of $600 or more in
single year to single person
– Withholding required if prize worth more than $5K
and is at least 300 times ticket cost
– Backup withholding required if Form W-2G required
and winner does not provide W-9
– Form 990 – Schedule G
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Poker Tournaments
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Poker Tournaments in Texas

Typical charity poker fundraiser
– Participants pay for chips
– Participants use chips to make bets
– Winners receive cash or prizes

Result: Illegal gambling
– Criminal Act for participant and promoter
– No exception for charities
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Poker Tournaments in Texas
How to make poker fundraiser legal
– Eliminate consideration
 Ask for contributions
 Combine with dinner fundraiser
 But cannot require that participants contribute or
purchase dinner
– Eliminate prize
 Play for pride
 Play for plaque or trophy (questionable)
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Poker Tournaments in Texas
How to make poker fundraiser legal (cont.)
– Play for prizes to charities
 Participants pay to play
 Participants designate (in advance) charity to
receive prize money if they win
 Participants receive no prize other than possibly
plaque or trophy
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Poker Tournaments in Texas

Exception to criminal statute for poker
– Private place
 Public cannot have access
 Only winners can receive economic benefit
– Not helpful for charities because point of
fundraiser is for charity to benefit
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Poker Tournaments in Texas

Texas Sales Tax
– Entry fee should be considered for
“amusement service”
– No sales tax on amusement service sold by
charitable, educational, or religious
organization
– Charity cannot issue exemption certificate
when purchasing prizes
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Federal Income Tax Rules for Poker

Charitable Contribution Deductions
– No deduction allowed for poker entry fee if
winners can receive valuable prizes
– Deduction allowed for portion of entry fee if
no chance to win valuable prize and fee
exceeds value of goods and services
– Normal I.R.C. § 170 rules for persons who
donate prizes for poker
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Federal Income Tax Rules for Poker

Unrelated Business Income Tax
– No UBIT if not regularly carried on
– No UBIT if substantially all work done by
volunteers
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Federal Income Tax Rules for Poker
Reporting and Withholding Rules

Charity must provide “quid pro quo” notice to
participants if no chance to win valuable prize and
payment is $75 or more:
 Informs participant that amount of deductible
contribution limited to excess of contribution over value
of goods and services received from charity
 Provides good faith estimate of value of goods and
services provided to participant by charity
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Federal Income Tax Rules for Poker
Reporting and Withholding Rules (Cont.)

Winner includes prize in gross income

Form W-2G required if raffle prizes of $600 or more in
single year to single person

Withholding required if prize worth more than $5K and is
at least 300 times ticket cost

Backup withholding required if Form W-2G required and
winner does not provide W-9
Form 990 – Schedule G

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Charity Auctions
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Charity Auctions in Texas

Good News: Not Gambling
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Charity Auctions in Texas

Alcoholic Beverages as Auction Items
– Must obtain temporary charitable auction permit
– Costs $25
– Issued for 5-day period
– Only issued to 501(c)(3) organizations
– Allows auction only in areas where sale of relevant
type of alcohol is allowed
– Only one per calendar year
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Charity Auctions in Texas

Alcoholic Beverages as Auction Items (Cont.)
– Beverages to be auctioned must have been donated to
the charity
– Charity cannot pay persons for arranging or conducting
auction or donations of beverages
– Charity must give pre-auction notice to closest branch
office of Texas Alcoholic Beverage Commission
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Charity Auctions in Texas

Alcoholic Beverages as Auction Items (Cont.)
– Auction can be held at premises of another
alcohol sales permit holder or licensee
 Must keep auction items separate from regular
inventory
 Must remove auction items from premises immediately
after auction
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Charity Auctions in Texas

Texas Sales Tax
– Texas charities are exempt from sales tax on
their purchases
– Texas charities that are sellers ordinarily must
obtain sales tax permit and collect sales tax
– Exception: Two one-day sales per calendar
year
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Charity Auctions in Texas

Texas Sales Tax Charity Exception
– Charity can have two one-day sales per calendar
year w/o sales tax permit or collection
– Does not apply to items that sell for more than
$5K and were not manufactured by or donated to
the charity
– Does not apply to items donated to charity and
sold back to donor for more than $5K
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Federal Income Tax Rules for Auctions
Charitable Contribution Deductions for
Donors of Auction Items
– Most goods donated as auction items
 Tangible personal property not used by charity in
activity related to exempt purpose
 Deduction limited to lesser of cost or fair market
value
 Items purchased and immediately donated for
auction should have fair market value equal to cost
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Federal Income Tax Rules for Auctions
Charitable Contribution Deductions for
Donors of Auction Items (Cont.)
– Self-created goods donated as auction items
 Deduction ordinarily limited to cost of supplies
consumed in creating goods
– Services donated as auction items
 No deduction for contribution of contributor’s own
services
 Donation of purchased airline tickets or hotel stay
should be deductible
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Federal Income Tax Rules for Auctions
Substantiation of Charitable Contribution
Deductions for Donors of Auction Items
– Donor must have either a bank record or a
written record from charity showing
 charity’s name
 date of contribution
 amount of contribution or, if contribution is a good,
location of contribution and reasonably detailed
description of the good
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Federal Income Tax Rules for Auctions
Substantiation of Charitable Contribution
Deductions for Donors of Auction Items
– Donor giving $250 or more at once must have
written acknowledgement from charity
 Obtain by earlier of date return for year filed or
due date (with extensions) for such return
 Must include amount of cash, description of any
property, and whether charity provided any goods
or services as consideration for the contribution
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Federal Income Tax Rules for Auctions
Charitable Contribution Deductions for
Purchasers of Auction Items
– No charitable contribution unless amount paid
exceeds fair value of auction item
– If amount paid exceeds fair value and amount
paid is $75 or more, charity must provide
“quid pro quo” notice to contributor
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Federal Income Tax Rules for Auctions

Unrelated Business Income Tax
– No UBIT if not regularly carried on
– No UBIT if substantially all work done by
volunteers
– No UBIT if substantially all auction items
consist of merchandise donated to the charity
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Bingo
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Bingo in Texas

Back to Gambling Again

Legal under Bingo Enabling Act
– Chapter 2001 of Texas Occupations Code
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Bingo in Texas

Bingo Enabling Act
– Heavy regulation of bingo
– Requires bingo permit
– Annual license fee
– Significant training required
– Prize value limits
– Narrow group of organizations can apply
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Bingo in Texas

Bingo Enabling Act: Organizations that can apply
for bingo permit
 Religious societies existing at least 8 years
 Nonprofits supporting medical research or
treatment and existing at least 3 years
 Fraternal organizations active at least 3 years
 Veterans organizations chartered by US Congress
 Active volunteer fire departments
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Federal Income Tax Rules for Bingo

Charitable Contribution Rules
– Purchase of bingo games not a charitable
contribution

Unrelated Business Income Tax
– Section 513(f): conducting bingo is not
unrelated trade or business
 Must not violate state or local law
 State and local law must not allow for-profit bingo
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Federal Income Tax Rules for Bingo

Reporting and Withholding Rules
 Winner includes prize in gross income
 Form W-2G required if bingo prizes of $1,200 or
more to single person in single game
 Backup withholding required if Form W-2G
required and winner does not provide W-9
information
 Bingo specifically exempt from regular withholding
of gambling winnings
 Form 990 – Schedule G
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Legal Issues of Fundraising
via Charitable Raffles,
Poker, Auctions, and Other
Gaming
Tyree Collier
Thompson & Knight L.L.P.
Dallas, Texas