Transcript Events DO Training October 2012 - Blink

UCSD Development Training
October 2012
Training Agenda
 Why Is This Important?
 Common Definitions
 Event Elements/Issues
 Tickets
 Sponsorships and Underwriting
 Auctions
 Raffles
 Use of External Vendors
Why is this important?
 Many new Development Officers and staff
 Development is responsible for knowing UC policies
 Ditto: IRS Regulations (Yes - Ugg!)
 Need to manage volunteer expectations, ideas, and
demands vis-a-vis these policies and regulations
 Protect UCSD and UC San Diego Foundation by
complying with charitable regulations and UC policy
 Inform donors so there are no surprises and a we have
a happy outcome!
GIFT
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A conveyance or transfer of an asset
(including cash or negotiable instruments)
given with charitable intent and without
consideration – (legal definition).
Necessary components: charitable intention,
not an equal exchange, given irrevocably,
release of control
TAX DEDUCTIBLE GIFT
 Given to a bonafide charity recognized by the IRS
 Cannot be given to individuals, and cannot be
given to a charity as restricted for individual for
personal benefit.
 Cannot be given to an entity that is not legally
recognized as a tax exempt charity by the IRS.
 Can be restricted for a specified charitable purpose
 Quid pro quo portion of a gift is not tax
deductible
QUID PRO QUO
 “Quid pro quo” is essentially defined as an “even
exchange” or equal value recieved.
 In the case of charitable events, it means some
portion of the funds given represents “value”
received in exchange for a price paid.
 There can be a quid pro quo component to a gift,
but and that portion will not be tax deductible.
Typical Event Elements - Overview
 Tickets or table purchased to attend
 A price for tickets or tables that includes the “value” of the
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benefits received as well as a donation component.
Event sponsorship/underwriting at “levels”
Vendors that provide things for free or reduced costs
Auctions and Raffles – Items given to UCSD to use as auction
items or raffle prizes, AND
The sales proceeds from the auction sale or raffle ticket sales.
Vendors that want to sell things then gift a portion of the sales
revenue.
All of these require some disclosures to the donors so there
are no surprises!
Event Elements – Donor Disclosures
 Value of each “event” venue per ticket or table must be
determined by Development using the price a person
would have paid for it on the outside, exclusive of
discounts.
 In IRS terms – the Fair Market Value of what is being given
to the donors must be clearly disclosed in advance.
 Similarly, if any sponsors or underwriters receive packaged
benefits in exchange for their funds, those benefits must be
valued and will reduce their deduction and must be
disclosed in advance.
 Gift Processing needs to know these amounts and must
receipt accordingly.
Event Elements – Donor
Disclosures
 Vendors that provide goods or services for free or
reduced costs must be advised that their donation will
probably have limited deductibility for tax purposes –
the IRS does not recognize lost revenue/profit.
 Auctions and Raffles – For items given to UCSD to use
as auction items or raffle prizes; donors need to
provide a FMV for the items– as this must be used as
required disclosure prior to the sale of the item.
Development needs to verify the value provided is
reasonable.
Event Elements – Donor
Disclosures
 Sales proceeds from auctions or raffle ticket sales:
 no deductibility for the price of a raffle ticket
 usually no deduction for the price paid for an auction
item (unless the amount paid exceeds the FMV of the
item)
 And…finally, in raffles – all must be registered with the
State to be legal and some winnings may be taxable
winnings that we have to collect tax on.
WHEW! ( We know!)
Event Tickets
Often have a Quid pro quo component– defined as “value
received” (get what you pay for)
 IRS rules: the charity is responsible to specifically disclose,
at the time of solicitation, the fair market value (FMV) of
any benefits a donor receives in exchange for a gift.
 Special events are notorious for this: meals,
entertainment, drink, valet, music, etc.
 The cost to the charity of providing these items to the
charity is not necessarily a measure of FMV, especially if
the costs were underwritten by a vendor.
 The charity must disclose the FMV of the benefits, which
is not a tax deductible gift, in advance, on invitations,
flyers, etc.
IRS Disclosure Regs and Example
IRS Penalties
UCSD Ticket/Table Disclosure Example
“The price of each ticket, less
$140, or $1400 per table, is tax
deductible as a charitable
donation”
Or:
“$140 per ticket, or $1400 per
table, represents the value of
the benefits received; the
balance is a charitable gift”
Sponsorships
 SPONSORSHIP
Sponsorships come in two forms:
 where commercially valuable benefits such as significant
advertising of the sponsor and their products are
returned to a sponsor by the donee entity, the
sponsorship is considered business income to the donee
entity and advertising or marketing expense to the
sponsor (that is, not a gift).
 Such income may be subject to Unrelated Business
Income Tax (UBIT) by the donee.
Sponsorships
 SPONSORSHIP (cont’d)
 Where only incidental benefits are returned to a sponsor
by the donee entity, such as use of the sponsor’s name or
logo for donor acknowledgment, and when less than 2%
the sponsorship paid is returned in value of goods or
services to the sponsor, then the sponsorship is a
“qualified sponsorship” to the donee entity, is not
subject to UBIT, and is a defined as a GIFT under
University policy and IRS regulations.
 Most of our Development-related events have
sponsorships that would be defined in this vein.
They are thought of as…
Underwriting
EVENT UNDERWRITING
 Generally a gift provided to assist UCSD in putting on an event
 May be cash or be the value of free services or goods from a vendor
 If cash, underwriting is treated as a charitable gift, as long as the benefits
returned to the sponsor fall under the 2% rule.
 Benefits, in the form of event tickets, etc, may be provided in return to the
underwriter, as quid pro quo, and will be receipted accordingly.
 Value of goods and services provided should be acknowledged and celebrated,
but usually are not a gift (or the gift is greatly reduced as it is limited to out of
pocket costs).
 Must disclose the values of the benefits on the sponsorship form when
solicited.
Sponsorship Disclosure Example
Auctions
Auctions involve a good amount of necessary
organization and paper trail. They have two
components:
1. Incoming gifts in kind from donors (the items to
be auctioned off):
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Some items are recorded as private support and
receipted as gifts, such as tangible personal property
Other items, such as free services, free uses of facilities
or homes etc, or free meals, are lost income to the
provider and are not receipted or recorded, but are still
accepted for as an auction item.
All should be acknowledged by Development, using
care to not imply a tax deductible gift if there is not
one.
Auctions, cont.
2. Items Auctioned Off:
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Must be listed with a fair market value at the auction
with written disclosures related to the amount that
will qualify as a tax deductible gift if purchased.
IRS RULE:
Anything paid under or at the FMV of the item
represents equal value received or “quid pro quo”,
meaning that portion is not a gift and not tax
deductible. (this is the usual outcome)
Anything paid in excess of the FMV of the item is
receipted as a gift and tax deductible. (a rare
outcome)
Auction Donor Form
Auction Accounting Sheet
Raffles and Opportunity Drawings
 What constitutes a raffle versus an opportunity
drawing?
 What are the State of California charitable raffle
regulations and filing requirements?
 What are the federal and state tax reporting and
withholding regulations for certain “winnings” – raffle
or opportunity drawing?
 Raffle/Drawing checklist and forms.
What is a Raffle?
A raffle occurs when tickets are sold for a price, in exchange
for the right to win a prize.
 Charitable raffles in the State of California are now legal
 Must be in compliance with state law as well as state and
federal income tax law.
 Raffle ticket purchases are not tax deductible as a
charitable donation since they represent the purchase of a
“chance to win”; they are considered 100% “quid pro quo”
(equal value received).
 Purchasers of the tickets must be advised, by clear
disclosure on the ticket and in advertisements, that there is
no tax deduction for the ticket price paid. (But the uses of
the proceeds for charitable purposes can be stated).
Raffle Regulations
 Raffles are regulated under the CA Penal Code section
320.5
 The UC San Diego Foundation “(“Foundation”) files an
annual registration statement with the State of CA
which states our intent to hold raffles during the year
(filing is Sept 1 through Aug 31st).
 In addition to filing an annual registration statement,
an individual financial report for EACH raffle must be
prepared and filed.
Raffle Regulations continued
 All raffles must comply with the “90/10 rule” - 90% of
the proceeds must go to the charity and only 10% of
the proceeds may be expended for winnings or raffle
related expenses.
 Therefore “50/50” raffles are illegal in California
(meaning where 50% of the collected raffle ticket sales
are given away as the prize).
 No raffle tickets can be sold over the internet! (The
event website can only announce there will be a raffle).
Tickets can be sold by mail.
Raffle Regulations, continued
 Purchases of prizes or cash awards given from the
proceeds of the raffle ticket sales will probably not
meet the 90/10 rule. Prizes need to be donated as gifts
in kind, or if purchased, an entirely different source
must be used (not recommended).
 IMPORTANT: all raffles must to be registered under
the UC San Diego Foundation. Per UCOP directive,
raffles cannot be registered in name of The Regents.
 Therefore, the proceeds need to be to the UC San
Diego Foundation.
Raffles – Development Role
 A financial report of the raffle proceeds and costs be prepared for
each raffle by the department holding the raffle.
 We must rely on Development to compile this information and
excellent record keeping is necessary.
 The report filed with the State for each raffle has a section of
true/false certifications that must be answered and signed by the
CFO of the UC San Diego Foundation. YIKES! 
 The certifications are, essentially, the requirements for
conducting a raffle in accordance with State law; therefore, it is
important that the Development officer, department
representatives and volunteers understand the law before a raffle
is held.
Opportunity Drawings
 The State stipulates that you can hold an opportunity
drawing (and not have to file with the State) if all of the
following are true:
 The tickets are given away and provide the chance to
everyone to win a prize - a general and indiscriminate
distributing of the tickets.
 The free tickets are offered on the same terms and conditions
as any additional tickets for which a donation is offered.
 The scheme does not require any of the participants to pay for
a chance to win and that fact is clearly advertised.
 Therefore, you must advertise in advance of the drawing that
the drawing is free to anyone who wants to participate.
Opportunity Drawings
 If the drawing is an Opportunity Drawing, it only
eliminates the responsibility to file a report to the CA
State board of Equalization.
 It does NOT eliminate the responsibility to report and
withhold taxes to the IRS on prize winnings depending
upon the value of the prize. (More on that in a
minute!)
Federal and State Income Tax
Regulations on Winnings
 The IRS defines raffles and opportunity drawings as a
form of a lottery. As such, a raffle generally refers to a
method for the distribution of prizes among persons
who have paid for a chance to win such prizes, usually
determined by the numbers, or symbols, on tickets
drawn.
 The winnings are therefore considered “gambling”
winnings.
Federal Income Tax Regulations
 The IRS has BOTH 1) filing requirements and 2) tax withholding
requirements for prizes/gambling winnings.
 Remember: only one ticket wins each prize, no matter how many each
patron buys (this is a clue for something below!)
 Winner Reporting Requirements:
If a single prize won is greater than
1)
2)
$600 in cash or FMV and
if the prize value is 300 times larger than the “wager” (the price for one raffle
ticket), the Foundation is responsible for reporting the winner of the prize,
their social security number and the value to the prize to the IRS.
IRS Winner Reporting -Example
 Example 1:
Jane Triton buys 1 raffle ticket for $20. Her ticket wins the raffle and gets a prize worth
$1,000.
Test 1: The prize is over $600 in value
Test 2: 300 times her ticket price of $20 is $6,000, less $20 paid, or $5980.
Do we need to obtain her tax id information and report on her prize winnings to the IRS?
NO, because the value of her prize was less than 300 times the price paid for her ticket.
 Example 2:
Joe Triton buys 20 raffles tickets at $1 each for $20. One of his tickets wins the raffle and
gets a prize worth $1,000.
Test 1: The prize is over $600 in value
Test 2: 300 times his ticket price of $1 is $300
Must we report on his prize winnings?
YES, because the value of his prize was more than $600 and more than 300 times the price
paid of his ticket.
Tax Withholding Requirements for
Winnings
 Tax Withholding Requirements
In addition to winnings reporting there may also tax
withholding requirements. (UGG!!)
 Simply put, if the value of a prize is over $5,000 (net of the
price of one ticket), we must withhold or collect taxes from
the winner before they take possession of their prize,
whether the prize was cash or non-cash.
IMPORTANT - this criteria overrides the test of 300 times
the value of a ticket.
Tax Withholding Requirements for
Winnings
 Cash and Non Cash prizes – donor provides correct taxpayer number
If the prize winner provides a correct taxpayer number (in most cases a social
security number) a withholding tax of 25% must be withheld from the
winnings (a complicated calculation) that assumes that tax is added to their
winnings). The tax will be based on the cash value less the value of the wager.
Example:
Jane Triton purchases a raffle ticket for $100. She wins a cash prize of $6,000.
Because the proceeds from her wager is greater than $5,000 ($6,000 less $100), we
must withhold $1,966 in taxes from her prize and remit and report it to the IRS.
($5,900 divided by .75 = $7,866 in the total with tax.
$7,866 – $5,900 = $1,966 in tax due.
We also have filing requirements. We must complete a W2-G form and have
the prize winner sign it before we give them their prize.
IRS Tax Withholding Requirements
for Winnings
 Cash and Non Cash prizes – donor does not provide correct taxpayer
number
If the donor does not provide a correct (or any taxpayer number) a backup
withholding tax of 28% (as of Dec 2012) must be withheld from the winnings.
Example:
Jane Triton purchases a raffle ticket for $100. She wins a cash prize of
$6,000. She will not provide us a social security number. Because the
proceeds from her wager is greater than $5,000 ($6,000 less $100), we
must withhold $2,274 ($5,900 divided by .72 = $8,194 is the total with
tax.
($8,194 – $5,900 = $2,274 in tax)
 We want to avoid this - otherwise we will be filing out a lot of
paperwork and having a lot of correspondence with the IRS!
IRS Tax Withholding Requirements
for Winnings
 There also can be state tax withholding at 7% and more forms to
file with the state!
 Fair Market Value is critical to determining the tax filing and
withholding requirements for non- cash prizes.
 We must show we followed proper and reasonable efforts to
determine the fair market value of non-cash prizes, and to
document them in detail with sources (such as prices
published on websites for services, rooms, dinners, etc, or
on ebay if a tangible item, or by formal appraisal if a
valuable item).
Summary Regarding Raffles
Compliance:
We must comply with State and Federal law when holding opportunity
drawings or raffles. Raffles will always require a State of California filing.
Disclosure:
We need to disclose to donors that ticket purchases are not tax deductible and
winning may be reportable to the IRS and taxed. There should be no surprises
to winners.
Reporting and Taxation:
The reporting and tax computations are complicated and there are specific tax
forms that must be collected from the prize winners at the raffle as well as
other forms that must be remitted to the IRS within a designated time period.
Advancement Services will be there to do this if the prize values qualify.
Please ensure we are completely in the loop prior to the event
Best Practices
 It is probably best if no prize in a raffle or drawing is worth
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more than $5,000 to avoid the withholding requirements.
Use care to determine if prizes worth $600 to $5,000 would
invoke IRS reporting, avoid if possible.
If any IRS reporting or withholding is possible, all ticket
purchasers need to apprised in advance of the raffle.
A staff member from Advancement Services should be in
attendance at the event to obtain the required tax
identification information from the winner and ensure the
proper IRS reporting forms are completed.
No winnings should be provided until these forms are
completed, if required.
Use of External Vendors
 From time to time, a vendor will offer their goods for
sale as a part of the event.
 This is usually in the form of items they hope to “sell”
at your event – and they promise a portion of their
sales proceeds back to UCSD as a gift.
 Whatever the “deal” is that is offered, use care and
caution. Trust, but VERIFY!
 Look up internet reviews on the vendor – are they
considered fair business folks or unfair, or worse swindlers?
Use of External Vendors
 Ensure that the vendor is offering valid goods for sale if
purported to be highly valuable originals, etc. Can you
verify this?
 UCSD events are generally not to be used for the sale
of goods by others. There may be unusual
circumstances for such arrangements, and those
should be discussed with Advancement Services prior
to the event.
 If approved, an agreement with the vendor will need to
be executed that articulates the amount UCSD will get,
by when, and a minimum amount.
References
 It is critical that you have knowledge of the State and
IRS regulations regarding quid pro quo values,
auctions, raffles and opportunity drawings, and that
your volunteers are aware of these requirements.
 As a prominent public charity, we take great care to be
in compliance with the laws – this is not optional and
your volunteers must understand this.
 Use the DO Toolkit, the GP website and the IRS
Guides
References
http://www.irs.gov/pub/irs-pdf/p1771.pdf
AND
http://www.irs.gov/pub/irs-pdf/p526.pdf
References
 Use the raffle/drawing checklist for your event.
 To learn about the state requirements for raffles,
review FAQ’s and get filing forms go to:
http://ag.ca.gov/charities/raffles.php
 For IRS regulations see IRS Pub. 3079, “Tax-Exempt
Organizations and Gaming”.
http://www.irs.gov/pub/irs-pdf/p3079.pdf
Thank you!!