Legal Issues of Fundraising via Charitable Raffles, Poker, Auctions, and Other Gaming

1
Legal Issues of Fundraising via Charitable
Raffles, Poker, Auctions, and Other Gaming

• Tyree Collier
• Thompson Knight L.L.P.
• Dallas, Texas

2
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 ActRequirements

• 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 ActRequirements
(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 ActRequirements
(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 ActRequirements
(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 ActRequirements
(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)

21
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 contributors
  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
• charitys 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