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

Legal Issues of Legal Issues of Fundraising via Fundraising via

Charitable Raffles, Charitable Raffles, Poker, Auctions, and Poker, Auctions, and

Other GamingOther Gaming

Tyree CollierTyree Collier

Thompson & Knight L.L.P.Thompson & Knight L.L.P.

Dallas, TexasDallas, Texas

22

Charitable RafflesCharitable Raffles

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Charitable Raffles in TexasCharitable Raffles in Texas

Default: Raffles are illegal gamblingDefault: Raffles are illegal gambling– Criminal Act for participant and Criminal Act for participant and

promoterpromoter

Exception: Texas Charitable Raffle Exception: Texas Charitable Raffle Enabling ActEnabling Act– Promoter must comply with ActPromoter must comply with Act– Participant must reasonably believe Participant must reasonably believe

conduct is permitted by Actconduct is permitted by Act

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Texas Charitable Raffle Enabling Texas Charitable Raffle Enabling ActAct

Qualified Organizations can hold Qualified Organizations can hold rafflesraffles

Four types of Qualified OrganizationsFour types of Qualified Organizations– Qualified nonprofit organizationQualified nonprofit organization– Religious societyReligious society– Volunteer fire departmentVolunteer fire department– Volunteer emergency medical serviceVolunteer emergency medical service

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Qualified Organizations cannot Qualified Organizations cannot distribute income to members, distribute income to members, officers, governing bodyofficers, governing body

– Reasonable compensation allowedReasonable compensation allowed

– Reimbursement of expenses allowedReimbursement of expenses allowed

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Qualified Nonprofit OrganizationQualified Nonprofit Organization– Has existed for at least three preceding Has existed for at least three preceding

yearsyears– No political interventionNo political intervention– No substantial lobbyingNo substantial lobbying– Has IRS exemption letter ruling Has IRS exemption letter ruling

organization is I.R.C. § 501(c) organization is I.R.C. § 501(c) organizationorganization

– Satisfies formation requirementSatisfies formation requirement

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Qualified Nonprofit Organization Qualified Nonprofit Organization Formation Requirement: 4 typesFormation Requirement: 4 types

– Formed or authorized under Formed or authorized under TNPCA/TBOCTNPCA/TBOC

– Legal entity serving as local chapter or Legal entity serving as local chapter or unit of parent formed or authorized unit of parent formed or authorized under TNPCA/TBOCunder TNPCA/TBOC

– Local chapter or unit of a grand lodgeLocal chapter or unit of a grand lodge– Unincorporated local organization Unincorporated local organization

affiliated for at least 3 years with state affiliated for at least 3 years with state or national organizationor national organization

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Qualified religious societyQualified religious society– Existed in Texas at least 10 yearsExisted in Texas at least 10 years

Qualified volunteer EMS or qualified Qualified volunteer EMS or qualified volunteer fire departmentvolunteer fire department– Can pay members only nominal Can pay members only nominal

compensationcompensation– Organized primarily to provide EMS Organized primarily to provide EMS

service or fire-fighting serviceservice or fire-fighting service– Actively provides EMS service or fire-Actively provides EMS service or fire-

fighting servicefighting service

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RequirementsRequirements Single drawing among single ticket Single drawing among single ticket

poolpool

No more than 2 non-overlapping No more than 2 non-overlapping raffles per calendar yearraffles per calendar year

Must have ownership or possession Must have ownership or possession of prize(s) or post bond for full valueof prize(s) or post bond for full value

Special rules for “reverse raffles”Special rules for “reverse raffles”

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Requirements (Continued)Requirements (Continued)

No paid advertising in mass mediaNo paid advertising in mass media

No statewide promotion or saleNo statewide promotion or sale

No compensation for raffle workersNo compensation for raffle workers

No sales by unauthorized personsNo sales by unauthorized persons

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Requirements (Continued)Requirements (Continued) Information printed on each ticket:Information printed on each ticket:

– Name of organizationName of organization– Address of organization or of a named Address of organization or of a named

officer of organizationofficer of organization– Price of the ticketPrice of the ticket– General description of each prize valued General description of each prize valued

at more than $10at more than $10– Date when prize(s) will be awardedDate when prize(s) will be awarded

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Requirements (Continued)Requirements (Continued) Prize Limitations:Prize Limitations:

– Money not offered or awarded as prize Money not offered or awarded as prize (but prepaid credit cards are not money)(but prepaid credit cards are not money)

– Prize value limited to $50K ($250K if a Prize value limited to $50K ($250K if a residence) if organization provides any residence) if organization provides any consideration for prizeconsideration for prize

– No limit on prize value if organization No limit on prize value if organization provides no consideration for prizeprovides no consideration for prize

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Requirements (Continued)Requirements (Continued) Net proceeds must be used for Net proceeds must be used for

authorized charitable purposes:authorized charitable purposes:– Religious or educational enhancementReligious or educational enhancement– Relief of disease, suffering, distressRelief of disease, suffering, distress– Contributing to physical well-beingContributing to physical well-being– Establishing needy or deserving people as Establishing needy or deserving people as

worthy and useful citizensworthy and useful citizens– Increasing patriotism and government Increasing patriotism and government

loyaltyloyalty– Public works and public structuresPublic works and public structures

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Charitable Raffles in TexasCharitable Raffles in Texas

Sales TaxSales Tax– No sales tax due on ticket salesNo sales tax due on ticket sales– Cannot issue exemption certificate when Cannot issue exemption certificate when

purchasing prizespurchasing prizes

Motor Vehicles as prizesMotor Vehicles as prizes– Sales tax on vehicle if charity pays for Sales tax on vehicle if charity pays for

vehiclevehicle– $10 gift tax from charity and/or raffle $10 gift tax from charity and/or raffle

winner if vehicle donated for rafflewinner if vehicle donated for raffle

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Federal Income Tax Rules for Federal Income Tax Rules for RafflesRaffles

Charitable Contribution DeductionsCharitable Contribution Deductions

– No deduction allowed for purchase of No deduction allowed for purchase of raffle ticket: chance to win equals price raffle ticket: chance to win equals price paidpaid

– Normal I.R.C. § 170 rules for persons Normal I.R.C. § 170 rules for persons who donate prizes for raffleswho donate prizes for raffles

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Unrelated Business Income Tax Unrelated Business Income Tax (“UBIT”)(“UBIT”)– Raffle is unrelated trade or businessRaffle is unrelated trade or business– No UBIT if raffle not regularly carried onNo UBIT if raffle not regularly carried on– No UBIT if substantially all work No UBIT if substantially all work

performed by volunteersperformed by volunteers– No UBIT if raffle is sale of donated No UBIT if raffle is sale of donated

merchandise (questionable)merchandise (questionable)

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Reporting and Withholding RulesReporting and Withholding Rules

– Winner includes prize in gross incomeWinner includes prize in gross income– Form W-2G required if raffle prizes of $600 or Form W-2G required if raffle prizes of $600 or

more in single year to single personmore in single year to single person– Withholding required if prize worth more than Withholding required if prize worth more than

$5K and is at least 300 times ticket cost$5K and is at least 300 times ticket cost– Backup withholding required if Form W-2G Backup withholding required if Form W-2G

required and winner does not provide W-9required and winner does not provide W-9– Form 990 – Schedule GForm 990 – Schedule G

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Poker TournamentsPoker Tournaments

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Poker Tournaments in TexasPoker Tournaments in Texas

Typical charity poker fundraiserTypical charity poker fundraiser– Participants pay for chipsParticipants pay for chips– Participants use chips to make betsParticipants use chips to make bets– Winners receive cash or prizesWinners receive cash or prizes

Result: Illegal gamblingResult: Illegal gambling– Criminal Act for participant and Criminal Act for participant and

promoterpromoter– No exception for charitiesNo exception for charities

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How to make poker fundraiser legalHow to make poker fundraiser legal– Eliminate considerationEliminate consideration

Ask for contributionsAsk for contributions Combine with dinner fundraiserCombine with dinner fundraiser But cannot require that participants But cannot require that participants

contribute or purchase dinnercontribute or purchase dinner

– Eliminate prizeEliminate prize Play for pridePlay for pride Play for plaque or trophy (questionable)Play for plaque or trophy (questionable)

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How to make poker fundraiser legal How to make poker fundraiser legal (cont.)(cont.)

– Play for prizes to charitiesPlay for prizes to charities

Participants pay to playParticipants pay to play

Participants designate (in advance) charity Participants designate (in advance) charity to receive prize money if they winto receive prize money if they win

Participants receive no prize other than Participants receive no prize other than possibly plaque or trophypossibly plaque or trophy

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Exception to criminal statute for pokerException to criminal statute for poker

– Private placePrivate place Public cannot have accessPublic cannot have access Only winners can receive economic Only winners can receive economic

benefitbenefit

– Not helpful for charities because point of Not helpful for charities because point of fundraiser is for charity to benefitfundraiser is for charity to benefit

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Texas Sales TaxTexas Sales Tax

– Entry fee should be considered for Entry fee should be considered for “amusement service”“amusement service”

– No sales tax on amusement service sold No sales tax on amusement service sold by charitable, educational, or religious by charitable, educational, or religious organizationorganization

– Charity cannot issue exemption Charity cannot issue exemption certificate when purchasing prizescertificate when purchasing prizes

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Federal Income Tax Rules for Federal Income Tax Rules for PokerPoker

Charitable Contribution DeductionsCharitable Contribution Deductions– No deduction allowed for poker entry fee No deduction allowed for poker entry fee

if winners can receive valuable prizesif winners can receive valuable prizes

– Deduction allowed for portion of entry Deduction allowed for portion of entry fee if no chance to win valuable prize fee if no chance to win valuable prize and fee exceeds value of goods and and fee exceeds value of goods and servicesservices

– Normal I.R.C. § 170 rules for persons Normal I.R.C. § 170 rules for persons who donate prizes for pokerwho donate prizes for poker

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Unrelated Business Income TaxUnrelated Business Income Tax

– No UBIT if not regularly carried onNo UBIT if not regularly carried on

– No UBIT if substantially all work done by No UBIT if substantially all work done by volunteersvolunteers

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Reporting and Withholding RulesReporting and Withholding Rules

Charity must provide “quid pro quo” notice to Charity must provide “quid pro quo” notice to participants if no chance to win valuable prize participants if no chance to win valuable prize and payment is $75 or more:and payment is $75 or more:

Informs participant that amount of deductible Informs participant that amount of deductible contribution limited to excess of contribution contribution limited to excess of contribution over value of goods and services received from over value of goods and services received from charitycharity

Provides good faith estimate of value of goods Provides good faith estimate of value of goods and services provided to participant by charityand services provided to participant by charity

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Reporting and Withholding Rules (Cont.)Reporting and Withholding Rules (Cont.) Winner includes prize in gross incomeWinner includes prize in gross income

Form W-2G required if raffle prizes of $600 or more Form W-2G required if raffle prizes of $600 or more in single year to single personin single year to single person

Withholding required if prize worth more than $5K Withholding required if prize worth more than $5K and is at least 300 times ticket costand is at least 300 times ticket cost

Backup withholding required if Form W-2G required Backup withholding required if Form W-2G required and winner does not provide W-9and winner does not provide W-9

Form 990 – Schedule GForm 990 – Schedule G

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Charity AuctionsCharity Auctions

2929

Charity Auctions in TexasCharity Auctions in Texas

Good News: Not GamblingGood News: Not Gambling

3030


Alcoholic Beverages as Auction ItemsAlcoholic Beverages as Auction Items

– Must obtain temporary charitable auction Must obtain temporary charitable auction permitpermit

– Costs $25Costs $25

– Issued for 5-day periodIssued for 5-day period

– Only issued to 501(c)(3) organizationsOnly issued to 501(c)(3) organizations

– Allows auction only in areas where sale of Allows auction only in areas where sale of relevant type of alcohol is allowedrelevant type of alcohol is allowed

– Only one per calendar yearOnly one per calendar year

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Alcoholic Beverages as Auction Items Alcoholic Beverages as Auction Items (Cont.)(Cont.)

– Beverages to be auctioned must have been Beverages to be auctioned must have been donated to the charitydonated to the charity

– Charity cannot pay persons for arranging or Charity cannot pay persons for arranging or conducting auction or donations of beveragesconducting auction or donations of beverages

– Charity must give pre-auction notice to closest Charity must give pre-auction notice to closest branch office of Texas Alcoholic Beverage branch office of Texas Alcoholic Beverage CommissionCommission

3232

Charity Auctions in TexasCharity Auctions in Texas Alcoholic Beverages as Auction Items Alcoholic Beverages as Auction Items

(Cont.)(Cont.)

– Auction can be held at premises of another Auction can be held at premises of another alcohol sales permit holder or licenseealcohol sales permit holder or licensee

Must keep auction items separate from regular Must keep auction items separate from regular inventoryinventory

Must remove auction items from premises Must remove auction items from premises immediately after auctionimmediately after auction

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Texas Sales TaxTexas Sales Tax

– Texas charities are exempt from sales Texas charities are exempt from sales tax on their tax on their purchasespurchases

– Texas charities that are Texas charities that are sellerssellers ordinarily ordinarily must obtain sales tax permit and collect must obtain sales tax permit and collect sales taxsales tax

– Exception: Two one-day sales per Exception: Two one-day sales per calendar yearcalendar year

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Texas Sales Tax Charity ExceptionTexas Sales Tax Charity Exception

– Charity can have two one-day sales per Charity can have two one-day sales per calendar year w/o sales tax permit or calendar year w/o sales tax permit or collectioncollection

– Does not apply to items that sell for more Does not apply to items that sell for more than $5K and were not manufactured by or than $5K and were not manufactured by or donated to the charitydonated to the charity

– Does not apply to items donated to charity Does not apply to items donated to charity and sold back to donor for more than $5Kand sold back to donor for more than $5K

3535

Federal Income Tax Rules for Federal Income Tax Rules for AuctionsAuctions

Charitable Contribution Deductions for Charitable Contribution Deductions for Donors of Auction ItemsDonors of Auction Items

– Most goods donated as auction itemsMost goods donated as auction items

Tangible personal property not used by Tangible personal property not used by charity in activity related to exempt purposecharity in activity related to exempt purpose

Deduction limited to lesser of cost or fair Deduction limited to lesser of cost or fair market valuemarket value

Items purchased and immediately donated Items purchased and immediately donated for auction should have fair market value for auction should have fair market value equal to costequal to cost

3636


Charitable Contribution Deductions for Charitable Contribution Deductions for Donors of Auction Items (Cont.)Donors of Auction Items (Cont.)

– Self-created goods donated as auction Self-created goods donated as auction itemsitems Deduction ordinarily limited to cost of Deduction ordinarily limited to cost of

supplies consumed in creating goodssupplies consumed in creating goods

– Services donated as auction itemsServices donated as auction items No deduction for contribution of No deduction for contribution of

contributor’s own servicescontributor’s own services Donation of purchased airline tickets or Donation of purchased airline tickets or

hotel stay should be deductiblehotel stay should be deductible

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Substantiation of Charitable Substantiation of Charitable Contribution Deductions for Donors Contribution Deductions for Donors

of Auction Itemsof Auction Items

– Donor must have either a bank record or Donor must have either a bank record or a written record from charity showinga written record from charity showing charity’s namecharity’s name date of contributiondate of contribution amount of contribution or, if contribution is a amount of contribution or, if contribution is a

good, location of contribution and good, location of contribution and reasonably detailed description of the goodreasonably detailed description of the good

3838


Substantiation of Charitable Contribution Substantiation of Charitable Contribution Deductions for Donors of Auction ItemsDeductions for Donors of Auction Items

– Donor giving $250 or more at once must Donor giving $250 or more at once must have written acknowledgement from have written acknowledgement from charitycharity

Obtain by earlier of date return for year filed or Obtain by earlier of date return for year filed or due date (with extensions) for such returndue date (with extensions) for such return

Must include amount of cash, description of any Must include amount of cash, description of any property, and whether charity provided any property, and whether charity provided any goods or services as consideration for the goods or services as consideration for the contributioncontribution

3939


Charitable Contribution Deductions for Charitable Contribution Deductions for PurchasersPurchasers of Auction Items of Auction Items

– No charitable contribution unless No charitable contribution unless amount paid exceeds fair value of amount paid exceeds fair value of auction itemauction item

– If amount paid exceeds fair value and If amount paid exceeds fair value and amount paid is $75 or more, charity amount paid is $75 or more, charity must provide “quid pro quo” notice to must provide “quid pro quo” notice to contributorcontributor

4040


Unrelated Business Income TaxUnrelated Business Income Tax

– No UBIT if not regularly carried onNo UBIT if not regularly carried on

– No UBIT if substantially all work done by No UBIT if substantially all work done by volunteersvolunteers

– No UBIT if substantially all auction items No UBIT if substantially all auction items consist of merchandise donated to the consist of merchandise donated to the charitycharity

4141

BingoBingo

4242

Bingo in TexasBingo in Texas

Back to Gambling AgainBack to Gambling Again

Legal under Bingo Enabling ActLegal under Bingo Enabling Act– Chapter 2001 of Texas Occupations Chapter 2001 of Texas Occupations

CodeCode

4343


Bingo Enabling ActBingo Enabling Act– Heavy regulation of bingoHeavy regulation of bingo– Requires bingo permitRequires bingo permit– Annual license feeAnnual license fee– Significant training requiredSignificant training required– Prize value limitsPrize value limits– Narrow group of organizations can applyNarrow group of organizations can apply

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Bingo Enabling Act: Organizations that can Bingo Enabling Act: Organizations that can apply for bingo permitapply for bingo permit

Religious societies existing at least 8 yearsReligious societies existing at least 8 years Nonprofits supporting medical research or Nonprofits supporting medical research or

treatment and existing at least 3 yearstreatment and existing at least 3 years Fraternal organizations active at least 3 Fraternal organizations active at least 3

yearsyears Veterans organizations chartered by US Veterans organizations chartered by US

CongressCongress Active volunteer fire departmentsActive volunteer fire departments

4545

Federal Income Tax Rules for Federal Income Tax Rules for BingoBingo

Charitable Contribution RulesCharitable Contribution Rules– Purchase of bingo games not a Purchase of bingo games not a

charitable contributioncharitable contribution

Unrelated Business Income TaxUnrelated Business Income Tax– Section 513(f): conducting bingo is not Section 513(f): conducting bingo is not

unrelated trade or businessunrelated trade or business Must not violate state or local lawMust not violate state or local law State and local law must not allow for-profit State and local law must not allow for-profit

bingobingo

4646

Federal Income Tax Rules for Federal Income Tax Rules for BingoBingo

Reporting and Withholding RulesReporting and Withholding Rules Winner includes prize in gross incomeWinner includes prize in gross income

Form W-2G required if bingo prizes of Form W-2G required if bingo prizes of $1,200 or more to single person in single $1,200 or more to single person in single gamegame

Backup withholding required if Form W-2G Backup withholding required if Form W-2G required and winner does not provide W-9 required and winner does not provide W-9 informationinformation

Bingo specifically exempt from regular Bingo specifically exempt from regular withholding of gambling winningswithholding of gambling winnings

Form 990 – Schedule GForm 990 – Schedule G

Legal Issues of Legal Issues of Fundraising via Fundraising via

Charitable Raffles, Charitable Raffles, Poker, Auctions, and Poker, Auctions, and

Other GamingOther Gaming

Tyree CollierTyree Collier

Thompson & Knight L.L.P.Thompson & Knight L.L.P.

Dallas, TexasDallas, Texas

Date post:	31-Mar-2015
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Legal Issues of Fundraising via Charitable Raffles, Poker, Auctions, and Other Gaming Tyree Collier...

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