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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.

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Presentation on theme: "Legal Issues of Fundraising via Charitable Raffles, Poker, Auctions, and Other Gaming Tyree Collier Thompson & Knight L.L.P. Dallas, Texas."— Presentation transcript:

1 Legal Issues of Fundraising via Charitable Raffles, Poker, Auctions, and Other Gaming Tyree Collier Thompson & Knight L.L.P. Dallas, Texas

2 2 Charitable Raffles

3 3 Charitable Raffles in Texas Default: Raffles are illegal gambling Default: Raffles are illegal gambling –Criminal Act for participant and promoter Exception: Texas Charitable Raffle Enabling Act Exception: Texas Charitable Raffle Enabling Act –Promoter must comply with Act –Participant must reasonably believe conduct is permitted by Act

4 4 Texas Charitable Raffle Enabling Act Qualified Organizations can hold raffles Qualified Organizations can hold raffles Four types of Qualified Organizations Four types of Qualified Organizations –Qualified nonprofit organization –Religious society –Volunteer fire department –Volunteer emergency medical service

5 5 Texas Charitable Raffle Enabling Act Qualified Organizations cannot distribute income to members, officers, governing body Qualified Organizations cannot distribute income to members, officers, governing body –Reasonable compensation allowed –Reimbursement of expenses allowed

6 6 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

7 7 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

8 8 Texas Charitable Raffle Enabling Act Qualified religious society Qualified religious society –Existed in Texas at least 10 years Qualified volunteer EMS or qualified volunteer fire department 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

9 9 Texas Charitable Raffle Enabling Act Requirements Single drawing among single ticket pool Single drawing among single ticket pool No more than 2 non-overlapping raffles per calendar year No more than 2 non-overlapping raffles per calendar year Must have ownership or possession of prize(s) or post bond for full value Must have ownership or possession of prize(s) or post bond for full value Special rules for reverse raffles Special rules for reverse raffles

10 10 Texas Charitable Raffle Enabling Act Requirements (Continued) No paid advertising in mass media No paid advertising in mass media No statewide promotion or sale No statewide promotion or sale No compensation for raffle workers No compensation for raffle workers No sales by unauthorized persons No sales by unauthorized persons

11 11 Texas Charitable Raffle Enabling Act Requirements (Continued) Information printed on each ticket: 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

12 12 Texas Charitable Raffle Enabling Act Requirements (Continued) Prize Limitations: 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

13 13 Texas Charitable Raffle Enabling Act Requirements (Continued) Net proceeds must be used for authorized charitable purposes: 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

14 14 Charitable Raffles in Texas Sales Tax Sales Tax –No sales tax due on ticket sales –Cannot issue exemption certificate when purchasing prizes Motor Vehicles as 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

15 15 Federal Income Tax Rules for Raffles Charitable Contribution Deductions 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

16 16 Federal Income Tax Rules for Raffles Unrelated Business Income Tax (UBIT) 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)

17 17 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

18 18 Poker Tournaments

19 19 Poker Tournaments in Texas Typical charity poker fundraiser Typical charity poker fundraiser –Participants pay for chips –Participants use chips to make bets –Winners receive cash or prizes Result: Illegal gambling Result: Illegal gambling –Criminal Act for participant and promoter –No exception for charities

20 20 Poker Tournaments in Texas How to make poker fundraiser legal –Eliminate consideration Ask for contributions Ask for contributions Combine with dinner fundraiser Combine with dinner fundraiser But cannot require that participants contribute or purchase dinner But cannot require that participants contribute or purchase dinner –Eliminate prize Play for pride Play for pride Play for plaque or trophy (questionable) Play for plaque or trophy (questionable)

21 21 Poker Tournaments in Texas How to make poker fundraiser legal (cont.) –Play for prizes to charities Participants pay to play Participants pay to play Participants designate (in advance) charity to receive prize money if they win Participants designate (in advance) charity to receive prize money if they win Participants receive no prize other than possibly plaque or trophy Participants receive no prize other than possibly plaque or trophy

22 22 Poker Tournaments in Texas Exception to criminal statute for poker Exception to criminal statute for poker –Private place Public cannot have access Public cannot have access Only winners can receive economic benefit Only winners can receive economic benefit –Not helpful for charities because point of fundraiser is for charity to benefit

23 23 Poker Tournaments in Texas Texas Sales Tax 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

24 24 Federal Income Tax Rules for Poker Charitable Contribution Deductions 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

25 25 Federal Income Tax Rules for Poker Unrelated Business Income Tax Unrelated Business Income Tax –No UBIT if not regularly carried on –No UBIT if substantially all work done by volunteers

26 26 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: 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 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 Provides good faith estimate of value of goods and services provided to participant by charity

27 27 Federal Income Tax Rules for Poker Reporting and Withholding Rules (Cont.) Winner includes prize in gross income Winner includes prize in gross income Form W-2G required if raffle prizes of $600 or more in single year to single person 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 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 Backup withholding required if Form W-2G required and winner does not provide W-9 Form 990 – Schedule G Form 990 – Schedule G

28 28 Charity Auctions

29 29 Charity Auctions in Texas Good News: Not Gambling Good News: Not Gambling

30 30 Charity Auctions in Texas Alcoholic Beverages as Auction Items 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

31 31 Charity Auctions in Texas Alcoholic Beverages as Auction Items (Cont.) 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

32 32 Charity Auctions in Texas Alcoholic Beverages as Auction Items (Cont.) 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 keep auction items separate from regular inventory Must remove auction items from premises immediately after auction Must remove auction items from premises immediately after auction

33 33 Charity Auctions in Texas Texas Sales Tax 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

34 34 Charity Auctions in Texas Texas Sales Tax Charity Exception 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

35 35 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 Tangible personal property not used by charity in activity related to exempt purpose Deduction limited to lesser of cost or fair market value 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 Items purchased and immediately donated for auction should have fair market value equal to cost

36 36 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 Deduction ordinarily limited to cost of supplies consumed in creating goods –Services donated as auction items No deduction for contribution of contributors own services No deduction for contribution of contributors own services Donation of purchased airline tickets or hotel stay should be deductible Donation of purchased airline tickets or hotel stay should be deductible

37 37 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 charitys name date of contribution date of contribution amount of contribution or, if contribution is a good, location of contribution and reasonably detailed description of the good amount of contribution or, if contribution is a good, location of contribution and reasonably detailed description of the good

38 38 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 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 Must include amount of cash, description of any property, and whether charity provided any goods or services as consideration for the contribution

39 39 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

40 40 Federal Income Tax Rules for Auctions Unrelated Business Income Tax 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

41 41 Bingo

42 42 Bingo in Texas Back to Gambling Again Back to Gambling Again Legal under Bingo Enabling Act Legal under Bingo Enabling Act –Chapter 2001 of Texas Occupations Code

43 43 Bingo in Texas Bingo Enabling Act 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

44 44 Bingo in Texas Bingo Enabling Act: Organizations that can apply for bingo permit Bingo Enabling Act: Organizations that can apply for bingo permit Religious societies existing at least 8 years Religious societies existing at least 8 years Nonprofits supporting medical research or treatment and existing at least 3 years Nonprofits supporting medical research or treatment and existing at least 3 years Fraternal organizations active at least 3 years Fraternal organizations active at least 3 years Veterans organizations chartered by US Congress Veterans organizations chartered by US Congress Active volunteer fire departments Active volunteer fire departments

45 45 Federal Income Tax Rules for Bingo Charitable Contribution Rules Charitable Contribution Rules –Purchase of bingo games not a charitable contribution Unrelated Business Income Tax Unrelated Business Income Tax –Section 513(f): conducting bingo is not unrelated trade or business Must not violate state or local law Must not violate state or local law State and local law must not allow for-profit bingo State and local law must not allow for-profit bingo

46 46 Federal Income Tax Rules for Bingo Reporting and Withholding Rules Reporting and Withholding Rules Winner includes prize in gross income Winner includes prize in gross income Form W-2G required if bingo prizes of $1,200 or more to single person in single game 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 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 Bingo specifically exempt from regular withholding of gambling winnings Form 990 – Schedule G Form 990 – Schedule G

47 Legal Issues of Fundraising via Charitable Raffles, Poker, Auctions, and Other Gaming Tyree Collier Thompson & Knight L.L.P. Dallas, Texas


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