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

Charitable Raffles

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

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

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

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

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

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

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”

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

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

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

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

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

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

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)

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

Poker Tournaments

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

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)

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

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

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

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

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

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

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

Charity Auctions

Charity Auctions in Texas Good News: Not Gambling

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

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

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

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

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

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

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

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

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

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

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

Bingo

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

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

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

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

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

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