1. 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

2. Charitable Raffles

3. 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

4. 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

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

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. 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. 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

9. 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”

10. 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

11. 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

12. 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

13. 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

14. 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

15. 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

16. 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)

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. Poker Tournaments

19. 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

20. 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

22. 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

23. 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

24. 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

25. 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

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:
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

27. 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

28. Charity Auctions

29. Charity Auctions in Texas
Good News: Not Gambling

30. 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

31. 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

32. 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

33. 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

34. 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

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
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

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
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

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
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

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

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. 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

41. Bingo

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

43. 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

44. 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

45. 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

46. 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

47. 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