Legal Issues of Fundraising
via Charitable Raffles,
Poker, Auctions, and Other
Gaming
Tyree Collier
Thompson & Knight L.L.P.
Dallas, Texas
Charitable Raffles
2
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
3
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
4
Texas Charitable Raffle Enabling Act

Qualified Organizations cannot distribute
income to members, officers, governing
body
– Reasonable compensation allowed
– Reimbursement of expenses allowed
5
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
6
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
7
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
8
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”
9
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
10
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
11
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
12
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
13
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
14
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
15
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)
16
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
17
Poker Tournaments
18
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
19
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)
20
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
21
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
22
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
23
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
24
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
25
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
26
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

27
Charity Auctions
28
Charity Auctions in Texas

Good News: Not Gambling
29
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
30
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
31
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
32
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
33
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
34
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
35
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
36
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
37
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
38
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
39
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
40
Bingo
41
Bingo in Texas

Back to Gambling Again

Legal under Bingo Enabling Act
– Chapter 2001 of Texas Occupations Code
42
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
43
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
44
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
45
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
46
Legal Issues of Fundraising
via Charitable Raffles,
Poker, Auctions, and Other
Gaming
Tyree Collier
Thompson & Knight L.L.P.
Dallas, Texas