Not-for-Profit Raffles: Don't Gamble with Federal and State RequirementsBy Magdalena M. Czerniawski | Robert Lyons | March 26, 2020
With an ever-increasing need for funding and, in some cases, a decrease in charitable contributions, not-for-profits are turning to a variety of other alternatives when seeking to fund their mission. Charitable gambling activities, whether utilized as a stand-alone activity or part of a larger event, such as a gala, are becoming more popular with many organizations. Raffles are one of the most common examples of such activities, and the one that we will examine more closely in this article. While raffles are often an effective way to raise funds, not-for-profits that undertake raffle activities should be cautious and ensure they understand all federal and state filing requirements triggered by the charitable gambling activity. Not following the proper protocol can threaten an organization’s exempt status and/or create issues at the state and federal levels.
It is important to first be aware that gambling activities can trigger additional reporting requirements for non- profits. Determining whether an activity rises to the level of gambling is more of a state issue than a federal issue, other than proper reporting on Schedule G Part III (Gaming Activities). Charitable gambling is more commonly referred to as “games of chance,” though in this article, we will refer to raffles specifically. In general, “Gambling is defined as the wagering, betting, or laying of money or other things of value on the transpiring of any event whatsoever, whether it be on the result of a game of chance or on a contest of skill, strength, speed, or endurance, whereby one party gains and the other loses something for nothing, whether the parties betting be the actors in the event or which their wager is laid or not.”1
With regard to not-for-profit organizations, “games of chance” are generally restricted to raffles, lotteries, bingo, casino nights and “Calcutta Wagering.” However, there is a general overall warning that participation in the activities of a membership organization by a “guest” of the members can expose the organization to tax on unrelated business income. For instance, if a membership organization hosts a raffle, but it allows nonmembers to purchase tickets, any income generated from the nonmember sales would be considered Unrelated Business Taxable Income. This assumes that the activity is regularly carried on, which has to do with the frequency of the activity. The Internal Revenue Code also addresses other types of gambling that are outside the scope of this article. Again, this is determined by the commerciality doctrine—paid employees versus volunteers, etc. In fact, a “substantially all” volunteer workforce has its own exception in addition to the bingo exception found in Code section 513(f).
In addition to being cognizant of the provisions taxing unrelated business income, exempt organizations that sponsor gambling activities must be certain that the net earnings derived from those activities do not inure to the benefit of any private individual. In particular, this has become the focal point of many state laws.
If a charitable organization can establish that (a) the conduct of the gaming activities such as raffles are “substantially related” to the exempt purpose or (b) that the gaming activities are not regularly carried on by the organization, the income derived from the activity will not be subject to tax on unrelated business income except as noted above for some membership organizations. This is in addition to specific exclusions where the work is either done by volunteers or has a specific exemption, as in the case of bingo.
With regard to Form 990, gaming activities are reported in Part III of Schedule G if the total from gaming activities exceeds $15,000. Financial data requested by the form
is fairly straightforward: (1) gross revenue (gross receipts less contributions), and (2) expenses applicable to the gaming activity. The remainder of the information on Part III is more beneficial to the states, which leads into the next sections of this article, namely, filing requirements related to raffles held in New York and New Jersey.
RAFFLE RULES IN NEW YORK STATE
New York provides a long list of rules pertaining to raffle drawings held by organizations, including the following:
- Raffle tickets may be sold and drawings conducted on an authorized organization’s premises; during its licensed casino nights or carnival games of chance events; and during its licensed bingo occasions;
- Only persons 18 years of age or older shall purchase raffle tickets, sell raffle tickets, or conduct or assist in the conduct of a raffle drawing;
- Raffle tickets may also be sold to the public outside the premises of an authorized organization or an authorized game of chance lessor, provided such sales occur in municipalities which have passed a local law, ordinance or resolution in which the authorized organization is located and the counties which are contiguous to the county in which the municipality in which the authorized organization is located provided those municipalities have authorized the licensee, in writing, on a Raffle Consent Form to sell such raffle tickets therein;
- No sale of raffle tickets shall be made more than one hundred eighty days prior to the date scheduled for the occasion at which the raffle will be conducted;
- The winner of any raffle prize shall not be required to be present at the time such raffle drawing is conducted; and,
- All proceeds derived from games of chance, including raffles, must be disbursed solely for lawful purposes.
RAFFLE CATEGORIES IN NEW YORK AND CORRESPONDING REQUIREMENTS
- Category 1:
Operation of a raffle in which the cumulative net proceeds for all raffles conducted during the calendar year will meet or exceed $30,000: The organization must file a game of chance license application with the municipal clerk using forms GC-2, GC-2A and GC-2B along with a $25 annual license fee. It is also required that the organization apply for and obtain a Games of Chance Identification Number from the Board (Gaming Commission) and obtain a Games of Chance License issued by the municipal clerk on form GC-5. The organization must maintain a special raffle or games of chance checking account into which all raffle proceeds will be deposited, and from which such funds will be lawfully disbursed. Additionally, no single prize awarded can exceed the sum of or value of $50,000, except under certain specific circumstances. The organization must file a financial statement of raffle operations on Form GC-7R with the municipal clerk and the Board by January 30 of the following year. An additional fee must be remitted to the municipality assessed at 2% of the net profits of $30,000 or more. If the net proceeds derived from a single raffle will be between $5,000 and $29,999, the organization must apply for and obtain a Games of Chance Identification Number from the Commission. In addition, they must file a verified statement with the municipal clerk on Form GCVS-1 attesting that the net proceeds for each raffle conducted during the calendar year will be between $5,000 and $29,999. [The rules are onerous concerning raffle ticket sales at the event and should be reviewed before the event.]
- Category 2:
Operation of a raffle in which the organization derives less than $5,000 in net raffle proceeds from any single raffle and less than $30,000 in net raffle proceeds from all raffles conducted during the calendar year: The organization is required to review its document to ensure that it is an “authorized organization (charity) and that all proceeds derived from the conduct of raffles shall be deposited into a bank account maintained solely by the organization to be disbursed only for the lawful expenditures (charitable). The same rules apply to day-of-event sales.
If during the course of a calendar year in which raffles are conducted, the net proceeds for a single raffle reach or exceed the above limits by category, the authorized organization has to apply for and obtain a Games of Chance Identification Number from the Commission and meet the filing requirements of Category 1.
Raffle drawings can be conducted on premises other than that of the authorized organization or games of chance lessor located within the same municipality in which the authorized organization is domiciled, and within municipalities with the same county in which the authorized organization is domiciled, and within counties that are contiguous to the county in which the authorized organization is domiciled, provided that prior written authorization is obtained from the clerk of the municipality in which the premise is located on a Raffle Consent Form as prescribed by the Gaming Commission.
Organizations should note that while they may accept credit card payments for the purchase of raffle tickets, sales via the internet are currently not authorized.
The rules in New Jersey are considerably simpler than those in New York. To obtain a license to run a raffle, a not-for-profit must first show that it is a qualified organization (charity). The organization must then apply for a municipal license from the municipality where the raffle will be conducted. The application should include one sample raffle ticket. New Jersey also requires a designated contact person to be responsible for the raffle. The licensing process is rather lengthy, so organizations should plan well in advance to ensure they complete the application process for the raffle.
The licensing process is rather lengthy, so organizations should plan well in advance to ensure they complete the application process for the raffle.
In New Jersey, no organization can award a prize that has a retail value of more than $100,000 in any one raffle. There is also a 12-month limit of $500,000. Following the raffle, the organization responsible has to file a report with the Legalized Games of Chance Control Commission during the calendar month after the month of the raffle. This report should show the gross receipts, the expenses and the net profit. The organization is also required to provide details about how the money is to be used. The Commission retains the right to impose fines on any organization that has not complied with the statutory rules.
Gambling activities such as raffles can be a successful activity for charitable organizations looking to reach their fundraising goals, so long as an organization understands that advanced applications may be necessary and strict filing requirements may be triggered on a state or federal level. While the requirements are considerably more stringent in New York, both jurisdictions (New York and New Jersey) monitor gaming activity very carefully, so the rules should be followed closely in order to avoid issues with the states. On a federal level, the IRS has requirements concerning the relationship of the event to the exempt purpose and issues with inurement, so these must also be considered. Not-for-profit organizations looking to utilize gaming activities certainly don’t want to gamble with their exempt status or risk having any tax issues arise later on.
About Magdalena M. Czerniawski
Magdalena M. Czerniawski, CPA, MBA, is a Partner at Marks Paneth LLP and a member of the firm’s Nonprofit, Government & Healthcare Group. With over 15 years of nonprofit industry experience, she provides tax services to a wide array of nonprofits, including charitable organizations, schools, social welfare organizations, professional associations and private foundations. In addition to providing tax planning and advisory services, Ms. Czerniawski specializes in matters related to ASC 740-10 (FIN 48), the reporting... READ MORE +
About Robert Lyons
Robert (Rob) Lyons, CPA, MST, is a Tax Director, Exempt Organizations in the Nonprofit, Government & Healthcare Group at Marks Paneth LLP. Mr. Lyons brings to this role the skills he has developed during more than 30 years of providing tax and consulting services to his clients in the nonprofit, higher education, and public sector industries. His experience includes handling substantial exempt organization tax issues. Mr. Lyons has testified in front of the House and Ways Committee in... READ MORE +