IRS May Not Consider Gaming a Charitable Activity
Tax-exempt charitable organizations often engage in gaming activities—pull-tabs, raffles, keno, split-the-pot and other games of chance—to fund and support their core purposes. Donor payments to a charitable organization usually are treated as deductible contributions; however, payments that are considered gaming are nondeductible donations. If prizes received by the donor have more than a nominal value, and there's a minimum payment for entry into an event, gaming activities often are deemed to exist.
Charitable organizations may conduct gaming activities in many different forms. In some cases, the charity may not realize gaming activities have occurred. While most organizations are familiar with bingo, keno and other common games of chance, they fail to realize a single raffle is considered a gaming activity.
Gaming, if regularly carried on, is considered unrelated business income (UBI), which usually requires a Form 990-T. However, there are some exemptions to the UBI characterization. For example, traditional bingo games—where wagers are placed, winners determined and prizes awarded in the presence of the contestants—are inherently exempt from the 990-T requirement.
Excessive amounts of UBI in relation to an organization’s exempt function income could put an organization’s tax-exempt status at risk. To determine if an organization’s gaming activity is regularly carried on, the IRS considers the activity’s frequency, length of time conducted and promotion, as well as how non-exempt businesses conduct similar activities.
For some noncharitable organizations, such as those exempt from tax under IRC Sections 501(c)(7), 501(c)(8), 501(c)(10) and 501(c)(19), gaming often inherently supports the exempt purposes of the organization by providing social or recreational activities for members and their guests. In this case, these gaming activities may not be treated as an unrelated trade or business requiring Form 990-T. However, the IRS does not consider all gaming activities conducted by these organizations as exempt from UBI tax. Fraternal-type organizations should avoid allowing gaming open to the general public, as well as collecting more than 50 percent of their gaming revenue from nonmembers.
For Sec. 501(c)(3) charitable organizations, the IRS asserts that gaming activities conducted will not jeopardize exempt status if the gaming activities are not substantial in relation to the charity's primary exempt-purpose activities of the charity. Substantiality may be judged by the time and effort expended on gaming in comparison to the organization’s central charitable endeavors. Sec. 501(c)(3) charities should demonstrate that significantly more time and effort are utilized to promote their central charitable activities than time and effort spent on gaming activities. Organizations that fail to demonstrate the nonsubstantial portion of gaming to their overall exempt activities could risk the loss of exempt status.
In addition to UBI tax considerations, many state regulatory agencies often require organizations to register gaming activities with the state. The state often confers with the IRS to see that the activity is being reported on Form 990 or 990-T. Most state regulatory agencies have strict rules regarding registration of gaming activities, and many offer registration exemptions for exempt organizations that conduct their gaming activities under certain limited circumstances.
Gaming activities are now reported separately on Form 990 even if the activity is not deemed UBI. Revenues are segregated on the core form, and additional disclosures are required on Schedule G (fundraising) when certain income thresholds are met. Finally, prizes won are taxable (reported on Form W-2G) to the recipient, and mandatory withholding requirements must be met when prizes exceed certain thresholds.
Exempt organizations should be aware the IRS continues to increase scrutiny over exempt status, and improper use of gaming as a method of raising funds may place an organization in jeopardy. For more information on how your organization could be affected, contact your BKD advisor.