Insights // Winter 2022 4
HBK Nonprofit Solutions
activities if at all possible, as they can easily be considered interstate gambling activity, which is a violation of both federal and state gaming laws.
501(c)(3) Organizations and Gaming
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Gaming as Fundraising: Know the Rules By Ashlynn Reeder, CPA
Teal Strammer, CPA
HBK SENIOR MANAGER & TAX SPECIALIST ASSISTANT DIRECTOR | NONPROFIT SOLUTIONS
HBK MANAGER & TAX SPECIALIST
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any nonprofit organizations engage in some type of gaming activity on a regular basis, whether it’s
through annual fundraising events or social events for their members. The main purpose behind these types of activities is to raise funds that are then used to further the organization’s exempt purpose (see Insights volume 1, issue 3 “Understanding a Charitable Organization’s Exempt Purpose” for discussion of “exempt purpose”). It’s important to note that gaming activities in and of themselves do not further the exempt purpose of most organizations, and therefore could be treated as taxable unrelated business income.
Gaming Activities Examples of gaming activities include, but are not limited to, raffles, bingo, casino, and card games, scratch-offs, slot machines, and other games of chance. Although the IRS does not define all gaming activities, it does generally distinguish between games of chance and games of skill: • Raffles are games of chance where the participant is required to give something
of value in order to participate: cash or a required purchase of goods or services. Raffles are also referred to as lotteries. • Contests are games of skill, where chance doesn’t determine a winner. Generally, contests aren’t considered gaming activities, even if those who participate are required to pay to play. • Sweepstakes are games of chance where a participant isn’t required to give anything of value in order to participate (i.e., no purchase necessary) and are generally not considered gaming activities. In all cases, wagers and similar payments aren’t considered to be charitable contributions, regardless of whether the participant wins or not. The entire purchase price of the raffle ticket or wager placed is deemed to be payment for goods and services. Not all states define gaming the same. Before engaging in any activity you believe could be considered gaming, be sure to check how the state where you’re holding the activity defines gaming and whether special licenses or permits are required to conduct gaming activities. As well, avoid online gaming
To qualify as a 501(c)(3) organization, the nonprofit has to operate exclusively for religious, charitable, scientific, literary, or educational purposes. Gaming activities are commonly thought of as charitable if run by a nonprofit organization. The proceeds from those activities may be used to cover expenses related to its charitable programs, but gaming activities themselves do not further any charitable purpose, and therefore must be an insubstantial part of a 501(c)(3) organization’s operations. There are no specific quantitative factors explicitly stated by the IRS to determine whether an activity is substantial or not, but all aspects of the activity will be taken into consideration when evaluating it: amounts raised, expenses paid, time spent, resources devoted. Section 501(c)(3) public charities must also be cognizant of their public support test and how their gaming and unrelated business activities might negatively impact their public support percentage. Funds raised from unrelated business income like gaming are not considered part of the “public” portion of the support test. If a public charity receives too much of their financial support from these non-public sources, they risk failing their public support test and could be classified as a private foundation. Private foundations also cannot have substantial financial support from activities classified as unrelated trade or business. Gaming activities could also be subject to unrelated business income tax, and the organization would need to report the unrelated business income from gaming activities on Form 990-T. Sections 501(c)(3) organizations also must not be organized or operated for the benefit of private interests or inure profits for the benefit of any private shareholder or individual. Any profits received from gaming activities must support the organization.
