Games of chance, raffles, and charity auctions

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Many nonprofits use games of chance and auctions as fundraising vehicles – without realizing that “legalized games of chance” are regulated activities, and indeed illegal in many states. So that poker night or silent auction that created such a buzz…make sure that the buzz is not the vibration of your cell phone letting you know that your nonprofit is being cited for criminal penalties. Even an auctions that is raising money for a charitable cause, can result in unintended consequences for donors and charitable nonprofits alike, unless you know and follow the rules. From fantasy leagues to casino nights, nonprofits and games of chance are a misunderstood minefield.

Know the rules

Your state may, or may not, permit charitable nonprofits to conduct raffles, Bingo, auctions, and other games of chance. If it does, it is likely your nonprofit will need to apply for a license from the state beforehand. The IRS regulates games of chance too, as well as the taxable income that is earned by victorious game-players. Here are some of the issues that games of chance raise for charitable nonprofits:

  • Income from games of chance may be considered unrelated business income and therefore the charitable nonprofit may owe tax on the income, and winners may owe tax that the nonprofit is required to withhold.
  • In some states, proceeds from games of chance have to be kept in a special bank account (e.g., Pennsylvania).
  • Games of chance might trigger the requirement to conduct criminal background checks on the CEO or other staff of the nonprofit that is hosting the games.
  • State or federal law may require the nonprofit to maintain special records and file certain reports about the games/winners.
  • Employment laws in the state may be triggered when staff members are involved.
  • The nonprofit may be subject to Gaming Excise taxes.
  • A nonprofit hosting an event such as a charity casino night, where alcohol is served, may need a separate alcohol license. 
  • How the nonprofit uses net proceeds from games of chance may be limited in some way. For example, in North Carolina the law states: “None of the net proceeds of the raffle may be used to pay any person to conduct the raffle, or to rent a building where the tickets are received or sold or the drawing is conducted.”

What can donors deduct?

Nada. Donors who are successful bidders at an auction or winners at a game of chance, often think that the money they spent in pursuit of their winnings is deductible just because the event is hosted by a charitable nonprofit, or the earnings are advertised as supporting a charitable cause. In fact, the winners of games of chance are not able to deduct what they spent to play the game, or bid at the auction.

Often auction donors are very surprised to learn – after the fact – that their “contributions” are not deductible. The reason is that in a silent or live auction their contribution is actually a payment for donated goods or a donated experience such as an all-expenses paid trip to Bermuda. Consequently, they did not provide the charity with a contribution in excess of the fair market value of what they received. Instead they engaged in a transaction to purchase an experience or goods. In the case of other types of games of chance, the person who plays the game is expecting (hoping) to win something in return, so the money exchanged is considered just like a purchase or sale of goods, rather than a voluntary gift to the charitable nonprofit with no expectation of receiving anything tangible in return.

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