Could You Raffle Away Your Tax-Exempt Status?

Insights on a common misconception that gaming is a “charitable” activity

Congregations that raise funds through raffles, bingo nights, or other games of chance would be wise to familiarize themselves with the 2018 revision of IRS Publication 3079, “Tax-Exempt Organizations and Gaming” (available on IRS.gov). Here is an excerpt that specifically addresses 501(c)(3) organizations—including churches:

An organization may qualify for exemption under IRC Section 501(c)(3) if it is organized and operated exclusively for religious, charitable, scientific, literary or educational purposes or for the purposes of testing for public safety, fostering national or international amateur sports competition or preventing cruelty to children or animals. To be exempt under Section 501(c)(3), an organization must engage in activities that accomplish one or more of these purposes. Examples of Section 501(c)(3) organizations include schools, churches and non-profit hospitals.

A common misconception is that gaming is a “charitable” activity. There is nothing inherently charitable about gaming. It is a recreational activity and a business. Although a charity may use the proceeds from gaming to pay expenses associated with its charitable programs, gaming itself does not further any charitable purpose. Thus, gaming cannot be a more than an insubstantial purpose of a 501(c)(3) organization. . . .

An organization puts its exempt status in jeopardy when gaming results in inurement or prohibited private benefit to individuals, or where funds from the activity are diverted for private purposes.

A charity conducting gaming as an insubstantial part of its activities will not ordinarily jeopardize its tax-exempt status but may be subject to the tax on unrelated business income. . . .

The IRS determines whether an organization is conducting a “substantial” unrelated activity by examining all the facts and circumstances. There is no “bright-line” or numerical test prescribed by the [Internal Revenue Code]. The IRS will consider the dollars raised by and spent on an unrelated activity as well as the time and other resources devoted to it in making the determination of substantiality.

This content is designed to provide accurate and authoritative information in regard to the subject matter covered. It is sold with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional person should be sought. "From a Declaration of Principles jointly adopted by a Committee of the American Bar Association and a Committee of Publishers and Associations." Due to the nature of the U.S. legal system, laws and regulations constantly change. The editors encourage readers to carefully search the site for all content related to the topic of interest and consult qualified local counsel to verify the status of specific statutes, laws, regulations, and precedential court holdings.

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