Charity Raffles – Tread Carefully

As the recession deepens, we get more and more creative ideas from people wanting to conduct complex raffles. In Arizona, the most popular questions this year involve raffles of real estate.

While raffles can be great revenue generators for charitable organizations, many charities do not realize that in most states, including Arizona, raffles are illegal gambling. Cautionary tales abound.

Related post: Charitable Gambling in Arizona

Most states have specific exceptions for charitable raffles but require the charity and the raffle to meet specific criteria to qualify. Charities considering hosting raffles should consider the laws in each state where tickets will be sold.  For example, a raffle is not gambling in Arizona if:

  1. it is sponsored by a nonprofit that has been in existence for 1 year*;
  2. no insider receives a direct or indirect pecuniary benefit other than participation on an equal basis with all other participants; and
  3. no person except a bona fide local member of the sponsoring organization may participate directly or indirectly in the management, sales, or operation of the raffle.

Many jurisdictions require non-profits to obtain a permit to conduct a raffle. Permits can take weeks or even months to process. In addition, several tax issues must be considered when planning a raffle.

Tax Issues to Be Considered When Planning a Raffle

Deductibility of Ticket Price

A ticket purchaser has not made a deductible gift. The consideration paid is considered equal to the “chance” to win a prize therefore there is no disinterested gift and therefore no contribution deduction.

Deductibility of Prizes Contributed

Those contributing prizes to the raffle may be entitled to a deduction depending upon whether the contribution is an interest in the property (as opposed to a non-deductible service or right to use the property). The charitable deduction for in-kind contributions that are raffled off in support of a charity is generally going to be limited to the taxpayer’s basis in the property (rather than fair market value).

Non-profit’s Obligation to Report Prize Income

The prizes are taxable income to the winners so the non-profit must ensure it properly reports the raffle prizes to the I.R.S. Generally, raffle prizes must be reported on Form W-2G with a copy to the winner if  

  • a) the amount paid, reduced by the amount the person paid for the chance to win a prize, is $600 or more;  and
  • b) the payout is at least 300 times the amount of the wager.

Non-profit’s Obligation to Withhold from Prize Income

If the fair market value of winnings amounts to more than $5,000, the non-profit must withhold taxes from the winnings and report this amount to the I.R.S. on Form W-2G. The non-profit is liable for any tax it fails to correctly withhold.

Back-up Withholding

If the prize is reportable (the amount paid, reduced by the amount the person paid for the chance to win a prize, is $600 or more; and b) the payout is at least 300 times the amount of the wager) and the winner fails to supply a taxpayer identification number, then the Foundation must withhold 31% of the total proceeds.

Federal Laws

If the non-profit plans to use the U.S. mail for any part of the raffle “ e.g. for mailing entry cards or raffle tickets “ there are federal laws and regulations that bear consideration. Also, the FTC is empowered to regulate certain types of sweepstakes and contests.

Non-profits sponsoring raffles should consider creating raffle rules and treating them as contracts. Drafting detailed rules permits the non-profit to set defined limits on the giveaway “ who may participate, what laws apply, warranty and liability disclaimers, etc.

Raffle rules also provide a way for non-profits to cancel or modify their obligations if too few tickets are purchased or there are other technical problems.

We have also advised non-profits running raffles to have the raffle winner (or winners) sign an affidavit of eligibility and a release of liability. This is a good place to ensure the winner understands his or her tax reporting obligations and is eligible to accept the prize.

Constructing a legal and compliant raffle takes time and may require the advice of a professional. Non-profits that take care to do it right will avoid embarrassing and costly legal mistakes and have a model that they can use to raise funds again and again.

  • updated to reflect the 2022 change in the law reducing the number of years a nonprofit must have been in existence from 5 years to 1 year

Ellis Carter is a nonprofit lawyer with Caritas Law Group, P.C. licensed to practice in Washington and Arizona. Ellis advises nonprofit and socially responsible businesses on federal tax and fundraising regulations nationwide. Ellis also advises donors concerning major gifts. To schedule a consultation with Ellis, call 602-456-0071 or email us through our contact form

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