How does the IRS treat nonprofits' gambling revenues?

Summary:

Many nonprofits rely on gambling activities to bring in much-needed revenue. IRS publication 3079 covers related taxes and other issues in detail.

Answer:

From the Exempt Organizations Update: What's Hot In Washington,
May, 1998, by
James J. McGovern,
KPMG Peat Marwick LLP --
Exempt Organizations Tax Practice (EXOTAX)
© 1998 KPMG Peat Marwick LLP

Gaming Publication for Tax-Exempt Organizations Released

Publication
3079, Gaming Publication for Tax-Exempt Organizations, outlines
federal requirements for income, employment and excise taxes when
exempt organizations conduct or sponsor a broad range of gaming
activities, including bingo, lotteries, pull-tabs, and pari-mutuel
betting. This comprehensive publication discusses UBIT,
recordkeeping, filing requirements, and contains sample spreadsheets
that can be used to document games played, receipts per game, and
bingo inventory and receipts. It is a "must read" for exempts that
conduct or sponsor gambling activities. Publication 3079 provides an
excellent insight into the Service's approach and likely position on
technical issues. It also gives organizations and their tax advisers
the opportunity to conduct self-audits to insure compliance before
the IRS arrives. This is important because review of exempt gaming
activities is a high audit priority.

This and many other IRS publications can be downloaded through http://www.irs.ustreas.gov/formspubs/index.html. It is also available for immediate download, without any welcome screens or explanations, from http://www.irs.gov/pub/irs-pdf/p3079.pdf . It is in .pdf format; there is a description of this and other file formats on the IRS website at http://www.irs.gov/help/fileformats.html. That page also provides instructions on how to download the free .pdf file reader if need be.

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Gambling is, of course, also closely regulated by states and many municipalities. Any nonprofit considering a raffle, bingo game, or other gambling activity as a fund-raiser should investigate very carefully before accepting any money from the public or otherwise initiating a gambling program.

Further, as explained in http://www.nonprofits.org/npofaq/11/06.html, purchases of raffle tickets and other gambling expenditures should not be considered tax-deductible contributions by supporters, since the chance of winning is seen by the IRS as a quid pro quo equal in value to the price of the ticket.

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Posted 5/1/98; revised with new IRS links 11/20/02 -- PB