Can a 501(c)(4) organization purchase a raffle ticket from another 501(c)(4)?
I have an unusual situation. I prepare Forms W-2G annually and a 990 annually for no charge for a small local 501c4 organization who holds an annual raffle. Tickets are $100 and the prize for the winning ticket is 15,000. There are 2nd to 5th place winners also but the amounts are much less. So each year the organization withholds 25% for the 1st prize winner and remits it to the IRS. This year the winning ticket was purchased by another 501c4. So my questions are 1) is a 501c4 allowed to purchase raffle tickets? 2) if not, i assume the 501c4 that paid the award would request it back OR 3) if a 501c4 is allowed to purchase a raffle ticket, how are the winnings to be reported (still on W2G?) and should there be any tax withholdings? Part of me is thinking a nonprofit should not be purchasing raffle tickets as it is not a charitable use of their funds but maybe that would more true in a 501c3 situation versus a 501c4. Part of me is thinking the winnings could be considered Unrelated Business Taxable Income. So i am looking for some guidance. I reached out to the IRS Tax Exempt Division and they were of no help.
I just found about this forum today through a call i made to TaxBook as i couldn't find much in the TaxBook and TaxBert was giving me some different answers based on the wording of my question.
For example:
1) TaxBert answer to "Can a 501c4 receive a winning raffle ticket" appears to be written more in the context of someone donating a winning ticket to the organization.
2) When I put in "Can a nonprofit purchase a raffle ticket", TaxBert answers "Yes, a nonprofit can purchase a raffle ticket, but the cost is not deductible as a charitable contribution. The cost of raffle, bingo, or lottery tickets does not qualify as a charitable contribution deduction. However, the expense may potentially qualify as a gambling loss if the nonprofit itemizes deductions and has offsetting gambling winnings. There's no prohibition on a tax-exempt organization purchasing raffle tickets, but the purchase must align with the organization's exempt purpose and not result in private benefit to insiders." [the wonky part of the answer here is the reference to itemized deductions and gambling losses which would be an IRS 1040]
3) When I put in "Can a 501c4 purchase a raffle ticket", TaxBert says "A 501(c)(4) social welfare organization can purchase a raffle ticket. However, the organization cannot deduct the cost as a charitable contribution since 501(c)(4) organizations are not qualified charitable organizations for deduction purposes.If the organization wins a prize, the fair market value of the prize would generally be taxable income to the organization, subject to unrelated business income tax (UBIT) rules depending on the circumstances. The purchase itself is permissible, but tax professionals should consider whether such activities align with the organization's exempt purpose and whether any winnings would be subject to UBIT."
I would welcome any thoughts from the community here if anyone has an opinion on this or has run across this in practice.
Thank you in advance!
Paul J. Smit, CPA
Lansing, Illinois
I just found about this forum today through a call i made to TaxBook as i couldn't find much in the TaxBook and TaxBert was giving me some different answers based on the wording of my question.
For example:
1) TaxBert answer to "Can a 501c4 receive a winning raffle ticket" appears to be written more in the context of someone donating a winning ticket to the organization.
2) When I put in "Can a nonprofit purchase a raffle ticket", TaxBert answers "Yes, a nonprofit can purchase a raffle ticket, but the cost is not deductible as a charitable contribution. The cost of raffle, bingo, or lottery tickets does not qualify as a charitable contribution deduction. However, the expense may potentially qualify as a gambling loss if the nonprofit itemizes deductions and has offsetting gambling winnings. There's no prohibition on a tax-exempt organization purchasing raffle tickets, but the purchase must align with the organization's exempt purpose and not result in private benefit to insiders." [the wonky part of the answer here is the reference to itemized deductions and gambling losses which would be an IRS 1040]
3) When I put in "Can a 501c4 purchase a raffle ticket", TaxBert says "A 501(c)(4) social welfare organization can purchase a raffle ticket. However, the organization cannot deduct the cost as a charitable contribution since 501(c)(4) organizations are not qualified charitable organizations for deduction purposes.If the organization wins a prize, the fair market value of the prize would generally be taxable income to the organization, subject to unrelated business income tax (UBIT) rules depending on the circumstances. The purchase itself is permissible, but tax professionals should consider whether such activities align with the organization's exempt purpose and whether any winnings would be subject to UBIT."
I would welcome any thoughts from the community here if anyone has an opinion on this or has run across this in practice.
Thank you in advance!
Paul J. Smit, CPA
Lansing, Illinois
Comment