Dear Nonprofiteer, Bingo!

Dear Nonprofiteer,

I am a director for a brand new community theatre NFP in Los Angeles.  We’re
coming to the last stages of getting our determination from the IRS, but one
item they keep sending back to us is our intent to use a local Bingo Night
to help us fundraise. 

The Bingo Night is orchestrated by a local restaurant
every Wednesday.  They ask a $20 donation for all patrons who want to play,
and the winners of each card receive non-monetary gifts baskets and tickets
and gift certificates and the like.  The benefiting non-profit each night
receives all the door admission fee over a certain small amount, something
like $200.  Do you know of any precedent that would make this kind of
activity against 501(c)3?  Do you have experience with Bingo-type
fundraising?

Signed, Cards on the Table

Dear Cards:

The Nonprofiteer has never been involved with Bingo fundraising.  But even a cursory glance at IRS regulations as well as guidance in the form of recently-released tax exemption denials makes clear to her that what you’ve proposed isn’t going to fly.  There are at least two problems with it:

  • first, that Bingo often results in unrelated business income, which in turn results in your having to pay Unrelated Business Income Taxes–unlikely to be part of your fundraising plan.
  • second, and much more serious: the rule about charity Bingo (at least in California) is that it be operated by a single charitable entity licensed to conduct the game–not in partnership, and not by any outside vendor.  (This rule is so inflexible that it appears in the California Parent-Teacher Association’s fundraising instructions for local PTAs.)  So a Bingo game operated by a restaurant (or any other outsider) for your benefit is verboten.

Why?  The Nonprofiteer’s guess is that Bingo, despite (or because of) its innocuous appearance, has the potential to serve as an extremely efficient money laundry.  The minute a game is run by an outside agency, there’s a substantial risk that two pools of money (the charity’s and the outsider’s) will flow together into one indistinguishable flood, making complicated the process of figuring out who owes taxes on what. 

So what?  So that’s usually the point: "commingling of funds" creates an opportunity to mix legitimate with illegitimate  revenue.  So naturally IRS bells go off at the prospect of your receiving "all the door admission fee over a certain small amount."  That commingled pool of admission payments could be (though it probably isn’t) a Trojan horse for a much larger amount of unreported or otherwise questionable income.

So you have two choices: you can run a Bingo game yourself, using the theater’s volunteers (no small undertaking, as you’ll see if you review the PTA instructions); or you can donate tickets as prizes for the restaurant’s Bingo game (a legitimate promotional expense on your part in any case) and then–separately–ask it for a donation of a fixed sum, perhaps based on your guess of the value of x weeks’ worth of Wednesday Bingo proceeds.  That way the risk of the Bingo game’s success (and compliance with the laws) is on the restaurant, and the cash is in your pocket.

Don’t let your plans for operating a community theater get stuck on this point.  I’m sure there’s a fair amount of money involved–maybe $10,000?–but the better the deal looks, the more likely that it’s crooked.  Think of some tactful way to explain this to the generous restaurateur, and while you’re at it think of some alternative channel for his charity to you; or let slide Bingo and donation alike, and do bare-stage productions.  Better a show without scenery than a room without scenery, which is what’s waiting for the director of a local community theater NFP who runs afoul of the IRS!

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2 Responses to “Dear Nonprofiteer, Bingo!”

  1. Robert Tolmach Says:

    Please allow me to respectfully disagree with one of your points. You wrote:

    “. . . what you’ve proposed isn’t going to fly. There are at least two problems with it. . .”

    The person is trying to get a tax determination letter. Generating some (not excessive) amount of unrelated business income should not prevent their 1023 from flying.

    Also, you contradict your initial point when you write, “. . .you can run a Bingo game yourself. . .”

  2. Nonprofiteer Says:

    You’re right: generating Unrelated Business Income will not prevent a charity from receiving a determination of nonprofit status, and I didn’t mean to imply that it would. But the proposal to rest the organization’s fundraising plan on a bingo game operated by an outsider (and a for-profit business, at that) WILL interfere with receiving a favorable IRS determination, for all the reasons I’ve cited.

    And yes, of course, there would be Unrelated Business Income (and associated taxes) even if the theater ran the Bingo game itself, but there would not be the difficulties in receiving a tax-exempt determination from the IRS. If I muddled the two issues in my hurry to mention both, I apologize.

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