Untitled Texas Attorney General Opinion

.’ OFFICE OF THE ATTORNEY GENERAL . STATE OF TEXAS

JOHN CORNYN

March 252002

The Honorable Tom Ramsay Opinion No. JC-0482

Chair, County Affairs Committee

Texas House of Representatives Re: Whether a private Texas nonprofit corporation

P.O. Box 2910 may operate a “charitable sweepstakes fundraising

Austin, Texas 7876829 10 program,” and related questions (RQ-0443-JC)

Dear Representative Ramsay:

You ask whether a particular “charitable sweepstakes fundraising program” conducted by

a private Texas nonprofit corporation is “legal” under Texas law.’ We answer in the negative. We

conclude that the sweepstakes scheme about which you ask is a “lottery,” the promotion of or setting

up of which would violate section 47.03 of the Penal Code. See TEX. PEN. CODE ANN. 8 47.03(5)

(Vernon 1994). Use of any “gambling devices” in the conduct of this sweepstakes would also

violate chapter 47 of the Penal Code. See id. 5 47.06. Given that the described sweepstakes scheme

is prohibited under Texas law, the fact that four percent of the sweepstakes proceeds is designated

for “charitable” purposes does not make the sweepstakes scheme “legal.” We cannot determine

whether moneys used to play the sweepstakes are deductible as “charitable contributions” under

section 170 of the Internal Revenue Code.

As a preliminary matter, we note that because the sweepstakes is conducted by a private

nonprofit corporation, this request does not implicate federal law with respect to Native American

gaming. The sweepstakes is conducted by “Cherokee Indian Nation of Texas, Incorporated.”

Notwithstanding its name, the corporation is not a federally recognized Native American Indian tribe

or related to any such tribe. The corporation is incorporated by private individuals under the Texas

Non-Profit Corporation Act for the purpose of transacting “any and all lawful business for which

non-profit organizations may be incorporated under the laws of the State of Texas, and section

501 (c)(3) of the [Internal] Revenue Code.“* We do not know whether the corporation is a section

501 (c)(3) charitable corporation. Thus, the provisions ofthe Federal Indian Gaming Regulatory Act,

25 U.S.C. $9 2701-2721 (1994), do not apply here.

‘See Letter from Honorable Tom Ramsay, Texas House of Representatives, to Honorable John Cornyn, Texas

Attorney General (Sept. 19,200l) (on file with Opinion Committee) [hereinafter Request Letter].

2See Amendment to Articles of Incorporation of the Cherokee Indian Nation of Texas (June 17,1996) (on file

with the Office of the Secretary of State of Texas, Corporations Section).

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We have been provided with little information regarding the corporation’s “charitable

sweepstakes fundraising program” (the “sweepstakes”). You do not describe the sweepstakes, but

refer us to “Enabling Tax Opinions” and “Rules and Regulations for the Participating Location

Owners and the Equipment Owners” attached to the Request Letter3 The “Rules and Regulations”

set out the following sweepstakes rules: “Any person may[,] . . . without [making] any purchase or

without [making] any donation,” enter a weekly sweepstakes drawing by filling out a numbered

ticket made available at a particular sweepstakes location. See “Rules and Regulations,” supra note

3, at 1. Although not required for the purchase of a ticket, a participant may “donate” money to the

sweepstakes and become a “member” of the corporation. See id. at l-2. The holder of a winning

ticket number who has not donated money has the possibility of winning “[one percent] from each

US Dollar inserted and Donated into the Sponsoring Charitable Sweepstakes Machines at that

location from the prior Week.” Id. at 1. In contrast, the participant “inserting Funds as a donation

into the local Charitable Sweepstake Machines has the possibility ofwinning approximately [seventy

percent] of the total gross revenue inserted and Donated into the Sweepstake Machines.” Id. at 2.

The owner of a particular sweepstakes location receives twelve and a half percent of the amount

inserted into the sweepstakes machines at that location as rental payment. See id. The owner of the

sweepstakes machines at a particular location also receives twelve and a half percent as rental

income. See id. (Each location owner and machine owner must become a “member and sponsor”

of the corporation and its sweepstakes.). The corporation receives four percent for unidentified

“Charitable Humanitarian Projects.” See id. Finally, a particular location may have daily sweep-

stakes drawings. See id. at l-2.

You ask:

(1) Even if the US Tax code is complied with in all respects, is this

sweepstakes fundraising program legal in Texas?

(2) Are the devices or machines used in such a sweepstakes legal in

Texas if used only for the sweepstakes?

(3) Are the proceeds from the sweepstakes distributed in a proper

manner?

(4) Considering the sweepstakes proceeds go entirely to a charitable

organization, is the money used to play the game tax deductible?

See Request Letter, supra note 1, at 1.

3See Attachments to Request Letter: “Enabling Tax Opinions” of Texas Tax Management Associates

(Sept. 8,200l) [hereinafter “Tax Opinion”]; Exhibit A, Cherokee Indian Nation of Texas, Inc., Charitable Sweepstake

Fundraising Program, Rules and Regulations for the Participating Location Owners and the Equipment Owners

[hereinafter “Rules and Regulations”].

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With respect to your first question, we have found no federal tax law provision that

specifically deals with a “charitable sweepstakes fundraising program” or, more importantly,

purports to authorize one. See “Tax Opinion,” supra note 3 (stating that corporation and its

sweepstakes comply “with requirements of the Internal Revenue Service of the United States

Government as a Non-profit Charitable Sweepstakes Fundraising Program”). In any case, we do not

believe that the sweepstakes scheme is “legal” under Texas law. In our opinion, the sweepstakes,

based on the limited information available to us, is a lottery prohibited by article III, section 47 of

the Texas Constitution and chapter 47 of the Texas Penal Code.

Article III, section 47(a) of the Texas Constitution directs the legislature to prohibit lotteries

and gift enterprises other than those specifically authorized by subsections (b), (d), and (e) of the

constitutional provision. See TEX. CONST.art. III, 8 47(a). Those subsections permit the legislature

to authorize bingo games conducted by certain charitable organizations, charitable raffles conducted

by qualified organizations, and a lottery operated by the state. See id. art. III, 8 47(b), (d), (e).

Pursuant to this authority, the legislature has enacted the Bingo Enabling Act, see TEX. OCC. CODE

ANN. ch. 2001 (Vernon 2002), the Charitable Raffle Enabling Act, see id. ch. 2002, and the State

Lottery Act, see TEX. GOV’T CODEANN. ch. 466 (Vernon 1998 & Supp. 2002).

Consistent with article III, section 47(a) of the Texas Constitution, chapter 47 of the Penal

Code prohibits gambling and gambling related activities, including the promotion of a “lottery.” See

TEX. PEN. CODEANN. $9 47.01-.lO (Vernon 1994 & Supp. 2002). Section 47.03 provides that a

person commits an offense of “gambling promotion,” a Class A misdemeanor, if the person

“intentionally or knowingly,” among other things:

for gain, sets up or promotes any lottery or sells or offers to sell or

knowingly possesses for transfer, or transfers any card, stub, ticket,

check, or other device designed to serve as evidence of participation

in any lottery.

Id. 8 47.03(a)(5) (V emon 1994) (emphasis added). See also id. $8 47.02 (a)(l), (2) (Vernon Supp.

2002) (person commits offense if bets on game or plays for money any game played with gambling

device); .04(a) (Vernon 1994) (person commits offense if knowingly uses or permits another to use

property as gambling place); .06(a) (person commits offense if with intent to further gambling,

person knowingly possesses gambling devices). Section 47.01(7) ofthe Penal Code defines the term

“lottery” as follows:

“Lottery” means any scheme or procedure whereby one or

more prizes are distributed by chance among persons who have paid

or promised consideration for a chance to win anything of value,

whether such scheme or procedure is called a pool, lottery, raffle, gift,

gift enterprise, sale, policy game, or some other name.

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Id. 5 47.01(7) (V emon Supp. 2002) (emphasis added). Under section 47.01(7), three elements

comprise an illegal “lottery”: (1) one or more prizes, (2) distribution of the prizes by chance, and

(3) payment or promise of consideration for the chance to win. See id. This statutory definition

echoes the established definition of a “lottery” under article III, section 47 and prior Penal Code

provisions. See Cole v. State, 112 S.W.2d 725, 730 (Tex. Crim. App. 1937) (J. Hawkins,

concurring) (prize, chance, and direct or indirect consideration necessary to establish a thing as

lottery); Brice v. State, 242 S.W.2d 433,434 (Tex. Crim. App. 1951) (same); State v. Socony Mobil

Oil Co., Inc., 386 S.W.2d 169, 172 (Tex. Civ. App.-San Antonio 1964, writ ref d n.r.e.) (same).

The sweepstakes conducted by the corporation at issue here is a “lottery.” The first two

elements-the distribution of one or more prizes by chance-are clearly present in the sweepstakes

game here. A money prize, either one percent or seventy percent of the total amount “donated” by

participants in the prior week, is awarded to the holder of a winning ticket pursuant to a weekly

drawing. Additionally, we do not believe that the characterization of the payment of money as a

“donation” and the distribution of free tickets removes the element of consideration from this

scheme. In Attorney General Opinion H-820, this office determined that a proposal to distribute

tickets to persons who make charitable “donations” of a designated sum is indistinguishable from

an outright sale of tickets. See Tex. Att’y Gen. Op. No. H-820 (1976) at 4; see also Tex. Att’y Gen.

Op. No. JM-5 13 (1986) at 2. Furthermore, as this office has previously observed, “the fact that one

person receives a chance to win for free while another persons ‘pays’ for the chance does not negate

the fact that someone in the contest has paid consideration for the chance to win.” Tex. Att’y Gen.

Op. No. JM-5 13 (1986) at 2. If, in fact, no one actually makes a donation, then there would be no

“lottery.” See id. Similarly, here, if there are no donations, there will be no sweepstakes drawings:

the sole source of prizes in the sweepstakes is the donation money received in the previous week.

And there is strong incentive to make a “donation.” Persons who make donations have the

possibility of winning seventy percent of the amounts donated in the previous week rather than the

one percent available to those who make no donations. See Tex. Att’y Gen. LO-97-008, at 6 (“If

‘any character of favoritism’ is shown to paying entrants, the scheme is a ‘lottery.“‘); cJ: Socony

Mobil Oil Co., 386 S.W.2d at 172-73 (lottery statute not implicated in promotional TV-bingo

scheme absent showing of “any character of favoritism” to paying customers of gas filling stations).

In sum, because the sweepstakes is a “lottery” under section 47.01(7) of the Penal Code, the

“setting up” or “promotion” of the sweepstakes would constitute an offense under section

47.03(a)(5) of the Penal Code.4 See TEX. PEN.CODE ANN. $8 47.01(7), .03(a)(5), (Vernon 1994 &

supp. 2002).

4The conduct of the sweepstakes or participation in it may also violate other Penal Code provisions. See TEX.

PEN. CODEANN. $0 47.02(a)(l), (2) (V emon Supp. 2002) (person commits offense if person bets on game or plays and

bets for money any game played with gambling device); .04(a) (Vernon 1994) (p erson commits offense if knowingly

uses or permits another to use property as gambling place); .06(a) (person commits offense if with intent to further

gambling, person knowingly possesses gambling devices).

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The fact that the sweepstakes is purportedly intended to raise money for charitable purposes

does not change that it is a prohibited lottery under chapter 47 of the Penal Code. See State v.

Amvets Post Number 80, 541 S.W.2d 481, 483 (Tex. Civ. App.-Dallas 1976, no writ); see also

Tussey v. State, 494 S.W.2d 866,869 (Tex. Crim. App. 1973) (any effort by legislature to authorize,

license, or legalize lotteries is unconstitutional); Tex. Att’y Gen. Op. No. JM-5 13 (1986) (promotion

intended to raise money for charitable purpose did not change fact that scheme was a prohibited

lottery); Tex. Att’y Gen. Op. No. H-820 (1976) at 5 (lotteries prohibited even though conducted for

charitable purposes). In a case decided prior to the constitutional amendment permitting the

legislature to authorize bingo, State v. Amvets Post Number SO, the Dallas Court of Appeals held that

bingo conducted by a veterans group was a prohibited lottery. See Amvets Post Number 80, 541

S.W.2d at 483. Significantly, the court stated that the conduct of the game could not be justified on

the theory that “if the game is restricted to members and their families it is not operated for gain.”

Id. at 482. The Amvets court noted that the bingo games were held on a regular basis and were

“undertaken for the express purpose of raising money”; that the revenues were used for the veterans

group’s “general operating expenses as well as for charitable” purposes; and that the proceeds were

a regular and expected part of the bingo scheme. See id. at 483. The court concluded:

Even if all the proceeds were contributed to charity, the game would

still be an enterprise undertaken ‘for gain.’ A gain is no less a gain

if it is contributed to charity. Consequently, a lottery is no less a

lottery if the proceeds are used for a charitable purpose.

Id.

Article III, section 47(a) of the Texas Constitution provides limited exceptions from

the general prohibition against gambling for charitable “bingo” and “raffle” and the state “lottery.”

See TEX. CONST. art. III, 9 47(b), (d), (e). S ee also discussion supra p. 3. Consistent with the

constitutional exceptions, it is a defense to prosecution under chapter 47 of the Penal Code that the

conduct is authorized under the Bingo Enabling Act, chapter 2001 of the Occupations Code, or the

Charitable Raffle Enabling Act, chapter 2002 of the Occupations Code, or that it was “a necessary

incident to the operation of the state lottery” and was directly or indirectly authorized by the State

Lottery Act, chapter 466 of the Government Code, or the Texas Lottery Commission. See TEX. PEN.

CODEANN. 5 47.09 (Vernon Supp. 2002). We look at each of these provisions in turn and conclude

that the sweepstakes is not authorized under any of them.

The Bingo Enabling Act permits authorized organizations-a religious society, a nonprofit

organization for the support of medical research or treatment programs, a fraternal organization, a

veterans organization, or a volunteer fire department-to obtain a license to conduct bingo in

accordance with its provisions. See TEX. OCC. CODE ANN. # 2001.101, .551 (Vernon 2002).

“Bingo” is “a specific game of chance, commonly known as bingo or lotto, in which prizes are

awarded on the basis of designated numbers or symbols conforming to randomly selected numbers

or symbols.” Id. 0 2001.002(4) (emphasis added). The corporation here-a nonprofit corporation

incorporated for the purpose of carrying on any activity that may be conducted by a nonprofit

corporation or a section 501(c)(3) charitable corporation-would not appear to be an organization

The Honorable Tom Ramsay - Page 6 (JC-0482)

that may be licensed to conduct bingo under the act. But more importantly, the sweepstakes, based

on the information available to us, is not a game of “bingo,” as commonly understood and as

defined by the bingo statute. See id.; see also “Rules and Regulations,” supra note 3, at 1 (person

may enter weekly sweepstakes drawing by filling out numbered ticket, placing half ofticket showing

name, address, and phone number in “the Container” and keeping other numbered half).

The Charitable Raffle Enabling Act authorizes qualified organizations-qualified religious

societies, qualified volunteer fire departments, qualified volunteer emergency medical service

organizations, or qualified nonprofit organizations-to conduct a raffle subject to the conditions set

out in the act. See TEX. OCC. CODEANN. 59 2002.002(2), .05 1 (Vernon 2002). The statute defines

a “raffle” as “the award of one or more prizes by chance at a single occasion among a single pool

or group ofpersons who have paid or promised a thing of value for a ticket that represents a chance

to win a prize.” Id. 8 2002.002(6) (emphasis added). The prize offered at a raffle may not be

money. See id.5 2002.056(a). All proceeds from the sale of tickets for a raffle must be expended

directly for the charitable purposes of the organization. See id. 8 2002.053. Lastly, an organization

may not conduct more than two raffles in a calendar year. Id. 5 2002.052.

With respect to the sweepstakes here, we do not know whether the corporation meets the

requirements for a “qualified nonprofit organization” authorized to conduct raffles under the

Charitable Raffle Enabling Act. See id. § 2002.003 (setting out criteria for qualified nonprofit

organizations). But even assuming that it does, the sweepstakes, based on the information available

to us, is not a “raffle” at which prizes are awarded “at a single occasion among a single pool or group

of persons.” See id. 8 2002.002(6). Moreover, contrary to the Charitable Raffle Enabling Act, the

sweepstakes prize awarded is money; the sweepstakes drawings are conducted more frequently than

twice in a calendar year; and all proceeds of the sweepstakes are not spent for the charitable purposes

of the corporation, whatever they may be, because proceeds of the prior week’s sweepstakes are used

to fund subsequent week’s drawings. See Tex. Att’y Gen. Op. No. JC-0046 (1999) at 4-5

(organization may use raffle proceeds to pay reasonable, incidental, and necessary expenses of

conducting raffle from which proceeds were raised, but no proceeds may be used to fund subsequent

raffles).

Finally, the State Lottery Act authorizes the state through the Texas Lottery Commission to

conduct lottery games in accordance with the act and the rules adopted by the Commission

thereunder. See TEX. GOV’TCODEANN. 59 466.001-.410 (Vernon 1998 & Supp. 2002). “Lottery”

for the purposes of the act means “the procedures operated by the state.” Id. 0 466.002(5) (emphasis

added); see also id. 9 466.002(6) (“‘Lottery game’ includes a lottery activity.“). The corporation’s

sweepstakes is clearly not authorized by this statute. The State Lottery Act does not authorize any

person or entity other than the state to conduct a lottery or a lottery activity. The corporation is not

the state.

You next ask whether the devices or machines used in the sweepstakes are “legal in Texas

if used only for the sweepstakes[.]” See Request Letter, supra note 1, at 1. You also ask whether

“the proceeds from the sweepstakes are distributed in a proper manner.” See id. The answer to both

The Honorable Tom Ramsay - Page 7 (JC-0482)

questions is, of course, “no.” These questions assume that the corporation’s sweepstakes scheme

is authorized under Texas law. In light of our conclusion to the contrary, we do not address these

questions in great detail. However, in order to provide some guidance, we briefly explain our

response.

Although you do not elaborate on your question regarding the legality of the machines or

devices used in the sweepstakes, we presume that you are concerned that they may be prohibited

gambling devices under chapter 47 of the Penal Code. See TEX. PEN. CODE ANN. 55 47.01(4)

(Vernon Supp. 2002) (defining “gambling devices”); .06(a) (Vernon 1994) (providing that person

commits offense, if with intent to further gambling, person knowingly owns or possess gambling

devices); see also id. $5 47.02 (a)(3) (V emon Supp. 2002) (person commits offense if plays for

money any game played with gambling device); .04(a) (Vernon 1994) (person commits offense if

knowingly uses or permits another to use property as gambling place). Assuming that the

sweepstakes machines or devices are gambling devices, as your question suggests, no provision in

chapter 47 of the Penal Code makes them “legal,” as a matter of law, because they are used only in

the conduct of a “charitable” sweepstakes of the type at issue here. C$ id. 8 47.06(d) (Vernon 1994)

(providing defenses for prosecution under section 47.06(a) if device or equipment is used or intended

for use entirely in private place, a person involved in gambling does not receive benefit other than

personal winnings, and if chance of winning is the same for all participants); id. 8 47.09 (Vernon

Supp. 2002) (providing defenses for prosecution for offenses under chapter 47 if conduct authorized

under Bingo Enabling Act, Charitable Raffle Enabling Act, or State Lottery Act). Accordingly, use

of any “gambling devices” in the conduct of the sweepstakes would also violate chapter 47 of the

Penal Code.

You also ask whether the sweepstakes proceeds are distributed in a proper manner. Because

the sweepstakes is prohibited under Texas law, how the proceeds are distributed is legally irrelevant.

Again, the fact that a portion of the proceeds is designated for charitable purposes of the corporation

does not make the sweepstakes “legal” for state law purposes. See discussion supra p. 5.

Finally, you ask: “Considering [that] the sweepstakes proceeds go entirely to a charitable

organization, is the money used to play the game tax deductible?” Request Letter, supra note 1, at

1. Because there is no local or state income tax, we presume you ask about the deductibility under

federal tax law. See 26 U.S.C. 5 170(a)(l) (1994) (p roviding for deduction of charitable

contributions made in compliance with statute and regulations promulgated thereunder). Whether

the sweepstakes “donations” are deductible as “charitable contributions” under section 170 of the

Internal Revenue Code and the regulations promulgated thereunder is a question appropriately

addressed to the Internal Revenue Service rather than this office. See, e.g., Tex. Att’y Gen. LO-95-

073, at 3 n.5 (exceptions in federal law to application of FICA and FUTA taxes is an issue that can

only be resolved by Internal Revenue Service and proper court); Tex. Att’y Gen. Op. No. JM-3 13

(1985) at 12-l 3 (“Questions about the federal income tax consequence of the receipt by individual

employees of ‘in kind’ bonuses should be addressed to the Internal Revenue Service.“); Tex. Att’y

Gen. LO-88-98, at 3 (“The question you ask is one of federal tax law, and neither the Internal

The Honorable Tom Ramsay - Page 8 (JC-0482)

Revenue Service nor the courts would have reason to accord any particular authority to an opinion

of this office on this matter.“).

The Honorable Tom Ramsay - Page 9 (JC-0482)

SUMMARY

A particular “charitable sweepstakes fundraising program”

conducted by a private nonprofit corporation is illegal under Texas

law. The described sweepstakes scheme is a “lottery,” the promotion

of or setting up of which would violate section 47.03 of the Penal

Code. Use of any “gambling devices” in the conduct of this

sweepstakes would also violate chapter 47 of the Penal Code. Given

that the sweepstakes scheme is prohibited under Texas law, the fact

that four percent of the sweepstakes proceeds is designated for

“charitable” purposes does not make the sweepstakes scheme “legal.”

Yo sve truly

iTa(--s

JOHN CORNYN

Attorney General of Texas

HOWARD G. BALDWIN, JR.

First Assistant Attorney General

NANCY FULLER

Deputy Attorney General - General Counsel

SUSAN DENMON GUSKY

Chair, Opinion Committee

Sheela Rai

Assistant Attorney General, Opinion Committee