Monday, April 22, 2013

Tax Loophole for Non-Profit Organizations Running Bingo

A teenager was arrested earlier this year for yelling a fake "bingo" at a Cincinnati bingo hall.  “At first, everybody started moaning and groaning when they thought they’d lost,” Police Sergeant Richard Webster said. “When they realized it wasn’t a real bingo, they started hooting and hollering and yelling and cussing. People take their bingo very seriously.” 

The Internal Revenue Code also takes bingo very seriously.

Tax-exempt 501(c) non-profit organizations are subject to federal income tax if they engage in certain commercial activities (so-called "unrelated trades or businesses").  Internal Revenue Code section 513(f) provides that the term “unrelated trade or business” does not include "any trade or business which consists of conducting bingo games."

Likewise, section 527 organizations are formed to raise funds for political campaigns.  They are allowed to receive tax-free contributions of money, membership dues, political fundraising proceeds, and (naturally) the "proceeds from the conducting of any bingo game."

In order to clear up any confusion about what constitutes "bingo games,"  the statute provides that the term "bingo game" means any "game of bingo," of a type in which usually,
1. the wagers are placed,
2. the winners are determined, and
3. and the distribution of prizes or other property is made, in the presence of all persons placing wagers in such game (i.e., no Internet bingo).

The games cannot violate any State or local law, and the tax-exempt organization must not conduct the games as ordinarily on a commercial basis.

The definition of "bingo" has been a hotbed of litigation by many non-profit organizations.

Waco Lodge No. 166, Benevolent & Protective Order of Elks had to pay federal income tax on its weekly bingo earnings because it could not use the section 513(f) exception, since bingo was illegal under local Texas law.

The Julius M. Israel Lodge of B'nai B'rith No. 2113 learned that its "Instant Bingo" did not count as bingo, because bingo requires the players to "place markets over randomly called numbers in an attempt to form a preselected pattern."  Instant Bingo provided the players with pre-made cards with pre-determined arrangements, and were no different from lotteries.  The Fifth Circuit noted the crucial distinction that: "Instant Bingo involves no random selection of numbers by a caller, nor does it require the player to participate in the game by covering the squares on his card that correspond to randomly drawn numbers."

Dayton, Ohio-based Help the Children, Inc. lost its tax-exempt status because its principal activity was the operation of bingo games (and a soda bar).

The bingo exception was enacted in 1978, but effective retroactively from 1970.  Pup Tent No. 14 Military Order of the Cootie of the United States had paid taxes on its 1971 and 1972 bingo earnings, but it discovered that it was not allowed a refund due to the statute of limitations.  The retroactive effect benefited only the non-profit organizations that were not as law-abiding and who did not pay taxes on their bingo earnings in the first place.

Section 513 Unrelated trade or business.

(a) General rule.  The term “unrelated trade or business” means, in the case of any organization subject to the tax imposed by section 511, any trade or business the conduct of which is not substantially related (aside from the need of such organization for income or funds or the use it makes of the profits derived) to the exercise or performance by such organization of its charitable, educational, or other purpose or function constituting the basis for its exemption under section 501 ***
(f) Certain bingo games.
(1) In general.  The term “unrelated trade or business” does not include any trade or business which consists of conducting bingo games.
(2) Bingo game defined.  For purposes of paragraph (1) , the term “bingo game” means any game of bingo— (A) of a type in which usually—
(i) the wagers are placed,
(ii) the winners are determined, and
(iii) the distribution of prizes or other property is made,
in the presence of all persons placing wagers in such game,
(B) the conducting of which is not an activity ordinarily carried out on a commercial basis, and
(C) the conducting of which does not violate any State or local law.


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