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Exclusion of Bingo from Unrelated Business Activity

Gaming is treated as an unrelated trade or business activity, unless a specific statutory exception applies. IRC Section 513(f), for example, provides that “traditional” bingo is not an unrelated trade or business.

IRC Section and Treas. Regulation

  • IRC Section 511 Imposition of tax on unrelated business income 
  • IRC Section 513(a)(1); Treas. Reg. Section 1.513-1(e) Any trade or business in which substantially all the work in carrying on such trade or business is performed for the organization without compensation is not an unrelated trade or business.  
  • IRC Section 513(d)(2) “Qualified public entertainment activity,” conducted by a “qualifying organization” described in Section 501(c)(3), (4), or (5), and conducted in conjunction with public fairs or expositions, is not an unrelated trade or business.
  • IRC Section 513(f); Treas. Reg. Section 1.513-5 Certain bingo games not unrelated trade or business.

Resources (Court Cases, Chief Counsel Advice, Revenue Rulings, Internal Resources)

  • Julius M. Isr. Lodge of B'nai B'rith No. 2113 v. Commissioner, 98 F.3d 190 (5th Cir. 1996) Taxpayer’s “Instant Bingo” was not “any game of bingo” as defined under Section 513(f) because players did not place markers over randomly called numbers and the winners were not determined in the presence of all persons placing wagers 
  • Audit Technique Guide (ATG) – Organizations Conducting Gaming Activities  
  • Notice 1335, Gaming Activities
  • Announcement 89-138, 1989-45 I.R.B. 41 Taxation of Gaming Activities Conducted by Tax Exempt Organizations

Analysis

“Gaming” refers to all forms of games of chance, from bingo and raffles to pari-mutuel betting and video games. Notice 1335 provides questions and answers that can help determine if an organization it has taxable income from gaming.

Most gaming, if regularly carried on for profit, is an unrelated trade or business activity, which may produce unrelated business taxable income (UBTI). Announcement 89-138, recaps rules on taxation applicable to gaming activity. 

As with other unrelated trade or business activities, the fact that an organization uses the proceeds from its gaming to pay for its exempt purpose programs does not make the gaming an activity related to its exempt purpose.

Therefore, gaming income received by exempt organizations is treated as unrelated business income, unless a specific exception applies. 

Certain bingo games - IRC Section 513(f) provides that certain bingo games are excluded from the definition of unrelated trade or business. Section 513 defines qualifying “bingo games” as any game of bingo in which the wagers are placed, the winners are determined, and the distribution of prizes or other property is made, in the presence of all persons placing wagers in such game. Regulation Section 1.513-5 further defines a qualifying “bingo game” as a game of chance played with cards that are typically printed with five rows of five squares each.

Participants place markers over randomly called numbers on the cards in an attempt to form a pre-selected pattern such as a horizontal, vertical, or diagonal line or all four corners. The first participant to form the pre-selected pattern wins the game. 

The Code and regulations further provide that, in order for the exclusion to apply, the bingo games must not violate state or local laws where played and must be played in a jurisdiction where bingo games are not regularly carried on by for-profit organizations.

Gaming that does not meet the statutory definition in Section 513 of bingo does not qualify for the exclusion, regardless of its name. Therefore, income from so-called “instant bingo,” “mini bingo,” “pull-tab” and similar scratch-off cards is unrelated business taxable income, unless another exception applies. See Julius M. Isr. Lodge, which held that the organization’s income from Instant Bingo was not exempt because game winners were determined at the time the deck of cards was manufactured instead of in the presence of all persons placing wagers.

Substantially all volunteer labor. Section 513(a)(1) provides that, if substantially all work involved in the gaming activity is performed by volunteers, the income, regardless of the type game being played, will not be income from a trade or business.  See also the Issue Snapshot, Volunteer Labor Exclusion from Unrelated Trade or Business.

Qualified public entertainment activities – Section 513(d) (2) provides that “qualified public entertainment activity,” conducted by a “qualifying organization” described in Section 501(c)(3), (4), or (5), and conducted in conjunction with public fairs or expositions, is not an unrelated trade or business.  Income from a gaming activity that meets these definitions will not be subject to UBIT.

Games of chance conducted in North Dakota - Most games of chance conducted by exempt organizations in North Dakota are not unrelated trade or business activities, if conducting the games does not violate state or local law. Only North Dakota enjoys this exception for non-bingo gaming. See ATG – “Organizations Conducting Gaming Activities.” 

Issue Indicators or Audit Tips

1) Does the gaming activity meet the three conditions that must be met for an activity to be classified as an unrelated trade or business:

  • Profit motivated trade or business
  • Unrelated to exempt purposes (The fact that the activity generates income for the organization to spend on its charitable programs does not make the activity related to the organization’s exempt purpose)?  
  • Regularly carried on?

2) Does the activity met one of the following exceptions: 

  • Certain “traditional” bingo games? 
  • Substantially all volunteer labor?
  • Qualified public entertainment activities? 
  • Games of chance conducted in North Dakota?

Income from gaming activities that do not fall under any statutory exceptions subject to UBIT and must be reported on Form 990-T.