Exempt Organization Gaming and Unrelated Business Taxable Income


The conduct of gaming by tax-exempt organizations may result in unrelated business taxable income.

IRC Section and Treas. Regulation

IRC Section 512(a)(1) defines the term "unrelated business taxable income.”

IRC Section 512(a)(3) provides special rules used in determining unrelated business taxable income for certain organizations, including those exempt under IRC Section 501(c)(7).

IRC Section 513(a)(1) and Treas. Reg. Section 1.513-1(e)(1) exclude from the definition of “unrelated trade or business” any trade or business in which substantially all the work in carrying on such trade or business is performed for the organization without compensation.

IRC Section 513(d)(1) and IRC Section 513(d)(2)(C) provide that the term “unrelated trade or business” does not include a “qualified public entertainment activity” conducted by an organization described in Section 501(c)(3), Section 501(c)(4), or Section 501(c)(5) that regularly conducts, as one of its substantial exempt purposes, an agricultural and educational fair or exposition.

IRC Section 513(f) excludes from the definition of “unrelated trade or business” any trade or business that consists of conducting bingo games.

Treas. Reg. Section 1.501(c)(6)-1 states that the purpose of a business league may not be to engage in a regular business of a kind ordinarily carried on for profit.

Treas Reg. Section 1.513-5(c) provides that IRC Section 513(f) will not apply to any bingo games conducted in violation of state or local law.

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

Rul. 68-505 held that a county fair association exempt under IRC 501(c)(3) that conducted a horse racing meet with pari-mutuel betting is engaged in an unrelated trade or business.

Rev. Rul. 69-68, 1969-1 C.B. 153 holds that gaming activities involving members and their bona fide guests further the exempt social and recreational purposes of a social club exempt under IRC Section 501(c)(7), even though the operation of gaming device is illegal under local law.

Rev. Rul. 74-361, 1974-2 C.B. 159 holds that, where a volunteer fire company exempt under Section 501(c)(3) or Section 501(c)(4) provides recreational facilities for members, such activity is in furtherance of charitable purposes of a Section 501(c)(3) organization of providing fire and rescue service for the general community or may be considered promoting the common good and general welfare of the community of a Section 501(c)(4) organization.

Rev Rul 79-145, 1979-1 C.B. 360 holds that amounts paid (including gaming income) to a social club by visiting members of another social club are amounts paid by nonmembers.

Rev. Proc. 95-21, 1995-1 C.B. 686 provides that, if a category of members of a Section 501(c)(5) organization has been formed or availed of for the purpose of producing unrelated business income, then dues from that category of members will be treated as unrelated business income.

Announcement 89-138, 1989-45 I.R.B. 41 (Nov.6,1989), “Taxation of Gaming Activities Conducted by Tax Exempt Organizations,” notes that income from regularly conducted gaming activities may be treated as unrelated business income, unless a specific exception applies.

Publication 3079 Tax Exempt Organizations and Gaming

Audit Technique Guide – Organizations Conducting Gaming Activities


Gaming is a recreational activity and, if conducted for a profit, a trade or business. Gaming includes bingo, beano, raffles, lotteries, pull-tabs, scratch-offs, pari-mutuel betting, Calcutta wagering, pickle jars, punchboards, tip boards, tip jars, certain video games, and other games of chance.

Gaming is also a common type of fundraising engaged in by tax-exempt organizations. In addition, many types of organizations conduct gaming in furtherance of social or recreational purposes. Gaming is normally regulated by state and local law in the jurisdiction in which the activity occurs.

Most gaming, if regularly carried on for profit, is an unrelated trade or business activity, which may produce unrelated business taxable income (UBTI).  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 activity related to its exempt purposes.  Therefore, gaming income received by exempt organizations is treated as UBTI, unless a specific exception applies.

General Exclusions and Exceptions:

  • Certain bingo games are excluded from the definition of “unrelated trade or business” as long as state or local law is not violated – IRC Section 513(f) Bingo Exclusion. See Issue Snapshot - Exclusion of Bingo from Unrelated Business Activity

  • Most games of chance conducted by exempt organizations in North Dakota are not unrelated trades or businesses if conducting the games does not violate any state or local law. Only North Dakota enjoys the exception for non-bingo gaming. See Pub. 3079

  • Qualified public entertainment activities, which may include gaming, are excluded from the definition of unrelated trade or business. IRC Section 513(d).
  • The term “unrelated trade or business” does not include any trade or business if substantially all work is performed by volunteers. IRC Section 513(a)(1). See Issue Snapshot – Volunteer Labor Exclusion from Unrelated Trade or Business. (but see Section 512(a)(3) for special rules applicable to organizations exempt under subsections (c)(7), (9), (17), or (20)).

501(c)(3) Organizations

Gaming isn’t an inherently charitable activity; it is a recreation and a business. Although an organization may use the proceeds from gaming to pay expenses associated with its charitable programs, gaming itself does not further exempt purposes. Thus, the sole purpose of a Section 501(c)(3) organization can’t be to conduct gaming. Further, foundation classification may be affected by gaming receipts. Gaming income is UBTI unless an exclusion or exception applies.

However, IRC Section 513(d) provides an exception for qualified public entertainment activities conducted in conjunction with public fairs and expositions by organizations described in Sections 501(c)(3), 501(c)(4), or 501(c)(5). Note that conducting a horse racing meet with pari-mutuel betting will be an unrelated business activity unless this qualified public entertainment exception is met. i.e. Rev. Rul. 68-505.

If an organization is classified as a private foundation because its sole source of support is from an unrelated trade or business (i.e., gaming), it may also have excess business holdings in a business enterprise within the meaning of IRC Section4943(a)(1), and the organization must divest itself of them. See Treas. Reg. Section 53.4943-10 (defining “business enterprise”).

501(c)(4) Organizations

IRC Section 501(c)(4) organizations promote social welfare. Gaming is considered both a business and a recreational activity; it does not ordinarily promote social welfare. If it is the primary activity of a social welfare organization, it may jeopardize the organization’s exempt status. If not a primary activity, the gaming income will be UBTI unless an exclusion or exception applies.

Gaming may be considered a social welfare activity in very limited situations for IRC Section 501(c)(4) organizations. For example, a volunteer fire company exempt under Section 501(c)(4) providing gaming for the firefighters (not the public) promotes camaraderie, which in turn encourages better performance of the department, thus promoting social welfare. Gaming activities conducted in this manner would be related to exempt purpose and would not generate any UBTI. Rev. Rul. 74-361

501(c)(5) Organizations

Gaming does not further the exempt purposes of a Section 501(c))(5) Labor or Agricultural organization. Thus, an organization exempt under Section 501(c)(5) may jeopardize its exemption if gaming becomes the organization’s primary activity, and the gaming income may also be subject to the tax on unrelated business income.

501(c)(6) Organizations

A Section 501(c)(6) Business League may not engage in a regular business of a kind, including gaming, ordinarily carried on for profit. See Treas. Reg. Section 1.501(c)(6)-1.

Social and Recreational Organizations

Gaming may be related to a social and recreational organization’s exempt purpose. Those organizations are generally Section 501(c)(7) social clubs, Section 501(c)(8) and Section 501(c)(10) fraternal organizations, and Section 501(c)(19) veterans’ organizations.

For these organizations, recreational gaming activities further exempt purposes if conducted only with members and their guests. See Rev. Rul. 69-68.  Such income would be “substantially related” and wouldn’t be generated from an unrelated trade or business.

Income from a member’s spouse or dependent children is treated as member income. Rev. Proc. 71-17, 1971-1 C.B. 683.

Income received from members to entertain their bona fide guests is treated as member income. See Rev. Proc. 71-17.

For Section 501(c)(7), Section 501(c)(8), Section 501(c)(10) and Section 501(c)(19) organizations, the term “guests” is generally defined as individuals whom the member invites and for whom the member pays. See Rev Rul 79-145. Generally, gaming activities involving the general public do not directly further exempt social or recreational purposes.

Note that social clubs exempt under Section 501(c)(7) are treated differently under the UBTI tax rules. Generally, the unrelated business taxable income (UBTI) of organizations described in section 501(c)(7) includes all gross income, less deductions directly connected with producing that income, but not including exempt function income. Income is exempt function income only when it’s from members and furthers traditional exempt purposes (e.g. gaming) or it’s income that is allowed to be set-aside and used as specified under IRC Section170(c)(4). See IRC Section 512(a)(3).

Therefore, none of the exceptions to or exclusions from UBI under IRC Section 513 (discussed above) apply to social clubs. Furthermore, unrelated business income includes gaming income from nonmembers and reciprocal 501(c)(7) club arrangements.

Gaming that is limited to members, bona fide guests, and members of the various posts exempt under the same group ruling furthers a Section 501(c)(19) Veterans organization’s social and recreational purpose and does not generate UBTI.

Issue Indicators or Audit Tips

Issue Indicators:

  • Gaming that isn’t related to exempt purposes.
  • Gaming is the organization’s primary activity.
  • Gaming conducted violates state or local law.
  • Gaming conducted off-site or with the general public.
  • Gaming inadequately managed by the organization.
  • Organization conducting the gaming activities makes a contribution to another exempt organization in return for the grantee providing “volunteer labor.”
  • 3rd parties sponsor the gaming activities (e.g., exempt organization sponsors pull-tab games at a for-profit establishment, where employees of the establishment sell tickets).
  • Not all of the games are reported (e.g. cash vendor purchases with no invoice).
  • Gaming revenues are reported at net instead of gross, which may affect Form 990/990-T filing requirements.

Audit Tips:

  • Determine whether gaming is an unrelated trade or business. Factors to consider:
  • The frequency of the activity,
  • The length of time it has continually been conducted,
  • How the organization promotes the activity, and
  • How nonexempt businesses conduct similar activities. 
  • Determine the organization’s meaning of “membership.”
  • Distinguish guest income from income from members of the general public
  • Determine whether the organization’s gaming activities are regulated by state or local law.
  • All workers involved in the operation of the gaming activities must be taken into account in determining if substantially all of the work is performed without compensation.
  • Bingo dauber sales and food/beverage sales don’t meet the bingo exclusion and are unrelated business income unless one of the IRC Section513(a) exceptions applies or bingo is conducted with members only (as applicable).
  • Determine if gaming activity is primary activity and/or if receipts are substantial which may affect foundation classification (for IRC Section 501(c)(3) organizations) and/or exemption status. For IRC
  • Section501(c)(7) organizations, unrelated business income from nonmembers/general public must not regularly exceed 15% of gross receipts