.’ OFFICE OF THE ATTORNEY GENERAL

. STATE OF TEXAS JOHN CORNYN

March 252002

The Honorable Tom Ramsay Chair, County Affairs Committee Texas House of Representatives P.O. Box 2910 Austin, Texas 7876829 10 Opinion No. JC-0482

Re: Whether aprivate Texas nonprofit corporation may operate a “charitable sweepstakes fundraising program,” and related questions (RQ-0443-JC)

Dear Representative Ramsay:

You ask whether aparticular “charitable sweepstakes fundraising program” conducted by
aprivate Texas nonprofit corporation is “legal” under Texas law.’ We answer in the negative. We conclude that the sweepstakes scheme about which you ask isa“lottery,” the promotion ofor setting up of which would violate section 47.03 of the Penal Code. See TEX. PEN. CODEANN.847.03(5) (Vernon 1994). Use of any “gambling devices” in the conduct of this sweepstakes would also violate chapter 47 ofthe Penal Code. See id. 547.06. Given that the described sweepstakes scheme isprohibited under Texas law, the fact that four percent ofthe 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 aprivate 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 itsname, the corporation isnot afederally recognized Native American Indian tribe
orrelated to any such tribe. The corporation isincorporated 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) ofthe [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 ofRepresentatives, to Honorable John Cornyn, Texas Attorney General (Sept. 19,200l) (on file with Opinion Committee) [hereinafter Request Letter].

2SeeAmendment to Articles ofIncorporation ofthe Cherokee Indian Nation ofTexas (June 17,1996) (on file with the Office of the Secretary of State of Texas, Corporations Section).The Honorable Tom Ramsay - Page 2 (JC-0482)

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 aparticular sweepstakes location. See “Rules and Regulations,” supra note 3, at 1. Although not required for the purchase of aticket, aparticipant may “donate” money to the sweepstakes and become a “member” of the corporation. See id. at l-2. The holder of awinning ticket number who has not donated money has the possibility ofwinning “[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 adonation into the local Charitable Sweepstake Machines has thepossibility 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 atthat location asrental payment. See id. The owner ofthe 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, aparticular location may have daily sweepstakes drawings. See id. at l-2.

You ask:
(1) Even ifthe 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 ifused only for the sweepstakes?
(3) Are the proceeds from the sweepstakes distributed in a proper manner?
(4) Considering the sweepstakes proceeds go entirely to acharitable 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”].The Honorable Tom Ramsay - Page 3 (JC-0482)

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 aNon-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 alottery prohibited by article III, section 47 of the Texas Constitution and chapter 47 of the Texas Penal Code.

Article III, section 47(a) ofthe Texas Constitution directs the legislature toprohibit lotteries and gift enterprises other than those specifically authorized by subsections (b), (d), and (e) of the constitutional provision. See TEX.CONST. art. III, 847(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’TCODE ANN.ch. 466 (Vernon 1998 & Supp. 2002).

Consistent with article III, section 47(a) ofthe Texas Constitution, chapter 47 of the Penal Code prohibits gambling and gambling related activities, including the promotion ofa“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 orpromotes 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 ofparticipation in any lottery.

Id. 847.03(a)(5) (Vemon 1994) (emphasis added). See also id. $847.02 (a)(l), (2) (Vernon Supp. 2002) (person commits offense ifbets on game orplays formoney any game played with gambling device); .04(a) (Vernon 1994) (person commits offense ifknowingly uses orpermits 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

moreprizes are distributed by chance among persons who havepaid
orpromised consideration for a chance to win anything ofvalue, whether such scheme orprocedure iscalled apool, lottery, raffle, gift, gift enterprise, sale, policy game, or some other name.The Honorable Tom Ramsay - Page 4 (JC-0482)

Id. 5 47.01(7) (Vemon 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 ofone ormore prizes by chance-are clearly present in the sweepstakes game here. A money prize, either one percent or seventy percent ofthe 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 adesignated sum is indistinguishable from
an outright sale oftickets. See Tex. Att’y Gen. Op. No. H-820 (1976) at4; see also Tex. Att’y Gen. Op. No. JM-5 13(1986) at2. Furthermore, asthis office has previously observed, “the fact that one person receives achance 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 adonation, then there would be no “lottery.” See id. Similarly, here, ifthere 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 ofthe 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 offavoritism” topaying customers ofgas filling stations).

In sum, because the sweepstakes is a“lottery” under section 47.01(7) ofthe 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.$847.01(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.CODE

ANN.$0 47.02(a)(l), (2) (Vemon Supp. 2002) (person commits offense ifperson bets on game orplays and bets for money any game played with gambling device); .04(a) (Vernon 1994) (person commits offense ifknowingly
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).The Honorable Tom Ramsay - Page 5 (JC-0482)

The fact that the sweepstakes ispurportedly 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, orlegalize lotteries isunconstitutional); 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 ofAppeals held that bingo conducted by a veterans group was aprohibited lottery. See Amvets Post Number 80, 541 S.W.2d at483. Significantly, the court stated that the conduct ofthe game could not bejustified on the theory that “ifthe 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 ofraising money”; that the revenues were used for the veterans group’s “general operating expenses aswell asfor charitable” purposes; and that the proceeds were aregular and expected part of the bingo scheme. See id. at 483. The court concluded:

Id. 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 ifthe proceeds are used for acharitable purpose.

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). See also discussion supra p. 3. Consistent with the constitutional exceptions, it is adefense to prosecution under chapter 47 ofthe Penal Code that the conduct is authorized under the Bingo Enabling Act, chapter 2001 ofthe Occupations Code, orthe Charitable Raffle Enabling Act, chapter 2002 ofthe Occupations Code, or that itwas “a necessary incident to the operation of the state lottery” and was directly or indirectly authorized by the State Lottery Act, chapter 466 ofthe Government Code, orthe Texas Lottery Commission. See TEX.PEN. CODE ANN.547.09 (Vernon Supp. 2002). We look ateach ofthese provisions in turn and conclude that the sweepstakes is not authorized under any ofthem.

The Bingo Enabling Act permits authorized organizations-a religious society, anonprofit organization for the support of medical research or treatment programs, afraternal organization, a veterans organization, or a volunteer fire department-to obtain a license to conduct bingo in accordance with its provisions. See TEX. OCC. CODEANN. # 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 ofdesignated numbers or symbols conforming to randomly selected numbers
or symbols.” Id. 02001.002(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 organizationThe 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 araffle subject to the conditions set out in the act. See TEX.OCC.CODE ANN. 59 2002.002(2), .051(Vernon 2002). The statute defines
a “raffle” as “the award of one or more prizes by chance at asingle occasion among a single pool
orgroup ofpersons who have paid or promised athing ofvalue for aticket that represents achance 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 araffle must be expended directly for the charitable purposes ofthe organization. See id. 82002.053. Lastly, an organization may not conduct more than two raffles in a calendar year. Id. 52002.052.

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 itdoes, the sweepstakes, based on the information available tous, isnot a“raffle” atwhich prizes are awarded “at asingle occasion among asingle pool or group ofpersons.” See id. 82002.002(6). Moreover, contrary to the Charitable Raffle Enabling Act, the sweepstakes prize awarded ismoney; the sweepstakes drawings areconducted more frequently than twice in acalendar year; and allproceeds ofthe sweepstakes arenot spent for the charitable purposes ofthe corporation, whatever they may be, because proceeds oftheprior 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. 59466.001-.410 (Vernon 1998 & Supp. 2002). “Lottery” for the purposes ofthe actmeans “the procedures operated bythe state.” Id. 0466.002(5) (emphasis added); see also id. 9466.002(6) (“‘Lottery game’ includes alottery 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 alottery or alottery 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 aproper manner.” See id. The answer tobothThe 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.CODEANN. 55 47.01(4) (Vernon Supp. 2002) (defining “gambling devices”); .06(a) (Vernon 1994) (providing that person commits offense, ifwith intent to further gambling, person knowingly owns or possess gambling devices); see also id. $5 47.02 (a)(3) (Vemon Supp. 2002) (person commits offense if plays for money any game played with gambling device); .04(a) (Vernon 1994) (person commits offense if knowingly uses or permits another to use property as gambling place). Assuming that the sweepstakes machines or devices are gambling devices, as your question suggests, no provision in chapter 47 ofthe Penal Code makes them “legal,” as amatter of law, because they are used only in the conduct of a“charitable” sweepstakes ofthe type atissue here. C$ id. 847.06(d) (Vernon 1994) (providing defenses forprosecution under section 47.06(a) ifdevice orequipment isused orintended for use entirely in private place, aperson 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 forprosecution for offenses under chapter 47 ifconduct 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 aproper manner. Because the sweepstakes isprohibited under Texas law, how the proceeds aredistributed islegally irrelevant. Again, the fact that aportion ofthe proceeds isdesignated for charitable purposes ofthe 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) (providing 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 3n.5 (exceptions in federal law to application ofFICA 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 ofthe 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 InternalThe 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 aprivate 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 ofthe Penal Code. Given that the sweepstakes scheme isprohibited 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