Untitled Texas Attorney General Opinion ( 2002 )

.’ 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).
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 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”].
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 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.
The Honorable Tom Ramsay - Page 4 (JC-0482)
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).
The Honorable Tom Ramsay - Page 5 (JC-0482)
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