October 16, 1997 | Read Time: 2 minutes
The U.S. Tax Court has ruled that an organization set up at a Vermont lounge to sell lottery tickets to raise money for good works does not qualify as a charity.
The organization, KJ’s Fund Raisers, was created by the owners of the KJ’s Place bar and incorporated as a non-profit group under Vermont law in 1992. Those visiting the lounge to buy lottery tickets were solicited for drinks by the bar’s owners and workers.
KJ’s Fund Raisers made grants from the ticket proceeds to numerous charities. The group’s contributions sometimes nabbed publicity. For example, local newspapers twice ran photographs of the lounge’s owners in front of the bar handing out a check to charity on behalf of KJ’s Fund Raisers.
Early on, both of the the bar’s owners were officers and directors of the organization. They later left the board, but one of its three current members is the sister of an owner.
The I.R.S. ruled last year that KJ’s Fund Raisers did not qualify as a charity, in part because it could not prove that its operation would not improperly give the lounge a financial lift.
In an appeal to the Tax Court, KJ’s Fund Raisers argued that its board was independent and that the bar itself had lost money because some customers preferred to buy lottery tickets rather than drinks.
But the Tax Court ruled that the organization was too closely tied to the lounge. The bar owners probably could set the charity’s policies without objection from the board, the court said. KJ’s Fund Raisers helped the bar get free publicity by making grants, the court continued, and did not prove that it caused the bar to ever lose money.
Finally, the court observed that rival clubs near KJ’s Place also featured gambling. One of the real reasons the bar’s owners probably created KJ’s Fund Raisers, the court said, “was to induce customers with a proclivity for this type of gambling not to desert KJ’s Place.” (KJ’s Fund Raisers v. Commissioner of Internal Revenue, T.C. Memo. 1997-424.)
