Can a charity that runs casino nights use the gambling proceeds to pay its officers or directors?

Plain-English summary

Prince George's County's own attorney asked the Maryland Attorney General a narrow but practical question in 1989: could a charity that was licensed to run "casino nights," under the special Prince George's County gambling exemption, use part of the proceeds to pay salaries or annual stipends to its own officers and board members? The organization in question paid its officers and directors for running the charity's day-to-day operations and distributing its charitable funds, but those people did not personally work the casino tables. The Attorney General concluded no. Article 27, §255(b)(1) and §258B(a) required that gambling proceeds either stay entirely free of private financial benefit or be limited to the organization's approved public purposes, and paying officers or directors out of those proceeds, even people who did legitimate work for the charity elsewhere, counted as prohibited private gain. Doing so, the opinion concluded, would turn an otherwise-lawful casino night into illegal gambling.

Currency note

This opinion was issued in 1989. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here.

Common questions

In 1989, could a Maryland charity pay its officers or directors from casino night proceeds? No. The opinion concluded that organizations licensed to conduct casino nights in Prince George's County under Article 27, §255(b)(1) and §258B(a) could not use any part of the proceeds to pay salaries or stipends to their own officers or directors.

Did it matter that the officers didn't personally work at the casino tables? No, and that was the specific fact pattern the opinion addressed. The organization's officers and directors managed the charity's operations and distributed its charitable funds but did not participate directly in running the casino nights. The opinion still concluded their compensation could not come from the gambling proceeds, because §258B(a) required the casino nights to be "managed and operated only by members of [the sponsoring] group or organization personally," suggesting the legislature expected that work to be uncompensated.

Could a charity use casino night proceeds to pay members who ran the event? The opinion concluded that §§255 and 258B did not permit using gambling proceeds to pay members' salaries or stipends. It considered payment for managing a casino night only as a hypothetical alternative, and held that the officers and directors in the request could not be paid from the proceeds under that reading either.

What law did this opinion rely on?
Article 27, §255(b)(1) authorized certain Prince George's County organizations to conduct gambling only if no individual "benefits financially" or "receives or is paid any of the proceeds ... for personal use or benefit." Article 27, §258B(a) separately authorized benefit performances whose net proceeds "inure to [the sponsoring] group" for public purposes "and not for the private gain of any member." The opinion read the two provisions together, following a prior 1988 Attorney General opinion that had already held they had to be construed as a single scheme.

Background and statutory framework

Maryland's gambling laws broadly prohibited private gambling except where specifically authorized, and the opinion noted that the General Assembly had directed courts to construe exceptions to that prohibition narrowly. Article 27, §255(b)(1) authorized designated charitable and service organizations in Prince George's County and seventeen other counties to conduct gambling, but only "if no individual or group of individuals benefits financially from the holding of any [gambling activities] or receives or is paid any of the proceeds ... for personal use or benefit." Article 27, §258B(a), enacted in the same legislative session, separately authorized "benefit performances" (of which casino nights were one kind) whose net proceeds had to "inure to [the sponsoring] group ... for the promotion of and to be used for one or more [enumerated purposes], and not for the private gain of any member." Prince George's County's own code, at §5-118.2 and §5-118.8, echoed that private-gain prohibition and required casino night workers to affirm they were not paid from the proceeds.

The opinion reasoned that both statutes reflected the same underlying legislative goal: making sure gambling proceeds served the organization's public, charitable purposes rather than any individual's private benefit. It borrowed, by analogy, the federal tax-exemption concept of "private inurement" under 26 U.S.C. §501(c)(3), reasoning that while a nonprofit may pay reasonable salaries for necessary work without losing its tax status, salaries paid to people uninvolved in running the actual fundraiser were not a "necessary expense" of that fundraiser and so came out of the protected "net proceeds," not out of permissible operating costs. Because the specific officers and directors described in the request did not participate in the casino nights themselves, the opinion concluded their salaries and stipends could not be paid from casino night proceeds under either statute.

Citations and references

Statutes:

• Article 27, §255(b)(1), the Prince George's County gambling authorization conditioned on no individual receiving financial benefit
• Article 27, §258B(a), the benefit-performance authorization requiring net proceeds to serve the group's public purposes and not private gain
• Article 27, §246, directing courts to construe gambling exceptions narrowly
• Article 27, §240, the general prohibition on gambling from which §255 and §258B are exceptions
• §5-118.2 and §5-118.8 of the Prince George's County Code, the local ordinance implementing §258B's private-gain prohibition for casino nights
• 26 U.S.C. §501(c)(3), the federal tax-exemption provision used by analogy for the "private inurement" concept
• Chapter 342, Laws of Maryland 1973, the law that originally enacted §258B

Cases:

• Gaither v. Cate, 156 Md. 254, 258-59 (1929), establishing that gambling statutes must be construed liberally to suppress gambling
• Edward B. Marks Music Corp. v. Colorado Magnetics, Inc., 497 F.2d 285, 288 (10th Cir. 1974), cert. denied, 419 U.S. 1120 (1975), on construing exceptions to clear public policy narrowly
• Twinbrook Swimming Pool Corp. v. Comptroller of the Treasury, 274 Md. 88, 94-95, 333 A.2d 49 (1975), on legislative acquiescence in an Attorney General's statutory interpretation
• State v. 149 Slot Machines, 310 Md. 356, 365, 529 A.2d 812 (1987), holding that gambling exemptions are limited and do not authorize any and all gambling activity
• Founding Church of Scientology v. United States, 412 F.2d 1197 (Ct. Cl. 1969), cert. denied, 397 U.S. 1009 (1970), on the tax-law "private inurement" concept applied by analogy
• Kaczorowski v. City of Baltimore, 309 Md. 505, 514-16, 525 A.2d 628 (1987), on reading a statute in light of related statutes rather than in isolation
• Carolina Freight Carriers v. Keane, 311 Md. 335, 339, 534 A.2d 1337 (1988), on statutory construction in context
• Bubbling Well Church of Universal Love v. Commissioner of Internal Revenue, 670 F.2d 104, 105-06 (9th Cir. 1981), on reasonable compensation not defeating tax-exempt status
• Church By Mail, Inc. v. Commissioner of Internal Revenue, 765 F.2d 1387, 1392 (9th Cir. 1985), on excessive salaries constituting prohibited inurement

Source

• Landing page: https://oag.maryland.gov/resources-info/Pages/attorney-general%E2%80%99s-opinions.aspx
• Original PDF: https://oag.maryland.gov/resources-info/Documents/pdfs/Opinions/1989/Volume74_1989.pdf (this opinion appears at printed pages 157-163 of the bound annual volume; Maryland's site does not publish a standalone PDF of this opinion)

Original opinion text

Best-effort transcription from a scanned PDF. Minor errors may remain, the linked PDF is authoritative.

GAMING

Casino Nights - Financial Benefit - Organizations Conducting Casino Nights In Prince George's County May Not Use Gambling Proceeds To Pay Salaries Of Officers Or Directors

June 8, 1989

Michael P. Whalen, Esquire
County Attorney
Prince George's County Government

You have requested an opinion on whether an organization that conducts casino nights in Prince George's County may use part of the proceeds of those events to pay salaries or stipends to the organization's officers or directors. For the reasons given below, we conclude that this use of casino night proceeds is not permitted by Article 27, §§255 and 258B and, thus, that an organization paying salaries or stipends from those proceeds would be engaged in illegal gambling.

I

Background

Article 27, §255(b)(1) authorizes various kinds of service or charitable organizations in Prince George's County and 17 other counties to conduct gambling "if no individual or group of individuals benefits financially from the holding of any [gambling activities] or receives or is paid any of the proceeds ... for personal use or benefit." Similarly, §258B(a) authorizes described kinds of organizations to conduct benefit performances "the net proceeds of which ... shall inure to [the sponsoring] group ... for the promotion of and to be used for one or more [enumerated purposes], and not for the private gain of any member," at which prizes may be awarded by chance.1

The organization that prompted your inquiry is eligible to conduct casino nights. It pays salaries to its officers and an annual stipend to each member of its board of directors. Those persons are responsible for the administration of the organization and for disbursing the funds for its charitable programs, but they do not participate directly in the operation of its casino nights. The organization presently does not use any proceeds of its casino nights to pay those individuals' salaries or stipends; however, it has asserted that State law would not prevent its doing so.

II

Analysis

Maryland's gaming laws broadly prohibit all forms of gambling conducted by private persons or groups, except as certain gambling activities may be expressly authorized. The General Assembly has mandated that "[t]he courts shall construe the [statutes] relating to gambling and betting liberally, so as to prevent the mischiefs intended to be provided against." Article 27, §246. See also Gaither v. Cate, 156 Md. 254, 258-59 (1929) (rule should be applied to all gambling statutes, whether enacted before or after §246). Accordingly, the limitations in statutes that authorize some gambling must be strictly adhered to, if those authorizations are not to operate in contravention of the basic legislative purpose of suppressing gambling. See Edward B. Marks Music Corp. v. Colorado Magnetics, Inc., 497 F.2d 285, 288 (10th Cir. 1974), cert. denied, 419 U.S. 1120 (1975) (statutes granting

1
Article 27, §258B(a) further requires an organization that wishes to conduct a benefit performance to obtain a permit from the county, and §258B(c) authorizes the county governing body to "restrict or prohibit the issuance of" permits for casino nights, defined as benefit performances "at which card games, wheels of fortune or roulette are played and prizes are awarded." Pursuant to that authorization, the county council has adopted §§5-118.1 through 5-118.13 of the county code. §5-118.2 reiterates the substance of the "private gain" prohibition in Article 27, §258B(a), and §5-118.8 requires persons who work at casino nights to submit affidavits that they are "not working for any salary from the organization or private gain from the net proceeds ...."

exceptions to clearly articulated public policy should be construed narrowly).

In 73 Opinions of the Attorney General 152, 154-55 (1988), we noted that, because the extension of §255 to Prince George's County and the enactment of §258B occurred in the same session of the General Assembly and those statutes deal with the same subject, they must be construed together to ascertain and effectuate the legislative intent regarding permitted gambling activities in Prince George's County.2 Because the General Assembly has not acted in any way that would evidence a contrary intent, we continue to believe that our view of the relationship between §§255 and 258B is correct. See Twinbrook Swimming Pool Corp. v. Comptroller of the Treasury, 274 Md. 88, 94-95, 333 A.2d 49 (1975) (legislative acquiescence in Attorney General's interpretation).

Both statutes are exemptions from the general statutes that broadly prohibit all gambling. E.g., §240. But they are limited exemptions, they do not authorize any and all gambling activities that may be conducted by an eligible organization. See State v. 149 Slot Machines, 310 Md. 356, 365, 529 A.2d 812 (1987). Any gambling activity not conducted in accordance with the limitations falls outside the scope of the exemption and is therefore prohibited. Cf. Founding Church of Scientology v. United States, 412 F.2d 1197 (Ct. Cl. 1969), cert. denied, 397 U.S. 1009 (1970) (substantial import of limitation on tax exemption for charitable organizations cannot be ignored).

Under §258B, gambling is authorized only if the "net proceeds" are used by the organization for described public purposes "and not for the private gain of any member ...." The limitation on private benefits in §255(b)(1) is phrased more broadly: Gambling is within the scope of that provision only if no individual "benefits financially ... or receives or is paid any of the proceeds ...." In Opinion No. 88-016, at 3-4 (March 11, 1988) (unpublished), we concluded that §255(b)(1) does not

2
The organization that prompted your inquiry has suggested that §255(b)(1) - but not §255(b)(2) or (3) - is a rule of construction that should be ignored in determining the meaning of §258B because the language of §258B is unambiguous. In Kaczorowski v. City of Baltimore, 309 Md. 505, 514-16, 525 A.2d 628 (1987), the Court of Appeals expressly rejected the proposition that any statute, whether or not ambiguous, can be read in isolation and without reference to its context, including other related statutes. See also Carolina Freight Carriers v. Keane, 311 Md. 335, 339, 534 A.2d 1337 (1988) ("We decline to enter the debate about ambiguity or to engage in an exchange of slogans.").

prohibit indirect financial benefit that is an unavoidable concomitant of the conduct of an organization's gambling activity, but does prohibit direct financial benefit that is not. Hence, an organization's lease of space in a commercial facility for its tip jar would not be permitted because it would not be a necessary expense. Opinion No. 88-016 at 4.

By the same token, we believe that the payment of salaries or stipends to an organization's members would not be a permitted use of the organization's gambling proceeds. The gambling activities conducted under §258B(a) must be "managed and operated only by members of [the sponsoring] group or organization personally." See also §255(b)(3) (gambling activities must be managed by members of organizations personally). We think that the legislative intent was to ensure that no gambling would be conducted for purposes of personal profit, first, by prohibiting the payment of any "net proceeds" to members and, second, by requiring that the activity be managed and operated by the members, who could be expected to perform those services without compensation because of their desire to promote the objectives of the organization.

Thus, the reference to "net proceeds" in §258B(a) was intended to recognize that the conduct of a fundraising event may entail some expenditures and to authorize the organizations to pay those expenses out of the proceeds of the fundraisers. Notably, §258B is not solely an authorization for the conduct of gambling activities as such. Rather, it was enacted to permit organizations conducting a wide variety of "benefit performances" to award prizes as an adjunct of those performances. See Chapter 342, Laws of Maryland 1973 (enacting §258B). Thus, a concert or lecture at which a door prize is awarded would come under the governance of §258B(a). The General Assembly may have contemplated that the necessary expenses of that kind of benefit performance might include the payment of compensation to the performer or lecturer. But it is not likely to have been within the legislative contemplation that persons interested enough in an organization's goals to join the organization would require the added

incentive of compensation before supporting its efforts to raise funds to further those goals.3

Moreover, the possibility of abuse if members of an organization, who determine whether to conduct fundraisers and how to use the proceeds, could receive personal financial benefit from the fundraisers would contravene the clear legislative intent to authorize only limited gambling for purposes beneficial to the public in general. Therefore, we think that §§255 and 258B were not intended to permit the use of gambling proceeds to pay salaries or stipends to members of the organizations that conduct the gambling activities.

Even were we to construe §258B(a) as authorizing the organizations to compensate their members for managing or operating casino nights, we do not believe that the particular officers and directors about whom you have inquired may be compensated from casino night proceeds. A somewhat analogous provision of the Internal Revenue Code exempts from income taxes charitable and similar organizations "no part of the net earnings of which inures to the benefit of any private shareholder or individual ...." 26 U.S.C. §501(c)(3). That provision "has been construed to permit an organization to incur ordinary and necessary expenditures in the course of its operations without losing its tax-exempt status." Founding Church of Scientology, 412 F.2d at 1200. Therefore, an organization may pay salaries to individuals without losing its tax-exempt status, so long as the salaries are reasonable in relation to the services rendered to the organization by those persons. Bubbling Well Church of Universal Love v. Commissioner of Internal Revenue, 670 F.2d 104, 105-06 (9th Cir. 1981). Excessive salaries, however, constitute the inurement of net earnings to private benefit. Church By Mail, Inc. v. Commissioner of Internal Revenue, 765 F.2d 1387, 1392 (9th Cir. 1985).

3
We do not mean to suggest, of course, that it is improper for an organization to compensate any of its members under any circumstances. Many organizations have members who also serve as full-time or part-time employees, and without whose services the organizations would be hard-pressed to continue functioning. Organizations are not prohibited from compensating those members; that compensation simply must be derived from sources other than gambling conducted under §255 or 258B.

While 26 U.S.C. §501(c)(3) is concerned with the overall operations of tax-exempt organizations and the uses that they make of all of their net earnings, regardless of source, §258B(a) is concerned only with the conduct of service and charitable organizations' fundraisers and the uses made of the net proceeds of those fundraisers. Hence, a construction of §258B(a) that would allow the payment of salaries to members out of the proceeds of fundraisers must be limited to the payment of salaries that can be regarded as reasonable and necessary expenses of the fundraisers.

Put another way, any salary that is not simply reasonable compensation for work done in managing or operating a fundraiser is not a necessary expense of the fundraiser. Therefore, the payment of that salary would be a payment of part of the fundraiser's net proceeds, the proceeds remaining after reasonable and necessary expenses have been paid. You have specifically advised us that the officers and directors about whom you inquire do not participate in the casino nights. Accordingly, their compensation cannot be regarded as expenses of the operation of the casino nights and, if paid out of the proceeds of those events, would necessarily be paid out of the net proceeds. We think that §258B prohibits any inurement of the net proceeds of a fundraiser to members of the sponsoring organization.4

III

Conclusion

In summary, it is our opinion that, under Article 27, §255(b)(1) and 258(B)(a), organizations that conduct casino nights in Prince

4
The organization about which you inquire suggests that a reasonable salary is not "private gain," relying on the language of §5-118.8 of the Prince George's County Code. See note 1. The organization suggests that this provision distinguishes between salary, which the organization characterizes as quid pro quo compensation for services rendered, and pecuniary benefit that is provided without any quid pro quo. In our view, the phrase "private gain" must be construed in its ordinary sense as a broad term denoting all forms of pecuniary increase to a private individual rather than the public at large. Thus, the term is not distinct from, but includes, salary. We note, for example, that federal courts considering whether net earnings of a tax- exempt organization inured to the benefit of a private individual have considered the total compensation received by the individual, regardless of form. Those courts have not distinguished between salary and benefits and have not hesitated to conclude that the combination may constitute inurement of net earnings even when the salary alone might not be unreasonable. See e.g., Founding Church of Scientology, 412 F.2d at 1200.

George's County are not permitted to use part of the proceeds of those events to pay salaries of stipends to the organizations' officers or directors. Accordingly, organizations that use casino night proceeds to pay members' salaries of stipends would be engaged in illegal gambling activities.

J. Joseph Curran, Jr.
Attorney General

C. J. Messerschmidt
Assistant Attorney General

Jack Schwartz
Chief Counsel
Opinions & Advice