Could South Carolina withhold bingo-tax distributions from an organization it determined was a fictitious charity?

Plain-English summary

South Carolina Revenue Ruling 98-7 said the Department of Revenue could stop bingo-tax distributions to a nonprofit organization after determining it was a “fictitious charity,” provided the Department properly notified the organization of the determination and its reasons.

The Department could withhold payments from the time of notice through the administrative and judicial appeal process unless the Administrative Law Judge Division or a court ordered payment. It could also assess the organization to recover distributions made during the period the organization was determined to have operated deceptively or as a sham.

At the same time as the withholding notice, the Department would notify the organization that it intended to seek revocation of the organization's bingo license.

What counted as a fictitious charity

The ruling quoted the Bingo Act's definition of a nonprofit organization as an entity organized and operated exclusively for charitable, religious, or fraternal purposes.

Because the statute did not separately define “fictitious charity,” the Department used the ordinary meaning of “fictitious”—something adopted to deceive or a sham. It concluded that an organization operated for purposes other than the listed nonprofit purposes could be treated as a fictitious charity under Section 12-21-4090(J).

Withholding during an appeal

The ruling rejected waiting until every appeal was finished before withholding funds. It reasoned that otherwise an organization found to be fictitious could keep receiving distributions for months or years while review continued.

Notice was the trigger. Once properly notified, the organization could have its distributions withheld during the dispute unless an administrative law judge or court directed otherwise.

Repayment and license consequences

The Department could seek reimbursement through an assessment, but only for the period it determined the organization had been operated to deceive or as a sham. The ruling did not authorize recovery for periods outside that determination.

It also linked the distribution decision to bingo-license enforcement: the Department would notify the organization that it would seek revocation under the cited provisions.

Common questions

Q: Could the Department withhold payments before all appeals ended?

A: Yes, after proper notice. Withholding could continue during appeal unless an administrative law judge or court ordered the Department to issue the payments.

Q: Could the Department recover distributions already paid?

A: Yes, through an assessment for the period the organization was determined to have operated deceptively or as a sham.

Q: Did the organization have to receive reasons for the decision?

A: Yes. The ruling repeatedly conditioned withholding and reimbursement on proper notice of both the determination and its reasons.

Q: Was license revocation separate from withholding?

A: The ruling said the Department would notify the organization at the same time that it intended to seek revocation of the bingo license.

Citations and references

• S.C. Code Ann. § 12-21-4190 (bingo-tax distributions to sponsoring charities)
• S.C. Code Ann. § 12-21-4090(J) (payments due a fictitious charity revert to the general fund)
• S.C. Code Ann. § 12-21-3920(5) (nonprofit organization definition quoted in the ruling)
• S.C. Code Ann. § 12-21-4280 and § 12-54-90 (license-revocation provisions cited in the ruling)

Subject

Withholding of Distributions to “Fictitious Charity”

Source

• Landing page: https://dor.sc.gov/advisory-opinion-search
• Original PDF: https://dor.sc.gov/sites/dor/files/policies/RR98-7.pdf

Original ruling text

State of South Carolina

Department of Revenue
301 Gervais Street, P.O. Box 125, Columbia, South Carolina 29214

SC REVENUE RULING # 98-7

SUBJECT:

Withholding of Distributions to “Fictitious Charity”
(Bingo)

EFFECTIVE DATE:

Applies to all periods open under the statute.

SUPERSEDES:

All previous documents and any oral directives in conflict
herewith.

REFERENCES:

S. C. Code Ann. Section 12-21-4190 (Supp. 1997)
S. C. Code Ann. Section 12-21-4080 (Supp. 1997)
S. C. Code Ann. Section 12-21-4090 (Supp. 1997)

AUTHORITY:

S. C. Code Ann. Section 12-4-320 (Supp. 1997)
SC Revenue Procedure #97-8

SCOPE:

A Revenue Ruling is the Department of Revenue's official
advisory opinion of how laws administered by the Department
are to be applied to a specific issue or a specific set of facts, and
is provided as guidance for all persons or a particular group. It is
valid and remains in effect until superseded or modified by a
change in the statute or regulations or a subsequent court
decision, Revenue Ruling or Revenue Procedure.

Question:
May the department withhold the money to be distributed to a nonprofit organization
under Code Section 12-21-4190(1) if it determines that the nonprofit organization is a
fictitious charity?
Conclusion:
The department, if it determines that an organization is a “fictitious charity,” may
withhold from the organization the payments due under Code Section 12-21-4190(1),
provided it has properly notified the organization of this determination and the reasons for
the determination. These payments will be withheld from the time of notification until the
matter is resolved, including the time period the matter is appealed, unless otherwise
ordered by the Administrative Law Judge Division or the courts to issue such payments.
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In addition, the department may seek reimbursement of any payments made to a
“fictitious charity” under the provisions of Code Section 12-21-4190(1), provided it has
properly notified the organization of this determination and the reasons for the
determination. The department will seek the reimbursement of these payments via an
assessment for only that time period that the department has determined the organization
was being operated in order to deceive or as a sham.
Finally, under the provisions of Code Section 12-21-4280 or Code Section 12-54-90, the
department, at the same time it notifies an organization that it will withhold payments due
under Code Section 12-21-4190(1), will notify the organization that it will seek
revocation of its bingo license.
Facts:
Effective October 1, 1997, the General Assembly enacted the Bingo Act of 1996 which
adds Article 24, Chapter 21, Title 12 and repeals Article 23, Chapter 21, Title 12. The
Bingo Act of 1996 implements a wide variety of substantial changes to the bingo laws.
The main change concerns the purchase of bingo cards. The following is a brief
explanation of this aspect of the law:
1.

All bingo operators will be required to obtain their bingo cards by paying a tax to the
department. Upon application for the cards, the department will authorize a
qualified distributor to sell bingo cards to the bingo operator. The tax must be paid
within 15 days of application for the cards.

2.

The department must collect 16.5 cents per dollar face value of the bingo cards
(except for Class C nonprofit organizations.) Twenty-six percent of this revenue
will be distributed to the nonprofit organizations, with the remainder distributed in
accordance with the statute for governmental purposes.

3.

The department will make distributions to the nonprofit organization (sponsoring
charity) from the tax received by the last day of the month following the month the
revenue was collected.

4.

The nonprofit organization, or the promoter conducting the games on its behalf, may
then use the bingo cards purchased from the distributor through this procedure to
conduct bingo games in order to raise money in accordance with the law.

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Discussion:
The issue is whether the department may withhold from the nonprofit organization the
money to be distributed to the nonprofit organization under Code Section 12-21-4190(1)
if the department has determined that the nonprofit organization is a fictitious charity.
Code Section 12-21-4190 concerns the payment of the tax to the department, and reads:
The department shall charge and retain sixteen and one-half cents of the dollar
value for each bingo card sold except sales to Class C licensees pursuant to this
article. The revenue retained must be distributed as follows:
(1) twenty-six percent of the revenue must be distributed to the sponsoring
charity for which the bingo cards were purchased. The department shall
make the distribution to the sponsoring charity by the last day of the next
month following the month the revenue was collected. Distributions under
this subsection must be reduced by any delinquent debts as defined in the
Setoff Debt Collection Act.
(2) seventy-four percent pursuant to Section 12-21-4200.
Code Section 12-21-4200 distributes the seventy-four percent discussed above among
various state agencies.
Code Section 12-21-4090(J) reads in part:
If the organization is identified as a fictitious charity after originally licensed,
any payments due the charity revert to the general fund.
Code Section 12-21-3920(5) defines the term “nonprofit organization” to mean, in part:
an entity which is organized and operated exclusively for charitable, religious,
or fraternal purposes ...
The statute does not define the term “fictitious charity.” However, it is an accepted
practice in South Carolina to resort to the dictionary to determine the literal meaning of
words used in statutes. For cases where this has been done, see Hay v. South Carolina
Tax Commission, 273 S.C. 269, 255 S.E. 2d 837 (1979); Fennell v. South Carolina Tax
Commission, 233 S.C. 43, 103 S.E. 2d 424 (1958); Etiwan Fertilizer Co. v. South
Carolina Tax Commission, 217 S.C. 484, 60 S.E. 2d 682 (1950).

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The American Heritage Dictionary, Second College Edition. defines the word “fictitious”
to mean:
adj. 1. Of, pertaining to, or characterized by fiction; imaginary. 2. Adopted
or assumed in order to deceive; a fictitious name. 3. Not genuinely believed or
felt; sham; greeted me with a fictitious enthusiasm.
Therefore, if the department determines that a nonprofit organization is organized and
operated for purposes other than charitable, religious, or fraternal, then the organization is
organized and operated in order to deceive or as a sham and is a “fictitious charity” under
the provisions of Code Section 12-21-4090(J).
The question now arises as to when the department should withhold the payments due
under Code Section 12-21-4190(1) if it has determined that the organization in question is
a fictitious charity.
The timing of withholding such payments could create a dilemma. If the department does
not withhold the payments until after the organization has exhausted its appeal of the
determination, then a fictitious charity could receive payments for months, even years,
while the matter makes it way through the administrative and judicial process.
A second question also arises. If the organization has already received payments under
Code Section 12-21-4190(1) and it is determined that it has been operating in a deceptive
manner or as a sham, then what happens to the money? Does the department seeking
reimbursement of these payments? Is the organization allowed to keep this money?
“A statute subject to interpretation is presumed not to have been intended to produce
absurd consequences, but to have the most reasonable operation that its language permits.
If possible, doubtful provisions should be given a reasonable, rational, sensible, and
intelligent construction. These rules prevail where they are not restrained by the clear
language of the statute. Under this rule, general terms in a statute should be so limited in
their application as not to lead to absurd consequences.” 73 Am.Jur.2d Statutes Section
265.
Based on the above, the department, if it determines that an organization is a “fictitious
charity,” may withhold the payments due under Code Section 12-21-4190(1) provided it
has properly notified the organization of this determination and the reasons for this
determination. These payments will be withheld from the time of notification until the
matter is resolved, including the time period the matter is appealed, unless otherwise
ordered by the Administrative Law Judge Division or the courts to issue such payments.

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In addition, the department may seek reimbursement of any payments made to a
“fictitious charity” provided it has properly notified the organization of this determination
and the reasons for the determination. The department will seek the reimbursement of
these payments via an assessment for only that time period that the department has
determined the organization was being operated in order to deceive or as a sham.
Finally, under the provisions of Code Section 12-21-4280 or Code Section 12-54-90, the
department, at the same time it notifies an organization that it will withhold payments due
under Code Section 12-21-4190(1), will notify the organization that it will seek
revocation of its bingo license.
SOUTH CAROLINA DEPARTMENT OF REVENUE

s/Burnet R. Maybank III
Burnet R. Maybank, III

, 1998
March 24
Columbia, South Carolina

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