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Statehouse Beat: Are some video lottery clubs illegal?

CHARLESTON, W.Va. -- You've got to admire Jesse Bane, operator of a couple of Limited Video Lottery clubs in Fayette County, whose primary avocation is being a thorn in the side (or voice of reason) to state Lottery officials.

Bane was one of the plaintiffs in a (unsuccessful) lawsuit to permit LVL clubs to advertise, and more recently, he made the Lottery aware that more than 100 LVL establishments operating under Class A beer licenses were failing to comply with an ABCA license requirement that they prepare and serve food on premises.

That led to a Lottery rule requiring those establishments to have bare-bones food service operations, with the capacity to serve five meals per day, per machine. (Not sure how strictly that rule has been enforced.)

Now, Bane and his state Association of Club Owners are going after faux fraternal organizations -- bars around the state that have affiliated with obscure fraternal organizations like the Order of Orioles, Legion of Guardsmen, Order of the Owl's Nest or Eagles Aerie in order to operate 10 LVL machines, instead of the maximum five allowed in bars or clubs.

The Lottery lists at least 38 such fraternals statewide, including nine in Wood County alone.

(The issue of "fake fraternals" has come up before: In 2005, the Lottery cracked down on bars and LVL parlors that affiliated with fraternals in order to get 10 machines, but operated under their original names -- the former Hot Spot in Kanawha City was probably the most publicized example. Otherwise, the Lottery has not attempted to differentiate between legitimate fraternal organizations, and bars operating under the guise of being fraternals, as long as they have tax-exempt status from the IRS as fraternal organizations.)

Bane and company have done considerable research of IRS code and state law and reached a couple of significant conclusions:

1. In order to maintain tax-exempt status under federal IRS rules, fraternals have either operated for the exclusive benefit of members of the lodge, or alternately, "devote their net earnings entirely to religious, charitable or other exempt purposes." 

"Gambling is not a charitable activity, it is a business," Bane said. "Thus, according to the federal government, the sole purpose of a tax-exempt organization cannot be to conduct gambling."

Bane contends that the fake fraternals are not complying with IRS Code, in requiring that their proceeds either benefit lodge members or go to charitable causes.

A quick glance at IRS 990 forms filed by the groups appears to bear him out:

* Legion of Guardsmen in Wheeling, with 10 LVL machines, in 2011 reported revenue of $149,885, with $0 in charitable contributions, $0 in program services, $17,820 in executive compensation, and $64,870 in salaries and wages.

* Order of Orioles, Shinnston: 10 machines, $374,196 in revenue, $0 in contributions, $0 in program services, $107,555 in salaries and wages.

* Eagles Lodge, Clarksburg: 7 machines, $317,054 in revenue, $6,868 in contributions, $114,086 in salaries and wages, $201,003 in other expenses.

We could go on, but that's pretty representative of the 990s.

2. While the fraternals technically are supposed to be open to dues-paying members and accompanied guests only, the fake fraternals are open to the public, and Bane said that at least one Northern Panhandle fraternal has a sign stating, "Everyone Welcome."

Likewise, Bane said it violates IRS regulations for the fake fraternals to charge a nominal membership fee, if the only purpose for membership is to play the LVL machines.

(There's a legal train of thought that it's OK to admit non-members, so long as revenue they provide is reported separately as taxable income.)   

* * *

Bane has found a legislative advocate in the form of Sen. Larry Edgell, D-Wetzel. Edgell is a member of the Moose Club in New Martinsville, and said he's been concerned that the club's finances have been squeezed by two faux fraternals in town.

As a test, he said his wife and sister went to both establishments, were welcomed in, allowed to play LVL, with no questions raised about their membership status.

During legislative interim meetings last week, Edgell said he planned to raise his concerns with Lottery Commission director John Musgrave -- a discussion that apparently proved fruitful.

Late last week, Musgrave said he's placing those establishments under close scrutiny.

"We've had issues with fraternals not being in compliance to be a fraternal," he said. "We're taking a hard look at complaints we've had with a number of fraternal organizations. I've asked our inspectors to take a hard look at how they're operating."

* * *

Finally, Lottery revenues are continuing an 8 to 9 percent plunge, and Hollywood Casino in Charles Town -- by far the largest and most profitable in the state -- is losing huge chunks of business to the new Maryland Live! casino in nearby Anne Arundel County.

Meanwhile, a reader notes that the Baltimore Sun reported that the Charles Town casino's parent company -- Penn National Gaming -- is in a bidding war for a license to build a $700 million casino in Prince George's County, Md., just outside of Washington, D.C.

Not only would that be the death knell for Charles Town (and for state Lottery revenues), but in bidding for the casino license, Penn National is offering to give Maryland and the county 100 percent of the casino's profits for 15 years, an estimated haul of $320 million.

Reach Phil Kabler at philk@wvgazette.com or 304-348-1220.


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