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Statehouse beat: It's just the beginning for faux fraternals

CHARLESTON, W.Va. -- Lottery Director John Musgrave is evidently taking seriously the allegations of faux fraternal groups operating as Limited Video Lottery retailers.

Musgrave last week sent show-cause letters to four of those LVL retailers, ordering them to appear before the Lottery Commission on Jan. 23 and 24 to explain why the commission should not take punitive action against them.

You may recall that last fall, Jesse Bane and the state Association of Club Owners asked Musgrave to investigate bars around the state that affiliated with obscure fraternal organizations like Order of Orioles or Legion of Guardsmen to operate 10 LVL machines, instead of the maximum of five permitted for bars or clubs.

In November, Musgrave sent a letter to all 170 LVL outlets operating as fraternal or veterans' organizations requesting verification of their status, including IRS approval of tax-exempt status, IRS 990 form, a copy of the fraternal charter, and a list of officers and members, among other information.

The four faux fraternals in question drew the commission's immediate attention because the LVL sites are not located anywhere close to where the fraternal organizations list their lodge locations, Musgrave said.

In one case, the LVL club is 100 miles away from the fraternal lodge's hometown.

Apparently, the owners of the clubs entered into agreements with the fraternal organizations in which they pay for the rights to use the fraternal's name, acting as sort of a "branch" lodge, he said.

That alone raises issues, Musgrave said.

"Any third-party agreement has to be approved by the commission," he said.

If the four LVL retailers in question are found to be in violation of Lottery rules, they could face fines, and have their LVL licenses revoked or reduced from a 10-machine maximum to a five-machine limit.

Musgrave said this is just the beginning of the commission's investigation into possible faux fraternals.

"This is just the start of it," he said. "We think there's quite a few retailers doing the same thing."

***

Bane, meanwhile, sent along a copy of an IRS audit of a faux fraternal in the Northern Panhandle.

It raised two key issues, one being that to maintain tax-exempt status as a fraternal or veterans' organization, it must operate exclusively to provide social and recreational activities for members, and care must be taken to limit access to non-members.

"While the provision of social and recreational facilities to members is an appropriate activity, providing such facilities to the general public is not," it states.

The other issue was that the faux fraternal was not reporting gross receipts as required on its 990 form, but instead the retailer's share of LVL profits. In the example given, that allowed the retailer to reduce $100,000 of gross receipts to $24,500, allowing it to lowball the required contribution of revenues to charitable purposes.

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Speaking of Lottery, the administration's six-year budget outlook prepared by the state Budget Office assumes that an eight-year decline in Lottery revenues, caused by competition from competing casinos opening in Pennsylvania, Ohio and Maryland will level off next year, settling at about $314 million of annual revenue thereafter.

I thought that was way optimistic, given the specter of a $965 million MGM Grand casino complex coming to National Harbor, just south of Washington, D.C. (Maryland's casino licensing board awarded the license to MGM last month.)

According to the Washington Post, the mega casino anticipates $700 million a year in gaming revenues, $350 million coming from northern Virginia residents.

Which bodes ill for Charles Town's Hollywood Casino, which currently outperforms West Virginia's four other casinos combined, and relies on Virginia as its single largest market. Maryland Live! in Arundel Mills has already cut into the Charles Town's casino business by about 15 percent, drawing away a lot of players from Maryland.

I asked Musgrave about the projections for Lottery revenues, and he admitted that Lottery officials simply assume revenues will be flat over the long-term, because they have no accurate way to calculate the impact a new border state casino will have on state revenues (other than not positive ...).

"There's not any way we can tell a year out or two," he said. "We don't have a crystal ball."

***

Finally, some blasts from the not-too-recent past in the House of Delegates: Dan Kimble, who had been chief of staff to former Speaker Rick Thompson, returned to House chambers Thursday to give the invocation. Kimble's now with the Monongalia Chamber of Commerce.

Meanwhile, Joe Koval, who retired in November with 26 years in state government, most recently as computer/technology director for the House, is back as a per-diem employee in his customary role of announcing bill titles during floor sessions.

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


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