Tsskinne YeOldPinPlayer
$3500 is the cash that the winner would receive if they didn't want the pinball machine. This is customary in large prize raffles that include prizes such as trips, cars, and houses. The cash prize is not equal to the value of the pinball machine. The text clearly states "In the case where the winner does not want the pinball machine prize they may choose a cash prize of $3500 USD."
The IRS gross receipts question is more complicated as seemingly all IRS filings. As I've stated above Pinball EDU hasn't deducted anything from our "receipts". Pinball EDU has a raffle license. That license allows Pinball EDU to conduct raffles. These raffles are then managed by our raffle management company. They disburse the money to Pinball EDU and our pinball vendor. Money that does not come into Pinball EDU's bank account is not calculated in our gross receipts.
Further, gross receipts is actually not gross receipts. This is where it doesn't make sense to anyone thats not a tax person. See the 100 page document on the form 990:
"Instructions for Form 990 Return of Organization Exempt From Income Tax:"
https://www.irs.gov/pub/irs-pdf/i990.pdf
On page 75 you find "Appendix B. How to Determine Whether an Organization's Gross Receipts Are Normally $50,000 (or $5,000) or Less"
"To determine whether an organization's gross receipts are normally $50,000 or less, apply the following test. An organization's gross receipts are considered normally to be $50,000 or less if the organization is:
1. Up to a year old and has received, or donors have pledged to give, $75,000 or less during its first tax year;
2. Between 1 and 3 years old and averaged $60,000 or less in gross receipts during each of its first 2 tax years; or
3. Three years old or more and averaged $50,000 or less in gross receipts for the immediately preceding 3 tax years (including the year for which the return would be filed)"
In the center of the page you will find "$50,000 Gross Receipts Test"
Additionally, note the line:
"If the organization's gross receipts are normally $50,000 or less, it must submit Form 990-N..."
In this case where the raffles were conducted through Paypal as they were in 2015, where Pinball EDU receives the whole amount it would have the following receipts:
2014 - $0
2015 - $39,128
2016 - about $94000 ($42000 plus the cost of the pinball machines and fees)
Pinball EDU incorporated in December of 2014 and regardless of which test you apply Pinball EDU must submit a 990N, and therefore it has.
Again, I hope this answers your questions and I expect that you hold other charities to the same standards.