I agree with your response but that is exact wording on the letter. 

"I understand that i was the winner of raffle and was entitled to xxx$ which i am not accepting and in turn donating back ."

   seems to me the and in turn should be deleted.  if you are not accepting cant donate it.I am inclined to not report as income.

She should have been issued a w2 g as she meets the requirements. but was not