Restricted Contributions Come with Strings Attached

The effects of COVID-19 continue to be felt by all of us: in our lives, our families, our jobs, and our businesses. One business sector receiving little attention is non-profit organizations. While most non-profits have experienced sharp downturns in donations (requiring them to furlough staff and limit operations), organizations that were in the midst of capital campaigns were uniquely affected by their inability to meet fundraising goals for specific projects and initiatives. And, in some cases, COVID-19 related guidelines may have rendered the project no longer suitable. As a result, projects and initiatives for which restricted contributions had already been received may have to be abandoned. The question, then, is what happens to the restricted contributions?

While courts have dealt with this for decades, the rulings, and the rationale for those rulings, have not always been consistent. That said, the following principles seem to be generally accepted. First, the restricted contributions cannot simply be applied by the organization to another use or project. Second, the organization should contact each donor and ask if they want a refund of their contribution or if the organization can apply it to another purpose (the donor’s response should be in writing). Third, if a refund is requested, the donor should be advised that if they have already taken a charitable deduction for the contribution, the refund may have tax consequences which should be discussed with the donor’s tax advisor.

To avoid this predicament, organizations should include a disclaimer in their fundraising materials stating that the organization may apply the donation for another purpose if the specific project is canceled.

If you are a donor or an organization that finds yourself in this situation, we can help. Please call us at (248) 477-6300.