Can One Non-Profit Donate Money To Another?

I was asked if one 501(c)(3) non-profit can give money to another 501(c)(3) charity. With the usual, and necessary, caveat of, “I am not attorney, nor am I giving legal advice,” I responded that, Yes, when the transaction advances the donor non-profit’s charitable mission, a non-profit can donate money (and other resources) to another non-profit.

In some instances doing so is an essential part of a non-profit carrying out its mission. Example: An orchestra could donate funds to an organization which seeks to develop overall marketing and PR education and outreach to that city’s arts and culture population.

Along with that necessary start to the process, the donor non-profit needs to make absolutely certain that there is:

  1. No conflict of interest. Any person or persons responsible for the transfer of the donated funds must not personally (their families, friends, associates, etc.) benefit in any way. Example: The donated funds are used to purchase equipment in some way connected to business interests of a Board member of the donor non-profit
  2. No violation of donor restrictions. While exacting restrictions are not generally connected to most donations, nevertheless, the risk is that some donors would not approve of their money, in principle, going to another charity they did not choose, no matter how it fits or how worthy.
  3. No misuse of the donated charitable resources by the receiving non-profit. Should the receiving non-profit subsequently have publicized financial problems, even though the donated funds were not in fact misused, the overall perception of the receiving organization trumps the reality. Perception is everything. There could be serious trouble for the donor non-profit requiring it to justify its support of the ailing organization.
  4. No question that donating funds in any way will imperil the donor non-profit’s own financial health. In other words, that the donation was not over the top, excessive, or out of the realm of good judgment.

Of course, there are always exceptions, and at times such arrangements can be mutual beneficial. But, from what I have mostly come to know, the donation-to-another-charity question is most often asked by people who hope the answer is “No” because they are unhappy about, or uncomfortable with, a proposed action of this type. I know I would be as director of development, especially when challenges are possible by my donors asking that I explain the above point 2. I would not want to risk hearing, “Not with my money, you won’t!”

Email this to someoneTweet about this on TwitterShare on FacebookShare on LinkedInPin on PinterestShare on Google+Share on StumbleUponShare on TumblrDigg this

175 Comments

  1. Hi Tony,

    My nonprofit organization has been approached by a private donor who has asked us to pass through funds that he wants to donate to one of our partner public schools. I’ve been told that he wants to use the nonprofit because he wants the tax deduction. Won’t he get that from donating to a school? Is it legal for us to serve in this role, and by accepting the responsibility of passing through these funds, would we be officially serving as a “fiscal sponsor?” Thank you!

    Reply
    • Nichole,
      If the school chosen by the donor has its own 501 c 3 certification, then you are correct that he should make his donation directly there.

      If that school does not have such an IRS certification, then any funding passing through your organization cannot be allowed as a “donation.”

      What special interest does the gentleman have with the school of his choice? Is there any direct benefit to him, or to family or friends, when such money would go to the school? Would he be calling the shots on the application of the funds?

      You should not accept money which you are obliged to give it away according to the dictates of the donor.

      I think that your organization, as an accredited non-profit, is not in the same position as you would be as a Fiscal Sponsor raising money for a cause which does not have tax-deduction privileges. It would be a real stretch to have the donor be the latter, and you the FS, with his money.

      Legal or illegal, to me is rather fuzzy here, but I do go back to what would be my prohibition—that I could not accept a donation to give a tax-deduction for someone directing the money to go a lesser classified organization—even if that entity was a partner to my organization.

      Reply
  2. An historic mill recently burned down and the owner is asking for help in rebuilding. Even if our nonprofit’s mission is related to the mill’s operation and success (keeping a water right active), we cannot give a monetary contribution to the mill’s owner to help with rebuilding, correct? (The mill is a commercial venture.)

    Reply
    • Donna,
      It’s possible.
      But, you definitely need the counsel of an attorney skilled in non-profit law, knowing the regulations as such from the IRS and your state’s Attorney General.

      From what I have come to know, a non-profit charitable organization can contract with a for-profit when doing so fits the non-profit’s mission and the selection of the for-profit being given the money can in no way result in gain or profit for anyone connected with the non-profit charity.

      If the water right active issue is the core value of your organization—its mission—then, it would appear that without the mill, you would not be able to conduct your business. In the eyes of the law, this could allow you give money for the rebuilding.

      Such arrangements are common enough when valuable medical research is done by for-profit organizations for non-profits. Again, the key point —- the money given to the for-profit, as given to the non-profit foundation by its own donors, must be given in a manner they endorse and understand as they were compelled to give according to the non-profit’s Mission Statement.

      As well, I would imagine that the accounting procedures would be demanding and exacting. When dealing out a non-profit’s donated funds to a profit making organization for worthy and defensible programs, strict and precise accounting for each penny is not an exaggerated requirement.

      Reply
  3. A teacher friend and I worked together doing nine years of fundraising for two separate students organizations both 501c’s. One for miscellaneous field trips and educational supplies, the other for a specific history trip. One account has $10000 & the other $6000. The school board, principal, and superintendent now are planning to use both accounts for whatever they deem “student necessary” and “principals fund”. They have told my teacher friend if she wants to continue field trips, she will have to fund raise for them. We both have approached the board & explained we’ve been fundraising for nine years! Is this legal?

    Reply
    • Debby,
      It appears to me that you are being confronted by a crass and unappreciative bunch of school administrators. But, there could be far more serious issues at work here.

      1. it is possible they could be jeopardizing the non-profit status of the organizations, depending on the original bylaws and Articles of Incorporation.

      If the missions were clearly stated and registered with the IRS and your state’s Attorney General for the purposes you stated, then taking those raised funds and using them in other, dramatically different ways, (“student necessary,” and “principal’s fund”), could be illegal.

      2. There could be a real problem too with the original donors who would expect their donations to be used in the manner and for the purposes they were solicited in the first place. There may be some very prominent parents who donated to the programs they expect will be produced. They should know from you about what is happening, in that there is going to be an apparent misuse of the money they gave.

      3. Though you stated that you and a teacher friend were the fund-raisers, it depends upon whom you relied upon as the board members required in the formation of any non-profit. If they are the board, principal and superintendent, then they must be reminded that they cannot legally use the donated funds in any manner other than what is dictated by the original mission.

      4. The school system’s attorney should be in on this, and important that he or she be well versed in non-profit law.

      After all you have done for the schools over nine years, how those folks can then expect you to forego the money you raised for those specific purposes, and use the funds in other ways, then to expect you to still go to the community for separate field trip money, is all well beyond any common sense and sense of what just and right.

      Reply
    • Tony I saw Franks question and I have a question along the same line. I belong to 501c4 and we also have a 501c3 which was created so we could accept donations and the person donating could take a tax deduction. We have a repair/restoration project that is going to run around 50,000.00. Can the 501c3 accept donations and them make payments towards the restoration project? Thanks, Jeff Smith

      Reply
      • Jeff,
        Applying what I suggested to Frank—as prompted by the IRS website’s declarations—I cannot see how a 501 c 3 could be created as what is essentially a pass-through entity, having its donors claim tax-deductions, then to have those funds go to a 504 c 4, where its direct donors cannot make such claims for tax relief. The latter entity was created that way for a good reason.

        From what I read, 501 c 4 organizations are comprised of members who collectively seek benefits which accrue to themselves, thus being a one-eighty from 501 c 3 organizations which are for the “public good,” as the IRS dictates.

        To my non-expert way of seeing this issue, a 501 c 3 cannot have a meaningful “mission” which only or mainly raises tax-deductible money as a conduit for the benefit of another classification of non-profit which does not enjoy that distinction.

        This is certainly a case for a lawyer skilled in non-profit law.

        I expect all motives are good, but the arrangement seems to me to be illegal, or quite close to being so.

      • Tony thanks for the comments. It seems like this a gray area. Our group is an Antique Tractor & Engine Club, we have been around since 1979. Some years ago we created the c3 because we were told it would be difficult and expensive to change the existing c4 to a c3. We wanted to be able to accept donations that would be tax deductable for the donor. The c3 has one member, the c4 membership.Doesn’t seem pratical to me to have both and pay expenses for both. Is there a good reason to have both? Should be be thinking about consolidating both into the c3?It looks like this going to be difficult for us to raise money for the Boiler on our 1915 65HP Case Steam Traction Engine if the persons donating larger sums of money can’t take a tax deduction. Thanks for the help.

      • Jeff,
        It all depends upon the statement of purpose for setting up the 501 c 3 in the first place. It’s core values. It’s reason for being.

        According to the IRS such tax-exempt organizations must provide a needed and wanted service in the community served.It must make a positive difference in lives, for animals, or the environment.

        While the refurbishment of the engine is exemplary, it seems to me that it does not fulfill a demonstrated need to serve identified constituents.

        Thus, the mission of the original 501 c 3 may be at great odds to that of the 501 c 4, hence it seems to me no way for shifting donations from the former to the latter to have donors receive tax-deductions.

        Here are some very worthy resources, beginning with the first listed.

        — Can a 501 c 3 donate to a 501 c 4?
        http://info.legalzoom.com/can-501c3-donate-501c4-22494.html

        — Differences between 501 c 3 and 501 c 4 organizations
        http://www.nj.com/helpinghands/nonprofitknowhow/index.ssf/2008/07/the_difference_between_501c3_a.html

        — IRS Life Cycle of non-profits

        — And what I think is a good primer on what a true mission statement is for a 501 c 3

        Don’t Make Your Organization’s Statement Of Purpose A “Mission Impossible”
        http://www.raise-funds.com/2001/dont-make-your-organizations-statement-of-purpose-amission-impossible/

      • Tony, once again, thank you for the info. I will see if I can read and understand the written word.
        Our club mission as I recall is Preservation & Education. We put on two shows a year. At the shows we demonstrate The Hit & Miss engines shelling & grinding corn, water pumping. Tractors plowing, disking,planting & Threshing plus other chores that were needed on farms after tractors started replacing horses

      • Tony if you have chance look at our website,www.aedgeta.org

  4. If a ‘program’ under non-profit A were to leave and go to non-profit B (both 501 c 3) can they legally/reasonably ask for the donations that were earmarked for their program be given them?

    Reply
    • JP,
      It seems to me that it would be up to the donors to agree to the transfer of what they gave, if such donations were expressly directed/designated to NP-A’s program.

      Being so “earmarked,” strongly suggests that to do otherwise) giving the funds to NP-B) would not be proper.

      I think that great care and tact are necessary here before the program is handed off to NP-B, so you can properly determine if or how those designated funds can go along with the program as well.

      Should donors to NP-A’s original program not agree to the transfer of their contributions to NP-B, then you may need to return their donations if requested.

      Reply
  5. Does anyone know if one local PTA at a public school can donate to another?

    Reply
    • As long as your PTA meets the criteria as described in the article.

      We would expect that both PTAs would be fairly close in missions.

      But, other of your parents must approve. Maybe this one criterion is even more difficult to meet, due to the unique nature of such an exchange.

      You must make certain that your own parents will not be distressed that the money they give in the first place to benefit their kids, will be given to another PTA to serve others’ kids.

      Reply
  6. Ok, I have a tough question…. how about a 501c3 has part of it’s mission to support the charitable purposes of a 501c4, can a donation to the 501c3 be granted to the 501c4? What if the 501c4 holds a trademark that licenses to the 501c3 to use, can the 501c3 grant funds to the 501c4 to protect it’s licensed trademark?

    Reply
    • Frank,
      See the quote I lifted from the IRS website. There are qualifying words enough such as generally, etc., that would have your question best answered by the IRS of a non-profit-skilled attorney.

      It is interesting to me that your mission included the serving of another non-profit whose contributions received are not tax-deductible.

      Troublesome too, maybe your 501 c 3, a charity “for the public good,” as described by the IRS, is involved in any way with trademarks and licenses

      (Begin)
      Donations to Section 501(c)(4) Organizations

      Contribu­tions to civic leagues or other section 501(c)(4) organizations generally are not deductible as charitable contributions for federal income tax purposes. They may be deductible as trade or business expenses, if ordinary and necessary in the conduct of the taxpayer’s business. How­ever, see Nondeductible Lobbying and Political Expenditures for more information. Also, the organization may be required to disclose that contributions are not deductible when it solicits contributions.

      Donations to volunteer fire companies are deductible as charitable contributions on the donor’s federal income tax return, but only if made for exclusively public purposes. Similarly, contributions to certain war veterans organizations are deductible. If the contributions are deductible as charitable contributions, substantiation and disclosure requirements may apply.
      (End)

      Reply
  7. We are a chapter of an international non-profit organization (music related) which will soon be dissolved (that is the ‘chapter’ only). Before we turn over the balance of our treasury to the internationl organization can we make a donation to another non-profit origanization (health related) and is there a limit or not? I would appreciate your expert advice. Many thanks

    Reply
    • Phyllis,
      Thanks for “expert” reference, but as you read over the many comments on this topic, Dave and I can only use what we do know, and apply some common sense at times, but all the while being aware that the IRS does have the exacting rulings, and the last words.

      This would be especially true, I am thinking, in what are most often complicated arrangements with national or international “parent” non-profit charitable/NGO organizations and their respective chapters, affiliates or other named branches.

      Whether your chapter is a separate “corporation,” or is under total control of the parent entity, makes the use of your assets determined by the state in which you operate according to its dissolution rules, or if the funds are under the control of the parent.

      It would seem to me that things will be even more complicated regarding the international connection you have in regards to any funds going, if they are, overseas. Such transfers of US funds to foreign destinations are scrutinized very closely by the IRS.

      All questions regarding the disposal of any of your assets, it would seem to me, must be first communicated to the parent entity to be referenced to its Articles of Incorporation and other financial policies.

      Even if you “own” the funds, to my way of thinking, you must be sure to follow the extensive and comprehensive dissolution steps by your chapter to be sure you are in line with the regulations of your state. You may find that one of the steps allowed is the donation of funds to an existing, like, organization—but maybe you best take care to do so according the state’s process and timetable.

      Reply
  8. As a 501(c)(3), we will use a golf related website as a fundraising tool for some outstanding childhood cancer fighting organizations. We will maintain our distinction but would like to formalize our commitment that after expenses, the three organizations which we will support will each receive equal shares of funds raised. While the golf related website will be our long term fundraiser, the website is not yet operational. What is the best way to formalize our commitment? Letter of agreement which codifies our percentages beyond expenses which will transfer to each organization? We want nothing formal in return but feel that our effectiveness can be increased if the receiving organizations know that our commitment is binding. We have no problem having everything notarized and made legally binding to eliminate any blurred lines. Thank you.

    Reply
    • Herb,
      As a 501 c 3 organization, what is your direct and incorporated mission?

      As I understand how IRS classifications work, one such as yours should not mostly or primarily be raising money for other non-profits. I am unclear regarding what it means that your organization “will maintain our distinction.”

      Even with that declaration, will the focus on the golf-related website to fund-raise with an event, or otherwise, for three other organizations, outweigh your attention to your own organization’s original and prime reason for being?

      I would like to know how the golf-related website, as a fund-raising tool for the benefit of other organizations, fits within, and with, your charter mission.

      Then, I will be in better position to advise regarding your way or ways to formalize the agreement with the receiving charities. In advance however, I think that all you need is to post on your website your intention to divide among the three organizations the net proceeds of your fund-raising efforts. To my way of thinking, nothing more is required. You make a promise on your website for all to see, and you hold true to the promise.

      Reply
      • Thanks Tony. That’s the way I am proceeding and if the organizations want to assist us along the way, all the better. I have re-written our Mission Statement to clarify that funds raised will be split equally among the 3 organizations.

      • We are a local Alumni Chapter of a national Fraternity (501c7).

        We have various community care initiatives where we raise specific funds which are in turn divided and donated to different area non-profits (501c3’s).

        Question: Can individuals that contribute to our (501c7) philanthropic fund raising efforts count their contributions as tax deductible if we provide them a letter indicating our (501c7) donation on their behalf made to “ABC-501c3”? What is the best way to publicize and market the intent and effort?

      • Ramon,
        No such letter will be acceptable.

        Donations to exempt social and recreation clubs are not deductible as charitable contributions on the donor’s federal income tax return.

        Thus, no donation made to your organization, which is not tax-deductible, can be assigned to a 501 c 3 for any such tax break.

        You can be a fund-raising “clearinghouse” of sorts to stimulate giving through your promotion and marketing–but you must stress that checks must be made payable directly to the respective 501 c 3.

    • Can I get help from you? To pay my debts. I have debts for about USD100,000.00.

      Reply
  9. Hello,
    How long does a 501c3 entity have to wait to sell a donated item if the entity has no need or use for the item?

    Reply
    • Roland,
      As I understand it, there is no such time limit. (Unless, for some reason, the donor gave the item with conditions.)

      Once the item is yours, and you acknowledged the In-Kind donation appropriately, it is yours to do with as you wish and for as long as it takes.

      Example: An organization receives items to sell in its gift shop. They could very well sell some of them the same day the items were received. Some of the items may take much longer to sell, or they may never sell.

      By the way, regarding how to handle In-kind donations, I suggest you read my article:

      __ In-Kind Gifts: How to Acknowledge and Recognize Them
      http://www.raise-funds.com/2008/in-kind-gifts-how-to-acknowledge-and-recognize-them/

      Reply
  10. Hi there!

    Question? Can the mission of a NON-profit organization for educational purposes be to specifically raise support and funds for student scholarships that attend a for-profit school?

    Reply
    • David,
      While your seeking of advice from an attorney skilled in non-profit law, or from the IRS, is essential here, nonetheless, I will dip into those sometimes muddy waters with comments from my own experience and judgment.

      To me, the choice of the for-profit recipient institution sends up a red flag. Being a commercial business, the giving of charitable/donated funds directly to the school would not fit with the mission of a non-profit, whose charge from the IRS is to fill a void where doing public good is a requirement. Such action may be illegal.

      Being for-profit, it is up to the school to operate as a business does—to generate earned income and make money.

      The choice of a for-profit school can also raise a question regarding any possible conflict of interest for personal or business gain for any official from either entity.

      As well, according to the IRS, the non-profit cannot give its donated funds to a named individual for his or her scholarship costs in the first place. And, the donating non-profit, on the other hand, cannot direct any school to give the scholarships to named individuals. OK for classes of individuals or students taking certain courses.

      In any event, all schools, more or less, would have their own scholarship fund programs internally managed for the seeking of contributions and for them to make the ultimate distribution choices.

      In my opinion, any money you raise should be donated to an education non-profit for them to manage and present scholarships.

      Reply
      • Hi,
        I would like you to expand on this comment a little please. What about an educational 501 (c) 3 non profit that is acting as a fiscal sponsor to raise money for scholarships for a non-profit school that does not have its 501 (c) 3 status yet. They are raising funds for general scholarships so that underserved children can apply and matriculate in the school. They are not assigning funds to any specific individuals, but handing the money over for the school to manage. They want to charge a 7% transaction fee for the money raised. Can you let me know your thought on this?
        Also, the school is currently applying for 501 (c) 3 status. Will that effect their application or is it something they should note in their application (that they received funds in this way).
        The son of the donor organization goes to the school and receives tuition deduction, but not from the donated funds.
        Thanks

      • Ally,
        First, to be sure the partnership between the Fiscal Sponsor (FS) and the school is set according to the IRS guidelines:

        (1) The money must be used for specific projects in conjunction with the fiscal sponsor’s own exempt purposes, i. e., the missions must be the same.
        (That appears to be the case with both the FS and school operating as educational organizations.)

        (2) The fiscal sponsor must retain control and discretion as to the use of the funds provided to the group or organization under the fiscal sponsor’s “umbrella.”
        (That does not appear to be true if the FS is simply “handing over the money” to the receiving organization-school.)

        (3) The fiscal sponsor is obliged, according to law, that the money provided to the sponsored group or organization were, in fact, used for the stated 501(c)(3) purpose.
        (So, just by “handing the money over: to the school, could allow for inadvertent mis-use of the money, or worse, known mis-application of the donated funds.)

        To keep those rules in effect and working, an agreement in writing is necessary to be sure that the expectations and duties of both parties are clearly understood.

        The 7% transaction fee appears to me to be in keeping with such agreements, considering the FS is raising the money and using its non-profit status to process the funds, making reports to the IRS, etc.

        Since the FS is expected to do more than just hand over the money, how that Fiscal Sponsor will expect to influence or to otherwise manage in some way what the school wishes to do, is perhaps the most important condition both parties will address. In other words, is the project the school wishes to operate in the way it wants it to run as equally agreed upon by the FS?

        From what I understand, there are times when sponsored organizations just want their money, and they do not clearly understand that the Fiscal Sponsor must ensure that the money raised for the purpose as stated to donors, is exactly how the money is spent. Sponsored organizations simply do not take the money and run with it. And the IRS looks into these arrangements.

        As well, the school will want to consider early in the arrangement when and if the school might decide to establish its own non-profit status and work accordingly with the FS for such a possible disengagement and transition.

  11. Thanks for putting this information out there. It’s very interesting. But in reality its going to come down to partnerships and collaborative efforts to survive. If there is an event that will support my nonprofit and I’m asked to participate financially knowing that I will receive 100 times my investment…why wouldn’t I do this? Is it a good use of the nonprofits money to spend thousands of dollars to create their own event (with no guarantee the proceeds will exceed expenses) when a small investment in another event generates thousands of dollars? Quite honestly if a funder doesn’t understand the business sense in that type of partnership…it’s time to find funders who do.

    Reply
    • Terri,
      Yes, some non-profits can cooperate, partner and collaborate in certain reasonably non-competitive ventures to broaden their respective markets and increase their contributed and earned revenues. For example, the local orchestra can partner with the local ballet company to present a joint performance of music and dance. We did that with the Cleveland Ballet when I was with The Cleveland Orchestra.

      However, such relationships may not work well, or at all, for a host of reasons. (From experience, they are not always made in Heaven.)

      I am not certain from your posting whether you are referring to another non-profit, or a for-profit event presenter, when you gave your example of your organization’s investment, thus I will try to cover both. First, working with another non-profit or non-profits.

      — assessment of the other non-profit’s name and reputation as one to which yours would be associated.

      — if for example, there is a collaborative effort to produce a special fund-raising event, there is almost always an imbalance from the one organization to the other regarding selling tickets, helping with promotion, obtaining underwriting money, getting in-kind donations, setting up the facility, closing down afterwards, etc.

      — enthusiastic and supportive attendance (paid) at the event of the other non-profit’s leadership, staff, and others close to them, and the attempts they made to do more than be passive observers.

      — the final decision regarding which organization receives how much money, is another stubborn issue to settle. (How come they get so much for the little work they did?“)

      Be ready, though for a problem, no matter the amount you decide. To some it will be too much, and to others, it will be too little.

      Thus, in my opinion, it is not going to come down to having those relationships for non-profits in general to survive. If missions are strong, management is good, and the volunteer board fulfills its promised responsibility, most any non-profit must stand on its own feet.

      To my way of thinking, such partnering efforts should only be conducted when the results measurably enhance the good things the organization is doing. If the non-profit is seeking to be involved in that way for the sake of survival, then I suggest that the non-profit probably should not exist in the first place.

      I am guessing that your citing of an investment of your non-profit’s money generating a 100 times return, is a hypothetical example. I cannot see how such a return on investment is possible in collaboration with another (or other) non-profit.

      Perhaps the non-profit’s donated money is being invested in a speculative for-profit business activity. If so, that would be a gross misuse of the money given to the charity. That’s mainly because if the presenter is a for-profit business, then others are going to personally and directly benefit from the money given by charitable donors.

      It’s one thing to engage a professional event planner and to pay that person a fair and reasonable fee, but quite another to use donated funds to give financial backing to a business venture.

      Funders do not see what they give to your organization as a business deal for them. They do want you to operate your organization in a business-like manner, to be sure, but they are giving to have you fulfill your mission, not to make a good business deal for the presenter of the event–no matter how much you get out of it.

      Reply
  12. Any there any similar restrictions or other considerations when a 501c6 wants to make a contribution to a 501c3? These would be employee donations collected by the organization and then contributed on their behalf to a charity selected by those employees.
    Thanks for any insights.

    Reply
    • Ann,
      To my way of thinking, there should be no restrictions when the employees themselves choose where their fees/dues could be given to benefit a 501 c 3 charity.

      In the main, however, be sure to stick close to your mission, regarding what the organizations does for the member employees in the first place.

      And there is much to learn from numerous webpages devoted to the operation of a 501 c 6. Just enter into a search engine and get what else you may need.

      Reply
  13. Any insight on restrictions to a 501c3 for making a contribution to a 501c6?

    Reply
    • Sarrah,
      I do know that donations to 501 c 6 organizations are not tax deductible. Thus, money going from a 501 c 3 to such an organization is not a contribution.

      That’s because c 6 organizations include business leagues, chambers of commerce, boards of trade, real estate boards and professional football leagues. A business league is an association of persons with a common business interest. Members can be for-profit businesses.

      Since c 6 organizations are formed to have its members’ professions/businesses interests furthered, as I see it, it makes no sense (indeed, it’s probably illegal) to give a c 3 organization’s charitable contributions to a c 6 member organization. The mission of a c 6 is directly related to its members’ personal gain—for the most part.

      In the first place, from the above observations, it would be highly likely that the mission of a c 3 would not in any way be in sync with what a c 6 does when its goal is to improve the for-profit business interests of its members.

      I see great risk here to the non-profit status of the c 3 should it give its charitable donations to what ends up being a commercial, business and profession-furthering, entity.

      Now, the usual caveats that my comments are only observations, and that if such a plan is in the thinking/making stage, nothing should be done without the advice of the appropriate professionals, be they with the IRS or a lawyer skilled in non-profit law.

      Nonetheless, I have no problem with my assertion that such a contribution could easily cause the “contributing” 501 c 3 to lose its IRS classification, and worse, there could be some legal penalties in the making as well.

      Reply
  14. Hi,
    Thanks for all of the great information. I’m forming a new non-profit in CA which will raise money in the US to be used on clean water projects in other countries. I have read a couple of things about money given to organizations outside of the US not being tax deductible. I wanted to see if you knew anything about this.
    Thank you.

    Reply
    • Hello Brian,
      Please click onto the following link to an article on the Raise-Funds website:

      — Greetings from America:
      How U. S.-Style Fund-Raising Can Work In Your Country
      http://www.raise-funds.com/2007/greetings-from-america-how-u-s-style-fund-raising-can-work-in-your-country/

      While that short essay deals with how money can be raised in other countries, do be sure to scroll down the Addendum for information directly related to what you stated in your Blog.

      The instructions there are from the IRS as I know them.

      In essence, you must develop a US-based “Friends” entity which then must be in total control of the charity for which the funds are intended.

      Reply
  15. Wow! Sounds like you may be the to go person here. I have a Question. I am forming an LLC manufacture wholesaler that will sell my products to a retail buyer. The buyer/retailer allows me to sale my products at their locations. ON my products are labels that state we donate 10% of sales to the XXX program. The product sold will tell of the XXX program of which I formed and information on how the consumer of my product can donate to the cause of the XXX program. The XXX program is under a fiscal sponsorship 501(3)c entity. There will be no donations benefiting in any way my private LLC. PLEASE HELP OR AM I OFF MY ROCKING CHAIR,PLEASE FEEL FREE TO EMAIL ME. THANK YOU

    Reply
    • I can only, in an unofficial capacity, give you my comments based on experience and some common sense.

      My observations may help as you must press on to discuss this rather complex situation with those more appropriate:
      — Accountant, Attorney, and the Fiscal Sponsor (FS).

      I am sure that you must first work with the Fiscal Sponsor of your XXX non-profit program to get its OK in the first place.

      From what I understand, all donations must first go through the FS. The FS has the 401 c 3 classification, which the XXX organization does not.

      Then, whatever percentage of those donated funds, agreed upon in the contract, would go the the programs of the XXX organization.

      Thus, not all of the 10% proceeds from sales would in fact go to XXX as advertised.

      That the sale of your products would have the revenues from customers finally go to your XXX organization, makes urgent that no one connected to XXX derives any benefit whatever. That includes you if you have a paid staff position, or any of your family. I think this point is the one most sticky, and one which you must examine with great care.

      Will your business claim a tax-deduction for the 10% donations going to the FS with which your XXX organization is affiliated? Maybe that is OK, but here is yet another example regarding why you must consult with the true experts to ensure you do not violate any laws.

      Another point to address is for you to be ready with precise sales and financial reports to exactly prove and account for the true 10% donation claimed while selling the products.

      No reflection on you, of course, but when such general statements are made, and funds are raised in that way, it is necessary to prove what is claimed.

      And, is the 10% figure related to manufacturing costs, wholesale costs, or exactly from retail sales?

      Just some initial thoughts to get the ball rolling. We would be interested in your comments regarding the points raised.

      Reply
  16. Hi! This is a lot of good and useful information, thank you! I have a question you may be able to help with, and I hope I am not too far behind this conversation to ask.

    My organization coordinates a bunch of separate NPOs—all social or educational in nature, geared toward recreation & sport. Once a year, we do a donation drive for our local food banks among all the NPOs. That’s not part of our mission, although all our groups are asked to be good citizens of their communities and we’ve often done volunteerism over the years. The funds we get during this drive are kept separate from our regular funds, the destination of the donations is made clear, nobody is paid from these funds, the destination is a registered charity, there’s nobody in our group on the boards of these charities—every dollar is passed through to the food banks.

    A few members have asked questions about whether this arrangement is illegal or fraudulent. It looks okay to me (except for possibly the mission part, but we’ve been doing volunteerism for decades), but I thought I’d ask someone with more experience. Thank you for your thoughts.

    Reply
    • Ben,
      The way in which you described the raising and the use of the funds, to my way of thinking, certainly rules out any hint of fraud, and of it being illegal.

      The mission departure, however, is another thing. But such concerns are almost always due to an overall drifting of sorts away from the original core principles upon which a given non-profit was established. Your annual, one-time event, seem OK to me, though I am not an expert regarding the boundaries of the various IRS 501 classifications.

      That brings my thought to the fact that yours may be a member-type organization of sorts, thus perhaps the member organizations pay dues. And those organizations, being of the sport and recreation type, suggests that the IRS classifications are not those of what I know best as being 501 (c) (3) charitable organizations.

      If that is so, then it would seem that the only caveat/concern about raising money for the food banks, would be the status of the tax-deduction for donors giving to support the drive for the food banks.

      These points are best discussed with your attorney, CPA, the state’s Attorney General, or the IRS, though from what we have been hearing, the latter does not reply to phone calls.

      In summary, as long as you can account for every penny raised, and that absolutely the only beneficiaries are the food banks, without anyone enriching themselves, then it seems OK from where I sit. The mission departure, being one-time annually, could very well pass muster with most any critic.

      Reply
      • Detailed, informative, appropriately caveated. Thank you.

  17. Ariane,
    The donation information was seen on an IRS form 990, well after the fact.

    Other than those top officials being in the know, was the entire board aware of such a large donation being given to another organization?

    There should be concern regarding the recipient non-profit foundation’s use of the funds to organizations which may have widely different missions.

    If there was no financial gain by any official of the receiving organization, then I would think the worst conflict of interest may a conflict of loyalty. That would be hard to prove and even harder to rule against. Maybe not unethical, but certainly bad decision making, bordering on the money being given by a select individual according to his own preference–influenced by another family member.

    It appears to me as more a matter of poor judgment, but far more serious if the board was not aware, and if donors to the college would be upset if they knew.

    Reply
    • Thanks, Tony. I don’t know if the college’s board approved this donation..one would hope they did!.. and am not aware of any personal financial gain. However there was definitely no communication by the college to its donors.

      Reply
      • Upon further research it appears this donation was not voted by the college board of trustees, according to the 990 it was simply “approved by the president and confirmed by the executive vice president.” Further we discovered that the college made another $2 million donation to this same nonprofit foundation 3 years earlier. Interestingly this earlier donation was disclosed on the recipient foundation’s 990, but NOT on the college’s 990. So it seems likely the college board of trustees didn’t know about that one either. At the time of the previous donation, the college president was an (unpaid) board member of the recipient foundation, since then he has left the board but his daughter has joined. Also this college is very heavily leveraged, more than $160 million in debt, mostly taken on during the last 7-8 years. Taken all together it seems very dubious.

      • Ariane,
        “Dubious” is far removed from an outright scandal.

        It looks like a disaster about ready to happen, with the institution seeming to be about as close as it can be to bankruptcy — maybe even losing its non-profit status.

        It is not for me to say, or even to imply, that there could be possible criminal overtones with the transfer of funds, but there certainly is a serious abrogation of responsibility on the part of the Board of Trustees.

        Surely, they must know that such actions taken, even if independent of their knowledge, nonetheless, in the eyes of the IRS and the state’s Attorney General, makes them liable.

        They, after all, are signed on to be the stewards of the college’s donated funds. They are doing nothing to safeguard the college’s financial integrity.

        Someone had better get some of those key board members up to speed regarding the outrageous actions on the part of just two officials.

        What would any of the major funders think? How about involving a key alum or two who are the biggest boosters of the college?

        A “whistle-blower” is needed there, and fast.

      • Tony, thank you for this response which confirms our fears. It’s a delicate situation because the person who brought this to my attention is employed by the college, and might get fired if we spoke about it publicly. We did anonymously send messages to a few trustees pointing out the issue, so perhaps that will get some action. It’s a very large board, more than 40 members, and our impression is they rarely raise questions about what the president is doing. I don’t think there’s any harm in telling you, the college is High Point University in High Point NC, in case any readers might know a trustee or prominent alumni.

      • Hello, Tony–We have a follow-up question to our earlier conversation. The latest financials show that the college obtained a loan of $900,000 from un-identified individuals during the past fiscal year, at an interest rate of 0.5%. It doesn’t seem the lender would profit from a rate this low, but it still seems questionable as the college already has more than $162 million in longterm debt, and the president has said he and the trustees agreed not to take on any more debt. (We don’t know if the trustees approved this new loan) Are there any rules on 501c(3)s borrowing from individuals? Also if taken alongside the matter we discussed earlier of donations to another 501c(3), do you think this should be reported to the IRS? thank you.

      • Ariane,
        Apparently it is OK for a non-profit to accept a loan from an individual.
        http://www.blueavocado.org/content/loans-nonprofit-board-members

        And that rate of interest looks quite acceptable, to say the least.

        But, the much bigger issue is, from reading the article cited above, is whether the board was in on the transaction all the way.

        If so, then from the financial plight you described, the school’s operation has long crossed the border to gross mismanagement.

        If the board was not in on the deal, they should know they could be liable in the event of default–and they should probably consider dismissing the persons responsible.

        This entire calamity to well out of my are of resolve. Someone of key importance and close to the organization must take the lead and make things right.

  18. A smallish private college (about 4,000 students, annual budget around $100 million, very small endowment, i.e. most revenue comes from tuition/room & board) gave $2 million to a nonprofit foundation last year, according to the college’s IRS 990. The recipient foundation is based in the same city as the college. It supports a number of charitable activities, isn’t focused particularly on education. The college president’s daughter is on the foundation’s board; the college president himself has served on the foundation’s board, including chairmanship, within the past few years. Does that sound kosher?

    Reply

Submit a Comment

Your email address will not be published. Required fields are marked *