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!”

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135 Comments

  1. 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
  2. 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
  3. 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.

        Reply
  4. 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.

        Reply
        • 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.

          Reply
          • 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.

            Reply
  5. 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

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