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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273 Comments

  1. A church has a tenant agreement with their church school (K-12 education) (both nonprofits). The agreement allows the school to use a portion of the church property to “house” the school rent free. The school is out growing the current space and would like to raise $1M+ to build a new school building. The school then wants to donate the building to the church and continue with the same agreement of using the space rent free. What are your thoughts?

    Reply
    • Pam,
      At first look, it seems to me that a good deal of discussion should be made between church and school leadership, with counsel from an attorney—especially.

      If the church is the parent organization, to my way of thinking, the church should take the lead in any fund-raising for what a satellite operation. Best bet is to have co-ownership of the capital campaign with leaders from both entities running the campaign.

      As well, a good deal of work must be done in the first place to determine any capability to raise the money needed to build, furnish and operate.

      Even before that, all must agree on the project in all phases and forms, from architecture to function and the resultant budget.

      You will find a good deal of such pre-campaign information free on this website.

      —- Campaign Feasibility Studies: Taking The Time To Find Out Whether The Time Is Right
      http://www.raise-funds.com/2002/campaign-feasibility-studies-taking-the-time-to-find-out-whether-the-time-is-right/

      — Capital Campaigns: Building For Now
      http://www.raise-funds.com/1999/capital-campaigns-building-for-now/

      I do not see the school as taking the lead — solely or mainly — to raise the money needed, to see that the school is constructed, then to donate the building to the church, with the latter having responsibility for future maintenance and repairs.

      And, who is to know now for far in the distance, if by then the school will operate “rent free?” Big investment of time, effort and money for something as uncertain and changeable.

      Reply
  2. (apologies, I accidentally posted this earlier as a reply to an un-related thread)
    Tony, I work for a private college which is 501c(3). I contacted you previously about some questionable activities by the administration. Now there is something new, involving a 501c(4) that the college recently set up. (None of this was announced publicly, we learned about it from a colleague.) So far as we can tell, here is what happened: Immediately after setting up the 501c(4) the college loaned it a significant sum (about $8 million). The 501c(4) turned this money over to a private investment fund which then solicited investors, promising they could receive something called a “New Market Tax Credit” which is intended for investment in low-income communities. The fund collected $2.7 million in outside investment. This money, along with the $8 million, was then loaned back to the college … the 501c(3), that is. The private investment fund retained a fee of about $500,000. Is it proper for a 501c(3) to set up a 501c(4) for this kind of transaction? And is there any legitimate reason you can think of, for a 501c(3) college even to engage in something like this?

    Reply
    • Ariane,
      From what we have discussed in the past, regarding the machinations of the private college’s leadership, and now, this latest scenario—it seems to me that it is possible that laws are broken in this latter instance.

      I am not an attorney, nor skilled in non-profit law. Those are the officials whose counsel is needed.

      I can only simply summarize how the situation you described looks to me

      1. 501 c 4 organizations mostly, if not totally, are established to incentive community development and local economic growth—being able, unlike the c 3, lobby on behalf of the cause.

      Thus, the private college would need to have a mission akin to the goals, and I simply cannot see how that could be the case.

      2. People are making money on this deal, so personal gain of anyone involved must be scrutinized to the smallest degree.

      I simply cannot see how the mission of the private college would fit in any way to to the goals and operations of the c 4. That question, first and foremost, should be asked immediately.

      As well, I think it absolutely necessary to know the investors–anyone profiting from the operation, to see question the legality in the first place, and to know if those individuals have any association with anyone in power at the private college.

      Reply
      • Thank you Tony, I do think we may be at the point where we need legal advice or perhaps get the news media involved. We did complain earlier to the IRS but nothing happened as far as we know. We were able to find the incorporation papers for the 501c(4) which say it is to “support various endeavors of the University…and to promote health and wellness in the region through programs sponsored by or affiliated with the University.” Reading between the lines, we think this refers to a pharmacy school that the college is building. It appears they may be running short of money to finish it.

  3. We are a 501(c)3 that benefits our local school (we are not a PTA). The students are raising money for a science camp. It is quite expensive and the funds are pooled to pay for the costs. The 501(c)3’s mission is to help the school and its students. Is there any problem with collecting the money and then writing a check to pay the costs? Thanks.

    Reply
    • Steve,
      Your PTO is meant to do meaningful things for the students, whether you are directly affiliated with the school, or set up as an independent organization.

      You can certainly assist in the funding efforts for the science camp.

      The only caution would be to keep a keen eye on what the camp’s organizers have determined as expenses.

      Be sure to justify the use of the money you raise and give to what you termed the camp’s costs to be as “quite expensive.”

      While you might not be able to control or influence what should be a defensible expense budget, you certainly can choose to donate your raised funds or not, being aware of how the money, in fact, will be used.

      Reply
  4. Hello-
    I have been in the process of creating a charitable nonprofit organization in my community. Currently those involved in the founding process, who will serve as directors, decided to nominate me in becoming executive director and not serving on the board, because of my experience with the Chamber of Commerce and public relations. Once it comes back that the organization is incorporated, I will volunteer as the ED until we have obtained 501(c)(3) status and can afford to pay a salary.

    My main concern with the organization is funding(which I know is the main concern of most nonprofits, but I’m getting to another point). I currently have a list of individual and corporate donors who have committed to a recurring monthly donation, once we are incorporated. I want to do so much more in the community, but funding from donations alone will prevent this. By the time I use money to carry out starting programs, pay utilities and insurances, etc… there will be no room for expansion. I have been working like crazy as sort of a volunteer ED right now, to promote the mission of the organization while it is in the making, and to maximize potential donors and volunteers. What I’m getting to is I would like to be able to provide a service to the community that the organization can charge for, to provide additional funding. I would eventually like to work with the Chamber of Commerce and set up a split office building, since both organizations promote an enhanced quality of life and revitalization, but from different standpoints. The chamber from an economic approach, and my organization from a grassroots approach. I feel that it would be a good mix for maximum impact in the community to collaborate our services.
    Many community leaders like this plan, along with the Chamber ED, but you would think that within this development process and networking, I would be able to figure out a service to charge for. I’m only 21, so there are a number of people who brush me off when I bring the subject up, (good old boy mindset residents) but, it’s only making me want to succeed more. I feel that being able to bring revenue in from a service will be a key sustainable aspect.
    Would you happen to have any ideas on services or things other charitable nonprofits charge for?

    Sorry for the long comment. Just wanted to provide a detailed explanation of where the organization is at and what I am trying to do.

    Thanks,
    John

    Reply
    • John,

      As a former executive director and development director, I find a number of issues that need to be addressed in your situation. By the way I have also been CEO of for-profit organizations and been involved in a number of startup companies.

      To begin with, and I don’t mean to sound petty, you say that your main concern and the main concern of most nonprofits is funding. That should not be true.

      A nonprofit’s main concern should be carrying out its mission. This is an important mindset issue, and yes I realize that without adequate funding it is hard to carry out mission. But this statement when coupled with the statement that follows (“I want to do so much more in the community, but funding from donations alone will prevent this. By the time I use money to carry out starting programs, pay utilities and insurances, etc… there will be no room for expansion. “) suggests that you may be trying to run before your crawl or at least walk. It also raises questions about what a nonprofit’s relationship to its community should be.

      Expansion should not be a major concern of a new nonprofit. Mission and stability are the primary concerns of a fledgling organization. An organization needs to show that it can deliver its mission and on the promises it makes to donors before it tries to take major growth steps. An organization needs to prove itself by working within the scale of its founding. The commitment you have from your individual and corporate donors is a major part of that founding.

      As far as charging for your services goes, I see no problem if those services are mission related. If on the other hand you are talking about setting up a “business” that is not directly germane to the delivery of mission-critical services, then you are stepping onto some unstable ground. First, such a business is likely to be a drain on the resources—human and financial—of the organization at a time when the organization is vulnerable. Nonprofit organizations, like humans, are extremely vulnerable and most in need of support and protection in their infancy.

      Secondly, the IRS may consider such a business endeavor as profit making, and therefore require that it be set up as a profit making arm of a nonprofit organization. The organization would be liable for taxes on the activities of the business. Google “profit making arm of a nonprofit organization” to learn more.

      Finally there is the issue of why nonprofit organizations exist. They exist to be in service to community. To paraphrase a famous Lincoln quotation: Nonprofits are of the people, by the people, and for the people. For me the need to raise money from the constituency you serve is an important positive for a nonprofit.

      It is hard for an organization to lose its way when it must constantly ask the community for funding. The organization that you are helping create is not your organization or even your board’s organization. It is the community’s organization. Your nonprofit charter comes from that government Lincoln described as of, by, and for the people.

      Nonprofits survive and grow because the community supports them. When the community fails to support them they fail. Fundraising is an important responsibility of the management and volunteer leadership of a nonprofit. I believe that is where your energy, enthusiasm, hard work, and creativity should be applied rather than to trying to turn a profit that can be used to support your nonprofit. Let others in the community make profits. Then convince them to share those profits with the community through donations to your organization because of its value to the community.

      You were kind enough to point out your youth. I was 21 once too, and boy was I impatient to accomplish things. I too thought those old people that I now have become one of stood in my way and that they didn’t get it. To some extent that was true, but it was just as true that I didn’t get the value of systems I did not understand. Understanding the why, how, and value of slow and steady does not come easy. In large part, nonprofits work because systemically they are built on the wisdom, support, and ongoing evaluation of the community they serve.

      Take your story to your community. Share it. Let the community tell you what they think. Listen, and then adapt to what the community shows you its needs and values to be. If you do that, you can create a vision that resonates with your community. That resonance will be measured by the response you get when you ask for the funds to support your mission.

      Reply
  5. I am involved in a 501(c)(3) . The current un-paid director will be leaving the area and strongly feels that the organization cannot move forward without him. Others including myself do not agree. He is attempting to disburse the current funds in the organization to 3 other charities, 2 churches and a 502(c)(3) and disband the charity. The current secretary and treasurer support this plan. What laws, if any would or could be broken if he goes forward with this plan? I will be honest, I want as much information as possible to attempt to prevent this from happening. Thanks for your advice.

    Reply
    • Kathleen,
      Such a move for dissolution must first be something of consensus agreement of the board of directors. Not the Director alone, especially if he is (unpaid or not) serving at the pleasure of the Board of Trustees. Those volunteers alone are entrusted with the future of the organization in such matters as dissolution.

      The secretary and treasurer, if board members, can vote. Otherwise, they cannot participate in the voting process.

      There are a number of key steps to take before the assets are given away, chief among them is to apprise the IRS and the State Attorney General.

      You can readily find the rules and processes with a Google or Bing search, asking for “Dissolving a Non-Profit.”

      Reply
  6. Can a 501(c)(3) public charity make a donation to a 501(c)(3) private foundation? While the answer seems to be “yes”, I am not sure which portion of the Internal Revenue Code permits it. Assuming the donation to the 501(c)(3) private foundation is permissible, does the public charity need to exercise expenditure responsibility?

    Thanks

    Reply
    • Dom,
      This is a matter for you to discuss with the IRS and an attorney skilled in non-profit law.

      But, as I see it, a public charity cannot/should not donate money to a private (family) foundation.

      A public charity by law is “owned” by the community. It has a volunteer board of trustees from the community.

      A private, granting, (family) foundation has its own selected trustees whose focus on making grants to public charities is influenced by family legacy, explicit control, family involvement in all decision making, and spending what is deemed as administrative expenses—all out of the influence and oversight of a public charity making a donation (if it could.)

      The tight control of private foundations, where the assets are created by the family or family business, seems to me to be no place for money donated by a public charity in the first place, where the money was given to carry out its own mission.

      Private family foundations are, in effect, family trusts—even a planned giving vehicle. I see no part to be played in such an entity by a public charity.

      That is only my opinion. Does it make sense to you?

      Reply
    • Dom,
      I just heard from a friend and colleague who is a former IRS agent specializing in non-profit law, who has been consulting in the same way for years.

      Though I do not know if the ruling is on the IRS site, my friend said that there is no regulation preventing a public charity giving money to a private foundation. She said it does not happen often.

      Still, my concerns voiced earlier may be of some use.

      But, from a reliable source, It is OK. Sorry though that we cannot pin point the language on the IRS site in the event such is needed.

      Since there is no regulation against, I guess it would be unlikely there would be applicable language available that it could be so.

      Reply
      • Thank you so much for looking into this for me! Best regards!

  7. I work for a 501(c)3 that has purchased a table at a fundraising event being put on by another 501(c)3. We purchased the table to show support for them, and there is no doubt that doing so can easily be justified as part of our mission. We currently have no legal or other ties to the other entity, although used to be part of that entity. No problems there or any questions on my part with that aspect of the transaction. We are now, in turn, asking our board members and other interested parties to “pay” for a seat or two at this table by giving us the funds to cover our costs to purchase the table. There are ten seats at the table so we are dividing our cost by ten to arrive at the amount we are charging those who we are soliciting. We have the standard acknowledgement letter from the 501(c)3 entity putting on the event that shows our donation and the FMV of what we are receiving as benefit, and the amount we could deduct. Of course we as a 501(c)3 aren’t too concerned with that. Those to whom we are trying to sell those seats to our table, however, are VERY interested in what (if anything) they can claim as a charitable donation.

    So, the question: can those who purchase a seat at our table claim the charitable donation amount that was determined by the other entity, even though those funds aren’t going directly from the individual to that entity? My inclination is to say no, but would be very happy to learn that they can claim that deduction.

    Reply
    • Tom,
      The tickets are your property now.

      “Selling” them directly to your supporters is a possibility, but the Fair Market Value (FMV) aspect of such a transaction would not apply. That benefit was closed when your organization purchased the tickets.

      But, there may be another way to consider.

      Let’s say you paid $250 for each ticket.

      I suggest that you simply ask your prospects to make a tax-deductible contribution to your organization in the amount of $250 (or the full, actual, price you paid per ticket) as a separate donation.

      You tell them that, in turn, you will give them a ticket to the event as a token of your appreciation.

      Chances are probably high that any of your organization’s purchasers/donors of the tickets you own would not go to the other organization’s event in the first place.

      Thus, it would seem, the event would be of no real attraction, making the money given for the tickets, money given mostly, or solely, in your organization’s best interest. They might even give away the tickets. They might not use them at all.

      That’s why I think a stand-alone donation and “comp” ticket deal would work.

      I see no paper trail hint of any improper doing. Not when the tickets are yours to do with as you please. Sell them at face value with no tax-deduction at all, or go the other way as described above.

      Reply
      • Thanks for the prompt response and very helpful answer! This is excellent food for thought and raises a possibility (a good one) that I hadn’t considered.

      • I must disagree completely with Tony’s response here. Any time something of value (goods/services), is provided to the donor in exchange for their contribution, this is a quid-pro-quo donation. In your example, the “token of appreciation” you are giving the donor in exchange for their $250 “donation” is actually a ticket with a cost of $250. Regardless of the deductibility issues raised by the initial purchase of tickets by your nonprofit, this is precisely the situation in which goods/services are given in an exchange for a contribution. Since it is pretty clear that the FMV of such a ticket would be $250, your “donor” would not be able to claim a tax deduction for this scheme. Situations exactly like this often leave nonprofits in hot water, even if unintentionally. Thanks, and good luck!

  8. Francine,
    The way I see it, the Sober Living House (SLH) project/organization, may be seen as being unduly influenced for creation as a “cash cow” for the Church.

    Even if that is not so, the fact that the SLH and the Church’s finances are linked well before the SLH even exists, is not a good thing.

    The concept waters down the future Mission of the proposed SLH, and looks elsewhere for the operating funds the Church needs.

    The Church should focus on how to maximize offerings from its parishioners, and not look away from where the money must come internally, to a far and distant source not even yet created.

    The SLH, in turn, should not be created with the thought mainly, or mostly, that income from its services will support the Church.

    As well, the proposed SLH could not be operated by the Church, nor its officials be able to serve on the board of the SLH, due to potential conflict of interest relating to the money donation issue.

    The Mission of the Church must be directed to the spiritual well-being of the people it serves—its parishioners, and not have its leadership misdirect their stewardship obligations to the Church by way of the SLH.

    Should that SLH non-profit be created, it would belong to the “community” in general, and the Church would have no say in its operation.

    Even more realistic, as a separate entity, should the SLH become operational, there is no guarantee that it would have funds to donate practically or legally to another non-profit in the first place, and even if it did, the SLH leadership could very well choose not to give its money to the Church

    Reply
  9. Hello, my church 501(c)(3) church has a continual deficit each month due to staff salaries. We are meeting expenses and payroll by spending down our start-up funds. The idea to open up a Sober Living House is being investigated. The church leaders have presented that the Sober Living House would be is own 501(c)(3) entity and have separate staff. The Sober Living House is projected to generate significant revenue above it’s operating expenses. The church leaders present to us that the excess revenue the Sober Living House can be transferred / donated to the church to make up the church’s shortfall in revenue. Is this true? Can the Sober Living House give money to the church?

    Reply

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