Something to Consider…

We recently asked church leaders about the following situation:

A sizable check is found in the offering plate at your church with, Pipe Organ written in the memo line. Your church doesn’t have a pipe organ (or a pipe organ fund) and most music used during worship services is contemporary Christian music.

What should the church do with the check?

  1. Deposit the check and send the donor a thank you letter?
  2. Return the check to the donor?
  3. Approach the donor asking him or her to add the phrase Suggested for on the memo line?
  4. Use the check for normal church expenses?
  5. Buy a pipe organ?

Church leaders often work hard encouraging their church family to contribute to the church’s financial needs. Then along comes a five-figure check with Pipe organ written in the check’s memo line. So what’s the problem you may ask? Well, for one thing, your church doesn’t have a designated fund for a pipe organ. And besides, your church hasn’t sung a traditional hymn during a worship service in ten years—or more! What’s a leader to do?

If you accept the check by depositing it, you probably need to start looking at pipe organs because unless something changes, that’s the only way that you can use it. Spending any part of the gift for anything other than a pipe organ would at a minimum constitute breach of fiduciary duty and at worst, fraud. Yes, it’s that serious.

But if you delay depositing the check, you’ve got a couple of options. One of course is to thank the donor for his or her good intentions and generosity, and give it back. Another option is to ask the donor if they’re flexible on how the church spends the generous contribution. If they are willing to give the church leeway in how it spends the gift, you can ask the donor to write the phrase, Suggested for on the check’s memo line in front of pipe organ. That way the church is not legally bound to purchase a pipe organ.

A Temptation to Avoid: Borrowing from Designated Funds

Leaders at older churches sometimes find that years earlier a designated fund was established either by a donor or by the church for some special project or program that never came to fruition. And it isn’t likely to ever happen regardless of how much money is raised. It’s temping for church leaders to borrow from that fund if regular giving falls short of ongoing financial needs. But regardless who established the fund, the church or a donor, borrowing from it is illegal and again comes under the category of fraudulent activity. Church leaders engaging in such a practice would be well advised to repay the loan as quickly as possible and be transparent with its members about what they have done and how they’re correcting their mistake.

Sometimes a church starts a capital stewardship campaign for something that it believes it needs to further its mission—like a church bus for example. But the fund falls woefully short of its minimum goal. No matter how long the fund exists, enough money for a church bus will never be collected. Rather than ignore the problem, church leaders would be well advised to contact participating donors and get written permission to modify the original designation of their gifts to other needs that the church has. Nevertheless, the church needs to be prepared for donors to request that their original donations be returned. Regardless, the longer leaders wait, the more difficult the task becomes. When donors move or even die, the problem only gets harder to fix.

When appealing for funds for a particular purpose, the wording included on solicitation materials and in public pleas might make some flexibility in how they’re spent possible.

Then there is the situation where a church may not be able to identify all donors who contributed to an abandoned project. Some people may have given small amounts or anonymous cash gifts. If that is the case, engaging current members in a solution can be helpful. At a membership meeting ask the members to adopt a resolution with regard to what to do with the money from the unknown donors. Problem solved.

After reasonable efforts have been made by church leaders to contact an unavailable but identifiable donor to an abandoned project, the church may petition the court to modify the designation of the donor’s gift. The court is going to review if the restrictions on the original gift have become impracticable or wasteful among other considerations. Your state’s Attorney General may even need to get involved. But at least it is an outcome that is legally recognized and that resolves the church’s liability in the matter.

But a bit of foresight on the part of church leaders can go a long way in keeping the church’s finances from getting hamstrung by designated gifts. When appealing for funds for a particular purpose, the wording included on solicitation materials and in public pleas might make some flexibility in how they’re spent possible. Church Tax and Law Report suggests the following, By contributing to this project, donors acknowledge that the church has full authority to apply contributions designated for this project to other purposes in the event the project is canceled or oversubscribed. Including this or a similar statement on every special offering envelope, mailing, brochure, or pledge card as well as in verbal communications about the campaign will give donors notice that leaders have the flexibility to repurpose gifts if the project receives excess funds or is abandoned for whatever reason.

Return of Undesignated Gifts—Not So Fast!

So far we’ve been dealing with designated gifts. What if a donor asks the church to return an undesignated contribution? While the courts have upheld the return of donations that were designated for abandoned projects or used for something other than what they were designated for, such is not the case for undesignated gifts.

The reason that a donation to your church is tax deductible is because it is considered an irrevocable gift to a charity. If your church routinely returns donations to donors who request a refund, it would put the deductibility of all donors’ gifts into question. Instead of being considered charitable gifts, they would be considered demand loans that can be recalled by donors at will.

We’ve seen times when pastors have challenged their members to give a full tithe for several months, and if they don’t believe that all of their financial needs have been met during the campaign, they can receive a full refund of their donations. At a minimum a campaign of this type should be run so that refunds can be given during the same year as they were received. At least that would minimize the tax considerations for donors who received refunds. Nevertheless, we recommend if your church is considering such a campaign that it consult with an attorney who specializes in non-profits.

A well thought out Gift Policy can help your pastor say thanks, but our policy won’t let me accept that, without damaging his or her relationship with the donor.

Should church leaders consider returning contributions, an issue for them to consider before they refund a donation is inurement. One of the conditions for tax exempt status is that none of the church’s assets inures to the benefit of a private individual. (A statement to that effect is often required to be included in your Articles of Incorporation and Bylaws.) An undesignated gift is considered a church asset. If a church voluntarily returns such gifts, doing so may be considered as prohibited inurement. In a worse-case scenario, inurement could lead to a church losing its tax-exempt status. The financial cost to the church going forward could be staggering!

Once church leaders agree to a donor’s request for the return of a non-designated contribution, they would establish an undesirable precedent; leading to a situation where they most likely would feel compelled to comply with every other donor’s request for a similar return of contributions. Is this the kind of slippery slope that you want to see your church head down?

Lastly there is the effect of such a refund of a charitable gift on the donor’s tax liability. The donor may need to file an amended return. While it’s not the job, nor a good idea, for the church to serve as a tax advisor, in order to preclude the church facing potential liability for aiding and abetting in the substantial understatement of tax by a donor they gave a refund to, it should accompany the return of funds with a letter recommending that the donor seek help from a professional tax advisor in the matter.

How a church handles the gifts that it receives may present problems that church leaders haven’t previously considered, regardless if they are unrestricted, or restricted by donors or even the church itself. We recommend that church leaders adopt and follow a Gift Policy. Such a policy can help avoid not only some of the problems we included here, but others that we haven’t talked about. For example, does your church really want to accept that old sofa that someone is cleaning out of their basement? A well thought out Gift Policy can help your pastor say thanks, but our policy won’t let me accept that, without damaging his or her relationship with the donor.

If you need help crafting a Gift Policy, please contact us.

Please Note: This information is provided with the understanding that Church Administrative Professionals is not rendering professional advice or service.

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Deborah Miller, cca

Charles Kneyse

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