Miscalculations can create both legal and public relations problems if development officers fail to find the right balance for gifts with restrictions.
Development officers dealing with major donors are frequently called upon to structure the terms of a gift to meet the donor’s interests. Some development officers even discourage unrestricted gifts on the theory that a donor will develop a greater relationship with the institution if the gift satisfies the donor’s specific interests.
But charities must be careful about restrictions on any gift. Misunderstandings can create major public relations problems with a donor and improper or ill-considered restrictions can create significant legal difficulties for both the donor and the charity.
In general, any gift with a “material restriction” that prevents the charity from “freely and effectively employing the transferred assets, or the income derived therefrom, in furtherance of the charity’s exempt purposes” creates a problem under federal tax law. Whether a restriction is material is decided on a case by case basis under an imprecise “facts and circumstances” standard.
Some things are generally deemed to be okay. Naming a fund, a building or a program after the donor is perfectly alright. Designating a restricted use of the funds or property is generally alright, so long as the use is consistent with the charitable purpose of the recipient charity. It is permissible, for example, to give money to a college for its scholarship fund or athletic equipment, to the hospital for medical research, or to the United Way for a designated charity.
But even here, charities must be careful to assure that the use is not “earmarked” too narrowly. It would not be a charitable gift to give a scholarship for a specific person. It would probably not be a deductible gift to give to the hospital for your brother’s research project. A deduction would definitely be denied for a gift earmarked for a foreign organization or a non-charitable domestic entity.
It is permissible to maintain the gift in a separate fund, such as required to endow a specific chair at a university or a medical research fund at a hospital. It may even be permissible to place a restriction on transfer of property, if the property is essential to achieve the intended charitable purpose. A restriction against selling a contributed woodland preserve or arboretum might be permissible if critical to achieve the charitable purpose. A restriction on selling investment securities would not be.
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