Two relatively recent news events have raised the issue of nonprofit organizations returning gifts to donors:
- The mainstream media wanted to know if Penn State University should return donations to donors who ask for a refund or should Penn State stick to its longstanding policy of not returning gifts. Following the Jerry Sandusky child sex-abuse scandal, the University affirmed its no-refund policy in its official talking points.
- The mainstream media also took notice of a lawsuit filed by country music star Garth Brooks against INTEGRIS Canadian Valley Regional Hospital. Brooks sought the return of a $500,000 contribution. The media wondered if the Hospital should have returned the donation before things ended up in court.
Since much has already been said about whether gifts should be returned upon a request by a donor, I want to focus on whether a nonprofit organization can legally return a donation.
I’m not a lawyer. So, I decided to contact one. I spoke with a high-ranking state official who specializes in the regulation of nonprofit organizations. The official requested anonymity since we were discussing hypothetical situations.
Under certain circumstances, nonprofit organizations can refund a donor’s contribution. However, under other circumstances, returning a donor’s gift could result in a review by state authorities. Whether or not a situation results in state review will depend on a given state’s regulations, the impact returning the gift would have on the nonprofit, and the size of the gift in question,.
Different states have different laws and regulations governing nonprofit organizations. However, most, if not all, state rules are vague on the point of charities returning gifts. What states do recognize is that when a donor gives money to a nonprofit organization, that money is no longer the donor’s once accepted by the charity. Instead, the money is, in effect, owned by the public interest. Because nonprofit organizations exist to benefit the public interest, regulators will be concerned that gifts are used to further the public interest. Returning a donor’s gift could be contrary to the public interest. That’s the issue for regulators.
For example, a donor may want his $1 million gift returned. However, at the time of the request, the nonprofit may have already spent the money on construction of a new building. It may no longer be holding the donor’s money. And, it may not have sufficient cash on-hand to provide a refund. Or, providing a refund may substantially hurt the organization’s financial health. In such a situation, state regulators might find that returning the gift could be counter to the public interest and might move to block a refund.
The smaller the gift in question, the less likely the refund situation is to attract the interest of state officials. For example, state regulators are very unlikely to get involved if a $50 donor wants her gift returned. On the other hand, they are more likely to take notice if a $1 million gift is at issue.
By contrast, nonprofit organizations are required to return a donor’s gift if the funds cannot be used according to the donor’s intent or if any significant provisions of a gift agreement are violated. The donor’s intent and/or the gift agreement are a contract governing the relationship between the donor and the organization. Nonprofit organizations are legally bound by such agreements.
To ensure that organizations do not run afoul of state authorities or donors, nonprofits should take the following measures:
- The boards of nonprofit organizations should adopt a donation refund policy. Typically, the policy will not allow for refunds of donations. That’s the policy that’s been in place at Penn State. If the organization wants to allow refunds under special circumstances, those should be carefully spelled out in the policy.
- Nonprofit organizations should use written gift agreements for all large contributions. The organization should adopt a policy about the use of gift agreements including when they must be used and what points must be covered in them. If a well-written gift agreement had been in place between Garth Brooks and INTEGRIS, it’s doubtful that the two would have ended up in court. However, without a solid gift agreement, INTEGRIS ended up in court and was ordered to return the $500,000 gift and pay an additional $500,000 in punitive damages.
- Nonprofit organizations should subscribe to fundraising codes of ethics and should even adopt an institutional code of ethics. Adhering to the highest ethical standards and committing to honor donor intent will avoid many situations that could trigger a donor to request a refund. A gift agreement is one way to outline the donor’s intent. However, in the absence of a gift agreement, correspondence and notes may help document the donor’s intent. At the very least, the nature of the appeal itself provides an indication of donor intent. For example, a direct mail appeal that speaks of scholarship funding will generate donations from individuals who expect their gifts will be used for scholarships.
The only time nonprofit organizations are required to refund a donation is if the organization violates the terms of the gift. Otherwise, the decision about refunding is up to each individual nonprofit though state authorities may step in to protect the public interest.
The best thing all nonprofit organizations can do is minimize the circumstances that can lead a donor to request a refund. To mitigate the risk of a refund request, organizations should use gift agreements, honor donor intent, and adhere to the highest ethical standards.
That’s what Michael Rosen says… What do you say?
Michael Rosen Says... 