A colleague recently told me that last year he had made a donation to a local nonprofit organization for a specific purpose. He has since learned that the leadership of the nonprofit has now determined that the project for which his donation was given is no longer going to happen. So, when he asked me if it’s possible for him to receive the money back that he donated I told him that the answer is a complicated one.
Historically, according to Northwestern University law professor Robert Bennett, U.S. law has “operated on the principle that once a gift is given, it can’t be taken back.” However, that belief is changing. Some courts have ruled in favor of donors having increased authority over funds they have already donated and within the past ten years, most states have instituted Uniform Trust Codes, called the Uniform Prudent Management of Institutional Funds Act (UPMIFA) in California. Additionally, the internet has increased the transparency of a nonprofit’s finances via sites such as GuideStar and Charity Navigator, enabling donors to see exactly how a nonprofit spends its money.
My colleague’s real question should actually be, “What’s the right thing for the nonprofit to do if I want my gift returned?” Ideally, if a nonprofit organization is requesting funding for a restricted purpose, it would be wise for the nonprofit to state in writing up front what will happen if the organization decides to pull the plug on the project. Many nonprofit attorneys and CPAs suggest that charities should consider adding a statement on solicitation documents such as this: “By contributing to this project, donors acknowledge that the organization has the authority to apply contributions designated for this project to another, related purpose in the event that the project is canceled.”
Regarding unrestricted gifts, some attorneys and CPAs recommend that the nonprofit include a gift over clause that enables the donor to request a transfer of the gift to a different nonprofit in the case of misuse. Such clauses often give donors the right to sue to enforce the terms of the gift. Donors should be aware that if their gift is returned to them and not transferred to a different charity or to a different purpose within the same charity, they may no longer realize the tax deduction they originally received in the year the donation was made.
But, if the nonprofit’s solicitation documents never included provisions for returning or transferring the gift, what should the nonprofit’s leaders do if a donor requests a refund? In my experience, the simplest thing to do is to communicate with the donor to determine what the donor is really requesting. Is it that the donor has changed his mind and no longer wants to support that particular nonprofit for any of a variety of reasons? Or is it that the donor really wants to support the original purpose of his donation and now that the organization isn’t implementing that project, maybe he wants his money to go to a different nonprofit organization that is investing in a project aligned with the donor’s original wishes? One organization with which I worked had a donor who objected to how her donation would be used, so the organization readily returned her contribution without any official protest on her part. That was the easiest way to accommodate both the needs of the donor and the integrity of the nonprofit organization.
So, back to my colleague’s question: The best thing for the charity to do would be for the leadership to contact all those donors who contributed to its project to inform them that the project to which they donated isn’t going to happen and to give them some choices regarding what they want the charity to do with their donations. Of course, one option would be to offer to return donor contributions, while reminding them of the tax consequences. Another option would be to ask donors if they want their donations to be applied to a different purpose within the organization. Or, after learning that the donor really wants to still support the original purpose of his contribution, the nonprofit’s leaders could identify a different charity that would fulfill the donor’s original purpose, and make arrangements, if the donor agrees, for the donor’s original contribution to be transferred to that organization.
If the leaders of the nonprofit determine that they do not wish to either transfer or return donors’ contributions, both the nonprofit leaders and the donors may wish to consult their attorneys to determine their legal status under California law when it comes to enforcing a designated charitable gift.