When a church solicits funds for a designated project but later abandons it, questions arise about refunding designated contributions. Are churches legally obligated to refund such contributions? What are the tax consequences for donors? This article explores these questions and provides practical insights for church leaders.
When Designated Contributions Are Requested Back
Consider these common scenarios:
- A member donates $5,000 to a church building fund. When the project is abandoned, the member asks for the contribution to be returned.
- A member contributes $1,000 to a mission project, but the church later decides to forego the initiative. The donor requests a refund.
Such situations often leave church leaders unsure of their legal and ethical obligations.
IRS Guidance on Returning Contributions
The IRS addressed these concerns in response to questions from Congresswoman Kay Granger. While the IRS declined to provide definitive guidance on whether charities can or should return designated contributions, they did clarify the tax implications for donors who receive refunds.
Key IRS Points:
- If a refunded contribution was previously claimed as a charitable deduction, the donor must report it as taxable income in the year it is refunded.
- Interest refunded alongside the contribution must also be reported as taxable income.
- Refunded contributions can be redonated to another charity, qualifying for a new charitable deduction.
Legal Considerations for Churches
While donors generally cannot enforce the return of a designated gift, there are some exceptions:
- State attorneys general or trustees may enforce the use of designated funds if they were held in trust.
- Courts typically avoid intervening in church disputes, citing First Amendment protections, as noted in McDonald v. Macedonia Missionary Baptist Church.
Taxation of Refunded Contributions
The IRS emphasizes the application of the “tax benefit rule,” which requires donors to report refunded contributions as income. Key considerations include:
- Donors who did not claim a deduction may not need to report refunds as income.
- High-income donors may have received a discounted deduction, which complicates tax reporting.
- Churches should advise donors to consult tax advisors for proper reporting.
Practical Steps for Churches
Here are some best practices for handling designated contributions:
- When abandoning a project, consult donors and ask if they want refunds or wish to redirect their contributions.
- Include a disclaimer in solicitation materials, such as: “By contributing to this project, donors acknowledge that the church has full authority to apply contributions to other purposes if the project is canceled.”
- Seek legal advice when managing abandoned designated funds, especially when donors cannot be identified.
Conclusion
Churches soliciting designated contributions must carefully navigate the legal and tax implications when projects are abandoned. Clear communication with donors, well-drafted solicitation materials, and professional legal and tax advice can help mitigate risks and ensure compliance.
FAQs
1. Can a donor legally demand a refund of a designated contribution?
Generally, no. Contributions are irrevocable gifts, but exceptions may apply if the funds were held in trust.
2. What are the tax implications of a refunded contribution?
Refunded contributions must be reported as taxable income if previously claimed as a deduction. Consult a tax advisor for details.
3. Can refunded contributions be donated to another charity?
Yes, donors can redonate refunded contributions and claim a new charitable deduction.
4. What should churches do with unidentified designated funds?
Churches can consult members for guidance or seek court authorization to transfer funds to another purpose.
This article first appeared in Church Finance Today, March 2010.
