It is common for church members to make “designated” or restricted charitable contributions to their church specifying that their contributions be used for a specified purpose. What happens if a church board applies such contributions to some other purpose? Are there legal consequences for either the church or the church board? A recent decision by the Mississippi Supreme Court addresses this question.
The case is significant since it represents the most extended discussion of the legal consequences of expending donor restricted contributions for other purposes. Also significant: The case suggests that donors who make designated contributions to their church may have a legal right to a refund of their contributions if the church fails to use the contributions for the designated purpose.
This Feature Article reviews the facts of the case, explains the court’s ruling, and assesses the significance of the case to churches and church leaders. The article also reviews all of the leading cases throughout the past 150 years addressing the use of donor restricted contributions for other purposes. With this article in hand, church leaders will have access to every case addressing this important topic, and will be more likely to make informed decisions. Of course, no decisions regarding the use of donor restricted contributions for other purposes should be made without the assistance of legal counsel.
On August 29, 2005, Hurricane Katrina ravaged the Mississippi Gulf Coast. The storm caused extensive damage to the property of St. Paul Catholic Church. On November 27, 2005, the diocesan bishop issued a decree merging the St. Paul Church with Our Lady of Lourdes church to form a new parish called the Holy Family Parish. The decree stated that the Holy Family Parish would maintain two church edifices, St. Paul Church and Our Lady of Lourdes Church. Pursuant to this decree, plans were initiated to rebuild the St. Paul Church, and donations were solicited and given for that purpose. More than one year later, on March 13, 2007, the bishop issued a second decree announcing that Our Lady of Lourdes would be the only church in the Holy Family Parish. This decision effectively closed the doors of the St. Paul Church. This decision was made because Our Lady of Lourdes Church, unlike St. Paul, is located in a non-flood-zone area.
A number of St. Paul’s former parishioners filed a canonical appeal through the Roman Catholic Church’s ecclesiastical tribunals. On November 30, 2007, the Vatican issued a decree which stated that the bishop had acted in accordance with the requirements and procedures set forth under canon law.
While the canonical appeal was pending, 157 former parishioners filed suit against the Catholic Diocese of Biloxi, the pastor of St. Paul church, and the bishop (the “church defendants”), asserting that:
1. any financial contributions made for the specific purpose of rebuilding the St. Paul church were held in trust and must be used exclusively for rebuilding efforts;
2. the church defendants violated said trust; and
3. the pastor of St. Paul made intentional misrepresentations by soliciting donations to rebuild the St. Paul church while having personal knowledge that the decision not to rebuild had been made.
After conducting a hearing, the trial court dismissed the plaintiffs’ lawsuit. The court characterized the case as an internal administrative matter rather than a property dispute, and found that the issues could not be heard without excessive entanglement with religion. The court determined that canon law prescribed a specific procedure for altering a parish, and that the church defendants had followed that procedure. In sum, the trial court concluded that the “church autonomy doctrine” of the First Amendment, which generally bars civil court involvement in matters of internal church governance and administration, deprived the court of jurisdiction.
The trial court relied on a ruling by the North Carolina Supreme Court in Harris v. Matthews, 361 N.C. 265, 643 S.E.2d 566 (2007). Harris states that:
Determining whether actions, including expenditures, by a church’s pastor, secretary, and chairman of the Board of Trustees were proper requires an examination of the church’s view of the role of the pastor, staff, and church leaders, their authority and compensation, and church management. Because a church’s religious doctrine and practice affect its understanding of each of these concepts, seeking a court’s review of the matters presented here is no different than asking a court to determine whether a particular church’s grounds for membership are spiritually or doctrinally correct or whether a church’s charitable pursuits accord with the congregation’s beliefs. None of these issues can be addressed using neutral principles of law.
2. “St. Paul #1″—Schmidt v. Catholic Diocese, 18 So.3d 814 (Miss. 2009)
A. Using donor designated contributions for other purposes
The plaintiffs appealed to the Mississippi Supreme Court, claiming that the case could be decided on neutral principles of trust and property law, and therefore the trial court erred in dismissing the case. According to plaintiffs, their case addressed the church defendants’ obligations with regard to funds donated for the rebuilding of St. Paul church. The church defendants claimed that “the core” of the dispute was an internal church disagreement over the decision not to rebuild the church, and that plaintiffs were simply masking their claims as a property dispute. The court observed:
Plaintiffs submit that church defendants hold any donations made for the purpose of rebuilding the St. Paul church in trust. They argue that these funds were given based on church defendants’ promise to rebuild the church, and that the funds may not be used for any other purpose. They assert that church defendants breached their fiduciary duties by merely contacting donors for permission to use the donors’ contributions toward a different purpose. Plaintiffs thus seek to enjoin the diversion of the funds, and request an adjudication of whether church defendants’ decisions have been fiscally irresponsible, and whether those funds must be used in a manner mutually agreeable to them or in their best interest.
The court agreed that “civil courts may not second-guess church administrative or management decisions, or substitute their judgment in place of the church’s,” and therefore the trial court “correctly determined that our courts may not consider whether the church defendants’ management or administrative decisions were fiscally irresponsible, or whether those decisions were in the best interests of parishioners.”
However, the court concluded that the trial court “erred in dismissing plaintiffs’ claims that church defendants improperly diverted designated funds.” It explained that “while churches have large, almost-unfettered discretion in their administrative decision-making, they are not entitled to violate recognized duties or standards of conduct.”
The Mississippi Supreme Court then explained the “general law of contributions” as follows: “Where a religious society raises a fund by subscription for a particular purpose, it cannot divert the funds to another purpose, and, if it abandons such purpose, the donors may reclaim their contributions.” In support of this conclusion the court relied on the following cases:
(1) Roman Catholic Diocese v. Morrison, 905 So.2d 1213 (Miss. 2005).
The Mississippi Supreme Court concluded:
Rather, each cause of action asserted against a religious organization claiming First Amendment protection, must be evaluated according to its particular facts. For instance, with respect to a claim of breach of fiduciary duty, a religious organization might enjoy First Amendment protection from claims of failure to provide a certain quantity or quality of religious instruction in exchange for tithes and offerings, but might not enjoy such protection from claims that it solicited and accepted funds to be held in trust for a specific, stated purpose, but spent the funds for an unauthorized purpose.
(2) Dunaway v. First Presbyterian Church, 442 P.2d 93 (Ariz. 1968).
An Arizona church planned on constructing a much-needed building facility for Sunday school purposes. A building committee was appointed to consider a building site and financing for the planned building. A married couple (the “donors”) informed the building committee that they would “start the ball rolling” by a contribution of stock worth $10,000 to be applied to the construction of the Sunday school building and a plaque honoring the church’s long-term pastor. The donors proceeded to donate the stock to the church. A year later the pastor retired, and the church board wrote the donors and asked for permission to use $8,000 of the stock to purchase lots across the street from the church. The donors refused to grant such permission and requested the return of the stock. This request was refused.
The donors sued the church to recover the stock on the theory that the stock was specifically limited to the building of an addition to the Sunday school building of the church and as a memorial for the pastor, and for no other purpose. The trial court granted the church’s motion to dismiss the lawsuit for failure to state a cognizable claim.
A state appeals court noted that the donors’ offer to “start the ball rolling” by giving $10,000 worth of stock to the church “was a charitable subscription.” As to charitable subscriptions, “the law in this country is neither uniform nor well settled. Some courts have failed to find any consideration in a promise to make a gift. But where the gift has passed into the hands of the donee, there is an implied promise agreeing to the purposes for which it is offered from the acceptance of the donation and there arises a bilateral contract supported by a valuable consideration.”
The court concluded:
After the donors sent the stock to the church’s treasurer, the church exercised dominion over it … . The communication received by the donors which requested permission to use $8,000 of the gift for land and the refusal to return the stock is further evidence of the exercise of dominion over the stock … . We hold that on the present state of the record the church, by exercising dominion over the stock, assented to the conditions of the donation and is bound both in law and in good conscience to perform the conditions or to return the stock.
That the stock and dividends must be returned if the Church fails to perform the purposes of the gift has been decided in parallel circumstances. We think the rule stated in First Church of Christ Scientist v. Schreck, 127 N.Y.S. 174 (1911) … is the correct one applicable to the case before us: “Where a religious society raises a fund by subscription for a particular purpose, it cannot divert the fund to another purpose, and, if it abandons such purpose, the donors may reclaim their contributions.”
(3) Barker v. Wardens and Vestrymen of St. Barnabas Church, 126 N.W.2d 170 (Nebr. 1964).
Elizabeth Barker died in 1953. Her will named her son as executor of her estate, and distributed her assets equally to her son and three daughters. The estate was closed in 1955 following payment of debts and distribution of assets. In 1958, the son informed a local court that there were assets belonging to the estate that were recently discovered, necessitating the reopening of the estate. The court reopened the estate, and the son identified the additional asset as a $1,000 charitable contribution his mother had made to her church for the construction of a new church building. Since the church had abandoned the construction project, the estate was entitled to a return of the contribution.
Establishing a Wrongful Diversion of Donor Designated Funds Claim
The Nebraska Supreme Court listed the following four factors that establish a “diversion of designated funds” claim:
1. money was pledged and paid pursuant to a fund-raising drive to build a new church;
2. the plan was abandoned and the funds were diverted for a different purpose;
3. the plaintiff demanded that the contribution be returned; and
4. the church refused to refund the plaintiff’s donation.
The church acknowledged that it initiated a building fund drive in the years 1950 and 1951 for the purpose of acquiring another site and erecting a new church building, and that substantial contributions were received, including the $1,000 from the executor’s mother. With part of the funds so raised a site was purchased.
The parties agreed that a pledge card used in the campaign was signed by the deceased, and pledged $1,000 for the building fund. The pledge card contained the following terms:
St. Barnabas Church Omaha, Nebraska
I hereby pledge to the St. Barnabas Church New Building Fund the total sum of $_____ to be paid in ( ) Monthly ( ) Quarterly ( ) Annual installments before December 31, 19__
Checks, payable to St. Barnabas Building Fund or payments may be deposited in the collection plate or sent to [the church treasurer].
In the years 1956 and 1957, the church board decided not to build the new church. At an annual parish meeting in January 1957, it was resolved that the new site be sold and that on request the contributors would be reimbursed their contributions and the remaining funds be spent (1) for necessary repairs and improvements of the present church building and (2) for establishing and maintaining a parochial mission of St. Barnabas Church. The sale was made at a profit of $24,000.
Certain contributors requested a return of their contributions pursuant to the resolution and all such contributions were returned. The funds raised in the drive and the profits from the sale of the lot, less only the funds returned to contributors on request, were used to rehabilitate the existing church.
The executor of Elizabeth Barker’s estate requested the return of the $1,000 contribution made by the deceased to the building fund but the request was refused by the church and no refund was made to the decedent’s estate, or the executor. The executor sued the church, demanding that it disgorge itself of the $1,000 contribution.
A trial court dismissed the executor’s claims, but this ruling was reversed on appeal by the Nebraska Supreme Court. The court concluded that the church had to refund the $1,000 contribution to the estate, and relied on the following prior cases:
Avery v. Baker, 43 N.W. 174 (Nebr. 1889). The Nebraska Supreme Court concluded: “Where a church edifice has been erected by voluntary contributions and upon the promise and agreement that the building is to be used for certain specified purposes, the contributors to the fund have a right to insist that the property be used for the purposes named, and may enjoin a sale of the building where no adequate cause is shown and the effect would be to divert the funds from the use intended and apply them elsewhere … . A church organization, like any other, must act in good faith with those contributing to the erection of an edifice for its use. A church edifice is the result, ordinarily, of many voluntary subscriptions. It would be the property of those who contributed to its erection, but for the fact that it was made as a donation to a particular society. The donation, however, is for a particular purpose—the erection of a church edifice. The money so contributed cannot be diverted and applied to another use without the donors’ consent as the erection of a building for a college, however much the latter might be needed. If good faith requires the application of the money to the uses for which it was designed, the same rule would seem to apply after the building was erected.”
First Church of Christ Scientist v. Schreck, 127 N.Y.S. 174 (1911). A New York court concluded: “Where a religious society raises a fund by subscription for a particular purpose, it cannot divert the fund to another purpose, and, if it abandons such purpose, the donors may reclaim their contributions.”
The Mississippi Supreme Court again rejected the plaintiffs’ wrongful diversion of donor designated funds claim, relying on the four factors enunciated by the Nebraska Supreme Court in the Barker case (see above):
In the present case the contribution was for the ‘New Building Fund’ of the St. Barnabas Church. The subscription card so designated it. It was pledged and paid pursuant thereto in the course of a drive to procure such funds for building a new church. The plan was abandoned, the lot was sold at a profit, and the funds were diverted to another purpose. They were returned on request to certain contributors … . Demand was made by the executor for the return of the contribution and was refused by the church. All of these facts were pleaded by the executor in his petition. All of the facts were admitted either by answer or the stipulation of the parties. We know of nothing more which is necessary to be pleaded or proved by the executor to sustain his cause of action or entitle him to judgment, and the church points out nothing further.
B. Intentional misrepresentation (fraud)
The plaintiffs claimed that the pastor of St. Paul church made intentional misrepresentations in soliciting contributions for the rebuilding of St. Paul, knowing that the church would be closed. The court ruled that the trial court erred in dismissing this claim. It observed: “The cloak of religion does not shield religious institutions from civil responsibility for fraud … . Moreover, the First Amendment does not protect fraudulent statements that concern neither religious doctrine nor practice.”
The court noted that intentional or fraudulent misrepresentation requires: “(1) a representation, (2) its falsity, (3) its materiality, (4) the speaker’s knowledge of its falsity or ignorance of its truth, (5) his intent that it should be acted on by the hearer and in the manner reasonably contemplated, (6) the hearer’s ignorance of its falsity, (7) his reliance on its truth, (8) his right to rely thereon, and (9) his consequent and proximate injury.” The court concluded that this claim “can be decided on neutral principles of law without excessive entanglement in ecclesiastical affairs.”
The Mississippi Supreme Court remanded the case back to the trial court for further consideration of the plaintiffs’ claims of wrongful diversion of donor designated funds and intentional misrepresentation.
3. St. Paul #2—Kinney v. Catholic Diocese, 142 So.3d 407 (Miss. 2014)
On remand, the trial court once again rejected the plaintiffs’ claims, and the case was appealed to the state supreme court. The state supreme court found in favor of the plaintiffs. It quoted from its decision in St. Paul #1: “Where a religious society raises a fund … for a particular purpose, it cannot divert the funds to another purpose, and, if it abandons such purpose, the donors may reclaim their contributions.”
The court stressed that the civil courts are prohibited by the First Amendment guaranty of religious freedom from “considering whether the church defendants’ management or administrative decisions were fiscally irresponsible, or whether those decisions were in the best interests of parishioners.” The court concluded:
Management or administrative decisions necessarily include a hierarchical church’s decision whether or not to close, open, build, or rebuild a church, and how much money to expend on such a project … . Thus, we hold that St. Paul #1 established that plaintiffs cannot use civil courts to second-guess church defendants’ decision not to use the funds to rebuild St. Paul’s. Because we find plaintiffs cannot tell church defendants what to do with the money via civil courts in this state, the remedy is what was stated in St. Paul #1: Plaintiffs may obtain a refund of their donations from the church. Only when this request is refused would a prospective plaintiff have a cause of action … .
For the above reasons, we hold that only plaintiffs who donated have a “legally enforceable right” to the return of their donations once the church announced it was not going to rebuild St. Paul’s. Further … only those plaintiffs who asked for a refund but were subsequently refused have a claim for a diversion of designated funds.
The court also affirmed its prior ruling rejecting the plaintiffs’ claim for intentional misrepresentation, concluding that they failed to establish the necessary nine elements referenced by the court in its previous decision in St. Paul #1 (above).
4. Other Precedent
Few courts have addressed the legal consequences associated with a charitable organization’s decision to use restricted or donor designated funds for another purpose. Summarized below are the leading cases.
(1) Adler v. Save, 74 A.3d 41 (N.J. Super. A.D. 2013).
A New Jersey court concluded that a married couple who donated $50,000 to an animal shelter for construction of a new and larger facility containing separate rooms for large dogs and older cats was entitled to a refund of their contribution after the shelter announced that it was not able to honor the donors’ conditions.
—Mississippi Supreme Court
An animal shelter (the “shelter”) launched a capital campaign to raise funds for a new facility. A married couple (the “donors”) contributed $50,000 to the project, on the condition that their contribution would be used to construct separate rooms for large dogs and older cats. The husband later testified that he did not specifically discuss with the shelter what would occur if the new facility were not constructed. However, he testified that, based on his business background, he expected the recipient of the donation to honor, in good faith, the express purpose of his gift. He testified as follows: “There was no specific discussion, but I’m in business and when you make a donation for a specific purpose, in this instance for a facility to be built, if the facility doesn’t get built, you return the money.”
The shelter’s director informed the donors that their donation would assist the shelter “to accomplish a long-held vision for urgently needed capital expansion with enhanced programs and services for cats and dogs.” The director added that “we are especially touched that you want to fund a space for large dogs that may spend more time with us before they are adopted.”
A few years later, the shelter announced to its donors that it was merging with another charity and as a result it would not be constructing its new shelter. Instead, the merged charity would be constructing a much smaller animal shelter at another site. This announcement came as a total surprise to the donors. Unable to speak directly with the shelter’s director despite numerous attempts, the donors sent a letter requesting the return of their $50,000 donation. When this request was denied, the donors sued the shelter, seeking a return of their contribution.
A trial court concluded that the donor’s gift was “conditional,” and it ordered the shelter to return the gift to the donors due to a failure of the condition. The shelter appealed. A state appeals court affirmed the trial court’s decision ordering the shelter to refund the donors’ contribution. It began its opinion by conceding that “we have not found … a published opinion in this state directly addressing the right of a live donor to demand the return of a conditional inter vivos gift based on the recipient’s failure to honor the donor’s conditions.” Nevertheless, guided by its “general sense of fairness,” the court concluded:
The record here makes it clear that the donors expressly announced their conditions at the time they made their gift, and the shelter expressly acknowledged those conditions at the time it accepted the gift … . Under these circumstances, it can reasonably be argued that returning the gift is the most lenient sanction the shelter may receive from a menu that includes breach of fiduciary duty and civil fraud … .
Based on the unquestioned realization that the recipient accepted the gift fully aware of the donor’s conditions and did not express any reservation to the donor about its ability to meet those conditions, we conclude that this created a reasonable expectation in the donor’s mind that: (1) the recipient would attempt to meet those conditions in good faith; (2) absent the donor’s consent, the recipient did not have the right to ignore or disregard any of the material conditions of the gift; and (3) if the recipient of the gift decides to unilaterally disregard the donor’s expressed condition, basic fairness dictates that the gift must be returned to the donor.
The court added that “by opting to disregard the donors’ conditions, the shelter breached its fiduciary duty. Under these circumstances, requiring it to return the gift appears not only eminently suitable, but a mild sanction.” The court concluded that “under the facts presented here, it would be a perversion of equitable principles to permit a charity to aggressively solicit funds from a donor, accept the donor’s unequivocally expressed conditional gift, and thereafter disregard those conditions and rededicate the gift to a purpose materially unrelated to donor’s original purpose.”
The court made two final rulings. First, it “categorically rejected” the shelter’s argument that a ruling in favor of the donors in this case will cause all charities in the state to risk losing contributions committed to them “merely because they take longer than anticipated to raise funds needed to build a new facility or start a new initiative.” This “parade of horribles” argument “is based on mere speculation and is not rooted to the salient facts of this case.”
Second, the court acknowledged that the donors testified at trial that they had claimed a charitable contribution deduction on their federal income tax return for their contribution. The court surmised that “this line of questioning was intended to undermine their credibility by showing that they took full advantage of the tax benefits of their gift.” The court did not find this evidence relevant to its conclusions.
(2) Tennessee Division of the United Daughters of the Confederacy v. Vanderbilt University, 174 S.W.3d 98 (Tenn. App. 2005)
In 1867, George Peabody, an American merchant and financier living in London, donated $1 million to establish a fund for the improvement of education in the South in the aftermath of the Civil War. Within a few years, the trustees of the fund had settled on a plan to endow a teacher training school as the best way to achieve the purpose of the fund. A school was established that came to be known as “Peabody Normal College” in honor of the school’s benefactor. Years later the school changed its name to Peabody College.
The Tennessee Division of the United Daughters of the Confederacy (Tennessee UDC) entered into various agreements with Peabody College to raise funds for the construction of a women’s dormitory subject to three conditions: (1) the college agreed to allow women descendants of Confederate soldiers to live in the dormitory rent-free; (2) the dormitory would be named “Confederate Memorial Hall”; and (3) a plaque identifying the dormitory as Confederate Memorial Hall would be installed on the outside of the building.
Peabody College eventually merged with Vanderbilt University, and as part of the merger agreement Vanderbilt agreed to assume all of the legal obligations of Peabody College.
Controversy over the name of Confederate Memorial Hall arose in 2000 when the Vanderbilt Student Government Association passed a resolution calling on the administration to change the name of the building. The resolution stated that students, faculty, staff, and members of the administration had expressed great discontent with the name, that the name did not honor the heritage of all Vanderbilt students, faculty, and administrators, many of whom felt offended by the name. In response, Vanderbilt University changed the name of the building in 2002 from “Confederate Memorial Hall” to “Memorial Hall.” Later that year, the Tennessee UDC sued Vanderbilt for breach of contract. It claimed that Vanderbilt’s renaming of Confederate Memorial Hall constituted a breach of the conditions of its donations, and it sought an injunction to prevent Vanderbilt from removing the inscription on the pediment on the front of the building, and compensatory damages in an amount to be shown at trial.
Vanderbilt asserted that it should not be required “to maintain a name on one of its campus buildings in spite of the fact that that name evokes racial animosity from a significant, though unfortunate, period of American history.” It also insisted that the Tennessee UDC had received full consideration for its $50,000 donation because of the many women who had been allowed to live in the dormitory rent-free over the years and because the name “Confederate Memorial Hall” had remained on the building for almost 70 years.
A trial court ruled in favor of Vanderbilt University, and the Tennessee UDC appealed. A state appeals court reversed the trial court’s ruling. The appeals court observed:
Donors often seek to impose conditions on gifts to charitable organizations. In the case of inter vivos transfers, the conditions are generally embodied in a gift agreement or a deed of conveyance … . In the case of transfers to take place on the death of the donor, the conditions are generally contained in the terms of the donor’s will.
A conditional gift is enforceable according to the terms of the document or documents that created the gift. If the recipient fails or ceases to comply with the conditions, the donor’s remedy is limited to recovery of the gift … . Because noncompliance results in a forfeiture of the gift, the conditions must be created by express terms or by clear implication and are construed strictly.
The court noted that the gift from the Tennessee UDC to Peabody College was subject to three specific conditions (noted above), and that “these conditions were not meant to bind Peabody College forever but instead were to be limited to the life of the building itself. Thus, as long as the building stands, these three conditions apply to the gift.”
The court then addressed the remedies available to the Tennessee UDC as a result of Vanderbilt’s breach of the conditions to the original donation:
Where a donee fails or ceases to comply with the conditions of a gift, the donor’s remedy is limited to recovery of the gift. However, it would be inequitable to allow Vanderbilt to “return” the gift at issue here simply by paying the Tennessee UDC the same sum of money the Tennessee UDC donated [nearly a century ago] because the value of a dollar today is very different from the value of a dollar [then]. To reflect the change in the buying power of the dollar, the amount Vanderbilt must pay to the Tennessee UDC in order to return the gift should be based on the consumer price index published by the Bureau of Labor Statistics of the United States Department of Labor. As attested by numerous Tennessee statutes, reference to the consumer price index is the most common way to calculate a change in the value of money over time under Tennessee law. In addition, the Tennessee Supreme Court has endorsed the consumer price index as an accurate measure of the change in the purchasing power of a dollar … . Thus, on remand, if Vanderbilt continues to elect not to comply with the terms of the gift, it must pay the Tennessee UDC in today’s dollars the value of the original gift.
The court concluded:
In summary, we have determined that the undisputed facts establish that the Tennessee UDC gave a monetary gift to Vanderbilt’s predecessor-in-interest subject to conditions and that Vanderbilt’s predecessor-in-interest accepted the gift as well as the conditions that accompanied it. It is further undisputed that Vanderbilt now declines to abide by the conditions attached to the gift. Thus, because Vanderbilt has presented no legal basis for permitting it to keep the gift while refusing to honor the conditions attached to it, Vanderbilt must now either return the present value of the gift to the Tennessee U.D.C. or reverse its present course and agree to abide by the conditions originally placed on the gift.
(3) McDonald v. Macedonia Missionary Baptist Church, 2003 WL 1689618 (Mich. App. 2003)
A married couple donated $4,000 to their church’s “new building fund.” The congregation planned to construct a new church the following year, but these plans were put on hold when the church received an unused school building. The couple sued their church, seeking a return of their building fund donation on the basis of the church’s “breach of contract.” Church leaders noted that the church had $500,000 in its new building fund and insisted that it still planned to build a new sanctuary as soon as the fund grew to $6 million. A trial court agreed with the couple and ordered the church to refund their contributions. The church appealed.
A Michigan appeals court reversed the trial court’s ruling and dismissed the case. It concluded that the civil courts are barred by the First Amendment guaranty of religious freedom from intervening in such internal church disputes:
It is well settled that courts, both federal and state, are severely circumscribed by the First Amendment [and the Michigan constitution] in resolution of disputes between a church and its members. Jurisdiction is limited to property rights which can be resolved by application of civil law. Whenever the trial court must stray into questions of ecclesiastical polity or religious doctrine the court loses jurisdiction … . We hold that this dispute involves a policy of the church for which our civil courts should not interfere. Because the decision of when and where to build a new church building is exclusively within the province of the church members and its officials, the trial court erred in not dismissing the couple’s lawsuit.
(4) Estate of Champlin, 684 A.2d 798 (Me. 1996)
The Maine Supreme Court ruled that a gift in trust for the construction of a public school had to be returned to the donor’s heir since no school had been constructed in 40 years. An elderly male (the “donor”) died in 1929 leaving a will providing, among other things, a transfer of funds in trust for a school to be named for his parents. The will stipulated that “if the city failed to meet the provisions of the will within a reasonable time the trust assets would be turned over to [his nephew].”
Over the next 40 years the city failed to build a school, and the donor’s heirs asked a court to require the trustee bank to turn over the trust account to the donor’s nephew as provided in the will. The trial court concluded that the city had failed to meet the requirements of the will within a reasonable time and ordered the trustee to transfer the trust account to the donor’s nephew. The state supreme court affirmed the trial court’s ruling: “Where no particular time is mentioned for the performance of a condition attached to a charitable grant, devise, or bequest, the law requires that it should be done in a reasonable time, to be determined from all the surrounding circumstances, and unreasonable delay may be considered as a refusal of the gift … . In light of the city’s failure to plan or construct a public school named for the [donor’s parents] and the fact that nearly 40 years has passed … a reasonable amount of time has expired.”
(5) Cotner College v. Hester’s Estate, 51 N.W.2d 612 (Neb. 1952).
A donor made a contribution of $25,000 in 1921 to a college on the condition that the funds be used as an endowment to provide scholarships for students of religion. The college was severely affected by the Great Depression, and was forced to close in 1933. The college reopened in 1946, but no longer offered religious education. The college sued the donor’s estate for a continuation of the endowment that had been funded by the donor’s contribution. The donor’s estate rejected this request due to the substantial changes that had occurred, and the college sued the estate to compel enforcement of the 1921 contribution.
A trial court ruled in favor or the estate on the ground that “all educational activities of said college ceased … and have never been revived,” and that “the attempted renewal of educational facilities in 1946 was not a renewal of its former educational program and was not the type of education formerly provided at [the college]. As a result of the failure of the college to maintain and continue its educational program and the abandonment of its educational facilities, “the consideration for the note involved herein wholly failed, and the estate is not liable thereon.”
The court added:
It is an implied condition of a [donor restricted contribution] that the money shall not be diverted from the purpose for which it was subscribed and the enterprise shall not be abandoned … . Abandonment of a charitable enterprise releases the subscriber to its fund … . The general principles governing the performance of contracts apply to subscriptions. If a material change in the plan or purpose for which a subscription was made is effected without the consent of the subscriber, he is excused from performing his promise, unless there has been a waiver, or unless he has estopped himself to deny his consent to the change … . The law is not so absurd as to hold one to his subscription or promise to give to a charitable or public enterprise after the enterprise has been abandoned.
(6) Indianapolis Bible Institute v. Kiddey, 187 N.E.2d 846 (Ind. App. 1933)
Indianapolis Bible Institute (IBI) was formed for “the giving of religious instructions, training in religious work, conducting a school for the study of the Bible, and religious, evangelistic, civic, educational, charitable, missionary, musical, literary and benevolent purposes.”
In 1925 ICI launched a campaign for the raising of a fund for the purpose of constructing a building in which to conduct its school, said fund to be known as a “building fund.” In furtherance of this campaign, ICI published announcements in local newspapers, and held dinners to which large numbers of persons were invited as guests and at which donations were solicited.
Only $2,500 was raised for the building fund, and this amount was inadequate to purchase or construct a building. The building fund was never used for its intended purpose. In 1930, some five years after the building fund was established, ICI’s board of directors voted to abandon its decision to construct a new building. There was disagreement among board members as to how to handle the building fund. Some wanted to return it to the donors, while others wanted to transfer it to ICI’s checking account “so as to enable it to use such funds for the general expenses of the corporation, including the payment of salaries.”
An individual (the “plaintiff”) subscribed and paid $400 to the IBI building fund, and later sued the school on behalf of all donors to the fund for a return of their contributions on the ground that “the accomplishment of the purpose for which the [donation] was made and paid has been abandoned, and that said building fund is in danger of being wasted; that demand has been made on IBI for the return of said building fund to the subscribers thereto, but IBI neglects, fails, and refuses to do so.”
The plaintiff asked the court to appoint a receiver to take charge of the building fund, and that the fund balance be returned to those who contributed to the fund. The trial court issued a ruling declaring the “building fund” a trust fund held by ICI for the benefit of the donors, finding the amount each of the donors was entitled to recover, appointing a receiver to take charge of the fund, with instructions to the receiver that he obtain as full and complete a list as possible of the donors to the fund and report his findings to the court for further orders.
A trial court ruled in favor of the plaintiff, and ICI appealed. A state appeals court affirmed the trial court’s ruling. The appeals court observed:
When funds are solicited, donated, and received for a certain definite purpose, the donee of such funds has no right to apply the same to any other purpose. When the object or purpose for which the contributions were made fails, a resulting trust will arise for the benefit of the donors or their heirs.
Should churches ever return a contribution to a donor? This is a question that nearly every church leader faces eventually. The answer often will depend on whether the contribution was unresticted or restricted. Both scenarios are summarized below.
Most charitable contributions are unresricted, meaning that the donor does not specify how the contribution is to be spent. An example would be a church member’s weekly contributions to a church’s general fund.
Unrestricted contributions are unconditional gifts. A church generally has no legal obligation to return unrestricted contributions to donors. In fact, a number of problems are associated with the return of unrestricted contributions to donors. These include:
A return of a donor’s contributions would be completely inconsistent with the church’s previous characterization of the transactions as charitable contributions. A charitable contribution is tax-deductible because it is an irrevocable gift to a charity. If a church complies with enough donors’ requests to refund their contributions, this raises a serious question as to the deductibility of any contribution made to the church. Contributions under these circumstances might be viewed as no-interest “demand loans”—that is, temporary transfers of funds that are recallable by donors at will. As such, they would not be tax-deductible as charitable contributions.
(2) amended tax returns
Donors who receive a “refund” of their contributions would need to be advised to file amended federal tax returns if they claimed a charitable contribution deduction for their “contributions” for any of the previous three tax years. This would mean that donors would have to file a Form 1040X with the IRS. In many states, donors also would have to file amended state income tax returns.
(3) church liability
A church that returns a charitable contribution to a donor who does not file an amended tax return to remove a prior charitable contribution deduction faces potential liability for “aiding and abetting” in the substantial understatement of tax. IRC 6701(b).
One of the conditions for tax-exempt status under section 501(c)(3) of the tax code is that none of a church’s assets inures to the benefit of a private individual. Since unrestricted contributions are church assets, a church that voluntarily returns such contributions to donors is distributing its resources to private individuals. It is possible that the return of such contributions would amount to prohibited inurement, thereby jeopardizing the church’s tax-exempt status.
(5) “refund department”
Compliance with a donor’s demand for the return of a contribution would morally compel a church to honor the demands of anyone wanting a return of a contribution. This would establish an undesirable precedent.
Key point. Churches should resist appeals from donors to return their unrestricted contributions. No legal basis exists for doing so, even in emergencies. Honoring such requests can create serious problems, as noted above. Churches should not honor such requests without the recommendation of an attorney.
(6) First Amendment issues
A few courts have concluded that the First Amendment’s guarantees of the nonestablishment and free exercise of religion bar the civil courts from refunding charitable contributions to donors if doing so would implicate religious doctrine.
The leading case is Hawthorne v. Couch, 911 So.2d 907 (La. App. 2005). A church member (the “donor”) sued a church, seeking repayment of tithes he paid the church and also damages and attorney fees. The lawsuit alleged that the pastor of the church obtained the donor’s tithes by exerting a “powerful influence over members of his church, demanding total submission to his authority, and gaining complete control of the members’ minds and money.” The lawsuit further alleged that the pastor involved himself in the day-to-day business of a company the donor owned; ordered the donor to pay tithes on the gross income from the business and to increase the tithes paid by the business; and threatened him with “judgment and hell” if he did not pay up. The lawsuit claimed that the pastor knew his teaching was not biblical but that he was “overwhelmed with greed and power” and at some point had the idea that he would take over the donor’s business. The donor claimed that his efforts to comply with the pastor’s false teaching was bankrupting the company and that the pastor offered to purchase the business for a nominal sum.
The donor insisted that he always intended to tithe on his personal income, as opposed to the gross receipts from his business, and that he donated money to the church under duress. He claimed that the pastor’s “misrepresentation of the Bible” constituted fraud, that the pastor knew his teaching was false, and that he knew the donor was relying on that teaching in making excessive contributions to the church’s enrichment.
A trial court dismissed the donor’s lawsuit, and the case was appealed. A Louisiana state appellate court began its opinion by noting that the First Amendment guaranty of religious freedom forbids the civil courts from interfering in the ecclesiastical matters of religious organizations and that this prohibition “extends to matters of religious discipline, faith, and custom.” The court acknowledged that “not all church disputes necessarily involve purely ecclesiastical matters,” but it concluded that where a “dispute is rooted in an ecclesial tenet of a church, the court will not have jurisdiction of the matter.”
The court noted that the donor’s claims “focused almost exclusively on the pastor’s teachings regarding tithing. Without question, any legal analysis that would require a court to analyze and pass judgment upon such teachings would violate the [First Amendment]. The issue of tithing is at its core a purely ecclesiastical matter … . Accordingly, the trial court correctly concluded that it lacked jurisdiction.”
The donor insisted that no religious doctrine had to be considered in the revocation of his donations to the church, and so his claims could be considered. He relied on the general rule that a donation “shall be declared null upon proof that it is the product of influence by the donee or another person that so impaired the volition of the donor as to substitute the volition of the donee or other person for the volition of the donor.” However, the court pointed out that the donor’s allegations regarding the validity of his consent “are rooted in the religious teachings or beliefs of the pastor and the church”:
He alleged that the pastor threatened him with judgment and hell if he failed to make proper tithes. Although he claimed not to have free will and his gifts were made under duress due to the fraud allegedly perpetrated by the pastor, he further characterized the pastor’s position as false teaching based on his misinterpretation of the Bible … . Whereas the donor masks his claims with legal terms such as consent, fraud, and duress, this controversy is indeed purely religious. Any consideration of his claims would require a court to examine the interpretation of the Bible on the subject of tithing which was applied by the pastor and then make a determination of whether that interpretation was or was not fraudulent. A civil court is in no position to make a judicial determination of what is and what is not a correct biblical interpretation. Furthermore, to consider whether the pastor was attempting to substitute his volition for the donor’s would likewise require a court to consider the biblical basis of the pastor’s threats aimed at the donor. A court would have to consider the pastor’s intent in directing such statements at the donor, which again would require an interpretation of the basis for the comments, i.e., the Bible. For instance, in considering the allegation that the donor was threatened with judgment and hell for failing to give sufficiently, a court would need to delve into the issue of whether such statement was an actual threat to coerce the donor to donate money or rather a literal interpretation of the Bible as believed by the pastor. Clearly, as discussed herein, such an analysis is outside the jurisdiction of a civil trial court.
Moreover, at all times herein, the donor possessed the free will to simply walk away from this controversy by disassociating himself from the pastor and church. That would have ended the controversy concerning the amount of tithe he did or did not give to the church, and all parties would then have been free to live by any biblical interpretation they chose concerning this subject. By even requesting this or any other civil court to issue a ruling on such a clearly ecclesiastical matter runs the honored issue of separation of church and state to the very edge of the fabric. The Founders showed incredible foresight in setting up our system of government where the lines should never cross on such issues, and the courts should and do maintain a neutral posture.
IRS response to a question submitted by a member of Congress. In 2010 the IRS responded to questions submitted by Congresswoman Kay Granger on behalf of one of her constituents regarding the tax consequences associated with a charity’s return of a charitable contribution. The IRS observed:
We are pleased to provide you with the following general information about the federal income consequences to a donor who receives a repayment of a charitable gift plus interest on the repayment … .
If a taxpayer receives the full tax benefit of a charitable contribution deduction when making a contribution to a qualified charity, and the charity repays the contribution to the taxpayer in a subsequent year, the “tax benefit rule” requires the taxpayer to include in gross income in that subsequence year the amount of the previously deducted contribution.
A taxpayer who receives interest on a repaid contribution must also include that amount in income. An individual taxpayer generally includes interest in income when it is available to the taxpayer free of substantial limitations and restrictions … .
If the taxpayer uses a repaid contribution to make a new charitable contribution to a different charitable organization, he or she may claim a charitable contribution deduction for the new contribution, subject to the usual restrictions and limitations on charitable contribution deductions.
The tax benefit rule referenced in the above-quoted IRS response is codified in section 111 of the tax code, which states: “Gross income does not include income attributable to the recovery during the taxable year of any amount deducted in any prior taxable year to the extent such amount did not reduce the amount of tax imposed by this chapter.”
In several cases the IRS and the courts have ruled that section 111 requires donors who have received a refund of a charitable contribution made in a prior year should report the refund as taxable income in the year of the refund rather than file an amended return for the year of the contribution deleting that contribution. See, e.g., Revenue Ruling 75-150.
Key point. Note that Congresswoman Kay Granger’s constituent made his restricted contribution to charity “more than two decades ago.” According to the IRS, this did not affect his obligation to report the refunded contribution as taxable income.
Restricted contributions—project not abandoned
The cases summarized above with the Mississippi Supreme Court ruling, which represent all the leading cases to address the use of restricted charitable contributions for other purposes, illustrate that donors who make designated contributions to their church may have a legal right to a refund of their contributions if the church fails to use the contributions for the restricted purpose. This may occur because the church board simply ignores donors’ designations and applies the funds to other uses. Or, it may occur because a church has failed to use the funds for the restricted purpose within a reasonable amount of time.
But, so long as a specified project for which contributions are solicited has not been abandoned by a church, then according to the precedent summarized above, donors who made contributions designated for the specified project generally have no legal right to a refund of their contributions.
However, at some point, a church’s delay in using restricted funds for a specified purpose may be so substantial that it amounts to an abandonment of the project entitling donors to a refund of their restricted contributions. As the Maine Supreme Court has noted: “Where no particular time is mentioned for the performance of a condition attached to a charitable grant, devise, or bequest, the law requires that it should be done in a reasonable time, to be determined from all the surrounding circumstances, and unreasonable delay may be considered as a refusal of the gift … . In light of … the fact that nearly 40 years (have) passed … a reasonable amount of time has expired.” Estate of Champlin, 684 A.2d 798 (Me. 1996).
Restricted contributions—project abandoned
What if a donor contributes money to a church’s building fund and the church later abandons its plans to construct a new facility? Should the church refund contributions to donors who stipulated that their contributions were for the building fund? A number of possibilities exist, including the following:
Donors can be identified. If donors can be identified, they should be asked if they want their contributions to be returned or retained by the church and used for some other purpose. As the Mississippi Supreme Court noted in the St. Paul #1 case summarized above, “Where a religious society raises a fund by subscription for a particular purpose, it cannot divert the funds to another purpose, and, if it abandons such purpose, the donors may reclaim their contributions.” Schmidt v. Catholic Diocese, 18 So.3d 814 (Miss. 2009).
A church should send a letter to donors who request a refund of a prior restricted contribution informing them that (1) there may be tax consequences; (2) they may want to consider filing an amended tax return to remove any deduction claimed in previous years as a result of their restricted contribution; and (3) they should discuss the options with their tax advisor.
Some churches have issued donors a Form 1099-MISC under these circumstances to reduce the church’s risk of liability for aiding and abetting in the substantial understatement of tax. IRC 6701(b). But this approach presents two problems:
(1) It assumes that the donor claimed a charitable contribution deduction for the restricted gift and will not file an amended tax return. In fact, some donors did not get a tax deduction for their gifts because they could not itemize their deductions on Schedule A. Others received a “discounted” deduction because of the amount of their income (high-income taxpayers only get a partial deduction for their charitable contributions). A church treasurer would have to inspect the actual tax return of each donor who requests a return of his or her contribution. Most church leaders consider such precautions excessive and unnecessary, especially for smaller contributions.
(2) Form 1099-MISC is not designed to report this kind of income. It is designed for nonemployee compensation. In what sense have these donors performed services for the church for which they are being compensated?
In summary, the best approach is for the church to inform donors who request a refund of a restricted contribution to address the tax consequences with their tax advisor. They can either do nothing, report the amount of the returned contribution as “other income” on line 21 of their Form 1040, or file an amended return for the year the restricted contribution was made, which removes the contribution from Schedule A. Keep in mind that amended returns can be made for only one of the previous three years.
Example. Bob gives $1,000 to his church building fund in 2010. In 2015 the church decides to abandon the building project. Bob asks the church to refund his contribution. While it is too late for Bob to file an amended return for 2010, he feels morally compelled to report the $1,000 as income on his 2015 tax return. Doing so, however, is problematic, since Bob may not have been able to claim a deduction in the year of the contribution, or the deduction was reduced. Even if a full deduction was claimed, this only reduced taxable income. A $1,000 contribution to the building fund was not, in other words, worth $1,000. It was worth considerably less, depending on Bob’s income and tax bracket. If Bob was in the 15 percent tax bracket in 2010, then the value of the contribution to him was $150. His $1,000 donation reduced taxable income by $1,000, thereby saving him $150 in taxes. Further, if Bob had substantial income in the year of the gift, the value of his donation may have been even less (charitable contribution deductions were partially “phased out” for high-income taxpayers in 2010). So when Bob receives his $1,000 back several years later, it is not a simple matter of reporting $1,000 as taxable income. At best, this should be something for Bob to decide, not the church.
Key point. Often donors prefer to let the church retain their restricted contributions rather than go through the inconvenience of filing an amended tax return.
Donors cannot be identified. A church may not be able to identify all donors who contributed to the building fund. This is often true of donors who contributed small amounts, or donors who made anonymous cash offerings to the fund. In some cases, restricted contributions were made many years before the church abandoned its building plans, and there are no records that identify donors. Under these circumstances, the church has a variety of options.
One option is to address the matter in a membership meeting. Inform the membership of the amount of restricted contributions in the church building fund that cannot be traced to specific donors, and ask the membership to adopt a resolution with regard to the disposition of the fund. Often the members will authorize the transfer of the funds to the general fund. Note that this procedure is appropriate only for that portion of the building fund that cannot be traced to specific donors. If donors can be identified, use the procedure described above.
Another option is to ask a court for authorization to transfer the building fund to another church fund. Most states have adopted the Uniform Prudent Management of Institutional Funds Act (UPMIFA), and this Act permits churches to ask a civil court for authorization to remove a restriction on charitable contributions to permanent endowment funds in some situations. UPMIFA is addressed below.
Other options are available. Churches should consult with an attorney when deciding how to dispose of restricted funds if the specified purpose has been abandoned or is no longer feasible.
Key point. Some courts have ruled that a donor has no legal standing to enforce a restricted gift to charity. While the donor may not be able to enforce such a trust, this does not mean that a church or charity can ignore it. Some courts have ruled that the state attorney general can enforce a trust created by a restricted gift, and so can any other person with a “special interest” in the trust. While this does not ordinarily include donors, their families or heirs, or even beneficiaries of the gift or trust, it may include fiduciaries (such as a trustee of a written trust). The issue of a donor’s standing to enforce a restricted contribution is not addressed in this article, but it is addressed fully in chapter 8 of my annual Church & Clergy Tax Guide (ChurchLawAnd TaxStore.com).
Some donors can be identified, and some cannot. In most cases, some of the building fund can be traced to specific donors, but some of it cannot. Both of the procedures summarized above may apply.
The Uniform Prudent Management of Institutional Funds Act of 2006 (UPMIFA)
The Uniform Prudent Management of Institutional Funds Act (UPMIFA) has been adopted, with minor variations, in 47 states. It replaces the Uniform Management of Institutional Funds Act (UMIFA), which was adopted by most states since its inception in 1972. An introductory note to UPMIFA states that one of the reasons for the revision of UMIFA was an update to the provisions “governing the release and modification of restrictions on charitable funds to permit more efficient management of these funds.” In this regard, Section 6 of UPMIFA states:
(a) If the donor consents in a record, an institution may release or modify, in whole or in part, a restriction contained in a gift instrument on the management, investment, or purpose of an institutional fund. A release or modification may not allow a fund to be used for a purpose other than a charitable purpose of the institution.
Solicitation Materials Can Minimize or Avoid Problems
Churches that solicit funds for designated projects face difficult choices when they abandon the project and are left with the task of disposing of funds donated for that project. These problems can be avoided if the church simply includes a statement similar to the following when soliciting funds for a specific project: “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.” Such a statement should be printed on special offering envelopes used for the project, or on any other materials so long as they provide adequate notice to donors of the policy and reflect donors’ consent to it.
(b) The court, upon application of an institution, may modify a restriction contained in a gift instrument regarding the management or investment of an institutional fund if the restriction has become impracticable or wasteful, if it impairs the management or investment of the fund, or if, because of circumstances not anticipated by the donor, a modification of a restriction will further the purposes of the fund. The institution shall notify the [Attorney General] of the application, and the [Attorney General] must be given an opportunity to be heard. To the extent practicable, any modification must be made in accordance with the donor’s probable intention.
(c) If a particular charitable purpose or a restriction contained in a gift instrument on the use of an institutional fund becomes unlawful, impracticable, impossible to achieve, or wasteful, the court, upon application of an institution, may modify the purpose of the fund or the restriction on the use of the fund in a manner consistent with the charitable purposes expressed in the gift instrument. The institution shall notify the [Attorney General] of the application, and the [Attorney General] must be given an opportunity to be heard.
(d) If an institution determines that a restriction contained in a gift instrument on the management, investment, or purpose of an institutional fund is unlawful, impracticable, impossible to achieve, or wasteful, the institution, [60 days] after notification to the [Attorney General], may release or modify the restriction, in whole or part, if:
(1) the institutional fund subject to the restriction has a total value of less than [$25,000];
(2) more than  years have elapsed since the fund was established; and
(3) the institution uses the property in a manner consistent with the charitable purposes expressed in the gift instrument.
UPMIFA defines an institutional fund as “a fund held by an institution exclusively for charitable purposes. The term does not include: (A) program-related assets; (B) a fund held for an institution by a trustee that is not an institution; or (C) a fund in which a beneficiary that is not an institution has an interest, other than an interest that could arise upon violation or failure of the purposes of the fund.” Charitable purposes are defined as “the relief of poverty, the advancement of education or religion, the promotion of health, the promotion of a governmental purpose, or any other purpose the achievement of which is beneficial to the community.” The Act defines a program-related asset as “an asset held by an institution primarily to accomplish a charitable purpose of the institution and not primarily for investment.” An “institution” means any entity organized and operated exclusively for charitable purposes. This would include a church.
An official comment to section 6 (quoted above) states:
Subsection (a) permits the release of a restriction if the donor consents. A release with donor consent cannot change the charitable beneficiary of the fund. Although the donor has the power to consent to a release of a restriction, this section does not create a power in the donor that will cause a federal tax problem for the donor. The gift to the institution is a completed gift for tax purposes, the property cannot be diverted from the charitable beneficiary, and the donor cannot redirect the property to another use by the charity. The donor has no retained interest in the fund.
Subsection (b) applies the rule of equitable deviation … . Under the deviation doctrine, a court may modify restrictions on the way an institution manages or administers a fund in a manner that furthers the purposes of the fund. Deviation implements the donor’s intent. A donor commonly has a predominating purpose for a gift and, secondarily, an intent that the purpose be carried out in a particular manner. Deviation does not alter the purpose but rather modifies the means in order to carry out the purpose.
Sometimes deviation is needed on account of circumstances unanticipated when the donor created the restriction. In other situations the restriction may impair the management or investment of the fund. Modification of the restriction may permit the institution to carry out the donor’s purposes in a more effective manner. A court applying deviation should attempt to follow the donor’s probable intention in deciding how to modify the restriction. Consistent with the doctrine of equitable deviation in trust law, subsection (b) does not require an institution to notify donors of the proposed modification. Good practice dictates notifying any donors who are alive and can be located with a reasonable expenditure of time and money. Consistent with the doctrine of deviation under trust law, the institution must notify the attorney general who may choose to participate in the court proceeding. The attorney general protects donor intent as well as the public’s interest in charitable assets. Attorney general is in brackets in the Act because in some states another official enforces the law of charities.
The cy pres rule
The cy pres doctrine (which has been adopted in most states) specifies that if property is given in trust to be applied to a particular charitable purpose, and it becomes impossible or impracticable to carry out that purpose, and if the donor manifested a more general intention to devote the property to charitable purposes, the trust will not fail but the court will direct the application of the property to some charitable purpose which falls within the general charitable intention of the donor.
An official comment to section 8 of UPMIFA confirms that
subsection (c) applies the rule of cy pres from trust law, authorizing the court to modify the purpose of an institutional fund. The term modify encompasses the release of a restriction as well as an alteration of a restriction and also permits a court to order that the fund be paid to another institution. A court can apply the doctrine of cy pres only if the restriction in question has become unlawful, impracticable, impossible to achieve, or wasteful … . Any change must be made in a manner consistent with the charitable purposes expressed in the gift instrument. Consistent with the doctrine of cy pres, subsection (c) does not require an institution seeking cy pres to notify donors. Good practice will be to notify donors whenever possible. As with deviation, the institution must notify the attorney general who must have the opportunity to be heard in the proceeding.
Case study. An elderly man drafted a will in 1971 that left most of his estate in trust to his sisters, and upon the death of the surviving sister to a local Congregational church with the stipulation that the funds be used “solely for the building of a new church.” The man died in 1981, and his surviving sister died in 1988. Since the Congregational church had no plans to build a new sanctuary, it asked a local court to interpret the will to permit the church to use the trust fund not only for construction of a new facility but also “for the remodeling, improvement, or expansion of the existing church facilities” and for the purchase of real estate that may be needed for future church construction. The church also asked the court for permission to use income from the trust fund for any purposes that the church board wanted. The state attorney general, pursuant to state law, reviewed the church’s petition and asked the court to grant the church’s requests.
However, a number of heirs opposed the church’s position, insisting that the decedent’s will was clear and that the church was attempting to use the trust funds “for purposes other than building a new church.” They asked the court to distribute the trust fund to the decedent’s lawful heirs. The local court agreed with the church on the ground that “gifts to charitable uses and purposes are highly favored in law and will be most liberally construed to make effectual the intended purpose of the donor.” The trial court’s ruling was appealed by the heirs, and the state supreme court agreed with the trial court and ruled in favor of the church. The supreme court began its opinion by observing that “it is contrary to the public policy of this state to indulge in strained construction of the provisions of a will in order to seek out and discover a basis for avoiding the primary purpose of the [decedent] to bestow a charitable trust.”
The court emphasized that the cy pres doctrine clearly required it to rule in favor of the church. Applying the cy pres rule, the court concluded: “The will gave the property in trust for a particular charitable purpose, the building of a new church. The evidence clearly indicated that it was impractical to carry out this particular purpose. Furthermore, the [decedent] did not provide that the trust should terminate if the purpose failed. A trust is not forfeited when it becomes impossible to carry out its specific purpose, and there is no forfeiture or reversion clause.” The court concluded that the trial court’s decision to permit the church to use the trust fund for the remodeling, improvement, or expansion of the existing church facilities “falls within the [decedent’s] general charitable intention.” Accordingly, the trial court’s decision represented a proper application of the cy pres rule. Matter of Trust of Rothrock, 452 N.W.2d 403 (Iowa 1990).