Article summary. Church members often make “designated gifts” to their church. Such gifts specify that the donated money or property be used for a designated purpose. There are two questions that often are associated with such donations. First, do donors have a legal right to enforce their designated gifts should the church decide to ignore the designation and use the donated money or property for some other purpose? Second, under what circumstances may donors compel a church to “refund” designated contributions to them? This article addresses these important questions in the light of the most recent legal precedent.
It is common for donors to make gifts to a church that designate a specific purpose. For example, donors frequently donate funds or property to a church’s building fund, missions fund, benevolence fund, or a similar project. In some cases, a church does not honor a donor’s designation. Does a donor have a legal right to enforce a designated gift if the church ignores the designation?
Donors whose designated gifts to their church are not honored may seek to enforce their designations in two ways:
- They may ask a civil court to order the church to honor the designation; or
- They may ask a court to order a return of their contribution.
- In some states, donors have the legal authority to enforce their designated gifts in the civil courts.
- In many states, donors have the legal authority to enforce their designated gifts if they have a “special interest.”
- In most states, the attorney general is empowered to enforce the terms of charitable gifts.
- There are ethical and practical reasons why church leaders ordinarily would want to honor donor designations.
- In states that have adopted UMIFA, donors who make contributions to a permanent “institutional fund” (not expendable in the current year) have a legal right to release their restriction.
- So long as a church honors donors’ designations, or plans to do so in the foreseeable future, it ordinarily has no legal obligation to return such contributions to donors. To the contrary, returning a donor’s designated contribution under these circumstances could create one or more of the problems as noted above. If a church abandons a project for which it solicited designated funds from donors, one option would be for the church to ask donors if they want their contributions returned or retained by the church and used for some other purpose. Ideally, donors should communicate their decision in writing to avoid any misunderstandings. What if a church cannot identify all of the donors who contributed to the abandoned project? One option is to address the matter in a membership meeting. Another is to ask a court for authorization to transfer the building fund to another church fund, pursuant to UMIFA. As noted above, UMIFA has not been enacted in all states, and even where it is enacted, it applies only to “institutional funds” (such as endowment funds) that are regarded as permanent. Other options are available. Churches should consult with an attorney when deciding how to dispose of designated funds if the specified purpose has been abandoned or is no longer feasible.
- When deciding how to respond to donors’ attempts to enforce their designated gifts, or to their demands for a refund of their contributions, it is advisable for a church to seek legal counsel.
Either option involves a judicial recognition of the legally enforceable nature of the donor’s designation. Few courts have addressed these important questions, so authoritative legal guidance is sparse. The leading cases, and key conclusions, are summarized below.
Key point. This article does not address transfers of money or property to a church that are not valid charitable contributions. For example, a “donation” of funds to a church with the stipulation that it must be used for a specified needy person, or student, is not a charitable contribution and should not be accepted by a church. As a result, the questions addressed in this article do not apply.
1. The definition of “gift” and the requirement of “standing”
Understanding the legal authority of a donor to enforce the terms of a completed gift to charity requires an understanding of two important concepts: (1) the definition of a gift, and (2) the legal requirement of standing.
definition of a “gift”
Section 170 of the tax code allows a deduction, subject to certain limitations, for charitable contributions made during the taxable year. Section 170(c) defines a charitable contribution as a contribution or gift “to or for the use of” a corporation organized and operated exclusively for religious, educational or other charitable purposes, no part of the net earnings of which inures to the benefit of any private individual.
The courts have ruled that a “charitable contribution” and a gift are synonymous, and so a contribution is not deductible unless it is a valid gift. In one of the most often-quoted definitions of “gift,” the Ohio Supreme court noted: “The weight of authority … may be summarized in the statement that to support a gift there must be clear and convincing proof, first, of an intention on the part of the donor to transfer the title and right of possession of the particular property to the donee then and there, and, second, in pursuance of such intention, a delivery by the donor to the donee of the subject-matter of the gift to the extent practicable or possible considering its nature, with relinquishment of ownership, dominion, and control over it.” Bolles v. Toledo Trust Company, 4 N.E.2d 917 (Ohio 1936) (emphasis added).
Since no gift occurs unless a donor absolutely and irrevocably transfers title, dominion, and control over the gift to the donee, it follows that no charitable contribution deduction is available unless the contribution is unconditional. Similarly, no charitable contribution deduction is permitted if the donor receives a direct and material benefit for the contribution, since a gift by definition is a gratuitous transfer of property without consideration or benefit to the donor other than the feeling of satisfaction that it evokes.
the requirement of standing
A fundamental requirement in any lawsuit is that the plaintiff have “standing.” Standing means that the plaintiff has suffered an injury to a legally protected interest that can be redressed by a civil court. Since no gift occurs unless a donor absolutely and irrevocably transfers title, dominion, and control over the gift to the donee, it follows that donors have no legal interest to protect when their designated gifts to charity are not honored. To illustrate, in a frequently-cited case, the Supreme Court of Connecticut observed: “At common law, a donor who has made a completed charitable contribution, whether as an absolute gift or in trust, had no standing to bring an action to enforce the terms of his or her gift or trust unless he or she had expressly reserved the right to do so.” Carl J. Herzog Foundation, Inc. v. University of Bridgeport, 699 A.2d 995 (Conn. 1997).
How can a donor who has made a designated contribution to a church sue to enforce the designation when a charitable contribution by definition is a transfer of all of the donor’s interest in the donated funds or property to the church? Standing poses a significant legal barrier to any donor who is considering litigation as a means of enforcing the terms of a designated gift.
One judge aptly observed: “In considering the subject of standing, I begin with the observation that, when a charitable gift is made, without any provision for a reversion of the gift to the donor or his heirs, the interest of the donor and his heirs is permanently excluded.” Smithers v. St. Luke’s-Roosevelt Hospital Center, 723 N.Y.S.2d 426 (2001) (Judge Friedman, dissenting). This judge quoted from a leading treatise on trust law:
There is no property interest left in the [donor] or his heirs, devises, next of kin, or legatees. The donor or his successors may have a sentimental interest in seeing that his wishes are respected, but no financial [interest] which the law recognizes … and hence neither he nor they are as a general rule permitted to sue the trustees to compel them to carry out the trust …. The better reasoned cases refuse to permit the donor during his lifetime, or his successors after his death, to sue merely as donor or successors to compel the execution of the charitable trust. Bogert, Trusts and Trustees, § 415.
2. The traditional view – donors cannot enforce their designated gifts to charity
Section 391 of the Restatement (Second) of Trusts, a respected legal treatise that has been adopted in many states, specifies that donors or their heirs may not enforce the terms of a charitable gift:
A suit can be maintained for the enforcement of a charitable trust by the attorney general or other public officer, or by a co-trustee, or by a person who has a special interest in the enforcement of the charitable trust, but not by persons who have no special interest or by the [donor] or his heirs, personal representatives or next of kin.
Several courts have concluded that donors lack the legal authority to enforce a designated gift to charity, usually on the basis of one or both of the two principles described above (the definition of a “gift,” or a lack of standing). The leading cases are summarized below.
• Carl J. Herzog Foundation, Inc. v. University of Bridgeport, 699 A.2d 995 (Conn. 1997). A charitable foundation (the “donor”) made a gift of $250,000 to a university “to provide need-based merit scholarship aid to disadvantaged students for medical related education.” A few years later, the university informed the donor that it no longer was using the funds for the specified purpose. The donor sued the university to enforce the terms of the gift. The Connecticut Supreme Court conducted a thorough analysis of the laws and judicial precedent of all 50 states, concluding that donors do not have standing to enforce their completed gifts. The donor insisted that it had standing because the university’s decision to discontinue using the donated funds pursuant to the terms of the gift constituted an injury that a court could redress. The donor also claimed that the Uniform Management of Institutional Funds Act (UMIFA) conferred standing on donors to enforce the terms of completed gifts even if no such right was reserved in a gift instrument. UMIFA, which has been adopted by most states, provides the boards and trustees of charitable organizations with guidance in handling perpetual endowment funds.
UMIFA provides that “with the written consent of the donor, the governing board may release, in whole or in part, a restriction imposed by the applicable gift instrument on the use or investment of an institutional fund.” The donor insisted that it would be illogical for UMIFA to provide for written consent by a donor to change a restriction and then deny that donor access to the courts to complain of a change without such consent. In other words, UMIFA implicitly confers donor standing on donors. The Connecticut Supreme Court disagreed, noting that the drafters of UMIFA, in an official comment, stated that “the donor has no right to enforce the restriction, no interest in the fund and no power to change the beneficiary of the fund. He may only acquiesce in a lessening of a restriction already in effect.” UMIFA, § 7, comment.
The court noted that this comment regarding the power of a donor to enforce restrictions on a charitable gift
arose in the context of debate concerning the creation of potential adverse tax consequences for donors, if UMIFA was interpreted to provide donors with control over their gift property after the completion of the gift. Pursuant to section 170 of the [federal tax code, quoted above] an income tax deduction for a charitable contribution is disallowed unless the taxpayer has permanently surrendered dominion and control over the property or funds in question. Where there is a possibility not so remote as to be negligible that the charitable gift subject to a condition might fail, the tax deduction is disallowed. The drafters of UMIFA worked closely with an impressive group of professionals, including tax advisers, who were concerned with the federal tax implications of the proposed Act. The drafters’ principal concern in this regard was that the matter of donor restrictions not affect the donor’s charitable contribution deduction for the purposes of federal income taxation. In other words, the concern was that the donor not be so tethered to the charitable gift through the control of restrictions in the gift that the donor would not be entitled to claim a federal charitable contribution exemption for the gift. IRC § 170(a), Treas. Reg. § 1.170A-1 (c).
In resolving these concerns, the drafters of UMIFA clearly stated their position in the commentary. “No federal tax problems for the donor are anticipated by permitting release of a restriction. The donor has no right to enforce the restriction, no interest in the fund and no power to change the eleemosynary beneficiary of the fund. He may only acquiesce in a lessening of a restriction already in effect.” … . Indeed, it would have been anomalous for the drafters of UMIFA to strive to assist charitable institutions by creating smoother procedural avenues for the release of restrictions while simultaneously establishing standing for a new class of litigants, donors, who would defeat this very purpose by virtue of the potential of lengthy and complicated litigation.
This ruling directly acknowledges that the deductibility of a charitable contribution would be jeopardized if donors were legally capable of suing to enforce the terms of their completed gifts.
• Russell v. Yale University, 737 A.2d 941 (Conn. App. 1999). A graduate of Yale University died in 1918, leaving a substantial sum of money in trust for the erection of a building that would constitute a fitting memorial reflecting his gratitude and affection for his alma mater. The trustees were given broad discretion in the disposition of these funds. In 1930, the trustees voted to contribute money for the erection of the divinity school quadrangle. The divinity school is one of Yale’s graduate professional schools, which educates men and women for the ministry and provides theological education for persons engaged in other professions. In 1996, as a result of a comprehensive study, the university decided to demolish large portions of the divinity school quadrangle. The trustees took exception to this proposal and asked a court to block it on the grounds that it violated the terms of the trust. Relying on the Herzog case (summarized above) a Connecticut appellate court concluded that the trustees lacked standing to enforce the terms of the trust: “Although the plaintiffs are sincere in their efforts to maintain the divinity school as a leader in theological education and preparation for the Christian ministry and they acted in good faith based on motives that are beyond question, the plaintiffs, as a matter of law, lack standing to adjudicate the equitable remedies they seek.”
• Amundson v. Kletzing-McLaughlin Memorial Foundation College, 73N.W.2d 114 (Iowa 1955). The Iowa Supreme Court ruled that “where the donor has effectually passed out of himself all interest in the fund devoted to a charity, neither he, nor those claiming under him, have any standing in a court of equity as to its disposition and control.”
3. Enforcement of designated gifts by the state attorney general
While a donor may not have standing to enforce a designated gift to a church this does not mean that the church can ignore it. Most states have enacted laws empowering the attorney general to enforce the terms of such gifts. An official comment to section 348 of the Restatement (Second) of Trusts, a respected legal treatise that has been adopted in many states, specifies:
Where property is given to a charitable corporation, particularly where restrictions are imposed by the donor, it is sometimes said by the courts that a charitable trust is created and that the corporation is a trustee. It is sometimes said, however, that a charitable trust is not created. This is a mere matter of terminology. The important question is whether and to what extent the principles and rules applicable to charitable trusts are applicable to charitable corporations. Ordinarily the principles and rules applicable to charitable trusts are applicable to charitable corporations. Where property is given to a charitable corporation without restrictions as to the disposition of the property, the corporation is under a duty, enforceable at the suit of the attorney general, not to divert the property to other purposes but to apply it to one or more of the charitable purposes for which it is organized. Where property is given to a charitable corporation and it is directed by the terms of the gift to devote the property to a particular one of its purposes, it is under a duty, enforceable at the suit of the [state] attorney general, to devote the property to that purpose. Section 348, comment f (emphasis added).
Another leading legal treatise states: “The public benefits arising from the charitable trust justify the selection of some public official for its enforcement. Since the attorney general is the governmental officer whose duties include the protection of the rights of the people of the state in general, it is natural that he has been chosen as the prosecutor, supervisor, and enforcer of charitable trusts, both in England and in the several states.” Bogert & Bogert, Trusts and Trustees § 411.
Several courts have recognized the exclusive authority of the state attorney general to enforce the terms of completed gifts.
• Carl J. Herzog Foundation, Inc. v. University of Bridgeport, 699 A.2d 995 (Conn. 1997). The Connecticut Supreme Court, after ruling that donors have no legal right to enforce their gifts to charity, concluded that the attorney general could do so:
The general rule is that charitable trusts or gifts to charitable corporations for stated purposes are [enforceable] at the instance of the attorney general …. Although gifts to a charitable organization do not create a trust in the technical sense, where a purpose is stated a trust will be implied, and the disposition enforced by the attorney general, pursuant to his duty to effectuate the donor’s wishes …. Connecticut is among the majority of jurisdictions which have … entrusted the attorney general with the responsibility and duty to represent the public interest in the protection of any gifts, legacies or devises intended for public or charitable purposes …. The theory underlying the power of the attorney general to enforce gifts for a stated purpose is that a donor who attaches conditions to his gift has a right to have his intention enforced. The donor’s right, however, is enforceable only at the instance of the attorney general.
• Wier v. Howard Hughes Medical Institute, 407 A.2d 1051 (Del. Ch. 1979). A Delaware court ruled that the state attorney general “has the exclusive power to bring actions to enforce charitable trusts.”
• Lopez v. Medford Community Center, Inc., 424 N.E.2d 229 (Mass. 1981). A Massachusetts court ruled that “it is the exclusive function of the attorney general to correct abuses in the administration of a public charity by the institution of proper proceedings” and that donors have no standing to enforce the terms of their gifts when they have not retained a specific right to do so, such as a right of reverter, after relinquishing physical possession of it.
• Marin Hospital District v. State Dept. of Health, 154 Cal. Rptr. 838 (Cal. 1979). A California court concluded that the fact that a charity is bound to use contributions for purposes for which they were given does not confer upon the donor standing to enforce the terms of the gift.
• Smith v. Thompson, 266 Ill.App. 165, 169 (Ill. 1932) (quoting Perry, Trusts and Trustees § 732a). An Illinois court observed, “As a matter of common law, when a … donor of property to a charity fails specifically to provide for a reservation of rights in the trust or gift instrument, neither the donor nor his heirs have any standing in court in a proceeding to compel the proper execution of the trust.” The court also noted that “where the donor has effectually passed out of himself all interest in the fund devoted to a charity, neither he nor those claiming under him have any standing in a court of equity as to its disposition and control.”
• Lefkowitz v. Lebensfeld, 417 N.Y.S.2d 715 (1979). A New York court observed: “The general rule is that gifts to charitable corporations for stated purposes are [enforceable] at the instance of the attorney general… . It matters not whether the gift is absolute or in trust or whether a technical condition is attached to the gift.”
• Brown v. Concerned Citizens for Sickle Cell, 382 N.E.2d 1155 (Ohio. App. 1978). An Ohio court concluded: “One of the recognized powers held by the attorney general at common law was to inquire into any abuses of charitable donations. Clearly, the attorney general’s traditional power to protect public donations to charity goes beyond the mere enforcement of express trusts where the formal elements of such a trust (manifestation of intent to create a trust, the existence of trust property, and a fiduciary relationship) are [present]. The attorney general, in seeking to protect the public interest, may also bring suit to impose a constructive trust on funds collected for charitable purposes but subsequently diverted to other purposes. A constructive trust, although not a formal trust at all, serves as a means to prevent the unjust enrichment of those who would abuse their voluntary roles as public solicitors for charity. For this court to hold that the attorney general can only enforce express charitable trusts would greatly hamper his ability to carry out his statutory and common law duties.”
Several other courts have concluded that the attorney general alone may enforce designated gifts to charity. See, e.g., Denver Foundation v. Wells Fargo Bank, 163 P.3d 1116 (Cal. App. 2007); American Center for Education, Inc. v. Cavnar, 145 Cal. Rptr. 736 (Cal. App. 1978); Greenway v. Irvine’s Trustee, 131 S.W.2d 705 (Ky. 1930); Weaver v. Wood, 680 N.E.2d 918 (Mass. 1997); In re James’ Estate, 123 N.Y.S.2d 520 (N.Y. Sur. 1953).
The authority of a state attorney general to enforce donors’ designated gifts to charity is largely meaningless, since state attorneys general rarely exercise this power. When they do, it is in cases involving large gifts to prominent charities. Attorneys general rarely if ever have enforced designated gifts to a church. Attorney General v. First United Baptist Church, 601 A.2d 96 (Maine 1992).
4. Persons having a “special interest” may enforce a gift to charity
Section 391 of the Restatement (Second) of Trusts, specifies that there are others, in addition to the attorney general, who may enforce the terms of a charitable trust: “A suit can be maintained for the enforcement of a charitable trust by the attorney general or other public officer, or by a co-trustee, or by a person who has a special interest in the enforcement of the charitable trust, but not by persons who have no special interest or by the [donor] or his heirs, personal representatives or next of kin.”
One court concluded that “fiduciaries, such as trustees, have historically been deemed to have a special interest so as to possess standing.” Hartford v. Larrabee Fund Association, 288 A.2d 71 (1971). However, the court cautioned that the attorney general must be joined as a party to protect the public interest.
Those with no “special interest” have no standing to bring an action to enforce the conditions of a gift. These include beneficiaries of the charitable gift. Steeneck v. University of Bridgeport, 668 A.2d 688 (Conn. 1995).
The California Supreme Court ruled that “the prevailing view of other jurisdictions is that the attorney general does not have exclusive power to enforce a charitable trust and that a trustee or other person having a sufficient special interest may also bring an action for this purpose. This position is adopted by [section 391 of] the Restatement (Second) of Trusts and is supported by many legal scholars.” Holt v. College of Osteopathic Physicians and Surgeons, 40 Cal. Rptr. 244 (1964).
5. Donors may enforce a charitable gift if they reserved a property interest
By expressly reserving a property interest such as a right of reverter in a gift instrument, donors may bring themselves and their heirs within the special interest exception to the general rule that donors and beneficiaries of a charitable trust may not bring an action to enforce the trust, but rather are represented exclusively by the attorney general. A right of reverter is created when a property owner transfers title to another with the express stipulation that title will revert back to the prior owner upon the occurrence of a specified condition.
To illustrate, a landowner could convey a home or other property to a church “so long as the property is used for church purposes.” If the property ceases to be used for church purposes, then title reverts back to the former owner by operation of law. Such deeds vest only a “determinable” or “conditional” title in the church, since title will immediately revert back to the previous owner (or such person’s heirs or successors) by operation of law upon a violation of the condition.
Reversionary clauses represent one way for donors to ensure that they will be able to enforce a donation of land or a building to a church for specified purposes. However, note that if a reversionary clause is inserted in a deed as part of a donation of property to a church, the donor may be denied a charitable contribution deduction unless the IRS determines that the possibility of a reversion of title from the church back to the former owner is so remote at to be negligible. As the drafters of UMIFA stated:
Pursuant to section 170 of the [federal tax code] an income tax deduction for a charitable contribution is disallowed unless the taxpayer has permanently surrendered dominion and control over the property or funds in question. Where there is a possibility not so remote as to be negligible that the charitable gift subject to a condition might fail, the tax deduction is disallowed. The drafters of UMIFA worked closely with an impressive group of professionals, including tax advisers, who were concerned with the federal tax implications of the proposed Act. The drafters’ principal concern in this regard was that the matter of donor restrictions not affect the donor’s charitable contribution deduction for the purposes of federal income taxation.In other words, the concern was that the donor not be so tethered to the charitable gift through the control of restrictions in the gift that the donor would not be entitled to claim a federal charitable contribution exemption for the gift. IRC § 170(a), Treas. Reg. § 1.170A-1 (c).
The income tax regulations specify that a charitable contribution deduction “shall not be disallowed … merely because the interest which passes to, or is vested in, the charity may be defeated by the performance of some act or the happening of some event, if on the date of the gift it appears that the possibility that such act or event will occur is so remote as to be negligible.”
The language “so remote as to be negligible” has been defined as “a chance which persons generally would disregard as so highly improbable that it might be ignored with reasonable safety in undertaking a serious business transaction. It is likewise a chance which every dictate of reason would justify an intelligent person in disregarding as so highly improbable and remote as to be lacking in reason and substance.”
The IRS applies the following factors in deciding if a charitable contribution deduction should be allowed or denied: (1) whether the donor and donee intend at the time of the donation to cause the event’s occurrence; (2) the incidence of the event’s occurring in the past; (3) the extent to which the occurrence of the event would defeat the donation; and (4) whether the taxpayer has control over the event’s occurrence. IRS Letter Ruling 200610017 (2005).
6. Some courts allow donors to enforce their designated gifts to charity
In recent years, a few courts have rejected the traditional rule that donors cannot enforce their completed gifts, and have allowed donors (or their heirs) to sue a charity in order to enforce the terms of a completed gift. The leading cases are summarized below.
• L.B. Research and Education Foundation v. UCLA Foundation, 29 Cal.Rptr.3d 710 (Cal. App. 2005). A donor contributed $1 million to establish an endowed chair at a university medical school which the school accepted along with the conditions imposed by the donor. Several years later, the donor sued the school for specific performance of the agreement and breach of contract, alleging that the school had failed to honor the conditions specified in the original gift. The court concluded that the gift was a “conditional gift” rather than a charitable trust. It defined a conditional gift as a gift in which “it is expressly provided in the instrument that the donee shall forfeit it or that the donor or his heirs may [sue] for breach of the condition.” The court noted that standing is presumed in cases of a conditional gift. It acknowledged that donors have no legal authority to enforce a charitable trust unless they have standing, but it concluded that even if the gift in this case were construed to be a charitable trust rather than a conditional gift, the donor would have standing. The court noted, “The attorney general’s power to enforce charitable trusts does not … deprive the donor of standing to enforce the terms of the trust it created …. The prevailing view of other jurisdictions is that the attorney general does not have exclusive power to enforce a charitable trust and that a trustee or other person having a sufficient special interest may also bring an action for this purpose. In addition to the general public interest, however, there is the interest of donors who have directed that their contributions be used for certain charitable purposes.”
• Glenn v. University of Southern California, 2002 WL 31022068 (Cal. App. 2003). A school asked a wealthy individual to donate $1.5 million to endow a professorial chair to support young, untenured researchers in the field of gerontology. The donor agreed to do so, and agreed to give $1.5 million within 10 years. The school added that if the donor promised to increase his pledge to keep pace with inflation until he fully funded the endowment, it would immediately establish the professorship and select and fund the chair’s holder without waiting for the donation. The donor agreed to these terms, and over the next ten years transferred $1.6 million to the school. The donor later learned that the school had not used the donated funds for the specified purpose, and he sued the school for promissory fraud and breach of contract.
The court concluded that a breach of contract claim requires proof of (1) a contract, (2) the donor’s performance of his contractual obligations, (3) the school’s breach of its commitments, and (4) damages. The donor alleged that he had a partly-oral, partly-written contract with the school to endow a professorial chair which the school promised to fund while it waited for him to honor his pledge. He claimed that he performed his commitment under the contract when he transferred $1.6 million to the school, and that the school breached the contract by not funding the professorship as promised. Finally, he alleged that the school’s breach damaged him because he could have put his money to other uses. The court agreed that the donor had established a claim for breach of contract.
The court also agreed that the donor had established a claim for promissory fraud, which it defined as (1) a knowing misrepresentation, (2) made with the intent to induce another’s reliance, (3) the other’s justifiable reliance, and (4) damages. The donor claimed that the school promised to fund the professorship immediately without intending to do so. He alleged that the school made the promise to encourage him to endow the position, and in giving $1.6 million he justifiably relied on that promise.
Surprisingly, the court did not address the question of whether the donor had standing to enforce the terms of his gift.
• Maffei v. Roman Catholic Archbishop, 867 N.E.2d 300 (Mass. 2007). A church launched a capital fundraising campaign. A retiree in her 80s (Eileen) contributed $35,000 to the campaign. She later testified, “If I had known that the archdiocese … was giving any consideration to closing the church, I would not have made the gift of $35,000.” A few years later, the archbishop ordered the closure of the church as part of a reorganization. During one of the last worship services before the church closed, Eileen asked the pastor, “Why didn’t you tell us the church was closing?” He replied, “I didn’t know it.” Eileen sued the archbishop, claiming negligent misrepresentation and breach of a fiduciary duty. The Massachusetts Supreme Judicial Court ruled that Eileen had standing to pursue her claim:
It is clear that Eileen has alleged an individual stake in this dispute that makes her, and not the state attorney general, the party to bring suit …. A gift to a church generally creates a public charity. It is the exclusive function of the attorney general to correct abuses in the administration of a public charity by the institution of proper proceedings. It is his duty to see that the public interests are protected … or to decline so to proceed as those interests may require. However, a plaintiff who asserts an individual interest in the charitable organization distinct from that of the general public has standing to pursue her individual claims. In this case, Eileen’s claims are readily distinguishable from those of the general class of parishioner-beneficiaries …. She claims that she lost substantial personal funds as the result of the archbishop’s negligent misrepresentation to her. This claim is personal, specific, and exists apart from any broader community interest in keeping the church open. She has alleged a personal right that would, in the ordinary course, entitle her to standing.
• Smithers v. St. Luke’s-Roosevelt Hospital Center, 723 N.Y.S.2d 426 (2001). A recovered alcoholic devoted the last 40 years of his life to the treatment of alcoholism. In 1971 he announced his intention to make a gift to a hospital of $10 million for the establishment of an alcoholism treatment center. With $1 million from the first installment of the gift the hospital purchased a building for the rehabilitation program. According to the donor’s widow, the hospital sought to avoid its obligations under the terms of the gift, and its relationship with the donor was an uneasy one. A year after the donor’s death in 1994 the hospital informed his widow that it planned to move the treatment center into a hospital ward and sell the building.
The hospital’s plans aroused the suspicions of the donor’s widow, and she demanded an accounting of the treatment center’s finances. The hospital at first resisted disclosing its financial records, but the widow persisted, and in 1995 the hospital disclosed that it had been misappropriating monies from the endowment fund (funded by the donor’s original gift) and transferring them to its general fund where they were used for purposes unrelated to the treatment center. The widow notified the state attorney general who investigated the hospital’s finances and confirmed that it had transferred restricted assets from the endowment fund to its general fund in what it called “loans.” The attorney general demanded the return of these assets and the hospital returned nearly $5 million to the endowment fund, although it did not restore the income lost on those funds during the intervening years.
The widow was still convinced that the hospital was not fully honoring her husband’s gift, and so she filed a lawsuit in which she asked a court to compel the hospital to honor the terms of the gift. The state attorney general asked the court to dismiss the widow’s lawsuit on the ground that donors lack “standing” (judicial authority) to enforce the terms of their gifts. The attorney general insisted that standing to enforce the terms of a charitable gift is limited to the attorney general. The court concluded that a donor (or, in this case, a donor’s widow acting on his behalf) has the legal authority to enforce the terms of a charitable contribution.
the Episcopal seminary case
The court referred to an earlier decision of the New York Court of Appeals (the highest state court in New York) in a case addressing the question of whether alumni of a seminary, who had donated funds for the endowment of a professorship with specified conditions, could sue to enforce those conditions when they were violated. Associate Alumni of the General Theological Seminary of the Protestant Episcopal Church v. The General Theological Seminary of the Protestant Episcopal Church, 163 N.Y. 417 (1900). The court concluded that the donors (alumni) could enforce the conditions of their contributions, but could not obtain a return of their contributions. The court described the general rule as follows, “If the trustees of a charity abuse the trust, misemploy the charity fund, or commit a breach of the trust, the property does not revert to the heir or legal representative of the donor unless there is an express condition of the gift that it shall revert to the donor or his heirs, in case the trust is abused, but the redress is by … the attorney-general or other person having the right to sue.“
The court in the Episcopal seminary case concluded that while the donors were not entitled to a return of their contributions, they “had sufficient standing to maintain an action to enforce the trust.”
The court concluded that the Episcopal seminary case “forecloses the conclusion that the attorney general’s standing in these actions is exclusive.” In other words, the attorney general is not the only person who is legally authorized to enforce the terms of a charitable gift. In some cases, donors can as well. Further, the court concluded that donors may have the right to enforce the terms of charitable gifts even though they do not specifically reserve the right to do so.
The court then defended its conclusion that donors can enforce the terms of their gifts to charity:
The donor of a charitable gift is in a better position than the attorney general to be vigilant and, if he or she is so inclined, to enforce his or her own intent… . To hold that, in her capacity as her late husband’s representative [the donor’s widow] has no standing to institute an action to enforce the terms of the gift is to contravene the well-settled principle that a donor’s expressed intent is entitled to protection and the longstanding recognition under New York law of standing for a donor. We have seen no New York case in which a donor attempting to enforce the terms of his charitable gift was denied standing to do so ….
Moreover, the circumstances of this case demonstrate the need for co-existent standing for the attorney general and the donor. The attorney general’s office was notified of the hospital’s misappropriation of funds by [the donor’s widow]. Indeed, there is no substitute for a donor, who has a “special, personal interest in the enforcement of the gift restriction” … . We conclude that the distinct but related interests of the donor and the attorney general are best served by continuing to accord standing to donors to enforce the terms of their own gifts concurrent with the attorney general’s standing to enforce such gifts on behalf of the beneficiaries thereof.
Church leaders should be familiar with this case, and understand its implications. It is common for churches to receive contributions from donors that are designated for a specific purpose. For example, donors contribute money to the church’s building fund, or a scholarship fund or missions fund. Can these donors legally enforce their designations if the church decides to divert these contributions to other purposes? This court concluded that they can, even if they retained no right to do so in a written agreement. The attorney general also is authorized to enforce the conditions of a designated gift, but the attorney general’s authority is not exclusive. It is “concurrent” with the authority of the donors themselves. As noted above, many courts have rejected this reasoning, and have ruled that the authority of the attorney general to enforce charitable gifts is exclusive.
7. Constitutional considerations
A few courts have concluded that the First Amendment’s guarantees of the nonestablishment and free exercise of religion bar the civil courts from resolving donors’ disputes with churches regarding the handling of designation contributions if doing so would implicate religious doctrine.
• McDonald v. Macedonia Missionary Baptist Church, 2003 WL 1689618 (Mich. App. 2003). A Michigan appeals court 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.”
• Hawthorne v. Couch, 911 So.2d 907 (La. App. 2005). A Louisiana court concluded: “Not all church disputes necessarily involve purely ecclesiastical matters… . However, where the dispute is rooted in an ecclesial tenet of the church, the court will not have jurisdiction of the matter. In this case, the testimony focused almost exclusively on the pastor’s teachings regarding tithing. Without question, any legal analysis that would require the 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.”
• Maffei v. Roman Catholic Archbishop, 867 N.E.2d 300 (Mass. 2007). An Italian immigrant (James) established a successful gravel business and owned several tracts of land. Upon the death of James and his wife, most of their property passed to their six children. The pastor of a Catholic church was interested in acquiring an 8-acre tract from the family as the site of a new sanctuary. Two of the six siblings agreed to donate their interest in the land to the church, but the other four siblings were reluctant to transfer their interests until the pastor assured them that the new church would be named “St. James” in honor of their father, and that the church would remain a tribute to James “forever.” During the negotiations for the property the pastor did not inform any members of the family that canon law permitted the closure of the church in the future. A church was constructed on the land in 1958. By the 1990s, however, question arose concerning the continuing viability of the church. A local newspaper story listed the church among those that the archdiocese planned to close. The current pastor of the church assured the congregation that the story was false. The church launched a capital fundraising campaign. A retiree in her 80s (Eileen) contributed $35,000 to the campaign. She later testified, “If I had known that the archdiocese … was giving any consideration to closing St. James, I would not have made the gift of $35,000.” In 2004, the archdiocese ordered the closure of St. James. During one of the last worship services before the church closed, Eileen asked the pastor, “Why didn’t you tell us the church was closing?” He replied, “I didn’t know it.”
Eileen, as well as the sole surviving sibling to have transferred the land to the church, sued the archbishop. The lawsuit claimed that the oral assurance by church officials that the church would be named “St. James” forever was a binding and enforceable commitment that was breached by the church’s closure. The lawsuit also alleged negligent misrepresentation, breach of a fiduciary duty, and asked the court to order a reversion of the property to the surviving sibling.
The Supreme Judicial Court noted that the First Amendment guaranty of religious freedom “places beyond our jurisdiction disputes involving church doctrine, canon law, polity, discipline, and ministerial relationships,” and that “among the religious controversies off limits to our courts are promises by members of the clergy to keep a church open.” The court concluded that it had jurisdiction over church property disputes “if and to the extent, and only to the extent, that they are capable of resolution under neutral principles of law” involving no inquiry into church doctrine or polity.
The court concluded that the sole surviving sibling who conveyed property to the church had standing, since she gave up her rights in the property in reliance on the pastor’s assurance that the property would always be used as a church in memory of James. In other words, her rights were different from members of the congregation generally. Similarly, the court concluded that Eileen had standing to sue:
It is clear that Eileen has alleged an individual stake in this dispute that makes her, and not the state attorney general, the party to bring suit …. A gift to a church generally creates a public charity. It is the exclusive function of the attorney general to correct abuses in the administration of a public charity by the institution of proper proceedings. It is his duty to see that the public interests are protected … or to decline so to proceed as those interests may require. However, a plaintiff who asserts an individual interest in the charitable organization distinct from that of the general public has standing to pursue her individual claims. In this case, Eileen’s claims are readily distinguishable from those of the general class of parishioner-beneficiaries… . She claims that she lost substantial personal funds as the result of the archbishop’s negligent misrepresentation to her. This claim is personal, specific, and exists apart from any broader community interest in keeping the church open. She has alleged a personal right that would, in the ordinary course, entitle her to standing.
However, the court ruled that the First Amendment prevented it from resolving the sibling’s claims. For example, the sibling claimed that the pastor breached a fiduciary duty to her by not informing her at the time she conveyed her interests in the property to the archbishop that the church could be closed according to canon law. In rejecting this argument, the court observed:
A ruling that a Roman Catholic priest, or a member of the clergy of any (or indeed every) religion, owes a fiduciary-confidential relationship to a parishioner that inheres in their shared faith and nothing more is impossible as a matter of law. Such a conclusion would require a civil court to affirm questions of purely spiritual and doctrinal obligation. The ecclesiastical authority of the archbishop and [the pastor] over the parishioners, the ecclesiastical authority of the archbishop over the pastor, the state of canon law at the date of the property transfer … the canonical obligation of the pastor, if any, to inform parishioners of canonical law—all of these inquiries bearing on resolution of the fiduciary claims would take us far afield of neutral principles of law. We decline to hold that, as a matter of civil law, the relationship of a member of the clergy to his or her congregants, without more, creates a fiduciary or confidential relationship grounded in their shared religious affiliation for which redress is available in our courts.
The court also rejected Eileen’s claim that the archbishop acted negligently in failing to inform the local pastor of the plans to close the church when he knew he would be soliciting funds to sustain the church “now and for the future.” The court noted that Eileen’s gift was made in 2002, nearly two years before the archbishop decided to close the church. As a result, the pastor’s efforts to raise funds for the maintenance of the church, both now and in the future, was not negligent or a misrepresentation.
To help clarify the true intention of the donor of a designated contribution (at the time of the contribution) the IRS has suggested that the following language be used in a receipt for the contribution: “This contribution is made with the understanding that the donee organization has complete control and administration over the use of the donated funds.” IRS Exempt Organizations Continuing Professional Education Technical Instruction Program for 1999.
This language clearly indicates that donors are transferring all rights in the donated funds or property, and as a result it will make it less likely that they will attempt to enforce their gift designations. It also will weaken any legal basis for doing so.
9. Tax deduction
There are two tax issues associated with designated contributions. First, can a donor deduct a contribution to a church or other charity that designates a specific project or individual? This question is addressed fully in Chapter 8, Section B, of Richard Hammar’s 2008 Church & Clergy Tax Guide. Second, is the deductibility of charitable contributions jeopardized if donors are legally capable of suing to enforce the terms of their completed gifts? This question is addressed above in the summary of the Herzog Foundation case which quotes the drafters of the Uniform Management of Institutionalized Funds Act.
10. Practical considerations
Donors may not have the legal right to enforce a designated gift, but this does not mean that church leaders should ignore requests by donors to honor their designations. After all, there are both practical and ethical considerations to be taken into account. As two dissenting judges noted in the Herzog case (summarized above): “This decision is simply an approval of a [charity] double crossing the donor, and doing it with impunity unless an elected attorney general does something about it.” Do church leaders want to be perceived as “double crossing” members who make designated gifts?
Further, the dissenting judges noted that the court’s decision “will not encourage donations to [charities].” What did they mean? Simply this—many donors are prompted to make a charitable contribution because of a desire to further a specific purpose or project. If donors realize that they have no legal right to enforce a designated gift then many of them may decide not to give.
The fact is that most donors who make designated gifts to their church do so assuming that the church is ethically, if not legally, bound to honor their designations. Church leaders that violate this perception will be viewed by many donors as guilty of unethical conduct that may lead to internal dissension.
Church leaders should consider these potential consequences before making a decision to ignore a donor’s designation, and consult with legal counsel before doing so to determine whether or not the designation is legally enforceable under state law, and if so, by whom.
11. Returning donated funds to donors
Donors whose designated gifts to their church are not honored may seek to enforce their designations in two ways. First, they may ask a civil court to order the church to honor the designation; or second, they may ask a court to order a return of their contribution. Either option involves a judicial recognition of the legally enforceable nature of the donor’s designation.
Key point. This section is only addressing a return of designated gifts to identifiable donors. The related question of refunding undesignated contributions to donors, or designated contributions if the donors cannot be identified, are not addressed.
designated contributions—project not abandoned
So long as the church honors the designations, or plans to do so in the foreseeable future, it has no legal obligation to return a donor’s designated contribution. Quite to the contrary, returning a donor’s designated contribution under these circumstances would create several potential problems, including the following:
Inconsistency. A return of a donor’s contributions would be completely inconsistent with the church’s previous characterization of the transactions as charitable contributions. As already noted, a charitable contribution is taxdeductible since it is an irrevocable gift to a charity. If a church complies with enough donors’ requests to refund their contributions, then this raises a serious question as to the deductibility of any contribution made to the church. Contributions under these circumstances might be viewed as nointerest “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.
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 most states, donors also would have to file amended state income tax returns.
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).
Inurement. 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 undesignated 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. Inurement is discussed more fully in Chapter 4, Section A.
“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.
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 cases are summarized below.
• 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 on constructing 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 on building 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.
• 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, in addition to 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, 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 upon 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.
designated 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? There are a number of possibilities, including the following:
Donors can be identified. If donors can be identified, they should be asked if they want their contributions returned or retained by the church and used for some other purpose. Ideally, donors should communicate their decision in writing to avoid any misunderstandings. Churches must provide donors with this option in order to avoid violating their legal duty to use “trust funds” only for the purposes specified.
A church should send a letter to donors who request a refund of a prior designated 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 during any of the three previous years as a result of their designated contribution, and (3)Â they should discuss the options with their tax advisor.
Some churches have issued donors a 1099-MISC form 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 there are two problems with this approach:
(1) It assumes that the donor claimed a charitable contribution deduction for the designated 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 designated 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 designated 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 2001. In 2007 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 2001, he feels morally compelled to report the $1,000 as “income” on his 2007 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 28% tax bracket in 2001, then the “value” of the contribution to him was $280. His $1,000 donation reduced taxable income by $1,000, thereby saving him $280 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 are “phased out” for high income taxpayers). 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 designated 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, designated 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 designated 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, then use the procedure described above.
Another option is to ask a court for authorization to transfer the building fund to another church fund. Over 40 states have adopted the Uniform Management of Institutional Funds Act (UMIFA), and this Act permits churches to ask a civil court for authorization to remove a restriction on charitable contributions to “endowment” funds in some situations. UMIFA is addressed below.
Other options are available. Churches should consult with an attorney when deciding how to dispose of designated 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 designated gift to charity. The reason for this rule is simple—a charitable contribution is a gift, and a gift is a transfer of all of a donor’s “control” over the donated property. Allowing a donor to enforce a designated gift is not legally possible because the donor has no remaining interest in the gift. This is true even if the gift was “designated.” The fact remains that a designated gift is held by a church or charity “in trust” for the specified purpose. The trust may be expressed in a written trust instrument, but usually no instrument exists and the trust is implied. 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 designated 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).
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.
Key point. This section has focused on building funds. The same analysis is relevant to contributions that designate any other specific purpose or activity. Other examples include contributions designating a new organ, a missions activity, or a new vehicle.
Tip. 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.” 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.
12. The Uniform Management of Institutional Funds Act (UMIFA)
This Act, which has been adopted in most states, is designed to provide the boards and trustees of charitable organizations (including churches) with guidance in handling institutional funds. The Act defines an institutional fund as a fund that is “not wholly expendable by the institution on a current basis under the terms of the applicable gift instrument.” An official interpretation of the Act, adopted by its drafters, further clarifies that
an endowment fund is an institutional fund … which is held in perpetuity or for a term and which is not wholly expendable by the institution. Implicit in the definition is the continued maintenance of all or a specified portion of the original gift …. If a governing board has the power to spend all of a fund but, in its discretion, decides to invest the fund and spend only the yield or appreciation therefrom, the fund does not become an endowment fund under this definition ….
According to these provisions, the Act would not apply to church building funds (or other designated funds) that exist for a specific project requiring the expenditure of the entire fund. However, some churches have established perpetual endowment funds that will meet the Act’s definition of an institutional fund.
An introductory note to the Act states:
It is established law that the donor may place restrictions on his largesse which the donee institution must honor. Too often, the restrictions on use or investment become outmoded or wasteful or unworkable. There is a need for review of obsolete restrictions and a way of modifying or adjusting them. The Act authorizes the governing board to obtain the acquiescence of the donor to a release of restrictions and, in the absence of the donor, to petition the appropriate court for relief in appropriate cases.
The Act contains the following relevant provisions:
§ 7. (a) With the written consent of the donor, the governing board may release, in whole or in part, a restriction imposed by the applicable gift instrument on the use or investment of an institutional fund.
(b) If written consent of the donor cannot be obtained by reason of his death, disability, unavailability, or impossibility of identification, the governing board may apply in the name of the institution to the [appropriate] court for release of a restriction imposed by the applicable gift instrument on the use or investment of an institutional fund. The [attorney general] shall be notified of the application and shall be given an opportunity to be heard. If the court finds that the restriction is obsolete, inappropriate, or impracticable, it may by order release the restriction in whole or in part. A release under this subsection may not change an endowment fund to a fund that is not an endowment fund.
(c) A release under this section may not allow a fund to be used for purposes other than the educational, religious, charitable, or other eleemosynary purposes of the institution affected.
(d) This section does not limit the application of the doctrine of cy pres.
An official comment to this section of the Act contains the following additional guidance:
One of the difficult problems of fund management involves gifts restricted to uses which cannot be feasibly administered or to investments which are no longer available or productive. There should be an expeditious way to make necessary adjustments when the restrictions no longer serve the original purpose …. This section permits a release of limitations that imperil efficient administration of a fund or prevent sound investment management if the governing board can secure the approval of the donor or the appropriate court.
Although the donor has no property interest in a fund after the gift, nonetheless if it is the donor’s limitation that controls the governing board and he or she agrees that the restriction need not apply, the board should be free of the burden …. If the donor is unable to consent or cannot be identified, the appropriate court may upon application of a governing board release a limitation which is shown to be obsolete, inappropriate or impracticable.
This section of the Act, which remains largely unknown to church leaders and their advisers, provides important guidance in the event that the purpose of a perpetual endowment fund is frustrated and the church would like to expend the gift for another purpose.
Example. The Connecticut Supreme Court ruled that the Uniform Management of Institutional Funds Act (UMIFA) does not give donors the authority to enforce designated gifts to charity. The court acknowledged that UMIFA permits a charity to avoid an obsolete designation in a gift without resort to the courts by obtaining the donor’s consent: “With the written consent of the donor, the governing board may release, in whole or in part, a restriction imposed by the applicable gift instrument on the use or investment of an institutional fund.” However, the court pointed out that the drafters of UMIFA made the following official comments: “It is established law that the donor may place restrictions on his largesse which the donee institution must honor. Too often, the restrictions on use or investment become outmoded or wasteful or unworkable. There is a need for review of obsolete restrictions and a way of modifying or adjusting them. The Act authorizes the governing board to obtain the acquiescence of the donor to a release of restrictions and, in the absence of the donor, to petition the appropriate court for relief in appropriate cases …. The donor has no right to enforce the restriction, no interest in the fund and no power to change the [charitable] beneficiary. Carl J. Herzog Foundation, Inc. v. University of Bridgeport, 699 A.2d 995 (Conn. 1997).
Note that Section 7(c) of UMIFA (quoted above) specifies that the Act does not limit the application of the cy pres doctrine. This is a potentially significant provision. The “cy pres” doctrine (which has been adopted by most states) generally specifies that if property is given in trust to be applied to a particular charitable purpose, and it is or becomes impossible or impracticable or illegal to carry out the particular 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.
Example. 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, and insisted 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).
Example. Another court ruled that church funds earmarked by a donor for a specific purpose could be used by the church for other, related purposes. In 1911, a Quaker church established a fund for the care and maintenance of its graveyard, and began soliciting contributions for the fund. By 1988, the fund had increased to nearly $200,000, and had annual income far in excess of expenses. In 1985, the church discussed the possibility of using the excess income for purposes other than graveyard maintenance, and ultimately expressed a desire to use excess income from the fund for general church purposes (including upkeep and maintenance of church properties). A church trustee who administered the fund took an unbending position that the fund could not be used for any purpose other than graveyard maintenance. The church and trustee thereupon sought an opinion (“declaratory judgment”) from a local court as to the use of the fund for other purposes. The trial court ruled that the excess income could be used for general church purposes other than graveyard maintenance, and the trustee appealed the case to a state appeals court on the ground that the trial court’s decision “conflicts with the express intent of the donors.” The appeals court agreed with the trial court on the basis of the “cy pres” doctrine. The court observed that the cy pres doctrine was created “for the preservation of a charitable trust when accomplishment of the particular purpose of the trust becomes impossible, impractical, or illegal.” The court concluded that “if income from a charitable trust exceeds that which is necessary to achieve the donor’s charitable objective, cy pres may be applied to the surplus income since there is an impossibility of using the income to advance any of the charitable purposes of the [donor].” Therefore, to the extent that the graveyard fund in question “exceeds maintenance and preservation costs, application of cy pres is appropriate since there is an impossibility of using the excess income to advance the particular purpose expressed by the donors.” The only remaining question was whether or not the donors manifested an intention to devote excess income to a charitable purpose more general than graveyard maintenance. The court concluded that the donors to the graveyard fund in fact manifested such an intent: “Since the donations were made for the perpetual maintenance of a graveyard, it is logical to assume that the donors expected excess income would be used … “to strengthen the very institution to which [they] entrusted their money” to permit it to survive in perpetuity in order to carry out the donors’ intent. A contrary result, that the income be held in the trust and accumulate in perpetuity for maintenance of the graveyard, is both illogical and contrary to the probable intent of the donors. The only sensible conclusion to be reached is that the donors did not intend that the trusts would grow while the [church] itself may cease to exist because of lack of funds. We are also convinced that use of the funds for general meeting purposes is sufficiently similar to the particular purpose of the [donors] to apply the cy pres doctrine.” The court emphasized that only trust income in excess of graveyard expenses could be applied for general church purposes, and that the church’s bylaws required an annual audit of the fund by certified public accountants. Sharpless v. Medford Monthly Meeting of the Religious Society of Friends, 548 A.2d 1157 (N.J. Super. 1988).
In deciding whether or not to disregard donors’ designations, church leaders should consider several factors, including the following:
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