We are canceling or postponing several of our mission trips due to COVID-19 (coronavirus). We normally do not refund donations, but some have requested refunds. What are we legally allowed to do?
The decision tree starts with the way the church structured its mission trips. Some churches structure the trips as ministry trips so that the costs are tax-deductible as volunteer expenses. Under this structure, because the donations are tax-deductible, they cannot be refunded because the donation represented an unconditional gift to the church. Other churches structure the trips so that participants are paying for the travel, much like a travel agency. Under this structure, the funds can be refunded because the payment represented payment for services. Since the services were not delivered, a refund is the best remedy.
But tax law is not the only law that governs this situation. The charitable gift doctrine also likely applies if using the donation model. This doctrine states that the church must fulfill the representations to the donors that they were paying for a mission team to take the trip. Since the church cannot fulfill the representations, the charitable gift doctrine requires the church to seek to fulfill those representations as closely as possible. The church may want to consider transferring the funds to another trip. If taking the mission trip becomes impossible, then the only remedy is to refund the payments. The refund may cause the Internal Revenue Service (IRS) to question whether the gifts were deductible in the first place, even for those donors who do not want a refund.
The path forward will be determined on the facts that are specific to each donor and each trip. The details matter.
If the church contacts a specific donor about how the donation can be spent going forward, keep detailed notes about the conversation. If the donation was restricted to a specific mission trip, then the church will need consent from the donor to use the donation for other purposes.
Unfortunately, the law does not favor dealing with donors individually. Once received by the church, all donor funds are commingled. For a practical perspective, the church cannot identify the funds given by any one donor once they are deposited. The law requires the church to treat the fund homogenously. The church cannot refund one donor their funds because their funds cannot be identified if any funds have been spent. In other words, the only safe situation to spend the funds for something else is one in which every single donor consents. Again, if you can’t gain consent from a given donor, then the courts will need to decide whether the donor is entitled to a refund.
If the church decides to issue a refund, it should notify the donor regarding the tax consequences of the refund. If the donor has taken a tax deduction for the contribution in a prior year, the donor must include in income the amount of the donation that generated a reduction in income taxes in the prior year.
Your church needs to review its options with an attorney so that you can make an informed decision.
Finally, your church also must be aware of public perception under these circumstances. Failure to refund may make future fundraising for trips difficult.
For further help on restricted funds and the broader topic of charitable donations, see the following:
2020 Church & Clergy Tax Guide (chapter 8)