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What court cases or IRS rulings, if any, define restricted funds?  Can an officer of a charity restrict funds by saying at a fund raiser that funds raised at the event will be used for a certain purpose, or must the donor state explicitly a restriction on the use of the funds?

You could write a treatise on this one.  First, the IRS generally does not concern itself with whether or not funds are “restricted.”  This is normally a matter of state law.  Each state will have its own case law or statutes to support the concept.  You can find working definitions in the Financial Accounting Standards Board (“FASB”) materials such as its Standard No. 116 on accounting for contributions. These apply for financial accounting purposes, but generally reflect the state of the law.

Generally, funds are ‘restricted” when a donor places restrictions on their use.  Typically, there are two types of restrictions—permanent or temporary. 

Permanently restricted funds are those for which the donor says the recipient must retain the assets permanently but may spend some or all of the income for specified purposes.  The Uniform Management of Institutional Funds Act, adopted in some form in most states, has separate rules for handling this type of funds, which it calls “endowment.”  (See Ready Reference Pages:  “UMIFA Sets Rules for Charitable Endowments” and “New UPMIFA Sets Rules for Management of Charitable Funds.”)

Temporarily restricted funds are those for which the donor says they must be used only for a specific purpose or after a certain period of time.  The income from permanently restricted funds can be temporarily restricted by requiring that it be used for certain purposes.  Your question implies that the funds solicited at the event will be temporarily restricted for a certain purpose.

The key to restriction is that it must be donor-placed.  Boards, acting alone, cannot normally create legally enforceable restrictions.  If, however, a charity solicits funds for a specific purpose, it is generally believed that gifts made for that purpose become restricted for that purpose because the donor, by contributing for the purpose, has adopted the restriction. 

Most charitable solicitation registration laws require a charity to use funds for the purpose for which they are solicited.  That is one reason why solicitations ought to include broad charitable use language as well as specific intent.  If you get more than you can use, or if the project changes, you can still use the funds for general charitable purposes.

It sounds in your case as though you ought to treat the funds as temporarily restricted.  You may run serious risks if you don’t.

April 29, 2009

Article Archives >> To the Point

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