Our 501(c)(3) nonprofit’s board approved an internal policy of allocating a certain percentage of gifts raised to our general operating budget, even where the solicitation was for a specific project. We recently completed a special project appeal and allocated 18% of the net funds raised to general operations and 82% to the project, as set forth in our policy. Our auditors have told us we can’t do it this way. Since all projects have overhead and there wasn’t anything in the appeal that promised 100% to the project, I think we should be able to do it. Do you agree?
I agree with the auditors. You can allocate some of the funds to the actual overhead of the project, but not to your general unrelated operations. You can’t solicit for one purpose and use the money for another purpose if the other purpose hasn’t been disclosed. People call that misrepresentation, and misrepresentation is usually a violation of the charitable solicitation registration and consumer protection laws of the states.
You will remember the trouble that the American Red Cross got itself into when it solicited funds for the victims of the 9/11 World Trade Center attack and then used some of the money for its general disaster relief programs elsewhere. The then-Attorney General of New York and others were outraged by the “bait and switch” advertising. It would have been okay if the additional purpose had been disclosed. But when it wasn’t, people were legitimately furious.
If you refer your donors to your internal policy when you make your appeal and they give with full knowledge of the policy, I suspect the auditors will permit the allocation you request. But I also suspect that you suspect that if you do explain the policy in advance of contributions, you will receive less in contributions. That’s why the failure to disclose is considered a misrepresentation.