Our 501(c)(3) friends of the library group raised money last year for the specific purpose of building an extension on the existing library. It now turns out that we can’t build the extension, but can build a new building at another location. One of our donors wants his $5000 contribution back. What should we do?
Charities that raise funds for a specific purpose must use the funds for the purpose represented to the donor. That’s why many charities give themselves some wiggle room in solicitations by saying something to the effect that funds may also be used for the general purposes of the organization.
If the donor is not willing to allow the change in use, it is appropriate to return the money to him -- and to give him a 1099 Form next year for the amount returned. He probably claimed a charitable contribution deduction last year when he made the gift, and he will have to include the return of the money as income this year and pay the requisite taxes.