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working definitions in the Financial Accounting Standards Board (“FASB”) materials such as its Standard No. 116 (now superseded) on accounting for contributions.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 Prudent Management of Institutional Funds Act, adopted in some form in all states except Pennsylvania as the successor to the Uniform Management of Institutional Funds Act, 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 will be considered temporarily restricted if the donor requires 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 (and other state consumer protection 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.
Can the charity buy the item and then get restricted funds for the item even though they have already purchased the item.
I am trying to find out if a Restricted Account can be used for Ministry expense if Ministry expense was short from Budget Cuts.
Restricted funds must be used for the purpose for which they were restricted by a donor unless you get approval to change the purpose from the donor or from the state attorney general or a court. You run a real risk of personal liability if you misues funds given for a specific purpose. If the funds were "restricted" by the board, and not by a donor, the board can "unrestrict" them, but the same is not true with restrictions set by a third-party donor. —Don Kramer
A foundation that has supported us for many years granted our organization funds with language in the transmitting letter that stated that we would be advised how they wanted the funds to be used. It has now been over a year since we received the funds, and we still have not received any direction from the foundation. We also have had no communication from the foundation for over six months. The funds are being held as 'restricted' and have not been touched. I have called and left messages on the foundation answering machine and on a director's voicemail, twice on each, just 'checking in,' not asking for anything. At the end of the year, I filed a report by e-mail to all foundation directors, and sent a hard copy in the mail. In the report, I proposed two suggested uses for the funds. 1. Is there a time limit on this type of restriction? 2. What must we do if we never hear from the foundation?
This is a great question. See our answer published 1-21-2020 - What do we do when donor says it will, but doesn’t, specify use of funds?
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