Our 501(c)(3) charity received a donation of $10,000 with the instructions to pay a specific family's medical bills. I'm the treasurer but I was out of town and the President deposited the check. I know that this is NOT a tax deductible donation but I'm not sure what to do now. Can I carry out the request and pay the hospital bills BUT alert the donor that it won't be allowed as a deduction, or am I better off just to issue a refund and not get involved? I feel I'm already involved.
I agree that you are already involved, but you don’t necessarily have to make the decision of what to do with the money. I would suggest that you contact the donor, explain the situation, and see what the donor would like you to do. The donor may want you to go ahead and pay the bills, knowing that the gift is not deductible, perhaps because the donor wants the gift to be anonymous. Assuming that payment would be within your charitable mission, I see no reason why you could not make the payment. Just be sure, if you thank the donor in writing, that you do not give a standard gift acknowledgment letter and specifically state that the gift is not deductible because it was earmarked for a specific family.
If the donor wants the contribution back because a deduction is not available, I think you can refund it on the theory that it was made by mistake. The donor could make the gift directly to the family if desired, perhaps only to the extent of the “out of pocket” cost of a deductible contribution. In either case, it would not be taxable to the recipient family and would not be subject to a gift tax for the donor.
I would try to get the donor to make the decision if I were you and follow the donor’s wishes.