FREQUENTLY ASKED FOUNDATION FUNDRAISING QUESTIONS

Introduction

While there has been a great deal of publicity in the past few years about the types of educational activities and programs that fraternal foundations may fund for their related fraternal organizations and the necessity of grant agreements in connection with same, some of the most frequently asked questions by fraternal foundation clients are in the realm of questions about day-to-day fundraising and donor cultivation matters. I find that these matters and the IRS position with respect to same are often misunderstood and that frequently, foundations may take too conservative a position on these matters or refrain from engaging in beneficial activities because they are fearful of running afoul of IRS rules.

This column will examine some of the most frequently asked questions of this type and discuss my views as to how the IRS approaches these various issues. A general guideline to be followed is that all expenses,  especially those relating to fundraising and donor cultivation, must be reasonable in amount taking into account the size of the foundation, its annual fundraising receipts and the “stage in life” of the foundation. For example, a foundation that is just beginning to build a donor base or one that is engaged in a capital campaign may have to expend a higher percentage for these types of expenses than a foundation which is not in these situations.

Questions and Answers

1. Can an officer, trustee or authorized volunteer of a foundation take a prospective donor to dinner or a similar event at the Foundation’s expense?

A foundation can certainly entertain donors and prospective donors at dinner as a fundraising expense, provided the particular dinner is not lavish in nature and the overall fundraising expenses of the foundation are reasonable in relation to amounts raised  by  the  foundation and the foundation’s overall budget.

2. Can a foundation sponsor and pay for dinners, fundraising receptions, informal gatherings and the like which it conducts for donors and prospective donors to inform them of the foundation’s mission?

Again, these types of activities are perfectly appropriate for a foundation to fund subject to the caveats indicated above.

3. Can a foundation give relatively small gifts to donors as donor recognition or appreciation items?

These types of gifts may be made as long as they are reasonable in amount, but they are subject to special rules regarding donee disclosure and reporting requirements of the foundation. Thus, the foundation is required to notify donors    who   make   contributions in excess of $75.00 if they receive articles in connection therewith, unless such articles fall within the low cost articles rules described in Revenue Procedure 90-12, that their contributions  must be reduced. Generally, this means that the fair market value of all of the benefits received in connection with the contribution may not  be more than  two percent  of  the  contribution or $50.00, whichever is less, or the  contribution is more than $25.00 and the only  benefits  received by the donor are token items bearing the organization’s name or logo. (The limit on the cost of the  latter  items  for the year  2000  was $7.40 or  less.)   If  these  safe  harbors  are not met, then the foundation must make a good faith estimate of the value of the items given and the donor must be  informed  that  the amount of his contribution is reduced by such value. Most foundations prefer to avoid having to so inform donors.

4. What is the best way to handle expenses incurred by a foundation board member or volunteer in carrying out his duties for the foundation such as attending foundation board meetings? Many foundations like to publicize to donors that the board members “pay their own way,” but  the board members would like to be assured of a tax deduction for doing this. What is the best way to accomplish this?

The general rule is that a deduction is  allowed for transportation or other travel expenses including meals and lodging incurred in the performance of services away from home on  behalf of a charitable organization if there is no “significant element” of personal pleasure. recreation or vacation. Thus, in most cases the best approach to this issue, in my view, is the straightforward one – the individual should pay these expenses directly or reimburse them to the organization. Note that deductions are disallowed where two unrelated taxpayers pay each other’s travel expenses or members of a group contribute to a fund that pays for all travel expenses. Individuals who qualify for a deduction for the use of an automobile may use the statutory standard mileage rate of 14 cents per mile in lieu of a deduction based on the actual expenses incurred (see Revenue Procedure 99-38), and may also take additional deductions for parking fees, tolls, etc.; depreciation and insurance are not deductible as part of the contribution.

5. May a foundation accept donor-restricted contributions to fund a particular leadership conference or for fundraising activities of the foundation?

A foundation  may  accept  restricted  contributions from donors for any legitimate foundation purpose, including educational and leadership programs, or to defray fundraising expenses of the foundation, provided there is no element of donor personal benefit involved. If  a  contribution is accepted to fund an educational or leadership program, then the foundation needs to make sure that it can, in fact, fund the particular activity. For example, if a contribution is accepted to fund a leadership conference in its entirety, then  the  foundation  must  ensure  that the activity is 100% qualifying by IRS guidelines. By the same token, if the foundation accepts a contribution to support fundraising activities, it should ensure that those fundraising activities are reasonable and appropriate. However, foundations may want to consider, in deciding whether to accept these types of  restricted contributions, whether the  administration involved outweighs the beneficial nature  of the contribution. For this reason, most mature foundations set a floor on the dollar amount for accepting this type of contribution.

6. Is it a good idea for a foundation to have a written agreement with related fraternal organization as to how fundraising activities are to be performed?

Generally, in order to avoid misunderstandings, I believe that it is a good idea  for a foundation to have a joint fundraising agreement with its related fraternal organization. Such agreements may cover such topics as the type of fundraising to be conducted, the population to be solicited, how expenses are to be handled and the like. Such agreements should be extremely carefully drafted to ensure that the foundation retains ultimate control  of  its  own  programs and activities, and they should never contain a legal commitment to grant a specific amount of funds to a related fraternal organization without review of particular programs and adequate grant documentation.

7. Are joint fundraising campaigns by foundations and their related fraternal organizations a good idea?

In general, such campaigns have been made logistically very difficult by the legal requirements for fundraising solicitations, including the requirement that non-deductible contributions to a fraternal organization be specifically stated to be such and the desirability of complying with the safe harbor rules for such a  warning. If a joint fundraising campaign between the foundation and its related fraternal organization is being considered, specific and knowledgeable legal advice, as well as fundraising advice must be sought at an early stage.

8. Can a foundation sponsor a breakfast, dinner or similar event at the fraternity’s convention to award scholarships, describe foundation  activities, have a philanthropic speaker, etc.?

The answer to this question is certainly yes and, in fact, this kind of activity can be a necessity for a fraternal foundation. The foundation may pay all reasonable expenses of such  an  activity – some of them may be considered as educational in nature and some as fundraising expenses.

9. Can a foundation make an award to a  member or non-member of the fraternity at the fraternity’s convention or other meeting and provide an honorarium to the awardee, as wen as pay for a plaque or other symbol of the award? Can a foundation pay the travel and  lodging  expenses of the awardee to attend the convention or meeting?

Again, all of these activities are perfectly appropriate, as long as the award is directly related to the foundation’s purposes and the amounts involved are reasonable in relation to the achievement that is being honored. However, it is recommended that the honorarium be made in the form of a contribution to the awardee’s designated public charity.

Conclusion

It can readily be seen through the above questions and answers that a foundation may engage in a wide variety of fundraising activities and pay reasonable expenses in connection therewith. The overriding guideline is whether the activity furthers the foundation’s exempt purposes, either directly or by providing additional donor funds to carry out such purposes. Further, the amounts involved should always be reasonable, in light of the size and scope of the foundation’s  program.   As long as a foundation keeps these basic points in the forefront, it is unlikely that the foundation will run afoul of IRS guidelines in the fundraising arena, but as always, specific and unusual questions or substantial expenditures should be referred for competent professional advice.