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.
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I am the church compliance specialist for the California Southern Baptist Convention. I routinely receive similar questions from our churches, and I try to guide the church away from accepting non-deductible contributions such as that described here. The church should not act as a pass-through conduit for what would likely be a non-deductible gift between two persons. That is especially so when the beneficiary is an employee of the church, in which case the contribution through the church would have to be reported as taxable income to the employee.
The guidance here to ask the donor what he would want done may be unsatisfactory. The church could become an unwitting accomplice in a money-laundering scheme. When I was confronted with a similar donation as treasurer of my local church several years ago, even though the money had been deposited to the church's general fund checking account, and notwithstanding the good intentions of the donor, I issued a refund check and sent it with a letter to the donor explaining that the church could not accept the donation under its specified terms, and that the donor's check was inadvertently deposited before the donation could be reviewed. The donor accepted the refund and the matter was closed. The deposit was included in the financial report for the month, as was the refund check, and a note was placed at the bottom of the financial report to describe the nature of the two transactions. A new donations policy had to be written and adopted by the Board of Directors, that prohibited the deposit of large contributions without approval of the church Treasurer or majority of the Board. The situation did not repeat itself in the next (and final) two years of my 10-year stint as Treasurer.
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