Last Christmas Eve, the Rochester suburb of Webster, N.Y. was shaken by news that two of the community’s beloved firefighters had been shot and killed by a man who apparently set fire to a blaze that eventually destroyed seven homes.
In a massive outpouring of care and concern, supporters donated about $900,000 for their families through the West Webster Volunteer Fireman’s Association, a section 501(c)(3) public charity. Now nearly seven months later something almost equally stunning is happening: neither family has received any of that money. Why not?
It would seem that contributions from well-intentioned donors ought to be able to reach their intended recipients. Indeed, most of the time, that is what happens – and legally so. But as announced by WHEC-TV in Rochester, and reported in Philanthropy Today, in this case the money could not be funneled to the families through the Association, simply based on the donors’ intention. The following critical tax principles are at stake.
Of foundational importance, a public charity like the Association may only distribute its charitable resources in furtherance of its tax-exempt purposes. Accordingly, the organization must carefully vet prospective recipients to ensure that either (a) they are qualified recipients of charity, or (b) they are providing goods or services of comparable value in return for funds paid out.
The firefighters’ families may well qualify as charitable recipients, but the donors cannot per se dictate whether such recipients are in fact qualified for such charity. That role of discernment belongs to the public charity – here, the Association – and subject to the IRS’s oversight. (Likewise, employees, vendors, or other providers of goods and services may receive charitable funds as payment therefor, but only if legitimately provided for reasonable value, again subject to IRS accountability.)
Underlying these restrictions is the requirement of control. Tax law mandates that a charitable organization exercises control over all charitable contributions, so that their resources are used properly as described above.
Bottom line: donors may not use a 501(c)(3) organization merely as its conduit for directing money to intended recipients. Otherwise, abuse of the charitable tax system would be far too easy. Indeed, without the control requirement, individuals could use such a system to make virtually any sort of payment to anyone through a 501(c)(3), for any ostensible purpose, and then claim a tax deduction for the amount provided.
The news story is an important cautionary tale for well-intentioned people who would serve and assist others financially in times of need. It is possible to accomplish what the good people of Webster N.Y. wanted to do, to aid those in need with charitable resources. To so do, it is crucial that interested individuals and charitable organizations follow the applicable tax rules so that, to the extent possible, their donations reach their intended destinations.
