I am a graduate of Providence College, a small, liberal arts school in Providence, Rhode Island founded in 1917. This year is its centennial celebration. The college decided that in its 100th year, “it was only fitting that the college recognize and support the efforts of Catholic education in Rhode Island” by “donating $100,000 to the Diocese of Providence to provide financial aid to children attending Catholic elementary and high schools.”
I was taken aback when I read about this donation in various publications by the pride with which the college announced it. Having been solicited for financial support almost since my graduation ceremony because “the college’s budget included expenses that were only partially met by tuition revenues,” I was surprised to read that it was giving money away to a non-college purpose. I guess they didn’t need my contribution after all!
Then I began to question what the law was in this regard. Although my annual donations were not restricted to a specific purpose at the college, e.g., business books for the library or scholarships for accounting majors, I believed that my donations were implicitly restricted to Providence College. Could the college unilaterally decide to give away the money I donated to some other charitable organization?
Of course, there is no specific link between my annual fund donation and the contribution the college made to the Diocese of Providence. However, I took a look at the school's latest Form 990 on Guidestar.org and saw that for the year ended June 30, 2015, the latest year for which a Form 990 is available, the college had tuition revenue of approximately $224 million and operating expenses of approximately $243 million. This means that the college was only able to operate due to the amount of contributions received ($28 million), investment income and other non-tuition sources of revenue.
Most professionals knowledgeable of nonprofit charitable accounting recognize that all donations to the entity are implicitly restricted to the mission of the organization. Donors to a hospital would assume that their donations were funding medical care and not the restoration of a historic building on the hospital’s campus. Likewise, donations to an education institution should safely assume that their donations are furthering education at that institution.
In this situation, the college did have over $6.5 million in revenue from athletics (a major college basketball and hockey program) and close to $700,000 from commissions of one kind or another, plus other innocuous sources of revenue.
It appears, therefore, that the college has plenty of revenue sources that come into the college coffers with absolutely no strings attached. No actual strings or implied strings. I think of my annual fund donation as having at least an implied restriction that it is to be used for the college’s tax-exempt mission of educating its students. The athletic department revenues from major college televised basketball is likely viewed as totally without restriction. Some may disagree with this. They would point to the fact that the Internal Revenue Service does not consider this revenue taxable as unrelated business income. If this income is related to the college’s charitable mission, then it, too, has an implied restriction prohibiting its use for purposes other than the college’s mission of educating its students.
However, the IRS, the government department responsible for administering tax-exempt status, has no prohibition against one charity donating to another 501(c)(3) charity. As a matter of fact, the IRS in its sample articles of incorporation for 501(c)(3) entities specifically mentions distributions to qualified exempt organizations as being an acceptable portion of the mission for any 501(c)(3) entity. Although unclear, this clause is likely in the IRS literature to provide for foundations whose primary charitable purpose is raising funds to support other charitable entities.
Other authors have written about the criteria that should be satisfied when evaluating a donation from one charity to another. There should be no conflict of interest between the two entities. The donated funds must not violate any donor restrictions that applied to the donor organization. The recipient charity must not misuse the donated funds, and the donation should not imperil the donor organization’s financial health. The Providence College donation did not violate any of these criteria.
In conclusion, it appears that Providence College was on reasonably solid ground in making this $100,000 donation to the Diocese of Providence as part of its centennial celebration. However, it struck me as odd, having recently written my annual fund check; others to whom I have spoken had a similar reaction. Often abiding by the letter of the law is not the sole criteria upon which an action should be decided.