FINANCES & A Leadership Exercise on the Dilemma of Restricted Funds

by Bob Whitesel D.Min., Ph.D., 11/61/15

I designed this leadership exercise to help leaders wrestle with tactical decisions that arise from donations that are given (or “restricted”) for a specific purpose.

Leadership Exercise:

DILEMMA:  Lee gave $5,000 to the church with a restriction* that it be used for the youth ministry program. The youth ministry had been in need of funds, and the pastor had even publicly solicited monies for this fund.  However, recently the church boiler has stopped working and with the approach of winter the boiler must be repaired if the church is to remain open (and the youth to have a place to meet).  The boiler repair will cost $5,000 and the church administrative board sees no other place to get this money other than to use the money that was restricted to the youth program.

YOUR ADVICE:  Now, what would you advise this board to do?  Do an online search for laws that govern such restricted giving in your state.  Then, using some online references tell us what you would recommend the church do in this dilemma of restricted funds.

* Some people might call the funds that Lee gave “designated” funds, but actually they are “restricted” funds.  A student once summarized this by saying “a board designates, a donor restricts (Hammar & Cobble, 2006).  If the donor restricts, then the only option is for the board to ask the donor to remove the restriction for use with the repair.  If the board designated money, then it can undesignate the money at any time.  For example, if they create a youth ‘fund’ and allow contributions to be made to it, than the board can decide to undesignate the youth funds and reclassify the funds however they want.  It all has to do with who is initiating the special use.”  This is a good summation.

Hammar, Richard R., & Cobble, James F. (2006). The 4-Hour Legal Training Program: For Church Boards (CD edition). Carol Stream, IL: Christianity Today.

For further reading:

Here are some interesting resources that students have discovered on this issue:

http://www.lifeway.com/lwc/files/lwcF_PDF_Hamilton_DesignatedFundManagement.pdf

http://berrymoorman.com/2009/07/22/what-can-a-nonprofit-entity-do-with-designated-charitable-donations/

And, sometimes churches will receive a donation that is intended to directly support an individual, such as a teen going on a mission trip.  Here is what one student found about this: “From the IRS Website: ‘The law allows a taxpayer to deduct a contribution or gift that is to or for the use of a qualified organization (section 170(a) of the Internal Revenue Code (the Code)). A religious organization, such as a church, is generally a qualified organization. However, for a contribution to be deductible, the church must have full control of the donated funds and discretion as to their use. This ensures that the organization will use the funds to carry out the organization’s functions and purposes. Further, to deduct a contribution, the donor’s intent in making the payment must have been to benefit the charitable organization and not an individual recipient.’ (http://www.irs.gov/pub/irs-wd/09-0038.pdf)
(Caveat:  remember, this is an exercise designed to help you find and locate financial advice and consul.  This exercise is not meant to create anything legally binding. Always consult professionals such as accountants and lawyers.)