Expert: Harvey Mechanic - 7/7/2009

Question
My client has been approached by another "group" who is putting together a lunch and bike ride/raffle fundraiser.  This group wants to donate all proceeds of the event to my client, a 501(c)(3) but rather than just cut a check for the net profit, this "group" wants to advertise that the donation will benefit my client's 501(c)(3) and issue each donor a receipt so they can deduct it (to the extent allowable over the raffle amount and lunch amount).  They also want my client to pay for some expenses up front.  Oh, and the donations are actually going directly to the group's pay pal account and not to my client's bank account.  How should I advise my client.  I think the best is to just accept a net profit check, but this "group" may not prefer that.  Any way to handle this easily.

Answer
First we need to know in what states the raffle tickets will be sold. For State rules where you will be selling:
www.gambling-law-us.com/Charitable-Gaming

Also it appears that the other group would be categorized as what states call "professional fund raisers" and would need to register under the applicable state's regulations. The site
www.nasconet.org/agencies
has a list of the state offices that regulate charitable
organizations and charitable solicitations.

Certainly, however, unless all of the funds are transferred to the account of the 501(c)(3) organization, then the 501(c)(3) organization may not issue a receipt to the persons who ostensibly purchased tickets. Although the outcome may vary depending on the facts and
circumstances of each case, including the U.S. Supreme Court Case
Davis v. United States. , and the other cases and revenue rulings
provide clear guidance that under IRC 170, whether a contribution
is made "to" the individual or "to or for the use of" the
charitable organization depends on whether the  organization has
full control of funds and discretion as to their use; whether the
contributors intent in making the payment was to benefit the
charitable organization itself and not the individual recipient;
and whether the organization has a legally enforceable right to
the funds.

In Davis v. United States, 495 U.S. 472 (1990), the Supreme Court
provided guidance for the first time on the issue of whether
payments made "to or for the use of" a qualified organization
were deductible as charitable contributions under IRC 170(c).
The taxpayers, who are members of the Church of Jesus Christ of
Latter-day Saints (Church) claimed such deductions for funds
transferred to their sons while they were serving as full-time,
unpaid missionaries for the Church.  The Church requested
payments, set their amounts, and, through written guidelines,
instructed that they be used exclusively for missionary work.  In
accordance with the guidelines, their sons used the money
primarily to pay for rent, food, transportation, and personal
needs while on their missions.  The Supreme Court denied
deductability.
http://pages.citebite.com/c1x0m7h3w8mdo

Harvey Mechanic
Attorney at Law
Harvey108@hotmail.com