November 1, 2001

Legal and Tax Considerations for Capital Campaigns

3 min

Before your association - or its related foundation - embarks on its next capital campaign, there are a few important legal and tax considerations to keep in mind.

Disclosures. If your capital campaign is being conducted by a non-501(c)(3) tax-exempt organization (such as a 501(c)(6) association), you generally will be required to include a statement in your solicitations that payments or gifts to the campaign are not deductible as charitable contributions for federal income tax purposes. If your campaign is being conducted by a 501(c)(3) organization (such as a related foundation of a 501(c)(6) association), the 501(c)(3) must provide certain IRS-required written substantiation to all donors who make contributions of $250 or more. In addition, you must make certain written disclosures to donors who make contributions in excess of $75 and receive something of more than insubstantial value in return. This requirement is particularly important for capital campaigns that rely on proceeds from ticket sales to dinners or other events. Further, it is important for the 501(c)(3) to make clear to potential attendees at a fundraising event that a gift is being solicited in addition to participation in the event. Otherwise, the attendees might not be permitted a charitable tax deduction for any portion of their payment in connection with the event.

Related Foundation Issues. If your association's foundation is spearheading the capital campaign, remember that there must always be strict financial, management and operational separation between the association and the foundation. Generally, a written affiliation agreement, addressing these issues (among others), is recommended between parent associations and their affiliated entities. Though a certain degree of control by the parent is necessary (most association foundations are formed as "supporting organizations" under the Internal Revenue Code, which actually requires certain oversight by the parent association), a lack of separateness between the parent and foundation could have crippling effects. If the IRS or a court determines that the parent association controls the foundation so pervasively that the foundation becomes a "mere instrumentality" of the parent, then the 501(c)(3) status of the foundation will be in jeopardy and the parent will be exposed to the foundation's liabilities. Further, note that the activities of a 501(c)(3) organization - even one that is formed as a supporting organization of a 501(c)(6) parent - must be organized and operate to benefit the public and its activities may not be limited to the parent association's members.

Corporate Sponsorship. A popular incentive in capital campaigns is the promise of exposure to the donor. Associations and their foundations will frequently create different levels of recognition depending upon the amount given by a donor. The greater the amount of the donation, the more prestigious (and usually the more visible) the recognition will be. Association and foundation executives must be careful when doling out these benefits to donors, as they could end up incurring significant tax liability for their organizations. The basic rule is that recognition that constitutes "advertising" for the donor can jeopardize the tax-free treatment of at least a portion of the contribution. The IRS has very detailed rules covering what constitutes a mere "acknowledgment" and what constitutes "advertising." A discussion of these rules can be found on Venable's Web site.