Controlling a donation: The IRS and recipient need to know. (Financial Control).

Question: Your nonprofit receives a check from the Charitable Gift Fund of Fidelity Corp. indicating that you should send an acknowledgement to Jane Smith. Who gets the legal credit: Jane Smith or the Charitable Gift Fund?

Answer: It depends.

According to John H. Taylor, director of alumni and development records at Duke University, it is not always clear whether the gift is coming from a donor-advised fund or a donor-directed fund.

"For those of us who are on the gift processing side of the house, the ones who need to be issuing these receipts, it's extremely important that we know which of these two funds the gift is coming from," Taylor told the Association of Fundraising Professionals (AFP) 38th Annual Conference on Fundraising, held recently in San Diego.

With a donor-directed fund, the donor sends an asset to a financial institution (like Fidelity) for investment and safekeeping. The asset remains in the name, and under the control of, the donor. The donor then contacts the financial institution and directs it to issue a check in the nonprofit's name. In this case, the donor making the direction is the legal donor.

"It's more or less like another savings account of mine," Taylor said. "I have an account with Fidelity. I transfer money periodically from my checking account at my bank to Fidelity. That money is mine. It's just being held by Fidelity I will send a request to Fidelity on occasion to send some of that money out, but for all practical purposes, the money is mine."

That's not the case with a donor-advised fund. Here, the donor sends an asset to the tax-exempt arm of a financial institution as a donation to that entity. The asset is now under the name, and control, of that entity. The donor then contacts the firm and advises it to make a gift to an organization. In this case, the firm is the legal donor.

The difference between donor-advised and donor-directed funds was one of several issues discussed in Taylor's seminar, titled Legal and Financial Issues that Affect Educational Institutions. IRS rules and regulations that affect organizations on the receiving side of donations (versus the requesting side) were the main focus of his session.

Three issues arise with donor-advised funds. First, who gets recognition as the legal donor in an organization's annual fund honor roll? According to Taylor, since the financial institution is the legal donor, it should get the recognition. But the person who donated the money to the financial institution made the gift possible. Does he or she also deserve to be in the honor roll that year?

"Absolutely," Taylor said. "You wouldn't have gotten the money if it weren't for that person. We can solve the donor recognition problem here by using soft credit. I think most of us - not all of us - but most of us are now using software systems that facilitate the soft crediting issue."

Soft crediting means recording the gift on the legal donor's record but also making a notation on the original donor's record that indicates that that person made the gift possible. According to Taylor, the legal and original donor are usually separated out by using two columns on a spread sheet, one for legal gifts and one for soft gifts.

"It's not real money, but it gives you the opportunity to recognize the donor in your honor roll," Taylor said.

Matching gifts, the second issue involved with donor-advised funds, are a serious problem, according to Taylor. The problem arises when a donor makes a gift to a financial institution, tells that institution to make a gift to an organization and then fills out a matching gift form and sends it to the organization requesting that it have that gift matched by his or her employer. However, the matching gift company will only match gifts made by its employees. The donor didn't make the gift; the financial institution did.

"The donors -- and we need to educate them on this - need to understand that they can't have their cake and eat it, too," Taylor said.

Pledges are the third issue involved with donor-advised funds. Private foundations cannot pay personal pledges. By doing so, Taylor said, they would clearly be showing the IRS who had control of the gift. In an IRS audit, that foundation would jeopardize its tax-exempt status, because it is no longer operating independently, but rather at the direction of an individual.

"Pledges are a very significant issue," Taylor said. "Donors cannot pledge funds held in a donor-advised fund, because the money really isn't theirs. What we need to do is get the donor to be a little more creative in constructing the pledge."

Working within the construct of the law, Taylor advised reconstructing the language in a pledge, so that instead of saying "I will give to Duke University," say "Either I will give, or will cause to be given, to Duke University ..."

"It's really important when we talk to our donors who are making commitments and signing endowment agreements or whatever that we know where the money is going to be coming from, so that we can properly construct the pledge, "Taylor said.

He also discussed the rules and regulations surrounding written acknowledgements, or receipts. To claim a charitable deduction, written acknowledgements are required for all contributions of $250 or more; a cancelled check is sufficient for gifts less than $250. The donor is responsible for obtaining that receipt, and substantiation to the donor must be contemporaneous, which means the donor must have it in time for tax filing.

According to Taylor, written acknowledgments must provide the amount contributed (or description, not value, of noncash property contributed) and a statement indicating whether any goods or services were provided in exchange for the gift.

"What is not required or demanded by the IRS to be on a receipt? It's one thing that always creates problems for a lot of institutions -- a date," Taylor said. "It's the donor's responsibility to prove or disprove when a charitable contribution was made."

According to Taylor, quid pro quo receipts, which are given when an organization provides something to a donor in exchange for a gift, are not required in the following three situations:

* If the fair market value of all benefits received in connection with the payment does not exceed the lesser of 2 percent of the gift amount or $76;

* If the gift is $38 or more and the cost of all benefits given does not exceed the IRS' low-cost articles minimum of $7.60;

* If the only benefit the donor received consisted of token items bearing the institution's name or logo.

Quid pro quo involves any contribution of $75 or more where part of the payment is for goods or services received and part is a contribution. The disclosure must inform the donor that the tax-deductible amount is limited to the excess of the amount contributed over the value of goods or services provided. It must also provide the donor with a good faith estimate of the value of such goods and services.

Gina Bernacchi is a reporter for the Denver News Bureau.