Fundraising events are a critical source of revenue for many nonprofit organizations. Private foundation and donor advised funds, however, must proceed with caution when supporting such events. Federal tax rules limit how and whether persons closely connected to a private foundation may attend a fundraising event using a ticket purchased by that private foundation. Similar tax rules also prohibit donor advised fund holders from purchasing tickets to charitable fundraising events.
As you know, the private foundation self-dealing rules preclude most direct and indirect financial transactions between a foundation and its disqualified persons. Disqualified persons include the creator of the foundation, substantial contributors, trustees, directors, and their family members.
The IRS has determined that, in most instances, attending a fundraising event as a disqualified person using a ticket purchased by a private foundation is an act of self-dealing. The rationale is that some of the contributed funds are used for the benefit of a disqualified person (i.e., entertainment, food, and beverages, etc. provided at the event). The tickets may be used by a disqualified person only when there is a business need for the disqualified person, such as an officer or a board member, to attend the fundraising event on behalf of the foundation.
In response to this restriction, some have suggested that the cost of a ticket to a fundraising event be bifurcated between the private foundation and the disqualified person, with the disqualified person paying the fair market value of the benefit they received from attending the event. This approach, however, has not been endorsed by the IRS. The IRS has indicated that it qualifies as self-dealing because the disqualified person receives a benefit from the foundation. The benefit is the ability to attend the fundraising event at a lower price (fair market value of benefits) than the other attendees are required to pay (fair market value of benefits, plus a charitable gift).
Similarly, donor advised funds may not be used to give more than an incidental benefit to the donor. This includes any benefit that reduces the contribution that the charity would receive absent the benefit to the donor. Therefore, tickets to a fundraising event may not be purchased for a donor using money in the fund because the benefit to the donor from attending the event decreases the amount of money actually received by the charity.
Best practice is to include a clear statement in a grant agreement and/or correspondence accompanying your contribution about your desire not to receive benefits from the nonprofit, such as: “The Foundation desires that all resources of Grantee be dedicated to accomplishing its philanthropic purposes. Accordingly, Grantee agrees not to recognize the Foundation, its board members or staff with any goods or services.”
Here’s the bottom line:
- Use personal funds or a corporate marketing budget to purchase tickets to fundraising events sponsored by nonprofit organizations.
- If private foundation assets are used to sponsor an event and a disqualified person plans to attend, carefully document the business need.
- Communicate your desire not to receive tickets and other benefits clearly to your nonprofit grantees.
- Better still, disclaim the tickets or donate them back to the organization to be used by a client or volunteer!