Many, if not most, churches have established a specific fund to receive building fund donations. This fund is designated solely for building purposes and accumulates money until the project is completely funded. In limited situations, the building project is never started or not started in a timely manner based upon the donor’s understanding. The question then arises as to whether or not the church has a legal obligation to refund those designated contributions to the donor. Courts skirted around this issue for years without providing any clear direction.
However, several years ago a state appeals court in Michigan directly addressed this contentious issue. The trial court ruled that the church had a legal obligation to return building fund money that was not used in a timely manner. However, the appeals court reversed the trial court and stated that the dispute was “ecclesiastical” in nature and that the first amendment prohibited a trial court from intervening in such a dispute between a church and its member. The appellate court went on to state that “the decision of when and where to build a church building is exclusively within the province of the church members and its officials…” For more information on this specific case, see McDonald v. Macedonia Missionary Baptist Church, 2003 WL 1689618 (Mich. App. 2003).
It should be noted that the above mentioned Michigan appellate court decision has limited applicability outside of a few counties in Michigan. However, the decision provides guidance to other courts across the country faced with this issue. Further, it is important to point out that the court’s decision only dealt with the legal obligation of a church to return designated funds when the project was not started within a timely manner or not started according to the projection provided to the donor when the donation was given. The case does not go into the ethical or moral obligation that a church might have to refund donations under such circumstances.
It is suggested that churches adopt an internal policy to refund any funds not used in a timely manner for the specific designated purpose. While the church may not have a legal obligation to refund the money, a church should never get involved in litigation with a member over matters such as appeared in the Michigan case discussed above. The church leadership may decide that the project previously planned is now not in the best interest of the church or, another, and more attractive, opportunity may arise that the church decides to pursue. If the designated funds are not given under a broad designation to cover the new opportunity, then the funds should be returned to the donor with the suggestion that they be re-designated for the new project.
For example, money designated for a new sanctuary should not be used to buy a recreational facility for the church’s sport teams. The donor should be given the opportunity to re-designate the funds or they should be returned to the donor if the sanctuary project is not going to move forward in a timely manner.
The direction of a church may change due to a leadership change or due to new opportunities presenting themselves to the congregation. While a church may not have a legal obligation to refund designated monies that will not be used in a timely manner, it is suggested that a moral and ethical obligation exist that should dictate the refund of those gifts. A church never likes the idea of refunding contributions. However, in the long run, a simple refund of a designated gift can save the church a lot of grief.
The tax implications of returning a charitable contribution cannot be overlooked. If the donation is returned in the same year that it was given, most tax implications will be eliminated. However, if the donation is returned in a subsequent year, the donor should either amend his tax return for the year in which the gift was given or he should claim the returned charitable donation as income in the year that it was returned. Generally, the best option will be to amend the return for the year in which the gift was given. The church returning the donation should advise the recipient that such creates tax liability and that the person should seek professional tax advice.