Meddling
(Added 05/10/2021)
I work at an independent boarding school and a donor has told us he would like to establish an endowed scholarship. The general idea is that the scholarship would be offered to a qualified applicant who can demonstrate financial need. All good. But then, in our discussions, he asked if he could take part in the selection process. I know the IRS looks down on this but I don’t know exactly where it lands on this particular question. But, as important, I find it interesting how some donors want so much control over their "gifts." How much involvement is too much?
Let me reiterate that this is not a column that dispenses legal advice. There are, however, instances where the IRS has weighed in on the question of specificity and control, and I see your question of a donor wanting some involvement over who receives the scholarship as one relating to both.
First, let’s understand that this is only one strand of several that lie within the broader question of donor intent. Many times donors ask for, and the charity agrees to, restrictions on how the gift is used and administered. Yours is about a donor who wants to help choose the beneficiary of his generosity — and, of course, protect his charitable income tax deduction and avoid a potential gift tax.
In 1993 the IRS ruled (Private Letter Ruling 9322017) favorably for a donor who earmarked his gift to pay a university president’s salary. At the time, the president’s position was vacant and the donor didn’t have a say in naming the next president. The IRS reasoned that the donation was deductible because it was not directed to a specific individual. (Keep in mind that a PLR is only a one-time answer for one person’s question and can’t be relied upon in other situations, even if they are similar.)
In another case, Tripp v. Commissioner, decided in 1964, (yes, a long time ago, but some fundamentals don’t change much), a donor wrote to the director of admissions at Luther College in Iowa, "I am aware that a donation to a Scholarship Fund is only deductible if it is unspecified, however, if in your opinion and that of the authorities, it could be applied to the advantage of Mr. Robert F. Roble, I think it would be constructive." Even though the language was (intentionally?) ambiguous, apparently the word “constructive” doomed the gift. The tax court decided that the gift really was intended for a specific and named individual and therefore not deductible (even though, as it turns out, Mr. Roble was an ideal candidate for a scholarship).
Still, the consensus seems to support permitting some donor involvement. The Whatcom Community Foundation in Washington tells its donors, “Individuals … that establish permanent scholarship funds may be involved in a number of ways, such as participating on the selection committee. However, recent regulations have clarified that donors and related parties may not control the recipient selection process.”
Although an attorney’s voice is essential to sort out the legal issues within your question, it seems safe to say that the levels of specificity and control are the driving variables here.
Once you are satisfied with an interpretation of the IRS parameters of the answer to your question, you still need to determine the ethical parameters. If you decide to permit the donor to sit in on the selection process, you would be wise to define that role. Guidelines might address when he should recuse himself, not only from a decision but from a discussion, and questions might include whether he is related to an applicant and whether he knows a relative of the applicant. There are others, perhaps many others, that your school’s board and administrators may ask as well.
That is to say, there is a point where the donor may ask for too much, and it is primarily up to you to determine where that line is. Of course it would be easier had he not asked, but much in the world of ethical decision-making is not easy.