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Vol. 33 No. 9 — November 2016

He was also known for being frugal. He lived alone, had Fritos and soda for breakfast, drove a 1992 Plymouth, and rarely bought new clothes. He retired in 2014 and lived the final 15 months of his life at a nearby assisted living center, passing away at age 77.

The story does not end with Morin’s passing, however. His thrifty lifestyle allowed him to stash away nearly all of his savings, which grew steadily over his lifetime. As a result, upon his death, Morin had amassed an estate of more than $4 million, which he donated to UNH. The bequest was announced by the university in August 2016 and was described by UNH president Mark Huddleston as a “demonstrated commitment to UNH through his philanthropy [that] is tremendously inspiring.”

The feel-good story took a sharp turn, however, when UNH announced its intentions for the money. Morin had dedicated $100,000 of his gift to the Dimond Library, which will be used to provide scholarships for work-study students, to support staff members continuing their library science studies, and to renovate one of the library’s multimedia rooms. The remainder of the gift was not dedicated and was unrestricted. In its announcement, UNH indicated that $2.5 million was to be spent on an expansion of the career center and $1 million on a new video scoreboard at the football stadium.

Scoreboard Uproar

UNH’s decision to apply a quarter of Morin’s gift to a video scoreboard resulted in a social media uproar. The university posted an announcement of the gift on its Facebook page on the morning of Aug. 30. Within hours, replies and comments began to flood in, most of them extremely critical of the scoreboard news, describing it as a “wrong priority,” a “disgusting waste,” and an “insensitive, irresponsible,” and “frivolous” decision.

Debbie Dutton, president of the UNH Foundation, says, “Unrestricted gifts give the university the ability to use the funds for their highest priorities and emerging opportunities.” Within a day of a New Hampshire Union Leader article about the gift, readers posted comments that were critical of the scoreboard decision. Additional criticism has come from New Hampshire state leaders, including the speaker of the New Hampshire House of Representatives and the state’s governor, Maggie Hassan.

The gift, UNH’s use of the gift, and the reaction to UNH’s decision have made national headlines and shined a spotlight on donations to colleges, universities, and other charitable organizations, the uses of those donations by the organizations, what kinds of restrictions a donor may place on his or her donations, and what limits the organization may be subject to in spending donated funds. To be clear, while UNH’s decision to apply a portion of Morin’s gift has proved controversial, no suggestion has been made that it was legally improper.

The goverance of charitable organizations and donations comes from a combination of state and federal laws, common law, the law of contract, and “best practices.” It might be broken down into three main areas: the charitable organization, the donor and donation, and the use of the donation by the organization.

Nonprofit Organizations

There is a tendency to consider nonprofit organizations, tax-exempt organizations, and charitable organizations as one and the same, but, legally, there are distinctions among them. All are formed as legal entities under state law in a manner similar to that of for-profit organizations. They can be established as nonprofit corporations, charitable trusts, unincorporated associations, or nonprofit limited liability corporations. Nonprofit corporations are the most common form of organization.

In establishing a nonprofit organization, particularly a nonprofit corporation, the entity files articles of incorporation within the state. Included is the purpose clause, which establishes the objective of the entity, whether it is to educate students, operate a museum, support research in eradicating a disease, or provide healthcare services. The purpose clause ideally should be narrow enough to establish the intent of the organization, but broad enough to give the organization the flexibility to achieve that intent. For a college or university, this would include not only educating students, but may also include providing necessary administrative, extracurricular, and other recreational services for students.

Tax Deductible

In order for a nonprofit organization to be tax-exempt, it must meet criteria for tax-exempt status as established by the Internal Revenue Service. Section 501(c) outlines the types of exemptions available, including those for recreational clubs, civic organizations, fraternal organizations, and others. However, not all tax-exempt organizations are charities, which are organizations whose contributions are tax deductible. Only those that are exempt under Section 501(c)(3) are entitled to this status, and it is limited to organizations whose purpose—as identified by the purpose clause—is “religious, charitable, scientific, testing for public safety, literary, or educational.” As a nonprofit educational institution, UNH qualifies under Section 501(c)(3).

Consequently, donations to UNH (and similar colleges and universities) are considered tax-deductible charitable donations. A combination of state and federal laws govern donors and donations to charitable organizations. Much of this law focuses on consumer protection concerns, including regulations on the solicitation of donations by organizations, disclosure, certification and record-keeping requirements, and the use of professional or third-party solicitors (such as telemarketing or direct mail companies) to connect with potential donors. The intent of these laws is usually oriented toward protecting the public by ensuring that their donations are going to legitimate charities and being used for legitimate purposes.

Charities are entitled to spend charitable funds on fundraising and administrative costs. The adage “It takes money to make money” often applies to charities. Sending a solicitation in the mail accompanied by “free” mailing labels or greeting cards or promising a gift in return for a donation are legitimate practices. (The “free” gifts enclosed with a charitable solicitation are regulated by the Federal Trade Commission as “unordered merchandise” and create no obligation to send in a donation in return.) It is also accepted in the fundraising industry that costs to identify new donors are typically higher than costs associated with recurring donors. Excessive fundraising expenses, however, may generate consumer or regulatory scrutiny.

Similarly, charitable organizations incur administrative costs to manage the charity’s programs and service and to provide for operations and infrastructure. It is consistent with the “purpose” of the charity to raise money and spend it on these mundane costs. Again, however, excessive administrative expenses may generate consumer or regulatory scrutiny.

Highest Priority

It is this kind of consumer scrutiny that UNH is receiving in its use of the Morin gift for a scoreboard. To be clear, there is no indication that UNH has done anything to violate state or federal charitable or fundraising regulations. Athletics is a common activity within colleges and universities, and support for athletics would fall within the purpose of the institution. Infrastructure costs such as for stadiums, arenas, and scoreboards are necessary to support the athletic purpose and, therefore, are also are legitimate uses of funds received from donors.

However, it is the seeming disconnect between the donor and the use of the donation that has generated the discussion and complaints in the allocation of Morin’s gift. During his time at the university, Morin was not identified as having an interest in athletics or football, although in a statement, UNH indicates that later in life, he started watching football on television, “mastering the rules and names of the players and teams.”

Critically, however, only $100,000 of Morin’s $4 million gift was restricted to a particular use: supporting the library. The remaining $3.9 million was unrestricted, meaning UNH could spend the money for any need within the broad scope of its overall purpose. Dutton’s statement about using unrestricted gifts for the university’s “highest priorities and emerging opportunities” raised questions about whether a scoreboard represented a “highest priority.” But in this case, “unrestricted” means exactly what it says: The donor put no restrictions on the gift, and the university could allocate it at its discretion.

Both law and practice give donors rights to direct how their gift will be used—if they so choose. Similarly, the university has rights to determine how to manage its funds. Most universities will use a combination of fundraising programs, including annual giving programs, targeted or special-purpose giving programs, capital campaigns, and major gifts. The gifts can take the form of immediate cash, pledged future cash, immediate or future non-cash gifts such as property or services, or estate gifts, for which the donor pledges a gift to be paid out of his or her estate. Gifts may also go into annual spending budgets or targeted project budgets or may become (or add to) an endowment, wherein the funds are retained as an investment, and only the proceeds are spent.

In all of these programs, there can be a tension between the interests of the donor and the interests of the institution. Unrestricted gifts are favored by the institution as they give maximum flexibility to address priorities. Restricted gifts may be favored by donors as they allow them to support those aspects of the institution’s activities they hold most dear. My wife and I make annual contributions to our respective alma maters. Mine is to the Friends of the Library program, which requires gifts to be used for library acquisitions. Hers is unrestricted and could be used for anything, including library books, lab equipment, or sports uniforms—and she gets no say in the matter.

A Gift

Large gifts, whether as part of annual giving, a capital campaign, or an estate gift, are often the subject of extensive negotiations between the donor and the institution. The donor may have an interest in a particular department or program and perhaps wants his or her name recognized by funding a physical space or program. The institution wants to maximize the donation by complying with the donor’s wishes, but also wants to ensure that the money can be effectively used.

A donation of $100,000 is probably not going to get your name on the new $10 million astronomy building, and it isn’t enough to fully fund the astronomy department. However, if the donor wanted to restrict it only to astronomy books for the library, it might be more than is needed, and absent an alternate means to spend the extra money, the gift can’t be fully used. The negotiated solution might be an endowment for a library collection of astronomy and “related” works. The library may only get $4,000 or $5,000 a year, but over time, the payout would exceed the initial gift and would allow the library to re-allocate $4,000 or $5,000 from its operating budget elsewhere.

The takeaway in the Morin case is that donors can and should consider and express their wishes in making donations to any charitable institution. If restrictions on a gift are agreed to by the institution, those restrictions can take the form of a contract, which is enforceable by the courts if necessary. It appears that Morin did consider this issue and elected to make a largely unrestricted donation.