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An Introduction to Deputized Fundraising

Author
Antoine Kazzi
FOCUS
VP of Legal, Risk, & Compliance
Format
Blog
Perspective
Issue Areas
501(c)(3) Status
Corporate Governance
Starting a Nonprofit
Tax Compliance
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August 10, 2022

Deputized fundraising (DF) has been common among religious organizations for several decades. Yet it is rarely utilized outside the religious sector so it is almost never discussed in charitable giving literature.

For religious organizations, DF is a natural part of mission outreach—many people who are convicted by the mission want to support a missionary, and it is those people who feel directly connected to the organization’s work that are often its strongest donors.

Many other benefits can be mentioned, such as increased commitment to the mission amongst staff and a broader donor base that is more resilient to economic downturns.  That said, there is a real cost to running a DF system, so an organization should only introduce it if it is willing to invest in its proper maintenance.  

To understand the model, it is necessary to understand its practical implications, applicable IRS tax consequences, and employment considerations.

The basics of the deputized fundraising model

The idea of DF is simple: an employee of a tax-exempt organization is responsible for meeting certain fundraising goals, in addition to fulfilling his or her other roles.  

Consider a hypothetical missionary, Michelle, who lives in LA and works for the charity, Faith in Hollywood.  Most of her time is spent doing outreach through local parishes for which she is paid a salary, but she also committed to bringing family and friends on mission who could financially support the work of the charity.  Their donations grow the total pool of resources from which her salary is ultimately drawn, which is the goal of DF.

The DF model can be broken down into three key elements:

  1. The charitable organization:  Faith in Hollywood is a charitable organization that has received tax-exempt status by the IRS under s.501(c)(3) of the Internal Revenue Code, allowing its donors to deduct charitable gifts to the organization from their income.
  1. Charity-set compensation:  Michelle’s salary is set by Faith in Hollywood in the typical way compensation is set (e.g. consider type of work performed, education/experience, performance, etc.).  It is important to keep in mind that salary cannot be set or changed solely with reference to Michelle’s fundraising ability.
  1. Deputizing the charity’s fundraising:  One of the ways for Faith in Hollywood to bring more people on mission and to keep its fundraising costs down is to have Michelle invite those close to her to financially support the charity.  So, one of Michelle’s employment duties is to fundraise on behalf of Faith in Hollywood.

The IRS tests

Over many decades, tax cases and rulings have distilled the requirements of a DF model into two tests:  

  1. Intended beneficiary test: First, the donor must intend the donation to be for the benefit of the charity, even if they may express a preference for who their donation supports.  
  1. Control and discretion test: Second, the charity must retain control over the donations and be able to decide how they are used (e.g. part is paid to cover overhead, part is paid to salaries, etc.)  

Implementing deputized fundraising

Some nonprofits understandably find it tricky to translate these concepts into policies and practices.  

Does Michelle think that to get paid more, she just has to raise more money?  Do Michelle's family and friends think they are supporting her or Faith in Hollywood?  Does Michelle think that when her time with the charity comes to an end, she can take the remaining monies she helped fundraise?

It is important for Faith in Hollywood to structure its operations carefully, otherwise the gifts will lose their deductibility status.  The flow-on effects could be devastating for an apostolate heavily reliant on DF.  

For best practices on this, see the Evangelical Council for Financial Accountability’s article on DF and ensure you consult an attorney/accountant who is familiar with DF.

Further Reading:  

David W. Jones (Chief, Review Branch, Exempt Organizations, IRS) letter to Milton Cerny, c. 2000