November 4, 1999 | Read Time: 4 minutes
United Ways receive hundreds of millions annually in contributions earmarked by donors for specific charities.
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But how to fairly account for those donations has been a subject of intense debate throughout the decade.
In July, the Financial Accounting Standards Board, which issues the accounting guidelines followed by most charities, said gifts earmarked for other organizations should not be counted as revenue in charities’ financial reports. The July announcement, known as Statement No. 136, will cover fiscal periods after December 15, 1999, and was designed to clarify a 1992 statement known as No. 116 that also said earmarked gifts shouldn’t be counted as total revenue.
The Internal Revenue Service says it has always agreed with the accounting board’s view — and that charities are supposed to take that approach when reporting financial figures on their informational tax returns.
In compiling this year’s Philanthropy 400, The Chronicle relied on the approach of those groups to tally United Way figures. Doing so made a big difference as to whether organizations appeared on the list. Seven United Ways would have made the list if their earmarked contributions had been included in the figures used to compile the rankings: Mile High United Way (in Denver), the United Way of Central Maryland, the United Way of Delaware, the United Way of the Saint Paul Area, the United Way of San Antonio and Bexar County, the United Way of Santa Clara County, and the United Way of the National Capital Area.
But many United Ways don’t find the issue so clear-cut. They lobbied the accounting board hard to allow them to count earmarked gifts in their totals — arguing that the donations wouldn’t have been made unless United Way had run a campaign to collect them. In addition to wanting to be able to tout big donation totals to the public, United Ways have been worried that their fund-raising costs will look excessive under the July FASB policy.
“You have to incur all those administrative and fund-raising expenses, yet you never get to count that revenue,” says Chris Amundsen, chief administrative officer at the United Way of America. “Does that fairly represent your financial statement? From the United Way perspective, I would say No.”
The lack of agreement with FASB can be seen in the approach United Ways take to reporting their financial figures.
Of the 41 United Ways that sent information to The Chronicle as part of the Philanthropy 400 survey, 32 included earmarked donations in their figures for total amount raised in private donations.
United Way officials say the instructions for filling out tax returns, known as Form 990, don’t clearly state that such money should be excluded from revenue totals. Those instructions refer to the 1992 FASB ruling, which many accountants said was written in such a vague way that it could be interpreted as allowing earmarked funds to be included in totals.
But David Jones, chief of the review branch of the IRS division that oversees charities, says that that is a misreading of the accounting rules, as well as federal law and regulations.
Mr. Jones notes that the Tax Reform Act of 1969 stated that an organization would be considered a private foundation — and not a charity — if donors retained the right to designate who would receive an organization’s gifts. That means, he says, that in cases where donors control the use of funds by a charity, the donations shouldn’t be counted as revenue.
The I.R.S. has never made an issue of the way such funds are reported by United Ways, Mr. Jones said, because there’s no question that they receive millions in non-earmarked funds and therefore clearly qualify to be classified as charities.
Officials of several United Ways, however, said the I.R.S. has never clearly stated that position. In fact, several said they had been unable to get consistent answers from the I.R.S. to questions about how to handle earmarked funds.
Says Dale DePoy, chief financial officer at the United Way of Central Indiana: “I could call the I.R.S. and the C.F.O. for the United Way of America could call the I.R.S., and unless we’re talking to the same person, we could get different answers.”
