Quatloos!

I need some input on something I'm checking into.

There appears to be an unregistered charity collecting funds under false pretenses, and also accepting funds from a registered charity which are earmarked to be given to the unregistered charity. Donors are being told that their donations are tax deductible, but it appears they are not deductible due to the earmarking.

The registered charity claims it is not giving money to the unregistered charity, but if that's true, why would donations need to be earmarked?

In the interim, the state of Oklahoma consumer protection agency appears to have issued a cease and desist order against the unregistered charity, for misappropriation of funds. From what I understand, it appears that they're just living off the money. I'm quite sure they are not reporting this money to the IRS as income.

The reason for the cease and desist might go deeper, though. Basically, this is the family of a child who was murdered by a stepfather, and the biological father's family claims the father is a "war hero" who was serving in Iraq when his daughter was killed. In truth, he was in drug rehab at Fort Benning, and was deemed unfit for military service and given a dishonorable discharge. They were and are soliciting funds under this facially false story, and I'm wondering if this is a fraudulent inducement case.

Can someone take a look at this and give me an opinion?

http://www.activeboard.com/forum.spark? ... D=13039208

I work a bit with non-profits and every single one has to have a yearly audit of their books - which I believe should catch things like earmarking contributions to go to another charity. One of the non-profits is part of a national organization who demands the audits and the results each year.

I'm on someone else's wireless connection right now (dumb shit left it open) and I have to get off now and go home, so I can't check. Is there a national organization related to the legal non-profit that can be alerted as to this indiscretion?

I'm not sure what you mean by "registered charity" or "unregistered charity."

Whether or not a charity is tax exempt and whether or not donations to a charity are tax deductible is determined by the IRS, and the status of a charity can be checked using the on-line version of Publication 78.

However, each state has its own rules about whether or not an organization can solicit donations within that state. The fact that an organization is determined to be charitable by the IRS does not mean that the organization can solicit donations because the organization still has to comply with state law regarding registration.

A donation to a charitable organization that is "earmarked" or committed to a noncharitable purpose or noncharitable organization is NOT deductible.

Conversely, a donation to a tax-exempt non-charitable organization (such as a social club) that is earmarked for a charitable purpose might still be deductible.

Regardless of whether or not an organization is exempt, gifts are usually not considered income, so a non-exempt organization would not report non-deductible gifts as income. But a gift induced by fraud might be considered income because it is not really a gift, but income from wrongful conduct.

Generally speaking, donors are not responsible for what happens to their donations. If a donor contributes to an organization listed in Publication 78, the donor is usually entitled to a charitable deduction even if the money is never spent for any charitable purpose. The rules are different for private foundations and for donors who control the charity.

In many (most?) states, the Attorney General has the authority to enforce the charitable obligations of organizations that claim to be charitable. So, for example, if an organization received donations for a charitable purpose, the AG might have the authority to see that the money was actually spent for that charitable purpose.

I don't know how these principles might apply to the situation described, but there it is.

And the subject is not relevant to tax protesters, so I'll be moving it to a different forum. (Not sure which one yet.)

Thanks, Dan, that's very informative.

By registered vs unregistered, I meant merely that they had not registered with either the state or the IRS as a charity, or anything else. Sorry I wasn't clear.