Funding a Dissolving Nonprofit

Question: Our foundation has been funding a local nonprofit for the last ten years. The nonprofit has one full-time employee and an annual operating budget of about $300,000. The nonprofit recently requested a $50,000 grant for operating expenditures or it will have to close down immediately. Even if we make the grant, they may only operate for another month or so. If the foundation makes the grant but the nonprofit dissolves anyway and $20,000 of the grant remains unspent, what happens to that money? Can we fund them?

Answer: Under federal tax law, when a nonprofit dissolves, any remaining funds must be distributed in furtherance of its exempt purposes. This does not mean that they have to give the money back to you, just that it has to be spent for charitable purposes. If the foundation wants unspent grant funds to be returned, the grant agreement should explicitly state what the grant funds are to be used for and that any unexpended funds must be returned to the foundation. This will only help if there are actually funds left over. If the organization is running out of money, you may have to wait in line with other creditors to see if you can get your funds back.

As a policy matter, providing funds for an organization to dissolve in an orderly and thoughtful way may serve the community well. If the $50,000 grant will allow the nonprofit to smoothly wrap up some outstanding projects or find a new home for other projects, the money may be well spent. This may be especially true in social services organizations where several more months of feeding the homeless or providing children with after-school programs may provide a great benefit to the community.

If you are concerned that the organization is "crying wolf," you can ask them to be more specific about their grant request. If you are considering funding them so they can wind down, ask for a proposal indicating how the funds will be used to dissolve the corporation. If the grant is intended to keep them on "life support" while they seek new funding, request a fundraising plan, or build incentives into the grant such as a matching requirement or substantial progress on fundraising before some of the grant funds are released. No matter how much information you get, there may still be some risk that the funds won't be used as you had hoped and yet you can't get them back. At the end of the day, it's all a judgment call and you need to decide if the risk is worth the intended benefit.