Charitable Giving to Illinois Public Libraries

Local libraries and public library districts in Illinois are tax-exempt political subdivisions that may receive and administer charitable donations for the present and future benefit of the community. Through the use of donors’ gifts, endowments, and bequests, the libraries and public library districts are able to enhance the educational, cultural, and historical value of the area. In addition, the donors are benefited by a wide range of opportunities to express their philanthropy.

The history of America is replete with examples of philanthropy towards our public libraries. Indeed, virtually all public libraries found their genesis in local community groups, women’s clubs, reading circles and parent-teacher organizations. “Charitable giving” came in all sizes and types: book loans, lumber, nails, bricks and mortar (and the talent to use them), grass cutting, bake sales, and, yes, cash. Andrew Carnegie, at the turn of the century, is best remembered for the direct infusion in hundreds of communities of money for library building programs. Charitable giving to libraries and public library districts has and does make it possible for libraries to serve the future generations.

Things Libraries Should Know About Receiving Charitable Gifts

To encourage charitable giving in the private sector, Congress has, for more than 60 years, granted favorable tax treatment to charitable contributions by individuals. In addition, many organizations benefit greatly when a charitable gift is made. However, when a person or organization makes monetary or property donations for the benefit of an organization such as a local library or public library district, some of the most common questions asked are “How does a local library or public library district qualify to accept charitable gifts?” “Should the local library or public library district set up a foundation?” “Are there other alternative methods available?” “What are the tax benefits and/or consequences, both to the donor and the local library or public library district, of charitable gifts to the library?” This article will attempt to briefly answer these questions.

There are two ways in which a public library may qualify to accept a charitable gift. The first method is to set up a tax exempt foundation qualified under the Internal Revenue Code, §501(c)(3). First, the local library or public library district would have to establish a not-for-profit organization “organized and operated exclusively for . . . literary or educational purposes.” IRC §501(c)(3). Technically and legally, this corporation would be a separate entity from the library. The most common example in Illinois would be a Not-for-Profit Illinois Corporation organized through the Secretary of State’s office. Articles of Incorporation, bylaws, a Board of Directors, a registered agent, registered office, and an annual report filing are all necessary elements to such an organization.

Second, since the IRS defines a charitable contribution as a “contribution or gift to or for the use of” certain types of organizations, the corporation would have to apply to the IRS for “charitable foundation status” commonly called 501(c)(3) status. Once established, the foundation may receive charitable contributions, much like more famous 501(c)(3) foundations (e.g. American Cancer Society, United Way). This relatively inexpensive and easy not-for-profit incorporation does not by itself make the entity either tax exempt itself or contributions to it tax deductible.

The method of forming a foundation is not only a lengthy process, in terms of forms and approval from the IRS, but expensive in terms of application and renewal fees, annual tax returns, and accountant or attorneys’ fees, and a highly technical process with many traps for the unwary. In addition, although a donor’s charitable contributions are usually deductible for tax purposes, a transfer of money or other property to a charitable organization is not always an allowable charitable contribution for tax purposes. A charitable gift is deductible only if it is made to or for the use of a charitable organization qualified to receive such a gift. The precise question of deductibility should and must be left to the donor and his, her, or its attorney or accountant, since it varies somewhat, based on the donor’s particular status.

The second method, and we believe usually the better way, by which the local library or public library district may qualify to receive charitable gifts is inherent in their nature as a part of a municipality (local library) or a sovereign political subdivision (public library district). Both types of libraries fall within the term “political subdivision” as used by the IRS. The Internal Revenue Code §170(c)(1) states any political subdivision may receive charitable contributions, “but only if the gift is made for exclusively public purposes.”

Under Illinois library law, any person or group of persons may make donations of money or property for the benefit of any local library or public library district. 75 ILCS 5/l-6 (formerly Ill.Rev.Stat., ch. 8l, ¶¶l-6) and 75 ILCS l6/30-75 (formerly ch. 8l, ¶l004-l3.l) Title to the donation vests in the library board of trustees, upon acceptance according to the terms of the donor’s deed, gift, devise, or bequest. The library’s board of trustees automatically becomes a special trustee of the donated property under the library statutes without having to form a separate corporation or apply for the §501(c)(3) status of a foundation. Because of §170(c)(1) of the IRC, the political subdivisions do not have to file for qualifications as a §501(c)(3) organization initially nor report annually to the IRS with information tax returns.

The benefits of §170(c)(1) and being a part of a municipality or political subdivision (rather than forming a foundation) are:

The extent to which individuals may deduct charitable contributions for income tax purposes is limited by federal law. Limitations are imposed both on the amount of contribution that may be deducted and on the extent to which the contribution deduction may reduce a donor’s taxable income.

The income tax results of such gifts differ widely among individual donors. The tax benefits derived from charitable giving depend ultimately on the nature of the property given, the types of organizations to which donations are made, the current and future income level of the donor, and the donor’s marital status. A word of caution--neither the libraries nor the library board of trustees can give accurate advice regarding the taxability of a donor’s contributions. Donors should seek the tax advice of counsel or their accountant to ensure they are in compliance with their tax returns and deductions.

The humanitarian and moral aspects of private philanthropy have always been its primary motivating force. The tax benefits resulting from charitable giving, however, have assumed increasing importance as our tax system has grown in complexity and scope. Donors who make charitable contributions to governmental units under §l70(c)(1) must be aware that they can receive a favorable tax deduction. They are not treated any more favorably by contributing to a §501(c)(3) foundation. Moreover, the initial costs and the annual fees incurred by a foundation are much higher than any incurred by a unit of government such as a library, so that more of the principal should be available for actual use or the “end purpose” of the donation and less for “administration,” accountant’s, or attorney’s fees.

Of course the size of expected donations may influence the decision regarding the creation of a corporation/foundation. If the “set-up” costs initially are $1,000.00 and the annual costs $200 to $300, then donations in the range of $5,000 to $15,000 may not justify the costs involved, i.e. the costs match the income from such principle or even may require use of some of that principle. On the other hand donations in six figures, particularly if more likely to a foundation than a governmental unit, can well justify those costs. But even here, consideration should be given to much cheaper options (see discussion below of the ILSDO “Fund for Illinois Libraries.”

The three most common concerns expressed on this are that 1) potential donors do not wish to give to a tax-supported governmental unit, 2) the bylaws of many private corporations’ foundations (which presumably have already been approved by the IRS and are not otherwise in need of amendment) require 501(c)3 status of their donees thus keeping governmental units from benefiting therefrom, and 3) that creating a foundation will focus library/community energies on private fundraising and thereby supplement library revenues. The third point does not in fact hold true. The success of energetic fundraising does not correlate to the use of foundations. In other words, there are many examples of successful and energetic fundraising done by governmental units (and their “friends”), particularly public libraries, without the use of foundations, and there are many examples of ineffective and unsuccessful fundraising where foundations had been established (and where eventually the annual costs and requirements lead to dissolution, either voluntarily or by state and federal action, or even where the failure to file information returns penalties are much larger than any and all donations received).

In our experience there are two truths to keep in mind: 1) never use paid, professional fundraising, and 2) your success will depend on locating, recruiting, retaining, and utilizing the type of committed and talented local people who themselves are donors and will encourage others to donate (whether a foundation is used or not).

As for the other two concerns, if there are foundations likely to donate or grant to the library with such restrictive bylaw provisions, and the size of the donations and/or their frequency will justify the “set-up” costs and annual costs of a foundation, then it is entirely appropriate to do so, but the ILSDO “Fund for Illinois Libraries” program may be far more preferable (and much cheaper both in the short-term and in the long-term). It is unlikely, but may be worth the attempt to raise with the foundation the possibility of amending their bylaws to broaden the restriction to include local governmental units or specifically public libraries, but the costs of doing so from their perspective may be prohibitive. Such a foundation would have the same or similar requirements as a library foundation, and it points up the high standard of business activity which the IRS and, to a lesser extent, the State of Illinois requires of 501(c)3 organizations.

As for the hesitancy of a donor to give to a taxing body, it may be a persistent view, but often after the history of charitable support for public libraries is explained, the donor will reconsider. In addition many prospective donors, particularly the more sophisticated, will appreciate the savings of those “set-up” costs and annual costs of a foundation so that 100% of the principle and income from donations can be used for the library or the purpose of the donation to begin with.

Due to the necessarily strict state and federal rules for operations of tax-exempt corporations and the attendant high costs of proper operation thereof (as well as the frequent failure, in fact, of such foundations to meet all compliance without suffering penalties and interest charges), but also the occasional need for libraries to have a 501(c)3 “alternative” for some types of donors, in 1999 the Illinois Library System Directors Organization (“ILSDO”), itself a properly operating 501(c)3 formed to promote the development of Illinois libraries, initiated a free program for Illinois libraries. ILSDO created the “Fund for Illinois Libraries” as a temporary receptacle for donor checks whose rules or bylaws only permit giving to 501(c)3s. Upon deposit of such with ILSDO, for the credit of an Illinois library, ILSDO will immediately send its comparable payment to the library. ILSDO will not serve as an investment advisor or agent, nor will the money be invested by ILSDO; it will be sent directly to the library. But ILSDO will, as it has done as a 501(c)3 all along, file the required state and federal reports and tax returns, thus saving the libraries the responsibility and costs of doing so.

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