When donating money to an organization for a specific cause, is it legal / ethical for a non-profit to "Sunset" or close out a restricted fund if the fund's mission failed or changed?

Long story short, for about 10 years, some of us former Minnesota Transportation Museum members (and board members) raised money to repaint the Great Northern SDP40 #325 into Big Sky Blue. The gentleman who worked for BNSF at the time of the locomotives donation in 2009(ish) loved BSB and wanted to see the Museum succeed in raising the money to paint 325 in BSB.

Approximately $16,400 was donated toward the project. About 5 years ago, the goal was not only to repaint 325, but to also have a bunch of needed steel / body work done so the locomotive wouldn't look like a hooptie up close and personal. Our overall goal was around $25,000.

Earlier this year, a member of the Minnesota Transportation Museum stepped forward to pay for the whole repaint, at a cost of $60,000. The locomotive is at Relco getting paint along with an MTM coach.

Here's the issue I currently have, the most recent post on Facebook from MTM is concerning to me as a donor.

I don't think reallocation of funds is legal without written permission from donors, whether by Minnesota or Federal Statute.

I GUARANTEE MTM's Treasurer has the records down to the penny, of who donated how much. It is my opinion they won't go through the motions of asking donors politely because MTM has a track record over the past year and a half of doing some really stupid things.

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"UPDATE ON 325 LOCOMOTIVE: The 325 restoration and paint job is well underway. We expect to have 325 operating in Osceola in August. Thanks to the special donor who is supporting the restoration in traditional Great Northern colors.

Thanks also to those who originally donated to painting the locomotive in big sky blue, and for your generosity in allowing your donation to be used for other priorities. MTM will sunset that restricted account at the end of June, 2023. Anyone requesting a refund has until then to notify the MTM office, provide proof of the donation, and accept tax reporting requirements of a refund.

Requests should be directed by email to director@trainride.org. Funds remaining in the account as of July 1, 2023 will be redirected to additional expenses incurred on the 325. Otherwise your donation will still be used to preserve this historic locomotive.

Thank you for your support!"

An Internet search for "nonprofit restricted funds" will find a number of good discussions and answer your basic question on whether an organization can expend restricted funds for something other that than what was permitted under a donor's restrictions.

Beyond that, and assuming that you aren't in a position to discuss your concerns with the board of directors, you would be better served by getting advice from an attorney or CPA.

It occurs to me that an intelligent approach to this would be for a museum to approach the big donor, and ask him/her/them to accept a transfer of $16,400 of their painting/restoration donation to other museum uses, and apply the restricted donations to their original cause. That would make everything above-board and legal.

The appropriate question, of course, is whether or not the MTM approaches every past paint-fund donor and makes the "refund or transfer?" query. IF they do not, they have something of an issue.

My takeaway from the OP was that the issue wasn't that someone else had funded the paint job, but that it was the wrong color.

When TVRM’s former President Robert Soule passed away, it was encouraged to donate to the #5288 restoration fund. I often wonder how my money was actually spent.

It would be nice to at least get an explanation of why money was spent in a different way. It definitely makes me want to donate less to such causes.

Correct, they wanted the later Big Sky Blue paint scheme and the donation is for the traditional Green and Orange. Whichever you feel is a better choice, it doesn't change the fact the money was earmarked for something that's not happening now.

Not a lawyer, don't play one on TV and I don't know the mechanics of "restricted funds".

At least they're offering donations, so that's a good start. As a donor, I think I would have preferred to get a letter saying "That project has been cancelled, due to this... Our records show that you donated $xxxx. Please advise whether you'd like to get a refund, or would choose to allow us to use the funs for general restoration etc.

I can certainly see the advantage of the "We're keeping it unless you tell us otherwise, and do it within 30 days", but I can also see where donors might be thinking "if I'd wanted this to go to general funding, I'd have donated to general funding.

Now, the question is how many simply wanted a nice paint job on the loco and will be happy, and how many were set on having a certain specific scheme?

If you ordered and paid for steak and are served chicken you may say “well I just wanted to eat” but many would ask for a refund simply because it’s not what they wanted or for the simple fact that it wasn’t what they ordered and were promised.

That doesn’t mean the chicken dinner is bad.

Yes, I agree, and I can see why this would be problematic. I suspect they do as well, which is likely why they're saying "Contact us if you want a refund and provide documentation" rather than contacting donors and saying "What is your preference?" The harder your make it, the less likely folks are to ask for refunds.

Some of the online fund raising sites have automated this, where they say that if the goal isn't reached, they simply refund the money. Seems like the best way to handle restricted funds, since they were given with a specific goal in mind.

However, not knowing anything about the loco's condition, current paint scheme or how the funds were raised, I'm not sure if any of the donors would be of the opinion that while Big Sky Blue is nice, any paint job is better than what it has now and be OK with the change to another scheme.

Here are some thoughts based on my 10-year tenure as treasurer of a 501(c)(3) non-profit and over 20 years on the boards of 501(c)(3) museum-type organizations. Disclaimer - I'm not an attorney or an accountant. I'm not an expert, but I've learned enough to stay out of trouble.

When someone contributes for a particular purpose and the organization accepts a donation for that purpose, there is a moral obligation to follow the donor's desires.

When a donor contributes for a particular purpose there may also be a legal obligation to honor those desires and record them as restricted funds. Some questions that could affect the legal status - Did the donor formally express what the contribution was for, or did the organization formally solicit donations for a particular purpose? Did the donor receive something of value in exchange for their donation? Was there a stipulation by the non-profit that if the project wasn't completed within a certain time frame that the funds could be used for something else?

There's a whole body of state case law on use of "restricted funds", and all states may not be entirely on the same page. But, as a general matter, donor "restricted funds" must be used for the purpose they were donated unless the donor agrees to an alternate use or a court approves an alternate use. There's a legal doctrine called "cy pres" (or something like that) covering the latter scenario. For example, if a donor donated funds to a particular project but the organization needs the funds for other purposes to stay in business, a court may approve such use under this doctrine. Keep in mind that this is all from the top of my head, so I may have misstated something. I'm old and getting senile (my wife says the "senile" part should be present tense).

One lesson from this is that an organization should be careful not to define restricted funds too narrowly in its solicitations . For example, "donate to the paint the XYZ locomotive fund" is more restrictive than "donate to the XYZ locomotive fund so we can paint the engine and to do other needed work". Also, as a general matter, it's a bad idea to have multiple restricted funds for a single project.

It may depend on if your donations were collected by "Minnesota Transportation Museum" or "Minnesota Transportation Museum Big Sky Fund" for example. If everything was collected to the general fund then those donations may not be restricted.

Ultimately you need to ask an actual lawyer if you wish to get a definitive answer.

Weren't there also concerns that MTM was reallocating restricted funds that were intended for restoration of the Ranch Car after MTM threw in the towel on it after the meltdown they had a few months back?

It is my understanding that once a donation was received and the non profit has sent out a receipt, if the donation is returned to the donor it comes with a 1099 and may be taxable.