Ethics Scenario #27: Harristown Musical Association

27. The Harristown Musical Association generates income by a partnership it has with a for-profit company that sells donated vehicles. The partnership works by having the nonprofit organization solicit the donation of surplus vehicles. The for-profit partner picks up the vehicles, processes all of the paperwork for the donor to receive a tax deduction, and then sells them at a hefty profit. The charity typically receives 10% of the sale price of the vehicle, but has almost no direct costs itself, so it risks nothing by accepting the vehicles for donation. The Harristown Musical Association purposely avoids finding out how much these vehicles sell for and how little it receives from this partnership so that the arrangement is not threatened, and it can plausibly respond that it doesn’t know how much profit the for-profit partner made on the sale. However, the donors do receive a substantiation letter from the charity, and the charity, according to IRS regulations, informs the donor when the sale price of the vehicle is less than $500. Rarely does that value exceed $500 in the case of that particular vendor because he often buys the vehicles himself for use in his auto parts business.

a. Is the charity acting unethically if it solicits donations from individuals, knowing that most of the revenue accruing from the donation of the donated vehicles accrue to the for-profit partner?

b. Is the charity acting unethically if it purposely keeps the donor unaware of amount of the donation actually received by the charity in exchange for the donation?

c. What can the IRS do to assure that donations intended for charitable purposes are not siphoned off by private companies exploiting the brand name of a charity?