Legal Brief

The events of September 11 have drawn attention to the IRS’s rules on providing assistance to victims of disasters. This column summarizes the existing guidance on this form of charitable grantmaking and provides references to other sources of information.

Helping the needy—whether their needs arise from poverty or a natural or civic disaster—is a charitable activity. Individuals and corporations may generally take a charitable income tax deduction for contributions to charitable organizations that aid disaster victims. Both public charities, such as community foundations, and private foundations may generally distribute funds to disaster relief charities as well. Donors may generally request that funds be spent in a particular geographical area or to provide a particular form of aid (scholarships for victims’ families, for example).

To ensure that they are organized and operated for public purposes, all charities should take care that their disaster relief programs serve a charitable class—a group large enough so that the specific recipients of aid will not be known to donors. A class that consists of families of all those hurt or killed in the September 11 attacks will certainly be large enough to qualify as charitable. It appears that many subsets of this group —families of firefighters and other rescue workers, for example—will also be large enough to qualify as charitable classes. Leaving the class open by including victims of future disasters among those eligible for assistance can help ensure the charitable nature of the effort.

Aid may not be solicited or donated for the benefit of one person, one family or a small group of people, no matter how needy or deserving of assistance these individuals might be. If a contribution is earmarked for a particular individual or small group, the IRS is free to disregard the existence of the charitable entity and treat the gift as having been made directly from one individual to another—a contribution for which no charitable deduction is available (earmarking is any oral or written understanding that a contribution will be routed in a particular way).

Grants to Individuals
Establishing a program of grants to individuals who are disaster victims raises a number of issues both for private foundations and for public charities.

Neither public charities nor private foundations are required to seek advance approval of disaster relief programs from the IRS, but there are a number of rules that should be followed in making these sorts of grants. Private foundations sponsored by corporations must be particularly careful in establishing individual disaster relief programs.

When a charity proposes to provide financial assistance to disaster victims or their families, it must establish that they are, in fact, needy. The IRS defines a needy person as someone who lacks the basic necessities of life—food, clothing, shelter, medical help or transportation—as a result of poverty or temporary distress. A person may have short-term needs in one or more of these areas even if he or she has resources (such as insurance or inheritances) that will be available in the long run. Not all losses make a person needy for the purposes of a charitable grant; it would not be charitable to give a grant to an individual to fix the roof on a vacation home. Charitable aid is available to help people obtain necessities that will re-establish their physical, mental and emotional well-being, not to replace lost income.

Providing Assistance to Corporate Employees
Corporations seeking to provide assistance to their employees must ensure that their aid conforms to the IRS’s rules in this area.

In recent years, the IRS has revoked its prior approvals of corporation foundation programs that aided employees in times of hardship. The IRS has now taken the position that a company foundation that provides disaster assistance to employees is serving a business purpose of the corporation, not a charitable aim. Corporate foundation disaster assistance grants may be deemed taxable expenditures and acts of self-dealing. Under this reasoning, grant funds constitute income to the recipient, as they are considered a form of compensation. While the Council on Foundations disagrees with this analysis, we must caution employers seeking to establish a disaster assistance program to work closely with their counsel.

Options available to employers include establishing a fund at an existing public charity that will benefit corporate employees and their families as well as other members of the general public. The charity must be able to demonstrate that it is applying consistent, objective criteria for assessing need and may be required to include people with no ties to the company on the fund’s selection committee.

Corporate employees are generally free to establish a charitable disaster relief fund for their fellow employees or for members of their profession at their own and other companies. Corporations may contribute to these funds, but they should take care not to dominate the funding or administration of these entities such that the IRS might deem them vehicles of the company rather than broad-based charitable efforts.

Documenting the Grant
The IRS has suggested that a detailed application is not necessary for short-term assistance but that longer-term aid (providing scholarships for disaster victims’ dependents, for example) will require more documentation. Recordkeeping requirements, which apply to all charities that make grants to individuals, demand that organizations keep on file the following: names and addresses of aid recipients; the amount distributed to each; the purpose for which aid was given; the manner in which the recipient was selected; and the relationship, if any, between the aid recipient and any charity insiders. Private foundations are required to identify individual grantees on their Forms 990-PF.

Grants to Individuals by Community Foundations by Jane C. Nober (Council on Foundations, 1999) discusses disaster assistance grants extensively and provides sample application forms and other documents. Order on-line or by calling 888/239-5221; cost is $35 for Council members, $60 for nonmembers.

A number of IRS resources provide guidance in this area:

• In the wake of the September 11 events, the IRS posted the advance text of a new publication, Disaster Relief: Providing Assistance through Charitable Organizations. This text is available in pdf format at www.irs.gov/relief/aid-charity-pub.pdf. There is also a link to the text on the Council on Foundations’ Web site, www.cof.org. 
• A 1998 chapter in a continuing professional education manual for IRS agents titled “Disaster Relief and Emergency Hardship Programs” (R. Rivera Huetter and M. Friedlander, IRS Continuing Professional Education Exempt Organizations Technical Instruction Program for FY 1999, page 219) covers the concept of the charitable class and both employee- and employer-sponsored emergency assistance programs. It contains an extensive discussion of the IRS’s negative views on corporate foundation disaster relief programs. The document is available in pdf format at www.irs.ustreas.gov/prod/bus_info/eo/topick.pdf. 
• After the 1995 bombing of the Alfred P. Murrah Federal Building in Oklahoma City, the IRS summarized the existing law on disaster relief and provided answers to very specific questions on topics such as the expenses that charitable disaster aid may cover. This document is available in pdf format on the Council’s Web site at www.cof.org/government/irsguidance.pdf. 
• Rev. Rul. 56-304 (1956-2 C.B. 306) sets out the recordkeeping requirements for charities that make grants to individuals.