Disaster Relief Requirements

In light of the Sept. 11, 2001 terrorist attack and subsequent anthrax attacks, the IRS released a special publication titled Disaster Relief: Providing Assistance Through Charitable Organizations. The publication provides important guidance on employer-sponsored assistance programs, as well as on the special rules enacted in the Victims of Terrorism Tax Relief Act of 2001 (VTTRA) that apply to charities providing relief to attack victims.

Previously, a considerable debate had ensued as to the circumstances under which employer-sponsored assistance programs could result in inurement, private benefit or self-dealing that could affect an organization's tax-exempt status or result in imposition of excise taxes. In addition, after media attention concerning eligibility for aid as a result of the September 11 attacks, several charitable organizations made inquiries about how to distribute funds to victims. The information provided by the Service in its new publication seems to clarify somewhat the standards by which employer-sponsored assistance programs and September 11 disaster-relief programs will be judged.

Employer-Sponsored Programs

When natural or civil disasters take place that affect employees, many employers want to reach out to their employees and their employee's families by providing financial aid through a charitable organization. Employers can provide such support through public charities or private foundations; however, public charities can provide a broader range of assistance. A private foundation that is employer-sponsored is limited to making "qualified disaster" relief payments. The IRS has defined that term to include a disaster that results from terroristic or military actions, a Presidentially declared disaster, a disaster that results from an accident involving a common carrier or any other event that the Service determines as catastrophic. Public charities, however, can generally establish employer-sponsored assistance programs to respond to any disaster or employee hardship, including illness, death or other personal events.

Employers and the charitable organizations with which they work are encouraged to take steps to ensure that the organization's provision of aid to employees will be consistent with the organization's charitable purposes. In its new publication, the IRS explains that if the employer and sponsor and the employee (or the employee's family members) meet certain requirements, it will presume that disaster payments qualify. Those requirements are:

1. The class of beneficiaries must be sufficiently large or indefinite;

2. The recipients must be selected based on an objective determination of need; and

3. The selection must be made using either an independent selection committee or adequate substitute procedures to ensure that any benefit to the employer is incidental. The selection committee would be deemed to be independent if a majority of its members is not in a position to exercise substantial influence over the employer's affairs.

If these requirements are met, the Service will treat the payments as made for charitable purposes, not resulting in employee compensation. For private foundations, the payments will not result in prohibited self-dealing simply because the recipient is an employee (or family member of an employee) of the employer-sponsor. However, private foundations should be aware that payments that otherwise would be self-dealing—such as payments to directors, officers, trustees or members of the foundation's selection committee—nonetheless could still be self-dealing.

September 11 Disaster Relief

Assessment of need. Generally, an organization providing disaster relief must make a specific assessment that an aid recipient is financially or otherwise in need. Individuals are not automatically entitled to relief simply because they are disaster victims. An exception to this general rule applies for the September 11 terrorist-attack victims.

Under the VTTRA, charitable organizations making payments "by reason of the death, injury, wounding, or illness of an individual incurred as a result of the terrorist attacks against the United States on September 11, or an attack involving anthrax occurring on or after September 11, 2001 and before January 1, 2002," are not required to make a specific assessment. In its new publication regarding disaster relief, the IRS explains that this rule would apply if the organization makes the payments in good faith using a reasonable and objective formula that it applies consistently.

The Service will interpret "good faith" to mean that the charity is doing its best to accomplish its charitable purpose. It will interpret "a reasonable and objective formula that is consistently applied" to mean that the charity is using objective distribution criteria that take into account all pertinent circumstances (including the size of the amounts distributed) to avoid impermissible private benefit. As the publication explains, a charitable organization that assists families of victims killed in the line of duty on September 11 can, under a special rule, make distributions based on the number of families, family size or the age of dependent children—even though it does not consider each family's specific financial and other needs.

Reporting requirements. A charitable organization that makes payments using the special rule for September 11 disaster relief must describe these payments specifically in its annual return. Public charities filing Form 990, Return of Organization Exempt From Income Tax, must describe all such payments in a separate narrative of "Program Service Accomplishments" on Part III of Form 990 or 990EZ. Private foundations filing Form 990-PF, Return of Private Foundation, must describe all such payments in a separate narrative of "Purpose of Grant or Contribution" in Part XV, Line 3, of Form 990-PF.

From Katrina D. Walker, J.D., Washington, DC