IRS responds: Rules for disaster fundraising. (Taxing Issues).
Due to the level of activity, the Internal Revenue Service (IRS) has issued an advance copy of a new publication called Disaster Relief: Providing Assistance Through Charitable Organizations, was released on September 14. It was released just three days after the attacks.
The publication addresses four subject areas: (1) using existing charitable organizations; (2) establishing a new charitable organization; (3) how organizations can help victims; and (4) the rules on gifts and charitable contributions. In addition, it contains a list of useful IRS publications and telephone numbers.
Your organization may be involved in aiding the victims, or collecting funds for that purpose. You may also be considering establishing a new organization to focus on the needs of the disadvantaged. If you are involved, you need to know some of the key principles.
Many organizations exist to help relieve human suffering. According to the IRS, such activity is "charity in its most basic form." Charitable organizations can provide immediate help, long-term help or both.
The rules covering existing organizations are relatively straightforward. Donations can be made to organizations that serve these purposes, or existing organizations can expand their purposes to include assistance to victims. If you choose to expand your purposes, you will have to amend your by-laws or other governing documents and notify the IRS of your new purpose.
The IRS publication suggests that using an existing organization may be simpler than establishing a new one. However, it also notes that you have. to give the existing organization full control and authority over the program. Thus, the question is whether retaining control is critical to you or your organization.
You can establish a new organization by following the traditional route. That is, you form it legally, and then you file Form 1023 with the IRS to obtain a determination that you qualify for tax exemption under Code Section 501(c)(3). The IRS has established a special expedited review and approval process for new organizations.
How can you help victims?
When you file Form 1023, you should write "Disaster Relief, September 11, 2001" at the top. Your application will then receive immediate attention. While this may have been critical immediately after the disaster, it will still speed the process if you are filing now.
A charitable organization must provide assistance to a charitable class of people. These can include persons who are impoverished as a result of low income and lack of resources, those who are temporarily in need of food or shelter due to the disaster, victims of a civil disturbance or crimes of violence or abuse, and otherwise experiencing financial or other difficulties.
The class must be large or indefinite enough "that providing aid to members of the class benefits the community as a whole." Therefore, you can't form an organization to benefit particular pre-selected individuals, and contributions can't be earmarked to benefit specific persons.
The IRS publication illustrates this by some examples. In one, a child suffers severe burns in a fire The parents' friends and co-workers form a foundation to raise money to meet the medical expenses. The foundation will not qualify as a charitable exempt organization, as there is no charitable class that will receive the benefits. However, if the foundation is formed to help all children injured by disasters, establishes criteria to decide who can get assistance, and meets other requirements, it can qualify. Of course, it still couldn't accept donations earmarked to the particular child injured in the fire.
If your organization provides short-term help to disaster victims, its charitable class will be different from that of an organization that provides long-term aid.
The IRS publication discusses this in terms of victims of a terrorist attack. If your organization is providing funds to meet immediate financial and medical needs to the victims or their families, longer-term financial need may not be an important criterion, as the families require the help now.
However, if it is formed to help provide help for anticipated long-term needs, the families' financial condition at the time of the grant will be a critical fact for you to determine. Just because a member of the family was a victim, the family may not need financial help. Insurance and other resources can obviate the need.
An example of a long-term program is providing funds for the education of children of disaster victims. This is a need that will occur in the future. Therefore, you will have to establish a mechanism to review the financial need of applicants for assistance to make sure they qualify as part of the charitable class when the grant is made.
The publication spends some time discussing the special rules that apply if an employer establishes a program to provide assistance to employees. Often, the employer will establish a charitable foundation. The key question is whether the employer is acting to chiefly serve its private interests. If so, then the organization will not qualify as charitable, and the employees will likely owe tax on the assistance.
To avoid this characterization, there are 10 criteria listed. If they are satisfied, the IRS will consider that employment is merely a factor, rather than the primary basis for providing the relief.
The criteria include whether the organization is a public charity or a private foundation; whether the employer controls it; whether it fulfills the employer's legal obligation; whether an independent committee administers the program; whether there are written criteria for assistance that are objective and nondiscriminatory; whether all employees are informed of the fund and whether it accepts voluntary contributions.
It is not clear how many of these have to be met to obtain exempt status. However, what is clear is that employer-sponsored organizations are held to high standards in order to obtain exempt status.
General gift and contribution rules
When individuals contribute money they are making gifts to the recipient. If the recipient is a qualified charity, the donor can claim a tax deduction. If the recipient is an individual, no deduction is allowed. The recipient of a gift does not owe taxes on the money, so gifts can be a good way to assist those in immediate need, regardless, of the tax consequences to the donor.
If the gift is to a charity, the donor should make sure that the organization is qualified. This can be done by asking for a copy of their tax return; or checking them out through the IRS Web site. If the gift exceeds $250; the donor must obtain an acknowledgment in order to deduct it as a contribution.
In addition to the publication, the IRS has taken some other steps to assist disaster victims. The IRS has established a toll-free number, 1-866-562-5227, to assist people who are having trouble with their tax obligation due to the September 11 attacks. There is also a special email address, email@example.com for businesses to obtain answers to questions about their tax obligations.
The IRS granted a number of blanket extensions of time for filing returns and paying taxes to those involved. Congress is also considering legislation that will eliminate victims income tax liability. No laws have been enacted as of the time this article was written.
The IRS has been quite proactive in providing assistance and information in the wake of the disaster. Hopefully, you and your organization can obtain whatever information you may need to serve your constituents.
Harvey Berger is partner and national director of not-for-profit tax services in Alexandria, Va., for the accounting and management consulting firm Grant Thornton LLP.
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|Publication:||The Non-profit Times|
|Date:||Nov 1, 2001|
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