Special Considerations for Gifts by an Employer-Controlled Private Foundation to Individuals Affected By a Natural Disaster
September 19, 2017
By Michael Somer, CPA
Private foundations generally grant funds to public charities and individuals for education and travel. However, in certain circumstances, such as the occurrence of a natural disaster, they may wish to grant to funds for relief of affected individuals. Grants of this nature are allowed as long as certain requirements are met.
An employer-sponsored private foundation may make qualified disaster relief payments and the IRS will presume that such payments are consistent with the foundation’s charitable purpose if:
- The charitable class of beneficiaries is large or indefinite.
- The recipients are selected based on an objective determination of need.
- The selection is made using either an independent selection committee or adequate substitute procedures to ensure that any benefit to the employer is incidental and tenuous. The foundation’s selection committee is independent if a majority of the members of the committee consists of persons who are not in a position to exercise substantial influence over the affairs of the employer.
According to IRS Publication 3833, “Disaster Relief: Providing Assistance Through Charitable Organizations,” “a charitable class must be large enough or sufficiently indefinite that the community as a whole, rather than a pre-selected group of people, benefits when a charity provides assistance. For example, a charitable class could consist of all the individuals in a city, county or state. This charitable class is large enough that the potential beneficiaries cannot be individually identified and providing benefits to this group would benefit the entire community. If the group of eligible beneficiaries is limited to a smaller group, such as the employees of a particular employer, the group of persons eligible for assistance must be indefinite. To be considered to benefit an indefinite class, the proposed relief program must be open-ended and include employees affected by the current disaster and those who may be affected by a future disaster. Accordingly, if a charity follows a policy of assisting employees who are victims of all disasters, present or future, it would be providing assistance to an indefinite charitable class. If the facts and circumstances indicate that a newly established disaster relief program is intended to benefit only the victims of a current disaster without any intention to provide for victims of future disasters, the organization would not be considered to be benefiting a charitable class. Because of the requirement that exempt organizations must serve a charitable class, a tax-exempt disaster relief or emergency hardship organization cannot target and limit its assistance to specific individuals, such as a few persons injured in a particular fire.”
The group of people affected by a hurricane that causes widespread damage to property and loss of life in several counties of a state is an example of a charitable class. The group of people affected by this event is large enough that providing aid to this group benefits the public as a whole.
In determining a recipient’s need, per Publication 3833, a disaster relief organization must make a “specific assessment that a recipient of aid is financially or otherwise in need. Individuals do not have to be totally destitute to be financially needy; they may merely lack the resources to obtain basic necessities. Under established rules, charitable funds cannot be distributed to individuals merely because they are victims of a disaster. Therefore, an organization’s decision about how its funds will be distributed must be based on an objective evaluation of the victims’ needs at the time the grant is made.” However, an individual who is eligible for assistance because the individual is a victim of a disaster or emergency hardship has no automatic right to a charity’s fund. A charitable organization is responsible for taking into account the charitable purposes for which it was formed, the public benefit of its activities, and the specific needs and resources of each victim when using its discretion to distribute funds.
Assistance Benefiting Company Employees
Employer-sponsored private foundations that wish to provide emergency assistance benefiting employees of the sponsoring employer may face several issues. According to Publication 3833, employer-sponsored private foundations may provide assistance to employees or family members affected by a “qualified disaster” (as defined in the Internal Revenue Code ) as long as certain safeguards are in place to ensure that such assistance is servicing charitable purposes, rather than the business purposes of the employer. A “qualified disaster” is defined as a disaster that results from terrorist or military actions, results from an accident involving a common carrier, is a Presidentially declared disaster or is an event that the Secretary of the Treasury determines is catastrophic. Employer-sponsored private foundations can only make payments to employees or their family members affected by qualified disasters, and not in non-qualified disasters or in emergency hardship situations.
Additionally, the IRS will presume that payments in response to a qualified disaster made by a private foundation to employees (or family members of employees) of an employer that is a disqualified person (such as a company that is a substantial contributor) are consistent with the foundation’s charitable purposes if it meets the three requirements stated above regarding charitable class, selection of recipients based on an objective determination of need, and selection of recipients is made using an independent selection committee or adequate substitute procedures. If these requirements are met, the foundation’s payments will be treated as being made for charitable purposes and will not be considered to be prohibited self-dealing. This presumption that the payments are not self-dealing does not apply to payments made to, or for the benefit of, individuals who are directors, officers, or trustees of the private foundation or members of the foundation’s selection committee. However, Publication 3833 indicates that, even though the foundation may meet all the above requirements, the IRS may still review the facts and circumstances to ensure that any benefit to the employer is tenuous and incidental, and that its program is not used to induce employees to follow a course of action sought by the employer or designed to designed to relieve the employer of a legal obligation for employee benefits.
The Internal Revenue Code provides that “qualified disaster relief payments” from any source, including employers, reimbursing or paying individuals’ specified expenses in connection with qualified disasters are not taxable as income and are not subject to employment taxes or withholding. Qualified disaster relief payments include payments received (regardless of the source) for the following: reasonable and necessary personal, family, living or funeral expenses incurred as a result of a qualified disaster; reasonable and necessary expenses incurred for the repair or rehabilitation of a personal residence due to a qualified disaster (a personal residence can be a rented residence or one the taxpayer owns); and reasonable and necessary expenses incurred for the repair or replacement of the contents of a personal residence due to a qualified declared disaster. Qualified disaster relief payments do not include payments for expenses otherwise paid for by insurance or other reimbursements; or income replacement payments, such as payments of lost wages, lost business income, or unemployment compensation.