How to Assist When Disaster Strikes: Relief Guidance for Charitable Organizations
Tax-Exempt Organizations 03/24/20 Norah L. Jones, Jodi P. Patt, Amanda K. Blaising, Patricia S. Marx
The rapid spread of the novel Coronavirus Disease 2019 (“COVID-19”), which was declared a global pandemic on March 11, 2020, has put the most vulnerable among us at risk and caused significant disruptions to businesses, economies, and the everyday lives of people all over the world. Charitable organizations can play a pivotal role in helping individuals and businesses impacted by this escalating global crisis, provided that certain requirements are satisfied.
I. Disaster Relief Generally
As a preliminary matter, a Code Section 501(c)(3) organization’s disaster or emergency hardship relief program must be structured to ensure that the organization serves public, rather than private, interests. To be considered charitable, the program generally must, at a minimum, meet the following requirements: (1) the class of persons eligible for assistance from the organization must be sufficiently large or indefinite such that providing aid to members of that class benefits the community as a whole; (2) the charitable organization must have control and discretion over the disbursement of funds; and (3) aid recipients must be selected on an objective and non-discriminatory basis. Other requirements or restrictions may apply depending on the specific facts and circumstances, including, but not limited to, the following:
- the charitable organization’s foundation status (e.g., public charity or private foundation);
- the class of persons eligible for aid under the program (e.g., for-profit businesses, a large group of unidentifiable individuals, only employees of a particular employer, etc.);
- the type of aid to be provided (e.g., financial assistance with mortgage or rent payments to prevent loss of a primary home, hot meals, low-interest loans, medical supplies, etc.);
- the basis for the assistance (e.g., financial or other need);
- the timeframe and duration of the aid (e.g., short-term emergency aid in the immediate aftermath of a disaster or long-term aid); and
- the legal authority invoked in connection with the disaster, if applicable (e.g., official Presidential disaster declaration, emergency declaration, etc.).
II. Employer-Sponsored Programs
With a significant portion of the country’s workforce unable to work as a result of exposure to COVID-19, school or business closures, government orders or guidelines, or similar social distancing measures, employers may consider working with affiliated or unaffiliated tax-exempt charitable organizations to provide relief to affected employees in a tax-effective manner. Any such employer-sponsored relief program must be structured to ensure that any benefit to the employer is merely incidental and tenuous and the employer is not able to exercise undue influence over the selection of aid recipients. Additional specific requirements apply depending on whether the charitable organization is classified as a public charity, a private foundation, or a donor-advised fund.
An employer-sponsored disaster relief program of a public charity generally must satisfy the following requirements:
- the class of beneficiaries eligible for relief must be sufficiently large or indefinite to qualify as a charitable class (e.g., employees of ABC, Inc., who are adversely impacted by any disaster, not just the current one);
- recipients must be selected based on an objective determination of need; and
- recipients must be selected by an independent selection committee, or adequate substitute procedures must be in place to ensure that any benefit to the employer is incidental and tenuous.
If these requirements are met, payments are presumed to be made for charitable purposes and not to result in taxable compensation to the employees.
Employer-sponsored public charities may provide relief to employees for any disaster or emergency hardship, provided that the above requirements are met.
By contrast, employer-sponsored private foundations and donor-advised funds may provide relief to employees of the employer only in connection with a “qualified disaster” under Code Section 139 (i.e., not non-qualified disasters or in emergency hardship situations). Additional requirements and restrictions apply, as described in greater detail in IRS Publication 3833.
“Qualified disasters” under Code Section 139 include, among others, (a) disasters determined by the President to warrant federal government assistance under the Robert T. Stafford Disaster Relief and Emergency Assistance Act (the “Stafford Act”); and (b) disasters resulting from any events determined by the Secretary of the Treasury to be catastrophic. President Trump recently approved COVID-19 major disaster declarations under the Stafford Act (each a “Disaster Declaration”) for the states of New York, California, and Washington (each, a “Qualified Disaster Area” and, together with any areas specified in future Disaster Declarations, the “Qualified Disaster Areas”). Disaster Declarations have not yet been issued for any other areas, however.
At this time, it is not entirely clear that COVID-19 is a “qualified disaster” for purposes of Code Section 139, except in the Qualified Disaster Areas. Until there is clarifying guidance on this issue, employers should exercise caution in establishing disaster relief funds through private foundations or donor-advised funds for COVID-19 relief outside of the Qualified Disaster Areas. Quarles & Brady will provide an update if and when such guidance is issued or there are further developments.
III. Income Tax Treatment of Relief Payments
For federal income tax purposes, gross income generally includes all income from whatever source derived, unless a specific exception applies to exclude the income. In the context of disaster relief, for example, relief payments an individual receives from a Code Section 501(c)(3) organization generally are considered to be gifts excludable from the recipient’s gross income under Code Section 102, so long as the organization complies with the requirements and restrictions described in this alert and in IRS Publication 3833. Where the payment is made to a for-profit business, the IRS will consider the surrounding facts and circumstances in determining whether the payment qualifies as a gift for purposes of Code Section 102. Other exclusions may apply under certain circumstances (e.g., qualified disaster relief payments from any source, including non-charitable entities or individuals, are excludable from income under Code Section 139).
IV. Special Temporary Relief
For certain disasters, the IRS may issue guidance providing temporary relief in addition to the relief available under applicable law. Examples include the following:
- Charitable giving incentives, such as a temporary suspension of charitable contribution limits for certain charitable contributions that are made within prescribed time periods for relief efforts in a disaster area and for which the donor obtains a contemporaneous written acknowledgment that the contribution was used for relief efforts;
- Extension of tax filing and/or payment deadlines, such as that announced recently and discussed further here; and
- Favorable tax treatment of leave-based donation programs in which employees may elect to forgo unused vacation, sick, or personal leave in exchange for cash contributions that the employer makes to charitable organizations providing disaster assistance.
Quarles & Brady is monitoring COVID-19 developments closely and expects the IRS to issue additional guidance as this situation continues to unfold. Any new COVID-19 guidance, once issued by the IRS, should be made available on the IRS’s coronavirus tax relief webpage.
This update is intended as a general summary of legal matters and not as specific advice to any particular client. If you have any questions concerning the subject matter of this update, please contact your Quarles & Brady attorney or: