Question: A recently enacted law provides tax relief to victims of the September 11 attacks. What impact will this law have on charities aiding these victims?
Answer: In January, President Bush signed into law the Victims of Terrorism Tax Relief Act of 2001. The Act generally provides tax relief to the victims of September 11, the recent anthrax attacks, and other “qualified disasters.”
The Act also provides a safe harbor for section 501(c)(3) organizations that make payments to individuals in connection with victims who suffer death, injury, wounding, or illness as a result of the September 11 terrorist attacks and the anthrax attacks in 2001. Under this safe harbor, charities are released from the usual legal requirement of specifically assessing a recipient’s neediness, as long as the payments are made in good faith, using a reasonable, objective, and consistently applied formula. In addition, if a private foundation makes payments under the same circumstances, the payments will not be subject to the usual legal prohibitions of “self-dealing.”
The Technical Explanation of the Act provided by the Joint Committee on Taxation states that the Act does not change the other substantive requirements for exemption under section 501(c)(3), including the prohibition against private inurement. Payments still must be for public and not private benefit and must serve a charitable class.
Under this safe harbor, a charity could make a pro rata distribution to the families of firefighters killed in the September 11 attacks without considering the specific financial needs of each family. But it would not be appropriate for a charity to make pro rata payments based on the recipients’ living expenses before September 11 if the result of using such a formula would provide significantly greater assistance to persons in a better position to provide for themselves than to persons with fewer financial resources. Such a formula would not meet the “reasonableness” requirement of the safe harbor.
The case of future disasters is also considered by the Explanation. Ordinarily, payments to individuals that do not fall under the safe harbor provisions for payments in connection with the September 11 and anthrax attacks must follow the usual requirements of needs-based relief.
On the other hand, the Explanation states that Congress expects the IRS will presume that a charity providing cash assistance in good faith to victims of a qualified disaster and their family members is acting within the requirements of section 501(c)(3) if the class of beneficiaries is sufficiently large or indefinite and the charity can demonstrate that it is applying consistent, objective criteria for assessing need.
For this purpose, a “qualified disaster” is defined as, among other things, a disaster that results from a terroristic or military action, a presidentially declared disaster, a disaster that results from an accident involving a common carrier, or from any other event determined by the Secretary of the Treasury to be of a catastrophic nature.
If qualified disaster relief payments are made by a private foundation to employees (or their family members) of an employer that controls the foundation, the Joint Committee Explanation states that the above presumption will apply if recipients are selected by an independent committee of the private foundation, a majority of which do not have substantial influence over the affairs of the employer. The presumption would not apply to payments made to or for the benefit of a disqualified person or member of the committee.
According to the Explanation, Congress intends for the IRS to handle a private foundation’s qualified disaster relief payments in particular ways: (1) payments will not be treated as self-dealing merely because the recipient is an employee (or a family member of an employee) of a disqualified person with respect to the foundation, (2) payments will be treated as in furtherance of proper purposes, and (3) payments will meet the applicable requirements for private foundation grants to individuals. The Explanation also directs the IRS to issue “prompt guidance” consistent with the Act.
In the end, we have yet to hear from the IRS as to how it will interpret the guidance of the Joint Committee. Regardless, the Act significantly changes the rules governing public charities and private foundations involved in disaster relief. The Act also significantly changes the taxation of disaster relief payments to individuals made by charities, private foundations, and employers; for example, it clarifies that an employee who receives qualified disaster relief from his employer’s foundation will not be subject to tax on the payments.
V. Moore is a senior manager in the Exempt Organizations Tax Practice of KPMG LLP. For more information on the services KPMG provides to donors, charities and private foundations, please contact Mr. Moore at (202) 533-4172. The questions and answers presented here are illustrative only and should not be considered tax or legal advice. Consult a qualified trust and estate attorney for answers to specific questions.