Charitable Donations and the IRS

Charitable Donations and the IRS (ii)
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Questions for Charities – Natural Disasters

The following is from the Internal Revenue Service (IRS).

What are the federal tax requirements to form a charity to help disasters like Hurricane Katrina and other natural events victims?

A new charitable organization with anticipated annual gross receipts over $5,000 must apply for tax-exempt status from the IRS. (There are exceptions to this general rule – churches, synagogues, temples, and mosques may, but are not required to, apply for recognition of tax-exempt status). Starting Out discusses how to form an organization that will qualify as a charitable organization under section 501(c)(3).

An organization must use Form 1023, Application for Recognition of Exemption, to apply for recognition of exemption.

I want to hold a fundraising event to benefit existing charities. Are there any special rules?

To ensure that contributors can deduct contributions made at a fundraising event, one or more qualified charities must conduct the event, so that the contributor can document that the gift was made to a qualified charitable donee. If someone other than a charity is conducting the event, the charity must clearly authorize that person to act as its agent in raising funds. The IRS provides assistance to donors in verifying that a charity is qualified.

Federal tax law applies substantiation and disclosure requirements to charities that receive deductible charitable contributions. For a complete explanation, see Publication 1771, Charitable Contributions: Substantiation and Disclosure Requirements.

Can a charity provide disaster relief limited to affected employees of a company?

An organization can be exempt as a charitable organization if it benefits a charitable class (see the following question). Beneficiaries must be needy or distressed. Therefore, aid recipients must be selected based on an objective determination of need or distress, and the selection must be made using either an independent selection committee or substitute procedures adequate to ensure that any benefit to the employer is incidental and tenuous. See Publication 3833 for information on employer-sponsored assistance programs.

A corporate private foundation may provide disaster assistance to corporate employees without being subject to self-dealing taxes if it follows the above-referenced criteria. However, employees who are disqualified persons may not receive grants from the corporate foundation.

What exactly is meant by charitable class?

The group of individuals that may properly receive assistance from a charitable organization is called a charitable class. A charitable class must be sufficiently large or indefinite that the community as a whole rather than a pre-selected group of people is benefited. For example, a charitable class could consist of all individuals located in a city, county, or state. If the eligible group of beneficiaries is limited, such as to employees of a particular employer, the group of individuals eligible for disaster assistance must be indefinite. This means that the relief program must be open-ended and include employees affected by the current disaster and those who may be affected by a future disaster. In this circumstance, the total number of members comprising the class cannot be precisely quantified. Although it may be possible to determine the precise number of people who were victims of a present disaster, it would be impossible to quantify all those who could be affected by future disasters, as well. Accordingly, if a corporate foundation follows a policy of providing assistance to employees who are victims of all disasters, present and future, it would be providing assistance to a charitable class.

Caution: If the facts and circumstances indicate that a newly established disaster relief program to help employees is intended to benefit only current beneficiaries without any intention to provide for future disasters, a charitable class would not be present.

Can a charity assist businesses affected by a disaster?

If a charity benefits the poor and distressed or underprivileged directly, the charitable purpose intended to be accomplished is clear. Where the charity intends to accomplish an exempt purpose indirectly through a business (1) the assistance must be reasonably related to the accomplishment of an exempt purpose, and (2) private benefit to the business must be incidental. Although a business is not itself a member of a charitable class, and thus not an appropriate charitable object, it may be the means to accomplish charitable purposes.

Where a charity intends to accomplish a charitable purpose by assisting businesses, evidence of insignificant private benefit would include a showing that the business does not have adequate resources from its own assets, conventional financing, or insurance to recover from the disaster. Moreover, a charity would need to determine that without its intervention the business would not remain in the area.

Do you intend to provide a model application?

Form 1023, Application for Recognition of Exemption under Section 501(c)(3) of the Internal Revenue Code, Publication 557, Tax-Exempt Status for Your Organization, and Life Cycle of a Public Charity, provide detailed information about applying for exemption. A prototype application would not be particularly helpful because organizations are required to provide detailed information about their own activities, finances, governing boards, and other types of information particular to an applicant.

Will a large donation made by an employer to an employer-sponsored public charity to provide funds for Hurricane Katrina relief programs cause the charity to fail its public support test and become a private foundation?

A large donation made by the sponsoring employer may cause an employer-sponsored public charity that normally satisfies the one-third public support test to fail that test. The organization may still satisfy the facts and circumstances test to remain a public charity and avoid private foundation status, however. To satisfy the facts and circumstances test, the organization must receive at least 10 percent of its support from donations from public sources and operate in a manner designed to attract donations from the general public, community, or membership group. For more information about the facts and circumstances test, see Publication 557, Tax-Exempt Status for Your Organization.

The IRS is expediting its review of applications. How can I request expedited treatment?

Expediting an application means that the application is worked ahead of the regular order (date received). Charities applying under the special expedited procedures for Hurricane Katrina organizations must write “Disaster Relief, Hurricane Katrina” at the top of their application form.

Caution: An organization that requests expedited processing of its exemption application should provide a written explanation justify the need for expedited treatment. Expedited treatment does not guarantee exemption. It does mean that an application is processed before other applications that do not require expedited processing.

How can I find out whether an organization is listed with the IRS as a qualified charitable organization eligible to receive tax-deductible contributions?

People who have a specific charity in mind can make sure that it is a qualified charity by searching an IRS-approved list available on the IRS website. IRS.gov has an on-line search feature that allows people to find qualified charities. Some organizations, such as churches and governments, may be qualified even though they are not listed. Newly qualified charities that provide Hurricane Katrina relief are listed in an addendum section that is listed on the search feature web page.

If an employer provides assistance directly to employees who are in need because of Hurricane Katrina without going through a charitable organization, is such assistance taxable income to employees?

Amounts paid to reimburse or pay reasonable and necessary personal, family, living, funeral expenses or for the repair or rehabilitation of a personal residence incurred as a result of Hurricane Katrina are not subject to federal income taxation to the extent any expense compensated by the assistance is not otherwise compensated for by insurance or otherwise. See Revenue Ruling 2003-12, 2003-1 C.B. 283.

Can a qualified charitable organization that does not do disaster relief give money to a disaster relief organization helping the victims of Hurricane Katrina?

Yes. One qualified section 501(c)(3) charity can give money to another qualified charity to carry out disaster relief.

May an organization provide Hurricane Katrina relief even though disaster relief was not specified in its exemption application?

Yes. An organization that is qualified under section 501(c)(3) may engage in other activities that accomplish charitable purposes even though those activities were not described in its exemption application, without having to notify, or obtain permission from, the IRS. The organization should report such new activities to the IRS at: Internal Revenue Service, P.O. Box 2508, Cincinnati, Ohio 45201. It should also report new activities on its annual return. When reporting new activities, include an employer identification number on all correspondence with the Internal Revenue Service.

I have looked at Publication 3833, Disaster Relief: Providing Assistance Through Charitable Organizations. Where can I go to find information on the legal requirements on which it is based?

The IRS website contains a wealth of information. One item of particular interest is an Exempt Organizations Continuing Professional Education Text article entitled entitled Disaster Relief–Current Developments in the Exempt Organizations Continuing Professional Education Technical Instruction Program.


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