“It was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair, we had everything before us, we had nothing before us…”
Charles Dickens, A Tale of Two Cities
Lost power, inability to contact relatives, violence, loss of basic necessities such as clothing, shelter, clean water, and emergency health care - in recent months, nightmare has become reality in many parts of the United States as well in our neighboring countries in the South. The news report one tragedy after another: terrorism, hurricanes, earthquakes, fire, and other disasters.
Yet these periods of suffering provide opportunities for human service. Acts of bravery, showings of kindness, and stories of heroic unselfishness abound as people rush to the aid of those in need. Indeed, many nonprofits respond with outpourings of food, medical supplies, other materials, and compassionate volunteers ready to care for their neighbors.
What key legal compliance considerations apply for nonprofits participating in disaster relief? Nonprofits need to stay true to their mission overall, avoid improper private benefit, remain mindful of time-related guidelines, report aid properly, and consider strategic initiatives like partnering with others or starting a new nonprofit to serve others most effectively.
What’s the Mission?
Through large-scale relief efforts, organizations provide services, material necessities, and even financial support to communities affected by disasters. Citizens who cannot help in person often send aid through money or donations of goods. These acts of “charity,” in the vernacular sense, when channeled through 501(c)(3) organizations or “public charities,” can provide significant tax benefits to participants, provided that both participants and the charities comply with numerous requirements under 501(c)(3) and related regulations.
Under section 501(c)(3) nonprofits must be organized and operated exclusively for tax-exempt purposes, such as religious, educational, or charitable. Such legal requirements apply both broadly for tax-exempt classification and specifically as reflected in a nonprofit’s corporate purpose statement (typically located in charter documents like articles of incorporation or bylaws). The IRS recognizes that “providing immediate aid to a needy person” generally qualifies as a tax-exempt charitable purpose, as does “lessening the burdens of government.” When disaster strikes, all affected may become appropriate objects of charity – sufficiently qualified by their circumstances to receive handouts of food, blankets, water, etc. in their time of dire need. Nonprofit organizations may provide such assistance, provided that the nonprofit’s efforts also fit generally within the nonprofit’s corporate purposes - e.g., to provide community assistance (charitable), to share God’s love through benevolence (religious), or to help students learn through helping others (educational).
Timing is Everything
In the context of federal tax-exempt activities, disaster relief is sorted into short-term and long- term relief. Recognizing the urgency of relief after disasters strike, the IRS standards on certain types of aid are more relaxed. However, with the passage of time, scrutiny on charitable beneficiaries increases and ultimately returns to normal standards.
a. Short-term Relief
With these compelling time-related considerations in mind, the IRS has identified certain types of relief which may offered immediately after a disaster with very little “red tape.” This short-term relief is described by the IRS as “providing immediate aid to a needy person in the wake of a disaster.” The IRS applies something like a “presumption of public benefit” standard in the context of this type of relief. Under this standard, everyone in the affected area is generally regarded to be of sufficient need to characterize the relief as for “public benefit.” For that reason, individual determinations of need for each person receiving relief are not required.
Short-term relief thus focuses on providing victims with food, shelter, clothing, and medical care. For example, people suddenly needing emergency care after a shooting, or perhaps people who stayed home through a hurricane in need of diapers and clean water from a pop-up shelter would likely qualify for short-term care. Notably, however, recipients of short-term care generally may not receive cash or similar types of financial support. Relief funds cannot be distributed to individuals merely because they are victims of a disaster.
b. Long-term Relief
Long-term relief is based on financial assessments that consider each prospective beneficiary’s individual needs and resources, as well as procedural safeguards to ensure such assessments properly are made. In other words, some people affected by disasters may need blankets and water one day, but then be able to restock from stores once things are back to normal; others may find themselves in far different circumstances for quite some time. By carrying out appropriate financial assessments, each Section 501(c)(3) may obtain and provide assurances that its charitable resources are used for qualified long-term charitable purposes.
Record-Keeping – Now and Later
For short-term relief, the IRS recognizes that the focus is properly on the aid given, not the paperwork. Consequently, recordkeeping requires only documentation of the type of assistance, criteria for disbursements, date and place of disbursements, number of victims assisted, charitable purpose, and cost of aid. This information should be developed as best as possible while planning for and distributing aid, with final reports prepared in a disaster’s aftermath.
Long-term relief efforts, on the other hand, require more substantive reporting. Best practices for nonprofits providing financial assistance and other long-term acts of benevolence include the following: requiring applications for financial aid; making assessments of each applicant’s need and other resources available; determining financial aid without any conflicts of interest among the decision-makers; and providing for accountability in use of such charitable resources, such as through continued contact with the recipients and follow-up written reports on financial assistance provided to others. These standards vary depending what assistance is given and how much. For example, providing a meal to a person who appears to be homeless hardly requires any assessment beyond a kindly smile; giving $500 to him or her, on the other hand, should involve an application and further evaluation of specific needs involved.
Remember that Public, Not Private, Benefit Matters to the IRS
Just how many people must a nonprofit help: many? a few? Under applicable tax law, a Section 501(c)(3) organization’s intended beneficiaries must be a class “large or sufficiently indefinite that the community as a whole benefits.” (IRS Publication 3833). Organizations can attain this status either by selecting a broad category of immediate recipients of aid or by creating the entity to continue in the long term to serve future victims of similar disasters.
Thus, a nonprofit’s disaster assistance should not focus on an overly narrow class of beneficiaries, such as only certain persons living in one neighborhood of flooded Houston or only persons working for one company in fire-ravaged areas of California. The nonprofit may broaden the charitable class easily by including more people who would qualify to receive aid after a specific type of disaster (e.g., all persons affected by California fires in 2017), or by expanding time-related considerations (e.g., all persons affected by hurricanes in Florida, not just in 2017).
As one example of the latter approach, after the tragic shooting at Sandy Hook Elementary School, some individuals sought to start a charity to support the families and victims of the attack. In the IRS’s view, this beneficiary class was too narrow for Section 501(c)(3) status. The legally appropriate solution was to develop and carry out a nonprofit corporate purpose to aid “these [Sandy Hook] families and victims and the families and victims of future similar acts of school violence.” By extending the organization’s mission to include relief for victims of “future similar acts,” the beneficiary group became sufficiently large to constitute public benefit.
Similarly, an employer-sponsored relief fund for “employees of Shell Oil who were impacted by Hurricane Harvey” would likely be denied exemption due to not serving the general public. However, a standing employee relief organizations or fund, with the purpose “to provide for Shell Oil employees and their families in the event of a disaster” could [JH2] serve a class which is sufficiently broad to satisfy IRS standards. In addition to creating an indefinite class of beneficiaries, the employer must satisfy two criteria. The organization must use objective measures to determine recipient’s need and make awards of assistance solely through an independent selection committee whose members do not exercise substantial influence over the business. This avoids potential situations where the employee relief organization might be operating for the private benefit of the employer.
How About Something New, and Fast!
Individuals seeking to create a new Section 501(c)(3) in response to a disaster should keep two things in mind: (1) expedited IRS approval is available, but rarely granted; and (2) the “public benefit” standard still applies, so organizations that seek to aid victims of a specific disaster should make their corporate purpose statement sufficiently broad, as explained above. The Service further requires that organizations seeking the expedited request demonstrate the existence of a compelling reason to process their applications ahead of others. Generally, this means a showing that the organization “is meeting an immediate need of disaster relief” and that “its ability to provide immediate assistance to such victims will be adversely impacted in a material way” if the process is not expedited.
With these considerations in mind, individuals seeking to start a disaster relief organization may wish to start early - and move quickly! Specific steps include getting the state nonprofit incorporation underway with a well-developed corporate purpose statement, strong leadership through directors and officers, bylaws and other key initial governance documents, and of course the IRS Form 1023 tax-exemption application. The application should contain specific information showing both clear public benefit and understanding of other tax-exemption requirements (e.g., applicable standards for short-term and long-term aid), as well as the standard financial projections and other key information.
Strategic Partnering Could Be Good Too
When disaster strikes, it takes a team to bring relief. Creative nonprofit leaders thus may wish to engage in strategic partnerships with other nonprofits, or even businesses and private individuals, to multiply effectiveness. Such partnerships may be ad hoc, such as to deliver water and blankets on a specified date. Other team efforts may involve a greater commitment, such as to purchase material goods together, to rent a vehicle for deliveries, to sponsor a fundraising event together, or to partner together for several weeks for disaster relief. Such higher-lever efforts likely warrant a written agreement to allocate each party’ respective responsibilities, including insurance coverage, charitable receipting, and use of volunteers and other workers. To the extent businesses or individuals are involved, they should be eligible to receive charitable tax deductions for any in-kind contributions.
One high-flying example could be a partnership between a nonprofit and a business or wealthy supporter who provide access to a privately-owned aircraft, to get much needed supplies to heavily impacted areas. Such strategic partners might not only loan their aircraft to assist disaster-relief charities in delivering supplies, but also provide pilots, fuel, oil, parking, and payment of other costs. Expenses directly attributable to the plane’s use for disaster-relief services will generally be tax deductible for the donor, although fixed costs related to the use of the aircraft (e.g., insurance or aircraft depreciation) will ordinarily not be deductible. Alternatively, a sponsorship agreement between a company and the nonprofit could be developed to allow the corporation’s loan of the private plane to be deducted as a business expense. The rules governing the deductibility of such contributions and/or business expenses are highly nuanced, so tax counsel is warranted along with other cautions such as focusing correctly on charitable benefits and attending to applicable FAA restrictions.
Nonprofits serve vital roles by helping others, especially in times of disaster. Doing so in compliance with IRS requirements means being aware of each organization’s mission and how disaster relief fits within it. In addition, it means becoming aware of where the needs are most critical, and how an organization may best respond – both short-term and long-term, with what types of resources, and to whom. It also may involve new initiatives, perhaps a new organization or deeply rewarding strategic engagement with others. And there is always the paperwork, but thankfully less for prompt disaster responses. Disasters are tragic, but we can all be deeply thankful for nonprofits that stand in the gap to serve others so powerfully and effectively.