Nonprofit Accounting Basics

Disaster Relief Organizations

There have been so many disasters in recent years, both natural and financial. Many individuals and companies are seeking ways to help those in need. Existing charities often take the lead in collecting funds and goods that can be used for relief. In some cases, an employer group will want to provide relief to employees and communities where they are located. We have seen many new organizations formed for disaster relief and assistance and believe it may be useful to outline some of the rules. The information below is a summary and in part excerpted from IRS Pub 3833, Disaster Relief, Providing Assistance Through Charitable Organizations, cited at the end of this article.

Internal Revenue Code (IRC) 501(c)(3) Status for Disaster Relief Organizations

Relief of the poor and distressed is a 501(c)(3) charitable purpose. Relief can take many forms including providing food or shelter after a flood or earthquake, counseling of victims of crime or physical abuse, or assisting with longer-term needs of housing, healthcare, or education. Providing relief to persons in distress therefore can be a charitable purpose, provided the class of persons assisted is broad enough to constitute a charitable class, as opposed to being a single family or individual. A charitable class is large enough or sufficiently indefinite that the com¬munity as a whole, rather than a pre-selected group of people, benefits from the charity’s assistance. So, for example, if the class of people benefitted is all the people in a particular town hit by a tornado, the class is sufficiently large and indefinite to qualify.

Even if the group is smaller and limited to a particular group of employees or franchisees, the group could still qualify as a charitable class if the group is indefinite and open ended, such as one that includes victims of a current disaster and future disasters.

Assuming an organization qualifies as a 501(c)(3) organization, a determination must still be made as to whether the organization is a public charity or a private foundation. The classification as a public charity will depend upon whether there is broad-based public support as opposed to a few individuals or a company making the major contributions. Or, in some cases, a disaster relief organization may be classified as a public charity because it supports another public charity such as a community foundation. In the case of a new organization formed by a company to help employees in communities where there has been a disaster, it may be possible for that charity to show broad public support if other employees make donations. Even though the employees are associated with the company, they are still considered the general public when it comes to individual donations that are attributable to them personally.

In addition to the charitable class requirement, an employer relief organization cannot excessively control the public charity or impermissibly serve the related employer’s private interest.

The following requirements should be met:

  • the recipients must be selected based on an objective determination of need or distress, and
  • the recipients must be selected by an independent selection committee or similar procedures to ensure any benefit to the employer is incidental and tenuous.

The charity’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.

If these requirements are met, the public charity’s payments to the employer-sponsor’s employees and their family members in response to a disaster or emergency hardship are presumed: (1) to be made for charitable purposes and (2) not to result in taxable compensation to the employees.

Regardless of the public charity or private foundation status, a new nonprofit organization must submit an application for exemption (Form 1023) to the Internal Revenue Service. If the organization can show the victims of the disaster will be adversely affected if the application is not reviewed expeditiously, the application may receive an expedited review. Some of the elements of a request for expedited treatment include:

  • a compelling reason to process the application ahead of others;
  • a brief description of the disaster and details of how the organization will provide relief;
  • an explanation of the immediate need for the specific disaster relief services the organization provides;
  • a description of any pending grants, including information about the grantor and the amount or property to be received;
  • an explanation of how the loss of the grant(s) might impact the organization’s ability to operate and provide relief; or
  • any other anticipated consequences should the expedited processing be denied.

Private foundations can make need-based distributions to victims of disasters or to the poor or distressed. However, several issues arise when an employer-sponsored private foundation provides aid that favors the employees of the sponsoring employer, but only when it involves qualified disasters as defined in section 139 of the Internal Revenue Code. Also, some community foundations and other public charities maintain donor advised funds that can be used for employees who are victims of qualified disasters.

All organizations should maintain records to document that payments are for charitable purposes and made on an appropriate assessment of the individuals’ needs. An organization providing short-term emergency assistance would only be expected to maintain records showing the type of assistance provided, criteria for disbursing assistance, date, place, estimated number of victims assisted (individual names and addresses are not required), charitable purpose intended to be accomplished, and the cost of the aid.

This information is a summary of the information provided by the IRS on their website. For more detailed information, see the IRS website and Pub 3833 at http://www.irs.gov/pub/irs-pdf/p3833.pdf.

* For purposes of this section, the term ''qualified disaster'' means -- (1) a disaster which results from a terroristic or military action (as defined in section 692(c)(2)), (2) a presidentially declared disaster (as defined in section 1033(h)(3)), (3) a disaster which results from an accident involving a common carrier, or from any other event, which is determined by the Secretary of the Treasury (Secretary) to be of a catastrophic nature, or (4) with respect to amounts described in subsection (b)(4), a disaster which is determined by an applicable federal, state, or local authority (as determined by the Secretary) to warrant assistance from the federal, state, or local government or agency or instrumentality thereof.