Editorial: Planning For Disaster Relief

The Connecticut Law Tribune

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With the tragic results of Hurricane Sandy, the Newtown shootings, and the Boston Marathon bombings, there should be guidelines as to how organizations and individuals, wishing to render help, should proceed.

First of all, an existing charitable organization, such as the Red Cross, United Way or a hospital, may accept tax deductible contributions for the purpose of addressing the needs of persons involved in such tragedies.

This response may include short-term (emergency) assistance and longer term aid to ensure that needy victims have the basic necessities, such as food, clothing, housing, transportation, and medical attention (including psychological counseling). Assistance may also be provided in the form of cash grants from the charity or vouchers for goods or services. Even devastated businesses may be aided if shown to be crucial to the economy of a stricken area.

The Internal Revenue Service requires that the parties benefited must constitute a "charitable class," a group of persons that may properly receive assistance from the charitable organization. The class must be either large enough that the potential beneficiaries cannot be individually identified, or sufficiently indefinite to benefit the community as a whole, rather than a pre-selected group of people. For example, a charitable class could consist of all individuals located in an area affected by a disaster. In the case of a specific disaster, such as a shooting or bombing, persons not physically injured may suffer severe psychological problems and hence be part of the "class." The charity involved should also be prepared to support people who may be affected by future disasters, if funds remain available.

Under the law, disbursements of aid to victims of a disaster are to be based on "an objective evaluation of the victims' needs at the time the grant is made." The IRS applies this rule with common sense and sympathy for the plight of victims. Obviously, immediate needs may be addressed. But as time goes on, and people struggle to survive, it will become increasingly necessary for charities to conduct individual financial needs assessments. For example, long-term housing and education are expenses which may be covered under appropriate circumstances.

In many cases, benefactors may desire to create a new charitable organization to provide relief, as individual donations will not be tax deductible unless made through an existing or new tax qualified entity. An organization qualifies as a tax-exempt charitable organization if it is organized and operated exclusively for charitable purposes, serves public rather than private interests, benefits a class, and refrains from participating or intervening in any political campaign or engaging in substantial amounts of lobbying activity.

Generally, a new charitable organization with actual or anticipated annual gross receipts in excess of $5,000 must submit an application for exemption and be recognized as tax-exempt by the IRS. The new organization must obtain an employer identification number (EIN) from the IRS before it applies for tax-exempt status. Normally, a Form 1023 filed with the IRS (Application for Recognition of Exemption) is processed in order based upon the date it is received. However, new disaster relief and emergency hardship organizations may request expedited handling of these applications. To obtain this favored treatment, specific information must be provided to the IRS as to the need for expedition.

Once the organization is established, and has applied for exemption, contributions to the organization will be tax deductible even if made prior to a favorable IRS determination if that status is eventually awarded based on the Form 1023 submitted.

It will be important that any such new organization be a "public charity," rather than a "private foundation," (i.e., a charity which receives support from many different sources, as contrasted with one or more large contributions) to maximize the tax deductibility of contributions.

Not surprisingly, a key issue is the distribution of funds to those affected by the tragedy, in a manner which is deemed equitable for all concerned. This should be decided at the outset, but flexibly since not all needs may be initially evident, and priorities may vary over time. In the case of Newtown, some families have objected to the proposed distribution plan, structured with the assistance of a respected retired federal judge, Alan Nevas, and the State Attorney General has been consulted. The famed attorney, Kenneth Feinberg (responsible for allocating funds after the September 11 attacks in New York City), has also been consulted in Newtown, and will head up planning for distributions following the Boston tragedy.

An effort is underway to establish a Washington, D.C.-based nonprofit called the National Compassion Fund to collect donations after disasters and then to distribute funds to parties affected in an orderly manner, based upon established criteria. It will be interesting to see if this concept will be generally adopted and followed, as each disaster area has its own particular problems and needs, and local leadership may be desirable.•

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