Qualified disasters offer corporate grantmakers flexibility in response -- within legal parameters. Here are some.

by Kelly Shipp Simone

As the country continues to recover from Hurricanes Katrina and Rita, corporate grantmakers are actively reaching out to address the needs of employees and the community at large. Hurricane Katrina is a "qualified disaster" -- a label that grants corporate grantmakers maximum flexibility in crafting a response to the devastation. Grantmakers must understand the legal rules that govern disaster grantmaking, and below are the answers to the most frequent questions recently received by the Council's legal department.

Although this information provides the legal context for corporate grantmakers' response to the disaster, corporations and their foundations should always review their particular approach with knowledgeable legal counsel.

Why is the qualified disaster designation important?

Legislation passed after September 11, 2001 (the Victims of Terrorism Tax Relief Act of 2001) defined qualified disasters and made it easier for corporations and corporate grantmakers to provide assistance in such situations. First, the legislation provided that qualified disaster relief payments (defined below) do not count as wages or other income and recipients do not have to pay income taxes on them.

Second, the act's legislative history directed the IRS to issue new guidance permitting company foundations to provide disaster relief to company employees, as long as certain safeguards are in place. IRS Publication 3833 includes the IRS response: As long as the disaster is a qualified disaster and specified criteria are met, a company foundation may offer disaster relief to employees. (Private company foundations may not assist company employees in a disaster that does not meet the definition of a qualified disaster, however, as the IRS reasons that such assistance is serving the business purpose of the corporation and therefore is not charitable.)

What is a qualified disaster?

A qualified disaster is: (1) a disaster that results from a terrorist or military action (2) a presidentially declared disaster (3) a disaster resulting from an accident involving a common carrier (4) a disaster caused by any other event determined by the secretary of the treasury to be of a catastrophic nature.

Is Hurricane Katrina a qualified disaster?

Yes, Hurricane Katrina is a presidentially declared disaster, allowing corporate grantmakers to take advantage of the special rules.

What is a qualified disaster relief payment?

Qualified disaster relief payments include payments or reimbursements attributable to a qualified disaster for reasonable and necessary personal, family, living or funeral expenses and reasonable and necessary expenses incurred for the repair or rehabilitation of a personal residence or the repair or replacement of its contents.

How can we assist affected employees?

Direct corporate giving. The easiest way for companies to assist employees affected by a qualified disaster is usually through direct company support. A program that uses corporate resources is not required to meet the special conditions that the company foundation must follow. Whether provided by the company or the foundation, qualified disaster relief payments are not taxable income to employees.

Company-sponsored private foundation. In the event of a qualified disaster, a company-sponsored private foundation may make disaster relief distributions to employees and their families as long as the following requirements are met (comments on the rules are in italics):

• The class of beneficiaries must be large or indefinite.

There is little conclusive guidance from the IRS as to how big a group must be to be deemed "large." A few affected employees would not be a charitable class, while a number in the hundreds probably would be. Private foundations can avoid uncertainty by creating programs that provide assistance not just to employees who are victims of Hurricane Katrina, but also to those who suffer losses in subsequent qualified disasters. Opening the program to future victims should satisfy the charitable class requirement because the class of beneficiaries is indefinite.

• Recipients must be selected based on an objective determination of need.

The process for determining need may vary depending upon the circumstances. Immediate needs for shelter and food, for example, may be met without a determination of financial need. Longterm assistance, such as financial assistance to pay for housing for a period of months, would require the foundation to determine the financial need of the individual.

The foundation should maintain documentation that demonstrates individuals' needs. This documentation should include:

(1) A complete description of the assistance

(2) The purpose for which aid was provided

(3) The objective criteria the foundation used to provide assistance

(4) The name and address of each recipient and the amount distributed to him or her

(5) Any relationship between the recipient and officers, directors and key employees of the foundation or its substantial contributor (the company).

• The recipients must be selected by an independent selection committee (or by other substitute procedures that ensure that any benefit to the employer is incidental and tenuous).

A committee is considered independent if a majority of the members of the committee are not in a position to exercise substantial influence over the employer. Members of the board of directors, the chief executive officer and the chief financial officer are examples of individuals typically in a position of substantial influence.

If a private foundation follows those requirements, the IRS will presume that any distribution is consistent with the foundation's charitable purpose and the payment will not be taxable wages for the employee. Also, any distribution to employees?other than individuals who are directors, officers or trustees of the foundation or members of the selection committee?will be presumed not to violate the prohibition against self-dealing. (The self-dealing rules prohibit private foundations, including company foundations, from entering into a range of financial transactions with disqualified persons. Disqualified persons include substantial contributors to the foundation, as well as foundation directors and officers.)

Note that if a private foundation chooses to provide scholarships to assist in the aftermath of a disaster, the foundation still must obtain advance approval of the grantmaking procedures and either follow the requirements for employer-related scholarships and education loans or be able to demonstrate that the scholarships for those affected by the qualified disaster are neither compensatory nor self-dealing. Grants to Individuals by Private Foundations contains more information about the requirements for scholarships.

Public charity. A public charity, whether sponsored by the corporation or completely independent, such as a community foundation, may also make payments for disaster relief. The guidelines outlined above for company-sponsored private foundations should be closely adhered to in order to ensure that the grants are made for charitable purposes.

How can we help the affected communities at large?

Direct corporate giving. The rules for the deductibility of company contributions of products and cash are unchanged by the qualified disaster determination. Contributions of products and grants provided to charities and government bodies for the purpose of disaster relief will be deductible.

Note that contributions of inventory?property held for sale to customers?made to charities for the care of the ill, needy or infants generally qualify for greater deductibility than contributions of inventory for other purposes. Typically, companies may receive a charitable deduction of no more than the cost basis of inventory. However, companies donating inventory for the care of the ill, needy or infants may receive a charitable deduction for no more than twice the cost basis of the property. The term "needy" is defined to include a person who lacks the necessities of life as a result of temporary distress and includes victims of a natural disaster. Companies should consult with their advisors to determine the amount of any deduction for contributions of inventory.

Grants to non-charities, such as a chamber of commerce or an individual, will not be deductible as a charitable contribution by a corporation.

Corporate-sponsored private foundations and public charities. Aside from the differences in grantmaking to employees, there are no special rules for contributions by private foundations and public charities in the event of a qualified disaster. Most relief work is being conducted by public charities and governmental entities. However, a chamber of commerce or other non-charity may be facilitating the support of evacuees in some communities. When making grants to non-charities, private foundations must exercise expenditure responsibility to ensure that the grants are used for charitable purposes. Included in the requirements of expenditure responsibility are the use of a written grant agreement and receipt of follow-up reports from the grantee on the use of the money. Most payments for disaster relief presumably will be charitable, but private foundations must ensure that they follow the rules of expenditure responsibility to avoid incurring an excise tax. Expenditure Responsibility Step by Step (www.cof.org/Publications/Detail.cfm?ProductID=2847) contains additional information on those rules. Public charities have more flexibility in making grants to non-charities, but still need to ensure that any grant is used for charitable purposes.

Our employees want to assist affected coworkers, how can we facilitate and/or encourage this giving?

While corporations may set up bank accounts to collect contributions for coworkers affected by a disaster, payments to such a bank account would not be charitable and, thus, the donor would receive no charitable deduction. However, employees may contribute to a disaster relief fund at a company-sponsored private foundation or public charity and receive a deduction.

Company-sponsored private foundations that typically only receive contributions from the corporation should be particularly aware of the substantiation rules. Generally, donors will need receipts for contributions over $250 so that they may claim a charitable deduction. See the IRS publication Charitable Contributions?Substantiation and Disclosure Requirements (www.irs.gov/pub/irs-pdf/p1771.pdf) for more information.

Company foundations should also take into account state charitable solicitation laws and consider whether they must register in states with such laws before accepting employee donations. Even if gifts from employees would permit the private foundation to be classed as a public charity, this would not happen unless the foundation applies to the IRS for reclassification.

Many corporations are mobilizing their matching gift programs through their direct giving program or foundation to encourage employee giving. These programs frequently match gifts either to a particular charity chosen by the corporation?such as the American Red Cross?or to charities of the employees' choice that are providing disaster relief.

What are some additional resources for more information?

IRS Publication 3833: Disaster Relief: Providing Assistance through Charitable Organizations (www.irs.gov/pub/irs-pdf/p3833.pdf)

Disaster Relief?Current Developments, IRS FY 2003 Continuing Professional Education material (www.irs.gov/pub/irs-tege/eotopicm03.pdf)

Grants to Government (www.cof.org/Content/General/Display.cfm?contentID=2593)