The coronavirus pandemic causing the disease known as COVID-19 is dramatically impacting nearly all countries around the globe, and now is spreading within the United States. This pandemic likely will cost far more economically than any contemporary hurricane or other natural disaster, and tragically, it is anticipated that COVID-19 also will claim more lives, although it is hoped that effective treatment and a vaccine will be developed and made widely available as soon as possible.
Meanwhile, federal and state governments have mobilized en masse in an effort to suppress the virus' ongoing spread. Local governments, in conjunction with significant help from the private sector, are supplying equipment, medical supplies and other daily items – from food to paper products to utilities – throughout the country. Healthcare providers, first responders, grocery store workers and others are generously providing frontline assistance. For those sheltering at home, the U.S. tax code offers some of the most significant charitable giving provisions in the world to encourage business entities and private clients to provide valuable help.
There are many ways in which charities, businesses and individuals can provide aid to others to relieve human suffering and get through this time of crisis. IRS Publication 3833 (Disaster Relief: Providing Assistance through Charitable Organizations) serves as an excellent overview of some of the philanthropic vehicles available during disasters and other catastrophic events, discussing specific steps that a business entity or a private client would pursue in order to create a new charitable organization with a disaster relief program. The publication also gives guidance to existing charitable organizations that want to help victims of disasters, including "Aid to Individuals" and "Aid to Businesses" that are in need.
When creating a new disaster relief program, charities, businesses and individuals should keep several important considerations in mind. For one, any charitable organization must benefit a sufficiently broad "charitable class." As described on page 9 of Publication 3833, "A charitable class must be large enough or sufficiently indefinite that the community as a whole, rather than a pre-selected group of people, benefits when a charity provides assistance." If the desired charitable class is limited to a smaller group, such as victims that are employees of a particular employer, the program must make that group indefinitely large by extending the time period for inclusion in the group. In other words, the disaster relief program must be open-ended and include not only those employees affected by the current disaster but also those who may be affected by future disasters. This program structure avoids the prohibition against targeting the disaster relief to specific individuals.
Another important consideration is whether a recipient of assistance will have to include any relief payments as taxable income. In order to exclude "qualified disaster relief payments" from an individual's or business entity's taxable income under Section 139 of the Internal Revenue Code, a "qualified disaster" is required. Section 139 of the Internal Revenue Code defines such a disaster as including a presidentially declared disaster. In the current crisis, President Donald Trump used the Robert T. Stafford Disaster Relief and Emergency Assistance Act (the Stafford Act) to declare the COVID-19 pandemic to be a national emergency. A review of the Stafford Act indicates that this national emergency will be classified as a "qualified disaster," much like President Bill Clinton's use of the Stafford Act to confront the West Nile virus outbreak in 2000. While tax professionals would certainly welcome the comfort of a notice from Treasury Secretary Steven Mnuchin "confirming" this emergency as a qualified disaster, the absence of such a notice – at least to date – should not change that classification.
In the face of this qualified disaster, a relief program can provide various types of assistance. Whereas most generally think of disaster relief involving expenses incurred for the repair or rehabilitation of a personal residence or the replacement of the contents of a personal residence, disaster relief payments also can include reasonable and necessary personal, family, living or funeral expenses incurred as a result of a qualified disaster, as well as any governmental payments to individuals and business entities affected by a qualified disaster. However, in order to be excluded from taxable income, disaster relief payments must not include: 1) payments for expenses otherwise paid for by insurance or other reimbursements; or 2) income replacement payments, such as payments of lost wages, lost business income or unemployment compensation.
In addition to qualified disaster relief payments, charitable organizations – including employer-sponsored assistance programs – may assist individuals suffering from certain personal hardships that are not necessarily related to a qualified disaster. For example, the sudden death of a family member can qualify as a personal hardship in this context. As explained in more detail in Publication 3833, an employer-sponsored assistance program's ability to make grants to individuals will depend on whether that program is being conducted through a donor-advised fund (DAF), a public charity that is not excessively controlled by the employer, or a private foundation. In each case, certain requirements must be met.
Holland & Knight's Nonprofit and Tax-Exempt Organizations Team has assisted both corporate and private clients in establishing more general disaster relief charitable organizations as well as charitable organizations or funds that provide emergency hardship assistance (including situations that are not qualified disasters). Our attorneys' extensive experience includes multiple employer-sponsored programs that can assist those affected by a qualified disaster and/or an emergency personal hardship. Contact the authors or another team member if you have questions or any interest in pursuing one of these philanthropic vehicles.
DISCLAIMER: Please note that the situation surrounding COVID-19 is evolving and that the subject matter discussed in these publications may change on a daily basis. Please contact the author or your responsible Holland & Knight lawyer for timely advice.
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