Generally, 501(c)(3) organizations can make grants to individuals and to businesses if such grants are made in furtherance of their 501(c)(3) tax-exempt purposes and are not expended in a manner inconsistent with 501(c)(3). In Part One of this series, we focused on mission-consistency, charitable class, and prohibited private benefits. In Part Two, we looked more specifically at a public charity’s provision of grants to individuals for disaster relief and emergency hardships. In Part Three, we reviewed a public charity’s provision of grants to businesses for disaster relief and emergency hardships. In this Part Four, we focus our attention on a private foundation’s provision of grants to individuals and businesses for disaster relief and emergency hardships.
Private foundations are subject to a different set of rules than public charities when making grants to individuals or for-profit businesses, but such grantmaking is possible, particularly in the context of disaster relief. Of course, the grants must be consistent with the foundation’s mission, they must benefit a charitable class, and they must not result in a prohibited private benefit, as discussed in Part One. Also, the same requirements applicable to public charities discussed in Part Two and Part Three generally apply, including selection of individual grantees based on an objective determination of need. Additionally, the grants must not constitute self-dealing or a taxable expenditure under the private foundation laws.
Self-Dealing
A private foundation’s payment of compensation or reimbursement of expenses to a disqualified person (including directors, officers, and substantial contributors) generally falls within the definition of a prohibited self-dealing transaction under Section 4941 of the Internal Revenue Code (“IRC”). However, qualified disaster relief payments are excluded from the definition of self-dealing merely because the recipient is an employee (or family member of an employee) of an employer for-profit business that sponsors/funds the foundation (“employer-sponsored private foundation”). Such payments are also excluded from the individual’s taxable income and not required to be reported on Form 1099.
Qualified Disaster
A qualified disaster includes a disaster which results from a terroristic or military action; a federally declared disaster (disaster subsequently determined by the President of the United States to warrant assistance by the Federal Government under the Robert T. Stafford Disaster Relief and Emergency Assistance Act); and a disaster which results from an accident involving a common carrier (like a plane or train), or from any other event, which is determined by the Secretary of the Treasury to be of a catastrophic nature.
A qualified disaster relief payment is defined in IRC Section 139 as any amount paid to or for the benefit of an individual—
- to reimburse or pay reasonable and necessary personal, family, living, or funeral expenses incurred as a result of a qualified disaster,
- to reimburse or pay reasonable and necessary expenses incurred for the repair or rehabilitation of a personal residence or repair or replacement of its contents to the extent that the need for such repair, rehabilitation, or replacement is attributable to a qualified disaster,
- by a person engaged in the furnishing or sale of transportation as a common carrier by reason of the death or personal physical injuries incurred as a result of a qualified disaster, or
- if such amount is paid by a Federal, State, or local government, or agency or instrumentality thereof, in connection with a qualified disaster in order to promote the general welfare,
but only to the extent any expense compensated by such payment is not otherwise compensated for by insurance or otherwise.
Taxable Expenditure
Under the general rule, grants to individuals or for-profit businesses may be prohibited taxable expenditures under Section 4945 of the Internal Revenue Code (“IRC”) unless the private foundation exercises expenditure responsibility. However, private foundation grants to individuals that constitute qualified disaster relief payments, if properly made and documented, will not constitute a taxable expenditure and will not require expenditure responsibility. Private foundation grants to for-profit entities for exclusively charitable purposes related to disaster relief or economic hardship, even if otherwise properly made and documented, will require expenditure responsibility.
Employer-Sponsored Private Foundation
Employer-sponsored private foundations may provide assistance to employees or their family members affected by a qualified disaster as long as certain safeguards are in place to ensure that such assistance is serving charitable purposes, rather than the business purposes of the employer. For purposes of this section, we’ll assume that the employer sponsoring the private foundation is a disqualified person, likely as a substantial contributor.
The IRS will presume that grants made by an employer-sponsored private foundation to such employer’s employees (or their family members) in response to a qualified disaster are consistent with the foundation’s charitable purposes if:
- the class of beneficiaries constitutes a charitable class,
- the recipients are selected based on an objective determination of need, and
- the selection is made using either an independent selection committee (one in which a majority of the committee’s members consists of persons who are not in a position to exercise substantial influence over the affairs of the employer) or adequate substitute procedures to ensure that any benefit to the employer is incidental and tenuous.
If the requirements of this presumption are met, the private foundation’s payments in response to a qualified disaster are treated as made for charitable purposes; do not result in prohibited self-dealing merely because the recipient is an employee (or family member of an employee) of the employer-sponsor; and do not result in taxable compensation to the employees.
The presumption described above does not apply to payments that would otherwise constitute self-dealing and subject the organization to excise taxes. For example, the presumption does not apply to payments made to (or for the benefit of) individuals who are directors, officers, or trustees of the private foundation or members of the private foundation’s selection committee.
While a private foundation may fail to meet all of the requirements of the presumption, other procedures and standards may be considered to constitute adequate substitutes to ensure that any benefit to the employer is incidental and tenuous, when all the facts and circumstances are taken into account. Conversely, even though a private foundation meets the presumption, the IRS may still review the facts and circumstances to ensure that any benefit to the employer is tenuous and incidental. For example, a program may not be used to induce employees to follow a course of action sought by the employer or designed to relieve the employer of a legal obligation for employee benefits.
IRS Publication 3833
Employer-sponsored private foundations may not provide assistance to employees or their family members affected by non-qualified disasters or other emergency hardship situations.
Deeper Dive
Standards for Charitable Disaster Relief In the Time of Pandemic (Ellen Aprill), Tax Analysts 395 (June 2020)
Charitable Class, Disaster Relief, and First Responders (Ellen Aprill), Tax Notes, Vol. 153, No. 7, 2016
Accessing Charitable Endowment Funds to Address Critical Needs During COVID-19 (Davis Wright Tremaine)