How to Set Up a Disaster Relief Charity

West

When tragedy strikes as it did in different ways last week in Boston and West one thing is a constant, the desire of Americans to help their neighbors. That help comes in many forms as people seek to meet the physical, emotional, spiritual and even financial needs of those affected. Sometimes to meet those needs individuals and businesses decide to set up new charitable organizations. This post will teach you how to set up a new charity (one that follows the IRS rules) to provide aid following a disaster.

There are many ways to help our neighbors in need. We give blood, give to established charities like the Red Cross and Salvation Army, donate clothes, food, and blankets, and join together to pray and show support. After the most immediate needs have been met in the aftermath of tragedy, the focus turns to what we can do longer term. Sometimes a decision is made to establish a fund to help those affected. While not mandated, often the decision is made to seek tax exempt status. Trying to meet the needs we see while also navigating the various rules that regulate this type of good is an admirable goal but not one without challenges.

The key to establishing a tax-compliant charity to provide for disaster assistance is defining the persons eligible for aid. This requires two answering two questions: (1) what class of persons is eligible for assistance, and (2) which of the persons in that class are needy or distressed.

To qualify for tax exempt status under Section 501(c)(3) an organization must serve public purposes, not private purposes. In the context of disaster relief this means defining the class broadly so as to benefit a “charitable class” as opposed to a narrower subset of individuals. Stated differently, the class must be sufficiently large or indefinite as opposed to closed and definite. For example, an organization established to provide assistance to families of the first responders who lost their lives in West, Texas would fail to qualify as a Section 501(c)(3) organization the class is closed and defined (i.e. a specific group that would qualify and no one else). However, an organization established to provide assistance to families of West, Texas first responders who lose their lives in the line of duty, both those from last week’s fertilizer plant explosion and those who may lose their lives in the future, would qualify the class is open and indefinite (the criteria may apply to any number of people in the future). As a side note, there is no bright line on what class is “sufficiently large” so as to qualify as a charitable class. While a class like the first responders killed during the event would be too small, a class of families of those killed or injured (more than 170) could arguably be large enough.  For example, One Fund Boston, according to news reports, has been established specifically to assist families of those killed or injured in the Boston bombing. It will be interesting to see if that class is sufficiently large so as to be charitable.

After ensuring the assistance is available for a charitable class, the organization providing disaster relief must also ensure the specific persons receiving aid are proper recipients of charity. The IRS has acknowledged that both individuals and businesses may be appropriate recipients of charity. Further, charitable aid may be provided on an emergency basis, a short-term basis (e.g. 3-6 months) or a long-term basis. With respect to emergency aid (such as blankets, hot meals, clothing), it is sufficient that the persons receiving aid were victims of the disaster no showing of financial need is required. However, for assistance beyond immediate emergency assistance, the organization must conduct an assessment to ensure the recipient of aid meets the test of being in need and qualifying for charitable aid, namely lacking the resources to obtain basic necessities.

At that point, the type of aid that is appropriate depends on the recipient’s needs and resources. For example, while all victims in the immediate area of the Boston Marathon bombing may qualify for immediate crisis counseling, whether long(er) term counseling may be given by a charitable organization depends on the needs and resources of the individual.

It is critical for the organization dispensing aid to document the assessment it performs so that it will have records to show that its funds were spent for charitable purposes. More information on documentation and reporting can be found in the IRS’s helpful publication on disaster relief, Publication 3833.

Aside from the issues in this post specific to disaster relief, to create a disaster relief charity, the founders must follow state law to create the organization and file Form 1023 to obtain recognition of tax exempt status from the IRS. Here is a link to a paper that I wrote in 2004 and updated in 2011 regarding the basic set-up of a 501(c)(3) organization discussing these concepts: Setting Up Your 501(c)(3) Nonprofit Organization.

Religious Property Tax Exemptions: A Sticky Issue

Last week an article appeared on Forbes online that caught my attention. The article discussed a Tennessee case in which a megachurch sought (ultimately unsuccessfully) property tax exemption for portions of its real property used for a bookstore and a fitness center. You can read more of the details in the article.

Essentially the church argued that part of its religious worship was operation of these facilities to create a “third space” environment. Many churches are engaging in such activities – bookstores, fitness centers, coffee shops, etc. The question of taxation is often analyzed from a federal income tax standpoint. Are these activities related or unrelated to the church’s exempt purpose? If unrelated, are they substantial? If unrelated are there exceptions to payment of unrelated business income tax (such as being operated for the benefit of members only, being operated by volunteers, etc.)? What is often (and unfortunately so) overlooked is property tax exemption, a very important benefit for churches.

Property Tax_church

Property tax exemption does not track federal tax exemption. It is a different scheme altogether. Each state is responsible for determining how it will tax (or exempt) various institutions. In my home state of Texas, for example, churches are exempt but a 501(c)(3) animal rescue clinic is not. The specific state statute has to be consulted to determine eligibility for property tax exemption. Again, in Texas, for example, among other things churches may seek exemption of real property owned by the church and used as a place of regular religious worship but only as to that portion of the property reasonably necessary for engaging in religious worship. Most observers would agree this includes the church sanctuary. But what else? The choir rehearsal room? The fellowship hall? The church offices? The green space behind the church used for the annual Easter Carnival? These are issues that require interpretation. Likewise, the question of a church bookstore and fitness center require interpretation. The problem arises because the First Amendment makes it a little sticky for a local county official (the tax assessor initially and later the court) to interpret whether these ancillary areas are “reasonably necessary” for engaging in religious worship.

This problem isn’t isolated to property tax issues. In fact, while the Internal Revenue Code recognizes an exemption from federal income tax for religious organizations, neither the Internal Revenue Code nor the Treasury Regulations define the term “religious.” Likewise, the term “church” is found, but not defined, in the Internal Revenue Code. The IRS has tackled the question by looking at a number of factors that it considers indicia of being a church (in Stephen Colbert-speak: evidence of churchiness). Courts have likewise looked to such “indicia.” But in these instances, the IRS and/or the courts are merely trying to determine whether the organization itself – in totality – is a church. The local tax assessor has a much more difficult (constitutionally-speaking) question: are specific areas reasonably necessary for engaging in religious worship which begs the question of whether the activities undertaken in those areas is, in fact, religious worship. That’s sticky.

And so we are left with an ad hoc state by state (if not county by county) analysis of religious property tax exemption. One solution would be to draw a bright line: no exemption at all or exemption only for the primary sanctuary. An alternative would be to base property tax exemption on whether the property is used for a related purpose utilizing the body of law that has developed under Section 513 of the Internal Revenue Code with respect to unrelated business income. Either would be better than spending the nonprofit’s money and the government’s money on legal fees and court costs.

Until then, though, don’t neglect concern for property tax exemption and consult a local lawyer who can tell you the “lay of the land” in your specific county.

A Basic Framework of the Nonprofit Sector

A Basic Framework of the Nonprofit Sector (paper), 30th Annual Nonprofit Organizations Institute, Austin, Texas, January 16-17, 2013

A Basic Framework of the Nonprofit Sector (ppt)

moore-slider6This seminar paper and presentation) provides a basic framework for the entire nonprofit sector, explaining the differences between private foundations and public charities and briefly discussing other types of nonprofit entities. In addition, this paper lays out the various types of structures and nonprofit entities and discusses choice of form. Finally, this paper discusses end of life issues of nonprofit organizations as well.