In response to the severe damage caused by Hurricane Sandy, the IRS has issued several news releases that provide guidance to charitable organizations, employers, and individuals who want to help victims of Hurricane Sandy.
Qualified Disaster Relief Payments
The IRS has released IR-2012-84 to alert employers and others to the favorable tax treatment of qualified disaster relief payments. Because Hurricane Sandy has been designated a qualified disaster for U.S. federal tax purposes, certain payments made by employers and others to assist disaster victims will be considered qualified disaster relief payments and thus can be excluded from taxable income. Additionally, employer-sponsored foundations may, with some limitations, provide disaster relief to employee-victims of Hurricane Sandy without affecting their tax-exempt status.
Payments by Employers
Section 139 of the Code provides that qualified disaster relief payments, including payments from employers, are not subject to income or employment taxes or withholding. A qualified disaster includes a presidentially declared disaster, a disaster resulting from an event that is determined to be of a catastrophic nature by the Secretary of the Treasury, a disaster resulting from terrorist or military actions or a disaster resulting from an accident involving a common carrier.
Qualified disaster relief payments include amounts paid to or for the benefit of individuals for the following types of expenses incurred as a result of the qualified disaster, to the extent such expenses are reasonable and necessary:
personal, family, living or funeral expenses;
the costs of repairs to or the rehabilitation of a personal residence (rented or owned); or
the cost of repairs to or the replacement of the contents of a personal residence.
Payments by federal, state, or local governments or agencies to those affected by a qualified disaster in order to promote general welfare are also qualified disaster relief payments. However, payments for expenses that are covered by insurance or otherwise reimbursed or payments to replace income, such as lost wages, are not qualified disaster relief payments.
Payments by Employer-Sponsored Private Foundations
Private foundations, including employer-sponsored private foundations, may provide disaster relief to victims of the disaster. Employer-sponsored private foundations may also provide disaster relief to employees or family members of employees affected by a qualified disaster, if the employer takes certain precautions to ensure that such assistance is for charitable purposes, rather than promoting the business interests of the employer. Employer-sponsored private foundations cannot make payments to employees in non-qualified disasters or in emergency hardship situations.
There is a presumption that payments made to assist employees are consistent with the foundation’s charitable purpose if:
the class of beneficiaries is large or indefinite;
the recipients are selected based on an objective determination of need or distress; and
the selection is made using either an independent selection committee or adequate substitute procedures to ensure that any benefit to the employer is incidental and tenuous.
If the payments are consistent with this presumption, then: (1) the foundation’s payments are treated as made for charitable purposes; (2) the payments do not result in prohibited “self-dealing” solely due to the employee’s connection to the employer-sponsor and (3) the payments do not result in taxable compensation to the recipient employee. However, if the payments would otherwise constitute “self-dealing,” and, thus, result in the imposition of excise taxes on the organization under Section 4941 of the Code, the presumption does not apply. Accordingly, payments made to directors, officers, or trustees of the foundation would not fall within the presumption. Furthermore, even if the presumption is met, the IRS can review all the facts and circumstances to determine whether the benefit to the employer was tenuous and incidental.
Leave-Based Donation Programs
Some employers have adopted, or are considering adopting, leave-based donation programs, in which employees choose to give up their vacation, sick, or personal leave in exchange for cash payments that the employer makes to charitable organizations described in Section 170(c) of the Code (“Section 170(c) Organizations”). In Notice 2012-69, the IRS provides guidance on such leave-based donation programs for the benefit of Hurricane Sandy victims. The IRS will not treat leave-based donations as gross income or wages of the employees if: (1) the payments are made to Section 170(c) Organizations for the relief of victims of Hurricane Sandy; and (2) the payment is made before January 1, 2014. Furthermore, the IRS will not assert that the opportunity to make a leave-based donation results in constructive receipt of gross income for employees. Employers are permitted to deduct the cash payments made to Section 170(c) Organizations under Section 162, but the employees are not entitled to claim any charitable contribution deductions with respect to the foregone leave.
Expediting Charity Applications
The IRS has released IR-2012-87 to provide instructions relating to the formation of new tax-exempt organizations to provide relief to the victims of Hurricane Sandy. Such organizations should apply for tax-exempt status by filing a Form 1023 and writing “Disaster Relief, Hurricane Sandy” at the top of the Form. The IRS will expedite the review and approval process of these Forms. However, the IRS encourages people who wish to provide assistance to the victims of Hurricane Sandy to consider using existing organizations that are already working on relief efforts. Existing charitable organizations tend to have fund-raising and distribution infrastructures in place, and, therefore, may be more efficient in administering relief programs than new organizations.
The IRS provides additional guidance for charitable organizations providing disaster relief assistance in Publication 3833, Disaster Relief: Providing Assistance Through Charitable Organizations including employer-sponsored donor advised funds. There are also Questions and Answers on the IRS website. The IRS has also compiled additional links on Hurricane Sandy and disaster relief.