Employee funded emergency aid programs: are they charitable organizations?

• Author: Snowling, Randall

There has been an outpouring of assistance to aid the victims of the destruction caused by Hurricanes Andrew and Iniki. In many instances, companies have established assistance programs funded by deductible contributions by employees to provide aid to their co-workers affected by these natural disasters.

The fact that these programs are focusing on the destruction caused by the two hurricanes has masked the possibility of a company creating a more long-range benefit by establishing this type of emergency aid program as a charitable benefit for employees at little or no cost to the employer. This can be accomplished by setting up a private foundation dedicated to aiding employees who are in distress and in need of charitable assistance. Employees and the company would make deductible charitable contributions to the foundation for this purpose. In many instances, an existing company foundation could be used, but the foundation's charter may have to be amended to add the new purpose.

Tax exemption

Historically, the IRS has recognized that assistance programs developed to relieve the effects of natural disasters are charitable (OD 345 (1919)). However, the programs still must meet the exemption requirements of Sec. 501 (c)(3) to allow the employee contributions to be deductible. The most basic issue is whether the class of beneficiaries is broad enough to constitute a charitable class. in their 1991 Technical Instruction Program, the Service published the following guidelines on emergency funds and disaster relief organizations. * Organizational documents must establish the charitable purpose and the intended beneficiaries. * Criteria for receipt of aid must be established. * Assistance to principals and their families must not be disproportionate to that of other recipients. * Use of excess funds must be identified. * Fundraising and notices concerning the availability of funds should demonstrate public effort. * Adequate records must be maintained.

The question remains, then, whether a fund established for employees of a single employer benefits a sufficiently large enough charitable class. Company scholarship fund parallel Rev. Proc. 76-47 is helpful in determining whether an employee assistance fund is operated exclusively for charitable purposes. Although Rev. Proc. 76-47 explicitly states that it is directed only to the question of whether a scholarship qualifies for exclusion from gross income under Sec. 117, it does address the issue of...