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Archives
October 2001
Doing Their Part: Guidance for Organizations Collecting Disaster Relief Funds
Mounting costs from the September 11 disaster spurred numerous organizations into action raising money for victims and their families. Many of these organizations now face the task of distributing this assistance. Even in the wake of a disaster, IRS rules are not relaxed. Organizations providing relief need to be aware that federal tax law provides guidelines for charitable assistance and imposes requirements to ensure a public benefit is served.
Public vs. Private Benefit
Federal tax law requires that a charitable program serve a public and not a private purpose. The IRS defines a "charitable class" as a needy or distressed group of people that is of an indefinite size (e.g. a category of victims of this and future terrorist attacks such as employees of a particular company) or a sufficient size (e.g. all victims of the September 11 attack). The IRS does not indicate how large the charitable class must be in these situations, yet assistance to a small number of victims will likely not meet the criteria when thousands have been affected by a disaster.
Funds that provide assistance only to a limited group of needy individuals risk being considered used for "private benefit" rather than charitable purposes. If the organization is considered to be providing a private benefit, it will not be considered a charity, and the funds designated for the limited class will be taxable income.
Objective Criteria for Determining Aid
Once the class has been established, organizations with relief funds must establish a set of objective criteria to determine which members of the charitable class will receive assistance and the amount each will receive. In the immediate aftermath of a disaster, the IRS acknowledges that charities need to quickly provide assistance to cover the cost of critical needs. In such cases the charity may provide funds without having established objective criteria.
However, as basic needs are met and organizations move into a second stage of assistance, certain information on recipients must be compiled. At minimum, charities should obtain each applicant's name and contact information, social security or other identification number, a brief description of the loss suffered, and the type and amount of assistance needed and granted. It is also important for organizations to compile complete information and maintain accurate records demonstrating the charitable nature of their relief efforts. For example, organizations should have evidence of an applicant's financial condition, expenses, number of dependents, and anticipated cash flow, in addition to the objective criteria used to evaluate each request for assistance. This information allows a charity to evaluate whether these resources are inadequate to cover the applicant's existing obligations and basic living expenses. The charity can then determine how much financial aid and other assistance it should provide.
Disbursement Options
Charities have a number of options for disbursing aid. Organizations must decide whether they want to disburse all of the funds immediately, whether they wish to provide continuing assistance to victims, or whether they should work through other charitable organizations.
The IRS formally disapproves of lump sum payments, though they may be allowed under certain needbased circumstances.
Organizations with the means to administer funding should consider setting a portion aside for anticipated long-term needs of the charitable class. When a grant is made out of these set-aside funds, an organization must use objective criteria to determine the amount of support based on the needs that exist at the time the grant is made.
Some organizations have already started soliciting donations for a limited group of victims, such as their employees and their families. Because of the size and specificity of the group of recipients and because they will be associated with the organization, funds provided to these individuals risk being considered used for private benefit rather than for charitable purposes. To avoid this, some organizations may choose to provide immediate assistance to victims through donor-advised grants to other independent charitable organizations. Organizations choosing this option may request but cannot require that the charity use the grant to assist a particular group of victims.
By Anne Cornelison
Cancelling Event Facilities Agreements in the Wake of Disaster
After the horror of the terrorist attacks of September 11, many organizations made the decision that under no circumstances were they going to go forward with a planned convention in the coming months. Unfortunately, faced with collapsing occupancy figures as travelers around the country come to the same conclusion, hotels and resorts are unlikely to take a particularly accommodating view toward last minute cancellations.
If an organization is considering cancelling an upcoming conference or convention, the first thing the planners should do is to take a careful look at the agreement between the facility and the organization. This document, either the product of painstaking negotiation or a hotel's standard form, will govern both parties'rights of cancellation.
The Impossibility Clause
The first place to look is at the section entitled something like "Impossibility Clause."
Typically the clause will allow termination of the agreement between the hotel and the organization in the event of Acts of God, war, government regulations, disaster, strikes, civil disorder, curtailment of transportation facilities, or any other emergency making it illegal or impossible to provide facilities or to hold the conference. If the organization's event is in New York or, to a lesser extent, in Washington, D.C., the clause may be literally implicated. As of this writing, it would be 2 physically impossible to hold a conference in lower Manhattan. Like many terms of art, however, "impossibility" does not necessarily mean literally impossible, as except in extreme circumstances, it is always possible to hold a convention, even if participants have to arrive by bus. Most jurisdictions have construed "highly impracticable" as the functional equivalent of impossible. For most events outside of New York or Washington, the most likely application of the impossibility clause will be through the "curtailment of transportation facilities" language. As long as air travel is considerably restricted, this may be a viable strategy. But, as flights return to a more normal schedule, barring the bankruptcy of a major airline or two, air travel is becoming less curtailed.
Perhaps surprisingly, terrorist attacks are generally not considered an "act of war" under American contract and insurance law, regardless of the president's declarations. Unless an organization's agreement contains specific reference to acts or threats of terrorism, the impossibility clause provides little else to offer.
Frustration of Purpose
Every jurisdiction recognizes the frustration of purpose doctrine in its contract law. It is a means of allowing a party not to perform because that party's mutually understood intended benefit from the contract cannot be realized as a result of unforeseen events which arose after formation of the contract.
In order to establish that a frustration of purpose has occurred, it is necessary to 1) determine what the mutually-understood purpose of the event was; 2) establish that the purpose has been substantially frustrated; 3) by unforeseen risks; 4) whose nature makes it unjust to force the party seeking relief to bear. As the generally mutually-understood purpose of a hotel agreement is the actual attendance of the attendees, an organization will have to argue that the massively increased risk of air travel due to terrorism has caused substantial cancellations. It is unlikely that a court would require the organization to assume the risk of terrorism for contracts concluded before September 11.
For contracts concluded after September 11, however, it is less likely that an act or threat of terrorism will operate to frustrate the purpose of an event, as the risk is now, sadly, foreseeable.
Negotiation
Negotiation should always be the starting point. Once an organization has made the decision to cancel, it should call the hotel and attempt to reschedule the event. As few hotels and resorts want to appear totally insensitive to the legitimate fears of their guests, they may be open to a different date.
Future Agreements
In future agreements, organizations should negotiate two specific addendums to their contracts with event facilities to provide a more straightforward exit from the agreement when the world situation has become too dangerous for an event to go forward.
First, an organization should insist on including "an act or threat of terrorism" in the impossibility clause. This will allow the organization to more easily argue that a threat of terrorism makes it impossible to hold the event. If its negotiating position is quite strong, an organization should also attempt to insert an objective standard for travel curtailment resulting in an "automatic" termination of the agreement (e.g., the curtailment of transportation services preventing the attendance of at least [25%] of the anticipated or registered attendees).
From the common law frustration standpoint, it would also be helpful to add language fleshing out the purpose of an event (e.g. "to encourage communication and ... among members representing X countries and Y organizations"). This helps establish a mutually-understood purpose beyond "some people attending." Even mentioning the name of the proposed conference and a word or two about the theme might be helpful to making a frustration analysis.
By Anne Cornelison
Trade Name Dropping: As Part of Master Business Licensing, D.C. Finally Allows Nonprofits to Register Trade Names
Until very recently, nonprofit organizations incorporated in or registered to do business in the District of Columbia were not able to register for and transact business under an assumed name, or trade name. With the government's adoption of the new Master Business License Program and statute in 1999, all businesses in D.C. are now able to register trade names with the Department of Consumer and Regulatory Affairs (DCRA). The new law allows businesses to use the trade name to conduct their business--including transactions with vendors and financial institutions--and to undertake legal action under that name.
Trade names can be useful to nonprofit organizations in a variety of circumstances. For example, a nonprofit organization may want to operate one of its programs under a different name, or it may want to use a new name for a joint venture with another non-profit. One of the many advantages of registering a trade name in D.C. is that it should enable the nonprofit to obtain a postal permit under the assumed name.
Legal Considerations and Restrictions
There are a few legal restrictions that govern use of assumed names. An organization may not file an action under a trade name in any of the courts of the District until it has registered the name with the D.C. govern ment. Registration of a trade name does not protect the name from use by any other business entity; organizations seeking such protection should consider trademarking the name. Finally, the availability of a name for registration does not guarantee that the name is not being used, only that it has not been registered with DCRA.
Business License Restrictions
Theoretically, applying for a trade name should not be difficult. But because the statute allowing for trade names is part of the larger Master Business License Program, applications are subject to additional restrictions. The most significant of these is that an organization that does not have any other business licenses (such as a license for charitable solicitation) cannot register a trade name until it has obtained a Master Business License (MBL), together with the appropriate endorsements. It will be able to register a trade name together with its application for the MBL, or at any time after having obtained the MBL. A business that already has one or more business license registrations should be able to apply for the trade name now, even though it does not yet have a Master Business License.
The Master Business License is a new, comprehensive form of business license that makes it easier for businesses to renew their business licenses by consolidating all the registrations onto one form. Businesses holding the MBL will renew all registrations at the same time every two years. Every nonprofit organization incorporated in or doing business in the District will eventually have to obtain a Class B Master Business License, and those that solicit funds in D.C. will have to get an endorsement for charitable solicitation annexed to their Class B license. In an effort to encourage registration for the Master Business License, the government will not grant trade names to organizations that do not yet hold such licenses. The DCRAis less concerned with transferring already-licensed organizations to the MBL, a process that will be completed over the next six months to one year.
Applying for the Trade Name
To further complicate matters, the D.C. government is still in the process of implementing the Master Business License statute. Businesses have only been able to apply for the Master Business License and a trade name since September 4, and the government has not yet created paper filing forms. Nevertheless, DCRA personnel have confirmed that the online filing system for the Class B Master Business License and registration of trade names is now functioning.
Furthermore, the government has already established a fee schedule for transactions related to trade names. The fee for registering a trade name is $50; amendments to a registered trade name and cancellations will be $25 each. Among the information a corporation must supply with the registration is the corporation's Federal Tax Identification Number (Federal Employer Identification Number or FEIN) and the signature of an incorporator, director or officer. Keep in mind that a corporation must be in "good standing" in the District (that is, it must have filed all required Two-Year Reports) in order to register a trade name.
Please connect to
By Mark Sawchuk
IRS Provides Help in Terrorism's Aftermath
In the aftermath of the September 11 tragedy, the IRS is providing assistance to business taxpayers--including nonprofits-- whose ability to file their tax returns has been affected by the disaster.
"Affected taxpayers" include any business entity whose principal place of business is located in a Presidentially-declared disaster area or whose records necessary to meet a filing or paying deadline with the IRS are maintained in a disaster area. In the nonprofit context, a charity that meets these requirements will be granted a 120 day postponement and a six-month extension of time to file an annual information return (Form 990) that was due on or after September 11 and on or before November 30. The covered disaster areas include Arlington County in Virginia and the following five New York counties: Bronx, Kings, New York City (Brooklyn and Manhattan), Queens, and Richmond. Please see notice 2001-61, available on the IRS' web page at
In addition to a stay on filing returns, the IRS has established a special expedited review and approval process for new 501(c)(3) organizations that are being set up in the wake of the disaster to provide relief and assistance to the victims. Organizations should write "Disaster Relief: September 11, 2001" at the top of their Form 1023, the application for recognition of tax-exemption, to ensure that they receive immediate attention.
By Mark Sawchuk
Calling All EOs: IRS Soliciting Comments for Online 990s
The IRS is looking for input from exempt organizations on setting up an online filing system for information returns. The move to online filing would also simplify public disclosure of 990s and make it easier for the IRS to process the large amount of data received by exempt organizations every year.
The IRS Form 990 E-File project manager, Midori Morgan-Gaide, stated in a recent interview with Tax Analysts that she is soliciting comments to make electronic filing easier for the exempt organizations. Specifically, the Service is trying to identify possible barriers that would discourage charities from filing electronically. The IRS plans to use the public comments it receives to implement an electronic filing system that would fit the needs of exempt organizations.
Through these suggestions, the IRS also hopes to identify possible features or incentives that would encourage organizations to file electronically. Morgan-Gaide indicated that the Service is particularly interested in hearing about any complexities or obstacles in the present form that would deter electronic filing.
An e-mail address has been set up to handle public comments regarding filing online returns. To send the IRS suggestions on issues that you feel are would affect electronic filing, contact Cheryl Chasin at tege-eo-efile@irs.gov. Any input on whether your organization would use the online filing system and how to make the form easier to fill out is particularly welcome.
By Anne Cornelison
This publication is designed to provide accurate and authoritative information about the subject matter covered. It is not distributed with the intent to render legal, accounting, or other professional advice. The services of a competent professional should be sought if legal advice or other expert assistance is required.
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