IRS ADDITIONAL GUIDANCE CONCERNING POPULAR FOUNDATION PROGRAMS

Barbara Schwartz Bromberg, Thompson, Hine & Flory, LLP. Cincinnati, Ohio

Introduction

Two popular programs sponsored by many fraternal foundations are the maintenance of an “aid to needy members” fund, which is often named after a significant person in the fraternal organization’s history or a generous benefactor, and the maintenance of a museum or historical house, usually at a site related to the founding of the fraternal organization. The IRS has recently issued further guidance relating to these types of programs and this column will discuss some of the ramifications of such guidance for fraternal foundations that sponsor one or both of these programs.

Aid to Needy Members Fund

In the mid-1990′ s, the IRS issued several private letter rulings holding that employer-related disaster assistance and hardship relief foundations further charitable purposes within the meaning of Code Section 50 l (c)(3). (Such  foundations are operated somewhat similarly to those maintained by fraternal foundations to aid needy members and consequently, these private letter rulings provide much of the guidance upon which the recommended procedures for operation of such funds is based.) Recently, however, the IRS revoked (a fairly rare procedure) these rulings and ruled that the same foundations did not further charitable purposes because of prohibited private benefit to the employers. The IRS also discussed disaster relief and emergency hardship funds in its 1999 Continuing Professional Educational Technical Instruction Program.

Even assuming the rationale of the new rulings is viable, since IRS private letter rulings apply only to the organizations to which they are issued, and there are significant differences between employer funds of this type and the fraternal foundation funds, it does not appear that the Service’s recent change in position should apply to funds established by Greek foundations. Nevertheless, in light of this guidance, there are some steps recommended to all fraternal foundations maintaining this type of fund in order to incorporate some of the concepts emphasized in the recent guidelines. These are as follows:

• Foundations should establish an objective set of criteria concerning eligibility for awards from the For example, very often no definition of “needy” is provided. The definition of “needy” in the Treasury regulations suggests that a definition such as the following would be acceptable for these purposes. As noted below, an individual does  not have to be totally destitute to be needy.  “A person is considered ‘needy’ if he or she lacks the necessities of life, involving physical, mental, or emotional well-being, as a result of poverty or temporary distress. Generally, the person will  have  become  needy as a result of sudden and severe financial burdens as a result of events that are beyond such individual’s control. Examples of needy persons include a person who is financially impoverished as a result of low income and lack of financial resources, a person who temporarily lacks food or shelter and the means to provide for  it,  a  person who is the victim of a civil disaster, and a person  who is temporarily not self-sufficient as a result of a sudden and severe personal or family crisis.”
• The foundation should always determine the amount of an award from such a fund based upon all of the facts and circumstances of the individual’s situation. An outright transfer of monies without regard to meeting the individual’s particular financial needs would likely result in prohibited private benefit and could even threaten the foundation’s exemption. For example, the foundation should avoid a pattern of granting the same amount to each applicant in every situation. In this regard, foundations should consider adoption of the following guidelines:
  • “The foundation will determine whether a person is needy as a result of poverty or financial hardship based on all of the facts and circumstances. Poverty or financial hardship shall be determined by examining  whether the potential recipient’s available cash, assets that can be disposed of without causing further personal hardship, and anticipated cash flow (income, insurance proceeds, etc.) from all sources can reasonably be expected to be insufficient to provide for timely retirement of existing obligations and basic living needs, such as food, housing, clothing, medical care, transportation, household repairs, or other similar necessities.  A  recipient  does not have to be totally destitute to be needy. Instead, the person must  lack  the  resources to meet the basic necessities of life. The foundation will determine the amount of the award based upon all of the facts and circumstances of the individual’s situation and the foundation’s resources.”
• Such a foundation must maintain adequate records and case histories to justify the individual grants as being in furtherance of charitable purposes if a question  were to be raised.  It is recommended  that a foundation incorporate into its procedures governing such a fund guidelines like the following to carry out this requirement:
  • “The fund shall maintain records concerning each applicant containing basic information such as names, addresses, telephone numbers, social security numbers, a brief description of temporary financial distress, the type and amount of assistance needed, and the type and amount of assistance granted (if any). Moreover, the fund shall maintain records concerning each applicant’s financial condition such as available cash, expenses, other financial obligations, assets that can be disposed of without causing further personal hardship, and anticipated cash flow (income, insurance proceeds, etc.). The fund shall also retain  records  for each applicant concerning whether the applicant’s resources are insufficient to provide for timely retirement of existing obligations and the continuing basic living requirements (food, housing, clothing, medical care, transportation, household repairs, or other similar necessities).”
• The foundation should always advertise the availability of the fund to all of its alumnae(i) members.

Note that the above is not an exhaustive list of all procedures which apply to this type of fund and foundations maintaining these funds are urged to consult with their counsel in order to ensure that their funds are operated in a manner to benefit only the truly needy.

Museums and Historical Houses

Another IRS private letter ruling arose out of an audit of an organization that operated a historic site including a manor house which contained a valuable and significant collection of antique furnishings and household effects and was registered as a national historic landmark.  While  the  IRS had initially granted the organization recognition of charitable tax exempt status provided that the house remained open to the general public at regular set hours, upon an IRS audit, the Service determined that the organization had not  made the house adequately accessible to the general public. In order to resolve the matter, the Service and the organization agreed that the organization would take the following additional steps in the interest of public accessibility:

• The house would be open to the public on set days and times during the week, in addition to being open at other times by appointment.
• Visitors would be provided with detailed printed material describing the history, architecture and furnishings of the house, and a tour of the public  rooms of the house.
• The brochure would include  detailed  directions  to the house, a telephone number, and the times of operation, along with a detailed history of the house and a map of the house.
• A permanent sign would be placed at the main entrance on the public road to the house with information about the house and times of public access  to the house prominently visible.
• The brochure would be distributed to a number of area tourism groups, such as chambers of commerce, for distribution and display at their visitor centers.
• The organization would advertise at least annually in an historical or antiquities interest periodical of wide circulation and more frequently in an appropriate periodical of regional circulation and a newspaper of general circulation in locations frequented by area tourists.  The  advertisement  would  include an historical identification, as well as the  information in the brochure.
• The organization would keep a visitor register.

Again, the foregoing items apply by their terms only to the specific factual situation addressed in the IRS private letter ruling in question. Nevertheless, the above items provide insight into the type of factors that the IRS could well  apply to the typical historic site maintained by a fraternal foundation. It is therefore recommended that fraternal foundations supporting such properties work with their counsel to determine how to adapt as many as possible of these factors  to their own particular situation.