KATRINA: DISASTER RELIEF BY FRATERNAL ORGANIZATIONS AND FOUNDATIONS

Barbara Schwartz Bromberg, Dinsmore & Shohl LLP

Introduction:     

The recent hurricane disasters in the Gulf Coast region have prompted many fraternal organizations and their affiliated foundations to consider establishing disaster relief funds and providing relief to their needy members who have experienced financial difficulties because of these occurrences.  Many of these organizations have decided to proceed with establishing such funds and accepting contributions thereto.  The traditional feeling of fraternal organizations as to this type of relief had been that it was best left to other organizations organized for this specific purpose to handle, but the widespread devastation of these disasters and the effect on a particular region has led some fraternal organizations to change their minds about this.  It is very important that any fraternal organization considering this type of program be aware that there are clear IRS guidelines for this type of program.  The purpose of this article is to explain those guidelines and how they generally should apply in a fraternal foundation’s situation.

IRS Guidelines:

Most fraternal organizations are interested in offering a tax deductible contribution opportunity to their members for making contributions to these types of funds.  That being the case, most organizations have elected to establish such funds in their affiliated foundations rather than in the fraternity itself.  It is well established that a Code Section 501(c)(3) organization such as a fraternal foundation may provide assistance to disaster victims under a “relief of poverty” or “relief of distress” rubric.  However, events that occurred with respect to relief of individuals involved in the September 11, 2001 tragedies have prompted the IRS to issue clear guidelines on the type of aid that may be provided and to whom.  For example, it is clear that such relief may be provided only on a needs assessment basis and may not simply be distributed to everyone involved in such a disaster.

The IRS guidelines break this type of aid down into two types in terms of the extent of investigation and record keeping that is required – i.e., short-term and long-term.

With respect to short-term aid, the IRS has stated that a charity may provide crisis counseling, rescue services, or emergency aid without a showing of financial aid since the individuals requiring these services are distressed irrespective of financial condition.  The only type of records that need to be maintained for such short-term emergency assistance (over about a three to five day period) is the type of assistance provided; criteria for disbursing assistance;  date, place and estimated number of victims assisted (individual names and addresses not required);  charitable purpose intended to be accomplished and the cost of the aid.  Examples of such short-term emergency aid include blankets, hot meals, electric fans and coats, hats and gloves.

Most fraternal foundations have not attempted to provide such short-term relief but rather are interested in providing long-term monetary relief over a period of perhaps six months after the disaster.  In such cases, the IRS rules are clear that the organization must make a specific assessment that a recipient of aid is financially or otherwise in need.  The types of assistance that may be given once such a determination of need is made include payment for basic necessities such as food, clothing, temporary housing, immediate medical care, funeral services and other critical needs arising directly out of the disaster or emergency.  In addition, fraternal foundations often desire to provide tuition, books and fees to students who would otherwise have their educations interrupted or terminated because of financial emergencies due to the occurrence of the disaster.  In these cases, adequate records that demonstrate the recipients’ need for assistance must be kept, and to document that an assessment of need has been made.  Documentation for these purposes should include:

1) A complete description of the assistance.

2) The purpose for which the aid was given.

3) The charity’s objective criteria for disbursing assistance.

4) How the recipients were selected.

5) The name, address and amount distributed to each recipient; and

6) Any relationship between a recipient and officers, directors or key employees of or substantial contributors to the charitable organization.

Special Considerations for Fraternal Foundations in Providing Disaster Relief:

Having assisted a number of fraternal foundation clients in establishing disaster relief funds, and based upon the foregoing IRS disaster relief guidelines for general disaster relief organizations, the following are some of my observations about the steps that fraternal foundations should take in establishing and maintaining these types of funds:

1) General disaster relief organizations usually only have one criterion for relief and that is that the recipient has a financial need arising out of the disaster.  Fraternal foundations generally add a requirement that the recipient be a member in good standing of its affiliated fraternity.  That being the case, fraternal foundations need to be extremely careful in how the recipients are selected and the types of aid that are given.  For example, we recommend that grants not be awarded to pay members’ dues or room and board in a chapter house as these could be considered to be not basic necessities and self-serving.

2) Fraternal foundations should be extremely wary of possible conflicts of interest and provide a method in the program’s documentation for dealing with a possible conflict of interest should, for example, a proposed recipient be related to a member of the committee administering the fund.

3) Financial information should be sought from the recipient and the recipient’s need should be verified through at least one independent source such as an unrelated alumnus or clergyman.

4) There should be a maximum amount stated which can be granted to any one individual in connection with any one disaster.

5) There should be a simple reporting mechanism that is required of a recipient so that if, for example, the recipient receives insurance proceeds for the grant purpose, the recipient must refund the amount received to the foundation.

Conclusion:

Fraternities, their affiliated foundations and contributing members are to be applauded for stepping in and providing relief in these catastrophic situations.  Documentation should be drafted so that it is not limited to one specific occurrence but can be used in the future as, unfortunately, we know that there will be future situations that will require this type of aid.  If the fraternity and its affiliated foundation follow the IRS guidelines and the additional suggestions indicated in this article, they should be able to add this worthy relief effort to their programs without risking their tax exempt status.