Many charities and foundations have sought to make grants to individuals and grants to businesses that have been severely impacted by the COVID-19 crisis. With close to 2.3 million confirmed cases of COVID-19 and about 45 million persons claiming unemployment in the U.S. over the past few months, the need is certainly there. But there is much uncertainty about whether these types of grants are permissible and how they can be made.
The short answer is that 501(c)(3) organizations can make grants to individuals and to businesses if such grants are made in furtherance of their 501(c)(3) tax-exempt purposes and are not expended in a manner inconsistent with 501(c)(3). Such prohibited expenditures would include those to support or oppose candidates for public office and those that would provide more than an incidental private benefit to some person or entity. Donor advised fund (DAF) sponsoring organizations and private foundations have additional rules limiting their grantmaking, but they still can make certain types of grants to individuals and businesses.
In Part One of this series of posts, we focus on mission-consistency, charitable class, and prohibited private benefits. Part Two will focus on a public charity’s provision of grants for disaster relief and emergency hardships impacting employees of a particular for-profit company.
The specific purpose of a charitable nonprofit corporation may be specified in its articles of incorporation. It may also be restated or further limited in the corporation’s bylaws or other public communications or filings.
To the extent that the specific purpose is limited by provisions in the articles and bylaws, the corporation must operate in furtherance of such specific purpose and not for any other purpose, even if charitable (except perhaps to an insubstantial extent).
Thus, a charity whose specific purpose statement in its articles is to provide afterschool reading programs to children in Central California should not start a substantial new program making disaster relief grants to adversely impacted persons in Texas. If, however, the charity amended its purpose statement in its articles to allow for it to pursue the new program, it could then go ahead and do so. But charitable trust laws may restrict the use of past funds for the new purpose.
A 501(c)(3) nonprofit must serve a charitable class. The IRS defines charitable class as follows:
A charitable class is a group of individuals that may properly receive assistance from a charitable organization. A charitable class must be either large enough that the potential beneficiaries cannot be individually identified, or sufficiently indefinite that the community as a whole, rather than a pre-selected group of people, benefits when a charity provides assistance. For example, a charitable class could consist of all individuals located in a city, county, or state. This charitable class is large and benefits to it benefit the entire geographic community.
If the group of eligible beneficiaries is more limited, such as employees of a particular employer, the group of individuals eligible for disaster assistance (the class) must be indefinite. Otherwise, the charitable class would consist of a pre-selected group of people, which is prohibited. To benefit an indefinite charitable class, the relief program must be open-ended and include employees affected by the current disaster and those who may be affected by a future disaster. In this situation, the total number of potential members making up the charitable class cannot be counted or identified. Thus, while it may be possible to identify the employees who were victims of a present disaster (which is prohibited as pre-selection), it is not possible to identify employees who could be affected by future disasters. Accordingly, if a charity follows a policy of assisting employees who are victims of all disasters, present and future, it would be providing assistance to an indefinite charitable class.
Caution: If the facts and circumstances indicate that a newly established disaster relief program to help employees is intended to benefit only current beneficiaries without any intention to provide for future disasters, a charitable class would not be present.
Disaster Relief: Meaning of “Charitable Class” (May 5, 2020)
Prohibited Private Benefits
A 501(c)(3) nonprofit must not be organized or operated for the benefit of private interests, including any individual or business entity. The IRS acknowledges, however, that “genuine public benefit often provides an incidental benefit to private individuals.” For such benefit to be permissible, it must be incidental both quantitatively and qualitatively.
The term “qualitative” relates to the necessity to serve private interests in order to also accomplish a charitable purpose. The term “quantitative” relates to whether the private benefit is insubstantial when viewed in relation to the public benefit conferred by the activity.
IRS 1999 EO CPE Text, K. Disaster Relief and Emergency Hardship Programs
Charitable grants of aid to individual victims of a disaster must be based on an objective evaluation of the victim’s needs at the time the grant is made. Giving a grant to an individual adversely impacted by a disaster to the extent of not having access or the ability to pay for necessities like food, housing, medicines, and/or child/dependent care, for the purposes of charitable relief, would be charitable. But giving a grant to a wealthy individual adversely impacted by a disaster unrelated to any distress or financial need to access necessities, and allowing the grantee to use the funds to repair a luxury estate, would almost certainly be a prohibited private benefit.
This IRS site provides that it applies this objective evaluation rule with “common sense and sympathy for the plight of victims:
- In the chaotic and disorienting aftermath of a disaster, a charity can attend to a victim’s immediate needs without regard to financial means. When flood waters drive people from their homes, everyone urgently needs shelter, warmth, food, clothing, medicine, transportation, and some cash for incidental expenses. A charity may provide this immediate aid to everyone without pausing to conduct an individual needs assessment. However, the charity is still responsible for documenting and maintaining records of this type of assistance.
- But as time goes on, the danger recedes, and people are able to call upon their individual resources, it becomes increasingly appropriate for charities to conduct individual financial needs assessments. Those who require additional assistance can have it, but those who do not need such continuing assistance should not use charitable resources. For example, families displaced by a hurricane may have a need for longer term emergency housing assistance if they do not have adequate resources to meet basic living needs.”
According to an older IRS publication‘s explanation of an impermissible private benefit: “Maintaining a person’s standard of living at a level satisfactory to that person rather than at a level to satisfy basic needs could also serve private interests.”
Charitable grants of aid to businesses adversely impacted by a disaster may also be possible. This IRS site explains:
“[A] charity may indirectly accomplish a charitable purpose, such as combating community deterioration or lessening the burdens of government. This is permissible as long as (1) the assistance is reasonably related to the accomplishment of an exempt purpose, and (2) private benefit to the business is incidental. Although a business is not itself a member of a charitable class, and thus not an appropriate charitable object, it may be the means to accomplish charitable purposes.
Evidence of incidental private benefit would include a showing that the business does not have adequate resources from its own assets, conventional financing, or insurance to recover from the disaster. Moreover, a charity would need to determine that without its intervention the business would not locate or remain in the area.”
Grants to individuals and businesses may also be made for other 501(c)(3) exempt purposes in a context other than disaster relief or emergency hardship. For example, 501(c)(3) organizations may provide scholarships or awards to individuals; they may make grants to commission a piece of art aimed at public education; and they may make grants to pharmaceutical companies to fund the research, development, and distribution of life-saving drugs that might not otherwise be commercially viable. Those examples are also subject to the private benefit prohibition described above.