Elaine's Tax Tips for Nonprofits

Benevolence

Meeting the Ever Increasing Need

What Is Benevolence

Benevolence is the desire to do good to others, an act of kindness; or a charitable gift. In churches and other nonprofits, a benevolence program is a program established to identify and meet the needs of individuals that they cannot meet themselves. While it is most commonly considered in light of finances, any program that meets this definition is a benevolence program. For example, even a organization providing meals is operating a benevolence program. However, no matter the method of meeting a “need”, there are financial considerations involved.

The Concept of a Charitable Class

There is a tax concept in the world of nonprofits known as “charitable class”. If a program serves no charitable class, then it more than likely does not meet the test for being a proper exempt purpose program. Those who are “poor and distressed or underprivileged” constitute a charitable class. Therefore charitable purposes or exempt purposes include the relief of the poor and distressed. However, the charitable class defined must be of either an indefinite or sufficient size to avoid benefiting private interests. For example in PLR 201205011 a nonprofit was denied exemption because it was formed to aid children with special needs, but they were all of the same family.

Qualifying for Benevolence

There are two facets requiring scrutiny in operating a benevolence program. The IRS generally states that an acceptable benevolence can be granted to 1) meet a need and 2) that need cannot be met by the recipient from resources currently available to them.

Determining need requires determining a necessity missing in a person's life. Necessities normally include items such as food, clothing, shelter, transportation and health care. Determining available resources requires inquiries into why a person can't meed the "need" or provide the "necessity" out of resources already available to them. For example, after 9/11 many people had resources that were not available for use to meet basic needs. Therefore, even though someone has financial resources, if they are not available for use, they may still qualify for assistance.

Structure of a Benevolence Program

The key to operating a successful benevolence program is in constructing the program. The more structure provided to the program, the more successful it will be and the easier it is to operate the program. For a program to not threaten the exempt status of the organization/church, it must operate according to a formal structure. (Church in Boston, 71 T.C. 102 & PLR 201235022)

Successful programs contain these aspects:

A method of verifying the person is a member of a valid charitable class, i.e., that they have a need and it cannot be met out of their currently available resources. This generally requires an application besides a potential interview with the applicant. The documentation will:

support the church’s decision to make the payment;
prove that the payment is within the guidelines established by the church; and
prove that the payment fulfills the church’s exempt purposes.

.A set of guidelines provides staff with the tools to operate the plan. Common items addressed in the guidelines or the policy include:

Who has the authority to approve a request at various dollar thresholds;
What types of needs will be considered;
What type of third party confirmation is needed to confirm the existence of the need;
What proof of other resources is required;
Who is the targeted group to be considered; i.e., is it just church members; is it active church members or just members? CAUTION: Do not link approval of a benevolence request to a person’s tithing records;
Determination of situations that disqualify an applicant;
The actions an applicant must take to secure the assistance;
How will the need be met, i.e. payments to requester or payments be made directly to a third party benefiting the requester;
How will requests for multiple requests be handled;
How will requests from employees and their family members be handled; and
The process for making the requests.

A manner of reviewing the above information by persons independent or disinterested from the person making the request.

Repeat Requests

While most benevolence plans deal primarily with short term needs, plans must exist to deal with circumstances presenting long term needs. People encounter extended illnesses prohibiting them from working and providing for their families or a single parent struggles to support their family even though she/he is gainfully employed. Long term situations should be cautiously supported by an organization taking these steps:

Have the appropriate committee approve the situation;
Perform regular reevaluations of the situation to document that the need continues to exist; and
Assist the recipient in exploring other sources to meet a continued need.

Designated Gifts

It is not acceptable for an organization to accept contributions earmarked for an individual, even when a need is justifiable. An organization, including a church, may not solicit funds for a specific person. An organization may solicit for additional funds to increase its overall benevolence funds and provide funds in response to an unusual need. However, it must be clearly conveyed to donors that the organization is the one making the final determination as to the amount of assistance that any recipient will receive.

An organization should have a practice that consistently states that any designation by a donor is a “suggestion” and the final use of all funds is at the discretion of the governing body; i.,e., the finance committee, board of directors, elders, etc.

Employee Benevolence

Internal Revenue Code Section 102 specifically states that gifts are not taxable. The exclusion provided in Section 102 allows benevolence to not be taxable to recipients. However, the exclusion is not available to amounts provided to employees. There are several considerations when working with benevolence related to employees.

Regular Employees - Benevolence assistance provided to an employee should be approved as additional income. Consideration must be given to confirm that the total compensation paid to an employee is always reasonable.
Employees Considered as Disqualified Persons under IRC Section 4958 – These are employees who are in positions of control and authority. All of their income must be reasonable” and “approved in writing”, so it is imperative that any additional payments to this group of employees be carefully documented. Failure to follow the correct procedures could cause the assessment of intermediate section ranging from 25% to 200% of the assistance to the disqualified person. Benevolence payments to this group should be made only after great care, consideration and approvals.
Family Members of Employees – In general benevolence to family members of employees is considered income to the employee, if the employee is responsible for the care of the family member. Sometimes the relationship may not trigger income to the employee as long as the employee is not a disqualified person.
Family Members of Disqualified Persons – Family members of disqualified persons should never be provided assistance unless the same procedures are followed as in the case of the payment of compensation or benevolence to the disqualified person. member, then he/she may not use the church to fulfill their moral and/or legal obligation. Failure to follow the correct procedures could cause the assessment of intermediate section ranging from 25% to 200% of the assistance to the disqualified person.

Exceptions under IRC Section 139 – IRC Section 139 allows for tax-free assistance/benevolence type payments to be made to employees affected by a qualifying disaster. This would also apply to family members of the employees affected by a qualifying disaster. Organizations should establish disaster assistance programs separate benevolence assistance programs. Requirements for these programs were discussed in my blog of September 2, 2017.

Summary

While operating benevolence or assistance programs is a natural activity of many types of nonprofit organizations and most churches, it is necessary the programs operate in compliance with all the rules applicable to nonprofit organizations. Operating a program that cannot justify its assistance fulfills its charitable purposes creates a threat to the organization's tax exempt status.