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Loving Thy Neighbor: Tax-Compliant Benevolence

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Does your house of worship financially help those in need? Commonly known as “benevolence,” this charitable assistance arises from age-old religious concepts and carries significant modern-day tax compliance implications. Not only should such religious organizations maintain benevolence policies, but they also need to follow through with related communications, financial controls, and other safeguards.

Background – Helping Those in Need

The common theological reasons for benevolence include stewardship, the belief that everything one has belongs to God and should be at his service; love of neighbor as a form of worship; divine justice; or, the interdependence of all life. In the Jewish faith, giving to the poor, or tzedakah, is a commandment, or mitzvah.[1] In the Islamic faith, giving to the poor, known as zakat, is one of the Five Pillars of Islam.[2] Buddhism emphasizes the role of charity in helping a follower acknowledge the interdependence of all life, which is an important part of the path to enlightenment. For Christians, service and support of the poor is often referred to as charity and is a part of the Greatest Commandment.

The well-known parable of the Good Samaritan exemplifies the Christian concept of benevolence. As set forth in the Gospel of Luke, a Samaritan sees a beaten man by the side of road, stripped and left for dead by robbers. The Samaritan takes pity on the victim, bandages his wound, carries him to an inn, and even pays the innkeeper for the expense of housing him (Luke 10:33-35). While the Samaritan certainly had no formal benevolence policy to go by (and that would have been a different parable!), he acted as many houses of worship do – reaching out compassionately to care for others, including provision of financial needs.

Non-religious organizations often help people financially too, such as through need-based grants or scholarships. Disaster relief is another form of benevolence, focused on specific crises and short-term needs arising from them. Each of these types of activities involve legal requirements for tax compliance.[3]

Underlying Tax-Exempt Concepts – No Impermissible Private Benefit

What do these types of financial assistance have in common? They may all be carried out by Section 501(c)(3) public charities in furtherance of their tax-exempt purposes, including churches, synagogues, mosques, and other houses of worship. Correspondingly, such assistance may not result in “impermissible private benefit” to its charitable beneficiaries, which is antithetical to Section 501(c)(3) constraints.[4] What is impermissible private benefit? 

Let’s start with what is legally permissible. A Section 501(c)(3) organization that pays a vendor a fair price for goods or services (e.g., the electric company, for electricity) is conveying private benefit, but legitimately so in furtherance of the organization’s tax-exempt purposes (to run its office). In addition, a Section 501(c)(3) organization that freely distributes its benefits among many (e.g., a free public concert) may incidentally benefit the donor who helped pay for the musicians, but only incidentally so. Looking at the victim helped by the Good Samaritan, he certainly received a private benefit – that is, personal benefit through medical care and housing – but he was legitimately a beneficiary based on his clearly apparent distress. In other words, he received benevolent assistance. The same holds true generally for people in need who eat at a soup kitchen, people who lose their jobs and need help with rent, or those who face medical needs beyond their financial means.

Now consider what is legally impermissible. What if the person asking for help with rent were related to a church representative tasked with identifying benevolent needs and providing financial assistance? Should the applicant be given favoritism over another person who is not related to the church representative? Or what if the applicant does not really need help with rent, but instead has other ample financial resources available? What if the applicant does need help and is not related to the church representative, but the church representative (unwisely) decides to give the applicant, rather than the landlord, six months’ rent without further investigation into the applicant’s reputation as a compulsive gambler? All of these situations could likely result in impermissible private benefit – through a conflict of interest involving the church representative, a lack of genuine financial need, or unwise assistance in light of the relevant circumstances.

A Recipe for Success: The Key “Ingredients” of a Benevolence Policy

From a tax perspective, and taking into account sound stewardship principles, the solution is to (a) develop a board-approved, written benevolence policy and (b) follow it in practice. A well-developed benevolence policy contains clear objective criteria affirmatively addressing the following questions:

How? – The policy should address how resources will be designated to be distributed as aid and how the opportunities for aid will be made available.

Who? – The policy should indicate who will make decisions related to the distribution of assistance. This may be the board of directors, but is most often a designated benevolence committee or other subset of the board. The key is that the decision makers are objective, independent, and familiar with applicable tax law requirements for what constitutes a permissible benefit. 

To whom? – The policy should have a clear and objective rubric for assessing an individual’s legitimate charitable need within the context of 501(c)(3) and prevent undue favoritism to insiders or others.[5]

Why? – The policy should set boundaries regarding what types of requests will be facilitated. For example, will the aid only be used toward basic needs? What will be considered a basic need? The IRS’s Private Letter Ruling 200634016 provides a helpful illustrative framework for assessing charitable needs due to unforeseen financial hardships.[6] For religious organizations, the tenets of the religious faith may warrant a more wholistic or unique benevolence structure. Under any circumstance, the language of the Policy should clearly connect how and why the needs addressed further the organization’s exempt purposes under 501(c)(3). 

How much, and for how long? - The policy should also set limits on the amount of financial aid given to one individual, both in terms of value and in number of grants paid. Not only is this a best practice to avoid the financial support becoming a source of dependency rather than empowerment, but it also addresses the private benefit issue by ensuring that no one person receives a disproportionate benefit from the benevolence fund.

When? – The policy should address whether applications for aid will be reviewed as needed or otherwise periodically.

In what manner? – The organization should establish methods of transmitting funds which allow the organization enough oversight to ensure that the funds are being used for charitable purposes. When possible, payments should be made directly to a creditor or vendor. If this is not possible, the organization should request receipts to prove that the funds were used for their intended purpose.

Anything else? Recordkeeping is critical to this process. The needs assessments should be maintained in the corporate records, along with the committee’s or other decision-maker’s deliberations and resolutions, as well as an accounting of all funds given and related supporting documents.

Form 1099 & Benevolence

In Private Letter Ruling 9314014, the IRS ruled that a charity’s provision of respite care and transportation services to the needy, while in excess of $600, did not trigger a Form 1099 reporting requirement for the beneficiaries because the value of the benefit was excludable from the beneficiaries’ gross income. Accordingly, a charity is not required to issue a Form 1099 to a benevolence recipient provided the individual is a member of a charitable class and did not perform services to the organization in exchange for such payment. However, a charity may have a Form 1099 reporting requirement for payments made directly to a landlord or other vendor for the benefit of the benevolence recipient. For example, if a charity makes over $600 in rent payments under its benevolence policy to a landlord, the charity should report such payments on a Form 1099-MISC for the landlord. While the amount may be considered a gift to the benevolence recipient, it is taxable income to the landlord and the charity is responsible to issue a Form 1099 to report such payments. 

Donations for Benevolence – Staying in Control and Legally Compliant

On the other side of the benevolence equation are the donors, who presumably would like to (and expect to) receive tax deductions for their charitable contributions for benevolent assistance. May a donor require that his or her donation be used only for a certain recipient? The short answer is no. In order for donations to qualify as tax deductible, the use of the funds must ultimately lie within the donee organization’s control and discretion. Donors may indicate their preference for a particular person’s need, but all communications should reflect that the church retains control (e.g., the need turns to be unwarranted, or the benevolence committee decides that another need is more deserving of financial assistance). 

Additionally, keep in mind that generous-minded individuals can give separately to recipients, instead of through a religious organization. For example, they could give directly to a specific individual in need, they could initiate a GoFundMe or similar crowdfunding effort, or even start a private trust fund (as sometimes occurs in a situation of major medical needs). For each of these fundraising efforts, however, there should be no organizational sponsorship or other formal involvement, and consequently such donations will not be tax deductible to the donor.

Worthy Cause Indeed

Benevolence assistance provides vital financial resources to those in need. Religious organizations thus play a crucial role in filling these needs and relieving suffering. As Section 501(c)(3) tax-exempt entities, these organizations should do so through high-quality benevolence policies and consistent practices to achieve optimal tax compliance. That’s wise stewardship too!

[1] "When you reap the harvest of your land, do not reap to the very edges of your field…Leave them for the poor and the alien.” (Leviticus 23:22)

[2] See e.g., "Do not worship except Allah; and to parents do good and to relatives, orphans, and the needy. And speak to people good [words] and establish prayer and give alms." (Surat Al-Baqarah 2:83)

[3] To learn more about grants and disaster relief, see our posts here and here.

[4] For further guidance on these Section 501(c)(3)-related private benefit constraints, see our blog article here.

[5] A good standard is to include a provision in the policy that prohibits granting funds to benefit a director, officer, key contributor, or employee of the organization, as well as individuals that have a family or business relationship with these individuals. A family relationship includes: spouse, sibling, child, grandchild, great-grandchildren, a sibling’s ancestor, and the spouse of siblings, children, grandchildren, and great-grandchildren.

[6] Benevolence is limited to desperate financial needs including: (a) a need resulting directly from an identifiable, sudden, and unexpected event; (b) the inability to provide for the basic necessities of life, such as food, clothing, and other basic sustenance; (c) unusual and uninsured medical expenses caused by severe illness or accident; and (d) a need for supplemental assistance by an aged or handicapped individual with income insufficient to maintain a minimum standard of living. An emergency event includes a serious injury or illness of the applicant or a member of the applicant’s household, casualty or theft loss to a personal residence or workplace, and civil unrest. The event must be caused by factors outside the control of the applicant and must be unlikely to recur or to continue for a long period of time. Assistance will not be provided for expenses covered by insurance or other sources.

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