Unlike public charities, private foundations are generally required to seek prior IRS approval before making grants to individuals, such as scholarships and other awards for specific objectives. If unauthorized distributions to individuals are made by a private foundation, the organization will be subject to monetary penalties for making “taxable expenditures.” If a taxable expenditure is not repaid after IRS notification, these penalties can equal 100% of the amount of the unauthorized distribution. Monetary penalties for the distributions may also be imposed on the private foundation’s board of directors and other managers.
Qualified Disaster Relief
However, the IRS does allow private foundations to make grants and awards to individuals and families who are victims of a “qualified disaster,” which includes a Presidentially declared disaster. On March 13, 2020, the President issued a nationwide emergency declaration in response to the COVID-19 pandemic, rendering it a qualified disaster.
Unless its articles of incorporation, bylaws, or other policies prohibit it, a private foundation can distribute funds to individuals upon a showing of the individual’s financial need which arose as a result of the qualifying disaster. These payments can take the form of such things as rent or mortgage assistance, medical payments, food assistance, car loan assistance and funeral expenses. These expenditures are permissible even if this type of activity wasn’t disclosed in the organization’s application for tax-exempt status.
In order to make qualified disaster relief payments, a private foundation must proceed with caution and follow numerous IRS requirements. These include identifying a class of potential recipients large or indefinite enough to constitute a “charitable class,” which can’t be limited to a single disaster event. In addition, the recipients of the grants must be selected on an objective determination of their need, and selection must be done by an independent selection committee.
The private foundation’s board members, officers, employees and other “insiders” cannot receive qualified disaster payments, which would implicate the Internal Revenue Code’s prohibitions against self-dealing by a private foundation’s principals. Proper documentation of the recipients’ needs, the selection process and the purpose of the payments are a few examples of necessary procedures to protect the private foundation from exposure to taxable expenditure treatment.
Qualified disaster relief payments from private foundations offer a unique opportunity for these organizations to provide much needed financial assistance directly to individuals. To do so safely, a private foundation should consult with its legal or tax counsel in advance to make sure that it follows the necessary protocols to ensure that such payments do not subject the organization to potential taxable expenditure liability.
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