When my eldest daughter entered her senior year of high school, she paid the high school’s parking-space-paint-fee and used the opportunity to paint and profess her mantra of: Treat People with Kindness.
Kindness – a term stemming from circa 1300, with origins of the religious act of benevolence.
“Benevolence” – the quality of being kind.
For tax-exempt public charities, benevolent acts must be considered within the guardrails of section 501(c)(3) of the Internal Revenue Code. To enjoy tax-exemption as an organization described in Section 501(c)(3), the organization must be organized and operated primarily to accomplish one or more of the exempt purposes specified in section 501(c)(3). See 26 U.S.C. § 501(c)(3); 26 C.F.R. § 1.501(c)(3)-1(c). To enjoy or maintain tax-exempt status, the charitable organization must avoid use of charitable assets for the substantial benefit of unqualified individuals or, for certain, control persons.
So, how do public charities, especially religious organizations, manage the confluence of benevolence (i.e., kindness) and tax regulations when seeking to tend to the poor, naked, infirmed, or hungry, i.e., those “in need”?
In a technical sense, the answer is, basically, identification of need and provision of sufficient resources that do not exceed that need—identify a life necessity that the beneficial recipient cannot meet with available resources.
Not a perfect science.
But, theoretical science should not unreasonably deter the objective of treating people with kindness.
For federal income tax purposes, the recipient of benevolence must, technically, lack the resources to meet the need. The test to be applied is usually focused on the type of need to be addressed and the resources given to address that need. A brief affirmation of resources (or lack thereof) could serve to support due diligence on the applicant’s available resources. Some organizations request financial records of the prospective recipient in order to evaluate the lack of resources to meet the need in issue. Other organizations simply require the applicant to sign a statement, indicating that the recipient lacks the resources to pay for the need made the basis for the benevolence request. Again, there is no perfect science on the matter, but the more due diligence the better prepared the organization will be to combat any audit or inquiry by the taxing government.
For federal tax purposes, the public charity should—in a best case scenario—reasonably document benevolent expenditures, recording that the expenditures meet or address the identified need of the recipient. The organization should document that the request for (for example) housing expenses, food, clothing, fuel, healthcare, travel, etc. represents an unmet necessity of the recipient.
An organization involved in routine benevolence should consider adopting a benevolence policy or written form to use for creation of a case-by-case record of requests and decision-making regarding acts of kindness. And, those records should be maintain for an appropriate amount of time in the event of audit or inquiry from the taxing authorities. Nothing too complicated because kindness must remain nimble to life. For example, a written form with schedules for input of information about the requestor, others that may be involved, their life situation, available resources, and the need to be addressed will serve as a record tool for use in the event of audit or inquiry.
Treat people with kindness (but don’t forget about the Internal Revenue Code when doing so, especially on a tax-exempt basis).
Freeman Law aggressively represents clients in tax litigation at both the state and federal levels. When the stakes are high, clients rely on our experience, knowledge, and talent to help them navigate all levels of the tax dispute lifecycle—from audits and examinations to the courtroom and all levels of appeals. Schedule a consultation or call (214) 984-3000 to discuss your tax needs.