United States: Charitable Giving and Disaster Relief Efforts in Response to the Haitian and Chilean Earthquakes

Several recent natural disasters have caused much death and destruction. Floods have devastated areas in Brazil, Mexico, Peru, and Bolivia, and earthquakes have caused great destruction in Haiti and Chile. The Chilean earthquake's epicenter off the coast of Chile near the city of Concepcion caused huge tsunami waves that devastated seacoast villages. Destruction of this magnitude has not been seen since a tsunami crushed the seacoast villages of Indonesia and swept across the Indian Ocean to cause more damage on the Indian Peninsula in 2004.

What have we learned from the tsunami of 2004, and how can we provide immediate assistance to the victims of today's disasters and help countries rebuild? Faced with crushing poverty, Haiti will need a coordinated international effort not only to rebuild its infrastructure but to create a totally new economy and effective government.

Haiti Earthquake

Lessons from other disasters are not always relevant to the earthquake that struck Haiti on January 12. The Indian Ocean tsunami, for example, affected a ribbon of remote, mainly rural areas. The governments of the affected nations like Indonesia could lead their relief efforts. But Haiti's institutions were weak even before the disaster. Because the earthquake devastated the capital of Port-au-Prince, the recovery efforts of both the Haitian government and the United Nations, which has been trying to rebuild Haiti's infrastructure and delivery of services since the floods of 2004, were disrupted. Many nongovernmental organizations, which were already in Haiti to help it recover from recent floods, also were affected by the earthquake.

Immediately after the earthquake struck, the world's governments, NGOs, and for-profit companies began organizing a global humanitarian response. Among the first responders were search and rescue teams from as far away as Iceland and Israel, security forces from the United States and Qatar, and relief organizations such as Partners in Health and the American Red Cross. However, the initial response efforts were slowed by the magnitude of the disaster, which included significant loss of life, including the deaths of government officials, as well as the devastation to infrastructure.

Because of the destruction of Haiti's key transportation hubs, significant bottlenecks occurred as government entities and NGOs rushed supplies and personnel to the country. The loss of life among Haitian officials and the destruction of the government's facilities led to an ad. hoc coordination of the rescue, security, and relief efforts. In the early days of the response, tension arose between the competing interests of government-supplied security forces that were trying to maintain law and order in the face of looting and the NGOs rushing to provide food, shelter, medical supplies, and services to the survivors. The early priority for security, as set by U.S. officials in control at Haiti's airport, quickly gave way to prioritizing relief shipments.

To date approximately 150 countries have contributed to the relief efforts in Haiti (see graphic). Contributions from national governments, NGOs, and corporations have varied depending on the ability of each organization or nation to give, with many supplying personnel and relief materials while others have donated directly to the organizations providing relief services. The response of NGOs to the crises has been far-reaching, with. myriad. international, regional, and religious organizations contributing, either by providing direct services to the earthquake's victims or making donations to support the ongoing relief and rescue efforts.

In the aftermath of the earthquake, Haiti's minister of trade and industry estimated that the disaster had resulted in the loss of 20 percent of the country's jobs. This figure is especially distressing considering that before the earthquake, two- thirds of the country's 9 million people were not formally employed, and 70 percent of its residents were living on less than $2 a day. Before the earthquake, an international effort was under way to provide significant development and humanitarian assistance to Haiti. The effort was largely considered successful in bringing increased stability and economic development. After the earthquake, Haiti's president, Rene Preval, estimated it would take three years just to clear the rubble. It is too early to tell how far Haiti's long-term development plans will be set back as a result of the disaster.

Rebuilding Haiti will be difficult and must be done under a long-term strategy. Some have even suggested establishing a temporary, internationally led development authority with wide powers to act. There is an existing blueprint, drawn up by Haiti's government and presented to donors last year. it calls for investment in infrastructure, basic services, and combating soil erosion to help farmers become more productive and make the country less vulnerable to hurricanes. NGOs and private companies have also developed prototypes of permanent housing made of concrete and steel that can withstand the ravages of earthquakes and floods. In addition, plans for solar energy and cell phone technology will replace antiquated forms of electrical utilities and communication in both cities and rural areas.

The problem is that Haiti's government has neither the financial resources nor the management capability to take charge of the reconstruction effort. Rebuilding homes, schools, roads, and other infrastructure will take between $8 billion and $14 billion, according to an estimate by economists at the Inter-American Development Bank.

Many respected. international NGOs stepped in to provide relief and asked for public support. However, not all charities are as advertised. To keep individuals from donating to fraudulent charities, the Better Business Bureau published a list of more than 40 charities in the United States that were providing assistance to Haiti)¹ The FBI also issued a press release urging donors to be careful when responding to requests for aid, as individuals with criminal intent frequently use natural disasters to solicit contributions for a fake charity or cause.² The IRS routinely encourages donors to verify whether a recipient charity is qualified as a tax-exempt organization.³

As of April 6, a total of $2.7 billion in contributions and and had caused a tsunami. Communications with sea commitments had been made to the Haitian relief effort, coast villages were hindered by a power failure that and an additional $1.3 billion of uncommitted pledges are on record.⁴ Of this amount, individuals and NGOs have given more than 40 percent of the total contributions. In a sign of the times, contributions made through cellphones, such as those made through the American Red Cross's cellphone texting program during the NFL playoffs, raised an estimated $30 million in 10 days for relief efforts. The U.S. government is by far the biggest contributor, accounting for approximately 35 percent of contributions to date, with an additional 35 percent of all contributions coming from private individuals and organizations. The next largest government contributors were Canada, Saudi Arabia, France, and Spain. It remains to be seen whether the total contributions to the Haitian relief efforts will come close to equaling the estimated $8 billion in aid given in response to the 2004 Indian Ocean tsunami.

Chilean Earthquake

Less than two months after the earthquake hit Haiti, a massive 8.8-magnitude earthquake struck off the coast of Chile on February 27, killing hundreds of people and leaving many missing. The earthquake triggered a tsunami that flattened. cities along Chile's coast and led to warnings in more than 50 countries and territories throughout the Pacific Ocean. Fortunately, extensive damage did not extend to the countries in the warning zone, as it did following the 2004 Indian Ocean earthquake. In fact, the tsunami monitoring systems, which were improved after the 2004 earthquake, appear to have been successful.

The Chilean earthquake, the seventh strongest in recorded history, is believed to have shortened the duration of an Earth day by 1.26 microseconds. But although the Chilean earthquake was hundreds of times more powerful than the Haitian earthquake, it was much less deadly because of several factors, including its deeper depth. Chile's president, Michelle Bachelet, said at first that the country wouldn't seek international assistance. She soon reconsidered and requested international aid in the face of 2 million affected citizens and 1.5 million damaged buildings. Damage estimates total $15 billion to $30 billion, which is roughly equivalent to 10 to 20 percent of Chile's gross domestic product. The Chilean government was slow to respond because it did not realize that the epicenter of the earthquake was offshore and had caused a tsunami. Communications with seacoast villages were hindered by a power failure that prevented use of the Internet and cell phones. The government must now build 500,000 new houses and rebuild roads and ports to restore the economy. Many NGOs, national governments, and companies that contributed to the Haiti relief effort have offered monetary donations and supplies to aid Chile.⁵

Accelerated Deductions for Donations to Earthquake Relief

After the earthquakes in Haiti and Chile, Congress passed legislation to allow taxpayers to accelerate deductions for donations to relief efforts. The legislation gave taxpayers until April 15 to claim deductions on their 2009 tax returns for their donations.

IRS Publication 3833

IRS Publication 3833, Disaster Relief, Providing Assistance Through Charitable Organizations, sets forth rules on disaster relief for U.S. donors and charities. The publication explains that donors who want to help can either donate to an existing charitable organization or establish a new one. In response to the earthquakes in Haiti and Chile, most donors in the U.S. made contributions to organizations that the IRS previously determined were tax exempt. In order for contributions to a U.S. charity to be deductible when they are to be distributed in a foreign country, the U.S. charity must have control and discretion in using them. Contributions to foreign charities are generally not deductible for U.S. income tax purposes except when permitted by a tax treaty.

In general, charitable contributions may not be designated to benefit a specific family or individual, but may be designated for a particular type of relief, such as earthquake relief. Because limiting benefits to an individual or family is prohibited, charities usually focus on providing relief to a charitable class comprising a group of individuals needing assistance. A valid charitable class must be large enough that individual beneficiaries cannot be identified, or the class must be sufficiently indefinite that a targeted community benefits from the relief rather than just a select group of individuals. Of course, in disasters like those in Haiti and Chile, the charitable class may be all individuals requiring assistance in the affected areas. Such a class is large, and the assistance provided by charities accrues to the benefit of the stricken community.

Instead of providing contributions to an existing charitable organization, ambitious donors could choose to create a new charity. The application process generally requires forming an entity or trust under state law and seeking tax-exempt status from the IRS. In general, creating a charitable organization is not a practical way to provide short-term immediate relief to those affected by specific disasters like the earthquakes in Haiti or Chile. However, it may be appropriate when the proposed organization's charitable purpose is to provide long-term relief to a devastated area or to provide relief wherever future disasters occur.

Charities commonly provide aid directly to individuals affected by natural disasters. Organizations like Doctors Without Borders and Oxfam America are providing direct aid to individuals in Haiti to help them meet their basic needs, including healthcare and access to clean water and shelter. Charitable organizations serve disaster victims both in the short term by supplying food, shelter, clothing, and medical needs, and for the long term by establishing permanent housing, education, and medical facilities.

Distribution of aid to disaster victims generally must satisfy the needs-based test, which requires that the aid be based on an objective evaluation of the victim's needs when the distribution is made. immediately following a. disaster, charities may attend. to all individuals in need without conducting a needs assessment. However, after people begin to regain their ability to provide for themselves, charities must be more diligent in determining which individuals truly require further aid. Individuals able to support themselves are generally ineligible for continued charitable assistance.

Just as donors to charitable organizations must properly document their contributions in order to claim an income tax deduction, charities providing disaster relief must properly document their distributions and. expenditures in order to maintain their exempt status. According to Publication 3833, a charity's documentation for long-term. disaster relief distributions should include:

• a complete description of the assistance provided;
• costs associated with providing the assistance;
• the purpose for which the aid was given;
• the charity's objective criteria for disbursing assistance under each program;
• how the recipients were selected;
• the name, address, and amount distributed to each recipient;
• any relationship between a recipient and officers, directors, or key employees or substantial contributors to the charitable organization; and
• the composition of the selection committee approving the assistance.

The IRS requires similar but less detailed documentation from charities providing short-term aid (such as distribution of meals or individual articles of clothing). When disaster relief efforts are among a charity's or foundation's primary activities during a year, such organizations, in addition to providing documentation, must describe the disaster relief services provided on Form 990, "Return of Organization Exempt From Income Tax."

Charities also can provide aid to businesses affected by disasters if the assistance is reasonably related to accomplishing a charitable purpose and any benefit that accrues privately is incidental to accomplishing that purpose. For example, charitable aid to a damaged restaurant in Haiti or a tourist hotel in Chile may be appropriate until the business can support itself. Also, a charity that does not provide disaster relief may make contributions directly to a charity engaged in disaster relief efforts.

Qualified Disaster Relief Payments

In IRB 2010-6, Notice 2010-16, published February 8, the IRS designated the Haiti earthquake a qualified disaster under section 139. It designated the Chilean earthquake a qualified disaster in Notice 2010-26. Section 139 provides that qualified disaster relief payments are excluded from gross income. A qualified disaster is defined in section 139 as any disaster that:

results from terrorist or military actions;

• results from terrorist or military actions;
• is a presidentially declared disaster;
• occurs as a result of an accident involving a common carrier; or
• is an event determined catastrophic by the Treasury secretary.

A qualified disaster relief payment is a payment received, regardless of source, for:

• reasonable and necessary personal, family, living, or funeral expenses incurred as a result of a qualified disaster;
• reasonable and necessary expenses incurred for the repair or rehabilitation of a personal residence damaged by a qualified disaster;
• reasonable and necessary expenses incurred for the repair or replacement of the contents of a personal residence following a qualified disaster; or
• the promotion of general welfare following a qualified disaster if such payment is made by a federal, state, or local government.

Insurance payments and reimbursements, including income replacement and unemployment compensation, are not included in the definition of qualified disaster relief payments.

As a result of the IRS's determination that the Haitian and Chilean earthquakes were qualified disasters, employer-sponsored private foundations could provide disaster relief directly to employees who were victims of the earthquakes. Generally, disaster victims who receive payments from charities or employers meeting the requirements will not have to pay income tax on the disbursements because the payments are treated as gifts and excluded from gross income. Therefore, any U.S. taxpayer receiving disaster relief from a charity or the taxpayer's employer will not be taxed on payments the taxpayer receives as relief from the Haitian and Chilean earthquakes. A similar income exclusion exists for payments taxpayers receive from federal or state government sources.

Conclusion

Natural disasters like the earthquakes in Haiti and Chile trigger an outpouring of support from individuals, charitable organizations, and national governments to the victims. Early in a campaign of disaster relief, effectively matching donors to charities and matching charities and other relief agencies to victims can be frustrating because of the devastation on the ground. Given. the ad hoc nature of relief efforts and the inherent limitations of providing relief in a devastated area, some delay in aid reaching victims is inevitable. Nevertheless, after the immediate needs of the victims are satisfied, it is equally important to focus on sustainable long-term recovery efforts in affected areas, especially when a disaster strikes a country like Haiti, which has struggled for decades, if not centuries, to provide for its citizens.

Public charities and private foundations could be engaged in the coordinated international efforts to create a new economy for Haiti. A report prepared by the American Bar Association Section of Taxation on program-related investments that sets forth helpful examples and guidelines for this type of effort was recently submitted to the IRS.⁶ Example 2 discusses development of a new organic farming process through a startup corporation seeking venture capital, and Example 4 discusses loans and investments by small businesses destroyed by a natural disaster. Example 6 discusses foreign economic development through investments. These and other examples could be used to assist Haiti and Chile if the IRS acts quickly on the recommendations.

To ensure the continuing needs of those in disaster areas are met, donors must be confident that their contributions will reach the intended individuals. Fortunately there do not appear to be any widespread cases of fraud in the efforts to respond to the earthquakes in Haiti and Chile, although fraud is usually discovered some time after the disaster. Donors must also be aware of restrictions on the deductibility of their contributions to domestic and foreign charities.

As for the charities themselves, they must comply with increasingly complex state and federal reporting requirements. To maintain tax-exempt status with the IRS, charities must maintain proper documentation of their disaster relief efforts and perform needs assessments when serving disaster-affected populations in the long term. Although these reporting requirements may slow the delivery of services provided by charities to disaster victims, the rules ultimately serve to protect donors and charities alike by maintaining the public's faith in the charitable organizations providing essential disaster relief.

Footnotes

1. The list of charities meeting the Better Business Bureau's Wise Giving Alliance's Standards for Charity Accountability can be found at http://www.bbb.org/us/article/charities¬providing-haiti-earthquake-relief-14690 (retrieved April 6, 2010).

2. A list of tips published by the FBI intended to prevent donors from unwittingly contributing to fraudulent charities is posted on the FBI's Web site at http://www.fbi.gov/pressrel/pressre/10/earthquake011310.htm (retrieved April 6, 2010).

3. In Publication 78, Cumulative List of organization Described in Section 170(c) of the Internal Revenue Code of 1986, the IRS maintains a list of organizations eligible to receive tax-deductible charitable contributions. Donors can search this database online at http://www.irs.gov/charities/article/ 0id=96136,00.html (retrieved. April 6, 2010).

4. A detailed breakdown of contributions by organization can be found at http://www.reliefweb.int/rw/fts.nsf/doc105? OpenForm&rc=2Szemid-,EQ-2010-000009-FITI (retrieved April 6, 2010).

5. 'As of April 6, 2010, contributions, commitments, and pledges to aid Chile totaled approximately $123.2 million. A detailed summary of these donations can be found at http:// www.reliefweb.int/rw/fts.nsf/doc105?OpenForm&rc=2&zemid =EQ-2010-000034-CHL, (retrieved April 6, 2010).

6. American Bar Association Section of Taxation comments on program-related investments of exempt organizations, submitted March 3 to IRS Commissioner Douglas Shulman.

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