Monday, February 11, 2008

Von Maur victims fund beneficiaires must establish need to avoid private benefit

On Wednesday, December 5, 2007, a gunman entered a Von Maur store in Omaha, Nebraska, and killed eight people and injuring five others before killing himself.  In response to the shooting, the company set up a victims fund through the local United Way. This fund has raised $1.17 million. The committee administering the fund must determine how to distribute the funds in a manner consistent with charitable purposes, in order to avoid subjecting payouts to taxes. According to an article in today's Omaha World-Herald, the IRS has informed the committee overseeing the fund that only after victims document their need for assistance (e.g., medical expenses, counseling, education for children left behind), can tax-free payouts be made.

This is a recurring issue. Following the Columbine shootings and the Virginia Tech massacre, donors poured millions of dollars to establish funds to compensate families of the dead and injured.  After 9/11, Congress created and funded a special Victims Compensation Fund to the same end.   Unlike those other funds, however, the Von Maur Victims Fund may not be permitted to make tax-free payments to victims and their survivors based on either: (a) dividing the total sum raised equally (as occurred to some extent with the Columbine, 9/11, and Virginia Tech massacres) or (b) based on projections of lost future income (as occurred in the 9/11 Victims Compensation Fund). 

Although disaster relief has long been recognized as a charitable purpose, the IRS suggested prior to 9/11 that payouts from victims funds might violate the private benefit doctrine if not made to those traditionally classified as poor or under some other specific financial need. Tax-free payments could not based "solely on an individual’s involvement in a disaster or without regard to meeting the individual’s particular distress or financial needs..."  After the 9/11 attacks, however, the IRS issued Notice 2001-78 stating that it would treat payments made by charities to disaster victims and their families as related to the charity’s exempt purpose as long as such grants were made “in good faith using objective standards," and Congress enacted legislation that specifically provided that cash grants to 9/11 victims would be considered as made for an exempt purpose.  Because Virginia Tech was a state instrumentality,  it obtained special authority from Virginia's governor to distribute the money to victims. In any event, Congress and the Virginia Legislature later passed bills to ensure that victims wouldn't have to pay federal and state taxes on the payouts.

Washington attorney Kenneth Feinberg, who handled both the 9/11 and Virginia Tech funds, advocates making equal payments to the families of those who die in such tragedies, to avoid the perception that some victims' lives are worth more than others.  Yet the current IRS position on disaster relief has returned to the proposition that the charity must make some kind of “needs” assessment when appropriate and to document the basis for its grants.  This is as it should be, as Professor Robert Katz argued in two articles published in 2003: A Pig in a Python: How the Charitable Response to September 11 Overwhelmed the Law of Disaster Relief,  and Too Much of a Good Thing: When Charitable Gifts Augment Victim Compensation.  Katz argued that both state charity law and the federal tax private benefit doctrine should be read to prohibit charities from conferring excessive financial benefits on their beneficiaries in the context of disaster relief.  Katz distinguished between the objectives tort law and charity law, noting that while tort law strives to make a person whole, there is nothing inherently charitable about that objective, and that by contrast, “loss alleviation ceases to be charitable . . . if it disburses more cash than necessary to relieve the victim’s financial distress.”  Accordingly, the charitable purpose of disaster relief must necessarily focus on simply relieving financial distress of victims, not granting them compensatory tort damages.  Professor John Colombo (a mentch who deserves all good things) incorporated this situation into a broader theory of private benefit in In Search of Private Benefit (2006).

Stay tuned to whether Congress will enact special legislation to exempt the Von Maur fund from the private benefit doctrine.  The 9/11 tragedy was a hard case, and it continues to generate new laws.


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