Thursday, July 18, 2019

Aren't donations to charities intended for crime victim compensation charitable contributions? Whose Advising the Virginia Governor otherwise?



Do organizations set up to collect and distribute donations to victims and victim families of mass shootings qualify for tax exempt status under IRC 501(c)(3)?  And if so, are contributions to those organizations deductible under IRC 170?  Of course, right?  What could be more charitable?  Sadly, mass shootings are becoming . . . well . . . ubiquitous.  As the map above shows, one of the latest mass shootings happened in Virginia Beach on May 31, when a gunman killed 11 people, wounding 4, before being killed himself in a hail of police gunfire.   So I am not quite sure why the Virginia Governor had to certify that a 501(c)(3)  doing just that -- collecting and donating funds to victim and victim families -- is performing "an essential government function."  His staff apparently thinks that without that designation, donations to the organization may not be deductible under IRC 170.  Here is the Governor's July 16 press release:

RICHMOND—Governor Ralph Northam today issued a proclamation recognizing that the Virginia Beach Tragedy Fund (Fund) seeks to perform an essential government function and urged the Internal Revenue Service (IRS) to follow suit. The Fund, which was established by United Way of South Hampton Roads in partnership with the City of Virginia Beach, must receive this designation in order to confirm that donations to the Fund will be tax deductible.

“Members of my administration have been in close and frequent contact with officials from the City of Virginia Beach and have offered to assist the victims and families affected by this senseless tragedy,” said Governor Northam. “As a result, I am issuing a proclamation that the Virginia Beach Tragedy Fund seeks to perform an essential government function, and I urge the Internal Revenue Service to find the same. The families of the victims and those injured in the tragic shooting in Virginia Beach rely upon this critical financial assistance and we must ensure they are receiving the support they deserve.”

Current IRS guidelines establish that donations to victim assistance funds are generally considered personal gifts and therefore are not guaranteed to be tax deductible. In June, the IRS confirmed that families of the victims and those injured are exempt from paying taxes on money they receive from the Fund. But the IRS has not yet certified that contributions to the Fund, which have come from thousands of individuals, reaching more than $3 million, will be tax deductible.

Here is the Governor's July 16, 2019 proclamation regarding the "Virginia Beach Tragedy Fund: 

Virginia Beach Tragedy Fund

WHEREAS, on May 31, 2019, 12 people were killed and four people were wounded in a mass shooting at a municipal building in the City of Virginia Beach, Virginia; and

WHEREAS, the shootings were horrific, jarring, and heartbreaking; and

WHEREAS, the victims and their families incurred medical, funeral, and other expenses as a result of this tragedy; and

WHEREAS, after this terrible tragedy, there was an outpouring of generosity by people and businesses offering monetary donations to help the victims of the mass shooting and their families; and

WHEREAS, the United Way of South Hampton Roads, a nonprofit §501(c)(3) organization, and the City of Virginia Beach created the Virginia Beach Tragedy Fund (Fund); and

WHEREAS, through the Fund, the City of Virginia Beach and the United Way of South Hampton Roads are working to ensure that monetary donations are used to provide financial assistance to the victims of the mass shooting and their families; and

WHEREAS, the Fund seeks to address the loss suffered by victims and their families, memorialize the heroism of first responders and community members, and assist the victims, their families, and the community in recovering from this tragedy.  Such services lessen the burdens of government;

NOW, THEREFORE, I, Ralph S. Northam, do hereby recognize that the Fund seeks to perform an essential government function with respect to the Virginia Beach mass shooting by lessening the burdens of government and promoting the health, welfare, and recovery of the victims, their families, and the Virginia Beach community.


The United Way South Hampton Roads website states "[p]lease note, donations given to victim assistance funds are generally considered personal gifts and are not guaranteed to be tax deductible so you will not be receiving a tax donation receipt."  Apparently, it is this qualifier that motivates the Governor's lawyers to have the fund designated as something that performs an "essential government function." But it seems to me that this approach is like that old game "Twister," (often played on that corny show, "The Brady Bunch").  I mean, why go through all these contortions?  United Way is definitely a 501(c)(3), contributions to which are tax deductible.  It has set up a fund to help crime victims and donations for that purpose, just like donations to assist victims of natural disasters -- are surely deductible, n'est-ce pa?  What am I missing here?  Why go through the trouble of proclaiming that the fund is performing an "essential government function," which by the way is a phrase nowhere found in IRC 170 and seemingly has nothing to do with charitable contributions.  Instead it is found in IRC 115 and, if applicable, would make the fund exempt from federal taxation.  Who thought doing so would resolve whatever charitable contribution uncertainty I am not seeing?   

Darryll K. Jones

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Despite having spent my childhood in Virginia (plus some time as a student at William and Mary), I have no ideas about Virginia state income tax law. I would make two observations about the federal issues:

1) No charitable gift *is* tax deductible. It may be *eligible* for deductibility based on applicable tax law (e.g., the qualification of the recipient organization, the nature and terms of the gift, etc.) AND the individual taxpayer's specific tax circumstances (e.g., do they choose to itemize? have they exceeded their AGI-limited charitable donations?)

2) Gifts to victims compensation funds are generally not considered eligible for deduction, even when the gifts are made to 501(c)(3) organizations. The IRS requires beneficiaries of such gifts to be members of an open class. Most victims compensation funds are designated or tied to a specific event, the beneficiary pool is limited to the victims of that event. The IRS considers this a closed class and disallows deductibility. The sole exception to this that I'm aware of is gifts to 501(c)(3) charities made for the benefit of 9/11 victims and their families. This exception actually required an act of Congress.

Posted by: Michael L. Wyland | Jul 19, 2019 9:56:39 AM

Quite right Michael regarding the eligibility requirements. I guess I am making a normative argument, really. But before I explain, I suppose I can understand the argument that gifts to a charity after a crime has occurred and after victims have been identified could logically be viewed as gifts directly to a closed group of people, wherein the gift maker is trying to generate a deduction using the charity as a mere intermediary. Would it be different if donations were made to a charity that existed to help future crime victims? Donations to a charity before a crime occurs for assistance to future, as of yet unidentified crime victims? In that case, the pool of recipients is unlimited and “open.” The organization’s goal is certainly charitable, isn’t it? Or what if United Way had simply taken unrestricted monies donated before the crime (which resulted in charitable contribution deductions, let’s assume) and made grants – for food, shelter, funeral, or other expenses of family members of the Virginia Beach shooting victims? I think in the latter two cases, the donations could generate eligible charitable deductions. The other point that causes me confusion is that I assume that donations to specific disaster relief funds set up by the Red Cross, for example, even after the hurricane, tornado or earthquake has occurred are generally deductible (again, assuming itemization, etc). The number of disaster victims after a natural disaster is more often, but not necessarily, greater than the number of crime victims after a criminal act. But the number of potential beneficiaries of an organization otherwise concededly charitable just doesn’t seem a convincing rationale to me. It’s not as if the charity is set up to assist just one non-randomly selected person (as in the case of a go fund me type charity set up to assist one person’s catastrophic medical expenses). Apparently there is at least enough reluctance by the IRS to say so that there is doubt on the matter. But I think I might write and then to defend an opinion letter for someone seeking to take a donation to criminal victim compensation funds (before or after the crime) if I were ever asked to do so. I could lose, as with anything, but it seems wholly defensible to me.

Posted by: Darryll K Jones | Jul 22, 2019 11:57:27 AM

See this article of mine on these issues.

Posted by: Ellen Aprill | Jul 23, 2019 8:07:08 PM

Thanks Ellen. That hits the nail on the head!

Posted by: Darryll K Jones | Jul 24, 2019 7:45:44 AM

I also posted a reply which included a link to training materials on the IRS website. Not sure why it hasn’t been posted.

Posted by: Michael L. Wyland | Jul 24, 2019 5:38:05 PM

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