Making money flow

A legal “plumber” finds it’s not so simple to give charitable aid

By Victoria Bjorklund ’73

Victoria Bjorklund ’73 is a partner at the law firm of Simpson Thacher & Bartlett, where she heads the group that advises charities and donors. She has received numerous honors for her work relating to the aftermath of September 11, and recently was named Pro Bono Lawyer of the Year by the American Bar Association’s Tax Section.

On the morning of September 11, 2001, I stood at a window in the Simpson Thacher & Bartlett law offices at 425 Lexington Avenue and watched as the collapsed Twin Towers burned a short distance away. This image will be seared in my memory forever. But in the immense pain of that moment, I knew that my group at Simpson Thacher, which advises charities and donors, was uniquely positioned to help. We would manage the legal “plumbing” so that the charities could serve the unknown thousands of survivors in this time of unprecedented need.

It is critical to remember that the terrorist attack created a cloud of unknowing. How many were killed? Ten thousand, as the press initially speculated? Who were their survivors? How would charities find them? What needs would they have? Who would lose jobs and income? Would the American economy suffer severely? Would charities’ “normal” missions continue or be badly disrupted? “Locked down” in our almost deserted offices – the railroad to home was still closed – with no working telephones, I knew that we would soon be summoned.

And we were. Among the first to call were officials of the Civic Capital Corporation, the charitable arm of the New York City Investment Fund, an economic development charity that loans money to small businesses. Civic Capital and one other charity, Seedco, decided to provide cash grants to small businesses hurt by the attack. Civic Capital officials told me how adversely small businesses in Lower Manhattan had been affected. Not only were their suppliers and customers physically unable to come to them, but the lost office space in the area was equal in square footage to all of the office space in Indianapolis, America’s 12th largest city. With so many offices, restaurants, and stores destroyed, serious economic disruption was inevitable. Civic Capital, which itself is located in the frozen zone, requested our assistance to create its 9/11 relief fund.

One might think it would be simple for charities to give cash grants to anyone in such a crisis, but that was not the case. We faced two key questions: First, would a charity put its own federal tax exemption at risk if it gave a gift of money to a for-profit business? Second, would a business receiving such money be allowed to treat it as a tax-exempt gift, or would it have to pay income tax on such money as if it were earned revenue? We were dismayed when our research showed no precedent for charities (as opposed to government) making disaster-relief grants to businesses. Charities traditionally paid relief money to individuals whose homes were damaged by tornadoes or floods, not to their employers. But on September 11, it was primarily businesses, not homes, that were destroyed, in addition to the horrific loss of life.

In performing our legal research, we found no precedent approving of charities paying relief grants to private businesses. Further, our research turned up troubling, informal advice in an Internal Revenue Service official’s 1995 letter to charities after the Oklahoma City bombing: “[A] business is not an appropriate charitable beneficiary.” Despite this statement, we knew that for 40 years, private foundations have made so-called “program-related charitable investments” in for-profit businesses. Thus, we had a well-established body of law promoting charitable support of businesses for purposes such as assisting them to stay in a disadvantaged location to retain jobs. Using that authority as our guide, we drafted Civic Capital’s relief fund documents, and then sought to assist Civic Capital in seeking immediate contributions.

I was shocked at the resistance I met. While foundation officials would give millions to aid rescue personnel, they were skeptical about aiding businesses to keep low-wage workers employed, fearing penalties for improper grants. I argued that if small businesses were to shut down, their employees would be forced out onto the street. (Later, columnist Bob Herbert wrote in the New York Times that “as many as 80,000 jobs will have been lost by the end of the year, most of them paying less than $25,000 annually.”)

In those stressful days, I called foundations around the country to beg for grants for New York City’s small businesses. Over and over again I heard sophisticated donors reply that they were uncomfortable with such grants under existing law, despite their program-related investment histories. It was then that I decided that we would have to take steps to clarify the law on charitable grants to small businesses.

But how? We decided to draft an inquiry letter to the I.R.S. The American Bar Association Tax Section 9/11 Task Force, on which I served, kindly agreed to submit this letter, which asked I.R.S. Commissioner Charles Rossotti to clarify the consequences of a charity like Civic Capital paying loans and grants to for-profit businesses affected by the September 11 terrorist attacks.

We soon heard that our inquiry had caused significant discussion among government officials in Washington. On November 8, 2001, the chairman of the 9/11 task force, the group that submitted our request, was summoned to testify about our inquiry before the Subcommittee on Oversight of the House Ways and Means Committee. Soon after, an attorney-adviser at the Treasury Department contacted me to discuss case studies. Finally, we were asked to provide to the Treasury Department concrete examples of the kinds of grants to businesses that charities might make, and the paperwork on which they might rely.

We prepared and submitted all these responsive materials to the Treasury Department on November 19, 2001. Then we waited. And waited.

At last, the Department of the Treasury responded on April 15, 2002 (ironically, tax day), generally blessing our examples of charitable loans and grants to for-profit small businesses.

Six months to the day after the question was asked, one September 11 uncertainty was finally resolved. We salute Civic Capital, Seedco, and their donors for all they did in the interim, despite the uncertainty. And we trust that this guidance will give confidence to funders in the future to support needy small businesses in the aftermath of a disaster, because the economic consequences of losing employers are much more expensive in the long run than judicious charitable giving at the employers’ moment of need.

In the end, Civic Capital and Seedco cooperated by dividing potential applicants between them. Seedco took responsibility for aid to small retailers with fewer than 50 employees and small manufacturers. Civic Capital took responsibility for technical, catering, and professional services companies with fewer than 100 employees. So far, the two organizations have distributed more than $21 million to lower Manhattan’s small businesses — saving thousands of jobs, and helping a stricken community get back on its feet.