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2001-11-26

November 26,2001

Kenneth L, Zwick
Director
Office of Management Programs
U.S. Department of Justice, Civil Division
Main Building, Room 3140
950 Pennsylvania Avenue NW
Washington, DC 20530

Re: Adoption of Rules to Govern the September 11 Victim Compensation Program-
Topic #6: Should Charitable Gifts Be Considered Payments from a Collateral Source

Dear Mr. Zwick:

The Council on Foundations is a membership organization that serves the public good by
promoting and enhancing responsible and effective philanthropy. The Council's 2,100
members include independent foundations, family foundations, community foundations
and corporate grantmakers.

Council members responded quickly and generously to the terrorist attacks on September
11. Many gave to The September 11 Fund, established by the New York Community
Trust, a Council member, and the United Way of New York City, and to the Survivor's
Fund of the Community Foundation of the National Capital Region, another Council
member. But Council members also made emergency grants to many of the other
charities providing services and financial assistance to those who incurred losses as a
result of September 11. In some cases, they established programs of their own to make
grants directly to individuals and families. Council members made most of these gifts
with the expectation that their contributions, along with the millions of dollars
contributed by others, would provide immediate assistance during the time it takes to
mobilize a governmental response and would then supplement and enhance the
government's effort.

The Justice Department's request for comments on the content of rules governing the
government's September 11 Victim Compensation Program asks whether the definition
of "collateral source" in section 402 of the Act establishing the program can be read to
exclude gifts by charitable organizations to those injured in the September 11 tragedies
and to the families of those who lose their lives. The Council believes that gifts by
charities should not be deemed to be payments by a collateral source and that Congress
never intended such a result.

There are many reasons why gifts by a charity to September 11 victims do not fall within
the statute's definition of "collateral source." This submission will focus on three. First, as a
straightforward case of statutory interpretation, the definition provides four examples
of payments that are from a "collateral source" - life insurance, pension funds, death benefit
programs and payments by Federal, State or local governments. Each of these examples is a
payment to which survivors are entitled either as a contractual obligation or by meeting the
qualifications for assistance from a government program. Charitable gifts are plainly different
from these payments simply because they are gifts-survivors have no individual, enforceable
right to receive a payment from a charity, any more than they would have a right to compel a
friend or family member to make a gift. The wording of section 405(b)(6) of the Act
underscores this interpretation. That section reduces the compensattion available from the
government's fund by "the Collateral source of compensation the claimant has received or is
entitled to receive" (emphasis supplied), implying that Congress was thinking about amounts that
are predictable because the claimant has a legal right to collect them. Because charity assistance
is a gift, not a right, claimants would not be "entitled' to any future assistance, much less a
determinable amount. Consequently, applying the collateral source rule to charity aid would
treat claimants differently depending on the timing of their receipt of charitable assistance-
reductions for those who receive aid prior to their case being determined, but no reductions for
those who receive aid subsequently. The Department can avoid this problem by excluding
charity aid from the definition of collateral source.

The second reason why charitable gifts should not be considered a collateral source is that doing
so would hold defeat the purpose of the Act-to encourage survivors to accept an administrative
settlement rather than sue airlines and other potential defendants. Since charitable gifts would
not reduce damage awards in litigation, using them to reduce the amount claimants would
receive from the fund creates a disincentive to use the fund.

A third reason to exclude charitable gifts from the definition of collateral source is that decisions
about who should receive charitable gifts, and the amount they should receive, are made on a
different basis than the decisions about how much compensation survivors should receive from
the government's fund. The purpose of the government fund is to compensate victims and
survivors for their economic and noneconomic losses; charity aid is directed primarily to
alleviating need. As we will explain, the result of that difference is that reducing government
compensation by charitable aid would disproportionately penalize those most in need.

The federal September 11 compensation fund will provide essentially the same level of
compensation to survivors on an administrative basis as they would receive if they prevailed in
litigation against the airlines and other parties who might be found liable in tort. Thus the fund
will award two types of compensation-one that covers economic losses resulting from physical
injury or death in the September 11 tragedy and the other covering noneconomic losses, such as
pain and suffering, loss of society and companionship and similar nonpecuniary losses. As is
appropriate, the victim's current and expected future earnings will be a substantial component of
the economic loss portion of the award. As a result, and again appropriately given the nature of
the fund, the economic compensation awarded to the family of a stockbroker or an insurance
executive will be substantially greater than that received by the family of a receptionist or a
dishwasher. Even assuming that the noneconomic loss portion of the compensation award is
based on factors that disregard income, it is reasonable to expect that the largest awards from the
fund generally will go to the families with the highest pre-September 11 earnings. Charity
assistance, however, is based on need. As the IRS wrote in guidance it issued shortly after
September 11, Charitable funds cannot be distributed to persons merely because they are victims
of a disaster. Therefore, an organization's decision about how its funds will be distributed must
be based on an objective evaluation of the victim's needs at the time of the grant.

Advanced Text of a Special IRS Publication, "Disaster Relief: Providing Assistance Through
Charitable Organizations,"http:/www.irs.gov/relief/aid-charity-pub.pdf.

As the special Publication explains in greater detail, charities provide disaster victims with food,
shelter, clothing, medical care, grief counseling and similar emergency services in the immediate
aftermath of a disaster. Because the IRS recognizes the need for charities to dispense such aid as
quickly and efficiently as possible, it is not normally necessary to conduct an extensive inquiry
into the recipient's financial circumstances. However, as the response shifts to meeting longer-
term needs, the IRS requires that charitites shift their focus to meeting basic needs of those who
cannot provide for themselves from other resources.

Recognizing the unique circumstances of the September 11 terrorist attacks, the IRS announced
on November 16,2001 that it will not question payments by charitites to September 11 victims
and survivors as long as "the payments are made in good faith using objective standards." IRS
Notice 2001-78 on Disaster Relief Distributions by Charities on Sept. 11 Terrorist Attack
Victims
(scheduled to appear in Internal Revenue Bulletin 2001-50, dated December 10,2001).The IRS
notice covers payments made through the earlier of December 31,2001 or the date on which
Congress enacts legislation addressing the issue. Section 103 of The Victims of Terrorism Relief
Act of 2001 (H.R. 2884 EAS), which passed the Senate on November 16 and is pending in the
House of Representatives, includes language similar to that used in IRS Notice 2001-78
permitting charities to distribute funds to September 11 victims based on objective criteria.
Legislative history captures the intent of congress to permit charities to make payments to
appropriate classes, such as firefighters killed in the line of duty on September 11, without
directly considering the specific financial needs of each family. Similarly, charities that make
payments based on an appropriate surrogate standard, such as the number of dependents in a
family, need not examine the specific needs of each family. S.Prt. 107-49 at 30 (2001)
http://finance.senate.gov/76060.pdf.

IRS Notice 2001-78 and the legislation, if Congress enacts it, free charities to provide assistance
to September 11 survivors more quickly than would be possible with strict adherence to the
economic need test that normally governs disaster relief distributions once the immediate crisis is
past. While the result may be that some families receive charitable assistance that might not
have qualified under a strict application of the economic circumstances in deciding the type and
amount of aid to provide. Knowing that the most substantial settlement from the government's
fund likely will accrue to those with the highest pre-attack incomes, it is reasonable to expect
that charitable assistance will flow most heavily to the survivors who were economically needy
prior to the disaster and whose compensation from the fund is thus likely to be among the lowest.

Despite the fund compensation they will receive, many of these families will need continued
charitable support and would suffer disproportionately if the aid they received from charities was
used to lower the government's cost of paying compensation claims rather than to provide them
with the extra help they need to rebuild their lives.

Believing, as we do, that the Department should not consider payments by charities to be
payments by a collateral source if they are based on need, we note that both the IRS
announcement and the legislation, if Congress enacts it, in effect deem payments by charities in
response to September 11 to bear a relationship to need and charitable class. We believe that the
Justice Department should respect that presumption. To do otherwise would require the
Department to gather information on the process employed by dozens of charities with respect to
thousands of families and to second-guess the good-faith decisions those charities made. At the
very least, this would be terribly time-consuming, likely to produce inconsistent results, and
contrary to the intent expressed by the Senate and the IRS regarding this particular disaster.

The role of philanthropy in times of disaster is to meet needs that are not met from other
sources. Philanthropy supplements a survivor's personal and family resources and fills
the gap in government programs. Reducing government compensation by the amount of
charitable aid a survivor receives would disproportionately penalize those who most need
the assistance and could deter giving in future disasters.

Sincerely,

Council on Foundations

2001-11-26