BIG ONLINE INTERNATIONAL
Rules for U.S. Foundations for Cross-Border Grant Making
By John A. Edie and Jane C. Nober
Beyond our Borders: A Guide to Making Grants Outside the U.S.
For U.S. Grantmakers, international giving takes two forms: support for U.S. based non-profit organizations and "cross-border" awards to organizations based in other countries. The latter requires that a funder meet special requirements.
The Internal Revenue Code (the tax code) contains rules that shape how independent and corporate foundations and corporate giving programs may provide cross-border assistance.
Rules for Private Foundations
Independent and corporate foundations must satisfy Tax Code provisions that require minimum annual expenditure of approximately 5% of their assets for charitable purposes. Unless international grants are made according to Tax Code rules, they may fail to count toward these requirements or may be considered non-charitable "tax expenditures", which are subject to a penalty tax.
The easiest way for a private foundation to ensure that its grants are made for a charitable purpose is to choose a recipient that has qualified as a public charity with the IRS. Potential recipients may include:
For private foundations choosing to makes grants to non-U.S. organizations that are not recognized as public charities by the IRS, there are two approaches:
- U.S. public charities with extensive international operations.
- U.S. public charities that exist to provide support to one or more designated foreign charities, often called "Friends" organizations.
- U.S. public charities that offer donor-advised international funds, such that the private foundation retains the privilege of recommending distributions to particular foreign grantees.
- Foreign charities that have applied for and received a determination from the IRS that they are public charities.
(1) Determine that the foreign organization is the "equivalent" of a U.S. public charity; or if not equivalent,
(2) Exercise "expenditure responsibility". Some important aspects of equivalency determination and expenditure responsibility are discussed below.
Most experienced international grant makers undertake a process that combines both methods, by proceeding through the following steps:
- Make sure the grant is for charitable purposes;
- Assess whether the foreign organization is the equivalent of a U.S. charity, ie., organized and operated exclusively for charitable purposes. If yes, gather sufficient documentation to support equivalency determination. If no, exercise expenditure responsibility.
- Determine whether the foreign charity is the equivalent of a U.S. private foundation or a public charity. If a private foundation, exercise expenditure responsibility. If a public charity, proceed with equivalency determination; and
- Determine what other steps are necessary to ensure that grant will qualify toward the minimum annual expenditure requirement.
If a private foundation can establish that a foreign organization is the equivalent of a U.S. public charity, it may make grants to that entity without penalty and may count those grants towards its annual minimum expenditure requirement. The private foundation's good faith determination may be made up on the basis of an affidavit from the potential grantee or an opinion of legal counsel. The type of documents that must be secured from the grantee include:
- The certificate of incorporation or declaration of trust establishing the organization
- Detailed descriptions of the purpose of the organization and its past and proposed activities
- The governing statutory law or provision in the organizational document that describes how the organization's assets will be distributed if it should cease to exist.
- The governing statutory law or provision in the organizational documents that ensures (1) none of the assets or income of the organization will provide a private benefit to individuals, (2) any non-charitable activities or legislative lobbying are and will remain insubstantial, and (3) the organization will not participate or intervene directly or indirectly in a political campaign or public election on behalf of or in opposition to a candidate for public office.
- Detailed financial records (excluding religious institutions, medical institutions, and educational organizations)
In many cases, it will not be possible for a private foundation to secure a grantee's affidavit or an opinion of counsel that establishes a foreign organization as the equivalent of a U.S. public charity. The organization may be unable to provide the required material or may not be an exclusively charitable organization. Nonetheless, by exercising expenditure responsibility, a private foundation may in many cases make its desired grant.
Expenditure responsibility is a 4-5 step process, depending on the recipient organization type - that places responsibility on the private foundation for ensuring that its funds are expended for charitable purposes by the grantee. Meeting the technical requirement of the Tax Code involves extensive legal work. The following outline suggests only the general requirements for a private foundation that wants to provide expenditure responsibility grants.
Among the many additional issues that may arise for private foundations making international grants are those relating to re-granting to individuals, grants for endowments and capital expenses, and the complexities of making grants to organizes that are similar to private foundations.
- Conduct a pre-grant inquiry that makes a reasonable determination that the intended grantee is capable of fulfilling the charitable purposes of the grant;
- Execute a grant agreement that includes spending and reporting responsibilities and commits the grantee to spend the money only for the specified charitable purposes;
- Require one or more reports from the grantee detailing how the funds have been spent;
- Provide notification of the exercise of the expenditure responsibility grant, generally by reporting it on the 990-PF; and
- Maintain grant funds in a separate account dedicated to one or more charitable purposes (necessary when the grantee is other than a private foundation).
Rules for Corporate Direct Giving Programs
For corporate direct giving, as for U.S. citizens generally, the Tax Code provides an income tax charitable deduction only for contributions to charitable organizations that are organized in the United States. In general, no deduction is available for gifts made to charities that are organized and operated outside the U.S. Corporations face the further limitation that their donations must be made to entities that are incorporated (rather than unincorporated or trust form-organizations). These limitations generally push corporate direct giving toward one or more of the following types of organizations in order to provide international assistance and qualify for an income tax deduction:
A central concern for corporate givers working with any of these types of organizations should be the Tax Code's general requirement that the U.S. charity possess substantive control over the expenditure of the funds. If the charity is required as a condition of the gift to distribute the funds to another charity, it may not be deemed to have the appropriate degree of control. If the U.S. charity does not exercise sufficient control, the IRS may take the position that the corporations gift was in effect made directly to a foreign organization, and no charitable deduction would be given.
- U.S. organizations with extensive international operations.
- U.S. organizations that exist to provide support to one or more designated foreign charities, often called "Friends of" organizations.
- U.S. organizations that offer donor-advised international funds, such that the corporation retains the privilege of recommending distributions to particular foreign grantees.
Similarly, a "Friends of" organization may not be a "mere conduit" for support of a foreign charity but must exercise independent discretion regarding the projects it will support or the amounts to be committed.
Organizations that offer donor-advised international funds must also demonstrate that they exercise discretion in the expenditure of funds. To meet this standard and serve the interests of corporate givers, some organizations have developed expertise in a particular field or geographical area. Corporate donors can reply on this expertise to help shape their giving recommendations, while the organization can offer better targeted support.
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