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Charitable Not Entitled to an Income Tax Deduction the Gift Is Deductible

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Charitable Not Entitled to an Income Tax Deduction the Gift Is Deductible FEATURE Cross-Border Grant Making by Private Foundations By Jane Peebles, JD haritable gifts by Americans Donations via “friends of” foreign charity that would qualify as a to fund projects abroad have organizations. Contributions also public charity if it had been established C increased dramatically in the may be made to a U.S. public charity here; 2) the grant is to a foreign charity past decade, yet many U.S. donors, formed to support a foreign charity or that is the equivalent of a U.S. private foundation directors, and their advisors charities. A U.S. donor who wishes to foundation, and the U.S. foundation are unaware of the complex tax rules benefi t Oxford University in England, making the grant exercises “expendi- that govern such gifts. for example, can make a donation ture responsibility” with respect to the to the “American Friends of Oxford grant; or 3) the foreign entity is not the The Basic Rules University,” a U.S. charity formed for equivalent of a U.S. charity but agrees to A U.S. citizen or resident who makes a this purpose. Th e “friends of” organiza- segregate the grant funds in a separate direct donation to a foreign charity is tion monitors the use of the funds, so account, use them only for charitable not entitled to an income tax deduction the gift is deductible. purposes as defi ned by IRC Section for that gift. However, if the funds are Donations via community foun- 170(c), and account to the U.S. founda- donated to a charity that was created dations. A U.S. donor also can claim tion regarding its use of the funds. or organized in the United States, and a deduction for a gift to a community Foreign charities with U.S. exempt which then uses the donation to fund a foundation which, in turn, regrants the status. A foreign charity that is the charitable project abroad, the donation funds to a foreign charity. Th e commu- equivalent of a U.S. public charity can is deductible. Th e U.S. charity must re- nity foundation’s governing documents apply for and obtain U.S. tax-exempt tain discretion and control over the use and internal policies must allow it to status. Few foreign charities bother to of the funds, and the funds must be put make grants abroad and it must not act do this because U.S. individual donors to uses recognized as charitable under as a mere conduit for the gift. still are not entitled to deduct direct U.S. tax laws. A gift to a U.S. charity Donations via private founda- contributions to them. If a foreign char- for use abroad may be made through a tions. Th e donor’s own private founda- ity is granted U.S. tax-exempt status, a “friends of” organization, community tion also can make grants to foreign grant to it by a U.S. private foundation foundation, or other U.S. public charity, charities. Th e private foundation must always counts toward the foundation’s or through a U.S. private foundation. retain discretion and control over the 5-percent annual payout. Donations to U.S. charities oper- use of the funds and follow procedures Good faith determination. If the ating abroad. Th e easiest way to get an to ensure the funds are used only to foreign charity does not have U.S. tax- income tax deduction for a donation to further its own charitable purposes. exempt status, the private foundation be used abroad is to make it to a U.S. can collect data to determine whether public charity that operates abroad. Th e Rules Applicable to U.S. Private it is the equivalent of a U.S. public use of the funds is under the complete Foundations Making Grants Abroad charity. If the foundation can make control of the U.S. charity, so the U.S. U.S. private nonoperating foundations a “good faith determination” that the charity is treated as the true benefi - making grants abroad will want to foreign charity meets the requirements ciary. A number of U.S. charities, such determine whether the grants count as for U.S. public charity status, the grant as the Red Cross, CARE, and Oxfam “qualifying distributions” that satisfy to it will be a qualifying distribution. America, have broad-based direct their required 5-percent annual payout In attempting to make an equivalency programs abroad. Th e U.S. donor may under Section 4942 of the Internal Rev- determination, the private foundation earmark contributions to such charities enue Code (IRC). A foundation grant to may rely on information provided in for a particular foreign program of the a foreign charity is a qualifying distribu- an opinion from its own counsel or U.S. charity, but gifts may not be ear- tion if it is made for charitable purposes the foreign charity’s counsel, but the marked for regranting to a particular recognized by the Internal Revenue cost of obtaining an opinion may be foreign charity. Service (IRS) and 1) the grant is to a prohibitive for smaller foundations. 14 Investments&Wealth MONITOR © 2010 Investment Management Consultants Association. Reprint with permission only. FEATURE In Revenue Procedure 92-94, 1992-2 and 4) separately account for the grant sibility grant to it also must meet the C.B. 507, the IRS approved a form of funds or, if the foreign grantee is not “out of corpus” requirement. A grant affi davit of the foreign grantee that can the equivalent of a U.S. nonprofi t (e.g., from one private foundation to another be relied upon by multiple U.S. founda- it is for-profi t or an entity such as a will not count toward the U.S. founda- tions. Th is helps small foundations trade group), then to maintain the grant tion’s 5-percent annual payout unless make their equivalency determinations funds in a separate account dedicated to the grantee satisfi es the “out of corpus” at a reasonable cost. one or more charitable purposes. Th e rule. Th e “out of corpus” rule gener- Expenditure responsibility. It is agreement typically also will prohibit ally requires that any grant from one often impossible to determine that the the grantee from regranting the funds private foundation to another must be foreign charity is equivalent to a U.S. to other foreign organizations or indi- spent by the grantee within 12 months public charity. Particularly with smaller viduals because that triggers additional after the close of the tax year in which charities in developing or underdevel- complicated rules to minimize the like- it received the funds. Th is policy is oped nations, the proposed grantee may lihood that the funds will be diverted designed to ensure that such grants will not keep adequate fi nancial records for from charitable purposes. Expenditure be used to benefi t the public and not to a U.S. funder to determine whether it responsibility grants are reported to build the grantee’s investment portfolio. meets the one-third public support test the IRS on the U.S. foundation’s Form Additional complex restrictions govern that applies to public charities other 990-PF. the “out of corpus” rule. than churches, schools, and hospitals. In many cases, the foreign charity may have adequate records but may receive its funding from too narrow a base of A foreign government, or any agency donors to meet the one-third public “or instrumentality thereof, is treated like a support test. In such cases, the grant still can be made, but the U.S. founda- U.S. public charity. A grant to it counts toward tion must exercise “expenditure respon- sibility” over the grant funds. Exercising the U.S. foundation’s 5-percent payout require- expenditure responsibility maximizes ment as long as the gift is used for charitable the odds that the funds will be used for U.S. charitable purposes because the purposes. U.S. foundation closely monitors the ” use of the funds. Th e U.S. foundation must make all reasonable eff orts to see that the grant Grants to governmental units. Anti-Terrorism is spent solely for the purposes for Grants to foreign governmental units Financing Guidelines which it was made. Exercising expen- do not require either an equivalency U.S. private foundations also should diture responsibility entails making a determination or expenditure respon- be aware of the potential for criminal pre-grant inquiry to allow the grantor sibility. A foreign government, or any prosecution, civil penalties, and the to determine whether the proposed agency or instrumentality thereof, freezing of their assets if they are found foreign grantee can fulfi ll the chari- is treated like a U.S. public charity. to have made contributions to foreign table purpose of the grant. An offi cer A grant to it counts toward the U.S. or domestic charities that engage in or or director of the foreign grantee also foundation’s 5-percent payout require- support terrorism. must sign a written grant agreement ment as long as the gift is used for Executive Order 13224 and the specifying the charitable purpose of charitable purposes. Th e U.S. founda- Patriot Act. Very soon after the the grant and committing the grantee tion’s fi le should contain documentation terrorist attacks of 9/11/01, President to: 1) repay any funds not used for establishing that the grantee is a foreign Bush issued Executive Order 13224, the grant’s purpose; 2) submit annual government or governmental unit and “Blocking Property and Prohibiting reports detailing how the funds have a copy of its grant letter specifying the Transactions with Persons Who been used, compliance with the grant charitable purpose of the grant.
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