As the world continues to get smaller and as more and more taxpayers want to see the instant benefit that their charitable giving provides, private foundations are faced with some unique challenges. Traditional giving to qualifying charities continues to be the norm; however, grants to foreign charitable organizations and scholarship giving are beginning to grow in popularity.
Grants to Foreign Charities
If a private foundation is considering making a grant to a foreign charity, it is imperative that they take the steps necessary to ensure that the grant will not be considered a taxable expenditure. It is critical that proper due diligence be done well before the grant is ever made.
There are two methods that can be followed in order to protect against taxable expenditure treatment - the equivalency determination test or the expenditure responsibility rules. The ultimate goal of both of these methods is to ensure that the grant is truly used for the charitable purpose it is meant to fund.
In order to meet the equivalency determination test, the private foundation must
be able to substantiate that the foreign charity, if organized in the United States,
would qualify as a public charity. This can mean reviewing the charities documents,
interviewing management and reviewing any tax filings or financial statements that
they may have. Many times the private foundation will find itself trying to translate
the documents of the charity since they are in another language. It is suggested
that once all of this information is obtained an affidavit is secured from the foreign
charity that confirms all findings. Due to the extensive due diligence that must
be done in anticipation of this grant, a private foundation should seriously consider
this test when it plans to make a series of contributions over a period of years.
The expenditure responsibility rules have their own challenges. In order to satisfy
this test, the private foundation must follow the grant proceeds from the time the
funds are given to the charity until the funds are ultimately used for the charitable
purpose. Many times this period of following the money extends over a period of
years. This entire process should start with a pre-grant inquiry, followed by obtaining
a written agreement from the charity stating its intended use of the grant proceeds,
gathering annual reports from the charity and notifying the Internal Revenue Service
that the expenditure rules have been followed in this instance.
If there is an international charity that a private foundation is interested in
supporting, the foundation should take some time to investigate all options. There
are charities that are organized in the United States that have a charitable mission
that extends into another country. By making the grant to one of these charities,
the private foundation would avoid the administrative burden associated with the
options above.
Grants to Individuals
More and more private foundations are becoming increasingly interested in making
grants directly to individuals. This comes mainly in the form of some type of
scholarship giving. This type of giving can be accomplished; however, integral
steps must be taken by the private foundation before the first dollar is ever granted.
Also, the private foundation should revisit its documents to make sure that scholarship
giving and the program it is going to create, fits within its charitable mission.
Any grants provided to an individual must be awarded on an objective and nondiscriminatory basis. The individual receiving the grant should not be related in any way to the foundation, its board or its employees. Next, the process must be approved by the Internal Revenue Service well in advance of any grants being made. There is no template method to creating a program. As such, the grant making process should be unique to the private foundation based on its charitable purpose. The goal of the program, however, must be to improve or enhance a literacy, artistic, musical, scientific, teaching, or other similar capacity, skill or talent of the person receiving the grant. It could also be achieve a specific objective, produce a report of some sort or create a similar product. That said, the charitable mission of the private foundation should always
be followed.
As private foundations are considering these different forms of giving, their boards
need to understand the importance of proper planning, research and due diligence.
There are rules that must be followed in order to prevent taxable expenditure treatment
and if the time is invested now it will prevent much unnecessary and unwanted tax
compliance burdens later.
For questions about the content of this article, please contact Kim Dula at kdula@friedmanllp.com or your engagement partner.
