Webinar Recap - Planning Your Next International Grant: Legal Issues for Foundations and DAFs Giving Abroad

In case you missed it, NGOsource hosted a webinar on September 12, 2018 led by nonprofit legal experts, Brigit Kavanagh and Martha Lackritz-Peltier. The webinar addressed various commonly asked questions around equivalency determinations and international grantmaking, as well as tips for complying with some of the more nuanced grantmaking rules, including out of corpus and the specific project grant rule. You can watch the full webinar here. We’ve also provided a few questions and answers from the webinar below, and two related articles for further reading. If you’re new to equivalency determinations (ED) and expenditure responsibility (ER), you may want to start by reading our Guide to ED and our LegalEASE article on ER.

How can I get a sense of whether my grantee may be a good candidate for ED?

It’s difficult to know whether an organization will qualify as equivalent without undergoing a full ED analysis. Because each country’s legal system is different, certain terms around an organization’s entity type, purposes, and activities may not sound like the terms we use to describe charities in the U.S. Nevertheless, such terminology may not be disqualifying. For example, many charities in other countries are organized as limited companies and may even call their members “shareholders.” As long as such shareholders don’t retain rights over the organization’s assets, the organization may still be charitable.

The four most common reasons that an NGO cannot be certified as a public charity equivalent under U.S. law are: (1) political activity, (2) excessive lobbying, (3) improper dissolution clauses, and (4) failure to meet public charity financial support requirements. NGOsource provides a short list of “prescreening” questions (“What is the best way to prepare grantees for the ED process?”) that you can use on your grantees to get a sense of whether they may be unable to qualify. These questions cannot conclusively determine whether or not an organization will qualify for an ED. For example, some organizations may not contain requisite language in their governing documents but may still qualify pursuant to relevant local law requirements. Finally, even if an organization is organized and operated for charitable purposes, it may still fail the public support test if its activities require qualification under this test. In short, these are not fail-safe indicators, but they may be a useful guide in deciding whether to undertake ED.

What is required when making a grant to a government?

U.S. Treasury Regulation section 53.4945-5(a)(4)(iii) allows private foundations and donor-advised funds to forego exercising expenditure responsibility on certain “public” organizations, as long as the grant is made exclusively for charitable purposes. A public organization is defined as “a foreign government, or any agency or instrumentality thereof, or an international organization designated as such by Executive order under 22 U.S.C. 288.” Therefore, if you choose to make a grant to a government agency or instrumentality, or to a designated international organization, you must restrict use of the grant funds exclusively for charitable purposes, even though you may avoid exercising ER.

How can I tell whether an organization is a government agency or instrumentality?

While government agencies are typically easy to identify, government instrumentalities (which may include public libraries, hospitals, or schools, for example) are not always as readily identifiable. The IRS relies on a facts and circumstances test to determine whether an entity is sufficiently controlled by the government and in fact exercises a government function in order to identify government instrumentalities. This test applies equally to U.S. and non-U.S. instrumentalities. To quote a pertinent Revenue Ruling:

In cases involving the status of an organization as an instrumentality of one or more states or political subdivisions, the following factors are taken into consideration: (1) whether it is used for a governmental purpose and performs a governmental function; (2) whether performance of its function is on behalf of one or more states or political subdivisions; (3) whether there are any private interests involved, or whether the states or political subdivisions involved have the powers and interests of an owner; (4) whether control and supervision of the organization is vested in public authority or authorities; (5) if express or implied statutory or other authority is necessary for the creation and/or use of such an instrumentality and whether such authority exists; and (6) the degree of financial autonomy and the source of its operating expenses. 

Rev. Rul. 75-359.

For more information on government entities, read our blog post on the topic.

How do I know whether an organization is recognized as a public “international organization”?

An organization is recognized as a public international organization if it is listed on Executive Order 9698. Note that the World Bank does not itself appear on this list, but qualifies as such because it is made up of five affiliated institutions (IBRD, IDA, IFC, MIGA, and ICSID), each of which appears individually on EO 9698. The United Nations is listed as a public international organization. Certain UN subsidiary bodies may also qualify even if they’re not listed individually, depending on whether they are central enough to the UN to be considered the UN. This is a complicated question that may require the advice of counsel.

Should my grantee seek recognition as a 501(c)(3) public charity?

There are advantages and disadvantages to non-U.S. charities seeking official recognition as 501(c)(3) public charities by the Internal Revenue Service. There are also some circumstances where the entity would be required to do based on the amounts of its income from U.S. sources, or its desire to seek tax-exemption from U.S. source income. For more detail on the potential advantages and disadvantages, we encourage you to watch the webinar.

What is out of corpus and when does it apply?

To quote from a preeminent article on this topic:

While many grants from private foundations to organizations exempt under Section 501(c)(3) will count as qualifying distributions, other such grants will not. Specifically, grants to other private (nonoperating) foundations  and grants to organizations that are controlled by the grantor private foundation or its disqualified persons  will not count as qualifying distributions. The only exception to this general rule is the statutory scheme known as the "flow-through" or "out of corpus" exception. To take advantage of this exception, the grantee must redistribute the full grant amount and must also satisfy its annual distribution obligation for that year from other sources, without counting the grant funds. Strict and specific time limits and ordering rules apply to these distributions.  

Philanthropic Partnerships Using the ‘Out of Corpus’ Rules (PDF), by Betsy Buchalter Adler and Brigit Kavanagh

To learn more, listen to co-author of the above article, Brigit Kavanagh, discuss it during the second half of the webinar.

What is the “specific project grant rule”?

Formerly referred to as the “McIntosh Rule,” the specific project grant rule is found in U.S. Treasury Regulation section 53.4945-2(a)(6)(ii). According to the IRS:

A grant by a private foundation to fund a specific project of a public charity is not a taxable expenditure, even if the public charity engages in lobbying activities as part of the project, if each of the following requirements are met:

  • The grant is not earmarked to be used in an attempt to influence legislation; and
  • The sum of all grants made by the foundation for the same project for the same year does not exceed the amount budgeted, for the year of the grant, by the grantee organization for activities of the project that are not attempts to influence legislation.

If the grant is for more than one year, the rule applies to each year of the grant with the amount of the grant measured by the amount actually disbursed by the foundation in each year or divided equally between the years, at the foundation's option.  The same method of measuring the annual amount must be used in all years of a grant.

To learn more, listen to Brigit Kavanagh discuss the potential advantages of using this rule during the second half of the webinar.

Additional Resources

Planning Your Next International Grant: Legal Issues for Foundations and DAFs Giving Abroad (Webinar recording)

NGOsource Guide to Equivalency Determination (PDF)

Philanthropic Partnerships Using the ‘Out of Corpus’ Rules (PDF), by Betsy Buchalter Adler and Brigit Kavanagh

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This article is for general informational purposes only and does not represent legal advice as to any particular set of facts. Please seek legal counsel as you deem necessary.