Grants to foreign non-governmental organizations (“NGOs”) can help carry out important charitable activity—they are often made to organizations struggling to deal with hunger, poverty and health issues and can help improve the lives of some of the world’s poorest people. However, for private foundations, grants to foreign NGOs can present an extra layer of difficulty. Private foundations are prohibited from making grants to foreign NGOs (which have not received a 501(c)(3) determination from the IRS) unless they utilize one of the following mechanisms:
- Expenditure responsibility: an elevated grantmaking process that requires the private foundation to undertake a pre-grant inquiry, enter into a written grant agreement with certain commitments on the part of the grantee, supervise the grant and maintain certain records.
- Equivalency determination: a process by which the private foundation determines that the organization is the equivalent of a U.S. 501(c)(3) public charity, private operating foundation or exempt operating foundation.
Most private foundations have opted to go with the expenditure responsibility option, because the current rules for equivalency determinations require that they be based on the affidavit of the foreign NGO or the opinion of counsel of the grantor or grantee, which can be costly and time-consuming. However, expenditure responsibility does carry costs and burdens of its own.
A Potential Solution
Several organizations, including the Council on Foundations, have pushed for a more streamlined process that could include an equivalency determination repository. Assume, for example, that a foundation wants to make a grant to a certain foreign organization, and is able to go to an organizational repository to see if a determination has been made for that organization. If so, the foundation could potentially rely on it (or the information collected could be used efficiently to create another equivalency determination for the organization); if not, the foundation could request that such a determination be made. The current rules do not clearly permit this repository model, because the “opinion of counsel” requirement implies that the opinion needs to be provided in the context of a legal relationship between and attorney and an organization (meaning that the same opinion could not necessarily be used by another foundation). This leads to different organizations conducting the same information collection and analysis, and obtaining separate opinions of counsel, for the same potential grantees.
However, the IRS has proposed rules that would allow the determination to be based on written advice of a qualified tax practitioner subject to Circular 230, who can be an attorney, CPA or enrolled agent. This would allow a private foundation to rely on written advice from a practitioner without necessarily establishing an attorney-client relationship between that tax practitioner and the grantor or grantee, and thus could allow for a repository containing determinations for a number of foreign organizations.
A natural question that follows from the idea of such a repository is whether there should be a time limit on how long a grantor can rely on written advice for purposes of the equivalency determination. This is something the IRS has solicited comments on, as well as whether the ability to rely on affidavits of foreign grantees should be removed or modified (comments can be submitted until December 24, 2012).
(Photo courtesy of U.S. Friends of Orphans and Vulnerable Children)
Have you conducted an equivalency determination for foreign grantees under the current rules?
What are potential concerns you see with the repository idea?