With a little caution, community foundations can support the charitable activities of non-charities.
A chamber of commerce requests a grant to start a computer-training program.
A gardening club asks for money to cover a local beautification project.
A cemetery association seeks support for restoration of a memorial statue.
May a community foundation make any of these grants? The short answer: it depends. The longer answer follows.
A community foundation must consider a number of factors when reviewing requests such as these. If the community foundation provides support, it should collect documents and take follow-up steps to ensure that its grant is properly made.
What Does Your Charter Say?
Like community foundations, chambers of commerce, gardening clubs and cemetery associations are exempt from federal income tax under Section 501(c) of the Tax Code. Although community foundations and most of their usual grantees are exempt under Section 501(c)(3), which refers to organizations that are charitable, the grantees discussed here are exempt under some other provision of Section 501(c). Chambers of commerce, for example, are 501(c)(6) entities and cemetery associations are 501(c)(13) organizations. This means that—unlike community foundations, which are exclusively charitable—they may operate both charitable and non-charitable programs.
A community foundation receiving a grant request from a non-501(c)(3) must first determine whether its organizing documents permit such a grant. Does the charter, certificate of incorporation or deed of trust restrict grantmaking to 501(c)(3) organizations, or does it simply direct the community foundation to make distributions for charitable purposes? Is there a provision in the bylaws or a directive from the board that restricts grantmaking to 501(c)(3) entities? If no restriction exists, the foundation is free to consider the request.
Look for Charitable Purpose
In reviewing a grant request from a non-501(c)(3), community foundation managers must assess whether the funds will be used for a charitable purpose—which include religious, scientific, literary and educational activities as well as the promotion of amateur sports and the prevention of cruelty to children and animals.
The community foundation must also determine whether the grant-funded activities will serve the public or provide benefits to private interests. Only a grant that serves the public will be a charitable expenditure. For example, is the chamber of commerce
requesting funding for a training program that targets disadvantaged high school students who do not generally have access to such services? Or will payments be made to all chamber of commerce members to help them upgrade the skills of their secretarial help? Will the horticultural society be beautifying a town park or private property with little public access? Does the cemetery's memorial honor all of the area's World War I soldiers or merely the descendants of one family?
What to Put in the Grant File
If the community foundation provides funding, it should collect documents that demonstrate the charitable nature of the expenditure to IRS auditors or others. The grant file should contain the proposal and any additional materials that the community foundation consulted in assessing the project. There should generally be a written grant agreement that describes the sponsored activities, sets out the budget and the personnel responsible, and provides that any funds not used for the charitable purposes specified will be returned to the community foundation. This agreement should be signed by an officer of the community foundation as well as an officer of the grantee organization.
In most cases, the community foundation should require follow-up reporting from the non-501(c)(3) grantee organization that details the progress made toward achieving the charitable goals of the project. Depending on the term of the grant, this reporting could be required during the course of the project or at its conclusion. A very small grant may require little formal reporting (the horticultural society might submit receipts for the $250 of plants and fertilizer it purchased with grant funds), while a larger expenditure may require a more extensive narrative (the chamber of commerce might describe the programs it ran with the $10,000 grant, the number of individuals trained and the jobs they secured within the grant period).
Community foundations are generally not subject to the private foundation expenditure responsibility rules. These rules prescribe specific procedures that a private foundation must undertake to have a grant to a non-501(c)(3) organization count as a qualifying distribution for charitable purposes. Although community foundations don't have to follow these rules, they provide guidance to managers who seek to ensure and demonstrate that grants to non-501(c)(3)s are truly charitable expenditures. One exception to this general rule applies to grants from donor advised funds . While grants to non-charities from donor advised funds are permitted, the community foundation must in these cases carefully follow the expenditure responsibility rules lest the IRS views the grant as a taxable expenditure. For more information about grants from donor-advised funds and expenditure responsibility, read this article .
If a community foundation's organizing documents don't permit a grant to a non-501(c)(3) organization (and even if they do), an option may be to make a grant to an organization that is a supporting organization to the non-charitable grantee. Under certain circumstances, groups such as civic leagues and labor organizations may have affiliated 501(c)(3) entities that support the charitable undertakings of the non-501(c)(3) group. However, if the grant is from a donor advised fund to such a supporting organization, the community foundation will need to further inquire to determine if expenditure responsibility will be required since grants to certain supporting organizations require expenditure responsibility .
Although there are a few exceptions, generally, contributions to non-501(c)(3) organizations are not eligible for charitable income tax deductions. As a result, community foundations must be quite cautious about accepting donations for charitable projects that are run by non-501(c)(3) groups. Donors who wish to support the efforts of a non-charity through the community foundation may be seeking indirectly to secure the charitable income tax deduction that they cannot secure with a direct contribution. A community foundation may not establish a designated fund for a non-charity. When a community foundation wishes to establish an ongoing relationship (including fundraising) with a non-501(c)(3) entity in support of a specific charitable endeavor, it may consider establishing a fund for this project. This arrangement may best be treated as a formal fiscal sponsorship.