by Betsy Buchalter Adler and Ingrid P. Mittermaier
Silk, Adler & Colvin
When a private foundation makes a grant to an American charity that subsequently uses the grant funds outside the United States, expenditure responsibility is the exception rather than the rule, as it is only required for grants from one private foundation to another. If the private foundation grants funds directly to a foreign charity, however, Section 4945 makes expenditure responsibility the norm.
There is only one exception. If the grantee is the equivalent of a public charity-that is, the grantee would qualify as a publicly supported organization under federal tax law if it were organized under the laws of the United States-expenditure responsibility is not required. To avail itself of this exception to expenditure responsibility, the private foundation must make a "reasonable judgment" and "good faith determination" of the grantee's public charity equivalent status, based on information obtained from the grantee.
Several years ago, in response to concerns expressed by grantmakers and by the Council on Foundations about the difficulties and the duplications of effort involved in making the foreign public charity equivalence determination, the Internal Revenue Service (IRS) issued a ruling known as Revenue Procedure 92-94. That ruling allows private foundations to rely on an affidavit of the grantee, prepared for the grantor charity or for another grantor, which contains certain specified information.
Often, a grantee will not understand why the foundation needs this information. To make it easier for private foundations to explain the affidavit to potential grantees, we have prepared the following chart. We hope it will be a useful reference for funders.
What the affidavit asks for
Why the information is necessary
|The purposes for which the grantee was organized.
||To determine whether the grantee is organized exclusively for purposes within the scope of Section 501(c)(3).
|A description of the grantee's past, current and future activities and operations.
||To determine whether the grantee is operated primarily for Section 501(c)(3) purposes.
|A copy of the grantee's organizational and governing documents.
||To determine whether the grantee is organized exclusively for Section 501(c)(3) purposes.
|A statement that none of the grantee's income and assets confer an improper private benefit.
||To determine that the grantee complies with Section 501(c)(3)'s prohibition against private benefit.
|A statement that no person has a proprietary interest in the income or assets of the grantee.
||To determine that the grantee complies with Section 501(c)(3)'s ban on private inurement.
|A copy of the relevant statutory law or provision in the grantee's governing instruments controlling the distribution of the grantee's assets upon dissolution.
||To determine whether the grantee meets the requirements of Section 501(c)(3) regarding the distribution of assets upon dissolution.
|A statement that the grantee is not engaged, beyond an insubstantial amount, in activities that further nonexempt purposes or in influencing legislation.
||To determine that the grantee complies with the operational test and other limitations on activities set forth in Section 501(c)(3).
|A statement that the grantee does not engage in candidate campaign activity.
||To determine that the grantee complies with the ban on candidate campaign activity set forth in Section 501(c)(3).
|Whether the grantee is controlled by another organization and, if so, what organization.
||To determine whether the grantee is controlled by a for-profit entity (which can lead to stricter scrutiny by the IRS) or is controlled by the American grantor charity (which results in stricter requirements under Rev. Proc. 92-94 for a "currently qualified" affidavit).
|A statement of what type of publicly supported charity the grantee is: a school, a hospital, a church or an organization satisfying one of the public support tests.
||To determine what public charity standard to apply: the statutory and regulatory tests for school, hospital or church status, or the mathematical public support tests of Sections 170(b)(1)(A)(vi) or 509(a)(2).
|If the grantee is a school, whether it is operated pursuant to a racially nondiscriminatory policy as to students.
||To determine whether the grantee meets the requirements imposed by various Revenue Procedures on domestic organizations seeking public charity status as educational institutions.
|If the grantee claims to meet a public support test, a Schedule of Financial Support for the four most recently completed taxable years.
||To determine whether the foreign charity satisfies one of the public support tests:
- One-third of the charity's total support consists of includible public support, or
- At least 10 percent of the charity's total support consists of includible public support, and the facts and circumstances indicate that the charity is operated so as to generate public support, or
- The charity derives at least one-third of its total support from includible public support (both donations and income from performing its exempt functions) and not more than one-third of its total support from investment income.
Betsy Buchalter Adler is a senior partner in the San Francisco law firm of Silk, Adler & Colvin, which specializes in representing tax-exempt organizations and their supporters throughout the United States and abroad. Ms. Adler also teaches the law of tax-exempt organizations at Boalt Hall School of Law, University of California at Berkeley, and lectures frequently on topics of interest to the nonprofit sector.
Ingrid P. Mittermaier is an associate at Silk, Adler & Colvin. She received her B.A., with distinction, in 1991 from Stanford University, and her J.D. from the School of Law (Boalt Hall) of the University of California at Berkeley. Before joining Silk, Adler & Colvin, Ms. Mittermaier was engaged in the practice of corporate, nonprofit and state and local tax law in the San Francisco Bay Area and in Los Angeles.
For copies of this article with citations to legal authority, please contact Ms. Adler at 415/421-7555. Legal Dimensions articles are edited by an editorial board in which the following firms are represented: International Center for Not-for-Profit Law; Silk, Adler & Colvin; Day, Berry & Howard; and Caplin & Drysdale.