Expenditure Responsibility: Step by Step

A Chapter in Mastering Foundation Law:
The Council on Foundations Compendium of Legal Resources

Expenditure responsibility is the federally mandated procedure that a private foundation—and some public charities—must follow for any grant made to an organization that is not a public charity.

This chapter focuses on the steps of expenditure responsibility when granting to non 501(c)(3) organizations. A foundation can make a grant to any type of legitimate organization anywhere in the world so long as the grant is strictly for charitable purposes and the foundation is prepared to take on the additional due-diligence requirements (e.g., paperwork and administrative oversight).

For many foundations, completing the five steps of expenditure responsibility is not overly cumbersome. However, foundation staff must be aware of additional complexities and understand important rules when applying expenditure responsibility in certain circumstances, such as:

  • Grants to organizations formed outside the United States
  • Grants to private foundations
  • Grants for program related investments
  • Grants to organizations for the subsequent purpose of creating or adding to an endowment, purchasing capital equipment, or for re-granting the funds to individuals or other organizations
  • Payments to terminate the existence of the grantor foundation

This chapter is divided into seven parts:

Congressional History and Intent

Part One reviews of what Congress had in mind when it added this set of requirements to the Internal Revenue Code.

Changes to Expenditure Responsibility Mandated by the Pension Protection Act of 2006

Part Two covers the changes to expenditure responsibility for private foundations and public charities in the Pension Protection Act of 2006.

When to Use Expenditure Responsibility

Part Three explains knowing when to use expenditure responsibility in grantmaking.

Expenditure Responsibility: The Basics

Part Four defines the five basic requirements for completing expenditure responsibility.

Strict Court Interpretations

Part Five examines the legal cases upholding expenditure responsibility.

Penalties for Failure to Exercise Expenditure Responsibility

Part Six describes the tax penalties for failure to exercise expenditure responsibility.

Expenditure Responsibility and Specific Grantees

Part Seven details how to use expenditure responsibility with different types of grantees – private foundations, international organization, and public charities.