Cross Border Gifts

Cross Border Gifts

Article posted in International on 8 September 1999| comments
audience: National Publication | last updated: 18 May 2011


The United States has been described as the "great melting pot." So, is it any wonder that given the origins of its people, their wealth and their generosity, that many charitable gifts would find their way to foreign lands? In this edition of Gift Planner's Digest, Los Angeles attorney Jane Peebles discusses the tax rules governing "cross border" gifts.

by Jane Peebles, Esq.

In recent years, charitable giving advisors have seen a dramatic increase in the number of U.S. donors wishing to make contributions for use outside the United States. As one would expect, many individual donors are wholly ignorant of the rules governing the deductibility of such contributions for U.S. tax purposes. More than one client has been astounded to hear from the author that he is not entitled to U.S. income tax deductions for his annual contributions to charities in his foreign country of origin. Other donors are more knowledgeable about the basic rules governing deductibility of charitable gifts for use outside of the United States, but are unaware of specific procedures that must be followed if they are to maximize tax benefits available with respect to such gifts. Moreover, as the trend toward increased cross border giving grows, more U.S. tax exempt organizations are seeking advice regarding special requirements applicable to grants for use abroad.

The basic U.S. tax rules governing the deductibility of charitable gifts by individuals for use abroad are easy to summarize: Such direct gifts to foreign charities are not deductible for income tax purposes but generally are deductible for gift and estate tax purposes. Similarly, the basic rules governing whether a U.S. tax exempt organization may safely make grants to foreign organizations may be simply stated as follows: A U.S. charity may make such grants if its board takes appropriate steps to allow it to fulfill its fiduciary duty to see that the funds will, in fact, be used for charitable purposes.

This article is intended to provide an overview of the more specific requirements applicable to charitable contributions by U.S. donors for use abroad and to offer some pragmatic guidance regarding how to work within the rules to ensure deductibility of such gifts for U.S. individual and corporate donors and to allow U.S. public charities to make such grants without jeopardizing their tax exempt status, and U.S. private foundations to make such grants without exposing themselves to excise taxes.

Cross Border Gifts By U.S. Individual Donors

Income Tax Deduction. The Code does not allow U.S. persons any income tax deduction for direct contributions to foreign charities. Section 170(c) of the Code provides that an income tax deduction is permitted only if the donee organization was created or organized in the United States or any possession thereof, or under the law of the United States, any state, the District of Columbia or any U.S. possession. Therefore, in the absence of an applicable treaty exception, if a U.S. individual donor wants a deduction against U.S. income for a gift to a foreign charity, the donation must be made to a U.S. tax exempt organization that operates abroad or can make grants abroad. Code Section 170(c) further specifies that a donation to a U.S. charity is deductible only if it is to be used for purposes specified in Section 170(c)(2)(B).

As long as the donee organization was created or organized under the laws of the United States (generally, a U.S. corporation or a trust), the use of the charitable contribution abroad does not preclude the donor from claiming a U.S. income tax deduction for the donation. A gift by a U.S. donor to a U.S. charity for use abroad may be made through a "friends of" organization, community foundation, U.S. public charity, or through a U.S. private foundation. In each case, the Treasury has specified rules and guidelines intended to ensure that the use of the funds remains within the discretion of the U.S. donee organization, and that the funds are utilized to further its charitable purposes.

Donations to U.S. Charities Operating Abroad. The easiest way for a U.S. individual to obtain an income tax deduction for a charitable donation to be used abroad is to make the donation to a U.S. public charity that operates abroad through a foreign branch office or subsidiary. As long as the foreign branch or subsidiary is under the complete control of the U.S. charity, the U.S. charity is considered to be the true beneficiary and an income tax deduction is permitted. The critical point is that the funds are to be used in a foreign country by a U.S. organization as opposed to being used by a foreign organization. A number of U.S. charities, such as the Red Cross, CARE and Oxfam America, have broad-based direct programs abroad. The U.S. donor may earmark contributions to such charities for a particular foreign program of the U.S. charity as long as the earmarking is limited to programs subject to total control by the U.S. donee organization.

Donations Via "Friends of" Organizations. Contributions by U.S. individuals for use abroad may also be made via "friends of" or "feeder" organizations, which are U.S. public charities formed to support a foreign charity or charities. A U.S. donor who wished to contribute to a particular foreign university, for example, could make a donation to a U.S. organization formed to support that foreign entity. These organizations frequently have names such as "American Friends of Oxford University."

Donations Via Community Foundation. A U.S. individual can also obtain an income tax deduction for a charitable gift for use abroad when the gift is made to a community foundation that, in turn, makes a foreign grant of the funds. The gift may be made to a "field of interest fund" or to a "donor advised fund" or it may be made by the community foundation from unrestricted funds, as long as the community foundation's governing documents and internal policies allow it to make grants abroad, and it is careful not to act as a mere conduit for the gift.

Donations Via Private Foundations. A cross border charitable gift may also be made by means of a contribution to a U.S. private foundation that makes grants to foreign charities. Stringent rules apply to such foreign grants, however, and the donor will want to be sure that the procedures of the private foundation meet IRS guidelines for assuring that the foundation has ultimate discretion over the use of the funds, and adequate procedures in place to ensure the funds are used only for purposes recognized by U.S. taxing authorities as charitable purposes.

Treaty Exceptions. The U.S. income tax treaties with Canada, Israel and Mexico contain more generous provisions regarding deductions for gifts by U.S. persons to charities in the foreign jurisdiction. These treaties allow U.S. donors to deduct donations to charities in the contracting state against their foreign-source income from that jurisdiction.

Under the U.S.--Canada income tax treaty, U.S. donors with Canadian-source income can deduct gifts to Canadian "registered charities" against their Canadian-source income, subject to U.S. percentage limitations. A more generous provision of the treaty allows U.S. donors a deduction against their U.S.-source income for donations to Canadian colleges and universities attended by the donor or a member of the donor's family (again, subject to U.S. percentage limitations). The U.S.--Canada treaty also provides for reciprocal charitable credit for gifts by Canadian residents to U.S. tax exempt organizations that could qualify in Canada as "registered charities" if they were Canadian organizations. The credits may generally be claimed by Canadian donors only against U.S.-source income, subject to Canadian percentage limitations. However, gifts to U.S. colleges or universities attended by the donor or a member of the donor's family are creditable against Canadian-source income (again, subject to Canadian percentage limitations).

On September 10, 1999, the IRS released Notice 99-47, providing guidance on the U.S.-Canada treaty. The Notice states that, if a U.S. donor makes a gift to a Canadian registered charity, the Canadian charity will be deemed to be a private foundation under U.S. law, unless the Canadian charity provides the IRS with the financial information needed to determine its proper classification. Also, the Canadian charity will not be listed in IRS Publication 78 - Cumulative List of Organizations, unless it provides this information. If the Canadian charity is deemed to be a private foundation, the U.S. donor's income tax deduction will be limited to 30% of the donor's Canadian source income.

If the Canadian organization does provide financial data to the IRS, it will be listed in Publication 78, as either a private foundation or a public charity, and will be required to file Forms 990 or 990-PF unless it receives less than $25,000 of U.S. source income in any given year. If the IRS determines that the Canadian charity is a public charity under U.S. law, the donor's income tax deduction will be subject to the higher percentage limitations.

With rare exceptions, treaty provisions governing the deductibility of direct gifts to foreign nonprofits require that the taxing authorities of the donor's nation determine whether a charity organized in the other nation qualifies for public charity status under the laws of the donor's nation. The new Protocol to the U.S.--Canada treaty recognizes that Canadian law governing tax exempt status is materially equivalent to U.S. law governing charities. Under the Protocol, the public charity status of a Canadian organization is recognized by the United States, without a separate determination by the IRS or oversight responsibility by a donor U.S. organization, and vice versa. As a result, U.S. private foundations may make grants to Canadian "registered charities" free of the cumbersome expenditure responsibility that U.S. law usually imposes for such grants, and without the duty to obtain affidavits or legal opinions regarding the donee's public charity status.

The U.S.--Mexico tax treaty also contains unusually relaxed provisions allowing deductions for cross border charitable gifts. The U.S.--Mexico treaty provisions are predicated on an emerging set of principles based on a common concept of charity and establishing rules for administering charities (including public disclosure of information) that are equivalent to the administration of charities in the United States. Article XXII of the treaty allows income tax deductions to U.S. citizens and residents for contributions to Mexican charities. The deductions are allowed only with respect to Mexican-source income and are subject to U.S. percentage limitations. Mexicans are allowed reciprocal deductions against U.S.-source income (subject to Mexican percentage limitations) for contributions to U.S. charities. The U.S.--Mexico treaty preceded the 1995 Protocol to the U.S.--Canada treaty in recognizing that (except for churches) the standards for income tax exemption under the laws of the two contracting states are essentially equivalent. Under this breakthrough provision, the responsibility for determining public charity status is consigned to the taxing authority of the nation in which the charity was organized. This permits U.S. private foundations to make grants to most Mexican public charities free of oversight responsibility and without a separate determination of public charity status.

Article 15-A of the U.S.-Israel Income Tax Treaty permits U.S. citizens and residents to deduct contributions to Israeli charities against their Israeli-source income if the Israeli charity would have qualified for tax exemption under U.S. law had it been established here. The deduction is capped at 25% of Israeli-source adjusted gross income for individual donors and 25% of Israeli-source taxable income for corporate donors. Israelis are permitted a reciprocal deduction against U.S.-source income for contributions to U.S. charities that would qualify for tax exemption under Israeli law if organized there. The deduction is limited to 25% of U.S.-source taxable income.

The reciprocity offered by these three treaties also makes it easier for U.S. charities to attract donations from residents of the other contracting nations.

Gift And Estate Tax Considerations

Gift Tax. U.S. donors are generally permitted to claim gift tax deductions for lifetime gifts to foreign charities and estate tax deductions for testamentary gifts to foreign charities. Direct testamentary gifts to foreign charities are far more common than direct intervivos gifts, however, since a U.S. income tax deduction is rarely available for such a lifetime gift.

A U.S. gift tax deduction under Code Section 2522(a) will be allowed for a direct contribution to a foreign charity if:

  1. the donee is organized for Section 170(c) purposes (i.e., religious, charitable, scientific, literary, educational, etc.);

  2. no part of its net earnings inures to the benefit of any individual; and

  3. it does not violate Code Section 4945 prohibitions against self-dealing, lobbying and attempting to influence political campaigns.

Gifts to organizations in common law countries that are recognized as tax exempt in their own jurisdictions will generally qualify for the U.S. gift tax deduction since the laws of other common law jurisdictions are similar to U.S. laws governing tax exempt entities. Regardless of where the foreign charity is located, a gift tax deduction will be available if the foreign charity has obtained an IRS determination of tax exempt status under Code Section 501(c)(3).

Estate Tax. An estate tax deduction is similarly available for transfers of property by U.S. individuals to foreign charitable organizations provided the requirements of Code Section 2055(a), which are the same as those described above for Code Section 2522(a), are met.

Gifts and Bequests to Foreign Governments. A U.S. gift or estate tax deduction for an intervivos or testamentary gift to a foreign government or governmental unit will be available only if the gift must be used for charitable, rather than public, purposes. A written gift agreement for a lifetime gift, or the Will or living trust providing for the testamentary gift, should specify that the gift must be used solely for charitable purposes. An unrestricted bequest to a foreign government is not deductible under Section 2055(a), even if that government has adopted an internal policy or local law requiring all such bequests to be used solely for charitable purposes. The IRS rationale is apparently that the foreign jurisdiction might fail to enforce its own laws or policies or might, through internal policy decisions, redirect the bequest to public purposes even after its initial allocation for charitable purposes. If the gift agreement, Will or trust providing for the gift or bequest fails to mandate use for charitable purposes, the IRS will not respect a probate court order imposing that limitation if the order conflicts with local law in the foreign jurisdiction.

Gifts through Charitable Remainder Trusts. Advisors who assist U.S. donors in structuring gifts through charitable remainder trusts should be aware that, even if a treaty provision would allow a U.S. donor to claim an income tax deduction for a direct gift to a charity organized under the laws of the treaty partner, such a charity should not be named as the charitable beneficiary of a charitable remainder trust. The Code specifies that each charitable beneficiary of a remainder trust must be a Section 170(c) organization and therefore may not be organized abroad. As a practical matter, the trust should not fail to qualify as a split-interest trust even if a foreign charity is inadvertently named as a beneficiary, since the trust instrument will contain a savings clause requiring that each charitable beneficiary be a Section 170(c) organization. However, since the trustee will be required to redirect the gift to one or more U.S. charities, it will not flow to the intended charitable recipient unless the trustee can locate a U.S. "friends of" organization or other U.S. charity through which to funnel the gift to the foreign charity.

U.S. Corporate Grants For Use Abroad

A further special restriction applies to corporate contributions. The language of Section 170(c)(2) specifies:

"A contribution or gift by a corporation to a trust, chest, fund or foundation shall be deductible by reason of this paragraph only if it is to be used within the United States or any of its possessions [emphasis added]."

This language notably fails to list corporate gifts to charitable corporations and has therefore been interpreted to permit U.S. corporations to claim income tax deductions for gifts to U.S. charities in corporate form that are for ultimate use abroad. For this reason, U.S. charities with international operations are generally organized as corporations rather than as trusts or unincorporated associations. Although there is no logical reason for this distinction, the result is that a U.S. corporation may make a deductible donation for use abroad only if the donee "friends of" organization, community foundation, other U.S. public charity or private foundation is organized in corporate form.

IRS Recognition Of Foreign Charities

A foreign charity may apply to the IRS for recognition as an organization exempt from taxation under IRC Section 501(c)(3). However, relatively few non-U.S. charities apply. One disincentive to such applications is that, even if the foreign charity has obtained IRS recognition, direct contributions from U.S. donors still cannot be deducted against income tax liability because the organization is not formed in the United States. Legal costs and complicated ongoing reporting requirements (including U.S. information returns for each year in which the foreign charity has more than $25,000 of U.S.-source income) are also disincentives.

Although IRS recognition of a foreign charity does not qualify donations to it for U.S. income tax deductions, it does offer important benefits to the foreign charity. A non-U.S. charity that has obtained IRS recognition may make investments and earn income in the United States with reduced U.S. tax liability, or no U.S. tax liability. Moreover, U.S. private foundations can make grants to such a foreign charity without worrying about the requirements of an equivalency determination or expenditure responsibility. Grants from U.S. public charities to foreign charities with IRS determination letters are also simplified. Therefore, foreign charities that want to receive funds from U.S. charities should consider going through the application process. Since most foreign charities do not obtain IRS recognition, a complex set of rules governs the process of making grants abroad, in order to ensure that grant funds are expended for solely charitable purposes.

Rules Applicable To U.S. Charities Making Grants Abroad

"Friends of" Organizations. The rules governing "friends of" organizations, U.S. public charities established to support foreign charities, are designed to ensure that the U.S. charity is the true donee and not merely a conduit for sending funds abroad. The U.S. intermediary organization must review and approve each proposed foreign grant as being in furtherance of its own charitable purposes. Donations to the U.S. intermediary may not be earmarked by the donor for a specific foreign charity. The U.S. intermediary donee must exercise sufficient control over the use of the funds to be considered the true recipient of the gift. In order to satisfy this requirement, the U.S. feeder should:

  1. review the purposes of the foreign donee charity to determine that they are within the ambit of Code Section 170(c);

  2. review and approve specific foreign projects and related solicitation programs;

  3. enter into a written agreement with the foreign donee specifying in detail the projects for which the grant will be used;

  4. require accountings from the foreign donee each year until the grant has been fully expended so the U.S. charity can account for the use of the funds; and

  5. retain exclusive power to refuse any conditional or earmarked donations and avoid obligating itself to expend contributions for the use of foreign charities or projects.

While the "friends of" organization may solicit funds for specific projects abroad, it must retain discretion to use the funds for other exempt purposes if, for example, it learns that the foreign donee organization has diverted the grant funds or if the foreign donee fails adequately to account for the funds. A U.S. donor may nevertheless make a donation to a U.S. feeder with reasonable certainty that the funds will reach the intended foreign organization or project.

The IRS position is that the board of the U.S. grantor organization must approve the specific project of the foreign charity and related solicitation programs before it solicits any contributions for the project. This gives rise to a "chicken and egg" timing problem. Since contributions also cannot be earmarked by the donor for use abroad, U.S. fundraisers must be careful not to make representations that the funds will be used for a specific project.

One workable approach might be to tell prospective donors that the funds will go to the U.S. charity that will then approve and make grants for specific projects of the foreign charity. Another approach would be for a contributor to make a pledge contingent on the U.S. organization's pre-approval of the foreign project. If the contingency were not later satisfied, the pledge would have no effect, and the donation would not be made. This latter approach might, however, run afoul of the prohibition against earmarking.

Another possible solution to the requirement that the U.S. charity review and approve all projects of the foreign charity for which grants may be made before soliciting donations might be for the board to review and pre-approve any number of projects of the foreign charity each year and then raise funds for those specific projects. The U.S. fundraisers must, in all events, be careful not to promise that any donation will definitely fund the foreign project since the "friends of" organization must retain the discretion not to fund the project, or to discontinue its funding if, for example, it becomes aware of irregularities in the use of the funds abroad.

Other U.S. Public Charities. The IRS imposes few formal restrictions on grants abroad by U.S. public charities that are not "friends of" organizations but that make occasional grants to foreign charities. However, boards of public charities have a fiduciary duty to ensure that the funds under their control are used solely for charitable purposes. For this reason, any public charity making grants abroad would be wise to review the governing instruments of the intended foreign grantee as well as local governing law, enter into a written agreement with the grantee that documents the grantee's commitments and obtain annual accountings from the grantee until the grant has been fully expended. Although the U.S. public charity is not required to make a determination that the foreign grantee is the equivalent of a Code Section 501(c)(3) organization, it will be in a stronger position on audit if it has done so and documented its file accordingly.

The U.S. public charity should obtain copies of all of the foreign charity's organizational documents and a description of all of the activities and programs of the grantee, including proposed activities. These documents should be translated into English.

A written agreement between the U.S. grantor and the foreign grantee should commit the grantee to use the funds for strictly charitable purposes, and the purposes of the grant should be specified. It is unsafe to make a grant for the general support of a foreign charity unless the grantee is clearly the equivalent of a Section 501(c)(3) organization operated exclusively for charitable purposes, since such a grant would shift discretion over the use of the funds from the U.S. grantor to the foreign grantee. Therefore, the grant agreement should describe with sufficient detail the nature of the specific project to be funded by the grant. The written agreement should also commit the grantee to the basic requirements of Section 501(c)(3) prohibiting private inurement, attempting to influence legislation or affect the outcome of elections, and distributing assets in the event of termination.

The foreign charity should be required to provide the U.S. public charity with a written financial report at the end of each of its accounting periods until the grant has been fully expended. These reports will help demonstrate that the U.S. charity has taken appropriate steps to allow it to exercise the necessary discretion and control over the use of the funds. Such reports should describe the use of the funds, the donee's compliance with the terms of the grant and the progress it has made in achieving the purpose of the grant.

Community Foundations. The procedures delineated above should be adopted by all U.S. public charities making grants abroad, including community foundations making grants from unrestricted funds. Community foundations may be subject to geographic restrictions in their governing documents requiring that grants be made only to support local organizations and projects--if this is the case, the governing documents must be amended before any foreign grant is made. Even if the governing documents permit grants abroad, a community foundation making a foreign grant from unrestricted funds should follow the general guidelines for such grants by public charities described above.

If the foreign grant will not come from unrestricted funds, other issues may arise. If the donor to a "field of interest" fund has specified a particular charitable focus but has left total discretion to the community foundation to determine the ultimate grantee, the community foundation may make grants to a foreign charity from the fund without any additional problems. Donors to "donor advised funds" are able to make only nonbinding recommendations as to the use of the funds, so grants to foreign charities from donor advised funds do not by themselves cause problems. However, if the community foundation permits grants abroad from donor advised funds but not from unrestricted funds, the IRS may argue that the "advised fund" is in fact subject to donor control.

Private Foundations. Private nonoperating foundations making grants abroad will want to determine whether the foreign grant counts as a "qualifying distribution" for purposes of the Code Section 4942 minimum distribution rules and to avoid running afoul of the Code Section 4945 prohibition against grants to organizations other than public charities unless the grantor exercises "expenditure responsibility."

The availability of income tax charitable deductions for grants abroad is not a concern for private foundations, since they are generally not subject to income taxes in any event. However, if a private foundation fails to make sufficient qualifying distributions annually of amounts equal to five percent of the aggregate fair market value of all of its assets, it will be subject to an excise tax in that year. The term "qualifying distribution" is defined by reference to qualifying charitable purposes and the tax classification of the recipient, rather than by the location of the grantee. The taxable expenditure provisions of Section 4945 of the Code also have a substantial impact on grants abroad by private foundations. A private foundation makes a taxable expenditure subject to excise tax if it makes a grant: 1) for any purpose other than one specified in Section 170(c)(2)(B) of the Code; or 2) to an organization that is not a public charity (or foreign equivalent of a U.S. public charity) unless the private foundation exercises "expenditure responsibility" with respect to the grant.

"Good Faith Determination." A grant by a U.S. private foundation to a foreign organization that has received an IRS determination letter that it is a public charity is always a qualifying distribution for purposes of the five percent minimum distribution rule. If the foreign donee does not have such a determination letter, the private foundation must first try to make a "good faith determination" that the donee is the equivalent of a U.S. public charity. If this determination can be made, the foreign grant will be a qualifying distribution even if the U.S. grantor does not exercise expenditure responsibility.

In making a good faith determination, the private foundation may rely on an opinion from its counsel or the grantee's counsel or an affidavit of the grantee. However, if this method is used, each potential U.S. grantor private foundation must obtain its own lawyer equivalency letter or grantee affidavit, and the cost may be prohibitive for smaller foundations. In Revenue Procedure 92-94, the IRS approved a form of affidavit of the foreign grantee that may be relied upon by multiple U.S. grantors as long as it contains current information. This should help small foundations make their good faith determinations at a reasonable cost.

Expenditure Responsibility. If the private foundation cannot determine that the proposed foreign donee organization is the equivalent of a U.S. public charity, then the grantor private foundation must exercise expenditure responsibility over the grant. Exercising expenditure responsibility entails making a pre-grant inquiry to allow the grantor to make a reasonable determination that the proposed grantee can fulfill the charitable purpose of the grant. An officer or director of the foreign grantee must also sign a written grant agreement specifying the charitable purpose of the grant and committing the grantee to:

  1. repay any funds not used for the grant's purpose;

  2. submit annual reports detailing how the funds have been used, compliance with the grant agreement and the grantee's progress in achieving the purpose for which the grant was made;

  3. maintain books and records that are made reasonably available to the grantor; and

  4. refrain from using any of the funds for lobbying, direct or indirect influence on any public election or voter registration drive, or any activity for a noncharitable purpose, to the extent such use of the funds would be taxable to a private foundation.

The agreement will typically also prohibit the grantee from re-granting the funds to other organizations or individuals since that triggers additional complicated rules. It should require the donee to maintain the grant funds in a separate fund dedicated to charitable purposes so that the donee may properly account for the funds.

The Treasury Regulations on expenditure responsibility recognize that "[a] private foundation is not an insurer of the activity of the organization to which it makes a grant." The Regulations provide that the grantor foundation will not be found to have violated the taxable expenditure rules if it has followed the prescribed expenditure responsibility procedures, even if funds are in fact diverted by the grantee or something else goes wrong.

The U.S. grantor private foundation must "execute all reasonable efforts to establish adequate procedures to see that the grant is spent solely for the purposes for which made" and obtain detailed annual reports from the grantee on how the funds are spent. It must also provide the IRS with annual reports on all expenditure responsibility grants. In order to satisfy its own IRS reporting requirement, the grantor private foundation must provide the following information on its annual Form 990-PF information return with respect to each expenditure responsibility grant made during the taxable year, as well as for each such grant with respect to which there are funds outstanding at any time during the taxable year:

  • The name and address of the grantee.

  • The date and amount of the grant.

  • The purpose of the grant.

  • The amounts expended by the grantee (based on the most recent report received from the grantee).

  • Whether the grantee has, to the knowledge of the grantor, diverted any portion of the grant funds or the income therefrom.

  • The dates of any reports received from the grantee.

  • The date and results of any verification of the grantee's reports undertaken due to their dubious accuracy or reliability.

These reporting requirements may be satisfied with respect to a grant by attaching to the grantor's Form 990-PF the expenditure report received from the grantee, if the grantee's report contains all of the required information.

Grants to Governmental Units. Grants to foreign governmental units do not require either an equivalency determination or expenditure responsibility. The Treasury Regulations provide that a foreign organization will be treated as a public charity if it is a "foreign government, or any agency or instrumentality thereof?even if it is not described in IRC Section 501(c)(3)." However, any grant to such a governmental unit must be for charitable, not public purposes. The U.S. grantor organization's file should contain:

  • documentation establishing that the grantee is a foreign government or governmental unit; and

  • a copy of its grant letter specifying the charitable purpose of the grant.

Ideally, the foreign government will sign a grant agreement of the sort required for grants subject to expenditure responsibility even though the grantor is not required to exercise expenditure responsibility.

The "Out of Corpus" Requirement. If the foreign charity grantee is the equivalent of a U.S. private foundation, the U.S. foundation's grant to it must also meet the "out of corpus" requirement. A grant from one private foundation to another will not meet the definition of a qualifying distribution for purposes of application of the five percent minimum payout rules to the grantor unless the grantee satisfies the "out of corpus" rule. The "out of corpus" rule requires that any grant from one private foundation to another must be spent by the grantee within 12 months after the close of the taxable year in which it received the funds. One private foundation cannot make grants to endow another. The grantee must take the grant funds "out of corpus" and spend them within the required amount of time. This policy is designed to ensure that such private foundation grants will be used for the public benefit and not to build the recipient organization's investment portfolio.

Furthermore, the grantee foundation must provide records to the grantor foundation showing that:

  1. the grantee met its minimum payout requirement before it received the grant; and

  2. the grantee satisfied its minimum payout requirement for the year in which the grant was received in addition to spending the grant.

Since most foreign charities are unfamiliar with the minimum payout rules and do not maintain the records necessary to compute it, satisfying the "out of corpus" requirement frequently will not be possible. In such a case, the grantor may adopt one of the following approaches:

  1. If the U.S. grantor private foundation's actual charitable distributions for other grants during the year far exceed its minimum payout requirement, it can exercise expenditure responsibility over the grant to the foreign private foundation equivalent and simply not count the grant in meeting the minimum payout requirement. This would allow it to avoid the "out of corpus" rule entirely with respect to the grant.

  2. In the alternative, if the grant to the foreign charity is earmarked for the purchase of capital equipment, and if the purchases are completed within 12 months after the close of the taxable year in which the foreign charity receives the funds, the "out of corpus" rule will be satisfied.


The rules governing charitable donations for use abroad are quite complex. Attorneys, development officers, accountants and allied professionals who work with individual, corporate and nonprofit clients must tread carefully when advising clients or donors with respect to cross border gifts or grants. Different rules apply to income tax deductibility by U.S. individual and corporate donors. Even within the gift and estate tax context, the rules differ as to outright gifts, gifts in trust, gifts to foreign nongovernmental entities and gifts to foreign governments. To complicate matters even more, certain tax treaties vary the rules in the Code. Moreover, the professional who counsels U.S. nonprofit organizations must be familiar with the rules applicable to grants abroad by U.S. public charities as compared to foreign grants made by private foundations.

Reprinted with permission from The Journal of Gift Planning, April 1999.

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