The world is increasingly a global community, and this phenomenon is equally visible in sports as in the business and social arenas. With professional sports leagues spanning national borders in Major League Baseball, the National Basketball Association, Major League Soccer, and the National Hockey League and players from around the globe playing professionally in the United States and beyond, there are more opportunities than ever before for athletes and their affiliates to have a worldwide reach, both professionally and in their philanthropic endeavors.
This article wraps up this introductory series on philanthropic and mission-driven organizations by highlighting the significant restrictions on U.S. charities’ funding of non-U.S. projects, and suggesting four options for organizations to accomplish their goals without violating those restrictions. Cross-border philanthropy is a highly nuanced field and should be undertaken in consultation with competent legal and tax counsel.
Generally speaking, U.S. federal income tax law prohibits tax-exempt charities from employing their assets in ways that would provide a benefit to anyone other than the charitable class for whose benefit the charity was formed. This prohibition shows up in a number of different ways, but are often articulated in the “inurement” and “private benefit” doctrines, violation of which are fatal to the charity’s continued tax-exemption. These doctrines broadly prohibit any “insider” from receiving any portion of the charity’s net income and require the charity to benefit the public (or a class of persons from the general public) rather than any designated group of private interests.
Grant-making presents an opportunity for charities to achieve charitable purposes by making grants to individuals or organizations, rather than by expending funds on administrative matters, salaries, and operational costs. Therefore, grant-making can be an efficient way to accomplish a charity’s mission. Yet, grant-making also presents a number of opportunities for the charity to run afoul of the inurement doctrine or private benefit doctrine, thus endangering the charity’s tax-exempt status, or for unscrupulous actors to take advantage of the charity, thereby undermining the charitable mission and wasting charitable assets.
Ensuring that tax-exempt organizations use their assets in permissible ways can be difficult, particularly where the organization’s assets are expended outside the United States. When making grants to individuals, the IRS requires that private foundations obtain approval of the grant selection and approval process before making the grant. Grants to organizations are also subject to specific requirements to ensure compliance with the fundamental requirements applicable to Section 501(c)(3) organizations. Those requirements, together with four options to accomplish projects outside the U.S. are outlined below.
Option 1: Perform Direct Operations
The most straightforward approach to compliance is to ensure the charity maintains absolute control over the expenditure of its resources. In practical application, this means deploying the charity’s own employees, assets, and programs in the desired destination, measuring outcomes, and reporting results to donors.
Option 2: Grant to Entity with IRS Determination Letter
Where U.S.-based charities have insufficient administrative bandwidth or other resource restrictions preventing the deployment of their own employees and resources outside the United States, an alternative option is to make grants to partner organizations located in the destination country. Naturally, there is significant concern on the part of the IRS that such grants could be made to non-charitable endeavors. Therefore, unrestricted grants made to foreign organizations generally violate IRS restrictions. Private foundations can avoid invoking the private inurement or private benefit doctrines by making grants only to foreign organizations for which the foundation has received an “equivalency determination.”
An equivalency determination is an opinion from a qualified tax law professional stating that the recipient organization would qualify as a public charity if it had been formed under the laws of the United States, it doesn’t engage in certain activities (such as lobbying), and is operated primarily for a tax-exempt purpose. Equivalency determinations can be a great way to prove the charitable uses of donations to foreign organizations if the recipient organization is well-known, well-run, and has solicited American grant money in the past, as these organizations often will have undertaken the equivalency determination process for previous grants. In other circumstances, where the recipient is more obscure, less sophisticated, or affiliated with non-charitable organizations, obtaining an equivalency determination can be time consuming and expensive, if one can be obtained at all.
Option 3: Grant to Entity with Expenditure Responsibility
An alternative to obtaining an equivalency determination for a recipient organization is for a U.S.-based private foundations to exercise “expenditure responsibility” over a grant. In broad strokes, this means that the private foundation must take sufficient measures to ensure that its grant money is being sent to a trustworthy recipient, used for charitable purposes, and can be refunded from the recipient if the private foundation determines the recipient has failed to adequately restrict the funds to charitable use.
Option 4: Qualify as a Public Charity
In contrast to private foundations, public charities are not required to obtain an equivalency determination or exercise expenditure responsibility when making grants to foreign organizations. However, a public charity should, as a matter of protecting its assets, consider reasonable steps to ensure any grants will be properly used for the intended purposes. Therefore, in many cases undertaking expenditure responsibility over grants to foreign organizations would be advisable for public charities, even though not required.
In summary, because there are a number of federal income tax laws restricting the use of charitable assets for the benefit of private individuals, any charity should be vigilant to put policies and procedures into place to monitor the use of its assets. This is particularly true where assets are deployed or grants are made to fund projects outside the United States. Organizations contemplating projects outside the United States should therefore engage qualified legal and accounting professionals beforehand, to avoid potentially devastating consequences including excise taxes, penalties, or revocation of tax exempt status.