IRS Rules & Best Practices for International & Enhanced Domestic Grant Making
Ted Hart, ACFRE CEO, CAF America
CAF America 2013
1. Expenditure Responsibility 2. Equivalency Determination 3. Enhanced Domestic Vetting (Due Diligence)
Three Protocols
CAF America 2013
• Pension Protection Act of 2006 for the first time defined donor
advised funds and placed new rules on their use.
• Owned by a sponsoring public charity
• Separately tracked funds identified by reference to one or more
specific donors
• Donors or their designees reasonably expect to have advisory
privileges
• Can make distributions to multiple grantees
Donor Advised Fund (DAF)
CAF America 2013
• Corporation, Foundation or Individual gives to a recognized public charity
that manages the Fund
• Those with tax obligations can receive immediate tax benefits for
contribution
• The charity takes responsibility to ensure charitable use of funds
• Donor may advise or suggest but cannot direct, instruct, control, etc
Donor Advised Fund (DAF)
CAF America 2013
• Donor can get a tax deduction now and give later
• Private foundations can make grants without
exercising normal oversight
• Sponsoring charity handles due diligence process
Benefits of a DAF
CAF America 2013
• Must exercise expenditure responsibility if grantee is
not a certain kind of public charity or private
operating foundation
• No distributions to individuals
• No distributions for non-charitable purposes
• 20% (of value of grant) tax on sponsoring
charity for violations
Restrictions on DAFs
CAF America 2013
• 25% tax on donor for any grant, loan, compensation
or similar payment to donor, advisor or related
parties (repayment required).
• 125% tax on other substantial return benefit
• Tickets, tuition credit, member dues, etc.
• Recognition for gift OK
• Round-tripping?
Restrictions Donor Benefit
CAF America 2013
Direct Gift = No Tax Benefits
Gift through a DAF = Tax-deductible contribution
Why Use a DAF?
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CAF America 2013
• No “earmarking/ pledging”: No agreement, oral or
otherwise, that funds must go to predetermined
recipient or to recipient of donor’s choice.
• Must clearly inform donor that donor advised fund
has ultimate discretion/control over funds – donor
does not!
• IRS looks to reality, not just form
• Do we inevitably follow donor’s advice? Do we
provide our own expertise?
• Are we serious about making sure grants further
our charitable purposes?
IRS Requirements
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CAF America 2013
The Preapproved Grant Relationship model of fiscal sponsorship is widely misunderstood and easily abused as a “conduit” when the fiscal grant maker fails to exercise the requisite “discretion and control.” The key element to avoid in grant making relationships is the creation of a “pass-through” or “conduit” arrangement. The grant maker must exercise “variance power” or independent “discretion and control” over the grant funds for the relationship to pass IRS muster.
No Conduit
“discretion and
control”
CAF America 2013
• Relief of poverty, combating community deterioration
• Education, promotion of the arts
• Scientific research
• Combating prejudice, protecting human rights, helping
disadvantaged
• Protecting the environment
• Lessening burdens of government
• Promotion of health (e.g., hospitals)
• Religious purposes
Charitable Purposes
CAF America 2013
• No substantial private benefit or commercial purpose—benefit to
private parties must be incidental:
• Organization improving a public lake is charitable even if neighboring property owners are benefitted
• Community hospitals can be funded
• Private practices cannot
• Watch for close relationships with a related commercial entity
• Make sure benefits are designed to serve a charitable class
(not an individual or small group, not businesses)
• Watch for organizations acting like a for-profit business
Charitable Benefit
CAF America 2013
No candidate endorsements, contributions, in-kind
assistance
Ban any non-neutral expression of favoritism (e.g.,
voter guides, voter registration or mobilization,
etc.)
No highlighting candidate positions that
exclusively agree/disagree with organization
Do not support activities that provide candidates
unequal speaking opportunities
Do not fund activities that ask candidates to sign
onto the organization’s “pledge”
No Political Activity
CAF America 2013
You must not fund activities that “attempt to influence
legislation” at any level
But you can seek to influence rules and regulations
once laws are passed
Do not fund communications with legislators, staff, or
other officials, or encouraging the public to make such
communications, for the purpose of influencing
legislation
You can fund advocacy for broad causes and issues
Do not fund activities that directly advocate
for/against legislation
Lobbying vs. Advocacy
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CAF America 2013
Pre-grant inquiry: “reasonable assurance” that
the expenditure is charitable
Grant agreement restricts use of funds to
specific charitable projects
Financial & narrative reports at least annually
& final cumulative report
Reporting to IRS: Coming soon?
20% tax on amount of the grant if you get it wrong
Expenditure Responsibility
IRS Requirements and Penalty
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CAF America 2013
Certifies that selected organizations meet the highest standards of our proprietary due diligence
vetting process:
• Organization Identification and Contact
• Document Collection:
Grant Eligibility Application (GEA) Financials Governing Documents Board and Executive Staff rosters Proof of Charitable status Country-specific relevant documentation
• Ongoing weekly watch list scanning
Scan the nonprofit, key staff and board members against 450 + global databases.
• Three-tier CAFAmerica review
CAF America’s 100-step industry leading due diligence process is a combination of both Expenditure Responsibility and Equivalency Determination.
Beyond The Minimum
CAF America 2013
Complete enough to give a reasonable person assurance that the
grantee will use the grant for proper purposes
Identity and prior history and experience of grantee and its
managers.
Information about management and practices of grantee
Prior successful completion of grants normally enough
Rigor may depend on size of grant
Pre-Grant Inquiry
Requirements and Best Practices
CAF America 2013
Must include certain terms & be signed by an officer:
Specify use of funds, which must be charitable
Prohibit lobbying, political campaign intervention, non-charitable
activity
Prohibit grants that would violate IRS section 4945 rules on
individual travel/study/scholarship grants or ER requirements
Require funds to be tracked in a separate account
(does not require a separate bank account)
Require access to files on request and written reports
Grant Agreement
Requirements and Best Practices
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CAF America 2013
Annual Narrative and Financial Reports
Reports collected at end of each accounting
period of the grantee
Final cumulative reports at the end of grant period
Must report on use of grant funds, progress toward goals, and
compliance with grant terms
IMPORTANT: you must not make additional grants when reports
are outstanding or if there are unresolved concerns raised over
use of funds or compliance;
IMPORTANT: you must make reasonable efforts to obtain reports
Reporting
Requirements and Best Practices
CAF America 2013
When a report indicates funds have been misspent:
Grant maker must try to get funds restored /
returned
Must withhold further grants until special
measures in place to avoid future misuses
Normally, IRS requires a summary report on each ER
grant indicating purpose of grant, name and address
of grantee, dates of reports received, amounts
expended by grantee (per report), and information
about any diversions / verification efforts.
This is not required yet on the Form 990, but IRS has
indicated informally that orgs should maintain this
information
Verification & Reporting
MISSPENT FUNDS
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CAF America 2013
Still can’t be a conduit relationship in granting funds
Still need to make sure funds are used for charitable
purposes
Specific penalties for failure to get ER right don’t apply
No prohibition on grants to individuals, if such payments
and the charitable purpose served are documented
Donors can receive benefits in return for gift if the grant
maker properly indicates value of benefit received and
reduces charitable deduction receipt accordingly
Non-DAF Funded Grants
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CAF America 2013
If grantee uses funds to purchase capital
equipment, arguably those funds are not spent
until end of useful life of that equipment—longer
period of ER reports required.
Normally, easiest to have grantee use our funds
for something else.
If recipient is a 501(c)(3) or equivalent, can stop
reports after 3 years.
[Equivalency Determination Rules Will Help Here]
Funding Capital Equipment
CAF America 2013
Private foundation ER rules require grantee to
agree not to make any grants that a grant maker
couldn’t make itself.
If grantee will re-grant to organizations, you
need to require the grantee to exercise
expenditure responsibility as grant maker
would.
It is less clear how re-grants to individuals
would work—conservative view is that
grantee’s individual grant procedures would
need to meet Private Foundation
requirements, including IRS preapproval.
Re-granting Rules
CAF America 2013
IRS tracks a long history of abuse.
“Donations” in lieu of tuition payments
Grants for junkets or no charitable activity at all
Do not grant directly from a DAF scholarship awards (or
any other awards) to individuals
Equivalency Determination grants to charities for
scholarships are OK, so long as grantee selects recipients
“completely independently”
No grantee rep or donor/advisor rep on selection
committee
No non-charitable constraints (e.g., requirement
that only corporate executive children need apply)
Scholarships
CAF America 2013
Focused on Grantee as a Whole
Grant maker must make reasonable judgment / good
faith determination that grantee meets U.S. standards
IRS Rev. Proc. 92-94 issued September 2012
http://www.irs.gov/pub/irs-tege/rp_1992-94.pdf
New Guidance: Qualified Tax Practioners can provide
opinions to third parties
Equivalency Determination
CAF America 2013
For-profits, individuals
Nonprofits Could include charities, unions, trade
associations, political organizations, etc.
Nonprofit status
• Can’t distribute earnings or
assets to shareholders,
members, or similar private
owners.
• No private ownership interest
in organization.
• No “private inurement”—
dealings with insiders must be
at fair market value.
Charitable Standards
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CAF America 2013
For-profits, individuals
Nonprofits Charitable status
• Nonprofit
• Organized and operated
“exclusively” for charitable
purposes.
• Private benefit must be incidental
• No substantial lobbying
• No campaign intervention
• Permanently dedicated to
charitable purposes (dissolution
clause)
Charities
501(c)(3)
Charitable Standards
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CAF America 2013
For-profits, individuals
Nonprofits
Charities
501(c)(3)
Private
Foundations
Public Charities
509(a)(1), (2),
(3)
Public Charities
• Churches, schools, hospitals
• Medical research organizations
• Orgs supported by gov’t, public, or other
publicly supported charities
• Orgs supported by combination of
donations & revenue from charitable
activity from public
• Supporting organizations
Private Foundations
• Supported by investments or a few
donors
• Operating or non-operating
Charitable Standards
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CAF America 2013
For-profits, individuals
Nonprofits
Charities (501(c)(3))
Operating
Foundations
4942(j)(3)
Schools, hospitals,
churches, MROs
Publicly supported
(donations)
509(a)(2)
509(a)(3)
Non-Operating
Foundations
Public Charities
• Churches, schools, hospitals
• Medical research organizations
• Orgs supported by gov’t, public, or other
publicly supported charities
• Orgs supported by combination of
donations & revenue from charitable
activity from public
• Supporting organizations
Private Foundations
• Supported by investments or a few
donors
• Operating or non-operating
509(a)(1)
Charitable Standards
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CAF America 2013
Organizational Test
Organizing document must limit
purposes to be exclusively
charitable.
Cannot expressly empower
lobbying, electioneering, inurement,
or other non-charitable activities.
Assets must be permanently
dedicated to charitable purposes.
Dissolution clause.
Law (e.g., cy pres) Post-2006 DAF Grant making
Nonprofits
Charities (501(c)(3))
Operating
Foundations
4942(j)(3)
Schools, hospitals,
churches, MROs
Publicly supported
(donations)
509(a)(2)
509(a)(3)
Non-Operating
Foundations
509(a)(1)
Charitable Standards
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CAF America 2013
Operational test
Activities must be “exclusively”
charitable (no substantial
exceptions).
No substantial lobbying, no
electioneering at all.
Assets must be permanently
dedicated to charitable purposes.
Dissolution clause.
Law (e.g., cy pres)
No private inurement, no
substantial private benefit. Post-2006 DAF Grant making
Nonprofits
Charities (501(c)(3))
Operating
Foundations
4942(j)(3)
Schools, hospitals,
churches, MROs
Publicly supported
(donations)
509(a)(2)
509(a)(3)
Non-Operating
Foundations
509(a)(1)
ED Step 1: 501c3 Status
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CAF America 2013
No Substantial Lobbying
Contacting government officials for
the purpose of influencing
legislation.
Urging the public to do so.
Advocating the adoption or
rejection of legislation.
Exceptions for discussions of broad
social issues, nonpartisan analysis &
research, technical advice, self-
defense.
5% rule of thumb. Post-2006 DAF Grant making
Nonprofits
Charities (501(c)(3))
Operating
Foundations
4942(j)(3)
Schools, hospitals,
churches, MROs
Publicly supported
(donations)
509(a)(2)
509(a)(3)
Non-Operating
Foundations
509(a)(1)
ED Step 1: 501c3 Status
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CAF America 2013
No Electioneering
Candidate forums, voter
registration, voter education OK if
absolutely nonpartisan.
Can’t focus charitable activities on
one candidate or party.
Educating the public on candidates’
position on single issue on which
organization has a clear position is
not OK.
Even insubstantial electioneering is
forbidden. Post-2006 DAF Grant making
Nonprofits
Charities (501(c)(3))
Operating
Foundations
4942(j)(3)
Schools, hospitals,
churches, MROs
Publicly supported
(donations)
509(a)(2)
509(a)(3)
Non-Operating
Foundations
509(a)(1)
ED Step 1: 501c3 Status
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CAF America 2013
“Per Se” Public Charities
Educational Institutions
Churches
Hospitals
“Honorary” public charities:
Government entities
Certain international
organizations
Post-2006 DAF Grant making
Nonprofits
Charities (501(c)(3))
Operating
Foundations
4942(j)(3)
Schools, hospitals,
churches, MROs
Publicly supported
(donations)
509(a)(2)
509(a)(3)
Non-Operating
Foundations
509(a)(1)
ED Step 2: Public Charity
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CAF America 2013
509(a)(1) Public Support Test
Determine percentage of all support over
preceding 5 years that is “public
support”.
Revenues from charitable activities are
ignored.
Contributions from government entities
and other publicly supported (US)
charities counted as public support.
Other donations counted as public
support but only up to 2% per donor.
Above one-third passes, above 10% =
case-by-case qualitative evaluation. Post-2006 DAF Grant making
Nonprofits
Charities (501(c)(3))
Operating
Foundations
4942(j)(3)
Schools, hospitals,
churches, MROs
Publicly supported
(donations)
509(a)(2)
509(a)(3)
Non-Operating
Foundations
509(a)(1)
ED Step 2: Public Charity
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CAF America 2013
Private Operating Foundation Tests
Designed to distinguish foundations that are
conducting charitable activity from those that
just make grants or that just stockpile
endowment.
Most currently funded organizations will
qualify.
Generally must spend 85% of income (not
including contributions/grants) on direct
charitable activities & related admin.
Direct charitable spending must be over 3.33%
of investment assets & other no n-charitable
assets. (But there are other alternative tests.)
Current and previous 3 years—3 out of 4 or
cumulative. Post-2006 DAF Grant making
Nonprofits
Charities (501(c)(3))
Operating
Foundations
4942(j)(3)
Schools, hospitals,
churches, MROs
Publicly supported
(donations)
509(a)(2)
509(a)(3)
Non-Operating
Foundations
509(a)(1)
ED Step 2: Public Charity
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CAF America 2013
Generally, foreign charity
classification is helpful but not a
guarantee.
BUT Canadian registered charities
are automatically classified as
501(c)(3).
Mexican Article 70-B organizations
(now renumbered to Article 97) are
automatically classified as 509(a)(1).
Post-2006 DAF Grant making
Nonprofits
Charities (501(c)(3))
Operating
Foundations
4942(j)(3)
Schools, hospitals,
churches, MROs
Publicly supported
(donations)
509(a)(2)
509(a)(3)
Non-Operating
Foundations
509(a)(1)
ED : Treaty Agreements
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CAF America 2013
Need to avoid being a conduit (need to
exercise discretion and control, have a
specific purpose for the funds).
Grant Agreement provisions can vary, but
some agreement / reporting still
advisable.
Specific restrictions on re-granting don’t
apply, but needs to be for a defined
purpose.
Post-2006 DAF Grant making
Nonprofits
Charities (501(c)(3))
Operating
Foundations
4942(j)(3)
Schools, hospitals,
churches, MROs
Publicly supported
(donations)
509(a)(2)
509(a)(3)
Non-Operating
Foundations
509(a)(1)
ED Cautions
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CAF America 2013
Expenditure Responsibility
• Focused on specific funds
• Pre-grant Inquiry
• Restrictive agreements
• Detailed reporting (to CAFA
and to IRS) until all spent.
• Awkward for capital
equipment, regranting
Equivalency
• Focused on the nature of the
grantee.
• Grantee must meet same legal
requirements as US public
charity/operating foundation.
• General support OK, less reporting
required.
• Depends on governing documents
& detailed formulas applied to
finances.
Post-2006 DAF Grant making
Nonprofits
Charities (501(c)(3))
Operating
Foundations
4942(j)(3)
Schools, hospitals,
churches, MROs
Publicly supported
(donations)
509(a)(2)
509(a)(3)
Non-Operating
Foundations
509(a)(1) Public Charities
• Churches, schools, hospitals
• Medical research organizations
• Orgs supported by gov’t, public, or
other publicly supported charities
• Orgs supported by combination of
donations & revenue from charitable
activity from public
• Supporting organizations
Private Foundations
• Supported by investments or a few
donors
• Operating or non-operating
ED: Is It Charitable?
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CAF America 2013
A unique enhanced domestic nonprofit vetting process goes far beyond the standard practice of only verifying IRS charitable status for USA based Charities. We dig deep to ensure our donors are making safe and secure grants; providing confidence regarding governance structure and the application of funds through:
Online grant eligibility application
Ongoing weekly watch list scanning
Verification of current nonprofit business address and banking information.
Identification of nonprofits whose exemption status has been revoked due to IRS BMF exclusion, Pub 78 exclusion, OFAC inclusion and compliance with the Pension Protection Act.
These additional screenings provide peace of mind regarding the governance, leadership and administration of the organization.
Enhanced Domestic
CAF America 2013
Specially Designated Nations (SDN) List: Grant maker may not
engage in transactions with listed persons (or others it knows
to be terrorists or terrorism supporters).
www.treasury.gov/sdn
Voluntary guidelines. Treasury recommends routine
screening of grantees, their officers, directors, and key
employees, especially in high-risk areas.
Controversy over material support. Example of Palestine.
Sanctioned countries. Transactions in certain countries or
with their nationals are forbidden: Cuba, Iran, North Korea,
Sudan (with some exceptions). Other countries have more
limited restrictions.
Office of Foreign Assets Control (OFAC)
CAF America 2013
Foreign organizations owe 30% tax on U.S. source income.
Safe interpretation: Grant maker must withhold
30% of portion of grants to foreign organizations
spent on U.S. activities.
Exceptions. Grant maker can obtain
documentation making such withholding
unnecessary.
W-8BEN if a treaty applies
W-8EXP & opinion of counsel otherwise
Standard GEA prohibits these activities for simplicity.
1441 withholding of tax on nonresident aliens
1441 Withholding
CAF America 2013
CAFAmerica 1800 Diagonal Road, Suite 150
Alexandria, VA 22314
www.CAFAmerica.org
Ted Hart Chief Executive Officer T: +1 (703) 549-8931 F: +1 (703) 549-8934 [email protected]
Serving Corporations, Foundations, Families and Individuals
Thank you