understanding expenditure responsibility expenditure responsibility ... grant proposal questions and...
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UnderstandingExpenditure ResponsibilityA Step by Step Guide
Annie Sherzer, Esq.,
Program Services Manager, W.K. Kellogg Foundation
Celeste Dado,
Senior Grants Manager, Arcus Foundation
Grants Managers Network, Sixth Annual ConferenceMarch 23, 2011
Arcus Foundation
Global foundation advancing
pressing social justice and conser-
vation issues by supporting LGBT
equality and protection of great apes
Founded in 2000 in Kalamazoo, MI,
with offices in NYC & Cambridge, U.K.
Annual giving of $26 million in
approximately 200 grants
Supporting work nationally and
internationally – all of Africa and
31 countries in the Middle East,
South and Southeast Asia
DIRECT grantmaking to non-U.S. based organizations in 2010
25 non-U.S.based grants in 22 countries
6 Equivalency Determination
19 Expenditure Responsibility grants
Expenditure Responsibility grants in 2010:
New awards: 38
U.S.-based: 19
Active (open) grants: 77
W.K. Kellogg Foundation
Established in 1930 and located
in Battle Creek, MI.
Grants are concentrated in the
United States, southern Africa,
Latin America and the Caribbean.
Annual giving is approximately $300M.
In 2010, Kellogg made 674 new grants
(14 are ER, totaling approx. $7M)
Total active grants 2,299 (30 are ER)
Total international grants 202 (15 are ER)
Mission:
Support children, families
and communities as they
strengthen and create
conditions that propel
vulnerable children to
achieve success as
individuals and as
contributors to the larger
community and society.
Expenditure Responsibility (ER) is:
A procedure mandated by the Internal Revenue Code that
requires a private foundation to comply with specific require-
ments when making a grant to an organization that is not
classified as a 501(c)(3) public institution or governmental unit.
Due diligence process designed to ensure grant is used for
charitable purpose and foundation maintains appropriate
oversight and documentation.
Covered in Reg.§53.4945-5(b) and§4945-6
Note to Community Foundations: ER must be used with certain grants made from donor-advised funds.
International Grantees – ED vs ER
Two regulatory ways of qualifying non-U.S. based organizations
to receive grants:
Equivalency Determination – process for determining if foreign
organization is equivalent to U.S. public charity.
Expenditure Responsibility – allows foundations to make
grants to foreign organizations that are not recognized as U.S.
public charities by IRS.
Organizations that Require ER
501(c) orgs other than 501(c)(3) charities, such as:
- 501(c)(4) social welfare orgs;
- 501(c)(5) labor unions;
- 501(c)(10) fraternal orders
Private foundations
For-profit companies
Organizations that have not received 501(c)(3) recognition
from IRS
Foreign orgs (in lieu of equivalency determination)
Five Basic Steps/Requirements
Pre-grant
Inquiry
1
Written
Agreement
2
Separate
Account for
Non-Charities
3
Annual
Reporting
by Grantee
4
Reporting
to IRS by
Private
Foundation
5
Step 1: Pre-Grant Inquiry
Pre-grant inquiry is a limited
inquiry that should be complete
enough to give a reasonable
person assurance that the
grantee will use grant for proper
charitable purpose. Inquiry
should concern itself with:
Documents that may
be helpful in completing
the inquiry:
Identity, prior history and experience of organization and its managers;
Any knowledge which the founda-tion has or other information which is readily available concerning the management, activities, and practices of the grantseeker
Evidence of legal status
Grantseeker’s annual report and audited financial statements
Business plan and organizational chart
List of directors and officers
Previous experience with grantee and/or staff
Arcus Pre-Grant Inquiry Process
Site visits by Program Officers in many cases
Grant proposal questions and requirements capture required
information
Grant recommendation write-up addresses regulatory
requirements
Grants Management unit reviews full proposal, project budget
and grant recommendation for legal compliance
Grants Management determines necessary clauses to include
in grant agreement
Step 2: Written Agreement
Agreement must be in writing & signed by officer, director,
or trustee of grantee. It must also include:
Specific charitable purpose(s)
Agreement by grantee to repay any portion of grant not used
for the purpose(s) of the grant
Requirement to submit annual report after the close of
the Grantee’s annual accounting period on how funds were
spent, progress on accomplishing purpose of grant, and
compliance with terms
Maintain record of receipts and expenditures
Provision to not use funds for lobbying, influencing elections,
regranting to individuals, or for any purpose other than
charitable
Grant Agreement Terms/Conditions
Step 3: Separate Account
Non-charitable grantees must maintain grants funds in a separate
fund dedicated for charitable purposes
Cannot comingle charitable
and non-charitable money
Grant to another
private foundation
does not require
a physically
separate account
Grant Agreement Clauses on Separate Account
Step 4: Annual Reporting by Grantee
Reports must be submitted by the Grantee within a “reasonable”
period of time after the close of the Grantee’s annual
accounting period.
Grantee must provide reports on:
1) the use of the funds,
2) compliance with the terms of the grant, and
3) progress made towards achieving the purpose
of the grant.
Reports must be submitted annually until all grant funds are
expended. The FINAL report must include reporting on all
expenditures, as well as progress made toward accomplishing
the goals of the grant.
Following the Grant $$$
Recording in grants management system
Coding of ER grants
Reporting requirements include notation of:
1) fiscal year end,
2) reporting period covered,
3) grant amount expended for reporting period
Dates when reports requested and subsequent follow-up,
as well as format of requests
Grants Management Database Record
Step 5: IRS Reporting by Foundation
ER grants must be separately reported on
Foundation’s IRS Form 990-PF:
- When grant is made
- Each year funds or a report are outstanding
Report must include:
- Grantee name and address
- Date and amount of grant
- Purpose of grant
- Amount expended by grantee based
on latest report
- Diversion of funds
- Dates of any reports received from Grantee
- Date and result of verification conducted,
if any
IRS Form 990-PF:Schedule of Expenditure Responsibility Grants
Failure to Report by Grantee
If Grantee has not submitted required reports, foundation must treat as taxable expenditure unless the foundation has:
Made grant in accordance with all ER requirements;
Complied with IRS reporting requirements;
Made reasonable effort to obtain reports; and
Withholds all future payments to this Grantee until such report is furnished.
When ER goes wrong…
Example 1: Michigan-based non
501(c)(3) organization
Funded as part of racial and economic
justice three-year initiative
Leadership changed after the
second year
Inadequate grant reports
Actions Taken
Engaged an independent accounting firm to conduct a grant “review”
Continued request for supporting documentation following grant “review”
Requested determination from outside legal counsel summarized in a memo
Legal Memo
Accountant report did not state any discovery of misuse or diversion of grant funds
Foundation made grant in accordance with expenditure responsibility requirements
Foundation complied with its requirements to report the grant to the IRS
Foundation made reasonable efforts to obtain the required reports
Foundation could no longer fund this non (c)(3) organization until reports are furnished
Not a taxable expenditure for the Foundation
Foundation no longer required to report on 990 PF return
Diversion of Funds
For a Private Foundation to avoid a penalty tax for diversion of
funds by Grantee, foundation must:
Take all reasonable and appropriate steps to recover the
grant funds or ensure restoration of diverted funds, and
Withhold future payments to Grantee after foundation becomes
aware that diversion may have taken place until it has:
- Received grantee’s assurance that future diversions will not occur
and
- Required grantee to take extraordinary precautions to prevent
future diversions from occurring.
When ER goes wrong…
Example 2: Kenyan-based chimpanzee sanctuary, not-publicly
supported, with a for-profit arm
Arcus supported since 2004 totaling $27.2 million in 14 grants and
1 program-related investment
Assessment report provided by a global accounting firm which also
performed an audit of a capital grant
Newly-appointed CFO discovers fraud in the Finance department
Actions Taken
Arcus demanded an audit of the organization by another independent firm
Arcus Board directed a forensic audit be conducted by yet another accounting firm
Forensic audit report reviewed by Foundation staff and project consultants
Requirements Imposed on Grantee
Prior to making a new grant – submission of written procedures for financial controls and administration of grant funds
Prior to making subsequent grant payments – submission of a copy of bank statement exclusively used for Arcus-funded activities
Submission of quarterly narrative and financial reports to ensure compliance
Special Circumstances
Earmarking – the foundation causes the selection of the
secondary grantee
- Cannot avoid ER by making grant to “fiscal agent”. Foundation must
exercise ER as if grant was made directly to secondary grantee.
Subgranting/Regranting – foundation awards a grant to a
Grantee and the Grantee gives all or a portion of the foundation
grant funds to another legal entity
- IRS will hold foundation responsible for the regranting undertaken
by the original grantee.
Capital Equipment and Endowment – regulations provide
clear guidance on reporting for private foundation grantees,
but not on non-501(c)(3) grantees. May want to explore
“useful life” approach.
General Operating Support – not allowed with ER
Resources
“Expenditure Responsibility:
Step by Step” by John A. Edie
www.cof.org
(search: expenditure responsibility)
Internal Revenue Code
Reg.§53.4945-5(b) and§4945-6
Pension Protection Act of 2006
Legal Counsel
Questions