US Federal Income Tax Law and Donations to International Charities

A Discussion of Issues in an Age of Terrorism Related Restrictions

Seminar in International Philanthropy

November 12, 2007

Utrecht, Netherlands

prepared by

Karla W. Simon

Professor of Law

Catholic University of America

Traditional income tax deduction theory 1. efficient alternative to government support

(but criticized as a tax expenditure) 2. taxing only consumable income (followed

up by Andrews in defense of consumption tax)

Water’s edge limitation?

1. No restriction on use of money in US under Reg. sec. 1.170A-8(c)(2)(a)

2. US individual taxpayer may thus make a gift to a domestic charity that is tax deductible even if it is for use outside the US (corporations limited to gifts to corporations)

3. May not make deductible contributions directly to a foreign charity (section 170 itself forbids this)

4. There are convoluted rules that apply to be allowed to take the deduction permitted under 2.

Donee organization must be a domestic “friends-of” organization 1. Rev Rul 63-252 sets out guidelines for

qualification 2. These include that there be no special

earmarking of the funds 3. Funds must be “subject to the control” of

the domestic organization 4. Foreign charity can also become a US 501

(c)(3)

Treaty based regimes for donations to Canada and Mexico 1. US has two bilateral treaties that permit

individuals to take deductions for donations to foreign charities (with Mexico and Canada)

2. It has a similar arrangement with Israel 3. Foreign orgs must qualify as if they were

domestic organizations 4. Reluctance of Treasury to consider others

Private foundations

1. Rev Proc 92-94 allows US private foundations to make international philanthropic gifts

2. Two procedures – equivalency determination and expenditure responsibility

3. These rules probably apply to public charities as well as donor-advised funds

4. Growing importance of this because of rise in US philanthropic giving internationally

Estimates of foundation giving

Estimated giving by U.S. foundations for international purposes reached a record $3.8 billion in 2005, according to an International Grantmaking Update, released in 2006 by the Foundation Center in cooperation with the Council on Foundations. This increase represented a nearly 12 percent inflation-adjusted gain over 2002—far surpassing the 2 percent rise in overall giving in the same period.

How to do it? Equivalency determination 1. Collecting certain information from the grantee

about its origins, activities and finances through an affidavit

2. Makes a good faith determination concerning U.S. public charity equivalency and

3. Document the decision 4. Determination may be made by the private

foundation on its own or by relying on the written opinion of counsel or the potential grantee’s counsel

How to do it? Expenditure Responsibility 1. A method of making direct cross-border

grants to a non-U.S. organization when the private foundation assumes full responsibility for ensuring that its grant is used for a charitable purpose

2. Various steps need to be taken including a thorough pre-grant inquiry and substantial follow-up

3. Grant must be reported on Form 990 PF

Finding the applicable law in the donee organization’s country

1. USIG project initiated by Am Express Foundation and ICNL several years ago

2. Currently has 32 countries

3. Reflects interests of US private foundations, but compares favorably with other resources in Europe

Terrorism related issues

1. Executive Order 13224, signed by President George W. Bush on September 24, 2001, cuts off resources to terrorists and terrorist organizations through asset blocking; it prohibits transactions with those entities deemed by the Executive Branch to be associated with terrorism and freezes all assets controlled by or in the possession of these entities and those who support them

Terrorism related issues continued

2. The U.S.A. Patriot Act was enacted in October 2001 and reauthorized in 2005; it increased existing criminal penalties for knowingly or intentionally providing material support or resources for terrorism. For foundations and other grantmakers, these criminal statutes open the possibility that they could be found -- despite their best intentions -- to have knowingly or intentionally provided material support or resources for terrorism. Another concern for grantmakers is potential civil liability should their grants end up in the wrong hands.

Terrorism related issues continued

3. On September 29, 2006, the U.S. Department of the Treasury issued an updated version of the “Anti-terrorist Financing Guidelines: Voluntary Best Practices for U.S.-Based Charities.” These impose certain requirements that foundations may find it difficult to meet. There is considerable concern within the grant-making community about these measures and the use of “lists” of potential suspects.

Terrorism related issues continued

4. Many public charities were dismayed by a move by USAID to implement a new “Partner Vetting System” to obtain information on directors, officers, and other employees of charities seeking USAID funding. Under the proposal, USAID would collect a variety of personal information, including an individual’s name, address, date and place of birth, citizenship, Social Security and passport numbers, sex, telephone and email contacts, and profession “or other employment data.” This was later withdrawn for further consideration

Remedial alternatives to consider

1. Carefully document all gifts

2. Education about required anti-terrorism measures

3. Consider developing an anti-terrorism policy statement if a grant-making organization and document steps taken to comply with the Executive Order and the Patriot Act

4. Keep informed about anti-terrorism developments

Thank you for your attention!