Monday, September 18, 2017

New Guidance Provided for Determinations of Acceptable Foreign Grant Recipients


Private foundations have very specific rules applicable to foreign grants that have long been ignored by churches and other public charities.  However, with the events of 9-11, governmental scrutiny of any charity's foreign expenditures greatly increased.  For charities filing Form 990, information on foreign expenditures is requested each year through Schedule F.  Schedule F requires reporting areas of foreign operations as well as a description of foreign activities and foreign recipients.  Churches don't file Form 990, so they escape this particular scrutiny by the IRS.  However, churches are subject to other filing requirement on foreign activities.  For example, when churches have funds in foreign accounts, they are subject to the financial bank account reporting (FBAR) on FinCen 114.  (For more information on reporting of foreign assets, including the FinCen 114 go to

As the IRS increases scrutiny of all charities' foreign activities, it is necessary to be familiar with the documentation, expected by the IRS, required to support the exempt purposes of the activities.  Without any specific guidance for churches and public charities, it is necessary to look to the long standing requirements placed on private foundations' foreign activities.  Therefore, when the IRS issues new guidance to private foundations regarding foreign activities, it is wisdom for all charities with foreign activities to become familiar with this guidance and the related criteria.

Expenditure Responsibility or Equivalency Determinations

Private foundations are required to operate foreign grants under one of two scenarios.

  1. Expenditure responsibility  - These requirements state that the grant funds will be segregated from other funds of the foreign charity and that all expenditures will be reported back to the grantor through the use of pictures, written reports, receipts, financial statements or other methods of reporting and documenting how the funds were specifically utilized.  Think of this requirement as similar to operating an accountable expense reimbursement plan with the grantee.
  2. Equivalency determination  - This is a process in which a qualified professional determines that the foreign recipient organization meets the qualifications of IRC Section 501(c)(3) and grants to it may be treated in the same manner as grants to U.S. 501(c)(3) charities. 

New Guidelines for Equivalency Determinations

IRS Rev. Proc. 2017-53 details out the new standards for equivalency determinations, now to be referred to as "preferred written advice" or PWA.  While binding on private foundations, the new standards provide an excellent guide for how churches and other public charities may establish foreign grant programs. The Rev. Proc. states that the equivalency determination is:

  • Based on current written advice - "Current" is defined as advice based on the grantee's current or previous year.  The advice may be relied on for a period of up to two years after the advice is provided depending on how recent the factual information is on which the advice is based. (As long as there is not a relevant law change affecting the advice during this two year period.) 
  • Prepared by a qualified tax practitioner - A qualified tax practitioner is an attorney, a certified public accountant or an enrolled agent who is subject to the IRS Circular 230 standards of practice. 
  • Indicates that the recipient is a qualifying public charity - The foreign grantee must meet the tests be the equivalent of a public charity as defined in IRC Section 509(a)(1), 509(a)(2) or certain 509(a)(3) organizations.  This includes churches, schools and hospitals as well as other organizations generally supported by donations or governmental support.  For some foreign grantees, this determination is made through specific testing as performed on U.S. public charities by using Form 990 Schedule A. 
  • Includes the statement that the grantor is reasonably relying on the written advice in accordance with IR Reg. Sec. 1.6664-4(c)(1). 
The preferred written advice should be in English and all attachments should be translated into English.  The advice should contain the following components.  
  • Copies of the grantee's organizational documents;
  • Descriptions of the grantee's exempt purposes and how these purposes align with 501(c)(3) exempt purposes;
  • Confirmation that upon dissolution the grantee's assets will be distributed to another charitable organization for charitable purposes or to a governmental entity;
  • Confirmation that the grantee does not have shareholders or members with an ownership interest in the grantee and that the grantee's assets will not be used for non-charitable purposes or for the private benefit of an individual except for the payment of reasonable compensation;
  • Confirmation that the grantee does not directly or indirectly intervene in any political campaign to any extent or work to influence legislation more than as an insubstantial part of its activities;
  • Disclosures of related or affiliated organizations that control the grantee or work in connection with the grantee;
  • Details of the grantee's activities, past, present and anticipated over the life or term of the grant.  These details should be specific as to sources of revenues and types of expenditures;
  • References to any relevant federal tax law applying to the grantee's operations;
  • Confirmation that the grantee has not been identified as or designated as a terrorist organization by the United States government.  (While not required, it is recommended that all key individuals associated with the grantee also be screened for terrorist designations.);
  • If the grantee, is a school, its organizational documents must include the required nondiscrimination policy as applicable to U.S. schools; and
  • Financial support testing for grantees meeting the  "public charity" test under 170(b)(1)(A)(vi) or 509(a)(2).  (Form 990 Schedule A schedules may be used for this requirement.) 

Application to Churches and Public Charities

It cannot be disputed that the required documentation of foreign activities is overwhelming and burdensome to a U.S. church or charity.  The days of blindly sending money to foreign grantees is over and operating in this manner is dangerous for a U.S. organization.  While appearing to be onerous in many aspects, the equivalency determination  can alleviate  many of the complications for churches and other public charities working in foreign countries. 

For example, a church may have a sister church it supports in Kenya.  Generally, the support provided to the Kenyan church must be specifically accounted for with documentation of the expenditures back to the U.S. church.  If preferred written advice or an equivalency determination is gained for the Kenyan church, then the U.S. church can provide support with less ongoing paperwork. 

In seeking an equivalency determination, churches and public charities should seek a qualified tax professional with experience with nonprofit organizations with extensive foreign activities.  Since, the above requirements are similar to the information provided to the IRS when exemption applications are filed, a professional experienced in filing exemption applications is also preferential. 

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