Page 131 - Washington Nonprofit Handbook 2018 Edition

The bylaws further provided that the organization could solicit funds for
grants to a specific project or purpose that the board of directors had previously
approved; provided, however, that the board of directors must have the right to
withdraw approval of the grant and use the funds for other exempt purposes. The
organization’s board of directors communicated to donors that it could withdraw its
approval of a particular grant at any time. And finally, the organization refused to
accept earmarked contributions to a particular foreign organization.

Commentators have suggested that organizations seeking to qualify as a
domestic friends-of organization (1) include the bylaw provisions described above,
(2) establish grant application review and approval procedures, (3) adopt the
appropriate resolutions for fundraising proposals for each grant and each
disbursement, and (4) require grant accountability. Furthermore, the organization’s
solicitation materials should ensure that donors understand that they are not
giving to the foreign organization and that the domestic organization retains
discretion over the use of the gift.

d. Private Foundations and Earmarking Concerns

Private foundations often elect to forego direct contributions to foreign
organizations in lieu of making grants to “friends-of” organizations because by
making a grant to a U.S. public charity, they avoid the expenditure responsibility
requirements of I.R.C. section 4945(h) and are assured that the grant is a qualifying
distribution under I.R.C. section 4942. (The expenditure responsibility and
qualifying distribution requirements are discussed in further detail in Chapter 38.)
The earmarking concerns discussed above apply to grants by private foundations in
this type of situation. See Treas. Reg. section 53.4945-5(6). To obtain the benefits of
making a grant to a U.S. public charity, the private foundation’s grant must be

viewed as made to and received by the U.S. public charity. If the U.S. charity is
merely a conduit or an agent for the foreign organization, the private foundation
will be considered to have made the gift directly to the foreign organization, and all
the complex rules discussed in this chapter will apply to the grant.

CHAPTER 39. Grants By U.S. Public Charities To Non-U.S. Organizations

As discussed above, a U.S. public charity may fulfill its qualified exempt
purposes by expending funds outside the United States, either by directly carrying
on its exempt activities outside the United States or by making grants to individuals
or organizations outside the United States that will advance the U.S. organization’s
exempt purpose.

WASHINGTON NONPROFIT HANDBOOK -120- 2018