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If the foreign organization has obtained a favorable determination letter
from the IRS regarding its section 501(c)(3) tax-exempt status, the U.S. public charity
can presume that the recipient will use the contribution for a proper exempt
purpose. However, if the foreign organization does not hold a favorable
determination letter, the U.S. public charity must establish that the grant was made
for an exempt activity, and was in fact, actually used for such purpose, all in
furtherance of the grantor’s exempt purpose. Although the detailed procedural
requirements imposed on private foundations by the Code and Regulations do not
apply to a public charity, the public charity must be able to demonstrate that is has
complied with the requirements of section 501(c)(3). A U.S. public charity cannot
make grants to a foreign organization without exercising sufficient supervision and

control to demonstrate compliance with section 501(c)(3).

Public charities typically employ written grant agreements to assure that the
recipient organizations comply with the requirements described above and that
grantees use the grant funds for proper purposes. The grantor often establishes
an internal procedure that demonstrates the charity’s evaluation of the proposed
foreign grant and the manner in which it advances the charity’s exempt purposes,
establishing controls in the grant arrangement to assure proper use of the funds,
and creating reporting obligations from the grantee on its use of the funds. A U.S.
charity will need to include provisions in the grant agreement that prevent violation
of the requirements of section 501(c)(3), such as appropriate restrictions of
lobbying and political campaigning activities and that empower the donor to

reacquire the funds if used for an improper purpose. It is easier to comply with the
requirements of section 501(c)(3) if the grant is for a specific project, rather than a
general support grant.

CHAPTER 40. Grants By U.S. Private Foundations To Non-U.S. Organizations

a. Special Rules Applicable to Private Foundations

The Code imposes additional rules on private foundations making grants
outside the U.S. These rules include the “expenditure responsibility” provisions of
section 4945(h) of the Code and the “qualifying distributions” requirements of
section 4942(g) of the Code.

(i) Expenditure Responsibility.

A private foundation’s grants to another organization will constitute a
“taxable expenditure” under section 4945 of the Code unless the recipient is a

public charity or the foundation exercises “expenditure responsibility” with respect

WASHINGTON NONPROFIT HANDBOOK -121- 2018