Page 138 - Washington Nonprofit Handbook 2018 Edition

A U.S. or Mexican contributor making a cross-border contribution to a charity
in the other country may deduct the contribution in the state of residence because
in Article 17(b) of the 1992 protocol, the two countries agreed that Article 70-B of
the Mexican Income Tax Law and sections 509(a)(1) and 509(a)(2) of the Code (other
than churches or a convention or association of churches as described in section
170(b)(1)(A)(i) of the Code) provide essentially equivalent standards as
contemplated by Articles 22(2) and 22(3) of the Treaty. Entities qualifying under
Mexican law will be treated as public charities for U.S. purposes, and unlike the
U.S.-Canada treaty, there is no need for an entity-by-entity determination of public
charity status for U.S. purposes.

In Information Letter 2003-0158, the IRS concluded “[i]f the Mexican
authorities have granted special authorization to a Mexican charity as an
organization described in Article 70–B, a U.S. private foundation or other grant-
maker may treat the Mexican charity as equivalent to a section 501(c)(3)
organization classified as a public charity described in section 509(a)(1) or (2).” Id.

CHAPTER 42. Consequences To Foreign Recipients Of Grants (Withholding
Issues For Grantor)

The Code imposes federal income tax on certain U.S. sources of income.
Sections 871(a)(1) and 881(a) of the Code impose a 30% tax on several types of U.S.-
source nonbusiness income of nonresident aliens and foreign corporations.
Section 1441(a) of the Code generally provides that the person making a payment
that constitutes gross income from sources within the United States to a
nonresident alien must withhold tax at a rate of 30% at the time the payment is
made. However, in the case of scholarship or fellowship payments made to
individuals in the United States on an F, J, M or Q immigration status, the

withholding rate may be reduced to 14%. Code section 1441(b); Rev. Proc. 88-24,
1988-1 CB 800. In addition, the withholding rate may be reduced or eliminated by
treaty.

Under the withholding rules discussed above, U.S. grantors are generally
required to withhold U.S. tax on the nonexempt portion of scholarship and
fellowship grants to foreign students for study in the United States. Code
section 117 excludes from the recipient’s income scholarships or fellowship grants
used for “qualified tuition and related expenses (i.e., tuition, fees, books, etc.).
However, grants used for other purposes, such as room and board, are not
excluded from income. Likewise, amounts received for services performed for the

WASHINGTON NONPROFIT HANDBOOK -127- 2018