Draft Foreign NGO Management Law (China)

Great Wall of China at the Jinshanling section.

China’s draft Foreign NGO Management Law released in May 2015 would, according to an Opinion piece in the New York Times (Will China Close its Doors?), require foreign nonprofits to be vetted by China’s security police before conducting activities in China and subject them to penalties for vaguely defined offenses such as subverting state power, destroying ethnic harmony, and damaging the national interest. Such penalties could apply regardless of whether the offenses occurred in China. Accordingly, if this law passes, the Chinese authorities could penalize a nonprofit and its agents operating in China for any criticism of the Chinese government or Chinese policy even if such criticism was made in the United States.

According to Reuters:

The draft law “governing foreign NGOs”, which has triggered a storm of criticism since it was made open for public consultation last month, requires foreign non-profits to find an official sponsor, typically a government-backed agency, and gives broad latitude to the police to regulate activities and funding.


In a confidential diplomatic document seen by Reuters, the European Union said China was using the law to “silence dissenting voices”.

American nonprofits operating in China will need to be very cautious about operating in China, particularly if they are involved in any type of human rights or social justice advocacy efforts. And it will be particularly important for such nonprofits to make their employees and volunteers aware of the additional personal risks they may face and to mitigate such risks to the extent possible.  It is unfortunate that such a law will very likely result in much less charitable support going to the residents of China and significantly more corruption.

See also China Asserts More Control Over Foreign and Domestic NGOs (Wall Street Journal).


2009 Western Conference on Tax-Exempt Organizations – Day Two

Day Two of the WCTEO began with EO attorney Bruce Hopkins delivering his always informative and
entertaining program on new developments over the past year, focusing
particularly on private letter rulings (PLRs).  Here are some of the notable PLRs:

  • Denying recognition of exemption under 501(c)(3) because of operation in substantially commercial manner:  200944053
  • Denying recognition of exemption under 501(c)(3) because of violation of public policy doctrine:  200826043
  • Denying recognition of exemption under 501(c)(4) because organization does not serve a community but rather its members:  200809035
  • Arrangement where novel written by director, which may be used in exempt functions, generates royalties payable to director's former spouse ruled to provide private benefit:  200913067
  • Online "seminary" failed to qualify as church:  200912039
  • Sale of grantmaking services by community foundation to charitable organization in its community held to be related business; sale of administrative and clerical services to them held to be unrelated business:  200832027, 200832028

With respect to the redesigned Form 990, Hopkins said he was "struck by how much law the Form introduces."  Here are some additional developments he discussed:

Next, there were three concurrent breakout sessions:  (1) global issues for private foundations and public charities; (2) licensing, self-generated software and other intellectual property issues; and (3) charitable giving update.  I attended the global issues program presented by EO attorney Jane Peebles. She covered all the basics and, with fellow EO attorney Betsy Adler, provided a very helpful set of materials. I particularly appreciated the sample affidavit used for an equivalency determination (one of two alternative due diligence methods required to be used by private foundations when giving to a foreign charity).

CPA Jody Blazek and Stephen Clarke of the IRS presented on Form 990 developments.  Blazek provided many helpful tips and cheat sheets to use when preparing the complicated new Form.  Among her materials:  When is Schedule O Required, Sample Board Questionnaire to Obtain Information Required in Revised 990, and Schedule L Interested Parties by Part and Organization Type. 

The final program was an experts panel with three incredibly knowledgeable panelists: Blazek, Hopkins, and Douglas Mancino. They were each asked for 10
quick pearls of wisdom. Here are some of them:

  • JB:  Public charities should follow foreign grant equivalency determination procedures (or expenditure responsibility).
  • BH:  Organizations should periodically review their websites for business transactions, lobbying, political activities, and the like (particularly important if they have affiliated organizations).
  • DM:  Organizations should always analyze the statute of limitations when faced with Ch. 42 taxes, including new taxes on Type III SOs and DAFs.
  • JB:  The IRS will (eventually) follow up on its FBAR initiative to require reporting of ownership in offshore partnerships and other accounts.
  • BH:  Charitable gift annuities are investment contracts under federal securities law and not covered by the Philanthropy Protection Act (Warfield v. Bestgen (9th Cir. 2009)).
  • DM:  Private foundations should consider if there are multiple acts of self-dealing rather than just a single act (foundation managers may be liable for up to $20,000 per act).

Read my post on Day One of the WCTEO here.


Schedule F of Redesigned Form 990 – Statement of Activities Outside the U.S.

The Redesigned Form 990, which goes into effect for tax years ending after December 31, 2008, contains a new Schedule F, Statement of Activities Outside the United States.  Schedule F, Part I, General Information on Activities Outside the United States, must be completed by organizations that have had aggregate revenues or expenses of more than $10,000 from grantmaking, fundraising, business, and program service activities outside the United States.  Part II requires a disclosure of grants or other assistance to organizations or entities outside the United States if over $5,000.  Part III requires a disclosure of grants or other assistance to individuals outside the United States if over $5,000.  Part IV requires the organization to describe its procedures for monitoring the use of grant funds outside of the United States.

The requirement of disclosing foreign recipients of grants posed concerns of the safety of recipients involved in furthering a U.S. charity’s mission, particularly in areas that are dangerous or hostile to Americans and those who work with American organizations or in furtherance of American interests.  The IRS explained that it cannot redact or withhold from public disclosure such information without legislative authority.  As a concession, in the 2008 Form, the IRS will require reporting on a regional (rather than on a country by country) basis and not require the identification of individual grantee organizations.


Nonprofits and Antiterrorism: GuideStar Interview with Treasury’s Amit Sharma

GuideStar recently published an interview it conducted with Amit Sharma, Treasury’s senior advisor to the assistant secretary for terrorist financing, focusing on the topic of charities and antiterrorism.  Among Sharma’s responses were the following comments:

  • "… the threat is very real, and it is ongoing."
  • "Designated terrorist groups around the world have been found, and continue to be seen, engaged in charitable activities, and this takes advantage of good faith donors."
  • "What leaders should also be aware of is how they can protect themselves from this risk — which means doing their due diligence."
  • "… we look to charities to understand the risks they face, and apply measures that are appropriate for their risks."
  • The benefits of due diligence to prevent terrorist financing exploitation in charities can not be underscored and ultimately outweigh the alternative.

Click here for the entire interview available on GuideStar’s website.


Anti-Terrorist Guidelines: Revised Best Practices for Charities

The U.S. Department of the Treasury released a revised version of its Anti-Terrorist Financing Guidelines:  Best Practices for U.S.-based Charities (the "Guidelines") on September 29, 2006.  According to the accompanying Treasury press release, this latest version takes into consideration "the comments and suggestions provided by the public to assist the charitable community in efforts to safeguard itself from the threat of abuse and exploitation by terrorist organizations."

Compliance with the Guidelines, the original version of which was first issued by Treasury in 2002, is voluntary, not mandatory.  A working group of charitable sector organizations and advisors, coordinated by the Council on Foundations, requested that Treasury withdraw the 2005 version of its Guidelines and endorse in their place the group's own Principles of International Charity.  Reaction to the latest version will be detailed in future posts.

Among the criticisms of the 2005 version of the Guidelines is the $250,000 annual gross income threshold for an audit.  In Treasury's Response to Comments Submitted on the Guidelines ("Treasury's Response"), Treasury explains that this figure "is drawn from the June 2005 final report to Congress of the Panel on the Nonprofit Sector [the "Nonprofit Panel"], convened by Independent Sector, and is thereby consistent with [the] industry's suggested threshold."  This explanation is misleading because the Nonprofit Panel set the amount of $250,000 as the threshold for requiring a financial statement review rather than a full-blown audit, which the Nonprofit Panel recommended should be mandatory at a $1,000,000 threshold.  The Guidelines' $250,000 audit threshold remains unchanged.


Click here for the September 29, 2006 version of the Guidelines.
Click here for Treasury's Response.


Patriot Act and Nonprofits

Guidestar recently published an article on "The Patriot Act and the Nonprofit Sector: Charitable Organizations After 9/11."  The article makes the following points:

  • The Act stipulates that financial contributions to questionable organizations are a punishable crime.
  • Treasury’s Office of Foreign Assets Control (OFAC) lists individuals and organizations that the government suspects have ties to terrorism and whose assets have therefore been frozen (click here for the updated list).
  • To date, OFAC has named only seven U.S. charities as having suspected links to terrorism.
  • Guidestar records identify that each of these seven suspected charities have had their assets frozen and six have had their exempt status revoked.

Click here for the Guidestar article.


Executive Order 13224

The following description of Executive Order is from the U.S. Department of State:

President Bush signed Executive Order 13224 on September 23, 2001.  Executive Order 13224 gives the U.S. Government a powerful tool to impede terrorist funding and is part of our national commitment to lead the international effort to bring a halt to the evil of terrorist activity.  …  In issuing Executive Order 13224, President Bush declared a national emergency to deal with the unusual and extraordinary threat to the national security, foreign policy, and economy of the United States posed by grave acts of terrorism and threats of terrorism committed by foreign terrorists, including the terrorist attacks in New York and Pennsylvania, and on the Pentagon committed on September 11, 2001, and the continuing and immediate threat of further attacks on U.S. nationals or the United States.

In general terms, the Order provides a means by which to disrupt the financial support network for terrorists and terrorist organizations by authorizing the U.S. government to designate and block the assets of foreign individuals and entities that commit, or pose a significant risk of committing, acts of terrorism.  In addition, because of the pervasiveness and expansiveness of the financial foundations of foreign terrorists, the order authorizes the U.S. government to block the assets of individuals and entities that provide support, services, or assistance to, or otherwise associate with, terrorists and terrorist organizations designated under the Order, as well as their subsidiaries, front organizations, agents, and associates.

Legal Consequences

1.  With limited exceptions set forth in the Order, or as authorized by OFAC [Office of Foreign Assets Control], all property and interests in property of designated individuals or entities that are in the United States or that come within the United States, or that come within the possession or control of U.S. persons are blocked.

2.  With limited exceptions set forth in the Order, or as authorized by OFAC, any transaction or dealing by U.S. persons or within the United States in property or interests in property blocked pursuant to the Order is prohibited, including but not limited to the making or receiving of any contribution of funds, goods, or services to or for the benefit of individuals or entities designated under the Order.

3.  Any transaction by any U.S. person or within the United States that evades or avoids, or has the purpose of evading or avoiding, or attempts to violate, any of the prohibitions in the Order is prohibited.  Any conspiracy formed to violate any of the prohibitions is also prohibited.

4.  Civil and criminal penalties may be assessed for violations.

Current List of Terrorists and Groups Identified Under E.O. 13224

For a current list, updated regularly, or terrorists and groups identified under E.O. 13224, see the 13224 List.

The Department of the Treasury, Anti-Terrorist Financing Guidelines:  Voluntary Best Practices for U.S. Charities (November 2002) also suggests that nonprofits and grantmakers check the following lists:

* Not referenced in the November 2005 Revised Guidelines


Council on Foundations Leads Call for Treasury Department to Withdraw Antiterrorism Guidelines

A coalition of more than 40 nonprofit organizations led by The Council on Foundations has called on the U.S. Department of Treasury to withdraw its "Anti-Terrorist Financing Guidelines:  Voluntary Best Practices for U.S.-based Charities" (rev. Nov. 2005).  In response to the Treasury Department’s invitation for public comments to propose alternative guidelines, the coalition recommended replacing the Treasury’s guidelines with its own Principles of International Charity submitted to the Treasury Department in March 2005.

Read the February 21, 2006 press release from The Council on Foundations here.


International Giving

A donor is not entitled to an income tax deduction for a charitable contribution to a foreign charity.  See IRC Sec. 170(c)(2)(A).  However, a donor may get an income tax deduction for a charitable contribution to a domestic charity even though all, or some portion, of the donated funds may be used in foreign countries for charitable or educational purposes.  26 CFR 1.170A-8(a)(1).  See Bilingual Montessori School of Paris, Inc., 75 T.C. 480 (1980).  Whather such contribution will be deductible for income tax purposes may depend on whether it violates the earmarking or conduit restrictions.

Domestic charitable organizations may fund a foreign charitable organization and/or individual when:
1.  the domestic organization’s purpose can be furthered by granting funds to a foreign entity;
2.  the domestic organization has reviewed and approved of the foreign entity’s purposes; and
3.  the grants are paid from general funds rather than from special funds solicited on behalf of the foreign organization.  See Rev. Rul. 63-252.

Donations made to domestic charitable organizations organized or operated solely to solicit funds on behalf of preexisting foreign entites and that are effectively agents or conduit organizations for the foreign entities are not deductible for income tax purposes.  See Cases 1-3 in Rev. Rul. 63-252. 

Donations made to domestic charitable organizations that solicit funds without any express understanding that the donations will be forwarded to foreign entities and that exercise discretion and control over the funds solicited from U.S. sources are deductible for income tax purposes.  See Cases 4-5 in Rev. Rul. 63-252.  In order to adequately exercise control over the forwarded funds, the domestic organization may need to retain full control of the donated funds to ensure that they will be used to carry out it’s own charitable purposes.  Contributions to a domestic charitable organization solicited for a specific project of a foreign organization are deductible where the domestic organization has reviewed and approved in advance the project as being in furtherance of its own exempt purposes and has control and discretion as to the use of the contributions.  Rev. Rul. 66-79.

An increasingly important aspect of international giving is compliance with counter-terrorism measures.  See The Handbook on Counter-Terrorism Measures:  What U.S. Nonprofits and Grantmakers Need to Know.

For more information:
Domestic Organizations with Foreign Operations, 1983 EO CPE Text
* Principles of International Charity (March 2005)
* Equivalency or Expenditure Responsibility?  A Guide in Plain English
Legal Issues, United States International Grantmaking (many excellent links)
Tax Planning for Cross-Border Philanthropy by U.S. Donors, by Jane Peebles, J.D.