International Grantmaking: Equivalency Determinations

Private foundations in the United States are often interested in funding promising organizations and projects that are based outside of the country. When doing so, these foundations are required to follow certain rules and procedures promulgated by the IRS to help ensure that the foreign grantees are properly using those funds for charitable purposes. Currently, when a private foundation engages in international grantmaking, it has two options for complying with these rules: exercising expenditure responsibility or conducting an equivalency determination.

What is an Equivalency Determination?

An equivalency determination generally refers to the review and evaluation by a private foundation of whether a potential grantee is the foreign equivalent to a U.S. public charity. This involves a review of its organization (governing documents) and operations to ensure it meets the following requirements described in Section 501(c)(3) of the Internal Revenue Code (IRC):

  • It is organized exclusively for a charitable, educational, or other 501(c)(3) exempt purpose;
  • It is operated primarily for a qualified exempt purpose;
  • It does not engage in any transactions that would result in private inurement or a prohibited private benefit;
  • Its assets, upon dissolution, would be distributed to another nonprofit for a qualified exempt purpose or a government instrumentality;
  • It does not engage in substantial lobbying; and
  • It does not engage in prohibited political campaign intervention.

In addition, the review must generally ensure that the foreign grantee would qualify as a public charity (and not a private foundation) if it were to apply for IRS recognition of exemption under 501(c)(3). Most public charities qualify as such because they are “publicly-supported” (i.e., they receive a significant portion of their financial support from public sources). For such organizations that do not receive a significant amount of earned income, this may be proven using one of two tests referenced in IRC Sections 509(a)(1) and 170(b)(1)(A)(vi).

First, an organization can demonstrate that it receives at least 1/3 of its total support from governmental units or the public. If the organization cannot meet this first test, it may pass an alternative facts and circumstances test, which requires the organization to establish that, under all of the facts and circumstances, it normally receives a substantial part of its support from government units or the general public.  (For more information about public support, see Adler and Colvin’s Qualifying For Public Charity Status).

For organizations that receive a significant amount of earned income, sufficient “public support” may be proven by meeting the requirements referenced in IRC Section 509(a)(2). In addition, a qualifying public charity also includes certain supporting organizations described in IRC Section 509(a)(3).

The equivalency determination process, outlined in the new IRS Revenue Procedure 2017-53 (released September 14, 2017), which modifies and supersedes IRS Revenue Procedure 92-94, requires the grantmaker to collect comprehensive information about the foreign organization’s operations and finances and, through one or more foundation managers, make a “good faith determination” of whether the grantee would be given tax-exempt, public charity status in the U.S., including whether it is publicly supported.

Often, these requirements can be difficult to satisfy because of differences in a foreign grantee’s accounting system, language, and sometimes governing legal system and reporting procedures in the grantee’s own country.

Basic Requirements

An equivalency determination is based on detailed information from the foreign grantee, including financials for the current and previous years, governing documents (a translated copy is now required), details about the board of directors, and descriptions of program activities. More specifically, in order for a grantee to be equivalent to a public charity based on its level of public support, it must provide the grantor with a financial support schedule for the current year as well as the four most recently completed years. The schedule must be detailed and include information such as grants and contributions received, net income from unrelated business activities, and gross receipts for services performed. Furthermore, the schedule must show contributions from donors that are in excess of 2% of the total support received (because such excess is not included as public support in the public support test).

Private foundations may rely on “current” written advice from a “qualified tax practitioner,” such as an attorney, a certified public accountant (CPA), or an enrolled agent who is subject to the standards of practice before the IRS set out in Circular 230. This no longer includes an opinion of foreign counsel of the grantor or grantee. While a grantee’s affidavit remains a good source of information on which qualified practitioners may rely when making the determination, the affidavit alone is no longer enough for the private foundation to rely on.

In order for the written advice to be “current”, the relevant law on which the advice is based must not have changed since the date of the written advice and the factual information on which the advice is based must be from the grantee’s current or prior taxable year (or the current or prior annual accounting period if the grantee does not have a taxable year for United States federal tax purposes). Therefore, the guidance states that a grantor may rely on written advice for a period of up to two years after the advice is provided, depending on when within the grantee’s taxable year the advice was provided.

Preferred written advice that meets the guidelines in Rev. Proc. 2017-53 must set forth the qualified tax practitioner’s own application of the law to the facts and own conclusion that the grantee would qualify as a qualifying public charity as of the date of the advice. Preferred written advice and any attachments (e.g., articles of organization, bylaws, or other organizing or enabling document or documents by which the grantee is formed and governed) must be written in or translated into English and must contain sufficient information to support the qualified tax practitioner’s conclusion. Further, preferred written advice must include verification that the grantee has not been designated or individually identified as a terrorist organization by the United States Government.

Repository

While the regulations aim to simplify and expand equivalency determinations, the process is quite burdensome and costly. For many years, there was no mechanism for sharing information about foreign grantees among grantmakers, and no uniform standard for collecting and processing the equivalency determination information. Thus, grantees were, and many continue to be, asked to provide affidavits and supplemental materials to multiple grantmakers in various forms. The regulations required each grantmaker to use its own reasonable judgment and good faith determination based on the materials collected. Therefore, foundations were not permitted to rely upon each other’s determinations.

To address these issues, several leading organizations such as The Council on Foundations, InterAction, the Foundation Center, and Independent Sector, worked to create a centralized repository of information to improve the efficiency of international grantmaking. The product of this effort, NGOsource, launched an online equivalency determination service and repository . NGOsource members can easily access which projects and organizations are approved for grantmaking purposes, thus eliminating redundant determinations and lowering costs for both the grantmaker and the foreign grantee.

For information about how NGOsource’s equivalency determination service works, click here.

Underlying Law

[Grants to] Certain foreign organizations. If a private foundation makes a grant to a foreign organization which does not have a ruling or determination letter that it is an organization described in section 509(a)(1), (a)(2), (a)(3) or in section 4940(d)(2), the grant will nonetheless be treated as a grant made to an organization described in section 509(a)(1), (a)(2), or (a)(3) (other than an organization described in section 4942(g)(4)(A)(i), or (ii)) or in section 4940(d)(2) if the grantor private foundation has made a good faith determination that the grantee organization is an organization described in section 509(a)(1), (a)(2), or (a)(3) (other than an organization described in section 4942(g)(4)(A)(i) or (ii)) or in section 4940(d)(2). A determination ordinarily will be considered good faith determination if the determination is based on current written advice received from a qualified tax practitioner concluding that the grantee is an organization described in section 509(a)(1), (a)(2), or (a)(3) (other than an organization described in section 4942(g)(4)(A)(i) or (ii)) or in section 4940(d)(2), and if the foundation reasonably relied in good faith on the written advice in accordance with the requirements of § 1.6664-4(c)(1) of this chapter. The written advice must set forth sufficient facts concerning the operations and support of the grantee organization for the Internal Revenue Service to determine that the grantee organization would be likely to qualify as an organization described in section 509(a) (1), (a)(2), or (a)(3) (other than an organization described in section 4942(g)(4)(A)(i), or (ii)) or in section 4940(d)(2) as of the date of the written advice… See paragraphs (b)(5) and (6) of this section for additional rules relating to foreign organizations. – Treasury Regulation §53.4945-5(a)(5)

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