A nonprofit that has obtained 501(c)(3)status and is situated in the United States may decide to invest a significant portion of its funds and other resources in the work being done by a foreign NGO (Non-Governmental Organization). Under such circumstances, it must take into account the fact that the IRS has very stringent guidelines when a domestic nonprofit seeks to carry out its mission in a foreign country. The following are a few of the frequently asked questions concerning the legal issues that arise when maintaining such a so-called “friends of” nonprofit.

FAQ # 1 – What is the general legal basis for the IRS to evaluate a transaction in which a domestic nonprofit is using its funds in a foreign country?

Grants and financial support from a 501(c)(3) Organization to a foreign non-governmental organization (“Foreign NGO”) are subject to heightened scrutiny. That generally focuses upon ensuring that the 501(c)(3) Organization is not serving as a “mere conduit” for the funds to be transferred to the Foreign NGO. See IRS Revenue Ruling 63-252 (“IRS Ruling 63-252”). If the IRS determines that the 501(c)(3) Organization is a mere conduit for the funds, the 501(c)(3) Organization will be at risk of potentially losing its tax-exempt status and the contributions provided by U.S. taxpayers may not necessarily be deductible.

FAQ # 2 – What is the legal definition of a “friends of organization,” as it relates to a domestic 501(c)(3) carrying out its mission in a foreign country?

The typical way a U.S. taxpayer contributes to a 501(c)(3) Organization that makes grants overseas to a separate entity—one that is not simply a branch administrative office of that 501(c)(3)—is through a “friends of organization.” Such a friends of organization cannot be a mere conduit of funds for the foreign organization. The IRS has provided a number of examples to illustrate when the donation might run afoul of that restriction; in other words, when a donor’s contribution will not normally be deductible. Two of them are as follows:

• If the 501(c)(3) Organization enters into an agreement with the Foreign NGO to conduct a general fundraising campaign on the Foreign NGO’s behalf.
• If the donor earmarks their contribution to be turned over to the Foreign NGO in a manner that supplants the discretion of the 501(c)(3) entity to determine the use of those funds. See IRS Ruling 63-252.

FAQ #3 – What are the general guidelines by which a domestic 501(c)(3)’s contribution to a foreign NGO may be deductible?

The domestic 501(c)(3)’s contribution may potentially be deductible in a situation in which the following criteria are generally satisfied. Id. (NOTE: This is a non-exclusive list and does not constitute a legal opinion.)

• There is a grant process for donating the funds to the Foreign NGO for a particular project.
• The purpose of that project can be furthered by granting funds to such an entity organized under the laws of that foreign country.
• The domestic organization makes such grants for purposes which it has reviewed and approved and are consistent with its mission.
• The grants are paid from its general funds.
• Although the organization solicits from the public, no special fund is raised by a solicitation on behalf of a particular Foreign NGO.

FAQ # 4 – What are some of the other criteria that the domestic 501(c)(3) should use to accomplish its mission in a foreign country?

In determining whether a 501(c)(3) Organization is a “friends of organization” with respect to the Foreign NGO, certain principles govern. The following is a non-exclusive list.

• Funding Specific Projects: The “friends of organization” should generally not send checks abroad to provide general support for the costs and programs of the Foreign NGO. Instead, it should generally provide funds to the Foreign NGO that are reserved for specific projects that the “friends of organization” has determined (after a pre-approval process) to be in furtherance of its charitable mission in compliance with the rules and regulations of the tax code. See discussion above.
• Asserting Discretion Over Funds: The “friends of organization” must retain the absolute discretion to refuse to make any grants or contributions—or otherwise render financial assistance—requested by the Foreign NGO. Grants should only be made (a) as internally authorized within the exclusive power and discretion of the “friends of organizations” and (b) not by mandate of the Foreign NGO.

Nonprofit Attorneys Representing NJ, NY, PA, & TX 501(c)(3) & 501(c)(4) Organizations

The Nissenbaum Law Group has a robust legal practice representing domestic 501(c)(3) entities that seek to carry out their mission by funding activities occurring in a foreign country. The legal and regulatory framework for doing so is complex, and the firm welcomes inquiries from nonprofits involved in such projects. Please review our Nonprofit and House of Worship legal service page for more information.