Equivalency Determination or Expenditure Responsibility

Private foundations wishing to make a cross-border grant must ensure that:

• The grant is clearly for a charitable purpose, and
• The grant counts as a qualifying distribution for the purpose of meeting the foundation’s annual distribution requirement.

The easiest way for a private foundation to satisfy both of these requirements is to choose a grantee that is recognized by the IRS as a public charity.

If a private foundation chooses to make a grant to a non-U.S. organization that is not recognized by the IRS as a public charity, the foundation must follow one of the two options provided in the tax code:

• Determine that the non-U.S. grantee is the “equivalent” of a U.S. public charity (“equivalency determination”).
• Exercise expenditure responsibility.

Equivalency Determination

Equivalency determination documents that the grantee organization is the equivalent of a U.S. public charity. To fulfill the requirements of equivalency determination, the private foundation must make a good faith determination on the basis of an affidavit from the potential grantee or an opinion of legal counsel (either the private foundation’s or the potential grantee’s) that the grantee is the equivalent to a U.S. public charity. The following documents should be obtained and translated into English:

• founding documents of the organization
• detailed description of the purposes of the organization and its past and proposed activities
• dissolution provisions, either contained in the applicable law or in the founding documents
• legal or founding document restrictions on private benefit, noncharitable activities, lobbying, and participation in political campaigns
• detailed financial records (excluding religious institutions or medical educational organizations)

Advantages: This method does not require grantee reports at the end of each accounting period, a separate account dedicated to charitable purposes, or detailed reporting on Form 990-PF.

Disadvantages: This method requires gathering numerous documents translated into English, preparing affidavits, and compiling detailed financial reporting from previous years (required to show that the foreign organization is not the equivalent of a U.S. private foundation) to make a “good faith determination” that the non-U.S. grantee is the equivalent of a U.S. public charity.

Expenditure Responsibility

Private foundations may apply grants to their payout requirement if they take the following steps to ensure the grant funds are used for charitable purposes:

• Undertake a pre-grant inquiry with reasonable determination that the intended grantee is capable of fulfilling the charitable purposes of the grant.
• Conclude a grant agreement that includes spending and reporting responsibilities and commits the grantee to spend the money only for the specified charitable purposes.
• Require the grantee to maintain grant funds in a separate account for charitable purposes.
• Require one or more reports from the grantee detailing how the funds have been spent.
• Report the grant on the foundation’s form 990-PF.

Advantages: Because equivalency determination can be a lengthy and sometimes difficult process, requiring the collection of a substantial amount of information up front, grantmakers often choose to exercise expenditure responsibility.

Disadvantages: Grants reports are required from the grantee until all the funds have been expended, which may require monitoring the grant over a period of several years.

Deciding Whether to Use Equivalency Determination or Expenditure Responsibility

According to a letter from the IRS to the Council on Foundations, a private foundation wishing to make a grant to a foreign organization can choose between expenditure responsibility and equivalency determination, and there is no obligation to rule out equivalency before turning to expenditure responsibility.

When the Grantor Doesn’t Have a Choice

When the Grantor Can Choose