Expenditure Responsibility

Equivalency Determination or Expenditure Responsibility

council-webteam — Sun, 10 Nov 2013 01:57:12 +0000

Equivalency Determination or Expenditure Responsibility council-webteam Sat, 11/09/2013 - 20:57

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

Situation	Required Action
Grantee is a noncharitable enterprise that will use the grant for charitable purposes	Expenditure responsibility is the only way to make this grant
Grantee cannot supply the information required for an equivalency affidavit	Grantor must use expenditure responsibility because it does not have enough information for an equivalency determination
Grantor evaluates the affidavit and concludes that despite everyone’s best efforts, the grantee is not the equivalent of a public charity	Expenditure responsibility is the only way to make the grant

When the Grantor Can Choose

Circumstances that favor Equivalency	Circumstances that favor Expenditure Responsibility
Grantor expects a long-term relationship	Grantor plans a one-time grant
Grantee can supply governing documents and no financial data is needed (that is, the grantee is a school, hospital, or church)	Grantee may have considerable difficulty in supplying historical financial data or obtaining a certified copy of its governing documents
Grantor wants flexible reporting procedures	Grantor wants strict reporting provisions
Grantor wants to make a general support grant
Grantee plans to re-grant funds received to accomplish its exempt purposes

Questions?

Connect with Council Staff

Equivalency Determination

Expenditure Responsibility

International Grantmaking Regulations

Related Events

Related Resources

ER Causing You Trauma? Diagnosing the Rules and Regulations for Expenditure Responsibility

kelsey.gerber@cof.org — Wed, 26 Sep 2018 20:18:49 +0000

ER Causing You Trauma? Diagnosing the Rules and Regulations for Expenditure Responsibility kelsey.gerber@… Wed, 09/26/2018 - 16:18

ER Causing You Trauma? Diagnosing the Rules and Regulations for Expenditure Responsibility

Webinar Recording

View the Slides

The steps of expenditure responsibility are the federally-mandated procedures a private foundation (and DAFs) must follow for any grant made to a non-charity. While the rules for exercising expenditure responsibility are relatively straightforward, many issues and concerns can arise, making grantmakers sick and tired when having to implement the ER steps.

We have the cure for you.

In this “Lunch with Legal Counsel,” resident Juris Doctor, Bryan J. Del Rosario conducts a thorough examination of the expenditure responsibility rules, including an intensive look into its corresponding Treasury Regulations to increase grantmakers’ health, happiness and awareness toward the steps. Members pay no copay.

Speaker

Bryan J. Del Rosario, Staff Counsel of Legal Affairs, Council on Foundations

Questions?

Connect with Council Staff

Expenditure Responsibility

Related Events

Related Resources

Expenditure Responsibility: Step by Step

council-webteam — Thu, 31 Mar 2016 13:40:52 +0000

Expenditure Responsibility: Step by Step council-webteam Thu, 03/31/2016 - 09:40

Expenditure Responsibility: Step by Step

A Chapter in Mastering Foundation Law:
The Council on Foundations Compendium of Legal Resources

Expenditure responsibility is the federally mandated procedure that a private foundation—and some public charities—must follow for any grant made to an organization that is not a public charity.

This chapter focuses on the steps of expenditure responsibility when granting to non 501(c)(3) organizations. A foundation can make a grant to any type of legitimate organization anywhere in the world, so long as the grant is strictly for charitable purposes and the foundation is prepared to take on the additional due-diligence requirements (e.g., paperwork and administrative oversight).

For many foundations, completing the five steps of expenditure responsibility is not overly cumbersome. However, foundation staff must be aware of additional complexities and understand important rules when applying expenditure responsibility in certain circumstances, such as:

Grants to organizations formed outside the United States
Grants to private foundations
Grants for program-related investments
Grants to organizations for the subsequent purpose of creating or adding to an endowment, purchasing capital equipment, or for re-granting the funds to individuals or other organizations
Payments to terminate the existence of the grantor foundation

This chapter is divided into seven parts:

Congressional History and Intent

Part One reviews what Congress had in mind when it added this set of requirements to the Internal Revenue Code.

Changes to Expenditure Responsibility Mandated by the Pension Protection Act of 2006

Part Two covers the changes to expenditure responsibility for private foundations and public charities in the Pension Protection Act of 2006.

When to Use Expenditure Responsibility

Part Three explains knowing when to use expenditure responsibility in grantmaking.

Expenditure Responsibility: The Basics

Part Four defines the five basic requirements for completing expenditure responsibility.

Strict Court Interpretations

Part Five examines the legal cases upholding expenditure responsibility.

Penalties for Failure to Exercise Expenditure Responsibility

Part Six describes the tax penalties for failure to exercise expenditure responsibility.

Expenditure Responsibility and Specific Grantees

Part Seven details how to use expenditure responsibility with different types of grantees – private foundations, international organization, and public charities.

Accessing this Chapter

As a benefit of Council membership, members can download this chapter for free. Nonmembers of the Council can purchase this chapter of the Legal Compendium in our store for $149.

Members Download for Free

Nonmembers Purchase from Store

Questions?

Connect with Council Staff

Expenditure Responsibility

Related Events

Related Resources

What is Expenditure Responsibility?

council-webteam — Tue, 09 Jun 2015 20:01:55 +0000

What is Expenditure Responsibility? council-webteam Tue, 06/09/2015 - 16:01

What is Expenditure Responsibility?

Expenditure responsibility is a five step procedure that is designed to ensure that foundation funds are used for exclusively charitable purposes.

The five basic steps that are required for completing expenditure responsibility include:

Conducting a pre-grant inquiry including a reasonable investigation of the grantee to ensure that the proposed activity is charitable and that the grantee is able to perform the proposed activity.
Executing a written agreement with the grantee that specifies the charitable purposes of the grant and includes provisions that prohibit use of the funds for lobbying activities and require the grantee to return any funds not used for the designated purposes.
Requiring the grantee to maintain the grant funds in a separate fund so that charitable funds are segregated from non-charitable funds.
Requiring the grantee to provide regular reports on the use of the funds and the charitable activity support by the grant.
Including a report on Form 990-PF about the grant including a brief description of the grant, the amount, the charitable purpose and the current status of the grant.

Foundations frequently find that exercising expenditure responsibility is less onerous than it may seem at first glance. Failure to exercise expenditure responsibility when making a grant to a non-charity could result in taxes on the foundation and any foundation manager who knowingly approved the transaction.

Expenditure responsibility for private foundations

For private foundation grantmakers, grants to certain organizations require the foundation to follow a procedure to ensure the grant is not a taxable expenditure for the foundation. Expenditure responsibility is designed to ensure that a grant is used for charitable purposes and that the private foundation maintains appropriate oversight of, and documentation for, the grant.

Expenditure Responsibility Chart for Private Foundations

A tool to help private foundations determine when to use expenditure responsibility for grants to public charities.

Expenditure Responsibility for Community foundations and Other Public Charities

Community foundations and other public charities generally have more flexibility in funding the charitable activities of non-charities, with one exception. Public charities that hold donor-advised funds are required to follow the expenditure responsibility rules that are described above when making certain grants, including those made overseas or to certain supporting organizations.For grants that are not from a donor-advised fund, there are no required steps under IRS regulations, but the public charity grantor may find that adhering closely to the expenditure responsibility rules is a sensible way to ensure that grant funds are used for charitable purposes when making grants to non-charities. Public charities can follow the private foundation expenditure responsibility rules with the exception of the report on the Form 990. Following these steps helps ensure clear documentation of the process the charity used to provide a grant to a non-charity and continued oversight over the grant.

Sample Documents for Use with Expenditure Responsibility Grants

Donor Advised Funds: Is Expenditure Responsibility Required?

Questions?

Connect with Council Staff

Expenditure Responsibility

Related Events

Related Resources

Expenditure Responsibility Chart for Private Foundations

council-webteam — Fri, 05 Jun 2015 18:24:50 +0000

Expenditure Responsibility Chart for Private Foundations council-webteam Fri, 06/05/2015 - 14:24

Expenditure Responsibility Chart for Private Foundations

This document is a tool to help you as a private foundation determine when to use expenditure responsibility for grants to public charities.

Download Document

Expenditure Responsibility Chart for Private Foundations

Questions?

Connect with Council Staff

Related Resources

Related Events

Sample Foreign Grant Expenditure Responsibility Letter

council-webteam — Sun, 17 Nov 2013 21:45:37 +0000

Sample Foreign Grant Expenditure Responsibility Letter council-webteam Sun, 11/17/2013 - 16:45

Sample Foreign Grant Expenditure Responsibility Letter

Sample foreign grant expenditure responsibility letter.

This sample document is being provided for informational purposes and is not to be shared without the permission of the Council on Foundations. Use of the sample document does not create an attorney-client relationship, and the information provided is not a substitute for expert legal, tax, or other professional advice tailored to your specific circumstances. The information may not be relied upon for the purposes of avoiding any penalties that may be imposed under the Internal Revenue Code.

Download Document

Sample Foreign Grant Expenditure Responsibility Letter

Questions?

Connect with Council Staff

Related Resources

Related Events

Sample Expenditure Responsibility Grant Agreement

council-webteam — Sun, 17 Nov 2013 21:35:06 +0000

Sample Expenditure Responsibility Grant Agreement council-webteam Sun, 11/17/2013 - 16:35

Sample Expenditure Responsibility Grant Agreement

Editable grant agreement for grants requiring expenditure responsibility.

Download Document

Sample Expenditure Responsibility Grant Agreement

Questions?

Connect with Council Staff

Related Resources

Related Events

Grants to Organizations from Donor-Advised Funds: Is Expenditure Responsibility Required?

council-webteam — Mon, 11 Nov 2013 16:39:23 +0000

Grants to Organizations from Donor-Advised Funds: Is Expenditure Responsibility Required? council-webteam Mon, 11/11/2013 - 11:39

Grants to Organizations from Donor-Advised Funds: Is Expenditure Responsibility Required?

Use this flowchart to determine if grants from donor-advised funds require expenditure responsibility.

Download Document

Grants to Organizations from Donor Advised Funds: Is Expenditure Responsibility Required?

Questions?

Connect with Council Staff

Expenditure Responsibility

Equivalency Determination or Expenditure Responsibility

Equivalency Determination or Expenditure Responsibility

Questions?

Related Events

Related Resources

ER Causing You Trauma? Diagnosing the Rules and Regulations for Expenditure Responsibility

ER Causing You Trauma? Diagnosing the Rules and Regulations for Expenditure Responsibility

Webinar Recording

Speaker

Questions?

Related Events

Related Resources

Expenditure Responsibility: Step by Step

Expenditure Responsibility: Step by Step

A Chapter in Mastering Foundation Law: The Council on Foundations Compendium of Legal Resources

Congressional History and Intent

Changes to Expenditure Responsibility Mandated by the Pension Protection Act of 2006

When to Use Expenditure Responsibility

Expenditure Responsibility: The Basics

Strict Court Interpretations

Penalties for Failure to Exercise Expenditure Responsibility

Expenditure Responsibility and Specific Grantees

Accessing this Chapter

Questions?

Related Events

Related Resources

What is Expenditure Responsibility?

What is Expenditure Responsibility?

Expenditure responsibility for private foundations

Expenditure Responsibility Chart for Private Foundations

Expenditure Responsibility for Community foundations and Other Public Charities

Sample Documents for Use with Expenditure Responsibility Grants

Donor Advised Funds: Is Expenditure Responsibility Required?

Questions?

Related Events

Related Resources

Expenditure Responsibility Chart for Private Foundations

Expenditure Responsibility Chart for Private Foundations

Download Document

Questions?

Related Resources

Related Events

Sample Foreign Grant Expenditure Responsibility Letter

Sample Foreign Grant Expenditure Responsibility Letter

Download Document

Questions?

Related Resources

Related Events

Sample Expenditure Responsibility Grant Agreement

Sample Expenditure Responsibility Grant Agreement

Download Document

Questions?

Related Resources

Related Events

Grants to Organizations from Donor-Advised Funds: Is Expenditure Responsibility Required?

Grants to Organizations from Donor-Advised Funds: Is Expenditure Responsibility Required?

Download Document

Questions?

Related Resources

Related Events

A Chapter in Mastering Foundation Law:
The Council on Foundations Compendium of Legal Resources