U.S. public charities are blessed, but also challenged, by a relative lack of regulation governing their grants to foreign persons and foreign entities.
U.S. public charities are blessed by this lack of regulation because the rules applicable to them when making grants are fairly simple, flexible and easy to understand, particularly when compared to the rules applicable to foreign grants made by private foundations. When a public charity makes a grant to an individual or organization, foreign or domestic, the funds must be used to further the public charity’s exempt purpose. If the public charity makes a grant to another Section 501(c)(3) organization, this requirement is presumed to be met. If a grant is made to a party other than another Section 501(c)(3) organization, the public charity has added burdens. The charity must establish that the grant was made consistent with its exempt activity by retaining control and discretion over the use of the funds and by maintaining records that memorialize that the funds were, in fact, used only for such exempt purposes. This burden can be greater and more difficult to meet when a grantee is located in a foreign country.
Statutes and regulations, however, do not specifically provide any guidelines to public charities regarding the kind of documentation that will meet a public charity’s burden to establish that its funds are used for exempt purposes. This lack of regulation can be a challenge for a board of a public charity seeking a safe-harbor, especially for a globally minded charity that wishes to make international grants but does not have the time or resources for international site visits.
Fortunately, public charities can look to the rules applicable to private foundations for guidance. While the private foundation rules do not apply to public charities as a matter of law, voluntarily adopting them in whole or in substantial part provides substantial protection from any attack on a public charity’s tax-exempt status and/or the propriety of its grant-making procedures. Therefore, BakerHostetler often advises public charities involved in international grant-making to establish clear grant policies that, at a minimum, adhere to the policies underlying the private foundation rules and, when possible, to the letter of that law. The specific grant policies established by each public charity necessarily will vary with the circumstances of each charity but all, in some fashion, should address pre-grant inquiries, written grant agreements, grantee reporting, grantor access to grantee records, restrictions on use of funds, and refunds for grants misused by the grantee.
Once a U.S. public charity has addressed those aspects of such policies focused on tax-related considerations, the policies should be further developed to address non-tax issues associated with international grant-making. Such issues include, but are not limited to, adherence to anti-terrorist financing laws under Executive Order 13224 and the USA PATRIOT Act, the ownership and use of intellectual property of the charity and/or the grantee, actual and perceived conflicts of interest, and compliance with applicable foreign law.
BakerHostetler’s Private Wealth Planning, Charitable Giving and Tax-Exempt Organizations Groups are well situated to assist tax-exempt organizations that are, or wish to be, involved in international grant-making. Please contact Chad Makuch at (216) 861-7535 or firstname.lastname@example.org, if you have questions or need assistance.
 Rev. Rul. 67-149, C.B. 1967-1 133 (holding a charitable organization exempt under Section 501(c)(3) where it provides financial assistance to other charitable organizations that are also exempt under Section 501(c)(3)).
 Rev. Rul. 68-489, 1968-2 C.B. 210 (requiring a charitable organization to assure that the grant funds are used only for Section 501(c)(3) purposes by limiting distributions to specific projects that are in furtherance of its own exempt purposes). See also, e.g., Rev. Rul. 56-304, 1956-2 CB 306 (grants to individuals); Rev. Rul. 68-489, 1968-2 CB 210 (grants to nonexempt organizations).
 PLR 200234071.