Michael Durham, an attorney at our sponsor Kirton McConkie, works on cross-border philanthropy; he helped me to understand more about the challenges faced by international nonprofits fundraising in the U.S. Specifically, he shared three tips for helping nonprofits set up a U.S. nonprofit affiliate to help with fundraising.
Here are the three tips for setting up a U.S. nonprofit arm for fundraising for an international nonprofit:
Let’s take each of these in order.
First, Michael says, “Make sure it is properly structured to vest real discretion and control over how the funds are used in the U.S. entity.” He explains, ” U.S. law does not permit donors a tax deduction for amounts contributed to foreign organizations or amounts funneled through U.S. organizations to foreign organizations.”
“But U.S. organizations can raise money and use that money to serve charitable purposes overseas,” he clarifies. “The clearest case is one where U.S. board is not controlled by foreign org, and all grants of U.S. raised funds are for specific charitable projects approved on a case-by-case basis by the U.S. board. If that is not possible, other models may also work, but ideally you would disclose those in your exemption application so that you are confident that your structure has been cleared by the IRS.”
Second, “Remember to build a record of real decisionmaking in the U.S. affiliate as to how the funds will be used by the international nonprofit,” he says.
Michael cautions, “It is easy to fall into a routine where the foreign organization simply makes a request for grants serving some broad goals, and the U.S. organization periodically turns over the bulk of its funds in response to such requests. In several recent rulings, the IRS has rejected U.S. ‘friends of’ foreign charities where they left too much discretion to the foreign charities. For instance, if the funds were being used to provide scholarships at a foreign university, the IRS might expect the U.S. affiliate to have reviewed the foreign university’s standards for determining financial need. The U.S. entity should review full details of the programs in advance, and should obtain detailed reports about how the funds were spent after the fact.”
He further warns, “Be careful how you describe the use of funds in fundraising appeals. It is permissible to state that funds will be used to support the foreign organization, but it should be clear that the U.S. organization could alter that decision if it no longer appeared that the foreign organization’s programs would carry out the U.S. ‘friends of’ organization’s purposes.”
Third, Michael says, “Consider other options besides setting up your own entity.”
He notes, “Many foreign organizations overestimate the amount of funds that a U.S. entity will attract. While it is true that U.S. charitable giving is higher than that of many other countries, attracting significant funds requires time and effort to distinguish your organization from all the others. A U.S. entity must comply with annual public filing requirements, including exhaustive financial information and salary information for the leadership of the U.S. entity, in some cases including salaries paid by the foreign affiliate.”
“As an alternative to setting up and maintaining your own U.S. affiliate, you might consider opening a ‘friends of’ fund with an existing public charity that manages such funds on behalf of multiple foreign charities. That is a lower-cost way to ‘test the waters’ to see how much your organization can realistically expect to raise in the U.S. before you invest in maintaining your own U.S. 501(c)(3) organization,” Michael concludes.
On Wednesday, December 23, 2015 at 1:00 Eastern, Michael will join me for a live discussion about optimizing a U.S. entity for fundraising for an international nonprofit. Tune in here then to watch the interview live. Post questions in the comments below or tweet questions before the interview to @devindthorpe.
More about Kirton McConkie:
Kirton McConkie is Utah’s largest law firm. It provides excellent service in helping clients solve problems, achieve results and realize opportunities. We serve individuals and businesses, from large multinational organizations to small start ups. As the largest law firm in Utah, we represent a depth of collective knowledge and skills, clients desire. We also know, for the most part, clients tend to hire individual lawyers they have heard about, who have been referred to them or who they already know. We know it is true because it happens for us all the time. Many of our new clients come from referrals. To us, this is the highest form of recognition for the work and service we provide as lawyers and as a law firm.
Michael Durham is a Shareholder at Kirton McConkie, a law firm based in Salt Lake City, where he focuses on the laws affecting nonprofit and tax-exempt organizations. Prior to joining the firm in 2015, he spent ten years practicing in the same area at Caplin & Drysdale, in Washington D.C. Michael has devoted a significant part of his practice to dealing with the increasingly complex rules governing cross-border philanthropy. His clients include internationally active high-tech nonprofits, religious organizations, private foundations, and donor advised fund organizatons, among any others. Michael is a graduate of the Yale Law School. He currently serves as co-chair of the Religious Organizations Subcomittee of the Exempt Organizations Committee of the American Bar Association Tax Section.