Whether it be preserving the breathtaking paintings and sculptures in the famous Louvre of Paris, feeding malnourished children in Somalia, or combatting extreme gender inequality in Saudi Arabia, there is no shortage of international causes that might compel U.S. citizens and organizations to want to donate abroad.
While a donor can directly donate to a foreign charity, the donor will not be able to take a tax deduction on such donation as only domestic 501(c)(3) organizations are eligible to receive deductible charitable contributions. Thus, if there is wide support for a foreign cause, setting up a “Friends Of” organization in the United States can be a great way of supporting the foreign charity while simultaneously preserving the option of tax deductibility to its donors.
What is a “Friends Of” Organization?
A domestic public charity that solicits money with the intent of granting it to a specific foreign charity is often called a “Friends Of” organization. Friends Of is not a statutory term, but is used colloquially as such domestic organizations often, though not always, include the words “Friends Of” or “American Friends Of” in their name. A few examples include Friends Of Ngong Road (Kenya), American Friends Of Canadian Conservation, and American Friends Of the Louvre.
Note that certain domestic private foundations may also be considered Friends Of organizations, but it is far less common, and additional rules and conditions can apply. Thus, this article focuses on grants made by domestic public charities to foreign organizations.
Concerns and Considerations: Maintaining “Discretion” and “Control”
Setting up a Friends Of organization is not entirely simple, however. If a domestic charity is seen as a mere conduit for diverting funds to a foreign organization, the charity will not be operating consistent with its tax-exempt status and may be misrepresenting to its donors that they are eligible to receive a charitable contribution deduction. Thus, a donor may not simply donate to a Friends Of organization and “earmark” its donation for the foreign charity, which the Friends Of nonprofit turns over without care. Instead, the Friends Of organization must retain adequate control and discretion over the use of the contributions as well as follow approved procedures before remitting the money abroad.
The IRS has provided detailed requirements and guidance for complying with the “discretion” and “control” requirements. Some of the most important requirements include:
- Charitable Mission: The Friends Of organization should have its own charitable mission that complies with 501(c)(3). This mission should be similar to that of the foreign organization it supports but should not be exclusively and irrevocably for the benefit of such foreign organization. It may, however, be exclusively to support charitable activities in a particular foreign country or possibly a specific region in such country.
- Fund Specific Projects: The Friends Of organization should not send checks abroad simply to provide general support for the costs and programs of the foreign organization. Instead, it should provide funds to the foreign organization that are specifically reserved for projects that the Friends Of organization has determined (after a pre-approval process) to be in furtherance of its own charitable mission in compliance with the rules and regulations of the tax code.
- Absolute Discretion Over Funds: The Friends Of organization must, in its absolute discretion, retain the ability to refuse to make any grants or contributions or otherwise render financial assistance to or for any or all the purposes for which funds are requested by the foreign organization. Grants should only be made within the exclusive power and discretion of the Friends Of organizations (and not by mandate of the foreign organization).
- 501(c)(3) Purposes: Grants and contributions should only be made for the Friends Of organization’s exempt purposes within the meaning of Section 501(c)(3) of the Code.
- Periodic Accounting Reports: The foreign charity should furnish periodic accounting statements and explanations to show that the funds were expended only for the purposes approved by the Friends Of organization.
- Transparency to Donors: While the Friends Of organization may solicit funds directly on behalf of the foreign organization, it must make available all facts to its donors, including that ultimately the donor’s contribution may not go to the foreign charity if, for example, the Friends Of organization determines that the funds would not be used for purposes that are compliant with applicable laws.
Given the importance of discretion and control by the domestic Friends Of organization, other important recommendations include:
- Board of Directors: The majority of the board of directors of the Friends Of organization should be independent of the foreign charity.
- Books and Records:
- The Friends Of organization should not directly deposit donors’ checks in an account controlled by the foreign charity (until they have been approved for a specific grant to the foreign charity) and the books and records of the Friends Of organization should reflect donor gifts as its own revenues.
- The foreign charity should not reflect on their books and records an assumption that perpetual funding will be coming in from the Friends Of organization. Instead, funds should only be recorded on a project by project basis, after such funds have been officially confirmed by the Friends Of organization after a pre-approval process for their use on each specific, tax-compliant project. While not necessary, it can also be advantageous for the foreign charity to hold the donated funds in a separate bank account for their specified purposes, especially if the grant size is significant.
- Fundraising and Substantiation: The Friends Of organization, and not the foreign beneficiary, should retain control of domestic fundraising, accounting, local mailing lists and donor databases, as well as issuing substantiation letters to donors.
- Political Campaigns and Terrorism: The Friends Of organization should take care to ensure that no funds are remitted to support political campaigns, terrorism, or military actions.
Other Issues Relating to Interactions with Foreign Organizations
In addition to the foregoing considerations, there are several other rules and regulations to take into account when grantmaking and/or interacting with foreign organizations, including rules governing anti-terrorism activities as well as compliance with local rules and regulations in the foreign charity’s home country. You can read more about some of those additional rules here.
When there is broad domestic support for an international cause, creating a Friends Of organization that pays special care to the foregoing rules can be an excellent way to prioritize, nurture, and provide long-term support for these very important missions.
Attracting U.S. Donors: A Guide to Establishing a “Friends Of” Organization in the United States (McDermott Will & Emery, 2014)