Microphilanthropy is a term that is being used more and more frequently. As one of the “top ten philanthropy buzzwords of 2007”, perhaps more attention needs to be paid to this emerging practice. The concept is similar to the notion behind the Grameen Bank. However, where microfinance talks of making micro-loans, microphilanthropy talks of making micro-grants.

“While microcredit extends small collateral free loans to the needy, Microphilanthropy extends small donations or gifts with the same goal. To help people become able to help themselves and in turn become productive members of society giving back to the community.”

At this juncture, we need to step back and understand the basics of grantmaking in the philanthropic sector. In general, private non-operating foundations have typically occupied the grantmaking sphere, although it is not uncommon for private operating foundations or even public charities to make grants. Grants are typically made to charitable projects and programs that further the exempt purposes of the grantmaking organization. That is, an organization will make grants to support a project which in line with the general charitable purposes of the grantmaking organization. Quite often, these grants will be made to other exempt organizations, such as public charities. These grants are typically made by foundations and organizations with the financial means to make large grants.

The premise behind microphilanthropy is to open the door to grantmaking, in some sense, to philanthropists of more modest means. Essentially, microphilanthropy serves to empower the individual philanthropist.

Thus, where one large grant could benefit one organization on a large scale, the same donor can, through several smaller donations, affect the lives of a greater number of persons in smaller ways.

Many groups have become interested in implementing the microphilanthropy model, where small scale donors could have a platform to donate to smaller projects. However, several issues arise the context of microphilanthropy. Currently, it is a relatively new area of the law and some legal practitioners say that it is an area that is still flying under the IRS’ radar. Despite the lack of substantial rhetoric in this area, there are some issues of general legal concern.

Priv. Ltr. Rul. 2003255005, although addressing mainly a micro-lending situation, presents issues of relevance to micro-granting. In this ruling, the applicant entity sought answers as to whether the act of distributing micro-loans to non-exempt organizations would jeopardize the applicant entity’s 501(c)(3) exemption status. The IRS ruled here that the 501(c)(3) status would not be jeopardized, even if the funds were distributed to a non-exempt entity, so long as the applicant entity retained “control and discretion as to the use of the funds and maintain[ed] records establishing that the funds were used for a 501(c)(3) purpose.”

The exempt purpose of the applicant in this particular ruling was related to the eradication of poverty and thus, the burden of satisfying exempt purpose was not so stringent in this particular case. In situations of narrower charitable purposes, however, the granting entity would need a higher level of prudence in making sure that the micro-grants further the exempt purposes of the entity. Thus, in the case of a charity set up for the assistance of unknown artists, the charity would need to take great care that any grants made through a microphilanthropy program of the charity would indeed be to help the struggling artists.

This brings up another valuable issue presented in the Letter Ruling, namely, the issue of substantiation and expenditure responsibility. Expenditure responsibility is a term we have come to equate with private foundations. In the most general sense, the IRS has imposed certain recordkeeping, substantiation and reporting requirements on grantmaking private foundations, ensuring that the grants are spent for the purposes they were made. This stringent rule applies even more rigidly to grants made overseas.

Even if the organization is not a private foundation, an organization setting up a microphilanthropy program needs to have the infrastructure in place to keep adequate records and to be able to substantiate its micro-giving activities. This may be more difficult in the context of many small grants, as there are numerous grantors and/or grantees involved and thus, a greater need for accuracy and detail.

All in all, the culture of microphilanthropy and peer-to-peer social change is rapidly expanding and perhaps could net a greater good in the world. Many small non-profits are attempting to implement such microphilanthropy initiatives. Ten years ago, microfinance was an unknown term and now, it is becoming increasingly common. Perhaps microphilanthropy will benefit from similar growth. Time will tell.

– Iram Ansari

Iram Ansari is a new contributor to the Nonprofit Law Blog and an exempt organizations attorney working in the San Francisco Bay Area.