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The International Journal
of Not-for-Profit Law

Volume 3, Issue 2, December 2000

A publication of the International Center for Not-for-Profit Law

Table of Contents

Letter from the Editor


Church and State Relationships in German "Public Benefit" Law
By Dr. Christine R. Barker

Evaluating Tax Incentives for Donations to Public Benefit Organizations
By Paul Bater

Freedom of Association: Recent Developments Regarding the "Neglected Right"
By Leon E. Irish and Karla Simon

The Government of Israel's Control of NGOs: Legal Dilemmas and Structural Constraints
By Nitza Nachmias and Amiram Bogot


Introduction to the Non-Profit Sector in the Balkans
By Jenny Hyatt
Reviewed by Douglas Rutzen

The Third Force
By Ann M. Florini
Reviewed by Karla Simon

Weak Democracy and Civil Society
By Imco Brouwer
Reviewed by Sam Charron

Case Notes

Central and Eastern Europe:

Latin America and the Caribbean:

Middle East and North Africa:
Egypt | Tunisia

North America:
the United States

Newly Independent States:
| Russia

Country Reports

Asia Pacific:
| Australia | the Philippines

Central and Eastern Europe:

Latin America and the Caribbean:
Regional | Dominican Republic | Guatemala | Peru

Middle East and North Africa:
Bahrain | Israel | Palestine | Yemen

Newly Independent States:
Kazakhstan | Ukraine

North America:
the United States

South Asia:
India | Pakistan

Sub-Saharan Africa:
Ghana | South Africa

Western Europe:
Belgium | France | Germany | Ireland

International Grantmaking

Conducting Overseas Site Visits
By Victoria B. Bjorklund and Jennifer I. Goldberg  

- - - - - - - - - -

Editorial Board

International Grantmaking

Conducting Overseas Site Visits*

By Victoria B. Bjorklund and Jennifer I. Goldberg
Simpson Thacher & Bartlett,
New York, N.Y.

The American public is the most generous in the world in terms of dollars given, and U.S. donors are becoming more and more involved with international issues. The enormous range of international activities conducted or funded by U.S. charities occasionally gives rise to the need to conduct site visits overseas. This article discusses how U.S. charities may use site visits to ensure, for themselves, their donors, and in some cases, the Internal Revenue Service (the “IRS”), that foreign activities are being conducted in conformity with the missions and standards of the U.S. charity and that funds are used for the purposes for which grants were made.

A U.S. charity may receive tax-deductible charitable contributions from U.S. donors and use these funds to conduct activities abroad. A U.S. charity may directly conduct programs in a foreign country,[1] or it may fund activities abroad through another organization located in the foreign country.[2]In the latter instance, to ensure that U.S. donors are eligible to receive a federal income tax deduction for their contributions, the U.S. charity must ensure that it has “discretion and control” over the flow of funds to the foreign recipient (i.e., the U.S. charity must show that it has full control over funds donated to it and discretion to ensure that the funds are used to carry out its charitable purposes).[3] In addition, a U.S. charity may fund overseas activities by providing financial assistance to a foreign government, so long as the funds are used exclusively for charitable purposes and the grant furthers the purposes for which the U.S. charity was formed. Furthermore, if the U.S. charity is a private foundation, extensive recordkeeping is required in connection with international grants.[4]

Site visits provide one excellent way for a U.S. charity to evaluate whether its overseas programs are effective, to determine that funds are used efficiently and to illustrate its exercise of discretion and control. While in many respects the planning and execution of international site visits is identical to that required for domestic visits, [5]there are special issues that may arise for U.S. funders abroad.

In any site visit to a foreign country, the U.S. representative must be prepared for language barriers and cultural differences. Cultural sensitivity is of paramount importance. For example, is it proper to meet with a local official in your office, or is it more appropriate for you to travel to the official’s office? What is the relationship between men and women? Is it acceptable for a woman to conduct a business meeting with a man? If not, how should this be handled? As in the domestic context, grantmakers can show respect for international grantees by arranging their visit at a mutually convenient time, stating in advance what they wish to learn from their visit and specifying with whom they wish to meet.[6]

A site visit may be used to conduct a financial audit or program audit, or to examine recordkeeping, and it is important to keep specific objectives in mind when planning such a visit. Keep in mind that accounting and legal requirements and practices will likely be different, and in some cases may be incompatible with requirements of U.S. laws. Determine in advance whether documents are in English or will need to be translated.

If a financial audit is planned, make sure that the finance director will be on hand and will have the necessary financial records available. Be prepared for accounting methods to be different and for funds to be reflected in local currency. Keep in mind that accepted practices in the U.S. (e.g. separate bank accounts, segregated funds) may be illegal or impossible in some countries.

If a program audit is planned, make sure that the relevant program officers will be available. If necessary, request that board members be available to discuss results. If seeing a grantee’s program in action would be helpful in assessing its effectiveness, ensure that your visit is designed to minimize disruption of the grantee’s services to clients.

In all cases be aware that foreign organizations may have the ability to conduct activities that U.S. charities cannot (e.g., charities formed in Germany may participate in political campaigns, although this is prohibited for U.S. charities). However, the IRS requires that foreign activities funded by U.S. charitable dollars comply with U.S. rules. Thus, among other things, foreign activities cannot result in private inurement or private benefit. The IRS has stated that “reliance on local law or custom as to what constitutes a charitable operation will not obviate an inquiry into whether private benefit or inurement is involved.” [7] In other words, “if local custom provides that [funds will be given] to a person who dispenses money as he/she sees fit with no separate account for moneys received from the United States for charitable purposes” -- a method of disbursement that raises a substantial likelihood of private inurement or benefit -- a foreign charity with such a program would have its application of U.S. tax exemption denied. A U.S. charity providing funds for these disbursements runs the risk of jeopardizing its tax-exempt charitable status for supporting non-charitable activities.[8]

Similarly, a U.S. private foundation, which is prohibited from lobbying, cannot fund lobbying abroad (Keep in mind that lobbying may have a different meaning in countries with different political systems).[9] A site visit is a good time to remind grantees’ program directors of these rules.

In some instances, site visits may be necessary or useful to comply with IRS requirements. As stated above, a U.S. donor will be eligible to receive a charitable contribution deduction only if the U.S. charity exercises discretion and control over the contributions it receives. Site visits are not specifically required by the Treasury Regulations to illustrate discretion and control, but site visits can be evidence that a U.S. charity is actively supervising the expenditure of donated funds. The IRS has stated that discretion and control entails more than “merely being able to decide whether or not to contribute [to the foreign recipient] and being able to require the foreign recipient to furnish a periodic accounting.”[10] In one precedential ruling, the IRS cited with approval a U.S. charity that stated that it would maintain control and discretion by (1) making an investigation of the purpose to which the funds would be put, (2) entering into a written agreement with the recipient organization and (3) making field investigations to see that the funds were spent in accordance with the agreement.[11] Indeed, in connection with a recent application for recognition of exempt status, the IRS requested that a U.S. public charity with significant international provide a supplemental submission confirming that it would conduct field investigations with regard to its foreign operations.[12]

Site visits may be especially useful if a U.S. charity becomes aware that a foreign grantee may be diverting funds from charitable purposes. In the event of diversion, Treasury Regulations require a U.S. private foundation to, among other things,

  1. take all reasonable and appropriate steps either to recover the diverted funds or ensure their restoration and
  2. require the foreign organization to take “extraordinary precautions” to prevent future diversions.[13] One effective way to comply with these rules is to send a representative of the U.S. charity to inspect books and records of the foreign grantee and to monitor accounting practices and procedures. Even if a U.S. charity is not required to take these steps, it may be prudent to do so.

About the Authors and Editors

Victoria B. Bjorklund is a partner at Simpson, Thacher & Bartlett, where she heads the firm’s Exempt Organizations Group. She is the co-author of New York Nonprofit Law and Practice (Lexis Publishing 1997). Jennifer I. Goldberg is an associate in the Simpson Exempt Organizations Group and a graduate of New York University (J.D.) and the University of Michigan (B.A.).

This article was edited by Timothy R. Lyman, a partner in the Hartford, Connecticut office of Day, Berry & Howard LLP, and Jane Nober, special council at the Council on Foundations.

* This article was originally published as a “Legal Dimensions” paper in the Council of Foundations’ quarterly journal, International Grant-making, and is reproduced here with the kind permission of the Council. The “Legal Dimensions” series is coordinated by the Council on Foundations with assistance from the Day, Berry & Howard Foundation (“promoting positive developments in the law, legal scholarship and legal education”). Inquiries may be addressed to the Council's International Programs department at 202/466-6512 or to Timothy R. Lyman, president of the Day, Berry & Howard Foundation, at 860/275-0329.


[1] See Rev. Rul. 71-460, 1971-2 C.B. 231; Rev. Rul. 68-165, 1968-1 C.B. 253.

[2] See Rev. Rul. 66-79, 1966-1 C.B. 48; Rev. Rul. 63-252, 1963-2 C.B. 101.

[3] See Rev. Rul. 66-79, supra.

[4] See Section 4945(h). All section references are to the Internal Revenue Code of 1986, as amended. The Internal Revenue Code (the “Code”) provides that a private foundation will be subject to excise taxes on grants made to a foreign charity unless: the foreign charity has applied to the IRS and received recognition as a public charity exempt from tax under Section 501(c)(3) of the Code; a determination is made that the foreign charity is the equivalent of a U.S. public charity, see Treas. Reg. § 53.4945-5(a)(5); or the U.S. private foundation exercises expenditure responsibility over the grants. For more information on international grantmaking by private foundations generally, see J. Edie and J. Nober, Beyond Our Borders, (Council on Foundations, 2 nd ed. 1999). Further information on foreign equivalence to a U.S. charity is contained in the January 1999 International Dateline Legal Dimensions article “What’s Behind the Foreign Public Charity Equivalence Affidavit?” by Betsy Buchalter Adler and Ingrid P. Mittermaier. For further information on expenditure responsibility, see the November 1998 International Dateline Legal Dimensions article “Grantmaking by Private Foundations in the International Arena” by Thomas Chomicz. In addition, a grant to a foreign organization that is deemed to be the equivalent of a U.S. private foundation will not be considered a qualifying distribution for purposes of meeting the minimum payout requirements of the Code unless the “out-of-corpus” rules are met, see Milt Cerny and Doug Varley, “The Out of Corpus Rule Reviewed,” Legal Dimensions April 1999.

[5] A fine chapter on site visits is included in B. Kibbe, F. Setterberg and C. Wilbur, Grantmaking Basics: A Field Guide for Funders (Council on Foundations, 1999).

[6] See Grantmaking Basics, supra note 5, at 32.

[7] See James F. Bloom, Edward D. Luft and John F. Reilly, Foreign Activities of Domestic Charities and Foreign Charities, IRS Exempt Organizations, 1991 Exempt Organizations Continuing Professional Education Technical Instruction Program, 230.

[8] Id.

[9] See id. at 234

[10] Id at 230.

[11] Rev. Rul. 75-65, 1975-1 C.B. 79.

[12] For more information on this IRS request, contact the authors.

[13]Treas. Reg. § 53.4945-5(e)(1).  

Embargoed Countries

For further information on grants to NGOs in "embargoed countries", one should consult the web site of the US Treasury's Office of Foreign Asset Control (OFAC).


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