Corporate Philanthropy and Law in the United States: A Practical Guide to Tax Choices and an Introduction to Compliance with Anti-Terrorism Laws

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Corporate Philanthropy and Law in the United States: A
Practical Guide to Tax Choices and an Introduction to
Compliance with Anti -Terrorism Laws
By Thomas Silk *
The modern legal empowerment of corporate philanthropy in the United States, the increased
complexity of tax law, globalization, and the increased duties of due diligence required of grantmakers
by actions taken by the President, the executive branch, and Congress in response to the terrorist
attacks of September 11, 2001 —together, these factors place increased demands on management in
designing and administering an effecti ve corporate philanthropy program. This article offers guidance
on the basic tax choices available to today’s manager of a corporate giving program in the United
States, and it introduces a new requirement —compliance with anti -terrorism laws. But first, a brief
review of the development of the two areas of law central to corporate philanthropy in America:
corporation law and federal income tax law.
Legal Context
Public policy in America has not always favored corporate philanthropy. Corporate law and feder al tax
law have developed along separate but remarkably similar evolutionary paths, leading to an
acceptance of corporate philanthropy. Yet fundamental questions about the legal rationale and
structure of corporate philanthropy continue to intrigue and con cern prominent legal scholars. [1] During the early stage of the development of modern corporate law, state courts interpreted the law
to require corporations to pursue pro fit maximization. [2] Corporate grantmaking was justified only to
the extent that it could contribute to the bottom line. But other views soon emerged, aiming for
broader man agerial discretion by urging that the interests of other constituencies be balanced against
the interest of shareholders or claiming that no conflict exists between a corporation’s long -term
interests and those of the community. [3] The last major legal challenge to corporate philanthropy
from a state law perspective was made in 1953 in A. P. Smith v. Barlow, [4] in which a group of
shareholders challenged the legality of corporate grantmaking. They sought a declaratory judgment
that the company’s board of directors acted beyond its powers in authorizing a donation of $1,500 to
Princeton Universit y. In a celebrated opinion, the Supreme Court of New Jersey ruled against the
shareholders. It upheld New Jersey statutory law that expressly permitted corporate contributions,
and added that “corporate power to make reasonable charitable contributions exi sts under modern
conditions, even apart from express statutory provision.” The Court observed further that “free and
vigorous non -governmental institutions … are vital to our democracy and … withdrawal of corporate
authority to make … contributions within reasonable limits would seriously threaten their continuance.”
At the federal tax level, the development of laws providing a tax incentive for corporate philanthropy
followed a similar course, with a slow movement from opposition to encouragement and support of
corporate philanthropy. [5] In 1918, Congress expressly refused to extend the charitable contribution
deduction from individuals to corporations. [6] Deductions by corporations for payments to charity
were allowed only if they “represented consideration for a benefit flowing directly to the
corporation.” [7] But that pattern was broken as the result of the 1934 U.S. Supreme Court decision
in Old Mission Portland Cement Co. v. Helvering .[8] The Court upheld the denial of federal income tax
deductions for corporate contributions of $1,000 per year over a four -year period to the San Francisco
Community Chest. The Court pointed out that Congress had not extended the charitable contribution
deduction to corporations. Although the expe nditure “resulted in good will” toward the corporation,
there was no evidence, said the Court, “of any direct benefit” to its business. In response to a
lobbying campaign led by community chests, Congress quickly responded by amending federal income
tax la ws to include, for the first time, a provision expressly permitting corporations to deduct
charitable contributions. New Deal concerns about the growing economic power of large corporations
prompted strong opposition from President Franklin Roosevelt and m any Democratic members of
Congress, [9] but the amendment was ultimately adopted. [10]

Tax Choices
Corporate philanthropy has become a permanent feature of the legal landscape in the United States.
To manage a corporate giving program successfully requires a working knowledge of the underlying
tax issues. In this article, we explore the four ma jor tax choices available for domestic and
international corporate giving —(1) direct corporate giving, (2) company foundation grants, (3) donor –
advised fund grants, and (4) promotional or marketing expenses —and we consider major non -tax
legal restrictions on charitable giving. Each choice carries benefits as well as limitations. Our goal is to
provide a corporate giving manager with preliminary guidance in sorting through these options so as
to make at least a tentative determination as to which choices bes t serve the interests of the company
in most domestic or international giving situations. [11] Direct Corporate Giving: Domestic
Corporate law does not restrict the ability of a corporation to make gifts that promote corporate goals,
even if there is no direct and immediate economic benefit to the corporation, as we learned from A.P.
Smith v. Barlow. Federal tax law imposes limitations, however, if the corporation seeks a cha ritable
deduction. Like other taxpayers, a corporation may obtain a charitable deduction only if it gives to a
qualified donee, such as a qualified charitable organization or a governmental unit for public
purposes. [12] Thus, corporations may not deduct contributions made directly to individuals, however
compelling the cause. This restriction may be determinative in causing the corporation to make a
particular grant through the company foundation rather than through the company’s giving program.
In addition, percentage limitations apply to corporate charitable deductions: a corporation may not
deduct charitable contributions in excess of 10 percent of the corporation’s taxabl e income. [13] Example 1. Corporation A has offices in New York and San Francisco. It makes grants through its
corporate giving program and also through the A Foundation, which Corporation A funds and controls.
Corporation A has long been known as a major funder of the arts. Its bo ard is considering a five -year
model program of grants and awards directly to deserving artists on both coasts in the total annual
amount of $500,000. What tax choices are preferred? What tax choice should be avoided?
Comment. Funding the program directly through the corporation’s giving program should probably be
avoided, since it will deprive the corporation of the flexibility to fund individual artists directly. The
program may legitimately be funded by A Foundation, however, once it has obtained Interna l Revenue
Service (IRS) approval of its grantee selection and monitoring procedures. [14] Alternatively, the
donor -advised fund model [15] may be particularly useful if A Foundation intends to attract other
foundation and corporate support for the grants and awards program for artists.
Direct giving by a corporation may include property as well as money. Corporations may claim a
charitable contribution deduction for gifts of inventory. Ordinarily, the amount of the deduction is
limited to the cost of the inventory items rather than their fair market value. [16] For computers and
other qualified inventory items meeting certain requirements, a larger deduction may be taken, equal
to the lesser of (a) twice the cost and (b) half the difference between cost and market. [17] Thus, if
the manufacturer donates a qualified computer that costs $500 and sells for $3,000 to a Section
501(c)(3) organization, the charitable deduction is the lesser of $1,000 and $1,250. [18] Direct Corporate Giving: International
Two rules limit foreign charitable contributions by a domestic corporation. Like any U.S. taxpayer, a
dome stic corporation may deduct charitable contributions only if made to a charitable organization
“created and organized in the United States.” [19] But unlike any other U.S. t axpayer, a domestic
corporation may take a charitable deduction for a contribution that will be used outside of the United
States only if the U.S. charitable donee is a corporation. [20] Example 2. Corporation B, located in Santa Fe, New Mexico, funds performing arts organizations,
including the Santa Fe Opera. The director of the Opera seeks funding from Corporation B for its

foreign tour and for bringing a Stuttgart Opera production to San Francisc o. May Corporation B fund
those activities directly?
Comment. Since the Santa Fe Opera is “created and organized in the U.S.,” Corporation B may fund
it directly, deducting the contribution under Section 170. [21] This is so even though the activities
funded will occur entirely outside the United States. Indeed, the deduction would be allowed for the
contribution even if the sole activity of the U.S. charity occurred outside the United States. [22] To
deduct the contribution related to the Stuttgart Opera production, Corporation B must be careful to
make its contribution to the domestic charity, the Santa Fe Opera, and subject to its discretion and
control, rather than directly to the Stuttgart Opera.
Multinational U.S. corporations with foreign source income must also take into account the interplay of
the foreign tax credit and the charitable contribution deduction. A higher foreign tax credit results in a
lower U.S. tax liability. In computing the foreign tax credit limitation, a taxpayer must determine its
U.S. source income and its foreign source income, and it must allocate U.S. income tax deductions in
accordance with the gross income from those two sources. The current regulations require
proportionate allocation of charitable contribution deductions between U.S. and foreign source income.
To the extent that the deduction is allocated aga inst foreign source income, it will reduce the available
foreign tax credit. [23] However, foreign grants by company foundations of multinational U.S.
corporations do not re duce available foreign tax credits. Consequently, where foreign tax credits are at
stake, grants by company foundations rather than direct contributions by the corporation may be the
preferred choice.
Company Foundation Grants: Domestic
Most company founda tions are classified as private foundations under federal tax law, because all the
assets come from a single source: the corporate founder. Thus, company foundations are subject to
all of the rules applicable to private foundations, including a minimum ann ual payout obligation of 5
percent of the net fair market value of the foundation’s assets; an annual excise tax of 1 to 2 percent
of the net investment income of the foundation; and an obligation to avoid imprudent investments,
excess holdings of interest s in business, and specified improper expenditures. [24] Because of the
close relationship between a company and a company foundation, the private foundation obligation
that is often most troublesome to company foundations is the duty to avoid self -dealing.
Federal tax law forbids private foundations from engaging in transactions that confer an economic
benefit on a disqualified person. For a company foundation, the disqualif ied person category includes
its directors, key employees, and family members as well as the corporation and the company’s
officials and other agents if, as is generally the case, the company is a substantial contributor. [25] In
this section, we briefly discuss areas of particular self -dealing risk to company foundations where the
IRS has provided guidance.
Pledges. Self -dealing includes the use of company foundation assets to pay the charitable pledge of
the corporation, the corporation’s CEO, or any other disqualified person to the
foundation. [26] Financial penalties are not the only possibl e adverse consequence of a private
foundation’s payment of a charitable pledge made by a disqualified person. In some circumstances,
payment of the pledge may be treated as a disguised or constructive dividend to the pledgor who is
also a shareholder of th e corporation. [27] Shared Expenses. Under what circumstances may a foundation and a related company share facilities,
equipment, goods, and services? A quick guide is appen ded containing various examples of shared
foundation operating expenses. “Follow the money” is as helpful a guide to solving self -dealing
problems as it is to solving more popular mysteries. If economic benefit (the money) flows from the
company to the fou ndation, self -dealing is probably not an issue, but if it flows the other way, from
the foundation to the company or related disqualified persons, self -dealing may be involved. Thus, the
company may pay for or provide office space, supplies, and equipment for the foundation. The
foundation may pay these expenses itself if the payee is an unrelated provider. A similar pattern
applies to most other foundation operating expenses. Only a few expenses, such as salaries and

professional fees, [28] lend themselves to an allocation or reimbursement arrangement between the
foundation and the company, based on detailed record -keeping. Advice from legal counsel familiar
with the self -dealing rules is advisable in structuring such an arrangement.
Tickets. Company foundations, particularly those that fund performing arts organizations, frequently
purchase or receive complimentary tickets from prospective grantees. The foundation must take great
care in handling such tickets to avoid self -dealing. The IRS ha s ruled that bifurcation is not a
solution. [29] That is, the foundation may not avoid self -dealing by requiring the CEO or the company
to pay the cost or fair market value of the meal and entertainment with the foundation paying the
charitable contribution portion of the ticket. The CEO still receives an improper benefit from the
expenditure of foundation funds.
Example 3. Foundation C purchased tickets to 39 fundraising act ivities conducted by various charities
that it normally supports. Most of the tickets were used without charge by the directors, officers, and
employees of Foundation C, but tickets to 17 of the events were given to the CEO of Corporation C
and guests —even though the CEO was not an officer, director, or employee of Foundation C. Did the
use of tickets by the CEO and his guests constitute self -dealing? What about the use of the tickets by
the directors, officers, and employees of Foundation C?
Comment. The m aterial facts in our example are taken from an IRS ruling that determined that
expenditures allocable to the benefits received by the CEO and his guests constituted self -dealing.
Foundation C failed to show that any portion of those expenses were reasonabl e administrative
expenses. The CEO was acting as an agent of Corporation C, not Foundation C. However, the IRS
ruled that the tickets provided to the directors, officers, and employees of Foundation C were
reasonable and necessary expenses related to the p erformance of their foundation duties and did not
constitute self -dealing. [30] Thus, a company foundation must avoid transactions where the company or its directors, office rs, or
employees, who have no relationship to the foundation, may receive tangible economic benefits as a
consequence of a foundation expenditure. For this reason, managers of corporate philanthropy
programs often prefer to use company funds, deductible ei ther as charitable contributions or as
business expenses, to purchase tickets to charitable fundraising events, rather than company
foundation funds.
Incidental and tenuous benefit. Not all benefits are prohibited. IRS regulations provide that an
exception to self -dealing exists for an incidental or tenuous benefit received by a disqualified person
from the use of foundation income or assets. [31] The IRS has ruled that:
[A]n incidental and tenuous benefit occurs when the general reputation or prestige of a disqualified
person is enhanced by public acknowledgement of some specific donation by such person, when a
disqualified person receives some other relatively minor benefit of an indirect nature, or when such a
person merely participates to a wholly incidental degree in the fruits of some charitable program that
is of broad public interest to the community. [32] The IRS regards public recognition and good will as being without economic value for purposes of
donor benefit analysis.
Example 4. Foundation D awards scholarships to high school students. The foundation insists that all
publicity conce rning the scholarships credit Corporation D as well as Foundation D. Has the foundation
engaged in self -dealing?
Comment. No, the Foundation has not engaged in self -dealing. This is a classic example of the sort of
public recognition to a disqualified person (Corporation D) that constitutes a permissible “incidental
and tenuous benefit” rather than self -dealing. [33] Thus a company may receive recognition, including
the display of the company name and logo, from the philanthropic efforts of the related company
foundation without causing the foun dation to violate the self -dealing rules. [34]

Disaster relief. In a major post -September 11, 2001, pronouncement, the IRS stated that “providing
aid to relieve human suffer ing that may be caused by natural or civil disaster or an emergency
hardship is charity in its most basic form.” [35] The IRS has not always been able to locate firm
ground from which to provide guidance, particularly where company foundations seek to provide
disaster relief to company employees. [36] The enactment of the Victims of Terrorism Tax Relief Act, which added IRC § 139 to the Internal
Revenue Code, has eliminated some confusion. It provides that gross income does not include any
amount received by an individual as a disaster relief payment. S ection 139 defines qualified disasters
to include acts of terror, a disaster resulting from an airplane, train, or other common carrier accident,
and any other disaster declared by the appropriate local, state, or federal authorities. [37] Section 139
also defines a qualified disaster relief payment.
For company foundations wanting to make disaster relief payment to employees, the legislative
history of the act sets forth the ground rules. [38] The IRS will presume that qualified disaster
payments made by a private foundation to employees (or their family members) are charitable, are
not self -de aling, and do not constitute income to the recipient if: (1) the class of beneficiaries is large
or indefinite, (2) the recipients selected are based on an objective determination of need, and (3) the
selection is made using either an independent selection committee or other procedures designed to
ensure that any benefit to the employer is incidental and tenuous. The presumption does not apply if
the payments are made to disqualified persons. [39] Example 5. Corporation E is located in an area affected by a severe flood that was declared a disaster
by the President. Corporation E made grants available to all of its employees who were adversely
affected by the flood. The grants were intended to reimburse employees for medical, temporary
housing, and transportation costs, but not to reimburse the cost of luxury or decorative items or
services. The employees were not required to provide proof of actual expenses. The program
contai ned procedures to assure that the grant amounts were reasonably commensurate with the
amount of allowable reimbursable expenses.
Comment. The IRS ruled that payments to the employees, under similar facts, are excludable from
their gross income under IRC § 139. [40] It is unlikely that the payments could be ded ucted by
Corporation E under IRC § 170 because the beneficiary class consists of all employees and is not
indefinite, a fundamental charitable requirement. However, the ruling also states that the payments
were not gifts and were made to compensate employe es. Accordingly, the payments should qualify as
deductible business expenses under IRC § 162.
Company Foundation Grants: International
Grants by a company foundation to a U.S. charity that makes grants abroad or conducts direct
operations outside of the Un ited States are subject to the same federal tax rules as grants made by
that private foundation to any other U.S. charity. [41] Most such charitable organizations are classi fied
as public charities by the IRS, making grant administration a straightforward and relatively simple
If a company foundation prefers instead to make grants directly to a non -U.S. charity, two methods
are available: expenditure responsibility gr ants and equivalency determinations. [42] Expenditure responsibility . IRS regulations require private foundations to follow expenditure
responsibility procedures in making g rants to any grantee that is not a public charity. [43] The
procedures consist of four steps: (1) a pre -grant inquiry, (2) a written grant agreement, (3) reports
from the gr antee on the status of the grant, and (4) disclosure of such grants to the IRS on Form 990 –
PF. If the grantee is not the equivalent of a U.S. private foundation, then the grantee must, in
addition, maintain the grant in a separate fund restricted to a char itable purpose. The expenditure
responsibility route allows for considerable flexibility. Edie and Nober comment that if the foundation
“is willing to follow the required procedures, it may make a grant for charitable purposes to virtually
any kind of orga nization almost anywhere in the world.” [44]

Equivalency determination . If the company foundation is able to determine that the non -U.S. grantee
is the equivalent of a U.S. public charity, then the foundation may make the grant without exercising
expenditure responsibility. Unfortunately, the documentation required to make that determination is
extensive; it is virtually the same information the grantee would be required to p rovide to the IRS to
obtain a tax exemption. Traditionally, the actual equivalency determination was made by legal counsel
for the private foundation in a written legal opinion, which protects the foundation and its directors.
Since 1992, however, IRS has permitted a private foundation to make its determination based on a
written affidavit of the grantee, without the need of a written legal opinion. [45] Which option is prefe rable? Few company foundations are likely to evaluate the strengths and
weaknesses of each option in the same manner. Some foundations may find the expenditure
responsibility rules daunting, while other foundations, whose normal grantmaking procedures incl ude
a pre -grant inquiry, a written grant agreement, and grantee reports, may find the expenditure
responsibility procedures quite familiar and not at all burdensome. Whether equivalency determination
is arduous or workable will often depend on whether the non -U.S. charity has the desire and the
expertise to generate the many required documents and to translate them into acceptable English.
The burden of an equivalency determination is likely to be experienced differently by the foundation
whose staff makes its own determination than by the foundation that turns the entire determination
over to legal counsel.
Foreign tax credit. Earlier, we considered the reduction in the foreign tax credit due to the
requirement of allocating charitable contribution deductio ns to foreign source income. [46] No such
requirement applies, of course, if the charitable expenditure is made in the form of a grant from a
company foundation rather than as a direct corporate contribution. [47] For this reason, multinational
U.S. corporations often prefer to make charitable expenditures from endowed company foundations or
do nor -advised funds rather than directly from the company.
Example 6. Corporation F, a music production company, is a U.S. corporation with offices in United
States and Ireland. F’s directors are young and idealistic, and they regard themselves as activists
promoting positive social change. In particular, they believe that F ’s goals are furthered by
encouraging the development of civil society internationally. Accordingly, the directors of Corporation
F want to expand F’s domestic matched giving program to F’s employees in Ireland.
Comment. Since the organizational beneficiari es of gifts by F’s employees in Ireland will presumably
be Irish charities rather than U.S. charities, F may not fund the match directly because F may only
deduct contributions made to a U.S. charity. Even if the gifts are matched by F’s company foundation ,
some procedure must be devised to assure that the funds are spent by the Irish grantees for
charitable purposes. One option, growing in popularity, is to enter into an agreement with a qualified
U.S. international charitable facilitator, knowledgeable ab out local charities in a particular region
abroad. The agreement would require the facilitator to review the gifts by the employees to determine
whether the Irish donees satisfied specified charitable criteria. The agreement would also provide that
Corpora tion F or its company foundation would make contributions to the facilitator to fund the
qualified employee gifts.
Donor -Advised Funds: Domestic
The rapid and widespread growth of donor -advised funds is a major development in modern
philanthropy. [48] The benefits of donor -advised funds are well advertised. [49] Properly used, a
donor -advised f und can enhance a company’s corporate philanthropy program. [50] Donor -Advised Funds: International
International grants need not be more complex than domestic grants. In fact, a significant number of
international grants are now made by means of grants from corporations and other taxpayers to
donor -advised funds that specialize in facilitating grants abroad. We refer to donor -advised funds that
ha ve developed the resources and expertise to facilitate and oversee the proper use of grant funds
abroad as U.S. international charitable facilitators. The list of qualified international charitable

facilitators has been growing. It has recently become poss ible for a U.S. individual, corporation, or
charitable organization to make contributions or grants by such means to fund public benefit activities
occurring in most regions of the world. [51] Example 7. Corporation G, with headquarters in New York, is a multinational corporation that
designs, manufactures, and sells casual clothing throughout the world. G has been actively involved in
international philanthropy for over 50 y ears. Some years ago, the board decided to operate its
international grantmaking program entirely through its endowed foundation rather than through the
Comment. G Foundation makes some foreign grants by exercising expenditure responsibility, a nd it
makes others through U.S. international charitable facilitators. But most of its grants abroad are
made, using equivalency determinations, to donor -advised fund arrangements within two nonprofit
organizations: a major foundation in France through whi ch G supports European charities, and a
highly regarded charity in Japan through which G supports charities in Asia. G Foundation has qualified
those non -U.S. organizations as foreign public charity equivalents under U.S. law to enable them to
facilitate e quivalency determination grants from other U.S. foundations as well as from G Foundation.
Promotional Expenditures: Domestic
Corporate contributions may qualify as deductible business expenses under IRC §162 as well as
deductible charitable contributions u nder IRC §170. These deduction categories often overlap. Only
rarely will the choice be dictated by tax law. But the corporate manager should be aware that Section
162(b) bars a deduction under Section 162 if the expenditure would qualify under Section 170 but for
percentage and other specified limitations. Usually, however, the company will be free to follow
budgetary or other managerial policies in making that choice.
Example 8. For many years, Corporation H had made a practice of contributing $10,000 to the local
PBS station during its annual year -end fundraising effort. Corporation H receives on -air recognition
and is listed as a donor on the PBS website. Is that contribution deductible as a charitable contribution
under Section 170 or as a business expe nse under Section 162?
Comment. Since the PBS station is incorporated in the U.S. and is exempt under IRC § 501(c)(3),
Corporation H’s contribution will qualify for a deduction under Section 170 if this deduction, together
with all other charitable deducti ons in the current year, does not exceed 10 percent of the taxable
income of H. Since H receives a business benefit from its contribution due to favorable publicity, it
may, alternatively, deduct the contribution as a business expense under Section 162.
Pr omotional Expenses: International
Similarly, a corporation will often have the option of deducting its international expenditure as a
business expense under IRC § 162 rather than as a charitable contribution, although management
should carefully scrutinize the adequacy of the benefit expected by the corporation from the
expenditure, to make sure the deduction passes muster under Section 162.
Example 9. Corporation M is a developer and manufacturer of computers and software. It also has an
affiliated company foundation. Its co -founders and sole shareholders were born in Taiwan, in the same
small village on the other side of the island from Taipei. M also has an assembly plant near Taipei. The
founders want to give back to their village by contributing $1.5 million to restore a local temple that
has fallen into disrepair and to build a community center. What tax pitfalls should M’s corporate giving
manager be aware of? What tax choice is best?
Comment. In the absence of any facts about post -contribution recognition to Corporation M, the
business benefit to M may not be direct enough to qualify the payment, without risk, as a deductible
business expense under IRC § 162. We know that M may not make a direct grant to a Taiwanese
charity to achieve the founder’s charitable goals because the charity is not a U.S. corporation. M could

make the grant through its company foundation, but the foundation lacks the resou rces to administer
and oversee the construction project. Corporation M identified an international charitable facilitator
with recognized on -the -ground oversight capacity in Taiwan. With legal counsel’s assistance,
Corporation M established a donor -advised fund relationship with the charitable facilitator that had
administered economic development and community restoration projects in East Asia. The facilitator
agreed to take on the village project by selecting a local general contractor and by monitoring t he
repair of the temple and the design and construction of the community center, subject to the advice of
Corporation M.
Non -Tax Legal Restrictions on Charitable Giving
Any analysis of tax choices in corporate philanthropy would be incomplete without consideration of
other laws that may limit or restrict those tax options. Four statutory provisions are relevant: (1) the
Export Administration Act [52] (“EEA”), (2) the Trading with the Enemy Act [53] (“TWEA”), (3) the
International Emergency Economic Powers Act [54] (“IEEPA”), and (4) the USA Patriot
Act [55] (“USAPA”).
Each act contains distinctive pr ovisions. The EEA, regulating exports generally, is least restrictive. It
does not limit monetary contributions, and its limitations on donations of goods contain an important
humanitarian exception allowing most donations of goods that meet basic human ne eds. The TWEA
regulates or prohibits donations of money and goods to listed nations, currently Cambodia, Cuba, and
North Korea. Under the IEEPA, contributions of money may be regulated or prohibited whenever a
national emergency has been declared, but dona tions of goods require an additional presidential
determination. Determinations under IEEPA are currently in effect for Angola, Haiti, Iran, Iraq, and
Libya, though most restrictions against Libya were lifted in April 2004. {OK?}
The broadest prohibitions under IEEPA are contained in Executive Order 13224, [56] promulgated
shortly after the terrorist attacks of September 11, 2001. It prohibits the donation of money or
humanit arian articles, such as food, clothing, and medicine, to specified donees. For the first time, the
proscribed donees are individuals, organizations, and other “listed persons,” rather than nation -states.
Within a month after the Executive Order, Congress p assed USAPA, which adds a list of specially
designated nationals and blocked persons, expands jurisdiction over the crime of providing support for
terrorism, and allows for civil penalties or imprisonment of up to 15 years for any person who provides
mater ial support and resources knowing or intending that they are to be used in terrorist acts by listed
foreign terrorist organizations.
In response to concern in Arab American and American Muslim communities about the chilling effect of
the Executive Order an d USAPA on legitimate charitable contributions to organizations, the
government issued a document entitled U.S. Department of the Treasury Anti -Terrorist Financing
Guidelines: Voluntary Best Practices for U.S. -Based Charities. [57] Unfortunately, those guidelines call
for due diligence procedures that are so demanding that full compliance may not be possible. For
example, some of the guidelines appear to require information abo ut the grantee that may be beyond
the capacity of any grantor to obtain in some countries and may not be available at all in others. So
long as they remain an expression of Treasury policy, however, a good -faith attempt to comply with
the guidelines and wi th USAPA may reduce the chance of blockage of assets and any other official
action against a grantor. Another choice may carry less risk —and it may be the only option (short of
making no foreign grants) for a grantor that lacks the resources to make even a plausible good -faith
effort. That option is to make grants in sensitive areas only through a qualified intermediary such as a
respected international charitable facilitator, which can exercise, to the maximum extent possible, the
level of due diligence de scribed in the guidelines, as well as check the grantee against the list in
Executive Order 13224 and added by the Patriot Act. [58] Managers of corporate philanthropy progr ams would be well -advised to remain alert for changes in
laws, regulations, and enforcement practices that may modify existing Treasury guidelines or require
an additional level of due diligence and compliance in grantmaking. On May 5, 2003, for example, t he
IRS published a formal request for public comment on “how it might clarify existing requirements that

section 501(c)(3) organizations must meet with respect to international grantmaking and other
international activities.” In its request the IRS mentio ned improper diversion of charitable assets but
also acknowledged the important role of international philanthropy. A likely outcome of the comment
process will be the promulgation of rulings or other documents providing additional guidance under
existing law. It is also conceivable that Treasury may submit additional legislation. But it is a certainty
that the international grantmaking process will become, as a result, more rule -bound.
Table 1
Quick Guide to the Self -Dealing Rules for
Foundation -Related Op erating Expenses
Item of Expense When Permitted When Prohibited
Reasonable salaries
and benefits for
personal services
performed for
1. Paid by Company and
not reimbursed by Foundation.
2. Paid by Company and
reimbursed by Foundation, for
time that is documented by
reasonable time sheets.
3. Paid directly by
Foundation to employee.
1. Foundation can’t pay
where employee who works for
both Company and Foundation,
is a disqu alified person, and fails
to keep reasonable time sheets.
2. Payment can’t take the
form of a loan from Company to
Foundation employee, even if
secured, and even if at market
Legal and accounting
fees of Foundation

1. Paid by Compan y and
not reimbursed by Foundation.
2. Paid by Company and
reimbursed by Foundation, for
work that is for Foundation, as
reflected on the professional
3. Paid directly by
Foundation to third Jparty
Where Foundation pays
Company a nd it is not clear that
the professional work is for the
Travel (such as airfare,
hotels, meals, and
taxis) for Foundation
1. Paid by Company and
not reimbursed by Foundation.
2. Paid by Company and
reimbursed by Foundation, but
only where the expense is
clearly identifiable as a
Foundation expense.
3. Paid directly by
Foundation to employee.
Recommend against
reimbursing Company for travel
with a joint Company J
Founda tion purpose. Extremely
difficult to manage in a legal
Office space, office
equipment purchase or
rental, office supplies,
and telephone for
1. Paid by Company and
not reimbursed by Foundation.
2. Paid directly by
Foundatio n to an unrelated
third Jparty provider.
Foundation can’t pay or
reimburse Company.

Table 2
Quick Guide to International Contributions by Corporations [59] Grantee Can You
Is grant
1. U.S. 501(c)(3) charity
operating outside U.S.
Yes Yes Note that the donee must be a
corporation. Otherwise, the
rules are the same for other
2. Corporate or other private
foundation that funds non -U.S.
Yes Yes Same as above. Must avoid
earmarking grant.
3. “Friends of” organization Yes Yes Same as 2.
4. Donor Jadvised fund of U.S.
Yes Yes Same as 2.
5. Non JU.S. charity with
501(c)(3) status
Yes No No charitable deduction but
may qualify for business
expense deduction.
6. Non JU.S. 501(c)(3)
Yes No Same as 5.
7. Other non JU.S.
Yes No Same as 5.
8. To individual donee for
charitable project in or out of
Yes No Same as 5.

Table 3
Quick Guide to International Grants by Company Foundations [60] Grantee Can
Does grant count
toward minimum
1. U.S. 501(c)(3) classified as
a public charity and operating
outside the U.S.
Yes Yes This grant is treated no
differently than any other
grant to a U.S. public charity.
2. U.S. corporate or other
private foundation that funds
non -U.S. institutions.
Yes Yes Grants to U.S. charitable
grantees other than public
charities require the exercise
of corporate responsibility.
3. “Friends of” organizations Yes Yes Same as 1.
4. Donor Jadvised fund of U.S.
Yes Yes Same as 1, but must avoid
earmarking grant.
5. Non JU.S. charity equivalent
to a 501(c)(3)
Yes Yes Either equivalency grant or
expenditure responsibility
grant is permissible.

6. Non -U.S. charity not
equivalent to a 501(c)(3)
Yes Yes Restrict grant to charitable
project. Expenditure
responsibility grant only.
7. Other non -U.S.
organizations for charitable
Yes Yes Same as 6.
8. To individual grantee for
charitable project in or out of
Yes Yes Same as 6.
Table 4
Comparing the Tax Choices
for Corporate Philanthropy
Tax Choices
under IRC
§ 170)
Donor -Advised
(deductible under
IRC § 162)
Company can control Yes Yes No, but most
donor advice is
Ease of administra -tion Yes No Yes Yes
Grants to individuals
No Yes Varies among
donor -advised
fund charities
Yes, but grantee
may be taxed
Avoid self -dealing
Yes No Yes Yes
Grants to foreign orgs.
No Yes Varies among
donor -advised
fund charities
Avoid withholding on
targeted grants to foreign
Yes Yes No
Least impact on foreign
tax credit
No Yes Varies among
donor -advised
fund charities
* Thomas Silk practices law with Silk, Adler & Colvin, a San Francisco firm specializing in the law of
nonprofit organizations. He is the editor of Philanthropy and Law in Asia (1999), and he has
contributed chapters to Serving Many Masters: The Challenges of Corporate Philanthropy (2003) and
The Josse y-Bass Handbook of Nonprofit Leadership and Management (2004). Copyright 2004 by
Thomas Silk.

[1] See, e.g., Evelyn Brody, Charities in Tax Reform: Threats to Sub sidies Overt and Covert, 66
Tenn. L. Rev. 687 (1998); Jerome L. Himmelstein, Looking Good and Doing Good: Corporate
Philanthropy and Corporate Power (Indiana, 1997). In a recent law review article, Harvard professors
Victor Brudney and Allen Ferrell ask a provocative question: Who in the corporate structure is (or
should be) empowered to authorize corporate charitable expenditures —management or stockholders?
Brudney and Ferrell, Corporate Charitable Giving, 69 U. Chicago L. Rev 1191, at 1192 and 1208
(2002) . They opt for the stockholders, arguing that laws should be enacted to compel corporations to
turn to their stockholders for the selection of charitable donees of the corporation. The authors also
consider the mechanism of imposing such a rule by a statut e applicable to all public investor -owned
corporations, but they prefer the approach of amending IRC § 170 of the Internal Revenue Code so
that corporations may deduct charitable contributions only if the donees are selected by the
stockholders individuall y. Id. at 19.
[2] See Dodge v. Ford Motor Co., 170 N. W. 668, 684 (Mich. 1919). In a case decided at the
dawn of the Automotive Age, the court compelled Ford to d eclare dividends to benefit its shareholders,
rejecting Henry Ford’s argument that because customers were stakeholders too, profits should also be
shared with them by reducing the price of the cars.
[3] For a brief but excellent introduction to these concepts see Choper, Coffee, and Morris,
Cases and Materials on Corporations at 36 -37 (3d ed. 1989).
[4] 98 A.2d 581 (N. J. 1953), appeal dismissed, 346 U.S. 861 (1953).
[5] See Chang, Goldberg, and Schrag, Cross Border Charitable Giving, 31 U.S.F. Law Rev. 563
at 580 -586.
[6] Cong. Rec. 10,426 (1918).
[7] See e.g., Treas. Reg. § 65, art. 562 (1926).
[8] 293 U.S. 289, 293 (1934).
[9] See 79 Cong. Rec. 12,423 (1935).
[10] Revenue Act of 1935, Pub. L. No. 74 -407 § 102(c), 49 Stat. 1014, 1016.
[11] The publications program of the Council on Foundations ( ) has be come
sufficiently comprehensive to provide a solid understanding of the concepts and details of charitable
law and federal income tax law applicable to domestic and international corporate philanthropy. See
e.g., John A. Edie, Expenditure Responsibility: S tep by Step (2002); John A. Edie and Jane C. Nober,
Beyond Our Borders: A Guide to Making Grants Outside the United States (2nd ed., 1999); Jane C.
Nober, Company Foundations and the Self -Dealing Rules (2002); and Betsy Buchalter Adler, The Rules
of the Ro ad: A Guide to the Law of Charities in the United States (1999).
[12] IRC § 170 (c).
[13] IRC § 170(b)(2). Corporate charitable contributions in excess of that limit may be carried
forward and deducted over the next five years, subject to the same annual percentage limitation. IRC
§ 170(d)(2).
[14] IRC § 4945(g)(3). See the discussion of company foundations, below.
[15] See the text acco mpanying notes 48 -49.
[16] IRC §170(e)(1)(A)

[17] IRC §170(e)(3) -(6) .
[18] Ordinarily, however, a corporation that donates inventory property will not take any
deduction under IRC § 170; the deduction will instead come in the ord inary course of business as
though the donated item had been sold.
[19] IRC § 170(c)(2)(A). This statutory limitation may be superseded by treaties. For example,
U.S. tax treaties with Canada, Mexico, and Israel allow U.S. taxpayers to deduct contributions to
charities within those countries, but only to the extent of i ncome derived in those countries. Thus, only
U.S. corporations with a branch or a subsidiary in a treaty country are likely to be able to deduct
contributions made to charities within that country.
[20] IRC § 170 (c)(2). See Table 2, Quick Guide to International Grants by Corporations,
[21] In addition, Corporati on B’s total charitable deductions for the tax year may not exceed 10
percent of B’s taxable income. IRC Section 170(b)(2).
[22] Bilingual Montessori School of Pa ris, Inc. v. Commissioner, 75 T.C. 480.
[23] Id., Cross Border Charitable Giving, note 6 at p. 587 -590. The IRS proposed regulations in
1991 that would alter that allocation rule. The charitable deduction would be allocated entirely to
foreign source income if the taxpayer knows or has reason to know that the contribution will be used
solely outside of the United States, thus reducing the foreign tax credit and the benefit of the
charitable deduction. The proposed regulation provoked strong opposition from international charities,
and it has never become final. Yet it has never been withdrawn. We have been advised, informally,
that current IRS policy permits taxpaye rs to rely on either the current or proposed regulations, as they
[24] Id. The Rules of the Road, note 11, at 29 -39, for a brief summary of the private f oundation
[25] The extension by the IRS of the definition of disqualified person to cover corporate agents
even if they are not major stockholders of the c ompany or foundation mangers of the company
foundation has occurred without fanfare, in the form of unpublished rulings (see TAM 8449008 and
PLR 9021066), and without challenge.
[26] See, e.g. Rev. Rul. 77 -160, 1977 -1 C.B.385 (payment by a private foundation of the church
dues of a disqualified person constitutes self -dealing). A weakening of the doctrine of consideration
and the growth of a social policy favoring charities has resulted in the enforcement of charitable
pledges as a matter of course without reference to legal doctrine. See, e.g. Melvin A. Eisenberg, The
World of Contracts and the World of Gifts, 85 Calif. L. Rev. 821, 824 (1997); Mary Francis Budig e t.
al., Pledges to Nonprofit Organizations: Are They Enforceable and Must They Be Enforced? 27 U.S.F.
Law Rev. 47, 51 (1992).
[27] See e.g., Shephard v. Commissio ner, 340 F.2d 27 (6th Cir, 1964) (cancellation of a debt
confers a taxable economic benefit on the debtor).
[28] For an extensive discussion of shared expenses, i ncluding the citation of authorities, see
Company Foundations and the Self -Dealing Rules, note 11, at 18 -26.
[29] PLR 9021066.
[30] PLR 8449008.

[31] Reg. § 53.4941(d)(2)(f)(2).
[32] Rev. Rul. 77 -331, 1977 -2 C.B. 388.
[33] These basic facts are contained in an IRS private letter ruling. PLR 9431029.
[34] See e.g. Rev. Rul. 73 -407, 1973 -2 C.B. 383 (the IRS found an “incidental and tenuous
benefit” rather than self -dealing where foundation promised to give charity a large sum of money if
charity changed its name to that of a substantial c ontributor to the foundation and agreed to refrain
from changing its name again for one hundred years).
[35] IRS Publication 3833, Disaster Relief: Providing Assi stance through Charitable
Organizations. Available at .
[36] Compare PLR 95116047 and PLR 9544023 (permitting dis aster relief payments by company
foundations to employees who suffered hardship as a result of major disasters where payments did
not benefit disqualified persons) with PLR 199914040 and PLR 199917077 (revoking the former
rulings because the programs may a ttract new employees and existing employees will consider the
program an incentive to continue their employment).
[37] Because IRC § 139 refers to authorities of the U.S. government, company foundations may
be limited in aiding company employees outside of the United States except in connection with acts of
terror or common carrier disasters.
[38] Joint Committee on Taxation, Technical Explanation of the “Victims of Terrorism Relief Act
of 2001,” as passed by the House and Senate on December 20, 2001. Guidance may also be found in
IRS Publication 3833 (see footnote 33, abov e) and in Gitterman and Friedlander, Disaster Relief —
Current Developments, which appears in the Exempt Organizations -Technical Instruction Program for
FY 2003, available at . See also Adler and Rosen, Dis aster! Practices and procedures
for charities providing relief after 9/11: A case study, 96 Journal of Taxation 297 (May 2002).
[39] Even if the presumption is no t applicable, a company foundation may not be out of luck, for
the IRS notes that a foundation “may still be operating consistent with the rules for charities when all
facts and circumstances are taken into account.” IRS Publication 3833, note 33, at p. 17 .
[40] Rev. Rul. 2003 -12, 2003 -3 I.R.B. 283.
[41] Rev. Rul. 6 6-79, 1966 -1 C.B. 48. This key ruling has come to stand for the broad
proposition that the role of a domestic charitable intermediary must have legal substance to receive
tax recognition. Specifically, donors may deduct under IRC § 170 contributions they m ake to a
domestic charitable organization soliciting for a particular foreign charity, but only if the foreign
charity furthers the purposes of the domestic charity that has “discretion and control as to the use of
the contributions received by it.”
[42] See Table 3, Quick Guide to International Grants by Company Foundations, attached.
[43] Treas. Reg. § 53.4945 -5.
[44] Id.; Beyond Our Borders, note 11 at 29.
[45] Rev. Proc. 92 -94, 1992 -2 C.B. 507.
[46] See the text accompanyi ng note 22.

[47] The proposed regulation referred to in note 22 would have changed that result by requiring
that the charitable deduction for a contribution to th e company foundation be allocated entirely to
foreign income if the taxpayer knew that the contribution would be used by the foundation to make
foreign charitable expenditures.
[48] A donor -advised fund (“DAF”) is a fund created in a public charity by or for a corporation or
other donor. All donations, together with complete legal control over the fund, pass from the donor to
the donee, but the donor may offer advi ce to the donee with regard to charitable distributions from
the fund, subject to terms and conditions mutually agreed upon. The IRS was unsuccessful in its initial
attempt to persuade courts to outlaw donor -advised funds (National Foundation, Inc. v. Unit ed States,
87 -2 U.S.T.C.¶ 9602 (Ct. Cl. 1987)). The IRS has also failed in the most recent round of litigation
(Fund for Anonymous Gifts v.United States, 99 -1 U.S.T.C. ¶ 50,440 (D.C. Cir. 1999)). The IRS finally
settled the case by conceding that the donor -advised fund involved is entitled to an advance ruling as
a public charity. 98 Tax Notes, p. 1506 (Monday, March 10, 2003); telephone conversation on March
13, 2003, between the author and Amber Wong Hsu, legal counsel to the fund; see also the website of
the fund, , established to satisfy IRS’s requirement of a fundraising plan.
[49] Donor -advised funds are offered by community foundations as well as by DAFs affiliated
with commercial organizations, such as mutual funds. Compare New York Community Trust
( ), San Francisco Foundation ( ), and California
Community Foundation ( ) with Fidelity ( ), Vanguard
( ) and Schwab ( . Largely in response
to criticisms, most commercially affiliated DAFs have now adopted policies imposing certain private
foundation -type rules, such as prohibiting grants that would confer an economic benefit on the donor
and requiring a minimum payout. However, some common restrictions adopted by commercially
affiliated DAFs are more severe than those imposed on private foun dations, such as limiting grants to
public charities and prohibiting grants to foreign charitable organizations.
[50] See, e.g., Examples 1, 6, 7, and 9.
[51] Qualified U.S. international charitable facilitators include Charities Aid Foundation America
(worldwide),; Give to Asia (Asia), ; United
Way International (worldwide),; and International Community Foundation (primar ily
Latin America), .
[52] 50 U.S.C. §§ 2401 -2420 (1994).
[53] 50 U.S.C. § 1 -44.
[54] 50 U.S.C. § 1701 -1706.
[55] 18 U.S.C. §§ 101 -1016.
[56] 50 U.S.C. § 1701.
[57] See .
[58] The difficulty is that the sensitive areas are not limited to the Middle East, Asia or other
geographic areas where al Qaeda may be active. Listed individuals and organizations also include
domestic terrorists in Ireland, Spain, and other countries. Moreover, an authoritative spokesman for
the executive branch claims that strict liability is the applicable standard. On March 27, 2003, in a
keynote address to the Securities Industry Association’s Anti -Money Laundering Compliance
Conference, Treasury G eneral Counsel David D. Aufhauser said, “the Executive Order effectively
imposes a duty of care upon the managers and fiduciaries of NGOs…. No intent, mens rea or showing
of scienter is required [by the Order]. It is as generous a standard of culpability as can exist in

jurisprudence —strict liability for failing to know what is going
on.” .
[59] Based on a table contained in Beyond Our Borders, note 1, at 17.
[60] Helpful information about international grantmaking by c ompany foundations is contained in
Beyond Our Borders and in an international grantmaking primer by Derek J. Aitken for the
International Center for Not -for -Profit Law available at .