You may have heard of an American Friends of Charity and wondered what it is and why they are necessary. Generally, contributions to organizations organized outside of the U.S. do not qualify for the charitable income tax deduction. Accordingly, foreign charities wishing to establish a base of support in the United States often seek to establish U.S. charities to solicit contributions from U.S. donors to support their causes. The U.S. affiliates of such foreign charities are often referred to as an American “Friends Of” charity.
To qualify as an American Friends of charity affiliated with a foreign charity, U.S. law dictates how the U.S. organization must relate to its foreign affiliate. Under United States tax law, U.S. Friends of charities must be operated independently of the foreign organizations they support.
To qualify as independent, the American “Friends Of” charity cannot be controlled by its foreign affiliate. This means that at least a majority of the U.S. organization’s board should be independent of the foreign organization.
An American Friends of charity is allowed to receive contributions from donors who ask (rather than designate) to have their contributions used for grants to a particular foreign organization. The American Friends of charity can then make grants to its foreign charity affiliate. Frequently, the American Friends of charity and its foreign affiliate are similarly named to further solidify the connection between the two organizations.
However, to make this relationship work under US law, it is necessary to ensure that the American Friends of charity puts appropriate grantmaking procedures in place to avoid being treated as a conduit or pass-through, which would cause donors to lose the ability to take a U.S. charitable tax deduction for their contribution. American Friends of charities must also take care in their messaging to US donors to avoid any implication that the American Friends 0f charity is a mere pass-through. The American Friends of charity must exercise dominion and control over the contributions and have discretion as to how the funds are expended.
To further establish its independence, the governing board of the U.S. Friends of Charity must have the legal authority and discretion to carry out the U.S. organization’s charitable purposes and oversee its management, finances and disbursements. In other words, the legal relationship between the foreign organization and the U.S Friends of Organization must be similar to that of a U.S. foundation and its foreign grantee.
There is typically an ongoing tension between the desire to operate for the benefit of the foreign charity and the requirement for the U.S. Friends of organization to operate independently. To make the relationship work, the U.S. organization must follow clear processes and procedures for the approval of grants to the foreign organization and take care to ensure that funds raised are mission restricted rather than earmarked for the foreign organization.
If the U.S. organization lacks independence, is dominated by the foreign affiliate in its decision-making process, or accepts contributions earmarked for the foreign organization, the IRS will likely view it as a mere conduit of the foreign charity and deny or revoke its tax-exempt status.
Ellis Carter is a nonprofit lawyer with Caritas Law Group, P.C. licensed to practice in Washington and Arizona. Ellis advises nonprofit and socially responsible businesses on corporate, tax, and fundraising regulations nationwide. Ellis also advises donors with regard to major gifts. To schedule a consultation with Ellis, call 602-456-0071 or email us through our contact form.