In general, the United States does not permit individuals to claim an income tax deduction for direct contributions to foreign charities. IRC Section 170(c)(2)(a) specifically limits the tax deduction to corporations, funds or foundations created or organized in the United States or under the laws of the United States. To that end, the IRS will disallow a tax deduction for contributions to domestic charities if the domestic charity is a mere conduit of funds to a foreign organization. To determine whether the domestic charity is a “mere conduit” of funds, the IRS will look to the whether the domestic organization exercises sufficient discretion and control over contributed funds.
In Revenue Ruling 63-252, the IRS considered the deductibility of contributions by individuals to a charity in the United States which thereafter transmits some or all of its funds to a foreign charitable organization. The IRS noted in Rev. Rul. 63-252 that the first step in determining whether contributions to or for the use of a particular charitable organization are deductible, is verifying that the recipient organization was validly created or organized in the United States, as required by IRC §170 (c) (2) (A). It must further be found that the recipient organization was organized and operated exclusively for one of the purposes stated in IRC §170(c)(2)(B) of the Code, namely, religious, charitable, scientific, literary, or educational purposes or for the prevention of cruelty to children or animals. Section 170(c)(2)(A) of the Code pertains only to the place of creation of the charitable organization to which deductible contributions may be made; it does not restrict the area in which deductible contributions may be used.
Rev. Rul. 63-252 further instructs that if the general requirements of §170 are met, the IRS will next consider whether the donation remains deductible if the donation is ear marked to be turned over to a foreign organization.
The IRS presented the following five (5) illustrative examples in Rev. Rul 63-252:
- In pursuance of a plan to solicit funds in this country a foreign organization caused a domestic organization to be formed. At the time of formation, it was proposed that the domestic organization would conduct a fund-raising campaign, pay the administrative expenses from the collected fund and remit any balance to the foreign organization.
- Certain persons in this country, desirous of furthering a foreign organization’s work formed a charitable organization within the United States. The charter of the domestic organization provides that it will receive contributions and send them, at convenient intervals, to the foreign organization.
- A foreign organization entered into an agreement with a domestic organization which provides that the domestic organization will conduct a fund-raising campaign on behalf of the foreign organization. The domestic organization has previously received a ruling that contributions to its are deductible under section 170 of the Code. In conducting the campaign, the domestic organization represents to prospective contributors that the raised funds will go to the foreign organization.
- A domestic organization conducts a variety of charitable activities in a foreign country. Where its purposes can be furthered by granting funds to charitable groups organized in the foreign country, the domestic organization makes such grants for purposes which it has reviewed and approved. The grants are paid from its general funds and although the organization solicits from the public, no special fund is raised by a solicitation on behalf of particular foreign organizations.
- A domestic organization, which does charitable work in a foreign country, formed a subsidiary in that country to facilitate its operations there. The foreign organization was formed for purposes of administrative convenience and the domestic organization controls every facet of its operations. In the past the domestic organization solicited contributions for the specific purpose of carrying out its charitable activities in the foreign country and it will continued to do so in the future, however, following the formation of the foreign subsidiary, the domestic organization will transmit funds it receives for its foreign charitable activities directly to that organization.
The IRS held that Example 1, 2 and 3 are not deductible. “[I]t seems clear that the requirements of section 170 (c) (2) (A) of the Code would be nullified if contributions inevitably committed to go a foreign organization were held to be deductible solely because, in the course of transmittal to the foreign organization, they came to rest momentarily in a qualifying domestic organization. In such case the domestic organization is only nominally the donee; the real donee is the ultimate foreign recipient.” On the other hand, the IRS held that Examples 4 and 5 are deductible. The IRS relied upon the fact that the donations were not specifically earmarked for any foreign organization and the donations were subject to the control of the domestic organization. The retention of the control over the donation forms the basis for the domestic organization being deemed to the recipient of the donation and not the foreign organization.
In 1966, the IRS amplified its findings of Rev. Rul. 63-252 in Rev. Rul. 66-79. In Rev. Rul. 66-79, the IRS indicated that contributions to a domestic charity that at times solicits contributions which are used to provide grants to a foreign organization, for specific purposes approved by the domestic charity’s board of directors in accordance with its bylaws would be eligible for a charitable deduction. The bylaws of the domestic charity which was the subject of Rev. Rul 66-79 specifically provided that the board of directors would review all requests for funds, would require information about the purposes for which such funds would be used, would require a grantee to furnish a periodic accounting to show that the funds were expended for purposes approved by the board of directors, and the board could in its absolute discretion refuse to make any grant or payment for any and all purposes.
The control of funds by a domestic charitable organization is the key component in securing deductibility status of donations.