Can an entity that is formed and operated entirely outside of the United States attain recognition of 501(c)(3) charitable status from the Internal Revenue Service so that Americans making donations can claim a charitable contribution deduction? My thought was “no” – they would have to have a fiscal sponsor in the US.
The question is a two-part question for which a final answer of “no” is correct, but may be misleading.
A foreign charity can obtain 501(c)(3) charitable recognition from the IRS (assuming it would meet the requirements if it were a U.S. entity), but that recognition does not give deductibility for gifts from U.S. donors. Individual and corporate donors may claim a charitable contribution deduction only for gifts to U.S. entities.
The biggest advantage for the foreign organization (other than avoiding tax on some U.S. investment income) is that the recognition allows U.S. private foundations to make grants to it as though it were a U.S. public charity (assuming it has public charity status with the IRS) without having to do expenditure responsibility or obtain a separate equivalency certificate.
Many foreign charities, particularly universities, use fiscal sponsors to obtain deductible gifts from U.S. citizens, but others expecting gifts over longer periods of time form a “friends of” organization as a U.S. charity to have greater control over the money and less cost of administration and hassle from the fiscal sponsor. Since the “friends of” organization is a U.S. charity, donors will be able to claim charitable contribution deductions, and the foreign organization is likely to have more influence over the intermediary than it would over a fiscal sponsor.
(For more on issues of fiscal sponsorships, join our webinar, “Fiscal Sponsorships: For the Present and the Future.”)
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