Cross-border charitable giving has generally become known as "international philanthropy" and when involving multiple countries "global philanthropy." However, by whatever name and in whatever scope, worldwide charitable giving and activities have grown tremendously in recent years and are likely to continue as individuals are increasingly connected and more aware of those needing charitable support. Charitable giving in the United States rose to approximately $427 billion in 2018, and of that, international giving comprised approximately $23 billion. (1)
Leading this trend have been donors who are individuals, corporations, public charities, and private foundations of the United States. This in turn has impacted U.S. lawyers, accountants, and other professional advisors who counsel them with respect to charitable giving and, more than ever, made it important for these professionals to understand the complex network of applicable federal tax and other laws. It has long been recognized that the tax laws governing charitable giving are complicated; however, they are even more challenging in the international context when a professional advisor must take into account not only the domestic tax laws, but also the rules of international taxation, U.S. anti-corruption and counterterrorism laws, and sometimes foreign law and practice that characterize the nature of a foreign charity for U.S. tax purposes.
This article introduces some of the major U.S. tax issues applicable to global philanthropy, and through this introduction, a professional advisor should begin to acquire a basic conceptual framework within which to guide clients more effectively in this area. (2)
"Charitable Organization" Defined
A "charitable organization" or a "501(c)(3)" are commonly used terms that refer to an organization that is exempt from federal income taxation under I.R.C. [section]501(c)(3). (3) Section 501(c) (3) is the cornerstone requirement and provides that the organization must be "organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes...." The entity itself may be organized as a corporation, fund, or foundation. (4) Often, a charitable organization is created as a not-for-profit corporation under state law. (5)
Every organization that qualifies for tax exemption under [section]501(c)(3) is a private foundation unless it is a public charity as a result of falling into one of the following three categories: (6) 1) organizations that generally have broad public support; (7) 2) organizations such as hospitals, educational, and religious institutions, governments, and others; or 3) organizations that support the foregoing charities by generally being operated, supervised, and/or controlled by the charity being supported (commonly referred to as "supporting organizations") subject to certain limitations. (8)
In the estate planning context, charitable organizations are often grantmaking or scholarship organizations funded primarily or exclusively from a family and are likely classified as a non-operating private foundation. (9) It is important to be aware of the distinction between private foundations and public charities because private foundations are subject to numerous regulatory requirements and certain excise taxes that do not apply to public charities. Additionally, the classification as a private foundation or public charity based on sources of financial support is not permanent; it may change depending upon its level of public support received over time from private-sector and government donations.
Tax-Deductible Charitable Contributions
A major question that every client asks is the simple but important one of whether the charitable contribution will be tax deductible. While it is a simple question, it is one that invokes more questions, many of which are relevant to charitable contributions made to both domestic and foreign charities. However, in the case of contributions to foreign charities or in support of foreign charitable activities, there are additional questions and issues to address.
The answer relating to tax deductibility of contributions to charitable organizations, domestic and foreign, begins with the oft-used words of tax lawyers, "it depends." It depends upon: Who is the taxpayer making the contribution--an individual, partnership, (10) corporation, (11) trust, or estate? What is the type of charity that will receive the contribution--a public charity or private foundation, domestic or foreign, and, if it is a foundation, is it a grant-making or operating foundation? What is the amount of the charitable contribution--small or large? What is the nature of the contribution--money or property, and if property, what is the nature of the property? Is the property created by the donor, such as art or intellectual property, is it a direct or indirect interest in real estate, or is it intangible property, such as publicly traded securities, interests in private or family-controlled companies, or other capital asset property? Is the charitable gift made with or without conditions, restrictions, or retained interests? Is the deduction desired for income, gift, or estate-tax purposes? These are among the important questions to resolve in order to make the determination of deductibility, and, therefore, the professional advisor should have a thorough discussion with the client about the nature of proposed charitable gift in light of these considerations.
Here are some general answers to these questions. An unrestricted contribution of money or property by an individual or corporation directly to a domestic public charity or domestic private foundation is deductible for federal income tax purposes subject to certain percentage limitations on the amount of the deduction. (12) A similar charitable contribution made directly to a foreign charity by an individual or corporation is not deductible for income tax purposes unless it is permitted under a tax treaty that the U.S. has with the foreign country where the charity is located, such as the tax treaties with Mexico, Canada, and Israel. (13)
A charitable contribution made by a partnership is not deductible by the partnership because the partnership is a "pass-through" entity. Rather, the deduction is allocated by the partnership to its partners (who may be individuals, corporations, partnerships, trusts, or estates) as a separately stated item and will then be deductible or not by those partners according to the various federal income tax rules applicable to each of them. (14) A corporation with an "S election" in effect will allocate the charitable contribution among its shareholders, and each shareholder will report a charitable contribution deduction or not according to its taxpayer status in the same manner as partners of a partnership. (15)
A charitable contribution made by a complex trust (16) is deductible for income tax purposes if permitted by the express terms of the trust agreement as the governing instrument, and unlike the case of an individual or corporation, the trust can make the deductible contribution directly to a foreign charity if certain conditions discussed below are satisfied. The deductible charitable contribution can be in an amount up to the entire gross income of the trust for the tax year and, therefore, completely eliminate the income tax liability of the trust for the year. (17) There is no percentage limitation that reduces the amount of the deduction as in the case of a charitable contribution by an individual or corporation. The deduction is claimed by the trust, not treated as allocated or distributed to the beneficiaries for use by them.
A charitable contribution made by an estate can be deductible for income or estate tax purposes depending upon the terms of the will as the governing instrument. (18) If made for income tax purposes, like a trust, the deduction can be in an amount up to the gross income of the estate for the year and eliminate any possible estate income tax liability. (19) If made for estate tax purposes, the charitable contribution will be in an amount equal to the value of the money or property that is included in the gross estate and that constitutes the charitable gift; there is no percentage limitation imposed upon the amount of the deduction. Also, like a trust, the deduction is allowable for a charitable contribution made to either a domestic or foreign charity.
Following rules similar to those applicable to the estate tax deduction, a charitable contribution made by a U.S. citizen or resident to a domestic or foreign charity can be deductible for gift-tax purposes so that the gratuitous transfer constituting the charitable contribution is not subject to U.S. gift tax. (20) A charitable gift...