Author:Gillette, Rachel

INTRODUCTION 1295 I. Private Foundations 1299 A. Foundations and Their Role in Civil Society 1299 B. Foundation Grant Making 1302 1. Project Support Grants 1303 2. General Support Grants 1304 C. Grant Making to International Organizations: The Expenditure Responsibility Requirements 1311 1. Pre-Grant Inquiry 1315 2. Written Grant Proposal and Written Grant 1315 3. Reporting Requirements 1316 4. Disclosure of Grant Information 1317 5. Taking Action to Remedy the Misuse of Funds 1318 II. Foundation Reluctance to Make General Support Grants While Operating Under Expenditure Responsibility Requirements 1319 A. The United States Code, Code of Federal Regulations, 1320 and the Internal Revenue Manual: The Explicit Mention of "General Support" B. Foundation Practice 1323 C. The Benefits and Importance of Providing General Support Grants: Why Foundations and the IRS Should Interpret Expenditure Responsibility Requirements to Allow General Support Grant Making 1325 1. General Support Is Better for Organizations, Better for Innovation, and Better for Society 1325 2. The Use of the Term "General Support" Matters 1327 3. The Policy Concerns Laid Out by Lawmakers Are Better Addressed by Interpreting Expenditure Responsibility to Allow for General Support Grants 1327 4. Developments in Practice Suggest General Momentum Towards Greater Numbers of General Support Grants 1328 5. Arguments Against Interpreting Expenditure Responsibility Rules to Allow General Support Grants 1329 III. Approaches Foundations Can Take to Provide General Support Grants While Operating Under Expenditure Responsibility Requirements 1333 A. Possibilities Under the Existing Legal Framework 1334 1. Potential Approach 1: Removing the Need for the General Support Safe Harbor 1334 2. Potential Approach 2: Bifurcated Budgets 1335 3. Potential Approach 3: De-Linking Funds from Specific Project Activities or the All/But Approach 1336 B. Recommendations for Minor Adjustments to the C.F.R 1338 CONCLUSION 1340 Appendix A: Expenditure Responsibility Requirements 1341 Appendix B: Sample Expenditure Responsibility Financial Report 1342 Appendix C: Sample Expenditure Responsibility Proposal 1344 Appendix D: Sample Expenditure Responsibility Report 1 1346 Appendix E: Sample Expenditure Responsibility Report 2 1348 Appendix F: Sample Expenditure Responsibility Report 3 1350 INTRODUCTION

It is an all too common story: A new organization with a fresh approach bursts onto the nonprofit scene, shaking up the status quo and spurring great leaps forward on their issue of choice, seeming to make every dollar support greater impact than was possible ever before. And yet, despite the ability to attract consistent funding and inspire its peers, the organization shutters just years after its founding. (1) Consider FORGE, an organization that helped over 70,000 refugees in Zambia and Botswana to build both short-term and long-term capacity by supporting initiatives developed by the beneficiaries themselves. (2) Such initiatives included building libraries, developing computer literacy and training programs, and establishing micro-financing for agricultural workers. (3) Despite FORGE's meaningful impact and responsive approach to its work, it closed after a modest nine years. (4) The self-reported cause of their closure: a lack of unrestricted funding and, as a result, underinvestment in the internal infrastructure necessary to maintain the organization. (5)

Dubbed the "Nonprofit Starvation Cycle" by the Stanford Social Innovation Review, the cycle of underfunded nonprofits continues. (6) There are a variety of reasons for this cycle: funders and nonprofits alike conflate higher overhead with reduced impact; grant-making foundations (7) are reticent to provide more flexible funding; or, due to restrictions placed on how grants to international organizations can be made, funders are under the false perception that the only way to make grants is through restricted project grants (8) that do not allow for investments in organizational infrastructure. (9) Though the problem likely stems from some combination of these issues, this Note focuses on the latter two issues.

Funders are beginning to acknowledge the issues raised above, and there is a growing movement to provide greater flexibility in the grants that they make. (10) This flexibility ensures that grantees can remain responsive to the field and effective in creating the change that both the grantee and the grantor want to see in society, while also building the institutional capacity necessary to function and adapt to each organization's constantly changing environment most effectively. (11) The most common way for a foundation to provide this flexibility is through a general support grant--a grant in which funds are not tied to particular budget lines or outcomes, and instead provides the grantee with flexibility to determine how funds are expended. (12) This approach stands in sharp contrast to project-support grants--the more typical approach to grant making--where funds are tied to particular outcomes and budget lines and, if the grantee desires to shift funds between budget-lines, they must receive prior approval from the funder. (13)

For foundations that have an international focus, however, providing general support grants is typically understood to be a rare possibility. When a foundation (14) is funding an organization that is not a registered 501(c)(3) public charity (15) (which encompasses many international organizations), they must adhere to a particular set of rules under a framework called expenditure responsibility. (16) While these rules seek to ensure that funds are spent for charitable purposes, they are consistently interpreted to be quite limiting in terms of the amount of flexibility that foundations can provide to grantees. (17) This Note argues that there is greater potential for flexibility in the interpretation of the expenditure responsibility rules than practitioners commonly recognize. Accordingly, this Note is dedicated to offering an interpretation for how foundations can make general support grants under the expenditure responsibility rules while staying within the margins of pre-existing law. Section I.A of this Note explores some background on what foundations are, their role in society, and how they foster change through grant making. Following an explanation in Section I.B of the basic types of grants that foundations can provide, Section I.C then explores the particular legal framework that governs grant making to international organizations. In Part II, this Note identifies the sources of tension between common foundation practice and the plain text of the law with regards to general support in the expenditure responsibility context, and offers a variety of legal and policy explanations for both why it is and is not appropriate to interpret the expenditure responsibility requirements in a manner that allows for general support grant making. In Part III, this Note offers three potential approaches to providing a general support grants under the expenditure responsibility rules and several recommendations to the Internal Revenue Service ("IRS") for how to clarify relevant regulations to confirm that the proposed approaches rest on solid legal ground.


    Part I provides an overview of private foundations, including what foundations are, their role in society, and how they foster change through grant making. Part I then proceeds to explain the basic types of grants that foundations can provide before exploring the particular legal framework that governs grant making to international organizations.

    1. Foundations and Their Role in Civil Society

      A private foundation is a tax-exempt organization established for a charitable purpose, generally by one person or family with a large amount of wealth. (18) Foundations seek to foster change in the world and wield their influence through the disbursement of funds to other organizations or individuals with a deep commitment to and expertise in the chosen area of concern. (19) Charitable purposes are any activities that seek to provide:

      relief of the poor, the distressed, or the underprivileged; advancement of religion; advancement of education or science; erecting or maintaining public buildings, monuments, or works; lessening the burdens of government; lessening neighborhood tensions; eliminating prejudice and discrimination; defending human and civil rights secured by law; and combating community deterioration and juvenile delinquency. (20) Along the same lines, foundations are not allowed to engage in lobbying activities or political campaigns. (21) Put simply, being charitable means that an organization is serving a "public rather than a private interest." (22)

      Foundations are regulated by the IRS and must follow relevant aspects of the U.S. Tax Code, the Code of Federal Regulations (the "C.F.R."), and a series of IRS guidelines shared in the Internal Revenue Manual (the "I.R.M."). (23) Given the positive potential impact of foundations, the U.S. government has incentivized the creation of and donation to foundations by making those contributions tax deductible. (24) There is contradictory evidence about whether or not the tax deductible nature of donations has a positive, neutral, or even negative impact on the amount of donations made to foundations; (25) however, tax deductibility is generally seen as a positive incentive. (26) For existing foundations, tax-exempt status is generally viewed as crucial to their long-term survival; therefore, foundations have every incentive to adhere to the IRS regulations governing how their tax deductible dollars can be spent in order to retain their tax-exempt status. (27)

      Private foundations have played--and continue to play--a key role in civil society, providing resources for underfunded interests and innovation, pushing the status quo, and supporting a diversity of...

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