More Mythbusting: US Fundraising and "American Friends" Groups
by Ken Hoffman - 01 May 2015
(Revised November 2020)
Ken Hoffman debunks the top 10 myths about US Fundraising and American Friends Groups.
I have spent most of my professional life advising non-US, chiefly British, universities, schools, arts organisations and charities on fundraising from American sources. So perhaps you will not be surprised if I tell you that patterns have begun to appear. Is your organisation raising US-sourced funds or thinking of doing so? Then possibly you have had or heard one (or more!) of the top ten myths that I have come across…
|1.||Where do we register our charity in the US?
You don’t. You can’t. There is no equivalent of the UK’s Charity Commission, so non-US charities, except in very limited circumstances, cannot “register” in the US: they have no legal standing. The ways to arrange tax-deductible gifts are: to establish your own “American Friends group” (the legal term is a 501(c)(3)) ; to work through an “intermediary” such as CAF America to accept tax-deductible gifts ; to cooperate with a similarly-themed US charity; or, for grants from foundations (but not from individuals), to establish your own charity’s “equivalence” to a US 501(c)(3). There’s more on this below.
|2.||We should set up our own 501(c)(3) before we begin fundraising in the US.
No! Don’t! For most organisations, it’s more efficient to begin US fundraising either of two other ways. One is to cooperate with an “intermediary”organisation . The second is to complete the documents needed to “establish equivalency.” These consist of an affidavit and financial disclosure statements which show that a non-US organisation, had it been incorporated in the US, would qualify as a “publicly supported charity”, i.e. the equivalent of a 501(c)(3). The Charles Stewart Mott Foundation has some useful material on this process. A funder may rely on an “equivalency determination” so its grants to the foreign charity are tax-deductible, or more formally known as “qualifying distributions” toward the 5% of fair market asset value the foundation must give away each year. The only circumstance that favours incorporating your own Friends group at the outset is if you know you have the potential to realise a significant number of large gifts from individuals.
|3.||Our Friends group can’t restrict its giving to a single charity.
Yes it can! The US Internal Revenue Service (IRS), a federal agency (equivalent to the UK’s HMRC) recognises a category of charity that gives to only a single recipient. Witness the success of Friends groups for Oxford and Cambridge Universities, British Museum, Tate, Royal Academy and Westminster Abbey. The Friends’ corporate purposes (expressed in their articles of incorporation, equivalent to a constitution) may or may not name that one charity as the sole object of the Friends’ support.
|4.||The Friends group can’t make unrestricted gifts to the beneficiary.
False, but I hear it all the time.
|5.||The Friends group can’t make restricted gifts to the beneficiary group.
False, but I hear it all the time. Every Friends’ grant should be accompanied by a formal transmittal letter that details the purpose of the grant and which requests a progress and financial report, typically due in 12 months’ time.
|6.||We’ll need to find US citizens willing to serve on the board of our Friends group.
False – at least in legal terms. There are no citizenship or residence tests for board members. To satisfy legal requirements a US charity board could be formed 100% from UK citizens resident in the UK! The measurement is not citizenship, but whether the Friends’ board is “independent” of the parent charity and whether the Friends exercise full “discretion” over funds they receive and “control” over the award of grants.
Even so, it is good practice for US residents to sit on a US 501(c)(3) boards for two reasons. First, it will make it easier to obtain initial tax exemption and second, the US board members can be well-placed to play important “on the ground” roles such as making connections and asking for gifts, accepting and processing donations and organising events.
|7.||Our Friends group board cannot have voting members who are employees of the parent organisation.
False. Employees of the parent group, such as Vice-Chancellors, CEOs, Principals and Directors of Finance, can and do sit on the board of American Friends. However, they must abstain on voting on grants to the parent organisation and the Friends must always have a majority of directors who are independent of the parent group. “Interlocking Boards”, where some individuals sit on the Council or Board of Trustees of the parent organisationand on the 501(c)(3) Board, need to be handled carefully but can be an excellent way of encouraging permanent cooperation between the two organisations.
|8.||Let’s apply for “foreign 501(c)(3) status” for our organisation and then we won’t need a separate ‘Friends group’ and we’ll be able to accept tax-deductible gifts.
Don’t do it – please don’t do it! I have never had a client who was glad to have secured “foreign 501(c)(3) status.” For three reasons. 1. Though it allows acceptance of foundation grants, it does not give tax deductibility to individual donors – you still need a US Friends group for that! 2. It subjects the charity to the massive regulatory burden of reporting to the Internal Revenue Service…and the potential fines for failure to report properly. I have dealt with fines of up to a third of a million dollars for failure to file tax returns, even though no tax was due. 3. There is no way – under statutes, regulations, or common law – to withdraw from “foreign 501(c)(3) status”. Once you’re in, there’s no way out short of winding up your charity.
|9.||It will be much less expensive and less time-consuming to form our own Friends group and not pay any of the intermediaries – like CAF America, The American Fund for Charities, Anglo-American Charity Ltd., or British Schools & Universities Foundation.
For initial operations, the intermediaries do a very good job at a reasonable cost. There are three disadvantages. First, the giving is on a “donor-advised” basis, which cannot be guaranteed to reach the parent…but always does. Second, the gifts are written to the intermediary, with a “suggestion” or “wish” that the funds be conveyed to a recommended charity – so marketing can suffer. Third, it can cost 1-8% of the gift to work this way. But, on the whole, the disadvantages rarely outweigh the benefits at the start of a US fundraising programme.
|10.||We’ve completed our “equivalency determination”, so we’re done with that.
Nope. An equivalency determination has a brief shelf life. It lasts, at most, for the two years following the financial data relied upon. For example, take audit figures for 31 March 2020 being used for an equivalency opinion written in December 2020. The opinion can be relied on only through 31 March 2022 – and that is as long as there is no material change in operations or governance. Renewal of the opinion should normally be faster and cheaper than the original advice, though public support must be recalculated using the most recent income figures.
Not one of these misperceptions is silly or unreasonable! The fact is that nothing is as opaque as another country’s tax code. You can’t reason your way through it. It’s like a computer programme: it just “is” and that’s what you have to learn. It works in the other direction, too. Every three months, when I visit the UK, I need Gift Aid explained to me again.
The above text is legal information for public educational purposes. It is not legal advice, for which you must seek out qualified advisors with experience not only with US non-profit organisations, but also with the more specialised world of “Friends groups” and international philanthropy. A legal advisor will consider all of your particular circumstances and help fashion an appropriate structure to meet your organisation’s needs.