International organizations have been highly successful in raising funds from the United States through U.S. based charities commonly referred to as “Friends of” organizations. These charities are registered in the States and have 501(c)3 tax-exempt status, allowing donations to these essentially foreign organizations to be tax-deductible.

As you can imagine, many charities registered outside of the United States consider an “American Friends of” organization as a vital part of their fundraising strategy.

Jewish causes, especially those based in Israel, are no exception to this rule. A recent report compiled by Dr. Nissan Limor estimated that foreign donations to Israeli charities from sources outside of Israel stood at 2.165 billion dollars in 2007, with much of that coming from the United States (although, he didn’t stipulate how much). There are about 1,000 new Israeli charities [amutot] created every year and it would hold that many of these organizations will seek to create an “American Friends of” supporting charity.

Hence, recent conversations I have had are causing me to worry.

The Reduction of 501(c)3 Exemptions Granted

In late July, I wrote about the scandal that rocked the Jewish community of Brooklyn and Deal, culminating in the arrest of three mayors, five respected community rabbis, and a score of government officials. Specifically, my third post on the scandal described the The IRS Expected Response.

In that post, one prediction I made was the “Reduction of 501(c)3 Exemptions Granted”

The easiest way to prevent future international fraud is to restrict the organizations that can gain tax-exempt status…The U.S. Department of Treasury has only enough manpower to audit between 2 – 3% of registered charities in America. Scrutiny of organizations that already have 501(c)3, then, seems almost like an impossibility. However, as every new organization that wants tax exempt status needs approval from the IRS, it would be a relatively simple procedure to restrict approval to new charities; more specifically, to new charities that donate to international causes.

Well, unfortunately, this seems to becoming a reality. Three recent conversations are shedding light on what seems to be new practices by the IRS. (Specific names are being withheld as applications and relationships are still ongoing.)

The Name “American Friends of” Bothers the IRS

On a recent trip to the States, I had the fortune to sit with a prominent lawyer that represents many Jewish nonprofits. He informed me that he submitted a file for 501(c)3 approval for the “The American Friends of _______,” an organization that would like to raise funds for a charity operating outside of America (but not in Israel). The application is taking an inordinate amount of time, mostly due to the staggering number of questions the lawyer has received from the IRS representative assigned to his file. His application folder measures an astounding 2.5 inches! Having been submitting similar applications for decades, the lawyer is quite surprised at the level of scrutiny and feels that it is the organization’s name that is evoking this reaction. The lawyer is losing patience and if nothing changes, will close the application and resubmit under a different name, hoping this will solve the problem.

Charities Should be Supporting a Mission, Not Supporting an Organization

The following day I met with a well known nonprofit consultant that works with both Jewish and non-Jewish charities. He informed me that it has come to his attention that the IRS will no longer approve 501(c)3 status for organizations that are founded simply to support one specific institution. In other words, when applying for exemption, the papers should list the mission or objective that the charity supports, not what organization it supports. It was implied, however, that in practice, a 501(c)3 charity can transfer money to (i.e. support) a single foreign organization without fear of losing its tax-exempt status — the American nonprofit, though, must be able to prove its independence. (More analysis, tips and background on international charity emanating from America can be found on an article I wrote: “International Charity in the Face of Global Terrorism.”)

Don’t Go Against American Policy

And finally, upon returning to Israel, I was speaking to a director of a Israeli nonprofit who told me of a colleague of his whose American charity had applied for 501(c)3 tax-exempt status.  At the time, the applicant informed this director that in his application he stated that the mission was to support Judea/Sumaria/Gaza. The applicant assured the director that the approval was imminent. A half a year later, his approval had yet to come and this applicant soon gave up.

The Obama administration is not in favor of what it calls the “Territories.” Leaving politics aside, we are seeing organizations whose mission clashes with American policy and/or opinion having trouble obtaining 501(c)3 tax-exempt status.

Conclusion

In closing, I would like to stress that whether these trends are good or bad is not the issue. The important point is that Israeli nonprofits and their American supporting counterparts should take notice and act accordingly.

These conversations stress:

1. New organizations that have the words “American Friends of” in their name will have trouble getting their 501(c)3 tax-exempt status approved.
2. By-laws of organization should list the cause that the organization is supporting, and should not specify particular organizations.
3. When applying for tax-exempt status from the American government, it might be best to “tow the party line.”

Tizku Lemitzvot,

Shuey

Disclaimer: This blog houses my personal opinions and is for informational purposes only – not advice. As charity laws can be quite complex, please refer all questions to qualified and licensed professionals. Read the full disclaimer.

The arrests of 44 individuals–including, 3 mayors, 5 respected community rabbis, a score of government officials, and others–on Thursday of last week (July 23) should highlight the dangers of organizations donating to international causes; and I guarantee you, the I.R.S. is having similar thoughts.

I believe that two reactions can be expected.

1. Greater Scrutiny of Charities

The fear that a charitable donation might not be used for a charitable purpose is not new. The U.S. Department of Treasury has long known the important role that charities play in financing terror and released in 2006 its third version of “Financing Guidelines: Voluntary Best Practices for U.S. Based Charities.”

(For a more detailed analysis, I published an article entitled, “International Charity in the Face of Global Terrorism: The U.S. Department of Treasurys Response.”)

Until now the guidelines produced by the IRS and other groups have been voluntary in nature and not enforced by the U.S. Government. Incidents like the one from last week and the Spinka Hasidim in 2007 are convincing the IRS that terrorists aren’t the only ones abusing the system.

With President Obama’s civic-minded government, we can expect these recommendations to become laws (click here to read more about Obama’s nonprofit agenda). When the Treasury reviews the practices of international organizations they will find that many of them are not following the guidelines that have been suggested. Organizations that are found to be negligent can find themselves facing criminal charges, fines, and revocation of tax-exempt status.

The U.S. government has already invested the time. The literature exists. In just a few short weeks, we can theoretically find these voluntary principles mandatory, so read the letter of the law and obey even the spirit of the law. Remember, the Patriot Act of 2002 allows the IRS to freeze accounts first, and ask questions later.

2. Restriction of 501(c)3 Tax-Exempt Status

The general locker-room talk, as one accountant put it, is that the easiest way to prevent future international fraud is to restrict the organizations that can gain tax-exempt status. Many Israeli organizations currently have or are thinking of opening “Friends of” organizations in the States to help fundraise from American citizens. Donations to these American-based organizations are exempt from United States federal taxes and are channeled to the final destination in Israel.

The U.S. Department of Treasury has only enough manpower to audit between 2 – 3% of registered charities in America. Scrutiny of organizations that already have 501(c)3, then, seems almost like an impossibility. However, as every new organization that wants tax exempt status needs approval from the IRS, it would be a relatively simple procedure to restrict approval to new charities; more specifically, to new charities that donate to international causes.

This could be done simply by requiring additional paperwork or by imposing a minimum existence period, as is the case in Israel.

(More about the difference between USA and Israeli charities can be found in my article entitled “Defining an Israeli Nonprofit Organization.”)

Those that are worried about obtaining this status should forget about waiting for the “right” time and apply now. For those organizations that do not set up a “Friends of” charities, organizations such as the PEF, Central Fund, FJC, One Israel Fund and others can provide receipts to donors and forward the money to the intended Israeli causes.

Tizku LeMitzvot [May you continue to merit doing good deeds],

Shuey

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Related Posts:

The New Jersey Scandal, Pt. 1: The Facts

The New Jersey Scandal, Pt. 2: The Israel Fallout

Professor Joel Fleishman, author of “The Foundation: A Great American Secret; How Private Wealth is Changing the World,” is very clear on one thing: America has a long history of positive social change affected through the initiatives of private individuals and foundations.   These nongovernmental institutions have been succesful because of their greatest weapon, independence.   An article that was recently forwarded to me in The Commentary Magazine entitled, “The War on Philanthropy”, by David Billet, argues that this autonomy is under fire.

First, by the United States Government.

The Obama administration has been trying to pass a law that will “reduce the charitable deduction for the highest two income-tax brackets by almost 30 percent.”  As it stands right now, these two brackets get to write off 39 percent while the other brackets only get to write off 28 percent; this initiative would cap all citizens at 28 percent.  But not to worry, it is all in the name of fairness.  And no, the President doesn’t address the fact that most charity is received from these top two brackets.  The President only offers a consoling “There is very little evidence that this program has a significant impact on charitable giving.”  Not so consoling when you read that the article cites a noted economist who concludes that “the President’s proposal would reduce the amount of money given to charity by at least 10 percent.”

Billet explains that “the specific indictment against private philanthropy goes something like this: Because the Treasury forfeits some $30 billion every year in various tax exemptions for charity, government has a responsibility to see that this subsidy is  justified by the use to while the money is put.”   Making things worse, the author is worried by the President’s “casual dismissal of the role of incentives in altruism” and that Obama “makes little of the fact that a donor does not consume a single penny of the charitable donation that is currently exempted from taxes.”  While currently, the Senate is refusing to pass the President’s bill, the economic downturn might force the Senate to rethink its position.

Second, by the nonprofit sector itself.

In recent years a number of think-tanks and organizations have sprung up that seek to police the “philanthropic status quo.”  Spurred by ideas of social and racial equality, these organizations are releasing widely-read authoritative reports and taking legal action in an attempt to impose “ideological mandates,” and to establish guidelines and percentages that will govern how foundations can allocate their funds.  In essense, the article concludes, these groups “rather than encourage the proliferation of views and ideas in the nonprofit world, they seek instead to stultify sameness.”

Third, by the socialists.

The article points out that the success of private institutions in providing public works is something that discomforts the public sector: “Virtually, wherever public and private groups take up the same task, the private group outperforms [the public sector].”  This is understanding considering that private individuals and foundations are energetic and passionate about their work, are more flexible than governmental agencies hampered by bureaucracy, are able to take more risks,  are more able to weed out corruption and are more fluid in moving on to the next pressing task.  The role of private philanthropy in the United States, thus, has been a matter of concern to those that believe that these tasks are justly the responsiblity of the government whose true function is “the administrator of social justice.”

This fight for independence is all the more prevalent in Israel, claims Hillel Shmid, Director of the Study of Philanthropy in Israel at the Hebrew Universityand Director of the Haruv Institute.  In a recent conversation I had with him, Prof. Shmid explained that the last decade has seen the government shifting away from being a socialist state.  Israel has been filling its void by contracting much of its former responsibilities out to nonprofit organizations.  To make sure that these institutions are up for the task, the government regularly issues guidelines and regulations.  In essense, Shmid argues, these institutions are slowly turning into mere extensions of the government.  The uniqueness and diversity once prevelant in Israeli nonprofits is starting to disappear.

The cure?  In Israel, the answer, while not easy, is straight forward according to Professor Shmid: He prescribes a complete withdrawal and refusal of governmental financial support.  A tall order, indeed, as these nonprofits would then need to rely soley on donations.  In the United States, the answers vary.  Some argue that as with natural disasters, one can only bunker down and wait for these policing trends to pass.  Others disagree and make a case for taking a stand and fighting in the necessary arenas.  Surely a costly venture.

Note: While I have summarized some of the points of the “The War on Philanthropy,” the full article is worth the read.

Tizku LeMitzvot [May you continue to merit doing good deeds],

Shuey