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.

A list of the essential articles I posted to Twitter from February 21– March 6, 2010.  This week’s topics include: Nonprofit Strategy & Governance; Social Media; Israel Finance & Economy; Global Finance & Economy; & Potpourri.

Sorry for the (relatively) long hiatus.  Between the holiday of Purim and a cold that knocked me out last week (and still lingers), I’ve been of the grid.  Good to be back.

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

Shuey

< break>

Nonprofit Strategy & Governanace

Game Changer? New US tax-status L3C allows company to focus on charity, earning profit is secondary. On @charitylawyer http://ow.ly/19LWC

Great facts that show NPOs playing critical role in economy (while silmutaniously misunderstood & under-appreciated) http://ow.ly/1ahxh

Does your Nonprofit bore people to tears? NPOs should use humor more often. http://ow.ly/1a7GL via @nptechblogs

As recession vaporized 1/5 of foundations’ assets, consider Program Related Investments (PRI) http://ow.ly/1aklC

Confused about Foundations & Program Related Investments (PRI)? Foundation Center elaborates: http://ow.ly/1alyW

<break>

Social Media

Get most out of Twitter: Tap into discussions rather than broadcast own thoughts http://ow.ly/1e2bs via @ToldotYisrael

<break>

Israel Finance & Economy

Israel is planning 2-year budget http://ow.ly/1adoN, could doing the same help NPOs develop strategy & save time/money?

G.S.: Bank of #Israel didn’t raise interest rates b/c of low inflation. Still predicts 3% by year’s end. http://ow.ly/1af8v via @Israel_News

Bill to abolish bank fees for checking accounts in #Israel doesn’t even make it out of the committee http://ow.ly/1adGk

#Israel c’tee recommended regulations to force Institutional Investors to stick to safer investments http://ow.ly/1b50K

<break>

Global Finance & Economy

Don’t get comfortable! Only 2 months into the year & already many economic assumptions for 2010 are under fire. http://ow.ly/1a7lW

Europe’s Recovery Shows Signs of Stalling: http://ow.ly/1aGrx. With EURO weaking, US Dollar might gain strength…

The global economic crisis has the public angry at banks, not the Government. Will that change soon? http://ow.ly/1b4Z3

<break>

Potpourri

Reduce Your Tax Bill by Accurately Deducting Charitable Gifts, on @Charitynav http://ow.ly/1e7yl

Change is hard but don’t fret: 5 Ways to Make Change Easier http://ow.ly/1a7yp via@guykawasaki

A list of my favorite articles that I posted to Twitter from December 27, 2009 – January 2, 2010.  This week’s categories: Nonprofit Strategy; Internet & Social Media; Israel Economy & Finance;  Global Economy & Finance; and Potpourri.

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

Shuey

<break>

Nonprofit Strategy

Internet & Social Media

Israel Economy & Finance

->@eJPhil: #Israel NPOs diversify funding, no longer rely only on donations from abroad http://ow.ly/Qol6 via @bethsteinberg @religion_state

Unemployment drops in #Israel : “Change in the trend in unemployment figures beginning in July.” http://ow.ly/Qodz

Report: #Israel bank fees are going down http://ow.ly/QGZO // As a banker, I’m surprised by the findings. Anyone else agree with me?

#Israel Tax Authority wants to encourage the public to save more for pensions. http://ow.ly/QH7J

RT @Israel_News: Globes: Israel’s economic growth in 2009 beats even optimistic forecasts. http://ow.ly/RkUY

# Israel Finance Minister cuts value tax by half percent to 16% in move to bloster economic growth. http://ow.ly/RlEX

Israelis should be forced to drive bumper cars // “Only” 346 traffic fatalies makes ’09 lowest in 40 yrs. http://ow.ly/RlZE via @Israel_News

<break>

Global Economy & Finance

Unbelievable. U.S. Banks “bet” against their clients & profited big time when financial crisis hit. http://ow.ly/Q4WL

Forecasting the next decade: Small returns in financial markets & a shrinking financial sector. Yay? http://ow.ly/R0BW

Are financial analysts spending too much staring at computer screens & not enough time out in the real world? http://ow.ly/QHeL

<break>

Potpourri

Can former nonprofit executives still work for the common good while simultaneously holding public office? http://ow.ly/RqXR

RT @TEAMDJW: RT @andressilvaa Forbes: Celebrities Can Be Bad For Brands http://tinyurl.com/yaucm6p

Holiday Fun via @bethsteinberg: Tips to help sensitive Christians make Jews comfortable during the Holiday Season. http://ow.ly/Qqzh

Charity is chic! Fashion models use their celeb power & cash to help nonprofits throughout the world. http://ow.ly/QGLJ

Children need to be bored, so I’m smashing the Wii: A mother’s fight to get her kids to use imagination. http://ow.ly/R0vs

Great site for the social or business entrepreurs out there. Resources, links, journals, you name it. http://ow.ly/RlNk via @RachelBergerNBN