International Charitable Giving And Planning ... - Phillips Nizer LLP

THE CHARITABLE INCOME TAX DEDUCTION AND FOREIGNDONEESIndividuals in GeneralAs already discussed, the United States does not permit individuals to claim an incometax deduction for direct contributions to foreign charities. Section 170(c)(2)(A) expresslylimits the charitable income tax deduction to corporations, trusts or community chests,funds or foundations "created or organized in the United States or any possessionthereof, or under the law of the United States, any State, the District of Columbia, or anypossession of the United States." Thus, in the leading case of Welti v. Comr., 4 the TaxCourt held that a contribution to the First Church of Christian Science in Berne,Switzerland, which was separately incorporated in Switzerland, was not eligible for thecharitable income tax deduction, even though the parent church was located in Boston.On the other hand, in the subsequent leading case of Bilingual Montessori School ofParis v. Comr., 5 the Tax Court sustained the charitable deduction for a contribution to aschool that was incorporated in the United States but located in France.In Rev. Rul. 63-252, the IRS discussed the following five scenarios:(i) A foreign charity causes a domestic charity to be formed tosolicit funds. The domestic charity is required, by its charter, topay funds to the foreign charity. Contributions to this type ofdomestic charity, said the IRS, are not deductible.(ii) U.S. persons organize a domestic charity to promote the workof a foreign charity. The domestic charity is required, by itscharter, to make periodic payments to the foreign charity.Contributions to this type of domestic charity, said the IRS, arenot deductible.(iii) A foreign charity enters into an agreement with a domesticcharity, which the United States has already recognized asexempt, for the domestic charity to conduct a fund-raisingcampaign for the express benefit of the foreign charity. The IRSsaid that funds contributed in response to this specific fundraisingcampaign would not be deductible. Other contributions tothe domestic charity would be deductible.(iv) A domestic charity conducts various domestic programs.From time to time this domestic charity also makes grants toforeign charities for purposes the domestic charity reviews andapproves. Grants are paid from general funds of the domesticcharity and no special funds are raised by solicitation from thepublic for purposes of the foreign charity. Contributions to thistype of domestic charity, the IRS said, are deductible.(v) A domestic charity, which conducts charitable activities in aforeign country, forms a subsidiary to facilitate its operationsthere. The foreign charitable subsidiary is completely controlledby the domestic charity. This domestic charity solicits funds tosupport its activities abroad. Following the formation of theforeign subsidiary, the domestic charity will transmit funds itraises for its foreign activities directly to the subsidiary.Contributions to this domestic charity for its foreign activities, theIRS said, are deductible.Tax Management Estates Gifts and Trusts Journal © 2005 Tax Management Inc.® Pg. 5