1. pbwt.com Overview of Tax-Exempt Organizations and Charitable Giving in the U.S. Robin Krause Patterson Belknap Webb & Tyler LLP May 11, 2016 8865027v1

2. Landscape of Tax-Exempt Entities in the U.S. “Tax-exempt” or “exempt” organizations refers to those that are exempt from U.S. Federal income tax under Section 501 of the U.S. Internal Revenue Code. There are over 25 different types of tax-exempt organizations, for example: ■ 501(c)(3): organizations formed for “charitable” purposes (discussed further below) ■ 501(c)(4)s: organizations formed for promotion of social welfare ■ 501(c)(5)s: labor or agricultural organizations ■ 501(c)(6)s: business leagues, boards of trade, professional associations 2

3. Landscape of Tax-Exempt Entities in the U.S. 501 (c)(3)s Public Charities Private Foundations 3 501(c)(3) organizations are the ones we identify as “charities”

4. Landscape of Tax-Exempt Entities in the U.S. All 501(c)(3) charities have the following characteristics: ■ Purposes that are exclusively religious, charitable, scientific, testing for public safety, literary or educational, or to foster national or international amateur sports competition, or for the prevention of cruelty to children or animals ■ No part of earnings of the organization “inures to the benefit of private shareholders or individuals” ■ May not have substantial lobbying activity ■ Prohibited from any political campaign activity 4

5. Landscape of Tax-Exempt Entities in the U.S.–Public Charities Public Charities: ■ Usually funded by the general public or have a purpose that makes them responsive to the general public ■ Favored in certain ways in the Internal Revenue Code (e.g., higher charitable deduction percentage limitations, not subject to the excise taxes applicable to private foundations, discussed below) ■ May engage in an insubstantial amount of lobbying activity (in contrast to private foundations) ■ May not engage in political campaign activities 5

6. Landscape of Tax-Exempt Entities in the U.S.–Public Charity Status 6 Three ways to earn public charity status: Purposes/ActivitiesSupport from PublicRelationships to Public Charities Churches (170(b)(1)(A)(i))Supporting organizations (509(a)(3)) Schools (170(b)(1)(A)(ii))10% public support plus facts and circumstances (Treas. Reg. 1.170A- 9(f)(3)) Medical research organizations (170(b)(1)(A)(iii)) Hospitals (170(b)(1)(A)(iii))Gross receipts (509(a)(2))

7. Landscape of Tax-Exempt Entities in the U.S.–Private Foundations 7 Private Foundations ■ Usually funded by an individual, a family, a corporation or a limited variety of sources ■ Subject to excise tax provisions of Sections 4940 through 4946 ■ Net investment income tax of 1% or 2% ■ Prohibitions and taxes on self-dealing transactions with “disqualified persons” ■ Required annual payout of 5% of assets for charitable purposes or taxes on undistributed income ■ Excess business holdings tax ■ Jeopardizing investments tax ■ Taxable expenditures for expenditures for non-charitable and other purposes ■ May not engage in lobbying ■ May not engage in political campaign activities

8. Deductibility of Charitable Contributions in the U.S. The Internal Revenue Code allows for an income tax deduction by a donor for charitable contributions made within the taxable year to a “qualified organization.” (Section 170) “Qualified organizations” must be created as a U.S. legal entity and be a charitable organization, generally under Section 501(c)(3). A contribution or gift is a payment of money or transfer of property without adequate consideration The donor must be acting with disinterested generosity and there must be a “completed gift” (no strings attached) Quid pro quo contributions reduce the deductible amount ■ any part of a donor’s contribution that is given in exchange for goods or services is not tax deductible ■ special documentation rules apply to these types of contributions 8

9. Deductibility of Charitable Contributions in the U.S.– Deduction Amounts Donors deduct the amount of their charitable gifts from their income, reducing their taxable income The total amount of charitable deductions that can be taken in a year is limited and is based on type of donor and donee: ■ Individual donors deduct up to the following amounts for gifts to: ■ Corporate donors are generally subject to a limitation of 10% of taxable income and also utilize ordinary deductions for business and marketing expenses. 9 Private FoundationPublic Charity Cash or ordinary income property: 30% of donor’s adjusted gross income 50% of donor’s adjusted gross income Capital gain property:20% of donor’s adjusted gross income 30% of donor’s adjusted gross income

10. Deductibility of Charitable Contributions in the U.S.–Required Documentation and Valuation Charities are required to provide written acknowledgment and substantiation of gifts to donors ■ Maintain and provide written record or receipt for all gifts including specific written acknowledgments for all gifts $250 and above ■ Qualified appraisal requirements for property gifts $500 and above ■ IRS Forms 8282 and 8283 required for certain gifts of property and are filed with the Internal Revenue Service Valuation of gifts of property ■ General rule is that the deductible amount is the fair market value at the time of the contribution for non-cash gifts ■ Special rules for different types of property such as appreciated property, tangible personal property, intellectual property 10

11. Structures for Giving to Non-U.S. based Entities A U.S. entity or partner is needed to raise and receive tax-deductible contributions from U.S. individual and corporate donors ■ These fundraising entities must be more than mere conduits for the non-U.S. entity and must retain control and discretion over charitable funds raised. Fundraising entities or structures can take various forms including: ■ a “friends of” organization ■ a donor advised fund operated by a public charity (“DAF”) to support the non-U.S. entity ■ a fiscal sponsor of the non-U.S. entity ■ a community foundation or other entity that supports the non-U.S. entity Non-U.S. charities can seek tax-exempt 501(c)(3) status for themselves but will be subject to U.S. tax requirements ■ 501(c)(3) status for a non-U.S. charity does not allow for deductible contributions by individuals (who can only deduct gifts to charities formed in the U.S.) Individuals can support a non-U.S. entity out of their donor advised fund or private foundation subject to specific rules or make the gift directly if a U.S. fundraising vehicle is established 11

12. Structures for Giving to Non-U.S. Entities Special grant making rules apply to grants made by U.S. private foundations or donor advised funds to non-U.S. entities which do not have 501(c)(3) status from the Internal Revenue Service. Such grants to the non-U.S. entity must be in support of a specific charitable purpose and be made subject to the “expenditure responsibility” provisions in the Internal Revenue Code which require the grantor to: ■ see that the grant is spent solely for the purpose for which it was made and have a written grant agreement ■ obtain reports from the grantee on how the grants were spent, and ■ make reports on the expenditures to the Internal Revenue Service 12

13. Structures for Giving to Non-U.S. Entities Foundations and donor advised funds may also make an “equivalency determination” of the non-U.S. entity by which they determine that the non-U.S. entity is equivalent to a U.S. public charity ■ Based on documentation including an affidavit and financial support information or information on status as an equivalent educational institution ■ Allows the grantor to avoid expenditure responsibility 13

14. Contacts 14 Robin Krause rkrause@pbwt.com 212-336-2125