31 July 2003


Internal Revenue Service
Attn: T:EO:RA:G (Announcement 2003-29)
P.O. Box 7604
Ben Franklin Station
Washington, DC 20044

RE: Announcement 2003-29, 2003-29 I.R.B. 928
Request for Comments Relating to International Grant-making and International Activities by Domestic 501(c)(3) Organizations

Dear Sir/Madam:

The United States Conference of Catholic Bishops submits these comments in response to Announcement 2003-29. IRS has requested public comment on how it might clarify existing requirements that section 501(c)(3) organizations must meet with respect to international grant-making and other international activities, with particular emphasis on minimizing risks of diversion of charitable assets for non-charitable purposes. USCCB shares the concerns of IRS that charitable funds not be diverted to support terrorism.1
Background

The United States Conference of Catholic Bishops ("USCCB") is a nonprofit corporation organized under the laws of the District of Columbia. The membership of USCCB is comprised of all active Catholic bishops of the United States. USCCB is recognized as exempt from federal income tax under section 501(c)(3) and classified as a church under section 170(b)(1)(A)(i) of the Internal Revenue Code of 1986 ("Code"). USCCB is excepted from the requirement to file annual Form 990 under the provisions of section 6033(a)(2)(A)(i) of the Code.

International relief efforts of the Catholic bishops of the United States are conducted overwhelmingly through a subsidiary of USCCB, Catholic Relief Services-United States Conference of Catholic Bishops ("CRS"), a nonprofit section 501(c)(3) corporation founded in 1943, having an annual operating budget in excess of $250,000,000. CRS has filed independent comments in response to Announcement 2003-292 ("CRS Comments"). USCCB directly conducts two foreign grant-making programs through its Office to Aid the Catholic Church in Central and Eastern Europe and its Secretariat for the Church in Latin America.3 Responses to the issues identified for comment in Announcement 2003-29 are provided below with respect to each of these programs.
Aid to the Catholic Church in Central and Eastern Europe

In November 1990, the bishops authorized an annual national collection in parishes throughout the U.S. to support the new USCCB Office to Aid the Catholic Church in Central and Eastern Europe ("ACCCEE") as a means of funding critical projects to restore the pastoral capacity of the Catholic Church in Central and Eastern Europe after decades of communist oppression. Annual grant distributions total approximately $7 million, although the total amount available is dependent on the amount collected through the annual national collection. Proposals from the following countries are eligible for ACCCEE funding: Albania, Armenia, Azerbaijan, Belarus, Bosnia, Bulgaria, Croatia, Czech Republic, Estonia, Georgia, Hungary, Kazakhstan, Kyrgystan, Latvia, Lithuania, Macedonia, Moldova, Poland, Romania, Russia, Slovakia, Tadzhikistan, Turkmenistan, Ukraine, Uzbekistan and Yugoslavia. Funded projects are intended to be temporary, until the Church in Central and Eastern Europe can become self-sustaining. During 2002, ACCCEE grants ranged from under $1000 for educational support to $100,000 for seminary renovation.

Project Eligibility. ACCCEE may be categorized as a church-to-church program, since its purpose and focus is limited to capacity building of the Catholic Church in its target countries. ACCCEE written guidelines solicit proposals for narrowly targeted Church-building projects: formation of priests and religious (including scholarships and support for seminaries and novitiates)4; religious education and evangelization (including formation of lay religious leaders, training of catechists, and the production of religious education materials); mass media (including the development of religious publishing and radio and television program production and broadcasting capabilities); and social ministry (including programs to help restore or establish the Church's capacity for charitable ministries).

Construction proposals are also considered. Primary consideration is given to construction grant requests that maximize or multiply the pastoral work of the Church, including seminaries, novitiates, pastoral centers and training centers. Secondary consideration is given to grant requests for the construction, reconstruction or renovation of individual churches, chapels or shrines. The applicant must demonstrate the urgency or importance of each such project.

ACCCEE presets a dollar limit for grants to be made in each eligible country. All grant requests must be endorsed by the bishop of the diocese in which the project will be conducted and also by the national bishops' conference of the country in which the project will be conducted. This ensures coordination of funding requests on both a diocesan and national level and also ensures that only requests deemed worthwhile and reflective of the priorities of the bishops of a particular country will move forward for consideration by the USCCB bishops' committee for ACCCEE.

Proposal Review and Approval. The USCCB bishops' committee for ACCCEE is comprised of six bishops, all of whom are members of USCCB and serve indefinite terms. The ACCCEE committee meets twice each year. Each bishop member is assigned a group of eligible countries for which he is responsible. Bishops make periodic trips to their assigned countries. One month in advance of an ACCCEE committee meeting, each bishop member is sent a full list of all projects to be considered during that meeting. Bishops are also sent copies of the full grant requests for projects in their assigned countries. All projects are presented to the committee by ACCCEE staff. The bishops' committee approves projects based on the recommendations of the ACCCEE executive director as well as their own first-hand knowledge based on visits to the region.

ACCCEE grant award letters are sent to successful applicants, announcing the amount awarded for the project and how the funds will be disbursed. Local bishops and national bishops' conferences also receive grant award letters with respect to projects that they have endorsed. Finally, the papal nuncio for the country in which an approved project is located also receives a letter listing all disbursals made within his country of jurisdiction.

Grant Disbursal and Accounting. When an ACCCEE project is approved, funds are wired electronically, generally either to the account of the local bishop or to the account of the national bishops' conference. Funds are never disbursed in cash. The bishops who originally endorsed the project serve as administrators of the funds to ensure that funds are disbursed to the applicant, that the applicant uses the funds as outlined in the application, and that ACCCEE receives upon completion of the project a full account of how the funds were used. On rare occasions, the papal nuncio of a specific country may serve as fund administrator.

Language. ACCCEE accepts correspondence in English only. All grant applications, grant award letters, and other correspondence are transacted in English.

Records Retention. Under USCCB records retention guidelines, documentation on closed ACCCEE grants is retained in the office for three years and then archived permanently.

Post-9/11 Changes. ACCCEE has not made any changes to its grant procedures in the wake of the September 11, 2001 terrorist attacks. Procedures already in place, including site visits, oversight by local bishops, national bishops' conference or papal nuncio, electronic transfer of funds, and post-grant reporting were already adequate to ensure against diversion of funds for terrorism or other non-charitable purposes.
Church in Latin America

The Committee on the Church in Latin America ("CLA") was established in 1960. In 1965, U.S. bishops approved an annual national collection in parishes throughout the U.S. to provide financial assistance to the Church in Latin America through the bishops of Latin America. Funding priority is given to pastoral programs and pilot projects initiated by local Latin American bishops. Annual grant distributions total approximately $6 million, with the amount available dependent upon the amount collected through the annual national collection. Proposals from the following countries, which are members of Consejo Episcopal Latinoamericano ("CELAM"), are eligible for CLA funding: Antilles, Argentina, Bolivia, Brazil, Chile, Colombia, Costa Rica, Cuba, Dominican Republic, Ecuador, El Salvador, Guatemala, Haiti, Honduras, Mexico, Nicaragua, Panama, Paraguay, Peru, Uruguay, and Venezuela.

Project Eligibility. CLA grant-making focuses on the initiation of pastoral projects as opposed to ongoing maintenance. Applicants must provide, from local sources, approximately one-third of the total initial cost of any project for which funding is requested. Grants do not exceed 12 months' expenses. Under CLA's written guidelines, grant requests must fall under one of the following categories: catechetics; evangelization; lay leadership training; pastoral; preparation for the permanent deaconate; religious education; religious personnel formation (as opposed to advanced religious training); and socio-religious research. Proposals for construction, repairs, remodeling, equipment purchases, etc. are not eligible for funding.5

CLA guidelines establish funding caps based on the identity of the grant recipient. Parishes may receive up to $10,000, dioceses up to $20,000, and national projects up to $40,000. Regional projects average $50,000 but may be authorized for additional funding. A proposal of diocesan scope or located within a specific diocese, e.g., a parish proposal, must be endorsed by the local bishop. A proposal of national scope must be endorsed by the national conference of bishops for the country in which it will be conducted. A proposal of regional scope must be endorsed by the bishop of every diocese involved. If a proposal relates to the work of a religious congregation, the provincial or superior of that congregation must also endorse the project. Proposals lacking endorsement by the appropriate ecclesiastical authority will not be considered for funding. Certain regional or continental projects fall outside a particular ecclesial jurisdiction. These are classified as "Latin America General" and are given special consideration by CLA. For example, participation scholarships were provided for World Youth Days 2000 and 2002. Funds were disbursed through the bishops' conference for each country in which scholarships were provided.

Proposal Review and Approval. The USCCB bishops' committee for CLA is comprised of seven bishops, all of whom are members of USCCB and serve three-year terms. The CLA Committee meets three times each year. All proposals are reviewed by CLA staff, which requests clarifications as necessary. Given the social, economic and, in some cases, political issues in Latin American and Caribbean countries, the quality of proposals and levels of organizational sophistication of applicants vary. For example, requests from Haiti and the jungle areas of the Amazon may reflect basic literacy and minimal grant-writing skills. When proposal reviews are completed, staff prepares a book identifying all proposals being considered, including project summaries and staff recommendations to fund (for full or partial amount) or not fund. This book is sent to CLA committee members in advance of their meetings, during which they review, discuss and vote on grant funding. Any site visits are arranged by the CLA executive director, who may be accompanied by a member or members of the CLA bishops' committee. The entire CLA bishops' committee conducted visits to Colombia in 2002 and Cuba in 2003.

Grant Disbursal and Accounting. Upon approval of a proposal by the CLA bishops' committee, an award letter containing instructions on submission and preparation of grant reports is sent to the grantee. Grant funds are sent to the individual (bishop, priest or religious superior) who is responsible for the project. If the person responsible for the grant is a lay person, the grant check is sent to the bishop who endorsed the project. Each project endorser receives a letter announcing all grants approved in his diocese as well as the due dates for reporting on the use of grant funds. The primary method of payment is check, although funds for larger institutions, e.g., CELAM or a diocese, may be transmitted by wire transfer (generally no more than 25% of all funds are sent by wire transfer).

Each grantee is responsible for submitting a complete report on how grant funds were utilized within a twelve-month period of receiving the funds. Grantees delinquent in submitting reports in a timely manner are reported to project endorsers, who are responsible for follow up. Delinquent grantees are ineligible for applying for further CLA funding. If a project is approved for more than $20,000, the grantee's initial payment is one-half of the total grant amount, with the remaining payment contingent upon receipt and staff review of a mid-year (six-month) report. There is also a special protocol for reports from CELAM, which receives a large annual grant.

Language. CLA applications are received in Creole, English, Portuguese, and Spanish, with the majority being in Spanish. CLA staff members are fluent in Spanish. Applications received in Portuguese and Creole are outsourced for translation.

Records Retention. Under USCCB records retention guidelines, documentation on closed CLA grants is retained in the office for three years and then is archived permanently.

Post 9/11 Changes. CLA has not made any changes to its grant procedures in specific response to the September 11, 2001 terrorist attacks. In March 2002, USCCB received an Office of Foreign Asset Control ("OFAC") license for the transmission of funds to Cuba. Special considerations are given to the review of projects under the purview of the OFAC license. All requests for pastoral projects in Cuba must be submitted through the Cuban bishops' conference and are reviewed once a year. Under the terms of the OFAC license, funds for approved Cuban projects are maintained in a dedicated USCCB account and are wired to the account of the Cuban apostolic nunciature at the Vatican Bank to ensure payment to the Cuban bishops' conference, which is responsible for disseminating funds for each project. Records of Cuban grants made under the OFAC license are subject to OFAC examination for at least five years from the date of the grant. In addition, in January 2002, USCCB implemented a policy whereby all peace education in Colombia must also receive approval from FICONPAZ, an entity of the Colombian bishops' conference and Caritas working on peace issues.6
Existing IRS Precedent

The earliest IRS precedent dealing with payments by charitable organizations to individuals, Rev. Rul. 56-304, is approaching its 50th anniversary. A subsequent series of 1960s rulings, Rev. Rul. 63-252, Rev. Rul. 66-79 and Rev. Rul. 68-489, dealing with deductibility of foreign payments by U.S. charitable organizations and payments by charitable organizations to non-exempt organizations, are of slightly more recent vintage. If only because of the age of these rulings, many religious organizations are not familiar with them. Further, even considered collectively, they do not present an analysis of the full range of tax issues about which domestic charitable organizations making foreign grants or undertaking foreign operations in the twenty-first century must be concerned.

USCCB supports issuance of updated IRS guidance with respect to the exemption, deductibility and related (USA PATRIOT Act of 2001, Executive Order 13224, etc.) requirements regarding foreign grant programs and foreign operations of U.S. charitable organizations.7 Such guidance must be comprehensive, practical and flexible in order to encompass the range of operations and grant activities undertaken by domestic charitable organizations, including churches and religious organizations. Any additional requirements imposed on U.S. charitable organizations must be targeted, effective, proportionate, and give due regard to principles of subsidiarity. Issuance of mandatory, "one-size-fits-all" requirements would be neither appropriate nor helpful. USCCB is particularly concerned that the integrity of church-to-church grant and operational programs, of which the ACCCEE and CLA programs described above are likely typical, be maintained.

Because of the complexity of the issues involved and the diversity of organizations involved in foreign grant-making and operations, guidance in the form of an IRS publication, rather than a revenue ruling, may be more effective. Any such guidance should be disseminated on as wide a basis as possible, including press releases, posting to the IRS/EO website, and publicity through umbrella organizations, such as Independent Sector. Further, the applicability of such guidance to all section 501(c)(3) organizations, including churches and religious organizations, should be emphasized prominently. USCCB is prepared to assist in disseminating new guidance to Catholic organizations nationwide.

USCCB endorses generally a "risk-based" approach to foreign grant-making and operations along the lines described in the comments of the ABA Committee on Exempt Organizations of the Section of Taxation8 ("ABA EO Comments"). Church-to-church grant and operational programs similar to the ACCCEE and CLA programs present an extremely low risk of potential fund diversion, because of the ongoing relationship with and involvement of foreign bishops and bishops' conferences in the grant process.

Targeting. Any additional requirements imposed on foreign grant-making or foreign operations of U.S. charitable organizations must be targeted to situations representing an identified risk for asset diversion. For example, domestic charitable organizations and foreign charitable organizations do not present the same risk profiles with respect to asset diversion for terrorist purposes.9 Likewise, all non-reporting situations (including churches and certain other religious organizations) do not present the same risk profile. Although churches are not required to file Form 1023, many nonetheless do so in order to verify deductibility to their contributors. While religiously-motivated contributions have been identified in some quarters as a significant source of terrorism funding, incidents involving U.S. charitable organizations have been rare.10 Such religiously-motivated giving is frequently done through informal channels outside the ambit of any U.S. charitable organizations.

Effectiveness. Any additional requirements imposed on foreign grant-making or foreign operations of U.S. charitable organizations must be effective to actually deter diversion of assets. Imposing additional reporting or other administrative requirements on law-abiding U.S. charitable organizations will do nothing to prevent terrorism funding through foreign charities, informal, non-traditional financial remittance systems, criminal enterprises (including credit card frauds), internet fundraising, or international trade in gems and precious metals. Nor will such additional requirements imposed on U.S. charitable organizations deter those who would intentionally utilize charitable organizations as fronts for terrorism funding. These individuals are not motivated by deductibility of contributions or concerns for maintaining tax-exempt status. The funding of terrorism is primarily a criminal enterprise and should be addressed as such.

Proportionality. Any additional requirements imposed on foreign grant-making or foreign operations of U.S. charitable organizations must balance their necessity and effectiveness in deterring diversion of assets against the financial and administrative burdens of compliance. For example, mandatory, detailed vetting of all foreign grants along the lines suggested in the Treasury voluntary guidelines is unnecessary and will not effectively deter those with intent to support terrorism. On the other hand, the costs of compliance would be significant, and would likely outstrip the value of many small foreign projects, thus artificially skewing international funding toward larger grants. Overly burdensome obligations not linked to any reasonable risk assessment will cause some U.S. charitable organizations to abandon their foreign grant-making programs entirely.

Subsidiarity. As described in the CRS Comments, subsidiarity is a principle whereby a higher level of organization should not perform any function that can be handled more effectively at a lower level. Unfortunately, when it comes to prevention of terror diversions, U.S. charitable organizations are not the most effective actors. Thus, while U.S. charitable organizations can properly be expected to conduct basic vetting of potential foreign grantees, obligations to conduct higher level investigations are more effectively accomplished by financial institutions or by the government, e.g., the due diligence obligations regarding financial institutions with which foreign grantees maintain accounts, as suggested by the voluntary Treasury guidelines. Likewise, all relevant terrorist exclusion lists should be consolidated by the U.S. government in a searchable database as a condition of imposing on U.S. charitable organizations any open-ended obligation, e.g., the voluntary Treasury guideline that charitable organizations consult lists maintained by OFAC, DOJ, UN, and EU, as well as "any other official list available to the charity."
Treasury Voluntary Guidelines

USCCB endorses the recommendations of the ABA EO Comments and those of the Counsel of Foundations11 that the voluntary Treasury guidelines be withdrawn. Given the diversity of the charitable sector, it is not possible to develop a single set of "best practices". Some of the suggested guidelines go beyond what is required by law, and do not reflect actual practice. Their "one-size-fits-all" approach fails to reflect the reality that that different requirements apply to certain subsets of charitable organization, e.g., private foundations, and churches and certain other religious organizations.

Governance. The structure and governance of most churches and certain other religious organizations does not conform to the standards suggested in the voluntary Treasury guidelines. First Amendment church-autonomy principles militate against imposition of mandatory structures or governance on churches and religious organizations. Church civil law structures differ significantly from those of charitable organizations generally, and include the ecclesial corporation, corporation sole, and trust formats. Church board composition is unlikely to be independent. In the latter two forms, boards of directors are typically non-existent.

Disclosure/Transparency. Also reflective of First Amendment principles, churches and certain religious organizations are not subject to the annual Form 990 filing requirements. Thus, they are not required to disclose information regarding board membership and compensation, key employee compensation, programs and expenses, and funding solicitations as suggested by the voluntary Treasury guidelines.

Anti-Terrorist Financing Procedures. The procedures suggested in the voluntary Treasury guidelines impose unreasonable burdens on the foreign grant-making and foreign operations of charitable organizations. The procedures are not targeted, effective or proportionate, and in respects identified above fail to reflect subsidiarity. Their "one-size-fits-all" approach fails to reflect prudent risk analysis or flexible response. They fail to reflect the reality of much international grant-making by churches. Like both ACCCEE and CLA, such international grant-making involves church-to-church programs, the hallmarks of which are close, ongoing, collaborative relationships developed over time between the U.S. church and foreign counterparts. The integrity of such programs must be maintained. Formal vetting of funded projects along the lines suggested in the voluntary Treasury guidelines is unnecessary for such programs and would needlessly increase the costs of administering them.

Further, religious and political complications often attend foreign grant-making by U.S. churches and other religious organizations. For example, the governments of post-Communist states continue a generally negative view of religion, and practice administrative harassment toward churches with foreign workers. The sort of detailed information suggested in the voluntary Treasury guidelines is difficult to obtain for fear of repression. For example, there is a reluctance to offer too much information regarding priests and sisters who are native to other countries, lest they become targets of bureaucratic harassment. In addition, building materials for construction of churches are frequently denied locally, sometimes necessitating the purchase of materials by third parties in other countries, a situation that makes precise bookkeeping very difficult.
Conclusion

USCCB supports IRS efforts to prevent diversion of charitable assets for terrorism or other non-charitable purposes, but urges that the voluntary Treasury guidelines be withdrawn. USCCB supports the issuance of updated, comprehensive guidance that is targeted, effective, proportionate and imposes obligations on the appropriate actors. This guidance should be disseminated widely through the tax-exempt community. USCCB would be pleased to answer any questions or provide additional information that would assist IRS in developing such guidance.

Sincerely,

Deirdre Dessingue
Associate General Counsel

Notes

  1. The Catholic bishops of the U.S. have particularly condemned terrorism in the name of religion, noting that "…terrorism in the name of religion profanes religion." A Pastoral Message: Living with Faith and Hope after September 11, Statement of the United States Conference of Catholic Bishops, at 2 (November 14, 2001) [available at www.usccb.org].
  2. Comments of Michael Wiest, Chief of Staff, Catholic Relief Services-United States Conference of Catholic Bishops (July 17, 2003).
  3. Occasional foreign grants are also made from USCCB's Catholic Communications Campaign ("CCC"), which is otherwise a domestic grant program. These grants are made to overseas dioceses for communications purposes, e.g., radio equipment. They are small in number (5-6 annually) and amount ($10,000 - $20,000) and are overseen by the USCCB bishops' committee for CCC.
  4. The novitiate is a period of training and formation for religious life.
  5. Exceptions can be made to CLA funding guidelines in the event of natural disaster. For example, in the aftermath of hurricanes Georges and Mitch in 1998 and the series of earthquakes in El Salvador in 2001, CLA provided funds for the rebuilding of churches that would ordinarily not be considered eligible for funding.
  6. With the war situation in Colombia, a number of grassroots peace initiatives have sprung up. In order to insure that they conform to Church teaching on peace, FICONPAZ must review and approve.
  7. The discretion and control requirements for deductibility set forth in the existing "anti-conduit" revenue rulings also serve the cause of preventing terrorism diversion. To avoid "conduit" issues, USCCB adopted a formal written policy against accepting unsolicited contributions or grants earmarked by donors or grantees for transmission to other organizations.
  8. Comments in Response to Internal Revenue Service Announcement 2003-29, 2003-20 I.R.B. 928 Regarding International Grant-Making and International Activities by Domestic 501(c)(3) Organizations, at 35 (July 18, 2003).
  9. The Council on Foreign Relations Independent Task Force, at 2 (2002), identifies individuals and charities in Saudi Arabia as the most important source of funds for Al Qaeda. The U.S. government's National Money Laundering Strategy, at 23 (July 2002), appropriately focuses on foreign charitable organizations and NGOs.
  10. Fewer than five U.S. charitable organizations have been the subject of asset blocking orders out of a universe of over a million such organizations.
  11. Comments on U.S. Department of Treasury Anti-Terrorist Financing Guidelines: Voluntary Best Practices for U.S.-Based Charities (June 20, 2003).

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