Expenditure Responsibility

When a private foundation makes a grant to a public charity, the foundation generally relies on the recipient's own accountability structures. But when a foundation grants to a for-profit entity, a foreign organization, or a non-exempt organization, federal law requires the foundation to exercise "expenditure responsibility": it must take affirmative steps to ensure the funds are spent for the intended charitable purpose and for no other use.

In practice, expenditure responsibility involves several components: a pre-grant inquiry into the grantee's capacity and character, a written grant agreement specifying how funds must be used, ongoing reporting by the grantee to the foundation, and the foundation's own reporting to the IRS. If the grantee misuses funds, the foundation must take corrective action or risk being treated as having made a taxable expenditure, a violation that triggers excise taxes.

A hypothetical foundation wishing to fund a startup social enterprise organized as an LLC (rather than a nonprofit) would need to apply expenditure responsibility. The added compliance burden often surprises families accustomed to straightforward grantmaking. This complexity is one reason some foundations described in discussions of wealth complexity benefit from dedicated program staff or outside legal support.

Expenditure responsibility is sometimes confused with self-dealing rules, but they address different risks. Self-dealing governs transactions with insiders; expenditure responsibility governs grants flowing outward to certain recipients. A qualified attorney should draft expenditure responsibility agreements to ensure they satisfy IRS requirements.