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§ 20.4 GRANTS OF FUNDS FROM U.S. CORPORATION-RELATED FOUNDATIONthe private foundation exercises expenditure responsibility with respectto the grant, 19 or• for any purpose other than a charitable purpose. 20The penalty for making a taxable expenditure begins at 10 percent of the expenditureagainst the foundation and 2.5 percent (maximum $5,000) against anyfoundation manager (such as a trustee or officer) who agreed to the expenditure.21 If the expenditure is not timely corrected, 22 the penalty increases to 100percent against the foundation and 50 percent (maximum $10,000) against thefoundation manager. 23To avoid exposure to taxable expenditure liability, a private foundation mustmake two preliminary determinations with regard to an overseas grant:1. Whether the grant is for a charitable purpose2. Whether the private foundation must exercise expenditure responsibilitywith respect to the grantee organization because it is not a public charity(b) Charitable PurposeThe United States regulatory scheme surrounding transborder grant-making parallelsthe rules concerning domestic grant-making. The most basic concept in thisregard is that of charitable purpose. A grant to a charitable organization will not, initself, satisfy the requirement. However, a grant that is specifically designated for acharitable purpose, but made to an organization that is not charitable, can qualify.To qualify as an eligible grantee, an organization must be organized andoperated exclusively for religious, charitable, scientific, literary, or educationalpurposes; to foster amateur sports competition; or for the prevention of crueltyto children or animals. 24 The emphasis is not on the structure of the organization;it is on the charitable purposes served.Terms such as charitable, educational, and scientific purposes are specificallydefined in U.S. tax law. 25(c) Expenditure ResponsibilityThe U.S. tax law requires expenditure responsibility of private foundations toensure that their grants are spent solely for the purpose for which they weremade, and that full and complete reports on how the funds were spent are submittedto the grantor by the grantee. This body of law requires privatefoundations to exercise expenditure responsibility with respect to grants to certainorganizations. 2619 IRC § 4945(h).20 IRC § 4945(d).21 IRC § 4945(a).22 IRC § 4945(i)(1).23 IRC § 4945(b).24 IRC § 170(c)(2)(B).25 See § 3.3.26 IRC § 4945(h); Reg. § 53.4945-5(h). 571