Grants from U.S. Foundations: New Rules Expand Who Can Determine Charitable Status of the Foreign Recipient
On September 24, 2012 the IRS and Treasury Department published proposed regulations stating that private foundations may rely on written advice from a “qualified tax practitioner” in making a “good faith” determination that a foreign organization is a charitable organization. Furthermore, the IRS and Treasury are considering changes to certain aspects of the good faith determination process, including the elimination or restriction of a private foundation’s ability to base a good faith determination on an affidavit.
- Private foundations that make grants to foreign organizations based on good faith determinations may want to contact their CohnReznick representative to determine the requirements needed in order to conform to the proposed regulations. This is important as after the proposed regulations are finalized, foundations will not be able to rely on written advice from a foreign counsel unless the foreign counsel is a qualified tax practitioner as defined by Circular 230.
- It is important that foundations begin planning for the potential elimination or restriction of the ability to make good faith determinations based on affidavits from foreign grantees.
In general, grants made by private foundations to most types of public charities are “qualifying distributions” under Internal Revenue Code (IRC) Section 4942 and are not “taxable expenditures” under IRC Section 4945. A grant made by a private foundation to a foreign organization that does not have an IRS determination letter is treated as a qualifying distribution and not a taxable expenditure if the foundation has made a “good faith determination” that the foreign organization is equivalent to a public charity.
How Is “Good Faith” Determined?
Under the current regulations, a determination is ordinarily considered as made in good faith if it is based on an affidavit of the foreign organization or an opinion of counsel of the grantor or grantee. Under the proposed regulations, private foundations may base a good faith determination on written advice from a “qualified tax practitioner.” The term “qualified tax practitioner” includes an attorney, a CPA, or an enrolled agent as defined in Circular 230. Unlike the current regulations, under the proposed regulations, a private foundation will not be able to base a good faith determination on written advice from foreign counsel, unless the foreign counsel is a qualified tax practitioner.
When Are the Proposed Regulations Effective?
The proposed regulations will apply for grants made after the date of publication of the regulations as final in the Federal Register. However, a private foundation may rely on the proposed regulations for grants made on or after September 24, 2012.
The Treasury Department and IRS are also considering the following items and are requesting comments as to whether:
- It is appropriate to limit the timeframe during which a private foundation will be permitted to make a good faith determination based upon a qualified tax practitioner’s written advice (such as 12 months from the date of the written advice).
- The current standards require modification to reflect changes to the public support tests for public charity status under IRC Sections 170 and 509.
- It is suitable that additional guidelines are provided regarding appropriate timeframes for gathering information upon which written advice is based.
- A foundation’s ability to base a good faith determination on an affidavit is to be eliminated or restricted.
For more information, please visit the CohnReznick Not-for-Profit and Education Practice webpage and contact:
Thomas Lanning, Tax Partner, at firstname.lastname@example.org or 646-834-4108;
Philip Cornblatt, Tax Partner, at email@example.com or 410-783-6236; or
Phil Royalty, Director, at firstname.lastname@example.org or 916-930-5222.