The IRS recently issued proposed regulations amending the rules applicable to a private foundation’s good faith determination that that a foreign grantee is the foreign equivalent of a public charity or private operating foundation, grants to which will be “qualifying distributions” and not “taxable expenditures.” Most significantly, the proposed regulations expand the class of practitioners whose opinion may be relied upon by a private foundation for purposes of making a good faith determination that a foreign grantee is the foreign equivalent of a public charity or private operating foundation. A private foundation may rely on the proposed regulations for grants made on or after September 24, 2012.
The current Treasury Regulations provide that a grant made for charitable purposes to a foreign organization that does not have a determination letter from the IRS may be treated as a “qualifying distribution” (for purposes of avoiding the excise tax imposed on a private foundation’s undistributed income under Section 4942 of the Code) and not as a “taxable expenditure” (for purposes of avoiding the excise tax on taxable expenditures under Section 4945 of the Code) if the private foundation makes a good faith determination that the foreign organization is the foreign equivalent of a public charity (other than a disqualified supporting organization) or a private operating foundation. A determination that is based on an affidavit of the grantee or an opinion of counsel of either the grantor or the grantee generally will be considered to have been made in “good faith.” If a private foundation cannot make a good faith determination, characterization of the grant as a taxable expenditure may still be avoided if the private foundation exercises expenditure responsibility over the funds to ensure they are used for charitable purposes.
Under the proposed regulations, a private foundation may now rely on the opinion of a “qualified tax practitioner” subject to the requirements of Circular 230, which includes an attorney or a certified public accountant licensed in a state, territory or possession of the United States or an “enrolled agent” (as defined in Circular 230). Notably though, this expanded class of practitioners in the proposed regulations would not include any foreign counsel if such person is not a “qualified tax practitioner.” The notice accompanying the proposed regulations provides that the change is expected to decrease the costs of seeking professional advice with respect to good faith determinations and enable private foundations to engage in international philanthropy in a more cost-efficient way.
Under both the current Treasury Regulations and the proposed regulations, the written advice relied upon must provide sufficient facts about the operations and financial support of the foreign organization for the IRS to determine that the grantee would be likely to qualify as a public charity or a private operating foundation. The proposed regulations also provide that a private foundation’s reliance on the written advice must meet the same standards that apply to the determination of whether a taxpayer has reasonably relied in good faith on advice for purposes of avoiding penalties under Section 6664 of the Code.
The IRS requested comments on whether the option to rely on an affidavit from the foreign grantee organization should be eliminated, or, if retained, should be restricted (e.g., by prohibiting reliance on an affidavit to grants under a certain threshold dollar amount or by requiring supporting factual information to corroborate the contents of the affidavit). The IRS also requested comments on: whether the length of time that a private foundation may rely on a qualified tax practitioner’s written advice for purposes of these rules should be limited; whether the standards under Revenue Procedure 92-94 (which provides a simplified procedure for making good faith determinations of a foreign grantee’s equivalency to a public charity or private non-operating foundation) should be modified to take into account changes that have been made to the public support test for public charity status under Sections 170 and 509 of the Code; and whether additional time limits regarding the gathering of the underlying supporting information should be included.