[Federal Register Volume 77, Number 185 (Monday, September 24, 2012)]
[Proposed Rules]
[Pages 58796-58799]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-23553]
=======================================================================
-----------------------------------------------------------------------
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 53
[REG-134974-12]
RIN 1545-BL23
Reliance Standards for Making Good Faith Determinations
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Notice of proposed rulemaking.
-----------------------------------------------------------------------
SUMMARY: This document contains proposed regulations regarding the
standards for making a good faith determination that a foreign
organization is a charitable organization, grants to which may be
qualifying distributions and not taxable expenditures. The regulations
will affect private foundations seeking to make such good faith
determinations.
DATES: Comments and requests for a public hearing must be received by
December 24, 2012.
ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-134974-12), room
5205, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station,
Washington, DC 20044. Submissions may be hand-delivered Monday through
Friday between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (REG-
134974-12), Courier's Desk, Internal Revenue Service, 1111 Constitution
Avenue NW., Washington, DC, or sent electronically via the Federal
eRulemaking Portal at http://www.regulations.gov/ (IRS REG-134974-12).
FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations,
Courtney D. Jones at (202) 622-6070; concerning submissions of comments
and requests for a public hearing, Oluwafunmilayo Taylor, (202) 622-
7180 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Background
To avoid certain excise taxes under chapter 42, private foundations
must make a minimum level of qualifying distributions (as defined in
section 4942 of the Internal Revenue Code) each year and must avoid
making taxable expenditures (as defined in section 4945). Grants for
charitable purposes to certain foreign organizations generally may be
treated as qualifying distributions under section 4942 if the private
foundation makes a good faith determination that the foreign
organization is an organization described in sections 501(c)(3) and
509(a)(1), (a)(2), or (a)(3) (``public charity'') that is not a
supporting organization described in section 4942(g)(4)(A)(i) or
(g)(4)(A)(ii) (``disqualified supporting organization'') or is an
organization described in sections 501(c)(3) and 4942(j)(3) (``private
operating foundation''). Similarly, grants for charitable purposes to
certain foreign organizations may be treated as other than taxable
expenditures under section 4945 if the private foundation makes a good
faith determination that the foreign organization is a public charity
(other than a disqualified supporting organization) or an organization
described in sections 501(c)(3) and 4940(d)(2) (``exempt operating
foundation'').
Qualifying Distributions Under Section 4942
Section 4942 generally requires a private foundation (other than a
private operating foundation) to make ``qualifying distributions''
equal to or exceeding a minimum ``distributable amount'' for each
taxable year. If a private foundation has not distributed the full
distributable amount by the end of the succeeding taxable year, section
4942 imposes an excise tax on the undistributed portion. A private
foundation's distributable amount for any taxable year generally equals
five percent of the aggregate fair market value of its non-exempt-use
assets, increased by any repayments of amounts treated as qualifying
distributions in prior years, and reduced by any taxes imposed under
subtitle A and section 4940. Section 4942(g) generally defines a
``qualifying distribution'' as any expenditure or grant, including
program-related investments and certain set-asides of income, paid to
accomplish one or more purposes described in section 170(c)(2)(B)
(``charitable purposes''). Under section 4942(g)(1)(A), however, grants
to organizations controlled, directly or indirectly, by the foundation
or one or more of its disqualified persons are not qualifying
distributions unless the grant is redistributed for charitable purposes
within the period specified in section 4942(g)(3). Similarly, grants to
other private foundations (except private operating foundations), are
not qualifying distributions. In addition, in 2006, the Pension
Protection Act of 2006, Public Law No. 109-208, 120 Stat. 780 (2006)
(``PPA''), added section 4942(g)(4), which provides that a qualifying
distribution does not include any amount paid to a disqualified
supporting organization. Section 53.4942(a)-3(a)(6), however, has not
been amended to reflect this statutory change.
For purposes of section 4942, a grant for charitable purposes to a
foreign organization that does not have a determination letter from the
IRS may be treated as a qualifying distribution if the grantor private
foundation makes a ``good faith determination'' that the foreign
organization is a private operating foundation or a public charity that
is not a disqualified supporting organization, provided that the
foreign organization is not controlled by the foundation or its
disqualified persons. See Sec. 53.4942(a)-3(a)(6). Under Sec.
53.4942(a)-3(a)(6), a private foundation will ordinarily be considered
to have made a ``good faith
[[Page 58797]]
determination'' if the determination is based on an affidavit of the
grantee or on an opinion of counsel of either the grantor or the
grantee. The affidavit or opinion must set forth sufficient facts
concerning the operations and support of the grantee for the IRS to
determine that the grantee would be likely to qualify as a public
charity or a private operating foundation.
Taxable Expenditures Under Section 4945
Section 4945 imposes an excise tax on a private foundation's
``taxable expenditures'' as defined in section 4945(d), including
expenditures for other than charitable purposes. Under section
4945(d)(4), a taxable expenditure includes any grant to an organization
unless: (1) The grantee is a public charity (other than a disqualified
supporting organization) or an exempt operating foundation; or (2) the
private foundation exercises expenditure responsibility with respect to
the grant in accordance with section 4945(h). The Deficit Reduction Act
of 1984, Public Law No. 98-369, 98 Stat. 494 (1984), amended section
4945(d)(4) to provide that expenditure responsibility is not required
for a grant to an exempt operating foundation. The PPA amended section
4945(d)(4) to require the exercise of expenditure responsibility with
respect to a grant to a disqualified supporting organization. Section
53.4945-5(a)(5), however, has not been amended to reflect these
statutory changes.
Section 53.4945-5(a)(5) provides that a grant to a foreign
organization that does not have a determination letter from the IRS
will be treated as a grant to a public charity (for which the grantor
is not required to exercise expenditure responsibility) if the grantor
has made a ``good faith determination'' that the grantee is a public
charity. Under Sec. 53.4945-5(a)(5), a private foundation will
ordinarily be considered to have made a ``good faith determination'' if
the determination is based on an affidavit of the grantee or on an
opinion of counsel of either the grantor or the grantee. The affidavit
or opinion must set forth sufficient facts concerning the operations
and support of the grantee for the IRS to determine that the grantee
would be likely to qualify as a public charity.
Standards Relating To Written Advice and Taxpayer Reliance
Section 330 of title 31 of the United States Code authorizes the
Secretary of the Treasury to regulate practice before the Treasury
Department. The Secretary has published regulations governing practice
before the IRS in 31 CFR part 10 and reprinted the regulations as
Treasury Department Circular No. 230 (``Circular 230''). Circular 230
provides minimum standards of conduct that tax practitioners are
required to meet with respect to written advice concerning Federal tax
issues. Many of these standards (including, among others, Sec. 10.37
and Sec. 10.51(a)(13)) reflect principles a qualified and competent
practitioner uses when considering and rendering any written tax
advice.
Section 6664 of the Internal Revenue Code provides a defense to
taxpayers for certain penalties imposed on an underpayment of tax if
the taxpayer shows that there was reasonable cause for the underpayment
and the taxpayer acted in good faith with respect to the underpayment.
A taxpayer may demonstrate reasonable cause and good faith with respect
to the underpayment by reasonably relying on written advice from a
professional tax advisor. Section 1.6664-4(c)(1) provides that all
pertinent facts and circumstances must be taken into account in
determining whether a taxpayer has reasonably relied in good faith on
written advice, including written advice from a professional tax
advisor. A taxpayer's education, sophistication, and business
experience are factors taken into account in determining whether the
taxpayer's reliance on written advice was reasonable and made in good
faith. A taxpayer will not be considered to have reasonably relied in
good faith on written advice unless the requirements of Sec. 1.6664-
4(c)(1) are satisfied. For example, a private foundation's reliance on
written advice is not reasonable and in good faith if the private
foundation knows, or reasonably should have known, that a professional
tax advisor lacks knowledge of the relevant aspects of Federal tax law
or that the professional tax advisor is otherwise not qualified or
competent to render the written advice. Moreover, a private foundation
may not rely on written advice if it knows, or has reason to know, that
relevant facts were not disclosed to the professional tax advisor or
the written advice is based on a representation or assumption that the
private foundation knows, or has reason to know, is unlikely to be
true.
Explanation of Provisions
The current regulations under sections 4942 and 4945 state that 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 the grantee. The proposed regulations modify
this rule to identify a broader class of tax practitioners upon whose
written advice a private foundation may base a ``good faith
determination.'' The proposed regulations also make certain conforming
changes consistent with statutory amendments that have been made to
sections 4942 and 4945.
Under the proposed regulations, a private foundation's good faith
determination ordinarily may be based on written advice given by a
``qualified tax practitioner'' who is subject to the requirements in
Circular 230, including the requirements in current Sec. Sec. 10.37
and 10.51(a)(13) (or successor provisions). A qualified tax
practitioner means an attorney, a certified public accountant
(``CPA''), or an enrolled agent, as those practitioners are defined in
Sec. Sec. 10.2 and 10.3 of Circular 230. The proposed regulations
limit the definition of a qualified tax practitioner to attorneys,
CPAs, and enrolled agents because these practitioners generally provide
advice to clients with respect to taking positions on tax returns, and
these practitioners are generally authorized to represent their clients
before the IRS without limitations applicable to other types of
practitioners (such as enrolled actuaries). The Treasury Department and
the IRS believe that expanding the class of practitioners on whose
written advice a private foundation may base a good faith determination
will decrease the cost of seeking professional advice regarding these
determinations, enabling foundations to engage in international
philanthropy in a more cost-effective manner. At the same time,
expressly allowing reliance on a broader spectrum of professional tax
advisors may encourage more private foundations to obtain written tax
advice, thus promoting the quality of the determinations being made.
Although the proposed regulations generally expand the class of
practitioners on whose written advice a private foundation may
ordinarily base a good faith determination, unlike the current rule,
the expanded class would not include foreign counsel unless the foreign
counsel is a qualified tax practitioner (as defined in the proposed
regulations). The proposed rule is consistent with the general
requirements of Circular 230 that an attorney or CPA be licensed in a
state, territory, or possession of the United States, and an enrolled
agent be enrolled by the IRS, in order to practice before the IRS.
The proposed regulations provide that a private foundation's
determination that is based on the written advice of a qualified tax
practitioner will be considered as made in good faith if the private
foundation's reliance on the
[[Page 58798]]
written advice meets the requirements of Sec. 1.6664-4(c)(1), which
are the standards that must be taken into account in determining
whether a taxpayer has reasonably relied in good faith on advice for
purposes of section 6664. Additionally, as is the case under the
present regulations under sections 4942 and 4945, the written advice
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 (other than a
disqualified supporting organization) or as a private operating
foundation or an exempt operating foundation, as applicable.
The Treasury Department and the IRS are considering whether it is
appropriate to limit the timeframe during which a private foundation
will be permitted to rely upon a qualified tax practitioner's written
advice solely for purposes of these regulations. For example, the final
regulations or future guidance published in the Internal Revenue
Bulletin may provide that a private foundation may base a good faith
determination on written advice of a qualified tax practitioner for
distributions that occur within a particular timeframe (such as 12
months) from the date of the written advice, provided the private
foundation does not know nor have reason to know that the facts
underlying the written advice have changed. The Treasury Department and
the IRS request comments regarding the appropriateness of a time limit
and, if appropriate, the length of the time limit.
The Treasury Department and the IRS are also considering whether
the current standards in Rev. Proc. 92-94 (1992-2 CB 507) should be
modified to take into account changes to the public support test for
public charity status under sections 170 and 509 and whether additional
guidelines regarding appropriate timeframes for gathering information
upon which written advice is based should be provided in final
regulations or in guidance published in the Internal Revenue Bulletin.
Comments on this issue are requested.
Because the proposed rule is expected to make it easier and less
costly to obtain professional tax advice that can be used as a basis to
make a good faith determination, the Treasury Department and the IRS
also are considering whether it is appropriate to further amend the
current regulations to remove the ability of a private foundation to
base a good faith determination on an affidavit of a foreign grantee,
which may be a less reliable basis for making a good faith
determination than advice from a qualified tax practitioner. The
Treasury Department and the IRS are concerned, however, that
eliminating the ability to base a good faith determination on an
affidavit of a foreign grantee may inappropriately discourage foreign
grantmaking by smaller private foundations, or inhibit smaller foreign
grants generally. While Rev. Proc. 92-94 continues to provide a
simplified procedure that private foundations may follow in making good
faith determinations based on affidavits, the Treasury Department and
the IRS request comments on whether a foundation's ability to base a
good faith determination on affidavits should be retained, and if so,
whether the use of affidavits should be restricted. For example, future
guidance could prohibit the use of affidavits for grants above a
certain dollar threshold, or could require supporting factual
information that might serve to corroborate the content of affidavits.
Proposed Effective/Applicability Date
The proposed regulations will apply for grants made after the date
of publication of the Treasury decision adopting these paragraphs as
final regulations in the Federal Register. However, a private
foundation may rely on these proposed regulations for grants made on or
after September 24, 2012.
Special Analyses
It has been determined that this notice of proposed rulemaking is
not a significant regulatory action as defined in Executive Order
12866, as supplemented by Executive Order 13563. Therefore, a
regulatory assessment is not required. It also has been determined that
section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5)
does not apply to this notice of proposed rulemaking, and because this
notice of proposed rulemaking does not impose a collection of
information on small entities, the Regulatory Flexibility Act (5 U.S.C.
chapter 6) does not apply. Pursuant to section 7805(f) of the Internal
Revenue Code, this notice of proposed rulemaking has been submitted to
the Chief Counsel for Advocacy of the Small Business Administration for
comment on its impact on small businesses.
Comments and Requests for Public Hearing
Before these proposed regulations are adopted as final regulations,
consideration will be given to any comments that are submitted timely
to the IRS as prescribed in this preamble under the ``Addresses''
heading. The Treasury Department and the IRS request comments on all
aspects of the proposed regulations. All comments will be available at
www.regulations.gov or upon request. A public hearing will be scheduled
if requested in writing by any person that timely submits written
comments. If a public hearing is scheduled, notice of the date, time,
and place for the public hearing will be published in the Federal
Register.
Drafting Information
The principal author of these proposed regulations is Courtney D.
Jones, Office of the Chief Counsel (Tax-Exempt and Government
Entities). However, other personnel from the Treasury Department and
the IRS participated in their development.
List of Subjects in 26 CFR Part 53
Excise taxes, Foundations, Investments, Lobbying, Reporting and
recordkeeping requirements, Trusts and trustees.
Proposed Amendments to the Regulations
Accordingly, 26 CFR part 53 is proposed to be amended as follows:
PART 53--FOUNDATION AND SIMILAR EXCISE TAXES
Paragraph 1. The authority citation for part 53 continues to read
in part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 53.4942(a)-3 is amended by revising paragraph
(a)(6) to read as follows:
Sec. 53.4942(a)-3 Qualifying distributions defined.
(a) * * *
(6) Certain foreign organizations--(i) In general. A distribution
for purposes described in section 170(c)(2)(B) to a foreign
organization, which has not received a ruling or determination letter
that it is an organization described in section 509(a)(1), (a)(2), or
(a)(3) or section 4942(j)(3), will be treated as a distribution made to
an organization described in section 509(a)(1), (a)(2), or (a)(3)
(other than an organization described in section 4942(g)(4)(A)(i) or
(g)(4)(A)(ii)) or section 4942(j)(3) if the distributing foundation has
made a good faith determination that the donee organization is an
organization described in section 509(a)(1), (a)(2), or (a)(3) (other
than an organization described in section 4942(g)(4)(A)(i) or
(g)(4)(A)(ii)) or section 4942(j)(3). A ``good faith determination''
ordinarily will be considered as made if the determination is based on
an affidavit of the donee organization or written advice
[[Page 58799]]
from a qualified tax practitioner that the donee is an organization
described in section 509(a)(1), (a)(2), or (a)(3) (other than an
organization described in section 4942(g)(4)(A)(i) or (g)(4)(A)(ii)) or
section 4942(j)(3). In the case of a determination based on written
advice, the determination will be considered as made in good faith if
the foundation reasonably relied in good faith on the written advice in
accordance with the requirements of Sec. 1.6664-4(c)(1). Furthermore,
the affidavit or written advice must set forth sufficient facts
concerning the operations and support of the donee organization for the
Internal Revenue Service to determine that the donee organization would
be likely to qualify as an organization described in section 509(a)(1),
(a)(2), or (a)(3) (other than an organization described in section
4942(g)(4)(A)(i) or (g)(4)(A)(ii)) or section 4942(j)(3).
(ii) Definitions. For purposes of this paragraph (a)(6)--
(a) The term ``foreign organization'' means any organization that
is not described in section 170(c)(2)(A).
(b) The term ``qualified tax practitioner'' means an attorney, a
certified public accountant, or an enrolled agent, within the meaning
of 31 CFR 10.2 and 10.3, who is subject to the requirements in 31 CFR
part 10.
(iii) Effective/applicability date. Paragraph (a)(6) of this
section will apply with respect to grants made after the date of
publication of the Treasury decision adopting this paragraph as a final
regulation in the Federal Register. However, a private foundation may
rely on these proposed regulations with respect to grants made on or
after September 24, 2012.
* * * * *
Par. 3. Section 53.4945-5 is amended by revising paragraph (a)(5)
to read as follows:
Sec. 53.4945-5 Grants to organizations.
(a) * * *
(5) Certain foreign organizations--(i) In general. If a private
foundation makes a grant to a foreign organization, which does not have
a ruling or determination letter that it is an organization described
in section 509(a)(1), (a)(2), or (a)(3) or section 4940(d)(2), the
grant will nonetheless be treated as a grant made to an organization
described in section 509(a)(1), (a)(2), or (a)(3) (other than an
organization described in section 4942(g)(4)(A)(i) or (g)(4)(A)(ii)) or
section 4940(d)(2) if the grantor private foundation has made a good
faith determination that the grantee organization is an organization
described in section 509(a)(1), (a)(2), or (a)(3) (other than an
organization described in section 4942(g)(4)(A)(i) or (g)(4)(A)(ii)) or
section 4940(d)(2). A ``good faith determination'' ordinarily will be
considered as made if the determination is based on an affidavit of the
grantee organization or written advice from a qualified tax
practitioner that the grantee is an organization described in section
509(a)(1), (a)(2), or (a)(3) (other than an organization described in
section 4942(g)(4)(A)(i) or (g)(4)(A)(ii)) or section 4940(d)(2). In
the case of a determination based on written advice, the determination
will be considered as made in good faith if the foundation reasonably
relied in good faith on the written advice in accordance with the
requirements of Sec. 1.6664-4(c)(1). Furthermore, the affidavit or
written advice must set forth sufficient facts concerning the
operations and support of the grantee organization for the Internal
Revenue Service to determine that the grantee organization would be
likely to qualify as an organization described in section 509(a)(1),
(a)(2), or (a)(3) (other than an organization described in section
4942(g)(4)(A)(i) or (g)(4)(A)(ii)) or section 4940(d)(2). See
paragraphs (b)(5) and (b)(6) of this section for additional rules
relating to foreign organizations.
(ii) Definitions. For purposes of this paragraph (a)(5)--
(a) The term ``foreign organization'' means any organization that
is not described in section 170(c)(2)(A).
(b) The term ``qualified tax practitioner'' means an attorney, a
certified public accountant, or an enrolled agent, within the meaning
of 31 CFR 10.2 and 10.3, who is subject to the requirements in 31 CFR
part 10.
(iii) Effective/applicability date. Paragraph (a)(5) of this
section will apply with respect to grants made after the date of
publication of the Treasury decision adopting this paragraph as a final
regulation in the Federal Register. However, a private foundation may
rely on these proposed regulations with respect to grants made on or
after September 24, 2012.
* * * * *
Steven T. Miller,
Deputy Commissioner for Services and Enforcement.
[FR Doc. 2012-23553 Filed 9-21-12; 8:45 am]
BILLING CODE 4830-01-P