[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