[Federal Register Volume 80, Number 186 (Friday, September 25, 2015)]
[Rules and Regulations]
[Pages 57709-57717]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-24346]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 53
[TD 9740]
RIN 1545-BL23
Reliance Standards for Making Good Faith Determinations
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final regulations.
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SUMMARY: This document contains final regulations regarding the
standards for making a good faith determination that a foreign
organization is a charitable organization that is not a private
foundation, so that grants made to that foreign organization may be
qualifying distributions and not taxable expenditures. The regulations
also make additional changes to conform the final regulations to
statutory amendments made by the Deficit Reduction Act of 1984 and the
Pension Protection Act of 2006. The regulations will affect private
foundations seeking to make good faith determinations.
DATES: Effective date: These regulations are effective on September 25,
2015.
Applicability date: For the dates of applicability, see Sec. Sec.
53.4942(a)-3(f) and 53.4945-5(f)(3).
FOR FURTHER INFORMATION CONTACT: Ward L. Thomas, (202) 317-6173 (not a
toll-free number).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collection of information in these final regulations is the
good faith determination set forth in Sec. Sec. 53.4942(a)-3(a)(6) and
53.4945-5(a)(5). The collection of information contained in these
regulations is reflected in the collection of information for Form 990-
PF, ``Return of Private Foundation or Section 4947(a)(1) Trust Treated
as Private Foundation,'' that has been reviewed and approved by the
Office of Management and Budget in accordance with the Paperwork
Reduction Act of 1995 (44 U.S.C. 3507(d)), under control number 1545-
0052. An agency may not conduct or sponsor, and a person is not
required to respond to, a collection of information unless it displays
a valid control number assigned by the Office of Management and Budget.
Books or records relating to a collection of information must be
retained as long as their contents might become material in the
administration of any internal revenue law.
Background
This document contains amendments to 26 CFR part 53 under chapter
42, subtitle D of the Internal Revenue Code (Code). To avoid certain
excise taxes under chapter 42, a private foundation (referred to in
this preamble as a ``foundation'' or ``grantor'') \1\ must make a
minimum level of ``qualifying distributions'' (as defined in section
4942 of the Code) each year and must avoid making taxable expenditures
(as defined in section 4945). A foundation generally may treat grants
made for charitable purposes to certain foreign organizations as
qualifying distributions under section 4942 if the 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) (a ``public charity'') that is not a ``disqualified supporting
organization'' described in section 4942(g)(4)(A)(i) or (ii), or is an
organization described in sections 501(c)(3) and 4942(j)(3) (an
``operating foundation,'' also known as a ``private operating
foundation''). Similarly, foundations may treat grants for charitable
purposes to certain foreign organizations as other than taxable
expenditures under section 4945 without having to exercise expenditure
responsibility if the foundation makes a good faith determination that
the foreign organization is a public charity (other than a disqualified
supporting organization) or is an operating foundation described in
section 4940(d)(2) (an ``exempt operating foundation''). In this
preamble, a foreign grantee that is a public charity or operating
foundation that may receive a qualifying distribution (or a grant for
which expenditure responsibility is not required) is referred to as a
``qualifying public charity.'' \2\ This good faith determination is
commonly known as an ``equivalency determination.''
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\1\ The regulations under section 4942 refer to ``distributing
foundations'' making distributions to ``donee organizations,''
whereas the regulations under section 4945 refer to ``grantor
foundations'' making or paying grants to ``grantee organizations.''
For simplicity, this preamble refers to grantors making grants or
distributions to grantee organizations, in reference to both Code
sections.
\2\ The class of qualifying public charities for purposes of
section 4945 is a slightly smaller subset of those for purposes of
section 4942. Thus, grants to foreign organizations determined to be
operating foundations that are not exempt operating foundations, and
grants by operating foundations to foreign organizations determined
to be disqualified supporting organizations, may be qualifying
distributions under section 4942 but the grantor must nevertheless
exercise expenditure responsibility to avoid excise taxes under
section 4945 on such grants.
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Longstanding regulations under both sections 4942 and 4945 provide
that a 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 or an operating foundation. See Sec. Sec. 53.4942(a)-3(a)(6)
and 53.4945-5(a)(5). In this preamble, we refer to this rule, which
gives assurance to
[[Page 57710]]
foundations meeting the rule that their grants to foreign organizations
will ordinarily be considered to be qualifying distributions and not
taxable expenditures, as the ``special rule.''
Revenue Procedure 92-94, 1992-2 CB 507, provides further guidance
by providing a ``simplified procedure'' that foundations may follow,
both for making ``good faith determinations'' under Sec. Sec.
53.4942(a)-3(a)(6) and 53.4945-5(a)(5), and for making similar
``reasonable judgments'' under Sec. 53.4945-6(c)(2)(ii) that a foreign
organization is described in section 501(c)(3) (or in section
4947(a)(1), and thus treated under section 4947(a)(1) as described in
section 501(c)(3) for purposes of chapter 42 of the Code). Under the
revenue procedure, if the grantor's determination that a foreign
organization is described in section 501(c)(3) or section 4947(a)(1) of
the Code and is either a public charity or an operating foundation is
based on a ``currently qualified'' affidavit prepared by the grantee
containing the information specified in the revenue procedure, then the
foundation will be deemed to have made a good faith determination (for
purposes of Sec. Sec. 53.4942(a)-3(a)(6) and 53.4945-5(a)(5)) and a
reasonable judgment (for purposes of Sec. 53.4945-6(c)(2)(ii)). If a
foundation possesses information that suggests the affidavit may not be
reliable, it must consider that information in determining whether the
affidavit is currently qualified.
Revenue Procedure 92-94 provides that an affidavit will be
considered currently qualified if: (1) The facts it contains reflect
the grantee organization's latest complete accounting year (or the
affidavit is updated to reflect the grantee organization's current
data) and (2) the relevant substantive requirements of sections
501(c)(3) and 4947(a)(1) and sections 509(a)(1), (2), or (3) or section
4942(j)(3) remain unchanged. If a grantee's status under the relevant
Code sections does not depend on financial support, which can change
from year to year, an affidavit need be updated only by asking the
grantee to amend the description of any facts in the original affidavit
that have changed. If the facts have not changed, an attested statement
by the grantee to that effect is enough to update an affidavit.
However, if a grantee's status as a public charity or operating
foundation depends on financial support, the affidavit must be updated
at least every other year by asking the grantee to provide an attested
statement containing enough financial data to establish that it
continues to meet the requirements of the applicable Code section.
On September 24, 2012, the Department of the Treasury (Treasury
Department) and the IRS published a notice of proposed rulemaking (REG-
134974-12) in the Federal Register (77 FR 58796) that contained
proposed regulations regarding the standards for making a good faith
determination that a foreign organization is a qualifying public
charity, so that grants made to the foreign organization may be
qualifying distributions and not taxable expenditures. The proposed
regulations would have modified the special rule in Sec. Sec.
53.4942(a)-3(a)(6) and 53.4945-5(a)(5) by generally expanding the class
of advisors upon whose advice foundations may ordinarily rely in making
good faith determinations beyond the attorneys for the grantor and
grantee to ``qualified tax practitioners'' (including attorneys, CPAs,
and enrolled agents subject to the requirements of Circular 230). In
addition, the proposed regulations would have clarified that a
determination based on written advice is ordinarily considered made in
good faith if the foundation's reliance on the written advice meets the
requirements of Sec. 1.6664-4(c)(1), which are the standards for
reasonable reliance in good faith on professional tax advice for
penalty relief purposes. The proposed regulations also would have
updated the regulations to reflect legislative changes regarding
qualifying public charities.
The proposed revisions to the regulations were intended to
facilitate grantmaking by foundations to foreign organizations by
making it easier and less costly for foundations to obtain written
advice from qualified tax practitioners to assure that a grant will
ordinarily be considered a qualifying distribution (and not a taxable
expenditure). The preamble to the proposed regulations explained that
expanding the class of practitioners on whose written advice a
foundation may base a good faith determination was expected to 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
for purposes of the special rule on a broader spectrum of professional
tax advisors was expected to encourage more foundations to obtain
written tax advice, thus promoting the quality of the determinations
being made. To facilitate this, foundations were permitted to rely on
the provisions of the proposed regulations for grants made on or after
September 24, 2012.
The preamble to the proposed regulations specifically requested
comments on three issues. First, comments were requested on whether a
time limit for reliance on an affidavit or written advice would be
appropriate, and if so, the proper length of such a time limit. Second,
comments were sought on whether Rev. Proc. 92-94 should be modified to
take into account changes to the public support test regulations for
public charity qualification that were finalized in 2011 (TD 9549; 76
FR 55745). Third, although the proposed regulations did not change the
ability of foundations to rely on grantee affidavits for purposes of
the special rule, the Treasury Department and the IRS notified the
public that they were considering whether it would be appropriate to
remove reliance on affidavits for purposes of the special rule, or to
restrict it (for example, by permitting use of affidavits only for
grants below a certain dollar amount or by requiring supporting
information), and requested comments.
No public hearing was requested or held; however, 11 comments from
the public were received. All comments are available at
www.regulations.gov or upon request. After consideration of the
comments, the proposed regulations are adopted as amended by this
Treasury decision.
Summary of Comments and Explanation of Provisions
Commenters were generally supportive of the proposed regulations,
with several expressing their hope or expectation that the proposed
regulations would reduce barriers to, and streamline the process of,
international grantmaking. Commenters noted that expanding the class of
professionals upon whose written advice a foundation may base its good
faith determination would reduce the costs of making equivalency
determinations by enabling the sector to take advantage of economies of
scale to increase the quality and efficiency of good faith
determinations regarding foreign grantees. The majority of comments
focused primarily on the three issues for which comments specifically
were requested: (1) The circumstances under which it would be
appropriate for foundations to rely on grantee affidavits in making
equivalency determinations, (2) the permitted reliance period for an
affidavit or advisor's written advice, and (3) modification of Rev.
Proc. 92-94.
The final regulations balance two important considerations: (1)
Removing barriers to international grantmaking by foundations (as well
as by entities
[[Page 57711]]
treated like foundations for these purposes) and (2) ensuring that
foundations' good faith determinations are informed by a sufficient
understanding of the applicable law, are based on all relevant factual
information, and are likely to be correct. The Treasury Department and
IRS take note that, according to publicly available data, foundations
(acting in reliance on the proposed regulations, as permitted) now may
obtain written advice of a qualified tax practitioner for purposes of
making a good faith determination at a substantially lower cost than
was previously available, in part due to economies of scale experienced
by organizations employing qualified tax practitioners specializing in
providing written advice to several grantors.
The major areas of comment and the revisions are discussed in this
preamble.
Expanded Class of Advisors
In accordance with the proposed regulations and public comments,
the final regulations modify the special rule to expand the class of
advisors providing written advice on which foundations may ordinarily
rely to qualified tax practitioners, including CPAs and enrolled agents
(as well as attorneys) who are subject to the standards of practice
before the IRS set out in Circular 230. A qualified tax practitioner
may include an attorney serving as a foundation's in-house counsel, as
well as a foundation's outside counsel. Because Circular 230 requires
that, to practice before the IRS, an attorney or CPA must be licensed
in a state, territory, or possession of the U.S., and an enrolled agent
must be enrolled by the IRS, the final regulations effectively require
that the advisor be authorized to practice in a state, territory, or
possession of the U.S. or as an enrolled agent. In addition, like the
proposed regulations, the final regulations provide that a
determination based on the written advice of a qualified tax
practitioner ordinarily will be considered as made in good faith if the
foundation's reliance meets the requirements of Sec. 1.6664-4(c)(1).
As noted in the preamble to the proposed regulations, Sec. 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, but a foundation's reliance on
written advice is not reasonable and in good faith if the foundation
knows, or reasonably should have known, that a qualified tax
practitioner lacks knowledge of the relevant aspects of U.S. tax law
(which, in this context, would include the U.S. tax law of charities).
Moreover, a foundation may not rely on written advice if it knows, or
has reason to know, that relevant facts were not disclosed to the
qualified tax practitioner or that the written advice is based on a
representation or assumption that the foundation knows, or has reason
to know, is unlikely to be true.
Reliance on Opinion of Foreign Counsel
One commenter suggested that the final regulations clarify that
foundations and qualified tax practitioners may obtain advice from
foreign counsel on questions of foreign law when making good faith
determinations. The final regulations, consistent with the proposed
regulations, provide that, for purposes of the special rule, if a
foundation's determination is based on the written advice of a
qualified tax practitioner, the foundation will ordinarily be
considered to have made a good faith determination. The Treasury
Department and the IRS are concerned that, standing alone, an opinion
of foreign counsel, who may or may not have expertise in U.S. tax law,
may not ordinarily be a sufficient basis for a determination of a
foreign organization's status. Thus, under the final regulations,
foundations basing their determination on an opinion of counsel of the
grantor or grantee will no longer come within the special rule unless
the counsel is a qualified tax practitioner. However, neither the
proposed regulations nor the final regulations proscribe the use of
foreign counsel in otherwise seeking to make a good faith
determination, including use of foreign counsel in gathering
information relevant to the determination. The standards of practice
before the IRS and requirements for written advice address reliance by
qualified tax practitioners on foreign counsel for questions of foreign
law. Sections 10.22(b), 10.35(a), and 10.37(b) of Circular 230
generally permit a practitioner to consult with and rely on other
experts in appropriate circumstances. It follows, therefore, that a
foundation may reasonably rely on written advice received from a
qualified tax practitioner in accordance with Sec. 1.6664-4(c)(1) that
in turn reasonably relies on advice or assistance from foreign counsel
as to questions of foreign law or other matters within such counsel's
expertise.
Reliance on Grantee Affidavits
The preamble to the proposed regulations requested comments on
whether a foundation's ability to base a good faith determination on an
affidavit should be removed, and if not, whether the use of such
affidavits should be restricted. In the preamble, the Treasury
Department and the IRS expressed their concern that, for purposes of
the special rule, grantee affidavits, standing alone, are not always as
reliable a basis for making good faith determinations as written advice
from qualified tax practitioners and asked for comments. Several
comments were received in response to this request.
Most commenters that addressed the issue recommended that
foundations continue to be permitted to base a good faith determination
on an affidavit of a foreign organization attested to by a principal
officer of the foreign organization. These commenters noted that
grantee affidavits are often a reliable means of collecting facts about
the organization and operations of the foreign grantee, even if, as one
commenter noted, on matters of U.S. tax law a grantmaker cannot
ordinarily rely on a foreign organization's conclusion that the grantee
has a particular tax status. Several commenters noted that the current
procedures outlined in Rev. Proc. 92-94 require that affidavits include
significant detail and specific accompanying information, which, in
their experience, ensures that a foundation has a clear picture of the
organization and operation of the foreign organization before making a
determination based on the affidavit. However, these commenters also
noted that, in their experience, it was often necessary for someone at
the foundation (presumably with knowledge of U.S. tax law) to work
closely with a foreign organization to ensure that the principal
officer attesting to the affidavit understands exactly what is called
for and that the affidavit is appropriately completed.
Many commenters stated that foundations should not be required to
obtain professional tax advice and requested assurance that a
foundation could continue to make good faith determinations without
having to engage counsel or another qualified tax practitioner,
especially if the foundation or the grant is small. One commenter noted
that engaging a qualified tax practitioner may impose substantial costs
on a foundation, particularly if the foundation makes repeated grants
to the same organization. Another commenter stated that it would be
excessive for the regulations to suggest that a grantmaker must
ordinarily use professional advisors in order for a determination to be
in good faith, but noted that if a grantmaker goes without professional
advice, it is fair for the IRS to review its conclusions and its
process for reaching
[[Page 57712]]
those conclusions to see if the grantmaker has complied with the good
faith determination standard in the regulations.
One commenter favored eliminating the grantee affidavit as a free-
standing means for making equivalency determinations. In the
commenter's experience, the staff and volunteers of most, but not all,
foreign grantees have neither the training nor the experience with U.S.
tax law needed to make determinations called for by Rev. Proc. 92-94.
Therefore, the commenter believed it is important to eliminate reliance
on the grantee affidavit.
The Treasury Department and the IRS agree that a grantee affidavit
may be a reliable basis for forming a good faith determination in
appropriate situations, for example, if the grantee has sufficient
knowledge of U.S. tax law to ensure that the affidavit is appropriately
completed and contains all relevant information. However, many foreign
organizations may lack knowledge of U.S. tax law of charities, as noted
by one commenter. In addition, although some foundations have knowledge
of U.S. tax law sufficient to assess the reliability of grantee
affidavits, to assist foreign grantees in completing the affidavits
properly (if necessary), and to appropriately apply the law to the
facts stated in the affidavit, the Treasury Department and IRS do not
believe that such knowledge of U.S. tax law is universal. Accordingly,
the Treasury Department and IRS do not think it is appropriate to
ordinarily consider a good faith determination to have been made solely
because it is based on a grantee affidavit. Therefore, under the final
regulations, a grantee affidavit is not included in the special rule as
a basis upon which a determination ordinarily will be considered a good
faith determination.
The final regulations do not, however, foreclose the use of grantee
affidavits as a source of information in otherwise making a good faith
determination. Nor does elimination of the affidavit for purposes of
the special rule mean that the foundation must obtain written advice
from a qualified tax practitioner in order to make a good faith
determination. For example, a foundation manager with understanding of
U.S. charity tax law may under the general rule make a good faith
determination that a foreign grantee is a qualifying public charity
based on the information in an affidavit supplied by the grantee.
Furthermore, foundation managers or their in-house counsel may
themselves be qualified tax practitioners, whose written advice may be
reasonably relied upon for determinations to come within the special
rule.
One commenter suggested that to ensure that affidavits of foreign
organizations provide a reliable basis for making a good faith
determination, the IRS should further clarify what supporting
documentation must be provided by a foreign organization and when
private foundations may in good faith rely on the responses of foreign
organizations. This commenter recommended that the IRS amplify Rev.
Proc. 92-94 to state explicitly when the response of the foreign
organization is sufficient and when additional supporting documentation
(for example, a copy of the relevant law) should be requested from the
organization. The Treasury Department and the IRS have concluded,
however, that due to the many possible factual differences in foreign
organizations' structures, governance, operations, financial support,
and relevant local laws and practices, it would be difficult to provide
specific guidance governing affidavits and supporting documentation in
various situations.
Some commenters raised concerns that removing reliance on grantee
affidavits for purposes of the special rule would increase costs for
foundations and inhibit international grantmaking, particularly for
those grantors making many small grants to foreign organizations.
However, commenters generally agreed with the Treasury Department and
IRS that the changes proposed in the regulations could lower the cost
of obtaining professional advice on equivalency determinations by
expanding the class of advisors who may provide written advice to
foundation managers. Indeed, based on publicly available information,
it appears that foundations relying on the proposed rules (as
permitted) are now able to obtain professional advice from qualified
tax practitioners to come within the special rule at a significantly
reduced cost. Furthermore, under the final regulations, grantee
affidavits remain a cost-effective way of obtaining information
relevant to making good faith determinations and foundations may
continue to rely on them when making determinations to the extent
reliance is reasonable and appropriate under the facts and
circumstances. Accordingly, the Treasury Department and IRS believe
that the final regulations achieve the balance of facilitating
international grantmaking while still ensuring that equivalency
determinations are appropriately made.
To mitigate the effects of elimination of reliance on grantee
affidavits for purposes of the special rule, the final regulations
provide a 90-day transition period similar to that set forth in Sec.
53.4945-5(f)(2) (dealing with the implementation of the expenditure
responsibility rules). During this 90-day period, foundations may
distribute grants in accordance with the former regulations regarding
the use of grantee affidavits and opinions of counsel of the grantor or
grantee. In addition, under the final regulations, if a grant is
distributed pursuant to a written commitment made prior to the
applicability date of the final regulations and the grantor made a
determination in good faith based on the prior regulations, the
distribution is treated as compliant as long as the grant is paid out
to the grantee within five years.
Period for Reliance on Written Advice
The preamble to the proposed regulations requested comments on
whether a time limit for reliance on written advice is appropriate, and
if so, suggestions for the length of time that should be considered
reasonable. Most commenters responded affirmatively to this request and
favored guidance setting forth a definite period for reliance on
written advice, with most suggesting a period of generally two years
(starting from the date of the written advice or the time of the
factual information on which the written advice is based).
More specifically, commenters recommended that foundations be able
to rely on written advice that a foreign organization meets a public
support test under Sec. 1.170A-9(f)(4)(vii)(B) or Sec. 1.509(a)-
3(c)(1)(i) for periods similar to those in the rules applicable to
publicly supported organizations that have been recognized by the IRS
as exempt under section 501(c)(3) and described in section
170(b)(1)(A)(vi) or 509(a)(2).\3\ For example, one commenter noted that
for section 170(b)(1)(A)(vi) and section 509(a)(2) organizations, if an
organization meets the public support test for a five-year test period,
then for most purposes, including for purposes of sections 4942 and
4945, the organization is treated as publicly supported for the two tax
years immediately following the end of the five-year support test
period. See Sec. 1.170A-9(f)(4)(vii)(B) and Sec. 1.509(a)-3(c)(1)(i).
Thus, if an organization meets a public support test for a five-year
test period ending in 2014, the organization
[[Page 57713]]
is also considered publicly supported in 2015 and (for most purposes)
2016.
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\3\ These rules provide that a publicly supported organization
that fails to meet the applicable public support test for two
consecutive years will be treated as a private foundation as of the
first day of the second consecutive taxable year only for purposes
of sections 507, 4940, and 6033.
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Commenters also noted that Rev. Proc. 92-94, section 4.05, provides
a general two-year period for reliance on an affidavit with regard to a
foreign grantee's public support status, such that it is ordinarily
necessary to obtain a full update of financial information to determine
public support under sections 170(b)(1)(A)(vi) and 509(a)(2) only every
other year. Citing these provisions, some commenters requested that the
final regulations permit reliance for two tax years after the end of
the foreign organization's last tax year of financial information used
to determine the organization's public support. Thus, for example,
commenters suggested that a 2012 equivalency determination based on
financial information from 2007-2011 should be sufficient to
demonstrate that the organization would be considered a public charity
for both 2012 and 2013, resulting in a period of reliance of up to two
years, depending on when in 2012 the determination was made. One
commenter suggested that reliance should extend only until the 15th day
of the fifth month after the end of the first year following the test
period--in the example above, until May 15, 2013--and that a qualified
tax practitioner should have to review the foreign grantee's sources of
financial support for 2012 before issuing advice that the organization
can be treated as publicly supported for the remainder of 2013.
For other qualifying public charities, which do not have a public
support requirement, such as schools or hospitals, one commenter
requested a reliance period of five years, with a requirement to get a
certificate after three years that the relevant law and facts have not
changed in any material respect. Another commenter suggested that a
foundation be able to rely on advice if the information (other than
that for the public support requirement) is current in the present or
immediately preceding accounting period of the grantee.
The Treasury Department and the IRS agree with commenters that
providing a specific timeframe for reliance on written advice for
purposes of the special rule will provide clarity for foundations
seeking to meet the requirements of the rule and will promote
determinations that are consistently based on current information.
Therefore, the final regulations provide that, for purposes of the
special rule, written advice of a qualified tax practitioner serving as
the basis for a good faith determination must be ``current.'' Written
advice will be considered current if, as of the date of the
distribution, the relevant law on which the advice was based has not
changed since the date of the written advice and the factual
information on which the advice was based is from the organization's
current or prior year. However, consistent with rules for
determinations of public support over a five-year test period for U.S.
public charities, written advice that an organization satisfied the
public support requirements under section 170(b)(1)(A)(vi) or section
509(a)(2) based on support over a test period of five years will be
treated as current for the two years of the grantee immediately
following the end of the five-year test period. For purposes of these
rules, an organization's year refers to its taxable year for U.S. tax
purposes, or its annual accounting period if it does not have a U.S.
taxable year. Additional guidance and examples illustrating the
application of these rules may be provided in the update to Rev. Proc.
92-94, discussed further in the next section of this preamble.
It should be noted that the rules regarding when written advice
will be considered current apply only for purposes of the special rule.
Although this standard reflects a belief that it will usually be
reasonable to rely on written advice of a qualified tax practitioner if
the advice and underlying facts are no more than two years old
(provided the foundation does not know or have reason to know that such
information is no longer accurate), it is possible that written advice
that is not current for purposes of the special rule may, under some
facts and circumstances, reasonably serve as the basis for a good faith
determination under the general rule. The age of the facts underlying
the written advice would be a consideration in determining whether a
good faith determination has been made.
Qualified tax practitioners must, of course, satisfy all
requirements for written advice under Circular 230 as of the date of
issuance of the written advice (including requirements regarding the
factual basis for the advice). The rules regarding when written advice
will be considered current for purposes of making distributions to
grantees do not alter the Circular 230 standards applicable to
qualified tax practitioners, which provide that the practitioner must
base the written advice on reasonable factual assumptions and
reasonably consider all relevant facts and circumstances that the
practitioner knows or reasonably should know. To avoid any implication
that the reliance period under the special rule would permit written
advice to be based on outdated factual information, the final
regulation has been revised to clarify that the written advice must
contain sufficient facts to permit the IRS to determine that the
grantee would be likely to qualify as a public charity at the time the
advice is written.
Update of Rev. Proc. 92-94
The preamble to the proposed regulations also requested comments on
whether Rev. Proc. 92-94 should be modified to take into account
changes in the public support test and whether additional guidelines
regarding appropriate timeframes for gathering information should be
provided. Most commenters recommended updating Rev. Proc. 92-94 and
noted that it is frequently used by qualified tax practitioners for
gathering factual information on which to base their written advice.
Commenters also recommended that an updated revenue procedure address
several key issues relating to foreign organizations, including foreign
school compliance with Rev. Proc. 75-50, 1975-2 CB 587, the nature of
support from foreign governments, and foreign hospital compliance with
section 501(r) (subsequently addressed at Sec. 1.501(r)-1(b)(17)).
The IRS intends to publish an updated revenue procedure, revised to
reflect the changes implemented in these regulations as well as changes
to the public support tests for section 170(b)(1)(A)(vi) and 509(a)(2)
organizations set forth in final regulations implementing the redesign
of Form 990, published in the Federal Register (TD 9549; 76 FR 55746)
on September 8, 2011. The Treasury Department and the IRS will consider
the issues raised by commenters in developing the updated revenue
procedure.
Reliance on Written Advice Shared by Another Foundation
One commenter asked for confirmation that a foundation could share
the written advice of its in-house counsel or other qualified tax
practitioner with other foundations, and that the other foundations
could make their determinations based on the shared advice, without
incurring excise taxes.
Written advice relating to the grantee's status for purposes of an
equivalency determination is based on the facts and circumstances of
the grantee, and not on the facts and circumstances of the grantor
foundation that received the advice. Therefore, it is possible that the
conclusions reached in
[[Page 57714]]
the written advice one foundation received from a qualified tax
practitioner could reasonably be used by another foundation to make a
good faith determination about the same grantee. This may be the case,
for example, if the foundation with whom the written advice is shared
knows the qualified tax practitioner well and is familiar with the due
diligence practices of the foundation that provided the facts to the
qualified tax practitioner and received the written advice. However,
when written advice obtained by one foundation is later shared with a
second foundation (or shared even further with other foundations), the
foundation seeking to base its good faith determination on the written
advice may have no knowledge of the qualified tax practitioner that
gave the advice or whether all material facts were disclosed to the
practitioner. Although reliance on shared advice of a trusted tax
practitioner that is based on all the material facts may be economical,
and in some cases may be reasonable and appropriate, the Treasury
Department and the IRS are concerned that, in other cases, the
foundation receiving the advice may not be in a position to
appropriately evaluate the reliability of the written advice that was
shared. Thus, the final regulations do not prohibit a foundation from
using written advice shared with it by another foundation in making a
good faith determination if it is reasonable to do so under all the
facts and circumstances (including the age of the facts supporting the
written advice). However, the final regulations clarify that for a
foundation seeking the benefit of the special rule, the written advice
a foundation relies on in making its determination must be received
from the qualified tax practitioner (rather than from another
foundation).
Equivalency Determinations by Sponsoring Organizations of Donor Advised
Funds
Commenters suggested that the Treasury Department and the IRS
clarify that sponsoring organizations of donor advised funds can use
these final regulations to make equivalency determinations for purposes
of distributions from donor advised funds to foreign organizations.
Until further guidance is issued, sponsoring organizations of donor
advised funds may use these regulations as guidance in making
equivalency determinations (applying the definition of ``disqualified
supporting organization'' under section 4966(d)(4) in lieu of section
4942(g)(4)(A)(i) or (ii)).\4\
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\4\ This is consistent with the Joint Committee on Taxation,
Technical Explanation of H.R. 4, the ``Pension Protection Act of
2006'' (JCX-38-06, Aug. 3, 2006) at p. 349, which provides:
For purposes of the requirement that a distribution be ``to'' an
organization described in section 170(b)(1)(A), in general, it is
intended that rules similar to the rules of Treasury regulation
Sec. 53.4945-5(a)(5) apply. Under such regulations, for purposes of
determining whether a grant by a private foundation is ``to'' an
organization described in section 509(a)(1), (2), or (3) and so not
a taxable expenditure under section 4945, a foreign organization
that otherwise is not a section 509(a)(1), (2), or (3) organization
is considered as such if the private foundation makes a good faith
determination that the grantee is such an organization. Similarly,
under the provision, if a sponsoring organization makes a good faith
determination (under standards similar to those currently applicable
for private foundations) that a distributee organization is an
organization described in section 170(b)(1)(A) (other than a
disqualified supporting organization), then a distribution to such
organization is not considered a taxable distribution.
---------------------------------------------------------------------------
Reliance by Public Charities
One commenter proposed that the final regulations also allow public
charities to make equivalency determinations to avoid the requirements
imposed on them by Rev. Rul. 68-489, 1968-2 CB 210, for grants to
organizations not exempt under section 501(c)(3). That ruling permits a
section 501(c)(3) organization to distribute funds to organizations not
exempt under section 501(c)(3) if the grantor organization ensures use
of the funds for section 501(c)(3) purposes by limiting distributions
to specific projects in furtherance of its own exempt purposes, retains
control and discretion as to the use of the funds, and maintains
records establishing that the funds were used for section 501(c)(3)
purposes. The commenter's proposal is outside the scope of this
regulations project, but it may be considered in future guidance.
Equivalency Determinations for Domestic Grantees and Foreign Government
Grantees
One commenter requested that the equivalency determination
procedures be made expressly applicable to grantees in the U.S. as well
as foreign grantees if the domestic grantee is not required to obtain a
determination from the IRS or the determination is pending with the
IRS. Another commenter requested clarification that a foundation could
use the same procedures to determine the status of grantees that are
foreign governments, agencies or instrumentalities of foreign
governments, or international organizations (which are treated as
section 509(a)(1) organizations under Sec. 53.4945-5(a)(4)(iii), even
if they are not described in section 501(c)(3), so long as the grant is
made exclusively for charitable purposes). Both of these suggestions
are beyond the scope of this regulations project but may be considered
in future guidance.
Parallel Changes to Similar Regulations
Commenters suggested that the Treasury Department and the IRS make
corresponding changes to other regulations that provide for
determinations similar to equivalency determinations. Section 53.4945-
6(c)(2) requires generally that a grant made to an organization not
described in section 501(c)(3) be maintained in a separate charitable
fund, unless made to a foreign organization that in the reasonable
judgment of a foundation manager is described in section 501(c)(3)
(other than section 509(a)(4)). Section 1.1441-9 sets forth exemptions
from withholding of tax on exempt income of foreign tax-exempt
organizations, and allows a withholding agent to accept an opinion from
a U.S. counsel concluding that a foreign organization is described in
section 501(c)(3) and is not a private foundation, supported by an
affidavit of the organization. For more than 20 years, under Rev. Proc.
92-94, a foundation has been able to make the reasonable judgment
required by Sec. 53.4945-6(c)(2) by following the same procedure for
making a good faith determination under Sec. Sec. 53.4942(a)-3(a)(6)
and 53.4945-5(a)(5). The Treasury Department and the IRS anticipate
that any revised version of that revenue procedure will continue to
provide that foundations may meet the requirements of Sec. 53.4945-
6(c)(2) by meeting the requirements of Sec. Sec. 53.4942(a)-3(a)(6)
and 53.4945-5(a)(5). The suggested changes to Sec. 1.1441-9 are beyond
the scope of this regulations project, but may be considered in future
guidance.
Amendments to Regulations Conforming to Statutory and Regulatory
Changes
The final regulations also include several amendments to conform
the regulations to prior statutory changes. Specifically, changes were
made to Sec. Sec. 53.4942(a)-3(a)(2)(i), 53.4942(a)-3(a)(6)(i),
53.4945-5(a)(1), 53.4945-5(a)(5)(i), 53.4945-5(a)(6)(ii), and 53.4945-
5(b)(5). Section 4945(d)(4) was amended in 1984 to treat exempt
operating foundations under section 4940(d)(2) as organizations that
may receive grants for which expenditure responsibility is not
required. Sections 4942 and 4945(d)(4) were amended in
[[Page 57715]]
2006 to eliminate certain section 509(a)(3) supporting organizations
from the class of organizations that may receive distributions treated
as qualifying distributions and that may receive grants for which
expenditure responsibility is not required. Changes to conform the
regulations to these statutory changes were made in Sec. Sec.
53.4942(a)-3(a)(6)(i) and 53.4945-5(a)(5)(i) of the proposed
regulations, and the changes to the other parts of Sec. Sec.
53.4942(a)-3 and 53.4945-5 are being made in the final regulations for
consistency. Similarly, for purposes of consistency with the changes in
the proposed regulations being implemented in these final regulations,
Sec. 53.4945-5(b)(5) is being updated to allow written advice from a
qualified tax practitioner for purposes of this provision, as well as
grantee affidavits and opinions of counsel of the grantee, which
continue to be permitted for the purposes of Sec. 53.4945-5(b)(5).
Effective/Applicability Date and Transition Relief
The final regulations apply generally to distributions made after
the date of publication of this Treasury decision in the Federal
Register. However, a good faith determination may continue to be made
in accordance with the prior regulations for any distribution to a
foreign organization within 90 days after such date. Also, a foundation
that has made a written commitment on or before the date of publication
of these final regulations in the Federal Register may make
distributions to the foreign organization, in fulfillment of that
commitment and pursuant to a determination made in good faith in
accordance with the prior regulations, for up to five years from the
date of publication.
Availability of IRS Documents
For copies of recently issued revenue procedures, revenue rulings,
notices and other guidance published in the Internal Revenue Bulletin,
please visit the IRS Web site at http://www.irs.gov or contact the
Superintendent of Documents, U.S. Government Printing Office,
Washington, DC 20402.
Special Analyses
Certain IRS regulations, including these, are exempt from the
requirements of Executive Order 12866, as supplemented and reaffirmed
by Executive Order 13563. Therefore, a regulatory impact 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
these regulations.
It is hereby certified that the collection of information in these
regulations will not have a significant economic impact on a
substantial number of small entities. The collection of information is
in Sec. Sec. 53.4942(a)-3(a)(6) and 53.4945-5(a)(5) and is part of the
collection of information for Form 990-PF. The equivalency
determination process set forth in these regulations provides
foundations with an optional procedure for determining that foreign
organizations are qualifying public charities. The Treasury Department
and the IRS believe that the economic impact of the proposed
regulations on grantors making equivalency determinations has already
been a reduction in cost of obtaining written tax advice, by expanding
the class of practitioners whose written advice may form the basis of
good faith determinations. The final regulations finalize this policy.
The final regulations continue to permit grantee affidavits to be used
in making good faith determinations under the general rule (although
without the same level of reliance as under the special rule) and it is
expected that affidavits will continue to be used for such purpose with
small grants. Therefore, a Regulatory Flexibility Analysis under the
Regulatory Flexibility Act (5 U.S.C. chapter 6) is not required.
Pursuant to section 7805(f) of the Internal Revenue Code, the notice of
proposed rulemaking preceding these regulations was submitted to the
Chief Counsel for Advocacy of the Small Business Administration for
comment on its impact on small businesses, and no comment was received.
Drafting Information
The principal author of these regulations is Ward L. Thomas of the
Office of Associate 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.
Adoption of Amendments to the Regulations
Accordingly, 26 CFR part 53 is amended as follows:
PART 53--FOUNDATION AND SIMILAR EXCISE TAXES
0
Paragraph 1. The authority citation for part 53 continues to read in
part as follows:
Authority: 26 U.S.C. 7805 * * *
0
Par. 2. Section 53.4942 (a)-3 is amended by:
0
1. Revising paragraphs (a)(2) introductory text, (a)(2)(i), and (a)(6).
0
2. Adding paragraph (f).
The revisions and addition read as follows:
Sec. 53.4942(a)-3 Qualifying distributions defined.
(a) * * *
(2) Definition. The term ``qualifying distribution'' means:
(i) Any amount (including program related investments, as defined
in section 4944(c), and reasonable and necessary administrative
expenses) paid to accomplish one or more purposes described in section
170(c)(1) or (2)(B), other than any contribution to:
(a) A private foundation which is not an operating foundation (as
defined in section 4942(j)(3)), except as provided in paragraph (c) of
this section;
(b) An organization controlled (directly or indirectly) by the
contributing private foundation or one or more disqualified persons
with respect to such foundation, except as provided in paragraph (c) of
this section; or
(c) An organization described in section 4942(g)(4)(A)(i) or (ii),
if paid by a private foundation that is not an operating foundation;
* * * * *
(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 in 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 (ii)) or in 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 (ii)) or in section 4942(j)(3). A determination
ordinarily will be considered a good faith determination if the
determination is based on current written advice received from a
qualified tax practitioner concluding 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 (ii)) or in
section 4942(j)(3), and if the foundation reasonably relied in good
faith on the written advice in accordance with the requirements of
Sec. 1.6664-4(c)(1) of this
[[Page 57716]]
chapter. The 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 (ii)) or in section 4942(j)(3) as of the date of
the written advice. For purposes of this section, except as provided in
the next sentence, written advice will be considered current if, as of
the date of distribution, the relevant law on which the advice is based
has not changed since the date of the written advice and the factual
information on which the advice is based is from the donee's current or
prior taxable year (or annual accounting period if the donee does not
have a taxable year for United States federal tax purposes). Written
advice that a donee met the public support test under section
170(b)(1)(A)(vi) or section 509(a)(2) for a test period of five years
will be treated as current for purposes of distributions to the donee
during the two taxable years (or, as applicable, annual accounting
periods) of the donee immediately following the end of the five-year
test period.
(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.
* * * * *
(f) Effective/applicability date and transition relief. Paragraphs
(a)(2)(i) and (a)(6) of this section are effective on and apply with
respect to distributions made after September 25, 2015. However,
foundations may continue to rely on the provisions of paragraph (a)(6)
of this section as contained in 26 CFR part 53, revised April 1, 2015,
with respect to distributions made on or before December 24, 2015
pursuant to a good faith determination made in accordance with such
provisions. Also, foundations may continue to rely on the provisions of
paragraph (a)(6) of this section as contained in 26 CFR part 53,
revised April 1, 2015, with respect to distributions pursuant to a
written commitment made on or before September 25, 2015 and pursuant to
a good faith determination made on or before such date in accordance
with such provisions if the committed amount is distributed within five
years of such date.
0
Par. 3. Section 53.4945-5 is amended by:
0
1. Revising paragraphs (a)(1), (a)(5), (a)(6)(ii), and (b)(5).
0
2. Adding paragraph (f)(3).
The revisions and addition read as follows:
Sec. 53.4945-5 Grants to organizations.
(a) Grants to nonpublic organizations--(1) In general. Under
section 4945(d)(4) the term ``taxable expenditure'' includes any amount
paid or incurred by a private foundation as a grant to an organization
(other than 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 (ii)) or in section 4940(d)(2)), unless the private
foundation exercises expenditure responsibility with respect to such
grant in accordance with section 4945(h). However, the granting
foundation does not have to exercise expenditure responsibility with
respect to amounts granted to organizations described in section
4945(f).
* * * * *
(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 in 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 (ii)) or in
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 (ii)) or in
section 4940(d)(2). A determination ordinarily will be considered a
good faith determination if the determination is based on current
written advice received from a qualified tax practitioner concluding
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 (ii)) or in section 4940(d)(2), and if the
foundation reasonably relied in good faith on the written advice in
accordance with the requirements of Sec. 1.6664-4(c)(1) of this
chapter. The 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 (ii)) or in section 4940(d)(2) as of the date of
the written advice. For purposes of these rules, except as provided in
the next sentence, written advice will be considered current if, as of
the date of the grant payment, the relevant law on which the advice is
based has not changed since the date of the written advice and the
factual information on which the advice is based is from the grantee's
current or prior taxable year (or annual accounting period if the
grantee does not have a taxable year for United States federal tax
purposes). Written advice that a grantee met the public support test
under section 170(b)(1)(A)(vi) or section 509(a)(2) for a test period
of five years will be treated as current for purposes of grant payments
to the grantee during the two taxable years (or, as applicable, annual
accounting periods) of the grantee immediately following the end of the
five-year test period. See paragraphs (b)(5) and (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.
(6) * * *
(ii) To governmental agencies. If a private foundation makes a
grant to an organization described in section 170(c)(1) and such grant
is earmarked for use by another organization, the granting foundation
need not exercise expenditure responsibility with respect to such grant
if the section 170(c)(1) organization satisfies the Commissioner in
advance that:
(a) Its grantmaking program is in furtherance of a purpose
described in section 170(c)(2)(B), and
(b) The section 170(c)(1) organization exercises ``expenditure
responsibility'' in a manner that would satisfy this section if it
applied to such section 170(c)(1) organization. However, with respect
to such grant, the granting foundation must make the reports required
by section 4945(h)(3) and paragraph (d) of this section, unless such
grant is earmarked for use by an organization described in section
509(a)(1), (a)(2), or (a)(3) (other than an
[[Page 57717]]
organization described in section 4942(g)(4)(A)(i) or (ii)), or in
section 4940(d)(2).
(b) * * *
(5) Certain grants to foreign organizations. With respect to a
grant to a foreign organization (other than 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 (ii)) or in section 4940(d)(2)
or treated as so described pursuant to paragraph (a)(4) or (5) of this
section), paragraph (b)(3)(iv) or (b)(4)(iv) of this section shall be
deemed satisfied if the agreement referred to in paragraph (b)(3) or
(4) of this section imposes restrictions on the use of the grant
substantially equivalent to the limitations imposed on a domestic
private foundation under section 4945(d). Such restrictions may be
phrased in appropriate terms under foreign law or custom and ordinarily
will be considered sufficient if an affidavit or opinion of counsel (of
the grantor or grantee) or written advice of a qualified tax
practitioner is obtained stating that, under foreign law or custom, the
agreement imposes restrictions on the use of the grant substantially
equivalent to the restrictions imposed on a domestic private foundation
under paragraph (b)(3) or (4) of this section.
* * * * *
(f) * * *
(3) Effective/applicability date of paragraphs (a)(1), (a)(5),
(a)(6)(ii), and (b)(5) and transition relief. Paragraphs (a)(1),
(a)(5), (a)(6)(ii), and (b)(5) of this section are effective on and
apply with respect to grants paid after September 25, 2015. However,
foundations may continue to rely on paragraph (a)(5) as contained in 26
CFR part 53, revised April 1, 2015, with respect to grants paid on or
before December 24, 2015 pursuant to a good faith determination made in
accordance with such provisions. Also, foundations may continue to rely
on paragraph (a)(5) as contained in 26 CFR part 53, revised April 1,
2015, with respect to grants paid pursuant to a written commitment made
on or before September 25, 2015 and pursuant to a good faith
determination made on or before such date in accordance with such
provisions if the committed amount is paid out within five years of
such date.
John M. Dalrymple,
Deputy Commissioner for Services and Enforcement.
Approved: September 16, 2015.
Mark J. Mazur,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2015-24346 Filed 9-23-15; 8:45 am]
BILLING CODE 4830-01-P