This week, the IRS finalized regulations that simplify the process of private foundation grants to foreign non-governmental organizations. The regulations were proposed back in 2012, and their implementation is good news for private foundations that engage in foreign grant-making.
Background on Older Regulations
In the 501(c)(3) world, private foundations are subject to several additional more regulations than are public charities. One of these rules requires private foundations to expend a certain amount on qualifying distributions, which include grants, program-related investments and certain administrative expenses. Another rule requires private foundations to exercise a heightened grant due diligence and oversight process known as expenditure responsibility for certain grants.
Both of these rules have special implications for grants to foreign organizations, because in order for those grants to count as qualifying distributions and not require expenditure responsibility, the private foundation needs to make an equivalency determination that the foreign organization is the equivalent of a U.S. 501(c)(3) public charity.
Historically, the rules for equivalency determinations have required that they be based on the affidavit of the foreign NGO or the opinion of counsel of the grantor or grantee, which can be costly and time-consuming. However, several organizations, including the Council on Foundations, have pushed for a more streamlined process that could include an equivalency determination repository. Assume, for example, that a foundation wants to make a grant to a certain foreign organization, and is able to go to an organizational repository to see if a determination has been made for that organization. If so, the foundation could potentially rely on it (or the information collected could be used efficiently to create another equivalency determination for the organization); if not, the foundation could request that such a determination be made. The older rules did not permit this repository model, because the “opinion of counsel” requirement implies that the opinion needs to be provided in the context of a legal relationship between and attorney and an organization (meaning that the same opinion could not necessarily be used by another foundation). This leads to different organizations conducting the same information collection and analysis, and obtaining separate opinions of counsel, for the same potential grantees.
Current Rule for Good Faith Determinations
The new rules, however, allow the good faith determination to be based on written advice of a qualified tax practitioner subject to Circular 230, who can be an attorney, CPA or enrolled agent. This would allow a private foundation to rely on written advice from a practitioner without necessarily establishing an attorney-client relationship between that tax practitioner and the grantor or grantee, and thus could allow for a repository containing determinations for a number of foreign organizations. The rules do require that the foundation receive the written advice directly from the tax practitioner (rather than from another foundation), though this requirement is consistent with the repository model discussed above, where tax practitioners are preparing and providing written advice and making it available to multiple foundation grantors.A determination based on written advice of a qualified tax practitioner will ordinarily be considered to be made in good faith if all of the pertinent facts and circumstances are known to the practitioner and are duly considered as required under Treas. Reg. § 1.664-4(c)(1).
At least partly in response to comments received for the proposed regulations, grantee affidavits, standing alone, will no longer be considered a sufficient basis on which a foundation may form a determination, but may be used as an important source of information in making a determination. To mitigate the impact of this change, there will be a 90-day transition period during which such grantee affidavits will continue to be considered sufficient basis so long as the applicable grant is paid out to the grantee within five years following the date of the determination.
Time Requirements for Reliance
Also in response to comments, the IRS requires that the written advice be “current” in order to serve as an acceptable basis for a good faith determination. Written advice will be considered current if, as of the date of the distribution of the advice, the relevant law on which the advice was based has not changed and the factual information on which the advice is based in from the grantee’s current or prior taxable year. However, written advice that a grantee met a public support test for a period of five years will be treated as current during the two taxable years of the grantee immediately following the end of the five-year test period.