September 24, 2012
The Department of Treasury and the IRS issued proposed regulations applicable to private foundations seeking to make grants to foreign organizations using equivalency determinations. The guidance broadens the range of professionals on whose written advice a private foundation may rely when making such grants. Previously, reliance on the written opinion of counsel of the private foundation or grantee was permitted. The proposed regulations expand that class of professionals to attorneys, certified public accountants, or enrolled agents who are subject to certain professional conduct rules of the IRS, thereby removing one key obstacle to the creation of an equivalency determination repository. The regulations were issued in proposed form but private foundations may begin to rely upon them immediately. While the regulations are not explicitly applicable to public charities engaged in international grantmaking, the guidance should pave the way for public charities as well.
Equivalency Determination Background
A private foundation wishing to directly make a grant to a foreign organization that does not have an IRS determination letter of charity status has two options: equivalency determination and expenditure responsibility. This guidance only affects grantmakers using equivalency determination. Succinctly, equivalency determination is a process through which a private foundation determines that a potential foreign grantee is equivalent to a public charity, private operating foundation, or exempt operating foundation. Based on a good faith determination of equivalency determination, the private foundation may make a grant to a foreign organization without being subject to excise taxes and include such grant when calculating its payout obligation.
Under current regulations, an equivalency determination is considered made in good faith if it is based on either (1) an affidavit of a foreign organization or (2) an opinion of counsel of the grantor or grantee. This process can be both time consuming and expensive, leading the Council on Foundations, TechSoup Global, and several major foundations to seek methods of streamlining the process. This guidance is a building block toward that streamlining effort and the activation of NGOsource as a source of equivalency determinations or “equivalency repository.” One obstacle to such a repository under prior law was that the regulations allowed reliance on an “opinion of counsel,” but that term applied only to opinions provided by legal counsel to the grantmaker or the grantee, and did not clearly extend to opinions by lawyers or other tax practitioners functioning outside of the law firm setting.
New Reliance Standards
The proposed regulations provide that an equivalency determination may be made a based on either (1) an affidavit of a foreign organization or (2) written advice of a qualified tax practitioner who is subject to Circular
230 requirements. A “qualified tax practitioner” is an attorney, certified public accountant, or an enrolled agent. Circular 230 governs the professional standards of these practitioners, including placing rules on the opinions they issue related to tax positions. Significant to efforts of streamlining equivalency determinations through the use of a public charity acting as an equivalency repository, the proposed regulations allow a private foundation to rely on written advice of a qualified tax practitioner without establishing an attorney-client relationship between that tax practitioner and the grantmaker or the grantee. As always, reliance on written advice must be reasonable and in good faith. The proposed regulations spell that duty out more explicitly by cross-referencing the general rules for reliance on professional tax advice under section 6664 of the Internal Revenue Code.
The explanation of the proposed regulations states that broadening the class of practitioners will “decrease the cost of seeking professional advice regarding these determinations, enabling foundations to engage in international philanthropy in a more cost effective manner.” In addition, the IRS hopes that this will encourage more private foundations to obtain written tax advice resulting in increased quality of determinations being made.
The shift from permitting reliance on qualified tax practitioners instead of counsel of the grantor or grantee does mean that, under the proposed regulations, a private foundation cannot rely on foreign counsel unless the individual meets the definition of a qualified tax practitioner subject to Circular 230.
Equivalency to Supporting Organizations
In addition to updating the reliance standards, Treasury and the IRS did clarify that equivalency determinations could not be used for grants to certain types of supporting organizations (a type of public charity). Private foundations making grants to either Type III non-functionally integrated supporting organizations or any type of supporting organization if one or more disqualified persons of the private foundation directly or indirectly control either the supporting or supported organization, would be required to follow the expenditure responsibility process. This is consistent with the rules for grants to U.S. public charities with such a tax designation enacted as part of the Pension Protection Act of 2006.
Applicability to Public Charities
While the proposed regulations explicitly amend the Treasury regulations with respect to the activities of private foundations, public charities have long looked to the private foundation regulations in this area. In addition, based on the legislative history of the Pension Protection Act of 2006, sponsoring organizations of donor-advised funds, such as community foundations, should also feel comfortable looking toward this guidance when making grants from donor-advised funds to foreign organizations.
Comments and Effective Date
The regulations were issued in proposed form with a comment period ending December 24, 2012. However, the notice is clear that private foundations may rely on the proposed regulations with respect to grants made on or after the publication of the proposed regulations in the Federal Register (September 24, 2012).
In addition to comments on the proposed regulations summarized above, Treasury and IRS requested input on several related questions, including:
- Should there be a time limit on how long a grantor is permitted to rely upon written advice of a qualified tax practitioner for purposes of an equivalency determination?
- Should the regulations be amended to either remove or modify the ability of private foundations to base equivalency determinations on affidavits of foreign grantees?
- Should Revenue Procedure 92-94 (the IRS guidance on what an equivalency affidavit should contain) be changed to reflect changes in the public support test finalized in September 2011? Some of those 2011 changes for public charities include calculating the public support test over a five-year period instead of a four-year period and calculating the test on the same basis as the organization kept its records rather than requiring a cash-based calculation.