Private foundations generally meet their minimum distribution requirements through grants to public charities that have an IRS determination letter. But when recipients are international, compliance becomes more complicated. In these cases, private foundations must either conduct expenditure responsibility with respect to the grant or obtain what’s called a determination of equivalency—which has just become a bit simpler thanks to new guidance.
In September, the Treasury Department and IRS released final regulations relating to equivalency determinations for private foundations’ international grants. With respect to other types of not-for-profits, sponsoring organizations (such as community foundations) may use the final regulations with respect to foreign grants made from donor-advised funds when making equivalency determinations until further guidance is issued; public charities making foreign grants are encouraged to follow the private foundation regulations as best practices until future guidance is established.
Let’s look at the requirements for equivalency determinations and what’s changed under the final regulations in greater detail.
Background: Equivalency Determinations
In general, when a private foundation makes a grant to a foreign organization that doesn’t have an IRS determination letter, it must determine that the foreign organization is equivalent to a US public charity. This is the process known as a foreign equivalency determination. When such a determination is made, the private foundation generally may treat the grant as a qualifying distribution, and the determination provides an exception from conducting expenditure responsibility with respect to the grants. This process also prevents the grant from being treated as a taxable expenditure, which would trigger an excise tax and mandatory correction.
Under preexisting rules, the equivalency determination can come from either of two sources:
- The opinion of either the grantor or grantee’s legal counsel
- An affidavit from the grantee
Grant-making organizations have continuously sought changes from the IRS to make this process more cost-effective. In September 2012, the IRS took steps toward reducing these barriers to global grant-making for foundations by proposing regulations that allowed private foundations to rely on a broader class of practitioners and advisors to provide written advice foundations could rely on to make good-faith determinations.
The Treasury Department and the IRS stated as much in Internal Revenue Bulletin 2012-47: “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.”
Guidelines for Written Advice
On September 25, 2015, the final regulations that adopt the provision of the proposed regulations were published in the Federal Register. This expanded the class of advisors that can provide written advice to qualified tax practitioners to include CPAs, enrolled agents, and attorneys. These advisors are all subject to the standards of practice and regulations the IRS sets out in Circular 230, Regulations Governing Practice Before the Internal Revenue Service.
The final regulations clarify that the expanded class doesn’t include foreign legal counsel unless that counsel meets the requirements of a qualified tax practitioner, and written advice can’t come from another foundation. The final regulations also eliminate the safe harbor of relying only on grantee affidavits; these can be used as a source of information in making good-faith determinations, but they can’t be the only source of information.
Additionally, the written advice of the qualified tax practitioners must be current—that is, as of the date of distribution, the relevant law on which the advice is based hasn’t changed, and the facts on which the advice is based is from the grantee’s current or prior taxable year. The final regulations also clarify that equivalency determinations can’t be used for grants to certain supporting organizations.
Transitioning to the New Guidance
The final regulations apply to distributions made after September 25, 2015. However, because the final regulations will affect a number of foundations that previously relied on grantee affidavits, it grants a 90-day transition period for grants distributed under a written commitment made before the effective date of the final regulations (and for which the grantor made a good-faith determination based on the prior regulations). These distributions will be treated as compliant and must be paid to the grantee within five years.
For more information on the final regulations, or for insight on the compliance of a potential grant, contact your Moss Adams professional.