In Revenue Procedure 2017-53, the IRS has issued updated guidelines for written advice from qualified tax practitioners on which private foundations and sponsoring organizations of donor-advised funds may rely in making a good faith determination that a foreign grantee is a qualifying public charity.

Background

Section 4942 generally requires private foundations to make "qualifying distributions" at least equal to a minimum distributable amount each tax year. For purposes of Section 4942, grants made for charitable purposes to foreign organizations that do 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 (other than a disqualified supporting organization).

Similarly, Section 4945 imposes an excise tax on a private foundation's "taxable expenditures," which include a 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). Accordingly, as with Section 4942, the grantor may want to make a "good faith determination" that the grantee is a public charity.

Before being modified and superseded by the current revenue procedure, Revenue Procedure 92-94 provided a simplified procedure that private foundations could follow in making good faith determinations (also known as "equivalency determinations").

In September 2015, the IRS issued final regulations (TD 9740, "2015 final regulations") expanding the types of tax professionals upon which private foundations may rely when making good faith determinations as to the public charity status of foreign grantees, eliminating reliance on grantee affidavits, and establishing a timeframe for reliance on written advice. The 2015 final regulations apply generally to distributions made after September 25, 2015. For a detailed discussion, see Tax Alert 2015-1843.

Updated guidelines and examples of current written advice

Revenue Procedure 2017-53 modifies and supersedes Revenue Procedure 92-94 to reflect changes made to the good faith determination rules in the 2015 final regulations. It also reflects changes made to the public support tests for Section 170(b)(1)(A)(vi) and Section 509(a)(2) organizations set forth in final regulations issued in 2011 (TD 9549, see Tax Alert 2011-1520). It further adopts other changes and updates in response to public comments. Revenue Procedure 2017-53 is effective September 14, 2017.

Examples of current written advice

In addition to the guidelines described later, the Revenue Procedure 2017-53 includes six examples of "current" written advice for publicly supported organizations. Under the 2015 final regulations, written advice of a qualified tax practitioner serving as the basis for a good faith determination generally must be "current" — meaning the relevant law has not changed since the advice was issued and the factual information on which the advice was based was from the organization's current or prior tax year. In addition, 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 grantee's two tax years immediately following the end of the five-year test period.

The examples in the revenue procedure illustrate the application of these rules. For instance, the examples consider a foreign organization formed in January 2017. If a foundation receives written advice from January 2017 that that organization will qualify under Section 170(b)(1)(A)(vi) for its first five years, the foundation may rely on that advice to make good faith determinations in 2017 and 2018. If the foundation wishes to make additional grants in 2019 and 2020, however, it may no longer rely on the 2017 written advice and must obtain new written advice in 2019.

The examples also illustrate the rules for a foreign organization in operation for more than five years that relies on written advice from a qualified tax practitioner that the organization met the public-support test for one five-year period (2011-2015) but not the next five-year period (2012-2016). As described in the examples, based on written advice that the organization met the public support test for 2011-2015, it is treated (for purposes of the good faith determination regulations) as publicly supported for 2016 and 2017 as well. Accordingly, the foundation may use the written advice to make a good faith determination in 2017 that that the foreign organization is a public charity.

Guidelines for written advice and sufficient facts

Under Revenue Procedure 2017-53, written advice that meets the guidelines specified therein (referred to as "preferred written advice") "ordinarily will be considered to contain sufficient facts" with respect to a foreign grantee for the IRS to determine that the grantee would likely qualify as a qualifying public charity as of the date of the written advice. The revenue procedure adds that, when the written advice does not meet one or more of the specified guidelines, the IRS's determination would depend on all the facts and circumstances. In all cases, the foundation must have reasonably relied in good faith on the advice and retain the original or a copy to be available to the IRS on request.

In general, the revenue procedure states that "preferred written advice" has the following characteristics:

1. Is written in, or translated into, English

2. Sets forth the qualified tax practitioner's application of the law to the facts, including, where relevant, grantee affidavits, which should be attested to by an officer or trustee of the grantee with personal knowledge of the facts

3. May rely on translations of and public information concerning foreign laws that meet the requirements of Revenue Procedure 2017-1, section 7.01(2)(b) and (c)

Sufficient facts for Section 501(c)(3) status

Written advice containing sufficient facts on Section 501(c)(3) status should:

1. Include an attachment with an English translation of the grantee's organizing documents

2. Identify the tax-exempt purpose under Section 501(c)(3) for which the grantee is organized and confirm that the grantee is not expressly permitted to engage in more than an insubstantial amount of activities for non-charitable purposes

3. Confirm that, if the grantee terminates, its assets will be distributed to another charity or governmental entity

4. Confirm that the grantee has no shareholders or members with an ownership interest in the grantee's income or assets

5. Confirm that the grantee does not attempt to influence legislation or intervene in political campaigns

6. Discuss any organizations that control, or are operated in connection with, the grantee

7. Describe the past, current and anticipated future activities of the grantee (including certain specified details)

8. Include verification that the grantee has not been designated as a terrorist organization

The revenue procedure also specifies that, for grantees operating a hospital facility in a foreign jurisdiction, the written advice does not need to address Section 501(r). In addition, the revenue procedure sets out specific guidelines for foreign school grantees concerning sufficient evidence on the issue of racial discrimination.

Sufficient facts for qualifying public charity status

Written advice containing sufficient facts on qualifying public charity status should:

1. Include application of relevant law to the facts and circumstances concerning whether the status of the qualifying public charity does not depend on a financial test (e.g., schools and hospitals)

2. Include a determination that the grantee can reasonably be expected to meet applicable requirements for its first five years (for organizations in existence less than five years)

3. Include as an attachment a support schedule (as provided in Form 990, or similar) for the applicable period, as well as a number of other specified attachments (for organizations in existence more than five years)

The revenue procedure also specifies additional information that should be included in written advice in the case of: (1) medical research organizations, (2) non-functionally integrated type III supporting organizations, and (3) operating foundations.

Implications

When making grants to foreign organizations, domestic private foundations must generally either adhere to a set of grant procedures known as "expenditure responsibility" for those grants, or alternatively make an "equivalency determination" to show that the grantee organization is equivalent to a US public charity. In making this decision, a foundation should consider the frequency of planned giving to the organization. For recurring grants, equivalency determination is generally favorable; although it requires more work upfront, going forward with the process can be less burdensome than expenditure responsibility.

In Revenue Procedure 2017-53, the IRS provides revised guidelines that qualified tax practitioners may use for preparing "preferred written advice": a safe harbor on which a domestic private foundation may ordinarily rely in making an equivalency determination that a foreign grantee meets Section 501(c)(3) and public charity requirements.

In preparing written advice, a qualified tax practitioner must:

1. Base the written advice on reasonable factual and legal assumptions (including assumptions as to future events)

2. Reasonably consider all relevant facts and circumstances that the practitioner knows or reasonably should know

3. Use reasonable efforts to identify and ascertain the relevant facts

4. Not rely upon representations, statements, findings or agreements (including projections, financial forecasts or appraisals) of the taxpayer or any other person if reliance on them would be unreasonable (which is the case if the practitioner knows or reasonably should know that one or more representations or assumptions on which any representation is based are incorrect, incomplete or inconsistent)

5. Relate applicable law and authorities to facts

6. Not base the advice on consideration of the possibility that a return will not be audited or that a matter will not be raised by the IRS on audit

For certain grantees, Revenue Procedure 2017-53 provides more detailed guidance:

1. A grantee that operates a hospital facility is not required to comply with Section 501(r) with respect to the facility unless the facility is required by one of the 50 US states (or the District of Columbia) to be licensed, registered or similarly recognized as a hospital. If the grantee operates a hospital facility in a foreign jurisdiction, the written advice does not need to address Section 501(r).

2. For medical research organizations that have been in existence beyond their organizational period, preferred written advice includes as an attachment a schedule showing that the grantee devotes more than half its assets, or spends at least 3.5% of the fair market value of its endowment, directly in conducting medical research (or an explanation as provided in Reg. Section 1.170A-9(d)(2)(A) if the organization fails both tests). Either test can be met based on a computation period consisting of the immediately preceding tax year or the immediately preceding four tax years.

3. Foreign school grantees must confirm that the grantee does not discriminate on the basis of race, color, or national or ethnic origin, both by policy and in practice. The grantee may fulfill the first part of this requirement via a policy in its governing documents or adopted by its governing body. While the procedures of Revenue Procedure 75-50 need not be followed, this remains an avenue by which a grantee may demonstrate that it actually operates in a racially non-discriminatory manner.

4. For a grantee that is an operating foundation under Section 4942(j)(3) or exempt operating foundation under Section 4940(d)(2) and has existed for more than one year, preferred written advice includes as an attachment the private operating foundation schedule provided on Form 990-PF, or a similar schedule of information, for the applicable period.

Until further guidance is issued, sponsoring organizations of donor-advised funds may also use the guidelines in Revenue Procedure 2017-53 for purposes of applying the exception under Section 4966(c)(2)(A) to the excise tax imposed on taxable distributions under Section 4966.

Please contact your Ernst & Young LLP tax professional with any questions.

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