11 January 2018 IRS revokes exempt status of organization operating as foreign conduit In PLR 201751015, the IRS revoked the tax-exempt status of an organization that raised funds in the US to support a foreign organization without maintaining expenditure responsibility nor retaining any control or discretion over the use of the funds, in addition to allowing its income to benefit a disqualified person. The organization subject to PLR 201751015 (ORG) was a Section 501(c)(3) tax-exempt organization, organized in the US, formed to further the work of a foreign organization. ORG solicited tax-deductible contributions, under Section 170 of the Code, in the US, and made payments, in intervals, to the foreign organization. ORG did not provide grants to the foreign organization on a proposal basis, but instead raised funds to support known activities in which the foreign organization consistently engaged. ORG was engaged in no other charitable activities during the years at issue. ORG also issued checks, payable to "cash", on various occasions. The person who ultimately cashed these checks was listed as "Senior Vice President" on the bank signature authorization card for ORG's account but was not listed as an officer on ORG's Form 990. Under Section 170(c)(2), the IRS explained, contributions made directly to foreign organizations are not deductible. Nonetheless, under Revenue Ruling 68-489, a Section 501(c)(3) organization will not jeopardize its tax-exempt status by making contributions to non-exempt organizations, including foreign organizations, so long as it retains control and discretion over the use of the funds and ensures they are used for charitable purposes by exercising expenditure responsibility. Because ORG made payments to a foreign organization of funds solicited in the US without any control or discretion over the use of those funds, the IRS concluded that ORG acted as a foreign conduit. The IRS also noted that ORG presented no documentation to show how the domestic organization maintained expenditure responsibility or how the foreign organization utilized any of the funds contributed. In addition, the IRS determined that ORG appeared to have permitted its income to inure to the benefit of a disqualified person (i.e., an officer, director, or trustee). The IRS noted that it is irrelevant that the person in question was not listed as an officer on ORG's Form 990, because the individual's power to exercise general authority was implied by his access to, and use of, ORG's checking account. The IRS has indicated that domestic charities serving as conduits for foreign organizations are among its current audit priorities. PLR 201751015 is consistent with previous private letter rulings in which the IRS has denied both Section 170 deductibility and Section 501(c)(3) status to organizations designed to support particular foreign institutions or their students, focusing on the control officers of those foreign institutions had over the US organization's board and especially over the US organization's bank accounts, as well as the minimal amount of supervision the US organization exercised over its foreign counterpart. Although the IRS did not provide specific examples of the questions that it asked the organization subject to PLR 201751015 regarding the organization's exercise of expenditure responsibility, other recent private letter rulings (see PLR 201539032) have shed some light on this process. Questions asked in these rulings include: (1) inquiries into the pre-grant process, including whether an application is completed by the foreign recipient; (2) whether a detailed description of the project is required; (3) whether any sort of inquiry has been made into the recipient's past activities; (4) whether the organization maintained a grant approval process and, if so, if it was followed; and (5) whether the board of directors approved the grant before notifying the foreign grant recipient. Tax-exempt organizations that send money abroad as a significant portion of their activities may want to review their procedures regarding the exercise of expenditure responsibility to ensure that the funds are being used for charitable purposes. By doing so, organizations lessen the likelihood of being classified as conduits to foreign organizations and thereby risking the loss of tax-exempt status. Organizations are also advised to monitor future guidance from the IRS as it becomes available. — For more information about EY's Exempt Organization Tax Services group, visit us at www.ey.com/ExemptOrg.
Document ID: 2018-0074 | |||||||||||||||||||
