May 30, 2018 IRS modifies, combines prior revenue procedures to provide consolidated guidance on deductibility of contributions to exempt organizations In Revenue Procedure 2018-32, the IRS has modified and combined several revenue procedures (Revenue Procedures 81-6, 81-7, 89-23, and 2011-33) "to provide accessible guidance for grantors and contributors to tax-exempt organizations on deductibility and reliance issues." The new guidance explains the extent to which grantors and contributors may rely on listings in the IRS database of organizations eligible to receive tax-deductible charitable contributions under Section 170, generally so the grantors and contributors know whether their grants or contributions are tax deductible. The new revenue procedure provides safe harbors for determining that a grant or contribution will not cause the associated grantor or contributor to be responsible for, or aware of, an act that results in the organization's loss of public charity status. In addition, the guidance reflects the changes to regulations that eliminated the advance ruling process and changed the computation period for determining public support for organizations classified under Sections 170(b)(1)(A)(vi) and 509(a)(1) or under Section 509(a)(2). Finally, the Revenue Procedure includes modifications made in the transition from the use of Publication 78, Cumulative List of Organizations described in Section 170(c), to the use of the IRS's new database, Tax Exempt Organization Search. Background Four prior revenue procedures, describing the extent to which grantors and contributors may rely on the IRS's identification of an organization's tax-exempt and public charity status, are superseded by Revenue Procedure 2018-32. Revenue Procedure 81-6 provided a safe harbor that would allow grantors or contributors to determine if they were entitled to rely on the classification of an organization as a public charity and, therefore, be deemed not to have any knowledge of or responsibility for a substantial or material change in the organization's source of support that resulted in revocation of public charity status. The safe harbor provided in Revenue Procedure 81-7 allowed a grantor or contributor to be assured that certain grants and contributions would be considered "unusual grants," which are excluded (under Reg. Section 1.170A-9(f)(6)(ii)) from both the numerator and the denominator of the applicable support fraction for purposes of determining whether the organization is publicly supported under Sections 170(b)(1)(A)(vi) and 509(a)(1), or under Section 509(a)(2). A grantor or contributor that makes an "unusual grant" to a publicly supported organization will not be considered responsible for an act that results in the organization's loss of publicly supported organization status. Revenue Procedure 89-23 provided private foundation grantors and contributors an additional safe harbor for determining if they were entitled to rely on the classification of an organization as tax-exempt. Under the safe harbor, grantors and contributors would be deemed not to have knowledge of, or be responsible for, a substantial, material change in an organization's source of support that resulted in revocation of the entity's public charity status and, therefore, converting to a private foundation. Revenue Procedure 2011-33 described the extent to which contributors and grantors may rely on the listing of an organization in Publication 78 or in the IRS Business Master File (BMF) extract for purposes of deducting contributions under Section 170 and making grants under Sections 4942, 4945 and/or 4966. (See Tax Alert 2011-0999.) Revenue Procedure 2018-32 IRS lists and databases The IRS makes publicly available two different compilations of information on organizations eligible to receive tax-deductible contributions under Section 170. One lists organizations eligible to receive charitable contributions for which a charitable deduction may be claimed; the other contains information on exempt organizations extracted from the Service's Business Master File (BMF), referred to as the EO BMF Extract. Before being discontinued in paper form in 2011, Publication 78 contained the Service's list of eligible exempt organizations. In 2011, the IRS replaced the print form of Publication 78 with an electronic database maintained on the IRS website as part of "Exempt Organization Select Check" (Select Check). In May of 2018, the IRS changed Select Check to the Tax Exempt Organizations Search (TEOS) and added two new searchable databases (see Tax Alert 2018-1003). TEOS includes five searchable databases with information on exempt organizations: (1) the eligible organization list, a searchable version of Publication 78; (2) the list of organizations that have had their exempt status revoked for failure to file requisite tax returns for three or more years; (3) information reported on Form 990-N filed by organizations not required to file a Form 990 or Form 990-EZ due to size; (4) publicly available images of Form 990 series returns (including Form 990-T) filed on or after January 1, 2018; and (5) images of favorable determination letters issued on or after January 1, 2014. Revenue Procedure 2018-32 notes that interactive searches may now be done across all five databases. The EO BMF Extract includes some additional information not available in a TEOS search query. The EO BMF Extract contains information on most tax-exempt organizations, rather than just the tax-exempt organizations eligible to receive tax-deductible contributions under Section 170, as well as additional data fields that include: (1) the organization's Employer Identification Number; (2) Section 501(c) subsection code; (3) affiliation code (status as an independent, central, or subordinate organization); (4) deductibility code; and (5) foundation code (indicating whether an organization is a private foundation, private operating foundation, or public charity and, if applicable, the appropriate subparagraph of Section 170(b)(1)(A), and (for determinations issued after 2011) whether a Section 509(a)(3) supporting organization is a Type I, Type II, or Type III functionally or non-functionally integrated supporting organization). Reliance on TEOS and EO BMF Extract for tax-exempt status Revenue Procedure 2018-32 explains when and how the taxpayer may rely upon searches of the IRS's TEOS and EO BMF Extract. — General reliance rule. If an organization that had been listed in or covered by the TEOS loses its status as an organization that may receive tax-deductible contributions under Section 170, the organization's grantors and contributors may continue to rely on the determination letter or ruling information provided in the TEOS or EO BMF Extract until the government makes a public announcement stating that the organization no longer qualifies to receive deductible contributions. — General reliance rule for automatic revocation. If an organization that had been listed in or covered by the TEOS loses its status as an organization that may receive tax-deductible contributions under Section 6033(j), grants and contributions made by those who are unaware of the status change generally will be deductible under Section 170 if they are made before the name of the organization is posted on the Auto-Revocation List. — Extended reliance. In some circumstances (e.g., a legally enforceable obligation has been made to the organization under local law before the public announcement or posting is made and the obligation is satisfied on or after the revocation announcement or posting is made), the period during which the grant or contribution is deductible may be extended under Section 7805(b)(8). — Exception to general reliance. Before a public announcement or posting of a revocation is made, the IRS may disallow a deduction for any contribution made to an organization that has ceased to qualify under Section 170(c) if the grantor or contributor: (a) knew that the entity had received a revocation letter; (b) knew revocation was imminent; or (c) was partially responsible for, or was aware of, the organization's activities or deficiencies that caused the loss of qualification. — Reliance rule for relisting after revocation or automatic revocation. Grantors and contributors may rely on an organization's relisting in the TEOS or EO BMF Extract even if the organization's exempt status had previously been revoked or automatically revoked. Reliance on the TEOS and EO BMF Extract for public charity status Searches of the IRS's TEOS and EO BMF Extract may be relied upon for determining public charity status as follows: — General reliance rule. If an organization that had been listed in or covered by the TEOS loses its public charity status, the organization's grantors and contributors may continue to rely on the classification information provided in the TEOS or EO BMF Extract until the government makes a public announcement stating that the organization no longer qualifies as a public charity. Grantors and contributors may also rely on an organization's classification as a Type I, II or III functionally or non-functionally integrated supporting organization in the TEOS or EO BMF Extract. In addition, private foundations and sponsoring organizations of donor-advised funds may rely on an organization's public charity status or supporting organization type to the extent set out in the TEOS or EO BMF Extract for grant-making purposes under Sections 4942, 4945 and/or 4966 until the government publicly announces that the organization has ceased to qualify as a public charity. — Exception to general reliance. A grantor or contributor may not rely on an organization's listed public charity classification in the TEOS, the EO BMF Extract, or the organization's determination letter if the grantor or contributor: (a) knew that the organization's public charity status had been revoked before the announcement was made; or (b) was partially responsible for, or was aware of, the organization's activities or deficiencies that caused the revocation. Limitations on tax-exempt and public charity status reliance The reliance rules only apply to grants or contributions made to an organization listed in the TEOS or EO BMF Extract in the organization's official name, recognized popular name or a contraction of these names that is "reasonably identifiable and widely known." Reliance does not extend to donations or contributions given to an organization that is listed in the TEOS or EO BMF Extract but with the understanding that the donations or contributions will be used by another organization that is not listed. Similarly, reliance does not apply to subordinate organizations covered by a group exemption letter, even if the subordinate organization appears in the EO BMF Extract. Safe harbors for grantors and contributors when organization loses public charity status — Aggregate support safe harbor. A grantor or contributor generally will not be considered responsible for or aware of an act that results in the loss of classification due to a change in financial support if the aggregate of the donor's grants or contributions for the organization's tax year is 25% or less of aggregate support received by the organization for the immediately preceding four tax years. The revenue procedure explains what exactly "support" means for publicly supported organizations described in Sections 170(b)(1)(A)(vi) and 509(a)(2). This safe harbor is not available to a grantor or contributor who: (a) is "a person of authority" with respect to the recipient organization, (b) is in a relationship described in Section 4946(a)(1)(C)-(G) with respect to a person who is in a position of authority or control, or (c) actually knows the organization lost its public charity status. — Additional safe harbor for private foundation grantors and contributors. Grantors and contributors will not be considered responsible for or aware of an act that results in a recipient organization's loss of public charity status due to a change in financial support if the organization has received a determination letter or ruling described in Sections 170(b)(1)(A)(vi) and 509(a)(1) or in Section 509(a)(2), and is not controlled by the private foundation. Control for these purposes occurs if the private foundation and disqualified persons can aggregate their votes or positions of authority to require the organization "to perform an act that significantly affects its operations" or to prevent the organization from performing such an act. Grantors and contributors may not take advantage of this safe harbor if they have actual knowledge that the organization lost its public charity status. — Safe harbor for "unusual grants." Section 7.03(1) of the revenue procedure defines an "unusual grant" generally as a grant or contribution that: a. Would, due to its size, adversely affect the status of a recipient organization under Sections 170(b)(1)(A)(vi) and 509(a)(1) or under Section 509(a)(2), unless it is treated as an "unusual grant" under Reg. Sections 1.170A-9(f)(6)(ii) and 1.509(a)-3(c)(3) b. Is not made by a person who created the organization or someone who has been a substantial contributor c. Is not made by a person who is in a position of authority with respect to the organization (e.g., foundation manager), who otherwise can exercise control over the organization, or who stands in relationship with any person who is in a position of authority or control d. Consists of cash, readily marketable securities or assets that directly further the organization's exempt purpose e. Is made to an organization that qualifies as a public charity and meets the public support test, regardless of the grant or contribution at issue Reliance on EO BMF Extract information from other sources Under certain circumstances, a grantor or contributor may rely on information that a third party obtains about an organization from the EO BMF Extract. The third party must provide a report to the grantor or contributor containing requisite identifying information about the organization, a statement that the information is from the most recent EO BMF Extract, and the date and time the information was provided to the grantor or contributor. Implications Tax-exempt organizations should routinely monitor the TEOS and EO BMF Extract to ensure that their respective organizations are appropriately listed and their tax-exempt and/or public charity status is accurately recorded. Individual contributors, donor organizations and foundations are increasingly using online services to research details about potential donee organizations in order to make decisions on grant funding. Grantmakers should also be aware of the consolidated reliance rules of Revenue Procedure 2018-32 in order to determine when they may rely on the information contained in the respective databases regarding an entity's tax-exempt and/or public charity status. These rules are significant for donors looking to receive a charitable contribution deduction under Section 170 because the allowable amount of the deduction will depend on the donee organization's tax-exempt and/or public charity status. Similarly, because private foundations must follow different expenditure responsibility rules based on the recipient's public charity status, they will also be interested in the rules regarding when they can and cannot rely on the information contained in the two databases. Private foundations and other tax-exempt organizations should also be aware of the updated safe harbors and examples provided in this new guidance, including how to calculate public support for purposes of Revenue Procedure 2018-32. In general, a donor organization or contributor is deemed to be aware of or responsible for the loss of an entity's public charity status due to its failure to meet the applicable public support test if the donor contributes more than 25% of the organization's aggregate support over four years. This rule has exceptions, however, including actual knowledge of a status change and certain relationships between the parties. Lastly, Revenue Procedure 2018-32 offers updated guidance and an additional safe harbor for unusual grants to public charities that may prove beneficial to organizations receiving these contributions. Please contact your EY Professional for additional information. ——————————————— — For more information about EY's Exempt Organization Tax Services group, visit us at www.ey.com/ExemptOrg ———————————————
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