On September 24, 2012, the IRS issued Proposed Regulations §§ 53.4942(a)-3 and 53.4945-5 in order to reduce barriers to international grant-making made by private foundations. Secretary of State Hilary Clinton announced the guidance during an address at the Clinton Global Initiative. In particular, the new guidance modernizes the process of evaluating whether a foreign non-governmental organization is equivalent to a U.S. public charity for purposes of charitable giving.
To avoid excise taxes, private foundations must, among other things, make a minimum level of “qualifying distributions” and must avoid making “taxable expenditures”. In general, under the current regulations grants for charitable purposes to certain foreign organizations (that do not already have a determination letter from the IRS) may be treated as qualifying distributions as well as grants that are other than taxable expenditures if the private foundation makes a good faith determination that the foreign organization is the equivalent to a U.S. public charity or an exempt operating foundation. Such determination should be based on an affidavit of the grantee or an opinion of counsel of either the grantor or grantee. The affidavit or opinion must set forth sufficient facts concerning the operations and support of the grantee demonstrating that the grantee would be likely to qualify as a public charity.
The Proposed Regulations
The proposed regulations broaden the range of professionals on whose written advice a private foundation may rely when making “a good faith determination” that the foreign organization is the equivalent to a U.S. public charity or an exempt operating foundation. Under the new rules, in addition to being able to rely on an affidavit of the grantee or an opinion of counsel of either the grantor or grantee, a private foundation’s good faith determination may also be made based on the written advice of a “qualified tax practitioner” who is subject to the requirements of Circular 230. This includes attorneys, certified public accountants (CPAs) or enrolled agents. It would not include foreign counsel unless such counsel was subject to the requirements of Circular 230 (e.g. the foreign practitioner was also licensed in the U.S.).
While the IRS has requested comments before adopting these proposed regulations as final, private foundations may begin relying on the proposed regulations immediately.
The IRS is requesting comments on the foregoing, and is also considering the following:
- Should there be a limit to the timeframe during which a private foundation may be permitted to rely upon a qualified tax practitioner’s written advice?
- Should the current regulations be amended to remove the ability of a private foundation to base a good faith determination on an affidavit of a foreign grantee?