Posted by David Rosenberg and Tyree Collier On Sept. 23, 2015, the IRS issued Treasury Decision 9740, which released its final regulations regarding the standards for private foundations to use in making a good faith determination that a foreign organization is a charitable organization that is not a private foundation, so that grants made to that foreign organization may be qualifying distributions and may not be taxable expenditures.Background.A private foundation generally may treat grants made for charitable purposes to certain foreign organizations as qualifying distributions under I.R.C. section 4942 if the foundation makes a good faith determination that the foreign organization is either (a) an organization described in sections 501(c)(3) and 509(a)(1), (2), or (3) (a “public charity”) that is not a “disqualified supporting organization” described in section 4942(g)(4)(A) (i) or (ii), or (b) an organization described in sections 501(c)(3) and 4942(j)(3) (an “operating foundation”). Similarly, private foundations may treat grants for charitable purposes to certain foreign organizations as other than taxable expenditures under section 4945 without having to exercise expenditure responsibility if the foundation makes a good faith determination that the foreign organization is a public charity (other than a disqualified supporting organization) or is an operating foundation described in section 4940(d)(2) (an “exempt operating foundation”). The good faith determination that a private foundation must make as described above is commonly known as an “equivalency determination.”Original Regulations.Treasury regulations have provided for many years that private foundations may make an equivalency determination by obtaining an affidavit of the grantee or on an opinion of counsel of either the grantor or the grantee, setting forth sufficient facts concerning the operations and support of the grantee for the IRS to determine that the grantee would be likely to qualify as a public charity or an operating foundation. Additionally, since 1992, Rev. Proc. 92-94 has allowed private foundations to rely on a “currently qualified” affidavit, provided that the foundation does not possess information indicating the affidavit may not be reliable. A “currently qualified” affidavit is generally one that contains facts reflecting the grantee organization’s latest complete accounting year (or is updated to reflect such current data) provided that the relevant substantive requirements of section 501(c)(3) and for a public charity or operating foundation remain unchanged. However, if a grantee’s status under the relevant Internal Revenue Code sections does not depend on financial support, which can change from year to year, an affidavit can be “qualified” by obtaining from the grantee an attestation that the facts have not changed.2012 Proposed Regulations.The newly-issued final regulations replace proposed regulations that were issued in 2012, which primarily (a) expanded the list of persons whose opinion can be relied on to include not only legal counsel, but also “qualified tax practitioners” (including attorneys, CPAs, and enrolled agents subject to the requirements of IRS Circular 230), and (b) clarified that the good faith of a private foundation’s reliance on an affidavit or opinion would be evaluated using the requirements of Treas. Reg. §1.6664-4(c)(1), which sets forth the standards for reasonable reliance in good faith on professional tax advice for penalty relief purposes. The proposed regulations also updated various provisions to reflect legislative changes that have occurred since the former regulations were issued, including to reflect changes under the Pension Protection Act of 2006. Private foundations have been allowed to rely on the proposed regulations since their 2012 issuance.New Final Regulations.Similar to the proposed regulations, the final regulations allow private foundations to rely ordinarily on written advice from qualified tax practitioners, including CPAs and enrolled agents (as well as attorneys) who are subject to the standards of practice before the IRS set out in IRS Circular 230. A qualified tax practitioner may include an attorney serving as a foundation’s in-house counsel, as well as a foundation’s outside counsel. By referencing IRS Circular 230, the final regulations effectively require that the advisor be authorized to practice in a state, territory, or possession of the U.S. or as an enrolled agent in the U.S. Thus, a private foundation may no longer rely on an opinion of the grantee’s foreign legal counsel (unless the counsel is a qualified tax practitioner under U.S. law). However, foreign legal counsel may still be part of the process, such as explaining a relevant point of foreign law to a qualified tax practitioner or by gathering information relevant to the determination.Also like the proposed regulations, the final regulations provide that a determination based on the written advice of a qualified tax practitioner ordinarily will be considered as made in good faith if the foundation’s reliance meets the requirements of Treas. Reg. §1.6664-4(c)(1), which provides that all pertinent facts and circumstances must be taken into account in determining whether a taxpayer has reasonably relied in good faith on written advice. A foundation’s reliance on written advice will not be reasonable and in good faith if the foundation knows, or reasonably should have known, that a qualified tax practitioner lacks knowledge of the relevant aspects of the U.S. tax law of charities. Moreover, a foundation may not rely on written advice if it knows, or has reason to know, that relevant facts were not disclosed to the qualified tax practitioner or that the written advice is based on a representation or assumption that the foundation knows, or has reason to know, is unlikely to be true.When the proposed regulations were issued, the IRS requested public comments on whether it should eliminate the ability of a private foundation to rely on an affidavit from a foreign charity. Most commenters suggested that the affidavit remain as an alternative so that private foundations would not be required to consult a qualified tax practitioner for every foreign grant. Nevertheless, the IRS concluded that some person with an adequate knowledge of U.S. charity tax law must be involved and, accordingly, the IRS eliminated the alternative of obtaining and relying on an affidavit from the foreign charity by itself.The IRS notes, however, that the final regulations do not foreclose the use of grantee affidavits as a source of information in otherwise making a good faith determination, and they do not mean that a foundation must obtain written advice from a qualified tax practitioner in order to make a good faith equivalency determination. The regulations provide that, for example, a foundation manager with understanding of U.S. charity tax law may under the general rule make a good faith determination that a foreign grantee is a qualifying public charity based on the information in an affidavit supplied by the grantee. They note further that foundation managers or their in-house counsel may themselves be qualified tax practitioners, whose written opinion may be reasonably relied.The final regulations also incorporate a requirement that the written advice of a qualified tax practitioner must be “current” in order for a private foundation to rely on it. Written advice will be considered current if, as of the date of the distribution, the relevant law on which the advice was based has not changed since the date of the written advice and the factual information on which the advice was based is from the organization’s current or prior year. However, written advice that an organization satisfied the public support requirements under section 170(b)(1)(A)(vi) or section 509(a)(2) based on support over a test period of five years will be treated as current for the two years of the grantee immediately following the end of the five-year test period.One commenter asked for confirmation that a foundation could share the written advice of its in-house counsel or other qualified tax practitioner with other foundations, and that the other foundations could make their determinations based on the shared advice, without incurring excise taxes. The IRS recognized the potential cost savings of such sharing but expressed concern about foundations relying on advice from an adviser they do not know that is not received directly from that advisor. Accordingly, while the final regulations do not specifically address a foundation’s use of written advice shared with it by another foundation in making a good faith determination, the IRS indicated in the Treasury Decision that a foundation can rely on written advice shared with it by another foundation in making a good faith determination if it is reasonable to do so under all the facts and circumstances (including the age of the facts supporting the written advice) and if the shared advice is received by the relying foundation from the qualified tax practitioner.In response to requests from commenters, the IRS also concluded that until further guidance is issued, sponsoring organizations of donor advised funds may use the final regulations as guidance in making their own equivalency determinations (applying the definition of “disqualified supporting organization” under section 4966(d)(4) in lieu of section 4942(g)(4)(A)(i) or (ii)).Effective Date and Transition.The final regulations replace the proposed regulations as of Sept. 25, 2015, when the final regulations were officially published in the Federal Register.The final regulations provide a 90-day transition period during which foundations may distribute grants in accordance with the former regulations regarding the use of grantee affidavits and opinions of counsel of the grantor or grantee. In addition, if a grant is distributed pursuant to a written commitment made prior to the applicability date of the final regulations and the grantor made a determination in good faith based on the prior regulations, the distribution is treated as compliant as long as the grant is paid out to the grantee within five years.Please contact one of us or any of the other Tax lawyers at Thompson & Knight if you have questions about grants to foreign organizations.