On Sept. 24, the Internal Revenue Service issued REG-134974-12, “Reliance Standards for Making Good Faith Determinations” (proposed regulations). The proposed regulations address the standards for making a good faith determination that a foreign organization is a charitable organization to which a private foundation (PF) can make qualifying distributions.
To avoid excise taxes, PFs must make minimum qualifying distributions each year (Internal Revenue Code Section 4942) and avoid making taxable expenditures (IRC Section 4945). A PF that makes a grant to certain foreign organizations may treat such grant as a qualifying distribution if the PF makes a good faith determination that the foreign organization is a public charity (as defined in IRC Sections 501(c)(3) and 509(a)(1), (a)(2) or (a)(3)), is a private operating foundation (as defined in Section 501(c)(3) and Section 4942(j)(3)) or isn’t a disqualifying organization (as defined in Sections 4942(g)(4)(A)(i) or (g)(4)(A)(ii)).
Expenditures made for other than charitable purposes are considered taxable expenditures as defined in IRC Section 4945(d) and will subject a PF to an excise tax.
Good Faith Determination
A PF that makes a grant to a foreign organization that doesn’t have a determination letter issued by the IRS will be treated as making a grant to a public charity if the PF has made a good faith determination that the grantee is a public charity. A “good faith determination” under Treasury Regulations Section 53.4945-5(a)(5) is one that’s based on a grantee’s affidavit or an opinion of counsel of either the PF or the grantee.
Who Can Give Advice
Under the proposed regulations, the PF’s reliance my be based on written advice given by a “qualified tax practitioner” who’s subject to the requirements of Circular 230. A “qualified tax practitioner” includes an attorney, a certified public accountant or an enrolled agent, as those practitioners are defined in Circular 230 Sections 10.2 and 10.3. The proposed regulations limit the definition of “qualified tax practitioner” to these three types of advisors because,
…these practitioners generally provide advice to clients with respect to taking positions on tax returns, and these practitioners are generally authorized to represent their clients before the IRS without limitations applicable to other types of practitioners…
The IRS also cites cost as a reason for expanding the class of practitioners on whose written advice a PF may rely. In its explanation of the proposed regulations, the IRS states that it and the Treasury Department believe that broadening the class of advisors will decrease the cost of seeking professional advice regarding these determinations, enabling PFs to engage in international philanthropy more cost-effectively. Expressly allowing a PF to rely on a broader spectrum of advisors could also encourage more PFs to get written tax advice, which would, in turn, promote the quality of the determinations that are made.
Importantly, unlike the current rule, the proposed regulations don’t include foreign counsel, unless the foreign counsel is a qualified tax practitioner as defined by the proposed regulations. This is consistent with Circular 230, which requires an attorney or certified public accountant be licensed in a state, territory or U.S. possession and an enrolled agent be enrolled by the IRS.
The IRS has requested comments on all aspects of the proposed regulations.