United States: IRS Issues New Regulations For Foreign Grantmaking By Private Foundations

On September 24, 2012, the Department of Treasury and the IRS issued proposed regulations governing the procedures used by private foundations for making a "good faith" determination as to whether a foreign grantee is the equivalent of a U.S. public charity. The new guidance broadens the class of tax practitioners upon whose written advice private foundations may rely in making such equivalency determinations.  Secretary of State Hillary Clinton has noted the change, stating that it would help clear the way for the creation of equivalency determination repositories, allowing multiple grantmakers to save time and effort by relying on a single equivalency determination. The Council on Foundations has been asking Treasury and the IRS to take steps to facilitate the creation of such a repository for some time.

Foundations may rely on the proposed regulations effective immediately for grants made on or after September 24, 2012.


To avoid certain excise taxes under section 4942 of the Internal Revenue Code, private foundations must make sufficient "qualifying distributions" for charitable purposes to meet a minimum "distributable amount." In addition, to avoid excise taxes under section 4945 of the Code, private foundations may not make "taxable expenditures," including distributions that are not for charitable purposes and grants to entities other than certain public charities or exempt operating foundations over which the foundation has not exercised "expenditure responsibility."1

For these purposes, grants to foreign organizations that do not have a determination letter from the IRS will be treated the same way as grants to recognized public charities if the grantor (i) makes a reasonable determination that the organization is described in section 501(c)(3) and (ii) makes a good faith determination that the grantee meets the requirements for the relevant U.S. public charity status—known as an "equivalency determination."  Such an equivalency determination applies for purposes of section 4942 and section 4945, making it easier for payments to the grantee to be treated as "qualifying distributions" counted toward the Foundation's payout requirement and not taxable expenditures (even if the grantmaker does not exercise expenditure responsibility).2 Of course, grantmakers can typically choose to exercise expenditure responsibility over a grant instead of performing an equivalency determination, and the proposed regulations do not affect the standards governing expenditure responsibility grants.

Section 4966 requires expenditure responsibility for certain grants from donor advised funds, depending on the public charity classification of the grantee.  While the newly proposed guidance is necessarily addressed to private foundations (regulations under 4966 have not yet been published), it seems reasonable to expect that similar standards would apply to donor advised funds trying to determine whether they must exercise expenditure responsibility over their foreign grantees as well. 

Expanded field of practitioners may issue equivalency determination opinions

Under the previous regulations, a private foundation would ordinarily be considered to have appropriately made a good faith equivalency determination if the determination was based on an affidavit of the foreign grantee or on an opinion of counsel of either the foundation or the grantee, but the previous regulations do not address reliance on other experts outside the legal counsel relationship.

The proposed regulations allow private foundations making equivalency determinations to now rely on written advice given by a "qualified tax practitioner," including attorneys, certified public accountants, and enrolled agents, as defined in and subject to the requirements of Treasury Department Circular 230. Circular 230 requires tax practitioners to meet specific professional standards of conduct for practice before the IRS, including standards for written advice. The proposed regulations authorize a foundation to rely on appropriate equivalency opinions even if they are provided by third-party practitioners and not by legal counsel to the grantee or the foundation. Because Circular 230 requires practitioners to be licensed to practice in a state, territory, or possession of the United States (or enrolled by the IRS), one side effect of these changes is that foreign counsel of grantees will no longer be able to provide equivalency opinions unless they meet these requirements.

As is the case under current law, the written advice must provide sufficient facts about the operations and financial support of the foreign organization for the IRS to determine that the grantee would be likely to qualify as a public charity. In addition, a private foundation's equivalency determination that is based upon the written advice of a qualified tax practitioner will be considered as made in "good faith" if the foundation's reliance meets the requirements of Treasury Regulations section 1.6664-4(c)(1), which states that all facts and circumstances must be taken into account in determining whether a taxpayer has reasonably relied in good faith on written advice.

Rationale for the change

The preamble to the proposed regulations states that the Treasury Department and the IRS believe that expanding the class of practitioners on whose written advice a foundation may rely for the purposes of making a good faith determination will decrease the cost of seeking professional advice, as well as encourage more foundations to obtain written tax advice, thereby promoting the quality of the equivalency determinations being made.

In addition, as Secretary of State Clinton mentioned in her statement and as the Council on Foundations has explained, these regulations may facilitate the establishment of organizations that will serve as repositories for equivalency determinations by allowing reliance on opinions prepared by qualified tax practitioners who are employed by such repositories, potentially easing the compliance burden on private foundations or donor advised funds that wish to engage in foreign grantmaking.

Request for public comments

The notice of proposed rulemaking stated that Treasury and the IRS will consider several issues prior to finalizing the regulations or in connection with issuing additional guidance. In specific, public comment is requested on the following topics:

  • whether it is appropriate to limit the timeframe (such as to a 12 month period) during which a private foundation may rely upon a qualified tax practitioner's written advice for purposes of making a good faith equivalency determination—after which period the foundation would need to receive an updated opinion from the practitioner;
  • whether it is appropriate to remove or restrict (such as for grants above a certain dollar threshold) the provision of the regulations expressly authorizing a private foundation to base its good faith determination on an affidavit of a foreign grantee, or to require additional supporting factual information to corroborate the contents of affidavits; and
  • whether the current standards in Revenue Procedure 92-94, 1992-2 C.B. 507, should be modified to take into account changes to the public support test for public charity status.


1 Expenditure responsibility is not required for exempt operating foundations described in section 4940(d)(2) of the Code or for organizations described in sections 501(c)(3) and 509(a)(1), (a)(2), or (a)(3) of the Internal Revenue Code, other than for disqualified supporting organizations described in section 4942(g)(4)(A)(i) or (ii). 

2 A private foundation may also use the equivalency determination process to treat its grants as made to an organization that qualifies as a "private operating foundation" under sections 501(c)(3) and 4942(j)(3) or, according to the preamble of the proposed regulations, an "exempt operating foundation" under sections 501(c)(3) and 4940(d)(2), making those grants subject to the same conditions that would apply to grants to the corresponding domestic entity.

This article is designed to give general information on the developments covered, not to serve as legal advice related to specific situations or as a legal opinion. Counsel should be consulted for legal advice.

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