Private foundations and donor-advised funds are set up to provide donations to other public charities. When the charities are outside the U.S., there are requirements that must be met for the donation to be seen as a qualified charitable donation. If the foreign charity doesn’t have a letter stating the U.S. recognizes that it’s seen as a public charity, then the private foundation has to either report the donation as a taxable expenditure or use the expenditure responsibility regulations to make the stance that the donation is a qualified donation.
This responsibility is burdensome to administrators and was previously allowed to be completed by a foreign non-U.S. person. The person could provide the affidavit to allow the charity to be seen as a qualified charity.
In 2015, the U.S. Department of the Treasury (Treasury) issued regulations on the expenditure responsibility to change who can provide advice on public support tests.
This revenue procedure modifies the Rev. Proc. 92-94, 1992-2 C.B. 507 by updating the qualified practitioner qualifications, support test from four to five years and redefines the burden of support.
Internal Revenue Code (IRC) Section 4945(h) provides the alternative regulations, and Rev. Proc. 2017-53 provides the guidance on the alternative to the expenditure responsibility requirements relating to foreign charities. These requirements were administratively burdensome, as they required written commitments from grantee organizations regarding how they use the funds, repayment if any funds weren’t used for the purpose of the grant, complete annual reports and records of receipt and expenditures.
Previously when a private foundation (or a donor-advised fund) donated to a foreign charity that didn’t have an IRS determination letter, the private foundation was required to follow the expenditure responsibility disclosures to be able to use the donation toward the required distributions instead of a taxable expenditure.
This revenue procedure sets requirements for qualified tax practitioners’ written advice. Treasury wrote the new regulations so foreign attorneys who don’t know U.S. tax law can’t provide affidavits on which a charity may rely.
Summary of Changes Addressed in This Revenue Procedure
First, written advice must be current. “Current” is typically defined as being used within two years of the advice being written. The revenue procedure provides examples to help define current. Also, the written advice must be from a “qualified tax practitioner,” which is an attorney, CPA or enrolled agent who’s subject to the standards of practice before the IRS set forth in Circular 230 (31 CFR Part 10). In all cases, the private foundation still must meet the requirement to have reasonably relied, in good faith, on the written advice in accordance with the requirements set out in §1.6664-4(c)(1). This means the private foundation must be able to substantiate that it can rely on the tax advisor based on the advisor’s knowledge, as well as that it has enough knowledge of the situation to be able to rely on the advisor.
The guidelines for written advice are as follows:
- The original written advice (or a copy) must be made available to the IRS upon request.
- The written advice and any attachments need to be in English or translated into English.
- The written advice may reference attached affidavits from the grantee that provide factual information upon which the written advice is based.
- The written advice can rely on translations of foreign laws.
Also, written advice needs to include sufficient facts regarding the organization’s 501(c)(3) status and:
- Grantee’s articles of organization, bylaws or other organizing or enabling documents that provide the formation and governance of the organization. The country the organization is formed in also should be noted, if not identifiable through these documents.
- Confirmation of the organization’s tax-exempt purpose (under 501(c)(3)) along with confirmation that the organization isn’t permitted to engage in substantial noncharitable purposes.
- Documentation that if the organization were to dissolve, the remainder of the assets would be distributed to another not-for-profit charitable organization.
- Documentation that there are no private shareholders.
- Documentation that the organization isn’t involved in any substantial lobbying or political intervention and that doing so is not permitted.
- All affiliated organizations need to be listed.
- Descriptions of activities and analysis of past, current and anticipated activities to ensure the organization would qualify as a public charity as of the date of the written advice.
- Preferred written advice includes verification that the grantee hasn’t been designated or individually identified as a terrorist organization by the U.S. government as described in §501(p)(2).
- Hospitals and 501(r) – A grantee that operates a hospital facility isn’t required to comply with §501(r) with respect to the facility unless the facility is required by one of the 50 states (or the District of Columbia) to be licensed, registered or similarly recognized as a hospital. See §1.501(r)-1(b)(17). If the grantee operates a hospital facility in a jurisdiction outside the U.S., the written advice doesn’t need to address §501(r).
- Regarding foreign school grantees, preferred written advice or an attached affidavit pertaining to a grantee described as a school in 70(b)(1)(A)(ii) is considered sufficient regarding the issue of racial discrimination concerning students if both of the following hold true:
- The written advice or attached affidavit states the grantee has adopted a policy in its governing instrument, or in a resolution of its governing body, that the grantee doesn’t discriminate against applicants and students on the basis of race, color or national or ethnic origin as required by §4.01 of Rev. Proc. 75-50 (or any successor revenue procedure).
- The written advice or attached affidavit provides evidence the grantee actually operates in a racially nondiscriminatory manner toward students.
In addition to this revenue procedure providing guidelines for documenting 501(c)(3) status of charities, it goes further into the types of support that the written advice must include to verify the public charity status of the following types of organizations. The revenue procedure explicitly offers guidelines for the following:
- Financial and nonfinancial tests
- Section 170(b)(1)(A)(vi) or 509(a)(2) organizations within the first five years
- Section 170(b)(1)(A)(vi) organizations after the first five years
- Section 509(a)(2) organizations after the first five years
- Support from governments
- Medical research organizations
- Nonfunctionally integrated Type III supporting organizations
- Operating and exempt operating foundations
Overall, Rev. Proc. 2017-53 offers an alternative to the expenditure responsibility requirements and requires qualified tax practitioners to fully document the stance taken regarding the distributions made from private foundations.
If you have questions or to learn more, contact Stephanie or your trusted BKD advisor.