Private Foundations Acting in Good Faith May Rely on Written Advice of Circular 230 Practitioners to Determine Foreign Charity Status

The IRS has provided in final regulations (TD 9740) that a private foundation may rely in good faith in making a determination that a foreign organization is a charitable organization that is not itself a private foundation by relying in good faith upon written advice from any of the following tax practitioners:

  • Attorney
  • Certified Public Accountant
  • Enrolled Agent

who are subject to IRS regulation via Circular 230 (traditional Circular 230 practitioners).

The preamble provides:

A qualified tax practitioner may include an attorney serving as a foundation's in-house counsel, as well as a foundation's outside counsel. Because Circular 230 requires that, to practice before the IRS, an attorney or CPA must be licensed in a state, territory, or possession of the U.S., and an enrolled agent must be enrolled by the IRS, 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 addition, 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 §1.6664-4(c)(1). As noted in the preamble to the proposed regulations, §1.6664-4(c)(1) 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, but a foundation's reliance on written advice is not 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 U.S. tax law (which, in this context, would include 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.

Generally a private foundation must make a minimum level of “qualifying distributions” each year and avoid making “taxable expenditures” to avoid various excise taxes.  Payments made to foreign organizations can qualify as “qualifying distributions” if the foundation makes a good faith determination the foreign charity is an organization that is of the type described in IRC §§501(c)(3), 509(a)(1), (2) or (3) that is not a supporting organization or a private operating foundation.

The IRS rejected a comment that requested the same protected status be provided to advice received from foreign counsel as is provided to advice from traditional Circular 230 regulated practitioners.  Thus, unless the counsel is also a qualified U.S. tax practitioner will not be granted the special protection granted to written advice received from a Circular 230 practitioner.

The final regulations also do not include any provisions that would granted protected status to affidavits of grantee organizations.  While they can be a source of information, the IRS concluded that the foundation must assure that someone knowledgeableregarding U.S. tax law (which could be the manager if he/she has that level of expertise) has concluded the organization meets the requirements, something a foreign organization itself may not be able to do.

The regulations also address how long the organization may continue to rely upon protected written advice.  As the preamble notes:

...the final regulations provide that, for purposes of the special rule, written advice of a qualified tax practitioner serving as the basis for a good faith determination must be “current.” 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, consistent with rules for determinations of public support over a five-year test period for U.S. public charities, 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. For purposes of these rules, an organization's year refers to its taxable year for U.S. tax purposes, or its annual accounting period if it does not have a U.S. taxable year.

The preamble also indicated that the IRS planned to issue an update to Revenue Procedure 92-94 which deals with methods to make “reasonable judgements” and “good faith determinations” of a foreign organizations status to take into account these rules.

The final regulations, published on September 25, 2015, become effective for grants paid 90 days after that date.