The IRS today released an advance version of Rev. Proc. 2017-53 providing guidance that qualified tax practitioners may use for preparing written advice, upon which private foundations and sponsoring organizations of donor advised funds ordinarily may rely in making a good faith determination that a foreign grantee is the equivalent to a U.S. public charity.
Read Rev. Proc. 2017-53 [PDF 99 KB]
Rev. Proc. 2017-53 is a long-awaited update to Rev. Proc. 92-94 and reflects the changes to the equivalency determination process (as set forth in regulations published in 2015), and the public support tests (as set forth in regulations published in 2011). In addition, it favorably resolves long-standing issues relating to nondiscrimination policies of foreign schools and support from foreign governments.
A private foundation generally must exercise “expenditure responsibility” under section 4945 over a grant that it makes to an organization that does not have an IRS determination letter recognizing the organization as a section 501(c)(3) public charity. However, an exception applies for a grant made to a foreign organization about which the private foundation has made a good faith determination that the organization is a “public charity.” This process—also referred to as an “equivalency determination”—generally allows the private foundation to treat the grant as a “qualifying distribution” under section 4942 and generally relieves the private foundation from exercising expenditure responsibility.
In making an equivalency determination, many foundations often relied on Rev. Proc. 92-94, which set forth simplified procedures for making “reasonable judgments” and “good faith determinations.” Specifically, the revenue procedure set forth guidelines for relying on an affidavit from the foreign grantee organization that demonstrated that it was the foreign equivalent of a U.S public charity.
In 2011, the IRS and Treasury Department issued final regulations that, among other things, modified the public support tests for organizations described in sections 509(a)(1) and 170(b)(1)(A)(vi) and section 509(a)(2). In relevant part, the final regulations changed the computation period from the four-year period ending prior to the tax year being tested to a five-year period ending with the tax year being tested.
In 2015, the IRS and Treasury Department issued final regulations that modified the requirements for making a “good faith determination” about a foreign organization’s public charity status, including measures:
In addition, the regulations permitted sponsoring organizations of donor advised funds (DAFs) to use the guidance in making equivalency determinations until further guidance is issued.
Written advice that meets the guidelines of sections 4, 5, and 6 of Rev. Proc. 2017-53 ordinarily will contain sufficient facts concerning the foreign grantee’s operations and support to meet that requirement of the equivalency determination regulations. The private foundation still must meet the requirement to have reasonably relied in good faith on such written advice and must retain the written advice and make it available upon request to the IRS.
To meet the requirements of sections 4, 5, and 6, the written advice must:
The revenue procedure also includes some favorable guidance in making equivalency determinations:
Rev. Proc. 2017-53 provides very detailed guidance for determining that written advice satisfies the requirements for an eventual good faith determination that a prospective foreign grantee is the equivalent of a U.S. public charity. To this end, private foundations (and sponsoring organizations of DAFs) need to consider revisiting their equivalency determination procedures; evaluating whether they meet the current guidelines; and if needed, enhancing the amount of information gathered from prospective grantees.
For more information, contact a tax professional with KPMG’s Washington National Tax practice:
Alexandra Mitchell | +1 202 533 6078 | email@example.com
Preston Quesenberry | +1 202 533 3985 | firstname.lastname@example.org
Randall Thomas | +1 202 533 3786 | email@example.com
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