Prop. Regs. Expand Options for Private Foundations in Grant-Making Process

By Kelli Archibald, CPA, Phoenix

Editor: Michael Dell, CPA

Exempt Organizations

In REG-134974-12, the IRS proposes expanding the types of tax professionals on which private foundations may rely when making good-faith determinations as to the public charity status of foreign grantees.


To avoid excise taxes, private foundations are generally required under Sec. 4942 to make “qualifying distributions” at least equal to a minimum distributable amount each tax year. For purposes of Sec. 4942, grants made for charitable purposes to a foreign organization that does not have a determination letter from the IRS may be treated as a qualifying distribution if the grantor private foundation makes a “good faith determination” that the foreign organization is a private operating foundation or a public charity (other than a disqualified supporting organization).

Similarly, Sec. 4945 imposes an excise tax on a private foundation’s “taxable expenditures,” which include any grants it makes unless (1) the grantee is a public charity (other than a disqualified supporting organization) or an exempt operating foundation, or (2) the private foundation exercises expenditure responsibility with respect to the grant in accordance with Sec. 4945(h). Accordingly, as with Sec. 4942, the grantor may need to make a good-faith determination that the grantee is a public charity.

Under the Secs. 4942 and 4945 regulations, a private foundation will ordinarily be considered to have made a good-faith determination about a foreign organization if the determination is based on an affidavit of the grantee or on an opinion of counsel of either the grantor or the grantee.

Proposed Regulations

The proposed regulations under Secs. 4942 and 4945 would modify the rule for good-faith determinations to expand the group of tax practitioners upon whose written advice a private foundation may base a good-faith determination. The current regulations require an opinion of counsel. Under the proposed regulations, a private foundation’s good-faith determination may ordinarily be based on written advice given by a “qualified tax practitioner” who is subject to the requirements in Circular 230, Regulations Governing Practice Before the Internal Revenue Service (31 C.F.R. Part 10). This would include not just attorneys but also CPAs and enrolled agents.

The IRS believes that broadening the group of tax professionals who can provide this type of advice will ease the burden and decrease the cost of obtaining these determinations for private foundations.

The expanded class of practitioners under the proposed rule would not, however, include foreign counsel, unless he or she is also a qualified tax practitioner under Circular 230. Accordingly, the professionals must be U.S.-licensed attorneys, CPAs, or agents enrolled by the IRS to practice before it.

The IRS noted that it is considering whether the regulations should limit the time frame within which private foundations may rely on such written advice (e.g., one year). Because it expects the proposed regulations to make it easier and less costly to obtain professional tax advice for use in making a good-faith determination, the IRS is also considering whether it should eliminate or modify the ability of private foundations to rely on affidavits of foreign grantees. The IRS believes these affidavits may be a less reliable basis for making good-faith determinations, but it is concerned that disallowing them may inhibit foreign grant-making by smaller foundations. The IRS requested comments on these topics by Dec. 24, 2012, and may amend the regulations when they are finalized, so practitioners and charities should check when the final regulations are issued to see whether the IRS has made any significant changes to the rules.


The proposed regulations are intended to make the good-faith determination process easier for private foundations by broadening the group of tax practitioners who may provide the advice. While the proposed regulations do not change the requirements of a good-faith determination, they do provide foundations with more options for obtaining the advice. The regulations are proposed to apply to grants made after publication of the final regulations, but private foundations may rely on the proposed regulations for grants made on or after Sept. 24, 2012.


Michael Dell is a partner with Ernst & Young LLP in Washington, D.C.

For additional information about these items, contact Mr. Dell at 202-327-8788 or

Unless otherwise noted, contributors are members of or associated with Ernst & Young LLP.

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