IRS updates charitable contribution procedures

By Sally P. Schreiber, J.D.

To give grantors and contributors to tax-exempt organizations more easily accessible guidance on deductibility and reliance issues, the IRS has combined into one revenue procedure scattered pieces of guidance dating to 1981 (Rev. Proc. 2018-32). The new revenue procedure tells grantors and contributors when they can rely on a listing of an organization on an IRS database of organizations eligible to receive tax-deductible contributions under Sec. 170 so they can determine whether grants or contributions may be deductible under Sec. 170. Rev. Proc. 2018-32 also provides two safe harbors for determining that a grantor's or contributor's grant or contribution will not cause the grantor or contributor to be considered to be responsible for, or aware of, an act that results in an organization's loss of public charity classification and a third safe harbor for determining that a grant or contribution is considered an unusual grant.

Reliance rules

The revenue procedure also updates the IRS's reliance rules for grantors and contributors to rely on a listing of an organization's tax-exempt status on the IRS database for tax-exempt status and public charity status. Under a general rule, if an organization listed in or covered by the IRS database Tax Exempt Organization Search (Pub. 78 Data) or the Exempt Organization Business Master File (EO BMF) Extract ceases to qualify as an organization to which contributions are deductible under Sec. 170, grantors and contributors to that organization may rely on the information provided in Tax Exempt Organization Search (Pub. 78 data) or the EO BMF Extract that contributions to the organization are deductible until the date of a public announcement stating that the organization ceases to qualify as an organization contributions to which are deductible under Sec. 170. Grants and contributions to an organization will be deductible by donors unaware of that status if the contribution is made on or before the organization's name is posted on the Automatic Revocation of Exemption List.

Under a second general rule, if an organization listed in or covered by Tax Exempt Organization Search (Pub. 78 Data) or the EO BMF as a public charity ceases to qualify as a public charity, grantors and contributors to that organization may generally rely on the classification information provided in Tax Exempt Organization Search (Pub. 78 Data) or the EO BMF Extract for contribution and grant purposes until the date of a public announcement stating that the organization ceases to qualify as a public charity.

The updated procedures also contain detailed rules for both extended reliance beyond the general rule for tax-exempt status determination purposes and exceptions to the general rules for both tax-exempt status and public charity status determination purposes.

Safe harbors

The revenue procedure also contains safe harbors for determining that a grantor's and contributor's grant or contribution will not cause the grantor or contributor to be considered to be responsible for, or aware of, an act that results in an organization's loss of public charity classification when an organization loses its public charity status.

Under the aggregate support safe harbor, grantors and contributors will not be considered responsible for, or aware of, an act that results in the loss of classification due to a change in financial support if the aggregate of grants or contributions received from that grantor or contributor for the tax year of the recipient organization in which the grant or contribution is received is 25% or less of the aggregate support, as defined in the revenue procedure, received by the recipient organization for the four tax years immediately preceding the tax year. Under a second safe harbor, a private foundation's grantors or contributors will not be considered responsible for, or aware of, an act that results in a recipient organization's loss of classification as a public charity due to a change in financial support if the recipient organization has received a determination letter or ruling that is described in Secs. 170(b)(1)(A)(vi) and 509(a)(1) or in Sec. 509(a)(2) and the recipient organization is not controlled directly or indirectly by the private foundation.

In addition, under a third safe harbor, for purposes of Regs. Secs. 1.170A-9(f)(6)(ii) and 1.509(a)-3(c)(3), a grant or contribution with all of the characteristics described in Section 7.03(1) of the revenue procedure will be considered an "unusual grant." In determining whether an organization is a public charity, an unusual grant is not taken into account in determining whether an organization is publicly supported.

Organizations challenging loss of status

Finally, the procedure contains the rules for making contributions to charitable organizations that are challenging their loss of tax-exempt status in a declaratory judgment proceeding under Sec. 7428. Under this provision, the organization continues to be treated as an organization described in Sec. 170(c)(2) for contributions from individual donors (up to a maximum of $1,000 in the aggregate) beginning on the date of the public announcement of the revocation or removal of the organization's name from Tax Exempt Organization Search (Pub. 78 Data) or the EO BMF Extract, whichever is earlier, and ending on the date on which a Tax Court decision becomes final or a judgment of the U.S. District Court for the District of Columbia or the U.S. Court of Federal Claims is entered that the organization is not described in Sec. 170(c)(2).

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