Private Foundations Can Rely on More Practitioners When Making Good-Faith Determinations

The types of tax professionals that private foundations can rely on when making a good-faith determination that a foreign grantee is a public charity were expanded by final regulations issued on Thursday (T.D. 9740). The regulations finalize with some changes proposed regulations issued in 2012, which private foundations have been allowed to rely on already. The regulations are designed to decrease the cost of obtaining professional advice for private foundations, allowing them to engage in more cost-effective international philanthropy.

Private foundations may be required to make good-faith determinations that a grantee foreign organization is a private operating foundation or a public charity in order to avoid paying an excise tax for making nonqualifying distributions or taxable expenditures.

Under the prior 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.

The final regulations issued on Wednesday expand the group of people upon whose written advice a private foundation may base a good-faith determination. Instead of requiring an opinion of counsel, under the new 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). Such practitioners must be licensed as a CPA or attorney in a U.S. state, territory, or possession or be an enrolled agent.

The regulations also clarify that a determination based on written advice will ordinarily be considered to have been made in good faith if the foundation’s reliance on the written advice meets the requirements of Regs. Sec. 1.6664-4(c)(1), which sets the standards for reasonable reliance in good faith on professional tax advice for penalty relief purposes. However, the IRS says that a foundation’s reliance on written advice is not reasonable and in good faith if the foundation knows—or reasonably should have known—that the tax practitioner lacks knowledge of the relevant aspects of U.S. tax law. The foundation also may not rely on written advice if it knows, or has reason to know, that relevant facts were not disclosed to the practitioner or the written advice is based on a representation or assumption that the foundation knows, or has reason to know, is unlikely to be true.

The regulations require that written advice of a qualified tax practitioner that serves as the basis for a good-faith determination must be “current.” In this context, “current” means that, as of the date of the distribution, the relevant law has not changed and the factual information on which the advice was based is from the organization’s current or prior year.

The regulations also remove the ability of foundations to base a good-faith determination entirely on a foreign grantee’s affidavit. However, grantee affidavits may be considered as a source of information when making a good-faith determination.

The regulations are effective for distributions made after Sept. 25, 2015; however, a good-faith determination may continue to be made under the prior rules for any distribution to a foreign organization within 90 days after that date. Foundations that have made a written commitment on or before Sept. 25, 2015, may make distributions to the foreign organization in fulfillment of that commitment (and pursuant to a good-faith determination made under the prior rules) for up to five years from that date.

—Alistair M. Nevius (anevius@aicpa.org) is The Tax Adviser’s editor-in-chief.