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 previous scattered pieces of guidance dating back 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 contributions under Sec. 170 so they can determine whether grants or contributions may be deductible under Sec. 170.
The IRS searchable database of tax-exempt organizations, originally called Exempt Organizations Select Check, replaced the print version of IRS Publication 78, Cumulative List of Organizations Described in § 170(c), in 2011 (Rev. Proc. 2011-33). Additionally, in May 2018, the IRS renamed its Select Check database to search tax-exempt organizations, Tax Exempt Organization Search (Pub. 78 Data), and expanded its capabilities.
The IRS explained that it now has five searchable databases of information on charitable organizations eligible to receive tax-deductible contributions. The first database, Tax Exempt Organization Search (Pub. 78 Data), lists organizations that are eligible to receive tax-deductible contributions. This database also now includes “deductibility codes” that indicate an organization’s status as a foundation under Sec. 509(a). It does not indicate specifically whether an organization qualifies under Sec. 509(a)(1) or (2) or a particular subparagraph of Sec. 170(b)(1)(A).
That database also contains a section called the Exempt Organization Business Master File (EO BMF Extract). The EO Business Master File contains more information, in a slightly different format, than Tax Exempt Organization Search (Pub. 78 Data) and includes information on most tax-exempt organizations, rather than just those eligible to receive tax-deductible contributions that are included in Tax Exempt Organization Search (Pub. 78 Data). Among the data fields provided for organizations in the EO BMF Extract are an organization’s name and Employer Identification Number (EIN), address, the Sec. 501(c) paragraph under which the organization is recognized as exempt, the exemption ruling date, affiliation code (status as an independent, central, or subordinate organization), deductibility code, and a foundation code, which describes whether an organization is a private foundation, private operating foundation, or a public charity.
The second database, the Automatic Revocation of Exemption List (or Auto-Revocation List), contains a list of charitable organizations that have had their tax-exempt status revoked under Sec. 6033(j) for failing to file a required annual return or notice for three consecutive years. Organizations that have had their exempt status revoked and then comply with the annual return requirement will be added back to the list of eligible organizations. However, their name will remain on the Auto-Revocation List because the IRS is statutorily required to keep it there, but that entry will be updated to include the reinstatement date.
The third database consists of the information reported by small tax-exempt organizations that are required only to file Form 990-N, usually called e-postcards.
These three databases have been in existence for some time. In May 2018, the IRS added two new databases: The fourth is a database containing images of Forms 990, Return of Organization Exempt From Income Tax, filed by exempt organizations on or after Jan. 1, 2018, that are available to the public under Sec. 6104. The fifth database contains images of favorable IRS determination letters to recognize an organization’s tax-exempt status. This database contains searchable determination letters issued on or after Jan. 1, 2014.
According to the IRS, the Tax Exempt Organization Search now allows users to search across all five databases.
The IRS also announced that it will issue affirmation letters to qualifying organizations asserting that they are currently recognized as tax-exempt and, if they are a Sec. 501(c)(3) organization, their foundation status. The IRS will also issue affirmation letters to exempt organizations to reflect name or address changes.
The revenue procedure also updates the IRS’s reliance rules for donors to rely on a listing of an organization’s tax-exempt status on the IRS database. First, grantors and contributors may generally rely on a determination letter or ruling information provided in the Tax Exempt Organization Search (Pub. 78 Data) or EO BMF Extract that contributions to the organization are deductible under Sec. 170 until the date of any public announcement stating that the organization has ceased to qualify as an organization, contributions to which are deductible under Sec. 170. For an organization that is listed on the Auto-Revocation List, grants and contributions to that 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 that list.
The updated procedures also contain detailed rules for donor reliance on the IRS database of tax-exempt organizations. Those rules include an extended reliance rule under certain circumstances; an exception to the general reliance rule where the donor had knowledge of the revocation, was aware revocation was imminent, or was responsible for, or aware of, the activities or deficiencies that led to the loss of qualification; a reliance rule for subsequent listing after prior revocation; and a reliance rule for subsequent listing after prior automatic revocation.
Another important provision that has been updated in the revenue procedure is the safe-harbor provision for contributions to organizations that have lost their tax-exempt status. In most cases, donors are entitled to rely on an organization’s tax-exempt status until the loss of exempt status is published in the IRS’s website.
The safe harbor provides that, under the exception to the general reliance rule, grantors and contributors will not be considered to be responsible for or aware of an act that results in loss of qualification due to change in financial support if the aggregate grants or contributions from the grantor or contributor are 25% or less of the organization’s aggregate support for the preceding four tax years. However, the safe harbor is not available to grantors or contributors who are in a position of authority (such as a foundation manager) at the organization. The safe harbor is also unavailable if the grantor or contributor had actual knowledge of the loss of qualification or after the date of the public announcement that the organization ceases to qualify.
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).
This revenue procedure modifies and supersedes Rev. Proc. 81-6, Rev. Proc. 81-7, Rev. Proc. 89-23, and Rev. Proc. 2011-33, and is effective May 16, 2018.
— Sally P. Schreiber (Sally.Schreiber@aicpa-cima.com) is a Tax Adviser senior editor.