Exempt Organizations Advisory - IRS Releases Reliance Criteria for Grantmaking Foundations

Catherine W. Wilkinson (cwilkinson@steptoe.com)
Suzanne Ross McDowell (smcdowell@steptoe.com) 

On June 30, the IRS released Revenue Procedure 2009-32; 2009-28 IRB 1 which provides reliance criteria for determining whether a grantee is a supporting organization. Under the Pension Protection Act of 2006, a “qualifying distribution” under section 4942(g) does not include amounts paid to Type III supporting organizations that are not functionally integrated, or to Type I, Type II, or functionally integrated Type III supporting organizations if a disqualified person of the private foundation directly or indirectly controls the supporting organization or a supported organization of the supporting organization. Thus, such grants do not count toward a private foundation’s minimum payout. In addition, distributions to these organizations from both foundations and donor advised funds are subject to excise taxes unless the private foundation or sponsoring organization exercises expenditure responsibility.

Notice 2006-109, 2006-2 C.B. 1121 provides that a private foundation or sponsoring organization can rely on either information from the IRS Business Master File (BMF) or the grantee’s determination letter to determine whether a grantee is a supporting organization. This Revenue Procedure expands on the Notice and formalizes guidance previously provided on the IRS website by allowing foundations and sponsors of donor advised funds to rely on BMF data obtained from a third party such as GuideStar. A grantor must receive from the third party a report that includes: the grantee’s name, employer identification number, and public charity classification; a statement that the information is from the most current update of the BMF and the BMF revision date; and the date and time the information was provided to the grantor. The report must also be in a form that the grantor can store in hard copy or electronically.