Overview
Treasury, IRS Issue Final Regulations on Reliance Standards for Making Good Faith Determinations: Today, Treasury and the IRS issued final regulations regarding the standards for making a “good faith determination” (commonly referred to as an equivalency determination) that a foreign organization is a charitable organization that is not a private foundation, in which case grants made to the foreign organization may be “qualifying distributions” (as defined in section 4942) and not “taxable expenditures” (as defined in section 4945). A foundation that has made a such good faith determination in accordance with the regulations is not required to exercise expenditure responsibility in connection with distributions to foreign organizations.
Current regulations generally provide that a foundation will ordinarily be considered to have made a good faith determination if the determination is based on an affidavit of the grantee or on an opinion of counsel of either the grantor or the grantee (referred to in the regulations as “the special rule”). Under the final regulations, a determination based solely on a grantee affidavit will not automatically be considered a good faith determination, but a grantee affidavit may be a source of information in otherwise making a good faith determination.
Consistent with proposed regulations released in 2012, the final regulations expand the class of advisors that may provide written advice on which foundations may ordinarily rely to qualified practitioners who are subject to the Circular 230 standards.
The final regulations also provide that written advice of a qualified tax practitioner serving as the basis for a good faith determination must be “current,” which generally requires that, as of the date of the distribution, the relevant law on which the advice was based has not changed and the factual information on which the advice was based is from the organization’s current or prior year.
The final regulations do not prohibit a foundation from using written advice shared with it by another foundation in making a good faith determination if it is reasonable to do so under all the facts and circumstances (including the age of the facts supporting the written advice). However, the final regulations clarify that for a foundation seeking the benefit of the special rule, the written advice a foundation relies on in making its determination must be received from the qualified tax practitioner (rather than from another foundation).
The preamble to the regulations indicates that the IRS intends to update Revenue Procedure 92-94, which provides a simplified procedure under which foundations may rely on an affidavit meeting certain requirements. The regulations generally apply to distributions made after September 25, 2015. However, a good faith determination may continue to be made in accordance with the prior regulations for any distribution made within 90 days of September 25. A foundation may make distributions to a foreign organization, in fulfillment of a prior written commitment and pursuant to a good faith determination made in accordance with prior regulations, for up to five years.
Until further guidance is issued, sponsoring organizations of donor advised funds may use these regulations as guidance in making good faith determinations.
TIGTA Releases Report on Unsupported Claims for Foreign Tax Credits: Today, the Treasury Inspector General for Tax Administration (TIGTA) released a report recommending that the IRS improve controls and processes to identify erroneous or unsupported foreign tax credit claims. TIGTA’s analysis focused on individual taxpayers. The IRS agreed with most of TIGTA’s recommendations, but stated that further enhancements to gather statistics are not possible due to current budget and resource restrictions.