CAF America Insider Blog

IRS Publishes New Guidelines for Equivalency Determination

Tags: Donor Advised Funds, blog, regulations, ED, IRS, Equivalency Determination

Many international grantmakers in the U.S. were very pleased when in 2015 the Department of Treasury published its final regulations called “Reliance Standards for Making Good Faith Determinations.”

With near lighting speed, for the IRS, just two years later on September 14th, 2017, the IRS has released Rev. Proc. 2017-53. These new guidelines clarify the process attorneys, CPAs, and international grantmakers can use in establishing the equivalency of foreign charitable organizations to that of an US 501(c)(3) public charity. The regulations are now very specific about what is to be included in a legal opinion that establishes an Equivalency Determination (“preferred written advice”). The IRS published these new guidelines to clarify what steps should be taken for conducting an ED and what documents can be used for the extensive review process leading to an equivalency determination. As a donor advised fund (DAF), CAF America was pleased to see best practices we have deployed for many years have now been incorporated into IRS rules.

CAF America has prepared a podcast as a companion to the information provided in this posting. Turn up your speakers and listen http://tiny.cc/IRS2017-53  

While the document is 24 pages long, below we are highlighting some of the important and new elements of a review drawn from  Rev. Proc. 2017-53. For a more in-depth analysis, continue reading after the bullet points.

• Section 3.03 (4): The IRS reminds grantmakers they should take into account the “education, sophistication, and business experience” of the preparer of any ED for which they plan to “reasonably rely in good faith” for making foreign grants.
• Section 3.03 (5): Provides a checklist, “general requirements” imposed on practitioners in preparing written ED advice.
• Section 4.02: Written advice and any attachments are to be written in or translated into English, but compliance with section 7.01 (2)(c) of Rev. Proc 2017-1, 2017-1 I.R.B. 1, 24, or the requirement for certified copies of translations “is not required”.                                                      
• Section 4.03: Affidavits must be signed or attested to by an officer or trustee of the organization. Not by a staff person who does not also hold one of these designations of leadership for the organization.             
• Section 4.04: The grantor and qualified tax practitioner may rely on translations of and public information about foreign laws that apply to the charity under review.
•  Section 5.02: Such written advice should include the grantee’s organizing document and support schedules.
• Section 5.06: A grantee affidavit is now sufficient for determining prohibitions on political activity and the extent of lobbying undertaken by the grantee. Attestations about this in the affidavit no longer need to be substantiated within governing documents or relevant law.
• Section 5.08: Grantees who have previously supplied an affidavit  can provide an updated affidavit describing only material changes, while providing a copy of the previously-supplied affidavit.
• Section 5.09: There is a new requirement that the “preferred written advice” must also confirm that the grantee is not subject to sanctions or designated as a terrorist organization by the US government. It is now also required that private foundations confirm that controlling persons, officers, or trustees of the organization do not have sanctions or terrorist designations, although this need not be included in the written advice.
• Section 5.10: Foreign hospitals do not need to comply with Section 501(r) related to the Affordable Care Act (ACA).
• Section 5.11: The new regulations confirm that foreign schools need to have a nondiscrimination policy in their governing documents, and they need to provide evidence that these policies are being followed in practice. It is not necessary for foreign schools to follow Rev. Proc. 75-50.
• Section 6.03: A foreign grantee in its first five years of existence may be treated as publicly-supported if the written advice determines the grantee can reasonably be expected to meet the applicable public support test.
• Section 7: Provides outstanding examples of current written advice for publicly supported organizations, that will be helpful to to the practitioner preparing an equivalency determination.

So, what do these updates actually mean and how can grantmakers adapt their processes to comply with the new Revenue Procedures?

Rev. Proc. 2017-53 provides further guidance regarding what it means to makes a “good faith determination” that a foreign grantee qualifies as a public charity (as defined in section 3.03(3) of this revenue procedure). These procedures validate many aspects of what CAF America has long determined to be best practices in our industry-leading validation of foreign grantees.

• This new revenue procedure modifies and supersedes Rev. Proc. 92-94, 1992-2 C.B. 507 and reflects the changes to the equivalency determination final regulations published in 2015 (TD 9740; 80 FR 57709; 2015-42 IRB 573). Beyond the changes addressed in the above bullet points, this document reinforces the need to work with a skilled practitioner when conducting an equivalency determination. The IRS states that a “qualified tax practitioner, without verification, may rely in good faith upon information furnished by the private foundation regarding the grantee, but may not ignore the implications of information furnished to, or actually known by, the practitioner, and must make reasonable inquiries if the information as furnished appears to be incorrect, inconsistent with an important fact or another factual assumption, or incomplete”. Your qualified tax practitioner, whether internal staff or outside counsel, should be confident in their determinations and substantiate their findings with as much relevant documentation as possible.

Perhaps most importantly, as mentioned in the bullet points, preferred written advice should now indicate that the organization has been verified as not being a designated terrorist entity by the United States Government. While not expressly required for written advice, the private foundation (or DAF) should also “confirm that the organization or its controlling officers, directors, or trustees are not foreign persons whose property and interests in property are blocked pursuant to an Executive Order or regulations administered by the Office of Foreign Assets Control (OFAC)”. Both aspects (organization validation and the checking of board members and senior leadership) have been legally required of international grantmakers, but there was not a requirement that this review be included within the written advice for an equivalency determination.

With the passing of the Affordable Care Act, there was confusion as to whether foreign hospitals needed to comply with § 501(r), which you can read more about here. The new regulations expressly confirm that foreign hospitals completing an ED do not have to comply with this.

A similar situation is evidenced in the IRS’s treatment of foreign schools and their capacity for nondiscrimination. As the procedure states, private schools in the US and foreign schools have been required to comply with with Rev. Proc. 75-50 (stating that they must have racially nondiscriminatory policies regarding students). However, before this new regulation the IRS was silent as to how this applies to EDs on foreign schools. The new procedure essentially requires that written advice (or attached affidavit) states that the grantee “has adopted a policy in its governing instrument, or in a resolution of its governing body” that the grantee doesn’t discriminate against students on the basis of race, color, or national or ethnic origin. Furthermore, the written advice or affidavit should provide evidence that this policy of nondiscrimination is actually practiced and enforced.

One of the challenges will likely be discussions between the private foundation and the grantee in terms of how to actually prove nondiscriminatory practices. Foreign schools should be prepared to share data that can help prove that they do not discriminate on the basis of race, color, or national or ethnic origin. U.S. grantors could assist in this process by providing examples of what the foreign school could provide as evidence.

While there are other aspects that Rev. Proc. 2017-53 addresses in its 24 pages, we consider the above aspects to be the most noteworthy. The new regulations provide much clarity around the requirements for the difficult ED process, and they ease (to some extent) the requirements around prohibitions on political activity and non-discrimination policies for foreign schools in significant ways. While they are still required to comply with similar rules as U.S. public charities and U.S. schools, the new regulations allow for more flexibility on these two points that enable grantmakers to apply more cultural sensitivity to their reviews. It was extremely difficult for foreign schools to follow the strict policies of Rev. Proc. 75-50, and it was often very difficult to substantiate prohibitions on political and substantial lobbying activities, even where those prohibitions existed in practice. The flexibility offered by these new regulations is a welcomed change, and it will make the ED process less burdensome for our grantees.

This is a summary based on CAF America’s analysis and best practices, this should not be construed as legal advice.