Latest from the IRS: New Standards for Equivalency Determination
Effective September 25, 2015, the IRS and the Department of Treasury have published final regulations concerning the practice of Equivalency Determination (ED). The Reliance Standards for Making Good Faith Determinations is welcomed news for grantmakers, as it clarifies the standards to be applied by international grantmakers in the process of making a good faith determination that a foreign organization is the equivalent of a public charity; thus, grants made to that foreign organization may be qualifying distributions and not taxable expenditures.
Since 2012, CAF America has been conducting its activities abiding by the proposed IRS regulations that were released at that time. CAF America donors and partners can therefore expect a seamless implementation of these permanent regulations.
The Reliance Standards for Making Good Faith Determinations clarify multiple aspects of conducting equivalency determinations (ED). Here are some of the key points:
- The final regulations now confirm that ED can be used by sponsoring organizations of Donor Advised Funds (DAFs) – such as CAF America – in determining whether a foreign organization is the equivalent of a public charity.
- Grantmaking organizations seeking to complete an ED – such as CAF America in its role as an international grantmaker – can now rely on written advice from “Qualified Tax Practitioners” such as attorneys, certified public accountants, or enrolled agents when conducting EDs. CAF America has always prepared ED certificates with written advice from our attorneys.
- This written advice must have substantial factual basis and must rely on current legislation and current documents provided by grantees; however, an attorney-client relationship is not necessary for this advice to be considered valid under law. This is a change from previous ED regulations where a grantmaker was able to rely solely on a grantee affidavit to make their determination. It is now necessary for the facts stated within the affidavit to be substantiated. The Department of Treasury is allowing a 90-day period for foundations to comply with this change. If the ED is based on a 5-year public support test, the ED is “current” for two years following the end of the test period.
Beyond addressing the standards applicable in ED, amendments were made to bring the final regulations into full compliance with statutory amendments made by the Deficit Reduction Act of 1984 and the Pension Protection Act of 2006. You can access the entire text of the final regulations on the IRS portal.