New Foreign Equivalency Determination Regulations

September 28, 2015

The IRS released final regulations under Internal Revenue Code Sections 4942 and 4945 on September 25, 2015, specifically addressing grants by private foundations to foreign organizations. These final regulations are partly favorable to private foundations (by confirming a broadened class of tax practitioners that can give comfort to foundations on the issues involved) but also partly unfavorable (by eliminating a formerly available alternative to written advice of a tax professional – an affidavit of the foreign organization). The regulations became effective immediately upon publication. 


A private foundation must make a minimum amount of “qualifying distributions” each year (as defined in Internal Revenue Code Section 4942) and must avoid making “taxable expenditures” (as defined in Internal Revenue Code Section 4945). Failure to comply with those requirements may result in punitive excise taxes being imposed on the foundation. Except in the rare cases where a private foundation makes a grant to a foreign organization that possesses a public charity determination letter from the IRS, a private foundation is faced with two choices for avoiding excise tax exposure. First, it can make a “good-faith determination” that the foreign grantee is the equivalent of a U.S. public charity. Alternatively, the private foundation can go through a process known as exercising “expenditure responsibility” over the grant. Expenditure responsibility involves a number of requirements, including that the private foundation conducts a pre-grant inquiry to determine whether a proposed foreign grantee is reasonably likely to use the grant for the specified purposes; the private foundation and the grantee must sign a written grant agreement with specific terms; the grantee must maintain the grant funds in a separate account on the grantee's books; the grantee must report to the private foundation, in writing, not less than once a year during the term of the grant, explaining how it used the funds and describing its compliance with the grant terms and its progress toward the grant purposes; and the private foundation must report each expenditure responsibility grant on its Form 990-PF as long as the grantee’s reports are required. 

Current Rules and September 2012 Proposed Regulations 

The required “good-faith determination” is widely known as an “equivalency determination.” Treasury Regulations and IRS Revenue Procedure 92-94 have long provided that a private foundation generally has two options for making the required “good-faith determination:” (i) an affidavit of the foreign grantee or (ii) an opinion of counsel of either the grantor or the grantee. The affidavit or opinion must set forth sufficient facts concerning the operations and support of the grantee for the IRS to determine that the grantee would be likely to qualify as a public charity. 

In September 2012 the IRS issued proposed regulations on the opinion of counsel approach to foreign equivalency determinations and also solicited comments on several other equivalency determination issues. The proposed regulations would have allowed private foundations to rely on written advice given by a “qualified tax practitioner,” which includes attorneys, certified public accountants, and enrolled agents, as defined in and subject to the requirements of Treasury Department Circular 230 (which addresses professional standards of conduct for practice before the IRS, including standards for written advice). Issues raised for comment included whether it is appropriate to limit the timeframe during which a private foundation may rely upon a qualified tax practitioner's written advice for these purposes and whether the affidavit approach should be eliminated or modified (e.g., by requiring particular supporting factual information to corroborate the contents of affidavits). 

The Final Regulations 

The final regulations confirm the broad group of qualifying tax practitioners than can provide acceptable written advice. However, the final regulations have eliminated grantee affidavits as an acceptable basis for a good-faith determination (while allowing grantee affidavits to serve as part of what can be used for develop the written advice of the tax practitioner). The last major element of the final regulations is a requirement that the written advice of a qualified tax practitioner serving as the basis for a “good-faith determination” must be “current.” Written advice will be considered current if the relevant law on which the written advice was based has not changed since the date of the written advice and the factual information on which the advice was based is from the organization's current or prior year. However, consistent with rules for determinations of public support over a five-year test period for U.S. public charities, written advice that an organization satisfied the public support requirements under Code Section 170(b)(1)(A)(vi) or Code Section 509(a)(2) based on support over a test period of five years will be treated as current for the two years of the grantee immediately following the end of the five-year test period.

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