IRS Releases Procedures
on Grantmaking to Supporting Organizations
The Internal Revenue Service issued final criteria for private foundations and sponsoring organizations that maintain donor advised funds to use when determining whether a potential grantee is classified as an Internal Revenue Code § 509(a)(1), (2), or (3) organization. Revenue Procedure 2009-32 , released in July, does not dramatically deviate from the interim guidance provided by the IRS in December 2006 following enactment of the Pension Protection Act (“PPA”).
Under IRS rules, private foundations are required to distribute at least 5% of their investment assets annually. Under the PPA, private foundations cannot include in their “minimum distribution” requirement any grants made to either: (i) a Type III supporting organization that is not functionally integrated, or (ii) a Type I, Type II or functionally integrated Type III supporting organization if a disqualified person of the private foundation directly or indirectly controls such supporting organization or a supported organization of the supporting organization. Furthermore, grants made to these types of supporting organizations are subject to tax penalties unless the private foundation exercises expenditure responsibility. Similarly, the PPA imposes excise taxes on distributions made by sponsoring organizations from donor advised funds to these types of supporting organizations unless the sponsoring organization exercises expenditure responsibility with respect to the distribution.
The recent Revenue Procedure provides that in determining whether a public charity is classified under § 509(a)(1), (2), or (3), a private foundation or sponsoring organization, acting in good faith, may rely on either: (i) the grantee’s current IRS tax determination letter which indicates its classification under § 509(a)(1), (2), or (3), or (ii) information from the IRS Business Master File (“BMF”), a cumulative list of exempt organizations, which the IRS updates on a monthly basis. Grantors may download the BMF from the IRS website or, alternatively, may obtain the BMF information from a third party. If the information is obtained from a third party, the grantor must receive a report, in hard or electronic copy, detailing:
- The grantee’s name, Employment Identification Number and public charity classification as either § 509(a)(1), (2), or (3);
- A statement that the information is from the most current BMF and BMF version date, and
- The date and time the information was provided to the grantor.
Services (such as GuideStar Charity Check) appear to meet the criteria outlined above and are now available to grantors to comply with these requirements.
The latest guidance only partially alleviates the burdens imposed under the PPA because it does not address the separate, more onerous, requirement for grantors to determine whether a potential grantee that is a 509(a)(3) supporting organization falls into the Type I, Type II or functionally integrated Type III category. To make this determination, grantors must rely on a written representation from a grantee signed by an officer, director or trustee of the grantee in conjunction with the grantor’s review of certain of the grantee’s governing documents. Alternatively, a grantor may rely on a written opinion of counsel concluding that the grantee is a Type I, Type II or functionally integrated Type III supporting organization.
For further information on how the IRS’s new guidance could affect your organization’s receipt of grants or grantmaking procedures, please contact any of our attorneys.
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