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Rev Proc explains deductibility and reliance issues relating to charitable contributions

May 18, 2018

IRS has issued a Revenue Procedure that modifies, supersedes, and consolidates certain previously issued guidance in order to provide more easily accessible guidance to grantors and contributors to tax-exempt organizations on certain deductibility and reliance issues.

Background.  Contributions to or for the use of an organization described as eligible for charitable contributions in Code Sec. 170(c) may be deductible, with certain limitations, by contributors for federal income tax purposes. It is the responsibility of an organization receiving contributions to ensure that its character, purposes, activities, and method of operation satisfy the qualification requirements of Code Sec. 170(c) at the time of the contribution in order for grantors and contributors to have the assurance that their contributions will be deductible when made.

A determination letter or ruling on tax-exempt status is based solely on the facts, attestations, and representations contained in the administrative record, including the application for exemption. Any such letter or ruling ceases to apply in the event of a material change inconsistent with the exemption, or if there was an omission or misstatement of material information such that the organization ceases to qualify as an organization under Code Sec. 170(c). In this situation, contributions made after the organization ceases to qualify are deductible only if certain requirements are met.

Reg. § 1.170A-9(f)(5)(ii) provides that a grantor or contributor may generally rely on the continued validity of a determination letter or ruling described above until IRS makes a public announcement of the entity’s change in status, unless the grantor or contribution was responsible for or aware of the act resulting in loss of classification. Similarly, under Reg. § 1.509(a)-7, once an organization has received a favorable determination letter or ruling, the treatment of contributions and grants, and the status of grantors and contributors to such organization, generally will not be affected by a subsequent revocation of the organization’s classification as a public charity until the date on which the IRS publicly announces the change of status, unless the grantor or contributor had prior knowledge of the revocation or was in part responsible for or aware of the act or failure to act which gave rise to the revocation.

Declaratory relief under Code Sec. 7428. Code Sec. 7428 creates a remedy in the form of access to declaratory judgment procedures, in part, for cases involving a determination by IRS with respect to the continuing qualification of an organization as one described in Code Sec. 170(c)(2) or Code Sec. 501(c)(3), or to the continuing classification of an organization under Code Sec. 509(a). The remedy is available in these cases if IRS determines that revocation of tax-exempt status under Code Sec. 501(c)(3), status under Code Sec. 170(c)(2), or foundation status under Code Sec. 509(a) is appropriate, the organization has exhausted its administrative remedies, and IRS has issued a final adverse determination letter to the organization. Under Code Sec. 7428(b)(4), no action may be brought under Code Sec. 7428 with respect to any automatic revocation of status described in Code Sec. 6033(j)(1) (see below).

IRS lists and databases. IRS maintains and updates two different publicly available compilations of information on organizations eligible to receive tax-deductible contributions under Code Sec. 170. The first compilation lists organizations that are eligible to receive tax-deductible charitable contributions—i.e., information that was previously maintained in IRS Publication 78, Cumulative List of Organizations Described in §170(c). The searchable database of these eligible organizations is referred to as the “tax-exempt organization search.”

The second is an extract of certain information concerning tax-exempt organizations (i.e., EOs) from IRS’s electronic Business Master File (BMF) (the EO BMF Extract). The EO BMF extract generally contains more information that the eligible organization lists and includes information on most tax-exempt organizations, and not just those eligible to receive tax-deductible contributions. The tax-exempt organization search and EO BMF Extract are referred to collectively as the “IRS databases.”

When an organization’s tax-exempt status has been automatically revoked under Code Sec. 6033(j) for failure to file certain information returns or submit notices for three consecutive years, the name of such organization is removed from the tax-exempt organization search (i.e., Pub. 78 data) and added to the Auto-Revocation List. An organization whose tax-exempt status was automatically revoked under Code Sec. 6033(j) that subsequently applies for and receives reinstatement of tax-exempt status will appear on the tax-exempt organization search but its name will remain on the Auto-Revocation List. (Rev Proc 2018-32, Section 3)

Prior guidance. IRS has issued several Revenue Procedures to further describe the extent to which grantors and contributors may rely on IRS’s identification of an organization’s tax-exempt and foundation status and to provide safe harbors with regard to the effect of grants and contributions on an organization’s foundation status, including:

  1. Rev Proc 81-6, 1981-1 CB 620, which provides a safe harbor to all grantors and contributors to determine if they were entitled to rely on the classification of an organization as a public charity, and would be deemed not to have knowledge of, be responsible for, or be aware of a substantial and material change in an organization’s source of support that gave rise to the revocation of a determination letter or ruling classifying the organization as a public charity.
  2. Rev Proc 81-7, 1981-1 CB 621, which provides a safe harbor to grantors and contributors as to the grants and contributions that will be considered “unusual grants” under Reg. §1.170A-9(f)(6)(ii) and Reg. §1.509(a)-3(c)(3), the receipt of which will not result in a grantee organization losing its classification as a public charity and becoming a private foundation
  3. Rev Proc 89-23, 1989-1 CB 844, which provides an additional safe harbor to private foundation grantors and contributors for determining if they were entitled to rely on the classification of an organization, and would be deemed not to have knowledge of, or be responsible for, or aware of, a substantial and material change in an organization’s source of support that gave rise to the revocation of a determination letter or ruling classifying the organization as a public charity.
  4. Rev Proc 2011-33, 2011-25 IRB 887, which, as an update to earlier revenue procedures, set out the extent to which grantors and contributors may rely on the listing of an organization in Publication 78, Cumulative List of Organizations Described in § 170(c), for purposes of deducting contributions under Code Sec. 170 and making grants under Code Sec. 4942Code Sec. 4945, and Code Sec. 4966.

New Guidance. To simplify compliance for grantors and contributors, IRS has combined the safe harbors described above and replaced them with a single revenue procedure on deductibility and reliance issues for grantors and contributors.

Reliance on IRS databases for tax-exempt status. In general, under the new Revenue Procedure, if (i) an organization listed in or covered by the IRS databases ceases to qualify as an organization to which contributions are deductible under Code Sec. 170 and (ii) IRS revokes a determination letter or ruling, grantors and contributors to that organization may rely on the determination letter or ruling information provided in the IRS databases until the date of a public announcement stating that the organization ceases to qualify. The public announcement may be made via the IRB, on the portion of IRS’s website that relates to exempt organizations, or by such other means designated to put the public on notice of the change in the organization’s status. (Rev Proc 2018-32, Section 4.01) However, if such an organization ceases to qualify as a result of tax-exempt status under Code Sec. 6033(j), grants and contributions made to the organization by persons unaware of the change in status generally will be considered deductible if made on or before the date its name is posted on the Auto-Revocation List. (Rev Proc 2018-32, Section 4.02)

The above timeframes may be extended under Code Sec. 7805(b)(8) in certain circumstances. (Rev Proc 2018-32, Section 4.03) IRS also noted that the rules in the previous paragraph don’t preclude it from disallowing contributions made after an organization ceases to qualify under Code Sec. 170(c) if the grantor or contributor knew of the revocation before the public announcement or posting, knew revocation was imminent, or was partially responsible for or aware of the activities or deficiencies giving rise to the loss of qualification. (Rev Proc 2018-32, Section 4.04) Certain other limitations apply. (Rev Proc 2018-32, Section 6)

If an organization’s tax-exempt status was previously revoked but later reinstated, grantors and contributors may rely on the organization’s subsequent listing in the IRS databases for contributions or grants made after that date, provided that the reinstatement date listed is after the date that the revocation was announced. (Rev Proc 2018-32, Section 4.05) If the organization’s tax-exempt status was automatically revoked under Code Sec. 6033(j) and the organization’s name appears on the Auto-Revocation list, grantors and contributors may generally rely on the organization’s subsequent listing in the IRS databases, provided that the re-posting date is later than the Auto-Revocation list posting date. (Rev Proc 2018-32, Section 4.06)

IRS also noted that the general reliance rules above don’t apply in the case of suspensions under Code Sec. 501(p) (relating to suspensions of tax-exempt status of organizations designated as terrorist organizations). (Rev Proc 2018-32, Section 2.04)

Reliance on IRS databases for public charity status. In general, if (i) an organization listed in or covered by the databases as a public charity ceases to qualify as a public charity and (ii) IRS revokes a determination letter or ruling classifying the organization as a public charity, grantors and contributors to that organization may generally rely on the classification information provided in the IRS databases for contribution and grant purposes until the date of a public announcement stating that the organization ceases to qualify as a public charity. Grantors and contributors may also rely on any classification in the IRS databases of an organization as a Type I, Type II, or Type III functionally or non-functionally integrated supporting organization. Private foundations and sponsoring organizations of donor-advised funds may rely on an organization’s public charity status (or supporting organization type), to the extent set forth in the IRS databases for grant making purposes under Code Sec. 4942Code Sec. 4945, and Code Sec. 4966, until the date of a public announcement stating that the organization ceases to qualify as a public charity. (Rev Proc 2018-32, Section 5.01)

However, the rules in the previous paragraph don’t apply if the grantor or contributor had knowledge of the revocation of the determination letter or ruling classifying the organization as a public charity prior to the announcement or posting, or was in part responsible for, or was aware of, the act or failure to act that gave rise to the revocation of the determination letter or ruling classifying it as a public charity. (Rev Proc 2018-32, Section 5.02) Certain other limitations apply. (Rev Proc 2018-32, Section 6)

Safe harbor—grantors and contributors. Grantors and contributors will not be considered responsible for, or aware of, an act that results in the loss of classification due to a change in financial support if the aggregate of grants or contributions received from such grantor or contributor for the tax year of the recipient organization in which the grant or contribution is received is 25% or less of the aggregate support received by the recipient organization for the four tax years immediately preceding such tax year. If a grant or contribution is made during the first four and one-half months of the recipient organization’s tax year, the computation period may consist of the four tax years immediately preceding such tax year or the four taxable years immediately preceding the prior tax year.

However, the safe harbor in the previous paragraph does not apply in certain situations, including if the grantor or contributor is in a position of authority with respect to the recipient organization, or g has actual knowledge of the loss of classification of public charity status or after the date of a public announcement that the organization ceases to qualify as a public charity. (Rev Proc 2018-32, Section 7.02)

Safe harbor—unusual grants. For purposes of Reg. § 1.170A-9(f)(6)(ii) and Reg. § 1.509(a)-3(c)(3), a grant or contribution that possesses certain characteristics will be considered an unusual grant. These include:

  • . . . the grant or contribution would, by reason of its size, adversely affect the status of the organization absent its treatment as an unusual grant;
  • . . . the grant or contribution is not made by a person who created the organization, by a substantial contributor to the organization prior to the contribution date, or by a person who is in a position of authority with respect to the organization;
  • . . . the grant or contribution is in the form of cash, readily marketable securities, or assets that directly further the exempt purpose of the organization;
  • . . . the organization has received a final determination letter or ruling classifying it as an organization described in Code Sec. 170(b)(1)(A)(vi) and Code Sec. 509(a)(1) or in Code Sec. 509(a)(2) and is actively engaged in a program of activities in furtherance of its exempt purpose;
  • . . . the grantor or contributor has not imposed material restrictions or conditions upon the organization in connection with the grant or contribution; and
  • . . . the terms and amount of the grant or contribution are expressly limited to underwriting no more than one year’s operating expenses, if the grant or contribution is intended to underwrite operating expenses, and the grant or contribution is not used to finance capital items.

A potential recipient organization may request a determination letter under Rev Proc 2018-5, and any successor revenue procedure, concerning whether a proposed grant or contribution that does or does not satisfy the above requirements will constitute an unusual grant. (Rev Proc 2018-32, Section 7.03)

Reliance on EO BMF Extract Information from other sources. A grantor or contributor may rely on information about an organization from the EO BMF Extract that is obtained from a third party, so long as: (1) the third party provides a report to the grantor or contributor that includes: (a) the organization’s name, EIN, foundation status under Code Sec. 509(a)(1)Code Sec. 509(a)(2), or Code Sec. 509(a)(3) (including supporting organization type, if applicable), and whether contributions to the organization are deductible; (b) a statement that the information is from the most current update of the EO BMF Extract and the revision date of the EO BMF Extract containing the information; and (c) the date and time the information was provided to the grantor or contributor; and (2) the grantor or contributor retains a paper or electronic copy of the report. (Rev Proc 2018-32, Section 8)

Relationship with Code Sec. 7428. Certain contributions are deemed valid under Code Sec. 7428(c) during declaratory judgment proceedings involving the revocation of a determination that the organization is described in Code Sec. 170(c)(2). Under this provision, the organization continues to be treated as an organization described in Code Sec. 170(c)(2) with respect to contributions from individuals (up to a maximum of $1,000 in the aggregate during the period during which statutory protection applies) and from other charitable organizations described in Code Sec. 170(c)(2) that are exempt from tax under Code Sec. 501(a) (other than organizations with respect to which there is pending a proceeding to revoke the determination under Code Sec. 170(c)(2)) (without limit).

Statutory protection for such contributions, if declaratory judgment is sought on the revocation, would begin on the date of the public announcement of the revocation or removal of the organization’s name from the IRS databases, whichever is earlier, and end on the date on which a decision in the Tax Court becomes final or a judgment of the U.S. district court for the District of Columbia or the U.S. Court of Federal Claims is entered that the organization is not described in Code Sec. 170(c)(2). This reliance, however, is not extended to any individual who was responsible, in whole or in part, for the activities (or failures to act) on the part of the organization that were the basis for the revocation. (Rev Proc 2018-32, Section 9)

IRS noted, however, that an organization that’s designated as a terrorist organization may not challenge the suspension of tax-exempt status or the denial of deductions in an administrative or judicial proceeding (including proceedings under Code Sec. 7428). (Rev Proc 2018-32, Section 2.04)

Effective date. Rev Proc 2018-32 is effective May 16, 2018. (Rev Proc 2018-32, Section 12)

References: For the deduction for charitable contributions, see FTC 2d/FIN ¶ K-2800United States Tax Reporter ¶ 1704.

Rev Proc 2018-32, 2018-23 IRB

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