IRS Updates and Consolidates Guidance on Charitable Contributions

(Parker Tax Publishing June 2018)

The IRS issued a revenue procedure which sets forth the extent to which grantors and contributors may rely on the listing in IRS databases of organizations eligible to receive tax-deductible contributions under Code Sec. 170, for purposes of determining whether the grants or contributions to such organizations are deductible under Code Sec. 170, and for certain other purposes. The revenue procedure also provides safe harbors for determining that a grantor's or contributor's grant or contribution will not cause the grantor or contributor to be considered to be responsible for, or aware of, an act that results in an organization's loss of public charity classification and for determining that a grant or contribution is considered an unusual grant. Rev. Proc. 2018-32.

Background

The IRS has issued several revenue procedures to describe the extent to which grantors and contributors may rely on the 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. In Rev. Proc. 81-6, the IRS 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.

In Rev. Proc. 81-7, the IRS provides a safe harbor to grantors and contributors as to the grants and contributions that will be considered unusual grants. Under Reg. Sec. 1.170A-9(f)(6)(ii) and Reg. Sec. 1.509(a)-3(c)(3), the receipt of an "unusual grant" will not result in a grantee organization losing its classification as a public charity and becoming a private foundation because an unusual grant is excluded from both the numerator and the denominator of the applicable support fraction for purposes of determining whether the organization is publicly supported under Code Sec. 170(b)(1)(A)(vi) and Code Sec. 509(a)(1) or under Code Sec. 509(a)(2). Thus, a grantor or contributor who makes a grant or contribution that is an "unusual grant" to a publicly supported organization will not be responsible for an act that results in the organization's loss of classification as a publicly supported organization and is entitled to rely on the organization's classification as a publicly supported organization.

In Rev. Proc. 89-23, the IRS 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. This additional safe harbor was provided to private foundations because in general their reliance on the classification of an organization relates to their liability for excise taxes under Code Sec. 4942 and Code Sec. 4945 if they make grants or contributions to other private foundations, rather than to the deductibility of contributions.

As an update to earlier revenue procedures, in Rev. Proc. 2011-33, the IRS sets forth the extent to which grantors and contributors may rely on the listing of an organization in IRS Pub. 78, Cumulative List of Organizations Described in Code Sec. 170(c), for purposes of deducting contributions under Code Sec. 170 and making grants under Code Sec. 4942, Code Sec. 4945, and Code Sec. 4966.

IRS Databases of Organizations Eligible to Receive Deductible Contributions

To assist the general public, the 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 (Tax Exempt Organization Search (Pub. 78 data)) and the second compilation is an extract of certain information concerning tax-exempt organizations from the IRS electronic Business Master File (BMF) (the EO BMF Extract).

IRS Combines Prior Procedures into One Revenue Procedure

In order to simplify compliance for grantors and contributors, the IRS issued Rev. Proc. 2018-32, which combines the safe harbors of Rev. Proc. 81-6, Rev. Proc. 81-7, and Rev. Proc. 89-23 and the reliance revenue procedure of Rev. Proc. 2011-33, and replaces them with one revenue procedure on deductibility and reliance issues for grantors and contributors - Rev. Proc. 2018-32.

General Reliance Rule under Revenue Procedure 2018-32

Under Rev. Proc. 2018-32, if an organization listed in or covered by Tax Exempt Organization Search (Pub. 78 data) or the EO BMF Extract ceases to qualify as an organization to which contributions are deductible under Code Sec. 170 and the IRS revokes a determination letter or ruling concluding that the organization is one to which contributions are deductible under Code Sec. 170, grantors and contributors to that organization may generally rely on the determination letter or ruling information provided in Tax Exempt Organization Search (Pub. 78 data) or the EO BMF Extract that contributions to the organization are deductible under Code Sec. 170 until the date of a public announcement stating that the organization ceases to qualify as an organization contributions to which are deductible. The public announcement may be made via the Internal Revenue Bulletin, on the portion of the IRS website (at {{www.irs.gov }}{) 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.

Safe Harbor Rules under Revenue Procedure 2018-32

There are several safe harbor rules in Rev. Proc. 2018-32. One of the safe harbor rules provides that 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 taxable year of the recipient organization in which the grant or contribution is received is 25 percent 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 tax years immediately preceding the prior taxable year. This safe harbor provision is not applicable if the grantor or contributor 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.

Under another safe harbor rule, private foundation grantors or contributors will not be considered responsible for, or aware of, an act that results in a recipient organization's loss of classification as a public charity due to a change in financial support if the recipient organization has received a determination letter or ruling that it is described in Code Sec. 170(b)(1)(A)(vi) and Code Sec. 509(a)(1) or in Code Sec. 509(a)(2) and the recipient organization is not controlled directly or indirectly by the private foundation. This safe harbor does not apply if the private foundation grantor or contributor 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.

Finally, a safe harbor is provided for certain "unusual grants" as defined in Reg. Sec. 1.170A-9(f)(6)(ii) and Reg. Sec. 1.509(a)-3(c)(3).

Effective Date

Rev. Proc. 2018-32 is effective May 16, 2018 and supersedes Rev. Proc. 81-6, Rev. Proc. 81-7, Rev. Proc. 89-23, and Rev. Proc. 2011-33.

For a discussion of rules relating to organizations that are qualified to receive tax deductible contributions, see Parker Tax ¶84,115.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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