IRS Issues New Procedures on Charitable Deductions
The IRS has issued procedural guidance regarding charitable deductions and reliance on exempt status that simultaneously combines four existing procedural rulings and updates them for recent changes. As updated, the guidance reflects the transition from the use of IRS Pub. 78 in print to the searchable database, Tax Exempt Organization Search (TEOS).
The list of organizations eligible to accept donations deductible under Code Sec. 170 was historically provided in print in IRS Pub. 78, which was discontinued in 2011 when it was replaced by a searchable database called Exempt Organization Select Check (or EO Select Check). EO Select Check actually contained three searchable databases. A second compiled list contained an extract of certain information concerning these tax-exempt organizations in an electronic database called the Business Master File (or EO BMF Extract).
In the switch to TEOS, the three databases from EO Select Check were retained and two new ones added. One of the new databases includes images of Form 990 series annual returns filed by tax-exempt organizations on or after January 1, 2018, while the other includes images of favorable determination letters issued on or after January 1, 2014. TEOS allows customers to search interactively across all five databases.
Grantors and contributors may generally rely on TEOS for the purpose of determining whether a grant or donation will be deductible under Code Sec. 170. However, the databases do not include separate listings for subordinate organizations covered by a group exemption letter. Grantors and contributors may consider an organization that is discoverable by searching TEOS or EO BMF Extract as one to which donations are deductible under Code Sec. 170 until the date of a public announcement stating that the organization ceases to qualify as such an organization. The public announcement may be made via the Internal Revenue Bulletin, on the portion of the IRS website relating to exempt organizations, or by such other means as the IRS chooses. The period for which a grant or contribution is deductible may be extended upon specific exercise of authority under Code Sec. 7805(b)(8). The period will end immediately upon revocation for contributors with knowledge of such revocation.
Grantors and contributors may also rely on any classification of an organization as a Type I, Type II, or Type III functionally or non-functionally integrated supporting organization as listed in the TEOS or EO BMF Extract. “Deductibility codes” indicate whether an organization is a supporting organization described in Code Sec. 509(a)(3) and whether the organization is a Type III non-functionally integrated supporting organization. This is done to assist grantors and contributors in determining the appropriate percentage limitations on deductibility of contributions to the organization, and also assists private foundations and the sponsoring organizations of donor-advised funds making grants to them in determining whether they would be required to exercise expenditure responsibility. Such reliance on the IRS databases does not apply for foundations and sponsoring organizations with actual knowledge that a revocation has occurred or was aware of (or responsible for) the act(s) that led to the revocation.
Safe harbors are provided for ensuring that a 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, or that a grant or contribution is considered an unusual grant. 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 is 25 percent or less of the aggregate support received by the recipient organization for the four immediately preceding tax years.
This safe harbor is not available to a grantor or contributor who is in a position of authority or who otherwise has the ability to exercise control over the recipient organization. Similarly, the exclusion is not available to a person who obtains a position of authority with respect to the recipient organization as a consequence of the grant or contribution, or to a related person (as described in Code Sec. 4946(a)(1)(C)- (G)) with respect to such a person.
Rev. Proc. 81-6, 1981-1 CB 620, Rev. Proc. 81-7, 1981-1 CB 621, Rev. Proc. 89-23, 1989-1 CB 844, and Rev. Proc. 2011-33, I.R.B. 2011-25, 887, are modified and superseded.
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