IRS Publishes Final Regulations for Equivalency Determinations

October 05, 2015

Take note of these practical concerns for private foundations making grants to foreign organizations.

On September 25, the Internal Revenue Service (IRS) published final regulations for private foundations making good faith determinations that a foreign organization is equivalent to a public charity (other than a Type 3 nonfunctionally integrated supporting organization) or a private operating foundation.

These regulations

  • finalize the provision in proposed regulations expanding the class of professional tax advisors able to provide reliance opinions for foundations making good faith determinations,
  • delete provisions allowing foundations to rely solely on grantee affidavits in making equivalency determinations, and
  • provide that an equivalency determination will generally be valid for two years.

Good Faith Determinations Under Code Sections 4942 and 4945

Under current law, private foundations making grants to foreign organizations that do not have IRS determination letters recognizing their 501(c)(3) public charity status can meet their obligations under sections 4942 and 4945 by following procedures for making a good faith equivalency determination.

Proposed Regulations to Facilitate Foreign Grantmaking

Longstanding regulations provided that foundations would ordinarily be considered to have made a good faith determination if the determination was based on an affidavit of the grantee or an opinion of counsel. On September 25, 2012, the IRS published proposed regulations intended to facilitate grantmaking by foundations to foreign organizations by making it easier and less costly for foundations to obtain written equivalency determinations from qualified advisors. The proposed regulations expanded the class of advisors upon whose advice foundations can rely to include certified public accountants (CPAs) and enrolled agents subject to the requirements of IRS Circular 230, as well as lawyers. Circular 230 sets standards for practice before the IRS. The proposed regulations also requested comments on (1) the appropriateness of a time limit for reliance on an affidavit or written advice, (2) whether reliance on grantee affidavits should be restricted, and (3) whether Revenue Procedure 92-94, which provides additional guidance for foundations making good faith determinations, should be updated.

The newly issued final regulations are generally consistent with the proposed regulations but include a few important changes.

Final Regulations Retain Expanded Advisor Class But Restrict Grantee Affidavits

Consistent with the proposed regulations, the final regulations retain the expanded class of advisors on whose advice foundations can ordinarily rely when making good faith equivalency determinations. Foundations can rely on advice from qualified tax practitioners, including lawyers who serve a foundation’s in-house or outside counsel, CPAs, and enrolled agents who are subject to Circular 230. The class does not include foreign lawyers, except in the unlikely event that they meet the definition of “qualified tax practitioner” subject to Circular 230. Of course, foreign counsel may be used to gather information relevant to the determination or for questions of foreign law or other matters within the foreign counsel’s expertise.

As foreshadowed by the proposed regulations’ request for comments, the final regulations eliminate reliance on a grantee affidavit as a sole basis for making a good faith equivalency determination. Grantee affidavits may continue to be used as a source of information in making a good faith determination, and there is no requirement that a foundation obtain written advice from a qualified tax practitioner. To mitigate the effects of this change, the final regulations provide a 90-day transition period during which foundations may make grants based on the proposed regulations. Also, a grant that is distributed pursuant to a written commitment made prior to the effective date of the final regulations and based on a good faith determination under the proposed regulations will be treated as compliant as long as the grant is fully funded within five years.

Finally, the final regulations provide that foreign equivalency determinations regarding public charity status based on support over a five-year test period can be relied on for the two years immediately following the end of the test period. 

Rev. Proc. 92-94

The IRS also announced that it intends to update Rev. Proc. 92-94. Rev. Proc. 92-94 contains details regarding the process for making equivalency determinations. We expect the update to include the changes implemented in these regulations and prior changes to the public support tests made in 2011 to reflect the redesigned Form 990. 

Practical Considerations

Foundations that have relied solely on grantee affidavits in making equivalency determinations need to consider their options for making such determinations in the future. These may include using in-house or outside counsel for providing equivalency opinions, exploring options like NGO Source as potential opinion providers, and, in appropriate cases, making good faith equivalency determinations without opinions. The latter option may be particularly appropriate for grants to established foreign charitable organizations. These may include foreign academic institutions, humanitarian organizations, and international research institutions, among others. Foundations may wish to consult with in-house or outside counsel about how to establish reasonable and cost-effective procedures for making good faith equivalency determinations going forward.


If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:

Washington, DC
Celia Roady
Caroline Waldner
Shira M. Helstrom