Note: The following discussion is provided for informational purposes only and is not intended to serve as legal or tax advice. For specific information about the IRS Revenue Procedure 2009-32, consult your attorney or tax advisor.
The IRS has formalized guidelines permitting grantmakers to rely on third parties to comply with new requirements in the Pension Protection Act of 2006. The act requires private foundations and sponsors of donor-advised funds to exercise expenditure responsibility (i.e., additional due diligence and monitoring) if they make grants or distributions to certain types of supporting organizations in certain situations. In addition, these grants do not count toward a private non-operating foundation's payout requirement. Grantors who fail to exercise required expenditure responsibility or who miscalculate grants counting toward a private foundation's payout requirement are subject to excise taxes. To avoid these taxes, funders must determine whether a grantee is a supporting organization before making a grant.
Issued June 30, 2009, Revenue Procedure 2009-32, "Reliance Criteria for Private Foundations and Sponsoring Organizations," outlines the resources private foundations and sponsoring organizations of donor-advised funds may rely on to determine if a potential grantee is a supporting organization. A charity's classification under section 509(a) of the U.S. tax code indicates whether or not it is a supporting organization. Charities classified under section 509(a)(1) or 509(a)(2) are not supporting organizations, and grantmakers can make payouts to them without concern about incurring excise taxes. Charities classified under section 509(a)(3) are supporting organizations. To avoid potential excise taxes on payouts to a 509(a)(3) organization, a grantmaker must do additional research to determine whether its grant to a supporting organization requires exercise expenditure responsibility and, in the case of a private non-operating foundation, whether its grant counts toward its payout requirement.
Revenue Procedure 2009-32 formalizes interim guidance previously published on the IRS Web site and in IRS Notice 2006-109. It allows private foundations and sponsors of donor advised funds to confirm a charity's 509(a) classification in any one of the following three sources:
- the IRS Business Master File (BMF);
- the charity's IRS letter of determination (the document in which the IRS granted the charity's application for tax-exempt status as a public charity); or
- a third-party provider of BMF information, as long as the provider meets certain criteria.
A third-party source of BMF data must provide the information in a report that shows:
- "the grantee's name, Employer Identification Number, and public charity classification under § 509(a)(1), (2), or (3)";
- "a statement that the information is from the most current update of the BMF and the BMF revision date"; and
- "the date and time the information was provided to the grantor."
For full compliance, the report must also be "in a form that the grantor can store in hard copy or electronically."
Revenue Procedure 2009-32 is good news for grantmakers who have hesitated to rely on third-party sources of BMF data. "IRS website guidance on the use of third-parties to access BMF data to determine supporting organization status was hard to find and its precedential value was uncertain," noted Suzanne Ross McDowell, a partner with Steptoe & Johnson in Washington, D.C. "Some grantmakers shied away from using third-party data at all. Revenue Procedure 2009-32 formalizes the IRS website guidance, making it clear to grantmakers that it is safe to rely on third-party sources of BMF information to comply with the Pension Protection Act of 2006."
GuideStar Charity Check is 100 percent compliant with Revenue Procedure 2009-32 criteria for third-party providers of BMF data. GuideStar Charity Check also enables grantmakers to verify a grantee's charitable status as required by Revenue Procedure 82-39 because it shows whether an organization is listed in IRS Publication 78. With GuideStar Charity Check, private foundations and sponsoring organizations can determine grantees' charitable status and supporting organization status in one easy step.
Suzanne E. Coffman, August 2009
© 2009, GuideStar USA, Inc.
Suzanne Coffman is GuideStar's director of communications and editor of the Newsletter.