To simplify compliance for grantors and contributors to tax-exempt organizations, the IRS recently issued an updated revenue procedure (Rev. Proc. 2018-32) that combines previously scattered guidance on deductibility and reliance issues. The new revenue procedure explains when grantors and contributors may rely on a listing of an organization on an IRS database of organizations eligible to receive contributions under Sec. 170 for purposes of determining whether the grants or contributions may be deductible under Sec. 170.
The IRS maintains and updates two different publicly available databases on organizations eligible to receive tax-deductible contributions under Sec. 170. The first lists organizations that are eligible to receive tax-deductible charitable donations (eligible organization list), and the second is an extract of certain information concerning tax-exempt organizations from the IRS electronic Business Master File (the EOB MF Extract).
Historically, the eligible organization list was maintained in print form in IRS Publication 78. In 2011, the IRS discontinued the print version of Publication 78 and began to maintain the eligible organization list only on an electronic database. The electronic database, called Exempt Organizations Select Check (Select Check), consisted of three searchable databases that contained information about tax-exempt organizations. In May 2018, the IRS renamed the Select Check database to the Tax Exempt Organization Search (Pub. 78 data), and expanded its capabilities. As part of the changes to Tax Exempt Organization Search (Pub. 78 data), the IRS retained the three existing databases and added two more. Additionally, the Tax Exempt Organization Search now allows users to search interactively across all five databases.
The five searchable databases are as follows:
- Tax Exempt Organization Search (Pub. 78 data) – This searchable database is the successor to Publication 78, and contains the eligible organization list. This database also contains the EOB MF Extract, which includes information on most tax-exempt organizations rather than only those eligible to receive tax-deductible contributions that are included in the Tax Exempt Organization Search (Pub. 78 data).
- Automatic Revocation of Exemption List (or Auto-Revocation List) – This database contains a list of organizations that have had their tax-exempt status revoked under Sec. 6033(j) for failure to file a required annual return or notice for three consecutive years. If an organization makes it on this list, then it will not be removed because the IRS is statutorily required to keep it there; however, if the organization is subsequently reinstated, the entry will be updated to include the reinstatement date.
- Small tax-exempt organizations – This database contains information reported in notices, or e-Postcards, by organizations that are not required to file a Form 990 or Form 990-EZ due to their size.
- Images of Form 990 – This database contains images of Form 990 filed by tax-exempt organizations on or after January 1, 2018 that are available to the public under Sec. 6104.
- Favorable Determination Letters – This database contains favorable determination letters issued on or after January 1, 2014, recognizing an organization’s tax-exempt status.
The IRS will now issue affirmation letters confirming that the IRS currently recognizes the organization’s tax-exempt status and, if a Sec. 501(c)(3) organization, its foundation status. Additionally, the IRS will issue to a tax-exempt organization an affirmation letter to reflect a name or address change.
Contributors or grantors may generally rely on information obtained from the Tax Exempt Organization Search (Pub. 78 data) or the EO BMF Extract until the date of any public announcement stating that the organization ceases to qualify as an organization to which contributions are deductible under Sec. 170. For an organization that is listed on the Auto-Revocation List, grants and contributions made to the organization by donors unaware of the organization’s status generally will be deductible if made on or before the date the organization’s name appears on the Auto-Revocation List.
Also included in the updated procedures are extended reliance rules under certain circumstances; exceptions to the general reliance rule where the donor (1) had knowledge of the revocation, (2) was aware that revocation was imminent, or (3) was responsible for, or aware of, the activities or deficiencies that gave rise to the loss of qualification; a reliance rule for subsequent listing after prior revocation; and a reliance rule for subsequent listing after prior automatic revocation.
The revenue procedure also updated the safe harbor provision for contributions to organizations that have lost their tax-exempt status. Under the safe harbor provision, donors are generally entitled to rely on an organization’s tax-exempt status until the IRS publishes the organization’s loss of exempt status on its website.
The safe harbor provides that donors will not be considered to be responsible for or aware of an act that results in the loss of qualification due to change in financial support if the aggregate grants or contributions from the donor are 25% or less of the organization’s aggregate support for the preceding four tax years. However, the safe harbor is not available to donors who are in a position of authority (such as a foundation manager) at the organization. Similarly to the exceptions for reliance, the safe harbor is also not available to donors who had actual knowledge of the loss of qualification or after the date of the public announcement that the organization ceases to qualify.
Contributions to Organizations Challenging Loss of Status
Finally, the revenue procedure contains rules pertaining to the deductibility of contributions to charitable organizations that are challenging the loss of their tax-exempt status in a declaratory judgment procedure under Sec. 7428. Under this provision, the organization continues to be treated as an organization described in Sec. 170(c)(2) with respect to contributions from individuals (up to $1000). Statutory protection for such contributions begins on the date of public announcement of the revocation or removal of the organization’s name from the Tax Exempt Organization Search (Pub. 78 data) or the EO BMF Extract, whichever is earlier, and ends on the date on which a Tax Court decision 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 Sec. 170(c)(2). Again, this reliance does not extend to any individual who was responsible for the activities that were the basis for the revocation of tax-exempt status.