D.3. Grants to Foreign Organizations

(1) Many foreign organizations do not have rulings or determination letters to show

that they are described in Sections 501(c)(3) or 509(a)(1), (2), or (3). Hence, grants they receive from private foundations may be taxable expenditures under Section 4945(d)(4) or Section 4945(d)(5). These grants are not taxable expenditures if a foreign organization meets two tests.

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a. The first test, in Treas. Reg. 53.4945-6(c)(2)(ii), concerns foreign grantee

organizations that do not have Section 501(c)(3) rulings. Generally, a foreign organization will be treated as akin to a Section 501(c)(3) organization if in the "reasonable judgement" of a foundation manager of the grantor private foundation, the grantee foreign organization is organized and operated as a Section 501(c)(3) organization. Reasonable judgement is defined by its generally accepted legal sense within the outlines developed by judicial decisions in the law of trusts. This test does not apply to "testing for public safety" organizations described in Section 501(c)(3) and 509(a)(4).

b. The second test, in Treas. Reg. 53.4945-5(a)(5), provides that if a grantor

private foundation makes a "good faith" determination that the foreign grantee organization is a qualifying public charity, such grants made to that foreign organization are considered to have been made to a qualifying public charity. The good faith determination ordinarily must be based upon current written advice received from a qualified tax practitioner, which must set forth sufficient facts concerning the operations and support of the grantee foreign organization to demonstrate that it would likely qualify as a qualifying public charity.

(2) Rev. Proc. 2017-53, 2017-40 I.R.B. 263, provides guidelines that qualified tax

practitioners may use for preparing written advice on which a domestic private foundation ordinarily may rely in making an equivalency determination that the foreign grantee of a grant made for Section 170(c)(2)(B) purposes (other than a grant described in Section 507(b)(2) and 1.507-3 (c)) is a qualifying public charity. A private foundation may make an equivalency determination that a foreign grantee is an organization described in Section 501(c)(3) and is a qualifying public charity even though the grantee lacks a determination letter from the IRS recognizing it as tax-exempt. Thus, a grant to such an organization would not need to be maintained in a separate fund and would ordinarily be treated as a qualifying distribution and not a taxable expenditure.

(3) In Thorne v. Commissioner, 99 T.C. 67 (1992), the court held that a foundation

did not make a good faith determination and thus a grant to a foreign organization without exercise of expenditure responsibility was a taxable expenditure.