The Pension Protection Act of 2006 imposed important limitations on private foundations that make grants to public charities that are Section 509(a)(3) supporting organizations. Prior to these limitations, such grants were qualified distributions under Code Section 4942 (and thus such grants helped the foundation meet its minimum distribution requirements) and were not taxable expenditures under Code Section 4945 (which would be subject to a penalty excise tax). This may not be the case now, depending on the type of supporting organization that is involved and other factors. Many private foundations now seek to avoid distributions to supporting organizations entirely, to avoid running afoul of the new provisions. Distributions to supporting organizations from donor advised funds can also run into similar problems.
The IRS has made it a little easier for a private foundation to find out whether a recipient organization is a supporting organization. Previously, the IRS allowed a grant making private foundation to determine the supporting organization of a grantee by reviewing:
- The IRS determination letter of the recipient organization can be reviewed. If one is not available, an updated one can be obtained from the IRS (1-877-829-5500)
- The IRS Business Master File (BMF) can be reviewed online.
However, it is not easy to use the IRS BMF. In recognition of this, the IRS now allows taxpayers to acquire this information from third parties who access the IRS database. If a grant making organization receives a written report that contains required information from a third-party provider, the organization is allowed to rely on that report.
One major provider of these reports (for a fee, of course) is Guidestar (http://www.guidestar.org).
IRS EO Update , Issue Number 2007-8