Validating the Tax Status of Grantees

Why, When, and How to Do It

Private foundations must abide by certain tax rules, and when they get into trouble, it’s often because they’re unaware of the laws or uncertain of what they need to do to stay in compliance. For example, Treasury regulations require that private foundations verify the public charity status of any 501(c)(3) charitable organization before making a grant to ensure that the grantee is currently classified as a public charity. However, misconceptions about when it’s necessary to validate the tax status of a grantee—or even how to do it—are common.

Many foundations mistakenly believe that certain types of tax-exempt organizations, like rotary clubs, chambers of commerce, and civic associations, are classified as public charities when they are not. Another common misperception is that a foundation may freely grant to another. Private foundations are not classified as public charities even though, like public charities, they are considered charitable organizations under Internal Revenue Code Section 501(c)(3). Accordingly, if one foundation grants to another without following special procedures, a penalty will result.

[callout]Perhaps the most rampant misconception is that once a grantee organization has been recognized as a public charity by the IRS, a foundation need not verify the grantee’s tax status each time a grant is made.[/callout]

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