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Cold Snap for Donor Advised Funds: The New DAF Rules

Trusts & Estates

Originally Published in Trusts & Estates.


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The Pension Protection Act of 2006 (“Act”), which so radically redefined the rules for supporting organizations, has also transformed the rules relating to donor advised funds (DAFs). For the first time, the Act accords DAFs express Internal Revenue Code (“Code”) recognition, a tribute to the recent rapid success of DAFs and the charities and commercial firms which sponsor them. DAFs are given this recognition merely in order that they can be subjected to new taxes and restrictions, however, and the Act imposes more than its fair share of these. There is a new tax imposed on what are called “taxable distributions” from DAFs. There is a new tax imposed (at the sobering rate of 125%) on what are termed “prohibited benefits.” The excise tax on “excess benefit transactions” is made expressly applicable to DAFs and their controlling charities, which Act terms “sponsoring organizations.” The excise tax on the “excess business holdings” of private foundations is stretched to encompass DAFs. Changes are made to annual returns and applications for recognition of tax-exempt status by sponsoring organizations. Rigorous new restrictions and limitations are imposed on the deductibility of contributions to DAFs under the income, gift, and estate tax provisions. Even more alarming for donors and their advisors, the future deductibility of any contributions to DAFs has come under a cloud.

DAFs

While DAFs certainly vary widely in their provisions and particulars, in general a DAF is a fund or account held by a charitable organization, to which contributions are made by donors who enjoy the privilege of “advising” the sponsoring organization as to what use it may make of the income or principal of the DAF, including what charities may ultimately receive distributions from the DAF. Though they have been utilized since the 1930s,1 and though collectively they now hold “billions of dollars in assets,”2 DAFs have managed to accumulate very little law in these seven decades, at least until the Act. Though they have been considered in a handful of decisions and rulings,3 and are given some discussion in the Treasury Regulations,4 surprisingly before August 17, 2006, they were not even mentioned in the Code itself. Despite their widespread use by community foundations and, more recently, by other charitable organizations as well as commercial firms, given the earlier dearth of law, DAFs may be said to have been relatively untested, even aggressive, charitable tools.

Among the many reasons for the great success of the DAF is its simplicity; a donor who might otherwise have created a private foundation or a supporting organization, with their attendant costs and hassles of establishment and compliance, can instead contribute assets to a DAF with a simple check or wire transfer. If the sponsoring organization qualifies as a public charity, then the donor enjoys the highest deductibility thresholds for the contribution: 50% of adjusted gross income (AGI) for cash gifts, 30% for gifts of appreciated assets, with a 5-year carryover of excess deductions (in contrast to 30% for cash contributions to a private foundation, 20% for gifts of appreciated publicly traded stock, and a harsh “reduce to basis” rule for appreciated nonstock contributions).5 DAFs have been particularly attractive for year-end gifts, for which donors lack the time and often the information to make a careful selection of charitable organizations to receive their contributions. Gifts too small to justify the creation of a private foundation make much more sense in a DAF setting. And while donors sacrifice the control they would have exercised over investments and distributions in a private foundation, the ease, simplicity, and flexibility of contributing to a DAF often more than make up for this loss.

So successful had been community foundations’ experience with DAFs, that eventually other traditional charitable organizations created DAFs as a means of attracting new donors and expanding gifts from existing donors. In the 1990s, a number of commercial investment firms, including industry giants Fidelity and Vanguard, formed their own DAF-holding charitable entities.

Mounting Concerns

As is sometimes the case for charitable tools,6 the stunning success of DAFs carried within it the seeds of the new restrictions and limitations now imposed by the Act. Perhaps most provocative of scrutiny and reform was the fact that DAFs were openly marketed as, in effect, substitutes for private foundations. If DAFs permitted donors to avoid the hassles of private foundations, at the same time they avoided the protections against abuse which were rather painstakingly drafted as part of the Tax Reform Act of 1969. Indeed, DAFs were attractive precisely because they avoided these protections. When the large commercial institutions entered the fray, concerns arose as to whether a DAF created by such an institution might be said to inure to the benefit of the founding enterprise.

The proper characterization of the ownership of the DAFs, too, became something of a sticky business. Should contributions to a DAF be considered contributions to the sponsoring organization, as part of meeting its “public support” test requirements?7 Or should the contributions be attributed to the ultimate recipient charity, to meet its own “public support” test requirements? Should both charities be allowed to garner the “public support” test benefits of these DAF contributions?8

And what about the advisory rights and powers retained by the donor? Were they sufficient to constitute an effective limitation on the sponsoring organization’s dominion and control over the DAF assets? Were they essentially a form of prohibited private inurement9 to the donors and their family members? Worse, could donors and their advisors find the means to retain effective donor control over the DAF assets, which were supposed to be controlled by the sponsoring organization? And just how real was the charity’s dominion and control over the DAF assets, when many sponsoring organizations repeatedly assured their donors that the donor’s advice would be followed in virtually all cases (except where a donor advised a grant to a nonqualifying recipient)?

These growing concerns began to spill over into IRS pronouncements. Increasingly strongly worded warnings found their way into the IRS Exempt Organization CPE Texts.10 In the IRS CPE Text for 2001, for example, the Service expressed concerns as to whether the fact that in many DAFs, “distributions from donors may only be triggered by donor recommendations” meant that the charity “lacks dominion and control or ‘ownership’ over the property.” Similar concerns were expressed in the document as to the lack of minimum payout requirements in many DAFs, with the suggestion that a 5% payout, similar to the requirement applicable to private foundations, should be applied to DAFs.

GAO Report

Ultimately, while Congress considered the legislation which emerged as the Act, the General Accounting Office issued its report to the House Ways and Means Committee on DAFs.11 The Report noted a number of abuses associated with DAFs. In one instance, a fund was found to have been offering what it called a “loan program,” under which donors to the DAF were able to repossess their donations, with no obligation for repayment.12 In another case, a DAF donor was able to achieve control over the DAF funds by virtue of his control position at the charity which was the ultimate recipient of DAF grants.13 In that situation, the Report noted that, if the DAF form did not exist, the recipient organization would likely have been classified as a private foundation, as it probably could not have met the “public support” tests.14 The preparers of the Report were troubled by examples of websites describing DAFs “as a giving option with all the benefits and advantages of a private foundation, which may mislead potential donors into believing they can retain control over their donation.”15

The Report noted the difficulties the GAO had had in attempting to gather information and data about DAFs in preparing the study, noting that “donor-advised fund data are limited because organizations that maintain the funds are not required to separately report fund data from other financial data on Form 990.”16 The Report also complained that the “IRS faces challenges gathering evidence or addressing activities that do not seem to benefit charities, but do not violate any law or regulation”.17 The Report continued, “[p]romoters, who are inliiduals or entities who facilitate abusive schemes, further complicate IRS’s examination efforts.”18

The concerns raised in the Report and in the earlier IRS pronouncements and positions, and the solutions these materials proposed, are often reflected in the Act, and provide a basis for understanding what might otherwise be fairly opaque provisions of the Act.

Deductibility Study

The very deductibility of future contributions to DAFs may be imperiled by the Act. Section 1226 of the Act provides that Treasury is to undertake a study on the organization and operation of DAFs, which shall specifically consider whether the income, gift and estate tax deductions for contributions to sponsoring organizations of DAFs are “appropriate,” considering the use of the contributed assets (including the type, extent, and timing of such use), or the use of sponsoring organizations’ assets for the benefit of the donor or related persons.19 Might the study conclude that contributions to DAFs are no longer deductible? That would certainly be within the province of the Act provision, though perhaps the study may draw a distinction in this regard between “commercial” and noncommercial DAFs. It would seem unlikely that the study would recommend some sort of retroactive disqualification of deductions for contributions to DAFs, beginning August 17, 2006, but that, too, is at least a remote possibility. Of course, Congress may not reflect all of the study’s recommendations in new legislation; then again, Congress might go farther than the study recommends. In any event, this “study” provision in the Act is not very encouraging for donors, and contributions to DAFs may well drop in coming months, as advisors come to understand the unpleasant implications of the provision.

The study is also to consider whether DAFs should be required to distribute a specified amount, based on income or assets, to ensure the sponsoring organization is operating consistently with its exempt purposes or function.20 There may well emerge from this aspect of the study a minimum annual distribution requirement similar to the private foundation requirement under Code Section 4942, under which at least 5% of the value of the assets of a particular DAF may be required to be distributed each year to public charities.21

Yet another goal of the study will be to consider whether donors’ retention of “rights and privileges” as to donated amounts, “including advisory rights or privileges with respect to the making of grants or the investment of assets,” is consistent with treatment of donations to DAFs as completed gifts which qualify for the charitable deduction.22 If a donor’s retention of a “right and privilege” to advise with regard to a DAF is to be enough to deny the donor a charitable deduction, then rather clearly this would spell the end of DAFs as we know them. Perhaps the statutory provision is intended merely to give the widest scope and berth for the Treasury’s study and recommendations, rather than suggesting that the study draw this conclusion. Given the Service’s sensitivity on the issue of DAFs in recent years, however, Treasury could well interpret this provision as a mandate to recommend changes which reach to the boundaries of the “study” provision.

The study is to be submitted to the Senate Finance Committee and the House Ways and Means Committee by August 17, 2007.23 Until the submission of the study and the resultant Congressional action, it must be observed that contributions to DAFs will remain under something of a cloud, and for this reason this “study” provision is arguably the harshest aspect of the new DAF legislation.

New DAF Excise Taxes

The remaining DAF provisions are gathered into Title XII, Subtitle B, Part 2 of the Act, which is pointedly entitled, “Improved Accountability of Donor Advised Funds”. The first provision of this Part 2 adds two new Code Sections, Section 4966, relating to taxes on a DAF’s “taxable distributions,” and Section 4967, taxes on a DAF’s “prohibited benefits”.

Tax on “Taxable Distributions”: New Code Section 4966 officially adds a number of new terms to the DAF lexicon, including, for the first time, a statutory definition of a DAF itself. A “donor advised fund” is defined as a fund or account which: (i) is separately identified by reference to contributions of one or more donors; (ii) is owned and controlled by a “sponsoring organization” (another new term); and (iii) with respect to which a donor (or a donor’s appointee or designee) has, or reasonably expects to have, advisory privileges as to the distribution or investment of amounts held in the fund by reason of the donor’s status as a donor.24

Expressly excluded from the definition of a “donor advised fund” is any fund or account which makes distributions only to a single identified organization, or to a governmental entity.25 Similarly, a fund or account is excluded from the “donor advised fund” definition if the donor (or the donor’s appointee or designee) advises as to inliiduals who are to receive grants for travel, study, or other similar purposes, if: (i) the advisory privileges are performed exclusively in the donor’s capacity as a member of a committee appointed by the sponsoring organization; (ii) no combination of donors or related persons directly or indirectly control this committee; and (iii) all grants from the fund or account are awarded on an objective and nondiscriminatory basis following a procedure approved in advance by the sponsoring organization’s board of directors,26 the procedure being designed to ensure that all grants meet the requirements of Code Section 4945(g).27 The referenced Code Section 4945(g) describes grants made by private foundations to inliiduals which are awarded on an objective and nondiscriminatory basis under a procedure approved in advance by the Service, and which meet other specified criteria.28

Treasury has the authority to exempt a fund or account from treatment as a “donor advised fund” if the fund or account is advised by a committee which is not controlled, directly or indirectly, by the donor (or the donor’s appointee or designee or related parties), or if the fund benefits a single identified charitable purpose.29

The new term “sponsoring organization” is defined as any organization described in Code Section 170(c) (other than Code Section 170(c)(1)) which is not a private foundation, and which maintains one or more “donor advised funds.”30 The term “fund manager” is defined as an officer, director, or trustee of the sponsoring organization (or a person with similar powers or responsibilities).31 The term also includes, with regard to a specific act or failure to act, the employees of the sponsoring organization having authority or responsibility as to such act or failure to act.32

This new Code Section imposes a tax of 20% of the amount of each “taxable distribution,” which is to be paid by the DAF’s sponsoring organization.33 In the familiar pattern of the private foundation excise tax provisions,34 a secondary tax is imposed on “the agreement of any fund manager to the making of a “taxable distribution,” if the manager knows that it is a “taxable expenditure.”35 This tax of 5% of the amount of the “taxable expenditure” is imposed on the fund manager “who agreed to the making of the distribution.” In cases in which more than one fund manager is responsible, the Act provides for joint and several liability,36 to help ensure collection. The maximum amount of tax imposed on fund managers with regard to any one “taxable transaction” is limited to $10,000.37

New Code Section 4966 goes on to define a “taxable expenditure” as “any” distribution from a DAF to a natural person, or to any other person if the distribution is for any purpose other than a Code Section 170(c)(2)(B) purpose,38 or if the sponsoring organization does not exercise “expenditure responsibility” as to the distribution, in accordance with Code Section 4945(h).39 “Expenditure responsibility” consists of seeing that the expenditure is spent solely for the purpose for which it was made, obtaining full and complete reports from the recipient as to how the funds are spent, and making full and detailed reports with respect to such expenditures to the Service.40 The term “taxable expenditure” does not include a distribution from a DAF: to any organization described in Code Section 170(b)(1)(A), other than a “disqualified supporting organization”; to the DAF’s own sponsoring organization; or to any other DAF.41

A “disqualified supporting organization,” in turn, is defined as any Type III supporting organization (other than a “functionally integrated” Type III supporting organization).42 Hence, it will now be crucially important for a DAF to determine the precise nature of its intended grant recipients, in order to avoid the new Code Section 4966 tax. Briefly stated, a “Type III” supporting organization (SO) is a Code Section 509(a)(3) organization which is “operated in connection with” one or more supported public charities. While many Type III SOs are essentially grant-making organizations, which support their supported public charities through direct grants, other Type III SOs support their public charities by carrying on their own charitable activities which, but for the supporting organization’s involvement, would normally be carried on by the supported charity itself. These “activities” Type III SOs are now termed “functionally integrated” Type III SOs in the Act, and it is this variety which is exempted from the definition of “disqualified supporting organizations” under new Code Section 4966(d)(4)(A)(i).43 However, Type III SOs have long been permitted to vary their operations from year to year from grant-making to carrying on their own activities. So how can a DAF and its sponsoring organization determine with any certainty whether a Type III is of the “not so good,” grant-making variety, or the “good,” activities variety? Well, this is not clear from the Act, and a further complication is that IRS letters of determination which are issued to SOs do not usually specify whether a supporting organization is a Type I, Type II, or Type III SO, let alone whether a Type III is an activities Type III versus a grant-making Type III. Perhaps the DAF’s sponsoring organization can attempt to secure a statement from the Type III SO, or from counsel, as to which variety of Type III it is. Faced with these difficulties, it may well be that sponsoring organizations may simply opt for the easier alternative–declining as a matter of policy to make gifts to any Type III SOs, though that is a more conservative procedure than is called for by the Act.

Grantmaking Type III SOs are not the only types of SOs which fall within the new Code Section 4966(d)(4) “disqualified supporting organization” category. Type I SOs44 and Type II SOs45 also fall within this category, if: (i) the donor (or the donor’s designee with regard to advising on distributions) or related parties control the SO, directly or indirectly, or the Secretary determines by regulations that a distribution to an SO is otherwise inappropriate.46

The new Code Section 4966 tax applies to taxable years beginning after August 17, 2006.47

Tax on “Prohibited Benefits”: New Code Section 4967 imposes a tax on what are termed “prohibited benefits” involving a DAF. This new provision imposes a very steep tax on “the advice of” certain persons to have a sponsoring organization make a distribution from a DAF which results in a direct or indirect benefit to a noncharity which is more than an incidental benefit. This new tax is imposed at the rate of 125% of the benefit, and is imposed on the person who advises as to the distribution, or who receives the benefit as a result of the distribution.48 The category of persons subject to the tax are the persons described in Code Section 4958(f)(7), a new subsection of the “excess benefit transaction” provisions which also is added by the Act.49 The category consists of persons described in new Code Section 4966(d)(2)(A)(iii), namely, “advising” donors (or their appointees or designees). Also included in this category are members of the family of the “advising” donors or their surrogates,50 and entities which are 35-percent controlled entities with regard to the “advising” donors.51

A lesser tax of 10% of the benefit is imposed on the agreement of any fund manager to the making of the offending distribution from the DAF in circumstances in which the fund manager knew that the distribution would confer the taxable benefit, and the tax is to be paid by that fund manager.52 No tax is to be imposed under this new provision if a tax has been imposed on the benefit distribution under Code Section 4958, the “excess benefit transaction” provision.53 Joint and several liability is applied to the “advising” donor and related parties, and to the fund managers who agreed to the distribution.54 The tax imposed on any one distribution upon fund managers is limited to $10,000;55 there is no equivalent limit for the “advising” donor category, however.

This new tax applies in taxable years beginning after August 17, 2006.56

Note that new Code Section 4967 offers precious little guidance as to exactly what sorts of DAF distributions may be treated as conferring a taxable benefit upon the “advising” donor or related parties, or precisely what sorts of benefits will be treated as involving a direct or indirect benefit which is more than an incidental benefit. While this might be said to be a drafting oversight, it is probable that the danger category was intentionally left vaguely defined. Presumably, the purely psychic rewards to a donor who feels good about advising a DAF grant are not enough by themselves to trigger the new tax, and are “incidental.” Would the benefit of being able to brag to friends, neighbors and business associates be sufficient? Probably not, though it is conceivable that a business owner’s use of the DAF distribution to boost the business’s goodwill or prestige, and to help it in the marketplace in general or in a pending transaction specifically, might just possibly be enough. Hopefully, authoritative guidance will emerge quickly on this key issue; without it, virtually any DAF distribution might conceivably trigger the new tax, and this uncertainty could prompt some DAFs, their donors, and their sponsoring charities, to refrain from making DAF distributions altogether, a stance which would defeat other goals of the new legislation.

Application of Excess Benefit Transactions Tax to DAFs

Section 1232 of the Act extends the Code Section 4958 tax on “excess benefit transactions” expressly to DAFs. Two new subsections are added to the Code Section 4958(f) definition of the term “disqualified person.” The first new subsection adds the category of DAF “advisor” donors (and their surrogates), as well as family members and 35-percent controlled entities.57 The second new subsection adds the category of “investment advisors,” their family members, and 35-percent controlled entities.58 An “investment advisor” is defined as any person, other than an employee of a sponsoring organization, who is compensated by the sponsoring organization for managing the investment of assets held in the sponsoring organization’s DAFs, or providing investment advice with respect to such assets.59

Code Section 4958(c) is also amended to add ‘Special Rules for Donor Advised Funds.’60 These new provisions define “excess benefit transaction” to include any grant, loan, compensation, or other similar payment from a DAF to an “advisor” donor or surrogate, family members, or 35-percent controlled entities.61 Similarly, the term “excess benefit” is defined to include the amount of any such grant, loan, compensation or other similar payment.62

Code Section 4958(f)(6) defines the terms “correction” and “correct” to mean, as to any “excess benefit transaction,” undoing the excess benefit to the extent possible, and taking any additional steps needed to place the organization in a financial position not worse than had the highest fiduciary standards been observed. Under an amendment to this provision, in the case of a “correction” of an “excess benefit transaction” involving a grant, loan or compensation to an “advisor” donor and related parties, no amount repaid in a manner prescribed by Treasury may be held in any donor advised fund.63 Despite the relative lack of clarity of the drafting (the term “repaid” in the amended language has no referent in the older language in Code Section 4958(f)(6)), this appears to mean that, if an “excess benefit” in the form of a grant, loan or compensation is repaid to the sponsoring organization, it cannot be placed back into the DAF (or any other DAF). This is presumably designed to help avoid the temptation to repeat the “excess benefit transaction” by the same donor from the same (or another) DAF, at least as to that particular amount which is “repaid.”

These new DAF “excess benefit transaction” provisions apply to transactions occurring after August 17, 2006.64

Application of Excess Business Holdings Tax to DAFs

Code Section 4943 imposes an excise tax on the “excess business holdings” of a private foundation. Briefly to summarize, a private foundation’s ownership interest in a business enterprise which, when added to the holdings in that enterprise owned by disqualified persons, exceed 20% of the ownership of the enterprise, constitute “excess business holdings.”65 A de minimis safe harbor is recognized for a private foundation’s holdings of up to 2% of the enterprise.66

The Act amends Code Section 4943 to treat DAFs as private foundations for purposes of the tax on “excess business holdings.”67 Consequently, DAFs must now determine whether or not their assets include “excess business holdings,” and if so, must liest themselves of such holdings down to permissible levels. In applying Code Section 4943 to DAFs, the term “disqualified person” is defined as an “advisor” donor or surrogate, a family member, and a 35-percent controlled entity.68 Some relief to the severity of this extension of the tax on “excess business holdings” is afforded by the provisions relating to the 5-year period to dispose of certain holdings, under Code Section 4943(c).69

These changes apply to taxable years beginning after August 17, 2006.70

Charitable Deductions for Contributions to DAFs

Anticipating the Treasury’s deductibility “study” discussed earlier, Section 1234 of the Act adds new restrictions and limitations on the deductibility of contributions to DAFs under the income, gift, and estate tax provisions. For income tax purposes, Code Section 170(f) is amended to add new Code Section 170(f)(18), under which deductions for contributions to DAFs are allowed only if certain conditions are met. First, the DAF’s sponsoring organization must not be a type of organization described in Code Section 170(c)(3), (4), or (5).71 This eliminates the deductibility of contributions to DAFs operated by posts or organizations of war veterans or affiliated organizations, by fraternal lodges and similar organizations, or by cemetery companies. Second, the DAF’s sponsoring organization must not be a grant-making Type III SO (but may be an “activities,” or “functionally integrated” SO).72 In addition, the taxpayer seeking the deduction must obtain a contemporaneous written acknowledgment from the sponsoring organization that it has exclusive legal control over the assets contributed to the DAF.73 Similar new changes are made to the estate tax charitable deduction provisions,74 and to the gift tax charitable deduction provisions.75

These changes to the deductibility of contributions to DAFs apply to contributions made after 180 days following August 17, 2006.76

Returns and Applications of Sponsoring Organizations

The Act amends Code Section 6033 to provide for additional requirements relating to the annual returns filed by sponsoring organizations. The returns must meet these new requirements: (1) they must list the total number of DAFs owned by the sponsoring organization at the end of the taxable year; (2) they must indicate the aggregate value of assets held in the DAFs at the end of the taxable year; and (3) they must indicate the aggregate contributions to and grants from the DAFs during the taxable year.77

These changes apply to returns filed for taxable years beginning after August 17, 2006.78 Presumably, the Service will revise Form 990 accordingly before 2007.

Finally, as to applications filed for recognition of tax-exempt status of sponsoring organizations, such organizations are now required to give notice to Treasury (in the manner Treasury is to provide) as to whether the organization maintains or intends to maintain DAFs, and the manner in which the organization plans to operate the DAFs.79

These changes apply to organizations applying for tax-exempt status after August 17, 2006.80 Form 1023 will be revised to request this additional information.

Coping

How can the many thousands of existing DAFs most effectively cope with these sweeping new changes? A number of action steps should be considered at once. First, the DAF should begin making annual distributions of at least 5% of the value of its assets; for while the payout requirement ultimately to be adopted following the Treasury “study” is not yet clear, it will be safer for the DAF to adopt a temporary minimum payout requirement now. Limiting donor’s “advice” to matters of distributions, as opposed to investments, might also be prudent in light of the “study” provisions, at least through August 17, 2007 when the “study” is to be presented. As for the cloud on deductibility posed by the “study,” it would be impractical as well as overly conservative for sponsoring organizations to decline to accept contributions to DAFs for a year, though some may opt for this approach to provide maximum temporary protection against the possible defeat of donors’ expectations.

Beyond the still somewhat nebulous “study” penumbra, DAFs and their sponsoring organizations should promptly adopt policies to ensure they handle distributions in such a manner as to avoid triggering the new tax on “taxable distributions.” While the related tax on “prohibited benefits” is nearly as elusive as the “study” provisions, DAFs should strive to eliminate the incidence of anything which might look like a “prohibited benefit” to a donor or related party, at least until firmer guidance emerges. No payments to a donor or related party of a grant, loan, compensation, or similar payments should ever be made, to avoid triggering the tax on “excess benefit transactions.” The DAF’s assets should be reviewed quickly to determine whether they have “excess business holdings,” and if so, should be liested. DAF grants should not be made to grantmaking Type III SOs, and DAFs and their sponsoring organizations will need to adopt a protocol to enable them to identify the precise nature of the exemption of grant candidates. Finally, annual returns and applications for new sponsoring organizations should conform fully with the Act’s requirements, even if the Service is not able to develop new forms within the deadlines imposed by the Act.

Footnotes

  • 1“Tax-Exempt Organizations: Collecting More Data on Donor-Advised Funds and Supporting Organizations Could Help Address Compliance Challenges,” US Government Accountability Office Report to the Chairman, Committee on Ways and Means, House of Representatives (July 2006), p. 6 (hereafter, “GAO Report”).
  • 2GAO Report, p. 1.
  • 3See, e.g., Fund for Anonymous Gifts v. IRS, 194 F.3d 173 (DC Cir. 1999); PLR 200037053; GCM 39875.
  • 4See, e.g., Treas. Reg. §1.170A-9(e)(11).
  • 5See Code Section 170.
  • 6For example, charitable remainder trusts and, more recently, supporting organizations, come to mind as having fallen within this unfelicitous category.
  • 7See Code Section 170(b)(1)(A)(iv).
  • 8For a good discussion of these and other DAF concerns, see Bruce R. Hopkins, The Law of Tax-Exempt Organizations (8th ed. 2003), at pp. 307-17.
  • 9See Code Section 501(c)(3).
  • 10See, e.g., IRS Exempt Organizations CPE Text for FY 2000, Part P, 2C, pp. 143-44; IRS Exempt Organization CPE Text for FY 2001, Topic G(3).
  • 11GAO Report.
  • 12GAO Report, p. 26.
  • 13GAO Report, p. 27.
  • 14GAO Report, pp. 27-28.
  • 15GAO Report, p. 35.
  • 16GAO Report, p. 1.
  • 17GAO Report, p. 1.
  • 18GAO Report, p. 1.
  • 19Act, Section 1226(a)(1).
  • 20Act, Section 1226(a)(2).
  • 21See I.R.C. §4942(e).
  • 22Act, Section 1226(a)(3).
  • 23Act, Section 1226(b).
  • 24New Code Section 4966(d)(2)(A).
  • 25New Code Section 4966(d)(2)(B)(i).
  • 26Presumably in the case of a sponsoring organization organized as a charitable trust rather than as a nonprofit corporation, it is the trustee or trustees which are to approve of this procedure.
  • 27New Code Section 4966(d)(2)(B)(ii).
  • 28Under Code Section 4945(g), these grantmaking procedures are to be demonstrated to the satisfaction of the Service to constitute either: (1) a scholarship or fellowship grant to be used for study at an educational institution described in Code Section 170(b)(1)(A)(ii), a prize or award subject to Code Section 74(b) if the recipient is selected from the general public, or a grant made to achieve a specific objective, produce a report, or improve or enhance a literary, artistic, musical, scientific, teaching, or similar capacity, skill or talent of the grantee.
  • 29New Code Section 4966(d)(2)(C).
  • 30New Code Section 4966(d)(1).
  • 31New Code Section 4966(d)(3)(A).
  • 32New Code Section 4966(d)(3)(B).
  • 33New Code Section 4966(a)(1).
  • 34See Code Sections 4941-4945.
  • 35New Code Section 4966(a)(2).
  • 36New Code Section 4966(b)(1).
  • 37New Code Section 4966(b)(2).
  • 38Code Section 170(c)(2)(B) lists “religious, charitable, scientific, literary, or educational purposes, or to foster national or international sports competition . . ., or for the prevention of cruelty to children or animals”.
  • 39New Code Section 4966(c)(1).
  • 40Code Section 4945(h).
  • 41New Code Section 4966(c)(2).
  • 42New Code Section 4966(d)(4)(A)(i).
  • 43For a discussion of these and other aspects of the treatment of supporting organizations under the Act, see Gerald B. Treacy, “What’s Left of SOs?”, Trusts & Estates (October 2006), pp. 28ff.
  • 44A Type I SO is one which is operated, supervised or controlled by one or more supported charities; typically this variety is characterized by the right of the supported charities to designate a majority of the members of the SO’s governing body.
  • 45A Type II SO is one which is supervised or controlled in connection with one or more supported charities; this variety is often characterized by having common control exercised by the governing bodies of both the SO and its supported charity, and is relatively uncommon.
  • 46New Code Section 4966(d)(4)(A)(ii).
  • 47Act, Section 1232(c).
  • 48New Code Section 4967(a)(1).
  • 49Act, Section 1232(a)(2).
  • 50See new Code Section 4958(f)(7)(B).
  • 51See new Code Section 4958(f)(7)(C).
  • 52New Code Section 4967(a)(2). Apparently this secondary tax would not apply to a fund manager who did not actually know, but reasonably should have known, that the distribution would confer the taxable benefit.
  • 53New Code Section 4967(b).
  • 54New Code Section 4967(c)(1).
  • 55New Code Section 4967(c)(2).
  • 56Act, Section 1231(c).
  • 57Code Section 4958(f)(1)(D), added by Act, Section 1232(a)(1). See Code Section 4958(f)(7), added by Act, Section 1232(a)(2).
  • 58Code Section 4958(f)(1)(E), added by Act, Section 1232(a)(1). See Code Section 4958(f)(8), added by Act, Section 1232(a)(2).
  • 59Code Section 4958(f)(8)(B), added by Act, Section 1232(a)(2).
  • 60Act, Section 1232(b)(1), adding new Code Section 4958(c)(2).
  • 61New Code Section 4958(c)(2)(A).
  • 62New Code Sectoin 4958(c)(2)(B).
  • 63Code Section 4958(f)(6), as amended by Act, Section 1232(b)(2).
  • 64Act, Section 1232(c).
  • 65Code Section 4943(c).
  • 66Code Section 4943(2)(C).
  • 67Code Section 4943(e)(1), added by Act, Section 1233(a).
  • 68Code Section 4943(e)(2), added by Act, Section 1233(a).
  • 69Act, Section 1233(a).
  • 70Act, Section 1233(b).
  • 71Code Section 170(f)(18)(A)(i), added by Act, Section 1234(a).
  • 72Code Section 170(f)(18)(A)(ii), added by Act, Section 1234(a).
  • 73Code Section 170(f)(18)(B).
  • 74Code Section 2055(e)(5), added by Act, Section 1234(b).
  • 75Code Section 2522(c)(5), added by Act, Section 1234(c).
  • 76Act, Section 1234(d).
  • 77Code Section 6033(k), added by Act, Section 1235(a).
  • 78Act, Section 1235(a)(2).
  • 79Code Section 508(f), added by Act, Section 1235(b).
  • 80Act, Section 1235(b)(2).

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