IRS Seeking Comments on Donor-Advised Funds
(Feb. 26, 2007) The Internal Revenue Service (IRS) is undertaking a study of the organization and operation of donor-advised funds and is requesting comments from the public.
The recently enacted Pension Protection Act, which included the IRA rollover provision, mandated that the agency look at a number of issues related to donor-advised funds, including:
- Whether donor-advised funds should be required to distribute for a charitable purpose a specified amount annually, in order to ensure that the fund is operating in a charitable fashion consistent with its tax-exempt status.
- Whether deductions allowed for income, gift or estates for charitable contributions to donor-advised funds are appropriate considering (a) how the assets are used (including the type, extent and timing of such use) and (b) if the assets are used for the benefit of the person making the contribution.
- Whether contributors to donor-advised funds should continue to have advisory rights and privileges related to the making of grants or the investment of assets.
Under a donor-advised fund, a contributor makes contributions to the fund, for which he or she can take a charitable deduction. The contributor can then advise the fund’s managers on how the money should be contributed. Fund managers do not have to follow the contributor’s advice, but in practice they often do.
The complete IRS announcement is available here, and a list of specific questions for which the agency is seeking comments is below. Comments are due to the IRS by April 9, 2007, and can be sent to:
Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, Washington, DC 20044, Attn: CC:PA:LPD:PR, Room 5203
Comments also can be emailed to Notice.Comments@irscounsel.treas.gov. All comments submitted will be available for public inspection.
Congress has becoming increasingly concerned about donor-advised funds and has tried to prevent the expansion of their use. Hurricane Katrina legislation, which offered enhanced tax incentive for contributions to help hurricane relief efforts, did not extend those provisions to gifts from donor-advised funds. In addition, the recent IRA rollover legislation prohibited gifts from individual retirement accounts to donor-advised funds.
Before the Pension Protection Act, donor-advised funds were barely regulated, and there was no definition of the funds in the Internal Revenue Code. However, the new act created several rules, including excise taxes for contributions that benefited the donor, fund adviser or related persons. The definition of donor-advised funds is now:
"A fund or account that is owned and controlled by a sponsoring organization, separately identified by reference to contributions of a donor or donors, and with respect to which the donor or a person appointed or designated by the donor (donor adviser) has or reasonably expects to have advisory privileges with respect to the distribution or investment of the assets in the fund. The term donor-advised fund does not include a fund or account (1) that makes distributions only to a single identified organization or governmental entity, or (2) with respect to which a donor advises a sponsoring organization regarding grants for travel, study or similar purposes, provided that certain requirements are met."
A sponsoring organization is defined as a Section 170(c) organization that is not a governmental organization or a private foundation and maintains one or more donor-advised funds.
A list of the specific questions that the IRS is asking is below. AFP members are encouraged to provide comments, and the AFP U.S. Government Relations Committee is planning on submitting comments as well.
1. What are the advantages and disadvantages of donor-advised funds and supporting organizations to the charitable sector, donors, sponsoring organizations and supported organizations, compared to private foundations and other charitable giving arrangements?
2. How should the amount and availability of a charitable contribution deduction for a transfer of assets to a donor-advised fund or a supporting organization, and the tax-exempt status or foundation classification of the donee, be determined if: (a) the transferred assets are paid to, or used for the benefit of, the donor or persons related to the donor (including, for example, salaries and other compensation arrangements, loans or any other personal benefits or rights)? (b) the donor has investment control over the transferred assets? (c) there is an expectation that the donor’s “advice” will be followed, or will be the sole or primary consideration, in determining distributions from, or investment of the assets in, the supporting organization or the donor-advised fund? (d) the donor or the donee has option rights (e.g., puts, calls or rights of first refusal) with respect to the transferred assets? (e) the transferred assets are appreciated real, personal or intangible property that is not readily convertible to cash?
3. What are the effects or the expected effects of the PPA provisions (including the §4958 excess benefit-transaction tax amendments applicable to donor-advised funds and supporting organizations) on the practices and behavior of donors, donor advised funds, sponsoring organizations, supporting organizations and supported organizations?
4. What would be appropriate payout requirements, and why, for: (a) donor-advised funds? (b) funds that are excepted from donor-advised fund treatment by statute or by the authority of the secretary, but for which the donor retains meaningful rights with respect to the investment or use of the transferred amounts? (c) supporting organizations? (d) any other types of charities?
5. What are the advantages and disadvantages of perpetual existence of donor-advised funds or supporting organizations?
6. What other types of charitable giving arrangements give rise to any of the above issues?