The exempt organization sector continues to await published guidance from IRS and Treasury on donor advised funds (DAFs), allocation of expenses in computing unrelated business taxable income, co-investing between private foundations and their disqualified persons, and other priorities indicated in the Priority Guidance Plan. Meanwhile, Congress and the courts have been busy with their own developments that affect exempt organizations. This article summarizes four recent developments from the legislative and judicial branches:
- The Accelerating Charitable Efforts (ACE) Act: Proposed legislation introduced to reform rules governing donor advised funds and private foundations.
- Americans for Prosperity v. Bonta, Attorney General of California: Supreme Court case evaluating California’s requirement that charities disclose the name and address of their donors to the state.
- Mayo Clinic v. United States: Eighth Circuit case evaluating the definition of “educational organizations.”
- Fumo v. Commissioner: Tax Court case defining “disqualified person” under section 4958.
Accelerating Charitable Efforts (ACE) Act
On June 9, 2021, Senators Angus King (D-N.Y.) and Chuck Grassley (R-Iowa) introduced the ACE Act (S. 1981), stating that its purpose is to “reform tax laws that cover charitable contributions, so that philanthropic funds are made available to working charities within a reasonable time period.” As proposed, the ACE Act would:
- Establish three types of DAFs
- Require a publicly supported public charity to aggregate contributions from all DAFs as contributions from a single donor, unless the original donor is specifically identified
- Prohibit a private foundation from claiming a qualifying distribution for amounts contributed to a DAF
- Preclude a private foundation from claiming a qualifying distribution for expenses paid to certain disqualified persons
- Exempt certain private foundations from the section 4940 excise tax on net investment income if it distributes at least 7% of its assets or is limited in duration to no more than 25 years
- If enacted as currently drafted, the ACE Act would be prospective and not affect funds currently held in DAFs.
Type |
Description |
Payout requirement |
Deduction timing |
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Qualified community foundation DAFs |
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Qualified DAFs |
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Other DAFs |
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Americans for Prosperity Foundation v. Bonta, Attorney General of California
On July 1, 2021, the Supreme Court of the United States (in a 6-3 decision) upheld a First Amendment challenge and invalidated California’s requirement that charities soliciting contributions in California must disclose the identities of its major donors to the Attorney General’s office. Although this information generally is required to be furnished to the IRS on Form 990, Schedule B, the instructions permit public charities to redact the personally identifiable information from any public disclosure copy. California’s law mandated that the charity provide the same information to the state as was provided to the federal government.
Mayo Clinic v. United States
On May 13, 2021, the Court of Appeals for the Eighth Circuit upheld, in part, Treasury regulations defining an educational institution and remanded the case to the lower court to evaluate whether Mayo Clinic’s primary purpose is educational. The Court enumerated three requirements for an organization to qualify as an “educational institution” under section 170(b)(1)(A)(ii):
- Be organized and operated exclusively for one or more exempt purposes,
- Be organized and operated exclusively for educational purposes, and
- Meet statutory criteria regarding faculty, curriculum, students, and place.
Fumo v. Commissioner
On May 17, 2021 the Tax Court held that an individual was a disqualified person under section 4958, even though he did not hold a position as an officer, director, or employee of the organization. The individual exercised “substantial influence” over the organization as a founder, significant fundraiser, and a person with authority over and significant participation in the organization’s decision making. The Court emphasized that an individual’s status as a disqualified person is governed by facts and circumstances and may include any person in a position to exercise substantial influence over the affairs of the organization.
