IRS issues guidance for certain distributions from donor advised funds
The comment period is open until March 5, 2018
INSIGHT ARTICLE |
In Notice 2017-73, the IRS describes approaches that it and the U.S. Department of the Treasury (Treasury Department) are considering to address in future proposed regulations for donor advised funds (DAFs).
Proposed regulations are forthcoming
In what has been long anticipated, the Treasury Department and the IRS are finally considering developing proposed regulations under section 4967 of the Internal Revenue Code that would, if finalized, provide that:
- certain distributions from a DAF that pay for the purchase of tickets that enable a donor, donor advisor, or related person under section 4958(f)(7), to attend or participate in a charity-sponsored event result is a more than incidental benefit to such person under section 4967; and,
- certain distributions from a DAF that the distributee charity treats as fulfilling a pledge made by a donor, donor advisor, or related person, does not result in a more than incidental benefit under section 4967 if certain requirements are met.
In addition, in another long anticipated move, the Treasury Department and the IRS are considering developing proposed regulations that would change the public support computation for organizations described in sections 170(b)(1)(A)(vi) and 509(a)(1) and in section 509(a)(2) to prevent the use of DAFs to circumvent the excise tax rules applicable to private foundations under Chapter 42 of the Internal Revenue Code.
Tickets and paying any ticket costs
The Treasury Department and the IRS currently agree that the relief of the donor/advisor’s obligation to pay the full price of a ticket to a charity-sponsored event can be considered a direct benefit to the donor/advisor that is more than incidental. Therefore, proposed regulations under section 4967 would, if finalized, provide that a distribution from a DAF pursuant to the advice of a donor/advisor that subsidizes the donor/advisor’s attendance or participation in a charity-sponsored event confers on the donor/advisor a more than incidental benefit under section 4967.
The Treasury Department and the IRS do not currently agree that, for purposes of section 4967, a distribution made by a sponsoring organization from a DAF to a charity upon advice of a donor/advisor should be analyzed the same as a hypothetical, direct contribution by the donor/advisor to the charity. A donor/advisor who wishes to receive goods or services (such as tickets to an event) offered by a charity in exchange for a contribution of a specified amount can make the contribution directly, without the involvement of a DAF.
The Treasury Department and the IRS recognize that a similar issue arises if a sponsoring organization makes a distribution from a DAF to a charity to pay, on behalf of a donor/advisor, the deductible portion of a membership fee charged by the charity, and the donor/advisor separately pays the nondeductible portion of the membership fee. Therefore, the Treasury Department and the IRS anticipate that the same analysis would apply to a case where the donor/advisor receives these types of membership benefits, so that the sponsoring organization cannot pay the deductible portion of the membership fee without conferring more than an incidental benefit on the donor/advisor.
Donor pledges and using the DAF to honor such a pledge
The Treasury Department and the IRS currently agree with prior received public comments which suggested that it is difficult for sponsoring organizations to differentiate between a legally enforceable pledge by an individual to a third-party charity and a mere expression of charitable intent. The Treasury Department and the IRS are of the view that, in the context of DAFs, the determination of whether an individual’s charitable pledge is legally binding is best left to the distributee charity, which has knowledge of the facts surrounding the pledge.
Accordingly, to facilitate distributions from DAFs to charities, the Treasury Department and the IRS are considering proposed regulations under section 4967 that would, if finalized, provide that distributions from a DAF to a charity will not be considered to result in a more than incidental benefit to a donor/advisor under section 4967 merely because the donor/advisor has made a charitable pledge to the same charity (regardless of whether the charity treats the distribution as satisfying the pledge), provided that the sponsoring organization makes no reference to the existence of any individual’s pledge when making the DAF distribution.
Specifically, it is anticipated that under this approach a distribution from a DAF to a charity to which a donor/advisor has made a charitable pledge (whether or not enforceable under local law) will not be considered to result in a more than incidental benefit to the donor/advisor if the following requirements are satisfied:
- the sponsoring organization makes no reference to the existence of a charitable pledge when making the DAF distribution;
- no donor/advisor receives, directly or indirectly, any other benefit that is more than incidental (as discussed in this notice and as further defined in future proposed regulations) on account of the DAF distribution; and
- a donor/advisor does not attempt to claim a charitable contribution deduction under section 170(a) with respect to the DAF distribution, even if the distributee charity erroneously sends the donor/advisor a written acknowledgment in accordance with section 170(f)(8) with respect to the DAF distribution.
For example, assume that charity Z, an organization described in sections 501(c)(3) and 170(b)(1)(A)(vi), holds an annual fundraising drive, and in response to the annual fundraising solicitation, individual B promises to contribute $1,000x to charity Z. Individual B has advisory privileges with respect to a DAF and advises that the sponsoring organization distribute $1,000x from the DAF to charity Z. The sponsoring organization makes the advised distribution. Assume further that in its transmittal letter to charity Z, the sponsoring organization identifies individual B as the individual who advised the distribution, but makes no reference to a charitable pledge by individual B or any other person. Charity Z chooses to treat the sponsoring organization’s distribution as satisfying individual B’s pledge. Charity Z also publicly recognizes individual B for individual B’s role in facilitating the distribution from the sponsoring organization, but charity Z provides no other benefit to individual B. Individual B does not attempt to claim a section 170 deduction with respect to the distribution. Under these facts, the Treasury Department and the IRS are currently of the view that the DAF distribution does not result in a more than incidental benefit to individual B under section 4967 merely because charity Z treats the distribution as satisfying individual B’s pledge.
Calculation of public support
In light of the potential for abuse, the Treasury Department and the IRS are considering treating, solely for purposes of determining whether the distributee charity qualifies as publicly supported, a distribution from a DAF as an indirect contribution from the donor (or donors) that funded the DAF rather than as a contribution from the sponsoring organization. Such treatment would better reflect the degree to which the distributee charity receives broad support from a representative number of persons.
The Treasury Department and the IRS are considering proposing changes to the regulations to prevent the use of DAFs to circumvent the private foundation rules and excise taxes imposed by the Internal Revenue Code by advising distributions from a DAF to a charity. It is currently anticipated that any proposed changes to these regulations would provide that a donee organization, for purposes of determining its amount of public support, must treat:
- a sponsoring organization’s distribution from a DAF as coming from the donor (or donors) that funded the DAF rather than from the sponsoring organization;
- all anonymous contributions received (including a DAF distribution for which the sponsoring organization fails to identify the donor that funded the DAF) as being made by one person; and
- distributions from a sponsoring organization as public support without limitation only if the sponsoring organization specifies that the distribution is not from a DAF or states that no donor or donor advisor advised the distribution.
The Treasury Department and the IRS recognize that a donee organization may need to obtain additional information from the sponsoring organization in order to determine its amount of public support. However, the Treasury Department and the IRS note that this additional information would only be needed if the donee organization intends to treat a distribution from a sponsoring organization as public support.
The Treasury Department and IRS have stated that taxpayers may rely on the rules described above in Notice 2017-73 until future guidance is issued.
Notice 2017-73 is the just the beginning to the highly-anticipated proposed regulations under section 4967 related to DAFs and distributions from such accounts. By providing the general public with this guidance, quite a bit of vagueness has been removed from an area that is often met with uncertainty and lack of direct guidance.