The Pension Protection Act of 2006 (PPA), which so radically redefined the rules for supporting organizations, also transformed the rules for donor-advised funds (DAFs). The PPA for the first time accords DAFs express recognition in the Internal Revenue Code, a tribute to the recent rapid success of DAFs as well as the charities and commercial firms that sponsor them. But DAFs are given this recognition merely so they can be subjected to new taxes and restrictions — 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 percent) on what are termed “prohibited benefits;”

  • the excise tax on “excess benefit transactions” is made expressly applicable to DAFs and their controlling charities, which the PPA 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; and

  • 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 is now under a cloud.

It's a lot to swallow. So let's break it into bite-size portions.

DAFS

While DAFs vary widely in their provisions and particulars, generally 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 DAF's income or principal, including what charities may ultimately receive distributions. Though they've been utilized since the 1930s1 and now hold billions in assets,2 DAFs have managed to accumulate very little law in these seven decades. The PPA certainly changes that. (See “Coping,” this page.)

DAFs have been considered in a handful of decisions and rulings.3 They're given some discussion in the Treasury Regulations.4 But, surprisingly, before Aug. 17, 2006, DAFs were not even mentioned in the Code. In fact, given this dearth of law, DAFs may be said to have been relatively untested, even aggressive, charitable vehicles. Yet, their use is widespread by community foundations and, more recently, by other charitable organizations, as well as commercial firms.

Among the many reasons for the DAF's great success was 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, the donor enjoys the highest deductibility thresholds for the contribution: 50 percent of adjusted gross income (AGI) for cash gifts, 30 percent for gifts of appreciated assets, with a five-year carryover of excess deductions. (This stands in sharp contrast to 30 percent for cash contributions to a private foundation, 20 percent 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 on which to bestow 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 makes 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 with charitable vehicles,6 their stunning success carries within it the seeds of the new restrictions and limitations later imposed. With DAFs, perhaps most provocative of scrutiny and reform was the fact that they 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 also avoided the protections against abuse that 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 surface in pronouncements from the Internal Revenue Service. Strongly worded warnings found their way into the IRS Exempt Organization Continued Professional Education (CPE) Texts.10 In the IRS CPE Text for Fiscal Year 2001, for example, the Service expressed concerns about whether the fact that in many DAFs, “distributions from donors may be triggered only 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 percent payout, similar to the requirement applicable to private foundations, should be applied to DAFs.

GAO REPORT

Ultimately, while Congress was considering the legislation that emerged as the PPA, the General Accounting Office (GAO) issued a report to the House Ways and Means Committee on DAFs.11 This report noted a number of abuses associated with DAFs. In one instance, the Tax Court found a DAF had been offering what the fund 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 that 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 likely would 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 GAO's difficulties in attempting to gather information and data about DAFs, 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: “Promoters, who are individuals or entities who facilitate abusive schemes, further complicate IRS's examination efforts.”18

The PPA often reflects the concerns raised in the report, in earlier IRS pronouncements and positions, and the solutions these materials proposed. Hence, these concerns provide a basis for understanding what might otherwise be fairly opaque provisions of the PPA.

DEDUCTIBILITY STUDY

The PPA may imperil the very deductibility of future contributions to DAFs. Section 1226 provides that the Treasury Department 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 If the Treasury study concludes that contributions to DAFs are no longer deductible, that would certainly be within the province of the PPA provision. Perhaps, though, this study might draw a distinction here 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 Aug. 17, 2006 — but that, too, is at least a remote possibility. Of course, Congress might not reflect all of the study's recommendations in new legislation; then again, Congress might go farther than the study recommends. In any event, the PPA's “study” provision is not very encouraging for donors. Contributions to DAFs may well drop in coming months, as advisors come to understand the provision's unpleasant implications.

The study also considers 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 IRC Section 4942, under which at least 5 percent 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 that 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 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, the Treasury could well interpret this provision as a mandate to recommend changes that 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 Aug. 17, 2007.23 Until it is submitted and Congress acts on it, contributions to DAFs will remain under something of a cloud. 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 PPA, which is pointedly entitled, “Improved Accountability of Donor Advised Funds.” The first provision of this Part 2 adds two new IRC Sections: Section 4966 relates to taxes on a DAF's taxable distributions”and Section 4967 to taxes on a DAF's prohibited benefits.

  • Tax on “Taxable Distributions”: New IRC Section 4966 officially adds a number of 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 that:

    1. is separately identified by reference to contributions of one or more donors;

    2. is owned and controlled by a sponsoring organization (another new term); and

    3. 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 that 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) gives advice about individuals who are to receive grants for travel, study or other similar purposes, if:

    1. the advisory privileges are performed exclusively in the donor's capacity as a member of a committee appointed by the sponsoring organization;26

    2. no combination of donors or related persons directly or indirectly control this committee;27 and

    3. 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;28 the procedure being designed to ensure that all grants meet the requirements of IRC Section 4945(g).29 This section describes grants made by private foundations to individuals who are awarded on an objective and nondiscriminatory basis under a procedure approved in advance by the Service, and who meet other specified criteria.30

    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 that 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.31

    The new term “sponsoring organization” is defined as any organization described in IRC Section 170(c) (other than IRC Section 170(c)(1)) that is not a private foundation, and that maintains one or more donor-advised funds. The term “fund manager”32 is defined as an officer, director or trustee of the sponsoring organization (or a person with similar powers or responsibilities).33 The term “fund manager” 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.

    This new IRC section imposes a tax of 20 percent of the amount of each taxable distribution, which is to be paid by the DAF's sponsoring organization.34 In the familiar pattern of the private foundation excise tax provisions,35 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.”36 This tax of 5 percent 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 PPA provides for joint and several liability37 to help ensure collection. The maximum amount of tax imposed on fund managers with regard to any one taxable transaction is limited to $10,000.38

    New IRC 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 an IRC Section 170(c)(2)(B) purpose,39 or if the sponsoring organization does not exercise “expenditure responsibility” as to the distribution, in accordance with IRC Section 4945(h).40 “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.41 The term “taxable expenditure” does not include a distribution from a DAF — to any organization described in IRC Section 170(b)(1)(A), other than a “disqualified supporting organization” to the DAF's own sponsoring organization; or to any other DAF.42

    A “disqualified supporting organization,” in turn, is defined as any Type III supporting organization (other than a “functionally integrated” Type III supporting organization).43 Hence, it now is crucial for a DAF to determine the precise nature of its intended grant recipients to avoid the new IRC Section 4966 tax. Briefly stated, a Type III supporting organization (SO) is an IRC Section 509(a)(3) organization that 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. The PPA renames these “activities” Type III SOs as “functionally integrated” Type III SOs — and this variety is exempt from the definition of “disqualified supporting organizations” under new IRC Section 4966(d)(4)(A)(i).44 However, Type III SOs have long been permitted to vary their operations from year to year from grantmaking 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? This is not clear from the PPA, and a further complication is that IRS letters of determination that 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. Of course, this is a more conservative approach than the PPA calls for.

    Grant-making Type III SOs are not the only types of SOs that fall within the new IRC Section 4966(d)(4) disqualified supporting organization category. Type I SOs45 and Type II SOs46 also do, if 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.47

    The new IRC Section 4966 tax applies to taxable years beginning after Aug. 17, 2006.48

  • Tax on “Prohibited Benefits”: New IRC 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 that results in a direct or indirect benefit to a noncharity that is more than an incidental benefit. This new tax is imposed at the rate of 125 percent 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.49 The category of persons subject to the tax are the persons described in IRC Section 4958(f)(7), a new subsection of the excess benefit transaction provisions that the PPA also added.50 The category consists of persons described in new IRC 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,51 and entities that are 35-percent controlled entities with regard to the advising donors.52

    A lesser tax of 10 percent 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.53 No tax is to be imposed under this new provision54 if a tax has been imposed on the benefit distribution under IRC Section 4958, the “excess benefit transaction” provision. Joint-and-several liability is applied to the advising donor and related parties, as well as to the fund managers who agreed to the distribution.55 The tax imposed on any one distribution upon fund managers is limited to $10,000.56 But there is no equivalent limit for the advising donor category.

    This new tax applies in taxable years beginning after Aug. 17, 2006.57

    Note that new IRC 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 that is more than an incidental benefit. While this might be construed as a drafting oversight, it's probable that the danger category was intentionally left vaguely defined. Presumably, the purely psychological 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, which would defeat other goals of the new legislation.

  • Application of excess benefit transactions tax to DAFs: PPA Section 1232 extends the IRC Section 4958 tax on excess benefit transactions” expressly to DAFs. Two new subsections are added to the IRC 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.58 The second new subsection adds the category of investment advisors, their family members, and 35-percent controlled entities.59 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.60

    IRC Section 4958(c) also is amended to add “Special Rules for Donor Advised Funds.”61 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.62 Similarly, the term “excess benefit” is defined to include the amount of a grant, loan, compensation or other similar payment.63

    IRC 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.64 Despite the relative lack of clarity of the drafting (the term “repaid” in the amended language has no referent in the older language in IRC 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 that is repaid.

    These new DAF excess benefit transaction provisions apply to transactions occurring after Aug. 17, 2006.65

  • Application of excess business holdings tax to DAFs: IRC Section 4943 imposes an excise tax on the excess business holdings of a private foundation. To summarize: a private foundation's ownership interest in a business enterprise that, when added to the holdings in an enterprise owned by disqualified persons, exceed 20 percent of the ownership of the enterprise, constitute excess business holdings.66 A de minimis safe harbor is recognized for a private foundation's holdings of up to 2 percent of the enterprise.67

    The PPA amends IRC Section 4943 to treat DAFs as private foundations for purposes of the tax on excess business holdings. Consequently, DAFs now must determine whether their assets include excess business holdings,68 and if so, must divest these holdings down to permissible levels. In applying IRC 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.69 Some relief from the severity of this extension of the tax on “excess business holdings” is afforded by the provisions relating to the five-year period to dispose of certain holdings, under IRC Section 4943(c).70

    These changes apply to taxable years beginning after Aug. 17, 2006.71

  • Charitable deductions for contributions to DAFs: Anticipating the Treasury's deductibility study, PPA Section 1234 adds new restrictions and limitations on the deductibility of contributions to DAFs under the income, gift and estate tax provisions. For income tax purposes, IRC Section 170(f) is amended to add new IRC Section 170(f)(18), under which deductions for contributions to DAFs are allowed only if certain conditions are met:

    1. The DAF's sponsoring organization must not be a type of organization described in IRC Sections 170(c)(3), (4), or (5).72 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.

    2. The DAF's sponsoring organization must not be a grant-making Type III SO (but may be an “activities,” or “functionally integrated” SO).73

    3. In addition, the taxpayer seeking the deduction must obtain a contemporaneous written acknowledgment from the sponsoring organization that has exclusive legal control over the assets contributed to the DAF.74

    Similar new changes are made to the estate tax charitable deduction provisions,75 and to the gift tax charitable deduction provisions.76

    These changes to the deductibility of contributions to DAFs apply to contributions made after 180 days following Aug. 17, 2006.77

  • Returns and applications of sponsoring organizations: The PPA amends IRC 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.78

These changes apply to returns filed for taxable years beginning after Aug. 17, 2006.79 Presumably, the Service will revise Form 990 before 2007.

Finally, as to applications filed for recognition of tax-exempt status of sponsoring organizations, such organizations now are required to give notice to the Treasury (in the manner that the Treasury has provided) as to whether the organization maintains or intends to maintain DAFs, and the manner in which the organization plans to operate the DAFs.80

These changes apply to organizations applying for tax-exempt status after Aug. 17, 2006.81 Form 1023 will be revised to request this additional information.

Endnotes

  1. “Tax-Exempt Organizations: Collecting More Data on Donor-Advised Funds and Supporting Organizations Could Help Address Compliance Challenges,” United States Government Accountability Office Report to the Chairman, Committee on Ways and Means, House of Representatives (July 2006), p. 6 (GAO Report).
  2. GAO Report, at p. 1.
  3. See, for example, Fund for Anonymous Gifts v. Internal Revenue Service, 194 F.3d 173 (DC Cir. 1999); Private Letter Ruling 200037053 General Counsel Memoranda 39875.
  4. See, for example, Treasury Regulations Section 1.170A-9(e)(11).
  5. See Internal Revenue Code Section 170.
  6. For example, charitable remainder trusts (CRTs) and, more recently, supporting organizations (SOs), come to mind as having fallen within this unfelicitous category.
  7. See IRC Section 170(b)(1)(A)(iv).
  8. For a good discussion of these and other DAF concerns, see Bruce R. Hopkins, The Law of Tax-Exempt Organizations, John Wiley & Sons (8th ed. 2003), at pp. 307-17.
  9. See IRC Section 501(c)(3).
  10. See, for example, IRS Exempt Organizations Continuing Professional Education (CPE) Text for Fiscal Year (FY) 2000,
  11. Part P, 2C; IRS Exempt Organization CPE Text for FY 2001, Topic G(3), at pp. 143-44.
  12. GAO Report.
  13. GAO Report, at p. 26.
  14. GAO Report, at p. 27.
  15. GAO Report, at pp. 27-28.
  16. GAO Report, at p. 35.
  17. GAO Report, at p. 1.
  18. GAO Report, at p. 1.
  19. GAO Report, at p. 1.
  20. PPA, Section 1226(a)(1).
  21. PPA, Section 1226(a)(2).
  22. See IRC Section 4942(e).
  23. PPA Section 1226(a)(3).
  24. PPA Section 1226(b).
  25. New: IRC Section 4966(d)(2)(A).
  26. New: IRC Section 4966(d)(2)(B)(i).
  27. Presumably in the case of a sponsoring organization organized as a charitable trust rather than as a nonprofit corporation, it is the trustee or trustees that are to approve of this procedure.
  28. New: IRC Section 4966(d)(2)(B)(ii).
  29. Under IRC Section 4945(g), these grant making procedures are 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 IRC Code Section 170(b)(1)(A)(ii), a prize or award subject to IRC Code Section 74(b) if the recipient is selected from the general public or a gr ant 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.
  30. New: IRC Section 4966(d)(2)(C).
  31. New: IRC Section 4966(d)(1).
  32. New: IRC Section 4966(d)(3)(A).
  33. New: IRC Section 4966(d)(3)(B).
  34. New: IRC Section 4966(a)(1).
  35. See IRC Sections 4941-4945.
  36. New: IRC Section 4966(a)(2).
  37. New: IRC Section 4966(b)(1).
  38. New: IRC Section 4966(b)(2).
  39. IRC 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.”
  40. New: IRC Section 4966(c)(1).
  41. IRC Section 4945(h).
  42. New: IRC Section 4966(c)(2).
  43. New: IRC Section 4966(d)(4)(A)(i).
  44. For a discussion of these and other aspects of the treatment of supporting organizations under the PPA, see Gerald B. Treacy, Jr., “What's Left of SOs?” Trusts & Estates (October 2006), pp. 28.
  45. A Type I SO is one that 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.
  46. A Type II SO is one that 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; it is relatively uncommon.
  47. New: IRC Section 4966(d)(4)(A)(ii).
  48. PPA, Section 1232(c).
  49. New: IRC Code Section 4967(a)(1).
  50. Act, Section 1232(a)(2).
  51. New: IRC Code Section 4958(f)(7)(B).
  52. New: IRC Code Section 4958(f)(7)(C).
  53. New: IRC 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.
  54. New: IRC Code Section 4967(b).
  55. New: IRC Code Section 4967(c)(1).
  56. New: IRC Code Section 4967(c)(2).
  57. Act, Section 1231(c).
  58. IRC Section 4958(f)(1)(D), added by PPA Section 1232(a)(1). See IRC Section 4958(f)(7), added by PPA Section 1232(a)(2).
  59. IRC Section 4958(f)(1)(E), added by PPA Section 1232(a)(1). See IRC Section 4958(f)(8), added by PPA Section 1232(a)(2).
  60. IRC Section 4958(f)(8)(B), added by PPA Section 1232(a)(2).
  61. PPA Section 1232(b)(1), adding new IRC Section 4958(c)(2).
  62. New: IRC Section 4958(c)(2)(A).
  63. New: IRC Section 4958(c)(2)(B).
  64. IRC Section 4958(f)(6), as amended by PPA Section 1232(b)(2).
  65. PPA Section 1232(c).
  66. IRC Code Section 4943(c).
  67. IRC Code Section 4943(2)(C).
  68. IRC Code Section 4943(e)(1), added by PPA, Section 1233(a).
  69. IRC Code Section 4943(e)(2), added by PPA, Section 1233(a).
  70. PPA Section 1233(a).
  71. PPA Section 1233(b).
  72. IRC Code Section 170(f)(18)(A)(i), added by PPA Section 1234(a).
  73. IRC Section 170(f)(18)(A)(ii), added by PPA Section 1234(a).
  74. IRC Section 170(f)(18)(B).
  75. IRC Section 2055(e)(5), added by PPA Section 1234(b).
  76. IRC Section 2522(c)(5), added by PPA Section 1234(c).
  77. PPA, Section 1234(d).
  78. IRC Section 6033(k), added by PPA Section 1235 (a).
  79. PPA, Section 1235(a)(2).
  80. IRC Section 508(f), added by PPA Section 1235(b).
  81. PPA Section 1235(b)(2).

COPING

This should be your immediate response to the sweeping changes imposed on donor-advised funds by the Pension Protection Act

The thousands of donor-advised funds (DAFs) in the nation must consider these eight steps at once. And donors who give to DAFs should ask what's being done.

Until the Treasury study proscribed by the Pension Protection Act is presented on Aug. 17, 2007:

  1. All DAFs should begin making annual distributions of at least 5 percent of the value of their assets. It's unclear whether such payouts ultimately will be mandated. But it's safer for DAFs to embrace this minimum payout requirement now, as a temporary, defensive move.

  2. It also would be prudent for DAFs to immediately limit donor's advice on distribution matters, as opposed to investments.

  3. As for the cloud on deductibility created by the impending 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.

    Regardless of the study, DAFs and their sponsoring organizations should promptly take these actions:

  4. Adopt policies to ensure they handle distributions in such a manner that will avoid triggering the new tax on “taxable distributions.”

  5. Strive to eliminate the incidence of anything that 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.”)

  6. Review all DAFs' assets quickly to determine whether they have “excess business holdings,” and if so, divest these holdings.

  7. Do not make DAF grants to grant-making Type III supporting oranizations; DAFs and their sponsoring organizations will need to adopt a protocol to enable them to identify the precise nature of exemption of grant candidates.

  8. Conform annual returns and applications for new sponsoring organizations fully with the PPA's requirements, even if the Service is not able to develop new forms within the deadlines imposed by the PPA.
    — Gerald B. Treacy, Jr.