In Notice 2017-73, issued by the IRS on December 4, (the “Notice”), the IRS announced how it expects to address proposed regulations on donor advised funds (“DAFs”). This is not the first time the IRS has issued interim guidance requesting comments on proposed DAF rules. The Notice draws on earlier requests for comment, dating back to 2006 when DAFs were officially introduced to the Internal Revenue Code. Because the proposals in the Notice impact donors, donor advisors, and the sponsoring organizations of DAFs, we wanted to highlight the three (proposed) rules on which it requests comment:
1. Certain distributions from a DAF that pay for the purchase of tickets that enable a donor, donor advisor, or related person (referred to as “Donor/Advisor” in the Notice) to attend or participate in a charity-sponsored event will result in a more than incidental benefit to such Donor/Advisor.
In other words, if an individual supports a charity event through that individual’s DAF and the charity in return gives the individual a ticket to the event – even if the ticket’s value is substantially less than the value of the gift – the individual might be penalized for receiving a return benefit.
2. Certain distributions from a DAF that the distributee charity treats as fulfilling a pledge made by a Donor/Advisor do not result in a more than incidental benefit if certain requirements are met.
If an individual personally makes a pledge to contribute to a charity, then fulfills the pledge through his/her DAF, this would be acceptable (as long as the sponsoring organization makes no reference to the existence of a charitable pledge when making the DAF distribution, and the donor/advisor does not receive any other direct or indirect return benefit).
3. In addition, the Treasury Department and the IRS are considering developing proposed regulations that would change the public support computation for publicly supported organizations to prevent the use of DAFs to circumvent the excise tax rules applicable to private foundations.
This proposed regulation, while not entirely unexpected from within the sector, is likely to have the most significant impact, and could materially affect the public support test for both U.S. public charities and for non-U.S. organizations who have/might receive an equivalency determination (EDs). Currently, a gift from a DAF is treated as a gift from the sponsoring public charity for purposes of public support. So, if a DAF is the exclusive funder of an organization, that organization will pass the public support test with 100% public charity support, despite the fact that the funding is indirectly coming from one individual (who made the recommendation through his/her DAF). See our blog post for more information on the public support computation. The IRS is proposing that, for public support purposes only, the beneficiary must “look through” the sponsoring organization and treat the gift from the DAF as a gift from the individual donor. For certain organizations, this could mean failing the public support test and therefore not qualifying as a public charity or an equivalent.
At the end of the Notice, the IRS asks additional questions regarding DAFs, about which it requests comment, without elaborating on their proposed application. If you feel that these changes may impact your operations, we suggest you consider submitting a comment. The IRS also specifies that taxpayers may rely on the rules described in the Notice until additional guidance is issued.
Feel free to reach out to us if you have any questions.
All the best,
Image by Brian Turner, CreativeCommons license