On December 4, 2017, the IRS released Notice 2017-73 , which describes proposed guidance for donor-advised funds (DAFs) and their sponsoring organizations.
The proposed regulations would establish the following rules for the scenarios listed below.
Payments from a DAF Enabling a Donor to Attend a Charity Event
The IRS seeks to clarify that distributions from a DAF that enable a donor or advisor to attend another charity’s fundraising event would result in a more than incidental benefit for the donor under Internal Revenue Code (IRC) Section 4967, even if the donor pays the nondeductible portion of the cost of the ticket.
This would result in an excise tax on any donor or advisor who advises the distribution as well as any individual who received the benefit of the payment from the DAF. A separate excise tax would also be paid by fund managers of the sponsoring organization making the distribution if those individuals knew it would confer a prohibited benefit.
Distributions from a DAF to Fulfill a Charitable Pledge Made by a Donor
Under the proposed guidance, distributions from a DAF to a charity wouldn’t be considered to result in a more than incidental benefit to a donor or advisor under IRC Section 4967 if the donor or 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.
- No donor or advisor receives any other benefit that’s more than incidental on account of the DAF distribution, either directly or indirectly.
- The donor or advisor doesn’t attempt to claim a charitable contribution deduction with respect to the DAF distribution.
Preventing Attempts to Use a DAF to Avoid Public Support Limitations
The IRS is also considering changes to the public support computation for publicly supported charities described in Section 170(b)(1)(A)(vi) to treat a distribution from a DAF as an indirect contribution from the donor or advisor of the DAF, rather than as a contribution from the DAF’s sponsoring organization.
The change would curtail perceived abuses by donors and recipient charities, which seek to use DAF sponsoring organizations as intermediaries for contributions, which wouldn’t be subject to the 2% public support limitation.
The proposed changes would provide that:
- All anonymous contributions received—including a DAF distribution for which the sponsoring organization fails to identify the donor that funded the DAF—would be considered as being made by one person.
- Distributions from a DAF sponsoring organization would only be treated as public support without limitation if the sponsoring organization specifies the distribution isn’t from a DAF or states that no donor or donor advisor advised the distribution.
The IRS has requested comments on the proposed guidance above on or before March 5, 2018. It has also requested comments on use of DAFs by private foundations, suggesting the IRS may be considering further guidance in that area as well.
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If you’d like to learn more about how these proposed changes could impact your organization, contact your Moss Adams professional.