It’s been nearly a year since Proposed Treasury Regulations REG-142338-07 were released, public comments were collected, and a hearing was held on the matter of excise taxes on taxable distributions made by a sponsoring organization from a donor advised fund (DAF). We haven’t heard much about this matter since the hearing was held on May 7, 2024, but this might be a good time to re-visit the scope of these proposed regulations and others that could be on the horizon.

Background

Proposed Treasury Regulations REG-142338-07 address excise taxes on taxable distributions made by a sponsoring organization from a donor advised fund (DAF), and on the agreement of certain fund managers to the making of such distributions under IRC Section 4966. Normally, distributions from Donor Advised Funds are not taxable, but under certain circumstances some distributions could be subject to excise tax.

A total of 235 public responses were received during the public comment period which expired on April 5, 2024. A great number of those responses were submitted by community foundations and other philanthropy advocacy organizations. The Community Foundation Awareness Initiative submitted a detailed response that outlined their concerns. It included several statements from community foundations around the U.S. that shared personal stories of the incredible generosity shared by donors through their DAFs. The Council on Foundations also submitted a written response, which was endorsed by dozens of other foundations from coast to coast. It carefully detailed potential concerns and recommended changes that would better serve the charitable community. The Venn Foundation submitted a response that outlines their unique position as a DAF sponsor that operates exclusively in the space of Program Related Investments – which could be significantly affected by these proposed regulations.

A bi-partisan group of members of congress wrote a letter to the Treasury advising caution when enacting these rules and requesting it works in collaboration with DAF providers to create guidance and rules that are not overreaching or create unwanted consequences.

Proposed Regulations of Note

The proposed regulations outline a number of things and I’d like to highlight three that are of particular note.

I. The Definition of Donor Advised Fund would be expanded to include funds that:

1. Are “separately identified” by reference to contributions from one or more donors, and;
2. Where donors or donor-advisors have “advisory privileges”, including a greatly expanded definition of that term.
   • Donors allowed to make recommendations regarding distributions or investments;
   • A written agreement between sponsor and donor or donor advisor states they have advisory privileges;
   • Documents or marketing materials indicate the donor of donor advisor may provide advice on distributions or investments;
   • Sponsor solicits advice from donor or donor-advisor;
   • Service on a committee that advises on distributions or investments. (some limited exceptions)  

II. The Definition of Donor and Donor-Advisor would be expanded to include:

1. Any person or entity that contributes to a fund (excluding public charities and governmental entities).
2. Anyone appointed or designated by a donor to have advisory privileges over distributions or investments.

These new definitions of DAF, Donor, and Donor-Advisor could cause giving techniques previously not included to be classified as DAFs – including arrangements at all types of charities – not just DAF sponsors, such as:

• Collaborative Funds
• Field of Interest Funds
• Agency Endowments
• Designated Funds
• Fiscal Sponsorships

III. The Definition of Taxable Distribution would be expanded to include:

Excise taxes on organizations and/or on fund managers would now apply to any distribution to a natural person for non-charitable purposes. (some exceptions for scholarship funds and disaster relief funds would apply).

This expanded definition could prevent legitimate fund expenses, such as those paid to realtors, attorneys, or other professionals who provide services relating to one particular fund or group of funds. 

This expanded definition could also apply to Program Related Investments that impose a 0% interest rate. These are currently categorized as investments and not distributions. 

This expanded definition would apply to investment advisors who are recommended by the donor and separately hired by the DAF sponsor to manage investments in that donor’s fund. 

Additional Proposed Regulations Expected

Further proposed regulations on the following areas are expected, but no firm timetable has been given.

• Under Section 4967: Taxes on Prohibited Benefits
• Under Section 4958: Taxes on Excess Benefit Transactions
• Guidance regarding public support computation for distributions from DAFs. 

It is important to remember that these regulations are proposed. They are not current law. One of the most beautiful things about our uniquely American system of government is our rights as individuals to participate in the creation of new laws. Make your voice heard. Reach out to your representatives to share your thoughts on these proposed laws and others before us at this time.