[Federal Register Volume 88, Number 218 (Tuesday, November 14, 2023)]
[Proposed Rules]
[Pages 77922-77941]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-24982]
-----------------------------------------------------------------------
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 53
[REG-142338-07]
RIN 1545-BI33
Taxes on Taxable Distributions From Donor Advised Funds Under
Section 4966
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Notice of proposed rulemaking.
-----------------------------------------------------------------------
SUMMARY: This document contains proposed regulations regarding 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. The proposed regulations would
provide guidance regarding DAFs and taxable distributions. The proposed
regulations generally would apply to certain organizations, including
community foundations and other charitable organizations, that maintain
one or more DAFs, and to other persons involved with the DAFs,
including donors, donor-advisors, related persons, and certain fund
managers.
DATES: Written or electronic comments and requests for a public hearing
must be received by January 16, 2024.
ADDRESSES: Commenters are strongly encouraged to submit public comments
electronically. Submit electronic submissions via the Federal
eRulemaking Portal at https://www.regulations.gov (indicate IRS and
REG-142338-07) by following the online instructions for submitting
comments. Requests for a public hearing must be submitted as prescribed
in the ``Comments and Requests for a Public Hearing'' section. Once
submitted to the Federal eRulemaking Portal, comments cannot be edited
or withdrawn. The Department of the Treasury (Treasury Department) and
the IRS will publish for public availability any comment received to
its public docket, whether submitted electronically or in hard copy.
Send paper submissions to: CC:PA:01:PR (REG-142338-07), Room 5203,
Internal Revenue Service, P.O. Box 7604, Ben Franklin Station,
Washington, DC 20044.
FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations,
Ward L. Thomas at (202) 317-5800 (not a toll-free number); concerning
submission of comments and requests for a public hearing, contact
Vivian Hayes by email at [email protected] (preferred) or by phone
at (202) 317-6901 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
I. Overview
Some charitable organizations (including community foundations)
establish accounts to which donors may contribute and thereafter
provide nonbinding advice or recommendations with regard to
distributions from the account or the investment of assets in the
account. Such accounts are commonly referred to as ``donor advised
funds'' or ``DAFs.'' Sections 1231-1235 of the Pension Protection Act
of 2006 (PPA), Public Law 109-280, 120 Stat. 780, 1094-1102 (August 17,
2006), enacted various amendments to the Internal Revenue Code (Code)
regarding DAFs. Among these, section 1232 of the PPA amended section
4958 of the Code to add special rules relating to excess benefit
transactions with DAFs; section 1231(b) of the PPA added section 4967
to the Code, which imposes an excise tax on prohibited benefits
resulting from distributions from DAFs; and section 1231(a) of the PPA
added section 4966 of the Code, which imposes excise taxes on taxable
distributions made by sponsoring organizations from a DAF, and on the
agreement of certain fund managers to the making of such distributions.
This notice of proposed rulemaking contains proposed amendments to 26
CFR part 53 (Foundation and Similar Excise Taxes) under section 4966
(proposed regulations).
II. Statutory Provisions
A. Section 4958
Section 4958 imposes an excise tax on any ``excess benefit
transaction,'' which is defined generally under section 4958(c)(1) as
any transaction in which an economic benefit is provided, the value of
which exceeds the value of any consideration received, by an applicable
tax-exempt organization (including a section 501(c)(3) sponsoring
organization of a DAF) directly or indirectly to or for the use of a
disqualified person with respect to a
[[Page 77923]]
transaction.\1\ This excise tax under section 4958 is paid by the
disqualified person with respect to the transaction. A separate excise
tax, paid by organization managers, is imposed on the participation of
any organization manager in the transaction, knowing that it is an
excess benefit transaction, unless such participation is not willful
and is due to reasonable cause.
---------------------------------------------------------------------------
\1\ For this purpose, a disqualified person is defined under
section 4958(f) as a person who was, at any time during the five-
year period ending on the date of the transaction, in a position to
exercise substantial influence over the affairs of the organization,
and certain related persons, with special rules for DAFs and section
509(a)(3) organizations.
---------------------------------------------------------------------------
Section 1232 of the PPA amended section 4958 to provide that, with
respect to any transaction that involves a DAF, a disqualified person
includes (1) any donor with respect to the DAF, (2) any donor-advisor
with respect to the DAF, and (3) any member of the family, or any 35-
percent controlled entity of a donor or donor-advisor or member of
their families with respect to the DAF, each, a ``related person,'' and
to provide that any grant, loan, compensation, or other similar payment
from the DAF to such disqualified person is an excess benefit
transaction. For purposes of this special rule for transactions
involving DAFs, the excess benefit includes the entire amount of the
grant, loan, compensation, or other similar payment. The PPA also
amended section 4958 to treat as a disqualified person with respect to
a transaction involving a sponsoring organization an investment advisor
(or a family member or a 35-percent controlled entity of such person).
B. Section 4966
1. DAFs
Section 4966(d)(2)(A) defines a ``DAF'' generally as a fund or
account (1) that is separately identified by reference to contributions
of a donor or donors, (2) that is owned and controlled by a sponsoring
organization, and (3) with respect to which a donor (or any person
appointed or designated by the donor, namely, a donor-advisor) has, or
reasonably expects to have, advisory privileges with respect to the
distribution or investment of amounts held in the fund or account by
reason of the donor's status as a donor.
Section 4966(d)(2)(B)(i) states that a DAF does not include a fund
or account that makes distributions only to a single identified
organization or governmental entity. Section 4966(d)(2)(B)(ii) states
that a DAF does not include a fund or account with respect to which a
donor or a donor-advisor provides advice regarding grants to
individuals for travel, study, or similar purposes if (1) the donor's,
or the donor-advisor's, advisory privileges are exercised exclusively
in the donor's or donor-advisor's capacity as a member of a committee
all the members of which are appointed by the sponsoring organization,
(2) no combination of donor(s), donor-advisor(s), or persons related to
such persons directly or indirectly control the committee, and (3) all
grants are awarded on an objective and nondiscriminatory basis pursuant
to a procedure approved in advance by the sponsoring organization's
board of directors, and the procedure is designed to ensure that the
grants meet the requirements of section 4945(g)(1), (2), or (3).
Section 4966(d)(2)(C) authorizes the Secretary of the Treasury or
her delegate (Secretary) to exempt a fund or account from treatment as
a DAF if it (1) is advised by a committee not directly or indirectly
controlled by the donor or any donor-advisor (and any related parties),
or (2) benefits a single identified charitable purpose.
2. Sponsoring Organizations
Section 4966(d)(1) defines a ``sponsoring organization'' as an
organization described in section 170(c) (including a foreign
organization that otherwise would be described in section 170(c)(2)),
other than a private foundation (as defined in section 509(a)) or a
governmental entity (as defined in section 170(c)(1)), that maintains
one or more DAFs.
3. Excise Tax on Taxable Distributions
Section 4966(a)(1) imposes a 20 percent excise tax on each taxable
distribution, payable by the sponsoring organization with respect to
the DAF. Section 4966(c)(1) defines a ``taxable distribution'' as
including any distribution from a DAF to any natural person. Section
4966(c)(1) also defines a taxable distribution as including a
distribution from a DAF to any other person if (1) the distribution is
for any purpose other than a purpose specified in section
170(c)(2)(B),\2\ or (2) the sponsoring organization does not exercise
expenditure responsibility with respect to the distribution in
accordance with section 4945(h).
---------------------------------------------------------------------------
\2\ Section 170(c)(2)(B) defines charitable contributions to
include contributions to certain organizations for the following
purposes: religious, charitable, scientific, literary, or
educational purposes, or to foster national or international amateur
sports competition (but only if no part of the organization's
activities involve the provision of athletic facilities or
equipment), or for the prevention of cruelty to children or animals.
---------------------------------------------------------------------------
Section 4966(c)(2) provides that a taxable distribution, however,
does not include a distribution from a DAF to (1) any organization
described in section 170(b)(1)(A) (other than a disqualified supporting
organization), (2) the sponsoring organization of such DAF, or (3) any
other DAF. Section 4966(d)(4) defines a ``disqualified supporting
organization'' as (1) a Type III supporting organization that is not
functionally integrated and (2) any other supporting organization if
the donor or any donor-advisor (and any related parties) with respect
to a DAF directly or indirectly controls a supported organization of
the supporting organization.
4. Excise Tax on Agreement of Fund Manager
Section 4966(a)(2) imposes a five percent excise tax on the
agreement of a fund manager to the making of a taxable distribution
knowing that it is a taxable distribution, payable by any fund manager
who agreed to the making of the distribution. Section 4966(d)(3)
defines a ``fund manager'' with respect to any sponsoring organization
as (1) an officer, director, or trustee of such sponsoring organization
(or an individual having powers or responsibilities similar to those of
officers, directors, or trustees of the sponsoring organization), and
(2) with respect to any act (or failure to act), the employees of the
sponsoring organization having authority or responsibility with respect
to each act (or failure to act).
Section 4966(b) provides that, if more than one fund manager is
liable under section 4966(a)(2), then all such persons are jointly and
severally liable with respect to the distribution; however, the maximum
amount of tax imposed by section 4966(a)(2) with respect to any one
taxable distribution is $10,000.
C. Section 4967
The PPA also added section 4967, which imposes an excise tax on the
advice that a donor, donor-advisor, or related person provides
regarding a distribution from a DAF that results in such person or any
other donor, donor-advisor, or related person receiving, directly or
indirectly, a more than incidental benefit. This excise tax is paid by
any donor, donor-advisor, or related person who advises the sponsoring
organization as to the distribution or who receives the prohibited
benefit. A separate excise tax, paid by the fund manager, is imposed on
the agreement of any fund manager of the sponsoring organization to the
making of the distribution,
[[Page 77924]]
knowing that it would confer a prohibited benefit. Section 4967(b)
provides that, with respect to any distribution, no tax can be imposed
under section 4967 if a tax has been imposed under section 4958.
III. Administrative Guidance
In December 2006, the Treasury Department and the IRS issued Notice
2006-109, 2006-2 C.B. 1121, to provide interim guidance on certain
requirements enacted by the PPA, including those that affect DAFs.\3\
Notice 2006-109 also requested comments regarding the notice and
suggestions for future guidance.
---------------------------------------------------------------------------
\3\ For example, section 5.01 of Notice 2006-109 excludes from
the definition of a DAF an employer-sponsored disaster relief fund
that meets certain requirements. To be excluded, the fund must: (1)
serve a single identified charitable purpose, which is to provide
relief from one or more qualified disasters within the meaning of
section 139(c)(1), (2), or (3); (2) serve a large or indefinite
class, i.e., a charitable class; (3) select recipients of grants
based on objective determinations of need; (4) select recipients of
grants using either an independent selection committee or adequate
substitute procedures to ensure that any benefit to the employer is
incidental and tenuous; (5) make no payment from the fund to or for
the benefit of any director, officer, or trustee of the sponsoring
organization of the fund or for the benefit of any member of the
fund's selection committee; and (6) maintain adequate records that
demonstrate the recipients' needs for the disaster relief
assistance.
---------------------------------------------------------------------------
In February 2007, the Treasury Department and the IRS issued Notice
2007-21, 2007-1 C.B. 611, requesting comments in connection with a
study conducted by the Treasury Department and the IRS on the
organization and operation of DAFs and supporting organizations, as
required by section 1226 of the PPA.
In December 2017, the Treasury Department and the IRS issued Notice
2017-73, 2017-51 I.R.B. 562, describing approaches being considered to
address certain issues regarding DAFs and requesting comments on those
approaches. In particular, Notice 2017-73 stated, among other things,
that the Treasury Department and the IRS are considering developing
proposed regulations under section 4967 that would, if finalized,
provide that (1) 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 in a more than incidental benefit to such person
under section 4967, and (2) certain distributions from a DAF that the
distributee charity treats as fulfilling a pledge made by a donor,
donor-advisor, or related person, do not result in a more than
incidental benefit under section 4967 if certain requirements are met.
In response to these three notices, the Treasury Department and the
IRS received 118 comments, 74 of which concerned DAFs and taxable
distributions.\4\ After consideration of the comments received, the
Treasury Department and the IRS are proposing these regulations
regarding the excise taxes payable by sponsoring organizations of DAFs
and fund managers on taxable distributions under section 4966. The
major areas of comment relating to section 4966 are discussed in the
Explanation of Provisions.
---------------------------------------------------------------------------
\4\ The Treasury Department and the IRS anticipate that the
other comments will be considered in the development of future
guidance under other Code sections.
---------------------------------------------------------------------------
Explanation of Provisions
1. Definition of Donor Advised Fund
In accordance with section 4966(d)(2)(A), the proposed regulations
would define a DAF generally as a fund or account (1) that is
separately identified by reference to contributions of a donor or
donors, (2) that is owned and controlled by a sponsoring organization,
and (3) with respect to which at least one donor or donor-advisor has,
or reasonably expects to have, advisory privileges with respect to the
distribution or investment of amounts held in such fund or account by
reason of the donor's status as a donor. Unless otherwise excepted, a
fund or account that meets all three prongs of the definition would be
a DAF.
A sponsoring organization is proposed to be defined in accordance
with section 4966(d)(1) as any organization that (1) is described in
section 170(c) (other than a governmental unit described in section
170(c)(1)), without the requirement under section 170(c)(2)(A) that it
be created or organized in the United States or in any possession
thereof, or under the law of the United States, any State, the District
of Columbia, or any possession of the United States; (2) is not a
private foundation; and (3) maintains one or more DAFs.
A. Separate Identification by Reference to Contributions of a Donor or
Donors
Section 4966(d)(2)(A)(i) states that a DAF must be separately
identified by reference to contributions of a donor or donors. In
general, the proposed regulations would provide that a fund or account
is separately identified by reference to contributions of a donor or
donors if the sponsoring organization maintains a formal record of
contributions to the fund or account relating to a donor or donors. A
formal record exists regardless of whether the sponsoring organization
commingles the assets attributed to the fund or account with other
assets of the sponsoring organization, as long as the sponsoring
organization tracks contributions of a donor or donors to the fund or
account. A contribution would be defined as any gift, bequest, or
similar payment or transfer, whether in cash or in-kind, to or for the
use of a sponsoring organization.
If the sponsoring organization does not maintain a formal record of
contributions to a fund or account, then whether a fund or account is
separately identified would be based on all the facts and
circumstances.
The proposed regulations would provide that facts and circumstances
that are relevant in determining that a fund or account is separately
identified by reference to contributions of a donor or donors include:
(1) the fund or account balance reflects items such as contributions,
dividends, interest, distributions, administrative expenses, and gains
and losses (realized or unrealized); (2) the fund or account is named
after one or more donors, donor-advisors, or related persons (as
defined by proposed Sec. 53.4966-1(j)); \5\ (3) the sponsoring
organization refers to the fund or account as a DAF; (4) the sponsoring
organization has an agreement or understanding with one or more donors
or donor-advisors that such fund or account is a DAF; (5) one or more
donors or donor-advisors regularly receive a fund or account statement
from the sponsoring organization; and (6) the sponsoring organization
generally solicits advice from the donor(s) or donor-advisor(s) before
making distributions from the fund or account. The Treasury Department
and the IRS request comments on these and any additional factors that
would be relevant in determining whether a fund or account is
separately identified by reference to contributions of a donor or
donors.
---------------------------------------------------------------------------
\5\ Section 53.4966-1(j) of the proposed regulations defines
``related person,'' by reference to section 4958(f)(7)(B) and (C),
as any family member (as defined in section 4958(f)(4)) or any 35-
percent controlled entity (as defined in section 4958(f)(3) with
appropriate substituted language).
---------------------------------------------------------------------------
Several commenters asked that funds or accounts funded by certain
types of organizations, such as public charities, private foundations,
or governmental entities, be excluded from the definition of a DAF. The
proposed regulations define a donor generally as any person described
in section 7701(a)(1) that
[[Page 77925]]
contributes to a fund or account of a sponsoring organization. However,
the proposed regulations would explicitly exclude from the definition
of donor (1) any public charity described in section 509(a)(1), (2), or
(3) (other than a disqualified supporting organization) and (2) any
governmental unit described in section 170(c)(1). A fund or account
that is separately identified by reference to contributions solely from
either of these types of entities would not be treated as separately
identified by reference to contributions from a donor and thus would
not be a DAF.\6\ Because private foundations and disqualified
supporting organizations could use a DAF to circumvent the payout and
other requirements that are applicable to those organizations, the
proposed regulations would not exclude private foundations or
disqualified supporting organizations from the definition of donor.
---------------------------------------------------------------------------
\6\ Because public charities and governmental units are not
treated as donors, it also follows that if only they have advisory
privileges with respect to a fund, the fund would not be a DAF even
if there are other donors. See Sec. 53.4966-3(e)(4) (Example 4) of
these proposed regulations.
---------------------------------------------------------------------------
B. Advisory Privileges
Under section 4966(d)(2)(A)(iii), for a fund or account to
constitute a DAF, (1) at least one donor or donor-advisor must have, or
reasonably expect to have, advisory privileges with respect to the
distribution or investment of amounts held in such fund or account, and
(2) such advisory privileges must arise by reason of (in other words,
because of) the donor's status as a donor. The proposed regulations
generally would provide that the existence of such advisory privileges
depends on the facts and circumstances, including the conduct (and any
agreement or understanding) of both the donor(s) or donor-advisor(s)
and the sponsoring organization. A donor (or donor-advisor) may have,
or reasonably expect to have, advisory privileges even in the absence
of the actual provision of advice. Advisory privileges would include
those arising from service on an advisory committee. The proposed
regulations also would presume that advisory privileges of a donor or
donor-advisor arise by reason of the donor's status as a donor, except
where specifically provided otherwise.
Commenters recommended that, for advisory privileges to exist,
advice must include a specified amount and a named recipient.
Commenters also suggested that, in the absence of written evidence,
advisory privileges should not be inferred unless there are at least
three separate successive occasions where the sponsoring organization
accepts the donor's advice. Commenters further requested that a
sponsoring organization's proposal to distribute a certain amount to a
certain distributee, subject to the donor's approval, be viewed as the
donor's exercise of the advisory privilege only if the donor approves
the proposal.
The Treasury Department and the IRS believe that the commenters'
recommendations would define advisory privileges too narrowly. Instead,
the proposed regulations would provide that the presence of any of the
following four facts is sufficient to establish that a donor or donor-
advisor has advisory privileges by reason of the donor's status as a
donor, regardless of whether they are exercised: (1) the sponsoring
organization allows a donor or donor-advisor to provide nonbinding
recommendations regarding distributions from, or regarding the
investment of assets held in, a fund or account; (2) a written
agreement states that a donor or donor-advisor has advisory privileges;
(3) a written document or any marketing material of the sponsoring
organization made available to a donor or donor-advisor indicates that
a donor or donor-advisor may provide advice to the sponsoring
organization regarding the distribution or investment of amounts held
by a sponsoring organization (for example, a pre-approved list of
investment options or distributees that the sponsoring organization
provides to a donor or donor-advisor); or (4) the sponsoring
organization generally solicits advice from a donor or donor-advisor
regarding the distribution or investment of amounts held in a fund or
account.
However, the proposed regulations would also provide four special
rules relating to advisory privileges. First, if at least one donor or
donor-advisor has, or reasonably expects to have, advisory privileges
with respect to a fund or account or any portion of a fund or account,
then advisory privileges by reason of the donor's status as a donor
exist with respect to that fund or account even if there are multiple
donors to the fund or account.
Second, there would be special rules for advisory privileges
arising from service on an advisory committee, as discussed in section
1.D of this Explanation of Provisions of this preamble.
Third, advice provided solely in a person's capacity as an officer,
director, employee (or in a similar capacity) of a sponsoring
organization would not by itself give rise to advisory privileges by
reason of a donor's status as a donor. However, if, by reason of the
person's contribution to a fund or account, an officer, director, or
employee of the sponsoring organization is allowed to advise on how to
distribute or invest amounts in the fund or account, the person would
be considered to have advisory privileges by reason of the donor's
status as a donor with respect to that fund or account.
Lastly, unless the special rule for officers, directors, and
employees of a sponsoring organization applies, if a donor to a fund or
account is the sole person with advisory privileges with respect to a
fund or account, the advisory privileges would be deemed to be by
reason of the donor's status as a donor. This bright-line rule would
provide clarity and enhance administrability. The Treasury Department
and the IRS request comments regarding whether there are additional
circumstances in which application of the bright-line rule is not
warranted.
Commenters asked that guidance clarify that advisory privileges do
not include certain legally enforceable rights of the donor with
respect to a contribution. If a restriction is placed on a gift at the
time the gift is made and there is no provision for subsequent
discretion regarding the restriction, then the restriction should not
give rise to advisory privileges. For example, a donor's mere
earmarking of a donation (at the time of donation) for a particular
fund or program of the recipient charity, without more, does not create
an advisory privilege. Whether the terms of a gift agreement create a
DAF depends on the restrictions set forth in the agreement. The
Treasury Department and the IRS request comments on the circumstances
in which a gift agreement or advisory rights retained by a donor could
create a DAF.
C. Donor-Advisor
Consistent with section 4966(d)(2)(A)(iii), the proposed
regulations would define donor-advisor as a person appointed or
designated by a donor to have advisory privileges regarding the
distribution or investment of assets held in a fund or account of a
sponsoring organization. If a donor-advisor delegates any of the donor-
advisor's advisory privileges to another person, that person also would
be a donor-advisor. No particular form of appointment or designation
would be necessary under the proposed regulations.
A donor-advisor generally would include a person suggested or
recommended by a donor to have advisory privileges if the sponsoring
organization provides such privileges.
[[Page 77926]]
However, this rule would not apply if (1) the donor recommends an
investment advisor who is properly viewed as providing services to the
sponsoring organization as a whole, rather than providing services to
the DAF, as described in this section 1.C of this Explanation of
Provisions of this preamble, or (2) the donor recommends a person to
serve on a committee of the sponsoring organization that advises as to
distributions or investments of amounts in a fund or account if the
recommendation is based on objective criteria related to the expertise
of the member in the particular field of interest or purpose of the
fund or account, the committee consists of three or more individuals
and a majority of the committee is not recommended by the donor or
donor-advisor, and the recommended person is not a related person with
respect to the recommending donor or donor-advisor, as discussed in
section 1.D of this Explanation of Provisions of this preamble.
The proposed regulations include three special rules with respect
to donor-advisors. First, a person (other than a person or governmental
unit excepted from status as a donor) who establishes a fund or account
and advises as to the distribution or investment of amounts in that
fund or account would be treated as a donor-advisor with respect to
that fund or account, regardless of whether the person contributes to
the fund or account. For example, if a person establishes a memorial or
fundraising fund to which the person does not contribute, but does
provide advice regarding distributions from the fund, the person would
be considered a donor-advisor. The donors to the fund have implicitly
designated the advisor to have advisory privileges.
Second, an investment advisor described in section 4958(f)(8)(B)
\7\ that manages the investment of, or provides investment advice with
respect to, both assets maintained in a DAF and the personal assets of
a donor to that DAF (personal investment advisor) would be a donor-
advisor with respect to the DAF while serving in that dual capacity,
regardless of whether the donor appointed, designated, or recommended
the personal investment advisor. However, recognizing that a personal
investment advisor may more generally advise the sponsoring
organization, the proposed regulations would provide that a personal
investment advisor will not be considered a donor-advisor if the
personal investment advisor is properly viewed as providing services to
the sponsoring organization as a whole, rather than providing services
to the DAF. For example, if an investment advisor contracts with a
sponsoring organization to provide services to all of its 1,000 DAFs,
and the sponsoring organization reasonably charges the investment
advisor's fees uniformly to all of those DAFs, the investment advisor
would properly be viewed as providing services to the sponsoring
organization as a whole.
---------------------------------------------------------------------------
\7\ Section 4958(f)(8)(B) defines investment advisor, with
respect to any sponsoring organization, as any person (other than an
employee of such organization) compensated by the organization for
managing the investment of, or providing investment advice with
respect to, assets maintained in DAFs owned by the organization.
---------------------------------------------------------------------------
The Treasury Department and the IRS request comments on additional
circumstances that would indicate that a personal investment advisor is
properly viewed as providing services to the sponsoring organization as
a whole, rather than providing services to the DAF, as well as
additional circumstances in which a personal investment advisor should
not be considered a donor-advisor.
One commenter suggested that an investment advisor recommended by a
donor to the sponsoring organization should not be treated as a donor-
advisor if the investment advisor is regulated by State and Federal
agencies, because agency oversight makes it unlikely that the
investment advisor would manipulate the assets of the DAF for personal
gain. The commenter stated that an investment advisor that was
considered a donor-advisor could not receive compensation from a DAF
because that would be an excess benefit transaction under section
4958(c)(2).
While the commenter believes that it is unlikely that a regulated
investment advisor would manipulate the assets of the DAF for personal
gain, the Treasury Department and the IRS view the close relationship
between a donor and his or her personal investment advisor as giving
the donor influence over investment decisions with respect to assets
held in the DAF comparable to that of a donor-advisor. Moreover, the
Treasury Department and the IRS are concerned about potential conflicts
of interest. Specifically, sponsoring organizations may allow the
appointment of a donor's personal investment advisor as an advisor
regarding the investment of DAF funds in order to encourage investment
advisors to promote their clients' giving through a DAF, rather than
directly to a public charity (other than the sponsoring organization).
In fact, a counterincentive may be created for both donors and their
personal investment advisors to not advise distributions out of their
DAFs to operating charities. Another significant concern is that a more
than incidental benefit may occur if the investment advisor charges the
donor a reduced fee for managing the donor's personal assets because
the investment advisor also manages the assets the donor contributed to
the DAF.
The Treasury Department and the IRS agree that a personal
investment advisor that is considered a donor-advisor would be subject
to the excess benefit transaction rules of section 4958(c)(2) if he or
she received a grant, loan, compensation, or similar payment from the
DAF.
Third, advisory committee members recommended by a donor and
appointed by the sponsoring organization would be donor-advisors,
except as discussed in section 1.D of this Explanation of Provisions of
this preamble.
D. Advisory Committees
The Treasury Department and the IRS generally would regard service
on a committee of a sponsoring organization that advises as to
distributions from or investments of assets of a fund or account as a
form of advisory privilege with respect to that fund or account in
determining whether the fund is a DAF, even though the sponsoring
organization controls the selection of committee members consistent
with its ownership and control of the fund or account in accordance
with section 4966(d)(2)(A)(ii). Recognizing that a fund or account,
including a multiple-donor fund, as discussed in section 1.E of this
Explanation of Provisions of this preamble, may sometimes be advised by
an advisory committee that includes one or more donors, donor-advisors,
related persons, or persons recommended by donors or donor-advisors to
serve on the advisory committee, the proposed regulations would provide
two special rules relating to advisory privileges arising from service
on an advisory committee. Under these two special rules, a fund or
account could be advised by a committee that may include one or more
donors, donor-advisors, related persons, or persons recommended by
donors or donor-advisors, without being a DAF.
First, when a sponsoring organization appoints a donor, donor-
advisor, or related person to serve on an advisory committee, the
donor, donor-advisor, or related person generally would have advisory
privileges by reason of the donor's status as a donor. However, the
proposed regulations would provide that a sponsoring organization's
appointment of a donor, donor-advisor,
[[Page 77927]]
or related person to be on a committee that advises as to distributions
or investments of amounts in the fund or account will not be deemed to
result in advisory privileges by reason of the donor's status as a
donor if (1) the appointment is based on objective criteria related to
the expertise of the appointee in the particular field of interest or
purpose of the fund or account; (2) the committee consists of three or
more individuals, not more than one-third of whom are related persons
with respect to any of the others; and (3) the appointee is not a
significant contributor to the fund or account, taking into account
contributions by related persons with respect to the appointee,\8\ at
the time of appointment. If an appointee or related person is not a
significant contributor to a fund or account at the time of appointment
but becomes one shortly afterwards, the IRS may find that the person
has advisory privileges based on the facts and circumstances. The
Treasury Department and the IRS request comments on what constitutes a
significant contributor for purposes of this exception.
---------------------------------------------------------------------------
\8\ For example, if a donor is a significant contributor, a
family member who is appointed to the committee also is considered a
significant contributor, regardless of whether the family member
actually contributed to the fund.
---------------------------------------------------------------------------
Second, when a donor (or donor-advisor) recommends someone to serve
on an advisory committee advising as to the distribution or investment
of funds in the fund or account, that person would be considered a
donor-advisor if the sponsoring organization appoints the recommended
person to serve on the advisory committee. However, the proposed
regulations would allow a donor (or donor-advisor) to recommend a
person to serve as a member of an advisory committee of the sponsoring
organization for the fund or account and not be considered to be a
donor-advisor if (1) the recommendation is based on objective criteria
related to the expertise of the member in the particular field of
interest or purpose of the fund or account; (2) the committee consists
of three or more individuals, and a majority of the committee is not
recommended by the donor or donor-advisor; and (3) the recommended
person is not a related person with respect to the recommending donor
or donor-advisor.
The Treasury Department and the IRS request comments on the
proposed advisory committee exceptions, including additional
circumstances in which advisory privileges arising from advisory
committees should not result in the creation of a DAF.
E. Multiple-Donor Funds or Accounts
Several commenters suggested excepting a fund or account to which
multiple unrelated donors contributed from the definition of DAF.
Commenters expressed concern that failing to provide an exception would
affect charitable giving practices encouraged by alumni organizations
or professional associations, as well as discourage the use of funds or
accounts to incubate potential public charities. One commenter
suggested that imposing various conditions, including that the fund or
account have at least three unrelated donors; that the donations be
aggregated into a single consolidated account balance; that no written
or oral understanding exists that donors have advisory privileges
corresponding to the amounts they donated to the fund or account; and
that no single donor or group of related donors gave more than 35
percent of all donations, would prevent the vast majority of potential
abuses of multiple-donor fund status while allowing most giving circles
and giving pools maintained at public charities to avoid DAF status.
Other commenters suggested that, without various safeguards, an
exception for multiple-donor funds or accounts may permit abuses.
The Treasury Department and the IRS anticipate that, in most
circumstances, a multiple-donor fund or account would be separately
identified by reference to contributions of a specific donor or donors.
However, even if separately identified, a multiple-donor fund or
account would not be a DAF if no donor or donor-advisor has, or
reasonably expects to have, advisory privileges with respect to the
distribution or investment of amounts held in the fund or account by
reason of the donor's status as a donor. Furthermore, section
4966(d)(2)(B) and the proposed regulations include several special
rules that may permit a multiple-donor fund or account to be excepted
from definition as a DAF even if it doesn't meet one of the exceptions
discussed in section 2 of this Explanation of Provisions of this
preamble (such as funds or accounts making distributions only to a
single identified organization or funds or accounts making certain
grants to individuals for travel, study, or other similar purposes).
First, as indicated in section 1.A. of this Explanation of
Provisions of this preamble, the proposed regulations would exclude
certain entities from the definition of ``donor.'' Specifically, the
proposed regulations would define donor to exclude any public charity
described in section 509(a)(1), (2), or (3) (other than a disqualified
supporting organization) and (2) any governmental unit described in
section 170(c)(1). If a fund or account has multiple donors but only a
public charity or governmental unit has the right to exercise advisory
privileges, then no donor, as defined by the proposed regulations,
would have advisory privileges with respect to the distribution or
investment of amounts held in the fund or account by reason of the
donor's status as a donor. Thus, the fund or account would not be a
DAF.
Second, as discussed in section 1.D of this Explanation of
Provisions of this preamble, the proposed regulations would provide two
special rules relating to advisory privileges arising from service on
an advisory committee. These two rules would allow certain multiple-
donor funds or accounts to be advised by a committee that may include
one or more donors, donor-advisors, related persons, or persons
recommended by donors or donor-advisors, without being a DAF.
The Treasury Department and the IRS request comments on whether and
in what circumstances additional types of exceptions are warranted to
allow multiple-donor funds or accounts to be excluded from the
definition of DAF. The Treasury Department and the IRS are particularly
interested in comments addressing how any exception for multiple-donor
funds or accounts can be crafted to prevent circumvention of the
provisions of section 4966 while still being administrable for both
sponsoring organizations and the IRS.
2. Exceptions to the Definition of Donor Advised Fund
Consistent with section 4966(d)(2)(B), the proposed regulations
generally would provide that a DAF does not include any fund or account
that makes (1) distributions only to a single identified organization,
or (2) certain grants to individuals for travel, study, or other
similar purposes. These exceptions are discussed in sections 2.A. and
2.B. of this Explanation of Provisions of this preamble.
In addition, under section 4966(d)(2)(C), the Secretary has
discretionary authority to exempt a fund or account from the definition
of DAF if the fund or account is advised by a committee not directly or
indirectly controlled by the donor or donor-advisor (and any related
parties \9\) or if
[[Page 77928]]
the fund or account benefits a single identified charitable purpose.
The proposed regulations would provide two exceptions to the definition
of DAF under this discretionary authority: (1) an exception for
disaster relief funds consistent with the exception originally set
forth in Notice 2006-109, with some modifications, and (2) an exception
for certain scholarship funds whose committee is nominated by a section
501(c)(4) organization with a broad-based membership.
---------------------------------------------------------------------------
\9\ Section 4966 does not define the term ``related parties''
and otherwise uses the term ``persons.'' Furthermore, another
provision applicable to donor advised funds, section 4958, defines
certain ``persons'' in connection with a DAF for purposes of excess
benefit transactions. For consistency and administrability across
the provisions applicable to DAFs, the proposed regulations use the
term ``related persons'' rather than ``related parties'' and define
``related persons'' as those persons described in section
4958(f)(7)(B) and (C).
---------------------------------------------------------------------------
The Treasury Department and the IRS request comments on whether
other funds should be excepted from the definition of DAF using the
authority under section 4966(d)(2)(C) and what, if any, restrictions
should apply to ensure that the intent of section 4966 is achieved.
A. Single Identified Organization Exception
Section 4966(d)(2)(B)(i) states that a fund or account that makes
distributions only to a single identified organization or governmental
entity is not a DAF. Several commenters suggested that a single
identified organization should include an organization that is not
described in section 501(c)(3), including a for-profit business and an
organization described in section 501(c)(4), so long as the
distributions to the organization or business are made for a charitable
purpose described in section 170(c)(2)(B). The proposed regulations
would provide that a fund or account will not be considered a DAF if,
along with meeting the other requirements discussed in this section
2.A, it is established to make (and actually does make) distributions
solely to a single identified organization that is either: (1) an
organization described in sections 170(c)(2) and 509(a)(1), (2), or (3)
(other than a disqualified supporting organization), or (2) a
governmental entity described in section 170(c)(1) if the distribution
is made exclusively for public purposes. The Treasury Department and
the IRS are concerned that expanding the exception to include other
types of organizations may allow circumvention of other tax provisions,
such as the private foundation and charitable contribution deduction
rules. Thus, the exception would not apply if the single identified
organization is a private foundation, disqualified supporting
organization, foreign organization, or non-charitable organization.
If the single identified organization loses its exempt status or
ceases operating, the proposed regulations would provide rules similar
to the rules found in Sec. 1.509(a)-4(d)(4)(i)(a) (allowing a
supporting organization to substitute a new supported organization). A
sponsoring organization would be permitted to substitute another single
identified organization if the substitution is conditioned upon the
occurrence of a loss of exemption, substantial failure or abandonment
of operations, or a dissolution or reorganization that results in the
named single identified organization ceasing to exist, and the event is
beyond the direct or indirect control of donor(s), donor-advisor(s), or
related persons.
Commenters suggested that the exception for a fund or account that
makes distributions to a single identified organization should
encompass distributions made to support that organization's activities
and that a fund restricted to a specific charitable project should be
considered a fund or account that makes distributions to a single
identified organization. Commenters suggested that a fund should
therefore be able to support the programs or activities of a single
identified organization by making distributions to individuals directly
(as long as the distributions are limited to those within the
charitable class served by that single identified organization), or by
receiving, holding and disbursing funds for a specific project or
program conducted by the single identified organization, including
making distributions to third parties for goods, services, and
incidental grant-making limited to a particular project or program. For
example, commenters suggested that the exception should apply to a
scholarship fund that a donor establishes at a university and that
provides scholarships and other grants solely to students at that
university whom the donor has a role in selecting.
Under the proposed regulations, the sponsoring organization would
be permitted to make distributions to the single identified
organization for the single identified organization's activities (and
only activities other than administering DAFs or grant-making) and,
thus, to make distributions to fund a specific charitable project
(other than administering DAFs or grant making) of the single
identified organization. However, the sponsoring organization could not
make distributions directly to third parties on behalf of the single
identified organization, such as by making distributions to third
parties for goods, services, or incidental grant-making for a
particular project or program, because the statute requires that the
fund or account make distributions only to the single identified
organization.
Because a fund or account that falls within the single identified
organization exception is not subject to the rules applicable to DAFs,
the proposed regulations would provide that distributions to the single
identified organization may not be used to administer DAFs or to make
grants. In addition, the proposed regulations would provide that a fund
or account will not be treated as making distributions only to a single
identified organization if (1) a donor, donor-advisor, or related
person has or reasonably expects to have, the ability to advise
regarding distributions from the single identified organization to
other individuals or entities, or (2) a distribution from the fund or
account will provide, directly or indirectly, a more than incidental
benefit (within the meaning of section 4967) to a donor, donor-advisor,
or related person with respect to the fund or account. Thus, for
example, if a donor establishes a fund to make distributions only to a
single public charity, and the donor is on the Board of the public
charity, then the fund would not be able to meet this exception because
the donor has the ability to advise some or all of the distributions
from the public charity to other entities.
Recognizing that a sponsoring organization may lack direct
knowledge regarding the activities of the donor, donor-advisor, or
related person with regard to the single identified organization,
however, the proposed regulations would allow a sponsoring organization
to rely on a certification from the donor that (1) no donor, donor-
advisor, or related person has or reasonably expects to have, the
ability to advise regarding distributions from the single identified
organization to other individuals or entities, and (2) no distribution
from the fund or account will provide, directly or indirectly, a more
than incidental benefit (within the meaning of section 4967) to a
donor, donor-advisor, or related person with respect to the fund or
account, as long as the sponsoring organization lacks knowledge to the
contrary.
The Treasury Department and the IRS request comments on whether
additional guidance is needed on situations in which a fund or account
is established at a public charity and the written agreement
establishing the fund or account provides that the contributed
[[Page 77929]]
amounts can only be used to support programs within that public
charity, but the donor retains advisory privileges with respect to the
public charity's use or investment of some or all of the funds. Section
4966(c)(2)(B) excepts from the definition of ``taxable distribution''
any distribution from a DAF to the sponsoring organization of the DAF;
accordingly, any fund or account established at a public charity that
is used to support operating programs of the public charity (rather
than to make distributions to third parties) would not have any taxable
distributions, if the fund or account were a DAF. For example, a donor
who established a fund or account at a university could advise that
contributions previously made to the fund or account be distributed to
the university's scholarship program. However, if the donor were to
want to have a role in advising on the selection of scholarship
recipients then, to avoid a taxable distribution, the donor's
involvement would need to meet the exception provided in section
4966(d)(2)(B)(ii) (discussed in section 2.B. of this Explanation of
Provisions of this preamble).
B. Statutory Scholarship Exception
Under section 4966(d)(2)(B)(ii) the term ``donor advised fund''
does not include a fund or account that exclusively makes grants for
travel, study, or other similar purposes, provided certain requirements
are met. Consistent with section 4966(d)(2)(B)(ii), the proposed
regulations would provide that, under this exception from the
definition of a DAF, a donor or donor-advisor may provide advice as to
which individuals receive grants for travel, study, or other similar
purposes from a fund or account if (1) the person provides the advice
exclusively in the person's capacity as a member of the selection
committee; (2) all the members of the selection committee are appointed
by the sponsoring organization; (3) no combination of donor(s), donor-
advisor(s), or related persons controls, directly or indirectly, the
committee; and (4) all grants from the fund or account are awarded on
an objective and nondiscriminatory basis pursuant to a written
procedure approved in advance by the board of directors of the
sponsoring organization and the procedure is designed to ensure that
all grants meet the requirements of paragraph (1), (2), or (3) of
section 4945(g) and the regulations thereunder. The requirements in the
regulations under section 4945(g) include the requirements that the
group from which grantees are selected will ordinarily be sufficiently
large to constitute a charitable class; that the members of the
selection committee will not be in a position to derive a private
benefit if certain potential grantees are selected over others; and
that the sponsoring organization will maintain adequate records
regarding the identification and selection of individual grantees. If a
fund or account satisfies the requirements of the exception, a
sponsoring organization may award a scholarship from the fund or
account to an individual without subjecting the sponsoring organization
or its fund managers to excise taxes under section 4966.
The proposed regulations would provide that whether a combination
of donor(s), donor-advisor(s), or related persons controls, directly or
indirectly, the selection committee is determined by looking to the
substance, rather than the form, of any arrangement. Direct control
would exist if donor(s), donor-advisor(s), or related persons, either
alone or together, (1) can require the committee to take or refrain
from taking any action; (2) control 50 percent or more of the total
voting power of the committee; or (3) have the right to exercise veto
power over the committee's decisions. Whether indirect control exists
is determined by the facts and circumstances, including the nature of
any relationships among members of the selection committee and with any
donor, donor-advisor, or related person. For example, a committee would
be ``indirectly controlled'' by a combination of donor(s), donor-
advisor(s), or related persons if a majority of the selection committee
is currently engaged by the donor, donor-advisor, or any related person
in any employment or fiduciary capacity, whether as an employee or
independent contractor, or recommended by a donor or donor-advisor and
appointed to the selection committee based on other than objective
criteria regarding the person's expertise, or a combination thereof.
One commenter recommended that a sponsoring organization be
permitted to set reasonable uniform procedures for appointing members
to selection committees, taking into account the size of the sponsoring
organization, the number of grants from the scholarship fund, and other
relevant facts and circumstances, rather than requiring action by the
entire board. The proposed regulations would provide that, in
appointing the members of the selection committee, a sponsoring
organization may act through its board of directors, trustees, or other
governing body, a committee appointed by its governing body, or an
appropriate officer of the sponsoring organization.
The Treasury Department and the IRS are concerned that some
employers may seek to use this statutory scholarship exception to grant
employer-related scholarships in a manner that would otherwise not be
considered a scholarship or fellowship grant subject to the provisions
of section 117(a), or that would otherwise be a taxable expenditure
under section 4945, by having a sponsoring organization administer
their scholarship programs. See, e.g., Rev. Proc. 76-47, 1976-2 C.B.
670, and Rev. Proc. 80-39, 1980-2 C.B. 772. The Treasury Department and
the IRS request comments on whether additional guidance is needed to
prevent avoidance of the employer-related scholarship rules or to
address any potential private benefit arising from employer-related
scholarship programs.
C. Exception for Certain Scholarship Funds Established by Certain
Section 501(c)(4) Organizations
Several commenters asked for guidance relating to a scholarship
fund of a sponsoring organization that receives contributions from a
tax-exempt membership organization, such as a section 501(c)(4) social
welfare organization. The commenters stated that, for example, Rotary
Club scholarship funds are often established at community foundations
and that these scholarship funds do not fit within the statutory
scholarship committee exception provided by section 4966(d)(2)(B)(ii)
because members of the section 501(c)(4) organization who may be donors
to the fund comprise a majority of the scholarship selection committee.
These commenters asked that the proposed regulations provide an
additional exception allowing members of a section 501(c)(4)
organization who are otherwise unrelated to one another to control the
scholarship selection committee, particularly since it is difficult to
find non-members willing to serve on the committee. The commenters
noted that requiring Rotary Clubs to form a section 501(c)(3)
organization to make distributions for Rotary scholarships would be an
inefficient use of charitable resources and that sponsoring
organizations can provide expertise on objective and charitable
standards for selecting scholarship recipients.
The proposed regulations would provide an exception to the
definition of DAF for a fund or account established by a broad-based
membership organization described in section
[[Page 77930]]
501(c)(4) if six conditions are met. The conditions would substantially
mirror the conditions in the statutory scholarship exception, except
that donors may control the committee.
First, the fund or account's single identified charitable purpose
must be to make grants to individuals for scholarships described in
section 4945(g)(1).
Second, the selection of recipients of scholarships from the fund
or account must be made by a selection committee the members of which
are nominated by the section 501(c)(4) organization and approved in
writing by the sponsoring organization. This requirement would allow
the section 501(c)(4) organization to have input on the members of the
selection committee, but would leave the final decision to the
sponsoring organization that owns and controls the assets of the fund
or account.
Third, the fund or account must serve a charitable class.
Fourth, like the statutory scholarship exception, recipients of
grants from the fund or account must be selected on an objective and
nondiscriminatory basis, pursuant to a written procedure, approved in
advance by the sponsoring organization's board of directors, that is
designed to ensure that all the grants meet the requirements of section
4945(g)(1) and the regulations under section 4945 (other than advance
approval by the IRS).
Fifth, no distribution may be made from the fund or account to (1)
any director, officer, or trustee of the sponsoring organization of the
fund, (2) any member of the fund's selection committee, (3) any member,
honorary member, or employee of the section 501(c)(4) organization, or
(4) any person related to anyone described in (1), (2), or (3).
Finally, the fund or account must maintain adequate records that
demonstrate the recipients were selected on an objective and
nondiscriminatory basis.
The Treasury Department and the IRS are concerned that not
requiring the section 501(c)(4) organization to have a broad-based
membership could allow a small group of persons to set up a section
501(c)(4) organization and use a fund or account at a sponsoring
organization to grant scholarships to their selected recipients with
tax-deductible contributions, circumventing the DAF rules. Given this
concern, the Treasury Department and the IRS request comments on how to
identify a broad-based membership organization described in section
501(c)(4), including factors such as the organization's number of
members, criteria for selecting members, membership rights, and
geographic coverage.
The Treasury Department and the IRS also request comments on
whether and under what circumstances other organizations, such as
section 501(c)(5) and 501(c)(6) organizations, use similar types of
committee-advised scholarship funds and whether the exception should be
extended to those organizations, recognizing that section 501(c)(4)
organizations are formed to promote social welfare whereas section
501(c)(5) and section 501(c)(6) organizations are formed to further
different purposes.
D. Disaster Relief Exception
Several commenters asked that the proposed regulations provide,
consistent with Notice 2006-109, that an employer-sponsored disaster
relief fund is not a DAF. Commenters also recommended that the
exception be extended to disaster relief funds outside of the
employment context and that the exception be extended to emergency
hardship situations outside of the disaster relief context.
Since the determination of the existence of a qualified disaster
under section 139 is not controlled by the sponsoring organization or
the fund or account's advisory committee, the proposed regulations
would exempt a non-employment based disaster relief fund. Thus, the
proposed regulations would provide that both an employer-sponsored
disaster relief fund and a disaster relief fund outside of the
employment context are not DAFs, as long as the requirements of section
139 are met. In contrast, since the determination of the existence of
an emergency hardship is controlled by the sponsoring organization or
the fund or account's advisory committee, the proposed regulations
would not extend the exception to emergency hardship funds.
To meet the disaster relief exception in the proposed regulations,
six conditions must be met. The conditions substantially mirror the
provisions in Notice 2006-109 (and the special rules generally for
charitable assistance in qualified disasters) and the provisions of the
statutory scholarship exception and the exception for certain
scholarship funds established by section 501(c)(4) organizations.
First, the fund or account's single identified charitable purpose
must be to provide relief from one or more qualified disasters within
the meaning of section 139(c)(1), (2), or (3).
Second, the fund or account must serve a charitable class.
Third, recipients of grants from the fund or account must be made
by a selection committee not controlled by donors, donor-advisors, or
related persons and for which all the members are appointed by the
sponsoring organization. Alternatively, if the fund or account gives
preference or priority to employees (or their family members) of an
employer to receive grants, the majority of the selection committee
must consist of persons who are not in a position to exercise
substantial influence over the affairs of the employer (or adequate
substitute procedures exist to ensure that any benefit to the employer
is incidental and tenuous).
Fourth, the selection committee must select grant recipients based
on objective and nondiscriminatory determinations of need pursuant to a
written procedure approved in advance by the board of directors of the
sponsoring organization.
Fifth, no distribution from the fund or account may result in more
than an incidental benefit to (1) any director, officer, or trustee of
the sponsoring organization of the fund or account; (2) any member of
the fund or account's selection committee; or (3) any person related to
a director, officer, or trustee of the sponsoring organization or a
member of the selection committee.
Lastly, the sponsoring organization must maintain records that (1)
demonstrate the need of the recipients for the disaster relief
assistance provided, and (2) satisfy the requirements of section
6033(b)(14).\10\
---------------------------------------------------------------------------
\10\ Section 6033(b)(14), added in 2008, requires every section
501(c)(3) organization required to file an annual information return
to furnish annually such information as the Secretary may require
with respect to disaster relief activities.
---------------------------------------------------------------------------
3. Taxable Distributions
Section 4966(c)(1) defines a taxable distribution as any
distribution from a DAF to (1) any natural person, or (2) any other
person unless the distribution is for a purpose specified in section
170(c)(2)(B) and the sponsoring organization exercises expenditure
responsibility with respect to the distribution in accordance with
section 4945(h).
Section 4966(c)(2) excepts from the term ``taxable distribution''
any distribution from a DAF to (1) any organization described in
section 170(b)(1)(A) (other than a disqualified supporting
organization), (2) the sponsoring organization of the DAF, or (3) any
other DAF. The Treasury Department and the IRS expect that most
distributions from DAFs are to organizations described in section
170(b)(1)(A) (but not to disqualified
[[Page 77931]]
supporting organizations) and thus are not taxable distributions.
The proposed regulations incorporate the statutory definition of
taxable distribution. In addition, the proposed regulations would set
forth an anti-abuse rule providing that, if a series of distributions
through intermediary distributees undertaken pursuant to a plan
achieves a result that is inconsistent with the purposes of section
4966, the distributions are treated as a single distribution for
purposes of section 4966. For example, if a donor advises a
distribution, that the sponsoring organization subsequently makes, from
a DAF to Charity X and the donor or the sponsoring organization
arranges for Charity X to use the funds to make distributions to an
individual recommended by the donor, the distribution would be a
taxable distribution from the sponsoring organization to an individual.
Several commenters recommended that the term ``distribution'' be
narrowly defined to include only a gratuitous transfer. These
commenters requested that a purchase of goods or services by a
sponsoring organization using funds from a DAF for charitable activity
or fundraising would not be considered a distribution. One commenter
asked that the term ``distribution'' be defined the same as the term
``grant'' in section 4945 and that it not include payments from a
sponsoring organization using funds from a DAF to vendors for goods or
services or employee compensation.
The proposed regulations do not adopt these suggestions and would
construe the term ``distribution'' broadly. In particular, the proposed
regulations would provide that the term ``distribution'' generally
means any grant, payment, disbursement, or transfer, whether in cash or
in kind, from a DAF. In addition, the proposed regulations would
provide that any use of DAF assets that results in a more than
incidental benefit to a donor, donor-advisor, or related person is a
deemed distribution and thus generally would be a taxable distribution.
The Treasury Department and the IRS note that distributions resulting
in a more than incidental benefit to a donor, donor-advisor, or related
person may also result in tax under section 4967. See Notice 2017-73,
2017-51 I.R.B. 562.
However, the proposed regulations would provide that (1)
investments and (2) reasonable investment and grant-related fees
generally are not distributions under this definition (unless they
result in a more than incidental benefit as noted above).
Investments generally would not be treated as distributions under
the proposed regulations because they typically merely reflect a change
from one form of property to another. The Treasury Department and the
IRS would consider investments for this purpose as including both debt
and equity instruments held for the purpose of obtaining income or
funds, including investments made partly for charitable purposes as
described in Notice 2015-62, 2015-39 I.R.B. 411. However, an investment
would not, for example, include a zero-interest loan, as there is no
purpose of, or provision for, obtaining income or funds from the zero-
interest loan. The Treasury Department and the IRS anticipate that a
zero-interest loan would be a distribution under the proposed
regulations and, unless made to a section 170(b)(1)(A) organization
other than a disqualified supporting organization, would require
expenditure responsibility by the sponsoring organization in order not
to be a taxable distribution. The Treasury Department and the IRS
request comments on how to further distinguish distributions from
investments.
Reasonable investment and grant-related fees paid from DAF assets
generally would not be considered distributions; however, an
unreasonable grant-related or investment fee would be a deemed
distribution and, thus, would be a taxable distribution. The Treasury
Department and the IRS expect that whether a fee is reasonable would be
determined by all the facts and circumstances. For example, an expense
charged uniformly or ratably across all DAFs generally would be
considered a reasonable fee and not a distribution. In addition, an
expense charged solely to a particular DAF (such as an expense arising
from an expenditure responsibility grant from the fund) may be
reasonable, depending on the facts and circumstances. However, the
proposed regulations would provide that an expense charged solely to a
particular DAF that is paid, directly or indirectly, to a donor, donor-
advisor, or related person with respect to the DAF, is a deemed
distribution subject to sections 4966, 4958, and/or 4967.
A. Distributions to Section 170(b)(1)(A) Organizations
Section 4966(c)(2)(A) provides that a distribution to any
organization described in section 170(b)(1)(A) (other than a
disqualified supporting organization) is not a taxable distribution.
Similar to existing guidance under Sec. 53.4945-5(a)(4), the proposed
regulations would provide several categories of organizations treated
as described in section 170(b)(1)(A) for purposes of section
4966(c)(2)(A).
First, an organization would be considered an organization
described in section 170(b)(1)(A) if it is described in both sections
170(b)(1)(A) and 170(c)(2) (other than a disqualified supporting
organization), without the requirement under section 170(c)(2)(A) that
it be created or organized in the United States or in any possession
thereof, or under the law of the United States, any State, the District
of Columbia, or any possession of the United States. Thus, for example,
a taxable organization that operates a for-profit school would not be
treated as described in section 170(b)(1)(A) because the organization
would not be described in section 170(c)(2).
Second, an organization that is a governmental unit described in
section 170(b)(1)(A)(v) and 170(c)(1) (or an agency or instrumentality
thereof, including an organization described in section 511(a)(2)(B))
would be considered an organization described in section 170(b)(1)(A),
as long as the distribution to it is made for exclusively public
purposes.
Third, a foreign government (or an agency or instrumentality
thereof), or an international organization designated as such by
Executive Order under 22 U.S.C. 288 would be treated as an organization
described in section 170(b)(1)(A), as long as the distribution to it is
made exclusively for purposes described in section 170(c)(2)(B).
One commenter asked that guidance expressly provide that DAFs may
make grants to foreign organizations based on the same equivalency
determinations that private foundations use for purposes of determining
whether a foreign organization is the equivalent of a domestic public
charity. The proposed regulations would adopt this suggestion.
Consistent with Rev. Proc. 2017-53, 2017-40 I.R.B. 263 (providing
guidelines for equivalency determinations by, among others, sponsoring
organizations of DAFs), the proposed regulations would provide that,
prior to the distribution, a sponsoring organization may make a good
faith determination that a foreign organization is described in
sections 501(c)(3) and 170(b)(1)(A) (other than a disqualified
supporting organization) using procedures similar to those procedures
permitted for private foundation grantors under Sec. 53.4945-5(a)(5).
Those procedures provide that a determination will ordinarily be a good
faith determination if it is based on current written advice from a
qualified practitioner and the organization reasonably relied in good
faith on the
[[Page 77932]]
written advice. If a sponsoring organization makes a good faith
determination that a foreign organization is described in sections
501(c)(3) and 170(b)(1)(A) (other than a disqualified supporting
organization), the sponsoring organization would not need to exercise
expenditure responsibility with respect to a distribution to that
organization.
B. Disqualified Supporting Organizations
Section 4966(d)(4)(A)(i) defines any Type III non-functionally
integrated supporting organization as a disqualified supporting
organization with respect to any distribution.\11\ Section
4966(d)(4)(A)(ii)(I) disqualifies any other type of supporting
organization if the donor or any donor-advisor (and any related
parties) \12\ directly or indirectly controls a supported organization
(as defined in section 509(f)(3)) of the supporting organization. The
Treasury Department and the IRS request comments on whether other
entities should be included in the definition of disqualified
supporting organization, using the authority under section
4966(d)(4)(A)(ii)(II) to designate other supporting organizations as
disqualified, because a distribution to such organization is
inappropriate if expenditure responsibility is not exercised to ensure
the distribution is for a purpose specified in section 170(c)(2)(B).
---------------------------------------------------------------------------
\11\ In defining a disqualified supporting organization, the
proposed regulations use the definitions of supporting organization
types under the section 509(a)(3) regulations.
\12\ See note 7.
---------------------------------------------------------------------------
C. Distributions to Non-Section 170(b)(1)(A) Organizations or to
Disqualified Supporting Organizations
Under section 4966(c)(1)(B), a distribution to any entity not
described in section 170(b)(1)(A), or to a disqualified supporting
organization, will be a taxable distribution unless (1) the
distribution is for a purpose specified in section 170(c)(2)(B)
(generally, is for a charitable purpose), and (2) the sponsoring
organization exercises expenditure responsibility with respect to the
distribution in accordance with section 4945(h).
i. Non-Charitable Purposes
The proposed regulations would provide that purposes described in
section 170(c)(2)(B) are treated as such whether or not carried out by
an organization described in section 170(c). However, a distribution to
be used for an activity prohibited under section 501(c)(3), or for an
activity that would cause loss of tax exemption if it were a
substantial part of a section 501(c)(3) organization's total
activities, is not for a purpose specified in section 170(c)(2)(B).
Thus, a distribution used for political campaign intervention activity
or attempts to influence legislation would be considered to be for a
purpose not specified in section 170(c)(2)(B) \13\ and, thus, if made
directly or to an entity not described in section 170(b)(1)(A), or to a
disqualified supporting organization, would be a taxable distribution.
---------------------------------------------------------------------------
\13\ The Treasury Department and the IRS also note that allowing
distributions from a DAF for lobbying or political campaign activity
would contravene the charitable contribution deduction rules and
private foundation restrictions.
---------------------------------------------------------------------------
The proposed regulations would also include a requirement, similar
to the requirement in Sec. 53.4945-6(c)(2), that a grant to an
organization (other than one that is described in section 501(c)(3) and
not in section 509(a)(4)) will not be considered to be for a purpose
specified in section 170(c)(2)(B) unless the grantee agrees to
separately account for grant funds (either by separately accounting for
grant funds on its books or by segregating the grant funds). (Such
grant funds must also be used for charitable purposes, consistent with
the expenditure responsibility rules discussed in section 3.C.ii of
this Explanation of Provisions of this preamble.)
ii. Expenditure Responsibility
Section 4966(c)(1)(B)(ii) requires sponsoring organizations to
exercise expenditure responsibility in accordance with section 4945(h)
for certain distributions. Thus, the proposed regulations cross-
reference the section 4945(h) expenditure responsibility regulations
applicable to private foundations, with one modification. In lieu of
the requirements found in Sec. 53.4945-5(b)(3)(iv)(c) and
(b)(4)(iv)(c) (pertaining to the recipient's permitted use of the
funds), the distributee would be required to agree not to: (1) make a
grant to an organization that does not comply with the expenditure
responsibility requirements, (2) make a grant to a natural person, or
(3) make a grant, loan, compensation, or other similar payment (as
described in section 4958(c)(2)) to a donor, donor-advisor, or related
person with respect to the DAF from which the distribution that is the
subject of the agreement is made. For purposes of these rules
pertaining to the secondary use of distributions, the definition of
``grant'' set forth in Sec. 53.4945-4(a)(2) would apply, rather than
the broader definition of ``distribution'' found in proposed Sec.
53.4966-1(e). If the definition of ``distribution'' found in proposed
Sec. 53.4966-1(e) applied, distributees would be required to exercise
expenditure responsibility in the purchase of goods and services, which
is not intended under the proposed rule.
The Treasury Department and the IRS request comments on this
modification to the expenditure responsibility rules and whether
additional guidance is needed.
4. Taxes on Taxable Distributions
Consistent with section 4966(a)(1), the proposed regulations would
provide that an excise tax equal to 20 percent of the amount of the
taxable distribution is imposed on each taxable distribution from a
DAF. This excise tax is paid by the sponsoring organization of the DAF.
The provisions of proposed Sec. 53.4966-2 are generally similar to
those of Sec. 53.4958-1 and other chapter 42 excise tax regulations
relating to the calculation of the tax on the organization and its
managers.
In addition, consistent with section 4966(a)(2), the proposed
regulations would provide that each fund manager who knowingly agrees
to the making of a taxable distribution is liable for an excise tax
equal to five percent of the amount of the taxable distribution, up to
a maximum of $10,000 for any one taxable distribution. If more than one
fund manager is liable for the excise tax, all such persons would be
jointly and severally liable for that tax. The proposed regulations,
consistent with section 4966(d)(3), would define a fund manager as (1)
an officer, director, or trustee of the sponsoring organization, or any
individual with authority or responsibility similar to that exercised
by an officer, director, or trustee of an organization, regardless of
title, and (2) with respect to any act (or failure to act), the
employee having authority or responsibility (either individually or as
a member of a collective body) for such act (or failure to act). An
example of a failure to act by a fund manager resulting in a taxable
distribution would be a failure to exercise expenditure responsibility
if required.
The proposed regulations would provide that the agreement of any
fund manager to the making of a taxable distribution consists of any
manifestation of approval of the distribution that is sufficient to
constitute an exercise of the fund manager's authority to approve, or
authority to exercise discretion in recommending approval of, the
making of the distribution by the sponsoring
[[Page 77933]]
organization, whether or not it is the final or decisive act on behalf
of the sponsoring organization.
A fund manager generally would be considered to have agreed to the
making of a distribution with knowledge that it is a taxable
distribution only if the manager (1) is in fact aware that it is a
taxable distribution; or (2) has knowledge of facts sufficient to
determine that, based on those facts, the distribution would be a
taxable distribution and negligently fails to make reasonable attempts
to ascertain whether the distribution is a taxable distribution. A fund
manager generally would not be considered to have negligently failed to
make reasonable attempts to ascertain whether a distribution is a
taxable distribution if the distribution is made to an organization
listed as an organization described in section 170(b)(1)(A) (other than
a supporting organization) on the IRS's search tool, Tax Exempt
Organization Search (Pub 78 data) (or if, with respect to a supporting
organization, it gathers information to determine that the organization
is not a disqualified supporting organization).
The Treasury Department and the IRS request comments on whether
guidance is needed regarding a fund manager's reliance on professional
advice.
Proposed Applicability Date
These regulations are proposed to be applicable to taxable years
ending after the date of publication of the Treasury decision adopting
these rules as final regulations in the Federal Register. A taxpayer
may rely on these proposed regulations for taxable years ending before
the date the Treasury decision adopting these regulations as final
regulations is published in the Federal Register.
The guidance these proposed regulations would provide with respect
to disaster relief funds generally would be consistent with the
guidance provided in section 5.01 of Notice 2006-109. However, in
certain instances these proposed regulations would modify the guidance
provided in Section 5.01 of Notice 2006-109. For taxable years ending
before the date the Treasury decision adopting these regulations as
final regulations is published in the Federal Register, taxpayers may
rely on the guidance provided in section 5.01 of Notice 2006-109 or,
alternatively, on these proposed regulations, including for periods
prior to November 14, 2023.
Special Analyses
I. Regulatory Planning and Review
Pursuant to the Memorandum of Agreement, Review of Treasury
Regulations under Executive Order 12866 (June 9, 2023), tax regulatory
actions issued by the IRS are not subject to the requirements of
section 6 of Executive Order 12866, as amended. Therefore, a regulatory
impact assessment is not required.
II. Paperwork Reduction Act
The collections of information contained in this notice of proposed
rulemaking have been submitted to the Office of Management and Budget
for review in accordance with the Paperwork Reduction Act of 1995 (44
U.S.C. 3507(d)). Comments on the collections of information should be
sent to the Office of Management and Budget, Attn: Desk Officer for the
Department of Treasury, Office of Information and Regulatory Affairs,
Washington, DC 20503, with copies to the Internal Revenue Service,
Attn: IRS Reports Clearance Officer, SE:W:CAR:MP:T:T:SP, Washington, DC
20224. Comments on the collection of information should be received by
January 16, 2024. Comments are specifically requested concerning:
Whether the proposed collections of information are necessary for
the proper performance of the functions of the Internal Revenue
Service, including whether the information will have practical utility;
The accuracy of the estimated burden associated with the proposed
collections of information (see below);
How the quality, utility, and clarity of the information to be
collected may be enhanced;
How the burden of complying with the proposed collections of
information may be minimized, including through the application of
automated collection techniques or other forms of information
technology; and
Estimates of capital or start-up costs and costs of operation,
maintenance, and purchase of service to provide information.
The collections of information in these proposed regulations are as
follows. Section 53.4966-4(a)(4)(ii) allows a sponsoring organization
to rely on a certification from the donor that all distributions
satisfy the special rules relating to the single identified
organization exception. Section 53.4966-4(b), (c), and (d) require an
organization with a fund excepted from the definition of a DAF to
maintain records regarding recipients and the selection process for
recipients. Section 53.4966-4(c) also requires the organization to
approve in writing the selection committee whose members are nominated
by a section 501(c)(4) organization. Section 53.4966-5(c) allows a
sponsoring organization to avoid a taxable distribution to certain
foreign organization distributees if it makes a good faith
determination regarding their tax-exempt status. Section 53.4966-
5(a)(1)(ii)(B) requires a sponsoring organization to exercise
expenditure responsibility with respect to certain distributions.
The expected recordkeepers are sponsoring organizations of DAFs
described in section 4966(d)(1), other organizations described in
section 4966(d)(1)(A) and (B) that maintain funds excepted from the
definition of a DAF under section 4966(d)(2)(B) or (C) (and certain
donors to funds described in section 4966(d)(2)(B)(i)), foreign
organization distributees that are the subject of equivalency
determinations by sponsoring organizations, and recipients of
expenditure responsibility distributions.
Estimated number of recordkeepers: 13,961.
Estimated average annual burden per recordkeeper: 3 hours, 47
minutes.
Estimated total annual recordkeeping burden: 52,874 hours.
Estimated annual frequency of responses: occasional.
An agency may not conduct or sponsor, and a person is not required
to respond to, a collection of information unless it displays a valid
control number assigned by the Office of Management and Budget.
Books or records relating to a collection of information must be
retained as long as their contents may become material in the
administration of any internal revenue law. Generally, tax returns and
tax return information are confidential, as required by 26 U.S.C. 6103.
III. Regulatory Flexibility Act
Pursuant to the Regulatory Flexibility Act (5 U.S.C. chapter 6), it
is hereby certified that these proposed regulations will not have a
significant economic impact on a substantial number of small entities.
This certification is based on the fact that the proposed regulations
will not impact a substantial number of small entities. Based on IRS
Statistics of Income data for 2019, there are 1,365,744 active
nonprofit charitable organizations, of which 1,624 self-identified as
sponsoring organizations of donor advised funds (DAFs). Another 82
organizations reported no DAFs but one or more funds similar to DAFs,
for a total of 1,706 organizations reporting DAFs or funds similar to
DAFs. Any economic impact stems from the collection of information
under Sec. Sec. 53.4966-4(a)(4)(ii); 53.4966-4(c)(2), (4), and (6);
53.4966-4(d)(4) and (6); and
[[Page 77934]]
53.4966-5(a)(1)(ii)(B) and (c)(2). The universe of sponsoring
organizations that would be affected by the collection of information
under Sec. Sec. 53.4966-4(a)(4)(ii); 53.4966-4(c)(2), (4), and (6);
53.4966-4(d)(4) and (6); and 53.4966-5(a)(1)(ii)(B) and (c)(2) is a
small subset of all sponsoring organizations, since those provisions
apply to limited exceptions to DAF status, to foreign organizations
determined to be the equivalent of a U.S. public charity, or to
organizations receiving distributions for which expenditure
responsibility is exercised. Thus, the number of organizations that
will be affected by the collection of information under Sec. Sec.
53.4966-4(a)(4)(ii); 53.4966-4(c)(2), (4), and (6); 53.4966-4(d)(4) and
(6); and 53.4966-5(a)(1)(ii)(B) and (c)(2) will not be substantial. In
2019, of the 1,365,744 active nonprofit charitable organizations, 1,706
organizations reported 988,718 DAFs and 72,144 non-DAF funds similar to
DAFs. We estimate that of the 72,144 non-DAF funds reported for 2019,
1.5 percent or 1082 will be section 501(c)(4) scholarship funds subject
to the collection of information in Sec. 53.4966-4(c)(2), (4), and
(6), and that these funds will be maintained by a significantly small
subset of the 1,706 total organizations reporting DAFs or funds similar
to DAFs. In 2019, 0.3 percent of the 1,365,744 active nonprofit
charitable organizations reported disaster relief preparedness as their
primary mission. Thus, we estimate that 0.3 percent or five of the
1,706 organizations may sponsor disaster relief funds subject to the
collection of information in Sec. 53.4966-4(d)(4) and (6). Any costs
incurred in meeting the collections of information applicable to
section 501(c)(4) scholarship funds and disaster relief funds would be
considerably less than the costs incurred in establishing and running a
separate section 501(c)(3) organization, which would be the alternative
means of providing the same benefits through a nonprofit charitable
organization. In addition, based on IRS Statistics of Income data for
2019, of the 1,624 self-identified sponsoring organizations, an
estimated 446 organizations made grants to foreign organizations
pursuant to equivalency determinations subject to the collection in
Sec. 53.4966-5(c)(2). An indeterminate number of foreign organizations
receiving grants from the 446 grant-making organizations also would be
subject to the collection of information in Sec. 53.4966-5(c)(2). The
provisions of Sec. 53.4966-5(c)(2) relieve both sponsoring
organizations and foreign organizations of the statutory expenditure
responsibility requirements under section 4966(c)(1)(B)(ii) that would
otherwise apply to grants to foreign organizations and that most
organizations prefer to avoid. Based on the 2019 annual returns of
private foundations, we estimate that very few sponsoring organizations
make grants requiring expenditure responsibility. For these reasons,
pursuant to the Regulatory Flexibility Act (5 U.S.C. Chapter 6), the
Secretary hereby certifies that this rule will not have significant
economic impact on a substantial number of small entities.
Notwithstanding this certification, the Treasury Department and the IRS
invite comments on the impact this rule may have on small entities.
Pursuant to section 7805(f) of the Code, this proposed rule has
been submitted to the Chief Counsel for the Office of Advocacy of the
Small Business Administration for comment on its impact on small
entities.
IV. Unfunded Mandates Reform Act
Section 202 of the Unfunded Mandates Reform Act of 1995 (UMRA)
requires that agencies assess anticipated costs and benefits and take
certain other actions before issuing a final rule that includes any
Federal mandate that may result in expenditures in any one year by a
State, local, or tribal government, in the aggregate, or by the private
sector, of $100 million in 1995 dollars, updated annually for
inflation. In 2022, that threshold is approximately $190 million. The
proposed regulations do not propose any rule that would include any
Federal mandate that may result in expenditures by State, local, or
tribal governments, or by the private sector in excess of that
threshold.
V. Executive Order 13132: Federalism
Executive Order 13132 (Federalism) prohibits an agency from
publishing any rule that has federalism implications if the rule either
imposes substantial, direct compliance costs on State and local
governments, and is not required by statute, or preempts State law,
unless the agency meets the consultation and funding requirements of
section 6 of the Executive Order. The proposed regulations do not
propose rules that would have federalism implications, impose
substantial direct compliance costs on State and local governments, or
preempt State law within the meaning of the Executive Order.
Comments and Requests for a Public Hearing
Consideration will be given to any comments that are submitted
timely to the IRS as prescribed in this preamble under the ADDRESSES
heading. The Treasury Department and the IRS request comments on all
aspects of the proposed regulations, and specifically request comments
on the clarity of the proposed rules and how they can be made easier to
understand, as well as on the proposed transition relief, including
whether and in what circumstances additional transition guidance or
relief may be necessary. All comments submitted will be made available
at https://www.regulations.gov or upon request.
A public hearing will be scheduled if requested in writing by any
person that timely submits electronic or written comments. Requests for
a public hearing are encouraged to be made electronically. If a public
hearing is scheduled, notice of the date, time, and place of the
hearing will be published in the Federal Register. Announcement 2023-
16, 2023-20 I.R.B. 854 (May 15, 2023), provides that public hearings
will be conducted in person, although the IRS will continue to provide
a telephonic option for individuals who wish to attend or testify at a
hearing by telephone. Any telephonic hearing will be made accessible to
people with disabilities.
Statement of Availability of IRS Documents
Announcement 2023-16, Notices 2006-109, 2007-21, 2015-62, and 2017-
73, and Revenue Procedures 76-47, 80-39, and 2017-53 are published in
the Internal Revenue Bulletin (or Cumulative Bulletin) and are
available from the Superintendent of Documents, U.S. Government
Printing Office, Washington, DC 20402, or by visiting the IRS website
at http://www.irs.gov.
Drafting Information
The principal author of these regulations is Ward L. Thomas, Office
of Associate Chief Counsel (Employee Benefits, Exempt Organizations,
and Employment Taxes). However, other personnel from the IRS and the
Treasury Department participated in their development.
List of Subjects in 26 CFR Part 53
Excise taxes, Foundations, Investments, Lobbying, Reporting and
recordkeeping requirements.
Proposed Amendments to the Regulations
Accordingly, the Treasury Department and the IRS propose to amend
26 CFR part 53 as follows:
[[Page 77935]]
PART 53--FOUNDATION AND SIMILAR EXCISE TAXES
0
Paragraph 1. The authority citation for part 53 continues to read, in
part, as follows:
Authority: 26 U.S.C. 7805 * * *
0
Par. 2. Sections 53.4966-0 through 53.4966-6 are added to read as
follows:
Sec.
* * * * *
53.4966-0 Outline of regulations.
53.4966-1 Definitions.
53.4966-2 Taxes on taxable distributions.
53.4966-3 Definition of donor advised fund.
53.4966-4 Exceptions to the definition of donor advised fund.
53.4966-5 Taxable distributions.
53.4966-6 Applicability date.
* * * * *
Sec. 53.4966-0 Outline of regulations.
This section lists the paragraphs in Sec. Sec. 53.4966-1 through
53.4966-6.
Sec. 53.4966-1 Definitions.
(a) In general.
(b) Contribution.
(c) Disqualified supporting organization.
(d) Distributee.
(e) Distribution.
(1) In general.
(2) Deemed distribution.
(f) Donor.
(g) Donor advised fund.
(h) Donor-advisor.
(1) In general.
(2) Person who establishes fund or account.
(3) Personal investment advisors.
(i) In general.
(ii) Exception.
(4) Donor-recommended advisory committee member.
(i) Fund manager.
(1) In general.
(2) Delegation of authority.
(j) Related persons.
(k) Section 4966 regulations.
(l) Sponsoring organization.
(m) Taxable distribution.
Sec. 53.4966-2 Taxes on taxable distributions.
(a) In general.
(b) Taxes paid by the sponsoring organization.
(c) Taxes paid by fund managers.
(1) In general.
(2) Agreement.
(3) Knowledge.
(4) Joint and several liability.
(5) Limit on liability for managers.
Sec. 53.4966-3 Definition of donor advised fund.
(a) In general.
(b) Separate identification by reference to contributions of a donor
or donors.
(1) In general.
(2) Facts and circumstances tending to show that a fund or account
is separately identified.
(3) Commingling.
(c) Advisory privileges.
(1) In general.
(i) Facts and circumstances.
(ii) Application to entire fund or account.
(iii) Donor, donor-advisor, or related person appointed to an
advisory committee.
(A) In general.
(B) Exception.
(iv) Officers, etc. of sponsoring organization.
(v) Deemed advisory privileges.
(2) Facts sufficient to find advisory privileges.
(d) Substance over form.
(e) Examples.
Sec. 53.4966-4 Exceptions to the definition of donor advised fund.
(a) Funds or accounts that make distributions only to a single
identified organization.
(1) In general.
(2) Single identified organization.
(3) Distributions to a single identified organization.
(4) Special rules.
(i) In general.
(ii) Certifications.
(5) Substitution for specified organization.
(6) Examples.
(b) Certain funds or accounts that grant scholarships.
(1) In general.
(2) Control of committee.
(i) In general.
(ii) Direct control.
(iii) Indirect control.
(3) Appointing members of the selection committee.
(4) Examples.
(c) Certain scholarship funds established by certain section
501(c)(4) organizations.
(d) Certain disaster relief funds.
Sec. 53.4966-5 Taxable distributions.
(a) Taxable distributions.
(1) In general.
(2) Non-taxable distributions.
(3) Special rule.
(b) Distribution for purpose not specified in section 170(c)(2)(B).
(1) In general.
(2) Grants to noncharitable organizations.
(c) Organizations described in section 170(b)(1)(A).
(1) In general.
(2) Certain foreign organizations.
(d) Expenditure responsibility.
(1) In general.
(2) Special rules.
(i) Non-applicability of certain Code provisions.
(ii) Substituted terms.
(iii) Additional modifications.
Sec. 53.4966-6 Applicability date.
Sec. 53.4966-1 Definitions.
(a) In general. The definitions in paragraphs (b) through (m) of
this section apply for purposes of section 4966 of the Internal Revenue
Code (Code) and the section 4966 regulations.
(b) Contribution. The term contribution means any gift, bequest, or
similar payment or transfer, whether in cash or in-kind, to or for the
use of a sponsoring organization.
(c) Disqualified supporting organization. With respect to any
distribution, the term disqualified supporting organization means--
(1) Any Type III supporting organization, as defined in section
4943(f)(5)(A) of the Code and the regulations under section 509(a)(3)
of the Code, that is not a functionally integrated Type III supporting
organization, as defined in section 4943(f)(5)(B) and the regulations
under section 509(a)(3) (see Sec. 1.509(a)-4(i) of this chapter); and
(2) Any other supporting organization described in section
509(a)(3) if a donor or donor-advisor with respect to the donor advised
fund (either alone or together with related persons) directly or
indirectly controls a supported organization (as defined in section
509(f)(3)) of the supporting organization. For purposes of this
paragraph (c), a supported organization will be considered controlled
by a donor or donor-advisor with respect to the donor advised fund if
that donor or donor-advisor, either alone or by aggregating votes or
positions of authority with related persons, may require the supported
organization to perform any act that significantly affects its
operations or may prevent the supported organization from performing
any such act. The supported organization will be considered to be
controlled directly or indirectly by a donor or donor-advisor with
respect to the donor advised fund, either alone or together with
related persons, if the voting power of such persons is 50 percent or
more of the total voting power of the governing body of such supported
organization or if one or more of such persons have the right to
exercise veto power over the actions of the governing body of the
supported organization. However, all pertinent facts and circumstances
will be taken into consideration in determining whether one or more
persons do in fact directly or indirectly control the supported
organization.
(d) Distributee. The term distributee means any person,
governmental entity, or donor advised fund receiving a distribution.
(e) Distribution--(1) In general. The term distribution means any
grant, payment, disbursement, or transfer, whether in cash or in kind,
from a donor advised fund. Except as provided in paragraph (e)(2) of
this section, investments and reasonable investment or grant-related
fees are not considered distributions.
(2) Deemed distribution. A distribution includes any use of donor
advised fund assets that results in a more than incidental benefit
(within the meaning of section 4967) to a donor, donor-advisor, or
related person. In addition, a distribution includes an expense charged
solely to a particular donor advised fund that is paid, directly
[[Page 77936]]
or indirectly, to a donor, donor-advisor, or related person with
respect to the donor advised fund.
(f) Donor. The term donor means any person described in section
7701(a)(1) of the Code that makes a contribution to a fund or account
of a sponsoring organization, other than a contributor that is a
governmental unit described in section 170(c)(1) of the Code or an
organization described in section 509(a)(1), (2), or (3) that is not a
disqualified supporting organization.
(g) Donor advised fund. See Sec. 53.4966-3 for the definition of
donor advised fund. See Sec. 53.4966-4 for exceptions to the
definition of donor advised fund.
(h) Donor-advisor--(1) In general. The term donor-advisor means a
person appointed or designated by a donor to have advisory privileges
regarding the distribution or investment of assets held in a fund or
account of a sponsoring organization. If a donor-advisor delegates any
of the donor-advisor's advisory privileges to another person, or
appoints or designates another donor-advisor, that person is also a
donor-advisor. No particular form of appointment or designation is
necessary. Except as provided in paragraphs (h)(3)(ii) and (h)(4) of
this section, a donor-advisor includes a person recommended by a donor
or donor-advisor to have advisory privileges if the sponsoring
organization provides such privileges.
(2) Person who establishes fund or account. A person (other than a
person or governmental unit excepted from status as a donor under
paragraph (f) of this section) who establishes a fund or account and
advises as to the distribution or investment of amounts in that fund or
account will be treated as a donor-advisor with respect to that fund or
account, regardless of whether the person contributes to the fund or
account.
(3) Personal investment advisors--(i) In general. An investment
advisor defined in section 4958(f)(8)(B) of the Code who manages the
investment of, or provides investment advice with respect to, both the
assets maintained in a donor advised fund and the personal assets of a
donor to that donor advised fund (personal investment advisor) will be
treated as a donor-advisor with respect to the donor advised fund while
serving in that dual capacity regardless of whether the donor
appointed, designated, or recommended the personal investment advisor.
(ii) Exception. A personal investment advisor is not considered a
donor-advisor if the personal investment advisor is properly viewed as
providing services to the sponsoring organization as a whole, rather
than providing services to the donor advised fund.
(4) Donor-recommended advisory committee member. A person
recommended by a donor or donor-advisor and appointed by the sponsoring
organization to serve as a member of a committee of the sponsoring
organization that advises as to distributions or investments of amounts
in a fund or account is a donor-advisor unless--
(i) The recommendation is based on objective criteria related to
the expertise of the member in the particular field of interest or
purpose of the fund or account;
(ii) The committee consists of three or more individuals, and a
majority of the committee is not recommended by the donor or donor-
advisor; and
(iii) The recommended person is not a related person with respect
to the recommending donor or donor-advisor.
(i) Fund manager--(1) In general. The term fund manager means, with
respect to any sponsoring organization--
(i) An officer, director, or trustee of the sponsoring organization
or any person having authority or responsibility similar to that
exercised by an officer, director, or trustee of a sponsoring
organization; or
(ii) With respect to any act (or failure to act) resulting in a
taxable distribution, the employee who has final authority or
responsibility (either individually or as a member of a collective
body) for the act (or failure to act).
(2) Delegation of authority. A person has authority or
responsibility similar to that exercised by an officer, director, or
trustee of a sponsoring organization within the meaning of paragraph
(i)(1)(i) of this section if, with respect to an act (or failure to
act) resulting in a taxable distribution, he or she has been delegated
final authority or responsibility with respect to the act by an
officer, director, or trustee of the sponsoring organization or by the
governing body of the sponsoring organization. For example, an
investment manager is a fund manager with respect to a taxable
distribution if the sponsoring organization's governing body delegated
to the investment manager the final authority to make certain
investment decisions and, in the exercise of that authority, the
manager committed the sponsoring organization to making a taxable
distribution. To be considered to have authority or responsibility
similar to that exercised by an officer, director, or trustee of a
sponsoring organization within the meaning of paragraph (i)(1)(i) of
this section, a person need not be an employee of the sponsoring
organization. A person does not have authority or responsibility
similar to that exercised by an officer, director, or trustee of a
sponsoring organization within the meaning of paragraph (i)(1)(i) of
this section if the person is merely implementing a decision made by a
superior.
(j) Related persons. With respect to any individual, the term
related person means a family member of the individual (as defined in
section 4958(f)(4)). With respect to any person or persons, the term
related person also means a 35-percent controlled entity (as defined in
section 4958(f)(3) by substituting such person or persons or their
family members for persons described in subparagraph (A) or (B) of
paragraph (1) in section 4958(f)(3)(A)(i)). See section 4958(f)(7)(B)
and (C).
(k) Section 4966 regulations. The term section 4966 regulations
means this section and Sec. Sec. 53.4966-2 through 53.4966-6.
(l) Sponsoring organization. The term sponsoring organization means
any organization that--
(1) Is described in section 170 (other than a governmental unit
described in section 170(c)(1)), without the requirement under section
170(c)(2)(A) that it be created or organized in the United States or in
any possession thereof, or under the law of the United States, any
State, the District of Columbia, or any possession of the United
States;
(2) Is not a private foundation (as defined in section 509(a) and
the regulations under section 509(a)); and
(3) Maintains one or more donor advised funds.
(m) Taxable distribution. See Sec. 53.4966-5 for the definition of
taxable distribution.
Sec. 53.4966-2 Taxes on taxable distributions.
(a) In general. Section 4966 of the Internal Revenue Code imposes
two excise taxes with respect to taxable distributions from a donor
advised fund. Paragraph (b) of this section describes the excise tax
under section 4966(a)(1) imposed on a sponsoring organization of a
donor advised fund. Paragraph (c) of this section describes the excise
tax under section 4966(a)(2) imposed on a fund manager who knowingly
agrees to a taxable distribution.
(b) Taxes paid by the sponsoring organization. For each taxable
distribution, the excise tax imposed by section 4966(a)(1) is equal to
20 percent of the amount of the taxable distribution
[[Page 77937]]
from a donor advised fund. The tax imposed by section 4966(a)(1) (20-
percent section 4966 tax) is paid by the sponsoring organization of the
donor advised fund.
(c) Taxes paid by fund managers--(1) In general. For each taxable
distribution with respect to which section 4966(a)(1) imposes an excise
tax, the excise tax imposed by section 4966(a)(2) is equal to five
percent of the amount of the taxable distribution on the agreement of
any fund manager who agreed to the making of the taxable distribution
with knowledge that it is a taxable distribution as described in
paragraph (c)(3) of this section. The tax imposed by section 4966(a)(2)
(five-percent section 4966 tax) is paid by the fund manager or managers
who agreed to the making of the taxable distribution.
(2) Agreement. The agreement of any fund manager to the making of a
taxable distribution consists of any manifestation of approval of the
distribution that is sufficient to constitute an exercise of the fund
manager's authority to approve, or to exercise discretion in
recommending approval of, the making of the distribution by the
sponsoring organization, whether or not the manifestation of approval
is the final or decisive approval on behalf of the sponsoring
organization.
(3) Knowledge. For purposes of section 4966(a)(2), a fund manager
agrees to the making of a distribution with knowledge that it is a
taxable distribution only if the manager either--
(i) Is in fact aware that it is a taxable distribution; or
(ii) Has knowledge of facts sufficient to determine that, based on
those facts, the distribution would be a taxable distribution and
negligently fails to make reasonable attempts to ascertain whether the
distribution is a taxable distribution.
(4) Joint and several liability. In any case in which more than one
fund manager is liable for the five-percent section 4966 tax, all such
fund managers are jointly and severally liable for the five-percent
section 4966 taxes imposed with respect to that distribution.
(5) Limit on liability for managers. The maximum aggregate amount
of five-percent section 4966 tax collectible for any one taxable
distribution is $10,000.
Sec. 53.4966-3 Definition of donor advised fund.
(a) In general. Except as provided in Sec. 53.4966-4, the term
donor advised fund means a fund or account--
(1) That is separately identified by reference to contributions of
a donor or donors in accordance with paragraph (b) of this section;
(2) That is owned and controlled by a sponsoring organization; and
(3) With respect to which at least one donor or donor-advisor has,
or reasonably expects to have, advisory privileges with respect to the
distribution or investment of amounts held in the fund or account by
reason of the donor's status as a donor in accordance with paragraph
(c) of this section.
(b) Separate identification by reference to contributions of a
donor or donors--(1) In general. A fund or account is separately
identified by reference to contributions of a donor or donors if the
sponsoring organization maintains a formal record of contributions to
the fund or account relating to a donor or donors. If there is no
formal record, whether a fund or account is separately identified by
reference to contributions of a donor or donors is based on all the
facts and circumstances.
(2) Facts and circumstances tending to show that a fund or account
is separately identified. Facts and circumstances that are relevant in
determining that a fund or account is separately identified by
reference to contributions of a donor or donors include--
(i) The fund or account balance reflects items such as
contributions, dividends, interest, distributions, administrative
expenses, and gains and losses (realized or unrealized);
(ii) The fund or account is named after one or more donors, donor-
advisors, or related persons;
(iii) The sponsoring organization refers to the fund or account as
a donor advised fund;
(iv) The sponsoring organization has an agreement or understanding
with one or more donors or donor-advisors that the fund or account is a
donor advised fund;
(v) One or more donors or donor-advisors regularly receive a fund
or account statement from the sponsoring organization; and
(vi) The sponsoring organization generally solicits advice from the
donor(s) or donor-advisor(s) before it makes distributions from the
fund or account.
(3) Commingling. A fund or account does not fail to be a donor
advised fund merely because the sponsoring organization commingles the
assets attributed to the fund or account with other assets of the
sponsoring organization, as long as the sponsoring organization treats
the fund or account as attributable to contributions of a donor or
donors.
(c) Advisory privileges--(1) In general--(i) Facts and
circumstances. Under section 4966(d)(2)(A)(iii) of the Internal Revenue
Code (Code), at least one donor or donor-advisor must have, or
reasonably expect to have, advisory privileges by reason of the donor's
status as a donor. A donor or donor-advisor may have, or reasonably
expect to have, advisory privileges even in the absence of actual
provision of advice. The existence of advisory privileges, or the
reasonable expectation thereof, is based on all the facts and
circumstances, which in turn depend on the conduct (and any agreement
or understanding) of both the donor(s) or donor-advisor(s) and the
sponsoring organization. Advisory privileges include those arising from
service on an advisory committee. If a donor or donor-advisor has, or
reasonably expects to have, advisory privileges as defined in this
paragraph (c), then the advisory privileges are deemed to be by reason
of the donor's status as a donor except as otherwise provided in this
paragraph (c).
(ii) Application to entire fund or account. If at least one donor
or donor-advisor has, or reasonably expects to have, advisory
privileges with respect to a fund or account or any portion of a fund
or account, advisory privileges by reason of the donor's status as a
donor exist with respect to that fund or account even if there are
multiple donors to the fund or account.
(iii) Donor, donor-advisor, or related person appointed to an
advisory committee--(A) In general. A sponsoring organization's
appointment of a donor, donor-advisor, or related person to be on a
committee of persons that advises as to distributions or investments of
amounts in the fund or account will be deemed to result in advisory
privileges by reason of the donor's status as a donor unless-
(1) The appointment is based on objective criteria related to the
expertise of the appointee in the particular field of interest or
purpose of the fund or account;
(2) The committee consists of three or more individuals, not more
than one-third of whom are related persons with respect to any member
of the committee; and
(3) The appointee is not a significant contributor to the fund or
account, taking into account contributions by related persons with
respect to the appointee, at the time of appointment.
(B) Exception. An appointee may be deemed to have advisory
privileges by reason of a donor's status as a donor
[[Page 77938]]
based on the facts and circumstances, such as if the appointee was not
a significant contributor to a fund or account at the time of
appointment but became a significant contributor shortly thereafter.
(iv) Officers, etc. of sponsoring organization. Advice provided
solely in a person's capacity as an officer, director, employee (or in
a similar capacity) of a sponsoring organization does not by itself
give rise to advisory privileges by reason of a donor's status as a
donor. However, if an officer, director, or employee of the sponsoring
organization is allowed to advise how to distribute or invest amounts
in a fund or account because of such person's contributions to the fund
or account, such person will be considered to have advisory privileges
by reason of the person's status as a donor with respect to that fund
or account.
(v) Deemed advisory privileges. Except as provided in paragraph
(c)(1)(iv) of this section, if a donor is the sole person with advisory
privileges with respect to a fund or account, the advisory privileges
will be deemed to be by reason of the donor's status as a donor.
(2) Facts sufficient to find advisory privileges. A donor or donor-
advisor has advisory privileges by reason of the donor's status as a
donor, regardless of whether they are exercised, if--
(i) The sponsoring organization allows a donor or donor-advisor to
provide nonbinding recommendations regarding distributions from, or
regarding the investment of assets held in, a fund or account;
(ii) A written agreement between the sponsoring organization and a
donor or a donor-advisor states that a donor or donor-advisor has
advisory privileges;
(iii) A written document or any marketing material made available
to a donor or donor-advisor indicates that a donor or donor-advisor may
provide advice to the sponsoring organization regarding the
distribution or investment of amounts held by a sponsoring organization
(for example, a pre-approved list of investment options or distributees
that the sponsoring organization provides to a donor or donor-advisor);
or
(iv) The sponsoring organization generally solicits advice from a
donor or donor-advisor regarding the distribution or investment of
amounts held in a fund or account.
(d) Substance over form. The Commissioner may look to the substance
of an arrangement, not merely its form, in determining whether the
arrangement is a donor advised fund.
(e) Examples. The following examples illustrate the principles of
this section (in each example, assume that the funds or accounts at
issue are owned and controlled by the sponsoring organization):
(1) Example 1. A, B, and C are unrelated donors who jointly
establish Fund X at sponsoring organization Y. A, B, and C each make
equal contributions to Fund X and each have advisory privileges with
respect to all of the assets in Fund X. Y sends A monthly account
statements showing Fund X's account balance and any transactions in the
account. A shares information about Fund X with B and C when asked or
as needed. Fund X is separately identified by reference to
contributions of donors and is a donor advised fund.
(2) Example 2. Assume the same facts as paragraph (e)(1) of this
section (Example 1), except that A makes 70 percent of the
contributions, B 20 percent, and C 10 percent, with each having
advisory privileges with respect to all of the assets in Fund X. Fund X
is separately identified by reference to contributions of donors and is
a donor advised fund.
(3) Example 3. In Year 1, X, a governmental entity described in
section 170(c)(1), and Y, a public charity described in section
509(a)(1) of the Code, establish and fully fund Fund M at sponsoring
organization A. Fund M is separately identified with respect to X and
Y. However, because neither X nor Y is a donor, Fund M is not
separately identified by reference to contributions of a donor or
donors and is not a donor advised fund.
(4) Example 4. Assume the same facts as paragraph (e)(3) of this
section (Example 3), except that in Year 2 individual donors contribute
to Fund M. Only X and Y have advisory privileges with respect to the
distribution or investment of amounts held in Fund M. Because no donor
or donor-advisor has advisory privileges with respect to Fund M, Fund M
is not a donor advised fund.
(5) Example 5. F, an individual, is a donor to Fund T, a multiple-
donor fund at sponsoring organization X. F is also a director of X who
provides investment advice that affects all funds at X in his capacity
as a director. F will not be considered to have advisory privileges
with respect to Fund T solely because of F's duties as director of X.
(6) Example 6. Assume the same facts as paragraph (e)(5) of this
section (Example 5), except that by reason of F's contribution to Fund
T, F is appointed to a committee that advises how to distribute or
invest amounts in Fund T. F has advisory privileges with respect to
Fund T by reason of F's status as a donor.
(7) Example 7. Sponsoring organization Y has established Fund P,
which is dedicated to the relief of poverty in City Z. Fund P is
advised by a 5-member committee selected by Y from residents of City Z,
potentially including donors to Fund P. The committee is comprised of
community leaders and other persons with special knowledge or
experience in the relief of poverty. Each committee member serves for a
term of three years and cannot serve more than two terms. No committee
member is related to another committee member and no committee member
is (together with related persons with respect to any committee member)
a significant contributor to Fund P. Over 100 citizens of City Z have
contributed to Fund P. Y maintains a formal record of donors to Fund P
and amounts contributed, and thus Fund P is separately identified by
reference to contributions of donors. However, under the circumstances,
no person who serves on the advisory committee of Fund P is deemed to
have advisory privileges by reason of a donor's status as a donor. Fund
P is not a donor advised fund.
(8) Example 8. Fifteen unrelated individuals establish Fund Q at
sponsoring organization T. Each individual contributes to Fund Q, and
these individuals constitute a committee appointed by T to advise on
investments and distributions from Fund Q. T regularly issues a
statement to one of the committee members (who shares the information
with the others) showing the account balance and any transactions with
Fund Q. Fund Q is a donor advised fund.
(9) Example 9. Assume the same facts as in paragraph (e)(8) of this
section (Example 8), except that the advisory committee consists of
three of the donors, rotated annually. Fund Q is a donor advised fund.
(10) Example 10. N, an individual, establishes Fund O at W, a
sponsoring organization. Fund O serves as a memorial to N's daughter,
and receives many contributions from unrelated individuals. N is the
only person with advisory privileges and thus is a donor advisor. Fund
O is a donor advised fund.
(11) Example 11. F, an individual, establishes Fund R at T, a
sponsoring organization, to provide scholarship grants for the
advancement of science at local secondary schools. F is the sole donor
to Fund R. Pursuant to F's recommendation, an advisory committee
consisting of five persons is solely responsible for advising T with
[[Page 77939]]
respect to the distribution and investment of amounts held in Fund R. F
recommends (and T appoints) two individuals who are the heads of the
science departments of those schools, neither of whom is related to F.
T independently appoints the other three committee members, none of
whom are recommended by donors or related to donors. The persons
recommended by F for committee membership are not donor-advisors
because F's recommendations are for individuals who are not related
persons with respect to F, who, based on objective criteria, have
expertise in the field of interest of Fund R, the committee consists of
more than two individuals, and a majority of the committee is not
recommended by F. Because no donor or donor-advisor has, or reasonably
expects to have, advisory privileges with respect to the distribution
or investment of amounts held in the fund or account by reason of the
donor's status as a donor, Fund R is not a donor advised fund.
Sec. 53.4966-4 Exceptions to the definition of donor advised fund.
(a) Funds or accounts that make distributions only to a single
identified organization--(1) In general. The term donor advised fund
does not include any fund or account that is established by written
agreement to make (and that actually does make) distributions only to a
single identified organization as defined in paragraph (a)(2) of this
section, and that meets the other requirements of this paragraph (a).
(2) Single identified organization. For purposes of this paragraph
(a), the term single identified organization means an organization that
is described in sections 170(c)(2) and 509(a)(1), (2), or (3) of the
Internal Revenue Code (Code) (other than a disqualified supporting
organization), or that is a governmental entity described in section
170(c)(1) if the distribution is exclusively for public purposes.
(3) Distributions to a single identified organization. The
sponsoring organization must make distributions from the fund or
account only to the single identified organization for use in the
single identified organization's activities (other than the activities
of administering donor advised funds or grant-making), and not to third
parties on behalf of the single identified organization.
(4) Special rules--(i) In general. A fund or account will not be
treated as making distributions only to a single identified
organization if--
(A) A donor, donor-advisor, or related person has or reasonably
expects to have the ability to advise regarding some or all of the
distributions from the single identified organization to other
individuals or entities; or
(B) A distribution from the fund or account provides, directly or
indirectly, a more than incidental benefit (within the meaning of
section 4967 of the Code), to a donor, donor-advisor, or related person
with respect to the fund.
(ii) Certifications. A sponsoring organization may rely on a
certification from the donor that no distribution will be described in
paragraph (a)(4)(i) of this section as long as the sponsoring
organization lacks knowledge to the contrary.
(5) Substitution for specified organization. A sponsoring
organization may substitute another single identified organization if
the substitution is conditioned upon the occurrence of a loss of
exemption, substantial failure or abandonment of operations, or a
dissolution or reorganization that results in the named single
identified organization ceasing to exist, and the event is beyond the
direct or indirect control of donor(s), donor-advisor(s), or related
persons.
(6) Examples. The following examples illustrate the principles of
this section:
(i) Example 1. A and B, a married couple, establish Fund V at X, a
sponsoring organization. Fund V is established by written agreement to
make distributions only to Y, a university recognized as exempt under
section 501(c)(3) of the Code and described in section
170(b)(1)(A)(ii). In the gift instrument, A and B reserve the right to
recommend which university projects should be supported by Fund V and
which investments to make with fund assets. A and B certify that A, B,
and persons related to A and B do not benefit from any distributions
from Fund V and do not have, or reasonably expect to have, the ability
to advise regarding some or all of the distributions from Y to other
entities. Fund V is not a donor advised fund because all distributions
are made to a single identified organization, Y.
(ii) Example 2. Assume the same facts as paragraph (a)(6)(i) of
this section (Example 1), except that the sponsoring organization uses
funds from Fund V to purchase goods to distribute to the community on
behalf of Y. Fund V does not meet the exception for a fund or account
that makes distributions only to a single identified organization
because not all distributions from Fund V are made to the single
identified organization, Y.
(iii) Example 3. Assume the same facts as paragraph (a)(6)(i) of
this section (Example 1), except that A is on the Board of Y. Because A
has the ability to advise some or all of the distributions from Y to
other entities, Fund V does not meet the exception for a fund or
account that makes distributions only to a single identified
organization.
(b) Certain funds or accounts that grant scholarships--(1) In
general. The term donor advised fund does not include any fund or
account with respect to which a donor or donor-advisor advises as to
which individuals receive grants for travel, study, or other similar
purposes, if--
(i) The exclusive purpose of the fund or account is to make grants
to individuals for travel, study, or other similar purposes;
(ii) The donor or donor-advisor provides advice exclusively in the
person's capacity as a member of the selection committee selecting the
individuals who receive grants;
(iii) All the members of the selection committee are appointed by
the sponsoring organization;
(iv) No combination of donor(s), donor-advisor(s), or related
persons controls, directly or indirectly, the selection committee;
(v) All grants from the fund or account are awarded on an objective
and nondiscriminatory basis pursuant to a written procedure approved in
advance by the board of directors of the sponsoring organization, and
the procedure is designed to ensure that all the grants adhere to the
principles set forth by section 4945(g)(1), (2) or (3) of the Code and
the regulations under section 4945 (other than the requirement to get
advance approval by the IRS); and
(vi) The fund or account maintains adequate records as described in
Sec. 53.4945-4(c)(6) that demonstrate the recipients were selected on
an objective and nondiscriminatory basis.
(2) Control of committee--(i) In general. For purposes of paragraph
(b)(1)(iv) of this section, whether control of the committee exists is
determined by looking to the substance, rather than the form, of any
arrangement.
(ii) Direct control. A committee will be considered controlled if
donor(s), donor-advisor(s), or related persons, either alone or
together--
(A) Can require the committee to take or refrain from taking any
action;
(B) Control 50 percent or more of the total voting power of the
committee; or
(C) Have the right to exercise veto power over the committee's
decisions.
(iii) Indirect control. Whether a committee is indirectly
controlled by a combination of donor(s), donor-advisor(s), or related
persons is determined by the facts and circumstances, including the
nature of
[[Page 77940]]
any relationships among the members of the selection committee and with
any donor, donor-advisor, or related person. For example, a committee
is indirectly controlled by a combination of donor(s), donor-
advisor(s), or related persons if a majority of the selection committee
is currently engaged by the donor, donor-advisor, or any related person
in any employment or fiduciary capacity, whether as an employee or
independent contractor, or recommended by a donor or donor-advisor and
appointed to the selection committee based on other than objective
criteria regarding the person's expertise, or a combination thereof.
(3) Appointing members of the selection committee. In appointing
the members of the selection committee, a sponsoring organization may
act through its board of directors, trustees, or other governing body;
a committee appointed by the governing body; or an appropriate officer
of the sponsoring organization.
(4) Examples. The following examples illustrate the principles of
this section:
(i) Example 1. Fund O was established at sponsoring organization Y
to grant scholarships. Fund O receives contributions from many
unrelated donors, including D, E, and F. Y appointed D, E, and F to
serve on Fund O's 5-person selection committee by reason of their
status as donors. Because donors control its selection committee, Fund
O does not meet the exception for certain funds or accounts that grant
scholarships under paragraph (b) of this section.
(ii) Example 2. Assume the same facts as in paragraph (b)(4)(i) of
this section (Example 1), except that Y appoints G, a donor; H, G's
donor-advisor; and I, an attorney currently employed by G to serve on
Fund O's 5-person selection committee. Y appoints G, H, and I by reason
of G's status as a donor. The committee is indirectly controlled by G,
and thus the fund does not meet the exception for certain funds or
accounts that grant scholarships under paragraph (b) of this section.
(iii) Example 3. Assume the same facts as in paragraph (b)(4)(i) of
this section (Example 1), except that Y appoints D and four officers of
Y who have not contributed to Fund O to serve on the 5-person selection
committee. Assuming that the other requirements of paragraph (b)(1) of
this section are met and that the facts do not indicate that D
indirectly controls the committee, Fund O meets the exception for
certain funds or accounts that grant scholarships under paragraph (b)
of this section.
(c) Certain scholarship funds established by certain section
501(c)(4) organizations. The term donor advised fund does not include a
fund or account established by a broad-based membership organization
described in section 501(c)(4) that establishes a committee to advise
as to which individuals receive grants, if--
(1) The fund or account's single identified charitable purpose is
to make grants to individuals for scholarships described in section
4945(g)(1);
(2) The selection of recipients of scholarships from the fund or
account is made using a selection committee the members of which are
nominated by the section 501(c)(4) organization and approved in writing
by the sponsoring organization;
(3) The fund or account serves a charitable class;
(4) Recipients of grants from the fund or account are selected on
an objective and nondiscriminatory basis pursuant to a procedure,
approved in advance by the sponsoring organization's board of
directors, that is designed to ensure that all the grants meet the
requirements of section 4945(g)(1) and the regulations under section
4945 (other than the requirement to get advance approval by the IRS);
(5) No distribution is made from the fund or account to, or for the
benefit of:
(i) Any director, officer, or trustee of the sponsoring
organization of the fund or account;
(ii) Any member of the fund or account's selection committee;
(iii) Any member, honorary member, or employee of the section
501(c)(4) organization; or
(iv) Any related person with respect to anyone described in
paragraph (c)(5)(i), (ii), or (iii) of this section; and
(6) The fund or account maintains adequate records as described in
Sec. 53.4945-4(c)(6) that demonstrate the recipients were selected on
an objective and nondiscriminatory basis.
(d) Certain disaster relief funds. The term donor advised fund does
not include a fund or account if--
(1) The fund or account's single identified charitable purpose is
to provide relief from one or more qualified disasters within the
meaning of section 139(c)(1), (2), or (3) of the Code;
(2) The fund or account serves a charitable class;
(3) The selection of recipients of grants from the fund or account
is made using a selection committee--
(i) That is not directly or indirectly controlled (as defined in
paragraph (b)(2) of this section) by donor(s), donor-advisor(s), or
related persons and to which all the members are appointed by the
sponsoring organization; or
(ii) The majority of which, if the fund or account gives preference
or priority to employees (or their family members) of an employer to
receive grants, consists of persons who are not in a position to
exercise substantial influence over the affairs of the employer (or
adequate substitute procedures exist to ensure that any benefit to the
employer is incidental and tenuous);
(4) The selection committee selects recipients of grants from the
fund or account (and determines the amounts of such grants) based on
objective and nondiscriminatory determinations of need pursuant to a
procedure approved in advance by the board of directors of the
sponsoring organization;
(5) No distribution is made from the fund or account that would
result in more than incidental benefit (within the meaning of section
4967 of the Code) to--
(i) Any director, officer, or trustee of the sponsoring
organization of the fund or account;
(ii) Any member of the fund's selection committee; or
(iii) Any related person with respect to a director, officer, or
trustee of the sponsoring organization or to a member of the selection
committee; and
(6) Records are maintained that demonstrate the need of the
recipients for the disaster relief assistance provided and that satisfy
section 6033(b)(14) of the Code.
Sec. 53.4966-5 Taxable distributions.
(a) Taxable distributions--(1) In general. Except as provided in
paragraphs (a)(2) and (3) of this section, the term taxable
distribution means any distribution from a donor advised fund--
(i) To any natural person; or
(ii) To any other person if--
(A) The distribution is for any purpose other than one specified in
section 170(c)(2)(B) of the Internal Revenue Code (Code), as defined in
paragraph (b) of this section; or
(B) The sponsoring organization does not exercise expenditure
responsibility with respect to the distribution in accordance with
paragraph (d) of this section.
(2) Non-taxable distributions. The term taxable distribution does
not include any distribution from a donor advised fund to--
(i) Any organization described in section 170(b)(1)(A) (other than
a disqualified supporting organization), as defined in paragraph (c) of
this section;
(ii) The sponsoring organization of the donor advised fund; or
(iii) Any other donor advised fund.
(3) Special rule. If a series of distributions is undertaken
pursuant to
[[Page 77941]]
a plan that achieves a result inconsistent with the purposes of section
4966 of the Code, the distributions are treated as a single
distribution for purposes of section 4966. For example, if a donor
advises a distribution, that the sponsoring organization subsequently
makes, from a donor advised fund to Charity X and the donor or the
sponsoring organization arranges for Charity X to use the funds to make
distributions to individuals recommended by the donor, the distribution
will be a taxable distribution from the sponsoring organization to
individuals.
(b) Distribution for purpose not specified in section
170(c)(2)(B)--(1) In general. For purposes of paragraph (a)(1)(ii)(A)
of this section, a distribution to be used for an activity that is
prohibited under section 501(c)(3) of the Code or for an activity that,
if it were a substantial part of a section 501(c)(3) organization's
total activities, would cause loss of tax exemption, is not for a
purpose specified in section 170(c)(2)(B). For example, a distribution
used for political campaign intervention activity or for attempting to
influence legislation is considered to be for a purpose not specified
in section 170(c)(2)(B). Purposes described in section 170(c)(2)(B) are
treated as such whether or not carried out by an organization described
in section 170(c).
(2) Grants to noncharitable organizations. If the distribution is a
grant (as defined in Sec. 53.4945-4(a)(2)) to any organization (other
than an organization described in section 501(c)(3) and not in section
509(a)(4) of the Code), it will not be considered for a purpose
specified in section 170(c)(2)(B) unless the grantee agrees either to
separately account for the grant funds on its books or to segregate the
grant funds.
(c) Organizations described in section 170(b)(1)(A)--(1) In
general. For purposes of paragraph (a)(2)(i) of this section, an
organization will be treated as described in section 170(b)(1)(A) if--
(i) It is described in both sections 170(b)(1)(A) and 170(c)(2),
other than a disqualified supporting organization, and without regard
to section 170(c)(2)(A);
(ii) It is a governmental unit described in section 170(b)(1)(A)(v)
and 170(c)(1) (or an agency or instrumentality thereof, including an
organization described in section 511(a)(2)(B) of the Code), as long as
the distribution to it is made for exclusively public purposes; or
(iii) It is a foreign government (or an agency or instrumentality
thereof), or an international organization designated as such by
Executive Order under 22 U.S.C. 288, as long as the distribution to it
is made exclusively for charitable purposes as described in section
170(c)(2)(B).
(2) Certain foreign organizations. For purposes of this section, a
foreign organization distributee that does not have a ruling or
determination letter that it is an organization described in sections
501(c)(3) and 170(b)(1)(A) (other than a disqualified supporting
organization) will be treated as described in sections 501(c)(3) and
170(b)(1)(A) (other than a disqualified supporting organization) if,
prior to the distribution, the sponsoring organization makes a good
faith determination, using procedures similar to those set forth in
Sec. 53.4945-5(a)(5), that the distributee is described in sections
501(c)(3) and 170(b)(1)(A) (other than a disqualified supporting
organization).
(d) Expenditure responsibility--(1) In general. For purposes of
paragraph (a)(1)(ii)(B) of this section, a sponsoring organization will
be treated as exercising expenditure responsibility if it follows the
procedures set forth in Sec. 53.4945-5(b) through (e) as modified by
paragraph (d)(2) of this section.
(2) Special rules--(i) Non-applicability of certain Code
provisions. References to sections 507, 4945(d), and 4948 of the Code
do not apply.
(ii) Substituted terms. In applying Sec. 53.4945-5(b) through (e),
substitute sponsoring organization for private foundation, granting
private foundation, granting foundation, grantor foundation,
foundation, or grantor (but not for private foundation grantees in
Sec. 53.4945-5(c)); substitute distribution for grant or amount
granted; substitute distributee for grantee; and substitute taxable
distribution for taxable expenditure each place they appear.
(iii) Additional modifications. In lieu of Sec. 53.4945-
5(b)(3)(iv)(c) and (b)(4)(iv)(c), the distributee must agree not to use
any of the funds to make any grant to an organization that does not
comply with the expenditure responsibility requirements of this
paragraph (d), to make any grant to a natural person, or to make any
grant, loan, compensation, or other similar payment (as described in
section 4958(c)(2) of the Code) to a donor, donor-advisor, or related
person with respect to the donor advised fund from which the
distribution that is the subject of the agreement is made.
Sec. 53.4966-6 Applicability date.
Applicability date. The rules of Sec. Sec. 53.4966-1 through
53.4966-5 apply to taxable years ending on or after [the date of
publication of the Treasury decision adopting these rules as final
regulations in the Federal Register].
Douglas W. O'Donnell,
Deputy Commissioner for Services and Enforcement.
[FR Doc. 2023-24982 Filed 11-13-23; 8:45 am]
BILLING CODE 4830-01-P