CPAs Submit Tweaks to Proposed Donor Advised Fund Regs

The American Institute of Certified Public Accountants (AICPA) sent a letter to leaders in the IRS Office of Chief Counsel suggesting improvements to proposed regs on taxable distributions from donor advised funds (DAFs), including examples of certain situations that should not count towards the definition of a DAF or donor-advisor.

Background.

“Per [Code Sec. 4966(d)(2)], a DAF is a fund or account owned and controlled by a sponsoring organization, which is separately identified by reference to contributions of a donor or donors, and with respect to which the donor, or any person appointed or designated by such donor (donor-advisor), has, or reasonably expects to have, advisory privileges with respect to the distribution or investment of the funds,” the AICPA explained in their January 29 correspondence.

Code Sec. 4966 provides for excise taxes imposed on taxable distributions made by a DAF’s sponsoring organization and, in some cases, on the individual advisors or donors who recommended the distribution. Examples of such taxable distributions include grants to individuals, grants for non-charitable purposes, and grants that result in more than incidental benefits to donors, advisors, or related parties.

Section 4966 works in conjunction with other sections of the Tax Code, like Code Sec. 4958, which addresses excess benefit transactions and can impose additional taxes on transactions that provide undue benefits to disqualified persons associated with the DAF. In November, the IRS issued proposed regs on the excise taxes under sections 4966 and 4958. Recently, the agency extended the public comment period from January 16 to February 15.

AICPA comments.

Of the letter’s seven recommendations, three pertain to definition exclusions to be addressed in the final regs. First, the CPAs want donors to be allowed to, once every five years, make changes to restricted gifts such as annual distribution amounts or allocation of distributions to charities and not have their accounts be considered DAFs.

“A recipient charity’s mission often changes over time, and in some cases, a charity no longer pursues one or more causes for which it has funds that have been restricted by donors,” AICPA Tax Executive Committee Chair Blake Vickers wrote. “Also, some charitable organizations allow a donor to contribute to a Designated (or similarly-named) Fund in which the donor specifies one or more charitable organizations to receive an annual distribution (or portion thereof), often set at no more than 5% of the fund’s value.”

Next, Vickers argues that a popular practice is for donors to reserve some advisory privileges for gifts made to support specific programs at a charity. The final regs should add guidance on when funds under such an arrangement do and do not constitute a DAF, he suggested. The letter outlines a recommended criteria for determining when these funds are not DAFs. One component of this test would require a written agreement clearly stating what the donated funds can be used for.

“If this type of fund were considered to be a DAF, to the extent that the donor provides advice with respect to payments made from the fund, such payments must be analyzed to determine whether they could be considered to be taxable distributions within the meaning of section 4966(c),” according to Vickers.

Finally, the IRS should “explicitly exclude investment advisors” from the definition of a donor-advisor, which also encompasses personal investment advisors, the AICPA said. Under section 4966(d)(2)(A)(iii), a donor-advisor is someone appointed or designated by a donor who “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.”

In the event that an investment advisor is considered a donor-advisor to a DAF, “then any compensation paid to the investment advisor is considered an automatic excess benefit transaction under section 4958(c)(2)(A),” Vickers contended. “This result would effectively limit the ability of donors to have advisory privileges with respect to the investment of amounts held in their DAFs because they would be unable to recommend the use of third-party investment management companies that would reasonably expect to be compensated for their services.”