Tim Shaw Editor, Federal Tax Update
The Accelerating Charitable Efforts (ACE) Act (S. 1981), a Senate bill introduced by Sen. Angus King (I-ME) and Sen. Chuck Grassley (R-IA) in June, would overhaul rules on donor advised funds (DAFs) with new definitions and limitations, as well as add an excise tax on sponsoring organizations that do not timely distribute donated funds to charities in an effort to prevent the warehousing of charitable assets.
DAFs provide charitable donors an alternative to creating and operating a private foundation subject to minimum distribution and reporting rules.
A donor contributing to a DAF owned and controlled by a sponsoring organization allows the donor to receive a larger tax deduction while retaining the ability to advise the sponsoring organization on how the donations are used in exchange for investment management fees for undistributed assets.
Unlike private foundations, DAFs are not required to make annual minimum distributions. Because of this, donors have been able to claim deductions for amounts that could sit in DAFs indefinitely.
Under the ACE Act, there would be two permissible forms of DAFs:
- A qualified DAF, which must terminate within 14 years following the year of a contribution, and
- A qualified community foundation DAF designed to serve a specific geographic community no larger than four states.
A donor seeking to claim a deduction for a contribution to a qualified DAF must identify a preferred organization at the time of the contribution.
A donor to a qualified community foundation DAF cannot have advisory privileges if their total donations exceed $1 million unless 5% of their donations are agreed to be distributed each year.
The ACE Act refers to existing DAFs as “nonqualified” DAFs, and contributions would be subject to the following additional restrictions:
- A donor contributing noncash assets cannot claim a deduction unless the sponsoring organization sells the contribution for cash and makes a qualifying distribution (see below).
- No deduction claims are allowed until the sponsoring organization makes a qualifying distribution of such contribution.
- The deduction is capped at the amount of the qualifying distribution
- Distributions are made on a first-in, first-out basis.
A qualifying distribution is any distribution that is not a taxable distribution as defined in Code Sec. 4966(c).
Contributions to nonqualifying DAFs would be eligible for deduction if distributed within 49 years after the year in which the contribution was made.
Sponsoring organizations responsible for DAFs would be subject to an excise tax for failure to make annual minimum distributions.
The tax would equal 50% of contributions, and any attributable earnings. Community foundations would be excepted.
Public Support Test
A charitable organization receiving distributions from a DAF would be required to identify the original donor who made the contribution to the sponsoring organization for the purpose of determining public support.
If the original donor cannot be identified, the donation would be considered an anonymous gift. If the original donor is identified, and the donor does not have an existing relationship with the charity, then the donor would have provided public support.
Proponents of the bill argue that the bill will result in nonprofits receiving more donations, and that the warehousing of assets in DAFs has negatively impacted communities of color. To supporters, donors would not be dissuaded by the ACE Act to give.
Opponents counter that the legislation is too complex and would disincentivize donors from contributing if deduction eligibility is restricted. Some point to the involvement of commercial entities as the root problem with the current state of charitable giving.
On December 1, Independent Sector held the last of a four-part series of webinars on the ACE Act, which culminated in a broader discussion about the difficulties with regulating charitable giving while promoting equity and empowering both nonprofit organizations and donors.
“I think the big picture is there is a lot of backlash against excessive wealth and against how that excessive wealth is sometimes used through philanthropic and nonprofit legal entities to do things that really aren’t public good,” one panelist, Jan Masaoka, CEO of CalNonprofits, said.
While the bill is not “perfect,” Masaoka said that CalNonprofits publicly supports the ACE Act.
Another panelist, United Philanthropy Forum Public Policy Director Matthew L. Evans, expressed skepticism towards the bill and noted that his organization is still in the process of drawing up its recommendations.
The forum has not yet supported the ACE Act, but Evans said that instead of outright objecting to it, the group is using it as an opportunity to further the conversation. “I think a lot of folks that we work with… are well-intentioned in getting something right within the near term and not kicking the can down the road,” he said.
Maryland Nonprofits Director of Public Policy Henry Bogdan told Checkpoint that the conversation should address “how to draw the distinctions between what are often characterized as the national charities or sponsors, single issue or cause driven charities, and community foundations, and perhaps equally important, how to achieve consensus on more transparent reporting of DAF activity.”
In an October 8 post on Maryland Nonprofit’s website, Bogdan wrote that the ACE Act “fails” to draw that distinction “in an adequate way.”
The charitable community is in near-universal agreement that there is a problem with donated funds remaining in DAFs and never reaching an intended organization while donors receive tax benefits, but the discussion goes beyond a single piece of legislation.
No action has been taken on the ACE Act since its introduction, and there are doubts surrounding the likelihood of its passage. Still, there is a desire within the philanthropic and charitable communities to have difficult discussions.
As Evans said, “Progress is a slow process.”
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