The "new" charity had also applied for and received exempt status for a pooled common fund under Code Section b 1 E iii. Two donors made contributions to the organization to be held in the donor advised funds. The two donors then requested that the funds in the donor advised funds be transferred to the pooled common funds. As a reason for the request, the charity indicated in part that it wanted to eliminate any risk of loss of its public charity status under Code Section a 1 because of a failure to operate the advised funds as component funds under the Regulations.
Among other things, the Internal Revenue Service "IRS" or "Service" ruled that the donor advised funds would not be treated as component funds from their inception because implementation of the transaction described would result in a material restriction under Treasury Regulation Section 1. The restriction arose because the donors would now be seeking to transfer those assets to a pooled common fund under Code Section b 1 E iii. Therefore, the Service found that the donor advised funds would "be treated as held in trust separate and apart from the community trust from inception.
In reviewing the cases, one basic issue that arises is whether the entities described are actually donor advised funds. None of the court opinions specifically refer to the charities or the funds they administer as donor advised funds. In National Foundation, Inc. According to the Court, National Foundation, Inc.
An interested person could establish a charitable project or an account by submitting an application to National Foundation, Inc. The Board had the sole discretion to approve or disapprove a project. The factors National Foundation, Inc. Once a donor committed his funds for use in a project or for general use by National Foundation, Inc.
After that time, if the donor became unhappy with how his or her funds were being used, the donor would not have legal recourse but could request that the funds be distributed to another Code Section c 3 entity. The Court noted that National Foundation, Inc. The Court indicated that "charitable development officers" would find donors for National Foundation, Inc.
The charitable development officers were typically lawyers, accountants, stockbrokers, trust officers, insurance underwriters, ministers, and officers of other charities. Each project was treated as a distinct charitable project so National Foundation, Inc. The Court noted that the sub-accounts were not separate funds or separate legal entities.
According to the Court, the only entity was National Foundation, Inc. In finding that National Foundation, Inc.
The Court stated that National Foundation, Inc. Among other things, the Court also found that the commissions paid by National Foundation, Inc. The Court rejected the Service's argument for private foundation status because it found that at least a third of National Foundation, Inc.
In The Fund for Anonymous Gifts v. The Court of Appeals found that the Fund was a Code Section c 3 charitable organization but remanded on the issue of whether the Fund was a public charity or a private foundation. As described by the District Court, the Fund was created by an agreement naming an individual as trustee. Donors would be allowed to make gifts on an anonymous basis while still obtaining a charitable deduction. The District Court observed that the fund also had a second unstated purpose of providing investment services to donors because the donors were allowed to direct how their gifts would be invested and the distribution of income from those gifts to other charities at a later date.
In addition to arguing that the Fund was not a Code Section c 3 entity, the IRS also argued that the Fund was structured so as to circumvent the private foundation rules. Because the District Court agreed that the Fund was not a Code Section c 3 entity, it did not reach the issue of whether the Fund was a public charity or private foundation. The District Court distinguished the Fund from Fidelity Investments' Charitable Gift Fund because Fidelity merely allowed donors to allocate donations among three investment pools with no continuing control over investments while the Fund's trustee would be bound by the investment decisions of its donors.
Further, Fidelity's circular contained very detailed rules about the operations of its charity and suggested that its donors needed to consult their own advisors about available charitable deductions. Before appealing the decision of the District Court, the Fund agreed to retroactively modify the agreement governing its operations so as to eliminate provisions allowing donors to place conditions subsequent on their gifts. As indicated above, the Court of Appeals ruled that the Fund was a Code Section c 3 entity, noting that it was "baffled by the government's apparent intransigence.
Apparently in a similar vein, the case of New Dynamics Foundation v.
Charitable Giving With Donor Advised Funds - Part I | Planned Giving Design Center
The Service denied the entity's application for tax-exempt status. The donors were able to make recommendations as to how their gifts should be invested and distributed. The Foundation's board would consider the donors' recommendations but the board would always have control of the ultimate decisions on investments. The Service suggests that this case could have ramifications affecting "the future development of donor advised fund issues. In its Continuing Professional Education for Exempt Organizations , the Service lists as a topic under public charity classification and private foundation issues, "'Aggressive' interpretations of provisions applicable to donor advised or directed funds and IRC a 3 supporting organizations.
It states that these applications had all included representations subjecting them to the conditions imposed on private foundations under Code Sections 27 and , 28 which were very important to the Service in giving its blessings to them. Specifically, the Service lists:.
Charitable Giving With Donor Advised Funds - Part I
The organization expects that its grant distributions for the year will equal or exceed five percent of its average net assets on a fiscal year rolling basis. If this level of grant activity is not attained, the organization will identify the named accounts from which grants over the same period totaled less than five percent of each account's average assets. The organization will then contact the donor-advisors of these accounts to request that they recommend grants of at least this amount.
If a donor-advisor does not provide the qualified grant recommendations, the organization is authorized to transfer up to five percent of assets from the donor-advisor's named account to the charity selected by the organization. The organization will add language to its promotional materials which indicates that the organization will investigate allegations of improper use of grant funds for the private benefit of donor-advisors. The organization will add language to its grantee letters to the effect that grants are to be used by grantees exclusively in furtherance of charitable purposes, and cannot be used for the private benefit of donor-advisors.
The Service states that a donor advised fund must have appropriate controls over donated assets in order to be exempt under Code Section c 3 , citing The Fund for Anonymous Gifts and National Foundation, Inc.
Charitable Giving With Donor Advised Funds - Part I
It goes on to state that it applies the material restriction provisions of Treasury Regulation Section 1. However, IRS Director of Exempt Organizations, Marcus Owens, has indicated that there is a distinction between donor advised funds and donor directed funds. United States case and indicated that donor advised funds "do not raise the same concerns" as donor directed funds. As noted above, donor advised funds have traditionally been used mainly by community foundations.
Because donors liked the advantages of an immediate charitable deduction, favorable percentage limitations for contributions, name recognition, the ability to make recommendations for distributions, and ease of use, donor advised funds eventually expanded to universities and other charities, including charities with a national scope.
Another appeal is that donors are sometimes given the opportunity to specify how the donor advised fund assets will be invested prior to distribution. Donor advised funds are touted as a less costly and less complex alternative to supporting organizations and private foundations, but with many of the same benefits. In more recent years, several for-profit financial institutions have established public charities allowing donors to make gifts with donor advised funds. Some people have raised concerns about the growth of donor advised funds created by financial institutions.
They are concerned that these entities are shifting donor support away from "traditional" public charities, like community foundations. Some have noted that these newer entities may be motivated more by the financial institutions' desire to increase the assets under their management and that there may be little or no review of the grants made. Concern has also been raised as to whether sufficient distributions are being made for charitable purposes.
On the other hand, others have applauded these new donor advised funds as making charitable giving more popular, convenient, and more available to donors who might not have otherwise considered lifetime gifts. The use and popularity of donor advised funds has grown significantly in recent years. Donor advised funds have many advantages including ease of use, immediate charitable deductions, favorable percentage limitations, donor recognition and donor involvement via non-binding advice.
However, the increased use of donor advised funds outside of the traditional community foundation or other public charity arena, along with the large growth in the amount of assets held in donor advised funds as a result of the new charities set up in connection with for-profit financial institutions, has led to increased concern about potential abuses. As a result, the President's fiscal year budget proposal contains a proposal for new laws governing donor advised funds. This proposal attempts to define a "donor advised fund," apply private foundation rules to these funds, and reclassify the public charity as a private foundation under certain circumstances.
It is not clear whether such legislation would increase the use of donor advised funds or would have a chilling effect on their use. A comprehensive analysis of this legislation will be undertaken in Part II of this two-part article. All references to the Code are to the Internal Revenue Code of , as amended from time to time.
Code Section provides in part that a transfer by gift need not be reported on a gift tax return if the transfer is one "with respect to which a deduction is allowed under section " but only if "such transfer is of the donor's entire interest in the property transferred" and "no other interest in such property is or has been transferred for less than adequate and full consideration in money or money's worth from the donor to a person, or for a use, not described in subsection a or b of section " or the transfer is described in Code Section d. The ruling cites former Code Section b 1 D iii.
See Internal Revenue Service: The IRS notes that this discussion is an update of the discussions in its Continuing Professional Education text on "donor directed funds" and in its Continuing Professional Education text on gift funds. This Code Section imposes an excise tax on private foundations that fail to make sufficient distributions.
Code Section imposes an excise tax on private foundations that has certain "jeopardizing" investments. Join Today For Free! Skip to Main Content Area. Court of Appeals U. Court of Claims U. National Publication last updated: Summary The use of donor advised funds has increased dramatically in recent years, making them one of the more popular vehicles for making charitable contributions.
Published on Apr Ackerman, Esquire Kathy Hanson, Esquire edited by: Introduction The use of donor advised funds has increased in recent years, making them one of the more popular vehicles for making charitable contributions. Donor Advised Funds - the Basics There is no specific definition of a donor advised fund in the Code. Background - Public Charity v.
Code Section b 1 E iii reads as follows: A Whether the public charity including a participating trustee, custodian, or agent in the case of a community trust is the owner in fee of the assets it receives from the private foundation; B Whether such assets are to be held and administered by the public charity in a manner consistent with one or more of its exempt purposes; C Whether the governing body of the public charity has the ultimate authority and control over such assets, and the income derived therefrom; and D Whether, and to what extent, the governing body of the public charity is organized and operated so as to be independent from the transferor.
Add comment Login or register to post comments. There has been endless speculation about how the new tax law will impact charitable giving. Take heart, here's a first look about what it begins to mean for planned giving. When working with your clients on their financial and estate planning, there are a few things you need to find out about their philanthropy, or you are missing a great opportunity to provide them At The Curtis Group, we are passionate about philanthropy.
Due to the projected ongoing growth of donor-advised funds, we foresee DAFs playing an increasingly important role in philanthropy. As a donor and as a nonprofit, you need to be informed. With knowledge, we can continue our critical conversations, strengthen our nonprofits, and ultimately increase awareness about philanthropy and its vital role in our country.
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