Exempt Organizations Advisory - IRS Requests Comments Regarding Donor Advised Funds and Supporting Organizations

On February 6, in Notice 2007-21, the IRS requested public comments regarding an Internal Revenue Service and Department of the Treasury study on the organization and operation of donor-advised funds and of supporting organizations. The study is required by the Pension Protection Act of 2006. That Act made significant changes in the tax laws affecting donor-advised funds and supporting organizations, and the results of this study may impact future legislation affecting donor-advised funds and supporting organizations. 

This study will  consider the following issues:

1. whether the deductions allowed for income, gift, or estate taxes for charitable contributions to sponsoring organizations of donor-advised funds or to supporting organizations are appropriate in consideration of (i) the use of contributed assets (including the type, extent, and timing of such use) or (ii) the use of the assets of such organizations for the benefit of the person making the charitable contribution (or a person related to such person);
2. whether donor-advised funds should be required to distribute for charitable purposes a specified amount (whether based on the income or assets of the fund) in order to ensure that the sponsoring organization with respect to the fund is operating consistent with the purposes or functions constituting the basis for its exemption under § 501 or its status as an organization described in § 509(a);
3. whether the retention by donors to donor-advised funds or supporting organizations of rights or privileges with respect to amounts transferred to such organizations (including advisory rights or privileges with respect to the making of grants or the investment of assets) is consistent with the treatment of such transfers as completed gifts that qualify for a deduction for income, gift, or estate taxes; and
4. whether any of the issues described above also are issues with respect to other forms of charities or charitable donations.

The Treasury and the Service request comments with respect to the following:

1. What are the advantages and disadvantages of donor-advised funds and supporting organizations to the charitable sector, donors, sponsoring organizations, and supported organizations, compared to private foundations and other charitable giving arrangements?
2. How should the amount and availability of a charitable contribution deduction for a transfer of assets to a donor-advised fund or a supporting organization, and the tax-exempt status or foundation classification of the donee, be determined if:

• a. the transferred assets are paid to, or used for the benefit of, the donor or persons related to the donor (including, for example, salaries and other compensation arrangements, loans, or any other personal benefits or rights)?
• b. the donor has investment control over the transferred assets?
• c. there is an expectation that the donor’s "advice" will be followed, or will be the sole or primary consideration, in determining distributions from, or investment of the assets in, the supporting organization or the donor-advised fund?
• d. the donor or the donee has option rights (e.g., puts, calls, or rights of first refusal) with respect to the transferred assets?
• e. the transferred assets are appreciated real, personal, or intangible property that is not readily convertible to cash?

1. 3. What are the effects or the expected effects of the PPA provisions (including the § 4958 excess benefit transaction tax amendments applicable to donor-advised funds and supporting organizations) on the practices and behavior of donors, donor advised funds, sponsoring organizations, supporting organizations and supported organizations?
2. 4. What would be appropriate payout requirements, and why, for:

• a. donor advised funds?
• b. funds that are excepted from donor-advised fund treatment by statute or by the authority of the Secretary, but for which the donor retains meaningful rights with respect to the investment or use of the transferred amounts?
• c. supporting organizations?
• d. any other types of charities?

1. 5. What are the advantages and disadvantages of perpetual existence of donor-advised funds or supporting organizations?
2. 6. What other types of charitable giving arrangements give rise to any of the above issues?