Sen. Angus King (I-ME) and Sen. Chuck Grassley (R-IA) introduced bipartisan legislation, the Accelerating Charitable Efforts Act (the ACE Act), which would tighten restrictions on donor advised funds (DAFs) and make certain changes to private foundation excise taxes. The legislation suggests that some members of Congress are concerned that the existing rules for DAFs and private foundations provide a charitable contribution deduction to donors but delay the receipt of funds by operating charities.
Tighter Restrictions on DAFs
The ACE Act would limit charitable contribution deductions when a taxpayer makes a contribution to certain "nonqualified" DAFs. When a contribution is made to a nonqualified DAF, four restrictions would apply:
- For non-cash contributions, no deduction would be allowed unless the sponsoring organization sells the contributed asset for cash.
- For any contribution, no deduction would be allowed until the taxable year in which the sponsoring organization makes a qualifying distribution of the contribution (or the proceeds from the sale of such contribution).
- The amount of the deduction would be limited to the amount of the corresponding qualifying distribution.
- Contributions must be distributed within 50 years of the donation, or an excise tax is imposed on the sponsoring organization.
These restrictions generally would not apply to contributions of cash or publicly-traded assets to "qualified DAFs" or to certain DAFs sponsored by qualified community foundations. For this purpose, a qualified DAF generally means a DAF with a written agreement in place that requires the donor’s advisory privilege for any contribution to the DAF to terminate within the 14 years following the year the contribution is made. In contrast, this 14-year termination provision would not be required for DAFs sponsored by a qualified community foundation, as long as either: (i) no individual who has advisory privileges with respect to the DAF has advisory privileges with respect to more than $1,000,000, in the aggregate, held across DAFs sponsored by the qualified community foundation; or (ii) the DAF is required to make qualifying distributions of at least 5% of the value of the DAF’s assets in each calendar year. A qualified community foundation, for this purpose, must serve the needs of a particular geography community that is no larger than four states and hold substantial assets outside of DAFs.
In addition, the ACE Act would make changes to the public support tests, which are used to determine whether a charity is classified as a public charity or as a private foundation. Under current law, support from a DAF is treated as coming from a public charity—the DAF sponsoring organization. This makes it easier for recipients of support from a DAF to themselves be treated as public charities.
Under the ACE Act, if support is provided by a DAF sponsoring organization, and the original donor is not identified by the sponsoring organization, the support generally would not be treated as provided by a public charity. Instead, the support would be aggregated with all unidentified amounts coming from all DAF sponsoring organizations as if a single person provided such support. If the sponsoring organization identifies the original donor, then the support would be treated as provided by such donor.
Changes to Private Foundation Minimum Distribution Requirements
The ACE Act would also make two changes to the minimum distribution requirements applicable to private foundations. First, the Act generally would disallow administrative expenses that are paid to disqualified persons that are substantial contributors or family members of substantial contributors from being treated as qualifying distributions for purposes of the private foundation minimum distribution requirements. Second, the Act would prohibit a distribution made to a DAF from being treated as a qualifying distribution.
Exemptions for Certain Private Foundations from Investment Income Excise Tax
The ACE Act would create two exemptions from the private foundation investment income excise tax. First, the Act would generally exempt private foundations that make qualifying distributions in excess of 7% of the aggregate fair market value (as adjusted to remove acquisition indebtedness) of the private foundation’s assets, other than its direct-use assets. Second, the ACE Act would exempt certain “limited-duration” private foundations that have a specified duration of not more than 25 years and do not any make distributions to other private foundations that share a common disqualified person.