Just when it looked like nothing could bring together Congressional Republicans and Democrats in any meaningful bipartisan effort, the IRS dropped new proposed donor advised fund regulations that resulted in a rare kumbaya moment of shared loathing. In total, thirty-three bipartisan members of the Ways and Means Committee signed a letter to Treasury Secretary Janet Yellen criticizing nearly all aspects of the proposed rules.
Background.
Donor advised funds, or “DAFs” for short, are charitable giving accounts established at a public charity that serves as a sponsoring organization, typically a community foundation or a charitable wing of a large investment firm, which manages and administers the individual accounts on behalf of donors. A wide range of donors use DAFs, including individuals and families, because they enable donors to receive an immediate charitable tax deduction for contributions to the account and allow the donor to make recommendations for grants from the account to their favorite charitable organizations without the administrative and regulatory burden of operating a private foundation. According to the National Philanthropic Trust, grants from DAFs account for more than 10% of all giving in the United States today.
As with all increasingly popular financial vehicles, DAFs have been subject to scrutiny and criticism, including that they provide for an immediate tax benefit to a donor, but have no requirement that the funds be passed along to charities within a certain amount of time. Thus, DAFs allow funds to stay warehoused at the sponsoring organization indefinitely, where investment advisors earn fees for management of the assets. Other criticisms include the fact that DAFs can provide for anonymity because the sponsoring organization is listed as the donor, which can make tracing donations difficult. In response to these criticisms and many others, a number of bills have been introduced in Congress as well as in the California legislature, but all have so far failed to gain traction.
At the end of 2023, the IRS issued new donor advised fund regulations to address some of the concerns. The regulations clarified definitions relevant to DAFs, the application of excise taxes under Section 4966, and also effectively prohibited a donor’s personal investment advisor from benefitting from managing the donor’s DAF assets (unless the advisor also advises the sponsoring organization as a whole). Roughly 200 public comments were submitted during the regulation’s comment period, which closed February 15, 2024, with many comments specifically critical of the impact of the regulations on investment advisors.
The Letter.
On April 24, 2024, the Ways and Means Committee issued its letter criticizing the new proposed regulations, arguing that the regulations will have a chilling effect on charitable giving and on community foundations in particular. Specifically the letter says that the regulations are overbroad in regulating investment advisors, in potentially classifying field of interest funds as DAFs, in defining any distribution for operating expenses as potentially a taxable distribution subject to excise tax, and in having a retroactive effective date which would alter longstanding industry practices. The letter concludes by detailing how crucial the charitable sector is in times of crisis, emphasizing that DAFs allow donors to donate and “pre-fund” charitable giving in good economic times that can be mobilized quickly to the appropriate operating charities to provide services in times of immediate need, such as when the pandemic occurred.
Such bipartisan agreement in objecting to the potentially harmful regulations warms the cockles of the heart. It remains to be seen, however, whether the IRS will be similarly moved by this showing of solidarity. Most commentators predict that due to the volume of comments submitted, we are unlikely to see any changes or finalization of the proposed regulations prior to the end of the year, so we will have to wait to see how this all plays out.
For the National Council of Nonprofits’ public comments on the proposed regulations, click here.
