Tuesday, February 27, 2024

DAF Proposed Regulations: Does the DAF Definition Discourage Best Practices?

Can replicating best practices stifle disruptive innovation?

IRC 4966 defines donor advised funds as a fund or account:

(i)  which is separately identified by reference to contributions of a donor or donors,
(ii) which is owned and controlled by a sponsoring organization, and
(iii) with respect to which a donor (or any person appointed or designated by such donor) has, or reasonably expects to have, advisory privileges with respect to the distribution or investment of amounts held in such fund or account by reason of the donor’s status as a donor.
Regarding the first requirement -- separate identification by reference to a donor's or donors' contributions -- the proposed regulations say this:  

Separate identification by reference to contributions of a donor or donors—(1) In general. A fund or account is separately identified by reference to contributions of a donor or donors if the sponsoring organization maintains a formal record of contributions to the fund or account relating to a donor or donors. If there is no formal record, whether a fund or account is separately identified by reference to contributions of a donor or donors is based on all the facts and circumstances.


Prop. Treas. Reg. 53.4966-3(b)(1). The American College of Trust and Estate Council (ACTEC) reasonably points out that any well-managed charity or charitable fund ought to keep records of contributions by donors' names.  If for no other reason than to put all of our names and phone numbers in an auto-dialer and then call us incessantly.  I added the last part, but ACTEC makes a perfectly reasonable point, suggesting that the regulation ought to articulate a distinction between records that are maintained by good managers, and those that are maintained to indicate to whom the fund is especially beholding.  I don't know how the distinction can be made but its a good point.  The sponsor's devotion of extraordinary attention to a particular donor is seemingly what the requirement is trying to get at, and the normal records of any charity don't suggest that a donor is the "big cheese" to whom special attention is given regarding a particular fund.  

If no "formal" record is maintained, the proposed regs instruct that relevant facts include whether the sponsor refers to the fund as a DAF, agrees with a donor that its a DAF, names the fund after a donor, donor-advisors, or related persons, or solicits advice from donors or donor-advisors before making distributions.  All reasonable.  But then the proposal includes these two facts:

  • The fund or account balance reflects items such as contributions, dividends, interest, distributions, administrative expenses, and gains and losses (realized or unrealized);
  • One or more donors or donor-advisors regularly receive a fund or account statement from the sponsoring organization; and

Here too, ACTEC reasonably asserts that these factors, comprising two-thirds of the six factors listed, will always be present in any well-managed charity or charitable fund.  Good record keeping is, of course, not just good management but probably also required by IRC 501(c)(3).  A charity ought to keep good records just to maintain tax exemption or proof that it is not a private foundation.  And what about state record keeping requirements?  ACTEC points out that sponsors should be transparent too, perhaps by sending "impact" statements and telling the public how much money has been spent and how. So the factors above are as strong an indication of best practices (transparency and good management) as they are that a particular donor is being kept appraised of how his donations are being spent.  

Is all this just nit-picking?  The definition still requires that a donor have advisory privileges so a sponsor that doesn't want DAF status can simply withhold those privileges.  But what if, in order to encourage sustained engagement (best practices again) a sponsor sends out quarterly, annual, biannual or semi-annual reports to all donors.  And questionnaires or surveys asking "how are we doing?" or "tell us what you think are the most pressing needs."  ACTEC didn't exactly raise those examples, but they are consistent with ACTEC and others' concerns that the proposed regulations might treat as DAFs virtually all well-managed funds that are transparent, or seek to generate donor engagement and loyalty.  What about churches that keep track of tithes and offerings and regularly solicit members' input for outreach activities?

What are the consequences of an overly broad regulatory interpretation of the statutory definition?  I am not quite sure.  We can probably think of all sorts of "worst case" scenarios, some legitimate and others not.  And in any event, we can probably plan around even a broad definition with a little thought.  But at the least, treating good management and transparency as indication of DAF status -- with its associated excise taxes under IRC 4958 and 4967, and the expenditure responsibility under IRC 4966(c)(1)(B(ii) -- will make sponsors think twice about implementing recording keeping and donor relations procedures that are just good stewardship rather than indications of special solicitousness to a particular donor.  I suppose, too, that overbreadth is good for us lawyers though.

darryll k. jones



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