Thursday, April 25, 2024

Ways and Means Members Hate the DAF Proposed Regulations

Nonprofit Law Prof Blog

Thirty-three members of Ways and Means, Republicans and Democrats alike, signed a  letter to Secretary Janet Yellen late last week basically pouring a big bucket of ice water on the DAF proposed regulations about which we posted extensively earlier this year.  The congress people criticized everything from the definition of "donor-advisor," "taxable distributions," the treatment of field of interest funds, and the color of grandma's sitting-around-the-house bloomers.  I mean, the writers like absolutely nothing about the proposed regulations.  

These sorts of coordinated oppositions are hardly spontaneous, as I point out to my students, and make for good exhibits when discussing tax policy and how tax laws come into existence.  To my mind, the letter evinces a well-planned and very probably successful campaign against the proposed regulations. I guess there is nothing wrong with participatory government, but I wonder if there is ever going to be an equally coordinated effort by proponents of DAF regulations.  I also think the Service walked into this one.  The letter proves that the proposed regs have the unlikely effect of bothering every disparate group interested -- investment banks, community foundations, churches -- all at once.  The regs are too ambitious in that they attempt a "one size fits all" approach that serves only to unite all sponsors of various genealogies in single opposition.  It would have been better to have issued regulations addressing each sector participant in separate subsections of a single regulation or even in separate regulations.  That's my take.

You can read the whole letter at the link above or here.  It's all very polite, by the way.  But without actually citing to a recent Tax Court opinion regarding how much time must be spent responding to public comments, the letter implies that without detailed consideration of and response to nearly 200 public comments, and even with detailed consideration and response, the Treasury department can expect a challenge to final regulations that are not wholly revamped. 

Here are a few extended excerpts from the letter:

First, the Regulations are overly broad, and may cause a chilling effect on charitable giving to DAFs. By making an investment advisor a donor-advisor, the Regulations could severely restrict the role of an investment advisor, and thus lead to donors choosing other vehicles. For instance, the Regulations could lead donors to pick alternative charitable vehicles with lower annual payouts, thereby negatively impacting the many charities that have come to rely on such funding.

Second, under the Regulations’ broad definition of the term “donor-advised fund,” many funds held by certain public charities could be classified as a DAF, and thus be subject to a more complicated regulatory regime. For example, counting field of interest funds (FOIFs) as DAFs would be particularly harmful at community foundations, where these funds support important local initiatives, often in perpetuity. Subjecting FOIFs, designated funds, or funds with advisory committees to the same substantiation requirements and limitations as what have been historically considered DAFs could be confusing for donors, expensive for sponsors, and lead to less money getting to end-use charities.

Third, the broad definition of the term “taxable distribution” could infringe on a DAF’s charitable operations and objectives. Generally, under the Regulations, any distribution to an individual, or not for a “charitable purpose,” is subject to penalty. By broadly defining a “distribution” as any grant, payment, disbursement, or transfer from a DAF, the Regulations could subject payments made to cover necessary operating charitable expenses – such as payments to philanthropic advisors and due diligence expenses – to an excise tax.

darryll k. jones

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