Sponsoring organizations and fund managers have received long-awaited proposed regulations (REG-142338-07) regarding taxable distributions made from donor advised funds (DAFs). The proposed regulations, issued Nov. 13, 2023, also specify which types of accounts qualify as DAFs. In most cases, the proposed regulations would apply to charitable organizations and community foundations that maintain at least one DAF, as well as individuals involved with the funds, including donors, fund managers and donor-advisors.
Section 4966, enacted by the Pension Protection Act of 2006, imposes excise taxes on any taxable distributions from donor advised funds (DAFs). As further described below, DAFs are separate accounts established and held by a sponsoring 501(c)(3) organization in which the donor contributes funds and is then entitled to direct subsequent disbursements. Generally, DAFs enable individuals to pursue their charitable goals in a tax-advantaged, charitable manner without the administrative burden of establishing a separate tax-exempt organization. Over the years, questions have mounted regarding distribution requirements and day-to-day implementation of these funds.
Application of Excise Taxes
Under the proposed regulations, a 20% excise tax would be imposed on each taxable distribution from a DAF, which is levied upon the fund’s sponsoring organization. A taxable distribution would be defined as any distribution from a DAF to a natural person or to any other person unless the distribution satisfies a charitable purpose under section 170(c)(2)(B) of the Code and where the sponsoring organization maintains responsibility for the distribution in accordance with section 4945(h) of the Code.
Additionally, any fund manager who “knowingly consents” to the taxable distribution will be liable for a 5% excise tax, up to $10,000 of liability per distribution. When there is more than one eligible fund manager, all are jointly and severally liable.
Definition of a DAF
The Pension Protection Act defines a DAF as a fund or account that:
- is separately identified by reference to the contributions of a donor or a donor-advisor,
- is owned and controlled by a sponsoring section 501(c)(3) organization (the sponsoring organization which must be a public charity) and
- by which the donor advisor reasonably expects to have advisory privileges regarding the distribution or invest of the funds
The proposed regulations elaborate on these definitions by specifying what a DAF and donor-advisor are, what constitutes a distribution and who the appropriate recipients of DAF distributions are, so that the donor and the sponsoring organization can understand when the excise tax might apply.
While the proposed regulations could affect charitable giving through DAFs, further clarification regarding the annual distribution requirements of DAFs is likely needed. Comments and public hearing requests on the proposed guidance must be submitted by Jan. 16, 2024, through the Federal eRulemaking Portal.
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