Taxes on Taxable Distributions from Donor Advised Funds under Section 4966

The Sustainable Economies Law Center supports the proposed regulations but argues they fail to address the "legal fiction" of donor control over Donor Advised Funds (DAFs). They recommend establishing specific criteria and a "facts and circumstances" test to ensure that DAF sponsors exercise meaningful ownership and control, suggesting that funds with high donor control should be taxed and regulated like private foundations.

The Minnesota Council of Nonprofits (MCN) supports the proposed regulations but argues they are insufficient because they lack requirements for private foundations to report the ultimate use of funds transferred to Donor Advised Funds (DAFs). The organization advocates for mandatory reporting on Form 990PF to ensure transparency, protect restricted charitable assets, and allow state attorneys general to fulfill their oversight duties.

Community Initiatives, a nonprofit fiscal sponsor, opposes the proposed regulations because they could unintentionally classify fiscal sponsorship accounts as donor-advised funds (DAFs). They argue that these rules would create significant administrative burdens and risks for fiscal sponsors, potentially disrupting their ability to support community-driven charitable projects.

The Council of Michigan Foundations, a 501(c)(3) membership organization for philanthropy staff and trustees, opposes several aspects of the proposed regulations regarding excise taxes on taxable distributions from Donor Advised Funds (DAFs). They argue that the regulations treat public charity-owned DAFs less favorably than private foundations, create overly broad definitions for "donor-advisors" that include professional investment advisors, and introduce unnecessary uncertainty through "substance over form" provisions.

The Ocean Foundation, a 501(c)(3) non-profit organization, opposes the proposed rules because they unfairly penalize non-investment 501(c)(3) entities by taxing distributions to natural persons and imposing burdensome equivalency tests. They argue that these rules hinder charitable work, such as funding scientists and community-led projects, and suggest that the government should instead focus on requiring minimum annual payouts for DAFs.

The Tax Section of the New York State Bar Association submitted a report providing specific recommendations and clarifications regarding the proposed regulations under Section 4966. They advocate for several modifications, including removing the "formal" record requirement for separate identification, providing exceptions for certain types of organizations, and clarifying rules on advisory privileges and taxable distributions.

Michael Ravnitzky expresses general support for the proposed rule, noting that it provides necessary clarity and prevents the misuse of Donor Advised Funds (DAFs). However, he urges the IRS to revise the rule to align more closely with statutory language, provide more robust data and impact analysis, and simplify burdensome valuation and reporting requirements.

The commenter argues that Donor Advised Funds (DAFs) are being abused by the ultra-wealthy to shelter wealth and avoid taxes. They advocate for the IRS to take action against these practices to protect taxpayers.