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.

Forefront, an Illinois association representing foundations and nonprofits, supports the proposed rulemaking but requests specific refinements to ensure clarity and equity. They advocate for exemptions for certain scholarship and disaster relief funds, clarification on fiscal sponsorship and lobbying rules, and a two-year delay for the effective date to allow for industry adaptation.

Vanguard Charitable, a sponsor of donor-advised funds (DAFs), supports the proposed regulations but requests specific modifications to ensure practical implementation. They advocate for a non-retroactive applicability date, a clearer definition of "distribution" that excludes reasonable DAF-specific administrative expenses, and specific guidance on grant-related expenses and expenditure responsibility.

Servant Foundation, a 501(c)(3) organization, supports the proposed regulations but requests specific clarifications and improvements. They argue that reasonable expenses for maintaining donated assets should not be considered taxable distributions and seek explicit guidance that funds established exclusively for a public charity's operating programs are not considered donor-advised funds (DAFs).

The Venn Foundation, a 501(c)(3) public charity and DAF sponsoring organization, argues that the proposed rules create confusion by removing established standards for Program-Related Investments (PRIs) and suggests incorporating existing PRI definitions for clarity. They also oppose the proposed retroactive applicability date, requesting a future applicability date and grandfathering provisions to allow for a smooth transition and to preserve existing charitable impacts.

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.

John K. Graham, a tax attorney, argues that Example 3 of the Proposed Regulations is overbroad and creates an inappropriate chilling effect on organizations seeking the Single Identified Organization Exception. He suggests dropping Example 3 in favor of a rule that explicitly restricts distributions to internal use, arguing that board membership by a donor should not automatically disqualify a fund.