Regulating Donor Advised Funds

Donor advised funds have certainly been a growing controversial area of tax law for many years. In late 2017, the Internal Revenue Service (“IRS”) announced that it would propose regulations to keep donor advised funds from being used to skirt private foundation rules and excise taxes. Needless to say, many non-profits have become increasingly concerned about the effects the 2017 Tax Cuts and Jobs Act will have on charitable giving, and are concerned that the IRS proposal regarding donor advised funds will also contribute to reductions in charitable giving.

Donor Advised Funds

A donor-advised fund is a philanthropic vehicle that allows donors to make a charitable contribution and receive an immediate tax benefit. Thereafter, the donor can recommend grants from the fund over time. A donor may contribute to the fund as frequently as they’d like and can make recommendations for grants to various charities when they are ready.

Internal Revenue Code (“IRC”) §4966(d)(2) defines a donor advised fund as a “fund or account owned and controlled by a sponsoring organization, which is separately identified by reference to contributions of a donor or donors, and with respect to which the donor, or any person appointed or designated by such donor (donor advisor), has, or reasonably expects to have, advisory privileges with respect to the distribution or investment of the funds.”

Notice 2017-73

The IRS issued Notice 2017-73 (“Notice”) which outlines the approaches the IRS is considering with respect to the regulation of donor advised funds. While the Treasury Department and the IRS continue to draft proposed regulations to address donor advised funds, this Notice is intended to provide interim guidance on these specific issues and to solicit additional comments in anticipation of the issuance of further guidance. The Notice focuses on the following three areas:

  • Distributions providing a more than incidental benefit to a donor, donor advisor or related person;
  • Use of donor advised fund assets to satisfy the charitable pledge of a donor, donor advisor or related person; and
  • Use of donor advised fund assets to “avoid” public support limitations.

Certain Distributions From A Donor Advised Fund Providing More Than An Incidental Benefit

Section 3 of the Notice addresses whether a distribution from a donor advised fund to an IRC §501(c)(3) public charity that enables a donor, donor advisor or related person to attend or participate in an event results in such person receiving a more than incidental benefit.

As outlined in the Notice, this issue arises when, for example, a charity sells tickets to a charity-sponsored event for $1,000 per ticket and notifies purchasers that the fair market value of each ticket is $100, then (assuming that the requirements of IRC §170 are satisfied), a person who purchases a ticket for $1,000 may deduct up to $900 of the payment as a charitable contribution.

However, the Treasury and the IRS view the payment of a portion of the ticket by the donor advised fund as relieving the donor of the obligation to pay the full price which can be considered a direct benefit that would be taxable under IRC §4967. The same methodology would apply to the use of donor advised fund assets to pay for the deductible portion of a membership fee, which would also be deemed to confer more than an incidental benefit.

The Notice indicates that a donor who wishes to receive goods or services (such as tickets to an event) offered by a charity in exchange for a contribution of a specified amount can make the contribution directly, without the involvement of a donor advised fund.

Use of Donor Advised Fund Assets To Satisfy The Charitable Pledge of a Donor, Donor Advisor Or Related Person

Section 4 of the Notice addresses whether a distribution from a donor advised fund to an IRC §501(c)(3) public charity can be used to satisfy the charitable pledge of a donor or whether such distribution constitutes a more than incidental benefit under IRC §4967.

Most commenters favored allowing distributions from a donor advised fund to fulfill a charitable pledge. However, some commentators expressed concern that requiring a sponsoring organization to determine whether a donor made a legally binding pledge, prior to making a donor advised fund distribution may complicate charitable giving.

The Notice indicates that the Treasury Department and the IRS “currently agree with those commenters who suggested that it is difficult for sponsoring organizations to differentiate between a legally enforceable pledge by an individual to a third-party charity and a mere expression of charitable intent.” The Notice states that under IRC §4967, distributions from a donor advised fund to a charity will not be considered to result in more than an incidental benefit to a donor under IRC §4967 (regardless of whether the grantee charity treats the distribution as satisfying the pledge and regardless of whether the pledge is enforceable under current law), if the following requirements are satisfied:

  • The sponsoring organization makes no reference to the existence of a charitable pledge when making the donor advised fund distribution;
  • No donor, donor advisor or related person receives, directly or indirectly, any other benefit that is more than incidental on account of the donor advised fund distribution; and
  • The donor does not attempt to claim a charitable contribution deduction under IRC 170(a) with respect to the donor advised distribution, even if the grantee charity erroneously sends the donor a written acknowledgement of the distribution.

The Notice further states that taxpayers may rely on Section 4 of the Notice until additional guidance is issued. However, the Notice makes clear that this “special rule” applies only for purposes of IRC §4967 and the prohibition on such transactions by a private foundation remains.

Preventing Attempts To Use A Donor Advised Fund to Avoid “Public Support” Limitations

Section 5 of the Notice discusses how contributions from donor advised funds may be treated, in certain situations, in calculating the recipient organization’s public support.

Because of the contributions they receive from the general public, donor advised fund sponsoring organizations typically qualify as IRC §170(b)(1)(A)(vi) public charities whose distributions would ordinarily be counted as public support without limitation to the distributee charity.

The Treasury Department and IRS are concerned that some donors and distributee charities seek to use donor advised fund sponsoring organizations as intermediaries to avoid the 2% limitations on contributions. For example, rather than making contributions, which would be subject to the 2% public support limitation directly to charities, certain donors make contributions to donor advised fund maintained by sponsoring organizations and then advise the sponsoring organizations to make distributions from the donor advised fund to the distributee charities.

In order to avoid the potential for abuse, the Treasury Department and the IRS are considering treating a distribution from a donor advised fund as an indirect contribution from the donor that funds the donor advised fund rather than as a contribution from the sponsoring organization; solely for purposes of determining whether the distributee charity qualifies as publicly supported.

It is anticipated that any proposed changes to these regulations would provide that a donee organization, for purposes of determining its amount of public support, must treat:

  • a sponsoring organization’s distribution from a donor advised fund as coming directly from the donor rather than from the sponsoring organization;
  • all anonymous contributions received (including a donor advised fund distribution for which the sponsoring organization fails to identify the donor) as being made by one person; and
  • distributions from a sponsoring organization as public support without limitation only if the sponsoring organization specifies that the distribution is not from a donor advised fund or states that no donor or donor advisor advised the distribution.


The IRS noted multiple times throughout the Notice that, once released, the proposed regulations may be relied upon on until final regulations are issued. However, the IRS requested comments from the public which were to be submitted by March 5, 2018. The proposed regulations will be drafted addressing the comments received.

A copy of the Notice can be accessed here.

Author: Hayley Shulman, CPA | [email protected]

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