In November 2023, the IRS issued proposed regulations relating to donor-advised funds ("DAFs") (discussed here). The regulations define certain terms such as DAFs, Donors, and Donor-Advisors, and describe taxable distributions that are subject to certain excise taxes. Since the release of the regulations, there have been several notable developments:
In February, the New York State Bar Association ("NYSBA") Tax Section issued a report with detailed recommendations on the proposed regulations. The report seeks greater clarity in the final regulations and highlights scenarios where Donors, Donor-Advisors, and sponsoring organizations should be exempt from the excise tax.
Key recommendations by the NYSBA include:
- clarifying that certain common donor arrangements should not be considered DAFs;
- clarifying that if a Donor has the ability to recommend uses of any portion of a sponsoring organization's funds, then the funds are considered separately identified, as required under the definition of a DAF in the proposed regulations;
- removing the word "formal" from the requirement that a sponsoring organization maintain a "formal record" of contributions to DAF by a Donor so that any records separately identifying the fund suffice;
- revising when a person will be considered to have advisory privileges with respect to a fund, noting that the proposed regulations are overly restrictive and vague; and
- adding a presumption that reasonable expenses incurred in the ordinary course of a sponsoring organization's operations are not considered taxable distributions under the DAF regime.
In April, a bipartisan group of members of the House Ways and Means Committee sent a letter (the " Letter") to the Treasury Secretary expressing concern that the proposed regulations may impose unnecessary compliance burdens on charitable organizations, thereby impeding the utilization of DAFs. Like the NYSBA, the Letter highlights issues with the broad definitions, as well as potential retroactive application, of the proposed regulations.
On May 6, 2024, the IRS convened a public hearing, which included numerous speakers representing public and private charities, lawyers and accountants, among others. Here, too, a common theme was concern for the chilling effect of the proposed regulations on charitable giving.
A comprehensive list of collected comments on the proposed regulations can be found here. The Treasury has expressed a willingness to take these comments and concerns into consideration when drafting final regulations.
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