Generally, a donor advised fund is a separately identified fund or account that is maintained and operated by a section 501(c)(3) organization, which is called a sponsoring organization. Each account is composed of contributions made by individual donors. Once the donor makes the contribution, the organization has legal control over it. However, the donor, or the donor’s representative, retains advisory privileges with respect to the distribution of funds and the investment of assets in the account.
The IRS is aware of a number of organizations that appeared to have abused the basic concepts underlying donor-advised funds. These organizations, promoted as donor-advised funds, appear to be established for the purpose of generating questionable charitable deductions, and providing impermissible economic benefits to donors and their families (including tax-sheltered investment income for the donors) and management fees for promoters.
Examinations of these arrangements may result in the following Service actions in appropriate cases: (a) disallow deductions for charitable contributions under Internal Revenue Code section 170 for payments to the fund; (b) impose section 4966 excise taxes on sponsoring organizations and managers of donor-advised funds; (c) impose section 4958 excise taxes on donors or managers of donor advised funds; and/or (d) deny or revoke the charity’s 501(c)(3) exemption.
New Requirements for Donor-Advised Funds
Donor-advised funds are subject to new requirements under the Pension Protection Act of 2006. The IRS has issued guidance and new procedures implementing the legislation.
New excise taxes may apply to sponsoring organizations and managers of donor-advised funds.
Thus, transactions between sponsoring organizations and fund managers may be subject to intermediate sanctions excise taxes and donor-advised funds may be subject to taxes on excess business holdings.
Notice 2006-109 provides interim guidance on issues affecting supporting organizations and sponsoring organizations of donor advised funds.
Donors are provided guidance on how to determine whether a grantee that is a donor-advised fund is a public charity under section 509(a)(1), (2), or (3), in IRS Business Master File information.
Notice 2007-21 requested public comments on issues to be included in a study of donor advised funds and supporting organizations; comments were due by April 9, 2007.
Donor Advised Funds – Guide Sheet and Related Materials
Memorandum from Director, Exempt Organizations Rulings & Agreements
Transmitting guidelines for processing exemption applications submitted by sponsoring organizations that maintain donor advised funds.
What Every NonProft should know about Donor Advised Funds
by SofterWare / Donorperfect Fundraising Software CEO Douglas Schoenberg
Donor Advised Funds.com
Take the complications out of giving with one of today’s most popular vehicles for charitable estate planning. The Donor Advised Fund, the simplified alternative to a Private Foundation.
DISCLAIMER: This information is not intended to provide legal or accounting advice, or to address specific situations. Please consult with your legal or tax advisor to supplement and verify what you learn here.