part7-37

A donor or any person appointed or designated by a donor (donor advisor)
who has, or reasonably expects to have, advisory privileges with respect to
the distribution or investment of amounts held in a donor-advised fund by
reason of the donor’s status as a donor. IRC §4958(f)(7)(A) (cross-referencing
IRC 4966(d)(2)(A)(iii));

A member of the family of an individual described above. IRC §4958(f)(7)(B);

A 35% controlled entity. IRC § 4958(f)(7)(C) (cross-referencing §4958(f)(3)).

An “investment advisor,”
which is any person (other
than an employee of the sponsoring organization) compensated by the sponsoring
organization for managing the investment of, or providing investment advice
with respect to, assets maintained in donor-advised funds. IRC 4958(f)(8)(B);

A member of the family of an individual described above. IRC §4958(f)(8)(A)(ii);

A 35% controlled entity. IRC § 4958(f) §4958(f)(8)(A)(iii).

As donors and donor advisors are disqualified persons with respect to
DAFs, they may be subject to IRC 4958 taxes if they engage in ”
excess benefit transactions,”
as defined in §4958(c)(1). See IRC
4958(f)(1)(E).

As investment advisors are disqualified persons with respect to sponsoring
organizations, they may be subject to §4958 taxes if they engage in “excess benefit transactions,”
as defined in section 4958(c)(1).
See IRC 4958(f)(1)(F).

Most sponsoring organizations are public charities described in IRC 501(c)(3)
and IRC 509(a). Sponsoring organizations may also be war veterans organizations,
domestic fraternal organizations, or cemetery companies that maintain one
or more donor-advised funds. Sponsoring organizations cannot be governmental
organizations or private foundations. See IRC 4966(d)(1).

The first prong of the definition requires that a donor-advised fund be
separately identified by reference to contributions of a donor or donors.
A distinct fund or account of a sponsoring organization does not meet this
prong of the definition unless the fund or account refers to contributions
of a donor or donors, such as by naming the fund after a donor, or by treating
a fund on the books of the sponsoring organization as attributable to funds
contributed by a specific donor or donors.

The second prong of the definition provides that the fund be owned and
controlled by a sponsoring organization. To the extent that a donor or person
other than the sponsoring organization owns or controls amounts deposited
to a sponsoring organization, a fund or account is not a donor-advised fund.

The third prong of the definition provides that with respect to a fund
or account of a sponsoring organization, a donor or donor advisor has or reasonably
expects to have advisory privileges with respect to the distribution or investment
of amounts held in the fund or account by reason of a donor’s status
as a donor. Advisory privileges refer to the right of a donor to provide non-compulsory
recommendations, suggestions, or consultative advice.

IRC 4966(d)(2)(B)(i) excepts as a donor-advised fund any fund or account
that makes distributions only to a single identified organization or governmental
entity. If an organization accepts a contribution of funds from a donor to
be maintained by the organization in an identified account and disbursed as
advised by the donor but only to a specifically named organization or government
entity, the account would not be treated as a donor-advised fund. (Of course,
the disbursement would have to otherwise qualify as furthering charitable
purposes to be deductible.)

Accordingly, a donor that contributes to a university for purposes of
establishing a fund named after the donor that exclusively supports the activities
of the university is not a donor-advised fund, even if the donor has advisory
privileges regarding the distribution or investment of amounts in the fund.

Notice 2006-109 excepts as a donor-advised fund any fund or account that
makes educational grants to individuals that are not excepted by IRC 4966(d)(2)(B)(ii)
but made pursuant to a grant commitment entered into on or before August 17,
2006. Notice 2006-109 sets out the special rules regarding whether a commitment
will be considered entered into on or before August 17, 2006.

The answer should be “Yes.”
If the organization answers “No,”
it should provide these documents before any decision
is made on recognition of exemption.

The answer should be “Yes.”
The organization should
provide these documents before any decision is made on recognition of exemption.
If the organization claims that it does not have these documents, it should
explain how it solicits donors.

The answer should be “Yes.”
If the answer is “No”
because the web site provides misleading representations
or significant discrepancies with the organization’s print representations,
the web site should be made a part of the administrative record and the organization
should be asked for a written explanation to address these issues, or this
might provide grounds for denying exemption.

The answer should be “Yes,”
because donors are not
permitted to impose restrictions or conditions on the assets in their account.
If an organization answers “No,”
the organization is not
a sponsoring organization.

The answer should be “Yes.”
If the answer is “No,”
the organization should explain how the advisory process
works when the donor is not provided relevant information relating to the
donor’s account or fund.

The answer should be “Yes.”
This is the essence of
a donor-advised fund: the donor makes recommendations on how the donated assets
are to be distributed. If the answer is “No,”
the organization
may not be a sponsoring organization. Check for consistency with Part I, question
3.

The answer should be “Yes.”
If the organization answers “No,”
it should be asked how it evaluates distribution recommendations
– and requested to provide appropriate supporting documentation, since
this answer raises concerns about whether accounts or funds are subject to
the organization’s ownership and control.

The answer should be “Yes.”
If an organization answers “No,”
the organization cannot establish that it qualifies for
exemption.

The answer should be “Yes.”
A sponsoring organization
must always have the ultimate decision-making authority regarding how to distribute
funds contributed by a donor. The donor’s instructions are always advisory
recommendations. If an organization answers “No,”
the
organization is not a sponsoring organization.

The answer should be “Yes”
; otherwise, the organization
cannot establish that it qualifies for exemption.

If the organization answers “Yes,”
continue to question
7b. Not all sponsoring organizations offer donors the ability to select investment
options. If the organization answers “No,”
continue to
question 8a.

The organization should provide a list of the options it offers, including
investment options outside the organization. The options should be scrutinized
for impermissible private benefit.

Explaining details about the investment options is important for determining
whether the sponsoring organization operates exclusively for charitable purposes
or whether a substantial part of its activities serves the private interests
of its donors, donor advisors, fund managers, or other persons.

Note the word “select”
in question 7a and the word “recommend”
in question 8a. Selecting an option from a list
that the sponsoring organization has pre-approved indicates that the organization
exercises ultimate decision-making authority regarding how to distribute funds
contributed by a donor. If the donor has the ability to recommend an option,
the organization must exercise ultimate decision-making authority in deciding
whether such distribution will accomplish charitable purposes.

Not all sponsoring organizations offer donors the ability to recommend
investment options. If an organization answers “Yes,”
continue
to question 8b. If the organization answers “No,”
continue
to question 9.

The organization should answer “Yes,”
since it must
ensure that the assets are being used to further charitable purposes and not
to create impermissible private benefit. If it answers “No,
”
the organization does not qualify for exemption.

The answer should be “Yes.”
The sponsoring organization
must have the ultimate decision-making authority regarding how to invest funds
contributed by a donor. If the answer is “No,”
the organization
is not a sponsoring organization.

The sponsoring organization is not required to offer this option. If the
answer is “Yes,”
the organization should explain how this
provision operates. If the answer is “No,”
the organization
should explain what happens to assets in the donor’s account (e.g.,
will they be distributed to a designated organization or will they default
to the sponsoring organization’s unrestricted fund?).

There are no prohibitions on a sponsoring organization having procedures
regarding inactive accounts. Sometimes the organization will impose additional
fees or close an inactive account. This question relates to whether the organization
has a provision to ensure the continuation of distributions where an account
becomes inactive.

If the organization answers “Yes,”
continue to question
10b. If the organization answers “No,”
continue to question
11.

This question relates to whether donor-advised funds should be required
to distribute for charitable purposes a specified amount in order to ensure
that the sponsoring organization with respect to the fund is operating consistent
with the purposes or functions constituting the basis for its exemption. See
Notice 2007-21, 2007-9 I.R.B. 611, Study on Donor-Advised Funds and Supporting
Organizations.

While there is no specific requirement in place to require a fixed distribution
amount, sponsoring organizations have generally taken steps to demonstrate
that they fulfill their tax-exempt purpose by making distributions.

Generally, sponsoring organizations have policies regarding minimum yearly
distributions spread across all funds, usually at least 5%.

This question continues 11a. Some sponsoring organizations may require
a minimum distribution from each fund or account instead of across all accounts.

This question aims to understand what percent payout the organization
has adopted. If the policy requires less than 5%, the organization should
be asked to explain how it will fulfill its tax-exempt purpose that includes
making distributions.

Without a mechanism to ensure that distributions from donors’ accounts
or funds are distributed, the organization may not be able to describe how
it intends to fulfill its tax-exempt purpose.

Without a requirement that a certain amount of assets be paid out annually,
the organization must establish that it is not being used to serve private
interests instead of public interests.

While sponsoring organizations will typically hire an investment advisor
or financial company, the arrangement must be scrutinized to ensure it does
not produce prohibited private benefit.

The organization should describe how each investment or financial company
is paid for its services. The arrangement should be scrutinized for impermissible
private benefit.

Donor-advised funds are intended to accomplish charitable purposes rather
than to generate fees from securities trading for investment advisors. If
the arrangement produces too much private benefit to the financial company,
the organization does not qualify for exemption.

An organization that answers “Yes”
has potential conflicts
of interest. Its ability to enter into arm’s length transactions could
be impaired. It is preferable for the organization to hire independent investment
or financial advisors. However, all the facts and circumstances of the arrangement
must be explored to determine whether the arrangement serves impermissible
private interests.

The organization should provide an explanation that describes how it will
undertake these arrangements to ensure that the investment or financial company
is not obtaining more than an incidental benefit from its relationship with
the organization.

A competitive bidding process is one method to ensure that a particular
financial or investment company is not obtaining more than an incidental benefit
from its relationship with the organization. If a competitive bidding process
is not used, the answer should include a description of the process used for
selecting the investment advisor, and the arrangement should be scrutinized
for impermissible private benefit.

This question is aimed at understanding whether the organization has an
in-house staff or some other arrangement for managing its investments.

IRC 4966 imposes an excise tax on distributions from a DAF to natural
persons, unless one of the exceptions applies (see questions 4 and 5 below).
If a DAF is making such distributions, it may not qualify for exemption because
this raises questions about whether it is operating for impermissible private
purposes instead of public purposes.

IRC 4966 imposes an excise tax on distributions from a DAF for grants
to individuals, unless one of the exceptions in 4b or 5b below applies. If
a DAF is making such distributions, it may not qualify for exemption because
this raises questions about whether it is operating for impermissible private
purposes instead of public purposes.

IRC 4966 imposes an excise tax on these distributions, unless the exception
below applies. If a DAF is making such distributions, it may not qualify for
exemption because this raises questions about whether it is operating for
impermissible private purposes instead of public purposes.

IRC 4966(d)(2)(C) authorizes the Secretary to exempt a fund or account
from the definition of donor-advised fund. Pursuant to this authority, Notice
2006-109, 2006-51 I.R.B. 112, excludes from the definition of donor-advised
fund any employer-sponsored disaster relief fund that meets certain enumerated
requirements.

Distributions to persons other than natural persons (e.g., corporations,
trusts, estates, partnerships, or associations) are taxable distributions
unless one of the exceptions applies (see questions 7 through 11). If a DAF
is making taxable distributions, it may not qualify for exemption because
this raises questions about whether it is operating for impermissible private
purposes instead of public purposes.

Only some distributions to supporting organizations are permissible. See
question 8b below.

The above distributions are permissible (i.e., not taxable distributions).
However, distributions to (1) a Type III supporting organization other than
one that is functionally integrated, and (2) to any supporting organization
with a donor who has advisory rights and who directly or indirectly controls
the recipient supported organization are taxable distributions. If a DAF is
making taxable distributions, it may not qualify for exemption because this
raises questions about whether it is operating for impermissible private purposes
instead of public purposes.

Distributions to the sponsoring organization of such donor-advised fund
or to another donor-advised fund are not taxable distributions.

Distributions from any donor-advised fund from which a sponsoring organization
makes distributions only to a specified organization or governmental entity
are not taxable distributions.

If the answer to question 11a is “Yes,”
continue to
question 11b below. If the answer is “No,”
continue to
question 12.

If the distribution is not for a charitable purpose, it is a taxable distribution.
Even if the distribution is for a purpose specified in IRC 170(c)(2)(B), go
on to question 11c below.

The expenditure responsibility rules generally require that an organization
exert all reasonable efforts and establish adequate procedures to see that
the distribution is spent solely for the purposes for which made, to obtain
full and complete reports from the distributee on how the funds are spent,
and to make full and detailed reports with respect to such expenditures to
the Secretary.

Grants to other organizations for purposes specified in IRC 170(c)(2)(B)
and where the organization exercises expenditure responsibility are not taxable
expenditures.

If the organization does not exercise expenditure responsibility, the
grant would be a taxable distribution. If a DAF is making taxable distributions,
it may not qualify for exemption because this raises questions about whether
it is operating for impermissible private purposes instead of public purposes.

The answer should be “Yes.”
Without such information,
the organization would likely not be able to establish that it qualifies for
exemption. It also would likely be subject to the IRC 4967 excise tax in future
years.

The answer should be “Yes.”
Such transactions are
automatically treated as excess benefit transactions under IRC 4958(c)(2),
with the entire amount paid to such person treated as the amount of the excess
benefit. Without such information, the organization would likely not be able
to establish that it qualifies for exemption. It also would likely be subject
to the 4958 excise tax in future years.

The answer should be “Yes.”
Without such information,
the organization would likely not be able to establish that it qualifies for
exemption. It also would likely be subject to the 4958 excise tax in future
years. Related persons are a member of the donor or donor advisor’s
family, or a 35% controlled entity of the aforementioned.