The Treasury Department on Tuesday issued long-awaited proposed rules regulating donor-advised funds that sidestep many of the heated debates over the fast-growing form of charitable giving. But the proposed IRS regulations would ban the use of the funds to support lobbying and campaign activity.
Contributions made to donor-advised funds have surged over the past decade, becoming a major feature of the charitable landscape. Last year, donors poured more than $85 billion into the accounts, up 9 percent over 2021, according to a study released Tuesday by the National Philanthropic Trust. Doing so allowed donors to take an immediate tax deduction and direct money in the accounts to charities when they see fit, with no specific time limit.
As the funds have grown, largely because of the popularity of charities associated with financial services companies like Fidelity, Schwab, and Vanguard, they have attracted criticism that they allow those companies to collect fees on money that is stockpiled in the accounts rather than being sent to charities.
Other uses of the funds — such as employing them as an intermediary to allow donors to support causes anonymously and to avoid additional regulations that are placed on foundations — have come under scrutiny. So has the practice by foundations of making grants to the funds to satisfy the federal requirement that they distribute a percentage of their assets to charity each year. Foundations, unlike donor-advised funds, must distribute at least 5 percent of the fair market value of their endowment annually.
Attempts to place limits on how long money can sit in a donor-advised fund account and efforts to curtail their use to meet the foundation payout requirement haven’t gone anywhere in Congress. Those issues are absent from the proposed IRS regulations issued by the Treasury Department.
The reason, according to Lloyd Hitoshi Mayer, a law professor specializing in nonprofits at Notre Dame University, is that many of the issues that have arisen about the funds were not recognized by Congress in 2006 when it passed the Pension Protection Act, its first major effort to regulate donor-advised funds. Congress, Mayer says, needs to weigh in.
“The IRS doesn’t have a mandate from Congress to address those bigger issues at this point. They can’t just stick it in the regs.”
Instead, the proposed regulations attempt to define basic items, such as what qualifies as a fund, a donor, and a charitable distribution to avoid being assessed an excise tax. To avoid penalties, grants would need to be made to public charities, and the gifts could come in the form of cash or other goods and services.
Perhaps the most notable item in the proposal is a prohibition on using donor-advised fund grants to support lobbying or campaign-related activities. Charities can lobby on legislative issues but cannot weigh in on campaigns. The proposed regulation does not indicate how a donor-advised fund organization is supposed to track whether a donor makes a grant for those purposes.
“This strikes me as odd,” he said. “It would be nice to have a little more guidance on that.”
The IRS also proposes an “anti-abuse” rule that would attempt to ban distributions through several intermediary funds to disguise a grant to an individual. The IRS would collapse all of the intermediary donations into a single donation to assess whether grants to noncharities are being made and penalties should be imposed.
Under the proposed regulations a fiscally sponsored organization could be treated as a donor-advised fund in some cases, said Alexander Reid, a tax lawyer and former legislative counsel to Congress’s Joint Committee on Taxation.
Organizations that administer charitable accounts have been “operating in the dark for nearly 20 years” about whether they are subject to the rules governing donor-advised funds, Reid said, adding that regulations on some of the most contested issues, like payout rates or time limits, can be addressed only after the IRS has generated a clear definition of what constitutes a donor-advised fund.
“We have to measure twice and cut once. And we can’t answer those questions without answering the fundamental questions first.”
A public comment period on the proposed regulations ends January 16.
