Laura L. Brownfield
General Counsel

Taxes on Taxable Distributions from Donor Advised Funds (IRC §4966)

The IRS released the first installment of proposed regulations in November of 2023 providing guidance on certain tax rules applying to donor advised funds (“DAFs”) including excise taxes on taxable distributions made by a sponsoring organization from a donor advised fund (DAF), and on the agreement of certain fund managers to the making of such distributions.

The proposed regulations would:

(1) provide guidance regarding DAFs and taxable distributions; and

(2) apply to certain organizations, including community foundations and other charitable organizations, that maintain one or more DAFs, and to other persons involved with the DAFs, including donors, donor-advisors, related persons, and investment advisors.

The definitions of both donor and donor-advisor are important because the ability of DAFs to engage in transactions with, and provide benefits to, donors and donor-advisors is limited and can give rise to excise taxes. The Proposed Regulations define an investment advisor that provides investment management and advice with respect to a client’s assets maintained in a DAF and the client’s personal assets as a donor-advisor with respect to the DAF while serving in that dual capacity. This has potential implications for the investment manager and the sponsoring organization.

The comments to the Proposed Regulations suggest that the IRS and Treasury Department are concerned about potential conflicts of interest and that an investment advisor may derive more than an incidental benefit in managing both the DAF and personal assets of a donor. The Proposed Regulations also provide that the payment of compensation from DAF assets to such investment advisors serving in this dual role would constitute a taxable distribution. In either case, a personal investment advisor that is considered a donor advisor would be subject to the excess benefit transaction rules under IRC Section 4958. The IRS is accepting comments and requests for a public hearing by Jan. 16, 2024.

Charitable Conservation Easement Deductions for Pass-Through Entities

The IRS and the Department of Treasury issued proposed regulations that provide guidance under a new section of the law that disallows deductions for certain charitable conservation contributions by partnerships and S corporations in late November. Under Sec. 170(h)(7), added by Section 605 of the SECURE 2.0 Act, a qualified conservation contribution is disallowed if the amount is more than 2.5 times the sum of each partner’s or shareholder’s relevant basis in the partnership or S corporation. The regulations provide definitions, explanations, computational guidance and examples of the new law. The IRS is seeking comments on the proposed regulations, and a public hearing is set for January 3, 2024.

Note: This material was developed by Community Foundation for Southeast Michigan. It is published with the understanding that neither the publisher nor the author is engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a professional advisor should be sought.