CPA Seeks Change in Treatment of IRA Distributions to DAFs

March 26, 2018

Ms. Elinor Ramey
Attorney-Advisor
Department of the Treasury

Mr. Stephen LaGarde
Benefits Tax Counsel
Department of the Treasury

Re: Request for Change in Treatment of Qualified Charitable Distributions From IRAs

Dear Ms. Ramey and Mr. LaGarde:

Thank you for the opportunity to submit comments on issues that may need guidance related to distributions to exempt organizations.

Under current law, distributions from IRAs to Donor-Advised Funds (DAFs) do not qualify for tax-favored treatment available to Qualified Charitable Distributions (QCDs).

I am writing to request that consideration be given to eliminating the wording in Section 408(d)(8)(B)(i) which disqualifies (or prevents) distributions from an IRA that would otherwise be Qualified Charitable Distributions from being treated as QCDs because the recipient is a Donor-Advised Fund (DAF).

As an alternative, I would suggest that language be introduced to amend the provisions to allow QCD treatment if the distribution from the IRA is made indirectly and “promptly” to organizations described in Section 170(b)(1)(A) by means of a contribution/distribution to a Donor-Advised Fund.

Clause (i) of Section 408(d)(8)(B) provides that . . .

For purposes of this paragraph, the term “qualified charitable distribution” means any distribution from an individual retirement plan (. . .) —

(i) which is made directly by the trustee to an organization described in section 170(b)(1)(A) (other than any organization described in section 509(a)(3) or any fund or account described in section 4966(d)(2)), and . . .

In general, Section 4966(d)(2) defines a “Donor-Advised Fund” as (1) a fund or account owned and controlled by a sponsoring organization, (2) which is separately identified by reference to contributions of the donor or donors, and (3) where the donor (or a person appointed or designated by the donor) has or reasonably expects to have advisory privileges over the distribution or investments of the assets.

The definition of a “Donor-Advised Fund” was not included in the Code or the Regulations until Section 4966(d)(2) was added by the Pension Protection Act of 2006 (Pub. L. No. 109-208). Before this provision was added, the Treasury and the IRS had been addressing concerns over potential abuses arising from the activities of donors or related parties who might be exercising excess control or receiving undue benefits from DAFs. Those concerns still exist after the provision was added.

I understand that the Treasury's concern regarding potential abuses related to distributions from DAFs to private foundations, in part, is the reason for the current treatment in Section 408(d)(8)(B)(i). I am also aware that some private foundations have severely abused the provisions permitting the use of DAFs by building up significant amounts for many years and by otherwise compromising limitations regarding the ability of donors to advise DAFs on the distributions of funds. As discussed below, I believe these concerns over abusive activities of this nature (in the context suggested below) could be appropriately addressed without continuing the elimination that presently exists.

I would suggest two significant reasons that now justify the changes I am recommending to allow distributions from IRAs that would otherwise be treated as QCDs to benefit from QCD treatment if they are made to Donor-Advised Funds.

First, currently the major sponsoring organizations have sufficient safeguards, procedures and governance in place to ensure that the assets in the DAFs they administer accomplish charitable purposes and are used exclusively for charitable purposes and not used for impermissible private benefits that revert directly or indirectly back to the donor.

Second, changes made by the Tax Cuts & Jobs Act of 2018 (P.L. 115-97) which became effective January 1, 2018 adversely impact the ability of some charitably-inclined individuals to expand their charitable giving when they take tax considerations into account.

Individuals who would be particularly benefitted by these changes are those individuals who are eligible to make QCDs (i.e., they are 70½ years of age) and desire to make charitable contributions in amounts greater than their Minimum Required Distributions (MRDs) but less than the $100,000 annual limitation on QCDs.

For individuals desiring to make charitable contributions within this range, allowing distributions from IRAs to be treated as QCDs would greatly facilitate their ability to split their overall contributions for the year between (1) QCD distributions/contributions in larger dollar amounts made directly to a few charitable organizations and (2) QCD distributions/contributions to a DAF from which contributions could be made to numerous qualified charitable organizations in significantly smaller dollar amounts ($50-$75-$100-$200, etc.)

The current tax treatment which prevents distributions to a DAF from an IRA (in amounts greater than the MRD limitation for that year, but less than $100,000 per year) potentially . . .

The increase in the standard deduction for individuals under the Tax Cuts & Jobs Act of 2018 which became effective January 1, 2018 complicates and potentially alters the timing of charitable contributions to many organizations which typically receive “smaller dollar” contribution amounts. In other words, these changes in the law could have the effect of limiting contributions to be made every other year in order to maximize the interplay between allowable itemized deductions and the expanded standard deduction which has now become law.

These potentially adverse effects would be significantly reduced if distributions from an IRA to a DAF were treated as QCDs.

I would also suggest that there are appropriate ways that the change in the law I am recommending could be implemented to assure the Treasury and the IRS that distributions from an IRA to a DAF are, in fact, flowed-through promptly to appropriate charitable organizations by the DAF as a conduit.

For example, a provision could be added to require that the amount of any QCD to a DAF must be distributed promptly to appropriate charitable organizations.

In other words, I believe that under appropriate circumstances, distributions to DAFs should be allowed preferential treatment as QCDs if such distributions flow through the DAF as a temporary conduit to Qualified Section 501(c)(3) charitable organizations within a specified time period (i.e., 30, 60 or 90 days) after the distribution is received by the DAF.

Furthermore, if necessary, an enhanced substantiation requirement could be added with respect to such distributions. This substantiation requirement would require the individual making the QCD to include substantiation of both (1) the QCD and (2) the prompt distributions by the DAF (as a conduit) by attaching a form to his or her income tax return for the year in which the QCD was made. This documentation should satisfy the Treasury and the IRS that distributions from the DAF to qualified charitable organizations were promptly made (within the allotted time frame).

To advance consideration of this proposition, I would be pleased to submit a draft of a form intended to be used for this purpose.

Coincidentally, I note that Senator John Thune recently introduced proposed legislation (Charities Helping Americans Regularly Throughout the Year Act of 2017 [S. 1343]) that seems to partially address the issue I have raised here. Should there be further consideration of his proposal, perhaps some of my suggestions might help.

Finally, if the subject of my comments for consideration do not fall within your respective areas of specialization or application, I would appreciate your forwarding my letter to the appropriate individuals within the Treasury and/or the IRS.

Respectfully,

Willard J. De Filipps, CPA
Mount Prospect, IL