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Foundations Council Seeks Guidance on Donor-Advised Funds

MAY 28, 2021

Foundations Council Seeks Guidance on Donor-Advised Funds

DATED MAY 28, 2021
DOCUMENT ATTRIBUTES
  • Institutional Authors
    Council of Michigan Foundations
  • Code Sections
  • Subject Area/Tax Topics
  • Jurisdictions
  • Tax Analysts Document Number
    2021-22337
  • Tax Analysts Electronic Citation
    2021 TNTF 107-19
    2021 EOR 7-40
  • Magazine Citation
    The Exempt Organization Tax Review, Jul. 2021, p. 28
    88 Exempt Org. Tax Rev. 28 (2021)

May 28, 2021

Internal Revenue Service
Attn: CC:PA:LPD:PR (Notice 2021-28)
Room 5203 4
P.O. Box 7604
Ben Franklin Station
Washington, D.C. 20044

Re: Comments in Response to Notice 2021-28

Dear Sir/Madame:

The Council of Michigan Foundations (“CMF”) is grateful for the opportunity to respond to Notice 2021-28 which solicited suggestions for matters to be included in the 2021-2022 Priority Guidance Plan. The Council of Michigan Foundations is a Section 501(c)(3) membership association encompassing more than 300 charitable grantmaking organizations, including corporate, family, independent and community foundations.

We are asking that the Treasury Department and the Internal Revenue Service include in the 2021-2022 Priority Guidance Plan the following:

Provide initial regulations for donor advised funds, including but not limited to definitions, under IRC §4966 to address areas open to interpretation and confusion. A few reasons that these regulations are needed include:

  • Definitions need to be clarified and strengthened. For example, IRC §4966(d)(2)(A)(iii) provides that a donor advised fund is, in part, a fund “with respect to which a donor (or any person appointed or designated by such donor) has, or reasonably expects to have, advisory privileges with respect to the distribution or investment of amounts held in such fund or account by reason of the donor's status as a donor.” As IRC §4966(c)(2) does not include a definition for “donor” questions arise as to whether certain funds are a donor advised fund in circumstances such as:

    • Assume a child (“founder”) establishes a fund but does not make any contributions into the fund, and others (parents) make contributions into the fund. A strict reading of IRC §4966 would conclude that the fund is not a donor advised fund as the founder/advisor (child) is not a donor in the common meaning of the word donor.

  • Similarly, can a 501(c)(3) organization be a donor to a donor advised fund? The lack of an answer to this question presents a conflict within the Code since (i) a donor advised fund is prohibited from making a grant to a donor or donor advisor (ii) yet grants to a 501(c)(3) from a donor advised fund are expressly not a taxable distribution. So, if a 501(c)(3) organization is a donor advisor can it recommend grants to itself? A definition that excludes as a “donor” a 501(c)(3) organizations would allow funds to be established by a 501(c)(3) wherein the 501(c)(3) is then allowed to recommend grants from the fund to itself.

    • IRC 4966(d)(2)(C) provides the Secretary specific authority with respect to donor advised funds which the Secretary has yet to exercise and this has resulted in sponsors and taxpayers wondering about the application of that provision. IRC 4966(d)(2)(C) provides: “The Secretary may exempt a fund or account not described in subparagraph (B) from treatment as a donor advised fund:

      (i) if such fund or account is advised by a committee not directly or indirectly controlled by the donor or any person appointed or designated by the donor for the purpose of advising with respect to distributions from such fund (and any related parties), or

      (ii) if such fund benefits a single identified charitable purpose.”

      Without regulations, open questions exist such as “controlled by” and “single identified charitable purpose” in connection with IRC 4966(d)(2)(D).

  • Provide regulations in response to and finalizing the subject matter of Notice 2017-73. The regulations that address the topics in this notice need to be finalized and should also address whether satisfaction of a pledge by a donor advised fund results in forgiveness of debt taxable income to the party that made the pledge, a topic not mentioned in Notice 2017-73 but of concern to sponsors, donor advisors and other taxpayers.

  • Provide additional guidance and regulations that foster use of “program related investments” and “mission related investments.” Members of the philanthropic community are sometimes reluctant to make these investments as existing Treasury Regulations are confusing.

    • One area of confusion arises from the borrowing of the definition and name for “program related investments” (also known as “PRIs”) from the jeopardy investment rules of IRC 4944 for purposes of determining if certain grants — such as recoverable grants — count toward the mandatory minimum investment return payout requirements under IRC §4942. Additional confusion exists within the philanthropic community as discussions encouraging “mission related investments” (also known as “MRIs”) are confused with program related investment grants. In other words, is a PRI an investment decision to which IRC 4944 applies over which an investment committee and its policies are applicable, or is the PRI a grant decision to which IRC §4942 applies and over which a grants committee has oversight? Clarity could be provided if the Treasury Regulations found that “mission related investments” are investment decisions under IRC §4944 and “program related investment” are grant decisions under IRC §4942.

  • Clarifying that the presence of possible market rates of return do not disqualify an investment or grant as an MRI/PRI. While Treasury recently attempted to make this clear, private foundations remain reluctant to find market rate investments as permissible in MRI/PRI decisions even when the primary reason for the decision is not the rate of return.

We appreciate your consideration of our response to Notice 2021-28 and welcome the opportunity to provide additional information that can address any questions you may have. Please feel free to contact me at kcaldwell@michiganfoundations.org.

Sincerely,

Kyle Caldwell
President and CEO
Council of Michigan Foundations
Grand Haven, MI

DOCUMENT ATTRIBUTES
  • Institutional Authors
    Council of Michigan Foundations
  • Code Sections
  • Subject Area/Tax Topics
  • Jurisdictions
  • Tax Analysts Document Number
    2021-22337
  • Tax Analysts Electronic Citation
    2021 TNTF 107-19
    2021 EOR 7-40
  • Magazine Citation
    The Exempt Organization Tax Review, Jul. 2021, p. 28
    88 Exempt Org. Tax Rev. 28 (2021)
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