Changes proposed for private foundation grants to donor-advised funds

| 4/7/2022
Changes proposed for private foundation grants to donor-advised funds

In its recently released “General Explanations of the Administration’s Fiscal Year 2023 Revenue Proposals” (Green Book), the Biden administration included provisions that would place additional limitations on private foundation grants to donor-advised funds (DAFs). The proposal follows the introduction of pending legislation in Congress to close perceived loopholes that permit a private foundation to delay the ultimate distribution of charitable contributions by contributing to DAFs.

The administration’s proposal, listed in the release under the “Close Loopholes” section, clarifies that a private foundation grant to a DAF is not a qualifying distribution under IRC Section 4942(g) unless the DAF funds are expended as a qualifying distribution by the end of the following taxable year and the private foundation maintains adequate records or other evidence showing that the DAF has made a qualifying distribution within the required time frame.

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The proposal would be effective after the date of enactment and is consistent with a similar provision  in the Senate’s Accelerating Charitable Efforts Act (ACE Act), also introduced in the House, that would prohibit private foundations from treating grants to DAFs as qualifying distributions, except for contributions made out of corpus within certain time periods.

These provisions would resolve a perceived abuse that private foundations use DAFs to “park” charitable funds rather than spending them on charitable activities as part of the 5% payout requirement under IRC Section 4942. Critics charge that for amounts to be treated as qualifying distributions, those amounts should immediately benefit charitable organizations that are implementing charitable activities. Foundations making distributions to DAFs also will have additional reporting considerations.

However, the administration’s proposal is more limited in scope than the ACE Act. While the administration’s proposal addresses how private foundations use DAFs, the ACE Act addresses broader concerns related more generally to DAFs and provides limitations on DAFs and on charitable contributions to DAFs. The administration’s proposal also does not include the ACE Act provision increasing a private foundation’s required charitable payout from 5% to 7% to avoid the excise tax on net investment income under IRC Section 4940.

The administration’s proposal comes shortly after the Senate Finance Committee’s March 17 hearing on “Examining Charitable Giving and Trends in the Nonprofit Sector.” While the hearing focused largely on expanding charitable deductions, Sen. Charles Grassley, a sponsor of the ACE Act, raised the issue of boosting the charitable payout of private foundations and DAFs. Grassley is a longtime challenger of the exempt sector and has been vocal on the potential abuses of private foundations and DAFs.

Looking ahead

Both the proposed legislation and the administration’s proposals are motivated by two policy concerns: timing (matching the timing of a charitable deduction with charitable impact) and perpetuity (limiting the duration of DAFs and foundations to limit grant-making vehicles with perpetual life). Many philanthropic leaders have advocated for changes to correct perceived abuses, but others say that the proposals might reduce total charitable funding.

While many doubt the ACE Act will pass in its entirety, the administration and Congress continue to focus on pursuing changes to address perceived loopholes related to holding charitable assets in private foundations and DAFs. Given the continued focus on tightening the tax rules for private foundations and DAFs, taxpayers should work with their tax advisers to stay abreast of any developments and prepare for how to respond should changes be enacted.

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The Dec. 15, 2021, event included a federal tax legislative update followed by two concurrent breakout sessions.

Stay up to speed on regulatory and legislative tax changes with timely updates from Crowe.

The Dec. 15, 2021, event included a federal tax legislative update followed by two concurrent breakout sessions.

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Lori McLaughlin
Lori McLaughlin
Partner, Not-for-Profit Tax