The IRS has issued long-awaited proposed regulations relating to taxable distributions from donor advised funds (DAFs).

These regulations have been percolating for years, beginning with the Pension Protection Act of 2006, and followed by IRS Notices in 2006, 2007, and 2017. The proposed regulations provide detailed definitions of terms frequently associated with DAFs, including guidance on what constitutes advisory privileges, who qualifies as a donor-advisor, and how to address funds or accounts with multiple donors. In addition, the proposed regulations contain certain exceptions to DAFs, including certain disaster relief funds, and scholarship funds created by Code Sec. 501(c)(4) organizations with a broad-based membership.

There are three initial take-aways:

  1. The expanded definition of a DAF may result in funds not historically treated as DAFs now falling within the new definition, effectively requiring those funds to follow the restrictions imposed on DAFs.
  2. The expanded definition of a “donor-advisor” includes the outside investment advisor of the donor, which may put an end to compensation of those advisors by both the donor and the DAF. This is an increasingly common arrangement and has been popular with some sponsoring organizations and donors.
  3. The narrowing of the term “distribution” to include only gratuitous transfers means any other payment from a DAF, other than reasonable investment and grant-related fees, may be subject to the taxable distribution rules.

The IRS has requested comments regarding 15 specific topics in the proposed regulations; however, they always accept comments regarding all content of the proposed regulations.

What’s Next?

The deadline for requested comments regarding the proposed regulations is February 15, 2024. The public is strongly encouraged to submit comments electronically at https://www.regulations.gov. After considering comments, the regulations will be final as the date they are published in the Federal Register. The proposed regulations state they are effective for tax years ending after the date the final regulations are published. If the final regulations are published in 2024, and absent changes to the effective date, organizations with December year-ends (for example) would be expected to comply with the terms of these regulations as of January 1, 2024.

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