Taxes on Taxable Distributions From Donor Advised Funds Under Section 4966, 77922-77941 [2023-24982]

Agencies

• Internal Revenue Service
• DEPARTMENT OF THE TREASURY

[Federal Register Volume 88, Number 218 (Tuesday, November 14, 2023)]
[Proposed Rules]
[Pages 77922-77941]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-24982]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 53

[REG-142338-07]
RIN 1545-BI33


Taxes on Taxable Distributions From Donor Advised Funds Under 
Section 4966

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking.

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SUMMARY: This document contains proposed regulations regarding 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 
provide guidance regarding DAFs and taxable distributions. The proposed 
regulations generally would 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 certain fund 
managers.

DATES: Written or electronic comments and requests for a public hearing 
must be received by January 16, 2024.

ADDRESSES: Commenters are strongly encouraged to submit public comments 
electronically. Submit electronic submissions via the Federal 
eRulemaking Portal at https://www.regulations.gov (indicate IRS and 
REG-142338-07) by following the online instructions for submitting 
comments. Requests for a public hearing must be submitted as prescribed 
in the ``Comments and Requests for a Public Hearing'' section. Once 
submitted to the Federal eRulemaking Portal, comments cannot be edited 
or withdrawn. The Department of the Treasury (Treasury Department) and 
the IRS will publish for public availability any comment received to 
its public docket, whether submitted electronically or in hard copy. 
Send paper submissions to: CC:PA:01:PR (REG-142338-07), Room 5203, 
Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, 
Washington, DC 20044.

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, 
Ward L. Thomas at (202) 317-5800 (not a toll-free number); concerning 
submission of comments and requests for a public hearing, contact 
Vivian Hayes by email at [email protected] (preferred) or by phone 
at (202) 317-6901 (not a toll-free number).

SUPPLEMENTARY INFORMATION: 

Background

I. Overview

    Some charitable organizations (including community foundations) 
establish accounts to which donors may contribute and thereafter 
provide nonbinding advice or recommendations with regard to 
distributions from the account or the investment of assets in the 
account. Such accounts are commonly referred to as ``donor advised 
funds'' or ``DAFs.'' Sections 1231-1235 of the Pension Protection Act 
of 2006 (PPA), Public Law 109-280, 120 Stat. 780, 1094-1102 (August 17, 
2006), enacted various amendments to the Internal Revenue Code (Code) 
regarding DAFs. Among these, section 1232 of the PPA amended section 
4958 of the Code to add special rules relating to excess benefit 
transactions with DAFs; section 1231(b) of the PPA added section 4967 
to the Code, which imposes an excise tax on prohibited benefits 
resulting from distributions from DAFs; and section 1231(a) of the PPA 
added section 4966 of the Code, which imposes excise taxes on taxable 
distributions made by sponsoring organizations from a DAF, and on the 
agreement of certain fund managers to the making of such distributions. 
This notice of proposed rulemaking contains proposed amendments to 26 
CFR part 53 (Foundation and Similar Excise Taxes) under section 4966 
(proposed regulations).

II. Statutory Provisions

A. Section 4958

    Section 4958 imposes an excise tax on any ``excess benefit 
transaction,'' which is defined generally under section 4958(c)(1) as 
any transaction in which an economic benefit is provided, the value of 
which exceeds the value of any consideration received, by an applicable 
tax-exempt organization (including a section 501(c)(3) sponsoring 
organization of a DAF) directly or indirectly to or for the use of a 
disqualified person with respect to a

[[Page 77923]]

transaction.\1\ This excise tax under section 4958 is paid by the 
disqualified person with respect to the transaction. A separate excise 
tax, paid by organization managers, is imposed on the participation of 
any organization manager in the transaction, knowing that it is an 
excess benefit transaction, unless such participation is not willful 
and is due to reasonable cause.
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    \1\ For this purpose, a disqualified person is defined under 
section 4958(f) as a person who was, at any time during the five-
year period ending on the date of the transaction, in a position to 
exercise substantial influence over the affairs of the organization, 
and certain related persons, with special rules for DAFs and section 
509(a)(3) organizations.
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    Section 1232 of the PPA amended section 4958 to provide that, with 
respect to any transaction that involves a DAF, a disqualified person 
includes (1) any donor with respect to the DAF, (2) any donor-advisor 
with respect to the DAF, and (3) any member of the family, or any 35-
percent controlled entity of a donor or donor-advisor or member of 
their families with respect to the DAF, each, a ``related person,'' and 
to provide that any grant, loan, compensation, or other similar payment 
from the DAF to such disqualified person is an excess benefit 
transaction. For purposes of this special rule for transactions 
involving DAFs, the excess benefit includes the entire amount of the 
grant, loan, compensation, or other similar payment. The PPA also 
amended section 4958 to treat as a disqualified person with respect to 
a transaction involving a sponsoring organization an investment advisor 
(or a family member or a 35-percent controlled entity of such person).

B. Section 4966

1. DAFs
    Section 4966(d)(2)(A) defines a ``DAF'' generally as a fund or 
account (1) that is separately identified by reference to contributions 
of a donor or donors, (2) that is owned and controlled by a sponsoring 
organization, and (3) with respect to which a donor (or any person 
appointed or designated by the donor, namely, a donor-advisor) has, or 
reasonably expects to have, advisory privileges with respect to the 
distribution or investment of amounts held in the fund or account by 
reason of the donor's status as a donor.
    Section 4966(d)(2)(B)(i) states that a DAF does not include a fund 
or account that makes distributions only to a single identified 
organization or governmental entity. Section 4966(d)(2)(B)(ii) states 
that a DAF does not include a fund or account with respect to which a 
donor or a donor-advisor provides advice regarding grants to 
individuals for travel, study, or similar purposes if (1) the donor's, 
or the donor-advisor's, advisory privileges are exercised exclusively 
in the donor's or donor-advisor's capacity as a member of a committee 
all the members of which are appointed by the sponsoring organization, 
(2) no combination of donor(s), donor-advisor(s), or persons related to 
such persons directly or indirectly control the committee, and (3) all 
grants are awarded on an objective and nondiscriminatory basis pursuant 
to a procedure approved in advance by the sponsoring organization's 
board of directors, and the procedure is designed to ensure that the 
grants meet the requirements of section 4945(g)(1), (2), or (3).
    Section 4966(d)(2)(C) authorizes the Secretary of the Treasury or 
her delegate (Secretary) to exempt a fund or account from treatment as 
a DAF if it (1) is advised by a committee not directly or indirectly 
controlled by the donor or any donor-advisor (and any related parties), 
or (2) benefits a single identified charitable purpose.
2. Sponsoring Organizations
    Section 4966(d)(1) defines a ``sponsoring organization'' as an 
organization described in section 170(c) (including a foreign 
organization that otherwise would be described in section 170(c)(2)), 
other than a private foundation (as defined in section 509(a)) or a 
governmental entity (as defined in section 170(c)(1)), that maintains 
one or more DAFs.
3. Excise Tax on Taxable Distributions
    Section 4966(a)(1) imposes a 20 percent excise tax on each taxable 
distribution, payable by the sponsoring organization with respect to 
the DAF. Section 4966(c)(1) defines a ``taxable distribution'' as 
including any distribution from a DAF to any natural person. Section 
4966(c)(1) also defines a taxable distribution as including a 
distribution from a DAF to any other person if (1) the distribution is 
for any purpose other than a purpose specified in section 
170(c)(2)(B),\2\ or (2) the sponsoring organization does not exercise 
expenditure responsibility with respect to the distribution in 
accordance with section 4945(h).
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    \2\ Section 170(c)(2)(B) defines charitable contributions to 
include contributions to certain organizations for the following 
purposes: religious, charitable, scientific, literary, or 
educational purposes, or to foster national or international amateur 
sports competition (but only if no part of the organization's 
activities involve the provision of athletic facilities or 
equipment), or for the prevention of cruelty to children or animals.
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    Section 4966(c)(2) provides that a taxable distribution, however, 
does not include a distribution from a DAF to (1) any organization 
described in section 170(b)(1)(A) (other than a disqualified supporting 
organization), (2) the sponsoring organization of such DAF, or (3) any 
other DAF. Section 4966(d)(4) defines a ``disqualified supporting 
organization'' as (1) a Type III supporting organization that is not 
functionally integrated and (2) any other supporting organization if 
the donor or any donor-advisor (and any related parties) with respect 
to a DAF directly or indirectly controls a supported organization of 
the supporting organization.
4. Excise Tax on Agreement of Fund Manager
    Section 4966(a)(2) imposes a five percent excise tax on the 
agreement of a fund manager to the making of a taxable distribution 
knowing that it is a taxable distribution, payable by any fund manager 
who agreed to the making of the distribution. Section 4966(d)(3) 
defines a ``fund manager'' with respect to any sponsoring organization 
as (1) an officer, director, or trustee of such sponsoring organization 
(or an individual having powers or responsibilities similar to those of 
officers, directors, or trustees of the sponsoring organization), and 
(2) with respect to any act (or failure to act), the employees of the 
sponsoring organization having authority or responsibility with respect 
to each act (or failure to act).
    Section 4966(b) provides that, if more than one fund manager is 
liable under section 4966(a)(2), then all such persons are jointly and 
severally liable with respect to the distribution; however, the maximum 
amount of tax imposed by section 4966(a)(2) with respect to any one 
taxable distribution is $10,000.

C. Section 4967

    The PPA also added section 4967, which imposes an excise tax on the 
advice that a donor, donor-advisor, or related person provides 
regarding a distribution from a DAF that results in such person or any 
other donor, donor-advisor, or related person receiving, directly or 
indirectly, a more than incidental benefit. This excise tax is paid by 
any donor, donor-advisor, or related person who advises the sponsoring 
organization as to the distribution or who receives the prohibited 
benefit. A separate excise tax, paid by the fund manager, is imposed on 
the agreement of any fund manager of the sponsoring organization to the 
making of the distribution,

[[Page 77924]]

knowing that it would confer a prohibited benefit. Section 4967(b) 
provides that, with respect to any distribution, no tax can be imposed 
under section 4967 if a tax has been imposed under section 4958.

III. Administrative Guidance

    In December 2006, the Treasury Department and the IRS issued Notice 
2006-109, 2006-2 C.B. 1121, to provide interim guidance on certain 
requirements enacted by the PPA, including those that affect DAFs.\3\ 
Notice 2006-109 also requested comments regarding the notice and 
suggestions for future guidance.
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    \3\ For example, section 5.01 of Notice 2006-109 excludes from 
the definition of a DAF an employer-sponsored disaster relief fund 
that meets certain requirements. To be excluded, the fund must: (1) 
serve a single identified charitable purpose, which is to provide 
relief from one or more qualified disasters within the meaning of 
section 139(c)(1), (2), or (3); (2) serve a large or indefinite 
class, i.e., a charitable class; (3) select recipients of grants 
based on objective determinations of need; (4) select recipients of 
grants using either an independent selection committee or adequate 
substitute procedures to ensure that any benefit to the employer is 
incidental and tenuous; (5) make no payment from the fund to or for 
the benefit of any director, officer, or trustee of the sponsoring 
organization of the fund or for the benefit of any member of the 
fund's selection committee; and (6) maintain adequate records that 
demonstrate the recipients' needs for the disaster relief 
assistance.
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    In February 2007, the Treasury Department and the IRS issued Notice 
2007-21, 2007-1 C.B. 611, requesting comments in connection with a 
study conducted by the Treasury Department and the IRS on the 
organization and operation of DAFs and supporting organizations, as 
required by section 1226 of the PPA.
    In December 2017, the Treasury Department and the IRS issued Notice 
2017-73, 2017-51 I.R.B. 562, describing approaches being considered to 
address certain issues regarding DAFs and requesting comments on those 
approaches. In particular, Notice 2017-73 stated, among other things, 
that the Treasury Department and the IRS are considering developing 
proposed regulations under section 4967 that would, if finalized, 
provide that (1) certain distributions from a DAF that pay for the 
purchase of tickets that enable a donor, donor-advisor, or related 
person under section 4958(f)(7) to attend or participate in a charity-
sponsored event result in a more than incidental benefit to such person 
under section 4967, and (2) certain distributions from a DAF that the 
distributee charity treats as fulfilling a pledge made by a donor, 
donor-advisor, or related person, do not result in a more than 
incidental benefit under section 4967 if certain requirements are met.
    In response to these three notices, the Treasury Department and the 
IRS received 118 comments, 74 of which concerned DAFs and taxable 
distributions.\4\ After consideration of the comments received, the 
Treasury Department and the IRS are proposing these regulations 
regarding the excise taxes payable by sponsoring organizations of DAFs 
and fund managers on taxable distributions under section 4966. The 
major areas of comment relating to section 4966 are discussed in the 
Explanation of Provisions.
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    \4\ The Treasury Department and the IRS anticipate that the 
other comments will be considered in the development of future 
guidance under other Code sections.
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Explanation of Provisions

1. Definition of Donor Advised Fund
    In accordance with section 4966(d)(2)(A), the proposed regulations 
would define a DAF generally as a fund or account (1) that is 
separately identified by reference to contributions of a donor or 
donors, (2) that is owned and controlled by a sponsoring organization, 
and (3) with respect to which at least one donor or donor-advisor 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. Unless otherwise excepted, a 
fund or account that meets all three prongs of the definition would be 
a DAF.
    A sponsoring organization is proposed to be defined in accordance 
with section 4966(d)(1) as any organization that (1) is described in 
section 170(c) (other than a governmental unit described in section 
170(c)(1)), without the requirement under section 170(c)(2)(A) that it 
be created or organized in the United States or in any possession 
thereof, or under the law of the United States, any State, the District 
of Columbia, or any possession of the United States; (2) is not a 
private foundation; and (3) maintains one or more DAFs.

A. Separate Identification by Reference to Contributions of a Donor or 
Donors

    Section 4966(d)(2)(A)(i) states that a DAF must be separately 
identified by reference to contributions of a donor or donors. In 
general, the proposed regulations would provide that a fund or account 
is separately identified by reference to contributions of a donor or 
donors if the sponsoring organization maintains a formal record of 
contributions to the fund or account relating to a donor or donors. A 
formal record exists regardless of whether the sponsoring organization 
commingles the assets attributed to the fund or account with other 
assets of the sponsoring organization, as long as the sponsoring 
organization tracks contributions of a donor or donors to the fund or 
account. A contribution would be defined as any gift, bequest, or 
similar payment or transfer, whether in cash or in-kind, to or for the 
use of a sponsoring organization.
    If the sponsoring organization does not maintain a formal record of 
contributions to a fund or account, then whether a fund or account is 
separately identified would be based on all the facts and 
circumstances.
    The proposed regulations would provide that facts and circumstances 
that are relevant in determining that a fund or account is separately 
identified by reference to contributions of a donor or donors include: 
(1) the fund or account balance reflects items such as contributions, 
dividends, interest, distributions, administrative expenses, and gains 
and losses (realized or unrealized); (2) the fund or account is named 
after one or more donors, donor-advisors, or related persons (as 
defined by proposed Sec.  53.4966-1(j)); \5\ (3) the sponsoring 
organization refers to the fund or account as a DAF; (4) the sponsoring 
organization has an agreement or understanding with one or more donors 
or donor-advisors that such fund or account is a DAF; (5) one or more 
donors or donor-advisors regularly receive a fund or account statement 
from the sponsoring organization; and (6) the sponsoring organization 
generally solicits advice from the donor(s) or donor-advisor(s) before 
making distributions from the fund or account. The Treasury Department 
and the IRS request comments on these and any additional factors that 
would be relevant in determining whether a fund or account is 
separately identified by reference to contributions of a donor or 
donors.
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    \5\ Section 53.4966-1(j) of the proposed regulations defines 
``related person,'' by reference to section 4958(f)(7)(B) and (C), 
as any family member (as defined in section 4958(f)(4)) or any 35-
percent controlled entity (as defined in section 4958(f)(3) with 
appropriate substituted language).
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    Several commenters asked that funds or accounts funded by certain 
types of organizations, such as public charities, private foundations, 
or governmental entities, be excluded from the definition of a DAF. The 
proposed regulations define a donor generally as any person described 
in section 7701(a)(1) that

[[Page 77925]]

contributes to a fund or account of a sponsoring organization. However, 
the proposed regulations would explicitly exclude from the definition 
of donor (1) any public charity described in section 509(a)(1), (2), or 
(3) (other than a disqualified supporting organization) and (2) any 
governmental unit described in section 170(c)(1). A fund or account 
that is separately identified by reference to contributions solely from 
either of these types of entities would not be treated as separately 
identified by reference to contributions from a donor and thus would 
not be a DAF.\6\ Because private foundations and disqualified 
supporting organizations could use a DAF to circumvent the payout and 
other requirements that are applicable to those organizations, the 
proposed regulations would not exclude private foundations or 
disqualified supporting organizations from the definition of donor.
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    \6\ Because public charities and governmental units are not 
treated as donors, it also follows that if only they have advisory 
privileges with respect to a fund, the fund would not be a DAF even 
if there are other donors. See Sec.  53.4966-3(e)(4) (Example 4) of 
these proposed regulations.
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B. Advisory Privileges

    Under section 4966(d)(2)(A)(iii), for a fund or account to 
constitute a DAF, (1) at least one donor or donor-advisor must have, or 
reasonably expect to have, advisory privileges with respect to the 
distribution or investment of amounts held in such fund or account, and 
(2) such advisory privileges must arise by reason of (in other words, 
because of) the donor's status as a donor. The proposed regulations 
generally would provide that the existence of such advisory privileges 
depends on the facts and circumstances, including the conduct (and any 
agreement or understanding) of both the donor(s) or donor-advisor(s) 
and the sponsoring organization. A donor (or donor-advisor) may have, 
or reasonably expect to have, advisory privileges even in the absence 
of the actual provision of advice. Advisory privileges would include 
those arising from service on an advisory committee. The proposed 
regulations also would presume that advisory privileges of a donor or 
donor-advisor arise by reason of the donor's status as a donor, except 
where specifically provided otherwise.
    Commenters recommended that, for advisory privileges to exist, 
advice must include a specified amount and a named recipient. 
Commenters also suggested that, in the absence of written evidence, 
advisory privileges should not be inferred unless there are at least 
three separate successive occasions where the sponsoring organization 
accepts the donor's advice. Commenters further requested that a 
sponsoring organization's proposal to distribute a certain amount to a 
certain distributee, subject to the donor's approval, be viewed as the 
donor's exercise of the advisory privilege only if the donor approves 
the proposal.
    The Treasury Department and the IRS believe that the commenters' 
recommendations would define advisory privileges too narrowly. Instead, 
the proposed regulations would provide that the presence of any of the 
following four facts is sufficient to establish that a donor or donor-
advisor has advisory privileges by reason of the donor's status as a 
donor, regardless of whether they are exercised: (1) the sponsoring 
organization allows a donor or donor-advisor to provide nonbinding 
recommendations regarding distributions from, or regarding the 
investment of assets held in, a fund or account; (2) a written 
agreement states that a donor or donor-advisor has advisory privileges; 
(3) a written document or any marketing material of the sponsoring 
organization made available to a donor or donor-advisor indicates that 
a donor or donor-advisor may provide advice to the sponsoring 
organization regarding the distribution or investment of amounts held 
by a sponsoring organization (for example, a pre-approved list of 
investment options or distributees that the sponsoring organization 
provides to a donor or donor-advisor); or (4) the sponsoring 
organization generally solicits advice from a donor or donor-advisor 
regarding the distribution or investment of amounts held in a fund or 
account.
    However, the proposed regulations would also provide four special 
rules relating to advisory privileges. First, if at least one donor or 
donor-advisor has, or reasonably expects to have, advisory privileges 
with respect to a fund or account or any portion of a fund or account, 
then advisory privileges by reason of the donor's status as a donor 
exist with respect to that fund or account even if there are multiple 
donors to the fund or account.
    Second, there would be special rules for advisory privileges 
arising from service on an advisory committee, as discussed in section 
1.D of this Explanation of Provisions of this preamble.
    Third, advice provided solely in a person's capacity as an officer, 
director, employee (or in a similar capacity) of a sponsoring 
organization would not by itself give rise to advisory privileges by 
reason of a donor's status as a donor. However, if, by reason of the 
person's contribution to a fund or account, an officer, director, or 
employee of the sponsoring organization is allowed to advise on how to 
distribute or invest amounts in the fund or account, the person would 
be considered to have advisory privileges by reason of the donor's 
status as a donor with respect to that fund or account.
    Lastly, unless the special rule for officers, directors, and 
employees of a sponsoring organization applies, if a donor to a fund or 
account is the sole person with advisory privileges with respect to a 
fund or account, the advisory privileges would be deemed to be by 
reason of the donor's status as a donor. This bright-line rule would 
provide clarity and enhance administrability. The Treasury Department 
and the IRS request comments regarding whether there are additional 
circumstances in which application of the bright-line rule is not 
warranted.
    Commenters asked that guidance clarify that advisory privileges do 
not include certain legally enforceable rights of the donor with 
respect to a contribution. If a restriction is placed on a gift at the 
time the gift is made and there is no provision for subsequent 
discretion regarding the restriction, then the restriction should not 
give rise to advisory privileges. For example, a donor's mere 
earmarking of a donation (at the time of donation) for a particular 
fund or program of the recipient charity, without more, does not create 
an advisory privilege. Whether the terms of a gift agreement create a 
DAF depends on the restrictions set forth in the agreement. The 
Treasury Department and the IRS request comments on the circumstances 
in which a gift agreement or advisory rights retained by a donor could 
create a DAF.

C. Donor-Advisor

    Consistent with section 4966(d)(2)(A)(iii), the proposed 
regulations would define donor-advisor as a person appointed or 
designated by a donor to have advisory privileges regarding the 
distribution or investment of assets held in a fund or account of a 
sponsoring organization. If a donor-advisor delegates any of the donor-
advisor's advisory privileges to another person, that person also would 
be a donor-advisor. No particular form of appointment or designation 
would be necessary under the proposed regulations.
    A donor-advisor generally would include a person suggested or 
recommended by a donor to have advisory privileges if the sponsoring 
organization provides such privileges.

[[Page 77926]]

However, this rule would not apply if (1) the donor recommends an 
investment advisor who is properly viewed as providing services to the 
sponsoring organization as a whole, rather than providing services to 
the DAF, as described in this section 1.C of this Explanation of 
Provisions of this preamble, or (2) the donor recommends a person to 
serve on a committee of the sponsoring organization that advises as to 
distributions or investments of amounts in a fund or account if the 
recommendation is based on objective criteria related to the expertise 
of the member in the particular field of interest or purpose of the 
fund or account, the committee consists of three or more individuals 
and a majority of the committee is not recommended by the donor or 
donor-advisor, and the recommended person is not a related person with 
respect to the recommending donor or donor-advisor, as discussed in 
section 1.D of this Explanation of Provisions of this preamble.
    The proposed regulations include three special rules with respect 
to donor-advisors. First, a person (other than a person or governmental 
unit excepted from status as a donor) who establishes a fund or account 
and advises as to the distribution or investment of amounts in that 
fund or account would be treated as a donor-advisor with respect to 
that fund or account, regardless of whether the person contributes to 
the fund or account. For example, if a person establishes a memorial or 
fundraising fund to which the person does not contribute, but does 
provide advice regarding distributions from the fund, the person would 
be considered a donor-advisor. The donors to the fund have implicitly 
designated the advisor to have advisory privileges.
    Second, an investment advisor described in section 4958(f)(8)(B) 
\7\ that manages the investment of, or provides investment advice with 
respect to, both assets maintained in a DAF and the personal assets of 
a donor to that DAF (personal investment advisor) would be a donor-
advisor with respect to the DAF while serving in that dual capacity, 
regardless of whether the donor appointed, designated, or recommended 
the personal investment advisor. However, recognizing that a personal 
investment advisor may more generally advise the sponsoring 
organization, the proposed regulations would provide that a personal 
investment advisor will not be considered a donor-advisor if the 
personal investment advisor is properly viewed as providing services to 
the sponsoring organization as a whole, rather than providing services 
to the DAF. For example, if an investment advisor contracts with a 
sponsoring organization to provide services to all of its 1,000 DAFs, 
and the sponsoring organization reasonably charges the investment 
advisor's fees uniformly to all of those DAFs, the investment advisor 
would properly be viewed as providing services to the sponsoring 
organization as a whole.
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    \7\ Section 4958(f)(8)(B) defines investment advisor, with 
respect to any sponsoring organization, as any person (other than an 
employee of such organization) compensated by the organization for 
managing the investment of, or providing investment advice with 
respect to, assets maintained in DAFs owned by the organization.
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    The Treasury Department and the IRS request comments on additional 
circumstances that would indicate that a personal investment advisor is 
properly viewed as providing services to the sponsoring organization as 
a whole, rather than providing services to the DAF, as well as 
additional circumstances in which a personal investment advisor should 
not be considered a donor-advisor.
    One commenter suggested that an investment advisor recommended by a 
donor to the sponsoring organization should not be treated as a donor-
advisor if the investment advisor is regulated by State and Federal 
agencies, because agency oversight makes it unlikely that the 
investment advisor would manipulate the assets of the DAF for personal 
gain. The commenter stated that an investment advisor that was 
considered a donor-advisor could not receive compensation from a DAF 
because that would be an excess benefit transaction under section 
4958(c)(2).
    While the commenter believes that it is unlikely that a regulated 
investment advisor would manipulate the assets of the DAF for personal 
gain, the Treasury Department and the IRS view the close relationship 
between a donor and his or her personal investment advisor as giving 
the donor influence over investment decisions with respect to assets 
held in the DAF comparable to that of a donor-advisor. Moreover, the 
Treasury Department and the IRS are concerned about potential conflicts 
of interest. Specifically, sponsoring organizations may allow the 
appointment of a donor's personal investment advisor as an advisor 
regarding the investment of DAF funds in order to encourage investment 
advisors to promote their clients' giving through a DAF, rather than 
directly to a public charity (other than the sponsoring organization). 
In fact, a counterincentive may be created for both donors and their 
personal investment advisors to not advise distributions out of their 
DAFs to operating charities. Another significant concern is that a more 
than incidental benefit may occur if the investment advisor charges the 
donor a reduced fee for managing the donor's personal assets because 
the investment advisor also manages the assets the donor contributed to 
the DAF.
    The Treasury Department and the IRS agree that a personal 
investment advisor that is considered a donor-advisor would be subject 
to the excess benefit transaction rules of section 4958(c)(2) if he or 
she received a grant, loan, compensation, or similar payment from the 
DAF.
    Third, advisory committee members recommended by a donor and 
appointed by the sponsoring organization would be donor-advisors, 
except as discussed in section 1.D of this Explanation of Provisions of 
this preamble.

D. Advisory Committees

    The Treasury Department and the IRS generally would regard service 
on a committee of a sponsoring organization that advises as to 
distributions from or investments of assets of a fund or account as a 
form of advisory privilege with respect to that fund or account in 
determining whether the fund is a DAF, even though the sponsoring 
organization controls the selection of committee members consistent 
with its ownership and control of the fund or account in accordance 
with section 4966(d)(2)(A)(ii). Recognizing that a fund or account, 
including a multiple-donor fund, as discussed in section 1.E of this 
Explanation of Provisions of this preamble, may sometimes be advised by 
an advisory committee that includes one or more donors, donor-advisors, 
related persons, or persons recommended by donors or donor-advisors to 
serve on the advisory committee, the proposed regulations would provide 
two special rules relating to advisory privileges arising from service 
on an advisory committee. Under these two special rules, a fund or 
account could be advised by a committee that may include one or more 
donors, donor-advisors, related persons, or persons recommended by 
donors or donor-advisors, without being a DAF.
    First, when a sponsoring organization appoints a donor, donor-
advisor, or related person to serve on an advisory committee, the 
donor, donor-advisor, or related person generally would have advisory 
privileges by reason of the donor's status as a donor. However, the 
proposed regulations would provide that a sponsoring organization's 
appointment of a donor, donor-advisor,

[[Page 77927]]

or related person to be on a committee that advises as to distributions 
or investments of amounts in the fund or account will not be deemed to 
result in advisory privileges by reason of the donor's status as a 
donor if (1) the appointment is based on objective criteria related to 
the expertise of the appointee in the particular field of interest or 
purpose of the fund or account; (2) the committee consists of three or 
more individuals, not more than one-third of whom are related persons 
with respect to any of the others; and (3) the appointee is not a 
significant contributor to the fund or account, taking into account 
contributions by related persons with respect to the appointee,\8\ at 
the time of appointment. If an appointee or related person is not a 
significant contributor to a fund or account at the time of appointment 
but becomes one shortly afterwards, the IRS may find that the person 
has advisory privileges based on the facts and circumstances. The 
Treasury Department and the IRS request comments on what constitutes a 
significant contributor for purposes of this exception.
---------------------------------------------------------------------------

    \8\ For example, if a donor is a significant contributor, a 
family member who is appointed to the committee also is considered a 
significant contributor, regardless of whether the family member 
actually contributed to the fund.
---------------------------------------------------------------------------

    Second, when a donor (or donor-advisor) recommends someone to serve 
on an advisory committee advising as to the distribution or investment 
of funds in the fund or account, that person would be considered a 
donor-advisor if the sponsoring organization appoints the recommended 
person to serve on the advisory committee. However, the proposed 
regulations would allow a donor (or donor-advisor) to recommend a 
person to serve as a member of an advisory committee of the sponsoring 
organization for the fund or account and not be considered to be a 
donor-advisor if (1) the recommendation is based on objective criteria 
related to the expertise of the member in the particular field of 
interest or purpose of the fund or account; (2) the committee consists 
of three or more individuals, and a majority of the committee is not 
recommended by the donor or donor-advisor; and (3) the recommended 
person is not a related person with respect to the recommending donor 
or donor-advisor.
    The Treasury Department and the IRS request comments on the 
proposed advisory committee exceptions, including additional 
circumstances in which advisory privileges arising from advisory 
committees should not result in the creation of a DAF.

E. Multiple-Donor Funds or Accounts

    Several commenters suggested excepting a fund or account to which 
multiple unrelated donors contributed from the definition of DAF. 
Commenters expressed concern that failing to provide an exception would 
affect charitable giving practices encouraged by alumni organizations 
or professional associations, as well as discourage the use of funds or 
accounts to incubate potential public charities. One commenter 
suggested that imposing various conditions, including that the fund or 
account have at least three unrelated donors; that the donations be 
aggregated into a single consolidated account balance; that no written 
or oral understanding exists that donors have advisory privileges 
corresponding to the amounts they donated to the fund or account; and 
that no single donor or group of related donors gave more than 35 
percent of all donations, would prevent the vast majority of potential 
abuses of multiple-donor fund status while allowing most giving circles 
and giving pools maintained at public charities to avoid DAF status. 
Other commenters suggested that, without various safeguards, an 
exception for multiple-donor funds or accounts may permit abuses.
    The Treasury Department and the IRS anticipate that, in most 
circumstances, a multiple-donor fund or account would be separately 
identified by reference to contributions of a specific donor or donors. 
However, even if separately identified, a multiple-donor fund or 
account would not be a DAF if no donor or donor-advisor has, or 
reasonably expects to have, advisory privileges with respect to the 
distribution or investment of amounts held in the fund or account by 
reason of the donor's status as a donor. Furthermore, section 
4966(d)(2)(B) and the proposed regulations include several special 
rules that may permit a multiple-donor fund or account to be excepted 
from definition as a DAF even if it doesn't meet one of the exceptions 
discussed in section 2 of this Explanation of Provisions of this 
preamble (such as funds or accounts making distributions only to a 
single identified organization or funds or accounts making certain 
grants to individuals for travel, study, or other similar purposes).
    First, as indicated in section 1.A. of this Explanation of 
Provisions of this preamble, the proposed regulations would exclude 
certain entities from the definition of ``donor.'' Specifically, the 
proposed regulations would define donor to exclude any public charity 
described in section 509(a)(1), (2), or (3) (other than a disqualified 
supporting organization) and (2) any governmental unit described in 
section 170(c)(1). If a fund or account has multiple donors but only a 
public charity or governmental unit has the right to exercise advisory 
privileges, then no donor, as defined by the proposed regulations, 
would have advisory privileges with respect to the distribution or 
investment of amounts held in the fund or account by reason of the 
donor's status as a donor. Thus, the fund or account would not be a 
DAF.
    Second, as discussed in section 1.D of this Explanation of 
Provisions of this preamble, the proposed regulations would provide two 
special rules relating to advisory privileges arising from service on 
an advisory committee. These two rules would allow certain multiple-
donor funds or accounts to be advised by a committee that may include 
one or more donors, donor-advisors, related persons, or persons 
recommended by donors or donor-advisors, without being a DAF.
    The Treasury Department and the IRS request comments on whether and 
in what circumstances additional types of exceptions are warranted to 
allow multiple-donor funds or accounts to be excluded from the 
definition of DAF. The Treasury Department and the IRS are particularly 
interested in comments addressing how any exception for multiple-donor 
funds or accounts can be crafted to prevent circumvention of the 
provisions of section 4966 while still being administrable for both 
sponsoring organizations and the IRS.

2. Exceptions to the Definition of Donor Advised Fund

    Consistent with section 4966(d)(2)(B), the proposed regulations 
generally would provide that a DAF does not include any fund or account 
that makes (1) distributions only to a single identified organization, 
or (2) certain grants to individuals for travel, study, or other 
similar purposes. These exceptions are discussed in sections 2.A. and 
2.B. of this Explanation of Provisions of this preamble.
    In addition, under section 4966(d)(2)(C), the Secretary has 
discretionary authority to exempt a fund or account from the definition 
of DAF if the fund or account is advised by a committee not directly or 
indirectly controlled by the donor or donor-advisor (and any related 
parties \9\) or if

[[Page 77928]]

the fund or account benefits a single identified charitable purpose. 
The proposed regulations would provide two exceptions to the definition 
of DAF under this discretionary authority: (1) an exception for 
disaster relief funds consistent with the exception originally set 
forth in Notice 2006-109, with some modifications, and (2) an exception 
for certain scholarship funds whose committee is nominated by a section 
501(c)(4) organization with a broad-based membership.
---------------------------------------------------------------------------

    \9\ Section 4966 does not define the term ``related parties'' 
and otherwise uses the term ``persons.'' Furthermore, another 
provision applicable to donor advised funds, section 4958, defines 
certain ``persons'' in connection with a DAF for purposes of excess 
benefit transactions. For consistency and administrability across 
the provisions applicable to DAFs, the proposed regulations use the 
term ``related persons'' rather than ``related parties'' and define 
``related persons'' as those persons described in section 
4958(f)(7)(B) and (C).
---------------------------------------------------------------------------

    The Treasury Department and the IRS request comments on whether 
other funds should be excepted from the definition of DAF using the 
authority under section 4966(d)(2)(C) and what, if any, restrictions 
should apply to ensure that the intent of section 4966 is achieved.

A. Single Identified Organization Exception

    Section 4966(d)(2)(B)(i) states that a fund or account that makes 
distributions only to a single identified organization or governmental 
entity is not a DAF. Several commenters suggested that a single 
identified organization should include an organization that is not 
described in section 501(c)(3), including a for-profit business and an 
organization described in section 501(c)(4), so long as the 
distributions to the organization or business are made for a charitable 
purpose described in section 170(c)(2)(B). The proposed regulations 
would provide that a fund or account will not be considered a DAF if, 
along with meeting the other requirements discussed in this section 
2.A, it is established to make (and actually does make) distributions 
solely to a single identified organization that is either: (1) an 
organization described in sections 170(c)(2) and 509(a)(1), (2), or (3) 
(other than a disqualified supporting organization), or (2) a 
governmental entity described in section 170(c)(1) if the distribution 
is made exclusively for public purposes. The Treasury Department and 
the IRS are concerned that expanding the exception to include other 
types of organizations may allow circumvention of other tax provisions, 
such as the private foundation and charitable contribution deduction 
rules. Thus, the exception would not apply if the single identified 
organization is a private foundation, disqualified supporting 
organization, foreign organization, or non-charitable organization.
    If the single identified organization loses its exempt status or 
ceases operating, the proposed regulations would provide rules similar 
to the rules found in Sec.  1.509(a)-4(d)(4)(i)(a) (allowing a 
supporting organization to substitute a new supported organization). A 
sponsoring organization would be permitted to substitute another single 
identified organization if the substitution is conditioned upon the 
occurrence of a loss of exemption, substantial failure or abandonment 
of operations, or a dissolution or reorganization that results in the 
named single identified organization ceasing to exist, and the event is 
beyond the direct or indirect control of donor(s), donor-advisor(s), or 
related persons.
    Commenters suggested that the exception for a fund or account that 
makes distributions to a single identified organization should 
encompass distributions made to support that organization's activities 
and that a fund restricted to a specific charitable project should be 
considered a fund or account that makes distributions to a single 
identified organization. Commenters suggested that a fund should 
therefore be able to support the programs or activities of a single 
identified organization by making distributions to individuals directly 
(as long as the distributions are limited to those within the 
charitable class served by that single identified organization), or by 
receiving, holding and disbursing funds for a specific project or 
program conducted by the single identified organization, including 
making distributions to third parties for goods, services, and 
incidental grant-making limited to a particular project or program. For 
example, commenters suggested that the exception should apply to a 
scholarship fund that a donor establishes at a university and that 
provides scholarships and other grants solely to students at that 
university whom the donor has a role in selecting.
    Under the proposed regulations, the sponsoring organization would 
be permitted to make distributions to the single identified 
organization for the single identified organization's activities (and 
only activities other than administering DAFs or grant-making) and, 
thus, to make distributions to fund a specific charitable project 
(other than administering DAFs or grant making) of the single 
identified organization. However, the sponsoring organization could not 
make distributions directly to third parties on behalf of the single 
identified organization, such as by making distributions to third 
parties for goods, services, or incidental grant-making for a 
particular project or program, because the statute requires that the 
fund or account make distributions only to the single identified 
organization.
    Because a fund or account that falls within the single identified 
organization exception is not subject to the rules applicable to DAFs, 
the proposed regulations would provide that distributions to the single 
identified organization may not be used to administer DAFs or to make 
grants. In addition, the proposed regulations would provide that a fund 
or account will not be treated as making distributions only to a single 
identified organization if (1) a donor, donor-advisor, or related 
person has or reasonably expects to have, the ability to advise 
regarding distributions from the single identified organization to 
other individuals or entities, or (2) a distribution from the fund or 
account will provide, directly or indirectly, a more than incidental 
benefit (within the meaning of section 4967) to a donor, donor-advisor, 
or related person with respect to the fund or account. Thus, for 
example, if a donor establishes a fund to make distributions only to a 
single public charity, and the donor is on the Board of the public 
charity, then the fund would not be able to meet this exception because 
the donor has the ability to advise some or all of the distributions 
from the public charity to other entities.
    Recognizing that a sponsoring organization may lack direct 
knowledge regarding the activities of the donor, donor-advisor, or 
related person with regard to the single identified organization, 
however, the proposed regulations would allow a sponsoring organization 
to rely on a certification from the donor that (1) no donor, donor-
advisor, or related person has or reasonably expects to have, the 
ability to advise regarding distributions from the single identified 
organization to other individuals or entities, and (2) no distribution 
from the fund or account will provide, directly or indirectly, a more 
than incidental benefit (within the meaning of section 4967) to a 
donor, donor-advisor, or related person with respect to the fund or 
account, as long as the sponsoring organization lacks knowledge to the 
contrary.
    The Treasury Department and the IRS request comments on whether 
additional guidance is needed on situations in which a fund or account 
is established at a public charity and the written agreement 
establishing the fund or account provides that the contributed

[[Page 77929]]

amounts can only be used to support programs within that public 
charity, but the donor retains advisory privileges with respect to the 
public charity's use or investment of some or all of the funds. Section 
4966(c)(2)(B) excepts from the definition of ``taxable distribution'' 
any distribution from a DAF to the sponsoring organization of the DAF; 
accordingly, any fund or account established at a public charity that 
is used to support operating programs of the public charity (rather 
than to make distributions to third parties) would not have any taxable 
distributions, if the fund or account were a DAF. For example, a donor 
who established a fund or account at a university could advise that 
contributions previously made to the fund or account be distributed to 
the university's scholarship program. However, if the donor were to 
want to have a role in advising on the selection of scholarship 
recipients then, to avoid a taxable distribution, the donor's 
involvement would need to meet the exception provided in section 
4966(d)(2)(B)(ii) (discussed in section 2.B. of this Explanation of 
Provisions of this preamble).

B. Statutory Scholarship Exception

    Under section 4966(d)(2)(B)(ii) the term ``donor advised fund'' 
does not include a fund or account that exclusively makes grants for 
travel, study, or other similar purposes, provided certain requirements 
are met. Consistent with section 4966(d)(2)(B)(ii), the proposed 
regulations would provide that, under this exception from the 
definition of a DAF, a donor or donor-advisor may provide advice as to 
which individuals receive grants for travel, study, or other similar 
purposes from a fund or account if (1) the person provides the advice 
exclusively in the person's capacity as a member of the selection 
committee; (2) all the members of the selection committee are appointed 
by the sponsoring organization; (3) no combination of donor(s), donor-
advisor(s), or related persons controls, directly or indirectly, the 
committee; and (4) all grants from the fund or account are awarded on 
an objective and nondiscriminatory basis pursuant to a written 
procedure approved in advance by the board of directors of the 
sponsoring organization and the procedure is designed to ensure that 
all grants meet the requirements of paragraph (1), (2), or (3) of 
section 4945(g) and the regulations thereunder. The requirements in the 
regulations under section 4945(g) include the requirements that the 
group from which grantees are selected will ordinarily be sufficiently 
large to constitute a charitable class; that the members of the 
selection committee will not be in a position to derive a private 
benefit if certain potential grantees are selected over others; and 
that the sponsoring organization will maintain adequate records 
regarding the identification and selection of individual grantees. If a 
fund or account satisfies the requirements of the exception, a 
sponsoring organization may award a scholarship from the fund or 
account to an individual without subjecting the sponsoring organization 
or its fund managers to excise taxes under section 4966.
    The proposed regulations would provide that whether a combination 
of donor(s), donor-advisor(s), or related persons controls, directly or 
indirectly, the selection committee is determined by looking to the 
substance, rather than the form, of any arrangement. Direct control 
would exist if donor(s), donor-advisor(s), or related persons, either 
alone or together, (1) can require the committee to take or refrain 
from taking any action; (2) control 50 percent or more of the total 
voting power of the committee; or (3) have the right to exercise veto 
power over the committee's decisions. Whether indirect control exists 
is determined by the facts and circumstances, including the nature of 
any relationships among members of the selection committee and with any 
donor, donor-advisor, or related person. For example, a committee would 
be ``indirectly controlled'' by a combination of donor(s), donor-
advisor(s), or related persons if a majority of the selection committee 
is currently engaged by the donor, donor-advisor, or any related person 
in any employment or fiduciary capacity, whether as an employee or 
independent contractor, or recommended by a donor or donor-advisor and 
appointed to the selection committee based on other than objective 
criteria regarding the person's expertise, or a combination thereof.
    One commenter recommended that a sponsoring organization be 
permitted to set reasonable uniform procedures for appointing members 
to selection committees, taking into account the size of the sponsoring 
organization, the number of grants from the scholarship fund, and other 
relevant facts and circumstances, rather than requiring action by the 
entire board. The proposed regulations would provide that, in 
appointing the members of the selection committee, a sponsoring 
organization may act through its board of directors, trustees, or other 
governing body, a committee appointed by its governing body, or an 
appropriate officer of the sponsoring organization.
    The Treasury Department and the IRS are concerned that some 
employers may seek to use this statutory scholarship exception to grant 
employer-related scholarships in a manner that would otherwise not be 
considered a scholarship or fellowship grant subject to the provisions 
of section 117(a), or that would otherwise be a taxable expenditure 
under section 4945, by having a sponsoring organization administer 
their scholarship programs. See, e.g., Rev. Proc. 76-47, 1976-2 C.B. 
670, and Rev. Proc. 80-39, 1980-2 C.B. 772. The Treasury Department and 
the IRS request comments on whether additional guidance is needed to 
prevent avoidance of the employer-related scholarship rules or to 
address any potential private benefit arising from employer-related 
scholarship programs.

C. Exception for Certain Scholarship Funds Established by Certain 
Section 501(c)(4) Organizations

    Several commenters asked for guidance relating to a scholarship 
fund of a sponsoring organization that receives contributions from a 
tax-exempt membership organization, such as a section 501(c)(4) social 
welfare organization. The commenters stated that, for example, Rotary 
Club scholarship funds are often established at community foundations 
and that these scholarship funds do not fit within the statutory 
scholarship committee exception provided by section 4966(d)(2)(B)(ii) 
because members of the section 501(c)(4) organization who may be donors 
to the fund comprise a majority of the scholarship selection committee. 
These commenters asked that the proposed regulations provide an 
additional exception allowing members of a section 501(c)(4) 
organization who are otherwise unrelated to one another to control the 
scholarship selection committee, particularly since it is difficult to 
find non-members willing to serve on the committee. The commenters 
noted that requiring Rotary Clubs to form a section 501(c)(3) 
organization to make distributions for Rotary scholarships would be an 
inefficient use of charitable resources and that sponsoring 
organizations can provide expertise on objective and charitable 
standards for selecting scholarship recipients.
    The proposed regulations would provide an exception to the 
definition of DAF for a fund or account established by a broad-based 
membership organization described in section

[[Page 77930]]

501(c)(4) if six conditions are met. The conditions would substantially 
mirror the conditions in the statutory scholarship exception, except 
that donors may control the committee.
    First, the fund or account's single identified charitable purpose 
must be to make grants to individuals for scholarships described in 
section 4945(g)(1).
    Second, the selection of recipients of scholarships from the fund 
or account must be made by a selection committee the members of which 
are nominated by the section 501(c)(4) organization and approved in 
writing by the sponsoring organization. This requirement would allow 
the section 501(c)(4) organization to have input on the members of the 
selection committee, but would leave the final decision to the 
sponsoring organization that owns and controls the assets of the fund 
or account.
    Third, the fund or account must serve a charitable class.
    Fourth, like the statutory scholarship exception, recipients of 
grants from the fund or account must be selected on an objective and 
nondiscriminatory basis, pursuant to a written procedure, approved in 
advance by the sponsoring organization's board of directors, that is 
designed to ensure that all the grants meet the requirements of section 
4945(g)(1) and the regulations under section 4945 (other than advance 
approval by the IRS).
    Fifth, no distribution may be made from the fund or account to (1) 
any director, officer, or trustee of the sponsoring organization of the 
fund, (2) any member of the fund's selection committee, (3) any member, 
honorary member, or employee of the section 501(c)(4) organization, or 
(4) any person related to anyone described in (1), (2), or (3).
    Finally, the fund or account must maintain adequate records that 
demonstrate the recipients were selected on an objective and 
nondiscriminatory basis.
    The Treasury Department and the IRS are concerned that not 
requiring the section 501(c)(4) organization to have a broad-based 
membership could allow a small group of persons to set up a section 
501(c)(4) organization and use a fund or account at a sponsoring 
organization to grant scholarships to their selected recipients with 
tax-deductible contributions, circumventing the DAF rules. Given this 
concern, the Treasury Department and the IRS request comments on how to 
identify a broad-based membership organization described in section 
501(c)(4), including factors such as the organization's number of 
members, criteria for selecting members, membership rights, and 
geographic coverage.
    The Treasury Department and the IRS also request comments on 
whether and under what circumstances other organizations, such as 
section 501(c)(5) and 501(c)(6) organizations, use similar types of 
committee-advised scholarship funds and whether the exception should be 
extended to those organizations, recognizing that section 501(c)(4) 
organizations are formed to promote social welfare whereas section 
501(c)(5) and section 501(c)(6) organizations are formed to further 
different purposes.

D. Disaster Relief Exception

    Several commenters asked that the proposed regulations provide, 
consistent with Notice 2006-109, that an employer-sponsored disaster 
relief fund is not a DAF. Commenters also recommended that the 
exception be extended to disaster relief funds outside of the 
employment context and that the exception be extended to emergency 
hardship situations outside of the disaster relief context.
    Since the determination of the existence of a qualified disaster 
under section 139 is not controlled by the sponsoring organization or 
the fund or account's advisory committee, the proposed regulations 
would exempt a non-employment based disaster relief fund. Thus, the 
proposed regulations would provide that both an employer-sponsored 
disaster relief fund and a disaster relief fund outside of the 
employment context are not DAFs, as long as the requirements of section 
139 are met. In contrast, since the determination of the existence of 
an emergency hardship is controlled by the sponsoring organization or 
the fund or account's advisory committee, the proposed regulations 
would not extend the exception to emergency hardship funds.
    To meet the disaster relief exception in the proposed regulations, 
six conditions must be met. The conditions substantially mirror the 
provisions in Notice 2006-109 (and the special rules generally for 
charitable assistance in qualified disasters) and the provisions of the 
statutory scholarship exception and the exception for certain 
scholarship funds established by section 501(c)(4) organizations.
    First, the fund or account's single identified charitable purpose 
must be to provide relief from one or more qualified disasters within 
the meaning of section 139(c)(1), (2), or (3).
    Second, the fund or account must serve a charitable class.
    Third, recipients of grants from the fund or account must be made 
by a selection committee not controlled by donors, donor-advisors, or 
related persons and for which all the members are appointed by the 
sponsoring organization. Alternatively, if the fund or account gives 
preference or priority to employees (or their family members) of an 
employer to receive grants, the majority of the selection committee 
must consist of persons who are not in a position to exercise 
substantial influence over the affairs of the employer (or adequate 
substitute procedures exist to ensure that any benefit to the employer 
is incidental and tenuous).
    Fourth, the selection committee must select grant recipients based 
on objective and nondiscriminatory determinations of need pursuant to a 
written procedure approved in advance by the board of directors of the 
sponsoring organization.
    Fifth, no distribution from the fund or account may result in more 
than an incidental benefit to (1) any director, officer, or trustee of 
the sponsoring organization of the fund or account; (2) any member of 
the fund or account's selection committee; or (3) any person related to 
a director, officer, or trustee of the sponsoring organization or a 
member of the selection committee.
    Lastly, the sponsoring organization must maintain records that (1) 
demonstrate the need of the recipients for the disaster relief 
assistance provided, and (2) satisfy the requirements of section 
6033(b)(14).\10\
---------------------------------------------------------------------------

    \10\ Section 6033(b)(14), added in 2008, requires every section 
501(c)(3) organization required to file an annual information return 
to furnish annually such information as the Secretary may require 
with respect to disaster relief activities.
---------------------------------------------------------------------------

3. Taxable Distributions

    Section 4966(c)(1) defines a taxable distribution as any 
distribution from a DAF to (1) any natural person, or (2) any other 
person unless the distribution is for a purpose specified in section 
170(c)(2)(B) and the sponsoring organization exercises expenditure 
responsibility with respect to the distribution in accordance with 
section 4945(h).
    Section 4966(c)(2) excepts from the term ``taxable distribution'' 
any distribution from a DAF to (1) any organization described in 
section 170(b)(1)(A) (other than a disqualified supporting 
organization), (2) the sponsoring organization of the DAF, or (3) any 
other DAF. The Treasury Department and the IRS expect that most 
distributions from DAFs are to organizations described in section 
170(b)(1)(A) (but not to disqualified

[[Page 77931]]

supporting organizations) and thus are not taxable distributions.
    The proposed regulations incorporate the statutory definition of 
taxable distribution. In addition, the proposed regulations would set 
forth an anti-abuse rule providing that, if a series of distributions 
through intermediary distributees undertaken pursuant to a plan 
achieves a result that is inconsistent with the purposes of section 
4966, the distributions are treated as a single distribution for 
purposes of section 4966. For example, if a donor advises a 
distribution, that the sponsoring organization subsequently makes, from 
a DAF to Charity X and the donor or the sponsoring organization 
arranges for Charity X to use the funds to make distributions to an 
individual recommended by the donor, the distribution would be a 
taxable distribution from the sponsoring organization to an individual.
    Several commenters recommended that the term ``distribution'' be 
narrowly defined to include only a gratuitous transfer. These 
commenters requested that a purchase of goods or services by a 
sponsoring organization using funds from a DAF for charitable activity 
or fundraising would not be considered a distribution. One commenter 
asked that the term ``distribution'' be defined the same as the term 
``grant'' in section 4945 and that it not include payments from a 
sponsoring organization using funds from a DAF to vendors for goods or 
services or employee compensation.
    The proposed regulations do not adopt these suggestions and would 
construe the term ``distribution'' broadly. In particular, the proposed 
regulations would provide that the term ``distribution'' generally 
means any grant, payment, disbursement, or transfer, whether in cash or 
in kind, from a DAF. In addition, the proposed regulations would 
provide that any use of DAF assets that results in a more than 
incidental benefit to a donor, donor-advisor, or related person is a 
deemed distribution and thus generally would be a taxable distribution. 
The Treasury Department and the IRS note that distributions resulting 
in a more than incidental benefit to a donor, donor-advisor, or related 
person may also result in tax under section 4967. See Notice 2017-73, 
2017-51 I.R.B. 562.
    However, the proposed regulations would provide that (1) 
investments and (2) reasonable investment and grant-related fees 
generally are not distributions under this definition (unless they 
result in a more than incidental benefit as noted above).
    Investments generally would not be treated as distributions under 
the proposed regulations because they typically merely reflect a change 
from one form of property to another. The Treasury Department and the 
IRS would consider investments for this purpose as including both debt 
and equity instruments held for the purpose of obtaining income or 
funds, including investments made partly for charitable purposes as 
described in Notice 2015-62, 2015-39 I.R.B. 411. However, an investment 
would not, for example, include a zero-interest loan, as there is no 
purpose of, or provision for, obtaining income or funds from the zero-
interest loan. The Treasury Department and the IRS anticipate that a 
zero-interest loan would be a distribution under the proposed 
regulations and, unless made to a section 170(b)(1)(A) organization 
other than a disqualified supporting organization, would require 
expenditure responsibility by the sponsoring organization in order not 
to be a taxable distribution. The Treasury Department and the IRS 
request comments on how to further distinguish distributions from 
investments.
    Reasonable investment and grant-related fees paid from DAF assets 
generally would not be considered distributions; however, an 
unreasonable grant-related or investment fee would be a deemed 
distribution and, thus, would be a taxable distribution. The Treasury 
Department and the IRS expect that whether a fee is reasonable would be 
determined by all the facts and circumstances. For example, an expense 
charged uniformly or ratably across all DAFs generally would be 
considered a reasonable fee and not a distribution. In addition, an 
expense charged solely to a particular DAF (such as an expense arising 
from an expenditure responsibility grant from the fund) may be 
reasonable, depending on the facts and circumstances. However, the 
proposed regulations would provide that an expense charged solely to a 
particular DAF that is paid, directly or indirectly, to a donor, donor-
advisor, or related person with respect to the DAF, is a deemed 
distribution subject to sections 4966, 4958, and/or 4967.

A. Distributions to Section 170(b)(1)(A) Organizations

    Section 4966(c)(2)(A) provides that a distribution to any 
organization described in section 170(b)(1)(A) (other than a 
disqualified supporting organization) is not a taxable distribution. 
Similar to existing guidance under Sec.  53.4945-5(a)(4), the proposed 
regulations would provide several categories of organizations treated 
as described in section 170(b)(1)(A) for purposes of section 
4966(c)(2)(A).
    First, an organization would be considered an organization 
described in section 170(b)(1)(A) if it is described in both sections 
170(b)(1)(A) and 170(c)(2) (other than a disqualified supporting 
organization), without the requirement under section 170(c)(2)(A) that 
it be created or organized in the United States or in any possession 
thereof, or under the law of the United States, any State, the District 
of Columbia, or any possession of the United States. Thus, for example, 
a taxable organization that operates a for-profit school would not be 
treated as described in section 170(b)(1)(A) because the organization 
would not be described in section 170(c)(2).
    Second, an organization that is a governmental unit described in 
section 170(b)(1)(A)(v) and 170(c)(1) (or an agency or instrumentality 
thereof, including an organization described in section 511(a)(2)(B)) 
would be considered an organization described in section 170(b)(1)(A), 
as long as the distribution to it is made for exclusively public 
purposes.
    Third, a foreign government (or an agency or instrumentality 
thereof), or an international organization designated as such by 
Executive Order under 22 U.S.C. 288 would be treated as an organization 
described in section 170(b)(1)(A), as long as the distribution to it is 
made exclusively for purposes described in section 170(c)(2)(B).
    One commenter asked that guidance expressly provide that DAFs may 
make grants to foreign organizations based on the same equivalency 
determinations that private foundations use for purposes of determining 
whether a foreign organization is the equivalent of a domestic public 
charity. The proposed regulations would adopt this suggestion. 
Consistent with Rev. Proc. 2017-53, 2017-40 I.R.B. 263 (providing 
guidelines for equivalency determinations by, among others, sponsoring 
organizations of DAFs), the proposed regulations would provide that, 
prior to the distribution, a sponsoring organization may make a good 
faith determination that a foreign organization is described in 
sections 501(c)(3) and 170(b)(1)(A) (other than a disqualified 
supporting organization) using procedures similar to those procedures 
permitted for private foundation grantors under Sec.  53.4945-5(a)(5). 
Those procedures provide that a determination will ordinarily be a good 
faith determination if it is based on current written advice from a 
qualified practitioner and the organization reasonably relied in good 
faith on the

[[Page 77932]]

written advice. If a sponsoring organization makes a good faith 
determination that a foreign organization is described in sections 
501(c)(3) and 170(b)(1)(A) (other than a disqualified supporting 
organization), the sponsoring organization would not need to exercise 
expenditure responsibility with respect to a distribution to that 
organization.

B. Disqualified Supporting Organizations

    Section 4966(d)(4)(A)(i) defines any Type III non-functionally 
integrated supporting organization as a disqualified supporting 
organization with respect to any distribution.\11\ Section 
4966(d)(4)(A)(ii)(I) disqualifies any other type of supporting 
organization if the donor or any donor-advisor (and any related 
parties) \12\ directly or indirectly controls a supported organization 
(as defined in section 509(f)(3)) of the supporting organization. The 
Treasury Department and the IRS request comments on whether other 
entities should be included in the definition of disqualified 
supporting organization, using the authority under section 
4966(d)(4)(A)(ii)(II) to designate other supporting organizations as 
disqualified, because a distribution to such organization is 
inappropriate if expenditure responsibility is not exercised to ensure 
the distribution is for a purpose specified in section 170(c)(2)(B).
---------------------------------------------------------------------------

    \11\ In defining a disqualified supporting organization, the 
proposed regulations use the definitions of supporting organization 
types under the section 509(a)(3) regulations.
    \12\ See note 7.
---------------------------------------------------------------------------

C. Distributions to Non-Section 170(b)(1)(A) Organizations or to 
Disqualified Supporting Organizations

    Under section 4966(c)(1)(B), a distribution to any entity not 
described in section 170(b)(1)(A), or to a disqualified supporting 
organization, will be a taxable distribution unless (1) the 
distribution is for a purpose specified in section 170(c)(2)(B) 
(generally, is for a charitable purpose), and (2) the sponsoring 
organization exercises expenditure responsibility with respect to the 
distribution in accordance with section 4945(h).
i. Non-Charitable Purposes
    The proposed regulations would provide that purposes described in 
section 170(c)(2)(B) are treated as such whether or not carried out by 
an organization described in section 170(c). However, a distribution to 
be used for an activity prohibited under section 501(c)(3), or for an 
activity that would cause loss of tax exemption if it were a 
substantial part of a section 501(c)(3) organization's total 
activities, is not for a purpose specified in section 170(c)(2)(B). 
Thus, a distribution used for political campaign intervention activity 
or attempts to influence legislation would be considered to be for a 
purpose not specified in section 170(c)(2)(B) \13\ and, thus, if made 
directly or to an entity not described in section 170(b)(1)(A), or to a 
disqualified supporting organization, would be a taxable distribution.
---------------------------------------------------------------------------

    \13\ The Treasury Department and the IRS also note that allowing 
distributions from a DAF for lobbying or political campaign activity 
would contravene the charitable contribution deduction rules and 
private foundation restrictions.
---------------------------------------------------------------------------

    The proposed regulations would also include a requirement, similar 
to the requirement in Sec.  53.4945-6(c)(2), that a grant to an 
organization (other than one that is described in section 501(c)(3) and 
not in section 509(a)(4)) will not be considered to be for a purpose 
specified in section 170(c)(2)(B) unless the grantee agrees to 
separately account for grant funds (either by separately accounting for 
grant funds on its books or by segregating the grant funds). (Such 
grant funds must also be used for charitable purposes, consistent with 
the expenditure responsibility rules discussed in section 3.C.ii of 
this Explanation of Provisions of this preamble.)
ii. Expenditure Responsibility
    Section 4966(c)(1)(B)(ii) requires sponsoring organizations to 
exercise expenditure responsibility in accordance with section 4945(h) 
for certain distributions. Thus, the proposed regulations cross-
reference the section 4945(h) expenditure responsibility regulations 
applicable to private foundations, with one modification. In lieu of 
the requirements found in Sec.  53.4945-5(b)(3)(iv)(c) and 
(b)(4)(iv)(c) (pertaining to the recipient's permitted use of the 
funds), the distributee would be required to agree not to: (1) make a 
grant to an organization that does not comply with the expenditure 
responsibility requirements, (2) make a grant to a natural person, or 
(3) make a grant, loan, compensation, or other similar payment (as 
described in section 4958(c)(2)) to a donor, donor-advisor, or related 
person with respect to the DAF from which the distribution that is the 
subject of the agreement is made. For purposes of these rules 
pertaining to the secondary use of distributions, the definition of 
``grant'' set forth in Sec.  53.4945-4(a)(2) would apply, rather than 
the broader definition of ``distribution'' found in proposed Sec.  
53.4966-1(e). If the definition of ``distribution'' found in proposed 
Sec.  53.4966-1(e) applied, distributees would be required to exercise 
expenditure responsibility in the purchase of goods and services, which 
is not intended under the proposed rule.
    The Treasury Department and the IRS request comments on this 
modification to the expenditure responsibility rules and whether 
additional guidance is needed.

4. Taxes on Taxable Distributions

    Consistent with section 4966(a)(1), the proposed regulations would 
provide that an excise tax equal to 20 percent of the amount of the 
taxable distribution is imposed on each taxable distribution from a 
DAF. This excise tax is paid by the sponsoring organization of the DAF. 
The provisions of proposed Sec.  53.4966-2 are generally similar to 
those of Sec.  53.4958-1 and other chapter 42 excise tax regulations 
relating to the calculation of the tax on the organization and its 
managers.
    In addition, consistent with section 4966(a)(2), the proposed 
regulations would provide that each fund manager who knowingly agrees 
to the making of a taxable distribution is liable for an excise tax 
equal to five percent of the amount of the taxable distribution, up to 
a maximum of $10,000 for any one taxable distribution. If more than one 
fund manager is liable for the excise tax, all such persons would be 
jointly and severally liable for that tax. The proposed regulations, 
consistent with section 4966(d)(3), would define a fund manager as (1) 
an officer, director, or trustee of the sponsoring organization, or any 
individual with authority or responsibility similar to that exercised 
by an officer, director, or trustee of an organization, regardless of 
title, and (2) with respect to any act (or failure to act), the 
employee having authority or responsibility (either individually or as 
a member of a collective body) for such act (or failure to act). An 
example of a failure to act by a fund manager resulting in a taxable 
distribution would be a failure to exercise expenditure responsibility 
if required.
    The proposed regulations would provide that the agreement of any 
fund manager to the making of a taxable distribution consists of any 
manifestation of approval of the distribution that is sufficient to 
constitute an exercise of the fund manager's authority to approve, or 
authority to exercise discretion in recommending approval of, the 
making of the distribution by the sponsoring

[[Page 77933]]

organization, whether or not it is the final or decisive act on behalf 
of the sponsoring organization.
    A fund manager generally would be considered to have agreed to the 
making of a distribution with knowledge that it is a taxable 
distribution only if the manager (1) is in fact aware that it is a 
taxable distribution; or (2) has knowledge of facts sufficient to 
determine that, based on those facts, the distribution would be a 
taxable distribution and negligently fails to make reasonable attempts 
to ascertain whether the distribution is a taxable distribution. A fund 
manager generally would not be considered to have negligently failed to 
make reasonable attempts to ascertain whether a distribution is a 
taxable distribution if the distribution is made to an organization 
listed as an organization described in section 170(b)(1)(A) (other than 
a supporting organization) on the IRS's search tool, Tax Exempt 
Organization Search (Pub 78 data) (or if, with respect to a supporting 
organization, it gathers information to determine that the organization 
is not a disqualified supporting organization).
    The Treasury Department and the IRS request comments on whether 
guidance is needed regarding a fund manager's reliance on professional 
advice.

Proposed Applicability Date

    These regulations are proposed to be applicable to taxable years 
ending after the date of publication of the Treasury decision adopting 
these rules as final regulations in the Federal Register. A taxpayer 
may rely on these proposed regulations for taxable years ending before 
the date the Treasury decision adopting these regulations as final 
regulations is published in the Federal Register.
    The guidance these proposed regulations would provide with respect 
to disaster relief funds generally would be consistent with the 
guidance provided in section 5.01 of Notice 2006-109. However, in 
certain instances these proposed regulations would modify the guidance 
provided in Section 5.01 of Notice 2006-109. For taxable years ending 
before the date the Treasury decision adopting these regulations as 
final regulations is published in the Federal Register, taxpayers may 
rely on the guidance provided in section 5.01 of Notice 2006-109 or, 
alternatively, on these proposed regulations, including for periods 
prior to November 14, 2023.

Special Analyses

I. Regulatory Planning and Review

    Pursuant to the Memorandum of Agreement, Review of Treasury 
Regulations under Executive Order 12866 (June 9, 2023), tax regulatory 
actions issued by the IRS are not subject to the requirements of 
section 6 of Executive Order 12866, as amended. Therefore, a regulatory 
impact assessment is not required.

II. Paperwork Reduction Act

    The collections of information contained in this notice of proposed 
rulemaking have been submitted to the Office of Management and Budget 
for review in accordance with the Paperwork Reduction Act of 1995 (44 
U.S.C. 3507(d)). Comments on the collections of information should be 
sent to the Office of Management and Budget, Attn: Desk Officer for the 
Department of Treasury, Office of Information and Regulatory Affairs, 
Washington, DC 20503, with copies to the Internal Revenue Service, 
Attn: IRS Reports Clearance Officer, SE:W:CAR:MP:T:T:SP, Washington, DC 
20224. Comments on the collection of information should be received by 
January 16, 2024. Comments are specifically requested concerning:
    Whether the proposed collections of information are necessary for 
the proper performance of the functions of the Internal Revenue 
Service, including whether the information will have practical utility;
    The accuracy of the estimated burden associated with the proposed 
collections of information (see below);
    How the quality, utility, and clarity of the information to be 
collected may be enhanced;
    How the burden of complying with the proposed collections of 
information may be minimized, including through the application of 
automated collection techniques or other forms of information 
technology; and
    Estimates of capital or start-up costs and costs of operation, 
maintenance, and purchase of service to provide information.
    The collections of information in these proposed regulations are as 
follows. Section 53.4966-4(a)(4)(ii) allows a sponsoring organization 
to rely on a certification from the donor that all distributions 
satisfy the special rules relating to the single identified 
organization exception. Section 53.4966-4(b), (c), and (d) require an 
organization with a fund excepted from the definition of a DAF to 
maintain records regarding recipients and the selection process for 
recipients. Section 53.4966-4(c) also requires the organization to 
approve in writing the selection committee whose members are nominated 
by a section 501(c)(4) organization. Section 53.4966-5(c) allows a 
sponsoring organization to avoid a taxable distribution to certain 
foreign organization distributees if it makes a good faith 
determination regarding their tax-exempt status. Section 53.4966-
5(a)(1)(ii)(B) requires a sponsoring organization to exercise 
expenditure responsibility with respect to certain distributions.
    The expected recordkeepers are sponsoring organizations of DAFs 
described in section 4966(d)(1), other organizations described in 
section 4966(d)(1)(A) and (B) that maintain funds excepted from the 
definition of a DAF under section 4966(d)(2)(B) or (C) (and certain 
donors to funds described in section 4966(d)(2)(B)(i)), foreign 
organization distributees that are the subject of equivalency 
determinations by sponsoring organizations, and recipients of 
expenditure responsibility distributions.
    Estimated number of recordkeepers: 13,961.
    Estimated average annual burden per recordkeeper: 3 hours, 47 
minutes.
    Estimated total annual recordkeeping burden: 52,874 hours.
    Estimated annual frequency of responses: occasional.
    An agency may not conduct or sponsor, and a person is not required 
to respond to, a collection of information unless it displays a valid 
control number assigned by the Office of Management and Budget.
    Books or records relating to a collection of information must be 
retained as long as their contents may become material in the 
administration of any internal revenue law. Generally, tax returns and 
tax return information are confidential, as required by 26 U.S.C. 6103.

III. Regulatory Flexibility Act

    Pursuant to the Regulatory Flexibility Act (5 U.S.C. chapter 6), it 
is hereby certified that these proposed regulations will not have a 
significant economic impact on a substantial number of small entities. 
This certification is based on the fact that the proposed regulations 
will not impact a substantial number of small entities. Based on IRS 
Statistics of Income data for 2019, there are 1,365,744 active 
nonprofit charitable organizations, of which 1,624 self-identified as 
sponsoring organizations of donor advised funds (DAFs). Another 82 
organizations reported no DAFs but one or more funds similar to DAFs, 
for a total of 1,706 organizations reporting DAFs or funds similar to 
DAFs. Any economic impact stems from the collection of information 
under Sec. Sec.  53.4966-4(a)(4)(ii); 53.4966-4(c)(2), (4), and (6); 
53.4966-4(d)(4) and (6); and

[[Page 77934]]

53.4966-5(a)(1)(ii)(B) and (c)(2). The universe of sponsoring 
organizations that would be affected by the collection of information 
under Sec. Sec.  53.4966-4(a)(4)(ii); 53.4966-4(c)(2), (4), and (6); 
53.4966-4(d)(4) and (6); and 53.4966-5(a)(1)(ii)(B) and (c)(2) is a 
small subset of all sponsoring organizations, since those provisions 
apply to limited exceptions to DAF status, to foreign organizations 
determined to be the equivalent of a U.S. public charity, or to 
organizations receiving distributions for which expenditure 
responsibility is exercised. Thus, the number of organizations that 
will be affected by the collection of information under Sec. Sec.  
53.4966-4(a)(4)(ii); 53.4966-4(c)(2), (4), and (6); 53.4966-4(d)(4) and 
(6); and 53.4966-5(a)(1)(ii)(B) and (c)(2) will not be substantial. In 
2019, of the 1,365,744 active nonprofit charitable organizations, 1,706 
organizations reported 988,718 DAFs and 72,144 non-DAF funds similar to 
DAFs. We estimate that of the 72,144 non-DAF funds reported for 2019, 
1.5 percent or 1082 will be section 501(c)(4) scholarship funds subject 
to the collection of information in Sec.  53.4966-4(c)(2), (4), and 
(6), and that these funds will be maintained by a significantly small 
subset of the 1,706 total organizations reporting DAFs or funds similar 
to DAFs. In 2019, 0.3 percent of the 1,365,744 active nonprofit 
charitable organizations reported disaster relief preparedness as their 
primary mission. Thus, we estimate that 0.3 percent or five of the 
1,706 organizations may sponsor disaster relief funds subject to the 
collection of information in Sec.  53.4966-4(d)(4) and (6). Any costs 
incurred in meeting the collections of information applicable to 
section 501(c)(4) scholarship funds and disaster relief funds would be 
considerably less than the costs incurred in establishing and running a 
separate section 501(c)(3) organization, which would be the alternative 
means of providing the same benefits through a nonprofit charitable 
organization. In addition, based on IRS Statistics of Income data for 
2019, of the 1,624 self-identified sponsoring organizations, an 
estimated 446 organizations made grants to foreign organizations 
pursuant to equivalency determinations subject to the collection in 
Sec.  53.4966-5(c)(2). An indeterminate number of foreign organizations 
receiving grants from the 446 grant-making organizations also would be 
subject to the collection of information in Sec.  53.4966-5(c)(2). The 
provisions of Sec.  53.4966-5(c)(2) relieve both sponsoring 
organizations and foreign organizations of the statutory expenditure 
responsibility requirements under section 4966(c)(1)(B)(ii) that would 
otherwise apply to grants to foreign organizations and that most 
organizations prefer to avoid. Based on the 2019 annual returns of 
private foundations, we estimate that very few sponsoring organizations 
make grants requiring expenditure responsibility. For these reasons, 
pursuant to the Regulatory Flexibility Act (5 U.S.C. Chapter 6), the 
Secretary hereby certifies that this rule will not have significant 
economic impact on a substantial number of small entities. 
Notwithstanding this certification, the Treasury Department and the IRS 
invite comments on the impact this rule may have on small entities.
    Pursuant to section 7805(f) of the Code, this proposed rule has 
been submitted to the Chief Counsel for the Office of Advocacy of the 
Small Business Administration for comment on its impact on small 
entities.

IV. Unfunded Mandates Reform Act

    Section 202 of the Unfunded Mandates Reform Act of 1995 (UMRA) 
requires that agencies assess anticipated costs and benefits and take 
certain other actions before issuing a final rule that includes any 
Federal mandate that may result in expenditures in any one year by a 
State, local, or tribal government, in the aggregate, or by the private 
sector, of $100 million in 1995 dollars, updated annually for 
inflation. In 2022, that threshold is approximately $190 million. The 
proposed regulations do not propose any rule that would include any 
Federal mandate that may result in expenditures by State, local, or 
tribal governments, or by the private sector in excess of that 
threshold.

V. Executive Order 13132: Federalism

    Executive Order 13132 (Federalism) prohibits an agency from 
publishing any rule that has federalism implications if the rule either 
imposes substantial, direct compliance costs on State and local 
governments, and is not required by statute, or preempts State law, 
unless the agency meets the consultation and funding requirements of 
section 6 of the Executive Order. The proposed regulations do not 
propose rules that would have federalism implications, impose 
substantial direct compliance costs on State and local governments, or 
preempt State law within the meaning of the Executive Order.

Comments and Requests for a Public Hearing

    Consideration will be given to any comments that are submitted 
timely to the IRS as prescribed in this preamble under the ADDRESSES 
heading. The Treasury Department and the IRS request comments on all 
aspects of the proposed regulations, and specifically request comments 
on the clarity of the proposed rules and how they can be made easier to 
understand, as well as on the proposed transition relief, including 
whether and in what circumstances additional transition guidance or 
relief may be necessary. All comments submitted will be made available 
at https://www.regulations.gov or upon request.
    A public hearing will be scheduled if requested in writing by any 
person that timely submits electronic or written comments. Requests for 
a public hearing are encouraged to be made electronically. If a public 
hearing is scheduled, notice of the date, time, and place of the 
hearing will be published in the Federal Register. Announcement 2023-
16, 2023-20 I.R.B. 854 (May 15, 2023), provides that public hearings 
will be conducted in person, although the IRS will continue to provide 
a telephonic option for individuals who wish to attend or testify at a 
hearing by telephone. Any telephonic hearing will be made accessible to 
people with disabilities.

Statement of Availability of IRS Documents

    Announcement 2023-16, Notices 2006-109, 2007-21, 2015-62, and 2017-
73, and Revenue Procedures 76-47, 80-39, and 2017-53 are published in 
the Internal Revenue Bulletin (or Cumulative Bulletin) and are 
available from the Superintendent of Documents, U.S. Government 
Printing Office, Washington, DC 20402, or by visiting the IRS website 
at https://www.irs.gov.

Drafting Information

    The principal author of these regulations is Ward L. Thomas, Office 
of Associate Chief Counsel (Employee Benefits, Exempt Organizations, 
and Employment Taxes). However, other personnel from the IRS and the 
Treasury Department participated in their development.

List of Subjects in 26 CFR Part 53

    Excise taxes, Foundations, Investments, Lobbying, Reporting and 
recordkeeping requirements.

Proposed Amendments to the Regulations

    Accordingly, the Treasury Department and the IRS propose to amend 
26 CFR part 53 as follows:

[[Page 77935]]

PART 53--FOUNDATION AND SIMILAR EXCISE TAXES

0
Paragraph 1. The authority citation for part 53 continues to read, in 
part, as follows:

    Authority: 26 U.S.C. 7805 * * *

0
Par. 2. Sections 53.4966-0 through 53.4966-6 are added to read as 
follows:
Sec.
* * * * *
53.4966-0 Outline of regulations.
53.4966-1 Definitions.
53.4966-2 Taxes on taxable distributions.
53.4966-3 Definition of donor advised fund.
53.4966-4 Exceptions to the definition of donor advised fund.
53.4966-5 Taxable distributions.
53.4966-6 Applicability date.
* * * * *


Sec.  53.4966-0   Outline of regulations.

    This section lists the paragraphs in Sec. Sec.  53.4966-1 through 
53.4966-6.
Sec.  53.4966-1 Definitions.
(a) In general.
(b) Contribution.
(c) Disqualified supporting organization.
(d) Distributee.
(e) Distribution.
(1) In general.
(2) Deemed distribution.
(f) Donor.
(g) Donor advised fund.
(h) Donor-advisor.
(1) In general.
(2) Person who establishes fund or account.
(3) Personal investment advisors.
(i) In general.
(ii) Exception.
(4) Donor-recommended advisory committee member.
(i) Fund manager.
(1) In general.
(2) Delegation of authority.
(j) Related persons.
(k) Section 4966 regulations.
(l) Sponsoring organization.
(m) Taxable distribution.
Sec.  53.4966-2 Taxes on taxable distributions.
(a) In general.
(b) Taxes paid by the sponsoring organization.
(c) Taxes paid by fund managers.
(1) In general.
(2) Agreement.
(3) Knowledge.
(4) Joint and several liability.
(5) Limit on liability for managers.
Sec.  53.4966-3 Definition of donor advised fund.
(a) In general.
(b) Separate identification by reference to contributions of a donor 
or donors.
(1) In general.
(2) Facts and circumstances tending to show that a fund or account 
is separately identified.
(3) Commingling.
(c) Advisory privileges.
(1) In general.
(i) Facts and circumstances.
(ii) Application to entire fund or account.
(iii) Donor, donor-advisor, or related person appointed to an 
advisory committee.
(A) In general.
(B) Exception.
(iv) Officers, etc. of sponsoring organization.
(v) Deemed advisory privileges.
(2) Facts sufficient to find advisory privileges.
(d) Substance over form.
(e) Examples.
Sec.  53.4966-4 Exceptions to the definition of donor advised fund.
(a) Funds or accounts that make distributions only to a single 
identified organization.
(1) In general.
(2) Single identified organization.
(3) Distributions to a single identified organization.
(4) Special rules.
(i) In general.
(ii) Certifications.
(5) Substitution for specified organization.
(6) Examples.
(b) Certain funds or accounts that grant scholarships.
(1) In general.
(2) Control of committee.
(i) In general.
(ii) Direct control.
(iii) Indirect control.
(3) Appointing members of the selection committee.
(4) Examples.
(c) Certain scholarship funds established by certain section 
501(c)(4) organizations.
(d) Certain disaster relief funds.
Sec.  53.4966-5 Taxable distributions.
(a) Taxable distributions.
(1) In general.
(2) Non-taxable distributions.
(3) Special rule.
(b) Distribution for purpose not specified in section 170(c)(2)(B).
(1) In general.
(2) Grants to noncharitable organizations.
(c) Organizations described in section 170(b)(1)(A).
(1) In general.
(2) Certain foreign organizations.
(d) Expenditure responsibility.
(1) In general.
(2) Special rules.
(i) Non-applicability of certain Code provisions.
(ii) Substituted terms.
(iii) Additional modifications.
Sec.  53.4966-6 Applicability date.


Sec.  53.4966-1   Definitions.

    (a) In general. The definitions in paragraphs (b) through (m) of 
this section apply for purposes of section 4966 of the Internal Revenue 
Code (Code) and the section 4966 regulations.
    (b) Contribution. The term contribution means any gift, bequest, or 
similar payment or transfer, whether in cash or in-kind, to or for the 
use of a sponsoring organization.
    (c) Disqualified supporting organization. With respect to any 
distribution, the term disqualified supporting organization means--
    (1) Any Type III supporting organization, as defined in section 
4943(f)(5)(A) of the Code and the regulations under section 509(a)(3) 
of the Code, that is not a functionally integrated Type III supporting 
organization, as defined in section 4943(f)(5)(B) and the regulations 
under section 509(a)(3) (see Sec.  1.509(a)-4(i) of this chapter); and
    (2) Any other supporting organization described in section 
509(a)(3) if a donor or donor-advisor with respect to the donor advised 
fund (either alone or together with related persons) directly or 
indirectly controls a supported organization (as defined in section 
509(f)(3)) of the supporting organization. For purposes of this 
paragraph (c), a supported organization will be considered controlled 
by a donor or donor-advisor with respect to the donor advised fund if 
that donor or donor-advisor, either alone or by aggregating votes or 
positions of authority with related persons, may require the supported 
organization to perform any act that significantly affects its 
operations or may prevent the supported organization from performing 
any such act. The supported organization will be considered to be 
controlled directly or indirectly by a donor or donor-advisor with 
respect to the donor advised fund, either alone or together with 
related persons, if the voting power of such persons is 50 percent or 
more of the total voting power of the governing body of such supported 
organization or if one or more of such persons have the right to 
exercise veto power over the actions of the governing body of the 
supported organization. However, all pertinent facts and circumstances 
will be taken into consideration in determining whether one or more 
persons do in fact directly or indirectly control the supported 
organization.
    (d) Distributee. The term distributee means any person, 
governmental entity, or donor advised fund receiving a distribution.
    (e) Distribution--(1) In general. The term distribution means any 
grant, payment, disbursement, or transfer, whether in cash or in kind, 
from a donor advised fund. Except as provided in paragraph (e)(2) of 
this section, investments and reasonable investment or grant-related 
fees are not considered distributions.
    (2) Deemed distribution. A distribution includes any use of donor 
advised fund assets that results in a more than incidental benefit 
(within the meaning of section 4967) to a donor, donor-advisor, or 
related person. In addition, a distribution includes an expense charged 
solely to a particular donor advised fund that is paid, directly

[[Page 77936]]

or indirectly, to a donor, donor-advisor, or related person with 
respect to the donor advised fund.
    (f) Donor. The term donor means any person described in section 
7701(a)(1) of the Code that makes a contribution to a fund or account 
of a sponsoring organization, other than a contributor that is a 
governmental unit described in section 170(c)(1) of the Code or an 
organization described in section 509(a)(1), (2), or (3) that is not a 
disqualified supporting organization.
    (g) Donor advised fund. See Sec.  53.4966-3 for the definition of 
donor advised fund. See Sec.  53.4966-4 for exceptions to the 
definition of donor advised fund.
    (h) Donor-advisor--(1) In general. The term donor-advisor means a 
person appointed or designated by a donor to have advisory privileges 
regarding the distribution or investment of assets held in a fund or 
account of a sponsoring organization. If a donor-advisor delegates any 
of the donor-advisor's advisory privileges to another person, or 
appoints or designates another donor-advisor, that person is also a 
donor-advisor. No particular form of appointment or designation is 
necessary. Except as provided in paragraphs (h)(3)(ii) and (h)(4) of 
this section, a donor-advisor includes a person recommended by a donor 
or donor-advisor to have advisory privileges if the sponsoring 
organization provides such privileges.
    (2) Person who establishes fund or account. A person (other than a 
person or governmental unit excepted from status as a donor under 
paragraph (f) of this section) who establishes a fund or account and 
advises as to the distribution or investment of amounts in that fund or 
account will be treated as a donor-advisor with respect to that fund or 
account, regardless of whether the person contributes to the fund or 
account.
    (3) Personal investment advisors--(i) In general. An investment 
advisor defined in section 4958(f)(8)(B) of the Code who manages the 
investment of, or provides investment advice with respect to, both the 
assets maintained in a donor advised fund and the personal assets of a 
donor to that donor advised fund (personal investment advisor) will be 
treated as a donor-advisor with respect to the donor advised fund while 
serving in that dual capacity regardless of whether the donor 
appointed, designated, or recommended the personal investment advisor.
    (ii) Exception. A personal investment advisor is not considered a 
donor-advisor if the personal investment advisor is properly viewed as 
providing services to the sponsoring organization as a whole, rather 
than providing services to the donor advised fund.
    (4) Donor-recommended advisory committee member. A person 
recommended by a donor or donor-advisor and appointed by the sponsoring 
organization to serve as a member of a committee of the sponsoring 
organization that advises as to distributions or investments of amounts 
in a fund or account is a donor-advisor unless--
    (i) The recommendation is based on objective criteria related to 
the expertise of the member in the particular field of interest or 
purpose of the fund or account;
    (ii) The committee consists of three or more individuals, and a 
majority of the committee is not recommended by the donor or donor-
advisor; and
    (iii) The recommended person is not a related person with respect 
to the recommending donor or donor-advisor.
    (i) Fund manager--(1) In general. The term fund manager means, with 
respect to any sponsoring organization--
    (i) An officer, director, or trustee of the sponsoring organization 
or any person having authority or responsibility similar to that 
exercised by an officer, director, or trustee of a sponsoring 
organization; or
    (ii) With respect to any act (or failure to act) resulting in a 
taxable distribution, the employee who has final authority or 
responsibility (either individually or as a member of a collective 
body) for the act (or failure to act).
    (2) Delegation of authority. A person has authority or 
responsibility similar to that exercised by an officer, director, or 
trustee of a sponsoring organization within the meaning of paragraph 
(i)(1)(i) of this section if, with respect to an act (or failure to 
act) resulting in a taxable distribution, he or she has been delegated 
final authority or responsibility with respect to the act by an 
officer, director, or trustee of the sponsoring organization or by the 
governing body of the sponsoring organization. For example, an 
investment manager is a fund manager with respect to a taxable 
distribution if the sponsoring organization's governing body delegated 
to the investment manager the final authority to make certain 
investment decisions and, in the exercise of that authority, the 
manager committed the sponsoring organization to making a taxable 
distribution. To be considered to have authority or responsibility 
similar to that exercised by an officer, director, or trustee of a 
sponsoring organization within the meaning of paragraph (i)(1)(i) of 
this section, a person need not be an employee of the sponsoring 
organization. A person does not have authority or responsibility 
similar to that exercised by an officer, director, or trustee of a 
sponsoring organization within the meaning of paragraph (i)(1)(i) of 
this section if the person is merely implementing a decision made by a 
superior.
    (j) Related persons. With respect to any individual, the term 
related person means a family member of the individual (as defined in 
section 4958(f)(4)). With respect to any person or persons, the term 
related person also means a 35-percent controlled entity (as defined in 
section 4958(f)(3) by substituting such person or persons or their 
family members for persons described in subparagraph (A) or (B) of 
paragraph (1) in section 4958(f)(3)(A)(i)). See section 4958(f)(7)(B) 
and (C).
    (k) Section 4966 regulations. The term section 4966 regulations 
means this section and Sec. Sec.  53.4966-2 through 53.4966-6.
    (l) Sponsoring organization. The term sponsoring organization means 
any organization that--
    (1) Is described in section 170 (other than a governmental unit 
described in section 170(c)(1)), without the requirement under section 
170(c)(2)(A) that it be created or organized in the United States or in 
any possession thereof, or under the law of the United States, any 
State, the District of Columbia, or any possession of the United 
States;
    (2) Is not a private foundation (as defined in section 509(a) and 
the regulations under section 509(a)); and
    (3) Maintains one or more donor advised funds.
    (m) Taxable distribution. See Sec.  53.4966-5 for the definition of 
taxable distribution.


Sec.  53.4966-2   Taxes on taxable distributions.

    (a) In general. Section 4966 of the Internal Revenue Code imposes 
two excise taxes with respect to taxable distributions from a donor 
advised fund. Paragraph (b) of this section describes the excise tax 
under section 4966(a)(1) imposed on a sponsoring organization of a 
donor advised fund. Paragraph (c) of this section describes the excise 
tax under section 4966(a)(2) imposed on a fund manager who knowingly 
agrees to a taxable distribution.
    (b) Taxes paid by the sponsoring organization. For each taxable 
distribution, the excise tax imposed by section 4966(a)(1) is equal to 
20 percent of the amount of the taxable distribution

[[Page 77937]]

from a donor advised fund. The tax imposed by section 4966(a)(1) (20-
percent section 4966 tax) is paid by the sponsoring organization of the 
donor advised fund.
    (c) Taxes paid by fund managers--(1) In general. For each taxable 
distribution with respect to which section 4966(a)(1) imposes an excise 
tax, the excise tax imposed by section 4966(a)(2) is equal to five 
percent of the amount of the taxable distribution on the agreement of 
any fund manager who agreed to the making of the taxable distribution 
with knowledge that it is a taxable distribution as described in 
paragraph (c)(3) of this section. The tax imposed by section 4966(a)(2) 
(five-percent section 4966 tax) is paid by the fund manager or managers 
who agreed to the making of the taxable distribution.
    (2) Agreement. The agreement of any fund manager to the making of a 
taxable distribution consists of any manifestation of approval of the 
distribution that is sufficient to constitute an exercise of the fund 
manager's authority to approve, or to exercise discretion in 
recommending approval of, the making of the distribution by the 
sponsoring organization, whether or not the manifestation of approval 
is the final or decisive approval on behalf of the sponsoring 
organization.
    (3) Knowledge. For purposes of section 4966(a)(2), a fund manager 
agrees to the making of a distribution with knowledge that it is a 
taxable distribution only if the manager either--
    (i) Is in fact aware that it is a taxable distribution; or
    (ii) Has knowledge of facts sufficient to determine that, based on 
those facts, the distribution would be a taxable distribution and 
negligently fails to make reasonable attempts to ascertain whether the 
distribution is a taxable distribution.
    (4) Joint and several liability. In any case in which more than one 
fund manager is liable for the five-percent section 4966 tax, all such 
fund managers are jointly and severally liable for the five-percent 
section 4966 taxes imposed with respect to that distribution.
    (5) Limit on liability for managers. The maximum aggregate amount 
of five-percent section 4966 tax collectible for any one taxable 
distribution is $10,000.


Sec.  53.4966-3   Definition of donor advised fund.

    (a) In general. Except as provided in Sec.  53.4966-4, the term 
donor advised fund means a fund or account--
    (1) That is separately identified by reference to contributions of 
a donor or donors in accordance with paragraph (b) of this section;
    (2) That is owned and controlled by a sponsoring organization; and
    (3) With respect to which at least one donor or donor-advisor has, 
or reasonably expects to have, advisory privileges with respect to the 
distribution or investment of amounts held in the fund or account by 
reason of the donor's status as a donor in accordance with paragraph 
(c) of this section.
    (b) Separate identification by reference to contributions of a 
donor or donors--(1) In general. A fund or account is separately 
identified by reference to contributions of a donor or donors if the 
sponsoring organization maintains a formal record of contributions to 
the fund or account relating to a donor or donors. If there is no 
formal record, whether a fund or account is separately identified by 
reference to contributions of a donor or donors is based on all the 
facts and circumstances.
    (2) Facts and circumstances tending to show that a fund or account 
is separately identified. Facts and circumstances that are relevant in 
determining that a fund or account is separately identified by 
reference to contributions of a donor or donors include--
    (i) The fund or account balance reflects items such as 
contributions, dividends, interest, distributions, administrative 
expenses, and gains and losses (realized or unrealized);
    (ii) The fund or account is named after one or more donors, donor-
advisors, or related persons;
    (iii) The sponsoring organization refers to the fund or account as 
a donor advised fund;
    (iv) The sponsoring organization has an agreement or understanding 
with one or more donors or donor-advisors that the fund or account is a 
donor advised fund;
    (v) One or more donors or donor-advisors regularly receive a fund 
or account statement from the sponsoring organization; and
    (vi) The sponsoring organization generally solicits advice from the 
donor(s) or donor-advisor(s) before it makes distributions from the 
fund or account.
    (3) Commingling. A fund or account does not fail to be a donor 
advised fund merely because the sponsoring organization commingles the 
assets attributed to the fund or account with other assets of the 
sponsoring organization, as long as the sponsoring organization treats 
the fund or account as attributable to contributions of a donor or 
donors.
    (c) Advisory privileges--(1) In general--(i) Facts and 
circumstances. Under section 4966(d)(2)(A)(iii) of the Internal Revenue 
Code (Code), at least one donor or donor-advisor must have, or 
reasonably expect to have, advisory privileges by reason of the donor's 
status as a donor. A donor or donor-advisor may have, or reasonably 
expect to have, advisory privileges even in the absence of actual 
provision of advice. The existence of advisory privileges, or the 
reasonable expectation thereof, is based on all the facts and 
circumstances, which in turn depend on the conduct (and any agreement 
or understanding) of both the donor(s) or donor-advisor(s) and the 
sponsoring organization. Advisory privileges include those arising from 
service on an advisory committee. If a donor or donor-advisor has, or 
reasonably expects to have, advisory privileges as defined in this 
paragraph (c), then the advisory privileges are deemed to be by reason 
of the donor's status as a donor except as otherwise provided in this 
paragraph (c).
    (ii) Application to entire fund or account. If at least one donor 
or donor-advisor has, or reasonably expects to have, advisory 
privileges with respect to a fund or account or any portion of a fund 
or account, advisory privileges by reason of the donor's status as a 
donor exist with respect to that fund or account even if there are 
multiple donors to the fund or account.
    (iii) Donor, donor-advisor, or related person appointed to an 
advisory committee--(A) In general. A sponsoring organization's 
appointment of a donor, donor-advisor, or related person to be on a 
committee of persons that advises as to distributions or investments of 
amounts in the fund or account will be deemed to result in advisory 
privileges by reason of the donor's status as a donor unless-
    (1) The appointment is based on objective criteria related to the 
expertise of the appointee in the particular field of interest or 
purpose of the fund or account;
    (2) The committee consists of three or more individuals, not more 
than one-third of whom are related persons with respect to any member 
of the committee; and
    (3) The appointee is not a significant contributor to the fund or 
account, taking into account contributions by related persons with 
respect to the appointee, at the time of appointment.
    (B) Exception. An appointee may be deemed to have advisory 
privileges by reason of a donor's status as a donor

[[Page 77938]]

based on the facts and circumstances, such as if the appointee was not 
a significant contributor to a fund or account at the time of 
appointment but became a significant contributor shortly thereafter.
    (iv) Officers, etc. of sponsoring organization. Advice provided 
solely in a person's capacity as an officer, director, employee (or in 
a similar capacity) of a sponsoring organization does not by itself 
give rise to advisory privileges by reason of a donor's status as a 
donor. However, if an officer, director, or employee of the sponsoring 
organization is allowed to advise how to distribute or invest amounts 
in a fund or account because of such person's contributions to the fund 
or account, such person will be considered to have advisory privileges 
by reason of the person's status as a donor with respect to that fund 
or account.
    (v) Deemed advisory privileges. Except as provided in paragraph 
(c)(1)(iv) of this section, if a donor is the sole person with advisory 
privileges with respect to a fund or account, the advisory privileges 
will be deemed to be by reason of the donor's status as a donor.
    (2) Facts sufficient to find advisory privileges. A donor or donor-
advisor has advisory privileges by reason of the donor's status as a 
donor, regardless of whether they are exercised, if--
    (i) The sponsoring organization allows a donor or donor-advisor to 
provide nonbinding recommendations regarding distributions from, or 
regarding the investment of assets held in, a fund or account;
    (ii) A written agreement between the sponsoring organization and a 
donor or a donor-advisor states that a donor or donor-advisor has 
advisory privileges;
    (iii) A written document or any marketing material made available 
to a donor or donor-advisor indicates that a donor or donor-advisor may 
provide advice to the sponsoring organization regarding the 
distribution or investment of amounts held by a sponsoring organization 
(for example, a pre-approved list of investment options or distributees 
that the sponsoring organization provides to a donor or donor-advisor); 
or
    (iv) The sponsoring organization generally solicits advice from a 
donor or donor-advisor regarding the distribution or investment of 
amounts held in a fund or account.
    (d) Substance over form. The Commissioner may look to the substance 
of an arrangement, not merely its form, in determining whether the 
arrangement is a donor advised fund.
    (e) Examples. The following examples illustrate the principles of 
this section (in each example, assume that the funds or accounts at 
issue are owned and controlled by the sponsoring organization):
    (1) Example 1. A, B, and C are unrelated donors who jointly 
establish Fund X at sponsoring organization Y. A, B, and C each make 
equal contributions to Fund X and each have advisory privileges with 
respect to all of the assets in Fund X. Y sends A monthly account 
statements showing Fund X's account balance and any transactions in the 
account. A shares information about Fund X with B and C when asked or 
as needed. Fund X is separately identified by reference to 
contributions of donors and is a donor advised fund.
    (2) Example 2. Assume the same facts as paragraph (e)(1) of this 
section (Example 1), except that A makes 70 percent of the 
contributions, B 20 percent, and C 10 percent, with each having 
advisory privileges with respect to all of the assets in Fund X. Fund X 
is separately identified by reference to contributions of donors and is 
a donor advised fund.
    (3) Example 3. In Year 1, X, a governmental entity described in 
section 170(c)(1), and Y, a public charity described in section 
509(a)(1) of the Code, establish and fully fund Fund M at sponsoring 
organization A. Fund M is separately identified with respect to X and 
Y. However, because neither X nor Y is a donor, Fund M is not 
separately identified by reference to contributions of a donor or 
donors and is not a donor advised fund.
    (4) Example 4. Assume the same facts as paragraph (e)(3) of this 
section (Example 3), except that in Year 2 individual donors contribute 
to Fund M. Only X and Y have advisory privileges with respect to the 
distribution or investment of amounts held in Fund M. Because no donor 
or donor-advisor has advisory privileges with respect to Fund M, Fund M 
is not a donor advised fund.
    (5) Example 5. F, an individual, is a donor to Fund T, a multiple-
donor fund at sponsoring organization X. F is also a director of X who 
provides investment advice that affects all funds at X in his capacity 
as a director. F will not be considered to have advisory privileges 
with respect to Fund T solely because of F's duties as director of X.
    (6) Example 6. Assume the same facts as paragraph (e)(5) of this 
section (Example 5), except that by reason of F's contribution to Fund 
T, F is appointed to a committee that advises how to distribute or 
invest amounts in Fund T. F has advisory privileges with respect to 
Fund T by reason of F's status as a donor.
    (7) Example 7. Sponsoring organization Y has established Fund P, 
which is dedicated to the relief of poverty in City Z. Fund P is 
advised by a 5-member committee selected by Y from residents of City Z, 
potentially including donors to Fund P. The committee is comprised of 
community leaders and other persons with special knowledge or 
experience in the relief of poverty. Each committee member serves for a 
term of three years and cannot serve more than two terms. No committee 
member is related to another committee member and no committee member 
is (together with related persons with respect to any committee member) 
a significant contributor to Fund P. Over 100 citizens of City Z have 
contributed to Fund P. Y maintains a formal record of donors to Fund P 
and amounts contributed, and thus Fund P is separately identified by 
reference to contributions of donors. However, under the circumstances, 
no person who serves on the advisory committee of Fund P is deemed to 
have advisory privileges by reason of a donor's status as a donor. Fund 
P is not a donor advised fund.
    (8) Example 8. Fifteen unrelated individuals establish Fund Q at 
sponsoring organization T. Each individual contributes to Fund Q, and 
these individuals constitute a committee appointed by T to advise on 
investments and distributions from Fund Q. T regularly issues a 
statement to one of the committee members (who shares the information 
with the others) showing the account balance and any transactions with 
Fund Q. Fund Q is a donor advised fund.
    (9) Example 9. Assume the same facts as in paragraph (e)(8) of this 
section (Example 8), except that the advisory committee consists of 
three of the donors, rotated annually. Fund Q is a donor advised fund.
    (10) Example 10. N, an individual, establishes Fund O at W, a 
sponsoring organization. Fund O serves as a memorial to N's daughter, 
and receives many contributions from unrelated individuals. N is the 
only person with advisory privileges and thus is a donor advisor. Fund 
O is a donor advised fund.
    (11) Example 11. F, an individual, establishes Fund R at T, a 
sponsoring organization, to provide scholarship grants for the 
advancement of science at local secondary schools. F is the sole donor 
to Fund R. Pursuant to F's recommendation, an advisory committee 
consisting of five persons is solely responsible for advising T with

[[Page 77939]]

respect to the distribution and investment of amounts held in Fund R. F 
recommends (and T appoints) two individuals who are the heads of the 
science departments of those schools, neither of whom is related to F. 
T independently appoints the other three committee members, none of 
whom are recommended by donors or related to donors. The persons 
recommended by F for committee membership are not donor-advisors 
because F's recommendations are for individuals who are not related 
persons with respect to F, who, based on objective criteria, have 
expertise in the field of interest of Fund R, the committee consists of 
more than two individuals, and a majority of the committee is not 
recommended by F. Because no donor or donor-advisor has, or reasonably 
expects to have, advisory privileges with respect to the distribution 
or investment of amounts held in the fund or account by reason of the 
donor's status as a donor, Fund R is not a donor advised fund.


Sec.  53.4966-4   Exceptions to the definition of donor advised fund.

    (a) Funds or accounts that make distributions only to a single 
identified organization--(1) In general. The term donor advised fund 
does not include any fund or account that is established by written 
agreement to make (and that actually does make) distributions only to a 
single identified organization as defined in paragraph (a)(2) of this 
section, and that meets the other requirements of this paragraph (a).
    (2) Single identified organization. For purposes of this paragraph 
(a), the term single identified organization means an organization that 
is described in sections 170(c)(2) and 509(a)(1), (2), or (3) of the 
Internal Revenue Code (Code) (other than a disqualified supporting 
organization), or that is a governmental entity described in section 
170(c)(1) if the distribution is exclusively for public purposes.
    (3) Distributions to a single identified organization. The 
sponsoring organization must make distributions from the fund or 
account only to the single identified organization for use in the 
single identified organization's activities (other than the activities 
of administering donor advised funds or grant-making), and not to third 
parties on behalf of the single identified organization.
    (4) Special rules--(i) In general. A fund or account will not be 
treated as making distributions only to a single identified 
organization if--
    (A) A donor, donor-advisor, or related person has or reasonably 
expects to have the ability to advise regarding some or all of the 
distributions from the single identified organization to other 
individuals or entities; or
    (B) A distribution from the fund or account provides, directly or 
indirectly, a more than incidental benefit (within the meaning of 
section 4967 of the Code), to a donor, donor-advisor, or related person 
with respect to the fund.
    (ii) Certifications. A sponsoring organization may rely on a 
certification from the donor that no distribution will be described in 
paragraph (a)(4)(i) of this section as long as the sponsoring 
organization lacks knowledge to the contrary.
    (5) Substitution for specified organization. A sponsoring 
organization may substitute another single identified organization if 
the substitution is conditioned upon the occurrence of a loss of 
exemption, substantial failure or abandonment of operations, or a 
dissolution or reorganization that results in the named single 
identified organization ceasing to exist, and the event is beyond the 
direct or indirect control of donor(s), donor-advisor(s), or related 
persons.
    (6) Examples. The following examples illustrate the principles of 
this section:
    (i) Example 1. A and B, a married couple, establish Fund V at X, a 
sponsoring organization. Fund V is established by written agreement to 
make distributions only to Y, a university recognized as exempt under 
section 501(c)(3) of the Code and described in section 
170(b)(1)(A)(ii). In the gift instrument, A and B reserve the right to 
recommend which university projects should be supported by Fund V and 
which investments to make with fund assets. A and B certify that A, B, 
and persons related to A and B do not benefit from any distributions 
from Fund V and do not have, or reasonably expect to have, the ability 
to advise regarding some or all of the distributions from Y to other 
entities. Fund V is not a donor advised fund because all distributions 
are made to a single identified organization, Y.
    (ii) Example 2. Assume the same facts as paragraph (a)(6)(i) of 
this section (Example 1), except that the sponsoring organization uses 
funds from Fund V to purchase goods to distribute to the community on 
behalf of Y. Fund V does not meet the exception for a fund or account 
that makes distributions only to a single identified organization 
because not all distributions from Fund V are made to the single 
identified organization, Y.
    (iii) Example 3. Assume the same facts as paragraph (a)(6)(i) of 
this section (Example 1), except that A is on the Board of Y. Because A 
has the ability to advise some or all of the distributions from Y to 
other entities, Fund V does not meet the exception for a fund or 
account that makes distributions only to a single identified 
organization.
    (b) Certain funds or accounts that grant scholarships--(1) In 
general. The term donor advised fund does not include any fund or 
account with respect to which a donor or donor-advisor advises as to 
which individuals receive grants for travel, study, or other similar 
purposes, if--
    (i) The exclusive purpose of the fund or account is to make grants 
to individuals for travel, study, or other similar purposes;
    (ii) The donor or donor-advisor provides advice exclusively in the 
person's capacity as a member of the selection committee selecting the 
individuals who receive grants;
    (iii) All the members of the selection committee are appointed by 
the sponsoring organization;
    (iv) No combination of donor(s), donor-advisor(s), or related 
persons controls, directly or indirectly, the selection committee;
    (v) All grants from the fund or account are awarded on an objective 
and nondiscriminatory basis pursuant to a written procedure approved in 
advance by the board of directors of the sponsoring organization, and 
the procedure is designed to ensure that all the grants adhere to the 
principles set forth by section 4945(g)(1), (2) or (3) of the Code and 
the regulations under section 4945 (other than the requirement to get 
advance approval by the IRS); and
    (vi) The fund or account maintains adequate records as described in 
Sec.  53.4945-4(c)(6) that demonstrate the recipients were selected on 
an objective and nondiscriminatory basis.
    (2) Control of committee--(i) In general. For purposes of paragraph 
(b)(1)(iv) of this section, whether control of the committee exists is 
determined by looking to the substance, rather than the form, of any 
arrangement.
    (ii) Direct control. A committee will be considered controlled if 
donor(s), donor-advisor(s), or related persons, either alone or 
together--
    (A) Can require the committee to take or refrain from taking any 
action;
    (B) Control 50 percent or more of the total voting power of the 
committee; or
    (C) Have the right to exercise veto power over the committee's 
decisions.
    (iii) Indirect control. Whether a committee is indirectly 
controlled by a combination of donor(s), donor-advisor(s), or related 
persons is determined by the facts and circumstances, including the 
nature of

[[Page 77940]]

any relationships among the members of the selection committee and with 
any donor, donor-advisor, or related person. For example, a committee 
is indirectly controlled by a combination of donor(s), donor-
advisor(s), or related persons if a majority of the selection committee 
is currently engaged by the donor, donor-advisor, or any related person 
in any employment or fiduciary capacity, whether as an employee or 
independent contractor, or recommended by a donor or donor-advisor and 
appointed to the selection committee based on other than objective 
criteria regarding the person's expertise, or a combination thereof.
    (3) Appointing members of the selection committee. In appointing 
the members of the selection committee, a sponsoring organization may 
act through its board of directors, trustees, or other governing body; 
a committee appointed by the governing body; or an appropriate officer 
of the sponsoring organization.
    (4) Examples. The following examples illustrate the principles of 
this section:
    (i) Example 1. Fund O was established at sponsoring organization Y 
to grant scholarships. Fund O receives contributions from many 
unrelated donors, including D, E, and F. Y appointed D, E, and F to 
serve on Fund O's 5-person selection committee by reason of their 
status as donors. Because donors control its selection committee, Fund 
O does not meet the exception for certain funds or accounts that grant 
scholarships under paragraph (b) of this section.
    (ii) Example 2. Assume the same facts as in paragraph (b)(4)(i) of 
this section (Example 1), except that Y appoints G, a donor; H, G's 
donor-advisor; and I, an attorney currently employed by G to serve on 
Fund O's 5-person selection committee. Y appoints G, H, and I by reason 
of G's status as a donor. The committee is indirectly controlled by G, 
and thus the fund does not meet the exception for certain funds or 
accounts that grant scholarships under paragraph (b) of this section.
    (iii) Example 3. Assume the same facts as in paragraph (b)(4)(i) of 
this section (Example 1), except that Y appoints D and four officers of 
Y who have not contributed to Fund O to serve on the 5-person selection 
committee. Assuming that the other requirements of paragraph (b)(1) of 
this section are met and that the facts do not indicate that D 
indirectly controls the committee, Fund O meets the exception for 
certain funds or accounts that grant scholarships under paragraph (b) 
of this section.
    (c) Certain scholarship funds established by certain section 
501(c)(4) organizations. The term donor advised fund does not include a 
fund or account established by a broad-based membership organization 
described in section 501(c)(4) that establishes a committee to advise 
as to which individuals receive grants, if--
    (1) The fund or account's single identified charitable purpose is 
to make grants to individuals for scholarships described in section 
4945(g)(1);
    (2) The selection of recipients of scholarships from the fund or 
account is made using a selection committee the members of which are 
nominated by the section 501(c)(4) organization and approved in writing 
by the sponsoring organization;
    (3) The fund or account serves a charitable class;
    (4) Recipients of grants from the fund or account are selected on 
an objective and nondiscriminatory basis pursuant to a procedure, 
approved in advance by the sponsoring organization's board of 
directors, that is designed to ensure that all the grants meet the 
requirements of section 4945(g)(1) and the regulations under section 
4945 (other than the requirement to get advance approval by the IRS);
    (5) No distribution is made from the fund or account to, or for the 
benefit of:
    (i) Any director, officer, or trustee of the sponsoring 
organization of the fund or account;
    (ii) Any member of the fund or account's selection committee;
    (iii) Any member, honorary member, or employee of the section 
501(c)(4) organization; or
    (iv) Any related person with respect to anyone described in 
paragraph (c)(5)(i), (ii), or (iii) of this section; and
    (6) The fund or account maintains adequate records as described in 
Sec.  53.4945-4(c)(6) that demonstrate the recipients were selected on 
an objective and nondiscriminatory basis.
    (d) Certain disaster relief funds. The term donor advised fund does 
not include a fund or account if--
    (1) The fund or account's single identified charitable purpose is 
to provide relief from one or more qualified disasters within the 
meaning of section 139(c)(1), (2), or (3) of the Code;
    (2) The fund or account serves a charitable class;
    (3) The selection of recipients of grants from the fund or account 
is made using a selection committee--
    (i) That is not directly or indirectly controlled (as defined in 
paragraph (b)(2) of this section) by donor(s), donor-advisor(s), or 
related persons and to which all the members are appointed by the 
sponsoring organization; or
    (ii) The majority of which, if the fund or account gives preference 
or priority to employees (or their family members) of an employer to 
receive grants, consists of persons who are not in a position to 
exercise substantial influence over the affairs of the employer (or 
adequate substitute procedures exist to ensure that any benefit to the 
employer is incidental and tenuous);
    (4) The selection committee selects recipients of grants from the 
fund or account (and determines the amounts of such grants) based on 
objective and nondiscriminatory determinations of need pursuant to a 
procedure approved in advance by the board of directors of the 
sponsoring organization;
    (5) No distribution is made from the fund or account that would 
result in more than incidental benefit (within the meaning of section 
4967 of the Code) to--
    (i) Any director, officer, or trustee of the sponsoring 
organization of the fund or account;
    (ii) Any member of the fund's selection committee; or
    (iii) Any related person with respect to a director, officer, or 
trustee of the sponsoring organization or to a member of the selection 
committee; and
    (6) Records are maintained that demonstrate the need of the 
recipients for the disaster relief assistance provided and that satisfy 
section 6033(b)(14) of the Code.


Sec.  53.4966-5   Taxable distributions.

    (a) Taxable distributions--(1) In general. Except as provided in 
paragraphs (a)(2) and (3) of this section, the term taxable 
distribution means any distribution from a donor advised fund--
    (i) To any natural person; or
    (ii) To any other person if--
    (A) The distribution is for any purpose other than one specified in 
section 170(c)(2)(B) of the Internal Revenue Code (Code), as defined in 
paragraph (b) of this section; or
    (B) The sponsoring organization does not exercise expenditure 
responsibility with respect to the distribution in accordance with 
paragraph (d) of this section.
    (2) Non-taxable distributions. The term taxable distribution does 
not include any distribution from a donor advised fund to--
    (i) Any organization described in section 170(b)(1)(A) (other than 
a disqualified supporting organization), as defined in paragraph (c) of 
this section;
    (ii) The sponsoring organization of the donor advised fund; or
    (iii) Any other donor advised fund.
    (3) Special rule. If a series of distributions is undertaken 
pursuant to

[[Page 77941]]

a plan that achieves a result inconsistent with the purposes of section 
4966 of the Code, the distributions are treated as a single 
distribution for purposes of section 4966. For example, if a donor 
advises a distribution, that the sponsoring organization subsequently 
makes, from a donor advised fund to Charity X and the donor or the 
sponsoring organization arranges for Charity X to use the funds to make 
distributions to individuals recommended by the donor, the distribution 
will be a taxable distribution from the sponsoring organization to 
individuals.
    (b) Distribution for purpose not specified in section 
170(c)(2)(B)--(1) In general. For purposes of paragraph (a)(1)(ii)(A) 
of this section, a distribution to be used for an activity that is 
prohibited under section 501(c)(3) of the Code or for an activity that, 
if it were a substantial part of a section 501(c)(3) organization's 
total activities, would cause loss of tax exemption, is not for a 
purpose specified in section 170(c)(2)(B). For example, a distribution 
used for political campaign intervention activity or for attempting to 
influence legislation is considered to be for a purpose not specified 
in section 170(c)(2)(B). Purposes described in section 170(c)(2)(B) are 
treated as such whether or not carried out by an organization described 
in section 170(c).
    (2) Grants to noncharitable organizations. If the distribution is a 
grant (as defined in Sec.  53.4945-4(a)(2)) to any organization (other 
than an organization described in section 501(c)(3) and not in section 
509(a)(4) of the Code), it will not be considered for a purpose 
specified in section 170(c)(2)(B) unless the grantee agrees either to 
separately account for the grant funds on its books or to segregate the 
grant funds.
    (c) Organizations described in section 170(b)(1)(A)--(1) In 
general. For purposes of paragraph (a)(2)(i) of this section, an 
organization will be treated as described in section 170(b)(1)(A) if--
    (i) It is described in both sections 170(b)(1)(A) and 170(c)(2), 
other than a disqualified supporting organization, and without regard 
to section 170(c)(2)(A);
    (ii) It is a governmental unit described in section 170(b)(1)(A)(v) 
and 170(c)(1) (or an agency or instrumentality thereof, including an 
organization described in section 511(a)(2)(B) of the Code), as long as 
the distribution to it is made for exclusively public purposes; or
    (iii) It is a foreign government (or an agency or instrumentality 
thereof), or an international organization designated as such by 
Executive Order under 22 U.S.C. 288, as long as the distribution to it 
is made exclusively for charitable purposes as described in section 
170(c)(2)(B).
    (2) Certain foreign organizations. For purposes of this section, a 
foreign organization distributee that does not have a ruling or 
determination letter that it is an organization described in sections 
501(c)(3) and 170(b)(1)(A) (other than a disqualified supporting 
organization) will be treated as described in sections 501(c)(3) and 
170(b)(1)(A) (other than a disqualified supporting organization) if, 
prior to the distribution, the sponsoring organization makes a good 
faith determination, using procedures similar to those set forth in 
Sec.  53.4945-5(a)(5), that the distributee is described in sections 
501(c)(3) and 170(b)(1)(A) (other than a disqualified supporting 
organization).
    (d) Expenditure responsibility--(1) In general. For purposes of 
paragraph (a)(1)(ii)(B) of this section, a sponsoring organization will 
be treated as exercising expenditure responsibility if it follows the 
procedures set forth in Sec.  53.4945-5(b) through (e) as modified by 
paragraph (d)(2) of this section.
    (2) Special rules--(i) Non-applicability of certain Code 
provisions. References to sections 507, 4945(d), and 4948 of the Code 
do not apply.
    (ii) Substituted terms. In applying Sec.  53.4945-5(b) through (e), 
substitute sponsoring organization for private foundation, granting 
private foundation, granting foundation, grantor foundation, 
foundation, or grantor (but not for private foundation grantees in 
Sec.  53.4945-5(c)); substitute distribution for grant or amount 
granted; substitute distributee for grantee; and substitute taxable 
distribution for taxable expenditure each place they appear.
    (iii) Additional modifications. In lieu of Sec.  53.4945-
5(b)(3)(iv)(c) and (b)(4)(iv)(c), the distributee must agree not to use 
any of the funds to make any grant to an organization that does not 
comply with the expenditure responsibility requirements of this 
paragraph (d), to make any grant to a natural person, or to make any 
grant, loan, compensation, or other similar payment (as described in 
section 4958(c)(2) of the Code) to a donor, donor-advisor, or related 
person with respect to the donor advised fund from which the 
distribution that is the subject of the agreement is made.


Sec.  53.4966-6   Applicability date.

    Applicability date. The rules of Sec. Sec.  53.4966-1 through 
53.4966-5 apply to taxable years ending on or after [the date of 
publication of the Treasury decision adopting these rules as final 
regulations in the Federal Register].

Douglas W. O'Donnell,
Deputy Commissioner for Services and Enforcement.
[FR Doc. 2023-24982 Filed 11-13-23; 8:45 am]
BILLING CODE 4830-01-P