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S. 1981 Creates New Definitions, Adds Complexity to the Tax Code and Chills Giving

The Bill Would Unnecessarily Divide DAFs Into Two Categories: Qualified and Nonqualified

The S. 1981 divides charitable giving vehicles and organizations into complex buckets. By doing so, it injects additional complexity into the tax code and discourages people from contributing to DAFs in  the first place.

 

Qualified DAF:

Offers the donor an immediate charitable tax deduction in the years gifts are made and extends advisory privileges for only 15 years, during which time all contributions must be distributed or the sponsoring organization faces a 50% tax penalty on the DAF assets.

Nonqualified DAF:

Offers the donor a charitable tax deduction only in the years gifts are distributed out of  a DAF and extends advisory privileges up to 50 years before facing the 50% tax penalty.  The donor may only deduct the amount of the qualifying distribution, and distributions  are treated as made from contributions on a first-in, first-out basis.

 

The Bill Would Create a Special Definition for a Narrow Set of “Qualified” Community Foundations and Their DAFs

 

Qualified Community Foundation:
Must serve a community no larger than four  states and hold at least 25% of their assets  outside of DAFs.

 

Qualified Community Foundation DAF:
Is exempt from the 50% penalty if the DAF is sponsored at a qualified community foundation and either:

  • Has no individual donor advisor with an aggregate value of $1 million in DAF accounts with the foundation; or
  • Must pay out at least 5% of the DAF’s value annually.

Impact:

  • Such complexity will lead directly to increased administrative burdens and compliance costs for the charitable sector and givers—resulting in less funds for charities and the communities they support.
  • It is also important to note that the tax penalty would be born by the sponsoring organization, a public charity, not by the donor. Taxing charitable assets runs counter to the purported goal of the bill as it would necessarily mean fewer dollars for charities.
  • The bill would also limit the important ability for donors to allow their funds to grow over time and save up to make a larger charitable gift. Removing the timing flexibility that makes DAFs so popular would also come at a detriment to charities, especially for those with long-term goals or future projects in need of support.

 

The Bill Would Create Complex Tax Deduction Rules for Gifts to DAFs

The bill would arbitrarily limit a donor’s ability to give complex assets through DAFs.

  • Contributions of non-cash assets and non-publicly traded assets (those without a price available on an established securities market) cannot be deducted until the asset is sold by the sponsoring organization.
  • When these assets are sold, the deduction cannot exceed the gross proceeds received from the sale and credited to the donor’s account.
  • The sponsoring organization must report the sale in a written acknowledgment to the donor within 30 days of crediting the proceeds to the DAF. This acknowledgment must include the donor’s name, certify the asset was sold, and include the gross proceeds as well as a statement that the deduction cannot exceed the proceeds credited to the donor’s DAF. The acknowledgment must also be submitted to the IRS.

Impact:

  • There are ample real-world examples of donors giving non-cash assets, such as commercial real estate and operating businesses, to a DAF sponsor to provide ongoing charitable funding over an extended period of time.
  • The Communities Foundation of Texas, for example, outlines on its website several cases in which their donors were able to support their communities through the donation of such assets. In one such case, a donor with property in Dallas was able to contribute a percentage of a business into a DAF, where it is able to produce income that can be used for grantmaking to nonprofits. Forcing a sale of such an asset at the time of donation is likely to yield less money for charities overall.
  • The bill also disallows anonymous contributions of non-cash assets by requiring a formal acknowledgment that includes the name of the donor. Beyond the significant donor privacy concerns, the acknowledgment itself would impose new compliance costs onto DAF sponsors—themselves public charities.
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