Biden’s proposal on private foundations’ distributions to DAFs

President Biden’s recent budget proposal, repeating a request from last year, asked Congress to limit the ability of private foundations to use payments to donor-advised funds to count towards their required 5% distribution requirement. In general, under IRC Section 4942, private foundations that do not directly conduct exempt activities (non-operating private foundations) are required to distribute 5% of their assets to charitable organizations. Distributions to other private (non-operating) foundations do not generally count as qualifying distributions.

DAFs, though nominally public charities, often have characteristics of private foundations:  the donors have significant influence on how the money is used (the “advised” part of DAF), with accounts at DAFs generally being funded by a small number of donors. Congress has recognized this similarity and applied some of the private foundation rules to DAFs, including the proscriptions on “taxable distributions” and “prohibited benefits” as per IRC Sections 4966 and 4967. But Congress has shied away from treating DAFs and private foundations equivalently and (for now) grants made to DAFs count towards a private foundation’s required 5% distribution.

 

Whether or not this is a good or bad depends on how analogous you think DAFs are to private foundations. Edward Zelinsky’s recent Tax Notes piece convincingly argues for full equivalence, suggesting that DAFs should be subjected to the full panoply of private foundation regulation, including the 5% distribution requirement and the 1.39% tax on investment income. Advocates for charitable organizations, unsurprisingly, think otherwise (see here and here, e.g.).

 

Manoj Viswanathan