DAF Proposed Regulations: Anti-Abuse Rules vs. Anti-Abuse Standards
I’ll be honest. Like most tax law professors, I love me some anti-abuse. But only anti-abuse standards, not anti-abuse rules. There is a long debate — mostly one sided in the academy — regarding whether we would be better served by standards than rules. I admit, rules provide certainty and that is good for taxpayer compliance. But excessive verbiage in the Code invariably tells taxpayers just how to get away with some unjustifiable, but technically or literally supported outcome. It’s not as if a detailed “stop it!” statute or regulation stops anything other than the exact thing the detailed rule prohibits. The slightest movement left or right avoids the proscription and violates the spirit. Take a look at the precisely defined prohibition in IRC 1014(e). The rule tells us that all it takes is to keep the old geezer on life support for a day longer than a year and voila! Stepped up basis. The precision in IRC 1014(e) makes it a lot harder to argue that appreciated property acquired from a decedent who dies 18 months after receiving the property as a gift from the very same beneficiary was just a ruse to get a stepped up basis. Specificity invariably implies that everything else is fair game.
So I am not all that sympathetic to those who object to the anti-abuse provisions in the proposed 4966 regulations. Few, if any, commenters like them. The first relates to a fund that makes distributions to a “single identified organization.” Prop. Treas. Reg. 53.4966-4(a)(3). IRC 4966(d)(2)(B)(i) excludes what commenters call “designated funds” from the definition of a DAF. A fund that provides grants to a “single identified organization” — a “designated fund” — is not a DAF. A donor can advise the sponsor on what activities within the identified charity should be funded, but donors may not advise the identified charity regarding distributions it makes. To do that makes the fund a DAF. The regs indicates that the exception does not apply if a donor to the fund is even in the position to influence the specified charity as to how it makes distributions:
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.
Example 3. Assume the same facts as paragraph 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.
Prop. Treas. 53.4966-4(a)(6), Example 3. Commenters hate example 3. They think a donor’s mere presence on the identified charity’s board is insufficient to cause concern that a donor will do whatever it is the law is trying to prevent. I would not support the objections except that in other parts of the proposed regulations, a donor’s presence on an advisory committee with at least two other unrelated members is permitted without treating the donor as though he or she has advisory privileges. Prop. Treas. Reg. 53.4966-3(c)(iii). A donor who sits on the board of an identified charity has the same diffused advisory privileges, so the proposed regs ought to incorporate the same concession into the designated fund exception. That’s my take.
But I don’t agree with the opposition to the explicit adoption of the step transaction doctrine — commenters call it the “daisy chain rule” — in Prop. Treas. Reg. 53.4966-5(a)(3). I say explicit because even if the rule is not in the proposed regulations, courts don’t have to respect a step transaction. Here is how the doctrine is articulated in the proposed regs:
Special rule. If a series of distributions is undertaken pursuant to 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.
Some commenters want . . . yep, more specificity in what is intended as an anti-abuse standard. But that misunderstands the nature of anti-abuse provisions intended to enforce the spirit not the letter. For example, the Orange County Community Foundation and others, want the proposal to adopt rules developed in “earmarking” cases where donors give money to a charity and the money is earmarked for a specific individual. Earmarked donations are generally viewed as gifts to individuals, not the charity. The charity is just a conduit that, if respected, provides a deduction. That’s a specific rule enforcing a general standard. And like most “stop doing that” rules, it is easier avoided than a standard. It would be a rule against a single transaction rather than an anti-abuse standard applicable generally. So no, the proposal ought to keep what is essentially nothing more than an expression of the step doctrine that applies, even if rarely, throughout the tax code. That’s my take.
darryll k. jones