In connection with the proposed regulations regarding Taxes on Taxable Distributions from Donor Advised Funds (“DAFs”) under Section 4966 of the Internal Revenue Code (the “Code”), you have requested comment as to “whether other funds should be exempt from the definition of DAF using the authority under section 4966(d)(2)(C) [which includes funds that benefit a single identified charitable purpose] and what, if any, restrictions should apply to ensure that the intent of section 4966 is achieved.” Federal Register, Vol. 88, No. 218, at 77928.
In response, the undersigned respectfully offer the present submission, encouraging the Department of the Treasury (“Treasury”) and the Internal Revenue Service (“IRS”) to clearly and categorically except from the definition of a DAF the practice of fiscal sponsorship.
- Fiscal Sponsorship is a Critical Practice within the Charitable Sector
Fiscal sponsorship refers to the practice by which an established public charity agrees to incubate, under its auspices and oversight, a charitable project with an identified charitable purpose related to its own.
Fiscal sponsorship serves many positive purposes. It is a critical tool for innovation in the sector, allowing nascent charitable work to be developed and piloted with a lower initial investment; it offers a mechanism to train new project leaders and transfer knowledge and best practices from veteran charities to new efforts; and it promotes a more efficient allocation of resources within the charitable sector, allowing a single fiscal-administrative infrastructure to support the work of multiple, purpose-adjacent programs.
The signatories to this letter are either sponsors themselves, or represent sponsors of charitable projects with extraordinary value and impact, ranging from projects established by local groups working to offer programs and services to advance education, workforce development, youth development, and health and wellness, within underserved communities; to a national network of conservation associations that operate, in partnership with state and local governments, to protect endangered wildlife across critical regions; to a global initiative working with municipalities around the world to advance and implement solutions to climate change; and more.
Fiscally-sponsored projects may be launched as the vision of a single individual, who may or may not contribute any funds, but who is committed to leading and managing the project’s programmatic operations. Others may be established by groups of stakeholders who continue to provide general advice and support to the project but do not directly manage its day-to-day operations. Some have seed contributions to launch the work at the outset; others begin (or exist perpetually) as volunteer-led initiatives, raising funds over time as needed to support essential costs. The particular circumstances at the inception of a charitable project are not the defining characteristic of fiscal sponsorship, since, like public charities generally, the governance structure and sources of support of charitable projects evolve over time. Rather, the common feature is that all exist to carry out direct charitable operations in furtherance of a particular charitable objective.
While there may be some superficial, technical similarities between DAFs and fiscal sponsorships – for example, from a bookkeeping standpoint, both structures involve what may be considered “a fund or account … which is separately identified by reference to contributions of a donor or donors” (Code section 4966(d)(2)(A)(i)), and the project director or advisory board may be said to have certain “advisory privileges with respect to … amounts held in such fund or account” (Code section 4966(d)(2)(A)(iii)) – substantively, the practices of DAFs and fiscal sponsorship are oriented to profoundly different purposes. Fiscal sponsorship exists to facilitate the implementation of direct charitable programming under the auspices of an established public charity, while DAFs exist to facilitate grantmaking by one or several donors outside of the context of a private foundation. At times, the proposed regulations seem to recognize and acknowledge the significant distinction between funds held for operating purposes (as with fiscal sponsorships) and funds held for grant-making purposes (as with DAFs), but the distinction is not drawn clearly or carried consistently throughout the proposed framework.[1]
- Current Ambiguity in the Proposed Regulations May Be Read to Encompass Fiscal Sponsorship
As drafted, the proposed regulations may be read to sweep virtually all fiscal sponsorship arrangements into the DAF regulatory framework – which would have disastrous impacts on this critical practice.
For example, the proposed regulations now define a person who establishes a fund or account (whether or not a donor) and who advises as to the distribution of such amounts – which may be understood to describe the work of a project director in a typical fiscal sponsorship, say, in putting together the budget or authorizing project expenses – as a “donor-advisor” (§ 53.4966-1(h)(2)). This language alone contains the universe, encompassing even those initiatives established by an individual who is not otherwise a funder or primary funder.[2]
The proposed regulations also suggest that a donor who establishes a charitable project at a public charity and recommends the charity designate, for the purpose of developing the project’s scope and activities, a specific group of advisors, selected on the basis of objective criteria relating to their expertise and the subject matter focus of the project, might also be deemed to have created a DAF. (§ 53.4966-1(h)(4)).
And where a project is advised by a group of advisory committee members, and a member of the advisory committee makes a substantial contribution to the project, whether at inception or thereafter, the project may again thereafter be deemed a donor-advised fund. (§ 53.4966-3(c)(1)(iii)).
Finally, the section of the proposed regulations that defines what it means to meet the first prong of the DAF definition – that is, for a particular fund or account to be “separately identified by reference to contributions of a donor or donors” (Code section 4966(d)(2)(A)(i)) – is now so broad that it encompasses all properly-managed restricted or program-specific accounts maintained by public charities. Under proposed regulation § 53.4966-3(b)(1), a fund meets this prong if an organization simply “maintains a formal record of contributions to the fund relating to donor or donors.” As a matter of responsible corporate record-keeping, public charities must separately track donations to restricted funds or project accounts to ensure that applicable donor restrictions are being honored (among other reasons, like to meet reporting and auditing requirements). This is an untenable outcome, as the Treasury and IRS seem again to acknowledge in the proposed regulations’ preamble: all multi-donor funds at any public charity that engages in prudent, responsible bookkeeping would be deemed to meet this prong.[3] Federal Register, Vol. 88, No. 218, at 77927. Many fiscally-sponsored projects are supported by such multi-donor funds.
- To Regulate Fiscal Sponsorships as DAFs Would Stifle This Critical Practice
The confluence of these – and other – provisions in the proposed regulations that, at every step, broaden the reach of the DAF framework create considerable uncertainty for many public charities that incubate and fiscally sponsor charitable projects. To sweep fiscal sponsorships into the DAF framework is an existential matter – it would severely inhibit, if not impede entirely, a project’s ability to carry out direct charitable programming. For example, if fiscally-sponsored projects are treated like DAFs:
- They would not be able to use designated project funds to pay for the goods or services required to carry out their charitable programming.[4]
- They would not be able to compensate a founder/project director as a provider of services to the project (and even if such person is brought on as a direct employee of the public charity sponsor, as is common) for their work leading and carrying out the day-to-day programmatic work of the project.
- They would also be limited in their programming opportunities. For example, they would not be able to provide charitable, need-based grants to individuals – even if they observed the standard requirements for assessing need and documenting such distributions.
- Fiscal Sponsorships Should be Added as an Explicit Exception to the DAF Rules
It is apparent from the language in the preamble and in its requests for comments that Treasury and the IRS are rightly concerned with impeding the vital charitable activity currently managed by public charities through the vehicle of fiscal sponsorship.
Given the critical importance of fiscal sponsorships to the charitable sector, the ambiguity in the proposed regulations, and the disastrous impact that subjecting fiscal sponsorships to an inapt regulatory framework would have, we urge the Treasury and IRS to resolve any ambiguity by exercising the authority provided under Section 4966(d)(2)(c) to clearly and categorically carve out fiscal sponsorships -- defined as funds or accounts with an identified charitable purpose that are managed by a public charity to conduct direct charitable programming (of which grant-making is not a substantial or exclusive part) -- from the scope of the DAF rules.
Respectfully –
Amarah Sedreddine, Esq., Sedreddine & Whoriskey, LLP
Veronica Aksu, Esq., Sedreddine & Whoriskey, LLP
Together with:
Deborah Buyer, Esq., Deborah Buyer Law, PLLC
Chai Jindasurat-Yasui, Vice President, Policy, Nonprofit New York
Brooklyn Org (formerly Brooklyn Community Foundation)
Fund for the City of New York
New York Council of Nonprofits
Nonprofit Staten Island
[1] For example, under the proposed regulations, the DAF exception for funds or accounts that make distributions to a single identified organization (“SIO”) is only available if distributions are made for the SIO’s activities “other than the activities of administering donor advised funds or grant-making” (emphasis added). § 53.4966–4(a)(3).
A similar distinction seems to be recognized in the preamble to the proposed regulations: “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” (emphasis added). Federal Register, Vol. 88, No. 218, at 77929.
And again, in its framing notes, the Treasury and IRS have asked 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 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” (emphasis added). Id. at 77928.
In the latter two examples, the commentary clearly manifests an intention to protect the practice of fiscal sponsorship, whether the vehicle is deemed a DAF or not.
[2] To be clear, we urge regulators not to distinguish between fiscal sponsorships established by one or more people who fund the initiative and fiscal sponsorships established by project directors that are purely engaged in fundraising from other sources. As with public charities within the advanced ruling period, charitable projects may take some time to establish a broad base of public support, and a project’s founder(s) should be permitted to support it. Further, we do not think all fiscal sponsorships need to be publicly-supported, and many are not, as projects of finite duration. As noted above, the reference point for identifying a fiscal sponsorship versus a DAF is the active conduct of charitable programming and operations (as opposed to grant-making, within a DAF), not by reference to the involvement of a donor.
[3] While not the focus of the present comments, we would welcome, consistent with the invitation for comment in the proposed regulations, the establishment of “additional types of exceptions … to allow multiple-donor funds or accounts to be excluded from the definition of DAF” – perhaps by clarifying, as a threshold matter, that only multi-donor funds or accounts used primarily or exclusively for grant-making may be considered DAFs. Federal Register, Vol. 88, No. 218, at 77927.
[4] This is a result of the expansive definition of “distributions” (which, under the proposed regulations, would include any “payment” § 53.4966-1(e)(1)), together with the fact that, generally, under the Code, distributions to organizations other than public charities are only permitted if the sponsor, among other requirements, exercises expenditure responsibility with respect to the distribution – a concept fundamentally incompatible with ordinary purchasing of goods or contracting for services. Code section 4966(c)(1)(B)(ii).
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