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Treasury Greenbook Takes Narrow Aim at Private Foundations and DAFs

Tax Alert

The Biden administration proposed changes to the rules governing private foundations in its Fiscal Year (FY) 2023 budget proposal. In its Greenbook, which sets out in detail the administration's FY 2023 revenue proposals, the Treasury Department proposes to "clarify" that contributions to donor advised funds (DAFs) are not "qualifying distributions" for purposes of a private nonoperating foundation's five percent annual distribution requirement. 

A private foundation must make "qualifying distributions" of at least five percent of the aggregate fair market value of all the foundation's assets that are not used to carry out the foundation's exempt purpose. Section 4942(e). A private foundation that fails to satisfy that distribution requirement is subject to a 30 percent tax on the undistributed amount. A qualifying distribution generally is any amount paid to accomplish religious, charitable, scientific, or education purposes, as well as any reasonable and necessary administrative expenses paid for such purposes. Id. at (g)(1). Qualifying distributions are often contributions to public charities. Contributions to public charities where a manager or substantial contributor has a close relationship to the private foundation generally do not qualify. 

Because DAF sponsoring organizations are public charities, private foundations can currently treat contributions to a DAF as a qualified distribution, regardless of when the DAF distributes the proceeds. DAF reform advocates have argued this as a potential "end run" around the qualifying distribution rules, because they claim it allows money to be "housed" in a DAF account rather than immediately deployed toward a charitable purpose. The IRS has long been aware of the potential issue, and in its most recent guidance on DAFs, the IRS highlighted the issue for public comments. Notice 2017-73, 2017-51 I.R.B. 562.

In the Greenbook, the Biden administration proposes to eliminate this option for private foundations. A contribution from a private foundation to a DAF only would be a qualifying distribution if (1) the DAF funds are distributed by the end of the next taxable year and (2) the private foundation keeps adequate records showing that the DAF funds were, in fact, distributed. The administration states that this tweak would eliminate the perceived abuse of private foundation expenditures being qualifying distributions even though they may not reach "operating" charities for many years.

Last June, Senators Angus King (I-ME) and Charles Grassley (R-IA) introduced the Accelerating Charitable Efforts (ACE) Act (S. 1981), and companion legislation (H.R. 6595) was introduced in the House of Representatives last month. As we previously discussed, the ACE Act contains a number of DAF reforms, including a similar proposal with respect to private foundation qualifying distributions. But the ACE Act has failed to gain significant traction in Congress, where tax efforts have been mostly focused on President Biden's Build Back Better agenda (which did not include any DAF provisions) and other legislative priorities. It is important to note that instead of a wholesale overhaul to the DAF regime as proposed in the ACE Act, the administration, in its Greenbook, has opted for a narrowly tailored approach in closing a single perceived loophole. 

The administration estimates the provision will only raise $64 million in revenue over the 10-year budget window, but that estimate does not reflect how much additional money will be directed to operating charities in the 10-year window, which is the intended goal of the provision. 

Miller & Chevalier will monitor the progress of this proposal, as well as other legislative and regulatory efforts affecting DAFs and private foundations.

For more information, please contact:

Jorge E. Castro,, 202-626-5859

Andrew L. Howlett,, 202-626-5821

Samuel A. Lapin,, 202-626-5807

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