Donor-Advised Fund Regulations Step One: Request for Comments

On December 4, 2017, the Internal Revenue Service and U.S. Treasury Department released Notice 2017-73 (Request for Comments on Application of Excise Taxes With Respect to Donor Advised Funds in Certain Situations), seeking comments to help them develop donor-advised fund regulations in three specific areas. Written comments must be submitted by March 5, 2018 and may be emailed to the IRS at (with “Notice 2017-73” entered in the subject line).


The Internal Revenue Code defines a donor-advised fund (DAF) as a fund or account owned and controlled by a sponsoring organization, which is separately identified by reference to contributions of a donor or donors, and with respect to which the donor, or any person appointed or designated by such donor (donor advisor), has, or reasonably expects to have, advisory privileges with respect to the distribution or investment of the funds. Specifically excepted from the definition of a DAF are funds or accounts which makes distributions only to a single identified organization or governmental entity, and certain committee-advised funds that make grants to individuals for travel, study, or other similar purposes.

Under Section 4967 of the Internal Revenue Code, a donor, donor advisor, or related person may be subject to a tax penalty if they advise a distribution, or receive, directly or indirectly, more than an “incidental benefit” resulting from a distribution. The penalty tax is 125% of the prohibited benefit, and any prohibited benefit must be returned to the DAF. Further, any fund manager (e.g., director, officer, or employee having authority or responsibility with respect to the act in question) of the sponsoring organization who knowingly agrees to make a distribution that confers a prohibited benefit faces a 10% tax amount of the benefit amount, not to exceed $10,000 per transaction.

For more background details, see our post: Donor-Advised Funds: What You Should Know.


In order to practically comply with the Section 4967, the public must know what constitutes an “incidental benefit.” In the following hypothetical, is the donor receiving more than an incidental benefit?

  1. Donor makes a donation to DAF/Sponsoring Organization.
  2. DAF/Sponsoring Organization makes a grant to Charity.
  3. Charity gives an event ticket to Donor, which otherwise costs $1,000.
  4. Event attendees receive $100 in value (dinner and entertainment) in return for the $1,000 ticket, meaning that they could take a $900 charitable contribution deduction for their payment of $1,000.
  5. DAF/Sponsoring Organization makes a grant of $900 to Charity and Donor pays $100 to Charity (the value of the dinner and entertainment).

At first blush, the event ticket given to Donor in exchange for the $900 grant made by DAF/Sponsoring Organization and $100 payment by Donor doesn’t provide any benefit to Donor because Donor paid fair market value for the dinner and entertainment (and such payment would not be considered a deductible charitable contribution). But on deeper analysis, there may be more value received by Donor than the value of goods and services because but for the DAF/Sponsoring Organization grant, Donor would have not been able to purchase a ticket for $100. This is the view currently adopted by the IRS and Treasury (emphasis added):

Therefore, proposed regulations under § 4967 would, if finalized, provide, that a distribution from a DAF pursuant to the advice of a Donor/Advisor that subsidizes the Donor/Advisor’s attendance or participation in a charity-sponsored event confers on the Donor/Advisor a more than incidental benefit under § 4967.


The current view of the IRS and Treasury regarding fulfillment of an individual’s pledge through a grant from a DAF/Sponsoring Organization is that it would not constitute more than an incidental benefit under the following conditions:

  1. the Sponsoring Organization makes no reference to the existence of a charitable pledge when making the DAF distribution;
  2. no Donor/Advisor receives, directly or indirectly, any other benefit that is more than incidental on account of the DAF distribution; and
  3. a Donor/Advisor does not attempt to claim a charitable contribution deduction with respect to the DAF distribution, even if the grantee charity erroneously sends the Donor/Advisor a written acknowledgment with respect to the DAF distribution.

This favorable treatment of the fulfillment of pledges (which can be relied upon until further guidance) seems surprising based on the possibility that the DAF/Sponsoring Organization would be relieving a legal obligation of the donor or advisor, which might be of enormous monetary benefit to the donor.


The IRS and Treasury propose changes to the regulations to prevent the use by a 501(c)(3) organization of DAFs to meet a public support test in order to qualify as a public charity. More specifically, a 501(c)(3) organization, for purposes of determining its amount of public support, must treat:

  1. a Sponsoring Organization’s distribution from a DAF as coming from the donor (or donors) that funded the DAF rather than from the Sponsoring Organization (even though that is inconsistent with other laws);
  2. all anonymous contributions received (including a DAF distribution for which the Sponsoring Organization fails to identify the donor that funded the DAF) as being made by one person; and
  3. distributions from a Sponsoring Organization as public support without limitation only if the Sponsoring Organization specifies that the distribution is not from a DAF or states that no donor or donor advisor advised the distribution.

Currently, while support from most sources (including individuals, for-profit entities, and private foundations) would be subject to a public support cap of 2% of total support, such limitation does not apply to grants from certain public charities, including most Sponsoring Organizations. Accordingly, a $50,000 grant by a DAF/Sponsoring Organization to a charity with $100,000 in total support over the 5-year public support test measuring period would count as $50,000 in public support under current law but only $2,000 in public support under the proposed change (i.e., 50% public support would turn into only 2% public support from such grant). This is a significant change that some charities may need to pay careful attention to in order to prevent  tipping into private foundation status.

Additional Comment Areas

  1. How private foundations use DAFs in support of their purposes.
  2. Whether, consistent with § 4942 and its purposes, a transfer of funds by a private foundation to a DAF should be treated as a “qualifying distribution” only if the DAF sponsoring organization agrees to distribute the funds for § 170(c)(2)(B) purposes (or to transfer the funds to its general fund) within a certain timeframe.
  3. Any additional considerations relating to DAFs with multiple unrelated donors under the proposed changes described in the Notice.
  4. Methods to streamline any required recordkeeping under the proposed changes described in the Notice.

Comments – Updated 5/4/18

Council on Foundations (March 5, 2018)

Fidelity Charitable (March 2, 2018)

NGO Source (March 5, 2018)

American Bar Association (download) (March 5, 2018)