The IRS has recently updated rules relating to donations and transfers to nonprofit organizations by donors and sponsors of donor-advised funds (DAFs). These rules are utilized by donors to assure themselves that their donations are eligible for charitable income tax donation and by DAFs who are required to exercise expenditure responsibility.
The Internal Revenue Code allows a charitable income tax deduction for contributions to certain nonprofit organizations. To qualify for the deduction, the organization must qualify at the time of the donation. The Treasury Regulations provide that once an organization qualifies under Section 509(a)(1), (2) or (3), the tax deductibility of contributions are not affected by an IRS revocation of such status until the date the revocation is made public.
Accordingly, there are certain steps that a DAF and a donor should take to assure that its donations are going to a qualified organization. The most common way to do so is to check IRS Publication 78, available on the IRS’s website. Under the new rules, the IRS has made it clear that donors and DAFs may also rely on the IRS Business Master File, also available online.
Private foundations and DAFs must also determine whether an organization that is a public charity is in fact a supporting organization as it affects the level of expenditure responsibility for the DAF. Unfortunately, Publication 78 does not currently identify separately those organizations that are supporting organizations (the IRS Business Master File does, however). Unfortunately, this information is not enough as the type of supporting organization also determines the expenditure responsibility, something that the IRS Business Master File does not provide. While the IRS has announced plans to modify its coding system, such modification has not occurred.
Finally, once the classification of the recipient charitable organization has been determined, donors and DAFs must confirm that the organization is still in good standing with the IRS. The IRS publishes a revocation list that will be periodically updated on its website.
It is recommended that donors and their advisors follow the best practices to document compliance with these rules by documenting that the donor or the DAF has checked Publication 78 or the IRS Business Master File and the IRS website to confirm that the tax-exempt status remains in place.
Further questions regarding business and tax law should be directed to Fraser Trebilcock attorney Mark E. Kellogg at firstname.lastname@example.org or 517.377.0890. Mark chairs Fraser Trebilcock’s Business and Tax Law practice, and has devoted his nearly 30 years of practice to the needs of family and closely-held businesses and enterprises, business succession, and estate planning.