Jewish Federations of North America Seeks Guidance on Effect of PPA Provisions on DAFs

Jewish Federations of North America Seeks Guidance on Effect of PPA Provisions on DAFs

News story posted in Comments on 9 August 2013| comments
audience: National Publication | last updated: 9 August 2013


Writing on behalf of the Jewish Federations of North America, Paul Berger, Edward Beckwith, and Donald Lubick have requested that Treasury issue guidance on three significant issues created by the Pension Protection Act of 2006. These include 1) the legal standard for "more than incidental benefit" under IRC section 4967; 2) the interaction between IRC sections 4958 and 4967; and 3) a discussion of "bifurcation" and pledges and whether such distributions can be made by DAFs.

Full Text:

July 15, 2013

Ruth Madrigal
Attorney Advisor
Office of Tax Legislative Counsel
Office of Tax Policy
U.S. Department of the Treasury
1500 Pennsylvania Avenue, NW,

Dear Ruth:

The Pension Protection Act of 2006 ("PPA") added important provisions to the Internal Revenue Code ("IRC") that apply to donor advised funds (DAFs). Over the last seven years The Jewish Federations of North America ("JFNA") has shared its views with the Department of the Treasury and the Internal Revenue Service with respect to the need for guidance with respect to PPA. This letter summarizes and restates JFNA's positions on several major issues including:

  1. The legal standard for "more than incidental benefit" under IRC section 4967;
  2. The interaction between IRC sections 4958 and 4967; and
  3. A discussion of "bifurcation" and pledges and whether such distributions can be made by DAFs.


JFNA is the national organization that represents and serves 153 Jewish federations, their affiliated Jewish community foundations, and over 300 independent Jewish network communities in more than 700 cities and towns across North America. In their communities, Jewish federations ("Federations") are the umbrella fundraising organizations and the central planning and coordinating bodies for an extensive network of Jewish health, education, and social service agencies that provide such services to hundreds of thousands of recipients. The endowment departments of the various individual Federations or their affiliated Jewish community foundations ("Federation system") rely heavily on numerous charitable planned giving vehicles including DAFs and Supporting Organizations (together referred to as "participatory funds"), to support one or more specified public charities or programs, and charitable income plans. The importance of DAFs to Federations cannot be overstated. According to its most recent annual endowment survey DAF assets amount to just under $4 billion system-wide, almost 30 percent of total endowment assets. Additional background on their use within the Federation movement has been well documented in prior JFNA submissions to the Treasury and the Internal Revenue Service. (please see Attachment 1, Submission to IRS in response to Notice 2007-21).

The aggregate payout amount for DAFs in the Federation system was approximately 21 percent. In short, JFNA strongly believes that to further burden DAFs sponsored by public charities with increased administrative burdens would diminish the capacity of the Federation system to accomplish their important chartable work and would be contrary to clear and broad distinctions made by Congress in drafting the Tax Reform Act of 1969 in which important restrictions where placed on private foundations, but not public charities.

Legal Standard for "more than incidental benefit"

An issue of great importance to the Federation system and its ability to raise and distribute charitable dollars is the development of an appropriate legal standard for "more than incidental benefit." IRC section 4967(a)(1), as added by the PPA, provides that when a donor, donor advisor, or related party provides advice on DAF distributions that result directly or indirectly in "more than incidental benefit" to such person, an excise tax is imposed on the person rendering the advice as well as on a fund manager who approved the distribution knowing that it would confer a "more than incidental benefit" on a donor, donor advisor, or related party. Congress enacted the penalty provisions under IRC section 4967 but did not specifically define the term "more than incidental benefit" in the statute.

JFNA believes that the IRC section 170 standard should be the proper legal standard for determining whether there is a "more than incidental benefit" under IRC section 4967. This will provide a bright-line test that can be easily understood by donors and readily administered by DAF managers, grant recipients, and the Internal Revenue Service. Individuals, charities, and tax administrators have long applied this standard when considering the proper charitable contribution deduction in the case of donations where benefits potentially flow back to donors.

The legislative history to the PPA contained in the Technical Explanation of H.R. 4. The "Pension Protection Act of 2006," as passed by the House on July 28, 2006, and as considered by the Senate on August 3, 2006, JCX-38-06, August 3, 2006 ("JCT Explanation") includes an unambiguous reference that the term should be defined by reference to the rules governing charitable contribution deductions under IRC section 170. The JCT Explanation provides:

"[I]n general...there is a more than incidental benefit if, as a result of a distribution from a donor advised fund, a donor, donor advisor, or related person with respect to such fund receives a benefit that would have reduced (or eliminated) a charitable contribution deduction if the benefit was received as part of the contribution to the sponsoring organization." See page 350.

This language was not accidental but purposely included in the legislative history to address this very issue.

There has been a suggestion that the IRC Section 4941 tax on self-dealing between a disqualified person and a private foundation is another possible legal standard for IRC section 4967. JFNA's predecessor organization, the United Jewish Communities ("UJC"), addressed this possibility at length with the tax-writing committee staff during the consideration of the PPA. Attachment 2 to this letter, "UJC Analysis of DAFs and the New Provisions of S.2020," was distributed to the applicable Congressional committees and focused on what then was "new IRC section 4969" and the "more than incidental benefit" provision. This memorandum described in detail how the Federation system would be significantly adversely affected if DAFs were to be subject to the rules applicable to private foundations. (Note: the language of proposed IRC section 4969 was subsequently incorporated into IRC section 4967 as enacted in the PPA).

A second memorandum was distributed to the relevant Congressional committees and staff in order to clarify concerns raised by the IRS and Treasury staff in response to the UJC letter. (please see Attachment 3, ). The clarified language sought to make it clear that the donor in no case would be allowed to maintain control over contributed assets to a DAF nor would be able to use them for personal gain. In the course of the discussions between UJC representatives and Congressional staff, UJC suggested that, in the event the language proposed for addition to the statutory provision were not included, that the legislative history to the provision should reflect the IRC section 170 should be the standard used in interpreting what would be considered a "more than incidental benefit."

UJC's presentations to Congress on the issue of "more than incidental benefit" focused on IRS Private Letter Ruling 9021066 which references Revenue Ruling 77-160, 1977-1 C.B. 351. The revenue ruling discusses both the rules for deductibility under IRC section 170 for contributions made by individuals and the private foundations rules regarding "self-dealing." Under the facts of the private letter ruling, the Internal Revenue Service determined, inter alia, that payments by a private foundation for a disqualified person's membership dues to a church represent an act of self-dealing under IRC section 4941. The ruling is equally clear that a donor or related person would be entitled to a charitable contribution deduction under IRC section 170 if such person made the contribution directly to the public charity involved. The ruling further notes that "[i]f, however, the rights and privileges of membership are incidental to making the organization function according to its charitable purpose and the only return benefit thereby attainable is the satisfaction of participating in furthering the charitable cause, the membership is a charitable contribution under section 170(c)". It also cites Revenue Ruling 70-47, 1970-1 C.B. 49, which holds that pew rents, building fund assessments, and periodic dues paid to a church are all methods of making contributions and such payments are deductible under IRC section 170.

JFNA believes the legislative history of the PPA is clear that a DAF should be permitted to make a distribution similar to that described in Rev. Rul. 77-160 if the trustees of the public charity sponsoring organization authorize such a distribution. This interpretation is consistent with concerns underlying many provision of the PPA that seek to assure that donors not be allowed to maintain control over assets contributed to DAFs or be able to use such charitable vehicles for personal gain, as the ultimate control of such assets is fully vested in the sponsoring organization at the time of the contribution to the DAF.

In enacting the PPA, Congress was fully capable of citing the private foundation rules when it desired to treat DAFs similarly to private foundations and subject DAFs to the same or similar restrictive rules that apply to private foundations. A review of the JCT Explanation cited above notes four separate instances where specific reference is made to the private foundation taxation regime. On pages 346 and 360, the JCT Explanation notes that the excess business holding rules of IRC section 4943 apply to DAFs and to Type III SOs. In the discussion of "taxable distributions" by DAFs in footnote 526, on page 349, reference is made to the expenditure responsibility rules which apply to private foundation grants through operation of the Treasury regulations. Perhaps the most telling example is found on page 350, just two sentences above the "IRC section 170" definitional reference to "more than incidental benefit." In a section covering "taxable distributions," the JCT Explanation states specifically that "a manager of a sponsoring organization" should be "defined in a manner similar to the term 'foundation manager' under IRC section 4945. Clearly, if Congress had wished to refer to the private foundation rules of IRC section 4941 to define the term "more than incidental benefit" in the subsequent paragraph, they could have done so as was the case with the term "manager of a sponsoring organization", but indicated to the contrary.

It is also important to note that the principal author of the JCT Explanation confirmed that the IRC section 170 standard should apply to IRC section 4967. At a District of Columbia Bar Tax-exempt Organization committee program entitled "Understanding the Pension Protection Act of 2006: Update from Capitol Hill and the IRS," held on October 4, 2006, Roger Colinvaux, then Legislation Counsel for the Joint Committee on Taxation, confirmed the legislative intent that the IRC section 170 standard should apply. In particular, Mr. Colinvaux stated that DAFs are not permitted to make a grant if the donor or the DAF is receiving a more than incidental benefit in return for such grant and explained that an impermissible benefit for purposed of the DAF provision is the same as a benefit that would preclude donor to a Section 501(c)(3) organization from receiving a charitable deduction under IRC section 170 for such a contribution.

Interaction between IRC sections 4958 and 4967

Another question has been raised about the interaction between new IRC sections 4958 and 4967. IRC section 4958(c)(2) provides that a grant, loan, compensation, and other similar payment from a DAF to a donor, advisor, or a related party is automatically subject to the "excess benefit transaction" rules. Such rules provide the entire amount of the payment is subject to a penalty excise tax. The distinguishing characteristic of this provision, in the DAF context, is that the DAF makes the prohibited payment directly to a donor, advisor, or a related party. IRC section 4967 covers transactions in which a donor or advisor to a DAF recommends a distribution that results in a "more than incidental benefit," whether directly or indirectly to the donor, an advisor, family member, or a 35 percent controlled entity of such donor, advisor, or family member. Rather than a direct payment from the DAF as is the case in IRC section 4958, the "more than incidental benefit" would flow from an organization that receives a grant or other payment from the DAF back to the donor, advisor, family member, or controlled entity. For example, IRC section 4958 would apply if the DAF made a grant directly to the donor or paid a child's school tuition. IRC section 4967 would apply if the DAF made a grant to a school that then applied such funds to pay the donor's child's tuition.
JFNA understands from conversations with Congressional staff that the principal area for coverage intended by IRC section 4967 was where a "more than incidental benefit" did not come directly from the DAF, but rather from a grantee organization. It appears, however, that under the statutory framework as enacted by the PPA, the Internal Revenue Service, in effect, has a choice whether to apply IRC section 4958 or 4967 to a particular transaction or type of transaction. If the Internal Revenue Service seeks to apply the IRC section 4958 penalty however, the IRC section 4967, by its own terms would be inapplicable. (please see IRC section 4967(b)) In any event, the existence of these two provisions and the application of the IRC section 170 for interpreting the proper standard for IRC section 4967 would, in no event, cause any legal or administrative issues for the Internal Revenue Service.


There has been no definitive guidance under IRC section 4967 as added by the PPA with respect to the issue of so-called "bifurcation." Bifurcation arises in the context where the donor recommends a sponsoring organization distribute DAF funds to pay for tickets to charitable events. This is specifically addressed with respect to individuals under IRC section 170. There, if the cost of the event is set at $1,000 and the charity conducting the event determines the fair market value of goods and services that attendees will receive (e.g. food and entertainment) is $200, the donor pays the full $1,000 but the statutory rule limits the value of the donor's charitable contribution deduction to $800 ($1,000 less the $200 benefit received by the donor.) Such practice, including direct notification to the donor by the charity regarding both the deductible and non-deductible portions of the payment for purposes of IRC section 170, is commonplace in fundraising activities throughout the United States. In the case of DAFs there is bifurcation when the DAF distributes the $800 that would have qualified as a charitable contribution had the payment been made directly by a donor and the donor advisor pays the $200 on a non-deductible basis to cover the value of the tangible benefit received.
JFNA understands that Treasury and the IRS may have some unresolved concerns whether bifurcation should be permitted for donor recommended distributions. JFNA believes, however, that whatever those concerns may be, there is no need for the Treasury and the Internal Revenue Service to abandon the IRC section 170 standard, in general, as the statutory rule to apply to DAFs to determine whether "a more than incidental benefit" is received by the donor, donor advisor, or related party.

One of the principle problems regarding bifurcation is the lack of understanding of the issue by charitable organizations that sponsor ticketed fundraising events and donors who maintain DAFs at certain sponsoring organizations. Donors often advise sponsoring organizations to make DAF distributions for either the full amount of the ticket or the deductible amount if stated by the prospective charitable grantee. A refusal to agree with such advice often leaves donors angry and confused. Resolution of the issue of bifurcation, either affirmatively or in the negative, by the Treasury and the Internal Revenue Service, will go a long way to resolving this tenuous situation for the charitable community. JFNA believes that providing explicit guidance in this area is an opportunity to remind charities that they must make good faith estimates of the value of any goods and services received by donors in connection with charitable contributions.


Another issue arising in the context of the new IRC section 4967 is the treatment of payments made from DAFs to satisfy a donor's prior expression of an intention to make a gift. Such expressions are often referred to as "pledges" although the word alone masks whether the expression can be viewed as legally enforceable. In most cases, a so-called pledge is not legally enforceable.

JFNA's predecessor organization, UJC, addressed this issue in detail during the legislative process which resulted in the enactment of the PPA. It was noted that the general rule for the standard for "more than incidental benefit" was separate and distinct from the issue of the status of the treatment of the satisfaction of pledges. UJC urged that the legislative history should reflect the satisfaction of a pledge never constitute a "more than incidental benefit" or "at worst, the question should be ignored and left to present law." (please see attachment 4 which discusses this issue at length) In the end, the statute and legislative history make no reference to pledges and leaves preexisting law applicable. (For a discussion of the legal issues involved in satisfaction by DAFs of charitable pledges, see the memorandum "Satisfaction by DAFs of Charitable Pledges," prepared by Arnold & Porter, referred to as attachment 5.)

JFNA continues to believe there are numerous reasons that DAFs should be permitted to satisfy charitable pledges. Those reasons include: (1) lack of uniformity among the states as to the definition of a legally-binding pledge; (2) implicit difficulty in determining what constitutes a pledge rather than an announced intention to give; (3) the importance of pledges to the proper administration and allocation of fundraising activities by robust public charities; and (4) the ease of evasion by sophisticated donors and charities which would leave this as an area as a trap for the uninformed.

Because the satisfaction of a charitable pledge is not a debt for federal income tax purposes when a public charity satisfies a charitable pledge, it does not confer on the pledgor any benefit that is cognizable for income tax purposes. See generally Wekesser v. Commissioner, T.C. Memo. 1976-214. It follows that a donor whose charitable pledge is satisfied by a DAF realizes no benefit in the nature of cancellation of indebtedness, or an economic benefit cognizable for tax purposes. This result would support a policy that permits a public charity that sponsors a DAF to satisfy a donor's charitable pledge without limitation or provision of "a more than incidental benefit" to the donor.

In determining rules for the administration of DAFs, there is no need, nor does it appear to be Congressional intent, to import rules and standards applicable to private foundations. Those stringent limitations were deliberately made inapplicable to public charities including those administering DAFs, because the IRC section 501(c)(3) regulations were adequate. The applicable limitations to apply to such public charities are defined in IRC section 170 and have been incorporated into new IRC section 4967 by the PPA. We respectfully submit there is no valid public policy justification to apply the rules and standards applicable to private foundations in the case of pledges.

An annual campaign is one of the most important fundraising activities of the Federation system. Substantial donors often receive individual oral solicitation requests from Federation representatives (volunteer and professional) for an annual campaign "pledge" or promise. Such requests are a matter of common practice rather than law. Except in rare cases, neither the solicitor nor the donor contemplate entering into an enforceable contract, but rather seek to provide the Federation and its related agencies with financial information vital to its operating budget for the upcoming year. Most Federations use such data to forecast programmatic needs and activities, based on reasonable estimates. In these varied and numerous personal encounters, it is not feasible to know what constitutes a "pledge," let alone a legally-binding pledge. To ask potential donors for binding contractual commitments would make annual fundraising impractical and inefficient. Similarly, to require the Internal Revenue Service to determine which commitments constitute binding legal pledges would present an overwhelming administrative challenge in the face of such abstruse questions of contract law as legal standards vary from state to state.


We hope this summary is helpful to you in providing much needed and anticipated guidance on these and other important issues raised by the PPA. Given the importance of a satisfactory solution to the issues discussed above and because of the significant passage of time since representatives from JFNA have had the opportunity to discuss these suggestions with representatives from Treasury and the Internal Revenue Service, we respectfully request another meeting with you and other interested parties to discuss these matters further. Please feel free to call Steven Woolf, JFNA senior tax policy counsel, at 202-736-5863, regarding any specific questions.
Sincerely yours,

Paul S. Berger
Co-chair, JFNA Charitable Giving
and Incentives Committee

Edward J. Beckwith
Participating member, JFNA
Charitable Giving and Incentives

Donald C. Lubick
Participating member, JFNA
Charitable Giving and Incentives

The Jewish Federations
of North America®
Washington, DC

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