Tax Reporting for Organizations that Hold Donor-Advised Funds

If our organization holds donor-advised funds, what information must we provide on Form 990?
A sponsoring organization, such as a community foundation, must disclose on Schedule D, Part I of its 990 the following information:

1. Number of donor-advised funds owned;
2. Aggregate value of assets held in donor-advised funds at the end of the tax year;
3. Aggregate contributions to donor-advised funds during the year; and
4. Aggregate grants made from donor-advised funds during the year.

In addition, the Form 990, as redesigned in 2009, added the following two questions to Schedule D, Part I:

1. Whether the organization has informed donors and donor advisors in writing that the assets held in donor-advised funds are the organization’s property, subject to the organization’s exclusive legal control; and
2. Whether the organization has informed all grantees, donors, and donor advisors in writing that grant funds may be used only for charitable purposes and not for the benefit of the donor or donor advisor or other impermissible private benefit.

Failure to include the first statement in the acknowledgement of gifts to donor-advised funds will result in the donor’s gift not being deductible. While an affirmative answer to the second question is not legally required, it suggests the importance with which the IRS views this due diligence practice and community foundations would be wise to follow it. Taking these due diligence steps also helps clarify to donors, donor advisors, and grantees the terms of the agreement and is consistent with National Standards for Community Foundations. Relevant language may simply be incorporated in fund agreements and grant letters/agreements. Visit the National Standards website for sample fund agreement language.

What information will a new organization be required to provide to the IRS if it intends to offer donor-advised funds?
New organizations filing Form 1023 to receive recognition of tax-exempt status will be required to disclose whether the organization intends to maintain donor-advised funds, and information about the manner in which the organization will operate the donor-advised funds program. Based on our analysis of the requirements, in describing their operations, organizations should include procedures they will use to communicate to donors and advisors that assets in donor-advised funds are the property of the organization. The organization should also describe procedures intended to ensure that distributions from donor-advised funds do not result in more than an incidental benefit to any person.

• Effective Date: Revised Form 990 reporting became effective for taxable years ending after August 17, 2006. Revised Form 1023 requirements became effective for organizations that applied for recognition of exempt status after August 17, 2006.

Last updated September 2012.

Disclaimer

The information provided is based on our continuing analysis of the Pension Protection Act. Every effort has been made to ensure accuracy of this information. Please understand, however, that due to the complexity of the Act and the fact that many of these provisions introduce issues that are new to the Internal Revenue Code, this information is subject to change. The information is not a substitute for expert legal, tax, or other professional advice and we strongly encourage grantmakers and donors to work with their counsel to determine the impact of these rules on their particular situations. This information may not be relied upon for the purposes of avoiding any penalties that may be imposed under the Internal Revenue Code.