IRS Notice 2017-73 (the “Notice”) provides advance notice of U.S. Treasury and IRS’ proposed rule changes for Donor-Advised Funds (“DAF’s”). Comments are requested by March 5, 2018. The Notice represents a significant departure from the rules governing the use of DAF’s by donors, sponsoring organizations, charities and their tax advisors. The Notice addresses the following three issues:
May DAF distributions be used to pay a donors’ charitable pledges without triggering penalty taxes under Section 4967, IRC? 
May DAF distributions be used to pay the charitable portion of tickets to attend charity-sponsored events, which are used by its donors, advisors and members of their extended families, without triggering penalty taxes under Section 4967, IRC?
May a donee charity use DAF distributions to demonstrate that is has substantial public support and should not be classified as a private foundation? How will “anonymous contributions” be treated to determine if the donee charity has substantial public support?
In each of the above cases, the unstated reasoning behind the proposed rule-making by United States Treasury and the Internal Revenue Service can best be understood if we examine the following four values:
What result will best allow the charity to staff its core mission through predictable annual funding?
What result will best allow donors to provide consistent annual funding to charities when the financial ability of donors to fund charities varies unpredictably from year to year?
Is the result consistent with the American public’s perception of fairness as it views the lives of the “rich and famous” in the “Society” pages of newspapers and in popular magazines, such as People® Magazine?
Is the result consistent with the “letter of the law,” as written in the Internal Revenue Code?
DAF Distributions Used to Fund a Donor’s Charitable Pledges
Do Not Trigger Section 4967 Penalty Taxes Under Certain Circumstances
There is a fundamental disconnect between the financial needs of charities and the abilities of major donors to fund the financial needs of charities. Charities require predictable annual funding so that they can properly staff their core mission. Major donors, however, often are unable to make predictable annual contributions directly to the charities. Why? Because the lion’s share of income from major donors is often derived from unpredictable sources: capital gains and unpredictable, contingent bonuses. Thus, major donors often lack the financial ability to promise the consistent annual funding needed by charities.
DAF’s can act as the bridge between the need of charities for predictable annual funding and the unpredictable financial abilities of major donors. From an economic perspective, the donor makes contributions to a sponsoring organization of a DAF at times when the donor has the financial ability to do so. The donor makes advance pledges to the charity so the charity is reasonably assured of predictable annual funding. Then, the donor or the donor’s advisor “advises” the sponsoring organization to make distributions to the donee charity from its DAF so that the donor’s pledges are honored and the donee charity can predictably fund its core mission.
Notice of Proposed Rule Making
The Notice deals with the following issues. Assume a sponsoring organization of a DAF pays the donor’s pledge to the charity. Should it matter if the pledge is a mere expression of charitable donative intent or if the pledge is legally enforceable? Should it matter if the sponsoring organization explicitly indicates that it is honoring the pledge of the donor? In each of the above cases, should the donor be penalized for receiving a “more than incidental benefit” under Section 4967, IRC? Similarly, under Section 4967 should the donor’s advisor be penalized for advising the sponsoring organization to make the distribution to the charity from its DAF?
The Notice side-steps the issue of whether the pledge is legally enforceable. The Notice permits the DAF to pay the pledges of donors without triggering Section 4967 penalties on the donor or the donor advisor provided that the following requirements are met:
The DAF’s sponsoring organization makes no reference to the existence of a charitable pledge when making the DAF distribution;
No donor/advisor receives, directly or indirectly, any other benefit that is more than incidental on account of the DAF distribution; and
A donor/advisor does not attempt to claim a charitable contribution deduction under Section 170(a) with respect to the DAF distribution, even if the distributee charity erroneously sends the Donor/Advisor a written acknowledgment in accordance with Section 170(f)(8) with respect to the DAF distribution.
To make matters explicitly clear, the Notice provides the following detailed example:
Assume that charity Z, an organization described in Sections 501(c)(3) and 170(b)(1)(A)(vi), holds an annual fundraising drive, and in response to the annual fundraising solicitation, individual B promises to contribute $1,000x to Z. B has advisory privileges with respect to a DAF and advises that the sponsoring organization distribute $1,000x from the DAF to Z. The sponsoring organization makes the advised distribution. Assume further that in its transmittal letter to Z, the sponsoring organization identifies B as the individual who advised the distribution, but makes no reference to a charitable pledge by B or any other person. Z chooses to treat the sponsoring organization’s distribution as satisfying B’s pledge. Z also publicly recognizes B for B’s role in facilitating the distribution from the sponsoring organization, but Z provides no other benefit to B. B does not attempt to claim a Section 170 deduction with respect to the distribution. Under these facts, the Treasury Department and the IRS are currently of the view that the DAF distribution does not result in a more than incidental benefit to B under Section 4967 merely because Z treats the distribution as satisfying B’s pledge.
The economic need of charities for predictable annual funding is reflected in the urgent annual solicitation of pledges from wealthy donors. The proposed rule understands the role that DAFs can play in allowing major donors to promise consistent annual payments to charities even though the income of major donors is often unpredictable. This economic reality “trumps” the very real benefits that a donor receives when the sponsoring organization’s DAF satisfies the legal and moral obligations of the donor and publicly praises the donor for the donor’s generosity. This result is consistent with the “letter of the law” because the donor is not explicitly released from the donor’s legal or moral obligation, if any, to fund his/her pledge. Equally importantly, this result is consistent with the American public’s perception of fairness.
DAF Distributions Used to Purchase Tickets to Charitable Events
Will Trigger Section 4967 Penalty Taxes
Donors frequently enjoy each other’s company at “exclusive” fundraising events, which are frequently reported in the “Society” pages of newspapers. Suppose that the minimum cost of a ticket is $1,000: $100 represent the cost of attendance and $900 represents a charitable contribution. If the DAF pays the $900 should the donor advisor be penalized for receiving a “more than incidental benefit” under Section 4967, IRC? Similarly, under Section 4967 should the donor’s advisor be penalized for advising the sponsoring organization to make the distribution to the charity?
Notice of Proposed Rule Making
Under the Notice a DAF distribution will trigger Section 4967 penalties if any portion of the distribution is used to for paying any portion of the event ticket that is used by the donor, the donor advisor, or the members of their families. The Notice states:
The Treasury Department and the IRS do not currently agree that, for purposes of § 4967, a distribution made by a sponsoring organization from a DAF to a charity upon advice of a donor/advisor should be analyzed the same as a hypothetical, direct contribution by the Donor/Advisor to the charity. A donor/advisor who wishes to receive goods or services (such as tickets to an event) offered by a charity in exchange for a contribution of a specified amount can make the contribution directly, without the involvement of a DAF.
From an economic perspective it makes no appreciable difference who pays the charitable deduction portion of the “event” ticket. But the American public’s perception of fairness is compromised. Americans can justly feel that the charitable contributions rules governing DAF’s has been manipulated so that the “rich and famous” can attend a high-status “event” without making any contemporaneous payment. Thus, respect for the public’s perception of fairness “trumps” a “sharp-penciled” analysis of economic reality.
Also, the income lost to a charity from the disallowance of DAF payments for “event” tickets may be fairly small. For example, assume that the charitable portion of the “event” ticket is $900 and that there are 250 guests. The charity’s income is therefore $225,000. But most attendees will pay their own way since they can afford to do so. Perhaps only 3 to 5 percent might seek to have their tickets paid from a DAF in the absence of the proposed new rule. Social pressure might persuade these donors to pay the charity directly if a distribution from the donor’s DAF could subject the donor and the donor advisors to penalties. Thus, the implementation of the proposed new rule might only represent the loss of one or two “event” tickets out of 250 tickets.
DAF Distributions Cannot Be Used
To Qualify the Donee as a Public Charity
A charity is classified as a private foundation unless, inter alia, it receives substantial public support. In determining public support, contributions from a person that exceed 2 percent of the charity’s total income are excluded from the calculation of public support (the “2% Rule”). The Notice observes that DAF’s have been used as “intermediary” public charities to avoid the 2% Rule. Avoidance of the 2 % Rule, in turn, allows some charities to avoid the private foundation rules of Chapter 42 of the Internal Revenue Code. The Notice asks whether income received from a DAF distribution should be treated as coming directly from the donor, thereby avoiding an end-run around the 2% Rule.
The Notice states:
Because of the contributions they receive from the general public, DAF sponsoring organizations typically qualify as § 170(b)(1)(A)(vi) organizations whose distributions from DAFs would ordinarily be counted as public support without limitation to the distributee charity. The Treasury Department and the IRS are aware that some donors and distributee charities seek to use DAF sponsoring organizations as intermediaries. Rather than making contributions, which would be subject to the 2-percent public support limitation, directly to charities, these donors make contributions to DAFs maintained by sponsoring organizations and then advise the sponsoring organizations to make distributions from the DAFs to the distributee charities. In light of the potential for abuse, the Treasury Department and the IRS are considering treating, solely for purposes of determining whether the distributee charity qualifies as publicly supported, a distribution from a DAF as an indirect contribution from the donor (or donors) that funded the DAF rather than as a contribution from the sponsoring organization. Such treatment would better reflect the degree to which the distributee charity receives broad support from a representative number of persons.
Notice of Proposed Rule Making
The Notice announces the following proposed rule changes:
It is currently anticipated that any proposed changes to these regulations would provide that a donee 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;
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.
I have two comments:
The use of so-called public charity “intermediaries” to avoid the 2% Rule represents an unjustified “end-run” around the private foundation rules which have been in place for nearly 50 years. Therefore, clauses (1) and (3), above, appear appropriate
I have difficulty treating all anonymous charitable contributions as coming from a single individual. Many persons choose to donate anonymously because they do not want publicity and because, perhaps, they do not want to be constantly solicited by other charities. Therefore, there should be a generous “de minimis” rule for anonymous contributions. I suggest that anonymous contributions will treated as gifts from the general public unless the aggregated anonymous contributions to the donee charity from all sources exceed 8 percent of total contributions received by the charity during its taxable year. If the 8 percent threshold is met, the donee charity will only be allowed to count an anonymous contribution as part of its public support if it confirms the source of the contribution.
 This article was prepared for the Boston Bar Association Tax Law Update Committee. The opinions contained herein do not necessarily reflect those of the Boston Bar Association or the Tax Law Update Committee.
 Donor-Advised Funds are defined and described in the Notice.
 The Notice has also solicited comments in areas where it has not disclosed the current position of the United States Treasury and the Internal Revenue Service. For details, see the Notice, Section 6. I have not identified these areas in this article.
 Sometimes, the pledges are an expression of charitable donative intent. Sometimes the pledges are legally enforceable. See Notice 2017-73 for details.
 Notice 2017-73 suggests that the issues raised affect “Chapter 43 penalties” other than those discussed in this article. Tax practitioners are strongly advised to read Notice 2017-73 in its entirety.
 The extended family of a donor or donor advisor consists of (1) the donor’s spouse and (2) the donor’s ancestors, children, grandchildren, great grandchildren, brothers and sisters (of the whole or half-blood) and their spouses. See Section 4958(f)(7) and Section 4946(d).
 See Footnote 5, above.
 Proposed rules must take has to take into account all four values. These values form a nuanced dialectic since it is not possible to maximize simultaneously the first three values. The fourth value, consistency with the “letter of the law,” is a boundary condition that all results must meet.
 This is also sound tax planning since tax deductions are typically limited by a percentage of an individual donor’s adjusted gross income. Thus, donors will want their annual charitable contributions to roughly mirror their unpredictable annual incomes.
 Section 4967(a) and (d); Section 4958(f)(7); and 4966(d)(2)(A)(iii), IRC.
 The Notice refers to tickets to charitable events used by donors, donor advisors and their families, which are paid by DAF distributions. See below.
 See Footnote 6, above.
 250 guests TIMES $900 per guest.
 A donor might not be able to make a $100,000 contribution each year since this money is derived from unpredictable capital gains and contingent bonuses. But a donor with a significant six or seven figure income can typically afford to pay for participation in several major charitable “events” each costing $1,000.
 This is my “hunch” based on my personal knowledge of major donors.
 8 percent represents one month (one-twelfth) of a public charity’s annual receipts.