United Jewish Communities Responds to IRS Notice 2007-21

United Jewish Communities Responds to IRS Notice 2007-21

News story posted in IRS Notices on 7 June 2007| comments
audience: National Publication | last updated: 18 May 2011
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Summary

The United Jewish Communities has responded to Notice 2007-21 in which Treasury and IRS invited public comments regarding a study being conducted on the organization and operation of donor advised funds and supporting organizations as required by the Pension Protection Act of 2006.
Full Text:

April 6, 2007

Internal Revenue Service
P.O. Box 7604
Ben Franklin Station
Washington, D.C. 20044
Attn: CC:PA:LPD:PR

Room 5203
also sent via email to Notice.Comments@irscounsel.treas.gov

Executive Summary

The comments that follow represent the response of the United Jewish Communities, Inc., ("UJC"), to IRS Notice 2007-21, which invited public comments in connection with a study conducted by the Department of Treasury and the Internal Revenue Service on the organization and operation of donor advised funds (as defined in Internal Revenue Code (code) section 4966(d)(2) of the Internal Revenue Code) and of supporting organizations as defined in code section 509(a)(3). This study is mandated by section 1226 of the Pension Protection Act of 2006 (the PPA).

UJC is the national organization that represents and serves 155 Jewish federations and 400 independent Jewish communities ("Network communities") in more than 800 cities and towns across North America. In their communities, the Jewish federation and Network volunteers (collectively, the "UJC System") are the umbrella Jewish fundraising organizations and the central planning and coordinating bodies for an extensive network of Jewish health, education and social services. The endowment department of a federation typically includes among its charitable vehicles donor-advised funds, supporting organizations, (together referred to a "participatory funds"), funds to support one or more specified public charities or programs, as well as charitable income plans.

In response to the specific questions in IRS Notice 2007-21, we wish to emphasize the following:

  • UJC's participatory funds provide numerous benefits to sponsoring organizations, donors, and communities, including continued dialogue between donors and federation professionals regarding Jewish community priorities, challenges, and federation funding. This system also enables us to provide donor education and grant oversight that may not be present in other charitable giving vehicles.
  • For purposes of determining whether a donor, a donor advisor or a related person receives "more than incidental benefit," the standard of Internal Revenue Code section 170 for no goods or services is the most administrable and effective test to preclude impermissible benefits to donors to participatory funds.
  • The sanctions contained in the Pension Protection Act of 2006 (PPA) are sufficient to penalize the distribution of impermissible benefits from participatory funds to disqualified persons.
  • An expectation that donor advice on distributions or investment of assets will be followed is not sufficient to deny the deductibility of donations, provided that the sponsoring organization takes appropriate steps to assure that no impermissible benefits flow to donors and donees are qualified grant recipients.
  • Participatory funds should not be precluded from accepting gifts of certain illiquid assets as this would disadvantage the funds in comparison to other types of public charities.
  • Individual fund accounts maintained by sponsoring organizations should not have an annual payout requirement, as this would create a disincentive for certain types of contributions and would hinder the effective administration of participatory funds.
  • Long-term existence of participatory funds fosters continued relationship building between sponsoring organizations and donor families.
  • In interpreting the provisions of the PPA, Treasury and the IRS should be cognizant that potential new rules might create significant administrative costs that must be borne by sponsoring organizations that maintain participatory funds.
  • Participatory funds offer a wide range of uses and benefits for donors, sponsoring organizations, and communities and should not be further disadvantages in comparison with other charitable gift vehicles.

The United Jewish Communities, Inc., ("UJC") is the national organization that represents and serves 155 Jewish federations and 400 independent Jewish communities ("Network communities") in more than 800 cities and towns across North America. In their communities, the Jewish federation and Network volunteers (collectively, the "UJC System") are the umbrella Jewish fundraising organizations and the central planning and coordinating bodies for an extensive network of Jewish health, education and social services. With thousands of affiliated agencies and schools, the UJC system is one of the United States' largest and most effective social service providers, serving well over one million clients each year in both the Jewish community and the general population. Participatory funds, such as supporting organizations and donor advised funds (collectively, "participatory funds") are critical fundraising tools for the UJC system. Collectively, federations raise over $2 billion each year, roughly half through an annual fundraising campaign and half from disbursements from over $10.2 billion in endowment assets. Included in this total are both restricted and unrestricted funds, donor advised funds, and funds controlled by supporting organizations. Donor advised funds and supporting organizations assets amount to approximately 60% of the endowment assets held by Jewish federations but they were the source of 80% or just over $1 billion of the $1.24 billion in grants made from endowment assets. Distributions from donor advised funds and supporting organizations represented 20.5% of their combined assets at the prior year-end.

Jewish federations and Network communities conduct annual fundraising campaigns that support the needs of local secular and Jewish agencies, as well as the needs of millions of Jews in North America, Israel, the former Soviet Union, and more than 60 countries around the world. In addition to conducting annual campaigns, many Jewish federations and the affiliated organizations raise endowment dollars for long-term support. In this regard, they are similar to their secular counterparts, the local community foundations. The endowment department of a federation typically includes among its charitable vehicles donor-advised funds, supporting organizations, funds to support one or more specified public charities or programs, as well as charitable income plans.

Collectively, federations raise over $2 billion each year, roughly half through an annual fundraising campaign and half from disbursements from over $10.2 billion in endowment assets. Included in this total are both restricted and unrestricted funds, donor advised funds, and funds controlled by supporting organizations. Donor advised funds and supporting organizations assets amount to approximately 60% of the endowment assets held by Jewish federations but they were the source of 80% or just over $1 billion of the $1.24 billion in grants made from endowment assets. Distributions from donor advised funds and supporting organizations represented 20.5% of their combined assets at the prior year-end. This spending rate compares favorably with the spending rate of all endowment vehicles, which exceeded 14.5% of the funds under Federation management. It is also important to note that approximately 30% of the funds from donor advised funds and supporting organizations were distributed to the general community and 70% within the Jewish community.

Participatory funds, such as donor advised funds and supporting organizations are critical fundraising tools for the UJC system. Hundreds of donor advised funds and supporting organizations have been funded with millions of dollars of liquidating distributions from private foundations, since 1969, when the Internal Revenue Code was revised to place limitations on private foundations. The UJC system believes that many of the provisions contained in the "Pension Protection Act of 2006" (the PPA) provide needed statutory definitions and operational rules for participatory funds as well as a penalty tax framework that can be applied to discourage unwarranted acts of self-dealing. However, we also believe that it is in the public interest to continue to provide incentives for donors to contribute assets to vehicles in which the public charity has control, such as participatory funds, rather than to place or leave such assets in vehicles in which a public charity has little or no control, such as private foundations.

We are exceptionally proud that agencies within the UJC system employ the highest ethical standards of self-regulation in governance and operation and regularly share expertise with other charities and policy makers outside the Jewish community on a variety of charitable giving issues. UJC has issued and maintains two separate publications, Donor Advised Funds: A Guide for Jewish Federation Endowment Professionals, and Handbook on Supporting Foundations, for use by endowment professionals in the UJC system. These publications describe appropriate rules and best practices associated with operating such charitable funds. Participatory funds are a vital funding source for the health, education and social service program of UJC system organizations. In this spirit, UJC is pleased to provide its comments in response to the questions listed in both the Joint Committee on Taxation's technical explanation of the PPA and in IRS Notice 2007-21.

      1. What are the advantages and disadvantages of donor advised funds and supporting organizations to the charitable sector, donors, sponsoring organizations, and supported organizations, compared to private foundations and other charitable giving arrangements?

UJC's mission is to inspire Jews to fulfill the mitzvah (commandment) of tzedakah (justice), securing the financial and human resources necessary to care for those in need, rescuing Jews in danger, and ensuring the continuity of our people as well as providing the strategic resources and direction to help local federations fulfill their individual and collective responsibilities of tikkun olam (repair of the world), community building and Jewish renaissance. Participatory funds such as donor advised funds and supporting organizations are essential in creating a broad base of support for the Jewish community to fulfill its social services mission. They offer a simple and economical means for benefiting the community and encouraging family philanthropy.

In addition to providing financial resources for critical human services in the local Jewish and general communities, these charitable vehicles also advance the values and goals of the UJC system through:

  • Nurturing relationships between Jewish philanthropists and federation professionals
  • Building leadership and social capital in the Jewish community
  • Establishing priorities that consider the future needs of the Jewish community
  • Reinforcing the positive perception of the federation as a philanthropic partner with the larger community
  • Helping to build the federation's unrestricted endowment fund

Private foundations do not provide donors and their families with the opportunities noted above to establish the direct connection with charities and the community. Unrestricted giving may be considered more advantageous in some ways than establishing donor advised funds and supporting organizations, but again may not provide the sponsoring organization with a vehicle to foster a long-term relationship with the donor and succeeding generations.

Another way of answering question 1 is to look at who benefits from donor advised funds and supporting organizations. First, the Jewish community and its philanthropic and social service mission benefit as such vehicles provide a reliable pool of dollars to fund a variety of social service activities. Second, the particular Jewish federation benefits because the relationship between the donor and the federation leads to an ongoing dialogue about community priorities and challenges and the importance of federation funding. Efficient administration, sound investment policies, stewardship and educational programming build relationships of trust with current and future donors, increasing the likelihood of enhanced giving and involvement, providing another opportunity for donor engagement in the organized Jewish community and giving the federation insight into individual donor priorities. Third, the donor benefits because these organizations provide a cost-effective alternative to a private foundation for gifts to public charities. While donors may not receive an impermissible "material benefit," they do receive the continuing educational benefit of ready access to the knowledge and experience of the federation staff regarding the Jewish community's needs and the organizations that exist to serve them. Donors also can engage other family members, including succeeding generations, in the grant-making process, as well as meet other like-minded community philanthropists. Donors are also relieved from burdensome administration and recordkeeping and are free to concentrate on the substance of charitable giving. Finally, there is the added benefit of efficient tax administration as well-administered donor advised funds and supporting organizations have policies and procedures in place to assure that qualified grants are made and impermissible material benefits to donors are not present. This community-policing function is an important component of the overall tax compliance system that operates in concert with the goal of furthering philanthropic endeavors. These unique benefits to the Jewish community, Jewish federations and organizations, donors, and tax administrators distinguish these participatory funds from private foundations and other charitable giving vehicles. It is also important to note that the system of donor education and grant oversight that is the hallmark of the UJC system and other community foundations is not present in "commercial" donor advised funds formed by a number of financial institutions in recent years that are referred to in the Joint Committee on Taxation's "Technical Explanation of H.R.4, The "Pension Protection Act of 2006," (JCX-38-06, August 3, 2006) on page 341.

      2. How should the amount and availability of a charitable contribution deduction for a transfer of assets to a donor advised fund or a supporting organization, and the tax-exempt status or foundation classification of the donee, be determined if:

            a. The transferred assets are paid to, or used for the benefit of, the donor or persons related to the donor (including, for example, salaries and other compensation arrangements, loans, or any other personal benefits or rights)?

If assets transferred to a participatory fund are paid to or used for the benefit of the donor or related parties, the donor should not be entitled to a charitable contribution deduction. In addition, the PPA contains various excise tax and penalty provisions designed to prohibit benefits to donors, their advisors and family members, as well as revised "excess benefit" transaction provisions whereby the entire amount of grants, loans, compensation or similar payments to such persons are treated as an excess benefit, regardless of the value of the consideration provided in return for such payment. See generally Internal Revenue Code (code) sections 4958, 4966, and 4967 as amended by the PPA. It is axiomatic that in order for there to be a charitable contribution deduction there must be a contribution. It is well-settled that in order to qualify as a charitable contribution deduction, a gift generally must be complete and irrevocable. The gift must be unconditional, i.e., it must not depend on some act or precedent event before it is effective. Neither may the donee's interest in the property, after vesting in or passing to the donee, be defeated by the subsequent performance of an act or the happening of some event. The written documents that govern participatory funds maintained by the UJC system are clear in the requirement that control over the assets rests with the sponsoring organization. As such, participatory funds should be treated no differently than contributions to other charities.

Code section 4958, as amended by the PPA, provides that any grant, loan, compensation, or other similar payment from a donor advised fund to a person that with respect to such fund is a donor, donor advisor, or a related person to a donor or donor advisor automatically is treated as an "excess benefit transaction," with the entire amount paid to any such person treated as the amount of the excess benefit. Similarly, for supporting organizations, disqualified persons (donors, trustees, directors, officers and related parties) of supporting organizations will be treated as disqualified persons with respect to transactions with their supported public charities for purposes of the excess benefit transaction rules. Code section 4967(a)(1), as added by the PPA, provides that when a donor, donor advisor, or related party provides advice on distributions that result directly or indirectly in more than an incidental benefit to such person, an excise tax of 125 percent is imposed on the amount of the benefit on the person rendering the advice, as well as a 125-percent tax on the recipient.

Donor advised funds are prohibited from making distributions which provide a "more than incidental benefit" to donors, donor advisors and related parties for tax years beginning after August 17, 2006. It is important to note that the Joint Committee on Taxation Technical Explanation (JCX-38-06) provides on pages 349-350 that "there is 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. This so-called section 170 test to determine that no goods or services have been provided to the donor is the most administrable and effective test to preclude impermissible benefits to donors under code section 4967 as added by the PPA.

            b. The donor has investment control over the transferred assets?

Under new IRC section 4966(d)(2), a donor advised fund must be separately identified fund or account, owned and controlled by a sponsoring organization and provide the donor with advisory privileges with respect to distributions or investments of amounts held in such fund or account. The code section makes specific reference to a donor retaining or expecting to retain advisory privileges as to the investment activities. The sponsoring organization, however, controls the investment of all donor advised assets, as such assets are the property of the sponsoring organization. It follows that the sponsoring organization has the absolute right to invest such assets according to its investment policies and guidelines. Although it is the clear policy of the UJC system that donors are restricted from having any control over the management of fund assets, donors, in some cases may have an advisory and non-binding privilege to recommend how the assets will be invested. In some cases, UJC sponsoring organizations offer donors different preapproved investment options and permit donors to recommend that donated assets be distributed among the various pre-approved investment options.

            c. There is an expectation that the donor's "advice" will be followed, or will be the sole or primary consideration, in determining distributions from, or investment of the assets in, the supporting organization or the donor advised fund?

Within the UJC system, even if a donor's advice is followed substantially all of the time with respect to the consideration of determining distributions from participatory funds, such advice will be followed only after an investigation of the recommended grant by the sponsoring organization to assure compatibility of purpose and compliance with the law. As noted above, new IRC section 4966(d)(2) provides that a donor advised fund is a fund that is owned and controlled by a sponsoring organization and maintained on the books of that charity as an account which is separately identified by reference to the donor or donors. A donor contributes cash or property to the fund with the expectation to have advisory privileges with respect to future distributions from the fund. The donor's retained right is advisory only.

The sponsoring charity is the owner of the contributed property and exercises ultimate control over its investment, administration and disposition. Within the UJC system, even if the donor has the expectation that donor advice will be followed or will be the primary consideration in distributions from or investment of assets in supporting organizations or donor advised funds, the sponsoring organization takes appropriate steps to assure that there are no impermissible benefits flowing to donors and the donees are qualified recipients of the grants. The donor advised manual maintained by UJC clearly states that in establishing a donor advised fund, policies and procedures be adopted that comply with the existing Treasury Regulations that are sometimes referred to as the "materialrestriction" regulations. See generally Treas. Reg. Sec 1.507-2(a)(8). Procedures that incorporate these regulations ensure that donors transfer all rights, title and interest in an asset and that the donor does not impose any material restriction or condition on the transferee organization. Although it can be argued that some of the factors referred to in the Treasury Regulations may be viewed as subjective, and no one factor on its own might necessarily invalidate a donor advised fund, UJC believes, that in aggregate, these regulations provide funds with workable standards and guidelines that ensure that donors do not retain the right to control the funds established by them.

Merely retaining the privileges of a donor advisor, including the privilege of making recommendations regarding grants paid out of a donor advised fund account, advising on the investment allocation of assets in the donor advised fund account, and naming successor donor advisors should not preclude such funds from qualifying for the charitable benefits that accrue to donor advised funds. These privileges are the essence of donor advised funds are recognized by statute with the enactment of the PPA.

One of the advantages of participatory funds is the continued involvement of the donor in the philanthropic activities of the sponsoring organization and the community. Donor advice is not only an important component in determining grant recommendations, it is one of the unique features that set participatory funds apart in today's competitive philanthropic environment. Working hand in hand with donors and their families, philanthropic professionals within the UJC system can work to fulfill the needs of the Jewish community. The sponsoring organizations approve or reject grant recommendations as discussed above.

            d. The donor or the donee has option rights with respect to transferred assets?

As noted above, a gift to charity must be "complete" to qualify as a charitable contribution for tax purposes. Donor recommendations regarding investments or distributions must be advisory only; the governing body of the sponsoring organization has legal control over all distributions. The donor must not have directly or indirectly subjected the fund to a "material restriction" with respect to the transferred assets. A material restriction is a restriction or condition that prevents a community foundation from "freely and effectively employing the transferred assets, or the income derived, in furtherance of its exempt purposes." Restrictions concerning contributed property, including required retention of investment assets and right of first refusal and other option rights indicate the presence of a material restriction and an incomplete gift. Funds maintained by the UJC system do not permit such restrictions.

            e. The transferred assets are appreciated real, personal, or intangible property that is not readily convertible to cash?

As noted above, donor advised funds and supporting organizations are public charities and there should not be any difference in the types of property that can be contributed to such public charities. Any blanket prohibition of such contributions would place these funds at a competitive disadvantage and discourage philanthropy. It is the stated policy of the UJC system, that "[d]onors should be able to contribute a wide range of assets to a federation for a Donor Advised Fund, including cash, publicly traded securities, bonds and mutual fund shares. Donors also may occasionally wish to donate assets to a federation for a Donor Advised Fund that are not liquid and cannot be easily sold, such as real estate, partnership interests, artwork, and closely-held, restricted or "Rule 144" stock. The federation must determine as part of its gift acceptance policy the criteria for accepting such contributions into a Donor Advised Fund. The investment policy must also provide for the management and monitoring of such investments." Similar to other public charities, donor advised funds and supporting organizations should not be precluded from accepting gifts of certain illiquid assets. For example, parcels of real estate which may not have a ready market today can quickly turn into a valuable asset in a sponsoring organization's portfolio due to changes in market conditions. In many cases, UJC, through participatory funds, has been the beneficiary of such largess and has been able to distribute the proceeds to worthy recipients throughout the UJC system

Sponsoring organizations should be able to accept intangible property but should be encouraged to develop policies for accepting such contributions. Best practices of our system include recommended policies that cover such issues as: (1) appraisal-a donor must provide an appraisal of the property and the interest in the property the supporting organization will receive if the gift is approved; (2) market-the appraisal must indicate that there is a market for the asset and that it can be sold in a timely fashion; (3) encumbrances or restrictions-all mortgages, deeds of trust, restrictions, reservations, easements, and other limitations must be disclosed or discharged where appropriate except in very unusual cases where the fair market value of the federation's interest in the property net of all encumbrances is substantial or where a separate agreement to pay any such encumbrances which might be charged to the federation has been executed by a financially responsible party; (4) carrying costs-the donor should disclose all carrying costs including, but not limited to, taxes, insurance, association dues, membership fees, and transfer charges must be disclosed; and (5) disposition-the supporting organization should assume responsibility to dispose of all gifts of intangible assets within a reasonable period of time, if such assets are income producing. In some cases, as noted above, it may be more prudent to retain the property based on recommendations of investment advisors and other professionals.

            3. What are the effects or the expected effects of the PPA provisions on the practices and behavior of donors, donor advised funds, sponsoring organizations, supporting organizations and supported organizations?

The PPA provisions present the UJC system with a number of challenges and opportunities, especially because donor advised funds and supporting organizations are currently a mainstay of donor-involved philanthropy. Our overriding concern is that despite the best intentions of Treasury and the IRS in interpreting the provisions enacted as part of the PP, such new rules will impose significant additional administrative costs of sponsoring organizations that maintain participatory funds. This concern is magnified as such costs become proportionately more burdensome for smaller and less sophisticated sponsoring organizations.

UJC has already undertaken numerous steps to provide individual federations and foundations the tools to begin considering the steps that should be taken in response to the new requirements imposed by the PPA. In many instances, however, the PPA codifies "best practices" long followed by the UJC system and embodied in the donor advised fund and supporting organization manuals. UJC will continue to provide guidance to lay leaders and their professional advisors regarding provisions in the PPA as well as steps to consider in order to assure that boards, staff and donors are aware of the provisions that will require changes in practices, administrative procedures and legal structures. Some of the most important steps that are being considered within the UJC system include (It is important to note that the provisions of the PPA have various effective dates which dictate that certain actions noted above be accelerated before others.):

      1. Identifying funds not currently treated as donor advised funds to determine if they fall within the new statutory definition.

      2. Implementing procedures to prevent payment of "prohibited benefits," "taxable distributions" and "excess benefits" from donor advised funds.

      3. Revising donor advised fund procedures to determine the tax classification of grantee organizations.

      4. Reviewing business holdings in donor advised funds to identify potential excess business holdings.

      5. Confirming donor advised fund acknowledgements conform to requirements.

      6. Determining if Type III supporting organizations exist within the UJC system, and, if so, whether they can be reformed to enable different classification.

      7. Establishing procedures to identify disqualified persons with respect to Type I and Type II supporting organizations affected by new provisions.

      8. Assembling information regarding supporting organization classification to provide to donor advised funds considering grants.

      9. Determining whether public support qualification is an alternative for various supporting organizations

      10. Determining whether indemnification of staff for penalty taxes is permissible under state law or advisable under existing director and officer insurance policies.

      11. Focusing on the need for "reasonable" nature of procedures in light of statutory provisions that will require clarification or additional IRS guidance.

      12. Establishing procedures for recognizing tax shelters.

A number of areas remain where additional guidance from Treasury and the IRS will be necessary before formal procedures are implemented. In some cases, it is clear that UJC system materials will need to be re-drafted to include operational documents that limit certain distributions and transactions. This will reinforce existing procedures that require grant request forms to affirm that such requests are not be used for a prohibited purpose and ensure that loans, compensation or other payments are not made to certain parties. Similarly, existing transmittal forms to grantees that require affirmation that the organization is a qualified entity and that no impermissible benefit to donors will require revisions to reflect the provisions of the PPA.

      4. What would be appropriate payout requirements, and why for: (a) donor advised funds; (b) funds for which the donor retains meaningful rights; (c) supporting organizations; and (d) any other types of charities?

UJC does not support any annual payout requirements as they would relate to individual donor advised fund accounts. An annual payout requirement for an individual donor advised fund can be impractical, especially in the case of funds that hold illiquid real estate where cash flow may be insufficient to meet this requirement and there may be a need to hold such assets for many years before generating sufficient cash for distribution from a particular account. Any minimum distribution requirement could create a disincentive for non-cash gifts to donor advised funds as compared with making the same gift to other types of public charities. Moreover, donor advised funds are sometimes used to grow amounts for a future charitable project or purpose, such as the accumulation of funds over a period of years that can be dedicated to the construction of a new facility in future years. The use of participatory funds for such projects should not be jeopardized by a minimum distribution requirement. Further, imposition of a minimum payout requirement could result in accelerated disposition of certain assets at less than optimal return.

UJC does support an overall minimum payout requirement for aggregate donor advised fund programs maintained by a sponsoring organization. Although there has been no legal requirement regarding minimum distributions, it has been UJC policy to adopt a policy that ensures grants from donor advised funds, in the aggregate, be no less than some specified percentage of the annual net assets averaged over several years. Further, it is important to note that the UJC system maintains a common practice of refraining from entering into a binding commitment to freeze distributions from any particular donor advised fund, except for limited periods of time. For example, such restriction on distributions would allow a donor to make sufficient contributions over time to meet the minimum contribution level applicable to all funds necessary to commence distributions.

Alternatively, it would allow the fund to grow to an agreed upon dollar amount to fund a specific charitable purpose. Such policies can serve to encourage initial contributions to "acorn funds" which are established with a smaller than minimum contribution with the understanding that the fund will be increased to the usual minimum within a relatively short period of time. Another exception can be crafted for increasingly popular children's funds created in honor of lifecycle events such as bar or bat mitzvah or graduation where a parent or other adult can serve as co-advisor until the child turns 18.

In the PPA, Congress directed the Treasury to issue regulations that establish minimum payout requirements as percentage of either income or assets to ensure that Type III supporting organizations distribute a significant amount to supported organizations. The new law contains no similar provisions for Type I or II supporting organizations. Such organizations should be able to satisfy the operational test by carrying on a permissible activity such as an independent activity or program that supports the supported organization as provided by Treasury Regulation section 1.509(a)-4(e)(2). As noted above when discussing statistics regarding assets totals, grants and spending rates, participatory funds within the UJC system continue to make significant distributions (in excess of 25 percent of combined assets in the case of donor advised funds) each year.

      5. What are the advantages and disadvantages of perpetual existence of donor advised funds or supporting organizations?

Many of the advantages of donor advised funds and supporting organizations have been referred to in response to question 1 above. Permitting participatory funds to exist for a long period of years allows for greater opportunities for sponsoring organizations to continue building a relationship between the donor and the donor's family. Such relationships often lead to the commitment of dedicated individuals to broaden their involvement in Jewish life and Jewish philanthropy. It is essential that the sponsoring or supported organization continue its obligation to educate and support donors. One of the greatest strengths of the UJC system lies in its unique ability to match donor's interests with funding opportunities in the Jewish community. Because donor advised funds can continue for an extended period of time, including the lifetime of the donor and spouse, heirs and additional successors, this relationship can continue to grow over time and next generation of Jewish community leaders can be fostered. This provides the UJC system with a valuable tool to educate succeeding generations of donors so that they can become effective funders in the future.

It is important to note that in most cases, donor advised funds within the UJC system do not have "perpetual existence." Even in cases where donor advised fund agreements provide that fund balances that may exist upon the death of the last advisor are "rolled into" unrestricted Federation funds, this also permits general planning and allocation committees to determine which philanthropic projects will receive grants based on community needs and priorities. A supporting organization, as a separate legal entity, has its own identity, name, and continuing existence after the donor's death. The supporting organization's affiliation with a supported organization assures continuity and continued operation after the donor's death. There should be no differentiation between the length of time that supporting organizations and supported organizations are allowed to remain in existence.

      6. What other types of charitable giving arrangements give rise to any of the above issues?

Over the past two decades the number of giving options has greatly expanded as philanthropic advisers, foundation staff, professional advisers, and donors have become more and more accustomed to a wider range of charitable giving vehicles. For the donor, the choice of a giving vehicle is no longer dependent on tax benefits alone. Many other factors such as perceived impact, control, name identification or personal values are now significant elements in the giving decision. More sophisticated donors can now compare the services provided from an endowed donor advised fund, supporting organization, or charitable gift fund and compare the differences in operation, cost, community impact and control.

As noted above, the UJC system relies on participatory funds to create a broad base of financial support for the Jewish community. They offer a simple and economical means of benefiting the community and encouraging family philanthropy. There are numerous examples of uses of donor advised funds and supporting organizations that result in benefits that redound to the community, the sponsoring organization and the donor. A donor might wish to terminate a private foundation but still have a role in the operation of the charitable fund. Parents might want to have adult children play a continuing role in the program of a charitable fund to carry on the family tradition of community responsibility and participation. A donor is not sure how he would like his charitable gift to be used but wants to make a significant contribution in a particular year. In each of these and in many other cases, a participatory fund can be the recipient of the gift. Although other types of gift vehicles may be appropriate in certain cases, participatory funds offer a wide range of uses and benefits that should continue to be encouraged. They should not be further disadvantaged in comparison to other charitable gift vehicles.

If you have any questions regarding these comments, please direct them to Steven Woolf, UJC's Senior Tax Policy Counsel at (202) 736-5863 (steven.woolf@ujc.org) or myself at (202) 736-5868 (william.daroff@ujc.org).

                                          Sincerely,

                                          William Daroff
                                          Vice President for
                                          Public Policy & Director
                                          of the Washington Office

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