Responding to requests from the Council on Foundations and Independent Sector, the Internal Revenue Service on December 4, 2006 issued interim guidance on several of the donor-advised fund issues arising from the Pension Protection Act of 2006. The IRS notice is available at http://www.irs.gov/pub/irs-drop/n-06-109.pdf.
The IRS provided only part of the relief that the Council requested under the PPA. The Council’s letter to Treasury asked whether employer-connected disaster relief and emergency hardship funds would be treated as donor-advised. The IRS did not provide guidance on this issue. However, the IRS did exercise its authority under the PPA to declare that if such funds are donor-advised funds that provide assistance only in the case of "qualified disasters," they can qualify for exemption from the prohibition on payments to individuals.
To be eligible for exemption funds must:
- Have as their sole purpose providing relief in the case of a qualified disaster. A disaster is qualified if it: 1) results from terroristic or military action; 2) is the result of an accident involving a common carrier; or 3) has been declared by the President of the United States or the Secretary of the U.S. Treasury to be a disaster;
- Serve a charitable class;
- Select recipients based on objective determinations of need;
- Use either an independent selection committee or one that is independent (a majority of its members are not in a position to exercise substantial influence over the affairs of the employer);
- Make no payment to anyone who is a director, officer, or trustee of the sponsoring organization or to any member of the selection committee; and
- Maintain adequate records demonstrating the recipients’ need for the relief provided.
The relief granted does not extend to payments for cases of individual hardship not related to a qualified disaster, or to disasters that are only declared by state or local authorities.
IRS has indicated the need for more information from the field about how emergency hardship funds operate in order to make a decision about whether such funds should be exempted from the definition of donor-advised. Call COF General Counsel Janne Gallagher or any of the lawyers in the General Counsel’s office if you have such a fund so that we can gather information about its operations. Foundation managers should keep in mind, though, that the IRS has not ruled that these funds are donor- advised.