The Pension Protection Act of 2006 created new categories of disqualified persons for donor advised funds and sponsoring organizations under the intermediate sanctions rules.
Categories of Disqualified Persons Created under the PPA
- Donors and donor advisors with regard to transactions with the relevant donor advised fund
- Investment advisors to assets of donor advised funds
- Disqualified persons of supporting organizations considered disqualified persons of the supported organization*
* This provision is discussed in the analysis of changes to intermediate sanctions for supporting organizations .
- Who are the disqualified persons of a donor advised fund?
- Who is a donor or donor advisor?
- What is a sponsoring organization?
- Who is considered an investment advisor?
- What are Automatic Excess Benefit Transactions under the PPA?
- Can a donor advised fund provide compensation to its donors or reimburse expenses they incur?
- One of our donors is planning a golf tournament to raise money for a donor advised fund. Can we reimburse the donor for catering expenses related to the fundraiser?
- One of our donors to an advised fund is also a service provider to the community foundation. Can the foundation pay the donor for services rendered to the foundation?
- One of our board members is also a donor advisor at our community foundation. Can we reimburse her for travel to and from the board meetings?
- A local bank maintains a donor advised fund at our community foundation. Our community foundation also has an agreement for services with this bank. The bank fees are passed on to all donor advised funds as routine fees. Are payments to the bank under the service agreement subject to the automatic excess benefit rules?
- Have the penalties for entering into an excess benefit transaction changed?
- What is the tax Imposed on Disqualified Persons?
- What is the Tax Imposed on Organization Managers?
- When did these changes become effective?
- What were the Intermediate Sanctions prior to the PPA? 
Donors and donor advisors are disqualified persons with respect to the donor advised fund. Additional disqualified persons to the fund: the donor’s or donor advisors’ family members (spouse, ancestors, children, grandchildren, great grandchildren, brothers, sisters and the spouses of children, grandchildren, great grandchildren, brothers, sisters). Donor and donor advisors also include any 35-percent controlled entities. Thirty-five percent controlled entities are those in which donors or donor advisors either:
- Own more than 35 percent of the total combined voting power (in a corporation),
- Own more than 35 percent of the profits interest (in a partnership), or
- Own more than 35 percent of the beneficial interest (in a trust or estate).
Example: A donor contributes land to the Smith Family Fund. If the donor’s daughter purchases the piece of land held by the donor advised fund foress than fair market value, the transaction would be treated as an excess benefit transaction because the donor’s daughter would be considered a disqualified person with respect to the Smith Family Fund.
Investment advisors to the community foundation or other sponsoring organization are also disqualified persons.
Donors and donor advisors include:
- A donor or any person appointed or designated by a donor,
- Who reasonably expects to have advisory privileges with respect to the distribution or investment of amounts held in the fund or account.
A sponsoring organization is any organization, usually a 501(c)(3) community foundation, that holds donor advised funds.
Investment advisors are any person compensated by the sponsoring organization either for managing the investment of or providing investment advice with respect to assets maintained in donor advised funds held by the sponsoring organization. This includes advisors with respect to investment pools that include donor advised assets as well as assets held by other types of funds. The definition of investment advisor does not include employees of the sponsoring organization. The term investment advisor includes members of an investment advisor’s families and 35 percent controlled entities using the same description provided in the section on donors/donor advisors as disqualified persons.
Example: An investment advisor to a community foundation’s investment pools in which donor advised funds are invested may not receive more than fair market value for the services provided. Note that this individual is a disqualified person even if the investment pool is only partially funded by donor advised funds and even though she would not otherwise be a person with substantial influence over the affairs of the community foundation.
- Grants, loans, compensation and similar payments to donors and donor advisors from donor advised funds
- Grants, loans, compensation and similar payments to substantial contributors of a supporting organization (Type I, II or III)*
- Loans to any disqualified person of a supporting organization (Type I, II or III)*
* These provisions are discussed in the analysis of intermediate sanctions for supporting organizations .
No. Under the PPA, any grant, loan, compensation or other similar payment from a donor advised fund to, or for the benefit of, a person who is a donor or donor advisor is automatically treated as an excess benefit transaction and the entire amount of the payment is considered an excess benefit. A "similar payment" includes expense reimbursement. Also prohibited are payments made to others to cover a donor’s expenses. However, payments for the sale or lease of property, for example, would not be treated as an automatic excess benefit transaction because they are not "similar" payments.
No, the community foundation may not reimburse the donor for the catering expenses. The foundation may provide a gift acknowledgement to enable the donor to deduct the expense as an out-of-pocket expense incurred in undertaking a charitable activity.
Example: A family with a very large donor advised fund meets once a year to decide on the organizations that they will recommend to receive grants from their fund. The donor asks that the fund pay the travel expenses for one of the donor’s children who must come a long distance to attend the meeting. The fund may not pay or reimburse the expense.
Example: A donor contributed closely held stock to a donor advised fund. The donor’s family—all disqualified persons—controls the closely held company. A sale of the stock to a family member of the donor would not be an automatic excess benefit transaction because, under the rule, payments for the sale or lease of property are not treated as impermissible payments. Instead, it would be subject to the general intermediate sanctions rules  which would require the family member to purchase the stock at fair market value.
Yes, a donor or advisor may receive a grant, loan, compensation or other similar payment, but only if the payment is from the foundation and not a payment from the donor advised fund.
Yes. The provision of mileage reimbursement for attendance at board meetings is not considered an automatic excess benefit because such a reimbursement is from the community foundation and is not a transaction with the donor advised fund.
A local bank maintains a donor advised fund at our community foundation. Our community foundation also has an agreement for services with this bank. The bank fees are passed on to all donor advised funds as routine fees. Are payments to the bank under the service agreement subject to the automatic excess benefit rules?
No, because the transaction would be considered a transaction between the community foundation and the bank, not a transaction with the donor advised funds even if the bank’s donor advised fund is charged the routine fee assessed to all donor advised funds. If a community foundation enters into an automatic excess benefit transaction, the entire amount paid to the donor, advisor or related party is considered an excess benefit.
Yes. As background, a tax is imposed on the disqualified person who enters into an excess benefit transaction as well as on organization managers who knowingly participated in the transaction.
The tax rate for penalties imposed on disqualified persons did not change, but the amount taxed did change. The initial tax remains 25 percent of the excess benefit amount. In the past, this tax was imposed on the amount of the excess benefit received by the disqualified person.
However, under the PPA, if the transaction is considered an automatic excess benefit transaction because the disqualified person received a grant, loan, compensation or other similar payment from a donor advised fund, the tax is applied to the entire amount of the transaction. For example, if the disqualified person received $5,000 for services with a fair market value of $4,000, the 25 percent tax would be imposed on the entire $5,000, and not just on the $1,000 excess benefit. Payments that are not corrected would be subject to a penalty of 200 percent of the entire payment. Finally, any amount repaid to the community foundation to correct the transaction may not be repaid to any donor advised fund.
Organization managers that participate in a transaction knowing it is an excess benefit transaction are also subject to tax. The PPA increased the maximum tax imposed on organization managers from $10,000 to $20,000. This applies to all public charities involved in the transaction, not just organizations that hold donor advised funds.
Changes in the definition of disqualified persons and automatic excess benefit transactions became effective after the date the PPA was enacted, which was August 17, 2006. The change in maximum tax imposed on a foundation manager became effective for taxable years beginning after the date the PPA was enacted.
The information provided here is based on our continuing analysis of the Pension Protection Act and subsequent guidance from the IRS. Every effort has been made to ensure accuracy of this information. However, 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 this legislation 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.