The ACE Act, sponsored by Sen. Angus King (I-ME) and Sen. Chuck Grassley (R-IA), would modify existing rules relating to donor advised funds (“DAFs”), make certain changes to the rules for the excise tax on undistributed income of private foundations, and exempt certain private foundations from the excise tax on investment income. Council staff are continuing to understand the contents of the bill and will update this summary as needed. Provisions of the bill include:
Section 1. Short Title
The Act may be called the “Accelerating Charitable Efforts Act”
Section 2: Additional Restrictions on Deductions for Contributions to DAFs
Nonqualified Donor Advised Fund: The bill would place additional restrictions, under section 170(f), for charitable contribution deductions when a taxpayer makes a gift to what the legislation calls “nonqualified” DAFs.
When a contribution is made to a “nonqualified DAF”, four restrictions would apply:
- For non-cash contributions, a donor would not be allowed to claim the deduction unless the sponsoring organization sells the contributed asset for cash, and makes a qualifying distribution (see next bullet).
- For any contribution, a donor would not be allowed to claim the deduction until the taxable year in which the sponsoring organization makes a qualifying distribution of that contribution (or the proceeds from the sale of such contribution).
- A “qualifying distribution,” for this purpose, means a distribution that is not made to another DAF and that would not be a taxable distribution under section 4966(c) (the excise tax rules for taxable distributions on DAF sponsoring organizations).
- Distributions would be treated as made from contributions (and earnings) on a first-in, first-out basis.
- The amount of the deduction would be limited to the amount of the corresponding qualifying distribution.
- Contributions must be distributed within 50 years of the donation, or an excise tax is imposed on the sponsoring organization.
The restrictions for nonqualified DAFs generally would not apply to contributions of cash or publicly traded assets to qualified DAFs or qualified community foundation DAFs.
Qualified Donor Advised Fund: The bill creates a definition of a “qualified DAF” generally as a DAF with a written agreement in place that requires the donor’s advisory privilege for any contribution to the DAF to terminate within the 14 years following the year of the contribution.
- To receive a deduction, the donor must—at the time of the contribution—identify a preferred organization for the purpose of making a distribution if one has not been made before the donor’s advisory privilege terminates.
Qualified Community Foundation Donor Advised Fund: The bill creates a definition of a “qualified community donor advised fund” as a DAF owned or controlled by a “qualified community foundation” and meets one or more of the following requirements:
- Maximum Value of Advisory Privileges: No individual with advisory privileges with respect to the DAF can have advisory privileges with respect to more than $1,000,000, in the aggregate, held across DAFs sponsored by the qualified community foundation;
- Minimum Payout: The DAF must be established under a written agreement that requires qualifying distributions of at least 5% of the value of the DAF’s assets in each calendar year.
Qualified Community Foundation: The bill defines a "qualified community foundation" as meeting the following criteria:
- Described in section 501(c)(3);
- Organized and operated for the purpose of understanding and serving the needs of a particular geographic community that is no larger than 4 States, and engaging donors to create charitable funds to further those needs; and
- Holds substantial assets, and which must be at least 25% of the organization’s total assets, outside of donor advised funds.
Contribution of non-publicly traded assets: No deduction would be allowed for the contribution of a non-publicly traded asset to a "qualified DAF" or a "qualified community foundation DAF" until the sponsoring organization sells the asset.
- The deduction would be limited to the amount of the proceeds and credited to the account of fund identified with the donor.
The section includes contemporaneous written acknowledgment rules necessary to administer these restrictions.
The effective date of Section 2 would be for contributions made after the date of enactment.
Section 3. Failure of Donor Advised Funds to Distribute Contributions
The bill creates a new excise tax on sponsoring organizations of DAFs to ensure that qualifying distributions are made promptly after an advisory privilege terminates.
The tax would equal 50 percent of the portion of such contribution, as well as any earnings attributed to it, that has not been distributed in the required time frame.
- The tax would not apply to a “qualified community foundation donor advised fund”.
The effective date of Section 3 would be for contributions made after the date of enactment.
Section 4. Treatment of Private Foundation Administrative Expenses Paid to Disqualified Persons
The bill would disallow administrative expenses that are paid to disqualified persons of the private foundation from being treated as qualifying distributions. However, it includes an exception for administrative expenses paid to foundation managers who are not family members of other disqualified persons.
The effective date of Section 4 would be for taxable years beginning after 2021.
Section 5. Treatment of Distributions to Donor Advised Funds from Private Foundations
The bill prohibits a distribution made to a DAF from being treated as part of the 5 percent annual payout (unless the DAF makes a qualifying distribution in the same year). Certain reporting requirements would also be required with respect to private foundations that make contributions to a DAF.
The effective date of Section 5 would be for distributions and returns after 2021.
Section 6. Treatment of Contributions from Donor Advised Funds for Purposes of Determining Public Support
For purposes of applying the public support tests of section 509(a)(2) and section 170(b)(1)(A)(vi), when support is provided by a DAF sponsoring organization, and the original donor is not identified by the sponsoring organization, the support would not be treated as provided by a public charity. Instead, the support would be aggregated with all unidentified amounts coming from all DAF sponsoring organizations as if a single person provided such support.
If the sponsoring organization identifies the original donor, then the support would be treated as provided by such donor.
- There is an exception for amounts where a sponsoring organization specifies that the support is not a distribution from a DAF and that no donor had advisory privileges with respect to the provision of the support.
The effective date of Section 6 would be for contributions made in taxable years beginning after the date of enactment.
Section 7. Exemptions for Tax on Investment Income for Certain Private Foundations Making Significant Qualifying Distributions
Exempts a private foundation that makes a significant qualifying distribution of 7 percent or more of the private foundation’s assets (other than its direct-use assets) from the excise tax for that taxable year.
The effective date of Section 7 would be for taxable years beginning after the date of enactment.
Section 8. Exemptions for Tax on Investment Income of Limited-Duration Private Foundations
Exempts certain “limited-duration” private foundations from the excise tax on investment income.
- A limited-duration private foundation as defined by this bill is a private foundation which, at the time of its establishment and all times thereafter:
- (i) has a duration specified in its governing documents of not more than 25 years; and
- (ii) makes no distributions to other private foundations [except other limited-duration private foundations] which share a disqualified person in common.
- A recapture tax would apply if a private foundation initially meets these requirements at the time it is established but then later fails to meet the requirements at a later date.
The effective date of Section 8 would be for taxable years beginning after the date of enactment.