Transcript of IRS Hearing on DAF Distribution Regs Is Available

“TAXES ON TAXABLE DISTRIBUTIONS FROM DONOR ADVISED FUNDS UNDER SECTION 4966"

UNITED STATES DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE

TELECONFERENCE PUBLIC HEARING ON PROPOSED REGULATIONS

[REG-142338-07]

Washington, D.C.

Monday, May 6, 2024

PARTICIPANTS:

For IRS:

RACHEL D. LEVY
Associate Chief Counsel
Employee Benefits, Exempt Organizations, and Employment Taxes

LYNNE A. CAMILLO
Deputy Associate Chief Counsel
Employee Benefits, Exempt Organizations, and Employment Taxes

TAINA EDLUND
Senior Technician Reviewer
Employee Benefits, Exempt Organizations, and Employment Taxes

WARD L. THOMAS
Senior Counsel
Employee Benefits, Exempt Organizations, and Employment Taxes

CHRISTOPHER A. HYDE
Attorney
Employee Benefits, Exempt Organizations, and Employment Taxes

For U.S. Department of Treasury:

AMBER MACKENZIE
Attorney Advisor
Office of Tax Policy

In-Person Speakers:

RON RANSOM
American Endowment Foundation

DEBORAH L. WILKERSON
Greater Kansas City Community Foundation

ROSE BRADSHAW
North Texas Community Foundation

KENDRA VANDERMEULEN
National Christian Charitable Foundation Inc.

CHRIS ANDERSON
American Institute of CPAs

ANDREA SÁENZ
Chicago Community Trust

EMANUEL J. KALLINA, II
Kallina & Associates, LLC

KEVIN CARROLL
Securities Industry and Financial Markets Association

DAVID SHEVLIN
American Bar Association, Section of Taxation

RACHEL SCHNOLL
Jewish Communal Fund

LISA M. CHMIOLA
Association of Fundraising Professionals

STEPHEN H. KING
Gammon & Grange PC

JENNIFER K. BARTENBACH
Central Indiana Community Foundation

DENNIS BUEHLER
Greater Green Bay Community Foundation

AMY FREITAG
New York Community Trust

KEITH BURWELL
Greater Toledo Community Foundation

AIMEE MINNICH
Impact Investing Charitable Foundation dba Impact Foundation

DR. MARK E. LAIL
Church of the Nazarene Foundation

FRANK FERNANDEZ
Community Foundation for Greater Atlanta

DAVID N. CICILLINE
Rhode Island Foundation

TONIA WELLONS
Greater Washington Community Foundation

ANNA MARIA CHÁVEZ
Arizona Community Foundation

EILEEN R. HEISMAN
National Philanthropic Trust

KRISTIN TODD
Community Foundation of Northern Colorado

MATTHEW L. EVANS
United Philanthropy Forum

JENN HOLCOMB
Council on Foundations

ROXANNE G. JERDE
Community Foundation of Sarasota County, Inc.

RICHARD MILLS
American Bar Association Real Property, Trust and Estate Law

ALEXANDER REID
TEGE Exempt Organizations Council

ANDREW GRUMET
Holland & Knight

MARGRET TRILLI
ImpactAssets, Inc.

STEVEN WOOLF
Jewish Federations of North America

ELIZABETH MCGUIGAN
Philanthropy Roundtable

GREGORY W. BAKER
Renaissance Charitable Foundation, Inc.

* * * * *

PROCEEDINGS

(10 a.m.)

MS. EDLUND: Hi, I'm Taina Edlund. I'm the senior technician reviewer who is also in Lynne's division.

MR. HYDE: Hi, my name is Christopher Hyde. I'm an attorney. I'm also in Lynne's division.

MS. MACKENZIE: I'm Amber MacKenzie. I'm an attorney-adviser with the Office of Tax Policy at Treasury.

MR. THOMAS: I'm Ward Thomas, also in Lynne's division. I am listed as the primary author of the NPRM for better or worse. And let's see. At least I'm not sitting on top of a dunk tank right now. So I am also going to be the official timer. Anybody that's going to be speaking will be up at the podium here and they will have a 10-minute clock with, I think it's yellow at one minute, red's time's up. I will also flash one minute and time's up and hopefully everything will go smoothly.

MS. CAMILLO: Thanks, Ward. I want to thank everyone who submitted comments and also thank those who arranged to speak today. The comments are very helpful to us in preparing the final regulations. We read them all carefully, take them into consideration, and do our best to address them in the final regulations. In addition to those in the room today, there are participants calling in by telephone, but they will be muted in listening mode only. I'd like to get started right away because we do have a full agenda of many speakers today. You should have all been given an agenda showing the scheduling and order of the speakers. Those who do not have a government ID are not permitted to leave the auditorium and walk around the building without an escort. But if you do need to get up to use the restroom, or if you wish to leave the building after you've spoken, or at any point before the end of the hearing, we have IRS employees stationed by the doors. They can arrange an escort for you. We expect the hearing to run all day. There will be a break for lunch at about 1 p.m. Each speaker will have only 10 minutes to speak. We will hold up a sign at the point, as Ward said, when each speaker has only one minute remaining. This will be an indicator that the speaker needs to wrap up their remarks and conclude. We will be cutting every speaker off at the 10-minute mark. Please understand we're not being rude, but we won't be able to get through our full agenda if speakers take more than 10 minutes. Remember, we do have your written comments. So with that, let's begin with the first speaker, Mr. Ron Ransom from American Endowment Foundation.

MR. RANSOM: Good morning. Thank you to the panel. And ladies and gentlemen, I'm honored to be here with you today. My name is Ron Ransom, chief executive officer with the American Endowment Foundation, also known as AEF. AEF is headquartered in Hudson, Ohio, a suburb of Cleveland, Ohio, and is one of the nation's largest independent donor-advised fund sponsors.

Despite our considerable scale within the donor-advised fund space, at our core we are roughly a 100-employee small business. Since our inception in 1993, AEF has remained steadfast in our commitment to expanding philanthropy. AEF delivers a best-in-class client experience to over 14,000 charitable individuals, nearly 6,000 financial advisers, and 2,500 partnering firms across the financial services industry. We are here today to address the proposed regulations that would impact AEF and the vital public charities we support.

The proposed regulations have garnered significant attention as demonstrated by the participation of the folks here today as well as the folks via telephone tomorrow. This attention is likely due to the potential implications to reshape the landscape of charitable giving and philanthropy at large. We at AEF have two main concerns with the proposed [regs]. The first is the potential classification of investment advisers as donor-advisers. Such a provision would essentially undermine the motivation for the investment advisers recommended to us by their donors. Over 99 percent of our donors rely on investment advisers to help manage and advise on their donor-advised fund assets. It's essential to note that AEF operates as a public charity, not as an institutional adviser, making the expertise of these investment advisers truly invaluable.

In fact, the funds managed by our donors' investment advisers generated 3.8 billion in charitable dollars over the past five years.

Without the experience and support of our investment advisers, achieving this growth in charitable dollars would not have been possible. We believe that with the proposed regulations, investment advisers may be less inclined to manage investments in donor-advised funds, but frankly, even recommend a DAF to donors. While acknowledging the importance of regulatory oversight, it's important to ensure that any changes do not inadvertently hinder the vital work of dedicated charitable organizations. Therefore, we ask for removal of this newly proposed classification. The second concern relates to the retroactive application of the proposed regulations. If enacted midyear, AEF would encounter compliance before having the opportunity to adjust our operational infrastructure accordingly. This would unnecessarily harm us and by extension, the many public charities we support. We ask for a manageable timeline that is not retroactive. If you will allow [me] to give you a lens of some of the positive roles and profound impact of donor-advised funds, particularly through the AEF lens.

Donor-advised funds are widely recognized as one of the fastest growing forms of giving, making a significant difference in our communities. AEF has been at the forefront of fostering philanthropy across charitable sectors, including education, religion, health, and environmental initiatives. Over the past five years, AEF has administered more than 393,000 grants, providing vital support to causes and charities recommended by donors. This averages over 78,000 grants annually, or 302 grants per day. In 2023 alone, we administered nearly 101,000 grants benefiting 32,000 unique charities. Where a few notable instances of AEF's grant administration has generated significant impact, we have again five-year totals over $80 million in grants that have been allocated to environmental causes. One notable charity in this category focuses on ocean conservation. This cause recognizes the importance of preserving our planet's future to safeguard marine ecosystems and ensure the vitality of our oceans. Ultimately, these endeavors in ocean conservation contribute to building a more sustainable society.

The second example, more than $811 million have been directed towards education, targeting higher education and other educational opportunities. These investments are geared towards unlocking individual potential while promoting inclusivity within society. And a third example and finally, nearly $660 million have been allocated to healthcare initiatives spanning a comprehensive array of critical areas, including general mental health support, proactive advocacy, groundbreaking medical research, and multifaceted efforts aimed at disease prevention, detection, and treatment. These examples, totaling over $1.5 billion, underscore how AEF has served as a driving force for positive change, amplifying the spirit of giving and empowering impactful initiatives at both local and national levels. As I mentioned, in 2023 numbers, AEF totaled $1.2 billion, or the equivalent of $4.9 million each business day. Whether it's fostering environmental conservation, advancing educational empowerment, or bolstering healthcare initiatives, donor-advised funds have a profound impact on society.

As a donor-advised fund sponsor, AEF is granting three times the amount of funds compared to current trend or average of private foundations. AEF's support extends beyond offering crucial assistance to numerous charitable organizations. Each grant plays a pivotal role in enriching communities, empowering individuals, and shaping a more promising, inclusive tomorrow. Finally, as we navigate the intricacies of regulatory frameworks, I want to reaffirm AEF's unwavering commitment to understanding the significant issues identified by the Department of Treasury and the Internal Revenue Service. Through open dialogue and continued diligent oversight, we can ensure that any new regulatory action aligns with this shared goal of expanding philanthropy and advancing social good. As I wrap up my time before you today, I'd like to leave you with three points.

No. 1, donor-advised funds like those administered by AEF play a pivotal role in expanding philanthropy across sectors like education, religion, health, and environmental initiatives, fostering positive change in our communities. Two, the versatility and flexibility of donor-advised funds often inspires donors to seek guidance in directing their contributions to the causes and charities they care about or to areas in great need, igniting a cycle of impactful charitable giving. And lastly, regulatory changes must be carefully crafted to ensure they do not inadvertently hinder the vital work of charitable organizations like AEF, especially regarding the proposed regulations affecting investment advisers and the retroactive application of such regulations. Let us seize the opportunity to shape a regulatory environment that fosters innovation, transparency, and above all, upholds the noble pursuit of philanthropy. Together, we must preserve the integrity and effectiveness of our nation's philanthropy. Thank you all for allowing us to be with you today.

MS. CAMILLO: Thank you, Mr. Ransom. Next we have Deborah Wilkerson from the Greater Kansas City Community Foundation.

MS. WILKERSON: Hello, my name is Debbie Wilkerson and I am the president of the Greater Kansas City Community Foundation. I must say, my first job out of law school was as a tax associate, and I worked for a brilliant attorney who had spent most of his career with the IRS. And he gave me a deep respect for the care and thought put into every notice, ruling, and regulation. Thank you for your service and for this opportunity to be with you today. So our community foundation in Kansas City is 46 years old, and that's middle-aged in the world of community foundations. I've got a lot of my colleagues here today. One that you'll get to hear from later is celebrating their 100th anniversary. So we had our start in the late '80s, and the first president of our community foundation in Kansas City went about asking donors to give us their charitable dollars and we would take care of this task of giving to the community, because [it] isn't that hard. But by the mid-80s, that's not the way any donors, in our community at least, wanted to give the bulk of their giving. And she finally had one wise and kind community member that said, “I'm having the time of my life giving my money away. Why would I give it to you to do that?” She realized in that moment that they had to do something different. So she and the board were early adopters of donor-advised funds.

So when I started at Kansas City Community Foundation in the late '90s, donor-advised funds had been around for a long time, but they were not very well known. And it was my job to explain them over and over. And I go to people and I'd say, “It's an irrevocable gift. You give it to us, you can't get it back. But that's why you get your tax deduction. But what you get to do is you get to keep advising grants out of this fund.” And they understood that. They liked that. But the stumbling block came to the investments because they wanted to keep their wealth adviser involved in their giving. They trusted their wealth adviser and actually fairly stated we as a community foundation, we don't have access to endless investment options. So what we did is we spent years building systems and infrastructure to carefully hire and oversee these investment advisers. And yes, we follow the rules that Congress laid out in 2006 very carefully, and we pay them reasonably and fairly because we need the full attention. And never have we seen an investment adviser suggest a donor not grant, or even slow down the process. As was mentioned in the proposed regs, our numbers show, just like you heard before, that DAFs managed by wealth advisers have a payout rate for us of about 15 percent. And yes, that's three times what those donors would have done through a private foundation. I believe the result of including personal investment advisers in the definition of donor-adviser will have two results.

First, you will see small, unstaffed private foundations popping up everywhere. It will be people with a charitable checkbook and no oversight, making grants to everything they think is charitable that really isn't. It might be (c)(6)s. It may be the full fare to a charitable event just because they don't know better. With donor-advised funds, you have us monitoring and overseeing legitimate grant-making in real time.

Do we turn down grants? All the time. We tell donors if an organization has the wrong tax status, we tell donors your rules around events. We watch carefully for impermissible benefits. With private foundations, it's all on you. And we don't know until a year and a half later when they file their [Form] 990, if they're following the rule.

Now, the second result. I believe you will see new captive staff sponsors. And why is that? Because the proposed regs say it's OK to pay an investment adviser if they invest 100 percent of the assets. So investment advisers will set up their own DAF entities and advise 100 percent of the DAF, and most with no expertise on staff. And what that does, that cuts community foundations completely out of the equation. I have a story about a donor that I'd like to use to explain my last point. There is a couple in Kansas City, and they had spent most of their entire married lives building a business. And when they neared retirement and started thinking about selling the business, their wealth adviser asked them a very thoughtful question. Do you want to set some of the money aside for charity? He was the one that opened their minds to taking some of what they had built all their married days and having some of it be personal assets and some of it be charitable assets. And they liked that a lot. So they did it. They gave us a small ownership in their business and later when they found that buyer, we sold our interest alongside them. To accept and sell our interest responsibly, we needed to have legal fees. And I've read so many of the comments, maybe not as many as you have, but I know many of them point to the proposed reg definition of taxable distributions as disallowing those reasonable and important expenses that are final, specific, and I'm not sure that was meant to be.

But what I really want to bring to light today is the antiabuse rules. So these donors told me later when I ran into them that maybe their favorite part of retirement was their donor-fund. They were giving in ways and amounts they never had dreamed possible. They gave to all different kinds of charities and continue to do so. But one that's really important to them is an organization in our city that helps pregnant mothers who have no support system. Now the wife is on the board and they grant to this organization from their fund. I think of them when I read the antiabuse rule provisions in the proposed regs. It's the provision that says we as a sponsoring organization must determine if the grantee is doing something with the grant that couldn't be done directly from the DAF. And so the way we read this is, is if this donor is on the board of the charity and the charity puts money directly in the hands of an unwed pregnant mother, that is impermissible because the donor couldn't have given that young mother money directly from the DAF. Plus, the proposed regs suggest it's implied, not actual, knowledge of a taxable distribution that matters. So that means if I, as the fund manager, could have known, or should have known, the wife is on the board and an unwed pregnant mother would receive dollars because of that DAF grant, I'll be hit with a penalty.

Grant-making is going to grind to a halt, or at least to a crawl. We've been so careful all these years. We remind donors all the time, with every grant, no benefit, no more than a coffee mug, ever. But we need to make grants and get the money to the grantees quickly because that's our job. But the fear for the things we don't know and can't control means we need to shut down all the automation we've built and move to a very slow manual system. And for me, worst, it changes the spirit of our work, the joy and encouragement we share with donors around their giving. That's all going to flip in an instant. It's now going to be suspicion and fear. It should be simple. It could be simple if we could just follow the 170 rules. It would be easy for donors. It would be easy for us. It would be easy for you. If I could have one bright yellow highlighter for the record of my testimony, this is the sentence I would highlight: If a donor can give to a public charity personally and get a tax deduction, they should be able to make that same grant to the charity through their donor-advised funds.

Retroactivity, lots of comments on it. I just want you to know there's a lot of folks out there making some pretty rash decisions already because of retroactivity. So if there's anything you can do to settle people on this point while you evaluate and consider the regs would be much appreciated. It's a long day ahead. I'm going to sit and listen to the rest of the comments with you. Thank you for the chance.

MS. CAMILLO: Thank you, Ms. Wilkerson. Next we have Rose Bradshaw from North Texas Community Foundation.

MS. BRADSHAW: Good morning. Thank you for the invitation to be here with you today. I'm Rose Bradshaw, president of the North Texas Community Foundation, where I'm privileged to represent 323 individual families and a handful of businesses who are giving back to Texas. I'm here today because these generous folks depend on our community foundation and our investment adviser support to help direct their charitable dollars to make sure North Texas, home to the second-fastest-city in the country, Fort Worth, is strong for the long haul. Sorry. I'm here on behalf of 35 other community foundations across the state of Texas, each one of which is charged with raising and deploying dollars to meet our communities' most pressing needs. Together, we hold assets of over $6 billion, $2.5 billion of which are held in donor-advised fund accounts. I'm here to let you know how critical DAFs are to our work, and investment advisers are really helping us to grow assets.

I know there's concern about DAFs warehousing money, and I'm telling you, that's just not happening in the state of Texas, where our commissioned donor-advised funds have an average payout rate, like Debbie said, in Texas, it's 16 percent. And what do those dollars get done? Well, in Fort Worth, Texas, they're being deployed to build housing for people who are mentally and physically challenged. They're getting students back on track for college and careers so that they can have successful, productive lives. They're helping our local hospitals deal with a terrible problem we're having around maternal mortality. They're building child care centers so working parents can send their kids to quality care. And they're saving the prairie, cleaning up the river, and taking care of abandoned dogs and cats. They're supporting first responders who have been killed or injured in the line of duty. And they're helping to build the Medal of Honor Museum in honor of the 3,515 American heroes awarded for their valor in combat. My community foundation, more than 80 percent of our funds stay local, and that's where we need to support their growth. When it's time to help others in their hour of need, though, our donors show up, and down, in the south part of Texas in Uvalde, we all learned about the terrible tragedy in Uvalde. We're so proud when donors in Fort Worth were able to send $4 million down to help build a new school for those kids and families. As one of our fund holders remarked, “It's about Texans helping Texans.” That's what it's all about. And donor-advised funds help us do that.

We are here because we are focused on impact. And I know I speak for all of my peers here when I say warehousing money is not what it's all about. If we wanted to sit in the pile of money, it would be in a different line of business. Donor-advised funds are a critical tool in our toolbox, and investment advisers are key partners helping us to grow assets for our community. They introduce us to their clients, then help charitable dollars benefit from investment performance and the magic of compound interest, which Einstein called the eighth wonder of the world. Here's how that works for our community's benefit. In 1985, Ella McFadden gave our foundation $12 million, and she designated it to benefit 13 nonprofit organizations benefiting our community. Those funds are invested, making charities the beneficiary of market performance and compound interest. And fast-forward 40 years later. It turns out Einstein was right again. Those nonprofits have received $39 million in grants, and the fund stands at $40 million, making it a perpetual source of support for our community. Good investment advisers help us multiply charitable dollars for community benefit, and they help us find new donors to serve. A Fort Worth-based investment adviser recently referred an 87-year-old wonderful woman with no heirs to our community, resulting in a planned gift valued at $115 million. These endowed funds will stay local and provide support for young women's education, historic preservation, and local gardens, causes very near and dear to her heart, and now mine, too, as we get to protect those intentions going forward.

The proposed [regs] would disincentivize referrals such as this, and they appear to be designed to address problems that we are not experiencing. For those concerned about oversight, community foundations already voluntarily comply with rigorous national standards. They require that we have investment committees that are robust and closely monitor performance. They cap our fees, and they require that we regularly audit grant activity to ensure that no accounts are dormant. Our investment advisers are not warehousing charitable dollars. When I talked about the average staff payout in Texas being 16 percent, we did an analysis of all the grants that are going out that are held by investment advisers. They're advised by outside advisers. So the average of 16 percent for ODAF, they actually exceed that rate, and it's 17 percent for those that are held in outside accounts. The regs proposed also, as Debbie mentioned, that fees and expenses of a DAF be taxable distributions. And I'm telling you, that will only reduce the amount of funds available to support local charities. Our community foundation recently employed attorneys to defend donor intent for a $1 million estate gift to support education in the community of Mineral Wells, Texas, per the last will and testament of a deceased school teacher. When her estranged son attempted to redirect that gift, we incurred $50,000 in legal fees to defend her intentions. Making these professional fees taxable distributions would further reduce the funds available for education in Mineral Wells, Texas.

Thank you for offering me the opportunity to tell you about the wonderful work underway in Texas and across the country, thanks to community foundation donors, their DAFs, and the excellent service that we're getting from investment advisers. We applaud your focus on making sure charitable dollars maximally benefit our communities. Please know we're on your side, and donor-advised funds and investment advisers are critical to our work. Thank you for your time and your service to our country.

MS. CAMILLO: Thank you, Ms. Bradshaw. Next we have Kendra VanderMeulen from National Christian Charitable.

MS. VANDERMEULEN: Good morning. I'm Kendra VanderMeulen. I am CEO of National Christian Foundation, also known as NCF. Thank you for the opportunity to share my thoughts with you today. By way of the introduction, prior to becoming CEO of NCF, I served for 14 years and founded the Northwest office in Seattle, which is where I still live. So thanks for bringing me all the way out here. During those 14 years, I had the privilege of navigating the relationship with givers as they walked the journey of generosity. And prior to that, I worked for three decades in the telecommunications industry, mostly as an executive in the wireless space. But over the years, I've become encouraged by the transformative power of generosity, and that's what concerns me today.

I'd like to have a chance to share what I've learned over those years. First, a little background on NCF. National Christian Foundation was founded in 1982 in response to a local community foundation's unwillingness to allow grants to a Christian organization. Over the past 42 years, NCS has grown. We are now a network of local offices in 120 places across the country, supported by a national office employing altogether over 400 people. We sponsor 30,000 DAFs and other giving funds, serving 25,000 families, and I said, and serving 120 communities around the country. In the process, NCF has granted more than $19 billion to approximately 90,000 churches and ministries recommended by our givers.

So what have I learned through all this time? First, most Americans want to be generous with both their time and their talent, and their treasure. Generosity is life-giving. It's life-changing, not just for the recipient, but for the giver. Generosity is also relative. It's not about the amount. It's about the heart. Generosity can be challenging as well. The more you have, the harder it can be and the more help you need. Generosity is mobilizing, and it knits communities together. It's part of the American legacy to stand together in times of need. And generosity requires planning. Wealth is often perplexing. And generosity — giving wisely takes time and thought. So NCF seeks to come alongside individuals and families, to be an encourager, to be a trusted partner, to be a reminder that God is always with us, and this is the core of everything that we do.

Second, I witnessed firsthand that generosity inspires generosity. Generous people are rare, remarkable, and life-giving and inspiring. And generosity truly inspires more of it. In South Florida, we serve a giving circle like many others across the country, created by individuals who are dedicated to living generous lives and pooling their resources so they can have more impact in the world. This particular group started in 2014 and 10 years later had given over $1.5 million to important causes all over the world, inspiring others along the way. And there's an alliance in the Pacific Northwest that I personally get to participate in, where a group of 165 families, charities, and businesses are working together in sex trafficking in our area. And this has inspired a lifeline all over the country. And in Tennessee, where a family gave away a majority of their economic interest in their business, so as the profits could be used to fund charity and to teach the next generation about generosity, that story has inspired hundreds of other business leaders to do the same. These incredible stories inspire hundreds, if not thousands, to be generous.

And the DAF. The DAF is the single best giving tool to inspire generosity. It's flexible, allowing the receipt and liquidation of all kinds of assets, as well as grants to all kinds of public charities. It's simple. Individuals and financial advisers can open a DAF in a matter of minutes and begin a lifetime of generosity. It's convenient. Multiple people across cities, neighborhoods, and families can join together by a DAF to support all kinds of charitable causes.

And it's egalitarian, by drawing folks of many income levels into the giving journey.

So why am I here today? I am generally concerned — genuinely concerned — that these new DAF regs will significantly impair generosity in giving. And here are four of my concerns: First, the proposed DAF regulations create tremendous ambiguity. Baseline definitions are vague, and clarity will be reduced, not improved. Non-DAFs, especially those for single identified organizations, can be turned into DAFs for reasons which are confusing and impossible to navigate at scale. In just one case example, this could undermine the use of the IRA charitable distribution provision, which is a heavily used charitable vehicle. The definition of taxable distributions is so broadly defined as to include ordinary costs and expenses, and DAF advisers that people have already mentioned will include people who have no idea that they're DAF advisers. This is confusing even to me, and it will be for our givers.

Second, the proposed DAF regulations would establish multiple unnecessary and debilitating restrictions on DAF sponsors. Two examples. DAF sponsors are precluded from paying their reasonable, actual expenses, which are tied to DAFs. I don't know how DAF sponsors can be expected to operate if they're not allowed to pay their legitimate costs. And DAF sponsors are barred from hiring investment advisers, which everybody's already mentioned. Improving investment management of DAF resources is essential to our providing fantastic services, yet we'd be intentionally and severely limited in our ability to do that.

Third, the proposed DAF regs proposed several impossible requirements for us. The antiabuse rule, which has already been mentioned, is particularly alarming. Every year, NCF makes hundreds of thousands of grants to tens of thousands of organizations. How can we possibly reasonably be sure how each grant dollar is going to be used? Also, the retroactive nature of the proposed regs, which has already been brought to your attention, are untenable. It would take years for us to become compliant, and we got to — if we started right now, you know, we'd be indeterminate when we could possibly do it.

So finally, the DAF regulations upend the best giving solution available to givers. For reasons that do not make any sense to me, the proposed DAF regulations favor private foundations over donor-advised funds in numerous respects. DAFs are an incredibly positive giving tool. They encourage greater generosity, they're available to all Americans, they're efficient, they're cost-effective, they're exclusively run by public charities, they have public accountability, and they enable thousands of charities to thrive. Yet the proposed regs would follow a contrary path, adding requirements and restrictions that even private foundations don't have to live up to.

So what's at stake? For over four decades, NCF has been promoting generosity and the excellent work of churches, ministries, and other public charities all over the country. The proposed regs would significantly hamper our ability to continue to do this and would be a significant step backwards, discouraging giving and harming the incredible work of thousands of givers and public charities. We would be pleased to collaborate with you and the great work that you're trying to do — we truly would — to share ideas on best practices for DAF sponsors and other needs that the charitable sector has. And we're happy to work together to identify ways DAFs can best grow generosity and enable charities to flourish, and most importantly, to continue the tremendous strides that givers have been making. Thank you so much for listening, and thank you for your service.

MS. CAMILLO: Thank you, Ms. VanderMeulen. Next, we have Chris Anderson from American Institute of CPAs.

MR. ANDERSON: Good morning. My name is Chris Anderson, and I am testifying today on behalf of the American Institute of CPAs. I am currently the chair of the AICPA exempt organization technical resource panel, and I'm very grateful that several of you have periodically visited with our panel. On January 29, 2024, the AICPA submitted extensive recommendations and comments to the IRS and Treasury on the proposed regulations. I would invite you to review our written comments for more detail about all of our recommendations.

Today, I will focus on three topics, two of which have been very popular so far. Apparently one, the need to postpone the effective date of the proposed regulations. Two, the need to exclude investment advisers, including personal investment advisers, from the definition of a donor-adviser. And three, the need to allow donors to make infrequent changes to restricted gifts related to annual distribution amounts or allocation of distributions to recipient charities without causing the account to become a DAF.

First, as written, the proposed regulations would be applicable to tax years ending after the date of publication of the final regulations. Taxpayers would have the option to rely on the proposed regs for tax years ending before the date the final regulations are published. We recommend that Treasury and the IRS change the effective date of the final regulations to tax years beginning on or after the date of publication of the final regulations. The proposed regulations contain many complex provisions. Taxpayers will need additional time to adjust their current operations to comply with the new rules. Allowing taxpayers a full tax year to understand and apply the final regulations will increase compliance efforts and decrease the cost that taxpayers will incur to implement changes to conform their operations to the new rules.

I will briefly discuss three examples of provisions that would require additional time to implement. First, if the provisions regarding personal investment advisers being treated as donor-advisers are unaltered in the final regulations, many DAF sponsors will need a substantial amount of time to review agreements with outside advisers to comply with the new rules. Specifically, contracts with personal investment advisers will likely need to be canceled, and perhaps more importantly, the DAF sponsor will have to hire employees and/or outside third-party investment advisers to replace the DAFs' — the personal investment advisers. If these provisions are, based on the recommendations in our written comments, to provide multiple criteria indicative of an investment adviser being viewed as providing services to the sponsor instead of the DAF, the DAF sponsor will need time to implement those criteria into their operations and agreements with their outside investment advisers.

Second, DAF sponsors will need time to implement expenditure responsibility procedures that comply with the final regulations. DAF sponsors may not have these procedures fully in place and will have to create or modify them and then implement them, including creating and attaching expenditure responsibility reports to Form 990.

Third, charitable organizations that did not believe that they had DAF accounts under the Pension Protection [Act] definition of DAF may find the regulations now capture some of their accounts.

These organizations will have to implement policies and procedures to comply with all DAF requirements, including existing requirements to notify donors in writing that the assets of the DAF are those of the DAF sponsor, and the funds in the DAF account can only be used for charitable purposes. Drafting and implementing such procedures takes time.

Next, I would like to address the definition of a donor-adviser, specifically, the inclusion of an investment adviser, including personal investment advisers providing investment management and/or investment advice on assets maintained in the DAF and the personal assets of the donor to the DAF. The proposed regulations only provide an exception to including a personal investment adviser in the definition of a donor adviser if that investment adviser is properly viewed as providing services to the sponsoring organization as a whole rather than providing services to the individual DAF. We recommend that investment advisers, including personal investment advisers, be explicitly excluded from the definition of donor-adviser. In the alternative, if the definition of the proposed regulations is retained, we recommend that the final regulations include multiple criteria for determining that an investment adviser is properly viewed as providing services to the sponsoring organization, rather than to the DAF under a facts and circumstances approach.

If an investment adviser selected by a donor to a DAF is the donor-adviser, then any compensation paid to that investment adviser is considered an automatic excess benefit transaction under section 4958(c)(2)(A). This result would effectively limit the ability of donors to have advisory privileges with respect to the investments of amounts held in their DAFs because they would be unable to recommend the use of third-party investment management companies that would reasonably expect to be compensated for their services.

In addition to this proposal, the mounting regulatory challenges facing small practices could lead to reduced options for the public's access to financial advice. Not only will having limited options deter taxpayers from obtaining and making contributions to DAFs, but there could be broader implications for financial inclusion efforts as smaller registered investment advisers often play a vital role in in serving and educating diverse populations. Since a third-party investment company can be replaced at any time by the donor, the use of the services should not be considered a true delegation of advisory privileges with respect to the investment of amounts in the fund. Additionally, investment advisers do not typically make recommendations about distributions from the fund.

Therefore, we recommend that the final regulations clarify that the term donor-adviser does not include third-party investment management companies recommended by a donor or a donor adviser to the fund. If the definition of donor adviser in the proposed regulations is retained, we suggest that the final regulations include multiple criteria for determining that an investment adviser is properly viewed as providing services to the sponsoring organization rather than to the DAF under a facts and circumstances approach, including factors such as the following:

• The investment adviser is approved by the board of the sponsoring organization.

• The investment adviser is included in a list of advisors who have been vetted and preapproved by the sponsoring organization and offered as potential investment options for DAF held by the organization.

• The investment adviser is required to follow the board-approved investment policies of the sponsoring organization, and these policies could include a prohibition on the making of certain types of investments, caps on the percentage of the portfolio that can be invested in certain types of investments, and caps on the percentage of assets that could be charged as a management fee.

• And lastly, the investment adviser provides services to more than one DAF held by the sponsoring organization.

Finally, I would like to address the circumstances in which a gift agreement or advisory rights retained by a donor could create a DAF. We recommend that the final regulations allow donors to make infrequent changes, not more than once every five years, to restricted gifts related to annual distribution amounts or allocation of distributions to recipient charities without causing the account to become a DAF. A donor can impose restrictions on a gift related to fulfilling one or more particular purposes for the duration of time or in perpetuity. Gift restrictions are governed through each state's version of the Uniform Prudent Management of Institutional Funds Act, or the UPMIFA. The UPMIFA allows an organization to ask the donor for a release or revision from the donor-imposed restrictions, and the organization can petition a court for the same relief.

A recipient charity's mission often changes over time. In some cases, a charity no longer pursues one or more causes for which it has funds that have been restricted by donors. Also, some charitable organizations allow a donor to contribute to a so-called designated fund in which the donor specifies one or more charitable organizations to receive an annual distribution, often set at no more than 5 percent of the fund's value. Each state's version of the UPMIFA sets this percentage by law. Designated funds generally do not meet the definition of a DAF because the donor does not retain advisory privileges after the fund has been created and the recipients and distribution allocations have been determined.

However, just as a single organization may change its purposes and causes, a designated fund can encounter situations in which the recipient charity no longer exists or allocation of annual distributions to recipients are no longer in concert with the donor's original wishes.

Since the UPMIFA allows for changes to restricted funds with the approval of donors, infrequent changes requested by the donor related to the recipients and/or the allocation of annual distributions should be permitted without a restricted fund becoming a DAF. It would be reasonable for such changes to occur not more often than once every five years.

The AICPA appreciates the opportunity to testify at today's hearing, and thank you so much.

MS. CAMILLO: Thank you, Mr. Anderson.

Next, we have Andrea Sáenz from Chicago Community Trust.

MS. SÁENZ: Good morning. Thank you for this opportunity to testify. My name is Andrea Sáenz. I serve as president and CEO of the Chicago Community Trust, one of the nation's oldest and largest community foundations. Guided by our deep knowledge of Chicago, we fund, convene, collaborate, and partner with many institutions and people to address the most critical issues facing our communities. We build on a legacy of philanthropic leadership, from millions of dollars raised for unemployment relief during the Great Depression, to spearheading efforts to help people keep their homes during the 2008 foreclosure crisis, to more recently mobilizing $35 million to support our most vulnerable neighbors during the pandemic. Chicagoans see us as a trusted philanthropic resource for our community's well-being.

In addition to our own grant-making, we partner with donors to ensure they can make the greatest impact with their philanthropy. While the Chicago Community Trust offers many ways to give, donors most often choose our donor-advised funds as efficient vehicles to support nonprofits and respond to crises. Because DAFs are already earmarked for charity, they can be quickly mobilized for the community.

I'm here to share two areas of concern about how the proposed regulations on taxes and taxable distributions from donor-advised funds would adversely affect the work we do for our community. The first area of concern relates to how the proposed regulations would impede our ability to facilitate collaborative philanthropic giving, should collaborative funds, field-of-interest funds, be classified as donor-advised funds. The second is the potential negative impact on charitable giving in Chicago if investment managers are defined as donor-advisers, about which we've already heard but I'll share some examples. I hope that these examples will highlight the consequences that these proposed regulations would have on our ability to serve our community as we have for over a century.

I'll begin with the impact these regulations would have on community giving if collaborative funds are reclassified as DAFs. As a community foundation, the trust often serves as a backbone for collective philanthropic efforts where foundations, individual donors, community members come together to address issues of shared concern. These collaborative funding initiatives are unique to community foundations and common among us.

I'll share an example. At the height of the pandemic, the trust established a collaborative initiative called We Rise Together, with a goal of ensuring communities hit hardest by COVID-19 could recover from its twin economic and public health crises. Through a combination of gifts from private foundations, corporations, and individual donors, we've raised $54 million for the effort. This amount includes $23 million in gifts from donor-advised funds. Within three years, $46 million, or 85 percent of the funds, have been granted to 40 community projects, each with visible and quantifiable benefits for vulnerable Chicago communities.

For We Rise Together, being a collaborative fund housed at the trust means we provide the infrastructure that creates an environment of collaboration among donors, big and small, that multiplies the impact their charitable giving would have had if it had been done individually. The We Rise Together steering committee is made up of civic, corporate, foundation, and community leaders who together combine funds and expertise to ensure grants are deployed to drive development and opportunity for economically distressed communities. To do this effectively, the team and steering committee of We Rise listened to and respond to community-identified needs. We supported one such project, a community need, through a million-and-a-half-dollar grant that allowed a nonprofit to complete construction of a center, a youth education and social services center, in a distressed neighborhood. Since opening in February 2023, the center served more than 60,000 youth in after-school sports education programs and 12,000 adults. And additionally, external evaluators have found that the small businesses within a half-mile of the center have seen a lift of $6.5 million in consumer spending, making a tangible difference to the neighbors around the center.

This type of collective collaboration enables us to address our challenges and would be hampered if collaborative funds, like We Rise Together, were defined as donor-advised funds. Two reasons for one, for DAF distributions are limited to 501(c)(3) organizations, and therefore expenses related to carrying out the collaborative's charitable work by consultants would be considered prohibited distributions. For example, we hired consultants to facilitate We Rise Together community conversations as we tried to truly understand the needs of the North Austin neighborhood and to evaluate the impact of the grants. The work carried out by these consultants had an inherently charitable purpose and value, but these expenses would no longer be eligible.

In addition, many of our collaborative initiatives, including We Rise Together, receive contributions from private foundations, and their staff join the steering committees that guide our work. They may be less likely to bring their important perspective to these efforts if they would now be considered a donor-adviser as part of a steering committee. They would feel some uncertainty about that role. And reclassifying these collaborative funds as DAFs may also have a chilling effect for private foundations contributing to these efforts because of additional reporting obligations it may create. Reclassifying collaborative funds as DAFs would inhibit our ability to be a strong funding partner and would diminish the role we have long played as a backbone for collective funding efforts to benefit our community.

Now I'll talk about our experience with investment managers and our second area of concern. Having ability to work with investment management companies has expanded and enhanced our ability to facilitate charitable giving in Chicago. For the last three years, the trust has made more than a billion and a half dollars in grants annually, 90 percent of which comes from trust-hosted DAFs. Two-thirds of these are investor-managed DAFs. While it may seem that investment managers would deter grant-making from funds whose investments they manage, our experience has not borne that out. In fact, investor-managed DAFs at the trust have a high payout rate every year, much higher than the 5 percent payout we typically see from private foundations. In 2023, investor-managed multi-donor funds held at the trust had a payout rate of 29 percent, and for single-donor investment-managed funds, the rate was 69 percent.

The trust provides significant oversight of external investment management firms for our investor-managed DAFs. Before engaging a donor's preferred investment management firm, our team goes through a rigorous due diligence and vetting process. Once approved, the investment firm manages the DAF assets in coordination with the trust investment team, in accordance with our investment policy and with oversight from our board investment committee. Because of our working relationship with many advisers, when their clients are considering an exit from a business, for example, they introduce the idea of philanthropy and introduce often the trust to their client. In 2018, one such adviser's client created a DAF at the trust with business interests totaling approximately $1 million. Since then, $765,000 has been distributed to charities from that fund. Those dollars [might not have gone to] charity at all, if not use of a DAF and the ability of the adviser to recommend it as a vehicle.

Our interpretation of the proposed regulations is that investment managers would now be disincentivized to recommend DAFs because they could no longer be paid to manage the assets should their client open a DAF with us. This would mean that their clients would no longer have access to the subject matter experts at the trust who can speak to the philanthropic needs of the community and the nonprofits that are making a difference. Based on our experience, we think it is likely that the proposed regulations would mean less money would be granted to nonprofit organizations and charities in our region.

It's important to note that the ability to work with outside investment advisers is particular to community foundations and is critical to the work we do to coordinate philanthropic efforts. Our connection to both community organizations and a wide range of potential donors allows us to highlight the issues and charitable opportunities that need funding. Because we would be penalized if we continue to work with investment management firms, the proposed regulations would significantly hamper our ability to deploy philanthropic capital towards community-identified needs and purposes.

I hope I have provided some clarity for why we at the Chicago Community Trust are strongly opposed to the regulations as written. As highlighted, we truly play a unique role in philanthropy in helping organize and mobilize resources for community needs with a deep, place-based commitment to Chicago. In our estimation, the proposed regulations, if implemented, would lead to fewer dollars swiftly reaching nonprofits we care about.

I respectfully ask the Department of Treasury to reconsider its approach in light of the unique role and experiences of community foundations and the effect that these proposed regulations may have on charitable giving. Thank you so much for allowing me the time to be here today.

MS. CAMILLO: Thank you, Ms. Sáenz. The next speaker is Emanuel Kallina, from Kallina & Associates.

MR. KALLINA: Thank you. I appreciate the opportunity to speak today and to submit comments on the proposed regulations. I have been a practicing attorney for over 50 years and have spent much of my professional career in the charitable area. I have created and worked with a number of significant, large donor-advised funds, some of the individuals who are here today, and have day-to-day experience in this area. I work regularly with the Government Relations Committee of the National Association of Charitable Gift Planners, who are concerned about these DAF regulations. I only have 10 minutes, so I must forthrightly address the issues. Please forgive any bluntness. I don't mean to be rude in any respect. I'm going to approach it more from a technical aspect than I am a policy. In giving you examples, which are wonderful, of the benefits provided by a donor-advised fund, my focus is solely on the definition of investment adviser and donor-adviser, and you can see that in my earlier comments. It's my belief that the proposed regulations violate the distinction in the PPA which created 4956 code section. They violate the distinction that's created by the literal language of the code. That's No. 1. No. 2, that the regulations are not supported by legislative history. No. 3, that they ignore fiduciary principles that govern sponsoring charities of DAFs. Four, that they are based on speculation and not on study that has occurred. No. 5, that they're not due judicial deference under Chevron since the statute is not ambiguous on the definition. And sixth, they establish new policy and violate the concepts underlying the separation of powers.

I would like to address the specific statements and concerns voiced by IRS and Treasury in the proposed regs in the section entitled Supplementary Information. The regulations state that an investment adviser who invests assets of the donor and also invests a donor's personal assets would be a donor-adviser with respect to the DAF while serving in the dual capacity, rather the donor-appointed, -designated, or -recommended personal investment adviser. This statement is inconsistent with fiduciary law, which imposes on the board of directors or the board of trustees of a charity an affirmative duty to manage the assets of the charity. Usually, this fiduciary obligation is undertaken by a finance committee, which interviews and hires one or more investment advisers pursuant to an investment policy statement, or IPS.

The IPS governs how assets are to be invested, the split between equity and fixed, the expected return, the benchmarks, investment adviser fees and all-in fees, and accountability to the charity for reporting and investment performance. If a sponsoring charity has multiple investment advisers, it must aggregate their investments in a quarterly review to determine whether the investments as a whole meet the IPS; whether the funds collectively are properly weighted in terms of fixed; whether the portfolio variance is acceptable, the correlation of the various assets is acceptable, et cetera. The advice of the donor or the donor's representative cannot override these fiduciary duties that belong to the board. To treat the contractual relationship between the sponsoring charity and the investment advisers instead being a relationship between the donor and the charity violates 4946; excuse me, 4966, maybe 4969-96, but which states that the assets of a DAF legally belong to the charity.

The proposed regs present four theoretical possibilities to justify equating investment advisers with donor-advisers. I do not have time to reiterate these in my testimony, but they are not based upon, to my knowledge, any facts. They are based upon possibilities that might exist. I am not aware of any study to support these hypothetical concerns. Absent a study or some type of analysis, it would seem that these regs are overreaching on this point and are not justified. Congress passed the PPA and its restrictions on DAFs based on anecdotal evidence, not on the study or analysis of how widespread the abuses actually were. They sought to curb a few bad actors in the charitable arena. Legislation based on anecdote usually does not produce the best result, but Congress has a right to do as it wishes. IRS and Treasury, on the other hand, have no such privilege to legislate policy upon anecdote. Perhaps a better regulatory position would be one that affirms the fiduciary duties of the sponsoring charity to oversee all investment advisers so that the aggregate result of investments is consistent with the investment policy statement.

As proposed, these regulations will increase costs for charities, reduce giving, and favor so-called institutional or commercial DAFs. Prior written comments address these consequences, and the other speakers have addressed some of these issues already, so I will not do so. Assuming you issue regulations in this area, one question that arises in my mind is what deference should these regulations have? We are all familiar with the judicial background underlying deference to governmental regulation, including the Supreme Court cases of Skidmore, National Muffler, Chevron, and Mayo. Now the subject matter is before the Court in Relentless and Loper Bright. If we assume Chevron is the clearest expression of the law as it stands today, deference to the regulations does not come into play unless the statute is ambiguous. Unfortunately, one person may consider the statute clear while another views it as ambiguous. So Chevron unfortunately renders the analysis somewhat subjective, not objective.

It is reported that the Supreme Court in the cases of Relentless and Loper Bright is concerned whether an administrative determination or regulation is creating policy or implementing policy. I'd like to emphasize creating policy or implementing policy. In particular, Congress obviously understood the difference between an investment adviser and a donor-adviser. If they had wanted to equate the two, they could have easily done so. I have reviewed the legislative hearings and other history leading up to the PPA and the two items are not used interchangeably in the hearings or the legislative history. I certainly could have missed something on the subject. My wife and my children tell me frequently I'm not perfect, so I can assure you I may have missed something. But I'm not aware of it.

Another important point to consider in conjunction with the Chevron deference is whether or not they're interpreting, whether or not the statute is ambiguous, or they're attempting to create policy. If IRS and Treasury are attempting to create policy, that is exactly what I believe may be a concern of the Supreme Court as it addresses arguments in Relentless and Loper Bright. Policy is the fiat of Congress, not regulatory agencies. Since there is no apparent authority in the statutory language, there's no legislative history justifying the equating of the terms. There is no statutory authority allowing IRS to issue proscriptive regulations in this area and there are no studies or facts to support the regulations as they now stand. I would urge Treasury and the IRS to not equate an investment adviser with a donor-adviser. Thank you for these hearings and your consideration. And once again, the way someone else commented, the work you do.

MS. CAMILLO: Thank you Mr. Kallina. The next speaker is Kevin Carroll from Securities Industry and Financial Markets Association.

MR. CARROLL: Good morning. My name is Kevin Carroll. I'm a deputy general counsel at the Securities Industry and Financial Markets Association, also known as SIFMA. SIFMA is the leading trade association for financial services firms, including investment advisory firms operating in the U.S. and global capital markets. I appreciate the opportunity to testify today and to amplify the comments made in written submission to the IRS dated February 8, 2024. My testimony will address four key points.

The first is that the proposal exceeds the IRS's statutory authority. The proposed regulation seeks to redefine the term donor adviser to include a personal investment adviser. However, the relevant statute, Internal Revenue Code section 4966, already defines it for adviser and it does not include a personal investment adviser. Internal Revenue Code section 4966 defines a donor-adviser as a person appointed by a donor who has advisory privileges over the donor's donated assets. A personal investment adviser, however, which means an investment adviser who advises both a sponsoring organization on assets maintained in a DAF and the personal assets of a donor to that DAF, simply does not meet the statutory definition of donor-adviser, and the IRS is not free to expand the definition of donor adviser by regulation because the statute has already spoken on this point. Simply stated, the IRS's expanded definition of donor-adviser exceeds the IRS's statutory authority under Internal Revenue Code section 4966. Accordingly and respectfully, SIFMA recommends [that] the expanded definition of donor-adviser to include a personal investment adviser be stricken from the IRS proposal.

My second point is that a personal investment adviser does not, in fact, act as a donor-adviser and should not be treated as a donor under the proposal. As discussed, the Internal Revenue Code defines a donor-adviser as a person appointed by the donor who has advisory privileges over the donor's donated assets. A personal investment adviser, however, does not in fact have and does not exercise advisory privileges regarding his or her donor client's DAF assets. Moreover, a donor doesn't appoint his or her personal investment adviser to serve as an investment manager in the donor's DAF; that is the sole responsibility of the DAF sponsoring organization, and the donor client has no decision authority in that regard. Thus, a personal investment adviser does not, in fact, act as a donor-adviser. Just because a personal investment adviser advises a donor client's personal assets does not create a legal or other relationship of control or influence with respect to the personal investment adviser's investment recommendations about DAF assets, which recommendations are made solely to the sponsoring organization and not to the donor client.

So this leads naturally to my third key point, which is this: A personal investment adviser has two separate and distinct client relationships. The first is the donor client relationship with respect to the donor client's personal assets, and the second is the sponsoring organization client relationship with respect to DAF assets. Under the Investment Advisers Act of 1940, a personal investment adviser owes separate and distinct legal and fiduciary duties to their donor clients on the one hand, and to the sponsoring organization on the other hand. Under the advisers act, a personal investment adviser owes each client a duty of care to provide investment advice in the best interest of the client and a duty of loyalty to eliminate or make full and fair disclosure of all potential conflicts of interest. The IRS should give deference to these long-established federal statutory legal duties. As an investment manager of a DAF, a personal investment adviser's client is the sponsoring organization and the personal investment adviser must give advice that is in the best interest of the sponsoring organization.

With respect to DAF contributions, the personal investment adviser's advice is to the sponsoring organization and is intended to maximize the growth of those assets for later distribution. With respect to DAF distributions, the personal investment adviser may have a potential conflict of interest to advise against distributions because it would delete the fees they earn from the DAF. Under the investment adviser's duty of loyalty, however, the personal investment adviser is required to disclose and obtain the client's informed consent to this potential conflict and under the advisers act duty of care, the personal investment adviser is legally obligated to not act in accordance with this potential conflict; that is, to not give conflicted advice. If a personal investment adviser violated this legal duty, then he or she would be subject to SEC enforcement proceedings, disciplinary proceedings and sanctions, and potentially civil liability as well. The existing investment adviser regulatory regime fully safeguards against the potential conflicts of interest that appear to concern the IRS. The IRS should defer to the existing well-functioning federal securities laws. We urge the IRS against imposing excise tax penalties on DAF fees earned by personal investment advisers based upon near potential conflicts of interest. And as discussed, these potential conflicts of interest are already fully regulated, well managed, and duly enforced under the federal securities laws.

My fourth and final point is this. The proposal fails to provide underlying data or support and thus deprives the public of meaningful notice and opportunity to comment. The IRS suggests a few potential reasons for its proposed new tax treatment of personal investment advisers, including that one, the donor client can allegedly influence the personal investment adviser's investment advice to the sponsoring organization about DAF assets. And second, as discussed, personal investment advisers have a potential conflict to advise against distributions from the DAF. The proposal, however, provides no data or other empirical evidence to support either of these two alleged reasons. Thus, the public has had no meaningful opportunity to review and comment upon whether the IRS's stated reasons are valid or not. If the IRS has data or evidence to back up its reasons, then it should repose its rule, publish its data and evidence for public comment. On the other hand, if such data or evidence does not exist, then the IRS should set aside its proposal and conduct further study to determine whether or not the assumptions that underpin the reasons are valid. In conclusion, if the IRS proceeds with the proposal, SIFMA urges it to incorporate our recommended changes. If the IRS chooses not to proceed with the proposal, then SIFMA urges it to immediately withdraw the proposal so it does not have a chilling effect on the activities of DAFs or personal investment advisers with the overhang of a tax rule proposal that leaves them in limbo. This concludes my remarks. Thank you again for your time and the opportunity to testify.

MS. CAMILLO: Thank you, Mr. Carroll. The next speaker is David Shevlin, American Bar Association Section of Taxation.

MR. SHEVLIN: Good morning. Thank you. My name is Dave Shevlin. I'm a partner at the law firm Simpson Thacher & Bartlett, where I'm head of the exempt organizations practice. I am a past chair of the American Bar Association Section of Taxation, Committee on Exempt Organizations. I, along with several other practitioners, exercise principal responsibility for preparing comments on the proposed regulations on behalf of the Committee on Exempt Organizations, and my remarks today are based on those comments. In the interest of time, I will not be addressing all of submitted. I will focus on the personal investment adviser definition and certain aspects of the definitions of donor-advised funds and the definition of distribution with respect to the personal investment adviser rule.

The preamble identified several concerns that motivated the proposed treatment of personal investment advisers as donor-advisers, including improper donor influence over investment decisions with respect to assets held in a DAF, a negative impact on distributions, and a more-than-incidental benefit if the [donor-advisers] charge lower for management of the donor's personal assets as a result of the services. These concerns, in our view, are not borne out by the existing debt data, including the existing piece of grant-making which you have begun to hear about today. But even assuming hypothetically the validity of these concerns, they are currently sufficiently addressed by both code sections 4958 and 4907. In particular, investment advisers are subject to the normal excess benefit transaction rules under code section 4958 that tax the amount by which the economic benefit received provided by a sponsoring organization exceeds the value of the services they provided. In addition, if engaging a personal investment adviser to manage DAF assets resulted in a donor or donor-adviser receiving discounted fees for the personal investment adviser's management of personal assets, then arguably that situation would be subject to excise tax under section 4967. As drafted, the only exception in the proposed regulations relating to personal investment advisers applies only to such advisers providing services to the sponsoring organization as a whole.

Given the existing excise tax regime described above and the broad array of DAFs of various sizes and complexity, the proposed regulations and the limited exceptions, in our view, respectfully, unnecessarily interfere with the oversight of sponsoring organizations and are likely to cause sponsoring organizations to reach strictly and oversimplify DAF investment options. While limited investment options may be appropriate for some DAFs, in our practical experience, there are many DAFs for which more expansive and sophisticated investment options are appropriate and necessary. Further, Treasury and IRS do not prescribe investment strategies or limitations on engaging expert investment advisers for other types of charitable organizations and shoulder for sponsoring organizations. Human disqualified persons of private foundations, as you know, are permitted to receive reasonable compensation for providing personal services to a foundation that are reasonably necessary in carrying out its exempt purposes.

We suggested that if some form of this rule were to remain, that the final regulation should adopt a narrow definition of the term personal investment adviser. More specifically, the regulations should provide that an investment adviser is not a personal investment adviser who would be treated as a donor-adviser if a number of factors are present. These could include that the sponsoring organization and the investment adviser enter into a written agreement establishing, one, a direct fiduciary relationship between the investment adviser and the sponsoring organization. Two, that the investment adviser will not take direction directly from a donor or donor-adviser with respect to basis. Three, a right to terminate the engagement of the adviser by the sponsoring organization only. And four, a prohibition on any donor or donor-adviser receiving reduced fees or other economic benefits in connection with the adviser's services for assets maintained in a DAF. Additional factors showing that an investment adviser is not a personal investment adviser would be where the sponsoring organization relies on appropriate comparability data and where the investment adviser is [paid] by the sponsoring organization rather than the donor or donor-adviser for services with respect to the assets maintained in a DAF.

The preamble of the role that personal investment advisers may have in steering their clients' charitable giving through a DAF rather than directly to a grantee public charity, and in keeping such assets within the DAF. However, the actual choice for many donors is giving to DAF versus not giving at all. In my and many practitioners' experiences, investment advisers often encourage donors to increase their charitable giving through a DAF when the alternative would be to simply leave the money in their personal accounts. Allowing personal advisers to advise on both DAF and personal assets without prohibiting reasonable compensation properly aligns incentives for them to encourage more charitable giving overall, more of which would make its way to the grantee charities.

Now, with respect to the provisions affecting the definition of donor-advised fund. A DAF is defined in section 4966 account that's separately identified by reference to contributions of the donor or donors. The proposed regs state that a fund is thus separately identified if, as a general rule, the sponsoring organization maintains a formal record of contributions to the fund or account relating to a donor or donors. The regs provide little clarity on what constitutes a formal record, but the examples illustrate that a formal record can be as simple as maintaining a record of the names of donors and the amounts contributed. Respectfully, the vagueness of this definition of separately identified risks rendering this prong of the definition of the DAF irrelevant as many, if not most, public charities must keep track of their donors and contribution amounts in order to comply with existing requirements of the code. We suggested that the final regulation should clarify that a fund or account is separately identified by reference to contributions of a donor if the sponsoring organization maintains a formal record of, one, contributions made by or on behalf of donors to the fund or account, and two, balance adjustments from the amounts that are held in reference to the specific contributions of donors. The added detail would better align the final regulations with the clearest reading of the statute as well as the arrangements most commonly understood in the philanthropic sector to constitute DAFs.

Second, Treasury and the IRS should clarify that a fund held by a single charity that is used solely to cover the expenses of that public charity and furtherance of its charitable mission, whether for its general operations or the operations of a particular project, falls within the single identified organization exception. Consider a capital campaign fund or general endowment fund established at a hospital, museum, or university. The institution would almost certainly keep track of the donors to the fund and donation amounts, which under the proposed regs could render the fund separately identified by reference to the contribution of donors.

The institution would appoint a committee to oversee the investment and/or use of the fund. As is common practice, if even one donor serves on the committee by virtue of their being a donor, the fund would be excluded from the single identified organization exception. This is but one example of a common arrangement in the sector that would be unnecessarily disrupted respectfully by DAF operating restrictions under the proposed regs.

Finally, I want to speak to the provisions affecting the definition of distribution. Distribution is defined rather broadly and could significantly expand the types of expenditures from DAFs that would be taxable distributions under code section 4966. For example, distributions representing reasonable and necessary expenses for carrying out the exempt purposes of a DAF would be taxable distributions unless they relate specifically to an investment or grant. We assert that this definition is overbroad in scope, and recapture expenditures [are] generally considered to be appropriate uses of charitable dollars. For instance, DAFs may engage third-party philanthropic consultants or grant-making experts in connection with generally ensuring the effectiveness of such DAFs' grant-making programs. Such engagements provide material charitable benefits and no impermissible private benefits to the relevant donor or donor adviser. Thank you.

The definition of distribution should be revised to provide that, in addition to investments and reasonable investment- or grant-related fees, payments of reasonable and necessary administrative expenses is excepted from the definition of DAF. Under the proposed regs, any expense charged solely to a particular DAF that is paid indirectly to a donor or donor-adviser is deemed to be a distribution under this section. Such expenses would be taxable to the sponsoring organization regardless of whether a fund manager knowingly approved the making of the distribution, considering that 4958 and 4967 both already provide appropriate remedies in the event that payments from the DAF result in excess or prohibited benefits. This automatic tax is, in our view, overly punitive to sponsoring organizations. I thank you for your time this morning.

MS. CAMILLO: Thank you, Mr. Shevlin. The next speaker is Rachel Schnoll from the Jewish Communal Fund.

MS. SCHNOLL: Hello, my name is Rachel Schnoll and I'm the CEO of the Jewish Communal Fund, or JCF. JCF appreciates the opportunity to testify on the proposed regulations. JCF is the largest Jewish donor-advised fund with a 52-year track record of making charitable giving simple and efficient for our donors. JCF manages charitable assets for more than 4,800 individual DAF funds. In our fiscal year 2023, our generous donors recommended over 80,000 grants to 10,600 individual charities in an aggregate amount of over $900 million. In 2023, our donor-advised funds distributed 32 percent of the assets in their accounts to charity. Additionally, the Jewish Communal Fund awards communal gifts of over $4 million that support charities in the Jewish community in the New York area. These numbers illustrate why DAFs are an efficient way for individuals to send money to charitable organizations. JCF values the hard work of the IRS and Treasury in drafting the proposed regulations. However, we are concerned that the proposed regulations regarding DAF, if finalized, may require significant operational changes for sponsoring organizations, DAFs, donors, and donor-advisers. DAFs have been an efficient resource for making grants to charities, and the proposed regulations may serve to slow the speed of these charitable donations.

So I'll first talk about investment advisers. We recommend that an investment adviser who provides investment management or advisory services with respect to the assets maintained in a DAF not be considered a donor-adviser under section 4966 solely because the investment adviser also provides investment advisory services with respect to the donor's personal assets. I'll give three examples of how this proposal could affect fund holders and slow the funds, the flow of funds, to charities. Example 1, financial advisers provide considerable assistance to DAF fund holders who prefer help with investments, asset allocation, and philanthropic planning. Investments are similar to other tasks. Some people like undertaking them and other people prefer professional guidance. I could mow my lawn, but I'm not good at it, so I choose to hire a professional.

Many people feel unsure about making investment asset allocation and philanthropic decisions, and the recommendations of a financial adviser helps to guide them. At JCF, all financial advisers are vetted by our investment consultant and investment committee and must adhere to an investment policy statement. We believe that limiting financial advisers' participations in DAFs would limit their use, the use of DAFs, and slow the flow of funds to charities.

Example No. 2, the way that the proposed rule is worded with an exception from donor-adviser treatment for personal investment advisers that are, quote, properly viewed as advising the sponsoring organization as a whole rather than providing services to the donor-advised fund, unquote, provides an unlevel advantage to DAFs that are sponsored by financial institutions relative to community foundations or mission-driven DAFs like the Jewish Communal Fund. These types of DAFs provide vital support to the communities where we are based.

Today, financial advisers who recommend a DAF to their clients are free to choose a DAF that supports the philanthropic values of their clients. For example, an adviser who knows that supporting the Jewish community is important to their client may suggest the Jewish Communal Fund as a DAF. Because that adviser may not provide advice to JCF as a sponsoring organization, she would not be eligible to be paid. However, if that adviser promoted their proprietary DAF, she would be eligible to receive a fee because she works for the organization advising the sponsoring organization.

To the extent that the recommendation to not classify investment advisers as donor-advisers is not adopted, we recommend that the exception provide that a personal investment adviser who provides services to one or more DAFs maintained by a sponsoring organization will be properly viewed as advising the sponsoring organization as a whole, so long as the investment adviser has entered into a binding investment advisory or management contract with the sponsoring organization from which fiduciary duties arise.

Example No. 3. If these rules were to be adopted as proposed, we believe financial advisers would be more inclined to recommend private foundations, where they can continue to be paid for investment management services, rather than DAFs to their high-net-worth clients. This direction could be felt most acutely by charitable beneficiaries themselves.

A recent study by the National Philanthropic Trust found that while total assets held in DAFs in 2022 amounted to about $230 billion, the total grants from DAFs amounted to over $52 billion, or 23 percent of the total assets. In contrast, the total assets held in private foundations amounted to over $1.1 trillion, with total distributions amounting to just under $100 billion, or only 11.6 percent of assets.

Therefore, DAF assets comprise just 16.5 percent of the total assets in DAFs and private foundations. But the value of DAF grants amounted to over 34 percent, showing that DAFs are a good deployer of philanthropic dollars, with a dollar being contributed to a DAF more than two times as likely to be in service to a charity than that from a private foundation. It is therefore unclear why the proposed regulations would provide for rules that are less favorable to DAFs than private foundations.

I next want to address distributions. So JCF recommends that the term distributions for purposes of section 4966 be defined as having the same meaning as the term grant in section 4945. So an example of how DAFs use these distributions. DAFs frequently receive contributions of illiquid assets, such as limited partnership interests or even pieces of artwork. There may be expenses incurred with the contribution of these assets, such as document review or storage fees for artwork. These are expenses incurred on behalf of the contribution and should not be assessed broadly to the DAF, but to the donor who has made this contribution.

If the definition of distribution was to move forward as proposed, this could discourage DAFs from using the full suite of professionals they would otherwise use in fulfilling their fiduciary duties and might cause us to develop capabilities internally, which would increase overhead costs and end up raising costs for all donors at the expense of charitable beneficiaries. It also may favor large corporate-sponsored donor-funds over community foundations and mission-driven DAFs because they have more budget to spend on legal and other resources.

I'll comment briefly on timing. We recommend that the effective date of any final regulations include a reasonable transition period of at least one full tax year in order to provide sufficient notice and time for DAF sponsors to implement the regulations.

An existential reason for DAFs is that the funds are there in times of crisis. With antisemitism on the rise, my Jewish community is in crisis right now, and the Jewish Communal Fund has been there to provide organizations with philanthropic funds. I mentioned that last year our donors distributed $900 million to charitable organizations. This year I expect it to be over a billion.

Thank you for listening and your time.

MS. CAMILLO: Thank you, Ms. Schnoll. The next speaker is Lisa Chmiola, Association of Fundraising Professionals.

MS. CHMIOLA: Good morning. My name is Lisa Chmiola and I serve in a volunteer capacity as the chair of the Association of Fundraising Professionals' U.S. Government Relations Committee. I'm here to represent AFP, which serves as the professional association of individuals and organizations that generate philanthropic support for a wide variety of charitable nonprofits. Of our 27,000 members around the world, about 85 percent, or approximately 23,000, are based here in the United States.

We were founded in 1960 and we have more than 180 professional chapters across the globe, with 154 of those here in the U.S. AFP's individual and organizational members collectively raise more than $1 billion annually. AFP promotes donor trust and effective and ethical fundraising by requiring our members to comply annually with the code of ethical principles and standards. This is the only such enforced code in the profession.

In addition to representing AFP, my professional background has helped inform these comments. I have more than 22 years in philanthropic development for nonprofits. I'm currently working in gift planning for a university, but I also have served in major gift and gift planning roles for both public and private educational institutions and for a religious foundation. Following my initial career experience in event-based philanthropy for the American Heart Association, I also founded a consulting firm focused on legacy and noncash asset-giving strategies.

AFP's members are concerned about a historic drop in charitable giving. Therefore, we are concerned with any proposals that would further decrease giving to the charitable sector. AFP is a key partner in the Fundraising Effectiveness Project, which works with donor management software firms and other partners such as GivingTuesday to track giving trends.

According to FEP data, the number of small donations increased in 2020 and 2021 after Congress enacted a universal charitable deduction, but the number of those small gifts decreased in 2022 significantly after that temporary universal charitable deduction was not renewed. Our latest data, collected through the end of 2023, found that fundraising dollars, the number of donors, and retention all are down year over year.

Additionally, those who are considered micro donors, who give between $1 and $100, decreased the most. And finally, last year's Giving USA Report found that 2022 was only the fourth year that giving was in decline since tracking began in the 1950s.

We appreciate Treasury and the IRS for providing clarifying guidance in the proposed regulations on things such as the definitions of a donor-advised fund, a donor, a donor-adviser, on the exceptions to a definition of a DAF, and on taxable distributions from a DAF. However, AFP shares the concerns expressed by others here today that some of the provisions in the proposed regulations may inadvertently increase the compliance burden on DAF sponsor organizations and DAF donors, and therefore may result in unnecessary burdens on the flow of philanthropic dollars to the work of this charitable nonprofit.

Allow me to briefly highlight a few points of concern. For example, many organizations have embraced the concept of giving circles, as we've heard today, to inspire philanthropy from donors who may not have previously felt that they had a seat at the table of giving. When I worked for a religious foundation, we had a women's giving circle that employed such giving.

This style of giving encourages those like-minded individuals to come together and, with their pooled gifts, create a greater impact in their communities than they could individually. The impact of forcing fund types like giving circles to be inappropriately defined as a donor-advised fund would cause unnecessary confusion and regulation over the fund management, since in giving circles, all donors give similar amounts and there is no single donor who has exclusive advisory privileges. Often decisions about where to give are made collectively by the group or by a smaller committee, therefore limiting any risk that funds are used improperly. The additional regulation on reclassifying these funds would unnecessarily burden the staff of the organizations managing the circles and slow down the timeliness of the funds being sent to the nonprofits to have an impact on those who they serve.

Another type of fund that would be impacted are field-of-interest funds that are held at many of our community foundation member organizations. For example, Cochrane-Fountain City schools in Wisconsin and Lewiston-Altura schools in Minnesota hold funds at the Winona Community Foundation. The population of both these districts were less than 5,000 each in 2022.

Significant budget shortfalls in their educational funding motivated the residents to rally around raising funds in support of education in their district. They do not have the population density or the expertise to start a nonprofit foundation to support their schools. Instead, they established a field-of-interest fund at the Winona Community Foundation, and the advisory boards of these funds make grant recommendations in support of their schools. If these funds were to become DAFs, it would limit the opportunity for community members who are currently eligible to make qualified charitable distributions from their IRAs to these funds in support of their schools, since those distributions are not allowed to be made to DAFs.

AFP also shares the concerns of our colleagues about the chilling effect of classifying a personal investment adviser as a donor-adviser. We're also concerned [that] determining distributions from DAFs which are used to influence legislation as a taxable distribution will create a misperception that nonprofits should not engage in legally permitted advocacy.

And finally, we share the recommendations by several colleagues here today to support the adequate time needed for any changes to be administered. It's important to ensure that our nonprofits have the infrastructure to deliver critical programs and services to our communities. When they don't, individuals across the country suffer.

For example, the YWCA, provider of the largest network of domestic and sexual violence survivor services in the country, recently reported that more than three-fourths of their local associations are facing funding challenges, and they're bracing themselves for further decreases in 2025. To support their domestic violence, sexual assault, and trafficking initiatives, currently, these associations receive 37 percent of their funding from federal support. A decrease in corporate and individual philanthropy could lead to increased pressure on public support to fill the gaps in those program deliveries.

Additionally, the nonprofit sector is the third-largest private workforce in the nation, made up of 12.5 million people who work at more than 1.8 million nonprofits. The sector makes up more than 5 percent of the country's gross domestic product. Yet the majority of nonprofits currently have more vacancies now than compared to before the pandemic, as research for the National Council of Nonprofits shows.

Going back to the YWCA example, nearly one-third of their associations are reporting staffing shortages due to a variety of factors. Budget constraints, burnout, and not paying a livable wage all have an impact. Finally, a lack of quality child care continues to create barriers to recruiting nonprofit employees, nearly two-thirds of which are women.

Thank you for the opportunity to share AFP's concern with proposals that would reduce charitable giving at such a precarious time for nonprofit organizations. As we deal with this historic drop in giving and the widening disparity in who gives in this country, it's also always important to highlight the value of the nonprofit sector in our nation and the clients they serve through their missions. While these proposed regulations may seem narrow, any negative impact on charitable giving impacts the ability of nonprofits to serve their local communities.

As you consider your next steps, we invite you to consider AFP as a partner to your work, as well as a resource for the nonprofit sector. Thank you for your time, and thank you for your service.

MS. CAMILLO: Thank you, Ms. Chmiola. The next speaker is Stephen King from Gammon & Grange PC.

MR. KING: Good morning. Good to be with you today. Stephen King from Gammon & Grange. I think our firm, for those of you who know the history of donor-advised funds, was involved in the National Foundation case many years ago. I wasn't around then, but we created the problem basically that we're dealing with today.

Obviously, some complicated issues that you've had to deal with, Mr. Thomas and others. The interplay of sections 4966, 67, and 4958, statutory language that raises a number of questions, trying to regulate a nonentity, a fund within an entity, and the issues of donor influence that are inherent with the nature of donor-advised funds.

So I'll agree with the comments that were made before regarding the antiabuse rules, investment advisers, the effective date of the applications. But I wanted to drill down a little bit more on one of the issues that has been spoken on some, particularly by Andrea from the Chicago Community Trust, related to, and I'm going to call them fiscally sponsored programs, and how these proposed regulations could inadvertently bring fiscally sponsored programs, and especially what are called model A or direct model FSPs, into the donor-advised fund lab, which I don't think it was intended to do here.

So as you're probably aware, fiscally sponsored programs, which come in many varieties and sizes, are significant in promoting productive charitable activity. By facilitating incubation of new charitable ventures, they ensure that these programs are operated in an effective and compliant manner. They provide training on exempt organization administration and compliance for those just joining the sector.

So I have many clients who are doing this effectively. We have some representatives from United Charitable, one of my clients, here who are exemplary in the way that they, they handle these programs. So were these intended to be falling under the umbrella of a DAF? Well, let's go through a simple scenario to see how this plays out. Let's suppose we have Mary, who has an idea of serving low-income elderly in her town with some educational programs about available services for seniors and activities to meet the social and intellectual needs of the senior sector. So to do this, she'll need to rent some space to provide her programs and other activity costs. She'll need a fundraiser for this.

And in her research and finding out how to get this going, she finds out she could either start her own organization and set up the entity, get through the tax exemption recognition process, or perhaps she could get some help starting out by going to an organization that is already an existing 501(c)(3) organization that provides help in getting going and incubating this. And it could even be her local church or temple or synagogue that would agree to take on this project.

So let's say she chooses No. 2 and needs some help to do this and wants to get it incubated under another organization. Is this a DAF under the proposed regulations? Well, clearly, under the broad definition of a fund in the proposed regulations, any organization must track contributions that come in and if they're designated for a certain program that needs to be tracked. So it's going to be a fund. But the organization that agrees to take on this project is going to be a sponsoring organization if this project ends up being a donor-advised fund.

I guess that's sort of a, I forget the word about the quality of those terms. So we get into the little bit more complicated. Now if Mary could advise about space to rent for the program and other program expenditures that are going on, that would likely be an advisory privilege, I think, under the proposed regulations, the way that distribution is currently defined, and we've had several comments on this issue of distribution.

But I think it's interesting that the term that's used in 4966 and 67 is distribution and not expenditure, which is used in 4945 for private foundations, even though if it is a distribution that doesn't meet certain criteria, the expenditure responsibility requirements of 4945 come into play, which, by the way, just speaks to grants and program-related investments. So it's sort of interesting to think about, well, how could those expenditure responsibility requirements apply in a case of a direct charitable expenditure?

So as others have recommended, I think the definition of distribution needs to be thought through a little bit more carefully. I think it seems like the intent of that is grants or disbursements that are not quid pro quo payments for charitable-type of activity. So that would be one way that we could help not bring these fiscally sponsored programs into the ambit of a DAF.

Second, Mary, if she has advisory privileges, is a donor-adviser, on the proposed regulations under dash (1)(h)(2), we have a provision that says, a person who establishes a fund and advises as to the distribution or investment of amounts in that fund will be treated as a donor-adviser with respect to that fund, regardless of whether the person contributes to the fund or account. So under that definition, it seems like Mary would be a donor-adviser, which, as others have suggested, I think that really goes outside of the statutory bounds of how a donor or somebody appointed by a donor is in the statute here.

But under this proposed regulation, Mary would become a donor-adviser, whether or not she actually contributed herself to this program. And then with these advisory privileges by reason of Mary's status as a donor under proposed dash (3)(c)(2)(i) little roman numeral, I don't know what we call those. But anyway, it says that fact sufficient to find advisory privileges, a donor or donor-adviser has advisory privileges by reason of the donor status as a donor, regardless of whether their exercise as the sponsoring organization allows a donor or donor-adviser to provide nonbinding recommendations regarding distributions from the fund.

So I think in the scenario I put here, Mary would be a donor-adviser who, even though she didn't give in, by this regulation would be a donor adviser who is considered to be a donor-adviser by the fact that she initiated the fund only. So under the three-pronged test, this would be a donor-advised fund. And I don't think that's really what 4966 was intending to regulate here.

So we suggest a few things to fix this. No. 1, narrower definition of distribution, at least indicating that it does not include quid pro quo expenditures for charitable purposes. Elimination of the dash 1(a)(2) donor-adviser definition and Example 10, which followed up on that. And then under dash 3(c)(2), and this is the provision that says facts sufficient to find advisory privileges. That really seems to cut the statutory language about advisory privileges being by reason of being a donor or donor-adviser, because most things are going to fall under those four subheadings under that section.

So we think that dash (3)(c)(2) should at least be just presumptions and not bright-line rules as to the reason for a donor status as a donor adviser. And by the way, just as a side note, there's also a provision in the dash (c)(1)(iv) that provides a little bit of an exception for somebody acting in the capacity as an officer, director, or an employee of an organization.

That's a little bit unclear whether that would apply to Mary in this case, if she's just a volunteer. But in any case, there seems to be a little bit of a contradiction between that section, which does allow that if the employee happened to give, that maybe you could still make the case that they didn't give on the basis of, or they weren't given advisory privileges on the basis that, they were a donor. But then you have the (c)(2)(i) provision that makes the bright line, well, if they are a donor and they have advisory privileges, it's deemed that it's because of their donor status or donor-adviser status.

Finally, let's choose a scenario just a little bit, and let's say that Mary desires to donate a small amount to the project, although the bulk of the contributions are coming from a wide variety of unrelated sources. So here, even if we got rid of the one provision that Mary is a donor adviser, by the fact of just initiating the fund here, she would be a donor, and if she had advisement privileges under dash (3)(c)(2), assuming that she is the only adviser to the fund, it would be deemed that her advisement was due to her being a donor.

And again, that seems like this is contrary to the purpose of these types of funds. Somebody should be able to at least give a little bit. So we would suggest that there'd be some exception to the definition of donor through a fund to a multi, to a multi-giver fund where there are multiple donors, that would provide a unanimous exception that would allow for either maybe on a dollar amount basis or a combination of dollar amount and percentage of perception (phonetic) on the advisements. Thank you very much.

MS. CAMILLO: Thank you Mr. King. Next we have Jennifer Bartenbach, Central Indiana Community Foundation.

MS. BARTENBACH: Good morning. My name is Jennifer Bartenbach and I'm the CEO of the Central Indiana Community Foundation, or CICF. And I'm here on behalf of the philanthropic collaborative consisting of CICF, the Indianapolis Foundation, Hamilton County Community Foundation, Women's Fund of Central Indiana, and Impact Central Indiana.

Indiana is unique in that we have 94 community foundations across our state with at least one in every county. So thank you for this opportunity to testify to the impact these regulations would have on our collaborative if enacted. CICF was created in 1997 when the Indianapolis Foundation, Indiana's oldest community foundation, and Hamilton County Community Foundation came together with the understanding that the whole could be greater than the sum of its parts, creating efficiencies and unlocking new opportunities for donor engagement and fund development. Women's Fund of Central Indiana, now a component field-of-interest fund of CICF, focused on supporting organizations that serve all who identify as women and girls, was founded in 1996.

In Impact Central Indiana, the collaborative Impact Investing multimember LLC, was established in '20 — while each entity has its own initiatives and philanthropic priorities, we have a shared mission to mobilize people, ideas, and investments to make Central Indiana a community where every individual has equitable opportunity to reach their full potential, no matter their place, race, or identity.

Together, our collaborative holds $1 billion in charitable assets and more than 1,300 donor-advised funds along with other fund types.

As many others have mentioned, today, our donor-advised funds have a payout over 12 percent.

Among other things, CICF provides back-office administration, including donor-advised fund management and donor engagement services, to its affiliates. And the partnership with outside investment advisers and managers is critical to the success of our donor-advised fund program.

Before we offered the option of outside investing donor-advised funds, investment advisers often saw our funds and services as competition, at odds with their most critical metrics of success, their assets under management. Once CICF was able to keep assets invested with donors' investment advisers while providing first-class donor service, it became an opportunity for partnership rather than competition. Donors with outside invested donor-advised funds do so because they typically have a long-standing, trusted relationship with their adviser. When he or she recommends opening a fund with CICF, that prospective donor listens. Not only that, but outside invested funds tend to be larger in asset size than those that are not. These large funds are able to do transformational grant-making in our community.

In 2022, one such fund awarded $4.7 million over 126 grants, an average of more than $35,000 per grant. As an endowed fund, this fund does grant-making at a similar scale every single year. We have worked with this family for the entirety of CICF's existence and have established a long-standing relationship of trust with them as we help make their philanthropy impactful for the organizations they support and meaningful to their family.

Moreover, over 75 percent of their grants in 2022 went to support their passions for the environment and arts and culture. These are two areas that CICF has not prioritized and does not have the resources to support. By contributing to these interest areas, these sectors continue to be supported in Central Indiana and these grants help fill the gap left by CICF and other funders in our region.

Another family utilizing outside investment services used their donor-advised funds to create Indianapolis's bike share program, providing an affordable and active transportation option across our city. They continue to fund it with substantial annual support and have funded opportunities for significant expansion reaching areas in dire need of transportation access.

A final example is a family that unwound their private foundation into a donor-advised fund. In 2023, they recommended nearly $500,000 in grants to 21 organizations in their home county with an average grant size of over $20,000. Moreover, this funding aligns closely with the strategic funding priorities of our collaborative, allowing unrestricted endowment funds to be directed to other organizations that otherwise would not receive funding. Without the ability to outside invest their fund, it is quite likely that this family would have elected to keep their private foundation in lieu of a donor-advised fund.

Currently, CICF has 62 outside invested donor-advised funds with 29 investment advisers, totaling nearly $200 million in assets. This is almost 20 percent of our total assets. Though some advisers would continue to see donor-advised funds as helpful tools to accomplish their clients' philanthropic goals, others would be hesitant to recommend them for fear of losing assets under management. This churn effect would affect the entire philanthropic sector given the sharp rise in popularity of donor-advised funds as a preferred giving tool.

The perception of abuse that these regulations seek to remedy is false. As a sponsoring organization, we take our duty to ensure that investment fees charged are reasonable and consistent with industry standards very seriously. We meet with each of our outside investment advisers at least annually, and our finance team diligently reviews fund financial statements quarterly. We measure investment performance and provide information about our own investment pools so that outside investment advisers are aware of our performance and benchmarks. If there is an extended period of underperformance by the adviser, we discuss the situation with the donor and offer investment in one of our pools as an alternative. These checks and balances ensure that investment advisers keep charitable intent and exceptional investment returns top of mind. Thank you again for the opportunity to testify and for taking seriously the sector's concerns.

MS. CAMILLO: Thank you, Ms. Bartenbach. The next speaker is Dennis Buehler, Greater Green Bay Community Foundation.

MR. BUEHLER: Good afternoon. My name is Dennis Buehler, and I proudly serve as the president and CEO of the Greater Green Bay Community Foundation. On behalf of my community, our colleagues across the state of Wisconsin, I'd like to thank the panel for this opportunity to testify and for your service.

My comments will be brief as not to repeat much of what my colleagues have said here today. But over the past 35 years, we've invested more than $200 million across northeast Wisconsin to improve our quality of life through grants, community initiatives, and other programming. We collaborate every day with advisers and other professionals to support donors' charitable intent and achieve generational impact. We process complex gifts and steward resources for organizations who do not have the capacity to do so on their own. Administering donor-advised funds is just one of the many things community foundations do to support the geographic regions we serve.

Our primary concern with the proposed regulations is their failure to differentiate between nonprofit community foundations and the commercial gift funds created by for-profit institutions. Community foundations use their resources to promote funding and programs and initiatives that address the unique needs of local communities. While we understand the desire to create a uniform set of rules, as written the regulations will have a chilling impact on donors' commitments to their community and will negatively impact the community's ability to leverage important local philanthropic relationships.

Our foundations are governed by diverse groups of local volunteers and are not overseen by those with commercial interests in asset-building or warehousing charitable dollars. They model every day how community partnerships can result in greater impacts.

One example is our foundation's relationship with the NFL's only community-owned franchise, the Green Bay Packers. And with great respect to my colleagues in Kansas City and Chicago, they have achieved remarkable success on the football field. (Laughter.) But it's tools available at community foundations that allow us to partner and support their philanthropic interests and create unmatched collaborative impact in our community.

Our joint response to COVID-19 inspired local DA fund holders to contribute millions of dollars to nonprofits during this unprecedented time. Our staff, our respective boards, our donors, our advisers all work together to ensure these funds reached those who needed them the most.

We may be smaller markets in both the terms of football and community foundations, but our ability to plan and create meaningful impact is greater than most. Collaborative approaches between organizations like the Packers, local businesses, public institutions, and individual DA fund holders alike bring innovative thinking. This includes hosting one of the country's only evolving cohort-designed giving day circles called Give Big Green Bay. Over the last seven years alone, this program has delivered $13.5 million of support to 150 unique and important nonprofits. The average amount each of those nonprofits received from this event not only far exceeds national averages, but tops some of the largest foundations in the country.

Our tools, the tools that our donors use at community foundations, which would be greatly [affected by] these regulations, encourage small donors, DA fund holders, investment advisers, and corporate partners alike to engage in growing local philanthropy. Relationships matter, fund structures and local fee investments matter. For almost 100 years, community foundations across the country — or communities across the country — have benefited from this type of collaboration. If regulatory goals overreach, they will not only create confusion, but compliance will significantly impact oversight and unnecessarily raise management fees, all of which will drive donors away and diminish the innovative approaches at a time of rapidly changing needs. Responding to the changing needs requires trusted relationships, including those that we have built with our local financial advisers and third-party asset managers. We are generally concerned, as is noted here today, these regulations will significantly impact giving to our community foundation by incentivizing advisers to direct their clients to private and commercial funds. This inevitable decrease in local funding commitments with no complementary charitable counsel will have a negative impact on critical grant-making.

For example, recently our foundation, a donor, and our third-party asset manager assured a $365,000 grant reached Journey to Adult Success, a local nonprofit that helps former foster care youth transition to adulthood. The facilitation of this community investment came from our long-standing and trusted adviser relationship, and it was critical.

We know donors trust their local investment advisers and community foundations to address these community issues together. Honest dialogue, shared values, are what help identify charitable opportunities without barriers to make the greatest impact for causes our donors are passionate about. We intentionally build these relationships to leverage our strengths. Funds at community foundations through DA funds and third-party asset pools keep charitable dollars in our communities. The fees generated by these gifts are invested locally. They support program staff, grant-making, training programs, research, and other partnerships to create a remarkable return in our community.

Donor-advised funds in Green Bay represent 50 percent of our total funds and one-third of our asset base. Our collaborative approach with these fund holders creates grant spending rates north of 15 percent, as much as 30 percent, driving our overall spending rates well above similar foundations, all without the need of new regulation and well within the nationally accepted standards of practice already established in our field.

Proposed regulations place the same compliance burden on the community foundation as they do other fund sponsors. These are vastly different funds, but with one or two noticeable distinctions: our value and our impact. We respectfully ask you to work with us to create innovative approaches that reflect the unique operating models of community foundations and to encourage local investment and impact, not to diminish it. Thank you.

MS. CAMILLO: Thank you, Mr. Buehler. Next speaker is Amy Freitag, New York Community Trust.

MS. FREITAG: Greetings from New York, home to the Jets and Giants. (Laughter.) My name is Amy Freitag, and I'm honored to serve as president of the New York Community Trust, one of the largest community foundations in the United States. This year, we're celebrating 100 years connecting New York's most generous citizens to our highest-impact nonprofits.

The New York Community Trust has over $3 billion in assets, representing 2,300 funds established by individuals, families, foundations, and businesses to support nonprofits that have made a difference in our community. In the past 10 years alone, we've granted out more than $2 billion for a wide range of acute needs in our region, including hunger, housing, healthcare, arts, and social justice. What sets us apart is our deep bench of grant-making expertise focused on our eight-county region in downstate New York, the five counties that make up New York City, as well as Westchester to our north, and the two counties in Long Island to our east. Like our community foundation brethren around this room today and across the country, we pride ourselves in our deep knowledge of this community and our ability to match philanthropic priorities of our donors to grant-making opportunities that will have maximum impact.

Now, among our accomplishments over this hundred-year history is the creation of the donor-advised fund. Yay. (Laughter.) My purpose here today is to explain why we think DAFs are essential to the mission of community foundations and how the proposed regulations could have a detrimental impact on our ability to help our communities.

So back in 1931, when Francoise Barstow and her husband set up the first-ever donor-advised fund of the trust, she and her husband intended to leave their funds in their estate for the betterment of New York, but they also wanted to make grants during their lifetime. Fast-forward to today, three important features of the DAF have not changed since the Barstows opened their fund. One, donors enjoy the ability to be part of the process that transforms their generosity into grant-making. Two, the trust, or the DAF sponsor, retains control over the assets in the DAF. We manage the finances and the grant-making from our DAF, just as we do other types of funds. Three, DAFs can become a permanent part of New York's philanthropic landscape. The Barstow fund became part of our endowment at their death, which means our grant-making staff can deploy those funds year after year to meet the needs that our community has. That is a powerful legacy.

So of our 2,300 active funds, 1,300 are donor-advised funds, which come in many, many flavors, as you all know, such as memorial funds to honor a loved one, or an endowed DAF, or the garden variety of DAFs, which provide a low-barrier way for people of all walks of life to engage in philanthropy. The rest of our funds are other types other than DAFs, including funds that support a specific or particular purpose and those who support specified organizations. We also have funds that give out awards and prizes and scholarships, and collaborative funds where we bring donors together around a particular issue.

So similar to my wonderful colleague in Chicago, I want to focus for a moment on collaborative funds, which we're concerned could be negatively impacted by the proposed regulations. For almost 50 years, the trust has been an innovator in philanthropic collaboration, partnering with hundreds of funders to recommend grants addressing areas of broad public interest from more than 40 separate collaborative funds. Examples include our September 11 fund, which pulled over $500 million from individuals living in all 50 states and from 150 countries to respond to the tragic events of that day. Our COVID-19 fund granted over $70 million to New York nonprofits in the darkest days of the pandemic, receiving contributions as little as $20 from individuals who just wanted to help.

The way these collaborative funds work is that we establish a fund with a specified purpose that we define, and then we invite funders to join us. There are often a combination of individual donors and foundations. We appoint a committee composed of funders to work through the issues and provide recommendations, although we make the final decisions. We also, of course, handle all administration of the fund and provide staff support, which includes the issue experts on our program team.

Now, a big part of what makes collaborative funds so effective is the degree to which donors are engaged in the process. When our region is under siege, either due to terrorist attack or global pandemic, New Yorkers are at their best rolling up their sleeves to help their neighbors. We, the trust, control the administration and the grant-making from the funds, but this work benefits enormously from the creativity and the passion of our donors.

I want to note that at the trust we have always distinguished collaborative funds from giving circles, where like-minded donors organize themselves and recommend grants to organizations they wish to support based on their values and priorities. We administer giving circles as donor-advised funds.

So how would the proposed regulations affect our work? Put simply, as you've heard already today, they would turn certain funds into DAFs that are not currently DAFs, and other funds would be at risk of becoming a DAF based on future facts and circumstances. Because donor-advised funds are disfavored under the tax code relative to other funds that we administer, affecting both the types and contributions they can accept and grant-making from the fund, anything that causes a category fund to turn into a DAF makes it more complicated to administer, less attractive to our donors, and ultimately less effective.

So here are a couple of examples of some funds that would tip into becoming a DAF and what that could mean. A new collaborative fund we recently formed to address 180,000 migrants that have come to New York City in the past two years. Our advisory committee is composed of generous funders. If this became a DAF, we could not use this vehicle to provide cash assistance to migrants, a lifeline for many immigrant families. Another example is a fund supporting social work in New York City, established by a generous donor who spent her life as a social worker. Her joy is a once-a-year lunch with our staff when she shares her perspectives on the field. If this became a DAF, she could no longer contribute qualifying charitable distributions from her IRA to her fund.

So sorting all this out, communicating it to our donors, and developing systems to catch when a fund tips over into a DAF would significantly disadvantage community foundations relative to other DAF sponsors that have the capacity to increase compliance without raising fees. Donors will go elsewhere and those in our community who benefit from our funds will lose out the most. The draft regulations seem to presuppose that donor engagement is something suspicious or that stands in the way of sponsor control. But we don't see it like that at all. We think donor engagement is critical to the philanthropy of many, many people.

Would the Barstows have set up their fund during their lifetime if they couldn't have been involved? Probably not. Would all of our collaborative fund partners have been willing to contribute post 9/11 if they didn't have a seat at the table? We don't think so. And if these regulations chase away living donors, they're unlikely to make permanent gifts to our community, a compounding loss that will be felt by generations of people in our region.

So as a result, we urge you to consider what we believe must be unintended consequences of the proposed regulations. In our written comments, we lay out which provisions we hope will be struck entirely.

We also propose two different solutions to the issues around what it means to have advisory privileges. One solution is for the regulations to define what it means to have a sponsor-appointed advisory committee that includes donor participation, but does not turn the fund into a DAF. An alternative solution is for Treasury to rely on the authority in the law to develop an exception around funds with a single identified purpose that would prevent collaborative funds from being swept into the definition of a DAF.

Finally, we ask that there be another round of draft regulations before they are finalized.

So as you've heard today, community philanthropy works in ways that are both complex and delicate, and we stand ready to help Treasury understand what we do to ensure that the final regulations support that philanthropy rather than putting it at risk. Thank you.

MS. CAMILLO: Thank you, Ms. Freitag. The next speaker is Keith Burwell, Greater Toledo Community Foundation.

MR. BURWELL: Thank you for your time and your service. I don't think you're going to hear anyone come up and say, great job, we're going to give you an award. (Laughter.) I'm Keith Burwell, president and CEO of the Greater Toledo Community Foundation. I've worked with the foundation for over — in the community foundation world for over 26 years and 20 with Greater Toledo Community Foundation. The Greater Toledo Community Foundation works in northwest Ohio and southeast Michigan. And contrary to a lot of popular belief, most of the over 2,000 funds we have at the foundation, they're created by farmers, teachers, firefighters, small business people, not billionaires that decide to create a fund.

That said, let me begin by saying I'm not an attorney and I don't play one on TV. So my comments, while they're run through legal advice, take it for what it is from me. We believe that there are many issues to address. You've heard some already in the pronouncement, and I'm only going to touch on three, given the time.

First, if adopted under regulations, this broad donor-advised fund, many of the Greater Toledo Community Foundation's funds would be classified as a donor-advised fund. Field-of-interest funds is one of those issues I'll bring up as an example. Decades ago, a matriarch of the Champion Spark Plug Co. created what we call the C Corp fund. She then also gave her house to be an area park where you could get education and art in this one facility. That fund then funds educational work across the region and helps fund that part where classes take place. This fund today would be considered in many cases a donor-advised fund under these definitions. I would make the case if that were to be true, she would not have made this C Corp fund at the Greater Toledo Community Foundation, but would, in fact, put it in her family foundation.

Similarly, the Andersons Fund at the Greater Toledo Community Foundation is a field-of-interest fund created by the Andersons Inc. Fortune 500 company, a grain commodity company. They created a fund for capital needs within the region. So any capital project coming forward, the fund would look at and then through a specially created committee, determine what capital project should be funded. The fund was created through the sale of land, it then became a business park in the region, and has been very, very successful in the year funding capital projects that normally would not get money because of the nature of building buildings or projects with capital needs. If, in fact, this definition were used today, that you're finding the pronouncement, this fund may be considered a donor-advised fund and I could almost guarantee you that the business, the Andersons Inc. company, would not create this fund. Rather, we'd move that fund into the revenue of the company and forget the whole idea of philanthropy.

For Greater Toledo Community Foundation mandating field-of-interest, designated funds, or funds with committees to meet requirements that we see in these pronouncements creates a wall that we think is needless for donors and ultimately less money for charities within my region.

The second issue I'd like to address quickly is the overall definition of a taxable distribution, which we believe would hinder Greater Toledo Community Foundation's donor-advised funds, charitable operations, and community initiatives. You've heard several people comment on this already about what is a charitable purpose and the subject that could cause penalty or harm for the Greater Toledo Community Foundation.

I'm not going to touch on the adviser side, but you've heard some, or the due diligence expenses. I would like to take it to another level, and that is to the level of what would happen to those that are penalized for using funds from donor-advised funds to address community initiatives and payments, for instance, to consultants.

We have many, many issues within our community where we've had to be the lead or the convener to address an issue that is a great concern to the region. And in doing so, we've consulted with advisers, we consulted with consultants, use that term, to help us address that issue. One such area of concern is pre-K. We created a task force, consisting of citizens across the area, and they looked at what would be the best designed pre-K program for the region. In order to do that, we hired a consultant at the national level to come into Toledo and help us look at that. Under some of these pronouncements, if you draw the string to the logical end of the conclusion, payment of that consultant may not be allowed from donors at donor-advised funds that would like to contribute to that issue.

Likewise, we have looked now at the area of homelessness and how do we redesign in our region how we address homelessness? Because it's not quite working the way we think it should. Again, we have convened a task force and we have hired a consultant. Many of our donor-advised fund donors have suggested we use their funds to help pay for that consultant. Again, if you draw that logical conclusion to the very end, that may create a penalty for that donor-advised fund to support that campaign of that consultant in some form or fashion.

That said, just as has been mentioned, in Toledo, when the COVID outbreak occurred, the Greater Toledo Community Foundation looked at how could we help with several different funds. We created three. One of those was to provide meals, meals for first responders; benefited twofold. First, we provided a warm, nutritious meal for the first responders that were working hours and hours over. And second, it allowed our restaurants, which we contracted with, to keep their line staff and cooks hired when they were actually closed to help provide these meals. Our donor-advised fund holders' advisers encouraged us to take money from their donor-advised funds to help pay for these commitments and a practice. And these pronouncements, they might be considered a penalty to that donor-advised fund.

Finally, it's already been mentioned, looking backwards would provide an undue burden to the Greater Toledo Community Foundation. We're not big in staff, and the deep administrative burden of going backwards would cripple us, frankly, for months as we try to figure out the administrative and the expense side of going backwards from that date.

I want to thank you for the opportunity that we've had to speak to you today because without your help, we would not be able to do what we do. But with that said, donor-advised funds play a significant role in addressing social issues and concerns in our community, and we hope that you will not hinder this work with somewhat needless regulations on this philanthropic asset.

Thank you for allowing this time. And hopefully, if you have questions, I'm more than eager to have them and answer them later on. Thank you.

MS. CAMILLO: Thank you, Mr. Burwell. The next speaker is Aimee Minnich, Impact Investing Charitable Foundation doing business as Impact Foundation.

MS. MINNICH: Thank you all for allowing me to comment. I'm super impressed by your attention span. And if this many people showed up at my office to tell me how to do my job, I don't think I'd be as welcoming, so truly thank you. (Laughter.) I'm Aimee Minnich and I'm general counsel and CIO for Impact Investing Charitable Foundation. We go out in the world as Impact Foundation. I resonate with a lot of the concerns that have been shared this morning by others, but I have good news. I'm going to talk about something totally different. And I also think it's almost lunchtime, so we can do it.

The proposed regulations contain a broad definition of taxable distribution and it creates a carveout from the definition for investments.

The problem with the approach, however, is the definition given for investments is insufficient, and it also contradicts the understanding of the concept in other laws. I would respectfully suggest instead of redefining the concept of investments, the Service and Treasury could best serve our industry by defining investments, at least in reference to the rules for private foundations, specifically program-related investments from code section 4944 and associated regulations and mission-related investments from Notice 2015-62.

First, a little background. Our organization was founded with roots in our Christian faith. As followers of Jesus Christ, we believe that everything belongs to God and we have a stewardship responsibility for how we allocate our resources, including our investment funds, the businesses we run, and the dollars we donate to charity. In other words, the families we serve believe that they're not only accountable to the IRS, but also to God. And frankly, I'm not sure which is scarier. (Laughter.) I tell you this to say we take our work and (inaudible) for it very seriously.

In 2015, while working for the National Christian Foundation, we noticed that there's approximately a trillion dollars that's been set aside for charitable giving in foundations, mostly private foundations, and only about 7 to 10 percent is given away each year. That means there's over $900 billion invested purely to make a profit to sustain future grant-making.

But there's a rising movement to put those investment funds to work in projects that have a charitable purpose or a mission that aligns with charitable aim, either through program-related investments, PRIs, or mission-related investments, MRIs, while also providing a return for future grant-making activities. It's known as impact investing in the industry, and the rules for PRIs and MRIs are much more spelled out for private foundations than for donor-advised funds. But the same practices, if available to all philanthropists, could result in much more funding flowing to projects that bolster local communities and provide access to jobs, fund clean energy, provide education, and much more.

One example is Calvert Foundation, who invests in Craft3 to increase the flow of capital into disadvantaged communities. Craft3 is a nonprofit, nonbank community development financial institution with a mission to strengthen economic, ecological, and family resilience in Pacific Northwest communities of the U.S. Calvert Foundation's $2 million fixed-rate term loan for capital to Craft3's revolving loan fund, a vehicle which lends to enterprises and individuals making an impact in the community within its target geography, and thanks to global impact investing network for this case study.

According to Internal Revenue Code section 4944, this kind of investment would likely be considered a program-related investment for Calvert. Those of us sponsoring donor-advised funds would welcome the same kind of clarity to support similar investments that bridge the gap between traditional grant and purely profit-driven investments. The Treasury and the IRS could serve donor-advised funds by adopting rules that align with those that are already in place for private foundations. However, the proposed regulations suggest the different schemes that the IRS will use to evaluate our investments, and it doesn't align with the existing definitions and the rules above.

In particular, the preamble suggests or states, "an investment would not, for example, include a zero interest loan, as there's no purpose of or provision for obtaining income or funds from a zero interest loan. The Treasury and the IRS anticipate that a zero interest loan would be a distribution under the proposed regulations." On the other hand, Treasury Regulation 53.49443, which explains program-related investments, refers to a zero-interest loan in Example No. 9 and specifically calls that a program-related investment. So I'm a little confused so far.

Other seminal guidance for the impact investing community is found in Notice 20-562, in which the Service explains the application of section 4944 to investments that are made by private foundations for purposes described in section 170, but that aren't program-related investments. Notably, the Service references the alignment of these rules with state rules adopted from the Uniform Prudent Management of Institutional Funds Act, or UPMIFA. Practitioners helping donor-advised fund sponsors likewise have to comply with UPMIFA in all their investments. Not to mention the rules for excess business holdings, excess benefit transactions, joint ventures, UBIT. I've spent more time than I ever thought possible mapping the confluence of these rules and how they relate to our portfolio of mission-advancing investments.

In our 2015 application for tax-exempt status, we committed to investing assets consistently with the rules in place for private foundations wherever there was not clear guidance for donor-advised funds. And since our founding, we have developed — deployed — more than $535 million as loans to public charities and loans or equity investments in mission-aligned for-profit companies. We spend considerable time and energy collecting data to understand the true impact and influence of these investments. Impact can be measured in terms of clean water delivered, outcomes in education, and so much more. To provide you with just one metric, the companies in our portfolio recently reported creating more than 70,000 good jobs in local communities across 54 countries. That's 70,000 families whose lives are better off because of the investments we've made. Unfortunately, this impact is put at risk by the proposed regulations.

Because the definition of investment in the proposed regs can't be reconciled with the treatment of the concept in other laws, practitioners like me are left wondering if the Service intends to police our investments differently than we previously thought. But we don't have sufficient guidance to operate clearly within whatever the new scheme might be. Arrangements that would have previously been considered an investment seem now to be considered taxable distributions.

I would respectfully request that the proposed rules be withdrawn and new proposals undertaken. If not, at a minimum, the industry needs more time to understand how its activity can come into compliance with the rules. A lot of other people have talked about that, but from where I sit, it is particularly difficult to understand how we would divest of all these investments that we thought were investments that might now be distributions because they're highly illiquid. It's going to take more than a couple of months. Thank you very much for your time.

MS. CAMILLO: Thank you, Ms. Minnich. Next speaker is Dr. Mark Lail, Church of the Nazarene Foundation.

MR. LAIL: Thank you for this opportunity. The Church of the Nazarene Foundation, 20 years old, in Lenexa, Kansas, just outside of Kansas City, functions much like a community foundation for the community of Nazarenes. In the United States, there are 4,800 churches and we serve them all with donor-advised funds and various foundation type of activities. But thank you for listening and also hearing us and taking revisions under advisement. We really appreciate that.

With the 4,800 churches, the existence of our foundation elevates the compliance competency for the whole denomination and for the churches.

So when the complex assets come in to donor-advised funds through us, we think that they're actually handled more properly than they are likely among the local churches out there. So we encourage the churches to bring their complex asset donations through the foundation, often utilizing a donor-advised fund to help accomplish the goals of the donors. We think that there are less mistakes that way, whether they be inadvertent or abusive, than what they could be if they weren't using us through the donor-advised funds. So we solicit these donors by telling them that the donor-advised fund is a great option to a private foundation for simplicity, for compliance. Quite a few reasons there. We feel like the proposed regulations are adding complexity to the donor-advised fund to the extent that they're coming closer to the family foundation and might actually take some of the donor-advised fund business away for that very purpose.

So when I read these and began to understand the proposed regulations, I will admit that I had a few heart palpitations on the possibility of a tidal wave of excise taxes, because I think some of these things are normal business for some of our foundations. And I would like to specifically talk about the broad definition of distribution and the longer reach for expenditure responsibility as well as the timing of the implementation.

So the definition of these distributions is pretty all-inclusive, includes everything. Basically anything going out of a donor-advised fund is considered a distribution at this time, with the exception of reasonable management fees and granting expenses. I think there are several expenses or activities that the donor-advised fund does that doesn't really fit under these looser definitions of management fees and granting expenses. And that would be the expenses that are involved in receiving a complex asset and actually possessing the complex asset.

So for example, an 80-year-old donor with a donor-advised fund donates his second home in Arizona to our foundation, and as soon as he does that, expenses start to be incurred — level one EPA inspection, a record recording the deed, insurance while the donor-advised fund owns the home, taxes while the donor-advised fund owns the home. Perhaps repairs need to be made. We're going to pay a Realtor, a title policy, and all that happens before it gets cash. Once it's cash, we're all because then it's investment management, and the fees for operating the office and putting the donor portal up, and so forth. And then the grant, there could be grant fees as well, but those would be well extended out there. May not even happen for a few years. It's very distant from the actual expenses of receiving the gift.

So we would feel pain if those expenditures which don't seem to fit the exemptions included right here came under the category of the excise taxes. So we'd like to see that go a little different. The donor had some options. The donor, he hoped to give this money from the home to 10 different churches. He could have given the home to 10 different churches. That, of course, would be a mess when it comes to selling it and so forth. We feel like the donor-advised fund should make generosity easier for the donor and not more complex for the donor. So we hope that these regulations can be made in such a way that things will be easier and beneficial for the donor, I guess I would say, or at least donor-friendly.

That example of the home would be one such example. But you can take a lot of assets that way. We could potentially receive a business or a limited partnership that would cause the donor-advised fund to have an unrelated business income tax, which would be pretty unusual if you paid the UBIT tax out of the donor-advised fund, which created an excise tax. And you can just imagine agricultural products get donated. There's transportation sometimes, there's checkoff fees on those various items, and so I think the part that's left out there is the cost and, in the donor-advised fund, of having those kind of assets and the expenses related to them.

Concerning the long reach of the expenditure responsibility. We have a lot in place in our foundation, and I would guess that we're a lot like other people out there. A lot of checks and balances. We train the donors about appropriate donation — or appropriate grant requests. We use the nonprofit search tool all the time in our office to check, is this nonprofit in good shape? We look at 990s, we look at websites, promotional material. We make the donor sign a statement that they have no personal anything coming back because of this gift. And we make the — we have the recipient organization, we give them instructions, don't cash this check if there's any kind of benefit back to this donor, or it's quid pro quo of any sort out there. And so those are a pretty complete set of avoiding the problems that are out there. We train our employees to watch for clue words in the grant requests. You know, if a grant request comes into university and it says, “Put in the memo, Attention: student accounts,” there's a red flag. We watch for that. OK? And it says in the memo, “In fulfillment of a pledge,” there's a red flag. We watch for that. If it happens to say, “Re: funding fundraising option,” i.e., that is box seats to the Chiefs, the Super Bowl champion Kansas City Chiefs, then we say no to those things. So we say no on a pretty regular basis.

I said no to a really good donor just recently who put in a request for $4,000 to go to a funeral home. So the funeral home was a for-profit business. We had to say, we can't do that.

And so he said, “But this is a poor family. This is a poor family. I don't even know the family that's heard about it. It's a friend of a friend, and they're in dire straits, and they have this funeral they have to pay for.” We can't do it. “Just send the $4,000 over there.” And I said, “You know, that's outside of the rules. We can't do that.” And that came down to a point where we had an unhappy donor. We choose unhappy donors over unhappy IRS. So that's our preference in that case. And he didn't understand this the first, second, or third time that I explained it to him.

And he pretty much stopped using the donor-advised fund after that point. But that's the kind of scrutiny that we put on the operation that we have to try to maintain compliance.

If that gets extended into the deeper levels that seem to be included in the proposed regulations of what we need to know or even not know about the organization that's receiving the money from the grant and how that works. Our denomination is really, it's kind of like a big family, very tied to one another. Major donors are likely to show up on a local church board. They're likely to be on a college board and a campground board, an admissions board director, all sorts of things out there. It would be irresponsible for us not to pay attention to where the dollars are going, but I can't imagine how we would know the possible ties between, in our denomination, between a major donor and all the various types of leadership and decision-making entities that are out there.

I can give you an example in my own life. I do have a donor-advised fund with our foundation, and I transfer money from that and a grant to the local church that I attend. The local church that I attend asked me to fill in for the pastor on vacation. So I filled in for the pastor, expecting nothing but they wrote me a check for $200. That's when I realized, reading these regulations — but my wife's on the church board. Now, I paid tax on the $200. It's on my Schedule C. It was last year, OK? But those kind of connections and relationships go deep throughout the organizations that we're trying to assist with, and it's going to be nearly impossible for us to try to find a way to make that happen.

So I'll throw in my two cents, as several have, that the timing on this regulation, we're going to need some time to gear up for this thing, to retool, to retrain our employees, and essentially retrain, train the recipient organizations and retrain the donors as well. Thank you so much.

MS. CAMILLO: Thank you, Dr. Lail. The next speaker is Frank Fernandez, Community Foundation for Greater Atlanta.

MR. FERNANDEZ: Good afternoon. My name is Frank Fernandez. I'm the president and CEO of the Community Foundation for Greater Atlanta. And at a high level, we've been around 73 years and our mission is to help create a more equitable and prosperous place for everyone who calls metro Atlanta home, now the sixth largest metro in the country. So what I want to do, because you've had a lot of folks saying a lot of the same things, is really focus on three things, but really talk at length about the third thing.

So the first thing was just mentioned, retroactivity. It's bad. Reasonable time frame, good. No need for a dunk tank. We do that. The second is this conflation between donor-adviser and investment adviser. You've heard much more eloquently than I could share from attorneys and others why that's problematic. I'll just say for us, it's also challenging. We have over $600 million that would be subject to this new rule and that would really not only negatively impact giving, and would hurt us significantly, but I think would also limit choice for a lot of our donors, which I don't think is something that is intended. And so, I think that's another significant thing to consider. And then the third concern, which a lot of my community foundation colleagues already touched on, but I really want to dig into and give you more use cases for, which is the overly broad definition of a DAF and really needing to make sure you distinguish donor-advised funds from field-of-interest funds, from fiscally sponsored funds, from designated, and so on. Because it's really important. Because one of the things I think I want to really emphasize is that we play a unique role in philanthropy. We create a platform that not only helps inspire donors to give more to their passions and their priorities, but also gives them a platform for flexibility, for leverage, for innovation, and for aligned and strategic giving.

So I'm going to walk through a couple examples of that. The first one has been mentioned already. I just think it's worth bringing out, which is COVID response relief funds, we split one up as well. We gave over $30 million to more than 35 nonprofits across metro Atlanta. And a lot of the kinds of things we did during that time, but I want to take us all back to 2020 when we didn't know what was going on about what you could and couldn't do, what for-profits were doing versus nonprofits, and we've had to use consultants. You had to sometimes go ahead and work with for-profit companies. We were doing masks and testing. If you wanted to support your local community and if you had had your hands tied, that would have been much harder than you can't. It would have been hampered if that were done through a DAF versus a field-of-interest fund. So I just think, and as we know, 9/11, global pandemics, these things happen. And that's part of the role of the community foundation, is how do we stand up and respond? And you have a lot of uncertainty and being flexible. So I just think that's an important thing to bring up.

A second one for us is around really not just how DAFs affect other things, because there is a lot of a chain effect. And I'll talk about this. One of our biggest priorities is affordable housing. So affordable housing is complex financially, very complex, because you end up having to put together multiple layers of financing or capital, stacked to be able to make it work, which requires not just grants, 0 percent loans, equity investments, and debt from multiple actors to be able to do that. And so, for us, we stood up a field-of-interest fund. We raised over $100 million just for that, over $100 million for impact investment funds, and then been able to leverage that with the mayor once we announced that, committing another 100 million of public dollars.

Now, these dollars are not all pooled, but braided, and we end up having to do a lot of expenses out of our field-of-interest fund because you have this braided pool of funding, because you have complex transactions that may have an impact investment, a grant investment, a 0 percent forgivable loan. There's a lot of legal documentation, all right? But this is part of our commitment to making the affordable housing system more efficient and more frictionless. If you limit basically everything to a DAF, at least for the field-of-interest funds in that example, it really limits our ability to be able to serve as that platform that brings and braids funding together. I think that's a really important example, but I think it's an important one.

A third example I'll bring up is we serve as a fiscal sponsor for many initiatives. One of those is this thing called Learn for Life. Learn for Life is a collective impact education initiative where we bring together leaders from our region. We have college presidents, we have school superintendents, we have business leaders, philanthropic leaders, all serving on the same council, and it's really focused on a few high-level things. One is just understanding the state of affairs as it relates to education in our community in terms of what's happening with kindergarten readiness, third grade reading, eighth grade math and science, high school graduation.

All these things that we know are the key indicators to how we are doing as a community to support kids in metro Atlanta.

One of the other things that we do, though, is we amplify bright spots. So we identify what is working. Where is it that we're an outlier in a positive way, whether it's a programmatic or policy decision, made by school districts, and thinking about how do you tire it out and how you scale it. Again, we use for-profits and nonprofits to support that. So I'll give you an example of one that is now starting to scale. So one of the huge things that we have in our community — like many communities, I think, are, in the audience — is inadequate levels of literacy. So for our metro area, third grade reading level, folks who aren't on level, 41 percent. Four one, all right? Very problematic, and even more so for our Black and brown communities. And so we're really focused on interventions that are going to help address that.

So we supported this thing called the science of reading in one school district, and we pooled funding together, worked with consultants, for-profits, and some nonprofits, Atlanta Speech School, to develop the curriculum and implement it with the school district. And so now we've done two years of that, and we saw a 16 percent gain across the table in literacy for all, not just the general population, for kids in fee-reduced lunch, ESL, as well as Black students. That is a rarity. So right now, we're trying to accelerate that because we think that can have an impact, a positive impact, on hundreds of thousands of kids in our region. Again, that would be harder if we didn't, weren't, able to be serving as that fiscal sponsor, because there aren't groups who are doing that right now. This initiative is doing that.

And the last example, which is another example of a fiscal sponsorship, is Neighborhood Nexus. Neighborhood Nexus is a data indicator project that, again, looks at all the social indicators in our region, and it's a really important service to our community because, again, it provides us a sense of what is going on in our region as it relates to income and wealth, health, housing, education, all these things that we know are fundamental to well-being. And it is critical because it not only provides that to the general public but, again, unique to community foundations, to funders, whether it's our donors, our private foundation partners, or the public sector. And they use this data to help inform both their funding decisions, their policy, and then, for practitioners like nonprofits, how they should go about doing the work and where they should focus. This is a huge value-add to our community. Without fiscal sponsorship, that becomes much harder to do.

So community foundations play a really unique role in our philanthropic space. And our concern is that the overly broad definition of donor-advised funds would really hamper our ability to leverage the platform we have. And so I would urge you to think about coming up with a whole new proposed regulation based on a lot of the feedback you've got here, because this will, if not done properly and if not informed by years of practice, it can have a significant detrimental impact. Thank you for your time.

MS. CAMILLO: Thank you, Mr. Fernandez. We can do, I think, one more before we break for lunch. This is David Cicilline, Rhode Island Foundation.

MR. CICILLINE: Good afternoon, and thank you very much for your service to our country and also for giving us an opportunity to provide testimony about our concerns about the proposed Treasury regulation. My name is David Cicilline. I'm the president and CEO of the Rhode Island Foundation, which is our state's only community foundation and one of the oldest and largest community foundations in the country. We were founded over 100 years ago, in 1916, by a group of local donors. As you well know, as nonpartisan public charities, a community foundation like ours accepts charitable gifts of all shapes and sizes, invest those gifts in financial markets so they grow over time, and use a responsible portion of the proceeds from those invested charitable dollars each year to make grants, provide scholarships, and support organizations and efforts focused on strengthening our communities and enhancing the quality of life in our state.

The design is intended to provide a permanent source of funding to help improve lives now and for generations to come. And at a time in particular when conflict often overshadows collaboration and hinders real progress, community foundations serve a unifying purpose. They possess the unique ability to mobilize generosity and financial resources, build and activate networks of people, provide an enduring safe harbor during times of uncertainty, and celebrate and leverage differing experiences, all with the aim of solving critical community challenges. Our country has benefited from a long tradition of philanthropy, and as you all know, our tax code incentivizes citizens to support nonprofit organizations doing critical work in our communities. Last year, the Rhode Island Foundation awarded $89 million in grants to over 2,500 nonprofit organizations. Approximately one-third of those grants are foundation directed through our community investments program, and two-thirds are donor directed. Over 60 percent of the total grant dollars awarded in 2023 went to organizations supported by both donor- and foundation-directed grants, and this alignment and funding represents shared priorities between the foundation and our donors. Many of the grants align with our three strategic priorities: educational success, healthy lives, and economic security. Together with determined nonprofit partners and key community stakeholders, our work helps reduce achievement gaps in education, address health disparities across diverse populations, and boost true economic opportunity for all Rhode Islanders.

As a community foundation, we offer philanthropic Rhode Islanders many ways to give. Our team of grant-makers and philanthropic advisers work even each day to ensure that the valuable investments entrusted to us have impact and most importantly, are put to use to meet the evolving needs of the community we serve. We encourage local philanthropists to invest with us in a variety of ways. The oldest and most flexible vehicles we offer are named unrestricted endowment funds, which donors set up in support of the fund for Rhode Island, and field-of-interest endowment funds, which are meant to support a broad cause or geographic area in our state.

We also offer interested donors the option of opening a committee-advised fund. We are volunteer committee members working alongside our grant-making experts to offer grants to local organizations or scholarships to assist Rhode Island students. We began offering a donor-advised fund product in the late 1970s. As one of the oldest community foundations in the country, donor-advised funds comprise 28 percent of more than 2,000 funds and represent 27 percent of our $1.4 billion in total assets. Our donor-advised fund product allows local philanthropists to actively participate in grant-making and to work alongside us to meet community needs.

For example, since its inception as a donor-advised fund a dozen years ago, one of our component funds has distributed more than $37 million in Rhode Island's nonprofit sector to support Rhode Island students as they pursue higher education. The truth is that the diverse fund types that we offer are an incredible asset and benefit to the community.

Unfortunately, the proposed regulations will cause a chilling effect on charitable giving and are very likely to disrupt the fund resources that the nonprofit sector relies on for support, having a detrimental impact on the incredibly important work of local charities who are providing on-the-ground support to our needs and who are working to solve critical community challenges. We're particularly concerned with the regulations' broad definition of the term donor-advised fund, which would meet many of the funds that we as public charities steward on behalf of our community.

For example, including field-of-interest funds as donor-advised funds would be particularly detrimental. These funds are typically broad in scope and support sector or subject-matter-based areas or geographic regions, often into perpetuity. At the Rhode Island Foundation, we're fortunate to be able to steward and leverage field-of-interest funds, many of which were set up long ago to augment foundation-directed grant-making to support the state's most vulnerable populations, who are served by community-based organizations like the Rhode Island Community Food Bank, Adoption Rhode Island, Sojourner House, Hope's Harvest, and Connecting for Children and Families. Subjecting field-of-interest funds, committee-advised funds, and designated funds to the same substantiation requirements and limitations as donor-advised funds is overreaching and really harmful.

Finally, the regulations broaden the definition of the term taxable distribution as it relates to donor-advised funds, which is likely to impinge on the donor-advised funds' charitable operations and objectives and reduce overall support of the nonprofit sector. By broadly redefining the distribution of grant payment, dispersant, or transfer from a donor-advised fund, the regulations could subject payments and fees that cover necessary operating charitable expenses to an excise tax.

So I want to say we provided a more detailed discussion of the many negative impacts of these proposed regulations in the letter submitted to the Treasury Department by the Council on Foundations, signed by many, many community foundations across the country, and dated February 15, and hope that you consider that part of my testimony.

And finally, I want to just say that I concur strongly with the testimony of Mr. Carroll. As a former member of Congress, I think his testimony about safeguarding the right of the legislative body to make these major departures in public policy. And you also, or the secretary of the Treasury, also received a letter signed by a broad — more than 30 members of Congress — a fully bipartisan letter from members of the Ways and Means Committee, reflecting the same concerns about what the impact of these regulations would be on community foundations, which are really the lifeblood of supporting really important nonprofit work in communities all across America.

So I would ask you again — thank you for giving us an opportunity to speak to you today. Ultimately, our institutional goal and our charge is to meet the needs of the communities we serve. We hope that you will consider the very serious difficulties that these regulations would pose, and I urge you to withdraw this proposed regulation in its entirety. Thank you.

MS. CAMILLO: OK. Thank you, Mr. Cicilline. I would like to break for lunch now. You can leave the building if you like, but you'll need an escort because if you don't have a government ID, you're not permitted to walk around in the building. But I ask if, if you do leave the building, that you come back by 1:45 so we have time to sign you in and we can start up again at 2.

(Recess)

MS. CAMILLO: OK, good afternoon everyone. It's 2 p.m. so we can start up again. Same rules as this morning. Ten minutes per speaker, and I think the next speaker is Tonia Wellons from Greater Washington Community Foundation. Is Tonia here?

MS. WELLONS: So good afternoon everyone. Many thanks to the after-lunch crowd for staying the course, and a huge thanks to the panel for the opportunity to testify regarding the proposed changes to the regulations impacting donor-advised funds generally and community, our community foundation, specifically. My name is Tonia Wellons and I am the president and CEO at the Greater Washington Community Foundation, representing the more than 700,000 residents of this great city, including the Commanders, the Wizards, the Caps, Nats fanatics, and DC United, and over 4 million residents in the broader region, and that includes Northern Virginia, Montgomery County, and Prince George's counties in Maryland.

So the Greater Washington Community Foundation celebrated its 50th anniversary just last year, and we are the region's largest local funder, having invested more than $1.7 billion since 1973 in order to build a more racially just and equitable and thriving greater Washington region, where people of all races, places, and identities can reach their full potential. We take a lot of pride in keeping our finger on the pulse of the issues and organizations that make a difference in this region. We understand the challenges deeply here, the impacts on neighborhoods, and the effective nonprofits that serve on the front lines. Our community foundation is a trusted adviser and navigator, helping thousands of individuals, families, businesses, and government make a meaningful difference throughout this region and beyond. We serve as a critical link between caring donors, like many of our partners here, committed nonprofits, and the local communities where potential often exceeds resources and opportunity.

As a tax-exempt public charity, we take seriously our responsibility to be the best stewards of charitable resources in this community. We are accredited by the Council on Foundations for meeting its national standards for community foundations and maintain a four-star Charity Navigator rating and Candid's Gold Seal of Transparency. So we are proud of our institutional payout rate, which on an annual basis lies between 15 and 20 percent, and just last year we hit 27 percent.

So yes, our community of givers are generous almost to a fault. They helped the community foundation rise to the challenge brought on by COVID-19 like many of our other partners in the room, resourcing our ability to provide more than $90 million in support funds to local organizations, supporting personal protective equipment for frontline medical workers and community organization staff, providing essential food delivery for people in need, addressing the mental health needs of frontline workers and nonprofits whose staff members were also deeply impacted. Our donors have been at the forefront of community response not only in disasters, but in support of the day-to-day operations of thousands of local, national, and even international nonprofits. On an annual basis, our donors are providing $70 [million] to $90 million in to qualified nonprofits, offering a lifeline to many organizations and people who would otherwise struggle to make ends meet. Simply put, our donors make our region a better place for its residents, and this is why we are so concerned about the unintended consequences that the proposed regulations on donor-advised funds will bring.

First, I'd like to address the proposed rule change that would categorize investment advisers as donor-advisers. Our community foundation offers donors at a half-million in assets or higher the ability to maintain separately managed accounts. We offer this service as a way of attracting potentially larger funds with the opportunity to become a part of our community of givers, giving them access to our advisory services, including site visits and community engagement forums, in a more seamless way. At the Greater Washington Community Foundation, our separately managed funds, who are required to align their investments with our investment policy statement, represent 46 percent of our assets and had an effective payout rate last year of 19.5 percent. That meant they granted $48 million to qualified grant recipients. Should the proposed rules come into effect, the damage could be irreparable, making it likely that the donor would elect to become a private foundation with a payout rate of 5 percent, which would equate to a loss of $36 million in grant-making to this community. We urge you to reconsider the impact that a loss of this level would have right here.

So next, I'd like to address the proposed rule change that would reclassify many diverse fund types as donor-advised funds. Beginning with our field-of-interest funds, our family of more than 130 field-of-interest funds support a wide array of programs and initiatives, from community wealth-building to housing and homelessness to disaster relief. These funds are all backed by community advisory committees that help to ensure all investments through the fund go towards a stated field of interest, and they are a vital part of our community foundation's impact in the community. These vehicles offer both ground-level community knowledge due to their structure, but are also able to support a wider array of services, like many have said, including funds that can directly support individuals within the field of interest. Taking disaster relief as an example, our donors have historically again been at the forefront of our region's response, from COVID-19 to the 9/11 attacks on the Pentagon and rural Pennsylvania to the 2008 and 2011 financial crises. Currently, we house several employee disaster and emergency hardship funds on behalf of corporations. Our three largest funds alone collectively provided $12.7 million to individuals in need over the past five years, both locally and globally. If these funds were recategorized as DAFs, it would be much more challenging to make grants to individuals in need. Subjecting field-of-interest funds to the same substantiation requirements as DAFs, even though they are overseen directly by community, would be wasteful, expensive to implement, and really making these programs untenable.

Finally, reclassifying fiscal sponsorships as DAFs would have an equally chilling effect on community well-being. We currently host more than 30 fiscal sponsorships, a vehicle for programs and donors who want to do good in the community but lack the infrastructure to do so. So they rely on the community foundation to help facilitate community impact. These funds support programs including maternal health, food, justice, and we're working to combat violence in Washington, D.C. These funds also support youth enrichment through opportunities for students from around the country to come to participate in internships right here in Washington, D.C., exposing them to global careers. The fund pays their stipends, travel expenses, housing costs, and if the funds were reclassified as DAFs, they would no longer be able to pay for expenses, severely limiting the opportunities for students.

In closing, we urge Treasury and the IRS to consider the unintended negative consequences that these regulations would create as a place-based community hub for philanthropy. Community foundations form the backbone of our nation's regional response on almost every issue and every priority you can think of. We represent and support communities of givers that would be irreparably harmed by the regulations, putting solutions to community problems out of reach for many of us. I'll close by thanking you again for the opportunity, and I'm available for questions, if you have any.

MS. CAMILLO: Thank you, Ms. Wellons. The next speaker is Anna Maria Chavez, Arizona Community Foundation.

MS. CHAVEZ: Good afternoon. My name is Anna Maria Chavez and I'm the president and CEO of the Arizona Community Foundation. It's an honor and privilege to be here today. I'm excited to be here representing a foundation that was founded in 1978 with three individual contributors who each invested $100,000. And that's how our foundation was created. Our founders believe that charitable giving should be the responsibility of many, not a select few. Bert Getz, our last living founder, continues to invest and participate in the work of our organization today. I also am excited to be here because our organization serves the entire state of Arizona, which currently houses 7.4 million individuals. And speaking on behalf of the thousands of nonprofits that serve the community, I'm excited to be here to share their voice, and also from a point of privilege, I'd also say that I'm excited to be here. After 30 years of a career in public service, I started my career here in Washington, D.C, as an attorney-adviser at the U.S. Department of Transportation, where my job was actually to publish rules and to listen to the thousands of comments that were submitted. In addition, I've had the pleasure of meeting three national organizations, the Girl Scouts of the USA, the National Council on Aging, and the National School Boards Association, during the pandemic and now serving here in Arizona on behalf of foundation.

So as my other community foundation colleagues have stated, we have existed for decades in Arizona. Our foundation was established to help people with day-to-day needs. In the early 20th century, community foundations focused on building their endowments and discretionary funds. But in the early 1980s, when the Arizona Community Foundation was in its infancy, donors in our state wanted to stay more involved with their giving. So our community foundation became an early adopter of donor-advised funds and other charitable giving vehicles that provided more flexibility for donors to give to their chosen causes. Over the years, the Arizona Community Foundation has grown to become one of the largest community foundations in the nation, administering more than 2,000 charitable funds and managing more than $1.3 billion in assets. ACF consistently ranks in the top 25 of more than 900 community foundations in the United States based on our asset size, annual grant-making, and annual contributions. Today, we proudly say our mission is to lead, serve, and collaborate to mobilize enduring philanthropy for a better Arizona, and we take that mission very, very seriously. And to deliver this mission, we exist to increase charitable giving for Arizona communities by providing DAFs and other charitable giving vehicles which are established and funded by individuals, families, and businesses. Since inception, our generous donors have collectively enabled us to grant more than $1.3 billion from these charitable funds. Of the $89.7 million that the Arizona Community Foundation and its donors granted to nonprofit organizations in 2023, 47 percent, or $42.2 million, came from DAFs, supporting education, human services, environmental causes, health, the arts, religious institutions, and more. DAFs are the Arizona Community Foundation's most popular giving vehicle, encompassing 636 funds that represent $401 million, or 30 percent of all our assets.

In 2023, Arizona Community Foundation DAFs received $45 million in contributions, 39 percent of our total contributions. Our donors choose DAFs for several reasons, including the ability to make a single contribution that can be distributed to multiple charities. Through our DAFs, smaller charities that may not have the expertise to handle noncash gifts are able to receive donations of stock, closely held business interests, and real estate. Donors also choose DAFs because they provide the option to involve future generations in charitable giving. After the founding, donors are no longer able to do so. Many ACF donors use DAFs to come together for meaningful conversations about family history and values, creating peace of mind that their children and grandchildren will be able to continue to carry out the family's charitable legacy. And I've actually seen this in practice, where the family comes together, and the 10-year-old child has to make a pitch on behalf of their local charity they want to fund.

The Arizona Community Foundation's donors and DAF advisers are active, very active, and their involvement establishes a connection that leads to greater impact. By establishing a fund at the Arizona Community Foundation, donors continue to invest in the needs of communities as partners as time goes on, and often continue to give to their funds after making their initial contributions. And I find that happens when we're able to take these donors out on field visits across the state of Arizona, and they see and they get excited about the impact they've been investing in. The average payout rate over the last three years for DAFs at the Arizona Community Foundation has been 14.5 percent, well above the typical private foundation payout of 5 percent. In addition to that, the Arizona Community Foundation also administers nonprofit funds, supporting organizations, field-of-interest funds, designated funds, collaborative funds, and scholarship funds. We happen to be the largest private provider of scholarships in Arizona.

All ACFs fund types, including DAFs, are separately identified and tracked. It is our responsibility as a community foundation to ensure that the assets in all of our component funds are prudently managed under state law and as an office of the court in Arizona. I take that very seriously and that grant-making is appropriately administered in furtherance of charitable purposes. Since the enactment of the Pension Protection Act of 2006, the Arizona Community Foundation has managed in good faith its DAFs in compliance with the provisions of the act based on the guidance that IRS issued over the past 17 years. The proposed regulations would potentially eliminate the Arizona Community Foundation's ability to continue its work with donors using DAFs as a charitable giving tool and have a harmful effect on the administration of certain types of non-DAF funds that are currently supported through donor and volunteer service. I'd like to give you an example of one in particular.

In February, you may notice one of your federal agencies administers what they call the point-in-time survey. Essentially, we volunteer across the country to count the homeless in Arizona. It happened this year and I went on that count. I used to administer the homeless funds in Arizona at the state level 20 years ago, and I thought, you know, let me go back out. Let me figure out, has the homeless issue gotten worse in Arizona? And I spent many hours in the rain looking under bridges and empty cars, going behind warehouses. At one point, the mayor of the city of Phoenix showed up with her detail and found me in a tent talking to a homeless couple. And it turns out that this homeless couple had been making their rental payments, but because of COVID one of them had lost their job. And what I found was many of the individuals in the homeless population were just one payment away from keeping a roof over their head. Well, at the Arizona Community Foundation, I'm proud to say that we administer an Arizona housing fund. And what's interesting about this is that it offers the opportunity to give during closing when homebuyers are buying a house in Arizona. And that can be matched by lending agents, home builders, developers, and title companies. We have granted $1.3 million to fund new, affordable homes in Arizona. If this proposed rule goes into effect, it will actually, unfortunately, have a huge impact on our ability to actually put roofs over people's heads.

I will end, since I'm at the end of time, actually, with your own secretary's words; I had the honor and privilege to be with her in Arizona while she visited us. And she and I were at a convening by the McCain Institute called the Sedona Summit. And I was thrilled that in her remarks, Secretary Yellen stated that she believed that lively debate is critical to good outcomes and that such conversations are essential to our country's economic success. She went on to state that she wants to ensure that interested parties are allowed to comment on proposed rulemaking and that she encourages her staff to respond and listen. Finally, Secretary Yellen shared that sometimes the public commenters point out things that would make a regulation better. And I think you've heard today that we do have some feedback to give. And as I say, feedback to give. Growth is optional, but we're here to support you and to support the philanthropic community. And I highly recommend that you take these comments into consideration and republish this rule and allow us to comment again. Thank you.

MS. CAMILLO: Thank you, Ms. Chavez. The next speaker is Eileen Heisman, National Philanthropic Trust.

MS. HEISMAN: Greetings, everybody. How are you? Good to meet you all. My name is Eileen Heisman. I'm the president, excuse me, and CEO of the National Philanthropic Trust. I'm also, for those football mentioners who were earlier, I'm also related to the Heisman football trophy, but I do, I didn't play football in college. I was too short. I've been at NPT for the whole 28 years we've been in existence and I'm stepping down away from my job at the end of June. And so I'm here with a great amount of passion for a field that I've really been working in and devoted to for the last 28 years and beyond. NPT is the largest provider of, independent provider of, donor-advised funds in the country, and we were one of the leading grant-makers in the country for the last three years. I've been working with DAFs since 1987, initially at the Philadelphia Foundation, and worked with planned giving and hospital philanthropy after that. But between my years at the Philadelphia Foundation and NPT, I have significant expertise with DAFs and how they operate, especially as a giving tool. And I was really motivated to do this work because of the giving part. I really wanted to participate in a job and work that would help give back to the world and especially to the communities that we live in where people are disadvantaged or suffering in all different ways.

I've actually witnessed the evolution of this industry firsthand. When I got involved in '87, everything was on paper. Now everything's digital, and I know the critical role DAFs play in the charitable ecosystem. I believe that DAFs are really an effective giving tool. The giving flows from DAFs to charities, both large and small, charities all over the country, and it is a substantial amount of money. And I believe it's essential to sustaining the charitable sector. We know from our data that DAFs provided countercyclical funding during economic downturns. While charitable giving has decreased five times in the last decade, DAF grant-making has grown every year, according to the publicly available data. After the Pension Protection Act was passed in '06, DAF sponsors carefully developed policies and practices to fully comply. I know, because I was part of that, developing those, and I was also part of consulting with others to make sure that we were in line with how other DAF providers were doing it, relying on the language of the PPA, the practice of how DAFs work with investment advisers. Drink water while I'm speaking. How DAFs work with investment advisers who have relationships with donors emerged and that change became really important and part of why DAFs have grown.

At NPT, we have always understood this practice to be permissible, provided that the fee arrangement is reasonable and represents fair market value. Much of the significant growth of the popularity of DAFs since the Pension Protection Act as giving vehicles has been tied to the relationships with investment advisers. For the past 15 years, NPT has been publishing the primary report that summarizes donor-advised fund data from nearly 1,000 DAF sponsors. We publish it every November. We compile the data from charities that submit a DAF reporting schedule with their Form 990. After the Pension Protection Act, the 10-year trends are compelling. From 2013 through 2022, the most recent year for which public data is available, that grant-making grew 430 percent, from $9.8 billion to $52 billion in charitable grants. That's after the Pension Protection Act. During that same 10 years, the average annual increase in grant-making was roughly 19.5 percent. Also during that same period, the payout rate from DAFs across the sector never dipped below 20 percent in how our report calculates it. And in 2022 alone, the payout was 22.5 percent. And this is a compelling fact, which was noted by somebody else, the difference between DAF and private foundation grant-making payouts. DAFs granted out $52 billion, which is about half as much as private foundations granted, $99.6 [billion], while DAFs had percent of their assets. There's other research that's done on DAFs. The DAF Research Collaborative is an independent group of academic researchers led by Dan Heist of Brigham Young and Danielle Vance-McMullen of DePaul. They've been doing DAF research for the last couple of years and recently published a report on when individual DAF donors actually recommend grants. They found that No. 1, 54 percent of DAF accounts grant over half of their initial contributions by year 3, and nearly 60 percent of those donors grant all of it by year 8. This data corroborates the findings in NPT's donor-advised fund report. They also found that 49 percent of all DAFs have balances of less than $50,000. The proposed regulations being highlighted today would impose a massive shift from the well-developed practices and procedures of the sector created after the PPA, and it's been 17 years that we've been developing these procedures and working together for best practices. The proposed regulations expand and broaden a number of definitions related to DAFs — the definition of a DAF, the donor-adviser, and distribution — in ways that we think could discourage and diminish charitable giving.

The Pension Protection Act provided the IRS tools to address many of these concerns, such as prohibiting certain transactions between a DAF and a disqualified person. And we know DAF sponsors have worked together to develop and implement strong and consistent policies and practices to prevent these abuses. We encourage you, and I know this is not — it's hard to hear this over and over again, so I appreciate your patience in this — but to work with stakeholder communities like those in the room today and beyond to ensure that the final regulations achieve their stated goals. We really wish to encourage robust and sustained grant-making charities across the country. I'm going to focus on a few issues within the proposed regulations.

The first of my comments are on the personal investment adviser role, which many people have spoken about. We estimate at NPT that about 80 percent of our donors are referred to us by their financial advisers. This was not true when I started in the business in 1987. Like many DAF sponsors, NPT allows donors to recommend that their investment adviser manage the [assets] in their DAFs. This practice was developed relying on the plain language of the PPA and has grown significantly since its adoption. Financial advisers refer clients to us because of our expertise in philanthropy and because we make it easier or try to make it easier for their clients to achieve their philanthropic goals. We facilitate the grant recommendations online. We handle all the administrative work associated with giving, including managing the due diligence of grantees, issuing grant payments, and doing all the accounting matters. We also have a philanthropic solutions group who help donors in identifying social sector causes that are interesting and important to them. However, when a donor recommends an investment adviser to manage the investments of their DAF, we undertake a rigorous review and due diligence process before approving them, and not all investment advisers are approved. The investment adviser must complete a detailed questionnaire and submit supporting documentation, all of which are specific criteria.

NPT has also adopted a fee policy that [provides] clear guidelines on acceptable fee arrangements. Our procedures ensure that their fee arrangements with advisers are reasonable and represent market value. If an adviser proposes fees that do not comply with our policy, they will not be approved. NPT requires the investment adviser to sign a written agreement with us to formalize the terms and expectations of their work. NPT becomes the client of the investment adviser and not the donor. We maintain a significant oversight on these relationships. We review them regularly and if the accounts are out of compliance with our investment policy or they deviate their investment strategy from what NPT approved or have lagging performance, we will put them on a watch list. We will terminate them if they have not made corrective actions. Because these arrangements involve the contractual and fiduciary relationship between an investment adviser and NPT, in this case, which is arm's length, we believe they do not present the potential abuse that Treasury and the IRS have identified. One minute. I think I'm — I'm just, I think everything that I said, and I just want to say that I agree with many of the comments, particularly David Shevlin's.

I just want to say that anything that you might consider doing, I would ask that you engage and consult with those of us that have been doing it for a long time and see what we have in place, and then ascertain whether or not you think that some of your proposals might be modified or eliminated in ways that we could have a mutually beneficial charitable sector that continues to grow. Thank you very much.

MS. CAMILLO: Thank you, Ms. Heisman. The next speaker is Kristin Todd, Community Foundation of Northern Colorado.

MS. TODD: Good morning, or actually not good morning, good afternoon. It feels like morning. My name is Kristin Todd and I'm honored to be here representing the Community Foundation of Northern Colorado, where I serve as president and CEO.

And as one of my colleagues mentioned, there are nearly 900 community foundations in the United States. And I would imagine our esteemed panel feels like most of us have shown up today. (Laughter.) In our industry, though, we feel if you've met one community foundation, you've met one community foundation.

However, a similarity that we all share is that we try to make it flexible and possible for all kinds of donors and generous individuals to come together and address the present and future needs in their community. It's a little reminiscent of the barn-raising philosophy of the old pioneer west, where neighbors come together to help neighbors. And herein lies the magic of community foundations.

As one of our local donors noted, as a single person, I cannot contribute enough to solve the issues in our community. But when we work together, we can. The community foundation I represent was established in 1975 and has been a cornerstone of our region's generosity for nearly 50 years. We work with hundreds of donors, house more than 600 individual funds, about a third of which are donor-advised funds, and steward just over $200 million in charitable assets. We refer to ourselves as a matchmaker working at the intersection of community generosity and community need.

In addition to our work with donors, we play a vital role in convening the community to work collaboratively on the really challenging problems of our day, like affordable housing, child care, homelessness, education, and mental health. We work to ensure that our local nonprofit organizations who are doing this important work day in and day out have access to the financial resources that they need and are connected to the generous donors in our area.

Our community foundation serves seven counties in Colorado. The most well-known is Larimer County, home to Colorado State University and Fort Collins and Estes, gateway to the Rocky Mountain National Park. But we also serve six lesser-known rural counties in the far northeast corner of Colorado. This region is made up of small agricultural communities and numerous farming and ranching families who have made rural Colorado their home for generations.

I'd like to share a few stories from our work in Colorado, and I've chosen examples that would have all been negatively impacted or perhaps wouldn't have happened at all if the proposed regs had been in place. And the stories focus on two particular issues, the danger of reclassifying other types of funds as DAFs and the use of outside investment advisers.

The first example is a collaborative funding model and is a great illustration of Margaret Mead's quote, "Never doubt that a small group of thoughtful, committed citizens can change the world. Indeed, it's the only thing that ever has." The Sterling Community committee-advised fund is an effort born from the dedication of a handful of — who envisioned a brighter future for their small rural area. The group's vision was to establish an endowment to build a community legacy to endure for generations.

So far, they've raised $2 million and they've been responsible for the creation of a community park, renovations at the local county fairgrounds, and a trail beautification project.

This committee-advised fund is truly driving transformative change in their small rural area. And as you can imagine, in small areas like Sterling, engaged citizens wear many hats. The folks responsible for building this community endowment have played the role of fundraiser, donor, and grant adviser.

And under the proposed DAF regulations which expand the definition of DAFs and donor advisers, these committee members would not be allowed to take part in the grant-making portion of this virtuous cycle of local community engagement without triggering and turning this fund into a DAF. And it's not hard to imagine that if they were cut out of this part of the cycle, they would not be as motivated to spend the time building the important community legacy and being part of the small group of thoughtful, committed citizens that Margaret Mead spoke of.

The next example I'd like to share is about fiscal sponsorships and what would happen, at least at our community foundation, if those became classified as a DAF. Another example from rural Colorado is when our community foundation helped incubate a recreation center in the small community of Yuma. Yuma is an ag town with a population of about 3,400 people on the eastern plains of Colorado. And a small group of citizens approached us asking if we would serve as the project's fiscal sponsor.

So for a period of about 10 months, while the group sought their own 501(c)(3) status, we served as their fiscal sponsor and paid expenses on their behalf, provided their back-office support and a wide variety of administrative assistance. And this partnership not only provided the group with essential resources and guidance, but also laid the groundwork for something that will benefit the Yuma community for years to come. The regs as currently drafted, which significantly broaden what constitutes a taxable distribution, would negatively impact our ability to serve as a fiscal sponsor and catalyze important community projects like the Yuma rec center.

The next example is about the use of outside investment advisers, which you heard quite a bit about. The largest DAF at our community foundation is valued at about $10 million and it uses an outside investment adviser. The family that started the DAF shared with us that if the option of using their own trusted financial [adviser] had not been an option, that they probably would have taken the route of starting their own private foundation. Instead, our community foundation has been able to work with this family to distribute more than $4 million to local nonprofit organizations, significantly impacting our community's well-being far beyond the impact that would have taken place if the family would have started a private foundation, because data tells us that the annual DAF payout rate regularly exceeds 18 percent or more, as you've heard today, as compared to the 5 percent typical of private foundations.

However, beyond the financial benefit of this particular DAF to our local nonprofits, there's been a positive impact on the business model of our community foundation. The fees paid to us by our larger DAFs support our ability to provide services to our smaller DAFs. Our median DAF size is only about $85,000. So without this large DAF and others like it, we'd be hampered in our ability to support our smaller donors. Frankly, it would be a double whammy if larger DAFs bypass community foundations altogether and choose alternative vehicles with a lower payout rate, all because the flexibility that's been important to them has been taken away.

Also, as has been noted by others, when we do work with an outside investment adviser, the community foundation owns the assets, the outside investment adviser must work and comply within our investment policy statement, and the advisers are not involved whatsoever in the fund's grant-making decisions.

Finally, with regard to the important role community foundations play in times of crisis. We're concerned that the proposed exemption for federally declared disasters is too narrow. There are numerous examples of community . . . of disaster funds being established at community foundations for local tragedies that don't rise to the level of a federal disaster designation. I can confidently say that the community foundation response to tragedies and natural disasters in Colorado, such as mass shootings, wildfires, and floods, would be negatively impacted if these funds were reclassified as DAFs. The more complex requirements of a DAF would significantly delay our work at the very time we need to be nimble and swift.

In summary, the proposed regulations would profoundly disrupt the work of community foundations and our ability to drive positive community change. They would also have a disproportional negative impact on community foundations at a time when it's harder and harder for us to remain competitive with larger commercial DAF sponsors. Perhaps instead of the normal process of going right to final regulations, the department could consider starting from scratch on some of the more problematic provisions. I know I speak for my community foundation colleagues when I say that our field would be pleased to work closely with Treasury on a set of rules that would address the concerns you have without upsetting the economic model of community foundations and stifling charitable giving. Thank you.

MS. CAMILLO: Thank you, Ms. Todd. The next speaker is Matthew Evans, United Philanthropy Forum.

MR. EVANS: Good afternoon. My name is Matthew L. Evans. I currently serve as the senior director of public policy for United Philanthropy Forum. As the largest, most diverse network in American philanthropy, the forum holds a unique position in the social sector to help increase philanthropy's impact in communities across the country. We are a membership network of nearly 100 regional and national philanthropy serving organizations or PSOs, representing more than 7,000 funders who work to make philanthropy better.

Through our members and their networks, we reach almost every state and district in the country, working to promote a strong philanthropic sector and advocating for vibrant, healthy, and equitable communities nationwide. In February, we provided comments that outlined our concerns with the current recommendations, where we were joined by 15 PSOs from across the country. We are here today to respectfully submit our testimony seeing these regulations and specifically we wish to address a few of the recommendations, including the definition of a donor-adviser, the definition of DAF as it relates to different funding arrangements, the definition of a DAF for certain scholarship funds, and the regulatory exception for certain disaster relief funds; the rules addressing the effects of serving on an advisory committee, clarification on certain payments such as those used for lobbying activities, and changes to the effective date of the proposed regulations.

We respectfully object to the inclusion of a personal investment adviser in the definition of donor-adviser. This would be in direct conflict with the statutory language of section 4958 and the intent of its enhanced excess benefit rule, potentially disrupting and harming charitable activities. These existing sections of the Internal Revenue Code and the fiduciary duties of investment advisers already provide substantial safeguards against any potential abuse. By subjecting all investment advisers to the enhanced excess benefit rule simply due to their role in managing DAF assets, you risk unintended negative consequences. Such action could force donors to abandon DAFs in favor of private foundations. This would disproportionately harm local and regional organizations which rely on DAFs, diminishing philanthropy's impact on the grassroots level.

For example, as the pandemic unfolded in Michigan, some foundations created COVID-19 relief and response funds to support local, nonprofit, and governmental educational organizations that provided services to their communities in the pandemic. At the Grand Rapids Community Foundation, their COVID recovery fund helped the foundation pool resources and quickly dispatch dollars for crisis response and long-term recovery. Here, DAF holders played a critical role in the community foundation's COVID-19 response efforts to continue advancing toward recovery and reimagining the community's future, with DAFs increasing the amount of grant dollars distributed to nonprofits by 23 percent alone in '20. Through their COVID relief fund, the community foundation in Grand Rapids was able to make grants every week, and DAF holders were crucial in supporting these efforts.

We recommend that you remove the rule regarding investment advisers or significantly narrow it to address only the specific perceived abuses so that community foundations like this one can go about their work unencumbered. The proposed regulations' broad definition of DAFs would also encompass collaborative giving projects, fiscal sponsorships, and designated funds. This mischaracterizes the nature of these arrangements and runs counter to the intent of section 4966.

Donors and individuals with advisory roles in such projects lack the broad decision-making authority over distributions typically associated with DAFs. Their recommendations operate with pre-agreed guidelines and frameworks established by the sponsoring organization. Furthermore, arrangements like collaborative giving, or collective giving, and giving circles are often community-led efforts that make giving more accessible and prioritize issues like equity and justice. These accounts are clearly not DAFs, but many of these funds would be classified as such under the proposed regulations, having a detrimental impact on this type of grassroots approach toward giving, making it less accessible to communities across the country.

To prevent these unintended consequences, we ask for explicit clarification that these arrangements, where recommendations exist but are made within an agreed-upon framework, do not constitute DAFs.

We appreciate and commend the existing exemptions with regulations as it relates to scholarship and disaster relief funds.

We also support additional clarity on the exception for scholarship funds used for post-graduation loan repayment assistance. This should be explicitly included in the regulations as it serves the same purpose as pre-graduation tuition payments.

The regulations also include an exemption for certain disaster relief funds. We request that this be expanded to equalize events with significant impact, even if not federally declared disasters. Limiting the exception would make it harder to deliver aid to communities in need. For example, in December 2023 and January 2024, unexpected heavy rainfall quickly led to devastating flooding and mudslides in low-income communities in Southern California. Within several days, the local community foundations in San Diego County and Ventura County respectively launched emergency relief funds and mobilized hundreds of dollars from donors to help the most vulnerable storm victims. Limiting the exception and potentially subjecting these funds to excise taxes would make it more difficult for aid to reach the people who need it the most in situations like these.

The regulations include two separate and slightly different rules for determining who is a donor-adviser based on participation on advisory committees. This creates confusion, in our opinion. We just recommend a single, clear rule incorporating the scholarship committee exception, which requires committee members to be appointed by the sponsoring organization based on objective criteria, with no direct or indirect control by the donor or donor-adviser.

As it relates to taxable distributions, 501(c)(3) organizations are allowed to engage in legally permitted lobbying, including lobbying to influence legislation. As written, the proposed rules would make it more difficult for these nonprofit organizations to engage with policymakers on behalf of communities they serve and the charitable sector. Prohibiting DAFs from funding lobbying activities that fall within the legal limits for section 501(c)(3) organizations creates undue burdens and stifles legitimate advocacy.

We recommend that you eliminate this restriction or clarify that it applies only to lobbying expenses incurred directly by the DAF, not funds distributed for permissible lobbying by recipients. Clear guidelines must be established to ensure that organizations can engage in advocacy without fear of punitive tax implications, preserving their ability to effect change through legislative channels.

The proposed — and in closing, the proposed immediate effective date will severely disrupt charitable work, and a lot of folks have talked about that here today. We recommend implementing a transition period of at least one year to allow for adjustment or prospectively apply regulations to future taxable years. While we commend the efforts to enhance transparency and accountability in managing donor-advised funds, it is crucial that these regulations are crafted with a nuanced understanding of the diverse operations within the philanthropic sector.

We look forward to engaging further with the IRS and Treasury to develop regulations that support effective, equitable, and efficient charitable giving that benefits communities nationwide.

Thank you for your attention.

MS. CAMILLO: Thank you, Mr. Evans. The next speaker is Jenn Holcomb, Council on Foundations.

MS. HOLCOMB: Good afternoon. Thank you for convening today's public hearing. I'm Jenn Holcomb, vice president of government affairs and legal resources at the Council on Foundations. The council is a nonprofit membership association that serves as a guide for philanthropies as they advance the greater good. Building on our 75-year history, the council supports more than 900 member organizations in the United States and around the world to build trust in philanthropy.

The council is proud to advocate on behalf of our members and philanthropy broadly for a regulatory environment that fosters a thriving and vibrant sector. As you've heard, DAFs help individuals and organizations support the causes and charities and communities they care most about today and the long term. As we look at how these proposed regulations will impact community foundations, other sponsoring organizations, the council is concerned that much of what is proposed will cause confusion and disruption. We share many of the concerns you have and will hear from our members and partners during this hearing. And while there actually are parts of the regulation we do support, given my limited time, I'm going to focus on the three areas of concern: clarifying the definition of a DAF, the personal investment adviser provision, and the applicability date.

First, as you have heard, community foundations administer a wide variety of funds, but not all of those funds are DAFs, and these regulations should not treat such funds as DAFs. At the same time, we should all be able to agree that funds that operate like a DAF should be treated as one, as defined in the Pension Protection Act. To be considered a DAF, the fund must have three characteristics: separately identified with reference to the contribution of a donor or donors, owned and controlled by a sponsoring organization, and the donor or donor adviser must reasonably expect to have advisory privileges.

Now, while those prongs seem fairly clear, our legal resources team routinely fields questions from community foundations asking for clarification regarding whether a fund is a DAF. And since the proposed regulations were released, we have received so many more. Though meant to provide clarity, they have instead caused even more confusion and uncertainty. Staff are asking about whether fiscal sponsorships, giving circles, field-of-interest funds, and many others, many of the other funds they manage, could now be treated as DAFs.

Having these funds treated as DAFs limits their effectiveness as vehicles for collaborative giving. And even if some of these funds are ultimately determined to fall outside the regulations, the process of having to analyze each fund is a sizable undertaking. Many of our members manage hundreds, sometimes thousands, of various funds. Analyzing even a fraction of those to ensure each meets an exception or is simply not a DAF is costly in terms of time, staff power, and financial resources. These worries are reflected throughout the many comment letters you received and the testimony today from community foundations and other sponsoring organizations.

I do want to share an example from a council member about a fund that could be treated as a DAF under the proposed regulations. The San Angelo Area Foundation sponsors a giving circle named the Future Fund. It is composed of younger philanthropists who each give and collectively review grant requests and recommend grants to three or four charitable organizations annually. On average, the group ranges between 40 and 50 donors. No one donor's input is greater than the others, but the foundation is concerned that proposed regulations may treat this type of giving circle as a DAF.

Today, this fund's endowment continues to support the group's charitable efforts while continuing to add new members and donations. And I know there are many more examples, some you have already heard about and others you will during the hearing.

Each fund helps ensure charitable gifts support nonprofit organizations in communities across the country and sometimes around the world. Treating these funds as DAFs will not improve the charitable ecosystem, but instead add a new and unnecessary administrative roadblock.

Recent public comments by Treasury staff have suggested that the proposed regulations were not intended to capture some of these other types of funds. We appreciate this clarification and hope it is reflected in the final regulations. To that end, we urge you to opt for simplicity over complexity. This should include reiterating that all three prongs must be met to be considered a DAF, simplifying the facts and circumstances when considering if a fund is separately identified, and modeling an exception for participation in advisory committees that reflects the established rules for scholarship committees.

The definition of a DAF must be clear, simple, and consistently applied throughout the field, which is why getting these regulations right is critically important. Next, the council echoes many of the concerns you have already heard about considering a personal investment adviser a donor-adviser. We believe current and federal laws as well as standards of practice already exist to help prevent and address any instances of abuse that may occur.

For many of our community foundation members, outside investment advisers provide an important service. Foundation staff can work with these external consultants to ensure the DAF and investments are appropriately managed so donors can achieve their charitable goals. For many community foundations, using outside investment advisers is a part of their business model.

For instance, the Community Foundation of Western North Carolina has 423 DAFs with assets of more than $131 million. As of March, 19 percent of those DAFs were managed by independent investment advisers recommended by donor and donor advisers.

The Black Hills Area Community Foundation is a relatively small organization with $60 million in assets. They recently added DAFs managed by investment advisers recommended by donors to their work. In one instance, they were able to deepen a relationship with a donor who is now comfortable leaving a sizable estate gift to the foundation.

Finally, almost 1,000 of the funds administered by the Community Foundation of Greater Des Moines are DAFs. It also runs the Charitable Investment Partners program, which enables donors to benefit from both the services offered by their local community foundation and the existing relationship with their investment adviser. The CIP program includes 372 DAFs and 85 approved advisers.

Examining each of these arrangements and then making any necessary changes will take significant time and resources. It simply cannot happen overnight. It is important to note that the investment adviser arrangement can be revoked. A sponsoring organization can and should terminate the agreement if a problem or conflict arises or if the fund is underperforming. Over the past few months, I have talked with several members about this provision. Some have shared stories of having to do exactly that, end their relationship. Now, we believe your goal here is to stop and prevent instances of abuse or conflicts of interest. The council and our members share that broad goal. Our members take seriously the responsibility of being stewards of the charitable dollars they manage. That responsibility requires that foundations establish and maintain the public's trust. Without it, there's little the sector could accomplish.

At the council, we believe that public trust in philanthropy expands when our field demonstrates high professional and ethical standards. This commitment shows up in all we do, from the ethical principles developed in 2022, to the pledge we launched with partners at the start of the COVID crisis, to our community commitment to Community Foundations National Standards.

Since 2009, we have been the supported organization for Community Foundations National Standards, a voluntary self-regulatory program. The National Standards accreditation seal represents a community foundation's commitment to rigorous, sector-driven best practices that exceed federal and state law requirements and demonstrate accountability and excellence to communities, policymakers, and the public. To achieve accreditation, foundation policies and procedures are subjected to rigorous review by attorneys and peers. Today over 440 community foundations are accredited by National Standards, and dozens more are in the process.

Last, while we are sure by recent comments, public comments, that the final regulations will not be retroactive, we urge you to go further and ensure the field has adequate time to understand, pivot, and implement the final regulations. Our members vary in asset size, number of desks, and staff capacity. We have heard concerns from the biggest community foundations to the smallest about what implementing this rule will mean for them. The council recommends a period of no sooner than two years starting after the tax year publication in the Federal Register. That time will ensure our members can make the changes to their operations, minimizing any disruption to this sector and charitable giving broadly, while also maintaining the public's trust in the sector.

Thank you for letting me share these remarks on behalf of the council and foundation and our members. And please look to us as a partner. We are committed to helping ensure our members and the sector have the information they need to comply with the regulations.

MS. CAMILLO: Thank you, Ms. Holcomb. The next speaker is Roxanne Jerde from the Community Foundation of Sarasota County.

MS. JERDE: Thank you. And I'm cleanup. I think I'm the last community foundation you're going to hear from, or I think that's what Debbie said. But anyway, I am Roxy Jerde. I am president and CEO of the Community Foundation of Sarasota County in Sarasota, Florida. I've been in this field for over 20 years, eight at the Greater Kansas City Community Foundation. Go Chiefs.

And I've been 13 in Sarasota County. But thank you for your time today and your service. And you guys are really good listeners. So watching you, we can see that. So thank you.

Our community foundation was established nearly 45 years ago in the fall of 1979 by a coalition of professional advisers, including investment advisers, who were managing charitable trusts and wished to establish local, knowledgeable community leadership to make the greatest impact through charitable grant-making. They realized they didn't have that expertise to oversee millions of dollars they knew that came with charitable intentions. So they formed the Community Foundation of Sarasota County.

Today, our community foundation oversees the current-day charitable goals and lifelong legacies of nearly 1,600 individuals and families, and they trust our organization to steward their philanthropic intentions. Over the last four-plus decades, this has meant nearly $500 million has been provided in grants and scholarships to support the nonprofit organizations — people who make our local communities one where we hope everyone has opportunities to thrive. To date, approximately $70 million of our almost $500 million in assets, or 14 percent, are managed in 28 individually managed accounts. We expect another $50 million-plus to be contributed through what we know of 12 land gifts in the future, which will be (inaudible).

If these, you've heard this, proposed regulations were put in place, our community would be very negatively impacted because we would no longer be able to steward charitable assets managed by financial advisers to strengthen and improve the lives of our citizens. We are the local experts to guide charitable dollars, and this would be thwarted.

I'm just going to give you one example. In 2019, the largest fund we administer, $31 million, came into existence. Its purpose is to address dyslexia, a neurological condition that impairs reading for about one in five students, or 20 percent. The fund today is providing resources for more than 100,000 students in our two-county area and their families for helping identify dyslexia, for supporting interventions, and providing teachers the professional skills to equip them to identify, predict, and adjust their classroom teaching for dyslexia. It also incorporates the science of reading. We're on the Campaign for Grade-Level Reading. We want every child reading at that third grade level by the end of third grade. So this effort, while focusing on dyslexia, is helping all readers.

This important work is known as the Strauss Literacy Initiative, and it's named for Ira and Patricia Strauss, a couple without children, who, along with their professional advisers, chose to work with our community foundation because of our ability to effect local change, as well as the ways we could work with their investment adviser. It was contingent in establishing the fund that the investment adviser would continue to manage the estate upon the client's passing. This agreement supports millions of dollars being invested in our local school districts and nonprofits.

The alternatives to working, as you've heard, with our community foundation would have been to establish a private foundation, which would not have had the grant-making expertise to effectively implement community-wide initiatives of this magnitude or to work with a commercial fund that does not have the local knowledge to effectively manage these dollars to have the greatest impact. There are many misperceptions about donor-advised funds, and I want to clarify two points.

First, we are, as you've been hearing, the legal owners of these assets, and they require stringent oversight. These funds must meet our investment policies when they're managed individually as well as our other pool funds. We have fired managers when their performance is poor or failed to meet our guidelines and benchmarks.

And second, these individually managed accounts are not part at all of managing — of doing any grant advisements from the fund. The sole role is to manage the assets in accordance with our investment policies and their client. The grant-making strategy is overseen by our community foundation.

I personally knew and got to know Ira and Patricia Strauss, and I'm certain, without the opportunity for their adviser, whom they trusted and relied upon for financial guidance for decades, to continue to manage their estate after their passing that these vital funds would not be making the impact in our community as they had over the last several years. Patti herself was dyslexic. She wasn't diagnosed until her — didn't know she had dyslexia till her early 40s, and she talked about [how] her self-esteem was so impacted by her inability to read. So the fact her entire estate came to the community foundation to change lives for generations is so, so meaningful. And as I've shared, we would not be overseeing this community-wide initiative if their investment adviser were not part of this.

So these proposed regulations would prevent local oversight of critical charitable gifts that are making a difference in our community and across the country. Disruption in the adviser relationship may cause a donor to revisit their charitable objectives. So I urge you to please reconsider these proposed regulations. Donor-advised funds are a critical lifeline, helping nonprofit organizations swiftly respond to emerging needs.

Unfortunately, we understand about hurricanes in Sarasota, Florida, and have hurricane relief signs, as well as COVID-19 and other immediate needs that we've been able to address really quickly, and wider-range issues like dyslexia and communitywide needs that take generations at times to deal with. While the nuances of these proposals are many, one thing is clear: These proposed changes would ultimately dramatically inhibit the opportunity to impact lives of our residents through localized charitable giving.

Thank you for your time and consideration.

MS. CAMILLO: Thank you, Ms. Jerde. The next speaker is Richard Mills, American Bar Association, Real Property, Trust, and Estate Law.

MR. MILLS: Well, thank you so much for the opportunity to testify and to address the Service and the department. It's been very informative for me to hear from all the other speakers as I — and hopefully, it's been very informative for you.

My name is Rick Mills, and I am, I'm an attorney in private practice with the firm of Smith Haughey, and I'm here today as the chair of the charitable planning organizations group for the American Bar Association's Real Property, Trust, and Estate Law section. And our comments were written by my esteemed colleague, professor Chris Hoyt of the University of Missouri, Kansas City. And sadly, you get me to present our comments today.

I do have a disclaimer, not to sound like a drug commercial here. The views expressed in our comments are presented on behalf of the Section of Real Property, Trust, and Estate Law of the American Bar Association and have not been reviewed or approved by the house of delegates or the board of governors of the ABA itself. And accordingly, should not be construed as representing the position of the association itself. And all those side effects that every drug you hear of has, we'll add that to the disclaimer as well. But thank you for that.

So it is — you know, our section of the ABA is primarily trust and estate law attorneys who are advising charitable donors and advising those who create private foundations, those that established or advised funds. And it's you know, many of us, of course, are also active in nonprofit boards and foundation boards. I myself serve as actually the incoming board chair of our small community foundation. So you know, there are a few, you know, things that to bring out from our comments.

You know, donor-advised funds have exploded in popularity, and you've heard why. You know, you've heard why they're so popular, why they're so useful. And I'm, you know, just amazed to hear from the foundation colleagues here about the good work they do with their own advised funds. And, you know, there's concern out there in general that somehow, you know, you've heard of the warehousing of wealth argument that, you know, these funds are being deployed for charitable use. They're set aside irrevocably for charitable use. And every community in the country would look differently if these funds weren't being deployed in the form of a donor-advised fund.

It's kind of interesting that you have it's an interesting picture here. I love private foundations, by the way. I create them.

I advise them, certainly would never discourage my clients who have the means to establish a private foundation to do that. But they're expensive.

They're very expensive and they're very complex. You know, the rules can be arcane. And for many folks, they like the idea of endowment giving.

They like the idea of creating a way to involve their children and their grandchildren. You know, they like the fact that they can memorialize a loved one, but they really don't have the means to justify a private foundation. And I would hate to see clients doing that, or anyone for that matter. You know, creating private foundations that, you know, 20 years from now, they're going to be going, you know, I want to go to their local community foundation like they do and say, please take this off my hands. You know, we love the good it does, but we just don't want to be involved in, you know, all the tax compliance and all that stuff.

And there — you know, so we're typically, you're talking millions of dollars that really justifies the private foundation. For, you know, for donor-advised funds, you have this beautiful hybrid option. You have all those benefits without — you know, you have a professional organization that actually does all this administrative work. You know, in the case of community foundations, they bring the local expertise. They can — you know, these sponsoring organizations can accept the complex assets.

You've heard all these things today about all the great services they provide, and many of them are small. You know, I established one for the benefit of — or, excuse me, in the memory of my late wife, with $10,000 from a life insurance policy. And, you know, it is — certainly many, most donor-advised funds, are like that. You know, they're fairly small. But as you've heard today, many of these — many of the community foundations particularly, are relying on the largest of the donor-advised funds to pay for the small foundations, like the one that was established by my family. And those oftentimes have come, as you've heard today, from the advice and the recommendation of the adviser, the investment adviser. I know as an estate plan attorney, the investment adviser is — they're the person that knows the client the best. They're the person that can encourage them. They're the ones, unlike me, that can solicit them, you know, you should be thinking about, you know, charity. You should be, you know, setting aside funds.

And so the irony is that many of these investment advisers are — they are bar none the primary reason why hundreds of millions, but, you know, certainly hundreds of thousands in the small community foundations' case, are coming in — you know, coming in and, again, to be irrevocably set aside for charitable use. You know, they're not they're owned by the sponsor organization. They're subject to various powers. They're subject to all those things that we consider truly charitable.

And, you know, so you have this. If we lose those types of large, you know, individually managed funds, is what we call them in our local community foundation, but, you know, these locally investor-advised — or investment adviser-advised funds, you have, you know, one of two things happening. The largest ones will consider a private foundation and you're going to have a large swath in the middle. They're going to talk to a lawyer like me. I'm going to say, you really don't want a private foundation for even what is a very large gift, you know, because it's just going to be too expensive for you and it's going to be a burden on your family. So what happens is we don't see all this money pouring into the community.

So I certainly don't want to belabor the point that we have — you've heard over and over again that the investment adviser rule really could have a staggering effect on the deployment of philanthropy all over the country. And I really think it's going to have, as I'll talk about as far as some of these other proposals, it'll affect all sponsored organizations, all community foundations particularly, it's going to affect, as I think many of these rules would, unfortunately, affect our small community foundations in the small communities even more. Excuse me here. Another theme I had is that we just — it's obviously, for all regulations, we want it to be easy to comply with, to be clear. There's also so many standards in our tax code with regard to exempt organizations that are applied to, you know, public charities in general, to scholarship boards, all kinds of things that are crystal-clear, well-defined. There's really — so, to me, a donor-advised fund is such a — you know, it's — I don't want to say plain vanilla, but it's sort of a middle-income option. You know, we're not talking about the billionaire foundation, you know, the level of — you know, when they're abused, they're abused at the highest level. You know, we're talking about everyday people, you know, and it does not — makes no sense at all to make the rules for donor-advised funds more stringent than private foundations, because private foundations are intended for larger dollars and, frankly, for a foundation that isn't independent, it's intended to not be independent. It's intended to be the family foundation. Obviously, you know, it's intended to be charitable, but it's not. You know, a donor-advised fund has a sponsoring organization with a truly independent charity — or, excuse me, a truly independent board of a public charity overseeing it.

So there's no reason to make the rules any more stringent, especially since, as so many of our colleagues have testified today, the giving rates are so much higher. And that's obviously not because the private foundations can't give more, but historically, they really do give higher than that 5 percent required level. And so — and, frankly, the dollars, thank you, the dollars are not, even on some of these large donor-advised funds, are not the Ford Foundation. They're not, you know, they're not hundreds of — you know, they're not billions of dollars. They can live on into perpetuity, but they're not — it's not something that requires that level of oversight.

I'm particularly concerned about, and my closing note on, the units. It's in one of the examples with regard to donor-designated funds; Example 3 of the proposed regulations would classify such a fund as a donor-advised fund if the donor is on the board of the recipient organization. A small organization, a small community foundation that, you know, the folks that are passionate are passionate in every aspect. They wear, one of the speakers talked about, they wear several hats. They want to be on that board. They want to be on the fundraising committee. They want to be — you know, obviously, there's times when we have to be careful with conflicts of interest, but it just — it would be too difficult to have to stop and police that. Thank you so much.

MS. CAMILLO: Thank you, Mr. Mills. Next speaker is Alexander Reid, TEGE Exempt Organizations Council.

MR. REID: Hello, everyone. I'm Alexander Reid of BakerHostetler, where I warm the chair once held by Norm Sugarman, who is a Cleveland tax lawyer who worked at the IRS in the 1940s and 1950s and helped establish some of the first donor-advised funds in his work with the Jewish Federation. I participated in the drafting of the comments on behalf of the TEGE Council, which sounds like it's part of the government, but it is not. In fact, TEGE Council was formed at the request of the IRS many years ago to facilitate communication between the IRS TEGE, the real TEGE, and we practitioners who practice in tax-exempt and government entities.

In our comments, we called for the withdrawal and reproposal of the donor-advised fund regulations. I'd like to take a moment to explain our reasoning for the request to withdraw and repropose the NPRM, because I believe that withdrawal and reproposal will protect the IRS as much as it will protect the nonprofit sector, and it is in the best interests of tax administration.

As you've heard over and over again today, the proposed regulations are both very broad and very vague. In their current form the proposed regulations would change every aspect of the way sponsoring organizations administer donor-advised fund programs which have been developed. But none of us are sure exactly how, because we don't know where these rules under section 4966 will land or what the proposals under section 4967 and 58 will say.

In addition to being broad and vague as applied to DAFs, the proposed regulations would sweep in many customary non-DAF transactions between donors and nonprofits that have never been subject to the donor-advised fund rules. As a result, many members of the regulated community have no idea that they will be affected by the proposed rules and have not had an opportunity to voice their concerns. So due process is a big issue here.

Disruption. DAFs have been around for a century now and hold much of the resources for the nonprofit sector. At no point during that time or the past two decades since the Pension Protection Act has it occurred to practitioners that a DAF should be regulated less favorably than a private foundation. The central premise of DAFs is that they are programs within public charities and they should be regulated as public charities.

The law is changing. The state of administrative law is very much in flux right now with forthcoming guidance from the Supreme Court in the coming months about the appropriate scope of interpretive regulations. Sections 4966, 4967, and 4958 are not ambiguous statutes. We in the practitioner community have been applying them for nearly 20 years now, and we have not had a problem doing so. I'd refer you to the robust and highly articulated contracts that are commonly used to define the relationship between the donor and the sponsoring organization, on the one hand, and between the sponsoring organization and the grantee, on the other hand. These are commonly available contracts on the websites of sponsoring organizations, and they represent the state of the art and our understanding of the statute and how it applies.

I believe I can speak on behalf of the practitioner community that it has never occurred to us that the statutes were so ambiguous that regulations would fundamentally disrupt these basic operating agreements that we drafted. We do not read the Pension Protection Act to confer a major power to Treasury to remake donor-advised funds, so I fear that a legal challenge is inevitable given (1) the breadth and scope of the proposed regulations; (2) the disruption that they would cause to both the known regulated community in donor-advised funds and the unknown regulated community in the rest of the nonprofit sector; and (3) the rapid narrowing of the scope of regulatory authority under administrative law. A legal challenge to these regulations is extremely likely. A final regulation that is so disruptive as to invite legal challenge will lead to greater uncertainty overall and is not in the interests of either the IRS or the donor-advised fund community.

Risk. The other reason to withdraw and repropose is the chilling effect of proposed regulations. Proposed regulations establish the official IRS position. They form a sort of safe harbor, and even more than that, it's considered the right approach, the approach that the government sanctions and approves of. Over time, the logic of risk mitigation pushes toward the de-risked position. Yet if that is the wrong position, then the proposed regulations harm the interests of the regulated community and the IRS because they push the sector toward a position that will not ultimately correct the position.

I'd also like to address for a moment the major premise underlying these proposed regulations. Congress did not delegate a major power to regulate beyond the statute, but, if it did, that power would not include a mandate to shrink the donor-advised fund sector or to create disincentives to their use by donors. There is a common misperception that donor-advised funds involve a mismatch between the deduction and the public benefit, and that such a mismatch requires regulatory intervention.

To be clear, there is no such mismatch between the deduction and the public benefit because the public benefit grows over time. I'd like to rid the public dialogue of this false notion of a timing mismatch, which simply it does not exist.

What does exist and is incontrovertible is efficiency. The reason so many aspects — so many assets — are moving into donor-advised funds is consolidation and economies of scale. It is not nefarious and does not require a restrictive regulatory approach. On the contrary, I believe it was the French philosopher Voltaire who said, “If donor-advised funds did not exist, it would be necessary to invent them.” (Laughter.) Sharing administrative costs over many donors benefits charity, aids compliance and law-abiding behavior, and should be encouraged rather than chilled.

I'd like to call out two specific points in the proposed regulations. First, fiscal sponsorships should not be treated as donor-advised funds. These are efforts of small organizations to give up some of their autonomy in return for efficiency and administrative convenience. The IRS should encourage fiscal sponsorships rather than increasing risk by treating them as donor-advised funds. Having small and under-advised groups partner up with larger and more responsible trustees is in everyone's interest.

Lastly, the taxable distribution rule should be limited so that it doesn't harm donor-advised funds' ability to make program-related investments or to prevent customary administrative expenses. The private foundation taxable expenditure rules should be a floor for the DAF rules. Nothing that is permitted to private foundations should be prohibited to donor-advised funds.

That's the substance of my remarks. I thank you for your good work and your attention.

MS. CAMILLO: Thank you, Mr. Reid. The next speaker is Andrew Grumet, Holland & Knight.

MR. GRUMET: My name is Andrew Grumet and I'm a partner at Holland & Knight, where we represent numerous nonprofits that sponsor donor-advised fund programs of all sizes, along with numerous other nonprofits engaged in communities across the United States and around the globe. Our team includes not only lawyers, but numerous others who have spent years working at nonprofits of all sizes.

I'm here today to speak about the practical implications of the proposed regulations. While we appreciate the time and effort at clarifying the law through the regulatory process, we believe that enhancements to the proposed regulations can be made to better achieve the protection of assets dedicated to charitable purposes, while at the same time fostering the philanthropic spirit of this country.

Let me begin with a few statistics compiled by the team at National Philanthropic Trust in their 2023 donor-advised fund report. In 2022, $52.16 billion was granted from donor-advised funds. Of that amount, $34.65 billion came from what are referred to as national sponsors, $11.92 billion came from what are referred to as community foundations, and about $5.59 billion came from single-issue organizations like colleges, universities.

With those statistics in mind, let's move to our very first topic, proposed regulation 53-4966-583 (phonetic), which has come to be known as the daisy chain rule, provides, in effect, that if a series of distributions results in a grant that is otherwise impermissible, then the distributions will be treated as a single distribution. In the event there is any confusion about what that rule means, we get an example — if the donor advises the distribution that the sponsoring organization subsequently makes from a donor-advised fund's Charity X, and the donor or the sponsoring organization arranges for Charity X to use the funds to make distributions to individuals recommended by the donor, the distribution will be a taxable distribution from the sponsoring organization.

In light of this rule, the question becomes, how's a charity supposed to know? How do you know? In other words, how's a charity supposed to know whether or not the donor either had the power to take such action and if the donor had such a power, whether or not the power is exercised. We don't know. How in the world are any of these charities here supposed to know that? It would appear, based upon the rule, that the sponsor must determine information about the grantee, such as whether or not the donor or related party was on the board of the organization. Was that really important? No, not really. Really, what you need to determine is whether or not the donor in fact took any action with respect to a grantee that would be treated as having arranged "use of the grant funds to be distributed to an individual."

OK, let's stop there and consider for a moment how many charities that sponsor donor-advised funds operate today when it comes to grant-making. First, it's important to note that many, if not most, sponsors of programs heavily rely on technology in order to make grants possible and to manage virtually every aspect of their program. This includes tools that would allow the sponsor to vet charities, make and issue grant checks, track them. Without these tools, a sponsor with more than a few DAFs could hardly operate with any degree of efficiency. Many people in the audience here today would surely attest to that fact. Indeed, most sponsors have and continue to invest heavily in technology to efficiently and effectively administer their programs. I don't think we want to take a survey how much people are paying here for their technology platforms. I can assure you that we all know it is a very large amount.

That said, for those with a tech platform, a grant will begin with a donor or some other authorized person logging into the technology. They're going to make a grant recommendation by selecting a charity. They're going to select the amount of the proposed grant. They'll decide whether or not they want to suggest that the program should be anonymous, whether or not the grant should be in honor of some other person, and a bunch of other general information. OK, now it's in the system. Then what? OK, once the grant is submitted, then the grant recommendation will go through a series of automated processes confirming the tax status and classification of the grantee to ensure the grantee is permitted. Similar checks will be made with respect to OFAC to make sure that, that the proposed grantee's not on an OFAC watch list.

Many technologies, in fact, today will also allow the sponsoring charity to vet out certain terms so that, for example, if the donor puts the word “pledge” in that grant purpose, automatically a red flag goes off and we all know about it, right? If you see something in there that says “gala,” OK, the technology will usually flag that for you. It makes things fast and easy, OK. Does it do everything? Heck no.

Definitely not. Wish it did. I bet you everybody else wishes it did, too, right? It doesn't, OK. But it moves things along very rapidly. OK.

Once the technology check is done, now we're in step 4, OK. Now things get manual. Every organization has something, and it's usually fairly large, that's going to go and do a visual check on every one of those proposed grants that have already been listed as potentially approvable. OK? Now you're looking for all the terms that kind of move it through the tech process that didn't get picked up right away, what I'll call the creative grant purposes that raise your eyebrows and say, wait a minute, this may be a problem. OK? If the grant makes it past that process, then it's going on a grant file of some sort where senior management, along with the board or a committee of the board, is going to actually approve the grant, then it could finally go out, OK.

Now, it's also worth noting here, and I think one or two other speakers already mentioned this, typically when the grant goes out, in addition, along with that grant check, will usually be a whole bunch of stipulations to the grantee charity. They'd say something along the lines, in short form, if you accept this grant, you're hereby certifying that in fact, the donor is not receiving impermissible benefits. Blah, blah, blah. OK? All right. Others here probably can regurgitate the words line by line from memory, OK.

Now imagine the implications of the daisy chain rule. How are charities supposed to comply with this rule to ensure a taxable distribution is not made? I suspect step 4 will be radically changed. Charities will be required to do what? Hire a fleet of new staff so that they could physically pick up the phone and call charities and say, “Hey, charity, did a donor who recommended this grant do a, b, and c?” What are we supposed to do? OK, how is this supposed to work? OK. Alternatively, are we going, are charities now going to send out a written certification system form, so that when the grant gets to the little soup kitchen, the soup kitchen has to sign a document certifying, in fact, that the recommender on this grant in no way recommended that the money should go to this individual. It doesn't strike me as practical, OK?

I don't have a reliable amount – manner — to actually determine at what point the actual number of grants that were included in the National Philanthropic Trust report actually covered. That $52.16 billion is the number we know. That's a lot of grants. I can only imagine how many hundreds of thousands of grants it represents. Now imagine what those numbers would look like if we needed to go to a manual process for grant-making 100 percent. It seems to me that is not a useful result anyone would want to have.

In the absence of actual knowledge on the part of a sponsoring organization, a taxable distribution under the daisy chain rule seems to be inappropriate. Just my view of the world here. This brings me to my second point: personal liability to fund managers under proposed regulation 4966-2(c)(3)(iii). While the proposed rule creates personal liability for making a taxable distribution, including those where the daisy chain rule applies in cases where a fund manager has actual knowledge, the rule goes well beyond knowledge. Specifically, the rule imposes liability where the fund manager has facts sufficient to know.

Why a new standard? We already have a similar regime under the private foundation rules, section 4945, and the regulations thereunder.

I point out here that those regulations actually specify that knowledge means actual knowledge; it's for all purposes under chapter 42. So I'm not sure if these proposed regulations now conflict with the existing regulations and how that gets worked out, but it seems to be kind of an issue.

But second, more importantly the point, however, the practical question is what does it mean to have sufficient knowledge? I have no idea. OK. This is not a clear rule by any sense of the words. If I go back to the days where I actually sat in the role and was a fund manager, I certainly wouldn't know what it meant, and I know that I'd be damned careful and scared that I would end up getting a tax bill for a distribution for liability. Thank you for your time, appreciate the opportunity.

MS. CAMILLO: Thank you, Mr. Grumet. The next speaker is Margret Trilli, ImpactAssets Inc.

MS. DUKE: Hello, good afternoon. I am actually Ivy Duke. I am speaking in place of Margret Trilli, our CEO. I am actually the general counsel of ImpactAssets, the public charity sponsor of a $3 billion donor-advised fund serving a national base of 2,000 donors. Our model is based on serving purpose-driven individuals and working with their wealth managers, family offices, foundations, and corporations to galvanize and catalyze capital towards impact investing, so that we can effectively activate significantly more of the assets in the donor-advised fund towards the donors' missions.

Before I go further, I must say a plus one to all of the comments that my esteemed colleagues have already raised for you today. I also want to thank Mr. Grumet on going over the list of the steps for going through grants for donor-advised funds. That was right on point.

I now want to give you some important context on ImpactAssets. All of the organizations, again, that you've heard from today, have a specialty, such as the community foundations, with the knowledge of their local area and its charities. It also might be a specific area of philanthropy. For ImpactAssets, our specialty is how we make social and environmental impact with our investments as well as with our grants.

Stepping back a bit, on average, donor-advised funds give out between 11 and 24 percent of their assets every year, and the other 75 percent to 90 percent is invested in the account, arguably growing so that the donor-advised fund will have more giving power later. This is a perfectly acceptable convention and ImpactAssets was founded on the idea that we can do better. In fact, ImpactAssets' donor-advised fund accounts, by number, gave an average of 18 percent in 2023.

We at ImpactAssets, we like to think large. We think globally. We like to imagine how much good we could effect in the world if 100 percent of DAF assets were invested in ImpactAssets — excuse me, impact investments, such as loans to small businesses located in low-income and disadvantaged communities, investments in medical solutions and therapies for the so-called small diseases that affect the majority of humans but do not have solutions expensive enough to attract traditional biopharma companies and investors, or investments in CDFIs, community development financial institutions, who collectively ensure that everyone can be included in our financial system.

ImpactAssets was actually founded in 2010 specifically for the purpose of managing a donor-advised fund program. It works with its clients with donors to place grants and investments made through our assets' donor-advised fund platform, consistent with its mission and programmatic goals. A few real-life examples are investments in, as I just mentioned, nonprofit low-income housing and community development, where ImpactAssets made an investment; and a local initiative support corporation, so it's LISC; a not-for-profit community development financial institution, CDFI, that redevelops urban neighborhoods and rural communities through investments in affordable housing, health, education, public safety, and employment. ImpactAssets has also made low-interest loans to small businesses owned by members of economically disadvantaged groups where commercial funds at reasonable interest rates are not readily available.

One example is through an investment we've made in Hope Enterprise, a CDFI credit union which creates economic opportunity and generational wealth for underbanked communities in the Deep South. We also make investments in businesses in low-income areas, both domestic and foreign, that improve local economies by providing employment or training for unemployed residents. An example here is an investment we've made with Oweesta, the longest-running Native CDFI intermediary, offering financial products and development services exclusively to Native CDFIs and CDFI communities, helping Native people assert greater control over their own economic futures.

So for us, we often do investments instead of a grant. And why do we do this? First of all, we do not see these as mutually exclusive vehicles. There are times when grants are the appropriate instrument and times when investment is far more impactful. This is due to three reasons. When investments are repaid, the money goes back out again to support another organization, project, or person and rounds of impact. Sometimes a loan is a pivotal vote of confidence. It says I believe in you. I believe what you are telling me is viable and I believe you are able to repay me. And in the end, if a borrower is struggling, loans can be forgiven.

I would now like to provide a few industry adoption statistics. My appeal today is more than just about ImpactAssets' needs. The global impact investing network estimates that $1.1 trillion in assets worldwide are invested with the dual purpose of achieving social and environmental impact alongside of financial goals. The U.S. leads the globe in impact investing, accounting for 37 percent of that trillion dollars, and American organizations account for more than 50 percent of impact investors globally. Philanthropists, foundations, and donor-advised funds comprise an impressive majority of the U.S. impact investor demographic. In short, a large and growing number of donor-advised funds and community foundations have executed at least one impact investment. And organizations like ImpactAssets have completed hundreds and even thousands of these important investments.

So where am I going with this? ImpactAssets does invest much of its own assets. The reason our firm can have such outsized results is due in part to our partnerships with nearly 300 registered investment advisers.

With this backdrop on ImpactAssets and the role of donor-advised funds in carrying out ImpactAssets, I turned to the proposed rules. As proposed, we see their implementation as having unintended and even adverse consequences on donor-advised funds. I just referenced our partnership with investment advisers, and my first comment is just to caution against the rules as drafted. I don't want to belabor the points that were made by numerous speakers here today, but I do want to share our experience with our clients in that personal investment advisers most often have a completely different wealth management investment mandate with their clients' private wealth and a completely different private mandate for the impact investments made in the donor-advised fund.

I also want to stress that it has been our experience at ImpactAssets that the investment advisers associated with our donors in advising on donor-advised fund recommendations, are not encouraging clients to keep money growing in the account so they may generate fees. If fee generation were the true impetus of the investment adviser relationship surrounding our DAFs, then we would expect to see investment advisers advising their clients to not make any charitable donations, so as to retain those assets in their personal investment accounts, or to establish a private foundation where the level of active grant-making is markedly less than we experience on our own platform. Also, if the goal is to address concerns over a personal investment adviser's receipt of any incidental benefit or potential conflicts of interest, we suggest that a more narrowly tailored rule should be considered and promulgated instead.

I also want to just address that, as already has been mentioned, we just want to add another plus one to the comments that were already discussed. Specifically, my colleague from the Impact Foundation, regarding the proposed rules where you request comments on how to further distinguish distributions from investments. And we strongly recommend that you consider program-related investments, or PRIs, as a comparable metric for distinguishing distributions from investments.

My final comment is that I'd like to emphasize with respect to the proposed rule applicability date just to stress that we respectfully request implementation of a transition period upon adoption of the new regulations that will allow us to adopt and change our processes so that we can implement the final regulations properly. In sum, thank you for the opportunity to provide feedback to proposed regulations and for the opportunity to speak with you today.

MS. CAMILLO: Thank you, Ms. Duke. The next speaker is Steven Woolf, Jewish Federations of North America.

MR. WOOLF: Good afternoon. My name is Steven Woolf and I am representing the Jewish Federations of North America. First, JFNA would like to thank Treasury and the IRS for the hard work over many years in drafting these proposed regulations and recognizing the importance of donor-advised funds to the philanthropic community.

JFNA is the national organization representing almost 150 Jewish federations, their affiliated Jewish foundations, and over 300 independent Jewish communities across North America. The importance of donor-advised funds to the federation system cannot be overstated. Approximately 70 Jewish federations and related foundations serve as sponsoring organizations of DAFs, and collectively it is estimated the system holds almost $11 billion in DAF assets and distributes over $2.5 billion each year from such accounts to qualified charitable grantees.

The federation system has operated donor-advised funds and mission-based donor-advised funds for over 60 years, and I appreciate the reference to Norman Sugarman, who spent many years in this building as the assistant commissioner in the EO division, and then became really the father of the donor-advised fund movement throughout the federation system. DAFs have become a very increasingly popular vehicle for facilitating charitable giving fundraising across federations, their affiliated social service and educational institutions, as well as numerous nonaffiliated charities locally and nationally. Individual federations have long benefited from strong DAF programs based on a close and ongoing relationship with DAF donors, many of whom are now second- and third-generation donor-advisers, resulting in an ongoing dialogue regarding community priorities and challenges necessitating federation funding.

The system honors distribution requests from our donor-advisers if they are consistent with the overall charitable mission and purpose of the federation system. This ongoing purposeful review is conducted under documented administrative procedures collected in the systemwide DAF operating manual. It results in qualified distributions to qualified charities, the hallmark of our DAF programs. An active DAF program enables the federation system to nimbly respond to financial downturns, natural disasters, and even acts of war. It should be noted that a large percentage of funds made available in response to the events of October 7 came from funds on hand at DAF accounts across the federation system.

We recommend four major changes to the proposed regulations, all of which have been covered in great detail, so I'll try to be brief. We also remain concerned that the need to revise these proposed regulations will unduly delay the release of additional DAF regulations regarding such important issues as what constitutes a prohibited benefit under section 4967, as noted in the most recent Treasury-IRS priority guidance plan.

First, as it pertains to the investment adviser issue, and this has been covered in great detail. We believe the approach of the proposed regulations imposes further restrictions beyond the provisions enacted in sections 4958 and 4966. In our system, independent investment committees of sponsoring organizations actively review the selection of outside investment advisers, as well as potential donor investment recommendations. We recommend that the regulations either eliminate the inclusion of investment advisers as donor advisers or expand the exception to include situations where a management contract between the sponsoring organization and the outside investment adviser imposes certain fiduciary duties and responsibilities on both parties. Here we echo the comments made both by the ABA tax section and the AICPA.

Second, the expanded definition of what constitutes a DAF can have unfavorable impact on our system, including the impact on such vehicles as collaborative funds. As noted earlier, the relationship between DAFs and distributions from some such accounts is key to fulfill the donor intent of our DAF holders as well as the mission of the federation system. We recommend, however, that the single identified organization exception, the definition of a DAF, be expanded to include distributions from accounts to dependent agencies that share and integrate their overall charitable mission with that of a sponsoring organization, if such organizations maintain an independent board not controlled by the donor-adviser. This is vital to our system because the largest fundraising activity each year for every federation is an annual campaign in which funds are collected and then allocated to a variety of charitable organizations, including related Jewish agencies and others that foster the mission of the overall federation system.

Third, the broad definition of taxable distribution could unfairly subject sponsoring organizations to excise penalties, as has been discussed earlier. For example, many of our sponsoring organizations maintain gift exception policies requiring review of potential asset donations that necessitate engagement of outside professionals, such as engineers and appraisers. Such payments should not be subject to the taxable distribution excise tax.

Finally, the effective date of any regulation should include a more lenient transition period to permit sponsoring organizations to make sure any required changes in policies and procedures can be in place to protect the resources of the charity during the transition period. For example, we anticipate updating our DAF operating manual, referenced earlier, to reflect such final regulations. At a minimum, we recommend the effective date be no sooner than tax years beginning after the date of publication of the final regulations.

In conclusion, we thank you for holding this hearing and reiterate, the federation system has been a leader in the formation and operation of mission-based DAFs for over 60 years and has been a worthy steward of donor funds and supporter of thousands of qualified grantees over that period. We stand ready to work with you in the development of guidance that will help further the vital charitable needs met each day by DAFs and the robust public charities that sponsor them. Thank you.

MS. CAMILLO: Thank you, Mr. Woolf. The next speaker is Elizabeth McGuigan, Philanthropy Roundtable.

MS. MCGUIGAN: Good afternoon. My name is Elizabeth McGuigan and I'm a senior vice president at Philanthropy Roundtable. I want to thank you for the opportunity to testify today and for your amazing endurance in hearing all of these very significant concerns raised throughout the day.

The Philanthropy Roundtable represents a community of charitable givers who believe in the values of liberty, opportunity, and personal responsibility. We're a network of donors who come together to collaborate and strategize on how philanthropy can help address our society's most pressing and persistent challenges. So I speak today to support the effort to implement the Pension Protection Act and to encourage changes to proposed rules that will help spur more charitable giving, as the rules have outlined.

Before I get into our specific concerns with the proposed rules, I would like to again highlight the importance of donor-advised funds for our community. The roundtable, unlike many you've heard from today, is not a sponsoring organization, nor do we only represent donors that give through DAFs. But our overarching goal is to protect what we call philanthropic freedom, or the right for Americans to give how, when, and to what causes they choose. DAFs are a powerful giving tool, and any efforts to restrict or limit their use warrants careful consideration.

I want to briefly discuss three items that are of most concern to the roundtable: the effective date of the final regulations, the definition of donor-adviser as it pertains to personal investment advisers, and the definition of taxable distributions. You've heard some of these concerns throughout the day, but they are significant enough to reiterate once again. And I also want to briefly address additional actions that Treasury and the IRS may be considering under — separately under Notice 2017-73.

Now, first off, the roundtable is concerned that the dates set forth in the proposed regulations do not allow sufficient time to ensure effective compliance. The changes in the proposed regulations are dramatic and, as currently written, likely retroactive. The top priority for the roundtable is a later effective date for the proposed regulations. Regardless of the shape of the final rules, the size and the scope of your undertaking is too large for sponsoring organizations, for donors, and for other stakeholders to implement on a short timeline.

Depending on the timing of the final rules, affected entities may be faced with retroactive requirements that are impossible to meet. The result would be increased costs for stakeholders, less giving in a time of uncertain rules, and fewer resources ultimately available for meeting charitable missions.

The roundtable recommends an effective date of taxable years ending at least two years after the date of publication of the final rules in the Federal Register. We believe this will allow stakeholders sufficient time to fully comply with the rules without impeding the crucial support for charitable work underway. At the very least, the final rules should not be retroactive. That is, they should be effective as to taxable years beginning after the date the final rules are published.

Second, we also urge the department to reconsider its proposed expanded definition of donor-adviser that proposes including a donor's investment adviser. Under the proposed regulations, a personal investment adviser will be treated as a donor-adviser. This means, effectively, that such investment advisers simply cannot continue to serve in their current roles because any compensation that they receive for their donor-advised fund services would be subject to penalties imposed under sections 4958 and 4967.

This rule is misguided for several reasons. First, it's outside of the department's authority, as the law is written. In section 4958(c)(2), as enacted by the PPA, Congress already provided special rules for donor-advisers and related parties that are stricter than the general excess benefit transaction rule. Under this strict rule, any payment to such persons is an excess benefit subject to a penalty. Section 4958(c)(1) also subjects investment advisers to the general excess benefit rule, which penalizes payments that exceed an arm's-length standard. Clearly, Congress did not intend for personal investment advisers to be subject to the enhanced rules that apply to donor-advisers and related persons, or they would have explicitly done so under the PPA. Congress chose to subject them to the general rule, which allows personal investment advisers to manage DAF assets provided their compensation is arm's length.

From a policy perspective, including personal investment advisers in the definition raises concerns about potentially deviating from established tax policy, which has long favored public charities over private foundations. That is, donor-advisers currently have the option to use a personal investment adviser to manage their DAF assets rather than manage those assets themselves, so long as that compensation paid is arm's length. Taking that option away could push those donors toward private foundations where adviser and family member compensation structures are less restricted. And I'll say, as earlier speakers have also said, private foundations are another great giving vehicle, but giving will be more robust when you have more options, not fewer. The proposal could also reduce charitable giving overall by restricting some of the wealth management strategy flexibility that make DAFs attractive in the first place.

The last issue that I'll raise is the proposed regulations' definition of taxable distribution to include any "grant, payment, disbursement, or transfer from a donor-advised fund." The only accepted transactions are investments in reasonable investment- or grant-related fees. The (inaudible) for this, I believe, that this is just too broad. As written, it could invariably penalize routine and necessary expenses like legal counsel, accounting, or philanthropic advising, even if deemed reasonable and related to the DAF operation, because it's unclear whether these fees are investment related. Such broad application of the penalty taxes raises questions about how DAF sponsors can fulfill their duty to act in the best interest of donors. It might discourage essential service procurement, hindering efficient oversight and management of DAFs. If the Treasury and the IRS's true aim is to prevent grant funds from being used for noncharitable purposes or benefiting disqualified individuals, the proposed rules, scope, and language could benefit from significant clarification. At the very least, explicit exceptions should be added to cover common expenses undertaken by sponsoring organizations to fulfill their fiduciary duties, such as legal, accounting, and philanthropic advisers.

Finally, as Treasury and the IRS move forward with additional rulemaking related to DAFs, we also advise caution against taking sweeping action on Notice 2017-73, and implementing changes that could have transformational impact on the DAF system and make it more difficult for our nation's charities to count DAF contributions toward the public support test. Limiting the types of grantees that DAFs could support could exclude worthy organizations' activities that are deemed noncharitable. Or interpretations of the proposed changes in Notice 2017-73, constraining individual grants or support for foreign organizations, could hinder donors' ability to direct their philanthropy according to their given missions. Unwarranted increased scrutiny of donor recommendations will likely lead to delays in grant-making, discouraging giving at a time when causes and communities are in great need.

With respect to counting distributions from donor-advised funds as public support for operating charities, we think that the proposed changes in Notice 2017-73 would result in bad public policy. Congress clearly believes that sponsoring organizations of donor-advised funds are public charities, and for decades, operating public charities have relied on donor-advised funds to meet their public support schemes. Changing this rule would cause chaos for public charities, as they'll have to reconsider their funding sources and potentially undertake expensive, substantial diligence to trace contributions from donor-advised funds. Further, this raises privacy concerns for donor-advisers to donor-advised funds that support public charities.

Coming back to the regulations at this hearing, the unintended consequences of the proposed changes will ripple through the complex ecosystem of philanthropy, as you've heard today, with the ultimate burden falling on those who rely on the generosity of DAF donors. Organizations addressing urgent needs rely on the flexible funding from DAFs. The Philanthropy Roundtable supports the general effort to implement the 2006 PPA and seeks changes in the proposed rules that will help encourage charitable giving. On behalf of our giving community, we respectfully request consideration of these concerns. Thank you.

MS. CAMILLO: Thank you, Ms. McGuigan. The final speaker, Gregory W. Baker, Renaissance Charitable Foundation.

MR. BAKER: My name is Greg Baker, president and chairperson of Renaissance Charitable Foundation in Indiana. We submitted a comment letter on the proposed regulations and the foundation appreciates the opportunity to be heard today.

Since 2000, Renaissance Charitable has been a foremost sponsoring organization of donor-advised funds. Year over year, the foundation grants to charities in all 50 states and we received contributions from donors in all 50 states, usually in the first quarter. Renaissance Charitable is the sponsoring organization for over 21,000 donor-advised funds and has retained the services of numerous investment advisers to provide investment services to the foundation and over 8,000 separately managed investment accounts. In 2023 alone, Renaissance Charitable made more than 137,000 grants to charities, totaling more than $592 million, that supported over 57,000 unique charities. Two thousand one hundred and eight new donor-advised funds were created with the foundation in the fourth quarter alone. The median donor-advised fund value at the foundation is only $37,000, a signal that donors of all income levels, not just the wealthy, are using this giving tool. Renaissance Charitable believes that it would be a great disservice to donor-advised funds and to charitable giving overall to adopt the proposed regulations as written.

For Renaissance Charitable, the three most important items that need to be changed in the proposed regulations are the definition of the personal investment adviser, the applicability date, and the extended definition of donor-advised funds. First, is the definition of personal investment adviser. The definition of a personal investment adviser should be completely removed from the regulations. Proposed regulations overstep by including this new term, which is not relevant to donor-advised funds. It is inconsequential to a DAF's operation if a DAF's donor engages the same investment adviser for the donor's personal financial services needs. Under federal rules and other investment principles and regulations, investment advisers owe a duty to the owner of the investment account, which, in the case of the DAF, is a sponsoring organization, not the donor. Each investment adviser owes fiduciary duties to that account owner, which supersede the investment adviser's personal interests and also supersede the investment adviser's duties or commitments to other clients, including the DAF donor.

The proposed regulations' exception to a personal investment adviser further shows flawed rationale. For sponsoring organizations of sufficient size, it is practically impossible to have only one investment adviser for the entire portfolio. The way the modern financial services industry provides its services almost requires that a large sponsoring organization use multiple investment advisers or firms. One reason is because there is no single investment firm that is best at picking stocks, bonds, mutual funds, ETFs, alternative investments, and the rest of a wide range of investment options, while also providing best-in-class service.

Further, by investing a DAF's assets in its own separate investment management account, the DAF's investments can be designed specifically for that DAF's charitable goals and granting time frames. The explanation in the proposed regulations stated the relationship between a donor and a personal investment adviser might give the donor influence over investment decisions and a DAF. However, 4966(d)(2)(a)(3) of the code specifically gives the DAF's donor the right to provide investment recommendations to the sponsoring organization. Regulations should not take away from donors a right that is explicitly authorized in the code. In summary, the inclusion of personal investment adviser is harmful to sponsoring organizations and to DAFs, would lead to increased account monitoring costs, higher administrative fees, and will reduce the amount of dollars granted to end charities. Therefore, the definition of personal investment adviser must be completely removed from the regulations.

Second is the applicability date. It is our understanding that it was not Treasury's intent for the regulations to apply retroactively to the beginning of the tax year in which they are finalized. However, the proposed regulations are drafted to this effect. Applying regulations retroactively is unreasonable and could potentially violate the administrative procedure. When Treasury issued the private foundation regulations back in 1973, several rules only applied after a reasonable transition period of six years. This multiple-year transition period allowed existing private foundations the necessary time to adjust and change their operational relationships. Similarly, there must be a reasonable transition period for existing sponsoring organizations to adjust to new rules after nearly two decades of operating under the current set of rules and regulations.

Looking at the burden and difficulty on sponsoring organizations to react to some of the proposed regulations' requirements and thinking specifically about the possibly completely new definition of a personal investment adviser as a donor-adviser, it may be an absolutely impossible task to identify all of those relationships in any time frame. It will most certainly be impossible to enact those requirements within a single tax year, and clearly unfair to apply these provisions retroactively. In summary, Renaissance Charitable requests that the final regulations be effective only after a multiple-year transition period or a grandfather exception be implemented for existing DAFs. In addition, Renaissance Charitable requests that Treasury immediately issue an official notice that the applicability date will not apply retroactively.

Third is the broadened definition of a donor-advised fund. Under the proposed regulations, many charitable gifts that are neither currently classified nor administered as a DAF would now be construed as a donor-advised fund and subject to DAF regulation. This is due to the expansive definition of DAFs that include nearly any contribution made to the sponsoring organization where the donor has or thinks they may have retained an advisory privilege. In today's world of big data, the DAF test under section 4966(d)(2)(a)(1) is almost automatic for any gift to a sponsoring organization. Many charities, including sponsoring organizations, hold and manage funds that are not DAFs. Basing the determination of what constitutes a DAF on a donor's unstated belief will make administration of DAFs untenable.

It is crucial that donors and sponsoring organizations can rely on the terms of the written agreement between the donor and the sponsoring organization for purposes of determining whether a fund does or does not constitute a DAF. Some examples of charitable gifts that were explicitly created with the intention to not be DAFs include qualified charitable distributions and gifts that could create excess business holdings. In the case of qualified charitable distributions, DAFs are not eligible recipients of a qualified charitable distribution under 408(b)(1). With the currently available alternative to establishing a non-DAF, a sponsoring organization may receive a qualified charitable distribution and make subsequent grants to charities, so long as it is clear the donor has no future advisory privileges under section 4966(d)(2)(8)(3). However, without complete clarity as to what is or is not a DAF, future gifts of QCDs will be suspect and problematic for donors and sponsoring organizations alike.

Another example is the case of excess business holdings. Under section 4943 of the code, a DAF, along with certain individuals and entities, cannot, as a group, hold more than 20 percent voting stock of a business enterprise without subjecting the sponsoring organization to an excise tax. Presently, a sponsoring organization to an excise — presently a sponsoring organization may receive a gift of an entity which, if received in a DAF, would be subject to excess business holdings excise taxes. However, so long as the sponsoring organization maintains and manages the contribution in a non-DAF that is not subject to excess business holdings. Many sponsoring organizations have developed the staffing and procedural knowledge and are uniquely positioned to accept complex gifts, such as business entities that could otherwise create excess business holdings, whereas most other charitable organizations simply do not have the staff or procedural knowledge to accept such gifts.

Now let's look at another issue with a lack of clarity around what is a DAF. Under section 170(f)(18) of the code, in order for a donor to claim a charitable deduction for a gift to a DAF, when a contribution is received, the sponsoring organization must issue a contemporaneous written acknowledgment to the donor expressly stating the sponsoring organization has exclusive legal control over the assets contributed. The same requirement does not presently exist for contributions made to non-DAFs. If non-DAFs become DAFs, then all donor charitable deductions claimed for such contributions could be in jeopardy without this code-required language. Altering the definition of a DAF by both expanding the definition to include non-DAFS and also reducing giving options for donors and sponsoring organizations will create confusion for sponsoring organizations, donors, their advisers, and the IRS.

Further, limiting fund options for sponsoring organizations would reduce or eliminate many noncash contributions and available donor opportunities. In summary, Renaissance Charitable recommends that Treasury follow what is instructed in section 4966(d)(2)(C) of the code and clarify charitable gifts that would not be a DAF, instead of trying to expand the definition of DAFs.

As a final note, donor-advised funds are attractive and unique giving tools with relatively low administrative costs. Enactment of the proposed regulations as written would increase sponsoring organization administrative costs, thereby directly decreasing grants to end charities. Donors currently enjoy a wide range of choices when creating and funding their DAFs. They can choose from a wide menu of assets to contribute. The DAFs have numerous investment options, and there is operational flexibility. In a time when other charitable giving is declining, the federal government should take extra care when redrafting regulations that could lead to further declines in charitable giving. Given the significant number of substantive comments on the proposed regulations, we recommend that Treasury withdraw the regulations and repropose them so that there is opportunity for meaningful comments. Please do not make it harder for donors to make charitable gifts, especially through an effective giving tool such as the donor-advised fund.

MS. CAMILLO: Thank you, Mr. Baker. That concludes the hearing.

MR. THOMAS: Thanks to everyone who made it to provide their comments. We appreciate them, especially those who had to travel a ways to get here. Thank you for making the effort.

(Whereupon, at 4:18 p.m., the PROCEEDINGS were adjourned.)

* * * * *

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“TAXES ON TAXABLE DISTRIBUTIONS FROM DONOR ADVISED FUNDS UNDER SECTION 4966"

UNITED STATES DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE

TELECONFERENCE PUBLIC HEARING ON PROPOSED REGULATIONS

[REG-142338-07]

Washington, D.C.

Tuesday, May 7, 2024

PARTICIPANTS:

For IRS:

RACHEL D. LEVY
Associate Chief Counsel
Employee Benefits, Exempt Organizations, and Employment Taxes

LYNNE A. CAMILLO
Deputy Associate Chief Counsel
Employee Benefits, Exempt Organizations, and Employment Taxes

TAINA EDLUND
Senior Technician Reviewer
Employee Benefits, Exempt Organizations, and Employment Taxes

WARD L. THOMAS
Senior Counsel Employee Benefits, Exempt Organizations, and Employment Taxes

CHRISTOPHER A. HYDE
Attorney
Employee Benefits, Exempt Organizations, and Employment Taxes

For U.S. Department of Treasury:

AMBER MACKENZIE
Attorney Advisor
Office of Tax Policy

Telephonic Speakers:

BOB SORGE
Madison Community Foundation

LINDY EICHENBAUM
Lent Rose Community Foundation

LAUREN Y. CASTEEL
Women's Foundation of Colorado

REYNOLDS CAFFERATA
American College of Trust and Estate Counsel

NOAH ATENCIO
Philanthropy Colorado

MATTHEW RANDAZZO
Greater Cincinnati Foundation

MICHAEL PARKS
Dayton Foundation

DAN BLAKE
University Impact

* * * * *

PROCEEDINGS

(10:01 a.m.)

MS. CAMILLO: Okay. Good morning, everyone. Welcome to day two of the public hearing on proposed regulations regarding excise taxes on taxable distributions made by sponsoring organization from a donor-advised fund under section 4966. I am Lynne Camillo. I'm the Deputy Associate Chief Counsel, Employee Benefits, Exempt Organizations, and Employment Taxes in the IRS Office of Chief Counsel. First, I'd like to have the other members of the IRS and Treasury panel introduce themselves, and then I'll go through a few procedural remarks. Taina?

MS. EDLUND: Good morning. Yes, good morning. This is Taina Edwards and I'm a Senior Technician Reviewer in Lynne's organization.

MR. HYDE: Good morning. This is Chris Hyde. I'm an attorney also in Lynne's division.

MS. MACKENZIE: Assuming we're going in the same order as yesterday. This is Amber MacKenzie. I'm an attorney-adviser in the Office of Tax Policy at the Department of Treasury. Good morning.

MR. THOMAS: And, hi. Ward Thomas. Sorry. Yeah. Ward Thomas. I'm Senior Counsel and under — in Lynne's office. Thank you.

MS. CAMILLO: Okay. Thank you. I want to thank everyone who submitted comments and also thank everyone who arranged to speak today. The comments are very helpful to us in preparing the final regulations. We read them all carefully, take them into consideration, and do our best to address them when we issue final regulations. I'd like to get started right away because we do have eight speakers today. You should have all been given an agenda showing the schedule of speakers. I will call each speaker in order. If, when I call the speaker they are not ready to present, I'll move on to the next one and recall the speaker who was not ready. After the conclusion of the other speakers, each speaker will have only ten minutes to speak. You will be given notification when you have one minute remaining.

At the ten minute mark, you will be placed on mute. So I advise every speaker to wrap things up when they're notified that they have only one minute left. I also ask that you put yourself, everyone who is not speaking, please put yourselves on mute. If you don't put yourselves on mute, there will be feedback on the call that will make it difficult for others to hear.

With that, I will ask if there are any questions, and if not, then I will move to the first speaker. Okay. Hearing nothing. The first speaker will be Bob Sorge from the Madison Community Foundation, and everyone else should put themselves on mute, please. Thank you.

MR. SORGE: Thank you and good morning. I have been President and CEO of the Madison Community Foundation in Madison, Wisconsin for 11 years. I'd like to thank the panel for giving me the opportunity to testify regarding the proposed regulations so I can provide additional perspective on the comments in our letter of February 14, 2024.My primary concern with the proposed regulations is their failure to differentiate between nonprofit community foundations and commercial gift funds that are created by for-profit financial institutions. While community foundations and commercial gift funds both administer donor-advised funds, their similarities end there. Community foundations are focused on improving the quality of life in a specific geographic area. They typically support a wide variety of causes through grants and often provide other programming to benefit the community, such as professional development for nonprofit leadership or producing local research, or convening nonprofits working on similar issues or processing complex gifts for organizations that are too small to have the capacity for that work or any number of other activities. The fees donor-advised fund holders pay Madison Community Foundation support this work and help us accomplish our mission to advance a more vibrant and equitable community.

Commercial gift funds, on the other hand, are an affiliate of a larger for-profit entity. I don't know how their fees are used, but they don't offer the same types of programs as community foundations. They don't really know the local nonprofits they make distributions to, and they don't know the communities those nonprofits serve. Their value proposition is providing low-cost fee for service to their clients. It's simply a different business model that requires different regulation. While I understand the Treasury Department's and IRS's desire to apply one uniform set of rules to community foundations and commercial gift funds, as currently drafted, the proposed regulations are overly broad, difficult to apply, and attempt to impose uniform requirements on these fundamentally different organizations, which will result in a major negative impact on community foundations in particular.

I'd like to spend the remainder of my time describing those aspects of the proposed regulations I find most concerning. As a community foundation leader, regarding the definition of advisory privileges, it's important to understand that community foundations are governed by boards comprised of volunteers who make gifts to these institutions to reflect philanthropic leadership. Their generosity sets an example for the rest of the community. For Madison Community Foundation, a $400 million institution, the amount each board member gives is solely at their discretion, with gifts generally ranging from about $25 to $10,000. In 2023, the median gift by our board was $500. While we ask the board to lead by example in giving, they are not our largest donors. Our board members, together with other community volunteers, fill a variety of roles at the foundation, including oversight of the grant-making program and investment of its endowments. As drafted, their status as one of thousands of annual donors could define them as donor-advisers. There are exceptions to this rule for those who possess expertise in the subject matter of a fund,

but there are also prohibitions for significant donors. These restrictions fail to understand our business model fully and would add unnecessary complication for an organization that already has very strong conflict-of-interest policies in place. It may sound silly, but the way we read the proposed regulations, they suggest we disqualify those who reflect philanthropic leadership, part of our mission as a community foundation, and instead fill our board and committees with people who are uninterested in philanthropy.

We request that the proposed regulations be modified to allow board and committee members acting in these capacities and subject to their normal fiduciary duties and conflict-of-interest policies to make contributions to the sponsoring organization without creating a donor-adviser fund relationship. Second, the proposed regulations place the same compliance burden on a community foundation with $50 million in assets as a commercial gift fund sponsor such as Fidelity Charitable, which had $57 billion in assets in 2023. We have vastly different-sized staff capacity, and it would be impossible for our small operations team to monitor the multiple volunteer commitments of donors related to 1,280 different funds. We request you create separate regulations that reflect the different operating models and capacities of community foundations, private foundations, and commercial gift funds. Third, as drafted, the proposed regulations classify an investment adviser managing both the personal assets of the donor and their donor-advised fund as a donor-adviser, unless that adviser is viewed as providing services to the sponsoring organization as a whole. Practically speaking, this encourages commercial gift funds to self-deal. By design, their donor-advised fund assets are primarily managed by their affiliated for-profit entity, while commercial gift funds may assert they are not controlled by their for-profit affiliates. Note that Vanguard Charitable's website boasts that Vanguard investments underlie the majority of its investment options and they, quote, adhere to Vanguard's investment principles. And currently, both the staff and board at Schwab Charitable have extensive ties to Charles Schwab and company, including the board chair who is also the president of the Charles Schwab Corporation. These relationships pose far greater conflict-of-interest risks than a community foundation board member who may give $25 or $500 or whatever it may be.

While the proposed regulations incentivize commercial gift funds to self-deal, community foundations, especially those offering third-party asset management, may be penalized for providing donors with a wider variety of options. Community foundations will either need to take on the role of successfully marketing the services of their advisers to other fund holders to ensure those advisers are serving the foundation as a whole or be unable to pay compensation to those advisers without triggering the excess benefit transaction tax. The proposed prohibition on paying compensation to advisers of specific donor-advised funds will have a significant chilling effect on giving to community foundations. This decrease in funding for local community foundations will have a direct negative impact on their ability to meet the needs of their communities. We request that the proposed regulations be modified to adopt an arm's-length standard that is applicable to all investment advisers with any excess benefit transactions remaining subject to the requirements of code section 4958.

Finally, as drafted, the proposed regulations would become effective for taxable years ending on or after the date a Treasury decision is published in the Federal Register. Requiring retroactive compliance forces donor-advised fund sponsors to go back and review all distribution transactions starting from the first day of the tax year in which the final regulations are published and possibly reclassify or rescind any distributions that are noncompliant in order to avoid paying the excise tax under code section 4966. This is impractical and unnecessary. We request that the effective date of any new regulations be forward-looking and incorporate a transition period of at least two years.

In summary, we are concerned the proposed regulations will unfairly impact community foundations, reduce giving to community foundations, and increase their cost to comply with the regulations. For Madison Community Foundation's part, in the last seven years, we have twice successfully lowered our fees and anticipate continuing in this direction. The proposed regulations may not only cease these reductions, but reverse them, increasing the cost for our fund holders. Thank you again for the opportunity to provide testimony. I hope my remarks have been helpful to the panel and I would be happy to answer any questions you may have.

MR. THOMAS: Thank you, Mr. Sorge.

MS. CAMILLO: The next speaker is Lindy Eichenbaum Lent, Rose Community Foundation. Everyone else should please place yourself on mute. Is Lindy Eichenbaum Lent ready to speak? Okay, hearing nothing, we're going to move on to the next speaker. Lauren Y. Casteel, Women's Foundation of Colorado.

MS. CASTEEL: Good morning, my name is Lauren Y. Casteel and I am the President and CEO of the Women's Foundation of Colorado. Thank you for the opportunity to share our perspective with you. The Women's Foundation of Colorado, also known as WFCO, is a community foundation based in Denver serving the entire state of Colorado. We are the only statewide community-funded foundation for protecting the progress in advancing gender, racial and economic equity for all Colorado women. Through complementary strategies, including convening, grant-making, impact investing, policy and systems change, and gender lens investing, we address the acute challenges of today while cultivating women and girls' unlimited potential for tomorrow. Our most recent audited year-end the fiscal year ended March 31, 2023, WFCO holds $32,423,293 in total assets, made 291 grants for a total of $2,762,112 between April 1, 2022, and March 31, 2023, holds $6,555,236 in close to 90 donor-advised funds and eight giving circles. Our team is made up of 15 skilled and values-aligned individuals. One individual manager manages our donor-advised funds, while staff from other departments play an important support role in donor-advised fund administration. Our staff shares commitment to being an ethical and thoughtful philanthropic institution that adheres to the current law and best practices.

Thus, we have carefully reviewed these regulations. Our feedback is based on our understanding of the impact of the regulations, the knowledge of our capacity, and the effect it might have on our ability to distribute funds. While WFCO is proud to be a philanthropic steward for millions of dollars and hundreds of donors, we are equally proud of the way we engage individuals in our grant-making process, to ensure that grants are efficiently directed to community-based nonprofit organizations. We boldly stand in this mission and values with commitment to leveraging 100 percent of our resources to do so. We do this through several community-involved grant processes and eight giving circles providing community grants in service of our mission. As the wealth gap in our country grows exponentially each day, we believe it is our responsibility to democratize philanthropy through involvement of diverse individuals. DAFs, community advisory committees, giving circles and collaborative funds allow for more individuals to participate in philanthropy through community foundations. We are grateful for the public service the IRS and Treasury provide to our country, and thank you for putting together these important rules.

DAFs have been a growing part of not only the philanthropic services we provide as a community foundation, but also an important way nonprofit organizations such as ours receive funds from other community foundations that sustain our operations and ensure we can achieve our mission. With decreasing state and federal funding, community foundations and the nonprofits we fund through DAFs, giving circles, field-of-interest funds and collaborative funds are increasingly counted on to provide essential services and support thriving communities. The nonprofits that fill crucial gaps and promotes in our communities also play an integral role in our state and local economy, employing 182,000 Coloradans. While we understand the desire to further regulate DAFs, we are providing feedback to ensure that these rules do not impede community foundations' ability to efficiently and equitably distribute grant funds to communities when they are needed. More than ever before, our desks and giving circles support essential services such as skills training, arts, environment, education, healthcare, child care and affordable housing.

Our top concerns include, one, definition of donor-advised fund and exceptions. WFCO uses a number of tools to increase giving in addition to DAFs, including field-of-interest funds and giving circles to provide more inclusive and accessible philanthropic opportunities. We believe that these regulations might impede our ability to efficiently offer these tools and the impact they provide throughout our state. Field-of-interest funds, FOIF, it is common for field-of-interest funds to include grant advisory committees, and in some cases the donors may provide input in a minority capacity as members of the committee. WFCO holds FIOFs and finds them extremely impactful ways to efficiently grant funds to community organizations. This includes our women and girls of color fund. Decisions are made by a group of community leaders on an advisory committee for the fund-giving circles: groups of donors who pool a certain amount in contributions and collaboratively choose the charitable activities to support those funds. All donors give similar amounts, and there is no single donor who has exclusive advisory privileges. Often, decisions about where to give are made by a smaller committee or collectively by the group, limiting any risk that funds are used improperly. WFCO holds eight giving circles and values the opportunity they provide for individuals to engage in philanthropy.

Two, expanded definition of donor-adviser and advisory committees. WFCO often thoughtfully includes community members in all of our grant-making processes. Our understanding is that the expanded definition of donor-adviser might impact the ability to more inclusively make decisions about grant-making. We encourage Treasury and IRS to clarify that funds where the donor does not maintain control are not DAFs. Donors may establish a fund for two or more specified nonprofit organizations, but the donor retains no control after the creation of the fund over distributions, while a donor may continue to receive statements about the fund that by itself does not categorize this fund as a DAF. WFCO works to reduce barriers to charitable giving, and at a time when giving has seen a decline, it is important that the regulatory environment allows philanthropy to thrive while providing reasonable oversight.

Distribution, three, distribution for noncharitable purposes, including advocacy and lobbying. Some DAFs make gifts or operating grants to nonprofit organizations, including community foundations, that are permitted to and choose to engage in lobbying. The proposed regulations include language that would consider distributions from DAFs taxable if made to organizations that influence legislation unless the donations are made with express limitations. Prohibiting use of the funds for lobbying. WFCO is concerned about the practical effect that this provision would have in creating administrative burdens for both DAF-sponsoring organizations and the nonprofits they support, as well as the perception that nonprofits should not engage in legally permitted advocacy, including lobbying to influence legislation. WFCO has found that this is an extremely effective tool in advancing our mission, including passing bills that improved pay equity in Colorado, exempted essential personal products from sales tax, and bolstered the early care and education workforce. Creating additional hoops for donors, nonprofits and sponsoring organizations will only add costs and prevent critical philanthropic support needed to ensure that policymakers have access to information and are educated as they need to about how policy decisions will impact the community and those directly impacted in their communities, just as we are able to do so in providing this comment. As long as organizations are fully operating within the current rules for advocacy and lobbying, we strongly urge the final regulations do not curtail their ability to do what they are legally permitted to do.

Four, effective date. As you've heard from many others who testified, WFCO has serious concerns regarding the final rule's effective date and the need for a transition period. It is imperative that donors, donor-advisers, community foundations, and their nonprofit partners have adequate time to understand and adjust to the new rules, especially because community foundations and nonprofit organizations operate on thin margins and don't often have additional funds that can be used to address new regulations. An extended effective date would allow for time to transition effectively to a new regulatory environment. We thank Treasury and the IRS for this opportunity to share our perspective. We urge Treasury and the IRS to consider incorporating our recommendations into final rules. Thank you.

MS. CAMILLO: Thank you, Ms. Casteel. The next speaker will be Reynolds Cafferata, American College of Trust and Estate Counsel.

MR. CAFFERATA: Good morning. This is Reynolds Cafferata. Thank you for the opportunity to testify. I'm testifying on behalf of the American College of Trust and Estate Counsel, a nonprofit association of lawyers and law professors. It has more than 2,400 members who are fellows who practice throughout the United States and Canada and other foreign countries, and our members regularly advise both donor-advised fund sponsors and individuals making gifts to donor-advised funds. I'm the chairman of our charitable organization committee and the comments that were submitted, the written comments were put together by members of that committee. I'm going to try to adapt and focus on some things that haven't necessarily been covered so much by some of the other presenters. You've heard extensively from a number of the community foundations of the importance of fiscal sponsorship and the impact that the proposed regulations would have on their ability to offer that model.

To specifically address that, there are a couple areas in the proposed regulations that seem to be creating the issue that could be adjusted in order to allow the fiscal sponsorship model to continue. The first area relates to how multi-donor funds are defined. The legislative history contemplated that a fund with multiple donors would not be considered to be a donor-advised fund. And that seems to speak to the intent of Congress to protect, among other things, fiscal sponsorship, simply by broadening that exception. One possibility would be to treat as a multi-donor fund any fund that would, if it were a stand-alone fund, pass a public support test. That's probably a bit narrow and technical for organizations to implement. And so, a more simplified version, such as one where no donor contributes more than 5 percent of the value of the fund, will probably go a long ways towards creating a definition of multi-donor funds that community foundations can administer and could conduct fiscal sponsorship.

In another regard, the regulations, instead of requiring the donor to designate the advisers to the fund, effectively just creates a knowledge standard that if a donor is aware of the existence of a donor, and in fact the person doesn't even need to be a donor, that will be advising on the fund at the time that they make the gift, the regulations treat them as having designated that, for example, being the memorial fund, where the person who is advising on that fund may not have even made gifts to it, but the fact that the donor is aware of that person when they make their gift, that turns them into designating them. That again is adding to the issues with respect to fiscal sponsorship. The regulations appear to try to create an exception to possibly accommodate fiscal sponsorship with its description of a community-advised fund. The challenge with that definition in the regulations is that it doesn't match the reality of how fiscal sponsorship works. The normal way for a fiscal sponsorship to be started is that a group of individuals who are interested in whatever the cause is come together. They often initially are thinking about forming a charity, and then somewhere along the line they get some advice as to all that entails and are told about the fiscal sponsorship model. And that might be a way to start.

So by the time the individuals arrive at the community foundation or the organization that's going to sponsor the fiscal sponsorship, they have self-identified who would be on the board or the committee that's going to advise on that fiscal sponsorship. So that makes it very difficult for a community foundation to then satisfy that example. These are also the individuals who were initially most passionate about the cause, and so rules that exclude them from making donations to the fund also are problematic under the fiscal sponsorship model. Another aspect of the definitions under the regulations that creates difficulties with business sponsorship and other areas is how the regulations describe or define a fund as being separately identified. And the definition that the regulations use that refers to any fund where any tracking of the separate contributions of donors is done, essentially just sweeps in every separately identified fund of every organization. Because under standard accounting and tax practices, the organization is required, and for a variety of reasons, needs to know who the donors are to those particular funds.

And in looking at what Congress was dealing with at the time that they passed the PPA, in looking at the examples in the legislative history, it's clear that Congress was not intending that definition to sweep in just the regular accounting that any nonprofit does for any particular fund, and that the definition there should require a closer tying of the accounting for the donor and the donor's ability to advise as to the money that that particular donor put into the fund. And the joint committee report had an example of a multi-donor fund that they said was not a donor-advised fund. And looking back at that, you can see then that it's clear that the intent here was to, when they referred to separately accounting for donors and their contributions to the funds, they meant a much closer relationship where the, the tracking was done so that that particular donor could continue to advise on the money that they themselves put into the fund or the earnings on the money that they put into the fund. So if that definition were narrowed to that purpose, that again would go a long ways to addressing many of the concerns that have been raised.

Another concern that has been raised is the definition of distribution and fund expenses. And on that, I can just give a real-world example: I presently am representing a community foundation where an heir at law is challenging a trust that is making a gift to what would be a donor-advised fund. And it would be particularly problematic if community foundations are basically in a position where the only way they can defend a contest against a gift to a donor-advised fund is to dip into their own unrestricted funds because they aren't allowed to use the funds that are coming from the — that would be coming to the donor-advised fund to defend those — those situations. I mean, they take some risk as it is if they don't have access to the funds, but if they think they have a good case, then they would normally reimburse themselves the cost of recovering that fund from the heirs at law that were contesting it.

The antiabuse rule, ACTEC, is proposed that that be narrowed to look more like the earmarking requirement that is set forth in the private foundation arena for indirect self-dealing. It's the same concept and some similar concept should be used there. You've heard quite a bit of the confusion and consternation that that rule has created for the community foundations.

And finally, just echoing that the — the effective date of the regulations should be made prospective, not retroactive. I didn't hear a cutoff on my time, but my own timer is telling me that I am close. So thank you very much for your time today.

MS. CAMILLO: Okay, thank you, Mr. Cafferata. I'm going to move on to the next speaker. If you missed your turn and I called you, don't worry. I'm going to call those, you know, who weren't prepared to speak at the end. The next one on the list is Noah Atencio from Philanthropy Colorado. Is Noah Philanthropy prepared to speak? Okay, hearing nothing, I'm going to move down the list. The next speaker will be Matthew Randazzo, Greater Cincinnati Foundation.

MR. RANDAZZO: Good morning. I'm delighted to be here today to provide some insights and perspectives on the proposed regulations. My name is Matthew Randazzo. I'm the president and CEO of the Greater Cincinnati Foundation. For a little bit of context around our work, we are a community foundation that serves a tri-state region that includes southeastern Indiana, southwest Ohio, and northern Kentucky. Like many community foundations, we are a collection of many fund holders. So GCF has nearly 2,000 donor-partners who have entrusted GCF as their philanthropic partner and strategic adviser.

Again, just for a little bit more context about the size and scope of our institution, as of the 2023 year-end, we had roughly $1.1 billion in assets. And since our founding 61 years ago, GCF has made over $1.6 billion in grants to support and improve our region. 2023 was really a high watermark for the institution as we saw our donors generously give and make record-breaking contributions into their donor-advised funds totaling $240 million in a single year. But what's more important than that is we also saw them give as generously as they ever had, with record-breaking grant-making out into the community at nearly $150 million. So we are very much an institution that is rooted in donor partnerships, that works to activate and mobilize our donors against opportunities and needs in the community.

I'm going to focus my comments primarily around the proposed changes that would expand the definition of donor-adviser to include investment consultants. With this fear, frankly, that this may end up having a dampening effect on charitable giving, not just in our region, but across the country. Roughly 45 percent of GCF's charitable funds of that billion dollars are managed by outside advisers. Our ability to partner with outside advisers has really been a key driver of GCF's growth, really ensuring that investment advisers are centering philanthropy and charitable giving in all of their financial planning activities. This has been just a critical lever for, for introducing the concept of charity and philanthropy and giving back throughout the region. This partnership has greatly accelerated contributions into our donor-advised funds and dramatically increased grant-making within our region.

But I want to give you some specific data. So more specifically, these partnerships have nearly doubled our pace of growth and grant-making over the course of the last five years is we really leaned into this concept of separately managed accounts. So cumulatively, in the last five years, donors contributed roughly $750 million into their donor-advised funds, and in that same five-year period, they granted out about $580 million. So that's really the equivalent of a 77 percent spend-out rate, which is virtually unheard-of in philanthropy. So this hand and glove partnership with investment advisers, estate attorneys, and CPAs has really encouraged our donors, one, to ramp up their giving into their donor-advised funds. But most importantly, they are taking those resources and very quickly investing them back into the community. With a five-year average payout of nearly 80 percent.

Over that five years, this half a billion dollars in grant-making has truly been transformative for our region, particularly in advancing affordable housing, racial equity, health parity, increasing educational outcomes, and ensuring a vibrant arts, a vibrant arts and culture economy. So there really isn't a place across the greater Cincinnati region, a tri-state area, where our donors' generosity has not really lifted up the issues and causes and opportunities of our day.

My concern is that the proposed regs may encourage donors to consider other philanthropic tools, such as private foundations or other endowed solutions that tend to spend out dramatically less on an annual basis. We all understand the 5 percent distribution, and I think it's fair to note that there are many private foundations that spend beyond their 5 percent minimum required distribution. But you would be hard-pressed to find any private foundation that is spending out nearly 80 percent of its inbound income on an annual basis and punching so far above its weight as our donors do in Cincinnati.

I think another potential downside effect of the proposed regs is a siloing of philanthropic dollars into smaller private foundations, which will undoubtedly lead to reduced philanthropic collaboration, disparate focus areas, and less grant-making directed towards solving the complex issues that our communities face today. You know, community foundations have, I think, one primary superpower, and that is our ability to stitch together donors with similar interests and a common concern for their community to punch above their philanthropic weight. And I think one of the potential impacts of encouraging donors to choose institutions other than community foundations, whether they be commercial gift operators or private foundations, is that you lose the connective tissue and you lose the scale that comes with stitching together sometimes dozens of individual donors to make big investments in community-changing initiatives. We have seen that time and time again throughout the greater Cincinnati region as the superpower and our ability to really drive more equity and vibrancy throughout the region.

So just in conclusion, I think community foundations are truly stitched into the fabric of every community across our country. I know you all have heard from many folks representing coast to coast and border to border. We as institutions, work hand in glove with donors and nonprofits and businesses and governments to find scalable solutions that improve the outcomes for our friends and neighbors. That is the core mission for every one of the 700-plus community foundations in the United States.

I hope that you all will consider how these proposed rules may strain the capacity of small nonprofit institutions like ours and potentially divert critical grant-making resources away from the community at a time where we see rising inequality and rising gaps and a clarion call to stand in that gap to create more equitable and vibrant communities. And with that, I thank you all for your time and consideration of my comments.

MS. CAMILLO: Thank you, Mr. Randazzo. I'm going to move down the list to the next speaker again. If you missed your turn, I will call you to speak at the end. Please do not forget to unmute yourself when speaking and to mute yourself when you're not speaking. The next speaker will be Michael Parks from the Dayton Foundation.

MR. PARKS: Good morning. My name is Mike Parks and I have served as the president of the Dayton Foundation for the past 22 years. I greatly appreciate the opportunity to share comments today on the proposed regulations. The Dayton Foundation is the foundation of the greater Dayton area in southwest Ohio and is one of the oldest community foundations in our country, having been founded in 1921. We have over 4,000 charitable funds, of which about half are donor-advised funds. Last year, funds of the foundation granted out over $140 million to charities throughout our region and country.

Unfortunately, Dayton as a community has the fifth-highest poverty rate in America and the needs in our community are great. These gifts from funds of the foundation are absolutely vital and every dollar matters in helping us to meet critical community needs. Today, the number of Americans who give to charity is dropping. Our hope would be that the proposed regulations would encourage even more giving in our community. It's so desperately needed.

Over the past two days, you have heard numerous comments and concerns regarding classifying wealth advisers as donor-advisers of a fund. I'm not going to repeat the concerns that have been shared. I will simply share that our community has worked diligently for over four decades to grow and expand our relationships with wealth advisers here in our community. This is based on the fact that donors have deep trust in their financial advisers. As a result, we now have 53 pools of charitable assets managed by different firms. These firms have contractual agreements with us as the community foundation, as the sponsor of the DAFs, and not the donor-adviser of a fund. Donor-advisers have no ability to select, influence, or manage investments.

Additionally, another complication in classifying wealth advisers as donor-advisers are those donor-advised funds established at our community foundation in trust form or format. These legal agreements are three-ways binding agreements signed by the donor, the Dayton Foundation, and the trust institution. These funds are brought to the community foundation by a financial institution and the funds are managed by the trust institution in perpetuity. Donors trust these institutions and to also classify these trust institutions as donor fund advisers create significant issues. We respectfully ask for consideration to please eliminate the definition of a wealth adviser as a donor-adviser of a fund in the proposed regulations.

The proposed regulations also stated a concern that wealth advisers would encourage donor fund advisers to not make grants in an attempt to retain assets under management. In my 20-plus years of service, I've never seen this occur. It's unethical and just isn't the reality. As been shared by others, the reality around payouts is just the opposite. Our annual distributions from DAFs are over 20 percent, over four times the private foundation requirement. If inactivity in DAF remains a concern, I would encourage the consideration of an inactive fund policy requirement for DAFs. This is a proactive move to ensure funds are not dormant. Over 440 community foundations have already voluntarily approved an inactive fund policy as part of the National Community Foundation standards process. As a best practice, implementation could be as simple as asking two additional questions on the 990. One, are you a sponsoring organization of DAFs? And two, if yes, do you have an inactive funds policy? An inactive funds policy would be a good thing for philanthropy.

The regulations also speak to the role of donor-advisers on charitable fund committees. Rather than the proposed additional regulations that have been outlined to limit or control a donor's involvement on a committee, I suggest the definition should really be focused on control of the decision-making process in the committee. The proposed rules are different and more restrictive than the rules currently in place on scholarship funds. I would suggest and encourage that the control standards already in place around scholarship funds that were established after the PPA 17 years ago also be considered for donor fund advisers' participation on a committee. These guidelines work well for scholarships and there's not a need to introduce a second set of separate guidelines. This is just more work and time, and a solution already exists.

You have heard a lot of feedback as to why the broader or expanded definition of what constitutes a DAF will severely restrict giving in our communities. I 100 percent agree with the comments that have been shared. I also want to point out, affirm, and thank you for including three specific exemptions or exceptions to the definition of a DAF. One, the exception for certain 501(c)(4) organizations with broad-based memberships to nominate selection committees for scholarships. Two, the exception for disaster funds. And three, the exception for funds set up by another charity or government entity. Unfortunately, at the end of the day, the proposed regulations as written will have the unintended consequence of driving more donors to private foundations, a less efficient and less effective option without the safeguards and oversights provided by community foundations and other DAF sponsors. This will result in less funds to meet the critical needs in our communities. Philosophically or from a policy perspective, there's just no need to more highly regulate a DAF that has a responsible sponsoring organization as compared to a more independent private foundation that has less oversight and less regulation.

Last, as you can see from the responses to the request for written comments, as well as participation in the two days of public comments, there are a lot of individuals and organizations that care deeply about what the impact of the proposed regs will have on giving in their local communities. As you consider any changes to the proposed regs, I respectfully ask that you please consider an opportunity for charitable organizations, a final opportunity, to comment on any revisions to the proposed regulations.

I want to express my appreciation for the opportunity to share my comments and suggestions with you all today and for your consideration. Thank you.

MS. CAMILLO: Thank you, Mr. Parks. The next speaker is Dan Blake, University Impact.

MR. BLAKE: Yes, thank you. Good morning, and thank you for the opportunity to speak today on a matter of significant importance to the philanthropic sector and the broader communities that we serve. As mentioned, my name is Daniel Blake and I'm the executive director of University Impact.

Our mission is to train university students to be the next generation of social impact leaders through hands-on learning experiences and exposure to social impact by funding organizations solving the world's most pressing problems. In order to accomplish this mission and reduce barriers to charitable giving, we manage donor-advised funds as well as other charitable funds like field-of-interest funds, giving circles, community funds, and fiscal sponsorships.

Currently, we manage approximately $250 million in over 500 accounts. Over the last three years, we've deployed nearly $100 million for charitable purposes. We support clear and reasonable regulations that protect the integrity of DAFs while also allowing for flexibility and innovation in charitable giving. We believe in the need for regulation to maintain public trust and ensure charitable intent is honored.

Today, my comments are directed at the potential implications of broadening the definition of: 1) donor-adviser. As well as 2) donor-advised funds. First, the definition of donor-adviser. The Department of the Treasury and the IRS have indicated that they have concerns about the investment adviser having influence similar to that of a donor-adviser and potential conflicts of interest that could lead to assets in a DAF not being deployed for charitable purposes as quickly as they could. Our comments are shared with those concerns in mind. The criteria under which investment advisers are not considered donor-advisers needs further delineation. Practical scenarios and examples could offer clarity to DAFs and advisers.

Here are some practical scenarios from our experience where we believe a personal investment adviser should be viewed — should be properly viewed as providing services to the sponsoring organization as a whole, rather than providing services to the DAF. Investment advisers should conduct annual reviews not with donor-advisers but with the sponsoring organizations. These reviews must encompass all managed accounts, ensuring a comprehensive evaluation of the investment advisers' performance and strategy alignment with the organization's goals. Sponsoring organizations, rather than donor-advisers, should execute annual risk assessments. These assessments should inform the investment strategies for all assets, aligning with the organization's risk tolerance and mission to ensure the charitable intent of the sponsoring organization is preserved.

Fees charged by investment advisers should reflect the aggregate assets managed for the sponsoring organization, avoiding individual account-based fee structures. This approach promotes a holistic service model focusing on the collective impact of all DAFs under the investment adviser's purview. If an investment adviser is working for the sponsoring organization and not an individual, the investment adviser should be managing multiple accounts for the sponsoring organization. However, an investment adviser should not be required to represent all of the accounts at a sponsoring organization.

A sponsoring organization should be able to select multiple investment advisers based on their individual expertise, geographic location, et cetera. If a sponsoring organization is going to work with investment advisers, the sponsoring organization should be required to have both an investment policy statement that outlines appropriate management of assets in DAF given that they're meant for charitable purposes, as well as an investment philosophy statement that outlines the spirit in which funds should be managed. It's worth noting that there are items that an investment adviser and their staff will do outside of their normal course of business when working for a sponsoring organization. The ability of a sponsoring organization to engage the services of multiple investment advisers is important in creating scalable and sustainable processes for that sponsoring organization.

We recognize that while one single point from the list above may not properly show that an investment adviser is providing services to the sponsoring organization, but the collective implementation of these practices should provide regulators confidence that the investment adviser is indeed providing services to the sponsoring organization and not to a specific donor-adviser.

Second, the definition of donor-advised funds. We are worried about the broadening definitions which might impact the functionality of funds with advisory committees that are not traditionally considered donor-advised. While the definition of a DAF did not change, the broadening of the specific components may create unintended consequences. First, the addition indicating that a formal record of the contributions fulfill the requirement of a fund being separately identified by contributions potentially broadens the scope to include just about any fund where donor contributions are tracked. Typically, this tracking is standard practice, not necessarily indicative of donor control or advisory status. This wide net could include numerous funds never intended under the DAF umbrella. Second, the criteria under which a donor is appointed to an advisory committee has expanded to include more merit-based criteria. This change creates gray areas such as defining what defines expertise, significant contributions, and the scope of related persons. While these conditions aim to prevent undue influence, the term “significant contributor” remains undefined, leaving room for interpretation and potential inconsistency in application. Furthermore, the number of donors contributing to the fund does not mitigate the inclusion of the fund as a DAF, which adds another layer of complexity to the definition.

In a time where our communities need more engagement, we should not create rules that will reduce that engagement. The implications here are twofold. There's a possibility of unnecessarily broad definition of charitable funds as DAFs, potentially reducing their efficacy. Second, the nuance requirement for donor-appointed members on advisory committees could discourage skilled donors from taking advisory roles affecting the fund's effectiveness, especially in specialized fields.

I urge the reconsideration of these definitions to ensure that they clearly distinguish funds traditionally understood as DAFs from other types of charitable funds, avoid overly broad criteria that could inadvertently sweep non-DAF charitable funds into these stricter regulations, and provide clear definitions on what defines a significant contributor and clarify the percentage determination related to who is considered a related person in contribution terms. We appreciate the effort to regulate DAFs to ensure they serve their intended purposes without undue donor control. It's crucial that the regulations are crafted to not stifle legitimate charitable activities that operate within the spirit of the law. Thank you for considering our perspectives.

MS. CAMILLO: Thank you, Mr. Blake. I'm going to move back and call those who may have missed their turn in case they've joined the call. First, I'll call Lindy Eichenbaum Lent, Rose Community Foundation.

MS. EICHENBAUM LENT: Can you hear me this time?

MS. CAMILLO: Yes, I can.

MS. EICHENBAUM LENT: Fantastic, thank you. Good morning. I am Lindy Eichenbaum Lent, president and CEO of Rose Community Foundation in Denver, Colorado. We aim to advance inclusive, engaged, and equitable metro-Denver communities through strategic grant-making, policy and advocacy, donor engagement, and values-driven philanthropy. The foundation currently has $396 million in total assets under management, a third of which are charitable funds we hold on behalf of others, such as nonprofit endowments, donor-advised funds, field-of-interest funds, and fiscally sponsored projects.

Thank you for the opportunity to testify on behalf of Rose Community Foundation, the communities we serve in the seven-county metropolitan Denver-Boulder area, and our peer community foundations in Colorado and around the country.

Rose is a healthcare conversion foundation formed in '95 when a local nonprofit hospital was purchased by a for-profit hospital corporation. The transaction maintained an important medical asset in our community, while the proceeds from the sale simultaneously created a vital philanthropic asset for our region. In the 29 years since founding, we've deployed over $400 million in grant-making from our corpus-restricted funds and donor-advised funds. In 2023, our traditional donor-advised funds made $8.6 million in grants, a payout rate of 21 percent, exponentially higher than the minimum distribution required of private foundations. We made $12.4 million in discretionary grants from our corpus last year. But most relevant for today's conversation, we also granted out more than $10 million from fiscally sponsored initiatives and field-of-interest funds, we housed to address local critical issues. These funds and the impact they generate in our region would be jeopardized by the proposed regulations.

As you heard yesterday and today, Community foundations count the ability to house and administer funds in partnership with donors and nonprofits among our most important tools for local impact. The proposed regulations feel like a solution in search of a problem and, if enacted in their current form, would significantly hinder our ability to carry out charitable activities in partnership with others, likely reducing the dollars available to meet critical needs in communities across the country. The expanded definition of a donor-advised fund would reclassify many funds at Rose and other community foundations that are currently fiscal sponsorships, field-of-interest funds, giving circles, and other collaborative pools.

To give you a sense of the type of work that would be jeopardized, I'll provide a few examples from our work. In December '22, we launched the Newcomers Fund to raise and grant dollars to local nonprofits on the front lines of addressing basic needs and providing legal services support to the more than 41,000 people who have recently arrived in Denver from Central and South America. To date, the Newcomers Fund has received donations totaling more than $3.1 million from more than 5,000 foundation and individual donors, some contributing as little as $5. Grants from the fund are directed by an advisory committee with deep expertise and connections in the immigrant-serving community. Some are staff at organizations that have contributed to the funding.

If this were to be reclassified as a donor-advised fund with its advisory committee defined as donor-advisers, the legal obligation to ensure that none of the thousands of donors to the fund receive material benefits would make this fund's work too burdensome and impractical to administer. We would have to cease or dramatically adjust the work of this fund. We may have to stop accepting donations into the fund and would likely need to disband the advisory committee, both of which would reduce the amount and impact of available resources. Additionally,

the Newcomers Fund currently pays invoices for legal services provided to immigrants to comply with federal workforce authorization guidelines. Under the proposed regulations, this would not be allowable.

Another initiative that would be jeopardized is the Colorado Media Project, a collaborative funding effort focused on strengthening and sustaining local news and information ecosystems for which we are the fiscal sponsor. Funded by individual donors and multiple foundations, Colorado Media Project has granted out more than $3.8 million since 2020. While we have ultimate oversight as the fiscal sponsor, an executive committee advises on the work and grant-making of the project. Colorado Media Project makes grants to local news organizations, some of which are not 501(c)(3) entities, and pays project expenses such as consultants evaluating the impact of the work. Given the importance of advocacy to its work, Colorado Media Project also engages in lobbying activities and funds lobbying efforts of grassroots organizations.

These activities are all allowable for a fiscally sponsored fund. However, if Colorado Media Project were to be reclassified as a DAF, these activities would no longer be permitted, greatly limiting the effectiveness of this statewide initiative. We anticipate significantly increased staffing costs to keep these types of funds operating at even a fraction of the impact scale to ensure they are compliant with the proposed regulations, wasting philanthropic dollars, diverting them away from community needs, and potentially rendering this type of collaborative philanthropic work unsustainable.

Having a community foundation pool and grant out philanthropic dollars in partnership with other foundations and donors increases resources directed toward local community issues, enhances alignment across funders, and minimizes burdensome and often duplicative grant applications for nonprofits. Yet, the proposed regulations would significantly hinder and possibly have a chilling effect on that impactful work. As such, we respectfully request that the Treasury Department exercise cautious consideration of potential unintended consequences of the proposed regulations.

The U.S. has an extraordinary history of charitable giving, and community foundations play a critical role in encouraging this giving and growing philanthropic resources dedicated to strengthening local communities. That said, philanthropy is fundamentally a voluntary exercise, and, as you have heard from others, any regulations that add undue complexity and excessive liabilities to the process of giving, or make philanthropy less accessible and efficient, carry the risk of diminishing charitable participation, harming communities across the country.

Finally, the Treasury Department's proposal that the new regulations would be retroactively effective dating back to the beginning of the calendar year of adoption, creates real risk for all institutions that house funds that may be reclassified as donor-advised funds. It means that by continuing to operate according to our current practices and policies, we could eventually be held financially and legally responsible for violating rules that do not yet exist. In fact, we estimate that this could be $150,000 in penalties for just one fiscally sponsored fund for making expenditures considered newly taxable under the new regulations in 2024. Given that we have at least 20 funds to which this might apply and others in the pipeline, this would be an incredible expense for the foundation, diverting critical funding away from the communities we serve in metro Denver.

But regardless of the substance of any new regulations, we respectfully request that they go into effect at least 36 months after the issue date to allow adequate time for proper implementation and compliance. We are also very concerned about language in the proposed regulations that appears to create penalties and liabilities for trustees and staff of community foundations, which would undoubtedly impact the number and quality of people wanting to work or volunteer in these fields.

In closing, we join our philanthropic peers in requesting revisions to the proposed regulations to significantly narrow the expanded definition of DAF so that fiscally sponsored, field-of-interest funds, designated funds, giving circles, and other collaborative vehicles are not reclassified as DAFs. We would encourage the Treasury Department to work collaboratively with those in the philanthropic sector who've been doing this work for a long time and have a front-row seat to the unintended consequences the wrong regulations would create.

We would respectfully request an additional public comment period after any additional revisions to the proposed regulations are made. And as we previously mentioned, we request that revisions include the removal of retroactive enforcement and penalties, along with the provision of 36 months' notice before implementation of any final regulations.

Thank you for the opportunity to testify on these incredibly important matters. We very much appreciate the willingness of the Treasury Department and IRS to listen to and hopefully act upon the feedback provided by so many in the philanthropic sector. Our interests in bettering our communities and by extension, our country, are aligned with yours. Thank you.

MS. CAMILLO: Thank you, Ms. Lent. I now call the final speaker, Noah Atencio, Philanthropy Colorado.

MR. ATENCIO: Good morning to the representatives of the Internal Revenue Service and Department of the Treasury. I'm Noah Atencio, CEO of Philanthropy Colorado, representing our dynamic statewide network of Colorado philanthropic member organizations. Our members are on the front line of using sophisticated approaches to democratize philanthropic giving to improve the lives of Coloradans. This includes two of the community foundation speakers you heard from this morning, Rose Community Foundation and the Women's Foundation of Colorado, as well as the Community Foundation in Northern Colorado, whose CEO testified yesterday.

Philanthropy Colorado is participating today to convey that these concerns are not just a matter of self interest for those few who have testified, but a concern across our broad membership. Public and private foundations, urban and rural funders, large and small grant-makers could all be adversely affected without changes to the proposed regulations. Colorado community foundations have a demonstrated commitment to excellence, accountability, and impact community philanthropy, including through the stewardship of donor-advised funds and numerous collective giving instruments. Among many benefits, donor-advised funds at community foundations promote community wealth, serve as a gateway to lifelong philanthropy, support the capacity of community foundations to strengthen nonprofits in the communities they serve and unlock assets for local giving. Regulations that disrupt donor-advised and collective giving disrupt the critical services of community foundations.

As you've heard, there is significant risk from the proposed expansion of what constitutes a donor-advised fund and donor-adviser. Colorado speakers have highlighted how the proposed changes could undermine their ability to track local donors, reduce the amount of funding available to nonprofits and delay support for crises. At the same time they have shared that burdensome requirements, administrative costs, and legal risk for community foundations would increase. We respectfully question why these regulatory changes are being proposed or what concern they are intended to address, given that community foundations operate with a high level of integrity and transparency and have documented three-year payout rates of 18 percent or more for the donor-advised funds they hold, translating to over $120 million in annual grants to Colorado nonprofits.

Colorado representatives have discussed that funds captured under this much broader proposed definition include field-of-interest funds, giving circles, and other collaborative or pooled giving vehicles that provide multiple options to incentivize donors. These collective funds clearly do not allow one individual or family to have exclusive advisory privileges as donor-advised funds are currently defined. If all of these different giving options are regulated as donor-advised funds and potentially subject to punitive taxes, reporting, and other new requirements, fewer local donors will establish funds and give to their local community foundations.

Another way in which Colorado foundations anticipate these regulations could undermine local giving comes through defining investment advisers as donor-advisers, which would restrict and impose fees on their management of assets held in community foundation donor-advised funds. Again, advising on the investment of assets is not analogous to having advisory privileges related to the distribution of funds, as donor-advised funds are currently defined. Financial institutions would be discouraged from placing client assets with community foundations, and at the same time, community foundations would incur costs to develop their own expertise and capacity around asset management.

Philanthropy Colorado also has a critical concern that the proposed exemption for federally declared disasters is too narrow to cover disaster funds established to address isolated and local emergencies. Colorado is subject to issues such as flooding and wildfires that would not generate a federal disaster declaration, meaning that the proposed rules could eliminate or significantly delay local community relief.

Lastly, while we beseech you to consider all testimony today and yesterday and reconsider these regulations, we join in asking that any final rules not be applied retroactively, but instead take effect at least one year after finalization to allow foundations to prepare for the changes. We appreciate the opportunity to testify and thank the Treasury and IRS for your effort to seek feedback and clarify unintended consequences of these proposed regulations. Thank you.

MS. CAMILLO: Thank you, Mr. Atencio. Well, that concludes day two of the hearing. Thank you again to all the speakers for your written comments and testimony. I will end the call unless anybody else on the panel has anything to say or any questions. Okay, thanks.

MR. HYDE: Yeah, I just second Lynne's statement.

MS. CAMILLO: Thank you again for your written comments and testimony. We'll certainly take it all into careful consideration. Have a nice day,

(Whereupon, at 11:14 a.m., the PROCEEDINGS were adjourned.)

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