Washington Hotline – June 8, 2021


Advance Child Tax Credit Payments to Begin in July

On July 15, 2021, the IRS will start making Advance Child Tax Credit (ACTC) payments. Treasury Secretary Janet Yellen estimates that about 80% of eligible families will receive the ACTC payments from July through December of this year. She spoke to the House Appropriations Financial Services and General Government Subcommittee on May 27. She recognized that finding the other 20% of eligible persons will be a “whole-of-government” effort.

“Non-tax-filers are much more of a challenge,” noted Yellen. “What is most important for these nonfilers — and that includes some of the poorest families with the greatest need — is they need to learn about this program, they need to apply for it and they need to be made aware of what is available for them.”

The payments will be up to half of the $3,000 tax credit available for children ages 6 through 17 and $3,600 for children age 5 or under. This amount will be $250 per month for children ages 6 through 17 and $300 per month for each child under age 5.

Several financial websites have calculators to estimate the amount of a payment. For example, a family with children ages 2, 4 and 8 could receive $850 each month. The payments will be made from July 15 to December 15. This family also will be able to claim a $5,100 credit on an income tax return filed in early 2022. The ACTC amounts are phased out for married couples filing jointly with incomes over $150,000 or individuals with incomes over $75,000.

Yellen explained that the IRS is seeking assistance from nonprofits to inform individuals or families in homeless shelters, low-income housing and other programs who do not normally file income tax returns. Advisors and counselors for these families can perform a valuable service by encouraging them to benefit from the Advance Child Tax Credits.

The IRS is redesigning the ACTC webpage on IRS.gov. The webpage currently explains the benefits, but the updated version is expected to allow eligible individuals to enter non-filer information to start receiving their ACTC payments.

Yellen also complimented the IRS on its success in distributing Economic Impact Payments. She noted, “The IRS entered the pandemic as an agency that processes tax filings and returns once a year, and it managed to marshal its forces to disperse more than 460 million payments totaling approximately $800 billion.”

Editor’s Note: The IRS hopes all nonprofits will encourage individuals to learn about the Advance Child Tax Credit. There are many families in homeless shelters or who have low incomes. Nonprofit staff can perform an excellent service by assisting them in completing the online information to obtain their payments. Many of these individuals have great financial need and will be delighted to receive the ACTC payments.

COF Requests DAF Guidance

The Council on Foundations (COF) represents approximately 800 grantmaking foundations. In response to the IRS’ request to offer comments on the 2021-2022 Priority Guidance Plan, the COF offered multiple recommendations about donor advised funds (DAFs).

DAFs are subject to IRC Sections 4966 and 4967. These sections were passed in the Pension Protection Act of 2006. During the 15 years since passage of the Act, the IRS has not published regulations on these important provisions.

The COF is concerned that the DAFs may be managed in a way that creates a “taxable distribution” because there is greater than an “incidental benefit,” provided to a disqualified person. The code also prohibits DAFs from making grants to individuals or certain organizations unless the DAF sponsor exercises “expenditure responsibility.”

The COF expressed appreciation for the guidance on pledges in Notice 2017-73. This guidance has assisted organizations when donors desire to fulfill a pledge with a DAF grant. However, COF notes that there are many areas with no guidance. It stated, “This lack of guidance results in inconsistency across the sector and confusion for sponsoring organizations and donors contributing to DAFs. It also has hampered our efforts to establish standards for sponsoring organizations.”

A major problem is the lack of Sec. 4966 definitions for “taxable distributions.” This arises frequently when a DAF grant is proposed for an in-kind distribution. An example might be a donor advised fund grant to purchase backpacks with school supplies for students with financial needs. This is an obvious charitable purpose, but there are challenges.

If the sponsoring organization purchases goods and services from commercial vendors, is that a taxable distribution? If the vendor is a disqualified person under Sec. 4958(f)(7), does a purchase at fair market value transfer “more than an incidental benefit?” Finally, may the DAF sponsor transfer the in-kind property to a school without violating the taxable distribution rules? Guidance should be provided to clarify the specific rules for in-kind distributions.

A second category of problems occurs with DAF-excluded funds. Section 4966(d)(2)(C) permits the Secretary of the Treasury to exempt certain funds from treatment as a donor advised fund. The exemption is intended to apply if the “fund or account is advised by a committee not directly or indirectly controlled by the donor, or any person appointed or designated by the donor for the purpose of advising with respect to distributions from such fund.” The exception also applies if the fund has a single identified charitable purpose.

The question arises with various types of funds held by community foundations. Some funds are created by donors in giving circles, civic organizations or other public charities. Many of these funds have different grant approval methods, but often have a group or number of individuals who collectively decide on grants. The IRS should provide guidance on whether these funds are excluded from the restrictive DAF rules.

A particular problem arises if a fund is created by another nonprofit organization. For example, a church may create a fund at a community or religious foundation. There are frequently contributions to the fund by many members of the religious organization. The church desires to benefit from the investment and administration services provided by the community or religious foundation.

Generally, there is a governing board or designated committee that recommends grants from the fund. While some grants may be made to other organizations, it is frequently the case that a grant is desired from the fund to perform maintenance on the church, to provide resources for a youth program or to support another charitable purpose of the church. The regulations should clarify that these types of funds are excluded from the Sec. 4967 prohibition that a donor advised fund may not make a grant for the benefit of the donor, donor advisor or related person.

Another frequently created fund is a scholarship fund. The Pension Protection Act of 2006 and Sec. 4966 created an exception for a scholarship fund. The exception applies if the donor has “limited” advisory privileges. He or she may be a member of the committee, but may not “control, directly or indirectly, the committee.” In addition, scholarship grants must be made under “objective and nondiscriminatory” guidelines approved in advance by the board of the sponsoring organization.”

Community foundations have donor advised funds with a sole advisor and many funds that qualify under the “scholarship exception” rules. There also are field of interest funds, designated funds and geographic affiliate funds. Many of the latter funds have various types of “advisory committees” that recommend grants. These funds should be excluded from the DAF rules if the sponsoring organization “controls the advisory committee that selects grant recipients” and “the fund is not separately identified by reference to contributions of a donor or donors.”

There also should be recognition of the typical “Community Informed Funds.” These are created by community foundations as an opportunity for community engagement. These funds should have a specific category that enables them to not be subject to the donor advised fund rules.

CMF Proposals on DAFs

The Council of Michigan Foundations (“CMF”) also responded to the request for comments on the 2021-2022 Priority Guidance Plan. CMF represents over 300 charitable grantmaking organizations in the State of Michigan.

The primary focus of the comments by CMF were on the topic of donor advised funds (DAFs). First, Section 4966(d)(2)(A)(iii) states that a DAF is a fund in which a “donor (or any person appointed or designated by such donor) has, or reasonably expects to have, advisory privileges with respect to the distribution or investment of amounts held in such fund or account by reason of the donor’s status as a donor.” CMF points out that there is no specific definition of “donor.” If a child creates a DAF and it is funded by a parent, then a technical reading of Section 4966 would state that the child is not a donor within the meaning of the statute.

In addition, there are many funds held by community foundations that are created by another Sec. 501(c)(3) organization. Can a nonprofit that creates a fund at a community or religious foundation make grants to itself?

Section 4966(d)(2)(c) enables the Secretary to exempt funds from DAF rules. Generally, the fund must be advised by a committee and not controlled by the donor or persons appointed by the donor or it must have a single identified charitable purpose.

CMF requests the Treasury and IRS to provide definitions of the standard for “controlled by” and “single identified charitable purpose.”

Editor’s Note: DAFs are growing rapidly. They were initially created by community and religious foundations. However, many large organizations now offer DAFs to their donors. Because it has been 15 years since passage of these provisions, Treasury and the IRS are appropriately asked to provide further guidance on these common DAF questions and issues

Applicable Federal Rate of 1.2% for June — Rev. Rul. 2021-9; 2021-23 IRB 1 (16 May 2021)

The IRS has announced the Applicable Federal Rate (AFR) for June of 2021. The AFR under Section 7520 for the month of June is 1.2%. The rates for May of 1.2% or April of 1.0% also may be used. The highest AFR is beneficial for charitable deductions of remainder interests. The lowest AFR is best for lead trusts and life estate reserved agreements. With a gift annuity, if the annuitant desires greater tax-free payments the lowest AFR is preferable. During 2021, pooled income funds in existence less than three tax years must use a 2.2% deemed rate of return.