DAF, 501(c)(3), and self-dealing question

[Out-to-Lunch]

My sister-in-law (DW's sister) has recently set up a 501(c)(3) that we would like to support. We would like to use funds from an existing DAF to make a donation to it. My SIL is obviously a prinicpal on this organization.

I think there is no problem with this, but I want to make sure I am not in danger of running afoul of any self-dealing prohibitions. To be clear, we will not receive anything of any value whatsoever from this donation. Moreover, not one red cent will eventually go to my SIL herself (who is doing a LOT of work for this absolutely pro bono). (It is a good cause!)

Any thoughts, warnings, or reassurances are welcome.

[JoeWras]

Read your DAF's policies. Maybe give them a call. I'm SGOTI so don't take my answer as gospel.

Be transparent. Keep in mind they will vet organizations that have never been on their radar before. It is more than just seeing if they have an EIN.

Vanguard Charitable goes into some detail about the types of organizations supported and the advisor's possible connection. It is more than just being a 501(c)(3). Too much detail to get in here.

They discuss "family members" a bit but don't define "family," so it can be a grey area. For example:

Quote:

⁹ A Disqualified Person includes you and any other donor-advised fund account advisors, authorized parties on the account, your family members, and certain entities that you own or control.

Source: https://www.vanguardcharitable.org/c...and-guidelines

[Out-to-Lunch]

Quote:

Originally Posted by JoeWras Read your DAF's policies. Maybe give them a call. I'm SGOTI so don't take my answer as gospel. Be transparent. Keep in mind they will vet organizations that have never been on their radar before. It is more than just seeing if they have an EIN. Vanguard Charitable goes into some detail about the types of organizations supported and the advisor's possible connection. It is more than just being a 501(c)(3). Too much detail to get in here. They discuss "family members" a bit but don't define "family," so it can be a grey area. For example: Source: https://www.vanguardcharitable.org/c...and-guidelines

Thanks for the note and thoughts. The DAF is, indeed, with Vanguard Charitable. I didn't think to ask them, so I will do that. I was looking to figure out the answer from "IRS first principles," but that is a very good suggestion.

BTW, they DO define family member (footnote 7), and my SIL clearly fits. Thus, she is a "disqualified person." And that page says further:

Quote:

Vanguard Charitable may not make grants to supporting organizations that support organizations controlled directly or indirectly by Disqualified Persons.

Sigh. Now I am trying to wrap my brain around the difference between Type I, II, and III supporting organizations, and trying to understand "private non-operating foundations" and "non-functionally integrated supporting organizations" vs. "functionally integrated supporting organizations."

Thank you!

[JoeWras]

Quote:

Originally Posted by Out-to-Lunch Sigh. Now I am trying to wrap my brain around the difference between Type I, II, and III supporting organizations, and trying to understand "private non-operating foundations" and "non-functionally integrated supporting organizations" vs. "functionally integrated supporting organizations." Thank you!

This is where I got lost too. And thanks to the definition of family member, I missed that.

I don't understand all the type I,II,III stuff. I vaguely understand "non-operating". I was treasurer of a small religious non-profit (not officially a church, but it had a religious mission). I called up VG to ask if I was disqualified, even if the entire non-profit has zero employees and the treasurer makes no money, and the organization only pays for programs and doesn't pass it on (it was not "non-operating"). They still said that I had too much control of the money and therefore I was disqualified. So, I respected that and didn't use the DAF to donate during my time as treasurer.

Basically, when you read the IRS rules, it isn't necessarily about "self dealing" for financial gain (although that certainly is wrong), but it is also about creating a situation that is a conduit to other non-profits (a non-operating foundation) whereby the real use of the donation is now not known. This is about that 2006 law that has its origins in avoiding funding terrorists. Non-operating foundations have all kinds of IRS reporting requirements.

Think of it this way: the DAF and IRS needs to know in general terms where the money is ultimately going. If the DAF is giving to an entity that then passes it along, it is essentially like "washing" or "laundering" the donation.

[jebmke]

Quote:

Originally Posted by JoeWras This is where I got lost too. And thanks to the definition of family member, I missed that. I don't understand all the type I,II,III stuff. I vaguely understand "non-operating". I was treasurer of a small religious non-profit (not officially a church, but it had a religious mission). I called up VG to ask if I was disqualified, even if the entire non-profit has zero employees and the treasurer makes no money, and the organization only pays for programs and doesn't pass it on (it was not "non-operating"). They still said that I had too much control of the money and therefore I was disqualified. So, I respected that and didn't use the DAF to donate during my time as treasurer. Basically, when you read the IRS rules, it isn't necessarily about "self dealing" for financial gain (although that certainly is wrong), but it is also about creating a situation that is a conduit to other non-profits (a non-operating foundation) whereby the real use of the donation is now not known. This is about that 2006 law that has its origins in avoiding funding terrorists. Non-operating foundations have all kinds of IRS reporting requirements. Think of it this way: the DAF and IRS needs to know in general terms where the money is ultimately going. If the DAF is giving to an entity that then passes it along, it is essentially like "washing" or "laundering" the donation.

Where do community foundations fall in all of this?

[Out-to-Lunch]

This page was quite useful in explaining the broad outline: https://www.ccj.com/what-is-the-diff...e-foundations/.

It also pointed me to some relevant irs.gov pages:
https://www.irs.gov/charities-non-pr...undation-tests

https://www.irs.gov/charities-non-pr...ing-foundation

In my case, my SIL's organization will clearly be "operating" (although it perhaps may not be able to pass that test for 3 or 4 years from now!). The "disqualified person" test may be a bigger hurdle, as in your case.

I was planning to donate something like $5k. If the DAF turns out to be not feasible, perhaps I will have to just pony it up out of pocket and forgo the ~$1300 value of a deduction. But I will pursue it with VG Charitable.

[OldShooter]

Unless there's some reason you expect to be audited I wouldn't worry about this. It's a small amount of money and in the highly unlikely event of an audit and they disallow the transaction they will probably just ask for the back taxes and interest.

If you're old enough,a QCD might be a good workaround. AFIK the only requirement there is that the donation go directly to a 501(c)3 and not to a DAF.

[Out-to-Lunch]

Quote:

Originally Posted by OldShooter Unless there's some reason you expect to be audited I wouldn't worry about this. It's a small amount of money and in the highly unlikely event of an audit and they disallow the transaction they will probably just ask for the back taxes and interest. If you're old enough,a QCD might be a good workaround. AFIK the only requirement there is that the donation go directly to a 501(c)3 and not to a DAF.

Thanks for the thoughts. My comment was a bit misleading. I do not, in fact, itemize my deductions; I just take the standard deduction most years. By "forgoing the value of a deduction," I meant in some future year when I replenish the DAF. And I am too young for QCD, but good to know!

Hmmm, I wonder about giving their 501(c)(3) some appreciated shares of mutual funds instead of cash? I still wouldn't get the deduction (absent itemizing), but at least it would be a "cheaper" way for me to give. (The mechanics of that might be messy, for a new 501(c)(3) with no experience and no brokerage.)

[JoeWras]

Quote:

Originally Posted by OldShooter Unless there's some reason you expect to be audited I wouldn't worry about this. It's a small amount of money and in the highly unlikely event of an audit and they disallow the transaction they will probably just ask for the back taxes and interest.

The IRS won't audit the OP. It's the DAF that could get audited. Hence, the DAF has an obligation to assure that their advisors are following the IRS rules. The DAF mostly does this by asking the advisors (OP in this case) to follow the policy and guidelines. When you recommend a donation with Vanguard Charitable, you pledge that you don't have a controlling interest in the donation, among other things. They remind you and have you electronically sign.

As part of their due diligence, DAFs will get in contact with the charity for more information if required, mostly on new charities that haven't been recommended before. They may or may not ask if "Out-to-Lunch" has a connection to someone with a controlling interest in the charity.

Quote:

Originally Posted by Out-to-Lunch Hmmm, I wonder about giving their 501(c)(3) some appreciated shares of mutual funds instead of cash? I still wouldn't get the deduction (absent itemizing), but at least it would be a "cheaper" way for me to give. (The mechanics of that might be messy, for a new 501(c)(3) with no experience and no brokerage.)

For you, that would be the most in line with policy, and you still get a compromise benefit.

For the charity, it will be work for the treasurer, but perhaps well worth it to open a brokerage account and pave the way for such future transactions.

[Out-to-Lunch]

Thanks to both of you for your time and thoughts.

I believe Old Shooter was talking about audits in the case that I donated outside of my DAF (as I alluded to in post #6) and then claimed a deduction.