Notice 2006-109

HOLDING
CRP rental payments (including incentive payments) from USDA to a (1) farmer
actively engaged in the trade or business of
farming who enrolls land in CRP and fulfills the CRP contractual obligations personally and to (2) an individual not otherwise actively engaged in the trade or business of farming who enrolls land in CRP
and fulfills the CRP contractual obligations by arranging for a third party to perform the required activities are both includible in net income from self-employment for purposes of the SECA tax and not
excluded from net income from self-employment as rentals from real estate.
EFFECT ON OTHER REVENUE
RULINGS
Revenue Ruling 60–32 is obsoleted.
III. Request for Comments
Comments are requested regarding the
interaction of the proposed revenue ruling
with the treatment of CRP payments under other Code provisions, such as sections 2032A and 6166. The comments
will be available for public inspection and
copying. Comments must be submitted by
March 19, 2007. Comments should reference Notice 2006–108, and be addressed
to:
Internal Revenue Service
Office of the Associate Chief Counsel
(Tax Exempt and Government Entities)
CC:TEGE
1111 Constitution Ave., N.W.,
Rm. 4000
Washington, DC 20224
Attn: Elliot Rogers
In addition, comments may be submitted electronically via the Internet by sending them in an e-mail to
[email protected]
and specifying the comments concern Notice 2006–108.
DRAFTING INFORMATION
The principal authors of this notice
are Marie Cashman and Elliot Rogers of
the Office of the Associate Chief Counsel
(Tax Exempt and Government Entities).
However, other personnel from Treasury

2006–51 I.R.B.

and the Service participated in its development. For further information regarding
this notice, contact Mr. Rogers at (202)
622–6040 (not a toll-free call).

Interim Guidance Regarding
Supporting Organizations and
Donor Advised Funds
Notice 2006–109
Section 1. PURPOSE
This notice provides interim guidance
regarding the application of certain requirements enacted as part of the Pension
Protection Act of 2006, Pub. L. No.
109–208, 120 Stat. 780 (2006) (“PPA”),
that affect supporting organizations, donor
advised funds, and private foundations
that make grants to supporting organizations.
Sections 1231, 1241, 1242, 1243, and
1244 of the PPA add sections 509(f),
4943(f), 4958(c)(3), 4966, and 4967, to
the Internal Revenue Code (“Code”), and
amend sections 509(a)(3)(B), 4942(g)(4),
and 4945(d)(4)(A) of the Code. The
amendments to section 509(a)(3) and the
addition of section 509(f) prescribe new
requirements for supporting organizations. The addition of section 4943(f)
defines the terms “Type III supporting
organization” and “functionally integrated
Type III supporting organization.” The
amendments to sections 4942 and 4945
affect private foundations that make grants
or similar payments to supporting organizations under certain circumstances. The
amendments to section 4958, among other
things, subject substantial contributors
and persons related to them (as described
in section 4958(c)(3)(B)) to new excise
taxes if they engage in certain types of
transactions with supporting organizations
with which they have a relationship. New
section 4966 imposes an excise tax on
a sponsoring organization that maintains
donor advised funds if it makes certain
distributions from a donor advised fund.
New section 4967 imposes excise taxes on
certain distributions from a donor advised
fund that provide more than an incidental
benefit to a donor, a donor-advisor, or
related persons (as described in sections
4967(d) and 4958(f)(7)).

1121

This notice provides guidance on four
aspects of the application of these new
provisions of the Code. First, Section
3 provides criteria for private foundations that might make distributions to
supporting organizations that can be used
to determine for purposes of sections
4942(g)(4) and 4945(d)(4) whether an
organization is a Type I, Type II, or functionally integrated Type III supporting
organization. Section 3 also provides criteria for determining whether a supporting
organization, or any of its supported organizations, are controlled by disqualified
persons. Section 3 also provides similar
guidance with respect to section 4966 for
donor advised funds that make grants to
supporting organizations. Second, Section 4 clarifies the date of applicability
for the new section 4958(c)(3) excise tax
on certain excess benefit transactions involving supporting organizations. Third,
pursuant to the authority under new section 4966(d)(2)(C), Section 5.01 excludes
certain employer-sponsored disaster relief
funds from the definition of donor-advised
fund. Fourth, Section 5.02 clarifies how
the Internal Revenue Service (“Service”)
will apply the new section 4966(a) excise
taxes with respect to payments made pursuant to educational grants awarded prior
to the date of enactment of the PPA.
This notice is intended to address a limited number of issues which require immediate guidance. The Service and the Department of Treasury (“Treasury”) expect
to issue further guidance, including regulations, under these provisions of the PPA.
The rules provided in this notice apply until further guidance is issued. This notice
does not affect the substantive standards
for tax exemption under section 501(c)(3).
This notice also invites comments from
the public regarding this notice and suggestions for future guidance implementing
statutory changes under the PPA.
Section 2. BACKGROUND
Organizations that are organized and
operated exclusively for charitable, religious, educational or other specified purposes are generally exempt from income
tax under section 501(a) as organizations
described in section 501(c)(3). Section
509(a) divides section 501(c)(3) organizations into two subcategories: private
foundations and organizations that are not

December 18, 2006

private foundations, which are commonly
known as public charities. To be categorized as a public charity and not a private
foundation, an organization must be described in section 509(a). To be described
in section 509(a)(1) or (2), an organization must receive a substantial amount
of public support to fund its operations.
To be described in section 509(a)(3), an
organization must have a particular type
of structural relationship with a publicly
supported section 501(c)(3), (4), (5) or (6)
organization.
Private foundations are subject to a different regime of excise taxes than are public charities. For example, private foundations are subject to excise tax if they
do not make at least a minimum level of
qualifying distributions each year. Private
foundations are also subject to excise tax
if they make certain taxable expenditures.
Taxable expenditures include, but are not
limited to, certain grants to organizations
unless the private foundation exercises expenditure responsibility with respect to the
grants as required by section 4945(h) and
Treas. Reg. section 53.4945–5(b).
Section 170(c) describes organizations
eligible to receive charitable contributions
that are deductible for income tax purposes.
.01 Donor Advised Funds and Supporting
Organizations before the PPA
Donor Advised Funds
Prior to the PPA, the Code did not
define the term donor advised fund. However, the term was commonly understood
to refer to component funds of certain
community trusts. See Treas. Reg. section 1.170A–9(e)(10) and (11). The term
was also commonly understood to refer
to an account established by one or more
donors but owned and controlled by a public charity to which such donors or other
individuals designated by the donors could
provide nonbinding recommendations regarding distributions from the account or
regarding investment of the assets in the
account.
Supporting Organizations
Section 509(a)(3) excludes from the
definition of private foundation certain
organizations that support certain publicly
supported organizations. The Treasury

December 18, 2006

regulations under section 509(a)(3) refer
to these organizations as supporting organizations. To be described in section
509(a)(3), an organization must meet several tests: (1) it must be organized and
operated exclusively for the benefit of
specified publicly supported organizations
(generally, public charities); (2) it must
have one of three types of relationships
with its publicly supported organizations;
and (3) it must not be controlled, directly
or indirectly, by disqualified persons (as
defined in section 4946 other than foundation managers) with respect to such
supporting organization.
In general, supporting organizations
have been identified by the type of relationship they have with their publicly
supported organizations. A supporting
organization that is operated, supervised
or controlled by one or more publicly supported organizations is commonly known
as a Type I supporting organization. A
supporting organization supervised or
controlled in connection with one or more
publicly supported organizations is commonly known as a Type II supporting
organization. A supporting organization
that is operated in connection with one or
more publicly supported organizations is
commonly known as a Type III supporting
organization.
.02 Donor Advised Funds Under the PPA
Definition of a Donor Advised Fund
Under new section 4966(d)(2), a donor
advised fund is defined as a fund or account owned and controlled by a sponsoring organization, which is separately identified by reference to contributions of a
donor or donors, and with respect to which
the donor, or any person appointed or designated by such donor (“donor advisor”),
has, or reasonably expects to have, advisory privileges with respect to the distribution or investment of the funds.
A sponsoring organization is defined
under new section 4966(d)(1) as a section
170(c) organization that is not a governmental organization (referenced in section
170(c)(1) and (2)(A)) or a private foundation and maintains one or more donor advised funds.
Pursuant to new section 4966(d)(2)(B),
the term donor advised fund does not include a fund or account: (1) that makes

1122

distributions only to a single identified organization or governmental entity or (2)
with respect to which a donor advises a
sponsoring organization regarding grants
for travel, study or similar purposes if:
a.

the donor’s, or the donor advisor’s,
advisory privileges are performed in
his capacity as a member of a committee whose members are appointed by
the sponsoring organization,

b.

no combination of donors or donor advisors (or related persons) directly or
indirectly control the committee, and

c.

all grants are awarded on an objective
and nondiscriminatory basis pursuant
to a procedure approved in advance by
the sponsoring organization’s board
of directors.

Thus, a sponsoring organization that
owns and controls a fund that meets these
criteria may award a scholarship from
the fund to a natural person without subjecting the sponsoring organization or its
managers to excise taxes under new section 4966.
Taxable Distribution
New section 4966 imposes an excise tax
on a sponsoring organization for each taxable distribution it makes from a donor advised fund. It also imposes an excise tax on
the agreement of any fund manager of the
sponsoring organization to the making of
a distribution, knowing that it is a taxable
distribution. The tax on taxable distributions applies to distributions occurring in
taxable years beginning after August 17,
2006.
In general, under new section 4966(c),
a taxable distribution is any distribution
from a donor advised fund to any natural
person, or to any other person if (i) the
distribution is for any purpose other than
one specified in section 170(c)(2)(B), or
(ii) the sponsoring organization maintaining the donor advised fund does not exercise expenditure responsibility with respect to such distribution in accordance
with section 4945(h).
Under new section 4966(c)(2), a taxable distribution does not include a distribution from a donor advised fund to:
(1) any organization described in section
170(b)(1)(A) (other than a disqualified

2006–51 I.R.B.

supporting organization), (2) the sponsoring organization of such donor advised
fund, or (3) any other donor advised fund.
Under new section 4966(d)(4), a disqualified supporting organization includes
a Type III supporting organization that is
not functionally integrated and any Type I,
Type II, or functionally integrated Type III
supporting organization where the donor
or donor advisor (and any related parties)
directly or indirectly controls a supported
organization of the supporting organization.
Prohibited Benefit
New section 4967 imposes an excise
tax if a donor, donor advisor, or a person related to a donor or donor advisor
of a donor advised fund (as described in
sections 4967(d) and 4958(f)(7)) provides
advice as to a distribution that results in
any such person receiving, directly or indirectly, a more than incidental benefit. The
excise tax is imposed on any person who
advises as to the distribution or who receives the benefit. A separate excise tax
may be imposed on a fund manager who
agreed to the making of the distribution.
The new excise tax under section 4967 applies to taxable years beginning after August 17, 2006.
Secretarial Authority
New section 4966(d)(2)(C) grants the
Secretary authority to exempt certain
funds from treatment as donor advised
funds if either (1) the fund or account is
advised by a committee not directly or
indirectly controlled by the donor or donor
advisor (and any related parties), or (2)
such fund or account benefits a single
identified charitable purpose.
.03 Supporting Organizations Under the
PPA
Supporting Organization Definition
The PPA incorporates the previously
informal nomenclature used to distinguish among types of supporting organizations into the statute. Thus, new
section 4966(d)(4)(B)(i) defines a Type I
supporting organization as a supporting
organization that is operated, supervised,
or controlled by one or more section

2006–51 I.R.B.

509(a)(1) or 509(a)(2) organizations. New
section 4966(d)(4)(B)(ii) defines a Type
II supporting organization as a supporting
organization that is supervised or controlled in connection with one or more
section 509(a)(1) or 509(a)(2) organizations. (See also sections 4942(g)(4)(B)(i)
and (ii) for parallel definitions of Type
I and Type II supporting organizations).
Finally, new section 4943(f)(5)(A) defines
a Type III supporting organization as a
supporting organization that is operated in
connection with a section 509(a)(1) or (2)
organization.
New section 4943(f)(5)(B) defines
a functionally integrated Type III supporting organization as one which is not
required under regulations established by
the Secretary to make payments to supported organizations due to the activities
of the organization related to performing
the functions of, or carrying out the purposes of, such supported organizations.
New section 509(f)(2), which is effective August 17, 2006, prohibits certain
supporting organizations from accepting
gifts or contributions from certain persons
associated with the supported organization
of such supporting organization. This provision provides that any organization that
would otherwise meet the requirements of
a Type I or Type III supporting organization will be excluded under this provision
if it accepts any gift or contribution from a
person who directly or indirectly controls
(either alone or together with related persons described in section 509(f)(2)(B)(ii)
and (iii)) the governing body of a supported organization of such supporting
organization or from a related person described in section 509(f)(2)(B).
New Rules Regarding Section 4958 Excess
Benefit Transactions and Supporting
Organizations
Section 4958 imposes an excise tax on
certain persons if they engage in one or
more excess benefit transactions. New
section 4958(c)(3) provides that any grant,
loan, compensation, or other similar payment from a supporting organization to a
substantial contributor or persons related
to the substantial contributor (as described
in section 4958(c)(3)(B)) is treated as an
excess benefit transaction. In addition,
any loan from a supporting organization
to certain disqualified persons is treated

1123

as an excess benefit transaction. The entire amount of the payment to such persons
constitutes an excess benefit subject to an
excise tax under section 4958. This excise
tax applies to transactions occurring after
July 25, 2006.
Under new section 4958(c)(3)(C), a
substantial contributor includes any person who contributed or bequeathed an
aggregate amount of more than $5,000 to
the organization, if such amount is more
than 2 percent of the total contributions
and bequests received by the organization
before the close of the taxable year of the
organization in which the contribution or
bequest is received. A substantial contributor also includes the creator of a trust.
.04 New Restrictions on Grants Made
by Private Foundations to Supporting
Organizations
The PPA amended section 4942(g) to
deny qualifying distribution treatment to
grants by non-operating private foundations to (1) Type III supporting organizations that are not functionally integrated
and (2) to Type I, Type II, and functionally integrated Type III supporting organizations if a disqualified person of the private foundation directly or indirectly controls such supporting organization or a supported organization of the supporting organization. The PPA also amended section
4945(d)(4)(A) to treat grants to the above
entities by all private foundations as taxable expenditures unless the private foundation exercises expenditure responsibility
with respect to the grants.
Section 3. GRANTOR RELIANCE
STANDARDS FOR GRANTS
TO CERTAIN SUPPORTING
ORGANIZATIONS
.01 Treatment of Grants from Private
Foundations or Donor Advised Funds to
Supporting Organizations
As stated in Section 2.04, the enactment
of the PPA imposes certain limitations if
a private foundation makes a grant to (1)
a Type III supporting organization that is
not functionally integrated, or (2) a Type I,
Type II, or functionally integrated Type III
supporting organization if one or more disqualified persons of the private foundation
directly or indirectly controls such supporting organization or one of its supported

December 18, 2006

organizations. Specifically, for non-operating foundations, the grant is not a qualifying distribution under section 4942. For
all private foundations, the grant is a taxable expenditure under section 4945 if the
private foundation does not exercise expenditure responsibility with respect to the
grant.
Similarly, the PPA treats as a taxable
distribution any distribution from a donor
advised fund to (1) a Type III supporting
organization that is not functionally integrated, or (2) any other supporting organization if the fund’s donor or donor advisor
(and any related parties) directly or indirectly controls a supported organization of
the grantee if the sponsoring organization
does not exercise expenditure responsibility with respect to such distribution.
Until further guidance is issued, for
purposes of sections 4942, 4945, and 4966
(as applicable) a grantor, acting in good
faith, may rely on information from the
IRS Business Master File (“BMF”) or
the grantee’s current IRS letter recognizing the grantee as exempt from federal
income tax and indicating the grantee’s
public charity classification in determining whether the grantee is a public charity
under section 509(a)(1), (2), or (3). In
addition, a grantor, acting in good faith,
may rely on a written representation from
a grantee and specified documents as
described in A. and B. below in determining whether the grantee is a Type I,
Type II, or functionally integrated Type III
supporting organization. The good faith
requirement is not satisfied if the collected
specified documents are inconsistent with
the written representation. In each case,
the grantor must verify that the grantee is
listed in Publication 78, Cumulative List of
Organizations described in Section 170(c)
of the Internal Revenue Code of 1986,
or obtain a copy of the current IRS letter
recognizing the grantee as exempt from
federal income tax.
A. To establish that a grantee is a Type I
or a Type II supporting organization,
a grantor, acting in good faith, may
rely on a written representation signed
by an officer, director or trustee of the
grantee that the grantee is a Type I or
Type II supporting organization, provided that:

December 18, 2006

i.

ii.

the representation describes how
the grantee’s officers, directors,
or trustees are selected, and references any provisions in governing documents that establish a
Type I (operated, supervised, or
controlled by) or a Type II (supervised or controlled in connection
with) relationship (as applicable)
between the grantee and its supported organization(s); and
the grantor collects and reviews
copies of governing documents of
the grantee (and, if relevant, of
the supported organization(s)).

B. To establish that a grantee is a functionally integrated Type III supporting organization a grantor, acting in
good faith, may rely on a written representation signed by an officer, director or trustee of the grantee that
the grantee is a functionally integrated
Type III supporting organization, provided that:
i.

the grantee’s representation identifies the one or more supported
organizations with which the
grantee is functionally integrated;

ii.

the grantor collects and reviews
copies of governing documents
of the grantee (and, if relevant,
of the supported organization(s)),
and any other documents that
set forth the relationship of the
grantee to its supported organizations, if such relationship is not
reflected in the governing documents; and

iii. the grantor collects and reviews a
written representation signed by
an officer, director or trustee of
each of the supported organizations with which the grantee represents that it is functionally integrated describing the activities
of the grantee and confirming,
consistent with Section 3.02 of
this notice, that but for the involvement of the grantee engaging in activities to perform the
functions of, or to carry out the
purposes of, the supported organization, the supported organiza-

1124

tion would normally be engaged
in those activities itself.
As an alternative to relying on a written representation from a grantee and specified documents as described in A. or B.
above, a grantor may rely on a reasoned
written opinion of counsel of either the
grantor or the grantee concluding that the
grantee is a Type I, Type II, or functionally integrated Type III supporting organization.
A private foundation considering a
grant to a Type I, Type II, or functionally
integrated Type III supporting organization may need to obtain a list of the
grantee’s supported organizations from
the grantee to determine whether any of
the supported organizations is controlled
by disqualified persons of the private foundation. See Section 3.02, below, for the
definition of control that may be used. If
such control exists, the grant may not be a
qualifying distribution and the foundation
may be required to exercise expenditure
responsibility with respect to the grant.
Similarly, a sponsoring organization
considering a grant from a donor advised
fund to a Type I, Type II, or functionally
integrated Type III supporting organization may need to obtain a list of the
grantee’s supported organizations from
the grantee to determine whether any of
the supported organizations is controlled
by the fund’s donor or donor advisor (and
any related parties). See Section 3.02,
below, for the definition of control that
may be used. If such control exists, the
sponsoring organization will be required
to exercise expenditure responsibility.
.02 Standards for Determining Control
and for Defining “Functionally Integrated
Type III Supporting Organization”
The Service and the Treasury Department intend to issue regulations regarding
the meaning of “control” under sections
4942(g)(4)(A) and 4966(d)(4)(A) and the
definition of a “functionally integrated
Type III supporting organization” under
section 4943(f)(5)(B). Until those regulations are issued, a grantor may rely on the
standards described below for purposes of
sections 4942, 4945 and 4966 (as applicable). Although regulations may adopt
different standards from those referenced
below, those regulations will apply to

2006–51 I.R.B.

grants made by private foundations and
sponsoring organizations no sooner than
the date that the regulations are proposed.
The standards set forth below will apply
with respect to any grants made prior to
that date.
In determining whether a disqualified
person with respect to a private foundation controls a supporting organization or
one of its supported organizations, the control standards established in Treas. Reg.
section 53.4942(a)–3(a)(3) will apply. Under these standards, an organization is controlled by one or more disqualified persons
with respect to a foundation if any such
persons may, by aggregating their votes
or positions of authority, require the supporting or supported organization to make
an expenditure, or prevent the supporting
organization or the supported organization
from making an expenditure, regardless of
the method by which the control is exercised or exercisable.
Similarly, in determining whether a
donor or donor advisor or a person related
to a donor or donor advisor (as described
in sections 4967(d) and 4958(f)(7)) of any
donor advised fund controls a supported
organization of the grantee, the control
standards established in Treas. Reg. section 53.4942(a)–3(a)(3) will apply. Under
these standards, a supported organization
is controlled by one or more donor or
donor advisors (and any related parties)
of any donor advised fund if any such
persons may, by aggregating their votes or
positions of authority, require a supported
organization to make an expenditure, or
prevent a supported organization from
making an expenditure, regardless of the
method by which the control is exercised
or exercisable.
Also, solely for purposes of a representation or opinion of counsel on which a
grantor may rely, an organization will be
considered a functionally integrated Type
III supporting organization if it would meet
the test set forth in Treas. Reg. section
1.509(a)–4(i)(3)(ii).
Section 4. APPLICABILITY DATE FOR
EXCESS BENEFIT TRANSACTIONS
BY SUPPORTING ORGANIZATIONS
As stated in Section 2.03, under section 4958(c), as amended by the PPA, any
grant, loan, compensation, or other similar
payment by a supporting organization to a

2006–51 I.R.B.

substantial contributor or a person related
to a substantial contributor (as described in
section 4958(c)(3)(B)), and any loan provided by a supporting organization to certain disqualified persons, is treated automatically as an excess benefit transaction,
with the entire amount paid to the substantial contributor or disqualified person and
those related to them treated as an excess
benefit. The statute provides that this new
rule applies to transactions occurring after
July 25, 2006.
Treasury and the IRS understand that
before the PPA was enacted on August 17,
2006, a supporting organization may have
entered into a binding contract or other legal obligation to pay substantial contributors, or persons related to substantial contributors, for goods or services, or to provide a loan to a disqualified person. At
the time the supporting organization entered into these contracts or other legal
obligations, the payments required under
them were not necessarily considered excess benefit transactions.
To address the change to the law under the PPA, the IRS will not consider any
payment made pursuant to a written contract that was binding on August 17, 2006
as an excess benefit transaction under new
section 4958(c)(3), provided that (1) such
contract was binding at all times after August 17, 2006 and before payment is made,
(2) the contract is not modified during such
period, and (3) the payment under the contract is made on or before August 17, 2007.
Termination of the contract does not constitute a modification for this purpose.
Similarly, relief is provided with respect to certain arrangements that are not
governed by a binding written contract described in the preceding paragraph. With
respect to any such arrangement involving
an employment relationship in existence,
or other legal obligation in effect, on August 17, 2006, the IRS will not consider
any payment pursuant to such an arrangement as an excess benefit transaction under new section 4958(c)(3), provided that
(1) the terms of such arrangement are not
modified after August 17, 2006, (2) any
services are performed and any goods are
delivered as required by the arrangement
no later than December 31, 2006, and (3)
the payment is made no later than August
17, 2007. Termination of the arrangement
does not constitute a modification for this
purpose.

1125

The applicability dates set forth in this
section affect only liability for excise taxes
under new section 4958(c)(3). Notwithstanding any relief provided in this section,
if the supporting organization pays in excess of reasonable compensation for services or in excess of fair market value for
goods, it jeopardizes continued tax exemption under section 501(c)(3), and the individuals receiving the payments may be
subject to excise taxes under section 4958.
In addition, any relief provided by this section does not alter whether a transaction is
an excess benefit transaction under section
4958(c)(1).
Section 5. DONOR ADVISED FUNDS
New section 4966(c)(1)(A) imposes an
excise tax on all distributions to natural
persons from donor advised funds effective for taxable years beginning after August 17, 2006. However, pursuant to the
authority described in Section 2.02 above,
certain funds or accounts are excepted
from the definition of donor advised fund.
.01 Employer-Sponsored Disaster Relief
Assistance Programs
The definition of donor advised fund
in section 4966(d)(2)(A) encompasses all
funds and accounts owned or controlled by
a sponsoring organization separately identified with reference to the contribution of
a donor or donors for which the donor,
or anyone appointed by the donor, has or
reasonably expects to have, advisory privileges. Section 4966(d)(2)(C) grants the
Secretary the authority to exempt a fund
or account (a “fund”) from the definition
of donor advised fund.
Certain employers may establish disaster relief funds at a community foundation
or other public charity to provide disaster relief grants to employees or their family members who are the victims of a major disaster. The sponsoring organization
may receive contributions to these funds
from both the employer and its employees.
If these employer-sponsored disaster relief
funds are within the definition of donor
advised funds, any distribution from these
funds to employees or their family members would be subject to excise tax under
new section 4966.
Pursuant to the authority under
4966(d)(2)(C), the IRS and Department
of Treasury exclude from the definition of

December 18, 2006

donor advised fund any employer-sponsored disaster relief fund that meets the
following requirements:
a.

the fund serves a single identified
charitable purpose, which is to provide relief from one or more qualified
disasters within the meaning of section 139(c)(1), (2), or (3);1

b.

the fund serves a large or indefinite
class (a “charitable class”);

c.

recipients of grants from the fund are
selected based on objective determinations of need;

d.

e.

f.

the selection of recipients of grants
from the fund is made using either
an independent selection committee
or adequate substitute procedures to
ensure that any benefit to the employer is incidental and tenuous. The
selection committee is independent
if a majority of the members of the
committee consists of persons who
are not in a position to exercise substantial influence over the affairs of
the employer;
no payment is made from the fund to
or for the benefit of:
i.

any director, officer, or trustee
of the sponsoring organization of
the fund, or

ii.

members of the fund’s selection
committee; and

the fund maintains adequate records
that demonstrate the recipients’ needs
for the disaster relief assistance provided.

Satisfaction of these requirements does
not affect the determination of whether any
payments made from the fund might result
in taxable compensation to the employees.
.02 Applicability Date for Educational
Grants
As provided in Section 2.02 above, under new section 4966, distributions to natural persons from a donor advised fund

are subject to an excise tax. The PPA
provides that section 4966 applies to certain distributions (including certain educational grants) made in taxable years beginning after August 17, 2006. The excise tax
applies irrespective of whether the grant is
excludable from the recipient’s income as
a scholarship or fellowship under section
117.
The IRS and Department of Treasury
understand that certain educational grants
may have been committed to an individual on or before the date of enactment, the
payments of which extend beyond August
17, 2006. Pursuant to this notice, section
4966(c)(1)(A) shall not apply to payments
made after August 17, 2006, with respect
to an educational grant, if the payment is
made pursuant to a grant commitment entered into on or before August 17, 2006.
A commitment will be considered entered
into on or before August 17, 2006, if:
a.

b.

c.

the educational grant was awarded on
an objective and nondiscriminatory
basis and is reasonable in amount in
light of the purposes of the educational grant;
the educational grant was not awarded
to, nor are payments made pursuant
to that grant, to a donor, donor advisor, or any person related to a donor
or donor advisor (as described in sections 4967(d) and 4958(f)(7));
on or before August 17, 2006: (1)
(a) the name of the educational grant
recipient, the nature of the educational grant, the amount of the educational grant, the date on which it was
awarded, and the educational grant
period, were entered on the records of
the sponsoring organization or were
otherwise adequately evidenced, or
(b) notice of the payments to be
received was communicated to the
payee in writing, and (2) the sponsoring organization keeps a record
of such information or notice for a
period that ends no earlier than three
years after the close of the taxable
year in which the last payment is
made under the grant; and

d.

there is no material change in the
amount or in the conditions of the
educational grant, such as a required
reapplication for the grant.

Notwithstanding the above, section
4967 may apply to any grant that otherwise fits within the criteria specified.
Thus, if a sponsoring organization makes
an educational grant distribution that results in more than an incidental benefit to
a donor, donor advisor, or a person related
to a donor or donor advisor, the grant will
be subject to excise tax.
Section 6. REQUEST FOR COMMENTS
The IRS and the Department of Treasury request comments regarding this notice and suggestions for future guidance
with respect to changes in requirements
for donor advised funds and supporting
organizations or other changes affecting
tax-exempt organizations under the PPA.
Comments should refer to Notice
2006–109 and be submitted by February 1, 2007, to:
Internal Revenue Service
SE:T:EO:RA:G (Notice 2006–109)
P.O. Box 7604
Ben Franklin Station
Washington, DC 20044
Submissions may be hand delivered
Monday through Friday between the hours
of 8 a.m. and 4:00 p.m. to:
SE:T:EO:RA:T:G (Notice 2006–109)
Courier’s Desk
Internal Revenue Service
1111 Constitution Ave., N.W.
Washington, DC 20224
Alternatively, taxpayers may submit
comments
electronically
to
[email protected].
Please include “Notice 2006–109” in the subject line of any
electronic communications.
All comments will be available for public inspection and copying.

1 Under sections 139(c)(1), (2) and (3), a qualified disaster means a disaster that results from a terroristic or military action (as defined in section 692(c)(2)), a Presidentially declared disaster
(as defined in section 1033(h)(3)), and a disaster that results from an accident involving a common carrier or from any other event which the Secretary determines to be of a catastrophic nature.

December 18, 2006

1126

2006–51 I.R.B.

Section 7. PAPERWORK REDUCTION
ACT
The collection of information contained
in this notice has been reviewed and approved by the Office of Management and
Budget in accordance with the Paperwork
Reduction Act (44 U.S.C. 3507) under
control number 1545–2050. An agency
may not conduct or sponsor, and a person
is not required to respond to, a collection
of information unless the collection of
information displays a valid OMB control
number.
The requirements to collect information
are in Sections 3 and 5 of this notice. Collecting the required information provides
private foundations and sponsoring organizations of donor advised funds with relief from excise taxes imposed by sections
4942, 4945 and 4966 of the Code.
The estimated total annual reporting
and/or recordkeeping burden is 612,294
hours.
The estimated annual burden per respondent/recordkeeper varies from 7
hours, 53 minutes to 9 hours, 48 minutes,
depending on individual circumstances,
with an estimated average of 81/2 hours.
The estimated total number of respondents
and/or recordkeepers is 65,000.
The estimated frequency of collection
of such information is occasional.
Books or records relating to a collection
of information must be retained as long
as their contents may become material in
the administration of any internal revenue
law. Generally, tax returns and tax return
information are confidential, as required
by 26 U.S.C. section 6103.
Section 8. DRAFTING INFORMATION
The principal authors of this notice are
Mary Jo Salins and Robert Fontenrose of
the Exempt Organizations, Tax Exempt
and Government Entities Division. For
further information regarding this notice,
contact Ms. Salins at (202) 283–9453, or
Mr. Fontenrose at (202) 283–9484 (not a
toll-free call).

2006–51 I.R.B.

Recordkeeping Requirements
for Charitable Contributions
Made by Payroll Deduction
Notice 2006–110
SECTION 1. PURPOSE
This notice provides guidance on how
charitable contributions made by payroll
deduction may meet the requirements of
§ 170(f)(17) of the Internal Revenue Code.
Taxpayers claiming charitable contribution deductions for cash, check, or other
monetary gifts made in taxable years beginning after August 17, 2006, are subject
to the new recordkeeping requirements of
§ 170(f)(17), as added by section 1217
of the Pension Protection Act of 2006,
P.L. 109–280, 120 Stat. 780 (2006) (PPA).
To substantiate a deduction, § 170(f)(17)
requires a taxpayer to maintain a bank
record or a written communication from
the donee showing the name of the donee
organization, the date of the contribution,
and the amount of the contribution. For
a charitable contribution made by payroll
deduction, a pay stub, Form W–2, or other
employer-furnished document that sets
forth the amount withheld for payment to
a donee organization, along with a pledge
card prepared by or at the direction of the
donee organization, will be deemed to be
a “written communication from the donee
organization” that satisfies the requirements of § 170(f)(17).
The Internal Revenue Service and
the Treasury Department expect to issue regulations under § 170 incorporating the recordkeeping requirements of
§ 170(f)(17). Taxpayers making charitable contributions by payroll deduction
may rely on this notice to comply with the
new requirements until those regulations
are effective.
SECTION 2. BACKGROUND
Section 170 generally allows a deduction, subject to certain limitations, for
any charitable contribution (as defined in
§ 170(c)) payment of which is made during
the taxable year. For any contribution of
$250 or more, § 170(f)(8) provides that no
deduction is allowed unless the taxpayer
substantiates the contribution by a contemporaneous written acknowledgment
of the contribution by the donee organ-

1127

ization. The contemporaneous written
acknowledgment must contain the amount
of cash and a description of any property
other than cash contributed; a statement
whether the donee organization provided
any goods or services in consideration for
the contribution; and a description and
good faith estimate of the value of any
goods or services provided in consideration for the contribution, or, if the goods
or services consist solely of intangible religious benefits, a statement to that effect.
Section 1.170A–13(f)(11)(i) of the Income Tax Regulations provides that a
contribution made by means of withholding from a taxpayer’s wages and payment
by the taxpayer’s employer to a donee
organization (i.e., a contribution made by
payroll deduction) may be substantiated,
for purposes of § 170(f)(8), by both: (1)
a pay stub, Form W–2, or other document furnished by the employer that sets
forth the amount withheld by the employer for the purpose of payment to a
donee organization; and (2) a pledge card
or other document prepared by or at the
direction of the donee organization that
includes a statement to the effect that
the organization does not provide goods
or services in whole or partial consideration for any contribution made to the
organization by payroll deduction. Section 1.170A–13(f)(11)(ii) provides that the
contribution amount withheld from each
payment of wages to a taxpayer is treated
as a separate contribution for purposes of
applying the $250 threshold in § 170(f)(8)
to charitable contributions made by payroll deduction.
Section 1.170A–13(f)(12) provides,
in relevant part, that an organization described in § 170(c), or an organization
described in 5 CFR 950.105 (a Principal
Combined Fund Organization for purposes
of the Combined Federal Campaign) and
acting in that capacity, that receives a payment made as a contribution is treated as
a donee organization solely for purposes
of § 170(f)(8), even if the organization
(pursuant to the donor’s instructions or
otherwise) distributes the amount received
to one or more organizations described in
§ 170(c).
Section 1217 of the PPA adds
§ 170(f)(17), effective for contributions
made in taxable years beginning after
August 17, 2006. Section 170(f)(17) provides that no deduction is allowed under

December 18, 2006