IRS Publishes Guidance on Pension Protection Act

On Monday, December 4, the IRS published guidance interpreting several key provisions of the Pension Protection Act of 2006 (the "Pension Act") affecting private foundations, supporting organizations, and donor advised funds. In Notice 2006-109, which serves as interim guidance until formal regulations are issued, the IRS addresses the following:

• Procedures that should be followed with respect to grants from private nonoperating foundations and donor advised funds to supporting organizations;
• Scholarship payments awarded to individuals from donor advised funds before the enactment of the Pension Act;
• The exclusion of certain employer-sponsored disaster relief funds from treatment as regulated donor advised funds; and
• Pre-existing contracts and other arrangements involving payments from a supporting organization to its substantial contributors or related persons.

Grants to Supporting Organizations

The Pension Act limits distributions by private foundations and from donor advised funds to certain types of supporting organizations. (Generally, the Pension Act provides for three types of supporting organizations, each based on the relationship between a supporting organization and its supported public charities.) The Pension Act effectively prohibits distributions by a private foundation and from a donor advised fund to certain "Type III" supporting organizations or to any supporting organization that is controlled, or whose supported public charities are controlled, by disqualified persons of the private foundation or donor advised fund. Grants to non-controlled Type I and Type II entities continue to be permitted distributions. The principal difficulty presented by these provisions: how to distinguish between a Type I, Type II, and Type III supporting organization?

Notice 2006-109 explains that private foundations and sponsoring organizations of donor advised funds may determine the Type I or Type II status of a supporting organization by:

1. obtaining a written representation, signed by an authorized representative of the supporting organization, that describes the relationship between the supporting organization and its supported public charities, and
2. reviewing and retaining copies of the supporting organization's current governing documents establishing the Type I or Type II relationship.

For distributions to Type III supporting organizations, the Notice suggests that private foundations and sponsoring organizations of donor advised funds obtain more detailed information to substantiate the relationship required for a Type III supporting organization to be eligible to receive a grant (a Type III supporting organization will be eligible to receive grants only if it is a "functionally integrated" supporting organization).

Educational Grants from Donor Advised Funds

Generally, the Pension Act prohibits distributions from donor advised funds to individuals. Many sponsoring organizations have committed to scholarship grants from a donor advised fund prior to the enactment of the Pension Act (August 17, 2006). Notice 2006-109 allows sponsoring organizations to make payments from the donor advised fund with respect to such a pre-existing commitment so long as:

• The educational grant was awarded on an objective and nondiscriminatory basis and is reasonable in amount;
• The educational grant was not awarded to (and payments are not made to) a donor, donor advisor, or person related to the donor or donor advisor;
• The sponsoring organization maintains records establishing that, prior to August 17, the organization followed specific record-keeping procedures in awarding the educational grant to the individual or notified the payee, in writing, of the pending educational grant;
• The sponsoring organization keeps these records for three years; and
• There is no material change in the amount or conditions of the previously-awarded grant, such as a required reapplication for the grant.

Additional information regarding Notice 2006-109 will be included in the December issue of our Nonprofit Newsletter.