Reply To: Would this come under Step Transaction Doctrine

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Kaye Thomas

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For those who are wondering, in this context, DAF is donor advised fund, basically a private foundation without the prestige — or the headaches. You contribute to a fund qualifying as a public charity that keeps your dollars in a separate account and agrees to consider (and as a practical matter, nearly always follow) your subsequent advice as to disbursement of those dollars to one or more operating charities. Presumably the goal here is to allow B to claim a charitable deduction that would be of no value on A’s tax return.

I don’t think step transaction is the concern here. IRS would likely argue there was no completed gift from A to B, because the donation was prearranged, and B was merely acting as A’s agent. Even if there is a reasonable time lag between the two transactions, the IRS has a strong argument based on the fact that A controls the DAF, together with the fact that what B gave to the DAF is what A gifted to B. Issues like these are fact-based, of course, and it would help if A has a history of gifts to B that are not transferred to A’s DAF, or if B for some reason has a history of contributing to A’s DAF from B’s separate resources. It would be harder for IRS to challenge if, after a reasonable time lag, B contributes to a DAF controlled by B, with the understanding that B would value A’s subsequent thoughts on how to advise the charity on disbursement of this fund. There are various reasons A might not like this idea, but they would have to be weighed against the audit risk in the structure as originally proposed.