1. the fund is owned and controlled by a public charity;
2. the fund is separately identified by reference to contributions of a donor or donors
3. a donor has, or reasonably expects to have, advisory privileges with respect to the distribution or investment of amounts from the fund
A key to the third point is that the public charity will consider the advice of the donor, but the public charity itself controls all distributions.
This key was illustrated in a recent Tax Court case (Gundanna v. Commissioner, 136 T.C. 8). In that case, a doctor made a contribution to a charity; the terms of the donation included that the donor could direct the use of funds to compensate himself “to do good works” or for other personal charitable projects. In fact, the donor directed the use of funds to make student loans for his children’s education (and the charity did not exercise any independent judgment to indicate it actually made an independent decision rather than the donor). The Tax Court determined that the donor was not entitled to a deduction for his donation because he did not relinquish dominion and control over the donation.
Furthermore, the Tax Court imposed a penalty on the donor because he failed to “make a reasonable attempt to ascertain the correctness of a deduction which would seem to a reasonable or prudent person to be ‘too good to be true’ under the circumstances. ”
The tax lesson here is that donors need to understand the donor-advised fund rules if they intend to establish one.