The classification problem the regulation is solving. The regulation opens by naming the difficulty honestly: community trusts "have often been established to attract large contributions of a capital or endowment nature," and "often such contributions have come initially from a small number of donors." Large gifts from few donors is the profile of a private foundation. To be publicly supported instead, a community trust must meet the 33 1/3 percent support test or, failing that, be organized and operated so as to attract new and additional public or governmental support on a continuous basis sufficient to meet the facts and circumstances test. The regulation then softens that second route specifically for this kind of organization: the attraction-of-public-support requirement "generally will be satisfied if they seek gifts and bequests from a wide range of potential donors in the community or area served, through banks or trust companies, through attorneys or other professional persons, or in other appropriate ways," and it states expressly that a community trust is not required to run periodic community-wide fundraising campaigns aimed at a large number of small contributions.
The single-entity rule, and the four things it requires. Section 1.170A-9(f)(11)(i) provides that an organization meeting the requirements in (f)(11)(iii) through (vi) is treated as a single entity rather than as an aggregation of separate funds, for purposes of sections 170, 501, 507, 508, 509 and Chapter 42. Those requirements are: a name conveying the concept of a capital or endowment fund supporting charitable activities in the area served; a common governing instrument, whether a single document or several containing common language, to which all the funds are subject; a common governing body or distribution committee that directs the distribution of all the funds exclusively for charitable purposes, or monitors it in the case of a fund designated for specified beneficiaries; and common reports, meaning periodic financial reports treating all the funds held by the organization, directly or in component parts, as funds of the organization.
The governing body has to be able to override a donor. As part of the common-governing-body requirement, the board must hold three powers: to modify a restriction or condition on the distribution of funds where in its sole judgment the restriction has become unnecessary, incapable of fulfillment or inconsistent with the charitable needs of the community; to replace a participating trustee, custodian or agent for breach of fiduciary duty under state law; and to replace one for failing to produce a reasonable return of net income over a reasonable period. The first of those, which practitioners call the variance power, is covered in full on the published donor intent entry. What matters here is why it exists: it is a condition of the organization's own tax classification rather than something negotiated fund by fund, so a community foundation cannot offer a donor a restriction it can never revisit.
Which funds count, and what happens to one that does not. A trust or fund is a component part only if it was created by a gift, bequest, legacy, devise or other transfer to the community trust, and only if the transferor did not directly or indirectly subject the transferred assets to any material restriction or condition within the meaning of section 1.507-2(a)(7). A fund that fails that test is not a component part: under (f)(12) it is treated as a separate trust, or as a separate entity if it is a corporation or association, and if it is described in section 501(c)(3) it is treated as a private foundation unless it independently qualifies under section 509(a)(1), (2), (3) or (4). Donor control, in other words, is not a preference the regulation discourages; past a point it removes the fund from the structure that made the arrangement attractive.
The fund types inside one, which are not all the same. A donor-advised fund, covered on its own entry, gives the donor a right to recommend grants that the charity is not obliged to follow. A field-of-interest fund directs money toward a stated purpose, such as early childhood education in one county, with the grantmaking left entirely to the foundation. A designated fund names specific recipient organizations. An unrestricted fund leaves the use of the money to the board. Scholarship funds run through a community foundation have their own rules and are covered separately. Treating "community foundation fund" and "donor-advised fund" as synonyms is the most common error a reader brings to the subject.
