Wednesday, September 14, 2011

Calvin Johnson on Payout by Charities Over 50 Years

Calvin H. Johnson, Andrews & Kurth Centennial Professor at the University of Texas School of Law, has just published his latest Shelf Project proposal, Payout by Charity Over 50 Years, 132 Tax Notes 1161 (Sept. 12, 2011).  The Summary of the proposal states as follows:

This proposal would require a section 501(c)(3) charitable organization to spend or distribute a gift, both as to principal and interest, over the 50 years following receipt of the gift. The goal of the rule is to increase the good that comes from charitable deductions and reduce the administrative burden. Within broad definitions of charity, the worthiness of a charity is defined more by process than by detailed substantive rules -- a donor can be presumed to be trying to do the most good with his money. The world changes over time, however, and after 50 years it is different. The 50-year payout requirement would strengthen the tie between the wisdom of the donor and the most pressing needs of the times.
The requirement would also diminish the problems from charitable boards that are accountable on substance to nobody but themselves. A board without competition, recent donations, or meaningful substantive accountability should lose its special claim to control the money over time. A charity with continuing support, however, would not go out of business. The accounting would treat the earliest gifts as given out first, so that an active charity with both new contributions and high expenditures would have long since distributed its old funds.

In introducing his reasons for recommending changes to current law, Professor Johnson cites the limited ability of donors to foresee the future, and (in his view) the lack of accountability of charitable boards and (again, in his view) their consequent inability to justify their own administrative expenses over time.  Mechanically, Professor Johnson explains his proposal as follows:

The charity should be required to use or distribute both its income and the corpus of the gift over the 50-year period. The same considerations that imply the 50-year period imply that earlier is better. The charity should not distribute everything all at once at the end of the 50-year period. A norm should be that the charity will pay out funds at least as fast as the annuity that will distribute all the gift over 50 years. Thus, a charity making a 5 percent return on its funds will meet its 50-year payout if it spends or distributes 5.48 percent of its funds every year. A charity should be allowed to save up its funds for a grand project like a library or cathedral, but if it falls behind the annuity schedule that would distribute everything evenly, then it should have prior IRS approval on a showing that the deferring payout (for as much as five years) would better service an identifiable project.

Hat Tip: TaxProf Blog


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