Thursday, December 8, 2011
Report: Earlier this week, the Treasury Department issued its long-awaited Report to Congress on Supporting Organizations and Donor Advised Funds. Its answers to the specific questions raised by Congress are reproduced below.
Response: Senator Chuck Grassley (Iowa) wasted no time in criticizing the report, issuing a news release the next day titled Treasury Misses the Mark on Chance to Shut Down Charitable Loopholes. The release quotes Senator Grassley as saying "The study is disappointing and unresponsive. It doesn’t advance the ball in closing abusive loopholes. If anything, it gives abusive organizations cause for celebration. . . . [The] study discusses the status quo and pay-out rates as if there’s no cause for worry. Treasury apparently thinks Congress fixed problems with supporting organizations and donor-advised funds in 2006. In fact, Congress fixed a limited area and asked the IRS and Treasury to help us fix the rest. The study doesn’t offer any kind of road map about problems."
News Coverage: Chronicle of Philanthropy.
From the Treasury Report's Executive Summary:
[PPA = Pension Protection Act of 2006; SO = supporting organization; DAF = donor-advised fund]
• The PPA appears to have provided a legal structure to address abusive practices and accommodate innovations in the sector without creating undue additional burden or new opportunities for abuse.
• Although donors may prefer making gifts of appreciated property to SOs and DAFs, rather than to private foundations, in order to take a larger charitable contribution deduction, they may do so only if they are willing not only to part with control of the assets, but also to give the assets to organizations they do not control. Because contributions to DAF sponsoring organizations and SOs, like contributions to other public charities, are generally to organizations the donor doesn’t control, the deduction rules are appropriate.
• There may be a lag between when a donor contributes assets to a DAF sponsoring organization or an SO—and may claim a charitable contribution deduction—and when the donated assets are used for direct charitable activities. The issue of the lag between contribution and final use of assets is no different at DAF sponsoring organizations and SOs than it is for other public charities that may operate charitable funds or maintain endowments. Thus, it is appropriate that the contribution deduction rules faced by donors to SOs and DAF sponsoring organizations are the same as those applicable to donors to other public charities.
• Several provisions of the Code address issues related to donor benefit. A charitable deduction is disallowed to the extent that a donor receives benefits that are of more than insubstantial value in exchange for the contribution. In addition, an organization’s taxexempt status may be revoked if it operates to benefit private interests, such as those of its donors, or if it does not further a charitable purpose. Further, the Code contains deterrents in the form of excise taxes both on a donor who receives excess benefits from a public charity and on the charity’s managers if they knowingly approved the transaction conferring the benefit. The PPA also enacted new provisions in the form of taxes designed to deter SOs, DAF sponsoring organizations, and their donors from allowing donors to receive certain payments or any improper benefits from an SO or DAF.
• Compared to private foundations, the mean payout rates for Aggregate DAFs in tax year 2006 appear to be high for most categories of DAF sponsoring organizations.
• Current law disallows a charitable contribution deduction for a contribution to any charity that does not meet the standard of a completed gift, including in the case of a gift to a DAF or SO. However, as is the case with gifts to other charities, if all existing tax and other legal requirements are met, donations to a DAF or an SO may be completed gifts and become the property of the donee organization. Although donee organizations may feel an obligation to use donated funds in a manner preferred by the donor, especially when subsequent contributions may be desired, there is nothing unique about DAFs or SOs in this regard and, in fact, they have no legal obligation to follow the preference of the donor.
• As the effects of the PPA and the new regulations become clearer over time, Treasury looks forward to working with Congress to determine whether additional legislation or reporting is necessary.