Friday, July 19, 2024

The Great DAF Debate

On Tuesday, Paul Streckfus reported in his newsletter (EO Tax Journal) about a panel at the Western Philanthropy Conference way back in May called “The Great DAF Debate.” I thought it was worth sharing the concise and illuminating way that the panelists summarized the debate. Andrew Shulz, of counsel at Adler Colvin in San Francisco and generally pro-DAF, characterized the issues relating to DAFs as, “three tax policy debates that we have been having for decades.” First, an “endowment debate” about whether donating money for use in the future should be treated as tax-favorably as donating money for use now. Second, a debate about whether “working charities [should be preferred to] organizations that merely fund other charities.” I see this second one as the question of whether there is value to charitable intermediaries. The final debate is “about scandals, about abuse, about the fleecing of America.” Here the question is how much abuse-reducing regulation is optimal, given that anti-abuse regulation generally imposes some costs on compliant taxpayers, and at a certain point there are “diminishing returns in terms of the costs to the compliant relative to what is the abuse.” Of course, too little regulation undermines trust in the system (and rewards bad actors), and so the question of how to hit the optimal level is an ever-present one.

The other panelist, Roger Colinvaux, a professor at Catholic University’s Columbus School of Law and a leading expert on (and critic of) DAFs, characterized the debate as being comprised of similar categories. (Roger couldn’t attend the conference live and so sent written comments). About timing, he said, “Congress did not intend for the charitable giving incentive to be an incentive to earmark contributions for future charitable gifts.” He doesn’t directly address the question of whether there is value in charitable intermediaries, but his framing of the timing issue suggests that he does not think there is substantial value at least. He says, “As intermediaries, DAFs fundamentally clog the flow of funds and delay charitable benefits.” Though he does acknowledge that Community Foundations (as opposed to commercially-affiliated DAFs) argue that they provide benefits despite being largely intermediaries. Finally, as to abuses, he helpfully gives a “sampling” of potentially abusive uses of DAFs under current law:

“•  Private foundations can use DAFs to satisfy their payout obligation, and yet not actually advise that the funds come out of the DAF. 

•  Private foundations can use DAFs to avoid disclosure requirements. 

•  DAFs can be used as artificial public support for charities that should be classified as private foundations, essentially rendering the public support test meaningless. 

•  DAFs are not transparent. DAFs do not file Form 990s on their own behalf. DAF sponsors do not have to report on a DAF account basis, making it impossible for the public to know how individual DAFs operate.”

With the exception of the last comment about transparency, I think it’s hard to argue that these potential abuses are not real and harmful. While there may be some debate about how exactly to best close these loopholes, it’s hard to imagine a cogent argument that they shouldn’t be closed. And in fact, even the strongest DAF boosters tend to agree that some method should be used to prevent these abuses.

-- Benjamin Leff

https://lawprofessors.typepad.com/nonprofit/2024/07/thge-great-daf-debate.html

Federal – Legislative | Permalink

Comments

Thank you for this excellent summary and conclusions. There really is a growing movement to curb these problems. People who are unconditional DAF supporters tell me "but most people use their DAFs responsibly!" and I reply "most people aren't murderers, but we still need laws against murderers"

Posted by: Jan Masaoka | Jul 20, 2024 9:38:57 AM

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