Congress Should Respond: A Payout for Some DAFs and New Rules for Noncash Contributions

Donor advised funds attract a significant share of charitable giving and warrant Congress’s attention. The national sponsoring organization is distinct from other DAF sponsors. The national sponsoring organization’s exempt purpose is to spend money for the benefit of other 501(c)(3) organizations, and is best characterized as a fundraising organization. Given the national sponsoring organization’s exempt purpose, it is already subject to a facts and circumstances based payout. Because national sponsoring organizations fundamentally are vehicles for spending not saving, Congress should apply legislatively the commensurate in scope test and require that national sponsoring organizations spend contributed funds over a specified time period. The goal is to provide a spending period long enough so as not to alienate new donors, but short enough so as not to extend unduly the delay to charity that results when DAFs are used as public charity substitutes. Congress also should note that DAFs increasingly are used for noncash charitable contributions. The positive effect will be to make property conversions more efficient. The negative effect will be to accentuate the broken system for property contributions at great expense. DAFs present an opportunity for Congress to reduce the cost of the subsidy for property contributions and move to a net benefit to charity approach to the deduction

Charity in the 21st century: Trending toward Decay

The Article argues that the federal tax law framework relating to charitable organizations is decaying. Through an overview of the historical development of the law relating to charity in the 20th century, the Article shows that the statutory law has passively accommodated significant growth of the charitable sector without demanding any rigor of the sector in the form of positive requirements or quantitative measures. This has led to growth without meaningful oversight – a recipe for problems. The Article then provides an overview of many of the scandals that engulfed the sector during the early 21st century and shows that the scandals not only seriously eroded the “halo” effect of charitable organizations and enabled passage of reform legislation, but also illustrate the consequences of unchecked growth. The Article then discusses the central features of current law that are under pressure in part because of this growth without oversight: the breadth of the charitable standard, a regulatory framework based on the distinction between public charity and private foundation, and a facts and circumstances and all-or-nothing approach to enforcement. The Article analyzes the legislation enacted between 2004-2006, and in 2010 (as part of health care reform), and finds that although these efforts were not comprehensive reform, the legislation nevertheless planted seeds indicative of a shifting legislative policy toward charity, one that favors more substantive distinctions among charities for exemption purposes, undermines the current basis for distinguishing among charities, and points toward brighter enforcement lines. The Article concludes that we are asking too much of current tax law, and suggests a new approach based on developing different standards for the charitable tax benefits in order to focus attention more directly on the tax system’s support for the charitable sector

Donor Advised Funds: Charitable Spending Vehicles for 21st Century Philanthropy

The donor advised fund (DAF) is changing longstanding giving norms in United States philanthropy. DAF contributions now account for around 8.4% of giving by individuals in the U.S. Over half of those contributions go to national DAF sponsors that have relationships with large commercial investment firms like Fidelity, Vanguard, and Schwab. This Article seeks to advance the understanding of the donor advised fund and to address two of the main policy questions: whether to require a mandatory distribution of funds by DAFs and their sponsoring organizations and how to respond to the increased use of DAFs for noncash charitable contributions. Part I of the Article provides a brief overview of DAFs. Part II of the Article discusses the different ways DAFs are viewed—as quasi-private foundations, public charity substitutes, or as catalysts for new charitable giving. Each view suggests a different regulatory approach. Part III focuses distinctly on the national sponsoring organization and the reason for its section 501(c)(3) status. The Article argues that as an organization that fulfills its mission by spending, it is appropriate for policymakers to require each fund to spend down contributions over a range of years. Part IV of the Article examines the solicitation by DAF-sponsoring organizations of charitable contributions of property, including privately traded stock, real estate, fine art, collectibles, and publicly traded securities. The increasing use of DAFs for noncash contributions will accentuate the problems of current law, which include a deduction for unrealized appreciation, overvaluation of contributed property, uncertain benefits to charity, equity concerns, and enforcement. Part IV argues that if Congress intends to retain the subsidy for property contributions, DAFs present an opportunity to improve and lower the cost of the subsidy both by reducing the amount of unrealized appreciation that may be deducted and by basing the amount of the deduction for property contributions on the net benefit to charity

Speeding Up Benefits to Charity by Reforming Gifts to Intermediaries

Charitable giving tax incentives are intended to encourage giving for public benefit. Gifts to intermediaries frustrate this goal. Presently, $1.26 trillion has accumulated in donor advised funds (DAFs) and private foundations. These are charitable intermediaries that do not benefit the public until they release their funds for public use. Congress has long recognized that intermediaries cause a “delay in benefit” problem because the tax incentive is awarded before the public benefits from the gift. Congress addressed this problem for foundations in 1969 by requiring them to pay out a minimum amount annually. Congress, however, has not addressed the problem for DAFs, and the foundation payout now has too many loopholes. The Article explains that reform of charitable intermediaries is essential to the continued viability of the charitable giving incentives. The status quo allows donors to a take a tax deduction, retain effective control over their donations indefinitely, and provides no guarantees that the public will ever benefit from tax subsidized charitable gifts. This Article responds to arguments against charitable intermediary reform and analyzes bi-partisan legislation, the ACE Act, introduced to accelerate charitable giving from DAFs and foundations. The Article also considers whether community foundations and other mission driven DAF sponsors warrant distinct legal treatment. The Article concludes that the status quo undermines generosity and perpetuates wealth, and that reform is required. This Article further concludes that, though the ACE Act is sound legislation, it should apply to existing DAF accounts and require further study of its incentives for private foundations and whether DAFs at mission-driven sponsors further their mission

Political Activity Limits and Tax Exemption: A Gordian’s Knot

The article considers the correct tax treatment of organized political activity by the tax system and discusses the problems that have arisen from political activity depending on whether the organization is a charity, a noncharitable exempt, or a political organization. The article then examines administrative and legislative options to the problems raised by political activity. Quantum-based solutions to the problem of political activity by noncharitable exempts do not provide a clear advantage over present law. Formally quantifying the “primarily” test would result in more certainty, but would also require that the Service be more, not less, involved in the regulation of political activity. If the policy goal is to curb political activity by noncharitable exempts, changing the test from “primarily” to something more restrictive like “substantially” or “exclusively” would be effective, but would create new categories of taxable nonprofits that are treated worse than political organizations for engaging in less political activity, which is irrational. Further, it is not clear, especially after the Citizens United decision, why as a matter of tax exemption the regulations decree that political activity may not further noncharitable exempt purposes. Before Citizens United, the political activity limits were not especially relevant, but at least helped to differentiate organization types. However, Citizens United largely rendered existing tax law limitations obsolete by making a new kind of multi-purpose organization possible. As a result, definitional political activity limits are no longer justified and should be eliminated, but only if the 527(f) tax on investment income remains vital and the differences in the disclosure regimes between political organizations and noncharitable exempts are erased. In addition, Congress should affirm that the gift tax does not apply with respect to political contributions, but also extend the income tax to transfers of appreciated property to noncharitable exempts. Further, Congress should acknowledge that the increase in political speech by noncharitable exempts will lead to abuse of charitable organizations, and take steps to prevent the laundering of independent expenditures through the charitable form. Congress also should recognize that Citizens United has led to a need to develop a new tax baseline for political activity conducted “for profit” or outside of section 527

Charitable Contributions of Property: A Broken System Reimagined

On average, nearly $46 billion of property is given to charitable organizations each year, about twenty-five percent of the total charitable deduction. This makes the charitable contribution deduction for property a tax expenditure within a tax expenditure, yet it is rarely analyzed as such. It emerged as part of a noble effort to encourage contributions to worthy organizations. But the deduction for property has never worked well. The general rule allowing a deduction based on the fair market value of the property may have some intuitive appeal, but its implementation has yielded numerous exceptions and immense complexity. The Article argues that the extensive historical effort to allow a deduction for property contributions is a failure. Given the substantial direct and indirect costs involved, the uncertain benefit to the donee from property contributions, and the absence of any affirmative policy to favor property contributions as such, it is time to reverse the general rule and not allow a charitable deduction for property contributions. Reversing the general rule would provide many benefits — increased revenue, improved tax administration, fewer abusive transactions, a simpler and more equitable tax code, and a preference for cash. Exceptions to the general rule of disallowance may be warranted, but any exception should be analyzed and fashioned according to whether it provides a measurable benefit to the donee. By following a measurable benefit to the donee standard, emphasis will be placed on providing a tax benefit that is administrable and that is based on the goal — donee benefit. Any resulting complexity should be viewed as a cost of the incentive, and weighed accordingly in deciding whether it should be provided

Social Welfare and Political Organizations: Ending the Plague of Inconsistency

This article considers the use of social welfare organizations for political purposes, assesses the damage, and offers solutions. Part I of the article provides an overview of present law and compares social welfare and political organizations in the context of political campaign intervention. Part II considers the many serious ongoing harms that have resulted from the current legal framework. Part III assesses different solutions. The article concludes that in general, the disclosure and financing rules concerning the political activity of social welfare and political organizations should be consistent. Consistent rules would reduce incentives to deceive regulators and the public and help restore some integrity to the tax exemption system. Consistent rules would also pave the way to eliminate existing limits on political activity by social welfare organizations and reduce the role of the IRS in regulating speech