(Originally published in the February 2012 issue of Bruce R. Hopkins Nonprofit Counsel, available electronically to subscribers on publication.)
The Department of the Treasury, in early December, issued a report to Congress on the federal tax law pertaining to supporting organizations (SOs) and donor-advised funds (DAFs). This report, mandated by the Pension Protection Act of 2006 (PPA) (summarized in the October 2006 issue), summarizes these two bodies of law, including the rules enacted in 2006, provides a statistical analysis of SOs and DAFs, and answers questions posed by Congress. Overall, this report concludes that SOs and DAFs “play an important role in the charitable sector.”
The statistics utilized by the Treasury Department are for 2006, the first year for which complete data were available for use in time for this report. SOs received $94.1 billion and had outlays of $72.5 billion, including $11.5 billion in grants, $4 billion in payments to affiliates, and $46.9 billion in program expenditures. As of the close of that year, SOs had a net worth of $226.7 billion.
The report observes that SOs that “support organizations that provide medical and dental care for low-income households, work with hospital patients and employees, and conduct health research had the largest [amount of] revenue, expenses, and net worth.”
Organizations sponsoring DAFs received $59.5 billion, including $9 billion in contributions to DAFs. These sponsoring organizations had total expenses of $37.7 billion, including $5.7 billion in grants paid from DAF assets, $6.8 billion in other grants made, and $20.7 billion in program expenses. These organizations had a net worth of $211.3 billion at the end of the year. The 2,398 organizations sponsoring DAFs had 160,000 of them, entailing assets valued at $31.1 billion as of the end of the year.
The report notes that, beginning with 2006, the Form 990 was redesigned, requiring sponsoring organizations to report the aggregate value of assets held in, and the aggregate contributions to and grants from, their DAFs. This data, the report adds, will make it possible to calculate aggregate payout rates at the sponsoring organization level and compare the payout rates of these aggregate DAFs with those of private foundations.
The report references sponsoring organizations that have a “national reach” and have as their primary role services as “intermediaries between donors and a broad range of charities providing direct charitable services by sponsoring and maintaining DAFs and other similar charitable funds.” These are referred to as NDAFs. A subset of NDAFs is those that are sponsored by charitable affiliates of financial institutions—accorded the (unfortunate) name of commercial NDAFs.
Aggregate DAFs that are commercial NDAFs had an average of $424.5 million in total assets and median assets of $58.9 million. The average payout rate across all aggregate DAFs in 2006 was 9.3 percent. Among the commercial NDAFs, the average payout rate was 14.2 percent. This led the report to conclude that it would be “premature to recommend a distribution requirement for DAFs at this point.”
The report states that 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.”
As for public comments received by Treasury, the report observes that respondents “generally praised the relative benefits of SOs to the supported organizations compared to the benefits that charities derive from DAFs and private foundations.” Also, “[t]here is a consensus among the respondents that DAFs have been a helpful development for donors in the charitable sector.”
The final component of this report is a collection of answers to questions posed by Congress. As to the workability of the charitable contribution deduction in these contexts, the report concludes that the charitable deduction rules “for gifts to DAFs and SOs, which are the same as the rules for gifts to other public charities, appear to be appropriate.” Concerning distribution requirements, the report states, as noted, that “it would be premature to make a recommendation regarding distribution requirements for DAFs on the basis of this first year of reported data.” The report is of the view that “it is consistent to treat donations to DAFs and SOs that comply with existing legal requirements as completed gifts even if the donor retains non-binding advisory rights.”
The report concludes with this: “The PPA enacted provisions designed to mitigate undue donor influence on SOs and DAF sponsoring organizations and to increase the required transparency of these organizations. New reporting requirements will make more data available to federal and state regulators, as well as to researchers, the press, and the general public. As the effects of the PPA and new regulations become clearer over time, Treasury looks forward to working with Congress to determine whether additional legislation or reporting is necessary.” [11.8, 12.3(c)]
Commentary: This Treasury Department report is a fair and reasonably balanced analysis. The statistics it invokes are a testament to the importance of SOs and DAFs to the charitable sector. The sound message of the report is clear: Let’s not have any more legislation on these topics at least until there is greater understanding of the consequences of the laws enacted in 2006. As of now, the data dispel the notion of any need for more tinkering, such as adjustment of the charitable deductions or imposition of payout requirements.
This report is incorrect on one point. Certain provisions of the PPA, as augmented by proposed regulations and other forms of IRS “guidance,” indeed have in fact produced an array of, in the language of the report, “undue additional burden[s].” The fact is that many of the PPA’s provisions, particularly those pertaining to SOs, are not necessary. They constitute enormous overkill in relation to the ostensible problems. Pre-existing law is ample to address what the report terms “undue donor influence” on SOs and DAFs. (As to the former, see, e.g., IRS private letter rulings 200903081, 201004046, 201007076, 201019034, 201029032, 201052022, 201115030, and 201120035.) Indeed, the report does not speak to (other than by summarizing the law) the abuses that allegedly warrant the enactments. The PPA has nearly wrecked the SO regime. Additional legislation is hardly needed. What is needed is repeal of the elements of the legislation minted in 2006 that are destroying the funding and operations of extremely beneficial SOs.
©John Wiley & Sons, Professional and Trade Subscription Content
989 Market Street, 5th Floor, San Francisco, CA 94103 | Phone: 888.378.2537 | Fax: 888.481.2665