A much anticipated report to Congress from the Department of the Treasury was released this month. The 109 page document details the findings of the Treasury regarding a Pension Protection Act mandated study on the organization and operation of supporting organizations (SOs) and donor advised funds (DAFs). Congress requested that the Treasury focus on four key questions: (1) are the contribution deduction rules for SOs and DAFs appropriate, giving consideration to the type, extent, and timing of the use of the donated assets and if the rules are appropriate, giving consideration to the use of the assets of DAFs and SOs for the benefit of the person making the charitable contribution; (2) should DAFs have a distribution requirement; (3) is a gift to a DAF or a SO a completed gift and thus eligible for a charitable deduction; and (4)are the issues contemplate above also issues with respect to other forms of charities or charitable donations.
In exchange for a greater charitable deduction, donors to a SO or a DAF agree to give up control of the asset to an organization that they also have no control over. Donors are expressly prohibited from controlling SOs and typically do not control DAFs and thus have no ability to direct the use of their donation (although DAFs do allow a donor to retain non-binding advisory rights over the assets). The Treasury concluded that, because donors to DAFs and SOs are like donors to other public charities, giving up both control of the contributed assets and the ability to control the donee organization, the current deduction rules are appropriate and no change to the allowable deduction rates is necessary.
With regard to distribution requirements that would impose a minimum distribution for DAFs and SOs like that imposed on private foundations, the Treasury study found that the average payout rate for Aggregate DAFs in 2006 (the first year the data was available) was 9.3% of assets. The payout rate for other DAFs was similar to or above the average. Compared with data indicating a payout rate for private foundations just about 5%, the Treasury concluded that a distribution requirement is unnecessary as DAFs already distribute above the 5%minimum for private foundations. The Treasury did note however, that a definitive conclusion could not be made with only one year of data so further research will be necessary to determine if a distribution requirement will be necessary in the future.
In order to take a charitable deduction, a donor’s gift must be “complete” meaning that the charity must have obtained complete control over the gift. Congress’ question concerned whether gifts to DAFs and SOs are complete at the time they are made since donors maintain an advisory relationship in how funds are invested and/or distributed. The Treasury concluded that contributions to DAFs and SOs are irrevocable and non-refundable. Once the DAF or SO has acknowledged contemporaneously that it holds all rights to the contributed assets, the DAF or SO becomes the legal owner of the assets and controls their distribution. Thus, donations to DAFs and SOs that comply with existing legal requirements are treated as completed gifts even if the donor retains non-binding advisor rights. Finally, the Treasury related that issues regarding type, extent and timing of the use of charitable contributions and the appropriateness of the existing charitable contribution rules are the same for all public charities and that issues relating to when a charitable gift is considered complete are common to all charitable organizations.
Ellis Carter is a nonprofit lawyer licensed to practice in Washington and Arizona. Ellis advises tax-exempt clients on federal tax matters nationwide.