Reining in Donor-Advised Funds and Supporting Organizations
posted on: Monday, April 09, 2007
Donor-advised funds and supporting organizations have consistently made it into the IRS’ ‘dirty dozen’ list of tax scams. And for a reason: regulations governing both charitable instruments are filled with loopholes that need to be addressed to curb abuses.
There is a clear need to:
- Require full and timely disclosure and reporting of distributions and investments for all donor-advised funds and supporting organizations;
- Subject donor-advised funds and supporting organizations to the excise tax, which could help support oversight and enforcement of accountability regulations by the IRS and state regulators;
- Require a 6 percent all-grants minimum annual spending requirement for all donor-advised funds and supporting organizations; and,
- Simplify the supporting organization structure by eliminating the Type III classification, through which most abuses occur.
Donor-advised funds and supporting organizations have consistently made it into the IRS’ ‘dirty dozen’ list of tax scams. And for a reason: regulations governing both charitable instruments are filled with loopholes that need to be addressed to curb abuses.
There is a clear need to:
- Require full and timely disclosure and reporting of distributions and investments for all donor-advised funds and supporting organizations;
- Subject donor-advised funds and supporting organizations to the excise tax, which could help support oversight and enforcement of accountability regulations by the IRS and state regulators;
- Require a 6 percent all-grants minimum annual spending requirement for all donor-advised funds and supporting organizations; and,
- Simplify the supporting organization structure by eliminating the Type III classification, through which most abuses occur.
posted by NCRP at
12:00 PM
7 Comments:
In rural communities most community work is accomplished by volunteers. For example in many really remote places the volunteer fire department is the community hub where volunteers learn to be first responders, meals are prepared for elders or the ill, community meetings happen, a nurse practitioner sets up appointments twice a month, etc. These halls and the equipment in them require years of stashing really hard earned money into a donor advised fund, arranging donated materials and labor and all the other aspects of contemporary “barn building”. A mandatory 6% annual payout would be a sore loss to these efforts. It would render the best community building financial tool worthless. This is just one common example. I have seen hundreds of community building projects accomplished with “donor advised” funds, often by poor people with a dream for their community and have encountered very little “abuse” and none that was intentional. These are communities where almost no one is thinking of tax loopholes.
In the Hayfork Valley of Trinity County the last lumber mill closed about five years ago, prompting the SF Chronicle to do a series of stories on the “death of a mill town”. The town isn’t dead although it is desperately poor. A donor advised fund was set up so that towns folk could have a vehicle to raise money to make sure that every child had a coat and warm shoes and school supplies. People are working to create scholarship funds for the valley kids, which often take years to create. In Del Norte County, with average income for a family of four falling below $20,000, all the library books come from a donor advised fund.
In some cases the 6% a year would be met and in others it is impossible. The point is that it takes an entirely different mind set to understand how tools when used by the poor and working folk are different and need to be evaluated differently than the same tool used for other reasons by the wealthy. Because we choose to treat everyone the same; wealth is not a criteria for the way that we support and respect a person and their community work, many rich people choose not to work with us. What we see are donor advised funds created by communities, often not individuals, because working together is often the only way to address community progress.
I agree with you about the type three supporting organizations. They seem pretty hard to rationalize.
By
Peter Pennekamp, at 10:03 AM
I think there could be a way to apply for exemptions from the payout rate (which, if I’m not mistaken, have been considered by the Senate Finance Committee at some point before) for some donor-advised funds like the ones you described that would be adversely affected. The important thing would be to set standards for majority of the DAFs, which are used as tools by the wealthy.
By
Yna Moore, Communications Associate, NCRP, at 10:08 AM
Are you sure that the majority of DAFs are used as tools for the wealthy? We have a few hundred of them and all but about 5% fit the description I gave, as I believe would be the case for most rural public foundations. Typically these tools are not made available to the poor and working folk of inner cities because the foundations that “serve” them cannot get their eyes off of those with wealth, but DAFs should be a much more extensively used tool for all poor communities.
I am with you on an exempted class of DAFs, but it should be based on the wealth of those creating them, not just a location designation such as “rural.”
I have LOTS to say on how our obsession with the wealthy donor, positive or negative, renders invisible those that organizations like NCRP and HAF are most concerned about and forms its own matrix of inequitable action.
By
Peter Pennekamp, HAF, at 10:11 AM
We have substantial concerns about recent recommendations by NCRP made in response to the IRS’s call for comments concerning reform of donor advised funds. In particular, we believe that NCRP’s recommendations to the IRS, while well intentioned, would have serious negative effects on philanthropy in rural areas, particularly low-income rural communities.
Rural community philanthropy, a long neglected area among community foundations, has grown by leaps and bounds in recent years due in large part to the growth of geographic affiliate funds. These are funds administered by a community foundation for the specific benefit of geographic sub-sectors of the foundation’s territory, with distributions advised by members of the local community. Most are supported by small contributions from large numbers of people in the local community, and advised by a committee of local leaders, who are themselves contributors.
The Pension Protection Act (PPA) has already created confusion among host community foundations about whether these geographic affiliate funds are subject to the new rules governing donor advised funds. PPA creates questions about whether funds supported by a range of people in a community and advised by a group including some of the donors will be considered donor-advised. Many host foundations are treating them as donor advised until they get some kind of clarifying guidance because the sanctions for making a mistake are too onerous to risk.
These rural affiliate funds often raise contributions to take on major community projects – which can take considerable time. For instance, a community may desperately need a new ambulance, fire truck, community center or clinic requiring multiple years of fundraising. NCRP’s proposal to require a payout on a fund-by-fund basis, would make it difficult or impossible for poor communities to undertake these projects, which require years of sustained efforts.
Boosting the required payout to 6% for donor advised funds and not for the rest of philanthropy would also have a disproportionately negative impact on lower wealth individuals and low-income communities. Having a larger payout for donor advised funds will encourage more donors to create private foundations, with their lower 5% payout requirement, rather than to set up funds within community foundations. This will increase the administrative costs for these funds. Since administrative costs are considered to be part of payout, the net effect will almost certainly be a net decrease in the amount available for grantmaking – precisely the opposite effect from that desired by NCRP with these proposals!
In addition, smaller donors who cannot afford to set up their own private foundations will be penalized if donor advised funds have more restrictive conditions than private foundations. Ironically, this will set up a situation where the less wealth you bring to the table, the more onerous the conditions you would face to use your assets for philanthropic purposes. This threatens to roll-back the recent democratization of philanthropy – that is, that anyone of any wealth level can help grow community endowments…“you don’t have to be rich or dead to be a philanthropist” -- as smaller donors have flocked to community foundations to take advantage of these philanthropic tools and opportunities.
Furthermore, smaller rural community foundations are unable to earn the same returns as their larger urban colleagues or large private foundations. They don’t have the “minimum buy in” for the most lucrative investment products or best investment managers. With smaller amounts under investment, they are charged higher fees from investment houses than larger foundations. Boosting their payout rate to 6% will almost certainly ensure that they are unable to sustain the value of their endowments over time. Inflation plus 6% significantly exceeds the long-term gains a small community foundation can expect from a prudent investment portfolio. Essentially, this would “starve the golden goose” in poorer and more rural communities, as the purchasing power of their endowment payout would shrink over time.
Adding an excise tax to the mix would be particularly egregious for smaller rural community foundations. The revenue/business model for community foundations operating in smaller markets and rural communities is particularly fragile. It is extraordinarily difficult for smaller foundations to cover the cost of even minimal administrative operations with current fee structures. The PPA has already served to increase these administrative costs, making it even more difficult to sustain philanthropic structures in rural communities. Adding an excise tax would price community philanthropy out of the market in smaller, rural, and poorer communities. Funds would flow to larger markets seeking higher rates of return to offset the excise tax, starving out community philanthropic vehicles that are doing outstanding work responding to the needs of some of the poorest and most needy communities in our nation.
Smaller foundations are already facing a major hurdle complying with the restrictive new rules and uncertainties created by the PPA. Throwing in a higher payout than the rest of the field, applied on a fund-by-fund basis, and coupled with an excise tax will almost certainly have the perverse effect of reducing community philanthropy in the areas that can afford it least – this nation’s smaller and poorer rural communities. We don’t believe that our friends at NCRP have this in mind, and hope that they will reconsider the advisability of their recommendations on these matters.
By
Janet Topolsky, Aspen Institute Community Strategies Group, at 4:08 PM
You raised very important points, and we absolutely agree that in creating changes in the current system, we need need to consider how these would affect low-income/rural communities and efforts by organizations like Aspen to help address their needs.
NCRP is not calling for a double standard in payout requirements. It recommended that donor-advised funds be subject to the same payout requirements as private foundations. The payout requirements should be changed from the current 5 percent to 6 percent excluding administrative costs.
For both payout requirements and the excise tax payments,
there is room for exemptions for those community foundations like you and Peter mentioned so that their programs and communities are not adversely affected by new regulations.
By
Yna Moore, Communications Associate, NCRP, at 3:23 PM
To NCRP: is there any movement in your position relative to donor advised funds and their role for poor communities? Any ideas about how to not let the desire to rein in the rich do damage to the poor?
By
Peter Pennekamp, at 9:00 PM
We are currently awaiting the results of the IRS/Treasury study. NCRP will evaluate their recommendations and hope to continue engaging them, together with members of the nonprofit and foundation communities, on what built-in safeguards in our regulatory policies can be put in place to protect the poor and those donor-advised funds that effectively serve them.
By
Yna Moore, Communications Associate, NCRP, at 11:14 AM
Post a Comment
Links to this post:
Create a Link
<< Blog Home