Treasury Department Releases Long-Overdue Study on Supporting Organizations and Donor Advised Funds

December 16, 2011

On Dec. 6, 2011, the Department of the Treasury released its Report to Congress on Supporting Organizations and Donor Advised Funds. The full report is available on the Treasury’s website.

Congress directed the Treasury to conduct this study and provide a report on the results in the Pension Protection Act of 2006 and specifically requested the study to address whether the charitable deduction for contributions to supporting organizations and donor-advised funds is appropriate considering the use of such contributions by the charitable recipient or the use of such contributions for the benefit of the donor. Congress also requested the Treasury to examine whether donor-advised funds should be required to distribute a specified amount (based, perhaps, on the income or assets of the fund) and whether the donor’s advisory rights over a donor-advised fund are consistent with the treatment of contributions as completed gifts. In addition, Congress asked the Treasury to make appropriate recommendations on these subjects.

In the report, the Treasury provided a description of the federal tax law treatment of supporting organizations, donor-advised funds, and organizations that sponsor donor-advised funds, along with a statistical overview and analysis of such organizations. The Treasury provided such data based on IRS Statistics of Income data from 1985 through 2006, supplemented with information on donor-advised fund contributions and charitable deductions from individual income tax returns. The report states, however, that most of the information concerning donor-advised funds and supporting organizations was obtained from the Form 990 returns for tax year 2006, the first year that several reporting requirements were added for supporting organizations and sponsoring organizations.

The Treasury also reported on public comments received on the organization and operation of supporting organizations and donor-advised funds in response to IRS Notice 2007-21. Notice 2007-21 requested comments on issues regarding supporting organizations and donor-advised funds, including the advantages and disadvantages of those forms over other charitable giving arrangements, payout requirements, and the effect of the related provisions of the Pension Protection Act of 2006. While respondents agreed that donor-advised funds were a helpful development for donors in the charitable sector, they did not agree on whether consolidated reporting of funds was appropriate. Community foundations and other sponsoring organizations praised the advisory role of donors as a means of maintaining donor engagement and encouraging increased giving. The Treasury received comments presenting a wide range of opinions on whether there should be a minimum distribution requirement for donor-advised funds and supporting organizations, and received comments on other subjects as well, including prohibitions on donor retention of options or other rights over donated property, limits on management fees, limits on the duration of donor advisory rights, and limits on the duration of donor-advised funds.

The Treasury concluded that the contribution deduction rules for contributions to donor-advised funds and supporting organizations, being the same rules that are applicable to contributions made to publicly supported charities, are appropriate because (1) donors must give up control of the assets the same as if making a gift to any other public charity and (2) the time between when a supporting organization or donor-advised fund receives assets and uses them for charitable purposes is no different from the time applicable to any other public charities and their use of contributed assets.

After finding high average payout rates for most sponsoring organizations, the Treasury decided that it would be premature to recommend a minimum distribution requirement for donor-advised funds without having several more years of data and analysis.

The Treasury determined that, while sponsoring organizations may feel pressure to use donated funds in the manner preferred by the donor, especially when the sponsoring organization would like to obtain more donations from the donor, sponsoring organizations have no legal obligation to follow the advice of the donor, and thus such gifts are “completed” gifts for purposes of the charitable deduction.

Finally, the Treasury concluded that the issues addressed in the report, including the type, extent, and timing of the use of charitable contributions, the appropriateness of the charitable contribution rules, and the completeness of a gift, are generally the same for all public charities, and the Treasury will be able to determine whether additional legislation or reporting is necessary as the new reporting requirements provide more data and the effects of the Pension Protection Act of 2006 become more clear. Notably, the Treasury does not recommend any new legislation regarding either supporting organizations or donor-advised funds.

In response to the release of the Treasury’s report, Sen. Charles Grassley (R-Iowa) commented that the report was “disappointing and unresponsive” and did not offer any kind of road map to fix existing problems. Sen. Grassley was also disappointed that the study did not use data from more recent years, including 2008 when the revised Form 990 required charitable organizations to report more details, including additional information regarding their donor-advised funds.

Charitable organizations should keep the results of this study in mind because the study and the Treasury’s report may influence Congress when and if it considers future legislation affecting supporting organizations and donor-advised funds.

McGuireWoods Nonprofit & Tax-Exempt Organizations Group

Our Nonprofit & Tax-Exempt Organizations Group provides advice and guidance that enable charities and other nonprofits to operate more efficiently and effectively in today’s increasingly complicated, regulated, and competitive environment.