In December 2011, the United States Department of Treasury (Treasury) issued its long-awaited report (Report) on donor advised funds and supporting organizations, as required by the Pension Protection Act of 2006 (PPA). The Report describes the federal tax law governing charities, supporting organizations and donor advised funds (including changes following the PPA); provides statistical information and analysis with respect to supporting organizations and donor advised funds; and responds to public comments received in response to IRS Notice 2007-21, regarding the organization and operation of supporting organizations and donor advised funds. Moreover, the Report answers the following four questions that Congress asked the Treasury to address:
Whether the existing deduction rules for contributions to donor advised funds and supporting organizations are appropriate
Whether donor advised funds should be subject to a distribution requirement
Whether an advisory role in the investment or distribution of donated funds is consistent with a completed gift
Whether these issues apply to other types of charities
The Treasury found that deductions for contributions to supporting organizations and donor advised funds are appropriate because, like contributions to other public charities, such contributions are "generally to organizations the donor doesn't control." Moreover, the Treasury rejected the concern over the lag time between when the contribution is received (and the deduction is claimed) and when the assets are used for charitable purposes, indicating that this timing issue is no different from that of other charities that maintain charitable funds or endowments.
The Treasury concluded that it would be premature to recommend the implementation of a distribution requirement for donor advised funds. In this regard, the Report noted that IRS data for the 2006 tax year indicates that the average payout rate for aggregate donor advised funds was 9.3 percent of assets, while private foundation payout rates are generally just greater than 5 percent. The Treasury indicated that questions regarding donor advised funds that now appear on the Form 990 will, over time, provide a better picture of the spending practices of donor advised funds. The Treasury did caution that aggregate donor advised fund payout rates used in the Report may "mask low payout rates (or even no payout) from a subset of individual [donor advised funds]."
The Treasury determined that gifts to donor advised funds and supporting organizations are "complete" gifts when made, and a charitable deduction may be claimed at that point. A complete gift, and the ability to claim a charitable deduction, requires that a donor give up control over the gift, its sale or further use. In this regard, the Treasury provided that gifts made to donor advised funds and supporting organizations are legally owned and controlled by the donor advised funds or supporting organizations, and "a donor's non-binding advisory relationship does not alter this legal relationship." The Treasury further indicated that the pressures placed on managers of donor advised funds and supporting organizations to use funds in a manner consistent with the donors' wishes are no different than the pressures experienced by other charities from their donors.
The Treasury also concluded that the issues discussed in the Report, namely (i) the type, extent and timing of charitable contributions, (ii) the appropriateness of the existing charitable contribution rules and (iii) when a charitable gift is deemed complete, are the "same for all public charities."
Although the Treasury did not make recommendations with respect to the implementation of legislation that would address donor advised funds or supporting organizations, the Treasury concluded that measures implemented by the PPA designed to increase transparency of donor advised funds and supporting organizations will aid the Treasury in monitoring and determining any future need for legislation.
Senator Grassley, a senior member of the Senate Committee on Finance, was quick to criticize the Report as "disappointing and unresponsive." One of his criticisms was that the Treasury primarily relied upon data from the 2006 tax year in preparing the Report, when the revised Form 990, designed to capture more information from charities, was not in use until the 2008 tax year.
A copy of the report can be found on the Treasury's website at www.treasury.gov.