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A Response to the Initiative to Accelerate Charitable Giving

Posted on Feb. 1, 2021
Edward A. Zelinsky
Edward A. Zelinsky

Edward A. Zelinsky is the Morris and Annie Trachman Professor of Law at the Benjamin N. Cardozo School of Law of Yeshiva University.

In this article, Zelinsky responds to the Initiative to Accelerate Charitable Giving — agreeing with many, but not all of its points — and argues that the rules applied to private foundations should also govern donor-advised funds.

Introduction

The Initiative to Accelerate Charitable Giving describes itself as “a broad coalition dedicated to promoting common-sense, nonpartisan charitable giving reforms.”1

Among its proposals, the initiative would tighten and expand the provisions of the IRC relative to private foundations and donor-advised funds.2 The initiative performs an important public service by highlighting a topic the Biden administration and the 117th Congress should address and by advancing important proposals.

In this article I respond to the initiative, agreeing with much (but not all) of its perspective and arguing that the rules applied to private foundations should also govern donor-advised funds. Considerations of fairness and efficiency counsel that similar persons and entities should be taxed and regulated similarly. Donor-advised funds are functional substitutes for private foundations and should be treated equivalently by the law. Consequently, the code’s minimum distribution requirement3 and its excise tax on net investment incomes,4 now applicable just to private foundations, should apply to donor-advised funds as well.

Equally compelling is the initiative’s proposal that neither fees paid to donors and their families nor distributions to donor-advised funds should count for the IRC’s minimum distribution rule. The former is classic self-dealing and should be subject to the kind of per se prohibition known as the “no-further-inquiry” rule under trusts and estates law.5 The latter is simply a shell game.

However, I do not support the initiative’s proposal to require donor-advised funds to be time-limited. Here, the arguments of some of the initiative’s critics are compelling. There may be persuasive reasons for donors to establish firm end dates for their private foundations or for their donor-advised funds. But it would be overregulation to mandate those end dates if the other reforms prompted by the initiative are implemented, as I think they should be.

Ultimately, these issues are all matters of balance. On a cost-benefit basis, several of these reforms — such as applying the minimum distribution rules and net investment income tax to donor-advised funds, and prohibiting insider salaries and payments to donor-advised funds from satisfying the minimum distribution requirement — pass muster. In contrast, the initiative’s proposal for mandatory time limits strikes me as overregulation if Congress enacts this package of reforms.

The first section of this article discusses the history of the code’s regulation of private foundations, starting with the Tax Reform Act of 19696 through Congress’s recent simplification of the annual excise tax on investment income paid by private foundations. The second section discusses the emergence of donor-advised funds as effective substitutes for private foundations and Congress’s regulation of them. The third section discusses the initiative’s proposals relative to donor-advised funds and private foundations and the criticism these proposals have received. The fourth section makes the case for many, although not all, of the initiative’s proposals.

Regulating Private Foundations

TRA 19697 introduced the distinction between 501(c)(3) organizations that are private foundations and those that are public charities.8 Public charities are 501(c)(3) entities that satisfy one of three types of tests. The first test classifies organizations as public charities by virtue of the functions they undertake. These include “a church or a convention or association of churches,”9 schools,10 hospitals and related entities for medical education or medical research,11 organizations supporting public colleges and universities,12 some agricultural research organizations,13 and organizations “testing for public safety.”14

Under a second test, organizations qualify as public charities based on the breadth of their sources of support and governance.15 Finally, a third test identifies organizations that support and are controlled by entities qualifying under either of the first two tests.16

All 501(c)(3) organizations that do not qualify as public charities under one of these three tests are by default private foundations.17

To see how these rules work, consider a free-standing art museum. Museums do not fall within any of the functional descriptions of a public charity. Thus, whether a museum is a public charity or a private foundation depends on the breath of the museum’s financial support and governance. A 501(c)(3) museum funded and controlled by a single family is a private foundation. In contrast, a 501(c)(3) museum supported broadly by the public with a community-based board of directors is a public charity.18

The distinction between private foundations and public charities introduced by TRA 1969 was animated by the perception that private foundations were often used, not for genuinely charitable activity, but to further donors’ economic interests on a tax-deductible basis.19 To curb the perceived abuses through the use of private foundations, TRA 1969 established detailed supervision of those foundations through a series of taxes.

Illustrative of the 1969 reforms is the tax on “excess business holdings.”20 Among its other concerns that year, Congress focused on taxpayers who donated their businesses to 501(c)(3) organizations, thereby generating the benefits of income tax, estate tax, and gift tax deductions for charitable contributions.21 In many of these situations Congress determined relatively little business profits actually went to charity while family members, continuing to control their respective businesses through nominally charitable organizations, paid themselves lucrative salaries from these businesses, which had ostensibly been committed to charitable purposes.

To combat this perceived abuse, section 4943 limits the percentage of any single business that a private foundation can own. The general limit is that no private foundation may own more than 20 percent of any business.22 This ceiling curbs the ability of taxpayers to donate family businesses and take charitable tax deductions for those donations without really committing business profits to charitable causes. If this ceiling is violated, the private foundation pays penalty taxes, which can be as high as twice the value of the foundation’s excess business holdings.23

Another perceived abuse was the tax-deductible donation of funds to purportedly charitable endowments and the subsequent accumulation of endowment earnings without those earnings going to charitable activities.24 To deter this hoarding behavior, TRA 1969 added section 4942,25 which requires a private foundation to distribute annually for charitable purposes an amount equal to at least 5 percent of the value of the foundation’s assets.26 Failure to meet this minimum distribution requirement results in potentially prohibitive penalty taxes.27

Consider, for example, a private foundation with $1 million in assets that generates $70,000 in income this year. Section 4942 requires the foundation to distribute $50,00028 this year to charitable activities or else pay section 4942’s penalty taxes. This minimum distribution requirement would allow the foundation to accumulate $20,000 of this year’s income but no more.

Another innovation of TRA 1969 was the excise tax imposed by section 494029 on the investment incomes of private foundations. In 2019 Congress simplified this tax, which today is assessed yearly at a rate of 1.39 percent on each private foundation’s investment earnings.30 Unlike the other taxes imposed on private foundations, the tax levied by section 4940 is not a regulatory tax designed to control the misbehavior of private foundations or the misuse of their tax-advantaged assets. Rather, it is best understood as a modest requirement that those foundations, in light of their ability to pay, help defray the costs of the social overhead that benefits them.31

Additional regulatory taxes imposed by TRA 1969 penalize self-dealing activities between private foundations and the insiders who control them,32 discourage charitable endowments from making imprudent investments that jeopardize a foundation’s charitable purposes,33 and deter “taxable expenditures” by private foundations.34 Among these taxable expenditures are political outlays35 and grants to individuals “for travel, study, or other similar purposes” unless those grants are made under an IRS-approved procedure designed to ensure arm’s-length decision-making.36 Section 4945 reflects the concern that, without adequate regulation, the tax-advantaged funds of private foundations could be used to serve donors’ self-interests on a tax-deductible basis by, for example, supporting political campaigns or subsidizing the personal expenses of donors or their families for travel, study, or other similar activities.

Congress has largely left the private foundation provisions of TRA 1969 intact, although it has tweaked these provisions several times. One fine-tuning occurred in 2018, when it became apparent that section 4943 would have required the charitable foundation established by Paul Newman to divest its ownership of the “Newman’s Own” brand.37 In response, Congress amended section 4943 to permit a private foundation to own a controlling interest in a business if the foundation satisfies detailed requirements designed to guarantee that the business’s profits actually make their way to charitable operations.38

As noted, Congress in 2019 simplified the excise tax on private foundations’ investment income. Before this simplification, section 4940 established a two-tier tax: 1 percent of annual investment income for all private foundations, rising to 2 percent if a foundation failed to distribute enough to charities in any particular year.39 As now amended, section 4940 imposes a flat annual tax of 1.39 percent on the investment incomes of all private foundations. Unlike the other taxes imposed by Congress in 1969, section 4940 is revenue-raising rather than regulatory in nature. The tax imposed by section 4940 cannot be avoided by good behavior. Rather, section 4940 reflects private foundations’ capacity to pay and requires them to defray the cost of the federally provided social overhead that benefits those foundations.

The Emergence of Donor-Advised Funds

The formation and operation of a private foundation entails legal and accounting costs. A private foundation must either incorporate as a nonprofit corporation or must be formed as a charitable trust. Such a foundation must then apply to the IRS for recognition of its status as a nonprofit, charitable entity under section 501(c)(3).40 Every year a private foundation must file IRS Form 990-PF, “Return of Private Foundation,” which is daunting in its complexity. And, as we have just seen, private foundations must comply with the tax provisions of sections 4940 through 4946.

In response to these costs and the associated legal and accounting complexities, as an alternative to private foundations many public charities offer prospective donors the opportunity to establish donor-advised funds. Community foundations throughout the nation sponsor these funds41 as do public charities organized by such commercial investment services as Fidelity42 and Vanguard.43

A donor-advised fund is an account within the sponsoring public charity from which charitable contributions are made upon the “advice” of the donor creating the fund or of the donor’s family. Because a donor-advised fund is part of a public charity, it need not organize itself as a separate nonprofit corporation or charitable trust, need not file its own annual tax return with the IRS, and need not comply with the rules and taxes established in sections 4940 through 4946 for private foundations. As discussed later, Congress has taken some steps to regulate donor-advised funds, and those funds are charged for services by the public charity sponsoring the fund.44 Donor-advised funds are advertised by their sponsors as the functional equivalents of private foundations.45 This is truthful because donor-advised funds de facto serve as functional substitutes for private foundations.46 Like private foundations, donor-advised funds allow the taxpayer to take upfront tax deductions47 for her contribution to the fund with the donor in practice later determining which organizations will receive the fund’s largesse. Lewis B. Cullman and Ray Madoff observe that “when donors open donor-advised fund accounts they do so because they expect to have continuing control over their donations.”48

Consider, for example, a family that contemplates setting aside $100,000 for a family-controlled charitable endowment. This family could pay a lawyer to incorporate a private foundation with the family members as the corporation’s directors and officers. Alternatively, the lawyer could establish a charitable trust with the family members as the decision-making trustees. The lawyer would then prepare and submit IRS Form 1023, “Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code,” for recognition of the 501(c)(3) status of the corporation or trust. Another professional, typically an accountant, would then annually prepare return Form 990-PF. At the end of this process, the family, as corporate directors or as trustees, would annually allocate the charitable distributions of this private foundation, subject to the rules of sections 4940 through 4946.

The appeal of a donor-advised fund is that the family need not bother with any of these organizational or annual compliance costs or tasks while still de facto exercising the same degree of control over the donated funds as if they had established a private foundation. To establish a donor-advised fund, the family simply writes a check to or swipes a credit card for the community foundation or the commercially founded public charity that sponsors the donor-advised fund.

As a legal matter, the family does not control the distributions from the earnings generated by its donor-advised fund because the fund is an account within the sponsoring public charity, which has its own board of directors or trustees. As a matter of law,49 the family only advises those who govern the public charity about distributions from the family’s fund.

In practice, this distinction between control and advice is, at best, formal. More accurately, the distinction is fictional. De facto public charities sponsoring donor-advised funds invariably follow the donor’s advice. A public charity that regularly disregarded that advice (by refusing to make distributions the donor favors or by making distributions the donor does not want) would quickly find itself out of the donor-advised fund business and no longer receiving fees for sponsoring those funds.

The case for donor-advised funds (as opposed to private foundations) is strongest when the donor wants to contribute a relatively small amount as an endowment. In this setting, the legal and accounting fees of establishing a private foundation are disproportionate to the size of the fund.

Consider again the family that wants to earmark $100,000 for a charitable endowment. For that size fund, the costs and trouble of establishing a private foundation are inordinate. Moreover, the donor-advised fund has a framing effect advantage because the annual fees charged by the public charity sponsoring the fund are typically less salient to the donor than would be the more visible legal and accounting costs incurred directly to form and maintain a private foundation.

While the case for donor-advised funds is strongest in the case of relatively small contributions, community foundations in affluent communities push the newly wealthy to eschew the creation of private foundations and instead create donor-advised funds.50 Those funds yield tax benefits for the donors and fees for the sponsoring public charities while avoiding the minimum distribution rules and the net investment income tax that apply to private foundations.

Congress has taken some steps to regulate donor-advised funds. It has extended the private foundation tax on excess business holdings to those funds.51 Congress has also adopted rules for donor-advised funds designed to curb self-dealing52 and to prohibit taxable distributions.53

But so far, Congress has not extended to donor-advised funds the full range of taxes adopted for private foundations in 1969. In particular, donor-advised funds, because they are sponsored by public charities, have no minimum distribution requirement under section 4942 and do not pay to the federal treasury the excise tax on investment income under section 4940. In practice, those funds may resemble the type of pre-1969 charitable entities that caused Congress to regulate private foundations.54

The Initiative and Its Critics

Against this background, the initiative proposes several changes to the tax treatment of charitable contributions, private foundations, and donor-advised funds.55 The initiative’s stated goal is to strengthen the law to ensure that donations receiving tax-advantaged treatment actually yield substantial and timely charitable benefits.56

For private foundations the initiative would prohibit, for purposes of section 4942’s minimum distribution requirement, counting the salaries or travel expenses of founding family members as charitable outlays.57 The initiative would also exclude any private foundation’s donation to a donor-advised fund from satisfying the minimum distribution requirement.58

The initiative would eliminate the tax on a private foundation’s net investment income if either of two tests is met. For any year in which the foundation makes distributions of at least 7 percent of its asset value, the initiative would suspend that year’s excise tax on investment income.59 Alternatively, if any newly created private foundation limits its life span to 25 years or less, the life-limited foundation would never pay the tax on investment income.60

The initiative would also amend the code so that a newly created donor-advised fund would generate an income tax deduction for the donor upon her initial contribution to the fund only if the fund is scheduled to be totally paid out to charity within 15 years of the fund’s creation.61 Alternatively, if a donor wants her fund to last more than 15 years, she would, under the initiative’s proposal, only receive an income tax deduction when her donated funds are actually paid to a charitable donee.62 And, in any event, the code would, under the initiative’s platform, require that any donor-advised fund be totally distributed to charitable donees no later than the 10th anniversary of the donor’s death.63

The initiative also proposes that “donors cannot avoid private foundation status (with its attendant rules) by funding their entities through donor-advised funds.”64 As phrased, this recommendation is not a model of clarity. I argue in the next section for parity between private foundations and donor-advised funds by extending to the latter all the tax rules that now apply to the former, specifically, the minimum distribution requirement of section 4942 and the annual excise tax on investment income of section 4940.

The initiative’s recommendations have met with outspoken opposition both from defenders and critics of the status quo. Elise Westhoff, president and CEO of the Philanthropy Roundtable, argues that the initiative’s proposals would starve donor-advised funds of funding.65 “The 15-year marker is entirely arbitrary, and discriminatory,”66 Westhoff argues, and donor-advised funds “already have a higher payout rate than the required minimum payout for a foundation.”67

Westhoff takes particular aim at the initiative’s proposal that fees and travel expenses paid for family members should not count for purposes of meeting a private foundation’s minimum distribution requirement. The initiative’s proposal, Westhoff argues, reflects “a worldview hostile to wealth and private action.”68

In this same vein, Naomi Schaefer Riley and James Piereson argue that:

Philanthropy continues to be a robust activity in the United States in large part because it is private, pluralistic, and an expression of independent choice. Subjecting it to regulations like those proposed by the Initiative to Accelerate Charitable Giving would undermine a tradition that has served America well.69

In contrast to these critics, Chuck Collins and Alan S. Davis argue that the initiative’s proposals do not go far enough. Among the “reforms that would put the pedal to the metal,” they favor increased minimum distribution requirements that would apply to both private foundations and donor-advised funds.70

Regulating Donor-Advised Funds

My response to the initiative and its critics starts from the premise that, in terms of equity and efficiency, the legal and tax systems should treat like enterprises and like persons in like fashion. From this premise, there is no justification for the failure to extend to donor-advised funds all of the code’s rules for private foundations. Donor-advised funds are correctly advertised by their sponsors as functional alternatives to private foundations. Those funds, like private foundations, allow taxpayers to donate funds on a tax-deductible basis and then effectively control the subsequent distribution of the earnings generated by those funds.

For a private foundation, the donor’s control is formal because the donor and his family are typically the directors or trustees. For a donor-advised fund, the donor’s control is de facto because the advice of the donor or his family is in practice followed by the public charity sponsoring the fund. Substantively, the two arrangements are the same, permitting donors or their families to determine the ultimate charitable disposition of donated funds and the earnings those funds generate.

Critics of the initiative justly celebrate the role that private philanthropy plays in American life. That role was strengthened by the 1969 reforms, which assure U.S. taxpayers that the income, estate, and gift tax deductions provided for private foundations serve bona fide charitable purposes. Public confidence is an important asset of the philanthropic sector.

It may well be that a majority of donor-advised funds already make enough distributions annually to satisfy the minimum distribution rule applying to private foundations, that is, annual payments to charity equal to at least 5 percent of assets. If so, for these funds, formally applying section 4942 will confirm current practice. For the donor-advised funds that do not now satisfy the code’s minimum distribution requirement, it is appropriate that they do so to establish legal and tax parity.

It is critical to that parity that the code’s 5 percent minimum distribution requirement apply separately to each particular donor-advised fund, just as this requirement applies separately to every private foundation. A private foundation that in any year fails to meet section 4942’s minimum distribution requirement cannot excuse its noncompliance by invoking another private foundation that distributes more than the code requires. Similarly, each donor-advised fund should itself be subject to section 4942 and not excused from that provision’s distribution requirement because another donor-advised fund (whether or not sponsored by the same public charity) exceeds section 4942’s minimum.

Similar considerations of parity counsel that the excise tax on private foundations’ net investment incomes be extended to donor-advised funds as well. The best understanding of section 4940 starts with the fact that private foundations are funded entities that like all legal entities use public services and have the capacity to pay tax. Reflecting their capacity to pay as well as the benefits they receive, private foundations are required to make a modest contribution to the federal fisc, that is, 1.39 percent of annual net income. As substantively identical entities, donor-advised funds should make the same modest contribution to defray the costs of the nation’s overhead. Like private foundations, the public charities that sponsor donor-advised funds use public services and have the capacity to pay for those services.

The initiative also proposes that private foundations be forbidden from counting against their minimum distribution requirements the salaries and travel expenses those foundations pay donors and their families for services those individuals perform. I agree with this proposal.

A central insight of trusts and estates law is that some self-dealing transactions between legal entities and the insiders who control them should be prohibited per se with no further inquiry permitted regarding the reasonableness of those transactions.71 The logic of the bright-line no-further-inquiry rule is that some self-dealing transactions are difficult to monitor and police while the putative benefits of those insider arrangements are marginal at best. Therefore, on balance, it is more efficient to prohibit that self-dealing per se.

Congress embraced the logic of the no-further-inquiry rule both in ERISA72 and in TRA 1969. The 1969 law endorses the no-further-inquiry approach by prohibiting per se most self-dealing transactions between private foundations and the disqualified persons who, directly or indirectly, control those foundations.73 In similar fashion, ERISA prohibits per se self-dealing transactions between pension trusts and the disqualified persons who control them.74

However, the no-further-inquiry rule, in either its statutory or common law manifestations, is often understood as excepting from its bright-line prohibition on self-dealing reasonable compensation paid to insiders for services rendered.75 That exception, I would argue, is not appropriate for private foundations, given the problems of monitoring and policing that compensation. However, the proposal advanced by the initiative goes less far than I would, because the initiative would allow salary payments to insiders to continue. The initiative would only prevent those payments from counting against the 5 percent minimum distribution requirement.76

The logic of the no-further-inquiry rule supports the initiative’s modest proposal to exclude insider payments from satisfying a private foundation’s minimum distribution requirement. The tax benefits given to private foundations reflect the belief (shared by the members of the initiative and their critics) that private philanthropy plays a critical role in American life. But salaries to insiders are not philanthropy. They are self-dealing, hard to police, and often unreasonable.

Like so many decisions in this area, this is ultimately a matter of balance: The benefits of permitting private foundation insiders to take salaries are small. The costs are high. While we continue to permit those salaries, on balance, they should not be treated as charitable payments when they are often something else.

Similar observations are to be made about the initiative’s proposal that private foundations should not be permitted to satisfy their minimum distribution requirements by payments to donor-advised funds. The distribution requirement of section 4942 reflects a considered judgment by Congress that private foundations should make a basic contribution to actual charitable operations each year.77 When a private foundation gives money to a donor-advised fund, that money does not go to operational charity but rather, is diverted into another, essentially identical, holding entity. It is a shell game for a private foundation to distribute to a donor-advised fund and then treat these funds as if they went to actual charitable operations.

While I agree with the initiative on these issues, I do not support the initiative’s proposal for mandatory time limits for donor-advised funds. Again, the question is one of balance. If Congress subjects donor-advised funds to the minimum distribution rules and to the excise tax on net investment income now applicable to private foundations, mandatory time limits look like overregulation. There may be legitimate reasons a donor may time-limit her donor-advised fund or private foundation. But if that fund is subject to the code’s mandatory payout rule and the excise tax on net investment income, it is not compelling to force an end date to this charitable entity.

My views on these issues have been influenced by my personal experiences with the family foundation my wife and I created in our son’s memory. No member of our family takes a fee for the time spent on the foundation’s affairs. The 5 percent minimum distribution requirement is reasonable in light of the tax benefits we received on funding this foundation. The yearly excise tax of 1.39 percent of net investment income reflects the foundation’s capacity to pay and is a modest contribution to the social overhead from which the foundation benefits. Had we established our son’s memorial as a donor-advised fund, the same rules should properly apply to that fund. However, I would like my son’s memorial and its support of causes in which we believe to continue during the lifetimes of my son’s siblings.

Conclusion

The initiative performs an important public service by drawing attention to a topic that should be addressed by the Biden administration and Congress. In the interests of efficiency and fairness, the same rules should govern donor-advised funds as apply to private foundations because these are substantively identical entities. In particular, the code’s minimum distribution requirement and the code’s excise tax on private foundations’ net investment incomes should apply to donor-advised funds as well. Similarly persuasive is the initiative’s proposal that neither fees paid to donors and their families nor distributions to donor-advised funds should count for the code’s minimum distribution rule. If Congress adopts these rules, then I am not persuaded by the initiative’s proposal to require donor-advised funds to be time-limited.

At the end of the day, both the members of the initiative and the initiative’s critics understand the importance of a vibrant philanthropic sector. The initiative strengthens that sector by focusing public attention on potential reforms.

FOOTNOTES

1 Initiative to Accelerate Charitable Giving, About Us (2020).

2 Id.

5 See infra notes 71 through 76 and accompanying text.

6 P.L. 91-172, 83 Stat. 487.

7 Id.

8 Section 509(a) defines which section 501(c)(3) entities are not private foundations. It has become a matter of common parlance to refer to the 501(c)(3) entities that are not private foundations as public charities. See, e.g., section 507(b)(1) (using the term “public charity” in title); LTR 201044023 (discussing public charity status).

9 Sections 509(a)(1) and 170(b)(1)(A)(i).

18 Reg. section 1.170A-9(f)(9), Example 3.

19 Edwin S. Cohen provides a particularly enjoyable reminiscence of the background to the private foundation provisions of TRA 1969. Cohen, A Lawyer’s Life: Deep in the Heart of Taxes 395-402 (1994).

20 Section 4943. For more detailed discussion of section 4943, see Daniel N. Belin, Charitable Foundations: The Essential Guide to Giving and Compliance 107-113 (2015).

21 Cohen, supra note 19, at 397-398.

23 Section 4943(a)(b).

24 Cohen, supra note 19, at 397-398.

25 Section 4942. For more detailed discussion of section 4942, see Belin, supra note 20, at 115-134.

26 Section 4942(e)(1). Special provisions apply to operating foundations. See, e.g., section 4942(a)(1).

28 $1 million * 5 percent = $50,000.

29 Section 4940. For background on section 4940, see Cohen, supra note 19, at 398-400. For more detailed discussion of section 4940, see Belin, supra note 20, at 253-255.

31 See Edward A. Zelinsky, “The Taxation of Charitable Endowments’ Investment Incomes,” Tax Notes Federal, Jan. 20, 2020, p. 401. Similarly, the code’s tax on college and university endowments is best understood in terms of those endowments’ ability to pay and the benefits they receive, not as a regulatory device. Zelinsky, “Section 4968 and Taxing All Charitable Endowments: A Critique and a Proposal,” 38 Va. Tax Rev. 141, 164-170 (2018).

32 Sections 4941 and 4946. For more detailed discussion of sections 4940 and 4946, see Belin, supra note 20, at 53-81.

33 Section 4944. For more detailed discussion of section 4944, see Belin, supra note 20, at 135-137.

34 Section 4945. For more detailed discussion of section 4945, see Belin, supra note 20, at 45-52, 89-105, and 193-195.

37 Zelinsky, “Saving Butch Cassidy’s Charitable Legacy,” OUPBlog (Feb. 12, 2018).

39 See section 4940, before amendment by section 206 of P.L. 116-94, 133 Stat. 3246.

41 See, e.g., Fairfield County’s Community Foundation, “Donor Advised Funds” (2021).

42 Ann Charles Watts, “The Wolf in Charity’s Clothing: Behavioral Economics and the Case for Donor-Advised Fund Reform,” 43 Dayton L. Rev. 417 (2018) (discussing the emergence of Fidelity Charitable as the second-largest grant-giving institution in the nation); James A. Borrasso Jr. (student note), “Opening the Floodgates: Providing Liquidity to the Charitable Marketplace Through Changes to Donor-Advised Funds,” 18 U. Ill. L. Rev. 1533, 1534, 1546 (2018) (discussing emergence of Fidelity Charitable and other commercially sponsored donor-advised funds).

44 Lewis B. Cullman and Ray Madoff, “The Undermining of American Charity: How Donor-Advised Funds Deprive Charitable Organizations of the Money They Need,” The New York Review of Books, July 14, 2016 (discussing the “management fees for the financial institutions managing the [donor-advised] funds”); Brian Galle, “Pay It Forward? Law and the Problem of Restricted-Spending Philanthropy,” 93 Wash. U.L. Rev. 1143, 1200 (2016) (discussing how “DAF sponsors make money by claiming a yearly management fee, usually a percentage point or two of the assets in the fund”). See, e.g., Fidelity Charitable’s 2019 Annual Report at 15 (disclosing administrative, management and professional fees).

45 See, e.g., Fairfield County’s Community Foundation, supra note 41 (“At your convenience, make grants to your favorite nonprofits or causes that are meaningful to you.”).

46 Terry W. Knoepfle notes that donors to donor-advised funds “often have their name attached to the fund, much like a private foundation.” Knoepfle, “The Pension Protection Act of 2006: A Misguided Attack on Donor-Advised Funds and Supporting Organizations,” 9 Fla. Tax Rev. 221, 227 (2009).

47 Section 170 (income tax deduction for charitable contributions); section 2055 (estate tax deduction for charitable contributions); and section 2522 (gift tax deduction for charitable contributions).

48 Cullman and Madoff, supra note 44. They continue: “This expectation is reinforced by marketing materials that allude to control.”

49 See, e.g., section 170(f)(18)(B) (a 501(c)(3) organization sponsoring donor-advised funds “has exclusive legal control over the assets contributed.”).

50 David Gelles, “Inside a Powerful Silicon Valley Charity, a Toxic Culture Festered,” The New York Times, May 13, 2018 (“As Silicon Valley technology executives have amassed enormous fortunes in recent years, one relatively obscure group — the Silicon Valley Community Foundation — has emerged as the local charity of choice. Facebook’s chief executive, Mark Zuckerberg, has donated stock worth more than $1.8 billion to the foundation. Reed Hastings, the founder and chief executive of Netflix, has given $100 million. And many other tech titans, including the Twitter co-founder Jack Dorsey and Microsoft’s co-founder Paul Allen, have donated millions.”).

52 Sections 4958(f) and 4967.

54 Congress has also not extended to donor-advised funds the prohibition on imprudent investments that applies to private foundations. Section 4944.

55 Initiative to Accelerate Charitable Giving, supra note 1.

56 Id.

57 Id.

58 Id.

59 Id.

60 Id.

61 Id.

62 Id.

63 Id.

64 Id. (parenthetical in original).

65 Westhoff, “The Left Wants a Philanthropy of the Few,” The Wall Street Journal, Dec. 15, 2020.

66 Id.

67 Id.

68 Id.

70 Collins and Davis, “A Proposal to Accelerate Giving Won’t Even Get Philanthropy Out of Park,” Inside Philanthropy, Dec. 17, 2020.

71 Melanie B. Leslie, “Common Law, Common Sense: Fiduciary Standards and Trustee Identity,” 27 Cardozo L. Rev. 2713, 2720-2726 (2006) (discussing and justifying the no-further-inquiry rule).

72 P.L. 93-406, 88 Stat. 829.

73 Section 4941(a), (b), and (d)(1) (taxing and describing prohibited transactions between private foundations and disqualified persons) and section 4946 (defining disqualified persons).

74 Section 4975(a), (b), (c)(1), and (e)(2) (taxing and describing prohibited transactions between pension trusts and disqualified persons and defining disqualified persons); ERISA sections 3(14) (defining party in interest similarly to disqualified person) and 406 (proscribing prohibited transactions); 29 U.S.C. sections 1002(14) and 1106. For discussion of the prohibited transactions provisions pertaining to pension trusts, see John H. Langbein et al., Pension and Employee Benefit Law 541-549 (6th ed. 2015).

75 See, e.g., Uniform Trust Code section 802(h)(2) (permitting reasonable compensation to trustees); section 4975(d)(2) (permitting service payments to disqualified persons if those payments constitute reasonable compensation); ERISA section 408(b)(2) (permitting reasonable compensation service payments to party in interest); 29 U.S.C. section 1108(b)(2).

76 Initiative to Accelerate Charitable Giving, supra note 1. I would go further than the initiative by banning all payments between private foundations and insiders.

77 Cohen, supra note 19, at 397-398.

END FOOTNOTES

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