Fearing changes in tax policy up for debate in Congress will depress charitable giving, some nonprofit leaders on Wednesday struck back against proposed donor-advised-fund regulations, arguing they are based on faulty reasoning and an improper use of statistics.
In a letter to Senate Finance Committee Chairman Orrin Hatch, a Utah Republican, and Sen. Ron Wyden of Oregon, the panel’s ranking Democrat, the heads of some of the biggest nonprofit associations in the country slammed suggestions including time requirements on the disbursement of money out of donor-advised funds. The nonprofit leaders called the proposals “misguided and misleading.”
“We will strongly resist any proposals that would place restrictions on all DAFs to address perceived problems with only a small fraction of accounts,” they wrote.
The letter, written by leaders representing foundations, donors, and charities, countered proposals included in a July letter sent to the same Senate panel by two vocal donor-advised-fund critics. In that earlier letter, Roger Colinvaux of the Catholic University of America, and Ray Madoff of the Boston College Law School, called for requiring donor-advised funds to direct gifts to charities within a specific time period, rather than allowing them to sit in investment accounts indefinitely.
Such a proposal was “based on erroneous statistics and claims, would severely restrict philanthropy, and would reduce overall charitable giving in communities throughout the country,” wrote Dan Cardinali, president of Independent Sector; Douglas Kridler, president of the Columbus Foundation (on behalf of the Community Foundation Public Awareness Initiative); Adam Meyerson, president of the Philanthropy Roundtable; and Vikki Spruill, president of the Council on Foundations.
‘The Spirit of the Rules’
Created by community foundations or commercial financial firms like Fidelity and Vanguard, donor-advised funds allow donors to open an account, deposit a sum of money, and take an immediate tax deduction. The donors, however, are under no obligation to direct the money to an operating charity during a specific time frame, so the money can sit in the accounts indefinitely. The funds have become enormously popular. In 2016, Fidelity Charitable was the nation’s largest charity in The Chronicle’s annual Philanthropy 400 rankings.
Ms. Madoff and Mr. Colinvaux worry that money parked in those accounts are enriching the organizations that charge fees to manage the funds rather than going into the hands of nonprofits serving the public good.
“Despite the tremendous growth of contributions to DAFs, charitable giving has remained flat, at roughly 2 percent of disposable personal income,” Mr. Colinvaux and Ms. Madoff wrote to the senators in July. “This suggests that DAFs are not increasing overall giving but instead are attracting dollars that would otherwise be contributed directly to active nonprofits.”
The professors urged the lawmakers to impose a maximum time limit for the money to be directed to a charity. Doing so might activate dormant accounts at the one-quarter of donor-advised-fund sponsoring organizations that distribute less than 1 percent of their assets in a year, according to a 2015 Internal Revenue Service study.
Ms. Madoff and Mr. Colinvaux suggested that a 10-year time limit would still provide donors with flexibility in how and when they make their gifts, while at the same time ensuring that nonprofits receive contributions in a “reasonable” time period.
They also called for barring private foundations from giving to donor-advised funds to meet their federally mandated payout, which requires that 5 percent of a grant maker’s assets go toward a charitable purpose.
Such payouts are inconsistent with “the spirit of the rules” governing private foundations, the two argued.
“The payout is intended to measure distributions to active charities, not other investment funds,” they wrote.
Ms. Madoff and Mr. Colinvaux also suggested changes to the foundation excise tax. Currently, foundations must pay a 2 percent tax on investment gains. In years when the payout exceeds a foundation’s five-year average, the tax is lowered to 1 percent. Foundations have argued that the two-tiered tax provides a disincentive to increase payout to avoid the higher tax.
Ms. Madoff and Mr. Colinvaux proposed keeping a 2 percent tax. However, when foundations pay out more than 6 percent of their assets, the tax would drop to 1 percent; distributions of more than 8 percent would eliminate the tax altogether.
Active vs. Inactive Funds
In response, philanthropy leaders this week called the pair’s argument that the growth in donor-advised funds hadn’t boosted philanthropy “grossly misleading.”
Citing figures from “Giving USA,” they note that charitable giving totaled 2.1 percent of the nation’s gross domestic product in 2016, a higher mark than the 40-year average of 1.9 percent. The difference, they wrote, is equal to $37 billion, or a 10 percent increase in charitable giving.
“When considering huge numbers such as percentage of GDP, simply rounding to 2 percent and using that to buttress an argument is unacceptable,” they wrote.
In their letter, the philanthropy leaders said Ms. Madoff and Mr. Colinvaux lack hard evidence that a substantial number of donor-advised-fund accounts were inactive. The IRS data offered by the law professors, they said, did not take into account that many inactive funds are held by organizations that maintain a single fund, rather than community foundations and commercial funds that manage thousands of accounts. The inactive funds, they suggest, represent a small fraction of fund assets.
They defended the private-foundation practice of donating to donor-advised funds to meet payout requirements. Doing so, they said, allows foundations to meet their distribution requirements during periods of leadership change or when they shift strategies.
The nonprofits’ letter did not address the excise tax.
Previous Attempt
The last time a member of Congress floated a broad tax overhaul, it included a plan to force donor-advised funds to move money from their accounts to charities. That proposal, authored in 2014 by then-House Ways and Means Committee Chairman Dave Camp, a Republican from Michigan, went nowhere, but it triggered a huge reaction from donor-advised-fund proponents. They argued that the funds already pay out at a faster rate than foundations and that their flexibility attracts donors.
