Roger Colinvaux, professor of law, Catholic University of America, Columbus School of Law in Washington, D.C.
Professor Roger Colinvaux is a frequent writer on charitable topics, particularly private foundations and community foundations (CFs). His article has three parts. First, he provides a thorough, excellent discussion of the history of CF regulation, from its 1914 beginning in Cleveland, through the Tax Reform Act of 1969 and the 1976 CF regulations, until 2014 when the charitable gift funds maintained by Fidelity, Schwab and Vanguard (in the author’s phrase, “national sponsoring organizations” (NSOs)) exceeded in asset value the donor-advised funds (DAFs) of the largest 274 traditional CFs. Any lawyer, trust officer, accountant or member of a family office who works with CFs will benefit from reading the review with some care.
CF law can be confusing because CFs began as a collection of charitable trusts administered together but today are usually organized as state law non-profit (or not-for-profit) corporations that have all sorts of funds including DAFs. In layman’s terms, what the two forms have in common is that the CF has ultimate authority over the charitable funds—the donor hasn’t imposed a material restriction—including the ability to redeploy the funds if the original charitable purposes become obsolete or new conditions create the need for a change. That ability is referred to as the “variance power,” and it’s largely replaced, for CFs, the more traditional, and cumbersome, method of modifying a charitable trust, the doctrine of cy pres. The definition of “material restriction” can be argued about as the article quite properly notes, and even whether the term applies to charitable corporations in the same way it does to charitable trusts is disputed. At a minimum, if a donor retains more than advisory authority over funds contributed, that’s likely a material restriction, hence the name donor “advised” funds.
Second, the author voices his concern that if CFs present themselves as being essentially equivalent to the DAFs maintained by NSOs, then over time, they’ll be regulated in the same manner as the NSOs. The article states:
[i]n sum since the rise of the NSO the unmistakable trend is to view DAFs as an activity to be regulated, without regard to sponsor. For community foundations, what was once a useful fundraising tool that attracted little attention has become a national debating point. The practical impact on community foundations is that new donor advised fund rules inevitably will apply to them unless efforts are made to distinguish sponsoring organizations legislatively.
Prof. Colinvaux believes that CFs ought to receive rather better tax treatment than the DAFs created by NSOs. What sorts of rules might be imposed on DAFs? Reading the mind of a regulator is always uncertain, but one issue commonly lifted up is that contributions to a DAF generate an immediate income tax deduction but perhaps provide only delayed benefits to charity (a statement that presupposes that a CF itself isn’t “really” a charity). That is, I contribute $100,000 to my DAF today, but advise the DAF to make contributions to my church, school and other favorite charity over a period of time. In fact, the period of time may be significant, particularly when endowments are created with advisors spanning multiple generations. The question of whether that “delay” ought be viewed as a benefit or detriment to society hasn’t been settled, at least in the mind of this reviewer, and this article doesn’t purport to argue the case, although the author appears sympathetic to the claims that so-called “warehousing” is generally bad. Another common concern is that because DAFs are generally pass-throughs to other charities, various sorts of donor abuses can occur and are more likely than when charitable contributions go directly to “real” charities. Such abuses range from sophisticated estate-planning transactions down to donors running contributions to athletic departments for tickets through a DAF to obtain a 100 percent charitable deduction rather than the allowed 80 percent deduction. Lest the reader think that such concerns are fanciful or obscure, the international magazine,The Economist, in its March 25, 2017 issue, highlighted potential DAF abuses, as well as warehousing, and concluded of DAFs: “At present, there is scant evidence to suggest they fuel an overall rise in giving. Many philanthropists sing DAFs praises. But that does not prove their worth to society as a whole.”
We ought note in passing that many in the CF field believe that the NSOs actually limit the degree to which CFs will be regulated. That’s because the lobbying power of the NSOs is assumed to far outstrip that of CFs. Of course, even if that were true, on some issues, the two groups have differing concerns; for example, we can reasonably assume that in 2006, when the Pension Protection Act imposed excess business holdings rules on all DAFs, those maintained by CFs were more heavily affected than those held by NSOs.
Third, Prof. Colinvaux points out that there’s a solution to this potential regulation: CFs should distinguish themselves from DAFs maintained by NSOs because they’re located in, serve and are responsive to particular communities, especially geographic communities. Not only does community service have its own charitable purpose that’s independent from merely maintaining advised funds, but also the presence of a community board and the need to raise funds from a particular community limits the likelihood of donor abuse. The author would have CFs limit their grantmaking and activities outside of their geographic service area to enhance this distinction. Accordingly, CFs would occupy a different niche in U.S. philanthropy from not only PFs but also from NSO-advised funds, and for that matter, from national DAFs operated by other kinds of communities like churches or causes. This would enable CFs to argue for an appropriate level of regulation that, the author believes, would be less burdensome than is likely otherwise. As a technical matter, the specific proposal is for a definition of a CF in the Internal Revenue Code itself (we have a definition, since 2006, of a DAF but not of a CF), although the author recognizes such a proposal focuses attention, and once attention is focused by Congress, staff, Treasury and the Internal Revenue Service, undesirable results may result.
The issues identified in the article are significant and are worth keeping an eye on. The point for all those interested in philanthropy to remember is that in all political settings, advocacy for CFs and DAFs is worthwhile and may ultimately make a difference in the timing and degree of regulation.