Following up on my previous posts:
TaxProf Blog op-ed: The Law and Policy of Donor-Advised Funds, by Edward Kleinbard (USC):
Daniel Hemel’s analysis of Donor-Advised Funds is erroneous on both law and policy grounds.
As to law: you must begin with the self-evidently true factual proposition that the independence of the DAF from the donor is a sham. The DAF charity does what it is told to do by the donor, and not one whit more, or less. The DAF is the donor’s agent, not an independent actor that happens to get along with the donor. Were I in better health today I would litigate this for the government on a contingent fee basis. Moreover, the DAF itself does not put a single dollar to work in eleemosynary activity. It’s a personal financial asset that compounds at tax-free rates, a point that I think didn’t get developed in Dan’s piece.
What follows from this is that the DAF result is inconsistent with our annual system of accounting, in which expenses must relate to the period incurred. A firm that irrevocably prepays five years of TV advertising cannot deduct all five years’ worth today – yet that is the result that the DAF achieves. It is a simple end run around either cash or accrual accounting methods.
Second, there is a procedure in place for funding charitable endeavors today while controlling the long term disbursement of those funds over time. It’s called a private foundation. Congress created the private foundation, but it also imposed numerous restrictions on the operation of a private foundation. The DAF is an end run around the Congressionally-created scheme to handle the basic underlying facts of setting aside money today but controlling its disbursement into the futures. To say that a DAF does what a private foundation does not is to confess that the DAF is an evasion of the regulatory scheme that Congress intended.
In the same way, saying that a DAF enables a taxpayer to load up on charitable expenses in one year, so as to maximize the benefits of the deduction in light of the restrictions on other itemized deductions, does not mean that the DAF is a fair interpretation of law or good policy. Taxpayers can time their charitable contributions to maximize their tax efficiency, but they should make actual contributions that actually are put to work for charitable purposes.
Finally, Dan overlooks the big attraction of DAFs, which is that they enable taxpayers effectively to hedge their enormous unrealized gains in high flying tech stocks and the like. They get a deduction at today’s inflated value, and if the stock collapses in value there’s no recapture and no money to go to actual charities. (Yes the stock might continue to climb, but that’s why this is a hedge.)