Brunson Presents Donor-Advised Funds And The Deferral of Charity Today At Indiana

Sam Brunson (Loyola-Chicago) presents “I’d Gladly Pay You Tuesday for a [Tax Deduction] Today”: Donor-Advised Funds and the Deferral of Charity at Indiana today as part of its Tax Policy Colloquium Series hosted by David Gamage:

While donor-advised funds have existed, in some form, since the 1930s,116 Congress did not explicitly mention them in the tax law until 2006. Although a significant percentage of the Tax Reform Act of 1969 dealt with tax-exempt organizations, creating the private foundation regime, it allowed donor-advised funds to slip through the cracks. As a result, donor-advised funds managed slip between regimes, enjoying the more-generous treatment available to public charities while acting in many ways like private foundations.

Allowing donor-advised funds to act like private foundations while giving them the benefits of public charities creates at least two significant problems. First, it allows donors to accelerate their charitable deduction, while allowing their donated money to sit in the fund—potentially indefinitely—without being used in actual charitable endeavors. Second, it provides a means by which tax-exempt organizations can qualify as public charities in spite of lacking broad public support. ...

The problems with the tax treatment of donor-advised funds—and especially the risk of their not making distributions—are well understood by policymakers and commenters. They broadly recognize that the status quo is not optimal, for many of the reasons discussed above. As a result, these policymakers and commenters have made a number of proposals intended to either encourage donor-advised funds to make distributions or to better align charitable deductions and the actual charitable use of their donations. These proposed changes would have concomitant problems, though, that make them less desirable. This Part will discuss the strengths and weaknesses of some of the proposals, and will then propose an alternative regime that would deal with the current problems inherent to donor-advised funds. ...

The problems of donor-advised funds arise from the fact that they largely function as miniature private foundations, but the tax law treats them like public charities. This mismatch underlies both donors’ ability to take a charitable deduction potentially significantly in advance.