Zelinsky: A Response To The Initiative To Accelerate Charitable Giving

Edward A. Zelinsky (Cardozo), A Response to the Initiative to Accelerate Charitable Giving, 170 Tax Notes Fed. 755 (Feb. 1, 2021):

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

Among its proposals, the initiative would tighten and expand the provisions of the IRC relative to private foundations and donor-advised funds. 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 requirement and its excise tax on net investment incomes, 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. 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 1969 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.