Inside Philanthropy

A blog on philanthropy and nonprofit news and issues. A publication of Philanthropy Journal.

April 10, 2007

Tougher rules needed

The time is ripe for federal regulators to tighten rules on donor-advised funds and supporting organizations.

Charged in the Pension Protection Act of 2006 with studying both types of funding vehicles, regulators can take important steps to reduce the risk of abuse.

In comments filed with the Department of the Treasury and the IRS, the National Committee for Responsive Philanthropy recommends donor-advised funds be required to provide full and timely disclosure of their grants and investments.

The watchdog group also calls for eliminating Type III supporting organizations, which are not subject to the 5 percent payout requirement that applies to private foundations -- and which the National Committee says have the greatest potential for abuse.

Supporting organizations must provide financial or programmatic support to a beneficiary organization, which exercises some operational control over the supporting organization.

The National Committee also calls on the Treasury and IRS to ask lawmakers to subject donor-advised funds and supporting organizations to the same payout requirements as private foundations.

“With less overhead, less ‘process’ to their grantmaking and a comparatively low administrative ‘load’ charged by their fund managers, donor-advised funds should easily be able to make a 6 percent payout for each individual fund as well as cumulatively,” NCRP says. “Using supporting organizations to warehouse charitable funds does not further the interests of the nonprofit sector or the public at large.”

The watchdog group also says that, because donor-advised funds and supporting organizations “operate as the equivalent of foundations that accumulate billions of tax-exempt funds,” both types of funds should be subject to excise-tax payments.

Proceeds from those taxes support oversight and enforcement of accountability rules by the IRS and state regulators.

The recommendations by the National Committee for Responsive Philanthropy are most reasonable and long overdue.

With trillions of dollars expected to go to charity through the unprecedented transfer of wealth beginning to flow between generations, the rules governing charitable tools like donor-advised funds and supporting organizations need to be clear and effective antidotes against abuse, mismanagement and wrongdoing.

Rather than serving as a license to hoard charitable funds and exercise the virtually unchecked influence that control of those funds generates, tax-exempt status should require management of donor-advised funds and supporting organizations that is open and responsible and invests a fair share of the funds to support charitable causes.


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