Leff, on Donor Advised Funds

Ben Leff posted an interesting and prodigious article on donor advised funds this week. Here is the abstract:

Donor-Advised Funds (“DAFs”) have been the subject of a vigorous critical scholarship in the past two decades. DAFs have been called “virtual private foundations” because they share some aspects of private foundations but were treated for legal purposes as public charities. In 2006, Congress enacted legislation that both formally recognized DAFs for the first time, and subjected them to several new regulatory burdens that do not apply to other public charities. In some cases, Congress subjected DAFs to the same regulatory burdens that apply to private foundations; in some cases, it continued to permit DAFs to enjoy the more lenient regulatory burden and generous tax benefits that apply to public charities; but in other cases, Congress crafted a new regulatory regime for DAFs that was more restrictive than the one that already existed for private foundations. There has been commentary about the justifications for subjecting DAFs to the private foundation rules and continuing to permit DAFs public charity treatment, but there has to date been no serious scholarly discussion of the justifications for holding DAFs to a higher standard than private foundations, as the 2006 legislation does in key areas. This issue has become urgent because the Treasury Department released Proposed Regulations in November 2023 for the first of four areas, including those for which the legislation crafted new, especially strict, rules for DAFs.

This Article argues that the extra-strict regime for some aspects of DAFs is beneficial not because DAFs are especially susceptible to abuse, the way private foundations are, but because extra-strict rules provide bright lines that enable DAF providers to reduce costs and make charitable giving more efficient. Understanding this purpose of the extra-strict regime has implications for the regulation of DAFs. There is an egregious remaining loophole—called the “public support test” or “conduit” loophole—in the extra-strict regime that enables donors to pass donations through DAFs to privately controlled charities. It is essential for forthcoming Treasury Regulations or legislation to close this loophole. This Article examines how this loophole should be closed.

darryll k. jones