SPLC Indictment & DAF Sponsor Reactions

As has been widely reported, a federal grand jury last month indicted the Southern Poverty Law Center (SPLC) for alleged bank and donor fraud. Yesterday the SPLC filed a motion to dismiss the charges, alleging the prosecution was in response to the nonprofit’s criticism of the Trump administration. Coverage: CBS; PBS. Already, however, damage has been done to the SPLC in the form of large donor advised fund sponsor organizations halting distributions to the SPLC, including those sponsor organizations associated with Fidelity, Schwab, and Vanguard. Coverage: Nonprofit Law Blog; N.Y. Times. And earlier this month, the Alabama Attorney General announced the start of a civil investigation of SPLC, based on the federal indictment.

The actions of the DAF sponsors is particularly troubling because it means they have effectively delegated their decisions about acceptable recipients to federal prosecutors and perhaps state prosecutors and other government officials. While DAF sponsors have been criticized in the past for effectively delegating their decisions to the IRS by apparently approving any recommended distribution to a tax-exempt public charity, at least that delegation has now been endorsed by Congress when it enacted Internal Revenue Code section 4966, which automatically excludes from taxable DAF distributions any distribution to such an entity. But according to the N.Y. Times story, Fidelity Charitable states it has a policy against DAF distributions to an otherwise eligible recipient if there is an ongoing investigation, and Vanguard Charitable states it has a similar policy when there are allegations or charges that may call into question the recipient’s charitable purpose. Such policies raise the question of investigation or allegation by whom? Could any government official, whether motivated by principal or politics, effectively disqualify an otherwise qualified recipient merely by issuing a press release or launching an investigation? Given that DAFs now make a significant portion of all donations to charities, even the possibility of losing access to such distributions may be enough to chill the activities and speech of many tax-exempt charities.