Payouts by Charities – On a Contribution Basis

Buried in the “Additional Provisions” section of the “Miscellaneous Provisions” Title of the PATH Act is a new rule (pages 195-198) on agricultural research organizations (AROs). This would provoke yawns (even for us) except that the ARO rule is a reminder that Congress understands how to write a payout rule when it wants to – which has clear significance to donor advised funds.

AROs normally might be private foundations. But under the PATH Act, they get two benefits.

First, an ARO qualifies as a per se public charity. Just like a church, university, or hospital, an ARO automatically gets public charity status because of its function and without having to rely on a public support test. Congress here has made a judgment that an ARO should not be subject to the private foundation excise tax regime and so has carved them out.

Second, contributions to an ARO may be subject to the 50 percent limit, instead of the 30 percent limit that applies for contributions to private foundations. In order for the contribution to qualify for the 50 percent limit, the ARO “must be committed to spend the contribution for . . . research before January 1 of the fifth calendar year which begins after the date of the contribution.”

For those engaged in the debate about donor advised funds and whether Congress or the IRS should impose a fund-based payout, Congress’s action on AROs shows that a contribution-based spending rule is familiar (this rule already applies to medical research organizations) and under some circumstances appropriate as an attribute of public charity status.

Donor advised funds of course are different from AROs and medical research organizations, but there is precedent in the Code for requiring that contributions be spent down over a set time period.

The donor advised fund debate on this (and other issues) was recently featured at a conference sponsored by the Boston College Forum for Philanthropy and the Public Good (including video). My paper on the topic is available here and on the Boston College Forum website, along with papers by historians, economists, practitioners, and professors — covering the DAF issues from many points of view.

Roger Colinvaux