Starting and Managing a Nonprofit Organization: A Legal Guide

By Bruce R. Hopkins | Go to book overview

CHAPTER SIXTEEN
Donor-Advised Funds, Tax
Shelters, Insurance Schemes—And
Still More Taxes

One of the most significant trends in nonprofit law at the federal level is the imposition of taxes on ostensibly “tax-exempt” organizations and, in some instance, on their managers. Congress’s appetite in this regard was whetted when it enacted the unrelated business income tax rules (see Chapter 13), followed by the private foundation rules (see Chapter 7), followed again by taxes on public charities for engaging in unwarranted amounts of advocacy (see Chapters 14 and 15), and followed once again by taxes on management (and others) for involvement in excess benefit transactions (see Chapter 5).

This trend is continuing, with more taxes on nonprofit entities and management being recently added. The following sections discuss three more of these instances.


DONOR-ADVISED FUNDS

The donor-advised fund has long been a legitimate, albeit controversial, alternative to the private foundation (see Chapter 7). Until recently, this type of fund had not been defined in the law. Generally, however, a donor-advised fund is a segregated fund or account maintained by a public charity for contributions received from a donor (or donors) as to which there is an understanding that the donor (or the donor’s designee) may advise the charity regarding the distribution of any amounts held in the fund.


(a) Controversies

There are several reasons why donor-advised funds are controversial. Some contend that the organization that maintains them is not charitable at all (and thus is not taxexempt). It is seen as no more than a commercial bank’s holding accounts for the private benefit of depositors. This argument has no merit, in that once the donated funds are placed in the accounts, they belong to the sponsoring charity; no interest accrues to any “depositor,” and the monies cannot be withdrawn. Not surprisingly, the argument has been generally rejected by courts.

Another contention is that these transfers are not gifts (and thus are not deductible). The ostensible reason is that the “donor” has not, by reason of this understanding, parted with all of his or her (or sometimes its) right, title, and interest in the gift

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