Increased focus on donor-advised funds

NONPROFIT NEWS

With the continuing popularity of donor-advised funds and with the issuance of regulations regarding the operation of such funds looming at some point, we're seeing increased focus on these funds. In March, one sponsor of donor-advised funds drew particular attention when it was disclosed that it was the largest grantor, through one of its donor-advised funds, in past years to a nonprofit run by a notorious white nationalist. That same white nationalist nonprofit had its tax-exemption revoked by the Internal Revenue Service in March for failure to file three consecutive annual returns. The IRS also released two separate letters denying applications for exemption under Section 501(c)(3) in March, each based, at least in part, on the applicant's participation in political campaign activities.

DAFs & Donor Identity

As previously mentioned in this column, the use of donor-advised funds (DAFs) as vehicles for charitable giving is becoming increasingly popular and seems poised to continue growing. It was reported late last year that Fidelity Charitable Gift Fund, a DAF sponsor organization, raised the most money from private sources of any charity in 2015.

Internal Revenue Code Section 4966 defines a DAF as a "fund or account (i) which is separately identified by reference to contributions of a donor or donors, (ii) which is owned or controlled by a sponsoring organization, and (iii) with respect to which a donor (or any person appointed or designated by such donor) has, or reasonably expects to have, advisory privileges with respect to the distribution or investment of amounts held in such fund or account by reason of the donor's status as a donor." The IRC also lists some exclusions to the definition.

Although DAF sponsor organizations have legal control over the funds placed in the DAFs that they sponsor and ultimate responsibility for the distributions made from those DAFs, in practice, they typically honor the advice received from the donor or donor's appointee as to desired distributions, especially to other 501(c)(3) public charities. However, a story that arose in March shows the potential risks for DAF sponsor organizations that don't carefully review or consider the implications of those advised distributions.

Typically, large contributions to charities are required to be disclosed on Schedule B to the charity's Form 990 annual return. However, the information on Schedule B is not intended or required to be made publicly available with the rest of the filed Form 990. Utilizing a DAF sponsor can add an additional layer of protection from donor disclosure where a donor is particularly concerned with confidentiality. However, it is important to note that such confidentiality is not always guaranteed and donor identities are occasionally disclosed, either due to accidental disclosure of a Schedule B by a regulatory body or intentional or accidental disclosure by the filing organization itself.

On March 20, the Los Angeles Times ran a story regarding a total of $25,000 in contributions made from 2013 to 2014 to the National Policy Institute Inc., a nonprofit run by white nationalist Richard Spencer. Spencer reportedly voluntarily shared the organization's (apparently un-filed) returns, including the Schedule B forms listing its largest contributors, with the Times. The Schedule Bs reportedly showed that the largest donor to the white nationalist organization was the Community Foundation for the Central Savannah River Area, a community foundation in Augusta, Ga., that contributed to the National Policy Institute via one of its DAFs.

The community foundation refused to reveal the original donor to the DAF, but the revelation by Spencer immediately forced the DAF sponsor to go on the defensive. The Times articles quote its CEO as stating "In no way did our organization, its board or its staff actively know or support the mission of this organization, and I don't want it to be construed that we ever did." The CEO is also reported as saying that its board did not review the purpose of the National Policy Institute before making the grant.

Relatedly, on March 13, the IRS posted the revocation of the 501(c)(3) exempt status of the National Policy Institute retroactive to May 15, 2016. The revocation was apparently automatic upon the organization's failure to file three consecutive annual returns with the IRS. The IRS had apparently mistakenly misclassified the organization as not being required to file annual returns for several years and Spencer claimed the IRS error was the reason the organization had failed to file.

An article by the Los Angeles Times on the same day the revocation was posted also questioned whether the nonprofit had failed to comply with filing requirements with the state nonprofit oversight entity in Virginia, and whether the organization had run afoul of the prohibition on 501(c)(3)s intervening in political campaigns based upon anti-Hillary Clinton and pro-Donald Trump statements that Spencer had made at organizational events. Spencer has vowed to repeal the revocation or otherwise seek reinstatement of the organization's exempt status.

Denials of Exemption for Political Activity

In March, we also saw the release of two recent letters issued by the IRS denying applications for exemption under Section 501(c)(3) based, at least in part, on participation in political campaign activities. Although the identifying information is redacted from these denial letters, the analyses and bases for the denials are nonetheless instructive.

Denial 201712015 addressed an organization formed to "educate the community and [its members] on current civic issues" with a specific purpose to "organize with like-minded individuals with the interest to educate on significant events negatively impacting the country and families." The denial noted that some of the organization's activities were educational and charitable in furtherance of the purposes set forth in Section 501(c)(3). However, because the organization intervened in political campaigns on behalf of or in opposition to candidates for public office, it did not meet the operational test under Section 501(c)(3) and was therefore not entitled to exemption.

The denial letter noted that, while hosting nonpartisan public forums and debates may be an acceptable method of educating the public, certain events hosted by the applicant organization predominantly included only candidates of one political party affiliation. The letter noted several factors that may be looked to in determining whether an event at which a political candidate is invited to speak crosses the line into prohibited campaign intervention and concluded that the organization at issue had hosted events in a manner that showed bias and preference for certain candidates.

Moreover, the applicant's website linked to events for a certain Senatorial candidate, but not others. Considering all of the facts and circumstances, the IRS determined that such link also constituted prohibited campaign intervention. Finally, the IRS noted that the organization had engaged in get-out-the-vote activities that were conducted in a biased manner that favored a candidate or political party and therefore also constituted prohibited political campaign intervention. Based upon this analysis, the IRS determined that the applicant did not qualify for exemption under Section 501(c)(3).

In Denial 201712017, the IRS similarly determined that an applicant organized primarily to conduct research and engage in public education, which indicated in its application that it may engage in some lobbying and had a close connection with a separate 501(c)(4) organization, did not qualify for exemption under Section 501(c)(3). The denial was based on several grounds, including that the organization operated in a for-profit, commercial manner by offering "franchising opportunities" for organizations looking to become its branch entities and did not provide documentation showing that any assets it shared with the affiliated 501(c)(4) would be restricted for use solely in furtherance of 501(c)(3)-consistent purposes.

Finally, the IRS determined that the applicant indicated its branches "would become the place for political action, ideas, education and camaraderie." However, the application did not include sufficient information to allow the IRS to determine that the organization would not be engaging in prohibited campaign intervention. Accordingly, the IRS determined the organization had failed to establish that it qualified for exemption under Section 501(c)(3) and denied the application.