EFTA01104564.pdf

VIEWPOINTS (C) Tax Analysts 2011. All tights reserved. Tax Analysts does not claim copyright in any public domain or third party contenl. tax notes' It's Time to Reform The future of the tax rules governing DAFs is in play. For most of their history DAFs flew under the Donor-Advised Funds radar, receiving little scrutiny from Congress or By Ray D. Madoff Treasury. However, in the Pension Protection Act of 2006 (PPA), Congress for the first time provided a statutory definition for DAFs and imposed excise Ray D. Madoff is a pro- taxes to curb abuses. Moreover, in the PPA, Con- fessor of law at Boston Col- gress directed Treasury to conduct further studies lege Law School. She is the on DAFs (including on whether there should be a author of Immortality and the payout requirement) and report back by August 16, Law: The Rising Power of the 2007. Although the IRS requested comments from American Dead (Yale 2011) and is the lead author of the public in Notice 2007-21,, no report has yet been Practical Guide to Estate Plan- filed. However, based on the comments to Notice ning (with Cornelia Tenney, 2007-21 and the existing literature on DAFs, it Martin Hall, and Lisa Nal- seems that one of the proposals under consideration nay D. Mad chajian Mingolla) (CCH is to impose a 5 percent payout obligation on 2012). sponsoring organizations, similar to that imposed on private foundations. In this article, Madoff argues that the current law governing donor-advised funds provides too much In this article, I argue that while DAFs serve a of a benefit to donors and sponsoring organiza- valuable function by offering a low-cost alternative tions, without ensuring sufficient benefit to the to private foundations, they should be adequately charitable sector as a whole. Moreover, the current regulated to ensure they provide sufficient benefit rules undermine the integrity of the tax system by implicating the government in a "wink and a nod" to the charitable sector. As currently regulated, system that disproportionately benefits the DAFs provide too much of a tax benefit to donors wealthy. To remedy these problems, donor-advised and sponsoring organizations without ensuring a funds should be subject to a seven-year payout commensurate benefit to the charitable sector as a requirement, and the rules should be revised to whole. Also, the legal regime governing DAFs ensure that private foundations cannot satisfy their undermines the integrity of the tax system by payout obligations simply by making transfers to a implicating the government in a "wink and nod" donor-advised fund. system that encourages artifice over substance. That Copyright 2011 Ray D. Madoff. practice leaves donors and the public vulnerable to All rights reserved. sponsoring organizations and weakens the legiti- macy of the tax system. Congress should solve these problems — and strengthen both our tax system Donor-advised funds (DAFs) have gone from and the charitable sector — by abandoning the being a relatively rare phenomenon to being the fiction that DAFs are like other public charities and most popular form of charitable giving. Their ex- by imposing a real payout requirement. Although it traordinary popularity is due to the fact that they is tempting to reach for the 5 percent rule applicable appear to offer donors the best of both worlds: the to private foundations, it would be a mistake to do maximum tax benefits afforded to outright gifts to so. Instead, DAFs should be recognized for how public charities combined with the capacity to ac- they operate: as tax-favored charitable checking cumulate funds and exert ongoing influence over accounts that should be subject to a seven-year payout requirement. Moreover, Congress should the disposition of funds, like private foundations. make dear that contributions to DAFs do not Add to that the ease of accounting and the low cost qualify for purposes of meeting the 5 percent pay- of establishing a DAF, and it is not surprising to see out rule imposed on private foundations. why donors and their advisers love DAFs and why DAFs have eclipsed all other forms of charitable giving (most recently outnumbering private foun- dations by a two-to-one margin). '2007-1 C.B. 611, Doe 2007-3164, 2007 TNT 26-3. December 5, 2011 1265 EFTA01104564 COMMENTARY I VIEWPOINTS A. What Is a DAF? long-term involvement with the communities they A DAF is an account maintained by a public served. From the 1930s through the end of the 1980s (C) Tax Analysts 2011. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content. charity, called a sponsoring organization, to receive DAFs were a small part of the charitable sector. charitable donations. The sponsoring organization However, in 1991, Fidelity Investments created the agrees to maintain the donation in a separate ac- first commercially backed sponsor of DAFs. Soon count and to receive advice from the donor about thereafter, other financial institutions followed suit how to spend the money. Because the sponsoring and the popularity of DAFs exploded. organization has legal ownership of the donated As of 2009, there were more than 150,000 DAFs in funds, donors get an immediate charitable tax de- the United States, outnumbering private founda- duction for money transferred to a DAF, regardless tions by more than 2 to 1. The largest sponsoring of when, if ever, the money is distributed to an organization for DAFs — the Fidelity Charitable operating charity. Moreover, because the sponsor- Gift Fund — is the third largest public charity in the ing organization is a public charity and not a country. Despite the prevalence of DAFs, most private foundation, donors receive the most gener- Americans are not even aware of what they are, let ous tax benefits available for their charitable dona- alone the questions they raise. tions. B. Advantages and Disadvantages of DAFs To provide these beneficial tax results to donors, While DAFs provide enormous benefits to do- the sponsoring organization must legally own and nors and some sponsoring organizations, their im- control the property in the DAF just as it would own an outright contribution. The corollary to pact on the broader charitable sector is more mixed. ownership and control by the sponsoring charity is that the donor must not have any legal right to I. Donors. DAFs offer both tax and administrative control the disposition of the property. Contractual benefits to donors. The advantages of DAFs have agreements between donors and sponsoring or- been well documented and include the following: ganizations conform to those requirements. How- • Donors can claim an income tax charitable ever, despite these legal niceties, people establish deduction in the year that the DAF is funded, DAFs because of the understanding that they, as even though the ultimate distribution to the donors, will control the disposition of the funds. operating charity may not be made until many That understanding is conveyed artfully in the years into the future. marketing material regarding DAFs. For example, • Donors can obtain a charitable deduction for one sponsoring organization describes DAFs as "a the full fair market value of appreciated prop- type of charitable giving program that allows you to erty transferred to a DAF, including real estate combine the most favorable tax benefits with the and closely held business interests.° That is flexibility to support your favorite charities at any unlike transfers to private foundations in time."2 Many sponsoring organizations capture the which the charitable deduction for property idea of donor control more colloquially by referring other than publicly traded securities is limited to their DAFs as "charitable checking accounts." to the donor's adjusted basis in the property. The statutory definition of DAFs also captures • Donors are not subject to the smaller annual the disconnect between the legal rules and the limitation for charitable gifts to private foun- understanding of the parties. The statute defines a dations (30 percent of income for gifts of cash DAF as a fund or account that is owned and and 20 percent of income for gifts of stock); controlled by a sponsoring organization, separately instead, they are subject to the more generous identified by reference to contributions of a donor limitation applicable to gifts to public charities or donors, and for which the donor has or reason- (50 percent of income for gifts of cash and 30 ably expects to have advisory privileges regarding percent of income for gifts of appreciated prop- the distribution or investment of the assets in the erty). fund.3 DAFs were originally established by community foundations to encourage individuals to engage in regarding which a donor advises a sponsoring organization about grants for travel, study, or similar purposes, provided that specific requirements are met. ^Many commercial DAFs market themselves as being able to 'Fidelity Charitable Gift Fund fact sheet, available at http:// handle "complex assets." As Fidelity Charitable Gift Fund states personal.fidelity.com/myfidelity/InsideFidelity/NewsCenter/ in its marketing materials: "For many, charitable contributions mediadocs/dtaritable_gift_fund.pdf. Note that it gives the of illiquid assets — private C- and S-Corp stock, restricted stock, "flexibilits" not the "right," to support favorite charities. limited partnership interests, and other privately held assets — 'Section 4966(d)(2). The term "donor-advised fund" does not may be an effective and tax-efficient method of giving," available include a fund or account (1) that makes distributions only to a at http://www.charitablegiftorg/giving-strategies/tax-estate- single identified organization or governmental entity, or (2) planning/donate-non-publicly-traded-assets.mhtml. (Footnote continued in next column.) 1266 EFTA01104565  COMMENTARY I VIEWPOINTS • DAFs can be used for donors who want to • Donors' funds are vulnerable to the creditors of support foreign charities. Donors are able to the sponsoring organization in the event of the (C) Tax Analysts 2011. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content. claim a charitable deduction for transfers to a sponsoring organization's bankruptcy. At the DAF and then "advise" the DAF to benefit a National Heritage Foundation, 9,000 DAFs to- foreign charity when a direct gift to a foreign taling $25 million were wiped out under a charity would not otherwise be eligible for the reorganization plan approved by the federal charitable deduction. bankruptcy court for the Eastern District of • Under current law, DAFs have no payout re- Virginia in Alexandria.6 The National Heritage quirements, whereas private foundations must Foundation continues to operate today, collect- pay out at least 5 percent of their asset value ing funds from unsuspecting donors and is still each year. listed as a charity in good standing in IRS • DAFs can be used to accumulate funds to make Publication 78, Cumulative List of Organizations a significant contribution to a charity. Described in Section 170(c) of the Internal Revenue • DAFs simplify year-end tax planning because Code of 1986.7 they offer a ready-made vehicle to receive • To meet the requirements under the PPA, a property that is going to be committed to DAF cannot be used to satisfy a donor's pledge charity without requiring the donor to choose to a charitable organization. the charity. Thus, DAFs can give donors time to • Under current law DAFs are not eligible to reflect on their charitable choices. receive rollover funds from an IRA, although • DAFs provide significant administrative ad- many donors and sponsoring organizations vantages to donors in comparison to private would like to see this rule changed. foundations. DAFs are much easier and less 2. Sponsoring organizations. DAFs provide rev- expensive to create and maintain, as a private enues to sponsoring organizations. That provision foundation requires an initial application for is particularly advantageous for DAFs affiliated tax-exempt status and then annual federal and with financial institutions as the revenues provide a state filing fees. ready source of management fees to the related • DAFs provide administrative advantages to financial institution. donors who do not want to keep track of The effect of DAFs on noncommercial sponsoring receipts for each of their charitable donations. organizations, like community funds, is more mixed. Because these organizations have their own Despite the many advantages, there are some charitable mission — beyond the accumulation of disadvantages to donors of DAFs arising from the funds for other charitable missions — DAFs are fact that to achieve the desired tax results, donors valuable to the extent that they attract additional must legally give up all control over donated funds money to the organization (presumably the reason and cannot receive any benefit from the funds. these organizations set them up in the first place). • Donors are vulnerable to sponsoring organiza- However, noncommercial sponsoring organizations tions that disregard donors' advice and instead can be disadvantaged by DAFs to the extent they use the funds for their own purposes. In a limit the organizations' immediate access to those recent case, a donor transferred more than $2.5 funds. million to a DAF sponsored by the Friends of 3. The charitable sector. Supporters of DAFs argue Fiji. However, rather than transferring the that they have been advantageous to the charitable property as the donor requested, the trustees of sector because DAFs have attracted billions of dol- the sponsoring organization used the money to lars in charitable donations in the past 20 years. pay themselves large salaries, sponsor celeb- However, the growth of DAFs has not necessarily rity golf tournaments, and pay more than benefited the charitable sector. Funds held in a DAF $500,000 in legal fees defending themselves in a lawsuit brought by the disgruntled donor. The Nevada Supreme Court held that the donor could not recover funds transferred to that the donor "gave up any interest in the money when he the DAF because under the legal agreement made the un-restricted gift to FOF, allowing FOF the discretion entered into, the sponsoring organization had to reject any of his recommendations for the donation's use." Styles v. Friends of Fiji, No. 51642 (Nev. 2011). Further, the court full, legal control over the donated funds.5 held that because the donor "relinquished all power and control over the contribution by the terms of the donor-advised-fund agreement, the district court also acted within its discretion by declining to rescind the contract." Id. sRichard L. Fox, "Recent DAF Cases Raise Issues of Charities 'See In re National Heritage Foundation, No. 09-10525 (Bankr. Facing Financial Difficulties," 37 Estate Planning 32 (2010). On ED. Va. 2009). appeal, the Supreme Court of Nevada affirmed the district ?See http://www.nhf.org/ and http://www.irs.gov/app/ court's decision, stating that the district court correctly found pub-78/. (Footnote continued in next column.) December 5, 2011 1267 EFTA01104566 COMMENTARY / VIEWPOINTS do not benefit the charitable sector until they are 5 percent of their asset value in charitable pursuits. distributed to operating organizations. Therefore, By contributing to a DAF, those foundations are (C) Tax Analysts 2011. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content. the effect of DAFs on the charitable sector must be meeting the letter of the law but clearly skirting its judged by the amount of money that leaves DAFs purpose. and not just the amount that goes in. To understand C. Additional Problems With DAFs the effect of DAFs on the charitable sector, it is important to understand (1) whether DAFs have Regardless of their effect on the charitable sector, increased the total amount of dollars coming from DAFs raise other problems that Congress should donors to the charitable sector as a whole, and (2) address. First, DAFs are problematic because they the impact of the growth of DAFs on the payout of are based on deception, undermining the integrity funds to operating organizations. of the tax system and leaving donors vulnerable to Evidence suggests that despite the exponential the policies and financial stability of sponsoring growth of DAFs in recent years, that growth has not organizations. Second, by treating contributions to necessarily produced additional dollars for the DAFs the same for tax purposes as contributions to charitable sector. According to the latest numbers operating charities, the government is sending the from Giving USA, annual charitable giving as a wrong message to donors. Finally, by failing to share of disposable income has remained remark- impose meaningful payout obligations, the rules ably constant — hovering at approximately 2 per- governing DAFs do not adequately protect the cent — over the last 40 years. Indeed, in 1970, before charitable sector. the recent growth of DAFs, charitable giving was 1. DAFs are built on deception. DAFs encourage slightly higher as a percentage of disposable income donors and sponsoring organizations to operate than it was in 2010: 2.2 percent as opposed to 1.9 with a "wink and a nod" and to intentionally enter percent. Similarly, charitable giving as a share of into legal agreements that differ from their under- GDP has also remained constant, hovering at ap- standing of their relationship. proximately 2 percent over the last 40 years. Re- To deliver the desired tax benefits, the legal search suggests that charitable giving closely documents governing DAFs must provide that the correlates with stock market values (and the values donor has no further say on how their donated of the S&P 500, in particular)), That suggests that property is used. However, everyone — including the growth of DAFs is most likely a result of donors donors, sponsoring organizations, and the IRS — changing the form of their charitable giving to understands that the reason people create DAFs is DAFs from other alternatives (including outright so they can continue to direct the use of donated gifts to operating charities). funds. If the growth of DAFs represents a mere change Donors rely on the economic incentives of spon- in form of charitable giving, then the effect of DAFs soring organizations to ensure that their under- on the charitable sector depends on what otherwise standing of the relationship is effectuated. would have been done with the charitable dona- Generally, that works out fine because the sponsor- tion. Donations to private foundations might ini- ing organization usually has no incentive to deviate tially appear to be better for the charitable sector from the understanding. That is particularly true for because private foundations are subject to a 5 commercial DAFs when the organization lacks its percent payout rule while DAFs have no payout own charitable mission beyond the accumulation of requirements under current law. However, that is charitable funds and the primary motivation is to not necessarily the case. First, a 5 percent payout generate revenue from the funds under manage- rule does not necessarily translate to 5 percent for ment. However, even noncommercial DAFs that the charitable sector because a foundation can count don't have a profit motive and have their own trustee fees and other administrative expenses charitable goals — like community funds — under- toward that 5 percent. Moreover, increasingly, many stand that it is not in their interest to impose their private foundations use the 5 percent target as a own wishes on the donated funds. ceiling as well as a floor. By contrast, although Whether or not that deceptive system "works" in DAFs are not subject to any payout requirement, most situations, transactions based on a wink and a evidence suggests that on the whole, they pay out at nod are inherently problematic. higher rates than private foundations. Nonetheless, one clear disadvantage of DAFs for First, by sanctioning a deduction that operates on the charitable sector occurs when private founda- that basis, the government undermines the legiti- tions use DAFs to satisfy their obligations to spend macy of the tax system. This is particularly prob- lematic when it involves a provision — like the one applicable to DAFs — that disproportionately ap- plies to the wealthy, because it supports a notion %lying USA 2011. that the wealthy play by different rules. 1268 EFTA01104567  COMMENTARY / VIEWPOINTS Also, as illustrated by the cases involving the have become the most popular vehicle for chari- Friends of Fiji and the National Heritage Founda- table giving (outnumbering private foundations 2 (C) Tax Analysts 2011. All rights reserved. Tax Analysts does not claim copyright in any public domain or third patty content. tion, the deception leaves donors vulnerable to to 1), the lack of payout requirement endangers the unscrupulous and insolvent sponsoring organiza- future of the charitable sector, which increasingly tions that choose to exert their legal rights over the will depend on payouts from DAFs to do their funds rather than honoring their "understanding" work. with the donor. Those cases harm not just donors, Many of the comments submitted on behalf of but also the taxpaying public that funded those the status quo rules applicable to DAFs argue that transfers, as well as the country as a whole, which the government need not impose any payout obli- loses access to funds that had been intended for gation since it is common practice for DAFs to pay charitable use. out at relatively high rates (in 2010 it was estimated 2. It is inappropriate to treat DAFs the same as that DAFs distributed 17 percent on average). How- operating public charities. There is a significant ever, Congress and Treasury should not rely on difference between donations to operating public "common practices" to keep them from establishing charities and donations to DAFs, and the govern- appropriate standards, as those can change from ment should be more explicit in expressing that year to year. If the government wants donors to distinction. The charitable sector does important make distributions from their DAFs (as it most work in this country and it needs funds to do it. The certainly must), then it is important for it to say so tax system encourages donations by providing gen- directly. erous tax subsidies, but in doing so, the government should be mindful of fulfilling the goals of the D. Imposing a Payout Requirement on DAFs charitable deduction — namely, funding charitable DAFs serve many valuable functions. They facili- pursuits. By treating contributions to DAFs the tate charitable giving, decrease administrative costs, same as contributions to operating public charities, and, most notably, provide a cost-efficient alterna- the government is sending the wrong message to tive to private foundations. Yet the current treat- the donating public. ment of DAFs is problematic because it is based on deception and fails to ensure adequate payout to Consider a donor who is ready to donate $1 the charitable sector. million and is either going to give that donation to One solution is to impose a 5 percent payout the American Red Cross or to a DAF. Current law treats those transfers identically. However, the do- requirement on either the sponsoring organization nation to the Red Cross is immediately available to or the individual account. However, that approach would undermine much of what is valuable about be put to work in disaster relief (and not insignifi- cantly, that money is also available to fuel the DAFs while failing to adequately protect the chari- economy by employing individuals and purchasing table sector. goods and services). Therefore, the goals of the First, any payout rule needs to be imposed on the charitable deduction are fulfilled on transfer. How- individual DAF rather than on the sponsoring ever, with the alternative — a transfer to the DAF — organization. Many of the comments to Notice while the money might be segregated for charitable 2007-21 urged the government that if it is going to use, it has not yet been committed. No charitable impose a payout requirement, then it must do so on purposes are accomplished simply by setting the sponsoring organization and not on the indi- money aside in a DAF. For the goals of the chari- vidual DAF. However, to have a coherent tax rule, table deduction to be fulfilled, money must be payout rules must be imposed on the basis of each distributed from the fund and committed to an donor fund as opposed to the sponsoring organiza- operating charity. tion as a whole. It is the individual donor who is enjoying the extraordinary tax benefits of the chari- The lack of payout obligation for DAFs puts the table deduction associated with contributions to government in the awkward position of sending the DAFs, so the donor should be the one subject to the message that it is inconsequential from the govern- payout requirement. If the government were to ment's perspective whether charitable dollars are impose the obligation on the sponsoring organiza- being put to work to address society's problems and tion, then it would create a perverse incentive for provide an economic boost or simply sitting in a donors to shop among sponsoring organizations to bank account paying out management fees.9 find one that would offer donors longer payout 3. The lack of payout requirement endangers the terms. Moreover, why should an individual donor future of the charitable sector. Moreover, as DAFs have little or no payout obligation simply because another donor to the same sponsoring organization is paying out more quickly? 9Arguably, that is one reason why private foundations have Once the payout rule is applied to each fund, been treated less favorably under the law than public charities. additional problems of imposing a 5 percent payout December 5, 2011 1269 EFTA01104568 COMMENTARY / VIEWPOINTS rule become clear. Namely, applying the 5 percent the situation applicable to a $1 million charitable payout rule applicable to private foundations to donation of appreciated property when the appre- (C) Tax Analysts 2011. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content. DAFs is, as a practical matter, both too strict and too ciation is subject to zero income taxes, and the generous, and as a conceptual matter, inappropri- charitable deduction provides a net benefit to the ate. donor of $350,000. It is little wonder that Congress 1. Five percent would be too strict. A 5 percent sought to limit the benefit from the deduction of annual payout requirement on DAFs may under- appreciated property by significantly limiting its mine the very features that make DAFs so attrac- availability for transfers to private foundations.te tive. Given the generosity of the deduction, it is ap- One of the most valuable things about DAFs is propriate for DAFs to be subject to faster payout that they are relatively inexpensive to establish. rules than private foundations. However, sponsoring organizations claim that it 3. Five percent is conceptually inappropriate. The would be very costly to manage an annual payout 5 percent rule applicable to private foundations is requirement. Sponsoring organizations would un- not appropriate for DAFs. doubtedly pass those costs on to donors, which The 5 percent payout rule was adopted as a way could make DAFs much less cost effective. Also, to ensure perpetual life for private foundations. DAFs are frequently used to receive assets that need While the wisdom of perpetual life as applied to time to be liquidated. An annual payout require- private foundations is questionable at best, it is ment would be burdensome in that situation as arguably appropriate when a donor has a particular well. Finally, DAFs are often used for donors who charitable mission (such as the creation and opera- want to make distributions over time or be able to tion of a school) that he wants to fulfill in perpetu- accumulate funds over several years to make a ity. However, that justification has no application to significant gift. Annual payout rules also would DAFs, which are specifically geared for those who work against that use. are not ready to commit to a particular charitable 2. Five percent would be too generous. Paradoxi- goal. cally, not only would an annual 5 percent payout rule be too strict, it also would be too generous. E. A Better Approach for DAFs The tax benefits afforded to charitable donations Rather than being subject to an annual require- ment, all funds in a DAF should be required to be to DAFs are far more generous than those given to private foundations. Therefore, it would be appro- paid out in full by the end of seven years. That priate for donors to DAFs to have faster payout would be a more workable and appropriate payout system for DAFs and would preserve their best requirements. aspects while still ensuring that funds for which the The greatest tax advantage of DAFs is the ability charitable deduction has been granted get to work for donors to claim a full FMV deduction for addressing charitable goals. appreciated property, beyond marketable securities. A fixed-term payout rule could be easily admin- The rule allowing a full FMV deduction for appre- ciated property is extraordinarily generous because istered by requiring that, as a condition of the it enables the charitable deduction to operate as a charitable deduction, the DAF must designate a charity that will receive any property remaining in tax shelter. the account after the termination of the seven years. The financial advantages of transferring appreci- Flexibility would be maintained because a donor ated property are significant. For most taxpayers, would be free to make distributions to other chari- the charitable deduction simply allows them to table organizations during that time period. To avoid taxation on income to the extent that they manage annual contributions, the sponsoring orga- direct that income to charity. So if a person earns nization would only need to maintain separate $100,000 and makes a $1,000 contribution to charity, sub-accounts that referenced the year of the do- the effect of the charitable deduction is that the nated funds. Donors' distributions would be pre- $1,000 is not subject to income tax. The contribution sumed to come out of the accounts chronologically, to charity provides a net tax value to them of zero. unless the donor specifically notes otherwise. However, if a person can get a full FMV deduction on appreciated property that has never been subject A fixed-period payout requirement would di- to income tax, then that charitable deduction can be rectly acknowledge the valuable benefits being given to charitable donations to DAFs while pre- used to offset other income and provide a net gain to a taxpayer. A $1 million charitable donation of serving many of the features that make them so cash from earned income has a net benefit to the donor of zero (assuming a 35 percent tax rate, the income is subject to $350,000 of tax and the deduc- nth is unclear whether Congress should continue to provide tion is worth $350,000). That is in sharp contrast to that benefit at all, but that is beyond the scope of this article. 1270 EFTA01104569  COMMENTARY / VIEWPOINTS popular and desirable, including having low ad- ministration costs, allowing adequate time to liqui- (C) Tax Analysts 2011. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party co date property, and allowing for the accumulation of funds for a reasonable period of time. There are additional advantages to this approach as well. Most importantly, treating DAFs the way people use them increases transparency and im- proves the legitimacy of the tax system. Requiring a real payout sends the right message to donors that they have not done enough simply by funding their I Tax, professionals need to de DAF. Also, by recognizing DAFs as a distinct ve- hicle, rules can be enacted that protect donors and indispensalle to their clients. the American public from unscrupulous or insol- a vent sponsoring organizations. Finally, by recogniz- ing DAFs as something other than a true public charity, Congress can enact rules that make clear Which is why we're indispensaile that private foundations cannot satisfy their 5 per- cent payout requirement simply by making contri- to tax professionals. butions to a DAR Congress has already taken an important first step by adopting a statutory definition of DAFs. Now, it and Treasury should finish the job by adopting operating rules that protect the integrity of the tax system and the future of the charitable sector. Clients rely on tax professionals; so, they rely on us. Tax Notes Today covers all the breaking federal tax news, delivers insightful news analysis, and provides a daily inside track to essential tax documents. To discover why it has become the standard for the profession, please visit taxanalysts.com. tax notes today taxanalystf The experts' experts." December 5, 2011 1271 EFTA01104570