Testimony: Charitable Giving Problems (cont-12)
Donor Advised Funds
A donor advised fund is a separately identified account maintained and operated by a section 501(c)(3) organization. These accounts have become very popular in recent years. Each account is funded with contributions made by a donor or a group of donors. For the payment to qualify as a completed gift, the charity must have legal control over the donated funds. While the donor, or individuals selected by the donor, may advise on the distribution of funds from the account and the investment of assets in the account, the charity must be free to accept or reject the donor’s recommendations. For example, a donor may contribute $1,000,000 to a donor advised fund and claim the whole amount as a charitable deduction for the year in which the contribution is made. In future years the donor may advise the fund as to desired distributions to qualified beneficiaries (e.g., other charities). In operation these funds allow considerable input from the donor but are not classified as private foundations. Again, in a legitimate donor advised fund, the charity must have legal control over the donated funds and must have the right to disregard the donor’s advice.
We have seen abuses in this area, both in examinations and in applications for exemption from new organizations. A case in which the IRS denied exemption is pending in the Court of Federal Claims. In addition, we are aware that some promoters encourage clients to donate funds and then use those funds to pay personal expenses, which might include school expenses for the donor’s children, payments for the donor’s own “volunteer work”, and loans back to the donor. We have over 100 individuals under audit in connection with such cases.
Certain Employee Stock Ownership Plans (ESOPs)
Some ESOPs have been created for no purpose other than to circumvent statutory restrictions. For example, we discovered an abuse through our determination letter process that led to our publication of Rev. Rul. 2003-6 (PDF 67K), in which we stopped a strategy to market ESOPs on the basis that they would be eligible for the grandfathered (rather than the 2001) effective date of section 409(p). Rev. Rul. 2003-6 outlined a promotion where a person set up a series of ESOPs in advance of an effective date hoping to sell the plans later as part of the promotion.