Along with making significant changes to the rules for supporting organizations (“SOs”) and donor advised funds (“DAFs”) in the Pension Protection Act of 2006 (the “PPA”), Congress directed that Treasury conduct a study on the organization and operation of SOs and DAFs. Congress gave Treasury one year after the enactment of the PPA to submit a report on the study. On December 5th, more than four years past the prescribed deadline, Treasury finally released its long-awaited report to Congress. The report suggests that the current treatment of SOs and DAFs is appropriate and did not recommend any changes. While the report comes as good news to SOs and DAFs, some aren’t so keen. Senator Chuck Grassley (R–Iowa), denounced the study as disappointing, superficial, and a missed opportunity to “advance the ball in closing abusive loopholes.” For more, see his press release. Interested in whether SOs and DAFs should continue to be treated similarly to public charities, Congress asked Treasury to consider three specific questions regarding SOs and DAFs. A discussion of each question and Treasury’s response is discussed below.

Congress asked whether the deductions donors receive, which are more favorable than those donors receive for contributions to private foundations, are appropriate. The study concluded that because donors give up control of the contributed assets and do not have control over the donee organization, the donors to SOs and DAFs are in a similar position to donors to other public charities. Congress also expressed concern over the potential time lag between contributions, which may be used to build or maintain endowments, and the charitable use of those contributions, asking whether there should be a current deduction for such contributions. The report noted that issues relating to timing are germane to all types of charitable organizations, including public charities, and are not unique to SOs and DAFs. The Treasury concluded that the current deduction scheme is appropriate.

Congress asked whether DAFs should have a distribution requirement similar to those of private foundations. The study noted that the average payout rates among DAFs, which ranged from 9.3% to 28.7% in 2006, was higher than those of private foundations, which averaged just above 5%. This data was based on the one and only year of reported data from new questions on Form 990. Because there was only one year of data and because individual DAF information is not collected, the Treasury reported that it would be premature to make a recommendation regarding distribution requirements for DAFs at this time.

Finally, Congress asked if having an advisory relationship in respect of how funds are invested and/or distributed is consistent with the concept of what constitutes a completed gift for tax purposes. The report noted that contributions to SOs and DAFs are irrevocable and non-refundable and that the donor’s advisory relationship is non-binding. In addition, the report noted that just as a donor’s control of a private foundation does not make a gift to the foundation incomplete, it is consistent to treat donations to SOs and DAFs as completed gifts even if the donor retains non-binding advisory rights. Since this study was based on 2006 data, we’ll have to wait and see if the treatment of SOs and DAFs remains “appropriate” as more information becomes available from the redesigned Form 990