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Real Property, Trust and Estate Law Journal

Spring 2024

Donor Advised Funds and Disqualified Persons: Understanding the Logic of Code Section 4958(c)(2)

Lisa Goodrich Page

Summary

  • This article approaches the intricacies of donor advised funds by contrast to private foundations
  • Section I provides a brief introduction to contemporary vehicles for charitable giving.
  • Section II explores the distinct origins of the two vehicles, highlighting the differing historical contexts behind each.
  • Section III hones in on the rules governing compensation of disqualified persons by each of the two vehicles.
Donor Advised Funds and Disqualified Persons: Understanding the Logic of Code Section 4958(c)(2)
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Lisa G. Page, JD LLM, with thanks to Prof. Jill Manny for posing the question that became the center of this Article, and for her insight and review of an earlier version.

Author’s Synopsis: This Article approaches the intricacies of donor advised funds by contrast to private foundations, with focus on their disparate treatment of disqualified persons and an eye towards potential legislative and regulatory activity. Section I provides a brief introduction to contemporary vehicles for charitable giving, particularly donor advised funds and private foundations. Section II explores the distinct origins of the two vehicles, highlighting the differing historical contexts behind each. Section III hones in on the rules governing compensation of disqualified persons by each of the two vehicles, including their respective legislative histories, and turns to potential new rules on the horizon, from which Section IV looks ahead in conclusion.

I. Introduction

Individuals looking to make substantial donations to charity have a variety of options in front of them. They may wish to take the most straightforward route, giving directly to one or more particular charities for immediate application towards charitable causes. Other options add one or more steps, allowing donors to give to an intermediate entity before determining the ultimate charitable recipient at a later time. One such option is making a gift to a donor advised fund (also known as a “DAF”), or in the alternative, to a private foundation. DAFs and private foundations are in many regards functionally very similar, but given the key differences between them, they provide donors with meaningful choices in organized charitable giving.

Both DAFs and private foundations allow a donor to make a lump sum charitable contribution to the fund or foundation in one year (and take the corresponding charitable deduction), and then distribute funds to charity over time in later years. In that sense, both are excellent vehicles for donors who are charitably inclined but would benefit from separating the tax and timing considerations behind making a charitable gift from more qualitative decisions like which charities to benefit and on what timetable. DAFs and private foundations differ, however, in terms of who bears the administrative burden, and who receives the benefits correspondent to that control. In this and many other regards, the best means of explaining and understanding DAFs is by contrast to private foundations.

A donor establishing a private foundation is responsible for creating the foundation itself—usually as a trust or a corporation—and for managing it from year to year. This management includes filing an initial (and sometimes extensive) application for tax-exempt status, developing and adhering to policies and procedures, and satisfying yearly distribution and tax filing requirements. Although these ongoing responsibilities can be burdensome, they do come with certain advantages: by overseeing these processes, donors can have as much as total control over the private foundation’s activities and can create an entity as extensive as they wish and as resources allow, to include employing like-minded staff to manage and carry out the foundation’s mission.

A DAF, as the name suggests, is a fund, limited to making distribu-tions for charitable purposes (typically to public charities). Like a bank account, a DAF is housed at a custodian institution known as a sponsoring organization (often related to a bank or similar financial entity) and can receive assets, which will sit in each donor’s particular fund until he or she “advises” the sponsoring organization to make distributions from this fund to the charity or charities of the donor’s choice. A notable advantage to funding a DAF rather than a private foundation is that administrative matters—such as obtaining and maintaining tax-exempt status, as well as accounting and tax filing requirements—are largely satisfied by the custodian of the funds, and do not fall to donors themselves. The downside, however, is a loss of control: a donor to a DAF is limited to recommending the sponsoring organization make charitable distributions and is precluded from hiring a staff or collecting compensation for his or her own activities.

From the perspective of a potential donor, comparing the DAF to the private foundation is familiar and easy, but it is also incomplete. DAFs and private foundations arose from distinct processes, both legislatively and historically, separate in time and in outcomes, and the differences between the two charitable forms cannot be fully understood without situating them within this context and considering the particular, if analogous, structures that create each. This Article briefly addresses the respective origins and motivations behind these two forms, and by focusing on one particular difference in the rules governing DAFs and private foundations—namely the strict prohibition against compensation of disqualified persons from a DAF on the one hand, and the allowance for reasonable compensation of disqualified persons from a private foundation on the other—seeks to tease out the meaningful distinctions between both forms and the underlying logic.

II. The Origins of Private Foundations and Donor Advised Funds

Although in many regards DAFs and private foundations are analogous instruments from the perspective of a charitably-inclined donor, the two were born from fundamentally different legislative processes unfolding at different points in time. DAFs and private foundations are governed by different statutory provisions, each with their own origins and underlying rationales. Nevertheless, there are a number of common themes that emerged in the formation of both DAFs and private found-ations, and common concerns at the root of later regulation of each.

Section 501I(3) of the Internal Revenue Code describes entities that are exempt from taxation on their income, commonly known as tax-exempt entities. Section 509 of the Code further categorizes those entities: per section 509(a), all entities described by section 501(c)(3) are categorized as Private Foundations, unless they qualify for one of a short series of exceptions. One such exception, outlined under section 509(a)(2), describes public charities. Public charities are those non-profit entities that receive a substantial amount of funding from “public support,” typically in the form of many contributions from various individuals. Entities that qualify as public charities are generally subject to less onerous restrictions and oversight than private foundations, betraying the legislative assumption that the extent of public support required for an entity to qualify as a public charity creates accountability to donors and results in public oversight.

Despite being the “default” form for non-profit entities under section 509(a), private foundations are nevertheless a particular kind of entity unto themselves, subject to specific rules and regulations and their own origin story. Private foundations can be traced back to the middle of the nineteenth century with the establishment of the Peabody Education Fund in 1867, a “precursor of modern foundations.” In keeping with George Peabody’s eponymous efforts, a trend followed in the latter half of the nineteenth and early twentieth centuries of wealthy individuals and families establishing formal charitable institutions in family names rather than giving directly to charities. Examples from this time period include the Russell Sage Foundation, the Rockefeller Foundation, and not long after, the Guggenheim Foundation. The achievements funded by these foundations, as well as their involvement in social causes, spurred their visibility, but rules specific to private foundations did not follow immediately. Of particular note, the formal, codified distinction between private foundations and public charities was not in place until the late 1960s, a full century after the emergence of the Peabody Educational Fund.

In the 1940s and 1950s, against a backdrop of both fears and evidence of abuse of private foundations to include self-dealing by donors, Congress embarked upon a period of focus on private foundations and legislative action thereon, beginning with filing and disclosure requirements, as well as limitations on permissible transactions between a foundation and its donor. In spite of those efforts, the 1965 Treasury Department Report on Private Foundations (“1965 Treasury Report”) concluded the current legislation did not adequately curtail abuses by private foundations and their management. On the basis of over a year-long investigation, the 1965 Treasury Report identified six categories of abuse and proposed legislation to combat each. This period of attention and analysis culminated in the 1969 Private Foundation Law, much of which reflected the legislation proposed by the 1965 Treasury Report. In significant part, this law—part of the Tax Reform Act of 1969—divided section 501(c)(3) organizations into public and private entities, formally establishing the distinction between public charities and private foundations so critical to our current understanding of each, as well as the preferential treatment of the former over the latter.

There are many parallels between the origin of DAFs and that of private foundations, although the DAF is comparatively young. Similar to private foundations, DAFs existed and evolved over a significant period of time before they were formally codified, appearing in the Code only in 2006. The patterns that have come to be recognized as DAFs first appear-ed in the 1930s, by and large in association with community foundations; arguably the first DAF was established by the New York Community Trust in 1931. It took time for DAFs to more closely resemble the form they take today—and more time still to reach their current level of popularity. DAFs began to emerge as an alternative to private foundations during the 1970s, but, in the words of a former head of the California Community Foundation, continued for some time to be regarded as the “stepchildren of philanthropy.” In 1987, the National Foundation, Inc., operating in a manner meaningfully similar to the sponsoring organizations of today, successfully obtained a declaratory judgment that it was entitled to public charity status even though the Service denied its initial application for tax-exempt status. The resulting opinion amounts to an early judicial blessing of the DAF form. Commercial attention followed soon after, and with it, the beginnings of a surge in DAF popularity.

A watershed moment in the history of DAFs arrived in the early 1990s with the establishment of the Fidelity Charitable Gift Fund. Fidelity established the first commercial DAF in 1991, and it did not take long for other firms to establish their own, including Schwab, Vanguard, and Merrill Lynch. The advent of commercial DAFs pushed this form of giving to new heights of visibility and “exponential growth.” In 1995, a survey of DAFs indicated an aggregate value of $2.4 billion, a figure which in 2003 swelled by 500%. By 2004, Fidelity Charitable alone ranked as the seventh largest charitable organization in the United States.

Given that rate of growth, it is no surprise that by the early 2000s, DAFs had attracted legislative attention. The Clinton Administration’s 2001 “Green Book,” issued by the Department of the Treasury in February 2000, included a section recommending clarification of the public charity status of DAFs and associated restrictions, citing concerns that assets given to DAFs were not reaching charities on a current basis and that DAFs “may be used to provide donors with the benefits normally associated with private foundations (such as control over grantmaking), without the regulatory safeguards that apply to private foundations.” In addition to general requirements in keeping with the spirit of public charities, the Green Book’s proposals included mandating a minimum annual distribution and amending the definition of disqualified persons as applied to DAFs.

The concerns behind these proposals were not unfounded. Most egregiously (although there is no indication the practice was ever wide-spread), there is ample evidence of DAFs marketed to potential donors not as a means towards charitable giving, but rather as a mechanism for direct personal benefit. In his June 2004 statement before the Senate Committee on Finance, then Commissioner of Internal Revenue Mark W. Everson cited Service awareness 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.” Other schemes marketed DAFs as tools for tax-free adoptions or strategies for retirement planning.

Despite prior evidence of legislative intent and awareness of abuses, it took a few more years before rules and regulations were put in place, and DAFs and their sponsoring organizations were at last codified by the Pension Protection Act of 2006. For all the intervening discussions of abuses, this legislation was ultimately less stringent than that proposed in 2001. In particular, no annual distribution requirement was imposed. Much of the legislation is clarifying and explanatory in nature and is otherwise consistent with other rules applying to public charities. One rule, however, is unique, and was foreshadowed by the 2001 Revenue Proposals: the Pension Protection Act of 2006 created a new definition of “disqualified persons” applicable exclusively to DAFs and defining a class of people to whom a DAF may pay no compensation—no matter how reasonable—without triggering automatic excess benefit sanctions.

III. Similarities, Differences, and Governing Logic

In spite of their independent origin stories and different governing Code sections, private foundations and DAFs provide potential donors with two remarkably similar options for organized giving and are often referred to as alternatives to each other. For example, a 2003 Forbes article touted DAFs as “private foundations on the cheap,” a description that simultaneously emphasizes their similar functions while highlighting a key difference between DAFs and private foundations. A donor choosing between creating a private foundation or a DAF is likely weighing the control offered by the former against the complexity—and expense—avoided by the latter. Arguably the principal difference between the two forms from the perspective of potential donors is that in a private found-ation, all aspects of management and administration are within the purview of the foundation itself, whereas a DAF has no direct obligation to address management or administration, instead paying a fee to the custodian sponsoring organization, which in turn handles all manner of management and administration in the aggregate for all funds under its umbrella. As Eileen Heisman, president of the National Philanthropic Trust, stated, “Americans like tools and gadgets that make their lives easier . . . . Donor-advised funds are an extension of that. They’re the iPhone of the philanthropic world.”

This is not the only difference between the two forms. The bulk of the differences lie in the fact that DAFs, unlike private foundations, are treated as public charities under the Code. As discussed previously, due to their reliance on broad support from the general public, public charities are perceived as being less vulnerable to abuse by any individual for personal benefit, and so were never subject to regulations of the same rigor as those required of private foundations. Both donations to public charities, and public charities themselves, are generally treated more favorably than private foundations and the donations thereto.

Donations to public charities generally—and in turn to DAFs specifically—are more readily deductible by a donor than donations to private foundations. Furthermore, the rules governing DAFs are less stringent than those governing private foundations: private foundations are subject to an “excise-tax system” that does not generally apply to DAFs, including excise taxes on investment income, on failure to distribute income, and on jeopardizing investments, to which there are no analogous restrictions placed on DAFs. Viewed generally, a comparison of the rules governing private foundations to those governing DAFs suggests these restrictions favor DAFs, and points to DAFs as the comparatively user-friendly option. There is one particularly remarkable exception to this general trend, as alluded to above: whereas private foundations may pay reasonable compensation to individuals—including disqualified persons—for services provided to the foundation, a DAF is absolutely prohibited from compensating a disqualified person, at the risk of automatic excess benefit sanctions.

A. Origin of the Private Foundation Rule

The prohibition against private inurement is a general theme across all rules applicable to tax-exempt organizations, the rationale for which is that tax-exempt organizations receive this privileged status due to the public (as opposed to private) benefit they provide. As noted, the concern that private foundations were used for private benefit in violation of that basic concept was an animating principle behind the mid-twentieth century legislation governing private foundations. Consistent with that concern, the Revenue Act of 1950 (“1950 Law”) adopted self-dealing prohibitions, limiting the transactions a foundation could undertake with its donor, to include a prohibition against “paying any compensation in excess of a reasonable allowance for salaries or other compensation for personal services actually rendered.” This and other prohibitions were designed to capture no arms-length transactions and applied only to the private foundation’s donor, not reaching other influential parties such as private foundation officers or directors.

The 1965 Treasury Report found these prohibitions to be sorely lacking. With a lengthy discussion of administrative nightmares and ongoing private benefit, the 1965 Treasury Report describes the undefined “arms-length” standards put in place by the 1950 Law as creating great challenges to policing and opportunities for continued self-dealing. As a solution, the 1965 Treasury Report proposed a general prohibition on self-dealing, along with an expansion of the class of people affected by these rules to include the donor, as well as “certain parties so closely connected with the foundation as to lead to potential abuse.” In relevant part, among the self-dealing transactions that would be prohibited under the proposed rule was the payment of compensation, “other than reasonable compen-sation for personal services actually rendered.”

The 1969 Private Foundation Law, in fact, implemented a prohibition against self-dealing, specifically including “payment of compensation (or payment or reimbursement of expenses) by a private foundation to a disqualified person” among the prohibited transactions. On its face, the 1969 Private Foundation Law would appear to represent a departure from both the 1950 Law and the slightly more stringent rule proposed by the 1965 Treasury Report toward a complete prohibition against compen-sation of disqualified persons; however, that appearance does not reflect the state of the law. Consistent with the general principle of prohibitions on self-dealing and individual enrichment, disqualified persons as to a private foundation may not profit from that private foundation—but are not prohibited from receiving a benefit from the private foundation in the form of reasonable compensation. Under section 53.4941(d)-3(b)(c) of the Treasury Regulations, even disqualified persons are explicitly permitted to collect reasonable compensation from a private foundation.

That is, while the state of the law on self-dealing as it relates to private foundations has become more stringent over time, the rule specifically affecting compensation of disqualified persons has hardly changed since it was first imposed. Neither the 1965 Treasury Report, nor the summary of the 1969 Tax Reform Act (“1969 Act”) prepared by the Joint Committee on Internal Revenue Taxation and the Committee on Finance provides a clear answer as to why that law remains all but unchanged, as neither specifically addresses the prohibition against compensation of disqualified persons or discusses private benefit through compensation by private foundations. Although self-dealing is the very first “major problem” addressed under the 1965 Treasury Report, compensation of interested parties and disqualified persons is touched upon only as part of the summaries of existing and proposed rules to curtail self-dealing generally and is never discussed specifically. The same is true for the summary of the 1969 Act, which describes the challenges to the arms-length standards under the 1950 Act generally, but the 1969 Act does not discuss compensation specifically. One could perhaps infer that there was little evidence of abuse of compensation by disqualified persons, and therefore little reason to revisit the rule. Or perhaps there was every reason to keep the rule unchanged: given the degree of administrative responsi-bilities that fall upon private foundation management and the extent to which it can be time consuming and extensive to address these, retaining the ability to reasonably compensate private foundation management (to include officers and substantial contributors as may be the case) may be integral to incenting and supporting all manner of compliance and oversight critical to the basic functioning of private foundations.

B. Donor Advised Fund Rule

Separate and apart from the self-dealing provisions applicable to private foundations, the Pension Protection Act of 2006 created and codified prohibitions against self-dealing specific to DAFs. Subsequent to the Pension Protection Act of 2006, section 4958(f)(7) of the Code provides a definition of disqualified persons applicable to the DAF, which includes a donor to such fund and an advisor or close family member to such donor. Section 4958(a) imposes an excise tax on any “excess benefit transactions” undertaken by a disqualified person, defined as “any transaction in which an economic benefit is provided by an applicable tax-exempt organization directly or indirectly to or for the use of any disqualified person if the value of the economic benefit provided exceeds the value of any consideration . . . received for providing such benefit.” Section 4958(c)(2) of the Code specifically broadens that definition as applied to DAFs to include “any grant, loan, compensation, or other similar payment from such fund to a [donor or related party].” In effect, “any grant, loan, compensation, or other similar payment from a donor advised fund to a person that with respect to such fund is a donor, donor advisor, or a person related to a donor or donor advisor automatically is treated as an excess benefit transaction under section 4958.” Section 4958(c)(2) of the Code expressly prohibits any form of compensation—no matter how reasonable—of a disqualified person by a donor advised fund, and stands in sharp contrast to the relatively permissive rule that applies to private foundations.

Although other differences exist between DAFs and private foundations, this particular difference stands out as it cannot be explained by reference to the fact that the former is a public charity and the latter is not, nor by the trends in differences arising from these categorizations. The atypical aspects of this difference invite speculation as to why and how it came about. Knowing that Congress was aware of abuses of DAFs by donors at the time this difference was codified, it is easy to infer that the particularly harsh restrictions imposed on disqualified persons may have been a direct effort to curtail abuses. In the alternative, the difference could be explained as a simple drafting oversight, inconsistent with the overall schema due to a lack of attention rather than a specific purpose. Instead, the Technical Explanation points to a far more coherent and straight forward explanation, which does as much to explain the root of the difference as it does to clarify the legislative vision for DAFs as a whole and in contrast to private foundations. In addition, addressing questions as to the root and appropriateness of this difference through the structural approach suggested by the Technical Explanation makes it evident that this difference can at best be only partly understood if viewed primarily from the perspective of a potential donor—whereas a broader, structural perspective is far more illuminating.

In reading the Technical Explanation, it is apparent that to compare a DAF to a private foundation is fundamentally flawed. Instead, the entity more accurately analogous to a private foundation is a DAF plus a corresponding slice of the organizational superstructure provided by its sponsoring organization. Focusing on the Technical Explanation’s discussion of the particular difference in question—namely compensation of disqualified persons—is particularly illustrative. As the Technical Explanation makes clear, the prohibition against compensation of individ-uals who are disqualified persons as to a DAF applies only to the DAF itself—and not to the sponsoring organization. As the Technical Explanation clarifies:

As a factual matter, a person who is a donor to a donor advised fund and thus a disqualified person with respect to the fund also may be a service provider with respect to the sponsoring organization. In general, . . . the sponsoring organization’s trans-actions with the service provider are not subject to the rules of section 4958 unless the service provider is a disqualified person with respect to the sponsoring organization . . . or unless the transaction is not properly viewed as a transaction with the sponsoring organization but in substance is a transaction with the donor’s donor advised fund . . . . For example, if a sponsoring organization pays an amount as part of a service contract to a service provider (a bank, for example) who is also a donor to a donor advised fund of the sponsoring organization, and such amounts reasonably are charged uniformly in whole or in part as routine fees to all of the sponsoring organization’s donor advised funds, the transaction generally is considered to be between the sponsoring organization and the service provider . . . [and t]he transaction is not considered to be a transaction between a donor advised fund and the service provider even through an amount paid under the contract was charged to a donor advised fund of the service provider.

Because the management and administration of a DAF is not addressed at the fund level to begin with, and is instead addressed at the level of the sponsoring organization, this explanation clarifies that donors and other disqualified persons in fact may be compensated for their involvement in the oversight of a DAF—so long as their involvement is with the managerial function provided broadly by the sponsoring organization to its funds, and not with that donor’s fund or funds alone.

Viewed in that light, the seemingly more stringent, differing restric-tions on disqualified persons with regards to DAFs as compared to private foundations are in fact more consistent with the overall schema than the alternative. The relative simplicity of DAFs is integral to what they are, and in turn, a shift in administrative responsibilities off the fund to the sponsoring organization is integral to that simplicity (and vice versa). For a DAF to be able to directly compensate a disqualified person, even at a reasonable rate for services performed, would be at odds with the premise that administrative functions are carried out as part of the superstructure provided by the sponsoring organization, and for which it is compensated with a fee. Although it would be simplistic to state that absolutely all administrative costs must be addressed by the fees paid to its sponsoring organization by a donor advised fund, and that no additional costs may be covered by the DAF itself, that the ratio tilts firmly in favor of costs borne by the sponsoring organization is both consistent with and in furtherance of the simplified process presented by a DAF and its sponsoring organization.

C. Recent Developments

In the nearly two decades since the Pension Protection Act of 2006 (and the Technical Explanation that followed), the explosive growth of DAFs has continued unabated. From 2020 to 2021 alone, the aggregate charitable assets reported as held in DAFs rose by almost 40%, from $167.81 billion to $234.06 billion, reaching a nearly 100-fold increase from the $2.4 billion figure cited previously for 1995. If DAFs are a business, then business is booming.

Legislative and regulatory attention has also been on the rise, recycling themes familiar from the early 2000s, including concerns that DAFs result in stagnation of funds. The Biden Administration’s “Green Book” for 2024, for example, notes that DAFs lack time-based distribution requirements and propose that distributions to DAFs by a private foundation should not count towards the private foundation’s minimum distribution requirement because “this use of [DAFs] can subvert the goal behind requiring minimum distributions, by reducing the current charitable use of the associated funds.” The Accelerating Charitable Efforts (“ACE”) Act, introduced in 2021, would condition deductibility of a taxpayer’s contribution to a DAF on the fund’s complying with one of a subset of accelerated distribution requirements, and introduce an excise tax on funds not distributed from a DAF within a certain period of time.

In November of 2023, the Service issued the first installment in much-awaited proposed regulations of DAFs, with the first installment concerning particular excise taxes under section 4966 of the Code. In addition to seizing on the delay and consequent significance of these proposed regulations, many commentators have noted one particular aspect of the proposed regulations: that an investment advisor to the donor would be treated as a “donor-advisor,” direct compensation of which by a DAF would be a prohibited excess benefit transaction subject to excised taxes. Echoing the 2006 Technical Explanation, the proposed regulations explain that the prohibition is against a particular DAF paying compensation to that donor-advisor—whereas if the same advisor provid-ed investment services to the sponsoring organization broadly, excise tax would not apply. The proposed regulations recycle the distinction drawn by section 4958 of compensation paid to a person associated with a donor by a particular DAF, versus compensation of that same person paid by the sponsoring organization. If the final regulations issued are consistent with the proposed regulations in this regard, then this will be another instance in which, to analogize a DAF to a private foundation with respect to permissible transactions with parties proximate to the donor, the fulsome analogy will be to the DAF plus a portion of the sponsoring organization superstructure.

There is a key distinction to be drawn between the section 4958 prohibition of compensation by a DAF of a disqualified person, and the prohibition under the proposed regulations of compensation by a DAF of a donor-advisor: whereas the former was expressly prohibited by the laws enacted in 2006, the latter was not, arguably leaving a space the industry grew to fill over the course of the intervening years. Under current pract-ices, a remarkable number of sponsoring organizations appeal directly to financial advisors as a means of reaching their clients’ charitable dollars, a practice one can posit contributed to the robustness of the industry and is now deeply ingrained. It is difficult to say how significantly the industry would be impacted by enactment of the proposed regulation, but it follows that it would impact some funds more than others, and perhaps smaller, community-based funds disproportionately that are more reliant on local relationships than the larger, national vehicles. DAFs remain on the Priority Guidance Plan, including specifically section 4958, suggesting further developments will follow.

IV. Conclusion

Approaching the differences between DAFs and private foundations—and in particular the differing treatment of disqualified persons with respect to each—primarily from the perspective of a potential donor overlooks the larger structure into which each DAF falls, failing to capture the full relationship between a DAF and its sponsoring organiza-tion. A potential donor looking to make a charitable gift into a structure where the potential donor (or donor’s family) may be compensated for engaging in fund oversight, such as vetting of charities and other manager-ial processes, is unlikely to be satisfied by the structural explanation of the differences between DAFs and private foundations: that any one or more such disqualified persons could get a job at a sponsoring organization and be compensated for some degree of involvement in the DAF by that sponsoring organization is not likely to be responsive to that donor’s objectives and lead him or her to conclude that funding a DAF is the best option. The involvement this hypothetical donor seeks comes at an administrative cost to the donor, namely that associated with creating and maintaining a private foundation, the costs that would largely be avoided were a DAF appropriate for the donor’s objectives.

Section 4958(c)(2) of the Code is an interesting starting point for an analysis of the rules governing DAFs in comparison to private foundations because the analysis begins from a point of incongruence or inconsist-ency—that DAFs may not compensate disqualified persons, whereas private foundations are not subject to this same prohibition—but as it expands in breadth, beginning to capture the surrounding rules and underlying legislative history, it appears to reveal a coherent legislative logic and consistent regime. The proposed regulations point to a more nuanced system, one in which the rules arising in 2006 from the Pension Protection Act were permissive in some respects; there are indications that the present appetite to revisit these permissions may be in some conflict with the resulting evolution of the industry. Meaningfully different options empower potential donors to select the course most appealing to them and most responsive to their objectives; DAFs and private foundations are two options that exist among others, and the differences between them will continue to be refined and solidified over the course of the rulemaking underway.

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