Regulation of tax deduction for charitable functions

On the way to the break, we should be grateful that the Senate did not pass or even take up the Accelerating Charitable Efforts Act, which aims to force nonprofit donors to give up their assets sooner rather than later. The proposal, endorsed by Maine Senator Angus King and Iowa Senator Charles Grassley, should be set aside for good. Although at first glance it might seem like a modest amendment to the law, the law represents a radical change in the charitable tax deduction, which has been a cornerstone of the tax code since the introduction of income tax.

The law would add an entirely new and worrying principle to the charitable withdrawal: conditionality. It would require taxpayers who deposit into individual charity accounts known as Donor Advised Funds (DAFs) to distribute these funds within 15 years or to be excluded from withholding taxes. (Note that assets in these accounts already have only one legal purpose: charitable giving.)

The history of tax law governing charities and charitable giving shows us how King Grassley’s Act could open the door to a host of mischief. As one official IRS story puts it, the tax treatment of charities and charitable giving has historically been guided by three relatively narrow principles: “First, charitable organizations were granted federal income tax exemption. Second, charities had to be free from private insurance – that is, the revenues of a nonprofit organization could not be used for the benefit of any person associated with the organization. Finally, an income tax deduction for donations was developed to promote charitable donations. “

It is one thing – and perfectly right – for the IRS to link tax withholding to donations to 501 © (3) bona fide nonprofit organizations that are legitimized by the agency. Requiring donations to be paid out within a certain period of time is a completely different matter. Two of the law’s proponents, John Arnold of the John and Laura Arnold Foundation and Ray Madoff of Boston College, argue that this requirement is necessary because of the growth of DAFs, whose wealth is now nearly $ 40 billion thanks to an 80 percent increase in DAFs -Dollars has been contributing to such accounts since 2015. Over the same period, DAF grants – paid through local community foundations or national financial management firms such as Fidelity Charitable – have also increased, totaling more than $ 25 billion in 2019, an increase of 93 percent since 2015 In addition, the disbursement rates of the grants are estimated at up to 24 percent.

Critics like Arnold and Madoff fear that these funds are not being distributed quickly enough and that operational charities may not get the funds they need for immediate or short-term costs. There may be a reason for disbursing funds sooner rather than later, but that question has been appropriately left to the donors themselves. Some prefer to reserve funds for the long term – such as with university foundations. Of course, Arnold and Madoff are free to ask donors to increase the pace of DAF grants. David and Jennifer Risher, for example, founded the Half my DAF movement to urge donors to pay out half of their funds every year, and the movement has gained a following, especially during the pandemic.

But combining the charitable withdrawal with a 15 year payout is a bridge too far. It’s not hard to see how it can turn into a slippery slope that leads to even more conditions. Serious left-wing thinkers are already arguing that tax deductions should be limited to donations to groups that clearly benefit the poor, based on the view that deductions are only justified when charitable donations are fundamentally redistributed. For example, Rob Reich of Stanford University is skeptical of the deduction that applies to churches, the most common type of charity: “Religious groups look less like public charities and more like mutuals (i.e. other nonprofits whose supporters don’t entitled to deduct tax for their donations). “

Reich makes a fundamental mistake: the tax deduction not only supports charitable donations in the narrower sense, but also American civil society – our community – which we cannot take for granted.

But whether you agree with Reich or not, it is clear that the Accelerating Charitable Efforts Act opens the door to such ideas. If the law can dictate the deadline for charitable contributions, it can also make the deduction dependent on the type of recipient. Unpopular ideas supported by non-profit research groups would also be logical goals. In fact, it jeopardizes the entire Madisonian Project, which is based on protecting minority views. Arnold – Madoff is a small first step – but it opens the door wide.

Those who are concerned about how many charities are receiving donations and how quickly they are using them can ask donors to increase the pace of their donations. A better move would be to join efforts to get charitable tax breaks for those who don’t list their tax returns (90 percent of American households). This would encourage philanthropy without jeopardizing its future.

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