Case Made for Jettisoning Proposal to Change Public Support Regulation

• Published date: 01 May 2020
• Date: 01 May 2020
• DOI: http://doi.org/10.1002/npc.30721

Bruce R. Hopkins’ NONPROFIT COUNSEL

May 2020 5

THE LAW OF TAX-EXEMP T ORGANIZATIONS MONTHLY

Bruce R. Hopkins’ Nonpr ofit Counsel DOI:10.10 02/n pc

program, and implement a data-driven method to track

and quantify specific noncompliance issues.

IRS management agreed with three of these recom-

mendations and partially agreed with the other two.

[28A.3(h) (2020 Cum. Supp.)] ◆

CASE MADE FOR JETTISONING

PROPOSAL TO CHANGE

PUBLIC SUPPORT REGULATION

The Institute for Free Speech, by letter to the IRS

dated February 13, stated that the proposal to revise the

treatment of grants from donor-advised funds for pur-

poses of computation of public support, as suggested

by Notice 2017-73 (summarized in the February 2018

issue), is inconsistent with existing law and is unconsti-

tutional, and thus should be withdrawn.

Under current law, a grant from a donor-advised fund

is regarded as a grant from the sponsoring organization

involved and therefore constitutes public support in full

for the ultimate grantee. Treasury and the IRS are con-

templating a rule change by which grants of this nature

would be treated as made by the donors, which would

almost certainly reduce the extent of public support evi-

denced by these grants. The institute is concerned about

the resulting information reporting requirements.

Constitutional Law

The institute makes five arguments in support of its

position, asserting in one of them that this proposal would

violate constitutional law principles. The organization is of

the view that there are not the requisite “sufficiently

important governmental interests” supporting “this addi-

tional layer of donor disclosure.” The government, it is

said, “cannot simply state a generalized tax compliance

interest or law enforcement interest.” In any event, the

institute states that such a proposal “must be tailored so

as not to unnecessarily burden First Amendment rights.”

Inconsistency With Section 6104

The institute contends that this proposal to disclose

donor information to recipient charitable organizations

is contrary to congressional intent, because this type

of disclosure is not required by the federal tax law (IRC

§ 6104, which generally imposes certain disclosure

requirements on tax-exempt organizations). It writes of

the “careful balance” underlying this statutory scheme,

as reflected in the general requirement to publicly dis-

close annual returns, yet offset by nonpublic disclosure

of Schedule B. It states that Treasury and the IRS “should

not and may not use regulations to upset established

statutory requirements for donor disclosure.”

The institute takes notice of proposed regulations

that would eliminate the requirement now imposed on

certain categories of tax-exempt organizations to report

the identity of donors (summarized in the November

2019 issue). It states that this proposed law change

is based on the “weighing Congress has engaged in

between compliance and maintaining privacy.” It asserts

that Treasury and the IRS “should make a similar attempt

in this Notice to reject attempts to require disclosure

beyond what Congress has provided for.”

Inconsistency With Section 6103

The institute observes that Congress has established

a policy (under IRC § 6103) that tax returns and tax

return information “are private between the taxpayer

and the IRS.” It states that “[t]hird party information

reporting is a significant and invasive obligation that

should only be imposed by Congress through statute,

after Congress has weighed the invasiveness, costs, and

other burdens of the new information reporting obliga-

tion against the need for efficient tax administration.”

Proposal Ignores Legal Realities of DAFs

The institute states that the terms of the Treasury/

IRS proposal are “inconsistent with the legal rights of a

sponsoring organization of a donor advised fund under

existing law,” in that sponsoring organizations have

“absolute legal power to make decisions with regard to

the donor advised fund assets, including making grants

to recipient organizations.” It writes that the proposal

“flies in the face of this legal reality by disregarding

a fundamental point about donor advised funds: the

assets in donor advised funds and the distributions made

from these funds are made by the sponsoring organiza-

tion.” The proposal, the institute says, “seeks to treat

donor advised funds differently from this established

reality.”

Referencing enactment of the Pension Protection Act

of 2006, the institute concludes that Congress “chose

not to change the fundamental rules about the legal and

tax nature of donor advised funds — that these funds

are really only part of the sponsoring organization — yet

the proposal would change these fundamental rules.”

Administrative Burdens and Lack of

Evidence

The institute observes that the proposal is “intended

to prevent abuses stemming from organizations being

treated as public charities under the public support tests

when they should be considered private foundations

(and subject to the private foundation rules).” It states

that Treasury and the IRS should conduct and make

public research showing that, absent the proposal, the

recipient organizations are violating the private founda-

tion rules.

The institute states that if Treasury conducted this

type of research, it thinks that Treasury would find, “as

is [the institute’s] experience, that the primary reason