Case Made for Jettisoning Proposal to Change Public Support Regulation

Published date01 May 2020
Date01 May 2020
May 2020 5
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.)]
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tutional, and thus should be withdrawn.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
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
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

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