Authorized Updates: Proposed Laws for Personal Basis Minimal Distribution Necessities | Foley & Lardner LLP

A number of philanthropic leaders have voiced support for proposed legislation to increase the amount of distributions from private foundations and donor advised funds.  Named the “Initiative to Accelerate Charitable Giving”, the most prominent initiative is being led by John Arnold, a wealthy hedge fund trader and Ray Madoff, a professor of law at Boston University.  The Initiative’s reforms would seek to change certain rules around the private foundation 5% minimum distribution requirement so that salaries or travel expenses paid to foundation family members will not count against the 5% minimum distribution requirement. The proposal includes a provision so that most distributions by private foundations to donor advised funds would not count against the 5% minimum distribution requirement (ending the ability of private foundations to meet the 5% distribution requirement by making a distribution to a donor advised fund).  The proposed reforms would also eliminate the 1.39% annual net investment income excise tax for any year in which a private foundation pays out 7% or more of the fair market value of its assets or agrees to limit its life span to 25 years or less.  Separately, Professor Madoff has advocated for the minimum distribution requirement to be increased to 10% annually.

The proposal also defers the charitable deductions for contributions to donor advised funds unless the donor agrees to distribute the fund or release the advisory privileges within 15 years.  The proposal includes changes to the income tax deduction so that donors who contribute closely-held assets receive a charitable income tax deduction equal to the funds received by the donor advised fund from the sale.

At the moment, it appears unlikely that these proposals will pass (there is focused opposition, including The Philanthropy Roundtable.

Nonetheless, these proposals are indicative of a possible trend toward more scrutiny of philanthropy and of the wealth present in private foundations and donor advised funds.

Recent Supreme Court Case on Donor Disclosure

Americans for Prosperity v. Bonta

In a highly watched Supreme Court Case, the Supreme Court ruled on July 1, 2021 that charitable organizations who register with the State of California cannot be compelled to provide a copy of Form 990 Schedule B (Schedule B lists donors who contribute more than $5,000).

Section 501(c)(3) organizations file Schedule B as part of Form 990 or Form 990-PF.  For public charities, however, the schedule is not subject to public disclosure.  California required that charities soliciting in the state had to file a complete version of the Form 990, including the Schedule B with the state.  California argued that this disclosure was required in order to determine tax evasion and charitable fraud.  Plaintiffs (Americans for Prosperity Foundation) argued that security lapses and data breaches by California created a risk that donors would be disclosed, and donors had a First Amendment to not be publicly disclosed in order to avoid possible reprisals by third parties (which would unduly burden the associational aspect of making contributions).  The majority opinion ruled that a state could only compel disclosure if the disclosure was narrowly tailored to only address the problem or interest at issue and struck down the California requirement.

The case is a victory for donors (and organizations) who wish to maintain donor information as confidential; it extends the ruling in the Supreme Court’s 1958 NAACP v. Alabama decision (striking down a state law requiring disclosure of NAACP members when disclosure may subject them to reprisals) to modern-day arguments about donor transparency and disclosure.

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