The Treasury Department released its report on donor advised funds (DAFs) and supporting organizations (SOs)  in December of 2011. This report, mandated by the Pension Protection Act of 2006, was due in August 2007.
The report is 109 pages, including appendices, and is divided into five chapters: an introduction and summary; a detailed discussion of the legal requirements for supporting organizations and donor advised funds; an analysis of available statistical information about DAFs and SOs, with most data drawn from the 2006 Form 990; a lengthy summary of the comments Treasury received in response to a request back in 2007; and a short final chapter titled "Answering Congressional Questions." The report does not recommend any new legislative changes to the operation of either supporting organizations or donor advised funds.
To begin with the last chapter, Congress asked Treasury to address four specific areas:
- Whether existing rules for charitable deductions for gifts to DAFs and supporting organizations are appropriate or should be modified;
- Whether DAFs should be subject to a payout requirement;
- Whether a donor's advisory role with respect to investments or distributions is compatible with a completed gift having been made;
- Whether the issues above apply to other forms of charity
The report concluded that no changes are needed with respect to the deductibility of gifts to donor advised funds and supporting organizations. The authors note the several reforms enacted in the PPA both with respect to DAFs and SOs, but also new requirements for gifts of certain types of property, such as historic conservation easements. Most significantly, the report found a clear distinction between gifts to private foundations, over which a donor may exert control, when compared with gifts to DAFs and SOs, where the donor must give up control. This is a key distinction that was too often overlooked or disregarded in the formulation of the PPA reforms. The second key point is the reports explicit recognition that any issues with respect to the timing of the deduction or with perceived donor influence over the liquidation of a gift arise for gifts to all public charities not just SOs and DAFs.
Finding that the average aggregate payout by DAFs was 9.3 percent in 2006, the report recommended waiting for more years of data before deciding whether there is a need for a payout requirement. By comparison, the report noted that private foundation payout over the years has averaged around 6 percent. The report does note that high payout by some funds may mask low, or no, payouts by others. Please note that the payout calculation used is "grants only." The formula used was based on dividing the sum of asset values at the end of the year plus grants made during the year by grants made. The DAF payout rate would generally be even higher if one used the considerably more complicated private foundation calculation as that includes, among other things, administrative expenses incurred for charitable purposes.
The report concluded that gifts to DAFs and SOs are completed when made (and, accordingly, immediately deductible). As in the discussion of the deduction generally, the authors cite the distinction between advice and control and the fact that many organizations, not just DAFs and SOs, feel pressure from donors to use gifts in particular ways. In particular, the report noted that high approval rates for DAF recommendations from donors is not evidence of excessive control as sponsoring organizations report that they have guidelines for acceptable grant recommendations and make those known to donors and may educate donors about community needs.
Chapter 3, addressing information about DAFs and SOs from the 2006 990s, is likely to be of interest to many grantmakers. The report cautions that 2006 was the first year for many of the reporting requirements for DAFs and that a review of returns filed indicated confusion and mistakes by some filers weakening the validity of the data (noting that this is common when new questions are added to any tax form). The authors also note that the IRS has cautioned against relying on the self-classification of supporting organizations as Type I, II, or III and with respect to the functional integration status of Type IIIs. Nonetheless, the data in the report represent the first comprehensive information about DAFs and that break down the operations of supporting organizations by type. We have rounded numbers for convenience.
Donor Advised Funds - Data from 2006
|Number of organizations with advised funds||2,400|
|Number of individual funds||160,000|
|Total assets||$31.1 billion|
|Total gifts||$9 billion|
|Total grants||$5.6 billion|
The 990 does not break DAF gifts down by whether the contributions were cash or property, so the report extrapolates this from total gifts to the organizations with DAFs and concludes that cash gifts were about 65 percent of total. We suspect this may under state non-cash support for DAFs to the extent that some other types of funds, especially agency endowments, may skew heavily toward cash. This is somewhat confirmed because the national DAFs, where virtually all gifts are to DAFs, report two-thirds of their support came from non-cash gifts.
Table 3.5 divides the sponsoring organizations of donor advised funds into seven discrete subcategories, including one for the commercial donor advised funds and another for community foundations. The report found 23 national commercial advised fund sponsors. While a small number, this group held almost half the 160,000 funds and 35 percent of the asset value of all funds. About two-thirds of gifts to these funds were non-cash. The report points out that while the commercial funds are efficient in the administration of DAFs, their expenses may be understated as some investment fees may have been netted against investment income. Interestingly, the report also notes that management expenses can be "too low" as well as "too high," with low expenses possibly indicating that donors are receiving little supervision, while high expense may reflect efforts by the sponsoring organization to match donors with potential donee organizations. According to the report, these educational efforts by sponsoring organizations "may be an important public service provided by DAF sponsoring organizations as part of their charitable mission."
Community foundations were the second-largest category of DAF sponsors, holding almost 30 percent of total funds and $41 billion in assets. The report included 607 organizations in the community foundation category, suggesting that they finally have a grasp on the number of community foundations in existence. Contributions to community foundation DAFs totaled$2.8 billion, about half of their total gifts. Only 27 percent of total community foundation gifts (all gifts, not just DAFs) were non-cash. This is surprisingly low as the assumption would be that gifts of publicly traded stock and other forms of property would play a much larger role. Community foundations paid out $2 billion in grants from DAFs in 2006.
The balance of the DAFs is divided among a small group of national donor advised funds that are not "commercial," and educational, health, religious, and "other" organizations. With the exception of the first, DAFs are not an important part of their overall resources.
The report presents aggregate DAF payout rates with great caution due to the authors' belief that many organizations may have made reporting errors as the more-detailed DAF questions were asked for the first time in the 2006 returns. Nonetheless, the report finds that the mean (average) payout was 9.3 percent for all DAFs at all sponsoring organization. The commercial advised funds had significantly higher payout rates with a mean of 14.2 percent, a median of 14.7 percent, and a range from 11.0 percent at the 25th percentile to 17.6 at the 75th. Community foundation payouts matched the 9.3% average with the median at 7 percent. The range for community foundations was from 1.9 percent at the 25th percentile to 12.3 percent at the 75th.
Table 3.8 offers a breakdown of non-cash gifts by type of sponsoring organization. Again, the numbers reported in this table, which uses data from Form 8283, are for all gifts, not just those to DAFs. Forty-one thousand of the approximately 49,000 gifts reported were gifts of corporate stock, with the 23 commercial advised funds and the 600+ community foundations each receiving nearly the same total value ($1.3 billion for the commercial funds and $1.2 billion by community foundations). Unsurprisingly, the commercial funds got more gifts (by value) of mutual funds than community foundations, but community foundations received almost all of the gifts of real property and non-publicly traded stock (approximately $100 million in each category). Please note that the numbers reported in Table 3.8 are for 2005, not 2006, so are not directly comparable with the other numbers in the report.
Supporting Organizations. Just under 22,000 organizations filed Form 990 in 2006 as supporting organizations. Collectively, these organizations held $371 billion in assets, with $214 billion of this held by the approximately 8,200 SOs that self-identified as Type I. In addition to the 8,200 Type Is, the report found about 3,200 Type II SOs and 9,400 Type IIIs, with 3,400 of the latter self-classified as "functionally integrated." Although acknowledging significant grantmaking by Type I SOs, the report found that the non-functionally integrated IIIs differed sharply from other forms of SOs in being primarily grantmakers. They also differed from the other types of SOs in that almost 80% of their support from gifts was in the form of non-cash, while the others received mainly cash.
As with DAFs, the report subdivides supporting organizations into groups that, in this case, are based on the primary function of their supported organizations. Community foundation supporting organizations were placed in a category called "community benefit." Unlike the DAF community foundation category, however, the community benefit SO subgroup also includes SOs that support community economic development organizations and "other regionally based organizations." There were just over 800 supporting organizations in this category including 365 Type I, 214 Type II, and 224 Type IIIs (of which 110 were functionally integrated). Supporting organizations in the community benefit category held $19 billion in assets and made about $250 million in grants. This figure includes $146 million from DAFs controlled by the supporting organization, presumably reflecting community foundation affiliates that are organized as supporting organizations.
One apparent anomaly in the reported data is that supporting organizations in the community benefit category reported receiving more than half their income ($1.25 billion) from fees for program services. It's unlikely that community foundation supporting organizations, with the possible exception of affiliates, receive substantial revenue from program services, so this may reflect the inclusion in community benefit of supporting organizations to economic development and similar regional organizations in the community benefit category. This is somewhat confirmed as these supporting organizations also reported substantial ($1.4 billion) program expenses, an amount that dwarfs grants by these SOs.
There is also a subcategory for "philanthropic" SOs, with the report stating that the 2,300 supporting organizations in this category were primarily grantmakers. Although community foundation SOs are described as being in the community benefit category, it is possible that some were placed in this category. Well over half (1,500) of the philanthropic SOs were Type III.
The report notes that data supplied by supporting organizations on Form 990 do enable analysts to identify some potentially problematic behavior by them. Thus, the report states that in the pre-PPA period, Congress had identified loans by SOs to officers, directors, trustees, and key employees as a potential abuse area. In fact, only 57 of the 21,000 SOs reported such loans and only three of these were loans to disqualified persons. The total amount of all loans was $137 million, with most loans small in the aggregate and representing a small share of the SO's assets. Community benefit SOs reported no loans in either category.
All in all, the report is balanced and fair and provides some interesting data on DAFs and supporting organizations.
Senator Grassley issued a press release  on the report in which he called the report "disappointing and unresponsive." However, we believe that the report's findings will carry weight with other members of Congress and we'll continue our efforts to bring this matter to the attention of key legislators.
A related report from the Congressional Research Service  examines data from Form 990, and some of the statistical information about donor-advised funds that was included in the 2011 Treasury report on DAFs . The CRS report takes strong issue with several of the findings of the Treasury report . View the Council’s summary of the CRS report .