Loopholes, Manipulations, and Abuses

Larry Page, co-founder of Google, is a very rich guy – in fact, he’s the sixth-richest person in the United States, according to those who count such things. Befitting his extraordinary wealth, he created a private foundation with assets of over $3 billion. In fact, thanks to putting so much money into his foundation, Page has been listed several times by The Chronicle of Philanthropy as one of the country’s biggest philanthropists.

The only problem is that Larry Page hardly gives any money away, as far as we can tell.

What?

Well, the deal is that Page masterfully manipulates the loophole-laced laws governing donor-advised funds to keep the money from going to actual charities. At the very least, whatever charitable donations he’s actually made remain mostly out of public view.

Charitable End-Around

The story of Page’s sleight-of-hand is told in a well-researched Vox/Recode article by Teddy Schleifer. Schleifer explains that private foundations must disperse five percent of their value each year for charitable purposes – presumably, to organizations doing actual charitable work, like soup kitchens, schools, and environmental groups. But over the years Page instead has dropped 96% of his required charitable distributions into donor-advised funds that he controls. What happens after that, nobody knows. That’s because donations to donor-advised funds (thanks to a 1969 IRS ruling that has led to fifty years of bad repercussions) are considered gifts to public charities. Unlike private foundations, which must reveal each charitable distribution in their annual IRS filings, donor-advised funds do not have to report on their distributions – and, in fact, do not have to distribute a penny to charity in a given year… or ever.

So Larry Page received significant charitable deductions for contributing to his private foundation, with the understanding that five percent a year has to go to charity, all to be duly reported in his Form 990-PF. But then – in an end-around that I warned about as early as eight years ago – his foundation sent nearly all of that money into the black hole of commercial donor-advised funds. Has any money gone to actual charities? Who knows? If so, which ones? We don’t have a clue. Everything Page did is as legal as it is reprehensible. He has been dissing the whole notion of charitable giving, and there isn’t a thing, under current rules, that the government can do.

In 2017, two deeply respected law professors, Ray Madoff and Roger Colinvaux, suggested to the Senate Finance Committee a prohibition of this sort of transfer. That is, Madoff and Colinvaux urged that private foundations be prevented from including grants to donor-advised funds to meet their five-percent annual distribution test. This was an utterly reasonable suggestion, which anticipated the kind of “charitable” chicanery perfected by Larry Page. But the philanthropic establishment – a consortium of community foundations, Independent Sector, the Philanthropy Roundtable, and the Council on Foundations – reacted vehemently, with references to how such reforms would “severely restrict philanthropy, and would reduce charitable giving in communities throughout the country.” Of course, Congress reacted as Congress does, supporting the right of wealthy people to do whatever they want, and donor-advised funds remain fundamentally unregulated.

And so, Larry Page gets enormous tax deductions, sends none of his money to charity, operates with zero transparency, and we can’t do a damned thing about it other than write angry articles.

DAFs Funding Hate

But this isn’t the only issue that’s arisen in 2019 around abuse of donor-advised funds.

Recent stories from CBS News and Sludge describe how Fidelity Charitable and other donor-advised sponsors have been making charitable grants to organizations labeled as hate groups by the Southern Poverty Law Center. These stories expose the infuriating inconsistency that lies at the heart of donor-advised funds. On one hand, DAF sponsors claim to be the final decision-makers on all grants. (That’s the reason, dating back to 1969, why donations to donor-advised funds are treated like gifts to public charities, rather than private foundations.) On the other hand, donor-advised fund sponsors like Fidelity take no responsibility for toxic grant distributions. That’s beyond their control, they say.

“As an independent charity that is cause-neutral, it is not Fidelity Charitable’s role to dictate what [donors’] values should be,” said a Fidelity spokesperson. “Each of our individual donors has the right to decide which IRS-qualified charities they choose to support.” Surely, this line of reasoning would surprise the IRS officials who allowed themselves to be convinced in 1969 that control would rest with the DAF sponsor, not the donor. And so grants from Fidelity and other DAF sponsors go to the Family Research Center, which agitates against gay rights and calls for restricting the freedoms of Muslims in America, and the VDARE Foundation, widely seen as a source of white nationalist propaganda.

Recently, commercial DAF sponsors have started tepidly drawing a line or two, as Schwab Charitable, for example, ruled out grants to nonprofits tied to the National Rifle Association. But groups denying the rights of citizenship to Muslims or LGBTQ people? Apparently, those organizations are still considered worthy of receiving grants.

These are not the only recent stories about DAFs funding hate groups. In March an article ran about the National Christian Foundation, one of the country’s largest DAF sponsors, making grants totaling tens of millions of dollars to hate groups. And, lest you think that community foundations, which generally take much greater care around grant distributions, are immune from taking this “cause-neutral” approach, it’s worth noting that The Foundation for the Carolinas is under fire for being the source of significant funding for anti-immigrant groups.

It’s not a stretch to think that DAFs to a certain extent are a means of identity-laundering: getting funds to controversial causes without connecting the gifts to the donors.

DAFs Buying Illegal College Admissions

The most recent and tantalizing DAF corruption tidbit has to do with the Varsity Blues scandal, where wealthy parents were famously buying their children’s admission to elite colleges by paying “college counselor” Rick Singer to change the applicants’ test scores, enhance their qualifications, and pay off corrupt college coaches. One high-profile parent involved, private equity czar Bill McGlashan, apparently made his payoff to Singer using his Schwab Charitable donor-advised fund. Now, in a new version of “whose fault is it?” McGlashan is blaming Schwab, which should have known better, and Schwab is blaming McGlashan, or operator error, or, well, whatever.

* * * * * * *

For years, those of us urging reform of donor-advised funds have been warning that DAFs are ripe for abuse. DAF sponsors, with their fellow travelers in the associations that supposedly look out for the interests of nonprofits, have said that we critics were wildly exaggerating the risks, and that any limitations on charitable transfers were fundamentally bad.

So now we have Larry Page, one of the richest men in the world, dumping hundreds of millions of dollars into donor-advised funds, in mockery of the rules governing private foundations. We have donor-advised funds sending tens of millions of dollars in grants to vile hate groups, while DAF sponsors (who have long protested that they, and not the donors, control the distributions) shrug their shoulders and say that it’s all beyond their control. We even have billionaires treating their DAFs as slush funds for making payments to illicit schemes to buy their kids’ way into college.

Can we finally agree that donor-advised funds need to be reformed? The DAF industry may continue to preach how donor-advised funds promote charity and democratize philanthropy, and that anything that encourages charitable giving is inherently good. But it’s hard to avoid a different conclusion: that donor-advised funds have in fact encouraged manipulation of tax laws, reduced transparency, and promoted the hoarding of charitable funds that otherwise would be put to good purposes. I don’t question that most donors use their donor-advised funds responsibly. But isn’t in their best interests, and society’s, to enact reforms to limit abuses?

Copyright Alan Cantor 2019. All rights reserved.

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10 Comments. Leave new

  • THANK YOU!

    Reply
  • At the risk seeming like a groupie, it seems you can only write incisively. The Paul Krugman of charitable oversight. In any case, sort of like what Gates did to the foundation world, DAFs threaten to distort and disqualify most of what we could previously say about charitable giving. Those high level insights about year to year trends about generosity, and who is giving to what, seem to be completely meaningless now given the scale (and opacity) of DAFs. Thanks for your help understanding, Alan. I promise to consider more implications, as well as ways to “resist” (in current parlance).

    Reply
    • Thank you, Aron. You’re very kind! Paul Krugman, eh? That’s a bit of a reach, but I’m honored and appreciative.

      Reply
  • MR GEORGE COGAN
    December 23, 2019 7:39 pm

    Hi Alan, I have grown to agree with you more and more over the years on DAF reform – for the most part, anyway. It would seem smart for the Feds to just require an annual distribution of the same magnitude as the foundation requirement. On your specific points, I guess we dont really know what Larry Page is doing with his DAF. He may be just using it to protect his privacy – and not publicize where he is giving. He is known to be a private person. For all we know he may distribute every penny he puts into his DAF. On Singer – that is more complex. How in the heck did Singer get to create a 501c3 – that seems to be where some work should be done. I agree that Schwab should be lauded for taking a stand on gun control. Would be nice if they would also ban hate groups.

    Reply
    • Hi, George — Thanks for these thoughtful comments.

      I may be sensitive to this kind of chicanery because folks like Charles Koch do this to launder their identity. That is, Koch makes a grant from his personal foundation to DonorsTrust, a right-wing DAF sponsor, which then makes an anonymous grant to the Heartland Institute or another controversial grantee. (Heartland does “research” to rebut the scientific consensus on climate change.) This scheme disconnects the donor from the cause, to the benefit of each.

      So, yes, Larry Page may well be distributing the funds and just wants privacy. Problem number one is: that’s not how private foundations are structured. Congress said in 1969: “OK, private foundations. The donor retains full control. Fine. But we want to know everything the foundation does.” Running grants through a DAF is a violation of the spirit, if not the letter, of that ruling.

      Problem number two is that DAFs are not supposed to provide donors with that kind of control — but they do.

      Anyway, I’m glad you’ve moved in the direction of a required annual payout from DAFs. I still think DAFs, given the higher tax benefits they provide the donors, should be paid out completely within ten or fifteen years of the gift. But I respect your point of view.

      As for the Singer “charity”: This is a HUGE problem. At this point, the IRS is a rubber-stamp machine for each and every new public charity application. Over a recent three-week period, the IRS Exempt Organizations division received 6,000 applications and turned down exactly one. So there’s no review at all. As Paul Streckfus, an expert on nonprofit tax law says, it’s really a registration.

      It didn’t used to be that way. Why did things change? First, funding for the EO division has been cut repeatedly over the years. Second, a few years ago there was a scandal-that-wasn’t, where the GOP Congress accused the IRS of being too hard on conservative would-be nonprofits. (In fact, the IRS wasn’t biased, but they were freaked out by the experience and now don’t offer any resistance to any new nonprofit application.) I have half a blog post on this subject — but, I’ve been busy.

      Thanks again. Take good care, George!

      Reply
  • Jamie Strayer, CU Strategic Planning
    December 24, 2019 6:35 am

    Your writing is poignant, Al. I will certainly be following you more closely. Thank you for the education in such a well written format.

    Reply
  • Since I read the Vox article, I’ve been wondering why people like Larry Page bother to even set up a private foundation…couldn’t he receive the same tax benefit by putting the money directly in a DAF? His “philanthropy” makes a vivid case for reforms.

    Reply
    • Agreed, Kathleen. Though mega-donors like the absolute and explicit control provided by private foundations, even if they chafe (as he clearly does) against the transparency and required payouts. Also, they might in the back of their minds be thinking that eventually Congress and the IRS will come to their senses and require spend-downs and transparency for DAFs. They don’t want to drop their billions into a structure that may become less advantageous as the years pass.

      Reply
  • Very well written; thank you for sharing your thoughts on this issue. A few years back, I attended a seminar hosted by a high-profile community trust about DAFs. During the seminar, they had 4-5 different speakers (including a rep from Fidelity) tell us how good DAFs are and why we should be in favor of this type of donor relations system. I asked several questions during the presentation about how this might impact nonprofit development staff and philanthropic relationships between donor/organization. They responded with “DAFs are good,” and never gave us a chance to discuss the impact it might have on those sitting in the room (and the organizations they represented). I guess I’ve been out of the game for a minute not to know the types of abuse occurring now until I read your well-researched article. I hope you’ll continue monitoring and posting about this topic because I think the abuse and consequences will extend further.

    Reply

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