Getting Donor-Advised Funds Regulation Right: Closing the Public Support Test Loophole

Authors

• Benjamin Leff, Washington College of LawFollow

Abstract

Donor-Advised Funds (“DAFs”) have been the subject of vigorous critical scholarship in the past two decades. This Article addresses two timely issues in DAF regulation: the theoretical justifications for extra strict regulation of DAFs, and, in light of those justifications, how to close a major loophole in the regulatory scheme. DAFs have been called “virtual private foundations” because they are similar in some respects to private foundations, but until two decades ago, they were treated for legal purposes as public charities. In 2006, Congress enacted legislation that both formally recognized DAFs for the first time and subjected them to several new regulatory burdens that do not apply to other public charities, although they remain classified as public charities for legal purposes. In some cases, Congress subjected DAFs to the same regulatory burdens that apply to private foundations, while in others, it continued to permit DAFs to enjoy the more lenient regulatory burden and generous tax benefits that apply to public charities. But for certain situations, Congress crafted a new regulatory regime for DAFs that was more restrictive than the one that already existed for private foundations. There has been commentary about the justifications for subjecting DAFs to the private foundation rules and continuing to permit DAFs' public charity treatment, but to date, there has been no significant scholarly discussion of the justifications for holding DAFs to a higher standard than private foundations. This issue has become *126 urgent because the Treasury Department released Proposed Regulations in November 2023 that included new, especially strict rules for DAFs.    This Article argues that this extra strict regime for only some aspects of DAFs is beneficial, not because DAFs are especially susceptible to abuse the way private foundations are, but because these rules provide bright lines that enable DAF providers to reduce costs and make charitable giving more efficient. Understanding this benefit of the extra strict regime has implications for the regulation of DAFs. Specifically, there is an egregious remaining loophole-- the “public support test” or “conduit” loophole--in the regime that enables donors to pass donations through DAFs to privately controlled charities. It is essential for forthcoming Treasury Regulations or new legislation to close this loophole. This Article examines how this loophole should be closed.

Repository Citation

Benjamin Leff, Getting Donor-Advised Funds Regulation Right: Closing the Public Support Test Loophole, 28 N.Y.U. J. Leg. & Pub. Pol. 126 (2025).
Available at: https://digitalcommons.wcl.american.edu/facsch_lawrev/2330