Statement of New York Community Trust

Introduction

For almost a century, community foundations have been building permanent charitable resources to meet the current needs of their communities and the unforeseen needs of the future. And for more than 80 years, The New York Community Trust (The Trust), through the generosity of donors past and present, has supported nonprofit organizations in the New York metropolitan area that work daily to ensure that our community is a vital and healthy place in which to live and work—for all residents. When we started in 1924, our sole mission was to distribute to nonprofit organizations the income from charitable trusts set up by will and held by New York City banks. The Trust’s founders were men of vision who understood the power of an institution that could employ the combined charitable passions of individuals to meet a broad variety of community needs. They also understood that contemporary donors could not anticipate the compelling issues that would confront their successors—and they were committed to ensuring that adequate resources would be available for the future. In those early days, our donors set up unrestricted or broad field-of-interest funds through bequests, trusting tomorrow’s leaders to spend it wisely. Today, The Trust has assets of $2 billion; $700 million of that total is held in more than 1,000 donor-advised funds, which range in size from $5,000 up to $99 million. Those funds routinely pay out more than 10 percent of their assets to charity annually. The remaining $1.3 billion rests in permanent unrestricted or field-of-interest funds.

We opened our first “donor-advised” fund in 1934, before there was even a name

for it—and long before there were any specific laws or regulations. During her lifetime, this first “donor advisor” made suggestions to the staff of The Trust as to charitable distributions from the

fund. When she died, the assets remaining in the advised fund became part of The Trust’s discretionary grantmaking program—a program that relies on a professional staff that assesses community needs, investigates nonprofits, vets their projects and finances, and recommends grants to our distinguished volunteer board. Grants we make from the fund she created, which now has $64 million in assets, support projects to help low-income elders keep their homes and apartments, train poor, young women to become licensed day-care providers, reduce environmental health hazards in substandard housing, and much more.

A profoundly important social contract was established with that first donor-advisor that continues to this day: in consideration for the privilege of making grant recommendations, money would be left in the fund for future generations. That is still our expectation and is characteristic of our relationship with most donors to The Trust.

The philanthropic world has changed since 1934 and 21^st century donors have

significantly more choice than they did years ago. When the IRS gave public charity status to donor-advised funds sponsored by financial institutions, donor expectations changed. The notion of community philanthropy pioneered by community foundations morphed into individual charitable checking accounts, with little expectation of, commitment to, or mechanism for permanence.

Nonetheless, The Trust and its donors support a dazzling array of charitable

activity. So it was with dismay that we greeted the tax advantages offered for Hurricane Katrina giving and the IRA charitable rollover because those incentives were not available for contributions to donor-advised funds. In addition, other provisions of the Pension Reform Act of 2006 imposed burdens that seem designed to discourage charitable giving and based on assumptions that donor-advised funds are inherently flawed and that contributions to these funds are not, in fact, completed gifts. We recognize that there have been some egregious misuses, but we believe that enforcement of existing regulations can surely find and punish those individuals who violate the law without penalizing generous people who use their funds to do good. Indeed, the 1976 Treasury regulations implementing the Tax Reform Act of 1969, and the so-called “Section 507 regs,” set out in careful detail the facts and circumstances needed for a completed gift. Guided by the Section 507 regulations, The Trust, and our community foundation colleagues, instituted policies to make sure that our charitable institutions and our donor-advisors are in compliance.

In short, donor-advised funds are not a new-fangled tool to avoid taxes; they are a long-standing approach developed by community foundations and addressed in Treasury Regulations to enhance and encourage donors to invest charitably in the immediate and future needs of communities. They are one of many ways that permanent charitable institutions are able to both consolidate many grants from different funds—restricted, unrestricted, and donor-advised—to support community programs and to build their assets for the future health and well-being of their communities.

This is the prism through which we respond to the Committee’s request for comments on how the Pension Protection has affected community foundations.

Definition of Donor-Advised Funds

The Trust considers the definition of donor-advised fund under Code Section 4966(d)(2) to be overly broad in that it includes donor-advised funds established by governments, public charities, and private foundations. As a result, donor-advised funds established by governmental and tax-exempt entities are prevented from indirectly supporting the types of programs that they are still permitted to operate or for which they may provide direct support. This result seems at best unintended and at worst counterproductive. Treasury Regulation Section 1.507-2(a)(8) sets out in detail the requirements for a private foundation that terminates its existence and transfers “all of its right, title, and interest in and to all of its net assets” to one or more Code Section 170(b)(l)(A) organizations. The Section 507 regulations provide clear rules, and have been looked to since their promulgation in the mid 1970s as the legal anchor not only for the proper termination of private foundations into donor-advised funds of public charities, but also for the establishment of donor-advised funds within public charities. In fact, the regulations under Section 170 governing component funds of community trusts specifically cross reference Treasury Regulation Section 1.507-2(a)(8) in defining how a transferor private foundation may transfer its assets to a fund at a community trust that would qualify as a component fund. Until the mid-1950s, The New York Community Trust existed solely in trust form, and the various funds that constituted The Trust met the requirement of being a “component fund” as prescribed in the special community foundation regulations under Code Section 170 and adopted by Treasury in 1976. Twenty years before the ‘69 Tax Act, The New York Community Trust created a sister not-for-profit corporation, Community Funds, Inc., to which donors could make contributions for all the same purposes and in analogous forms as contributions to The Trust. The two entities  are treated as one organization for tax purposes. Most community foundations formed in recent years have taken the form of not-for-profit corporations rather than trusts, and virtually all community foundations, regardless of the structure, have looked to the Code Section 507 regulations for guidance in establishing and operating donor-advised fund programs.

 The PPA also sweeps up in its definition a fund where the advisors are “appointed” by the donor—even when they are named in the instrument. As a result, a fund set up by will is deemed to be a donor-advised fund if the decedent named unrelated individuals to an advisory committee. In addition, the broad definition of what constitutes advisory privileges pulls in relationships so minor that the donor cannot be viewed as controlling the fund, for example, where the donor’s advice is limited to the amount of money to be expended each year.

Applying Private Foundation Rules to Donor-Advised Funds

Donor-advised funds encourage charitable giving by individuals who want to engage regularly in thoughtful, responsible philanthropy and want to be part of a permanent charitable institution that will respond to the community’s needs now and in the future. They offer a community, with all of its complexity and diversity, the opportunity to receive support from an array of donors whose passions and commitments reflect that very diversity and complexity: popular vs. unpopular causes, general support vs. project support; liberal vs. conservative; direct services vs. policy work; immediate needs vs. future needs.

As a “sponsoring organization” under the new nomenclature of the Pension Protection Act of 2006, The Trust (and other community foundations) provides its donor-advisors with professional grantmaking staff and knowledge of the community and its needs. Its board can hardly be viewed as controlled by its donors.  At The Trust, staff also brings a high level of diligence to its review of potential grantees prior to approving grant recommendations. In this respect, the Trust performs an independent investigation of any charity recommended for support, including support from a donor-advised fund at The Trust. The charitable sector as a whole benefits from this kind of review because it imposes a discipline on prospective grantees, who know that both their fiscal and program operations are being scrutinized.

In addition to providing guidance on the selection of grantees, the sponsoring organization provides an extra layer of oversight and necessary administration that is otherwise difficult for individual donors or unstaffed family foundations to manage. A sponsoring organization is responsible for determining that grantees have current financial statements and or audits, operate with independent boards of directors, have timely filed their Forms 990 with the IRS, and have an organizational structure adequate to the projects being undertaken. Because the

Trust, as a sponsoring organization, has legal title and control over all of its assets, including donor-advised funds, it assumes the responsibility for charitable assets and assures that these assets are used exclusively for tax-exempt charitable purposes. Being part of a major charitable institution that is equipped to manage and oversee grants to hundreds of organizations empowers donors to hold grantees accountable for the quality of their work.

The law governing charitable contribution deductions (Section 170 of the Code and the accompanying Treasury Regulations, court cases and so forth) quite clearly provides that a gift to a charity that provides impermissible private benefit to the donor or another private individual is not tax-deductible. To create special rules and regulations for contributions to donor-advised funds that are part of a functioning public charity does not add anything material to existing law. The need is for best practices and oversight by sponsoring organizations and donors and for enforcement by the IRS: new and redundant special rules will only create a maze of foot faults.

Rules restricting certain grants, described more fully below, also treat donor-advised funds like private foundations, including restrictions on grants to foreign organizations, 501(c)(4) organizations for charitable purposes, and individuals.  The likely effect will be to drive more donors to private foundations, rather than to the more cost-effective donor advised funds at a professionally staffed sponsoring organization.

Prohibition on Certain Types of Grants from Donor-Advised Funds

 Scholarship Funds:  Complex rules about when a donor is deemed to control the advisory committee to a scholarship fund are overly broad.  The PPA should have excluded from the definition those funds established for scholarships and awards, regardless of composition of committee. Congressional concern about inappropriate benefits to the donor or her family is already addressed by other rules prohibiting personal benefit.  And the prohibition on grants from donor-advised funds to individuals should not have included funds with a specific charitable purpose such as scholarships and awards, regardless of the composition of the advisory committee. Many of our scholarship funds are small, but important, and function efficiently only because they are advised by the families or individuals who created them. We have reconstituted these committees in compliance with PPA, but we are concerned that they will not function as well as they have, and discourage future donors who want to involve their families in philanthropy.

Grants to Foreign Charities and 501(c)4s:  Many of our donors support charities abroad. Requiring the sponsoring organization to exercise full expenditure responsibility imposes an unreasonable burden, and has compelled us to prohibit donors from suggesting these grants. Similarly, many 501(c)4s have charitable missions, including volunteer fire departments and rotary clubs. The burden of exercising expenditure responsibility for what are often modest grants is excessive, and we no longer permit them.

Supporting Organization: The rules precluding grants from donor-advised funds to non-functionally integrated type III supporting organizations also make the sponsoring organization responsible for determining which organizations meet the type III definition. This imposes an unreasonable burden on a sponsoring organization with hundreds of donor-advised funds.  Such determinations should be the responsibility of the IRS.

Penalties on Certain Transactions 

Section 4967 imposes a tax on a donor or advisor who recommends to the sponsoring organization a distribution from a donor-advised fund if the distribution results in a donor, donor-advisor, or related person receiving a more than an “incidental benefit.” A tax also is imposed on the donor, donor-advisor or related person who receives the benefit and fund managers of the sponsoring organization who knowingly agree to make the distribution, with no concomitant burden on the grantee that improperly provides the benefit. 

This new provision will require a sponsoring organization to devote more of its resources to the administrative task of identifying those individuals and entities that might be related to the donor or donor-advisor.

Section 4958 (Intermediate Sanctions)

The inclusion of investment advisors as disqualified persons is overly broad,picking up all investment advisors for many sponsoring organizations, whether they are independent or have a relationship with a donor to a donor-advised fund. Compensation to any vendor should be reasonable, but to create an additional category of disqualified persons solely for sponsoring organizations makes no sense. If Congress considers investment advisors and their fees suspect, then they should be suspect for all public charities.

Section 4943 (Excess Business Holdings)

The Pension Protection Act extends the application of the excess business holdings rules to donor-advised funds. In applying the rules, each donor-advised fund’s holdings are aggregated with the holdings of disqualified persons with respect to the donor-advised fund,as defined by Code Section 4943(e)(2). A sponsoring organization will now be required to devote considerable staff and financial resources to compliance with these rules—no small undertaking in light of the breadth of the aggregation rules. A sponsoring organization must monitor the holdings of each donor-advised fund to determine whether it falls within the 2 percent de minimus rule and, if not, additionally identify the disqualified persons and their investment holdings that are in common with the donor-advised fund. This is a daunting task because of the endless string of relatedness constituting disqualified persons. There is no rational way that an institution with numerous donor-advised funds can gather and track thisinformation in any meaningfully accurate way; the result is likely to be significant noncompliance or meaningless attempted compliance.

IRA Charitable Rollover

Because of the estate tax rates on IRA assets left to heirs other than a spouse, and because many donors can afford to forego these assets, we applauded the charitable rollover provision of the PPA. However, donor-advised funds should not have been excluded. Indeed, donor-advised funds at a community foundation, with the oversight and grantmaking experience explained above, are the ideal vehicles for the rollover; investment managers that hold IRA assets do not have this expertise. The Trust also believes that the rollover should be made permanent.

Form 990T

The PPA requires that Form 990T be made public. Unlike the Form 990, the information return, which is public information, the 990T is a tax return. Individuals’ and corporations’ tax returns are not public documents, and this provision puts public charities, and any taxable companies in which they have an interest, at a disadvantage.

 As explained in the Introduction, community foundations and similar charitable institutions have twin goals: to serve living donors and meet immediate community needs; and to be permanent endowments that have the resources to respond to the needs we cannot now imagine. Encouraging donors to think in terms of contributing to a permanent fund buttresses both goals. At The Trust, all donor-advised funds, if not fully expended after two successions of advisors, become unrestricted funds of The Trust. And with our other component funds, they provide irreplaceable support for the voluntary institutions that are a vital part of American democracy.