It's all gotten so scammy that we should probably just start taxing the trusts and foundations and endowments.
From American Affairs Journal, December 2022:
REVIEW ESSAY
For-Profit Philanthropy: Elite Power and the Threat of Limited Liability Companies,
Donor-Advised Funds, and Strategic Corporate Giving
by Dana Brakman Reiser and Steven A. Dean
Oxford University Press, 2023, 344 pages
The 1969 Tax Reform Act that established—and remains—the basic legal structure of American philanthropy was a “Grand Bargain,” according to Brooklyn Law School professors Dana Brakman Reiser and Steve A. Dean in their impressive forthcoming book For-Profit Philanthropy. “Key to the Grand Bargain’s success was constructing the regulated—albeit lightly—private foundation form in which to conduct elite philanthropy,” Reiser and Dean write. Philanthropists who opt into the bargain and create a private foundation accept three basic strictures on targeting, timing, and transparency, in exchange for significant tax benefits.
First, “[t]argeting requirements limit the purposes to which purportedly philanthropic funds” of a private foundation may be directed, which cannot include helping the giver’s for-profit business or making political contributions. Second, “[t]iming requirements impose a schedule for putting philanthropic assets to active use,” precluding “foundations from merely hoarding wealth to magnify the power and influence of their donors.” And third, “[t]ransparency requirements force elite philanthropy into the sunlight, where media and the public can test its claims of public benefit.
This Grand Bargain, in the analysis of Reiser and Dean, has engendered enough public trust in establishment philanthropy to protect it against attack, allowed it to flourish for decades, and greatly benefited charities and thus the country. Essentially, it’s been a good deal.
Nevertheless, Big Philanthropy is now on the defensive. Increasingly aggressive critiques of it often, though not always, focus on alleged violations of the Grand Bargain. These critiques are cross-ideological. Many progressives and activists think the bargain’s terms have come to allow too much latitude for anti-democratic oligarchs, for example. Meanwhile, some populist conservatives think establishment philanthropy is an overly politicized progressive monoculture that foists elitist, top-down policy solutions on a citizenry forced to subsidize it. In some sense, these are left and right versions of the same critique.
Reviving, revising, or outright replacing the now fraying Grand Bargain may or may not sate the growing appetite for reform among these critics. But For-Profit Philanthropy helps lay a solid foundation for the intelligent consideration of what, if anything, should be done about Big Philanthropy and the bygone Grand Bargain. In the book, Reiser and Dean suggest some thought-provoking options that should be discussed seriously—whether to affirm the bargain’s original terms, or potentially to improve it.
After Three Strictures, Three Trends
For-Profit Philanthropy explores three recent major philanthropic trends that arose after, and in large part beyond the bounds of, the Grand Bargain. Their informed examinations of these trends—which underlie “a crisis now loom[ing] over the future of the philanthropic sector itself”—could increase appreciation for the original deal and/or inform the beginning of a new, better one.
“[W]here for decades elite philanthropy was the province of private foundations, today it is likely to be practiced within philanthropy LLCs, commercially affiliated donor-advised funds [DAFs], and strategic corporate giving programs,” according to Reiser and Dean. “Each operates outside the foundation model, unwedded to the Grand Bargain’s terms. No longer walled off from the influence of American capitalism by philanthropy law, for-profit philanthropy deploys the arsenal of business in service of charitable goals.”
Regarding philanthropy LLCs, Reiser and Dean quote a December 2015 Facebook post by Mark Zuckerberg explaining the newly created Chan Zuckerberg Initiative. “By using an LLC instead of a traditional foundation, we receive no tax benefit from transferring our shares to the Chan Zuckerberg Initiative, but we gain flexibility to execute our mission more effectively.” As Reiser and Dean then properly explain,
for ultra-rich donors like [Priscilla] Chan and Zuckerberg, the LLC improves on conventional philanthropic platforms. A generation before, creating a philanthropic vehicle without securing a tax-exemption for it might easily have been legal malpractice; tax-exempt foundations represented the obvious choice. By the time of the Chan Zuckerberg Initiative’s founding, the philanthropy LLC had become a proven alternative. . . .
LLC adopters cite its operational versatility as the key to its appeal. And employing a philanthropy LLC undoubtedly eliminates countless burdens the traditional foundation format imposes. Since 1969, a series of excise taxes have served as lighthouses marking hidden shoals—entanglement with business or politics—perceived as existential threats to philanthropy. Philanthropy LLCs blithely ignore those risks and the safeguards built to guard against them. Their funders accept a moderately higher tax burden in exchange for freedom to pursue their vision of the good unfettered by foundation law’s limitations.
Forget about any good or bad Grand Bargain in the LLC case, in other words. There’s really no deal at all here.
When defenders and promoters of donor freedom decry existing or proposed government mandates on private foundations, they’re really only decrying government conditions on the deductibility of donations to and/or the tax exemption of those foundations. Government cannot condition those tax benefits on the waiving of a constitutional right, but that does not preclude any and all conditions; there are permissible ones, and there has been and will be more litigation about what is and isn’t allowed.
The growing popularity of philanthropy LLCs shows that an increasing number of donors well understand this. There are bounds to the Grand Bargain’s reach; the desired extra donor freedom is actually achievable, though at some cost. As For-Profit Philanthropy shows, some donors are willing to incur it.
Another Sort of Deal, and a Different Strategy
Second, commercially affiliated sponsors of DAFs “qualify as public charities under federal tax law but do no charitable work” in and of themselves, as Reiser and Dean accurately characterize them. “They hold donated assets” in accounts for those who open them, who get a tax deduction for the donation upon their opening. The assets then “await future distribution to operating charities” upon direction by those who open them, labeled advisors. There is no time limit on how long these assets can stay there.
“In the meantime,” these DAF sponsors “invest those assets in return for fees. They are independent from their affiliated for-profit companies but share their names, customers, and platforms and contract with them to provide investment and administrative expenses for the funds they hold.” The largest of them are with Fidelity, Vanguard, Schwab, and Goldman Sachs. They are among the largest recipients of charitable funds in the country, and they are only getting larger.
While the philanthropy LLC rejects the Grand Bargain’s “rigid framework and the tax benefits the law offers in exchange,” according to Reiser and Dean, “[i]n a sense, the DAF does the opposite, seizing the tax benefits available to charitable entities without fitting neatly into any of the law’s categories.”....
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