Nonprofit Chronicles

Journalism about foundations, nonprofits and their impact

Rules, they say, are made to be broken.

This is not necessary when it comes to the rules designed to promote transparency in foundations. They’re so ineffectual that there’s no need to break them.

Wealthy donors can and do hide charitable giving for which they claim tax deductions, the investments they hold in tax-advantaged accounts and information about what they pay their professional staff, which is also tax-deductible.

The result is that despite such well-meaning initiatives as Glasspockets and the Fund for Shared Insight, transparency and accountability in the philanthropic sector are on the wane.

Billions of dollars of philanthropic dark money are flowing into so-called donor-advised funds, the black boxes of philanthropy. Private foundations and charities, meantime, have devised their own ways to avoid public scrutiny.

This is a problem for a couple of reasons. First, the money flowing into foundations and nonprofits is tax-subsidized. Donations are tax deductible, as are most earnings from investments. In order to judge whether the tax subsidies are beneficial, people and their elected representatives should know where the money comes from, how it’s managed and where it goes. Second, big-time philanthropy is an exercise of power. The charter school movement, environmental activism, Washington think tanks of every stripe–these are all fueled by charitable dollars. By deploying dark money, the wealthy escape accountability.

This problem was thrown into focus last week by the inadvertent disclosure of deposits made by three of America’s wealthiest donors into donor-advised funds held by the Goldman Sachs Philanthropy Fund. Former Microsoft chief executive Steve Ballmer donated $1.9bn into his account. Laurene Powell Jobs, the widow of Apple founder Steve Jobs, put $526m into her fund. Jan Koum, the co-founder of WhatsApp, deposited $144m.

Their deposits were revealed only because of an IRS mistake caught by Bloomberg. Without the IRS error, no one would know that these funds exist. Going forward, it will be difficult if not impossible to know how they are spent. Big money is shielded from public view. .

By coincidence, Ray Madoff, a Boston College law professor and leading critic of donor-advised funds, or DAFs, last week held a philanthropy “boot camp” for reporters. Madoff, who has been called the woman saving the world from philanthropy, told those of us in attendance that it is harder than ever to hold big-time philanthropy accountable for its power.

Of the $1.9bn deposit into a DAF made by Ballmer, Madoff quipped: “I hope you all enjoyed making that gift with your tax dollars.”

It’s no joke. Assuming that the former MSFT exec is in a top tax bracket, that donation could save him (and cost the federal government) as much as $600m. Which is fine, but it would be useful to know how the money is being spent, so we can judge whether the tax deduction for such charitable donations is worth the foregone federal revenues.

The fastest-growing sector of philanthropy

Donor-advised funds, or DAFs, are the fastest growing sector of philanthropy, largely because of the tax benefits and anonymity they offer. Tech-industry titans, in particular, favor DAFs. Just in the last few months, my own reporting has bumped up against DAFs funded by Facebook’s Mark Zuckerberg and his wife, Priscilla Chan; Facebook co-founder Dustin Moskovitz and his wife Cari Tuna; Instagram co-founder Mike Krieger and his wife, Kaitlyn Krieger; and Brian Acton, who with Koum founded WhatsApp.

In 2016, DAFs brought in $23bn in contributions and held charitable assets of $85bn, according to the National Philanthropic Trust. In 2017, driven by the new tax law, they almost surely grew faster. Donor-advised funds made up six of the 10 biggest charities — yes, as a matter of law, these are public charities — on the latest annual list published by the Chronicle of Philanthropy.

DAFs provide significant tax advantages over private foundations, which until recently were the common philanthropic vehicle of the very rich, even in Silicon Valley, as evidenced by the Hewlett, Packard and Moore Foundations.

The key, as Madoff explained it, is the differing tax treatment of so-called complex assets, such as pre-IPO stock, private C- and S-Corp stock, restricted stock, limited partnership interests, artwork and collectibles. While tax law requires private foundations to value such donations based on their cost, DAFs permit donors to deduct the full value of such assets, without paying capital gains tax on the appreciation, according to Madoff.

“Taxpayers who give appreciated property get double the tax benefits of those who give cash,” she said. “This double benefit is a big part of the rise of DAFs.”

In a pitch to donors, Fidelity Charitable quotes Steven C. Mayer, the former CEO of Teva Pharmaceuticals and a Fidelity DAF holder, as saying: “Donating privately held stock to a private foundation is not a tax-efficient option.” The pitch concludes: “When it comes to helping donors and their advisors donate complex assets to charity, Fidelity Charitable is an ideal option.”

Particularly if you are donating “commercial grains” or “virtual currency,” which Fidelity accepted as donations in 2015, according to its latest IRS Form 990. We can only imagine how these complex assets are valued for tax purposes.

Why DAFS are a sham

Right about now, we should also point out that DAFs are based on a fiction. Under the law, when donors put money into a DAF, they “give up all legal control over their donations,” Madoff said. In practice, the donors can merely “advise” the DAF — hence the term donor-advised fund — about where they want the money to go. You can bet your last dollar that the DAF management firms heed that “advice,” so long as donations go to an accredited charity.

This fiction is the reason why donors can take an immediate tax deduction when they give to a DAF, and incur no obligation to push the money out to real charities that, er, actually try to do good.

Unlike private foundations or most public charities, DAFs have found a way to avoid disclosing information about their own operations–and, importantly, how much they generate in fees for the asset management companies that birthed them. Fidelity Charitable’s operations are outsourced to FMR, i.e., Fidelity Investments. which as a private company need not disclose salaries. It does not report the pay of any employee.

Remarkably, Goldman’s Sachs Philanthropy Fund also does not pay any employees, which is convenient because it does not have to disclose what they are paid. It told the IRA on its Form 990 that “neither the organization nor any related organization compensated any current officer, director or trustee.” *

It’s not as if private foundations are models of transparency, either. Try, for example, to find out what Bloomberg Philanthropies, the foundation of former NYC mayor and billionaire Michael Bloomberg, pays its CEO. Its Form 990 lists fees paid to directors, but not to staff. Nor does it list its investments–as most private foundations do. Instead, it simply says that its endowment is managed by Willett Advisors.

Might Gates and Bloomberg own shares of fossil fuel or tobacco companies? If you care about such things–I don’t, particularly–there’s no way to check.

See what I mean about not having to break the rules designed to promote transparency? They’ve become a joke.

***

Disclosure: I opened a DAF with Vanguard last year for tax reasons. None of the money will sit in the DAF for any longer than three years. Because I’m a reporter who covers philanthropy, I list my charitable donations each year in a blogpost, like this one.

UPDATE:  * Andrew Williams of Goldman Sachs emailed me immediately after this post went up to explain. He wrote: “This DAF is managed by Goldman Sachs Private Wealth employees as a service to our charitable clients and all services are donated.  GSPF (Goldman Sachs Philanthropy Fund) has no employees.”

Also, I probably should not have singled out the Bloomberg Family Fund for its lack of transparency. John Seitz of Foundation Financial Research sent me pages from the Ford, Hewlett and Moore Foundation 990s that show investments in funds identified only by numbers or letters, whose actual holdings are opaque. Others, like MacArthur and the Robert Wood Johnson Foundation, are much more transparent, he notes.

4 thoughts on “Philanthropy’s dark money

  1. Tee W says:

    This piece is an informative article as it explains DAF’s, promoting transparency, and why the three percent wealthy stay the 3% because they’re great at hiding their funds in plan view via the guise of “charitable” donations.

    Like

  2. Thanks for continuing to shine the light on DAF. There are a lot of details that few people seem to understand, especially donors. And small to mid-sized nonprofits are the ones that are going to suffer.

    DAF are, however, growing exponentially and I can’t believe that is entirely due to mega-donors. Simplicity seems to be a key to that growth, although I am not sure how it is any easier than sending a check to a nonprofit you want to support.

    In addition the transparency issues you not, the fact that there are no disbursement requirements is odd and I also recall an article recently about the fact that some of the DAF are planning to provide rating/rankings to donors (amazing all the work these people are doing without getting paid). Given the spotty record of rating/ranking organizations in the nonprofit space, this new development is disconcerting to say the least.

    Liked by 1 person

  3. chris cox says:

    Thanks, Marc, for lifting the hood on the genuine lack of transparency in these tax vehicles.

    Liked by 1 person

  4. Warren Goldstein says:

    Great piece!

    On Tue, Mar 20, 2018 at 6:01 AM, Nonprofit Chronicles wrote:

    > Marc Gunther posted: ” Rules, they say, are made to be broken. This is not > necessary when it comes to the rules designed to promote transparency in > foundations. They’re so ineffectual that there’s no need to break them. > Wealthy donors can and do hide charitable giving for w” >

    Liked by 1 person

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