The Pension Protection Act of 2006: A Misguided Attack on Donor-Advised Funds and Supporting Organizations

Authors

• Terry W. Knoepfle, North Dakota State University College of Business

Abstract

In 2006, with the passage of the Pension Protection Act (PPA), Congress provided the tools for the Internal Revenue Service (IRS) to launch a full-scale attack on tax-exempt, charitable organizations, particularly sponsoring organizations of donor-advised funds, donor-advised funds, and supporting organizations, as well as their donors and advisors. In fact, the IRS already had every tool it needed to monitor, regulate, and sanction donor-advised funds and supporting organizations. The legislation was primarily enacted as a message to the IRS to go after donor-advised funds and supporting organizations. As an incentive, Congress passed Draconian penalty excise taxes that apply only to donor-advised funds and supporting organizations, and not to other public charitable organizations. The impact of this legislation has been to dissuade donors from creating donor-advised funds and, as a result, to negatively impact the ability of public charities to provide the types of assistance and support that communities across the United States have relied on for decades.

The PPA’s amendments impacting sponsoring organizations, donor-advised funds, and supporting organizations has added incomprehensible complexity to the Code that flies directly in the face of recommendations from the Treasury Department. Moreover, these amendments open the door to the types of IRS abuses discussed in this article. Tragically, the economic costs to these charitable organizations will result in less revenue being expended for vital community needs.

This article will (1) introduce the PPA’s amendments that have negatively impacted donor-advised funds and supporting organizations, (2) explain the events that led up to the misguided enactment of these amendments, particularly with regard to intermediate sanctions and the “incidental benefit” provisions, (3) analyze the impact that these amendments have had and will have on exempt organizations, including donors, officers, employees, and advisors to donor-advised funds and supporting organizations, and (4) explain why Congress’ and the IRS’s attack on donor-advised funds and supporting organizations is both bad tax and public policy.

Recommended Citation

Terry W. Knoepfle, The Pension Protection Act of 2006: A Misguided Attack on Donor-Advised Funds and Supporting Organizations, 9 Fla. Tax Rev. (2010).
Available at: https://scholarship.law.ufl.edu/ftr/vol9/iss1/5