New revelations about the Nike founder's tax-dodging schemes raise questions about his charitable giving.
Donor-advised funds have come under increasing fire as tax avoidance vehicles for the wealthy. Donors get a charitable gift tax deduction when they transfer money into the funds, but whereas private foundations have to distribute at least 5 percent of assets to charities every year, donor-advised funds face no such payout requirements.
Under pressure from a series of revealing and damaging new reports, and facing efforts to regulate a largely unregulated industry, donor-advised fund sponsors are responding by turning the malarkey meter up to 11.
Here’s the background: In June, the Council of Michigan Foundations (CMF) issued a path-breaking report on donor-advised funds. As we noted at the time, CMF’s report was revolutionary because it reported on DAFs at the individual account level. The results were shocking:
CMF found that typical payout rates for individual DAFs are abysmally low. In 2018, the median payout rate of Michigan’s DAFs was just 3.1 percent, far below the 5.9 percent median payout rate of Michigan’s private foundations, and even farther below the aggregate rates reported by national DAF sponsors.
And it gets worse. CMF found that in 2020, only 43 percent of the DAFs they analyzed met or surpassed the 5 percent payout threshold required of private foundations. Twenty-two percent of the DAFs paid out at less than 5 percent. And 35 percent — more than one third — paid out nothing at all to charity.
Further reporting by Boston College law professor and philanthropy expert Ray Madoff also underscored the degree to which DAFs are warehousing funds — documenting the steady rate at which charitable donations are being steered not directly to charities, but to intermediaries that can hold onto those donations for years or even decades.
This is the kind of data that gave impetus to the ACE Act introduced by Senators Chuck Grassley and Angus King, which would finally impose reasonable guardrails to ensure DAFs are put to work for the public good within a reasonable period of time. But instead of taking these arguments head on, the National Philanthropic Trust (NPT), a large national DAF sponsor and advocate, has issued a report that presents no new data but instead doubles down, repackaging previous misleading information in even more misleading ways.
The Institute for Policy Studies and others have already challenged NPT over the way their reports distort DAF payout rates and account sizes. But instead of answering the CMF study with comparably believable data, NPT clouded the waters even further.
Here’s just one example: NPT’s charts show a range of average DAF payout rates, each using different calculations, with the most reasonable formula showing the lowest payout. In their effort to cast DAFs in the best possible light and counter the damning Michigan stats, NPT has concocted a new formula that yields much higher payout rates by artificially shrinking the denominator. Instead of figuring payout based on assets in DAFs from the end of the most recent year, they divide grants in the current year by the average value of assets over the past five years.
Why is this so preposterous? Because assets in DAFs have been growing astronomically year on year: total assets have shot up from $70 billion in 2014 to $142 billion in 2019. So averaging in past years of course brings the denominator way down. (Imagine if corporate officials tried to present earnings growth as the current year’s profits over an average of the previous five years; they would be laughed out of the board room).
NPT also claims that while private foundations can claim a certain share of grantmaking-related operating expenses towards their 5 percent payout, “DAFs only include grant dollars distributed to qualified charities.” True enough — except that what NPT does not tell us is that their figures for DAF grants include very large transfers between DAFs themselves.
Our recent report showed that commercial DAFs alone transferred $1 billion between themselves in 2019 — transfers that are included in NPT’s grant figures. That $1 billion in DAF-to-DAF granting in 2019 accounted for 4 percent of all DAF grants and a full 6 percent of the grants from national commercial DAF sponsors reported by NPT that year.
Finally, NPT’s comparison of DAFs to private foundations fails to mention endowed DAFs, which featured prominently in the Michigan report because of their extremely low payout rates. In fact, many DAF sponsors use the 5 percent private foundation payout figure — or even lower — not as a minimum but as the maximum payout rate for endowed DAFs.
But here’s the real point: the ACE Act would actually mandate a minimum requirement that is far, far below the payout levels NPT says DAFs already meet. So why is NPT so defensive about it? Because even as NPT uses concocted payout rates to argue that money is readily flowing out to charity, their own figures show that, on average, 76 percent of DAF funds in fact remain warehoused.
NPT and other DAF sponsors and boosters know their credibility is at risk. Their reports generate good headlines, but their data only fuels further mistrust of a sector that is already held in increasing suspicion.