This is the accessible text file for GAO report number GAO-06-799 
entitled 'Tax-Exempt Organizations: Collecting More Data on Donor-
Advised Funds and Supporting Organizations Could Help Address 
Compliance Challenges' which was released on August 28, 2006. 

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Report to the Chairman, Committee on Ways and Means, House of 
Representatives: 

United States Government Accountability Office: 

GAO: 

July 2006: 

Tax-Exempt Organizations: 

Collecting More Data on Donor-Advised Funds and Supporting 
Organizations Could Help Address Compliance Challenges: 

Tax Compliance: 

GAO-06-799: 

GAO Highlights: 

Highlights of GAO-06-799, a report to the Chairman, Committee on Ways 
and Means, House of Representatives 

Why GAO Did This Study: 

Donor-advised funds and supporting organizations are two charitable-
giving options that have received attention from Congress and the 
Internal Revenue Service (IRS) for their potential to facilitate 
noncompliance with tax law. As requested, GAO is providing information 
on donor-advised funds and supporting organizations related to (1) 
federal laws and regulations, compared to private foundations; (2) 
financial and organizational characteristics; and (3) types of 
noncompliance and promotion methods and challenges identifying them. 

What GAO Found: 

Donor-advised funds, supporting organizations, and private foundations 
are all tax-exempt charitable-giving vehicles. Donor-advised funds are 
separate accounts held by a public charity to receive contributions 
from donors who may recommend, but not control, charitable 
distributions from the account. Supporting organizations are public 
charities that are to carry out their tax-exempt purpose by supporting 
one or more tax-exempt organizations, usually other public charities. 
Compared with private foundations, donor-advised funds and supporting 
organizations give donors less control over how their donation will be 
used but provide donors more favorable tax deductions, lower 
administration costs, less IRS oversight, and fewer reporting 
requirements. 

Donor-advised funds hold billions of dollars in assets, and supporting 
organizations and private foundations hold hundreds of billions of 
dollars in assets. Public charities and private foundations must 
annually file an IRS Form 990 or Form 990-PF, respectively, to report 
their activities. However, donor-advised fund data are limited because 
organizations that maintain the funds are not required to separately 
report fund data from other financial data on Form 990. Although some 
supporting organization characteristics can be determined from Form 990 
data, other characteristics, such as the rate at which payments are 
made to charities and details about the recipients of loans from the 
organization, cannot be reliably determined. Concerns have arisen about 
the “payout” rate to charities, and Congress is considering a minimum 
payout requirement, similar to the one for private foundations. 
Further, supporting organizations are not required to report their 
supported organizations’ identification numbers, making it more 
difficult to track the relationship between organizations. To collect 
additional data, IRS revised Form 990 for 2003 and 2005 and is 
considering further revisions, but no firm plans have been determined. 

According to IRS managers, examinations reveal that some donor-advised 
funds and supporting organizations are used in abusive schemes to 
unallowably benefit donors or related parties or give donors excess 
control of charitable assets and operations. In some cases, IRS is able 
to clearly determine noncompliance and assign appropriate corrective 
actions. However, in other cases, IRS faces challenges gathering 
evidence or addressing activities that do not seem to benefit 
charities, but do not violate any law or regulation, such as when a 
supporting organization loans money, at market rate, to a donor, 
director, or officer of the organization. Promoters, who are 
individuals or entities who facilitate abusive schemes, further 
complicate IRS’s examination efforts. 

What GAO Recommends: 

GAO suggests that Congress consider (1) directing IRS to collect Form 
990 data for, and provide guidance on calculating payout rates for 
donor-advised funds and supporting organizations, and (2) providing IRS 
authority to protect from public disclosure the taxpayer identification 
numbers (TIN) of loan recipients, so that IRS can collect the TINs on 
the Form 990. GAO recommends that IRS require (1) more comprehensive 
reporting of donor-advised fund data, (2) reporting of supported 
organizations’ identification numbers, and (3) reporting of TINs for 
recipients of large loans, if granted authority to protect the TINs 
from public disclosure. 

IRS agrees with the first two recommendations but believes it needs 
legislative authority to protect loan recipient TINs. 

[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-06-799]. 

To view the full product, including the scope and methodology, click on 
the link above. For more information, contact Michael Brostek at (202) 
512-9110 or brostekm@gao.gov. 

[End of Section] 

Contents: 

Letter: 

Results in Brief: 

Background: 

Scope and Methodology: 

Federal Laws and Regulations Impose Fewer Requirements on Donor-Advised 
Funds and Supporting Organizations and Their Donors, but Allow Donors 
Less Control Compared to Private Foundations: 

Donor-Advised Funds, Supporting Organizations, and Private Foundations 
Hold Billions of Dollars in Assets, but Some Organizational 
Characteristics Cannot Be Reliably Determined from Form 990 Data: 

Private Benefit, Inurement, and Donor Control Have Been Found in Some 
Cases Involving Donor-Advised Funds and Supporting Organizations, with 
Promoters Sometimes Facilitating Schemes: 

Conclusion: 

Matters for Congressional Consideration: 

Recommendations for Executive Action: 

Agency Comments: 

Appendix I: Tax-Exempt Excise Taxes: 

Appendix II: Summary Data Tables for Section 501(c)(3) Tax-Exempt 
Charities in 2005 Constant Dollars, Tax Years 1999-2003: 

Appendix III: Noncash Contribution Valuation Methods: 

Appendix IV: Methods and Materials Used to Market Donor-Advised Funds 
and Supporting Organizations to Potential Donors: 

Appendix V: Comments from the Internal Revenue Service: 

Appendix VI: GAO Contact and Staff Acknowledgments: 

Glossary: 

Tables: 

Table 1: Simplified Comparison of Differences and Similarities in 
Federal Tax Laws for Donor-Advised Funds, Supporting Organizations, and 
Private Foundations: 

Table 2: Selected Financial Characteristics Reported by Supporting 
Organizations and Private Foundations in 2005 Constant Dollars, Tax 
Years 1999 and 2003: 

Table 3: Medians and Related Data for Selected Financial 
Characteristics Reported by Supporting Organizations and Private 
Foundations in 2005 Constant Dollars, Tax Years 1999 and 2003: 

Table 4: Number of Returns Filed, Tax Years 1999 through 2003: 

Table 5: Total Assets Reported by Section 501(c)(3) Organizations in 
Constant 2005 Dollars, Tax Years 1999 through 2003: 

Table 6: Total Revenue Reported by Section 501(c)(3) Organizations in 
Constant 2005 Dollars, Tax Years 1999 through 2003: 

Table 7: Total Expenses Reported by Section 501(c)(3) Organizations in 
Constant 2005 Dollars, Tax Years 1999 through 2003: 

Table 8: Total Contributions Received Reported by Section 501(c)(3) 
Organizations in Constant 2005 Dollars, Tax Years 1999 through 2003: 

Table 9: Total Noncash Contributions Received Reported by Section 
501(c)(3) Organizations in Constant 2005 Dollars, Tax Years 1999 
through 2003: 

Table 10: Total Grants Paid Reported by Section 501(c)(3) Organizations 
in Constant 2005 Dollars, Tax Years 1999 through 2003: 

Table 11: Total Executive Compensation Reported by Section 501(c)(3) 
Organizations in Constant 2005 Dollars, Tax Years 1999 through 2003: 

Figures: 

Figure 1: Simplified Example of How Donor-Advised Fund Accounts 
Operate: 

Figure 2: Simplified Example of Governance and Structure of Type I, II, 
and III Supporting Organizations: 

United States Government Accountability Office: 
Washington, DC 20548: 

July 27, 2006: 

The Honorable William M. Thomas: 
Chairman: 
Committee on Ways and Means: 
House of Representatives: 

Dear Mr. Chairman: 

Each year, millions of donors give hundreds of billions of dollars to 
charities.[Footnote 1] The Internal Revenue Service (IRS) estimated 
that for tax year 2002, charitable contributions totaled over $229 
billion, the largest portion coming from individuals and 
foundations.[Footnote 2] In addition to traditional public charities 
and private foundations, donors may make charitable contributions 
through the use of donor-advised funds and supporting organizations. 
Donor-advised funds are generally separate funds or accounts 
established and maintained by a public charity to receive contributions 
from a single donor or a group of donors.[Footnote 3] While the donor 
may recommend charitable distributions from the account, the charity 
must be free to accept or reject the donor's recommendations. 
Supporting organizations are public charities that are to carry out 
their tax-exempt purpose by supporting one or more tax- exempt 
organizations, usually other public charities. IRS has recognized that 
while the majority of tax-exempt organizations are trying to comply 
with tax law, a significant compliance challenge involves the use of 
donor-advised funds and supporting organizations in abusive 
arrangements benefiting individuals or organizations other than 
charities. Concerns about these abuses have led to proposed legislation 
imposing requirements on the operation of donor-advised funds and 
supporting organizations. 

As requested, we are providing information on (1) federal laws and 
regulations regarding donor-advised funds and supporting organizations, 
as compared to private foundations;[Footnote 4] (2) financial and 
organizational characteristics, such as loan recipients, of donor-
advised funds, supporting organizations, and private foundations, to 
the extent data are available; and (3) types of potential or actual 
noncompliance and promotion methods involving donor-advised funds and 
supporting organizations and the challenges identifying them. In 
addition, we agreed to provide information about noncash contribution 
valuation methods and marketing methods involving donor-advised funds 
and supporting organizations, which are discussed in appendixes III and 
IV. 

To compare current federal laws and regulations for donor-advised funds 
and supporting organizations to those for private foundations, we 
reviewed the Internal Revenue Code (IRC), Department of the Treasury 
regulations, and IRS publications as they related to the purpose and 
operation of these entities. To determine financial and organizational 
characteristics of donor-advised funds, supporting organizations, and 
private foundations, we analyzed IRS Forms 990 and 990-PF[Footnote 5] 
data, as well as reviewed survey data that external organizations 
collected on donor-advised funds. Unless otherwise noted, tax year 2003 
was the most recent year of data available at the time of our analysis. 
We converted 2003 dollar amounts to 2005 constant dollars. To identify 
types of noncompliance and promotion methods involving donor-advised 
funds and supporting organizations, we reviewed documents from IRS as 
well as from our literature search. For each objective, we spoke to 
various IRS managers and individuals knowledgeable about the tax-exempt 
community. We conducted our review from July 2005 through May 2006 in 
accordance with generally accepted government auditing standards. 

Results in Brief: 

Although donor-advised funds, supporting organizations, and private 
foundations are all tax-exempt, charitable-giving vehicles, federal tax 
laws and regulations treat them differently. In general, donors who 
establish donor-advised funds and supporting organizations have less 
control over the use of the charitable assets than those who establish 
private foundations, but they generally incur less administrative 
burden, receive less IRS oversight, have fewer limits in claiming 
charitable tax deductions, and have fewer reporting requirements. Donor-
advised funds, unlike supporting organizations and private foundations, 
are charitable-giving vehicles rather than entities and are not defined 
under federal law. Supporting organizations fall in between a donor-
advised fund and a private foundation in terms of restrictions and 
sanctions versus control over the use of the charitable assets. The 
level of control that the supported charity has over the supporting 
organization varies, depending on the type of relationship between the 
two entities. Unlike donor-advised funds and supporting organizations, 
private foundations are not public charities. They also face more types 
of taxes and requirements, such as in annual reporting, making 
investments, and paying out funds. 

Donor-advised funds hold billions of dollars in assets, and supporting 
organizations and private foundations hold hundreds of billions of 
dollars in assets. However, IRS data on donor-advised funds are limited 
because although organizations that maintain donor-advised funds are to 
file a Form 990 that includes financial data for all organizational 
activities, including for donor-advised funds, data on these funds are 
not readily identified from the form because these data are not 
separately reported. Limited data on donor-advised funds are available 
from annual surveys by The Chronicle of Philanthropy, even though these 
data are incomplete and only represent those who voluntarily 
responded.[Footnote 6] For 2003, the 90 survey respondents reported 
that their donor-advised fund accounts held over $11.9 billion in 
assets and distributed over $2.2 billion to charities. Data from Forms 
990 and 990-PF for 2003 showed differences between supporting 
organizations and private foundations. For example, in 2003, supporting 
organizations held over $239.4 billion in assets and paid over $10.7 
billion in grants.[Footnote 7] Private foundations held over $449.5 
billion in assets in 2003 and paid over $31.0 billion in grants. 
Certain other characteristics cannot be reliably determined from Form 
990. For example, supporting organizations are not required to compute 
and report a "payout" rate equivalent to that for private foundations. 
Questions have arisen about how much and how often supporting 
organizations pay out to charities because, like private foundations, 
some supporting organizations can be used to accumulate contributions 
before distributing the money to charity. Further, other organizational 
characteristics, such as detailed information on loan recipients and 
supported organizations' identification numbers, are not readily 
identified from the Form 990. IRS revised the Form 990 for 2003 to 
include whether the Form 990 filer maintains donor-advised funds, and 
for 2005, the type of supporting organization in terms of its 
relationship to its supported organization. IRS is considering other 
Form 990 revisions for donor-advised funds and supporting 
organizations, but plans for making revisions are preliminary. 

Through examinations, IRS is finding evidence that some donors or 
related parties are exerting excess control over or receiving undue 
benefits from a donor-advised fund or supporting organization. For 
example, some donors to donor-advised funds and supporting 
organizations participate in schemes which allow them to regain their 
contribution, thus giving them a tax deduction on assets that did not 
actually go to charity. These examinations were not intended to be a 
statistically representative sample and even when finished will not 
allow IRS to estimate the magnitude of noncompliance involving donor- 
advised funds and supporting organizations. Although the examinations 
have produced strong evidence of abusive schemes involving excess 
control and undue benefits, IRS faces challenges when identifying and 
examining noncompliance, namely the difficulty of gathering evidence on 
the facts and circumstances of some cases. IRS is also challenged by 
cases in which a donor-advised fund or supporting organization is 
compliant because no law or regulation is violated, but engage in 
activities that do not seem to benefit charity. For example, under 
certain circumstances, a market rate loan made to a donor, officer, or 
director from a supporting organization may not violate legal 
requirements applicable to public charities even though it may appear 
to be a conflict of interest and have no benefit to charity. Some 
abusive schemes are instigated or facilitated by entities or 
individuals, such as attorneys, accountants, and financial planners, 
who promote the schemes. Because of the potentially criminal and 
obscure nature of their activities, these entities and individuals are 
often difficult to identify and investigate, which adds to the 
challenges in IRS's examinations. 

Given the concerns about how much and how often donor-advised funds and 
supporting organizations are paying out their assets to charities, this 
report suggests that Congress should consider directing IRS to revise 
the Form 990 to collect sufficient information so that a consistent 
payout rate can be calculated for both types of charitable-giving 
vehicles. This information could help inform decisions about whether to 
adopt a minimum payout requirement and if so, whether the required rate 
should be adjusted over time. To help IRS make these revisions, 
Congress should direct IRS about the types of support that should be 
included in the payout rate, as it has for private foundations. In 
addition, given the lack of data from the Form 990 to be used to 
determine certain characteristics of donor-advised funds and supporting 
organizations and the concerns about noncompliance involving these 
charitable-giving vehicles, we are making recommendations to IRS on 
collecting better data on the Form 990. IRS agreed with our two 
recommendations to require more comprehensive reporting of donor- 
advised fund data and to require supporting organizations to report 
their supported organizations' employer identification numbers (EIN). 
However, IRS did not believe that it could implement our third 
recommendation to require reporting of loan recipients' taxpayer 
identification numbers (TIN) without legislative authority to protect 
the TINs from public disclosure.[Footnote 8] In response, we have 
revised our recommendation and, so that IRS can modify the Form 990 to 
require reporting of TINs of loan recipients from supporting 
organizations, we are also suggesting that Congress consider providing 
IRS authority to protect that information from public disclosure. 

Background: 

IRC section 501(c) specifies 28 types of entities that are eligible for 
tax-exempt status and over 1.6 million entities have been recognized as 
exempt as of 2005. One subset of these tax-exempt entities is 
classified as 501(c)(3) charitable organizations, of which slightly 
over 1 million existed in 2005, according to IRS. In 1969, Congress 
directed that all 501(c)(3) organizations would be private foundations 
unless they qualify for exclusion from that status under IRC section 
509. This change subdivided section 501(c)(3) organizations into two 
general categories--"public charities" and "private foundations." 

Within the public charities classification, Congress created supporting 
organizations, which are defined in section 509(a)(3) as public 
charities organized to support one or more public charities, including 
churches and certain governmental units, and certain other tax-exempt 
entities, such as membership-based organizations (e.g., unions and 
professional organizations). Supporting organizations are classified as 
public charities not because they are themselves publicly supported, 
but because they are to support another public charity with which they 
are to maintain a strong relationship. In creating supporting 
organizations, Congress recognized that it can be beneficial and 
prudent to place certain assets or activities in a separate legal 
entity to insulate assets from liability or to facilitate separation of 
functions for programmatic, accounting, or other reasons, according to 
the Panel on the Nonprofit Sector Final Report.[Footnote 9] 

Donor-advised funds are generally separate accounts operated by tax- 
exempt public charities to receive contributions from a single donor or 
group of donors. Donors can advise on the distributions from the 
account. For the contribution to qualify as a completed gift, the 
charity must have ultimate control over how the assets in the account 
are invested and distributed. According to our interviews with 
knowledgeable individuals and recent Senate testimony, donor-advised 
funds have generally been in existence since the 1930s and have 
traditionally been operated by community foundations.[Footnote 10] In 
the 1990s, financial investment firms began establishing "commercial 
funds," which are tax-exempt public charities that operate donor- 
advised fund accounts. Investment of contributions to the fund accounts 
is controlled by the commercial fund's board, which hires the 
investment firm that established the commercial fund to manage the 
fund's assets. 

Generally, an entity must apply to IRS to obtain tax-exempt 
recognition. Most organizations seeking recognition from federal income 
tax must use specific forms, including Form 1023 (Application for 
Recognition of Exemption under Section 501(c)(3) of the IRC) or Form 
1024 (Application for Recognition of Exemption under Section 501(a)) as 
well as other documentation.[Footnote 11] After receiving tax- exempt 
recognition, public charitable entities must annually file a Form 990 
information return to report their financial transactions and 
activities for a tax year. Charities that have less than $100,000 in 
gross receipts and $250,000 in year-end assets may use Form 990-EZ. 
Entities with gross receipts below $25,000, and certain types of 
entities, such as churches and certain entities associated with 
churches, generally are not required to file. Form 990 collects 
information on revenues, expenses, and assets, and has accompanying 
schedules. Schedule A of Form 990 covers several areas such as 
compensation, lobbying expenditures, and revenue sources. Schedule B 
covers the source of contributions to charities and certain other 
exempt entities.[Footnote 12] Congress has granted public access to 
Form 990 data in recognition of the importance of public oversight to 
inform donors about how their money is spent and to stem potential 
abuses. Private foundations, regardless of their amounts of gross 
receipts or assets, are required file a Form 990-PF information return 
annually. 

IRS oversight of tax-exempt entities generally relies on two 
activities. First, IRS reviews applications for tax-exempt status to 
determine whether a tax-exempt purpose is envisioned. IRS approves 
those applications that are properly completed and for which the 
applicant can demonstrate to the satisfaction of IRS that its 
activities or proposed activities meet the requirements of the section 
under which exemption is claimed. Second, IRS annually examines 
selected Forms 990 to determine whether the exempt entities meet 
various requirements (such as properly reporting unrelated business 
income tax).[Footnote 13] In general, IRS attempts to select entities 
that it believes are likely to have violated requirements. Based on 
examination evidence, IRS can accept the Form 990 as filed or change 
the status of the entity, impose excise taxes for certain types of 
violations, or revoke the exempt status if the violations are serious 
enough.[Footnote 14] As appropriate, IRS can also assess other types of 
taxes, such as employment taxes or unrelated business income taxes. 

In 2004, the Senate Committee on Finance asked a panel of experts to 
make recommendations to Congress to improve oversight, transparency, 
and governance in the tax-exempt sector. To do so, the Independent 
Sector[Footnote 15] convened a Panel on the Nonprofit Sector in October 
2004, which included 24 nonprofit and philanthropic leaders.[Footnote 
16] The Panel issued a final report in June 2005 with over 120 
recommendations, several focusing on donor-advised funds and supporting 
organizations. On the basis of this report and other information, 
Congress has considered proposals to impose more restrictions and 
requirements on donor-advised funds and supporting organizations to 
better ensure that their contributions advance charitable rather than 
private interests and that their donors do not exert control or receive 
private benefits. Provisions in legislative proposals that apply to 
donor-advised funds have included providing a formal definition of a 
fund, setting minimum payout requirements, and placing restrictions on 
dealings with those who may privately benefit from charitable 
activities. Provisions related to supporting organizations have 
included those that would apply certain private foundation rules and 
restrictions, such as those on the annual payout requirement and excess 
business holding rules. 

Scope and Methodology: 

To compare the federal laws and regulations on donor-advised funds and 
supporting organizations with those for private foundations, we 
reviewed the IRC, Treasury regulations, IRS publications, and various 
other documents describing these laws and regulations. We also 
interviewed 18 IRS staff and 16 individuals knowledgeable about the tax-
exempt community, such as attorneys and governmental-affairs managers 
at tax-exempt entities, to obtain their input about these laws and 
regulations and our comparison of them. 

To determine financial and organizational characteristics of donor- 
advised funds, supporting organizations, and other tax-exempt 
charitable organizations, we obtained and analyzed IRS Form 990 and 
Form 990-PF data, as well as reviewed survey data on donor-advised 
funds that were collected by The Chronicle of Philanthropy. We used the 
surveys to obtain data on donor-advised funds because this information 
was not identifiable on the Form 990. To determine the reliability of 
the donor-advised fund data, we interviewed The Chronicle of 
Philanthropy staff about their survey methodology. To obtain supporting 
organization and other tax-exempt charitable organization data fields, 
we obtained data from IRS's Returns Inventory and Classification System 
(RICS) for tax years 1999 through 2003, the 5 most recent years of data 
available at the time of our analysis. Because not all the data fields 
we wanted were available from RICS, we obtained additional Form 990 
data fields from GuideStar, an organization that electronically 
captures Form 990 data for public access. To assess the reliability of 
the RICS and GuideStar data, we interviewed agency officials and 
conducted electronic data testing. In addition, we reviewed a selection 
of Forms 990 submitted to IRS to confirm that the values on the form 
matched those in the database. While we identified some minor 
discrepancies, we determined that the Form 990 data were sufficiently 
reliable for our purposes. The data files we obtained included the 
population of tax-exempt charities filing returns for those years, 
including supporting organizations and private foundations. Using 
computer software to analyze these data files, we determined summary 
statistics and converted dollar amounts to 2005 constant dollars. For 
our discussion on "payout" rate, compensation, and Form 990 revisions, 
we performed literature searches and interviewed 20 knowledgeable 
individuals from IRS's Statistics of Income (SOI) program and Tax- 
Exempt & Government Entities (TE/GE) division, Urban Institute, and 
Congressional Research Service (CRS).[Footnote 17]  

To describe the types of noncompliance and promotion methods involving 
donor-advised funds and supporting organizations, we reviewed IRS 
summaries of examination cases. To obtain anecdotal information about 
noncompliance involving donor-advised funds and supporting 
organizations, we also interviewed 4 managers at IRS who oversee 
examinations of donor-advised funds and supporting organizations and 7 
individuals knowledgeable about the tax-exempt community who work at 
organizations such as the Council on Foundations and the Independent 
Sector. We also interviewed 6 financial professionals and 11 community 
foundation managers on how donor-advised funds and supporting 
organizations are promoted to clients for abusive transactions. We also 
reviewed an IRS research report on developing abusive promoter leads 
through searching the Internet. 

To provide additional information on noncash contribution valuation 
methods (see app. III), we reviewed IRS publications and forms and 
interviewed an IRS field specialist working on valuation issues in the 
Large and Mid-Sized Business operating division. To obtain information 
on the marketing of donor-advised funds and supporting organizations 
(see app. IV), we spoke with 11 community foundation managers, 6 
financial professionals, and 18 managers at IRS. The examples we 
discuss come from materials that we were referred to or located online 
based on our interviews, and do not necessarily represent all materials 
and methods used to market donor-advised funds and supporting 
organizations. 

Federal Laws and Regulations Impose Fewer Requirements on Donor-Advised 
Funds and Supporting Organizations and Their Donors, but Allow Donors 
Less Control Compared to Private Foundations: 

In recent years, donor-advised funds have become popular charitable- 
giving vehicles, and the number of supporting organizations has also 
continued to increase. At the same time, federal tax law generally 
imposes fewer restrictions and requirements on donor-advised funds and 
supporting organizations, but provides them and their donors less 
control over the use and investment of the charitable assets compared 
to private foundations; in fact, section 501(c)(3) and federal 
regulations do not specifically mention donor-advised funds. 

As a general principle, the more control that a donor has over the use 
of the charitable contributions and assets, the more regulations and 
restrictions apply. Table 1 discusses how federal tax law views donor- 
advised funds and supporting organizations compared to private 
foundations across a number of variables. 

Table 1: Simplified Comparison of Differences and Similarities in 
Federal Tax Laws for Donor-Advised Funds, Supporting Organizations, and 
Private Foundations: 

Tax code treatment; 
Donor-advised funds: Although not statutorily defined, part of a public 
charity that operates funds as separately identified accounts; 
Supporting organizations: Public charities that carry out their 
charitable purpose by supporting other public charities; 
Private foundations: Charities that do not qualify as public charities. 

Filing requirement; 
Donor-advised funds: Fund administrators must apply for tax-exempt 
status and annually file Form 990 if annual gross receipts are over 
$25,000, indicating if they have separate accounts (on which separate 
Forms 990 are not required); 
Supporting organizations: Must apply for exempt status as a supporting 
organization. Must annually file Form 990 if annual gross receipts are 
over $25,000; 
Private foundations: Must apply for exempt status as a private 
foundation. Must annually file Form 990-PF as well as schedules on the 
use, distribution, and investment of funds. 

Donor control; 
Donor-advised funds: Donors cannot have control but may advise on use 
of funds; 
Supporting organizations: Donors can be involved with boards but should 
not directly or indirectly control the boards; 
Private foundations: Donors and foundation's board have absolute 
control, such as hiring staff and choosing charities to support. 

Donor tax deductions; 
Donor-advised funds: Follows rules for public charities. See 
"Supporting organizations."; 
Supporting organizations: Donors may deduct up to 50 percent of 
adjusted gross income for cash donations and up to 30 percent of 
adjusted gross income for donations of capital gain property at fair 
market value; 
Private foundations: Donors may deduct up to 30 percent of adjusted 
gross income for donations of cash and up to 20 percent of adjusted 
gross income on capital gain property at cost basis. 

Excise taxation; 
Donor-advised funds: Follows rules for public charities. See 
"Supporting organizations."; 
Supporting organizations: Subject to two excise taxes; 
Private foundations: Subject to six excise taxes. 

Payout rules; 
Donor-advised funds: None; 
Supporting organizations: None; 
Private foundations: Must meet annual minimum payout requirement. 

Association with foreign entities; 
Donor-advised funds: Follows rules for public charities. See 
"Supporting organizations."; 
Supporting organizations: May make grants to foreign organizations, but 
must ensure that funds are used for charitable purposes; 
Private foundations: Must follow more detailed rules than for public 
charities, including expenditure responsibility process. 

Source: GAO analysis of Internal Revenue Code, Treasury Regulations, 
and IRS Forms and Publications. 

[End of table] 

Among the three types of charitable-giving vehicles, donor-advised 
funds allow donors to create a long-term vehicle for supporting 
charities with relatively less administrative burden because the fund 
is managed by a third party. Furthermore, donor-advised funds are not 
required to file separate tax returns, file for tax-exempt status, or 
adhere to private foundation rules. The donor can make a gift and take 
an income tax deduction for that tax year, and at that time or later, 
advise which charities should receive the distribution. However, in 
doing so, the donor gives up control over the distribution of the gift 
to charities. 

Figure 1: Simplified Example of How Donor-Advised Fund Accounts 
Operate: 

[See PDF for image] 

Source: GAO (analysis); Art Explosion (images). 

[End of figure] 

Supporting organizations are public charities that are to support one 
or more public charities or certain other tax-exempt organizations. 
They fall in between a donor-advised fund and a private foundation in 
terms of restrictions and sanctions versus donor control over the use 
of the charitable assets. For example, donors who create a supporting 
organization avoid private foundation excise taxes and other rules and 
face fewer restrictions on the deductibility of their donations at the 
expense of having less control compared to donors at a private 
foundation, such as involvement on the board. The level of control that 
the supported charity has over the supporting organization varies by 
the three basic types of supporting organizations. Type I supporting 
organizations are "operated, supervised, or controlled by" the 
supported charitable organization. Type II supporting organizations are 
"supervised or controlled in connection with" the supported 
organization. In contrast, Type III supporting organizations only are 
"operated in connection with" the supported organization (see fig. 2). 

Figure 2: Simplified Example of Governance and Structure of Type I, II, 
and III Supporting Organizations: 

[See PDF for image] 

Source: GAO (analysis); Art Explosion (images). 

[End of figure] 

In reforming the rules for charitable organizations in 1969, Congress 
made changes to restrict and regulate private foundations more than 
public charities. Private foundations are generally funded and 
controlled by a single or small number of donors and therefore may be 
prone to potential abuses, particularly by disqualified 
persons.[Footnote 18] As a result, private foundations are subject to 
anti-abuse rules and related sanctions that are not applicable to donor-
advised funds, supporting organizations, and public charities as a 
whole. For example, public charities, including donor-advised fund 
operators and supporting organizations, are subject to restrictions and 
two related excise taxes for activities involving political 
expenditures (section 4955) and excess benefit transactions[Footnote 
19] (section 4958). In contrast, private foundations are subject to six 
excise taxes[Footnote 20] for activities involving: 

* investment income[Footnote 21] (section 4940); 

* self-dealing[Footnote 22] (section 4941); 

* failure to distribute income (section 4942); 

* excess business holdings (section 4943); 

* investments that jeopardize the charitable purpose (section 4944); 
and: 

* certain "taxable expenditures" (section 4945). 

Although public charities, such as donor-advised fund operators and 
supporting organizations, and private foundations are subject to 
different restrictions on transactions with disqualified persons, both 
excess benefit and self-dealing restrictions are intended to prevent 
inurement or undue private benefit, which are prohibited for all 
section 501(c)3 organizations. Inurement is the transfer or use of the 
charity's assets or income to or for the benefit of a charity's 
insiders. All transactions that more than incidentally benefit 
insiders, other than reasonable compensation and arm's length 
transactions, are prohibited inurement transactions. Private benefit is 
a broader concept, and may involve a transfer or use of a charity's 
assets or income by private persons who are not necessarily insiders. 
Some private benefit may be allowed, but if present, must be no more 
than incidental to the exempt purpose being served. 

Unlike with donor-advised funds and supporting organizations, a private 
foundation is required under section 4942 to distribute annually a 
minimum amount of its funds, equal to approximately 5 percent of the 
fair market value of the foundation's noncharitable use of assets 
(generally, stocks and other investments that compose the foundation's 
endowment). In 1984, Congress passed legislation that clarified what 
expenses can be included towards meeting this minimum "payout" 
requirement.[Footnote 23] If this "payout" rate is unmet, the 
foundation is subject to paying taxes on the undistributed amount. 

Donor-Advised Funds, Supporting Organizations, and Private Foundations 
Hold Billions of Dollars in Assets, but Some Organizational 
Characteristics Cannot Be Reliably Determined from Form 990 Data: 

Donor-advised funds hold billions of dollars in assets, and supporting 
organizations and private foundations hold hundreds of billions of 
dollars in assets. Financial data on donor-advised funds are not 
separately identified and reported on the Form 990. Although some data 
on donor-advised funds have been collected through an annual survey, 
these data are incomplete and not statistically representative of the 
fund population. Using 2003 data from Forms 990 and 990-PF, we found 
differences between supporting organizations and private foundations. 
For instance, in 2003, private foundations tended to report more total 
assets and contributions received but fewer revenues and expenses 
compared to supporting organizations. However, certain other 
characteristics of supporting organizations cannot be reliably 
determined from the Form 990 because this information is either not 
required to be reported or may be misreported for various reasons, 
according to IRS. Specifically, supporting organizations are not 
required to report a payout rate or to pay out a minimum amount of 
funds to charities, as private foundations must do. IRS has recently 
revised the Form 990 to better identify supporting organizations and 
donor-advised funds and is considering additional revisions, but plans 
to further revise the Form 990 are still preliminary. 

Limited Data Are Available for Donor-Advised Funds: 

Data on donor-advised funds are limited because, unlike supporting 
organizations and private foundations, the funds usually are not 
entities that file a Form 990 to report their activities. Organizations 
that maintain donor-advised funds are to file a Form 990 that includes 
the assets and other aggregate information for all activities, 
including for donor-advised funds, but data on these funds are not 
readily identified from the form because these data are not separately 
reported. 

To provide more information about donor-advised funds, The Chronicle of 
Philanthropy has been conducting an annual survey of organizations that 
maintain donor-advised funds. Started in 2000, the survey focuses on 
the largest donor-advised funds and collects data such as the total 
assets held and the amount of grants awarded. For 2003, The Chronicle 
of Philanthropy reported that the 90 organizations participating in its 
survey held over $11.9 billion in assets and distributed over $2.2 
billion to charities from their donor-advised fund accounts.[Footnote 
24]  

However, these survey results, which are one of the few data sources 
available for donor-advised funds, do not represent the entire 
population of donor-advised funds and also have other data 
limitations.[Footnote 25] The survey does not try to capture 
information for all donor-advised funds, as the population of donor- 
advised funds to be surveyed is unknown, and focuses on the largest 
funds, such as the 50 largest community foundations, by amount of money 
raised. Also, while some efforts are made to generate a high response 
rate and to check unusual responses, the survey response rate has 
ranged between 53 percent to 57 percent. Further, survey respondents 
vary from year to year, and the data are self-reported and cannot be 
checked for accuracy. Finally, the survey does not collect data for 
individual donor-advised fund accounts. 

Data on Supporting Organizations Highlight Differences from Private 
Foundations: 

From our analysis of Forms 990 and 990-PF, we found that supporting 
organizations filed nearly 21,400 Forms 990, and private foundations 
filed over 80,300 Forms 990-PF for tax year 2003.[Footnote 26] Table 2 
summarizes differences in the amounts of assets, revenues, expenses, 
and contributions received when comparing 1999 and 2003. Appendix II 
provides additional related data, including data for the years 1999 
through 2003. 

Table 2: Selected Financial Characteristics Reported by Supporting 
Organizations and Private Foundations in 2005 Constant Dollars, Tax 
Years 1999 and 2003: 

(Dollars in billions). 

Number of returns filed; 
Tax year: 1999; 
Supporting organizations: Total: 20,217; 
Supporting organizations: Percentage change: N/A; 
Private foundations: Total: 69,812; 
Private foundations: Percentage change: N/A. 

Number of returns filed; 
Tax year: 2003; 
Supporting organizations: Total: 21,372; 
Supporting organizations: Percentage change: 6%; 
Private foundations: Total: 80,365; 
Private foundations: Percentage change: 15%. 

Total assets[A]; 
Tax year: 1999; 
Supporting organizations: Total: $211.1; 
Supporting organizations: Percentage change: N/A; 
Private foundations: Total: $428.4; 
Private foundations: Percentage change: N/A. 

Total assets[A]; 
Tax year: 2003; 
Supporting organizations: Total: 239.4; 
Supporting organizations: Percentage change: 13%; 
Private foundations: Total: 449.5; 
Private foundations: Percentage change: 5%. 

Total revenue[B]; 
Tax year: 1999; 
Supporting organizations: Total: 63.0; 
Supporting organizations: Percentage change: N/A;  
Private foundations: Total: 84.6; 
Private foundations: Percentage change: N/A. 

Total revenue[B]; 
Tax year: 2003; 
Supporting organizations: Total: 65.0; 
Supporting organizations: Percentage change: 3%; 
Private foundations: Total: 53.6; 
Private foundations: Percentage change: -37%. 

Total expenses[C]; 
Tax year: 1999; 
Supporting organizations: Total: 50.0; 
Supporting organizations: Percentage change: N/A; 
Private foundations: Total: 40.6; 
Private foundations: Percentage change: N/A. 

Total expenses[C]; 
Tax year: 2003; 
Supporting organizations: Total: 55.6; 
Supporting organizations: Percentage change: 11%; 
Private foundations: Total: 41.1; 
Private foundations: Percentage change: 1%. 

Total grants paid; 
Tax year: 1999; 
Supporting organizations: Total: 8.5; 
Supporting organizations: Percentage change: N/A; 
Private foundations: Total: 32.4; 
Private foundations: Percentage change: N/A. 

Total grants paid; 
Tax year: 2003; 
Supporting organizations: Total: 10.7; 
Supporting organizations: Percentage change: 27%; 
Private foundations: Total: 31.0; 
Private foundations: Percentage change: -4%. 

Total contributions received[D]; 
Tax year: 1999; 
Supporting organizations: Total: 14.2; 
Supporting organizations: Percentage change: N/A; 
Private foundations: Total: 31.3; 
Private foundations: Percentage change: N/A. 

Total contributions received[D]; 
Tax year: 2003; 
Supporting organizations: Total: $15.5; 
Supporting organizations: Percentage change: 9%; 
Private foundations: Total: $27.7; 
Private foundations: Percentage change: -12%. 

Source: GAO analysis of data from IRS's Returns Inventory and 
Classification System and from GuideStar, 1999 and 2003. 

[A] Total assets include cash and investments in securities, land, 
buildings, and equipment. 

[B] Total revenue includes contributions received and dividends and 
interest earned from the investmentnt of securities. 

[C] Total expenses include grants paid, executive compensation, 
salaries and wages, and other administrative expenses, which can be 
both program-related and nonprogram-related. 

[D] Total contributions received include direct contributions from 
individuals, indirect contributions through federated fundraising 
campaigns or affiliate organizations, and government grants. 

[End of table] 

Table 2 shows that in 2003, the number of private foundations 
outnumbered the number of supporting organizations by more than a 
factor of 3, reported over $200 billion more in assets, and reported 
more contributions received. However, supporting organizations reported 
more revenue but also more expenses by 2003 compared to private 
foundations. Furthermore, comparing 1999 to 2003, supporting 
organizations tended to report growth in all of these areas while 
private foundations reported declines in revenue and contributions 
received. We were unable to determine the reasons for these changes, 
but the year-to-year variations during 2000, 2001, and 2002, in part 
due to a significant stock market decline during this time, provided 
some insights (see app. II for summary tables with annual data). Median 
values for the dollar amounts reported are shown in table 3. 

Table 3: Medians and Related Data for Selected Financial 
Characteristics Reported by Supporting Organizations and Private 
Foundations in 2005 Constant Dollars, Tax Years 1999 and 2003: 

Total assets; 
Tax year: 1999; 
Supporting organizations: Median[A]: $1,249,657; 
Supporting organizations: Percentage change: N/A; 
Supporting organizations: Percentage returns reporting: zero[B]: 20%; 
Private foundations: Median[A]: $392,542; 
Private foundations: Percentage change: N/A; 
Private foundations: Percentage returns reporting Median[B]: 5%. 

Tax year: 2003; 
Supporting organizations: Median[A]: : 1,221,457; 
Supporting organizations: Percentage change: -2%; 
Supporting organizations: Percentage returns reporting: Median[B]: 18%; 
Private foundations: Median[A]: 377,827; 
Private foundations: Percentage change: -4%; 
Private foundations: Percentage returns reporting Median[B]: 6%. 

Total revenue; 
Tax year: 1999; 
Supporting organizations: Median[A]: 286,340; 
Supporting organizations: Percentage change: N/A; 
Supporting organizations: Percentage returns reporting: Median[B]: 19%; 
Private foundations: Median[A]: 66,180; 
Private foundations: Percentage change: N/A; 
Private foundations: Percentage returns reporting Median[B]: 5%. 

Tax year: 2003; 
Supporting organizations: Median[A]: 196,376; 
Supporting organizations: Percentage change: -31%; 
Supporting organizations: Percentage returns reporting: Median[B]: 17%; 
Private foundations: Median[A]: 27,632; 
Private foundations: Percentage change: -58%; 
Private foundations: Percentage returns reporting Median[B]: 6%. 

Total expenses; 
Tax year: 1999; 
Supporting organizations: Median[A]: 164,172; 
Supporting organizations: Percentage change: N/A; 
Supporting organizations: Percentage returns reporting: Median[B]: 21%; 
Private foundations: Median[A]: 45,346; 
Private foundations: Percentage change: N/A; 
Private foundations: Percentage returns reporting Median[B]: 7%. 

Tax year: 2003; 
Supporting organizations: Median[A]: 159,935; 
Supporting organizations: Percentage change: -3%; 
Supporting organizations: Percentage returns reporting: Median[B]: 18%; 
Private foundations: Median[A]: 41,019; 
Private foundations: Percentage change: -10%; 
Private foundations: Percentage returns reporting Median[B]: 6%. 

Total grants paid; 
Tax year: 1999; 
Supporting organizations: Median[A]: 66,001; 
Supporting organizations: Percentage change: N/A; 
Supporting organizations: Percentage returns reporting: Median[B]: 49%; 
Private foundations: Median[A]: 41,538; 
Private foundations: Percentage change: N/A; 
Private foundations: Percentage returns reporting Median[B]: 19%. 

Tax year: 2003; 
Supporting organizations: Median[A]: 73,578; 
Supporting organizations: Percentage change: 11%; 
Supporting organizations: Percentage returns reporting: Median[B]: 46%; 
Private foundations: Median[A]: 37,079; 
Private foundations: Percentage change: -11%; 
Private foundations: Percentage returns reporting Median[B]: 18%. 

Total contributions received; 
Tax year: 1999; 
Supporting organizations: Median[A]: 141,474; 
Supporting organizations: Percentage change: N/A; 
Supporting organizations: Percentage returns reporting: Median[B]: 55%; 
Private foundations: Median[A]: 57,294; 
Private foundations: Percentage change: N/A; 
Private foundations: Percentage returns reporting Median[B]: 54%. 

Tax year: 2003; 
Supporting organizations: Median[A]: $133,474; 
Supporting organizations: Percentage change: -6%; 
Supporting organizations: Percentage returns reporting: Median[B]: 53%; 
Private foundations: Median[A]: $41,938; 
Private foundations: Percentage change: -27%; 
Private foundations: Percentage returns reporting Median[B]: 58%. 

Source: GAO analysis of data from IRS's Returns Inventory and 
Classification System and from GuideStar, 1999 and 2003. 

[A] Medians were calculated using returns reporting a nonzero value for 
the characteristic being analyzed. A median is the number above and 
below which 50 percent of organizations fall for the characteristic 
measured. We present the median because it better represents the 
typical organization than would the average, which could be affected by 
extreme dollar values for each measure. 

[B] Although medians were calculated using returns reporting a nonzero 
value, we included, for context, returns that reported a zero value for 
these characteristics. 

[End of table] 

For the four financial characteristics listed in table 3, median values 
for supporting organizations were much higher compared to private 
foundations in both 1999 and 2003, in contrast to the higher total 
values for private foundations listed in table 2. Also, the declines in 
supporting organization median values between 1999 and 2003 were much 
less compared to private foundations. We excluded zero values from our 
median analyses. IRS officials said that organizations might be 
reporting zero values if filing a final return or for other reasons. 
However, we were unable to conduct additional analysis on these zero 
values, particularly for total contributions received in which over 50 
percent of the values reported by supporting organizations and private 
foundations were zero. 

Some Financial and Organizational Characteristics of Supporting 
Organizations Cannot Be Reliably Determined from 990 Data: 

Some financial characteristics of supporting organizations cannot be 
reliably determined because they are not required to be reported on the 
Form 990 or may be misreported. As a result, directly comparing 
supporting organizations and private foundations or other tax-exempt 
charitable organizations can pose challenges. Being able to make these 
comparisons is important in order to address concerns, such as how much 
and how often supporting organizations pay out to charities, since, 
like private foundations, supporting organizations can be used to 
accumulate contributions prior to distributing the money to charity, 
but, unlike private foundations, they do not have a minimum payout 
requirement to support charities that must be annually 
reported.[Footnote 27] 

Because supporting organizations do not have this payout requirement, 
they do not explicitly report a payout rate, as is required for private 
foundations. Certain lines on the Form 990-PF allow IRS, and the 
public, to determine whether private foundations have met their 
required payout rate. For supporting organizations, factors that are 
included in the payout calculation for private foundations might not be 
readily determined from the Form 990.[Footnote 28] Absent being able to 
identify these additional data and clarifying how they are to be 
accounted for in a supporting organization payout rate, consistently 
comparing supporting organizations' and private foundations' payout 
rates cannot be done. Similarly, for donor-advised funds, payout rate 
has not been statutorily required or defined and consequently is also 
not required to be reported on the Form 990, and available data do not 
allow a payout rate to be determined. 

Despite these difficulties, researchers have studied different ways to 
compute a payout rate for supporting organizations. A 2005 Urban 
Institute study found that supporting organization payout rates could 
vary due to factors such as the purpose of the organization and which 
lines on the Form 990 were included in determining how much support was 
provided.[Footnote 29] The study pointed out that differences in 
supporting organization payout rates may reflect differences in the 
purpose and operation of the supporting organizations, rather than the 
amount of charitable support provided. For example, some supporting 
organizations provide operational services to their supported 
charities, rather than provide grants. Supporting organizations can 
serve to pool or manage investments or endowments for their supported 
organization, hold real estate, or provide services, such as office or 
property management. Payout rates for these types of supporting 
organizations might indeed be low or infrequent, since these 
organizations do not hold and distribute charitable funds like other 
supporting organizations or private foundations whose primary purpose 
is grant-making. 

While the Form 990 includes a supporting organization's grants and net 
assets, using only those lines to determine a payout rate may provide 
an incomplete picture of the supporting organization's charitable 
activity. In 2002, supporting organizations reported over $7 billion in 
grants as transfers of charitable support. However, in the Urban 
Institute study, researchers found that transfers of support from a 
supporting organization to its supported organizations were reported on 
1 or more of at least 10 lines on the Form 990.[Footnote 30] While the 
amounts reported on these lines might include transfers of support, the 
Form 990 line data alone are generally not enough to determine how much 
of the amount reported, if any, supports charities. For example, they 
found that organizations they sampled sometimes reported transfers of 
support to a supported organization on the line for rental expenses. 
However, only by examining Form 990-related documentation, which an 
Urban Institute researcher said required considerable effort, could 
they determine this result. In 2003, supporting organizations reported 
over $431 million on this Form 990 line, but without significant 
effort, one cannot determine how much, if any, of this amount consisted 
of transfers of support to supported organizations. 

Another challenge in using Form 990 data to determine financial 
characteristics arises when analyzing compensation paid to executives 
and employees of tax-exempt organizations, such as supporting 
organizations. In 1999 and 2003, supporting organizations reported over 
$894 million and over $1 billion, respectively, in total executive 
compensation. Private foundations reported almost $739 million in 1999 
and about $812 million in 2003 in total executive compensation (see 
app. II for data tables). Organizations are required to report 
compensation for certain employees on the Form 990 and Schedule A. 
However, according to IRS managers, misreporting is not uncommon, 
although some may be unintentional, in such areas as deferred executive 
compensation, payments made to relatives, and compensation paid from 
related entities, such as a for-profit subsidiary of a tax-exempt 
organization paying the salary of an employee or board member of its 
parent tax-exempt organization. In addition, an IRS researcher had 
concerns that compensation could be overreported for tax-exempt 
organizations within a network, such as a health care network of 
hospitals. In such networks, which commonly include supporting 
organizations, compensation for board members can be misreported on the 
Forms 990 when related organizations have common board members. 

IRS is currently working on an initiative to identify and stop abuses 
by public charities and private foundations that pay excessive 
compensation and benefits to their officers and other insiders. 
Beginning in late 2004, IRS contacted a broad spectrum of over 1,800 
public charities and private foundations seeking information about 
their compensation practices and procedures. IRS also just started a 
new phase of the initiative, involving an additional 250 contacts about 
loans to officers, directors, and key employees. The goals for the 
initiative are to: 

* learn how exempt organizations determine and manage compensation; 

* gauge the existence and effectiveness of exempt organizations' 
controls over compensation issues; 

* learn how exempt organizations report compensation on Forms 990 and 
990-PF; 

* address instances of questionable compensation practices, as well as 
compensation of specific individuals; 
and: 

* increase exempt organizations' awareness of compensation-related tax 
issues. 

The initial results of the compensation initiative will be included in 
a report that is expected to be completed in late August or September 
2006. All examinations are expected to be completed by or during 2007. 

In addition to financial characteristics such as payout rate and 
executive compensation, organizational characteristics about supporting 
organizations are difficult to determine from the Form 990. For 
example, Form 990 does not collect the EINs of their supported 
organizations, which according to IRS officials, would facilitate IRS's 
ability to track the flow of donations. In addition, an IRS manager 
said that having supported organizations' EINs would facilitate IRS's 
ability to track how compensation is treated between supporting 
organizations and supported organizations. IRS emphasized that any form 
changes must be balanced against the increased burden on taxpayers of 
supplying additional information. 

Other organizational characteristics for which IRS collects limited 
data on Form 990 include relationships with foreign entities, noncash 
contributions, loan recipients, and donor information. We were unable 
to closely evaluate these characteristics because IRS had limited data 
and information to provide and because of time constraints. Although 
the costs and burdens of collecting additional data to determine these 
organizational characteristics and protecting taxpayer privacy are 
legitimate concerns, IRS has acknowledged the need for greater 
transparency and better data to track the flow of funds between donors 
and charities. For example, IRS does not have TINs of loan recipients 
to track the flow of funds. 

IRS Has Made and Is Considering Changes to the Form 990 Regarding Donor-
Advised Funds and Supporting Organizations: 

IRS has begun to take steps to help address the lack of information 
reported on donor-advised funds and supporting organizations. For 
example, IRS has revised the 2005 Form 990 Schedule A to include a 
check box to indicate whether a supporting organization is Type I, II, 
or III.[Footnote 31] This information will be transcribed into IRS's 
electronic databases beginning in 2007, which, according to IRS, would 
allow it to better focus its examination and educational resources on 
compliance issues particular to each type. Also, starting with the 2003 
Form 990 Schedule A, organizations must indicate whether they maintain 
separate accounts for donors, such as donor-advised funds. In January 
2006, IRS began transcribing this information, which is a first step 
towards identifying how many and which charities have donor-advised 
funds. However, these organizations are not required to separately 
report data on the donor-advised funds from the other activity reported 
on the Form 990, meaning that data on the funds are not easily 
identified. While IRS is considering revising the Form 990 to include 
more information about donor-advised funds, it does not have details on 
what data they might collect or how or when they would revise the form. 

IRS is considering additional changes to the Form 990 that, pending 
management approval, would include reorganizing the form in stages. A 
pending proposal includes recommendations to create new sections or 
schedules on the Form 990 with questions on donor-advised funds and 
supporting organizations. Because the Form 1023 asks questions 
regarding donor-advised funds and supporting organizations, the 
proposal recommends aligning the Form 990 with Form 1023 so that IRS 
can track a charity from its formation. If the recommendation is 
approved, IRS's Form 990 Redesign Team plans to rewrite the Form 990 
instructions and add a glossary consistent with the Form 1023 which, 
according to IRS, may provide better data. 

According to IRS staff and others we interviewed, these form revisions, 
along with increased use of electronic filing, could improve the 
quality of data available to IRS to better identify noncompliance 
through its research and compliance efforts, as well as to the public 
to improve the effectiveness of tax-exempt charitable organizations. 

Private Benefit, Inurement, and Donor Control Have Been Found in Some 
Cases Involving Donor-Advised Funds and Supporting Organizations, with 
Promoters Sometimes Facilitating Schemes: 

IRS program managers report that some donor-advised funds and 
supporting organizations cases highlight concerns about private 
benefit, inurement, and donor control. Some of these cases demonstrate 
clear noncompliance, allowing IRS to propose appropriate corrective 
actions. However, IRS is confronted with many cases that require 
detailed assessments of evidence, which makes addressing noncompliance 
challenging. Additionally, IRS contends with activities involving donor-
advised funds and supporting organizations that do not violate laws or 
regulations, yet do not seem to benefit charities. Entities or 
individuals, such as financial advisers or attorneys, sometimes 
facilitate abusive schemes, introducing additional complexities to 
IRS's examination process. 

Private Benefit, Inurement, and Donor Control Are Prevailing Concerns 
in Donor-Advised Fund and Supporting Organization Noncompliance Cases: 

Private benefit, inurement, and donor control are common concerns for 
IRS in examinations of potential noncompliance involving donor-advised 
funds and supporting organizations. IRS is unable to provide estimates 
about the prevalence of this noncompliance, and noncompliance in 
general. Thus, the examples presented are intended to illustrate known 
cases of private benefit and donor control, and do not represent the 
entire range of noncompliance.[Footnote 32] 

Private Benefit and Inurement Lead to Personal Gains: 

Private benefit occurs when a 501(c)(3) organization is not operated or 
organized exclusively for exempt purposes because it serves a private 
rather than public interest. Because they are subject to section 
501(c)(3), both donor-advised funds and supporting organizations must 
avoid private benefit that is more than incidental to the charitable 
purpose being served; if private benefit is substantial enough, it may 
jeopardize an organization's tax-exempt status. If the organization's 
assets or income are transferred to an individual who is a charity 
insider, the benefit is called "inurement."[Footnote 33] Private 
benefit and inurement schemes involving donor-advised funds and 
supporting organizations may benefit various individuals and may vary 
in complexity. 

IRS has encountered multiple cases of private benefit where donors to 
donor-advised funds are able to regain some or all of their 
contribution. For example, IRS has concerns about one fund offering a 
"loan program," where donors were able to repossess their donation, 
with no obligation for repayment. IRS also sees inurement cases, in 
which individuals other than the donor receive private benefit. For 
example, IRS is examining one exempt organization and donor-advised 
fund operated by a for-profit company. The company offered the fund as 
a charitable giving vehicle for its employees. The exempt organization 
lacked an independent board, with the president-who also served as 
president of the for-profit company-receiving potentially high 
commissions and fees from contracts with the donor-advised fund. 

While donor-advised fund schemes often involve private benefit, schemes 
involving supporting organizations more often result in inurement and 
are typically more complex, according to IRS management. Schemes can 
involve direct payment of benefits to donors or, more indirectly, 
payments routed through offshore entities. One direct payment scheme, 
designed to benefit a donor's children, funneled school tuition 
payments through a supporting organization intended to support their 
child's school. More complex schemes enable the donor to regain his or 
her donation after it is routed offshore. One typical scheme begins 
with a donation to a supporting organization, which is then transferred 
to an account in an offshore investment firm controlled by a financial 
planner, accountant, or other knowledgeable insider working with the 
donor. The money is then transferred to a domestic mortgage lender, 
also controlled by the insider, giving the donor access to the money 
for use toward an interest-only mortgage. As a result, the donor 
benefits from a tax deduction on his or her contribution, while still 
retaining access to the donation. To justify the scheme, the supporting 
organization claims that earnings from their investment in the offshore 
firm will benefit charity. 

Donor Control May Involve Assets or Charity Operations: 

Donor control arises when a donor holds authority that exceeds what is 
permissible for donor-advised funds or supporting organizations. 
Illegal control can occur when a donor or disqualified person has 
control over the charity's assets, operations, or governance, or the 
organizations receiving support.[Footnote 34] It is possible for donor 
control to occur without private benefit. A donor may control a 
function or operation of a supporting organization or donor-advised 
fund without receiving benefits, according to IRS management. Donor 
control involving donor-advised funds and supporting organizations 
manifests in different ways. 

Donor control of a donor-advised fund occurs when the donor oversteps 
his or her advisory role and retains ultimate authority over the 
distribution of fund assets. One IRS manager told us that, although 
more common in supporting organization cases, a donor-advised fund 
donor may also achieve control by controlling the exempt organization 
receiving the benefits of their donation. For example, IRS is pursuing 
a case where a donor-advised fund appears to be making distributions to 
a public charity, which is controlled by the donor-advised fund's 
donor. If the donor-advised fund did not exist, the public charity 
recipient would likely be classified as a private foundation. IRS is 
investigating whether the charity has other support sources. 

For supporting organizations, control of the organization's board or 
the donor's ability to designate charitable recipients can constitute 
donor control.[Footnote 35] Board control can occur directly by 
controlling more than 50 percent of board voting power or veto power 
granted to disqualified persons. Alternatively, board control can occur 
indirectly through a disqualified person influencing board members who 
are not disqualified persons, according to IRS managers. Retaining 
access to assets can also signify direct or indirect control of a 
supporting organization. In one case, IRS has questioned whether or not 
a donor controlled the operations and investments of the supporting 
organization that the donor founded, although the donor did not receive 
private benefit. Donor control can also occur indirectly through 
control of an asset donated to the supporting organization. For 
example, in one case, IRS is concerned that a donor is continuing to 
collect and retain rent from building tenants after the building was 
donated to a supporting organization. 

Other Types of Noncompliance Exist: 

Although private benefit, inurement, and donor control are reoccurring 
themes in IRS's caseload, other types of noncompliance involving donor- 
advised funds and supporting organizations can occur. Specifically, a 
supporting organization could fail to maintain a relationship with its 
supported organization(s).[Footnote 36] A representative from the tax-
exempt community told us of situations where charities listed as 
supported organizations were unaware of a purported relationship with a 
supporting organization. The Panel on the Nonprofit Sector also 
recognized this problem in its June 2005 report. Similarly, IRS 
managers told us that a major issue in supporting organization 
examinations is whether or not the organization maintains a sufficient 
relationship with its supported organization. Form 990 only requires 
that supporting organizations report the name of their supported 
organizations; it does not require them to report the EIN of the 
supported organization. IRS managers told us that not knowing the EIN 
makes it harder for IRS staff to track the relationship between the two 
organizations. 

IRS Has Various Efforts to Identify and Correct Noncompliance, but Does 
Not Know the Rate of Noncompliance: 

IRS uses resources from a variety of units to identify and examine 
noncompliance involving donor-advised funds and supporting 
organizations. Toward these ends, IRS created two teams, one on donor- 
advised funds and one on supporting organizations.[Footnote 37] As of 
June 2006, the donor-advised fund team had opened but had not yet 
closed 27 examinations, according to an IRS manager.[Footnote 38] As of 
June 2006, the supporting organization team had opened 102 examinations 
and closed 20 of them; 18 of which were found to be noncompliant, 
according to IRS. IRS managers also told us that other programs-
including the Tax Examination Program and the Excessive Compensation 
Program-have also examined and closed supporting organization cases, 
and are currently examining 655 supporting organizations.[Footnote 39]  

Regardless of the type of noncompliance found, IRS can propose 
corrective actions when the evidence shows that a law or regulation has 
been unmistakably violated. IRS is developing criteria for proposing 
corrective actions for donor-advised funds as the related team finishes 
its examinations; many of the examinations are in the early stages. For 
supporting organization cases, IRS officials said, in general, they 
will propose a change to private foundation status for issues of donor 
control. Intermediate sanctions or revocation of the tax-exempt status 
are typically proposed for inurement cases, according to IRS.[Footnote 
40] Criminal charges may be brought upon individuals found to be 
exhibiting criminal behavior while participating in abusive schemes, 
and may occur in conjunction with corrective actions resulting from 
examinations. In cases where the donor-advised fund or supporting 
organization is believed to be beneficial overall but needs correction 
in order to be fully compliant, IRS managers told us they may also 
initiate a closing agreement, which provides a set of requirements 
intended to correct flaws in the donor-advised fund or supporting 
organization structure or operations. 

For various reasons, IRS does not know the overall rate of 
noncompliance or the prevalence of different forms of noncompliance 
involving donor-advised funds and supporting organizations. First, IRS 
did not use a random sample to identify cases for examination. Instead, 
it used methods that led to examining the most egregious noncompliance 
schemes. For example, the manager for the donor-advised fund team told 
us it selected cases for examination based on large asset size or other 
unusual characteristics, such as high compensation or high 
fees.[Footnote 41] Supporting organizations cases were selected based 
on referrals from other IRS units, according to the team's manager. 
Second, IRS has no established population of donor-advised funds for 
which to estimate a noncompliance rate. An IRS manager said IRS is 
unable to identify the population because exempt organizations have not 
been required to report their use of donor-advised funds, which 
prevents IRS from employing statistical sampling methodology to 
estimate donor-advised fund noncompliance. Third, examinations by IRS's 
teams are relatively new; examinations began in 2005 for donor-advised 
funds and began in 2004 for supporting organizations, according to IRS 
managers.[Footnote 42] 

IRS Faces Challenges in Addressing Noncompliance Involving Donor- 
Advised Funds and Supporting Organizations: 

Not all cases involving donor-advised funds and supporting 
organizations are clear; IRS faces challenges in identifying and 
examining potential noncompliance. In part, these challenges are due to 
uncertainty about whether the evidence unequivocally points to 
noncompliance, and to the difficulty in exhaustively collecting 
evidence on the facts and circumstances of a case. 

To evaluate facts and circumstances, IRS managers said that agents may 
evaluate minutes of meetings, correspondence among trustees, contracts 
or agreements on loans or rent, news articles, or the organization's 
trust document. Although exempt organizations must maintain 
documentation that they operate exclusively for exempt purposes, the 
existence and quality of these documents may differ among 
organizations, according to IRS managers. Therefore, IRS may need to 
collect evidence that is time-or resource-intensive to uncover. 
Evidence that does not readily exist or that is difficult to uncover, 
combined with the practical limits of the examination process, make 
some noncompliance nearly impossible to detect, as the following 
examples illustrate. 

* In determining influence on or control of a board, regulations define 
permissible relationships between disqualified persons and supporting 
organization boards. Despite regulatory guidance, IRS is unable to 
identify all noncompliant situations because it cannot always identify 
influence on board members by disqualified persons, especially when 
attempting to identify a disqualified person's indirect influence. 
Nomination of a majority of board members by a disqualified person may 
signify this influence, but IRS cannot consistently track the 
origination of a board nomination. Only in some cases are trust 
documents and meeting minutes available that may document the 
nomination process, according to IRS. Additionally, IRS may have 
difficulty identifying a disqualified person's indirect influence on a 
board when this influence may occur in private conversations. 

* It may also be challenging to find evidence that ensures that donor- 
advised funds are operating on "donor advice" rather than "donor 
control." To establish that donors are not exercising undue control, 
IRS may examine the process by which a donor makes a funding 
recommendation, according to the manager of IRS's donor-advised fund 
team. Specifically, IRS managers said this examination could include 
verification of an independent board, the process by which the fund 
operator investigates donor recommendations or provides documents that 
show that a donor's recommendations are not all accepted. However, 
similar to the challenges of identifying board control, IRS may not be 
able to detect subtle coercion occurring in payout decisions. 

* Detecting control of assets may also be difficult. For example, a 
donor may contribute a large portion of interest in a business 
partnership to a supporting organization.[Footnote 43] The donor, 
serving as the business's general partner, retains some ownership of 
the partnership and has a management responsibility or controls voting 
stock. According to an IRS manager, unless the supporting organization 
has other assets, this situation would likely allow the donor to have 
effective control over the assets of the supporting organization. In 
some situations, the business may claim that the general partner lacks 
controlling power, in which case IRS managers said examiners must rely 
on available evidence, such as partnership agreements, to determine the 
donor/partner's control over the business. Once again, evidence of more 
subtle control may not be available or practical for IRS to pursue. 

Some Compliant Activities Involving Donor-Advised Funds and Supporting 
Organizations Do Not Seem to Benefit Charity, Thus Introducing Areas 
for Potential Future Scrutiny: 

Not all cases involving donor-advised funds and supporting 
organizations are clear cases of private benefit, inurement, or donor 
control, or involve the challenges of gathering evidence. IRS managers 
said they encounter scenarios where no statute or regulation was 
violated, but where activities involving donor-advised funds or 
supporting organizations do not seem to benefit charity. In these 
situations, noncompliance cannot be alleged, but IRS may still question 
an organization's or individual's charitable purposes. A general lack 
of data as well as a lack of legal definitions and regulations for 
donor-advised funds contribute to these uncertainties for IRS, which 
have prompted both IRS and Congress to consider different solutions for 
reform, as the following examples illustrate. 

* One IRS manager told us that IRS is uncertain about whether or not 
donor-advised funds with low payout rates are supporting charitable 
purposes. No laws or regulations require annual minimum payouts to 
charities from donor-advised funds, but according to IRS management, 
idle assets are unlikely to result in benefits. Conversely, a donor- 
advised fund may be idle in paying out to build an endowment. If a 
supporting organization has a low payout rate, however, IRS said this 
can sometimes signify that it is not fulfilling its requirement. 
Legislation has been introduced in Congress to impose a minimum payout 
on donor-advised funds and supporting organizations. As of early July 
2006, legislation on this issue had not passed. 

* IRS managers told us that examiners have discovered loans made from a 
supporting organization to a donor or insider. Loans made by public 
charities to officers, directors, donors, and others are legal, 
provided that they are repaid and not made at terms lower than the 
market rate.[Footnote 44] According to IRS, charities could justify 
these loans as an investment. However, these loans may carry risk or 
introduce a conflict of interest. For example, if a borrower has some 
form of control over the organization, such as that of a board member 
or executive, it is less likely that the organization will take legal 
action if the loan is not repaid. Also, loans may prevent assets from 
being paid out to charitable purposes. Furthermore, if a loan is made 
as part of an employee compensation package, in some cases it may be 
classified as an excess benefit under IRC section 4958, according to 
IRS management. Additionally, these loans may signify control by 
disqualified persons. Even if a loan's interest rate is reasonable, or 
the borrower is not an employee or in control of the organization, the 
terms of the loan may give a borrower other benefits, thus making a 
case that the organization serves private rather than public purposes. 
In recognition of such potential improprieties, 19 states have banned 
such loans, according to The Chronicle of Philanthropy. As part of a 
broader study of executive compensation at public charities, IRS is 
examining loans made to insiders, but is not specifically focusing on 
supporting organizations. 

Promoters May Aid in Abusive Schemes, and May Be Difficult to Identify 
and Examine: 

In addition to examining donor-advised funds, supporting organizations, 
and donors, IRS investigates the promoters--creators and facilitators 
of abusive schemes. Some abusive schemes are organized or participated 
in by professionals or entities who work in concert with the donor. 
Identifying and examining the roles of these professionals or entities 
can be difficult and therefore may exacerbate the challenges in 
examining donor-advised fund and supporting organizations cases. 

A promoter is an individual or entity that organizes or assists in the 
organization of a partnership, trust, investment plan, or any other 
arrangement to be sold to a third party and designed to be used or is 
actually used in obtaining illegal tax benefits.[Footnote 45] 
Accountants, financial planners, attorneys, community foundations, and 
tax preparers could serve as promoters, and may not just be involved in 
schemes involving exempt organizations. Cases involving promoters 
address both the material used to promote noncompliance, which must 
adhere to tax law, as well as the actual activities implementing a 
scheme.[Footnote 46] Because promoters may be committing fraud, 
promoters could face criminal charges. See appendix IV for a discussion 
of materials and methods for publicizing donor-advised funds and 
supporting organizations which are not intended to lead to abusive 
schemes. 

According to IRS managers, some schemes, particularly those benefiting 
high-income donors, originate with a financial planner, accountant, or 
lawyer. Other promoters may play a role in facilitating schemes, such 
as the mortgage inurement scheme previously described in this report. 
According to the manager of IRS's donor-advised fund team, promoters 
are typically more involved in schemes involving supporting 
organizations than donor-advised funds due to the complexity of 
supporting organizations' schemes. 

For some cases IRS is able to identify the promoter, noncompliant 
material, and transactions that promote noncompliance.[Footnote 47] For 
example, material from a financial planner offered a hypothetical 
estate plan proposing that a supporting organization hold a wealthy 
donor's personal assets, thus facilitating a reduction in estate taxes 
upon the donor's death. The plan proposed transferring land owned by 
the donor to the supporting organization, who would offer the sale of 
the land to the donor's heirs at about 10 percent of its fair market 
value. Furthermore, the plan proposed that the supporting organization 
also lease the estate assets back to the donor's business. If the plan 
were carried out, inurement, private benefit, excess benefit, and donor 
control would be significant legal concerns. 

However, according to IRS managers identifying and investigating 
promoters is often challenging. IRS managers said they rely on 
referrals and Internet searches to find promoters. Although some 
promoters advertise on the Internet, they may sometimes only share 
details about the promotion in conversations with a donor. IRS's donor- 
advised fund and supporting organization teams have investigated nine 
promoters involved in potentially abusive schemes, according to IRS 
managers. In addition to the work of the issue teams, IRS's civil Lead 
Development Center is tasked with identifying promoters and 
coordinating promoter investigations. IRS managers told us that once 
IRS identifies potential promoters, examiners must seek information 
that is typically carefully hidden among complex transactions involving 
multiple entities. This requires that IRS carefully craft document 
requests and summonses, which can be a lengthy process. Furthermore, 
once IRS refines its examination process to target certain schemes, 
promoters quickly alter their approaches. 

Finally, like some of the cases described earlier in this section, some 
marketing material may not violate a law or regulation, but may have a 
questionable purpose which may indicate potential noncompliance by 
misleading donors with incomplete information. This may occur when 
marketing material may be providing incomplete information on the 
limits of donor-advised funds and supporting organizations versus 
private foundations. We found examples of Web sites that describe a 
donor-advised fund or supporting organization as a giving option with 
all the benefits and advantages of a private foundation, which may 
mislead potential donors into believing they can retain control over 
their donation. 

Conclusion: 

Donor-advised funds, supporting organizations, and private foundations 
are vehicles for charitable giving. Donors can use these approaches for 
long-term giving or to accumulate assets to address some larger need. 
They also may create donor-advised funds or supporting organizations to 
avoid the costs, burdens, excise taxes, and restrictions associated 
with private foundations. 

However, concerns have been expressed about the potential for abuses by 
those who create and operate donor-advised funds and supporting 
organizations, prompting legislative proposals to deter abuses. IRS has 
found examples of abuses in these funds and organizations involving 
those who do not give up control of their donations and who benefit 
privately at the expense of the charitable interest. Although IRS has 
efforts to focus on such abuses, IRS examiners lack sufficient data, 
which complicates efforts to identify and address the noncompliance. 

Congress is considering proposals to require donor-advised funds and 
supporting organizations to annually pay out a certain percentage of 
their assets to serve charities, which would roughly mirror the 
requirement for private foundations. However, no defined way exists to 
calculate a payout rate for these funds and these organizations, and 
current Form 990 data do not allow for full or consistent analyses of 
the payout rate for donor-advised funds or supporting organizations. 
Guidance is needed on what types of support should be included in a 
payout rate so that the Form 990 collects the necessary data. If a 
payout rate requirement is not adopted, these Form 990 requirements 
would provide data to inform future congressional decisions about 
whether a requirement should be instituted. If a payout rate is 
adopted, the data would help in tracking compliance and determining 
whether the requirement may need to be adjusted. 

Collecting payout information on the Form 990, however, would not be 
possible for donor-advised funds due to limitations in annual Form 990 
reporting. Starting in tax year 2003, IRS has been able to identify 
Forms 990 that report donor-advised fund activity. However, IRS will 
not have data that separate the fund activity from other activity. 
Adding a requirement to separately report the donor-advised fund 
activity from other activity on the Form 990 would allow IRS to check 
the payout rate as well as other fund activity that looks suspicious. 

IRS also has concerns with supporting organizations that do not support 
their supported organizations or that make loans to individuals or 
organizations. IRS would be better able to track the flow of funds to 
the charities to be supported and loan recipients if it knew their 
TINs, which are generally Social Security numbers for individuals or 
EINs for organizations. Collecting the TINs of loan recipients raises 
concerns about the potential costs and burdens and the protection of 
the TINs from unauthorized use. IRS could address these concerns by 
only requiring TIN reporting for loans above a certain dollar threshold 
and by not making the information publicly available. If the Form 990 
is changed to separately report data on donor-advised fund activity, 
IRS should consider extending this TIN reporting to donor-advised 
funds. 

Matters for Congressional Consideration: 

Given the concerns about payout rates for both donor-advised funds and 
supporting organizations, Congress should consider directing IRS to 
revise the Form 990 to collect sufficient information so that a 
consistent payout rate can be calculated for both types of charitable- 
giving vehicles. This information could help inform decisions about 
whether to adopt a minimum payout requirement and if any required rate 
should be adjusted. To help IRS in making these revisions, Congress 
should direct IRS about the types of support that should be included, 
as it has for private foundations. In addition, so that IRS can modify 
the Form 990 to require TINs of loan recipients from supporting 
organizations, Congress should also consider providing IRS authority to 
protect that information from public disclosure. 

Recommendations for Executive Action: 

To better understand the characteristics of donor-advised funds and 
supporting organizations and to better identify possible noncompliance, 
the Commissioner of Internal Revenue should, as part of the Form 990 
revision process, (1) require more comprehensive reporting of donor- 
advised fund activity, (2) require supporting organizations to report 
their supported organizations' EINs, and (3) require that the TINs for 
recipients of large loans be reported, if IRS is granted authority to 
protect the TINs from public disclosure. 

Agency Comments: 

The Commissioner of Internal Revenue provided written comments on a 
draft of this report in a July 19, 2006, letter, which is reprinted in 
appendix V. IRS said our recommendations would help it deter abuse 
within tax-exempt and government entities and the misuse of such 
entities by third parties. IRS agreed with our two recommendations 
regarding requiring more comprehensive reporting of donor-advised fund 
activity and requiring supporting organizations to report their 
supported organizations' EINs on the Form 990. IRS said it will 
consider these form changes as part of the Form 990 revision process, 
but the timing of these revisions will depend on available resources. 
IRS also said that reporting supported organizations' EINs would 
potentially help with early identification of abuses involving 
promoters and donors getting back their donations in the form of a 
purported loan that may never be repaid. Regarding our third 
recommendation, which had been to require that the TINs for large-loan 
recipients be reported on the Form 990, IRS agreed that greater 
transparency and better tracking of loans are needed. However, IRS did 
not believe that it had the authority under current law to protect the 
TINs of loan recipients from public disclosure if the TINs were 
reported on the Form 990. As a result, we have added a matter for 
congressional consideration to provide IRS the authority to protect 
loan recipient TINs on the Form 990 from public disclosure and revised 
the recommendation so that if provided the authority to protect the 
information from public disclosure, IRS should revise the Form 990 to 
collect loan recipient TINs. 

As agreed with your office, unless you publicly announce its contents 
earlier, we plan no further distribution of this report until 30 days 
from its issue date. At that time, we will send copies to the Ranking 
Minority Member, the Senate Committee on Finance; 
the Secretary of the Treasury; 
the Commissioner of Internal Revenue; 
and other interested parties. We will make copies available to others 
on request. In addition, the report will be available at no charge on 
the GAO Web site at [Hyperlink, http://www.gao.gov]. 

If you or your staff have any questions about this report, please 
contact me at (202) 512-9110 or brostekm@gao.gov. Contact points for 
our Offices of Congressional Relations and Public Affairs may be found 
on the last page of this report. Key contributors to this report are 
listed in appendix VI. 

Sincerely yours, 

Signed by: 

Michael Brostek: 
Director, Tax Issue: 
Strategic Issues: 

[End of section] 

Appendix I: Tax-Exempt Excise Taxes: 

Over the years, Congress has imposed various excise taxes that affect 
tax-exempt entities, particularly private foundations under section 
501(c)(3). Public charities differ in several ways from private 
foundations. Public charities have broad public support and tend to 
provide charitable services directly to beneficiaries. Private 
foundations are often tightly controlled and receive a significant 
portion of their funds from a small number of donors, and tend to make 
grants directly to other organizations rather than directly provide 
charitable services. Since these differences create the potential for 
self-dealing or abuse by a small group, private foundations are subject 
to anti-abuse rules not applicable to public charities. In addition, 
both public charities and private foundations are generally prohibited 
from engaging in certain types of transactions. Excise taxes are to be 
levied on public charities and private foundations, as well as a few 
other types of tax-exempt entities, that violate the rules. Details on 
these rules and excise taxes follow. 

Excise Tax on Section 501(c)(3) Political Expenditures (Section 4955): 

Section 4955 was added by the Revenue Act of 1987, P.L. 100-203. 
According to the House Report[Footnote 48] for the Act, the committee 
believed that the excise tax applicable to private foundations for 
making prohibited political expenditures (section 4945) should also 
apply to public charities. Section 4955 imposes an initial 10 percent 
excise tax on each political expenditure of a section 501(c) (3) 
organization. An additional 2-˝ percent excise tax is imposed on the 
organization's manager if the manager knew that it was a political 
expenditure. Political expenditures include any amounts paid or 
incurred by the organization in any participation or intervention in 
any political campaign on behalf of any candidate for public office. If 
an initial tax has been imposed regarding a political expenditure and 
that expenditure is not corrected, an additional tax equal to 100 
percent of the amount is to be imposed on the organization. An 
additional tax equal to 50 percent of the amount of the expenditure is 
to be imposed on the organization's manager if that manager refuses to 
agree to part or all of the correction. 

Excise Tax on Section 501(c)(3) and (4) Excess Benefit Transactions 
(Section 4958): 

Section 4958 was added in 1996 by the Taxpayer Bill of Rights 2, P.L. 
104-168. According to the related House Report[Footnote 49] this excise 
tax was added to ensure that the advantages of tax-exempt status 
benefit the community and not private individuals. The act provided for 
this intermediate sanction (i.e., something short of a loss of tax- 
exemption) to be imposed when nonprofit organizations engage in 
transactions with certain insiders that result in private inurement. 
Section 4958 imposes an initial tax of 25 percent on each excess 
benefit transaction entered into between a disqualified person and tax- 
exempt organizations under sections 501(c)(3) and (4). The initial tax 
is to be paid by this disqualified person, including any person who at 
any time during the 5-year period ending on the date of the transaction 
was in a position to exercise substantial influence over the 
organization, a member of this person's family, and a 35 percent 
controlled entity. Such an entity exists when a disqualified person 
owns more than 35 percent of the voting power of a corporation, more 
than 35 percent of the profit interest of a partnership, or more than 
35 percent of the beneficial interest of a trust or estate. If an 
initial tax is imposed on the disqualified persons, an additional tax 
of 10 percent is to be imposed on the organization's manager if that 
manager participated knowing that it was an excess benefit transaction. 
If the excess benefit transaction is not corrected within the taxable 
period, a tax equal to 200 percent of the excess benefit transaction 
will be imposed on the disqualified person. Private foundations are not 
subject to this excise tax. 

Excise Tax on Private Foundation Investment Income (Section 4940): 

Section 4940 was added by the Tax Reform Act of 1969, P.L. 91-172. The 
related Senate Report[Footnote 50] described the excise tax as an 
"audit fee tax" that was believed to be necessary to cover IRS's costs 
for increased supervision over private foundations under the act. 
Section 4940 imposes a 2 percent excise tax on the net investment 
income of tax-exempt private foundations. Net investment income 
includes income from interest, dividends, and net capital gains that is 
reduced by the expenses incurred to earn it. This tax is 1 percent if a 
private foundation meets certain distribution requirements. Private 
foundations that meet the requirements to be an "exempt operating 
foundation" are not subject to this excise tax. Among these 
requirements are stipulations that the foundation be publicly supported 
for at least 10 years and that it have a governing body that is broadly 
representative of the general public. Private foundations that are not 
exempt from taxation are subject to this excise tax and unrelated 
business income tax. 

Excise Tax on Private Foundation Acts of Self-Dealing (Section 4941): 

Because a tax-exempt entity cannot operate to confer a benefit on 
private parties, Section 4941 was enacted by the Tax Reform Act of 
1969. According to the Senate Report, generally prohibiting self- 
dealing transactions would minimize the need to apply the subjective 
arm's-length standard that was used for loans, payments of 
compensation, and preferential availability of services under the 1950 
amendments. Section 4941 imposes a 5 percent excise tax on acts of self-
dealing between a private foundation and disqualified persons. This tax 
is to be paid by the disqualified person who participated in the self-
dealing. An additional tax equal to 200 percent of the amount involved 
is to be imposed if the self-dealing is not corrected during the 
taxation period. A separate tax equal to 2-˝ percent of the amount 
involved is to be imposed on the foundation's manager if that manager 
knowingly participated in the act of self-dealing. If this additional 
tax has been imposed on the foundation manager and that manager refuses 
to agree to part or all of the correction, an additional tax equal to 
50 percent of the amount is to be imposed. Acts of self-dealing include 
sales, exchanges, or leases of property; lending of money or other 
extensions of credit; and payment of compensation. Disqualified persons 
include substantial contributors to the foundation, foundation 
managers, an owner of more than 20 percent of a business enterprise 
that is a substantial contributor, and certain government officials. 

Excise Tax on Private Foundation Failure to Distribute Income (Section 
4942): 

Section 4942 was enacted by the Tax Reform Act of 1969. Prior to it, a 
private foundation could lose its exemption if it failed to make 
distributions towards its charitable purposes instead of just 
accumulating income. According to the Senate Report, the committee 
believed that loss of exempt status as the only sanction was often 
ineffective or harsh, and that substantial improvement could be 
achieved by providing a graduation of sanctions if income is not 
distributed. Section 4942 imposes a 15 percent excise tax on the 
undistributed income of a private foundation for any taxable year in 
which the required amount has not been distributed before the first day 
of the next taxable year. If an initial tax has been imposed under 
section 4942 and the income remains undistributed at the end of the 
taxable period, a tax equal to 100 percent of the remaining 
undistributed amount is to be imposed. This excise tax does not apply 
to private operating foundations that meet distribution requirements or 
to the extent that the failure to distribute is due solely to an 
incorrect valuation of assets as long as other requirements are met. 

Excise Tax on Private Foundation Excess Business Holdings (Section 
4943): 

Section 4943 was enacted by the Tax Reform Act of 1969. According to 
its Senate Report, the use of foundations to maintain control of a 
business appeared to be increasing, and some who wished to use a 
foundation's stock holdings to control a business were relatively 
unconcerned about producing income for charitable purposes. Where the 
charitable ownership predominated, the business could unfairly compete 
with businesses whose owners were required to pay taxes on their 
business income. The committee concluded that a limit on the extent to 
which a private foundation may control a business was needed. Section 
4943 imposes a 5 percent excise tax on certain excess business holdings 
of a private foundation. Permitted holdings generally include up to 20 
percent of the voting stock of an incorporated business enterprise 
(reduced by the percentage of the voting stock owned by all 
disqualified persons) and similar holdings in partnerships and other 
unincorporated enterprises (except sole proprietorships). If the excise 
tax has been imposed, foundations that fail to make the required 
divestiture of excess holdings above the permitted amounts are subject 
to an additional tax equal to 200 percent of the excess holdings. In 
certain cases, foundations are allowed a 5-year period to dispose of 
the excess holdings and may receive an additional 5-year extension. 

Excise Tax on Private Foundation Investments Which Jeopardize 
Charitable Purpose (Section 4944): 

Section 4944 was enacted by the Tax Reform Act of 1969. Under prior 
law, a private foundation could lose its exemption if it invested in a 
manner that jeopardized its exempt purpose. In the Senate Report, the 
committee concluded that limited sanctions were preferable to the loss 
of exemption. Section 4944 imposes an initial 5 percent excise tax on 
the amount involved if a private foundation invests in a manner that 
jeopardizes its exempt purpose (e.g., investing with the purpose of 
income production or property appreciation). If this tax is imposed on 
the foundation, a separate 5 percent excise tax is to be imposed on the 
foundation manager if that manager knew that making the investment 
would jeopardize the foundation's exempt purpose. If an initial tax is 
imposed, an additional tax equal to 25 percent of the amount of the 
investment is to be imposed on the foundation if the investment is not 
withdrawn within the taxable period. An additional tax equal to 5 
percent of the amount of the investment is to be imposed on the 
foundation manager if the investment is not withdrawn. 

Excise Tax on Private Foundation Taxable Expenditures (Section 4945): 

Section 4945 was enacted by the Tax Reform Act of 1969. Under prior 
law, the only sanction against prohibited political activity by a 
foundation was loss of exemption. The Senate Committee Report noted 
that the standards for determining the permissible level of political 
activity were so vague as to encourage subjective application of the 
sanction. As a result, section 4945 was added to clarify the types of 
impermissible activities and provide more limited sanctions. Section 
4945 imposes an initial 10 percent excise tax on each taxable 
expenditure made by the foundation. An additional 2-˝ percent excise 
tax is to be imposed on the foundation manager if that manager 
knowingly participated in the taxable expenditure. Taxable expenditures 
include amounts paid to carry on propaganda or otherwise influence 
legislation or the outcome of a public election, or to directly or 
indirectly carry on a voter registration drive. If the expenditure is 
not corrected within the taxable period, an additional tax equal to 100 
percent of the amount of the expenditure is to be imposed on the 
foundation and an additional tax equal to 50 percent of the amount of 
the expenditure is to be imposed on the foundation manager. 

[End of section] 

Appendix II: Summary Data Tables for Section 501(c)(3) Tax-Exempt 
Charities in 2005 Constant Dollars, Tax Years 1999-2003: 

The following tables summarize data reported on the annual Forms 990 
and 990-PF filed by tax-exempt charitable entities under section 
501(c)(3) of the Internal Revenue Code. The tables cover number of 
returns filed and the reported totals for the following 
characteristics: assets, revenues, expenses, contributions received, 
noncash contributions received, grants paid, and executive 
compensation. The data are categorized by supporting organizations, 
private foundations, and all other 501(c)(3) charities. 

Table 4: Number of Returns Filed, Tax Years 1999 through 2003: 

Tax year: 1999; 
Supporting organizations: 20,217; 
Percentage change: N/ A; 
Private foundations: 69,812; 
Percentage change: N/A; 
All other 501(c)(3) tax-exempt charities: 280,033; 
Percentage change: N/A. 

Tax year: 2000; 
Supporting organizations: 20,817; 
Percentage change: 3%; 
Private foundations: 74,056; 
Percentage change: 6%; 
All other 501(c)(3) tax-exempt charities: 283,826; 
Percentage change: 1%. 

Tax year: 2001; 
Supporting organizations: 21,466; 
Percentage change: 3%; 
Private foundations: 77,229; 
Percentage change: 4%; 
All other 501(c)(3) tax-exempt charities: 301,043; 
Percentage change: 6%. 

Tax year: 2002; 
Supporting organizations: 21,057; 
Percentage change: - 2%; 
Private foundations: 80,631; 
Percentage change: 4%; 
All other 501(c)(3) tax-exempt charities: 289,381; 
Percentage change: -4%. 

Tax year: 2003; 
Supporting organizations: 21,372; 
Percentage change: 1%; 
Private foundations: 80,365; 
Percentage change: 0%; 
All other 501(c)(3) tax-exempt charities: 298,897; 
Percentage change: 3%.  

Source: GAO analysis of data from IRS's Returns Inventory and 
Classification System, 1999 through 2003. 

[End of table]

Table 5: Total Assets Reported by Section 501(c)(3) Organizations in 
Constant 2005 Dollars, Tax Years 1999 through 2003: 

(Dollars in billions). 

1999; 
Supporting organizations: $211.1; 
Percentage change: N/A; 
Private foundations: $428.4; 
Percentage change: N/A; 
All other 501(c)(3) tax-exempt charities: $1,514.1; 
Percentage change: N/A. 

2000; 
Supporting organizations: 213.5; 
Percentage change: 1%; 
Private foundations: 470.5; 
Percentage change: 10%; 
All other 501(c)(3) tax-exempt charities: 1,544.1; 
Percentage change: 2%. 

2001; 
Supporting organizations: 214.6; 
Percentage change: 1%; 
Private foundations: 451.9; 
Percentage change: - 4%; 
All other 501(c)(3) tax-exempt charities: 1,583.1; 
Percentage change: 3%. 

2002; 
Supporting organizations: 215.8; 
Percentage change: 1%; 
Private foundations: 447.8; 
Percentage change: - 1%; 
All other 501(c)(3) tax-exempt charities: 1,546.7; 
Percentage change: -2%. 

2003; 
Supporting organizations: $239.4; 
Percentage change: 11%; 
Private foundations: $449.5; 
Percentage change: 0%; 
All other 501(c)(3) tax-exempt charities: $1,646.3; 
Percentage change: 6%. 

Source: GAO analysis of data from IRS's Returns Inventory and 
Classification System, 1999 through 2003. 

[End of table] 

Table 6: Total Revenue Reported by Section 501(c)(3) Organizations in 
Constant 2005 Dollars, Tax Years 1999 through 2003: 

(Dollars in billions). 

1999; 
Supporting organizations: $63.0; 
Percentage change: N/A; 
Private foundations: $84.6; 
Percentage change: N/A; 
All other 501(c)(3) tax-exempt charities: $896.4; 
Percentage change: N/A. 

2000; 
Supporting organizations: 62.5; 
Percentage change: -1%; 
Private foundations: 84.4; 
Percentage change: 0%; 
All other 501(c)(3) tax-exempt charities: 915.8; 
Percentage change: 2%. 

2001; 
Supporting organizations: 55.2; 
Percentage change: -12%; 
Private foundations: 50.0; 
Percentage change: -41%; 
All other 501(c)(3) tax-exempt charities: 934.0; 
Percentage change: 2%. 

2002; 
Supporting organizations: 55.4; 
Percentage change: 0%; 
Private foundations: 35.6; 
Percentage change: -29%; 
All other 501(c)(3) tax-exempt charities: 925.6; 
Percentage change: -1%. 

2003; 
Supporting organizations: $65.0; 
Percentage change: 17%; 
Private foundations: $53.6; 
Percentage change: 51%; 
All other 501(c)(3) tax-exempt charities: $987.4; 
Percentage change: 7%. 

Source: GAO analysis of data from IRS's Returns Inventory and 
Classification System, 1999 through 2003. 

[End of table] 

Table 7: Total Expenses Reported by Section 501(c)(3) Organizations in 
Constant 2005 Dollars, Tax Years 1999 through 2003: 

(Dollars in billions). 

1999; 
Supporting organizations: $50.0; 
Percentage change: N/A; 
Private foundations: $40.6; 
Percentage change: N/A; 
All other 501(c)(3) tax-exempt charities: $806.5; 
Percentage change: N/A. 

2000; 
Supporting organizations: 53.3; 
Percentage change: 6%; 
Private foundations: 44.0; 
Percentage change: 8%; 
All other 501(c)(3) tax-exempt charities: 845.2; 
Percentage change: 5%. 

2001; 
Supporting organizations: 51.3; 
Percentage change: -4%; 
Private foundations: 43.5; 
Percentage change: -1%; 
All other 501(c)(3) tax-exempt charities: 894.6; 
Percentage change: 6%. 

2002; 
Supporting organizations: 52.9; 
Percentage change: 3%; 
Private foundations: 41.6; 
Percentage change: -4%; 
All other 501(c)(3) tax-exempt charities: 903.3; 
Percentage change: 1%. 

2003; 
Supporting organizations: $55.6; 
Percentage change: 5%; 
Private foundations: $41.1; 
Percentage change: - 1%; 
All other 501(c)(3) tax-exempt charities: $927.5; 
Percentage change: 3%. 

Source: GAO analysis of data from IRS's Returns Inventory and 
Classification System, 1999 through 2003. 

[End of table] 

Table 8: Total Contributions Received Reported by Section 501(c)(3) 
Organizations in Constant 2005 Dollars, Tax Years 1999 through 2003: 

(Dollars in billions). 

1999; 
Supporting organizations: $14.2; 
Percentage change: N/A; 
Private foundations: $31.3; 
Percentage change: N/A; 
All other 501(c)(3) tax-exempt charities: $195.9; 
Percentage change: N/A. 

2000; 
Supporting organizations: 16.3; 
Percentage change: 14%; 
Private foundations: 36.0; 
Percentage change: 15%; 
All other 501(c)(3) tax-exempt charities: 211.8; 
Percentage change: 8%. 

2001; 
Supporting organizations: 14.7; 
Percentage change: -10%; 
Private foundations: 31.3; 
Percentage change: -13%; 
All other 501(c)(3) tax-exempt charities: 225.0; 
Percentage change: 6%. 

2002; 
Supporting organizations: 13.3; 
Percentage change: -9%; 
Private foundations: 25.2; 
Percentage change: -19%; 
All other 501(c)(3) tax-exempt charities: 211.9; 
Percentage change: -6%. 

2003; 
Supporting organizations: $15.5; 
Percentage change: 17%; 
Private foundations: $27.7; 
Percentage change: 10%; 
All other 501(c)(3) tax-exempt charities: $219.4; 
Percentage change: 4%. 

Source: GAO analysis of data from IRS's Returns Inventory and 
Classification System, 1999 through 2003. 

[End of table] 

Table 9: Total Noncash Contributions Received Reported by Section 
501(c)(3) Organizations in Constant 2005 Dollars, Tax Years 1999 
through 2003: 

(Dollars in billions). 

1999; 
Supporting organizations: $2.7; 
Percentage change: N/A; 
Private foundations[A] N/A ; 
Percentage change: N/ A; 
All other 501(c)(3) tax-exempt charities: $16.7; 
Percentage change: N/A. 

2000; 
Supporting organizations: 2.6; 
Percentage change: -1%; 
Private foundations[A]: N/A ; 
Percentage change: N/ A; 
All other 501(c)(3) tax-exempt charities: 20.3; 
Percentage change: 22%. 

2001; 
Supporting organizations: 2.6; 
Percentage change: -2%; 
Private foundations[A]: N/A ; 
Percentage change: N/ A; 
All other 501(c)(3) tax-exempt charities: 21.0; 
Percentage change: 3%. 

2002; 
Supporting organizations: 1.8; 
Percentage change: -30%; 
Private foundations[A]: N/A ; 
Percentage change: N/ A; 
All other 501(c)(3) tax-exempt charities: 18.0; 
Percentage change: - 14%. 

2003; 
Supporting organizations: $2.4; 
Percentage change: 33%; 
Private foundations[A]: N/A ; 
Percentage change: N/ A; 
All other 501(c)(3) tax-exempt charities: $25.8; 
Percentage change: 43%. 

Source: GAO analysis of data from GuideStar, 1999 through 2003. 

[A] Unlike organizations that file a form 990, private foundations do 
not report the amount of noncash contributions received on the Form 990-
PF. 

[End of table] 

Table 10: Total Grants Paid Reported by Section 501(c)(3) Organizations 
in Constant 2005 Dollars, Tax Years 1999 through 2003: 

(Dollars in billions). 

1999; 
Supporting organizations: $ 8.5; 
Percentage change: N/A; 
Private foundations: $32.4; 
Percentage change: N/A; 
All other 501(c)(3) tax-exempt charities: $42.6; 
Percentage change: N/A. 

2000; 
Supporting organizations: 11.3; 
Percentage change: 33%; 
Private foundations: 34.9; 
Percentage change: 8%; 
All other 501(c)(3) tax-exempt charities: 45.5; 
Percentage change: 7%. 

2001; 
Supporting organizations: 8.0; 
Percentage change: -29%; 
Private foundations: 35.9; 
Percentage change: 3%; 
All other 501(c)(3) tax-exempt charities: 48.2; 
Percentage change: 6%. 

2002; 
Supporting organizations: 7.9; 
Percentage change: -2%; 
Private foundations: 33.9; 
Percentage change: -6%; 
All other 501(c)(3) tax-exempt charities: 47.4; 
Percentage change: -2%. 

2003; 
Supporting organizations: $10.7; 
Percentage change: 37%; 
Private foundations: $31.0; 
Percentage change: 
-9%; 
All other 501(c)(3) tax-exempt charities: $58.2; 
Percentage change: 23%. 

Source: GAO analysis of data from IRS's Returns Inventory and 
Classification System for private foundations, and from GuideStar for 
supporting organizations and all other 501(c)(3) tax-exempt charities, 
1999 through 2003. 

[End of table] 

Table 11: Total Executive Compensation Reported by Section 501(c)(3) 
Organizations in Constant 2005 Dollars, Tax Years 1999 through 2003: 

(Dollars in billions). 

1999; 
Supporting organizations: $0.9; 
Percentage change: N/A; 
Private foundations: $0.7; 
Percentage change: N/A; 
All other 501(c)(3) tax-exempt charities: $11.1; 
Percentage change: N/A. 

2000; 
Supporting organizations: 1.0; 
Percentage change: 6%; 
Private foundations: 0.8; 
Percentage change: 8%; 
All other 501(c)(3) tax-exempt charities: 11.5; 
Percentage change: 3%. 

2001; 
Supporting organizations: 1.0; 
Percentage change: 4%; 
Private foundations: 0.9; 
Percentage change: 9%; 
All other 501(c)(3) tax-exempt charities: 12.9; 
Percentage change: 12%. 

2002; 
Supporting organizations: 1.0; 
Percentage change: 2%; 
Private foundations: 0.8; 
Percentage change: -3%; 
All other 501(c)(3) tax-exempt charities: 12.8; 
Percentage change: -1%. 

2003; 
Supporting organizations: $1.1; 
Percentage change: 7%; 
Private foundations: $0.8; 
Percentage change: -4%; 
All other 501(c)(3) tax-exempt charities: $13.0; 
Percentage change: 2%. 

Source: GAO analysis of data from IRS's Returns Inventory and 
Classification System, 1999 through 2003. 

[End of table] 

[End of section] 

Appendix III: Noncash Contribution Valuation Methods: 

IRS's Publication 561 provides guidance to taxpayers on determining the 
value of property donated to qualified organizations. It defines "fair 
market value" (FMV) as the price a willing, knowledgeable buyer would 
pay a willing, knowledgeable seller when neither has to buy or sell. 
Future events that may affect the property cannot be included in FMV 
unless they are known at the time of the donation. In addition, past 
events, such as rapid growth of value over the short term, may have to 
be balanced out over a longer time frame for a realistic projection of 
value. While there is no single method to determine FMV, factors to 
consider include the cost or selling price, sales of comparable 
properties, replacement costs, and opinions of experts. 

Although there are many categories of noncash contributions including 
vehicles, used clothing, and works of art that charities may receive, 
donor-advised funds and supporting organizations typically receive 
larger noncash gifts, according to IRS. 

For stocks and bonds, the fair market value is the average price 
between the highest and lowest trading price on the date of donation. 
This method is only to be used for items for which an active market 
exists. If the item is traded on multiple exchanges, then the principle 
exchange must be used. In addition, large blocks of stock may require 
an expert to assist in the appraisal. 

For closely-held securities, determining FMV would include considering 
the company's net worth, prospective earning power, dividend-paying 
capacity, and other factors such as the economic outlook in the 
particular industry and the company's relative position within it, and 
the value of securities of companies engaged in the same or similar 
business. 

For real estate, a detailed appraisal by a qualified appraiser is 
required. Certain items must be included such as complete description, 
legal description, lot and block number, physical features, condition, 
dimension, zoning, and potential uses. Three valuation methods may be 
used--comparable sales, capitalization of income, and replacement cost 
new or reproduction cost minus observed depreciation (this method used 
alone does not determine FMV but rather tends to set the upper limit of 
value). 

IRC section 170, particularly Sec 170(f)(8), provides the basis for 
reporting noncash charitable contributions, such as using a qualified 
appraiser. The American Jobs Creation Act of 2004[Footnote 51] also 
contains provisions regarding noncash contributions, including 
requiring the donor to attach a qualified appraisal to the tax return 
if the contribution is over $500,000. 

Taxpayers are required to file IRS Form 8283 (Noncash Charitable 
Contributions) if the charitable tax deduction claimed is greater than 
$500. Form 8283 should be filed for the tax year that the deduction is 
claimed. Different sections of the form are to be completed based on 
type of property donated and whether the amount claimed is less than or 
greater than $5,000. Generally appraisals are required by a qualified 
appraiser for donations of more than $5,000. Charitable organizations 
receiving donated property must file Form 8282 to report information to 
IRS about disposition of certain charitable deduction property made 
within 2 years after the donor contributed the property. 

According to an IRS manager, closely-held stock is a growing concern 
and challenge to IRS, since it can involve a broad base of taxpayers. 
He added that artwork, while well-publicized in terms of valuation 
issues, is less of a concern since the dollar amounts involved are 
small compared to other types of noncash contributions. In addition, 
the IRS manager identified the following challenges to addressing 
noncompliance, gathered from about 100 examination cases: 

* donors are sometimes vague when describing the contribution on Form 
8283, impeding IRS's understanding and ability to address any problems; 

* donors can submit Form 8283 upon examination, creating problems with 
detecting problems early; 

* corporate donors of patents can structure the contribution (e.g., pay 
maintenance fees on the patent) so that the donee is not required to 
file a Form 8282 upon disposition of the contribution; 

* no requirement exists that noncash contribution amounts reported on a 
donor's tax return and a charity's Form 990 must match; 

* donors take improper deductions without adverse impact to the 
charity; and: 

* multiple appraisals of contribution value are not helpful because 
appraisals are very subjective. 

To address some of these concerns, IRS has several initiatives looking 
at specific types of noncash contributions, such as vehicle donations 
and art valuations. Additionally, IRS has a program that compares 
valuations of noncash contributions claimed by taxpayers (on Form 8283) 
with the price obtained by recipient charities when they resell the 
property. IRS has used data from this program to complete a study of 
large noncash contributions. 

[End of section] 

Appendix IV: Methods and Materials Used to Market Donor-Advised Funds 
and Supporting Organizations to Potential Donors: 

Earlier in this report, we discussed some of the methods and materials 
used to publicize donor-advised funds and supporting organizations that 
may lead to noncompliance with tax laws. The following is a discussion 
of donor motivations and materials and methods that are not intended to 
lead to abusive schemes. To obtain this information, we spoke with 11 
community foundation managers, 6 financial professionals, and 18 
managers at IRS. The examples we discuss come from materials that we 
were referred to or located online based on our interviews, and do not 
necessarily represent all materials and methods used to market donor- 
advised funds and supporting organizations. 

Because donor-advised funds and supporting organizations are just two 
among many charitable giving options, potential donors must select an 
option that best suits their goals and donation plan. Factors that may 
influence a donor's decision include: types of causes they wish to 
support, the size and type of donation they wish to give, and their 
desired involvement level in directing the use of their donation. For 
example, some donors, who desire to donate to a specific community or 
to have in-depth information on charities receiving their funds, might 
find that a donor-advised fund administered by a community foundation 
is an appealing option. Community foundations, which typically have a 
local focus, may do particularly well at performing due diligence on 
charities receiving their funds, according to one estate planner. Due 
diligence may include identifying organizations listed in IRS 
Publication 78,[Footnote 52] or interacting with exempt organizations 
that are potential recipients of funds, according to community 
foundation managers. 

To evaluate giving options in relation to their goals, donors may seek 
information from accountants, financial planners, lawyers, community 
foundations, the Internet, and tax-exempt organizations, among others. 
Some exempt organizations' efforts to market donation options tend to 
be limited, according to a study by a nonprofit philanthropic research 
and development organization. This makes personal and business 
relationships important ways for donors to learn about donor-advised 
funds and supporting organizations, according to community foundation 
managers. Because many donor-advised funds are administered by 
community foundations or are housed in charities affiliated with 
commercial investment firms, such as Vanguard and Fidelity, these 
relationships may be particularly important sources for introducing 
donors to donor-advised funds, according to a community foundation 
manager interviewed by The Chronicle of Philanthropy. According to 
several community foundation managers, many donors to community 
foundation donor advised funds are referred from professional advisers. 
Recognizing the importance of these relationships, some community 
foundations have launched specific outreach efforts aimed at financial 
advisers and other professionals who could refer donor-advised fund 
clients. 

In addition to discussions with professionals, donors may encounter or 
be presented with a variety of material explaining charitable giving 
options. Material may contain details of giving options in relation to 
both tax incentives to the donor and charitable benefits for the exempt 
organization. Some firms advertise services for clients in magazines or 
national publications, according to IRS managers and an estate lawyer, 
while others depend on the Internet. Descriptions of professional 
services can include outlines of charitable giving options, some of 
which attempt to explain giving options based on the legal, practical, 
and charitable characteristics of each option. For example, some 
community foundations, philanthropy organizations, and investment firms 
provide tables or descriptions comparing various combinations of donor-
advised funds, supporting organizations, private foundations, and other 
donation options. These tables describe and compare levels of donor 
involvement, tax status, deductions by asset type, start-up costs, and 
administrative requirements. Other material outlines the steps and 
requirements necessary to establish a donor-advised fund or supporting 
organization. 

[End of section] 

Appendix V: Comments from the Internal Revenue Service: 

Department Of The Treasury: 
Internal Revenue Service: 
Washington, D.C. 20224: 

Commissioner: 

July 19, 2006: 

Mr. Michael Brostek: 
Director, Tax Issues: 
U.S. Government Accountability Office: 
441 G Street, N.W. 
Washington, D.C. 20548: 

Dear Mr. Brostek: 

I am pleased to respond to your draft report concerning donor-advised 
funds and supporting organizations and ways in which collecting more 
data on these entities could enhance compliance (GAO-06-799). 

I welcome your study. One of the IRS's strategic objectives is to deter 
abuse within tax-exempt and government entities and the misuse of such 
entities by third parties for tax avoidance and other unintended 
purposes. Your report makes several recommendations that can help us 
meet that objective. 

The recommendations address aspects of a project we currently have 
underway to redesign the Form 990, the annual information report filed 
by many public charities. Our goal, an aggressive one which is still 
subject to available funding, approval of major design considerations, 
and final approval of schedule, is to complete this project in stages 
for the 2009 filing season. As part of the first stage, we plan to 
release a draft revised Form 990 for public comment no later than May 
2007. The draft will present information about public charities in a 
more coherent fashion, contain new and clearer instructions, and 
include a glossary of terms. We plan to take comments we receive from 
the public into account in a subsequent revision, and add questions 
related to organizational governance, compensation, and related-party 
transactions. 

In the next stage, we plan to revise the revenue and expense statements 
and the balance sheet. We also plan to create new sections for areas of 
special concern, including donor-advised funds, supporting 
organizations, and health care/hospitals. At that point, the Form 990 
will be a superior information return that increases the transparency 
of the operations of tax-exempt organizations and improves the 
usefulness of the Form 990 as a compliance tool. 

In the final stage, we plan to harmonize the Form 990 with the Form 
1023, and will consider the creation of new sections for additional 
areas of special concern, such as credit-counseling, low-income and 
elderly housing, gaming, and professional fundraising. 

This comprehensive revision of the Form 990 is a matter of interest and 
concern not only to the IRS, but also to the exempt organizations 
community generally, to state charity regulators, and to our partners 
in the software industry who provide Form 990-related software. The 990 
project requires close consultation among the affected parties, and the 
development and introduction of new software. We are looking for ways 
to accelerate the project as much as possible, but recognize that it 
will require steady funding and several years to complete. 

Our response to the report's three recommendations is enclosed. If you 
have any questions, please contact Lois G. Lerner, Director of Exempt 
Organizations, Tax Exempt and Government Entities Division at (202) 283-
2300. 

Sincerely, 

Signed by: 

Mark W. Everson: 

Enclosure: 

Enclosure: 

Recommendation 1: require more comprehensive reporting of donor-advised 
fund activity as part of the Form 990 revision process. 

The IRS agrees with this recommendation. We are now conducting 
compliance work on donor-advised funds. One type of fund we are 
addressing is the large commercial donor-advised fund, often associated 
with large investment firms. We also are examining organizations that 
appear to be abusing the basic concepts underlying donor-advised funds. 
More comprehensive reporting of donor-advised fund activity on an 
organization's Form 990 could help expose this sort of abuse and 
enhance tax compliance. Your staff has been in contact with IRS 
personnel working on the on-going comprehensive revision of the Form 
990, and we will incorporate this recommendation as part of the 
revision process. We expect this phase of the project to be completed 
for filings due in 2009, subject to approval of final design and 
available funding. 

Recommendation 2: require supporting organizations to report their 
supported organization's employer identification number as part of the 
Form 990 revision process. 

The IRS agrees with this recommendation. We have undertaken a 
compliance project to examine organizations that have been established 
by promoters, and are finding abuse in this area. An identifying 
characteristic of these cases is that a donor makes a "charitable" 
contribution to the supporting organization. The supporting 
organization then returns the donated amount to the donor, often in the 
form of a sham loan that may never be repaid. Reporting the supported 
organization's employer identification number on the Form 990 could aid 
us in the early identification of this type of abuse. Our current 
schedule is to include this change in a revision of the Form 990 to be 
available by December 31, 2007, subject to approval of final design 
considerations and available funding. 

Recommendation 3: require reporting of the taxpayer identification 
number (TIN) for recipients of large loans, while safeguarding taxpayer 
privacy, as part of the Form 990 revision process. 

The IRS agrees that there is a need for greater transparency within 
donor-advised funds and for tracking the flow of funds from donors and 
charities. However, under current law, we do not believe that we can 
protect the TINs of individual loan recipients from public disclosure 
if the TINs are entered on a Form 990. Section 6033 of the Internal 
Revenue Code requires an annual information return to be filed by 
organizations exempt from taxation under section 501(a), with certain 
specified exceptions. Section 6104 of the Code requires that 
information required to be furnished by section 6033 be disclosed and 
made available for public inspection both by the IRS and by the 
organization. Sections 6104(b) and 6104(d)(3)(A) provide that the names 
and addresses of contributors to an organization which is not a private 
foundation within the meaning of section 509(a) or a political 
organization exempt from taxation under section 527 are excepted from 
disclosure. However, there is no corresponding provision that would 
protect information concerning loan recipients. 

We have considered whether we could redact the TINs of loan recipients 
before releasing Forms 990 to the public, or in some other manner 
protect this information from public disclosure, but we have concluded 
that we cannot do so under the statute. Implementation of this 
recommendation therefore would require the IRS to disclose individual 
taxpayer identification numbers to the general public. This is 
inconsistent with the expectation of taxpayer privacy that individual 
taxpayers generally have when they provide such sensitive information 
to the IRS. We therefore cannot agree with this recommendation. 

[End of section] 

Appendix VI: GAO Contact and Staff Acknowledgments: 

GAO Contact: 

Michael Brostek, (202) 512-9110: 

Acknowledgments: 

In addition to the contact named above, Tom Short, Assistant Director; 
Mark Bondo; Marta Chaffee; Elizabeth Fan; Evan Gilman; Nancy Hess; 
Shirley Jones; Donna Miller; John Mingus; Coltrane Stansbury; Paul 
Thacker; and Lindsay Welter made key contributions to this report. 

[End of section] 

Glossary: 

Charity insider: 

An individual such as an officer, board member, or other persons able 
to exercise substantial influence over a tax-exempt organization. 
Donors to donor-advised funds are rarely considered to be insiders, 
while donors to supporting organizations can sometimes be insiders if 
they also serve on the supported organization's board. 

Community foundation: 

An organization, usually a nonoperating charity, providing charitable 
support through grants to local or regional communities. Typically a 
community foundation will aggregate contributions from local residents, 
build endowments, and distribute grants to communities. 

Disqualified person: 

An individual, defined in IRC section 4946, who may have a significant 
conflict of interest with a charity due to financial, executive, or 
voting powers, such as those held by donors, officers, or directors. 
The definition applies to individuals involved with private foundations 
and supporting organizations, and has a limited application to public 
charities that are not supporting organizations. 

Donor-advised fund: 

Charitable giving accounts that are held by a public charity. A donor 
contributes to an individual account within a charity's donor-advised 
fund, and maintains an advisory role on distribution of the funds. No 
statutory or regulatory definition currently exists. 

Donor control: 

Authority exerted by a donor that exceeds what is allowable for a donor-
advised fund or supporting organization. Donor control includes direct 
or indirect power over decisions regarding an organization's assets or 
operations. 

Excess benefit: 

A transaction, directly or indirectly, between a disqualified person 
and a tax-exempt organization that results in economic benefit to the 
disqualified person exceeding the value of service to the organization. 
Subject to excise taxation under IRC section 4958. 

Excise tax: 

A tax imposed on an act, occupation, privilege, manufacture, sale, or 
consumption and that is usually designed to influence taxpayer 
behavior. 

Expenditure responsibility process: 

A set of procedures used by private foundations to ensure responsible 
use of grants to charities. The assessment may include: 

a pre-grant inquiry on the recipient charity, establishment of 
commitments for grant recipient, investment requirements, or agreements 
on actions if agreements are violated. 

Intermediate sanctions: 

Excise taxes that provide a corrective remedy for excess benefit 
transactions. The excise taxes are paid by the disqualified person, as 
defined in IRC 4958, who receives excess benefit, or by a charity 
manager who knowingly participates in the transaction. 

Inurement: 

The transfer or use of a charity's assets or income for the benefit of 
a charity's insiders. Inurement is a specific form of private benefit, 
and is prohibited for all 501(c)(3) organizations. 

IRS Form 1023: 

Application for Recognition of Exemption under IRC Section 501(c)(3) 
that organizations must file in order to receive tax-exempt status. 

IRS Form 990: 

IRS information return that public charities are required to file 
annually unless the organization is a church or entity associated with 
a church, a certain type of governmental unit affiliate, or falls below 
certain gross receipts thresholds. 

IRS Form 990-PF: 

IRS information return that private foundations must file annually. 

Noncash contribution: 

An asset other than cash donated to a tax-exempt organization, for 
example, stocks, bonds, vehicles, artwork, or real estate. 

Payout: 

An organization's expenditures to individuals or charities for certain 
operational or administrative functions. Private foundations must 
distribute about 5 percent of the average market value of their 
noncharitable use assets, generally stocks or other investments that 
compose the foundation's endowment; 
donor-advised funds and supporting organizations do not have to meet a 
minimum payout. 

Private foundation: 

A 501(c)(3) organization, further defined in IRC section 509(a), that 
does not qualify as a public charity. Generally, private foundation 
rules and regulations are more complex and limiting than those for 
public charities. 

Private benefit: 

The transfer or use of a charity's assets or income, or the conferment 
of undue advantage, to private persons who are not necessarily charity 
insiders. Some private benefit is permitted, but it must not be more 
than incidental to the charitable purpose being served. Private benefit 
is a broad term that includes inurement and applies to all 501(c)(3) 
organizations. 

Public charity: 

A tax-exempt organization defined in IRC section 501(c)(3) that 
receives broad financial support or is a supporting organization. 
Public charities have fewer legal requirements than private 
foundations. 

Revocation: 

A corrective action that removes a charity's tax-exempt charter. 
Revocation is used for violations such as inurement, performing 
nonexempt activities, operating in a commercial manner, and operating 
for private use. 

Section 501(c)(3) organization: 

A tax-exempt organization operated for a charitable purpose. Purposes 
considered to be charitable include serving the poor and distressed; 
advancing religious, educational, or scientific endeavors; 
and protecting human or civil rights. All 501(c)(3) organizations are 
considered either public charities or private charities, known as 
private foundations. Contributions to charities are tax deductible 
under IRC section 170. 

Self-dealing: 

Transactions, either direct or indirect, made between a private 
foundation and disqualified person that involve (1) sale, exchange, or 
lease of property; (2) lending of money or other extensions of credit; 
(3) providing goods, services, or facilities; (4) paying compensation 
to or reimbursing expenses of a disqualified person; (5) transferring 
foundation income or assets to, or for the use or benefit of, a 
disqualified person; and (6) certain agreements to make payments of 
money or property to government officials. 

Supported organization: 

A tax-exempt organization that receives funds or services from a 
supporting organization. 

Supporting organization: 

A public charity defined under IRC section 509(a)(3) that provides 
money or services to one or more supported organizations. There are 
three types of supporting organizations defined by their relationship 
with their supported organization(s): 

Type I: 

operated, supervised, or controlled by a supported organization (parent-
subsidiary relationship); 

Type II: 

supervised or controlled in connection with the supporting organization 
(brother-sister relationship); 
and: 

Type III: 

operated in connection with the supported organization(s). 

FOOTNOTES 

[1] Charities, recognized by Internal Revenue Code (IRC) section 
501(c)(3), are exempt from paying income taxes on the funds collected 
for charitable purposes. Charitable purposes include serving the poor 
and distressed; advancing religious, educational, and scientific 
endeavors; protecting various human and civil rights; and addressing 
various societal problems. Contributions to charities are tax 
deductible under IRC section 170. See glossary for terms used 
throughout this report. 

[2] The most recent IRS estimate available at the time of our review 
was for tax year 2002. We have converted IRS's reported dollar amounts 
to 2005 constant dollars. 

[3] The term donor-advised funds has been used to refer to both the 
individual accounts donors establish, as well as the charities that 
maintain these accounts. For this report, we will be using the terms 
donor-advised funds or donor-advised fund accounts to refer to the 
accounts that donors establish, unless otherwise noted. 

[4] Private foundations are defined by IRC as section 501(c)(3) 
domestic or foreign tax-exempt organizations except those specifically 
excluded from the definition by section 509(a), including universities, 
churches, and hospitals, and similar organizations that meet a public 
support test or that support one of these organizations. 

[5] IRS Forms 990 and 990-PF are federal information returns filed 
annually by tax-exempt public charities, such as supporting 
organizations, and private foundations, respectively. Information 
reported on these returns includes assets held, contributions received, 
and grants paid. 

[6] The Chronicle of Philanthropy is a newspaper that publishes 
articles about the tax-exempt sector and is a source cited by IRS and 
others on the tax-exempt sector. Its most recent survey of donor- 
advised funds collected 2005 data, but in order to compare the data to 
that for supporting organizations, we used 2003 survey data that we 
adjusted to 2005 constant dollars. Results from this survey cannot be 
interpreted as being representative of all donor-advised funds. 

[7] Beyond grants, supporting organizations can also provide support 
through other means, such as providing direct services. At the time of 
our analysis, the most recent data available were from 2003. For data 
that IRS did not transcribe, such as amount of grants paid for 
supporting organizations, we obtained the data from GuideStar. 
GuideStar is a nonprofit organization that transcribes data from Form 
990 into searchable databases. IRS has not assessed in detail the 
quality of GuideStar's data, but did include quality control provisions 
in its contract with GuideStar. 

[8] A taxpayer identification number (TIN) is generally a Social 
Security number for individuals or employer identification number for 
organizations. 

[9] The Panel on the Nonprofit Sector Final Report was published in 
June 2005 and contains recommendations for charitable reform. We 
discuss the Panel Report further in the Background section of this 
report. 

[10] Community foundations are charitable organizations established to 
hold funds contributed from a variety of sources and to use those funds 
to make charitable grants for the benefit of the local community. See 
also U.S. Senate, Committee on Finance, statement of Jane G. Gravelle, 
Charities and Charitable Giving: Proposals for Reform, 109th Cong., 1st 
session, April 5, 2005. 

[11] Entities that are not required to apply include those that are not 
private foundations and that have gross receipts normally not more than 
$5,000, as well as churches and certain entities associated with 
churches. The other documentation to be submitted includes organizing 
and enabling documents, such as the Articles of Incorporation, 
financial data and budgets, and a full description of its exempt 
purposes and activities. 

[12] In this report, when we refer to Form 990, we are also referring 
to Form 990-related schedules, such as Schedules A and B. 

[13] Tax-exempt organizations are required to file a Form 990-T federal 
tax return and pay taxes on income of $1,000 or more earned from 
activities unrelated to their exempt purposes. 

[14] GAO, Tax-Exempt Organizations: Improvements Possible in Public, 
IRS, and State Oversight of Charities, HTGAO-02-526 TH(Washington, 
D.C.: Apr. 30, 2002) discusses IRS examinations of tax-exempt 
organizations and reasons for tax-exempt status revocation. 

[15] The Independent Sector is a national coalition of nonprofit 
organizations, private foundations, and corporate-giving programs that 
is to support the tax-exempt sector. 

[16] The Panel is assisted by over 100 executives of nonprofit entities 
and other experts on five work groups. 

[17] IRS's SOI program collects and processes tax data and annually 
publishes statistics related to the tax system. IRS's TE/GE division 
covers the areas of employee plans, exempt organizations, and 
government entities. The Urban Institute is a nonpartisan public policy 
research center that operates the National Center for Charitable 
Statistics. CRS is the public policy research arm of Congress. 

[18] A disqualified person is an individual, defined in IRC section 
4946, who may have a significant conflict of interest with a charity 
due to financial, executive, or voting powers, such as those held by 
donors, officers, or directors. The definition applies to individuals 
involved with private foundations and supporting organizations, and has 
limited application to public charities other than supporting 
organizations. See section 4958. 

[19] An excess benefit transaction is a transaction in which an 
economic benefit is provided by an applicable tax-exempt organization, 
directly or indirectly, to or for the use of a disqualified person, and 
the value of the economic benefit provided by the organization exceeds 
the value of the consideration received by the organization. 

[20] See appendix I for a more detailed description of tax-exempt 
excise taxes. 

[21] This excise tax is not related to any perceived abusive activity. 

[22] Self-dealing includes the following transactions, whether direct 
or indirect, between a private foundation and a disqualified person:(1) 
sale, exchange, or lease of property; (2) lending money or other 
extensions of credit; (3) providing goods, services, or facilities; (4) 
paying compensation or reimbursing expenses to a disqualified person; 
(5) transferring foundation income or assets to, or for the use or 
benefit of, a disqualified person; and (6) certain agreements to make 
payments of money or property to government officials. 

[23] Pub. L. No. 98-369 (1984). 

[24] The Chronicle of Philanthropy's most recent survey on donor- 
advised funds was published in May 2006 and collected 2005 data. It 
reported that 88 organizations participating in the survey held $15.5 
billion in assets and distributed $3.3 billion to charities. We report 
2003 survey data that we adjusted to 2005 constant dollars to be 
comparable to our other data. 

[25] We did not assess the reliability of the survey results from this 
and other studies on donor-advised funds. In addition to this survey, 
in 2001, the Council on Foundations collaborated with the Columbus 
Foundation to survey donor-advised funds offered by community 
foundations. The Council on Foundations provides legal and other 
services to its members and the general public. The Columbus Foundation 
is a community foundation serving central Ohio. In 2003, the Council on 
Foundations also collaborated on a study on donor-advised funds 
focusing on donor preferences. Both of these studies can be found at 
[Hyperlink, 
http://www.cof.org/files/Documents/Community_Foundations/CF_Columbus_DAF
.pdf] and [Hyperlink, 
http://www.cof.org/files/Documents/Community_Foundations/External_Report
s/FSG2_Oct2003.pdf]. 

[26] Data for tax year 2003 were the most recent complete IRS and 
GuideStar data available at the time of our analysis. In our past work 
(HTGAO-02-526TH), we have reported that caution in interpreting the 
data is warranted. No measures are available on the accuracy of the 
expense data and substantial discretion in allocating the expenses 
makes use of the data problematic in comparing charities. 

[27] Type III supporting organizations can demonstrate that they are an 
integral part of their supported organizations by paying substantially 
all--85 percent or more--of their income to, or for the use of, one or 
more of their supported organizations. The amount of support provided 
must also be enough to ensure the attentiveness of these supported 
organizations. 

[28] Factors include administrative expenses, program-related 
investments, trustee fees, amounts set aside for future charitable 
projects, and monthly average of fair market value of noncharitable use 
securities. 

[29] Thomas H. Pollak and Jonathan D. Durnford, TThe Scope and 
Activities of 501(c)(3) Supporting Organizations T(Washington, D.C.: 
Urban Institute), June 2005, http://www.urban.org/url.cfm?ID=411175 
(downloaded Aug. 8, 2005). 

[30] As described by the Urban Institute, transfers of support are the 
flow of funds from the supporting organization to the supported 
organization, including grants, payments, and loans. 

[31] Supporting organization type is now also being indicated on IRS's 
determination letters. 

[32] All examples in this section are from ongoing or past IRS 
investigations, and were described by IRS officials. 

[33] A charity insider is an individual such as an officer, board 
member, or other persons able to exercise substantial influence over a 
tax-exempt organization. Donors to donor-advised funds are rarely 
considered to be insiders, while donors to supporting organizations can 
be insiders, for example, if they also serve on the supported 
organization's board. 

[34] In order for a charitable contribution to be considered a donation 
eligible for a tax deduction, the donor must relinquish control of the 
asset. IRC section 170 defines charitable contributions and provides 
the rules and limits for tax deductions for individuals and 
corporations. 

[35] Definitions of "control" and the limits of power for disqualified 
persons are found in Treas. Reg. §1.509(a)-4(j)(1). Also see Rev. Rul. 
80-207 for analysis of indirect influence on a board. 

[36] Because of required structures and board oversight for Type I and 
II supporting organizations, this problem is more likely for Type III 
supporting organizations. 

[37] Each team will report on noncompliance trends and possible 
regulatory or legislative actions. The donor-advised fund team, which 
formed in 2002, plans to issue a report by the end of 2006, according 
to an IRS manager. The supporting organization team, which formed in 
2003, told us it plans to issue reports-the first of which would be 
released in August 2006 and the last of which would be released at the 
end of fiscal year 2007-on each of the three waves of cases they are 
investigating. 

[38] The 27 examination cases involved 27 tax returns for 22 different 
organizations. 

[39] Between October 1, 2001, and September 30, 2005, these other IRS 
units have closed 715 cases involving supporting organizations, 400 of 
which were found to be noncompliant. For fiscal year 2006, 94 cases 
have been closed so far; 
64 of which were found to be noncompliant. 

[40] "Intermediate sanctions" in this context generally refers to 
excise taxes paid by a disqualified person receiving private benefit or 
a charity manager with knowledge of a scheme, as defined in IRC section 
4958. IRS officials said that, in the most egregious cases, IRS may 
recommend intermediate sanctions in conjunction with revocation of the 
supporting organization's tax-exempt status. 

[41] IRS identified donor-advised funds for potential examination using 
(1) data from IRS's Rulings and Agreements office, which assesses 
organizations' applications for tax-exempt status, and (2) outside 
sources, including TThe Chronicle of Philanthropy.T: 

[42] Although the donor-advised fund and supporting organizations teams 
began in 2002 and 2003, respectively, examinations did not begin until 
later. 

[43] A donor-advised fund can receive a donation of interest in a 
partnership, but the legal analysis required to determine donor control 
differs from that for a supporting organization. 

[44] IRS encounters transactions between supporting organizations and 
donors that are labeled as "loans" but do not result in repayment. 
These transactions are likely cases of inurement and are a separate 
issue from true loans, which result in repayment. As described in IRC 
section 4941, loans made from a private foundation to a disqualified 
person are subject to excise taxation. 

[45] The definition of promoters is for purposes of IRC section 6700. 

[46] Promoters are subject to laws prohibiting the promotion of abusive 
tax structures, covered in IRC sections 6700 and 6701. 

[47] IRS is unable to determine the extent of the role of promoters in 
noncompliance. 

[48] H. Rep. No. 100-391 (1987). 

[49] H. Rep. No. 104-506 (1996). 

[50] S. Rep. No. 91-552 (1969). 

[51] Pub. L. No. 108-357 (2004). 

[52] IRS's Publication 78, the Cumulative List of Organizations 
described in Section 170(c) of the Internal Revenue Code of 1986, 
contains a list of all organizations eligible to accept tax-deductible 
donations. 

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