Editors’ Note: This Friday, in Washington, DC, Boston College Law School’s Forum on Philanthropy and the Public Good will be hosting a conference, “The Rise of Donor-Advised Funds: Should Congress Respond.” Among the scholars and policy-makers convening to discuss DAFs is Lila Corwin Berman, Associate Professor of History at Temple University, who will be presenting on “Donor Advised Funds in Historical Perspective.” DAFs have escaped historical scrutiny much as, as Berman points out, they have largely escaped regulatory scrutiny, and her work represents an important step in remedying that scholarly lacunae. Below, she gives HistPhil a taste of her presentation. The full paper will be published as part of the proceedings of the conference and HistPhil will provide a link to it as soon as it is available [10/30 Update: Here is the link to the paper]. 

When I try to explain to other historians—or, really, almost anybody—that donor advised funds fundamentally changed the balance of public and private power in the United States starting in the 1970s, I often receive blank stares in return. Even those who know what a donor advised fund is (and I count myself among the people who had no clue what they were until very recently) find it difficult to imagine how a charitable investment fund that their accountant likely recommended might have anything to do with the way power operates on a grand scale. With good reason, few historians have paid much attention to donor advised funds or DAFs. After all, integral to their creation, development, and operation has been their invisibility. As an historian interested in charting the transformations of philanthropic power and the public good within American-Jewish life specifically, I find this invisibility simultaneously maddening and compelling.

Most basically, a DAF is an individual account maintained by a sponsoring public charity. The account houses irrevocably charitable dollars that can be donated to charities under the individual account holder’s non-binding recommendations. Only in 2006, with the passage of the Pension Protection Act, did the Internal Revenue Service define DAFs in its codes and regulations. The funds were nothing new, but their growth had finally reached the point where Congress could no longer sanction their invisibility as a matter of policy. Why had DAFs evaded legal definition for so many decades? The answer gets to the purpose of tax law and the ways in which private power and finance have gained traction over public modes of decision making in the second half of the twentieth century.

In form, DAF-like structures had existed as charitable trusts since the early decades of the twentieth century. Only starting in the 1950s did DAFs begin to emerge with a more specific purpose or rationality. In those years, Congressional committees scrutinized the charitable landscape and sought to end abuses, in part, by crafting a distinction between public and private charities. To do so, Congress used tax policy to articulate norms of charitable behavior: an organization could gain certain clear tax benefits if it adhered to public mandates, defined either categorically (educational or religious institutions) or operationally (according to a test of public support). Should individuals wish to breach those norms, for example by establishing a private family foundation, they could pay for that privilege. In return for being able to use public dollars for their own charitable priorities, they would carry greater tax burden—that is, they would receive less of a public subsidy—and be made to comply with more onerous regulatory measures than public charities.

DAFs, however, subverted the behavioral norms of tax codes by extending public charities’ privileges to private interests. Midcentury tax attorneys, in concert with public charities, identified the absences in the tax code and interpreted them as communicating the greatest permissiveness possible. Specifically, they set up the legal structure for individuals to pay into separately named accounts held by public charities and immediately receive a tax deduction as if they had donated that money to a public charity. In reality, these individuals were simply parking their charitable dollars within a public housing, while retaining the individual right to decide where and when to donate those funds.

In my research, I have read reams of correspondence between Norman Sugarman, a Jewish tax lawyer born in Cleveland in 1917, and the Jewish Federation, an umbrella local and national charitable structure founded at the turn of the century that collected and distributed Jewish dollars. Sugarman, who had worked for the IRS in the 1940s and early 1950s, was extraordinarily savvy in his reading and application of tax code and well understood the possibility contained in its lacunae. In the late 1960s, as Congress moved to implement a clear division between public and private charities, Sugarman advised his clients to petition the IRS for public designation. In this way, they could ready themselves to absorb funds that donors may have once kept in private foundations but that could gain better tax treatment when housed in accounts, such as DAFs (which he called “philanthropic funds” and, occasionally, “advised” or “designated” funds), held by public charities. At Sugarman’s behest, the IRS issued a private-letter ruling sanctioning his vision.

Donor control was essential to the way Sugarman, other tax attorneys, and entrepreneurial leaders of public charities imagined these new philanthropic funds operating. Even as the Tax Reform Act of 1969 had sought to balance the power of donors, by demanding they either donate to public charities or pay excise taxes and other fees in return for their private power, Sugarman and others found a safe harbor for donor control. The IRS private-letter ruling hedged on the extent of individual power by saying that donors could only “recommend” in an “advisory” role how the money from these special accounts would be spent and that public charities maintained the final say.

As time passed, the IRS’s hedge served only to buttress the policy invisibility of DAFs, since the advisory process existed outside of legal structures. Practice, not policy, endowed DAF account holders with near-absolute power. In practice, in all but a few rare cases, the only time a public charity would refuse donors their allocation requests was if they crossed a clear legal line by designating money to be allocated to a non-501(c)(3) organization. Otherwise, donors retained control over their charitable dollars, even as they received the tax benefits reserved in law for donations to public charities. The relatively relaxed rules intended for public entities, thus, applied to private decision-making about charitable allocation. As the law stands, even after the Pension Protection Act of 2006, this general pattern remains in place.

Alone, DAFs may not have necessarily shifted the balance between public and private power. Yet they emerged from a broad set of policies that expanded in the 1970s, which have augmented private control, often at the expense of public regulation and revenue dollars.

Of course, philanthropy as a practice does just that: it names the private individual as an interested party in public governance and vests the individual with public dollars (through tax deductions) to take risks and try to make the world better. The problem with tax policies from lacunae—or invisible tax policies—is that they generally protect the individual interest far more than they guard the public risk. As DAFs have expanded, so much so that Fidelity Investment’s Charitable Gift Fund now ranks as the second largest charitable organization in the United States, the public has unwittingly taken on substantially more risk and ceded substantially more of its power. For this reason, as we historians think about the terms of public and private power across the twentieth century, I suggest we pay as much attention to the barely visible structures, such as DAFs, as we do to the visible structures that reconfigured how power works.

-Lila Corwin Berman

Lila Corwin Berman is Associate Professor of History at Temple University, where she holds the Murray Friedman Chair of American Jewish History and directs the Feinstein Center for American Jewish History. She is author most recently of Metropolitan Jews: Politics, Race, and Religion in Postwar Detroit (Chicago, 2015) and is working on a new book called “The American Jewish Philanthropic Complex: The Historical Formation of a Multi-Billion Dollar Institution.”