One of the lesser known aspects of a donor advised fund (DAF) is the advisory privilege on investments.1
Presently there are no regulations under sec. 4966 of the Internal Revenue Code (Code) providing guidance. The practice of charities sponsoring DAFs has been to maintain legal ownership and control of the assets after receipt. Failure to do so risks the deductibility of the contribution.
A case winding its way through the United States District Court of the Northern District of California (Court) might ultimately decide when the advisory privilege has crossed the line and endangers the deductibility of a contribution. In December of 2017, the Fairbairns contributed $100 million of lightly traded public stock to the Fidelity Charitable Gift Fund (Fidelity). They were concerned about liquidating all the stock representing 10 percent of the company especially in light of Fidelity’s policy to “sell as soon as practicable.”
Fidelity sold all of the stock during a short period of time. The value of the gift turned out to be closer to $70M.
Fairbairns sued, alleging that they were encouraged to contribute to Fidelity on its promises to employ state-of-the-art techniques to liquidate large blocks of stock and allow them to advise on a price limit.
Fidelity argued that the Fairbairns’ claiming of a charitable income tax deduction on the 2017 return bars them from directing the timing of and the amount of the gifted shares to be liquidated. Fidelity argued that the Fairbairns’ claim of misrepresentation would mean it did not have the exclusive control over the gifted asset as required under Sec. 4966 of the Code.
The Court rejected Fidelity’s argument characterizing the Fairbairns’ instructions as conditions issued prior to the time of the donation and not subsequent to the donation. The Court further noted the legislative history accompanying the codification of the DAF under Sec. 4966 of the Code does not distinguish between a legally enforceable promise made at time of contribution and one made after the donation. Nor did a 2011 Treasury Report to the Congress on Donor Advised Funds.2
The danger to the donor of a lost or diminished income tax deduction arises when the right of advise¬ment becomes interpreted as a legal right of direction able to be legally enforced. While that argument of Fidelity was dismissed during its hearing on its motion for summary judgment, the Court’s order doesn’t preclude it from being raised at trial. The risk to the Fairbairns is winning the argument of enforceable promises that a court interprets as preventing Fidelity from ever having dominion and control. While that may not be a likely or even a correct result, it would be a Pyrrhic victory for the Fairbairns.
For a more detailed discussion of this case, please see my article in the April issue of Trusts & Estates entitled Fairbairn v. Fidelity Investments Charitable Gift Fund: Plaintiffs’ Day in Court Still Possible But Will Victory be Pyrrhic?
By Professor Christopher Woehrle, Chair & Professor of Tax & Estate Planning Department, College for Financial Planning, Centennial, Colorado
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1. Internal Revenue Code, sec. 4966 (d) (2)(A)(iii). ↵
2. See The Joint Committee on Taxation, Pension Protection Act of 2006, Title XII: Provisions Relating to Exempt Organizations, 2006 WL 4791686 and www.treasury.gov/resource-center/tax policy.Documents/Report-Donor-Advised-Funds-2011.pdf. at p. two. The 2011 report notes “In the case of a DAF, the donor is explicitly permitted to advise the sponsoring organization about how the donated funds should be invested and/or disbursed to other charities, but such advice is subject to the DAF sponsoring organization’s ultimate discretion and control.” Notice there is no distinction for when these rights of recommendation exist. ↵
