In my blog post of May 27th (An Era of Heightened Scrutiny Arising for Donor Advised Funds?), I noted the case of the Fairbairns versus Fidelity Investments Charitable Fund (Fidelity).
Their complaint alleged Fidelity failed to follow their investment recommendation on a liquidating strategy of a $100 million gift of lightly traded stock representing 10% of the company. The disposition of the stock on two of the lightest trading days of the year allegedly resulted in damages of $30 million, reflecting diminution of their charitable deduction and funds available to benefit charity. The donors alleged representations by Fidelity of its expertise in liquidating concentrated stock positions induced them to transfer.
Recently, the U.S. District Court for the Northern District of California denied Fidelity’s motion for summary judgment, ultimately finding that the tax estoppel doctrine did not apply because the charitable income tax deduction claimed by the Fairbairns was not clearly inconsistent with their assertion that Fidelity was bound by its alleged promises.1
The court recognized that although tax law requires a sponsoring organization of a DAF to have exclusive legal control over donated assets, the parties were still free, albeit at their own peril, to enter into a legally binding agreement that ultimately could cause a purported DAF not to provide the otherwise available tax benefits to the donor.1
The court ruled the requests made by the Fairbairns to control the amount and timing of the liquidation as conditions inducing the transfer to Fidelity, not conditions subsequent. The judge ruled whether or not the promises are legally enforceable and whether or not to disqualify the tax deduction are questions of fact for a jury or judge to decide at a trial.
The court noted the Fairbairns bear the risk of whether the trier of fact interprets the representations as permissible conditions precedent or impermissible conditions subsequent.2
Fidelity could also be a Pyrrhic victor with a Fairbairn loss. Would all donor advisory privileges need to be ignored or only those after receipt of contributions to their donor advised fund? Would that severely diminish the business model of commercially sponsored donor advised funds whose strength is liquidating hard to value or hard to sell assets? Would ignoring post-contribution recommendations even be contrary to the legislative intent of permitting donor recommendations of investment of the proceeds? Will this litigation prompt a legislative response? With any of these outcomes, this litigation has the potential to leave donors and donor advised funds very disappointed.
By Professor Chris Woehrle, Chair & Professor of Tax & Estate Planning Department, College for Financial Planning, Centennial, Colorado
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1. For the court’s ruling on the summary motion see Case 3:18-cv-04881-JSC Document 171 filed 03/02/20 in United States District Court for the Northern District of California. ↵
2. The legislative history of the passage of donor advised funds suggests no distinction between when these rights may be exercised whether before, simultaneous to or after the contribution. See The Joint Committee on Taxation, Pension Protection Act of 2006, Title XII: Provisions Relating to Exempt Organizations, 2006 WL 479168 and Page 2 of www.treasury.gov/resource-center/tax policy.Documents/Report-Donor-Advised-Funds-2011.pdf.. 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.” ↵
