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In recent years, donor-advised funds have become an increasingly popular vehicle for charitable giving. In part, their popularity can be traced to a disconnect in the law: donor-advised funds look in many ways like private foundations, but the tax law treats them as public charities. This disconnect is advantageous to donors. Because Congress was worried about wealthy individuals' ability to take advantage of the control they can exercise over private foundations, it imposed a series of additional tax rules on private foundations. These rules, among other things, limit the deductibility of donations to private foundations, require that private foundations make minimum annual distributions, and require a significant level of transparency from private foundations.

The disconnect between donor-advised funds functioning like private foundations but being classified as public charities means that donors can use donor-advised funds to circumvent the more onerous regulations governing private foundations. Through a donor-advised fund, a taxpayer can take an immediate deduction for a charitable donation with no requirement that the fund distribute any of its assets. The taxpayer enjoys a significant level of control over when and to whom the donor-advised fund eventually distributes the money. Further, the taxpayer enjoys complete privacy: as a public charity, the donor-advised fund does not have to disclose to the public what it does with its money.

Donor-advised funds qualify as public charities because they are not individual entities. Rather, each fund is a segregated account within a larger sponsoring organization. This structure causes the donor base to be diverse, which, in turn, is how these funds qualify as public charities. Donor-advised funds do not have to provide a way for donors to circumvent the private foundations rules, though. This Article proposes that donor-advised funds be required to qualify as public charities individually rather than at the sponsoring organization level. Doing so will ensure that the rules meant to prevent charitable abuses will look at donor-advised funds' functions, not their forms.

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