Fund For Anonymous Gifts Validated

The Fund for Anonymous Gifts v. IRS

PGDC SUMMARY:

William Lehrefield established The Fund for Anonymous Gifts ("Fund") and named himself as trustee in 1993. Fund's purpose was to (i) allow donors to make charitable contributions on an anonymous basis and still be eligible for the charitable contribution deduction, and (ii) allow donors to make a donation to Fund with the condition that the donation be invested by the trustee as directed by the donor, and that the income from the investment be donated on an anonymous basis at a later time as specified by the donor to the ultimate charitable recipient. Under the trust agreement, the trustee was bound by any enforceable conditions subsequent which a donor placed on his donations, which included who the ultimate recipient of the donation is, when the donation is made, and how the donation is invested.

The District Court held that Fund failed to meet its burden of proving that it was formed to operate for an exempt purpose and did not address whether Fund qualified as a publicly supported charity under 170(b)(1)(A)(vi). On appeal, Fund agreed to amend its trust agreement to eliminate the provision which allowed conditions subsequent on the donations to Fund. The D.C. Circuit Court of Appeals ordered the IRS in March 1999 to show cause as to why its position denying tax-exempt status to Fund should not be reversed.

In its response to the Court of Appeals' motion to show cause as to why Fund should not prevail given that it enacted a retroactive amendment eliminating the control provision, "the government [offered] an incoherent response." Additionally, the Court stated that "the government was unable at oral argument, and is unable a year later, to offer any understandable reason why, apart from the control provision (now removed), [Fund] is not a section 501(c)(3) organization."

Accordingly, the Court (i) vacated the District Court's decision and ordered the District Court to enter a favorable summary judgment to Fund on the section 501(c)(3) determination, and (ii) remanded the issue as to whether the Fund should be classified as a publicly-supported charity rather than a private foundation.

POINTS TO PONDER:

The IRS' concern regarding a donor directed fund is clear -- how does this decision affect the recently popular and approved-by-PLR commercial charitable funds?

FULL TEXT:

This cause came to be heard on the record on appeal from the United States District Court for the District of Columbia, and was briefed and argued by counsel. While the issues presented occasion no need for a published opinion, they have been accorded full consideration by the Court. See D.C. Cir. R. 36(b). On consideration thereof, it is

ORDERED and ADJUDGED, by this Court, that the judgment of the district court appealed from in this case is hereby vacated and remanded in part. Appellant Fund for Anonymous Gifts permits individuals to make charitable contributions on an anonymous basis. Appellant sought a declaratory judgement in the district court that it is a charitable organization as described in 26 U.S.C. section 501(c)(3)(1994), and that it is a publicly supported organization as described in 26 U.S.C. section 170(b)(1)(A)(vi). The district court denied appellant's motion for summary judgement and granted summary judgment to the government on the section 501(c)(3) question. The court held that more than an insubstantial part of appellant's activities were not in furtherance of an exempt purpose, and that appellant was therefore not organized and operated "exclusively" for one or more exempt purposes, id. at section 501(c)(3). It did so solely on the ground that the fund's governing instrument permitted donors to place conditions subsequent on their donations. These conditions were binding on the Fund's trustee, and among other things, permitted donors to retain investment control over their donation. The court did not decide whether appellant is a publicly supported organization because section 501(c)(3) status is a prerequisite for that classification.

At oral argument on appeal, the appellant expressed a willingness to amend its governing instrument to strike out the provision authorizing conditions subsequent on donations to the Fund. Appellant explained that anonymity, not control over investments, was its principal concern. The government responded: "The anonymity aspect of the fund does not disturb the government. It's the control aspect." [Tr. of Oral Argument at 18.] Although unwilling to state that elimination of the control provision would necessarily entitle the Fund to section 501(c)(3) status, the government agreed to enter into settlement negotiations with appellant and we held the case in abeyance. The Fund then amended its governing instrument, retroactive to the date the Fund was established, to eliminate the provision for conditions subsequent over donations. Over a year after settlement negotiations began, the parties still were unable to reach an agreement.

We are baffled by the government's apparent intransigence. It its response to our motion to show cause why appellant should not prevail given the retroactive amendment eliminating the control provision -- the only provision on which the district court's decision was based and which the government represented at oral argument was its concern -- the government offers an incoherent response. It asserts that the amended provision does not ensure that the Fund has "complete" control over donations, but then concedes that "[t]o be sure, the 'amendment' . . . does away, at least nominally, with the requirement that the Trustee follow conditions subsequent expressly imposed by the donor at the time of the contribution." (It never explains why the control is less than complete.) [Supp. Mem. of Appellee at 3.] Then, the government purports to explain why, even apart from the control issue, the Fund is not entitled to section 501(c)(3) status. Yet in every argument presented, the government resorts to the control issue as the objectionable feature. The government was unable at oral argument, and is unable a year later, to offer any understandable reason why, apart from the control provision (now removed), appellant is not a section 501(c)(3) organization.

We do not reverse the district court because, at the time it issued, was based exclusively on the offending control provision. Instead, we vacate that decision and order the district court to enter summary judgment to appellant on the section 501(c)(3) determination. We remand the publicly supported charity determination since the district court did not rule on it in light of its rejection of appellant's section 501(c)(3) claim. It is

FURTHER ORDERED, by this Court, sua sponte, that the Clerk shall withhold issuance of the mandate herein until seven days after disposition of any timely petition for rehearing. See D.C. Cir. R. 41(a)(1). This instruction to the Clerk is without prejudice to the right of any party at any time to move for expendited issuance of the mandate for good cause shown.

Per Curiam
For the Court:
Mark J. Langer, Clerk

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