INSIGHT: Organization Control Over Donor Advised Fund Requirement Doesn’t Trump Donors’ Claim of False Promises

In Fairbairn v. Fidelity Investments Charitable Gift Fund (Fidelity Charitable), Case No. 3:18-cv-4881, N.D. Cal. (complaint filed 8/10/18), the donors, Emily and Malcolm Fairbairn, decided to make a charitable contribution of publicly traded stock prior to the end of 2017 in order to offset substantial income they had realized during the year. At that same time, they desired to create a philanthropic vehicle to hold the sale proceeds to facilitate their long-term charitable giving objectives.

The Fairbairns proposed to contribute 1.93 million shares of a public company known as Energous, valued at approximately $100 million. Having previously run a San Francisco-based registered investment advisory firm, the Fairbairns were keenly aware that liquidating such a large block of stock can be a delicate process, and if not executed properly can cause a stock’s value to crash, thereby substantially reducing the amount of funds available to further their philanthropic objectives.

Rather than contribute the shares to a private foundation that would have offered them ultimate control over the liquidation process, the Fairbairns decided to contribute the shares to Fidelity Charitable, a tax code Section 501(c)(3) public charity, to fund a donor advised fund (DAF). Using a DAF instead of a private foundation offered the Fairbairns more favorable income tax treatment with respect to the available charitable income tax deduction, because a DAF is treated as a component part of a public charity and, therefore, a contribution to a DAF is considered to be made to a public charity.

A DAF also avoids the restrictive and complex excise tax regime under tax code Chapter 42 applicable to private foundations, including the requirement of an annual payout of 5% of the fair market value of the foundation’s assets and the imposition of a special net investment excise tax of 1.39%. Like a private foundation, however, a DAF can have a name identified by reference to its donor and make distributions to further a donor’s charitable giving objectives.

A DAF, unlike a private foundation, does not offer control to a donor, a key distinction between a DAF and a private foundation. Indeed, the very premise of the tax advantages of a DAF over a private foundation is the complete lack of donor control. Under Section 4966(d)(2)(A)(ii), a DAF must be “owned and controlled” by the sponsoring organization—in this case, Fidelity Charitable, and under Section 170(f)(18), a donor to a DAF may not claim a charitable income tax deduction unless the donor obtains a contemporaneous written acknowledgment from the sponsoring organization “that such organization has exclusive control over the assets contributed.” Although the sponsoring organization must have ownership and exclusive control over a DAF, the donor “has, or reasonably expects to have, advisory privileges with respect to the distribution or investment of amounts held in such fund or account by reason of the donor’s status as a donor.” Section 4966(d)(2)(A)(iii).

Prior to their contribution, the Fairbairns grew concerned when they learned that the guidelines of Fidelity Charitable simply stated that it liquidates donated stock “at the earliest possible date,” an approach that gave the Fairbairns pause and caused then to reconsider making their contribution using a Fidelity Charitable DAF. According to the Fairbairns, in order to convince them to use a Fidelity Charity DAF, Fidelity Charitable made personalized promises to the Fairbairns regarding the manner in which their donated stock would be liquidated, which included not trading more than 10% of the daily volume of the Energous stock and not making any sales of the stock until 2018.

The Fairbairns asserted that in reliance of these promises, they made their donation of the 1.93 million shares of Energous to Fidelity Charitable at the end of 2017, including 1.2 million shares on Dec. 29, 2017. However, rather than adhering to its alleged promises regarding the liquidation process it would employ, Fidelity Charitable liquidated the entire block of donated shares over a three-hour trading window on Dec. 29, 2017, the last business day of the year, causing a more than 30% run-down of the stock value.

The Fairbairns subsequently brought suit against Fidelity Charitable based upon its failure to adhere to the promises it had made regarding the liquidation process, leaving the Fairbairns with tens of millions of dollars less in their Fidelity Charitable DAF and causing a significant reduction in the amount of the charitable income tax deduction claimed on their 2017 income tax return. In a motion for summary judgement, Fidelity Charitable asserted that as a result of the Fairbairns claiming a charitable income tax on the basis of the federal tax requirement that a sponsoring organization of a DAF have exclusive legal control over the assets contributed to a DAF, the Fairbairns were estopped from asserting that they were induced to donate their shares through legally enforceable promises as to the disposition of their contributed shares.

In March 2020, the U.S. District Court for the Northern District of California denied Fidelity Charitable’s motion for summary judgment, paving the way for the case to go to trial, now, however, with Fidelity Charitable having to assert the unenforceability of its alleged promises on grounds other than on the basis of the tax law requirement of a sponsoring organization’s exclusive control over assets contributed to a DAF.

Fairbairn v. Fidelity Charitable raises important issues as to the effect of promises made by a sponsoring organization of a DAF that go beyond providing donors with mere “advisory privileges” and is a cautionary tale to both sponsors of DAFs and their donors. Although it is not a tax case and the court will therefore not ultimately make any determination regarding any tax issues, the case raises significant tax issues regarding the effect of conditions placed on assets contributed to a DAF, assuming such conditions are legally enforceable by the donor, a determination ultimately to be made by the court in this case. These include the qualification of a DAF under Section 4966(d)(2) and its possible reclassification to private foundation status, the availability of a charitable income tax deduction, the valuation of contributed assets for income tax purposes, the ability of a sponsoring organization to provide an Section 170(f)(18) acknowledgment, and the need, in the case of a contribution of publicly traded securities, for a qualified appraisal where one might not otherwise be required.

Background on Claims Made by the Fairbairns Against Fidelity Charitable

In a complaint filed on August 10, 2018, in the U.S. District Court for the Northern District of California against Fidelity Charitable, the Fairbairns accused Fidelity Charitable of “making false promises to secure a $100 million donation … and then outrageously mishandling the donation, costing the Fairbairns millions of dollars and severely impairing their ability to support important charitable causes.”

The Fairbairns sought to contribute approximately $100 million to Fidelity Charitable in late December 2017, including 1.93 million shares of stock in a publicly-traded company called Energous, which trades on the NASDAQ under the ticker symbol “WATT,” to fund a DAF, much of which was to be dedicated to fighting Lyme disease, a disease that had recently stricken their entire family and which has become a silent, rapidly spreading, worldwide disease.

The donors were angel investors in Energous and would continue to hold significant shares even after their proposed contribution. The 1.93 million shares represented just under 10% of all the outstanding stock of the company. The share price of Energous had spiked 39% over the course of Dec. 27, 2017, as a result of the Federal Communications Commission approving the core technology behind the company, prompting the donors to seek to make the charitable contribution of Energous stock prior to the end of 2017 in order to offset substantial income they had realized during the year.

According to the complaint, the donors could have made the donation of the stock to a DAF maintained at JP Morgan Charitable, with whom the donors already had an existing relationship and where they had already established a $20 million DAF. The alternative to a JP Morgan Charitable DAF was a Fidelity Charitable DAF and “Fidelity Charitable aggressively promoted itself as the best choice for the Fairbairns’ charitable giving in 2017.”

According to the complaint, JP Morgan allows donors to “[a]dvise on the timing and rate at which the donated securities are liquidated.” Fidelity Charitable had no such policy and its guidelines, contained in the “Fidelity Charitable Policy Guidelines: Program Circular,” simply stated that it will liquidate donated stock “at the earliest possible date,” an approach that gave the Fairbairns pause because they were aware that liquidating a large block of stock can be a delicate process and “if not executed according to best practices, it can cause the stock’s value to crash.”

Given the lack of built-in protections at Fidelity Charitable for circumstances requiring a liquidation strategy more sophisticated than “the earliest date possible,” the Fairbairns had three principal concerns about Fidelity Charitable handling the Energous stock liquidation, as set forth in their complaint as follows:

• First, a botched liquidation would mean they had less money to direct to the fight against Lyme disease.

• Second, if the “earliest date possible” for liquidation was the same day the stock was donated, it could significantly reduce the size of the Fairbairns’ own charitable income tax deduction. That is because the size of the deduction for donated stocks turns on the stock’s fair market value on the day the charitable organization receives it, and fair market value is calculated by averaging the daily high and low prices for the stock.

• Third, as angel investors and continued stakeholders in Energous, the Fairbairns were concerned that a botched liquidation would damage the company going forward.

The Fairbairns’ concerns regarding the policy of Fidelity Charitable to liquidate contributed stock “at the earlier possible date” caused the Fairbairns to reconsider making their donation through Fidelity Charitable and instead to strongly consider using a DAF at JP Morgan Charitable. According to the complaint, to convince the Fairbairns to contribute to a Fidelity Charity DAF, an individual acting as an agent of Fidelity Charitable made the following critical promises on behalf of Fidelity Charitable about how it would handle the liquidation:

(1) It would employ sophisticated, state-of-the-art methods for liquidating large blocks of stock;

(2) It would not trade more than 10% of the daily trading volume of Energous shares;

(3) It would not liquidate any shares until the beginning of 2018; and

(4) It would allow the Fairbairns to advise on a price limit.

The Fairbairns asserted that in reliance of these promises, they made their donation of the 1.93 million shares of Energous to Fidelity Charitable, 700,000 shares on Dec. 28, 2017, and remaining shares on Dec. 29, 2017. The complaint further alleges that following the donation of the shares, Fidelity Charitable violated all of its promises to the Fairbairns by immediately liquidating the donated shares, with the complaint specifically stating as follows:

“[A]fter the Fairbairns donated the 1.93 million shares, Fidelity Charitable promptly—and egregiously—broke each of its promises. It (1) liquidated the entire block of shares in a three-hour window on December 29, [2017], (2) accounting for 16% of the day’s exchange-traded volume and an incredible 35% of the volume over the three-hour trading window, (3) using inappropriate methodologies that caused its own trades to compete against each other and drive the share price down still further, (4) without even telling the Fairbairns it was happening, let alone allowing them to advise on a price limit … The catastrophic result was a 30% run-down of the stock’s value—leaving the Fairbairns with tens of millions less to direct to charitable causes, and reducing the size of their tax deduction by millions more.” (Emphasis added.)

The Fairbairns sued Fidelity Charitable based upon the following claims: (1) misrepresentation, (2) breach of contract, (3) estoppel, (4) negligence, (5) violation of the California’s Unfair Competition Law (UCL), and sought to have Fidelity Charitable restore to the Fairbairns’ DAF account the amount of money that a reasonably competent liquidation (adhering to the promises made) would have yielded and to make them whole with respect to their charitable income tax deduction.

Motion for Summary Judgment Filed by Fidelity Charitable Asserts That Requirement of Exclusive Control of DAF by Sponsoring Organization for Tax Purposes Trumps Donors’ Claim of False Promises

Following the denial of its motion to dismiss and ahead of a trial, Fidelity Charitable filed a motion for summary judgment on Feb. 19, 2020, on all of the Fairbairns’ claims except for their negligence claim. All of the remaining claims—breach of contract, misrepresentation, estoppel, and violation of the UCL—were premised on the Fairbairns’ contention that Fidelity Charitable made the four legally enforceable promises indicated above.

In its motion for summary judgment, Fidelity Charitable asserted that the Fairbairns could not pursue any claims with respect to the first three promises on the basis of the “tax estoppel” doctrine. Under the tax estoppel doctrine, a party to a litigation is estopped from taking a position that is clearly inconsistent with a position previously taken by the party for tax purposes.

Fidelity Charitable cited, for example, Marks v. Am. Airlines, Inc., where the plaintiff was estopped from asserting that he was a California resident and therefore able to bring a claim under California law because for years he avoided California income tax by claiming to be a Florida resident, indisputably irreconcilable positions. On the basis of the tax estoppel doctrine, Fidelity Charitable stated that it is settled law that “[a]n individual is estopped from taking one position on his tax returns, gaining a benefit from that tax return, and then seeking another benefit in court by taking a position incompatible with that taken on the tax return.”

In asserting the tax estoppel doctrine, Fidelity Charitable relied upon Section 4966(d)(2)(A), under which a DAF must be “owned and controlled by a sponsoring organization,” in this case Fidelity Charitable, and with respect to which a donor only has “advisory privileges with respect to the distribution or investment of amounts held in such fund or account.” In this context, Fidelity Charitable noted that the Joint Committee on Taxation Technical Explanation of Pension Protection Act of 2006 stated that “[a]lthough sponsoring charities frequently permit donors … to provide nonbinding recommendations concerning the distribution or investment of assets in a donor advised fund, sponsoring charities generally must have legal ownership and control of such assets following the contribution. If the sponsoring charity does not have such control (or permits a donor to exercisecontrol over amounts contributed), the donor’s contributions may not qualify for a charitable deduction.” Joint Comm. on Taxation, Technical Explanation of Pension Protection Act of 2006, Tit. XII: Provisions Relating to Exempt Organizations.

Also cited by Fidelity Charitable was Section 170(f)(18)(B), under which an income tax deduction for any contribution to a DAF shall only be allowed if the taxpayer obtains a contemporaneous written acknowledgment from the sponsoring organization of such DAF “that such organization has exclusive legal control over the assets contributed.” In further support of its position, Fidelity Charitable cited a number of tax cases where the courts have held that in order to claim a charitable income tax deduction, a donor must divest himself of control of the subject matter of the gift and must effect the irrevocable transfer of dominion and control of the entire gift to the donee, so that the donor can exercise no further act or dominion or control over it. See, e.g., Goldstein v. Commissioner; see also Gookin v. United States; Pauley v. United States.

Based upon the federal tax regime governing DAFs, Fidelity then stated that the Fairbairns are “estopped from claiming that they had legally enforceable rights to control the liquidation process because, in taking their charitable income tax deduction on their 2017 tax return, the Fairbairns swore that their donation satisfied the Internal Revenue Code requirement that they had ceded to Fidelity Charitable ‘exclusive legal control over the assets contributed. 26 U.S.C. §170(f)(18)(B) (emphasis added). That admission binds them here: If the Fairbairns did not intend to convey and in fact did not convey exclusive control over the donated [Energous] shares to Fidelity Charitable, they were not entitled to the deduction. By taking the deduction, they have attested that they intended to retain only the privilege prescribed by federal tax law—the privilege to advise.” Thus, accordingly to Fidelity Charitable, the Fairbairns “[h]aving reaped the considerable benefit of a tax deduction available upon unequivocal surrender of their legal rights to control over those shares” cannot then “seek another benefit in court by taking a position incompatible with that taken on the tax return … namely, by seeking to enforce (through a damages award) supposedly legally enforceable rights to restrict the time, volume and manner of the sale of the stock.”

In addition to the tax estoppel argument, Fidelity Charitable argued that the Fairbairn’s admissions made during discovery that they lacked “legal control” and retained only “advisory rights” after they made the donation are, as a matter of law, plainly dispositive of the contract claims, stating “If, as the Fairbairns admit, the only rights they retained post-donation are rights to advise, then they have admitted that Fidelity Charitable did not convey the right to control [the liquidation process] … Prescribing the time, volume or manner of the liquidation … is fundamentally incompatible with the Fairbairns’ admitted retention solely of advisory rights.”

District Court Denies Fidelity Charitable’s Motion for Summary Judgment

In a decision dated March 2, 2020, the court denied Fidelity Charitable’s motion for summary judgment, finding that “Fidelity Charitable has not proved that the Fairbairns’ representation on their 2017 federal tax return that their donation of Energous stock to Fidelity Charitable is tax deductible clearly contradicts their contention that Fidelity Charitable made the asserted legally-enforceable promises. To put it another way, Fidelity Charitable has not established as a matter of law that the Fairbairns’ donation with the alleged conditions means that Fidelity Charitable did not acquire exclusive legal control of the donation as required by the tax code.”

The court found that the cases cited by Fidelity Charitable did not establish that if a sponsoring organization promises to handle a future donation in a particular way, that means that the sponsoring organization “does not retain exclusive legal control within the meaning of the tax code.” The court particularly noted that in Fund for Anonymous Gifts v. IRS, a case cited by Fidelity Charitable in support of its position, the donee charity, with respect to funds established by donors, “was bound by any enforceable conditions subsequent which a donor places on his donation.” That is, the fund was required to honor donor requests made after the donation, such that the donor had continuing control over the fund.

Here, the court emphasized that the “Fairbairns placed the alleged conditions at issue here prior to or at the time of their donation, not subsequent to their donation.” (Emphasis added.) The court stated that the agency and legislative authority cited by Fidelity Charitable “likewise do not distinguish between a legally-enforceable promise made at the time of the donation versus a legally-enforceable promise to abide by a donor’s directions given after a donation.”

Fidelity Charitable’ s reliance on the Fairbairns’ response to a discovery request for admission was also determined not to be persuasive. Fidelity Charitable had asked the Fairbairns to admit that Fidelity Charitable “retained control” of the donated shares. In response, the Fairbairns admitted that they only retained advisory rights and that Fidelity Charitable did, in fact, have legal control. Fidelity Charitable contended that the Fairbairns’ admission that Fidelity Charitable had legal control meant they had admitted that Fidelity Charitable could not have induced them to donate their shares through the unfulfilled promises. But, the court noted that “legal control” was not defined at the time of the response by the Fairbairns or Fidelity Charitable. According to the Fairbairns, legal control in the context of their response meant that “once the donation was made, Fidelity Charitable alone controlled the donation, subject to any promises it made prior to the donation.”

On the basis of the foregoing, the court held that the charitable income tax deduction claimed by the Fairbairns’ on their 2017 income tax return was not clearly inconsistent with their assertion that Fidelity Charitable is bound by its alleged promises and, accordingly, concluded that the doctrine of tax estopped could not be applied to forestall the Fairbairns claims of unfilled promises by Fidelity Charitable.

Interestingly, the court noted that the statute of limitations on the Fairbairns’ 2017 has not yet run and, in this regard, stated that “if the Fairbairns prove that Fidelity Charitable made the legally-enforceable promises, and Fidelity Charitable is correct that such legally-enforceable promises disqualify the donation from a charitable tax deduction, the IRS may take action against the Fairbairns to recover any improper deduction. No ‘taxpayer estoppel’ is needed to prevent any unfairness: Fidelity would be held to its promises, and the Fairbairns would suffer the consequences, if any, of enforcing those promises.”

Discussion of Tax Issues Assuming Promises of Fidelity Charitable are Determined to be Legally Enforceable

The court in Fairbairns v. Fidelity Charitable is not going to make any determination regarding tax consequences, as its charge is to determine whether Fidelity is liable for any purported promises it made to the Fairbairns. The case, does, however raise some important tax issues regarding the effect of the conditions placed by the Fairbairns on their contribution of Energous stock to Fidelity Charitable, assuming they are legally enforceable.

Treatment of Fund Established at Fidelity Charitable as a DAF Under Section 4966(d)(2)(A). As indicated by the court in its decision on the Fidelity Charitable motion for summary judgment, a legally enforceable donor condition imposed at the time of the donation, as opposed to a legally enforceable condition that a charity abide by a donor’s continuing directions after a donation, does not necessarily cause the disallowance of a charitable income tax deduction, although it may affect the value of the contribution. In Revenue Ruling 2003-28 a three-year restriction on the transferability of a patent contributed to a university did not cause disallowance of charitable income tax deduction, but “reduces what would otherwise be the fair market value of the patent.” In Silverman v. Commissioner, the U.S. Tax Court held that restrictions on the transferability of artwork contributed to various charities should be taken into account in determining the amount of the available charitable income tax deduction. And Rev. Rul. 85-99, allowed a charitable income tax deduction for land donated to an agricultural college that could only be used for agricultural purposes, but required the land to be valued based upon the restriction placed on its use.

The fact, however, that the control retained by the Fairbairns with respect to the liquidation of donated stock may not cause the disallowance of a charitable income tax deduction does not mean that such retained control does not disqualify a charitable fund from being treated as a DAF for tax purposes. Indeed, the very premise of a fund being classified as a DAF for tax purposes under Section 4966(d)(2)(A), and the attendant tax advantages offered by a DAF over those of a private foundation, is that the fund be “owned and controlled by a sponsoring organization” and that the donor merely have “advisory privileges,” not legally binding control.

Similarly, the very premise of a charitable income tax deduction for a contribution to a DAF under Section 170(f)(18) is that the sponsoring organization of a DAF have “exclusive legal control over the assets contributed.” The legislative history to Section 4966(d)(2)(A), Technical Explanation of H.R. 4, The “Pension Protection Act of 2006,” Joint Committee on Taxation (Aug. 3, 2006), clearly indicates that an agreement between a sponsoring organization and a donor that provides enforceable legal rights to a donor with respect to assets contributed to a DAF goes beyond mere “advisory privileges” and will disqualify a fund from being treated as a DAF, stating as follows:

“Advisory privileges are distinct from a legal right or obligation. For example, if a donor executes a gift agreement with a sponsoring organization that specifies certain enforceable rights of the donor with respect to a gift, the donor will not be treated as having ‘advisory privileges’ due to such enforceable rights for purposes of the DAF definition.”

The definition of a DAF under Section 4966(d)(2)(A) and the requirements for deductibility for contributions to a DAF under Section 170(f)(18) squarely align with the treatment of a DAF as a “component part” of the sponsoring organization of the DAF, as opposed to a separate taxable entity. To be treated as a component part of the sponsoring organization of a DAF, such that a contribution to the DAF is treated as a contribution to the public charity sponsoring organization and not to a separate taxable entity, the governing body of the sponsoring organization must have “the ultimate authority and control” over the contributed assets and the income derived therefrom. See Reg. §§1.170A-9(f)(11); 1.507-2(a)(7)(i)(C).

Absent a DAF being classified as a component part of the sponsoring organization, it should be treated as a private foundation, not a public charity. See Treasury Regulation 1.170A-9(f)(11). In the Fairbairn v. Fidelity Charitable case, assuming that the asserted promises made by Fidelity Charitable are ultimately determined by the court to be legally enforceable rights by the Fairbairns, it would therefore appear that the purported DAF created by the Fairbairns at Fidelity Charitable would not be a DAF in the first instance.

Moreover, it would also appear that the Fairbairns’ fund at Fidelity Charitable would not be considered a component part of Fidelity Charitable, but would be treated as a private foundation, at least as long Fidelity Charitable’s legally enforceable promises are in force. In substance, the contribution by the Fairbairns would be treated for tax purposes as if the Fairbairn’s initially made their contribution of Energous shares to a private foundation and, upon the legally enforceable promises no longer being in place, the private foundation distributed all of its funds to a DAF.

Consideration of Tax Consequences of Private Foundation Classification of Fairbairns’ Fund at Fidelity Charitable. If the Fairbairns’ are considered to have made their charitable contribution of Energous shares to a private foundation, the tax consequences would include the following:

• Amount of Charitable Income Tax Deduction Limited to Tax Basis Because Contributed Stock Does Not Constitute “Qualified Appreciated Stock.” In the case of a contributed of appreciated stock to a private foundation, unless it meets the definition of “qualified appreciated stock,” the charitable income tax deduction will be limited to income tax basis, not the greater fair market value. Section 170(b)(1)(B)(ii). Under Section 170(e)(5)(B), “qualified appreciated stock” includes “any stock of a corporation” for which, as of the date of the contribution, market quotations are available on an established securities market and which is held for more than one year.” The language of Section 170(e)(5) regarding qualified appreciated stock, which requires that market quotations be available on an established securities market, is similar to the language of Treas. Reg. 1.170A-13(c)(7)(xi)(A), which defines “publicly traded securities” as meaning securities “for which (as of the date of the contribution) market quotations are readily available on an established securities market.” Under this regulation, however, securities are not considered publicly traded securities if “the securities are subject to any restrictions that materially affect the value of the securities to the donor or prevent the securities from being freely traded.” Because of contributed Energous stock could not be freely traded by Fidelity Charitable on account of the restrictions placed by the Fairbairns on the liquidation of the stock, the contributed stock, albeit stock in a publicly traded company traded on NASDAQ, would not likely qualify as “qualified appreciated stock,” thereby limiting the charitable income tax deduction to its tax basis.

• Reduction of Gross Income Percentage Limitation. The gross income percentage limitation for contributions of property to a private foundation is 20% of a taxpayer’s “contributions base” (generally equal to adjusted gross income) as opposed to a 30% limitation applied for contributions of to a public charity.

• Imposition of Excise Tax on Capital Gain. Section 4940 imposes a 1.39% excise tax on the net investment income, which includes capital gain, of a private foundation, thereby exposing the capital gain realized on the sale of the Energous stock to a 1.39% excise tax.

Other Tax Issues to Consider. Normally, in order to claim a charitable income tax deduction for a charitable contribution of stock valued at more than $10,000, a “qualified appraisal is required” and, if the appraised value exceeds $500,000, the appraisal must be attached to the tax return on which the deduction is claimed. Section 170(f)(11)(D). An exception to this requirement applies where the contributed stock constitutes a publicly traded security, Section 170(f)(11)(A)(ii), which means, consistent with Section 170(e)(5)(B ), a security “for which (as of the date of the contribution) market quotations are readily available on an established securities market.” Section 170(f)(11)(A)(ii).

As indicated above, the conditions placed on the liquidation of the Energous stock contributed to Fidelity Charitable make it likely that the exception to the appraisal requirement for a publicly traded security would not apply to the Energous stock. In addition, the conditions placed on the liquidation of the Energous stock would also negatively impact its valuation for purposes of determining the amount of the charitable income tax deduction and raise an issue as to whether Fidelity Charitable could have furnished a Section 170(f)(18) acknowledgment that it had “exclusive control over the assets contributed.”

Conclusion

Fairbairn v. Fidelity Charitable raises important issues as to the effect of promises made by a sponsoring organization of a DAF and is a cautionary tale to sponsors of DAFs and donors alike. Both sponsoring organizations and donors alike should carefully consider the tax consequences of any promises, representations, or conditions providing donors with legally enforceable rights.

Donors should also consider the effect of not retaining legally enforceable rights, given that the sponsoring organization would have the ultimate control over contributed assets with the power, among other things, to liquidate donated securities in its sole and absolute discretion, subject only to the donors retaining non-binding advisory privileges. Donors may seek, instead, to utilize a private foundation when ultimate control is desired, but such retained control should be weighed against the tax benefits a DAF offers over a private foundation.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Author Information

Richard L. Fox is a shareholder and attorney in the Philadelphia office of Buchanan Ingersoll & Rooney, PC, where he writes and speaks frequently on issues pertaining to philanthropic planning. Richard can be reached at (215) 665-3811 and richard.fox@bipc.com.