April 22, 1999 | Read Time: 2 minutes
A federal appeals court has ruled that an organization created to make it easier for people to give anonymously to charity is entitled to tax-exempt status.
William J. Lehrfeld, a lawyer in Bethesda, Md., established the Fund for Anonymous Gifts in 1993 to permit donors to support unpopular or controversial causes in secrecy. The fund would allow donors to designate their gifts for specific charities without disclosing their identities.
The I.R.S. denied its application for tax-exempt status. The revenue service argued that tax-exempt organizations must have some intrinsic charitable purpose beyond merely serving the wishes of their donors — and that the fund failed that test. What’s more, the government said, the fund’s real purpose was to help its donors circumvent restrictions in the tax code that regulate charitable gifts and investments.
A federal district judge ruled in 1997 that the Fund for Anonymous Gifts was not entitled to tax-exempt status because donors would retain control over how the fund invested their gifts.
Mr. Lehrfeld then retroactively deleted from the fund’s governing documents the provisions that the judge had found objectionable. But he still was unable to win tax-exempt status in negotiations with the I.R.S.
The U.S. Court of Appeals for the District of Columbia Circuit, in a ruling issued last week, said it was “baffled by the government’s apparent intransigence” in reaching agreement after the provisions to which it had objected were removed.
Still left for the District Court to decide is the question of whether the Fund for Anonymous Gifts constitutes a charity, as it contends it is, or a private foundation, which is governed by stricter regulations.
The ruling may spur the creation of more intermediary funds that allow donors to designate gifts to other charities of the donors’ choosing. Some commercial funds — most notably the Charitable Gift Fund started by Fidelity Investments — have rapidly gained donors, and now handle gifts worth millions of dollars a year.
“The primary purpose of the litigation was to get the government to articulate in a sufficiently reliable form the way designated funds should be treated as to both donor and donee,” Mr. Lehrfeld said. “The government has chosen to make tax policy through litigation rather than through regulation.”
The disadvantage of that course of action, he added, is that “in this case, they lost on the merits.”
