IRC section 501(c) specifies 28 types of entities that are eligible for tax- exempt status and over 1.6 million entities have been recognized as exempt as of 2005. One subset of these tax-exempt entities is classified as 501(c)(3) charitable organizations, of which slightly over 1 million existed in 2005, according to IRS. In 1969, Congress directed that all 501(c)(3) organizations would be private foundations unless they qualify for exclusion from that status under IRC section 509. This change subdivided section 501(c)(3) organizations into two general categories—”public charities” and “private foundations.” Within the public charities classification, Congress created supporting organizations, which are defined in section 509(a)(3) as public charities organized to support one or more public charities, including churches and certain governmental units, and certain other tax-exempt entities, such as membership-based organizations (e.g., unions and professional organizations). Supporting organizations are classified as public charities not because they are themselves publicly supported, but because they are to support another public charity with which they are to maintain a strong relationship. In creating supporting organizations, Congress recognized that it can be beneficial and prudent to place certain assets or activities in a separate legal entity to insulate assets from liability or to facilitate separation of functions for programmatic, accounting, or other reasons, according to the Panel on the Nonprofit Sector Final Report. Donor-advised funds are generally separate accounts operated by tax- exempt public charities to receive contributions from a single donor or group of donors. Donors can advise on the distributions from the account. For the contribution to qualify as a completed gift, the charity must have ultimate control over how the assets in the account are invested and distributed. According to our interviews with knowledgeable individuals and recent Senate testimony, donor-advised funds have generally been in existence since the 1930s and have traditionally been operated by community foundations. In the 1990s, financial investment firms began establishing “commercial funds,” which are tax-exempt public charities that operate donor-advised fund accounts. Investment of contributions to the fund accounts is controlled by the commercial fund’s board, which hires the investment firm that established the commercial fund to manage the fund’s assets. Generally, an entity must apply to IRS to obtain tax-exempt recognition. Most organizations seeking recognition from federal income tax must use specific forms, including Form 1023 (Application for Recognition of Exemption under Section 501(c)(3) of the IRC) or Form 1024 (Application for Recognition of Exemption under Section 501(a)) as well as other documentation. After receiving tax-exempt recognition, public charitable entities must annually file a Form 990 information return to report their financial transactions and activities for a tax year. Charities that have less than $100,000 in gross receipts and $250,000 in year-end assets may use Form 990-EZ. Entities with gross receipts below $25,000, and certain types of entities, such as churches and certain entities associated with churches, generally are not required to file. Form 990 collects information on revenues, expenses, and assets, and has accompanying schedules. Schedule A of Form 990 covers several areas such as compensation, lobbying expenditures, and revenue sources. Schedule B covers the source of contributions to charities and certain other exempt entities. Congress has granted public access to Form 990 data in recognition of the importance of public oversight to inform donors about how their money is spent and to stem potential abuses. Private foundations, regardless of their amounts of gross receipts or assets, are required file a Form 990-PF information return annually. IRS oversight of tax-exempt entities generally relies on two activities. First, IRS reviews applications for tax-exempt status to determine whether a tax-exempt purpose is envisioned. IRS approves those applications that are properly completed and for which the applicant can demonstrate to the satisfaction of IRS that its activities or proposed activities meet the requirements of the section under which exemption is claimed. Second, IRS annually examines selected Forms 990 to determine whether the exempt entities meet various requirements (such as properly reporting unrelated business income tax). In general, IRS attempts to select entities that it believes are likely to have violated requirements. Based on examination evidence, IRS can accept the Form 990 as filed or change the status of the entity, impose excise taxes for certain types of violations, or revoke the exempt status if the violations are serious enough. As appropriate, IRS can also assess other types of taxes, such as employment taxes or unrelated business income taxes. In 2004, the Senate Committee on Finance asked a panel of experts to make recommendations to Congress to improve oversight, transparency, and governance in the tax-exempt sector. To do so, the Independent Sector convened a Panel on the Nonprofit Sector in October 2004, which included 24 nonprofit and philanthropic leaders. The Panel issued a final report in June 2005 with over 120 recommendations, several focusing on donor-advised funds and supporting organizations. On the basis of this report and other information, Congress has considered proposals to impose more restrictions and requirements on donor-advised funds and supporting organizations to better ensure that their contributions advance charitable rather than private interests and that their donors do not exert control or receive private benefits. Provisions in legislative proposals that apply to donor-advised funds have included providing a formal definition of a fund, setting minimum payout requirements, and placing restrictions on dealings with those who may privately benefit from charitable activities. Provisions related to supporting organizations have included those that would apply certain private foundation rules and restrictions, such as those on the annual payout requirement and excess business holding rules. To compare the federal laws and regulations on donor-advised funds and supporting organizations with those for private foundations, we reviewed the IRC, Treasury regulations, IRS publications, and various other documents describing these laws and regulations. We also interviewed 18 IRS staff and 16 individuals knowledgeable about the tax-exempt community, such as attorneys and governmental-affairs managers at tax- exempt entities, to obtain their input about these laws and regulations and our comparison of them. To determine financial and organizational characteristics of donor-advised funds, supporting organizations, and other tax-exempt charitable organizations, we obtained and analyzed IRS Form 990 and Form 990-PF data, as well as reviewed survey data on donor-advised funds that were collected by The Chronicle of Philanthropy. We used the surveys to obtain data on donor-advised funds because this information was not identifiable on the Form 990. To determine the reliability of the donor-advised fund data, we interviewed The Chronicle of Philanthropy staff about their survey methodology. To obtain supporting organization and other tax- exempt charitable organization data fields, we obtained data from IRS’s Returns Inventory and Classification System (RICS) for tax years 1999 through 2003, the 5 most recent years of data available at the time of our analysis. Because not all the data fields we wanted were available from RICS, we obtained additional Form 990 data fields from GuideStar, an organization that electronically captures Form 990 data for public access. To assess the reliability of the RICS and GuideStar data, we interviewed agency officials and conducted electronic data testing. In addition, we reviewed a selection of Forms 990 submitted to IRS to confirm that the values on the form matched those in the database. While we identified some minor discrepancies, we determined that the Form 990 data were sufficiently reliable for our purposes. The data files we obtained included the population of tax-exempt charities filing returns for those years, including supporting organizations and private foundations. Using computer software to analyze these data files, we determined summary statistics and converted dollar amounts to 2005 constant dollars. For our discussion on “payout” rate, compensation, and Form 990 revisions, we performed literature searches and interviewed 20 knowledgeable individuals from IRS’s Statistics of Income (SOI) program and Tax-Exempt & Government Entities (TE/GE) division, Urban Institute, and Congressional Research Service (CRS). To describe the types of noncompliance and promotion methods involving donor-advised funds and supporting organizations, we reviewed IRS summaries of examination cases. To obtain anecdotal information about noncompliance involving donor-advised funds and supporting organizations, we also interviewed 4 managers at IRS who oversee examinations of donor-advised funds and supporting organizations and 7 individuals knowledgeable about the tax-exempt community who work at organizations such as the Council on Foundations and the Independent Sector. We also interviewed 6 financial professionals and 11 community foundation managers on how donor-advised funds and supporting organizations are promoted to clients for abusive transactions. We also reviewed an IRS research report on developing abusive promoter leads through searching the Internet. To provide additional information on noncash contribution valuation methods (see app. III), we reviewed IRS publications and forms and interviewed an IRS field specialist working on valuation issues in the Large and Mid-Sized Business operating division. To obtain information on the marketing of donor-advised funds and supporting organizations (see app. IV), we spoke with 11 community foundation managers, 6 financial professionals, and 18 managers at IRS. The examples we discuss come from materials that we were referred to or located online based on our interviews, and do not necessarily represent all materials and methods used to market donor-advised funds and supporting organizations. In recent years, donor-advised funds have become popular charitable- giving vehicles, and the number of supporting organizations has also continued to increase. At the same time, federal tax law generally imposes fewer restrictions and requirements on donor-advised funds and supporting organizations, but provides them and their donors less control over the use and investment of the charitable assets compared to private foundations; in fact, section 501(c)(3) and federal regulations do not specifically mention donor-advised funds. As a general principle, the more control that a donor has over the use of the charitable contributions and assets, the more regulations and restrictions apply.