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Fidelity Case Tests Big Philanthropy Question on Tax Break (1)

Feb. 20, 2020, 3:59 PMUpdated: Feb. 20, 2020, 9:33 PM

The outcome of a much-watched lawsuit between Fidelity Investments Charitable Gift Fund and shuttered San Francisco investment adviser Ascend Capital is likely to clear up important questions surrounding donor advised funds.

Donor advised funds, a fast-growing form of charitable giving, allow donors to contribute money, or complex assets such as stock or cryptocurrency, and have the donations distributed to charitable causes by the charitable sponsor of the fund—in this case Fidelity Charitable. Contributions to the funds totaled $37.12 billion in 2018, an 86% increase over five years, according to the National Philanthropic Trust.

The owners of Ascend Capital, Emily and Malcolm Fairbairn, accuse Fidelity of mishandling their $100 million stock-based charitable donation. The Fairbairn’s claims that Fidelity used false promises to get their donation can’t support a viable lawsuit, because the Fairbairns admitted multiple times that they gave up all legal rights to control the disposition of their donated stock shares, Fidelity told a federal judge in the Northern District of California in a motion made public Wednesday.

The case gets at a broader misunderstanding of how donor-advised funds work, law professors said. The thinking is that an individual can make a donation and retain some control over the asset, but the tax deduction is based on having fully given it up.

“What makes this very interesting is that it falls into this disconnect between the understanding of the parties and the formal legal agreement they enter into,” said Ray Madoff, a professor at Boston College Law School who focuses on philanthropy policy and taxes.

Challenging Handling of Donation

It’s “black-letter law” that the Fairbairns had to relinquish control over their donation in order to get their $52 million tax deduction, Fidelity Charitable said.

They can’t now challenge Fidelity’s handling of the donation based on imprecise memories of their conversations with Fidelity employees, which didn’t amount to enforceable promises, the company said.

The Fairbairns called this a “blame-the-victim” theory that “reflects serious chutzpah on Fidelity’s part, given that Fidelity is the one who attempted to fudge the donation’s date.”

Karl Mill, an associate at Adler & Colvin, agreed with Fidelity that there was a tension between claiming the deduction and challenging Fidelity’s treatment of the donation.

“I would be surprised if the court let a donor both claim a deduction and sue a charity because getting a deduction is premised on the idea that the donor’s given up control,” he said.

Not Mandatory

Donor-advised funds can offer unique tax benefits to donors. For example, they allow a donor who intends to make donations over more than one year to group those donations into a single year while having the funds dispersed over a longer time horizon. This can enable donations that wouldn’t exceed the standard tax deduction in a single year to do so by bunching donations together, potentially reducing the donor’s taxes.

In addition, donors can reduce their tax bill by donating assets, such as stock, on which they would otherwise have had to pay capital gains taxes after a sale.

While the funds can be attached to various charities such as universities or community foundations, the Fairbairns’ lawsuit zeroes in on a fund controlled by a charitable sponsor that’s linked to an investment firm, where the assets in the fund may be managed by the investment company for a fee.

‘False Promises’

Donor-advised funds are owned and controlled by the sponsoring organization under tax code Section 4966, which was Fidelity Charitable in this case.

However, in the Fairbairns’ case, they say Fidelity Charitable made “false promises” to secure their $100 million donation that included stock in Energous, a wireless charging company whose stock soared 39 percent when Energous’s core technology received government approval on Dec. 26, 2017. Specifically, they claim the charitable sponsor promised to use “state-of-the-art methods” of liquidation and to abstain from liquidating any shares until 2018.

Fidelity Charitable liquidated this stock three days later without authorization and using unsophisticated trading strategies, causing the stock’s value to drop 30 percent and leaving the Fairbairns with less to give to Lyme disease-connected charities and more to pay in taxes, the couple claims.

The case is set for a Thursday hearing before Judge Jacqueline Scott Corley on Fidelity’s motion for summary judgment. In 2018, Corley denied Fidelity Charitable’s motion to dismiss.

Stris & Maher LLP represents the Fairbairns. Wilmer Cutler Pickering Hale and Dorr LLP represents Fidelity Charitable.

The case is Fairbairn v. Fid. Invs. Charitable Gift Fund, N.D. Cal., No. 3:18-cv-04881, motion for summary judgment 2/19/20.

(Updates with additional information throughout starting in first paragraph.)

To contact the reporters on this story: Jacklyn Wille in Washington at jwille@bloomberglaw.com; Aysha Bagchi in Washington at abagchi@bloombergtax.com

To contact the editors responsible for this story: Rob Tricchinelli at rtricchinelli@bloomberglaw.com; Colleen Murphy at cmurphy@bloombergtax.com

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