Volume IV, Issue II (April 2006) - Columbus School of Law

position and encourage the use of investment advisors as opposed to brokers. The next sectionwill propose ways Congress could rectify this inequity.POLICY IMPLICATIONS FOR CHARITIESVII.The fact that brokerage fees result in a better tax result for individual investors is, of course, notrelevant to charities that do not pay tax. On the other hand, it is clear that both privatefoundations and public charities should try to find investment advice that is practical and useful.As Jane Nober has recently pointed out, “foundations need to ensure that the deals they makewith money managers are wise investments as well.” 538 If the Code encourages individuals to usebrokers rather than investment advisors, it may well be that charities may follow that pathbecause the costs of brokerage services are lower than investment management services.This may well be inconsistent with the fiduciary duties of trustees of charities or directors ofcharitable corporations, whose duties of care and loyalty have an obvious impact on whatdecisions should be made with regard to investments of the funds placed in their care. Publiccharities and private foundations are becoming more sophisticated in investment and businesstransactions with each other and with individuals. While these transactions are opportunities forsignificant benefit, they are also encumbered with risk, both tax and financial. In makinginvestment decisions, the fiduciaries of charities are “under a duty similar to that of the trustee ofa private trust.” 539 Given that fact, the choice to use an investment advisor should not begoverned solely by market principles.In the end, of course, the aim of investing funds for charities should have both charitable andfinancial goals. As one long-time donor has put it: “Charitable giving strategy is like investmentstrategy in that you want your “investments” to be successful—in this case measured bycharitable rather than financial objectives. A good philanthropic “portfolio” should bediversified, with some seasoned organizations and some smaller and more venturesomecauses.” 540VIII.Proposed Revisions to the Internal Revenue CodeHaving set forth the basic premise that the IRC improperly provides favorable tax treatment tobrokerage fees, this section will propose some alternatives to the IRC’s current provisions.One idea would be to disallow basis adjustments for brokerage fees. This approach wouldcertainly be met with a great deal of opposition, especially considering the drastic consequencethis provision would have on taxpayers’ capital gains. Further, brokerage firms would no longerbe able to tell their clients that commissions would be a proper basis adjustment. From a fairnessstandpoint, it seems counter-intuitive to repeal a long-standing rule that brokers commissions area proper basis adjustments. Thus, instead of altering the treatment of brokerage fees, it is likely538 Jane C. Nober, Legal Brief, Conflicts of Interest, Part 3, in Foundation News and Commentary,September/October 2004, available at http://www.foundationnews.org/CME/article.cfm?ID=3006.539 Marion Fremont-Smith, GOVERNING NONPROFIT ORGANIZATIONS (Belknap, Harvard 2004) at 190-191(citing Restatement (Second) of Trusts, §389 (revised)).540 David A. Strawbridge, in BEYOND, the T. Rowe Price magazine on charitable giving, available athttp://www.programforgiving.org/newsletter/winter02.pdf#page=5.88