The tax return of America’s biggest charity runs more than 5,000 pages. It details $10 billion in donations to tens of thousands of ­nonprofits, including youth centers, theater companies and soup kitchens. At least 1,300 Baptist churches are listed, as are Planned Parenthood, the Environmental Defense Fund and Teach for America. Page 738 of Schedule I shows $100,000 flowing to Puppies & Golf Inc.

The return reveals something else, too: hundreds of millions of dollars of transfers to entities linked to financial services firms such as Morgan Stanley, Schwab and Vanguard.

A Carnegie, a Ford or a Gates didn’t establish this philanthropic colossus. Its creator was Fidelity Investments, one of the world’s largest money managers. Three decades ago, the company persuaded the US government to let it build a charity that would offer—sponsor, in industry parlance—a then obscure kind of account called a donor-advised fund, or DAF. People who give to one get an upfront tax deduction for the irrevocable donation. The money can then sit there until donors tell the sponsor to distribute it to their charities of choice. Fidelity marketed this perk to Americans eager to cut their tax bills but unsure where to give. It eventually dropped minimum account balances for individuals to zero, making them accessible to the masses and leading to a sea change in philanthropy.

Rivals including Charles Schwab Corp. and Vanguard Group Inc. followed suit, making DAFs one of the fastest-­growing areas of philanthropy. Organizations that sponsor the funds now rank, by the value of grants made, among the largest charities in the US, with Fidelity leading the pack. Individuals, corporations and others rely on DAFs because they’re flexible and convenient. In 2021 the accounts held about $234 billion, more than double four years earlier, according to the National Philanthropic Trust, which compiles reports on the DAF industry and offers accounts of its own.

This boom is stoking concern that donors are stockpiling money instead of handing it out to working charities. Some private foundations have even turned to DAFs to delay and conceal where they’re giving, reported in October. There’s no time limit for emptying the accounts. But members of Congress have proposed requiring donors to distribute the money within 15 years if they want all the upfront tax breaks. The industry opposes the change.

Fidelity Charitable, the nonprofit that the money manager created to sponsor its accounts, has made the case for DAFs by showcasing good works. Its annual Giving Report emphasizes the flood of grants its donors make every year and the accounts’ widespread use, especially by those with smaller sums to distribute. The median account holds $24,086, the company says in its latest report.

But a Bloomberg review of Fidelity Charitable’s tax returns, which provides the most detailed look yet of its donors’ giving, shows that the portrait the company paints in its ­marketing is incomplete. Between July 2016 and June 2021, the organization sent at least $1.4 billion to other major DAF sponsors and received $1.5 billion from those same entities. In other words, donors were shuffling money around. The transfers let sponsors take credit for donations moved to another middleman rather than a working charity.

These sorts of payments are on the rise, according to a 2021 study by researchers at Indiana University’s Lilly Family School of Philanthropy for Giving USA. In October, California regulators released an audit that suggests such transfers account for $1 out of every $10 that DAFs distribute. “If money is going from DAF to DAF, it’s not really a payout,” says Brian Mittendorf, an accounting professor at Ohio State University who studies nonprofits. “It’s just a transfer from one pocket to another.”

In its 2022 Giving Report, Fidelity touts the number of its accounts supporting popular charities, including Doctors Without Borders USA (more than 11,000) and the American National Red Cross (more than 8,500). But a list of the biggest-­dollar recipients in the tax filings looks quite different. Wealthy institutions such as the Church of Jesus Christ of Latter-day Saints, whose adherents are often referred to as Mormons, and elite universities including Harvard and Stanford got far more, even though fewer DAF accounts sent them money.

Other charities topping the list can reflect the priorities of a single billionaire, such as MacKenzie Scott or Jack Dorsey, suggesting that DAFs are as much a tool for the ultrawealthy as they are for the masses. The Giving USA research found that DAF donors, like high-net-worth individuals, tend to concentrate on education, culture, art and the humanities.

Fidelity Charitable says that there are several reasons for transfers among DAFs, such as when a donor changes financial advisers, and that, even excluding the inter-DAF flows, its accounts give generously. Highlighting where a few donors send lots of money “ignores the generosity of hundreds of thousands of our donors,” the company said in a written response to questions.

The nonprofit sector raises more in the fourth quarter than at any other time of year, with about one-fifth of donations made in December alone. As Americans plan their yearend giving, Fidelity’s sales machinery cranks up to help them capture a share of the $50 billion in federal tax breaks handed out annually for contributing to charity. That process is ­reinforcing a model some critics say distorts philanthropy and should be subject to greater regulation. “Our conception of what it means to give is ­changing,” says Roger Colinvaux, a law professor at Catholic University of America and a former counsel to the Joint Committee on Taxation of the US Congress. “It’s about the donor and not the charity.”

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