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FUNDAMENTAL CONCEPTSall of its assets to a community foundation, which in turn would place the assetsin a donor-advised fund. 157 The private foundation remained in existence for thesole purpose of advising the community foundation on the use of the fund forcharitable purposes. The IRS ruled that the retention of the ability to make thistype of recommendation would not constitute a prohibited material restriction asthat term is used for purposes of the private foundation termination tax. 158The law concerning prohibited material restrictions is similar to the law pertainingto the distinctions between donor-directed funds and donor-advisedfunds. This body of law is found in the federal tax regulations. 159 The test underthese restrictions is whether the transferee of assets is prevented from freely andeffectively employing the transferred assets or the income from them for charitablepurposes. For example, if the transferor reserved the right to direct (designate)one or more public charities to which the transferee must distribute thetransferred assets and/or income, that would constitute a prohibited materialrestriction. The same is true with respect to restrictions on the transferee’s abilityto maintain or manage the assets, or to any other condition imposed on thetransferee that prevents it from exercising ultimate control over the assetsreceived from the transferor. This private letter ruling specifically held that theability to make the recommendation expressed by the trustees of the privatefoundation did not constitute a prohibited material restriction.There is, however, one court opinion that directly relates to this matter. 160The organization involved in that case was held to be tax-exempt as a charitableorganization and a publicly supported entity. It established subaccounts; donorsmade gifts to it and the contributions were held in the appropriate subaccounts.A donor had the right to request that the funds in a subaccount (which was not aseparate legal entity), representing gifts made by the donor, be used for one ormore certain charitable purposes.The IRS characterized this organization as a “mere commercial enterprisewhich provides service to a collection of clients and accordingly performs noexempt activities.” 161 The IRS also asserted that the organization’s “activities areall originated, funded, and controlled by small related groups, by single individuals,or by families” and that “these individual donors retain full control of thefunds.” 162 The court, however, rejected this characterization and the view thatthe organization was merely a “conduit” of gifts. 163 Indeed, the court found thatthe donors to this organization “relinquish all ownership and custody of thedonated funds or property” and that the organization is “free to accept or rejectany suggestion or request made by a donor.” 164 Rather than a “federation ofindividual clients serviced by a central organization,” as the IRS asserted, the157 This private letter ruling does not define the term donor-advised fund. See Private Foundations § 16.1158 IRC § 507. See Private Foundations § 13.3.159 Reg. § 1.507-2(a)(8)(iii).160 National Foundation, Inc. v. United States, 87-2 U.S.T.C. 9,602, 13 Ct. Cl. 486 (1987). See also The Fundfor Anonymous Gifts v. United States, 99-1 U.S.T.C. 50,440 (D.C. Cir. 1999), vacating & remanding 97-2U.S.T.C. 50,710 (D.D.C. 1997).161 National Found., 13 Cl. Ct. at 491.162 Id.163 Id. at 492.164 Id. at 493. 80