The Private Foundation Rules at Fifty: How Did We Get Them and Do They Meet Current Needs?

Abstract

From the earliest decades of the twentieth century private foundations were suspect organizations. They were criticized by the left as a device to allow the affluent to maintain control of their businesses without the burdens of paying income and estate taxes and to use their wealth through the foundation form to influence politics, policy and society. Those on the right charged that private foundations were used for radical political purposes such as voter registration drives and support of civil rights. There were elements of truth in both sides’ criticisms.

This article first examines the legislative process that resulted in a separate, more restrictive regulatory regime for private foundations than applied to public charities. It then discusses a contemporary flaw in foundation oversight of small foundations, those with assets under one million dollars, that are essentially unregulated because of the Internal Revenue Service’s lack of resources or interest. The article recommends legislation that may better assure these foundations are operating within the requirements of the law.

Commencing in 1916 Congress conducted several investigations of foundations. The article examines the developments that resulted in a separate, more restrictive rules for private foundations than applied to public charities. It discusses the 1965 Treasury Report that became a partial template for the private foundation legislation.

Public hostility to foundations was fomented by reports issued in the 1960s by a populist Texas Congressman, Wright Patman. A general movement for tax reform led to the 1969 hearings on private foundations that resulted in the rules and regulations that define private foundations today.

The 1969 Congressional hearings provided dramatic unexpected testimony, front page headlines and were influenced by the political atmosphere and exogenous events that became public at inopportune times such as the revelation that two sitting justices of the Supreme Court were on the payrolls of two private foundations, whose donors were of dubious respectability.

Though most of the resulting legislative strictures on private foundations had been proposed previously, the stringency of the regulatory regime was exacerbated by the political atmosphere and testimony from hearings and shocked the philanthropic community. After fifty years of experience, the Private Foundation Rules though complicated and burdensome, must be regarded as a success. They have been effective, and there have been few amendments to the original legislation. Perhaps more importantly, the legislation has eliminated the hostility that private foundations engendered in the past.

Keywords: Nonprofit, private foundations, tax-exempt, IRS