Committee Prints

Because of the importance which this Nation attaches to private philanthropy, the Federal Government has long made generous provision for tax exemptions of charitable organizations and tax deductions for the contributors to such organizations. Since the Federal tax laws in this way encourage and, in substantial measure, finance private charity, it is altogether proper-indeed, it is imperativefor Congress and the Treasury Department periodically to reexamine the character of these laws and their impact upon the persons to which they apply to insure that they do, in fact, promote the values associated with philanthropy and that they do not afford scope for abuse or unwarranted private advantage.

This Report responds to requests by the Committee on Finance of the U.S. Senate and the Committee on Ways and Means of the House of Representatives that the Treasury Department examine the activities of private foundations for tax abuses and report its conclusions and recommendations. Both the Congress and the Treasury Department have investigated these problem areas in the past. A major study resulted in important legislation in 1950, when opportunities for self-dealing and the accumulation of income were restricted and, in addition, the income of feeder organizations and the unrelated business income of certain classes of organizations were subjected to tax. The Revenue Act of 1964 imposed further restrictions on foundations seeking to qualify as recipients of unlimited charitable contributions. However, the major revisions of 1950 have not been comprehensively reviewed since their enactment. In its present study, the Treasury Department has sought to determine whether existing legislation has eliminated the abuses with which it was designed to cope, and whether additional abuses have developed which require correction by legislative action.

In keeping with the congressional requests which prompted it, the scope of this Report is limited to private foundations. The discussion of problems and proposed solutions, thus, is confined to that context. The restriction of the Report to private foundations does not indicate any judgment upon whether or not similar or other types of problems may exist among other classes of exempt organizations. For purposes of this Report, the term "private foundation" designates:

(1) Organizations of the type granted tax exemption by section 501(c)(3) (that is, generally, corporations or trusts formed and

The terms "charity" and "charitable" are used in their generic sense in this Report, including all philanthropic activities upon which the relevant portion of the Internal Revenue Code of 1954 (sec. 501(c)(3)) confers exemption. Unless otherwise indicated, all statutory references are to the Internal Revenue Code of 1954, as amended.

operated for religious, charitable, scientific, literary, or educational purposes, or for testing for public safety or the prevention of cruelty to children or animals), with the exception of—

(a) Organizations which normally receive a substantial part of their support from the general public or governmental bodies: 2

(b) Churches or conventions or associations of churches; (c) Educational organizations with regular faculties, curriculums, and student bodies; and

(d) Organizations whose purpose is testing for public safety; and

(2) Nonexempt trusts empowered by their governing instruments to pay or permanently to set aside amounts for certain charitable purposes.

In carrying forward its study, the Treasury Department has conducted an extensive examination of the charactistics and activities of private foundations. It has investigated and evaluated the experience of the Internal Revenue Service and the Department of Justice in the administration of the laws governing the taxation of foundations, their contributors, and related parties. Its study has drawn upon pertinent information assembled in investigations conducted by other groups. It has conducted a special canvass of approximately 1,300 selected foundations. From these and other sources, it has compiled and tabulated a variety of classes of relevant statistical data. has discussed the area with an Informal Advisory Committee on Foundations appointed by Secretary Dillon. It has, further, considered a broad range of proposals for reform, extending from remedies narrowly tailored to end specific abuses to sweeping recommendations for the elimination or restriction of tax exemptions and deductions for certain classes of foundations.

The Department's investigation has revealed that the preponderant number of private foundations perform their functions without tax abuse. However, its study has also produced evidence of serious faults among a minority of such organizations. Six major classes of problems exist; other problems are also present. While the Internal Revenue Service has taken vigorous action in recent years to improve its administration of the existing laws which govern foundations and their contributors," additional legislative measures appear necessary to resolve these problems.

This Report seeks first to place private foundations in general perspective, by considering the values associated with philanthropy and the part played by private foundations in realizing those values. Against this background, it explores the major problems in detail and

2 Described in sec. 503 (b) (3). Described in sec. 503(b)(2).

While organizations within this minor category are exempt from tax, contributions to them are not deductible; and they would therefore appear to be more closely analogous to business leagues, social welfare organizations, and similar exempt groups than to foundations.

E.g., Subcommittee No. 1, Select Committee on Small Business of the House of Representatives, whose chairman is Representative Wright Patman. The reports of the investigations of this subcommittee, entitled "Tax-Exempt Foundations and Charitable Trusts: Their Impact on Our Economy," have been published in three installments (dated, respectively, Dec. 31, 1962, Oct. 16, 1963, and Mar. 20, 1964) and are hereinafter referred to as the "Patman Reports." A transcript of hearings held by the group in 1964 has been published recently. See "Tax-Exempt Foundations: Their Impact on Small Business," hearings before subcommittee No. 1 on Foundations, 88th Cong., 2d sess., 1964.

This Committee met with Treasury officials on several occasions, and was a valuable source of informed opinion; but the conclusions and recommendations of this Report are those of the Treasury Department, and are, of course, based on facts and views drawn from many additional sources.

Appendix B summarizes the administrative improvements which have been effected by the Internal Revenue Service.

presents possible solutions. In a separate part it describes additional problems of less general significance and recommends approaches to deal with them. Appendixes present tables of relevant statistics and other information.

The Report does not deal with the problem of distinguishing between permissible educational activities of foundations and dissemination of propaganda. The distinction is drawn by existing law. The Internal Revenue Service has been investigating situations of questionable operations and taking the action appropriate under presently applicable rules. This program will continue.

The provisions designed to insure compliance with existing law will have to be reexamined to determine their adequacy to the task of securing compliance with the rules proposed in this Report. The fundamental objective of such provisions should be to make certain that funds which have been committed to charity and for which tax benefits have been granted will in fact be devoted to charitable ends. Also, effective enforcement of the rules recommended here will require the filing of information returns by the organizations to which the rules apply. Since certain private foundations are not now required to file such returns, suitable revisions will have to be made in the relevant provisions of existing law.

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