should include specific interdiction of devices ordinarily deemed inherently speculative as, for example, the purchase of "puts," "calls," "straddles," "spreads," "strips," "straps," and "special options," selling short, and trading in commodity futures.41

Like the borrowing and lending recommendations of the two preceding portions of the present section, this measure would exclude foundations from a class of financial transactions in which they ought not to be engaged. When combined with the business and selfdealing restrictions proposed elsewhere in the report, these rules would confine the unrelated financial activities of private foundations to areas which are appropriate for organizations whose assets have been committed to the advancement of the public welfare and whose concerns should be exclusively with the attainment of charitable aims.

F. BROADENING OF FOUNDATION MANAGEMENT

The Treasury Department's study of private foundations has revealed the existence of a group of interrelated problems which are at once more pervasive and more fundamental, but less concrete, less easy to identify, and less susceptible of isolation, than those with which the preceding sections of this Part have dealt. By their very nature, these problems evade precise definition and quantitative analysis. One cannot compile statistics which demonstrate their character and extent. In the main, one cannot report individual instances of their effect. For all of these attributes, however, they possess both reality and significance.

For the purposes of discussion, one may separate these problems into three general categories.

(1) Abuse potentialities of donor influence

The ability of a donor to wield substantial influence over the management of a private foundation which he has established or endowed presents continuing opportunities for the diversion of the foundation to purposes which are not wholly charitable. General prohibition of financial intercourse between donor and foundation, as Part II-A of this Report recommends, would, it is true, foreclose the most palpable abuses which have arisen in this area. Restrictions of foundation ownership of businesses and postponement of deductions for contributions of interests in controlled property would further reduce the possibilities for diversion and conflicts of responsibility. Nonetheless, the modes of human satisfaction have almost infinite diversity; and the ways in which wealth can be employed for personal advantage are, consequently, multiple and highly varied. Many donors, too, have manifested a common and deep-seated tendency to regard foundations which they have created as their own, to be availed of for their own ends where a contemplated use does not involve obvious and direct deflection of assets from charity and where no specific statutory prohibition lies in the way. Combination of these facts makes it difficult to escape the conclusion that real danger of abuse through substantial donor influence-albeit in forms less straightforward and apparent than those which have thus far occupied the attention of the Treasury Department and the Congress-will survive the restrictions proposed by other portions of this Report.

41 The suggestions advanced in Part II-E (1) above for the restriction of foundation borrowing would prevent margin purchases of securities.

Accurate appraisal of this problem is complicated by the fact that, as Part I of the Report has explained, the private foundation can derive important values from donor influence. The donor can bring imagination and creativity to the foundation, infuse spirit and drive into its operations, give unique focus to its efforts. But the fact that donor influence contains potentialities both for benefit and for detriment does not present a permanent dilemma: for its dangers and its values do not subsist equally throughout the life cycle of the foundation. While possibilities for abuse remain relatively unchanged, advantages tend to decline sharply with the passage of time. The donor can frame the fundamental structure of the foundation in its organizational documents; he can set the pattern for its activities and interests in the early years of its operations; he can establish its character by example, custom, and usage as it matures. Thereafter the magnitude of his contribution must, almost necessarily, diminish. In view of these facts, the present problem would seem capable of solution by a rule which confines substantial donor influence to the developmental and maturation stages of foundation life: such a rule would preserve the primary benefits of influence, and would eliminate a large measure of its possible detriments.

(2) Perpetual existence of foundations

A different, but related problem arises from the proliferation and perpetual existence of private foundations. By 1962 there appear to have been approximately 15,000 foundations in the United States. Current information indicates that an average of about 1,200 new foundations are being formed every year. The Foundation Library Center estimates that, of the foundations in existence in 1962, 72 percent of those with assets of less than $100,000 had been established since 1950, and 56 percent of those with assets of more than $100,000 had been created since 1950. Most of these foundations are established under organizational documents which place no limitation upon the period of their existence; and while satisfactory data upon foundation terminations is not available, it seems relatively clear that deaths are a good deal less frequent than births.

The continued existence of foundations whose number is constantly increasing generates a number of administrative burdens. Returns must be processed; questionable transactions must be investigated; compliance with legal requirements must be secured, sometimes through litigation. All of these activities cost the Federal Government considerable sums of money. Part I of this Report has explored at some length the reasons why, despite these facts, the imposition of a general limitation upon the lives of foundations is inadvisable. In specific situations, however, it may be far from clear that the perpetuation of an individual foundation justifies the attendant administrative burdens. It seems plain, at least, that many foundations continue in existence year after year without achieving any of the external indicia of unique advancement of philanthropy. They attract no public attention; their endeavors gain no public support; they appear to open no new areas, develop no new vistas, create no rearrangements or alterations of focus among charitable enterprises generally. Hence, while a universal restriction upon foundation lives is undesirable, a method of winnowing the useful from the superfluousof evaluating the accomplishments, nature, and status of each private

foundation at some point in its existence, with a view to a judgment upon the advisability of continuing it-would possess real utility.

Such a task would require a multitude of difficult and delicate value judgments, and should, therefore, not be undertaken by a governmental body without grounds considerably more pressing than those which obtain in the present situation. On the other hand, a foundation's creator, or those related to him, may not approach an endeavor of this kind with detachment. Consequently, satisfactory solution of this problem would seem to demand a rule permitting independent private parties to examine a foundation after it has had a reasonable period of time within which to prove itself. If their review leads them to conclude that the organization's record and capabilities do not justify its continuation, they should have power to wind up its affairs, distribute its assets in accordance with its purposes, and dissolve it.

(3) Possibilities for narrowness of foundation management

Under present law it is possible for an individual to establish a private foundation, dominate its affairs throughout his life, and pass its management to members of his family upon his death. In such a system supervision of the activities of a foundation may remain within the power of a very limited and homogenous group for an indefinite period of time; there is, indeed, no assurance that persons more broadly representative of the public will ever be introduced into the organization's governing body.

The disadvantages of the system are apparent. All of the dangers of narrowness of view and parochialism can persist in perpetuity. A foundation's motive force can, over time, become dissipated; and it is not guaranteed a source of replenishment. Attitudes may harden into prejudices; approaches may solidify; the responsiveness which this branch of philanthropy should have to the changing needs of our society may suffer. Projects which were useful and desirable when when they were undertaken may be continued long after they have become outmoded.

Recognizing the dangers intrinsic in narrowness of base, many of our colleges and universities take pains to secure personnel who have been trained at other institutions or who have drawn experience from different academic communities. Some of our great corporations have, in their hiring policies, manifested a consciousness of the same problem. Consequently, it would seem altogether inappropriate to permit this defect to insinuate itself into the management of one of the important areas of private philanthropy.

(4) Possible solution

To resolve these three problems, the Treasury Department recommends that provision be made to convert private foundations, after they have been in existence for 25 years, to management which is independent of their donors and parties related to donors. Without the harshness of requiring a complete severance of the donor from the foundation, this result can be accomplished by placing a limit upon the part which the donor and related parties can play in the management of the foundation. For several reasons, however, the fixing of the quantitative level of this limit requires some care.

The level should be set high enough to permit the donor significant representation on the foundation's governing body. On the other hand, imperfections necessarily inherent in the definition of the class of donor-related parties-parties who have sufficient connection with the donor to be likely to be subject to his influence-make it essential to confine donor participation to a relatively small percentage if effective prevention of substantial donor influence upon foundation decisions is to be attained. Administrative considerations make it impracticable to include, within the category of donor-related parties, more than the following: (1) members of the donor's family, (2) persons with whom the donor has a direct or indirect employment relationship, and (3) persons with whom the donor has a continuing business or professional relationship. Yet substantial areas of practical donor influence lie beyond the boundaries of this definition. Friends, neighbors, business acquaintances, and others may well be willing to accept the donor's judgment on matters pertaining to a foundation which he has established and whose assets he has contributed. Hence, if an approach is to be made to workable and effective prohibition of substantial donor influence over a foundation, the limit upon participation of the donor and related parties on the foundation's governing body should be fixed no higher than 25 percent.12

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A rule which, after the first 25 years of the existence of a private foundation, would prevent the donor and related parties from composing more than 25 percent of the managing board of the foundation would deal effectively with each of the three problems which have been described in the present section. It would limit the time period within which abuses could occur through the exercise of substantial donor influence; and, by assuring the donor that his actions would ultimately be subject to independent review, it would tend to protect the foundation from abuse even during its first 25 years. By enabling independent private parties to evaluate the performance and potentiality of the foundation after 25 years of operation and granting them power to terminate the organization, then or later, the measure would provide a method for eliminating foundation which have doubtful or minimal utility. Finally, in broadening the base of foundation management, the recommendation would bring fresh views to the foundation's councils, combat parochialism, and augment the flexibility of the organization in responding to social needs and changes.

43 Even with the limit upon identifiable donor representation set at this level, passage of control to independent parties may not be immediate. The donor may, for a time, be able to retain effective control through persons who do not fall within the definition of donor-related parties. But friends, neighbors, and others are unlikely to remain subject to the influence of the donor and his family indefinitely; and, with a 25-percent ceiling upon participation by more closely related parties, actual independent dominion over the foundation should ensue without undue delay.

To avoid possible disruption of foundation affairs by requiring an abrupt, unanticipated change in management, foundations which have already been in existence for 25 years or more should be permitted to continue subject to substantial donor influence for an additional period of from 5 to 10 years.

PART III. ADDITIONAL PROBLEMS

In the course of its review of private foundations and the tax laws which apply to them, the Treasury Department has encountered several problems which, while possessing less general significance than the problems discussed in part II of the report, are sufficiently serious to warrant remedial action. Some donors have been able to secure substantial deductions for contributing to foundations assets which produce no benefit whatever for charity. Other donors have reduced their personal taxes by accomplishing tax-free bailouts of corporate earnings to foundations or by making contributions of other property which would have generated ordinary income upon sale. A defect in the computation of the estate tax marital deduction has permitted taxpayers unjustifiable enlargements in the tax benefits of bequests to their spouses through various devices involving foundations. Proper enforcement of reporting rules has been hampered by the absence of an effective sanction for failure to file the information returns required of foundations.

This Part of the Report sets forth illustrations of these problems, analyzes them, and suggests appropriate remedies.

A. CONTRIBUTIONS OF UNPRODUCTIVE PROPERTY

The Internal Revenue Service has discovered a number of situations in which very substantial income tax deductions have been claimed for contributions to private foundations of property which does not produce income and which the foundation does not, or cannot, devote to charitable uses.

Example 1.-One taxpayer, for example, claimed a charitable deduction of $39,500 for the gift of family jewelry to her husband's foundation. The jewelry was placed in a safe deposit box listed in the name of the foundation, and at last report it has been held there for more than 6 years.

Example 2.-Other taxpayers have secured significant tax savings by contributing paintings and other artworks to controlled foundations which do not maintain museums.

Example 3.-A company donated vacant land adjoining its plant facilities to its foundation. During the 11 years for which the foundation held the property, it produced no income whatever. Example 4.-A man and his wife contributed the remainder interest in their personal residence to a foundation.

Difficult valuation problems frequently attend the donor's assertion of a right to a charitable deduction in these cases. More fundamental, however, is the criticism that the donor obtains a current tax advantage for a transfer which confers no concomitant benefit upon charity. The Government, in effect, pays the donor for his act; but the jewelry remains in the safe deposit box, the painting in the warehouse, and the land unused. As other portions of this report have noted, the presupposition of the tax statute is that the cost of the charitable

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