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results go far beyond sound tax policy or any reasonable intention of the Congress in 1969.


Other Rules, Already in Effect, Serve
to Limit Abuses

A great deal has happened since 1969 in the regulation of the charitable field. The 1969 Act itself, by imposing penalty taxes on "self-dealing," by requiring annual distributions by private foundations for charitable purposes and by other limitations on investments and programs of private foundations have created a degree of responsibility in this field which substantially eliminates the abuses which were thought to exist in some cases in 1969. In fact, the abuses which concerned Congress have been corrected by other provisions, leaving S 4943 to serve only as an additional regulator of business operations rather than in furtherance of any sound tax policy.

Additionally, many states have strengthened their laws regarding charities and have provided additional means for their state officials to regulate foundations.

There may be other problems in the charitable field, such as those arising in connection with charitable solicitations and similar activities, but these have nothing to do with holdings of family or other private foundations and provide no basis for requiring divestiture of investments.

It should always be remembered, there are state laws, and fiduciary standards enforceable under these state laws, with respect to the responsibilities of foundation managers to use prudence in their acquisition and maintenance of investments. Moreover, the courts have been properly used over the years to enforce such standards. The issue is whether it is necessary to have the tax laws impose arbitrary limitations on investment holdings, not based on their quality but on lineage. This issue needs to be considered especially in light of the facts that divestiture may actually be injurious to the support of charity, by serving as a disincentive to creating charitable funds and by serving as a depressant on values realized for charitable purposes. Thus, the policy exemplified by S 4943 is in sharp contrast to national policy which in other respects seeks to promote private sector support for charity.

The fact that some foundations have divested themselves of certain business holdings since 1969 is not a sufficient answer. The question remains: what is the right

policy now? The Congress has the responsibility to reexamine policies and to change them as needed, as it does every year in the tax and other fields.

E. Is Mandatory Divestiture Desirable?

In 1969 the Congress was asked to enact arbitrary divestiture rules so they could be applied by the administrators of the law (the IRS) without the exercise of judgment. Is this a sound policy today?

While there is much to be said for predictable administration, this does not require that convenience of the Internal Revenue Service override sound policy. It may be convenient and administratively simpler for the IRS to impose penalties based on mathematical formulas; but where sensitive matters such as volunteerism, community interests, support of local charities, maintenance of small business and of jobs are involved, then policy not mathematics should be controlling and methods appropriate to implementation of such policy should be permitted.

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The tax laws reflect national policy and are designed to encourage charitable giving and the maintenance of organizations for charitable purposes. Standards already exist, under both Federal and State laws with respect to the appropriateness of maintaining certain business holdings in a charitable organization. While it may be easier for the administrators if a penalty is automatically imposed when such holdings exceed a certain fixed percent, this really is irrelevant to the issues of whether the retention or divestiture of such holdings is proper under established legal standards and whether charitable and public interests are being served.

Elimination of S 4943 and permitting the determination of whether business holdings can be acquired or maintained based on whether such action is consistent with prudent standards and charitable purposes, would provide greater overall benefit than the present arbitrary standards. As previously indicated, there are already other penalties under the tax laws which provide the IRS ample tools for curbing any true abuses.

Summary of Basic Policy Considerations

The foregoing policy considerations require that Congress reexamine § 4943 and determine whether the price being paid for regulating business holdings of foundations is too great in light of the need for charitable support,

maintenance of local businesses
community resources in the public interest.

While the cost of the existing policy to communities and the public can be demonstrated on a case-by-case basis, the Congress should recognize that the cumulative effect is to establish that there is a need to permit charitable foundations to acquire or hold investments where that can be justified under prudent standards and in the public interest. The dictates of fourteen years ago should not blind the Congress to the need for a more enlightened policy which recognizes the importance of generating support for community interests from the private sector.


If S 4943 is repealed and abuses appear in the future, the Congress can then take proper corrective action. In the meantime, the creation and development of charitable foundations should be encouraged, not discouraged.

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This statement is submitted for the record on behalf of Houston Endowment Inc. of Houston, Texas in response to the hearing on S. 1464 held on August 1, 1983 by the Finance Subcommittee on Taxation and Debt Management.

S. 1464 represents one solution to the divestiture problem presented by I.R.C. of 1954 $4943. The problem presented by $4943 is also of major concern to Houston Endowment Inc. Agreeing with the concept of S. 1464 that I.R.C. of 1954 $4943 should be repealed or overriden in certain instances, this statement presents a discussion of the problems caused by $4943 and a discussion of a legislative solution to the problem currently being considered in the U. S. Senate.

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Houston Endowment Inc. ("Endowment") was organized in 1937 by Jesse H. Jones and his wife, Mary Gibbs Jones. Mr. Jones is best remembered for his services during the Franklin D. Roosevelt administration as Secretary of Commerce and as head of the Reconstruction Finance Corporation.

Prior to his death in 1956, Mr. Jones pursued a policy of making substantial annual gifts to Endowment, and Endowment was named as principal beneficiary in his will.

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