The result is that the alternative which is encouraged is a sell-out to a larger business, generally in the form of a tax free exchange of stock. In fact, $ 4943 goes further, for if stock is contributed to a family foundation, the tax laws themselves become a vehicle to force a change in control of the business. Since there is a limit on the holdings of both "disqualified persons" and the foundation, an acquisition of stock by a dissident disqualified person can force foundation to sell the stock, in order to avoid a penalty tax under S 4943 - which penalty can be several times the value of the stock. Further such a sale can only be made to persons who are not family members. the Thus the owners of a business who put stock in a foundation may find that they have created the very vehicle which makes the business a takeover target. In this respect, the policy of $ 4943 is in sharp contrast to the efforts of the Congress in other provisions under the tax law (most notably IRC $ 6166) to ease the tax burden on family businesses so that divestiture is not required due to a tax provision. C. The Effect Upon Community Resources, Employment and other Local Benefits Typically, family or private foundations have been formed by individuals to fulfill a belief that wealth derived from a community should be returned for the benefit of that community. Whether this concept is entirely inspired by benevolence or is "good business", the result is the same. The foundation, which is created to hold stock in a local business and receive dividends which are distributed in support of local charities, creates in the community not only a very substantial stake in the foundation but also in the business. In many cases, the effect of S 4943 is to threaten that community system because forced divestiture of stock is likely to place the control of a business in the hands of interests that have no ties to the community and which view the business solely from the standpoint of the bottom line. Cases have been presented to the Congress where local businesses, whether in the form of a hotel, a newspaper, or a manufacturer which is a substantial employer in the community, are faced with a threat that control will pass out of local hands and into those who do not have the same or traditional interest in the community. Certainly such results go far beyond sound tax policy or any reasonable intention of the Congress in 1969. D. Other Rules, Already in Effect, Serve 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 § 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 invest ments. 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 re policy now? The Congress has the responsibility to examine 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. 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 $ 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 and the preservation of 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. |