1972, March, Pg. 21. Your Charitable Organization and the New Private Foundation Provisions.

• Author: by Peter C. Guthery

1 Colo.Law. 21

Colorado Lawyer

1972.

1972, March, Pg. 21.

Your Charitable Organization and the New Private Foundation Provisions

211972, March, Pg. 21Your Charitable Organization and the New Private Foundation Provisionsby Peter C. GutheryPeter C. Guthery, Denver, is a director-shareholder of Pendleton, Sabian, Guthery and Lewis, P.C. His article originally appeared in the tax notes section of the January 1972 issue of the American Bar Association Journal, and is reprinted here with that publication's permission. Many of the footnotes to the original article have been excluded here to facilitate re-publication, and headings have been added.Every lawyer who organizes or represents a charitable tax-exempt organization should be aware of the sweeping new legislation pertaining to private foundations that is contained in the Tax Reform Act of 1969. Organizations that fall under these provisions are now subject to new operating restrictions, reporting requirements and possible penalties.

Historical BackgroundCharitable giving is encouraged by what amounts to a program of federal subsidization which is built into the Internal Revenue Code of 1954, as amended.(fn1) A qualified charitable organization(fn2) is granted an exemption from income tax, while the donor is allowed an income, estate or gift tax deduction.

The amount of the allowable yearly charitable income tax deduction depends upon the nature of the organization. Prior to the Tax Reform Act of 1969, contributions to churches, schools, hospitals, fundraisers for schools, states and their subdivisions, and contributions to charities that were publicly supported were deductible in an amount up to 30 per cent of the indiviudal's adjusted gross income.(fn3) Other charitable organizations, which were organized and operated for charitable purposes, but which were more "privately" supported, could also receive tax deductible donations, albeit only to the extent of 20 per cent of the contributor's adjusted gross income.

The tax deduction and tax shelter available to "privately supported" charitable organizations (or private foundations) combined with limited reporting and qualification requirements, stimulated individuals to take advantage of the private foundation vehicle frequently for other than charitable purposes. This, to a great extent, involved noncharitable dealings between the persons who created the private foundation and the foundation itself. These individuals would use the organization as a means to sell or lease property, borrow needed funds, furnish goods or services for compensation, or to use the foundation's income or assets for their own self-interest.

Some private foundations invested in assets which failed to produce current income, thereby precluding the possibility

22that current distributions would be made to charity. Yet, the donor received the benefit of the tax deduction at the time of funding. Similarly, investments were made that jeopardized the charity's corpus.

Many foundations were found to control businesses, especially family corporations. The Senate Finance Committee feared that charitable concerns had become secondary to the need to devote time to the operation of the enterprises. Because of the tax exemption, the businesses were able to compete unfairly with taxpaying companies. The committee cited an example of one foundation which was found to control eighteen operating businesses, including a ten million dollar newspaper, the largest radio station in the state, a twenty million dollar insurance company, a lumber company, several banks, three large hotels, a garage and a number of office buildings.

Private foundations became increasingly involved in legislative activities, even though the code provided certain limitations.(fn4) Large foundations were able to stay within the statutory limitations while still engaging in major lobbying activities and, since the only sanction was a prospective loss of exemption, a well-endowed foundation could requalify under another tax-exempt provision as it was no longer concerned with receiving tax-deductible donations.

In addition, it was discovered that "educational" grants were made to enable certain private individuals to prepare works which furthered their specific political viewpoints, to finance paid vacations outside the United States and to permit compensating "interludes" between jobs.

Although Section 331 of the Revenue Act of 1950 contained provisions that sought to curtail some of the abuses, the standards were not sufficiently definitive to bring about the desired improvement in the administration of the private foundation. In 1962, Congressman Wright Patman began to direct attention to the abuses. The House and Senate Committees subsequently requested the Treasury Department to examine the activities of the private foundations and to make recommendations. Its report was published in 1965 by the Senate Finance Committee. No further action was taken by Congress on the recommendations contained in the report until 1969, at which time the members shared...