## Facts

- The Senate Committee on Finance issued a report on H.R. 13270, a bill that became the Tax Reform Act of 1969.
- The report addressed perceived abuses involving tax-exempt private foundations acquiring and retaining controlling interests in for-profit businesses.
- The Committee described patterns in which foundations amassed controlling stakes in multiple enterprises, including examples of foundations functioning as regional “economic empires” and conglomerates with numerous operating businesses.
- The report noted concerns that some foundations sought profitable business acquisitions and that family-dominated structures could perpetuate control while retaining tax-favored status.
- The Committee concluded that existing law and administrative enforcement tools were insufficient to prevent these outcomes.

## Issues

1. Whether tax-exempt private foundations should be permitted to acquire and maintain controlling or substantial interests in for-profit business enterprises while retaining charitable tax benefits.
2. Whether existing tax-law tools adequately deter foundations from using charitable status to accumulate wealth, concentrate economic power, or distort competition.
3. What statutory ownership limits, excise taxes, and divestiture mechanisms should be adopted to align foundation conduct with charitable purposes.

## Decision

- The Committee recommended a statutory framework to restrict private foundations’ ownership and control of business enterprises.
- The Committee supported ownership thresholds and rules requiring divestiture of excess holdings over time.
- The Committee endorsed excise taxes to deter and penalize disqualifying or excessive business holdings.
- The Committee linked these recommendations to a broader regime regulating private foundation operations, including rules targeting self-dealing, insufficient distributions, jeopardizing investments, and taxable expenditures.

## Legal Principles

- Charitable exemption and deductible contributions are justified only when an organization’s primary activities serve public-benefit purposes rather than operating commercial conglomerates.
- Tax-exempt control of operating businesses can concentrate economic power in entities not subject to ordinary market discipline and can distort competition through tax-favored capital accumulation.
- Significant business ownership can divert managerial attention and resources from charitable programs and encourage retention of earnings rather than charitable outlays.
- Clear statutory standards (ownership limits, excise taxes, and divestiture periods) are preferred over case-by-case administrative determinations to prevent abuse before it occurs.
- Legislative intent favored stringent limits on private foundation involvement in business enterprises, reflected in the private-foundation excise-tax structure later codified in the Internal Revenue Code (including the excess business holdings regime).

## Conclusion

The report articulated Congress’s policy judgment that private foundations should not use tax-favored status to control for-profit enterprises; instead, foundations should be constrained by defined ownership limits, excise taxes, and divestiture rules to preserve competitive neutrality and ensure that charitable tax benefits support genuine charitable activity.


S. Rep. No. 91-552, 91st Cong., 1st Sess., 1969-3 C.B. 423 (1969)