The regulation of American foundations: Looking backward at the Tax Reform Act of 1969

Abstract

The American Tax Reform Act of 1969 represented a major watershed in the law of philanthropy, introducing a new classification scheme —one that sharply distinguished between ‘private foundations’ and other charitable organisations- and, for the private foundation category, a new regulatory system, new regulatory sanctions, a new tax on investment income and new restricitons on the deductibility of property gifts. After briefly tracing the origins of this legislation, the paper sets forth five norms that should characterise the legislative process, and proceeds to explore, albeit in abbreviated fashion, the extent to which each of these norms was respected by the Congress in 1969. The paper then turns from an examination of regulatory principles to a consideration of regulatoryimpacts, dealing with several ways in which the 1969 Act appears to have caused diversion of resources, including: diversion of charitable giving from foundations to non-foundation charities (with consequences for the ‘birthrate’ of foundations); diversion of resources from charitable to non-charitable uses; diversion of funds from charitable channels to the US Treasury; and a diversion of resources from certain grantees to others. The mitigating effects of recent forms of deregulation are described, followed by the suggestion that more deregulation is desirable, in order to sustain the health and strength of America's private foundation sector.