Editors’ Note: Lila Corwin Berman continues HistPhil’s (slightly dilatory) forum marking the 50th anniversary of the Tax Reform Act of 1969 with a contribution explaining how the Act paved the way for the spectacular rise of donor-advised funds.

Throughout the 1950s and 1960s, Congress worried about the unchecked private power that philanthropic entities could hold over putatively public processes. By the time they passed the 1969 Tax Reform Act, American legislators may have thought they were putting the matter to rest by drawing a sharp distinction between public and private charitable bodies. As it turned out, their attempt to draw those boundaries ended up conferring unprecedented levels of public-subsidized power to private actors—specifically, to donor-advised funds.

Already in the 1940s, Congress had sought to regulate and constrain philanthropic power based upon the assumption that charitable activity could be divided between public and private forms, the latter distinguished by relying on its funding from an individual or a small circle of donors. Yet even with this distinction in mind, the world of private charitable foundations remained murky. Writing in the Virginia Law Review in 1949, a lawyer who specialized in taxation noted that “the most amazing aspect of foundations is that so little information is available concerning them,” and continued that if tax lawyers were befuddled by the subject, “to the general public…the subject assumes the aura of a mystery.”[1] Private foundations remained a legal enigma throughout the 1950s, despite the fact that over 5000 existed, including a few massive ones, such as the Ford Foundation.

The primary impetus of Congress’s investigations into philanthropy and, eventually, the measures it passed in the 1969 legislation was to make private foundations legible and, thus, subject to clear regulation. According to the new law, any charity classified as public, including all educational and religious organizations, received immunity from most regulatory demands, since Congress determined that these organizations by their very nature acted in the best interest of the public and, if they did not, would fail the market test of receiving new donations. In contrast, private foundations, as a class, faced several new regulations to bolster their accountability to the public. In the eyes of Congress, individual control over private foundations would be counter-balanced by the public regulatory and reporting requirements placed upon those private foundations. Despite pending proposals at the time, Congress stopped short of limiting the lifespan of private foundations, a proposal that some legislators had hoped would decisively block long-term abuses of private power.

But there was a hitch in the 1969 law, throwing into disarray what may have appeared to be a neat division between public and private voluntary giving. In its effort to define what separated a private foundation from a public charity, the law left several lacunae when it came to the types of philanthropic capital that public charities could hold while still preserving their privileged status.

As my research has shown, tax attorneys—particularly one named Norman Sugarman, who was a legal advisor to Jewish charitable organizations and a former IRS staffer—helped lead the way in preserving the legislation’s gap and then interpretively stretching it. Very quickly after its passage, the law made room for definitionally public charities to house privately-designated and controlled funds without ceding their tax privileges. This meant that public charities could act as warehouses for private foundations, using the distinction that Congress had attempted to draw as a tool for eroding it.

Already, in the early 1960s, philanthropic organizations had experimented with a new vehicle, often called “philanthropic funds,” that blurred the line between private donor control and public charitable oversight. Cleveland’s Jewish federation, an umbrella charitable structure that had been founded in 1903 to allocate communal funds to Jewish agencies, played a critical role in developing these philanthropic funds as it sought to expand its endowment holdings. Federation staff and its lay leaders designed philanthropic funds in the early 1960s to be “in effect a private foundation established through contract within the Federation.”[2] The funds carried the names of their private donors and were generally allocated according to donor recommendations, but federation counted the assets held in them as part of its endowment.

So ill-defined was the position of these philanthropic funds along the public charity-private foundation axis that during the lead up to the passage of the new law, many risk-averse tax attorneys advised their clients to assume the funds would be classified as private foundations. However, a different interpretation of the funds and the law—advanced by Sugarman and other lobbyists from the philanthropic world—held that Congress best met its legislative goals by making public charities the more attractive and capacious philanthropic vehicles. This interpretation, which had struck many observers as contrary to the aim of the law, nevertheless carried the day, as Sugarman, more than anyone else, convinced Congress it would be better off construing public charities as broadly as possible, even if this meant constraining its own regulatory power.

Although far from draconian, the 1969 tax act had set the expectation that the government had the right to control private foundations in return for the favorable treatment they still received: Congress could mandate payout rates, tax investment income, and require annual reports on grants made. When it came to public charities, however, Congress set no such expectations, making it a matter of practice that the government should have minimal control over these funds, beyond keeping them within the wide world of organizations classified under section 501(c)3 of the Internal Revenue Code.

When Congress and the Department of Treasury agreed to allow “philanthropic funds” to fall on the public charity side of their division, they surely did not anticipate the wild growth of these funds. And they would have never guessed that by the early 1990s, the funds—now called donor-advised funds—would stimulate the creation of charitable wings of commercial investment houses, such as Fidelity, which saw them as good business ventures.

As the distinction between private foundations and public charities caved in around donor-advised funds, their boosters came to believe that these funds deserved freedom from all but the most superficial government regulation, even as they received subsidy from taxpayers. Accordingly, a significant (and the fastest growing) part of the assets of the philanthropic sector, already enriched by the government, gained the freedom to accumulate, all on the promise of fulfilling a public mission at some unspecified future moment.

The recently passed fiftieth anniversary of the 1969 Tax Reform Act provides an opportunity to take stock of this history. The puzzle of how to balance public and private power that Congress set out to solve five decades ago is arguably even more pressing today than it was in the 1960s. From the early 1970s to our own moment, tax policy has inexorably tilted the balance toward private power, using public revenue or “tax expenditures” to favor private capital, philanthropic and otherwise. We now know that over the last half century, this has had the effect of creating a wide chasm between the very wealthiest and the rest. Even the most ambitious philanthropic project cannot remedy this disparity, in part because philanthropy itself is complicit in it.

But if we only blame philanthropy or castigate private wealth or cast aspersions on billionaires, then we will have missed the true historical context of U.S. policy that enabled this state of affairs. Instead, we would do well to turn our eyes toward the evolution of charitable tax policy and the record it offers of a public good put in the trust of private interests. Should we wish to find a new balance between public and private power, this record will help us see the policy choices, pressures, and historical forces that led us to the present and may free us to imagine the next fifty years differently.

-Lila Corwin Berman

Lila Corwin Berman is Professor of History at Temple University, where she holds the Murray Friedman Chair of American Jewish History and directs the Feinstein Center for American Jewish History. She is author of a forthcoming book titled, The American Jewish Philanthropic Complex: The History of a Multi-Billion Dollar Institution (Princeton, 2020).

NOTES

[1] Berrien Eaton, Jr, “Charitable Foundations and Related Matters under the 1950 Revenue Act: Part I,” Virginia Law Review 37, no. 1 (Jan 1951): 810.

[2] Report to the Endowment Fund Committee Regarding Federation Trust Fund Program, April 1961, no author listed; and David Myers, “A Federation Endowment Program with Special Reference to Trust Fund,” Nov 19, 1961, Folder 1159, Box 49, Cleveland Federation Papers, MS 4835, Western Reserve Historical Society, Cleveland, Ohio.