Editors’ Note: Eric John Abrahamson continues HistPhil‘s forum marking the 50th anniversary of the Tax Reform Act of 1969.

In 1969, Texas Rep. Wright Patman and other members of Congress believed that a significant number of donors who created private foundations had little interest in philanthropy. Faced with high estate tax rates that would force their heirs to liquidate the companies they had built, these entrepreneurs established private foundations, endowed them with sufficient shares of their company’s stock to create a controlling interest, and then appointed foundation boards of relatives and friends to perpetuate family control of their businesses—all in the name of philanthropy. The Tax Reform Act passed that year sought to put an end to this practice and build a higher wall between the market economy and nonprofit institutions in civil society.

Much has been written about the history of the Tax Reform Act of 1969 and its effects on philanthropy in the United States, but surprisingly little attention has been paid to this idea of “control stock.” The issue is important for a number of reasons. Many of the foundations created with control stock prior to 1969 are still among the largest in the United States, with total assets in 2016 that exceeded $50 billion. Many donors who established these foundations undoubtedly had charitable intentions, but the evidence suggests that most were primarily interested in maintaining corporate control and had little specific donor intent—an important factor in today’s debates around philanthropic norms and legitimacy. Finally, the debate over control stock in 1969 is important because, 50 years later, the bright line the Act sought to establish between for-profit and non-profit activity is fading, and some of us are left wondering why this divide was so important to earlier generations of policymakers in the first place.

The strategy to endow foundations with enough stock to maintain control of a for-profit enterprise took hold in the United States in the 1930s. With the nation in the middle of the Great Depression, the US Congress had steadily increased the tax on large estates to almost confiscatory levels — 70 percent on estates with a net value of $50 million or more. As the major owner of stock in the Ford Motor Company (FMC), for example, Henry Ford worried that if he died his family would be forced to liquidate so many shares to pay the taxes that his family would lose control.^[1]

Fortunately, Ford had a smart attorney, who suggested that he create a private foundation and donate nearly all of the shares of FMC to this new entity. In the event of Ford’s death, these shares and any income they generated would not be subject to the estate tax. In the meantime, by naming trustees who were close to Ford to govern the foundation, Henry and his family could maintain control of FMC and continue to direct its future.

For Ford, the idea of creating a private foundation was not attractive. Generally, he believed charity promoted dependence. Socially, the capital generated from profits provided more benefits, including more jobs, when it was invested in entrepreneurial activity. Ford also thought that endowments and foundations tended to be slow-moving and conservative, benefitting insiders and employees more than society.^[2] But Ford was even more opposed to selling his company.

With Ford’s approval, his attorney organized the Ford Foundation in 1936 and drafted wills for Henry and his son Edsel that left 95 percent of the stock of FMC to the foundation. Significantly, this stock had no voting rights. The remaining 5 percent of the shares went to Ford family heirs, who retained voting rights and total control of the company. In the process, Ford let go of one of the greatest fortunes created in the history of the nation, but he saved his heirs an estimated $321 million in inheritance taxes.^[3]

Other entrepreneurs followed Ford’s example. Over the next three decades, as estate taxes remained high, hundreds of private foundations were created by businessmen seeking to avoid taxes and maintain corporate control. Articles in Fortune and Dun’s Review touted this strategy.^[4] In 1948 and 1949, the Virginia Law Review outlined “The Use of Charitable Foundations for Avoidance of Taxes” and provided a step-by-step guide to lawyers and tax consultants.^[5] In 1960, Business Week concluded that “The real motive behind most private foundations is keeping control of wealth (even while the wealth itself is given away).”^[6]

Corporate Control and Donor Intent

Most donors who gave corporate control to their private foundations had very little specific donor intent. Their lawyers used boilerplate language to encompass the broadest possible range of philanthropic activities. The Ford Foundation, for example, was established to support “scientific, educational and charitable purposes, all for the public welfare.” The founders of Lilly Endowment hoped their resources would be used for the “promotion and support of religious, educational or charitable purposes.” And the Charles Stewart Mott Foundation, chartered in 1926, was established “to carry on philanthropic, charitable, and educational work.”

For the American public, these gifts of control stock often produced very little charity initially. Private foundations were under no legal mandate to make grants from either their income or assets, and donors of control stock were often more focused on reinvesting corporate profits to continue to grow their companies than in providing dividends that could be used by their foundations for charity. From 1936 until Ford’s death in 1947, for example, the Ford Foundation gave away only about $1 million a year.^[7] As late as 1968, the Houston Endowment paid out only 14.4 percent of its income to charities.[8] Meanwhile, since there were no disclosure laws on the books, the public knew very little about the amount of philanthropic capital that had been parked in these private foundations, and there was almost no external pressure on these foundations to expand their grantmaking.

As early as 1943, Congress began to take notice of the Ford strategy. In various hearings over the next 26 years, witnesses urged Congress to close this loophole. Critics argued that donors were manipulating the system to serve their personal and business interests, forcing ordinary taxpayers to shoulder more of the burden of paying for government, and using tax benefits to gain an unfair advantage for their businesses in the marketplace.

All of these arguments coalesced after Wright Patman launched a campaign against private foundations in the early 1960s. The Treasury Department sifted through Patman’s research and allegations, as well as its own records. In February 1965, the department recommended changes to the tax laws. These changes sought to curb “self-dealing” donor behavior, mandate the distribution of private foundation income to public charities, and end the practice of using private foundations to control for profit companies. Four years later, the essential elements of the Treasury report were embedded in the Tax Reform Act of 1969.

Under the new law, private foundations with significant corporate control stock were forced to reduce their holdings of any single company to less than 20 percent. This provision overwhelmingly affected the largest private foundations in the country (those with assets of more than $10 million), 80 percent of whom were endowed with control stock or appreciated property or both.^[9] Although Congress provided an elaborate set of rules that allowed these foundations to take as long as 35 years to divest, many private foundations—including the Kresge, Dana, Lilly and Robert Wood Johnson foundations—rushed to divest. Some of these transactions made headlines on Wall Street. When the Amon G. Carter Foundation sold Carter Publications Inc.’s media holdings for $115 million ($661.8 million in 2019 dollars), the deal was described as the largest sale ever of communications properties.^[10] Other foundations traded shares. Kresge and Ford, for example, swapped blocks of stock in the companies created by their founders.^[11] One commentator even suggested that the problems of all these foundations could be solved if they “could all sit down at a table and reshuffle their holdings.”^[12]

Even as these foundations rushed to comply with the law, however, many people in the foundation community chafed at the restrictions on control stock. The privately organized Commission on Foundations and Private Philanthropy (the Peterson Commission) estimated that 40 percent “of all contributions to foundations [historically] were in the form of control stock.”^[13] If policymakers didn’t find some new way to incentivize these major gifts, the birth rate of private foundations was likely to plunge. But they were wrong. After suffering through the economic doldrums of the 1970s, the birth rate of private foundations rose in the late 1980s and soared in the 1990s and beyond. Surprisingly few scholars have asked why these predictions were so wrong.

Explaining the Resilience of Private Foundations

The convergence of various macroeconomic factors may have diminished the importance of Henry Ford’s strategy long before the passage of the Tax Reform Act. By 1969, the US economy had made a substantial transition away from the era of proprietary capitalism (where firms are controlled by the founder or his or her family) and into the age of managerial capitalism. As the stock market exploded in the 1950s and 1960s, with vast infusions of new capital from pension funds and then mutual funds, the temptation to go public increased and the percentage of shares needed to maintain corporate control declined substantially, often to 20 percent or less. As a result, the need to use foundations to park large blocks of control stock was undoubtedly waning long before the Tax Reform Act of 1969.

Changes in the estate tax also diminished the desire of many entrepreneurs to follow in Henry Ford’s footsteps. New rules adopted in 1976, for example, allowed estates composed of a closely-held business interest to take five years to complete their tax payments, a provision that provided for business continuity and planning and lowered the concerns of owners who worried about a sudden forced sale of their business to pay the government.^[14] Five years later, with the Economic Recovery Tax Act of 1981, Congress expanded that timeline to 15 years. Over the next two decades, Congress continued to ease the burdens on the estates of entrepreneurs who died owning their businesses. Then in the early 2000s, Congress began an effort to phase out the estate tax altogether. By 2018, the exemption had increased to $11.18 million per taxpayer and the tax itself was projected to affect only about 2,000 taxpayers.

All of these changes to the tax code played an important part in shaping the philanthropic decisions of donors, but clearly the most important factor in the birthrate of private foundations in the last quarter of the 20^th century and the beginning of the new millennium was the growth in wealth at the highest levels of the income spectrum. With assets to give and tax policies that continued to incentivize giving in the highest tax brackets, foundations flourished even as other forms of giving, like donor-advised funds, increased as well.

Nearly fifty years after the passage of the Tax Reform Act of 1969, policymakers, pundits in the world of philanthropy and the American public are still struggling with issues that concerned Congress in 1969, especially as they relate to self-interest, profit-making, and the time it takes for a qualified tax deduction to actually benefit a public charity. The long history of philanthropy in the United States in the twentieth century suggests that this public suspicion will not go away. As a new generation celebrates the marriage of profit-making with efforts to promote the public good, it’s important to understand why an earlier generation was skeptical of donors and their motivations.

-Eric John Abrahamson

Eric John Abrahamson is president of Vantage Point History and an IAEGHSBE fellow at Johns Hopkins University. He is the author of Beyond Charity: A Century of Philanthropic Innovation for the Rockefeller Foundation and has researched and documented the histories of more than a half dozen major foundations in the United States and Canada.

NOTES

[1] Ford Richardson Bryan, Friends, Families, & Forays: Scenes From the Life and Times of Henry Ford (Dearborn, Mich.: Ford Books, 2002), 263.

[2] Randall G. Holcombe, Writing Off Ideas: Taxation, Foundations, and Philanthropy in America (New York: Routledge, 2017 ed. (originally published 2000 by Transaction Publishers).

[3]  Ford R. Bryan, Henry’s Lieutenants (Detroit: Wayne State University Press, 1993), 180.

[4] Gabriel Rudney, “Creation of Foundations and Their Wealth,” in Teresa Odendahl, ed., America’s Wealthy and the Future of Foundations (New York: The Foundation Center, 1987), 179-202.

[5] [Berrien C. Eaton, Jr.], “The Use of Charitable Foundations for Avoidance of Taxes,” Virginia Law Review 34:2 (Feb., 1948), 182-201; “Charitable Foundations, Tax Avoidance, and Business Expediency,”  Virginia Law Review 35:7 (Nov., 1949), 809-861; and “Charitable Foundations, Tax Avoidance, and Business Expediency,”  [Part Two], Virginia Law Review 35:8 (Dec., 1949), 987-1051.

[6] Business Week, May 7, 1960, 153, cited in U.S. Treasury Department, Report on Private Foundations (Washington, D.C.: Government Printing Office, 1965), 38.

[7] Richard Magat, The Ford Foundation at Work: Philanthropic Choices, Methods, and Styles (New York: Plenum Press, 1979), 18.

[8] Associated Press, “Foundations Must Give More Under New Laws,” Los Angeles Times, July 25, 1971, 2.

[9] John G. Simon, “The regulation of American foundations: looking backward at the Tax Reform Act of 1969,” Voluntas: International Journal of Voluntary and Nonprofit Organizations 6:3 (October 1995), 249.

[10] Carole Foryst, “Texas Firm’s Media Holdings to Be Acquired for $115 Million,” Los Angeles Times, January 6, 1973, D7; “Fort Worth Paper, TV, Radio Outlets Are to Be Sold,” Wall Street Journal, January 8, 1973, 9.

[11] For Kresge, see Isadore Barmash, “3-for-1 Split of Stock and Offering Set,” New York Times, March 22, 1972, 63. On Kresge and Ford Foundations swap, see “Kresge Foundation Offers 175,000 Shares to Ford Foundation for Stock of Auto Firm,” Wall Street Journal, April 12, 1972, 6. At the time of this transaction, the Kresge Foundation owned 16.6 percent of Kresge Co.’s stock and was the largest single shareholder.

[12] John R. Labovitz, “The Impact of the Private Foundation Provisions of the Tax Reform Act of 1969: Early Empirical Measurements,” Journal of Legal Studies 3:1 (January, 1974), 95.

[13] Commission on Foundations and Private Philanthropy, Foundations, Private Giving, and Public Policy: Report and Recommendations of the Commission on Foundations and Private Philanthropy (Chicago: University of Chicago Press, 1970), 165-66.

[14] John R. Luckey, “A History of Federal Estate, Gift, and Generation-Skipping Taxes,” Congressional Research Service Report for Congress, January 16, 2009, 12.