Private foundation rules

Incremental regulatory initiatives

Tax Reform Act of 1969

Following public hearings that highlighted abuses by private foundations established by wealthy U.S. individuals, Congress enacted a comprehensive series of rules governing private foundations as part of the Tax Reform Act of 1969. As a result, any charitable organization that does not meet the legal definition of a public charity must be operated in compliance with a complex regulatory regime administered by the Internal Revenue Service if it is to maintain its tax-exempt status.

Prior to the enactment of these measures, the propriety of various transactions and practices was judged by an arm's-length standard – that is, whether the transaction or practice at issue was reasonable and fair when judged from the perspective of how unrelated parties might have acted. After focusing on several highly publicized cases involving wealthy families, Congress determined that objective tests should be substituted for the inherently subjective, “all facts and circumstances” evaluations of such practices, which had been the standard under existing law.

During the hearings, which culminated in the enactment of the Tax Reform Act of 1969, Congress criticized previous Internal Revenue Service enforcement efforts as ineffective. It found that the difficulty in proving a violation of law under the arm's-length standard tended to discourage the IRS from enforcing the law.