Tax Reform Act of 1969

Grade Level: 
6, 7, 8, 9, 10, 11, 12
Charity; Nonprofit organizations; Assessment; Effectiveness
The Tax Reform Act of 1969 was the first piece of legislation to solidify the distinction between grant-making and service-providing institutions, and to establish a separate and unequal relationship between them.

Written by Angela White, Ph.D.



The Tax Reform Act of 1969 (TRA69) was a significant federal tax overhaul for nonprofit organizations.  The parts of TRA69 that relate to nonprofits sprang from a desire to hold them accountable for the benefits they receive from the tax code.  It divided nonprofit organizations into two types:  public charities, which have broad-based public support, and private foundations, which are primarily grant-making institutions supported by the contributions of an individual or small group of people.  Grant-making institutions faced the brunt of the legislation, which included the following provisions:

  • 4% tax on investment income (reduced to 2% in 1978)
  • 5% minimum distribution of income
  • Limit of 20% ownership of the stock holdings of a business
  • Prohibition on the attempt to influence legislation or elections
  • Taxation on unrelated business income
  • Prohibitions on “self-dealing”; officers and donors could not benefit financially from their transactions with the foundation
  • Enhanced reporting requirements, including grants awarded; public access to all of this information guaranteed

The same requirements for unrelated business income, political activity, and reporting existed for service-providing organizations, with the exception that donor lists would not be made public (Tax Reform Act, 1969).


Historic Roots

One of the major concerns about private foundations was that tax exemption for donations was essentially akin to public support for the activities that they funded.  Understanding where this money was going, what causes it was supporting, and whether those causes were appropriate for diverted tax dollars was of primary concern to the critics of grant-giving institutions.  A few well-publicized examples of corruption negatively impacted public opinion (Treasury Department, 1965).  Public sentiment focused on the use of foundations as a tax shelter for the very rich, who continued to benefit from their foundation money long after it had been “donated”. Also, support for overtly political ends and the influencing of elections, and refusal to spend dollars allocated to charity were all seen as problematic (Crimm, 2001).

But criticism of this portion of the nonprofit sector was far from new in the 1960s—the first Congressional commissions tasked with investigating their work date back to the 1910s, after decades of criticisms in the press. The early refusal of Congress to establish a federal charter for the Rockefeller Foundation had ended in state approval with little to no oversight of how funds were spent.  The 1950s saw the Cox and Reese Commissions investigate foundation ties to Communist sympathizers, though the political hysteria of the time did not significantly impact the inner workings of foundations—neither investigation saw any ties to Communism or the Soviet Union (Crimm, 2001).

The 1965 Treasury Report on private foundations set the stage for the reforms as they were passed.  Although the Treasury Department believed “that the preponderant number of private foundations perform their functions without tax abuse”, their investigation revealed many of the problems that TRA69 sought to address, including self-dealing, failure to use accumulated funds for charitable purposes, unrelated business income, and use of foundations to control corporate and personal property (Treasury Department, 1965).

The Commission on Foundations and Private Philanthropy (Peterson Commission, 1968-69) began with the premise that information about foundations would be relatively easy to find, but members quickly discovered that it was, in fact, very difficult to find useful information to aid their research (Brilliant, 2000).  Formed as a result of John D. Rockefeller III’s concerns about growing criticism from Congress and the public at large, the Commission sought to investigate some of the negative claims against private foundations and moderate the public discussion of their role in American life.  A small group came together—focused primarily around Chicago and brought together by having some passing acquaintance of Peterson, they found themselves unable to answer the questions posed by the public without significant research.  And although Peterson presented his preliminary findings to the Ways and Means subcommittee, the Commission did not finish its work before TRA69 passed through Congress.



Although the inner workings of nonprofits were significantly modified by the reforms of 1969, the attempts to extinguish corruption were not particularly visible to the public.  One enduring impact was the increase in administrative costs that resulted from attempts to improve public perceptions of foundations.  Professional staff could allay some public fears, but at the cost of funds diverted to paying them.  The professionalization of foundations also meant a change in the types of grants offered—the trend toward project grants increased at the expense of general operating grants (Frumkin, 1998).

One visible impact of TRA69 stems from the revision of Forms 990 (the tax filings for nonprofits required by law) to increase the amount of information available to the public about the inner workings of nonprofits, especially private foundations.  Organizations like Guidestar and the Foundation Center continue to make extensive use of these forms to help the public decide where to apply for grants and where their charitable donations might best be used.  TRA69 required not only that private foundations provide a list of grants that would be available to the public, but also had to advertise the availability of this information.  Transparency, particularly for grant-making institutions (often operating out of the public eye), remains a rallying cry; lack of transparency remains a criticism of private foundations despite the reporting requirements of TRA69.  Some grant-makers have turned to Donor Advised Funds, which have more lenient requirements on payout and reporting, to the requirements of the law (Cantor, 2017).

The number of new foundations decreased temporarily in the wake of the new regulations (Simo,  1995).  Some foundations folded, either by spending down or passing their funds on to community foundations or other, larger foundations.  The trend toward relatively conservative giving—i.e. programs that did not fight to change the status of minority groups through undermining the political system—continued.  Despite earlier fears that foundations were seeking to undermine the political system, recent work on this period indicates that most grants seeking to improve equality for underrepresented groups often undermined effective political challenges from grassroots organizations.


Ties to the Philanthropic Sector

The Tax Reform Act of 1969 made a variety of changes to the tax code, not all of which impacted the nonprofit sector.  However, nearly one-fourth of the text of the Act was specifically related to the segment of the nonprofit world that came to be known as private foundations (Brilliant, 2000). 

The TRA69 had profound impacts on what information nonprofit organizations had to provide to the public, and limited its ability to rely on a small circle of friends and family to run the organization and benefit from its activities.  For grant-making institutions, the minimum payout of 5% annually marked a big change from their previous behavior.  The reduction of the taxpayer charitable deductions to 20% of annual gross income (AGI) for private foundations, and the corresponding increase to 50% AGI for public charities shifted the proportions of charitable donations to service providers (Arnsberger, 2008).

Many important individuals testified before Congress during the hearings related to TRA69, including John D. Rockefeller, III, one of the heirs to the Rockefeller fortune.  The Commission on Private Philanthropy and Public Needs (the Filer Commission) was formed in direct response to TRA69—their work on nonprofits led to the creation of Independent Sector, an organization that helped define the role of nonprofits as the “third sector” of society, along with government and the private sector.

Current political debates on tax reform threaten to make significant changes to the limit of charitable deductions and regulations on lobbying and political activity.


Key Related Ideas

  • Nonprofit Transparency is the movement toward providing more information about the inner workings of nonprofit organizations, to enable the public to make more informed decisions about where their donations go and what impact they might have.  In addition to filing Forms 990, nonprofits can elect to provide more information through annual reports, their organization website, and through tools like Glasspockets provided by the Foundation Center.
  • Donor-Advised Funds are tax-exempt accounts created by public charities to manage donations of individuals, families, or organizations.  Donors are able to act as advisors for distributing these funds.  Not subject to the same reporting requirements as private foundations, some donors prefer using these funds for making anonymous donations.
  • Forms 990 are the informational forms filed with the IRS by all nonprofit organizations, beginning in 1941.  Public charities file variations of Form 990; private foundations file Form 990-PF.  These forms provide basic information about assets, expenditures, and (in the case of foundations) a list of grants made with foundation assets.
  • The Johnson Amendment, which became part of the tax code in 1954, prohibits all 501(c)(3) nonprofit organizations from endorsing political candidates.
  • Tax Exemption is for organizations that fall under article 501(c)(3) of the IRS tax code, who are not required to pay taxes on their income.  This category includes public charities, private foundations, and most religious organizations.


Important People Related to the Topic

  • John D. Rockefeller, III (1906-1978), heir to the Rockefeller fortune, eventually became board chair of the Rockefeller Foundation.  He was instrumental in founding the Foundation Center, Independent Sector, and the Council on Foundations.  He organized both the Commission on Foundations and Private Philanthropy (the Peterson Commission) and the Commission on Private Philanthropy and Public Needs (the Filer Commission).
  • Wright Patman, democratic representative from Texas, was deeply skeptical of grant-giving institutions and led several investigations into foundation financial abuses.  Although generally disliked by his colleagues, his investigations laid the groundwork for TRA69.


Related Nonprofit Organizations

  • The Foundation Center was formed in 1955 to collect and disseminate information about private foundations.  Spurred on by anti-foundation sentiments and funded by the Carnegie Corporation and the Russell Sage Foundation, it worked to counter criticisms of foundations and encourage foundation transparency.
  • Guidestar was established in 1996 in enable people to “make better decisions about social change” by providing information about the nonprofit sector.  Guidestar is best known using the information in Forms 990 to assist with transparency for nonprofit organizations.
  • Commission on Foundations and Private Philanthropy, better known as the Peterson Commission, was established by John D. Rockefeller, III and was chaired by Peter Peterson.  The Commission conducted research into private foundations and made recommendations to Congress based on this work.  TRA69 was passed before its work was completed.  Its recommendations were published in Foundations, Private Giving, and Public Policy in 1970, which included a higher payout for foundations, more frequent audits by the IRS, and the establishment of a national Philanthropic Policy Board.
  • Commission on Private Philanthropy and Public Needs (the Filer Commission) was formed in 1973 in order to make recommendations regarding ways to improve the effectiveness of the nonprofit sector.  Established in part through the efforts of John D. Rockefeller, III, the Commission was chaired by John H. Filer.  Its recommendations were published in Giving in America:  Toward a Stronger Voluntary Sector.  In addition, 5 volumes of research papers created through the work of the Commission and its affiliates were published.  Recommendations included enhanced deductions for charitable donations for taxpayers, increased freedom for nonprofits to influence legislation, and the establishment by Congress of a permanent national commission on the nonprofit sector.
  • Independent Sector was founded in 1980 as a coalition of nonprofit organizations seeking to enhance the nonprofit sector.  It was formed partly as a response to the work of the Filer and Peterson Commissions.


Reflection Question - Why might it be a good idea to know how nonprofit organizations spend their money?



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  • Brilliant, Eleanor.  Private Charity and Public Inquiry:  A History of the Filer and Peterson Commissions.  Bloomington and Indianapolis:  Indiana University Press, 2000.
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  • Clotfelter, Charles T.  “Foundations” in Federal Tax Policy and Charitable Giving.  Ed. by Charles T. Clotfelter.  Chicago:  University of Chicago Press, 1985:  253-272.
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This paper was developed by students taking a Philanthropic Studies course taught at the Lilly Family School of Philanthropy at Indiana University in 2017. It is offered by Learning To Give and the Center on Philanthropy at Indiana University.