How a Foundation Tax Became the Minimum-Payout Rule

When Peter G. Peterson, a businessman, started speaking out about his views on fiscal policy in the 1960s,

he was invited to play a leading role on one of the most influential philanthropy committees in history.

John D. Rockefeller III and others persuaded Mr. Peterson to head the Commission on Foundations and Private Philanthropy, an ad hoc group created in 1969 to advocate for grant makers and to make sure that members of Congress who were trying to close tax loopholes used by rich people didn’t levy taxes on private foundations. Informally, the group became known as the Peterson Commission.

At the time, anecdotes about millionaires who paid no taxes reverberated throughout the halls of Congress. Foundations faced collateral damage because lawmakers lumped them in with wealthy individuals.

“I was a University of Chicago type who believed in using good information. I was just appalled at the lack of knowledge in Congress about what foundations did,” recalls Mr. Peterson, who this week is opening his own foundation, which eventually will be worth $1-billion.

He went about trying to enlighten several powerful members, including Russell Long, the legendary senator from Louisiana and chairman of the Senate Finance Committee, who, like other elected officials, had risen before Congress to decry the perceived sins of American philanthropy, including the existence of hundreds of company-created foundations that had done little more than donate dividends of 1 percent to 2 percent to charities each year. Legislators were worried that such foundations had been set up to allow large corporations to retain their stock holdings tax-free.

“At the time, there was a strong movement to tax foundations at 46 percent of their income and to put a 10-year limit on them,” Mr. Peterson says. “I told John Rockefeller we had a very serious problem on our hands.”

He met with Mr. Long, who “had a drink or two” during their conversation, Mr. Peterson says. “I won’t mention the language he used to put down foundations,” he adds, laughing at the memory.

Change in Plans

Before the meeting, Mr. Peterson conducted research on charitable giving by foundations to groups in New Orleans, Senator Long’s hometown. He discovered that nearly all of the grants they made went to the Catholic Church, local charities, and universities, such as Tulane.

Mr. Peterson attempted to convince the senator that a stiff foundation tax would drain grantees of money that helps New Orleans residents.

“I told him what was needed wasn’t a large tax, but this minimum-payout idea I had,” Mr. Peterson says.

Senator Long liked the idea of helping the poor while guaranteeing more from the rich.

“‘You mean there’s a way I can’ — and I won’t use the word — ‘the bad guys and help the good guys?,’ was how he put it,” says Mr. Peterson.

Within two days, Senator Long dropped his push for a foundation tax and spoke on the Senate floor in favor of a minimum payout rule that required private foundations to make grants totaling at least 5 percent of their net assets each year. The rule, with a few amendments, is still in force.

“It has really increased foundation giving,” says Mr. Peterson.