As Congress debated enacting the income tax in 1910, oil tycoon John D. Rockefeller Sr. made an unprecedented offer. Rockefeller wanted a federal charter to permit the creation of a philanthropic corporation that he said would promote the welfare of the entire country. In return, he wanted the money given to this new foundation to be exempt from personal property taxes. In a period marked by staggering income inequality, Gilded Age business magnates like Rockefeller had served the nation’s patrons, but in the face of progressive taxation, they wanted special exemptions like this to continue their philanthropic endeavors.
Many in Congress feared that writing such an organization into law would open avenues for abuse and corporate misdeeds and could eventually become a platform from which Rockefeller could wield undue influence over public affairs.
But Rockefeller made major concessions, and the House eventually passed a bill with a two-thirds margin that gave Congress tremendous influence over the operation of the proposed foundation, including the power to dissolve it. The bill also created a system for appointing trustees that required input from public figures, including the president.
But a small group of senators rebelled, blocking the bill’s passage in the Senate, despite a favorable recommendation from a bipartisan committee. So Rockefeller pivoted and convinced the New York legislature to pass a state-level version of his original proposal with none of the concessions he had made to try to secure passage at the federal level.
Over the next few decades, foundations became the preferred vehicle for large private giving as the post-war economic boom buoyed the wealth of America’s richest families. Foundations multiplied throughout the nation as philanthropists sought ways to minimize tax burdens and retain familial control of assets. Figures like Henry Ford II and Eli Lilly Jr. became the faces of a new generation of philanthropy, launching projects to fund universities, investing in community programs and creating institutions that still shape the arts, education and policy conversations.
However, because Congress never passed national legislation setting rules for foundations, states began rapidly issuing charters with few explicit guardrails. Philanthropy was so inconsistently regulated at the state level that by 1961, the IRS could not even say with certainty how many foundations existed in the country.
In the 1960s, Rep. Wright Patman (D-Tex.) launched a decade-long study to bring oversight and accountability to the foundation world. First elected to the House in 1928 and a committed populist, Patman maintained an early-New Deal suspicion of economic concentration. He soon found that some of the nation’s largest foundations were also some of its largest shareholders. A survey of 534 foundations showed that 111 of them owned more than 10 percent of a single company’s stock. This included the Ford Foundation, which held 100 percent of the Ford Motor Company’s class A nonvoting stock, making the nonprofit organization the largest stockholder of one of the country’s most important corporations — and leaving a staggering amount of wealth beyond the reach of taxation. And while organizations like the Ford Foundation spent millions of dollars on programs that developed public educational television, among other charitable endeavors, the Treasury Department estimated that 10 percent of foundations merely functioned as tax shelters to promote private profit.