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exempt status. Sec. 503(a)(1).9 “Prohibited transaction” was
defined as any of certain types of transactions between the
entity and certain related persons; the types of transactions
involved case-by-case analyses of arm’s-length standards--
determinations of reasonableness, adequacy, or preferential
basis. Sec. 503(c).
In 1969, the Congress concluded that, as applied to private
foundations, (1) The arm’s-length standards of then-existing law
required disproportionately great enforcement efforts, (2)
violations of the law often resulted in disproportionately severe
sanctions, and (3) at the same time, the law’s standards often
permitted those who controlled the private foundations to use the
foundations’ assets for personal noncharitable purposes without
any significant sanctions being imposed on those who thus misused
the private foundations. See H. Rept. 91-413 (Part 1), 4, 20-21
(1969), 1969-3 C.B 202, 214; S. Rept. 91-552, 6, 28-29 (1969),
1969-3 C.B. 426, 442-443; also see Staff of the Joint Committee
on Internal Revenue Taxation, General Explanation of the Tax
Reform Act of 1969 (hereinafter sometimes referred to as the TRA
‘69 Blue Book) 3, 30-31. The Senate Finance Committee described
its conclusions as follows:
9 Sec. 503 of the Internal Revenue Code of 1954 was derived
from sec. 3813 of the Internal Revenue Code of 1939; that
provision had been enacted in 1950.
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