The Role of Philanthropy

The Role of Philanthropy: An Institutional View Author(s): Albert M. Sacks Source: Virginia Law Review, Vol. 46, No. 3, Law and Philanthropy (Apr., 1960), pp. 516-538 Published by: Virginia Law Review Stable URL: http://www.jstor.org/stable/1070520 . Accessed: 13/07/2011 05:38 Your use of the JSTOR archive indicates your acceptance of JSTOR's Terms and Conditions of Use, available at . http://www.jstor.org/page/info/about/policies/terms.jsp. JSTOR's Terms and Conditions of Use provides, in part, that unless you have obtained prior permission, you may not download an entire issue of a journal or multiple copies of articles, and you may use content in the JSTOR archive only for your personal, non-commercial use. Please contact the publisher regarding any further use of this work. Publisher contact information may be obtained at . http://www.jstor.org/action/showPublisher?publisherCode=vlr. . Each copy of any part of a JSTOR transmission must contain the same copyright notice that appears on the screen or printed page of such transmission. JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about JSTOR, please contact support@jstor.org. Virginia Law Review is collaborating with JSTOR to digitize, preserve and extend access to Virginia Law Review. http://www.jstor.org THE ROLE OF PHILANTHROPY: AN INSTITUTIONAL VIEWt Albert M. Sacks* N recent years there has been a flowering of concern about the problems of philanthropy. Renewed interest in such old issues as the obsolescent charitable trust has been supplemented by "discovery" of such relatively new bones of contention as the "propagandist" founda- tion. The ever more massive impact of the tax laws, the increased acceptance of public regulation of matters of "public concern," the discovery by scholars that philanthropy is a distinctive and fascinating institutionl-all these have played a part in this development. As this symposium should make clear, each of the various problems deserves full, separate treatment. But it may also be helpful to take a more general view-to see the problems in light of the institutional setting in which philanthropy functions. For that setting may suggest some of the values and the weaknesses of philanthropic activity, and may help explain some of the dilemmas which confront us. It is, therefore, the purpose of this article to suggest in broad terms the institutional role that philanthropy plays in our society and to illustrate by two examples how an understanding of that role may illumine current de- bates. THE INSTITUTIONAL SETTING It is paradoxical that philanthropy, which traces its lineage through the centuries, should be thought to need a clearer statement of its role. Yet large foundations, whose charters broadly refer them to "charita- ble" or "educational" purposes, seem intermittently to cast about for some general framework in which to function.2 Congressional com- t The author's interest in the matters discussed here was first stirred when he was asked to think about them as a consultant to the Ford Foundation in 1954-56. The views expressed are, of course, entirely his own. * Professor of Law, Harvard University. B.B.A., 1940, City College of New York; LLB., 1948, Harvard University. Member, District of Columbia and Massachusetts Bars. 1. For a description of the results of a conference on the potential of historical research in American philanthropy see RussELL SAGE FOUNDATION, REPORT OF THE PRINCE- TON CONFERENCE OF THE HISTORY OF PHILANTHROPY IN THE UNITED STATES (1956). 2. See KIGER, OPERATING PRINCIPLES OF THE LARGER FOUNDATIONS 45-66 (1954). [516] The Role of Philanthropy mittees have in the past decade embarked upon investigations of whether charitable organizations are abusing their mandates, and have found a definition of those mandates to be an elusive goal, for they are multi- farious and changing.3 It is dangerous to assume that this has not always been so, but we can identify significant recent departures from the past. The sheer in- crease in total funds made available by an affluent society brings philanthropy into greater prominence. Far more dramatic has been the emergence of the large foundation, commanding vast resources and resting somewhat uncomfortably under a resultant public attention. These large foundations, with funds that enable them to act upon a scale not previously possible, have been leaders in the search for new ways in which philanthropy may serve useful purposes.4 It is this latter development, perhaps more than any other, which has stimulated a fresh look at philanthropy's role. It is not suggested here that we examine whether philanthropy has affirmative values in our society. At least with respect to those activities which all regard as philanthropic, this would be tantamount to an inquiry into the values of motherhood. Certain tenets have enjoyed such wide and deeply held acceptance over the years that they may safely be taken for granted. And philanthropy is usually defined in precisely those terms which command universal acceptance: In its simplest definition, philanthropy is the 'love of mankind, especially as manifested in deeds of practical beneficence.' It is that kind of 'good will to men' which induces people to give voluntarily of their money, property, time, and strength to cooperative causes and institutions which serve the welfare, the health, the character, the mind, the soul, and the advancing culture of the human race.5 Although the courts have had to decide literally thousands of in- dividual cases by determining whether or not a particular activity or objective is "charitable," they have not developed more precise criteria. The Restatement of Trusts, summarizing the fruits of judicial thought, 3. Compare H.R. REP. No. 2514, 82d Cong., 2d Sess. 3-4 (1953) (Cox Committee Report), with H. R. REP. No. 2681, 83d Cong., 2d Sess. 30-32 (1954) (Reece Committee Report). 4. See, e.g., FORD FOUNDATION, REPORT OF THE STUDY ON POLICY AND PROGRAM 22-24 (1949). 5. MARTS, PHILANTHROPY'S ROLE IN CIVILIZATION: ITS CONTRIBUTION TO HUMAN FREEDOM 3 (1953). 1960] 517 518 Virginia Law Reziew [Vol. 46:516 defines charitable trusts in terms of charitable purposes, and then goes on to say: A purpose is charitable if its accomplishment is of such social interest to the community as to justify permitting the property to be devoted to the purpose in perpetuity.6 This broad definition does not mean, however, that the whole area is shrouded in uncertainty. From the many decisions a number of broad sectors of clearly philanthropic activities have emerged, including "(a) the relief of poverty; (b) the advancement of education; (c) the advancement of religion; (d) the promotion of health; [and] (e) governmental or municipal purposes."7 But these exemplary areas do not exhaust the concept of philanthropy. Many other activities qualify as "charitable" within the Restatement's definition, and in light of their variety, Professor Scott, the reporter, has concluded that "there is no fixed standard to determine what purposes are of such social interest to the community [as to justify treating them as charitable]; the interests of the community vary with time and place." 8 Recognition that the concept of philanthropy is relative and dynamic rather than absolute and immutable yields several significant implica- tions. On the one hand, there can be no flat objection to a foundation's new program merely because it represents a departure from established forms and is therefore somewhat unique. On the other hand, we can ex- pect any new program to encounter a suspicious, resistant attitude until it receives community acceptance over a period of time-that is, until it becomes traditional. Even though two activities may both be re- garded as charitable, one may be more clearly so than the other. Thus, in the law of charitable trusts, the usual requirements of a "sufficiently large or indefinite class" of beneficiaries is relaxed only in favor of those charities relating to poverty, religion, education, and health.9 The predilections of the Congress were reflected in its increasing the charitable deduction from twenty to thirty per cent, limited, however, to religious organizations, educational institutions of formal instruction, and hospitals.10 Here, then, we have one underlying source of the 6. RESTATEMENT (SECOND), TRUSTS ? 368, comment b (1959). 7. Id. at ? 368. 8. Id. at ? 368, comment b; see SCOTT, TRUSTS ? 368 (2d ed. 1956). 9. Scorr, TRUSTS ? 375 (2d ed. 1956). 10. INT. REV. CODE OF 1954, ? 170. The Role of Philanthropy difficulty which a foundation may meet when it strikes out into relatively new fields, such as the financing of social science research. If identification of "clearly philanthropic" activities is only of limited value with respect to the more marginal areas, our understanding of philanthropy may be aided by an institutional inquiry. What follows is a schematic presentation which is inevitably simplified, but which seems to provide a useful framework for analysis. Human activities, which are of such communal importance that they should be not only permitted but strongly encouraged, may be carried on by three broad forms of social organization in our society: (1) they may be conducted for private profit through the mechanism of the commercial market; (2) they may be carried on by government; or (3) they may be fostered by a philanthropic organization. This seems obvious enough, but there is a corollary which may not be as clear. Since all three institutional forms conduct activities of great "social interest to the community," philanthropy is not defined distinctively by this or similar phrases. In any event, this trichotomy suggests a variety of fruitful questions. As an historical matter, what sphere of responsibility has philanthropy evolved in relation to the other two institutions? Has it overlapped them or occupied a distinctive place? Can we identify criteria by reference to which the "appropriateness" of the development has been judged? What is the situation today? Can we, by reference to history or to institutional characteristics, identify the functions that philanthropy is distinctively fitted to perform, as compared with the other two? Full answers to these questions obviously cannot be attempted here, but a provocative beginning is ventured. A philanthropy is conceived of as a nonbusiness, i.e., nonprofit, and nongovernmental person or group. Of course, it normally invests its funds to secure income in the business market, and it may finance some portion of its activity by a charge for the benefits it confers. It com- monly receives financial aid through grants from business and tax ad- vantages from government. Cooperation of philanthropy and govern- ment in a single undertaking is becoming more and more common, al- though we can ordinarily identify the part played by each institution. Classification by form of social organization is not pure, but it is significant. Why has philanthropic activity been limited to the nonprofit area? To some this question is silly; they note that philanthropy is a working 1960] 519 520 Virginia Law Review [Vol. 46:516 reflection of altruism, of "love of mankind," and therefore intrinsically inconsistent with private profit. Moreover, such special benefits as a tax exemption or permission to devote property in perpetuity should not be granted any activity yielding a profit; otherwise all useful businesses may demand one. Thus it is that the so-called proprietary hospitals operated for profit are not philanthropic, though they may confer the same benefits on the community that other hospitals do. Of course, the distinction cannot arise with respect to such a traditionally philanthropic activity as relief of poverty, wherein talk of private profit is a contradiction in terms. The basic explanation, however, may go somewhat deeper than altruistic motive. If we imagine a donation for the purpose of supplying free clothing to all young people in the community without regard to wealth, we have a different situation from those described. This is a function which has traditionally been carried on through the com- mercial market, and gifts of property to conduct such activities on a nonprofit basis have been rare. Such few as have been made have been thought invalid.1' Yet it is indeed difficult to say that such a gift would not substantially benefit the community. I would suggest as an explana- tion that when activities have been adjudged adequately performed through the market mechanism, they have not been regarded as phil- anthropic, even though organized on a nonprofit basis. If this explanation is sound, it suggests that philanthropy has evolved as an adjunct of, as a supplement to, our economic system of private enterprise, and that it has been thought more naturally suited to those areas where the commercial market does not operate satisfactorily to supply social needs. It should be added that, whether the theory is right or wrong in explaining the limits of power of charitable institu- tions, donors have not generally made bequests to foster traditionally "business" activities on a nonprofit basis. This general conception of the appropriate roles of business and philanthropy seems to have pre- vailed for at least the past two or three centuries. Our present day attitude appears to mark no sharp break with past tradition, but one may discern a quickening tempo in the role of philanthropy, a greater willingness to assume new tasks accompanied by less reluctance on the part of official organs to conclude that com- mercial enterprise cannot discharge the entire burden. The allocation of television stations for educational purposes during the infancy of 11. E.g., In re Gwyon, [1930] 1 Ch. 255. The Role of Philanthropy the industry is one indicator; philanthropic activities in housing and urban renewal may be another. The motivation for this changed view is unclear. As living standards rise, community needs become more complex, and more of them must be collectively, rather than individual- ly, satisfied. The market mechanism may be seen as less suitable for these changing purposes than heretofore. In any event, the result has been an increasing overlap between busi- ness and charitable activity. Traditionally, we have had the charitable and proprietary school and hospital functioning in fields in some parts of which profit was possible, but wherein the commercial market had not completely fulfilled felt needs. The currently increasing overlap has brought sharpening conflict. On the one hand, Congress has re- flected the fear that nonprofit enterprise may by "unfair" competition displace legitimate commercial activity. Thus, charitable operation of an unrelated business, with all income going to charity, has been declared taxable.12 On the other hand, as the line between philanthropy and business shifts, an increased degree of competition becomes in- evitable. The presence of commercial enterprises in a particular field cannot of itself preclude the intrusion of charitable enterprises. Con- sider the growth in recent years of research laboratories of both kinds.l3 If the commercial mechanism proves inadequate, there is ordinarily an alternative to private philanthropy in the form of governmental operation. Religious matters must remain in the private domain except for government fringe benefits, but as to most other activities a choice exists. This choice is made by governmental officials, either legislative or executive. On what basis has an allocation of competencies been made? One congressional committee, in explaining why the tax deduction was limited to gifts made to domestic organizations, asserted that govern- ment saves money when a function is privately performed which the government would otherwise pay for, and that the tax benefit is a quid pro quo on which the government has a net gain.14 This explana- 12. INT. REV. CODE OF 1954, ?? 502, 511-14. 13. For an interesting picture of the problems which have arisen see the papers sub- mitted by Messrs. Harris, Mansfield, and Sugarman in connection with panel discussions on broadening of the tax base conducted during the fall of 1959. STAFF OF THE HOUSE COMMITIEE ON WAYS AND MEANS, 86TH CONG., 1ST SESS., TAX REVISION COMPENDIUM, Vol. 3, 2067-76, 2101-25 (Comm. Print 1959). Messrs. Mansfield and Sugarman agreed that competition in this field must be permitted, but Mr. Mansfield urged that charitable enterprises be required to make their research results public. 14. See H.R. REP. No. 1860, 75th Cong., 3d Sess. 19-20 (1938). 1960] 521 522 Virginia Law Review [Vol. 46:516 tion is most unsatisfying. The committee may have been implying that it is a matter of indifference whether the activity is private or governmental; the tax benefit is merely a transfer of funds to the unit which happens to perform the service. It is doubtful that the tax exemption historically developed as an alternative to government ex- penditure. Charities entered upon activities decades and even centuries before government action was thought of as appropriate.15 Alternatively, the congressional committee may have been saying that private action is better because it enables government to achieve a lower budget. For some this reward is sufficient, and they would perhaps support the result by asserting that private action is generally superior to public. During the nineteenth century a fairly strong presumption in favor of private action prevailed, and some states even inaugurated a system of regular payments to private agencies for their work.16 This attitude is not entirely dissipated today, but government is far readier to examine the question of whether public or private action is superior. The quest-surely a legitimate one-is for particulars con- cerning the merits. The British confronted the issue in rather sharply etched form a few years ago when they contemplated the place of philanthropy in the "welfare state." After study, a royal commission issued the so-called Nathan Report which arrived at general conclusions deserving care- ful attention.17 Noting that private philanthropy had sought to provide "universal services" for deserving economic and social needs, the report concluded that this had been a "magnificent failure" and that the state gradually had broadened its activities from merely filling gaps left by private charity to taking over primary responsibility.18 The report then turned to the function which might now be performed by "volun- tary organization": The advantage of voluntary effort over state activity lies in its greater flexibility; its ability to set new standards or to undertake new work 15. For a number of concrete developments in which philanthropy preceded govern- ment see MARTS, op. cit. supra note 5, at 50-72. See also Trustees of Dartmouth College v. Woodward, 17 U.S. (4 Wheat.) 518, 647 (1819) (Marshall, C. J.): "These eleemosynary institutions do not fill the place, which would otherwise be occupied by government, but that which would otherwise remain vacant." 16. See, e.g., N.Y. Const. Convention of 1894, Doc. No. 59, pp. 4-5. 17. Committee on Law and Practice, Report Relating to Charitable Trusts, CMD. No. 8710 (1952) [hereinafter cited as Report Relating to Charitable Trusts]. 18. Id. at 10-11. The R