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
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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
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