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[NOTE: While three of the four books reviewed here are not particularly
relevant to the history of economics (albeit perhaps of general interest
to some), the fourth, by Sealander, deals with a subject that has
begun to gain some attention in the literature.--RBE]
EH.NET BOOK REVIEW
Published by [log in to unmask] and EH.Net (May 1998)
Bruce R. Hopkins and Jody Blazek. _Private Foundations: Tax
Law and Compliance_. New York: John Wiley & Sons, 1997. xxi +
498 pp. List of exhibits, appendices, tables, bibliographical
references and index. $125.00 (cloth), ISBN 0-471-16892-0.
Bruce R. Hopkins and D. Benson Tesdahl. _Intermediate
Sanctions: Curbing Nonprofit Abuse_. New York: John Wiley &
Sons, 1997. xiii + 194 pp. Appendices, glossary, bibliography,
index. $49.95 (paper), ISBN 0-471-17456-4.
Lester M. Salamon, with the assistance of Stefan Toepler and
Associates. _The International Guide to Nonprofit Law_. New
York: John Wiley & Sons, 1997. xxxii + 400 pp. Appendices,
bibliography, index. $125.00 (cloth), ISBN 0-471-05518-2.
Judith Sealander. _Private Wealth and Public Life: Foundation
Philanthropy and the Reshaping of American Public Policy from
the Progressive Era to the New Deal_. Baltimore: Johns Hopkins
University Press, 1997. xii + 245 pp. Notes, bibliography,
index. $39.95 (cloth), ISBN 0-8018-5460-1.
Reviewed for H-Business and EH.Net by Milton Goldin <[log in to unmask]>,
National Coalition of Independent Scholars
What ties together these four timely books is scrupulous
research on subjects that require, but infrequently receive,
thorough investigation: attempts (in the first three books
listed) to offer lucid descriptions of complex legal frameworks,
and perceptions in all four books that at the turn of the 21st
century Congress may be no closer to defining coherent
guidelines for grant-giving entities and other nonprofit
organizations than it was at the turn of the 20th century, when
American charity began its journey to "scientific philanthropy."
Hopkins and Blazek offer a survey of foundation law, Hopkins and
Tesdahl discuss "intermediate sanctions" (a major new legal
issue for nonprofits), and Lester M. Salamon and co-authors
survey nonprofit law and issues in the United States and
twenty-one other countries. Judith Sealander is the only writer
in this group not to emphasize that our present understandings
of what foundations can and cannot do are riddled with legalisms
so convoluted that they severely test the understandings of
highly-qualified lawyers, accountants, nonprofit executives, and
fundraising professionals, not to mention the Internal Revenue
Service. Sealander tells us that many historians, past and
present, have not got quite right how seven pioneering
foundations--four of them Rockefeller (the Rockefeller
Foundation, the Laura Spelman Memorial, the General Education
Board, and the Bureau of Social Hygiene), and the Commonwealth
Fund, Rosenwald Fund, and Russell Sage Foundation--functioned
during their early years and why these enterprises had problems
deciding what foundations could and could not do.
One measure of the need for such books is the spectacular growth
in the number of nonprofits, including foundations, especially
during the past half century. As late as 1940, America had only
12,500 nonprofits. By 1967, there were 309,000, and by 1993,
there were some 1.3 million--a 10,300 percent increase in just
over fifty years. At the beginning of the 20th century, only
eight foundations were in existence; today there are estimated
to be some 50,000--a 624,900 percent increase.[1] Salamon
further points out (p. 2) that as of 1990, in seven major
industrial nations including the United States, "nonprofit
organizations employed the equivalent of 11.8 million full-time
employees....This was six times larger than the number of
workers employed by the largest private corporation in each of
these countries."
In 1993, American nonprofits had total annual operating budgets
of some $500 billion; foundations had assets of about $195.8
billion. Two years earlier, two adjoining hospitals in New York
City--New York Hospital-Cornell Medical Center and Memorial
Sloan-Kettering Cancer Center--had a combined annual budget of
$1 billion, which more than equalled the budget of the entire
United States government just prior to World War I.[2]
Hopkins and Blazek, attorneys and legal authorities on tax-
exempt organizations, remind us (p. 18) in _Private Foundations_
that although Congress first concerned itself with foundations
in 1912, no body of law governing such organizations existed
prior to the Tax Reform Act of 1969. This legislation came into
existence thanks mainly to Representative C. Wright Patman of
Texas, a populist who deplored the existence of foundations to
the same extent that he deplored the existence of Wall Street
financial institutions, and for the same reason--wealthy
Easterners served on the boards of both the banks and the
foundations.
In theory, after the 1969 enactment, statutes and regulations
would frame foundation law. But in practice, procedural
details, which stemmed from IRS private determinations--meaning
letter rulings, technical advice, and general counsel
memoranda--that are technically not "law," as Hopkins and Blazek
also rightly remind us beginning on p. 8, actually defined
foundation law. Such documents emerged from the IRS with
bewildering frequency. The IRS initiated (and in some instances
reversed) policy so rapidly that no one knew exactly what was
happening at any specified moment.
Hopkins and Blazek add (p. 200) that the Tax Reform Act of 1981
in which Congress revised private foundation mandatory
distribution rules, partly because of dramatically high interest
rates paid on bonds and other debt instruments during the late
1970s, further complicated matters. But surprisingly, the
authors do not touch on a new height of cynicism about
foundation regulation inevitable with a discovery by donors and
their financial advisors, in the early 1990s, that the IRS
sometimes does not strictly enforce regulations governing
tax-exempt organizations. (The Clinton administration has thus
far cut by ten percent the budget of the IRS Exempt
Organizations Division, which today has only 400 agents to
oversee nonprofits, or one agent for every 3,250 such
organizations. On the state level, attorneys general in 24
states have no designated person assigned to monitor nonprofits,
and only 11 states have two or more people dealing with such
matters full time, according to the National Association of
Attorneys General.)[3]
Wisely, Hopkins and Blazek decided to limit _Foundations_ to
what could be of the most advantage to a market consisting
mainly of attorneys, nonprofit board members, and professionals
in the nonprofit field. Their work serves as a valuable
handbook summarizing foundation law, and it can assist
foundation officers and managers in understanding and completing
such documents as IRS Form 990-PF, which must be filed annually
to prove that a private foundation maintains an ongoing policy
satisfying rules.
Completing Form 990-PF can be a daunting task. The authors tell
us that "instructions are 26 pages long and exemplify the
complexity of reporting and compliance requirements for a
private foundation" (p. 331). Successful completion of the form
does not guarantee immunity from IRS searches: "The manner in
which the IRS chooses organizations to examine changes from year
to year is always a matter of great speculation. In some years,
the IRS looks at business leagues, some years at social clubs,
and in other years it may examine hospitals, related clinics,
and universities" (p. 71).
Readers will find a chart (pp. 331-356) outlining those Form
990-PF parts to prepare first and those parts that are dependent
upon some other part for completion. An invaluable checklist of
private foundation compliance issues (pp. 356-390) should be
read by every person with more than a casual interest in the
subject.
Hopkins and Blazek make admirable efforts to define terms as
well as to deal with frameworks, optimistically writing (p.
viii), "the myth has to be dispelled that private foundations
are difficult if not impossible to manage." Which, under the
circumstances, might seem a hopeless task to some readers.
Consider a problem that emerges as early as page 13, with the
term "charitable." Federal income tax regulations, which use
the term in its English common law sense, note that it can also
be used in a "generally accepted legal sense" (p. 13), which
regulations fail to precisely define. This leads Hopkins and
Blazek to note a court decision in which a judge found that
"evolutions" in the definition of "charitable" are "wrought by
changes in moral and ethical precepts generally held, or by
changes in relative values assigned to different and sometimes
competing and even conflicting interests of society" (p. 13).
This may strike some readers as proof positive that the courts
lean to a striking lack of clarity.
In _Intermediate Sanctions_, Hopkins, this time with D. Benson
Tesdahl, an attorney and Adjunct Professor of Law at Georgetown
University Law Center, deals with a new challenge for the
nonprofit field, to grasp the essentials of "intermediate
sanctions." These new laws stem, in part, from IRS concerns
about "self-dealing," which it defines, in the "private
foundation context," as "inappropriate arrangements between a
private foundation and those closely associated with it" (p.
180).
As an example (not cited in the book) of what had concerned the
IRS, two Shubert Foundation attorneys and officers, Bernard B.
Jacobs and Gerald Schoenfeld, benefitted greatly from a
highly-unusual and little-known tax ruling in 1979 that gave
that foundation an exemption from federal tax laws that declare
that private charities generally cannot own a controlling stake
in a profit-making business.[4] It had developed that Jacobs
and Schoenfeld received hundreds of thousands of dollars as paid
advisers to the benefit funds of their own workers in the
Shubert Theater chain,[5] who, like the attorneys, might
possibly have been considered foundation employees by the IRS,
given that the foundation controlled the theaters.
"The only mystery--and that was scant," write Hopkins and
Tesdahl, "surrounding intermediate sanctions was_when_they would
be enacted" (p. x). Which is not quite accurate, because
another mystery was _whom_, exactly, would the sanctions
concern? No further newspaper articles suggested that they
concerned Jacobs and Schoenfeld, and/or the Shubert Foundation,
but the IRS had already been emphatic that penalties--structured
as excise taxes--could be imposed on disqualified persons who
improperly benefited from transactions and on an organization's
managers who participated in such transactions knowing that they
were improper.
Would new definitions of "disqualified persons" be offered? In
answer to this question, Hopkins and Tesdahl note as possible
examples of wrongdoers the executive officer of a tax-exempt
charitable hospital, the director of a large museum, the
president of a small private college, and the executive director
of an advocacy group, all of whom could be theoretically caught
in a legal net because in each instance an "excess benefit
transaction" might have taken place in connection with their
earnings or benefits (pp. 1-5).
And what is an "excess benefit transaction"? The authors define
it as "Any transaction in which an economic benefit is provided
by an applicable tax-exempt organization directly or indirectly
to or for the use of the disqualified person, if the value of
the economic benefit provided by the exempt organization exceeds
the value of the consideration (including the performance of
services) received for providing the benefit"(p. 8). Hopkins
and Tesdahl predict, "the potential impact on operations of
nonprofit organizations is enormous...(but) much of the actual
outcome will depend on the vigor of the IRS and, ultimately, of
the courts" (p. 8). Additionally, "Intermediate sanctions have
the promise of transforming the private inurement and private
benefit doctrines, and are likely to impact the composition and
functioning of many boards of directors of nonprofit
organizations," given that they also "apply with respect to
public charities and tax-exempt social welfare organizations."
(p. 8).
This is quite a large "promise," and again, the Treasury
Department would have performed a mighty service had it provided
more guidance, in advance. The authors rightly argue (p. x)
that what the IRS should have done was have an intermediate
sanctions explanatory package available within a week of the
enactment--say, by early August 1996. Had this happened, exempt
organizations might not have floundered for months with little
knowledge about compliance, definitions of key elements, and
specifics on sanctions to be applied.
What the Treasury Department did not do, Hopkins and Tesdahl
have concisely done in the pages of _Intermediate Sanctions_,
which, like_Private Foundations..._, can be used as a handbook
by those individuals who need reliable information quickly.
On a larger scale, Lester Salamon's purpose in _The
International Guide_ is to address legal particulars of a
worldwide proliferation of American-style foundations and
nonprofits. Salamon is a professor in the Schools of Arts and
Sciences and Hygiene and Public Health at Johns Hopkins
University, and director of the Johns Hopkins Institute for
Policy Studies. Highly-informative books and articles on
nonprofit issues have flowed from his pen over the years, and
recently he has been particularly concerned with the issue of
nonprofit for-profit activities.
Salamon's _The International Guide_ grew out of a series of
"field guides" he tells us (p. xiii) were commissioned on the
legal treatment of nonprofit organizations in thirteen
countries. The process yielded far more material than could
effectively be used in the monographs, and the idea emerged that
an international guide should be produced. Salamon warns,
however, that we must "understand the great difficulties
attending the kind of task that was attempted here, particularly
given the complex legal questions that were at issue. In such a
context, no account, and certainly no account operating within
the space constraints of this one, can aspire to definitiveness"
(p. xiii).
Salamon's caveat notwithstanding, his book, like Hopkins and
Blazek's, offers an excellent introduction not only to nonprofit
law (foundations are understandably not covered as thoroughly as
in Hopkins and Blazek) but to systemic issues in the nonprofit
field. American readers should particularly note his concern
that such issues go "largely invisible in both scholarly
analysis and public debate, with the result that we know
precious little about them in most places" (p. 7).
This state of affairs, he counsels, could one day present a
serious problem: "For the nonprofit sector to remain able to
secure contributions, it is imperative that public trust in the
sector be protected" (p. 36).
Salamon is less confident than Hopkins and Blazek, however, that
the nonprofit system can continue to exist as we know it. "The
United States is a common law country that nevertheless has a
written constitution. In addition, the country has a federal
governmental structure that features a national government and
50 state governments with their own elected officials and their
own authority to exercise sovereign powers. These circumstances
make the legal position of the nonprofit sector far more
amorphous and disjointed in the United States than the
significant size and scope of this sector might suggest" (p.
342).
Finally, credit must be given Salamon for doing more than simply
citing problems. His Appendix A, "Toward a Vital Voluntary
Sector: An International Statement of Principles," offers an
"emerging consensus so that those involved in the development of
the third sector around the world can take its contents into
account when framing their own policies and practices" (pp.
369-374).
After attempting to grasp nonprofit law, reading Judith
Sealander's _Private Wealth_ is almost like dipping into a
novel. Her interests are not only the pros and cons of the late
nineteenth- and early twentieth-century foundations noted above,
but assessments of their founders. Among the people she favors
are John D. Rockefeller, Sr., John D., Jr., Julius Rosenwald,
and, notably, the remarkable John Campbell of the Russell Sage
Foundation, who is seldom mentioned in the literature. She
believes Andrew Carnegie's influence on philanthropy to have
been overrated by scholars (p. 16), and his appearance at the
Walsh Committee Hearings, in 1912, to have been something of a
farce (p. 229). (Rockefeller, who, with Carnegie, was a founder
of modern American philanthropy, would not have shared her views
on the Steel King. Rockefeller admiringly wrote Carnegie, after
the publication of Carnegie's two seminal essays on philanthropy
in the _North American Review_, "I would that more men of wealth
were doing as you are doing with your money." Later,
Rockefeller ruefully admitted, "I (had been) still following the
haphazard fashion of giving here and there as appeals presented
themselves.")
Sealander makes clear, with respect to all seven foundations,
that there were great differences between what these Progressive
Era donors and their staffs hoped to accomplish and what they
could realistically achieve. There was an additional gap, she
suggests, between what "Americans, including public policy
makers" knew about John D. Rockefeller, Sr., the most generous
giver of all, and how political establishments and writers
portrayed him: "The overwhelming majority of the country's
population never heard him, or saw him, or read a word he wrote"
(p. 56). Yet the image conjured up by media and politicians led
to a situation in which "Americans decided Rockefeller was a
terrible man because leading politicians and journalists told
them so" (p. 56).
Nor does Sealander approve of today's "static" lack of interest
(pp. 6, 9, 31) in studies of the emergence and history of
foundations. She could have added that albeit bereft of
critical information, one school of thought in academies
condemns such agencies because they exist thanks to the
benevolence of individuals who may not truly be benevolent, only
interested in tax relief. Meanwhile, another school of thought,
also based in academies, lauds them because from where else can
money for experimental and non-governmental programs come, if
non-benevolent as well as benevolent types do not create
foundations and thus save on their taxes?
The truth, of course, lies somewhere between these extreme
views. But the right question never seems to get asked: After
a century of experience, have foundations done enough good to
merit the loss of taxable funds their existence costs the public
treasury?
Which returns us to issues raised earlier in this review. We do
not currently know enough about the impact of foundations and
nonprofits on economies to render informed judgements. And the
price of _not_ knowing, carried too far into the future, may one
day be a sudden, angry public awakening to the fact that
benevolence has a price in tax relief that societies cannot
afford.
Sealander ends her study, "The small group of people who created
the foundations this volume has examined possessed an
intellectual gift lost to many in the late twentieth century.
With a fierce kind of optimism we now find peculiar, they
believed people could be better, that government could be
better, that society could improve" (p. 245).
I couldn't agree more. Put in the vernacular, whatever their
personal flaws, men and women of the generation that included
Rockefeller, Carnegie, Rosenwald, and Katherine Bement Davis (a
student of Thorstein Veblen) put their time and/or their money
where their mouths were.
[1]. The statistic, 50,000, is from Hopkins and Blazek, _Op.
cit._, pp. 1, 10; Sealander, _Op. cit._, p. 10, writes that
there were 22,000 foundations in 1990.
[2]. Milton Goldin, "At New York Hospital, Memorial,
Consolidation Becoming Imperative." _The New York Observer_ 5
August-12 August, 1991, p. 18.
[3]. Thomas J. Billitteri. "Rethinking Who Can Sue a Charity."
_The Chronicle of Philanthropy_ 12 March 1998, p. 35.
[4]. Mel Gussow. "Bernard B. Jacobs, a Pillar of American
Theater as Shubert Executive, Dies at 80." _New York Times_ 28
Aug 1996, D: 18.
[5]. Ralph Blumenthal. "Shubert Leaders Got Fees from Workers'
Funds." _New York Times_ 6 June 1996, C:16.
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