Published by 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 , 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 fund raising 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 equaled 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, benefited 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 waswhenthey 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 wrong doers 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, likePrivate 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.