Table Of ContentINFORMATION TO USERS
This material was produced from a microfilm copy of the original document. While
the most advanced technological means to photograph and reproduce this document
have been used, the quality is heavily dependent upon the quality of the original
submitted.
The following explanation of techniques is provided to help you understand
markings or patterns which may appear on this reproduction.
1. The sign or “target" for pages apparently lacking from the document
photographed is "Missing Paga(s)". If it was possible to obtain the missing
page{s) or section, they are spliced into the film along with adjacent pages.
This may have necessitated cutting thru an image and duplicating adjacent
pages to insure you complete continuity.
2. When an image on the film is obliterated with e large round black mark, it
is an indication that the photographer suspected that the copy may have
moved during exposure and thus cause a blurred image. You will find a
good image of the page in the adjacent frame.
3. When a map, drawing or chart, etc., was part of the material being
photographed the photographer followed a definite method in
"sectioning" the material. It is customary to begin photoing at the upper
left hand corner of a large sheet and to continue photoing from left to
right in equal sections with a small overlap. If necessary, sectioning is
continued again — beginning below the first row and continuing on until
complete.
4. The majority of users indicate that the textual content is of greetest value,
however, a somewhet higher quality reproduction could be made from
"photographs" if essential to the understanding of the dissertation. Silver
prints of "photographs" may be ordered at additional charge by writing
the Order Department, giving the catalog number, title, author and
specific pages you wish reproduced.
5. PLEASE NOTE: Some pages may have indistinct print. Filmed as
received.
Xerox University Microfilms
300 North Zaato Road
Ann Arbor. Michigan 40106
LD3907 'T b 'lZ 'lb l s
1951 Kurnow, Srnest, 1912-
»K9 The nodern foundation; ■ problem
in social and adcdnistrative con
tr o l.
277p. tab les.
Thesis (?h.D.) - N.Y.T7., Craduata
school. 1951.
b ib lio g ra p h y : p .2 6 2 -277.
C8ol*26
*
RK.lt Ust .
Xerox University Microfilms, Ann Arbor, Michigan 48106
THIS DISSERTATION HAS BEEN MICROFILMED EXACTLY AS RECEIVED.
NTT** Y Uit'T'.T.-RTT?
UK I 11Y rfi-i’:. i ' '
THE MODERN FOUNDATION:
A PROBLEM IN SOCIAL AND ADMINISTRATIVE CONTROL
By
ESrnest Kurnow
A dissertation in the department of Public
Administration submitted in p artial fu lfill
ment of the requirements for the degree of
Doctor of Philosophy a t New York U niversity.
1 VI
PREFACE
The w riter's In terest In the subject of foundations was stim ulated by
the newspaper accounts of the foundation ventures of Textron, Incorporated.
Cursory in itia l probing convinced the w riter of the tru th of Robert M. Les
te r's %/ observation that the most amazing thing about foundations is that
so little is known about them. Most previous studies of the subject had
been conducted from the special, and therefore lim ited, points of view of
tox-accountants, lawyers, and social workers. No adequate analysis of the
social and adm inistrative questions raised by the organization and operation
of the modern foundation was available. It was in an attem pt to help f ill
this gap th at the present study was undertaken.
The w riter wishes to express his sincere gratitude to Professor Paul
Studenski of New York University fo r his invaluable guidance and advice.
Others to whom the w riter is indebted include: Solomon Barkin, Re
search D irector of the Textile Workers Union of America, for worthwhile
suggestions; the Philanthropic Department of the C entral Hanover Bank and
Trust Company for its cooperation in arranging interview s and for the use
of its Philanthropic Library; and Julius Marks and his staff a t the lib rary
of the Sohool of Law of New York U niversity for th eir in fin ite patience.
The w riter is especially indebted to his wife who assisted with the
proof reading and who was a constant source of encouragement throughout
the course of the study.
i / Secretary of the Carnegie Corporation of New York.
CONTENTS
Preface............................... ....................................................................................................................i
I* Introduction......................................................................................................................1
II* Historical Background*....................... ...5
Charitable "Funds" in Antiquity* .. .............*.....................................5
Early English Charitable "Funds"*........................................................9
Development of Foundations in America. ........... 12
III* The Foundation Today* ........................................................................255
Types of Foundations................................ .24
Methods of Operation...• ...• .• • ■ .......• • • ...• * • • • • • .• .• .• .4 0
Legal Form of Organization................... ..........4 1
Sources of Incom e.........................................................................................4 2
Duration............................................. 44
Administration of Foundations.................. ..48
Fields of V.ork. ...............................................53
IV. Tax and Non-Tax Advantages . . . . . ........... . . . . . . . . . . . * .56
Private Benefits to the Founder. ................................. 57
Private Advantages to the Family..........................................................60
Advantage to B u s i n e s s . .66
Special Advantages as a Reservdir of Capital to Business...7 0
V* Public Supervision of F o u n d a t i o n s . . . . . . . . . ..76
Control Over Creation........................ 76
Control Over Duration...................................* ••.........................................*84
Control Over Operation on the State Level*..........................* .8 5
Control Over Operation on the Federal Level*..................... 88
VI* Legal Aspeots...................... ...92
The Interpretation of the Language of the Statute.......................94
Business A ctivities*...........................................................................................103
VII. Engagement in Business - Social and Economic Aspects.••••••.119
Extent of A ctivities................... ..120
Regular Business A ctivity*.*••••...................• • • ........• ...• • • 1 2 1
Sale and Lease-3aok Transactions*..*• ...........................................124
Criticism Directed Against Business A c tiv itie s.......................132
VIII* Questionable Accumulation* * *................ ........1 4 0
Restrictive Nature of Foundation Purposes.....................................140
Inadequacy of the Cy Pres D ootrlne..........................•••.••.••••148
Legal and Administrative”b iffic u ltie s...............*................. 150
Insufficiency of In itial Funds •••........... ..152
Vested Interests of Trustees• * ....* ............................. 152
Accumulations in Family Foundations***•••••• ...........*.153
Accumulations - The "Little-type" Trusts. . . . . . . . . . . . . . . . . . 1 5 5
IX* Mismanagement and Inefficient Operation*................... ••••157
Mismanagement by Trustees* *............ 157
M ultiplicity of Foundations.......................... .169
X. A Screen for Tax Avoidance....................... 172
George and Francis Ball F ou n d ation ........................... 172
The Textron T rusts... ..................... 178
XI. Remedial Provisions of the Revenue Aot of 1950.......................1 9 7
Publio A c c o u n t a b i l i t y . ...................................... 198
The Conduct of a Regular Business •••••201
nSale and Lease-Back" Transactions • ......................................................211
Exemptions for Past Years• • • ... ................................. .215
Questionable Accumulations........................ .217
Use As a Screen for Tax Avoidance. ...........................................223
Gap in the 1950 Acts Inadequate Remedies against
Retention of Family Control. ..........................•••••227
Administrative Problems. . ••••........... .231
XII. State Regulation and Other R e m e d i e s . ............234
Appendix A. British Experience.............................................. .244
Appendix B. Analysis of Information Returns Filed
by Section 101(6) Organisations.••••••••••••••••••» •.25 3
Biblography. ................... .262
LIST OF TABLES
I. Distribution of 454 Foundations by Date of Organisation.. 19
II. The Geographical Distribution of 887 Foundations • ...........................21
III. Capital Assets, Total Expenditures, and Grants
for the 17 Largest F o u n d a t i o n s .26
IV. Legal Status of Foundations. ............... .42
V. Selected Fields of Work of Foundations................... .....5 4
VI. Selected List of Business A ctivities of Foundations.....•••..1 2 2
VII. Business Inoome of Firms Reoei Ing Tax
Exemption under Section 101(6)................... .255
VIII. Number of Returns, Gross Receipts from Business, and
Total Gross Reoelpbs of Tax-Exempt Organizations.........................257
IX. Geographical D istribution of Tax-Exempt Organizations
with Gras Receipts from B u sin e ss....... . . . . . . . . . . . 260
I
INTRODUCTION
The word "foundation" lends itse lf to a host of different
meanings. Moreover, it is used interchangeably with such terms as
"fund", "endowment", and "tru st". This study w ill define "foundation”
as followss
...a non-governmental non-profit organisation having a
principal fund of its own, established to m aintain or aid
social, eduoational, charitable or other activ ities serv
ing the cosomon welfare .1 /
Foundations, in th is country, have developed in an environ
ment of ideas and relationships which have been extremely favorable to
th eir growth. They have been, and for the most part s till are, free
from legal restrictio n s. Although Anerloans have imposed many re stric
tions upon themselves in the publio in terest, foundations have been
affected by relativ ely few restrain ts. In a sense, it oan be said th at
they are our freest enterprise.
Because they have been operating in th is favorable environment,
foundations have become a social in stitu tio n important enough to be ranked
with the school, the press, and the ohuroh. Very often, however, they
are not publiely aooorded equal recognition. This is so because founda
tions generally do not servios the publio direotly, but operate through
financial grants made to the servioing sooial agencieaW hen found. +■ions
do ooeasionally oarry on services direotly, it is mainly in the field of
research.
Foundations have been most effeetivs on the frontiers of
l/Sholby M. Harrison and F. P erson Andrews, imerloan Foundations for
Sooial Welfare (Wsw York, 1946), p. 11. This definition tuts been
adopted slnoe i t is generally aooepted in the current literatu re on!
the subjeet of foundations.
2
knowledge* They are able to venture on experimental projects mhieh
publio authorities eannot undertake* Publio authorities are inhibited
whenever the p o ssib ility of a fru itless dissipation of the taxpayer*a
funds exists* Foundations, however, are subject to no suoh restraints*
They consistently risk funds for experim entation in a ll promising avenues
of sooial endeavor* They support advanced research in the a rts, the
physical soiences, and the sooial sciences*
Thus, the Rockefeller Foundation was instrum ental in advanc
ing American medical soience and in raising the standards of medical
education and publio health adm inistration* It provided funds for
the 'eradication of hookworm, m alaria, and yellow fever throughout
the world* Andrew Carnegie's benefactions were instrum ental in esta
blishing several thousand libraries throughout the United States. The
Julius Rosenwald Fund worked to equalise educational opportunities for
members of a ll races* The Russell Sage Foundation concentrated p arti
cularly on the development of scien tific techniques in the field of sooial
work*
Because foundations have been created for sooial purposes,
the g ifts to foundations, as well as th eir properties and income have
been granted tax-exemption by publio authorities—national, state, and
lo cd l.^/ Congress has stated thats
•••the Government is compensated for the loss of revenue
by its re lie f from finanoial burden which would other
wise have to be met.*.from publio funds, and by the
2/This study w ill be eonoerned solely with the exemption of foundations
from Federal taxation*
3
•$/
benefits resulting from the promotion of the general welfare
But, not a ll foundations have been operated orimarily for social
ourposes. The creators of some foundations have made use of the cloak of
social oumoses as a oretext for the avoidance of taxation or to gain
other advantages to themselves.
vor have a ll foundations pursued their purposes efficien tly
enough to justify their tax exemption granted by society. Some have wasted
their funds on unworthy projects.
Foundations, in this country, were subjected to intensive publio
scrutiny in the th irties and forties. This was a time in which a multi
plication in their numbers was particularly marked. Private studies and
state and Congressional inquiries revealed a number of abuses in the
organization and operation of some of the foundations, namely* the use
of the organization for private advantage rather than DUblic good; the
engagement of foundations in business unrelated to their primary purposes;
the w est ionable accumulation of funds bv some of them; mismanagement
and inefficient operation; the lack of public accounting for the operations
of many foundations.
Various suggestions for the correction or prevention of such
abuses have been made. Some of these means have been incorporated in
3/Report of the Committee on Y/ays and Means, House of Representatives on
Revenue Revisions of 1^5k, Vfexh Cong., &ra Sess., House Report IRo. 1860
(1938), p. 1&. Sim ilar statements have been made by various private
authorities. See, e .g ., Carl Shoup, "Tax Exemption", Encyclopedia
of the Social Sciences (New York, 1930), Vol. XIV, p. 528; James '.V.
i a rt in, w General Theory of Tax Exemptions", Tax Exemptions (New York,
1939), p. 17; C. Lowell H arrias, "Philanthropy and Federal Tax Exemp
tion", Journal of P o litical Economy (August, 1939), Vol. XLVII, No. 4,
p. 527. Ror contrary views, see* Joslah Wedgwood, The Economies of
Inheritance (London, 1929), p. §2; Farwell Knapp, "Tax Exemptions11,
Proceedings of the Twenty-Seventh Annual Conference on Taxation of the
National Tax A ssociation (Columbia, S.C., 1934), pp. 77-78.
4
state laws, and some in the Revenue Act of 1950 adopted by Congress while
th is study was in progress*
This study examines the operation of foundations and the efficacy
of reoent regulatory measures* It also explores the nature of other public
controls which may s till need to be established.
The study relies mainly on published documentary m aterial! govern
mental reports, Congressional hearings, court decisions, reports of the
larger foundations, books in the field , disoussions in legal journals and
other periodical, and newspaper reports of current foundion a c tiv ities.
It did not seem practical to devise a questionnaire* Other Investigator-t'e;
experiences with questionnaires Have shown that many foundations are reluctant
to reply-even when such questionnaires come from well-known research
organisations*i/ In some aspects, therefore, this study is necessarily
lim ited by the paucity of available data. A fu lle r examination of some
of the problems brought out here w ill be possible only a few years hence,
when more detailed data, submitted to the Treasury under the Revenue Aot
of 1950, w ill become available*
^T he author of one study made under the auspices of the Russell Sage
Foundation saidt
Had it occurred to me that it would require eight years of
persistent Inquiry at a wholly disproportionate cost to dis
close even the basic quantitative faots***this study would
have been promptly abandoned*
Edward C. Iindeman. Health and Culture! A Study of One Hundred Founda
tions and Their Operations buring the becads Ifezl-l&fco (Hew frork, 1936),
p. VII* The editors of a eeoond study made on the Invitation of The
Twentieth Century Fund reported that 4S6 organisations, out of a to tal
of 899, refused to supply any information* m iner Shield Rich and
Neva R. Afieardorff (Bda), American Foundations and Their Fields, VI
(Hew Tork, 1948), p* 244* in ''ike Use of Charitable foundations for
the Avoidanoe of Taxes*, V irginia law Review (Feb*, 1948), Vol. IV,
Do* 2, p. 182, the author, an independent researcher, reports that
out of 168 questionnaires sent to foundations, only 22 were answered*
