Vol. 11 No. 7 (July 2001) pp. 351-356.

A CORPORATE FORM OF FREEDOM: THE EMERGENCE OF THE NONPROFIT SECTOR by Norman I. Silber. Boulder, CO: Westview Press, 2001. 184 pp. Paper $29.00. ISBN: 0-8133-9762-6.

FOUNDATIONS OF CHARITY by Charles Mitchell and Susan R. Moody (Editors). Oxford: Hart Publishing Co., 2000. 275 pp. Cloth $58.00. ISBN: 1-84113-130-X.

Reviewed by Kenneth M. Holland, Department of Political Science, The University of Memphis.

Both A CORPORATE FORM OF FREEDOM and FOUNDATIONS OF CHARITY address issues surrounding the laws regulating nonprofit organizations. Norman Silber, a law professor in the United States, examines American law. Charles Mitchell and Susan Moody, lecturers in law in Great Britain, focus on British law. Silber's book is a history of the role of the courts in reviewing applications for incorporation submitted by not-for-profits. Mitchell and Moody's volume is a collection of essays originally presented as papers at a 1998 conference at King's College, London, on the legal definition of charity. The contributors, law professors from several English-speaking countries, discuss charitable status not only in England and Scotland, but also in Australia, Canada and the United States. The approach taken is that of doctrinal analysis, appropriate to legal scholars. They serve their intended audience, lawmakers and practitioners in the not-for-profit sector, well. There is very little empirical data, an omission consistent with the absence of social scientists among the authors.

The thesis of Silber's book is that the abolition in the 1960s of judicial discretion over the granting of nonprofit corporate charters has left a regulatory void. The public confidence in nonprofit organizations has diminished due to a number of recent scandals, including those surrounding nonprofit hospitals that operate for-profit subsidiaries. Some alternative form of regulation is necessary, he urges, to assure the public that nonprofits are efficiently administered and to justify the privileges, including exemption from taxes, that nonprofit corporations enjoy. It is more difficult to find a single point on which the nine contributors to FOUNDATIONS OF CHARITY can agree. A thesis to which each can subscribe is that the Statute of Charitable Uses of 1601 is no longer adequate as a legal basis for the granting of privileges to some nonprofit organizations while denying them to others. American nonprofit law also traces its origin to this Elizabethan Act of Parliament, adopted by each of the states at the time of the American Revolution. The statute limits charity to four objectives: the relief of poverty, the advancement of education, the promotion of religion, and other purposes beneficial to the community. The authors disagree profoundly, however, on which direction legal reform should take.

Although the vocabulary is different in the two books, the writers in both are debating the same legal subject. The term "nonprofit" was not commonly used until the 1970s in the United States and has not yet replaced "charitable" in Canada, Australia and Britain. American lawmakers and commentators, in search of a secular vocabulary, avoid the term "charity" because of its status as a Christian virtue. Because Britain lacks the separation of church and state, the pressures to find a non-religious term are not strong there.

Although none of the authors is a political scientist, each is aware of the political dimension of the debate over governmental subsidies to non-commercial organizations. Laws in all English-speaking countries restrict the ability of organizations receiving charitable contributions to engage in political activities such as lobbying legislatures and regulatory agencies. Judicial denial of corporate status has been used in both England and the American states to suppress behavior unacceptable to the majority in general and subversive activity in particular. The failure of private charities to provide help for the indigent and education to the lower classes led to the establishment of the welfare state in the twentieth century on both sides of the Atlantic.

A theoretical argument in favor of removing the barriers to certification as a nonprofit corporation was made by political scientists such as David Truman, Robert Dahl and Seymour Martin Lipset in the 1950s and 1960s. They contended that organized interest groups play a much more important role than individuals in representative democracy. It is the expression of preferences by groups and the consequent negotiation among competing organizations that produce the social equilibrium and political stability characteristic of America. Corporate and tax-exempt status empowers nonprofit organizations and enhances their capacity to serve as advocates of their members' and clients' interests. The privileges enjoyed by charities amount to large public subsidies to private actors. The allocation of scarce resources by government is at the core of what politics is about. A key shift in the law governing the not-for-profit sector in the 1960s and 1970s in the United States was from viewing incorporation as a privilege to an entitlement. The timeliness of the topic of these two books is illustrated by the efforts in 2001 by the new Republican administration of George W. Bush to persuade Congress to allow religious charities to administer government social service programs. The controversy over giving government grants and contracts to faith-based organizations pits conservative Republicans, who prefer private-sector dispensation of charity, against liberal Democrats, who view the welfare state as a superior means of assisting the needy. Republicans tend to view favorably government endorsement of religion, while Democrats tend to insist on governmental neutrality between religion and non-religion.

Silber traces the history of the role of state judges in granting corporate status to charitable institutions. Originally, English law developed the vehicle of incorporation to benefit religious bodies. A religious corporation could live forever and thus avoid disposing of its assets upon the death of its founder. Corporate status, moreover, encouraged contributions from private donors. The law made no distinction between for-profit and not-for-profit corporations, a point reflected in John Marshall's opinion for the U. S. Supreme Court in DARTMOUTH COLLEGE V. WOODWARD (1819). In the mid-nineteenth century, states began writing eparate laws for business corporations. In the 1780s and 1790s state legislatures chartered both commercial and charitable corporations, using the test of public benefit in deciding whether to grant a charter. In England the preferred mode for legitimating not-for-profit associations was the charitable trust. In the nineteenth century, however, the corporation became the preferred form in the American states. In 1848 New York enacted a law authorizing justices of the Supreme Court, New York's trial court of general jurisdiction, to approve applications for corporate charters submitted by nonprofit associations. Silber examines how judges in New York and Pennsylvania exercised their discretion. The state laws provided little guidance to judges about which applicants should be denied corporate status. Silber shows that judges used their discretion to reject applications from organizations whose purposes the judges found personally repugnant. Justice Roger A. Pryor, a former Confederate general, for example, in 1896 declined to approve a certificate of incorporation submitted by a group of Jewish immigrants residing in New York City. The group provided social services and financial assistance to other recent immigrants. He pointed to the fact that the Jewish Sabbath fell on Saturday and that Jews often conducted business on Sunday. Holding corporate meetings on Sunday, he said, was against the public policy of the state, even though there was no law against such meetings.

Judicial discretion survived with little criticism until the 1950s. During the Civil Rights movement, judges in the South used their discretion to deny corporate status to organizations opposed to racial segregation, such as state chapters of the National Association for Colored People (NAACP). Students at prestigious law schools began writing notes and comments for law reviews attacking the assumption on which judicial discretion was based, namely, that corporate status was a privilege available only to those associations likely to benefit the public. Articles in the Yale, Harvard and Cornell law reviews urged legislatures to change the law to reflect the premise that incorporation as a tax exempt organization was an entitlement owed by the government to every nonprofit undertaking. They emphasized the First Amendment argument that diversity of viewpoints served the public interest better than judicial screening of applicants and the Fourteenth Amendment concern that all applicants receive due process. These arguments proved persuasive. In ASSOCIATION FOR THE PRESERVATION OF FREEDOM OF CHOICE v. SHAPIRO (1961) the New York Court of Appeals transformed the nonprofit corporate charter from a privilege to a right. The New York legislature, and that of most other states, followed suit and abolished judicial pre-incorporation screening. The history illustrates the role of legal scholarship in legal reform. The Court of Appeals cited not one judicial precedent for its revolutionary decision. Its only authorities were the law review articles mentioned above. The Internal Revenue Service changed its policy as well and began granting tax-exempt status under section 503 (c) (3) of the tax code to nearly all applicants, even associations with controversial purposes, such as advancement of homosexual rights.

In his conclusion, Shapiro exposes flaws in the lack of substantive screening of nonprofit requests for incorporation and exemption from taxes. It is true, he says, that judicial discretion was exercised in favor of racial prejudice and class oppression but we should not forget that judges also denied charters to associations formed to fix prices and to defraud donors. The controversy during the administration of President Ronald Reagan surrounding the IRS's policy of granting tax exemption to racially segregated private schools illustrates the shortcomings of an entitlement approach to the bestowal of privileges to nonprofits. The weakness in Silber's book is the failure to articulate an alternative to the current laissez-faire approach. In the final two pages, he lists several proposed changes, including establishing a federal agency to screen all requests for nonprofit status and privileges, but does not discuss them in detail and does not endorse any one in particular.

As Mitchell and Moody's edited volume makes clear, England does have just such a centralized body, the Charity Commission, tasked with screening all petitions for registration as a charity. In chapter 7, Mitchell discusses why the commission in 1999 decided to review all organizations listed in the Register of Charities. arliament established the commission in 1853 to replace judicial screening with review of applications by a specialized bureaucracy. Unlike agencies in the United States, the English Charity Commission does not regard charitable status as an entitlement. In recent years it has refused such status to organizations whose purposes, in the commissioners' opinion, do not benefit the public, including gun clubs, soccer clubs and the Church of Scientology. Appeals by disappointed applicants under the European Convention on Human Rights, however, may force the British government to view charitable status as an entitlement under the concept of freedom of expression. If the European Court of Human Rights accepts the diversity argument then Britain will be forced to accept the non-discretionary American approach.

Several of the essays are theoretical treatments of charity law. John Gardner is concerned with the trend of individuals to sue nonprofit entities and to ask judges to review the decisions of the officers and trustees. He looks at the writings of the seventeenth century English philosopher Thomas Hobbes as the source of the idea that governments are properly concerned with justice and equity and not with charity. The alms giver owes the beggar nothing. The just person, on the other hand, distributes to individuals what is due them. Gardner's conclusion is that the courts should reduce their intervention into the internal affairs of charitable organizations because there is no duty to be charitable only the power to be so. In his contribution, David Stevens uses Mother Teresa as an example of someone who was truly charitable. Mother Teresa explained her decision to minister to the poor in Calcutta as a means of expressing her love of God, the literal meaning of "charity." There can be no true altruism and thus no real charity without religion, he claims. Secular organizations enjoying nonprofit status do not love the poor. Their decision to help the poor, he says, is motivated by self-interest, a fact that lies behind much of the cynicism felt by the public concerning the nonprofit sector.

Alison Dunn examines the reasons why Parliament prohibits charities from engaging in political activities. The chief purpose, she says, is to protect donors who may not wish their donations to be used to lobby the government. She advocates lifting these restrictions. If the purpose of charities is to help the poor, she argues, then it makes sense for them to be able to pressure the government to do more for the neediest segments of the population. Dunn's chapter underscores a difference between British and American approaches. British law views charities primarily as vehicles to aid the poor, while American law views them generally as vehicles for the expression of the interests of their members or constituency. Marc Freedland draws attention to the difficulty of making the private/public distinction in the law of charity. The Charitable Uses Act requires that charities provide a public benefit. He asks how granting non-profit, tax-exempt status to Oxford and Cambridge Universities, for example, benefits the public, when it is obvious that the beneficiaries are members of the middle- and upper class. Do not all charities provide benefits to a sector of society and not to society as a whole, he asks.

In his contribution, Rob Atkinson questions the wisdom of state intervention into the internal affairs of voluntary associations. He notices a trend for the courts to become involved in disputes between members of non-profit organizations. He asserts that such intervention threatens the very existence of voluntary associations and the legitimacy of the liberal state. The liberal state is based on the assumption that citizens should be free to form associations with friends and with those who share their world-view. As long as nonprofit organizations do not impinge on the market economy or on democracy, the state has no authority to become involved in their internal disputes, he concludes. Patrick Ford compares the English and Scottish definitions of charity. Scottish law defines public benefit in a much wider way than English law. The Scottish Parliament, however, can only legislate for trust law. It cannot change the rules governing the Charity Commission, which must operate in accordance with the English definition of public benefit. Ford concludes that this restriction will remain until the British Parliament extends the competence of the new Scottish Parliament.

In his essay, Michael Chesterman addresses the trend of governments to contract with charitable organizations to provide welfare services, a trend supported by the Bush administration in the United States. The voluntary sector, he says, is participating in a new "contract culture." He argues that tax-exempt status should not be extended to private schools and hospitals that serve the high-income classes. Associations that help the poor, however, even those that engage in political activity such as lobbying, should receive fiscal privileges, he says.

Together, the chapters in FOUNDATIONS OF CHARITY raise fundamental questions about the privileges granted to non-profit entities. Should non-profit status be limited to those associations that provide a public benefit, or should they be regarded simply as groups pursuing their constituencies' self-interest? Is incorporation as a not-for-profit a privilege or a right? Should tax-exemption be available only to groups that serve the poor and the disadvantaged? Should donors be allowed to deduct their donations to organizations, such as elite private universities, that serve the rich? To what extent should government avoid becoming entangled with voluntary associations by hearing disputes among members or by entering into contracts for welfare services?

A benefit of reading both books is the realization that certain trends are common to all the English-speaking countries surveyed. Religion plays a much less important role in the mission of non-profits. They are becoming private contractors, providing welfare services for the poor and disadvantaged in place of local governments. Conflicts within charitable associations are more likely than ever to involve lawyers and litigation. Government can no longer arbitrarily and selectively deny applications for incorporation and for tax-exempt status. There is a realization that government must become more involved in dealing with corruption within the non-profit sector. Judging by the annual growth in the amount of money contributed to non-profit institutions in the United States, Britain, Canada and Australia, there is no crisis of legitimacy in the not-for-profit sector, and the need for reform may be overstated.

CASE REFERENCES:

ASSOCIATION FOR THE PRESERVATION OF FREEDOM OF CHOICE v. SHAPIRO, 9 N.Y.2d 376; 174 N.E.2d 487 (1961).

DARTMOUTH COLLEGE v. WOODWARD, 4 Wheat. 518 (1819).

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