Boston College Law Review Volume 31 Article 1 Issue 3 Number 3 5-1-1990 Altruism in Nonprofit Organizations Rob Atkinson Follow this and additional works at: http://lawdigitalcommons.bc.edu/bclr Part of the Organizations Law Commons Recommended Citation Rob Atkinson, Altruism in Nonprofit Organizations, 31 B.C.L. Rev. 501 (1990), http://lawdigitalcommons.bc.edu/bclr/vol31/iss3/1 This Article is brought to you for free and open access by the Law Journals at Digital Commons @ Boston College Law School. It has been accepted for inclusion in Boston College Law Review by an authorized editor of Digital Commons @ Boston College Law School. For more information, please contact [email protected]. BOSTON COLLEGE LAW REVIEW VOLUME XXXI MAY 1990 NUMBER 3 ALTRUISM IN NONPROFIT ORGANIZATIONS` ROB ATKINSON * I. INTRODUCTION 503 II. THE EMERGING ORTHODOXY—HANSMANN'S THEORY OF THE ROLE OF NONPROFIT ORGANIZATIONS 512 III. A RESPECTFUL HERESY—THE ROLE OF ALTRUISM IN NONPROFITS 519 A. Donative Entrepreneurials—The Easy Case for Altruism 520 1. Type 1 Organizations—Donative Nonprofits Op- erated for the Benefit of Neither Donors nor Controllers 521 2. Type 2 Organizations-,--Donative Entrepreneu- rials Operated For the Benefit of Donors 533 3. Type 3 Organizations—Donee-Controlled Do- native Entrepreneurials 537 B. Donative Mutuals—Equally Clear Cases for Altruism 537 1. Type 4 Organizations—Donor Control for Oth- ers' Benefit 537 t Copyright © 1990 Koh Atkinson *Assistant Professor of Law, Florida State University. B.A, 1979, Washington and Lee University; J.D. 1982, Yale Law School. I am indebted to more people for help with this article than the customary space will accommodate. I am particularly grateful to my senior colleague Donald. Weidner, who pro- vided continual encouragement. and copious comments through the entire project; my former mentors Carolyn Chiechi and John Simon, who commented on earlier drafts; and Meg Baldwin, Tony Herman, Adam Hirsch, and Mark Seidenfeld, who critically reviewed my introduction and who shared with me the mixed joys of the junior academic. Lori Willner and Mark Williamson were invaluable research assistants. 501 502 BOSTON COLLEGE LAW REVIEW [Vol. 31:501 2. Type 5 Organizations—Donor Control for Their Own Benefit 538 C. From Donative to Commercial Nonprofits—Altruism in Education and the Performing Arts 538 D. Commercial Entrepreneunals—Is There Altruism Here Too? 542 1. Type 7 Organizations—Commercial Entrepre- neurials Operated for Patrons' Benefit 543 2. Type 6 Organizations—Commercial Entrepre- neurials Operated for the Benefit of Non- Patrons 554 3. Type 8 Organizations—Commercial Entrepre- neurials Operated for the Benefit of Controllers 556 E. Commercial Mutuals—Altruism and Beyond 557 1. Type 9 Organizations—Commercial Mutuals Op- erated for the Benefit of Non-Patrons 557 2. Type 10 Organizations—Commercial Mutuals Operated for the Benefit of Patrons 558 F. Type 10 Organizations as the Limiting Case of Nonprofit Status 562 G. Summary—A Taxonomy of Nonprofits in Terms of Altruism 565 IV. THE NEED FOR ALTRUISTIC ORGANIZATIONS 566 A. General Supply-Side Phenomena 567 1. Altruistic Provision of Capital 567 2. Integration 569 B. The Need for Distinct Vehicles for Altruistic Investment 571 1. The Problem with For-Profit Firms 571 2. The Problem with Government 576 C. Private Foundations 580 1. The Contract Failure Account of Private Foundations 580 2. Private Foundations and the Altruistic Supply of Capital 585 3. The Advantages of Integration 587 4. The Need for Separate Organizations 590 5. The Ideal, the Real, and the Law 596 V. POLICY ANALYSIS—THE FEDERAL INCOME TAX EXEMP- TION OF NONPROFIT ORGANIZATIONS 599 A. Altruistic Organizations' Gift, Exempt Function, and Pas- sive Income 600 1. Hansmann's "Capital Formation Theory" 602 May 1990] NONPROFIT ORGANIZATIONS 503 2. Traditional Subsidy Theory (Herein Mostly of I.R.C. Section 501(c)(3)) 605 3. Bittker and Randert's Technical Definition Theory 610 4. Altruism Itself as the Basis of the Tax Exemption of Altruistic Nonprofits 616 B. Mutual Benefit Organizations 620 1. Traditional Subsidy Theory 621 2. Bittker and Randert's Theory 622 3. Hansmann's Critique 623 C. Unrelated Business Income of Altruistic Nonprofits 625 D. Altruism as a Metabenefit to Be Subsidized 628 1. The Goodness of Altruism 628 2. Counting the Costs of Altruism 630 a. Loss of tax exemption for non-altruistic organizations 630 b. Efficiency costs 631 c. Tax exemption as an appropriate means 632 d. Administrative costs 632 e. Regressivity problem 633 f. Privilege and the power to allocate 634 • g. Prohibitions of current law 635 h. Eccentric purposes 635 VI. CONCLUSION 638 I. INTRODUCTION Between the well-charted domains of for-profit firms and mod- ern government lies what was until recently a virtual terra incognita. Early explorers labelled this middle ground "the Third Sector," reflecting their recognition that they were in a distinctive sphere. But their recognition was largely intuitive. The Third Sector was said to be inhabited by a congeries of tribes who acknowledged fealty to neither Caesar nor the Invisible Hand, who were account- able in neither the arena of politics nor the marketplace of econom- ics. Systematic study of this sector's inhabitants, known collectively as nonprofits, lagged behind that of their neighbors on the govern- mental and for-profit sides.' I After I had written this paragraph, a quotation in J. VAN TIL, MAPPING THE THIRD SECTOR: VOLUNTARISM IN A CHANGING SOCIAL ECONOMY 71 (1988) led me to very similar language in COMMISSION ON PRIVATE PHILAN ' rHROPY AND PUBLIC NEEDS, GIVING IN AMERICA: TOWARD A STRONGER VOLUNTARY SECTOR 31 (1975) [hereinafter FILER COMMISSION REPORT]. 504 BOSTON COLLEGE LAW REVIEW [Vol. 31:501 Recently, however, this has begun to change. In the last decade or so, a new generation of explorers, equipped with the insights of contemporary social science, have sought to penetrate the mysteries of the Third Sector.2 Demographers have surveyed its inhabitants,3 cartographers have mapped its contours, 4 and a host of empirical studies have described the cultures of particular precincts. 5 Building on these studies,6 other scholars have attempted, at a more Toyn- beean level of generality, to erect theories explaining why nonprofits evolve and how they behave once they appear.' As a result, we now have several theories, complementary at some points and conflicting at others, of the internal organization and operation of nonprofits. 6 We also have a detailed and widely- Though, as the title of Van Til's book suggests, the general cartography metaphor has passed into common usage, the specific language of the Filer Commission Report is sufficientlyclose to mine to warrant separate acknowledgment. It is possible to identify a fourth sector, the "household" or "informal" sector. See J. VAN TIL, supra, at 87. The presence of this sector is implicit in my discussion in section IV of the need for altruism to take institutional forms, and warrants explicit discussion in connection with the tax exemption of mutual benefit organizations. See infra notes 343-54 and accom- panying text for a discussion of the relationship between mutual benefit organizations and household production. In some respects' the watershed year was 1975. In December of that year, the Com- mission on Private Philanthropy and Public Needs published its report and recommendations. See FILER COMMISSION REPORT, supra note I. The Commission's research papers, which were published in 1977 in collaboration with the Treasury Department, not only "provided scholars and policymakers with a baseline knowledge. circa the mid-1970s, of the scope and operations of the nonprofit sector," THE NONPROFIT SECTOR xi (W. Powell ed. 1987) [hereinafter THE NONPROFIT SECTOR]; they also laid the foundation for analysis of the nonprofit sector's role and offered specific proposals for law reform. Another significant impetus to the study of nonprofits came in 1976, when the Program on Non-Profit Organizations was established under the auspices of the Institute for Social and Policy Studies at Yale. It was the first of several university-affiliated interdisciplinary programs devoted to the study of nonprofits. • 3 The demographic accounts in the FILER COMMISSION RESEARCH PAPERS appear pri- marily in Volume 1, History, Trends, and Current Magnitudes. See 1 COMMISSION ON PRIVATE PHILANTHROPY AND PUBLIC NEEDS, RESEARCH PAPERS (1977) [hereinafter FILER COMMISSION PAPERS]. For a more recent survey, see Rudney, The Scope and Dimensions of Nonprofit Activity, in THE NONPROFIT SECTOR, supra note 2, at 55. 4 See, e.g., J. VAN TIL, supra note I. See, e.g., 2 FILER COMMISSION PAPERS, supra note 3; Hansmann, Economic Theories of Nonprofit Organization, in THE NONPROFIT SECTOR, supra note 2, at 27 (citing pre-Filer Com- mission studies in the health care industry). 6 For a brief account of the development of general theories from particular industry studies, particularly those in the area of health care, see Hansmann, supra note 5. 7 In distinguishing between theories that account for the role of nonprofits and those that account for their behavior, I am following Hansmann, supra note '5, at 27-28. For a survey of these "behavior" theories, see Hansmann, supra note 5, at 37-40. See also E. JAMES & S. ROSE-ACKERMAN, THE NONPROFIT ENTERPRISE IN MARKET ECONOMICS (1986). To the extent that these theories address a common issue beyond the behavior of May 1990] NONPROFIT ORGANIZATIONS 505 accepted account that explains why nonprofits evolve in the ecolog- ical niche they occupy in the western, and particularly the American, institutional landscape. The emerging orthodox account of the role of nonprofit organizations is aptly dubbed the twin failure theory.9 It describes nonprofits as a response to social and economic chal- lenges beyond the capabilities of for-profit firms on the one hand and government on the other.") Though the two halves of the twin failure theory — market failure and government failure — were developed separately, together they give a plausible and coherent account of the Third Sector.