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Tax Expenditures, the Nature of the Corporation, and the Social Construction of Charity

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Tax Expenditures, the Nature of the Corporation, and the Social Construction of Charity DePaul Law Review Volume 44 Issue 1 Fall 1994 Article 2 The Paradox of Corporate Giving: Tax Expenditures, the Nature of the Corporation, and the Social Construction of Charity Nancy J. Knauer Follow this and additional works at: https://via.library.depaul.edu/law-review Recommended Citation Nancy J. Knauer, The Paradox of Corporate Giving: Tax Expenditures, the Nature of the Corporation, and the Social Construction of Charity, 44 DePaul L. Rev. 1 (1994) Available at: https://via.library.depaul.edu/law-review/vol44/iss1/2 This Article is brought to you for free and open access by the College of Law at Via Sapientiae. It has been accepted for inclusion in DePaul Law Review by an authorized editor of Via Sapientiae. For more information, please contact [email protected]. THE PARADOX OF CORPORATE GIVING: TAX EXPENDITURES, THE NATURE OF THE CORPORATION, AND THE SOCIAL CONSTRUCTION OF CHARITY Nancy J. Knauer* TABLE OF CONTENTS INTRODUCTION ................................ 3 I. CORPORATE GIVING: ITS SCOPE, HISTORY, AND TAX T REATM ENT ................................... 12 A. Statistical Overview of Corporate Charitable G iving . 12 B. A Brief History of Corporate Giving and the L aw . 15 1. Corporate Giving and the Deduction ...... 15 (a) Corporate Giving Priorto the Revenue A ct of 1935 ...................... 16 (b) The 1935 Enactment of the Corporate Charitable Contribution Deduction... 19 2. The Ever-Changing Theory of Corporate Purp ose .............................. 20 (a) Early Conceptions of Corporate Form and Purpose ...................... 21 (b) Corporate Purpose and the Berle- Dodd Debate ..................... 22 3. Theory, Doctrine, and the Courts ........ 23 4. In Search of the Socially Responsible Corporate Citizen ...................... 28 * Assistant Professor of Law at Temple University School of Law. I would like to thank Wil- liam J. Woodward, Jr., Scott Burris and Marina Angel for their encouragement and comments on this Article. For research assistance, I am indebted to Christine P. Jackson, Cheryl Siskin and Carole Sheffield. I presented a draft of this Article at a Temple University School of Law Faculty Colloquium, and I benefitted from the many thoughtful and helpful comments generated by the presentation. Finally, I am grateful to Temple University School of Law for the financial support it provided for this Article. DEPAUL LAW REVIEW [Vol. 44:1 C. The Structure of the Federal Income Tax Corporate Charitable Contribution Deduction, Its Interpretation, and Its Limitations ........ 32 1. Section 170: the Statute ................ 33 2. The "Contribution or Gift" Requirement.. 35 (a) The Subjective Standard ........... 37 (b) Hernandez and the Quid Pro Quo S tandard......................... 39 3. Intersection With the Section 162 Deduction for Ordinary and Necessary Business Exp enses ............................. 4 1 (a) The Nondeductibility of Goodwill ... 43 (b) Transfers of Appreciated or Inventory Property ......................... 44 4. The Corporate Level Deduction .......... 45 (a) A Constructive Dividend? ........... 45 (b) Compensation to the Manager ...... 48 II. CORPORATE GIVING: ITS MANY EXPLANATIONS AND M ANIFESTATIONS ............................... 49 A. The "Halo Effect" and What CorporationsSay They Expect to Get When They Give? ....... 49 1. Tax Deductibility as the Sine Qua Non of Corporate Giving ...................... 49 2. The Perceived Business Benefit of Corporate Giving . 5 3 3. The "Halo Effect" .................... 57 B. The Discourse of Corporate Giving .......... 60 1. Advertising and Marketing .............. 60 (a) Cause-related Marketing ........... 64 (b) Corporate Sponsorship ............. 66 2. Goodwill & Public Relations ............ 71 3. Investment in the Future: Future Markets and Future Employees ................. 75 4. The Delicate Balance Required .......... 79 C. A Final Caveat - To Look Beyond the Stated. 81 1. Dual Agenda or Hidden Agenda Giving... 81 2. Corporate Giving as Social Currency ..... 83 3. Corporate Giving as a Defensive Strategy 85 III. TAX EXPENDITURE ANALYSIS REDUX ............... 88 CONCLUSION ....................................... 93 1994] PARADOX OF CORPORATE GIVING INTRODUCTION Corporate charitable giving is big business. Fundraisers estimate that in 1992, U.S. corporations "contributed" $6 billion1 to qualified charitable organizations.' Hardpressed for funds, qualified charities actively seek and compete for corporate contributions.3 Fundraising literature identifies corporate giving as the last great frontier of phi- lanthropy." Marketing literature touts corporate giving as the latest advertising and public relations technique. 5 Both camps proclaim that corporate giving is good for business and extol the business ad- vantages which flow from transfers to charity.6 In short, corporate giving means "doing best by doing good."' Legal scholarship ignores the way corporate giving is described, justified, and expressed by those making the transfers (corporate managers) and those receiving the transfers (fundraisers).' Instead, 1. 1993 GIVING USA: THE ANNUAL REPORT ON PHILANTHROPY FOR THE YEAR 1992 10 (Anne E. Kaplan, ed. 1993) [hereinafter GIVING]. For a discussion of charitable giving statistics, see infra notes 59-72 and accompanying text. 2. This Article deals with corporate transfers to charitable organizations exempt from federal income tax under section 501(c)(3) and qualified to receive tax-deductible contributions under section 170 of t n er oet 1 as amendT, Unless otherwise noted, all section references refer to the Internal Revenue Code of 1986, as amended, and the regulations thereun- der. See infra notes 182-84 and accompanying text (describing in more detail the requirements for qualification and the general types of organizations which so qualify). 3. Fundraising literature is replete with helpful suggestions of how to secure corporate contribu- tions. See infra notes 300-08 and accompanying text (discussing the fundraising literature). 4. As used throughout this Article, the term "marketing and fundraising literature" refers to a broad range of texts discussing the practice of corporate giving. Generally, the fundraising litera- ture is directed to charities and offers advice concerning how to attract corporate funding. The most influential trade journal is The Chronicle of Philanthropy, a biweekly newspaper reporting on issues of interest to charitable organizations. Corporate giving is a popular topic. Marketing literature is directed toward corporate managers. Tips on corporate giving can be found in trade journals for various industries as well as in advertising journals. Both perspectives (how to attract corporate transfers versus how to make corporate transfers) discuss the business benefits associ- ated with corporate giving. 5. See infra notes 273-332 and accompanying text (discussing the publicity benefits of corpo- rate giving). 6. See infra notes 300-318 and accompanying text (discussing the perceived business benefits associated with corporate transfers to charity). 7. This phrase is the title of a particularly outspoken text written by two fundraising consul- tants who specialize in arranging corporate sponsorship programs. RICHARD STECKEL & ROBIN SIMONS. DOING BEST BY DOING GOOD (1992). 8. This Article refers to two general classes of individuals: corporate managers and fundraisers. The term corporate managers refers to corporate employees (they may or may not be shareholders in the corporation). Corporate managers vary considerably in rank and authority. They include corporate officers as well as public relations and corporate giving executives. Fundraisers are em- ployed by the charitable organization to attract corporate (and individual or foundation) financial support. A third group of players consists of independent agents. Those retained by corporations DEPAUL LAW REVIEW [Vol. 44:1 it presents the widespread practice of "corporate giving" as an ap- parent paradox: why would corporations give away $6 billion in as- sets each year? It then typically analyzes this practice in terms of the theory of corporate purpose and federal tax policy.9 Both ap- proaches fail because they misapprehend the behavior they purport to explain. Both assume that the distinguishing feature of corporate giving is the absence of a quid pro quo; the absence of an expected commensurate benefit. Yet, this assumption is at odds with the con- temporary understanding of corporate giving. Marketing and fun- draising literature describes corporate giving in terms of "enlight- ened self-interest,"10 making it clear that a corporate transfer to charity is "not altruistic; it is intensely self-interested."' 1 Such transfers are made with the expectation of receiving a commensu- rate benefit in return.' 2 The anticipated benefit ranges from immedi- ate advertising and marketing services to long-term public relations and goodwill advantages."3 Legal scholarship, however, posits disinterested corporate giving are advertising and marketing specialists who specialize in developing advertising or marketing programs centered on transfers to charitable organizations. Individuals retained by charitable or- ganizations are typically referred to as fundraising consultants, some of whom may charge a fee based on a percentage of the funds they raise on behalf of the organization. See, e.g., id. at 260-61 (discussing the advantages and disadvantages of using consultants). 9. See, e.g., William T. Allen, Our Schizophrenic Conception of the Business
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