A. Role of the Attorney General
C. Expanding the Concept of Standing to Sue
D. Museum Cases Involving the Issue of Standing to Sue
E. Oversight by Taxing Authorities
F. As Recipients of Federal Financial Assistance
According to figures published by Giving USA 2010,1 Americans donated more than $303 billion to charity in 2009.2 Charities are “big business,” and yet, as noted in the previous chapter, a charity is not a “business” as this term is traditionally used. Charitable organizations occupy such a unique and prominent role in the United States that they are often referred to as “the third sector,” after government and business.3 To keep government on course, we have elaborate systems of checks and balances, and businesses must answer to stockholders, customers, the Internal Revenue Service, and innumerable other governmental entities. The third sector has its watchdogs also, and here again there is an area of evolving law.
Traditionally, the enforcement of charitable trusts or gifts to charities has been assigned to the attorney general of the state in which the charity is located.4 This practice stems from English law: for centuries, suits were brought by the king’s attorney general to enforce charitable trusts, the king being the guardian of such trusts. The practice was adopted in this country for practical as well as historic reasons. The community has a substantial interest in the enforcement of a charitable gift because it is the beneficiary; yet individual members of the community cannot be expected to police the administration of the gift. Such a situation could result in no oversight, since few, if any, individuals would assume the financial costs of court action, or it could result in the harassment of trustees (those charged with administering the gift), since many citizens might see fit to bring a variety of actions based on their individual theories of wrongdoing. The realistic solution was to look to the attorney general of the state to oversee the management of charities.5
A concise statement of the customary interpretation of this rule can be found in Dickey v. Volker:6
An individual member of the public has no vested interest in the property or funds of the [charitable] trust. In common with other members, he has an interest in the charitable use. He has no right of action for the mismanagement or misuse of the fund. Any action on this account must be taken by the Attorney General as the representative of the public. However, those with a special interest may enforce the trust, or a localized or grouped charity may be enforced by a class suit. In such suits it is proper and often necessary to make the Attorney General a party defendant.7
Similar instruction was given in People ex rel. Ellert v. Cogswell:8
This action is based upon averments of a public trust. It is brought to remedy abuses in the management of this trust. It is not only the right, but the duty, of the attorney general to prosecute such an action. The state as parens patriae, [literally, “father of the country”] superintends the management of all public charities or trusts, and, in these matters, acts through her attorney general. Generally speaking, such an action will not be entertained at all unless the attorney general is a party to it. Such was the rule at common law, and it has not been changed in this state.9
Certainly over the years attorneys general have not been preoccupied with the supervision of museums. Attorneys general have many responsibilities, and with limited time and resources, they naturally focus their efforts on law enforcement matters of major public interest. But since the mid-1980s, issues relating to nonprofit activity have been headline news, causing some attorneys general to become much more involved in matters of direct concern to nonprofits and, accordingly, to museums and also causing some attorneys general to define more clearly their policies regarding oversight of nonprofit activity.
Several nonprofit issues have attracted substantial public attention over the past decade or so.
Nonprofit Compensation. This subject was brought forcefully to the attention of the public in 1992 when newspaper stories began to question the salary, lifestyle, and management practices of the president of United Way of America. United Way is one of the largest charities in the country, and news reports described the president as being grossly overcompensated, living lavishly, and favoring family and friends in managing the charity’s assets. The United Way case caused inquiry into the compensation practices of other charities, a good number of which reported paying to certain high-level officials salaries and benefits that seemed excessive. Over time such cases became more common. For example, just in the museum profession in 2006 Barry Munitz, the president of the J. Paul Getty Trust (one of the world’s richest art museums), resigned his post under pressure when serious questions arose about the way he handled funds under his control.10 At the time the California Attorney General’s Office was looking into allegations that Munitz had spent trust money lavishly for his own benefit and for that of family and friends. Around this time several high-ranking officials at the Smithsonian Institution left their positions because of allegations of misuse of institution funds for personal benefit and/or for other unauthorized purposes.
Fund-Raising Activities. The methods used by some nonprofits to raise money began to spark criticism. Quite often, but not always, the situations involved outside fund-raising firms; the general complaint was that a disproportionate share of the money raised was being used to pay fund-raising expenses, not to further the public-service work of the nonprofit organizations. In light of these reports, states began to enact statutes that placed limitations on fund-raising costs or that required fund-raisers to make certain disclosures when soliciting donations. These statutes ran into constitutional (free speech) problems. Many states then strengthened reporting requirements on fund-raising activity. Now, in an effort to educate their publics, a growing number of attorneys general publish detailed annual reports on nonprofit fund-raising activities in their states. As fund-raising becomes more competitive, it is unlikely that the interest of state attorneys general in fund-raising will wane.
Accountability of Nonprofits. The reticence of some nonprofits to give out information to the public has become a matter of growing concern, especially when nonprofits refuse to release information on matters such as compensation of staff, sources of income, and donor relations. When a public-service organization refuses to give out information of this type, the public tends to become suspicious, and often the attorney general of a state, as the protector of the public’s interest in charitable activity, is called on to examine more closely the operations of the organization.11 The continued failure of some nonprofits to be less than forthcoming about how they operate caused the Internal Revenue Service to revise its standard 990 and 990 EZ tax forms (those used by nonprofits). As a result, since 2008 much more internal information must be disclosed in those forms. Moreover, based on this information the IRS has devised a “governance checklist” to use in audits where it finds further investigation is needed.12 More is said on this subject in Chapter XII, “Tax Consideration,” Part 1, “Tax Considerations Relevant to Gifts,” and in Chapter XII’s footnote 32.
Deaccessioning. For museums, the matter of deaccessioning has been thrust to the forefront as more collecting organizations have been forced to consider deaccessioning because of economic conditions. As a result, attorneys general find themselves involved in an increasing number of controversial deaccessioning proposals. For more information on this subject, see Chapter V, “The Disposal of Objects: Deaccessioning,” Section B.2.f, “Use of Proceeds Derived from Deaccessions.”
Financial Instability. Some nonprofit boards, including museum boards, have remained relatively complacent as their organizations have moved steadily toward insolvency. A natural question is, “At what point in such cases, if at all, do board members expose themselves to liability for failure to take decisive action?” For museum boards, there is an added consideration. When insolvency may mean not just curtailment of a public service but also irreparable harm to a unique asset—the museum’s collections—should this affect the level of attention expected of board members?
All of the above matters ultimately raise the issue of board liability. As explained in the previous chapter, the law spells out the standard of conduct for nonprofit board members in the broadest of terms. Relatively few cases apply the standard to museum boards. This means that when an attorney general is asked to look into a complaint alleging museum mismanagement, there is little precedent to offer guidance in determining whether there is culpable negligence. Lacking strong precedent, the average attorney general does not take an aggressive stand but seeks some defensible compromise. Few attorneys general want to sue nonprofit board members and thus discourage volunteer service, but this situation appears to be changing. As public dissatisfaction with the governance of nonprofits, including museums, continues to grow, attorneys general may have no choice but to initiate more legal actions against nonprofit board members in order to establish clearer guidance concerning acceptable board conduct. Warning signs are signaling that the days of nonprofit board complacency may be over.13
To encourage self-improvement and ward off the need for court action or more regulatory control, some attorneys general have taken an active role in educating nonprofit boards about their responsibilities. This is being done through educational brochures and seminars. Some attorneys general are even willing to give informal advice to boards facing difficult problems. Practices in this area differ from state to state, but it is always sensible for a museum to inquire about educational services that may be offered by the office of the attorney general in its state.14
Based on the traditional rule that the enforcement of charitable trusts is reserved to the attorney general, donors and heirs of donors usually are denied standing to sue for the enforcement of such trusts.15 Having made a gift for the benefit of the public, a donor is viewed as having no stronger claim to that gift than any other member of the public. This view, commonly accepted when an unrestricted gift is at issue, should certainly be considered by a museum as a defense when faced with a lawsuit brought by a displeased donor.
Regarding conditional gifts or those gifts that reserve a right to revoke or terminate, authorities are divided over whether donors, or their representatives, can sue for enforcement. If donors are permitted to sue, there is the added question of whether they can sue individually, in their own names, or only with the attorney general as a consenting party.16 The Restatement of Trusts favors the view that the attorney general is a necessary party in any such suit, following the theory, perhaps, that a gift to charity, even though conditional, involves a public interest that must be represented.17
Decisions regarding the standing of donors to enforce conditional gifts turn on the particular facts of each case, and it would appear that courts have little trouble in fashioning theories to support desired results. In Amato v. The Metropolitan Museum of Art,18 for instance, a restricted bequest was made to the museum. The museum had six months in which to accept the gift; otherwise the bequest passed to the donor’s daughter. The museum accepted. Years later, the daughter sued, claiming that the museum had not honored the restriction. The court denied relief, one of the grounds being that once the museum accepted the gift, any interest the daughter had in the property terminated. Since the daughter now had no special interest, she lacked standing to sue.
Another court approach that inhibits donor intervention is the theory that a conditional or restricted gift does not fail just because its terms cannot be followed exactly. For instance, if carrying out the terms of a restricted gift proves impractical or impossible, a museum may seek court approval to alter the restriction in either a cy pres action19 or a petition for deviation.20 If the court approves the change, there is deemed to be no failure of the gift because the general charitable intent of the donor is still being effected. If there is no failure, the donor and the donor’s heirs have nothing to enforce in court.21
In Abrams v. The Maryland Historical Society,22 heirs of a donor sued to prevent the sale of an object given to the historical society, claiming that the society accepted the gift with the understanding that the object would never be sold. Some evidence supported the claim, namely, correspondence from individual members of the society’s board of trustees, and there was no executed deed of gift. The court ruled that the heirs had no standing to sue: “Gifts cannot be presumed to be conditional. Their conditions must be clearly set forth.” But years later, in a somewhat similar case in the same state, the issue of “standing to sue” was not mentioned by the court in its opinion.23 In this later instance, the donor, not the heirs of the donor, sued a local historical society in an effort to stop the deaccessioning of objects given a number of years earlier. The historical society prevailed in this case on the merits. Perhaps when a donor is still living and involved with the community, there is a reluctance to invoke procedural grounds that stop a suit, the feeling being that a court hearing on the merits will be therapeutic.
With the public becoming more interested in the management of charitable organizations, not only is more pressure being placed on attorneys general, but questions are also being raised as to whether there should be more effective ways to monitor charities than by relying mainly on the initiative and interest of attorneys general. One avenue being explored is the possible expansion of the “standing to sue” concept.
In the prevailing majority view, the attorney general is a necessary party in a suit alleging mismanagement of a charity, but the attorney general cannot be compelled to be a party.24 Can, then, an individual or group force a charity into court without the cooperation of the attorney general? Creative arguments are being fashioned to support a broader concept of standing to sue for alleged mismanagement of charitable organizations.25 If the public’s interest in nonprofit management continues to escalate, some of these arguments could lead to legislative changes.26 And cases can already be found in which courts have seen fit to expand the class of individuals who can question board governance in nonprofit organizations. Of interest here is the Wilson College case.27
Wilson College is a charitable corporation that was chartered by the state of Pennsylvania in 1869 for the purpose of educating young women. It is managed by a board of trustees. In 1979 the trustees of the college voted to close the school because of declining enrollment. One trustee, several students, a few alumnae/donors, and a faculty member sued the majority of the trustees for negligence and requested the court to enjoin the closing and to remove the defendant trustees from office. The attorney general entered an appearance on behalf of the state. Without elaborating its reason, the court concluded that the trustee, the alumnae/donors, and the faculty member had standing to sue but that the students, “while having a distinct and unique interest in the proceeding,” did not have “legal standing to maintain it.”28
The Sibley Hospital case,29 which was discussed in Chapter I in relation to the issue of board liability, also dealt with the issue of standing. The plaintiff in that case was the parent of a child who had been a patient at the hospital, and he brought the action on behalf of all patients who were forced to pay higher hospital fees because of the alleged mismanagement by the hospital trustees. On the issue of standing, the court said: “Plaintiffs purporting to represent a class of users of the Hospital’s services have a sufficient special interest to challenge the conduct of the trustees operating this charitable institution. This is especially so here, for neither the District of Columbia nor the hospital has taken any action to question the conduct brought into issue by the … complaint.”30
The courts of New Jersey and Maryland have taken liberal views in decisions concerning standing to sue charities. In the case of Patterson v. The Patterson General Hospital,31 the city and two residents of the city were permitted to sue Patterson General Hospital, a charitable corporation that was alleged to have deviated from its trust purposes. The court said the following:
It must be conceded that in this state, and throughout the country as a whole, supervision of the administration of charities has been neglected. Charities in this state, whether or not incorporated, are, in general, only subject to the supervision of the Attorney General. The manifold duties of this office make readily understandable the facts that such supervision is necessarily sporadic.… While public supervision of the administration of charities remains inadequate, a liberal rule as to the standing of a plaintiff to complain about the administration of a charitable trust or charitable corporation seems decidedly in the public interest.32
This view was reinforced by a similar holding in Cinnaminson v. First Camden National Bank and Trust Co.33 and was echoed in Gordon v. City of Baltimore.34 In the Gordon case, a taxpayer was granted standing to challenge the transfer of a library from one private charitable institution to another. Since the latter institution received considerable money from the city for its operating expenses, the court reasoned that if the library was accepted, the city would be called on to increase its support, and thus the taxpayer had a sufficient pecuniary interest to bring suit.
The trend to enlarge the concept of “standing to sue” should be of considerable interest to museums, as illustrated by two cases. One concerns the Carnegie Institute’s attempt to deaccession two of its collections; the other involves the problems encountered by the Pasadena Art Museum when it put several of its works up for auction.
In January 1979, the Carnegie Institute of Pittsburgh petitioned the Pennsylvania court for approval to sell at public sale substantially all of its coin and stamp collections.35 The court petition approach was taken because of the volume of material at issue.36 In its petition, the institute explained that (1) the stamp and coin collections marked for sale were unrestricted gifts to the museum, (2) the institute had never had the funds to provide professional staff and security for the collections and thus had never been able to make the collections truly available to the public, (3) the institute had determined that retention of these collections would not effectively promote the broader purpose for which the museum was formed, and (4) it would be in the best interests of the people of Pittsburgh for the institute to sell substantially all of these collections.37 The attorney general was made a party to the proceeding, and he entered a brief on behalf of the public. When it became evident to the court that there was much public sentiment both for and against the proposed sale, a six-month stay was ordered so that interested parties could offer alternative solutions. At the expiration of the six months, another hearing was held. Present at the hearing and offering testimony was a local historical society. The historical society had submitted the only offer for an alternative method of disposition, but the offer had not been accepted.38 The record on the case was then closed, but further time was given to the institute to effect a compromise. Several months later, an agreement was reached between the institute and the attorney general, and this was submitted to the court. The agreement permitted the institute to sell the collections, with certain limited exceptions. The historical society objected to the proposed agreement as well as the sale, but the court approved the agreement, stating that the interest of the public would be served by adjusting the matter by mutual concession. On the issue of the historical society’s standing to be heard, the court said the following:
Initially it is observed that charitable trusts are enforced by the Attorney General, not individual members of the public. In the absence of statutory authority, a person who has no special interest cannot maintain a suit for the enforcement of a charitable trust, nor may the Attorney General delegate the control of such a suit.… This is a necessity since if one individual person could interpose objections, any other individual person could also either raise objections or give support and as the decision on one individual objection would not be a bar to another individual objection, there would be no end to litigation. Therefore, while the position of the Historical Society is appreciated as well as the individual expressions of interest, there does not appear in the record of these proceedings sufficient evidence to deny giving effect to the agreement reached between petitioner [the institute] and the Attorney General.39
The historical society filed exceptions to the court’s decision. It gave several reasons why it should have standing to participate in the proceedings, including the following:
1. The society was a nonprofit corporation chartered for the preservation of the culture and heritage of western Pennsylvania, which was the subject of the case. Therefore, the society had a special interest.
2. Many of the members of the society were stamp and coin collectors, and they thus had an interest in the preservation of the collections.
3. The historical society’s submission of an alternative plan within the designated six-month period gave it a special interest that should be heard.
4. The attorney general did not adequately represent the public in the case, and therefore the society should be heard.
5. The court should hear all available evidence on the case and should not merely accept the institute and the attorney general’s assertions that the proposed sale was in the best interest of the public.
6. The court should apply the cy pres doctrine and should award the collections to the historical society as successor trustee.40
The issue of standing became moot when the Carnegie Institute, believing protracted litigation would be counterproductive, amended its petition to the court. It requested permission to sell a major portion of its stamp collection only, with the understanding that the fate of the coin collection would not be pressed at that time. All parties interested in the matter agreed to this amended petition, and court approval was given in December 1980 for the sale of the described stamp collection. Two years had been spent in court on the matter.
Further ramifications of the “standing to sue” concept were raised in Rowan v. Pasadena Art Museum, in which legal steps were taken to halt a scheduled sale of certain works of art from the collections of the Pasadena Art Museum.41 The museum had deaccessioned several works, which were scheduled to be sold at a major New York auction house. Shortly before the sale, three former trustees of the museum obtained from a California court a temporary restraining order enjoining the sale. The former trustees alleged that the proposed sale would violate the trust obligations of the museum. On the issue of their “standing” to bring the action, they argued that their position as former trustees was “functionally equivalent” to that of minority trustees and that, hence, they were entitled to standing. In addition, they cited the following “personal and private interests”:
1. They were individual contributors to the museum, and thus they personally should be entitled to enforce the conditions under which their gifts were made.
2. As former trustees, they had made express representations to other contributors. They considered themselves morally responsible for these representations, and some contributors might seek to hold them legally responsible. (Regarding reasons 1 and 2, the plaintiffs offered no evidence that the gifts in question were conditional. We can only assume that the gifts were made without express conditions and that the gist of the plaintiffs’ argument was that any contributor to a museum acquires a special interest that entitles him or her to standing to sue.)
3. As former trustees, they had a right to vindicate the actions that they had taken as trustees and that related to the proposed sale.
In its decision on the jurisdictional aspects of the Rowan case, the court had to interpret California’s new Corporation Code. Section 5142 of the code lists the following as having standing to sue a public-benefit (i.e., charitable) corporation:
1. The charitable corporation itself
2. An officer of the corporation
3. A director of the corporation
4. A person with a reversionary, contractual, or property interest in the assets of the corporation
5. The attorney general or any person granted relator status by the attorney general
The court considered this list to be an exclusive one, and it then proceeded to analyze whether the plaintiffs fell within category 2, 3, or 4. It determined that Section 5142 was not intended to give standing to former members, directors, or officers; thus categories 2 and 3 were unavailable to the plaintiffs.42 The court indicated that category 4 might permit separate causes of actions by individual donors seeking relief for the museum’s failure to abide by the terms of their particular gifts, but the court added that in this case the plaintiffs had failed to frame their complaint in this manner. In other words, the relief sought must be specifically related to the violated promise; the mere fact that one is a donor does not confer standing to question generally the actions of the museum. Regarding category 5, the court conceded that the attorney general had not granted formal relator status,43 but the plaintiffs contended that there had been an informal grant of such status. As a practical solution, the court allowed the attorney general a short period of time in which to determine if he wanted to grant such formal status and thus secure a category 5 basis for proceeding to a trial on the merits. Subsequently, the plaintiffs did obtain formal relator status.44
Last, but not least, many museum board members are now faced with sorting out their responsibilities in light of problems caused by the financial crisis beginning in 2007. The problem may be whether the museum has a responsibility to insist that a now-ruined donor complete a promised gift, or how the museum should respond if in a bankruptcy proceeding there is a request that the museum return a recent donation made by the now-bankrupt party so that creditor claims can be paid, or whether the museum’s endowment suffered undue damage in the financial crisis because of lax monitoring by the board. It is too early to know whether this group of cases will change in any way the liability exposure of nonprofit board members.45
Good arguments can be made for and against the expansion of the standing to sue rule, but few would deny that if public disillusionment with much that is now going on in the nonprofit sector continues, there will be added pressure to open more avenues of recourse for those who are discontent. If standing to sue does expand, museum trustees will find it harder to resolve controversial management issues quickly. Prior approval of proposed action by the attorney general may not protect them from lawsuits, more individual trustees may be encouraged to question board decisions through court action, and more dissatisfied third parties may decide it is worth the effort to test their ability to obtain court review of trustee decisions. But this should not discourage the prudent trustee. Good internal procedures for decision making and adherence to those procedures invariably protect members of a board from personal liability for mismanagement.46
A museum, as a charity, occupies a favored position in the U.S. tax structure. “Charity” status provides a dual sustenance: it substantially renders the museum’s revenues exempt from taxation, and it provides strong tax incentives for donations to the museum.47 On the other hand, this privileged status also is a basis for a good deal of oversight of museum operations by the taxing authority.48 Just how the government should control a charity through this tax power is a subject of much debate. A general understanding of the issues involved is helpful if one wants to respond intelligently to some of the more subtle tax-related problems that can face a museum. The issues are easier to illustrate in a historical setting.
Early in the 1900s, when the U.S. income tax system was taking root, it was acknowledged that charitable organizations were beneficial to the country and that the tax structure should foster rather than inhibit their growth. Charities had played a dominant role in the growth of the country. True to their pioneering spirit, the forefathers looked first to their community, not to the government, for basic social services. Innumerable voluntary organizations sprang up to satisfy community needs, and these organizations became accepted as part of the American way of life.49 A major study on philanthropy, commonly known as the Filer Report, describes this phenomenon as a reflection of “a national belief in the philosophy of pluralism and in the profound importance to society of individual initiative.”50 To foster these perceived public benefits of pluralism and self-help, the early tax code protected and encouraged charities by granting them tax-exempt status and by devising the charitable contribution deduction. In effect, the early tax structure encouraged diversity and sheltered charities from direct government control. As long as an organization could meet the definition given in the tax code—that it was “organized and operated exclusively for … educational purposes”51—it was ensured the favored tax-exempt status.
In later years, with the rise of a more enlightened social conscience in this country, government began to play a greater role in providing some of the services formerly left to the nonprofit sector. An effective way for the government to increase its role in this sphere proved to be the grant process wherein the government makes available to nonprofit organizations various forms of “federal financial assistance” designed to support the public-service work of such organizations. But these grants come with “strings”: Nonprofits receiving the grants must conform to a variety of government social programs as a condition for the aid.52 Most nonprofit organizations seek available grants and accept the strings. But some nonprofit organizations choose not to participate either because they object to certain of the policies imposed or because they view the grant process as an unwarranted intrusion by the government into the ideological independence of the nonprofit sector. To draw this second group into conformity with government-endorsed social policies, a new theory for justifying tax-exempt status is being touted, with considerable success. This theory equates tax-exempt status with a government expenditure. That is, the tax exemption is characterized as a sum actually owed the government but allotted, by way of the tax structure, to the charitable organization.53 Under this approach, nonprofits are not viewed as “self-help” segments of society that received their support directly from private philanthropy but are considered recipients of public funds.
At first glance, these differing philosophic characterizations of a tax exemption may seem sophomoric quibbling, but there is a crucial distinction in end results. If, for example, a tax exemption is considered to be just what its name implies—a decision that an entity is not subject to a tax—then the only legitimate interest of the taxing authority in that entity is to see that the exemption is honestly obtained and maintained. Under this theory, called here “the traditional theory,” oversight requirements imposed by the taxing authority essentially amount to maintaining and disclosing records that document true charitable activity on the part of the organization. On the other hand, if a tax exemption is viewed as an efficient way of returning to an entity its tax payment in the form of a government grant (that is, public largesse), then the mandate of the supervising government authority is more pervasive and the charity’s entitlement to privileged status is far more tenuous. Under this theory, called here “the more modern theory,” government oversight can take on the additional dimension of requiring charities to adhere to standards, programs, and procedures designed to further national, social, and economic goals that are deemed appropriate for recipients of public largesse.54
The two described theories, if followed logically, give very different dimensions to the nonprofit sector. One emphasizes the sector’s independence; the other, the more modern theory, makes the sector much more dependent on the will of the majority. Which theory is better? Finding the answer is not simple, since either theory carried to extremes brings problems.55 The preferred ground lies somewhere in between. But maintaining a middle ground—one where diversity and individual initiative can flourish without serious abuse—requires informed vigilance on the part of those who operate in the nonprofit sector. The key is maintaining public confidence in the overall integrity of the sector. A public that sees the nonprofit sector as essentially trustworthy is more willing to accept the traditional theory of tax-exempt status because even though the public may not sympathize with some nonprofit activity, it accepts the importance of allowing unpopular activity if that activity is honestly pursued. However, a public disillusioned by real or apparent abuses of status by nonprofits is much more willing to support the more modern theory, which legitimizes broad governmental control of the nonprofit sector through the tax mechanism. This is an old story: the greater the freedom sought, the more important it is to demonstrate integrity. The lesson for nonprofits is that their conduct—in other words, the level of trust they are able to maintain with the public—governs to a great extent whether the traditional view or the more modern view of nonprofit tax status prevails at a particular time. Simply put, for nonprofits, “trust” and “taxes” are directly linked.
The phrase “federal financial assistance” should, by now, be quite familiar to the museum community. If a museum receives support that falls within the definition of federal financial assistance, it can expect that support to come with many strings attached:
• Requiring that the museum avoid certain described activity
• Requiring that the museum provide certain services or engage in certain activities
• Making the museum liable to the government for failure to adhere to various regulations
• Making the museum liable to third parties for failure to adhere to various regulations
Thus, “federal financial assistance” brings other layers of oversight that can have a dramatic impact on the administration and budget of a museum. From both legal and management points of view, it is important for a museum to understand, right from the start, the range of “strings” it must accept with any particular form of federal financial assistance.
Federal financial assistance is usually defined broadly to mean
[a]ny grant, entitlement, loan, contract (other than a procurement contract or a contract of insurance or guaranty), or any other arrangement by which the [federal] agency provides or otherwise makes available assistance in the form of
(a) funds;
(b) services of federal personnel; or
(c) real and personal property or any interest in or use of property including the following:
(1) transfers or leases of such property for less than fair market value or for reduced consideration; and
(2) proceeds from a subsequent transfer or lease of such property if the federal share of its fair market value is not returned to the federal government.
To be a “recipient” of federal financial assistance, one need not receive the assistance directly from a federal agency. By administrative interpretation, the definition of a “recipient” includes any successor, assignee, or transferee of the original recipient but excludes the ultimate beneficiary of the assistance. Thus, if museum programs receive federal funds dispensed by a state arts agency or if museum activities are supported by municipal funds acquired from federal revenue sharing, such indirect support is considered federal financial assistance, and the affected programs and activities must be administered in compliance with the federal statute or statutes in question. Even if federal financial assistance provides only partial support for a program or activity, as a general rule the entire program or activity must be in compliance. Similarly, if the assistance covers any portion of overhead or general operating expenses of an organization, all the organization’s programs and activities are affected.56
From the above definition of federal financial assistance, we see that a museum can become a “recipient” in a variety of ways. The most common is through the grant process, which will be used here to enumerate the usual “strings” that a museum accepts as a “recipient” of government assistance. When a museum accepts a grant from the National Endowment for the Arts or the National Endowment for the Humanities, or some other federal government agency, it immediately certifies that it will or will continue to comply with certain federal laws and/or regulations that concern civil rights, drug avoidance, lobbying activity, payment of federal debts, and interaction with organizations or individuals that have been barred from participation in certain federal programs or convicted of certain serious offenses.57
Regarding civil rights, a museum must certify compliance with the following laws:
The applicant certifies that it will comply with the following nondiscrimination statutes and their implementing regulations: (a) Title VI of the Civil Rights Act of 1964, as amended (42 U.S.C. 2000d et seq.), which provides that no person in the United States shall, on the ground of race, color, or national origin, be excluded from participation in, be denied the benefits of, or be otherwise subjected to discrimination under any program or activity for which the applicant received federal financial assistance; (b) Section 504 of the Rehabilitation Act of 1973, as amended (29 U.S.C. 794), which prohibits discrimination on the basis of handicap in programs and activities receiving federal financial assistance;58 (c) Title IX of the Education Amendments of 1972, as amended (20 U.S.C. 1681 et seq.), which prohibits discrimination on the basis of sex in education programs and activities receiving federal financial assistance; and (d) the Age Discrimination Act of 1975, as amended (42 U.S.C. 6101 et seq.) which prohibits discrimination on the basis of age in programs and activities receiving federal financial assistance, except that actions which reasonably take age into account as a factor necessary for the normal operation or achievement of any statutory objective of the project or activity shall not violate this statute.
On drug avoidance, the Drug-Free Workplace Act of 1988 (Pub. L. 100–690) states the following:
(A) The grantee (i.e., the museum receiving the grant) certifies that it will or will continue to provide a drug-free workplace by
(a) publishing a statement notifying employees that the unlawful manufacture, distribution, dispensing, possession or use of a controlled substance is prohibited in the grantee’s workplace and specifying the actions that will be taken against employees for violation of such prohibitions;
(b) establishing an ongoing drug-free awareness program to inform employees about (1) the dangers of drug abuse in the workplace; (2) the grantee’s policy of maintaining a drug-free workplace; (3) any available drug counseling, rehabilitation, and employee assistance programs; and (4) the penalties that may be imposed on employees for drug abuse violations occurring in the workplace;
(c) making it a requirement that each employee to be engaged in the performance of the grant be given a copy of the statement required by paragraph (a);
(d) notifying the employee in the statement required by paragraph (a) that, as a condition of employment under the grant, the employee will (1) abide by the terms of the statement; and (2) notify the employer in writing of his or her conviction for a violation of a criminal drug statute occurring in the workplace not later than five calendar days after such conviction;
(e) notifying the agency (i.e., the agency awarding the grant) in writing within ten calendar days after receiving notice under subparagraph (d)(2) from an employee or otherwise receiving actual notice of such conviction. Employers of convicted employees must provide notice, including position title, to every grant officer on whose grant activity the convicted employee was working, unless the federal agency has designated a central point for the receipt of such notices. Notices shall include the identification number(s) of each affected grant;
(f) taking one of the following actions, within 30 calendar days of receiving notice under subparagraph (d)(2), with respect to any employee who is so convicted: (1) taking appropriate personnel action against such an employee, up to and including termination consistent with the requirements of the Rehabilitation Act of 1973, as amended; or (2) requiring such employee to participate satisfactorily in a drug abuse assistance or rehabilitation program approved for such purposes by a federal, state, or local health, law enforcement, or other appropriate agency;
(g) making a good faith effort to continue to maintain a drug-free workplace through implementation of paragraphs (a), (b), (c), (d), (e), and (f).
(B) The applicant shall either identify the site(s) for the performance of work done in connection with the project in the application material or shall keep this information on file in its office so that it is available for federal inspection. The street address, city, county, state, and zip code should be provided whenever possible.
Regarding lobbying, if the federal financial assistance in question is more than $100,000, the following certifications apply.59
The undersigned (i.e., the museum official that accepts the grant award on behalf of the museum) certifies, to the best of his or her knowledge and belief, that:
(1) No federal appropriated funds have been paid or will be paid, by or on behalf of the undersigned, to any person for influencing or attempting to influence an officer or employee of any agency, a Member of Congress, an officer or employee of Congress, or an employee of a Member of Congress in connection with the awarding of a federal contract, the making of a federal grant, the making of a federal loan, the entering into of a cooperative agreement, and the extension, continuation, renewal, amendment, or modification of a federal contract, grant, loan, or cooperative agreement.
(2) If any funds other than federal appropriated funds have been paid or will be paid to any person (other than a regularly employed officer or employee of the applicant) for influencing or attempting to influence an officer or employee of any agency, a Member of Congress, an officer or employee of Congress, or an employee of a Member of Congress in connection with this federal contract, grant, loan, or cooperative agreement, the undersigned shall complete and submit Standard Form LLL, “Disclosure of Lobbying Activities,” in accordance with its instructions.
(3) The undersigned shall require that the language of this certification be included in the award documents for all subawards at all tiers (including subcontracts, subgrants, and contracts under grants, loans, and cooperative agreements) and that all subrecipients shall certify and disclose accordingly.
Regarding debt status, the following certification is required:60 “The applicant certifies to the best of its knowledge and belief that it is not delinquent in the repayment of any federal debt.”
Finally, the grant recipient certifies the following regarding debarment and suspension:61
The prospective primary participant (applicant) certifies to the best of its knowledge and belief that it and its principals: (a) are not presently debarred, suspended, proposed for debarment, declared ineligible, or voluntarily excluded from covered transactions by any federal department or agency; (b) have not within a three-year period preceding this proposal been convicted of or had a civil judgment rendered against them for commission of fraud or a criminal offense in connection with obtaining, attempting to obtain, or performing a public (federal, state, or local) transaction or contract under public transaction; violation of federal or state antitrust statutes or commission of embezzlement, theft, forgery, bribery, falsification or destruction of records, making false statements, or receiving stolen property; (c) are not presently indicted for or otherwise criminally or civilly charged by a government entity (federal, state, or local) with commission of any of the offenses enumerated in paragraph (b) of this certification; and (d) have not within a three-year period preceding this application/proposal had one or more public transactions (federal, state, or local) terminated for cause or default.
Information on how these certifications can affect a particular situation within a museum can usually be obtained from the government organization offering the grant. Also, considerable literature has been published on the various aspects of the civil rights statutes covered by the certifications and on the Drug-Free Workplace Act.
Another statute that is important to museums but that is not specifically mentioned in many government grant applications is the Native American Graves Protection and Repatriation Act.62 This 1990 statute addresses the rights of Native Americans to certain human remains, funerary objects, sacred objects, and objects of cultural patrimony with which they are affiliated, and it affects collections of museums that receive “federal funds” as distinct from “federal financial assistance.” The regulations interpreting the act define the phrase “receives federal funds” to mean
[t]he receipt of funds by a museum after November 16, 1990 [the date the statute went into effect], from a Federal agency through any grant, loan, contract (other than a procurement contract), or other arrangement by which a Federal agency makes or made available to a museum assistance in the form of funds. Federal funds provided for any purpose that are received by a larger entity of which the museum is a part are considered Federal funds, for the purposes of these regulations. For example, if a museum is a part of a state or local government or a private university and the state or local government or private university receives Federal funds for any purpose, the museum is considered to receive Federal funds for the purpose of these regulations.63
In other words, the term “federal funds” is defined more narrowly; it covers only the receipt of money. The term “federal financial assistance” covers not just funds but also goods, services, and other benefits. A museum should note, however, that whether it receives “federal funds” or “federal financial assistance,” the scope of the impact on the organization is the same.
1. The Center on Philanthropy at Indiana University, Giving USA 2010: The Annual Report on Philanthropy for the Year 2009, 55th Annual Issue (Giving USA Foundation, Glenview, Ill.: 2010). This estimate takes into consideration both cash and in-kind gifts but not the value of volunteer services.
2. See “Did Americans Give Steadily during the Economic Downturn?,” Chronicle of Philanthropy (June 17, 2010), 6.
3. For an explanation of “the third sector,” see Chapter 1 of M. Malaro, Museum Governance: Mission, Ethics, Policy (Washington, D.C.: Smithsonian Institution Press, 1994); W. Powell, ed., The Nonprofit Sector: A Research Handbook, 2d ed. (New Haven, Conn.: Yale U. Press, 2006); L. Salamon, America’s Nonprofit Sector: A Primer, 2d ed. (New York: Foundation Center, 1999); V. Hodgkinson and R. Lyman, The Future of the Nonprofit Sector: Challenges, Changes, and Policy Considerations (San Francisco: Jossey-Boss, 1989).
4. Most states have statutes setting forth the attorney general’s duties in this regard, but even in the absence of statutes, the attorney general usually is found to have the power to oversee charities as a common law incident of the office. (As explained in Chapter I, the terms “charity,” “charitable trust,” and “charitable corporation” are used interchangeably in this text because in most museum activity the precise form of the organization is not controlling.) In some states the power to oversee charities is vested, by statute, in a state agent other than the attorney general. See 15 Am. Jur. 2d, “Charities,” § 144 (1976). See also Scott on Trusts § 391 (3d ed.) and Restatement (Second) of Trusts § 391 (1959). The law regarding charitable corporations and charitable trusts developed unevenly in the various states. Interpretations reflected local social and political views as well as efforts to assimilate English precedent. Even today, when a question arises concerning the oversight of a charitable corporation or trust, a museum should carefully check the law of the particular jurisdiction. Two articles that describe the growth of the various legal theories in this country are T. Blackwell, “The Charitable Corporation and the Charitable Trust,” 24 Wash. U. L.Q. 1 (1938); and Note, “The Enforcement of Charitable Trusts in America: A History of Evolving Social Attitudes,” 54 Va. L. Rev. 436 (Apr. 1968). For a concise discussion, see C. Hantizis, “The Role of the Attorney General in Supervising Charitable Organizations,” in American Law Institute–American Bar Association (ALI-ABA), Course of Studies Materials: Legal Problems of Museum Administration (Philadelphia: ALI-ABA, 1985). See also D. Kurtz, “The Role of the Attorney General in Regulating Museums,” and S. Urice, “External Constraints on Museum Authority,” in American Law Institute–American Bar Association (ALI-ABA), Course of Studies Materials: Legal Problems of Museum Administration (Philadelphia: ALI-ABA, 2004). Regarding particular state laws, see W. Abbott and C. Kornblum, “The Jurisdiction of the Attorney General over Corporate Fiduciaries under the New California Nonprofit Corporation Law,” 13 U.S.F. L. Rev. 753 (Summer 1979); and Lefkowitz v. Lebensfeld, 51 N.Y. 2d 442, 415 N.E.2d 919, 434 N.Y.S.2d 929 (1980). For the views of several state attorneys general, see H. Bograd, “The Role of State Attorneys General in Relation to Troubled Nonprofits,” PONPO Working Paper, No. 206 (New Haven, Conn.: Program on Non-Profit Organizations, Yale U., 1994).
5. The role of the attorney general is to see that the trustees do not abuse their discretion. It is not the attorney general’s role to control their discretion. Conway v. Emeny, 139 Conn. 612, 96 A.2d 221 (1953). In Lefkowitz v. Lebensfeld, 51 N.Y. 2d 442, 415 N.E.2d 919, 434 N.Y.S.2d 929 (1980), the court discusses the history in New York of the attorney general’s authority over charities and of the attorney general’s limitations regarding the enforcement of obligations owed to a charity.
6. 321 Mo. 235, 11 S.W.2d 278 (1928), cert. denied, 49 S. Ct. 252 (1929). The decision contains extensive annotations on the then existing interpretation of the power to enforce charitable trusts.
7. Ibid., 246.
8. 113 Cal. 129, 45 P. 270 (1896).
9. People ex rel. Ellert v. Cogswell, 45 P. 270, 271 (Cal. 1896); see also Parker v. May, 59 Mass. 336, 5 Cush. 336 (1850); United States v. Mount Vernon Mortgage Corp., 128 F. Supp. 629 (D.D.C. 1954), aff’d, 236 F.2d 724 (D.C. Cir. 1956), cert. denied, 352 U.S. 988 (1957).
10. See R. Kennedy and C. Vogel, “Pressured, Director of Getty Trust Steps Down,” New York Times, Feb. 10, 2006.
11. In the 2006 Milwaukee Public Museum case where the museum found itself in financial ruin because of the alleged misconduct of its chief financial officer, a major question was whether only the financial officer would be held responsible. See B. Gose, “Former Financial Officer Faces Charges in Museum Debt Case,” Chronicle of Philanthropy (Oct. 26, 2006), 62.
12. IRS Form 14114 (12-2009), checklist to be used by Exempt Organization Revenue Agents in examining public charities.
13. For a discussion of nonprofit board members’ traditionally limited exposure to liability, see C. Swords, “An Examination of Nonprofit Board Members Exposures to Liability,” in American Law Institute–American Bar Association (ALI-ABA), Course of Studies Materials: Legal Problems of Museum Administration (Philadelphia: ALI-ABA, 1990). Note that Pub. L. 104–168 of 1996 gives the IRS added authority to check excess compensation awarded officials of charitable organizations.
14. For a study of the approach to preventive education taken by attorneys general in New York, Massachusetts, and Pennsylvania, see H. Bograd, “The Role of State Attorneys General in Relation to Troubled Nonprofits,” PONPO Working Paper, No. 206 (New Haven, Conn.: Program on Non-Profit Organizations, Yale U., 1994). For examples of instructive pamphlets published by attorneys general, see Mass. Attorney General’s Office, The Attorney General’s Guide for Board Members of Charitable Organizations (Boston, Mass.: Commonwealth of Mass., Office of the Attorney General, 1993); and Fiduciary Duties of Directors of Charitable Organizations (St. Paul, Minn.: Minnesota’s Attorney General’s Office, Charitable Division, 1993). In October 2007, the Panel on the Nonprofit Sector (formed by Independent Sector) published “Principles for Good Governance and Ethical Practice: A Guide for Charities and Foundations.” On the whole the pamphlet sets forth more demanding standards, clearly with the hope that voluntary compliance will ward off more drastic legislation.
15. Scott on Trusts § 391 (3d ed.). Compare the arguments of the plaintiffs in the Pasadena Museum case mentioned later in this chapter. See also Herzog Foundation v. Univ. of Bridgeport, 243 Conn. 1, 699 A.2d 995 (1997). See also L. Mendenhall, “Who Can Sue the Museum: The Evolving Doctrine of Legal Standing,” in American Law Institute–American Bar Association (ALI-ABA), Course of Studies Materials: Legal Issues in Museum Administration (Philadelphia: ALI-ABA, 2007); and J. Soris, “Exclusive Standing of the Attorney General to Enforce Charitable Gifts—A Massachusetts Regulator’s View,” in American Law Institute–American Bar Association (ALI-ABA), Course of Studies Materials: Legal Issues in Museum Administration (Philadelphia: ALI-ABA, 2009).
16. 15 Am. Jur. 2d Charities § 143 (1976).
17. Restatement (Second) of Trusts § 391 comment f (1957).
18. No. 15122/79 (N.Y. Sup. Ct., N.Y. County, Sept. 1979). See also In re Stuart’s Estate, 183 Misc. 20, 46 N.Y.S.2d 911 (1944).
19. If a charitable trust lacks a proper trustee or if the trust proves impossible or impracticable for other reasons, the court may apply the cy pres doctrine and approve an alternative means for carrying out the general charitable intent. For more information on cy pres, see Chapter IV, “The Acquisition of Objects: Accessioning,” Section E.1, “Restricted Gifts.”
20. Questions concerning a donor’s ability to sue a museum invariably require a close look at the particular circumstances. For a more detailed discussion of this issue, see Chapter IV, “The Acquisition of Objects: Accessioning,” Section E.1, “Restricted Gifts.”
21. See Cleveland Museum of Art v. O’Neill, 57 Ohio Op. 250, 129 N.E.2d 669 (1955). In O’Hara v. Grand Lodge Independent Order of Good Templars, 213 Cal. 131, 2 P.2d 21 (1931), the court indicated that cy pres action taken by a charity without prior court approval could be confirmed later by the court to avoid intervention of the donor.
22. Equity No. A-58791/A513/1979 (Md. Cir. Ct. for Baltimore City, June 1979).
23. Taussig v. Historic Annapolis, Case #C-93-4451 (Md. Cir. Ct. for Anne Arundel County, Feb. 15, 1995).
24. In Dickey v. Volker, 321 Mo. 235, 11 S.W.2d 278, 62 A.L.R. 858 (1928), it was argued that the attorney general, by challenging the plaintiff’s right to bring such a suit, violated the plaintiff’s constitutional right to due process of the law. The court struck down this argument. It pointed out that the plaintiff had established no property right in the charitable trust (i.e., no special interest) and that therefore he was not entitled to any trial. In Wiegand v. Barnes Foundation, 374 Pa. 149, 97 A.2d 81, 83 (1953), the plaintiff, as a citizen and a reporter for a major newspaper, sued a local charitable corporation. The suit was brought with the consent of the attorney general. When the court held that the plaintiff did not have standing to sue because he had no special interest, the plaintiff argued that he had the consent of the attorney general to sue. The court said that “the protection of the public generally against the failure of a corporation to perform the duties required by its charter is the concern of the sovereign, and any action undertaken for such purpose must be by the Attorney General on its behalf. In the absence of statutory authority, the Attorney General may not delegate the conduct or control of the suit.”
25. See, for example, K. Karst, “The Efficiency of the Charitable Dollar: Unfulfilled State Responsibility,” 73 Harv. L. Rev. 433 (1960). Professor Karst suggests the establishment of state boards to monitor and coordinate the activities of private charities. See also J. Fishman, “The Development of Nonprofit Corporation Law and an Agenda for Reform,” 34 Emory L.J. 617 (No. 34, 1985); and A. Ben-Ner and T. Van Hoomissen, “The Governance of Nonprofit Organizations: Law and Public Policy,” 4 Nonprofit Mgmt. and Leadership 393 [PONPO Working Paper, No. 195 (New Haven, Conn.: Program on Non-Profit Organizations, Yale U., 1993)].
26. Note, for example, the experience in California. When California adopted a new comprehensive nonprofit corporation law in 1980, the new statute spelled out a broader class of individuals who could challenge the quality of nonprofit board action. See also Rowan v. Pasadena Art Museum, No. C322817 (Cal. Sup. Ct. L.A. County, Sept. 22, 1981), which interprets the 1980 California nonprofit corporation law regarding standing to sue.
27. Zehner v. Alexander, 89 (Penn. 39th Jud. Dist., Franklin County, Ct. of C.P., Orphans’ Ct. Div.) 262 (May 25, 1979).
28. See also Miller v. Alderhold, 228 Ga. 65, 184 S.E.2d 172 (1971), where students in a college sued to challenge a board of trustees’ decision to sell certain college land. The students argued that the college was a charitable trust and that they had standing because they were beneficiaries of the trust. The court rejected the argument on the ground that the college was a charitable corporation and hence had no specific beneficiaries. The Miller case was affirmed in the Corporation of Mercer University v. Smith, 258 Ga. 509, 371 S.E.2d 858 (1988). The issue of “trust” versus “corporation” can be a murky one, as can the issue of the ramifications of either status regarding “standing to sue.” See, for example, Art Institute of Chicago v. Castle, 9 Ill. App. 2d 473, 133 N.E.2d 748 (1956); Stuart v. Continental Illinois Nat’l Bank and Trust Co., 68 Ill. 2d 502, 369 N.E.2d 1262 (1977), appeal after remand 75 Ill. 2d 22, 387 N.E.2d 312 (1979), cert. denied 100 S. Ct. 86 (1979); Jones v. Grant, 344 So.2d 1210 (Ala. 1977).
29. Stern v. Lucy Webb Hayes National Training School for Deaconesses and Missionaries, 367 F. Supp. 536 (D.D.C. 1973) (order granting standing of plaintiffs to sue); 381 F. Supp. 1003 (D.D.C. 1974) (final decision).
30. Stern v. Lucy Webb Hayes National Training School for Deaconesses and Missionaries, No. 267–73 (D.D.C. June 8, 1973) (order granting standing of plaintiffs to sue). When this case was decided, the District of Columbia did not function as a “state” and did not have a traditional Office of Attorney General.
31. 97 N.J. Super. 514, 235 A.2d 487 (1967).
32. Ibid., 495.
33. 99 N.J. Super. 115, 238 A.2d 701 (1968).
34. 258 Md. 682, 267 A.2d 98 (1970). See also Lord v. Wilmington, 332 A.2d 414 (Del. 1975), aff’d, 378 A.2d 635 (Del. 1977).
35. In re Carnegie Institute, No. 208 of 1979 (Penn. Ct. of C.P., Allegheny County, Orphans’ Ct. Div., May 14, 1980). The Carnegie Institute maintains two museums in Pittsburgh: the Carnegie Museum of Natural History and the Museum of Art, Carnegie Institute. The Carnegie Museum of Natural History was the petitioner in this case.
36. See Chapter V, “The Disposal of Objects: Deaccessioning,” Section B.2.b, “The Proper Authority to Approve a Decision to Deaccession.”
37. The Carnegie had offered the collections to other educational organizations in the area, but none were able to purchase and maintain the collections.
38. The historical society had offered to accept the collections as a gift.
39. In re Carnegie Institute, No. 208 of 1979 (Penn. Ct. of C.P., Allegheny County, Orphans’ Ct. Div., May 14, 1980), 2–3.
40. Compare In re Estate of Nevil, 414 Pa. 122, 199 A.2d 419 (1964), where a charitable organization, in a position similar to that of the historical society in the Carnegie case, was denied standing to challenge the court’s action.
41. Rowan v. Pasadena Art Museum, No. C322817 (Cal. Sup. Ct., L.A. County, Sept. 22, 1981). Suits of this type are becoming more prevalent. A short time after the planned art sale by the Pasadena Museum was halted by a California court order, a similar restraining order was granted by a Pennsylvania court stopping another auction sale of artworks belonging to the Edwin Forrest Home for Retired Actors. The restraining order was sought because of the claim that the proposed sale violated the terms of Forrest’s trust. In re the Edwin Forrest Home, No. 154 of 1981 (Penn., Philadelphia Ct. of C.P., Orphans’ Ct. Div., Apr. 24, 1981) (Opinion of Court en banc, 1982). See Chapter V, “The Disposal of Objects: Deaccessioning,” for other cases in which restraining orders have been sought in order to stop scheduled deaccession sales.
42. See also American Center for Education Inc. v. Cavnar, 80 Cal. App. 3d 476, 145 Cal. Rptr. 736, 742 (1978).
43. Relator status essentially means that the attorney general expressly permits the individual to sue in the attorney general’s stead.
44. If a museum finds itself embroiled in a public debate over the interpretation of, for example, a restricted gift, it can initiate a declaratory judgment action. Here the museum asks the court to interpret the disputed language, the hope being that the court interpretation of what the language actually means will avoid protracted litigation. The declaratory judgment approach usually avoids the “standing to sue” issue but does provide a vehicle for airing the viewpoints of all arguing parties.
45. J. Sare and B. Guiney, “Donor’s Insolvency and Bankruptcy: Some Basic Background for the Museum Donee,” in American Law Institute–American Bar Association (ALI-ABA), Course of Studies Materials: Legal Issues in Museum Administration (Philadelphia: ALI-ABA, 2011). See also D. Blum, “When Donors Commit Fraud, Nonprofits Often Pay the Price,” Chronicle of Philanthropy (Mar. 6, 2011). See also Chapter XI, “Promised Gifts,” which discusses this topic.
46. J. Merryman, “Securing Greater Trustee and Staff Accountability,” in American Law Institute–American Bar Association (ALI-ABA), Course of Studies Materials: Legal Problems of Museum Administration (Philadelphia: ALI-ABA, 1985), argues that carefully expanding “standing to sue” could be beneficial and suggests elements of a well-drafted statute in this regard. L. Miller et al., “Selling Off the Nation’s Not-For-Profit Hospitals: The Legal Basis for Oversight” (paper presented at the National Association of Attorneys General Charitable Trusts and Solicitations Seminar, Williamsburg, Va., 1995), urged attorneys general to consider authorizing private parties to bring actions to challenge the growing number of sales of nonprofit hospitals to for-profit entities. See also H. Hansmann, “Reforming Nonprofit Corporation Law,” 129 U. Pa. L. Rev. 497, 600 (1981).
47. Outside the scope of this text is the issue of unrelated business income, income that subjects even a charity to taxation. Publications of interest on this subject are J. Gilbert, “Museums and the Internal Revenue Code: Corporate Sponsorship and the Unrelated Business Income Tax,” in American Law Institute–American Bar Association (ALI-ABA), Course of Studies Materials: Legal Problems of Museum Administration (Philadelphia: ALI-ABA, 1993); Memorandum of Chairman Pickle to Committee Members, “Draft Report Describing Recommendations on the Unrelated Business Income Tax, Oversight Subcommittee of the Committee on Ways and Means, U.S. House of Representatives, June 23, 1988”; E. Aprill, “Lessons from the UBIT Debate,” 45 Tax Notes 1105 (Nov. 27, 1989); C. Roady, “Inspired by the Collections: The Unrelated Business Income Tax and Museum Merchandizing,” in American Law Institute–American Bar Association (ALI-ABA), Course of Studies Materials: Legal Problems of Museum Administration (Philadelphia: ALI-ABA, 2005); C. Roady and M. Shaines, “Tax and UBIT Review: Current Developments,” in American Law Institute–American Bar Association (ALI-ABA), Course of Studies Materials: Legal Problems of Museum Administration (Philadelphia: ALI-ABA, 2001); and M. Knoll, “UBIT: Leveling an Uneven Playing Field or Tilting a Level One,” 76 Fordham L. Rev. 857 (2007–8).
48. Provisions of the federal Internal Revenue Code are frequently mirrored by a state’s revenue statutes. Both federal and state authorities, therefore, may assert supervision over a charity through the tax medium. On the state and local level, charities are frequently exempt from property taxes, but not always. Much depends on the interpretation of the applicable statute. For example, in the early 1980s, New York City began refusing property tax exemptions to certain educational organizations that did not have a curriculum or a faculty, but this interpretation of the law was reversed after widespread protest from cultural organizations. See the decision concerning the Asian Society as reported in the New York Law Journal (Mar. 7, 1983) and Art in America 216 (Sept. 1983). Since the mid-1980s, more and more state and local authorities have been revising their statutes so as to restrict access to property tax exemption. This movement has been motivated not only by a need for more tax revenue but also by the perceived commercial overtones of some nonprofit activities. See also Chapter XII, “Tax Considerations.”
49. The Filer Report, referred to in the following footnote, states that even today there are many more voluntarily supported educational, cultural, and social organizations in the United States than in other countries, where state-run charitable organizations are the rule. An excellent selection of essays on the growth of voluntary organizations in the United States is B. O’Connell, ed., America’s Voluntary Spirit: A Book of Readings (New York: Foundation Center, 1983).
50. Commission on Private Philanthropy and Public Needs, Giving in America, Toward a Stronger Voluntary Sector: Report to the Commission on Private Philanthropy and Public Needs (Washington, D.C.: Commission on Private Philanthropy and Public Needs, 1975), known as the Filer Report. In 1995, some in the nonprofit sector attempted to initiate a movement for a second study—similar in magnitude to the Filer Report—of the current status of the nonprofit sector. These efforts were unsuccessful.
51. 26 U.S.C. § 501(c)(3).
52. See Chapter II, “Museums Are Accountable to Whom?,” Section F, “As Recipients of Federal Financial Assistance.”
53. See S. Surrey, “Federal Income Tax Reform: The Varied Approaches Necessary to Replace Tax Expenditures with Direct Governmental Assistance,” 84 Harv. L. Rev. 352 (1970).
54. L. Stone, “Federal Tax Support of Charities and Other Exempt Organizations: The Need for a National Policy,” 20 U.S. Cal. L. Center Tax Inst. 27 (1968); J. Kurtz, “Tax Incentives: Their Use and Misuse,” 20 U.S. Cal. L. Center Tax Inst. 1 (1968); H. Friendly, “The Dartmouth College Case and the Public-Private Penumbra,” 12 Tex. Q. (2d Supp.) 141 (1969). For a complete discussion of taxes as they relate to nonprofits, see J. Simon et al., “The Federal Tax Treatment of Charitable Organizations,” in W. Powell and R. Steinberg, eds., The Non-Profit Sector: A Research Handbook, 2d ed. (New Haven, Conn.: Yale U. Press, 2006).
55. The case of Bob Jones University v. United States highlights this [461 U.S. 574, 76 L.Ed. 2d 157, 103 S. Ct. 2017 (1983)]. In that case, Bob Jones University had a policy that forbade interracial dating and marriage—a policy based on religious philosophy. The university accepted no federal money. A group challenged the school’s tax-exempt status on the “modern” theory that tax-exempt status is actually federal support. The U.S. Supreme Court carefully avoided following this line of reasoning because if tax-exempt status is truly equivalent to federal support, then under the doctrine of separation of church and state no religious organization could enjoy tax-exempt status. Years later the university sought a ruling on the tax status of its museum. See Bob Jones University Museum and Gallery v. Commissioner of Internal Revenue, T.C. memo 1996–247.
56. The definition and the explanation of “federal financial assistance” are general ones. The definition given in the text is the one most commonly used in federal grant programs as of 1997. A museum needs to read carefully the definition and its interpretations that might apply to any specific support that the museum receives and that falls under this general category.
57. The certifications that follow are as they appear in the 1996 grant application instructions published by the National Endowment for the Humanities. These certifications tend to be standard among federal granting organizations, but current versions should be consulted for possible new statutory or regulatory language.
58. The Americans with Disabilities Act (ADA) of 1990 expanded protection for the disabled to all museums, not just those receiving federal financial assistance. For more information on access for the disabled, see Chapter XVI, “Access to the Collections,” Section E, “Access for the Disabled.”
59. See 45 C.F.R. § 1168.
60. See O.M.B. Circular A-129.
61. See 45 C.F.R. § 1169.
62. Pub. L. 101–601, 25 U.S.C. §§ 3001–3013 (1990). For a more detailed discussion of this statute, see Chapter IV, “The Acquisition of Objects: Accessioning,” Section D.6.f, “Museum Ethical Codes.”
63. 43 C.F.R. § 10.2 (iii).