A Corporate Form of Freedom: The Emergence of the Nonprofit Sector.

Author:Sidel, Mark


The burgeoning field of nonprofit and philanthropic law has a new and superb history in Norman Silber's pathbreaking A Corporate Form of Freedom: The Emergence of the Nonprofit Sector. In confronting "the history of efforts to control the creation and permissible purposes for nonprofit corporations by states, and ... the relocation of these efforts to the Internal Revenue Service" (p. 5), Professor Silber effectively delineates the rich history of our ambiguous, often conflicted attempts to regulate the American nonprofit sector, and points clearly to the ways in which history influences the current complexities of state regulation. From a discredited era of state intrusion into the purposes and goals of nonprofit formation, a history admirably analyzed by Silber's volume, we have now turned to an inconsistent pattern of several decades of post-registration state monitoring of the nonprofit sector--in some jurisdictions a virtual ceding of nonprofit monitoring to the Internal Revenue Service, and in others a new state activism well worth exploring.

The struggle to effectively balance oversight with freedom in the regulation of the American nonprofit sector is a key theme of Silber's work. This is, of course, a long-standing problem in American law. Because of continuing concerns for the efficacy of IRS oversight, limitations on the right of citizens to have standing to sue upon misconduct by nonprofits, and a virtual absence of effective means of self-regulation in the nonprofit sector, states--led by New York--have at times aggressively exercised their powers to monitor, oversee and regulate the nonprofit sector. At least one key state appears to be doing so now. Given the failure, or at least the limitations, of other oversight means, it is perhaps inevitable that the states should step into this fray. That new state activism is well worth exploring in its own right--but it is also not without significant problems, inconsistencies, and limitations, as this Review indicates. The time has perhaps now arrived to put the new state activism into an analytical framework that can help determine its utility in the regulation of the rapidly growing and now considerably more complex American nonprofit sector.


    Today the American nonprofit sector is, in Silber's words:

    integral to the national economy and a valued part of [our] social fabric. ... [It] embodies the philanthropic goodness, conviviality, cultural excitement, and democratic spirit of the American people. ... [and] has provided a valued social location in which groups can operate without pecuniary obsessions and with measures of success that are not necessarily related to financial profitability. (p. 2) Yet organizations within the sector do not--perhaps should not--coordinate activities and policies particularly effectively with each other; that joyous chaos may be one of the chief attributes of American civil society. The issues are legion: misconduct in the nonprofit sector, such as the United Way debacle of the early 1990s; (1) coordination and relief problems after September 11, including the problems faced by the American Red Cross; (2) a continuing convergence between nonprofit and for-profit organizational forms and goals; weak self-regulatory mechanisms in the sector; and many others. We have little in the way of direct, resource-favored supervisory power to rely upon even if we would wish to do so. The Internal Revenue Service remains an uneven regulator of the sector, and many states devote very few personnel or resources to nonprofit oversight. (3)

    And so, at least in many states, our legal regime for the nonprofit sector works well in the good days and badly in the tougher times, when some form of closer observation might be useful. But even in the better days, the weak state of nonprofit regulation sparks exposes of nonprofit deficiencies (4) and reflexive calls to tighten regulation, often beginning with moves to reimpose property taxation on nonprofits (5) or to over-regulate--in Silber's words, "threaten[ing] to eliminate all of the important privileges for all organizations, not just the abusers" (p. 4; italics omitted). The evolution of nonprofit regulation is the primary topic of Professor Silber's book and may shed some light on the future of nonprofit oversight.

    Early in our history, state legislatures retained power over the American charitable sector through the power to charter nonprofit corporations. In the mid-nineteenth century, state legislatures "gave judges in some states and bureaucrats in others the primary authority to stand guard at the main entrance to the sector and to monitor organizational changes to existing groups" (p. 5). Much of Silber's book is about the judicial strand of this second period in nonprofit regulation, when state legislatures ceded substantial control of gate-keeping and monitoring functions to judiciaries in some states and executive branch officials in others. This long period, from about the 1850s until the 1950s was marked in judge-dominant states, by a "vigorous expan[sion]" of judicial power, and, at least in New York, by "[holding] onto a discretion which became so strong that their personal reservations--religious, political, class, cultural, racial, and social--as a matter of legal doctrine were sufficient to sanction disapproval" (p. 5). Silber's volume is at its best in exposing the political, religious, racial, social, and cultural biases that helped to guide judicial decisions on nonprofit registration in New York in the late nineteenth century and the first half of the twentieth century. Based loosely on the statutory guide that judges approve only nonprofit applications with "lawful" purposes, judicial discretion developed through rejection of blanket approval of charters and the cultivation of a "jurisprudence of privilege which required applicants further to demonstrate that their conduct would be socially beneficial, from the judge's perspective" (p. 32).

    Silber traces a string of these cases, beginning with the rejection of Augudath Hakehiloth, a social services and mutual aid association for immigrants, whose application indicated that its meetings would occur on Sundays. "A thing may be lawful, and yet not laudable," wrote the trial court judge to whom the approval petition was brought under the New York General Laws of 1895. (6) Membership meetings on Sunday violated "the public policy of the state, if not to [the] letter of its law." (7) In the years that followed, New York's judges expanded their interpretation of the language of the 1895 Membership Corporation Law, which in Silber's words "explicitly required ... judicial approval of [nonprofit] certificates," and allowed judicial interpretation of the eligibility requirement of "any lawful purpose" contained in the statute (p. 35). The judicial role would not be merely ministerial, but substantive as well:

    The Legislature has prescribed simple means by which an artificial entity may be created, and, when created, endowed with certain powers and privileges. What more reasonable than that, before imparting legal life, there should be judicial scrutiny of those qualifications which the law makes essential, and not a mere perfunctory passing on what may be presented. (8) The implementation of this doctrine by New York judges took several forms. A white Elks organization received judicial support in its attempt to block the registration of a black Elks organization, ostensibly as a consumer protection device to avoid confusion in organizational names. (9) But, as Silber points out, "[c]loaking obtuseness as impartiality allowed the court to use the incorporation law to perpetuate the social and cultural separation of the races" (p. 38). Other cases extended the rationales for judicial intervention, especially following the first World War and during the Red Scare of the 1910s and 1920s. Allowing a Catalonian Nationalist Club to incorporate in New York in 1920 would not, in the words of the deciding judge, reflect "that the great need of the time is the teaching of American `culture'" rather than the slowing of "homogeneity." (10) The amended certificate of the Lithuanian Worker's Literature Society, which was made up of Socialist Party members and sought to publish socialist materials, was disapproved because it would publish "propaganda, which our Penal Law makes criminal and even felonious." (11) Judicial and executive intervention sought to govern the extension of nonprofit corporations in certain business activities by asserting their "own role in determining the boundaries for nonprofit corporate activities and widen[ing] those boundaries to allow new opportunities for business activities, provided they were technically compliant with established rules." (12)

    Silber provides other useful examples of the perils of the discretionary period as well, making a strong argument that judges and their biases predominated in nonprofit chartering decisions in New York and other states between the mid-nineteenth and mid-twentieth centuries (pp. 48-81). As Silber shows at least briefly, the stereotypes and political views that New York judges reflected were also found in other state courts (p. 5). But then Silber attempts to broaden the applicability of these state court opinions: "For a considerable part of American history, therefore, the thought of officials about what was a proper role for nonprofits can be illuminated by analyzing the actions of common law judges in New York, Pennsylvania, and the other states in which reported opinions can be found" (p. 5). What of the other states, in which "legislatures gave ... bureaucrats ... the primary authority...

To continue reading