Covers corporate charitable contributions

Gose, J. Gordon

English

UW Law Digital Commons (University of Washington)

Washington Law Review Volume 28 Number 3 Washington Legislation—1953 8-1-1953 Corporations J. Gordon Gose University of Washington School of Law Follow this and additional works at: https://digitalcommons.law.uw.edu/wlr  Part of the Business Organizations Law Commons Recommended Citation J. G. Gose, Washington Legislation, Corporations, 28 Wash. L. Rev. & St. B.J. 167 (1953). Available at: https://digitalcommons.law.uw.edu/wlr/vol28/iss3/4 This Washington Legislation is brought to you for free and open access by the Law Reviews and Journals at UW Law Digital Commons. It has been accepted for inclusion in Washington Law Review by an authorized editor of UW Law Digital Commons. For more information, please contact cnyberg@uw.edu. WASHINGTON LAW REVIEWANDSTATE BAR JOURNALVOLUME 28 AUGUST, 1953 NUMBER 3WASHINGTON LEGISLATION-1953In this series of articles, the faculty of the University of WashingtonSchool of Law analyzes the enactments of the Thirty-third Session ofthe Washington State Legislature. Coverage is limited to those statuteshaving the greatest significance to the practicing lawyer.CIVIL RIGHTSRacial Discrimination. The 1909 statute forbidding denial of service,etc., at "places of public resort" because of "race, creed, or color," hasbeen amended' by providing very broad definitions of all its terms,definitions which, however, are no broader than could reasonably begiven the general terms of the original statute.' The legislature failed toprovide a civil remedy to redress the private injury, which remedywould probably be a more potent deterrent than the threat of criminalprosecution for a misdemeanor, the sanction provided. The courts hadcreated a tort remedy to implement the old statue.' It is to be hopedthat the new statutb will not be construed as an implied legislativerepudiation of this judicial invention.JOHN B. SHoLLEY1 RCW 9.91.010 [RRS § 2686].2L. 1953, c. 87.8 In fact, the older statute had, because it was a criminal statute, been rathernarrowly construed, even in civil litigation. See Goff v. Savage, 122 Wash. 194, 210Pac. 374 (1922).'Anderson v. Pantages Theatre Co., 114 Wash. 24, 194 Pac. 813 (1921).CORPORATIONSCorporate Charitable Contributions. The Washington state legisla-ture in its 1953 session adopted an act specifically authorizing corpora-WASHINGTON LAW REVIEWtions to make contributions for charitable and other public purposes.'By this action Washington joins an ever increasing number of stateswhich have enacted similar legislation.2Although the Supreme Court of Washington has not had occasionto rule upon the propriety of charitable or similar contributions bycorporations in the absence of such statutory authorization, it is mostprobable that it would in large measure have recognized the proprietyof such corporate action without the aid of the statute. It is commonknowledge that present day corporations do contribute substantiallyto the support of charitable and public enterprises and of recent yearsthe legality of such contributions has not been seriously challenged.3Nevertheless, legal advisers to corporations are, in the absence of sta-tutory authorization, confronted by some doubts as to legality of suchcontributions, particularly where no direct benefit to the corporationis demonstrable.The historic and current rules on the subject have been thoroughlyreviewed in three articles published in the American Bar AssociationJournal in 1952.' In view of the comprehensive treatment of the sub-ject in those articles, a detailed survey of the problem here would belargely repetitive. In general, however, the problem involves the ultravzres doctrine. In the early history of the modern business corporation,there was much litigation concerning corporate action which was as-serted to be invalid because it was beyond the purposes and powers ofthe corporation. The courts were disposed to take a narrow view of theproper scope of corporate activity I Action not directly related to thebusiness operations of the corporation was frequently enjoined or de-clared unenforceable by or against the corporation. By the same lineof reasoning, corporate expenditures which were not directly designedI L. 1953, c. 213.2Bleicken, Corporate Contributions to Charities The Modern Rule, 38 A.B.A. JOUR-NAL 999 (1952) cites statutes of twenty-four states and Hawaii which in varyingterms authorize charitable contributions by corporations.8 Sec. 23 (q) of the Internal Revenue Code permits a corporation to deduct chari-table contributions up to five per cent of the corporation's net income in computing itsincome tax.6 Bleicken, Corporate Contributions to Charities" The Modern Rule, 38 A.B.A. JOUR-NAL 999 (1952) , Bell, Corporation Support of Education--The Legal Basis, 38 A.B.A.JOURNAL 119 (1952) , de Capriles and Garrett, Legality of Corporate Support to Educa-tson. A Survey of Current Development, 38 A.B.A. JoURNAL 209 (1952). See alsoCousens, How Far Corporations May Contribute to Charity, 35 Va. L. Rav. 401 (1949).5 An excellent example of the extremely strict views of an earlier period is Davis v.Old Colony Railroad Co., 131 Mass. 248, 41 Am. Rep. 221 (1881) where it was heldthat the railroad could not contribute to the support of a World Peace Jubilee andInternational Music Festival to be held in Boston, even though it appeared that pat-ronage of the railroad might be increased by the holding of these events.[AUGUSTWASHINGTON LEGISLATION-1953to produce corporate income were declared improper. Even as late asa generation ago, the study of corporate law was concerned in substan-tial part with the ultra vires doctrine. At the present time, however, theultra vires doctrine has declined in practical importance until it hasbecome a mere shadow of its former self.The reasons for the decline of the doctrine are several. The dispo-sition of present day corporate draftsmen is to broaden the statementof corporate purposes so as to permit a much wider variety of activitiesthan was indicated by the charters issued by state legislatures or ob-tained under earlier general incorporation statutes. It is, however,doubtful if this practice has done much to meet the charitable orpublic contribution problem, since charter provisions specifically deal-ing with that subject are seldom encountered. The real inroads on theultra vires doctrine so far as this specific problem is concerned havecome from a general change in judicial and popular views of the properrange of corporate activity. More and more the courts have extendedthe concept of implied corporate powers and, more to the point, rec-ognized that the welfare of the general community is a matter of inter-est and importance to the corporation which operates within it. Ineffect the modern judicial attitude is a paraphrase of the recently wide-ly quoted statement of Mr. Charles E. Wilson, the Secretary of Defense,to the effect that what is good for General Motors is good for the coun-try. The judicial praraphrases would be that what is good for the com-munity is beneficial to the corporation.There have of course always been and will continue to be contri-butions by coporations which, although broadly classified as charitable,are in fact quite directly related to the business activities of the cor-poration. For example, contributions by General Electric Companytoward research or even general study in schools of electrical engi-neering bear such a patent relationship to the corporate business as tosatisfy all but the most technical advocates of a rigid ultra 'vires rule.When, however, no such direct relationship exists as, for example, whenthe same corporation contributes to the support of a college generally,or to its department of philosophy, or to a children's hospital or tothe community fund, a larger view of corporate functions and permis-sible activities is necessary. Although custom has long since vindicat-ed financial contributions in some of these areas, community fund con-tributions, for example, doubts have remained as the possibility of1953]WASHINGTON LAW REVIEWdemonstrating apparent corporate benefits becomes more remote. Thestatute is designed to remove those doubts.Parenthetically it should be observed that such concern as may havebeen felt by corporate directors and their advisers is not entirely lim-ited to the ultra vires problem. Even assuming that the court mighthold a particular contribution to be intra vtres, there is always thepossibility of adverse criticism by corporate shareholders as to the wis-dom of he contribution both as to amount and the recipient.For the most part, statutory enactments authorizing contributionshave been quite brief. The Washington statute, on the contrary isquite detailed.8 The act (1) declares that charitable contributions madein accordance therewith are a valid and proper use of corporate fundsand are approved as a matter of public policy unless forbidden by ex-press charter provision, (2) states that such contributions shall bedeemed to inure to the benefit of the corporation and its shareholders;(3) authorizes contributions "from surplus or reserve funds" of suchamounts as the directors may deem proper; (4) names as eligible re-cipients the United States or any territory or possession thereof, anystate or political subdivision thereof or any corporation, communitychest fund or foundation organized for religious, charitable, scientific,literary or educational purposes; (5) limits contributions to any gov-ernmental recipient to those made for "public purposes", (6) specifiesthat private recipients must be non-profit organizations not substantial-ly engaged in "carrying on propaganda or otherwise attempting to in-fluence legislation", (7) validates prior gifts as fully as those madeafter the effective date of the statute.The limitation of the power to "surplus and reserve funds" is of someimportance. The use of these terms is perhaps unfortunate from a tech-nical standpoint. Legislatures have historically been prone to use simi-lar vague expressions in prescribing the conditions under which corpo-rations may lawfully pay dividends. The basic purpose of such statutesis to permit corporate distributions to shareholders only to the extentthat the value of the assets exceeds debts owing to third persons plusthe liability attributable to issued stock. Statutes attempting to estab-lish such a formula employ such terms as "surplus," "surplus profits,"''net earnings," "net profits," or approach the matter negatively byforbidding payment where the effect would be to "impair capital." Al-6 Note 1 supra. The Washington statute, in substantial part, appears to have beenpatterned on Sec. 23 (q) of the Internal Revenue Code, note 3 .-upra, although thereare substantial differences between the two statutes.[AUGUSTWASHINGTON LEGISLATION-1953though the same fundamental idea runs through all of these words orphrases, litigation inevitably arises in which some peculiar significanceis asserted to rest in the particular language used. The Washingtonstatute on dividends is quite detailed and specifies the conditions underwhich dividends may be paid with considerable certainty.' If, as ap-pears probable, the charitable contributions statute has the same mo-tivation, it would have been preferable to define the conditions formaking such contributions by reference to the dividend statute. In allprobability, however, the courts will reach the same result under thestatute as drawn. It is to be hoped that the use of the words "reserve" inaddition to "surplus" will not be interpreted to justify payments to theextent of "reserves" created for other specific purposes.Although -the statute, read literally, purports to validate all charitablecontributions to designated classes of recipients up to the amount of"surplus and reserve funds," it probably goes no farther than to over-come the possibility of ultra vires attacks. Certainly directors stillshould be required to strike some reasonable balance between dividendsand charitable contributions. It would be totally alien to the modernconcept of corporate contributions to charity to permit the directors topay all or the lion's share of corporate surplus to charity. To do sowould convert a commercial enterprise into an eleemosynary one. Thefamiliar limitation of resonableness must be read into the statute. Thereal purpose of the act is to relieve the directors of the necessity ofshowing some direct connection between the contribution and the busi-ness in which the corporation is engaged.It may also be doubted whether the act will permit directors to favorcharities in which they have strong personal interests to the exclusionof others. It takes no great imagination to envision shareholder com-plaint concerning contributions restricted to some particular charityin which the directors or their wives have an intense personal interestnot shared by the shareholders generally. Some diversification of con-tributions would no doubt be indicated where such objection appearsprobable.In the final analysis, the act is designed to aid solicitors for thosecharities which have, in the past, encountered some resistance becausetheir projects, though worthy, have no direct connection with a particu-lar corporate enterprise. They can no longer be turned down with theanswer that the corporation would like to contribute but that it would7 RCW 23.24.020, 2324.030, 2324.040 [RRS § 3803-24].1953]WASHINGTON LAW REVIEWbe contrary to law for it to give to a particular charity, because itsactivities bear no resemblance to the corporate business. Boards of di-rectors are now assured that the type of charity is of no moment, solong as the recipient meets the general statutory standards. The chil-dren's hospital, the liberal arts college and the humane society arequalified to receive charitable contributions from corporations whosebusiness enterprises may be restricted to the manufacture of rubbertires or cosmetics or nuts and bolts. Whether such corporations are tocontribute to such charities is, within reasonable limitations as toamount, a matter of director discretion unfettered by the ultra viresdoctrine.J. GoRnoN GosECREDITORS' RIGHTSLabor Liens-Restaurant, Hotel, Tavern, Etc. Employees. Chapter205 gives to persons performing labor in the operation of "any restaur-ant, hotel, tavern, or other place of business engaged in the selling ofprepared foods or drinks, or any hotel service employee" a lien on theearnings of and the property used in the operation of, the "said busi-ness." It will require litigation to determine precisely what businessinstitutions fall within the statutory coverage. The reference to restaur-ants and taverns is clear enough. The reference to "hotel--or any hotelservice employee" is unclear. Does it mean that all hotel employees arebeneficiaries of the statute, or only those engaged in "service" employ-ment or employment concerned with the selling of food or drink?The statutory language "or other place of business engaged in theselling of prepared foods or drinks" is a particularly fruitful source ofcontroversy The statute does not read "engaged solely in the selling",it refers to hotels, whose food and drink dispensing business is but apart of the overall activity. What of other institutions a part of whoseoperations is the sale of food or drinks? The usual so-called "drug"store is an example. So is the department store or other mercantileestablishment which operates a soda fountain, lunch counter or diningroom. So is the establishment which operates a cafeteria for its em-ployees. What of the business institution on whose premises a foodor drink vending machine is situated?That counsel who represents employees of employers like these willclaim the benefits of the statute for their clients would seem fairlycertain. Employees of establishments like grocery stores, markets andbaked goods shops may be tempted too, since these sell food and possi-[AUGUST

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