Court Opinion

ID: 9460582
Source: CourtListenerOpinion
Date Created: 2023-08-04 21:55:05.621571+00
Date Added: 2024-06-11T17:36:41.714328
License: Public Domain

FRIENDLY, Circuit Judge,
with whom HAYS and MULLIGAN, Circuit Judges, join, dissenting from the denial of reconsideration en banc:
As stated in the panel opinion, this appears to be the first claim that, because of tax exemption, a denial of grants by private charitable foundations could constitute government action, for which an aggrieved applicant may obtain damages and declaratory or injunctive relief under the equal protection clause of the Fourteenth Amendment or its embodiment in the due process clause of the Fifth. Somewhat incredibly, the panel thought an affirmative answer to be so obvious as to deserve only a single paragraph of a per curiam opinion, slip opinion 573, 576, decided December 4, 1973. On December 12, 1973, I requested a poll of the judges in regular active service on reconsideration en banc; after several judges had voted for this, the panel requested that the vote be deferred pending preparation of a revised opinion. The new opinion, finding a variety of added reasons to reaffirm the previous conclusion, was not circulated until March 1, 1974. While it is even stronger against the defendants than the per curiam, in my view it is analytically unsound, dangerously open-ended, and at war with controlling precedent both in the Supreme Court and in this circuit. Indeed, with all deference, it seems to *637me the most ill-advised decision with respect to “state action” yet rendered by any court and unless corrected will be the source of enormous damage to the great edifice of private philanthropy which has been one of this country’s most distinctive and admirable features. Although the defendants on remand may somehow manage to escape from the net the panel has woven1 or, more likely, to show that plaintiff’s criticisms are unfounded, the harm done by this opinion will remain. It is therefore most regrettable that, despite the request of half its present complement of judges now in regular active service, the court should decline reconsideration en banc.
I.
The panel’s fundamental error is its loose characterization of the “state action” doctrine. In holding that the federal and state tax exemptions provided to charitable foundations render them subject to civil rights suits challenging their policy decisions in the selection of beneficiai’ies, the panel relies primarily on three-judge court cases that have struck down tax exemptions for institutions practicing the crudest form of racial discrimination — the exclusion of blacks from attendance in schools or membership in clubs of a public nature.2 In these cases, however, the plaintiffs had sued federal or state officials to force revocation of tax benefits. The challenged action was clearly government action; the only question was whether that action sufficiently promoted private racial discrimination to render the decisions impermissible for a government officer, see Norwood v. Harrison, 413 U.S. 455, 93 S.Ct. 2804, 37 L.Ed.2d 723 (1973). In this case, by contrast, the plaintiff has sued the foundations themselves. While analysis of these two problems has occasionally overlapped, see McGlotten v. Connally, 338 F.Supp. 448, 455 (D.D.C.1972) (three-judge court); Bittker & Kaufman, Taxes and Civil Rights: “Constitutionalizing” the Internal Revenue Code, 82 Yale L.J. 51, 61-63 (1972), there is a clear distinction between them. A holding that an otherwise private institution has become an arm of the state is much broader and can have far more serious consequences than a determination that the state has impermissibly fostered private discrimination. The foundation might be exposed to damage claims for prior discriminatory conduct and could be required by a court to make decisions not only as to the disposition of its charitable donations but in the selection of its employees in accordance with the restrictions properly imposed on governmental agencies. Indeed, it might not be able to escape the mark of government action even by disclaiming future tax benefits; the courts might hold that years of tax benefits had rendered the foundation’s status as an agent of the state irrevocable, see Bittker & Kaufman, supra, at 60-61.
*638II.
The implications of this decision for institutions receiving tax benefits of various sorts are staggering. Simply because of tax exemptions, private social agencies, community centers, institutions of higher education, homes for the young and the aged, endowed by private donors for the sole or preferential benefit of particular creeds or races, must open their doors equally to all, with every decision subject to judicial reexamination, even though this may impair or destroy the very purpose which led the donor to endow them. Beyond this, if the tax exemption given to charitable foundations converts their giving into government action, I see no really tenable basis for distinguishing the tax deductions allowed individuals and corporations.
Because of its broad availability, a tax exemption, in itself, has never previously been thought to impose the government’s imprimatur sufficiently to convert the recipient into a de facto arm of the government. An exemption or other tax benefit, available to a wide range of institutions, has always been regarded as the least possible form of government support, except for the police and fire protection provided all citizens. The Chief Justice, writing for five Justices, said in Walz v. Tax Commission, 397 U. S. 664, 675, 90 S.Ct. 1409, 1415, 25 L. Ed.2d 697 (1970), “no one has ever suggested that tax exemption has converted libraries, art galleries, or hospitals into arms of the state or put employees ‘on the public payroll.’ ” Still less had anyone ever suggested this, prior to the decision here, with respect to foundations, many of which are simply an incorporation of an individual’s pocketbook.
There is no force in the panel’s reliance on the government’s regulation of foundations to prevent abuse of the tax exemption. The “state action” cases that have stressed the heavy presence of government regulation are those in which private institutions are carrying out state policy against the plaintiffs 3 or in which the state is benefiting directly from the private activity. In Powe v. Miles, 407 F.2d 73, 81 (2 Cir. 1968), we rejected the argument that New York’s regulation of educational standards in private schools, colleges and universities made the disciplinary actions of Alfred College the acts of the state. That argument, we noted,
overlooks the essential point — that the state must be involved not simply with some activity of the institution alleged to have inflicted injury upon a plaintiff but with the activity that caused the injury. Putting the point another way, the state action, not the private action, must be the subject of complaint.
The Supreme Court, in Moose Lodge No. 107 v. Irvis, 407 U.S. 163, 176-177, 92 S.Ct. 1965, 32 L.Ed.2d 627 (1972), made much the same point in discussing the regulations of the Pennsylvania Liquor Control Board, which applied to the Moose Lodge. “However detailed this type of regulation may be in some particulars,” the Court wrote, “it cannot be said to in any way foster or encourage racial discrimination. Nor can it be said to make the State in any realistic sense a partner or even a joint venturer in the club’s enterprise.” The fact that Congress has deemed it necessary in I. R.C. § 501(c)(3) to limit the tax exemption to
any . . . foundation, organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes, or for the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private shareholder or individual, no substantial part of the *639activities of which is carrying on propaganda, or otherwise attempting to influence legislation, and which does not participate in, or intervene in (including the publishing or distributing of statements), any political campaign on behalf of any candidate for public office
gives no encouragement to racial discrimination. And the detailed reporting and record-keeping requirements imposed upon charitable foundations have been established to ensure that the foundations, like all taxable entities, benefit from tax advantages only when they meet the statutory qualifications.4 The panel’s attempt to blur this essential distinction between a regulatory scheme in which a private institution plays a part in an offensive government policy and. one which is designed to prevent the institution’s acting in an abusive way runs counter to our recent decisions in Shirley v. State National Bank of Connecticut, 493 F.2d 739 (2 Cir. 1974), and Bond v. Dentzer, 494 F.2d 302 (2 Cir. 1973). As Judge Mulligan wrote for us in the former, 493 F.2d 739, at 743, the “enactment was ameliatory not regressive; it did not ‘move in’ on the plaintiff or other buyers, but rather on the instalment sellers.” Private action does not become state action simply because government regulation has not gone so far as a plaintiff would like.
The panel’s fleeting treatment of the “public function” argument is wholly unconvincing. Private charitable foundations are light years away from the “company town” analysis of Marsh v. Alabama, 326 U.S. 501, 66 S.Ct. 276, 90 L.Ed. 265 (1946), and Amalgamated Food Employees Union Local 590 v. Logan Valley Plaza, Inc., 391 U.S. 308, 88 S.Ct. 1601, 20 L.Ed.2d 603 (1968). Compare Lloyd Corp. v. Tanner, 407 U.S. 551, 92 S.Ct. 2219, 33 L.Ed.2d 131 (1972). Far less than the university which we held not to be an arm of the state in Powe v. Miles, supra, 407 F.2d at 80, do they “concern activities or facilities so clearly governmental in nature that the state cannot be permitted to escape responsibility by allowing them to be managed by a supposedly private agency.”
Whereas the panel blows the factors favoring a finding of state action out of all proportion in the context here presented, it unduly minimizes a factor pointing strongly the other way. As we said in Wahba v. New York University, 492 F.2d 96, at 102 (2 Cir. 1974), courts should pay heed, in testing for government action, to the “value of preserving a private sector free from the constitutional requirements applicable to government institutions.” An organization should not have to demonstrate an “associational or other constitutional” claim to privacy, as the panel suggests, before the courts will take cognizance of the social values that private eleemosynary institutions can promote. The interest in preserving an area of untrammeled choice for private philanthropy is very great. Even among philanthropic insti*640tutions, the activities of charitable family foundations, receiving no government benefit other than tax exemption, should be the last to be swept, under a “sifting of facts and exercise of judgment,” within the concept of state action. There are hundreds of thousands of foundations ranging from the giants to the pigmies. While most foundations, particularly large ones, give mainly to institutions serving all races and creeds, although hardly in the completely nondiscriminatory way required of public institutions, I see nothing offensive, either constitutionally or morally, in a foundation’s choosing to give preferentially or even exclusively to Jesuit seminaries, to Yeshivas, to black colleges or to the NAACP. Indeed, I find it something of a misnomer to apply the pejorative term “racial discrimination” to a failure to make a charitable gift. One of the most inexplicable passages in the opinion is in footnote 17, where after noting the conclusion of the Peterson Commission that the “new rationale views foundations as more efficient than government in that foundations can be more flexible and more innovative than government” because of “bureaucratic or majoritarian constraints” applicable to the latter, the opinion concludes that foundations should be subject to the same constraints applicable to government itself. Moreover, as already indicated, if the tax exemption makes this state action subject to judicial scrutiny to assure lack of discrimination, so must the tax deduction with respect to individual and corporate gifts. Donors are not going to be willing to spend their time and money, or to have directors and staffs of foundations spend theirs, in defending actions like this one. If the federal courts take over the supervision of philanthropy, there will ultimately be no philanthropy to supervise.
III.
As said at the outset, what makes the panel’s opinion so peculiarly unfortunate is that the evil will in no way be eradicated by a finding on remand that the defendants have not engaged in discrimination. Despite this, the decision will spawn countless civil rights suits against charitable foundations by disgruntled minority applicants, add unnecessarily to the crushing burden on the district courts and the courts of appeals, and, worst of all, seriously discourage private philanthropy by subjecting donors to the necessity of justifying their decisions in court. Even an impeccable history of fairness will not protect against trials in actions by those who choose to think the inevitable turndowns were based on racial grounds. The record in this case suggests that several of the defendant foundations commendably have given liberally to black and other minority causes. None have any policy against such gifts. Those that are in the business of granting scholarships have granted them to blacks. But this record will not save these foundations, and many others in later suits, from the necessity of full factual exploration and explanation of just what they have done over the years, with the attendant burdens on foundation directors and staffs and the courts.
Doubtless because of their confidence in prevailing on the merits, the defendants did not seek certiorari from the per curiam decision of last December. Since this case has been continually sub judice by this court and the substituted decision seems to me to go even further down the state action road, it may not be too late to do this, see F.T.C. v. Colgate-Palmolive Co., 380 U.S. 374, 384, 85 S.Ct. 1035, 13 L.Ed.2d 904 (1965). And although the Supreme Court does not generally grant certiorari with respect to non-final judgments of the courts of appeals, it does so when convinced that “there is some important and clear-cut issue of law that is fundamental to the further conduct of the case and that would otherwise qualify as a basis for certiorari,” see Stern & Gressman Supreme Court Practice, § 4.19 at 180-81 (4th ed. 1969), see Land v. Dollar, 330 U.S. 731, 734 n. 2, 67 S.Ct. 1009, 91 L. Ed; 1209 (1947), and Larson v. Domes*641tic & Foreign Commerce Corp., 337 U.S. 682, 683 n. 3, 69 S.Ct. 1457, 93 L.Ed. 1628 (1949). It is to be hoped, in any event, that other circuits will not follow this disastrous course.
Judge Feinberg also dissents from the denial of reconsideration en banc.

. Although the panel technically did not make a finding of government action as to the defendant foundations in this case, I cannot see how the district court can read the substituted opinion as leaving it any real leeway.
This dissent does not apply to the holding with resj)ect to the defendant Buffalo Foundation, which I agree falls within the principle of the Girard College decisions, Pennsylvania v. Board of Directors of City Trusts, 353 U.S. 230, 77 S.Ct. 806, 1 L.Ed.2d 792 (1958), and Pennsylvania v. Brown, 392 F. 2d 120 (3 Cir.), cert. denied, 391 U.S. 921, 88 S.Ct. 1811, 20 L.Ed.2d 657 (1968).

. 'Significantly, the only one of these four cases cited in the per curiam to have been approved by the Supreme Court was Green v. Connally, 330 F.Supp. 1150 (D.D.C.), aff’d mem. sub nom. Coit v. Green, 404 U.S. 997, 92 S.Ct. 564, 30 L.Ed.2d 550 (1971), which dealt with tax exemption for a lily-white Southern school and struck down the exemption on statutory grounds. The Oreen case is supported in its result, if not entirely in its reasoning, by Poindexter v. Louisiana Education Comm’n for Needy Children, 296 F.Supp. 686 (E.D.La.), aff’d mem., 393 U.S. 17, 89 S.Ct. 48, 21 L.Ed.2d 16 (1968), and Brown v. South Carolina Board of Education, 296 F.Supp. 199 (D.S.C.) (three-judge court), aff’d mem., 393 U.S. 222, 89 S.Ct. 449, 21 L.Ed.2d 391 (1968).

. Even in such a case the majority refused to find state action in Coleman v. Wagner College, 429 F.2d 1120 (2 Cir. 1970), without further proof that college administrators considered that a state statute required them to act against the plaintiffs. There could be no such finding with respect to the statutes regulating tax exemption for foundations.

. The panel attaches great weight to § 4945, added to the Code in 1969, and particularly the requirement, § 4945(d)(3), (g), that individual grants for “travel, study, or other similar purposes” be awarded “on an objective and nondiscriminatory basis.” As the legislative history and the regulations make clear, this provision was intended to bar the use of private foundations as a device to channel income to previously designated individuals or to unqualified persons whose receipt of foundation grants is suspiciously inconsistent with the putative purpose for which tax exemption is granted — in other words to prevent use of a foundation for gifts that would not be deductible if made by an individual or corporation. The “objective and nondiscriminatory” requirement applies only among the members of the designated charitable class. As T.R. § 53.4945-44(b)(5) Example (2) illustrates, the statutory standard permits the charitable class to be composed of the members of a single ethnic group so long as the purpose of the program is legitimate. Indeed the panel properly concedes “There is no evidence to the effect that Congress sought to prevent foundations from choosing on the basis of race between two public uses of foundation assets.” In any event this provision could not support a holding of government action with respect to foundation grants to other than individuals.