UNITED STATES COURT OF APPEALS FOR THE SECOND CIRCUIT
decided: December 4, 1973.
REV. DONALD L. JACKSON, PLAINTIFF-APPELLANT,
THE STATLER FOUNDATION ET AL., DEFENDANTS-APPELLEES
Appeal from dismissal of pro se civil rights complaint in the United States District Court for the Western District of New York, John T. Curtin, Judge. Affirmed in part, reversed in part and remanded.
Smith, Mansfield and Oakes, Circuit Judges. Friendly, Circuit Judge, with whom Hays and Mulligan, Circuit Judges, join, dissenting from the denial of reconsideration en banc.
Smith, Circuit Judge:
This is an appeal from an order of the United States District Court, Western District of New York, John T. Curtin, Judge, dated March 7, 1973, dismissing appellant's complaint on the pleadings. We reverse in part, affirm in part and remand for further proceedings.
Appellant Reverend Jackson brought suit against thirteen charitable foundations located in the Buffalo, New York area alleging racial discrimination against himself, his children and his foundation in that the appellee foundations refused to hire him as a director of their foundations, refused to give scholarships to his children and refused to grant money to his foundation, all for reasons of race. Appellant also challenged an alleged pattern of discriminatory employment and investment by the foundations. Reverend Jackson sought injunctive and declaratory relief, damages, the revocation of appellees' tax exempt status under the Internal Revenue Code, and an order directing the foundations to surrender all their assets to the United States Treasury. Judge Curtin dismissed the complaint, ruling that insofar as appellant's claims were based on 42 U.S.C. § 1983, Moose Lodge No. 107 v. Irvis, 407 U.S. 163, 32 L. Ed. 2d 627, 92 S. Ct. 1965 (1972), precluded a finding of "state action" and thus required dismissal, that to the extent that the claims were based on 42 U.S.C. §§ 1981 and 1985 there were insufficient facts stated in the complaint, and that Reverend Jackson had no standing to challenge appellees' tax exemptions.
Throughout these proceedings, Reverend Jackson has appeared pro se. This fact no doubt explains much of the confusion in his complaint and in his briefs. That confusion is compounded by appellant's shotgun approach to this litigation, an approach which casts some doubt on the substantiality of his claims.*fn1 Still, courts must construe pro se complaints generously, Haines v. Kerner, 404 U.S. 519, 30 L. Ed. 2d 652, 92 S. Ct. 594 (1972), and it is for the district court and not for us to judge factual issues.
Although a liberal reading of appellant's complaint evidences a sufficient basis to give him standing to challenge appellees' tax exemptions, see, McGlotten v. Connally, 338 F. Supp. 448, 452 (D.D.C. 1972) (three-judge court), and Falkenstein v. Department of Revenue, 350 F. Supp. 887, 888 (D. Ore. 1972) (three-judge court), appeal dismissed, Oregon State Elks Asso. v. Falkenstein, 409 U.S. 1099, 93 S. Ct. 907, 34 L. Ed. 2d 681 (1973), the complaint, insofar as it seeks revocation of the appellees' federal and state tax exempt status, is deficient on its face for failure to join the Secretary of the Treasury and the New York State Tax Commissioner, who would be indispensable parties to a suit for such relief.*fn2 Moreover, appellant has not alleged facts which would give him standing to challenge past employment and investment patterns, failing to show how he personally has been affected by these practices.*fn3 Neither has he displayed an explicit intention to sue in a representative capacity. Since appellant is appearing pro se, we leave these matters for the district court to deal with on remand, without prejudice to motions to join necessary parties and to amend the complaint to allege additional facts. Further, the district court should consider requesting that counsel represent appellant. In this regard, we note that if appellant's foundation is incorporated it may only appear with counsel. Shapiro, Bernstein & Co. v. Continental Record Co., 386 F.2d 426 (2d Cir. 1967).
This court has jurisdiction to consider appellant's challenge to appellees' tax exemptions.*fn4 See, McGlotten, supra, at 452-53.
Appellant's § 1983 claim against the foundations as well as the tax exemption challenges require us to wade "into the murky waters of the 'state action' doctrine."
The court below dismissed appellant's § 1983 claim on the authority of Moose Lodge, supra. That decision involved a suit by a guest of a member of the lodge who was refused service because he was black. He brought suit under § 1983 against both the lodge and the Pennsylvania Liquor Authority, which had granted a liquor license to the lodge. The Supreme Court held that the grant of the license did not constitute "state action," distinguishing Burton v. Wilmington Parking Authority, 365 U.S. 715, 6 L. Ed. 2d 45, 81 S. Ct. 856 (1961), where "state action" had been found on the grounds that the discriminating Eagle Restaurant constituted part of the Parking Authority project. The Moose Lodge Court emphasized that Pennsylvania did not benefit from the lodge as Delaware had benefited from the restaurant (in terms of the enhanced viability of the Parking Authority), that the lodge was located on private property whereas the restaurant had been on public land, and that the lodge was a "private club" whereas the restaurant had been open to the general public, save black people.
Whether private conduct which is in some manner aided by the actions of the State is or is not "state action" for the purposes of the Fourteenth Amendment is not an easy question.*fn5 "Only by sifting facts and weighing circumstances can the non-obvious involvement of the State in private conduct be attributed its true significance. Burton . . . at 722." Moose Lodge, supra, at 172. This appears to be the first case in which the issue of the status of tax-exempt "private foundations"*fn6 has been raised.
Prior case law while not directly controlling is not, of course, unenlightening. It is noteworthy that several courts have considered claims that the activities of tax-exempt organizations constitute "state action." Significantly, these cases divide into two groups: Where racial discrimination is involved, the courts have found "state action" to exist; where other constitutional claims are at issue (due process, freedom of speech), the courts have generally concluded that no "state action" has occurred. Compare, McGlotten, supra ;*fn7 Pitts v. Department of Revenue, 333 F. Supp. 662 (E.D. Wisc. 1971) (three-judge court); Falkenstein, supra ; Smith v. YMCA of Montgomery, 316 F. Supp. 899 (M.D. Ala. 1970), modified, 462 F.2d 634 (5th Cir. 1972), with Powe v. Miles, 407 F.2d 73 (2d Cir. 1968); Browns v. Mitchell, 409 F.2d 593 (10th Cir. 1969); Chicago Joint Board, Amalgamated Clothing Workers v. Chicago Tribune Co., 435 F.2d 470 (7th Cir. 1970), cert. denied, 402 U.S. 973, 29 L. Ed. 2d 138, 91 S. Ct. 1662 (1971); Bright v. Isenbarger, 314 F. Supp. 1382 (N.D. Ind. 1970), aff'd 445 F.2d 412 (7th Cir. 1971) and Marker v. Schultz, 158 U.S. App. D.C. 224, 485 F.2d 1003 (D.C. Cir. 1973). See also, Walz v. Tax Commission, 397 U.S. 664, 25 L. Ed. 2d 697, 90 S. Ct. 1409 (1970). This dichotomy is explained in part by the double "state action" standard which has been recognized -- one, a less onerous test for cases involving racial discrimination, and a more rigorous standard for other claims. See, e.g., Lefcourt v. Legal Aid Society, 445 F.2d 1150, 1155 n. 6 (2d Cir. 1971); Wolin v. Port Authority, 392 F.2d 83, 89 (2d Cir. 1968), cert. denied, 393 U.S. 940, 21 L. Ed. 2d 275, 89 S. Ct. 290 (1969); Powe, supra, at 81-82; Pitts, supra, at 668-69. However, these results may also be explainable in terms of facts and circumstances peculiar to each case.
A review of the "state action" case law suggests five factors which are particularly important to a determination of "state action": (1) the degree to which the "private" organization is dependent on governmental aid; (2) the extent and intrusiveness of the governmental regulatory scheme; (3) whether that scheme connotes government approval of the activity or whether the assistance is merely provided to all without such connotation; (4) the extent to which the organization serves a public function or acts as a surrogate for the State; (5) whether the organization has legitimate claims to recognition as a "private" organization in associational or other constitutional terms.
Each of these factors is material; no one factor is conclusive.
While the record before us with regard to the particular defendant foundations is meager, it does appear that private tax-exempt foundations in many instances may well involve "state action."
The defendant foundations no doubt receive substantial assistance in the form of tax exemptions. Green v. Kennedy, 309 F. Supp. 1127, 1134 (D.D.C. 1970) (three-judge court); Norwood v. Harrison, 413 U.S. 455, 37 L. Ed. 2d 723, 730-33, 93 S. Ct. 2804 (1973); Marker, supra, at 1006, n. 4; McGlotten, supra, at 456, n. 37 and 459, n. 58; Bob Jones University v. Connally, 341 F. Supp. 277, 281 (D.S.C. 1971), rev'd on other grounds, 472 F.2d 903, 906 (4th Cir. 1973), cert. granted, 414 U.S. 817, 38 L. Ed. 2d 49, 94 S. Ct. 116, 42 U.S.L.W. 3194 (1973). It is highly unlikely that they could sustain their programs at anywhere near present levels without the exemptions.*fn8 It might well be that, absent these exemptions, these foundations would never have been established.
It appears also that these foundations are subject to a "sustained and detailed administrative relationship . . . for enforcement of statutory . . . standards. . . ." Walz, supra, at 675.
The 1969 Tax Reform Act requires every tax-exempt foundation to file an annual information return with the Internal Revenue Service.*fn9 The annual report must be made available for public inspection for a period of 180 days after newspaper notice of its availability.*fn10 The Internal Revenue Service has assured Congress that it is closely scrutinizing the activities of "private foundations."*fn11 The 1969 Tax Reform Act imposed an excise tax on the net investment income of private exempt foundations, the revenue to finance the surveillance mechanisms contemplated by the Act.*fn12 The Tax Reform Act also mandated certain changes in the charters of exempt foundations. Foundation charters must now include provisions which expressly require adherence to the substantive limitations on foundation activity provided for in the Act.*fn13
The most relevant of the substantive limitations is 26 U.S.C. § 4945(a)-(d) and (g).*fn14 These sections provide that a foundation which gives grants to individuals must do so in an "objective and non-discriminatory" manner. If it does not do so, the foundation and the manager who approved that grant are respectively subject to an "excise tax" of 10% and 2 1/2% of the offending grant. If the offending grant is not recovered to the extent that recovery is possible by the foundation within a certain time, the fines are increased to 100% and 50%. These provisions would appear to apply to Reverend Jackson's complaint of discrimination in the failure to award scholarships to his children. These provisions would also appear to oppose the notion that "state action" is present.
However, these appearances may be deceiving. The abuse which Congress sought to curb by means of these provisions was the practice of making grants to the well-connected few, not a practice of failure to make grants to candidates selected out for suspect reasons. Professor Bittker puts the statute in historical context:
Section 4945's restrictions on "individual grants" by private foundations are also best viewed, if one wants to be realistic, as a bit of legislation whose general form belies its specific origin. If the Ford Foundation had not made its famous grants to members of Senator Kennedy's staff when they left their federal jobs after his assassination, it is not likely that the Senate Finance Committee would have concluded that
existing law does not effectively limit the extent to which foundations can use their money for "educational" grants to enable people to take their vacations abroad, to have paid interludes between jobs, and to subsidize the preparation of materials furthering specific political viewpoints.
Bittker, Should Foundations Be Third-Class Charities?, in The Future of Foundations, p. 132, 157-58.
The House Report stated:
The bill also prohibits nonobjective grants to individuals. This provision does not affect private foundations which engage in extensive programs involving grants to individuals chosen as a result of open competitions or on any other nondiscriminatory programmatic basis. Also, certain foundations have developed an expertise in grantmaking that is utilized by other private foundations. These developments in the private foundation field are in accord with the concern of your committee that expertise and fairness replace whim and personal relationships in such matters.
H.R. Rep. No. 91-413, 91st Cong., 1st Sess. 34, U.S. Code Cong. & Admin. News, p. 1679 (1969).
The remedy provided tracks this reading of Congressional intent: Since the evil was awarding grants for invalid reasons, the remedy is the revocation of the grant. If the evil were a failure to award a grant for invalid reasons, revocation would make little sense as a remedy. In accord, Treas. Reg. § 53.4945-4(b) (5).
Congress attempted in § 4945 to prevent nepotism and favoritism in grantmaking, examples of the use of foundation assets for private purposes. 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.*fn15 Properly construed, these provisions are only further evidence of the intrusiveness of the regulatory scheme.
Such an intrusive and detailed scheme was deemed necessary to prevent the use of foundations' assets for a wide range of private purposes, such as profit-taking, control of businesses, and nepotism, and to ensure that the fruits of exemption benefit the public. As the Report of the House Committee on Ways and Means, H.R. Rep. No. 91-413, 91st Cong., 1st Sess. 39, U.S. Code Cong. & Admin. News, p. (1969) stated:
Accord, Senate Finance Committee, S. Rep. No. 91-552, 91st Cong., 1st Sess. 55, U.S. Code Cong. & Admin. News, p. (1969). As one commentator concludes, the ". . . Act's basic approach is to locate and maintain contact with the foundations. . . ." Private Foundations under the Tax Reform Act of 1969, 7 Colum. J. Law & Soc. Prob. 240, 254 (1971).
The exemptions in question are not the type of government assistance such as police or fire protection, which is routinely provided to all without any connotation of approval. See, Moose Lodge, supra, at 173. Organizations must apply for exempt status.*fn16 Moreover, the acts of application and approval are not value neutral. In effect, the government would appear to be certifying that every foundation on its tax-exempt list is laboring in the public interest. Compare, Marker, supra, at 1007, with McGlotten, supra, at 456-57.
It also appears that the defendant foundations cannot assert a constitutional claim to be left alone. Compare, Gilmore v. City of Montgomery, 473 F.2d 832, 838-39 (5th Cir. 1973), cert. granted, 414 U.S. 907, 38 L. Ed. 2d 145, 94 S. Ct. 215, 42 U.S.L.W. 3226 (1973) and Bob Jones University, 341 F. Supp. at 285, with Green v. Connally, supra, n. 2, at 1165-68. While these organizations may not hold themselves out to the public as open to all but a few as did the Eagle Restaurant, they surely are not private clubs which value the intimate relationships among their members as did the Moose Lodge. To the extent that any constitutional rights are involved here, it is more likely the right to dispose of one's property as one chooses. Yet it is well settled that one cannot dispose of property in a racially discriminatory manner and entangle the State in the process. Evans v. Newton, 382 U.S. 296, 301, 15 L. Ed. 2d 373, 86 S. Ct. 486 (1966); Commonwealth of Pennsylvania v. Brown, 392 F.2d 120 (3d Cir. 1968), cert. denied, 391 U.S. 921, 20 L. Ed. 2d 657, 88 S. Ct. 1811 (1968).
As to public function, there may be more question. The legislative history concerning the purpose of the Internal Revenue Code's charitable exemption and deduction sets forth this rationale:
The [deduction] is based upon the theory that the Government is compensated for the loss of revenue by its relief from financial burden which would otherwise have to be met by appropriations from public funds, and by the benefits resulting from the promotion of the general welfare.
H.R. Rep. No. 1860, 75th Cong., 3d Sess. 19 (1938). This might be said to raise something approaching a presumption that foundation activities are public functions. However, this may not be the case with respect to the particular foundations which are defendants in this case.*fn17 The record before us is unclear on this point.
In sum, we believe that if on remand the district court finds that the defendant foundations are substantially dependent upon their exempt status, that the regulatory scheme is both detailed and intrusive, that the scheme carries connotations of government approval, that the foundations do not have a substantial claim of constitutional protection, and that they serve some public function, then a finding of "state action" would be appropriate. Moreover, even if one of these factors is absent, a finding of "state action" may still be appropriate. On remand, the parties may be able to point to individual circumstances which distinguish the defendants from exempt private foundations generally. Again, the anticipated joining of the Commissioner of Internal Revenue and the State Tax Commissioner should illuminate the issues.*fn18
At least as to the appellee Buffalo Foundation, however, the record is somewhat fuller and the balance must be struck somewhat differently. The Buffalo Foundation admitted in an affidavit in support of a motion for summary judgment that its by-laws provide that of its seven-member Governing Committee one member is to be appointed by the Mayor of Buffalo, one by the Surrogate of Erie County, one by the United States District Court Judge of the Western District of New York, and one by the Senior Justice of the Supreme Court Trial Term in the Buffalo district. This type of governmental participation in the management of an organization comes perilously close to the situation in Pennsylvania v. Board of Trusts, 353 U.S. 230, 1 L. Ed. 2d 792, 77 S. Ct. 806 (1957), where the position of an agency of the State as trustee of an organization was held sufficient without more to constitute "state action." Of course, here the control is less absolute and direct. But even indirect governmental participation in the management of an organization is persuasive evidence of the existence of "state action" where that participation is both substantial and other than neutral. This is not to say that the Surrogate Court's traditional supervisory role transforms the estate or trust into "state action." See, United States National Bank v. Snodgrass, 202 Ore. 530, 275 P.2d 860 (en banc 1954); Gordon v. Gordon, 332 Mass. 197, 124 N.E. 2d 228, cert. denied, 349 U.S. 947, 99 L. Ed. 1273, 75 S. Ct. 875 (1955); Mayers v. Ridley, 151 U.S. App. D.C. 45, 465 F.2d 630, 658-59 (1972) (en banc, Tamm, J., dissenting). But here public officials, named in their ex officio capacities, control the selection of a majority of the governing body, and the Buffalo Foundation appears to have established this procedure for the very purpose of involving the public in its activities. This participation is neither insignificant nor neutral. Therefore, as to the Buffalo Foundation, a finding of "state action" may be warranted even if the court should find only some other significant evidence of "state action."
The formulation of this definition of "state action" is applicable only to claims of racial discrimination. As noted above, conduct which is admittedly part private and part governmental must be more strictly scrutinized when claims of racial discrimination are made. Again, we think that the combination of factors noted gives courts sufficient room ". . . so that a cluster of rooms in a college dormitory can be distinguished from a restaurant in a public facility, a bowling league from a bar association, and a radio repair shop from a TV broadcasting network." Bittker and Kaufman, Taxes and Civil Rights: "Constitutionalizing" the Internal Revenue Code, 82 Yale L.J. 51, 87 (1972). We doubt that the fruits of charity will wither on the vine as a result of a decision barring racial discrimination. Tax-exempt philanthropy which constitutes "state action" is limited thereby only to the extent of ensuring an absence of such discrimination. Truly private philanthropy, meanwhile, is not affected at all.
Appellant challenges both federal and state exemptions. Since the two exemptions are clearly linked in practice (in terms of the near identity of the statutory definitions of exemption and in terms of administrative symbiosis) and in purpose and since the evil against which the Fifth and the Fourteenth Amendments were set was governmental fostering of racial discrimination and not merely state or merely federal action, similar treatment for constitutional purposes seems proper.
Appellant's § 1983 claim against the foundations raises a slightly different problem. 42 U.S.C. § 1983 proscribes only conduct ". . . under color of any statute . . . of any State . . ." and has been construed as not applying to the actions of the federal government, District of Columbia v. Carter, 409 U.S. 418, 424-25, 34 L. Ed. 2d 613, 93 S. Ct. 602 (1973); Wheeldin v. Wheeler, 373 U.S. 647, 650 n. 2, 10 L. Ed. 2d 605, 83 S. Ct. 1441 (1963), unless there is conspiracy between the state and federal officials, Kletschka v. Driver, 411 F.2d 436, 448-49 (2d Cir. 1969). Since no colorable claim of such conspiracy can be made here (and none has been made), in determining whether appellant has a claim under § 1983 the district court should look only to the state exemptions.
Again, because of the state of the record before us, we cannot judge the impact of the state exemptions alone.*fn19
Appellant's claims under 42 U.S.C. § 1981 and 42 U.S.C. § 1985 were dismissed because appellant alleged facts which, if believed, were still insufficient to state a cause of action under these sections. Since this is a pro se action further consideration of these claims is necessary. Haines, 404 U.S. 519, 30 L. Ed. 2d 652, 92 S. Ct. 594. If on remand appellant, hopefully with the assistance of counsel, cannot show applications to specific defendants, the existence of specific vacancies and grants, the existence of conspiratorial action on the part of the defendant foundations, or other material facts, summary judgment will be appropriate.
The court below properly dismissed appellant's remaining claim. Reverend Jackson cannot seek a judicial decree directing that assets be forfeited to the United States Treasury. Wolkstein v. Port of New York Authority, 178 F. Supp. 209 (D.N.J. 1959).
The case is remanded to the district court for further proceedings in accordance with this opinion.
A request for en banc reconsideration having been made by a judge of this Court, and a poll of the judges in regular active service having been taken, and Chief Judge Kaufman, Circuit Judges Mansfield, Oakes and Timbers having voted against en banc reconsideration, and Circuit Judges Friendly, Hays, Feinberg and Mulligan having voted in favor thereof, and an opinion by Circuit Judge Friendly dissenting from denial of en banc reconsideration, in which Circuit Judges Hays and Mulligan join, having been filed,
Upon consideration thereof, it is
Ordered that said request be and it hereby is denied.
IRVING R. KAUFMAN
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 me 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 woven*fn1 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.
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 beneficiaries, 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.*fn2 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, 37 L. Ed. 2d 723, 93 S. Ct. 2804 (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.
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, 25 L. Ed. 2d 697, 90 S. Ct. 1409 (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*fn3 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, 176-77, 32 L. Ed. 2d 627, 92 S. Ct. 1965 (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 activities 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.*fn4 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, 743, the "enactment was ameliatory not regressive; it did not 'move in' on the plaintiff or other buyers, but rather on the installment 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, 90 L. Ed. 265, 66 S. Ct. 276 (1946), and Amalgamated Food Employees Union Local 590 v. Logan Valley Plaza, Inc., 391 U.S. 308, 20 L. Ed. 2d 603, 88 S. Ct. 1601 (1968). Compare Lloyd Corp. v. Tanner, 407 U.S. 551, 33 L. Ed. 2d 131, 92 S. Ct. 2219 (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, 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 institutions, 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 non-discriminatory 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.
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, 13 L. Ed. 2d 904, 85 S. Ct. 1035 (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, 91 L. Ed. 1209, 67 S. Ct. 1009 (1947), and Larson v. Domestic & Foreign Commerce Corp., 337 U.S. 682, 683 n.3, 93 L. Ed. 1628, 69 S. Ct. 1457 (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.