Princeton's Test Case on Corporation Gifts Might Brighten University's Financial Future

Whether more unrestricted corporation gifts will bolster Harvard's financial reserves may well depend on the outcome of a legal battle between a female stockholder and the board of directors of a New Jersey manufacturing firm now being fought out before the supreme court of that state.

Stockholder Ruth Barlow has objected to an unrestricted $1500 gift to Princeton University by the A. P. Smith Man-facturing Company on the grounds that it would not benefit the firm.

If the gift is ruled legal, the case will be a "clarification" of a corporation's right to underwrite independent higher education. Currently the bulk of corporation gifts to the University are ear-marked for specific purposes--mainly scientific research.

"As inflation continues to mount," James R. Reynolds '23, Assistant to the President, said yesterday, "the great problem is to get hold of more free, unrestricted money...we don't stand alone on this."

"The significance of this decision," he went on," is the impact on future trends, rather than an immediate source of income--if by establishing a precedent it should open up a new possibility for general support to higher education."

Lawyers state that his case would not be binding on Massachusetts law, although the Massachusetts Supreme Court tends to watch decisions by other states supreme courts.

This would be a precedent in that should the New Jersey company loose, a stockholder in a Massachusetts firm probably would soon start a similar suit.

If the company wins, unrestricted corporate gifts probably would increase because corporations' fears of a stockholder revolt against such giving would be minimized.

Formerly common law was interpreted to mean that such gifts were prohibited unless they were directly beneficial to the corporation. Its stockholders, and employees. Twenty-two states--including Massachusetts and New Jersey--have passed laws liberalizing interpretation and clarifying doubts as the legality of such expenditures.

In Massachusetts a minority stockholder cannot "as of right" sue the directors for such donations except in un-usual cases.

Since 1936 corporations have been able to donate tax-free five percent of their income before taxes to assist educational, scientific, and welfare activities and organizations. This means that a company has only to use $1 of its final net profits in order to deduct $1 from its tax liability to the government.

If a company is in the excess profits category, this ratio can be as high as 1 to 3. This is a far cry from the time when the law went into effect and corporate taxes took only about 10 percent of net income--a 5 to 1 ratio.

Tuition Charges Insufficient

Only about 58 percent of an educational institution's income is provided by tuition charges; the rest must come from endowment, corporate and private gifts, or the government. Due to inflation, endowments are estimated to be worth about 50 percent of what they were two decades ago.

Corporation chairmen are currently conducting a campaign to make firms recognize that by unrestricted donations to schools and colleges they not not only realize their obligations to education, but also create good will for future customers and employees.

With corporate profits before taxes running about $45 billion, corporate contributions could have been about $2.2 billion in 1951. Actually such gifts run about one-fifth of what the law allows.

"The basis on which a specific corporation might give would be on the social basis rather than the specific--quid pro quo--return to the corporation," Dana M. Doten '39, Publication Agent for the University, said yesterday.

Assails Shortsightedness

Walter P. Paepcke, Chairman of the Container Corporation of America, recently voiced the pressing need: "Corporation managers have, broadly speaking, not gotten much beyond the Community Chest and the Red Cross stage in their thinking...Heads of companies who are not essentially gift-minded hide behind their boards of directors, the board of directors pontifically asserts that 'the money in the treasury belongs to the shareholder...'"

Private support to education is also lagging. Currently a person can contribute up to 15 percent of his income and have it tax-deductable; actually individuals are contributing about three or four percent.

To increase this trickle, Senator Edward Martin (R-Pa.) proposed to introduce to congress in the next few days a bill increasing the maximum tax-reduction to 25 percent. It will be attached as a rider to a current bill in the House permitting the Red Cross to give free benefit performances.

Although President Conant is in favor of Federal aid to education, most college heads agree with Princeton's President Dodd who recently called on Tiger alumnl to help preserve the "islands of independence in education without political accountability... The moment we federal underpinning we loose our dependence," he warned.

A report issued last fall by the Nationel Planning Association emphasized need for unrestricted educational gift "Existing tax incentives are hasten this process," it predicted, "The timid (companies) will evidently be judged the five-percent programs of their more energetic competitors and, in time, they too will be compelled by the logic of the situation to reappraise their own five-percent expenditures."