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Peking University Law School

Prof. Ge Yunsong
Visiting Prof. Karla Simon
with the assistance of
Visiting Prof. Leon Irish

COMPARATIVE CIVIL SOCIETY LAW


Reader

Beijing
2005/2006 Academic Year

Leon E. Irish & Karla W. Simon

PEKING UNIVERSITY LAW SCHOOL

Prof. Ge Yunsong, Prof. Karla Simon, Prof. Leon Irish


COMPARATIVE CIVIL SOCIETY LAW
Syllabus 2005
(in preparation)

Leon E. Irish and Karla W. Simon 2005

ii

TABLE OF CONTENTS

Chapter 1
1.1

Select Provisions of Human Rights Instruments Protecting


the Freedom of Association

1.2

United Communist Party v. Turkey

1.3

Sidiropolous and Others v. Greece

20

1.4

Freedom and Democracy Party (ZDEP) v. Turkey

31

1.5

Refah Partisi (The Welfare Party) and Others v. Turkey

37

1.6

Nigeria Case Law on Freedom of Association

71

1.7

Hurley v. Irish-American Gay, Lesbian &


Bisexual Group of Boston

77

Chapter 2

87

2.1

Revised Model Nonprofit Corporation Act (RMNCA)(ABA 1987)

88

2.2

Excerpts from NY Not-for-Profit Corporation Law

89

2.3

Excerpts from Chinese NPO regulations

90

2.4

Excerpt from book chapter about Japanese NPO legislation

95

2.5

State ex rel. Grant v. Brown (US)

104

2.6

Discussion examples

108

2.7

Discussion questions

111

Chapter 3

111

3.1

111

The Statute of Charitable Uses Act (1601)

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iii

3.2

3.3

3.4

3.5

Model PBO Provisions for Laws Affecting


Public Benefit Organizations

113

Report of the Joint Parliamentary Committee on the


Draft Charities Bill in England (Excerpts)

117

Canadian Revenue Authoritys Proposed Guidelines for


Registering a Charity: Meeting the Public Benefit Test

121

U.S. Charity Commissions

150

Chapter 4

151

4.1

General Fiduciary Obligations

151

4.1.1

Revised Model Nonprofit Corporation Act

151

4.1.2

UK Parliament Joint Committee First Report, Charities Bill

154

4.1.3

Northeast Harbor Golf Club, Inc. v. Nancy Harris

155

4.2

The Sibley Hospital Case

159

4.3

The Bishop Estate Controversy (US)

174

4.3.1

Overview by Professor Randall W. Roth

174

4.3.2

Bishop Estate Settlement

181

4.4

Possible Criminal Liability for Trustees

181

4.5

Statutory Provisions Re Personal Benefit

184

Chapter 5

185

5.1

Introduction

185

5.2

Public Policy (Political) Activities

186

5.2.1

Civil Law v. Common Law

186

5.2.2

Canada Revenue Agency, Policy Statement:


Political Activities

188

Southwood v. A.G.

192

5.2.3

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iv

5.3

5.2.4

Alliance for Life v. M.N.R

192

5.2.5

Branch Ministries Case

198

5.2.6

Electioneering and Lobbying -- Notes and Questions

205

5.2.7

Charity Commission on the Promotion of Human Rights

206

Economic Activities

209

5.3.1

Discussion Examples Regarding Economic Activities

209

5.3.2

UK Joint Committee on the Draft Charities Bill First Report

210

5.3.3

Discussion Questions

214

Chapter 6

215

6.1

NPO Accounting

215

6.1.1 SORP on accounting from Charity Commission

217

Audits of NPOs

218

6.2.1

Audits of NPOs in Israel

219

6.2.2

Discussion: Making Reports Available Under the Canada

6.2

Corporations Act
6.3

Obligation to Report to the Donor: China

221
223

Chapter 7

224

7.1

224

Income Tax Exemptions


7.1.1

Donations, Grants, Subsidies, and


Membership Dues

224

7.1.2

Polish Science Foundation Case

225

7.1.3

Tax Exemption for Income from Commercial


Activities (South Africa)

226

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7.1.4

7.2.

7.3

7.4

Tax Exemption for Income From Commercial


Activities (France)

228

7.1.5 Presbyterian and Reformed Publishing Co. v. Commissioner

233

7.1.6 Discussions Questions

235

Income Tax Deductions, Credits and Tax Designation Schemes

235

7.2.1

Income Tax Deductions in the US

235

7.2.2

Credits Under Canadian Law

236

7.2.3

The Hungarian 1% Law.

237

7.2.4

Discussion questions

242

Treatment of NPOs Under Indirect Tax Regimes

242

7.3.1

244

Discussion Questions.

Employment tax rules.

Leon E. Irish and Karla W. Simon 2005

246

vi

COMPARATIVE NOT-FOR-PROFIT LAW

Chapter 1 FREEDOM OF ASSOCIATION

1.1

Select Provisions of Human Rights Instruments Protecting


the Freedom of Association

1.2

United Communist Party v. Turkey

1.3

Sidiropolous and Others v. Greece

20

1.4

Freedom and Democracy Party (ZDEP) v. Turkey

31

1.5

Refah Partisi (The Welfare Party) and Others v. Turkey

37

1.6

Nigeria Case Law on Freedom of Association

71

1.7

Hurley v. Irish-American Gay, Lesbian &


Bisexual Group of Boston

77

SELECT PROVISIONS OF HUMAN RIGHTS INSTRUMENTS


PROTECTING THE FREEDOM OF ASSOCIATION

Universal Declaration of Human Rights


Article 20

(1) Everyone has the right to freedom of peaceful assembly and association.
(2) No one may be compelled to belong to an association.

European Convention on Human Rights


Article 11
1. Everyone has the right to freedom of peaceful assembly and to freedom of
association with others, including the right to form and to join trade unions for the
protection of his interests.

Leon E. Irish & Karla W. Simon

2. No restrictions shall be placed on the exercise of these rights other than


such as are prescribed by law and are necessary in a democratic society in the
interests of national security or public safety, for the prevention of disorder or
crime, for the protection of health or morals or for the protection of the rights
and freedoms of others. This Article shall not prevent the imposition of lawful
restrictions on the exercise of these rights by members of the armed forces, of
the police or of the administration of the State.
Article 16
Nothing in Articles 10, 11, and 14 shall be regarded as preventing the High
Contracting Parties from imposing restrictions on the political activity of
aliens.
The International Covenant on Civil and Political Rights

Article 2
1. Each State Party to the present Covenant undertakes to respect and to
ensure to all individuals within its territory and subject to its jurisdiction the
rights recognized in the present Covenant, without distinction of any kind,
such as race, colour, sex, language, religion, political or other opinion,
national or social origin, property, birth or other status.
2. Where not already provided for by existing legislative or other measures,
each State Party to the present Covenant undertakes to take the necessary
steps, in accordance with its constitutional processes and with the provisions
of the present Covenant, to adopt such legislative or other measures as may
be necessary to give effect to the rights recognized in the present Covenant.
3. Each State Party to the present Covenant undertakes:
(a) To ensure that any person whose rights or freedoms as herein recognized
are violated shall have an effective remedy, notwithstanding that the violation
has been committed by persons acting in an official capacity;
(b) To ensure that any person claiming such a remedy shall have his right
thereto determined by competent judicial, administrative or legislative
authorities, or by any other competent authority provided for by the legal
system of the State, and to develop the possibilities of judicial remedy;
(c) To ensure that the competent authorities shall enforce such remedies when
granted.

Leon E. Irish and Karla W. Simon 2005

Article 19
1. Everyone shall have the right to hold opinions without interference.
2. Everyone shall have the right to freedom of expression; this right shall include
freedom to seek, receive and impart information and ideas of all kinds, regardless of
frontiers, either orally, in writing or in print, in the form of art, or through any other
media of his choice.
3. The exercise of the rights provided for in paragraph 2 of this article carries with it
special duties and responsibilities. It may therefore be subject to certain restrictions,
but these shall only be such as are provided by law and are necessary:
(a) For respect of the rights or reputations of others;
(b) For the protection of national security or of public order (ordre public), or of
public health or morals.
Article 21
The right of peaceful assembly shall be recognized. No restrictions may be placed on
the exercise of this right other than those imposed in conformity with the law and
which are necessary in a democratic society in the interests of national security or
public safety, public order (ordre public), the protection of public health or morals or
the protection of the rights and freedoms of others.
Article 22
1. Everyone shall have the right to freedom of association with others, including the
right to form and join trade unions for the protection of his interests.
2. No restrictions may be placed on the exercise of this right other than those which
are prescribed by law and which are necessary in a democratic society in the interests
of national security or public safety, public order (ordre public), the protection of
public health or morals or the protection of the rights and freedoms of others. This
article shall not prevent the imposition of lawful restrictions on members of the
armed forces and of the police in their exercise of this right.

3. Nothing in this article shall authorize States Parties to the International


Labour Organisation Convention of 1948 concerning Freedom of Association
and Protection of the Right to Organize to take legislative measures which
would prejudice, or to apply the law in such a manner as to prejudice, the
guarantees provided for in that Convention.
UN General Assembly Declaration on Human Rights Defenders
Article 5
For the purpose of promoting and protecting human rights and fundamental
freedoms, everyone has the right, individually and in association with others,
at the national and international levels:

Leon E. Irish and Karla W. Simon 2005

(a) To meet or assemble peacefully;


(b) To form, join and participate in non-governmental organizations,
associations or groups;
(c) To communicate with non-governmental or intergovernmental
organizations.
[Declaration on the Right and Responsibility of Individuals, Groups and
Organs of Society to Promote and Protect Universally Recognized Human
Rights and Fundamental Freedoms (A/RES/53/144, 9 Dec. 1998).]

1.2

UNITED COMMUNIST PARTY OF TURKEY


AND OTHERS v. TURKEY

30 January 1998
[Decision of the Grand Chamber]
PROCEDURE
The case was referred to the Court by the European Commission of
Human Rights ("the Commission") on 28 October 1996, . . . It
originated in an application (no. 19392/92) against the Republic of
Turkey lodged with the Commission under Article 25 by a political
party, the United Communist Party of Turkey ("the TBKP"), and two
Turkish nationals, Mr Nihat Sargin and Mr Nabi Yagci, on 7 January
1992.
AS TO THE FACTS
I. THE CIRCUMSTANCES OF THE CASE
7. The United Communist Party of Turkey ("the TBKP"), the first applicant,
was a political party that was dissolved by the Constitutional Court (see
paragraph 10 below). Mr Nihat Sargin and Mr Nabi Yagci, the second and
third applicants, were respectively Chairman and General Secretary of the
TBKP. They live in Istanbul.
8. The TBKP was formed on 4 June 1990. On the same day, its constitution
and programme were submitted to the office of Principal State Counsel at the
Court of Cassation for assessment of their compatibility with the Constitution
and Law no. 2820 on the regulation of political parties ("Law no. 2820" see
paragraph 12 below).
A. The application to have the TBKP dissolved

Leon E. Irish and Karla W. Simon 2005

9. On 14 June 1990, when the TBKP was preparing to participate in a general


election, Principal State Counsel at the Court of Cassation ("Principal State
Counsel ") applied to the Constitutional Court for an order dissolving the
TBKP. He accused the party of having sought to establish the domination of
one social class over the others (Articles 6, 10 and 14 and former Article 68 of
the Constitution and section 78 of Law no. 2820), of having incorporated the
word "communist" into its name (contrary to section 96 (3) of Law no. 2820),
of having carried on activities likely to undermine the territorial integrity of
the State and the unity of the nation (Articles 2, 3 and 66 and former Article 68
of the Constitution, and sections 78 and 81 of Law no. 2820) and of having
declared itself to be the successor to a previously dissolved political party, the
Turkish Workers Party (section 96(2) of Law no. 2820).
In support of his application Principal State Counsel relied in particular on
passages from the TBKPs programme, mainly taken from a chapter entitled
"Towards a peaceful, democratic and fair solution for the Kurdish problem";
that chapter read as follows:
"The existence of the Kurds and their legitimate rights have been
denied ever since the Republic was founded, although the national war
of independence was waged with their support. The authorities have
responded to the awakening of Kurdish national consciousness with
bans, oppression and terror. Racist, militarist and chauvinistic policies
have exacerbated the Kurdish problem. That fact both constitutes an
obstacle to the democratisation of Turkey and serves the interests of
the international imperialist and militaristic forces seeking to heighten
tension in the Middle East, set peoples against each other and propel
Turkey into military adventures.
The Kurdish problem is a political one arising from the denial of the
Kurdish peoples existence, national identity and rights. It therefore
cannot be resolved by oppression, terror and military means. Recourse
to violence means that the right to self-determination, which is a
natural and inalienable right of all peoples, is not exercised jointly, but
separately and unilaterally. The remedy for this problem is political. If
the oppression of the Kurdish people and discrimination against them
are to end, Turks and Kurds must unite.
The TBKP will strive for a peaceful, democratic and fair solution of the
Kurdish problem, so that the Kurdish and Turkish peoples may live
together of their free will within the borders of the Turkish Republic,
on the basis of equal rights and with a view to democratic restructuring
founded on their common interests.
The solution of the Kurdish problem must be based on the free will of
the Kurds and take into account the common interests of the Turkish

Leon E. Irish and Karla W. Simon 2005

and Kurdish nations and contribute to the democratisation of Turkey


and peace in the Middle East.
A solution to the Kurdish problem will only be found if the parties
concerned are able to express their opinions freely, if they agree not to
resort to violence in any form in order to resolve the problem and if
they are able to take part in politics with their own national identity.
The solution of the Kurdish problem will require time. In the
immediate future, priority must be given to ending military and
political pressure on the Kurds, protecting the lives of Kurdish citizens,
bringing the state of emergency to an end, abandoning the village
guards system and lifting bans on the Kurdish language and Kurdish
culture. The problem should be freely discussed. The existence of the
Kurds must be acknowledged in the Constitution.
Without a solution of the Kurdish problem, democratic renewal cannot
take place in Turkey. Any solution will entail a fight for the
democratisation of Turkey."
Two other passages relied on by Principal State Counsel read as follows:
"... the United Communist Party of Turkey is the party of the working
class, formed from the merger of the Turkish Workers Party and the
Turkish Communist Party.
...
The cultural revival will be fashioned by, on the one hand, the
reciprocal influence of contemporary universal culture and, on the
other, Turkish and Kurdish national values, the heritage of the
Anatolian civilisations, the humanist elements of Islamic culture and
all the values developed by our people in their effort to evolve with
their times."
The Turkish Workers Party referred to above had been dissolved on
16 October 1981 on grounds similar to those relied on against the TBKP.
B. Dissolution of the TBKP
10. On 16 July 1991 the Constitutional Court made an order dissolving the
TBKP, which entailed ipso jure the liquidation of the party and the transfer of
its assets to the Treasury, in accordance with section 107(1) of Law no. 2820.
The order was published in the Official Gazette on 28 January 1992. As a
consequence, the founders and managers of the party were banned from
holding similar office in any other political body (Article 69 of the
Constitution and section 95(1) of Law no. 2820 see paragraph 11 below).

Leon E. Irish and Karla W. Simon 2005

The Constitutional Court firstly rejected the submission that the TBKP
maintained that one social class, the proletariat, was superior to the others.
Referring to the partys constitution, modern works on Marxist ideology and
contemporary political ideas, it held that the TBKP satisfied the requirements
of democracy, which was based on political pluralism, universal suffrage and
freedom to take part in politics.
The court also rejected the argument, based on section 96(2) of Law no. 2820,
that no political party might claim to be the successor to a party that had
previously been dissolved. In its view, it was entirely natural and consistent
with the concept of democracy for a political party to claim the cultural
heritage of past movements and currents of political thought. The TBKP had
accordingly not infringed the provision relied on by reason only of its
intention of drawing on the experience and achievements of Marxist
institutions.
The Constitutional Court went on to hold that the mere fact that a political
party included in its name a word prohibited by section 96(3) of Law no. 2820,
as the TBKP had done in the present case, sufficed to trigger the application of
that provision and consequently to entail the dissolution of the party
concerned.
As to the allegation that the TBKPs constitution and programme contained
statements likely to undermine the territorial integrity of the State and the
unity of the nation, the Constitutional Court noted, inter alia, that those
documents referred to two nations: the Kurdish nation and the Turkish
nation. But it could not be accepted that there were two nations within the
Republic of Turkey, whose citizens, whatever their ethnic origin, had Turkish
nationality. In reality the proposals in the party constitution covering support
for non-Turkish languages and cultures were intended to create minorities, to
the detriment of the unity of the Turkish nation.
Reiterating that self-determination and regional autonomy were prohibited
by the Constitution, the Constitutional Court said that the State was unitary,
the country indivisible and that there was only one nation. It considered that
national unity was achieved through the integration of communities and
individuals who, irrespective of their ethnic origin and on an equal footing,
formed the nation and founded the State. In Turkey there were no
"minorities" or "national minorities", other than those referred to in the Treaty
of Lausanne and the friendship treaty between Turkey and Bulgaria, and
there were no constitutional or legislative provisions allowing distinctions to
be made between citizens. Like all nationals of foreign descent, nationals of
Kurdish origin could express their identity, but the Constitution and the law
precluded them from forming a nation or a minority distinct from the Turkish
nation. Consequently, objectives which, like those of the TBKP, encouraged

Leon E. Irish and Karla W. Simon 2005

separatism and the division of the Turkish nation were unacceptable and
justified dissolving the party concerned.

II. RELEVANT DOMESTIC LAW


The Constitution
11. At the material time the relevant provisions of the Constitution read as
follows:
Article 2
"The Republic of Turkey is a democratic, secular and social State based
on the rule of law, respectful of human rights in a spirit of social peace,
national solidarity and justice, adhering to the nationalism of Ataturk
and resting on the fundamental principles set out in the Preamble."
Article 3, 1
"The State of Turkey constitutes with its territory and nation, an
indivisible whole. The official language is Turkish."
Article 6
"Sovereignty resides unconditionally and unreservedly in the nation."
...
Sovereign power shall not under any circumstances be transferred to
an individual, a group or a social class ..."
Article 10 1
"All individuals shall be equal before the law without any distinction
based on language, race, colour, sex, political opinion, philosophical
belief, religion, membership of a religious sect or other similar
grounds."
Article 14 1
"None of the rights and freedoms referred to in the Constitution shall
be exercised with a view to undermining the territorial integrity of the
State and the unity of the nation, jeopardising the existence of the
Turkish State or Republic, abolishing fundamental rights and
freedoms, placing the control of the State in the hands of a single

Leon E. Irish and Karla W. Simon 2005

individual or group, ensuring the domination of one social class over


other social classes, introducing discrimination on the grounds of
language, race, religion or membership of a religious sect, or
establishing by any other means a political system based on any of the
above concepts and opinions."
Article 66 1
"Everyone linked to the Turkish State by nationality shall be Turkish."
(Former) Article 68
"Citizens shall have the right to form political parties and to join them
or withdraw from them in accordance with the lawful procedure laid
down for the purpose...
Political parties shall be an indispensable part of the democratic
political system.
Political parties may be formed without prior permission and shall
carry on their activities in accordance with the Constitution and the
law.
The constitutions and programmes of political parties shall not be
inconsistent with the absolute integrity of State territory and of the
nation, human rights, national sovereignty or the principles of a
democratic secular Republic.
No political party shall be formed which aims to advocate or establish
the domination of one social class or group, or any form of
dictatorship, ..."
(Former) Article 69
"Political parties shall not engage in activities other than those referred
to in their constitutions and programmes, nor shall they disregard the
restrictions laid down by Article 14 of the Constitution, on pain of
permanent dissolution.
...
The decisions and internal running of political parties shall not be
contrary to democratic principles.
...
Immediately a political party is formed, Principal State Counsel shall
verify as a matter of priority that its constitution and programme and
the legal position of its founding members are consistent with the

Leon E. Irish and Karla W. Simon 2005

Constitution and the laws of the land. He shall also monitor its
activities.
Political parties may be dissolved by the Constitutional Court, on
application by Principal State Counsel.
Founding members and managers, at whatever level, of political
parties which have been permanently dissolved may not become
founding members, managers or financial controllers of any new
political party, nor shall a new party be formed if a majority of its
members previously belonged to a party which has been dissolved..."
B. Law no. 2820 on the regulation of political parties
12. The relevant provisions of Law no. 2820 on the regulation of political
parties read as follows:
Section 78
"Political parties
(a) shall not aim, strive or incite third parties to change: the republican
form of the Turkish State; the ... provisions concerning the absolute
integrity of the Turkish States territory, the absolute unity of its nation,
its official language, its flag or its national anthem; ... the principle that
sovereignty resides unconditionally and unreservedly in the Turkish
nation; ... the provision that sovereign power cannot be transferred to
an individual, a group or a social class...;
jeopardise the existence of the Turkish State and Republic, abolish
fundamental rights and freedoms, introduce discrimination on
grounds of language, race, colour, religion or membership of a
religious sect, or establish, by any means, a system of government
based on any such notion or concept
...
(c) shall not aim to defend or establish the domination of one social
class over the other social classes or the domination of a community or
the setting up of any form of dictatorship; they shall not carry on
activities in pursuit of such aims..."
Section 80
"Political parties shall aim to change the principle of the unitary State
on which the Turkish Republic is founded, nor carry on activities in
pursuit of such an aim."
Section 81

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10

"Political parties shall not


(a) assert that there exist within the territory of the Turkish Republic
any national minorities based on differences relating to national or
religious culture, membership of a religious sect, race or language; or
(b) aim to destroy national unity by proposing, on the pretext of
protecting, promoting or disseminating a non-Turkish language or
culture, to create minorities on the territory of the Turkish Republic or
to engage in similar activities..."
Section 90(1)
"The constitution, programme and activities of political parties may not
contravene the Constitution or this Law."
Section 96(3)
"No political party shall be formed with the name communist,
anarchist, fascist, theocratic or national socialist, the name of a
religion, language, race, sect or region, or a name including any of the
above words or similar ones."
Section 101
"The Constitutional Court shall dissolve a political party where
(a) the partys programme or constitution... is contrary to the
provisions of Chapter 4 of this Law; or
(b) its membership, central committee or executive committee ... take a
decision, issue a circular or make a statement ... contrary to the
provisions of Chapter 4 of this Law or the Chairman, Vice-Chairman or
General Secretary makes any written or oral statement contrary to
those provisions......"
Section 107(1)
"All the assets of political parties dissolved by order of the
Constitutional Court shall be transferred to the Treasury."
....
AS TO THE LAW
I. ALLEGED VIOLATION OF ARTICLE 11 OF THE CONVENTION . . . .
A. Applicability of Article 11 . . . .
2. The Courts assessment

Leon E. Irish and Karla W. Simon 2005

11

24. The Court considers that the wording of Article 11 provides an initial
indication as to whether political parties may rely on that provision. It notes
that although Article 11 refers to "freedom of association with others,
including the right to form trade unions", the conjunction "including"
clearly shows that trade unions are but one example among others of the form
in which the right to freedom of association may be exercised. It is therefore
not possible to conclude, as the Government did, that by referring to trade
unions for reasons related mainly to issues that were current at the time
those who drafted the Convention intended to exclude political parties from
the scope of Article 11.
25. However, even more persuasive than the wording of Article 11, in the
Courts view, is the fact that political parties are a form of association essential
to the proper functioning of democracy. In view of the importance of
democracy in the Convention system (see paragraph 45 below), there can be
no doubt that political parties come within the scope of Article 11.
26. As to the Governments allegation that the TBKP had called Turkeys
constitutional order into question and the inferences that were to be drawn
from that fact, it should be said at the outset that at this stage the Court does
not have to decide whether that allegation is true or whether it could be
sustained solely on the basis of the constitution and programme of the party
concerned. The Court refers in this connection to its observations concerning
the necessity of the impugned interference (see paragraphs 42-47 below).
27. The Court notes on the other hand that an association, including a
political party, is not excluded from the protection afforded by the
Convention simply because its activities are regarded by the national
authorities as undermining the constitutional structures of the State and
calling for the imposition of restrictions. As the Court has said in the past,
while it is in principle open to the national authorities to take such action as
they consider necessary to respect the rule of law or to give effect to
constitutional rights, they must do so in a manner which is compatible with
their obligations under the Convention and subject to review by the
Convention institutions (see the Open Door and Dublin Well Woman
v. Ireland judgment of 29 October 1992, Series A no. 246-A, p. 29, 69).
28. The Preamble to the Convention refers to the "common heritage of
political traditions, ideals, freedom and the rule of law" (see paragraph 45
below), of which national constitutions are in fact often the first embodiment.
Through its system of collective enforcement of the rights it establishes (see
the Loizidou v. Turkey (Preliminary Objections) judgment of 23 March 1995,
Series A no. 310, p. 26, 70), the Convention reinforces, in accordance with
the principle of subsidiarity, the protection afforded at national level, but
never limits it (Article 60 of the Convention).

Leon E. Irish and Karla W. Simon 2005

12

29. The Court points out, moreover, that Article 1 requires the States Parties
to "secure to everyone within their jurisdiction the rights and freedoms
defined in Section 1 of th[e] Convention". That provision, together with
Articles 14, 2 to 13 and 63, demarcates the scope of the Convention ratione
personae, materiae and loci (see the Ireland v. the United Kingdom judgment of
18 January 1978, Series A no. 25, p. 90, 238). It makes no distinction as to the
type of rule or measure concerned and does not exclude any part of the
member States jurisdiction from scrutiny under the Convention. It is,
therefore, with respect to their jurisdiction as a whole which is often
exercised in the first place through the Constitution that the States Parties
are called on to show compliance with the Convention.
30. The political and institutional organisation of the member States must
accordingly respect the rights and principles enshrined in the Convention. It
matters little in this context whether the provisions in issue are constitutional
(see, for example, the Gitonas and Others v. Greece judgment of 1 July 1997,
Reports of Judgments and Decisions 1997-V) or merely legislative (see, for
example, the Mathieu-Mohin and Clerfayt v. Belgium judgment of 2 March
1987, Series A no. 113). From the moment that such provisions are the means
by which the State concerned exercises its jurisdiction, they are subject to
review under the Convention.
31. Moreover, it may on occasion prove difficult, even artificial, in
proceedings before the Court, to attempt to distinguish between what forms
part of a States institutional structures and what relates to fundamental rights
in the strict sense. That is particularly true of an order for dissolution of the
kind in issue in the present case. In view of the role played by political parties
(see paragraph 25 above), such measures affect both freedom of association
and, consequently, democracy in the State concerned.
32. It does not, however, follow that the authorities of a State in which an
association, through its activities, jeopardises that States institutions are
deprived of the right to protect those institutions. In this connection, the
Court points out that it has previously held that some compromise between
the requirements of defending democratic society and individual rights is
inherent in the system of the Convention (see, mutatis mutandis, the Klass and
Others v. Germany of 6 September 1978, Series A no. 28, p. 28, 59). For there
to be a compromise of that sort any intervention by the authorities must be in
accordance with paragraph 2 of Article 11, which the Court considers below
(see paragraphs 37 et seq.). Only when that review is complete will the Court
be in a position to decide, in the light of all the circumstances of the case,
whether Article 17 of the Convention should be applied.

Leon E. Irish and Karla W. Simon 2005

13

33. Before the Commission the Government also submitted, in the alternative,
that while Article 11 guaranteed freedom to form an association, it did not on
that account prevent one from being dissolved.
The Commission took the view that freedom of association not only
concerned the right to form a political party but also guaranteed the right of
such a party, once formed, to carry on its political activities freely.
The Court reiterates that the Convention is intended to guarantee rights that
are not theoretical or illusory, but practical and effective (see, among other
authorities, the Artico v. Italy judgment of 13 May 1980, Series A no. 37, p. 16,
33, and the Loizidou judgment cited above, p. 27, 72). The right
guaranteed by Article 11 would be largely theoretical and illusory if it were
limited to the founding of an association, since the national authorities could
immediately disband the association without having to comply with the
Convention. It follows that the protection afforded by Article 11 lasts for an
associations entire life and that dissolution of an association by a countrys
authorities must accordingly satisfy the requirements of paragraph 2 of that
provision (see paragraphs 35-47 below).
34. In conclusion Article 11 is applicable to the facts of the case.
B. Compliance with Article 11
1. Whether there has been an interference . . . .
36. Like the Commission, the Court concludes that there has been an
interference with that right in respect of all three applicants, having regard (in
the case of Mr Sargin and Mr Yagci) to their role as founders and leaders of
the party and to the ban which prevented them from discharging similar
responsibilities in any other political grouping (see paragraph 10 above).
2. Whether the interference was justified
Such an interference will constitute a breach of Article 11 unless it was
"prescribed by law", pursued one or more legitimate aims under
paragraph 2 and was "necessary in a democratic society" for the
achievement of those aims.
(a) "Prescribed by law"
38. It was common ground that the interference was "prescribed by law", as
the measures ordered by the Constitutional Court were based on Articles 2, 3
1, 6, 10 1 and 14 1, and former Article 68 of the Constitution and
sections 78, 81 and 96(3) of Law no. 2820 on the regulation of political parties
(see paragraphs 11-12 above).

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14

(b) Legitimate aim


39. The Government maintained that the interference pursued a number of
legitimate aims: ensuring national security, public safety and territorial
integrity and protecting the rights and freedom of others. . . .
41. Like the Commission, the Court considers that the dissolution of the
TBKP pursued at least one of the "legitimate aims" set out in Article 11: the
protection of "national security".
(c) "Necessary in a democratic society"
(i) General principles
42. The Court reiterates that notwithstanding its autonomous role and
particular sphere of application, Article 11 must, in the present case, also be
considered in the light of Article 10. The protection of opinions and the
freedom to express them is one of the objectives of the freedoms of assembly
and association as enshrined in Article 11 (see, among other authorities, the
Young, James and Webster v. the United Kingdom judgment of 13 August
1981, Series A, no. 44, p. 23, 57, and the Vogt v. Germany judgment of 26
September 1995, Series A no. 323, p. 30, 64).
43. That applies all the more in relation to political parties in view of their
essential role in ensuring pluralism and the proper functioning of democracy
(see paragraph 25 above).
As the Court has said many times, there can be no democracy without
pluralism. It is for that reason that freedom of expression as enshrined in
Article 10 is applicable, subject to paragraph 2, not only to "information" or
"ideas" that are favourably received or regarded as inoffensive or as a matter
of indifference, but also to those that offend, shock or disturb (see, among
many other authorities, the Vogt judgment cited above, p. 25, 52). The fact
that their activities form part of a collective exercise of freedom of expression
in itself entitles political parties to seek the protection of Articles 10 and 11 of
the Convention.
44. In the Informationsverein Lentia and Others v. Austria judgment the
Court described the State as the ultimate guarantor of the principle of
pluralism (see the judgment of 24 November 1993, Series A no. 276, p. 16,
38). In the political sphere that responsibility means that the State is under the
obligation, among others, to hold, in accordance with Article 3 of Protocol No.
1, free elections at reasonable intervals by secret ballot under conditions
which will ensure the free expression of the opinion of the people in the
choice of the legislature. Such expression is inconceivable without the

Leon E. Irish and Karla W. Simon 2005

15

participation of a plurality of political parties representing the different


shades of opinion to be found within a countrys population. By relaying this
range of opinion, not only within political institutions but also with the help
of the media at all levels of social life, political parties make an irreplaceable
contribution to political debate, which is at the very core of the concept of a
democratic society (see the Lingens v. Austria judgment of 8 July 1986, Series
A no. 103, p. 26, 42, and the Castells v. Spain judgment of 23 April 1992,
Series A no. 236, p. 23, 43).
45. Democracy is without doubt a fundamental feature of the European
public order (see the Loizidou judgment cited above, p. 27, 75).
That is apparent, firstly, from the Preamble to the Convention, which
establishes a very clear connection between the Convention and democracy
by stating that the maintenance and further realisation of human rights and
fundamental freedoms are best ensured on the one hand by an effective
political democracy and on the other by a common understanding and
observance of human rights (see the Klass and Others judgment cited above,
p. 28, 59). The Preamble goes on to affirm that European countries have a
common heritage of political tradition, ideals, freedom and the rule of law.
The Court has observed that in that common heritage are to be found the
underlying values of the Convention (see the Soering v. the United Kingdom
judgment of 7 July 1989, Series A no. 161, p. 35, 88); it has pointed out
several times that the Convention was designed to maintain and promote the
ideals and values of a democratic society (see the Kjeldsen, Busk Madsen and
Pedersen v. Denmark judgment of 7 December 1976, Series A no. 23, p. 27,
53, and the Soering judgment cited above, p. 34, 87).
In addition, Articles 8, 9, 10 and 11 of the Convention require that interference
with the exercise of the rights they enshrine must be assessed by the yardstick
of what is "necessary in a democratic society". The only type of necessity
capable of justifying an interference with any of those rights is, therefore, one
which may claim to spring from "democratic society". Democracy thus
appears to be the only political model contemplated by the Convention and,
accordingly, the only one compatible with it.
The Court has identified certain provisions of the Convention as being
characteristic of democratic society. Thus in its very first judgment it held that
in a "democratic society within the meaning of the Preamble and the other
clauses of the Convention", proceedings before the judiciary should be
conducted in the presence of the parties and in public and that that
fundamental principle was upheld in Article 6 of the Convention (see the
Lawless v. Ireland judgment of 14 November 1960 (preliminary objections
and questions of procedure), Series A no. 1, p. 13). In a field closer to the one
concerned in the instant case, the Court has on many occasions stated, for
example, that freedom of expression constitutes one of the essential

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16

foundations of a democratic society and one of the basic conditions for its
progress and each individuals self-fulfilment (see, among other authorities,
the Vogt judgment cited above, p. 25, 52), whereas in the Mathieu-Mohin
and Clerfayt judgment cited above, it noted the prime importance of Article 3
of Protocol No. 1, which enshrines a characteristic principle of an effective
political democracy (p. 22, 47).
46. Consequently, the exceptions set out in Article 11 are, where political
parties are concerned, to be construed strictly; only convincing and
compelling reasons can justify restrictions on such parties freedom of
association. In determining whether a necessity within the meaning of Article
11 2 exists, the Contracting States possess only a limited margin of
appreciation, which goes hand in hand with rigorous European supervision
embracing both the law and the decisions applying it, including those given
by independent courts. The Court has already held that such scrutiny was
necessary in a case concerning a Member of Parliament who had been
convicted of proffering insults (see the Castells judgment cited above, pp. 2223, 42); such scrutiny is all the more necessary where an entire political
party is dissolved and its leaders banned from carrying on any similar activity
in the future.
47. When the Court carries out its scrutiny, its task is not to substitute its own
view for that of the relevant national authorities but rather to review under
Article 11 the decisions they delivered in the exercise of their discretion. This
does not mean that it has to confine itself to ascertaining whether the
respondent State exercised its discretion reasonably, carefully and in good
faith; it must look at the interference complained of in the light of the case as a
whole and determine whether it was "proportionate to the legitimate aim
pursued" and whether the reasons adduced by the national authorities to
justify it are "relevant and sufficient". In so doing, the Court has to satisfy
itself that the national authorities applied standards which were in conformity
with the principles embodied in Article 11 and, moreover, that they based
their decisions on an acceptable assessment of the relevant facts (see, mutatis
mutandis, the Jersild v. Denmark judgment of 23 September 1994, Series A no.
298, p. 26, 31).
(ii) Application of the principles to the present case
Submissions of those appearing before the Court [omitted]
(b) The Courts assessment
51. The Court notes at the outset that the TBKP was dissolved even before it
had been able to start its activities and that the dissolution was therefore
ordered solely on the basis of the TBKPs constitution and programme, which
however as is for that matter apparent from the Constitutional Courts
decision contain nothing to suggest that they did not reflect the partys true

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17

objectives and its leaders true intentions (see paragraph 58 below). Like the
national authorities, the Court will therefore take those documents as a basis
for assessing whether the interference in question was necessary.
52. It is to be noted further that in support of his application for a dissolution
order, Principal State Counsel at the Court of Cassation made four
submissions. Two of these were rejected by the Constitutional Court: the
claim that the TBKP intended to maintain that the proletariat was superior to
the other social classes and the argument that it was contrary to section 96(2)
of Law no. 2820 for it to claim to be the successor to a political party that had
previously been dissolved the Turkish Workers Party (see paragraph 9
above).
The Court can therefore confine its review to the other two grounds, which
were upheld by the Constitutional Court.
53. In the first of these it was alleged that the TBKP had included the word
"communist" in its name, contrary to section 96(3) of Law no. 2820 (see
paragraph 12 above). The Constitutional Court held, in particular, that that
provision prohibited the formation of political parties on a purely formal
ground: the mere fact of using a name proscribed in that section sufficed to
trigger its application and consequently to entail the dissolution of any
political party that, like the TBKP, had contravened it (see paragraph 10
above).
54. The Court considers that a political partys choice of name cannot in
principle justify a measure as drastic as dissolution, in the absence of other
relevant and sufficient circumstances.
In this connection, it must be noted, firstly, that on 12 April 1991 the
provisions of the Criminal Code making it a criminal offence to carry on
political activities inspired, in particular, by communist ideology were
repealed by Law no. 3713 on the prevention of terrorism. The Court also
attaches much weight to the Constitutional Courts finding that the TBKP was
not seeking, in spite of its name, to establish the domination of one social class
over the others, and that, on the contrary, it satisfied the requirements of
democracy, including political pluralism, universal suffrage and freedom to
take part in politics (see paragraph 10 above). In that respect, the TBKP was
clearly different from the German Communist Party, which was dissolved on
17 August 1956 by the German Constitutional Court (see the Commissions
decision cited above in the German Communist Party case).

[Ed.] In its judgment banning the former Communist Party (KPD) (BVerfGE 5,p. 85), the
Federal Constitutional Court held that not only the 'tactics of conflict' employed by the former
KPD but also the different phases of the process leading to attainment of its final objective of
'socialist rule' [sozialistische Herrschaft], namely proletarian revolution by peaceful or violent

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18

Accordingly, in the absence of any concrete evidence to show that in choosing


to call itself "communist", the TBKP had opted for a policy that represented a
real threat to Turkish society or the Turkish State, the Court cannot accept that
the submission based on the partys name may, by itself, entail the partys
dissolution.
55. The second submission accepted by the Constitutional Court was that the
TBKP sought to promote separatism and the division of the Turkish nation.
By drawing a distinction in its constitution and programme between the
Kurdish and Turkish nations, the TBKP had revealed its intention of working
to achieve the creation of minorities which with the exception of those
referred to in the Treaty of Lausanne and the treaty with Bulgaria posed a
threat to the States territorial integrity. It was for that reason that selfdetermination and regional autonomy were both proscribed by the
constitution (see paragraph 10 above).
56. The Court notes that although the TBKP refers in its programme (see
paragraph 9 above) to the Kurdish "people" and "nation" and Kurdish
"citizens", it neither describes them as a "minority" nor makes any claim
other than for recognition of their existence for them to enjoy special
treatment or rights, still less a right to secede from the rest of the Turkish
population. On the contrary, the programme states: "The TBKP will strive for
a peaceful, democratic and fair solution of the Kurdish problem, so that the
Kurdish and Turkish peoples may live together of their free will within the
borders of the Turkish Republic, on the basis of equal rights and with a view
to democratic restructuring founded on their common interests." With regard
to the right to self-determination, the TBKP does no more in its programme
than deplore the fact that because of the use of violence, it was not "exercised
jointly, but separately and unilaterally", adding that "the remedy for this
problem is political" and that "[i]f the oppression of the Kurdish people and
discrimination against them are to end, Turks and Kurds must unite".
The TBKP also said in its programme: "A solution to the Kurdish problem will
only be found if the parties concerned are able to express their opinions
means and the triumph of the working class ..., were incompatible with the free democratic
constitutional system. [It] also stated that intensive propaganda and persistent unrest aimed
at establishing - even if this was not to be achieved in the near future a political regime that
was clearly contrary to the free democratic constitutional system inevitably caused direct and
immediate harm to that system ... The Federal Constitutional Court thus also unquestionably
held that the transitional stages of this process, which were of indefinite duration [and which
the party sought to impose] through intensive propaganda and persistent unrest were
incompatible with the free democratic constitutional system (BVerwGE 47, pp. 365 and 374).
See Communist Party (KPD) v. Germany, no. 250/57, Commission decision of 20 July 1957,
Yearbook 1, p. 222.

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19

freely, if they agree not to resort to violence in any form in order to resolve the
problem and if they are able to take part in politics with their own national
identity."
57. The Court considers one of the principal characteristics of democracy to
be the possibility it offers of resolving a countrys problems through dialogue,
without recourse to violence, even when they are irksome. Democracy thrives
on freedom of expression. From that point of view, there can be no
justification for hindering a political group solely because it seeks to debate in
public the situation of part of the States population and to take part in the
nations political life in order to find, according to democratic rules, solutions
capable of satisfying everyone concerned. To judge by its programme, that
was indeed the TBKPs objective in this area. That distinguishes the present
case from those referred to by the Government (see paragraph 49 above).
58. Admittedly, it cannot be ruled out that a partys political programme may
conceal objectives and intentions different from the ones it proclaims. To
verify that it does not, the content of the programme must be compared with
the partys actions and the positions it defends. In the present case, the TBKPs
programme could hardly have been belied by any practical action it took,
since it was dissolved immediately after being formed and accordingly did
not even have time to take any action. It was thus penalised for conduct
relating solely to the exercise of freedom of expression.
59. The Court is also prepared to take into account the background of cases
before it, in particular the difficulties associated with the fight against
terrorism (see, among other authorities, the Ireland v. the United Kingdom
judgment cited above, pp. 9 et seq., 11 et seq., and the Aksoy v. Turkey
judgment of 18 December 1996, Reports 1996-VI, p. ..., 70 and 84). In the
present case, however, it finds no evidence to enable it to conclude, in the
absence of any activity by the TBKP, that the party bore any responsibility for
the problems which terrorism poses in Turkey. . . .
61. Regard being had to all the above, a measure as drastic as the immediate
and permanent dissolution of the TBKP, ordered before its activities had even
started and coupled with a ban barring its leaders from discharging any other
political responsibility, is disproportionate to the aim pursued and
consequently unnecessary in a democratic society. It follows that the measure
infringed Article 11 of the Convention.

1.3 SIDIROPOULOS AND OTHERS v. GREECE


JUDGMENT
STRASBOURG

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20

10 July 1998
AS TO THE FACTS
I. THE CIRCUMSTANCES OF THE CASE
7. The applicants all live at Florina, in northern Greece, on the border of the
Former Yugoslav Republic of Macedonia.
8. On 18 April 1990 the applicants, who claim to be of "Macedonian" ethnic
origin and to have a "Macedonian national consciousness", decided together
with forty-nine other people to form a non-profit-making association
(somatio) called "Home of Macedonian Civilisation" (Stegi Makedonikou
Politismou). The associations headquarters were to be at Florina. According
to clause 2 of its memorandum of association, the associations objects were
"(a) the cultural, intellectual and artistic development of its members and of
the inhabitants of Florina in general and the fostering of a spirit of
cooperation, solidarity and love between them; (b) cultural decentralisation
and the preservation of intellectual and artistic endeavours and traditions and
of the civilisations monuments and, more generally, the promotion and
development of [their] folk culture; and (c) the protection of the regions
natural and cultural environment".
A. The proceedings in the Florina Court of First Instance
9. On 12 June 1990 the applicants, who constituted the provisional
management committee of the association, lodged an application under
Article 79 of the Civil Code with the Florina Court of First Instance for
registration of their association under the name of "Home of Macedonian
Civilisation".
10. On 9 August 1990 the court, having heard the applicants, refused their
application on the following grounds:
"It is apparent from the documents lodged by the applicants and from the
information which the Court may take into consideration of its own motion
that recognition of the association under this same name has already been
sought, in an application on 19 January 1990 which was dismissed by this
Court on 19 March 1990... Now that the words [the defence of national
independence] that constituted the ground on which the aforementioned
application was dismissed as being contrary to law have been deleted, a fresh
application has been made for recognition of the association in question. Some
of the founder members of the association who are on the provisional
management committee have engaged in promoting the idea that there is a
Macedonian minority in Greece (see, for example, the newspapers Makhitis,
Ellinikos Voras, Nea and Stokhos of 28 June 1990, 24 June 1990, 18 June 1990

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21

and 28 June 1990 respectively); these newspapers strengthen the Court all the
more in its previous opinion as none of the applicants has so far cast any
doubt on the matters set out in these newspapers , namely that they
travelled to Copenhagen on 9 June 1990 and took part in the Conference on
Security and Co-operation in Europe (CSCE), where they maintained that
there was a Macedonian minority in Greece and even congratulated Professor
Ataov, a Turk, who read out a text containing provocative and unacceptable
allegations against Greece. One of the members of the provisional
management committee, Mr Constantinos Gotsis, refused, in the course of
proceedings in the Florina Court of First Instance against the publisher of the
newspaper Stokhos, to accept that he was Greek Besides, sixteen founder
members of the above-mentioned association reportedly contributed money
so that Christos Sidiropoulos and Stavros Anastassiadis could go to
Copenhagen to defend their ideas On the basis of the foregoing
circumstances, which have been proved, the Court considers that the true
object of the aforementioned association is not the one indicated in clause 2 of
the memorandum of association but the promotion of the idea that there is a
Macedonian minority in Greece, which is contrary to the countrys national
interest and consequently contrary to law.
B. The proceedings in the Salonika Court of Appeal
11. On 7 September 1990 the applicants appealed against that judgment to the
Salonika Court of Appeal. After hearing the applicants, that court dismissed
their appeal on the following grounds:
III. In view of the strong public interest at stake, the court, when examining
the grounds of an application being heard under the special procedure, as in
the present case, may and indeed must take into consideration, of its own
motion, matters over and above the evidence submitted to the court by the
parties in particular, real events and situations reported in publications
(books, magazines, newspapers, etc.) accessible to any interested person and
this notwithstanding the ordinary rules on the burden of proof. On the basis
of the well-known facts set out below, whose validity the Court does not
doubt, the Court accepts the following in relation to the case: [a long list of
historical interpretation as well as political discussion tending to show that
being Macedonian is inconsistent with being Greek.]
The aim is to create a Macedonian Question with international
ramifications. The parties applying for recognition of the above association
are the enablers in this operation. This, in combination with the name of the
proposed association and with the whole content of its memorandum of
association, renders at least dubious the associations aims, which according
to the founder members seemingly lawful statement in clause 2 of the
memorandum of association, consist in the cultural, intellectual and artistic
advancement of its members, cultural decentralisation, etc. This assessment is

Leon E. Irish and Karla W. Simon 2005

22

supported by the content of clause 3, paragraph 2, of the same memorandum


of association, which states that all youths in the Florina area will be enrolled
in the proposed associations youth section. It is clear from this that there is a
danger that the immaturity of young people will be exploited and that youths
will be trapped by suitable propaganda in an ethnologically non-existent and
historically evacuated Slav-Macedonian minority. Clause 4 of the same
memorandum of association lays down the condition that enrolment in the
association is subject to written acceptance of the associations principles.
Nowhere in the associations memorandum of association, however, are these
principles defined. Thus the memorandum of association does not provide a
clear idea of who will enrol, since a clear definition of the principles
governing the proposed association is deliberately omitted. Lastly, the very
name of the association may be a source of confusion, because at first sight it
creates the impression that it refers to Macedonias Greek civilisation,
whereas in reality it envisages a specifically Slavic civilisation which does not
exist in the region in question. Altogether, this Court has good reasons in the
light of the foregoing to believe that the purpose of using the term
Macedonian is to dispute the Greek identity of Macedonia and its
inhabitants by indirect and therefore underhand means, and discerns an
intention on the part of the founders to undermine Greeces territorial
integrity. The impugned refusal of the application in question was therefore
justified, notwithstanding that it was based on shorter and partly different
reasoning; and the arguments to the contrary put forward in the present
appeal must fail.
C. The proceedings in the Court of Cassation
12. On 20 June 1991 the applicants appealed on points of law to the Court of
Cassation, relying, in particular, on Articles 2, 4, 5 and 12 of the Greek
Constitution and the corresponding provisions of the Convention. They
maintained that, contrary to law, the Court of Appeal had (a) not confined
itself to reviewing the lawfulness of the establishment of their association
namely whether the requirements of Articles 78 to 80 of the Civil Code had
been satisfied but had reviewed its desirability, relying on the presumed
intentions of the founder members, which (assuming them to have any
reality) could not, however, be the subject of judicial review at the stage of
granting the association legal recognition; (b) taken into consideration
information (in particular, irresponsible and unfounded press articles
concerning some of the founder members) that had not been produced by the
parties; (c) accepted as true certain matters that were of decisive importance
for the outcome of the proceedings without ordering evidence to be taken to
establish whether they were in fact true; (d) distorted the content of the
associations memorandum of association; and (e) not given sufficient reasons
in its judgment.

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23

13. In a judgment of 16 May 1994 the Court of Cassation upheld the Court of
Appeals judgment. It considered that the grounds of appeal were vague and
unfounded. It pointed out that under the special procedure for granting
recognition to associations, the inquisitorial system allowed the court to take
into account, of its own motion, matters which had not been mentioned by the
parties and that the court was not bound by the parties evidence and
assertions. The Court of Appeal had accepted the truth of certain
circumstances in reliance on the content of the associations memorandum of
association and on matters that were common knowledge and supported by
documents such as the press articles; and there had not, moreover, been any
distortion of the content of the memorandum of association. . . .
ii. extracts from the press articles on which the greek courts relied . . . .
14. Article in the 5 February 1991 issue of the Ethnos newspaper:
Skopje: Skopje has made use of three Greeks one of them a public
employee who made allegations of repression against the Greek
Government to a representative of the American embassy visiting villages in
in Florina. . . .
Sidiropoulos is a forestry official employed by the Greek State. These and
other Greeks belonging to an association called Home of Macedonian
Civilisation are controlled by Vasil Tuvorkovsky, a member of the central
committee of Yugoslavias Presidential Council and a frequent visitor to
Greece, where he stays in a mobile home in Halkidiki.
15. Article in the 17 March 1991 issue of the Ellinikos Voras newspaper: . . .
The application to be heard tomorrow in the Salonika Court of Appeal for
registration of the Home of Macedonian Civilisation will in fact set in motion
a provocation of the Greek system of justice which was planned abroad as far
back as 1989. The aim is to trap Greece into a series of legal refusals which
will then be used against Greece by Skopje in the European Court of Human
Rights and the Committee of Ministers at the Council of Europe in
Strasbourg. The plot is satanic because if the Greek courts accept the
application by the leader of the Aegean Macedonians, Greece will be
legalising a Trojan horse sent by Skopje to trap unwitting bilingual Greek
Macedonians and deliver them into the claws of foreigners and of
propaganda inspired from abroad.
The Slavic plot which is to be submitted tomorrow in Salonika to
unsuspecting appeal court judges is part of a directive released by
independence activists in Australia two years ago, in 1989, following their
first appearance on the international stage at the Council of Europe in
Strasbourg. At the time Macedonian professors Michael Radin and Chris

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24

Popov, who are Australian citizens, released a plan of action entitled The
road to Macedonian human rights on behalf of the Salonika section. The
report was written in English and printed abroad and its title mentions that it
is a publication of Christos Sidiropouloss secret phantom organisation in
Salonika. It contains 55 pages; page 38 contains the following revelations:
The following scenario is a convincing way of lawfully challenging the
denial of Macedonians rights by the Greek State. Macedonians from Aegean
Macedonia could, for instance, set up an association for popular dances with
the name Macedonian Folklore Association. The association will
undoubtedly be forbidden by the laws mentioned above, which prohibit
establishing groups on the ground of nationality. Provided that all appeals to
the lower courts are turned down, the case will go through the Greek judicial
system until it reaches the countrys highest court, the Court of Cassation. The
refusal of an appeal at that level will mean that all domestic legal remedies
have been exhausted. One of the conditions for submission of a case to the
Convention for the Protection of Human Rights will thus have been fulfilled.
Within six months of the Supreme Courts decision an application can be
submitted on the ground that the right to freedom of peaceful assembly and
association has been violated, with the result that the Court of Human Rights,
or the Committee of Ministers of the Council of Europe, will deliver a decision
against Greece.
III. RELEVANT DOMESTIC LAW
A. Constitution
16. Article 4 1 of the Constitution provides:
"All Greeks shall be equal before the law."
17. Article 12 1 of the Constitution provides:
"All Greeks shall be entitled to form non-profit-making unions and
associations, in accordance with the law, which may not, however, make the
exercise of this right subject to prior authorisation."
B. Civil Code
18. The Civil Code contains the following provisions concerning non-profitmaking associations:
Article 78
Associations

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25

"A union of persons pursuing a non-profit-making aim shall acquire legal


personality as soon as it has been entered in a special public register (of
associations) held at the Court of First Instance for the place where it has its
headquarters. At least twenty persons shall be necessary to form an
association."

Article 79
Application for the registration of an association
"In order to have an association registered, its founders or its management
committee must lodge an application with the Court of First Instance. The
application must be accompanied by the document establishing the
association, a list of the names of the members of the management committee
and the memorandum of association dated and signed by the committees
members."
Article 80
Memorandum of association
"To be valid, the memorandum of association must specify (a) the object,
name and headquarters of the association; (b) the conditions of admission,
withdrawal and expulsion of its members, together with their rights and
obligations; "

Article 81
Decision to register an association
"The Court of First Instance shall allow the application if it is satisfied that
all the legal requirements have been complied with"
Article 105
Dissolution of an association
"The Court of First Instance shall order the dissolution of an association
(c) if the association pursues aims different from those laid down in its
memorandum of association or if its object or its functioning prove to be
contrary to law, morality or public policy."
C. Code of Civil Procedure
19. The non-contentious procedure (ekoussia dikeodossia) followed by the
courts when they examine, among other things, applications to register an
association is governed by the following provisions:

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26

Article 744
"The court may of its own motion order any measure which might lead to
the establishment of relevant facts, even if these are not mentioned in the
parties submissions"

Article 759 2 and 3


"2. Where the court directs that evidence is to be taken, such evidence shall
be brought by one of the parties.
3. The court may of its own motion order any measure that it considers
necessary for establishing the facts, even if in so doing it departs from the
provisions governing the taking of evidence."
Furthermore, Article 336 1 provides:
"The court may, of its own motion and without directing that evidence is to
be taken, have regard to matters which are so widely known that their truth
cannot reasonably be put in doubt."
Lastly, Article 345 allows a party who does not have to discharge the burden
of proof to adduce refuting evidence.
AS TO THE LAW . . . .
II. ALLEGED VIOLATION OF ARTICLE 11 OF THE CONVENTION
30. The applicants alleged that the national courts refusal of their application
to register their association had infringed their right to freedom of association,
as guaranteed by Article 11 of the Convention, which provides:
"1. Everyone has the right to freedom of peaceful assembly and to freedom
of association with others, including the right to form and to join trade unions
for the protection of his interests.
2. No restrictions shall be placed on the exercise of these rights other than
such as are prescribed by law and are necessary in a democratic society in the
interests of national security or public safety, for the prevention of disorder or
crime, for the protection of health or morals or for the protection of the rights
and freedoms of others. This Article shall not prevent the imposition of lawful
restrictions on the exercise of these rights by members of the armed forces, of
the police or of the administration of the State."
A. Whether there was an interference

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27

31. The Court considers, as the applicants and the Commission did, that the
Greek courts refusal to register the applicants association amounts to an
interference by the authorities with the applicants exercise of their right to
freedom of association; the refusal deprived the applicants of any possibility
of jointly or individually pursuing the aims they had laid down in the
associations memorandum of association and of thus exercising the right in
question. This interference was not denied by the
Greek Government.
B. Justification for the interference
32. Such an interference will contravene Article 11 unless it was "prescribed
by law", pursued one or more of the legitimate aims under paragraph 2 and
was "necessary in a democratic society" for achieving them.
1. "Prescribed by law" . . . .
36. The Court considers that the interference was "prescribed by law", as
Articles 79 to 81 of the Civil Code allowed the courts to refuse an application
to register an association where they found that the validity of its
memorandum of association was open to question. More especially, the Court
notes like the Government that an associations aim, as set out in its
memorandum of association, must be the one really pursued by it and not be
contrary to law, morality or public policy; Article 105 of the Civil Code,
moreover, provides for the dissolution of an association already constituted
where it proves to be pursuing an aim different from the one laid down in its
memorandum of association (see paragraph 18 above).
2. Legitimate aim
37. The Government submitted that the interference in question pursued
several aims: the maintenance of national security, the prevention of disorder
and the upholding of Greeces cultural traditions and historical and cultural
symbols.
38. The Court is not persuaded that the last of those aims may constitute one
of the "legitimate aims" referred to in Article 11 2. Exceptions to freedom of
expression must be narrowly interpreted, such that the enumeration of them
is strictly exhaustive and the definition of them necessarily restrictive.
39. The Court notes nevertheless that the Salonika Court of Appeal based its
decision on the conviction that the applicants intended to dispute the Greek
identity of Macedonia and its inhabitants and undermine Greeces territorial
integrity. Having regard to the situation prevailing in the Balkans at the time
and to the political friction between Greece and the FYROM (see paragraph 42

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28

below), the Court accepts that the interference in issue was intended to
protect national security and prevent disorder.
3. "Necessary in a democratic society"
40. The Court points out that the right to form an association is an inherent
part of the right set forth in Article 11, even if that Article only makes express
reference to the right to form trade unions. That citizens should be able to
form a legal entity in order to act collectively in a field of mutual interest is
one of the most important aspects of the right to freedom of association,
without which that right would be deprived of any meaning. The way in
which national legislation enshrines this freedom and its practical application
by the authorities reveal the state of democracy in the country concerned.
Certainly States have a right to satisfy themselves that an associations aim
and activities are in conformity with the rules laid down in legislation, but
they must do so in a manner compatible with their obligations under the
Convention and subject to review by the Convention institutions.
Consequently, the exceptions set out in Article 11 are to be construed strictly;
only convincing and compelling reasons can justify restrictions on freedom of
association. In determining whether a necessity within the meaning of Article
11 2 exists, the States have only a limited margin of appreciation, which goes
hand in hand with rigorous European supervision embracing both the law
and the decisions applying it, including those given by independent courts.
When the Court carries out its scrutiny, its task is not to substitute its own
view for that of the relevant national authorities but rather to review under
Article 11 the decisions they delivered in the exercise of their discretion. This
does not mean that it has to confine itself to ascertaining whether the
respondent State exercised its discretion reasonably, carefully and in good
faith; it must look at the interference complained of in the light of the case as a
whole and determine whether it was "proportionate to the legitimate aim
pursued" and whether the reasons adduced by the national authorities to
justify it are "relevant and sufficient". In so doing, the Court has to satisfy
itself that the national authorities applied standards which were in conformity
with the principles embodied in Article 11 and, moreover, that they based
their decisions on an acceptable assessment of the relevant facts (see, the
United Communist Party of Turkey and Others judgment, 46 and 47). . . . .
44. The Court notes, in the first place, that the aims of the association called
"Home of Macedonian Civilisation", as set out in its memorandum of
association, were exclusively to preserve and develop the traditions and folk
culture of the Florina region (see paragraph 8 above). Such aims appear to the
Court to be perfectly clear and legitimate; the inhabitants of a region in a
country are entitled to form associations in order to promote the regions
special characteristics, for historical as well as economic reasons. Even

Leon E. Irish and Karla W. Simon 2005

29

supposing that the founders of an association like the one in the instant case
assert a minority consciousness, the Document of the Copenhagen Meeting of
the Conference on the Human Dimension of the CSCE (Section IV) of 29 June
1990 and the Charter of Paris for a New Europe of 21 November 1990 which
Greece has signed allow them to form associations to protect their cultural
and spiritual heritage. In the second place, in justifying its refusal of the
application for registration, the Salonika Court of Appeal decided that it had
"good reasons to believe that the purpose of using the term Macedonian
[was] to dispute the Greek identity of Macedonia and its inhabitants by
indirect and therefore underhand means, and discern[ed] in it an intention on
the part of the founders to undermine Greeces territorial integrity".
In reaching that decision, the Court of Appeal, of its own motion, took into
consideration as evidence material which the applicants maintained they had
not been able to challenge during the proceedings as it had not been placed in
the case file.
45. The Court reiterates that the taking of evidence is governed primarily by
the rules of domestic law and that it is in principle for the national courts to
assess the evidence before them (see, among many other authorities, the Sadi
v. France judgment of 20 September 1993, Series A no. 261-C, p. 56, 43).
However, careful study of the press articles in question (see paragraphs 14
and 15 above), which had a decisive influence on the outcome of the
proceedings, shows that they reported matters some of which were
unconnected with the applicants and drew inferences derived from a
subjective assessment by the authors of the articles. Relying on those articles
and having regard to the political dispute that then dominated relations
between Greece and the FYROM (the latter of which had not yet even
proclaimed its independence at the material time), the national courts held
that the applicants and the association they wished to found represented a
danger to Greeces territorial integrity.
That statement, however, was based on a mere suspicion as to the true
intentions of the associations founders and the activities it might have
engaged in once it had begun to function.
The Court also takes into account in this context the fact that Greek law does
not lay down a system of preventive review for setting up non-profit-making
associations. Article 12 of the Constitution provides that the forming of
associations cannot be made subject to prior authorisation (see paragraph 17
above); Article 81 of the Civil Code allows the courts merely to review
lawfulness and not to review desirability (see paragraph 18 above).
46. In the United Communist Party of Turkey and Others judgment cited
above (p. , 58) the Court held that it could not rule out that a political

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30

partys programme might conceal objectives and intentions different from the
ones it proclaimed. To verify that it did not, the content of the programme
had to be compared with the partys actions and the positions it defended.
Similarly, in the instant case the Court does not rule out that, once founded,
the association might, under cover of the aims mentioned in its memorandum
of association, have engaged in activities incompatible with those aims. Such
a possibility, which the national courts saw as a certainty, could hardly have
been belied by any practical action as, having never existed, the association
did not have time to take any action. If the possibility had become a reality,
the authorities would not have been powerless; under Article 105 of the Civil
Code, the Court of First Instance could order that the association should be
dissolved if it subsequently pursued an aim different from the one laid down
in its memorandum of association or if its functioning proved to be contrary
to law, morality or public policy (see paragraph 18 above).
47. In the light of the foregoing, the Court concludes that the refusal to
register the applicants association was disproportionate to the objectives
pursued. That being so, there has been a violation of Article 11.

1.4

FREEDOM AND DEMOCRACY PARTY (ZDEP) v. TURKEY


JUDGMENT
STRASBOURG
8 December 1999

The European Court of Human Rights, sitting . . . as a Grand Chamber . . . .


THE FACTS . . . .
8. The Freedom and Democracy Party (ZDEP) was founded on 19 October 1992.
Its constitution was lodged with the Ministry of the Interior the same day. Its
programme included the following passages. . . .
The dominant Turkish philosophy has been maintained up to the present day,
overriding the most natural rights and claims of the Kurdish people, by means of
militaristic and chauvinistic propaganda and a policy of exile and destruction. State
policy, based on a capitalist system designed to oppress minorities particularly
Kurdish minorities, but even Turkish ones has been pursued in the name of
modernisation and westernisation. . . . .
The Freedom and Democracy Party uses political, democratic and ideological
means to combat all fascist, fundamentalist, chauvinistic and racist movements or
organisations hindering solidarity, unity and brotherhood between peoples.
Both in domestic and foreign policy, the aim of the Freedom and Democracy Party is
to protect the interests of our peoples and those of all workers. ZDEP is the
guarantor of the cultural, occupational, economic and political values of the various

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31

national or religious minorities and of every socio-professional category. It seeks


recognition of the right to form a political party.
Our Party will guarantee the religious and national minorities the right to worship
as they please, to practise their religion freely, to freedom of thought and to respect
for their customs, cultures and languages. Every individual will be entitled to use the
media, especially radio and television. . . .
ZDEP supports the just and legitimate struggle of the peoples for independence
and freedom. It stands by them in this struggle.
Our Party proposes the creation of a democratic assembly of representatives of the
people elected by universal suffrage. This assembly will represent the interests of the
Turkish people, the Kurdish people and any other minority. . . .
The Freedom and Democracy Party considers that there can be democracy only if
the Kurdish problem is solved. This problem concerns every Turk and Kurd who
supports freedom and democracy. The Freedom and Democracy Party favours a
peaceful and democratic solution to the Kurdish problem, subject to the strict
application of international instruments such as the Helsinki Final Act, the European
Convention on Human Rights and the Universal Declaration of Human Rights. The
Freedom and Democracy Party will fully respect the Kurdish peoples right to selfdetermination so that a democratic solution based on the self-determination and
equality of peoples can be found.
Currently, our legislation and the manner in which the legal system operates are
inherently undemocratic, contrary to fundamental human rights and freedoms and
based on class interests. They deny the Kurdish people an identity and forbid any
form of workers organisation or association. They are racist and retrograde. . . .
The education system from primary school to university will be based on education
in ones mother tongue. A persons mother tongue shall be given precedence in court
proceedings ...
B. The application to have ZDEP dissolved
9. On 29 January 1993, Principal State Counsel at the Court of Cassation (Principal
State Counsel) applied to the Turkish Constitutional Court to have ZDEP
dissolved on the grounds that it had infringed the principles of the Constitution and
the Law on the regulation of political parties. He considered that the content and
aims set out in the partys programme sought to undermine the territorial integrity
and secular nature of the State and the unity of the nation. . . .
C. Dissolution of ZDEP
12. On 30 April 1993, while the Constitutional Court proceedings were still
pending, a meeting of the founding members of ZDEP resolved to dissolve the
party. . . .
14. On 14 July 1993 the Constitutional Court made an order dissolving ZDEP,
notably on the ground that its programme was apt to undermine the territorial
integrity of the State and the unity of the nation and violated both the Constitution
and sections 78(a) and 81(a) and (b) of the Law on the regulation of political parties. .
. . The Constitutional Court held, firstly, that, pursuant to section 108 of the Law on
the regulation of political parties, ZDEPs resolution to go into voluntary
dissolution did not prevent that court from ruling on the merits of the case as it had
been made after the commencement of the proceedings before it.

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32

As to the merits, the Constitutional Court began by reiterating the constitutional


principles that all persons living on Turkish territory, whatever their ethnic origin,
formed a whole united by their common culture. The sum of the persons who made
up the Republic of Turkey was called the Turkish nation. The different ethnic
groups making up the Turkish nation were not divided into a majority and
minorities. The court reiterated that, under the Constitution, no political or legal
distinction based on ethnic or racial origin could be made between citizens: all
Turkish nationals, without distinction, could avail themselves of all civil, political
and economic rights.
With particular reference to Turkish citizens of Kurdish origin, the Constitutional
Court held that in every region of Turkey such persons enjoyed the same rights as
other Turkish citizens. That did not mean that the Constitution denied the existence
of a Kurdish identity, since citizens of Kurdish origin were not forbidden to express
their Kurdish identity. The Kurdish language could be used on all private premises,
in workplaces, in the press and in works of art and literature. . . .
With regard to the content of ZDEPs programme, the Constitutional Court
observed that it was based on the assumption that there was a separate Kurdish
people in Turkey with its own culture and language. The Kurds were portrayed in
the programme as an oppressed people whose democratic rights were being
completely ignored. According to the Constitutional Court, ZDEP called for a right
to self-determination for the Kurds and supported their right to wage a war of
independence. Its stance was similar to that of terrorist organisations and
constituted in itself an incitement to insurrection. . . .
The Constitutional Court pointed to the fact that the Charter of Paris for a New
Europe condemned racism, ethnic hatred and terrorism and that the Helsinki Final
Act guaranteed the inviolability of national frontiers and territorial integrity. It
concluded that ZDEPs activities were subject, inter alia, to the restrictions referred
to in paragraph 2 of Article 11 and to Article 17 of the Convention.
II. relevant domestic law
A. The Constitution
15. The relevant provisions of the Constitution read as follows: . . . . [Article 14 1,
Article 66 1,(Former) Article 68, and (Former) Article 69 see Reader, pages 8-10
supra.]
B. Law no. 2820 on the regulation of political parties: . . . [Section 78, Section 80,
Section 81, and Section 96(3) see Reader, pages 10-11 supra.]
Section 108
A resolution by the competent body of a political party dissolving that party after
an application for its dissolution has been lodged shall not prevent the proceedings
before the Constitutional Court continuing or deprive any dissolution order that is
made of its legal effects.
PROCEEDINGS BEFORE THE COMMISSION
17. ZDEP applied to the Commission on 21 March 1994. It alleged a violation of
Articles 9, 10, 11 and 14 of the Convention.

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33

18. The Commission declared the application (no. 23885/94) admissible on 2


September 1996. In its report of 12 March 1998 (former Article 31 of the Convention),
it expressed the opinion, by twenty-nine votes to one, that there had been a violation
of Article 11, that no separate issue arose under Articles 9 or 10 and that it was
unnecessary to examine separately whether there had been a violation of Article 14. .
..
TO THE LAW . . .
B. Merits of the complaint
1. Whether there has been an interference
27. All of those appearing before the Court accepted that ZDEPs dissolution
amounted to an interference with the freedom of association of its members. The
Court takes the same view.
2. Whether the interference was justified
28. Such an interference will constitute a breach of Article 11 unless it was
prescribed by law, pursued one or more legitimate aims under paragraph 2 and
was necessary in a democratic society for the achievement of those aims.
(a) Prescribed by law
29. It was common ground that the interference was prescribed by law, as the
measures ordered by the Constitutional Court were based on the Constitution and
sections 78, 81 and 89 of Law no. 2820 on the regulation of political parties (see
paragraphs 15-16 above).
(b) Legitimate aim
30. The Government maintained that the interference pursued a number of
legitimate aims: preventing disorder, protecting the rights of others and ensuring
national security, including the territorial integrity of the country.
31. The applicant party denied that it had ever been a threat to Turkish society.
32. The Commission considered that the impugned measures could be regarded as
having pursued at least one of the legitimate aims set out in paragraph 2 of Article
11: the protection of territorial integrity and thus the preservation of national
security.
33. The Court shares the Commissions view on this point.
(c) Necessary in a democratic society . . . .
37. The Court reiterates that notwithstanding its autonomous role and particular
sphere of application, Article 11 must also be considered in the light of Article 10.
The protection of opinions and the freedom to express them is one of the objectives
of the freedoms of assembly and association as enshrined in Article 11. That applies
all the more in relation to political parties in view of their essential role in ensuring
pluralism and the proper functioning of democracy.
As the Court has said many times, there can be no democracy without pluralism. It
is for that reason that freedom of expression as enshrined in Article 10 is applicable,
subject to paragraph 2, not only to information or ideas that are favourably
received or regarded as inoffensive or as a matter of indifference, but also to those
that offend, shock or disturb. The fact that their activities form part of a collective
exercise of freedom of expression in itself entitles political parties to seek the

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34

protection of Articles 10 and 11 of the Convention (see, among other authorities, the
United Communist Party of Turkey and Others judgment cited above, pp. 20-21,
42-43).
38. In the instant case, it must firstly be noted that in its judgment of 14 July 1993,
the reasons given by the Constitutional Court for ordering ZDEPs dissolution
were that the partys programme tended to undermine the territorial integrity of the
State and the unity of the nation, while violating the Constitution and sections 78(a)
and 81(a) and (b) of the Law on the regulation of political parties. In the
Constitutional Courts view, the programme was based on the assumption that there
was a separate Kurdish people in Turkey with its own culture and language. The
Kurds were presented in the programme as an oppressed people whose democratic
rights were being completely ignored. ZDEP had called for a right to selfdetermination for the Kurds and supported their right to wage a war of
independence. Its stance was similar to that of terrorist organisations and
constituted in itself an incitement to insurrection. That justified making an order for
its dissolution (see paragraph 14 above).
In addition, the Constitutional Court found that, by advocating the abolition of the
government Religious Affairs Department in its programme (on the ground that
religious affairs should be under the control of the religious institutions themselves),
ZDEP had undermined the principle of secularism. The Constitutional Court
therefore held that there had been a breach of section 89 of the Law on the regulation
of political parties.
39. In the light of these factors, the Court must consider the content of the passages
in issue and determine whether it justified ZDEPs dissolution.
With regard to the first issue the Court reiterates that when it carries out its
scrutiny, its task is not to substitute its own view for that of the relevant national
authorities but rather to review under Article 11 the decisions they delivered in the
exercise of their discretion. In so doing, the Court has in particular to satisfy itself
that the national authorities based their decisions on an acceptable assessment of the
relevant facts (see, mutatis mutandis, the Socialist Party and Others judgment cited
above, p. 1256, 44).
40. Having analysed ZDEPs programme, the Court finds nothing in it that can be
considered a call for the use of violence, an uprising or any other form of rejection of
democratic principles. That, in the Courts view is an essential factor to be taken into
consideration (see, mutatis mutandis, Okuolu v. Turkey [GC], no. 24246/94, 48, 8
July 1999, unreported). On the contrary, the need to abide by democratic rules when
implementing the proposed political project was stressed in the programme. Among
other things, it says that ZDEP proposes the creation of a democratic assembly of
representatives of the people elected by universal suffrage and favours a peaceful
and democratic solution to the Kurdish problem, subject to the strict application of
international instruments such as the Helsinki Final Act, the European Convention
on Human Rights and the Universal Declaration of Human Rights (see paragraph 8
above).
According to the Government, however, ZDEP openly supported the armed
struggle by declaring in a statement leaving no room for doubt that ZDEP
supports the just and legitimate struggle of the peoples for independence and
freedom. It stands by them in this struggle.

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35

While the Court considers that that phrase did represent a statement of intent by
ZDEP to make certain political demands, it finds nothing in it that would incite
people to use violence or break the rules of democracy. In that respect, the passage
concerned is virtually indistinguishable from passages to be found in the
programmes of certain bodies that are politically active in other member States of the
Council of Europe.
41. The Constitutional Court also criticised ZDEP for having distinguished two
nations in its programme the Kurds and the Turks and for having referred to the
existence of minorities and to their right to self-determination, to the detriment of the
unity of the Turkish nation and the territorial integrity of the Turkish State.
The Court notes that, taken together, the passages in issue present a political project
whose aim is in essence the establishment in accordance with democratic rules of
a social order encompassing the Turkish and Kurdish peoples. It is stated
elsewhere in the programme that [t]he Freedom and Democracy Party is
campaigning for the voluntary unification of the Kurdish and Turkish peoples, who
participated in the foundation of the country. It is true that in its programme
ZDEP also refers to the right to self-determination of the national or religious
minorities; however, taken in context, those words do not encourage people to seek
separation from Turkey but are intended instead to emphasise that the proposed
political project must be underpinned by the freely given, democratically expressed,
consent of the Kurds.
In the Courts view, the fact that such a political project is considered incompatible
with the current principles and structures of the Turkish State does not mean that it
infringes democratic rules. It is of the essence of democracy to allow diverse political
projects to be proposed and debated, even those that call into question the way a
State is currently organised, provided that they do not harm democracy itself (see the
Socialist Party and Others judgment cited above, p. 1257, 47). The same applies,
too, to ZDEPs proposals for the abolition of the Religious Affairs Department.
42. Admittedly, it cannot be ruled out that the passages concerned may conceal a
different political design from the publicly proclaimed one. However, given the
absence of any concrete acts suggesting otherwise, there is no reason to cast doubts
on the genuineness of ZDEPs programme. ZDEP was therefore penalised solely
for exercising its freedom of expression.
43. The Court must now determine whether, in the light of the above
considerations, ZDEPs dissolution can be considered to have been necessary in a
democratic society, that is to say whether it met a pressing social need and was
proportionate to the legitimate aim pursued (see the Socialist Party and Others
judgment cited above, p. 1258, 49).
44. In view of the essential role played by political parties in the proper functioning
of democracy (see the United Communist Party of Turkey and Others judgment cited
above, p. 17, 25), the exceptions set out in Article 11 are, where political parties are
concerned, to be construed strictly; only convincing and compelling reasons can
justify restrictions on such parties freedom of association. In determining whether a
necessity within the meaning of Article 11 2 exists, the Contracting States have only
a limited margin of appreciation, which goes hand in hand with rigorous European
supervision embracing both the law and the decisions applying it, including those
given by independent courts (ibid., p. 22, 46).

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36

Further, the Court has previously held that one of the principal characteristics of
democracy is the possibility it offers of resolving a countrys problems through
dialogue, without recourse to violence, even when they are irksome. Democracy
thrives on freedom of expression. From that point of view, there can be no
justification for hindering a political group solely because it seeks to debate in public
the situation of part of the States population and to take part in the nations political
life in order to find, according to democratic rules, solutions capable of satisfying
everyone concerned (see the Socialist Party and Others judgment cited above,
p. 1256, 45).
45. In the instant case, the Court notes that the interference in issue was radical:
ZDEP was definitively dissolved with immediate effect, its assets were liquidated
and transferred ipso jure to the Treasury and its leaders were banned from carrying
on certain similar political activities. Such drastic measures may be taken only in the
most serious cases.
46. The Court has already noted that the relevant passages in ZDEPs
programme, though voicing criticism and demands, do not in its view call into
question the need to comply with the principles and rules of democracy.
The Court takes into account the background of cases before it, in particular the
difficulties associated with the fight against terrorism (see, among other authorities,
the United Communist Party of Turkey and Others
judgment cited above, p. 27, 59). In that connection, the Government have affirmed
that ZDEP bears a share of the responsibility for the problems caused by terrorism
in Turkey (see paragraph 35 above). The Government nonetheless fail to explain how
that could be so as ZDEP scarcely had time to take any significant action. It was
formed on 19 October 1992, the first application for it to be dissolved was made on 29
January 1993 and it was dissolved, initially at a meeting of its founding members on
30 April 1993 and then by the Constitutional Court on 14 July 1993. Any danger there
may have been could have come only from ZDEPs programme, but there, too, the
Government have not established in any convincing manner how, despite their
declared attachment to democracy and peaceful solutions, the passages in issue in
ZDEPs programme could be regarded as having exacerbated terrorism in Turkey. .
..
48. In conclusion, ZDEPs dissolution was disproportionate to the aim pursued
and consequently unnecessary in a democratic society. It follows that there has been
a violation of Article 11 of the Convention.

1.5

REFAH PARTISI (THE WELFARE PARTY) AND OTHERS V. TURKEY

JUDGMENT
(Grand Chamber)
STRASBOURG
13 February 2003
PROCEDURE

Leon E. Irish and Karla W. Simon 2005

37

1. The case originated in four applications (nos. 41340/98, 41342/98,


41343/98 and 41344/98) against the Republic of Turkey lodged with the
European Commission of Human Rights (the Commission) under former
Article 25 of the Convention for the Protection of Human Rights and
Fundamental Freedoms (the Convention) by a Turkish political party,
Refah Partisi (the Welfare Party Refah) and three Turkish nationals,
Mr Necmettin Erbakan, Mr evket Kazan and Mr Ahmet Tekdal (the
applicants) on 22 May 1998. . . .
5. On 31 July 2001 the Chamber gave judgment, holding by four votes to
three that there had been no violation of Article 11 of the Convention and
unanimously that it was not necessary to examine separately the complaints
under Articles 9, 10, 14, 17 and 18 of the Convention and Articles 1 and 3 of
Protocol No. 1. The joint dissenting opinion of Judges Fuhrmann, Loucaides
and Sir Nicolas Bratza was annexed to the judgment.
6. On 30 October 2001 the applicants requested, under Article 43 of the
Convention and Rule 73, that the case be referred to the Grand Chamber. . . .
THE FACTS
I. THE CIRCUMSTANCES OF THE CASE
A. The applicants
10. The first applicant, Refah Partisi (the Welfare Party Refah), was a
political party founded on 19 July 1983. It was represented by its chairman,
Mr Necmettin Erbakan, who is also the second applicant. . . .
11. Refah took part in a number of general and local elections. In the local elections
in March 1989 Refah obtained about 10% of the votes and its candidates were elected
mayor in a number of towns, including five large cities. In the general election of
1991 it obtained 16.88% of the votes. The sixty-two MPs elected as a result took part
between 1991 and 1995 in the work of Parliament and its various committees,
including the Committee on Constitutional Questions, which proposed amendments
to Article 69 of the Constitution that became law on 23 July 1995. . . .

Ultimately, Refah obtained approximately 22% of the votes in the general


election of 24 December 1995 and about 35% of the votes in the local elections
of 3 November 1996. The results of the 1995 general election made Refah the
largest political party in Turkey with a total of 158 seats in the Grand National
Assembly (which had 450 members at the material time). On 28 June 1996
Refah came to power by forming a coalition government with the centre-right
True Path Party (Doru Yol Partisi), led by Mrs Tansu Ciller. According to an
opinion poll carried out in January 1997, if a general election had been held at
that time, Refah would have obtained 38% of the votes. The same poll

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predicted that Refah might obtain 67% of the votes in the general election to
be held roughly four years later. . . .
B. Proceedings in the Constitutional Court
1. Principal State Counsels submissions
12. On 21 May 1997 Principal State Counsel at the Court of Cassation
applied to the Turkish Constitutional Court to have Refah dissolved on the
grounds that it was a centre (mihrak) of activities contrary to the principles
of secularism. . . .
4. The Constitutional Courts judgments
22. In a judgment of 9 January 1998, which it delivered following
proceedings on preliminary issues it had instituted of its own motion as the
court dealing with the merits, the Constitutional Court ruled that, regard
being had to Article 69 6 of the Constitution, the second paragraph of
section 103 of the Law on the regulation of political parties was
unconstitutional and declared it null and void. Article 69 6, taken together
with section 101(d) of the same Law, provided that for a political party to be
considered a centre of activities contrary to the fundamental principles of
the Republic its members had to have been convicted of criminal offences.
According to the Constitutional Court, that legal restriction did not cover all
cases where the principles of the Republic had been flouted. It pointed out,
among other observations, that after the repeal of Article 163 of the Criminal
Code activities contrary to the principle of secularism no longer attracted
criminal penalties.
23. On 16 January 1998 the Constitutional Court dissolved Refah on the
ground that it had become a centre of activities contrary to the principle of
secularism. It based its decision on sections 101(b) and 103(1) of Law no. 2820
on the regulation of political parties. It also noted the transfer of Refahs assets
to the Treasury as an automatic consequence of dissolution, in accordance
with section 107 of Law no. 2820. . . .
26. The Constitutional Court held that the following evidence proved that
Refah had become a centre of activities contrary to the principle of secularism
(see paragraphs 27-39 below):
27. Refahs chairman, Mr Necmettin Erbakan, had encouraged the wearing
of Islamic headscarves in public and educational establishments. On 10
October 1993, at the partys Fourth Ordinary General Meeting, he had said:
... when we were in government, for four years, the notorious Article 163 of
the Persecution Code was never applied against any child in the country. In

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our time there was never any question of hostility to the wearing of
headscarves ...
In his speech of 14 December 1995 before the general election he had said:
... [university] chancellors are going to retreat before the headscarf when
Refah comes to power.
But manifesting ones religion in such a manner amounted to exerting
pressure on persons who did not follow that practice and created
discrimination on the ground of religion or beliefs. That finding was
supported by various rulings of the Constitutional Court and the Supreme
Administrative Court and by the case-law of the European Commission of
Human Rights on applications nos. 16278/90 and 18783/91 concerning the
wearing of headscarves at universities.
28. The plurality of legal systems proposed by Mr Necmettin Erbakan was
nothing to do with the freedom to enter into contracts as Refah claimed, but
was an attempt to establish a distinction between citizens on the ground of
their religion and beliefs and was aimed at the installation of a theocratic
regime. On 23 March 1993 Mr Erbakan had made the following speech to the
National Assembly:
... you shall live in a manner compatible with your beliefs. We want
despotism to be abolished. There must be several legal systems. The citizen
must be able to choose for himself which legal system is most appropriate for
him, within a framework of general principles. Moreover, that has always
been the case throughout our history. In our history there have been various
religious movements. Everyone lived according to the legal rules of his own
organisation, and so everyone lived in peace. Why, then, should I be obliged
to live according to anothers rules? ... The right to choose ones own legal
system is an integral part of the freedom of religion.
In addition, Mr Necmettin Erbakan had spoken as follows on 10 October
1993 at a Refah party conference:
... we shall guarantee all human rights. We shall guarantee to everyone the
right to live as he sees fit and to choose the legal system he prefers. We shall
free the administration from centralism. The State which you have installed is
a repressive State, not a State at the peoples service. You do not allow the
freedom to choose ones code of law. When we are in power a Muslim will be
able to get married before the mufti, if he wishes, and a Christian will be able
to marry in church, if he prefers.
29. The plurality of legal systems advocated by Mr Necmettin Erbakan in his
speeches had its origin in the practice introduced in the first years of Islam by

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the Medina Agreement, which had given the Jewish and polytheist
communities the right to live according to their own legal systems, not
according to Islamic law. On the basis of the Medina Agreement some
Islamist thinkers and politicians had proposed a model of peaceful social coexistence under which each religious group would be free to choose its own
legal system. Since the foundation of the Nizam Party in 1970 (dissolved by a
judgment of 2 May 1971) Mr Necmettin Erbakan had been seeking to replace
the single legal system with a plurality of legal systems.
30. The Constitutional Court further observed that in a plurality of legal
systems, as proposed by Refah, society would have to be divided into several
religious movements; each individual would have to choose the movement to
which he wished to belong and would thus be subjected to the rights and
obligations prescribed by the religion of his community. The Constitutional
Court pointed out that such a system, whose origins lay in the history of Islam
as a political regime, was inimical to the consciousness of allegiance to a
nation having legislative and judicial unity. It would naturally impair judicial
unity since each religious movement would set up its own courts and the
ordinary courts would be obliged to apply the law according to the religion of
those appearing before them, thus obliging the latter to reveal their beliefs. It
would also undermine legislative and judicial unity, the preconditions for
secularism and the consciousness of nationhood, given that each religious
movement would be empowered to decree what legal rules should be
applicable to its members.
31. In addition, Mr Necmettin Erbakan had made a speech on 13 April 1994
to the Refah group in Parliament in which he had advocated setting up a
theocratic regime, if necessary through force:
The second important point is this: Refah will come to power and a just
[social] order [adil dozen] will be established. The question we must ask
ourselves is whether this change will be violent or peaceful; whether it will
entail bloodshed. I would have preferred not to have to use those terms, but
in the face of all that, in the face of terrorism, and so that everyone can see the
true situation clearly, I feel obliged to do so. Today Turkey must take a
decision. The Welfare Party will establish a just order, that is certain. [But]
will the transition be peaceful or violent; will it be achieved harmoniously or
by bloodshed? The sixty million [citizens] must make up their minds on that
point.
32. The reception given by Mr Necmettin Erbakan at the Prime Ministers
residence to the leaders of various religious movements, who had attended in
vestments denoting their religious allegiance, unambiguously evidenced
Refahs chairmans support for these religious groups vis--vis public opinion.

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33. In a public speech in April 1994 Mr evki Ylmaz, MP for the province of
Rize, had issued a clear call to wage a jihad and had argued for the
introduction of Islamic law, making the following declaration:
We shall certainly call to account those who turn their backs on the precepts
of the Koran and those who deprive Allahs Messenger of his jurisdiction in
their country.
In another public speech, also in April 1994, Mr evki Ylmaz had said:
In the hereafter you will be summoned with the leaders you have chosen in
this life. ... Have you considered to what extent the Koran is applied in this
country? I have done the sums. Only 39% [of the rules] in the Koran are
applied in this country. Six thousand five hundred verses have been quietly
forgotten ... You found a Koranic school, you build a hostel, you pay for a
childs education, you teach, you preach. ... None of that is part of the chapter
on jihad but of that on the amel-i salih [peacetime activities]. Jihad is the name
given to the quest for power for the advent of justice, for the propagation of
justice and for glorification of Allahs Word. Allah did not see that task as an
abstract political concept; he made it a requirement for warriors [cahudi].
What does that mean? That jihad must be waged by an army! The
commander is identified ... The condition to be met before prayer [namaz] is
the Islamisation of power. Allah says that, before mosques, it is the path of
power which must be Muslim ... It is not erecting vaulted ceilings in the
places of prayer which will lead you to Paradise. For Allah does not ask
whether you have built up vaulted ceilings in this country. He will not ask
that. He will ask you if you have reached a sufficient level ... today, if Muslims
have a hundred liras, they must give thirty to the Koranic schools, to train our
children, girls and boys, and sixty must be given to the political
establishments which open the road to power. Allah asked all His prophets to
fight for power. You cannot name a single member of a religious movement
who does not fight for power. I tell you, if I had as many heads as I have hairs
on my head, even if each of those heads were to be torn from my shoulders
for following the way of the Koran, I would not abandon my cause ... The
question Allah will ask you is this: Why, in the time of the blasphemous
regime, did you not work for the construction of an Islamic State? Erbakan
and his friends want to bring Islam to this country in the form of a political
party. The prosecutor understood that clearly. If we could understand that as
he did, the problem would be solved. Even Abraham the Jew has realised that
in this country the symbol of Islam is Refah. He who incites the Muslim
community [cemaat] to take up arms before political power is in Muslim
hands is a fool, or a traitor doing the bidding of others. For none of the
prophets authorised war before the capture of State power. ... Muslims are
intelligent. They do not reveal how they intend to beat their enemy. The
general staff gives orders and the soldiers obey. If the general staff reveals its
plan, it is up to the commanders of the Muslim community to make a new

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plan. Our mission is not to talk, but to apply the war plan, as soldiers in the
army ...
Criminal proceedings had been brought against Mr evki Ylmaz. Although
his antipathy to secularism was well-known, Refah had adopted him as a
candidate in local-government elections. After he had been elected mayor of
Rize, Refah had made sure that he was elected as an MP in the Turkish Grand
National Assembly.
34. In a public speech on 14 March 1993 and a television interview first
recorded in 1992 and rebroadcast on 24 November 1996, Mr Hasan Hseyin
Ceylan, Refah MP for the province of Ankara, had encouraged discrimination
between believers and non-believers and had predicted that if the supporters
of applying sharia came to power they would annihilate non-believers:
Our homeland belongs to us, but not the regime, dear brothers. The regime
and Kemalism belong to others. ... Turkey will be destroyed, gentlemen.
People say: Could Turkey become like Algeria? Just as, in Algeria, we got 81%
[of the votes], here too we will reach 81%, we will not remain on 20%. Do not
waste your energy on us I am speaking here to you, to those ... of the
imperialist West, the colonising West, the wild West, to those who, in order to
unite with the rest of the world, become the enemies of honour and modesty,
those who lower themselves to the level of dogs, of puppies, in order to
imitate the West, to the extent of putting dogs between the legs of Muslim
women it is to you I speak when I say: Do not waste your energy on us, you
will die at the hands of the people of Krkkale.
... the army says: We can accept it if youre a supporter of the PKK, but a
supporter of sharia, never. Well you wont solve the problem with that
attitude. If you want the solution, its sharia.
Refah had ensured that Mr Ceylan was elected as an MP and its local
branches had played videotapes of this speech and the interview.
35. Refahs vice-chairman, Mr Ahmet Tekdal, in a speech he made in 1993
while on pilgrimage in Saudi Arabia which was shown by a Turkish
television station, had said that he advocated installing a regime based on
sharia:
In countries which have a parliamentary regime, if the people are not
sufficiently aware, if they do not work hard enough to bring about the advent
of hak nizami [a just order or Gods order], two calamities lie ahead. The first
calamity is the renegades they will have to face. They will be tyrannised by
them and will eventually disappear. The second calamity is that they will not
be able to give a satisfactory account of themselves to Allah, as they will not
have worked to establish hak nizami. And so they will likewise perish.

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Venerable brothers, our duty is to do what is necessary to introduce the


system of justice, taking these subtleties into consideration. The political
apparatus which seeks to establish hak nizami in Turkey is the Welfare
Party.
36. On 10 November 1996 the mayor of Kayseri, Mr kr Karatepe, had
urged the population to renounce secularism and asked his audience to keep
their hatred alive until the regime was changed, in the following terms:
The dominant forces say either you live as we do or we will sow discord
and corruption among you. So even Welfare Party Ministers dare not reveal
their world-outlook inside their Ministries. This morning I too attended a
ceremony in my official capacity. When you see me dressed up like this in all
this finery, dont think its because Im a supporter of secularism. In this
period when our beliefs are not respected, and indeed are blasphemed
against, I have had to attend these ceremonies in spite of myself. The Prime
Minister, other Ministers and MPs have certain obligations. But you have no
obligations. This system must change. We have waited, we will wait a little
longer. Let us see what the future has in store for us. And let Muslims keep
alive the resentment, rancour and hatred they feel in their hearts.
Mr kr Karatepe had been convicted of inciting the people to hatred on
the ground of religion.
37. On 8 May 1997 Mr brahim Halil elik, Refah MP for the province of
anlurfa, had spoken in Parliament in favour of the establishment of a regime
based on sharia and approving acts of violence like those which were taking
place in Algeria:
If you attempt to close down the mam-Hatip theological colleges while the
Welfare Party is in government, blood will flow. It would be worse than in
Algeria. I too would like blood to flow. Thats how democracy will be
installed. And it will be a beautiful thing. The army has not been able to deal
with 3,500 members of the PKK. How would it see off six million Islamists? If
they piss into the wind theyll get their faces wet. If anyone attacks me I will
strike back. I will fight to the end to introduce sharia.
Mr brahim Halil elik had been expelled from the party one month after the
application for dissolution had been lodged. His exclusion had probably only
been an attempt to evade the penalty in question.
38. Refahs vice-chairman, the Minister of Justice, Mr evket Kazan, had
visited a person detained pending trial for activities contrary to the principle
of secularism, thus publicly lending him his support as a Minister.

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39. On the basis of the evidence adduced on 7 July 1997 by Principal State
Counsels Office, the Constitutional Court held that the following further
evidence confirmed that Refah was a centre of activities contrary to the
principle of secularism:
In a public speech on 7 May 1996 Mr Necmettin Erbakan had emphasised
the importance of television as an instrument of propaganda in the holy war
being waged in order to establish Islamic order:
... A State without television is not a State. If today, with your leadership,
you wished to create a State, if you wanted to set up a television station, you
would not even be able to broadcast for more than twenty-four hours. Do you
believe it is as easy as that to create a State? Thats what I told them ten years
ago. I remember it now. Because today people who have beliefs, an audience
and a certain vision of the world, have a television station of their own,
thanks be to God. It is a great event.
Conscience, the fact that the television [channel] has the same conscience in
all its programmes, and that the whole is harmonious, is very important. A
cause cannot be fought for without [the support of] television. Besides, today
we can say that television plays the role of artillery or an air force in the jihad,
that is the war for domination of the people ... it would be unthinkable to send
a soldier to occupy a hill before those forces had shelled or bombed it. That is
why the jihad of today cannot be waged without television. So, for something
so vital, sacrifices must be made. What difference does it make if we sacrifice
money? Death is close to all of us. When everything is dark, after death, if you
want something to show you the way, that something is the money you give
today, with conviction, for Kanal 7. It was to remind you of that that I shared
my memories with you.
... That is why, from now on, with that conviction, we will truly make every
sacrifice, until it hurts. May those who contribute, with conviction, to the
supremacy of Hakk [Allah] be happy. May Allah bless you all, and may He
grant Kanal 7 even more success. Greetings.
By a decree of 13 January 1997 the cabinet (in which the Refah members
formed a majority) had reorganised working hours in public establishments
to make allowances for fasting during Ramadan. The Supreme
Administrative Court had annulled this decree on the ground that it
undermined the principle of secularism.
40. The Constitutional Court observed that it had taken into consideration
international human-rights protection instruments, including the Convention.
It also referred to the restrictions authorised by the second paragraph of
Article 11 and Article 17 of the Convention. It pointed out in that context that
Refahs leaders and members were using democratic rights and freedoms

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with a view to replacing the democratic order with a system based on sharia.
The Constitutional Court observed:
Democracy is the antithesis of sharia. [The] principle [of secularism], which
is a sign of civic responsibility, was the impetus which enabled the Turkish
Republic to move on from Ummah [mmet the Muslim religious
community] to the nation. With adherence to the principle of secularism,
values based on reason and science replaced dogmatic values. ... Persons of
different beliefs, desiring to live together, were encouraged to do so by the
States egalitarian attitude towards them. ... Secularism accelerated civilisation
by preventing religion from replacing scientific thought in the States
activities. It creates a vast environment of civic responsibility and freedom.
The philosophy of modernisation of Turkey is based on a humanist ideal,
namely living in a more human way. Under a secular regime religion, which
is a specific social institution, can have no authority over the constitution and
governance of the State. ... Conferring on the State the right to supervise and
oversee religious matters cannot be regarded as interference contrary to the
requirements of democratic society. ... Secularism, which is also the
instrument of the transition to democracy, is the philosophical essence of life
in Turkey. Within a secular State religious feelings simply cannot be
associated with politics, public affairs and legislative provisions. Those are
not matters to which religious requirements and thought apply, only scientific
data, with consideration for the needs of individuals and societies.
The Constitutional Court held that where a political party pursued activities
aimed at bringing the democratic order to an end and used its freedom of
expression to issue calls to action to achieve that aim, the Constitution and
supranational human-rights protection rules authorised its dissolution.
41. The Constitutional Court observed that the public statements of Refahs
leaders, namely those of Mr Necmettin Erbakan, Mr evket Kazan and Mr
Ahmet Tekdal, had directly engaged Refahs responsibility with regard to the
constitutionality of its activities. It further observed that the public statements
made by MPs Mr evki Ylmaz, Mr Hasan Hseyin Ceylan and Mr brahim
Halil elik, and by the mayor of Kayseri, Mr kr Karatepe, had likewise
engaged the partys responsibility since it had not reacted to them in any way
or sought to distance itself from them, or at least not before the
commencement of the dissolution proceedings. . . .
II. RELEVANT DOMESTIC LAW
A. The Constitution
45. The relevant provisions of the Constitution read as follows:
Article 2

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The Republic of Turkey is a democratic, secular and social State based on


the rule of law, respectful of human rights in a spirit of social peace, national
solidarity and justice, adhering to the nationalism of Atatrk and resting on
the fundamental principles set out in the Preamble.

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Article 4
No amendment may be made or proposed to the provisions of Article 1 of
the Constitution providing that the State shall be a republic, the provisions of
Article 2 concerning the characteristics of the Republic or the provisions of
Article 3.
Article 6
Sovereignty resides unconditionally and unreservedly in the nation. ...
Sovereign power shall not under any circumstances be delegated to an
individual, a group or a social class. ...
Article 10 1
All individuals shall be equal before the law without any distinction based
on language, race, colour, sex, political opinion, philosophical beliefs, religion,
membership of a religious sect or other similar grounds.
Article 14 1
None of the rights and freedoms referred to in the Constitution shall be
exercised with a view to undermining the territorial integrity of the State and
the unity of the nation, jeopardising the existence of the Turkish State or
Republic, abolishing fundamental rights and freedoms, placing the control of
the State in the hands of a single individual or group, ensuring the
domination of one social class over other social classes, introducing
discrimination on the grounds of language, race, religion or membership of a
religious organisation, or establishing by any other means a State political
system based on such concepts and opinions.
Article 24 4
No one may exploit or abuse religion, religious feelings or things held
sacred by religion in any manner whatsoever with a view to causing the
social, economic, political or legal order of the State to be based on religious
precepts, even if only in part, or for the purpose of securing political or
personal interest or influence thereby.
Article 68 4
The constitutions, rule books and activities of political parties shall not be
incompatible with the independence of the State, the integrity of State
territory and of the nation, human rights, the principles of equality and the

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rule of law, national sovereignty or the principles of a democratic, secular


republic. No political party may be founded with the aim of advocating and
establishing the domination of one social class or group, or a dictatorship in
any form whatsoever. ...
Article 69 4
... The Constitutional Court shall give a final ruling on the dissolution of
political parties on an application by Principal State Counsel at the Court of
Cassation.
Article 69 6
... A political party may not be dissolved on account of activities contrary to
the provisions of Article 68 4 unless the Constitutional Court has held that
the political party concerned constitutes a centre of such activities.
This provision of the Constitution was added on 23 July 1995.
Article 69 8
... Members and leaders whose declarations and activities lead to the
dissolution of a political party may not be founder members, leaders or
auditors of another political party for a period of five years from the date on
which the reasoned decision to dissolve the party is published in the Official
Gazette ...
Article 84
Forfeiture of the status of member
Where the Council of the Presidency of the Grand National Assembly has
validated the resignation of members of Parliament, the loss of their status as
members shall be decided by the Grand National Assembly in plenary
session.
A convicted member of Parliament shall not forfeit the status of member until
the court which convicted him has notified the plenary Assembly of the final
judgment.
A member of Parliament who continues to hold an office or carry on an
activity incompatible with the status of member, within the meaning of
Article 82, shall forfeit that status after a secret ballot of the plenary Assembly
held in the light of the relevant committees report showing that the member
concerned holds or carries on the office or activity in question.

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Where the Council of the Presidency of the Grand National Assembly notes
that a member of Parliament, without valid authorisation or excuse, has
failed, for a total of five days in one month, to take part in the work of the
Assembly, that member shall forfeit the status of member where by majority
vote the plenary Assembly so decides.
The term of office of a member of Parliament whose words and deeds have,
according to the Constitutional Courts judgment, led to the dissolution of his
party, shall end on the date when that judgment is published in the Official
Gazette. The Presidency of the Grand National Assembly shall enforce that
part of the judgment and inform the plenary Assembly accordingly.
B. Law no. 2820 on the regulation of political parties
46. The relevant provisions of Law no. 2820 read as follows:
Section 78
Political parties
... shall not aim or strive to or incite third parties to
...
jeopardise the existence of the Turkish State and Republic, abolish
fundamental rights and freedoms, introduce discrimination on grounds of
language, race, colour, religion or membership of a religious sect, or establish,
by any means, a system of government based on any such notion or concept.
...
Section 90(1)
The constitution, programme and activities of political parties shall not
contravene the Constitution or this Law.
Section 101
The Constitutional Court shall dissolve a political party
...
(b) where its general meeting, central office or executive committee ... takes a
decision, issues a circular or makes a statement ... contrary to the provisions of
Chapter 4 of this Law [This chapter (from section 78 to section 97), which
concerns restrictions on the activities of political parties, provides, inter alia,

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that such activities may not be conducted to the detriment of the democratic
constitutional order (including the sovereignty of the people and free
elections), the nature of the nation State (including national independence,
national unity and the principle of equality), and the secular nature of the
State (including observance of the reforms carried out by Atatrk, the
prohibition on exploiting religious feelings and the prohibition on religious
demonstrations organised by political parties)], or where the chairman, vicechairman or general secretary makes any written or oral statement contrary to
those provisions.
...
(d) Where acts contrary to the provisions of Chapter 4 of this Law have been
committed by organs, authorities or councils other than those mentioned in
sub-paragraph (b), State Counsel shall, within two years of the act concerned,
require the party in writing to disband those organs and/or authorities
and/or councils. State Counsel shall order the permanent exclusion from the
party of those members who have been convicted for committing acts or
making statements which contravene the provisions of Part 4.
State counsel shall institute proceedings for the dissolution of any political
party which fails to comply with the instructions in his letter within thirty
days of its service. If, within thirty days of service of State Counsels
application, the organs, authorities or councils concerned have been
disbanded by the party, and the member or members in question have been
permanently excluded, the dissolution proceedings shall lapse. If not, the
Constitutional Court shall consider the case on the basis of the file and shall
adjudicate after hearing, if necessary, the oral submissions of State Counsel,
the representatives of the political party and all those capable of providing
information about the case ...
Section 103
Where it is found that a political party has become a centre of activities
contrary to the provisions of sections 78 to 88 ... of the present Law, the party
shall be dissolved by the Constitutional Court.
Section 107(1)
All the assets of political parties dissolved by order of the Constitutional
Court shall be transferred to the Treasury.
47. Paragraph 2 of section 103, which the Constitutional Court declared
unconstitutional on 9 January 1998, prescribed the use of the procedure laid
down in section 101(d) for determination of the question whether a political
party had become a centre of anti-constitutional activities.

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C. Article 163 of the Criminal Code, repealed on 12 April 1991


48. This provision was worded as follows:
It shall be an offence, punishable by eight to fifteen years imprisonment, to
establish, found, organise, regulate, direct or administer associations with the
intention of adapting the fundamental legal, social, economic or political
bases of the State, even in part, to religious beliefs.
It shall be an offence, punishable by five to twelve years imprisonment, to be
a member of an association of that type or to incite another to become a
member.
It shall be an offence, punishable by five to ten years imprisonment, to
spread propaganda in any form or to attempt to acquire influence by
exploiting religion, religious feelings or objects regarded as sacred by religion
in a manner contrary to the principle of secularism and with the intention of
adapting the fundamental legal, social, economic or political bases of the
State, even in part, to religious beliefs or of serving political interests.
It shall be an offence, punishable by two to five years imprisonment, to
spread propaganda in any form or to attempt to acquire influence, with the
aim of serving ones personal interests or obtaining advantages, by exploiting
religion, religious feelings, objects regarded as sacred by religion or religious
books.
Where the acts mentioned above are committed on the premises of the public
administrative authorities, municipal councils, publicly owned undertakings
whose capital, or part of whose capital, belongs to the State, trade unions,
workers organisations, schools, or institutions of higher education, or by civil
servants, technicians, doorkeepers or members of such establishments, the
penalty shall be increased by a third.
Where the acts mentioned in the third and fourth paragraphs above are
committed by means of publications, the penalty shall be increased by a half.
THE LAW
I. ALLEGED VIOLATION OF ARTICLE 11 OF THE CONVENTION
49. The applicants alleged that the dissolution of Refah Partisi (the Welfare
Party) and the temporary prohibition barring its leaders including Mr
Necmettin Erbakan, Mr evket Kazan and Mr Ahmet Tekdal from holding
similar office in any other political party had infringed their right to freedom
of association, guaranteed by Article 11 of the Convention, the relevant parts
of which provide:

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1. Everyone has the right to freedom of peaceful assembly and to freedom


of association ...
2. No restrictions shall be placed on the exercise of these rights other than
such as are prescribed by law and are necessary in a democratic society in the
interests of national security or public safety, for the prevention of disorder or
crime, for the protection of health or morals or for the protection of the rights
and freedoms of others. ...
A. Whether there was an interference
50. The parties accepted that Refahs dissolution and the measures which
accompanied it amounted to an interference with the applicants exercise of
their right to freedom of association. The Court takes the same view.
B. Whether the interference was justified
51. Such an interference will constitute a breach of Article 11 unless it was
prescribed by law, pursued one or more of the legitimate aims set out in
paragraph 2 of that provision and was necessary in a democratic society for
the achievement of those aims.
1. Prescribed by law . . . .
(b) The Courts assessment . . . .

57. As regards the accessibility of the provisions in issue and the


foreseeability of their effects, the Court reiterates that the expression
prescribed by law requires firstly that the impugned measure should have a
basis in domestic law. It also refers to the quality of the law in question,
requiring that it be accessible to the persons concerned and formulated with
sufficient precision to enable them if need be, with appropriate advice to
foresee, to a degree that is reasonable in the circumstances, the consequences
which a given action may entail. Experience shows, however, that it is
impossible to attain absolute precision in the framing of laws, particularly in
fields in which the situation changes according to the evolving views of
society. A law which confers a discretion is not in itself inconsistent with this
requirement, provided that the scope of the discretion and the manner of its
exercise are indicated with sufficient clarity, having regard to the legitimate
aim in question, to give the individual adequate protection against arbitrary
interference (see Mller and Others v. Switzerland, judgment of 24 May 1988,
Series A no. 133, p. 20, 29; Ezelin v. France, judgment of 26 April 1991, Series
A no. 202, pp. 21-22, 45; and Margareta and Roger Andersson v. Sweden,
judgment of 25 February 1992, Series A no. 226-A, p. 25, 75). The Court also
accepts that the level of precision required of domestic legislation which
cannot in any case provide for every eventuality depends to a considerable

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53

degree on the content of the instrument in question, the field it is designed to


cover and the status of those to whom it is addressed. It is, moreover,
primarily for the national authorities to interpret and apply domestic law (see
Vogt v. Germany, 26 September 1995, Series A no. 323, p. 24, 48). . . .
57. As regards the accessibility of the provisions in issue and the foreseeability of
their effects, the Court reiterates that the expression prescribed by law requires
firstly that the impugned measure should have a basis in domestic law. It also refers
to the quality of the law in question, requiring that it be accessible to the persons
concerned and formulated with sufficient precision to enable them if need be, with
appropriate advice to foresee, to a degree that is reasonable in the circumstances,
the consequences which a given action may entail. Experience shows, however, that
it is impossible to attain absolute precision in the framing of laws, particularly in
fields in which the situation changes according to the evolving views of society. A
law which confers a discretion is not in itself inconsistent with this requirement,
provided that the scope of the discretion and the manner of its exercise are indicated
with sufficient clarity, having regard to the legitimate aim in question, to give the
individual adequate protection against arbitrary interference (see Mller and Others
v. Switzerland, judgment of 24 May 1988, Series A no. 133, p. 20, 29; Ezelin v. France,
judgment of 26 April 1991, Series A no. 202, pp. 21-22, 45; and Margareta and Roger
Andersson v. Sweden, judgment of 25 February 1992, Series A no. 226-A, p. 25, 75).
The Court also accepts that the level of precision required of domestic legislation
which cannot in any case provide for every eventuality depends to a considerable
degree on the content of the instrument in question, the field it is designed to cover
and the status of those to whom it is addressed. It is, moreover, primarily for the
national authorities to interpret and apply domestic law (see Vogt v. Germany, 26
September 1995, Series A no. 323, p. 24, 48). . . .

61. It remains to be determined whether the applicants must have been aware
of the possibility of a direct application of the Constitution in their case and
could thus have foreseen the risks they ran through their partys anti-secular
activities or through their refusal to distance themselves from that type of
activity, without the procedure laid down by section 103(2) of the Law on the
regulation of political parties being followed.
In order to be able to answer that question, the Court must first consider the
relevant particularities of the legal background against which the facts of the
case took place, as set out in the judgment of the Turkish Constitutional Court
and not contested by the parties. The Turkish Constitution cannot be
amended by ordinary legislation and takes precedence over statute law; a
conflict between the Constitutions provisions and those of ordinary
legislation is resolved in the Constitutions favour. In addition, the
Constitutional Court has the power and the duty to review the
constitutionality of legislation. Where in a particular case there is a
discrepancy between the provisions of the applicable statute law and those of
the Constitution, as happened in the instant case, the Constitutional Court is
clearly required to give precedence to the provisions of the Constitution,
disregarding the unconstitutional provisions of the relevant legislation.

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54

62. The Court next takes into account the applicants status as the persons to
whom the relevant legal instruments were addressed. Refah was a large
political party which had legal advisers conversant with constitutional law
and the rules governing political parties. Mr Necmettin Erbakan, Mr evket
Kazan and Mr Ahmet Tekdal were also experienced politicians. As members
of the Turkish parliament they had taken part in parliamentary discussions
and procedures concerning the amendments to the Constitution, during
which the Constitutional Courts power to rule that a party had become a
centre of anti-constitutional activities and the discrepancy between the new
text of the Constitution and Law no. 2820 were mentioned. In addition, Mr
evket Kazan and Mr Ahmet Tekdal were lawyers by profession (see
paragraphs 10-11 above).
63. That being so, the Court considers that the applicants were reasonably
able to foresee that they ran the risk of proceedings to dissolve Refah if the
partys leaders and members engaged in anti-secular activities, and that the
fact that the steps laid down in section 103(2) of Law no. 2820 were not taken,
having become inapplicable as a result of the 1991 changes to the Criminal
Codes provisions on anti-secular activities, could not prevent
implementation of the dissolution procedure required by the Turkish
Constitution.
64. Consequently, the interference was prescribed by law.
2. Legitimate aim . . . .
67. The Court considers that the applicants have not adduced sufficient evidence to
establish that Refah was dissolved for reasons other than those cited by the
Constitutional Court. Taking into account the importance of the principle of
secularism for the democratic system in Turkey, it considers that Refahs dissolution
pursued several of the legitimate aims listed in Article 11, namely protection of
national security and public safety, prevention of disorder or crime and protection of
the rights and freedoms of others.

3. Necessary in a democratic society . . . .


b) The Courts assessment
(i) General principles
() Democracy and political parties in the Convention system
86. On the question of the relationship between democracy and the
Convention, the Court has already ruled, in United Communist Party of Turkey
and Others v. Turkey (judgment of 30 January 1998, Reports of Judgments and
Decisions 1998-I, pp. 21-22, 45), as follows:

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55

Democracy is without doubt a fundamental feature of the European public


order ...
87. The Court has also confirmed on a number of occasions the primordial
role played in a democratic regime by political parties enjoying the freedoms
and rights enshrined in Article 11 and also in Article 10 of the Convention. . . .
88. Moreover, the Court has previously noted that protection of opinions
and the freedom to express them within the meaning of Article 10 of the
Convention is one of the objectives of the freedoms of assembly and
association enshrined in Article 11. That applies all the more in relation to
political parties in view of their essential role in ensuring pluralism and the
proper functioning of democracy (ibid., pp. 20-21, 42-43). . . .
89. The Court considers that there can be no democracy without pluralism.
It is for that reason that freedom of expression as enshrined in Article 10 is
applicable, subject to paragraph 2, not only to information or ideas that
are favourably received or regarded as inoffensive or as a matter of
indifference, but also to those that offend, shock or disturb . . . .
() Democracy and religion in the Convention system
90. For the purposes of the present case, the Court also refers to its case-law
concerning the place of religion in a democratic society and a democratic
State. It reiterates that, as protected by Article 9, freedom of thought,
conscience and religion is one of the foundations of a democratic society
within the meaning of the Convention. It is, in its religious dimension, one of
the most vital elements that go to make up the identity of believers and their
conception of life, but it is also a precious asset for atheists, agnostics, sceptics
and the unconcerned. The pluralism indissociable from a democratic society,
which has been dearly won over the centuries, depends on it. That freedom
entails, inter alia, freedom to hold or not to hold religious beliefs and to
practise or not to practise a religion (see Kokkinakis v. Greece, judgment of 25
May 1993, Series A no. 260-A, p. 17, 31, and Buscarini and Others v. San
Marino [GC], no. 24645/94, 34, ECHR 1999-I).
91. Moreover, in democratic societies, in which several religions coexist
within one and the same population, it may be necessary to place restrictions
on this freedom in order to reconcile the interests of the various groups and
ensure that everyones beliefs are respected (see Kokkinakis, cited above, p. 18,
33). The Court has frequently emphasised the States role as the neutral and
impartial organiser of the exercise of various religions, faiths and beliefs, and
stated that this role is conducive to public order, religious harmony and
tolerance in a democratic society. It also considers that the States duty of
neutrality and impartiality is incompatible with any power on the States part
to assess the legitimacy of religious beliefs (see, mutatis mutandis, Chaare

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Shalom Ve Tsedek v. France [GC], no. 27417/95, 84, ECHR 2000-VII) and that
it requires the State to ensure mutual tolerance between opposing groups (see,
mutatis mutandis, Metropolitan Church of Bessarabia and Others v. Moldova, no.
45701/99, 123, ECHR 2001-XII).
92. The Courts established case-law confirms this function of the State. It
has held that in a democratic society the State may limit the freedom to
manifest a religion, for example by wearing an Islamic headscarf, if the
exercise of that freedom clashes with the aim of protecting the rights and
freedoms of others, public order and public safety (see Dahlab v. Switzerland
(dec.), no. 42393/98, ECHR 2001-V).
While freedom of religion is in the first place a matter of individual
conscience, it also implies freedom to manifest ones religion alone and in
private or in community with others, in public and within the circle of those
whose faith one shares. Article 9 lists a number of forms which manifestation
of a religion or belief may take, namely worship, teaching, practice and
observance. Nevertheless, it does not protect every act motivated or
influenced by a religion or belief (see Kala v. Turkey, judgment of 1 July 1997,
Reports 1997-IV, p. 1209, 27).
The obligation for a teacher to observe normal working hours which, he
asserts, clash with his attendance at prayers, may be compatible with the
freedom of religion (see X v. the United Kingdom, no. 8160/78, Commission
decision of 12 March 1981, Decisions and Reports (DR) 22, p. 27), as may the
obligation requiring a motorcyclist to wear a crash helmet, which in his view
is incompatible with his religious duties (see X v. the United Kingdom, no.
7992/77, Commission decision of 12 July 1978, DR 14, p. 234).
93. In applying the above principles to Turkey the Convention institutions
have expressed the view that the principle of secularism is certainly one of the
fundamental principles of the State which are in harmony with the rule of law
and respect for human rights and democracy. An attitude which fails to
respect that principle will not necessarily be accepted as being covered by the
freedom to manifest ones religion and will not enjoy the protection of Article
9 of the Convention (see the opinion of the Commission, expressed in its
report of 27 February 1996, in Kala, cited above, p. 1215, 44, and, mutatis
mutandis, p. 1209, 27-31).
94. In order to perform its role as the neutral and impartial organiser of the
exercise of religious beliefs, the State may decide to impose on its serving or
future civil servants, who will be required to wield a portion of its sovereign
power, the duty to refrain from taking part in the Islamic fundamentalist
movement, whose goal and plan of action is to bring about the pre-eminence
of religious rules (see, mutatis mutandis, Yanasik v. Turkey, no. 14524/89,

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57

Commission decision of 6 January 1993, DR 74, p. 14, and Kala, cited above,
p. 1209, 28).
95. In a country like Turkey, where the great majority of the population
belong to a particular religion, measures taken in universities to prevent
certain fundamentalist religious movements from exerting pressure on
students who do not practise that religion or on those who belong to another
religion may be justified under Article 9 2 of the Convention. In that context,
secular universities may regulate manifestation of the rites and symbols of the
said religion by imposing restrictions as to the place and manner of such
manifestation with the aim of ensuring peaceful co-existence between
students of various faiths and thus protecting public order and the beliefs of
others (see Karaduman v. Turkey, no. 16278/90, Commission decision of 3 May
1993, DR 74, p. 93).
() The possibility of imposing restrictions, and rigorous European
supervision
96. The freedoms guaranteed by Article 11, and by Articles 9 and 10 of the
Convention, cannot deprive the authorities of a State in which an association,
through its activities, jeopardises that States institutions, of the right to
protect those institutions. In this connection, the Court points out that it has
previously held that some compromise between the requirements of
defending democratic society and individual rights is inherent in the
Convention system. . . .
98. On that point, the Court considers that a political party may promote a
change in the law or the legal and constitutional structures of the State on two
conditions: firstly, the means used to that end must be legal and democratic;
secondly, the change proposed must itself be compatible with fundamental
democratic principles. It necessarily follows that a political party whose
leaders incite to violence or put forward a policy which fails to respect
democracy or which is aimed at the destruction of democracy and the flouting
of the rights and freedoms recognised in a democracy cannot lay claim to the
Conventions protection against penalties imposed on those grounds (see
Yazar and Others v. Turkey, nos. 22723/93, 22724/93 and 22725/93, 49, ECHR
2002-II, and, mutatis mutandis, the following judgments: Stankov and the United
Macedonian Organisation Ilinden v. Bulgaria, nos. 29221/95 and 29225/95, 97,
ECHR 2001-IX, and Socialist Party and Others v. Turkey, judgment of 25 May
1998, Reports 1998-III, pp. 1256-57, 46-47).
99. The possibility cannot be excluded that a political party, in pleading the
rights enshrined in Article 11 and also in Articles 9 and 10 of the Convention,
might attempt to derive therefrom the right to conduct what amounts in
practice to activities intended to destroy the rights or freedoms set forth in the
Convention and thus bring about the destruction of democracy (see

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Communist Party (KPD) v. Germany, no. 250/57, Commission decision of 20


July 1957, Yearbook 1, p. 222). In view of the very clear link between the
Convention and democracy (see paragraphs 86-89 above), no one must be
authorised to rely on the Conventions provisions in order to weaken or
destroy the ideals and values of a democratic society. Pluralism and
democracy are based on a compromise that requires various concessions by
individuals or groups of individuals, who must sometimes agree to limit
some of the freedoms they enjoy in order to guarantee greater stability of the
country as a whole (see, mutatis mutandis, Petersen v. Germany (dec.), no.
39793/98, ECHR 2001-XII).
In that context, the Court considers that it is not at all improbable that
totalitarian movements, organised in the form of political parties, might do
away with democracy, after prospering under the democratic regime, there
being examples of this in modern European history.
100. The Court reiterates, however, that the exceptions set out in Article 11
are, where political parties are concerned, to be construed strictly; only
convincing and compelling reasons can justify restrictions on such parties
freedom of association. In determining whether a necessity within the
meaning of Article 11 2 exists, the Contracting States have only a limited
margin of appreciation. Although it is not for the Court to take the place of
the national authorities, which are better placed than an international court to
decide, for example, the appropriate timing for interference, it must exercise
rigorous supervision embracing both the law and the decisions applying it,
including those given by independent courts. Drastic measures, such as the
dissolution of an entire political party and a disability barring its leaders from
carrying on any similar activity for a specified period, may be taken only in
the most serious cases (see the following judgments: United Communist Party
of Turkey and Others, cited above, p. 22, 46; Socialist Party and Others, cited
above, p. 1258, 50; and Freedom and Democracy Party (ZDEP) v. Turkey [GC],
no. 23885/94, 45, ECHR 1999-VIII). Provided that it satisfies the conditions
set out in paragraph 98 above, a political party animated by the moral values
imposed by a religion cannot be regarded as intrinsically inimical to the
fundamental principles of democracy, as set forth in the Convention.
() Imputability to a political party of the acts and speeches of its members
101. The Court further considers that the constitution and programme of a
political party cannot be taken into account as the sole criterion for
determining its objectives and intentions. The political experience of the
Contracting States has shown that in the past political parties with aims
contrary to the fundamental principles of democracy have not revealed such
aims in their official publications until after taking power. That is why the
Court has always pointed out that a partys political programme may conceal
objectives and intentions different from the ones it proclaims. To verify that it

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does not, the content of the programme must be compared with the actions of
the partys leaders and the positions they defend. Taken together, these acts
and stances may be relevant in proceedings for the dissolution of a political
party, provided that as a whole they disclose its aims and intentions (see
United Communist Party of Turkey and Others, cited above, p. 27, 58, and
Socialist Party and Others, cited above, pp. 1257-58, 48).
() The appropriate timing for dissolution
102. In addition, the Court considers that a State cannot be required to wait,
before intervening, until a political party has seized power and begun to take
concrete steps to implement a policy incompatible with the standards of the
Convention and democracy, even though the danger of that policy for
democracy is sufficiently established and imminent. The Court accepts that
where the presence of such a danger has been established by the national
courts, after detailed scrutiny subjected to rigorous European supervision, a
State may reasonably forestall the execution of such a policy, which is
incompatible with the Conventions provisions, before an attempt is made to
implement it through concrete steps that might prejudice civil peace and the
countrys democratic regime (see the Chambers judgment, 81). . . .
() Overall examination
104. In the light of the above considerations, the Courts overall examination
of the question whether the dissolution of a political party on account of a risk
of democratic principles being undermined met a pressing social need (see,
for example, Socialist Party and Others, cited above, p. 1258, 49) must
concentrate on the following points: (i) whether there was plausible evidence
that the risk to democracy, supposing it had been proved to exist, was
sufficiently imminent; (ii) whether the acts and speeches of the leaders and
members of the political party concerned were imputable to the party as a
whole; and (iii) whether the acts and speeches imputable to the political party
formed a whole which gave a clear picture of a model of society conceived
and advocated by the party which was incompatible with the concept of a
democratic society.
105. The overall examination of the above points that the Court must
conduct also has to take account of the historical context in which the
dissolution of the party concerned took place and the general interest in
preserving the principle of secularism in that context in the country concerned
to ensure the proper functioning of democratic society (see, mutatis
mutandis, Petersen, cited above).
(ii) Application of the above principles to the present case

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106. The Court will devote the first part of its examination to the question
whether Refahs dissolution and the secondary penalties imposed on the
other applicants met a pressing social need. It will then determine, if the
case arises, whether those penalties were proportionate to the legitimate
aims pursued.
() Pressing social need
The appropriate timing for dissolution
107. The Court will first determine whether Refah could have presented a
threat to the democratic regime at the time when it was dissolved.
It observes in that connection that Refah was founded in 1983, took part in a
number of general and local election campaigns and obtained approximately
22% of the votes in the 1995 general election, which gave it 158 seats in the
Grand National Assembly (out of a total of 450 at the material time). After
sharing power in a coalition government, Refah obtained about 35% of the
votes in the local elections of November 1996. According to an opinion poll
carried out in January 1997, if a general election had been held at that time
Refah would have received 38% of the votes. According to the forecasts of the
same opinion poll, Refah could have obtained 67% of the votes in the general
election likely to be held about four years later (see paragraph 11 above).
Notwithstanding the uncertain nature of some opinion polls, those figures
bear witness to a considerable rise in Refahs influence as a political party and
its chances of coming to power alone.
108. The Court accordingly considers that at the time of its dissolution Refah
had the real potential to seize political power without being restricted by the
compromises inherent in a coalition. If Refah had proposed a programme
contrary to democratic principles, its monopoly of political power would have
enabled it to establish the model of society envisaged in that programme.
109. As regards the applicants argument that Refah was punished for
speeches by its members made several years before its dissolution, the Court
considers that the Turkish courts, when reviewing the constitutionality of
Refahs acts, could legitimately take into consideration the progression over
time of the real risk that the partys activities represented for the principles of
democracy. The same applies to the review of Refahs compliance with the
principles set forth in the Convention.
Firstly, the programme and policies of a political party may become clear
through the accumulation of acts and speeches by its members over a
relatively long period. Secondly, the party concerned may, over the years,
increase its chances of gaining political power and implementing its policies.

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110. While it can be considered, in the present case, that Refahs policies
were dangerous for the rights and freedoms guaranteed by the Convention,
the real chances that Refah would implement its programme after gaining
power made that danger more tangible and more immediate. That being the
case, the Court cannot criticise the national courts for not acting earlier, at the
risk of intervening prematurely and before the danger concerned had taken
shape and become real. Nor can it criticise them for not waiting, at the risk of
putting the political regime and civil peace in jeopardy, for Refah to seize
power and swing into action, for example by tabling bills in Parliament, in
order to implement its plans.
In short, the Court considers that in electing to intervene at the time when
they did in the present case the national authorities did not go beyond the
margin of appreciation left to them under the Convention.
Imputability to Refah of the acts and speeches of its members
111. The parties before the Court agreed that neither in its constitution nor
in the coalition programme it had negotiated with another political party, the
True Path Party (Doru Yol Partisi), had Refah proposed altering Turkeys
constitutional settlement in a way that would be contrary to the fundamental
principles of democracy. Refah was dissolved on the basis of the statements
made and stances adopted by its chairman and some of its members.
112. Those statements and stances were made or adopted, according to the
Constitutional Court, by seven of Refahs leading figures, namely its
chairman, Mr Necmettin Erbakan, its two vice-chairmen, Mr evket Kazan
and Mr Ahmet Tekdal, three Refah members of Turkeys Grand National
Assembly, Mr evki Ylmaz, Mr Hasan Hseyin Ceylan and Mr brahim Halil
elik, and the mayor of the city of Konya, Mr Recai Karatepe, elected on a
Refah ticket.
113. The Court considers that the statements and acts of Mr Necmettin
Erbakan, in his capacity as chairman of Refah or as the Prime Minister elected
on account of his position as the leader of his party, could incontestably be
attributed to Refah. The role of a chairman, who is frequently a partys
emblematic figure, is different in that respect from that of a simple member.
Remarks on politically sensitive subjects or positions taken up by the
chairman of a party are perceived by political institutions and by public
opinion as acts reflecting the partys views, rather than his personal opinions,
unless he declares that this is not the case. The Court observes on that point
that Mr Erbakan never made it clear that his statements and stances did not
reflect Refahs policy or that he was only expressing his personal opinion.
114. The Court considers that the speeches and stances of Refahs vicechairmen could be treated in the same way as those of its chairman. Save

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where otherwise indicated, remarks by such persons on political questions are


imputable to the party they represent. That applies in the present case to the
remarks of Mr evket Kazan and Mr Ahmet Tekdal.
115. Moreover, the Court considers that, inasmuch as the acts and remarks
of the other Refah members who were MPs or held local government posts
formed a whole which disclosed the partys aims and intentions and projected
an image, when viewed in the aggregate, of the model of society it wished to
set up, these could also be imputed to Refah. These acts or remarks were
likely to influence potential voters by arousing their hopes, expectations or
fears, not because they were attributable to individuals but because they had
been done or made on Refahs behalf by MPs and a mayor, all of whom had
been elected on a Refah platform. Such acts and speeches were potentially
more effective than abstract forms of words written in the partys constitution
and programme in achieving any unlawful ends. The Court considers that
such acts and speeches are imputable to a party unless it distances itself from
them.
But a short time later Refah presented those responsible for these acts and
speeches as candidates for important posts, such as member of Parliament or
mayor of a large city, and distributed one of the offending speeches to its local
branches to serve as material for the political training of its members. Before
the proceedings to dissolve Refah were instituted no disciplinary action was
taken within the party against those who had made the speeches concerned
on account of their activities or public statements and Refah never criticised
their remarks. The Court accepts the Turkish Constitutional Courts
conclusion on this point to the effect that Refah had decided to expel those
responsible for the acts and speeches concerned in the hope of avoiding
dissolution and that the decision was not made freely, as the decisions of
leaders of associations should be if they are to be recognised under Article 11
(see, mutatis mutandis, Freedom and Democracy Party (ZDEP), cited above,
26).
The Court accordingly concludes that the acts and speeches of Refahs
members and leaders cited by the Constitutional Court in its dissolution
judgment were imputable to the whole party.
The main grounds for dissolution cited by the Constitutional Court
116. The Court considers on this point that among the arguments for
dissolution pleaded by Principal State Counsel at the Court of Cassation those
cited by the Constitutional Court as grounds for its finding that Refah had
become a centre of anti-constitutional activities can be classified into three
main groups: (i) the arguments that Refah intended to set up a plurality of
legal systems, leading to discrimination based on religious beliefs; (ii) the
arguments that Refah intended to apply sharia to the internal or external

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relations of the Muslim community within the context of this plurality of legal
systems; and (iii) the arguments based on the references made by Refah
members to the possibility of recourse to force as a political method. The
Court must therefore limit its examination to those three groups of arguments
cited by the Constitutional Court.
(a) The plan to set up a plurality of legal systems
117. The Court notes . . . two declarations by the applicant Mr Necmettin
Erbakan, Refahs chairman, on 23 March 1993 in Parliament and on 10
October 1993 at a Refah party conference (see paragraph 28 above). . . . [I]t
takes the view that these two speeches could be regarded as reflecting one of
the policies which formed part of Refahs programme, even though the
partys constitution said nothing on the subject.
118. With regard to the applicants argument that when Refah was in power
it had never taken any concrete steps to implement the idea behind this
proposal, the Court considers that it would not have been realistic to wait
until Refah was in a position to include such objectives in the coalition
programme it had negotiated with a political party of the centre-right. It
merely notes that a plurality of legal systems was a policy which formed part
of Refahs programme.
119. The Court sees no reason to depart from the Chambers conclusion that
a plurality of legal systems, as proposed by Refah, cannot be considered to be
compatible with the Convention system. In its judgment, the Chamber gave
the following reasoning:
70. ... the Court considers that Refahs proposal that there should be a
plurality of legal systems would introduce into all legal relationships a
distinction between individuals grounded on religion, would categorise
everyone according to his religious beliefs and would allow him rights and
freedoms not as an individual but according to his allegiance to a religious
movement.
The Court takes the view that such a societal model cannot be considered
compatible with the Convention system, for two reasons.
Firstly, it would do away with the States role as the guarantor of individual
rights and freedoms and the impartial organiser of the practice of the various
beliefs and religions in a democratic society, since it would oblige individuals
to obey, not rules laid down by the State in the exercise of its abovementioned functions, but static rules of law imposed by the religion
concerned. But the State has a positive obligation to ensure that everyone
within its jurisdiction enjoys in full, and without being able to waive them,

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the rights and freedoms guaranteed by the Convention (see, mutatis mutandis,
Airey v. Ireland, judgment of 9 October 1979, Series A no. 32, p. 14, 25).
Secondly, such a system would undeniably infringe the principle of nondiscrimination between individuals as regards their enjoyment of public
freedoms, which is one of the fundamental principles of democracy. A
difference in treatment between individuals in all fields of public and private
law according to their religion or beliefs manifestly cannot be justified under
the Convention, and more particularly Article 14 thereof, which prohibits
discrimination. Such a difference in treatment cannot maintain a fair balance
between, on the one hand, the claims of certain religious groups who wish to
be governed by their own rules and on the other the interest of society as a
whole, which must be based on peace and on tolerance between the various
religions and beliefs (see, mutatis mutandis, the judgment of 23 July 1968 in the
Belgian linguistic case, Series A no. 6, pp. 33-35, 9 and 10, and Abdulaziz,
Cabales and Balkandali v. the United Kingdom, judgment of 28 May 1985, Series
A no. 94, pp. 35-36, 72).
(b) Sharia
120. The Court observes in the first place that the intention to set up a
regime based on sharia was explicitly portended in the following remarks
cited by the Constitutional Court, which had been made by certain members
of Refah, all of whom were MPs:
In a television interview broadcast on 24 November 1996 Mr Hasan
Hseyin Ceylan, Refah MP for the province of Ankara, said that sharia was
the solution for the country (see paragraph 34 above);
On 8 May 1997 Mr brahim Halil elik, Refah MP for the province of
anlurfa, said: I will fight to the end to introduce sharia (see paragraph 37
above);
In April 1994 Mr evki Ylmaz, Refah MP for the province of Rize, urged
believers to call to account those who turn their backs on the precepts of the
Koran and those who deprive Allahs Messenger of his jurisdiction in their
country and asserted: Only 39% [of the rules] in the Koran are applied in
this country. . . .
121. The Court further notes the following remarks by Refahs chairman and
vice-chairman, on their desire to set up a just order or order of justice or
Gods order, which the Constitutional Court took into consideration:
On 13 April 1994 Mr Necmettin Erbakan said: Refah will come to power
and a just order [adil dozen] will be established (see paragraph 31 above), and

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65

in a speech on 7 May 1996 he praised those who contribute, with conviction,


to the supremacy of Allah (see paragraph 39 above);
While on pilgrimage in 1993 Mr Ahmet Tekdal said: If the people ... do
not work hard enough to bring about the advent of hak nizami [a just order or
Gods order], ... they will be tyrannised by [renegades] and will eventually
disappear ... they will not be able to give a satisfactory account of themselves
to Allah, as they will not have worked to establish hak nizami (see
paragraph 35 above).
122. Even though these last two statements lend themselves to a number of
different interpretations, their common denominator is that they both refer to
religious or divine rules as the basis for the political regime which the
speakers wished to bring into being. They betray ambiguity about those
speakers attachment to any order not based on religious rules. In the light of
the context created by the various views attributed to Refahs leaders which
the Constitutional Court cited in its judgment, for example on the question of
the wearing of Islamic headscarves in the public sector or on the organisation
of working hours in the civil service to fit in with the appointed times for
prayers, the statements concerned could reasonably have been understood as
confirming statements made by Refah MPs which revealed the partys
intention of setting up a regime based on sharia. The Court can therefore
accept the Constitutional Courts conclusion that these remarks and stances of
Refahs leaders formed a whole and gave a clear picture of a model conceived
and proposed by the party of a State and society organised according to
religious rules.
123. The Court concurs in the Chambers view that sharia is incompatible
with the fundamental principles of democracy, as set forth in the Convention:
72. Like the Constitutional Court, the Court considers that sharia, which
faithfully reflects the dogmas and divine rules laid down by religion, is stable
and invariable. Principles such as pluralism in the political sphere or the
constant evolution of public freedoms have no place in it. The Court notes
that, when read together, the offending statements, which contain explicit
references to the introduction of sharia, are difficult to reconcile with the
fundamental principles of democracy, as conceived in the Convention taken
as a whole. It is difficult to declare ones respect for democracy and human
rights while at the same time supporting a regime based on sharia, which
clearly diverges from Convention values, particularly with regard to its
criminal law and criminal procedure, its rules on the legal status of women
and the way it intervenes in all spheres of private and public life in
accordance with religious precepts. ... In the Courts view, a political party
whose actions seem to be aimed at introducing sharia in a State party to the
Convention can hardly be regarded as an association complying with the
democratic ideal that underlies the whole of the Convention.

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66

124. The Court must not lose sight of the fact that in the past political
movements based on religious fundamentalism have been able to seize
political power in certain States and have had the opportunity to set up the
model of society which they had in mind. It considers that, in accordance with
the Conventions provisions, each Contracting State may oppose such
political movements in the light of its historical experience.
125. The Court further observes that there was already an Islamic theocratic
regime under Ottoman law. When the former theocratic regime was
dismantled and the republican regime was being set up, Turkey opted for a
form of secularism which confined Islam and other religions to the sphere of
private religious practice. Mindful of the importance for survival of the
democratic regime of ensuring respect for the principle of secularism in
Turkey, the Court considers that the Constitutional Court was justified in
holding that Refahs policy of establishing sharia was incompatible with
democracy (see paragraph 40 above).
(c) Sharia and its relationship with the plurality of legal systems
proposed by Refah
126. The Court will next examine the applicants argument that the Chamber
contradicted itself in holding that Refah supported introducing both a
plurality of legal systems and sharia simultaneously.
It takes note of the Constitutional Courts considerations concerning the part
played by a plurality of legal systems in the application of sharia in the
history of Islamic law. These showed that sharia is a system of law applicable
to relations between Muslims themselves and between Muslims and the
adherents of other faiths. In order to enable the communities owing allegiance
to other religions to live in a society dominated by sharia, a plurality of legal
systems had also been introduced by the Islamic theocratic regime during the
Ottoman Empire, before the Republic was founded.
127. The Court is not required to express an opinion in the abstract on the
advantages and disadvantages of a plurality of legal systems. It notes, for the
purposes of the present case, that as the Constitutional Court observed
Refahs policy was to apply some of sharias private-law rules to a large part
of the population in Turkey (namely Muslims), within the framework of a
plurality of legal systems. Such a policy goes beyond the freedom of
individuals to observe the precepts of their religion, for example by
organising religious wedding ceremonies before or after a civil marriage (a
common practice in Turkey) and according religious marriage the effect of a
civil marriage (see, mutatis mutandis, Serif v. Greece, no. 38178/97, 50, ECHR
1999-IX). This Refah policy falls outside the private sphere to which Turkish
law confines religion and suffers from the same contradictions with the
Convention system as the introduction of sharia (see paragraph 125 above).

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67

128. Pursuing that line of reasoning, the Court rejects the applicants
argument that prohibiting a plurality of private-law systems in the name of
the special role of secularism in Turkey amounted to establishing
discrimination against Muslims who wished to live their private lives in
accordance with the precepts of their religion.
It reiterates that freedom of religion, including the freedom to manifest ones
religion by worship and observance, is primarily a matter of individual
conscience, and stresses that the sphere of individual conscience is quite
different from the field of private law, which concerns the organisation and
functioning of society as a whole.
It has not been disputed before the Court that in Turkey everyone can
observe in his private life the requirements of his religion. On the other hand,
Turkey, like any other Contracting Party, may legitimately prevent the
application within its jurisdiction of private-law rules of religious inspiration
prejudicial to public order and the values of democracy for Convention
purposes (such as rules permitting discrimination based on the gender of the
parties concerned, as in polygamy and privileges for the male sex in matters
of divorce and succession). The freedom to enter into contracts cannot
encroach upon the States role as the neutral and impartial organiser of the
exercise of religions, faiths and beliefs (see paragraphs 91-92 above).
(d) The possibility of recourse to force
129. The Court takes into consideration under this heading the following
remarks cited by the Constitutional Court and made by:
Mr Necmettin Erbakan, on 13 April 1994, on the question whether power
would be gained by violence or by peaceful means (whether the change
would involve bloodshed or not see paragraph 31 above);
Mr evki Ylmaz, in April 1994, concerning his interpretation of jihad and
the possibility for Muslims of arming themselves after coming to power (see
paragraph 33 above);
Mr Hasan Hseyin Ceylan, on 14 March 1993, who insulted and
threatened the supporters of a regime on the Western model (see
paragraph 34 above);
Mr kr Karatepe, who, in his speech on 10 December 1996, advised
believers to keep alive the rancour and hatred they felt in their hearts (see
paragraph 36 above); and
Mr brahim Halil elik, on 8 May 1997, who said he wanted blood to flow
to prevent the closure of the theological colleges (see paragraph 37 above).

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68

The Court also takes into account the visit by Mr evket Kazan, who was
then the Minister of Justice, to a member of his party charged with incitement
to hatred based on religious discrimination (see paragraph 38 above).
130. The Court considers that, whatever meaning is ascribed to the term
jihad used in most of the speeches mentioned above (whose primary
meaning is holy war and the struggle to be waged until the total domination
of Islam in society is achieved), there was ambiguity in the terminology used
to refer to the method to be employed to gain political power. In all of these
speeches the possibility was mentioned of resorting legitimately to force in
order to overcome various obstacles Refah expected to meet in the political
route by which it intended to gain and retain power.
131. Furthermore, the Court endorses the following finding of the Chamber:
74. ...
While it is true that [Refahs] leaders did not, in government documents, call
for the use of force and violence as a political weapon, they did not take
prompt practical steps to distance themselves from those members of [Refah]
who had publicly referred with approval to the possibility of using force
against politicians who opposed them. Consequently, Refahs leaders did not
dispel the ambiguity of these statements about the possibility of having
recourse to violent methods in order to gain power and retain it (see, mutatis
mutandis, Zana v. Turkey, judgment of 25 November 1997, Reports 1997-VII, p.
2549, 58).
Overall examination of pressing social need
132. In making an overall assessment of the points it has just listed above in
connection with its examination of the question whether there was a pressing
social need for the interference in issue in the present case, the Court finds
that the acts and speeches of Refahs members and leaders cited by the
Constitutional Court were imputable to the whole of the party, that those acts
and speeches revealed Refahs long-term policy of setting up a regime based
on sharia within the framework of a plurality of legal systems and that Refah
did not exclude recourse to force in order to implement its policy and keep
the system it envisaged in place. In view of the fact that these plans were
incompatible with the concept of a democratic society and that the real
opportunities Refah had to put them into practice made the danger to
democracy more tangible and more immediate, the penalty imposed on the
applicants by the Constitutional Court, even in the context of the restricted
margin of appreciation left to Contracting States, may reasonably be
considered to have met a pressing social need.
() Proportionality of the measure complained of

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69

133. After considering the parties arguments, the Court sees no good reason
to depart from the following considerations in the Chambers judgment:
82. ... The Court has previously held that the dissolution of a political party
accompanied by a temporary ban prohibiting its leaders from exercising
political responsibilities was a drastic measure and that measures of such
severity might be applied only in the most serious cases (see the previously
cited Socialist Party and Others v. Turkey judgment, p. 1258, 51). In the present
case it has just found that the interference in question met a pressing social
need. It should also be noted that after [Refahs] dissolution only five of its
MPs (including the applicants) temporarily forfeited their parliamentary
office and their role as leaders of a political party. The 152 remaining MPs
continued to sit in Parliament and pursued their political careers normally. ...
The Court considers in that connection that the nature and severity of the
interference are also factors to be taken into account when assessing its
proportionality (see, for example, Srek v. Turkey (no. 1) [GC], no. 26682/95,
64, ECHR 1999-IV).
134. The Court also notes that the pecuniary damage alleged by the
applicants was made up largely of a loss of earnings and is speculative in
nature. In view of the low value of Refahs assets, their transfer to the
Treasury can have no bearing on the proportionality of the interference in
issue. Moreover, the Court observes that the prohibition barring three of the
applicants, Mr Necmettin Erbakan, Mr evket Kazan and Mr Ahmet Tekdal,
from engaging in certain types of political activity for a period of five years
was temporary, and that, through their speeches and the stances they adopted
in their capacity as the chairman and vice-chairmen of the party, they bear the
main responsibility for Refahs dissolution.
It follows that the interference in issue in the present case cannot be regarded
as disproportionate in relation to the aims pursued.
4. The Courts conclusion regarding Article 11 of the Convention
135. Consequently, following a rigorous review to verify that there were
convincing and compelling reasons justifying Refahs dissolution and the
temporary forfeiture of certain political rights imposed on the other
applicants, the Court considers that those interferences met a pressing social
need and were proportionate to the aims pursued. It follows that Refahs
dissolution may be regarded as necessary in a democratic society within the
meaning of Article 11 2.
Accordingly, there has been no violation of Article 11 of the Convention.
Note: The victory of the Justice and Development Party (AKP) in the election
on November 3rd 2002 (when it won 363 of the 550 seats) marked the first

Leon E. Irish and Karla W. Simon 2005

70

time for 15 years that one party had held an absolute majority in Turkeys
parliament. The party is a descendant of the Islamist Virtue Party, closed
down June 2001 by the constitutional court. In Virtues place, two parties
formed: the Prosperity Party (see below) and the AKP, led by Recep Tayip
Erdogan, a popular former Welfare Party mayor of Istanbul from 1994 to
1998. Mr Erdogan claims that his new party is not ideologically Islamist. This
new moderation, combined with widespread disgust at the political habits of
the other established players, contributed to the AKPs overwhelming victory
in the 2002 election. However, Mr Erdogans Islamic past has caused him
problems. In 1999, he served four months in jail for reciting an allegedly proIslamist poem, and in 2002, the constitutional court ruled that this conviction
disqualified him from being a founding member of a political party or
running for parliament. In July 2002, the high election board confirmed that
he was banned from standing in the election. Consequently, although Mr
Erdogan remained the AKPs leader behind the scenes, Abdullah Gul, an
economist and former disciple of Necmettin Erbakan, the founder of the
Islamist political movement, was named prime minister in mid-November.
However, by March 2003, the AKP-dominated parliament had successfully
voted to amend the constitution to allow Mr Edogan to be elected to
parliament, and thus to become prime minister (Mr Gul subsequently became
foreign minister).
After the February 1998 closure of the Welfare Party and Necmettin Erbakan's
exclusion from official participation in politics for five years, the Islamists
regrouped to form the Virtue Party (Fazilet). In June 2001 the party followed
its predecessor by being closed down by the constitutional court. In its place,
two successor parties were established: the Prosperity Party (SP), nominally
led by Recai Kutan, but in fact controlled by Mr Erbakan from behind the
scenes, and the Justice and Development Party (AKP) (see above). But, in a
sign that Islamism is not the political threat the army claims, AKPs victory in
the November 2002 election followed from its distancing itself from its
Islamist roots, while the SP managed only 2.5% of the vote, well down from
Virtues 15.4% in 1999. [Economist Intelligence Unit, April 2003.]

1.6

Nigeria Case Law on Freedom of Association

FREEDOM OF ASSOCIATION IN A NIGERIAN COMMUNITY


OLD USAGES, NEW RULES
by Emeka Iheme

At the dawn of the 20th Century, the Imperial Powers of Western Europe had
by treaty and conquest completely asserted sovereign control over nearly all

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71

of Africa. Each of these Powers had to work out the most appropriate
approach to the task of governing its colonies. The French tried both the
policy of assimilation, which sought to very closely influence the colonial
subjects and suffuse them with all the appurtenances of French language and
culture, virtually turning them into African Frenchmen; and the rival policy of
association which prescribed that the French colonial authorities should not
seek to transform the colonial subjects but merely to co-exist or associate
with them while pursuing the serious business of the colonial enterprise.
The British approach notably in its colonies on the West Coast of Africa was quite coherent, the policy was styled indirect rule. It was akin to the policy
of association and required that the colonial peoples continued to be ruled by
their indigenous rulers who now became subject to the supervisory
jurisdiction of British colonial officers. This system was not merely designed
to respect and accommodate the usages and institutions of the colonial
peoples. It was informed by a pragmatic consideration: that of keeping the
cost of administration low, as fewer British administrative officers were
required. In the 1920s, for instance, His Majestys Government paid a fresh
Oxbridge graduate in the colonial service a salary two and half times more
than any employer in Britain could offer. For the ambitious and adventurous
young Briton, service in the dominions beyond the seas was very
rewarding.1
One important consequence of the indirect rule system was that although the
principles of English common law were introduced, native law and customs
were allowed to continue to regulate the lives of the colonial peoples. Except
for Muslim law which was defined as part of customary law - these rules of
customary law were unwritten, as they served societies that were largely or
wholly illiterate. They were diverse, as they varied from one community to
the other. They derived legitimacy from the fact that they were accepted in
particular communities as binding. They also had a dynamic character in that
some of the rules changed from time to time, especially as novel situations
arose, mainly due to external forces.
As the colonial enterprise was rationalized, in part, as a civilizing mission, it
was provided for in statutes that the enforceability of the rules of native
customary law shall be subject to three tests, to wit: they must not be
repugnant to natural justice, equity and good conscience; they must not be
incompatible with any local statutory enactment, and they must not be
contrary to public policy. The first test empowered the British colonial judges,
and the indigenous but Western educated judges who have taken over from
For instance, an officer who had his entire career in the colony of Nigeria, Sir Rex Niven, reported that
after leaving Oxford in 1920 No one would employ me in the United Kingdom at a salary above 200 a
year. He accepted an offer from the Colonial Office to go and serve in Nigeria, at the entry point salary
of 500 a year. See Rex Niven, Nigerian Kaleidoscope: Memoirs of a Colonial Servant (London: C. Hurst &
Company, 1982) pp. vii

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72

them, to refuse to enforce rules that were considered barbaric. As one


commentator put it, The courts have not developed any general theory on
the basis of which rules of customary law are to be tested. Rather, they have
adopted a liberal and flexible approach and have, on an ad hoc manner,
invalidated or sanctioned a rule sought to be applied on the basis of their
notion of what is fair and just.2 The second test ensures that no rule of
customary law could prevail over the provisions of any enactment of the local
legislature. The third test, the meaning of which has remained a subject of
disagreement among judges and scholars, seems to have been intended to
vest the courts with some residual power to invalidate any rule of customary
law.
Through statutory enactments, the colonial administration abrogated several
usages of native law and custom, and such customary law rules became
unenforceable in the light of the second test. The practices that were outlawed
include trial by ordeal which became an offence under the Criminal Code3 and the osu caste system, under which persons who or whose ancestors had
been dedicated to the service of a god, were subjected to legal and social
disabilities.4
This wind of change that came with colonialism was soon to become a
whirlwind. At the time of independence in 1960, the concept and principles of
human rights, as enshrined in the Universal Declaration of Human Rights
1948, had gained wide acceptance. Indeed, these principles had been invoked
by the Nigerian nationalists in their struggle for independence from British
rule. The principles were therefore to be provided for, as fundamental human
rights, in the constitution introduced at independence and in the successive
Nigerian constitutions. The legal effect of this is that as the constitution is
supreme over any other law whether statutory, common law or customary
law for a rule of customary law to be enforceable, it must not only pass the
three tests, but must also not be incompatible with the terms of the
constitution which is the most superior enactment. Under the Fundamenta1
Human Rights provisions of the 1963 Republican Constitution of Nigeria, it
was provided that no person shall be convicted of a criminal offence unless
that is defined and the penalty therefore is prescribed in a written form. The
effect of this provision was to abolish all customary law offences, thus placing
criminal justice entirely within the jurisdiction of the British-style courts.

G. Ezejiofor, Sources of Nigerian Law in C. O. Okonkwo (ed.), Introduction to Nigerian Law, (London:
Sweet & Maxwell, 1980) p.43
3 The Criminal Code, which was introduced into Nigeria in 1916, had been drafted by the British jurist,
Sir James Fitzstephen, as a restatement of the English common law on crimes. The intention was to enact
it into law as a codification of criminal law in England but it was never so enacted. It was however
enacted into law in the Australian state of Queensland and in the then colony of Nigeria. In 1961, the
legislature of the largely Muslim Northern Nigeria repealed it in the region and replaced it with a code
that reflects the ethos of a Muslim community. It is still in force in the states of Southern Nigeria.
4 Abolition of the Osu System Law 1956 (Eastern Nigeria).
2

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73

In respect of freedom of association, sections 24(1) and 26(1) of the 1963


Constitution provided as follows:
24(1) Every person shall be entitled to freedom of thought, conscience
and religion, including freedom to change his religion or belief and
freedom, either alone or in community with others and in public or in
private, to manifest and propagate his religion or belief in worship,
teaching, practice and observance.
26(1) Every person shall be entitled to assemble freely and associate
with other persons, and in particular he may form or belong to trade
unions and other associations for the protection of his interests.5
In the interesting case of Agbai v. Okogbue,6 the Supreme Court of Nigeria had
occasion to consider the effect of these provisions on the enforceability of a
rule of the customary law of an Igbo community. Some background
information is necessary for a proper understanding of the decision and its
significance.
The Igbo (sometimes Anglicised to Ibo) people, whose homeland is in
Southern Nigeria, constitute one of the three largest of Nigerias
approximately 250 ethnic groups. There has never been one central political
authority in Igboland. With just a few exceptions, Igbo communities are
acephalous and a council of elders - a body that is the most venerated of the
social groups that participate in decision-making runs the affairs of each
community.7 In these communities, people are grouped into age groups (also
referred to as age grade), on the basis of being born in approximately the
same period of time (often a three-year period). The persons so grouped
usually set up an age group to which nearly all of them will belong .In some
cases, a person may join, not the age grade into which he has been grouped
but another age grade of his choice provided that he is accepted into it.
In the olden days, practically every member of the community belonged to an
age group. Those were the days before the advent of the West and the new
possibilities it brought along the option of abandoning the worship of the
gods of old and becoming an adherent of one Christian (or other religious)
denomination or the other, the option of going to the city to pursue any of the
new occupations rather than remaining in the village and working on the
The Constitution of the Federal Republic of Nigeria, 1999, which is currently in force in Nigeria has a
more elegantly-drafted bill of rights in which the freedom of association is provided for (in s.40) in the
following terms: Every person shall be entitled to assemble freely and associate with other persons,
and in particular he may form or belong to any political party, trade union or any other association for
the protection of his interests.
6 [1991] 7 NWLR (Part 204) 391
7 The Economist May 13, 2000 in an article Africa: The heart of the matter (pp. 23 25) contended that
Traditionally, African societies with a few exceptions such as those of the Somalis or the Ibos in
Nigeria, were not very democratic, though many had checks on the powers of the ruler.
5

Leon E. Irish and Karla W. Simon 2005

74

land. Age groups are often given responsibilities for the execution of certain
tasks, including public works. Especially in recent times, these groups have
been volunteering to levy their members and thereby raise funds for the
provision of various modern amenities required by the community but not
provided by the state. In the context of a new order in which increasing
urbanization and emigration has eroded the old cohesion found in the
pristine Igbo community, this form of participation in community
development has given age groups a new legitimacy and, perhaps,
encouraged old excesses.
In Agbai v. Okogbue8 the plaintiff (Okogbue) and the defendants (Agbai and
others) all hailed from the Igbo village of Amankalu Alayi but lived in the city
of Aba. They were all grouped into the same age group. The age group was
promptly inaugurated and the defendants became the leaders of the Aba
Branch of the age group. The plaintiff was invited to the inauguration and
asked to register as a member. The group also undertook to build a health
center for the village and, for that purpose, proceeded to impose a levy on its
members. On the ground of his religious persuasion, the plaintiff refused to
join the group, and not being a member of the group he refused to pay the
levy imposed by the group. . The plaintiff was however not opposed to the
imposition of levies on members of the community for development projects;
he established this by showing that he had in the past contributed to such
projects. The defendants, relying on a customary practice of seizing the goods
of anyone who fails to pay a debt owed the community, impounded the
plaintiffs sewing machine. He then sued for the return of his sewing machine,
for loss of use and for general damages.
Mr. Justice Nwokedi, who read the lead judgment, with which all other
justices on the panel agreed, drew a distinction between, on the one hand,
grouping the members of a community into age groups and, on the other
hand, the joining of an age group. He took judicial notice of the fact (as he was
entitled to under the Evidence Act) that grouping youngmen [sic] into age
group[s] is a well known custom throughout Igbo communities. It is no more
than a manner of dating or showing the age of the group in a society where
age matters a lot and the art of writing had not been acquired. The age groups
are named for the purpose of identification.9 He went on to state One does
not automatically become a member of the association because he [sic] was so
grouped. One was not under compulsion to join the age group association
under which he was grouped as he [sic] had the option to join any other age
group of his [sic] liking.10 He then observed that the substance of the
plaintiffs case was that he did not belong to the age group, on religious
Op. cit.
ibid. 413 The other justices who made up the Supreme Court panel for the case were Karibi-Whyte,
Kawu, Wali and Akpata. The case was instituted at the Magistrates Court in Aba. By way of appeals, it
went through the High Court and the Court of Appeal before getting to the Supreme Court.
10 ibid. 415
8
9

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75

grounds, and that the defendants were trying to induct him into the group by
force.
In giving judgment in favor of the plaintiff, he held that Much as one would
welcome development projects in the community, there must be caution to
ensure that the fundamental rights of a citizen are not trampled upon by
popular enthusiasm. These rights have been enshrined in a legislation, that is,
the Constitution, which enjoys superiority over local custom.11 In concurring
with the lead judgment, another justice of the Court, Mr. Justice KaribiWhyte, explained as follows: the concept of Age-grade per se, does not offend
the provisions of the Constitution. On the other hand the idea of the
automatic membership is an infringement of the freedom of association
which is the fundamental right of the individual .12
This interesting decision deserves to be set in the context of the larger issue.
The African society needs to ensure that its culture does not become static. It
need not hold on to the ways of old, if such ways are now seen to be
inadequate or undesirable. It need not be unnecessarily protective of its own.
It need not be ashamed to adopt or adapt new ways from elsewhere. It needs
to ensure that old usages that have some merit are transformed by new rules
and made more serviceable for the present. Justice Nwokedi apparently
considered that the courts could contribute to this by a creative exercise of the
power to apply the repugnancy test in determining the enforceability of a
customary law rule. As he stated in his judgment:
Customary laws are formulated from time immemorial. As our
society advances, they are more removed from its pristine social
ecology. They meet situations which were inconceivable at the time
they took root. The doctrine of repugnancy in my view affords the
courts the opportunity for fine-tuning customary laws to meet changed
social conditions where necessary, more especially as there is no forum
for repealing or amending customary laws. I do not intend to be
understood as holding that the Courts are there to enact customary
laws. When however customary law is confronted by a novel situation,
the courts have to consider its application under existing social
environment13
Progress depends on the introduction and acceptance of new ideas. New
ideas can only emerge if the social milieu permits individuals to do things in
ways different from the ways of their fathers. The African society continues to
ibid.
ibid. 428
13 ibid. 417 Indeed, Mr. Justice Osborne, a colonial chief justice of Nigeria had rightly observed in the old
case of Lewis v. Bankole (1908) 1 NLR 81 at 100-101:One of the most striking features of West African
native custom is its flexibility; it appears to have been always subject to motives of expediency, and it
shows unquestionable adaptability to altered circumstances without entirely losing its character.
11
12

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76

be challenged in this regard. How far is it willing to permit freedom of the


individual? How willing is it to accept the change that it needs to regenerate
itself? Freedom of association is but a consequence of freedom of the
individual, as one who is not free cannot choose whom to associate with. And
freedom of association implies the freedom of dissociation. The deeper
significance of the decision in Agbai v. Okogbue, therefore, is that it holds open
a window of opportunity for personal freedom, for the freedom to associate
or to dissociate, according to ones own choice. It reinforces the constitutional
foundation for the building of an open society. Will other social forces now
help to erect the superstructure?
1.7
JOHN J. HURLEY and SOUTH BOSTON ALLIED WAR VETERANS
COUNCIL, PETITIONERS v. IRISH AMERICAN GAY, LESBIAN AND
BISEXUAL GROUP OF BOSTON, etc., et al. 515 U.S. 557 (1995)
ON WRIT OF CERTIORARI TO THE SUPREME JUDICIAL COURT OF MASSACHUSETTS

Justice Souter delivered the opinion of the Court.


March 17 is set aside for two celebrations in South Boston. As early as
1737, some people in Boston observed the feast of the apostle to Ireland,
and since 1776 the day has marked the evacuation of royal troops and
Loyalists from the city, prompted by the guns captured at Ticonderoga
and set up on Dorchester Heights under General Washington's
command. Washington himself reportedly drew on the earlier tradition
in choosing "St. Patrick" as the response to "Boston," the password used
in the colonial lines on evacuation day. See J. Crimmins, St. Patrick's
Day: Its Celebration in New York and other American Places, 17371845, pp. 15, 19 (1902); see generally 1 H.S. Commager & R. Morris,
The Spirit of 'Seventy Six 138-183 (1958); The American Book of Days
262-265 (J. Hatch ed., 3d ed. 1978). Although the General Court of
Massachusetts did not officially designate March 17 as Evacuation Day
until 1938, see Mass. Gen. Laws 6:12K (1992), the City Council of
Boston had previously sponsored public celebrations of Evacuation Day,
including notable commemorations on the centennial in 1876, and on the
125th anniversary in 1901, with its parade, salute, concert, and fireworks
display. See Celebration of the Centennial Anniversary of the
Evacuation of Boston by the British Army (G. Ellis ed. 1876); Irish
American Gay, Lesbian and Bisexual Group of Boston v. City of Boston
et al., Civ. Action No. 92-1516 (Super. Ct., Mass., Dec. 15, 1993),
reprinted in App. to Pet. for Cert. B1, B8-B9.
The tradition of formal sponsorship by the city came to an end in 1947,
however, when Mayor James Michael Curley himself granted authority
to organize and conduct the St. Patrick's Day Evacuation Day Parade to
the petitioner South Boston Allied War Veterans Council, an
unincorporated association of individuals elected from various South
Boston veterans groups. Every year since that time, the Council has
applied for and received a permit for the parade, which at times has
included as many as 20,000 marchers and drawn up to 1 million
watchers. No other applicant has ever applied for that permit. Id., at B9.
Through 1992, the city allowed the Council to use the city's official seal,
and provided printing services as well as direct funding.

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1992 was the year that a number of gay, lesbian, and bisexual
descendants of the Irish immigrants joined together with other supporters
to form the respondent organization, GLIB, to march in the parade as a
way to express pride in their Irish heritage as openly gay, lesbian, and
bisexual individuals, to demonstrate that there are such men and women
among those so descended, and to express their solidarity with like
individuals who sought to march in New York's St. Patrick's Day Parade.
Id., at B3; App. 51. Although the Council denied GLIB's application to
take part in the 1992 parade, GLIB obtained a state court order to
include its contingent, which marched "uneventfully" among that year's
10,000 participants and 750,000 spectators. App. to Pet. for Cert. B3,
and n. 4.
In 1993, after the Council had again refused to admit GLIB to the
upcoming parade, the organization and some of its members filed this
suit against the Council, the individual petitioner John J. "Wacko"
Hurley, and the City of Boston, alleging violations of the State and
Federal Constitutions and of the state public accommodations law,
which prohibits "any distinction, discrimination or restriction on account
of . . . sexual orientation . . . relative to the admission of any person to,
or treatment in any place of public accommodation, resort or
amusement." Mass. Gen. Laws 272:98. After finding that "[f]or at least
the past 47 years, the Parade has traveled the same basic route along the
public streets of South Boston, providing entertainment, amusement, and
recreation to participants and spectators alike," App. to Pet. for Cert. B5B6, the state trial court ruled that the parade fell within the statutory
definition of a public accommodation, which includes "any place . . .
which is open to and accepts or solicits the patronage of the general
public and, without limiting the generality of this definition, whether or
not it be . . . (6) a boardwalk or other public highway [or] . . . (8) a place
of public amusement, recreation, sport, exercise or entertainment," Mass.
Gen. Laws 272:92A. The court found that the Council had no written
criteria and employed no particular procedures for admission, voted on
new applications in batches, had occasionally admitted groups who
simply showed up at the parade without having submitted an application,
and did "not generally inquire into the specific messages or views of
each applicant." App. to Pet. for Cert. B8-B9. The court consequently
rejected the Council's contention that the parade was "private" (in the
sense of being exclusive), holding instead that "the lack of genuine
selectivity in choosing participants and sponsors demonstrates that the
Parade is a public event." Id., at B6. It found the parade to be "eclectic,"
containing a wide variety of "patriotic, commercial, political, moral,
artistic, religious, athletic, public service, trade union, and eleemosynary
themes," as well as conflicting messages. Id., at B24. While noting that
the Council had indeed excluded the Ku Klux Klan and ROAR (an
antibusing group), id., at B7, it attributed little significance to these facts,
concluding ultimately that "[t]he only common theme among the
participants and sponsors is their public involvement in the Parade," id.,
at B24.
The court rejected the Council's assertion that the exclusion of "groups
with sexual themes merely formalized [the fact] that the Parade
expresses traditional religious and social values," id., at B3, and found
the Council's "final position [to be] that GLIB would be excluded
because of its values and its message, i.e., its members' sexual
orientation," id., at B4, n. 5, citing Tr. of Closing Arg. 43, 51-52 (Nov.
23, 1993). This position, in the court's view, was not only violative of
the public accommodations law but "paradoxical" as well, since "a
proper celebration of St. Patrick's and Evacuation Day requires diversity

Leon E. Irish and Karla W. Simon 2005

78

and inclusiveness." App. to Pet. for Cert. B24. The court rejected the
notion that GLIB's admission would trample on the Council's First
Amendment rights since the court understood that constitutional
protection of any interest in expressive association would "requir[e]
focus on a specific message, theme, or group" absent from the parade.
Ibid. "Given the [Council's] lack of selectivity in choosing participants
and failure to circumscribe the marchers' message," the court found it
"impossible to discern any specific expressive purpose entitling the
Parade to protection under the First Amendment." Id., at B25. It
concluded that the parade is "not an exercise of [the Council's]
constitutionally protected right of expressive association," but instead
"an open recreational event that is subject to the public accommodations
law." Id., at B27.
The court held that because the statute did not mandate inclusion of
GLIB but only prohibited discrimination based on sexual orientation,
any infringement on the Council's right to expressive association was
only "incidental" and "no greater than necessary to accomplish the
statute's legitimate purpose" of eradicating discrimination. Id., at B25,
citing Roberts v. United States Jaycees, 468 U.S. 609, 628-629 (1984).
Accordingly, it ruled that "GLIB is entitled to participate in the Parade
on the same terms and conditions as other participants." Id., at B27. [n.1]
The Supreme Judicial Court of Massachusetts affirmed, seeing nothing
clearly erroneous in the trial judge's findings that GLIB was excluded
from the parade based on the sexual orientation of its members, that it
was impossible to detect an expressive purpose in the parade, that there
was no state action, and that the parade was a public accommodation
within the meaning of 272:92A. Irish American Gay, Lesbian and
Bisexual Group of Boston v. Boston, 418 Mass. 238, 242-248, 636N. E.
2d 1293, 1295-1298 (1994). [n.2] Turning to petitioners' First Amendment
claim that application of the public accommodations law to the parade
violated their freedom of speech (as distinguished from their right to
expressive association, raised in the trial court), the court's majority held
that it need not decide on the particular First Amendment theory
involved "because, as the [trial] judge found, it is `impossible to discern
any specific expressive purpose entitling the parade to protection under
the First Amendment.' " Id., at 249, 636 N. E. 2d, at 1299 (footnote
omitted). The defendants had thus failed at the trial level "to demonstrate
that the parade truly was an exercise of . . . First Amendment rights," id.,
at 250, 636 N. E. 2d, at 1299, citing Clark v. Community for Creative
Non Violence, 468 U.S. 288, 293, n. 5 (1984), and on appeal nothing
indicated to the majority of the Supreme Judicial Court that the trial
judge's assessment of the evidence on this point was clearly erroneous,
ibid. The court rejected petitioners' further challenge to the law as
overbroad, holding that it does not, on its face, regulate speech, does not
let public officials examine the content of speech, and would not be
interpreted as reaching speech. Id., at 251-252, 636 N. E. 2d, at 1300.
Finally, the court rejected the challenge that the public accommodations
law was unconstitutionally vague, holding that this case did not present
an issue of speech and that the law gave persons of ordinary intelligence
a reasonable opportunity to know what was prohibited. Id., at 252, 636
N. E. 2d, at 1300-1301.
Justice Nolan dissented. In his view, the Council "does not need a
narrow or distinct theme or message in its parade for it to be protected
under the First Amendment." Id., at 256, 636 N. E. 2d, at 1303. First, he
wrote, even if the parade had no message at all, GLIB's particular
message could not be forced upon it. Id., at 257, 636 N. E. 2d, at 1303,

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79

citing Wooley v. Maynard, 430 U.S. 705, 717 (1977) (state requirement
to display "Live Free or Die" on license plates violates First
Amendment). Second, according to Justice Nolan, the trial judge clearly
erred in finding the parade devoid of expressive purpose. Ibid. He would
have held that the Council, like any expressive association, cannot be
barred from excluding applicants who do not share the views the Council
wishes to advance. Id., at 257-259, 636 N. E. 2d, at 1303-1304, citing
Roberts v. United States Jaycees, 468 U.S. 609 (1984). Under either a
pure speech or associational theory, the State's purpose of eliminating
discrimination on the basis of sexual orientation, according to the
dissent, could be achieved by more narrowly drawn means, such as
ordering admission of individuals regardless of sexual preference,
without taking the further step of prohibiting the Council from editing
the views expressed in their parade. Id., at 256, 258, 636 N. E. 2d, at
1302, 1304. In Justice Nolan's opinion, because GLIB's message was
separable from the status of its members, such a narrower order would
accommodate the State's interest without the likelihood of infringing on
the Council's First Amendment rights. Finally, he found clear error in the
trial judge's equation of exclusion on the basis of GLIB's message with
exclusion on the basis of its members' sexual orientation. To the dissent
this appeared false in the light of "overwhelming evidence" that the
Council objected to GLIB on account of its message and a dearth of
testimony or documentation indicating that sexual orientation was the
bar to admission. Id., at 260, 636 N. E. 2d, at 1304. The dissent
accordingly concluded that the Council had not even violated the State's
public accommodations law.
We granted certiorari to determine whether the requirement to admit a
parade contingent expressing a message not of the private organizers'
own choosing violates the First Amendment. 513 U. S. ___ (1995). We
hold that it does and reverse.
* * * * *
If there were no reason for a group of people to march from here to there
except to reach a destination, they could make the trip without
expressing any message beyond the fact of the march itself. Some people
might call such a procession a parade, but it would not be much of one.
Real "[p]arades are public dramas of social relations, and in them
performers define who can be a social actor and what subjects and ideas
are available for communication and consideration." S. Davis, Parades
and Power: Street Theatre in Nineteenth Century Philadelphia 6 (1986).
Hence, we use the word "parade" to indicate marchers who are making
some sort of collective point, not just to each other but to bystanders
along the way. Indeed a parade's dependence on watchers is so extreme
that nowadays, as with Bishop Berkeley's celebrated tree, "if a parade or
demonstration receives no media coverage, it may as well not have
happened." Id., at 171. Parades are thus a form of expression, not just
motion, and the inherent expressiveness of marching to make a point
explains our cases involving protest marches. In Gregory v. Chicago,
394 U.S. 111, 112 (1969), for example, petitioners had taken part in a
procession to express their grievances to the city government, and we
held that such a "march, if peaceful and orderly, falls well within the
sphere of conduct protected by the First Amendment." Similarly, in
Edwards v. South Carolina, 372 U.S. 229, 235 (1963), where petitioners
had joined in a march of protest and pride, carrying placards and singing
The Star Spangled Banner, we held that the activities "reflect an exercise
of these basic constitutional rights in their most pristine and classic
form." Accord, Shuttlesworth v. Birmingham, 394 U.S. 147, 152 (1969).

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80

The protected expression that inheres in a parade is not limited to its


banners and songs, however, for the Constitution looks beyond written
or spoken words as mediums of expression. Noting that "[s]ymbolism is
a primitive but effective way of communicating ideas," West Virginia
Bd. of Ed. v. Barnette, 319 U.S. 624, 632 (1943), our cases have
recognized that the First Amendment shields such acts as saluting a flag
(and refusing to do so), id., at 632, 642, wearing an arm band to protest a
war, Tinker v. Des Moines Independent Community School Dist., 393
U.S. 503, 505-506 (1969), displaying a red flag, Stromberg v.
California, 283 U.S. 359, 369 (1931), and even "[m]arching, walking or
parading" in uniforms displaying the swastika, National Socialist Party
of America v. Skokie, 432 U.S. 43 (1977). As some of these examples
show, a narrow, succinctly articulable message is not a condition of
constitutional protection, which if confined to expressions conveying a
"particularized message," cf. Spence v. Washington, 418 U.S. 405, 411
(1974) (per curiam), would never reach the unquestionably shielded
painting of Jackson Pollock, music of Arnold Schnberg, or
Jabberwocky verse of Lewis Carroll.
Not many marches, then, are beyond the realm of expressive parades,
and the South Boston celebration is not one of them. Spectators line the
streets; people march in costumes and uniforms, carrying flags and
banners with all sorts of messages (e.g., "England get out of Ireland,"
"Say no to drugs"); marching bands and pipers play, floats are pulled
along, and the whole show is broadcast over Boston television. See
Record, Exh. 84 (video). To be sure, we agree with the state courts that
in spite of excluding some applicants, the Council is rather lenient in
admitting participants. But a private speaker does not forfeit
constitutional protection simply by combining multifarious voices, or by
failing to edit their themes to isolate an exact message as the exclusive
subject matter of the speech. Nor, under our precedent, does First
Amendment protection require a speaker to generate, as an original
matter, each item featured in the communication. Cable operators, for
example, are engaged in protected speech activities even when they only
select programming originally produced by others. Turner Broadcasting
System, Inc. v. FCC, 512 U. S. ___, ___ (1994) (slip op., at 11) ("Cable
programmers and cable operators engage in and transmit speech, and
they are entitled to the protection of the speech and press provisions of
the First Amendment"). For that matter, the presentation of an edited
compilation of speech generated by other persons is a staple of most
newspapers' opinion pages, which, of course, fall squarely within the
core of First Amendment security, Miami Herald Publishing Co. v.
Tornillo, 418 U.S. 241, 258 (1974), as does even the simple selection of
a paid noncommercial advertisement for inclusion in a daily paper, see
New York Times, 376 U. S., at 265-266. The selection of contingents to
make a parade is entitled to similar protection.
Respondents' participation as a unit in the parade was equally
expressive. GLIB was formed for the very purpose of marching in it, as
the trial court found, in order to celebrate its members' identity as openly
gay, lesbian, and bisexual descendants of the Irish immigrants, to show
that there are such individuals in the community, and to support the like
men and women who sought to march in the New York parade. App. to
Pet. for Cert. B3. The organization distributed a fact sheet describing the
members' intentions, App. A51, and the record otherwise corroborates
the expressive nature of GLIB's participation, see Record, Exh. 84; App.
A67 (photograph). In 1993, members of GLIB marched behind a
shamrock strewn banner with the simple inscription "Irish American
Gay, Lesbian and Bisexual Group of Boston." GLIB understandably

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seeks to communicate its ideas as part of the existing parade, rather than
staging one of its own.
The Massachusetts public accommodations law under which respondents
brought suit has a venerable history. At common law, innkeepers,
smiths, and others who "made profession of a public employment," were
prohibited from refusing, without good reason, to serve a customer. Lane
v. Cotton, 12 Mod. 472, 484-485, 88 Eng. Rep. 1458, 1464-1465 (K.B.
1701) (Holt, C. J.); see Bell v. Maryland, 378 U.S. 226, 298, n. 17
(1964) (Goldberg, J., concurring); Lombard v. Louisiana, 373 U.S. 267,
277 (1963) (Douglas, J., concurring). As one of the 19th century English
judges put it, the rule was that "[t]he innkeeper is not to select his
guests[;] [h]e has no right to say to one, you shall come into my inn, and
to another you shall not, as every one coming and conducting himself in
a proper manner has a right to be received; and for this purpose
innkeepers are a sort of public servants." Rex v. Ivens, 7 Car. & P. 213,
219, 173 Eng. Rep. 94, 96 (N.P. 1835); M. Konvitz & T. Leskes, A
Century of Civil Rights 160 (1961).
After the Civil War, the Commonwealth of Massachusetts was the first
State to codify this principle to ensure access to public accommodations
regardless of race. See Act Forbidding Unjust Discrimination on
Account of Color or Race, 1865 Mass. Acts, ch. 277 (May 16, 1865);
Konvitz & Leskes, supra, at 155-56; L.G. Lerman & A. Sanderson,
Discrimination in Access to Public Places: A Survey of State and
Federal Public Accommodations Laws, 7 N. Y. U. Rev. L. & Soc.
Change 215, 238 (1978); F. Fox, Discrimination and Antidiscrimination
in Massachusetts Law, 44 B. U. L. Rev. 30, 58 (1964). In prohibiting
discrimination "in any licensed inn, in any public place of amusement,
public conveyance or public meeting," 1865 Mass. Acts, ch. 277, 1, the
original statute already expanded upon the common law, which had not
conferred any right of access to places of public amusement, Lerman &
Anderson, supra, at 248. As with many public accommodations statutes
across the Nation, the legislature continued to broaden the scope of
legislation, to the point that the law today prohibits discrimination on the
basis of "race, color, religious creed, national origin, sex, sexual
orientation . . ., deafness, blindness or any physical or mental disability
or ancestry" in "the admission of any person to, or treatment in any place
of public accommodation, resort or amusement." Mass. Gen. Laws
272:98. Provisions like these are well within the State's usual power to
enact when a legislature has reason to believe that a given group is the
target of discrimination, and they do not, as a general matter, violate the
First or Fourteenth Amendments. See, e.g., New York State Club Assn.,
Inc. v. City of New York, 487 U.S. 1, 11-16 (1988); Roberts v. United
States Jaycees, 468 U.S. 609, 624-626 (1984); Heart of Atlanta Motel,
Inc. v. United States, 379 U.S. 241, 258-262 (1964). Nor is this statute
unusual in any obvious way, since it does not, on its face, target speech
or discriminate on the basis of its content, the focal point of its
prohibition being rather on the act of discriminating against individuals
in the provision of publicly available goods, privileges, and services on
the proscribed grounds.
In the case before us, however, the Massachusetts law has been applied
in a peculiar way. Its enforcement does not address any dispute about the
participation of openly gay, lesbian, or bisexual individuals in various
units admitted to the parade. The petitioners disclaim any intent to
exclude homosexuals as such, and no individual member of GLIB claims
to have been excluded from parading as a member of any group that the
Council has approved to march. Instead, the disagreement goes to the

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admission of GLIB as its own parade unit carrying its own banner. See
App. to Pet. for Cert. B26-B27, and n. 28. Since every participating unit
affects the message conveyed by the private organizers, the state courts'
application of the statute produced an order essentially requiring
petitioners to alter the expressive content of their parade. Although the
state courts spoke of the parade as a place of public accommodation, see,
e.g., 418 Mass., at 247-248, 636 N. E. 2d, at 1297-1298, once the
expressive character of both the parade and the marching GLIB
contingent is understood, it becomes apparent that the state courts'
application of the statute had the effect of declaring the sponsors' speech
itself to be the public accommodation. Under this approach any
contingent of protected individuals with a message would have the right
to participate in petitioners' speech, so that the communication produced
by the private organizers would be shaped by all those protected by the
law who wished to join in with some expressive demonstration of their
own. But this use of the State's power violates the fundamental rule of
protection under the First Amendment, that a speaker has the autonomy
to choose the content of his own message.
"Since all speech inherently involves choices of what to say and what to
leave unsaid," Pacific Gas & Electric Co. v. Public Utilities Comm'n of
Cal., 475 U.S. 1, 11 (1986) (plurality opinion) (emphasis in original),
one important manifestation of the principle of free speech is that one
who chooses to speak may also decide "what not to say," id., at 16.
Although the State may at times "prescribe what shall be orthodox in
commercial advertising" by requiring the dissemination of "purely
factual and uncontroversial information," Zauderer v. Office of
Disciplinary Counsel of Supreme Court of Ohio, 471 U.S. 626, 651
(1985); see Pittsburgh Press Co. v. Pittsburgh Comm'n on Human
Relations, 413 U.S. 376, 386-387 (1973), outside that context it may not
compel affirmance of a belief with which the speaker disagrees, see
Barnette, 319 U. S., at 642. Indeed this general rule, that the speaker has
the right to tailor the speech, applies not only to expressions of value,
opinion, or endorsement, but equally to statements of fact the speaker
would rather avoid, McIntyre v. Ohio Elections Comm'n, 514 U. S. ___,
___ (1995) (slip op., at 6-7); Riley v. National Federation of Blind of
N.C., Inc., 487 U.S. 781, 797-798 (1988), subject, perhaps, to the
permissive law of defamation, New York Times, 376 U.S. 254; Gertz v.
Robert Welch, Inc., 418 U.S. 323, 347-349 (1974); Hustler Magazine,
Inc. v. Falwell, 485 U.S. 46 (1988). Nor is the rule's benefit restricted to
the press, being enjoyed by business corporations generally and by
ordinary people engaged in unsophisticated expression as well as by
professional publishers. Its point is simply the point of all speech
protection, which is to shield just those choices of content that in
someone's eyes are misguided, or even hurtful. See Brandenburg v.
Ohio, 395 U.S. 444 (1969); Terminiello v. Chicago, 337 U.S. 1 (1949).
Petitioners' claim to the benefit of this principle of autonomy to control
one's own speech is as sound as the South Boston parade is expressive.
Rather like a composer, the Council selects the expressive units of the
parade from potential participants, and though the score may not produce
a particularized message, each contingent's expression in the Council's
eyes comports with what merits celebration on that day. Even if this
view gives the Council credit for a more considered judgment than it
actively made, the Council clearly decided to exclude a message it did
not like from the communication it chose to make, and that is enough to
invoke its right as a private speaker to shape its expression by speaking
on one subject while remaining silent on another. The message it
disfavored is not difficult to identify. Although GLIB's point (like the

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83

Council's) is not wholly articulate, a contingent marching behind the


organization's banner would at least bear witness to the fact that some
Irish are gay, lesbian, or bisexual, and the presence of the organized
marchers would suggest their view that people of their sexual
orientations have as much claim to unqualified social acceptance as
heterosexuals and indeed as members of parade units organized around
other identifying characteristics. The parade's organizers may not believe
these facts about Irish sexuality to be so, or they may object to
unqualified social acceptance of gays and lesbians or have some other
reason for wishing to keep GLIB's message out of the parade. But
whatever the reason, it boils down to the choice of a speaker not to
propound a particular point of view, and that choice is presumed to lie
beyond the government's power to control.
Respondents argue that any tension between this rule and the
Massachusetts law falls short of unconstitutionality, citing the most
recent of our cases on the general subject of compelled access for
expressive purposes, Turner Broadcasting, 512 U. S. ___. There we
reviewed regulations requiring cable operators to set aside channels for
designated broadcast signals, and applied only intermediate scrutiny. Id.,
at ___ (slip op., at 38). Respondents contend on this authority that
admission of GLIB to the parade would not threaten the core principle of
speaker's autonomy because the Council, like a cable operator, is merely
"a conduit" for the speech of participants in the parade "rather than itself
a speaker." Brief for Respondent 21. But this metaphor is not apt here,
because GLIB's participation would likely be perceived as having
resulted from the Council's customary determination about a unit
admitted to the parade, that its message was worthy of presentation and
quite possibly of support as well. A newspaper, similarly, "is more than
a passive receptacle or conduit for news, comment, and advertising," and
we have held that "[t]he choice of material . . . and the decisions made as
to limitations on the size and content . . . and treatment of public issues .
. .--whether fair or unfair--constitute the exercise of editorial control and
judgment" upon which the State can not intrude. Tornillo, 418 U. S., at
258. Indeed, in Pacific Gas & Electric, we invalidated coerced access to
the envelope of a private utility's bill and newsletter because the utility
"may be forced either to appear to agree with [the intruding leaflet] or to
respond." 475 U. S., at 15 (plurality) (citation omitted). The plurality
made the further point that if "the government [were] freely able to
compel . . . speakers to propound political messages with which they
disagree, . . . protection [of a speaker's freedom] would be empty, for the
government could require speakers to affirm in one breath that which
they deny in the next." Id., at 16. Thus, when dissemination of a view
contrary to one's own is forced upon a speaker intimately connected with
the communication advanced, the speaker's right to autonomy over the
message is compromised.
In Turner Broadcasting, we found this problem absent in the cable
context, because "[g]iven cable's long history of serving as a conduit for
broadcast signals, there appears little risk that cable viewers would
assume that the broadcast stations carried on a cable system convey
ideas or messages endorsed by the cable operator." 512 U. S., at ___
(slip op., at 31). We stressed that the viewer is frequently apprised of the
identity of the broadcaster whose signal is being received via cable and
that it is "common practice for broadcasters to disclaim any identity of
viewpoint between the management and the speakers who use the
broadcast facility." Ibid. (slip op., at 31) (citation omitted); see id., at ___
(slip op., at 11) (O'Connor, J., concurring in part and dissenting in part)

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(noting that Congress "might . . . conceivably obligate cable operators to


act as common carriers for some of their channels").
Parades and demonstrations, in contrast, are not understood to be so
neutrally presented or selectively viewed. Unlike the programming
offered on various channels by a cable network, the parade does not
consist of individual, unrelated segments that happen to be transmitted
together for individual selection by members of the audience. Although
each parade unit generally identifies itself, each is understood to
contribute something to a common theme, and accordingly there is no
customary practice whereby private sponsors disavow "any identity of
viewpoint" between themselves and the selected participants. Practice
follows practicability here, for such disclaimers would be quite curious
in a moving parade. Cf. Prune Yard Shopping Center v. Robins, 447
U.S. 74, 87 (1980) (owner of shopping mall "can expressly disavow any
connection with the message by simply posting signs in the area where
the speakers or handbillers stand"). Without deciding on the precise
significance of the likelihood of misattribution, it nonetheless becomes
clear that in the context of an expressive parade, as with a protest march,
the parade's overall message is distilled from the individual presentations
along the way, and each unit's expression is perceived by spectators as
part of the whole.
An additional distinction between Turner Broadcasting and this case
points to the fundamental weakness of any attempt to justify the state
court order's limitation on the Council's autonomy as a speaker. A cable
is not only a conduit for speech produced by others and selected by cable
operators for transmission, but a franchised channel giving monopolistic
opportunity to shut out some speakers. This power gives rise to the
government's interest in limiting monopolistic autonomy in order to
allow for the survival of broadcasters who might otherwise be silenced
and consequently destroyed. The government's interest in Turner
Broadcasting was not the alteration of speech, but the survival of
speakers. In thus identifying an interest going beyond abridgment of
speech itself, the defenders of the law at issue in Turner Broadcasting
addressed the threshold requirement of any review under the Speech
Clause, whatever the ultimate level of scrutiny, that a challenged
restriction on speech serve a compelling, or at least important,
governmental object, see, e.g., Pacific Gas & Electric, supra, at 19;
Turner Broadcasting, supra, at ___ (slip op., at 38); United States v.
O'Brien, 391 U.S. 367, 377 (1968).
In this case, of course, there is no assertion comparable to the Turner
Broadcasting claim that some speakers will be destroyed in the absence
of the challenged law. True, the size and success of petitioners' parade
makes it an enviable vehicle for the dissemination of GLIB's views, but
that fact, without more, would fall far short of supporting a claim that
petitioners enjoy an abiding monopoly of access to spectators. See App.
to Pet. for Cert. B9; Brief for Respondents 10 (citing trial court's finding
that no other applicant has applied for the permit). Considering that
GLIB presumably would have had a fair shot (under neutral criteria
developed by the city) at obtaining a parade permit of its own,
respondents have not shown that petitioners enjoy the capacity to
"silence the voice of competing speakers," as cable operators do with
respect to program providers who wish to reach subscribers, Turner
Broadcasting, supra, at ___ (slip op., at 32). Nor has any other
legitimate interest been identified in support of applying the
Massachusetts statute in this way to expressive activity like the parade.

Leon E. Irish and Karla W. Simon 2005

85

The statute, Mass. Gen. Laws 272:98, is a piece of protective


legislation that announces no purpose beyond the object both expressed
and apparent in its provisions, which is to prevent any denial of access to
(or discriminatory treatment in) public accommodations on proscribed
grounds, including sexual orientation. On its face, the object of the law is
to ensure by statute for gays and lesbians desiring to make use of public
accommodations what the old common law promised to any member of
the public wanting a meal at the inn, that accepting the usual terms of
service, they will not be turned away merely on the proprietor's exercise
of personal preference. When the law is applied to expressive activity in
the way it was done here, its apparent object is simply to require
speakers to modify the content of their expression to whatever extent
beneficiaries of the law choose to alter it with messages of their own.
But in the absence of some further, legitimate end, this object is merely
to allow exactly what the general rule of speaker's autonomy forbids.
It might, of course, have been argued that a broader objective is
apparent: that the ultimate point of forbidding acts of discrimination
toward certain classes is to produce a society free of the corresponding
biases. Requiring access to a speaker's message would thus be not an end
in itself, but a means to produce speakers free of the biases, whose
expressive conduct would be at least neutral toward the particular
classes, obviating any future need for correction. But if this indeed is the
point of applying the state law to expressive conduct, it is a decidedly
fatal objective. Having availed itself of the public thoroughfares "for
purposes of assembly [and] communicating thoughts between citizens,"
the Council is engaged in a use of the streets that has "from ancient
times, been a part of the privileges, immunities, rights, and liberties of
citizens." Hague v. Committee for Industrial Organization, 307 U.S.
496, 515 (1939) (opinion of Roberts, J.). Our tradition of free speech
commands that a speaker who takes to the street corner to express his
views in this way should be free from interference by the State based on
the content of what he says. See, e.g., Police Department of Chicago v.
Mosley, 408 U.S. 92, 95 (1972); cf. H. Kalven, Jr., A Worthy Tradition
6-19 (1988); O. Fiss, Free Speech and Social Structure, 71 Iowa L. Rev.
1405, 1408-1409 (1986). The very idea that a noncommercial speech
restriction be used to produce thoughts and statements acceptable to
some groups or, indeed, all people, grates on the First Amendment, for it
amounts to nothing less than a proposal to limit speech in the service of
orthodox expression. The Speech Clause has no more certain antithesis.
See, e.g., Barnette, 319 U. S., at 642; Pacific Gas & Electric, 475 U. S.,
at 20. While the law is free to promote all sorts of conduct in place of
harmful behavior, it is not free to interfere with speech for no better
reason than promoting an approved message or discouraging a
disfavored one, however enlightened either purpose may strike the
government.
Far from supporting GLIB, then, Turner Broadcasting points to the
reasons why the present application of the Massachusetts law can not be
sustained. So do the two other principal authorities GLIB has cited. In
PruneYard, 447 U.S. 74, to be sure, we sustained a state law requiring
the proprietors of shopping malls to allow visitors to solicit signatures on
political petitions without a showing that the shopping mall owners
would otherwise prevent the beneficiaries of the law from reaching an
audience. But we found in that case that the proprietors were running "a
business establishment that is open to the public to come and go as they
please," that the solicitations would "not likely be identified with those
of the owner," and that the proprietors could "expressly disavow any
connection with the message by simply posting signs in the area where

Leon E. Irish and Karla W. Simon 2005

86

the speakers or handbillers stand." Id., at 87. Also, in Pacific Gas &
Electric, supra, at 12, we noted that PruneYard did not involve "any
concern that access to this area might affect the shopping center owner's
exercise of his own right to speak: the owner did not even allege that he
objected to the content of the pamphlets . . . ." The principle of speaker's
autonomy was simply not threatened in that case.
New York State Club Association is also instructive by the contrast it
provides. There, we turned back a facial challenge to a state
antidiscrimination statute on the assumption that the expressive
associational character of a dining club with over 400 members could be
sufficiently attenuated to permit application of the law even to such a
private organization, but we also recognized that the State did not
prohibit exclusion of those whose views were at odds with positions
espoused by the general club memberships. 487 U. S., at 13; see also
Roberts, 468 U. S., at 627. In other words, although the association
provided public benefits to which a State could ensure equal access, it
was also engaged in expressive activity; compelled access to the benefit,
which was upheld, did not trespass on the organization's message itself.
If we were to analyze this case strictly along those lines, GLIB would
lose. Assuming the parade to be large enough and a source of benefits
(apart from its expression) that would generally justify a mandated
access provision, GLIB could nonetheless be refused admission as an
expressive contingent with its own message just as readily as a private
club could exclude an applicant whose manifest views were at odds with
a position taken by the club's existing members.
Our holding today rests not on any particular view about the Council's
message but on the Nation's commitment to protect freedom of speech.
Disapproval of a private speaker's statement does not legitimize use of
the Commonwealth's power to compel the speaker to alter the message
by including one more acceptable to others. Accordingly, the judgment
of the Supreme Judicial Court is reversed and the case remanded for
proceedings not inconsistent with this opinion.
It is so ordered.

Chapter 2 -- LEGAL EXISTENCE OF NPOs


2.1

Revised Model Nonprofit Corporation Act (RMNCA)(ABA 1987)

88

2.2

Excerpts from NY Not-for-Profit Corporation Law

89

2.3

Excerpts from Chinese NPO regulations

90

2.4

Excerpt from book chapter about Japanese NPO legislation

95

2.5

State ex rel. Grant v. Brown (US)

104

2.6

Discussion examples

108

2.7

Discussion questions

111

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87

2.1 Revised Model Nonprofit Corporation Act (RMNCA)(ABA 1987)


Section 2.01. Incorporators.
One or more persons may act as the incorporator or incorporators of a corporation by
delivering articles of incorporation to the secretary of state for filing.
Section 2.02. Articles of Incorporation.
(a) The articles of incorporation must set forth:
(1) a corporate name for the corporation that satisfies the requirements of section
4.01;
(2) one of the following statements:
(i) This corporation is a public benefit corporation.
(ii) This corporation is a mutual benefit corporation.
(iii) This corporation is a religious corporation;
(3) the street address of the corporation's initial registered office and the name
of its initial registered agent at that office;
(4) the name and address of each incorporator;
(5) whether or not the corporation will have members; and
(6) provisions not inconsistent with law regarding the distribution of assets
on dissolution.
(b) The articles of incorporation may set forth:
(1) the purpose or purposes for which the corporation is organized, which
may be, either alone or in combination with other purposes, the transaction of
any lawful activity;
(2) the names and addresses of the individuals who are to serve as the initial
directors;
(3) provisions not inconsistent with law regarding:
(i) managing and regulating the affairs of the corporation;
(ii) defining, limiting, and regulating the powers of the corporation, its
board of directors, and members (or any class of members); and
(iii) the characteristics, qualifications, rights, limitations and
obligations attaching to each or any class of members.
(4) any provision that under this Act is required or permitted to be set forth in
the bylaws.
(c) Each incorporator and director named in the articles must sign the articles.
(d) The articles of incorporation need not set forth any of the corporate powers
enumerated in this Act.

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88

2.2 Excerpt from New York State Not-for-Profit Corporation Law


Sec. 101. Short title.
This chapter shall be known as the "Not-for-Profit Corporation Law" and may be
cited as "N-PCL".
Sec. 201. Purposes.
(a) A corporation, as defined in subparagraph (5), paragraph (a) of
sec. 102 (Definitions), may be formed under this chapter as provided
in paragraph (b) unless it may be formed under any other corporate law
of this state in which event it may not be formed under this chapter
unless such other corporate law expressly so provides.
(b) A corporation, of a type and for a purpose or purposes as
follows, may be formed under this chapter, provided consents required
under any other statute of this state have been obtained:
Type A - A not-for-profit corporation of this type may be formed for
any lawful non-business purpose or purposes including, but not
limited to, any one or more of the following non-pecuniary purposes:
civic, patriotic, political, social, fraternal, athletic, agricultural,
horticultural, animal husbandry, and for a professional, commercial,
industrial, trade or service association.
Type B - A not-for-profit corporation of this type may be formed for
any one or more of the following non-business purposes: charitable,
educational, religious, scientific, literary, cultural or for the prevention
of cruelty to children or animals.
Type C - A not-for-profit corporation of this type may be formed for
any lawful business purpose to achieve a lawful public or quasi-public
objective.
Type D A not-for-profit corporation of this type may be formed
under this chapter when such formation is authorized by any other
corporate law of this state for any business or non-business, or
pecuniary or non-pecuniary, purpose or purposes specified by such
other law, whether such purpose or purposes are also within types A,
B, or C above or otherwise.
(c) If a corporation is formed for purposes which are within both type A and
type B above, it is a type B corporation. If a corporation has among its
purposes any purpose which is within type C, such corporation is a type C
corporation. A type D corporation is subject to all provisions of this chapter
which are applicable to a type B corporation under this chapter unless
provided to the contrary in, and subject to the contrary provisions of, in the

Leon E. Irish and Karla W. Simon 2005

89

other corporate law authorizing formation under this chapter of the type D
corporation.
Sec. 404. Approvals and consents.
(a) Every certificate of incorporation which includes among its purposes the
formation of a trade or business association shall have endorsed thereon or
annexed thereto the consent of the attorney-general.
(b) Every certificate of incorporation which includes among its purposes the
care of destitute, delinquent, abandoned, neglected or dependent children;
the establishment or operation of a day care center for children; the
establishment or operation of day care development programs . . . shall have
endorsed thereon or annexed thereto the approval of the commissioner of
social services.
(c) Every certificate of incorporation which includes among the purposes of
the corporation, the establishment, maintenance and operation of a hospital
service or a health service or a medical expense indemnity plan or a dental
expense indemnity plan as permitted in article forty-three of the insurance
law, shall have endorsed thereon or annexed thereto the approval of the
superintendent of insurance and the commissioner of health.
(d) Every certificate of incorporation which includes a purpose for which a
corporation might be chartered by the regents of the university of the State of
New York shall have endorsed thereon or annexed thereto the consent of the
commissioner of education.
(e) Every certificate of incorporation of a cemetery corporation, except those
within the exclusionary provisions of section 1503 (Cemetery corporations)
shall have endorsed thereon or annexed thereto the approval of the cemetery
board.

2.3

Excerpts From Chinese Regulations Governing Associations,


PeoplesRepublic of China (1998)
Chapter I General Provisions

Those Regulations are formulated for the purposes of safeguarding


Article 1
the freedom of assembly of citizens, maintaining the lawful rights and interests of
associations, strengthening the registration and administration of associations and
promoting both social material progress and cultural and ethical progress.

Article 2
Associations referred to in these Regulations mean the nonprofit-making social organizations composed of Chinese citizens on their
voluntariness to perform activities in accordance with the articles of
association for the realization of the common desires of their members.

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90

Organizations, excluding State organs, may, as unit members, be members of


associations.
Article 3
The establishment of an association shall be subject to the
review and consent of the competent business unit and shall be registered in
accordance with the provision of the Regulations. Associations shall be
qualified as legal persons. The following bodies do not fall within in the
scope of registration under these Regulations:
(1) the peoples bodies which have joined the Chinese Peoples Political
Consultative Conference;
(2) the bodies which have been confirmed by the administrative
department for institutional organization of the State Council and are
exempt from registration us approved by the State Council
(3) the bodies which are established under organs, bodies, enterprise
and institutions with the approval of their own units, and perform
activities there within.
Associations shall abide by the Constitution, laws, regulations
Article 4
and policies of the State, shall not oppose the basic principles enshrined in the
Constitution, shall not endanger the reunification and security of the country,
and the unity of the nationalities, and shall not infringe upon the State
interests, public and social interests as well as the lawful rights and interests
of other organizations and citizens, and shall not breach social ethics and
morality. Associations shall not conduct business activities for profit
The civil affairs department of the State Council and the civil
Article 6
affairs departments of the local peoples government at and above the county
level are the registration and administration organs for associations of the
peoples government at their corresponding levels (hereinafter referred to as
the registration and administration organs).
The relevant departments of the State Council and those of the local
peoples governments at and above the county level as well as organizations
authorized by the State Council or those by the local peoples governments at
and above the county level shall be the competent business units over
associations of trades, academic disciplines or lines of business (hereafter
referred to as the competent business units).
Where the laws and administrative regulations stipulated otherwise
with regard to the supervision and administration of associations, these
relevant laws and administrative regulations shall be applied.

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91

Chapter II Jurisdiction
National associations shall be registered and administered by the
Article 7
registration and administration of the State Council; local associations shall be
registered and administered by registration and administration organs of the
peoples governments in places where they are located. The Trans-administrativedistrict associations shall be registered and administered by the registration and
administration organs of their common peoples governments at the next higher level
over the administrative districts these associations straddle.

Where the domiciles of the registration and administration


Article 8
organs and the competent business units are not in the same places as those of
the associations, the registration and administration organs and the
competent business units in places where these associations are domiciled
may be entrusted with the work of supervision and administration within the
scope of the entrustment.
Chapter III Establishment and Registration
In applying for the establishment of an association, the matter shall be
Article 9
subject to the review and consent of the business unit, and the sponsor shall apply
for the approval of preparations to the registration and administration organ.

Article 10
The establishment of an association shall meet the following
requirements:
(1) possession of more than 50 individual members or 30 unit
members; a total of more than 50 members are required if an
association consists of both individual and unit members.
(2) possession of standardized name and corresponding organizational
structure;
(3) possession of fixed domicile;
(4) possession of full-time staff suitable for its business activities;
(5) possession of lawful assets and sources of funding, the national
association shall have an business fund of more than 100,000 yuan
while a local association and a trans-administration-district association
more than 30,000 yuan;
(6) possession of the ability to bear civil liabilities independently .
The name of an association shall be in conformity with the with the provisions
of the laws and regulations, and shall not breach shall social ethics and
morality. The name of an association shall correspond with its business
scopes, location of members and areas of activities and shall precisely reflect
its characteristics. National associations that wish to may head their names
with such words as China, National or Chinese.

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92

Article 11
In applying for the preparations for the establishment of an
association, the sponsor shall submit to the registration and administration
organ the following documents:
(1) an application letter for the preparations;
(2) the approval documents of the competent business unit;
(3) the capital verification report and the certificate for the use right of
site;
(4) the basic facts and identification paper of the sponsor and the
proposed responsible person;
(5) the draft articles of association.
The registration and administration organs shall make decisions
Article 12
of approval or disapproval of the preparations for the establishment within 60
days after the receipt of all valid documents specified in Article 11 of there
Regulations; if the application for preparations is not approved, the
registration and administration organ shall give reasons to the sponsor.
Article 13
The registration and administration organs shall not approve
the preparations under any of the following circumstances:
(1) there are evidences to indicate that the purposes and business
scopes of the association being applied for preparations are not in
conformity with the provisions of Article 4 of these Regulations;
(2) there is no need for the establishment of an association as there
already exists an association whose business scopes is either identical
or similar to that of the proposed association in the same
administrative area;
(3) the sponsor and the proposed responsible person are still or were
once under the criminal penalty of the deprivation of the political
rights, or are not in possession of full capabilities for civil conducts;
(4) fraud and falsification are resorted to in applying for preparations;
(5) other circumstances prohibited by laws and administrative
regulations.
An association whose establishment is under preparations shall
Article 14
convene a members assembly or a members congress within 6 months after
the date of approval of the application for preparations to adopt its articles of
association, and create its executive, responsible persons and the legal
representative, and shall apply for establishment registration to the
registration and administration organ. No activities other than those directly
related to the preparations may be performed during the preparatory period.
The articles of association of an association shall contain the
Article 15
following items:

Leon E. Irish and Karla W. Simon 2005

93

(1) its name and domicile;


(2) its purposes, business scopes and areas of activities;
(3) qualifications of its members and their rights and obligations
(4) a democratic organization and management system, and the
procedures for the creation of its executive;
(5) qualifications for its responsible person and procedures for the
election and dismissal thereof;
(6) principles on the management and use of its assets
(7) procedures for revising its articles of association;
(8) procedures for termination and the disposal of its assets thereof;
(9) other matters that shall be provided for in the articles of association.
The registration and administration organs shall complete the
Article 16
review within 30 days after the receipt of the application letter for registration
and relative documents of the associations which has accomplished the
preparatory work. Registration shall be granted and a Registration Certificate
for Associations as Legal Person shall be issued to an association that is free
from the circumstance provided for in Article 13 of these regulations and
whose preparations are in conformity with all the requirements and the
content of its articles of association is complete. The registration items shall
include:
(1) the name;
(2) the domicile;
(3) the purpose, business scopes and areas of activities;
(4) the legal representative;
(5) the funds for its activities
An association qualified as a legal person on the day its
Article 17
establishment was approved according to the provisions of law shall, within
60 days after the date of approval of its establishment, file to the registration
and administration organ for record. The registration and administration
organ shall, within 30 days after the receipt of the documents for record, issue
a Registration Certificate for Association as Legal Person.
The items for record of an association shall include, in addition to the
items specified in Article 16 of these Regulations, the approval documents
issued by the competent business units according to law.
An association shall, on the strength of the Registration
Article 18
Certificate for Association as Legal Person, apply for engraving its seal and
opening a bank account. The association shall submit the design of its seal
and the number of its bank account to the registration and administration
organ for record.

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94

Article 19
An established association that intends to establish a branch or
representative office shall, upon the review and consent of the competent
business unit, submit to the registration and administration organ for
registration with such documents as the name, business scopes, domicile and
the primary responsible person of the branch or representative office.
The branch or representative office of an association is an integral component
thereof, and as such, it shall not be qualified as a legal person, it shall, according to
the purpose and within the business scopes specified in the articles of association of
the association to which it is affiliated, perform activities, recruit members within the
scope of authorities by the association. The branch of association shall not establish
its own sub-branch.

An association shall not establish any regional branch. . . .


The competent business units shall exercise the following
Article 28
functions of supervision and administration:
(1) being responsible for pre-review prior to the preparation
application, establishment registration, changes in registration and
cancellation of registration of associations. . . .
2.4

Excerpt on Japanese Legislation for NPOs

The Legal Framework for Voluntary and Not-for-Profit Activity in Japan


by Robert Pekkanen and Karla Simon 2001,2002
A. Introduction
This chapter discusses the Japanese legal and regulatory framework for
voluntary and not-for-profit activities and its impact on the way in which civil
society has developed in Japan. After a brief introduction placing the Japanese
framework in a comparative and historical perspective, the body of the chapter
explains the central provisions of the current laws and regulations. Key aspects of
the laws are highlighted, and the typology of organizations that have been formed
under the provisions is described.

Four things stand out in comparative perspective. First, although


Japans Constitution of 1946 specifically guarantees the freedom of association
in Article 21, the legal framework within which the freedom is supposed to be
exercised was until quite recently extremely cumbersome. This legal
framework antedates the Constitution, as it is based in the Civil Code of 1896.
Second, during Japans entire post-Occupation history, and despite massive
social changes, there was no change in the system for regulating not-for-profit
entities until 1998. This is quite remarkable, given not only the internal social
changes but also the development in thinking about these issues outside
Japan. Third, compared to other industrialized democracies, Japans legal
framework for not-for-profit organizations is relatively strict, making it
difficult for groups to form legal entities. The system is also quite stingy with

Leon E. Irish and Karla W. Simon 2005

95

the tax and other benefits they receive.14 Fourth, Japanese law frequently
inhibits the autonomy of the not-for-profit organizations it governs, and it can
be applied to the disadvantage of groups that seek to maintain their
independence from state control. All of this makes it difficult for independent
groups to grow large in Japan and for large groups to remain independent.
This hinders the development of a strong civil society and the existence of
dissenting voices within it.
B. Sources of Japanese Law
Before turning to the specifics of the legal and regulatory framework for civil
society organizations in Japan, it is important to place Japanese law in comparative
context. Two points need to be made here. First, Japanese law is in the tradition of
the civil law, and not the common law, but the latter has had some influence on legal
developments (e.g., the creation of the trust form for charities under Article 66 of the
Trust Law). Second, Japanese law has a long tradition of incorporating foreign
influences, beginning with Chinese law, continuing in the Meiji period with French
and German law (the latter of which influenced the Civil Code of 1896), and later, in
the Occupation, with the influence of American law. However, Japanese borrowing
from other legal traditions has often been self-conscious and adaptive.
C. Regulating the Not-for-Profit Sector in General
The legal framework for voluntary and not-for-profit activity encompasses a
variety of different laws, governing different aspects of the interaction between notfor-profit organizations15 and the state. These include the legal rules governing the
creation and operations of not-for-profit organizations as well as the legal rules
governing access to benefits provided by the state, such as tax exemption and tax
deductibility of donations. There are also laws dealing with direct state support,
through public sector transfers.16 In addition, there may be laws governing volunteer
activity, an increasing area of state concern around the world. In general the
Japanese legal framework encompasses all of the types of laws that govern not-forprofit organizations. This chapter deals mainly with the laws affecting formation
and oversight of such organizations, their access to tax benefits, and the regulations
affecting state support and government contracts.

An important caveat is that there have been many policies promoting certain aspects of civil
societyneighborhood associations, social welfare legal persons, volunteering, and recently,
and to a smaller extent, internationally-oriented development NGOs. See Pekkanen 1999,
2001c, 2002, and Forthcoming; Pickert, 2001; Kage, Unpublished; Reimann, 2001.
15 Although much of the general literature in this field refers to all types of not-for-profit
organizations as NPOs or NGOs (nongovernmental organizations), in this chapter we reserve
the term NPO for the special type of not-for-profit organizations formed under the 1998
NPO Law. . . .
16 All of these laws are important if the state is going to be able to take advantage of working
cooperatively with the NPO sector. See Simon and Irish1998, Symposium issue of IJNL 2001..
14

Leon E. Irish and Karla W. Simon 2005

96

D. Acquiring Juridical Personality


One of the most important points of interaction between the state and civil
society organizations is in the states granting of legal personality to groups seeking
to acquire that status. Registration (civil law) or incorporation (common law) is in
many countries a fairly simple and essentially ministerial process. Generally, the law
requires that founding documents (e.g., articles of incorporation, statute, or bylaws)
be filed with the registering or incorporating body (court or agency). These
documents must state purposes and activities for the not-for-profit entity that are
appropriate under the laws of the registering or incorporating jurisdiction. In
addition, forms must be filled out and a small fee must be paid to the registering or
incorporating body. Once these requirements are fulfilled, the organization acquires
legal personality.
In Japan, it is more difficult for not-for-profit groups to acquire legal
personality than in most other industrialized democracies. Of course, Article 21 of
the Japanese Constitution provides for the freedom of association. However, in
practice, this broad guarantee applies to voluntary and informal groups of citizens
and does not imply that any group can easily obtain juridical personality (legal
status or houjinka).17 Without legal status, small groups can still operate in Japan,
but they are at a significant disadvantage; Groups that are not legal persons cannot
sign contracts or open bank accounts. This means, for example, that as a group they
cannot hire staff, own property, sign lease agreements for office space, undertake
joint projects with domestic government bodies, or even, on a mundane level, lease a
photocopy machine. Legal status is important not simply because of its operational
ramifications, but because it confers legitimacy on groups themselves and on civil
society as a whole. For a description of the types of legal entities governed by
Japanese Law, see Table 5-1.
Legal Categories of Registered Not-for-Profit Entities in Japan
Assuming that most organizations desire to obtain legal personality, this
section describes the legal regimes that permit them to do so. The first of these deals
with Public Interest Legal Persons (PILPs), which are defined in Article 34 of the
Civil Code -- Incorporated Associations and Incorporated Foundations. The second
group is a wider category of PILPs, which serve the public interest but which are
authorized by special laws attached to Article 34. These include Social Welfare Legal
Persons, Medical Legal Persons, Private School Legal Persons, Religious Legal
Persons, and Special Nonprofit Activities Legal Persons. A third category includes
civil society organizations whose legal status is authorized under other laws, such as
Public Charitable Trusts and Neighborhood Associations. (See Table 5-2) It is
important to note in this discussion that the Special Nonprofit Activities Legal
Persons are newly authorized as a special category of not-for-profit legal entity
under the 1998 law commonly known as the NPO Law.

17 Under Japan's Civil Code system, only 26,089 groups gained legal status as nonprofit Public
Interest Legal Persons (PILPs) versus the 1,140,000 American not-for-profit organizations
formed as legal entities.

Leon E. Irish and Karla W. Simon 2005

97

Table 5-1 Legal Entities Established by the Civil Code


Table 5-2 Categories of Not-for-Profit Legal Entities in Japan18
Entity
Governi
Purpose of the entity
Central
ng Law
Permittin
(Date)
g Body

Associatio
n shadan
houjin

zaidan
houjin

Social
Welfare
Corporati
on
shakai
fukushi
houjin
Education
al
Corporati
on
Religious
Corporati
on
shyuukyou
houjin
Medical
Corporati
on

18

Num
ber of
existi
ng
entitie
s
Permissio 11,867
n kyoka

Civil
Associations with the
Code,
objective of worship, religion,
Article
charity, education, arts and
34 (1897)

Compete
nt
Governm
ent
Agency

Civil
Foundations with the
Code,
objective of worship, religion,
Article
charity, education, arts and
34 (1897)

Compete
nt
Governm
ent
Agency

Permissio 12,
n kyoka
814

Social
Welfare
Business
Law,
Article 22
(1951)

Ministry
of Health
and
Welfare

Approval 13,307
ninka

Minister
of
Educatio
n

Approval 11,765
ninka

Minister
of
Educatio
n

Certificat
ion
ninshou

Ministry
of Health
and
Welfare

Approval 14,048
ninka

crafts, and other activities for


public interest, and not for
profit

Foundatio
n

Permittin
g
Standard

crafts, and other activities for


public interest, and not for
profit

Private
School
Law,
Article 3
(1949)
Religious
Corporati
on Law,
Article 4
(1951)
Medical
Law,
Article 39
(1950)

Corporations established
under the law with the
objective of social welfare
businesses

Corporations established
under the law for the purpose
of establishing a private
school
Corporations having the
purpose of evangelizing,
conducting religious rites,
and educating and nurturing
believers
Associations or foundations
whose objectives are to
establish a hospital or clinic

183,89
4

Source: Pekkanen, 2000c.

Leon E. Irish and Karla W. Simon 2005

98

where doctors and dentists


are regularly in attendance, or
a facility for the health and
welfare for the elderly

Public
Charitable
Trust

Trust
Law,
Article 66
(1923
applied
1977)

Approved
Communi
ty-Based
Organizati
on
Special
Nonprofit
Activities
Legal
Person
NPO
houjin

Local
Autonom
y Law
260 (2)
(1991)
Special
Nonprofi
t
Activities
Promotio
n Law
(1998)

Trusts with the objectives of


worship, religion, charity,
education, arts and crafts, and
other purposes in the public
interest

Organizations formed by
residents of a community

Nonprofit entities whose


activities include those in
promotion of health, welfare,
education, community
development, arts, culture,
sports, disaster relief,
international cooperation,
administration of
organizations engaging in
these activities, etc. (11
examples)

Minister
of
competen
t
governm
ent
agency
Mayor or
town or
village
headpers
on
Economic
Planning
Agency

Permissio 433
n kyoka

Notificati
on
todokede

841

Certificat
ion
ninshou

1012

Public Interest Legal Persons Organized Under Article 34 of the Civil Code

In the Civil Code Public Interest Legal Persons (PILPs) include two
different types of organization Incorporated Associations and Incorporated
Foundations; this division reflects the typical civil law division of entities into
those with members (associations) and those that own property (foundations).
Incorporated Associations or shadan houjin are authorized by Article 34 of the
Civil Code, which provides for associations with the objective of worship,
religion, charity, education, arts and crafts, and other activities for public
interest, and not for profit. Associations are formed by members, but once
formed, they obtain legal status apart from their members and regardless of
changes in the size of the membership. Once registered, an association
operates under a Charter of Association and is governed by the general
assembly of all group members (shain soukai). The members may and usually
do elect a board of directors to oversee the day-to-day activities of the
organization.

Leon E. Irish and Karla W. Simon 2005

99

The Incorporated Foundation or zaidan houjin is the other type of PILP


authorized by Article 34 of the Civil Code. The objectives of incorporated
foundations must also be for worship, religion, charity, education, arts and
crafts, and other activities for public interest, and not for profit. While
Incorporated Associations are formed around a group of members,
Incorporated Foundations are formed around an amount of money
(patrimony or endowment). A foundation comes into existence to make sure
that the funds will be maintained and managed in order to serve a public
purpose specified by the donors. A foundation does not have members, but it
is governed by a board of directors, in accordance with basic rules laid down
by its founders in the charter of the foundation. Permitting procedures for
foundations are similar to those for associations, but with an emphasis on
meeting specified capital requirements .
Public Interest Groups Organized under Special Laws

Because of the narrowness of the PILP definition and the difficulties


associated with it, the Diet enacted a series of special laws beginning in 1949,
which have permitted certain other organizations operating in the public
interest to be established under specific regimes. The applicability of these
special regimes was limited to, e.g., social welfare organizations (1951),
private schools (1949), religious organizations (1951), and health care
organizations, such as hospitals and clinics (1950). Under an expansion of the
1923 Trust Law, charitable trusts were permitted beginning in 1977, and they
are allowed to have a wide variety of public benefit purposes bu tthey also
must go through a permitting scheme similar to that for PILPs. More
recently, the Diet also created by special legislation a regime to govern
approved community-based organizations.
It was not until 1998, however, that a more general approach to
liberalizing the organizational and operational aspects of the not-for-profit
sector evolved. This section tracks the history of the various regulatory
systems created during the Occupation for certain types of not-for-profit
organizations that are both incorporated and related to Article 34 of the Civil
Code.
Table 5-3: Explanation of Legal Terms (descending order of discretion)19
Permission
Gives significant bureaucratic discretion.
Kyoka
Approval
In practice can approximate kyoka, but technically less
Ninka
bureaucratic discretion is involved.
Qualification
New term for 2001 Tax Reform measures discussed below.
Nintei
Implementation unclear, but likely between ninka and
todokede.
Certification
A term whose level of discretion is contested.
Ninshou
19

Source: Pekkanen, 2000c.

Leon E. Irish and Karla W. Simon 2005

100

Notification
Todokede
Registration
Touroku

Automatic approval, given satisfaction of clear criteria. No


discretion.
Automatic approval. No bureaucratic discretion.

A Social Welfare Corporation is an organization formed under the


Social Welfare Business Law, Article 22. This 1951 law was part of the US-led
Occupation era (1945-1952) reforms. Technically, it is a Special Law attached
to Article 34 of the Civil Code. As such, it carves out a subcategory of Public
Interest Legal Persons and specifies different rules for them. Most
importantly, perhaps, is that the rules for approval are relaxed, which
means that organizations that fit within the definition of social welfare
corporation can be formed more easily than a PILP. These groups are active
in fields such as services for the elderly, children, and handicapped. The
single largest group of Social Welfare Corporations is day care centers for
children under five years of age. The standard that these organizations must
meet in order to become juridical persons is called approval (see Table 5-3),
and it requires only that all legal requirements must be met by the
organization. If they are, the Ministry is required to allow the organization to
be established. This obviously removes the bureaucratic discretion that is
applicable to PILPs under the permission system. On the other hand, social
welfare corporations cannot easily change their purposes, except to the extent
that the changed purposes would come under the jurisdiction of the Ministry
of Health and Welfare, which is the most active ministry in overseeing these
organizations.
An Educational Corporation or a Private School Corporation is
another type of organization whose formation was liberalized by a Special
Law attached to Article 34 during the Occupation. The law in question is
Private School Law, Article 3 of 1949. These organizations are set up
essentially to run private schools, thus relieving the burdens on the public
education system. The separate category of Private School Corporation was
meant to ensure greater independence than would be available to educational
PILPs, formed under the Civil Code. These groups in many cases had been
incorporated as Foundations before World War II, and the state had the
power to intervene in their activities, even to the level of dismissing a
particular teacher. After the passage of the 1949 law, these organizations
could be formed under an approval system, like the system later made
available to Social Welfare Corporations. These organizations may apply to
the prefectural board of education or the Ministry of Education and Culture
for approval.
A Religious Corporation is another type of organization whose
formation was liberalized by a Special Law enacted during the Occupation.
In this case, the relevant law is the Religious Corporation Law, Article 4 of
1951. These groups register under the Agency for Cultural Affairs under the

Leon E. Irish and Karla W. Simon 2005

101

Ministry of Education and Culture and an approval system is applied to their


applications instead of a permission system.
A Medical Corporation is a type of organizations formed under the
Medical Corporation Act of 1950, which allows the establishment of
associations or foundations whose objectives are to establish a hospital or
clinic. In order to meet the legal requirements, doctors and dentists must be
regularly in attendance, or the facility must be for the health and welfare for
the elderly. The Medical Corporation Act is another law passed by the Diet
during Occupation, and its aim was obviously to liberalize the PILP regime
for health care providers. The Ministry of Health and Welfare is most active
in granting recognition to these groups under an approval system.
c. NPO Legal Persons
In 1998, in response to a very significant political shift in attitude, the
Diet passed the Special Nonprofit Activities Promotion Law, which created
a new category of incorporated organization known as the Special Activities
Nonprofit Legal Person or NPO. Similar to the laws adopted during the
Occupation, this law is a Special Law attached to Article 34 of the Civil Code.
The Economic Planning Agency is the agency designated by the law as the
agency responsible for granting recognition to and overseeing NPOs. The
system for access to legal status is called a certification system.
The NPO Law aims to address some of the difficulties of the PILP
system. In the long run, the NPO Law could invigorate Japan's civil society.
For one thing, the law will allow many more groups to gain legal status -becoming an NPO legal person is easier than becoming a PILP. Even more
importantly, the NPO Law is designed to permit groups to gain legal status
without being subjected to bureaucratic screening. Furthermore, it aims to
allow the groups to operate without continuing bureaucratic administrative
guidance. These measures could substantially increase the number of
organizations that can acquire legal personality in Japan. They could also
change the way organizations relate to the government and to international
organizations. With legal status, they will be able more easily to sign
contracts to undertake projects with the government, and also to cooperate in
projects with overseas organizations.
The new NPOs should also be able to operate with a minimum of
supervision by the bureaucrats (see discussion below, under Regulation).
This independence is rare and prized in Japan. The organizations themselves,
however, put the highest value on the legitimating function of being able to
have legal status. This legitimacy extends to the groups as they gain separate
juridical personality, and also to the sector as a whole. Since 1998 the sector
has been recognized as having a socially valued purpose, and it seems no
longer to require excessive bureaucratic intrusion into its affairs.
The NPO Law began to be implemented on December 1, 1998, and it is
still too early to judge the long-term results of the law. At this stage, however,
three things stand out about the developments since its implementation began
are discussed in the following paragraphs.

Leon E. Irish and Karla W. Simon 2005

102

First, the number of applicants for NPO status was initially quite low.
It was not until early August 1999 that the number of applicants topped 1000.
Expectations for an initial rush had been much higher. For example,
Kanagawa prefecture had set up 7 windows for an onslaught of NPO
applicants; yet by December 18th 1999, there had only been 8 applications.20
The rate of applications, however, almost doubled from winter to spring 1999.
This reflected the wait-and-see approach of many groups, especially the
established ones.21 Changing legal status takes some time and effort. For
example, it would require the undoubtedly salutary but tedious task of
transferring titles and contracts from the name of the organizations leader to
the name to the newly incorporated organization. Moreover, as in other cases
where the rules of the game are changed, it requires time for actors to adjust
to altered incentives (see also the chapter by Pekkanen this volume).
As familiarity with the law has grown, however, thousands of
organizations have been able to gain legal status. By April 2001, 4626 groups
had applied for and 3933 had been granted NPO Legal Person status.
However, a survey of the 1,034 groups granted NPO legal person status by
November 1999 (to which 463 responded) found only 5.2 percent satisfied
with the law. Although legal status itself was an important achievement for
them, the vast majority of these groups (84%) caomplained about the lack of
tax benefits available. They wanted income tax exemption and taxdeductibility for contributions made to them. They received only the latter, as
discussed below in the section dealing with Taxation. This trend in thinking
appears to have continued among the more recent applicants, but there is
only anecdotal evidence for that conclusion.
Second, implementation of the NPO law was intitially seen as an
opportunity for continued administrative intervention in the activities of
NPOs. Despite the laws being written to strictly limit bureaucratic discretion,
it appears that the practice of administrative guidance (applicable to PILPs)
was, at least intitially still being applied to some NPO applicants.22 Contrary
to the intent of the law, bureaucrats are conferring actively with most of the
applicant organizations before the application is filed. While this often may
spring from a sincere attempt to help the organization complete the
paperwork accurately, it is nonetheless a violation of the spirit of the law and
looks a lot like a screening process.
Cs nyusureta 22. December 25, 1998. P.2. Mainichi Shimbun on December 6, 1998, notes
that although 3000 groups had been expected within the year, only 52 applied on the first
day.

20

Noting this phenomenon, Nihon Keizai Shimbun of November 29, 1998 gives the example
of a Tokyo group involved in development work in Bangladesh which says that although
legal status is necessary for the group, they still have decided to wait and see how the law
works in practice.

21

Mainichi Shimbun December 6, 1998. The piece also notes that despite the laws provisions,
bureaucrats feel they still must scrutinize the groups out of a sense of responsibility should
the group later misbehave. For a description of the administrative guidance system, see
infra under the discussion of regulation of PILPs.
22

Leon E. Irish and Karla W. Simon 2005

103

Third, some requirements of the law seem to have been applied too loosely at
the outset of the laws implementation. This resulted in a low number of rejected
applicants (only 2 as of August 1999 -- both essentially trade organizations, which
were rejected because they limited membership to those in the trade). The law
required that the reasons for rejection be explicitly stated and the applicant group
could re-apply by taking the objections into account. This process, with its explicit
publication of information, was envisioned specifically to avoid the uncertainties of
administrative guidance and screening and to give prospective applicants a sense
of what might be expected of them in a more objective system. By April 2001, about
500 organizations had been denied NPO status, and that is giving new applicant
organizations better information about how to meet the requirements. At this stage,
however, it is still premature to judge whether the NPO Law will achieve the goals of
its drafters.

c. Other Types of Organizaitons in the Not-for-Profit Sector


A Public Charitable Trust is a Trust whose purposes are in the public
interest. The Public Charitable Trust is based on a 1923 law that was not used
for public benefit purposes until 1977, when it seemed a potential remedy to
problems inherent in the PILP scheme. Nevertheless, permission (kyoka) is
still required to form such an entity. The Ministry of Construction and the
Ministry of Foreign Affairs authorized the first two charitable trusts in 1977.
While Public Charitable Trusts have increased in number, there are still very
few public benefit organizations organized as trusts in Japan.
A Neighborhood Association is usually not recognized as a legal person.
However, some neighborhood associations (NHAs) have held property, in effect
recognizing their separate status from their members. Because of the operational
difficulties such groups would face without clear legal status, the government
responded by creating a new legal category for incorporated Neighborhood
Associations in 1991 (under the Local Autonomy Law 260 (2)). These organizations
apply to the Mayor or town or village headperson for recognition; the process is
essentially one of notification (todokede) as opposed to permission. The
governments responsiveness to this issue is in contrast with the protracted disputes
over the creation of the Special Nonprofit Activities Legal Persons.23

2.5

State ex rel. Grant v. Brown, Secy. of State,


Supreme Court of Ohio (1974)

OPINION: On August 9, 1972, relators tendered articles of


incorporation for a nonprofit corporation to respondent, Secretary of
State. He refused to accept those articles because:

23 This reflects the general bias the Japanese state has for promoting small local grassroots
groups and inhibiting the autonomous development of large not-for-profits. See Pekkanen
2000a, 2000b, 2000d, 2001a, and especially 2002, and Forthcoming.

Leon E. Irish and Karla W. Simon 2005

104

"* * * this office finds that acceptance of the proposed articles of


incorporation for Greater Cincinnati Gay Society, Inc. appear to be
contrary to public policy since homosexuality as a 'valid life style' has
been and is currently defined by statute as a criminal act."
On August 24, 1972, a complaint, styled State of Ohio, ex rel. Greater
Cincinnati Gay Society, Inc., v. Brown, Secretary of State, was filed in
this court asking for a writ of mandamus to require the Secretary of
State to accept, approve, file and record those articles of incorporation.
Respondent filed a motion to dismiss, arguing that relator was
improperly denominated in the complaint as a corporation; that its
avowed purpose was, on its face, contrary to public policy; and that it
might be advocating furtherance of its objectives by means other than
legal.
This court overruled the motion to dismiss, and allowed relator to
amend its complaint by changing the name of relator.
In the amended complaint, relators argue that "there is no statute
whatsoever which prohibits the state of being a homosexual or
promoting homosexuality as a valid life style." They argue further that
nowhere in the articles of incorporation can a purpose to engage in, or
urge others to engage in, criminal acts be found. Finally, relators argue
that R. C. Chapter 2907 of the new Criminal Code, effective January 1,
1974, dealing with sexual offenses, shows no specific animus against the
activities of homosexuals so that promoting homosexual conduct cannot
be said to be contrary to public policy in Ohio. The subject, as a whole,
invites more extensive discussion, but we forbear.
The Secretary of State refused to accept the articles of incorporation
pursuant to R. C. 1702.07(A), which, in pertinent part, provides:
"When articles of incorporation and other certificates relating to the
corporation are filed with the Secretary of State, he shall, if he finds that
they comply with the provisions of Sections 1702.01 to 1702.58, inclusive,
of the Revised Code, endorse thereon his approval * * *." (Emphasis
added.)
The Secretary of State found that the articles of incorporation, as
tendered, did not comply with R. C. 1702.03, which provides:
"A corporation may be formed for any purpose or purposes for which
natural persons lawfully may associate themselves * * *." (Emphasis
added.)

Leon E. Irish and Karla W. Simon 2005

105

It is the opinion of this court that the statutes (R. C. 1702.01 to 1702.58)
give the Secretary of State discretion in determining which articles of
incorporation he will accept.
Although homosexual acts between consenting adults are no longer
statutory offenses since the new Criminal Code came into effect, there is
still reason for denying the writ. We agree with the Secretary of State
that the promotion of homosexuality as a valid life style is contrary to
the public policy of the state.
Writ denied.
CONCUR: HERBERT, J., concurring in judgment.
I concur in the judgment, but disagree with the language in the opinion
which suggests that unfettered discretion reposes in the Secretary of
State. Furthermore, it should be pointed out that a major weakness in
the dissent lies in its conclusion that an absence of statutory law always
establishes the presence of a definitive public policy.
P. BROWN, J., concurs in the foregoing concurring opinion.
DISSENTS: STERN, J., dissenting.
As I read the majority opinion, it is henceforth unlawful in this state for
any group of persons to attempt, in any fashion, to persuade the public
that homosexuality represents a valid, alternative life style. n1 Because I
believe this position to have no basis in law, I dissent.
The majority is factually inaccurate in stating that respondent's decision
was based upon public policy grounds. In his final brief, filed on
November 5, 1973, in this court, the Secretary of State explained:
"Respondent did state, when giving a reason for not accepting and filing
relator's articles of incorporation, that they appear to be contrary to
public policy. This does not mean, however, that the Secretary of State is
attempting to dictate what is contrary to public policy. The use of that term was
merely another way of saying that relator's purpose clause could logically be
interpreted as encouraging the commission of unlawful acts (as established by
the Legislature)." (Emphasis added.)
Specifically, according to respondent, he is concerned with relators'
potential violations of R. C. 2905.44, which prohibited sodomy, and R. C.
2905.30, which prohibited the solicitation of acts of sex perversion.
It is clear, at least to me, that as of January 1, 1974, when Amended

Leon E. Irish and Karla W. Simon 2005

106

Substitute House Bill 511 became effective, respondent's objections to


relators' articles of incorporation are moot. n2 Sodomy, and solicitation
of acts of sex perversion, are no longer crimes in this state. The General
Assembly has seen fit to decriminalize all private sexual activity
between consenting adults, and it is wholly unreasonable and improper
to infer from the general language of relators' purpose clause any intent
to violate any provision in the Criminal Code.
What is most disturbing about the majority opinion, however, is that it
confers broad discretionary power upon the Secretary of State, and at
least implies that the office of the Secretary of State is a vehicle for
formulating and implementing state public policy. Both of these notions
are in direct conflict with the long-standing law found in paragraph one
of the syllabus in State, ex rel., v. Taylor (1896), 55 Ohio St. 61, 44 N. E.
513, as follows:
"The duty of the Secretary of State, on presentation of articles of
incorporation and tender of proper fees, to file and record such articles,
and upon request issue a duly certified copy thereof, is controlled by the
statutes of the state, and not by the discretion of the officer."
The proposition is widely accepted that a state administrative officer,
charged with the responsibility of passing upon articles of
incorporation, exercises limited discretion. 1 Fletcher, Cyclopedia
Corporations, 618, Section 156; 18 American Jurisprudence 2d 587,
Corporations, Section 40; 18 Corpus Juris Secundum 443, Corporations,
Section 59. As pertains to Ohio, this is so because "Section 2, Article XIII
of the Constitution grants full and complete authority to the General
Assembly to provide, by general laws, for the formation of corporations
* * *." Paragraph two of the syllabus in Belden v. Union Central Life Ins.
Co. (1944), 143 Ohio St. 329, 55 N. E. 2d 629. R. C. Chapter 1702
constitutes a delegation of that constitutionally-founded authority to the
Secretary of State. Unlike the majority, who perceive R. C. 1702.01 to
1702.58, inclusive, to grant discretionary power, I would rather believe
that the existence of 58 distinct statutes serves more to circumscribe and
limit whatever discretionary authority the Secretary of State does
possess. . . .
The Secretary of State, in discharging his duties pursuant to R. C.
Chapter 1702, cannot be viewed as the original spokesman or interpreter
of state public policy. Neither his office, nor his assigned responsibilities
permit him this initiative. If the Secretary of State is to act upon policy
considerations at all, those considerations must stem from discernible
and particularized pronouncements by the people, through their
constitutions, legislators, or judicial officers. See Kintz v. Harriger (1919),
99 Ohio St. 240, 246, 124 N. E. 168.

Leon E. Irish and Karla W. Simon 2005

107

Since the majority has declared relators' avowed purpose to be against


public policy, one must assume that their decision is based upon
considerations to be found in our constitutions, our statutes, or our
judicial pronouncements. The Ohio Constitution displays no preference
for sexual life style. Both the Ohio Constitution (Section 11, Article I)
and the United States Constitution (First Amendment) do contain,
however, a bias in favor of permitting people to speak their minds and
promote their causes in a peaceful manner.
The recent amendments to R. C. Title 29, which decriminalize all private
sexual activity between consenting adults, indicate an express public
policy to tolerate the existence of different sexual life styles in this state.
Insofar as the Criminal Code in Ohio is now concerned, no distinction is
drawn between heterosexual and homosexual activities.
Past judicial pronouncements of this court also fail to support the
majority's public policy pronouncement. In fact, nowhere in the
recorded decisions of the Ohio Supreme Court has any justice ever used
the term "homosexual" or "homosexuality," n3 let alone discuss the
policy implications of such a life style. Thus, the cryptic comment that
"the subject, as a whole, invites more extensive discussion, but we
forbear," leaves this reader without a hint of the underlying rationale
that has prompted the majority decision.
Under the law of this state, as I perceive it, this court is duty-bound to
allow respondents the opportunity to associate for the purpose of
fostering acceptance of their freely-chosen life style. The writ of
mandamus should be allowed.
WILLIAM B. BROWN, J., dissenting.
I concur in the dissenting opinion of Justice Stern. If articles of
incorporation are filed in legal form following all legal requirements in
the Secretary of State's office under R. C. Chapter 1702, it is his duty to
accept them. He has only a ministerial duty to record the same. If for
any reason the articles of incorporation are illegal or against public
policy, the responsibility devolves upon the Attorney General of Ohio to
bring a quo warranto action to dissolve the corporation.

Discussion Examples Establishment


The following examples from actual legislation should be considered for purposes of
the class discussion. Provisions of the statutes excerpted in the preceding materials

Leon E. Irish and Karla W. Simon 2005

108

should also be considered. The issues are framed by seeking the answer to the
following question: what would the optimal legislation on establishment look like?
Example 1

The creation of a public association which proclaims and practices racial,


national, social and religious intolerance, social estate exclusiveness, calls for a
violent overthrow of the constitutional system, or threatens the territorial
integrity of the republic, as well as participation in the activities of such an
association shall be punished by deprivation of freedom for a term of up to
three years.
Article 63-3, Criminal Code, Kazakstan
Example 2

Activities by unregistered public associations are prohibited.


Section 3, Presidential Decree, no. 2 of 01, 26-99, Belarus
Example 3

A citizen association, association of foreigners and foundation shall be


punished with a fine of 20,000.00 to 80,000.00 dinars for a violation if: (1) it
starts to operate before it is entered into the Register....
Article 74, Law on Citizen Associations and Foundations, Macedonia, June 1998
Example 4

An association, in order to obtain legal status, must be made up of at least 20


members....
Article 32, Law for Legal Persons (Associations and Foundations), Romania, 1924
Example 5

An association can be founded by at least 30 adults of citizens of Federation


capable for business.
Article 9, Federation Law on Associations of Citizens, The Federation of Bosnia Herzegovina,
1995

Leon E. Irish and Karla W. Simon 2005

109

Example 6
Citizen associations and foundations are obligated to submit an application for entry
into the Register of the primary court within 30 days from the day the deed of
foundation is enacted.

Article 44, Law on Citizen Associations and Foundations, Macedonia, June 1998
Example 7

Public organizations and their associations shall not be registered if: (1) the
submitted Charter or activities of separate persons or a group of persons
during the process of establishing the public organization reveal that its
objectives or activities are contrary to the Constitution, the present Law and
other laws of the Republic of Latvia, conventions or international treaties
ratified by the Republic of Latvia; (2) their name, abbreviation or symbols
coincide with or are similar to the name, abbreviation or symbols of public
organizations and their associations whose operation has been terminated by
law, the decision of the Supreme Council of the Republic of Latvia or a court
ruling; (3) they use communist or national socialist symbols of the occupation
period in Latvia or the state symbols of the USSR or the LSSR.
Article 13, Law on Public Organizations and their Associations, Latvia, 1992
Example 8

A foundation is founded by Bosnia and Herzegovina Government at the


proposal by a federal minister to whose area of responsibility belongs the
operation of a foundation which is being founded.
At the consent of Government, a Foundation can by founded by domestic and
foreign legal entities and persons.
Article 6, Law on Foundation and Funds, The Federation of Bosnia & Herzegovina,
1998
Example 9
Associations which have a political, religious, scientific, artistic, charitable, social, or
any other than an industrial object, acquire the status of a person as soon as they
show by their constitution their intention to have a corporate existence.
Swiss Civil Code (1907) Title II Chapter II art. 60(1).

Leon E. Irish and Karla W. Simon 2005

110

Example 10
The Israeli Law of Amutot, 5740-1980, provides in art. 6: Should the Registrar refuse
to register an Amuta, the founders may appeal before the District Court within thirty
days of receiving notice of the refusal. The same article provides that an amuta can
appeal a demand by the Registrar that the amuta change its name.
Example 11
The new Law of Associations and Foundations of Yemen provides that applications
should be submitted to the Ministry of Pensions and Social Affairs, either the
centralized ministry or a branch office. Article 9 of the law gives the Ministry one
month to process an application. [I]f this period terminates and the processing has
not been completed, then the application shall be deemed to have been accepted by
force of law and the Ministry or its relevant office...should undertake that
registration in the register set up for this and...publicize this in any official
newspaper.

2.7

Discussion Questions

1.Describe the general powers that an agency of government should have


over the establishment of NPOs.
2. What role(s) should courts play in NPO oversight?
Chapter 3 DETERMINATION OF PUBLIC BENEFIT STATUS
3.1

The Statute of Charitable Uses Act (1601)

111

3.2

Model PBO Provisions for Laws Affecting


Public Benefit Organizations

113

Report of the Joint Parliamentary Committee on the


Draft Charities Bill in England (Excerpts)

117

Canadian Revenue Authoritys Proposed Guidelines for


Registering a Charity: Meeting the Public Benefit Test

121

U.S. Charity Commissions

150

3.3

3.4

3.5

3.1 The Statute of Charitable Uses Act (1601), 43 Elizabeth I c. 4


An Acte to redresse the Misemployment of Landes Goodes and Stockes of
Money heretofore given to Charitable Uses.

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Whereas Landes Tenementes Rentes Annuities Profittes Hereditamentes,


Goodes Chattels Money and Stockes of Money, have bene heretofore given
limitted appointed and assigned, as well by the Queenes most excellent
Majestie and her moste noble Progenitors, as by sondrie other well disposed
persons, some for Releife of aged impotent and poore people, some for
Maintenance of sicke and maymed Souldiers and Marriners, Schooles of
Learninge, Free Schooles and Schollers in Universities, some for Repaire of
Bridges Portes Havens Causwaies Churches Seabankes and Highwaies, some
for Educacion and prefermente of Orphans, some for or towardes Reliefe
Stocke or Maintenance of Howses of Correccion, some for Mariages of poore
Maides, some for Supportacion Ayde and Helpe of younge tradesmen
Handicraftesmen and persons decayed, and others for reliefe or redemption
of Prisoners or Captives, and for aide or ease of any poore Inhabitantes
concerninge paymente of Fifteenes, setting out of Souldiers and other Taxes;
Whiche Landes Tenementes Rents Annuities Profitts Hereditaments Goodes
Chattells Money and Stockes of Money nevertheles have not byn imployed
accordinge to the charitable intente of the givers and founders thereof, by
reason of Fraudes breaches of Truste and Negligence in those that shoulde
pay delyver and imploy the same: For Redresse and Remedie whereof, Be it
enacted by Aucthoritie of this presente Parliament, That it shall and may be
lawfull to and for the Lorde Chauncellor or Keeper of the Greate Seale of
Englande for the tyme beinge, and for the Chauncellor of the Dutchie of
Lancaster for the tyme beinge for Landes within the Countie Palatine of
Lancaster, from tyme to tyme to award Commissions under the Greate Seale
of Englande, or the Seale of the Countie Palatine as the case shall require, into
all or any parte or partes of this Realme respectivelie, according to their
severall Jurisdiccions as aforesaide, to the Bishoppe of everie severall Diocesse
and his Chanceller, in case there shalbe any Bishoppe of that Diocesse at the
tyme of awardinge of the same Commissions, and to other persons of good
and sounde behaviour, authorisinge them therebie, or any fower or more of
them, to inquire, as well by the Oathes of Twelve lawfull Men or more of the
Countie, whereunto the saide parties interessed shall as by all other good and
lawfull waies and menes, of all and singular such Giftes Limitacions
Assignements and Appoyntments aforesaide, and of the Abuses Breaches of
Trustes Negligences Mysimploymentes, not imployinge concealinge
defraudinge misconvertinge or misgovernmente, of any Landes Tenementes
Rentes Annuities Profits Hereditaments Goods Chattels Money and Stockes of
Money heretofore given limitted appointed or assigned, or whiche hereafter
shalbe given limitted appointed or assigned, to or for any the charitable and
godlie uses before rehearsed: And after the saide Commissioners or any fower
or more of them, upon callinge the parties interessed in any suche Landes
Tenementes Rentes Annuities Profits Hereditaments Goodes Chattels Money
and Stockes of Money, shall make inquirie by the Oathes of twelve men or
more of the saide Countie, whereunto the saide parties interessed shall and
maye have and take their lawfull challenge and challenges; and upon suche

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inquiry hearinge and examinynge thereof set downe suche Orders Judgments
and Decrees, as the saide Landes Tenementes Rents Annuities Profits Goods
Chattels Money and Stockes of Money may be duelie and faithfullie
imployed, to and for suche of the charitable uses and intents before rehearsed
respectivelie, for whiche they were given limitted assigned or appointed by
the Donors and Founders thereof: whiche Orders Judgements and Decrees,
not being contrarie or repugnante to the Orders Statutes or Decrees of the
Donors or Founders, shall by the Authoritie of this presente Parliamente
stand firme and good accordinge to the tenor and purporte thereof, and
shalbe executed accordinglie, untill the same shalbe undon or altered by the
Lorde Chauncellor of Englande or Lorde Keeper or the Greate Seale of
Englande, or the Chauncellor of the Countie Palatine of Lancaster,
respectivelie within their severall Jurisdiccions, upon complainte by any
partie grieved, to be made to them. . . . And be it further enacted, That . . .
the saide Lorde Chancellor or Lorde Keeper, or the saide Chancellor of the
Duchie may, accordinge to their saide severall Jurisdiccions, by suche course
as to their wisedomes shall seeme meeteste, the circumstances of the case
considered, proceede to the examinacion hearinge and determynynge thereof;
and upon hearinge thereof shall and may adnull dymynishe alter or enlarge
the saide Orders Judgements and Decrees of the saide Commyssioners, or any
fower or more of them, as to either of them, in their saide severall
Jurisdiccions, shalbe thoughte to stande withe Equitie and good Conscience,
accordinge to the true intente and meaninge of the Donors and Fownders
thereof; and shall and may taxe and awarde good Costes of Suite by their
discrecions againste such persons as they shall fynde to complaine unto them,
without juste and sufficient cause, of the Orders Judgments and Decrees
before mencioned.

3.2

Model Provisions for Laws Affecting Public Benefit Organizations

LAW ON PUBLIC BENEFIT ORGANIZATIONS


PREAMBLE

In order to increase the role of Public Benefit Organizations (PBOs) in society,


to promote their public benefit activities, to foster transparency and
accountability, and to provide guidance to the government for using public
benefit organizations in procurement of services for the benefit of the general
public, the [Parliament of Country] enacts the following:
While some countries have a tradition of preambles, others do not. Even where no
such tradition exists, however, a law that regulates a completely new area, or one that
has not been regulated for decades, may well utilize a preamble in order to introduce

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the subject matter and the general principles, which can then be applied in
interpreting the law.
The above preamble is based in part on the Hungarian law on PBOs (1997).
While it is appropriate to include language in a preamble to a PBO law that
encourages partnerships between the government and PBOs, it would not
generally be appropriate to mandate by law that governments form
partnerships with PBOs.
CHAPTER I: GENERAL DEFINTIONS

Article 1:

Public Benefit Activity

A Public Benefit Activity is any lawful activity that supports or promotes public
benefit by supporting or promoting one or more of the following:

(a)
(b)

Amateur athletics,
Arts,

(c)

Assistance to, or protection of physically or mentally handicapped


people,

(d)

Assistance to refugees,

(e)

Charity,

(f)
(g)

Civil or human rights,


Consumer protection,

(h)

Culture,

(i)
(j)
(k)
(l)

Democracy,
Ecology or the protection of environment,
Education, training, and enlightenment,
Elimination of discrimination based on race, ethnicity, religion,
or any other legally proscribed form of discrimination,
Elimination of poverty,
Health or physical well-being,
Historical preservation,
Humanitarian or disaster relief,
Medical care,
Protection of children, youth, and disadvantaged individuals,
Protection or care of injured or vulnerable animals,
Relieving the burdens of government,
Religion,
Science,
Social cohesion,
Social or economic development,
Social welfare,

(m)
(n)
(o)
(p)
(q)
(r)
(s)
(t)
(u)
(v)
(w)
(x)
(y)
(z)

Any other activity that is determined by the Public Benefit Commission to


support or promote public benefit.

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The above list contains virtually all of the Public Benefit Activities recognized in one or more
countries in Central and Eastern Europe, but no list can be comprehensive. The list may be
too extensive for any particular country. What is most needed is that the list be interpreted
and applied to promote activities that are beneficial to the public. Any list of Public Benefit
Activities, of course, should reflect the needs, values, and traditions of the country in
question. Further, no list of Public Benefit Activities should be closed, for the needs and
values of any society change and evolve. See Art. 1(z). Finally, it is important to note that
indicators of whether an organization will or will not qualify for Public Benefit Organization
(PBO) status are provided by Art. 2.4 and 2.5.

Article 2:
2.1

Public Benefit Organization

A Public Benefit Organization (PBO) is any Not-For-Profit


Organization (NPO) that is:
(a)

registered under [relevant laws];

(b)

organized and operated principally to engage in Public Benefit


Activities, as defined in Art. 1; and

(c)

certified as such by the Public Benefits Commission.

The Model Provisions presume that NPOs are defined in and registered under other laws,
and that those other laws include a prohibition on the distribution of profits. Most typically,
NPOs will be either foundations or associations. It is possible, though, for countries to define
other types of persons as NPOs (e.g., institutes, not-for-profit corporations). There is no need
to exclude any particular kind of NPO from the possibility of qualifying as a PBO.

An organization is organized principally for public benefit if the purposes and


activities permitted by its governing documents limit it to engaging principally in
Public Benefit Activities. An organization is operated principally for public benefit
if its actual activities are principally Public Benefit Activities. Principally may
mean more than 50% or virtually all, depending on the context and the country.
There are different ways of measuring whether the principally test, as used in this
article, has been satisfied (e.g., portion of expenditures, portion of staff time, portion of
facilities, etc.). The exact definition and method of measurement could be specified in
a countrys law, or it could be left to the Public Benefit Commission to define. Note,
that defining and interpreting terms such as this argues strongly for a specialized
commission to oversee the PBO sector (as opposed to other possibilities, discussed in
reference to Art. 3 below).
Determination whether an NPO is organized and operated principally to
engage in Public Benefit Activities will be based on the NPOs
certification application and activities, if any.
2.3

Qualification for public benefit status will be based on whether the


NPOs application, subsequent reports, and other information, taken as

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a whole and considering all facts and circumstances, indicate that the
NPO is organized and operated principally to engage in Public Benefit
Activities.
2.4

Factors to be taken into account in determining that an NPO is


organized and operated to engage principally in Public Benefit
Activities generally include:
That the NPO provides significant benefits
to the public-at-large, or
to a targeted class of beneficiaries, where
the class is disadvantaged relative to the population as
a whole, or
there is a significant value to the community in
providing special benefits to the targeted class.

Note that this factor constitutes a significant limitation on what constitutes a PBO.
This factor means that it is not sufficient for an organization to engage in a Public
Benefit Activity as listed in Article 1. It should also provide significant benefits,
either to the public at large or to a targeted group under the conditions specified
above. Thus by combining this article with Article 1 (x), for example, the Public
Benefit Commission should determine that an organization that promotes economic
development only in a prosperous area would not qualify as a PBO. One that
promoted economic development in a disadvantaged region of a country, however, or
even in a whole country if the entire population can be deemed disadvantaged,
would be eligible for PBO status.
That the NPO provides significant goods and services at or below cost;

All other factors indicating that the NPO is organized and operated
principally to engage in Public Benefit Activities.
Factors to be taken into account in determining that an NPO is not organized
and operated to engage principally in Public Benefit Activities
generally include:
That the NPO targets a closed or otherwise limited class of
beneficiaries, particularly one that includes persons affiliated in
some way with the organization or its staff;
That the nature and extent of the NPOs economic activities indicate
that the NPO is not merely advancing its not-for-profit purposes
but is instead organized and operated principally for a
commercial purpose;

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The purpose of this factor is to ensure that what is essentially a commercial business
not be afforded the protection of PBO status. If the economic activities advance the
public benefit purposes of the NPO, however, they should not be deemed a negative
factor. See Article 13 and the accompanying note.
That the NPO regularly engages in the sale of goods or services at a
price above cost; and
Selling goods and services in substantial amounts at prices that exceed cost is often an
indicator that an NPO is in reality a commercial business.
That the NPO provides unreasonable compensation or other special
benefits to its employees or other persons affiliated with the
organization.
The terms reasonable or unreasonable, or their functional equivalent, are often
defined in other laws. For example, in a specific country unreasonable
compensation might mean compensation that is more than 30% above the average
compensation paid in that country to people who have similar jobs.
3.3

Joint Committee on the Draft Charities Bill, First Report


Parliament of the United Kingdom
3 September 2004

....
2 Charitable Purposes
Current position
46. For a body to be a charity in law, it must meet two conditions:
a) it must have exclusively charitable purposes and
b) it must be for the public benefit.
For a purpose to be charitable under current law, it must fall under one of
four "heads" - the relief of poverty, the advancement of education, the
advancement of religion, or a general catch-all category "other purposes
beneficial to the community". New purposes under the fourth category are
developed by the courts in the common law by analogy to the first three
purposes.
Draft Bill changes

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47. Clause 2(2) of the draft Bill defines twelve charitable purposes:
a) the first three existing purposes:
i. the prevention or relief of poverty;
ii. the advancement of education;
iii. the advancement of religion;
b) eight new purposes to be set out in statute but already
recognised in case law:
i. the advancement of health;
ii. the advancement of citizenship or community
development;
iii. the advancement of the arts, heritage or science;
iv. the advancement of amateur sport;
v. the advancement of human rights, conflict resolution or
reconciliation;
vi. the advancement of environmental protection or
improvement;
vii. the relief of those in need, by reason of youth, age, illhealth, disability, financial hardship or other disadvantage;
viii. the advancement of animal welfare;
c) any other purposes recognised as charitable purposes under
existing charity law or any purposes analogous to the defined
purposes. . . .
50. A number of organisations regretted the failure to include a definition of
religion in the draft Bill. Others pointed out difficulties with the present
definition and its requirement of worship of a deity, leading to the anomaly that
some organisations already registered under the head of the advancement of
religion, for example Buddhism, do not meet the current legal definition.
Concerns were also raised that the present definition is not compliant with
human rights obligations. Religions Working Together pointed to a lack of clarity
in Charity Commission guidance on the charitable status of religious
organisations. Evidence from the Rev and Mrs M Braybrooke said that this "may
be prejudicial to newer religious groups or to Jainism which do not speak of a

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118

Supernatural Being". A possible form of words was suggested by the Charity


Law Association: "belief in a supernatural being, thing or principle and
acceptance and observance of certain canons of conduct giving effect to those
beliefs". . . .
54. We recommend that the draft Bill includes a definition of religion in clause
2 making it clear that non-deity and multi-deity groups can satisfy the
definition of 'religion' for charitable purposes. Any organisation would still be
subject to the requirement of showing public benefit before it could attain
charitable status. . . .
56. We recommend that an additional charitable purpose be added to 2(2) for
"the provision of religious harmony, racial, harmony, and equality and
diversity".
57. We recommend that the new charitable purpose on "the advancement of
arts, heritage and science", should include the word "culture" to bring it in line
with the wording of the draft Charities Bill and Trustee Investment (Scotland)
Bill.
58. We recommend that "the saving of lives" be added to the new charitable
purpose of the advancement of health. . . .

60. We recommend that the draft Bill be amended by adding to the


general 'any other purposes' category, the words 'or within the spirit or
intent of the [11 specific] purposes' listed in clause 2 (2) above.
3 Public benefit
Current position
61. Currently, in order for a body to be a charity in law, it must meet two
criteria: (i) it must have exclusively charitable purposes; (ii) it must be for
the 'public benefit'. We have dealt in chapter 2 above with the changes to
charitable purposes. We now turn to the Bill's effect on public benefit.
62. 'Public benefit' is not defined in statute law and its legal meaning is
derived from a series of court cases over many years. There is no
straightforward definition in case law. According to the Government's
Strategy Unit, public benefit means that a charity's purposes must: confer
benefit, as opposed to harm; benefit either the whole community or a
'significant' section of it; and confer only incidental private benefit.
63. At present, a charity whose purpose falls under the first three heads the relief of poverty, the advancement of education and the advancement
of religion - is presumed to be of public benefit and does not have to
demonstrate this unless some positive reason for doubt is presented. [79]
The only change made by the draft Bill in this context is to remove that
presumption. Much of our inquiry has been taken up in trying to establish
what the consequences of that change will be. The draft Bill does not
contain any new statutory definition of public benefit; it provides that

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judgments about public benefit will continue to be based on principles


determined by the courts; and it assumes that the Charity Commission will
continue to decide how to apply the public benefit test.
64. On the basis of the evidence we have received, the main difficulty
which arises in this area is how schools and hospitals which charge high
fees demonstrate adequate public benefit when access to the services they
provide is limited in this way. . . .
70. The draft Bill says that for a body to be a charity, it must:
a) fall within the 12 (rather than current four) charitable purposes listed in the
Bill at clause 2(2);
b) be for the public benefit "as that term is understood for the purposes of the
law relating to charities in England and Wales" (clauses 3(1) and 3(3)).
71. Clause 3(2) says that "it is not to be presumed that a purpose of a particular
description is for the public benefit". This abolishes the presumption of public
benefit under the existing law for the relief of poverty, or advancement of
education or religion. . . .
Fee-charging schools and hospitals
84. The importance of the requirement of public benefit, and the difficulty of
applying any test of public benefit, became very apparent from the evidence we
received in relation to independent schools and hospitals. The draft Bill makes no
explicit provision for any change in the charitable status of schools and hospitals
which charge fees and therefore limit public access to a certain extent. Although
we have taken evidence about schools and hospitals at the same time, their
situations are different. Some medical charities are funded in part by government
contracts while most of the funding for independent schools comes in fees from
individuals. . . .
86. The main points which have been made to us are set out below. The Socialist
Education Association told us:
" 'public benefit' can only be justified if it can be applied unequivocally to
the central purposes of a charity, which each applicant must be obliged to
demonstrate and maintain. There can be no blanket awards based on a
few inessential additions to their main activities. If private schools are not
prepared to open the opportunity to attend them to all children equally,
irrespective of parental income or deemed ability (which would be a true
public benefit) they should not be regarded as a charity. The private
sector's role in the provision of education in this country is significant for
many reasons. Few of them currently have much to do with charity. Until
all of them face up to the true nature of the role they have chosen to play,
and stop trying to safeguard privilege for the already privileged as well as
100+ million per annum in public subsidy, those that do not provide
genuine 'public benefit' should be denied charitable status."
87. We took oral evidence from the independent schools sector and a private
hospital on 30 June and that evidence, together with much written evidence, is
published with this report. Among the points made to us on behalf of educational

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and health charities were:


"Education is a charitable purpose. It has been a charitable activity for
more than 400 years and it remains so in this draft Bill. I think that most
people, the general public, would actually prefer schools to be in the
hands of charitable institutions rather than to be run for profit. In terms of
what we do, we educate nearly half a million children and that is in itself
a public good because education is a public good. We use endowments,
fees and other sources of revenue to widen access, and really the
important point is the extent to which schools, independent schools,
extend the access to their benefits beyond the class of people who can
afford to pay full fees. We are doing that more and more and I personally
see this Bill as entirely beneficial to the extent that, if there is any need for
a wake-up call, it will provide a mechanism to ensure that schools actually
do provide public benefit, it will be audited, and to the extent that they
need to provide more, then the Charity Commissioner, as regulator, will
be able to ensure that."
88. On the other hand we heard from Dr Anthony Seldon that:
"There are two very different kinds of independent school. There are the
small minority which are very wealthy which are doing extremely nicely
and which I do not think are very innovative. They look after
themselves and they pay lip service to odd charitable things, but they are
a self-perpetuating oligarchy and .. they have great wealth, and I think
they should be doing much more, not the least charitable and not the least
creative and innovative, to play a responsible part in our one nation, and
there are the rest. I would say that the rest are about 97 per cent, like
Brighton College, and we are passionate about being involved in the local
community and our parents are drawn from a very broad cross-section
and they make huge sacrifices. They remortgage their homes and
grandparents pay, both parents go out to work and I just want to break
down this notion of a monolithic independent sector".

3.4

Canadian Revenue Authoritys Proposed Guidelines for Registering a


Charity: Meeting the Public Benefit Test24

Registered charities have told the Canadian Revenue Authority (CRA) that they
require more information relating to the criteria applied and the process involved
for attaining registered status. . . . The purpose of the guidelines is to provide
basic information about the requirement and to clarify the meaning of the term
public benefit as we understand and apply it when we make determinations of
charitable status under the ITA.
Table of Contents

Introduction

24

http://www.cra-arc.gc.ca/tax/charities/consultations/publicbenefit-e.html.

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1.0 About this publication


2.0 The Fundamentals of Charity
3.0 The Test for Public Benefit
3.1 How we Determine 'Benefit'
3.1.1 When is proof required?
3.1.2 Basic Requirements
3.1.3 Variation of public benefit over time
3.1.4 Proof of Benefit
3.2 The Meaning of Public
3.2.1 What constitutes a sufficient segment of the
community?
3.2.2 Restricting or focussing benefit to a specific group of
beneficiaries
3.2.3 Self-help Organizations: A sufficient segment of
community?
3.2.4 Private benefit: To what extent may individuals
benefit privately?
3.2.5 Is the issue of public benefit affected by charging
fees?
Appendix A The Legal Foundation for the Common Law Definition
of Charity
Appendix B Case Law Reference
Introduction
The issue of public benefit is at the heart of every inquiry into an organizations
claim to charitable status under the Income Tax Act (ITA). Under current law, an
organization is only charitable if it meets the definition of charity at common
law.1 Part of that definition requires that in order for an organization to be
considered charitable it must be established for public benefit.2
Over the past decade, this notion of public benefit has received considerable
notice, and has, in some jurisdictions, emerged as the guiding consideration for

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determining what constitutes a charity. However, applying the common law test
for public benefit under the current regime remains a challenge. Courts, as well
as legal commentators, have noted the lack of clarity and certainty, as well as the
difficulties inherent in the application of the rules relating to public benefit. The
Ontario Law Reform Commission (OLRC), in its comprehensive review of the
law of charities published in 1996, commented on the confusion in the case law
over the meaning and significance of the public benefit aspect of the common-law
test.3 The report notes that the same words are used in the context of each of the
three elements of the test for charity: determining charitable purpose;
determining whether the purpose is of practical utility (the benefit test); and
determining those who will benefit from the purpose.4
On the international front, there have been a number of reviews of the definition
of charity undertaken in recent years. Most of these propose some version of a
legislated definition of charity, often reflecting the common-law approach, but
typically, with a greater emphasis on public benefit.5 In the jurisdictions where
reviews have been completed, some have: enacted legislation (e.g., South Africa);
tabled draft legislation for consultation, (e.g., Australia, the U.K., and Scotland)6;
or indicated that legislation would be forthcoming (New Zealand).
In Canada, important initiatives have recently been undertaken to improve the
legislative and regulatory environment in which the charitable sector operates at
the federal level. A joint-policy exploration process with sector representatives
the Joint Regulatory Table (JRT)was mandated to look into a number of areas
for improvement in the regulatory environment and issued its report in March of
2003.7 In the 2004 Budget Speech, the Government outlined an agenda for
continued reform of the federal regulation of charities. The agenda included
measures that directly respond to the JRT recommendations for improving the
legislative and regulatory environment within which the charitable sector
operates. One of the many initiatives involves the provision of more accessible
information regarding Canada Revenue Agency (CRA) policies, as well as
decisions and regulatory requirements pertaining to registered charities.8
Within this climate of regulatory reform in Canada and internationally, and
where the concept of public benefit is being factored in as the cornerstone of the
definition of charity in other jurisdictions,9 it is important to understand what we
mean in theory and practice. The following document is put forth as draft
guidance on the issue of public benefit.
1.0 About this publication
This publication clarifies the meaning of the term public benefit as we
understand and apply it when we make determinations of charitable status under
the ITA. For an organization to be considered charitable at law, it must be
established for public benefit.
Although these guidelines are primarily concerned with the application of the
test for public benefit during the registration process, it is important to keep in
mind that an organization must be established for the benefit of the public at all
times for it to be considered a charity.

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2.0 The Fundamentals of Charity


To take advantage of special tax privileges given charities under the ITAthe
most significant one being the ability to issue tax receipts to donors10charities
must first register with the CRA. To do so, an applicant organization must meet
the requirements of the ITA; namely that it must be charitable at law and devote
its resources to charitable purposes and activities.
At common law, an applicant organization will be determined charitable only if it
meets two fundamental requirements:

The organizations purposes must be exclusively and legally charitable.


It must be established for the benefit of the public or a sufficient
segment of the public.11
As part of the first requirement, an organizations purposes are considered legally
charitable only if they fall within one of the four categories of charity set out in
the 19th century decision, Commissioners for Special Purposes of Income Tax v. Pemsel,
(hereinafter referred to as Pemsel),12 or within the spirit and intendment of the
preamble to the Statute of Elizabeth ( the Preamble). As a result, in order to be
found charitable for the purposes of being registered under the ITA, an
organizations purposes must be sufficiently similar to others previously
recognized to be charitable at law.
Pemsel categories include:

purposes for the relief of poverty;


purposes for the advancement of education;
purposes for the advancement of religion; and
other purposes beneficial to the community in a way the law regards as
charitable.13
Within the public benefit requirement, there are several sub-requirements, which
are listed below and discussed in more detail later in this document:

The benefit should generally be tangible.


The beneficiaries must be the public-at-large or come from a sufficient
segment of the public as determined by the charitable purpose
being considered.
The organization may not otherwise benefit private individuals except
under certain limited conditions.
Subject to some exceptions,14 the organization cannot exist for the

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benefit of its members. Professional associations, trade unions are


not typically considered charitable at law.
The organization cannot restrict delivery of the benefits to a certain
group or class of persons without adequate justification.
The organization cannot charge fees for its services where the effect of
the charge would be to unduly exclude members of the public.
Finally, there are other general factors that are considered when determining
whether an entity is entitled to charitable status. If any of these exist, it may
disqualify an applicant:

The organization must not be established for the purposes of making a


profit.
The organization must not be set up for illegal purposes or for
purposes that are contrary to public policy.
The organization cannot be set up for political purposes or be involved
in political activities beyond the limits allowed at law.15
Since this publication is about public benefit, the focus will be on those elements
of the legal concept of charity that relate to this subject. That said, however, the
test for public benefit cannot be applied outside the general decision-making
context because it is inextricably linked to the overall determination of whether or
not an applicant organization is legally charitable. In fact, there is confusion over
the fact that the fourth category of charity (purposes beneficial to the public) uses
the same words as this broader test of public benefit, which applies to all
categories. However, the two are not the same. The fourth Pemsel category
includes only those purposes, determined to be of benefit to the community, in a
way the law regards as charitable. This latter part of the test can only be
determined through the process of analogy. The broader public benefit test,
which is the subject matter of these guidelines, is essentially concerned with the
question of who will benefit.16
These guidelines will be complemented in the fall by the release of our draft
guidelines on the decision-making process.17 That document will provide a
general overview of the manner in which the CRA approaches an application by
an organization for registration as a charity, and will include an explanation of
the source and scope of our authority as well as a review of the process
undertaken by examiners at the CRA Charities Directorate. These guidelines deal
with the basis for, and application of, the test for public benefit.
3.0 The Test for Public Benefit
It is well established in law that all organizations that want to be registered as a
charity under the ITA must ensure that their purposes are directed to the public
benefit. This requirement attaches to all categories of charity. However, those

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organizations whose purposes are directed to the relief of poverty face a


somewhat less rigorous public benefit review, though only for the second part of
the testthe question of who will benefit.18
The requirement of public benefit involves the application of a two-part test, each
part having a somewhat different application to the four categories of charity:19

The first part of the test generally requires that a tangible benefit be
conferred, directly or indirectly. (More recently, and in the
Canadian context, this requirement has also been described as an
objectively measurable and socially useful benefit.20)
The second part of the test requires that the benefit have a public
character, that is, be directed to the public or a sufficient section of
the public.
The benefit aspect of the test concerns whether the charitable purpose under
consideration is directed towards achieving a universal good that is not harmful
to the publica socially useful endeavour. The public aspect involves an
examination of who, and to what extent, constitutes the public. This notion of
public benefit has also been called the public character of charity, in that it
seeks the welfare of the public; it is not concerned with the conferment of
private advantage.21
The two parts are interrelated. Whether or not a particular group of the public
comprises a sufficient segment of the public will depend on, and may change
according to, the charitable purpose being conferred.22
The subsequent sections of these guidelines set out some background to the twopronged tests for public benefit and outline the main criteria considered by the
CRA examiners when applying the tests. The meaning and application of the first
testthe test for benefitis set out in s. 3.1. A similar approach follows in s. 3. 2
in respect of the second arm of the testthe test for who constitutes the public.
3.1 How we Determine 'Benefit'
Assessing whether an applicant organization has sufficiently established that it is
of benefit to the community at large (i.e., that it is a socially useful undertaking) is
a difficult task, particularly when a novel or different type of organization is
being proposed. In such cases, the CRA will only register an organization if these
new or novel purposes are both charitable at law and directed to the public
benefit. Though difficult, however, the benefit test is generally more simply
met than demonstrating a new charitable purpose. Organizations are often found
to be of benefit to the community, but not charitable, for a number of reasons.23
Factors affecting the extent to which proof of benefit is required include: the
nature of the proposed charitable purpose and the category it falls under; the
social and economic conditions of the time; the extent to which the benefit may be
quantified; the existence of any harmful impact of the undertaking; and the
relationship between the purpose and the intended beneficiaries.

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3.1.1 When is proof required?


The extent to which an applicant charity is required to meet the first part of the
public benefit test will depend, in large part, under which category the proposed
purposes fall. When the purposes fall within the first three categories of charity, a
presumption of benefit exists.24 This presumption arises because purposes falling
within these categoriesrelief of poverty, advancement of education, and
advancement of religionhave historically been recognized as beneficial to the
public. However, this presumption only arises once it has been clearly established
that the purposes fall within these categories. For example, trusts for the
advancement of religion will only be presumed to be for the benefit of the public
if the purposes of the organization first meet the criteria in law that will clearly
place it within that particular category of charity. If not, proof of benefit will be
required. Moreover, if the organization is not otherwise able to establish that its
purpose or purposes are charitable, the organization will not be recognized as
such under the ITA.
The presumption however, can be challenged. So when the contrary is shown,25
or when the charitable nature of the organization is called into question, proof of
benefit will then be required.26 For example, where a religious organization is set
up that promotes beliefs that tend to undermine accepted foundations of religion
or morality, the presumption of benefit can be challenged.27 When the
presumption is disputed, the burden of proving public benefit becomes once
again the responsibility of the applicant organization.
Although a similar presumption arises for some purposes that fall within the
fourth category (primarily those that are well-established and the benefit is clear,
for example, the provision of healthcare services or services that provide relief for
the aged)28, it is otherwise generally understood that the benefit aspect of the test
must be proved in applications concerning purposes proposed under the fourth
category.
Assessing applicants under the fourth category poses unique challenges for the
CRA examiners. As noted in our companion guidance on the decision-making
process, examiners largely determine whether a purpose is charitable by the
general approach of reasoning by analogy. If, after reviewing similar facts in
previous cases, an analogy can readily be found with a previously determined
charitable purpose, then the benefit aspect of the test has been effectively
established. To the extent that purposes have already been found to be charitable
under this category, similar purpose organizations will generally not be required
to prove benefit. That is because the courts have already determined the benefit
of such organizations29 (e.g., organizations established for the purpose of
providing community health care). Thus it is primarily in circumstances where
applications for novel, unrecognized purposes are being submitted for
registration, that evidence of benefit to the public must be provided. (See section
3.1.4 below for a discussion on the type of evidence that may be required to
establish benefit).
In practice, if an applicant organization sufficiently demonstrates that the
organizations purposes fall within one of the first three categories, or establishes
a connection with a previously recognized purpose under the fourth category,
CRA examiners will likely conclude that a benefit exists. But if the application

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contains information that suggests otherwise30 or raises issues that require further
clarification, the examiners may require proof of benefit before registering the
organization as a charity.31
To sum up, proving benefit under the public benefit test, is effectively only
required in the following instances:

when there are novel purposes to be considered;


when the presumption of benefit under the first three categories of
charity has been disputed; or
when a presumption of benefit under the fourth category would be
considered charitable but for the concerns raised (e.g. a health clinic
specializing in alternative therapies).
In such cases, applicants must establish the following:32

The benefit must be generally shown to be tangible. If it is intangible, it


must be demonstrated that the benefit is regarded as valuable by
the common understanding of enlightened opinion. 33
The benefit must be generally shown to be direct, although in some
circumstances, examiners may consider an indirect benefit.
When benefit is proven, it must be weighed against any harm that may
arise from the proposed activity and a net benefit must result.
3.1.2 Basic Requirements
A benefit should generally be tangible
At common law, the test of benefit under the overarching public benefit
test requires that the charitable purpose confer a tangible, or objectively
measurable, benefit on the public.34 The requirement that the benefit be
tangible stems from the need to have a benefit that is recognizable,
capable of being proved.35
Intangible benefits are acceptable as wellbut only in cases where there is
a clear general consensus that the benefit exists. 36
Intangible benefits can generally be found in charitable purposes arising
from the general category of purposes directed to the mental and moral
improvement of mankind,37 or promoting the moral or spiritual welfare of
the community.38 Charities that are established for the protection of
animals are typically registered under the category of the promotion of
morality because it is believed that they promote morality and check
mans innate tendency to cruelty and thus of benefit to humanity.39

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A benefit may be either direct or indirect


In assessing this aspect of the benefit test, examiners consider whether the
benefit is a direct result and consequence of the organizations activities
and whether under the circumstances, that benefit can be reasonably
achieved. In most instances, the benefit provided should be conferred
directly, although there is authority in case law to support an indirect
benefit as well. Animal welfare organizations, that have long been
recognized as charitable, have been justified solely on the basis of benefits
that can only be characterized as indirect, for example, charitable
purposes benefiting animals directly have been held to benefit mankind
under the fourth category.40
Indirect benefits can also be found in cases where benefiting one segment
of the community can be viewed as an indirect benefit to the greater
community, for example, providing accommodations for relatives of
critically ill patients will be seen as an indirect improvement or aid to the
hospital and the patients. 41 For many charitable purposes, it is quite often
the case that there is both a direct benefit to a targeted group of
beneficiaries and an indirect overarching benefit to the public at large.42
At times, the indirect benefit may be considered too remoteparticularly
when the direct benefit is in favour of private individuals. An
examination of this issue often involves a balancing of private benefit
versus public benefit, the former being generally prohibited (discussed
below). In the case of IRC v Oldham Training and Enterprise Council,43 the
public benefit of relieving unemployment in a depressed area was found
to be too remote relative to the more direct benefit of promoting the
interests of individuals involved in private business.44
Requirement that there be a net benefit for the public
The charitable purposes of some organizations may result in a benefit to
the public, while at the same time produce some negative effect. Where
such a conflict occurs, the public benefit, shown to arise from the
charitable purpose, is typically evaluated against any harm that may also
arise from the proposed activity.45 In determining charitable purpose, we
are looking to ensure that a substantial net benefit results.
3.1.3 Variation of public benefit over time
What was once considered a public benefit for a charitable purpose may not
necessarily always be so. What is beneficial is considered in light of prevailing
standards current at the time and accordingly, the courts notion of what
constitutes public benefit may vary with the passing of time. Previous recognition
or rejection of a type of public benefit does not end the issue for all time.46
This principle has been applied by the Charity Commissioners in the case of
promotion of race relations. In Re Strakosch47 the appeasement of race relations
was deemed political and thus not charitable. The Commissioners reversed the
position because legislation had since been passed in an attempt to enforce good

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race relations and accordingly considered it a purpose beneficial to the


community. The issue was no longer one for the court to decide.48
The Charity Commissioners also reversed their position relating to gun and rifle
clubs in the U.K. Civilian gun and rifle clubs in the U.K. had been recognised as
charitable by the Charity Commission for many years. The courts having
previously determined that such organizations were analogous to organizations
established to promote the efficiency of the armed forces. In 1993, the Charity
Commission reconsidered the issue and determined that such objects could no
longer be recognised as charitable at the end of the 20th century. The original
charitable purpose was based on the notion that such activities would be
preparatory for promoting the security of the nation. Current skills required for
such purposes were clearly different than those acquired through belonging to
the gun and rifle clubs, the latter being now more geared toward recreational or
sporting activity.
The CRA may similarly consider new purposes charitable when the issue of what
benefits the public has been altered through a change in legislation or stated
government policy. It may consider this provided, of course, that the proposed
new purpose is otherwise of a charitable nature, that is, within the spirit and
intendment of the Preamble.49 The CRA has recently revised and clarified its
policy for organizations created for the elimination of racism based on similar
reasoning. Organizations established for this purpose were previously only
registered if their purposes fell within the educational category.
Within this context, the CRA looks at changes in legislation, changes in stated
government policy, other forms of financial support for the organization
(particularly support from other local or municipal authorities), and changes in
the needs of the community.
3.1.4 Proof of Benefit
The existence of public benefit must be demonstrated through evidence
submitted by the applicant organization. It is not sufficient for an applicant to
merely state that in its view a public benefit will derive from the purposes.50
Examiners may consider a broad range of materials filed in support of an
application for registration as a charity. The nature and extent of the evidence
required will largely depend on the purpose the organization is seeking to have
recognized, its approach to achieving the purpose, and any limitations the
organization places on the class of beneficiaries. Where the purposes are novel or
there is some type of restriction on the beneficiary class, additional objective
evidence may be required.
An applicant organization is well-advised to consider supporting an application
with some of the following to establish public benefit. At the same time, however,
it should be mindful of the fact that the submission of such information may not
always be enough to demonstrate public benefit in the circumstances:

Needs assessment studies by academics, government bodies, or nonprofit organizations that document the existence of the need being
addressed.

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Project and/or funding proposals that address how the proposed


activities are best suited to meet the need in question.
Program evaluations showing that similar programs or this specific
proposed program has been demonstrated to meet the need
effectively.
Identification of government programs addressing the need in question
along with details on how the program complements or
supplements the government program.
Identification of explicit statements of government policy that may be
consistent with the goals and objects of their organization.
Demonstration of existing public sources of financial support for the
organization.
Identification of new or recent legislative initiatives consistent with the
proposed purpose.
Any other types of objective material that supports the proposal.
Although legislative initiatives may be considered, the mere existence of
legislation is not conclusive evidence that an organization is pursuing a public
benefit in a way the law regards as charitable. As per Iacobucci, J., in Vancouver
Society, the benefit must still be determined through ... analogy to cases already
found to be charitable.51 He further notes that he is not saying that legislation is
never relevant to the question of what is charitable. Relying on the decision in
Everywomans Health Centre, he noted that the court there pointed to legislation
in order to rebut the argument that the provision of abortions in private clinics
was contrary to public policy.52
3.2 The Meaning of Public
Charities are required to have a public character. This requirement is found in
the second part of the public benefit test, which requires that a charitable purpose
be for the benefit of the community (at large) or a sufficient segment of the
community.53 The necessary public element is required for all heads of charity
except for purposes for the relief of poverty where this part of the test is less
rigorously applied.
Conversely, a purpose will not be charitable if it confers private benefits. A
private benefit occurs when one of the reasons for the organizations existence is
to confer individual benefits to a limited group of persons on the basis of criteria
that are not relevant to the charitable purpose at hand.
At common law, this part of the testidentifying the eligible beneficiaries of the
charitable undertakingis least important to the relief of poverty category,
somewhat important to the advancement of religion category, but critical to the

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education and the fourth categories. In the case of the first category of charity,
relief of poverty, the target beneficiary group has historically been narrowly
limited.54
Determining what constitutes the public or whether there is a sufficient public as
opposed to private aspect to the undertaking proposed is a difficult task. The law
is unclear about how and under what circumstances we may arrive at a
conclusion that this aspect of the test has been met. However, various rules have
developed in the case law over the years, and these provide some general
guidance on how we can determine who may be eligible to benefit in relation to
all categories of charity. We discuss some of these rules in the following sections
with a particular focus on our interpretation and application.
3.2.1 What constitutes a sufficient segment of the community?
A key part of the process of determining charitable status involves a
consideration of the question of who will be benefiting. Although most
organizations applying to be registered as charitable under the ITA will be
offering services or programs aimed at the public at large, there are others that
will be set up for the purposes of providing services or programs directed at or
serving specific groups or classes of people (e.g. womens shelters, organizations
addressing people affected with a particular disease, or refugee settlement
services directed at a specific racial or ethnic group). Under what circumstances
will the CRA consider such groups a sufficient segment of the community?
It is difficult to describe, with any precision, what constitutes a sufficient segment
of the community. Moreover, this notion of sufficiency seems to imply large
enough numbers of beneficiaries whereas, in fact, the number of those benefiting
is not a major consideration. Each case must be determined on its merits. Certain
general rules / guidelines have emerged in case law, on which examiners rely
when faced with the issue of having to determine if a particular group constitutes
a sufficient segment of the community.
These general rules include:

Certain classes of persons eligible to benefit are generally acceptable at


law:
Those who need the particular service Abused women for a
domestic shelter; deaf or hard-of-hearing adults or children;
or children diagnosed with a particular disease or condition.
Reasonable geographical restrictions Inhabitants of a specific
geographical location are generally permitted, if there are no
other restrictive qualifications (e.g., clinics set up to provide
service to a certain geographic or jurisdictional area).55
Whether or not a class of eligible beneficiaries is a sufficient segment is
determined in relation to the charitable purpose proposed. 56 A
group of beneficiaries may be sufficient for one purpose, but not

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another. For example, a religious charity may well be limited to


those who are adherents of that particular faith, whereas that same
limitation would not suffice for an organization established to assist
persons with a disability.
Organizations that confer a private benefit are not charitable. A private
benefit will be found when the beneficiaries of the organizations
services are defined solely by some personal connection, such as
family relationships or common employment; or another
connection unrelated to the organizations purpose, such as colour
of hair or membership in a group unrelated to the need served.57
Generally, limiting or restricting service or program availability will
offend the public benefit test, unless it is shown to be relevant to
achieving the charitable purpose (e.g., organizations providing
general health services but wanting to restrict such services to a
particular ethnic group will not be recognized as charitable unless
the reason for the restriction is clearly justified). See section 4.2.2
below for an outline of the kinds of criteria applied by examiners
when they consider if a restriction is justified.
Although the potential number of beneficiaries is an important factor
and should not be numerically negligible, the mere fact that only a
limited number of persons are able to avail themselves of a benefit
at a given time will not necessarily offend the public benefit test.
For example, trusts that confer prizes to a single, but different,
meritorious musician on an annual basis will be charitable.
3.2.2 Restricting or focussing benefit to a specific group of beneficiaries
The issue of what constitutes the public most frequently arises in the context of an
applicant organization placing limitations on the group served by the
organization because of, among other things, ethnicity, gender, race, age, sexual
orientation, and religion. Although the restriction itself may be directly in line
with the nature of the charitable purpose, some organizations want to specifically
restrict the benefit to a specified group for other reasons. As well, others want
merely to focus the intended benefit on, or offer specialized service to, an
identifiable group. All types of limitations have the potential of offending the
public benefit test, although to differing degrees. Organizations that want an
outright restriction of benefit or exclusion of services have a far greater burden of
establishing public benefit than those organizations that want only to focus
attention on a specific group, but extend service delivery to the general public.
When a charity proposes to restrict the beneficiaries of the undertaking in any
way, the nature of the restriction must be clearly linked to the proposed benefit.
Is the restriction relevant to achieving the charitable object? For example, a
restriction imposed on eligibility based on a persons religion when the purpose
of the undertaking is not religious in nature (e.g., the establishment of a science

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museum) will likely fail the public benefit test and disentitle the applicant from
being registered as charitable.58 At the other end of the continuum are the
organizations whose restrictions are directly linked, or part of the charitable
purpose, which will be considered acceptable. An example of this latter scenario
would be an organization set up to assist women with ovarian cancer or one set
up to assist men with prostate cancer. Those organizations, whose purposes fall
between these two extremes, must demonstrate why their proposed restriction on
who will directly benefit from the purposes is necessary in relation to the
charitable purpose proposed.
When dealing with an applicant that proposes to restrict the benefits to a certain
segment of the community, or focus the service delivery on a specific group but
be open to the public, examiners will generally consider one or more of the
following factors to varying degrees of importance (depending on the
circumstances) when they determine if the restriction is justifiable:

The logical connection between the restriction and the benefit


provided.
Whether the restriction precludes the delivery of services to some
individuals or parts of the community that also have an identified
need.
Whether the services provided are irrelevant to excluded persons.
Whether the organization is particularly expert in the proposed service
for the proposed restriction.
Whether the restriction can be supported by evidence of service being
more effective if targeted (needs assessment / social science
research).
Whether the restriction arises from an intention to use resources to
address a specific acute disadvantage or need identified with a
particular group or a particular region.
The restriction is due, in part, to financial considerations and there is
willingness to lift the restriction if the organization becomes betterresourced over time, or a provision of referral to other organizations
that offer equivalent or more suitable services.
Examples:

Evidence supporting a need for separate services for men and women
for rehabilitation centres for substance abuse will be sufficient to
support a restriction in favour of separate rehabilitation facilities.
An organization that provides settlement services for refugeesbut is

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also directed at a particular community, which in particular offers


such services in the languages of that particular community and
targets specific issues that are unique to that communitymay be
considered charitable providing adequate proof of need is
established.
When an applicant organization is unable to adequately establish that an outright
restriction is justified, in some circumstances, the CRA may nonetheless allow an
organization that is in all respects open and accessible to the public at large, to
provide or focus services, of interest only to a narrower community. Although the
same criteria is applied, it is applied less stringently, and the overriding
requirement is that the service be open to those who want to use the service.
Example:

An organization that serves elderly people but directs its programs to


people who have a natural affinity or share similar problems, such
as persons with the same sexual orientation or persons of the same
ethnicity or cultural affinity, may be found charitable if the services
are otherwise open to the public at large. (Policy Statement on Relief
of the Aged, CPS 002, dated July 6, 1990) (Note: It may be possible
to establish an outright restriction on these facts provided that the
case for such a restriction is made.)
Finally, organizations that seek to restrict benefits must always ensure that the
restrictions proposed are not illegal or contrary to public policy. Any such
restrictions are incapable of providing a public benefit. Organizations with
purposes that are discriminatory or based on notions of racism, may, depending
on the nature of the discriminatory purpose, offend the norms in the Canadian
Charter of Rights and Freedoms. They may also be in contravention of the
various human rights regimes either federally or provincially, or contrary to
public policy as expressed in those constitutional and legislative regimes.59
3.2.3 Self-help Organizations: A sufficient segment of community?60
Organizations established in part for their members, and that provide programs
and/or benefits directly for their members, will not generally be considered
charitable at law because they lack a sufficient public character. Members groups
include professional associations, unions, co-operatives and tenants associations,
to name a few. Typically, such groups are established for the direct benefit of
their members, often in an advocacy role, and are accordingly not charitable at
law.
There are some exceptions.

Some members groups may be charitable if the purpose for which they
are established is the relief of poverty.61
Other member groups that are charitable include organizations that

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have as their object the promotion of racial equality, even though


group members may have a stake in the matter. This is because the
benefit is not confined to the members but extends to all those
affected by racial discrimination.62
Some self-help groups may similarly be an exception to the general
rule. Although they are member groups, in the sense that they are
typically a group of individuals and part of an organization
established for their benefit, they are different from other member
groups in very significant ways.
First, membership in such self-help groups is typically open and
accessible to either those who meet the criteria relating to the
charitable need for which the self-help group was created, or
those simply interested in the particular problem.
Second, unlike members groups generally, self-help groups are
established, typically in recognition of the therapeutic or
other benefits of peer support, to help individuals help
themselves, often utilizing a peer-support function, rather
than function in an advocacy role for the benefit of their
members.
The CRA recognizes as charitable those organizations that provide education,
support therapy, or rehabilitation to eligible clients through the model of selfhelp groups, as the overall benefit to the public at large is apparent. Such groups
are established to assist individuals, drawn from the community-at-large, in the
support of their specific problem or disadvantage. This can include problems
associated with discrimination, social exclusion, domestic violence, dysfunctional
families, as well as alcohol and substance abuse, to name a few.
Examples

Groups formed to assist members in rehabilitation efforts from alcohol


or substance abuse will be recognized as charitable by the CRA.
Groups formed by recent immigrants to Canada that face social isolation, to
build self-confidence, provide mutual support, find solutions to common
problems experienced by the group, and help members develop the skills to
be more active participants in broader civic life, may also be recognized as
charitable by the CRA.
3.2.4 Private benefit: To what extent may individuals benefit privately?
Although charitable organizations cannot be established to confer private
benefits, some private benefit may arise in the course of pursuing charitable
objects. However, the public benefit of an organization must not be outweighed
by any ensuing private benefit. Any benefit to an individual or group of

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individuals must either arise directly through pursuit of the charitys purposes
(e.g., relief of poverty), or be incidental to the pursuit of those purposes (e.g., as in
the case of programs pursued by community economic development
organizations), by providing inducements to attract needed social and
community services to a distressed region.63 The private benefit is only acceptable
as a minor and incidental by-product of the charitable purpose.
Differentiating between public and private benefit is difficult. There is no
quantitative test for measuring private benefit against the greater benefit to the
community at large.
Some of the factors considered include:

The extent to which private benefits are considered incidental


Private benefits will be considered acceptable when they occur in the
delivery of a reasonable charitable benefit to a properly chosen
beneficiary. For example, when a religious institution, which is otherwise
charitable, holds social activities for the benefits of its members and/or
youth groups, such activities, though not charitable in their own right,
will be considered acceptable because they are incidental to the main
purposethe advancement of religion;

The degree to which the private benefits further the charitable purpose
Actions by the charity, which result in private benefits to individuals or
business corporations, should be ones that otherwise further the
charitable purpose and not promote a collateral purpose.64 For example, in
community economic development matters, there is often a tension
between promotion of industry and commerce (which is charitable) on the
one hand, and promotion and support of private businesses, on the
other.65

The amount of private benefit should be reasonable.


When reviewing the private benefit, examiners want to ensure that any
benefit conferred is no more than is necessary to achieve the charitable
purpose.
3.2.5 Is the issue of public benefit affected by charging fees?
Many charitiesfor example, museums, arts organizations, and some religious
institutionscharge fees for their services. Charging fees does not of itself offend
the public benefit principle, although under certain circumstances it may. The
concern for public benefit arises when the effect of the charge would be to
exclude members of the public, in which case, the organization would ordinarily
not be considered charitable.
Several factors are taken into account when determining whether the charging of
fees is incompatible with public benefit:66

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Charges should be reasonable; typically they should be below-market


because they do not have a profit component and should aim at cost
recovery at the most. Organizations that charge market rates may
bring into question their charitable nature.
Exceptionally, charges may, if appropriate to the overall purposes of
the charity, be set at a rate that generates a surplus to help fund the
organizations charitable programs and activities.
Any charge should not be set at a level that deters or excludes a
substantial proportion of the beneficiary class.
The service provided should not cater only to those who are financially
well-offit should be open to all potential beneficiaries.
It should be clear that there is a sufficient general benefit to the
community, directly or indirectly, from the existence of the service.
Appendix A The Legal Foundation for the Common Law Definition of Charity
Since there is no definition of charity within the ITA, it is necessary to look to
common law to determine its meaning. The basis for the common law definition
of charity dates back to the preamble to the Statute of Charitable Uses, 1601.67 The
preamble of the statute lists many charitable objects or purposes and is frequently
referred to in its modern English rendition:68
Relief of the aged, impotent and poor people; the maintenance of sick and
maimed soldiers and mariners; schools of learning, free schools and scholars in
universities; the repair of bridges, ports, havens, causeways, churches, sea banks,
and highways; the education and preferment of orphans; the relief, stock or
maintenance of houses of correction; marriages of poor maids; supportation, aid
and help of young tradesmen, handycraftsmen, and persons decayed; the relief or
redemption of prisoners or captives; and the aid or ease of any poor inhabitants
concerning payments of fifteens, setting out of soldiers and other taxes.
At the time of the enactment of the Statute, the list of charitable purposes set out
above was not considered exhaustive. In order to determine charitable character,
the courts instead would consider whether a particular purpose was within the
equity of the Statute (preamble) or, put in other words, within its spirit and
intendment.69 Within that general context, the courts developed a body of
charitable purposes by analogizing new purposes to those in the preamble, or to
those since found to be charitable by a court of law. That continues to be the
approach adopted by the courts today.
In the late 1800s, the list of charitable purposes developed at common law was
classified into four categories of charitable purposes by Lord Macnaghton, in the
case of Commissioners for Special Purposes of the Income Tax Act v. Pemsel:70

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Charity in its legal sense comprises four principal divisions: trusts for the relief of
poverty; trusts for the advancement of education; trusts for the advancement of
religion; and trusts for other purposes beneficial to the community not falling
under any of the preceding heads.71
Although the classification approach to determining charitable purpose is
generally of assistance to the process, there are still problems. In particular, the
language used to describe the classes is far from clear, particularly as it relates to
the fourth category, the interpretation of which has been the subject of substantial
litigation.
It is these four categories of charitable purposes, together with the preamble, that
serve as starting points for a determination of charity at common law. Courts
typically consider first whether the organizations purposes can fall within one or
more of the specific categories and, if not, whether the purposes can reasonably
fall within the general category typically referred to as the fourth head. The
classification approach was first explicitly approved of by the Supreme Court of
Canada in Guaranty Trust Co. of Canada v. Minister of National Revenue72 and
confirmed in the more recent Supreme Court decision in Vancouver Society.73
Appendix B Case Law Reference
Public Benefit
We have noted in the preamble to these guidelines that problems associated with
the application of the test for public benefit in the context of the definition of
charity are not insignificant. Varying calls for clarification and/or modernization
of the definition of charity have come from judges, legal commentators, and
members of the charitable sector alike. Criticisms of the current law include: lack
of reasonable precision;74 confusing framework and confusion generally;75 lack of
clarity and guidance;76 difficulties in articulating how the law of charities is to
keep moving;77 and inconsistency in decision-making.78
It is within this context that we put forth these policy guidelines and, in so doing,
we have articulated the manner and foundation upon which we apply the test for
public benefit. Within the text, we have referred to the case law that is the
foundation for our interpretive guidance. In this appendix we set out some key
quotes from some of the leading cases and legal texts that we have relied on to
formulate these guidelines. This appendix is divided into the following
categories:

Case law and authoritative texts relied on for the general application of
the test.
Case law and authoritative texts relied on for our interpretation and
application of the test for benefit.
Cases relied on for our interpretation and application for the test for
the meaning of public.

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Generally
For a general source on the requirement of public benefit, the case of Verge v.
Somerville is often cited.79
Verge v. Somerville, [1924] A.C. 496 at 499
To ascertain whether a gift constitutes a valid and charitable trust so as to escape
being void on the ground against perpetuity, a first inquiry must be whether it is
public whether it is for the benefit of the community or of an appreciably
important class of the community. The inhabitants of a parish or town, or any
particular class of such inhabitants, may, for instance, be the objects of such a gift,
but private individuals, or a fluctuating body of private individuals, cannot.
[Emphasis added]
Statements regarding the confusion surrounding the language used for the
overarching public benefit test and the fourth head of charity:
Vancouver Society of Immigrant and Visible Minority Women v. M.N.R., [1999] 1
S.C.R. 10.
This language of benefit of the community is unfortunate because it creates
confusion with the fourth head of charity under the Pemsel scheme -- trusts for
other purposes beneficial to the community. Nonetheless, this other notion of
public benefit is different and reflects the general concern that [t]he essential
attribute of a charitable activity is that it seeks the welfare of the public; it is not
concerned with the conferment of private advantage: Waters, supra at 550.
And as further illustrated by the Court,
[t]he difference between the Pemsel classification and this additional notion of
being for the benefit of the community is perhaps best understood in the
following terms. The requirement of being for the benefit of the community is a
necessary, but not a sufficient, condition for a finding of charity at common law.
If it is not present, then the purpose cannot be charitable. However, even if it is
present the court must still ask whether the purpose in question has what
Professor Waters calls, at p. 550, the generic character of charity. This character
is discerned by perceiving an analogy with those purposes already found to be
charitable at common law, and which are classified for convenience in Pemsel.
The difference is also often one of focus: the four heads of charity concern what is
being provided while the for the benefit of the community requirement more
often centres on who is the recipient.
Evidentiary requirements to establish public benefit.
McGovern v. A.G., [1982] 2 W.L.R. 222 at 234.
Save in the case of gifts to classes of poor persons, a trust must always be shown
to promote a public benefit of a nature recognized by the courts as being such, if
it is to qualify as being charitable. The question whether a purpose will or may
operate for the public benefit is to be answered by a court forming an opinion on
the evidence before it: see National Anti-Vivisection Society v IRC [1948] AC 31, 44,

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per Lord Wright. No doubt in some cases a purpose may be so manifestly


beneficial to the public that it would be absurd to call evidence on this point. In
many other instances, however, the element of public benefit may be much more
debatable. Indeed, in some cases the court will regard this element as being
incapable of proof one way or the other and thus will inevitably decline to
recognize the trust as being of a charitable nature.
Re Hummeltenberg, [1923] 1 Ch. 237 at 242.
In my opinion, the question whether a gift is or may be operative for the public
benefit is a question to be answered by the court by forming an opinion upon the
evidence before it.
The Test for Benefit
Challenging the presumption
Benefit under the first three heads of charity is presumed once an applicant
organization establishes at law that the proposed purposes meet the legal
requirements to enable such purposes to fall within one or more of those
categories. Once an applicant establishes that the purpose or purposes is intended
to either relieve poverty, advance education, or advance religion, within the
parameters required by law, the presumption arises. The presumption , however,
may be nonetheless rebutted by concerns raised.
In their decision on the Church of Scientology, the Charity Commissioners
concluded that the presumption in that case was rebutted by a number of
circumstances and that they would take a wide view of public benefit and
consider a number of different factors, including: the fact that it was a new
religion; that there was public concern about scientology generally; and, that
there was expressed judicial concern about some of its practices both in the U.K.
and abroad. They rejected the argument that, in order to displace the
presumption of public benefit, it must be shown that the gift is detrimental to the
community.80
Proving Benefit Under the Fourth Head
Under the fourth head of charity, this aspect of the test must be proved. The
fourth head poses unique problems in the application of this test. As noted by
Chesterman:
The requirement that such a benefit exists is integrally bound up with the
demarcation of the category itself, so that while it is strictly wrong to say that
compliance with this limb is an additional requirement over and above being
proved to be within the category, it is also somewhat misleading to speak in
terms of automatic compliance.81
And later
...the question raised in the first limb whether purposes confer a tangible benefit
does not arise as a separate issue with regard to fourth category of charitable
purpose. It is necessarily concluded one way or the other by the process of
determining whether the particular purposes being examined fall within the

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fourth category.82
As is also noted in the OLRC report, the benefit segment of the public benefit
test is used to facilitate consideration of the practical utilitythe benefitof the
project.83 In the case of charitable purposes falling under the fourth head of
charity, however, the practical utility of the project is intertwined with its
charitable purpose as that category is defined in terms of trusts for the benefit of
the community.
Tangible Benefit
The requirement that the benefit be generally tangible stems from the need to
have a benefit that is recognizable, and capable of being proved,84 although there
is authority for the acceptance of benefits that are intangible providing certain
conditions are met.85 There may be circumstances, though limited in number,
where intangible benefits have been determined acceptablespecifically if such
benefits would be regarded as valuable by the common understanding of
enlightened opinion.86
National Anti-Vivisection Society v. I.R.C., [1948] A.C. 31
I think that the whole tendency of the concept of the fourth head is towards
tangible and objective benefits and at least that approval by the common
understanding of enlightened opinion for the time being is necessary before an
intangible benefit can be taken to constitute a sufficient benefit to the community
to justify admission of the object into the fourth class.
This test was applied and rejected on the facts of the case in the determination of
charitable status for the Church of Scientology by the U.K. Charity Commission.
Application for Registration as a Charity by the Church of Scientology (England and
Wales)
Decision of the Charity Commissioners made on November 17th, 1999.
The Commissioners considered the test in respect of an intangible benefit to mean
a common consensus of opinion amongst people who were fair minded and free
from prejudice or bias.
Variation of Benefit over time
National Anti-Vivisection Society v. I.R.C., [1948] A.C. 31.
Again [charitable] trusts may, as economic ideas and conditions and ideas of
social service change, cease to be regarded as being for the benefit of the
community, and trusts for the advancement of learning or education may fail to
secure a place for charities, if it is seen that the learning or education is not of
public value.87
Vancouver Society of Immigrant and Visible Minority Women v. M.N.R., [1999] 1 SCR
10.
In the absence of legislative reform providing guidelines, the best way in which

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to discern the charitable quality of an organizations purposes is to continue to


proceed by way of analogy to those purposes already found to be charitable by
the common law, and conveniently classified in Pemsel, subject always to the
general requirement of providing a benefit to the community, and with an eye to
societys current social, moral and economic context.88
Test for Public
The second arm of the public benefit test is applied across all heads of charity,
except for charities whose purposes fall within the first headrelief of poverty.
All other purposes, however, must satisfy the public aspect of the test, albeit in
each case somewhat differently.
IRC v Baddeley, [1955] A.C. 572.
I cannot accept the principle submitted by the respondents that a section of the
public sufficient to support a valid trust in one category must as a matter of law
be sufficient to support a trust on any other category. I think that difficulties are
apt to arise if one seeks to consider the class apart from the particular purpose.
They are, in my opinion, interdependent. There might well be a valid trust for the
promotion of religion benefiting a small class. It would not at all follow that a
recreation ground for the exclusive use of the same class would be a valid
charity.89
Sufficient Segment of the Community
The purposes of a charity must be directed to the whole community or public, or
sufficient segment of that community. What constitutes a sufficient section of the
community?
Dingle v Turner, [1972] A.C. 601.
The phrase a section of the public is in truth a vague phrase which may mean
different things to different people. In the law of charity judges have sought to
elucidate its meaning by contrasting it with another phrase: a fluctuating body
of private individuals. But I get little help from the supposed contrast for as I see
it one and the same aggregate of persons may well be describable both as a
section of the public and as a fluctuating body of private individuals.90
Whether potential beneficiaries can fairly be said to constitute a section of the
public is a question of degree, and much will depend upon the purpose of the
trust.
Springhill Housing Action Committee v. Commr. of Valuation, [1983] N.I. 184.
...All of which leaves one very much on the high seas with the purpose of the
trust as the only reliable compass....I think it is not possible to lay down any
clearer distinction than has been done by the House of Lords, imprecise though it
be. I am satisfied that a trust for a section of the community is normally charitable
unless the object or purpose of the trust points to a different conclusion. In the
present case the Centre is occupied for a purpose which is normally charitable,
and the class of persons for whose benefit it is occupied, being the residents of a

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sizeable estate, is not so insignificant in numbers as to deprive it of its prima facie


public character.
Some of the principles that have been developed by the courts over the years, and
which provide some framework within which a determination on whether or not
a group of individuals is a sufficient segment of the community, are:

Examiners look at a class of beneficiaries relative to the charitable


purpose proposed.
Davies v. Perpetual Trustee Company, [1959] A.C. 439 at 456.
[The restriction is] wholly irrelevant to the educational object the testator
had in mind. It cannot be said that boys whose Presbyterian ancestors
trace their descent from emigrants from Northern Ireland are in greater
need of education in the standards of the Westminster Divines than other
boys whose Presbyterian ancestors are descended from emigrants
from, e.g., England or Scotland.
(See also the Baddeley quote and reference above.)
The number of beneficiaries should not be negligible.
Oppenheim v. Tobacco Securities Trust Co Ltd., [1951] A.C. 297 at 306.
These words section of the community have no special sanctity, but they
conveniently indicate first, that the possiblebeneficiaries must not be
numerically negligible, and secondly, that the quality which distinguishes
them from other members of the community, so that they form by
themselves a section of it, must be a quality which does not depend on
their relationship to a particular individual A group of persons may be
numerous but, if the nexus between them is their personal relationship to
a single propositi, they are neither the community nor a section for
charitable purposes.

The quality that distinguishes members of the beneficial class from


other members of the community must be a quality that does not
depend on their relationship to a particular person or persons.
Re Compton, [1945] Ch. 123.
A gift under which the beneficiaries are defined by reference to a purely
personal relationship to a named propositus cannot on principle be a
valid charitable gift. And this, I think , must be the case whether the
relationship be near or distant, whether it is limited to one generation or is
extended to two or three or in perpetuity. The inherent vice of the
personal element is present however long the chain and the claimant
cannot avoid basing his claim on it.
See also Oppenheim, above.

Restricting access to benefit without justification will offend the public

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benefit test.
Limiting the beneficiaries to a class within a class may preclude
recognition of the purpose as charitable. This concern relates back
to the Baddeley decision, in which the House of Lords considered
whether trusts were charitable when they were established for the
benefit of residents of two counties who were "in the opinion of
such leaders members or likely to become members of the
Methodist Church and of insufficient means otherwise to enjoy the
advantages...".
IRC v Baddeley, [1955] A.C. 572, per Viscount Simonds.
This brings me to another aspect of the case, which was argued at great length
and, to me at least, presents the most difficult of the many difficult problems in
this branch of the law. Suppose that...the trust would be a valid charitable trust if
the beneficiaries were the community at large or a section of the community
defined by some geographical limits, is it the less a valid trust if it is confined to
members or potential members of a particular church within a limited
geographical area? . But confine its use to a selected number of persons,
however numerous and important: it is then clearly not a charity.....I should, in
the present case, conclude that a trust cannot qualify as a charity within the
fourth class in Pemsel's case if the beneficiaries are a class of persons not only
confined to a particular area but selected from within it by reference to a
particular creed.
There are, however, a number of cases that hold charitable trusts, bequests, and
organizations that primarily benefit some subcategory of the public.
1 Although this is the case for the vast majority of charities, there are a few
organizations that derive their charitable status from the ITA, such as Registered
National Arts Services Organizations (RNASOS). As well, there are other
organizations deemed to be charities under other legislation, such as the
Canadian Race Relations Foundation, which has been created through its own act
of Parliament.
2 Verge v. Somerville, [1924] A.C. 496 at 499 (P.C.) [hereinafter Verge v. Somerville ].
3 Ontario Law Reform Commission, Report on the Law of Charities (Toronto: OLRC
1996) at 176 [hereinafter OLRC Report]. See also the reasons of the majority
judgment of Iacobucci, J., in Vancouver Society of Immigrant and Visible Minority
Women v. M.N.R., [1999] 1 S.C.R. 10 at para. 147ff, Iacobucci J. [hereinafter
Vancouver Society]. See also Vancouver Society, ibid. at para 37, Gonthier J.
4 OLRC Report, ibid. at 166.
5 See in particular, the review completed in the UK by the Strategy Unit, Cabinet
Office, Private Action, Public Benefit, A Review of Charities and the Wider Not-forProfit Sector, September 2002, online: Cabinet Office <http://www.cabinetoffice.gov.uk/innovation>. Acknowledging that the current law is confusing,
unclear, and outdated, the report calls for a legislated definition of charity

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comprising ten categories of charitable purposes, three of which represent new


charitable purposes. The purposes have been chosen to represent the main areas
of charitable activity that can reasonably be anticipated to continue to represent a
public benefit. The aim of the recommendation is to establish a clear framework
for the definition while at the same time, retaining the existing case law and the
flexibility to evolve as society changes. It also proposes to alter existing
parameters of charitable status to allow for organizations, that would otherwise
be denied charitable recognition, but that provide a clear public benefit. See also,
U.K., National Council on Voluntary Organizations, For the Public Benefit? A
Consultation Document on Charity Law Reform, London 2001, online: National
Council on Voluntary Organizations <http://www.ncvo-vol.org.uk>; Scotland,
Charity Scotland, The Report of the Scottish Charity Law Commission, May 2001,
online: Scottish Charity Law Review Commission
<http://www.scotland.gov.uk/justice/charitylaw/csmr/cssd-01.htm >;
Australia, Report of the Inquiry into the Definition of Charities and Related
Organizations, June 2001, online: Charities Definition Inquiry
<http://www.cdi.gov.au/html/report.htm>; South Africa, Ninth Interim Report
of the Commission of Inquiry into Certain Aspects of the Tax Structure of South Africa
Fiscal Issues Affecting Non-Profit Organizations (NPOs), 1999 (the Katz Commission
report), online: Ministry of Finance
<http://www.finance.gov.za/documents/katz/default.htm>; New Zealand, Tax
and Charities, June 2001, online: Inland Revenue Department
<http://www.taxpolicy.ird.govt.nz/publications/files/html/ddcharities/
index.html>.
6 As of the date of this consultation draft, Australia has been reported as having
withdrawn the proposed charities bill and is opting instead with retaining the
Common Law approach and remedying some minor anomalies from the
Common Law through legislation.
7 Voluntary Sector Initiative (Canada), Joint Regulatory Table, Strengthening
Canadas Charitable Sector: Regulatory Reform, March 2003, online: Voluntary Sector
Initiative <http://www.vsi-isbc.ca/eng/joint_tables/ regulatory/index.cfm>
[hereinafter Regulatory Reform].
8 Ibid. Recommendation 6.
9 Almost all recommendations from the report in the UK have been accepted by
the Government and a draft Charities Bill was released for consultation in May,
2004. In South Africa, since 2001, legislation has been in place that provides for
tax exemptions for Public Benefit Organizations.
10 The receipts are then used for non-refundable tax credits for personal income
taxpayers or taken as deductions in the case of corporations.
11 McGovern v. A.G., [1982] 3 All E.R. 439 [hereinafter McGovern].
12 Commissioners for Special Purposes of Income Tax v. Pemsel, [1891] A.C. 531 (H.L.)
[hereinafter Pemsel]. See Appendix A for an overview of the definition of
charity at common law.
13 Although the language used to describe the last category, purposes beneficial
to the community, is almost identical to the over-arching public benefit test that
is the subject matter of these guidelines, the two are not the same. See the

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discussion on page 7.
14 Umbrella groups or facilitator organizations and some self-help organizations
may be considered charitable if they otherwise meet the requirements under the
ITA and the common law. See the discussion on self-help groups below.
15 For information on political activities see CRA, Summary Policy CPS-022,
Political Activities (25 October 2002), online: CRA <http://www.craarc.gc.ca/tax/charities/policy/csp/csp-p02-e.html>.
16 The distinction is aptly drawn in Vancouver Society, supra note 3 at para. 148.
See Appendix B, Case Law Reference for the case quotation.
17 The draft guidelines are to be released for consultation in November, 2004.
18 At common law, charitable trusts for the benefit of poor relations and poor
employees have been upheld, where in all other categories, such beneficiaries
would not pass the public benefit test. This anomalous group of cases, however,
has been the subject of much criticism and is generally considered to be a
reflection of the social and economic conditions of their time. Whether or not such
cases would survive the scrutiny of the court today is questionable.
19 But see the discussion on public benefit in the OLRC Report, supra note 3 at 183,
where the variation in standard is questioned: These observations confirm rather
than deny, the existence of a single standard. The appearance of variation is only
an appearance.
20 Vancouver Society, supra note 3 at para. 42, Gonthier J.
21 D. Waters, The Law of Trusts in Canada, 2nd ed. (Toronto: Carswell, 1984) at 550.
22 I cannot accept the principle submitted by the respondents that a section of
the public sufficient to support a valid trust in one category must as a matter of
law be sufficient to support a trust in another category. I think that difficulties are
apt to arise if one seeks to consider the class apart from the particular nature of
the charitable purpose. They are, in my opinion, interdependent. I.R.C. v.
Baddeley, [1955] A.C. 572 at 615, per Lord Somervell of Harrow [hereinafter
Baddeley].
23 See for example Vancouver Society, supra note 3, where an immigrant and
visible minority womens society was found to be of benefit to the public but not
charitable.
24 National Anti-Vivisection Society v. I.R.C., [1948] A.C. 31 at 42: The test of
benefit to the community goes through the whole of Lord Macnaghtons
classification, though as regards the first three heads, it may be prima facie
assumed unless the contrary appears. [hereinafter National Anti-Vivisection
Society].
25 Ibid. at 43.
26 Ibid.
27 Ibid.
28 See Everywomans Health Centre v. M.N.R., [1992] 2 F.C. 52 at 60, Decarie, J.,
finding that the womens health center provided a public benefit, stated,
hospitals prima facie qualify as charities at common law on the basis that the
provision of medical care for the sick is accepted as conferring a public benefit.

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[hereinafter Everywomans Health Centre ].


29 McGovern, supra note 11 at 44, Slade J. The question whether a purpose will or
may operate for the public benefit is to be answered by the court forming an
opinion on the evidence before it. No doubt that in some cases a purpose may
be so manifestly beneficial to the public that it would be absurd to call evidence
on this point. In many other instances, however, the element of public benefit
may be much more debatable.
30 In Re Pinion, [1964] 1 All E. R. 890, the court refused to hold charitable a
bequest to a museum of the testators paintings, which may otherwise be
charitable as educational, as they had no artistic merit and were thus neither
educational nor of public utility [hereinafter Pinion].
31 For an interesting approach to the issue see Charity Commissioners for
England and Wales, Decision of the Charity Commissioners for England and Wales
(17November 1999). Application for Registration as a Charity by the Church of
Scientology (England and Wales), Charity Commission, London, 1999 at 41.
32 These criteria are discussed in detail below.
33 National Anti-Vivisection Society, supra note 23 at 31.
34 M. Chesterman, Charities, Trusts and Social Welfare (London: Weidenfeld and
Nicolson, 1979) at 136 [hereinafter Chesterman].
35 See generally, Gilmour v. Coats et al, [1949] 1 All E.R. 848 [ hereinafter Gilmour].
36 National Anti-Vivisection Society, supra note 23 at 49. The Charity Commission
has interpreted this test to mean, a common consensus of opinion amongst
people who are fair-minded and free from prejudice or bias. See Decision of the
Charity Commissioners for England and Wales (17November 1999). Application for
Registration as a Charity by the Church of Scientology (England and Wales), supra note
30 at 45. Courts in Canada have taken a more cautious approach to such
evidence, believing that a consideration of evidence of public opinion would be
injudicious, courts being ill-equipped to assess public consensus, which is a
fragile and volatile concept. See Everywomans Health Centre, supra note 27 at 6869, Decarie J.
37 A trust established to carry on the teachings of Dr. Rudolph Steiner was held
to be charitable as the teachings may have resulted in such mental or moral
improvement. Re Price, [1943] Ch. 422.
38 In Re Orr (1917), 40 O.L.R. 567, the court found charitable a trust to elevate the
community spiritually.
39 H. Picarda, The Law and Practice Relating to Charities , 3rd ed. (London:
Butterworths, 1999) at 157.
40 National Anti-Vivisection Society, supra note 23 at 45.
41 See in particular the cases referred to by G.H.L. Fridman, Charities and Public
Benefit , (1953) Can. B. Rev. 537 at 539, as authority for the provision of an indirect
benefit [hereinafter Fridman].
42 See Baddeley, supra note 21 at 532, regarding the importance of indirect benefit
to the public in fourth head cases where the direct benefit is to a limited class of
beneficiaries.

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43 I.R.C. v. Oldham Training and Enterprise Council, [1996] B.T.C. 539 [hereinafter
Oldham Training].
44 See generally CRA, Summary Policy CP-C03, Community Economic
Development (CED) (25 October 2002), online: <http://www.craarc.gc.ca/tax/charities/policy/csp/csp-c03-e.html>
45 See National Anti-Vivisection Society, supra note 23 at 42, where the House of
Lords weighed the relative value of the material and direct benefits of vivisection
against the moral benefit (indirect and intangible) assumed to flow from the work
of the anti-vivisectionists.
46 Ibid.
47 Re Strakosch, [1949] 1 Ch. 529.
48 U.K., Charity Commissioners, Report of the Charity Commissioners 1983, at
para.18.
49 See the draft consultation document on the decision-making process for an
overview of the CRAs approach to novel purposes generally.
50 Re Hummeltenberg, [1923] 1 Ch. 237 at 242 [hereinafter Hummeltenberg]. Cited
with approval in National Anti-Vivisection Society, supra note 23 at 44.
51 Vancouver Society, supra note 3 at para. 182.
52 Ibid. at para. 183.
53 Verge v. Sommerville, supra note 2 at 499, per Lord Wrenbury.
54 Note that many have called for the abolition of these anomalies. See for
example the OLRC Report, supra note 3 at 190, where the authors recommend that
a provision be enacted which excludes these charities from the currently available
tax privileges.
55 Verge and Sommerville, supra note 2.
56 Davies v. Perpetual Trustee Company, [1959] A.C. 439 at 456 [hereinafter Davies];
Baddeley, supra note 21 at 615, per Lord Somervell. See Appendix B, Case Law
Reference for the case quotations.
57 Oppenheim v. Tobacco Securities Trust Co Ltd., [1951] A.C. 297 at 306 [hereinafter
Oppenheim].
58 Baddeley,supra note 21 at 534, per Viscount Simonds.
59 See the discussion in Canada Trust Co. v. Ontario (Human Rights Commission)
(1990), 38 E.T.R. 1 at 38, Tarnopolsky J.
60 This issue is more fully discussed in CRA, Policy Statement CPS-016,
Distinction between self-help and members groups (7 September 2000), online:
CRA <http://www.cra-arc.gc.ca/tax/charities/policy/cps/cps-016-e.html>.
61 Re Clarks Trust (1875), 1 Ch. D. 497.
62 See CRA, Policy Statement CPS-016, Distinction between self-help and
members groups (7 September 2000), supra note 59.
63 See CRA, Registered Charities: Community Economic Development Programs, RC4143 (23 December 1999), online: CRA <http://www.craarc.gc.ca/E/pub/tg/rc4143/README.html>.

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64 Oldham Training, supra note 42.


65 Ibid.; CRA, Summary Policy CP-C03, Community Economic Development
(CED) (25 October 2002), supra note 43 at 11.
66 See Appendix B for a review of the relevant case law.
67 43 Eliz. 1, c.4 (U.K.) [hereinafter Statute of Elizabeth].
68 McGovern v. A.G., [1982] 3 All E.R. 439.
69 H. Picarda, The Law and Practice Relating to Charities, 3rd ed. (London:
Butterworths, 1999) at 23, 9.
70 [1891] A.C. 531 (H.L.).
71 Ibid.
72 [1967] S.C.R. 133.
73 Ibid.; Vancouver Society, supra note 3 at para. 147.
74 Fridman, supra note 40 at 541.
75 Vancouver Society, supra note 3 at paras. 147, 153, regarding confusion around
purposes and activities. See generally, OLRC Report, supra note 3.
76 Human Life International in Canada Inc. v. M.N.R., [1998] 3 F.C. 202 at 214 (C.A.),
Strayer J.A. [hereinafter Human Life].
77 Vancouver Society, supra note 3 at para. 150.
78 See generally Fridman, supra note 40.
79 See e.g. Vancouver Society, supra note 3.
80 Decision of the Charity Commissioners made (17 November 1999). Application for
Registration as a Charity by the Church of Scientology (England and Wales), supra note
35 at 41.
81 Chesterman, supra note 33.
82 Chesterman, supra note 33 at 183.
83 OLRC Report, supra note 3 at 176.
84 Gilmour v. Coats et al, [1949] 1 All E.R. 848.
85 National Anti-Vivisection Society, supra note 23.
86 Ibid. at 49, per Lord Wright.
87 Ibid. at 42.
88 Vancouver Society, supra note 3 at para. 159, Iacobucci, J.
89 Baddeley, supra note 21.
90 Dingle v Turner, [1972] A.C. 601.

3.5

U.S. Charity Commissions.

Two states in the United States South Carolina and West Virginia
established charity commissions to oversee charities, taking over powers

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generally exercised by the secretary of state and the attorney general. They
later repealed the legislation. Why do you suppose they did, given the
favorable discussion of the commission idea in other countries besides
England and Wales (e.g., Scotland, Australia, New Zealand)?
Chapter 4 -- GOVERNANCE
4.1

General Fiduciary Obligations

151

4.1.1

Revised Model Nonprofit Corporation Act

151

4.1.2

UK Parliament Joint Committee First Report, Charities Bill

154

4.1.3

Northeast Harbor Golf Club, Inc. v. Nancy Harris

155

4.2

The Sibley Hospital Case

159

4.3

The Bishop Estate Controversy (US)

174

4.3.1

Overview by Professor Randall W. Roth

174

4.3.2

Bishop Estate Settlement

181

4.4

Possible Criminal Liability for Trustees

181

4.5

Statutory Provisions Re Personal Benefit

184

General Fiduciary Obligations


4.1.1 Revised Model Nonprofit Corporation Statute (RMNCA)(1987)
Section 8.30. General Standards for Directors.
(a) A director shall discharge his or her duties as a director, including his or her duties
as a member of a committee:
(1) in good faith;
(2) with the care an ordinarily prudent person in a like position would exercise
under similar circumstances; and
(3) in a manner the director reasonably believes to be in the best interests of
the corporation.
(b) In discharging his or her duties, a director is entitled to rely on information,
opinions, reports, or statements, including financial statements and other financial
data, if prepared or presented by:

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(1) one or more officers or employees of the corporation whom the director
reasonably believes to be reliable and competent in the matters presented;
(2) legal counsel, public accountants or other persons as to matters the director
reasonably believes are within the person's professional or expert competence;
(3) a committee of the board of which the director is not a member, as to
matters within its jurisdiction, if the director reasonably believes the
committee merits confidence; or
(4) in the case of religious corporations, religious authorities and ministers,
priests, rabbis or other persons whose position or duties in the religious
organization the director believes justify reliance and confidence and whom
the director believes to be reliable and competent in the matters presented.
(c) A director is not acting in good faith if the director has knowledge concerning the
matter in question that makes reliance otherwise permitted by subsection (b)
unwarranted.
(d) A director is not liable to the corporation, any member, or any other person for any
action taken or not taken as a director, if the director acted in compliance with this
section.
(e) A director shall not be deemed to be a trustee with respect to the corporation or
with respect to any property held or administered by the corporation, including
without limit, property that may be subject to restrictions imposed by the donor or
transferor of such property.
Section 8.31. Director Conflict of Interest.
(a) A conflict of interest transaction is a transaction with the corporation in which a
director of the corporation has a direct or indirect interest. A conflict of interest
transaction is not voidable or the basis for imposing liability on the director if the
transaction was fair at the time it was entered into or is approved as provided in
subsections (b) or (c).
(b) A transaction in which a director of a public benefit or religious corporation has a
conflict of interest may be approved:
(1) in advance by the vote of the board of directors or a committee of the
board if:
(i) the material facts of the transaction and the director's interest are
disclosed or known to the board or committee of the board; and
(ii) the directors approving the transaction in good faith reasonably
believe that the transaction is fair to the corporation; or
(2) before or after it is consummated by obtaining approval of the:

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(i) attorney general; or


(ii) [describe or name] court in an action in which the attorney general
is joined as a party; or
(c) A transaction in which a director of a mutual benefit corporation has a conflict of
interest may be approved if;
(1) the material facts of the transaction and the director's interest were
disclosed or known to the board of directors or a committee of the board and
the board or committee of the board authorized, approved, or ratified the
transaction; or
(2) the material facts of the transaction and the director's interest were
disclosed or known to the members and they authorized, approved, or ratified
the transaction.
(d) For purposes of this section, a director of the corporation has an indirect interest in
a transaction if (1) another entity in which the director has a material interest or in
which the director is a general partner is a party to the transaction or (2) another entity
of which the director is a director, officer, or trustee is a party to the transaction.
(e) For purposes of subsections (b) and (c) a conflict of interest transaction is
authorized, approved, or ratified, if it receives the affirmative vote of a majority of the
directors on the board or on the committee, who have no direct or indirect interest in
the transaction, but a transaction may not be authorized, approved, or ratified under
this section by a single director. If a majority of the directors on the board who have
no direct or indirect interest in the transaction vote to authorize, approve, or ratify the
transaction, a quorum is present for the purpose of taking action under this section.
The presence of, or a vote cast by, a director with a direct or indirect interest in the
transaction does not affect the validity of any action taken under subsections (b)(1) or
(c)(1) if the transaction is otherwise approved as provided in subsection (b) or (c).
(f) For purposes of subsection (c)(2), a conflict of interest transaction is authorized,
approved, or ratified by the members if it receives a majority of the votes entitled to
be counted under this subsection. Votes cast by or voted under the control of a
director who has a direct or indirect interest in the transaction, and votes cast by or
voted under the control of an entity described in subsection (d)(1), may not be
counted in a vote of members to determine whether to authorize, approve, or ratify a
conflict of interest transaction under subsection (c)(2). The vote of these members,
however, is counted in determining whether the transaction is approved under other
sections of this Act. A majority of the voting power, whether or not present, that are
entitled to be counted in a vote on the transaction under this subsection constitutes a
quorum for the purpose of taking action under this section.
(g) The articles, bylaws, or a resolution of the board may impose additional
requirements on conflict of interest transactions.

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4.1.2 Joint Committee on the Draft Charities Bill, First Report, Parliament
of the United Kingdom (3 September 2004)
7 Trustees
Current position
252. The role of charity trustee is a voluntary one. The general, or default, rule is that
a trustee should not receive any financial benefit from acting as a trustee. A trustee is
not only barred from being remunerated for acting as a trustee; but the default rule is
that he or she cannot be paid for goods or services rendered to a charity. There must
be specific authority in a charity's governing instrument or permission from the
Charity Commission before a trustee can be paid. The Commission will only
authorise payment where there is a clear benefit to the charity and the amount paid
is reasonable.[275] A trustee is, however, entitled to be reimbursed from charity
funds for expenses properly incurred in carrying out his or her duties.
253. Individuals can become personally liable when acting as a charity trustee in two
ways. First, they can become liable for breach of trust, i.e. for acting in contravention
of the duties imposed on them as trustees. Secondly, they can become subject to third
party liabilities such as breach of contract.
254. The duty of care imposed on trustees is generally to act with such skill and care
as is reasonable in the circumstances. Trustees who act reasonably and prudently and
have primary regard to the interests of the charity are highly unlikely to incur
personal liability for breach of trust. As a long stop, the court has power under
section 61 of the Trustee Act 1925 to relieve a trustee from liability who is technically
in breach of trust but who has acted honestly and reasonably. Trustee indemnity
insurance against liability for breach of trust can only be purchased by a charity if
there is explicit power in the charity's governing instrument or the Charity
Commission gives permission as it amounts to a personal benefit for a trustee. Whilst
the Charity Commission has recently made obtaining permission easier, it is still a
process which has to be gone through.[276]
255. Charity trustees can purchase insurance in the usual way to protect themselves
from liability to third parties. Charities which have more than occasional dealings
with third parties often adopt the structure of a company to limit liability.
Draft Bill changes
256. Clause 27 of the Bill will allow trustees to be remunerated for providing goods
and services to a charity if four conditions are satisfied:
a) First, the amount of the remuneration must be reasonable and be set out in
a written agreement.
b) Secondly, the trustees must be satisfied that it is in the best interests of the
charity for that trustee to provide the relevant services and at that cost.
c) Thirdly, if more than one trustee is being remunerated, such trustees must
be in a minority.
d) Fourthly, the governing instrument must not contain an express
prohibition against the relevant trustee being paid.
In addition, by new section 73B, before entering into any remuneration agreement
the trustees must have had regard to any guidance issued by the Charity

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Commission and exercise the statutory duty of care in section 1(1) of the Trustee Act
2000.
257. Clause 28 provides that a trustee who would be entitled to remuneration under
an agreement is disqualified from taking part in any decision made by the trustees in
relation to that agreement. If a trustee does take part in a decision about his own
remuneration he is made liable to a criminal penalty and can also be directed by the
Charity Commission to repay any such remuneration.
258. The Charity Commission will have power to relieve trustees from personal
liability for breach of trust by clause 29. The power applies to a trustee who has acted
honestly and reasonably and ought fairly to be excused. The Charity Commission is,
in effect, given the power of the court under section 61 of the 1925 Act.
4.1.3

NORTHEAST HARBOR GOLF CLUB, INC. v. NANCY HARRIS

Maine Supreme Judicial Court, 1999 ME 38


CLIFFORD, J.
[1] Nancy Harris appeals from a judgment ordering equitable relief
entered in the Superior Court (Hancock County, Atwood, J.) in favor of
Northeast Harbor Golf Club, Inc., following a non-jury trial. Harris contends
that the court incorrectly determined that her purchase and development of
property surrounding the Club was a corporate opportunity that she
usurped, and further contends that any cause of action against her is barred
by the statute of limitations and by laches. The Club cross-appeals,
contending that, independent of usurping a corporate opportunity, Harris
breached her fiduciary duty to the Club when she began developing the
property in 1988. Because we conclude that the court correctly determined
that Harris usurped a corporate opportunity, but that the statute of
limitations period within which the Club could have brought an action
against Harris expired, and that laches applies to preclude any action not
barred by the expiration of the limitations period, and that no other cause of
action arose, we vacate the judgment.
[2] The Northeast Harbor Golf Club is a Maine corporation
operating
a golf course located in Mt. Desert. Nancy Harris served as president of the
Club from 1971 until August of 1990. The Club is managed by the president
and a board of directors. Although the board of directors was empowered to
approve policy decisions, it was content to have Harris assume much of the
responsibility for the Club's operation. Harris generously contributed to the
Club throughout her tenure as president. In addition to her duties as
president, she performed other tasks, including mowing and gardening.
Moreover, to alleviate the Club's financial difficulties, Harris often purchased
equipment for the Club with her own money and either leased or sold it to
the corporation for a reduced price to ensure that the Club would not be

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forced to make substantial cash outlays.


[3] From 1972 until 1984, the board, at Harris's insistence,
discussed either purchasing and developing land surrounding the Club or
developing some of the Club's real estate in order to raise money. At the
1976 annual meeting, the Club was informed that a consultant, after
investigating the matter, had concluded that the Club's land, surrounding
the golf course, was suitable for development. In 1977, the board authorized
Harris to form a committee to study in more detail developing some of the
Club's land. The purpose of development was to improve the financial
condition of the Club.
[4] At the 1982 meeting, Harris made it clear that she strongly
advocated housing development on Club property and volunteered to finance
construction of the first house. Although some directors opposed
development, the board eventually approved building houses on Club
property by a 14 to 4 vote. At the 1984 annual meeting, Harris presented an
"Outline of Proposal for Sale and Management of Excess Land" and the
board approved her proposal to sell two lots of Club land to raise revenue.
No lots were ever sold.
[5] The subject of this lawsuit is land surrounding the Club that
Harris purchased in her own name, some in 1979, and more in 1985. In
1979, in her capacity as Club president, Harris learned of an opportunity to
purchase property owned by Lucy Gilpin.{1} The Gilpin property adjoins
Club
property, including the driveway which provided access to the golf course,
the clubhouse, and a portion of the Club's parking lot. Moreover, the Gilpin
property is encumbered by an easement that allows golfers to travel from
the green of one hole to the tee area of the next hole.
[6] Harris purchased the Gilpin property in her own name for
$45,000. She did not disclose her plans to the board prior to acquiring the
property. The minutes from the Club's 1979 Board of Directors' meeting
stated that "Harris reported that she had recently acquired the Gilpin land
adjacent to the old first, second and third holes. Though she intends to
hold the land for herself, the golf club will be protected." Harris contends
that her statements were made to assure the Club that she would act
responsibly, not that she would never develop the land. The board took no
action in response to Harris's purchase. Harris testified that at the time she
bought the land she had no plans to develop the property and that no such
plans were formulated until 1988.
[7] In 1984, Harris, independent of her position with the Club,{2}
learned of the availability of property owned by the Smallidge family. The
property was surrounded on three sides by the Club and on the fourth side
by a house. Harris contracted to purchase eight of the ten interests of the
Smallidge heirs in February of 1985, another in March, and the last in June
of 1985, for a total of $60,000.{3} Harris disclosed the purchase to the board
of directors at the Club's annual meeting on August 28, 1985. At the
meeting, she apologized for delaying the construction of a shed approved

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156

the previous year, explaining that the construction was delayed because the
site was adjacent to the Smallidge property and she did not want to "rock
the boat" in her negotiations to purchase the land. She justified the
purchase by stating that she wanted the land to remain in "friendly hands."
The board took no formal action with respect to Harris's purchase.
[8] In December of 1988, Harris's son filed an application with the
Mt. Desert Planning Board to subdivide part of the Gilpin property into five
house lots to be named Bushwood. The plan was approved in June of 1991.
The board of directors of the Club took no action to oppose the subdivision.
A group of the Club's directors, however, formed a separate organization to
oppose the subdivision, contending that it violated local zoning ordinances.
The effort to oppose the subdivision did not succeed. Eventually the board
became divided over development. In 1989, however, the board agreed that
it "would not adopt any position" on Harris's son's pending subdivision
application. Harris was asked for and gave her resignation in 1990. In
1991, the Club voted to challenge the Bushwood subdivision. The challenge,
however, was not successful. See Northeast Harbor Golf Club, Inc. v. Town
of
Mount Desert, 618 A.2d 225 (Me. 1992). The Club commenced this suit
against Harris, on May 23, 1991, alleging that by purchasing the Gilpin and
Smallidge properties she usurped an opportunity that belonged to the Club.
[9] The Superior Court initially concluded that Harris had not
usurped a corporate opportunity because it found that the Club was not in
the business of purchasing property and lacked the financial ability to do so.
The Club appealed, and we adopted the American Law Institute's (ALI)
definition of taking a corporate opportunity, vacated the judgment, and
remanded the case to the Superior Court for trial of the facts pursuant to the
ALI definition. See Northeast Harbor Golf Club, Inc. v. Harris, 661 A.2d
1146, 1150-52 (Me. 1995). After remand, the Superior Court found that
Harris had usurped a corporate opportunity and that the Club's claim was
not barred by the statute of limitations. The court entered a judgment for
the Club, imposed a constructive trust on the property owned by Harris, and
ordered Harris to convey the properties to the Club on payment of the
purchase price and interest and taxes. These appeals by Harris and the Club
followed.
I. APPEAL BY HARRIS
A. Corporate Opportunity
[10] Harris concedes that, because she learned of the opportunity
to purchase the Gilpin property in her capacity as president of the Club, her
purchase of that property in 1979 constituted the taking of a corporate
opportunity. See Principles of Corporate Governance 5.05(b)(1)(A)
(American Law Institute, May 13, 1992). She disputes liability, relying on
the statute of limitations and laches. Harris contends that because she
learned of the availability of the Smallidge property independent of her
position as an officer of the Club, and because the purchase of that land was

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157

not closely related to the Club's business, that there was no usurpation of a
corporate opportunity. In reviewing the decision of the Superior Court, we
defer to the historical factual findings of the court, but the determination of
whether an opportunity is a "corporate opportunity" is a question of law that
we review de novo. See generally State v. O'Connor, 681 A.2d 475, 476 (Me.
1996).
[11] Even if the opportunity to engage in a business activity, in
which the officer or director becomes involved, is not learned of through
her connection to the business of the corporation, nevertheless, such an
opportunity may be considered a corporate opportunity if the officer or
director knows it "is closely related to a business in which the corporation
is engaged or expects to engage." Principles of Corporate Governance
5.50(b)(2).{4}
[12] "The central feature of the ALI test is the strict requirement of
full disclosure prior to taking advantage of any corporate opportunity."
Northeast Harbor Golf Club, 661 A.2d at 1151. This feature was designed to
prevent individual directors and officers from substituting their own
judgment for that of the corporation when determining whether it would be
in the corporate interest, or whether the corporation is financially or
otherwise able to take advantage of an opportunity. See Ostrowski v. Avery,
703 A.2d 117, 126 (Conn. 1997) (citing Note, When Opportunity Knocks: An
Analysis of the Brudney & Clark and ALI Principles of Corporate Governance
Proposals for Deciding Corporate Opportunity Claims, 28 Corp. Prac.
Commentator 507, 516 (1987)). Doubt about the financial capacity of a
corporation to pursue an opportunity may affect the incentive of a director
or officer to solve corporate financing problems, and evidence regarding the
corporation's financial status is often controlled by the usurping corporate
director or officer. See Victor Brudney & Robert Charles Clark, A New Look
at Corporate Opportunities, 94 Harv. L. Rev. 998, 1020-22 (1981). The ALI
approach recognizes the danger in allowing an individual director or officer
to determine whether a corporation has the ability to take an opportunity,
and accordingly disclosure to the corporation is required.
[13] Full disclosure is likewise important to prevent individual
directors and officers from using their own unfettered judgment to
determine whether the business opportunity is related to the corporation's
business, such that it would be in the corporate interest to take advantage of
that opportunity. "The appropriate method to determine whether or not a
corporate opportunity exists is to let the corporation decide at the time the
opportunity is presented." 3 Fletcher Cyc. Corp. 861.10, p. 285 (1994).
This rule protects individual directors and officers because after disclosing
the potential opportunity to the corporation, they can pursue their own
business ventures free from the possibility of a lawsuit. If there is doubt as
to whether a business opportunity is closely related to the business of the
corporation, that doubt must be resolved in favor of the corporation so that
the officer or director will have a strong incentive to disclose any business
opportunity even remotely related to the business of the corporation.

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[14] In this case, the Club's normal business is maintaining and


operating a golf course. That business is dependent on having sufficient land
for the course itself and ensuring that the activity of golf is not hindered or
affected by development of adjacent and surrounding property. The Club
had frequently discussed developing some of its own land and on one
occasion talked about the possibility of purchasing and developing adjacent
land. The purchase of the Smallidge land, surrounded as it is on three sides
by the Club's land and adjacent to three of its golf holes, land that could be
developed, is, in the circumstances of this case, sufficiently related to the
Club's business to constitute a corporate opportunity. Accordingly, Harris
would be liable to the Club for taking advantage of a corporate opportunity
for purchases of both the Gilpin and Smallidge properties unless the Club's
action is barred by the statute of limitations, or is otherwise barred by
laches. . . .

4.2

The Sibley Hospital Case

David M. STERN et al., Plaintiffs, v. LUCY WEBB HAYES


NATIONAL TRAINING SCHOOL FOR DEACONESSES AND
MISSIONARIES,
et al., Defendants
381 F. Supp. 1003, July 30, 1974

OPINION BY: Gesell, District Judge.


This is a class action which was tried to the Court without a jury.
Plaintiffs were certified as a class under Rule 23(b)(2) of the Federal Rules of
Civil Procedure and represent patients of Sibley Memorial Hospital, a District
of Columbia non-profit charitable corporation organized under D.C.Code
29-1001 et seq. They challenge various aspects of the Hospital's fiscal
management. The amended complaint named as defendants nine members of
the Hospital's Board of Trustees, n1 six financial institutions, and the Hospital
itself. Four trustees and one financial institution were dropped by plaintiffs
prior to trial, and the Court dismissed the complaint as to the remaining
financial institutions at the close of plaintiffs' case.
Several different causes of action were initially alleged. Some were
rejected after hearing pretrial motions. Others were dismissed at the close of
plaintiffs' evidence and still others are now awaiting determination following
completion of the record. The most significant pretrial rulings have been fully
covered in a prior opinion, Stern v. Lucy Webb Hayes Nat. Train. Sch. for
Deacon. & M., 367 F. Supp. 536 (D.D.C.1973). This Memorandum Opinion will
set forth the basis of the Court's determinations made at the close of plaintiffs'

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case and will, in addition, resolve the remaining issues which went to full
trial. All of these matters have been fully briefed and argued and proposed
findings of fact have been submitted, all of which the Court has carefully
considered. The record consists of 1,169 pages of transcript and 137 exhibits.
The two principal contentions in the complaint are that the defendant
trustees conspired to enrich themselves and certain financial institutions with
which they were affiliated by favoring those institutions in financial dealings
with the Hospital, and that they breached their fiduciary duties of care and
loyalty in the management of Sibley's funds. The defendant financial
institutions are said to have joined in the alleged conspiracy and to have
knowingly benefited from the alleged breaches of duty. The Hospital is
named as a nominal defendant for the purpose of facilitating relief.
I. Corporate History.
. . . The Lucy Webb Hayes National Training School for Deaconesses and
Missionaries was established in 1891 by the Methodist Women's Home
Missionary Society for the purpose, in part, of providing health care services
to the poor of the Washington area. The School was incorporated under the
laws of the District of Columbia as a charitable, benevolent and educational
institution by instrument dated August 8, 1894. During the following year,
the School built the Sibley Memorial Hospital on North Capitol Street to
facilitate its charitable work.
Over the years, operation of the Hospital has become the School's principal
concern, so that the two institutions have been referred to synonymously by
all parties and will be so treated in this Opinion. As increasing demands were
made upon Sibley's facilities, the Hospital was renovated several times.
Finally, in the mid-1950's, it was decided to move the Hospital to a new
location on Loughboro Road in Northwest Washington. The nearby
Hahnemann Hospital, another Methodist charity, was merged with Sibley in
1956 in anticipation of this move. The new Sibley Memorial Hospital was
dedicated on June 17, 1962.
In 1960, shortly after ground was broken for the new building, the
Sibley Board of Trustees revised the corporate by-laws in preparation for an
expected increase in the volume and complexity of Hospital business
following the move. Under the new by-laws, the Board was to consist of from
25 to 35 trustees, who were to meet at least twice each year. Between such
meetings, an Executive Committee was to represent the Board, and was
authorized, inter alia, to open checking and savings accounts, approve the
Hospital budget, renew mortgages, and enter into contracts. A Finance
Committee was created to review the budget and to report regularly on the
amount of cash available for investment. Management of those investments

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was to be supervised by an Investment Committee, which was to work closely


with the Finance Committee in such matters.
In fact, management of the Hospital from the early 1950's until 1968 was
handled almost exclusively by two trustee officers: Dr. Orem, the Hospital
Administrator, and Mr. Ernst, the Treasurer. Unlike most of their fellow
trustees, to whom membership on the Sibley Board was a charitable service
incidental to their principal vocations, Orem and Ernst were continuously
involved on almost a daily basis in the affairs of Sibley. They dominated the
Board and its Executive Committee, which routinely accepted their
recommendations and ratified their actions. Even more significantly, neither
the Finance Committee nor the Investment Committee ever met or conducted
business from the date of their creation until 1971, three years after the death
of Dr. Orem. As a result, budgetary and investment decisions during this
period, like most other management decisions affecting the Hospital's
finances, were handled by Orem and Ernst, receiving only cursory
supervision from the Executive Committee and the full Board.
Dr. Orem's death on April 5, 1968, obliged some of the other trustees to play
a more active role in running the Hospital. The Executive Committee, and
particularly defendant Stacy Reed (as Chairman of the Board, President of the
Hospital, and ex officio member of the Executive Committee), became more
deeply involved in the day-to-day management of the Hospital while efforts
were made to find a new Administrator. The man who was eventually
selected for that office, Dr. Jarvis, had little managerial experience and his
performance was not entirely satisfactory. Mr. Ernst still made most of the
financial and investment decisions for Sibley, but his actions and failures to
act came slowly under increasing scrutiny by several of the other trustees,
particularly after a series of disagreements between Ernst and the Hospital
Comptroller which led to the discharge of the latter early in 1971.
Prompted by these difficulties, Mr. Reed decided to activate the Finance and
Investment Committees in the Fall of 1971. However, as Chairman of the
Finance Committee and member of the Investment Committee as well as
Treasurer, Mr. Ernst continued to exercise dominant control over investment
decisions and, on several occasions, discouraged and flatly refused to respond
to inquiries by other trustees into such matters. It has only been since the
death of Mr. Ernston October 30, 1972, that the other trustees appear to have
assumed an identifiable supervisory role over investment policy and Hospital
fiscal management in general.
Against this background, the basic claims will be examined.
II. Conspiracy.
Plaintiffs first contend that the five defendant trustees and the five

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defendant financial institutions were involved in a conspiracy to


enrich themselves at the expense of the Hospital. They point to the fact
that each named trustee held positions of responsibility with one or more of
the 381 F. Supp. 1003, 1009; 1974 U.S. Dist. LEXIS 7380, defendant institutions
as evidence that the trustees had both motive and opportunity to carry out
such a conspiracy. The extent of these interlocking duties and interests is
revealed by the following table: (Table omitted)
Plaintiffs further contend that the defendants accomplished the
alleged conspiracy by arranging to have Sibley maintain unnecessarily large
amounts of money on deposit with the defendant banks and savings and loan
associations, drawing inadequate or no interest. As shown by table II, below,
the Hospital in fact maintained much of its liquid assets in savings and
checking accounts rather than in Treasury bonds or investment securities, at
least until the investment review instituted by Mr. Reed late in 1971. In that
year, for example, more than one-third of the nearly four million dollars
available for investment was deposited in checking accounts, as compared to
only about $135,000 in securities and $311,000 in Treasury bills. Although
substantial sums were used to purchase certificates of deposit, which produce
at least a moderate amount of income, the Hospital occasionally purchased a
certificate yielding lower interest rates than were available at other
institutions. (Table omitted)
It is also undisputed that most of these funds were deposited in the defendant
financial institutions. A single checking account, drawing no interest
whatever and maintained alternately at Riggs National Bank and Security
National Bank, usually contained more than $250,000 and on one occasion
grew to nearly $1,000,000.
Defendants were able to offer no adequate justification for this utilization
of the Hospital's liquid assets. By the same token, however, plaintiffs failed
to establish that it was the result of a conscious direction on the part of the
named defendants. As mentioned above, it was Mr. Ernst alone rather than
any of the defendant trustees who maintained almost exclusive control over
the Hospital's investments until his death in 1972. As Treasurer, he could
shift money between banks or accounts within banks and purchase or sell
securities without consulting any other trustee. Since the Investment and
Finance Committees never met, only Dr. Orem and a few of the other officers
apparently were aware of Mr. Ernst's investment policies. While it is true that
a yearly audit was made available to the Board and that the Executive
Committee had to approve the opening of new accounts, these matters were
treated as mere formalities. All of the defendant trustees testified that they
approved Ernst's recommendations as a matter of course, rarely if ever read
the relevant details of audits critically, and generally left investment decisions
to the presumed expertise of Mr. Ernst. Several also commented that the

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Treasurer regarded their suggestions as "interference" in these matters and


none forced the issue.
Mr. Ernst's own reasons for pursuing this conservative investment policy are
not altogether clear. It has been suggested that his experience in the
Depression was an important contributing factor. That same experience
undoubtedly helps explain his belief that Sibley should maintain close
relationships with a few local banks and his evident decision to favor those
banks which held a mortgage on the Hospital and which had interlocking
directorships with the Sibley Board.
There is no evidence that the defendant trustees reached a mutual agreement
to direct or even to encourage Ernst in such favoritism. It is true that the
trustees frequently approved transactions which benefited institutions with
which they were affiliated and that occasionally a particular trustee
would even seek out such an arrangement, but plaintiffs have not shown that
any of these decisions derived from a conspiratorial agreement. Moreover,
when the Board's own investigations brought the inadequacy of Mr. Ernst's
policies home to the Board, the trustees moved toward a more realistic
investment program in a manner that negates existence of a prior agreement.
Significant reductions in bank deposits have been made, and the newly
elected Treasurer is attempting -- with mixed success -- to hold demand
deposits below $500,000, a level which he deems adequate for the operation of
the Hospital.
Plaintiffs also attempted to bolster the conspiracy theory by pointing to two
other Hospital transactions: the continuation of a mortgage with the
defendant financial institutions and the signing of an investment advisory
agreement with Ferris & Co. The mortgage in question dates back to the late
1950's, when the Sibley Board began negotiations with various local banks to
obtain a loan to finance construction of the new hospital building. When
these negotiations fell through, the Board obtained an adequate loan
commitment from a Texas bank.
Although local banks had earlier refused to assist the Hospital, several
of the trustees then organized a syndicate of Washington banks willing to
provide the loan on equally favorable terms to the Texas proposal and
persuaded the Board to accept the local offer. As a result, the syndicate
agreed in 1959 to lend Sibley $3,000,000 secured by a mortgage on the
hospital. This sum was increased to $3,500,000 in 1961.
The loan was renewed in 1969 and is still partially outstanding. Although
Sibley probably had sufficient funds to pay off the loan without totally
impairing its ability to meet obligations as they become due, the Executive

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Committee voted instead for renewal. The cash flow would have put
operations on a tight basis and the trustees had in mind that available money
might well be needed for the renovation of certain property owned by Sibley.
The terms of this loan were entirely fair to Sibley at all times. There is
no indication that the Board could have received better terms elsewhere or
that it failed diligently to seek an optimum arrangement at the time of the
original loan. The renewal in 1969 also appears to have been a reasonable,
good-faith business decision. There is no indication that either
decision was motivated by a desire to benefit the banks involved at the
Hospital's expense.
The idea of employing an investment service was raised by Mr. Jones at the
meeting of Sibley's Investment Committee. It was decided that Mr. Ferris, a
member of that committee, should present a proposal from Ferris & Co., of
which Mr. Ferris was Chairman of the Board and principal stockholder, for
the provision of continuing investment advisory services to Sibley. Mr. Ferris
presented such a proposal on April 12, 1971, and the committee voted to
recommend approval. Mr. Ferris urged and may have voted in favor of that
recommendation at an informal session of the Investment Committee, but
thereafter he resigned from the Investment Committee to avoid further
possible conflicts of interest. For a short time he then served as Acting
Treasurer over the objection of some trustees. Upon formal approval by the
Hospital's counsel and the Executive Committee, of which Ferris was not a
member, Sibley entered into the "Investment Advisory Agreement" with
Ferris & Co., which written contract is still in effect today. Plaintiffs concede,
and the Court finds, that Ferris & Co.'s fee for investment service was fair
and equitable.
Plaintiffs concede that Ferris & Co. did a good job, although shifts in market
prices resulted in some losses in the account which, incidentally, would not
have occurred if the Hospital had kept the money in certificates of deposit. No
conspiratorial inference can be drawn from this course of dealing.
Thus, plaintiffs have not established a conspiracy between the named trustees
and the named financial institutions or between the members of each group.
There is no proof that the financial institutions ever had any contact between
themselves relating to the handling of Sibley's business, its apportionment or
even its existence. The trustees as a group were not shown to have solicited
business for any particular bank or savings and loan association, and, indeed,
it appears that most of the Sibley business done with these interlocking
institutions was initiated by Hospital officers without the advance knowledge
or direction of the trustees. Mr. George Ferris did solicit business for his firm,
but only after he was asked to advise on the handling of certain Hospital
investments. The contract made with Ferris & Co. was approved by

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counsel for the Hospital and by the Executive Committee of the Board,
including several of the defendant trustees, in the full realization that Ferris'
recommendations would diminish attractive bank accounts maintained by the
Hospital in several of the defendant financial institutions.
There being no proof of any express agreement, written or oral, relating to
the placing or division of Hospital business, the conspiracy claim depends
upon showing parallel conduct sufficient to bring the facts within such cases
as Theatre Enterprises, Inc. v. Paramount Film Distributing Corp., 346 U.S.
537, 74 S. Ct. 257, 98 L. Ed. 273 (1954); and Interstate Circuit, Inc. v. United
States, 306 U.S. 208, 59 S. Ct. 467, 83 L. Ed. 610 (1939). Here also the factual
showing is wholly deficient. Credible testimony of the trustees and
representatives of the financial institutions flatly denies conspiracy. Beyond
this, there is no cognizable pattern of dealing, no discussion, no complaint of
deviation from a course of agreed conduct, in fact nothing from which a
conspiracy between the defendants can be implied beyond the simple fact that
the Hospital did considerable business with the financial institutions that had
some interlocking ties to its Board of Trustees. This is not enough, and the
conspiracy claim failed for lack of proof.
III. Breach of Duty.
Plaintiffs' second contention is that, even if the facts do not establish a
conspiracy, they do reveal serious breaches of duty on the part of the
defendant trustees and the knowing acceptance of benefits from those
breaches by the defendant banks and savings and loan associations.

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A. The Trustees.
Basically, the trustees are charged with mismanagement, nonmanagement
and self-dealing. The applicable law is unsettled. The charitable corporation
is a relatively new legal entity which does not fit neatly into the established
common law categories of corporation and trust. As the discussion below
indicates, however, the modern trend is to apply corporate rather than trust
principles in determining the liability of the directors of charitable
corporations, because their functions are virtually indistinguishable from
those of their "pure" corporate counterparts.
1. Mismanagement.
Both trustees and corporate directors are liable for losses occasioned by
their negligent mismanagement of investments. However, the degree of
care required appears to differ in many jurisdictions. A trustee is uniformly
held to a high standard of care and will be held liable for simple negligence,
while a director must often have committed "gross negligence" or otherwise
be guilty of more than mere mistakes of judgment. 1 Hornstein, Corporation
Law and Practice 446 (1959); Ballantine, Corporations 63(a) (rev. ed. 1946);
Bishop, "Sitting Ducks and Decoy Ducks: New Trends in the Indemnification
of Corporate Directors and Officers," 77 Yale L.J. 1078, 1101 (1968). See also
Mann v.Commonwealth Bond Corp., 27 F. Supp. 315, 320 (S.D.N.Y. 1938).
This distinction may amount to little more than a recognition of the fact
that corporate directors have many areas of responsibility, while the
traditional trustee is often charged only with the management of the trust
funds and can therefore be expected to devote more time and expertise to that
task.
Since the board members of most large charitable corporations fall within the
corporate rather than the trust model, being charged with the operation of
ongoing businesses, it has been said that they should only be held to the less
stringent corporate standard of care. Beard v. Achenbach Mem. Hospital
Ass'n, 170 F.2d 859, 862 (10th Cir. 1948); Cary & Bright, The Law and the Lore
of Endowment Funds: Report to the Ford Foundation 58-61 (1969). More
specifically, directors of charitable corporations are required to exercise
ordinary and reasonable care in the performance of their duties, exhibiting
honesty and good faith. Beard v. Achenbach Mem. Hospital Ass'n, supra, at
862.
2. Nonmanagement
Plaintiffs allege that the individual defendants failed to supervise the
management of Hospital investments or even to attend meetings of the
committees charged with such supervision. Trustees are particularly

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vulnerable to such a charge, because they not only have an affirmative duty to
"maximize the trust income by prudent investment," Blankenship v. Boyle,
329 F. Supp. 1089, 1096 (D.D.C. 1971), but they may not delegate that duty,
even to a committee of their fellow trustees. Restatement (Second) of Trusts
171, at 375 (1959).
A corporate director, on the other hand, may delegate his investment
responsibility to fellow directors, corporate officers, or even outsiders, but
he must continue to exercise general supervision over the activities of
his delegates. See, e.g., Model Bus. Corp. Act Ann. 38 (1960), as amended
(Supp. 1966). Once again, the rule for charitable corporations is closer to the
traditional corporate rule: directors should at least be permitted to delegate
investment decisions to a committee of board members, so long as all
directors assume the responsibility for supervising such committees by
periodically scrutinizing their work. Restatement (Second) of Trusts 379,
comment b (1959); Cary & Bright, supra, at 61-65.
Total abdication of the supervisory role, however, is improper even under
traditional corporate principles. A director who fails to acquire the
information necessary to supervise investment policy or consistently fails
even to attend the meetings at which such policies are considered has violated
his fiduciary duty to the corporation. 3 Fletcher Cyc. Corp.
(Perm.Ed.Rev.1965) 1091 (1965). While a director is, of course, permitted to
rely upon the expertise of those to whom he has delegated investment
responsibility, such reliance is a tool for interpreting the delegate's reports,
not an excuse for dispensing with or ignoring such reports. See Heit v. Bixby,
276 F. Supp. 217, 231 (E.D.Mo.1967). A director whose failure to supervise
permits negligent mismanagement by others to go unchecked has committed
an independent wrong against the corporation; he is not merely an accessory
under an attenuated theory of respondeat superior or constructive notice. 3
Fletcher Cyc. Corp. (Perm.Ed.Rev.1965) 1065 et seq. Cf. DePinto v.
Provident Security Life Ins. Co., 374 F.2d 37 (9th Cir.), cert. denied, 389 U.S.
822, 88 S. Ct. 48, 19 L. Ed. 2d 74 (1967).
3. Self-dealing
Under District of Columbia Law, neither trustees nor corporate directors are
absolutely barred from placing funds under their control into a bank having
an interlocking directorship with their own institution. In both cases,
however, such transactions will be subjected to the closest scrutiny to
determine whether or not the duty of loyalty has been violated. Blankenship
v. Boyle, 145 U.S.App.D.C. 111, 447 F.2d 1280 (1971); Mayflower Hotel
Stockholders Protective Committee v. Mayflower Hotel Corp., 89
U.S.App.D.C. 171, 193 F.2d 666 (1951).

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A deliberate conspiracy among trustees or Board members to enrich the


interlocking bank at the expense of the trust or corporation would, for
example, constitute such a breach and render the conspirators liable for any
losses. Bentz v. Vardaman Mfg. Co., 210 So.2d 35 (Sup.Ct.Miss.1968). In the
absence of clear evidence of wrongdoing, however, the courts appear to have
used different standards to determine whether or not relief is appropriate,
depending again on the legal relationship involved. Trustees may be found
guilty of a breach of trust even for mere negligence in the maintenance of
accounts in banks with which they are associated, Blankenship v. Boyle,
supra, 329 F. Supp. at 1101-1102 n. 7 (D.D.C.1971) (dicta); 2 Scott on Trusts
170.19, at 1362-64 (3d ed. 1967), while corporate directors are generally only
required to show "entire fairness" to the corporation and "full disclosure" of
the potential conflict of interest to the Board. Mayflower Hotel Stockholders
Protective Committee v. Mayflower Hotel Corp., supra.
Most courts apply the less stringent corporate rule to charitable
corporations in this area as well. See, e.g., United States v. Mount Vernon
Mortgage Corp., 128 F. Supp. 629 (D.D.C. 1954), aff'd, 98 U.S.App.D.C. 429,
236 F.2d 724 (1956), cert. denied, 352 U.S. 988, 77 S. Ct. 386, 1 L. Ed. 2d
367 (1957); Gilbert v. McLeod Infirmary, 219 S.C. 174, 64 S.E.2d 524 (1951);
Fowle Mem. Hospital Co. v. Nicholson, 189 N.C. 44, 126 S.E. 94 (1925). See
also W. Porth, "Personal Liability of Trustees of Educational Institutions," 1 J.
of College and U.L. 84, 87-88 (1973). It is, however, occasionally added that a
director should not only disclose his interlocking responsibilities but also
refrain from voting on or otherwise influencing a corporate decision to
transact business with a company in which he has a significant interest or
control. See, e.g., Gilbert v. McLeod Infirmary, supra.
Although defendants have argued against the imposition of even these
limitations on self-dealing by the Sibley trustees, the Hospital Board recently
adopted a new by-law, based upon guidelines [*1015] issued by the
American Hospital Association, which essentially imposes the modified
corporate rule described above:
Article XXVIII, Conflicts of Interests
Section 1.
Any duality of interest or possible conflict of interest on the part of any
governing board member shall be disclosed to the other members of the
board and made a matter of record through an annual procedure and also
when the interest becomes a matter of board action.

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Section 2.
Any governing board member having a duality of interest or possible conflict
of interest on any matter shall not vote or use his personal influence on the
matter, and he shall not be counted in determining the quorum for the
meeting, even where permitted by law. The minutes of the meeting shall
reflect that a disclosure was made, the abstention from voting, and the
quorum situation.
Section 3.
The foregoing requirements shall not be construed as preventing the
governing board member from briefly stating his position in the matter, nor
from answering pertinent questions of other board members since his
knowledge may be of great assistance.
Section 4.
Any new member of the board will be advised of this policy upon entering on
the duties of his office.
Having surveyed the authorities as outlined above and weighed the briefs,
arguments and evidence submitted by counsel, the Court holds that a director
or so-called trustee of a charitable hospital organized under the Non-Profit
Corporation Act of the District of Columbia (D.C.Code 29-1001 et seq.)
is in default of his fiduciary duty to manage the fiscal and investment affairs
of the hospital if it has been shown by a preponderance of the evidence that:
(1) while assigned to a particular committee of the Board having general
financial or investment responsibility under the by-laws of the corporation, he
has failed to use due diligence in supervising the actions of those officers,
employees or outside experts to whom the responsibility for making day-today financial or investment decisions has been delegated; or
(2) he knowingly permitted the hospital to enter into a business transaction
with himself or with any corporation, partnership or association in which he
then had a substantial interest or held a position as trustee, director, general
manager or principal officer without having previously informed the persons
charged with approving that transaction of his interest or position and of any
significant reasons, unknown to or not fully appreciated by such persons,
why the transaction might not be in the best interests of the hospital; or
(3) except as required by the preceding paragraph, he actively participated
in or voted in favor of a decision by the Board or any committee or

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subcommittee thereof to transact business with himself or with any


corporation, partnership or association in which he then had a substantial
interest or held a position as trustee, director, general manager or principal
officer; or
(4) he otherwise failed to perform his duties honestly, in good faith, and
with a reasonable amount of diligence and care.
Applying these standards to the facts in the record, the Court finds that
each of the defendant trustees has breached his fiduciary duty to supervise
the management of Sibley's investments. All except Mr. Jones were duly and
repeatedly elected to the Investment Committee without ever bothering to
object when no meetings were called for more than ten years. Mr. Jones was a
member of the equally inactive Finance Committee, the failure of which to
report on the existence of investable funds was cited by several other
defendants as a reason for not convening the Investment Committee. In
addition, Reed, Jones and Smith were, for varying periods of time, also
members of the Executive Committee, which was charged with acquiring at
least enough information to vote intelligently on the opening of new bank
accounts. By their own testimony, it is clear that they failed to do so. And all
of the individual defendants ignored the investment sections of the yearly
audits which were made available to them as members of the Board. In short,
these men have in the past failed to exercise even the most cursory
supervision over the handling of Hospital funds and failed to establish and
carry out a defined policy.
The record is unclear on the degree to which full disclosure preceded the
frequent self-dealing which occurred during the period under consideration.
It is reasonable to assume that the Board was generally aware of the various
bank affiliations of the defendant trustees, but there is no indication that these
conflicting interests were brought home to the relevant committees when they
voted to approve particular transactions. Similarly, while plaintiffs have
shown no active misrepresentation on defendants' part, they have established
instances in which an interested trustee failed to alert the responsible
officials to better terms known to be available elsewhere.
It is clear that all of the defendant trustees have, at one time or another,
affirmatively approved self-dealing transactions. Most of these
incidents were of relatively minor significance: one interested trustee would
join a dozen disinterested fellow members of the Executive Committee in
unanimously approving the opening of a bank account; two or three
interested trustees would support a similarly large group in voting to give or
renew the mortgage. Others cannot be so easily disregarded. Defendant
Ferris' advice and vote in the relatively small Investment Committee to
recommend approval of the investment contract with Ferris & Co. may have
been crucial to that transaction.

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Defendant Reed assumed principal responsibility for account levels between


1969 and 1971, during which period the Security checking account grew to
more than a million dollars. And defendant Smith, in his capacity as
President of Jefferson Federal, personally negotiated the interest rates on a
$230,000 certificate account with the Hospital.
That the Hospital has suffered no measurable injury from many of these
transactions -- including the mortgage and the investment contract -- and that
the excessive deposits which were the real source of harm were caused
primarily by the uniform failure to supervise rather than the occasional selfdealing vote are both facts that the Court must take into account in fashioning
relief, but they do not alter the principle that the trustee of a charitable
hospital should always avoid active participation in a transaction in which he
or a corporation with which he is associated has a significant interest.
IV. Relief.
The foregoing constitutes the Court's findings of fact and conclusions of
law. Many of the parties' proposed findings have been incorporated into this
analysis, and others listed in the margin n4 are hereby adopted by the Court.
For the reasons set forth above, the Court has dismissed the amended
complaint as to all of the defendant financial institutions, rejected all
conspiracy claims, and refused to cancel the disputed mortgage. It must now
consider the appropriate relief in light of its finding that the defendant
trustees have breached their fiduciary duties of care and loyalty to the
Hospital.
In addition to a declaration defining the duties and obligations of the
trustees in the disputed area of the Hospital's fiscal management,
plaintiffs press for injunctive relief. Among other things, they urge that
defendant trustees be removed and disqualified, that the Hospital be barred
from transacting business with any firm if an officer, director, partner or
substantial shareholder of that firm is a Hospital trustee, that an accounting
be ordered, and that damages be assessed against the defendant trustees. In
short, plaintiffs approach this matter as though each trustee of the Hospital
were individually responsible for an abuse of fiduciary duty under an express
trust which has made the Hospital's patients beneficiaries. Were such the
case, application of very strict sanctions would be necessary. However, the
trustees here stand in a different status, as the Court's analysis shows, and the
proof does not in any way necessitate sanctions as harsh as those suggested.
The function of equity is not to punish but merely to take such action as the
Court in its discretion deems necessary to prevent the recurrence of improper
conduct. Hartford-Empire Co. v. United States, 323 U.S. 386, 409, 65 S.
Ct. 373, 89 L. Ed. 322 (1945); Hecht Co. v. Bowles, 321 U.S. 321, 329-330, 64 S.

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Ct. 587, 88 L. Ed. 754 (1944); Swift & Co. v. United States, 276 U.S. 311, 326,
48 S. Ct. 311, 72 L. Ed. 587 (1928). Where voluntary action has been taken in
good faith to minimize such recurrence, even though under the pressure of
litigation, this is a factor which the Court can take into account in
formulating relief. United States v. Oregon Medical Society, 343 U.S. 326, 334,
72 S. Ct. 690, 96 L. Ed. 978 (1952); Walling v. Youngerman-Reynolds
Hardwood Co., 325 U.S. 419, 421, 65 S. Ct. 1242, 89 L. Ed. 1705 (1945).
In attempting to balance the equities under the circumstances shown by the
record, there are a number of factors which lead the Court to feel that
intervention by injunction should be limited. See United States v. W. T. Grant
Co., 345 U.S. 629, 632-633, 73 S. Ct. 894, 97 L. Ed. 1303 (1953). First, the
defendant trustees in this case constitute but a small minority of the full
Sibley Board. Yet, in several respects, the responsibility for past failures
adequately to supervise the handling of Hospital funds rests equally on all
Board members. Second, it is clear that the practices criticized by
plaintiffs have, to a considerable extent, been corrected and that the
employees and trustees who were principally responsible for lax handling of
funds have died or have been dismissed. Third, there is no indication that
any of the named trustees were involved in fraudulent practices or profited
personally by lapses in proper fiscal supervision, and, indeed, the overall
operation of the Hospital in terms of low costs, efficient services and quality
patient care has been superior. Finally, this case is in a sense one of first
impression, since it brings into judicial focus for the first time in this
jurisdiction the nature and scope of trustee obligations in a non-profit, nonmember charitable institution incorporated under D.C.Code 29-1001 et seq.
The Court is well aware that it must take proper steps to insure a clean
break between the past and the future. Personnel changes and a recent
greater awareness of past laxity are encouraging, as is the addition of Article
XXVIII to the Hospital's by-laws, but good intentions expressed post-litem
must be accompanied by concrete action. Accordingly, it is desirable to
require by injunction that the appropriate committees and officers of the
Hospital present to the full Board a written policy statement governing
investments and the use of idle cash in the Hospital's bank accounts and other
funds, and establish a procedure for the periodic reexamination of existing
investments and other financial arrangements to insure compliance with
Board policies. No existing financial relationships should be continued unless
consistent with established policy and found by disinterested members of the
Board to be in the Hospital's best interests. In addition, each trustee should
fully disclose his affiliation with banks, savings and loan associations and
investment firms now doing business with the Hospital.
Removal of the defendant trustees from the Sibley Board would be unduly
harsh, and this will not be ordered. These trustees are now completing long
years of service and they will soon become less active in the day-to-day affairs

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of the Hospital because of age or illness. It would unduly disrupt the affairs
of the Hospital abruptly to terminate their relationship with that institution.
Others must soon take over their roles in carrying forward the Hospital's
affairs, and it is therefore unnecessary to interfere by order of removal or
disqualification with a transition that is necessarily already taking place due
to other immutable factors.
The management of a non-profit charitable hospital imposes a severe
obligation upon its trustees. A hospital such as Sibley is not closely
regulated by any public authority, it has no responsibility to file financial
reports, and its Board is self-perpetuating. The interests of its patients are
funneled primarily through large group insurers who pay the patients' bills,
and the patients lack meaningful participation in the Hospital's affairs. It is
obvious that, in due course, new trustees must come to the Board of this
Hospital, some of whom will be affiliated with banks, savings and loan
associations and other financial institutions. The tendency of representatives
of such institutions is often to seek business in return for advice and
assistance rendered as trustees. It must be made absolutely clear that Board
membership carries no right to preferential treatment in the placement or
handling of the Hospital's investments and business accounts. The Hospital
would be well advised to restrict membership on its Board to the
representatives of financial institutions which have no substantial business
relationship with the Hospital. The best way to avoid potential conflicts of
interest and to be assured of objective advice is to avoid the possibility of
such conflicts at the time new trustees are selected.
As an additional safeguard, the Court will require that each newly-elected
trustee read this Opinion and the attached Order. Compliance with this
requirement must appear in a document signed by the new trustee or in the
minutes of the Sibley Board. In view of the circumstances disclosed by the
record it will be desirable, in addition, to require public disclosure which
will further insure that the Board's recently-avowed good intentions are
faithfully carried out. To this end, the Court will direct that prior to each
meeting of the full Board the members of the Board shall receive, at least one
week in advance, a formal written statement prepared by the Hospital's
Treasurer or Comptroller disclosing in detail the full extent of all business
done by the Hospital since the last Board meeting with any bank, savings and
loan association, investment service or other financial institution with which
any trustee or officer of the Hospital is affiliated as a trustee, director,
principal officer, partner, general manager or substantial shareholder.
Moreover, all such dealings shall be summarized by the Hospital's auditors in
their annual audit and a copy of the annual audit shall be made available on
request for inspection by any patient of the Hospital at the Hospital's offices
during business hours. Such arrangements should continue for a period of
five years.

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For the reasons set forth in its Memorandum and Order of November 30,
1973, and at various pretrial hearings, the Court declines to award damages
incident to the injunctive and declaratory relief appropriate under Rule
23(b)(2) of the Federal Rules of Civil Procedure or to reconsider the denial of
certification under Rule 23(b)(1) and (3). No accounting will be ordered, and
all other relief requested by plaintiffs is denied. Since plaintiffs do not press
their claim for attorneys' fees at this time, the Court will postpone action on
that issue until such time as it is raised and briefed by the parties.

4.3

The Bishop Estate Litigation

4.3.1 Overview of the Bishop Estate Controversy, by Professor Randall W. Roth


University of Hawaii School of Law
Margery S. Bronster, Hawaiis Attorney General, has asked the states probate court
to remove the five trustees of the Bernice Pauahi Bishop Estate, the wealthiest charity
in the state. Bronster cites various breaches of fiduciary duties as the reason for her
action.
Kamehameha Schools/Bishop Estate (KS/BE) was established 114 years ago by the
will of Princess Bernice Pauahi Bishop, the great-granddaughter and last descendant
of King Kamehameha the Great. Initial funding of this charitable trust consisted of
roughly 10% of the Kingdom of Hawaii's land mass, including all of Waikiki. The
KS/BE corpus today is estimated to be worth approximately $10 billion, including a
10% interest in Goldman Sachs.
TERMS OF THE WILL. The will directs five trustees "to erect and maintain in the
Hawaiian Islands two schools, each for boarding and day scholars, one for boys and
one for girls, to be known as, and called the Kamehameha Schools." Up to one-half of
the corpus is for "the purchase of suitable premises, the erection of school buildings,
and in furnishing the same with the necessary and appropriate fixtures, furniture
and apparatus." Annual income generated by the remaining corpus must be
expended "in the maintenance of said schools; meaning thereby the salaries of
teachers, the repairing [of] buildings and other incidental expenses; and to devote a
portion of each years income to the support and education of orphans, and others in
indigent circumstances, giving the preference to Hawaiians of pure or part aboriginal
blood; the proportion in which said annual income is to be divided among the
various objects above mentioned to be determined solely by my said trustees ...."
The two schools were established relatively soon after Pauahi's death and then
combined many years later. Except as noted above, the will does not require or even
mention special treatment for native Hawaiians. The trustees' longstanding practice
of limiting enrollment to children with at least some quantum of aboriginal blood,
though widely supported, is one of many issues currently being scrutinized by the
IRS in an audit that began three years ago.
Despite the governing instrument requirement that income be expended each year,
the most money ever actually spent in one year on the school and other charitable
activities has been about $70 million, less than 1% of the estimated value of trust

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corpus. Competition for admissionto Kamehameha Schools is intense, with about ten
applications for each slot.
The will directs that trustees be chosen by justices of the "Supreme Court," which at
the time of the princess' death meant the Supreme Court of the Kingdom of Hawaii.
But Supreme Court justices continued to make the selections when Hawaii was a
republic, territory and state ... until late last year. It was then that four of the five
justices, bowing to public pressure, agreed not to participate in future trustee
selections. The one dissenter has suggested privately that he has authority to make
future selections "as a majority of one." In past years, the justices did not hesitate to
decide cases involving the trustees they selected. But earlier this year, the justices
agreed to recuse themselves in such matters.
HIGHLY COMPENSATED TRUSTEES. KS/BE trustees have paid themselves annual
fees averaging about $900,000 each. They argue that this has been within the
compensation cap set by mechanical application of Hawaii's statutory fee provision.
But the nation's preeminent authority on trust law has called this formula "practically
incomprehensible ... an awful statute." Among other problems, it does not define
"revenue," "income" and "general profits." As a result, it is not clear in what
circumstances net income as opposed to gross income is to be used, or to what extent
capital losses are to be offset against capital gains.
These ambiguities take on greater meaning when you consider a few numbers.
During the three-year period currently under review by a court-appointed master,
the trustees experienced losses and loss reserves totaling $241 million. This exceeded
investment income from all sources, including Goldman Sachs. Plus, annual
management and general expenses rose from $42 million to $52 million to $61
million. According to the master, the total return for this three-year period was
minus 1.0% .
Due to a dramatic, last-minute floor vote on the floor of the state House of
Representatives, the 1998 Legislature replaced the statutory fee formula with a
simple requirement that trustee compensation always be "reasonable under the
circumstances." The bill had been bottled up in the House Judiciary Committee
(whose chair has for years received a $4,000 monthly retainer from KS/BE), and was
actively fought by the Speaker of the House (who recently received a $132,000
consulting fee on a KS/BE land transaction).
POLITICAL CONNECTIONS. One of the current trustees was Speaker of the state
House of Representatives at the time of his appointment in 1984 and for several years
thereafter. Another had been President of the state Senate just prior to being
appointed a trustee. A third had just been chairman of the state Judicial Selection
Commission, and a fourth was a physical education teacher turned state Department
of Education administrator who recently had served as chairperson of the sitting
Governor's re-election committee on the island of Maui. The fifth trustee, Oswald
Stender, is sometimes called the accidental trustee. Unlike the other four, he is not
politically active and was not the first choice of any justice. Stender emerged as a
compromise candidate only when the justices reached a stalemate over other
candidates, one of whom was generally regarded at that time as a political "king
maker." Stender is the only trustee with CEO-like credentials.
Cynics sometimes point out that members of the Judicial Selection Commission are
selected by the Speaker of the House, President of the Senate and Chief Justice of the
Supreme Court ... and that KS/BE trustees in recent years have included a Speaker of

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the House, President of the Senate and Chief Justice of the Supreme Court. The
Governor also selects Commission members, and the most recent trustee is the best
friend and political confidant of the Governor.
The law firm of another recent Judicial Selection Commission chairman has received
$15 million in fees from KS/BE since his tenure on the Commission, and the law firm
of a former Governor received millions in fees soon after he left office in 1995.
Unsuccessful candidates for justice of the state Supreme Court have described being
quizzed by members of the Judicial Selection Commission about who they might be
inclined to name as a KS/BE trustee. These candidates concluded that no one gets
appointed to the high court in Hawaii unless they answer this question "correctly."
On August 9, 1997, the Honolulu Star Bulletin published Broken Trust, a newspaper
article written by four prominent members of the native Hawaiian community (a
senior federal district court judge, retired state appellate court judge, former
principal of Kamehameha Schools, and head trustee of the Queen Liliuokalani Trust)
and a University of Hawaii law professor. This 6,400 word essay triggered a public
outcry for reform and prompted an investigation by the state Attorney General. The
resulting media coverage rivaled what might have been given to the declaration of
World War III.
GOVERNANCE OF KAMEHAMEHA SCHOOLS. Four months later, a courtappointed fact finder submitted a scathing report on the trustees' management of the
Kamehameha Schools. Focused primarily on the so-called Lead Trustee for
Education, the report painted a picture of insensitivity, favoritism, incompetence and
vindictiveness. According to the fact finder, this trustee frequently would
countermand decisions of the school's president and principals, and tell teachers and
staff that they were incompetent and uncaring. At one point in time, she commanded
that nothing in writing leave the campus until it had been approved by her, causing
months-long delays in simple communications.
She had the student body president pulled out of class and ushered by a principal to
her downtown office for a closed door meeting after hearing that this student was
planning to write a letter supportive of the school's president. Among other thinly
disguised threats was "reassurance" that she wouldn't dream of calling
administrators at Princeton (where he had been offered a scholarship) to tell them
that he was a "rabble-rouser." As he left the two-hour session, his stomach was
"wrenched with pain." Later this student leader wrote that the session was
intimidating and terrifying, and that he felt trapped: "[I] could not get up, at any
time, and leave her office that day, though I wished I could have."
When one of this trustee's confidants wanted a particular child admitted to
Kamehameha Schools, a red dot would appear on that applicant's file. Staff had been
instructed to admit red- dot applicants, regardless of qualifications. On at least one
such occasion, the party asking for special treatment reportedly was the Supreme
Court justice who had pushed hard for her appointment as a trustee, and who now
contends that he can select future KS/BE trustees "as a majority of one."
According to the fact finder, these and other ways in which the lead trustee for
education and the people around her "usurped," "undermined" and "subverted" the
powers of the president and his staff left the school in "turmoil" and "disarray."
Other trustees pleaded ignorance, but the fact finder would have none of that: "The
Fact Finder finds that ... the other four trustees ... knew or should have known that

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the Lead Trustee was engaged in actions that were detrimental to the Kamehameha
School .... It is inconceivable to the Fact Finder that her fellow Trustees acting in
concert could not find out what the Lead Trustee was doing on campus. Though the
alarms were being sounded by the actions of one of the Trustees, the others either
ignored it, or failed to grasp the consequences of it."
A few months later, a Western Association of Schools and Colleges (WASC)
accreditation team was harsh in its assessment of the trustees, calling the governance
of the school "dysfunctional."
A master appointed by the probate court to review the trustees' accounts also has
been critical of the trustees' conduct: "Currently, there is no policy to guide the
Trustees on expending its resources .... Such a policy is fundamental to the
development of a strategic plan for investments and educational expenditures."
One of many "flawed" actions identified by the master related to the trustees'
termination of long-standing outreach programs in order to build new campuses on
neighbor islands. Their premise was that all planned programs, both old and new,
had to fit within that year's direct educational expenditure budget of $55 million. But
the trust at that time had an accumulated income balance of $316 million, and even
taking into account the cost of running new campuses, unspent accumulated income
was projected to reach $1.5 billion in just ten years.
The trustees announced the plan to build new campuses just three days after
publication of Broken Trust. This timing troubled the master: "Your master is unable
to determine the reasons why GoForward [the expansion plan] was announced in
such a hurried manner with limited involvement of key personnel and educational
expertise .... your master is not satisfied that critical and fundamental planning
considerations have been adequately analyzed .... both professional staff and key
management employees at the Kamehameha School (sic), as well as key management
personnel at the trust estate, were unaware of the many key details of the GoForward
initiative until it was publicly announced by the Trustees. This understandably
resulted in misunderstanding, confusion, loss of confidence, and a decline in
morale."
"Curiously" (the master's word), the financial model for estimating the operating and
capital costs of the proposed neighbor island campuses was not developed until one
year after critical decisions had been made.
The master addressed many other aspects of the trustees' management of estate
assets. In a report filed with the probate court three months ago, he noted numerous
serious and repeated breaches of trust. A sampling follows.
TRANSFER OF INCOME TO CORPUS. Despite will language directing the trustees
to expend income each year, and a Hawaii Supreme Court opinion and probate court
order indicating that all income be spent in the year earned or in accordance with an
approved plan, the trustees surreptitiously moved $350 million on the books from
the income account to the corpus account. The funds themselves were invested in
highly illiquid growth-oriented investments rather than spent on the school as
required by the will.
This diversion of funds was not noted in minutes of trustee meetings or disclosed in
notes to the financial statements. The master was concerned by what appeared to be
an element of deceit and attempt to blame others: "The contention in the Trustees'
Response that the reclassification of accumulated income to corpus was not

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deceptive because the information necessary to figure out how much income had
been accumulated was always available for past masters to uncover is outrageous. To
blame past masters for failing to discern the Trustees' concealment ... is ... a
diversionary attempt .... [R]esponsibility for their malfeasance should not be laid at
the doorstep of past masters ....The fact that the trustees cloaked their decision to
reclassify income to corpus as being confidential and privileged' speaks volumes
regarding the forthrightness of their action."
Trustee efforts to minimize the issue's significance by pointing out that the amounts
easily can be transferred back to the income account, have not satisfied the master:
"The inability of the Trustees to comprehend the gravity of their failure to properly
account for and expend accumulated income betrays a lack of sensitivity to one of
their most fundamental duties as trustees."
INVESTMENT PRACTICES. According to the master, investment decisions have
been ad hoc, based more on "relationships" than financial analysis; due diligence
work often has not been done ... or done but ignored; and completed investments
have not been properly monitored and measured against appropriate benchmarks. In
numerous ways, the estate's financial statements have been misleading.
As recently as earlier this year, the trustees were reporting the fair market value of
trust assets at about $2 billion even though the assessed value of estate land on the
island of Oahu alone totals nearly $5 billion and the estate's stake in Goldman Sachs
is generally believed to be worth up to $3 billion. Critics have suggested that
attempts to minimize the size of the trust estate are related to trustee contentions that
$70 million is not an inappropriately small amount to expend on the school each
year.
Several months ago, a court-ordered study by Arthur Andersen confirmed the
master's findings: "In virtually all areas of investment and management decisionmaking by the trustees, the Andersen Report notes a lack of appropriate investment
planning. Even more problematic, the Andersen Report observes that even to the
extent that there may be a semblance of an investment plan, there is a weak
commitment to abide by the plan."
LEAD TRUSTEES AND ACCOUNTABILITY. The master was especially critical of
the trustees' insistence upon a so-called lead trustee management system in which
each trustee acts as a CEO. According to the master, "efforts to identify a comparable
management structure within any major business organization of note turned up
nothing." The master noted that the trustees effectively hired themselves to manage
this unusually complex organization without first developing job descriptions,
minimum qualifications or procedures for reviewing job performance.
Compensation studies commissioned by the trustees were then cited by them as
proof of the reasonableness of their fees. But each compensation consultant basically
was asked little more than how much CEOs of billion-dollar businesses usually get
paid. None of these reports even considered the qualifications or performance of
these particular individuals.
FAILURE TO PROPERLY ACCOUNT. In addition to normal disclosure
requirements, the will directs that the trustees annually file with the court "an
inventory of the property in their hands and how invested." Interestingly, the will
also directs the trustees to publish this information in a newspaper for public review.
This has simply been ignored. According to the Attorney General, "The trustees have

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not only failed to account as required by the Will and by law, but have intentionally
concealed the accounts and the true condition of the Estate from the Court and the
beneficiaries."
The quality and quantity of available financial information about KS/BE is
amazingly limited. Even the court-appointed master compared his attempts to get
information from these trustees to trying to get it from the CIA. The usually mild
mannered master was "outraged" by the trustees' "specious rationale" for not
properly disclosing vital information. He called their excuses "so pathetic as to
border on the ludicrous."
When the trustees described the master's preliminary report as "a product of flawed
analysis, largely attributable to a failure of communication between the Estate staff
and the Master's accountant," the master stood by his reference to "the CIA" and
called the trustees' explanation "a gross mis-characterization:" "[T]he trustees are
inclined to disclose financial information only when and to the extent that it serves
their own purposes."
CONFLICTS OF INTEREST AND PRIVATE INUREMENT. According to the
Attorney General, "the trustees have at all times failed even to comprehend the
concept, meaning, or existence of a conflict of interest between themselves and the
beneficiaries."
The master's report details instances of co-investing and other troubling situations,
such as the time one trustee "recused" himself as a trustee just long enough to
negotiate a large land purchase from KS/BE, and the trustees' use of trust funds to
lobby against enactment of federal intermediate sanctions law. The master felt that
this last matter would have been a serious breach even if the trustees had used their
own money since it definitely worked against the best interests of the trust: "Your
master finds that [these efforts were] predominantly directed at preserving the
historical procedure for determining compensation of the trustees under state
statutory law and minimizing the potentially adverse impact that the intermediate
sanctions law would have on their continued ability to receive compensation in
accordance with and at the levels permitted under state law."
The $1 million or so that went into fighting enactment of this salutary legislation, and
millions more, went to the law firm of the former Governor who had appointed all
five of the current Supreme Court justices and key members of the Judicial Selection
Commission.
The trustees (except for Stender) accepted free golf club memberships worth up to
$40,000 from KS/BE leaseholders around the time leases were being renegotiated,
and one of the trustees is alleged to have pocketed substantial director fees from a
company in which the estate held a large block of stock. Another trustee used estate
personnel to perform valuable personal services and accepted trips in private jets to
events such as the Super Bowl and Olympics from vendors around the time of major
purchases by KS/BE. Yet another trustee is alleged to have engaged in a kickback
scheme with his brother-in-law and the estate. One of the trustees instructed KS/BE
personnel to surreptitiously and illegally pay off the campaign debts of several state
senators.
When the Attorney General accidentally discovered that one of these senators had
used a KS/BE credit card in strip bars and Las Vegas casinos, the trustees response
was to offset the $21,000 debt against a "retroactive bonus" so the senator would not

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have to personally repay the estate for his unauthorized use of the card. (Though
lacking a clear job description, this particular senator had for many years been on the
KS/BE payroll.)
INVESTIGATIONS AND PETITIONS FOR REMOVAL. The KS/BE trustees are
currently being investigated by the Internal Revenue Service and state Attorney
General. They also are the subjects of two grand jury criminal investigations, one
conducted by the U.S. Attorney in Hawaii, the other by the state Attorney General,
plus an inquiry by the state Campaign Spending Commission. The probate court has
not yet approved trustee accounts for any year since fiscal 1993 and so the courtappointed master also is actively involved in KS/BE affairs. Two of the trustees have
asked a state circuit court to remove a third (the one who had been lead trustee for
the school). That trial started on the 9th of November and is projected to last four to
six months.
The Attorney General's petition to permanently remove all five trustees has been set
for trial in late 1999, is not expected to start until sometime in the year 2000. Her
petition for temporary removal was taken under advisement by the probate judge on
October 2, 1998. The probate court's failure to act on this petition is not easily
explained since the court has had scathing reports from fact finders for many months
and the applicable law is quite clear.
The Master has documented numerous profound breaches of trust that violate the
fundamental purpose of the trust, the law, and numerous court orders. When the
Master sets forth a prima facie case of breach, the trustees have the burden of
proving that there is no breach. Monting v. Leong Kau, 7 Haw. 486 (1888); Nawahi v.
Trust Co., 31 Haw. 958, 973 (1931); and Estate of Baker, 34 Haw. 263, 267-268 (1937).
Attorney General's Response to Master's Consolidated Report.
There also is clear precedent in Hawaii and elsewhere for the removal of trustees on
an expedited basis. In Estate of Holt [33 Haw. 352, 362 (1935)], for example, the court
did not even wait for a formal petition since it was evident from the master's report
that the trustee "was not sufficiently careful and diligent in the performance of his
duties to meet the requirements of good stewardship." The probate court is supposed
to do what is in the best interests of the beneficiaries, even if the removed trustees
have done their best. In Holt, for example, the court affirmed the expedited, prepetition removal even though nothing in the record reflected adversely on the ousted
trustee's honesty or integrity.
WILL THEY BE REMOVED? In response to highly critical reports of fact finders and
outside consultants, the trustees have promised much in the way of reform, but have
yet to produced anything of significance. Their words express a desire to cooperate
with the various investigations, but their actions seem designed to stall for as long as
possible.
Among other on-going questionable expenditures, the trustees reportedly are paying
nearly $100,000 of trust funds each month to a law firm that the Attorney General
believes is working for "the protection and benefit of the individual trustees and not
the Estate or its beneficiaries." Total cost of the many investigations, inquiries and
related court battles, is estimated to have exceeded $5 million ... and an end is not yet
in sight.
For many years whenever the subject was KS/BE, Hawaii's judges and justices opted
not to make waves ... choosing simply to "look the other way." Some people think

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this has not changed and is the reason for the probate court's inaction. Many of them
are convinced that these trustees will never be removed.
Others think it is perfectly understandable that a probate judge would approach this
matter with caution or even trepidation. After all, she has been asked to fire
politically powerful people who were appointed by justices of the Supreme Court.
Plus, the job of naming a person or persons to run this historic and emotionally
charged institution would fall squarely into her lap. Just imagine if that person or
those persons were to perform poorly.
EVERYONE IS WATCHING. The judiciary's handling of this matter arguably will
establish the direction of justice in Hawaii for years to come. A concerned public is
watching closely, as are scores of concerned political insiders.
4.3.2

Bishop Estate Settlement

(Excerpt from a report in 1999) The IRS has signed-off on a $20.1 million agreement
between the Attorney General of Hawaii and the former trustees of Hawaiis
wealthiest charity. The trust, commonly known as the Bishop Estate, has a total
worth estimated between $6 billion and $10 billion. The bulk of the funds of the
agreement, $15 million, will go to the Kamehameha Schools that suffered under both
the corrupt practices of the trustees, and their apparent complete lack of oversight of
the trusts funds. Though paid as a result of actions of the trustees, the money will
come from the Federal Insurance Company, the trusts insurer, and ironically,
includes $4 million dollars to reimburse the trustees for the legal fees they incurred
personally while denying allegations of wrongdoing. The remainder, $1.3 will go to
Hawaiis Attorney General to cover legal expenses.
The state had initially sought over $200 million dollars in damages in compensation,
but the settlement agreed to, barely more than a tenth that amount, was seen as the
most expedient way to end the matter and in the best interests of the children who
had lost the most under the policies of the former trustees.
4.4

Possible criminal liability for trustees


State v. Coetzee and Others

South Africa Constitutional Court


6/03/1997

Excerpts from the opinion (footnotes omitted):


It is to be noted that the true purpose of section 332(5) is not the
creation of criminal liability without any fault on the part of the accused
director. What is intended is the conviction of those directors who either take
part in the commission of the offence or are in a position to prevent it but

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fail to do so. Proof of fault is therefore essential to a conviction under the


section. For the purposes of this judgment, it is therefore unnecessary to
consider whether the creation of absolute criminal liability for an offence
would be constitutionally permissible. I accordingly do not find it necessary
to comment on the view expressed in paragraph 93 of the judgment of
Kentridge AJ, that if an offence of absolute liability had been created, it
would not in itself have given rise to any question of the unfairness of the trial
in respect of such an offence.
What the legislator has in substance done is to place a positive duty on the
director or servant to disprove factors which are central to the offence
and made a conviction the consequence of a failure to do so. The legislature is,
in my view, fully entitled to place a positive duty on directors and to make
the omission to discharge that duty an offence. What is in issue here is how
this has been done. It is appropriate that the Court should have regard, not
only to the purpose and effect of the legislation, but also to the means used to
achieve its objective. What causes the provision to fall foul of the presumption
of innocence here is the effect of merely changing the form of the provision to
require the accused, rather than the prosecution, to prove elements which are
essential to his or her guilt or innocence. There is manifest unfairness where
the legislature, having created an offence potentially entailing very grave
penalties, goes on to subvert an important constitutionally protected right by
requiring crucial elements of the offence to be proved or disproved by the
accused on pain of conviction should the onus not be discharged. As pointed
out in Morissette, n46 there should be a limit to the power of the legislature
"to facilitate convictions by substituting presumptions for proof". In
Patterson v New York, the dissenting judges (Powell J, Brennan J and
Marshall J) objected cogently to the fact that the test which was the basis of
the majority judgment:
. . . allows a legislature to shift, virtually at will, the burden of
persuasion with respect to any factor in a criminal case so long as it is
careful not to mention the non-existence of that factor in the statutory
language that defines the crime."
It remains to be determined whether section 332(5) is nevertheless
justifiable in terms of section 33(1) of the Constitution. The question is
whether this limitation on the presumption of innocence is, in all the
circumstances, reasonable, justifiable and necessary and not a negation of the
essential content of any of the affected rights.
The question that arises then is whether section 332(5) imposes a form of
culpability, sufficient to justify the deprivation of freedom without giving
rise to constitutional complaint. To determine the answer to this question
requires a careful analysis of section 332(5).[179]It provides that once the

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state has established that a company has committed an offence, an accused


will bear a burden of proof to establish upon a balance of probabilities that he
or she did not take part in the commission of the offence and that he or she
could not have prevented its commission. The director will be liable for the
offence, regardless of whether the offence is one which, at common law,
contains a mens rea requirement, such as fraud or theft. Liability will arise
therefore even though there has been no positive act by the accused, but
merely an omission.
In S v Klopper 1975 (4) SA 773 (A) the court was concerned with a
forerunner to section 332(5), section 381(5) of Act 56 of 1955, which was in
identical terms. In that case, the accused had been charged with attempted
fraud on the basis of the provisions of section 381(5). At trial, the accused gave
evidence to the effect that he was not aware of the offence committed. He
conceded that his ignorance was due in part to his own negligence in failing
to read sufficiently carefully the documents which contained the fraud which
were sent to him. The Witwatersrand Local Division convicted him of fraud,
but referred to the Appellate Division the question as to whether the court
had been correct in concluding that the accused's evidence did not absolve
him of liability. Kotz AJA considered the requirement imposed by section
381(5).
Accordingly, the judge held that the accused had met the onus imposed upon
him by section 381(5) and set aside the conviction and sentence of the accused.
In so holding, Kotz AJA expressly rejected the view that the section requires
an accused to place objective facts before the court proving, not only that he
or she was not aware of the commission of the offence, but that he or she had
taken reasonable steps to prevent the commission of the offence, an approach
which had been adopted in S v Salama Taxis (Pty) Ltd and Others 1964 (1) SA
371 (C) at 376CH and followed in S v Poole 1975 (1) SA 924 (N) at 934E. The
rule in S v Klopper has been repeatedly applied. (See S v Film Fun Holdings
(Pty) Ltd and Others 1977 (2) SA 377 (E) at 386H; S v Deal Enterprises (Pty)
Ltd and Others 1978 (3) SA 302 (W) at 314H315A and 315H316A; S v Harper
and Another 1981 (2) SA 638 (D) at 641GH.)
The nature of the liability imposed upon directors by the provision then is
that they will be liable for any criminal offence committed by the [*215]
company unless they can show that they did not have knowledge of it and/or
that they could not have prevented it. According to the interpretation of the
section in Klopper's case, the test for prevention is not an objective one.
Directors need not show that they exercised due diligence and care to prevent
the commission of the offence, they need merely show that they could, as a
matter of subjective fact, not have prevented it. In this sense, the provision as
interpreted requires a form of subjective blameworthiness.
Imposing criminal liability upon a director who knows of the commission of

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an offence by the company and who is in a position to prevent the


commission of that offence but does not do so is not in any sense egregious.
Actual knowledge coupled with the ability to prevent the commission of the
offence by a director who is in a position of control in the corporate body
renders the failure to do so sufficiently culpable to warrant criminal liability.

4.5

Statutory Provisions on Direct or Indirect Personal Benefit


Canada Income Tax Act: no part of the income of which is payable to, or is
otherwise available for, the personal benefit of any proprietor, member,
shareholder, trustee, or settlor thereof.
US Income Tax Act section 501 (c) (3): no part of the net earnings of which
inures to the benefit of any private shareholder or individual.
South Africa Tax Act: prohibited from distributing any of its funds to any
person (otherwise than in the course of undertaking any public benefit
activity) and is required to utilise its funds solely for the object for which it
has been established
Croatia Law on Associations (1997): The association operates on a non-profit
basis. If the association realizes a profit, it should be used exclusively for its
activities....
Kosovo Regulation on Registration and Operations of Non-Governmental
Organizations (1999): An NGO may not distribute net earnings or profits as
such to any person. The assets, earnings, and profits of an NGO may not be
used to provide special personal benefits, directly or indirectly, to any
founder, director, officer, member of an association, employee, or donor. This
subsection does not preclude the payment of appropriate compensation for
work performed for the organization.
Russia Law on Noncommercial Organizations (1995): In order to avoid
conflict of interest, an interested entity (i.e. managers, creditors, or relatives of
people who are responsible for the management of a noncommercial
organization, etc.) must inform the managing body of a noncommercial
organization that it intends to enter into a deal with the noncommercial
organization. The deal must be approved by the management. If the deal is
accomplished unlawfully, a court has the power to cancel the deal and the
interested entity must compensate all losses to the noncommercial
organization.
Hungary Law on Public Service Organizations (1997): During the course of
its economic activities the public benefit company may not distribute its gains
which have to be spent on activity spelt out by it founding document.

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Chapter 5 ACTIVITIES OF NPOs


5.1

Introduction

185

5.2

Public Policy (Political) Activities

186

5.2.1

Civil Law v. Common Law

186

5.2.2

Canada Revenue Agency, Policy Statement:


Political Activities

188

5.2.3

Southwood v. A.G.

192

5.2.4

Alliance for Life v. M.N.R

192

5.2.5

Branch Ministries Case

198

5.2.6

Electioneering and Lobbying -- Notes and Questions

205

5.2.7

Charity Commission on the Promotion of Human Rights

206

5.3

Economic Activities

209

5.3.1

Discussion Examples Regarding Economic Activities

209

5.3.3

UK Joint Committee on the Draft Charities Bill First Report

210

5.3.3

Discussion Questions

214

5.1.

INTRODUCTION

The laws affecting NPOs should clearly permit them to engage in all
lawful activities that are permitted for individuals and for-profit entities. For
example, section 3.01(a) of the Revised Model Nonprofit Corporation Act
(RMNCA) provides that, Every corporation incorporated under this Act hs
the purpose of engaging in any lawful activity unless a more limited purpose
is set forth in the articles of incorporation. The law should further provide
that all powers available to for-profit legal entities should be available to any
NPO, including the power to sue or be sued in its own name.
The laws should also allow any NPO to engage in a public benefit
activity. But it should be clear that becoming a PBO, which would subject the
NPO to greater burdens commensurate with the greater benefits it receives,
should be voluntary. See OSI Guidelines, Section 6.1(b). In some cases it may
be permissible for state law to requ9re an NPO that has predominantly or

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exclusively public benefit purposes to be a PBO so that it will come under the
more burdensome regulatory regime of the state law applicable to PBOs. For
example, section 17.7(2) of the RMNCA requires any corporation that
qualifies as a tax exempt public charity under federal tax laws (I.R.C.
501(c)(3)) be classified as a public benefit organization for state law purposes.
Can you think of circumstances other than those just mentioned when it
would be appropriate to require an NPO to qualify for PBO status?
Why would an organization not want to be a PBO?

5.2

Public Policy (Political) Activities

5.2.1 Civil Law v. Common Law. Contrary to suggestions to the contrary, there is
no clear dichotomy between civil law and common law jurisdictions on the matter of
whether public benefit organizations may engage in political activities. In South
Africa, for instance, there is no restriction on political activities of NPOs.
In Germany the following rules apply:

Like most civil law countries, Germany has two types of not-for-profit
organizations that may generally engage in what the common law refers to as
charity. These are the association (Verein), referred to in the undesgesetzbuch
(BGB) 1; 21 ff, and the foundation (Stiftung), referred to in BGB 1; 80 ff. It is
also possible to register not-for-profit organizations in the GmbH (limited
liability) or AG (stock company) corporate forms, but there is no need to go
into those details for purposes of this short synopsis.
Although the law is very complex with regard to the administration of the
typical registered association or foundation in Germany, the specific
treatment of political activities can be found only in two places in German
law. There are restrictions in the civil law regarding associations and there
are restrictions in the tax law regarding all corporate bodies that are involved
in charitable and public benefit activities.
The civil law restrictions set out in the Association Law (Vereinsgesetz) are
really quite limited and apply only to registered associations with a
significant number or foreign persons as members or leaders. The tax law
restrictions are more interesting, because they apply to all corporate
organizations that engage in public benefit activities. Here the situation is a
bit complex when one compares it with common law jurisdictions, because
the general tax (fiscal) law (Abgabenordnung or AO) refers to charitable
(mildtaetige), public benefit (gemeinnuetzige), and religious (kirchliche)
purposes, and defines each of them with a list of permitted purposes.

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While the term charitable in AO 53 permits a fairly limited group of


purposes, e.g., organizations that care for the sick, the handicapped, the
homeless, etc.,25 the public benefit term used in AO 52 more nearly
encompasses the broader range of purposes referred to as the fourth head of
charity in the common law system. In addition, AO 54, which deals with
religious activities, comprises many that would be encompassed within the
second head of charity referred to by Pemsels case in common law
jurisdictions.
In this discussion, therefore, the public benefit category is treated as essentially
defining the concept of charity used in th e common law. The major reason for this is
that this category has some restrictions with respect to political activities, while the
other two do not. In fact, however, there is a built-in logic to this treatment most
Germans would not think that an organization providing a home for the homeless
would engage in any prohibited political activity as described below. Nor would an
organization that trains clergy. Thus, providing the limits on political activities
ONLY for the broader public benefit class (akin to the common law fourth head)
makes a lot of sense.

The restrictions on political activities of tax exempt public benefit


organizations are found in the regulations interpreting the AO 52
(Anwendungserlass zur Abgabenordnung -- AEAO 800). These regulations state
quite clearly that political purposes are fundamentally not public benefit
purposes. On the other hand, political is fairly narrowly defined by the
regulations. Although it specifically includes trying to influence public
opinion and supporting political parties, the regulations go on to say that a
certain amount of influencing public opinion is permissible for public
benefit organizations. In fact, it is permissible so long as the accomplishment
of a public benefit purpose is linked with setting a political goal, and the
actual attempts to influence the political parties and the state are not foremost
in what the organization does. The regulations go on to cite a specific case,
which held that an organization could take a specific political position,
consistent with its public benefit purposes, so long as that was not its primary
activity. In contrast, an organization that has the political goal as its only or
its primary purpose would fail as a public benefit organization. The rules are
thus quite unrestrictive and would seem to permit considerable purposerelated advocacy and lobbying.
2. In France, associations and foundations obtain recognition of public
benefit status by the Conseil dEtat (Frances Highest Administrative Court).
Nothing in the law specifically says that a public benefit organization may
not engage in political activities, but a decision by the Conseil dEtat, (sect.
Interior 18-12-1979 n 326214) clarifies that organizations with a primarily
political purpose, such as engaging primarily in political advocacy, cannot be
25

These do receive greater tax benefits, e.g., a higher limit on deductible donations.

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recognized as public benefit organizations. (Political organizations cannot be


considered to be carrying out activities of general interest and therefore do
not qualify for the status).
Political organizations cannot qualify for charitable status under either the tax law
or the administrative law. As a result, if the political activities of a charitable
organization were to increase to the extent that the administrative authorities would
consider it to be in violation of its charter, the organization would risk losing its
charitable status.
3. What should the rules be with respect to political activities? Should they be
contained in the general law or in the tax law?

5.2.2 Canada Revenue Agency, Policy Statement: Political Activities, Reference


Number, CPS 022, September 2, 2003 . . . .

4. The difference between political purposes and charitable purposes


All registered charities are required by law to have exclusively charitable
purposes. As the Act does not define what is charitable, we look to the
common law for both a definition of charity in its legal sense as well as the
principles to guide us in applying that definition. The formal objectives or
goals of a charity must be set out in its governing documents.
Under the Act and common law, an organization established for a political
purpose cannot be a charity. The courts have determined political purposes to
be those that seek to:
further the interests of a particular political party; or support a political
party or candidate for public office; or
retain, oppose, or change the law, policy, or decision of any level of
government in Canada or a foreign country.
The main reason why the courts rule out political purposes for charities is a
result of the requirement that a purpose is only charitable if it generates a
public benefit. A political purpose, such as seeking a ban on deer hunting,
requires a charity to enter into a debate about whether such a ban is good,
rather than providing or working towards an accepted public benefit.
It also means that in order to assess the public benefit of a political purpose, a
court would have to take sides in a political debate. In Canada, political issues
are for Parliament to decide, and the courts are reluctant to encroach on this
sovereign authority (other than when a constitutional issue arises). . . .
6.1 What are prohibited activities?

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A charity may not take part in an illegal activity or a partisan political activity.
A partisan political activity is one that involves direct or indirect support of,
or opposition to, any political party or candidate for public office.
When a political party or candidate for public office supports a policy that is
also supported by a charity, the charity is not prevented from promoting this
policy. However, a charity in this situation must not directly or indirectly
support the political party or candidate for public office. This means that a
charity may make the public aware of its position on an issue provided:
it does not explicitly connect its views to any political party or candidate
for public office;
the issue is connected to its purposes;
its views are based on a well-reasoned position;
public awareness campaigns do not become the charity's primary activity.
In addition, a charity in this situation is also subject to the restrictions this
guidance places on non-partisan political activity, public awareness
campaigns and communications with an elected representative or public
official.
Finally, a charity may provide information to its supporters or the public on
how all the Members of Parliament or the legislature of a province, territory
or municipal council voted on an issue connected with the charity's purpose.
However, a charity must not single out the voting pattern on an issue of any
one elected representative or political party.
6.2 What are political activities?
A charity may take part in political activities if they are non-partisan and
connected and subordinate to the charity's purposes.
We presume an activity to be political if a charity:
explicitly communicates a call to political action (i.e., encourages the
public to contact an elected representative or public official and urges
them to retain, oppose, or change the law, policy, or decision of any
level of government in Canada or a foreign country);
explicitly communicates to the public that the law, policy, or decision of
any level of government in Canada or a foreign country should be
retained (if the retention of the law, policy or decision is being
reconsidered by a government), opposed, or changed; or

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explicitly indicates in its materials (whether internal or external) that the


intention of the activity is to incite, or organize to put pressure on, an
elected representative or public official to retain, oppose, or change the
law, policy, or decision of any level of government in Canada or a
foreign country.
7. When is communication a charitable activity?
In carrying out their mandate, registered charities often have to communicate
with the public or public officials. The following sections outline when such
communication activities are charitable and when they are not.
7.1 Public awareness campaigns
A charity's public awareness campaigns aim to give useful knowledge to the
public to enable them to make decisions about the work a charity does or an
issue related to that work.
When a registered charity seeks to foster public awareness about its work or
an issue related to that work, it is presumed to be taking part in a charitable
activity as long as the activity is connected and subordinate to the charity's
purpose. In addition, the activity should be based on a position that is wellreasoned, rather than information the charity knows or ought to know is false,
inaccurate, or misleading. Finally, although the CCRA acknowledges that
material produced in support of a public awareness campaign may have some
emotional content, it would be unacceptable for a charity to undertake an
activity using primarily emotive material. . . .
Note: Organizations that provide information or promote a point of view, as
their sole or main activity cannot qualify as a charity under the head of
advancement of education. There is an important difference between a charity
educating people in a way that furthers an educational purpose and an
organization merely circulating information to the public about its work. . . .
7.3 Communicating with an elected representative or public official
When a registered charity makes a representation, whether by invitation or
not, to an elected representative or public official, the activity is considered to
be charitable. Even if the charity explicitly advocates that the law, policy, or
decision of any level of government in Canada or a foreign country ought to
be retained, opposed, or changed, the activity is considered to fall within the
general scope of charitable activities. However, such activity should be
subordinate to the charity's purposes and all representations should:
relate to an issue that is connected to the charity's purposes;

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be well-reasoned (or where time constraints make this impractical, should


be based on a well-reasoned position and such a position should be
submitted in a timely manner to the elected representative or public
official concerned); and
not contain information that the charity knows or ought to know is false,
inaccurate, or misleading. . . .
8. Education as a charitable purpose and how it differs from public
awareness campaigns
The courts stipulate that to qualify as a charity under the head of
advancement of education, a targeted attempt must be made to educate
othersthere must be some structure. It is not enough to simply provide an
opportunity for people to educate themselves by making materials available
with which they may accomplish this but need not.
To advance education in the charitable sense means:
training the mind;
advancing the knowledge or abilities of the recipient;
raising the artistic taste of the community; or
improving a useful branch of human knowledge through research.
Education is further explained in Vancouver Society of Immigrant and Visible
Minority Women v. The Minister of National Revenue, [1999] 1 S.C.R. 10.
A charity whose object includes the advancement of education must take care
not to disregard the boundary between education and propaganda. To be
considered charitable, an educational activity must be reasonably objective
and based on a well-reasoned position. This means a position that is based on
factual information that is methodically, objectively, fully, and fairly
analyzed. In addition, a well-reasoned position should present (i.e., address)
serious arguments and relevant facts to the contrary. This notion was
discussed in Challenge Team v. Revenue Canada, [2000] 2 C.T.C. 352 at para. 1
(Fed. C.A.):
We all agree with the appellant that educating people from a particular
political or moral perspective may be 9 educational in the charitable sense in
that it enables listeners to make an informed and critical choice. However, an
activity is not educational in the charitable sense when it is undertaken "solely
to promote a particular point of view" ( per Iacobucci J. Vancouver Society of

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Immigrant and Visible Minority Women v. M.N.R., [1999] 1 S.C.R. 10, at


paragraph 169).
The degree of bias in an activity will determine if it can still be considered
educational. The materials of some organizations may have such a slant or
predetermination that we can no longer reasonably consider them as
educational.
Also, to be educational in the charitable sense, organizations must not rely on
incomplete information or on an appeal to emotions. Even in a classroom
setting, promoting a particular point of view may not be educational in the
charitable sense. As a result, courses, workshops, and conferences may not be
charitable if they ultimately seek to create a climate of opinion or to advocate
a particular cause.
5.2.3 Southwood v. A.G., [2000] ECWA Civ. 204 at paras. 3.1, 29, 30 (BILII)
http://www.bailii.org/ew/cases/EWCA/Civ/2000/204.html is an English
law decision in which the Court of Appeal examined the refusal of the
Charity Commission to register the Project on Demilitarization (Prodem).
Prodem's stated purpose was the "advancement of the education of the public in the
subject of militarism and disarmament and related fields." The court held:
There is no objectionon public benefit groundsto an educational
programme which begins from the premise that peace is generally preferable
to war. ("...") I would have no difficulty in accepting the proposition that it
promotes public benefit for the public to be educated in the differing means
of securing a state of peace and avoiding a state of war. The difficulty comes
at the next stage. There are differing views as to how best to secure peace and
avoid war. To give two obvious examples: on the one hand it can be
contended that war is best avoided by "bargaining through strength"; on the
other hand it can be argued, with equal passion, that peace is best secured by
disarmament--if necessary, by unilateral disarmament.
The reason why Dr. Southwood's contentions ("...") must fail in this Court
("...") [is because] Prodem's object is not to educate the public in the differing
means of securing a state of peace and avoiding a state of war. Prodem's
object is to educate the public to an acceptance that peace is best secured by
"demilitarization." ("...") It is because the court cannot determine whether or
not it promotes the public benefit for the public to be educated to an
acceptance that peace is best secured by "demilitaristion" that Prodem's object
cannot be recognized as charitable.

5.2.4 Alliance for Life v. M.N.R., Federal Court of Appeal (Canada),


1999 . . .

A.C.W.S.J,

The appellant was incorporated as a corporation without share capital

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by Letters Patent issued by the Minister of Consumer and Corporate Affairs


on March 28, 1973, with the following objects:
1. TO promote respect for all human life from the moment of
conception onwards;
2. TO exemplify the right to life which is the basic human right on
which all other rights depend;
3. TO uphold and defend this right to life, both before and after birth;
4. TO contribute to the understanding of Canadians that society has a
duty to protect this right by legislation;
5. TO stimulate the creation of local Pro Life groups (Chapters) in
communities across Canada;
6. TO develop, guide and serve these Chapters, and individuals in their
attempts to educate the people in the objects set out in paragraphs one
to four hereof;
7. TO co-operate at all levels with other organizations where and in
whatever manner it is necessary or desirable to accomplish the objects
of the corporation;
8. FOR the attainment of the above objects to acquire, accept, solicit or
receive by purchase, lease, contract, donation, legacy, gift, grant,
bequest, devise or otherwise any kind of real or personal property; and
to enter into and carry out agreements, contracts, arrangements and
undertakings incidental thereto.
On August 9, 1973, the appellant submitted an application to
the respondent for registration as a charitable organization. The application
was accepted in November 1973 effective as of the date it was submitted. The
appellant thus became a "registered charity" pursuant to paragraph 248(1)(a)
of the Act.
The appellant is a broadly based organization. It is affiliated with
numerous member groups across Canada. It carries on its activities in close
harmony with those groups as well as with unrelated like-minded groups or
organizations. In addition to the activities in dispute which will be discussed
below, the appellant's activities included the presentation of briefs to public
and private bodies on such matters as reproductive technologies and child
care. It has also funded a study of the social, religious and economic factors

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considered by women in deciding to parent or abort their pregnancies, and


has acted as a referral source for speakers to schools and colleges across
Canada.
Throughout the course of the ensuing fifteen years the respondent
apparently did not raise any question concerning the charitable nature of the
appellant's purposes or activities. That situation changed in 1989. On
October 30, 1989, the appellant was notified in writing that an audit of its
operations for the fiscal periods ended April 30, 1985 and April 30, 1986 had
been carried out. The appellant was advised that it "may be in contravention
of certain provisions" of the Act and that "if these provisions are not complied
with by a particular registered charity, the Minister of National Revenue may
revoke its registration in the manner described in subsection 168(2) of the
Act". In the view of the respondent the appellant had failed to devote
all of its resources to charitable activities carried on by it and, accordingly,
did not meet the definition of "charitable organization" in paragraph
149.1(1)(b) of the Act. Specific examples were given of activities that were
considered non-charitable, most of which were viewed either as not being for
the advancement of education or as being primarily of a political nature.
There ensued much discussion and correspondence between the parties
with respect to this challenge to the appellant's status as a charitable
organization. With that in view, the parties met to discuss the matter at
the appellant's Winnipeg office on May 7, 1990. Shortly thereafter, in a letter
to the appellant of June 21, 1990, the respondent repeated much of what had been
stated in the letter of October 30, 1989. The respondent also summarized what was
perceived to be the framework by which the courts determine charitable status,
noting that in order for an organization to be so classified at common law it must fall
within at least one of four established heads of charity: the relief of poverty; the
advancement of religion; the advancement of education; other purposes beneficial to
the community, which the law regards as charitable. As there could be no argument
that the appellant's activities involved relief of the poor, the respondent focussed on
the three remaining heads.

The respondent expressed the view that for activities to be deemed


as being for the advancement of religion they must be directly related to the
"promotion of spiritual teachings" and the "maintenance of doctrines"
associated with the religion and that the fostering of ethical or moral
standards would not be seen as satisfying this test. Elaborating on the point
the respondent noted:
[W]hile the right to life from conception to natural death may in the
broad sense be interpreted by Christians as the will of God, it is evident
that a substantial portion of the Alliance's printed literature has little
relationship to the advancement of religion as defined at common law.
In conclusion, we would explain that simply because an activity is

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undertaken in conformity with a religious conviction does not mean


that the activity is a religious activity.
The respondent explained that for an activity to be deemed
educational efforts must be directed toward the training of the mind and that
materials used for the purpose must be presented in an unbiased manner so
as to allow the reader to make up his or her own mind on the position being
advocated. The respondent was of the opinion that materials provided to the
public by the appellant were aimed at encouraging a pro-life attitude and
designed to appeal in an emotional rather than analytical manner.
Accordingly, the provision of such materials could not be considered
educational. The respondent stated:
[T]he dissemination of knowledge to the public must encompass all
sides of an issue so that the recipients of the information can draw their
own conclusions. Although, we submit that no educational process is
free from all bias, if the dissemination of information is directed at
persuading the public to adopt a particular attitude of mind rather
than to allow an individual to draw an independent conclusion on the
basis of a reasonably full and unbiased presentation of the facts, the
process is not regarded as charitable by the courts.
Our review of the literature published and disseminated by the Alliance with
respect to the abortion issue causes us some particular concern. It does not
appear that the Alliance could offer abortion as a viable alternative based on
its commitment to "pro-life". However, in order to advance education in the
charitable sense, the dissemination of knowledge to the public must
encompass all sides of an issue so that the recipients of the information can
draw their own conclusions.
Bearing the foregoing in mind, if the Alliance feels that it can operate within
the parameters described above, we would ask for a fully executed undertaking to
the effect that the operations and activities of the Alliance will be amended to reflect
an unbiased presentation of the facts. With respect to the fourth head of charity the
respondent stated:

[I]t is important to note that not all endeavours which directly or


indirectly benefit the community are necessarily charitable at law.
Activities or programs that are considered charitable under this head
of charity are derived from previously decided cases. In qualifying a
particular purpose or activity as being "beneficial to the community",
we must be able to draw an analogy to precedents which have
specifically recognized similar purposes or activities as charitable.
Based on our review of the relevant jurisprudence, we conclude that
the Alliance could not be considered charitable under the fourth head
of charitable purposes.

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The respondent went on to acknowledge that the appellant may devote


a limited amount of its resources to "political activity" provided such activity
was both ancillary and incidental to its charitable activities. The respondent
then suggested several options for the appellant's consideration, one of which
was the formation of a non-profit organization to carry on non-charitable
activities. If this option were adopted, none of the appellant's resources could
go toward maintaining such an organization and gifts made to that
organization would not bestow a tax advantage on the donors.
In its reply letter of November 22, 1990 the appellant indicated the
action it proposed to take in response to the position of the respondent. This
would consist of the formation of a separate non-charitable organization "for
the purpose of conducting the activities which you have described in your
letter of June 21, 1990 as non-charitable in the department's view", coupled
with an undertaking to "amend the operations and activities of Alliance for
Life in a manner which will reflect the Department's position". . . .
On January 24, 1992, the appellant advised that it had incorporated
a non-profit organization called "Alliance Non-Profit Pro Life Action Inc."
(which is referred to in the record as "Alliance Action" or as "AA") and that it
planned to effect a "changeover" to the new organization on May 1, 1992.
(*12) The new organization would share office space and office equipment
with the appellant. . . .
Less than two years later, by letter of April 27, 1994, the
appellant was notified that its books and papers had again been audited, this
time for the fiscal period ending April 30, 1993. The audit was said to be by
way of "follow-up to the undertakings provided by the Charity" as a result of
the earlier audit. The appellant was advised that it continued to be in
contravention of certain provisions of the Act. The allegations of
non-compliance are set out in that letter which referenced the primary
activities of the appellant, with the exception of its 1-800 "HELPline". The
allegations read as follows:
The audit results indicate that the activities of the Charity are not
sufficiently segregated from those of AA and that its activities are not
exclusively charitable, as evidenced by the following factors:

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1) Fundraising
Although AA has been incorporated as a separate entity, the effect of
this division has been to separate funds received based on whether an
official donation receipt is [*18] requested, rather than to remove the
activities which are not charitable from those of the registered charity.
The fundraising campaigns for the Charity are printed on AA's
letterhead. The content of this fundraising activity is designed to
persuade the public to adopt a particular viewpoint and/or resist
change to existing legislation. This is evidenced in the fundraising
campaigns entitled "Morgentaler", "SIRCH", "All Lives", and "RU-486".
The fundraising documents state: "To help simplify our accounting
procedures, please make your donation payable to "Alliance". This
enables officials to deposit funds to the credit of either organization. In
addition, AA has been allowed to give a choice to donors as to whether
they receive an official income tax receipt or not. [There were also
other problems with what AA was doing, which are not included here.
The legal analysis then proceeded as follows]
Thus purposes aimed at promoting or advocating a change in the law
or in its administration, or a change in public policy, is not regarded as
charitable. The underlying reason for refusing to treat a political object as
charitable was articulated by Lord Parker of Waddington in
Bowman v. Secular Society, Ltd. :
Moreover, some courts have not regarded as charitable activities that promote
or advocate maintenance of the present law. As Vaisey J. stated in Re
Hopkinson , [1949] 1 All E.R. 346 (Ch. D.), at p. 350: "Political
propaganda masquerading . . . as education is not education within the
Statute of Elizabeth. . . . In other words, it is not charitable". See In re
Koeppler Will Trusts , [1984] Ch. 243, at pp. 260-61, reversed on other grounds
[1986] 1 Ch. 423 (C.A.). See also D.W.M. Waters, Law of Trust in Canada , 2nd
ed. (Toronto: Carswell, 1984), at p. 566. The learned author opined in this
same connection that "there is little doubt that, if the genuine and sole object
is to enlighten the public on the theories and concepts of political belief in
general, this is educational".
On the other hand, a trust to enforce existing law has been held to be
charitable: Inland Revenue Commissioners v. City of Glasgow Police
Association, [1953] A.C. 380 (H.L.). In determining that certain objects of the
Amnesty International Trust were invalid for advocating an alteration of the
law or policy, Slade J. distinguished the decision of the Supreme Court of
Massachusetts in Jackson v. Phillips (1867), 96 Mass. 539, which upheld a

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trust for the abolition of slavery, and where Gray J. expressed the opinion at
p. 567 that to "deliver men from bondage which the law regards as contrary to
natural right, humanity, justice and sound policy, is surely not less charitable
than to lessen the sufferings of animals".
In McGovern , supra , Slade J. made clear that his categorization
of "political purposes" was not intended to be exhaustive. In Positive
Action Against Pornography , this Court, building on that case,
expressed the view that certain purposes not falling within it were
nevertheless political in a legal sense. More recently, in Human Life
International of Canada, Inc. v. M.N.R. , this Court explicitly held that the
"advocacy of opinions on various important social issues" was a "political
activity" and therefore not charitable in the context of that case.
5.2.5 BRANCH MINISTRIES AND DAN LITTLE, PASTOR, v. CHARLES
O. ROSSOTTI, COMMISSIONER, INTERNAL REVENUE SERVICE, DC
Cir, 2000
BUCKLEY, Senior Judge: Four days before the 1992 presidential
election, Branch Ministries, a tax-exempt church, placed full-page
advertisements in two newspapers in which it urged Christians not to vote
for then-presidential candidate Bill Clinton because of his positions on certain
moral issues. The Internal Revenue Service concluded that the placement of
the advertisements violated the statutory restrictions on organizations exempt
from taxation and, for the first time in its history, it revoked a bona fide
church's tax-exempt status because of its involvement in politics. Branch
Ministries and its pastor, Dan Little, challenge the revocation on the grounds
that (1) the Service acted beyond its statutory authority, (2) the revocation
violated its right to the free exercise of religion guaranteed by the First
Amendment and the Religious Freedom Restoration Act, and (3) it was the
victim of selective prosecution in violation of the Fifth Amendment. Because
these objections are without merit, we affirm the district court's grant of
summary judgment to the Service.
I. BACKGROUND
A. Taxation of Churches
The Internal Revenue Code ("Code") exempts certain organizations from
taxation, including those organized and operated for religious purposes,
provided that they do not engage in certain activities, including involvement
in "any political campaign on behalf of (or in opposition to) any candidate
for public office." 26 U.S.C. 501(a), (c)(3) (1994). Contributions to such
organizations are also deductible from the donating taxpayer's taxable
income. Id. 170(a). Although most organizations seeking tax-exempt status

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are required to apply to the Internal Revenue Service ("IRS" or "Service") for
an advance determination that they meet the requirements of 501(c)(3), id.
508(a), a church may simply hold itself out as tax exempt and receive the
benefits of that status without applying for advance recognition from the IRS.
Id. 508(c)(1)(A).
The IRS maintains a periodically updated "Publication No. 78," in which it
lists all organizations that have received a ruling or determination letter
confirming the deductibility of contributions made to them. See Rev. Proc.
82-39, 1982-1 C.B. 759, 2.01, 2.03. Thus, a listing in that publication will
provide donors with advance assurance that their contributions will be
deductible under section 170(a). If a listed organization has subsequently had
its tax-exempt status revoked, contributions that are made to it by a donor
who is unaware of the change in status will generally be treated as
deductible if made on or before the date that the revocation is publicly
announced. Id. 3.01. Donors to a church that has not received an advance
determination of its tax-exempt status may also deduct their contributions;
but in the event of an audit, the taxpayer will bear the burden of establishing
that the church meets the requirements of section 501(c)(3). See generally id.
3.04; Rev. Proc. 80-24, 1980-1 C.B. 658, 6 (discussing taxpayers' obligations
in seeking a ruling or determination letter). . . .
B. Factual and Procedural History
Branch Ministries, Inc. operates the Church at Pierce Creek ("Church"), a
Christian church located in Binghamton, New York. In 1983, the Church
requested and received a letter from the IRS recognizing its tax-exempt status.
On October 30, 1992, four days before the presidential election, the Church
placed full-page advertisements in USA Today and the Washington Times.
Each bore the headline "Christians Beware" and asserted that then-Governor
Clinton's positions concerning abortion, homosexuality, and the distribution
of condoms to teenagers in schools violated Biblical precepts. The following
appeared at the bottom of each advertisement:
This advertisement was co-sponsored by the Church at Pierce Creek,
Daniel J. Little, Senior Pastor, and by churches and concerned
Christians nationwide. Tax-deductible donations for this
advertisement gladly accepted. Make donations to: The Church at
Pierce Creek. [mailing address].
The advertisements did not go unnoticed. They produced hundreds of
contributions to the Church from across the country and were mentioned in a
New York Times article and an Anthony Lewis column which stated that the
sponsors of the advertisement had almost certainly violated the Internal
Revenue Code. Peter Applebome, Religious Right Intensifies Campaign for

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Bush, N.Y. Times, Oct. 31, 1992, at A1; Anthony Lewis, Tax Exempt Politics?,
N.Y. Times, Dec. 1, 1992, atA15.
The advertisements also came to the attention of the Regional Commissioner
of the IRS, who notified the Church on November 20, 1992 that he had
authorized a church tax inquiry based on "a reasonable belief ... that you may
not be tax-exempt or that you may be liable for tax" due to political activities
and expenditures. Letter from Cornelius J. Coleman, IRS Regional
Commissioner, to The Church at Pierce Creek (Nov. 20, 1992), reprinted in
App. at Tab 5, Ex. F.
The Church denied that it had engaged in any prohibited political activity and
declined to provide the IRS with certain information the Service had
requested. On February 11, 1993, the IRS informed the Church that it was
beginning a church tax examination. Following two unproductive meetings
between the parties, the IRS revoked the Church's 501(c)(3) tax-exempt
status on January 19, 1995, citing the newspaper advertisements as prohibited
intervention in a political campaign.
The Church and Pastor Little (collectively, "Church") commenced this lawsuit
soon thereafter. This had the effect of suspending the revocation of the
Church's tax exemption until the district court entered its judgment in this
case. See 26 U.S.C. 7428(c). The Church challenged the revocation of its
tax-exempt status, alleging that the IRS had no authority to revoke its tax
exemption, that the revocation violated its right to free speech
and to freely exercise its religion under the First Amendment and the
Religious Freedom Restoration Act of 1993, 42 U.S.C. 2000bb (1994)
("RFRA"), and that the IRS engaged in selective prosecution in violation of the
Equal Protection Clause of the Fifth Amendment. After allowing discovery
on the Church's selective prosecution claim, Branch Ministries, Inc. v.
Richardson, 970 F. Supp. 11 (D.D.C. 1997), the district court granted summary
judgment in favor of the IRS. Branch Ministries, Inc. v. Rossotti, 40 F. Supp.
2d 15 (D.D.C. 1999).
The Church filed a timely appeal, and we have jurisdiction pursuant to 28
U.S.C. 1291. We review summary judgment decisions de novo, see Everett v.
United States, 332 U.S. App. D.C. 458, 158 F.3d 1364, 1367 (D.C. Cir. 1998),
cert. denied, 526 U.S. 1132, 143 L. Ed. 2d 1010, 119 S. Ct. 1807 (1999), and
will affirm only if there is no genuine issue as to any material fact and the
moving party is entitled to judgment as a matter of law. Fed. R. Civ. P. 56(c).
II. ANALYSIS . . . .
A. The Statutory Authority of the IRS . . . .

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Section 501(a) states that "an organization described in subsection (c) ... shall
be exempt from taxation . . . ." Id. 501(a). Those described in subsection (c)
include corporations . . . organized and operated exclusively for religious ...
purposes . . . which do not participate in, or intervene in (including the
publishing or distributing of statements), any political campaign on behalf of
(or in opposition to) any candidate for public office. Id. 501(c)(3). Similarly,
170(c) allows taxpayers to deduct from their taxable income donations made
to a corporation organized and operated exclusively for religious
purposes . . . which is not disqualified for tax exemption under 501(c)(3) by
reason of attempting to . . . intervene in (including the publishing or
distributing of statements), any political campaign on behalf of (or in
opposition to) any candidate for public office. Id. 170(c)(2)(B), (D).
The Code, in short, specifically states that organizations that fail to
comply with the restrictions set forth in 501(c) are not qualified to
receive the tax exemption that it provides. Having satisfied ourselves that the
IRS had the statutory authority to revoke the Church's tax-exempt status, we
now turn to the free exercise challenges.
B. First Amendment Claims and the RFRA
The Church claims that the revocation of its exemption violated its right to
freely exercise its religion under both the First Amendment and the RFRA. To
sustain its claim under either the Constitution or the statute, the Church must
first establish that its free exercise right has been substantially burdened. See
Jimmy Swaggart Ministries v. Board of Equalization, 493 U.S. 378, 384-85, 107
L. Ed. 2d 796, 110 S. Ct. 688 (1990) ("Our cases have established that the free
exercise inquiry asks whether government has placed a substantial burden on
the observation of a central religious belief or practice and, if so, whether a
compelling governmental interest justifies the burden.") (internal quotation
marks and brackets omitted); 42 U.S.C. 2000bb-1(a), (b) ("Government shall
not substantially burden a person's exercise of religion" in the absence of a
compelling government interest that is furthered by the least restrictive
means.). We conclude that the Church has failed to meet this test.
The Church asserts, first, that a revocation would threaten its existence.
See Affidavit of Dan Little dated July 31, 1995 at P 22, reprinted in App. at
Tab 8 ("The Church at Pierce Creek will have to close due to the revocation of
its tax exempt status, and the inability of congregants to deduct their
contributions from their taxes."). The Church maintains that a loss of
its tax-exempt status will not only make its members reluctant to contribute
the funds essential to its survival, but may obligate the Church itself to pay
taxes.
The Church appears to assume that the withdrawal of a conditional privilege
for failure to meet the condition is in itself an unconstitutional burden on its

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free exercise right. This is true, however, only if the receipt of the privilege
(in this case the tax exemption) is conditioned upon conduct proscribed by a
religious faith, or . . . denied . . . because of conduct mandated by religious
belief, thereby putting substantial pressure on an adherent to modify his
behavior and to violate his beliefs.
Jimmy Swaggart Ministries, 493 U.S. at 391-92 (internal quotation marks and
citation omitted). Although its advertisements reflected its religious
convictions on certain questions of morality, the Church does not maintain
that a withdrawal from electoral politics would violate its beliefs. The sole
effect of the loss of the tax exemption will be to decrease the amount of money
available to the Church for its religious practices. The Supreme Court has
declared, however, that such a burden "is not constitutionally significant." Id.
at 391; see also Hernandez v. Commissioner, 490 U.S. 680, 700, 104 L. Ed. 2d
766, 109 S. Ct. 2136 (1989) (the "contention that an incrementally larger tax
burden interferes with religious activities . . . knows no limitation").
In actual fact, even this burden is overstated. Because of the unique
treatment churches receive under the Internal Revenue Code, the impact of
the revocation is likely to be more symbolic than substantial. As the IRS
confirmed at oral argument, if the Church does not intervene in future
political campaigns, it may hold itself out as a 501(c)(3) organization and
receive all the benefits of that status. All that will have been lost, in that
event, is the advance assurance of deductibility in the event a donor should be
audited. See 26 U.S.C. 508(c)(1)(A); Rev. Proc. 82-39 2.03. Contributions
will remain tax deductible as long as donors are able to establish that the
Church meets the requirements of 501(c)(3).
Nor does the revocation necessarily make the Church liable for the payment
of taxes. As the IRS explicitly represented in its brief and reiterated at
oral argument, the revocation of the exemption does not convert bona fide
donations into income taxable to the Church. See 26 U.S.C. 102 ("Gross
income does not include the value of property acquired by gift . . . .").
Furthermore, we know of no authority, and counsel provided none, to
prevent the Church from reapplying for a prospective determination of its
tax-exempt status and regaining the advance assurance of deductibility-provided, of course, that it renounces future involvement in political
campaigns.
We also reject the Church's argument that it is substantially burdened
because it has no alternate means by which to communicate its sentiments
about candidates for public office. In Regan v. Taxation With Representation,
461 U.S. 540, 552-53, 76 L. Ed. 2d 129, 103 S. Ct. 1997 (1983) (Blackmun, J.,
concurring), three members of the Supreme Court stated that the availability
of such an alternate means of communication is essential to the
constitutionality of 501(c)(3)'s restrictions on lobbying. The Court

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subsequently confirmed that this was an accurate description of its holding.


See FCC v. League of Women Voters, 468 U.S. 364, 400, 82 L. Ed. 2d 278, 104 S.
Ct. 3106 (1984). In Regan, the concurring justices noted that "TWR may use
its present 501(c)(3) organization for its nonlobbying activities and may
create a 501(c)(4) affiliate to pursue its charitable goals through lobbying."
461 U.S. at 552.
The Church has such an avenue available to it. As was the case with TWR,
the Church may form a related organization under 501(c)(4) of the Code.
See 26 U.S.C. 501(c)(4) (tax exemption for "civic leagues or organizations not
organized for profit but operated exclusively for the promotion of social
welfare"). Such organizations are exempt from taxation; but unlike their
501(c)(3) counterparts, contributions to them are not deductible. See 26 U.S.C.
170(c); see also Regan, 461 U.S. at 543, 552-53. Although a 501(c)(4)
organization is also subject to the ban on intervening in political campaigns,
see 26 C.F.R. 1.501(c)(4)-1(a)(2)(ii) (1999), it may form a political action
committee ("PAC") that would be free to participate in political campaigns.
Id. .527-6(f), (g) ("An organization described in 501(c) that is exempt
from taxation under 501(a) may, [if it is not a 501(c)(3) organization],
establish and maintain such a separate segregated fund to receive
contributions and make expenditures in a political campaign.").
At oral argument, counsel for the Church doggedly maintained that there can
be no "Church at Pierce Creek PAC." True, it may not itself create a PAC; but
as we have pointed out, the Church can initiate a series of steps that will
provide an alternate means of political communication that will satisfy the
standards set by the concurring justices in Regan. Should the Church proceed
to do so, however, it must understand that the related 501(c)(4) organization
must be separately incorporated; and it must maintain records that will
demonstrate that tax-deductible contributions to the Church have not been
used to support the political activities conducted by the 501(c)(4)
organization's political action arm. See 26 U.S.C. 527(f)(3); 26 C.F.R. 1.5276(e), (f).
That the Church cannot use its tax-free dollars to fund such a PAC
unquestionably passes constitutional muster. The Supreme Court has
consistently held that, absent invidious discrimination, "Congress has not
violated [an organization's] First Amendment rights by declining to subsidize
its First Amendment activities." Regan, 461 U.S. at 548; see also Cammarano
v. United States, 358 U.S. 498, 513, 3 L. Ed. 2d 462, 79 S. Ct. 524 (1959)
("Petitioners are not being denied a tax deduction because they engage in
constitutionally protected activities, but are simply being required to pay for
those activities entirely out of their own pockets, as everyone else engaging in
similar activities is required to do under the provisions of the Internal
Revenue Code.").

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Because the Church has failed to demonstrate that its free exercise rights
have been substantially burdened, we do not reach its arguments that
501(c)(3) does not serve a compelling government interest or, if it is indeed
compelling, that revocation of its tax exemption was not the least restrictive
means of furthering that interest.
Nor does the Church succeed in its claim that the IRS has violated its First
Amendment free speech rights by engaging in viewpoint discrimination.
The restrictions imposed by 501(c)(3) are viewpoint neutral; they
prohibit intervention in favor of all candidates for public office by
all tax-exempt organizations, regardless of candidate, party, or viewpoint. Cf.
Regan, 461 U.S. at 550-51 (upholding denial of tax deduction for lobbying
activities, in spite of allowance of such deduction for veteran's groups).
C. Selective Prosecution (Fifth Amendment)
The Church alleges that the IRS violated the Equal Protection Clause of the
Fifth Amendment by engaging in selective prosecution. In support of its
claim, the Church has submitted several hundred pages of newspaper
excerpts reporting political campaign activities in, or by the pastors of, other
churches that have retained their tax-exempt status. These include reports of
explicit endorsements of Democratic candidates by clergymen as well as
many instances in which favored candidates have been invited to address
congregations from the pulpit. The Church complains that despite this
widespread and widely reported involvement by other churches in political
campaigns, it is the only one to have ever had its tax-exempt status revoked
for engaging in political activity. It attributes this alleged discrimination to
the Service's political bias.
To establish selective prosecution, the Church must "prove that (1)
[it] was singled out for prosecution from among others similarly situated and
(2) that [the] prosecution was improperly motivated, i.e., based on race,
religion or another arbitrary classification." United States v. Washington, 227
U.S. App. D.C. 184, 705 F.2d 489, 494 (D.C. Cir. 1983). This burden is a
demanding one because "in the absence of clear evidence to the contrary,
courts presume that [government prosecutors] have properly discharged their
official duties." United States v. Armstrong, 517 U.S. 456, 464, 134 L. Ed. 2d
687, 116 S. Ct. 1480 (1996) (internal quotation marks and citation omitted).
At oral argument, counsel for the IRS conceded that if some of the
church-sponsored political activities cited by the Church were accurately
reported, they were in violation of 501(c)(3) and could have resulted in
the revocation of those churches' tax-exempt status. But even if the Service
could have revoked their tax exemptions, the Church has failed to establish
selective prosecution because it has failed to demonstrate that it was similarly
situated to any of those other churches. None of the reported activities

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involved the placement of advertisements in newspapers with nationwide


circulations opposing a candidate and soliciting tax deductible contributions
to defray their cost. As we have stated, -if . . . there was no one to whom defendant could be compared in order
to resolve the question of [prosecutorial] selection, then it follows that
defendant has failed to make out one of the elements of its case.
Discrimination cannot exist in a vacuum; it can be found only in the
unequal treatment of people in similar circumstances.
Attorney Gen. v. Irish People, Inc., 221 U.S. App. D.C. 406, 684 F.2d 928, 946
(D.C. Cir. 1982); see also United States v. Hastings, 126 F.3d 310, 315 (4th
Cir. 1997) ("Defendants are similarly situated when their circumstances
present no distinguishable legitimate prosecutorial factors that might justify
making different prosecutorial decisions with respect to them.") (internal
quotation marks and citation omitted).
Because the Church has failed to establish that it was singled out for
prosecution from among others who were similarly situated, we need not
examine whether the IRS was improperly motivated in undertaking this
prosecution.
III. CONCLUSION
For the foregoing reasons, we find that the revocation of the Church's
tax-exempt status neither violated the Constitution nor exceeded the IRS's
statutory authority. The judgment of the district court is therefore
Affirmed.
5.2.6

Electioneering and Lobbying Notes and Questions

The restriction on campaigning and electoral activities entered the


Code in 1954, when the 1939 Code was re-codified. Although there
is no sure way to tell, because there is no legislative history with
regard to the addition to what it now section 501(c)(3), information
from the Congressional Record makes clear that then-Senator
Lyndon Johnson offered the amendment out of concern that funds
provided by a charitable foundation were being used to finance an
opponent in a primary election. See Bruce R. Hopkins, The Law of
Tax-Exempt Organizations, (John Wiley & Sons, 6th ed., 327).
Section 4945 of the Internal Revenue Code makes it totally
impermissible for a US private foundation to engage in any of five
categories or prescribed political activities. Why would such a
complete prohibition be thought necessary?

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Although U.S. tax laws prohibit U.S. 501(c)(3) public benefit


organizations (public charities and private foundations) from
engaging in lobbying activities, these organizations are allowed to
pay substantial membership dues to trade associations formed
under 501(c)(6), which are permitted to lobby actively on behalf of
their members. For example, Independent Sector represents many
public charities and the Council on Foundations represents many
private foundations. Does it make sense to permit (c)(3)
organizations to do indirectly what they cannot do directly?

5.2.7

Charity Commission Publication RR12 - The Promotion of Human Rights


(April 2003)

Summary
1. The Charity Commissioners have concluded that the promotion of human
rights is a charitable purpose. This guidance explains the basis of that
conclusion and looks at the various ways in which a charity can promote
human rights. In looking at this question, the Commissioners have also
concluded that the rule that organisations set up for political purposes cannot
be charitable is consistent with the Human Rights Act 1998. . . .
3. The sorts of activities that are encompassed within the charitable object of
promoting human rights include:
promoting the enforcement of human rights legislation in individual cases;
promoting the sound administration of human rights law;
the relief of need among the victims of human rights abuse;
education and research;
moral improvement and raising awareness of human rights and human
rights issues;
cultivating a public sentiment in favour of human rights. . . .
The promotion of human rights as a charitable purpose
7. There is a perception in some quarters that organisations set up with
purposes involving the promotion of human rights are likely to be denied
recognition as charities on the grounds that their purposes are 'political'.(1)
However, the incorporation into domestic law of many of the rights and
freedoms guaranteed under the European Convention for the Protection of

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Human Rights and Fundamental Freedoms(2) means that promoting human


rights in the United Kingdom is no longer a political purpose. Or, rather, that
promoting respect for the Convention rights in the United Kingdom is not a
political purpose. That is because that purpose no longer necessarily involves
promoting a change in the law or in government policy(3). In fact, strictly
speaking, promoting respect for the Convention rights ceased to be a political
purpose in 1966, when the United Kingdom accepted the right of individual
petition to the European Commission of Human Rights and recognised the
compulsory jurisdiction of the European Court of Human Rights. From that
date, no further change of law or policy was necessary to enable individual
citizens to enforce their Convention rights.(4)
8. Taking the argument one stage further, we have decided that to promote
observance of, and respect for, the Convention rights in the United Kingdom
is charitable by analogy with trusts for the enforcement of the law. The public
benefit requirement is satisfied by virtue of the fact that these rights have been
incorporated into domestic law and hence must be assumed to be for the
public benefit. . . .
Activities encompassed by the promotion of human rights
Promoting human rights at home and abroad
20. The incorporation of human rights into United Kingdom law entails that
promoting human rights in the United Kingdom is no longer a political purpose (as
that term is understood in charity law). It follows that promoting human rights in
foreign countries where those rights form part of domestic law should also no longer
be regarded as a political purpose. . . .
22. Where human rights are enshrined in the domestic law of a country, the
following activities are likely to be charitable:
(a) securing the enforcement of human rights law;
(b) promoting the sound administration of human rights law.
23. Whether or not human rights are enshrined in domestic law, it will be charitable:
(a) to relieve victims of human rights abuse who are in financial or physical
need;
(b) to raise awareness about human rights;
(c) to advance education about human rights, whether by teaching or by
conducting or commissioning research (and publishing the results of that
research);
d) to cultivate a public sentiment in favour of human rights; and

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(e) to engage in political activities which are ancillary and incidental to a good
charitable purpose. . . .

Political activities
40. There is an important distinction in charity law between political purposes
and political activities undertaken in furtherance of a charitable purpose. To
promote human rights by seeking a change in the law, or a shift in
government policy, or a reversal of a government decision is a political, rather
than a charitable, purpose. In the Amnesty case,(44) political purposes were
said to include:
(a) procuring
changes in the law of this country;(45)
changes in the law of a foreign country;
a reversal of government policy or of particular decisions of
government authorities in this country;
a reversal of government policy or of particular decisions of
government authorities in a foreign country;
(b) furthering the interests of a particular political party.(46)
41. It was said in the Amnesty case that the problem with political purposes is
that, first, the Court will ordinarily not be in a position, as a matter of
evidence, to judge whether the proposed change will or will not be for the
public benefit. Second, even if the evidence is sufficient to enable the court to
form the opinion that a change in the law is desirable, it must still decide the
case on the principle that the law is right as it stands. To do otherwise would
usurp the functions of the legislature.(47) In Annex A to this paper we set out
our reasons for thinking that the rule denying charitable status to
organisations with political purposes is consistent with the Convention rights
set out in the Human Rights Act. In Annex B, we explain why we think that
purposes with an overtly political content are bound to fall foul of that rule.
42. If a purpose necessarily involves a change in the law or government policy
of another country, that purpose is political and not charitable. . . .
43. By contrast, if a body's purposes are exclusively charitable, the mere fact
that the trustees are given incidental powers to employ political means does
not jeopardise its claim to charitable status.(48) What is important for
charitable status is that political means should not be the dominant method
by which the organisation will pursue its apparently charitable objects.(49)

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44. Although charities are able to engage in political activities in furtherance


of their charitable purposes, there are constraints on the sort of political
activity that they are able to undertake. The principles are explained in our
publications CC9(50) and CC9(a).(51) Essentially, the constraints are that:
charities cannot engage in political activity unrelated to their charitable
objects;(52)
there must be a reasonable expectation that the activities will further the
purposes of the charity to an extent justified by the resources
committed;
the activities must not be allowed to dominate the activities which are
carried out by the charity in order to further its objects directly;
the activities must be appropriate to a charity(53) and, in particular, the
views expressed must be based on a well-founded and reasoned case,
expressed in a responsible way.
45. In practice, these constraints are not especially onerous.

5.3
5.3.1

Economic Activities

Discussion Examples Regarding Economic Activities

Some countries prohibit NPOs or certain kinds of NPOs from engaging in economic
activities, especially if they do so in a commercialmanner. That means that they
must conduct such activities, if at all, through a subsidiary. The following include
some examples:
Example 1
An association shall be prohibited from engaging in commercial activities.
Article 10, Law on Associations, Lithuania, 1996
Example 2
Citizen associations and foundations may not perform economic activities.

Citizen associations and foundations may only found limited liability


companies and shareholding companies, for performing their goals, interests
and activities and for financing their functions determined by the statute.

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Article 7, Law on Citizen Associations and Foundations, Macedonia, 1998


Example 3

An association or foundation may engage in economic activities which are


directly related to the realization of their major statutory goals and activities
(related business activities) without obligation to establish a separate legal
body.
An association or foundation may engage in business activities which are not
directly related to realization of the major statutory goals and activities
(unrelated business activities) provided it establishes a separate legal entity
for conducting such activities.
Notwithstanding the previous paragraph, an association or foundation may
engage in unrelated economic activities without the obligation to establish a
separate legal entity if the annual revenue generated from such activities does
not exceed one-third of the associations annual budget or 10.000 Km,
whichever amount is higher.
Article 3 of the Final Draft of Law on Associations and Foundations of Republic of Srpska,
2000.

5.3.2

UK Joint Committee on the Draft Charities Bill First Report

9 Trading
Current position
333. There are, currently, three main types of trading by charities:
a) Primary purpose trading - i.e., trading in the course of actually carrying out the
primary purpose of the charity: for example, charging for admission to an exhibition
by a charitable art gallery;
b) Ancillary trading - i.e., trading linked to and carried out at the same time as
carrying out the primary purpose of a charity: for example, sales from a bar run by a
theatre charity for members of the audience;
c) Non-primary purpose trading - i.e., trading with the sole or main aim of raising
funds: for example, some charity shops or charity mail order catalogues.
334. In regard to (i) primary purpose trading and (ii) ancillary trading, charities both

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have the power to trade and are exempt from income tax on any profits from trading.
335. In regard to (iii) non-primary purpose trading, the situation is more complex. If
the income from this type of trading is small or incidental - i.e., 5,000 or less than
25% of the charity's total income (up to a maximum of 50,000) - then the charity
both has the power to trade and is exempt from income tax on trading profits.
However, a charity can get around this restriction by setting up a separate trading
company to carry on trading; the trading company can then transfer its profits back to
the charity under the Gift Aid scheme, so that no tax is paid on them. There are some
disadvantages to doing this: mainly that it results in additional paperwork.
Draft Bill changes
336. The draft Bill leaves the current position unchanged. The Strategy Unit,
however, recommended that charity law should be changed:
"to allow charities to undertake all trading within the charity, without the need for a
trading company. The power to undertake trade would be subject to a specific
statutory duty of care"
337. The Government rejected this recommendation. They said:
"Conducting trading activities within the tax exempt structure of charities would
offend the principle of a level playing field with private sector businesses". . . .
In favour of allowing charities to trade within the charity
339. Most of the evidence we received on this question supported reinstating the
Strategy Unit recommendation to allow charities to trade within the charity, subject to
a duty of care. The major advantage of allowing charities to trade within the charity,
we were told, would be to relieve them of the significant bureaucratic burden of
having to set up a trading company to trade. ACEVO told us:
"The current necessity to establish trading subsidiaries places a considerable burden
on charities [It] involves considerable costs, including professional advice and fees,
additional financial transaction, compliance costs and staff transferrals. These are of
particular significance to smaller charities.
"Managing trading subsidiaries demands double accounting procedures with respect
to VAT, management accounts, and tax returns. This makes allocating costs and
apportioning charity reliefs complex and problematic.
"To avoid tax charges, subsidiaries must donate their entire taxable profit to the
parent charity, making it difficult and expensive to build up working capital."
340. We received evidence from the National Coalmining Museum (a charity)
illustrating the problem. The Museum runs conferences and a shop with a turnover
exceeding 50,000. It therefore has established a separate trading company to run the
shop and the conference facilities. The same staff must be apportioned between the

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charity and the trading company. The Museum buys 20 loaves of bread but has to
keep two order books to record them. A record must be kept if a sandwich is
exchanged between the trading company and the charity. Running the trading
company costs the charity about 30,000 extra in staff time.
341. The Charity Commission, in written evidence, told us they too supported the
recommendation to extend the right of charities to trade . . . :
Against allowing charities to trade within charity
343. We sought evidence from the Federation of Small Businesses about whether the
proposals in the draft Bill would lead to unfair competition by charities against small
businesses. Mr Alambritis told us of:
"the impact on the smaller businesses next door, especially where there was a
common element as to what they sold. [Charities running] coffee bars are the classic
example, greetings cards is another one, crockery another. We have no objection to
the charitable status, to the fund raising; the only objection we have is to the business
rate tax break. That is the one element that small businesses are concerned about.
They would have no objection to the charity shop being next door provided the tax
system was relevant to all because they do see them as fairly aggressive commercial
institutions."
344. We also received a submission from the Charity Advisory Trust, who were
opposed to extending the power of charities to trade. They said:
"The Charities Advisory Trust's 'Charity Trading: a statistical analysis' shows that
trading income rarely produces significant income for charities. There is evidence that
there have been quite substantial losses through trading. Figures for 1995 - 2000
(incl.) show trading income as a proportion of income for the top 200 charities, by
income, was on average less than one quarter of a%. 10% of charities made losses
"The device of the wholly owned trading company has much merit. It isolates the
trading activity so it is easier to see if it is profitable or loss-making. Investment
(subsidy) in trading is easier to identify
"It would be regressive to return to this situation. Our experience in analysing charity
trading accounts is that when charities trade without using a separate trading
company, costs are not fully apportioned to the trading activity, so that the profit
levels are artificially enhanced the arms-length trading company ha[s] given charity
funds greater protection".[367]
345. The Minister also told us that she did not support the proposal to extend
charitable trading:
"Because the recommendation was to allow charities to not just trade to their
charitable purpose but to create a completely different kind of trading. I envisage the
risk that you could have within a charity someone who created some way of fundraising for the charity, the small bar in the village hall, who then started running a

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chain of pubs, and that would be quite possible, and that could raise money which
went to charities. They could benefit from tax relief in terms of non domestic rates,
they could benefit from all the other tax reliefs we do not think that you could be
able to form an enormous company with all the tax benefits that would have which
could compete in the high street, which had charitable character. If you want your
profits to give to charity you could covenant them to charity and get the tax breaks in
that way and that would be the right way to do it". . . .
Rebuttal
347. In response to the Government's objection that tax-exempt trade would lead to
unfair competition with private business, CFDG and others told us that allowing
charities to trade within the charity would give them no tax advantage that they did
not already enjoy.
"the reality is that charities that want to trade already do so through a trading
company and avoid tax by transferring profits to the charity. It is unlikely that the
competition to small businesses would increase if charities were allowed to trade
through the charity".
348. CFDG and ACEVO also sent us evidence addressing a number of other
objections commonly made to further powers of trading by charities. These objections
were:
a) That trading might lead to increased risk to charity assets and exposure of trustees
of unincorporated charities to greater personal liability. CFDG argued that, if charities
followed the duty of care in the Strategy Unit recommendation, then risky forms of
trading would be carried out through a trading company and charity assets would be
protected.
b) That boards of charities lack trustees with the commercial acumen required for
trading. CFDG pointed out that this objection would apply to trade as currently
carried on though a trading company, since the same people would be running the
trading company.
c) That some charities might develop trading to such an extent that it became their
dominant activity, thereby bringing their charitable status into question and possibly
damaging public confidence in charities. ACEVO argued that there was nothing to
stop this happening currently as a result of trading through a trading company. . . .
Conclusion
349. This issue is the only major point on which the draft Bill does not follow the
Strategy Unit's proposals. Whatever recommendation this Committee makes, it is
likely to be a key matter for debate in both Houses when the real Bill is brought
forward. . . .
351. . . .[ L]ike the Minister, we are conscious that changing the rules on trading
within the charity might encourage charities to increase their trading activity

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significantly. This would carry a number of risks. Firstly there could be loss of focus
on the charitable activity as unrelated trading activities increased. Secondly, where
that trade proved unsuccessful or even disastrous, with consequent loss of charitable
funds donated by the public (which would not be insulated against those losses), there
could be serious public disquiet. Another risk is that to justify increased unrelated
trade, the boards of charities could become unbalanced. There would also be the risk
that the more trading charities carried out, the greater the number of trading ventures
that would fail or be subject to scandal, which would also damage the charity brand.
The Charity Commission might wish to strengthen or issue guidance on procedures
for charities engaged on non-primary purpose commercial activity to disclose fully
what proportion of their income and expenditure relates to the costs of the
commercial activity.
352. We consider, however, that the other evidence we have received suggests that
there would be clear advantages to allowing charities to trade more extensively within
the charity - in particular, the savings smaller charities will make through avoiding
the administrative costs of having to run a trading company. We do not see that the
Government's stated objection to further powers of charitable trading - unfair tax
advantages to charities compared to private business - has been borne out.
353. On balance, we consider that further powers to trade are desirable provided there
remains some limit to them. That limit should be higher than the existing limit of
50,000 a year.
354. The Committee recommends that the draft Bill should be amended to allow
charities to trade within the charity and enjoy tax exemption on trading income
up to the point where income from trading equals 25% (or 5,000 if the greater)
of the charity's total turnover, but this should be subject to an overall limit
higher than the current 50,000 and the Government should consult on the level
at which that overall limit should be set.

5.3.3

Discussion Questions

After reading these materials, do you think that absolute prohibitions on


commercial activity of NPOs make sense?
If they do not, what kinds of restrictions or limitations would you place on
economic activities of NPOs?

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Chapter 6 REPORTING AND OVERSIGHT


6.1

6.2

NPO Accounting

215

6.1.1 SORP on accounting from Charity Commission

217

Audits of NPOs

218

6.2.1

Audits of NPOs in Israel

219

6.2.2

Discussion: Making Reports Available Under the Canada


Corporations Act

6.3

Obligation to Report to the Donor: China

221
223

6.1 NPO Accounting


The ways in which NPO financial records are kept, the system of accounting used,
and so forth are important both for the internal governance of the NPO and for
external supervision of it by government agencies. As a result, the area of NPO
accounting has received considerable attention in recent years. Nonetheless, no
consensus has developed as to what the correct approach should be.
The laws of most countries specify that NPO books and records must be kept
according to generally accepted accounting principles or GAAP. Just what this
means varies from country to country, as there are no internationally accepted
principles that generally apply. Many countries that have considered the problem
have adopted special accounting standards for NPOs. The reason for this is clear
the normal accounting rules that have been adopted are for for-profit corporations,
and many of those rules are difficult to apply in the not-for-profit context. Hence,
special rules, such as rules for long-term grants or pass-through contributions, are
required.26
a. Switzerland. In Switzerland, the Swiss Foundation for Accounting and Reporting
Recommendations (Fachkommission fuer Emfehlungen zur Rechnungslegung or
FER in German) has been developing recommendations for accounting standards for
NPOs in Switzerland since 1997. In recent months the FER has posted the proposed
standards online (in both French and German), proposed topics for discussion, and
held public hearings in Geneva and Lucerne. The proposal on NPOs can be accessed
at www.fer.ch, and the site also includes information (although not the proposed
standards themselves) in Italian and English.

The standards on NPOs are the 21st of the standards that have been
developed, and thus are called FER 21 in German. A working group to
26 For a very detailed statement regarding accounting for PBOs, see Charity Commission,
Accounting and Reporting for Charities: Standard of Recommended Practice (SORP) (2000) at
http://www.charity-commission.gov.uk/publications/pdfs/sorptext.pdf.

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develop FER 21 was established, and it included input from a variety of


experts and practitioners. The issues raised include the following:
how to differentiate between for-profit and not-for-profit
organizations with respect to the ways in which the accounting
standards should apply taking into account the fact that NPOs
are independent organizations, with public benefit purposes,
and that the financing of such organizations comes from gifts
and grants (thus the NPOs dealt with by FER 21 do not include
most professional associations, etc.);
how to differentiate between large and small organizations, with
the latter not being required to use accrual accounting the
proposed cut-off is 2 million Swiss franks;
determining the role of trial balances for NPOs.
A full list of the questions for discussion is available in French and German on the
ICCSL website.
b. United States. In the United States there are three major bodies involved in
developing and enforcing standards for nonprofit organization financial accounting:
the Financial Accounting Standards Board (FASB), the American Institute of
Certified Public Accountants (AICPA), and the U.S. Federal Office of Management
and Budget (OMB). The FASB is the primary standards issuing body in the U.S. So
far it has developed general "Statements of Financial Accounting Standards" for
NPOs: No. 116, "Accounting for Contributions Received and Contributions Made,"
and No. 117, "Financial Statements of Not-for-Profit Organizations."
The AICPA publishes the primary guide to GAAP for nonprofit organizations, the
"Not-for-Profit Organizations Audit & Accounting Guide." It also releases its own
standards, called "Statements of Position." The most recent, and controversial, of
these is SOP 98-2, which deals generally with the allocation of costs to fund-raising
activities.
The OMB develops standards and guidelines specifically for NPOs that receive
federal grants. Even if an organization do not currently receive such revenue, there
are many that would like to be able to do so at some point. Therefore, some
familiarity with the OMB guidelines can be useful, and that includes adopting the
accrual method of accounting. This method is also required for charities in England,
under the SORP on Accounting Standards for charities cited at note 6.

India. In India the private organization AccountAid India has not itself
promulgated any accounting standards, but it has developed a website that
provides considerable information as well as a listserve that provides users
with timely updates on accounting issues for Indian NPOs. Some of the
issues that are important in other countries are addressed on the site. For
example, one part of the site refers to the accounting standards developed by
the Swedish International Development Agency that are applicable to their
donees/contractors in India. It addresses, among other issues, how an NPO

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should account for revolving credit accounts if the NPO makes micro-credit
loans. See www.accountaid.net.
6.1.1 Charity Commission Standard of Recommended Practice (2005)

Accounting and Reporting by Charities


Statement of Recommended Practice
(Revised 2005)
Introduction
Effective Date of Commencement
1 This Charities Statement of Recommended Practice (SORP) is applicable to all
accounting periods beginning on or after 1 April 2005. Early adoption is encouraged.
The Objectives
2 The objectives of publishing these recommendations include:
(a) improving the quality of financial reporting by charities
(b) enhancing the relevance, comparability and understandability of information
presented in accounts;
(c) providing clarification, explanation and interpretation of accounting standards and
of their
application in the charities sector and to sector specific transactions; and thereby
(d) assisting those who are responsible for the preparation of the Trustees Annual
Report and Accounts
Scope
3 The accounting recommendations of this SORP apply to all charities in the United
Kingdom that prepare accounts on the accruals basis to give a true and fair view of a
charitys financial activities and financial position regardless of their size, constitution
or complexity.
4 Each accounting recommendation should be considered in the context of what is
material (Glossary GL 42) to the particular charity.
5 Where a separate SORP exists for a particular class of charities (eg SORPs
applicable to Registered Social Landlords and to Further and Higher Education
institutions), the charity trustees of charities in that class should adhere to that SORP
and any reporting requirements placed on such charities by charity law.
6 The accounting recommendations of this SORP do not apply to charities preparing
cash-based receipts and payments accounts, though such charities are encouraged
to adopt the activity approach provided in this SORP (see paragraph 93) to the
analysis of their receipts and payments (see appendix 5).
7 The SORP recognises that particular accounting disclosures and the activity basis
for the analysis of income and cost within the SoFA may not be relevant information
for the users of accruals accounts prepared by smaller charities. The concessions for
smaller charities are summarised in Appendix 5.
8 Whilst charities in the Republic of Ireland do not fall within the scope of this SORP
they may choose to comply with its recommendations. If a charity based in the
Republic of Ireland chooses to adopt this SORPs recommendations they are
encouraged to disclose that fact.
9 Charity accounts are accompanied and complemented by information that does not
form part of the financial statements. Within the United Kingdom such accompanying
information is primarily provided by charities through a Trustees Annual Report. As is
explained in paragraph 24, the legal requirements for an annual report and its
contents differ according to the charity reporting frameworks that apply within the
separate legal jurisdictions of the UK. The SORP recognises that such
accompanying information is of high importance for users of charity accounts in

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understanding the activities and achievements of a charity as a whole and therefore


provides best practice recommendations for the content of such reports.
In England and Wales these best practice recommendations are underpinned by law,
in Scotland and Northern Ireland whilst the recommendations are considered to be
consistent with the law they should be regarded as voluntary best practice
recommendations supplementing legal requirements.
Purpose of Trustees Annual Report and Accounts
10 The purpose of preparing a Trustees Annual Report and Accounts is to discharge
the charity trustees duty of public accountability and stewardship. This SORP sets
out recommended accounting practice for this purpose but charity trustees should
consider providing such additional information as is needed to give donors,
beneficiaries and the general public a greater insight into the charitys activities and
achievements. Accounts prepared on the basis of this SORP are not a substitute for
management accounts required to run the charity on a daily basis, though both will
draw on the same primary financial records.
11 Charities are highly disparate in character, so any comparison of the financial
information they produce should be undertaken with care, even if the charities
involved seem to be similar. Essentially the accounts should include all the money
and other assets entrusted to the charity for whatever purpose, and show how they
have been expended during the year and how the balance of each fund is deployed
at the end of the accounting period.
12 The balance sheet is not necessarily a measure of the wealth of the charity but
does show the resources available, what form those resources take and how they
are held in the different funds, and provides information about the liquidity of assets
and general solvency.
13 The Statement of Financial Activities provides information as to how a charity
receives and applies its resources to meet its objectives. It is not intended to
demonstrate a charitys efficiency.
14 Accounts focus on financial performance and in isolation do not give the reader a
perspective of what has been achieved from the activities undertaken and the
resources expended in their delivery. The SORP recognises these limitations and
places significant weight on the Trustees Annual Report to provide a necessary link
between objectives, strategies, activities and the achievements that flow from them.
Without this information the value of the accounts to the reader may be significantly
diminished.
15 The Trustees Annual Report and Accounts should therefore:
a) provide timely and regular information on the charity and its funds;
b) enable the reader to understand the charitys objectives, structure, activities and
achievements;
and
c) enable the reader to gain a full and proper appreciation of the charitys financial
transactions during the year and of the position of its funds at the end of the year.

6.2

Financial Audits.

General rules. Any NPO, whether or not it is a PBO, with substantial


activities or assets should be required to have its financial reports audited by
an independent certified or chartered accountant. What constitutes a level of
activities or assets sufficient to trigger a requirement for an independent

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accountants audit may or may not be specified in the law. As a matter of


good practice, members of the governing board should realize that most of
them do not have the time or the competence to analyze the financial records
of an NPO that has grown to any significant size. An independent audit
should be commissioned as soon as the organization can afford the services of
an outside auditor to perform this task, both for the benefit of the board and
those dealing with the organization. Further, NPOs quickly find that
responsible funders require independent financial audits of the books of an
organization before they will make grants to it. Finally, when an NPO
receives significant tax preferences or government contracts, it is typically
required to have audited financial statements. In no case, of course, should
the reporting requirements for NPOs be more onerous than comparable
reporting requirements for private companies.
6.2.1 Audits of NPOs in Israel
The Registrar of Non-Profit Organizations in Israel provides the
following general instructions and standards for (and attaching the very
complex forms an auditor is required to submit).
The State of Israel
Ministry of the Interior
Registrar of Non-Profit Organizations

Instructions for Auditors of Non-Profit Organizations


September 7, 1999
Function of the Auditor:

The task of the auditor is to verify the fitting nature of activities run by non-profit
organizations and the suitability of persons running such organizations. These issues
should be decided in accordance with the following principles:
Activities do not infringe upon existing laws, particularly the Law of Non-Profit
Organizations.
Proper management, fiscal responsibility, fairness and honesty.
Activities must be directed towards realizing the goals of the organization.

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The auditor will submit a report at least once a year but preferably once a quarter.
The report should be written accurately and clearly and should be divided into three
sections:
Section I General information on the organization and its sphere of activities and
how it works to achieve its goals.
Section II - Description and analysis of the organizations current state of affairs and
a presentation of conclusions.
In this section, results of the audit are presented according to the following topics:
Salary levels of employees, in particular those holding management
positions.
Decision-making process and implementation.
Issuing of contracts and tenders and their implementation.
Management of the organizations assets.
Bookkeeping.
Management of funds.
Financial obligations and liens.
Economic situation of the organization and use of its financial resources.
Correction of defects revealed in the past.
Additional topics related to the organizations activities.
Section III
1. Summary of the findings and recommendations and a report on whether defects
revealed in previous reports were corrected.
2. Recommendation for a General Assembly meeting to approve the financial report
and specification of conditions for approval.
3. The auditors report and financial reports are to be discussed at the General
Assembly meeting and submitted to the Registrars office.
Yours sincerely,
Amiram Bogot, adv.
Registrar of Non-Profit Organizations

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6.2.2

Discussion: Making Reports Available Under the Canada Corporations Act

Background
The Canada Corporations Act does not require
disclosure of corporate financial records. It
requires not-for-profit corporations to keep
detailed accounts and to have their accounts
audited, but it leaves disclosure largely to the
discretion of the organization.
Framework proposal
Require that not-for-profit corporations make
corporate financial statements available to
members, directors, officers, and the Director
A central goal of the proposed Act is to increase
transparency and accountability within the sector.
One of the most effective methods of attaining these
goals is to require that corporations disclose their
financial dealings to their members and to the people
who run the organization. Reflecting this, the
proposal contains provisions compelling
organizations to make their financial records available
to members, directors, officers and the Director.
Under this proposal, directors and officers of the
corporation would have the right to view the financial
statements so that they can properly manage or
supervise the management of the corporation.
Members would be given access to the statements so
that they might be able to monitor the financial
situation of the corporation between annual meetings,
and make sure that the funds of the corporation are
used to pursue the objectives of the corporation.
To prevent requests for copies of the financial
statements from becoming a financial burden on the
corporation, members would be required to pay for
copies requested at any time before the notice of the
annual general meeting is sent out by the corporation.
The fee charged by the corporation would have to be
fair and reflect only the actual cost to the corporation
of copying the documents.
To balance the need for accountability and

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transparency with the need to protect privacy, there


are no requirements that financial information be
made public. As well, the proposal contains a
provision that would allow organizations to apply to
the Director to be exempted from the disclosure
requirements. Exemptions could be granted by the
Director where the Director reasonably believes that
the disclosure of the financial statements could be
detrimental to the corporation or to its members.
These provisions strike an appropriate public-policy
balance between promoting transparency and
accountability within organizations in the sector,
while protecting the need for privacy and the financial
position of the organization. A corporation would be
free to determine whether its own situation warrants
public disclosure of financial information, without
being compelled by law to do so.
Some have argued that organizations in the not-forprofit sector, especially those receiving donations
from the public, should be required to be accountable
to the public. Stakeholders who favour public
disclosure argue that these organizations use public
funds and should therefore be required to make their
finances public, and not simply make this disclosure
to their members, who might have different interests
than the general public.

Option
Allow corporations to decide whether or not to
disclose their financial statements to members
This option would allow each organization to
decide whether or not members should have
regular access to the financial records of the
corporation. Organizations that place an
emphasis on transparency and accountability
would be free to provide open access, perhaps
access beyond that anticipated in the framework.
Other organizations that place a greater emphasis
on the need for privacy would be free to limit
access to the records.
This follows the basic goals of the framework
permissiveness and flexibility. Each organization
would be allowed to make the decision for itself

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about whether or not to allow members to have


access to the corporate financial records. The
decision would be based on the individual needs
of the organization and the interests of that
organization's members.

6.3

Obligation to Report to the Donor: China.

China enforces the recipients obligations to fulfill the donors contractual


requirements in the following manner: (excerpt from the People's Republic of China
Public Welfare Donation Law; People's Republic of China Premier's Order NO. 19;
Passed by the 10th meeting of the Standing Committee of the 9th National People's
Congress on 6/28/99, to take effect on 9/1/99):
Article 18 After reaching an agreement with the donors, the recipients should
make use of the donated property according to the provisions of the
agreement; they may not on their own authority change the use of the
donation. If there is an authentic need to change the use of the donation, the
receiver should solicit the donor's consent.
Article 19 The recipients should, in accordance with the country's relevant
laws, establish adequate procedures for the management of donations
(jianquan caiwu kuaiji zhidu) and a system for the regulated use of donations,
as well as strengthen their management of donations.
Article 20 Each fiscal year, recipients should report to the relevant
government Ministry on the use, management, and supervision of donations.
It is essential that at any time relevant government Ministries can conduct an
audit of the properties.
Customs officials will supervise and manage reductions and exemptions of
import duties on donated goods, in accordance with the law.
The Office of Overseas Chinese Affairs may participate in the management
and supervision of projects sponsored by donations from Overseas Chinese.
Article 21 Donors have the right to inquire to receivers about the use and
management of donations, and to put forward their opinions and
suggestions. The recipients must respond truthfully to the donor's inquiries.
Article 22 The recipients must make public the conditions, use and
management of donations and must accept the supervision of society (jieshou
shehui jiandu).

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Chapter 7 TAXATION
7.1

7.1.1

Donations, Grants, Subsidies, and


Membership Dues

224

7.1.2

Polish Science Foundation Case

225

7.1.3

Tax Exemption for Income from Commercial


Activities (South Africa)

226

Tax Exemption for Income From Commercial


Activities (France)

228

7.1.4

7.2.

7.3

7.4

224

Income Tax Exemptions

7.1.5 Presbyterian and Reformed Publishing Co. v. Commissioner

233

7.1.6 Discussions Questions

235

Income Tax Deductions, Credits and Tax Designation Schemes

235

7.2.1

Income Tax Deductions in the US

235

7.2.2

Credits Under Canadian Law

236

7.2.3

The Hungarian 1% Law.

237

7.2.4

Discussion questions

242

Treatment of NPOs Under Indirect Tax Regimes

242

7.3.1

244

Discussion Questions.

246

Employment tax rules.

7.1.

Income Tax Exemptions

7.1.1 Donations, Grants, Subsidies, and Membership Dues.


Typical sources of revenue for NPOs include donations, grants, subsidies,
membership dues, interest and dividends on investments, and gains from
sales or assets. The first two groups of revenue sources donations (gifts,
grants, subsidies, etc.) and membership dues are generally not taxed to

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NPOs in countries around the world, for the tax laws do not ordinarily
include such items in the definition of income.27 For example, Section 102 of
the Internal Revenue Code of the United States excludes gifts from income
with respect to all taxpayers. The theory is that the donor has already been
taxed on the item, and to include it in the income of the donee would subject
it to double taxation.28
8.1.2 Tax exemption for passive investment income. In most countries PBOs
are not subject to tax on passive investment income i.e., interest,
dividends, rents, royalties, and gains from the sale of capital assets. Issues
arise as to what is passive (e.g., when does the percentage of ownership of a
business ownership confer sufficient ability to control management to convert
it into an active trade or business?). In many countries, the passive income of
NPOs that are not PBOs is taxed.
7.1.2 Polish Science Foundation Case
Section 17(1)(4) of the Corporate Income Tax of Poland subjected foundations
to tax on income that is not expended for their statutory purposes. The
Foundation for the Advancement of Polish Science and Arts, which had been
established and endowed generously by the Polish government, invested the
bulk of its funds in shares of stock and government bonds. It spent income
from these investments to support scientific research and investment and
support projects that benefited Polish science and art. The Fiscal Supervision
Inspector found that the investments in stocks and bonds did not constitute
expenditures to support the objects of the Foundation and imposed tax on all
income so spent. The position of the tax authorities was upheld, first, by the
Warsaw Fiscal Chamber and then by the Chief Administrative Court (twice).
On an extraordinary appeal to the Supreme Court, that Court ruled 7-0 for the
taxpayer on 13 March 2002. By the time of this decision the value of the
asserted tax plus interest was PLN 160,000,000, which was more than US$ 40
million.
The Supreme Court of Poland observed that the Foundation had a duty to
preserve its endowment. This duty was a minimal standard under the laws
applicable to member states of the European Union. Polish laws should be
interpreted to ensure consistency with laws of the EU. There was no
requirement under Polish law that all income be expended immediately.
Like other gifts, donations, and subsidies received by religious, charitable, or educational
institutions, grants are ordinarily not treated as being subject to tax. Some grants may look
like contracts or even be in the form of a contract, but the proceeds of such a contract will
generally not be taxed so long as the NPO is receiving funds to provide goods or services to
third parties. If the contract is one to render goods or services to the contractor, however, the
proceeds of that contract may properly be treated as income from a business activity.
28
It is clear, of course, that if the donation to a PBO is also given a tax preference, there is a
double tax benefit exclusion for the donee and a deduction or credit for the donor.
27

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225

Income invested reasonably to preserve capital which is subsequently


expended in support of the objects of the Foundation was not subject to tax.
Just as it would be reasonable for a foundation to hold and invest income
until suitable research projects were presented for funding or until sufficient
funds had been accumulated to fund good research projects, so too it was
reasonable to invest a large endowment and use the income to fund research
on an continuing basis.
The tax authorities had taken the position that it would be permissible to
delay expenditures if the endowment funds were placed in bank accounts but
not in stocks or bonds. This is position is unjustified. The Foundation should
in fact seek the highest possible safe returns from its investments. A different
result would occur if the endowment funds were used to purchase a majority
interest in a business enterprise for the purpose of managing an active
business, but that is not the case here.
7.1.3 Tax Exemption for Income From Commercial Activities (South
Africa)
In this article, Karen Nelson, senior lobbyist/researcher at the Nonprofit Partnership,
compares the old and the amended income tax legislation as it relates to the trading
activities of the public benefit organization. To what extent can a non-profit
organization trade after the changes?
TRADING RESTRICTIONS BEFORE THE RECENT AMENDMENTS
In terms of the old section 10(1)(f) of the Income Tax Act which
was repealed in terms of the Taxation Laws Amendment
Act, 30 of 2000, all receipts and accruals of an income tax
exempt organisation were exempted from income tax. In the
absence of a specific provision to the contrary, this
exemption applied also to revenue from trading/business
activities. The law however, prohibited income tax exempt
funds from carrying on any business, and in practice the SARS
imposed this trading restriction on organisations as well.
In the past, the Commissioner often challenged the tax-exempt
status of NPO's on the basis of their trading activities. In one
particular case the Commissioner conceded that the appellant
organisation was an institution, and that it was a public
institution, but argued that it was not a charitable public
institution because it carried on a for-profit business.
Irrespective of its aims or objectives, the Commissioner argued,
an institution did not qualify as charitable for the purposes of
section10(1)(f) if as its main activity it conducted a business,

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operated a trade, and made a profit. Fortunately, in this


case, the court held that the term "charitable" could include
the carrying on of a business for profit, provided that the
institution did not distribute its revenue to its members, but
instead applied it to the promotion of its main charitable purpose.
Despite rulings in favour of "non-profit trading", the
Commissioner defended this conservative approach to trading
by non-profit organisations by arguing that exempt
organisations should not have an unfair advantage over taxpaying
entities.
Although unfair competition, and the opportunity for abuse by
trading entities are legitimate concerns, surely this is not enough
reason to prevent NPOs from supplementing their income with
business activities. The distinct difference in purpose and
objective between the non-profit and commercial sectors
should be reason enough to allow NPOs, within carefully
prescribed parameters, to engage in trading activities, provided
that the carrying on of those activities is not the main objective of
the organisation.
The traditional approach to trading clearly did not encourage
the financial sustainability of the sector outside the realm of
donor funding. To a certain extent the problem has been
addressed in the recent amendments to the Income Tax Act as
it relates to the non-profit sector.
TRADING RESTRICTIONS UNDER AMENDED FRAMEWORK
Under the new framework, the law has been clarified and public
benefit organisations approved for tax exemption, are allowed to
trade only within the parameters of the relevant provisions.
Trading or business activities are allowed under the following
circumstances:
A de minimis rule provides that gross income from the
business undertaking or trading activity must not exceed
the greater of 15% of the gross receipts of the
organisation, or R25 000. Should this amount be
exceeded, the following "tests" will apply.
Related trading activities that are integral or related
to the sole object of the organisation are allowed
if carried out on a basis substantially directed at
cost recovery, and does not result in unfair competition

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in relation to taxable entities.


Unrelated trading activities that are of an occasional
nature are allowed if substantially carried out with
voluntary assistance.
Any other activity approved by the Minister having regard
to the criteria in the Act.
The new trading provisions may not be as "liberal" as the sector
had hoped for, but to the extent that they create more certainty
than was previously the case, it is an improvement on the old law.
Furthermore, the amended provisions to the extent that they do
not entirely prohibit tax-exempt organisations from engaging
in trading activities, conform to international standards of best
practice. However, to the extent that the law still limits the
level of trading allowed, and links allowable trading activities to
concepts such as "cost-recovery" and "unfair competition",
the issue is unnecessarily complicated.
If we are to rid the sector of an unhealthy reliance on donor
funding and encourage financial sustainability, then the lobby for
more liberal trading provisions must continue.

7.1.4 Tax Exemption for Income From Commercial Activities (France)


Discussion of French tax rules
by Caroline L. Newman
The French Ministry of Finance is undertaking some serious rethinking of the way
income from economic activities of NPOs should be taxed. The Ministry of Finance
has issued in a very short period of time two fiscal instructions as well as explanatory
documents. In volume 1 issue 2 of IJNL, we discussed provisions from the
ministerial instruction of September 15, 1998. The measures taken in that instruction
were the result of a report (Clarification of the tax treatment of NPOs) prepared by
Mr. Goulard, counsel of the Conseil dEtat, to the Prime Minister on March 10, 1998.
On February 19, 1999, a second instruction was issued by the Ministry of Finance,
which provides further specifications to the instruction of 1998.
In this note we review the changes these instructions bring to the tax treatment of
NPOs in France.

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1.

General Principle

It is now confirmed that the exemption of NPOs from commercial taxes remains
a general principle, and their liability the exception.29 In order to guarantee the
principle of equality before tax and avoid distortion of competition, NPOs
engaging in business activities are liable for commercial taxes i.e., VAT,
professional tax and company tax. The criteria established by the doctrine des
uvres (fiscal instruction of May 27, 1977) in order to determine the social
utility, and therefore whether an NPO is tax exempt, is repealed. New criteria
have been established.
Furthermore, according to the instruction of February 19, NPOs performing
economic activities will be exempt from VAT and professional tax when:

The turnover of the organization engaging in the delivery of goods, the sale
of goods to be consumed on the premises of an establishment, or lodging
activities, is less than FF 500,000 per year.

The turnover of an organization engaging in any other economic activity is


less than FF 175,000 per year.

2.

Determination of the tax treatment of an NPO

A three-step approach, described in the chart below,30 aids in determining


whether an NPO is liable for the payment of commercial taxes.
STEP 1
Does the management have a financial interest
in the NPO?
No
Go to step 2

Yes
NPO liable for commercial taxes

STEP 2

Does the NPO compete


with the business sector?
No

29
30

Yes

Press communiqu of the Prime minister of September 15, 1998.


Section 1 of the Fiscal instruction of September 15, 1998.

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The NPO is exempt from commercial taxes

Go to step 3

STEP 3

Does the NPO conduct its activities along similar lines


to the business sector?
No

Yes

The NPO is exempt from commercial taxes

NPO liable for


commercial taxes

The following discussion explains each of these steps.


2.1. Does the management have a financial interest in the NPO?
The management does not have a financial interest in the NPO when:

The management and administration of the NPO are carried out


on a voluntary basis.

Profits are not distributed either directly or indirectly, but used for
the statutory purposes of the NPO.

In the case of dissolution, the assets of the NPO are to be


transferred to another NPO and must not be distributed among
members.

Since the last two points are self-explanatory, the only issue is when the
management of the NPO is considered to be on a voluntary basis.
Prior to the latest ministerial instruction, it was required that directors not be
remunerated.31 However, it is now accepted that they may receive 75% of the
minimum wage (SMIC)32 as compensation for work performed in the NPO,
in-kind contributions, bonuses and reimbursement of unverified expenses.33
Payment of rent at market rate for property used by the NPO or the payment
of a reasonable salary to a relative of the director who is employed in the
NPO are not to be considered as grounds for disqualification of the NPO.34
Organismes sans but lucratif, critres dapprciation de la non-lucrativit, nouvelles
rgles , Edition Francis Lefvre, FR 46-98, p. 7.
32 SMIC (Salaire Minimum Interprofessionnel de Croissance) is the minimum monthly salary
an employee should receive. The SMIC is established by the government.
33 Undated document by the tax authorities addressed to the Interministerial Delegation to
Social Innovation and Social Economy published in Edition Francis Lefvre, FR 24-99, p. 3.
34 Ministry of Economy and Finance, Nouveau rgime fiscal des NPOs, Coll. Guide pratiques, La
Documentation Franaise, Paris, 1999, p. 21.
31

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This requirement is to be applied to each director on an annual basis.


However, if a person is director of several NPOs, which are linked by their
purpose, activities and common directors, the total remuneration of the director
from all these NPOs should not be greater than 75% of the minimum wage
(SMIC).35 It is accepted that a director may be an employee of the NPO and
therefore receive a salary, but in this case, it is important that s/he be subject
to the supervision of the governing body. Otherwise, if s/he were a de facto
director and received remuneration greater than 75% of the minimum wage,
the NPO would be liable for payment of commercial taxes.36
Finally, the instruction dated February 19, 1999 clarified the issue of
remuneration of employees serving on the directing body of the organization.
Their remuneration is not limited to 75% of the minimum wage. These
employees are considered employees representatives and should not
compose more than one-fourth of the directing body.
2.2. Does the NPO compete with the private sector?
Only identical activities (including secondary activities) carried out by an
NGO and a business are to be taken into consideration. There is competition
only when a particular need can be satisfied either by a business or an NPO in
a given geographic area. It is further possible to evaluate whether the activity
carried out by the NPO can effectively take clients away from the business
entity and reduce its income.37
2.3. Does the NPO conduct its activities along lines similar to the business
sector?
The new method used to determine whether an NPO is exempt from
commercial taxes is an evaluation of the product, the public targeted, the
price applied, and the publicity given to the product. The importance of these
criteria, also called the rule of the 4Ps, is to be applied in decreasing order.
The product and the public are the key elements in determining the social
utility of the activity.
2.3.1.

The product

An activity satisfying a need which is not satisfied or is poorly satisfied


by the market is of social utility. When an agrment38 (accreditation)
cannot be granted to a business entity, and so is granted to an NPO by the

Undated document by the tax authorities addressed to the Interministerial Delegation to


Social Innovation and Social Economy, op. cit. p. 3.
36 Nouveau rgime fiscal des NPOs, op. cit. p. 21.
37 Nouveau rgime fiscal des NPOs, op. cit. p. 23.
38 An agrment is granted by the Ministry relevant to the activity the organization is
carrying out. It can be granted for licencing purposes, when a contract is established between
the State and a legal entity. Some agreements are specific and can be only granted to NPOs
such as to consumers organizations, sports organizations, popular education organizations,
environment organizations
35

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State,39[11] the activity undertaken by the NPO is recognized as being of


social utility.
2.3.2.

The public

The term public is understood to encompass the persons who purchase


goods or services from an NPO.40[12] The activity is considered of social
utility when the grant of specific advantages to the public is justified or
the economic and social situation of the public justifies it.
2.3.3.

The price

The price established for the provision of a good or service must be:
Significantly lower than the market price (commercial taxes paid by
business entities must be subtracted in order to compare the
prices);41
Sanctioned by public authorities; or
Variable, depending on the situation of the public.
2.3.4.

Publicity

Finally, it is necessary to evaluate how the organization manages its


marketing campaigns. For that purpose, it is necessary to establish
whether the NPO carries out informative marketing, which is acceptable,
or commercial marketing, which is not.
3.

Management of commercial activities


3.1. Division of activities into two classes: sectorisation
For purposes of the VAT, the sectorisation (division of activities into two
classes, one for-profit and one not-for-profit) of activities was already a
requirement. Now this system can be adopted by an NPO in order to escape
company tax and professional tax on those activities that qualify as not-forprofit. The not-for-profit activities must remain dominant, and the accounting
standards adopted should allow for the evaluation of each class of activity.
The organization will achieve the sectorisation of its activity in adopting
accounting standards that will allow the use of separate accounts for the
activities qualifying as commercial and those qualifying as not-for-profit
according to the rule of 4Ps. However, other parameters more difficult to
account for, such as volunteers time, will be taken into consideration. The
assets of the organization will then have to be allocated either to the

39Nouveau

rgime fiscal des NPOs, op. cit. p. 25.


Undated document by the tax authorities addressed to the Interministerial Delegation to
Social Innovation and Social Economy, op. cit. p. 5.
41 Ibid.
40

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commercial sector, the not-for-profit sector, or both.42 Further, donations


allocated to the not-for-profit sector will be tax deductible for the donor.
3.2. Creation of subsidiaries- filialisation
The active or passive (i.e., as a shareholder) participation of an NPO in a
business entity can be of interest when the NPO carries out significant taxable
activities. Indeed, transferring the commercial activities into a subsidiary
prevents the NPO from losing its exemption from commercial taxes.
However, if the activities of the NPO are carried out for the benefit of the
subsidiary created (e.g., helping the subsidiary reduce its expenses, increase
its profits, obtain more customers, improve its management, etc.)43 the NPO
may lose its tax exempt status.
The grace period, which had been granted until March 31, 1999, was extended to
January 1st, 2000.44 NPOs must now comply with the new regulations. Furthermore,
NPOs that consult the association correspondent from the tax authorities in order to
clarify their tax status before January 1st will not be liable to tax adjustment for the
prior tax periods. This is in addition to the measure already taken in September 1998
to revoke income tax assessment previously issued by the tax authority disputing the
non-profit character of an organization.

7.1.5 Presbyterian and Reformed Publishing Co. v. Commissioner, 743


F.2d 148
(3d Cir. 1984), reversing ___ T.C. ____ (1982)
Introduction to the Case
A federal court of appeals upheld the tax-exempt status of a religiously
oriented publishing house, in a decision that attempted to determine the point
at which the successful operation of a tax-exempt organization should be
deemed to have transformed the organization into a nonexempt commercial
enterprise.
Summary of the Facts
The purpose of the organization was to disseminate information pertaining to
the beliefs of the Presbyterian Church in the U.S. Its activities consisted of
publication of Christianity Today, a Presbyterian journal devoted to stating,
defending, and furthering the gospel. Its income was derived from
subscriptions and contributions. The organization was closely related to a
Presbyterian group dedicated to its view of reformed Presbyterian theology.
For years (1931-1969), the organization struggled financially, with heavy
Nouveau rgime fiscal des NPOs, op. cit. p. 32.
Nouveau rgime fiscal des NPOs, op. cit. p. 27.
44 Nouveau rgime fiscal des NPOs, op. cit. p. 3.
42
43

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emphasis on volunteers and gifts. Due to the sudden and unexpected


popularity of certain books, the organization began generating net income
and was able to utilize employees. It accumulated funds, purchased real
estate (in 1976), and constructed a combined warehouse and office building
(in 1978). The IRS revoked the tax-exempt status of the organization in 1980,
on the ground that it was engaged in a business activity carried on similar to
a commercial enterprise. The revocation was retroactive to 1969.
In 1982, the Tax Court affirmed this revocation but set the revocation year
at 1975, which the court held was the year in which the organization
acquired a truly commercial hue. In support of the conclusion that the
organization came to be animated by a substantial commercial purpose, the
Tax Court primarily relied on (1) the entitys soaring net and gross profits,
(2) the setting of prices that generated comfortable net profits rather than
lowering prices to encourage a broader readership, and (3) its purchase and
sale of books to and from a commercial publishing company. Other factors
included the searching out of more readers, employment of individuals,
dropping of money-losing plans, payment of royalties, and entering into
contracts with authors. The Tax Court concluded that the organization was in
competition with commercial publishers. In a subsequent opinion, the Tax
Court expressed the view that the existence of the building evidenced
commerciality.
The appellate court framed the issue before it as being at what point the
successful operation of a tax-exempt organization should be deemed to have
transformed that organization into a commercial enterprise and thereby to
have forfeited its tax exemption.
Summary of the Law and Analysis
The appellate court admitted that factors such as the accumulation of capital,
profitability, and the development of a professional staff are relevant in
assessing any commerciality. Nonetheless, the court was troubled by the
inflexibility of the Tax Courts approach. Indeed, the court of appeals wrote
that [i]t is doubtful that any small-scale exempt organization could ever
increase its economic activity without forfeiting its tax-exempt status under
such a definition of non-exempt commercial character. Looking at the
statute (IRC 501(c)(3)), the appellate court applied a two-prong test based on
the private inurement doctrine and the organizations purposes.
As to private inurement, the court of appeals wrote that the amounts
involved negate[d] any suggestion of personal enrichment. The salaries
paid were found to be relatively modest.
As to purposes, the appellate court admitted that this determination can
cause difficult and murky problems. It did, however, reject the thought

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that the purpose of an organization claiming tax-exempt status can be


determined as a direct derivative of the volume of business of that
organization. The court rejected the thought that accumulations of cash
automatically indicate commerciality. Indeed, the court wrote that success
in terms of audience reached and influence exerted, in and of itself, should
not jeopardize the tax-exempt status of organizations which remain true to
their stated goals.
The court observed that the U.S. is not a stagnant society in which various
ideas and creeds preserve a hold on a fixed proportion of the
population. Rather, our society was seen as having a dynamic
quality. The sudden popularity of an erstwhile obscure writer cannot, the
court wrote, be the basis for stating that the organization has departed
from its professed purpose. Focusing particularly on the matter of religious
publishing companies, the court said that such a standard would lead toan
inequitable disparity in treatment for publishers affiliated with mainstream
churches as opposed to small offshoots.
Thus, the court of appeals reversed the Tax Court in this case.
7.1.6

Discussions Questions
What do you think about the French and South African rules for
taxation of commercial activities as opposed to the rules in the
US?
Should investment income be taxed when received by NPOs that
are not PBOs notwithstanding the non-distribution constraint?

7.2 Income Tax Deductions, Credits and Tax Designation Schemes


7.2.1

Income Tax Deductions in the US

In the United States, the tax law defines an organization for which the
charitable contribution deduction is available as -a corporation, trust, community chest, fund or foundation
created or organized in the United States . . . ;
organized and operated exclusively for religious, charitable,
scientific, literary or educational purposes . . .
no part of the net earnings of which inures to the benefit of
any private shareholder or individual; and
which is not disqualified for tax exemption under section
501(c)(3) by reason of attempting to influence legislation,

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and which does not participate in, or intervene in


(including publishing or distributing statements), any
political campaign on behalf of (or in opposition to) any
candidate for public office.45
The regulations under this section and the closely related section 501
(c)(3) define charitable rather extensively, beginning with the
following sentence: The term charitable is used . . . in its generally
accepted legal sense and is, therefore, not to be construed as limited by
the separate enumeration in section 501 (c)(3) of other tax exempt
purposes which fall within the broad outlines of charity as developed
by judicial decisions.46
A major Supreme Court case, Bob Jones University v. United States,47
added a public policy limitation to the meaning of charitable in the
Internal Revenue Code, declaring that educational organizations that
practice racial discrimination in their admissions policies are not permitted
to be exempt from tax under section 501(c)(3). But no amendment of the
statute was thought to be required to codify this rule.
Generally speaking, individuals may not deduct in excess of 50% of their adjusted
gross income with respect to charitable contributions made during the tax year in
question,48 and corporations may not deduct in excess of 10%. These limitations are
subject to further special rules. For example, the applicable percentage limitation in
the case of contributions to private foundations (as opposed to public charities) is a
maximum of 30% of the donor's adjusted gross income, depending upon the nature
of the contribution, except in the case of contributions to operating foundations,
which generally enjoy the same deductibility thresholds as contributions to public
charities. Generally speaking, contributions to section 501(c)(3) organizations that
exceed the applicable deductibility threshold of the taxpayer in question may be
carried over and taken as a deduction in a subsequent year, subject to certain
limitations.
7.2.2

Credits Under Canadian Law


Information from the Revenue Canada website:

349 - Claiming charitable donations


A charitable donation is a non-refundable tax credit which reduces the federal
income tax you pay. It is called "non-refundable" because, even if you don't use the
full amount, you do not receive a refund for the difference.

IRC section 170 (c)(2).


Treas. Regs. 1.501 (c)(3)-1(d)(2).
47 461 US 574 (1983).
45
46

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You claim charitable donations by completing the calculation on your return or


Schedule 9 and claiming the amount at line 349 of your return. The maximum
amount you can claim is generally the lower of the total donations made in 2001,
plus any donations made in any of the five previous years that you have not claimed
before, or 75% of your net income from line 236.
If you are filing a paper return, attach official receipts for all donations you are
claiming, except for the amounts shown on your information slips, such as a T4 slip.
The receipts can be in your name or your spouse or common-law partner's name. We
will not accept photocopies, unless they are certified as true copies. We also do not
accept cancelled cheques, credit card slips, or pledge forms as proof of payment.
Donations other than cash may be eligible for this claim. For more information, see
the pamphlet called, "Gifts and Income Tax". For more information on eligible and
ineligible charitable donations, see Interpretation Bulletin IT-110, "Deductible Gifts and
Official Donation Receipts", and its Special Release. You can download or order these
publications from your tax services office. For information on donations that are
eligible for this credit, go to message 349-01. For information on whether or not you
can deduct donations made to the United States, go to message 349-02.
For information on how the credit for charitable donations is calculated and its affect
on your taxes, go to message 349-03.
349-01 - Eligible charitable donations
You can only claim as eligible charitable donations, amounts you gave to the
following:

Canadian registered charities;


registered Canadian amateur athletic associations;
prescribed universities outside Canada;
Canadian non profit organizations that only provide low cost housing for
seniors;
Canada or a Canadian province, territory, or municipality;
registered national arts service organizations;
the United Nations or its Specialized Agencies; or
charities outside Canada to which the Government of Canada has made a
donation in 2000 or 2001.
7.2.3. The Hungarian 1% Law.
HUNGARIAN TAX DESIGNATION PROVISION - THE "ONEPERCENT" RULE
by

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237

Istvan Csoka
A summary of the Act CCXVI of 1996 on the use of a specified portion of personal
income tax according
to the designation of the taxpayer (as amended by the Act CCXIX of 1997)
The Act CXVII of 1995 on Personal Income Tax grants private individuals the right to
designate, in a statement, the use of a specified portion of their tax paid for the
taxable year. For the purpose of the Act CXXVI of 1996, tax paid is the amount which
is left after deductions have been taken from the amount due on the consolidated tax
base in the individual's tax return or in the employer's account, if made in lieu of a
tax return. It is required that the private individual has paid his tax prior to the
deadline for submitting tax returns and has not been allowed to defer payment or
received a postponement of payment beyond September 30th in the year of the
designation statement.
1. Extent of the 'Specified Amount
The 1996 version of the Act on the Use of a Specified Portion of Personal Income Tax
According to the Designation of the Taxpayer limited the possible designation to one
percent of the tax paid. The change in the system for church financing has initiated
the 1997 amendment. According to the law in force, private individuals may "offer"
one percent of their personal income tax to the civil sector and an additional one
percent to churches. Each of the two amounts must be at least HUF 100.
If an individual has designated the above-mentioned specified amount(s), and the
transfer has already occurred, the amount cannot be modified later on as a result of
either a revision by tax authorities, or a self-revision by the individual. If one of these
revisions finds that the tax amount due on the consolidated tax base is lower than the
amount on the tax return, the individual must pay the difference between the
specified amount and the actual amount which will be designated, only if this
amount is at least HUF 1000 and has been transferred to the beneficiary.
2 Beneficiaries / Beneficiary Organizations
The Act recognizes two categories of potential beneficiaries. Certain organizations of
the civil non-profit sector belong to the first, while churches and advance
(earmarked) budgetary purposes belong to the second. The Act determines the
requirements of the beneficiary status differently for the two categories. Taxpayers
are permitted to designate only one beneficiary for each category for any tax year.
2.1. Beneficiaries in the first category:
a. Civil society organizations, with the exception of political parties and interest
groups for employers and employees, which were established on the basis of the Act
II of 1989 on Freedom of Association and foundations fulfilling the following
requirements constitute one "component" of this category. They must be registered
by the court at least three years prior to the first day of the year in which the
designation statement was made and they must effectively pursue a public benefit
activity as defined by the Act on Public Benefit Organizations and set forth in their
founding documents for at least one year before the first day of the year in which the
designation statement was made.
b. Public foundations pursuing public benefit activities also belong to this category.

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These organizations have additional criteria with which they must comply. These
provisions require that these organizations:
- have their headquarters in Hungary;
- operate for the interests of the domestic population, or of ethnic
Hungarians living outside the country;
- declare that they do not pursue direct political activity, their
organizations are independent of political parties and do not provide
them with financial support (in addition, they must amend their
founding documents accordingly; direct political activity includes
political party activity and the nomination of candidates for the
Parliamentary elections and the elections at county, or Metropolitan
level);
- declare that they do not have public debts due and registered by the
Customs -and Excise Guard, the social security administration, or
state tax authorities;
- obtain a certificate, issued within the previous 30 days, from the local
government tax authorities confirming that they have no registered
public debts due;
- declare that they effectively pursue a public benefit activity as
defined by the Act on Public Benefit Organizations, in accordance
with their founding documents, uninterruptedly for a period of not
less than one year prior to the year of the designation statements, in
compliance with all legal provisions relating thereto.
If an organization has registered public debts due, it still can be beneficiary, provided
that it complies with all the other requirements. In addition, it must inform the tax
authorities to use the amounts transferred by the designation statements to pay its
public debts and provide the names of the organizations to whom the debts is owed
and the order of paying the debts.
c. Certain national public collections and other cultural institutions (e.g. the
Hungarian National Museum, the Hungarian State Opera, the Hungarian National
Gallery, the National Theatre, the National Archives), the Hungarian Academy of
Sciences, the Central Fund for Technological Development, the National Scientific
Research Fund, the Child and Youth program, the Higher Education Development
Program, the separate state financial fund, theaters, public collections, institutions of
public education which had received an individual subsidy from a local. government
or from the central budget in any of the three years prior to the first day of the year in
which the designation statement takes place, the building program of the new
National Theatre also belong to the first category.
All the organizations in this category must publish a record detailing the way in
which the transferred funds were spent through October 31st of the year following
the year of the transfer.
2.2. Beneficiaries in the second category:
a. Any church, religious denomination or religious community established under the
Act IV of 1990 on Freedom of Conscience, Religion and Churches (hereinafter
churches), belongs to the second category if they were registered by the court before

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the first day of the year in which the designation statement was. However, an
organizational unit or institution of a church cannot be a beneficiary.
b. Any advanced or earmarked purpose defined by Parliament in its chapter in the
Act on (State) Budget relating to the year of the designation statement also belongs to
this category.
The Office for Taxation and Financial Control provides the beneficiaries in this
second category with "so-called" technical numbers. For an advanced budgetary
purpose, this is an ex officio obligation of the president of the Office. Churches may
obtain technical numbers based on their application and the certification of their
registration.
3. Invalid Designations
The following instances are examples of an invalid designation statement
enumerated by the Act:
a. The private individual has designated the one percent of his tax
paid to two or more beneficiaries, or the designated one percent is
below HUF 100.
b. Both of the two beneficiaries belong either to the first, or to the
second category of organizations.
c. The designation statement contains incorrect or illegible tax (or
technical) number, or no number at all, except, if the church or
earmarked budgetary purpose can be identified without it.
d. The designation, the envelope, or their filing/forwarding does not
comply with the prescribed rules.
e. The beneficiary of the first category does not fulfill the requirements
as instructed by the Office, or does not fulfill its obligation relating to
statements and information.
4. Designation Procedure
An individual taxpayer may make designation statement(s) on a form which can be
obtained at the Office for Taxation and Financial Control or on a sheet of paper of the
same size and the appropriate information on it. The tax number, or in case of
organizations belonging to the second category of beneficiaries, the technical number
of the beneficiary must be indicated on the form in every case. The indication of the
name of the beneficiary is not mandatory. Taxpayers must put the completed
designation form(s) into a postal standard size envelope, seal it and write their name,
address and tax identification code on the envelope. They must place the envelope
containing the designation statement(s) in their tax return package. In the event that
the personal income tax is reported by the employer in stead of an individual tax
return, the individual must give the designation statement in the envelope to the
employer no later than March 25th of the year following the taxable year. In the latter
case, individuals must sign the sealed side of the envelope. The employer gives a
receipt about the delivery of the envelope. The employer is not privy to the content
of the statement. He must send the intact envelope, together with other information,
to the competent tax authority in accordance with the rules governing the employees
tax account in lieu of the individual tax return.
5. Obligations of Tax Authorities

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240

5.1. Data Protection


The information on the envelope and in the designation statement is considered
confidential tax information and consequently it is subject to the rules of data
protection. Tax authorities may provide private individuals only with information
about their own data and designation statements, while beneficiaries may receive
information only about the amounts transferred to them. Tax authorities mark the
envelope and the designation statement contained therein with an identical
identification code. The processing and storing of these documents take place
separately, in such a way, that no person has simultaneous access to both documents.
Tax authorities only grant permission to authorized persons, acting in the course of
legal proceedings concerning the fulfillment of the designation statements to link
these two documents together. The tax authorities must store these documents for
five years after the designation statement was filed. If legal proceedings, involving
the designation statement, are commenced the documents must be maintained until
the proceedings are concluded by a final judgment. After this date, the envelopes
and the designation statements must be destroyed.
5.2. Transfer
Through September 1st of every year, tax authorities instruct the beneficiary civil
society organizations, foundations and public foundations to certify that they have
fulfilled the prescribed requirements. Namely, that they have their headquarters in
Hungary, they operate in the interests of the domestic population or ethnic
Hungarians living abroad, they are not engaged in prohibited political activity, they
effectively pursue a public benefit activity and they don't have registered and due
public debts, or if they do, the specification of the order of paying these debts. The
organizations have 30 days to fulfill their obligations. This deadline is strict, and if
neglected, results in the loss of the designated funds. In case the beneficiaries in
question certify the fulfillment of requirements unsuccessfully, or fail to fulfill their
obligations in this regard, the tax authorities pass a resolution. This resolution can
only be altered by the court which has registered the beneficiary organization, if the
requirements are actually met, on the basis of the application of the organization,
within 15 days through a non-contentious procedure.
The Office for Taxation and Financial Control transfers the funds to the beneficiaries
of the first category within 30 days after filing their required statements and
certifications, or through October 31st of the year of the designation statement at the
latest. If the organization has public debts, the Office deducts these debts from the
funds before transfers them to the beneficiaries.
The Office transfers the funds to the beneficiaries of the second category through
January 10th of the subsequent year following the designation statement at latest.
The reason for the extended time of transfer (in comparison with the first category) is
that in 1998 churches will also receive support under the Act on State Budget and the
Act on the Financial Conditions of Religious and Public Purpose Activities of
Churches in Hungary.
5.3. Information
Every year, the President of the Office informs the Office of the Prime Minister and
the Ministry of Financial Affairs about the funds transferred to churches or advanced
budgetary purposes by designation statements through August 31st. In addition, he
reports on the number of designation statements that relate to churches. The

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Minister of Financial Affairs publishes a report on the second category, detailing the
number of designation statements and the amount due to each of the beneficiaries as
of September 15th of that year.
5.4. Control
The funds transferred to the beneficiaries in the first category are considered
budgetary support of such a nature, that tax authorities are entitled to control the
appropriate use of such funds for public purpose activities. If the funds are not used
for public purposes, tax authorities can adopt a resolution which can require the
funds that be repaid.
7.2.4

Discussion Questions
Which treatment of tax benefits for donations seems best for the taxpayer?
For the charity? For the fisc?
Should tax benefits be available to non-itemizers in the US? If so, how would
you correct the system to provide for that?

7.3 Treatment of NPOs Under Indirect Tax Regimes


THE VALUE ADDED TAX AND NPOS
More than 120 countries, representing over 70 percent of the worlds population,
have a value added tax (VAT). In most of these countries the VAT is a more
important and burdensome tax for most non-governmental organizations (NGOs)
than is the income or profits tax. Whereas the income or profits tax is levied on and
paid directly by the person who earns the income or profits, VAT is collected and
remitted by someone other than the person who pays it. VAT is, accordingly, called
an indirect tax, and the concepts and terminology that go along with a VAT are
quite different from those applicable to the income or profits tax.

Some key terms and concepts:


Generally speaking, in a VAT system each person who sells goods or
services above an annual threshold amount must collect VAT from
the purchaser based on the sale price and remit it to the tax
authorities.
VAT is generally calculated as a percentage of the sales price (e.g.,
20%).
Goods and services are typically referred to as supplies for VAT
purposes.
Cash is usually excluded from the definition of goods or supplies.
Accordingly, a cash grant to an NGO is not subject to VAT, though
supplies purchased with that grant may be.
VAT paid by the purchaser of supplies (usually as part of the purchase
price) is referred to as input VAT.

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VAT charged and collected by the seller of supplies and remitted by it


to the tax authorities is referred to as output VAT.
If the seller is a middle man in a chain in which supplies move
towards their final use or consumption, the seller will pay input
VAT on supplies that it purchases and charge, collect, and remit
output VAT on supplies that it sells.
Obviously, what is input VAT to a purchaser will be output VAT to the
person who sold the particular supplies to it.
Although wages are not vatable, the cost of wages is obviously
reflected in the price that a supplier charges, so that VAT is
indirectly paid on wages that are related to vatable supplies.
When a seller remits output VAT to the tax authorities, it is entitled to
claim a credit, deduction, or refund (terminology and methodology
vary) for the input VAT it paid, to the extent that those input
supplies related to the supplies it sold.
The net burden of the VAT generally falls upon the person who is the
ultimate user or consumer of the supply in question.
This is because the ultimate user or consumer pays full input VAT on
the final value of the supply but, by definition, does not sell that
supply and therefore never gets a refund, credit, or deduction for
the input VAT it paid.
Up to the point of final use or consumption, any VAT taxable person
gets a refund, deduction, or credit for any input VAT it paid on any
supply it purchased and used in creating the supplies that it sells
and on which it collects and remits output VAT.
The preferred term for the party who collects and remits VAT is
taxable person. (Although this person is sometimes referred to as
a taxpayer; technically the taxpayer is the purchaser who pays
VAT as part of the price of the supply he or it purchases, whereas
the system imposes on the seller the duty, not to pay, but to collect
and remit, the tax.)
Thus, after the appropriate refund, deduction, or credit is taken into
account, a supplier is collecting and remitting VAT only on the
value it has added in the chain of production.
Technically, value added is a misnomer, because the VAT is imposed
on outputs whether or not the supplier has added any value (and
regardless of whether the supplier is making a profit).
To prevent evasion through the use of side payments, VAT is imposed
on the higher of the price charged or the market value of a supply.
If the supply is transferred gratuitously, VAT is typically imposed on
the supplier, not the purchaser, and is calculated using the market
value of the supply.
NGOs are typically end-users, for most NGOs do not sell goods or
services.
Since many of the supplies that are typically provided by NGOs (e.g.,
medical services, education) are exempt from VAT, the burden of

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any input VAT on supplies that are related to exempt outputs falls
on the NGO that provides the outputs.
If the economic activities of an NGO are below the annual threshold
that requires registration as a taxable person, the NGO is said to
be excluded from or not covered by the VAT system.
An excluded NGO may often voluntarily choose to be a VAT taxable
person in order to get into the VAT system.
If a supply is exempt from VAT, no VAT can be charged or collected
by the seller and, absent some special provision, no refund, credit,
or deduction can be claimed by the seller on any of the input VAT
related to the exempt supply that has been sold.
Conversely, a purchaser of an exempt supply pays no VAT to
acquire it and thus has nothing with respect to which to claim a
refund, credit, or deduction if that supply is used in connection
with a supply that is sold in a vatable transaction.
The burden of output VAT falls on any NGO that provides non-exempt
supplies gratuitously, rather than on the beneficiary that receives
those supplies.
A supplier that transfers vatable supplies gratuitously must pay output
VAT on the market value of those supplies, but can claim a refund,
deduction, or credit for any related input VAT.
If the sale of a supply is zero-rated, no VAT is charged or collected
by the seller, but the seller can claim a refund, credit, or deduction
on any input VAT related to the supplies that have been sold.
Under an export credit VAT system, which is the most common sort,
no VAT is charged or collected on supplies that are exported, but a
full credit can be claimed by the seller/exporter on any input VAT
related to those supplies.
When vatable supplies are imported, the purchaser, in addition to any
customs duty that is applicable, must pay VAT on the higher of the
price or market value of the imported supply.
Although exemptions from regular VAT or import VAT generally
apply with respect to particular kinds of supplies (e.g., books,
humanitarian assistance), sometimes they are also limited to the
purchase or sale of such supplies by a particular kind of person,
such as an NGO.
7.3.1 Discussion Questions.
1. Under what circumstances and why would an NGO that is not
required to register as a VAT taxable person want to do so voluntarily?
2. Under what circumstances and why would an NGO that provides
exempt supplies, either gratuitously or for a price, advocate the repeal
of the exemption for those supplies?

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3. Consider the following provision of the Kyrgyz Republics Tax Code.


What is the purpose of this provision? Will there be difficulties trying
to administer it? Does it represent good tax policy? Are there
preferable alternatives to this provision?
Provision of goods, works and services by non-commercial
organizations
Provision of goods, works and services effected for a payment which
does not exceed the cost of such provision, shall be exempt from VAT
if:

it is provision of goods, works and services effected by noncommercial organizations for healthcare, education, science,
culture and sports institutions;
it is provision of goods, works and services effected by noncommercial organizations for social security and protection of
children or low income elderly;
it is provision of services effected by healthcare, education, science,
culture and sports institutions;
it is provision of services effected by educational organizations
engaging in satisfaction of spiritual needs; [or]
4. More generally, although European countries oppose exemptions for input
VAT because they distort competition, they allow exemptions for some
outputs. Why the difference?

5. In most VAT systems the middle men in vatable transactions have to


pay input VAT and collect and remit output VAT, but do not bear any
of the burden of the tax. Interestingly, most such middle men do not
object to the administrative costs imposed on them by the VAT. Can
you imagine why?
6. Theoretically, a retail sales tax (of the kind used in the United States) is
simpler than a VAT and involves fewer administrative costs, yet can
yield as much revenue. Why do European countries prefer the VAT?
7. Slovenia is considering a program of state grants to NGOs to offset
some or all of the cost to them of the VAT. If you were the drafter, how
would you design this program?
8. How should foreign or domestic contributions in kind to NGOs be
treated under a VAT?

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7.4

Employment tax rules.

NPO employees typically expect and receive a lower level of


compensation than that which is paid for comparable work in the for-profit
sector Arguments have been advanced that, because NPO workers are paid
less than workers in the for-profit sector, they should therefore be exempt
from social security taxes or pay them at a reduced rate. Although it is a
valuable tax preference to provide exemptions for NPOs from most forms of
regular taxation, to exempt NPO employees from social security taxes while
including them in the benefits of such systems (e.g., pension and health
benefits) would create an appearance of unfairness and may cause resentment
among workers in the for-profit sector.49 On the other hand, employees of
NPOs should not suffer the double disability of working for a lower wage and
being excluded from basic employee benefit programs provided for other
employees in the society.
1 In Australia, however, NPOs involved in social welfare work pay reduced sales taxes and, if
their payroll is over A$10,000 a month, a reduced payroll tax as well, depending on which
State they are in.

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