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Tuesday, November 24, 2015

Chaffee on the "Collaboration Theory" of Charitable Organizations

Eric C. Chaffee (University of Toledo - College of Law) has posted Collaboration Theory: A Theory of the Charitable Tax Exempt Nonprofit Corporation (49 U.C. Davis L. Rev. __) on SSRN. Here is the abstract:

Legal scholarship regarding tax exempt nonprofit entities is meager at best. Although some excellent treatises, book chapters, and journal articles have been written, the body of scholarship relating to these entities is not nearly as healthy and robust as the scholarship relating to their for-profit companions. This is especially troubling considering that nonprofit entities help to improve our society in a myriad of different ways.

This Article seeks to fill a void in the existing scholarship by offering an essentialist theory for charitable tax exempt nonprofit corporations that helps to explain the essence of these entities. Beyond the purely academic metaphysical inquiry into what is a corporation, understanding the essential nature of these corporations is important because it helps to determine how they should interact with society, what rights they should have, and how they should be governed by the law. This discussion is especially timely because the recent opinions by the Supreme Court of the United States in Citizens United and Hobby Lobby have reinvigorated the debate over the essence of the corporation.

This Article breaks new ground by offering a new essentialist theory of the corporation, which shall be termed “collaboration theory.” The decades of debate over the essence of for-profit corporations has coalesced into three prevailing theories of the corporation, i.e., the artificial entity theory, the real entity theory, and the aggregate theory. The problem is that none of these prevailing theories fully answers the question of what is a corporation.

Collaboration theory suggests that charitable tax exempt nonprofit corporations are collaborations among the state governments, federal government, and individuals to promote the public good. Unlike the prevailing theories of the corporation, collaboration theory explains both how and why charitable tax exempt nonprofit corporations exist, which provides a fuller and more robust understanding of these corporations. Collaboration theory advances the existing scholarship by finally offering an essentialist theory for nonprofit corporations, and it shows remarkable promise for understanding the essential nature of for-profit corporations as well.

I saw Chaffee present this article at the Central States Law Schools Association 2015 Annual Scholarship Conference at the University of Toledo College of Law in October and was very impressed. And I could not recommend the paper more highly. As he observes, while the scholarship relating to the taxation of charitable organizations is vast and quite sophisticated, scholarship relating to the governance and theory of charitable organizations is considerably more meager. Unsurprisingly, tax scholars tend to see charitable organizations as an interesting taxation issue, and corporations scholars tend to see charitable organizations (to the extent they notice them) as just another corporate form.

By contrast, Chaffee sees the charitable organization as a unique organizational form that traditional theories of business corporations cannot adequately describe. As he explains:

This theory is superior to the existing essentialist theories of for profit corporations because it answers why corporations exist, rather than simply struggling with how they exist. The reason why charitable tax exempt nonprofit exist is because they are collaborations to promote the public good among state governments, the federal government, and individuals. How they exist is as separate entities because collaboration yields something greater than the state government, federal government, and individuals could achieve alone, yet the state and federal governments can circumscribe these entities rights because the state and federal governments are part of the collaboration.

But as Chaffee further observes, "collaboration theory" may enrich our understanding of business corporations as well, by explaining the normative justification for corporations, rather than just describing their function. In order to understand what corporations - charitable or otherwise - should look like and how they should be governed, we must understand their purpose and justification. Chaffee's article provides a helpful step in that direction. 

Posted by Brian Frye on November 24, 2015 at 06:52 PM | Permalink


First, thank you, Brian F., for posting this! I've found the community of people who I've met writing about tax exempt entities to be very welcoming, and I appreciate you taking the time to post about my work, especially because I've enjoyed your work so much.

Second, Brian G., I'm happy that you find my work provocative. I'm surprised that you find footnote 15 to be the most controversial point in the piece. It was more a lament that more people aren't writing about nonprofits and charity, which I didn't think was that controversial. I always look forward to your work on charity, and I've read most, if not all, of it. It's been very influential in my thinking about a number of topics. I suppose my lament is that I wish more people were writing about such topics. Every week, I check various lists of new publications, and I end up wanting more.

Posted by: Eric Chaffee | Nov 26, 2015 12:41:53 AM

Brian, thanks for sharing your thoughts! For what it's worth, my post & comments were by no means intended as an endorsement of everything in the article, only a reflection on why I found it interesting. While I obviously agree that there is a substantial L&E literature on charities, I do think it is rather dwarfed by the literature on business corporations. My sense is that Chaffee was just making a broad (perhaps over-broad?) generalization about tendencies in charity law scholarship & the discomfort that some L&E scholarship seems to have with the concept of altruism. While I agree that there are economically rational reasons to form a charity, in my experience they are not always the most salient to those who actually decide to start charities.

In any case, your comment prompted me to check out your SSRN page, which was quite productive, as several of your recent papers are quite relevant to some of my current projects. And for readers, I recommend Brian Galle's paper The Role of Charity in a Federal System (http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1473107), which elaborates on some of the points he makes above. And is quite insightful indeed.

Posted by: Brian L. Frye | Nov 25, 2015 8:52:08 PM

Thanks, Brian. It's an interesting piece, but a lot of things about it puzzle me. Take note 15, which goes on for quite a bit on the author's theories about why there is relatively little writing (that he's aware of) about nonprofit governance. He speculates that law & economics is important to the study of for-profit firms, but that l&e types are uninterested in nonprofits. This is a curious claim. Perhaps it stems from the author's other assertion (not in a footnote) that economics predicts that nonprofits should not exist. This in turn forms the basis for his claim that his is the first theory to explain the existence of nonprofits.

In fact, there is a pretty robust literature on why even rational self-maximizing entrepreneurs would form a non-profit, some of it (albeit probably the least insightful) by me.

Posted by: BDG | Nov 25, 2015 9:56:37 AM

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