RESEARCH REPORTS

On the Problem ofDefining Foundations in

a Comparative PerspectiveStefan Toepler

WITH governments in the developed world facing fiscal pres-sures and seeking to cut back on state spending over thepast two decades or so, a new interest in philanthropic

foundations has gradually emerged in Europe, as well as in otherregions of the world. At the same time, citizens have rediscoveredfoundations as a private alternative to tackle social, cultural, or envi-ronmental needs not sufficiently addressed by the welfare state.Although foundations are undoubtedly facing renewed attention, lit-tle is yet known about the scope, structure, and policy contexts ofthe European foundation sectors, and there is a dearth of compara-tive research. Nevertheless, there appear to be substantial differencesin the history and traditions of foundations across countries and sig-nificant variations in the shapes foundation sectors take (Strachwitzand Toepler, 1996; Anheier and Toepler, 1999). Moreover, the veryconcept of what a foundation is differs cross-nationally, and the def-inition of this set of institutions seems subject to cultural specificity.

With the foundation fields largely being a terra incognita in mostcountries, comparative analysis, where attempted, has tended tofocus on the United States, the only country to produce a substantialbody of knowledge and data on foundations. Using the United Statesas a point of reference, however, has not been without problems.Though pointing to the apparently vast size of the U.S. foundationsector (in terms of both numbers of organizations and assets) pro-vided a convenient starting point to lodge complaints about the locallack of such traditions, it also contributed to myth building aroundthe foundation concept internationally (Toepler, 1998). Now thatmore attention is focused on local foundation communities and dataare slowly improving, things can be put into better perspective.

In this article, I briefly describe legal definitions and commontypes of foundations in both the United States and Germany and

NONPROFIT MANAGEMENT & LEADERSHIP, vol. 10, no. 2, Winter 1999 © Jossey-Bass Publishers 215

show the conflicting nature of national approaches to the definitionof foundations. I suggest some types of foundations that should beincluded in more internationally oriented assessments of foundationphilanthropy in the United States and thus provide a road mapthrough some of the potential pitfalls of comparative, empiricalresearch in this area.

Defining Foundations in the United StatesIn the American common law tradition, the two legal forms thatfoundation-like organizations can take are the trust and the corpo-ration. A specific legal form for foundations has never existed. At thetime the modern philanthropic foundation began to emerge earlyin the twentieth century, from a legal standpoint it did so in a defi-nitional vacuum. The early modern philanthropic donors, includingCarnegie and Rockefeller as perhaps the most influential, typicallychose the corporation form for organizations that looked very dif-ferent from regular operating charitable corporations. With theCarnegie Corporation of New York, the Rockefeller Foundation, andother early philanthropic foundations as likely models, the endowedcorporation whose purpose it was to make grants to other nonprofitorganizations began to diffuse without specific legal definition andregulation in place. Although Congress began to distinguish implic-itly between public and private charitable organizations in the 1940sand 1950s (Edie, 1987), foundations were not subject to specialsupervision and regulation until public and congressional interestand criticism intensified in the 1950s and 1960s. With “foundationsunder fire” (Reeves, 1970) in the 1960s due to Congressman WrightPatman’s decade-long crusade investigating a variety of alleged mis-uses, Congress finally introduced substantial regulation of privatefoundations in the Tax Reform Act (TRA) of 1969, attempting to usethe fiscal law to distinguish between foundations and other nonprofitorganizations.

Legally a foundation is essentially a creation of the tax law,which basically considers this type of organization to be a donor-controlled (usually endowed) organization. Foundations are thuscharacterized by the dominance of a single source of income—provided by the founding donor—as opposed to public charitieswith a more diversified income structure. Somewhat simplified, pri-vate foundations are a residual category and principally comprisethose 501(c)(3) organizations that do not qualify for public charitystatus. The Internal Revenue Code grants a blanket exception fromprivate foundation status to certain types of organizations, includ-ing hospitals and colleges and universities, regardless of incomestructure, and establishes a number of tests to ferret out broadly sup-ported organizations (public charities) from single donor supportedorganizations (private foundations). Thus the U.S. law fails to spellout a comprehensive positive legal definition. Instead tax regulation

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Moreover, thevery concept of

what afoundation isdiffers cross-

nationally, andthe definition of

this set ofinstitutions seems

subject tocultural

specificity.

relies on various tests and exceptions to single out those foundation-like charitable organizations that Congress found in need of morestringent regulation and lesser tax privileges (for example, thedeductibility limits for gifts to private foundations are lower thanthose for public charities). Moreover, the TRA of 1969 also differ-entiated for the first time between operating and grantmaking foun-dations, easing for the former some of the harsher regulationsimposed on the latter.

With the legal system failing to define clearly what a foundationis (beyond the fact that it is financially not widely publicly sup-ported), a different approach to delineating the U.S. foundation uni-verse emerged. More specifically, F. Emerson Andrews (1956, p. 11),amid growing scrutiny of foundations in the 1950s, defined a foun-dation as “a nongovernmental, nonprofit organization having a prin-cipal fund of its own, managed by its own trustees or directors, andestablished to maintain or aid social, educational, charitable, reli-gious, or other activities serving the common welfare.” In the pre-TRA 1969 era, Andrews was thus casting a wide net thatencompassed a large number of endowed institutions that maintainrather than aid activities. However, in the 1960s, the issue of the daywas the mounting criticism of privately controlled grantmakingfoundations that largely escaped public accountability. The Founda-tion Center, founded to contribute preemptively to the transparencyand accountability of the foundation sector by making more infor-mation available to the public, subsequently modified Andrews’s ini-tial definition somewhat to narrow the target of its reporting to thosekinds of organizations that were at the core of the public debate andcongressional investigations. Accordingly, the Foundation Centercurrently defines a foundation as “a nongovernmental, nonprofitorganization with its own funds (usually from a single source, eitheran individual, a family, or a corporation) and program managed by itsown trustees and directors, established to maintain or aid educa-tional, social, charitable, religious, or other activities serving thecommon welfare, primarily by making grants to other nonprofit orga-nizations” (Renz, Mandler, and Treiber, 1998, p. 119; emphasisadded). The two main modifications serve to exclude organizationsbuilding endowments from multiple donations from the public atlarge (with the exception of community foundations) and to focuson predominantly grantmaking organizations. More or less in linewith this definition, four principal forms of foundations are usuallydistinguished in the United States:

Private independent foundations—grantmaking foundations estab-lished by individuals or single families and governed by self-perpetuating boards

Corporate or company-sponsored foundations—private grantmakingfoundations established by companies rather than individuals orfamilies

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Community foundations—foundations that receive their endowmentfrom multiple donors rather than a single source and are governedby boards drawn from the local communities they serve

Operating foundations—foundations that primarily operate their owninstitutions, programs or projects, although some may also havegrants programs

Defining Foundations in GermanyIn the German civil law system, Article 80–88 of the Civil Codeintroduces a number of basic aspects of the foundation as a legalform but shies away from an outright definition. However, thelegal literature usually suggests that foundations essentially consistof the founding act of the donor, certain assets tied to specific pur-poses, and an organizational structure to carry out the intendedpurposes (SOERGEL-Neuhoff, 1988). At this level, the law does notdistinguish between the origin or nature of required assets or theorganization of foundation work. Accordingly, foundations can beestablished with a variety of nonfinancial assets, such as art collec-tions or even institutions, such as a museum or a hospital; and a legaldistinction between grantmaking and operating foundations is notmade. Akin to the European Foundation Centre typology (OrpheusProgramme, 1995) and following U.S. custom, foundations inGermany can similarly be classified along kinds of activities (grantmaking versus operating) and types of founders, yielding six mainbut not exclusive categories:

Private FoundationsSimilar to independent foundations in the United States, most Ger-man foundations are established by individuals or sometimes fam-ilies (usually as the joint gift of two spouses) and incorporatedunder private law. As in the United States, privately endowed foun-dations range from large, multipurpose foundations established bymajor industrialists to medium-sized to very small foundations.Generally, private foundations in both countries are roughly com-parable, although there are differences in detail. The independentfamily foundation, for instance, is less common in Germany thanthe United States. Whereas such foundations in the United Statesare usually established to institutionalize a family’s philanthropicactivities and have a broad and flexible range of purposes, smallerand medium-sized German foundations are typically special-purpose foundations reflecting the donor’s personal interest in a cer-tain topic or personal experience. In addition, the fiscal laws inGermany tend to steer donors toward naming specific purposes.The involvement of family members in foundations is not uncom-mon but not as central as in many U.S. foundations. These foun-dation types account for the majority of foundations in bothcountries.

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Similar toindependent

foundations inthe United States,

most Germanfoundations areestablished byindividuals or

sometimesfamilies (usuallyas the joint gift oftwo spouses) and

incorporatedunder private

law.

Operating FoundationsNeither the general law nor tax regulations distinguish between grant-making and operating foundations in Germany. In fact, many foun-dations operate either institutions or self-designed projects in additionto grantmaking programs. More specifically, of about forty-one hun-dred German foundations that indicated grantmaking activities in1991, close to 11 percent also indicated the operation of institutionsor programs, or both. The comparatively high share of foundationsthat are both operating and grant making represents a significant dif-ference in the composition of the U.S. and German foundation sec-tors. In contrast to the United States, operating elements prevail evenamong the largest German foundations (Toepler, 1996).

Company-Sponsored FoundationsThese foundations are generally established by corporations as inde-pendent legal entities under private law and do not differ significantlyfrom their U.S. counterparts. Similar to the situation in the UnitedStates, company-sponsored foundations account for 5 percent of allgrantmaking foundations but show a high potential for growth.About 70 percent of all company-sponsored foundations were estab-lished in the 1980s and early 1990s (Toepler, 1996).

Company-Holding FoundationsFoundations in this subgroup of private philanthropic foundationsare established by proprietors of business corporations to controlthese businesses after the proprietor retires. Such foundations are ameans of preventing power struggles among heirs or large inheritancetaxes that would break up the company. Indeed, the option to bringcompanies under the control of foundations is seen as a major incen-tive, and much recent growth in the foundation field is attributed toit (Karpen, 1980; Strachwitz, 1994).

State-Administered FoundationsPrivate citizens have traditionally bequeathed endowments to pub-lic institutions such as city administrations or public universities,thus leaving the administration of charitable trusts to state agenciesand also the churches, rather than to banking or community institu-tions as in the nineteenth-century United States. The receiving pub-lic agency is legally bound to abide by the donor’s stipulations. Thesestate-administered private endowments are functional equivalents ofthe common law trusts that ushered in the community foundationmovement in the United States.

State-Sponsored FoundationsGovernments at the municipal, state, and federal levels have twooptions to become active in the foundation field: establish eitherpublic or private foundations. In theory, public foundations serve as

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vehicles to facilitate the provision of core public sector services andare closely connected to the state administration. However, govern-ment-sponsored foundations are increasingly constituted privately—and thus outside direct parliamentary oversight, althoughgovernment officials are usually represented on the governing boardsand are able to exercise a high degree of influence on grantmakingpolicies and programs (Maurice, 1991). In fact, two of the largestGerman foundations, the Volkswagen Foundation and the FederalFoundation for the Protection of the Environment, are independentprivate foundations established by the state and endowed with pro-ceeds from the privatization of state-owned enterprises. Other state-sponsored foundations have only minimal endowments and arefunded by government appropriations, allowances from state lotter-ies, and the like (Toman, 1990). Generally the relationship betweena state-sponsored private foundation and the state is principally thesame as the relationship between a company-sponsored foundationand the sponsoring company; the donor in both cases retains controlover the formally independent foundation and its funding policiesand programs through staffing and trustee selection.

Quasi-FoundationsIn addition, there are a number of fundraising “foundations” that donot meet the legal criteria for foundation status. These quasi-foun-dations include organizations that are raising funds for specific proj-ects or endowment funds for specific purposes. The question as towhether to include them in analyses of the grantmaking field is anongoing debate in the European context.

Distant Relatives or Close CousinsIn view of the growing interest in foundations at the internationallevel, we can expect an increased exchange about foundations, theinstitutional undergirdings of the foundation sector, and the devel-opment of policies toward these organizations. However, given thedearth of substantial comparative research, a number of myths andmisperceptions about foundations remain. Among the most signifi-cant pitfalls is the terminological entanglement and the lack of acommon definition of foundation with international validity. As thediscussion of common foundation types in Germany demonstrates,the U.S. and German foundation communities might indeed be con-sidered distant relatives, but the understanding of what constitutesa foundation, and thus what the boundaries of the sector are, variessignificantly in some important respects.

In both countries we find private independent foundations,corporate foundations, and operating foundations, although operat-ing foundations appear to be more prevalent in Germany. However,company-holding foundations as well as state-sponsored andstate-administered foundations seem to be more of a European

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Among the mostsignificant pitfalls

is theterminological

entanglement andthe lack of a

commondefinition of

foundation withinternational

validity.

phenomenon. Conversely, community foundations are a U.S.-specificfoundation form that is only now gaining footholds in Europe (Feurt,1998). By and large, the question is whether these are real differencesbetween the foundation sectors or whether this is just an artifact ofdefinitional conventions. In fact, from a European perspective, itcould be argued that there seems to be a problem with the conceptuallenses applied in the United States, leading to a partial research bias.

Generally the operating form is more prevalent in Europe, butthe almost exclusive emphasis on the grantmaking aspect of foun-dations in the United States has led to an underappreciation of thereal scope of the operating segment of the American foundation com-munity. Frequently the number of operating foundations with grantsprograms is mistaken for the total number of operating foundations.Consequently, the numbers that are often cited to delineate the sizeand composition of the U.S. foundation community do not fullydescribe the actual scope of the foundation sector as defined bythe tax code (Toepler, 1999). Company-holding foundations in theUnited States largely disappeared with the introduction of the excessbusiness holdings provision of the TRA of 1969, which prohibitsfoundations from holding more than 20 percent of the stock in anycorporation (35 percent under certain circumstances).

The relative importance of state-sponsored and state-administeredfoundations in Europe may be due in part to differences in the generalstructure of the legal system. The German civil law system allows theincorporation of foundations under private law, which governsthe legal relations between private legal persons (individuals andcorporations), and under public law, which governs the relationsamong public sector entities and between the state and privatelegal persons. However, the system allows cross-overs between thepublic and private spheres. Private citizens may endow foundationsunder public law (as is often the case with state-administered foun-dations), and governmental agencies may establish foundations underprivate law.

An alternative explanation of why state-related foundations donot figure in the U.S. foundation sector is that the prevailing researchbias precludes such organizations from consideration. There are fewdifferences in principle between foundations independently set up butcontrolled by governments and those independently set up butcontrolled by business corporations. Following this reasoning, thereis little support for excluding such foundations from a larger analysisof the foundation sector. Interestingly, in the 1950s, Andrews (1956,p. 34) still included governmental foundations, or “foundations con-trolled by the United States government and financed by taxation,”such as the National Science Foundation, in his descriptive overviewof different foundation types. Conceivably the neglect of this type offoundation in the United States might also be due to the possibilitythat there are not many of such institutions in existence. Whether thisis the case, proposals to turn the National Endowment for the Arts into

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a true endowment and recent attempts of state arts councils to estab-lish foundations using special tax and other types of revenue (Dipko,Hauser-Field, and Love, 1993) attest that governmental foundationsmay become more of an issue and merit greater research attention.

The other type of foundation that is usually not counted as partof the foundation sector but has some bearing in this context com-prises so-called supporting organizations under section 509(a)(3) ofthe Internal Revenue Code. Such supporting organizations includeprivately funded foundations that make grants to prespecified pub-lic charities, which also control the foundation. The tax code intro-duces the 509(a)(3) option so that “an organization may qualify asother than a private foundation even though it may be funded by asingle donor, family, or corporation” (Internal Revenue Service, 1997,p. 33). Supporting organizations—of which there were close totwenty thousand in 1991 compared to some thirty-six thousand inde-pendent grantmaking foundations (Bowen, Nygren, Turner, andDuffy, 1994)—frequently are used as the fundraising arms of otherinstitutions (akin to the European fundraising foundations), but alsoinclude “true” single donor endowed foundations, which lack onlythe characteristic of independence. Moreover, supporting organiza-tions occasionally can provide donors the opportunity to establishfoundations that are largely free from the more severe regulation andoversight of private foundations, a fact that recently has raised someregulatory concern (Troyer, 1999).

Unfortunately, not much is yet known about supporting organi-zations. Although many will certainly have little in common withfoundations, others have more, such as private endowments provid-ing scholarship funds that are controlled or operated in collaborationwith municipalities, schools, or school districts (Hopkins and Blazek,1997, pp. 457–458)—quite comparable to state-administered foun-dations in Germany. Supporting organizations thus also transcendthe public and private divide. Presumably many foundations sup-porting public universities are classified as supporting organizationsrather than private foundations, although some have endowmentfund status under section 509(a)(1) as “organizations operated forthe benefit of certain state and municipal colleges and universities”(Internal Revenue Service, 1997). Institutionally related foundationsexist currently at more than one thousand colleges and universities(Ransdell, 1997). Though such foundations are not only “reasonablyindependent” (Ransdell, 1997, p. 194), the question does arisewhether an exclusion of these foundations, as well as other support-ing organizations, from the analysis of private foundational philan-thropy is justifiable for larger research purposes.

ConclusionA closer look at foundations in different national settings may con-tribute to revealing inherent research and cultural biases that tosome degree distort our understanding of foundations nationally but

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might also easily lead to a comparison of apples and oranges in thefoundation field internationally. The analysis suggests the need foran inclusive positive definition of foundations as organizationalforms that transcends often incompatible national approaches. How-ever, to paraphrase Schuster (1987) on cross-national arts policyresearch, “making comparisons” often means “making compro-mises.” Clearly, applying the U.S. definition to Germany or otherEuropean countries would imply cutting large numbers of organi-zations that are considered legitimate parts of the foundation com-munities out of the picture. By the same token, using a Europeanapproach to capture U.S. foundations would imply casting a con-siderably wider net than is customarily done. In any case, the impli-cations are considerable.

Choosing the latter approach would mean a break with thelong-standing convention of focusing on single donor, privately con-trolled, independent foundations dating back to the 1960s. How-ever, after thirty years, it does seem appropriate to begin to loosenthe definitional straitjacket that the TRA of 1969 imposed on foun-dations and to reevaluate the broader definition of foundations thatAndrews developed in the 1950s. After all, the customary inclusionof community foundations in the foundation field, which are pub-lic charities under the tax law, has already gone beyond theextremely narrow legal understanding of foundations. In addition,the Foundation Center has recently begun to collect data on so-called public foundations, which are also grantmaking entities withpublic charity status by virtue of a broader support base. To takethis one step further by including governmental foundations andendowed supporting organizations would yield an even broader,richer, and more diverse picture of institutional philanthropy. Thiswould also bring American foundation analyses more in line withthose in the rest of the world.

STEFAN TOEPLER is associate research associate on the faculty of the JohnsHopkins University Institute for Policy Studies, Center for Civil SocietyStudies, and is coeditor of and a contributor to Private Funds, Public Pur-pose: Philanthropic Foundations in International Perspective (1999).

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