Spending of Realized Capital Gains


What does the Certificate of Incorporation say about the Robertson Foundation’s ability to spend realized capital gains?

Article 11(c) of the Foundation’s Certificate of Incorporation imposes limitations on the disbursement of capital assets “which do not constitute income or accumulated income as defined in Treasury Department Regulation § 1.504-1(c), or its then equivalent” but it does not restrict the expenditure of income. [Document: Excerpt from the Foundation Certificate of Incorporation (.pdf)]

In 1961, Treasury Regulation § 1.504-1(c) defined “income” as “gains, profits, and income determined under the principles applicable in determining the earnings and profits of a corporation.” [Document: Excerpt from Treasury Regulation § 1.504-1(c) (.pdf)] In 1961 (and today), “earnings and profits” included gains realized upon the sale of an asset. Thus, for purposes of Article 11(c), “income”—as defined in the Treasury Regulation expressly referenced in Article 11(c)—includes realized gains and does not restrict their expenditure in any respect.

For an overview of a number of the key issues in this dispute, see Robertson v. Princeton -- Perspective and Context, prepared by Victoria B. Bjorklund. Ms. Bjorklund is a member of the law firm Simpson Thacher & Bartlett LLP, which, together with Lowenstein Sandler PC, serves as litigation counsel to Princeton University and the individual defendants in the Robertson litigation.

Does the law have anything to say about the expenditure of realized gains?

The Robertson Foundation is incorporated in Delaware and Delaware’s Uniform Management of Institutional Funds Act, or “UMIFA,” authorizes expenditure of the Foundation’s realized capital gains. UMIFA was enacted over thirty years ago with retroactive effect. It was enacted to reverse the adverse effects of outmoded, self-imposed spending limitations often practiced by public charities (including educational institutions), such as those that plaintiffs want to re-impose here. UMIFA expressly provides the trustees of an endowment fund with authority to spend the realized and unrealized capital appreciation of the fund. UMIFA provides for an exception to this rule if the gift instrument expressly states the donor’s intent to prohibit the expenditure of capital gains, but there is no such prohibition in the Robertson Foundation’s “gift instrument,” the Certificate of Incorporation. (While New Jersey law does not apply on this matter, New Jersey’s UMIFA includes the same provision as Delaware’s.)

Why do the Robertson family members object to spending realized capital gains?

It is not clear why the Robertson family members objected to the expenditure of realized capital gains. Since 1992, the Foundation has regularly spent dividend and interest income and a portion of its capital gains realized from the sale of Foundation assets, consistent with the Certificate of Incorporation and UMIFA. Each year, the Foundation board members—including plaintiffs William Robertson and Robert Halligan—were given the Foundation’s financial statements that clearly reflected that the Foundation was spending dividend and interest income and a portion of its capital gains. At no point until shortly before the filing of the lawsuit did plaintiffs ever question or object to the spending of a portion of the Foundation’s capital gains.

In a motion for summary judgment, Princeton asked the court to rule that, contrary to assertions made by the Robertson plaintiffs, the plain language of Article 11(c) of the Foundation’s Certificate of Incorporation permits the spending of capital gains and appreciation. In addition, the Delaware Uniform Management of Institutional Funds Act (“UMIFA”), which governs the Foundation, also makes clear that gains on the sale of Robertson Foundation assets may be expended in support of the Foundation’s mission. [See: What does the Certificate of Incorporation say about the Robertson Foundation’s ability to spend realized capital gains?; Does the law have anything to say about the expenditure of realized gains?] In a detailed ruling on this issue in October of 2007, Judge Shuster rejected every argument advanced by the Robertson plaintiffs, siding with Princeton on every point.  [See What was Princeton’s “Capital Gains” or “Article 11(c)” motion? How did the court rule?]