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COVINGTON & BURLING

Smithsonian Institution
April 18, 1972
Page Four

discussion of the bases for our opinion. Part II hereof includes a discussion of the economic, financial and tax factors suggesting that the use of a prudent portion of yield and appreciation is legally defensible and desirable as a method for determining income of charitable institutions. Part III contains a discussion of the law in applicable and related fields. Finally, Part IV contains a discussion of the factors which the Smithsonian should consider in its determination of the prudent portion of yield and appreciation, based on a percentage of average fund values, to be treated as income.

II. 
The economic and financial bases, which form part of the legal justification for using a prudent portion of yield and appreciation as income, are set forth persuasively in two reports sponsored by the Ford Foundation. Advisory Committee on Endowment Management, Managing Educational Endowments (1969); W. Cary and C. Bright, The Law and the Lore of Endowment Funds (1969).3/
Charitable institutions have two primary duties with regard to their endowment funds. First, they must try to generate sufficient income from the funds and apply it