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COVINGTON & BURLING

Smithsonian Institution
April 18, 1972
Page Eight

to defining income is the supposition that the principal value of funds will be preserved by allocating all appreciation to principal.  As we have seen, this approach has not worked well for most charitable institutions, which generally have pressing needs--as well as the obligation--to generate sufficient currently expendable income. 16/

III.

A comprehensive analysis of the law governing income determination for permanent endowments of charitable institutions is contained in The Law and the Lore of Endowment Funds, supra.  We concur in its conclusion that

"there is no substantial authority under existing law to support the widely held view that the realized gains of endowment funds of [charitable] institutions must be treated as principal.  No case has been found which holds that such an institution does not have the legal right to determine for itself whether to retain all such gains or to expend a prudent part." 17/   

This conclusion remains sound whether it is considered that District of Columbia law, the law of the domicile of the donor, or Federal common law is applicable to the Smithsonian Institution.  Moreover, the Federal statutory provisions creating and governing the Smithsonian Institution do not affect this conclusion. 18/