Viewing page 72 of 95

This transcription has been completed. Contact us with corrections.

COVINGTON & BURLING

Smithsonian Institution
April 18, 1972
Page Fifteen

possible blockage discounts from value, in determining the amount of unrealized appreciation or depreciation which would be realizable at any given moment. Aside from these limitations, however, appreciation or depreciation in the value of marketable assets is just as real to a charitable institution whether or not it is actually "realized" by a sale. 

A rule which limited income by the amount of appreciation in assets actually realized by sale would probably lead an institution to engage in numerous unnecessary security transactions. 43/ We thus are unable to find any sound reason, in the case of tax-exempt charitable institutions, which are investing in marketable securities, to have the appreciation which would be available in the determination of income depend on realization, by sale, of the appreciation.

IV. 

If the Smithsonian is to rely on a method of determination of income which involves an expanded exercise of discretion, it must set up in advance a method for approaching income determination which is prudent. 44/

We consider it important that the Smithsonian be able to demonstrate that the percentage applied to total fund values to determine income does not exceed average