TAX-EXEMPT FOUNDATIONS: THEIR IMPACT ON SMALL BUSINESS

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TAX-EXEMPT FOUNDATIONS: THEIR
IMPACT ON SMALL BUSINESS
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WASHINGTON, D.C.
JULY 21, 22, 23, AUGUST 10, 31, SEPTEMBER 1 AND 4, 1564'
Printed for the use of the
Select Committee on Small Business
_
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TAX-EXEMPT FOUNDATIONS: THEIR
IMPACT ON SMALL BUSINESS
HEARINGS
BEFORE
SUBCOMMITTEE NO, 1
ON FOUNDATIONS
SELECT COMMITTEE ON SMALL BUSINESS
HOUSE OF REPRESENTATIVES
EIGHTY-EIGHTH CONGRESS
SECOND SESSION
PURSUANT TO
H. Res. 13
A RESOLUTION CREATING A SELECT COMMITTEE TO CONDUCT
STUDIES AND INVESTIGATIONS OF THE PROBLEMS
OF SMALL BUSINESS
WASHINGTON, D.C.
JULY 21, 22, 23, AUGUST 10, 31, SEPTEMBER 1 AND 4, 1964
Printed for the use of the
Select Committee on Small Business
U.S. GOVERNMENT PRINTING OFFICE
39-915 WASHINGTON: 1964
For sale by the Superintendent of Documents, U.S. Government Printing Office
Washington, D.C., 20402 - Price $1.25
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SELECT COMMITTEE ON SMALL BUSINESS
JOE L. EVINS,
WRIGHT PATMAN, Texas
ABRAHAM J. MULTER, NUW York
TOM STEED, Oklahoma
JAMES ROOSEVELT, California
JOHN C. KLUCZYNSKI,
JOHN D, DINGELL, Michigan
JOE L.
JAMES
Tennessee, Chairman
WILLIAM M. McCULLOCIT, Ohio
ARCH A, MOORE, JR., West Virginia
WILLIAM II. AVERY, Kansas
H. ALLEN SMITH, California
HOWARD W. ROBISON, New York
RALPH HARVEY, Indiana
OASKELL JACOUES, Stair Gircetor
MITCHELL, General Counsel
OLsnna, Director, Foundations Study
twri ON GOULD, Counsel
iorrv IN. Counsel
IOAILLES E. O'CONNOR, Counsel
NOV A. 1100INSON, Counsel
VI"RT1.11 IIUTII FOUTCII, Clerk
.HWN J, WILLIAMS, Minority Counsel
LOIGHL, Assistant Minority Counsel
31'.;01100M AIMEE: NO.
W 1LGIIT PATMAN, Texas, Chairman
,EVINS, Tennessee WILLIAM H. AVERY, KSIIIISS
ROOSEVELT, California RALPH HARVEY, Indiana
A. OLstnat. Director, Foundations Study
.115 .1. WILLIAMS, Minority Counsel
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CONTENTS
Page
Testimony of Douglas Dillon, Secretary of the Treasury 6
Testimony of Mortimer M. Caplin, Former Commissioner,
Internal Revenue Service 64
Testimony of Manuel F. Cohen, Acting Chairman, Securities
and Exchange Commission 103
Testimony of Bertrand M. Harding, Acting Commissioner,
Internal Revenue Service 127
Exhibits 295
III
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TAX-EXEMPT FOUNDATIONS: THEIR IMPACT ON
SMALL BUSINESS
TUESDAY, JULY 21, 1964
HOITSE OF REPRESENTATIVES,
SUBCOMMITTEE No. 1 ON FOUNDATION OF THE
SELECT COMMITTEE To CONDUCT STUDIES AND
INVESTIGATIONS OF THE PROBLEMS OF SMALL BUSINESS,
Washington, D .0 .
The subcommittee met, pursuant to call, at 10:10 a.m., in room 1301,
Longworth House Office Building, Hon. Wright Patman (chairman
of the subcommittee) presiding.
Present: Representatives Patma,n, Roosevelt, and Harvey.
Also present: Representative McCulloch of the full committee;
H. A. Olsher, Director of Foundation Studies; John J. Williams,
Minority Counsel; and Eugene Loehl, Assistant Minority Counsel.
The CHAIRMAN. The Committee will please come to order.
This is the first session of hearings of Subcommittee No. 1 on the
subject of the Federal Government's supervision of tax exempt foun-
dations and charitable trusts.
This morning Mr. Evins, the Chairman of the whole Committee on
Small Business and a member of this Subcommittee is unavoidably
detained and cannot be here.
Mr. Avery, of Kansas, is likewise detained, and is not here.
We are glad to have the other members of the Committee, Mr.
Roosevelt of California, and Mr. Harvey of Indiana.
The foundation is a phenomenon which has "come of age" since
1950. There was a time when a man's status in his community was
determined by the number of cars in his garage. Now, his position
in the community is based on the number of foundations under his
wing. This phenomenon packs a tremendous economic and political
wallop which is felt in many areas of our economy. Despite the wide
repercussions, the general public has only, in the past two years, be-
come aware of what is actually taking place. From the very begin-
ning of our study, the deep interest of the public has been indicated by
thousands of letters from all parts of the country and by the demand
for printed copies of our findings. I predict that an informed public
will make tax exempt foundations one of the most important issues
of our time.
The continuing huge purchases of common stocks by foundations are
signaling a change in the location of the economic power in this coun-
try. This is a force that can affect the course of our national economy.
The power will, in reality, rest in the hands of a. relatively small
group?the foundation managers.
1
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2 TAX-EXEMPT FOUNDATIONS: IMPACT ON SMALL BITEN
BACKGROUND OF THE HEARINGS
Since 1962, the House Small Business Committee has been engaged
in a fact-finding study of the impact of tax exempt foundations and
charitable trusts on the nation's economy?dealing in part with foun-
dation-controlled enterprises in competition with taxpaying business-
men.
The object of the study is to determine whether legislation is needed
in order to provide effective supervisory controls over such organiza-
tions. The study?when it is completed?will provide a base of in-
formation on foundations that can be used to formulate positive con-
gressional action.
Information has been gathered from 546 foundations and chari-
table trusts. To date, three reports have been transmitted by me to
the Subcommittee under dates of December 31, 1962, October 16, 1963,
and March 20, 1964. The data which have been assembled in the re-
ports present for the first time detailed information on the income,
assets, expenditures, etc., of a substantial number of foundations.
They permit the study of some important aspects of the foundation
field which have hitherto been largely unexplored.
EROSION OF THE TAX BASE
Our study provides the Congress with numerous dramatic examples
of the ever-increasing erosion of our tax base and the serious prob-
lems this creates for tax policy. More and more, the "cream" is
slipping out of our tax system as the great fortunes go into tax exempt
foundations. Thus, the "skim milk" incomes of average, hard-work-
ing families must shoulder an increasing part of the tax burden, both
Federal and State.
DODGING ESTATE AND INCOME TAXES
The trend to shift the wealth of America's richest families into tax
exempt foundations and trusts represents a gigantic loophole in our
tax laws. Such organizations have been and are being used, in part,
to avoid Federal estate taxes. Thus huge fortunes are kept from
being returned to public use for channeling into our economy with-
out limitations.
The late Secretary of the Treasury Mellon used a charitable founda-
tion to avoid estate taxes on a multimillion dollar estate. Of more
recent date the Ford Foundation was used to reduce the taxable
estates of f-lenry Ford and Edsel Ford and to avoid having to sell
Ford Motor Company stock to the public in order to meet large estate
taxes. Thus the Ford Foundation was given over 90 percent of the
equity in the Ford Motor Company.
So substantial parts of the great fortunes of those who have profited
by the enormous expansion of American industry have found their
way into tax exempt foundations. These foundations have already
passed and will continue to pass?by right of inheritance?to the con-
trol of heirs or their trustees. This enables a few individuals to con-
trol ever-increasing tax exempt wealth.
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The progressive development of thousands of foundations through
gifts of corporate stock illustrates the increasing flow of formerly
taxable income into these cozy tax shelters. Stock acquisitions of the
Charles Stewart Mott Foundation, Flint Michigan, Edward E. Ford
J
Foundation, New York City, W. Alton ones Foundation, New York
City, Phoebe Waterman Foundation, Inc., Philadelphia, Gulf
Oil Foundation, Houston, and a host of others provide examples of
how millions of dollars of formerly taxable income are now escaping
taxation.
LACK OF STATISTICS
Treasury has shown no improvement in the matter of statistical data
on foundations.
In 1948, the Treasury Department estimated that there were about
10,000 foundations in this country. The Senate Commerce Commit-
tee--which was investigating the Textron Trusts?was of the opinion,
however, that "nobody knows precisely how many such trusts exist."
In 1949, the report of the Senate Committee on Interstate and
Foreign Commerce on the Textron Trusts, stated as follows:
The committee staff engaged in research to obtain such information as was
available concerning charitable trusts as related to industrial enterprises, and
were surprised to learn of the scarcity of information available to the public or to
the Congress concerning such so-called charitable trusts * * * there is no agency
which has been able to obtain comprehensive information concerning the extent
of such tax avoidance and industrial investment, and the extent to which such
use of trusts gives unfair competitive advantages in the manufacturing field.
It is understood that there are many thousands of such trusts operating
throughout the country and yet even the Treasury Department does not know
the number or identity of all of the trusts and is ignorant of their financial
maneuverings.
Five years later, in 1954, the Reece Committee complained that it
was unable to arrive at any accurate estimate of the number of founda-
tions, their income, expenditures, and assets.
At one point, Commissioner Caplin advised us that there were 12,295
tax exempt organizations filing Tax Return Form 990-A during 1952,
and 45,124 such organizations filing Form 990-A during the year 1960.
Additionally, Commissioner Caplm has informed us that 18,298 new
"private" foundations were granted exemption during the years 1954
through 1962.
But, on May 16, 1963, Commissioner Caplin made a speech in
Cleveland in which he said that there were "roughly 15,000 actual
foundations."
Now, if we take the 1948 estimate of the Treasury Department-
10,000 foundations?and add the 18,298 new foundations, which, ac-
cording to Commissioner Caplin, were granted tax exemption during
the years 1954 through 1962, we come up with a total of 28,298 founda-
tions, not counting the unknown number of foundations that were
granted exemption during the years 1919 through 1953.
In all this, one very disquieting fact stands out: The Treasury De-
partment has no more knowledge today, respecting the number of
foundations in existence, than it had 15 years ago in 1948. Our
findings indicate that there may be countless foundations in operation
without the knowledge of the Treasury. In my view, an estimate of
100,000 tax exempt foundations may be far more accurate than 45,000.
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TAX-EXEMPT FOUNDATIONS: IMPACT ON SMALL BUSINESS
ASSETS HAVE REACHED MASSIVE PROPORTIONS
Our study indicates that (1) tax exempt foundations have reached
massive, undreamed of proportions i , (2) Certain of them have ac-
quired immense power and position m our economy, and (3) founda-
tion-controlled enterprises possess the money and competitive ad-
vantages to eliminate the small businessman. The following are
among the statistics cited in support of these statements:
? The 546 foundations under study had aggregate untaxed receipts,
including contributions received, of over $7 billion during the period
of 1951 through 1960. Hence, there was a withdrawal of $7 billion
from the reach of the tax collectors for those taxable years. During
the one year 1960, their total untaxed receipts were $1.044 billion, as
against $556 million in 1951.
? In 1960, there were 7,213,000 families, including unattached indi-
viduals, in the United States who had income of less than $2,000 be-
fore taxes. Their aggregate income was $8.040 billion, or an average
of $1,114.66 per family. Thus, the $1.044 billion received by the 546
tax exempt foundations in 1960 was 13 percent of the aggregate in-
come of 7,213,000 American families. In other words, the aggregate
receipts of these 546 foundations were equal to the average incomes of
937,000 American families in 1960.
? The $1.044 billion received by the 546 tax exempt foundations in
1960 was substantially more?in fact, 17 percent more?than the
$864,435,000 combined net operating earnings, after taxes, of the 50
largest banks in the United States.
? The 546 foundations had assets of no less than $10.3 billion at the
end of 1960.
? The financial condition of the 546 foundations, in general, was
enviable. Aggregate net worth (total assets less liabilities) was no
less than $9.8 billion at the end of 1960.
At the close of 1960, the net worth of the 546 foundations?$9.8 bil-
lion?was 20 percent greater than the $7.9 billion capital funds (cap-
ital, surplus and undivided profits) of the Nation's 50 biggest com-
mercial banks. The net worth of these foundations was also 22 per-
cent greater than the $7.7 billion invested capital (capital stock, sur-
plus and retained earnings) of the Nation's 50 largest merchandising
firms.
? During the period of 1951 through 1960, the contributions, gifts,
grants, scholarships, et cetera, paid out by. the 546 foundations total
over $3.4 billion roughly 50 percent of their aggregate receipts of $7
billion. They claimed expenses, including administrative and operat-
ing expenses, of over $748 million, 101/2 percent of the total receipts.
? The 546 foundations had accumulated (unspent) income of $902
million at the close of the last accounting period for which they sub-
mitted data to the Committee (usually 1960) , as against $271 million at
the close of the first accounting period (usually 1951) for which they
provided information.
Nonfeasance on the part of Treasury officials has fostered tax-free
commercial activities violations of law and Treasury regulations, and
tax avoidance through the device of foundations. Moreover, the De-
partment's indefensible apathy and its archaic procedures have en-
couraged certain owners of foundations to exploit their tax exempt
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TAX-EXEMPT FOUNDATIONS: IMPACT ON SMALL BUSINESS 5
status for personal gain and for the benefit of others with whom they
are affiliated through stockholdings, joint stock trading accounts,
promotion, syndicates, and other financial relations and transac-
tions.
To date, the granting of Federal tax exemption to foundations has
been a mere formality. The record proves that, as far as the Treas-
ury is concerned, an organization becomes "charitable" by merely
describing itself as such. Once the exemption has been granted, there
is little or no check on the foundation's operations. No less than 55
percent of the 546 foundations examined by the Subcommittee failed to
comply with certain Treasury regulations during one or more years.
CONTROL OF BUSINESSES
In the past two decades numerous business organizations have become
affiliated with or merged into so-called charitable foundations. It is
evident that control of our industrial and commercial enterprises is
to an ever-increasing degree passing into the hands of tax exempt
foundations through stock ownership.
One hundred eleven of the 546 foundations under study owned 10
percent or more of at least one class of stock in one or more of 263
different corporations on December 31, 1960. The stock ownership
of those 111 foundations ranged from 10 percent to 100 percent, and
included many well-known companies such as Ford Motor Company,
Great Atlantic and Pacific Tea Company, Eli Lilly and Company,
Kellogg Company, Callaway Mills Company, Duke Power Company,
and S. S. Kresge Company.
STOCK MARKET OPERATIONS
During the period of 1951 through 1960, the 546 foundations showed
capital gains of over $1.1 billion. This figure suggests that many
foundations have become a vehicle for trading in securities and dodg-
ing the capital gains tax. Additionally, there is considerable evidence
that certain foundations have operated as sources of unregulated stock
market credit.
Market activity by foundations?with huge, untaxed funds at their
disposal?poses some big questions in the light of the 1962 sharp
breaks in the market. Were the 546 foundations under study net
sellers or buyers? The Subcommittee will have the answer when its
study is completed.
What is the impact on small business? Basically, it is that sharp
market declines?such as that of 1962, work a hardship on many
small companies. Lack of stock financing limits opportunities for
such businesses and slows down their expansion plans.
A REASSESSMENT IS NEEDED
Tax exemption for foundations needs reassessment hi the light of
the present times. There is every indication that many tax exempt
charitable foundations are being used for purposes not related to char-
ity. The laws of the past are no longer effective. Congress could not
envision the gigantic proportions that the foundation business would
reach.
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6 TAX-EXEMPT FOUNDATIONS: IMPACT ON SMALL BUSINESS
On behalf of the Subcommittee, I should like to welcome our first
witness, The Honorable Douglas Dillon, Secretary of the Treasury.
Mr. Dillon, I believe you have a prepared statement which you have
furnished to us in advance, which we appreciate. You may proceed
in your own way, sir. We are delighted to have you.
TESTIMONY OF THE HONORABLE C. DOUGLAS DILLON, SECRETARY
OF THE TREASURY
Secretary DILLON. Thank you, Mr. Chairman.
Mr. Chairman, I appreciate your invitation to testify before this
Subcommittee on the important question of tax-exempt charitable
foundations. As you know, these foundations play a very significant
role in American life. Their effect is felt in all aspects of education,
charity, science, medicine, the literary arts and religion. Each year
substantial sums are contributed to foundations, and the foundations,
in turn make substantial, annual disbursements on which many peo-
ple and institutions are vitally dependent.
Because of the importance which we as a nation attach to private
philanthropy, we have promoted it by generous provisions for tax
exemption. This privilege applies to activities of foundations as well
as to the tax deductions which are available to contributors to foun-
dations. Because of this privilege it is healthy, indeed necessary,
that the Congress and the Administration periodically re-examine
those areas where tax exemption and tax deductions are provided. It
is important to make sure that no one is abusing the privilege of tax
exemption, and to put an end to such abuses as may be found. For
example, study is necessary to determine whether any foundations
have been the subject of a misuse which affords unintended or unde-
sirable tax benefits to contributors and others ? whether situations
exist where the interests of the intended beneficiaries of charitable
bounty have been unduly- slighted in deference to the financial inter-
ests of foundation contributors or those in control of foundations;
whether some investment policies of certain foundations may have
been geared more to the interests of controlling private parties than
to the interests of charity; whether charity has received less than a
full dollar of value for every dollar of tax deduction and tax exemp-
tion; and whether any foundations have engaged in business activities
to the detriment of their primary charitable concern, to the advantage
of their contributors and managers, or to the disadvantage of com-
peting private businesses operating without tax exemption.
Both the Congress and the Treasury have studied these problem
areas in the past. A major study resulted in important legislation in
1950 when opportunities for self-dealing were restricted and the unre-
lated business income of tax-exempt foundations was subjected to
income tax. The Revenue Act of 1964 further restricted the oppor-
tunities for self-dealing in the case of foundations seeking to qualify
for unlimited charitable contributions, and those organizations are
now required to make substantial disbursements of their income and
contributed assets.
It is now 14 years since the major revisions of 1950 were adopted,
and it is time to see whether the legislation of that period was ade-
quate to the task of remedying the abuses it was designed to elimi-
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TAX-EXEMPT FOUNDATIONS: IMPACT ON SMALL BUSINESS
nate; whether the legislation needs strengthening, either from a policy
or administrative point of view; and whether other abuses have devel-
oped since 1950 which require correction by legislative or administra-
tive action.
Both the Senate Finance Committee and the House Ways and Means
Committee have requested that the Treasury Department prepare a
report on this subject, and your Subcommittee has, of course, already
issued reports calling: attention to a number of possible problem areas.
The Treasury began its current study of foundation problems in 1961.
In its early stages the study proceeded with limitations imposed by
the priorities given to the Revenue Act of 1962 and the Revenue Act
of 1964. However, the study will be completed and our report sub-
mitted by the end of this year.
In conjunction with the Treasury's study, in 1963 I appointed an
Informal Advisory Committee on Foundations composed of reputable
? and responsible individuals who are associated with foundations on a
full-time, professional basis, lawyers and accountants who have
worked in the foundation area in their private practices, and a law
professor who has been a scholarly observer of foundations and has
written on the subject. The Committee has met on five occasions with
Assistant Secretary Surrey, the Tax Legislative Counsel; and others
from the Treasury and Internal Revenue Service. The purpose of
these meetings was to canvass the views of knowledgeable people on
the practices of taxpayers with respect to foundations, on the man-
agement, investment and disbursement practices of foundations, and
on various alleged abuses and proposed remedies which have been
discussed in this Subcommittee's reports and elsewhere. The Treasury
found these meetings valuable as a source of informed opinion, but
our ultimate conclusions and recommendations will be based on all
aspects of our studies and from evidence drawn from varied sources,
including, of course, field studies by the Internal Revenue Service
and data provided by this Subcommittee.
This Subcommittee's reports contain statistics gleaned from a study
of several hundred foundations, including their asset values, receipts,
accumulations, and disbursements. The Treasurystudy will benefit
from that information and from updated statistical data based upon
an extensive survey of the information returns which foundations
have filed on Form 990?A for the year 1962. It will also benefit from
the responses to a questionnaire which we are sending to a number
of foundations requesting additional statistics and information not
available from existing sources. I would like at this point to submit
for the record a copy of this questionnaire.
(The questionnaire and covering letter appear as Exhibit 50,
page 407.)
Secretary Drra,oic. Information provided by The Foundation Di-
rectory, published by the Russell Sage Foundation, is also being
studied. Thus, to the extent available concrete facts and figures will
provide the background material for the Treasury's ultimate con-
clusions and recommendations.
Although policy considerations will be fundamental to the Treas-
ury's ultimate recommendations, and to the Congress' ultimate judg-
ments, each policy question carries with it technical aspects which are
important to the overall statutory scheme, to equity and administrative
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8 TAX-EXEMPT FOUNDATIONS: IMPACT ON SMALL BUSINESS
practicability. Treasury lawyers intend to study these technical mat-
ters in conjunction with the staff of the Joint Committee on Internal
Revenue Taxation so that the ultimate report will place each conclu-
sion and recommendation in proper perspective, indicating its linkage
with related provisions of law and other relevant considerations.
As part of the Treasury's general interest in the foundation area,
and as Mr. Caplin will tell you in greater detail, the Internal Revenue
Service has, in the last three years, stepped up its program for audit-
ing exempt organization returns. Whereas only approximately 2,000
exempt organization returns per year had been audited before,
about 10,000 exempt organization returns were examined in fiscal year
1961. This should bring about more widespread and fuller compli-
ance with existing provisions of law. It will also help us to form
judgments as to which abuses can be corrected by the vigorous enforce-
ment of existing law and which require new legislation. In order to
provide more meaningful information and to bring to light areas of
possible concern, the information return required of foundations was
modified recently and is undergoing continued re-evaluation.
I would like to also submit for the record a description of the changes
that we have made in the Form 990?A during 1962 and 1963, and also
the new change in Form 1023.
The CHAIRMAN. The statements you have with your testimony may
be made a part of the record, sir.
(The document appears as Exhibit 51, page 411.)
Secretary DILLoic. Thank you, Mr. Chairman.
The scope of existing law is also being determined in litigation. Ap-
propriate cases are being diligently litigated by the Office of the Chief
Counsel of the Internal Revenue Service and by the Tax Division of the
Justice Department. Court decisions are helping to mark off those
areas where vigorous enforcement of existing law will carry out the
Congressional objectives from those where new action by the Congress
may be necessary. Such litigation tests some of the jud,gments made in
1950 in light of the years of experience which have passed since then.
A vigorous litigation policy is a continuous necessity if the effects of
legislation are to be reviewed on an empirical basis. This Adminis-
tration has pursued such a policy where warranted.
Both the administrative and litigation experience since 1950 will
shed light on the propriety of the sanctions which the law now pro-
vides in cases of abuse and outright violation of law. The study will
examine whether, in some cases, sanctions are inadequate or misdi-
rected, and whether in other cases sanctions are so stringent and auto-
matic that courts may be reluctant to hold them applicable.
CONCLUSION
Privately administered philanthropy has a vital, affirmative con-
tribution to make to a dynamic, democratic society like ours. Ours is
a pluralistic society composed of people and groups with diverse,
competing interests and ideas; it is dependent on a free market place
for these ideas and for qualified people to experiment with them.
Foundations directed by private individuals, not by government,
have made great contributions in education, in science, in medicine,
and in fostering an environment for the creation of ideas, for their
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TAX-EXEMPT FOUNDATIONS: IMPACT ON SMALL BUSINESS
debate, and for experiment and innovation. Government has con-
tributed to this healthy environment in many ways, not the least of
which is by providing tax benefits. This is a cost which the Congress
has always considered worth incurring. It is essential, however, that
the cost be a measured one?that abuses and inequitable tax advantages
claimed under the shelter of provisions of law designed to aid philan-
thropy be ferreted out and eliminated. The 1950 amendments were
expected to eliminate abuses and undesirable private benefit cases such
as those involving self-dealing between a contributor and the founda-
tion which he controls. To the extent that they may not have proved
fully effective, they must be strengthened. The study now underway
will explore this type of problem along with others. It is our hope
that we will be able to devise recommendations which will eliminate
abuses and make for efficient, even-handed administration?this with-
out detracting from the policy and provisions of law which encourage
society's realization of the true values of modern philanthropy.
The Treasury's study is proceeding with care and impartiality.
Until it is concluded and our report is submitted to the competent
legislative committees it would be neither desirable nor proper for
me to discuss in any detail particular issues or recommendations which
may be under consideration. You may be sure, however, that all
available data and views, including those set forth in this Subcom-
mittee's report, are being given our utmost attention.
Thank you, Mr. Chairman.
The CHAIRMAN. Thank you, Mr. Secretary.
Before asking questions myself, I wonder if members of the Com-
mittee would like to make a general statement?
Mr. Harvey, would you like to make a statement?
Mr. HARVEY. Mr. Chairman, I think in this instance I would only
like to make a general statement to the effect that I appreciate the
fact that the Secretary and the Department have undertaken a study,
a re-study, I probably should say, of the problem, and I certainly hope
that a more equitable and a more direct supervision of our foundations
will be a result.
I want to say, first of all, on my own behalf, that I certainly am not
opposed to foundations, and I know that a great many of them have
rendered service in the fields which you, Mr. Secretary, have indi-
cated. Their justification certainly is adequately set forth in your
statement, and I concur in it.
I feel that that is, without attempting to speak for the rest of the
members, I think there is a general concensus that the Committee it-
self is not here necessarily just to try to pillory the foundations, but
to try to help the executive branch to more carefully carry out the
provisions of the law.
Thank you, Mr. Chairman.
The CHAIRMAN. Our investigation covers privately-controlled foun-
dations.
Mr. Roosevelt?
Mr. ROOSEVELT. Thank you, Mr. Chairman. Mr. Secretary, I agree
with the statements you have made and equally with your summation.
I concur that private foundations have made a very distinct contribu-
tion in many fields to the progress of our civilization and of our na-
tional life.
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10 TAX-EXEMPT FOUNDATIONS: IMPACT ON SMALL BUSINESS
I would like it distinctly understood that even though considerable
reports and even though in the Chairman's statement itself there are
certain foundations or individuals which are named, as of now I hope
that this singling out of certain people will not be taken as an indica-
tion of any particular fault or criticism of their actions. It may well
be that what they have done is allowable by law and the law may be
changed in view of the light of experience which has happened.
But I think it would be going pretty far if they have done some-
thing in a legal and allowable way, to criticize them for doing it if the
law allows them to do it.
But it is our job, if good public policy now determines that the law
should be changed, to change the law, but not at the price of holding
them up to any adverse criticism, because I think this would be unfair
all down the line.
On the other hand, where individuals or foundations have used
their opportunities for private gain clearly beyond the law, that I
think should be exposed and proper steps taken to see that, Number
One, if it is punishable it is punished; and, Number Two, if it can be
prevented, that it is prevented.
I hope that this Committee will operate on that basis and in that
spirit.
I, for one, will be happy to cooperate with them.
The CHAIRMAN. The ranking minority member of the Committee
on Small Business, the Honorable William McCulloch, is with us
this morning.
Would you like to make a statement, Judge McCulloch?
Mr. McCuLLocii. Yes, I would, Mr. Chairman.
While I am not a member of this Subcommittee officially, I am
pleased that I have the opportunity to sit in as my time will allow.
Mr. Secretary, I am particularly impressed by that part in the
body of your statement which begins with the third sentence in the
second paragraph of your statement, as well as with your conclusion,
in view of the fact that most of the foundations are good foundations,
and have served a great cause in this country, I certainly hope that
the commitment made both in the body of your statement as well as in
the conclusion is implemented by both the administration and by the
Congress so far as it is necessary.
I certainly think that there is a time for a real objective study of this
field, and I am sure that this Committee or any other Committee of
the Congress which undertakes it will have the full cooperation of
your department.
(Discussion off the record.)
The CHAIRMAN. We have issued three reports as indicated. Has
the Treasury found our studies, as reported in these reports, useful,
Mr. Secretary ?
Secretary DILLON. Oh, I think indeed we have, and I would like to
express the hope--I understand the Committee is still continuing with
its work, because this is a complex and difficult and many-faceted sub-
ject?that the Committee could find it possible to complete its work by
the end of the year, so that all of its thinking and studies will be avail-
able for the tax-writing committees, the Ways and Means Committee
of the House in the first instance, when they consider this subject next
year.
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? The CHAIRMAN. We have three reports, about a thousand pages in
all. This is the first one, here is the second one, and the third one.
I will state this that our Committee is very proud of the fact that
out of the thousands and tens of thousands of statements of fact and
figures, not one fact has been challenged successfully. We are very
proud of that. This is a tribute to our staff and Mr. Olsher, in par-
ticular, who had charge of the work.
I notice you state "10,000 organization returns were examined in
fiscal year 1964." By exempt organizations you are referring to all
types of tax exempt organizations, not just foundations, is that
correct?
Secretary DILLON. That is correct.
The CHAIRMAN. Were those examinations field audits or desk ex-
aminations?
Secretary DILLON. I would have to refer that to the Internal Rev-
enue Service, Mr. Caplin and Mr. Harding, who will be here tomorrow.
I do know they took some 3 to 4 days work on the average, so they
were fairly complete audits, and I presume most of them were field
audits, for that reason.
The CHAIRMAN. How many foundations had field audits in fiscal
year 1964?
Secretary DILLON. You will have to ask Mr. Caplin that.
The CHAIRMAN. You may be interested in knowing that, by letter of
February 28, 1964, Commissioner Caplin informed us that?of 546
foundations under study by this Subcommittee?only "115 examina-
tions were completed in 1963."
Last September Mr. Surrey informed me that this Subcommittee
would have a report of Treasury recommendations "in a couple of
months." What has happened to that report, Mr. Dillon?
Secretary DILLON. We had originally thought we might be able
to suggest some new legislation earlier, but we found that we were not
able to do it. We have been consulting continually with the tax-
writing committees, and they were not in a position to consider any
such recommendations this year because they were otherwise fully
engaged, and they asked us to push our study in greater depth and have
it ready for the end of the year, so they could consider the matter next
year. That is what we are doing.
The CHAIRMAN. Our study indicates that a wide variety of assets?
which formerly produced taxable income for the Treasury?are find-
ing their way into tax-exempt foundations and thus escaping taxation.
Such assets include securities, art, copyrights to music, movies, and
theatrical production companies, among many others.
Are you concerned about this ever-increasing drift of wealth into
such organizations, since it represents a shift of wealth which is erod-
ing our tax base and increasing the tax burden for people who do pay
taxes?
What measures do you propose for halting this erosion of our tax
base, Mr. Dillon?
Secretary DILLON. We haven't so far proposed any measures, and I
doubt if we will, to end the tax exempt privilege for private philan-
thropy, because the Congress has always made it very clear that they
wished to favor private philanthropy, including the area of founda-
tions. In the 1950 law they did not accept the full sweep of the Treas-
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ury recommendations, and, although they tightened up the statutory
rules regarding foundations, they did so to a considerably lesser degree
than had been recommended by the Treasury.
We certainly feel that the definite desire of the majority of the Con-
()Tess is to continue the tax-exempt privilege for private charity,
including foundations, and as long as the foundations are operated
properly, I don't think we will make any recommendation to end
their exemption.
We do think the problem is one of curing abuses which may have
developed, and we are sure some of them have. Your reports have
pointed to some specific abuses, but we think there are a good many
others that will develop as a result of our study. We would expect
and hope that there would be a revision of the tax laws regarding
foundations next year which would give the country confidence that
there were no longer any opportunities for abuses in this field either
in the form of self-dealing or in the form of unfair business competi-
tion which you are particularly interested in.
I think that area needs considerable study and clarification. In
general, that has been our attitude.
Generally, we have not felt that we should try to restrict the area of
charitable contributions, either of the foundations or the thousands
of other exempt organizations which can currently receive deductible
contributions.
The CHAIRM AN I would like for you to answer specifically this one
question?
Secretary DILLoN. Yes.
The CHAIRMAN (continuing). Which I believe you overlooked since
I asked two at one time. This question is, are you concerned about
this ever-increasing drift of wealth into such organizations, since it
represents a shift of wealth which is eroding our tax base and increas-
ing the tax burden for people who do pay taxes?
Secretary DILLON. No, I am not, Mr. Chairman, since income if it
is properly used by these foundations is being used to support chari-
table purposes that should be supported, and which, if not supported
privately, probably would either have to be supported by the Govern-
ment or abandoned. I think either of those would be something that
we would not like to see. So I don't think that we are concerned
about this because of the erosion of the tax base, although it does mean
that we have less money than we otherwise would have if these gifts
to charity had not been made.
The CHAIRMAN. Mr. Roosevelt wanted to ask a question.
Mr. ROOSEVELT. Mr. Secretary, the Chairman's question implies that
there is a considerable additional income or gifts to foundations or
charitable organizations. How does that increase compare to the
general increase of the national income ? Do the figures show that it is
a remarkable increase, because it would seem from what you have said
that you would not be worried about it if a load was being taken off
Government expense.
Secretary DILLoN. Yes.
Mr. ROOSEVELT. Which this would take the place of, so that gather
your answer would be kind of a balance. But, on the other hand, I
would be interested in knowing whether it is really as much out of bal-
ance as is implied, considering the growth of general income in the
country.
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Secretary DELLoN. I will have much better figures on that when we
complete our statistical study, but my impression is that the growth of
assets of foundations has generally not been much greater' if any
greater, than the growth of the gross national product, with the pos-
sible exception of one very large foundation, the largest foundation--
the Ford Foundation?which when it was created probably changed
the statistics. But from after that and before that I have seen noth-
ing to indicate that the growth in the assets of the fotmclations, I am
not talking about numbers of them, the total assets which is the tax
base is any larger than the growth in our gross national product.
Air. ROOSEVELT. It certainly would be a field, Mr. Secretary, to get
more specific figures on. Then I think it would be very helpful if
we could have a summary somewhere as to your impression of where
the results of these foundations have relieved the Federal Government
of work which otherwise they would have to do.
Secretary DILLON. I would like to say one thing in connection with
this. The Chairman is quite right in saying that the Treasury does
not know how many foundations there are. Because of the growth
of this area, I think that is knowledge that we should have, and we
are in the process of acquiring it.
The reason that it was not originally available is that the original
laws, in fact the present laws, do not classify foundations as such.
They talk about exempt organizations, and there are some 17 differ-
ent categories of these. What was always done was all the exempt
organizations were kept in one area. They weren't divided into their
various types.
Now, with the advent of electronic data equipment the Internal
Revenue Service is in the process of asking all exempt organizations,
which are many hundreds of thousands, for statistical information
which will enable classification into foundations, fraternal orders,
religious orders, or whatever it is, and they intend to put all this
information on a master electronic tape which will be kept up to date
currently so we will have that information. But that will not be
completed for about a year.
At that time, we should know fairly exactly how many foundations
there are, and as new ones are formed we will have a running catalog
of them, and will be able to check up on them as a separate group
to the extent we or Congress or anyone else wishes to do and I think
that that is an important matter which is being now pushed vigorously.
The CHAIRMAN. I would like to ask Mr. Olsher to continue.
Mr. OLSHER. Let me give you a few examples of what is taking
place. The development of thousands of foundation tax shelters
through gifts of corporate stock has been treated at some length in
our three reports to the Subcommittee. Stock acquisitions of the
Charles Stewart Mott Foundation, Flint, Michigan, Edward E. Ford
Foundation New York City, W. Alton Jones Foundation, New York
City, Phoebe Waterman Foundation, Philadelphia, Gulf Oil Founda-
tion Houston, and a host of others provide examples of how millions
of dollars of formerly taxable income are now escaping taxation.
Now, let me give you a little additional information which did not
appear in our printed reports because we lacked the information
prior to publication date.
The Rodgers and Hammerstein Foundation, of New York City, was
organized on May 29, 1952 by Richard Rodgers and Oscar Hammer-
89-915-el-Pr
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14 TAX-EXEMPT FOUNDATIONS: IMPACT ON SMALL BUSINESS
stein II. Its assets were nil at date of organization. The first assets
acquired by the Foundation were copyrights in 1952. On September
16, 1952 the donors, Richard Rodgers and Oscar Hammerstein II, each
donated 50 percent of the copyright to a song, "There's Music In You"
valued at $40,000. From fiscal years ending April 30, 1953 through
April 30, 1961 this copyright produced $20,449.48 tax free income for
the Foundation. On October 21, 1952 Messrs Rodgers and Hammer-
stein each contributed to the Foundation 50 percent of the copyright
to a song, "Happy Christmas Little Friend" valued at $45,000. From
fiscal years ending April 30, 1953 through April 30, 1964 this copy-
right produced $27,825.29 tax free income for the Foundation. On
January 7, 1960 Messrs Rodgers and Hammerstein each contributed to
the Foundation 50 percent of the copyright to a musical play "Flower
Drum Song" valued at $300,000. From fiscal years ending April 30,
1960 through April 30, 1964 the Foundation received $285,216.92 tax
free income from this copyright.
The Alan Jay Lerner Foundation, of New York City, was organized
on June 22, 1956, with assets of $26,000. From December 1958 through
December 1962, Mr. Alan Jay Lerner contributed to the Foundation
shares of Allern Management Corporation' a theatrical production
company, as follows: 108 common shares, Class B stock and 3,910
shares of 4 percent Cumulative Preferred stock. As of August 19,
1963, Allem Management Corporation owned various theatrical and
musical rights to the productions "Brigadoon", "Paint Your Wagon",
and "Gigi", and a 50 percent share of a corporation which owns vari-
ous musical rights. Allern Management Corporation also owns mar-
ketable securities. These rights will exist until approximately the year
2000 and are expected to produce income during this period of time.
On November 30, 1959, the Foundation owned 27 percent of the
outstanding common Class B stock with an equity of $253,987.73 in
the common Class B stock and an equity of $63,496.93 in the common
Class A stock. These Class B shares were cancelled as of December
30, 1959 and exchanged for 580 shares of 4 percent Cumulative Pre-
ferred stock. On November 30, 1963 the Foundation owned $349,000
of the $555,000 total preferred stock outstanding, and its equity in the
common Class A stock was $645,000.
During fiscal years ending May 31, 1959, through May 31, 1963, the
Alan Jay Lerner Foundation received $42,329.60 income from Allern
Management Corporation.
The Samuel Goldwyn Foundation, of Hollywood, California, was
organized on February 5, 1947. Its assets as of date of organization
are unknown to us. However, on December 31, 1947 its assets were
valued at $454,197.97, including Mr. Samuel Goldw,yn's rights, title
and interest in the three movies "The Little Foxes,' "Ball of Fire,"
and "They Got Me Covered." Mr. Goldwyn had contributed these
rights to the Foundation March 24, 1947, valued at $200,000, $175,000,
and $150,000, respectively.
On April 21, 1950 Mr. Samuel Goldwyn and Mrs. Frances Goldwyn
donated to the Foundation undivided interests (68 percent to 75 per-
cent) in four additional movies, valued at $1,025,000. Titles of the
movies are unknown to us.
On April 1,.1951, the Foundation sold to Samuel Goldwyn Produc-
tions, Inc. its interest in the seven released photoplays for an amount
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equal to 821/2 percent of the purchaser's share of the net receipts from
the pictures to March 31, 1976, payable as follows: (1) $250,000 in cash
and $250,000 in notes upon execution of the agreement, and (2) the
balance in semi-annual installments after the sum of $500,000 has been
received and retained by the purchaser out of 821/2 percent of the net
receipts; the agreement of sale also provides that the Foundation will
not be obligated to return any part of the $500,000 advance payment
in the event that the amount of 821/2 percent of the net receipts during
the period does not equal that sum. At the date of sale the pictures
were carried at $627,020.19, representing $1,025,000 fair value of the
pictures when acquired by gift in 1947 and 1950 less subsequent receipts
of $397,979.81; the $500,000 advance payment from the sale was ap-
plied in reduction of the carrying value leaving a balance of $127,-
020.19 to be recovered out of future receipts from the pictures.
On December 18, 1956, and October 27, 1959, Mr. Samuel Goldwyn
donated to the Foundation 19/80ths interest in studio land and build-
ings valued at $453,815.96. On December 23, 1959 the Foundation
sold to Samuel Goldwyn Productions (a limited partnership in which
Samuel Goldwyn was a general partner) its interest in the studio land
and buildings for $500,000 payable $100,000 in cash and $400,000 in a
note.
With respect to the acquisitions of stock by the Edward E. Ford
Foundation, our earlier findings have now been supplemented by addi-
tional information which had not been furnished to us previously. It
goes as follows.
The assets of the Edward E. Ford Foundation, of New York City,
consisted solely of 100 shares of International Business Machines Cor-
poration capital stock valued at $30,000 on December 12, 1957 (date of
trust agreement) . A few years later, on April 12, 1961, Mr. Edward
E. Ford, of New York City, transferred to the Foundation 10,000
shares of International Business Machines Corporation capital stock
valued at over $7 million. Shortly thereafter (April 21, 1961?June 7,
1961), the Foundation sold the InM shares for $7,137,597 showing a
capital gain of $137,614. Hence, on December 31, 1963, the Founda-
tion's assets were valued at over $16 million, based on market value.
Mr. Ford had acquired the IBM shares on May 21, 1948 (date of
death of his father) . His cost basis for personal income tax purposes
was $212,955. Thus, if Mr. Ford had sold the shares on April 12,
1961, instead of transferring them to his foundation, he would have
paid a capital gains tax on a profit of over $6.7 million. The Foun-
dation, of course, pays no tax, including capital gains tax.
Moreover, Mr. Ford undoubtedly took his maximum charitable
deduction on his 1961 personal income tax for contributing the shares
to the foundation.
Mr. Ford died two years later, in March 1963. A few months later,
the foundation received $7.9 million from his estate, including 10,000
additional shares of IBM stock valued at $4.3 million.
The Edward E. Ford Foundation had total gross income of $687.33
in 1958. During 1963, its tax-free income had jumped to $357,652.
So, in these transactions the Treasury is the loser on the donors'
charitable deductions, on their avoidance of capital gains tax and
estate taxes, and on the once taxable income which now goes to the
tax exempt foundations.
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Our analysis of the Alfred I. duPont Estate and its affiliate, The
Nemours Foundation of Jacksonville, Florida, lays bare for the first
time the detailed anatomy of one of America's great fortunes and how
it will one day slip away forever from the payment of income taxes.
The Estate's principal beneficiary is Mrs. Jessie Ball duPont, age
80, widow of the late Alfred I. duPont. During the 13 years 1951
through 1963, the Estate paid to Mrs. duPont taxable income totaling
$67.4 million out of $83.9 million total income received by the Estate.
Payments by the Estate to Mrs. duPont in 1963 alone totaled $8.5
million. Mrs. duPont paid a Federal income tax of $4,832,664 in
1963. On the death of Mrs. duPont, the taxable income now paid to
her will end. Instead, that major part of the duPont Estate's dis-
bursements will then go to its affiliate, the tax exempt Nemours Foun-
dation, which, of course, pays no income tax.
The CHAIRMAN. Mr. Secretary, the Federal courts have repeatedly
declared that regulations issued by the Secretary of the Treasury,
when fairly within the scope of his jurisdiction, have the force of
law. Is that correct?
Secretary DILLON. I understand it is, yes.
The CHAIRMAN. Does the fact that foundations are exempt from
taxation mean that they are exempt from other Federal laws?
Secretary DILLON. No, I should think not.
The CHAIRMAN. Is it the Treasury's duty to be alert to all possible
violations of law?
Secretary DILLON. Our primary duty, of course, is to be alert to
violations of the tax laws.'
The CHAIRMAN. In your view has the present law, as it applies to
foundations, been properly enforced?
Secretary Dru.ox. Yes, I think it has in general. I do think there
were certain areas that have needed much more strict enforcement,
and, of course, we are moving in that direction.
One of the things that is noticeable, at least in some of the cases that
were read by Mr. Olsher, is the fact that two things happened. There
may have been some contributions of property that were valued at
more than they should have been based on the income that was received
from them. We changed the Form 990?A in 1962 so as to require
for the first time that organizations reporting the value of contribu-
tions they receive also indicate whether a gift was in cash or not.
When it is in property, that gives us an opportunity to look at it a
little more carefully to be sure that it was properly valued. Prior to
1962 there was no such requirement, so only the value of the gift was
listed, and it wasn't stated as to what it was.
Also, there is this question of self-dealing with foundations. My
own personal feelings is in consonance with recommendations of the
Treasury in 1950 to the Congress, which the Congress didn't see fit to
accept, that there should be a prohibition on dealings between a
foundation and its donor or donor controlled corporations that is
absolute. The law does not provide that now. It provides merely
that there should be a reasonable consideration, and in the case of
Secretary Dillon agreed that it is the Treasury's duty to be alert to all possible vio-
lations of law. However, at a later date when the Secretary reviewed the transcript, he
changed his earlier answer by stating "Our primary duty, of course, is to be alert to
violations of the tax laws."
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TAX-EXEMPT FOUNDATIONS: IMPACT ON SMALL U
these sorts of transactions where you are dealing with real estate,
where you are dealing with copyrights, where you are dealing with
the values of such things as movies I imagine it is pretty hard to
(Yet a fair value and to justify it.
I presume those transactions were all handled by lawyers who knew
what they were doing, and I think that it may well be that they were
squarely within the present law. But that is one of the things that we
are looking into very carefully and will probably be the subject of
some recommendations this fall.
The CHAIRMAN. Mr. Harvey ?
Mr. HAnvEy. Mr. Chairman? I wonder if you would yield.
The CHAIRMAN. Certainly, sin
Mr. HAnvEy. It has come to my attention in relation to this very
subject on which you have commented, that there is a tendency on the
part of the few large foundations which reports I have studied in
some depth, that their holdings which may have recently been a solid
block of a given corporation's stock, and that the managements of the
foundations have undertaken to broaden the base. In other words,
take Ford, for example. Instead of having all their eggs in the one
basket, they have attempted to spread out and exchange stock for the
holdings in other major corporations.
I think this is not only a good move from the standpoint of the
financial safety of the funds income, but also from the standpoint of
dissipating any claim that could rightfully be made that the founda-
tion officials have used or are in a position to use their power ruth-
lessly or possibly if not ruthlessly, at least unfairly or improperly.
Now, I am sure you have given this same subject a good deal of
observation and study. Is there any tendency on your part to believe
that this is a growing and common 6
practice among other foundations?
Secretary Dn,Loic. Well, I certainly agree with you that among the
larger ones that has become more or less publicly controlled, if they
had started with a large block of one particular stock, there has been
a tendency to sell that stock gradually in the market, and diversify
their assets. It also raises the question whether owning a controlling
interest in a business corporation places the foundation into business
activity not fully consistent with its operation as a charity.
This whole question that is raised here is one that is quite complex
and is under study. It bears on the provisions against unrelated busi-
ness income which, as presently written, are clear when certain exempt
organizations are running a business. But if that exempt organiza-
tion incorporates the business and owns the shares of the corporation,
then it no longer applies, because it merely gets the dividends from
the corporation that is running a business. Now, there is a question
whether that still doesn't represent some form of unfair competition
with other private businesses that are not owned 100 percent by a
charity. I don't know. We are looking into that. This is not some-
thing that is limited by any means to foundations. It applies to
many other forms of exempt organizations. In fact, showing the
interest in this in the way the Congress looks at it, Congress has just
passed a special law allowing a labor union exemption Prom this law,
and allowing them to conduct an associated unrelated business without
taxation. That was passed unanimously, I think, in both Houses of
the Congress.
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Mr. HAuvEy. Has your policy been with regard to this particular
tendency of which I have spoken, to approve it or to take a non-com-
mital attitude or to encourage it?
Secretary DILLoi.r. No, we have not been in a position to do any-
thing ourselves because it is clearly within the law as presently writ-
ten. We are studying this question, as I said, to see whether or not
legislation is in order to cover situations where businesses are either
wholly owned or effectively controlled by exempt organizations, and
we haven't yet reached any final conclusion on that, but we will before
the end of the year.
Mr. HARVEY. In other words, until this date you have not taken
any position officially with regard to this particular question that I
pose?
Secretary Diu,orr. With regard to the ownership of substantial in-
terests or controlling interests in companies by exempt organizations
we have not taken any position, because, in the first place this was
carefully studied by the Congress in 1950, and they clearly decided
they did not want to interfere with this.
Now, as we have said, 14 years have passed. It is a good time to i
look again. There has been a growth n exempt organizations, and
we are taking another good look at this.
Mr. HARVEY. If you will bear with me for just one more question,
Mr. Chairman, might I ask this particular question then, Mr. Secre-
tary:
Do you as a gentleman who has had a great deal of experience in
business and the investment field believe that the Congress should, if
we recommend legislation, include a recommendation to this effect?
Secretary DILLON. Well, although I want to have a chance to view
all the evidence when it is in, I am inclined to think that for an ex-
empt organization or a foundation to run a business, whether it is
run as an unrelated business or it is run as a business that is substan-
tially owned and controlled so it has the responsibilty for runnng it,
is something that is probably not entirely desirable. It means that
those who run the foundation, instead of devoting their time entirely
to charitable purposes, have to devote a very great deal of their time
to seeing that the business is operated properly. I think from that
point of view there is something wanting in allowing that sort of
situation.
Another thing that is very important, which we have not yet been
able to get adequate information on to form any opinion, is whether
this does lead to unfair competition with other businesses, and as we
develop information on that, I think that will be very important in
what the final recommendation will be.
Certainly any views that this Committee might have in this area
would be very much of interest.
Mr. HARVEY. From your statement, then, may I infer that you would
make a distinction so far as this particular point is concerned, between
foundations that operate for charitable purposes, and other tax ex-
empt organizations?
Secretary DILLoic. It might be, but I think that is a very difficult
line to draw. That is one of the reasons we are not prepared as yet to
make a recommendation here. I am not at all sure that the line should
be drawn there, and that it shouldn't be drawn somewhere else where
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it would include all exempt organizations, as least as far as certain
types of businesses or certain types of activity are concerned.
Mr. HARvEy. I am sorry you don't have a direct answer for that.
Secretary DILLON. It is an important question, but it is too complex.
We just haven't reached a conclusion.
I think it is easier to reach it on foundations than it is on the
others.
So we may want to reach further into the exempt organization
field than merely foundations.
That is all I am trying to indicate.
Mr. HARvEY. Thank you, Mr. Chairman.
The CHAIRMAN. Mr. Roosevelt, you say you want to ask a question?
Mr. ROOSEVELT. Yes, Mr. Chairman.
I have a question, but first I want to say, Mr. Secretary, I hope you
will look very carefully and come up with a definite recommendation
as to the competitive aspect of a business whose income is non-taxable,
not only from the point of view of good policy competition but from
the point of view of the Treasury. It seems to me that if I give IBM
stock, which I will not be giving, I don't have any, to a foundation, the
value of that stock can be immediately liquidated by the foundation and
can be put into non-competitive areas, such as Government bonds,
which would remove it completely from the competitive category.
The question I have deals with Mr. Olsher's statement which might
reveal what you call?I don't mean it as a criticism but which might
reveal?a self-dealing where a donor gave to a foundation and the
foundation then sells back to something the donor has an interest in,
if it isn't a direct sale to him. In those instances is there anything in
the present law which requires the Treasury of the Internal Revenue
to review those specific cases of what for lack of a better term we now
call self-dealing?
Secretary DILLON. No, because there is absolute prohibition of them
in the law. This was fully debated in 1950 when the Treasury recom-
mended it be absolutely prohibited, and the Congress decided not to
do it. Congress, instead, prohibited self-dealing when there was not
a reasonable price paid, a full price, an adequate price paid. So it
is really a question of whether the price paid is adequate or not.
Mr. ROOSEVELT. Who reviews it to make sure that the price paid in
self-dealing cases is adequate?
Secretary DILLON. That should be reviewed, if it is large, by the
Internal Revenue Service. There is a question, of course, of manpower
requirements in the Revenue Service. This is a question of judgment.
We could use a great many more revenue agents than we have. It is a
matter of record that the Congress has consistently refused to appro-
priate the funds that Treasury has requested for the Revenue agents
that are necessary to do the job, and while the Revenue Service has
increased in size, it hasn't increased as rapidly as we felt was necessary
to do an adequate auditing job. So that is one reason why auditing
may not have been adequate.
I am perfectly ready to concede that as the situation was in the past,
there were very few audits, and the general likelihood was that a sit-
uation like these transactions that were mentioned, many of these
transactions mentioned by Mr. Olsher, would not have been audited.
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A greater amount of manpower should be put on these organizations,
and, as this has developed, that is exactly what has happened now,
when the number of audits has been multiplied by five, which would
naturally bring to light more of these sort of cases.
I think the situation now is rapidly changing and there will be a
much greater audit coverage by the Internal Revenue Service.
Mr. ROOSEVELT. Can the Treasury Department force a repurchase
by an interested party from a foundation? For instance, can it force
him to pay more for it if it is found to be inadequate? What is the
remedy today, or the penalty?
Secretary DILLON. In a case in which a donor purchases property
from his foundation for less than its fair value, there is no provision
in the Federal tax law which allows the Internal Revenue Service to
force the donor to pay the difference between the purchase price and
the fair market value of the property. In all likelihood, however, such
a transaction would be a prohibited transaction, the penalty for which
is loss of the foundation's exemption. That is one area I mentioned
the need to study, where the penalties may be too strict. For example,
the 1950 law attempted to attack the area of unreasonable accumula-
tion. We said that accumulations should not be unreasonable in
foundations. The only penalty for that, is cancellation of the tax
exempt privilege of the foundation. As a result, the courts have been
very reluctant to ever impose that penalty which presumably they
found too strong, so the Treasury has been eminently unsuccessful in
legal cases in the courts in this area. We think some sort of a different
penalty there, maybe a penalty to tax certain accumulations that are
not distributed, would be much more likely to be effective than the
present situation. This may apply in this area that you are talking
of, too.
Mr. ROOSEVELT. Mr. Secretary, I think it would be very helpful to
the Committee, too, if you could give us specifically what are the
penalties.
Secretary Dir,Low. Twill be glad to.
Mr. ROOSEVELT. The penalties for improper transactions between
interested parties.
Secretary DILLON. I will be glad to do that as to what is improper,
plus the exact definition of what that is.
The CHAIRMAN. Insert them in the record at this point, please, sir.
(The information referred to follows:)
Section 503 (c) of existing law prohibits a foundation from:
(1) lending any part of its income or corpus, without the receipt of ade-
quate security and a reasonable rate of interest, to.;
(2) paying any compensation, in excess of a reasonable allowance for
salaries or other compensation for personal services actually rendered, to;
(3) making any part of its services available on a preferential basis to;
(4) making any substantial purchase of securities or other property, for
more than adequate consideration in money or money's worth, from;
(5) selling any subslantiat part of its securities or other property, for less
than adequate consideration in money or money's worth, to; or
(6) engaging in any other transaction which results in a substantica di-
version of its income or corpus to the donor, his family, or a corporation in
which the donor, directly or indirectly, owns 50 percent or more of the stock.
If a foundation does lend its corpus to the donor without receiving adequate
security and a reasonable rate of interest (or engages in any of the other transac-
tions noted above) the Code generally provides that the foundation's exemption
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shall be revoked only for taxable years after the year in which it is notified
that it has engaged in a prohibited transaction. However, if the foundation
entered into the transaction with the purpose of diverting corpus or income from
its exempt purpose, and such a transaction involved a substantial part of its
corpus or income, the Code provides that the denial of exemption shall be effective
as of the year in which the prohibited transaction took place.
With the exception of the revocation of the foundation's exempt status just
described, the only sanction which is available under current law is the possible
disallowance of deductions for gifts which it receives. However, section 503(e)
of the Code, in effect, does not generally disallow the donor's deduction for gifts
to the foundation until the foundation has lost its exempt status. Thus, as ex-
plained above, unless the prohibited transaction was entered into for the purpose
of diverting a substantial part of the foundation's corpus or income from an
exempt purpose, the donor's deduction can not be denied even for the year in
which the prohibited transaction took place, even if the donor was a party to the
prohibited transaction. Ilowever, if the Service can establish that the purpose of
the prohibited transaction was to divert the foundation's corpus or income from
an exempt purpose, and such a transaction involves a substantial part of the
foundation's corpus or income, the Code provides that the deduction claimed by
a donor who is a party to the prohibited transaction, such as a lender who does
not provide adequate security, will be disallowed, even though the contribution
may have been made in years prior to the prohibited transaction. However, the
disallowance of the deduction for contributions made in years prior to the prohib-
ited transaction can only be made where it can be shown that the contribution in
question was made for the purpose of allowing the organization to engage in
such prohibited transactions.
The CHAIRMAN. Do you agree, Mr. Secretary, that public reporting
of a foundation's activities can operate as a "control"?
Secretary DILLON. We think it is very helpful, and I think that what
this Committee pointed out in that area early in the game was very
useful, and, as you know, we have changed the Form 990?A and the
regulations regarding it, so that practically all information thereon
except only the names and the list of contributors is now available
publicly, and we think that is a great advantage.
The CHAIRMAN. Would you recommend that disclosure of the opera-
tions of foundations be made more complete, and that the public should
be given more ready access to more information?
Secretary DILLON. I think that we have taken a very substantial
step with the new information on 990?A. Whether we have to go
still further or not is something I don't have a final opinion on. I
think that most everything is there, but certainly as far as large foun-
dations are concerned, I see no reason why there shouldn't be the fullest
publicity. Certainly most of the large ones, I think, do put out reports
that are fairly complete as to what their transactions are. But in
the smaller foundations that may not be the case.
The CHAIRMAN. Would you agree, Mr. Secretary, that the full con-
tent of foundation tax returns should be open to public inspection?
Secretary DILLON. Uncle/ the present law we feel the names and
amounts of individual contributions are not something that should
be open, that can be open to public inspection. Everything else is.
I don't know whether that is a very significant item or not. Private
tax returns have always been protected. We are running up against
a different subject here, which is the protection of the private return
which Congress and the Treasury have always been very jealous of,
and I personally doubt that the Congress would want to make public
the amount that private individuals in a given year gave in contribu-
tions to a foundation or elsewhere.
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The CHAIRMAN. I do not agree that your illustrations are com-
parable, because in the case of foundations you are dealing with public
money, money that would otherwise go to the Treasury. Don't you
think there is a difference there, that they should be open to public
inspection?
Secretary DILLON. I don't think all of the money would otherwise
go to the Treasury. The individual, if he wants to give it away could
give it not to a foundation but could give it to a college and then it
wouldn't go to the Treasury. And also, the corpus wouldn't neces-
sarily go to the Treasury. So I am not certain that that follows on
gifts.
If a man has to make public his gift to a foundation, should he make
public his gift to a university or to a church or anything else? I am
not just certain about that. I don't see particularly that he should.
The CHAIRMAN. Would you personally agree that the full content
or foundation tax returns should be open to public inspection?
Secretary DiLLorr. I personally agree that there has been a great
advance in the number of foundations, and I see no reason why a foun-
dation shouldn't operate under the glare of publicity. That is one
of the best things to prevent any actions that are not proper. All I
lam saying is that when you get into the one specific field of the
amounts of contributions by specific, named individuals, we are coming
to another area which Congress and the Treasury have always been
very jealous of protecting, and that is the private transactions of indi-
viduals as shown in their income tax returns.
The CHAIRMAN. In your view, Mr. Secretary, should the names and
addresses of donors to a foundation be open to public inspection?
Secretary Du:Lox. I think it quite proper that the names and ad-
dresses of the original creators of a foundation should be made public
at the time the foundation receives its tax exemption.2
The CHAIRMAN. They should be. In your view, should all matters
relating to the granting or denial of tax exemption, as well as revoca-
tions and penalties, be made public?
Secretary Dir,LoN. I don't see why not.
The CHAIRMAN. You don't see why not?
Secretary DII,Lor.r. No.
The CHAIRMAN You favor it?
Secretary DILLoN. Yes. I would not object to public disclosure with
respect to a foundation's application for exempt status or the statu-
tory grounds upon which a foundation's exemption was revoked. Of
course, I do not think that it would be wise, from an overall viewpoint,
to open internal memoranda and reports to public inspection.3
The CHAIRMAN. Would you agree that the public, which supports
a foundation's tax subsidy, should have ready access to the
foundation?
2 Secretary Dillon agreed that the names and addresses of donors to a foundation should
be open to public inspection. However, at a later date when the secretary reviewed the
transcript, he qualified his earlier answer by stating "I think it quite proper that the
names and addresses of the original creators of a foundation should be made public at the
time the foundation receives its tax exemption."
3 Secretary Dillon agreed that all matters relating to the granting or denial of tax
exemption as well as revocations and penalties should be made public. However, at a later
date when the Secretary reviewed the transcript, he qualified his earlier answer by stating
"I would not object to public disclosure with respect to a foundation's application for
exempt status or the statutory grounds upon which a foundation's exemption was revoked.
Of course, I do not think that It would be wise, from an overall viewpoint, to open internal
memoranda and reports to public inspection."
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Secretary EinLow. I don't quite understand. You say to the
foundations themselves? I don't quite understand what that means.
The CHAIRMAN. Well, information pertaining to the activities of
the foundation.
Secretary DILLON. Through the Form 990?A, yes.
The CHAIRMAN. Well, what about the domicile of the foundation?
Should information be available to the public as to where it is lo-
cated and how it can be reached?
Secretary DILLON. You mean the names of them and all that?
The CHAIRMAN. Names and address, street address and post office
box and everything else that would enable a person to contact the
foundation.
Secretary DILLON. I see no reason why not.
The CHAIRMAN. In your view should a foundation's office be some-
thing more than just a post office box?
Secretary DILLON. That depends on the size of the foundation,
because, as you know, the great bulk of foundations are of course
not very large, and they are operated on a part-time basis and with
no full time staff at all. So those obviously could not have an of-
fice. That is one of the problems in this number of foundations,
because these large numbers that we are aware of are many of them
very, very small, and they don't amount to much money overall.
Assets of foundations are concentrated in a much smaller number of
foundations than the total amount.
The CHAIRMAN. Would you agree that they should certainly have
a telephone number?
Secretary DILLON. Not necessarily, if they are a very small one.
The CnAmmAN. I mean a listed telephone number.
Secretary DILLON. A telephone number would presumably be the
number of the trustee or the president or the officer, whatever it
is. Personally he should have one. I assume he does.
The CHAIRMAN. We have found that some of the foundations are
allergic to listed telephone numbers. For example, a small sampling
shows that none of the following foundations in New York City
have listed telephone numbers: Flagg Foundation, Inc. ( assets $140,-
000 December 31, 1962) ; Henry Luce Foundation, Inc. (assets $2.3
million December 31, 1962) ' ? Vivian B. Allen Foundation (assets
$4 million December 31, 1960) ; Owen Cheatham Foundation (assets
$529,000 December 31, 1960) .
In your view is the present law, as it applies to foundations, too
permissive?
Secretary DILLON. I think in certain respects it is. I have said
before that I think there should be a direct prohibition on self-dealing
rather than a permissive situation such as the present law has. That
is one area. I also think this may apply in other? areas. We need
more specificity in the area of accumulations.
The CHAIRMAN. HOW many applications for tax exemption did the
IRS approve in 1963? Do you know?
Secretary. DILLON. No, I don't. I think there are several thousand,
but they will be able to give that to you tomorrow.
The CHAIRMAN. Are the antitrust laws and the regulations of the
SEC fully applicable to foundations?
Secretary DILLON. I would assume so, generally.
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The CHAIRMAN. In the course of its administration of the various
regulations concerning foundations, does the Treasury examine the
foundations to determine whether they are being used as a device for
engaging in various trade practices which might be in violation of cer-
tain statutes administered by the Federal Trade Commission or the
Antitrust Division?
Secretary DILLON. I don't think so. I don't think that is the Treas-
ury's business. The Treasury is in business to see that tax exempt
foundations follow the laws which grant them, and I think these other
areas would come under the appropriate bodies, whether it be the Fed-
eral Trade Commission or the SEC. In the Treasury we clearly don't
have the competence to administer all these other laws and don't really
probably know on some of these complex things whether they are
being avoided or not.
The CHAIRMAN. During your term of office, Mr. Secretary, has the
Treasury, on its own initiative, ever forwarded to the FTC or the Anti-
trust Division information regarding the use of a foundation as a
device for engaging in various trade practices which may be a viola-
tion of certain statutes administered by the Federal Trade Commis-
sion or the Antitrust Division?
Secretary Dii,LoN. I understand that a procedure has been adopted
under which the Internal Revenue Service advises the Department of
Justice of information it possesses concerning violations of non-tax
Federal laws. The Internal Revenue Service is in continuous close
contact with the Department of Justice, and they would probably be
able to give you a better answer on that. They are furnishing them
information all the time. Whether they did in this field, I just don't
know.
The, CHAIRMAN In the course of the administration of its various
regulations concerning foundations, does the Treasury examine the
foundations to determine whether contributions are being made to the
foundations by persons or organizations that supply goods or services
o companies interlocked with the foundations?
Secretary DILLON. I don't think we do that because, as I understand
it, there is no prohibition against that at all under present law. That
is one of the things that might be prohibited under a strict no self-
dealing law which I think should be passed.
The CHAIRMAN. During your term of office has the Treasury, on its
own initiative, ever forwarded to Congressional committees, the White
House., or other government departments information regarding con-
tributions to foundations by persons or organizations that supply
goods or services to companies interlocked with the foundations?
Secretary Dir,LoN. I don't think so. You would have to ask the
Internal Revenue. I wouldn't know personally. As a matter of per-
sonal practice, I do not associate myself, and have disassociated myself
ever since I was in the Treasury, with individual tax cases and tax
questions, so that to the extent it is an individual case dealing with an
individual taxpayer or an individual foundation which is not a tax-
payer, but has to file information returns, I would not have any action.
That has been left entirely to the Internal Revenue Service.
The CHAIRMAN In your view should foundations be permitted to
accept contributions from (1) persons or organizations that supply
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goods or services to companies interlocked with the foundations, or
(2) from persons or organizations that buy goods or services from
companies interlocked with the foundation?
Secretary DILLON. I don't know quite what that means, when you
refer to companies interlocked with the foundation. But, as I say,
I think there should not be self-dealing. I don't know that there is
anything necessarily wrong in accepting a cash contribution.
Mr. ROOSEVELT. Would the Chairman yield? The point of that
question: I think, is that if the company that is interlocked with a
foundation is doing business and by a contribution to the parent foun-
dation they get the business because of that interlock, they are obvi-
ously getting an advantage.
Secretary DILLON. Yes. Well, that obviously should be one of these
things which should be considered in drafting a broad self-dealing
law.
The CHAIRMAN. During your term of office has the Treasury, on its
own initiative, found any cases where a contribution has been made to
a foundation for a business purpose rather than an eleemosynary pur-
pose? For example, under the Robinson-Patman Act, business con-
cerns are prohibited from making disproportionate discriminatory
discounts to particular buyers if the effect might be to substantially
lessen competition or tend to create a monopoly.
Do you know of any cases where contributions to a foundation may
have been a method of getting around this provision of law?
Secretary DILLON. I don't, but, Mr. Chairman, I would like to re.
peat, again, you are addressing these questions to the wrong person.
Internal Revenue Service has the full authority, and the Treasury
does not set itself up as a court of appeals above the Internal Revenue
Service in individual tax matters.
I know that there have been many hundreds of revocations by the
Internal Revenue Service of exempt organizations exemptions, and
I am sure there have been some in the field of foundations, quite a few.
I don't know what the basis of those various ones have been, because
none of the individual things have been referred to me. I am sure
that the Internal Revenue Service will be able to supply that sort
of information. I can't. I don't know it.
The CHAIRMAN. Are you familiar with the business practice known
as reciprocity? It involves tacit or actual agreement to do business
with a firm if it reciprocates and gives business in return. You are
familiar with that, I assume, Mr. Secretary.
Secretary DILLON. I have read about it.
The CHAIRMAN. During your term of office has the Treasury, on
its own initiative, ever forwarded to the FTC or the Antitrust Divi-
sion information regarding foundations that may be parties to re-
ciprocity arrangements? For example, where a business affiliated
with a foundation says to one of its suppliers, "I will buy from you if
you will contribute to such and such a foundation" or, "if you buy
from me, such and such foundation will make you a business loan at
favorable terms"?
Do you know of any situations like that?
Secretary DILLON. I don't know of them personally. The same
thing applies.
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The CHAIRMAN. Do you consider such arrangements to be legitimate
practices for a foundation to be a party to?
Secretary DILLoN. I think that certainly anything that is self-
dealing and anything where a foundation is used in a way that will
bring a benefit to the donor of the foundation, a personal benefit, is
not proper.
That is a broad characterization, but that will be a complex area
to draw legislation to cover all these things, but it all comes under
the same general tent.
The CIAIRMAN. Are you aware of the fact that reciprocity practices
may violate the antitrust laws?
Secretary Dia,LoN. I would assume they may.
The CHAIRMAN. Our study indicates that many business suppliers
and buyers have made sizable contributions to foundations controlled
by customers. For example, we know that a number of suppliers of
the Hilton Hotel chain are contributors to the Hilton Foundation.
Mr. C. N. Hilton, Jr., Secretary of the Conrad N. Hilton Foundation
of Los Angeles, has acknowledged that, during the fiscal years ending
February 28, 1952 through February 28, 1963, 29 donors?who were
suppliers of goods or services to Hilton Hotels Corporations or its
subsidiaries?made contributions to the Conrad N. Hilton Foundation
in the amount of 861,695.18,
Does not this kind of situation appear to raise the specter of business
reciprocity?We will buy from you if you contribute to our
foundation?
If so, does it not raise a number of serious antitrust problems?
Specifically, may it not involve a possible violation of the Robinson-
Patman Act because it involves the inducement of discriminatory
prices?
Or may it not involve a violation of Section 5 of the FTC Act as
have other instances of business reciprocity because they involve "un-
fair methods of competition"?
Would you like to comment on those, Mr. Secretary?
Secretary DILLON. Well, all I can say is that speaking to the author
of the Robinson-Patman Act, I don't feel that I am in a position to
comment because I am not fully aware of the details of that Act, and
if you feel that this might be a violation of it, I would accept your
judgment as the author of the Act, and I would think that would be a
matter for the organization which polices that Act to look into it.
The CHAIRMAN. Thank you, sir. I will ask Mr. Olsher to continue.
Mr. OrsHER. Here is another case I am wondering about. The
Rogosin Foundation, of New York City, is controlled by the Rogosin
family. The Rogosin family has also dominated Beaunit Corporation
(formerly Beaunit Mills, Inc.), Rogosin Industries, Limited, and
Skenandoa Rayon Corporation.
At December 31 ,1952, the Foundation held 331/3 percent of the non-
voting preferred stock of Beaunit Mills, Inc. (carrying value $2.7
million) as well as 5 percent of the common voting stock of the same
corporation (carrying value $1.9 million).
Beaunit Mills, Inc., manufactures synthetic yarn knits and weaves
fabrics, and manufactures intimate apparel. The yarn,
Tire and
Rubber Company of Okron, Ohio, has been a buyer of tire-cord yarn
from Beaunit Corporation.
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In March 1952, Goodyear made a cash donation of $150,000 to the
Rogosin Foundation. Additionally, on March 10, 1952, Goodyear
loaned $2.5 million to the Rogosin Foundation at 4 percent interest.
The loan was to be paid off in installments due January 3-August 15,
1953, January 3-August 15, 1954, and January 3-August 15, 1955.
According to the Foundation, payments on the loan were made on
August 15, 1953, August 15, 1954, and August 15, 1955.
The Foundation states that it used the $2.5 million loan to purchase
from Beaunit Mills, 0,000 shares of the latter's preferred stock.
An identical number of Inc.,aiares of Beaunit Mills, Inc.' preferred stock
was pledged by the Foundation as collateral for the loan.
Has the Treasury examined this to determine whether this arrange-
ment involves a price discount from Rogosin to Goodyear, for which
Goodyear, the buyer, compensated Rogosin by making a contribution
to the Rogosin Foundation?
Secretary DILLON. I would have to ask the Internal Revenue
Service.
The CHAIRMAN. The same answer you gave before?
Secretary DILLON. Yes.
Mr. OLSIIER. If this were the case, would it not seem to raise both
tax and antitrust problems?
Secretary DILLON. If it was a discount that was an unfair discount
under the antitrust laws, if they apply to a situation like that, I would
think it probably would raise a problem. I don't quite see offhand
without studying the matter and getting better legal advice, where it
would raise tax problems.
Mr. OLSIIER. First, is it an method whereby the buyer compensates
the seller by making a tax deductible contribution to the Rogosin
Foundation?
Secretary DILLON. That is not the seller.
Mr. OLSHER. I beg your pardon?
Secretary DILLoN. I say the Rogosin Foundation is not the seller.
It is the foundation owned?
Mr. OLSHER. The buyer compensates the seller.
Secretary DILLON. The Beaunit Mills is the seller.
Mr. OLSIIER. The buyer compensates the seller via the means of
making a tax deductible contribution to the foundation.
Second, would not this practice, at best, be a distortion of the pricing
and exchange process in a free enterprise economy?
Secretary DILLorr. I am in no position to answer that. I don't
know whether it would or not.
Mr. OLSIIER. Third, might not this practice actually involve (1) a
violation of the Robinson-Patman Act because it involved discrim-
inatory: pricing or, (2) a violation of Section 3 of the Federal Trade
Commission Act because it is an unfair method of competition?
Secretary DILLON. I would suggest asking the Federal Trade Com-
mission.
Mr. OLSHER. Additionally, of course, Goodyear was acting as a
source of unregulated credit.
The CHAIRMAN. Off the record.
(Discussion off the record.)
( W hereupon, at 11:50 a.m., the subcommittee recessed, to reconvene
at 4 :15 p.m., the same day.)
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AFTERNOON SESSION
The CIIAIRMAN The Committee will please come to order. Two
members have been here and have just left temporarily. They will
be right back.
Mr. Dillon, we appreciate your coming back, sir.
Would the persons in the IRS who examine foundation tax returns
be sufficiently familiar with the antitrust laws to know whether the
practices I have cited may violate Section 5 of the FTC Act or the
Sherman Act? If they found such practices, to whom would they
report them?
TESTIMONY OF THE HONORABLE C. DOUGLAS DILLON, SECRETARY
OF THE TREASURY?Resumed
Secretary Dim,ox. I think my answer is the same. You would have
to get the information from the IRS.
The CHAIRMAN. Are you familiar with any instances where indi-
viduals who are board members of foundations also sit on the boards
of competing companies?
Secretary DELLON. Competing with the foundation? I don't quite
understand the question, because I don't understand how a company
competes with the foundation.
The CHAIRMAN. Companies that compete with each other or one
another.
Secretary Dit,LoN. Oh, competing companies that compete with each
other. I wouldn't know of any, any more than other individuals
not on foundations.
The CHAIRMAN. If this practice does exist, do you feel that it
may create antitrust problems?
Secretary DILLON. Well, I think that is not good practice generally
whether the people are on foundations or not, to be on the board of
competing companies.
The CHAIRMAN. During your term of office has the Treasury ever
sought any instances of this to the antitrust agencies?
Secretary DILLON. I wouldn't know.
The CHAIRMAN. As you know, Section 8 of the Clayton Act pro-
vides that no person shall be a director of two cr more competing
corporations. Now, that Act does not apply to indirect interlocks,
such as when a foundation has two board members, one of whom is
also a board member of corporation A and the other member is on the
board of corporation B (a competitor of A). "While there is nothing
illegal about such an arrangement under Section 8, do you see any
special public interest problem when a foundation established for
eleemosynary purposes becomes a vehicle for such indirect interlocks
which might affect competition?
Secretary Dir,LoN. Well, I don't think there is anything wrong if a
foundation tends strictly to charitable business and does not get into
business relationships.
I could see that a foundation such as the Rockefeller Foundation,
the Carnegie Corporation, might have people who are interested in
charity on their boards who happen to be in the same general line of
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business, and they would not have anything to do with doing business
with each other. They would just be talking about charitable things.
But if they are doing business ,with each other, then I think that is bad.
The CHAIRMAN. In the course of its administration of the various
regulations concerning foundations, does the Treasury examine the
foundations to determine whether there are any actual or potential
conflicts of interest situations?
Secretary DILLoN. I would rather the Internal Revenue answer
that. I think we just stick to the tax consequences and the tax law.
The CHAIRMAN. During your term of office has the Treasury, on
their own initiative, ever forwarded to the FTC or Justice informa-
tion regarding actual or potential conflicts of interest situations in any
foundations?
Secretary DILLON. That is the same situation.
The CHAIRMAN. The same answer?
Secretary DILLON. Yes.
The CHAIRMAN. Will you agree, Mr. Secretary, that there is no
special legal treatment of foundations in the statutes administered by
the SEC?
Secretary DILLON. As far as I know there is none.
The CHAIRMAN. Will you agree that there is ample evidence that
many foundations are actively trading in the stock market with sub-
stantial portions of their funds?
Secretary DILLON. Well, you provided some evidence about a num-
ber of foundations in one of your reports. I don't know how many
there are, but there are certainly some.
The CHAIRMAN. That is the only information you have of it?
Secretary DILLON. I think that is the only good information we
have, yes.
The CHAIRMAN. Would you agree that, judging from the content of
their portfolios and the frequency of turnover, many foundations are
concerned less with equity yields and inflationary trends than they are
with the lure of capital gains to swell their principal funds?
Secretary DILLON. I would think that certainly the mass of the
capital that is owned in foundations which is largely in the larger
foundations, stays invested without any rapid turnover. There may
well be some foundations that are in for trading, and to the extent
there are, they are obviously trying to achieve capital gains rather
than straight income.
The CHAIRMAN. In the course of its administration of the various
regulations concerning foundations, does the Treasury examine the
foundations to determine whether they are violating any Federal
securities laws?
Secretary DILLON. I wouldn't think so.
The CHAIRMAN. Federal securities laws?
Secretary DILLON. I wouldn't think so. I think that is tax examina-
tion.
The CHAIRMAN. During your term of office has the Treasury, OD
its own initiative, ever forwarded to the SEC information regarding
any foundation's violations of the federal securities laws?
Secretary DILLON. That again would be something for the IRS.
They would forward direct if they did.
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The CHAIRMAN. In your view are speculative gains for charity
worth the risk of speculative losses?
Secretary DILLON. In my personal view the answer to that would
be no.
The CHAIRMAN. Would you agree that speculative activity by foun-
dations warrants surveillance?
Secretary DILLoN. I think that a foundation that puts a great deal
of effort into speculatinc, is doing the same thing that I mentioned
earlier this morning alma the foundation that puts a great deal of its
time into the running of business. It is not devoting that time to
charitable pursuts, and I think it would be better if foundations de-
voted all their time to charitable pursuits, as I think the great majority
of foundations, measured by their assets, slo.
Of course, as I say, it is a different thing when you talk about these
smaller foundations that don't have so many assets.
The CHAIRMAN. Do you know of any instances where directors or
trustees of a foundation have reimbursed the foundation for losses
incurred in speculation?
Secretary Dthwisr. I don't happen to know of any.
The CHAIRMAN. Do you consider any of the following to be proper
practices for a foundation: involvement in corporate proxy fights for
control of companies whose securities are listed on the Exchanges?
Involvement in insider deals?
Secretary DILLON. I would think the first one, involvement in proxy
contests, ordinarily is not proper. But there might be cases where a
foundation had a substantial amount of stock in a company, and I
think to the extent that they continued to have that, they would be
interested in the management, and I could conceive of cases where it
would be proper to be in a proxy contest over the management.
I don't know what insider deals means, but I certainly don't think
that they should have anything of that connotation. I don't think
anything of that connotation sounds proper for foundations.
The CHAIRMAN. Or involvement in stock price manipulations?
Secretary DILLON. Certainly not.
The CHAIRMAN. Involvement in short sales?
Secretary Dir,r,oN. I would think not. That is speculation and I
would think that kind of speculation is not proper.
The CHAIRMAN. Involvement in margin trading?
Secretary DILLON. That is the same thing.
The CHAIRMAN. Speculation in commodity futures.
Secretary DILLON. I would think that is the same thing, the main
reason being that while the proceeds all go to charity, it means that
those who are running the foundation, if they are doing this thing,
would spend too much of their time on things that are not charitable.
I don't think they should be doing that. They are also risking their
own capital rather than keeping it available for foundation purposes.
The CHAIRMAN. Acting as unregulated sources of stock market
credit?
Secretary DILLoN. No, I don't think that is proper.
The CHAIRMAN. Speculation in oil wells?
Secretary DILLON. That is another kind of speculation like running
a business. That is a business that is very popular down in your part
of the country, Mr. Chairman.
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The CHAIRMAN. I know about some of them. In the course of your
administration of the various regulations concerning foundations, does
the Treasury examine the foundations to determine whether they are
involved in any of the following activities: Insider deals?
Secretary DILLON. I would think again that is a question for the
IRS. I think that all we do is administer the present tax law, and I
would be surprised if they go beyond that.
The CHAIRMAN Stock price manipulations?
Secretary Dnr..noN. The same answer.
The CHAIRMAN. Margin trading?
Secretary DILLON. The same answer generally.
The CHAIRMAN. Speculation in commodity futures.
Secretary DILLON. The same answer.
The CHAIRMAN Short sales?
Secretary DILLON. The same answer.
The CHAIRMAN. Acting as unregulated sources of stock market
credit?
Secretary DILLON. The same answer.
The CHAIRMAN. Speculation in oil wells?
Secretary DILLON. The same applies.
The CHAIRMAN. Involvement in corporate proxy fights for control
of companies whose securities are listed on the Exchanges?
Secretary DILLON. The same answer.
The CHAIRMAN. During your term of office has the Treasury, on its
own initiative, ever forwarded to the SEC information regarding
foundations' activities in the following areas: Involvement of founda-
tions in corporate proxy fights for control of companies whose securi-
ties are listed on the Exchanges?
Secretary DILLON. I would be very surprised if they have. I as-
sume not. But the IRS would have to answer that question.
The CHAIRMAN. Involvement of foundations in insider deals?
Secretary DILLON. The same reply.
The CHAIRMAN. Involvement of foundations in stock price manipu-
lations?
Secretary DILLON. The same answer.
The CHAIRMAN. Speculative activity and margin trading of founda-
tions?
Secretary DILLON. Same reply.
The CHAIRMAN. Short sales by foundations?
Secretary DILLON. The same answer.
The CHAIRMAN. Foundations as unregulated sources of credit?
Secretary DILLON. Same reply.
The CIIAIRMAN. Speculation in commodity futures?
Secretary DILLON. Same reply.
The CHAIRMAN. Do you consider short sales to be a proper practice
for a tax-exempt foundation?
Secretary DILLON. I think you asked that question before, and I
thought I said I did not think so.
The CHAIRMAN. Schedules submitted by the Lillia Babbitt Hyde
Foundation, of New York City, show acquisition date of October 19,
1962 and sales date of March 5, 1962 on 2,000 shares of Pacific Gas &
Electric common. The gross sales price for the 2,000 shares was $70,-
750 with the foundation showing a gain of $9,052.55.
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Similarly, schedules submitted by the Clark Foundation, of New
York City, show acquisition dates of July 27, 1962 to July 30, 1962
and sales date of February 28, 1962 on 700 shares of Westinghouse
Air Brake common. The gross sales price for the 700 shares was
$20,387.50, showing a loss of $4,110.49.
On the surface, would these two cases seem to indicate short sales
on the part of the Hyde and Clark Foundations?
Secretary DILLoN. As I gather, the sales were prior to the purchase.
That is a question that I think that SEC could better answer than I
can.
It is not necessarily short sales because they may have already had
some of those securities in their portfolio, and simply sold some, and
then decided they wanted to add to their investment 6 months later,
and then bought some more. That is a possibility. I would have to
know what the facts were to have a real opinion.
The CHAIRMAN There is also indication that, during the period
of December 1, 1961, through June 30, 1962, certain foundations sold
stock which they repurchased not too long thereafter. For example,
the Mary Reynolds Babcock Foundation, Winston-Salem, North Car-
olina, sold 30,000 shares R.J. Reynolds Tobacco Common on Decem-
ber 28, 1961 for a sales price of $2,398,820.49, approximately $80 per
share, showing a gain of $2,096,195.49. On March 29, 1962, the foun-
dation repurchased 10,000 shares of the same stock at a cost of $670,000
or $67 per share.
In another case the Cummings Foundation, of Chicago, on April
9, 1963 sold 1100 shares of Metro-Goldwyn-Mayer Common for $47,-
300 (roughly $43 per share), showing a loss of $19,505. Subsequently,
on June 7, 1962 and June 18, 1962, the Foundation repurchased 1,000
shares of Metro-Goldwyn-Mayer Common at a cost of $32,199
(roughly $32 per share).
Mr. Nathan Cummings, Chairman, Consolidated Foods Corpora-
tion (listed on the big board), is formed and President of the Cum-
mings Foundation and a director of Metro-Goldwyn-Mayer.
The David, Josephine and Winfield Baird Foundation, of New
York City, is a similar case. During the period January 31, 1962
through March 6, 1962, the Foundation sold 4,900 shares of Metro-
Goldwyn-Mayer Common for $261,837 (roughly $53 per share), show-
ing a profit of $2,985. Subsequently, during the period of March 22,
1962 through June 15, 1962, the Foundation repurchased 4,400 shares
of the stock at a cost of $185,240 (average cost roughly $42 per share).
The Baird Foundations have also been substantial purchasers of stocks
of Consolidated Foods Corporation. In turn, Mr. Nathan Cum-
mings and Consolidated Foods have been substantial contributors to
the Baird Foundations.
In your view do these transactions of the Babcock, Cummings, and
Baird Foundations represent any special problem areas?
Secretary DILLON. I don't think so. It seems to me in this case from
the date you mention, Mr. Chairman, although on further study I re-
serve my right to change that view, but from first hearing those sales
took place at a time when the stock market was close to or at an all
time high level, which was in late 1961 and early 1962.
Thereafter the stock market, as you all recall, went much lower, and
finally had what was called a crash in the end of May, and the prices
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dropped very precipitously, and I can well understand any investor,
whether it is a foundation or anyone else, when they saw the low prices
of stocks which they knew of and understood, the price that they
reached that June, they decided to step in and buy, and I think they
would be more likely to buy stocks they knew about than ones they
didn't know about. For that reason offhand I wouldn't think that
there is anything very surprising or anything bad about those par-
ticular transactions.
The CHAIRMAN. Has the Treasury collected and collated any in-
formation as to the extent that foundations are involved in speculation
and trading on margin?
Secretary DILLON. No, we haven't any general information of that
nature.
The CHAIRMAN Has the Treasury collected and collated any data
on the subject of foundation involvement in corporate proxy fights?
Secretary DILLON. I don't think we have any overall information on
that either.
The CHAIRMAN In your view should a foundation be permitted to
enter into a proxy fight?
Secretary DILLON. As I said earlier, I think there would be situa-
tions where, in the protection of the investment they have, a foundation
should have the right, to vote its stock. I think a, prohibition of that, a
complete prohibition, would be unwise as long as foundations are al-
lowed to own substantial amounts of any one company.
If you had diversification rules, a situation where a foundation only
had small holdings in each company then maybe it would be one could
say that they shouldn't get into proxy fights. They would have the
alternative of selling their securities if they didn't like the new man-
agement. But where a foundation is heavily involved in a particular
security, and there is a contest between two managements, and they
feel one of them is good and the other is bad, I think they not only
have the right but the duty to vote for the one they think is the best
management.
The CHAIRMAN. I shall ask Mr. Olsher to continue.
Mr. OLSIIER. Would you agree that?to the extent that foundations
may become involved in proxy fights for control of companies whose
voting stocks are listed on Exchanges?they are subject to the same
filing and disclosure requirements as any other participant?
Secretary DILLON. I would think so.
Mr. OLSIIER. There is every indication that foundations have en-
tered into proxy fights. According to press reports, there have been
a number of such cases. In 1960, durinc, the battle for control of
the Endicott-Johnson Corporation, the Albert A. List Foundation,
of Byram' Conn., received 54,000 shares of Endicott-Johnson from
the J. M. Kaplan Fund of New York City. These shares were used
by Mr. Albert A. List in his unsuccessful attempt to acquire control
of the Corporation.
Our records indicate that, on February 20, 1959, a security analyst
employed by Jemkap, Inc., submitted a memorandum to the J. M.
Kaplan Fund, which is connected with Jemkap, stating as follows:
Endicott-Johnson Corporation may be a likely target for a "take-over" situa-
tion, in view of its rich net worth capital position to be "sweetened" by a
rebound profit-wise. The common stock of Endicott-Johnson Corp. is un-
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usually cheap on the basis of both its rich balance sheet and prospect earning
power about to materialize. As against a seemingly limited risk on the down-
side, there is apparently a capital appreciation potential of some 50 per cent
on the upside. An even greater gain could result market-wise if control of
this company were in the hands of interests aimed at acquisition or merger.
Endicott-Johnson should prove to be a well-heeled investment.
Also, according to press reports, during the struggle over the Al-
leghany Corporation between Allan P. Kirby and the Murchison
Brothers, the Fred M. Kirby Foundation purchased Alleghany shares
despite the fact that the shares had not previously paid a dividend.
Secretary Dit,LoN. I would like to say in connection with proxy
fights that where the capital of a foundation is used alongside of
other capital of an individual to try to gain control of the company,
that would probably be in the area which I would call self-dealing,
and that is something which I would not favor and would not think
is proper. The kind of proxy situation where I think it is proper
for a foundation to vote its stock in a proxy fight is quite different
from apparently the two kinds you have mentioned.
The CHAIRMAN. Would you agree, Mr. Secretary, that the SEC
should be alerted to the possibility of a foundation's involvement
in insider deals and stock -Drice manipulations?
Secretary Dii,Loisr. I Clink the SEC has full responsibility in all
those areas, and certainly if there is any problem there' it would
be helpful if they know about it, because that is what they have
offices for in New York, and they have rules, reports, and they should
know about it.
The CHAIRMAN1. For some time, we have been looking into the
stock market activities of the 546 foundations under study by this
Subcommittee. Although the study is not complete as yet, prelimi-
nary figures indicate that, during the period 1951 through 1961, the
546 foundations sold over $8.6 billion of securities, showing a capital
gain of over $1.8 billion. These figures include $3.7 billion of stock
sales showing a gain of $1.8 billion.
Preliminary figures also indicate that, during the period of Decem-
ber 1, 1961 through June 30, 1962 (the period of the big plunge of
1962), the 546 foundations sold 8.4 million shares of traded stocks for
a sales price of $565 million showing a gain of over $421 million.
During the same period, the 546 foundations purchased 4.4 million
shares of traded stock at a cost of $201 million.
In your view do these figures indicate a sizable amount of market
activity by foundations?
Secretary Dll,r,oN. Well, I would have to know a little more about
the breakdown. It sounds like it is fairly sizable, but I do know that
during that period the Ford Foundation was placing large blocks of
Ford stock on the market for the purpose of diversification, and I
don't know whether that is included or how important it is in there, and
I do know that there have been similar situations where founda-
tions have found themselves with one company where they had a
very large investment, and they felt they should diversify.
Now I think that sort of ceiling is normal and good. Selling for the
purpose of making gifts, if that is done, is perfectly good. As I said,
I don't believe that there should be any great deal of speculation by
foundations.
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To the extent this indicates that, I wouldn't think it was good, but
I would have to go into the details far more than I have to have a
worthwhile opinion.
The CHAIRMAN. Would you agree that there is ample evidence that
foundations' speculation is not limited to stock transactions?
Secretary DILLON. I don't have the evidence to answer that as of
now.
The CHAIRMAN. Would you agree that there is ample evidence that
foundations have risked their assets in oil ventures, commodity fu-
tures, and even third mortgages on Miami Beach hotels?
Secretary DILLON. I imagine from the question that your studies
have shown that to be the case. I am not aware of specific examples
of that, but if you say so, I imagine they exist.
The CHAIRMAN. Would you agree that a foundation can be a source
of unfair competition arising from active use of foundation assets by
donors or trustees for private business ends?
Secretary Dir,Loiv. They can be. They shouldn't be.
The CHAIRMAN. Would you agree that there are an infinite number
of ways in which foundation assets or income can be used for the pre-
ferment of one set of private persons over another?
Secretary Dit,Low. I assume there are all sorts of ways that founda-
tion assets could be used or abused. The point of our study is to try
to come up with recommendations that will stop any abuses there may
be so that actions of all foundations would be the same as the actions
of the great majority of foundations in terms of asset,' again I say
in assets?which I am sure have been perfectly proper.
The CHAIRMAN. Would you agree that foundations' moneylending
activities put them into unfair competition with private lenders and
also give the foundations an element of influence over a wide range of
business ventures?
Secretary DILLON. It could be, if they are too active in that area.
That could happen. Some of the things that your Committee has
reported are of that type.
The CHAIRMAN. Would you agree, Mr. Secretary, that foundations'
moneylending activities may present problems, such as preferential
rates of interest?
Secretary Dir.mow. It is possible.
The CHAIRMAN. Would you agree that, at present, the only restraint
on a foundation's moneylending appears to be that loans must carry
a "reasonable" rate of interest and adequate security, and that nothing
prevents the foundation from making loans to its founder or his
family, the businesses under his control, or a donor?
Secretary Dir,Loisr. Generally, you are absolutely correct. That is
what the law provides, and that is one of the things that we think
should be changed.
The CHAIRMAN. Would you agree that foundation tax returns
should require schedules of loans receivable, showing the name ma
address of the debtor, purpose for which each loan was used by the
debtor' information as to whether the loan is secured by note, date
made, face amount, interest rate, due date, date paid, and collateral
pledged for each loan?
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Secretary DILLON. I think that may well be advisable, to have full
reports of the assets of foundations and that will include loans as well
as holdings of real estate, common stock or anything like that. If you
had a full report, you would have most of the information that you
read out there. However, the Internal Revenue Service has been giv-
ing considerable study to the form required, and one of the problems
you have is that you can ask for all sorts of information which might
be useful in a particular case, but you have to take into account the
broad band of the cases and not ask for everything from everybody.
The same would apply to an individual income tax return. We could
think of all sorts of questions that would be nice to know, but we get a
tax return instead of being four pages long would be twenty or thirty
pages long.
The CHAIRMAN. Would you agree that foundation tax returns
should require schedules of loans payable, showing name and address
of the creditor, purpose for which each loan was used by the founda-
tion, information as to whether the loan was secured by note, date
made, face amount, interest rate, due date, date paid, and collateral
pledged for each loan?
Secretary Dmr.oN. Again: that might be useful, but it is a difficult
question as to whether there is enough information that would be worth
extending the return that long without getting it too complex. I just
don't know what the answer to that would be, because it would compli-
cate the return.
If this was beinc, done in enough volume so it was worth while, then
I think it would be a good thing to do, but I would like to know more
about what the problem is before saying yes or no to whether the
return should be that complex.
The CHAIRMAN. Would you agree that the repeated misuse of a
foundation's funds could conceivably be prevented if detailed sched-
ules of loans receivable and payable were required on foundation tax
returns?
Secretary Dim.ox-. Well, to the extent foundations' funds are mis-
used?they shouldn't be misused at all?to the extent they are misused
through either making loans or receiving loans, it would help by asking
for reporting.
But I am not certain that that is the proper answer. The proper
answer may well be to enact legislation which prevents loans or trans-
actions of any sort with donors or donor controlled individuals or sis-
ter relations of that type, and that might answer the problem much
more clear-cut than having to complicate the returns of all foundations
in order to capture a few of them that are doing something they
shouldn't be doing.
The CHAIRMAN. In your view should a foundation be permitted to
borrow funds for purposes of speculation?
Secretary DimoN. No, as a general rule I would not think that is
proper.
The ()HAIRMAN. In your view should a foundation be obliged to
have an independent audit annually by a certified public accountant?
Secretary DILLON. Again that is a question of the size of the foun-
dation. Certainly I think any large foundation should. But when
you have a smaller foundation, I am not certain that that requirement
of an every-year audit is necessary or even feasible. But certainly to
the extent of any size, I think that that is a proper thing.
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The CHAIRMAN. In the course of its administration of the various
regulations concerning foundations, does the Treasury investigate
loans to determine whether statutory standards are being met?
Secretary DILLON. You would have to ask the IRS that. I wouldn't
know.
The CHAIRMAN. Would you agree that it is a considerable competi-
tive advantage to a borrower to have a ready source of cash, even if it
is fettered with the statutory standards of a reasonable rate of inter-
est and adequate security?in other words, to have a ready source of
cash without having to assume a responsibility to banks or stock-
holders?
Secretary DILLON. I think that might well be. Again I think that
the problem there would be taken care of with a provision against self
dealing.
The CHAIRMAN. In the course of its administration of the various
regulations concerning foundations, does the Treasury examine the
foundations to determine whether donations of notes receivable by the
foundations may be attempts to conceal bad business loans?
Secretary DILLON. Yes. You see at least since 1962 when the form
990-A was changed, foundations are required to specify what their
receipts are, and naturally that enables us to take a look at anything
in the nature of contributions of receivables or contributions of prop-
erty that is indeterminate in value and requires a much closer look to
be sure it has been valued properly.
I am sure the Internal Revenue Service is able to do that, and does
do that much better now than it did in the past. In the past they
didn't do it because, as I have pointed out before, the 990-A until 1962
merely called for the amount of a contribution; it didn't require a
description of the contribution.
The CHAIRMAN. I shall ask Mr. Olsher to continue.
Mr. OLSHER. During your term of office has the Treasury, on its own
initiative, ever forwarded to any Congressional Committee informa-
tion regarding donations by foundations which were made to conceal
bad business loans?
Secretary DILLON. My guess is it has not, because I think anything
that has been forwarded. to Congressional Committees would presum-
ably be forwarded by the Treasury, and I know of no such thing.
Mr. OLSHER. By way of illustration, here is a problem that can re-
sult sometimes from bad business loans. This is a letter from Dr. W.
Randolph Lovelace, II of the Lovelace Foundation in Albuquerque,
New Mexico. It is addressed to Mr. David G. Baird, Baird and Com-
pany, 65 Broadway, New York. It deals with a donation that was
given to the Lovelace Foundation by one of the Baird Foundations.
Dr. Lovelace states as follows:
It was very distressing to us to hear that the Western Television Company
was not planning to pay the notes as they became due starting July 1. As you
know, we have been steadily expanding our program and we had budgeted
these funds for use this year. Failure to receive these funds as expected will
force us to curtail part of our program unless we are able to raise the money
In some other way. Do you think it would be possible to discount these notes,
or is there any possibility that Western Television might be able to pay them
after all?
The Internal Revenue Service is on record as having advised certain
foundations as follows?.
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Mr. ROOSEVELT. Could I interrupt there a minute? I think it ought
to be clear on the record that there ought to be some supporting evi-
dence that that is an attempt to conceal a bad debt. I mean simply
reading a letter doesn't make it a bad debt per se. Would that be a
fair statement, Mr. Secretary?
Secretary DILLoisT. I would think it would. I am not aware of the
details of the transaction at all.
Mr. ROOSEVELT. I am not either. I do not know anything about it.
Referring to the donation, in other words, it is perfectly conceivable
that a donor might make a donation at that time without having any
knowledge or any willful part in making a donation which turned out
not to be a good solid contribution.
Secretary Etim.ox. It is perfectly possible, yes.
Mr. ROOSEVELT. I would not like the intimation to just rest on that.
Secretary Dii,Loig. That is right.
Mr. ROOSEVELT. That it was necessarily so. If the committee has
evidence that should be put in. It still does not mean that the con-
tributor knew that at the time he made the donation. That is what
I am trying to get at.
Secretary DILLoisr. Yes.
The CHAIRMAN. There will be additional testimony.
Mr. OLsnun. The IRS is on record as having advised certain founda-
tions as follows:
Any further use of your funds to acquire mortgages or mortgage loans may
jeopardize your tax-exempt status. Further, the use of borrowed funds to
acquire income-producing property may also jeopardize the status of an other-
wise tax-exempt organization.
One part of our study relates to the moneylending and borrowing
activities of 546 foundations. To this end, we required the foundations
to submit schedules of all loans receivable and loans payable during the
period of 1951 through 1962. There is indication that funds loaned
out by those foundations during the period 1951 through 1962 is about
$841 million. Their borrowings total $251 million.
Our study is far from complete, but a preliminary examination of
some of the loans receivable indicates that 22 foundations made loans
of $19 million to assist borrowers in purchasing securities.
A similar preliminary examination of some of the loans payable
indicates that 23 foundations borrowed $17 million for the purpose of
purchasing securities.
We will need additional information from many of the foundations
in order to determine the exact purpose of funds loaned out or bor-
rowed. For example, some of the foundations state that certain loans
were made for "general corporate purposes." There is no indication
whether "general corporate purposes" include the purchase of secu-
rities or other assets.
Mr. McC-uLLocii. Might I ask a question there?
The CHAIRMAN. Certainly, sir.
Mr. MCCULLOCH. Is that the end of that communication?
Mr. OLSHER. Yes.
Mr. McC-uLLocii. And there is no description as to the meaning
of the phrase "general corporate purposes"?
Mr. OLSHER. No not in the schedules they submitted to us. We will
have to request additional information on those. These figures that
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I cited include only those schedules that showed the purposes which
were specific and which could be understood, such as purchase of
securities.
Mr. McCunnocx. And you do not have the articles of incorporation
of the corporation in question or the foundation in question which
would describe the ordinary corporate purposes?
Mr. OLSHER. Yes, sir, we have their charters and their corporate
purposes.
Mr. McCunnocx. And are they authorized to engage in such activ-
ities?
Mr. OLSHER. We would have to check each and every one.
Mr. ROOSEVELT. Mr. Chairman may I ask a question? Do not
most charitable foundations, in their articles of incorporation, as you
may know from your general knowledge, specifically include that
power?
Secretary DILLON. I think usually the charters as written by lawyers
are written very broadly and include all sorts of powers whether or
not they are expected to be used, so I think the answer to your ques-
tion is probably yes.
Mr. RoosEvEur. So again a question here, Mr. McCulloch, and not
being a lawyer I may be out of my depth, but as I understand it,
it is really not a question as to whether what may have been done was
legal. It may have been the power of the foundation from a legal point
of view but whether or not perhaps it is good public policy for which
there should be some future course taken.
Mr. MCCULLOCH. Yes. I understand that. I was asking the ques-
tion so that the Internal Revenue Service could be completely informed
on whether or not the activity in question is one that would continue
to entitle them to the tax exemption.
Mr. ROOSEVELT. That would, of course, require a definite finding as
to whether or not certain actions were to be prohibited by Federal
law, because otherwise the Internal Revenue Service would have no
basis to go on for declaring them not eligible for tax exemption pur-
poses unless they had violated some Federal law, so long as what they
did was within the power, the corporate power, under the charter
granted to them by a certain state.
Mr. McCunnom. Well, it may not be that which is prohibited by
Federal law. It might on the other hand be that which is authorized
and would still result in a tax exemption.
The CHAIRMAN. In the course of its administration of the various
regulations concerning foundations, does the Treasury examine the
foundations to determine whether they are violating any Civil Aero-
nautics Board regulations?
Secretary Dinnoiv. You will have to ask the IRS. I don't think so.
The CHAIRMAN. During the term of your office has the Treasury, on
its own initiative, ever forwarded to the CAB information regarding
any foundation's violation of CAB's regulations.
Secretary DinLoN. You will have to ask the IRS.
The CHAIRMAN. The Bureau of Enforcement of the Civil Aero-
nautics Board contends that financial institutions lending money to
airlines may come under CAB jurisdiction through terms of the loan
agreements.
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This was the Bureau's contention in the complaint of Hughes Tool
Company v. Metropolitan Insurance Company, the Equitable Life
Assurance Society of the United States, Irving Trust company, Dillon
Read Sz Company, Inc., Ernest R. Breech, Ben-Fleming Sessel, James
F. Oates, Jr., Harry C. Hagerty, Charles C. Tillinghast, Jr., Pan
American World Airways, Inc., and Juan T. Tripp.
Hughes Tool Company alleged that Equitable Life Assurance
Society of the U.S., Metropolitan Life Insurance Company, and Irving
Trust Company acquired control of the Trans World Air Lines with-
out prior CAB approval in violation of section 408 of the Act. This
allegation turns principally on whether the lending institutions may
be held to be "persons engaged in a phase of aeronautics" and thus come
under the provisions of the 1958 Federal Aviation Act, which require
CAB approval of the various corporate relationships in the aviation
industry.
According to the Bureau of Enforcement, "the issue here is not
the fact of borrowing money or establishing a normal debtor-creditor
relationship. The issue is whether the terms of the loan agreements
inject the lending institutions into managerial functions."
Would you say that a foundation that lends millions of dollars to
businesses year after year can be classed as a "financial institution,"
Mr. Secretary?
Secretary DinLow. I think it would depend on the circumstances.
Certainly I can see some foundations who would lend money to busi-
nesses that would not be financial institutions. I don't know whether
the Ford Foundation lends money or not, but it wouldn't be a finan-
cial institution as I would define them.
The CHAIRMAN. From September 28, 1960 through July 20, 1962,
the Ford Foundation loaned $3 million to Continental Airlines, Inc.
at 614 percent-61/2 percent interest, due December 31, 1972. Accord-
ing to the Foundation, Continental Airlines used the loans to purchase
new equipment.
In your view should the Ford Foundation be classed as a financial
institution lending money to an airline?
Secretary DILLON. I wouldn't think so.
(Discussion off the record.)
Mr. OLSHER. This deals with moneylending activities of founda-
tions which we discussed earlier. Our records indicate that, during
the period of 1951 through 1962, the Ford Foundation made loans to
commercial organizations of at least $300 million. This excludes the
following types of loans receivable: U.S. government obligations; par-
ticipations in loans made by the International Bank for Reconstruc-
tion and Development; short-term certificates of deposit of banks;
short-term commercial paper; short-term fixed and time deposits with
commercial banks; deposits with U.S. savings banks; and corporate
bonds purchased through regular bond market channels.
In at least one instance, a loan was made to assist a borrower in pur-
chasing securities. This was a loan of $5 million to Rapid-American
Corporation for the purpose of acquiring McCrory Corporation Com-
mon Stock. The loans in the amounts of $3.5 million and $1.5 mil-
lion were made on May 18, 1962 and on June 14, 1962 respectively. In-
terest was 584 percent; due date is June 1, 1976; and collateral pledged
is common stock of McCrory Corporation.
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Mr. ROOSEVELT. Is this a question to the Secretary? A proper finan-
cial transaction for a foundation?
Mr. OLSHER. This is a continuation of an earlier statement on
moneylending.
Secretary Dinnow. I didn't understand that was a question.
The CHAIRMAN Are there any special problems relating to foun-
dations that make gifts abroad, Mr. Secretary?
Secretary Dinwx. That make gifts abroad?
The CHAIRMAN. Yes.
Secretary Dinnox. Under our law, a foundation that is domiciled in
the United States can have activities abroad. The Rockefeller Foun-
dation, for instance, has done a lot of medical research and medical
work abroad. The Ford Foundation is doing a lot of work in under-
developed countries, and I don't think there is anything wrong with
that.
Mr. Roomy-ELT. Mr. Chairman, may I just ask this.
Mr. Secretary, there is some kind of regulation, however, I believe,
which says if a domestic foundation puts more than a reasonable
amount of its money abroad, I believe it may stand to lose its tax-
exempt status. I know that in the Eleanor Roosevelt Cancer Founda-
tion, when we were considering a fellowship program which largely
would go to international research students, that the Treasury?this
was submitted to the Treasury and the Treasury made some comment
that in this particular case, as long as it was in proportion to the total
that was king used, it didn't involve any problem, but warned us
that it might if
Secretary DuLoN. There is no restriction on the amount of money
which a bona fide domestic charity may spend abroad. What you may
be referring to is a limitation which disallows deductions for contribu-
tions made to a domestic organization which is organized solely to
solicit contributions in the United States for a foreign charity, and
the domestic organization exercises no control over the use to which
the foreign charity puts the funds. However, that limitation does not
apply to bona fide domestic charities merely because they conduct
their charitable activities abroad.
The CHAIRMAN. In the course of its administration of the various
regulations concerning foundations does the Treasury examine the
foundations to determine whether their foreign operations may be in
conflict with government policies?
Secretary DILLON. I would think you would have to ask the IRS
that. I don't know what they do.
The CHAIRMAN. During your term of office has the Treasury, on its
own initiative, ever forwarded to Congressional committees, the State
Department, or the White House information concerning any founda-
tion's activities abroad which may be in conflict with our government's
policies?
Secretary DILLON. Not to my knowledge.
The CHAIRMAN. How much did all United States foundations spend
on overseas donations in 1963?
Do you have the information?
Secretary Diinoic. I don't have that. I think we might be able to
get it. I don't know.
The CHAIRMAN. Will you furnish it?
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Secretary DILLON. If we can get it I will be glad to.
(The information submitted by the Treasury follows:)
The Internal Revenue Service's records do not Indicate the amount spent by
all U.S. foundations for international projects. However, according to informa-
tion contained in the Foundation Library Center's Directors, the larger founda-
tions made grants of approximately $52 million in 1962 for international type
projects. However, not all of these funds go abroad. Approximately 40 percent
($20 million) of these grants fall within the category of International Studies,
most of which went to American universities for projects such as area studies.
The CHAIRMAN. Our study has stirred up considerable Congres-
sional interest in the ever-increasing outpour of foundation funds to
foreign countries. In the minds of many Congressmen, there is a big
question as to whether Congress intended that foundations should be
permitted to spend their funds abroad. These Members believe that
the original intent of Congress was to grant tax exemption to foun-
dations for the purpose of aiding charity, education, etc. in the United
States. Hence they are disturbed over the mounting flood of foun-
dation funds into foreign activities.
Here are a few illustrations of foreign expenditures:
? During fiscal year ending September 30, 1962, the Ford Founda-
tion appropriated $45,916,448 for foreign activities. During fiscal
year ending September 30, 1956, the Ford Foundation's expenditures
for foreign activities were in excess of $16 million.
? In 1962, the Carnegie Corporation of New York paid out $798,402
for programs in the British Commonwealth nations.
? The following describes a few expenditures from among the mil-
lions of dollars in oversea expenditures made by the Rockefeller
Foundation during the year 1962:
Amount approved
Donee or paid out
Maintaining and operating the Villa Serbelloni in Italy $138,
213
Special program of fellowships, scholarships, and training awards in
Asia, Latin America, the Middle East and Africa
231,
077
Special program of grants to aid to Asia, Latin America, the Middle
East, and Africa
119,532
University College, Ibadan, Nigeria 1,
500, 000
University of Levanium, Leopoldville, Republic of the Congo
175,
000
Ministry of Health, Nairobi, Kenya, East Africa
45,
430
Ministry of Health and Labour, Tanganyika, East Africa
152,
000
University of East Africa, Kempala, Uganda
164,
897
University of Khartoum, Republic of the Sudan
500,000
Indian School of International Studies, New Delhi, India
150, 000
University of Lucknow, India
114,
700
Poona, India
107,
159
University of Ankara, Turkey
110,
000
Institute of Genetics, Misima, Japan
60.
000
Congress is on record as opposing aid to countries which "live on
our aid while they channel their own resources into arms from Russia."
It is alleged that this is precisely what has been happening in this
United Arab Republic. According to press reports, Colonel Nasser
has been sending a large part of his exportable cotton to the Commu-
nist countries as payment for over $100 million a year in arms and
other assistance.
Yet the Ford Foundation has allocated $135,000 to the University
of Cairo and another $210,000 to the University of Alexandria?all for
technical assistance. Here is something I should like to ask you about,
Mr. Secretary. A United States business corporation makes this
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Mr. ROOSEVELT. Mr. Chairman, are we going to leave this problem,
because I want to say a word about that before we leave it.
The CHAIRMAN. Let me finish this.
Mr. ROOSEVELT. This deals with the same thing.
The CHAIRMAN. Here is something I would like to ask you about.
A United States business corporation makes a gift to a United States
charitable trust. The charitable trust in turn makes a gift of such
funds to a United States charitable corporation. The charitable cor-
poration spends the money for charitable purposes abroad.
Have these funds been used within the United States or its posses-
sions when the charitable trust pays them over to the charitable
corporation?
Secretary DinLoic. I would think probably technically under the
law they have. I am not a lawyer, though, and I would have to get a
legal opinion on it.
The CHAIRMAN. Do you believe that the original intent of Congress
was to grant tax exemptions to foundations for the purpose of spend-
ing their money overseas?
Secretary DILLON. Oh, I think clearly it was, because the Rocke-
feller Foundation has been spending money overseas since its founda-
tion and I have not heard any Congressional criticism or any mention
of that in any of the tax writing committees.
Now, they may feel at present that too much money is being spent.
Congress may at any time change their view, but certainly 1 don't
think when it was originally done there was any prohibition against
spending appropriate amounts abroad of contributions made by
The CHAIRMAN. In other words, you think it is all right for a foun-
dation to get an exemption from the United States and thereby acquire
legal use of what would otherwise go into the Treasury of this country,
and use that money to help other governments abroad?
Secretary DILLoiv. Certainly, the Rockefeller Foundation, as I said
before, has for many years worked to eradicate disease around the
world, and to the extent they may help a foreign government by help-
ing its people, that can be said to help the foreign government. It is
really a question of humanity, and trying to improve the health and
wellbeing of human beings around the world who are not able to help
themselves.
It is the exact same principle as our Point IV program and our
technical assistance program that we have had for many years as gov-
ernment programs, and certainly they have been approved year after
year and are still being approved, so I can't see why the government
would feel that private individuals or private foundations should not
do the same thing and relieve the government to that extent from hav-
ing to do it itself.
The CHAIRMAN. Mr. Roosevelt would like to ask a question or make
a statement.
Mr. ROOSEVELT. Mr. Chairman, I want to say I completely agree
with the Secretary in his statement which he has just concluded and
I feel very strongly that while of course the matter can be overdone
and if a foundation is not giving it in the field of humanitarian pur-
poses, that this could be properly criticized, but as far as I am con-
cerned, there is no legitimate criticism that I have run across of any
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of the money which has been spent, whether it be in Latin America or
whether it be in Africa or whether it be in various places from the
foundations which have been named that was not for a specific pur-
pose, which was distinctly in the interest of the United States in our
over-all program to help free people remain free. I would regret
greatly if this investigation in any way was used as an effort to try to
stop this kind of assistance, which otherwise is going to put an addi-
tional burden on all the taxpayers of the United States in the way of
direct foreign aid.
I feel that this is a proper thing that has been done by the founda-
tions, and I certainly hope that there is no criticism implied in what
they have done in this area.
The CHAIRMAN. In the course of its administration of the various
regulations concerning foundations, does the Treasury examine the
foundations to determine whether their activities may be contributing
to the drain of United States gold reserves abroad?
Secretary DILLON. We have naturally an interest in the balance of
payments situation but we have felt that to the extent that funds are
used in under-developed countries, they are merely substituting for
government funds that would have to be used for the same purpose,
and therefore we have not felt that it was wise or proper to put any
limits on that. We have a number of laws in which the Congress has
exempted underdeveloped countries from provisions which restrict in-
vestment, for instance, in other parts of the world. The latest was the
1962 act dealing with taxation of foreign income which exempted un-
der-developed country investments in that area. I think the (Treat
majority of these foundations' expenditures are in under-developed
areas and are therefore proper.
The CHAIRMAN. During your term of office, Mr. Secretary, has the
Treasury, on its own initiative, ever forwarded to Congressional com-
mittees, the White House, or other government departments informa-
tion regarding any foundation's activities which may be contributing
to our balance of payments problems?
Secretary DILLON. I don't know of any that we have found or we
have forwarded.
The CHAIRMAN. In the course of its administration of the various
regulations concerning foundations does the Treasury examine the
foundations to determine whether they are making loans overseas that
may be contributing to our balance of payments problems?
Secretary DILLON. I don't think that there is that form of specific
examination because we have no legal right to tell them not to do that.
They have the same legal right as any other American to make loans
or buy securities. I would hope they wouldn't do it, but they have a
perfect right if they wish.
The CHAIRMAN. During your terna of office, has the Treasury, on
its own initiative, ever forwarded to Congressional committees, the
White House, or other government departments information regarding
foreign loans of foundations which may be contributing to our balance
of payments problems?
Secretary Dir,Low. No. We don't know of any substantial ones, and
I am sure we have never forwarded such information anyway.
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The CHAIRMAN. Would you agree that foreign loans by foundations
amounts to a government subsidy being used without government con-
trol in conflict with government policy?
Secretary DILLON. No, I don't think so. It is merely an investment
of their funds. As I say, I would hope they would not invest them
abroad at a time when we are in balance of payments difficulties and
I would hope most foundations follow that procedure.
The CHAIRMAN. During the 1961 balance-of-payments crisis, the
Ford Foundation loaned $33 million overseas?some of the loans to
industrial nations like France, Belgium and Canada. Would you
agree that the Ford Foundation loans to foreign corporations and
governments create a some what bewildering paradox?
t, Secretary DILLON. No. I would say they hurt our balance of pay-
ments at the time they were made, but I understand that the Ford
'Foundation, since then, has desisted from this form of operation and
has not been making investments overseas of that nature in more
; recent years.
The CHAIRMAN. Our government brought home soldiers' families
so as to save dollars overseas. Yet the Ford Foundation exported
$33 million in 1961. Hence, part of the dollars we saved by separat-
ing our soldiers from their families was sent back overseas by the
Ford Foundation. And the irony is that the Ford Foundation op-
erates on a subsidy from the taxpayers?in the form of tax exemption.
In the course of its administration of the various regulations con-
cerning foundations, does the Treasury examine the foundations to
determine the purpose of their loans to foreign corporations and
governments?
Secretary DILLON. I don't think so, no.
The CHAIRMAN. During the term of your office has the Treasury,
on its own initiative, ever forwarded to Congressional committees,
the White House, or other government departments information re-
garding the purpose of foundation loans to foreign corporations and
governments?
Secretary DILLON. Not that I know of.
The CHAIRMAN. Will you agree that if the loans are used by foreign
businesses?which are not bound by our antitrust statutes?to help
them gain entry to our market, these foreign firms have a competitive
advantage?
Secretary DILLON. If they are made a loan at the standard rate
of interest, I don't think they have any particular competitive ad-
vantage, if they get it from a foundation or a bank, I don't think
it makes any difference.
The CHAIRMAN. Would you agree that trade practices in the United
States and the Common Market are quite different?
Secretary DILLON. I certainly would.
The CHAIRMAN. Would you agree that, in Europe, industry cartels
can cut up the United States market, assigning to certain members
exclusive territorial rights in certain sections of this country, and
that our businesses cannot do this without facing violating of our
antitrust laws?
Secretary DILLON. Yes. The antitrust concept is only rather new
in Europe. They are trying to develop some antitrust laws in the
39-915-64 I
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Common Market, but I don't think they will go anywhere near as
far as ours.
The CHAIRMAN. Would you agree the foundations' loans to foreign
corporations could conceivably be helping our foreign competitors
who are not bound by the Sherman Act, the Robinson-Patman Act,
et cetera?
Secretary DirsoN. Well, any loan by an American to a foreign cor-
poration presumably helps the foreign corporation, or they wouldn't
make the loan, so to the extent that they are made by a foundati,on, it
would also help.
The CHAIRMAN. I shall ask Mr. Olsher to continue.
Mr. OLSHER. As you know, the Ford Foundation and the Ford
Motor Company have a rather substantial mutual interest. In Jan-;
nary and February 1962, the Company acquired from the Foundation ,
a large block of the Company's common stock and in turn disposed
of it to the Deutsche Bank of West Germany.
Here is the story as submitted to us by the Ford Foundation.
The Ford Foundation states that, in the spring of 1961, it initiated
discussions with Mr. Hermann J. Abs of the Deutsche Bank respect-
ing the possibility of either placing some shares of Ford Motor Com-
pany stock with large investors in Germany or, possibly, making a
public offering.
The following are quotes from a Ford Foundation letter to me:
"After studying the matter, Mr. Abs became convinced that a pub-
lic offering could be made. He stated that considerably more stock
could be sold in Germany if the stock were to be listed on one or more
German stock exchanges. Since the only organization that can make
application for such listing is the issuer itself, namely, Ford Motor
Company, the Foundation approached that company to see whether
it would be willing to make the application and incur the expense
of listing on one or more German exchanges. The Company indicated
that it was interested in exploring that matter.
"The terms of the proposed sale and public offering in Germany by
a syndicate headed by the Deutsche Bank were negotiated in November,
1961, between the representatives of that bank and the Foundation at
the Foundation's offices in New York. It developed during the course
of the discussions with Ford Motor Company concerning listing and
concerning the obtaining of common shares for the Deutsche Bank,
that the Company which has subsidiaries in Germany and many other
areas of the world, could use the foreign exchange proceeds from such
a sale in furthering the Company's business interests abroad."
On January 17, 1962, the Ford Foundation executed a contract with
the Deutsche Bank to sell up to 500,000 shares Ford Motor Company
Class A stock owned by it to the Bank for the purpose of an offering
for sale by the Bank and a syndicate of German banks formed by it
in West Germany of the shares of common stock of Ford Motor Com-
pany to be obtained by the Bank from the Company in exchange for
the shares of Class A stock purchased by the Bank. The purchase
price of the shares to be purchased by the Bank was fixed by the con-
tract at the market price of Ford common stock on the New York
Stock Exchange prevailing at the time when the Bank gave notice of
the take-down, less a discount of 5.25 percent on the first 250,000 shares
and less a discount of $2 per share on any additional shares purchased.
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TAX-EXEMPT FOUNDATIONS: IMPACT ON SMALL BUSINESS
The Foundation, by assignment dated January 23, 1962, with the
Bank's consent, assigned the Foundation's rights under the contract
to Ford Motor Company on the condition that the Company agreed
to sell directly to the Bank authorized but unissued common stock on
the same terms that the Foundation had agreed to sell Class A. stock
to the Bank and to purchase from the Foundation simultaneously with
the issue and sale of such shares to the Bank an equal number of
shares of Class A stock at the same price per share which the Com-
pany received for the common stock sold to the Bank. The Company
also undertook to apply for the listing of its common stock on one or
more German exchanges.
Pursuant to the contract, the Bank took down 150,000 shares on
January 25, 1962 at $98.54 per share and 100,000 shares on January
30, 1962 at the same price for settlement on February 5, 1962; 30,000
shares were taken down on February 19, 1962 at $103.75 and 8,000
shares on February 21, 1962 at $105.50 per share for settlement on
February 28, 1962. On each settlement date the Foundation sold an
equal number of shares of Class A stock to the Company at the same
purchase price per share.
The Deutsche Bank Syndicate marketed the common stock abroad.
The following describes the Foundation's proceeds, expense of sale,
and (rain realized from the sale: Number of shares 288,000; gross pro-
ceeds''$28,591,500 ; expenses of sale $32,148.38; gain $26,831,351.62.
In the course of its administration of the various regulations con-
cerning foundations, has the Treasury examined the Ford-Deutsch
Bank transaction to determine whether it was set up for the purpose of
avoiding taxation of foreign earnings?
Secretary DILLON. Mostly not. I would like to say though, that
from everything you have said that is a transaction which was emin-
ently in the interests of the United States, and we are delighted that
the Ford Foundation and the Ford Motor Company did it. We are
strongly in favor of companies trying to raise money for their oper-
ations abroad, raising it abroad, rather than transferring it from the
United States. In this case this is what happened. The Ford Motor
Company stock was sold to German investors. Funds were raised,
and it enabled Ford subsidiaries abroad to expand, and in that way
the money came from Germany rather than coming from the United
States and affecting our balance of payments.
There has just been a very distinguished committee which studied
how it would be possible to get foreigners to invest more heavily in
the United States, to help our balance of payments which was headed
by the former Under Secretary of the Treasury, Mr. Fowler, which
reported to the President a little while ago. One of the chief recom-
mendations was that large international companies should try to in-
crease the ownership of their companies abroad, by selling their stock
abroad.
That is what happened here clearly. From the point of view of
the foundation, it also represented some liquidation of the tremen-
dous concentration they had in Ford Motor Company stock, and I
would think it was probably desirable from that point of view also.
Mr. OLSIIER. Mr. Secretary, may I also ask you whether there is
any indication or evidenca that there was any attempt to evade taxes
on foreign profits?
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48 TAX-EXEMPT FOUNDATIONS: IMPACT ON SMALL BUSINESS
Secretary DinnoN. No, not the slightest from what I have heard. I
don't think it has any relation to it.
Mr. OLSIIER. As you lmow, Mr. Secretary, a new Federal law went
into effect on January 1, 1963 with respect to "tax havens." The new
law provides that income of certain United States controlled foreign
subsidiaries will be taxed to their United States parents when earned
instead of when brought home as dividends. However, it is my under-
standing that earnings of a foreign subsidiary are subject to immedi-
ate tax only if more than 50 per cent of its voting stock is owned by
United States taxpayers. As a result I understand that some foreign
United States parent companies have been selling stock to foreigners
in order to cut their foreign holdings down to 50 per cent. One way to
avoid such taxation would be for a United States parent to sell part
of its stock in an overseas corporation to a foreigner in its employ.
During your term of office has the Treasury, on its own initiative,
forwarded to the SEC information regarding the Ford-Deutsche
Bank transaction?
Secretary DILLON. No, but it bears no relation to what you just
said about the 1962 Act. It bears no relation whatsoever. I would
just like to make that clear.
Mr. OLSIIER. It seems to me that a direct and logical approach would
have been for the Foundation to exchange Ford Motor Company Class
A stock for common stock and then sell the common stock, or have the
Ford Motor Company sell its common stock and use the proceeds to
buy Class A stock for the Foundation.
Has the Treasury examined this transaction to determine the bene-
fits derived by the Ford Foundation and the Ford Motor Company
from taking the indirect approach in making the sale to the Deutsche
Bank?
Secretary DILLON. I don't see any difference between the Ford
Foundation acquiring common stock from the Ford Motor Company in
return for Class A stock, and then selling it to the Deutsche Bank, or
doing it the other way around, selling their Class A stock to the Ford
Company and then the Ford Company then selling their common
stock to the Deutsche Bank. I don't think there are any benefits in-
volved at all.
Mr. OLSIIER. What was the gain to the Ford Foundation and the
Ford Motor Company from using a foreign syndicate instead of an
American underwriting?
Secretary Dinnoist. I think the gain was perfectly clear. If they
wanted to sell their securities to Germans, probably they could do it
to. better advantage by using Germans to sell to Germans than by
using an American banker in New York to sell to Germans.
Mr. OLSHER. How did the Ford Foundation or the Ford Motor
Company benefit from marketing the stock abroad instead of in this
country?
Secretary Dinnow. The Ford Motor Company benefited by raising
money abroad, German money rather than having to transfer their
own American money overseas for further investment. That also
greatly helped our balance of payments.
Mr. OLSTIER. Was there anything that the Ford Foundation or the
Ford Motor Company could not do directly that became possible un-
der this involved mechanism?
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TAX-EXEMPT FOUNDATIONS: IMPACT ON SMALL BUSINESS 49
Secretary DILLON. No, I don't think so.
Mr. OLSHER. Has the Treasury examined this transaction to deter-
mine whether it may have been a device to reduce the Ford Motor
Company's equity in its European subsidiary or subsidiaries to a
point where only dividends actually received from such foreign com-
panies rather than their profits, are subject to Federal income tax?
Secretary DILLON. It had nothing to do with the Ford Motor Com-
pany's equity in their subsidiary. It was merely a sale of Ford Motor
Company stock of the United States to Germans. It has nothing to
do with their interest in a subsidiary.
Mr. OLSHER. Has the Treasury examined this transaction to deter-
mine whether it resulted in any income tax advantage to the Ford
Motor Company?
Secretary DILLow. No, I don't think we have, but certainly that will
be examined in the course of the regular examination of the income
tax returns of the Ford Motor Company which are examined every
year.
Mr. OLSHER. Is this Ford Foundation-Ford Company transaction
an isolated instance or are there other similar arrangements which
might involve foreign affiliates or subsidiaries?
Secretary DILLON. Well, since this did not involve a foreign affiliate
or a foreign subsidiary, I don't quite understand your question. But I
think it was probably that there are not many of this nature because
there are not many situations that are similar to the Ford situation.
A very substantial part of the stock of the company is owned by a
foundation, and it is a world-wide company that is interested in rais-
ing money for operations abroad. So I don't think there would be
many similar situations. I am very glad, as I say, that the Ford Motor
Company took this tack and we are trying to persuade other com-
panies to do the same thing, although there is no connection there
with foundations.
Mr. OisnER. Didn't this involve the foreign affiliates of the Ford
Motor Company?
Secretary DILLON. No.
Mr. OLSHER. The Ford Motor Company has substantial foreign
interests.
Secretary DILLON. Yes, but this has nothing to do with it.
Mr. OLSHER. Nothing at all?
Secretary DILLON. No. It is selling the parent company's stock.
Mr. OLSHER. Mr. Chairman, may I make an inquiry as to how long
we are going to proceed. It is now ten minutes of six.
(Discussion off the record.)
The CHAIRMAN. Would you agree that stock of our industrial and
commercial enterprises is to an ever-increasing degree passing into
the hands of tax-exempt foundations?
Secretary DILLON. I think that as foundations go and get stock it is
true that more of it is passing into their hands. I think that is a
correct statement.
The CHAIRMAN Would you agree that this offers boundless tempta-
tions and opportunities?
Secretary DILLON. I don't think that stock that is passing into the
hands of foundations year by year is anywhere near as important in
volume as the stock that is passing into the hands of other tax-exempt
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50 TAX-EXEMPT FOUNDATIONS: IMPACT ON SMALL BUSINESS
organizations such as pension funds, things of that nature, which are
growing even more rapidly.
The CHAIRMAN. Would you agree that many foundations have un-
limited powers to buy, sell, and speculate in stocks, just as if they were
private investment corporations of boundless powers with no public
duties or responsibilities, and not dependent on public confidence?
Secretary DILLoN. I think they generally have unlimited powers to
buy and sell, and that would presumably give them the powers to spec-
ulate if they so desire although I think that is an undesirable practice.
The CHAIRMAN. Would you agree that a foundation can serve as a
holding company device, Mr. Secretary?
Secretary DiLLoN. I would think that that would be possible, yes. I
don't know whether it has been done, but it may well have been done.
The CHAIRMAN. Here is an example of a foundation being used as
a holding company device.
During the period of 1954 through 1961 the Standard Oil Company
of Indiana donated to the Standard Oil Foundation of Chicago 489,250
shares of Midwest Oil Corporation common voting stock, carrying
value $17,024,750. Undoubtedly Standard Oil took its maximum
charitable deduction for this donation.
During the period of 1954 through 1963, the Foundation received
from Midwest Oil cash dividends of $4,111,921.70 and stock dividends
of $2,449,756.01.
Subsequently Standard Oil Company of Indiana decided that it
would like to have the shares back in its portfolio. So, on April 15,
1964, the Standard Oil Company of Indiana purchased the shares from
the Foundation for $37,488,781. Such shares represented 20.15 per-
cent of the outstanding stock of Midwest Oil Corporation.
I shall ask Mr. Olsher to continue.
Mr. OLSHER. In 1919 the Rockefeller Foundation received a dona-
tion of Standard Oil Company of New Jersey common stock. The
number of shares involved in this transaction is unknown to us. As
a result of stock dividends and splits, the original donation resulted
in 1 million shares as of February 23, 1962, which the Foundation
carried on its books at $5,171,006.20. Then, in 1962 the Standard Oil
Company of New Jersey decided that it wanted the shares. So, on
February 23, 1962, the Foundation sold the 1 million shares to Stand-
ard Oil Company of New Jersey for $52,250,000 showing a gain of
$47,013,093.80 after expense of sale.
We queried Standard Oil Company of New Jersey with respect to
its purchase of these shares, and were advised as follows:
These shares were added to those which were already held in our
Treasury, and which were used from time to time for various corporate
purposes, including the satisfaction of options granted under the Com-
pany's Incentive Stock Option Plan when requested by optionees. The
principal use of Treasury shares during 1962 has involved 1,451,820
shares which our affiliate, Humble Oil and Refining Company, exchanged
for the assets and business of the Olin Oil & Gas Corporation.
Subsequently we directed another inquiry to Standard Oil Company
of New Jersey with respect to its use of these shares and received the
following information:
These shares were added to those which were already held in our
Treasury, and thereupon ceased to maintain any separate identity.
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TAX-EXEMPT FOUNDATIONS: IMPACT ON SMALL BUSINESS 51
ffowever, if a first-in-first-out concept is applied it could be said that
297,615 of the 1,000,000 shares were included in the 1,415,820 shares
which were exchanged on June 13, 1962, by our affiliate, Humble Oil &
Refining Company, for the assets and business of the Olin Oil & Gas
Corporation. The shares used in the Olin acquisition were charged to
Humble and valued by Humble at a price of $46.875 per share which
represents the closing price of Jersey stock on the New York Stock
Exchange on November 13, 1961, the date on which the Letter of Intent
between companies was signed. The shares were transferred into the
name of Olin Oil & Gas Corporation on June 13, 1962, on behalf of the
Humble Oil & Refining Company.
During the period from June 13 to the close of business on November
30, an additional 235,157 shares have been used for various corporate
purposes as follows:
(a) 189,638 shares were used to satisfy options granted under the
company's incentive Stock Option Plan as requested by
optionees
Number of shares sold Option price paid by
Date of option grant to optionees optionees
12/3/59
7,
300
49.
25
7/7/60
3,
000
41.
50
9/22/60
179,
338
40.
38
189,
638
(b) 45,519 shares have been used for various corporate acquisitions at
prices between $50.625 and $54.75 per share.
On August 31, 19611 four of the Nation's largest banks sold control
60 percent) of the Discount Corp. of New York, a primary dealer in
U.S. Government securities, bankers acceptances, and negotiable time
certificates of deposit. The banks disposed of their private placement
to institutional investors. The number of shares owned and sold by
each selling stockholder is as follows:
Sham
International Banking Corp. (a wholly owned subsidiary of the
First National City Bank of New York) 9,998
Bankers Trust Co 4, 999
Morgan Guaranty Trust Co. of New York Charitable Trust 9, 739
The Chemical Bank New York Trust Foundation 4,998
Total 29, 734
According to press reports, the four banks decided to sell their shares
because their control of Discount Corp. was inviting Justice Depart-
ment investigation.
. In our report of December 31, 1962 to the Subcommittee, we cited in
some detail the establishment during 1961, of so-called charitable
foundations by two of the banks: Morgan Guaranty Trust Co. of New
York, and Chemical Bank New York Trust Company. Judging from
the information submitted by the banks, it would appear that they had
created foundations for the express purpose of selling their shares of
Discount Corp. through their foundations so as to avoid large capital
gains taxes.
Although our report of December 31, 1962 contained considerable
detail on these transactions, it did not carry the names of the buyers of
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52 TAX-EXEMPT FOUNDATIONS: IMPACT ON SMALL BUSINESS
the stock of Discount Corp. of N.Y. We now submit for the record
the names and addresses of those organizations that purchased the
stock on August 31, 1961.
Five Rockefeller-controlled organizations purchased 6,100 of the
29,734 shares sold, or approximately 21 percent. The Rockefeller-con-
trolled shares represent 12 percent of the 50,000 shares outstanding
on August 31, 1961. Following are the Rockefeller-controlled
purchasers:
Shares
Rockefeller Institute
1,
500
Rockefeller Brothers Foundation
1,
500
Colonial Williamsburg, Inc
1,
000
Sleepy Hollow Restorations, Inc
500
Chase Manhattan Bank
1,
600
Total 6,100
So, a substantial part of the shares of Discount Corp. of New York
moved from four New York banks to the Rockefellers, who control the
Chase Manhattan Bank. Additionally, 3,000 shares were purchased
by the Donner Foundation of Philadelphia (now known as the Inde-
pendence Foundation) .
On August 31, 1961, Bankers Trust Company, New York City, sold
4,999 shares of Discount Corporation of New York capital stock to the
purchasers listed below.
Number
Purchaser of shares
Yale University, Treasurer's Office, Drawer 1304A, Yale Station, New 504
Haven, Connecticut.
Companies of the Royal-Globe Group 454
American and Foreign Insurance Company, Limited.
The British & Foreign Marine Insurance Company, Limited.
Globe Indemnity Company.
The Liverpool & London & Globe Insurance Company, Limited.
Newark Insurance Company.
Queen Insurance Company of America.
Royal Indemnity Company.
Royal Insurance Company, Limited.
Thames and Mersey Marine Insurance Company, Limited.
150 William Street, New York 38, New York.
General Insurance Company of America, 4347 Brooklyn Avenue, N.B., 151
Seattle 5, Washington
General America Employees Profit Sharing Retirement Trust, Seattle First 84
National Bank Trustee, 4347 Brooklyn Avenue, N.E., Seattle 5, Wash-
ington
Philadelphia National Bank, Account No. 70,027, Philadelphia National 84
Bank Retirement Fund, Philadelphia 1, Pennsylvania
Donner Foundation, Inc., 2500 Philadelphia National Bank Building, 504
Philadelphia 7, Pennsylvania
Indianapolis Life Insurance Company, 2960 North Meridian Street, Indi- 84
anapolis 7, Indiana
American Electric Power System Retirement Trust, 2 Broadway, New York 168
8, New York
The Rockefeller Institute, 30 Rockefeller Plaza, Room 5600, New York 21, 252
New York
Rockefeller Brothers Fund, Inc., 30 Rockefeller Plaza, Roam 5600, New 252
York 21, New York
Colonial Williamsburg, Incorporated, 30 Rockefeller Plaza, Room 5600, 168
New York 21, New York
Sleepy Hollow Restorations, Inc., 30 Rockefeller Plaza, Room 5600, New 84
York 21, New York
Security First National Bank, Trust Department?Trust B-1520, 561 South 84
Spring Street, Los Angeles 54, California.
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53
Old Colony Trust Company (Two Purchases) , Trustee for Various Pension 403
Funds, 1 Federal Street, Boston 5, Massachusetts.
Massachusetts Institute of Technology, 77 Massachusetts Avenue, Cam- 252
bridge 39, Massachusetts.
Trustees of Dartmouth College, P.O. Box 31, Hanover, New Hampshire__ 252
Massachusetts General Hospital, 45 Milk Street, Boston, Massachusetts__ 168
State Street Bank and Trust Co., Trustee under H. P. Hood and Sons, Profit 23
Sharing Trust General Fund Acct. A, State and Congress Streets, Boston,
Massachusetts.
Calvert Fire Insurance Company, Commercial Credit Building, Baltimore 2, 84
Maryland.
Whitelaw & Co., c/o The National City Bank of Cleveland, East 6th & 126
Euclid Avenue, Cleveland 1, Ohio.
Chesapeake & Ohio Railway Company, Employees Pension Plan Trust 126
Fund, 2800 Terminal Tower, P.O. Box 5507, Cleveland 1, Ohio.
The Chase Manhattan Bank (3 purchases), 1 Chase Manhattan Plaza, 272
New York 5, New York.
U.S. Trust Co., a/c Hampton Institute, Permanent Endowment, 45 Wall 84
Street, New York 5, New York.
State of Wisconsin Investment Board, State Capitol, Madison 2, Wisconsin 336
On August 31, 1961, Morgan Guaranty Trust Company of New
York Charitable Trust sold 9,739 shares of Discount Corporation of
New York capital stock to the purchasers listed below.
Number
Purchaser of Shares
American Electric Power System Retirement Trust, 2 Broadway, New 328
York 8, New York.
Calvert Fire Ins. Co., Commercial Credit Bldg., Baltimore 2, Maryland___ 164
The Chase Manhattan Bank (3 purchases), 1 Chase Manhattan Plaza, 522
New York 5, New York.
Chesapeake & Ohio Railway Company, Employees Pension Plan Trust 246
Fund, 2800 Terminal Tower, P.O. Box 5507, Cleveland 1, Ohio.
Colonial Williamsburg, Incorporated, 30 Rockefeller Plaza, Rm. 5600, 328
New York 21, New York.
Trustees of Dartmouth College, P.O. Box 31, Hanover, New Hampshire_ 491
Donner Foundation, Inc., 2500 Philadelphia National Bank Bldg., Phila.- 983
delphia 7, Pennsylvania.
General American Employees Profit Sharing Retirement Trust, Seattle 164
First National Bank Trustee, 4347 Brooklyn Avenue, N.E., Seattle 5,
Washington.
General Insurance Company of America, 4347 Brooklyn Avenue, N.B., 295
Seattle 5, Washington.
Indianapolis Life Insurance Company, 2960 North Meridian Street, In- 164
dianapolis 7, Indiana.
Massachusetts General Hospital, 45 Milk Street, Boston, Massachusetts__ 328
Massachusetts Institute of Technology, 77 Massachusetts Avenue, Cam- 491
bridge 39, Massachusetts.
Old Colony Trust Company, Trustee for Various Pension Funds (2 pur- 787
chases), 1 Federal Street, Boston 5, Massachusetts.
Philadelphia National Bank, Account No. 70,027, Philadelphia National 164
Bank Retirement Fund, Philadelphia 1, Pennsylvania.
Rockefeller Brothers Fund, Inc., 30 Rockefeller Plaza, Rm. 5600, New 491
York 21, N.Y.
The Rockefeller Institute, 30 Rockefeller Plaza, Rm. 5600, New York 21, 491
New York.
Royal Globe Group (consisting of companies listed below), 150 William 884
Street, New York 38, N.Y.
American and Foreign Insurance Company, Limited.
The British & Foreign Marine Insurance Company, Limited.
Globe Indemnity Company.
The Liverpool & London & Globe Insurance Company, Limited.
Newark Insurance Company.
Queen Insurance Company of America.
Royal Indemnity Company.
Royal Insurance Company, Limited.
Thames and Mersey Marine Insurance Company, Limited.
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FOUNDATIONS:IMPACT ON SMALL BUSINESS
Security First National Bank, Trust Department, Trust B-1520, 561 164
South Spring Street, Los Angeles 54, California, As agent for Diocesan
Investment Trust.
Sleepy Hollow Restorations, Inc., 30 Rockefeller Plaza, Rm. 5600, New 164
York 21, New York.
State Street Bank and Trust Co., Trustee Under H. P. Hood and Sons, 43
Profit Sharing Trust General Fund, Acct. A, State and Congress Streets,
Boston, Massachusetts.
U.S. Trust Co., a/c Hampton Institute, Permanent Endowment, 45 Wall 164
Street, New York 5, New York.
Whitelaw & Co., c/o The National City Bank of Cleveland, East 6th & 245
Euclid Avenue, Cleveland 1, Ohio.
State of Wisconsin Investment Board, State Capitol, Madison 2, 655
Wisconsin.
Yale University, Treasurer's Office, Drawer 1304-A, Yale Station, New 983
Haven, Connecticut.
On August 31, 1961, The Chemical Bank New York Trust Founda-
tion sold 4,998 shares of Discount Corporation of New York capital
stock to the purchasers listed below.
Number
Purchaser of shares
Yale University, Treasurer's Office, Drawer 1304A, Yale Station, New 504
Haven, Connecticut.
Companies of the Royal-Globe Group, 150 William Street, New York 38, 454
New York.
General Insurance Company of America, 4347 Brooklyn Avenue, N.E., 151
Seattle 5, Washington.
General America Employees Profit Sharing Retirement Trust, Seattle 84
First National Bank Trustee, 4347 Brooklyn Avenue, N.E., Seattle 5,
Washington.
Philadelphia National Bank, Account No. 70,027, Philadelphia National 84
Bank Retirement Fund, Philadelphia 1, Pennsylvania.
Donner Foundation Inc., 2500 Philadelphia National Bank Building, 504
Philadelphia 7, Pennsylvania.
Indianapolis Life Insurance Company, 2960 North Meridian Street, 84
Indianapolis 7, Indiana.
American Electric Power System Retirement Trust, 2 Broadway, New 168
York 8, New York.
The Rockefeller Institute, 30 Rockefeller Plaza, Room 5600, New York 21, 252
New York.
Rockefeller Brothers Fund, Inc., 30 Rockefeller Plaza, Room 5600, New 252
York 21, New York.
Colonial Williamsburg, Incorporated, 30 Rockefeller Plaza, Room 5600, 168
New York 21, New York.
Sleepy Hollow Restorations, Inc., 30 Rockefeller Plaza, Room 5600, New 84
York 21, New York.
Security First National Bank Trust Department, Trust B 1520, 561 South 84
Spring Street, Los Angeles 54, California.
Old Colony Trust Company (Two separate agreements), Trustee for 403
Various Pension Funds, 1 Federal Street, Boston, Massachusetts.
Massachusetts Institute of Technology, 77 Massachusetts Avenue, Cam- 252
bridge 39, Massachusetts.
Trustees of Dartmouth College, Post Office Box 31, Hanover, New 252
Hampshire.
Massachusetts General Hospital, 45 Milk Street, Boston, Massachusetts__ 168
State Street Bank and Trust Co., Trustee under H. P. Hood and Sons 23
Profit Sharing Trust General Fund, Acct. A, State and Congress Streets,
Boston, Massachusetts.
Calvert Fire Insurance Company, Commercial Credit Building, Baltimore 84
2, Maryland.
Whitelaw & Co., c/o The National City Bank of Cleveland, East 6th & 126
Euclid Avenue, Cleveland 1, Ohio.
Chesapeake & Ohio Railway Company, Employees Pension Plan Trust 126
Fund, 2800 Terminal Tower, P.O. Box 5507, Cleveland 1, Ohio.
The Chase Manhattan Bank (Three separate agreements), 1 Chase Man- 271
hattan Plaza, New York 5, New York.
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U.S. Trust Co., a/c Hampton Institute, Permanent Endowment, 45 Wall 84
Street, New York 5, New York.
State of Wisconsin Investment Board, State Capitol, Madison 2, Wisconsin... 336
On August 31, 1961, The International Banking Corporation, New
York City, sold 9,998 shares of Discount Corporation of New York
capital stock to the purchasers listed below.
Number
Purchaser of shares
Yale University, Treasurer's Office, Drawer 1304A-Yale Station, New 1, 009
Haven, Connecticut.
Royal Globe Group, 150 William Street, New York 38, N.Y 908
Included in the Royal Globe Group are:
American and Foreign Insurance Company, Limited
The British & Foreign Marine Insurance Company, Limited
Globe Indemity Company
The Liverpool & London & Globe Insurance Company, Limited
Newark Insurance Company
Queen Insurance Company of America
Royal Indemnity Company
Royal Insurance Company, Limited
Thames and Mersey Marine Insurance Company, Limited
General Insurance Company of America, 4347 Brooklyn Avenue, N.E., 303
Seattle 5, Washington.
General America Employees Profit Sharing Retirement Trust, Seattle First 168
National Bank Trustee, 4347 Brooklyn Avenue, N.B., Seattle 5, Wash-
ington.
Philadelphia National Bank, Account No. 70,027, Philadelphia National 168
Bank Retirement Fund, Philadelphia 1, Pennsylvania.
Donner Foundation Inc., 2500 Philadelphia National Bank Bldg., Phila- 1, 009
delphia 7, Pennsylvania.
Indianapolis Life Insurance Company, 2960 North Meridian Street, In- 168
dianapolis 7, Indiana.
American Electric Power System Retirement Trust, 2 Broadway, New York 336
8, N.Y.
The Rockefeller Institute, 30 Rockefeller Plaza, Rm. 5600, New York 21, 505
N.Y.
Rockefeller Brothers Fund, Inc., 30 Rockefeller Plaza, Rm. 5600, New 505
York 21, N.Y.
Colonial Williamsburg, Incorporated, 30 Rockefeller Plaza, Rm. 5600, New 336
York 21, N.Y.
Sleepy Hollow Restorations Inc., 30 Rockefeller Plaza, Rin. 5600, New 168
York 21, N.Y.
Diocesan Investment Trust, By-Security First National Bank Trust Dept., 168
Trust B 1520, 561 South Spring Street, Los Angeles 54, California, as
Agent for said Diocesan Investment Trust.
Old Colony Trust Company (2 purchases) Trustee for Various Pension 807
Funds, 1 Federal Street, Boston 5, Massachusetts.
Massachusetts Institute of Technology, 77 Massachusetts Avenue, Cam- 505
bridge, Massachusetts (39).
Trustees of Dartmouth College, P.O. Box 31, Hanover, New Hampshire 505
Massachusetts General Hospital, 45 Milk Street, Boston, Massachusetts 336
State Street Bank and Trust Co., Trustee Under H. P. Hood and Sons 45
Profit Sharing Trust General Fund Acct. A, State and Congress Streets,
Boston, Massachusetts.
Calvert Fire Ins. Co., Commercial Credit Bldg., Baltimore 2, Maryland 168
Whitelaw & Co., c/o The National City Bank of Cleveland, East 6th & 253
Euclid Avenue, Cleveland 1, Ohio.
Chesapeake & Ohio Railway Company, Employees Pension Plan Trust 252
Fund, 2800 Terminal Tower, P.O. Box 5507, Cleveland 1, Ohio.
The Chase Manhattan Bank (3 purchases), 1 Chase Manhattan Plaza, 535
New York 5, N.Y.
U.S. Trust Co., a/c Hampton Institute, Permanent Endowment, 45 Wall 168
Street, New York 5, N.Y.
State of Wisconsin Investment Board, State Capitol, Madison 2, Wiscon- 673
sin.
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56 TAX-EXEMPT FOUNDATIONS: IMPACT ON SMALL BUSINESS
Secretary DILLori. I would just like to make one comment about
the transaction regarding the Rockefeller Foundation and Standard
Oil stock. As I understood it, the Rockefeller Foundation held that
stock for over 40 years and at the end of the 40-odd year period found
it advisable that they could sell at a good price, and sold to the Stand-
ard Oil Company of New Jersey, which then used it as it saw fit.
I don't see anything wrong in that from the point of view of the
Rockefeller Foundation. I would just like to make that clear.
The CHAIRMAN. In the course of its administration of the various
regulations concerning foundations, does the Treasury examine the
foundations to determine whether there may be a conflict of interest
between the advisory roles the foundation individuals hold as trustees,
directors or officers, and their private financial and business interests?
Secretary DILLON. I think if we should have a very clear-cut rule
against self-dealing, that problem will be solved by itself, because
there couldn't be any such conflict.
The CHAIRMAN During your term of office, has the Treasury, on
its own initiative, ever forwarded to Congressional committees, the
White House, or other government departments, information regard-
ing possible conflict of interest between the advisory roles foundation
individuals hold as trustees, directors or officers and their private
financial and business interests?
Secretary DiLhoi.sr. Not to my knowledge, but I think you would
have to ask the IRS to be certain.
The CHAIRMAN. In the course of its administration of the various
regulations concerning foundations, does the Treasury examine the
foundations to determine whether there is interlock between the
foundation directors, their investment counsels, and brokers?
Secretary DILLON. I would doubt that, but I would again have to
ask IRS for full details on that. They probably do in certain cases
when they think that the transactions are improper.
The CHAIRMAN During your term of office has the Treasury, on its
own initiative, ever forwarded to Congressional committees, the White
House, or other government departments information regarding inter-
lock between foundation directors, their investment counsels and
brokers?
Secretary DILLON. Not that I know of, but you will have to ask
the IRS, and I don't know just why we would forward such informa-
tion.
The CHAIRMAN. Would you agree that interlock between founda-
tions' directors, their investment counsels, and brokers could not only
raise conflict-of-interest problems, but would allow a tightly-knit
group to operate with great power?
Secretary DILLON. It depends on how the foundations operate. If
they speculate or use the foundation for business purposes, it certainly
would. But I think the way to cure it is in legislation that would deal
with what are proper operations by foundations.
The CHAIRMAN In the course of its administration of the various
regulations concerning foundations, does the Treasury examine the
foundations to determine whether there is a conflict of interest between
the duties of a foundation's directors and trustees, and their interests
as officers, stockholders, and employees of business corporations whose
stock is controlled by the foundation?
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TAX-EXEMPT FOUNDATIONS: IMPACT ON SMALL BUSINESS 57
Secretary DILLON. I don't think there is any particular examination
of that nature at present, but again I think that might come under
the self-dealing rule.
The CHAIRMAN. During the term of your office has the Treasury, on
its own initiative, ever forwarded to Congressional committees, the
White House, or other government departments information regard-
ing possible conflict of interest between the duties of a foundation's
directors and trustees and their interests as officers, stockholders, and
employees of business corporations whose stock is controlled by the
foundation ?
Secretary DILLON. Not that I know of.
The CHAIRMAN In the course of its administration of the various
regulations concerning foundations, does the Treasury examine the
foundations to determine whether there is any foundation favoritism
in investments?
Secretary DILLON. I don't quite understand what that question
means, but I don't think that they do.
The CHAIRMAN. During your term of office has the Treasury, on
its own initiative, ever forward to Congressional committees, the
White House, or other departments information regarding founda-
tion favoritism in investments?
Secretary 'DILLON. Not that I know rd.
The CHAIRMAN. Would you agree that common action on the part
of the foundations and associates in the purchase and sale of securities
could limit opportunities for certain companies?for example, that
this could hinder stock financing of small business and thus slow down
their expansion plans?
Secretary DELLois-. I certainly don't think that that should be the
case. To the extent that foundations invest their money in business,
there is more money available for business so it should help by making
money available. But I don't know what the specific instance is.
There may be some specific instance you have in mind that I am not
aware of.
The CHAIRMAN. In the course of its administration of the various
regulations concernnig foundations, does the Treasury examine the
foundations to determine whether there may be common action on the
part of foundations and associates in the purchase and sale of securi-
ties?
Secretary DILLON. Common action by foundations in the purchase
and sale of securities? Not that I know of. You will have to ask the
Internal Revenue Service that.
The CHAIRMAN. During your term of office has the Treasury, on its
own initiative, ever forwarded to Congressional committees, the White
House, or other government departments information regarding com-
mon action on the part of foundations and associates in the purchase
and sale of securities?
Secretary DILLON. I would doubt it, but you will have to ask the
Internal Revenue Service.
The CHAIRMAN. The statutes prohibit a person from serving on the
boards of two or more competing organizations, any one of which has
assets of $1 million. Would you agree that the presence, on a founda-
tion board, of members of the boards of competitors carries with it
the potential for restraint of competition?
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06 TAX-EXEMPT FOUNDATIONS: IMPACT ON SMALL BUSINESS
Secretary DILLON. Not necessarily any more than their presence
together on the board of a museum or an educational institution or
their service together in a vestry of a church would have the same
connotation.
The CHAIRMAN. In the course of its administration of various reg-
ulations concerning foundations, does the Treasury examine the foun-
dations to determine whether the foundations are channeling income
and corpus in a direction that may hurt competitors and investors?
Secretary DILLON. I think that IRS would have to answer that, but
I think all they look at is to see whether the foundations are following
the tax law, and I don't know whether that would be applicable in
that case.
The CHAIRMAN. During your term of office has the Treasury, on its
own initiative, ever forwarded to Congressional committees, the White
House, or other government departments information regarding foun-
dations' channeling income and corpus in a direction that may hurt
competitors and their investors?
Secretary DILLON. Not that I know of, but we would have to ask
the IRS to be sure.
The CHAIRMAN. In the course of its administration of the various
regulations concerning foundations, does the Treasury examine the
foundations to determine whether a foundation's services?such as
research, market studies, etc., are being made available to certain
businesses on a preferential basis?
Secretary DILLON. I don't know of any such cases, and I don't know
that the IRS has when they study foundations for tax purposes,
whether they look at that or not. You would have to ask the IRS.
The CHAIRMAN During your term of office has the Treasury, on
its own initiative, ever forwarded to Congressional committees, the
White House, or other government departments information regard-
ing foundations' services?such as research, market studies, etc., being
made available to certain businesses on a preferential basis?
Secretary DILLON. Not to my knowledge, but you have to ask the
IRS.
The CHAIRMAN In the course of its administration of the various
regulations concerning foundations, does the Treasury examine the
foundations to determine whether foundation income or corpus is
being used to grant benefits to a company employee?
Secretary DILLON. You will have to ask the IRS.
The CHAIRMAN. During your term of office has the Treasury, on its
own initiative, ever forwarded to Congressional committees, the White
House, or other government departments information regarding the
use of a foundation's funds to grant benefits to a company employee?
Secretary DILLON. You will have to ask the IRS on that question.
The CHAIRMAN. In your view should a foundation's income or
corpus be used to grant benefits to a company's employees?
Secretary DILLON. I would say under ordinary circumstances, no.
The CHAIRMAN. In your view does a company have a competitive
advantage where its foundation is permitted to grant benefits to the
company's employees?
Secretary DILLON. This is a foundation that is formed by the com-
pany. I don't know whether it would give the company any corn-
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TAX-EXEMPT FOUNDATIONS: IMPACT ON SMALL BUSINESS 59
petitive advantage by granting benefits that way or by granting them
directly. I just don't know enough about that to know whether there
would.
The CHAIRMAN. Would you agree that many of the problems of
regulating foundations are similar to the problems encountered in
regulating private pension funds which also have tax advantages and
which imply or involve a fiduciary relationship?
Secretary DimoN. I think ther e is some similarity there, yes, Mr.
Chairman.
The CHAIRMAN. One of the broad areas of abuses engaged in by cer-
tain tax-exempt foundations is what is commonly described as self
dealing.
In the ordinary course, would the general run of IRS examiners be
expected to have the accounting and auditing knowledge and exper-
ience necessary to deal with the intricacies of self dealing?
Secretary DILLoN. I think that the men who have now been trained
and are working on this do have that knowledge. Of course the prob-
lem is that under the law at present this is permitted.
The CHAIRMAN. A second broad area of abuse engaged in by cer-
tain tax-exempt foundations is the unreasonable accumulation of in-
come. This is quite unlike the problem of income accumulation by a
corporation subject to the income tax.
In the ordinary course would the general run of IRS examiners be
expected to have the accounting and auditing knowledge and exper-
ience necessary to determine that there had been an unreasonable ac-
cumulation of income, particularly where substantial debt and de-
preciable assets are involved?
Secretary IhmoN. I think so. This is an area that the IRS has
been fairly active in, as I pointed our earlier this morning, without
any great success, because this is an area where it may well be that the
penalty, which is revocation of charter, revocation of the tax-exempt
status of the foundation, is the only penalty. In cases which we have
taken to court, we have been generally unsuccessful, and the courts
have been very lenient in describing or in finding unreasonable ac-
cumulation.
We feel that there may be some more moderate penalty that better
fits the occasion and which would result in better enforcement, as we
would like. I think on the whole, however, the record shows that
? foundations distribute more income?not considering, of course, capital
gains?than they receive, because they distribute some of their gifts
directly, and some of them are in the process of liquidating. But over-
all, I think that the record is clear that they distribute more That
doesn't mean that some foundations don't have unreasonable accumu-
lations, and we would like to see that closed up by changes in legis-
lation.
The CHAIRMAN. A third broad area of abuse engaged in by certain
tax exempt foundations is speculation in securities and other property.
In the ordinary course, would the general run of IRS examiners be
expected to have the knowledge and experience necessary to recognize
speculation as against investment, a problem not usually, if at all, en-
countered in income tax examinations?
Secretary DILLow. You would have to ask the IRS.
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The CHAIRMAN A fourth broad area of abuse engaged in by certain
tax exempt foundations is competing with their tax advantage against
tax paying entities for interest and rental income.
In the ordinary course, would an IRS examiner have the knowledge
and experience necessary to deal with this?
Secretary Dir,LoN. You would have to ask the IRS.
The CHAIRMAN. A fifth broad area of abuse engaged in by certain
tax exempt foundations is the manipulation of leases.
In the ordinary course an IRS examiner must necessarily be able to
compute the taxable gain or loss in lease transactions. The question is
would he have the knowledge and experience necessary to recognize an
honest short-term lease as against an arrangement designed to avoid
taxation.
Secretary DILLoN. I would think so, because these leases are very
general in business and real estate, and they occur or have to be ex-
amined on many returns, and so I think that knowledge would be
available to the average well-informed IRS agent.
The CHAIRMAN. Would you agree that tax-exempt foundation repre-
sent a complex area involving tax law, accounting practice, SEC law,
and antitrust laws, among other law?
Secretary DILLON. I would certainly agree. It is a very complex
and broad area. I certainly agree with you on that, Mr. Chairman.
The CHAIRMAN. How many tax-exempt organizations of all types
were there at the close of 1963, Mr. Secretary?
Secretary DILLON. I don't think we have that figure. I think Mr.
Caplin has some figures for you tomorrow which, as I understand,
run upwards of a c uarter of a million tax-exempt organizations.
The CHAIRMAN. Mr. Olsher wants to ask a question.
Mr. OLSHER. The Chairman is referring to tax-exempt organiza-
tions of all types.
Secretary DILLON. Yes. I said more than a quarter of a million.
Maybe it is even considerably more than that. I know it is very
many.
Mr. OLSHER. Would it be one million?
Secretary DILLON. The figures I saw in Mr. Caplin's statement do
not indicate they are that high but I think you could probably get
better information from him.
Mr. OLSHER. I am referring to all tax-exempt organizations includ-
ing the organizations that do not come under 501?C.
Secretary DILLON. By that you mean all churches and things of
that nature?
Mr. OLSHER. Yes.
Secretary DILLON. It might be very large, yes.
Mr. OLSHER. I think that Mr. Caplin advised us at one point that at
the end of 1960 there were pretty close to 1,200,000.
Secretary DILLON. That might be, yes. It might well be, consid-
ering each church as a separate entity, which of course it is.
The CHAIRMAN Would you agree that the 'present number and size
of tax-exempt foundations dictates that consideration should be given
to a regulatory agency approach for their supervision?
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TAX-EXEMPT FOUNDATIONS: IMPACT ON SMALL BUSINESS 61
Secretary DILLON. That is one of the things that is being consid-
ered. It may well be that, after considering the matter further, reg-
ulatory agency supervision will be considered a wise thing. However,
there are all sorts of different animals there. A church is quite differ-
ent from a pension fund, and both of them are somewhat different
from a fraternal organization, and it is different from a foundation.
Whether it is advisable to have a regulatory body to watch over all
of these institutions is something that I am not prepared to take a
position on right now.
The CHAIRMAN. It is not proposed that you have a regulatory body
over churches, certainly. Would you agree that the General Account-
ing. Office may be the best agency to supervise tax exempt foundations ?
Secretary DILLON. No.
The CHAIRMAN. It would not be?
Secretary DILLON. The General Accounting Office' no.
Mr. OLSHER. Do you think, Mr. Secretary, that an annual regis-
tration fee for tax-exempt foundations would be a form of reducing
costs to the government, and thus implement the Presidential direc-
tives in the area of cost reduction?
Secretary DILLON. I don't know what particular costs we have in
collating and getting together the information on foundations. It
might be that some small user charge in that field would be useful and
proper. It is something that I am not prepared to make a direct
recommendation on at this time.
Mr. OLSHER. Do you think, Mr. Secretary, that a reasonable regis-
tration fee should be set for each tax-exempt foundation, which would
enable the government?which after all is the people?to recover a
small portion of the operating costs involved in conveying special bene-
fits to tax-exempt foundations?
Secretary DILLON. There is currently no fee imposed for the issu-
ance of a new tax-exempt ruling, but I would think that would be
perfectly proper, yes.
The CHAIRMAN. Mr. Secretary, you have been very kind and con-
siderate and patient. We appreciate it. We do not want to deprive
you of the opportunity of visiting or meeting with the people that you
have coming in here to see you tomorrow. We certainly would not
want to do anything in that direction. Thank you very much, sir.
Secretary DILLON. Thank you.
The CHAIRMAN. We are adjourned until 10 o'clock tomorrow.
(Whereupon, at 6:30 p.m. July 21, 1964, the subcommittee recessed,
to reconvene at 10 a.m., Wednesday, July 22, 1964.)
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TAX-EXEMPT FOUNDATIONS: THEIR IMPACT ON
SMALL BUSINESS
WEDNESDAY, JULY 22, 1964
HOUSE OF REPRESENTATIVES,
SUBCOMMITTEE No. 1 ON FOUNDATIONS OF
THE SELECT COMMITTEE TO CONDUCT STUDIES AND
INVESTIGATIONS OF THE PROBLEMS OF SMALL BUSINESS,
Washington, D.C.
The subcommittee met, pursuant to call, at 10 a.m., in room 1301,
Longworth House Office Building, Washington, D.C., Hon. Wright
Patman (chairman of the subcommittee) presiding.
Present: Representatives Patman and Harvey.
Also present: H. A. Olsher? Director of Foundation Studies; John
J. Williams, Minority Counsel; and Eugene Loehl, Assistant Minority
Counsel.
The CHAIRMAN. The Committee will please come to order.
This is the second session of the hearings of Subcommittee Number
1 on the subject of the Federa Government's supervision of tax exempt
foundations and charitable trusts.
Our study is confined solely to privately controlled foundations,
which are escaping taxation and thus creating a greater tax burden
for those who do_ pay taxes.
Hence our study excludes the following types of exempt organiza-
tions, among others: religious organizations; hospitals; educational
institutions; charitable organizations, which are supported in whole
or part by Federal and State governmental units, or primarily by
contributions from the general public ? fraternal organizations, etc.
The number of tax exempt privately-controlled foundations in-
creases daily. It is the duty of the Congress to know the resultant
effects on our economy and to determine what should be done about
it. On behalf of the Subcommittee, I should like to welcome today's
witnesses former Commissioner Mortimer M. Caplin and Acting Com-
mission 'Nil-. Bertrand M. Harding. Mr. Caplin, will you present
for the record the gentlemen accompanying you, please ?
Mr. CAPLIN. Mr. Patman, II am here individually, as a private citi-
zen, a practicing attorney in Washington, D.C. Mr. Harding here
is the Deputy Commissioner. He has brought with him the Chief
Counsel of the Internal Revenue Service, Sheldon Cohen, and the
Chairman of the Exempt Organization Council of the Internal Reve-
nue Service, Mitchell Rogovin.
The CHAIRMAN. Fine. Thank you, sir. You may proceed in your
own way. I understand you have a statement that you would like to
present.
63
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64 TAX-EXEMPT FOUNDATIONS: IMPACT ON SMALL BUSINESS
Mr. CAPLIN. Yes, sir, Mr. Chairman. I have the statement which
you requested that I submit.
The CHAIRMAN. That is right. We received it on time, and we ap-
preciate it.
TESTIMONY OF MORTIMER M. CAPLIN; ACCOMPANIED BY BERT-
RAND HARDING, DEPUTY COMMISSIONER, INTERNAL REVENUE
SERVICE; SHELDON COHEN, CHIEF COUNSEL, INTERNAL REV-
ENUE SERVICE; AND MITCHELL ROGOV1N, CHAIRMAN OF THE
EXEMPT ORGANIZATION COUNCIL OF THE INTERNAL REVENUE
SERVICE
Mr. CATLIN. In response to the invitation of the Chairman, I am
happy to appear as a private citizen before the Subcommittee on
Foundations of the Select Committee on Small Business.
At the outset, I will describe steps the Service took during my three
and a half years as Commissioner of Internal Revenue to strengthen
compliance with the tax law on exempt organizations, including
foundations and charitable trusts. While my resignation became ef-
fective July 10, 1964, my statement will reflect the course which the
Service has charted for the years ahead?a course Acting Commissioner
Harding has assured me will be followed. I might point out that my
statement here today has Internal Revenue's full concurrence.
What Internal Revenue has tried to accomplish during this period
may be summarized as follows:
1. Audit examinations of returns of exempt organizations were in-
creased from an average of 2,000 a year during the 1950's to over 10,000
in the last fiscal year ended June 30, 1964.
2. Efforts were made to assist exempt organizations in complying
with the law, and to expand voluntary compliance.
3. Improvements were made in the Service's internal controls and
procedures for better administration of the exempt organizations pro-
visions.
4. An affirmative litigation policy was pursued to resolve difficult
legal issues and to give authoritative guidance to field personnel in their
administration of the law.
5. A new Exempt Organization Council was put into operation?
to recommend Service-wide legal positions, to eliminate administrative
obstacles, and to give direction to the Service's total effort.
Before describing these items further, I would first like to discuss
some of the background of the tax exempt provisions, the large growth
of exempt organizations and the dimensions of the task of administer-
ing this aspect of tax law.
The Service has many responsibilities in our own country and
abroad. It administers what has been called the most complex law
ever devised by the mind of man, comprising almost 8,000 sections and
levying over 100 separate taxes. It is responsible for enforcing the
law and collecting the revenues that finance this government?collec-
tions estimated at $112 billion for this past fiscal year. And it must
do this in harmony with the American system of encouraging volun-
tary compliance and accurate self-assessment.
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The American tax system underwent a sharp transition during
World War II, shifting from a narrow base tax to a broad-base mass
income tax. There were complex excess profits taxes to be administered
during both World War II and the Korean War. And, as you recall,
the Service itself went through a nationwide reorganization in 1951
and 1952. Concurrently the country was growing in population, and
tax returns were mounting in numbers and in complexity.
These developments all played a part in determining the emphasis
the Service has been able to place on given tax areas in the decades
following 1940. For exempt organizations we also find a special
history.
From 1913 to 1942, the Service had the responsibility of enforcing
broadly defined exemption provisions without tax return requirements.
Once the organization had preliminarily established its right to exemp-
tion, and has been placed on the tax collector's rolls, it was free of any
further reporting requirement. Despite changes made in 1942, many
exempt organizations today are still not required to file annual in-
formation returns.
Despite the early absence of returns, the Service strongly opposed
the commercial involvements of these organizations right up to the
enactment of the Revenue Act of 1950. For the most part, it had been
unable to convince the courts that commercial activities were incom-
patible with an exemption grant.
In 1942, the Treasury had proposed a tax on unrelated business activ-
ities of these organizations. But it was not until 1950 that legislation
was adopted making some corrections.
The remedial legislation of 1950 was far less than the Service had
requested. For example, rather than expressly prohibit certain trans-
actions between a donor and his controlled foundation, as had been
in the Treasury proposal, the legislation chose to challenge such trans-
actions only when there were inadequate security, unreasonable rates
of interest, substantial diversion of income or corpus, excessive com-
pensation, improper sales prices or improper purchase prices, and the
like.
Even after this remedial legislation, the Service continued to suffer
a series of judicial defeats during. the 1950's when it attempted to en-
force its interpretation of the law in the courts.
One other aspect of federal efforts to monitor exempt organizations
should be noted. Overall supervision of charitable trusts and founda-
tions is a matter of state law. This is an historical fact. Yet, most
states have no agency to which even the existence of these organiza-
tions must be reported. This is not the healthiest climate in which to
administer a program.
I might add we have made efforts to contact the state organizations;
Mr. Rogovin might be able to elaborate on his visits with them.
Exemption of different forms of activity from taxation has been
part of our income tax system since its inception. In fact it goes back
to the Corporate Tax Law of 1909. Congress, in creating the various
categories of exempt organizations, has covered a wide range: civic
and social welfare organizations; labor unions ? social and recreational
clubs; fraternal orders; business leagues; cemetery corporations; pen-
sion funds; and, of course, innumerable forms of scientific, educational,
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66 TAX-EXEMPT FOUNDATIONS: IMPACT ON SMALL BUSINESS
religious, charitable, and literary organizations. Seventeen different
categories of income tax exemptions are contained in Code Section
501, with numerous sub-categories scattered throughout.
Congress has made the judgment on the social and economic justifica-
tions behind the statutory grant of exemptions. It has also estab-
lished the broad criteria for qualifying as an exempt organization, as
well as the standards for revocation of exemption and taxation of
certain types of income. Internal Revenue administers the law in
the form passed by Congress; and, here, the absence of precision in
various parts of the statute has made its administrative task a difficult
one.
Let us look at the magnitude of the administrative job. In terms
of numbers alone, the Service passes upon about 12,000 new exemp-
tion requests a year, of which about 10 percent are from charitable
trusts and foundations. It is also responsible for monitoring exemp-
tions under the statute of 400,000 principal organizations, plus several
hundred thousand additional subsidiary organizations.
This is a rapidly expanding field, for there has been an enormous
growth of exempt organizations since World War II. To take .but
one category, in Internal Revenue's 1939 cumulative listing, contribu-
tions are said to be deductible for 14,500 organizations. In 1962, this
number had grown to 71,850.
Another form of measurement is the increase in the number of in-
formation returns required from exempt organizations in all classifica-
tions. In 1950 we had slightly over 100,000; in 1962, over a quarter
of a million.
High tax rates have given impetus to the growth of tax exempt
organizations. In addition, these high rates have also contributed
to many of the borderline tax devices and tax schemes one finds in
this area. People have sought to utilize the exemption to shift a tax
burden?some in strict accordance with legislative intent, others pri-
marily for private advantage.
This large growth in exempt organizations and the proliferation of
problems flowing from that growth, had not been anticipated by the
framers of the legislation. Nor was the Service geared to cope with
it. The inability to balance the needs of this particular program
against other competing demands has been recognized in the past.
Congressman Reece 's subcommittee, investigating tax-exempt
foundations in 1954, recommended that there be an increase in the man-
power of the Service "to enable it to more closely watch foundation
activities." On the type of foundation examination that is possible,
this same subcommittee said "* * * it is obvious that the Internal
Revenue Service cannot, except at prohibitive cost, follow the activi-
ties of the individual foundation to ascertain whether violations of
law exist. * * *" This was also the view in 1957 of an Advisory
Group to the Subcommittee on Internal Revenue Taxation of the
House Ways and Means Committee, which stated:
"Obviously the personnel handicaps under which the Service must
labor have an especial effect in an area such as this. The choice which
the field official must make is more than difficult. Faced with limited
manpower, and a dwindling core of experienced veterans, it is dif-
ficult for him to divert any enforcement personnel from regular audit
to try for extended productivity in this area."
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These cogent observations reflect understanding of the many factors
the Service takes into account in examining returns.
The Service's natural predisposition?which is the usual expecta-
tion of its Appropriations Committees both in the House and Senate?
is to examine returns that experience teaches will be most in need of
correction and also productive of revenue. I do not mean this in a
crass sense of going out to wring every last tax dollar out of the mil-
lions of returns filed. Rather, it is simply a recognition that Internal
Revenue must strive to prevent large amounts of revenue from going
uncollected; and it must strive to examine taxpayers most likely to
commit errors of substantial revenue impact. These errors are not
necessarily deliberate or matters of negligence. Often they arise over
differences in interpreting complex provisions, or differences in exer-
cising judgment on given sets of facts.
At the same time, there is the need to focus on tax abuses and other
violations of law. They are dangerous not because of revenue loss
alone?although that is a factor?but because their continuation shakes
confidence in the vitality of our self-assessment tax system, and I
might add that over 97 percent of our revenues over the last years has
been from self-reporting, self-assessment, and withholding. In recent
years, Internal Revenue has had to divert audit resources to a number
of these areas: artificial international tax arrangements; the organized
crime drive; travel and entertainment abuses; failure to declare divi-
dend and interest income?these are just a few.
Then there is the need for random audits?testing of the accuracy
of returns in all categories regardless of the direct revenue impact.
This is important to strengthen the self -assessment concept. And the
need to employ valuable man-hours in learning and applying new leg-
islation and regulations. We have had a great amount of this in the
tax field over the past few years, such as the Revenue Act of 1962,
the Revenue Act of 1964, the depreciation guidelines, et cetera.
The competing demands in sound tax administration are many. And
with its limited resources, Internal Revenue does as much as it can,
allocating manpower in accordance with its best exercise of judg-
ment.
This was the background of the exempt organization audit program.
In my first year as Commissioner, we undertook a shift in our
overall audit emphasis. This Service-wide program had as its pri-
mary objective the broadening of audit coverage.
In particular, I concluded that greater effort should be made in
the exempt organization area. In terms of volume alone, new organi-
zations were coming into existence at the rate of approximately 12,000
a year. Nor were we satisfied that we were devoting enough manpower
to the audit of organizations that previously had received their ex-
emption.
To correct this, the Service did two things:
First, it decided to allocate enough audit manpower to the examina-
tion of exempt organizations to reach about 10,000 examinations a
year.
Secondly, it decided that exempt organization audits should be of
the same scope and depth as income tax audits. In other words, ex-
aminations should be made in accordance with properly prescribed
standards. They should not be hit or miss.
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In tax administration it is elementary that the Service just cannot
decree a new program by fiat. It has to block out its capabilities,
prepare written materials, communicate with its 58 district .offices,
and often train large numbers of personnel. The Service did this
incidentally with the travel and entertainment rules with the deprecia-
tion guidelines and with our engineering studies?where it brought
manpower from all over the field, held training programs in Wash-
ington, sent these instructors back to the 58 districts to tram some
14,000 revenue agents. Here, too, it had to lay the groundwork to
assure that a proper job was done.
Internal Revenue revised and reissued its Exempt Organization
Handbook to make it available to all examining officers. It had to
develop tentative tax audit guidelines for exempt organizations to
assure that audits were conducted competently and thoroughly. It
set up a special two-week training program to give its people the
required knowledges and skills.
Instructors have already been trained; and these men will in turn
train selected field employees in the techniques of exempt-organiza-
tions enforcement work. In addition, special technical field confer-
ences were held with top field personnel to assure their support of
the program.
By fiscal year 1963, the program began to bear its first fruit. The
Service completed 7,219 examinations representing an average of 3.9
days examination time per return, compared to one day previously.
For fiscal year 1964, just ended, it completed 10,262 examinations
of exempt organizations.
During the period from February 1963 through May 1964, the Serv-
ice examined 9,552 exempt organizations, including 1,851 private foun-
dations and charitable trusts. This number represents but a small
proportion of those it actually looked at as part of its normal classifica-
tion process.
I might say, Mr. Chairman, that what happens in a district office is
that the Service brings personnel in, experienced personnel, to sit down
at large tables, with many, many returns, classified as to, in this case,
exempt organizations. They know, for example, they want to examine
10,000 returns nationwide. And they may have an assignment in this
particular district of, let's say, one thousand. They must look through
perhaps 5,000 or even 10,000 returns to pick out 12000?those they
think seem to merit audit. So you have more than just the physical
audit of 1,851 private foundations and charitable trusts during this
period. You have an examination, a table examination, of the face
of the return and the exhibits, seeing if there are any unusual audit
characteristics.
Of these 9,552 examinations, field offices recommended 560 revoca-
tions and made 829 tax changes. Many technical errors and a few
glaring abuses were found. But on the whole, despite the extremely
light audit coverage that had prevailed in the past, the examinations
indicated that most exempt organizations were in substantial com-
pliance with the law. There were technical errors, but most seemed
to be making an effort to comply.
I.might say also that, in this process, the Service either has examined
or is now examming all organizations cited by this Subcommittee
which had not been audited since July 31, 1962. Of 463 examinations
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completed as of June 30 of this year, eight exemptions were revoked
and six other cases resulted in additional tax liability but without
revocation. I might also add that there are others under continuous
audit right now, and the full story is not in on your specified case list.
This audit program has developed information that will enable the
Service to improve identification of issues, sharpen investigative tech-
niques, and better classify returns for audit. It is also expected to
produce data that will be helpful to Treasury in its legislative
program.
Attaining a suitable audit pattern is not the end of Internal Rev-
enue's efforts?neither in the exempt organization nor in any other
area. The unique success of the American tax system lies in its self-
assessment nature?in the 97 percent of tax revenues that comes in
through withholding and through what people voluntarily declare
and pay. A_nd it is the primary mission of the Service to do everything
it reasonably can to attain the highest level of voluntary compliance.
T'his is true for tax exempt organizations as well as taxpayers in
general.
I might say that under the perfect tax system, we would get all our
reporting from voluntary compliance and our direct enforcement
efforts would go down to a very small amount. We know that we
have a long way to go. But we also know that the American public
as a whole does an outstanding job. And from our examination to
date, we think that foundations, too, are doing a good job, on the
whole.
The Service has an obligation to educate and inform. People can-
not comply if they do not know what they are supposed to do or what
their continuing obligations are. It is the Service's responsibility,
given our kind of tax system, to tell them this. It must encourage
compliance and assist organizations in their efforts to comply.
Many exempt organizations simply did not know, or had grown
careless about remembering, what was expected of them. Many of
the violations encountered were unintentional and purely technical in
nature. It was apparent that improved communication was needed
in this field.
For those affected, the expanded audit program will serve to educate
representatives of exempt organizations on statutory and filing re-
quirements applicable to them. But, albeit necessary, this is a limited,
expensive, and time-consuming form of education.
The Service has been discussing many of the 'problems encountered
with both groups of organizations affected by the activities of exempt
organizations. People who are feeling the competition of exempt
organizations, as well as with exempt organizations themselves. Ef-
forts have also been made to encourage tax exempt organizations to
adopt a code of conduct and to engage in voluntary self-policing.
More formally, in the past three and one-half years, the Service has
published in the Internal Revenue Bulletin 41 revenue rulings, reve-
nue procedures, and announcements relating to exempt organization
matters. Fifty-six more are in review right now, and we expect to have
them out in the near future.
Some time before leaving office, I asked the Technical organization
to begin work on what could prove to be a most important vehicle for i
informing the public. This s an exempt organizations booklet simi-
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lar to "Your Federal Income Tax" which will set forth comprehen-
sive guidance in complying with the law. The booklet will describe
the kinds of organizations which may be granted exemption under .the
law, the extent of exemption, what they must do to gain exemption,
how to file, the kinds of activities that jeopardize an organization's
exempt status, and the penalties, including revocation, for non-
compliance.
In the course of its expanded activities in the exempt organization
area, the Service found that it could make a number of improvements
in its internal controls and procedures. The goal was to procure bet-
ter administration of the law.
I should like to enumerate some of the steps taken:
1. A check for delinquent returns has been performed in all district
offices since fiscal year 1962, contributing in large measure to the in-
crease in returns filed by over 50,000 between 1961 and 1963. That
applies to all exempt orpnizations.
2. Chief Counsel's ofice has set up a procedure to control litigation
of cases involving exempt organizations. One of its purposes is to
assure that selected issues are litigated in order to gain administra-
tive guidance.
3. Chief Counsel is also applying data processing techniques to pro-
vide a legal inventory of exempt organization issues. This will be
nationwide in its application. This is part of its information retrieval
program.
4. The Service has installed a system for monitoring exempt or-
ganization audits to provide meaningful current information on the
number and kinds of organizations examined. This, in turn, will
assure better analysis and evaluation of results, and help design a
better enforcement program.
5. The Service has revised the application for exemption (Form
1023) used by organizations desiring exemption under Section
501 (c) (3). That is the general scientific, educational, charitable type
of organization. The new application form is accompanied by an
extensive instruction folder designed to clarify the kind of informa-
tion needed.
6. Following the suggestions of the Chairman of this Subcommit-
tee?I think that your contribution here, Mr. Chairman, was great?
the Service amended its regulations and revised the annual return
(Form 990?A) to provide for fuller public disclosure of information
concerning operations of exempt organizations. As part of this, it
has provided for public inspection of returns both in the district where
the return is filed and in the National Office. Disclosure is highly
essential in this field. And I think your analysis here, and your
urgings to the Treasury to amend its regulations bore good fruit.
7. To replace the existing manual record-keeping system, The Serv-
ice is establishing a Master File of exempt organizations on electronic
tape which will contain all the data it needs to meet its responsibilities.
The Service is taking advantage of the computer system, which it is
using on individual returns, and is applying it to the exempt organiza-
tion field. And it is moving this along more rapidly than it had
originally planned.
This is expected to be ready within a year.
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TAX-EXEMPT FOUNDATIONS: IMPACT ON SMALL BUSINESS 71
Further internal improvements will undoubtedly be needed, but a
good start has been made and attention is being given to the problem.
In appraising the Service's efforts over the past few years recog-
nition must be given to the need for an affirmative litigation program.
The legal issues in the exempt organization field are difficult to re-
solve. Further, the absence of authoritative guidance creates ob-
stacles for personnel in the different field offices. How can you audit
properly unless you know what the rules are, what the courts will
back up.
To correct this, the Chief Counsel and the Department of Justice
have sought judicial answers by pursuing a sustained and affirmative
litigation program. Illustrative of this policy is an important case
bearing on commercial dealings with an exempt organization, which
is now pending in the United States Supreme Court.
I might say that certiorari has been granted in that case, and the
? United States Supreme Court will hear the case this coming term.
On the subject of litigation, two observations are in order:
First, the full effect of the increased audit activity in the exempt
organization area is not yet reflected in current litigation caseloads.
Due process is provided taxpayers in the fullest sense?hearings in the
field, hearings in the National Office, briefs filed. This is a normal pro-
cedure; and with the increased audit activity and recommendations
of revocation of exemption, this due process procedure is made fully
available to all these organizations. This is again part of our tax
system.
The fact that this does not reflect the audit activity is due to the
time lapse between audit and litigation. Nevertheless, a survey this
spring of docketed exempt organization cases shows some 161 cases
pending before the Tax Court of the United States and approximately
85 cases pending in the United States District Courts and Courts of
Appeals. They directly or indirectly involve issues relating to the
exemption provisions of the Code, and embrace charitable as well as
various other classes of exempt organizations.
Second, the Service's litigation efforts have made one fact appar-
ent?the need for effective litigation control. Selecting your issues, the
important ones from an administrative standpoint, and moving those
cases before the courts to get judicial guidance for taxpayers as well
as for the field. This is essential to bring about those judicial deter-
minations required for nationwide administration of the law.
I cannot overemphasize the importance of these various legal efforts.
The administrator would be greatly assisted by a more detailed
statute on exempt organizations to provide better guidance. Within
the limitation of a broad statute, the Service has struggled over many
difficult interpretative issues. At times answers have been delayed and
uncertainty has continued. There are problems awaiting resolution
and decision, and their existence has impeded the Service's audit pro-
gram and hampered its taking clear-cut positions in litigation.
What was found necessary within the Service was a high-level
body to help remove these impediments, and to develop realistic and
workable principles for administering the exempt organization pro-
visions. To this end, in the spring of 1963, I set up an Exempt Orga-
nization Council headed by a member of my own staff, Mr. Mitchell
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72 TAX-EXEMPT FOUNDATIONS: IMPACT ON SMALL BUSINESS
Rogovin, with representatives from Chief Counsel, Technical, and
Compliance?the three key functions involved in the exempt orga-
nization area.
The Council's mission is to review and recommend an overhaul of
procedural and substantive issues. They are coordinating all existing
projects, identifying other problems, making decisions, and recom-
mending policy decisions to the Commissioner. This is a high priority
matter and the Council is moving along with a sense of urgency.
The Council presently has many important projects underway to
ease administration and compliance problems, and to establish legal
positions applicable to all aspects of the Service. Among these are:
determining the extent to which charitable organizations can engage
in business activity without jeopardy to exemption; determining the
limitation on commercial activity for other classes of exempt organi-
zations; and developing more workable rules for the application of
the tax on "unrelated business income." I can add accumulation issues,
et cetera, et cetera. An intensive study is also underway on whether
the activities of some organizations are so politically or ideologically
oriented as to jeopardize their exemption status, and this too is an
extremely difficult area of the exempt organization law.
On legislation, as Secretary Dillon has already advised you, studies
are now underway in the Department looking to the development of
legislative proposals. Internal Revenue has been cooperating closely
in this project, and is continuing to furnish its administrative records
and findings, as well as its recommendations for possible remedial
legislation.
When the Secretary completes his studies and a legislative program
is presented, it is my hope the Congress will seriously consider the
proposals, including those designed to remove difficulties in adminis-
tration.
In conclusion, Mr. Chairman, I believe the Service's three-year
record shows that it has moved steadily forward in the exempt organi-
zation area. I cannot help but feel that the combined efforts of (1)
its .expanded audit program; (2) its increased effort to inform and
assist taxpayers; (3) its improvements in internal procedures and
controls; (4) its affirmative litigation efforts; and (5) the operations
of its Exempt Organization Council, will contribute greatly to lasting,
improved compliance on the part of exempt organizations.
The Service is seeking to build a firm foundation to insure continued
long-range progress, and it is not complacent. The road to maximum
compliance in this area is a long one, but it is determined to continue
its efforts until the goal has been reached.
In closing I would like to state that this country is fortunate in
having the group of able, top executives now administering the affairs
of Internal Revenue. They are career employees of long experience.
They are honest, devoted and work long hours including weekends in
trying to serve the best interests of the nation. I have never served
with a better group of people, I have gotten great satisfaction from
working with them, and I am proud of this association.
In using the funds appropriated to the Service, these officials are
seeking to get the best dollar's worth for the American people. They
are striving!: for the highest productivity and best utilization of the re-
sources assigned to them. Differences may arise over their exercise of
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TAX-EXEMPT FOUNDATIONS: IMPACT ON SMALL BUSINESS 73
judgment; but in my many contacts with them over three and. a half
years, I always felt confident that their decisions were made in good
faith, and with great care and concern for the Congressional intent re-
flected in a statute as well as the public weal.
I have every confidence that these attitudes and practices will con-
tinue, and that they will be applied in carrying out the various pro-
grams and policies discussed today.
I appreciate your giving me the opportunity to appear before you,
Mr. Chairman.
The CHAIRMAN. Thank you, Mr. Caplin. We appreciate your very
informative and revealing statement. It will be very helpful to the
Committee.
The federal courts have repeatedly declared that regulations issued
by the Secretary of the Treasury, when fairly within the scope of his
jurisdiction, have the force of law. Is that correct?
Mr. GAMIN. This is a statement that is used, Mr. Chairman, al-
though time and again the courts will overrule regulations, in the
lower courts as well as in the Supreme Court.
The CHAIRMAN. Has there been considerable improvement in
foundation reporting in their 1962 and 1963 tax returns?such as in
furnishing the schedules required on sale of assets, contributions re-
ceived, contributions paid out, salaries, etc.?
Mr. CAPLIN. Well, as you know, Mr. Chairman, the return was modi-
fied in 1962, in part, and in 1963. This resulted in a fuller disclosure
on certain important items. In addition, the attention that both this
Committee focused on the various activities, and our own attention led
to a reaction on the part of the public. Our district directors feel that
we are getting a better return filed today.
Again, they are not perfect. There are many technical errors still
committed. But they are better returns.
The CHAtrimAN. With respect to sale or exchange of each asset,
Treasury regulations require that foundations attach a schedule to their
tax returns showing the following information: (a) date acquired,
manner of acquisition, date sold, and to whom sold; (b) gross sales
price; (c) cost, other basis, or value at time of acquisition if donated;
(d) expense of sale and cost of improvement subsequent to acquisition;
(e) depreciation since acquisition; and (f) gain or loss. Is that
correct?
Mr. CAPLIN. Yes, that data is called for by the instructions for filing
Form 990?A, under authority of the statute and Treasury regulations.
The CirmaxiA.N. We have heard a great deal from government of-
ficials and foundation executives who insist that it is not the large
foundations who abuse their tax exemption privileges. It is the small
ones, they say.
I have here the 1962 and 1963 tax returns of the Carnegie Corpora-
tion of New York, one of the Nation's largest foundations, with assets
of $250 million. I would like to have you inspect the capital gains
schedules which show gains of over $6.5 million in 1962 and over $3.5
million in 1963, and then tell us whether the Foundation had reported
all the information required by Treasury regulations.
Mr. CAPTAIN. There are a number of exhibits here, Mr. Chairman. I
will have to take time to go through this. I will be glad to supply the
answer for you on that.
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The CHAIRMAN. All right. Suppose you do that?and with special
reference to these points.
Mr. CAPLIN. Very good, sir.
The CHAIRMAN. You may go ahead and inspect it, then.
Mr. CAPLIN. Yes, sir. Mr. Chairman, of course, we will supply
this answer to you. Also the returns have not been audited, and it is
difficult to tell whether or not various requirements of the provision
are applicable to each of these transactions. But again, we will give
you a written reply to this.
The CHAIRMAN. All right. Is it correct that the following informa-
tion has not been filed on those Carnegie schedules: date acquired,
manner of acquisition, expense of sale, gam or loss on each asset.
Mr. CAPLIN. We will comment on that, sir, with our written reply.
The CHAtiniAN. Yes, sir. Is there a special statute which exempts
the Carnegie Corporation from complying with Federal law?
Mr. CAPLIN. Obviously not, sir.
The CHAIRMAN. Mr. Olsher will ask questions.
Mr. OLSHER. Mr. Caplin, the Chairman was referring to the capital
gains schedule on the sale of assets. There are only a few pages of
them.
Mr. CAPLIN. Hasn't the Chairman indicated the discrepancies in-
volved?
Mr. OLSHER. I think he raised the question as to whether there were
such discrepancies.
Mr. CAPLIN. Well, I could read what is on the schedule, Mr. Olsher.
I would prefer doing this in writing as the Chairman suggested.
The CHAIRMAN That will be all right. That is a reasonable request.
You can submit it.
(Following is the information received from the IRS under date of
August 4, 1964:)
We have examined the capital gains schedules submitted by the Car-
negie Corporation for 1962 and 1963 and find that complete information
on gain or loss from sale of assets required by our instructions was
not furnished.
As I previously stated, these returns for 1962 and 1963 have not been
audited to date. I find, however, that during a current audit of the
foundation's return for 1961, the agent called this deficiency to their
attention and advised them that the detailed schedule on capital trans-
actions must be submitted in the future.
Formal instructions have been issued to our field offices on the neces-
sity of securing complete returns from exempt organizations and we shall
continue to emphasize the importance of this in future communications.
The CHAIRMAN. It seems to me, Mr. Caplin, that the small founda-
tions have no monopoly on violation of Treasury regulations. For
example, beginning with the 1954 tax returns, the Treasury has re-
quired that foundations attach a schedule for compensation of officers,
directors, trustees, etc.----showing name, position, salary, and time de-
voted to position. Yet the Ford Foundation failed to comply fully
with this Treasury regulation during fiscal years 1954 through 1961.
Are you familiar with that?
Mr. CAPLIN. This you have reported on, sir.
The CHAIRMAN. In your view., should the entire content of founda-
tions' tax returns be open to public inspection?
Mr. CAPLIN. I think that there should be the greatest of disclosure
by foundations to the public. Exemption is an extremely preferred
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status under our tax system. And I would encourage disclosure to the
greatest extent.
Today, so far as the returns are concerned, the principal provision
which is not disclosed to the public is the name of the contributors to
the foundation.
Congress would have to make the judgment here in weighing whether
this disclosure of information will in any way violate the right of
privacy of the individual as opposed to the needs of the proper policing
of -foundations and the proper disclosure to the public.
My own tendency would be in favor of greater and greater dis-
closure, comparable to companies which report to the SEC.
The CHAIRMAN. By letter pf January 31, 1964, you advised me as
follows:
Regulations 301.6104-2 (T.D. 6645, 4-1-1963), make provision, for
the first time, for public inspection at the National Office of Part 2 of
Form 900?A, and Form 1041?A. Such inspection, however, is limited
to returns of that type which were filed for years ending on or after
December 31, 1962. Information furnished on the public portion of
such returns for prior years is available for inspection only in the office
of the district director with whom the Form 990?A or 1041?A was re-
quired to be filed.
Since neither your letter of January 31, 1964 or your letter of Feb-
ruary 18, 1964 was responsive to my inquiry, I once again advised you
that you were evading my question as to whether "the public portions
of all Forms 990?A and 1041?A filed throughout the country for the
year 1962 are currently available for public inspection in the Washing-
ton, D.C., National Office."
By letter of February 26, 1064, you wrote me as follows:
Copies of the public portions of approximately 39,000 Forms 990?A
and 1041?A filed throughout the country for the calendar year 1962 are
presently available for public inspection here in the National Office.
While this would represent substantially all of the returns filed, we are
still receiving them from the various district offices. (As you will note
in our February 18, 1964 letter, the figure of 49,000 represented the total
of both calendar and fiscal year returns.)
The notice applying to this appears in the Federal Register of
April 2, 1963. Such notice is dated March 28, 1963. This means, does
it not, that only foundation tax returns that were filed after March 28,
1963 will be open to public inspection at the National Office?
Mr. CAPLIN. As I understand the background to that, Mr. Chair-
man, there was a new procedure instituted, and we were having dif-
ficulties in getting the district offices to pull out these returns from
their files and to transmit to us as rapidly as we hoped for originally.
1963 returns would not be available yet for complete public inspec-
tion, because the normal date would be May 15, 1964, for a filing, and
some of them are fiscal years.
The CIIAIR1VIAN. The main point here is does it mean that only foun-
dation tax returns that were filed after March 28; 1963 will be open
to public inspection at the National Office?
Mr. CARLIN. Previously these returns were filed in the district only.
And this is one of the areas that you had identified, with both me and
the Secretary, and this is one of the procedures that we changed.
The amended regulations provide that all returns filed for taxable
years ending on or after December 31, 1962 are open to inspection here.
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Thus, returns of organizations filing for fiscal years ending prior to
December 31, 1962, will not be available for inspection in the National
Office.
I think in the past the nationwide assembly of foundation returns
had been done by some charitable 'organization which tried to collect
this data by actually traveling all over the country.
The CHAIRMAN. In other words, 1962 tax returns of foundations
that operate on a fiscal year basis, such as year ending September 30,
1962, will not be open to public inspection at the National Office since
they were filed prior to March 28, 1963. For example, the Ford
Foundation operates on a fiscal year ending September 30, 1962, so
the deadline for its filing would be February 28, 1963. Hence its
1962 tax returns would not be open to public inspection in the Na-
tional Office; is that correct, Mr. Caplin ?
Mr. CAPLIN. Yes, sir, Mr. Chairman. The prior procedure was
to maintain these files in the various district offices, and as far as we
know right now they are on file there today.
The 'CHAIRMAN. And would be subject to inspection.
Mr. GAMIN. And would be subject to public inspection.
The CHAIRMAN. How did the Internal Revenue Service happen to
exclude such 1962 fiscal year tax returns? I believe your answer
covers that.
Mr. CAPLIN. Yes, sir.
The CHAIRMAN. Such tax returns are also open to public inspection
at the district office. Is that correct?
Mr. CAPLIN. That is right.
The CHAIRMAN. In your view, should the names and addresses of
donors be open to public inspection? I believe you answered that a
while ago.
Mr. CAPLIN. Yes, sir. Incidentally, Mr. Chairman, I might add
that on that point, Internal Revenue's attorneys have advised it that
the statute today prevents disclosure of the names and addresses of the
indi vidual contributors.
The CHAIRMAN. And it would take a law
Mr. CAPLIN. Modification of the law to change that.
The CHAIRMAN. Do I understand correctly that, based on Treas-
ury's present interpretation of the law, the names and addresses of
donors are not open to public inspection ?
Mr. CAprafsi. That is right.
The CHAIRMAN. Are you familiar with a tax-exempt organization
called the Foundation Library Center of New York City?which I
understand is a sort of trade association for the foundation industry?
Are you acquainted with it?
Mr. CAPLIN. I am acquainted with the organization. As I under-
stand it, it is a tax-exempt organization formed by the Russell Sage
Foundation. It has the purpose of collecting information about tax-
exempt organizations?and actually maintains a file of foundations,
as it describes foundations, in various of its offices. It also has as one
of its purposes the effort to improve reporting procedures of founda-
tions, which is of great interest to you and the Service.
The CHAIRMAN. I will ask Mr. Olsher to continue now.
Mr. OLSHER. The tax-exempt Foundation Library Center of New
York City, which was incorporated in 1956 as an educational institu-
tion, bills itself as the factfinding statistical organization on founda-
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tions. According to the Foundation Directory of 1960, "It [Founda-
tion Library Center] is an independent agency under its own board
of trustees, men knowledgeable about foundations but representing the
public interest. With an initial grant from the Carnegie Corporation
of New York, it is charged with the task of gathering comprehensive
information about foundations, stimulating adequate reporting where
such does not exist, and making its collections freely and generally
available."
Mr. Caplinl does this organization, which bills itself as an educa-
tional institution, have a faculty?
Mr. CAFTAN. No, sir. That is not required under the statutory and
regulatory definition of education.
Mr. OLSIIER. Who are they educating? Do you know?
Mr. CAPLIN. Well, so far as I understand, they are concerned with
educating the public at large and, in addition the foundations them-
selves, as a nationwide body.
Mr. OLSIIER. Do you know whether they offer any educational
courses?
Mr. CArr,m. I have no idea. I do not have any close familiarity.
They have had contacts with our office, and we have met some of the
top officials. Very early in the new Administration they called upon
us to find out whether they could do a better job of getting copies of
returns and making them available to the public at large.
Mr. OLSIIER. Do they have any students, to your knowledge?
Mr. CAPTAIN. Not that I know, sir.
Mr. OLSIIER. As you know, the Alfred P. Sloan Foundation granted
$200,000 to the Foundation Library Center for the express purpose
of opening and operating an office in Washington, D.C.
On November 20, 1963, we queried you with respect to whether the
Foundation Library Center sought the approval of the Internal Reve-
nue Service with regard to the opening of its Washington office. By
letter of January 3, 1964, you advised us as follows:
The Foundation Library Center did not seek our approval to open its office
in Washington. However, the director of the Center did consult with us prior
to its opening relative to necessary arrangements for obtaining copies of Forms
990-A and 1041-A filed by foundations. He requested that we help facilitate ef-
forts to obtain copies of the foundation returns in view of the large numbers
involved. The Center plans to maintain these copies in their Washington, New
York, and regional libraries. We arranged for the Center to photocopy these with
equipment installed in our building, on an appropriate fee basis. We welcomed
this arrangment because of the opportunity it presented for additional locations
where these returns would be available for public inspection.
On January 14, 1964, we asked you to furnish the following addi-
tional information regarding the Foundation Library Center's photo-
copying foundation tax returns at the IRS:
1. Number of such information returns to be photocopied.
2. (a) Number of foundations whose returns will be photo-
copied, and (b) years to be photocopied.
3. Charge per page or other fee basis.
4. Is the job being done with Treasury personnel or with out-
side personnel?
5. Type of equipment being used?i.e., Xerox, photostat, etc.
6. Is the photocopying being done with Treasury equipment or
with outside equipment? If outside equipment is being used,
please advise as to (a) name and address of the person or orga-
39-915?.64 6
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TAX-EXEMPT FOUNDATIONS: IMPACT ON SMALL BUSINESS
nization paying for the rental or purchase of such equipment, and
(b) date on which the equipment was installed.
By letter of January 23, 1964, you responded as follows:
1. The Library Center estimates that it will photocopy approxi-
mately 15,000 information returns per year.
2. (a) The returns will represent some 15,000 foundations.
(b) Photocopying will continue indefinitely, covering the pub-
lic record portion of returns received from these foundations for
years endinc, December 31, 1962 and thereafter.
3. The Library Center is reimbursing Internal Revenue for
incidental costs at the rate of $.02 per each reproduction of each
page. (This is separate and apart from the costs incurred and
paid by the Center to other payees in connection with items 4-6.)
4. The photocopy job is being done by an individual hired and
paid by the Library Center.
5. A Xerox machine is being used.
6. The photocopy equipment has been obtained on a rental
basis by the Library Center.
(a) Rental payments are made by:
The Foundation Library Center
444 Madison Avenue
New York 22, New York
(b) The reproduction equipment was put into operation on
October 22, 1963.
By letter of February 20, 1964, we queried you as to whether the
Foundation Library Center furnished the Internal Revenue Service
a list of the 15,000 foundations whose tax returns they wished to
photograph. On February 26th, you informed us that the Foundation
Library Center did not furnish such a list.
Now,
let us make a little comparison. You had previously advised
us that the Internal Revenue Service charges the public 50 cents per
page for photocopies of the public portions of foundation tax returns.
To sum it up, you are charging 50 cents per page to the public,
which supports the tax exempt foundations by way of tax subsidies
but the approximate cost to the Foundation Library Center is 10 to
11 cents per page.
The Foundation Library Center's cost per page is based on figures
submitted to us by that organization, which indicate that its total cost
for this operation was about $6,500 for photocopying 61,758 pages
during the period of October 22, 1963 through April 1964.
How do you justify the 50 cents per page charged to the public as
against the 10 to 11 cents per page charged to the Foundation Library
Center?
Mr. CAPLIN. The cost involved in the Foundation Library Center
arrangement was very carefully projected by our financial people
within the Service.
The work of the Center would relieve Internal Revenue of having
to use its equipment, having to use personnel to man the machine, hav-
ing to use certain personnel on handling of the documents?and maybe
handling correspondence that comes in. People often write in that
they would like to have certain documents; we have to write a reply
letter.
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It was a good faith projection of the cost to the government. We
felt the two cents was fair for this limited job.
On the other hand, when you take into mind the total job, involving
correspondence in many cases, involving the procuring of individual
returns, the Xeroxing, the handling?our people felt that 50 cents was
a fair price on the average.
Mr. 43LSIIER. Yes, but you still have 50 cents to the public.
Mr. CAPLIN. I said so, sir. When it is entirely handled by the In-
ternal Revenue Service, taking into account all of the manpower in-
volved in this particular process.
Now, I do not have all the cost figures at hand. I am sure they
could be gone over with you by the people who projected them. But
all I could say is that, as I said in my original statement, that I am
satisfied, from my experience, that this was a good faith judgment
made on an examination of the facts?and taking into account the
overall cost.
Now, you recognize how time-consuming it is to write correspon-
dence to people sending requests in?the overall handling.
Mr. OLSIIER. Mr. Caplin, I visited that project to inspect its opera-
tion, along with Mr. Harding. And Mr. Keller informed me that he
had three people assigned to that project who did nothing but prepare
it for the Foundation Library Center, in terms of submitting returns
to a department which is working with the Foundation Library Cen-
ter. So the Internal Reveune Service does have people assigned to
that job.
Mr. CAPLIN. We have people assigned to taking care of this partic-
ular phase of the job, and this is where the two cents cost is projected.
Now, they could have written in to us, and we would have to reply to
them item by item, and that would be it. They would pay more
money for that, if they had done it on that basis. We would have had
more work.
Mr. OLSHER. You did state that contributions received are not open
to public inspection, is that correct?
Mr. CAPLIN, That is right. That is the general rule.
Mr. OLSITER. In inspectinc, the project with Mr. Harding, I looked
at some of the tax returns that had been turned over to the woman who
was handling the project for the Library Center, and in leafing
through them, I discovered a tax return from the Stephens Founda-
tion, of Nashville, Tennessee, which carried on it?and it had already
been photographed?the amount of contributions that had been re-
ceived by the Foundation.
Mr. CAPLIN. Yes, I am familiar with that. This was actually a
statement of the amount of contributions?you are correct, sir.
Mr. OLstiER. This is supposed to be forbidden territory, is it not?
Mr. CAPLIN. Well, the amount of contribution is not forbidden.
Mr. OLSIIER. I am talking about the list of donors.
Mr. CAPLIN. The names of two donors were also included?the peo-
ple who controlled the Foundation had listed their names. This was
the one instance, so far as we know, in this roughly 15,000, that oc-
curred. We investigated as to why it had occurred. On our investi-
gation, we found that the Foundation had not used the proper form.
It had used an old form. And to give the additional information
required under the new year, with the greater disclosure, instead of
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making additional pages on the new form, it filed copies of the first
two pages containing the two individual contributions. Now, that is
the best we can determine under the facts. We checked with the
accounting firm that prepared the return. They stated it was their
intent to make the donors names part of the public inspection portion
of the return.
Mr. OLSHER. Mr. Caplin, I was also informed that Mr. Keller's de-
partment is cutting out portions now which show names and ad-
dresses of donors. Is that correct?
Mr. CAPLIN. I am not familiar with that.
Mr. OLSIIER. I was also informed that they were throwing them
away, those portions of the tax returns. Now, what happens when
the Internal Revenue Service, the Washington Office, wants to refer
to any one of those tax returns with respect to contributions received.
Where are they going to find those schedules that were thrown away?
Mr. CAPLIN. Well, the obvious place would be in the district office.
Mr. OLSHER. Doesn't that involve a great deal of delay?
Mr. CAPLIN. It could. But we normally would not have need in
the National Office for this particular item. As you know, the In-
ternal Revenue Service is decentralized. The 52 district Offices to-
day handle the operational phase. Actually if we were in urgent need
of the information, we could do it very quickly by teletype, or using
the Government lines.
The CHAIRMAN. Mr. Harding, would you like to comment on that?
Mr. HARDING. Yes. I think the main point to be made to Mr. 01-
slier on that item is that the audit of these returns is at the district
office level. The only reason we have them in Washington is for
public inspection purposes. So there is no loss of information when
we throw away some portion of that section in Washington.
The CHAIRMAN. I shall ask Mr. Olsher to continue.
Mr. OLsuEn. Our records disclose that the IRS has levied $641,-
562.000 ($410,280.70 tax and $231,281.30 interest) in taxes on the
Lansing Foundation (assets $779,546, December 31, 1960), New York
City (one of three foundations operated by David G. Baird, Wall
Street broker and corporate director). The taxes were assessed for
the years 1952 and 1953, and, among other conditions imposed by the
IRS, the Foundation is required to divest itself of its entire net as-
sets to bona fide tax exempt charitable organizations on or before De-
cember 31, 1965.
The tax assessment was based upon Lansing's (1) profit-making
transactions and other financial ventures, and (2) unreasonable ac-
cumulation of income (unspent income).
Two other Baird Foundations?Winfield Baird Foundation (as-
sets $17.4 million, December 31, 1960), and David, Josephine & Win-
field Baird Foundation (assets $10.2 million, December 31, 1960)?
went unassessed despite the fact that their financial transactions were
similar to Lansing's and, in the case of the Winfield Baird Founda-
tion, considerably larger. In fact, in 1959, the Dirstrict Director of
the Internal Revenue Service had recommended revocation of the
tax exemption of the Winfield Baird Foundation and the David, Jos-
phine & Winfield Baird Foundation for a variety of reasons, includ-
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TAX-EXEMPT FOUNDATIONS: IMPACT ON SMALL BUSINESS 81
ing their operations as securities dealers. These two foundations
are, however, among other conditions imposed by the IRS, required
to divest themselves of their entire net assets to bona fide tax exempt
charitable organizations on or before December 31, 1965.
Here is a chronological account of the IRS-Baird Foundations tax
matter:
IRS-LANSING FOUNDATION
By letter dated August 6, 1954?The IRS revoked the tax exemp-
tion of the Lansing Foundation for the years beginning 1951. The
revocation was based upon unreasonable accumulation of income and
"without taking any of your other financial transactions or invest-
ments into consideration."
The Lansing Foundation filed a protest (date unknown).
By letter dated September 5, 1957--The IRS affirmed the revoca-
tion based on unreasonable accumulation of income and further con-
cluded, on the basis of Lansing's profit-making transactions and other
financial ventures, that its operations were not exclusively charitable
as required by the Statute.
By letter dated October 22, 1962?The IRS reconsidered and con-
cluded that Lansing was exempt from 1951, 1954 and subsequent
years, but not for 1952 and 1953. The ruling was issued with the
understanding that a closing agreement would be executed containing
certain conditions outlined in the letter.
By letter dated January 18, 1963?The IRS sent the Lansing Foun-
dation a copy of the signed agreement, approved by the Commissioner
of Internal Revenue on January 15, 1963.
IRS-DAVID, JOSEPHINE & WINFIELD BAIRD FOUNDATION
By letter dated March 4, 1959?The District Director of the Internal
Revenue Service, New York City, advised that David, Josephine and
Winfield Baird Foundation that he would recommend to the Com-
missioner of Internal Revenue, Washington, D.C., that the Founda-
tion's tax exemption be revoked for the years 1951 through 1959. A
final determination, however, would be within the jurisdiction of the
Commissioner. The basis of the revocation includes 1) the Founda-
tion's operations as a securities dealer, 2) unreasonable accumulation
of income, 3) jeopardizing assets by heavy borrowing, 4) registration
of securities in the names of nominees which permits co-mingling of
funds and 5) speculative investments.
The David, Josephine and Winfield Baird Foundation filed a pro-
test on September 25, 1959.
By letter dated October 22, 1962 The Commissioner of Internal
Revenue, Washington, D.C., overrode the recommendations of the
District Director and concluded that the Foundation was exempt for
the years 1951 through 1959. The ruling was issued with the under-
standing that a closing agreement would be executed containing cer-
tain conditions outlined in the letter.
By letter dated January 18, 1963?The Internal Revenue Service
sent the Foundation a signed copy of the agreement, approved by the
Commissioner of Internal Revenue on January 15, 1963.
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82 TAX-EXEMPT FOUNDATIONS: IMPACT ON SMALL BUSINESS
IRS-WINFIELD BAIRD FOUNDATION
By letter dated May 13, 1959?The District Director of the Internal
Revenue Service, New York City, advised the Winfield Baird Foun-
dation that he would recommend to the Commissioner of Internal
Revenue, Washington, D.C., that the Foundation's tax exemption be
revoked for the years 1951 through 1959. A final determination,
however, would be within the jurisdiction of the Commissioner. The
basis of the revocation includes 1) the Foundation's operations as a
securities dealer, 2) unreasonable accumulation of income, 3) jeopard-
izing assets by heavy borrowing, 4) registration of securities in the
names of nominees which permits co-mingling of funds and 5) specu-
lative investments.
The Winfield Baird Foundation filed a protest on September 25,
1959.
By letter dated October 22, 1962?The Commissioner of Internal
Revenue, Washington, D.C., overrode the recommendations of the
District Director and concluded that the Winfield Baird Foundation
was exempt for the years 1951 through 1959. The ruling was issued
with the understanding that a closing agreement would be executed
containing certain conditions outlined in the letter.
By letter dated January 18, 1963?The Internal Revenue Service
sent the Winfield Baird Foundation a signed copy of the agreement,
approved by the Commissioner of Internal Revenue on January 15,
1963.
TERMS OF IRS-BAIRD FOUNDATIONS AGREEMENTS
The principal terms of the IRS-Baird Foundations agreements are
as follows:
1. From the effective date of the restoration of their exempt
status until their formal dissolution and complete liquidation,
the three foundations would currently distribute all of their net
income, including net capital gains, to bona fide tax exempt chari-
table organizations.
2. On or before December 31, 1965, the three foundations would
divest themselves of their entire net assets to bona fide tax
exempt charitable organizations.
3. The three foundations agreed that they would not make dis-
tributions to so-called private foundations organized by private
individuals.
4. The operations of the three foundations which caused the rev-
ocation of their tax-exempt status would be discontinued. Their
investments would be passive in nature.
5. Waivers of the Statute of Limitations on assessment and
collection would be executed by the foundations.
6. The execution of the agreements was conditioned on the
execution of separate closing agreements between the IRS and
the three Baird Foundations covering the years 1951 through
1959.
7. Lansing Foundation was taxable for the years 1952 and 1953.
8. For the years 1951 through 1959, the David, Josephine &
Winfield Baird Foundation would not be liable for any income
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tax, excess profit taxes or penalties. The Foundation's exempt
status would l remain undisturbed for the year 1951 and all periods
subsequent thereto.
9. For the years 1951 through 1959, the Winfield Baird Foun-
dation would not be liable for any income tax, excess profits taxes
or penalties. The Foundation's exempt status would remain un-
disturbed for the year 1951 and all periods subsequent thereto.
The Foundation would not file any claim for refund for any taxes
which it may have paid for the years 1951 through 1959. Ap-
parently, delinquent returns, Forms 990?T, for the years 1951
through 1956 were filed on January 22, 1959, reporting unrelated
business income from the rental of property in .Allentown, Penn-
sylvania. The taxes paid on such net income amounted to $635.39
for the years 1951 through 1956.
10. Lansing's exempt status was restored for the years 1951,
1954 and subsequent years.
11. The agreements would terminate upon the breach of any of
their terms or conditions.
12. Notwithstanding anything to the contrary contained in
the agreement, Lansing could enter into transactions with the
Winfield Baird Foundation, and the David, Josephine, and Win-
field Baird Foundation for the purpose of acquiring funds to
liquidate its liability for income taxes plus interest without affect-
ing it tax-exempt status.
13. The Winfield Baird Foundation and the David, Josephine &
Winfield Baird Foundation agreed that if Lansing failed to pay
in full its income tax liability for the years 1952 and 1953 plus
interest, they would make payment of any unpaid amounts.
We began probing the Baird Foundations, as well as 500 other
foundations, in early 1962. Because of difficulties in obtaining infor-
mation from Mr. Baird, I issued a subpoena for the records of the
Baird Foundation in June 1963. On October 16, 1963, I submitted to
the Subcommittee my report on the tax-free commercial activities of
the Baird Foundations, describing them as unregulated, tax-free
securities dealers, unchartered bankers, and business brokers.
The IRS statement of tax liability to the Lansing Foundation is
dated October 18, 1963, two days after release of my report on the
Baird Foundations. The Foundation paid the tax liability in the
amounts of $313,915.17 (1952 tax including interest) and $327,646.83
(1955 tax including interest) on October 24, 1963 and October 25,
1963 respectively.
These facts were discovered by us subsequent to my report of Octo-
ber 16, 1963. Although the Baird Foundations' records were delivered
to us under subpoena, the Foundations had withheld their correspond-
ence with the IRS, among other things. When we discovered that the
Foundations had withheld such records, I asked that they be delivered
immediately. Thus, some records were delivered to us on October 31,
1963.
Upon reviewing the material delivered to us on October 31, 1963, we
found references to other records which had not been delivered to us.
Hence, by letter of November 13, 1963, I listed the still missing items.
Such items were forwarded to us on December 6, 1963.
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84 TAX-EXEMPT FOUNDATIONS: IMPACT ON SMALL BUSINESS
In my view, the IRS-Baird Foundation tax deal will earn a secure
place in the annuals of IRS activities which favor tax exempt founda-
tions at the expense of the taxpayers. If the Lansing Foundation
owed the Government $641,562, then the other two Baird Foundations
(Winfield Baird Foundation and David, Josephine 86 Winfield Baird
Foundation) owe several times that amount. Their financial trans-
actions were similar to Lansing's and, in the case of the Winfield Baird
Foundation, considerably larger. For example, during the period
1951 through 1961? the Lansing Foundation soli securities totaling
$23.2 million showing capital gains of $3.8 million. During the same
period, the *infield Baird Foundation sold securities totaling $89.1
million with capital gains of $16.5 million; and the David, Josephine
86 Winfield Baird Foundation sold securities totaling $14.2 million
with capital gains of $2.1 million.
This is another example of the IRS playing Santa Claus to owners
of foundations, to the detriment of the taxpayers who must foot the
bill. Obviously, each tax exemption and failure to collect taxes in-
creases the burden of our taxpaying citizens and businesses, including
small business.
Contrast the IRS indulgent treatment of foundations with its al-
leged handling of Mr. George Anthony, a small businessman in Peoria,
Illinois, who writes, in part as follows:
I am a small business man * * * Here is what happened. In the first place they
took about 3 months of my time, and then after not finding any errors, the agent
said I'll have to tax you $1200 for the time that I put in. Sir, can you imagine
that? My lawyer advised me to pay it, and then sue them for it. We did that
and won the case, but was out the lawyer's fees, plus the time and harassment
I know of other cases of this type in my city, so there must be thousands through-
out the country.
Why did the IRS tax the Lansing Foundation but fail to tax the two
larger, more active Baird Foundations?particularly the largest one,
the Winfield Baird Foundation?
Mr. CAPLIN. Mr. Chairman, is this question put to me by Mr. Olsher.
The CHAIRMAN I am putting the question.
Mr. CAPLIN. I assume he just read it for you.
The CHAIRMAN Yes, he read it for me.
Mr. CAPLIN. Well, Mr. Chairman, I would like to state primarily
on this case, number one, the District Office was never overruled; sec-
ondly, despite some of the newspaper releases, I should say one news-
paper, there was no contact between the Commissioner and Mr. Baird,
or any of the principles in the case.
As a matter of fact, the Commissioner did not know the case was
even in the office.
In terms of the chronology, if your staff had come to me, I would
have been very happy to fill_ in the chronology of the case. I think
there is some suggestion of some impropriety, here perhaps.
Now, in fact what happened after September of 1957, which is one
of the dates read to me?and I use the Lansing Foundation as the
key case, because that was the pivot here?the national office memo-
randum Was forwarded to the district, and the taxpayer made contact
protesting the letter. This is the due process procedure I referred to
at the outset. There was no automatic revocation without the right
to be heard.
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In 1958 and 1959, briefs were submitted in the district through the
normal decentralization procedure and heard out there.
In March of 1960, the Revenue agents from the district who were
examining this particular return came to Washington to meet with
the Exempt Organizations Branch for advice on the case, and they
talked about the proposal of settling the case on some basis with the
taxpayer's representative.
They went back to New York in May of 1960?"they" meaning the
district Revenue agents?and had a conference with the foundation
and their representatives in May 1960.
On June 6, 1960?and mind you this was in the prior Administra-
tion, contrary to the suggestions of that one newspaper article con-
cerning which administration passed upon this?a report was made
to the Chief of the Audit Division of the Manhattan District by one
of the Revenue agents working on the case' telling of his conference
with the taxpayer on May 27, 1960, setting forth the agreement reached
which is substantially the same as the one that is in the final report.
On December 1, 1960, the report of the agents to the Chief of the
Audit Division was finalized and discussed with the national office
officials working in the exempt organization area.
Mind you, by December 1, 1960, the entire dimensions of the case
were agreed upon?accepting the taxpayer's proposal. At that point,
the rest was just pure routine administration, carrying out the agree-
ment, with the district going back, writing up a 'full report?I will
not go into all the details?careful review in the field, recommenda-
tions from the field that the matter be settled.
The matter was forwarded up here, and was reviewed in the na-
tional office by career employees in the normal fashion. As the mat-
ter was not deemed important enough for me to personally sign, the
return letter was signed in my behalf as hundreds of documents
are.
This matter had been brought to the attention of the New York
Times by someone from your office as I understand, Mr. Patman.
The New York Times looked into this. They came up, they looked
at our public files, they were satisfied, they did not print the story.
The other day this matter was publicized in another newspaper
with these very unfortunate suggestions.
I am happy to see that the newspaper which did report that on
last Friday corrected their story on Monday.
Now, I will not go into the the legal issues, the question of what
our lawyers think about them. I will ask perhaps Mr. Rogovin or
the Chief Counsel to discuss with you the grounds upon which the
staff felt that this result was a right one.
The CHAIRMAN. According to the Wall Street Journal of July
20, 1964, a spokesman for the IRS states that you did not personal-
ly.9,pprove the IRS-Baird Foundations tax agreement.
Mr. CATLIN. That is correct.
The CHAIRMAN. Yet the closing agreement states that it was ap-
proved by the Commissioner on January 15, 1963 and signed by
Bertrand M. Harding on the same date. Moreover, the agreement of
October 22, 1962, which is identical with the closing agreement of
January 15, 1963, was signed by you.
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86 TAX-EXEMPT FOUNDATIONS : IMPACT ON SMALL BUSINESS
Mr. CAPLIN. It was not, sir.
The CITAIRMAN. It was not signed by you?
Mr. CAPLIN. It was not, sir. My name is signed on hundreds of
documents.
The CHAIRMAN I mean your name was not signed to it?
Mr. CAPLIN. I did not sign it. My name may have appeared as it
does on hundreds of documents.
The CHAIRMAN. Was there any indication you did not sign it?
Mr. CAPLIN. I do not know. I did not sign it.
The CHAIRMAN. Do you permit the use of your name that way?
Mr. CAPLIN. Yes, sir.
The CHAIRMAN You mean you let people sign it without reference
to the fact that you did not personally sign it?
Mr. CAPLIN. We have a complete record in the national office. We
have between 30,000 and 40,000 applications for rulings that come in.
There are certain important ones which may be sent forward for
higher review. We have a man assigned in the office, Mr. Edwin
Perkins, Assistant to the Commissioner, who has the authority to
sign the Commissioner's name, a delegation like in many other agen-
cies throughout government.
The CHAIRMAN. I doubt that that would be comparable to this.
This involves lots of money. And this is a case where you were sup-
posed to have signed that.
Mr. CAPLIN. No. I did not have to. This is merely a letter to the
taxpayer, Mr. Chairman.
The CHAIRMAN. You did not sign the agreement?
Mr. CAPLIN. I did not sign the agreement.
The CHAIRMAN You state your name was on that?
Mr. CAPLIN. My name is not on the agreement.
The CHAIRMAN. And the signature that you had in connection with
it was your signature, but it was not made by you?
Mr. CAPLIN. It was not my signature. It was my name written on
there.
The CHAIRMAN. But by permission?
Mr. CAPLIN. By delegation, which has been part of Internal Reve-
nue procedure for many, many years. And we go back a hundred
years.
The CHAIRMAN. Do you take responsibility for the actions of the
IRS during your term of office?
MT. CAPLIN. I do, sir.
The CHAIRMAN. Will you explain why the Lansing Foundation
was not billed for the $641,562 until October 18, 1963? The agree-
ment was approved by you on January 15, 1963.
Mr. CAPLIN. The agreement was forwarded to the District Office for
execution and billing. The bill was not sent out promptly. We made
an investigation through Internal Revenue's inspection service. De-
tailed interviews were made of the persons involved in the billing
procedure. As far as we can tell from the inspection report, this
just was an inadvertent error. A file was placed on a shelf. And the
actual mailing of the bill did not go out until this later date.
But I would like to say this, Mr. Chairman: An intensive audit has
been in active operation, so far as these organizations are concerned.
It is part of the closing agreement procedure to see whether every
single period and comma of the closing agreement is lived up to?
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which would have included payment. If there is any violation of the
closing agreement?and the closing agreement is wide open?it is re-
scinded and the whole matter is reopened. The statute of limitations
has been kept open by agreement.
So while it is true that in terms of timetable, the bill was actually
physically sent from the District Office after the date of your report,
I am confident that they would have been billed, plus interest always
running, at some time.
The CHAIRMAN. I have before me here a letter, a copy of a letter,
United States Treasury Department?it is Xeroxed, Thermofaxed,
or some duplicating process.
"Internal Revenue Service, Washington 25, D.C., October 22, 1962."
This is addressed to the Lansing Foundation, Inc., 65 Broadway,
New York 6, New York.
"Gentlemen"?the first sentence is:
"In our ruling of August 6, 1954 we revoked your exemption from
Federal income tax for the year 1951 and subsequent years on the
basis that you had unreasonably accumulated income in violation of
section 3814 of the 1939 Internal Revenue Code * * * On September
5, 1957, we affirmed that ruling", and so forth.
Now, that page and the next page and the next page, indicate an
agreement, an understanding. And this letter is five pages. And it
is signed:
"Sincerely yours, Mortimer M. Caplin, Commissioner."
Do you deny signing that letter, Mr. Caplin?
Mr. CAPLIN. is, sir. Regardless of the relevance of my signature,
I physically did not sign that letter.
The CHAIRMAN. Take a look at it.
Mr. CAPLIN. That is not my signature Mr. Chairman. I do not see
the relevance. But I tell you categorically, it is not my signature.
The CHAIRMAN. But that does?you have seen that letter?
Mr. CAPLIN. Subsequently, yes.
The CHAIRMAN. That sets forth the agreement between Internal
Revenue and the three Baird Foundations?
Mr. CAPLIN. It proposes an agreement. The agreement was not
executed until a closing agreement was physically signed.
The CHAIRMAN. But that was acted upon?
Mr. CAPLIN. There was a contract; yes, sir.
The CHAIRMAN. It was a contract?
Mr. CAPLIN. No?a second document was the contract. This was a
proposal. A second document, a closing agreement on a particular
form, constituted the contract.
The CHAIRMAN. It was accepted?it was a proposal by the United
States Government we will say, acting through you?
Mr. CAPLIN. That is right.
The CHAIRMAN. Yes, sir. And it was accepted?
Mr. CAPLIN. That is right. And I accept responsibility as Com-
missioner for that proposal.
The CHAIRMAN. I can understand, Mr. Caplin, how you would per-
mit the use of your name under certain conditions, where it is just
routine. But where this involves matters of really millions of dollars,
I don't understand why you would permit people to sign your name
without indicating it was signed with your permission.
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Mr. CAPLIN. Mr. Patman, that is a large sum of money. But I think
you must keep in mind that we handle billions of dollars' almost $113
billion this year. And in terms of the decision as to what is a signifi-
cant matter which requires the Commissioner's personal attention?
with many, many competing obligations during the day?this is some-
thing that I have to rely upon for staff determination. This has been
a procedure that has been in vogue for many, many years with many,
many commissioners in many, many administrations.
I am not saying it is the perfect system. But it is the best we have
been able to devise to keep the Commissioner functioning and making
himself effective in a 24-hour day.
The CHAIRMAN. Your statement about the $113 billion does not
impress me too much, because there are very few tax assessments like
this in the $113 billion a year.
Mr. CAPLIN. I was just trying to put the $600,000 closing agreement
in context with various cases we have. We have many individual cases
involving many more millions of dollars decided upon by a Revenue
agent in the field. I think it is important to recognize that we have
to delegate enormous authority, when you have 65 million individual
income tax returns, and 100 million returns of all varieties being filed-
60,000 employees spread out in 900 offices. We have delegations from
the Secretary to the Commissioner to Regional Commissioners, to
District Directors, to Chiefs of Divisions and to Branch Chiefs.
The CHAIRMAN. We will insert this letter in the record at this point.
(The letter referred to by the chairman follows:)
U.S. TREASURY DEPARTMENT,
INTERNAL REVENUE SERVICE,
Washington, D.C.
THE LANSING FOUNDATION, INC.,
65 Broadly/ay,
New York, New York.
GENTLEMEN: In our ruling of August 6, 1954, we revoked your exemption
from Federal income tax for the year 1951 and subsequent years on the basis
that you had unreasonably accumulated income in violation of section 3814
of the 1939 Internal Revenue Code (which corresponds to section 504 of the
1954 Code). On September 5, 1957, we affirmed that ruling and further con-
cluded, on the basis of your profitmaking transactions and other financial
ventures, that you were not operated exclusively for exempt purposes contem-
plated by the statute.
We have reconsidered your status for Federal income tax purposes for the
years involved in the light of information submitted in your protests and in
conference held in connection therewith. Based upon all the available informa-
tion, we have concluded that you are exempt from Federal income tax under
the provisions of section 501(c) (3) of the Code for the years 1951, 1954 and
subsequent years, but you are not exempt for the years 1952 and 1953 and are
required to file income tax returns for such years. Information returns, Form
990-A, are required to be filed for all years for which your exemption has been
reinstated.
This ruling is issued with the understanding that a closing agreement made
under and in pursuance of section 7121 of the Code, and containing, in essence,
the following conditions, will be executed:
1. From the effective date of the restoration of your exempt status until
your formal dissolution and complete liquidation you will currently dis-
tribute all of your net income, inclusive of net capital gains, to organizations
organized and operated exclusively for purposes described in section 501 (c)
(3) of the Internal Revenue Code of 1954 providing that such organizations
shall have obtained rulings or determinations from the Internal Revenue
Service that they are exempt from tax and satisfactorily establish that such
exemption is still in effect.
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41111
2. On or before December 31, 1965, you will have completely disposed
and divested yourself of your entire net assets to organizations organized
and operated exclusively for purposes described in section 501 (c) (3) of the
Internal Revenue Code of 1954, provided that such organizations shall have
obtained rulings or determinations from the Internal Revenue Service that
they are exempt from tax and satisfactorily establish that such exemption
is still in effect.
3. You will make no distributions to organizations organized by private
individuals which confine their activities to the receipt and disbursement
of funds for allowed purposes notwithstanding the fact that such organiza-
tions qualify within the meanings of paragraph 1 and 2 hereinabove. In
determining whether an organization is as above described, its size, activi-
ties and degree of control exercised by its organizer or organizers shall be
taken into consideration. Should any question arise as to whether an
organization is within the prescribed group, you will make no distribution
to it without the prior approval of the Internal Revenue Service.
4. The activities and operations which occasioned the loss of your exempt
status, as set forth in letters of the Internal Revenue Service dated August
6, 1954 and September 5, 1957, will be discontinued. Your activities and
operations will hereafter come within the allowable limitations set forth
In section 501(c) (3), 503 and 504 of the Internal Revenue Code of 1954
and the appropriate regulations thereunder. Your investments will be
passive in nature, principally for the production of investment income, Le.,
dividends, interest, etc.
5. Waivers of the Statute of Limitations on assessment and collection
extending the Statute of Limitations with respect to each of the years 1951
through 1959, inclusive, until June 30, 1963, will be executed by you at the
request of the Commissioner. Additional extensions of such waivers for
periods of not more than one year at a time will be executed by you at the
request of the Commissioner but in no event will you be required to extend
the Statute of Limitations for any of the years 1951 to 1959, inclusive
beyond December 31, 1967.
6. This ruling and the execution of the closing agreement are conditioned
on the execution of separate closing agreements between The Winfield Baird
Foundation and the David, Josephine and Winfield Baird Foundation, Inc.,
respectively, with the Commissioner covering the years 1951 through 1959,
inclusive. Any breach of the terms or conditions of said closing agreements
by any of the parties thereto shall constitute a breach of the terms and
conditions of this ruling and the closing agreement.
7. For the calendar years 1952 and 1953, you will be deemed a taxable
corporation for Federal income tax purposes.
8. Your exempt status will be restored for the years 1951, 1954 and sub-
sequent years.
9. The agreement shall terminate upon the breach of any of its terms or
conditions, and each of the parties thereto shall thereafter be free to pursue
his legal rights and remedies as if the agreement had not been executed.
10. The agreement shall inure to and be binding upon you, your legal
representatives, successors and assigns.
11. Notwithstanding anything to the contrary contained in this ruling or
the agreement, you may enter into transactions with the Winfield Baird
Foundation and the David, Josephine and Winfield Baird Foundation, Inc.
for the purpose of acquiring funds to liquidate your liability for income
taxes plus interest provided by law without affecting your tax exempt
status.
We will approve a closing agreement with respect to those issues set forth
above. The necessary closing agreement has been prepared in duplicate and
is enclosed.
Both the original and duplicate copy of each agreement should be dated and
signed as indicated with the corporate name followed by the signature and title
of an officer, or officers, authorized by the board of directors to act in the matter,
and the corporate seal should be affixed. There should also be attached to the
original of each agreement a certified copy of the minutes of the meeting of the
board of directors at which a resolution was adopted authorizing the officer, or
officers, signing the agreement to act on behalf of the organization in the matter
of entering into the closing agreement. The copy of the minutes should be
sworn to before a notary public. Upon execution of the closing agreements, they
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should be returned immediately to this office for the attention of T :R :E0 :6?
GAM.
In pursuance of our policy with respect to closing agreements, the agreement
contains a stipulation to the effect that any change or modification of applicable
statutes will render the agreement ineffective to the extent that it is dependent
upon such statutes.
This ruling modifies our rulings dated March 6, 1947, August 6, 1954, and
September 5, 1957.
It will be noted that the conditions set forth in the closing agreement enclosed
are substantially the same as those contained in the proposed closing agreement
executed by you on Form 866. However, where a closing agreement as contem-
plated here contains issues affecting future years, the appropriate form to be
utilized is Form 906 rather than Form 866.
The District Director, Manhattan, New York, is being advised of this action.
Sincerely yours,
MORTIMER M. CAPLIN, COMMi88i0Rer.
The CHAIRMAN. Will you explain, Mr. Caplin, why the Lansing
Foundation was only assessed taxes for the years 1952 and 1953?
The Foundation's exemption was revoked for all years beginning
1951 by ruling of August 16, 1954 and affirmed by ruling of Sep-
tember 5, 1957.
Mr. CAPLIN. Mr. Chairman, as I did not participate in that case,
I would like to suggest that the Chief Counsel or Mr. Rogovin address
themselves to that.
The CHAIRMAN. That will be satisfactory.
Mr. CAPLIN. But I would like to say this preliminarily. It must
be recognized that this was a death sentence. The agreement was a
death sentence so far as the Foundation was concerned?the three
Foundations were interrelated, they all had to go out of business by
1965 and distribute to bona fide charities. This was not a matter of
giving an individual taxpayer anything. They knew that they were,
and they are, under intense audit examination to see that they are
abiding by every period and comma in the closing agreement, to make
sure that these funds are going only to bona fide foundations. That
is on the procedural side.
The CHAIRMAN. Your statement bona fide charity?you mean by
that that they will not be allowed to contribute to another founda-
tion?I mean privately-controlled foundation?
Mr. CAPLIN. That is right, another private foundation.
The CHAIRMAN. You do not consider that bona fide?
Mr. CAPLIN. Under the agreement.
The CHAIRMAN. Under the agreement?
MT. CAPLIN. Yes, sir.
The CHAIRMAN. That is not considered bona fide under this agree-
ment?why should it be considered bona fide where Mr. Baird or
anybody else would just make contributions each year from one foun-
dation to another, and from that foundation to another foundation?
Mr. CAPLIN. The law permits this.
The CHAIRMAN. Do you not think that law should be changed?
Mr. CAPLIN. I think that ought to be examined very carefully, Mr.
Chairman.
The CHAIRMAN. Now I will ask you just one more question. What
were the reasons for the reinstatement of the three Baird Foundations
tax exemption by ruling of October 22, 1962?
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Mr. CAPLIN. This was all part of an overall proposal. They were
tightly interrelated. They were family foundations, with the same
group of people involved. And all three were disposed as part of a
package settlement agreement, with final liquidation fixed for 1965.
The CHAIRMAN. You say you want one of the other gentlemen to
make a statement?
Mr. CAPLIN. Yes.
(Following is revised testimony submitted by Mr. Rogovin under
date of August 4, 1964.)
Mr. ROGOVIN. Mr. Chairman, the Revenue Act of 1950 brought
about new statutory provisions regarding foundations and charities.
One specific provision?dealing with the effect an unreasonable ac-
cumulation of income has on exempt status?is particularly relevant
in the Lansing case.
In 1954 the examination of information returns filed by foundations
was conducted by the Exempt Organization Branch in the National
Office in Washington. At that time an examination was made of the
Lansing Foundation return and it appeared on the face of the return
that its accumulation of income might have been unreasonable and
therefore in violation of the provisions enacted in 1950.
The National Office sent a letter to Lansing requesting information
regarding its income accumulation and also certain security transac-
tions for 1953. As a result of this correspondence, the National Office
revoked the status of Lansing Foundation beginning with the calendar
year 1951. This was in the August 6, 1951 letter Mr. Olsher previously
read into the record.
The reason given the Foundation for this action was that there had
been an unreasonable accumulation of income for 1951. This appeared
et the time to be a satisfactory ground for revocation. The letter also
indicated that Lansing's other financial transactions and investments
had not been gone into. The Service was, in effect, not passing on those
trasactions at the time since the income accumulation appeared suffi-
cient to warrant revocation.
After the organization filed a protest to the revocation, a number
of conferences were held here in Washington with the Revenue Serv-
ice. These negotiations ended in 1957 when the Service reaffirmed the
prior revocation letter.
By 1957, when the affirmation of revocation had been sent, the
examination of information returns had been decentralized. As a
consequence, a memorandum was forwarded to the New York district
director advising him of the action taken in the Lansing case and also
pointing out that a collateral investigation of the two related founda-
tions, Winfield Baird Foundation and David, Josephine and Winfield
Baird Foundation, Inc., should be instituted because of overlapping
transactions. Audits of these two foundations covering years from
1950 through 1955 were thereupon undertaken by the New York dis-
trict office.
As a result of the examinations, "30-day letters" proposing revoca-
tion of exempt status were sent to both Baird foundations in the spring
of 1959. In each case, the same basic reasons for proposed revocation
were set forth. In essence, they were: (1) The foundation's funds
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were not devoted to exclusively charitable purposes; (2) Its primary
purpose was the carrying out of a trade or business for profit; (3) Its
assets were jeopardized by the manner in which they were invested;
and (4) There had been an unreasonable accumulation of income for
the years 1950 through 1957.
After several extensions of time, a "package" protest brief was filed
by the two foundations' attorneys. The brief contested certain find-
ings made by the agent and asserted that the foundations were not
dealers in securities; that their securities transactions were for the
production of income only and that there had been no unreasonable
accumulations of income. In the affirmative, they alleged that the
foundations were operated exclusively for charitable purposes.
Subsequently, there were negotiations between representatives of
the two Baird and the Lansing foundations with the Manhattan dis-
trict director's office. The field finally concluded that a package
settlement should be accepted as being in the best interests of the Gov-
ernment for the following reasons: (1) As to 1950, the accumulations
provision was not applicable; and (2) the evidence showed that the
Baird foundations were not dealers in securities and it was very doubt-
ful that a finding could be made that a trade or business existed. In
the absence of such a finding, gains from sale of capital assets could
not be included in determininc, accumulations. Moreover, it was indi-
cated that distributions to sister foundations or controlled foundations
are not necessarily proscribed and thus the Service might not be able
to add back those contributions in determining accumulations.
The terms of the settlement are known to you and have already been
read into the record. There are some of the reasons why the settle-
ment was made.
In essence, the exempt status of all three foundations was revoked.
Because, however' of doubts as to whether the Government would
ultimately prevail in revoking the status of all 3 foundations, a settle-
ment, reflecting these doubts, was arrived at. From the Government's
point of view, by the end of 1965 all three foundations will disgorge
corpus and accumulated income to approved operating charities and
go out of existence; some $600,000 in tax and interest was recovered;
and adequate safeguards regarding activities up to the date of final
dissolution were obtained.
The Service recognizes that the process of settling cases is not
precise. Often litigating hazards and interpretations of the law must
be equated into dollar figures. And this often is done during periods
in which the law, as shaped by court opinions, is in a state of flux.
Thus, in the matter of the Baird and Lansing foundations, the fact
that the litigable issues involved were not free from doubt made these
cases susceptible of settlement.
The CHAIRMAN. Will you excuse me just a minute?
(Discussion off the record.)
The CHAIRMAN. Back on the record.
I will ask Mr. Olsher to continue.
Mr. OLSHER. Mr. Caplin, out in California there seems to be a rather
unusual situation?an entire county dominated by a foundation. Let
me tell you about it.
Today, as has been the case for the past 100 years, the present and
future well-being of Orange County, California, the nation's fastest
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growing urban area, depends upon the decisions made by the men
who control The Irvine Foundation, which in turn controls the
Irvine Company.
No community, no business enterprise, no government entity in this
County's 797.8 square miles lies outside the shadow of the Irvine
Foundation influence.
The Irvine Company's vast land holdings reach as far as the eye can
see?and far beyond. Sweeping along 13 miles of enormously val-
uable shoreline of the blue Pacific and sprawling in a broad belt across
the center of Orange County for its entire width, the Company's ap-
proximate 93,000 acres are considered the most valuable property
available for development under single ownership in the world today.
This prime property comprises nearly 20 percent of hustling, bus-
tling Orange County's total land area of 510,920 acres. Today, the
County's population exceeds 1,000,000. By 1980, it is estimated that
it will top 2,000,000. I understand that the County is growing 11J/2
times faster than the national rate, and 41/2 times that for California
as a whole.
The Irvine property, according to conservative estimates, has a
market value today of $1 billion. Competent appraisers report an
appreciation factor of 2 percent per month for Orange County real
property at the present time. Depending upon location and poten-
tial use, the Irvine lands range in value from 25 cents to more than $7
a square foot.
What The Irvine Company does, or decides not to do, will in-
evitably have tremendous economic impact throughout Southern Cal-
ifornia, and especially on the future of the more than thirty fast-
growing communities which lie within its shadow.
The Irvine Company, its policies, its management, and its day-by-
day operations have been under the domination and absolute control
of The James Irvine Foundation, of San Francisco, since 1947. The
Foundation is owner of 459 shares, or 53.7 percent, of the issued and
outstanding Irvine stock.
James Irvine, principal stockholder of the Company he incorpo-
rated under the laws of West Virginia in 1894, established The James
Irvine Foundation as a California corporation on January 6, 1937.
Voting control of The Irvine Company passed to the Foundation's
self-perpetuating trustees upon Irvine's death in 1917. Three of the
original trustees are alive today.
Since 1957, there has been active and vigorous opposition to the
Foundation's stranglehold on the Company in the person of Mrs. Joan
Irvine Smith, granddaughter of James Irvine. Mrs. Smith is the
Company's second largest stockholder and the only one serving on the
Company's board of directors. She owns 180 shares, or 21.1 percent,
of the Irvine stock.
In the unremitting struggle Mrs. Smith has been waging for con-
structive reforms, the following examples of nonfeasance on the part
of the Foundation have been alleged:
? Stockholders have been denied adequate dividend returns as a
result of Foundation's failure to institute and maintain good cor-
porate management of the Company. Since 1947, the per share divi-
dend yield has been less than 1 percent of the stock's considerably
undervalued $109,000 per share market value.
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? Inflexible Foundation opposition to a proposal for identifying and
determining possible conflicts of interest among Company officers,
directors, and employees in the following areas: investment in supplier
companies; investment in customer companies; investment in com-
peting companies; borrowing from or lending to customer or supplier
companies; misuse of privileged information; use of company posi-
tion for personal gain; financial speculation; revealing confidential
data to outsiders; acceptance of employment from firms that have a
business relationship with the company; acquisition of real estate of
interest to the Company.
? Refusal to investigate the activities of a Foundation director and
Company officer in connection with transactions in which The Irvine
Company had an interest, which, when conducted by her at her own
expense, led to the partition of certain real properties held in joint
ownership by the director and the Company, and also to his resigna-
tion from the Company and the Foundation.
? Adamant rejection of her proposal to analyze Company opera-
tions in an effort to improve income and profit by securing answers to
the following questions:
What should the "character" of the Company be in order to
maximize profits?
What is a reasonable profit goal for the Company?
What action programs are necessary to achieve specific im-
provement opportunities in (1) policies, (2) planning, (3)
staffing, (4) method of marketing land, and (5) internal con-
trols?
How effective has past performance been (1) in investment
return, (2) yield as compared to developed goals, (3) com-
parison with outside experience in land development and
agriculture?
? Inflexible adherence to the Foundation's traditional motto, "What
goes on inside The Irvine Company is none of the general public's
damned business."
? Negligence and failure by the Foundation directors of their
fiduciary obligations in connection with certain real property transac-
tions which have deprived the Company of $605,960.
? Subversion of a resolution adopted by the Board prohibiting,
without advance knowledge and approval of the Board, the leasing or
conveyance of any Company real property to any officer, director,
shareholder, or employee.
? Various attempts to dilute stockholder ownership in the Company
by the proposed creation of subsidiary and independent realty develop-
ment companies.
? Negligence in the transfer and conveyance of 29 acres of real
property representing $500,000 in benefit and value to the Company.
? Many small businessmen find it difficult to do business with The
Irvine Company because they are not members of the "inner circle."
? Foundation directors have caused Irvine Company business to
flow to firms controlled by them or their friends.
It is contended that in each instance not only have the interests of
the Irvine minority stockholders been affected, but the alleged actions
have also influenced the economic well-being of the citizens and resi-
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dents of California, for whose benefit The James Irvine Foundation
was ostensibly established.
By the way, Mr. Caplin, the Irvine Foundation carries its 53-percent
ownership of the Irvine Company at $2, despite the fact that the
Foundation's equity in the net assets of the Company was valued at
$11.7 million on March 341964.
Has the Treasury examined the Irvine Foundation as to whether it
is fulfilling its responsibilities as a tax-exempt organization?
Mr. CAPLIN. I do not know whether the Treasury is examining or
not. Even if these various allegations are true, I do not know if there
is any impropriety under the tax law. But I certainly would hope
that the District Director in that area would have examined the trans-
actions. If he has not already, I suspect that he will be looking into
it sometime in the immediate future.
But I do think that the type of situation you described illustrates
the very point that the Chairman of this Committee has made?the
growth of some of the foundations, the broad participation of some of
the foundations in business activities, the difficulties under existing
law in doing anything about it from a tax standpoint.
We also have the question of whether the States should be taking
a more active role here whether the States should not be the proper
body for regulating. if the answer is that the federal government is
needed, your next question is which agency of the federal government?
Is the Internal Revenue Service the agency to evaluate portfolios
and types of investment and the like, or should there be some other
agency examining them?
Another point that is suggested by your various disclosures relates
to whether or not there ought to be a limitation on the aggregation of
assets over the years?whether or not foundations ought to be required
to actually expend part of their assets over some periodic basis, aside
from distributions of income.
I think the treatment of capital gains, both short term and long
term, as outside of the unreasonable accumulation provisions is also
involved here. Should these capital gains, particularly the short-term
capital gains, not be included under unreasonable accumulations?
On the question of dealings with any insiders?is the present statute
broad enough? Should we not really return to the philosophy of the
original House bill back in 1950, when you included not only the con-
trolling people in the foundation, the organizer and his family, but
also officers and directors; and you imposed flat prohibitions, rather
thn only in abuse situations, in dealings between the insiders and the
foundation?
Or should we not use an SEC standard like section 16(b) of the
Exchange Act in terms of any profit, requiring a disgorgement by
individuals of any profits growing out of the foundation relationship?
Another question that comes to mind is what the penalty should be
in violation. Should we penalize the foundation, when you have in-
siders taking advantage of the foundation's shell; or should you pena-
lize the individual, put a special tax on the individual himself, whether
he is the controlling stockholder or someone else.?
This is another question that suggests itself.
A related question is, why not broaden the definition of unrelated
business income?
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Today, we have great difficulty in applying this . provision. In
broadening that definition, should we not even prohibit certain ac-
tivity?
Should we prohibit or sharply limit borrowing, for example?
Should we require diversification of holdings?
Should we limit them in the amount of stock in a corporation that
they hold and the amount of assets to be invested in a particular
stock?
Should we limit their trading and speculation in securities?
These are all very legitimate inquiries, inquiries which you have
made, and which I would hope that the proper Committees of Con-
gress will consider.
The CHAIRMAN. I have a couple of more questions.
Mr. OLSHER. By the way, the Irvine Foundation had not been au-
dited by the IRS as of the end of 1963.
Mr. GAMIN. I think my prior statement stands.
Mr. ?MILER. Have you ever heard of sinking fund debentures be-
ing issued on a foundation?
Mr. CAPLIN. I think this is possible, yes.
Mr. OLSITER. Being issued on a foundation? Do you consider this
a proper practice for a foundation?
Mr. CAPLIN. You are talking in terms of the foundation itself is-
suing fund debentures.
Mr. OLSHER. At this point we do not know.
Mr. CATLIN. Well, it sounds like a rather extraordinary transaction
if they did do this. It would certainly raise serious audit questions,
and it would be something that a Revenue agent would want to re-
view carefully.
Mr. OLSHER. The facts on it are as follows:
According to 1VIr. David G. Baird, from December 13, 1962, through
May 12, 1964, a total of $2.8 million of 4 percent sinking fund deben-
tures, due June 30, 1982, were issued on the Baird Foundations?
$2,740,000 of these debentures were donated to a number of charitable
organizations.
The Winfield Baird Foundation was the holder of the remaining
$60,000 of debentures, acquired on June 27, 1962, but there is no in-
dication as to whether the debentures were acquired by donation or
purchase. On December 28, 1962, the Winfield Baird Foundation
sold the debentures to the Winfield Corporation, a firm with which
Mr. David G. Baird is associated.
Mr. CAPLIN. I do not know if any violation of present law is in-
volved, but I can assure you that under the closing agreement pro-
cedure, these matters will be examined most carefully. In fact, we
have conferred with the Revenue agents who are examining these
cases, and have tried to give them the benefit of all your factual studies
as well as any legal studies we have made here. So I can assure you
they will be well equipped in evaluating the facts and in reaching their
recommendations on how the matter should be finally disposed of.
Mr. OLSHER. It is unusual.
. Mr. CAPLIN. It sounds unusual to me. I can think of a situa-
tion where,. if they were constructing a hospital building, they might
want to raise some money in addition to contributions. Here a de-
benture might be appropriate, and a subordinated debenture is a
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piece of paper they might like to use in getting the support of the
community.
So it is difficult to jump to the conclusion that there is an impropri-
ety just because of the issuance of that type of obligation.
(By letter of October 1, 1964, Chairman Patman asked the IRS to
submit the following additional information in connection with the
transaction involving the issuance of sinking fund debentures on the
Baird Foundations:)
(a) A detailed description of the transaction.
(b) Does the IRS approve of this transaction?
(c) Is this transaction in violation of law or Treasury regulations?
If the answer is affirmative, please submit details.
( d) Is this transaction in violation of the IRS-Baird Foundations
agreement of November 1962? If the answer is affirmative, please
submit detaiLs.
(Under date of October 12, 1964, the IRS responded as follows.
Also, see Exhibit 12, page 312.)
In light of the procedural rules for dealing with issues raised in the
audit of returns, including rights of appeal available to taxpayers in such
cases, I am sure you will agree that it would be inappropriate for me,
as Acting Commissioner, to prejudge the tax consequences of the various
transactions you cite by responding to your questions at this time. Once
the Service audit has been concluded and final decisions reached, I
shall be glad to respond to the extent the disclosure statutes and good
administrative practices permit.
Mr. OLSIIER. Here is another Baird transaction I would like to
summarize. This relates to the Baird Foundations-Lansall Com-
pany-Lansall Corporation transactions.
On April 21, 1953, the Lansing Foundation purchased from the
Lansall Corp., Room 4500, Chrysler Building, New York City, 5,000
shares of Lansall Corp. Class B stock for $500,000. The Lansing
Foundation held the 5,000 shares of Class B stock until 1957 when it
was transferred to the David, Josephine & Winfield Baird Founda-
tion. The latter has carried the shares at $550,000.
On June 1, 1955, the Winfield Baird Foundation purchased from the
Alleghany Corp. 5,000 shares of Class A stock of Lansall Corp., as
well as $1 million of 41/2 percent debentures, for the sum of $1,796,225.
The Foundation gave Alleghany Corp. a note in the amount of
$1,796,225.
Thus, the stock and debentures, representing 100 percent owner-
ship of Lansall Corp., cost the two Baird Foundations $2346,225.
Subsequently, beginning August 317 1962, the David, Josephine &
Winfield Baird Foundation and. the Winfield Baird Foundation trans-
ferred $2,819,937.94 of assets to the Lansall Corp.
On December 26, 1962, the Lansall Company, a Delaware corpora-
tion was organized with total authorized capital stock of $200,000. A
50% interest (1,000 shares) was purchased by the Winfield Baird
Foundation for $100,000 and an equal number of shares were pur-
chased by Mr. Joseph A. Patrick, a general partner of Baird & Co.
Nine hundred fifty shares of the 1,000 shares purchased by the Win-
field Baird Foundation, were transferred to the name of Baird &
Company (as nominee) for various charitable organizations.
Under an agreement dated December 31, 1962, the David, Josephine
& Winfield Baird Foundation and the Winfield Baird Foundation
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98 TAX-EXEMPT FOUNDATIONS: IMPACT ON SMALL BUSINESS
allegedly sold to the Lansall Company all of their stock of the Lan-
sall Corp. (assets $7,2892289.58 at December 31, 1962 and liabilities
$1,397,313.16) plus certain other assets for the sum of $5,333,615.83
(cost of the assets to the Foundations). The two foundations received
cash in the amount of $615.83 plus subordinated promissory notes in
the amount of $5,333,000, drawing only 4 percent interest, with no
interest to be charged until January 1, 1966.
The aggregate principal amount of notes issued by the Lansall
Company was $7,305,000, all maturing on the first day of April 1978
and bearing interest for the same period payable at the same rate and
on the sanlirdates.
Thus, the Lansall Company, through this agreement, was able to
acquire completely the entire assets of the Lansall Corporation of
New York, whose statement of December 31, 1962 showed a total
capital and surplus of over $5,891,976.42, by issuing subordinated
promissory notes totalling $5,333,000, drawing only 4 per cent inter-
est, with no interest at all to be charged for the first two years, plus
$615.83 cash.
The two Baird Foundations put $5,333,000 into the Lansall Corpo-
ration and received therefrom only subordinated promissory notes
based on the actual cost of the assets to the Foundations. These notes
are subordinated to all senior obligations of the new Lansall Company,
which include all obligations which then existed or may exist. These
promissory notes are the least protected of any type of corporate
debentures. In addition to their subordination, two specific provisions
endanger their negotiability.
a. A provision in the notes which would allow modification
of the terms of the subordinated promissory notes by
agreement of 66% percent of the holders of said notes
would kill the negotiability of the first 331/3 percent of
the notes which could have been negotiated by the
Foundations.
b. The negotiability of said subordinated promissory notes
in any blocks of less than 25 percent of the aggregate
principal amount of all the notes is almost completely
destroyed by Section 12 of the subordinated promissory
notes themselves since it would take holders of more than
25 percent to be able to take any legal action on the
notes.
The Lansall Company notes in the amount of $5,333,000 were made
payable to 46 charitable organizations. The notes are all dated July
1963, six months after the sale of closing date of February 8, 1963.
To sum it up, after the two Baird Foundations invested $5,333,000
in the Lansall Corporation, they wound up holding promissory
notes, drawing only 4 percent interest, which are subordinated to all
other liabilities of the Lansall Company. It makes this investment
by the Foundations the most speculative of speculative investments.
It would also appear that the Lansall Company of Delaware was
set up for the express purpose of acquiring the entire assets of the
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Lansall Corporation of New York from the Foundations with no
initial capital outlay at all except the $200,000 capitalization of the
Company.
The 46 charities, who received the $5,333,000 subordinated promis-
sory notes from the Baird Foundations, may or may not receive the
face amount of the notes by April 1, 1978, if ever. Nor is there any
guarantee that they will receive interest beginning January 1, 1966.
In connection with the Foundation's disposal, under the agreement
of December 31, 1962, of their interests in the Lansall Corporation for
promissory notes conferring very subordinated and restricted legal
rights and consequently of a highly speculative nature, there are for
consideration the rulings dated October 22, 1962, of the Commissioner
of Internal Revenue and the closing tax agreements approved by
the Commissioner January 15, 1963, which were entered into pur-
suant to section 7121 of the Internal Revenue Code of 1954. The
rulings of October 22, 19621 permitted the tax exempt status of each
of the Foundations to remain in effect with the understanding that a
closing agreement continuing that status under prescribed conditions
would be entered into pursuant to section 7121 of the Code. The
David, Josephine and Winfield Baird Foundation signed such an
agreement November 15, 1962, and the Winfield Baird Foundation
signed a similar agreement on November 16, 1962. Subsequent to
such signing but prior to approval by the Commissioner, the Founda-
tions entered into the agreement for the disposal of their Lansall
Corporation stock and other interests to the Lansall Company. The
latter corporation is a taxpaying corporation.
Among the conditions stated in the rulings and incorporated in the
closing agreements is the provision that each of the Foundations
(with an exception of $200,000 required to be paid certain persons
by the deed of trust creating the Winfield Baird Foundation) will, on
or before December 31, 1965, have "completely disposed and divested
itself of its entire net assets to organizations organized and operated
exclusively for purposes described in Sec. 501 (c) (3) of the Internal
Revenue Code of 1954 provided that such organizations shall have
obtained rulings or determinations from the Internal Revenue Service
that they are exempt from tax and satisfactorily established that such
exemption is still in effect." In the absence of a valid explanation,
the Foundations' agreement of December 31, 1962, with the Lansall
Company appears to involve a disposal of assets at variance with the
above-quoted condition and the general tenor of the closing agree-
ments.
Are the closing agreements between the IRS and the Baird Founda-
tions final and conclusive except upon a showing of fraud or misrep-
resentation of a material fact?
Prior to approval of the IRS-Baird Foundations' closing agree-
ments, did the IRS have knowledge of the Lansall Company-Baird
Foundations disposal agreement of December 31, 1962.?
Has the statute of limitations expired on tax assessment and collec-
tion on the IRS-Baird Foundations agreements?
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Is donation of subordinated notes considered charitable giving by
the IRS?
In view of the fact that the Baird Foundations invested $5,333,000
in the Lansall Corporation and, after holding the stock for ten years,
sold it to allied persons at no profit, would you place this in the realm
of prudent investments?
Based on these facts, would you agree that Mr. David G. Baird
retains control and use of the assets transferred to both the Lansall
Corp. and the Lansall Company through the 50-percent interest in
Lansall Company stock which is in the name of Mr. Joseph Patrick, a
general partner of Baird & Co., and through the 24/2 percent of the
Lansall Company stock still retained by the Winfield Baird Founda-
tion?
It seems to me that here we have a situation where the Baird Foun-
dations have failed to fulfill the obligations of tax-exempt organiza-
tions over a, period of many years. So, as a reward for such antics,
the IRS permits them to donate $5,333,000 subordinated promissory
notes as a method of fulfilling their responsibilities. Do you approve
of this?
The CHAIRMAN. Mr. Caplin, you may answer these questions when
you examine your transcript.
Yesterday, in asking a number of questions of the Secretary of the
Treasury, he suggested that the questions be propounded to you instead
since he did not have the information. And we will submit those
questions, Mr. Caplin; also additional questions for you, and ask you
to answer them when you examine your transcript, please. Will that
be satisfactory?
Mr. CAPLIN. Yes, sir. Do you want it to be answered by me, or
would you rather have them answered by the Service?
The CHAIRMAN. Well, depending upon whether or not it is some-
thing that relates to you, or during your service. If so, we would like
for you to answer it, and not Mr. Harding.
Mr. CAPLIN. Yes, sir.
The CHAIRMAN. NOW, ME. Harvey.
Mr. HARVEY. Well, first of all, Mr. Chairman, I want to thank Mr.
Caplin for his cooperation. I have been listening to your testimony,
Mr. Caplin, with a great deal of interest. I noted particularly your
rather pointed suggestions as to what could be done, both by the In-
ternal Revenue Service and Congress, to improve the situation with
regard to tax-exempt foundations.
During my service on this Subcommittee one particular point seems
to be prevalent among many of the people who are charged with the
administration of these tax-exempt organizations, and that is the ques-
tion of whether the Congress, in realigning its policies concerning
these tax-exempt foundations, should permit them to continue in per-
petuity, or whether we should set up some guidelines and some possible
time limitations during which a foundation would be permitted to
exist.
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TAX-EXEMPT FOUNDATIONS: IMPACT ON SMALL BUSINESS 101
An example that came to my attention was the Ford Foundation,
which is the largest. In the past fiscal year they gave away a good
deal more than their assets brought in. I asked them whether it was
their theory or long-range policy that they would continue to do this
and eventually liquidate the assets of the foundation. They said, "no,
it was not." That brought to my thinking the question of whether, as
a policy, the Congress ought not set some kind of long-range limit
for an eventual termination to foundations.
I realize you are no longer in an official position. So, I am simply
asking this as a personal question to you, as a very important former
executive in the government.
Mr. CAPLIN. Thank you, sir.
I think it fairly obvious that any proposal for a rule of perpetuity
so to speak in the foundation field would be extremely controversial.
Many of the foundations perform admirably and are making sig-
nificant contributions to our society. This has been recognized by
Congress in this continuing exemption which dates back to 1909, was
restated in the 1913 Revenue Act, and then continued up to the pres-
ent. But at the same time, we see the abuses that have developed
through accumulation. Perhaps another approach would be to require
distributions of part of the corpus as it is received over a period
of time?maybe 25 years. Require, for example, that there be over a
25-year period a payout, so to speak, of these various capital contri-
butions and the appreciation growing out of them. So that you
would always have a movement, a flow of these funds, rather than
the great development of this tremendous accumulation of assets and
control of parts of the economy.
Mr. HARVEY. Well, in my question I do not want to intimate that
any of the foundations that I have mentioned are guilty. But, I have
noticed that a great many of them, because of the fact that they are
long established, and because of the apparent assumption that they
expect to operate in perpetuity, have now assumed an almost dic-
tatorial attitude which has encroached in some instances, I am sure,
on the various educational institutions of our nation. That is, they
have become the determining factor, in the establishment of policy for
some of our tax-supported institutions. The question that occurs to
me is: Has not the mere fact that they expect to be operating in per-
petuity greatly enhanced their power and, consequently, their impact
on society?
Mr. CAPLIN. With some foundations you may find a tendency to try
to build up a big capital investment to strengthen the base for ever
and ever.
This happens with small endowment funds, I know, in experience
with universities. There you will create funds, and rather than to
distribute the corpus, the people managing the fund tend to hold on
to this corpus. They often want it to increase and get larger and larg-
er, letting only the income go out for the purposes to which the con-
tributors really want to support.
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Personally, I think the approach would not be to have a blanket
perpetuity provision. But I do think that it would be worthy to
explore this idea of a flow over a given period of time of part of the
contributions?the actual principal of the foundation?to the exempt
purposes.
Mr. HARVEY. I think that is a very satisfactory answer. I appre-
ciate your candor very much. Thank you.
The CHAIRMAN. I appreciate it, too. Thank you very much, Mr.
Caplin, Mr. Harding, and the other gentlemen who accompanied
Messrs. Caplin and Harding. We appreciate your testimony. It will
be very helpful to us and certainly receive consideration.
Thank you.
(Whereupon, at 12 :10 p.m., July 22., 1964, the subcommittee recessed,
to reconvene Thursday, July 23, at 10 a.m.)
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TAX-EXEMPT FOUNDATIONS: THEIR IMPACT ON
SMALL BUSINESS
THURSDAY, JULY 23, 1964
HOUSE OF REPRESENTATIVES,
SUBCOMMITTEE No. 1 ON FOUNDATIONS
OF TIIE SELECT COMMITTEE To CONDUCT STUDIES AND
INVESTIGATIONS OF THE PROBLEMS OF SMALL BUSINESS,
Washington, D.C.
The subcommittee met, pursuant to call, at 10:05 a.m., in room
1301, Longworth House Office Building, IIon. Wright Patman
(chairman of the subcommittee) presiding.
Present: Representatives Patman and Harvey.
Also present: II. A. Olsher, Director of Foundation Studies, and
John J. Williams, Minority Counsel.
The CHAIRMAN. The committee will please come to order.
We have as our first witness this morning Commissioner Manuel F.
Cohen, of the Securities and Exchange Commission.
Mr. Cary is still the Chairman of the Commission, is he not, Mr.
Cohen?
Mr. COIIEN. Yes, sir.
The CHAIRMAN. And he hasn't resigned yet, but there is some talk
about his resignation. Is that correct?
Mr. COHEN. Yes. It is expected that he will retire as Chairman
within the near future.
The CHAIRMAN. Within the near future.
Now, we may still want to have him testify?although we are
delighted to have you, Mr. Cohen?you are the Acting Chairman,
I assume.
Mr. COIIEN. Yes, I am the Acting Chairman, Mr. Patman, and
President Johnson has honored me by announcing that he intends
to designate me as Chairman when Mr. ary resigns.
The CHAIRMAN. Well, that is fine. That gives us an added reason
for having you, of course. At the same time Mr. Cary has had
some experience in the past which we may wish to ask him about,
too.
Mr. COHEN. I would like to say that he has asked me to indicate
to you and to the members of the subcommittee that he will be avail-
able at your pleasure.
The CHAIRMAN. Thank you, sir.
Now, you may identify yourself for the record, and also identify
the gentlemen accompanying you, please, and proceed in your own
way.
103
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104 TAX-EXEMPT FOUNDATIONS: IMPACT ON SMALL BUSINESS
TESTIMONY OF MANITEL F. COHEN, COMMISSIONER, ACCOMPANIED
BY PHILIP A. LOOMIS, IR., GENERAL COUNSEL, AND IRVDTG M.
POLLACK, ASSOCIATE DIRECTOR, DIVISION OF TRADING AND
MARKETS, SECURITIES AND EXCHANGE COMMISSION
Mr. COHEN. Thank you.
On my right is Mr. Philip A. Loomis, Jr., who is our General Coun-
sel, and on my left is Mr. Irving M. Pollack, who is the Associate Di-
rector of our Division of Trac ing and Markets and responsible for
the overall enforcement activities of the Commission.
I have a short statement, Mr. Chairman, and with your permission,
I would like to read it.
The CHAIRMAN You may do SO, sir.
Mr. COHEN. Thank you.
I am here today at your invitation to testify concerning the relation
of the Commission's administration of the Federal securities laws to
the Federal Government's supervision of tax-exempt foundations and
charitable trusts.
The Federal securities laws were designed to protect investors by
imposing certain obligations upon persons and organizations engaged
in the securities business and upon certain issuers of publicly traded
securities. Insofar as relevant to the matters under discussion here
today, those laws contain provisions for the regulation of broker-
dealers, for the prevention of fraud in the purchase and sale of se-
curities, and for the prevention of manipulation of the securities mar-
kets. They also restrict the extension of credit, require the filing of
annual and other periodic reports and require compliance with the
Commission's rules in the solicitation of proxies.
In the administration of those statutes our relationship to charitable
trusts and tax-exempt foundations is essentially the same as our re-
lationship to other investors in securities. Although we do not regu-
late any such investors, the statutes which we administer do in certain
circumstances impose obligations upon them. These obligations arise
primarily under the provisions of the Securities Exchange Act of 1934.
Under Section 14 of the Securities Exchange Act, the Commission
has adopted comprehensive rules relating to the solicitation of the
proxies of the holders of securities listed on the national securities ex-
changes. Generally speaking, these rules require disclosure to share-
holders of pertinent information concerning nominees for corporate
office and other matters of concern to the corporation with regard to
which shareholder votes are solicited. In proxy, contests for election
of directors, participants are required to provide shareholders with
certain information: including their interests in securities of the com-
pany. These provisions apply to all persons, including charitable
trusts, tax-exempt foundations and other institutional investors, that
become participants in a proxy contest.
One of the areas which Chairman Patman indicated he wished
to explore in connection with my testimony today is the involvement
of trusts and foundations in proxy fights for control of companies
whose securities are listed on national exchanges. In light of this re-
guest we have examined proxy materials filed with the Commission
in all proxy contests since January 1, 1963, and have determined that
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TAX-EXEMPT FOUNDATIONS: IMPACT ON SMALL BUSINESS 105
only 11 trusts or foundations have been mentioned in the proxy mate-
rial filed since that date. None was a participant in a proxy contest;
10 were mentioned because of the relationship of a participant with
the trust, and the other because it owned more than 10 percent of the
securities with respect to which the solicitation was conducted and
under our proxy rules such owners must be identified and their share
holdings set forth. Our records do not reveal whether any of the 11
trusts or foundations is tax exempt. Indeed, we would not normally
have any way of obtaining that information, nor would such infor-
mation appear to be especially relevant to investors whose proxies are
solicited.
I should emphasize at this point that our records relate only to
solicitations with respect to securities registered on the national securi-
ties exchanges and a limited number of other companies. If legisla-
tion proposed by the Commission and embodied in H.R. 6793 is en-
acted., over-the-counter companies in whose securities there is a signifi-
cant public interest will be subject to rules adopted by the Commis-
sion relating to the solicitation of proxies.
Under Section 16 of the Securities Exchange Act holders of more
than 10 percent of a class of equity securities registered on a national
securities exchange are required to file with the Commission reports of
their securities holdings and changes therein. The purposes of these
reporting requirements are to deter, through publicity, short-term
trading by corporate insiders in the equity securities of the company
with which they are affiliated; to make available to the public informa-
tion necessary to determine whether activities of such persons have
created a Ea:leaky to account to the company for profits from short-
swing trading; and to furnish to the investing public some insight as
to possible views of such insiders, as indicated by their purchases and
sales, concerning the prospects of the company and the market for its
securities.
The ownership reports filed with the Commission pursuant to this
section include a number of reports by tax-exempt foundations and
charitable trusts. The Commission does not maintain, however, any
statistics reflecting the holdings or transactions of trusts or founda-
tions as distinct from any other category of 10 percent security holders.
In connection with the recently completed Special Study of the
Securities Markets, an investigation was made of the trading prac-
tices of institutional investors, including a detailed investigation of 11
large foundations estimated to hold 56 percent of the stock holdings
of all foundations as a class. The information obtained from those
foundations does not suggest any special problem in the area of report-
ing of security holdings by such foundations or any short-swing
trading by them. On the contrary, the information indicates that the
11 foundations studied did not engage in short-swing trading during
the period beginning January 1, 1961. The information does indicate
that in most instances acquisitions of securities by these foundations
was by way of gift, stock dividend or stock split and that dispositions
were generally by way of gift.
One of the areas concerning which we were invited to testify was the
involvement of foundations in insider deals. The information I have
just mentioned would indicate that these institutions have not engaged
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106 TAX-EXEMPT FOUNDATIONS: IMPACT ON SMALL BUSINESS
in short-swing transactions on the basis of any inside information. I
wish to make it clear, however, that it may be possible for any corpo-
rate insider to utilize inside information without incurring any liabil-
ity under Section 16(b) of the Securities Exchange Act. This could
be done, for example, if an insider had information which suggested
that the price of a security would probably decline, and sold his hold-
ings before that information was generally known. The information
filed with the Commission would not necessarily give an indication of
any such activity by a corporate insider.
We were also advised that the Committee wished to explore the
involvement of foundations in stock price manipulations and the ex-
tent to which foundations engage in speculative activity, margin trad-
ing and short sales. The antifraud and antimanipulative provisions
of the Securities Exchange Act apply uniformly to all persons pur-
chasing or selling securities by jurisdictional means, including tax-
exempt foundations and charitable trusts. The Commission does not
maintain statistics for such institutions as a separate group. In. the
ordinary course of the Commission's market surveillance, indications
of possible manipulations of stock prices are reviewed and, where such
action is deemed appropriate, investigated more thoroughly. This is
done without regard to the class of investors that may be involved.
The Special Study's investigation of the behavior of institutional
investors included the detaikd information from 11 large foundations
I previously mentioned. That information does not suggest any spe-
cial problems in this area. Indeed, the information developed indi-
cated that foundations exhibited turn-over ratios for stock portfolios
which were low in comparison to those of other types of institutional
investors surveyed. This information would indicate a lack of specula-
tive activity on the part of trusts and foundations. Moreover, foun-
dations did not engage heavily in transactions in new stock issues
during 1961, the period investigated by the Special Study. During
that year only 1 of the 11 foundations studied reported any purchases
of original offerings of common and preferred stock and that institu-
tions did not resell any security so purchased during the same year.
Under the Federal securities laws there is no requirement that in-
formation with respect to margin trading or short sales be reported
to the Commission. Accordingly, we are not in any position to make
any specific statements concerning such activities by foundations.
We do wish to note, however, that the information developed con-
cerning the 11 large foundations does not indicate any short sales by
a foundation of a security registered on a national securities exchange
of which the foundation was a 10-percent holder.
The last area the Subcommittee indicated it wished to explore was
that of foundations as unregulated sources of credit. Section 7 of the
Securities Exchange Act gives to the Federal Reserve Board, now the
Board of Governors of the Federal Reserve System, the responsibility
to prescribe rules and regulations governing the amount of credit that
initially may be extended and subsequently maintained on any secu-
rity registered on a national securities exchange, the amount of credit
that a broker or dealer may extend or maintain, and the amount of
credit any other person may extend or maintain for the purpose of
purchasing or ;trading securities registered on a national securities
exchange. This Commission has the responsibility of enforcing the
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rules and regulations promulgated by the Board of Governors. Reg-
ulation T promulgated by the Board of Governors prescribes margin
requirements for loans made or arranged by brokers and dealers and
for borrowing by brokers and dealers. Regulation U prescribes mar-
gin requirements for loans by banks for the purpose of purchasing or
carrying registered stocks. To the extent that foundations or trusts
wish to purchase securities on credit obtained from a broker or dealer
or from a bank, the loan would be subject to the margin and collateral
requirements of Regulation T or Regulation U.
Over and above the foregoing, foundations and trusts may borrow
from, or themselves become, unregulated lenders. It seems clear from
the second installment of the Subcommittee report on tax-exempt
foundations and charitable trusts that such institutions have, on at
least some occasions, became sources of such unregulated securities
credit.
Unregulated securities loans, both those for the purpose of purchas-
ing or carrying securities and those collateralized by securities, but
for other purposes, were also surveyed by the Special Study. However,
data on the aggregate amount of unregulated security credit and on
the breakdown of such amount by type of lender are not available.
Based on its evaluation of the importance of land dangers inherent in
unregulated security credit, the Special Study has recommended that
authority be given to the Board of Governors of the Federal Reserve
System to establish initial margin requirements on loans collateralized
by securities, irrespective of their purpose, for banks and all persons
who make loans to U.S. residents on the collateral of securities traded
in U.S. markets as well as for broker-dealers. The Commission, in its
comment on the proposal stated that the proposal has merit, but that
recognizing the paramount authority of the Board in this area, the
Commission will not initiate any action but will work closely with the
Board toward resolution of the problems raised.
A report on institutional share ownership, which was released by
the New York Stock Exchange last month, casts some light on the
place of foundations in the securities markets. According to this
report, total assets of foundations increased from $1.9 billion in 1945
to 813.8 billion in 1962, or an increase of 627 percent. This, however,
is only about 3 percent of the total assets of the institutional investors
surveyed by the Exchange.
Foundations held about $6.7 billion of stocks listed on the New York
Stock Exchange in 1962, and it is estimated that the value of such
holdings increased to $8 billion by the end of 1963. This is about 2
percent of the total value of stocks on the Exchange and about 10 per-
cent of institutional holdings.
On the sample days in October 1963 selected by the Exchange foun-
dations accounted for only 0.36 percent of the volume of trading on
the Exchange, and only about 3 percent of the volume of trading by
institutional investors. Since' as noted above, foundations had about
10 percent of the institutional holdings, their relatively lower volume
of trading tends to confirm the Special Study's conclusions that foun-
dations as a group are not active traders.
Finally, I should like to make brief mention of a situation referred
to us by this Subcommittee concerning the activities of three related
tax-exempt foundations which may involve violations of the Federal
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securities laws. Certain details concerning this situation were pub-
lished by the Subcommittee in the second installment of Tax Exempt
and Charitable Trusts; Their Impact on Our Economy (October 16,
1963). To the extent that these activities are set out in that report,
they are, of course, well known to this Subcommittee. Certain other
information about the mater is being developed by our staff, but they
have not completed their inquiries nor have we received any report
of their findings. In any event I would not regard it as appropriate
to discuss these activities at this time, since there is a possibility that
the situation may come before the Commission in its quasi-judicial
capacity.
Thank you, sir.
The CHAIRMAN Thank you very much, sir. Before asking you
some questions about your specific testimony, Mr. Cohen, I want to
take advantage of this opportunity to inquire of you about the status
of the bills concerniN,r placing the banks under SEC regulation.
That bill is pending before the Interstate and Foreign Commerce
Committee of the House, is it not?
Mr. CoriEN. I would be very glad to speak to it, Mr. Chairman.
The CHAIRMAN. Generally what does it provide?that all the banks
will be subject, or only those banks that have a certain amount of
securities traded?
Mr. COHEN. I think the bill the Chairman is referring to is H.R.
6703 which provides that the larger companies whose securities are
publicly traded in the over-the-counter market, should become sub-
ject essentially to the same rules to which companies listed on the
stock exchange are now subject.
That is to say that such companies would be subject to registra-
tion?filing of a registration statement with the Commission, report-
ing on an annual and periodic basis, the submission to the Commis-
sion and to shareholders of information in connection with proxy
solicitation, and the subjection of insiders to the short-term trading
provisions?short-term profit recovery provisions of Section 16 of
the Exchange Act.
The CHAIRMAN. Now, that only relates, of course, to the unregu-
lated market, the over-the-counter market?because most banks are
not listed on the Exchange. Possibly one bank is listed on the Ex-
change. Is that correct?
Mr. COHEN. I think the Chairman is entirely correct. However,
it is quite possible that with the passage of the legislation, many other
banks may consider seriously the possibility of listing their securities
on one or another stock exchange.
The CHAIRMAN. The idea is that they get, the benefit of the unregu-
lated market just the same as if they were listed on an exchange,
and they do not have the responsibility of making available to the
people, their depositors and other folks, information that they would
normally have to make available if they were an industrial or busi-
ness concern and not a bank.
Mr. COHEN. This has generally been the case and continues to be
the situation, Mr. Chairman, with some exceptions.
About a year ago, the Comptroller of the Currency adopted a series
of rules which were designed to require banks subject to his jurisdic-
tion to file with him and to submit to shareholders certain informa-
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tion which is intended to place stockholders in possession of informa-
tion concerning the operations of the bank.
More recently I have noticed in the newspapers that he has ex-
panded these regulations somewhat.
These are requirements that he has enacted based on the authority
that he has as a bank regulator in the national bank area.
These regulations do not have the benefit of the back up, if you will,
of a Congressional mandate, nor do these provisions provide, in my
opinion at least, the same quality and quantity of protection to the
American investor as do the rules and the statutes administered by the
Commission.
The CHAIRMAN. I have a feeling that now is the time that we must
give more careful consideration to what is going on about the owner-
ship of bank stock.
In my view, a bank should be operated and managed by local people.
In other words, people in whom those people have confidence and
trust.
There has been a time in this country when directors had to live
within a certain distance of the bank. They could not be absentee
owners, in other words. It was a local institution, to serve local
people.
But now we are getting away from that. And considering the fact
that we have a startling amount of funds in trust departments of
banks, I feel that we have an obligation to the people, even though
they have passed away, to their beneficiaries and others, to make sure
that these trust funds are properly and honestly administered.
I have here a statement published in the National Banking Review
for June 1964 by Mr. Stanley Silverman. The title is, "Bank Trust
Investments, Their Sizes and Significance." It really has some alarm-
ing figures. On page 585 of the magazine, table 5, it shows that the
estimated assets of trust departments where investment responsibility
is exercised, all commercial banks, aggregate $144,200,000,000 at year
end 1963.
So when a bank changes hands, the management of these estates
changes hands with the bank stock. Is that not correct, Mr. Cohen ?
Mr. COHEN. I cannot quarrel with that statement, sir.
The CHAIRMAN. In other words, if a bank is sold Out to mobsters Or
gangsters, or any other group, they get management of the trust ac-
counts' too.
Mr. COHEN. That is correct. And this is one of the reasons which
lie behind the Commission's recommendation to the Congress and now
contained in the current bill before the House of Representatives.
If I may?I don't believe I answered fully your question, Mr. Chair-
man as to the status of that bill.
The bill, as you know, was passed by the Senate. It has been re-
ported out by the House Interstate and Foreign Commerce Com-
mittee. The Rules Committee has issued a rule. And we are hopeful
that it will arrive on the floor of the House within the immediate
future.
The CHAIRMAN. Did it have strong support in the Committee?
What was the vote?
Mr. COHEN. It had very strong support in Committee. The bill
as a whole I believe had unanimous support.
39-915-64-8
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I should say further that the bill has the support of all segments of
industry, and I do want to emphasize it also has the support of the
banking industry.
The American Bankers Association has fully supported this legisla-
tion from its inception. There was only one little change in the bill,
from the form in which it was originally introduced.
The bill now provides that its provisions shall be administered by
the appropriate Federal banking regulatory authority?that is to say,
the Comptroller for National Rank's, the Federal Reserve Board for
member banks, and the FDIC for nonmember insured banks.
The CHAIRMAN. If I understand the situation correctly, the reason
the banks have not listed their stocks on the Exchange has been pri-
marily because they would immediately have to submit to you in-
formation that they do not like to submit, that is not required of
them. Isn't thai correct?
Mr. COHEN. That is the situation now.
Under the bill, if enacted, that would no longer be the case. And
it is for this reason I believe many banks may consider listing.
The CHAIRMAN. Well, that encourages them to list?if they have
got to submit the information anyway. Therefore, if a bank is listed
on the Exchange, the local people would have even less information
about the bank's ownership than they have now.
Mr. COHEN. No, sir, I don't believe that that would be the situation.
In addition to being subject to the reporting requirements of the
Securities and Exchange Act of 1934, the various exchanges have sup-
plemental reporting requirements which in many cases exceed those
of the Commission.
I believe information with respect to the bank, its management, and
its operations, would be available very generally and very widely.
The CHAIRMAN. But there is no one with power to stop the change
of ownership which would carry with it management?that is cor-
rect, is it not?
Mr. COHEN. First, I should indicate---
The CHAIRMAN. Well, that is correct, isn't it? In other words,
there is no _power under existing law that could stop any group from
assuming the ownership and management of any banking institution.
Mr. COHEN. There isn't anything to stop such a group, yes, sir.
But I think the enactment of the bill now pending in the House would
have the effect of requiring very substantial information with regard
to any -persons who wish to take over a bank by way of proxy
solicitation.
In addition, there are certain other provisions of the Exchange Act
which I believe would come into play in connection with any such, if I
may use the expression, takeover activities which are designed to place
information in the hands of the owners of the bank, and also to guard
against improper activity.
The CHAIRMAN. But suppose they are only dealing with a few people
who own the controlling interest in the bank. You would come into
play after the act had been performed, after the management had
taken over?not before.
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TAX-EXEMPT FOUNDATIONS: IMPACT ON SMALL BUSINESS 111
Mr. COHEN. Well, even if they were dealing with a small group,
unless that group had sufficient stock to provide a real change of con-
trol, it would probably require proxy solicitation. If that occurred,
information would be available. If that was not necessary, you are
quite right, sir.
The CHAIRMAN. You know, there are a lot of banks going broke
now under circumstances that look very suspicious?that they are
being raided by outsiders. And we want to be very careful, I think,
to make sure that that practice is stopped, if it is possible to stop it.
i
I refer to one bank n west Texas recently, and one out in Missouri,
and other places. It looks as though this is kind of a pattern. And
I think we ought to look into that.
Now I shall ask you some questions about your testimony.
Mr. COHEN. Yes.
The CHAIRMAN. What are the names of these 11 foundations to
which you refer?
Mr. CouEN. I don't have them here
The CHAIRMAN. Just a moment. Mr. Cary had promised to submit
these names to us after the publication of your study, but we have not
as yet received them. So, if you have them, we would like to have
them.
Mr. COHEN. Perhaps we may have them here.
The CHAIRMAN. Would you read them off, please?
Mr. COHEN. Yes, sir; we do have them.
The W. K. Kellogg Foundation, The Kress Foundation, .The Sam-
uel H. Kress Foundation. Sears-Roebuck and Company?it is desig-
nated this way, but I assume it is Sears-Roebuck and Company Foun-
dation. The Grant Foundation. John T. Hartford Foundation.
Henry J. Kaiser Family Foundation, David Schwartz Foundation.
Standard Oil Foundation. Aaron Straus and Lilly Straus Founda-
tion. And Pew Memorial Trust.
The CHAIRMAN. That list doesn't include the large ones.
Mr. CollEN. These were 11 of the larger ones that the study sur-
veyed. It may not include all of the very large ones.
The CIIAIRMAN. Now, I believe you said that you were dealing with
11 of the largest foundations. I think you are in error on that, Mr.
Cohen.
Mr. COHEN. I am sorry. I think you are right, Mr. Chairman. I
have been given the wrong list. Actually, these are names of founda-
tions which we obtained from your report. We have the wrong list
here.
The CHAIRMAN. Well, suppose you read the right list.
Mr. COHEN. I don't have it here, but we will supply it before the
end of the day.
The CHAIRMAN. Suppose you send for it. We will wait here.
Mr. COTTEN. Yes,
sir.
The CHAIRMAN. Fine.
In the past, the Commission has advised us that it had no informa-
tion on the following activities of tax-exempt foundations and chari-
table trusts: Insider deals, stock price manipulations, margin trading,
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112 TAX-EXEMPT FOUNDATIONS: IMPACT ON SMALL BUSINESS
short sales, involvement in proxy fights foundations as unregulated
source of stock market credit, or speculation in commodity futures.
In fact, on May 15, 1964, Mr. Cary wrote me that he doubted that he
would be able to contribute anything of value to our hearing because
the Commission has had "very limited experience" with foundations.
Mr. Cary also stated that, although the purchase and sale of securities
by foundations come within the Commission's purview, the Commis-
sion's information with respect to such transactions is "fragmentary."
Do the figures you are quoting mean that you have developed such
information? If such is the case, will you please submit all such
data to this Committee? You will, of course, submit that list when
it comes in.
MT. COHEN. Yes, sir.
The CHAIRMAN. And it will be here soon, will it
Mr. COHEN. Yes, sir.
The CHAIRMAN. All right. Fine. And other data, too, we would
like to have.
Mr. COHEN. Whatever data we have?
The CHAIRMAN. The information I mentioned here?insider deals
and such matters. When you look over your transcript, will you sub-
mit that, too?
Mr. COHEN. We will supply such information as we can, Mr. Chair-
man. I do want to emphasize what Mr. Cary said. We don't have the
information by foundations or trusts, and I am not altogether sure
I can comply fully with your request. But we will do the best we
can.
The CHAIRMAN. On page 4 you state that in connection with your
recent special study "An investigation was made of the trading prac-
tices of institutional investors' s includinff a detailed investigation of
11 Tan%s foundations estimated to hold 56 percent of the stock holdings
of all foundations as a class. The information obtained from those
foundations does not suggest any special problem in the area of re-
porting of security holdings by such foundations or any short-swing
trading by them. On the contrary, the information indicates that the
11 foundations studied did not engage in short-swing trading during
the period beginning January 1, 1961."
What is your source for the statement that the 11 foundations are
"estimated to hold 56 percent of the stock holdings of all foundations
as a class"? Has the Commission examined the portfolios of all the
foundations in the country?
Mr. COHEN. Well, I can't speak from personal knowledge, Mr.
Chairman, but our special study did make some detailed investigations
of the 11 foundations, and attempted to, and I believe did, obtain some
information with respect to stock holdings held by foundations as a
group.
Now, there are, of course, a number of different figures that I have
seen from time to time. I think that an attempt was made to verify
that figure as best could be done at that time, and this was the estimate
of the special group concerned with this matter.
The CHAIRMAN. I am interested in this because even the Treasury
Department doesn't know how many foundations there are in existence
today. Nor does the Treasury have any information on the extent of
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the stock holdings of the Nation's foundations. The Treasury has
admitted this.
Now, of course, that necessarily poses a question to us as to the source
of your information. And that information we would like to have.
Mr. COHEN. We will provide it.
The CHAIRMAN. Can you tell us now?
Mr. COHEN. I can't at this moment, no sir.
The CHAIRMAN. On page 5 you state, "The Commission does not
maintain statistics," for foundations and charitable trusts as a sep-
arate group. This is quite plain.
Then on page 6 you state that your investigation of the behavior of
institutional investors, including the 11 large foundations, "does not
suggest any special problems in this area." By that you mean that it
doesn't "suggest any special problems" among the 11 foundations in-
cluded in your study, is that correct?
Mr. COHEN. Essentially, that is correct, yes, sir.
The CHAIRMAN. On page 6. you also state "this information would
indicate a lack of speculative activity on the part of trusts and foun-
dations." how can you arrive at such a judgment from examining
only 11 foundations, none of which are known by you to be tax ex-
empt?
Mr. COHEN. I must confess it is a rather limited sample.
The CHAIRMAN. And you don't have enough information at this
time to answer that?
Mr. COHEN. I do want to advert again to the recent study and previ-
ous studies made by the New York Stock Exchange with respect to
institutional investors. They have broken out founelations and trusts,
and their figures seem to support this conclusion.
The CHAIRMAN. From those statements, it seems to me that you are
suggestinc, that there is common action on the part of foundations in
the purchase and sale of securities. If such is the case, this could limit
opportunities for certain companies who are not part of the founda-
tion clique.
Mr. COHEN. I didn't mean to suggest that, sir.
The CHAIRMAN. Outside of the 11 foundations included in your
study, the SEC has no information as to the extent that foundations
are involved in speculation and trading on margin, is that correct?
Mr. COHEN. That is correct.
The CHAIRMAN. In other words, the information available at the
SEC throws no light on the question of speculation or margin trading
by foundations?
Mr. COHEN. As a group, no, sir.
The CHAIRMAN. On page 9 you state that, according to a report of
the New York Stock Exchange foundations held about $8 billion
stocks listed on the New York Stock Exchange at the end of 1963. Do
you know what the source is for this figure of $8 billion? Is it based
on the foundations' carrying value or market value?
Mr. COHEN. I assume that it is market value, Sir.
The CHAIRMAN. Normally foundations don't use market value. I
do not say that the market value is not used here. But I am just
stating normally market value is not used.
Mr. COHEN. I understand that. In arriving at these figures, par-
ticularly if you will notice the reference to the figure at 1962 and the
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estimated increase by the end of 1963, it seems clear to me?although I
don't have a report before me, and that is my recollection?that they
were speaking in terms of market value.
The CHAIRMAN. How does the New York Stock Exchange know
what the total stock holdings of the Nation's foundations are when the
Treasury Department doesn't know the answer?
Mr. COHEN. I wouldn't know the answer to that, sir.
The CHAIRMAN. However, that $8 billion holding represents a siz-
able figure, does it not? Does the $8 billion figure include foundation
holdings that may be registered in the names of nominees?
Mr. COHEN. Well, sir, if there has been some concealment, then it
may well not include those amounts. I would assume that in making
its study, the questionnaires and the other data collected were properly
designed to elicit information of that character.
The CHAIRMAN. The truth is they could not give you that informa-
tion.
Mr. COHEN. They couldn't, certainly.
The CHAIRMAN. So the answer is it could not include nominees.
Mr. COHEN. Yes, sir. Perhaps I did not make myself clear.
Foundations, for example, may hold stock in a street name, in the
name of nominees, in the name of a bank. It is that type of nominee
which I believe would be included in the $8 billion.
The CHAIRMAN. That is a known nominee.
Mr. COHEN. That is a known, or an admitted nominee. There may
be situations where there is an attempt at concealment. And in such
situations they would not be included in the $8 billion figure. But I
do not wish to suggest that there is any substantial concealment. I
have no information to suggest that.
The CHAIRMAN. Well, how would the Exchange know who the
beneficiary is,
if a beneficiary was a foundation, and how would they
know to list it as a foundation account?
Mr. COHEN. Well, the Exchange, if I understand it?and I am not
sure I understand all the details of the process of gathering this in-
formation?does elicit information from known nominees. There is
a volume that thick?I am sure you have seen it, sir?which contains
the name of all nominees for security holdings.
They do elicit information from the banks.
The CHAIRMAN. If the nominees do not object to disclosing.
Mr. COHEN. That is right, sir.
The CHAIRMAN. But that doesn't mean that these nominees are dis-
closing the beneficiaries.
Mr. COHEN. That may be. I have no information.
The CHAIRMAN. On page 6 you state that "Foundations did not
engage heavily in transactions in new stock issues during 1961." You
are referring there to only the 11 foundations?
Mr. COHEN. Yes, sir.
The CHAIRMAN. You have not collected any information on all
foundations in this area, is that correct?
Mr. COHEN. That is correct.
The CHAIRMAN. On page 5 you state' "These institutions have not
engaged in short-swing transactions on the basis of any inside infor-
mation." By "these institutions" you mean only the 11 foundations,
is that correct?
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Mr. COHEN. Yes. We do mean that. But I do also want to qualify
the statement. I think what I said was that the information we had
would indicate that they had not engaged. I cannot testify that they
did not in fact engage in any such transactions.
The CHAIRMAN. I don't see how you can draw such a judgment from
11 foundations, unless your information is much better than the
Treasury's. And the Treasury- doesn't know.
Mr. COHEN. I should explain?my statement there is perhaps in-
adequate. I am speaking in terms of short-swing transactions, and
that by statute is defined to be sales and purchases or purchases and
sales within a 6-month period. And the purport of my statment is
only to indicate that on the information we have with respect to these
11 foundations there was not such trading within that short period.
The statute attempts to obviate the difficulties of proof as to the use
or misuse of inside information by providing that in all such short-
swing transactions, if they result in a profit, and if they are effected
by insiders?that profit is recoverable by the company:
The CHAIRMAN. Have you searched the Commission's records and
collected and collated information on insider deals by other founda-
tions? If you have, will you please submit such information to this
subcommittee?
Mr. COHEN. I am sorry, sir. I am not altogether sure just what
information you are asking for. Would you please repeat that?
The CHAIRMAN. Insider deals.
Mr. COHEN. We would not have information of that kind?unless
it related to a particular offering of securities or a particular situa-
tion in which a trust or a charitable foundation was more than a
10-percent holder of the securities of a particular company. We
have not collated information of that character.
The CHAIRMAN. On page 2 you state "We have examined proxy
materials filed with the Commission in all proxy contests since Janu-
ary 1, 1963, and have determined that only 11 trusts or foundations
have been mentioned in the proxy material filed since that time.
None was a participant in a proxy contest; 10 were mentioned be-
cause of the relationship of a participant with the trust, and the
other because it owned more than 10 percent of the securities with
respect to which the solicitation was conducted and under our proxy
rules such owners must be identified and their share holdings set
forth."
You also state that your "Records do not reveal whether any of the
11 trusts or foundations is tax exempt." Since we do not have the
names of these organizations and since you do not know whether
any of them are tax exempt, we, of course, have no way of knowing
whether any of them come within the purview of our study.
There is every indication that foundations have entered into proxy
fights.
Mr. COHEN. Excuse me, Mr. Chairman. The 11 that are referred
to here?that is, those 11 trusts or foundations that I read before
file reports with the Commission. That was the list that I had. It
was a list of 11.
The CHAIRMAN. Now, wait a minute.
Mr. COHEN. I am sorry.
The CHAIRMAN. I don't understand that.
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Mr. COHEN. Yes, you are right. I am glad you caught me. There
are two parts to that statement. If I may, I would like to explain
it a little bit.
The CHAIRMAN. All right.
Mr. COHEN. Under our proxy rules, when a proxy contest occurs,
every member of management?that is every member of the board of
directors, and the issuer, and every other person who may be con-
testing with management, is deemed to be a participant.
As soon as the proxy contest begins, each such person is required
to file with the Commission a schedule denominated as Schedule
14?B, in which he is required to give his occupation, background,
his interest in the securities of the company, and those of his as-
sociates.
Now, there may be occasions when an associate may be a charitable
trust in the sense that he is a trustee or some fiduciary connected with
that foundation or trust.
I understand that 10 of the 11 I referred to in my statement had a
relationship either to a member of the management of the company,
or to a person who was a participant in the contest. One other was a
trust which owned more than 10 percent of the securities of the com-
pany and, therefore, it had to be named, and that is required whether
or not there is a contest.
The 11 that I have named here?and I am finally getting around to
it, Mr. Chairman, with your indulgence?the 11 that I named here are
trusts which have a beneficial interest in more than 10 percent of the
securities of a company, of a particular listed company.
The CHAIRMAN. There is every indication that foundations have
entered into proxy fights. According to press reports, there have been
a number of such cases. In 1960, during the battle for control of the
Endicott Johnson Corporation, the Albert A. List Foundation of
Byram, Connecticut received 54,000 shares of Endicott Johnson from
the J. M. Kaplan Fund of New York City. These shares were used
by Mr. Albert A. List in his unsuccessful attempt to acquire control of
the Corporation.
Our records indicate that on February 20, 1959, a securities analyst
employed by JEMKAP, Incorporated, submitted a memorandum to
the J. M. Kaplan Fund which is connected with JEMKAP, stating as
follows:
Endicott Johnson Corporation may be a likely target for a "takeover"
situation in view of its rich net working capital position to be "sweet-
ened" by a rebound profitwise. The common stock of Endicott Johnson
Corporation is unusually cheap on the basis of both its rich balance
sheet and prospective earning power about to materialize. As against
a seemingly limited risk of the downside, there is apparently a capital
appreciation potential of some 50 percent on the upside. An even greater
gain could result marketwise if control of this company were in the
hands of interests aimed at acquisition or merger. Endicott Johnson
should prove to be a well heeled investment.
Also, according to press reports, during the struggle over the Alle-
ghany Corporation between Allan P. Kirby and the Murchison Broth-
ers, the Fred M. Kirby Foundation purchased Alleghany shares which
had not previously paid a dividend.
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TAX-EXEMPT FOUNDATIONS: IMPACT ON SMALL BU6LN
On page 4 you state that, "The ownership reports filed with the
Commission pursuant to this section include a number of reports by
tax-exempt foundations and trusts. The Commission does not main-
tain, however, any statistics reflecting the holdings or transactions of
trusts or foundations as distinct from any other category of 10-percent
securities holders." Will you collect these statistics tor purposes of our
study and submit them to us?
Mr. COHEN. May I explain the situation there, Mr. Chairman?
As I indicated, we don't collect separate statistics for foundations
or trusts. But in connection with the annual reports and other reports
filed by listed issuers, and by other companies that are required to file
reports with the Commission, our forms require identification of any
person who holds more than 10 percent of the voting securities of
that company. And it is in connection with that type of reporting,
and in connection with the proxy solicitation, in the manner I de-
scribed earlier, that we learn of the existence of these charitable foun-
dations and trusts.
In order to gather this information, it would require the review of
some 3,000 reports each year, and about 2,000 proxy statements.
I don't know whether there is any other means available to us to
gather this information. We will review the situation, Mr. Chairman.
But I just want to indicate the enormity of the task.
The CHAIRMAN. You had some information upon which your state-
ment was based, I assume, Mr. Cohen.
Mr. COHEN. As far as proxy contests are concerned, I can supply
that information readily, because there are usually not more than
about 40 proxy contests each year.
The CHAIRMAN. All right. File that, if you will.
Mr. COHEN. Yes, sir.
The CHAIRMAN. Has the Commission examined all the securities
transactions in the second installment of our study, Mr. Cohen?
Mr. COIIEN. The second installment of your study, sir, has led to a
very broad investigation in our shop. As I indicated in my statement,
that study is not completed, and we have not received a report.
Mr. Pollack, on my left here, is in charge of that study. If there
is anything regarding it you would wish, perhaps he can supply some
information.
The CHAIRMAN. When would it be completed and a report made
on it?
Mr. POLLACK. Mr. Chairman, I would be hopeful that we could
complete that before the end of the year. It is difficult to make
estimates, in view of the complications that you run into in conducting
as broad an inquiry as we are. I am sure in the preparation of your
own report, you encountered some of the difficulties that we are in
unraveling some of the transactions. But we are actively pursuing
this at the very moment.
The CHAIRMAN. Not so long ago Mr. Cary told us it would be ready
within 5 months, which is not far from your estimate now, of course.
I assume that you have run into difficulties, as we have, on getting the
information. .And necessarily you are sometimes delayed by reason
thereof.
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.116 TAX-EXEMPT FOUNDATIONS: IMPACT ON SMALL BUSINESS
Mr. COHEN. There is one thing I do know, Mr. Chairman. It is
being pursued with vigor.
The CHAIRMAN. And you expect to have a report before the first
of the year, and a public report will be made on it.
Mr. COHEN. I cannot say it will be a public report, sir, because it
may involve violations of law, it may lead to other things?I just don't
know.
The CHAIRMAN. You will send us a copy of the report?
Mr. COIIEN. We will send you a report.
The CHAIRMAN Mr. Cary promised us a report, since it is based
upon our study.
Mr. COHEN. Yes, Sir.
(A report submitted to the subcommittee by the SEC, under date
of November 30, 1964, appears as Exhibit 53, page 415. Also, see Ex-
hibit 52, page 413 for comments of Mr. William McC. Martin, Jr.,
Chairman, Board of Governors of the Federal Reserve System.)
The CHAIRMAN. With respect to the securities transactions described
in the second installment of our study, are there any areas of possible
violations in which you may have problems because of the statute of
limitations?
Mr. COHEN. I cannot speak to that, sir, but Mr. Pollack perhaps can.
Mr. POLLACK. The answer is yes.
The CHAIRMAN. Could you, without disclosing information which
you would not want to disclose at this time tell us something in gen-
eral about what the problems are?
Mr. POLLACK. Well, various of those transactions go back, as I re-
call, to the early 1950's. With respect to those, and insofar as the
statute of limitations may be applicable in an area we would have dif-
ficulty in pursuing those. But that, of course, is a consideration which
we consider as our investigation proceeds. But various actions not
subject to a statute of limitations may be available, even with respect
to those, and they are actively being inquired into.
The CHAIRMAN. On page 9 you refer to the second installment of our
study, with respect to possible violations of the Federal securities laws
by certain foundations covered therein. These activities were not
known to the Commission prior to the issuance of our report, is that
correct?
Mr. COHEN. To the best of my knowledge, yes, sir.
The CHAIRMAN With respect to the questionnaire that the Com-
mission sent out to institutional investors2 it did not directly involve
the matter of credit arrangements entered into by foundations for pur-
poses of market activities, is that correct?
Mr. COTTEN. I believe that is correct.
The CHAIRMAN. Let me give you a few preliminary figures we
have developed on the activities of the 546 foundations under study by
this Committee.
One part of our study relates to the moneylending and borrowing
activities of 546 foundations. To this end, we required the founda-
tions to submit schedules of all loans receivable and loans payable dur-
ing the period of 1951 through 1962.
There is indication that funds loaned out by those foundations dur-
ing the period of 1951 through 1962 is about $841 million. Their bor-
rowings total $251 million.
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TAX-EXEMPT FOUNDATIONS: IMPACT ON SMALL BTJSINESS 119
The study is far from complete, but a preliminary examination of
some of the loans receivable indicates that 22 foundations made loans
of $19 million to assist borrowers in purchasing securities.
A similar preliminary examination of some of the loans payable in-
dicates that 23 foundations borrowed $17 million for the purpose of
purchasing securities.
We will need additional information from many of the foundations
in order to determine the exact purpose of the funds loaned out or
borrowed.
For example, some of the foundations state that certain loans were
made for "general corporate purposes." There is no indication
whether "general corporate purposes" includes the purchase of securi-
ties or other assets.
On page 9 you reach the conclusion that "foundations as a group
are not active traders." I would like to read to you some preliminary
figures we have developed with respect to the market activity of the
546 foundations that we have under study.
For some time we have been lookincrl' into the stock market activities
of the 546 foundations under study by this Subcommittee. Although
the study is not complete as yet, preliminary figures indicate that,
during the period of 1951 through 1961, the 546 foundations sold
over 88.6 billion of securities showing a capital gain of over $1.8 bil-
lion. These figures include 4.7 billion of stock sales, showing a gain
of $1.8 billion.
Preliminary figures also indicate that, during the period of Decem-
ber 1, 1961 through June 30, 1962 (the period of the big plunge in
1962) the 546 foundations sold 8.4 million shares of traded stocks for
a sales price of $565 million, showing a gain of over $421 million.
During the same period, the 546 foundations purchased 4.4 million
shares of traded stocks at a cost of $201 million.
In your view, do these figures indicate a sizable amount of market
activity by foundations?
Mr. COIIEN. I believe they do.
The CHAIRMAN. Schedules submitted by the Lillia Babbitt Hyde
Foundation, of New York City, show acquisition date of October 19,
1962 and sales date of March 5, 1962 on 2,000 shares of Pacific Gas
and Electric common. The gross sales price for the 2,000 shares was
$70,750, with the Foundation showing a gain of $9,052.55.
Similarly, schedules submitted by the Clark Foundation, of New
York City, show acquisition dates of July 27, 1962 to July 30, 1962
and sales dates of February 28, 1962 on 700 shares of Westinghouse
Air Brake common. The gross sales price for the 700 shares was
$20,387.50, showing a loss of $4,410.49.
On the surface, would these two cases seem to indicate short sales
on the part of the Hyde and Clark foundations?
Mr. COHEN. Well, I may have missed the period.
The CIIAIRIVIAN. Possibly I went too fast on that.
Mr. COHEN. I am unable to state, on the basis of this informa-
tion alone, whether these were short sales. I did miss the dates. But
if they were within the 6 months period?I am sorry.
The CHAIRMAN. They were within the 6 months period.
Mr. COHEN. Then they would be short-swing transactions. But,
again, I don't know whether or not those particular trusts were holders
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120 TAX-EXEMPT FOUNDATIONS: IMPACT ON SMALL BUSINESS
of more than 10 percent of the stock of the company involved, and,
therefore, subject to the sanctions of Section 16 of the Exchange Act.
I believe not.
The CHAIRMAN Would you agree, Mr. Cohen, that a person who
effects a public distribution of securities for a foundation, which con-
trols the corporate issuer of the stock, is an underwriter within the
Act?
Mr. CorrEN. Well, whether or not he is an underwriter, if such a
foundation effects a public distribution of securities, it would be sub-
ject to registration under the Securities Act of 1933, and we have had
many such in the history of the Commission.
The CHAIRMAN. Would you agree that the question of control may
involve situations where the foundation appears to be under the con-
trol or domination of the donor, who is himself a controlling person
of the issuer?
Mr. COHEN. If such a situation occurred, and if I understand your
question, any public offering by the foundation would be subject to
registration.
The CHAIRMAN. If such a foundation decides to make a public offer-
ing of stock through an underwriter of a controlled corporation, is
the foundation required to file a registration statement, cause a
prospectus to be published and to take the same steps as may apply
with respect to any initial issue?
Mr. COHEN. It is essentially the same. Technically the issuer files
a registration statement, but a prospectus must be provided to in-
vestors.
The CHAIRMAN. If a foundation acquired stock under circumstances
which would constitute the foundation an underwriter?such as a
purchase or grant of stock from an issuer or controlling person with a
view to distribution?would registration be required?
Mr. COHEN. Generally speaking, yes, sir.
The CHAIRMAN. As I understand it, under the law, insiders?direct-
ors and officers of issuing companies, or persons who are beneficial
owners of more than 10 percent of any class of listed equity securi-
ties?are required to file statements with the SEC and the Exchange
disclosing their ownership of such securities and showing changes in
ownership which have occurred during the preceding calendar month.
Profits earned by such insiders by reason of their relationship to the
issuer from a purchase and sale or sale and purchase within a 6-month
period inure to and are recoverable by the issuing corporation,
Do these provisions apply to foundations, just as they apply to any
other stockholder?
Mr. COHEN. Yes, sir.
The CHAIRMAN. Even if the foundation is holding the stock in
trust?
Mr. COHEN. Yes' sir, if it has a beneficial interest.
The CHAIRMAN. Would you agree that except for the provisions of
the Act, which prohibit manipulation of security prices through the
facilities of a national securities exchange and on the over-the-counter
markets, there appears to be no special provision in the Act which
would prevent an officer of a corporation who holds the position of
director or trustee in a foundation from using that position to effect
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TAX-EXEMPT FOUNDATIONS: IMPACT ON SMALL BUSINESS
transactions by the foundation which would indirectly benefit him or
his company.
Mr. COHEN. There is nothing to prohibit such transactions, sir.
But if he or a controlled foundation effects transactions on the basis
o.f information known to him and not known to others, he and the
foundation may both be subject to civil and criminal sanctions.
The CHAIRMAN. Do you have the list yet, Mr. Cohen?
Mr. COHEN. It hasn't arrived as yet. We will supply it before the
close of business today.
The CHAIRMAN Mr. Cohen, your testimony before the Appropria-
tions Committee was called to our attention about the time it was
made. But we didn't get a copy of it until the book was published
later on. It deals with the Independent Offices Appropriations Act,
1965. The testimony appears on page 628 as follows:
Mr. COHEN. I might add, Mr. Edwards, that some of the information
In Mr. Patman's report actually came from information on file with the
Commission I would only supplement what Mr. Woodside said to
indicate that on occasion foundations have been used by individuals to
carry out various purposes, such as proxy fights and things of that
sort. In that area, our job has been limited to eliciting the relevant
facts and getting them out in the public prints. This is what we have
done. As I say, Mr. Patman got a great deal of his information from
our files.
Now, Mr. Cohen, will you please tell us what information we re-
ceived from you?
Mr. COHEN. It was my understanding?and that statement is based
on that understanding?that members of your staff reviewed the files
in the offices of the Commission and discussed the coverage of the re-
porting requirements with members of our staff, and that certain of
the information that formed the basis of that excellent report was
based on information in the Commission's public file.
The CHAIRMAN. Well, I know you are honest in your views on that,
Mr. Cohen. I know you are stating it exactly the way you understand
it. But the truth is that no information appeared in our reports that
came from your files.
Mr. COHEN. I am glad to be corrected, sir.
The CHAIRMAN. Of course you had a right to rely upon the staff,
and I am sure that they probably told you what they thought was the
true situation. But the truth is we didnot receive any information
from your files that was put into the report.
Now, Mr. Harvey, do you have a question?
Mr. HARVEY. Mr. Chairman, I first want to compliment you?
because you are very knowledgeable in the field of banking and in-
vestments?on the thoroughness with which you have questioned our
witness this morning.
I only .would like to ask a supplementary question for which I will
have to give you just a little preface.
In my rather limited knowledge of the operation of foundations,
I have observed that there are two types of operation practiced by
the foundations:
One has to do with a foundation which may have been the beneficiary
of the assets in the beginning of a single block of stock of some corpor-
ation, or maybe at most two or three, and which has realized that, in
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122 TAX-EXEMPT FOUNDATIONS: IMPACT ON SMALL BUSINESS
order to better preserve the continuity of its income, must sell some of
those stocks, or exchange them for stocks from other well known
corporate entities.
And then there is the other type of operation in. which a foundation
can and in certain instances has been used as a front for market
trading.
Would you agree that this is a true statement?
Mr. COHEN. Certainly on the basis of the report of this subcom-
mittee that I have read, and it is a very excellent report indeed, it
is a true statement.
Mr. HARVEY. You are in a position to observe the activities of prac-
tically every one of any consequence that deals on the board of trade.
Do you have any information indicating that the bulk of this trad-
ing that is going on is being done for other than proper purposes?
Mr. COHEN. I have no knowledge to which I can now speak. As
I have indicated, the report of the subcommittee adverted to three
foundations and provided substantial information which, as I also
indicated, was not theretofore available to the Commission, and which
we are now investigating.
It may be that the results of that investigation may provide me with
a better basis for answering your question.
Mr. HARVEY. How long have you been with the Commission, Mr.
Cohen?
Mr. COHEN. I have been with the Commission in one capacity or
another for 22 years.
Mr. HARVEY. Then, I think it is a fair question to ask you, because
of the long tenure you have served there, if you have actual and factual
data that you can present that foundations are using their rather
cloistered protection for improper purposes on the board of trade?
Mr. COIIEN. There are very few situations that have come to my
attention that could even approach that situation.
I do wish to hasten to add, however, that there have been any num-
ber of situations that have come to my attention in which, for example,
proxy contests have occurred, and certain persons who were partici-
pants in those proxy contests undoubtedly had the benefit of the share
holdings of the trust in assisting them in their endeavor to unseat a
management, or to obtain control of a company in another way.
This is a matter as to which I can speak from personal knowledge.
Mr. HARVEY. That is exactly what I am asking, Mr. Cohen, and I
think you have tried to be honest in your answer. I know that anyone
who has been associated with the Commission as long as you have must
have a very thorough knowledge of this segment, especially since you
know our Subcommittee has been interested in it.
Now, could you submit for our benefit the names of any of these
people whom you think may have been engaging in this kind of
activity?
Mr. COHEN. Mr. Harvey, I indicated earlier that I would attempt
to provide the Subcommittee with information in this area?that is,
with respect to proxy contests?for the period beginning January 1,
1963, or if the Committee wishes us to go back a little farther, we would
be glad to do that, too.
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TAX-EXEMPT FOUNDATIONS: IMPACT ON SMALL BUSINESS 123
Now, so far as other areas of activities to which the Subcommittee
has adverted in its report, I am not nearly as well prepared to speak
from personal knowledge.
I have the feeling that there are other situations which have come
to our attention?and I cannot now name one?through the years in
which a particular person may have used the facilities of a related
foundation or trust in effecting a certain series of securities trans-
actions which may not have been wholly consistent with law. As I
said before, we don't keep that information by that category. Any
such information we could submit would probably be incomplete, and
we would have to depend on the memory of gentlemen like Mr. Pol-
lack, of cases that he may have been associated with.
Mr. HARVEY. Are there others who are on the staff of the Commis-
sion?Mr. Chairman, I hope you will indulge this question
The CHAIRMAN. Yes, sir.
Mr. HARVEY (continuing). Since you, Mr. Cohen, have been there
many years you must know most of them intimately?who could be
more helpful than you in supplying this information, even if it is
necessary to give it in confidence?
Mr. COHEN. I will endeavor, when I return to the office, to speak to
all those who I believe would be in a position to supply this informa-
tion. I only want to add the further caveat that we don't have this
information by foundation or trust in any organized way, and the
information that we could provide would necessarily be incomplete.
Mr. HARVEY. Mr. Chairman, I again repeat my request.
We are dealing with a very sensitive issue here, and one that may
hold, if we are not able to properly cope with it at this time, a good
deal of threat to the future well being of many of our citizens. If the
Commission has other people on its staff who do have information, even
though it may not be documented, that can be helpful to the Commit-
tee, and even if they request that it be given to us in confidence, we
have a perfect right to request such information be given to us.
Mr. COIIEN. Mr. Chairman, may I suggest?because I do wish to
comply with Mr. Harvey's request?that we review the situation, pre-
pare a memorandum and submit it to you, sir.
The CHAIRMAN. 177.e11, that will be satisfactory for the present?
Mr. HARVEY. If it is satisfactory with the Chairman.
The CHAIRMAN. It is all right with me, if it is all right with you, i
for the present. And then if it is not satisfactory, we will take t up
again.
Mr. HARVEY. Yes, leave the door open, in other words.
Mr. COHEN. Yes, sir.
Mr. HARVEY. That will be fine.
The CHAIRMAN. Mr. Cohen, you haven't received that information
yet?
Mr. COHEN. Excuse me, sir.
May I approach the bench, sir?
The CHAIRMAN. Yes, sir, you may proceed.
(Discussion off the record.)
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124 TAX-EXEMPT FOUNDATIONS: IMPACT ON SMALL BUSINESS
The CHAIRMAN. We will take a few minutes recess. Let's take a few
minutes recess.
(A brief recess was taken.)
The CHAIRMAN. The Committee will come to order.
Mr. Cohen, did you want to make a statement?
Mr. COHEN. Yes, sir. In my statement I adverted to the special
study of the securities market. That study was primarily concerned
with the markets, and not with foundations as such.
However, an aspect of the study undertaken by that group was
activities of institutional investors, in the course of which they did
study a number of the activities of a number of these charitable
foundations.
Now, it is my understanding that these foundations provided the
information readily enough. But, at that time?and I don't know if I
can put it precisely, because the person who engaged in those negotia-
tions is not here?but it is my understanding that they had an under-
standing that the Commission would use the information they pro-
vided in the aggregate, and while there was no commitment by the
Commission that it would not reveal any names, there was an under-
standing that the Commission would not reveal the names of the
foundations.
Now, I have the list here, and I am very happy to submit it to the
Chairman, and if the Chairman feels that it should be made part of
the record I am sure that will be satisfactory.
The CHAIRMAN. You see, it is rather indirect, your information.
MT. COHEN. Yes, it is, sir.
The CHAIRMAN. You don't know for sure what statements were made
concerning its use. The gentleman is not available.
Mr. COHEN. I think that is a fair statement of the situation, be-
cause I have talked to two or three people who were concerned in the
activities of the study?although they are not the persons who were
actually negotiating this matter with the foundations.
The CHAIRMAN. Well, suppose you send the list up here, if you
please.
Mr. COHEN. Yes, sir.
The CHAIRMAN. Mr. Cary, of course, made the commitment to me?
to submit the information.
Mr. COHEN. I would like to carry it out for him.
The CHAIRMAN. I know. But I just wondered if we should ask you
to carry it out?if we shouldn't ask him to carry it out.
Mr. COHEN. Well, sir, I feel fairly certain that he would explain it
essentially as I have, and I think his position would be essentially the
one that I have expressed.
The Commission has no objection. I am quite certain that the foun-
dations would have no objection.
I merely wanted to explain the circumstances under which we got
the information.
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TAX-EXEMPT FOUNDATIONS: IMPACT ON SMALL BUSINESS 125
Mr. HARVEY. Well, can the Committee assume, then, that you are
assuming full responsibility in replying for Mr. Cary
Mr. COIIEN. Yes, sir.
The CHAIRMAN. All right. We will put these in the record, then.
You can take it and read the names out, please.
Mr. COHEN. The list are the following:
Ford Foundation Rockefeller Foundation, Duke Endowment, 30
Rockefeller Plaza, New York, John A. Hartford Foundation C
, ar-
negie Corporation, W. K. Kellogg Foundation, Alfred P. Sloan Foun-
dation, Lilly Endowment, Inc., Commonwealth Fund, Danforth Foun-
dation and Kresge Foundation. Those are the 11, sir.
The 'CHAIRMAN. Obviously you have some of the largest founda-
tions. Do you have any further questions, Mr. Harvey?
Mr. HARVEY. No, I have no further questions, Mr. Chairman.
Mr. COIIEN. If I indicated these were the first 11 in order of size,
perhaps I should modify that by saying it is my impression that
these are a sample and include n of the largest ones. And, as I
indicated, on the basis of the information developed by our statis-
ticians, and obviously that involved a procedure of projection, based
on available figures, they represented approximately 56 percent of
the aggregate holding.
The CHAIRMAN. That is the part we just don't see at all, Mr.
Cohen. We don't know and the Treasury doesn't know. You have
to have something to say it is 56 percent of.
Mr. COIIEN. Yes, sir. I feel myself, that your staff certainly and
the Internal Revenue Service has much more and better information
regarding this subject than we. And I am prepared to sit corrected
here as of this moment.
The CHAIRMAN. Well, Kresge, for instance?several foundations
that are not on your list would be larger than Kresge. Anyway,
you have submitted the 11 that you used. That is the information
we asked for. And we thank you very much, sir.
I wish you would advise Mr. Cary we may ask him to come here
at some convenient time mutually satisfactory.
Mr. COTTEN. Yes, sir.
Mr. HARVEY. Mr. Chairman?in furtherance of the request I made
Lo you, Mr. Cohen, since you yourself may not be back, I wish you
would relay our request to Mr. Cary, and if he does have people and
personnel there who have certain knowledge, that they, when Mr.
Cary comes, can come here.
Mr. COHEN. Yes, sir. And if the Committee wants me back, I will
be back, too.
The CHAIRMAN. We would like for you to be available if we need
you, Mr. Cohen. We have no plans at this time to ask your return.
We appreciate your testimony. It will be helpful to us.
Mr. COHEN. May I add one word? It has just been brought to my
attention that we do have the precise statement made in the study
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126 TAX-EXEMPT FOUNDATIONS : IMPACT ON SMALL BUSINESS
report with respect to the selection of these 11. It appears at page
837 of par II of the report of the Special Study of the Securities
Markets of the Securities and Exchange Commission, House Docu-
ment No. 95, Part II. And it is footnote 45 on that page.
The respondents were selected primarily from among the largest in
each institutional category studied, but also with some ecort to in-
clude coverage of different sizes and geographical locations of institu-
tions within each category.
Now, that footnote relates to all of the institutions studied, not just
the foundations and the trusts. But that is the statement of the study.
The CHAIRMAN. The 56 percent part is the part that I cannot under-
stand--when we just don't know what 100 percent is.
Mr. COIIEN. Well, we will try to provide some information on that
score, too.
The CHAIRMAN. If you will, please, sir. Thank you very much.
-We appreciate your testimony. And our thanks to the gentlemen
who accompanied you.
The Committee will stand in recess subject to the call of the Chair.
(-Whereupon, at 11 :45 a.m., July 23, 1964, the subcommittee recessed,
subject to the call of the Chair.)
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BUSINESS
MONDAY, AUGUST 10, 1964
HOUSE OF REPRESENTATIVES,
SUBCOMMITTEE No. 1 ON FOUNDATIONS OF THE
SELECT COMMITTEE To CONDUCT STUDIES AND
INVESTIGATIONS OF THE PROBLEMS OF SMALL BUSINESS,
Wash.ington, D.C.
The subcommittee met, pursuant to call, at 10:05 a.m., in room
1304 Longworth House Office Building, Hon. Wright Patman
(chairman of the subcommittee) presiding.
Present: Representatives Patman, Evins, Roosevelt, and Harvey.
Also present: H. A. Olsher, Director of Foundation Studies;
Myrtle Ruth Foutch, Clerk; John J. Williams, Minority Counsel; an
Eugene Loehl, Assistant Minority Counsel.
The CHAIRMAN. The Committee will come to order.
Mr. Harding, are you ready to proceed?
TESTIMONY OF BERTRAND M. HARDING, ACTING COMMISSIONER,
INTERNAL REVENUE SERVICE, ACCOMPANIED BY MITCHELL
ROGOVIN, ASSISTANT TO THE COMMISSIONER; SHELDON S.
COHEN, CHIEF COUNSEL; AND ARTHUR B. WHITE, SPECIAL AS-
SISTANT TO CHIEF COUNSEL, INTERNAL REVENUE SERVICE
MT. HARDING. Yes, Mr. Chairman.
The CHAIRMAN Identify, if you will, please, the persons accom-
panying you.
Mr. HARDING. I have Mr. Sheldon Cohen' the Chief Counsel of the
IRS, in the center; Mr. Mitchell Rogovin, Assistant to the Commis-
sioner, next to me ? and Mr. Arthur B. White, Special Assistant to the
Chief Counsel, on 11/r. Cohen's left.
The CHAIRMAN. This is the fourth session of hearings of Subcom-
mittee Number 1 on the subject of the Federal Government's super-
vision of tax-exempt foundations and charitable trusts.
On behalf of the Subcommittee, I should like to welcome our fourth
witness, Mr. Bertrand M. Harding, Acting Commissioner of the In-
ternal Revenue Service. Do you have a prepared statement, Mr.
Harding?
MT. HARDING. I do not, MT. Chairman.
The CHAIRMAN. Then I shall just proceed with the questioning.
Later in the hearing this morning, I shall ask you about the J. M.
Kaplan Fund, Inc.' of New York City (assets almost $15 million)?
a matter in which the National Office of the IRS has been involved
127
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128 TAX-EXEMPT FOUNDATIONS: IMPACT ON SMALL BUSINESS
for some time. Therefore, I would suggest that you have one of your
aides bring you the complete file on the J. M. Kaplan Fund, including
correspondence, memoranda, summaries of hearings, conferences, etc.
Would you do that, please?
Mr. HARDING. Chief counsel advises me that the case is under ac-
tive audit in New York and that the major file is at that location,
rather than in Washington. We probably have a correspondence file
in the National Office.
The CHAIRMAN. Well, just have available what you have here, then,
please, Mr. Harding.
Mr. HARDING. Yes, sir.
The CHAIRMAN. Mr. Harding, how long have you been with the
IRS?
Mr. HARDING. Eleven years, sin
The CHAIRMAN. What positions have you held?
Mr. HARDING. I started as the Assistant to the Deputy Commis-
sioner, became Assistant Director of the Collection Division, the As-
sistant Commissioner for Planning and Research, and in 1961, was
appointed Deputy Commissioner. In July of this year, I was desig-
nated Acting Commissioner of the Internal Revenue Service.
The CHAIRMAN. During Mr. Caplin's testimony of July 22, I men-
tioned that, although a few Government officials and foundation ex-
ecutives would have us believe that most of the abuses of tax exemp-
tion are by small foundations, we have found that violations of Treas-
ury Regulations are not confined to the latter foundations. For ex-
ample, I pointed out that the Carnegie Corporation of New York had
violated Treasury Regulations by failing to make full disclosure of
its capital gains for the years 1962 and 1963. I asked Mr. Caplin to
confirm or deny that the Voundation had failed to furnish such details
to the IRS. By letter of August 4, 1964, you informed me as follows:
We have examined the capital gains schedules submitted by the Carnegie Cor-
poration for 1962 and 1963 and find that complete information on gain or loss
from sale of assets required by our instructions was not furnished.
Also, during Mr. Dillon's testimony of July 21, I queried him as to
the amount of money spent overseas by all United States foundations
during 1963. The Secretary did not have the answer at the time and
has since informed us that the IRS records "Do not indicate the
amounts spent by all United States foundations for international
projects."
Have you found our studies useful in your work, Mr. Harding?
Mr. HARDING. Very useful, Mr. Chairman.
The CHAIRMAN. Secretary Dillon stated that 10,000 tax exempt or-
ganizations' tax returns were examined in fiscal year 1964. -Were
these examinations field audits or desk examinations?
Mr. HARDING. Mr. Chairman, we have examined the breakdown
between field and what we call office examinations for 1964 and we find
that of the total examined, 10,051 were examined by field agents; 211
were examined by office auditors, within the office.
The CHAIRMAN. Well, now, the field agents, do they go into offices
of the foundations?
Mr. HARDING. Yes, sir. The field agents typically go into the place
of business or residence of the taxpayer to examine his books and
records.
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The CHAIRMAN. FIOW many foundations had field audits in 1964?
I believe you said about 10,000?
Mr. HARDING. Those were total examinations of all exempt organ-
izations, Mr. Chairman.
The CHAIRMAN. I have them confused. My question is about foun-
dations. About how many?
Mr. HARDING. Yes, Sir WO examined approximately 1,300 founda-
tions in fiscal year 1964, all of which were field examinations.
The CHAIRMAN. And in the offices of the foundations?
Mr. HARDING. Yes sir.
The CHAIRMAN. How many applications for tax exemption did the
IRS approve in 1963?
Mr. HARDING. In fiscal year 1963, Mr. Chairman, I do not have the
figure currently at hand. I can give you the figure on fiscal year 1964
if that will be satisfactory.
The CHAIRMAN. Well, for a definite period?
Mr. HARDING. Yes, sir.
The CHAIRMAN. Fiscal year 1964?that will be all right. That is 12
months.
Mr. HARDING. I beg your pardon7 my figure is for 1963. We ap-
proved 9,735 applications for exemption in calendar year 1963.
The CHAIRMAN. 9,735?
Mr. HARDING. Yes, sir.
The CHAIRMAN. If every American had a tax exempt foundation,
where would the Federal, State, and local governments obtain funds
for their operations?
Mr. HARDING. That is a rather speculative question, Mr. Chairman.
I am probably not competent to answer it, but I would assume if every
American taxpayer was an exempt organization, there would be no
funds available at any of the levels for those operations.
The CHAIRMAN. Is there anything keeping them from doing it?
Mr. HARDING. Yes' Sir, I think there is. There are requirements
that the income from those sums be used for charitable, educational, or
research purposes. I think that most taxpayers are not willing to
dedicate their entire resources to those ends.
The CHAIRMAN. If all of them that were in a position to do so took
advantage of the present laws, it would seriously interfere with our
collection of adequate revenue to take care of the national defense and
interest on the public debt and things like that, would it not?
Mr. HARDING. That may be true, Mr. Chairman.
The CriAiRmAN. Would you agree that the living need charity more
than the dead?
Mr. HARDING. Yes, indeed, sir.
The CHAIRMAN. Under present law, foundations are not required
to spend their principal (which includes capital gains and contribu-
tions received) , is that correct?
Mr. HARDING. That is correct, sir.
The CHAIRMAN. It is a pretty liberal law, is it not, Mr. Harding?
Mr. HARDING. That is the law as I understand it, Mr. Chairman. I
would not want to characterize it.
The CHAIRMAN. Do I understand correctly that the IRS rule of
thumb is that?except for extraordinary circumstances?a founda-
tion is required to spend 90 percent of its annual income (meaning div-
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idends, interest, etc.) for the purpose for which it was granted tax
exemption?
Mr. HARDING. No, sir, I know of no such rule as that. The rule as
I understand it is merely that there must not be an unreasonable accu-
mulation of that income and it becomes a factual question.
The CHAIRMAN. What is the rule of thumb? What percentage?
MT. HARDING. I am sorry, Mr. Chairman, I do not know of a rule
of thumb.
The CHAIRMAN. Well, you have to have something to go by, do you
not? Is there a rule of any type that you go by?
Mr. HARDING. Not that I am aware of, sir.
The CHAIRMAN. I have always heard that 90 percent is your guide-
line. In fact, I believe we received that information in correspondence
from you.
Mr. HARDING. Well, I just personally am not aware of that rule,
Mr. Chairman. I shall attempt to find out if we do have a rule and
supply it for the record for you, sir. I am not aware of a set percent-
age rule that would guide us in making a determination of unreason-
able accumulation.
The CHAIRMAN It disturbs me that you have been with the Bureau
as long as you have-11 years?and you have no rule on this very im-
portant matter of how much may be spent and how much may be re-
tained. How do you instruct your field men? Do you say it is all
right if they just spend 50 percent or 75 percent for charity? What
do you tell them?
Mr. HARDING. It is a factual question, Mr. Chairman. We have
many factual questions, such as what is reasonable depreciation in the
corporate area. These are not areas where we can draw hard and fast
(The information submitted by the IRS, under date of Septem-
ber 25, 1964, follows:)
The Internal Revenue Service has established no "rule of thumb" on
the percentage of an exempt foundation's annual income that must be
spent for exempt purposes. The Service has neither a published position
nor an internal guideline that attempts to equate the "unreasonable ac-
cumulation of income" provisions of section 504 of the Internal Revenue
Code to a percentage figure since neither the language of the statute nor
its legislative history would support the use of a percentage figure in
determining whether, in a particular ease, the accumulation of income is
"unreasonable in amount or duration." The issue is inherently factual,
as an examination of various court opinions on the matter demoustrates.1
In 1950, the Senate Finance Committee rejected a House provision
which would, in effect, have taxed the accumulated income of certain
exempt organizations. This provision was deleted from the House bill
because the Senate Finance Committee believed it "too inflexible and as
a result would seriously injure many worthwhile educational and chari-
table projects." ( S. Rept. No. 2375, 81st Cong., 2nd Sess., 1950-2 Cum.
Bull. 488, 508.) It was in the Conference Committee that the existing
statutory provision regarding accumulations of income unreasonable in
amount or duration was added.
1 Samuel Friedland Foundation v. U.S. 144 Fed. Supp. 74 (1956) ; Erie Endowment v.
U.S. 202 Fed. Supp. 580 (1961), affirmed 316 Fed. (2d) 151 (1963) ; Stevens Bros. Foun-
dation, Inc. V. Commr. 39 T.C. 93 (1962) ; Danforth Foundation v. U.S. 222 Fed. Supp.
761 (1963) ;Hulnvan Foundation, Inc. v. U.S. 217 Fed. Supp. 423 (1962) ; and Frank F.
Truscott, Dwight L. Morris and I. Lehr Brishin, Trustees of Harry D. Hollway Foundation
V. U.S., United States District Court for Pennsylvania Eastern District, entered April 1,
1958. [58-1 USTC para. 9515]
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TAX-EXEMPT FOUNDATIONS: IMPACT ON SMALL BUSIN.Lbs
Thus, while the Service has published a series of interpretive rulings
as to the mechanics of the statute,' its very nature precludes the use of
a percentage test to determine compliance with the test of reasonableness
of accumulations.
The CHAIRMAN. Our study indicates that the foundations under
study by this Committee had accumulated income (meaning unspent
income) of $902 million at the close of 1960 as against $271 million in
1951. Based on these figures, would you agree that, as of the close of
1960, those foundations with unspent income had kept $902 million
from the reach of the living who are in need of charity?
Mr. HARDING. They have not yet distributed it at any rate, Mr.
Chairman.
The CHAIRMAN. In other words, they kept it from them. They just
did not distribute it?
Mr. HARDING. Yes, sir.
The CHAIRMAN. According to Treasury figures, 62.7 million individ-
uals filed income tax returns in 1962. The standard deduction form
was used by 36.1 million of these individuals. Thus there was no tax
reduction incentive which moved these 36.1 million !Americans to con-
tribute to charity, is that correct?
Mr. HARDING. Yes sir. I think that is a correct inference to draw.
The CHAIRMAN. According to figures compiled by the Treasury for
1961, persons with adjusted gross income of less than $12,000 per year
paid 61 percent of all income taxes in 1961. Is that your
understanding?
Mr. HARDING. That sounds about right, yes, sir.
The CHAIRMAN. Charity has been called the fourth largest industry
in the United States. It is estimated that $9.3 billion was contributed
to charity by the American public in 1962, as against $5.4 billion in
1954, and, according to the IRS, foundations contributed only $800
million of the $9.3 billion in 1962.
Hence, it is obvious that by far the largest part of the charitable
contributions in this country comes from middle and lower income
groups?from people who contribute one dollar, two dollars five dol-
lars, or ten dollars to their cancer -funds, community funds, March of
Dimes etc. These people give because of their sympathy for the poor,
the ill, and the underprivileged, not because they receive any tax
breaks.
During the period that we have been engaged in this study, we have
heard a great deal from a few government officials and vested interests,
such as foundation executives, who say that we must be careful not to
"dry up" the sources of foundation philanthropy.
At this point, I should like to read to you portions of a letter dated
July 13, 1964 which I received from Mr. G. Edward Johnson, Director
of Public Relations and Finance of the Greater Minneapolis Council
of Churches.
First of all I would like to commend you, your staff and your commit-
tee on the excellent work you are doing in noting the impact of tax-
exempt foundations and charitable trusts on our economy. I have
appreciated reading the three reports your committee has published.
2 Rev. Rul. 54-137, C.B. 1954-1, 289; Rev. Rttl. 55-674, C.B. 1955-2, 264; Rev. Rul.
54-2,27, C.B. 1954-1, 291; and Rev. Rill. 58-535, C.B. 1958-2, 270.
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Personally, I find it difficult to be sympathetic with any group, or-
ganization or individual who abuses the privilege of giving. If you take
the verb to give out of the concepts upon which our Nation was founded,
if it were removed from the hopes we hold for democracy today, our his-
tory would reflect a most unhealthy and selfish background.
What has this to do with foundations? Just this: When these groups
abuse the privilege and confidence placed in them, when they are
allowed to create an atmosphere of generosity when it is not so, then
they abuse freedom. It is at this point also that they must be held
accountable. To give means "to bestow freely without return." Too
many foundations are allowed to masquerade as givers when actually
this is not the case.
If a foundation does not do the things for which it is established then,
it seems to me, it automatically forfeits its right to exist and should be
subject to strong action.
The CHAIRMAN. Would you agree that every taxpayer subsidizes
gifts to foundations and, contrary to the principles of the income tax
laws, the wealthy are subsidized more heavily than the poor?
Mr. HARDING. Mr. Chairman, I am afraid you are a little out of my
depth as a tax administrator. I really do not think this is a position
that the Revenue Service has an official stance on. I think, as Secre-
tary Dillon pointed out in his testimony, a great deal of good is done
by charitable foundations, and I think that this is probably about as
far as I as an administrator and a career service officer ought to go in
commenting on what is essentially a matter of tax policy.
The CHAIRMAN. Would you agree that gifts by the wealthy may not
be purely unselfish donations since they can be a means of increasing
the donor's spendable income?
Mr. HARDING. Mr. Chairman I really do not know what motivates
wealthy people to make gifts. Not being one myself, I am not in a posi-
tion to see into their minds. I am afraid that I do not know the answer
to your question.
The CHAIRMAN. I am just asking you, would you agree that gifts by
the wealthy may not be purely unselfish donations?
Mr. HARDING. Yes, sir; I think that possibility exists.
The CHAIRMAN. How many gifts and bequests of $1 million or more
were there in 1962? What was their dollar value?
Mr. HARDING. I would have to supply that for you for the record,
sir.
The CHAIRMAN. And do not forget the dollar value, too.
Mr. HARDING. Let me be sure we understand the question, Mr. Chair-
man.
The CHAIRMAN. How many gifts and bequests of $1 million or more
were there in 1962, and--
Mr. HARDING. Are these single, individual bequests?
The CHAIR1WA N. That is right.
Mr. HARDING. I am afraid we may not have that information, Mr.
Chairman. Our statistics of income which show charitable deduc-
tions are in terms of those reported on tax returns, which would be in
gross only. We cannot tell whether that was a series of $250,000
bequests, or whether it was a total of $1 million.
The CHAIRMAN. Well, the best information you have.
Mr. HARDING. We shall give you the best information we have, Mr.
Chairman.
(The information submitted by the IRS, under date of September 1,
1964, appears on page 206.)
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TAX-EXEMPT FOUNDATIONS: IMPACT ON SMALL BUSINESS 133
The CHAIRMAN. Why should a person with income of $100,000 a
year be given a tax break for a charitable contribution when the per-
son earning $5,000 per year gets no such benefit ?
Mr. HARDING. The law, sir, requires or allows the taxpayer to take
charitable deductions. I presume in your $5,000 category, you are
referring to those people who take standard deductions. Of course,
a $5,000 person who itemizes is allowed a deduction for his charitable
deduction,
The CHAIRMAN. Mr. Evins?
Mr. EVINS. I believe you said you have been with the IRS about 12
years?
Mr. HARDING. Eleven years, sir.
Mr. EVINS. When was the charitable foundations law first enacted
by Congress?
Mr. HARDING. My understanding is that it goes back as early as
1909, before the income tax.
Mr. EVINS. How many amendments have been made to this law since
it was originally enacted in 1909?
Mr. HARDING. My legal counsel informs me in the neighborhood of
a half dozen, Mr. Evins. I am not familiar with it. I do know that
major changes were last made in this law in 1950.
Mr. EVINS. Were these 1950 amendments the result of investiga-
tions and recommendations of the Internal Revenue Service?
Mr. HARDING. They were the result of recommendations made to
the Congress by the Treasury Department, Mr. Evins.
Mr. EviNs. Over the years, have you had extensive experience and
difficulties in administering this law?
Mr. HARDING. We have had extensive difficulties in administering
this law, yes, sir.
Mr. EVINS. How many investigations are generally made annually
with respect to the tax exempt foundations?
Mr. HARDING. Well, sir, during the most recent period, we are run-
ning at the rate of about 10,000 examinations a year. This is up con-
siderably from prior years' experience.
Mr. EVINS. You are speaking of all exempt organizations
Mr. HARDING. All exempt organizations.
Mr. EVINS. We are addressing our remarks, and this is why I spe-
cifically referred to it, to foundations. How many investigations do
you make annually with respect to charitable exempt foundations?
Mr. HARDING. About 1,300 last year.
Mr. EVINS. How many charitable exempt foundations are there in
existence?
Mr. HARDING. Depending upon definitions, and this is not a legally
defined entity in the code, but somewhere in the neighborhood of
15,000.
Mr. EVINS. 15,000 tax exempt foundations, and you have made a
spot check on perhaps 1,000?
Mr. HARDING. Yes, sir.
Mr. EVINS. So 49,000 went by the board and were not examined?
Mr. HARDING. No, sir, that would be 14,000.
Mr. EVINS. Oh, that is right, 14,000.
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134 TAX-EXEMPT FOUNDATIONS: IMPACT ON SMALL BUSINESS
Mr. HARDING. That, Mr. Chairman, is probably about as high a ratio
as we have in our total audit program throughout the country. We
examine typically, nationwide, less than 5 percent of the returns filed.
Mr. EVINS. Have you made recommendations to the Congress of
the need of additional personnel for making these investigations?
Have you made recommendations for tightening up the law in this
area, or is there really any great concern in the Department?
Mr. HARDING. We annually make recommendations for additional
personnel for our total audit job, Mr. Evins.
Mr. EVINS. We are speaking about foundations.
Mr. HARDING. We have not made any specific request for personnel
for the audit of foundations. We have informed the Congress, how-
ever, of our increased audit program in our entire exempt organiza-
tion field. They are aware of this and this has been part of our
justification.
Mr. EVINS. How many -personnel in your organization are assigned
specifically to the investigation of organizations in the charitable
foundations field?
Mr. HARDING. I cannot give you that figure, Mr. Evins. We have
dedicated in excess
Mr. EVINS. How many personnel are assigned to foundation investi-
gation work exclusively?
Mr. HARDING. I say I cannot give you that figure. Our program-
ming in the National Office relates to total exempt organizations. In
this area, we have assigned about what we call man years, and our
figure is in excess of 100 man years in the exempt organization field.
Mr. EVINS. You have testified that you think there are about 15,000
tax exempt foundations, and I believe earlier, you testified you really
do not know how many there are.
Mr. HARDING. I said our best estimate, Mr. Evins, is that there are
in excess of 15,000. We are in the process now of developing a master
file of exempt organizations on electronic tape for the purpose of
keeping a continuing inventory on all exempt organizations. When
this job is completed, we shall have a much more precise figure to
give you on the number of foundations.
Mr. Evms. Mr. Harding, since, this law was first enacted in 1909,
and in view of the enormous growth in numbers of charitable exempt
foundations, and also the tremendous amount of funds involved, do
you not think it is incumbent upon you to this field of possible tax
avoidance?
Mr. HARDING. Mr. Evins, as Mr. Caplin pointed out in his testi-
mony last month, there has been a rather sizable increase in our effort
in the entire exempt organization field, and particularly in the founda-
tion area since this Subcommittee has evidenced its interest in the
matter and has made available to us the three reports we have received.
Mr. EVINS. Do you have any specific recommendations you wish to
make to this Subcommittee at this time as a result of the previous
reports that have been published?
Mr. HARDING. No, sir, our recommendations, such as they may be,
are being made to the Treasury Department for the purpose of in-
corporation in their legislative proposals which they intend to bring
to the Congress at the next session.
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Mr. EVINS. There is a concern in the Congress, I think there is a
national concern, about the national growth, and I think it is incum-
bent upon you as Commissioner to be more aggressive and active in
this field. There is a general feeling that there has been a neglect or
lack of concern, paying of little attention to it, anything that escapes
by the board.
Thank you, Mr. Chairman.
The CHAIRMAN. Mr. Evins is on the Appropriations Committee,
and I am sure he will consider any request that you may make for ad-
dition personnel, additional money to go into this foundation area.
Mr. HARDING. We shall certainly take advantage of Mr. Evins' in-
terest in this matter.
The CHAIRMAN. Since 1960, has the IRS examined foundation tax
returns to determine whether compensation of officers, directors, or
trustees may be exorbitant and unjustified?
Mr. HARDING. An examination of this sort, Mr. Chairman, would
be involved in a typical examination of foundations, yes sir.
The CHAIRMAN. You leave it generally up to the officers of the
foundation as to the salaries they pay and the expenses they desire
to pay, do you not?
Mr. HARDING. Yes sir, generally.
The CHAIRMAN. Generally, you do?
Mr. HARDING. Yes, sir, sir, as in the case of a corporation.
The CHAIRMAN. Since 1960, has the IRS found that compensa-
tion of officers, directors, or trustees among the large foundations is
reasonable and justified?
Mr. HARDING. I know of no evidence to the contrary, Mr. Chairman.
The CHAIRMAN. Would you agreei that there are numerous worth-
while charitable organizations n this country?such as the cancer
funds, community funds, etc.?that are always in need of funds?
MT. HARDING. Yes, sir.
The CHAIRMAN. With this in mind, I would like to give you a small
sampling of the amounts paid to officers, directors or trustees of eleven
foundations. These amounts represent payments made by nine foun-
dations in 1963, and by two foundations in 1962 (the 1962 figures for
the latter being the last year on file with the Subcommittee). Total
payments made to such officials of the eleven foundations were
$3,393,322.74, as follows:
Lilly Endowment, Inc., Indianapolis
$66,
899.
88
W. K. Kellogg Foundation, Battle Creek, Mich
166,
412.
00
Carnegie Corporation of New York (fiscal year ending 9/30/63)
254,
083.
00
Commonwealth Fund, N.Y.C. (fiscal year ending 6/30/63)
119,
906.
78
Duke Endowment, N.Y.C. and Charlotte, N.0
559,
713.
77
Ford Foundation, N.Y.C. (fiscal year ending 9/30/63)
619,
834.
44
Rockfeller Brothers Fund, Inc., N.Y.C.
60,
500.
00
Rockefeller Foundation, N.Y.C.
1,
032,
702.
01
Alfred P. Sloan Foundation, N.Y.0
194,
797.
00
Leona rd C. Hanna, Jr. Fund, Cleveland (fiscal Year ending
8/31/62)
245,
064.
86
Robert A. Welch Foundation, Houston (fiscal year ending
8/31/62)
73,
409.
00
Total (eleven foundations)
3,
393,
322.
74
Some of the officials devoted only part of their time to their posi-
tions. For example, payments to fourteen members of the Ford
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Foundation's Board of Trustees totaled $68,750 for their part time
duties during that one year. Mr. John J. McCloy was paid $30,000,
plus $120.85 travel expenses, for his part time work as Chairman of
the Board and Trustee of the Ford Foundation. Mr. Donald K.
David was paid $25,000, plus $5,000 conference and meeting expenses,
for his part time duties as Vice Chairman and Trustee of the Ford
Foundation.
Let us now have a further look at the payments to Ford Foundation
trustees for three years 1960 through 1962. According to the Founda-
tion, "All trustees receive an honorarium of $5,000 per year." Based
on that figure of $5,000 per year, the aggregate compensation of
eighteen trustees was $225,000 for the years 1960 through 1962. Here
is a run-down of (1) each trustee's compensation for that period, and
(2) the number of days of meetings attended by each of them dur-
ing that period. The data apply to Board of Trustees meetings,
Executive Committee meetings, and Finance Committee meetings.
? Stephen D. Bechtel was paid $10,000 or attending meetings on
twenty days during 1961 through 1962.
? Eugene R. Black was paid $15,000 for attending meetings on
thirty-one days during 1960 through 1962.
? James B. Black was paid $5,000 for attending meetings on nine
days during 1960.
? James F. Brownlee was paid $5,000 for attending meetings on
twelve days during 1960.
? John Cowles was paid $15,000 for attending meetings on twenty-
seven days during 1960 through 1962.
? Donald K. David was paid $15,000 for attending meetings on
forty-three days during 1960 through 1962.
? Mark F. Ethridge was paid $15,000 for attending meetings on
twenty-two days during 1960 through 1962.
? Benson Ford was paid $15,000 for attending meetings on three
days during 1960 through 1962.
? Henry Ford II was paid $15,000 for attendingmeetings on twelve
days during 1960 through 1962.
? H. Rowan Gaither, Jr. was paid $5,000 for attending meetings on
nine days during 1960.
? Lawenee M. Gould was paid $15,000 for attending meetings on
twenty-three days during 1960 through 1962.
? Henry T. Heald was paid $15,000 for attending meetings on fifty
days during 1960 through 1962.
? Roy E. Larsen was paid $15,000 for attending meetings on twenty-
five days during 1960 through 1962.
? John J. McCloy was paid $15,000 for atending meetings on thirty-
seven days during 1960 through 1962.
? J. Irwin Miller was paid $10,000 for attending meetings on ten
days durinff'' 1961 through 1962.
? Julius A. Stratton was paid $15,000 for attending meetings on
twenty-three days during 1960 through 1962.
? Bethuel M. Webster was paid $10,000 for attending meetings on
twenty-four Clays during 1961 through 1962.
? Charles E. Wyzanski, Jr., was paid $15,000 for attending meetings
on twenty-eight days during 1960 through 1962.
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TAX-EXEMPT FOUNPATIONS : IMPACT ON SMALL BUSINESS 137
At this point, in order to save time, I shall insert in the record, as
Exhibits, the details of the payments made to each individual by the
eleven foundations instead of reading them. (Exhibits it through 11,
pages 297-311.) I shall give you a copy, Mr. Harding.
As you know, the Leonard C. Hanna, Jr. Fund of Cleveland has
been liquidated and a tax return was filed for the final liquidation
period of September 1, 1962 through January 18, 1963. Has the IRS
found that the Fund has complied with all statutory requirements?
Mr. HARDING. I shall have to have that checked for you, Mr. Chair-
man. Off hand, I do not know.
The CHAIRMAN. And you will put your answer in the record?
Mr. HARDING. Yes, sir, I shall put the answer in the record.
(The information submitted by the IRS, under dates of October 2,
1964 and October 26, 1961, appears on page 207. Also see Exhibits
6 and 12, pages 302 and 312.)
The CHAIR1VIAN. Although the Hanna Fund filed a tax return for
the final liquidation period, it failed to report details of compensation
of officers and trustees. Such details, which are required by Treasury
regulations, include the name of the officer or trustee, position, time
devoted to position, salary, and expense account allowance.
We have made three requests to the Fund for such details, the first
one dated January 25, 1964.
The tax return for the period of September 1, 1962 through January
18 1963 indicates that $103,395 was paid to officers and trustees during
this short period of 41/2 months.
During the five year, four and one-half month period (fiscal years
ending August 31, 1958 through January 18, 1963) the four trustees
of the Hanna Fund?John C. Virden, Harold T. Clark, Lewis B.
Williams, and H. J. Reigert?received $712,986.95 as compensation
for their part time duties.
At this time, I would like to have you instruct one of your aides to
phone the Cleveland District Office and ask them to obtain from the
Hanna Fund for purposes of this record, the required information
respecting payments to the individual officers and trustees during the
period of September 1, 1962 through January 18, 1963. Would you do
that please, sir?
r. HARDING. Just one second, please, Mr. Chairman.
This would be the information, Mr. Chairman, that should have
been on their Form 990-A
The CHAIRMAN. Yes, sir, and which was not.
Mr. HARTING (continuing) . For the period ending what, again, sir?
The CHAIRMAN. January 18, 1963.
Mr. HARTING. I shall see if we can get that information for you.
The CHAIRMAN. That was their liquidation period.
Mr. HARTING. Mr. Chairman, if we are unsuccessful in getting that
information for you before the conclusion of this hearing, would it
be satisfactory, if it is available, for it to be inserted in the record?
The CHAIRMAN. Yes, sir, but we shall be in session this afternoon
I think, and during that period of time, you could probably get it.
Mr. HArimNo. We shall do our very best, Mr. Chairman. But
sometimes you cannot contact the responsible officers and you are not
able to get the information.
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138 TAX-EXEMPT FOUNDATIONS: IMPACT ON SMALL BUSINESS
The CHAIRMAN. That is right. But do it if you can.
(The information submitted by the IRS under date of August 11,
1961, appears on page 157. Also, see Exhibits 6 and 12, pages 302
and 312.
The CHAIRMAN. In your view, what is the justification for pay-
ments as large as those made by the aforementioned. eleven founda-
tions considering the pressing needs of many charitable organiza-
tions?
Mr. HARDING. Mr. Chairman, the matter of reasonable compensa-
tion of executives of any sort is a very difficult problem. As you were
going through this list, with particular reference to the individual
payments to some of these gentlemen, some of whose names are famil-
iar to all of us, I recognize that they seemed to be compensated in
terms of their time at. board meetings at the rate of about $500 a day.
Now, from our dealings with attorneys, with management consulting
firms, and with other professional groups, this is not an unreasonable
rate of compensation in the highly professional areas.
The CHAIRMAN. But this is for charity.
Mr. HARDING. Yes, sir; I grant you this is for charity. I think the
position we have to take, however, is that these people do demand these
prices in their every day world, and they are being compensated by
these foundations for their expert advice. I am sure that the founda-
tions would argue the case that their contributions to the foundations,
in terms of their expertise, more than compensate for the rate of daily
pay.
The CHAIRMAN. I notice one of the last ones I read was that Benson
Ford was paid $15,000 for attending meetings on three days during
1960 through 1962, and Mr. Henry Ford, II was paid $15,000 for
attending meetings on 12 days during 1960 through 1962. Since this
is supposedly for charity, it seems a little unusual to me that we
would have such huge amounts for service. Of course, I am not as
familiar with it as you are, and I do not pretend to be an expert on it.
Mr. HARDING. My only explanation is that these gentlemen are
being compensated for their expertise in the direction of the charitable
activities, and it. has been the decision of the board of directors that
this is a reasonable compensation.
Mr. HARVEY. Mr. Chairman
The CHAIRMAN. Yes, sir, Mr. Harvey.
Mr. HARVEY. I note here that one of the 11 that has been in-
cluded is the Lilly Endowment from Indianapolis. I followed
through the figures as to the salaries that were paid in the case of this
particular foundation. It is one with which I have some personal
acquaintance and knowledge. I notice in this case that the chief
executive official of the foundation is paid $30,000. Now, I happen
to know Mr. Lynn and I know the work of the foundation. I just
want to say in the instance of this particular foundation that I do
not think, knowing the competency and the responsible duties that Mr.
Lynn has, that I would consider his salary an excessive one at all.
There are many people within the Lilly organization who contrib-
ute a great deal of their time and of their talents without cost to the
foundation in an effort to make the operation of the foundation as
efficient and as effective as possible.
Mr. Chairman, again, I do not want to belabor the issue, because in
some instances I think the statement here has brought to light the pay-
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TAX-EXEMPT FOUNDATIONS: IMPACT ON SMALL Bi3.61iN
ments to employees which, even considering their expert advice and
judgment, would seem to be very liberal. But I did want to com-
ment in this instance, particularly with regard to the one foundation
from my own state, one with which I have knowledge, and to say again
that I think that this is a foundation that has not only followed the
letter but the spirit of the law as well.
The CHAIRMAN. Thank you, Mr. Harve,y. We are glad to have
your comments for the record.
What is the purpose of requiring foundations to report details of
compensation paid to officers, directors, trustees, etc., Mr. Harding?
Mr. HARDING. Primarily, Mr. Chairman, we are attempting to deter-
mine that the activities of the foundation are for charitable purposes,
and our reasons would be to examine into payments made to directors
and officers to be certain that this is not a subterfuge for compensation
of these people at unreasonable rates.
Tho CHAIRMAN. Does this salary reporting have anything to do
with making it possible for the IRS to determine whether salaries of
such persons are reasonble ?
Mr. HARDING. Yes, sir.
The CHAIRIVIAN. If such is the case, why do you omit salaries of per-
sons who are not officers? For example, the Longwood Foundation
of Wilmington, Delaware (a du Pont foundation) paid out salaries and
wages totaling 81,178,755.16 during fiscal year ending September 301
1963. Of this amount, $86,409.84 was paid to five non-officers each of
whom received 810,000 or more. Details of such payments are being
inserted in the record herewith.
(The information referred to is as follows:)
Longwood Foundation,, Inc., Wilmington, Del.?Compensation of employees
receiving $10,000 or more
[Fiscal year ending September 30,1963]
Name and address
Position
Salary
received
Expenses
received
Russell J. Seibert, Longwood
Gardens, Kennett Square, Pa.
Director, Longwood
Gardens.
$24,
000
$1,
978.
11
Everitt L. Miller, Longwood
Assistant Pirector_ _ _
17,
300
487.
63
Gardens, Kennett Square, Pa.
George E. Thompson, 8 Green
Tree Drive, West Chester, Pa.
Business Adminis-
trator.
16,
320
44.
10
Knowles R. Bowen, Ridgecote
Lane, Kennett Square, Pa.
Superintendent of
Maintenance.
15,
480
John M. Johnson, R.D. 2,
Chief Horticulturist _
10,
800
Kennett Square, Pa.
Total
83,
900
2,
509.
84
Mr. HARDING. Mr. Chairman, the reason that we do not require the
complete salary schedule on the return is that it would, in many cases,
make the return entirely too clumsy; and therefore, we, as in the case
of taxable corporations, do not require that they be submitted with the
990?A because of this difficulty of paper processing.
The CHAIRMAN. I would like to get on with the J. M. Kaplan Fund,
Inc., of New York City. First I shall give you a few statistics on its
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gross receipts and disbursements, and then I shall present a summary
of the matter before asking you some questions about the Fund.
Do you have your file here yet, Mr. Harding?
Mr. HARDING. No, sir.
The CHAIRMAN. Gross receipts of the J. M. Kaplan Fund totaled
$19.3 million for the years 1951 through the year 1963, including $2.5
million contributions received and $11.9 million capital gains. Con-
tributions paid out totaled $6 million.
I shall ask Mr. Olsher to continue.
Mr. OLSHER. The J.M. Kaplan Fund, Inc., of New York City, was
organized on October 6, 1944 under the laws of the State of Delaware.
By letter of October 11, 1944, the J. M. Kaplan Fund asked the
Commissioner of Internal Revenue, Washington, D.C., for a ruling as
to whether the Fund would be eligible for tax exemption based on the
facts set forth in its application of October 6, 1944. The Fund's
reason for requesting a ruling was:
Before the undersigned can commence functioning through
having contributions made to it, it is important to ascertain,
to the extent possible, that it complies with the tax exemption
requirements of Section 101 (6) and the requirements for
deductibility of contributions contained in Section 23 (o) and
Section 23 (q) of the Internal Revenue Code.
By letter of November 30, 1914, Mr. Norman D. Cann, Deputy
Commissioner of Internal Revenue, advised the J. M. Kaplan Fund
as follows:
It is the opinion of this office, based upon the evidence
presented, that if you are operated strictly in accordance with
the stated purposes, you will be entitled to exemption from
Federal income tax under the provisions of Section 101 (6)
of the Internal Revenue Code as an organization organized
and operated exclusively for charitable purposes.
Accordingly, you will not be required to file income tax
returns unless you change your character or the purposes for
which you were organized, engage in any activities not con-
templated by your stated purposes, or attempt to influence
legislation.
Contributions made to you will be deductible by the donors
in arriving at their taxable net income in the manner and to
the extent provided by Section 23 (o) and (q) of the Internal
Revenue Code.
Since the actual activities of an organization are a material
factor in determining whether or not it is organized and op-
erated in accordance with the several provisions of law re-
ferred to herein, you should, after your first complete year
of operation, complete and file with the Commissioner of In-
ternal Revenue for your District, Form 1023, in order that the
effect of your actual operations upon your exemption status
may be determined.
The Kaplan Fund filed an application for tax exemption on May 15,
1946. Income tax exemption was granted to the Fund as a charitable
and educational organization by Commissioner's letter dated June 6,
1946.
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Assets as of December 31, 1945, totaled $1,624,277. Assets as of
December 31, 1963, was valued at $14.7 million.
By letter of March 29, 1957, Mr. Donald R. Moysey, District Di-
rector of Lower Manhattan advised the Kaplan Fund that his office
had made an examination of its activities, as disclosed by its tax returns
for the years 1947 and 1949 through 1955, and "a detailed examina-
tion of the books, minutes, correspondence and other related data for
the year 1953." On the basis of the facts developed, it was the opinion
of the District Office that a substantial basis existed for the revocation
of the Fund's tax exemption for the following reasons:
(1) The J. M. Kaplan Fund, Inc., was not organized and
operated exclusively for charitable, religious, educational or
other exempt purposes within the meaning of section 101 (6)
of the 1939 Code (sections 501 (c) (3) of the 1954 Code), but
was availed by the creator for self-motivating interests.
(2) The J. M. Kaplan Fund, Inc., from its inception had
borrowed considerable sums of money from organizations
owned or controlled by the creator for the purpose of carrying
on a trade or business, namely, that of an investment and/or
trading enterprise, rather than those activities usually asso-
ciated with exempt organizations.
(3) The J. M. Kaplan Fund, Inc., in violation of section
3813 of the 1939 Code (corresponding to section 503 of the 1954
Code) engaged in prohibited transactions in 1953 and 1954
within the meaning of the Code.
(4) The J. M. Kaplan Fund, Inc., on an overall basis, was
never intended to be, from its inception, availed of for purely
charitable, educational or other exempt purposes, and in prac-
tice operated as the alter ego of Mr. J. M. Kaplan.
Accordingly, it was the considered opinion of the District Office that
the exempt status of the J. M. Kaplan Fund, Inc., under the provisions
of section 101 (6) of the 1939 Code and section 501 (c) (3) of the 1954
Code should be revoked, retroactively and prospectively.
Under established procedure the District Office would recommend
to the Commissioner of Internal Revenue, Washington 25, D.C., that
the Fund's exemption be revoked.
If the Fund did not agree with the foregoing conclusions, it could,
within 30 days from March 29, 1957, file a protest.
Additional observations and conclusions of the District Office were
as follows:
(1) A review of the facts shows that the J. M. Kaplan
Fund, Inc., has not been operating exclusively within the
specified purposes of the section 501 (c) (3) of the 1954 Code,
but was operating in the manner of an ordinary investment
enterprise.
(2) It was the opinion of the District Office that an or-
ganization is not entitled to exemption where its security
transactions and portfolio changes are of the nature and of
sufficient frequency to indicate that the organization is not
being operated for the purpose of acquiring property for
bona-fide investment purposes to be held in good faith for
the production of investment income. This is particularly
true when:
39-915-61---10
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142 TAX-EXEMPT FOUNDATIONS: IMPACT ON SMALL BUSINESS
(a) The bulk of the transactions are short term.
(b) A substantial part of the investment in stocks
are purchased anticipating capital gains, rather than
for dividend income; and the above are coupled with:
(c) Extensive borrowings of funds for the purpose
of entering into speculative transactions,. thereby
(d) Jeopardizing the carrying out of the charitable,
educational, or other purpose or function constituting
the basis for exemption.
(3) The J. M. Kaplan Fund, Inc., was clearly competing
with others in the market place, and since the business was
speculative the whole of the principal and profits could be
wiped out. An organization, such as this one, which over
the years engages in trade, business, or speculation, clearly
does not come within the terms of the statute granting ex-
emption from Federal income taxes.
(4) In 1953 the Fund showed a capital gain of $102,184.83.
The gain was primarily attributable to the sale of 113,901
shares of Pittsburgh Steel Co., which was acquired in 1951
from corporations controlled by the creator of the Fund.
The Fund had invested in securities as at December 31,
1951, $2,600,258.71, of which amount $1,773,070.26 or approxi-
mately 70% of the portfolio was invested in Pittsburgh Steel.
The cashbook of the Fund for the month of April, 1953
disclosed that $26,149.39 was paid to various attorneys for the
purpose of conducting an investigation of the affairs of Pitts-
burgh Steel, because it was stated that the management of said
company had been mismanaging its affairs to the detriment
of the stockholders.
It was clearly evident that the investment in Pittsburgh
Steel was made primarily for purposes of capital appreci-
ation rather than for investment in income-providing prop-
erty to be used for purposes specified in the exempting
statutes.
(5) As at January 1, 1955 the Fund had invested $2,917,-
433.05. As at December 31, 1955 the Fund had invested
$9,631,553.96, showing an increase in investments of $6,714,-
120.91.
The increase in the portfolio was primarily attributable to
an increase in, and use of, borrowed funds amounting to
$6,337,034.11, and to a lesser extent to capital gains and cash
reserves.
Forty-five securities were sold within one year of acquisi-
tion. Of this amount thirty-one were acquired in 1955. Fif-
teen were sold within one month or less from the date of
acquisition. Of the, balance of securities acquired in 1955,
sixteen were sold within six months of acquisition. In one
case, involving the purchase and sale of 3,900 shares A. G.
Spalding Brothers stock (purchased April 29, 1955 for 875,-
019.22 and sold April 14, 1955 for $86,274.29) , the Fund con-
summated a short sale for a gain of $11,255.07.
Mr. ROOSEVELT. I think there is a little correction there. You said
the stock was purchased at $75,019.22?
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TAX-EXEMPT FO UNDATIONS : IMPACT ON SMALL BUSINESS 1?
Mr. OLSIIER. It was a short sale.
Mr. RoosnvEur. I take it, it should be noted that that was a short
sale.
The CHAIRMAN. The reporter is getting this, so that will cover it.
Mr. OLSHER (continuing).?
(6) In 1953, the Kaplan Fund advanced 8400,000 to the
Etched Products Corporation. The advances were secured by
a second mortgage on realty and a chattel mortgage upon all.
the machinery, equipment, furniture and fixtures of Etched
Products Corporation, together with any replacements, im-
provements, and subsequent acquisitions.
Title to the stock of Etched Products Corporation at the
time the advances were made, was in Estate of Alfred Corporation,
Nieren-
berg, Theodore D. Nierenbere, (nephew of J.M. Kaplan) ,
Felice T. Schwartz (niece of J. M. Kaplan), and others. In
fact, the real incidents of ownership (directly or indirectly,
as set forth in correspondence submitted to the examining
officer) were in these persons plus Rose Nierenberc, (sister of
J. M. Kaplan) who had a one-third interest in the Estate of
Alfred Nierenberg.
After the death of Alfred Nierenberg, his son, Theodore
Nierenberg, took over the active management of Etched
Products. At the time the advance of $400,000 was made
Etched Products had considerable liabilities.
In order to "bail Out" the indebtedness of Etched Products
Mr. Kaplan caused the Fund to advance monies to Etched
Products Corporation to repay the loans and to relieve the
company of financial pressures. As aforestated these monies
were secured by a consolidated second mortgage on real estate
and chattel mortgages on the equipment. Mr. Kaplan also
personally guaranteed the obligation of Etched Products to
the Fund.
No interest was paid by Etched Products Corporation on its
indebtedness for the period beginning- December 17, 1953
and ending February 23, 1954.
On February 23, 1954 an agreement was entered into be-
tween the Electro-Chemical engraving Company and Theo-
dore Nierenberg, individually and as executor of the Estate
of Albert Nierenberg, and Felice T. Schwartz, whereby Elec-
tro-Chemical Engraving Company purchased their interest in
Etched Products Corporation. The price agreed upon was
$800,000, $317,330.94 of which was paid to the Estate on
transfer of the indebtdness and the balance to the stock-
holders (including shares held by the Estate). The debt of
$317,330.94 became owing to Electro-Chemical Engraving
Company. There were also other considerations.
The initial transaction in December of 1953 (the loan of
$400,000 to Etched Products Corporation) was questionable
because of the financial condition of Etched Products, the
relationship of the parties, the failure to pay interest on the
loan, the proviso for waiver of interest, and the nature of the
security behind the loan. The interests of the Kaplan Fund
were further diminished by virtue of the agreement of Feb-
ruary 23,1954.
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144 TAX-EXEMPT FOUNDATIONS: IMPACT ON SMALL I3USINESS
It would appear that the entire Etched Products Corpora-
tion transaction was an integral part of ? Mr. Kaplan's effort
to provide for his sister's and nephew's and Niece's welfare
when he became apprised of the financial condition of Etched
Products Corporation.
On the basis of the facts surrounding the advances of
$100,000 made by the Fund to Etched Products Corporation,
it was the opinion of the District Office that the transaction
constituted a "prohibited transaction" within the meaning of
section 3813 (b) (1) of the Code which states in part as fol-
lows:
For the purposes of this section, the term prohibited transaction
means any transaction in which an organization subject to the
provisions of this section?(1) Lends any part of its income or
corpus, without the receipt of adequate security and a reasonable
rate of interest, to . . . a member of the family (as defined in sec-
tion 24(b) (2) (D) of an individual who is the creator of?or who
?has made a substantial contribution to such organization . .
The family of an individual shall include only his brothers and
sisters, (whether by the whole or half-blood), spouse, ancestors
and lineal descendants.
Rose Nierenberg was a sister of J. M. Kaplan.
The provisions of section 3813 were violated by reason of
the lending of monies to the Etched Products Corporation
which was financially foundering and by the taking of secu-
rity (chattel and real mortgages) of questionable value.
This was further evidenced by the agreement of February 23,
1954, wherein the security was released and the $400,000 in-
debtedness became subordinated to the trade and bank cred-
itors of the borrowing corporation, Etched Products Corpo-
ration.
Here is a chronological account of the IRS?J. M. Kaplan Fund
tax matter subsequent to March 29, 1957:
? By letter of April 25, 1957?The Kaplan Fund requested a sixty
day extension, until June 29, 1957, for the filing of a protest. The
reason given for requesting the extension was that Mr. J. M. Kaplan
was out of the country and would not return until April 29, 1957.
? By letter of April 25, 1957?Mr. Donald R. Moysey, District Di-
rector of the Lower Manhattan District, granted an extension until
June 29, 1957.
? By letter of June 20, 1957?The Kaplan Fund requested an addi-
tional extension of thirty days, until July 29, 1957. The reason given
for requesting this extension was that Mr. J. M. Kaplan "returned to
New York toward the end of April and then left again about the
middle of May, to be gone until the middle of July."
? By letter of June 21, 1957?Mr. Raphael Meisels, District Direc-
tor of the Lower Manhattan District, granted an extension to July 29,
1957.
? By letter of July 26, 1957?The Kaplan Fund's attorney requested
a final extension of ten days, until August 8, 1957. The written request
was made "in accordance with Mr. Alexander's suggestion to confirm
today's telephone conversation" respecting a final extension. The let-
ter does not give the reasons for requesting this extension.
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TAX-EXEMPT FOUNDATIONS: IMPACT ON SMALL BUSINESS 145
? By letter of July 31, 1957?Mr. Raphael Meisels, District Director
of the Lower Manhattan District, granted an extension to August 8,
1957.
? By letter of August 7, 1957?The Kaplan Fund's attorney filed a
protest with Mr. Raphael Meisels, District Director of the Lower
Manhattan District.
? By letter of January 7, 1958?Mr. Raphael Meisels District Di-
rector of the Lower Manhattan District, advised the Kaplan Fund that
his office had given careful consideration to the Fund's brief and had
made "a thorough review of the issues involved". Thus, after careful
consideration, the District Office agreed with the March 29, 1957 rec-
ommendations of Mr. Donald R. Moysey, which would revoke the
Fund's tax exemption "retroactively and prospectively," and hence
"the case file has been forwarded to the Commissioner of Internal
Revenue, Washington 25, D.C.., for final disposition."
? A letter from the Kaplan Fund's attorney to the Commissioner of
Internal Revenue, Washington, D.C., dated November 20, 1958, refers
to a conference held on July 8, 1958, at which time additional informa-
tion was requested by the IRS.
? By letter of October 9, 1958?The Kaplan Fund's attorney con-
firmed the "oral arrangement extending until November 17, 1958, the
time for furnishing the additional information" requested by the IRS
in the conference of July 8, 1958.
? By letter of November 20, 1958?The Kaplan Fund's attorney sub-
mitted to the IRS the additional information requested at the confer-
ence of July 8, 1958. The Fund also requested a further conference.
? By letter of April 24, 1959?Mr. Raphael Meisels' District Di-
rector of the Lower Manhattan District, requested that the Kaplan
Fund execute and return within five days a consent Form 872, ex-
tending the statutory period of limitation upon assessment of tax for
the years 1954 and 1955.
ao'By letter of May 1, 1959?The Kaplan Fund's attorney forwarded
to the District Director of Lower Manhattan waivers on Form 872, ex-
tending the statute of limitations to June 30, 1960 for the years 1954
and 1955.
e By letter of March 24, 1960?Mr. Kenneth W. Moe, District Di-
rector of the Lower Manhattan District, overrode Mr. Moysey's recom-
mendations of March 29, 1957, and advised the Kaplan Fund that its
tax returns for the. years 1952 through 1956 "will be accepted as filed."
Hence the Fund "was exempt form Federal income taxes for such
years."
? By letter of June 6, 1961?The Kaplan Fund's attorney advised
the District Director of Lower Manhattan that "in accordance with
prior discussion" it was enclosing additional memoranda respecting
the Fund's tax returns for the years 1957 through 1960. Such mem-
oranda covered accounts with Jemkap, Inc., J. M. Kaplan and Trust
for J. M. Kaplan children, Baldwin Securities Corp., Publicker In-
dustries, Inc., Elkay Investments, letter dated May 16, 1961 from
Berlack, Israels, & Liberman, re fees paid to it by the Fund, and in-
vestments in Endicott Johnson Corp.
? By letter of August 31, 1961?The Kaplan Fund's attorney ad-
vised the District Director of Lower Manhattan that "in accordance
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146 TAX-EXEMPT FOUNDATIONS: IMPACT ON SMALL BUSINESS
with prior discussion" he was enclosing a memorandum respecting its
investment in stock of Endicott Johnson Corp. The attorney re-
quested an "opportunity to be heard in Washington in connection with
cosideration of this matter before any conclusions are reached," and
stated that powers of attorney would be forwarded within a few days.
? By letter of September 6, 1961?The Kaplan Fund's attorney
forwarded to the District Director of Lower Manhattan copies of
power of attorney respecting the Fund's tax returns for the years 1957
through 1960.
? By letter of April 12, 1962 The Kaplan Fund's attorney advised
the District Director of Lower Manhattan that "in accordance with
our telephone conversation" he was enclosing "Memorandum Supple-
mental to Protest" filed with the Commissioner of Internal Revenue
on November 20, 1958.
? By letter of April 24, 1962?The Kaplan Fund's attorney for-
warded to the District Director of Lower Manhattan consent Form
872, extending to June 30, 1963 the period of limitations for assess-
ment of the Fund for the year 1958.
? By letter of July 26, 1962?The Kaplan Fund's attorney advised
Mr. Harold Brodsky (Conference Coordinator Staff, Office of the
District Director of Lower Manhattan), that "in accordance with our
conversation" he was enclosing another memorandum, respecting the
Fund's tax returns for the years 1957 through 1960, and requested that
a copy of his "letter and said memorandum be forwarded to the ap-
propriate branch of the National Office," to be associated with the
Fund's file. The Attorney also reiterated his "request for a hearing
in the National Orrice before any conclusions are reached."
? By letters of January 22, 1964 and July 28, 1964?The Kaplan
Fund's attorney advised Rep. Wright Patman that there have been no
conferences or hearings with the Internal Revenue Service since July
26, 1962 with respect to the matters referred to in the IRS July 26,
1962 memorandum or any other matters of the J. M. Kaplan Fund,
Inc. Nor have any taxes been assessed by the IRS.
? By letter of February 19, 1964?The Fund's attorney forwarded
to the IRS Forms 872, extending the statute of limitations to June 30,
1965 for taxable years 1958 through 1960.
J. M. KAPLAN - M. KAPLAN FUND, FAMILIAR FIGURES IN THE
SO-CALLED "TAKE-OVER" BUSINESS
Mr. J. M. Kaplan, founder of the J. M. Kaplan Fund, Inc., follows
a familiar pattern for gaining control of companies. Mr. Kaplan,
formerly President. of Welch Grape Juice Company and of South-
western Sugar and Molasses Company, and once in control of Hearn's
Department Stores and other companies, is well known in the so-
called "take-over" business. He has waged a number of battles in
this field. In some of these contests, he has made use of charitable
funds set up and dominated by him. Such funds, of course, enjoy
the advantage of tax exemption.
Since 1945, Mr. Kaplan has been in and out of the following com-
panies: Welch Grape Juice Company, Southwestern Sugar and
Molasses Company, Pittsburgh Steel Company, Sharon Steel Com-
pany, Endicott Johnson Corporation, and Minnesota & Ontario Paper
Company.
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TAX-EXEMPT FOUNDATIONS: IMPACT ON SMALL BUSINESS 147
In addition, Mr. Kaplan and the funds of which he is a trustee or
officer, hold 19 percent of the voting stock of Lee National Corporation
and 31 percent of the voting stock of Illinois Brick Company.
In the 20 years since he won control of Welch Grape Juice Company
in a proxy contest, Mr. Kaplan's pattern of seeking control of com-
panies has been pretty much the same in every situation:
accumulation of stock in the company, usually through
purchases by himself and the tax-exempt foundations he has
set up and serves as trustee;
notification to the company of his holdings;
a request for membership on the board of directors, or for
adoption of policies he favors;
disposition of his holdings, frequently, at a handsome
profit?much of it tax-exempt.
This course of conduct has brought him editorial condemnation
by newspapers and by such nationally-known financial commentators
as Leslie Gould, financial editor of The New York Journal American,
and J. A. Livingston, financial editor of The Philadelphia Evening
Bulletin, for his use of tax-exempt foundations.
After organizing or heading a number of molasses companies from
1920 to 1925, Mr. kaplan became president of J. M. Kaplan & Broth-
ers, Inc., in 1926 and has been president of Kaplan Holding Company
and various successors since 1930. He was president and chairman of
Hearn Department Stores, Inc. 1932-1936; American Dry Ice Cor-
poration, 1933-34; Molasses Products Corporation 1934; president of
National Grape Corporation 1934-4945,
Upon winning his proxy fight for control of Welch Grape Juice
Company, Mr. Kaplan served as President and Director from 1945 to
1956. On August 25, 1955, the Navajo Corporation (100 percent
owned by the Kaplan Fund) sold to the Fund 244,681 shares of capi-
tal stock of Old Welch Company, or 61 percent of the outstanding
shares, for $5,138,483.00. At present, we have no information as to
how the Navajo Corporation acquired the shares. On December 10,
1956, the Fund disposed of the 244,681 shares for $15,781,924.50, show-
ing a gain of $10,643,441.50.
Mr. Kaplan was President of Southwestern Sugar and Molasses
Company from June, 1959 to March 1963.
According to Poor's Directory of Directors for 1964, Mr. J. M. Kap-
lan had the following business, affiliations:
President 86 Director, Nivell Corporation
President & Director, Jemka,p, Inc.
President & Director, Southwestern Sugar & Molasses Co.
President & Director, Ronier Corporation
A case-by-case study shows the pattern of Mr. Kaplan's business ac-
tivities since 1945.
CASE NO. I -LEE NATIONAL CORPORATION ( FORMERLY LEE RUBBER & TIRE
COMPANY)
As of March, 1964, foundations and funds, of which Mr. J. M. Kap-
lan was an officer, held 149,000 of the 785,000 shares of Lee National
Corporation outstanding stock, or about 19 percent.
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148 TAX-EXEMPT FOUNDATIONS: IMPACT ON SMALL BUSINESS
The J. M. Kaplan Fund, Inc., of which Mr. Kaplan is president,
Treasurer, and a Director, owned 77,000 shares, or 9.78 percent.
Jemkap, Inc., of which Mr. Kaplan is President, owned 26,500
shares.
Faigrel Leah Foundation, Inc., of which Mr. Kaplan is President,
owned 5,000 shares.
Mr. J. M. Kaplan, as Trustee, owned 37,500 shares.
Nemitco, Inc., owned 3,100 shares.
At Lee's annual meeting February 20, 1964, it was stated that Mr.
Kaplan had sought membership on the board of directors on the basis
of the stockholdings described above. When the management slate, of
directors was nominated, representatives of Mr. Kaplan placed in
nomination six opposition candidates. The Wall Street Journal of
February 21, 1964, reported that the group headed by J. M. Kaplan
arrived at the meeting with 128,410 shares of Lee's outstanding shares.
The stockholders, rebuffed him and his minority group in their at-
tempt to place six members on the nine-man board of directors.
CASE NO. 2?ILLINOIS BRICK COMPANY
As of April 15, 1963, Mr. J. M. Kaplan had acquired a 10-percent
stock interest in the Illinois Brick Company.
At January 22, 1961, Mr. Kaplan owned or controlled 63,391 shares
of the 204,665 outstanding shares, or 31 percent of the company's
stock.
The proxy statement of the Illinois Brick Company for the annual
shareholders meeting of April 20: 1964, indicates that the shares con-
trolled by Mr. Kaplan includes indirect ownership of 44,691 shares
owned by Jemkap, Inc.; 8,800 shares in a family trust, of which Mr.
Kaplan is Trustee, but in which he has no beneficial interest; 9,900
shares owned by a charitable corporation, of which Mr. Kaplan is
a Trustee, but in which he has no beneficial interest.
Mr. Kaplan was elected a Director of the Company.
CASE NO. 3?MINNESOTA & ONTARIO PAPER COMPANY
Mr. J. M. Kaplan reportedly accumulated approximately 134,000
shares of the stock of Minnesota & Ontario Paper Company over a
period of time beginning 1956. Total shares outstanding were 2,573,-
448 shares.
Mr. Kaplan reportedly advocated a policy line rejected by the man-
agement, and could not reach a position where he could ask for mem-
bership on the Board of Directors.
CASES NOS. 4 AND 5?PITTSBURGH STEEL COMPANY AND SHARON STEEL
COMPANY
As reported by Leslie Gould, Financial Editor of the New York
Journal American, January 6, 1961:
In his bid to become a steel tycoon, Kaplan first bought into Pittsburgh
Steel Co., which, like Endicott Johnson, is largely a family run affair.
The company then was dominated by J. H. Hillman, Jr., and his family.
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Kaplan, as in Endicott Johnson, demanded and got a place on the
Pittsburgh board. Hillman instead of giving battle to Kaplan did an
adroit selling job. This was that since Hinman had 20 percent of Pitts-
burgh, maybe a more fertile field would be in 'Sharon Steel.
It just so happened that another Hillman enterprise?Pennsylvania
Industries?had 64,000 shares, or 61/4 percent, of the Sharon stock. The
Hillmans might be persuaded to swap the Sharon stock for Kaplan's
holdings in Pittsburgh. Kaplan "bought" the deal. At the same time?
Sharon ?bought Pittsburgh .Steel's holdings in National Supply.
Kaplan demanded a place on the Sharon board, but after getting on
he had several run-ins with the two Roemers?H. A., sr., and jr.?who
were chairman and president and who with their families had 20 percent
of the Sharon stock.
Kaplan never got any further in his move to gain control, so an
arrangement was made for him to sell his holdings at virtually the price
he had paid. This was done through a secondary distribution.
The Kaplan Fund held 102,458 shares and 110,902 shares of Pitts-
burgh Steel as of December 31, 1951 and December 31, 1952 respec-
tively, at a cost of $1,773,070.26. In 1953 (date unknown), the Fund
sold 113,901 shares of Pittsburgh Steel for $2,163,380.24, showing a
gain of $390,309.98.
During the period that the Kaplan Fund held Sharon Steel Corpo-
ration stock, the Fund apparently did quite will. 61,600 shares of
such stock were purchased on December 18, 1950-October 17, 1951, at a
cost of $2,303,705.05 and were sold in late 1951 (date unknown) for
$2,527,780.99, showing a gain of $224,075.94.
CASE NO. 6?ENDICOTT JOIINSON CORPORATION
In the attempt of Glen Alden to take over the Endicott Johnson
Corporation, in 1961, two tax-exempt funds were involved, the J. M.
Kaplan Fund, Inc., and the Albert A. List Foundation. Mr. Albert
A. List was president of Glen Alden. Major holdings of Endicott
Johnson, held by the Kaplan Fund, were swapped for Glen Alden
shares.
At that time there were cryptic comments in journalistic and legis-
lative circles on the ethics of using assets of tax exempt funds in a
battle for the control of a business when the sole reason -for granting
tax ememption is charity.
Commenting on the Endicott Johnson case, J. A. Livingston, Fi-
nancial Editor of The Evening Bulletin, Philadelphia, wrote on
January 17, 1961:
Regarcile,ss of intent, the episode reveals in full nakedness how chari-
table foundations can be misused. A charitable trust, or foundation, is
granted tax free status by Congress solely for a charitable purpose.
Assets are not to be employed to enrich the donors, or founders or to
aggrandize their economic power.
A person can build up a foundation by contributing, every year, part
of his income. If the investments are well chosen, the fund may grow
rapidly through capital appreciation. Only income must be disbursed.
The foundation's sponsor may be able to use the assets to buy control
of companies. In so doing, he becomes an indirect beneficiary of the
trust through the power it confers on him. Ile can install himself as
president of a corporation so acquired. He can find jobs for friends,
relatives and business associates. He can favor friends with business.
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The deal in the Endicott Johnson case was the swap of 60,000 shares
of Endicott Johnson for shares of Glen Alden. Of this block, 54,000
shares were held by the Kaplan Fund, for which it received 126,000
Glen Alden shares. 6,000 shares of Endicott Johnson were held by
other Kaplan interests.
The swap was not announced publicly until well after Endicott
Johnson shares started to move on the Stock Exchange.
Commenting on this, and related matters, in the New York Journal
American, January 5, 1961, Leslie Gould, Financial Editor, noted that
the deal (between Messrs. Kaplan and List), was made December 29
after negotiations of a week or ten days. He added:
Two days later--the 31st?Glen Alden mailed to Endicott Johnson
stockholders an offer of $30.50 a share, which was $3 above the close for
the stock December 30. The shoe company stockholders got the offer in
the mail Monday--the second?or Tuesday?the third.
A question for the SEC is who supplied Glen Alden the Endicott
Johnson stockholder list? Endicott Johnson's president says Kaplan
did.
Another question is did anyone connected with Endicott Johnson sup-
ply Glen Alden confidential information as to the shoe company, such
as copies of an engineer report? Endicott Johnson's president says
Kaplan did.
In line with the Stock Exchange's "hot news" requirements and the
SEC's requirements as to disclosure when a proxy fight threatens, the
movements in the market call for some explaining.
Endicott Johnson closed December 28 at $24.623/4, unchanged from the
previous day. Volume was 2,300 shares. The next day?the date of Mr.
Kaplan's deal--volume jumped to 4,600 and the price rose $1.373/4 to $26.
The next day- the 30th?volume was 4,400 with the day's close $27.50,
UI) $1.50. It sold that day as high as $28.
The first day of trading of the new year the stock jumped to $31, up
$3.50 on a volume of 9,800 shares. The news was then out of the Glen
Alden offer. The next day?the 4th--the stock touched $31.121/2 and
closed at $31.
The motive for buying Endicott Johnson shares for a charitable
fund in the first place, when these shares were far from having a top
investment rating, also came in for pungent comments.
Mr. Livingston's column of January 17, 1961, observed:
Kaplan has said that Endicott Johnson was a dying "company".
Therefore, he wanted to bring in Glen Alden's management to revive
It. That raises this question: Is it prudent and proper for a trustee of
a foundation to invest charitable funds in a company which he thinks
requires a managerial pulmotor? Isn't that taking a speculative risk
which a trustee ought to avoid?
Reports of charitable trusts to the Treasury do not easily disclose how
assets are being used. Information returns must be filed annually dis-
closing income, disbursements, and assets. However, unless the trust
owns "10% or more of any class of stock of any corporation," it doesn't
have to disclose the name of the company. If a large taxpayer sets up
several trusts himself or through relatives, he could, without disclosure,
easily control companies by confining holdings in each trust to less than
10% of a company's stock.
Mr. Kaplan was openly accused by Francis A. Johnson, Endicott
Johnson president, in a letter to stockholders, of providing Glen Alden
with confidential board information over an extended period, of
negotiating a separate deal for himself apart from that offered other
stockholders and of supplying a copy of the stockholders list to Glen
Alden in violation of his stated purpose in asking for the list merely
to get acquainted with the names of stockholders.
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Messrs. Kaplan and List were also accused of entering into a con-
spiracy to gain control of Endicott Johnson. They denied this charge
but on January 13, 1961, Justice Joseph Molinari, of the State Su-
preme Court, Binghampton, New York, issued an order restraining
Glen Alden and List from acquiring additional Endicott Johnson
shares.
VIOLATIONS OF TREASURY REGULATIONS
The Kaplan Fund does not issue an independent auditor's financial
statement. In Chairman Patman's report to the Subcommittee (Octo-
ber 16, 1963, page 9), there is reference to the fact that the IRS per-
formed an audit of the Kaplan Fund in 1957. Yet later, when the
Fund filed its tax returns for the years 1957 and 1960, it failed to file
the required schedules disclosing its ownership of 10% or more stock
of a corporation. Nor did the Fund file such information for the
earlier years 1954 through 1956. (Also, see First Installment of
Chairman Patman's report to the subcommittee, dated December 31,
1962, pages 42 and 81, for other references to the Kaplan Fund.)
The CHAIRMAN. Would you agree that Mr. Kaplan has used the
Fund to accumulate substantial stock ownership in certain com-
panies?
Mr. HARDING. It would appear that the ownership has increased
materially, Mr. Chairman.
The CHAIRMAN. Would you agree that there was substantial bor-
rowing between Mr. Kaplan and his Fund?
Mr. HARDING. It would also appear that there was, yes, sir.
The CHAIRMAN. Since these loans bore no interest, had no collateral
and maturity on the death of Mr. Kaplan, would you say that these
were prudent loans for the Fund ?
Mr. HARDING. A loan without security I would not consider to be
prudent.
The CHAIRMAN. Has the IRS examined the movement of funds
between Mr. Kaplan and the Fund to determine whether such activi-
ties were en gaged in for the purpose of obtaining certain tax ad-
vantages for Mr. Kaplan ?
Mr. HARDING. The Internal Revenue Service is currently in such
an investigation, Mr. Chairman.
(See page 203 and Exhibit 12, page 312 for subsequent response of
IRS, under dates of October 12, 1964, and December 3, 1964.)
The CHAIRMAN. Have you received any of your files on this?
Mr. HARDING. No sir, I have not.
The CHAIRMAN. Would you agree that Mr. Kaplan has engaged in
self-dealing with his Fund?
Mr. HARDING. Mr. Chairman, as a matter of general policy
The CHAIRMAN. That is under investigation now?
Mr. HARDING. Yes, sir, it is under investigation. I would really
rather not comment on those prejudicial matters as long as we have an
investigation pending.
The CHAIRMAN. *ell, aside from your present investigation but
based upon the District Director's recommendations, would you agree?
Mr. HARDING. There was an earlier recommendation by the Dis-
trict Director, yes, sir, that went in that direction.
(See page 203 and Exhibit 12, page 312 for subsequent response of
IRS, under dates of October 12, 1964, and December 3, 1961.)
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The CHAIRMAN. What were the reasons for the substantial bor-
rowing that took place between the Fund and Mr. Kaplan or the
companies controlled by him?
Mr. HARDING. Mr. Chairman, I think that question is involved in
our current investigation.
(See page 203 and Exhibit 12, page 312 for subsequent response of
IRS, under dates of October 12, 1964, and December 3, 1964.)
The CHAIRMAN. Would you agree that the Fund has made specu-
lative investments in companies operating at losses, paying little
or no dividends, and whose stocks have poor marketability?
Mr. HARDING. Again, Mr. Chairman, that question is involved.
(See page 203 and Exhibit 12, page 312 for subsequent response of
IRS, under dates of October 12, 1964, and December 3, 1964.)
The CHAIRMAN. Mr. Roosevelt?
Mr. ROOSEVELT. I shall wait until you get to it.
The CHAIRMAN. Would you say that the investments made by
the Fund are typical of those which a trustee of a charitable founda-
tion usually makes in order to preserve the principal and to secure
reliable income?
Mr. HARDING. The same answer would apply, Mr. Chairman.
(See page 203 and Exhibit 12, page 312 for subsequent response of
IRS, under dates of October 12, 1964, and December 3, 1964.)
The CHAIRMAN. If these speculative investments cannot be con-
sidered as desirable for a charitable foundation, would you agree that
the size of such investments by the Fund indicates that the basic
intention may have been not one of investment but rather an attempt
to create business opportunities for Mr. Kaplan through the utiliza-
tion of the Fund's assets? For example, the Lee National Corpora-
tion has a very thin market and has not paid dividends since early
1962. The Illinois Brick Company is listed only on the Midwest Stock
Exchange and has a small amount of trading.
Mr. HARDING. This question also goes to the exempt status of the
Foundation and should not be commented upon, Mr. Chairman.
(See page 203 and Exhibit 12, page 312 for subsequent response of
IRS, under dates of October 12, 1964, and December 3, 1964.)
The CHAIRMAN. In your view, what is the justification for a foun-
dation making this type of investment? Do you see any justification
for it?
Mr. HARDING. The same answer, Mr. Chairman.
(See page 203 and Exhibit 12, page 312 for subsequent response of
IRS, under dates of October 12, 1964, and December 3, 1964.)
The CHAIRMAN. Would you agree that the Fund's business activi-
ties may have operated to the detriment of its primary purpose?
Mr. HARDING. The same answer, Mr. Chairman.
(See page 203 and Exhibit 12, page 312 for subsequent response of
IRS, under dates of October 12, 1964, and December 3, 1964.)
The CHAIRMAN. Now, we know that, by letter of March 29, 1957,
Mr. Donald R. Moysey, District Director of Lower Manhattan, recom-
mended that the Fund's tax exemption be revoked retroactively. We
also note that, by letter of January 7, 1958, Mr. Raphael Meisels,
successor to Mr. Moysey, upheld the latter's recommendation that
the Fund's tax exemption be, revoked "retroactively and progres-
sively."
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TAX-EXEMPT FOUNDATIONS: IMPACT ON SMALL BUSINESS 153
Then, by letter of March 24, 1960, Mr. Kenneth W. Moe, District
Director of the Lower Manhattan District and successor to Mr.
Meisels, overrode the recommendations of the two previous District
Directors, and advised the Kaplan Fund that its tax returns for the
years 1952 through 1956 "will be accepted as filed," and that the Fund
"was exempt from Federal income taxes for such years."
Mr. Moe 's letter of March 24, 1960 to the Kaplan Fund gives no
indication of why the Fund's tax returns were accepted as filed for
the years 1952 through 1956. Please tell us why the IRS decided that
the Fund "was exempt from Federal income taxes for such years?"
Mr. HARDING. Mr. Chairman, since that information is involved in
the file and I do not have it available, could I supply the answer to
that question for the record, sir?
The CHAIRMAN. That will be all right, sir. If you get the file before
we finish, bring it up, please.
(The information submitted by the IRS under date of October 2,
1964, appears on page 196. Also see Exhibits 12 through 25, pages
312-342.)
Mr. FIARDING. If it is feasible, yes, sir.
Mr. ROOSEVELT. Would the Washington office of IRS, Mr. Harding,
normally make a review of any such change from previous determina-
tions by a previous District Director?
Mr. HARDING. The National Office does review and takes final action
on proposed revocations of tax exemption. This is apparently what
occurred in this case, there was a National Office review.
Mr. ROOSEVELT. Was there any significance to the fact that there
were three different District Directors of Lower Manhattan during a
very short period of time?
Mr. HARDING. Only that we have a rather high turn-over in Man-
hattan Mr. Roosevelt.
Mr. hOOSEVELT. A high turn over in Manhattan?
Mr. HARDING. Of executive personnel.
You mean significant in the fact that we had so many personnel in
that period of time?
Mr. ROOSEVELT. Yes, sir.
Mr. HARDING. Nothing other than the fact that one of those gentle-
men, I know, is dead. There is no connection with this case that I am
at all aware of.
Mr. ROOSEVELT. Is it worth looking into that two previous directors
came to the same decision while the third one a few years later made an
entirely different decision? Is the reason for this worth looking into
carefully?
Mr. HARDING. In this particular case, I do not believe it appears in
the chronology the Chairman has submitted, but in the case of Mr.
Moe's recommendation, I believe this indicates a concurrence by the
National Office and was not merely his independent judgment on the
case.'
1 Mr. Donald R. Moysey was Acting Director of the Lower Manhattan District office
from August 8, 1955 through February Z. 1956, and was Director from February 7, 1056
through April 30, 1957. Mr. Raphael Meisels was Director of the Lower Manhattan
District office from May 1, 1957 through December 31, 1959.
On January 1, 1960, the Lower and Upper Manhattan District offices were consolidated.
Mr. Kenneth W. Moe was Director of the consolidated Manhattan District office from
January 1, 1960 through December 9, 1961. (IRS letter, October 12, 1964.)
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154 TAX-EXEMPT FOUNDATIONS: IMPACT ON SMALL BUSINESS
Mr. ROOSEVELT. The reasons for this you are going to supply to the
Committee?
Mr. HARDING. We are going to attempt to supply the reason for the
change in the revocation position which we took earlier and the ap-
proval position which we took subsequently, yes, sir.
Mr. ROOSEVELT. Why are you just going to attempt to? Why can
you not do it?
Mr. HARDING. The only reservation I have, Mr. Chairman, is, as I
pointed out, the case is under investigation. We would not want to
make it of public record if this would prejudice the investigation.
Mr. ROOSEVELT. But eventually, it will be available to the Subcom-
mittee, assuming that some time you finish the investigation?
Mr. HAnniico. Yes, we shall make it available. My only problem
here is the public record with a case which is under active investiga-
tion by the IRS.
(The information submitted by the IRS, under date of October 2,
1961, appears on page 196. Also, see Exhibit 12 through 25, pages
312-342.)
The CHAIRMAN. In 1962 or subsequent to that date has the IRS re-
ceived any information from a former employee of 1121.r. J. M. Kaplan
regarding the operations of the J. M. Kaplan Fund?
Mr. HARDING. Pardon me, Mr. Chairman, would you repeat the
question?
The CHAIRMAN. Yes, sir. In 1962 or subsequent to that date, has
the IRS received any information from a former employee of Mr.
J. M. Kaplan regarding the operations of the J. M. Kaplan Fund?
Mr. HARDING. Mr. Chairman. Could we go off the record for this
response?
The CHAIRMAN. Yes, off the record.
Mr. ROOSEVELT. Mr. Chairman, I think it would be fair to say that,
although it may be off the record, it is public information. The press
is here, so depending on your desire, let us say it is off the public record.
Mr. HARDEN-G. Could I come to your bench, sir, and give the answer
to that question privately?
The CHAIRMAN. Suppose you come up here, Mr. Harding.
(Off record discussion.)
The CHAIRMAN. The following items are herewith being inserted in
the record as Exhibits:
(a) Schedules of loans receivable and payable of the Kap-
lan Fund during the years 1951 through 1962. (See Ex-
hibits 13 and 11, pages 313-317.)
(b) Correspondence between the Kaplan Fund and the
IRS, as submitted to us by the Fund. (See Exhibits 15
through 18, pages 318-332.)
(c) Three letters of the Kaplan Fund to Rep. Wright Pat-
man. (See Exhibits 19 through 21, pages 333-335.)
(d) Newspaper clippings of New York Journal Ameri-
can dated January 5-6, 1961, and Philadelphia Bulletin of
January 17, 1961. (See Exhibits 22 through 24, pages 336-
341.)
The CHAIRMAN Mr. Harding, the House will have a signal bell in
just a minute. Could you be with us this afternoon?
Mr. HARDING. Yes, indeed, Mr. Chairman.
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The CHAIRMAN. I have talked to Mr. Harvey and he can be here
at two o'clock. I can be here at the same time, and Mr. Roosevelt can
be here soon thereafter. We would like to meet for a while this after-
noon, and, if you gentlemen can be back here, we will have some
further questions.
Mr. HARDING. Surely, Mr. Chairman.
The CHAIRMAN. The committee will stand in recess until 2 o'clock.
(Whereupon, at 11 :45 a.m., the Subcommittee recessed, until 2
p.m.)
AFTERNOON SESSION
The CHAIRMAN. The committee will come to order.
The other members asked me to start until they get here.
TESTIMONY OF BERTR,AND M. HARDING-, ACTING COMMISSIONER,
INTERNAL REVENUE SERVICE, ACCOMPANIED BY MITCHELL
ROGOVIN, ASSISTANT TO THE COMMISSIONER; SHELDON S.
COHEN, CHIEF COUNSEL; AND ARTHUR B. WHITE, SPECIAL AS-
SISTANT TO CHIEF COUNSEL, INTERNAL REVENUE SERVICE?
Resumed
The CHAIRMAN. This morning you stated, Mr. Harding, that the
Kaplan Fund was presently under investigation by the IRS. Is this
a new investigation or is it a revival of a dormant investigation?
Mr. HARDING. This is really a continuation, I guess, you might say,
Mr. Chairman, of the investigation that has been under way for some
time.
The CHAIRMAN. YOU mean several years Or several months?
Mr. HARDING. Yes sir.
The CHAIRMAN. According to the record which We presented this
morning, the National Office of the IRS has been involved in the J. M.
Kaplan Fund matter since January 1958. Our records also indicate
that there were conferences held at the Washington National Office of
the IRS during 1958. Yet, you said this morning that the Fund's file
is not here in Washington. How do you explain this?
Mr. HARDING. The file, sir, is back in New York in connection with
the current investigation.
The CHAIRMAN. That is where the investigation will have to be
made, in New York?
Mr. HARDING. Yes, sir.
The CHAIRMAN. The National Office though will be the one who will
finally pass on it, but you won't pass on it, until the District Office
passes on it ?
Mr. HARDING. Until the recommendation comes to the National
Office.
The CHAIRMAN. The Kaplan Fund attorney has advised us that
there have been no conferences or hearings with the IRS since July 26,
1962. Nor have any taxes been assessed by the IRS. IIow do you
explain this two years of lack of action by the IRS on a matter such as
this which may involve millions of dollars in tax liabilities?
Mr. HARDING. Well, Mr. Chairman, I think this is connected with
a matter which we discussed this morning in your chambers.
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The CHAIRMAN. You see, it is rather disturbing to us that there has
been a two year lack of action by the IRS on a matter such as this
which could involve millions of dollars of tax liability. Has anything
been done during those two years?
Mr. HARDING. Could Mr. Rogovin consult with you privately, Mr.
Chairman? He has just been in New York on this particular case
and I think he will give you some information on it.
The CHAIRMAN. Off the record.
(Discussion off the record.)
(See page 203 and Exhibit 12, page 312 for subsequent response of
IRS, under dates of October 12, 1964, and December 3, 1964.)
The CHAIRMAN. Mr. Harding, what is the status of the possible tax
liability of the Kaplan Fund for the years 1952 through 1956? Does
the fact that Mr. Moe overrode the earlier recommendations of the
District Directors on March 24, 1960 mean that the National Office
of the IRS cannot do anything about any tax liability that may exist
for the years 1952 through 1956? In other words, does the statute of
limitations kill any possibility for assessing taxes for those years?
Mr. HARDING. If the statute has run on those years, Mr. Chairman,
it would preclude our
The CHAIRMAN. Has it run?
Mr. HARDING. I do not know the answer to that question.
The CHAIRMAN. Obviously it would have run on some of them,
wouldn't it?
Mr. HARDING. Unless it was kept open by the consent of the tax-
payer, Mr. Chairman.
The CHAIRMAN. Yes. Suppose you get that information and file
it with your answer.
Mr. HARDING. Yes sir. The years being 1952 to 1956.
The CHAIRMAN Yes, sir.
Mr. HARDING. Yes, sir.
The CHAIRMAN. That is a period for which it would have been in-
voked in 1957.
Mr. HARDING. Yes, sir.
The CHAIRMAN. What are the years that are presently under inves-
tigation by the Internal Revenue Service? Obviously they would be
the ones that the statute of limitations would not run on, I suppose?
Mr. HARDING. Yes, sir. Those years subsequent to '57 on which
the statute has not run.
The CHAIRMAN. -Up through '63?
Mr. HARDING. Yes, Sir. Sixty-three would, of course, be open.
The CHAIRMAN. I can't understand why, since you had knowledge
of this thing before the statute of limitations ran, you didn't get some
kind of understand.
Mr. HARDING. As I say, Mr. Chairman, we may have extensions run-
ning on those years, I just don't know the answer at this point,. I would
be glad to give you the years that are open.
(The information submitted by the IRS, under date of September
1, 1964, appears on page 197. Also, see Exhibits 12 through 25, pages
312-342.)
The CHAIRMAN. Do you have the data I requested this morning
with respect to salary payments to the individual trustees of the Hanna
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TAX-EXEMPT FOUNDATIONS: IMPACT ON SMALL BUSINESS 157
Fund during the final liquidation period, September 1, 1962 through
January 18, 1963?
Mr. HARDING. We do not yet, Mr. Chairman. Our Director in
Cleveland is attempting to get that information and will call it in to
us the minute he has it.
(Following is the information submitted by the IRS under date of
August 11, 1964. Also see Exhibits 6 and 12, pages 302 and 312.)
U.S. TREASURY DEPARTMENT,
INTERNAL REVENUE SERVICE,
Washington, D.C., August 11, 1964.
DEAR MR. CIIAIRMAN : This is to confirm the information furnished Mr. Olsher
today by phone relative to payments by the Leonard C. Hanna Jr. Fund of
Cleveland, Ohio, to its officers and trustees for the period from September 1,
1962 to January 18, 1963, as follows:
Name and position
Salary
Distribution fee
Harold T. Clark, President and Trustee
$10,
000
$23,
798.
26
Lewis B. Williams, Vice President and Trustee
15,
000
23,
798.
26
John C. Virden, Trustee
5,
000
23,
798.
26
N. J. Reigert, Secretary and Assistant Treasurer
2,
000
Expense of Earning Gross Income
$32,
000
Expense of Distributing Principal (Rounded to)
Total per Form 990-A for Period Covered
$71,
$103,
395.
395.
00
00
I trust this will serve your purposes. If I can be of further assistance in this
regard, please let me know.
Sincerely,
BERTRAND M. HARDING,
Acting Commissioner.
HOD. WRIGHT BATMAN,
Chairman, Subcommittee Foundation Study,
Select Committee on Small Business,
Room 129, Cannon House Offlce
Washington, D.C.
The CITA-ERMAN. All right. During Mr. Caplin's testimony, I
mentioned that the Foundation Library Center calls itself an educa-
tional foundation. I asked Mr. Caplin whether the Foundation had
a faculty, students and educational courses, and whom it was educat-
ing. Mr. Caplin replied that the Foundation had no faculty or
students, and he did not know whether it offered any educational
courses. He did, however, say that the Foundation Library Center
is "concerned with educating the public at large and in addition the
foundations themselves."
Mr. Caplin indicated that he was not too familiar with the Founda-
tion Library Center of New York City. We will give you some of
the facts.
I shall ask Mr. Olsher to continue.
Mr. OLSITER. Let me acquaint you with some of the facts regarding
the operations of the Foundation Library Center during the eight year
period of 1956 through 1963:
? Total receipts (including contributions received) were $2,658,344.
Of this amount, the Foundation has retained $1,653,044, or 62 percent.
39-a15-64-41
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158 TAX-EXEMPT FOUNDATIONS : IMPACT ON SMALL BUSINESS
? Expenditures totaled $1,005,300, or 38 percent of the total receipts.
? $515,877 or almost 20 percent of the total receipts, was spent on
salaries and other compensation.
? $13,668 was spent for legal and accounting expenses.
? $123,790 was spent for rent, including $28,365 during the year
1963.
? $60,982 was spent for office and library furnishings.
? Other expenses totaled $290,983, including expenditures for clip-
pings in the amounts of $6,838 and $6,139 during each of the years 1962
and 1963, respectively.
? From the end of 1956 to the close of 1963, the Foundation's assets
have grown 30 fold?from $55,592 to $1,657,461.
? Contributions to charity have been nil.
? Support for the Foundation comes from six foundations. Their
gifts to the Foundation Library Center totaled $2,336,500 from 1956
through 1963, as follows:
Carnegie Corp. of New York
$750,
000
Ford Foundation, N. Y. C
550,
000
Rockefeller Foundation, N. Y. C
400,
000
Russell Sage Foundation, N. Y. C
136,
500
W. K. Kellogg Foundation, Battle Creek, Mich
400,
000
Alfred P. Sloan Foundation, N. Y. C
100,
000
Total
2, 336,
500
? Mr. F. Emerson Andrews is the Director of the Foundation Li-
brary Center. His salary in 1963 was $20,000 plus expenses for spend-
ing four-fifths of his time at the job. Mr. Andrews is also part time
consultant to the Russell Sage Foundation of New York City.
? Paid employees of the Foundation numbered seventeen at the
close of 1963. It started with four employees in 1956. Seven of the
seventeen employees of the Foundation other than Mr. Andrews, were
receiving $135 or more weekly at the close of 1953:
Rate of
Name and position Compensation
Irene R. Kay, Executive Assistant $8, 500
Marianna 0. Lewis, Editor 8, 500
Dr. Ralph Nelson, Research Director 12, 000
Lena F. Noe, Librarian 7, 500
J. Richard Taft, Manager, Washington, D.C., Branch 13, 000
Virginia Warner, Librarian 8, 000
Ann D. Walton, Secretary and Assistant to the Director 12. 000
? The Foundation publishes a hi-monthly bulletin called Founda-
tion News which had 3,635 paid subscribers for the last issue of 1963.
According to the Foundation, the subscribers to Foundation News can
be classed as follows:
Affiliation Percent
Universities and Colleges 40
Health and Welfare Agencies 17
Foundations 20
Humanities 4
Religious organizations 3
Miscellaneous and unidentified 16
Total 100
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? Following are the number of copies of each issue of Foundation
News printed beginning 1962.
Month
1962
1963
1964
January
3,
865
1
7,
700
4,
177
March
4,
081
4,
075
4,
174
May
4,
020
3,
979
4,
029
July
4,
092
4,
175
September
4,
087
4,
029
November
4,
093
4,
106
1 Promotional mailing in addition to rogular subscription list was 2,764.
? The Foundation has seven depositories located in Berkeley, Cali-
fornia, Los Angeles, Atlanta, Chicago, Kansas City, Cleveland, and
Austin, Texas.
? According to the Foundation, there were 3,932 registrations in the
Foundation Library Center in New York City during 1963. This
does not mean that 3,932 persons used the facilities of the Center in
1963, since one person may sign in more than once during a day.
The Foundation is unable to tell us how many persons used the
facilities of the seven branch depositories during 1963.
? The Foundation gathers the material for a book called "The Foun-
dation Directory" which is published by the Russell Sage Foundation
of New York City. The last two directories were published in 1960
and 1964. Pages totaled 817 in 1960 and 1,000 in 1964.
The directories list roughly 6,000 foundations. The information
includes the names and addresses of the foundations, dates of incorpo-
ration, the State in which they were incorporated, their purposes, the
names of the founders, officers, directors or trustees, their assets and
expenditures. Income of the foundations has been omitted despite the
fact that the Directory was compiled from (1) records in the Foun-
dation Library Center's files, (2) detailed questionnaires, which in-
cluded a request for income data, (3) public records of the district
offices of the Internal Revenue Service, and (4) news reports.
What is the purpose of a directory of tax-free foundations that
shows assets and expenditures but omits income figures? The answer
is that obviously the foundations prefer not to publicize their incomes.
By letter of April 10, 1961, we asked the Foundation Library Cen-
ter to furnish us the following:
(1) Number of persons involved in the preparation of the
1964 Directory; and
(2) Breakdown of expenses involved in the preparation of
the 1964 Directory, including salaries.
In its reply of April 27, 1964, the Foundation advised us that 24
persons were involved in producing the Directory, but it could not
furnish information respecting the expenses involved in the prep ara-
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160 TAX-EXEMPT FOUNDATIONS : IMPACT ON SMALL BUSINESS
tion of the Directory. According to the Foundation, "Preparation
of the Directory is so thoroughly integrated with the other operations
of the Center that no responsive answer can be made to this question.
No attempt was made to distribute the time of regular or field staff de-
voted to this special function."
By letter of May 8, 1964, we advised the Foundation that, on Oc-
tober 17, 1962, it had informed us that a "rough estimate of salaries. . .
attributable to the 1.960 Directory totals $46,126." We, therefore,
once again asked the Center to estimate such costs for the 1964 Direc-
tory. In its reply of May 22, 1964, the Center advised us that salary
costs for the 1964 Directory could not be given to us because "prepara-
tion of the Foundation Directory, Edition 2, is so thoroughly inte-
grated with the other operations of the Center that no responsive an-
swer can be made to this question".
I would estimate that the cost of each of the directories was no less
than $150,000.
Following is information received from the Russell Sage Founda-
tion respecting the 1964 Foundation Directory, which of course
omits salaries:
1. Manufacturing costs to April 1, 1964
2. Cost of promotion and distribution to April 1, 1964
3. General overhead to April 1, 1964
4. "Salaries of officers and staff. The publication of the Foundation
$49,
$11,
$1,
000
290
500
Directory is an integrated part of our entire program of operation.
As such, it is not possible for us to estimate the time officers and
staff devoted to this endeavor."
5. "Cost of research and preparation. The research and preparation
of materials for the Directory were done by the Staff of the Foun-
dation Library Center. We are, therefore, unable to provide cost
estimates for this item."
G. Number of copies printed to April 1, 1964
14,
762
Number of copies sold to April 1964
8,
190
7. Dollar value of sales to April 1964
$61,
425
Information received from the Russell Sage Foundation respecting
cost (excluding salaries) of the 1960 Foundation Directory is as
follows:
1. Cost of printing, binding, promotion, and distribution
$86,
712.
46
2. "No allocation has been made to cover the time of officers and
staff necessarily involved, other than a portion of the time of
our publication department."
3. Copies printed
13,
738
4. Copies sold through September 30, 1962
12,
278
5. Dollar value of sales
92,
085
According to the Foundation's application for tax exemption, its
purpose is "to assemble, and make available to the public, informa-
tion about philanthropic foundations in the United States and to
encourage fuller reporting by such organizations."
Its charter states that one of the purposes for which it was formed is
"to promote the development and maintenance of sound standards of
reporting by such foundations and to assist them in making such
reports available o the public * * *"
Mind you, one of the principal purposes of this organization is "to
promote the development and maintenance of sound standards for
reporting by such foundations and to assist them in making such
reports available to the public * * *" Yet, the Foundation did not
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make full disclosure with respect to capital gains or losses in its tax
returns for 1958 through 1961. It failed to file such schedules de-
spite the fact that Treasury regulations require a detailed statement
with respect to assets sold, including (a) date acquired, and manner
of acquisition, (b) gross sales price, (c) cost or other basis (value at
time of acquisition, if donated), and (d) gain or loss.
Nor did the Foundation report details of officers' salaries until
1962.
Moreover, although the Foundation Library Center bills itself as
the fact-finding statistical organization on foundations, it has been
unable to furnish us with (1) a study or analysis of investment port-
folios of foundations?that is, an analysis of their investments in
common stocks, preferred stocks, etc., or (2) names and addresses
of foundations which are the largest single stockholders or major
stockholders in commercial enterprises, or (3) material relating to
the supervision of foundations in England, Canada, France, or other
foreign countries.
The CHAIRMAN. How many District Offices does the IRS have in
the United States, Mr. Harding?
Mr. HARDING. Fifty-eight., sir.
The CHAIRMAN. The public portions of foundation tax returns are
available for inspection at all District Offices of the IRS throughout
the country, is that correct? "
MT. HARDING. That is correct, sir. Copies of 990?A's are available
at each District Office where the returns were filed.
The CHAIRMAN. As you know, the Foundation Library Center's
new Washington office and its project of photocopying foundation
tax returns at the IRS is being supported by a (rift of $200,000 from
the Alfred P. Sloan Foundation of New York City.
Mr. Caplin stated before this Committee on July 22 that he wel-
comed the arrangements which permit the Foundation Library Center
to photocopy foundation tax returns at a cost of 100 per page, one-fifth
the cost to the public "because of the opportunities it presented for
additional locations Aare these returns would be availdple for public
inspection."
In light of the fact that foundation tax returns are available for
public inspection in the National Office of the IRS and in all your
District Offices, how do you justify the expenditure of $200,000 for
the Foundation Library Center's Washington project when so many
charities could utilize that $200,000 for worthwhile purposes?
Mr. HARDING. Well, sir, of course, we don't pass on each and every
donation by a charitable foundation. I would point out to you, how-
ever?
The CHAIRMA.N. Why shouldn't you pass on large gifts?
Mr. HARDING. As long as it meets the purposes for which the Foun-
dation was established, kr. Chairman, we do not review the individual
charitable donations. This would appear to meet those standards.
Beyond this, and in furtherance of Mr. Caplin's remarks, I would
point out to the Chairman that the inspection of returns in the na-
tional office is done without fee to individuals who seek merely to look
at the 990A's The only charge we ever make is the 500 a page charge
when an individual desires to have a reproduction of the return.
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It is, however, quite expensive for us to search and make available
to individuals the returns which are on file for their inspection.
To date in Washington, the only reproductions that have been made
have been made by the Foundation Library.
We figure approximately 400 look-up cost on each return that an
individual would like to inspect. This is not reimbursed to the Gov-
ernment. Hence these inspections, and there have been many hun-
dreds of inspections of the returns in the office of the Foundation
Library have actually saved the Government money.
The CHAIRMAN. You say that the reason that this arrangement is
justified is that the look-up cost is 40? and the 100 is for the repro-
duction?
Mr. HARDING. Yes, sir.
The CHAIRMAN. And you consider then that, where there is no look-
up cost, the 100 charge is justified?
Mr. HARDING. Ten cents is a fair reproduction cost as such, yes, sir.
The CnAnuvrAN. Well, since you have three people in there serving
the Foundation Library Center, it seems to me that you are obligated
to add some look-up costs in addition to the 10? a copy.
Mr. HARDING. Well, sir, we are not involved in look-up. My infor-
mation, contrary to what was discussed when Mr. Caplin was here, is
that there are two employees working in that office but whether it is
two or three, the returns are not looked up for the Foundation Library.
They are given to them in bulk and they select from those returns
those which they wish to reproduce, and return the entire group to us.
We have relatively little look-up costs, and this is included in our
two cents overhead charge to them.
The CHAIRMAN. During Mr. Olsher's visit to the IRS on May 26,
1964, your staff informed him that tax return Form 990?A and 1041?A
were transmitted from Mr. Vincent J. Keller's department to Mr. Ken-
neth W. Johnson's department, the latter being the department
where the photocopying is being done by the Foundation Library Cen-
ter.
In the process of photographing the returns, who, among the Li-
brary Center's employees, determines which of these returns were filed
by so-called foundation, and which of them were filed by other
types of charitable organizations?
Mr. HARDING. I believe Mr. Olsher and I observed a lady whose
name I do not recall who was an employee of the Foundation Library
examining the stacks of returns and selecting, by certain criteria,
foundations as distinguished from all other exempt organizations.
The CHAIRMAN. Was her name Mrs. Tinsley or Miss Tinsley?
Mr. HARDING. I think that is the name, yes, Mr. Chairman.
The CHAIRMAN. Who did she get her guidance from?
Mr. HARDING. From the Foundation Library, I assume, sir.
The CHAIRMAN. What was Mrs. Mary Tinsley's educational and
working background prior to taking the position with the Foundation
Library Center in October 1963?
Mr. HARDING. I have no information on her background._
The CHAIRMAN. Our information is that she is a person who has
had a high school education and does not have any special qualifica-
tions for this type work.
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Mr. HARDING. Of course, she is not an employee of the Internal
Revenue Service.
The CHAIRMAN. She is an employee of the Foundation Library
Center?
Mr. HARDING. Yes, sir, she is. I will say, however, that I found her
a very charming lady the day Mr. Olsher and I visited her and this is
my only connection with her.
The CHAIRMAN. I wasn't challenging her charm.
MR. HARDING. I understand that.
The CHAIRMAN. We were talking about her qualifications. With
respect to contributions received, the Foundation Library Center's
instructions to Mrs. Tinsley require her to photograph such informa-
tion. The exact language is "Need schedules if supplied." Yet you
have indicated that the statute prohibits such schedules from being
made available for public inspection. How do you explain that?
Mr. FIARDING. I suspect, sir, that they are referring to schedules
other than the prohibited schedules. The schedules involving donors,
of course, are prohibited from attachment to that section. There are
other schedules that are attached. I presume they refer to the latter.
The CHAIRMAN. As you know, Mr. Olsher found that Mrs. Tinsley
had photographed contributions which had been received by the
Stephens Foundation, Incorporated, of Nashville.
Mr. Caplin tried to explain this by inserting the following in the
transcript of his testimony on July 22, 1964:
We checked with the accounting firm that prepared the re-
turn. They stated it was their intent to make the donors'
names part of the public inspection portion of the return.
Would you please have one of your aides call the IRS and ask them
to furnish, for this record, a copy of the letter from the Stephens
Foundation, Incorporated, of Nashville, or from its accounting firm,
which indicates the Foundation's intent to have the IRS make the
information available for public inspection?
Mr. HARDING. We can get such a letter, I assume, MT. Chairman.
As a matter of fact, the information which we got was received by
telephone, and was not in the form of a letter.
The CHAIRMAN. Did you query just this one foundation, or were
there other foundations whom you queried regarding such schedules?
Mr. HARDING. No, sir, we spoke to the accounting firm representing
the Foundation.
The CHAinmAN. And you will (Yet that information and supply it?
Mr. HARDING. Would you like t170, have a letter from them certifying
to that effect?
The CHAIRMAN. Yes, sir.
Mr. HARDING. We will be happy to put it in the record.
(The information submitted by the IRS, under dates of August 31,
1964, and September 21, 1964, appears on page 208.)
The CHAIRMAN. On this same subject of public inspection of donors'
contributions to a foundation, Mr. Dillon indicated, during his testi-
mony of July 21, that this is something for Congress to decide."
However, when the transcript was returned to us, Mr. Dillon had
crossed out that portion of his testimony which stated that the matter
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164 TAX-EXEMPT FOUNDATIONS: IMPACT ON SMALL BUSINESS
of public inspection of donors' contributions, "is something for Con-
gress to decide."
Mr. Dillon's exclusion of that part of his testimony, dealing with
public inspection of donors' contributions, would now seem to indicate
that such public inspection could be accomplished by administrative
ruling. Yet you people have consistently told us that public inspec-
tion of donors' contributions would require a, change in the present
law. How do you reconcile that, Mr. Harding?
Mr. HARDING. I would like to have Mr. Rogovin reply to that.
Mr. ROGOVIN. I believe I can respond to it at this time.
The CHAIRMAN. All right, go ahead and respond.
Mr. ROGOVIN. The disclosure statute Congress passed listed the sev-
eral types of information to be disclosed. The statute specified that
only the total amount of contributions is to be disclosed, and it does
not provide the authority to make public the names of donors.
The Revenue Service, on the other hand, with respect to its portion
of the Form 990-A, has the authority to inquire of an exempt organiza-
tion as to who makes the contributions. That is why the distinction
exists.
As far as the Secretary's response, I don't believe it should be in-
ferred from his deletion of the statement that this is something the
Revenue Service, can as an administrative matter handle.
It is the opinion of our Chief Counsel's office?an opinion of some
long standing?that the donor portion could not be made public. We
are prepared to submit a legal memorandum backing up the analysis
if so desired.
The CHAIRMAN. Until we call you on it you need not go to that
trouble.
At various times in the past, the IRS has advised us that details of
contributions received by foundations were open to public inspection
when they are reported in the public portions of the tax returns.
Such statements have been made to us by you, Mr. Caplin, and Mr.
Hobbs.
There seems to be a little confusion on this matter, Mr. Harding.
Would you like to answer this now?
MT. HARDING. I wasn't sure I understood. You say we have in-
formed you they con be made public?
The CHAIRMAN. Yes, sir. When they are reported in the public
portion of the tax returns.
Mr. TIARDING. Yes, sir, I think that, if I understand it correctly,
that where they are reported in the public portions they are available
for public inspection. Where a list is attached only to Part I in ac-
cordance with the rules governing the. preparation of the Form 990-A,
they are, according to our legal advice, prohibited from public dis-
closure.
The CHAIRMAN. In January of 1963 the Foundation Library Center
made a so-called "promotional mailing" of 2,764 copies of its publica-
tion, Foundation News. Why would a non-profit organization of this
type be making a "promotional mailing"?
Mr. -HARDING. I can only assume, Mr. Chairman, that this was in
furtherance of the educational purpose for which the Foundation had
been granted an exemption. In their view, at least, it was in further-
ance of that purpose.
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The CHAIRMAN. What was the Foundation Library Center promot-
ing? Selling their own services?
Mr. HARDING. Well, perhaps, sir, as the Red Cross promotes its serv-
ices and the Boy Scouts and other organizations of this type.
The CHAIRMAN. To whom was this promotional mailing sent?
Mr. HARDING. I do not know, sir.
The CHAIRMAN. For purposes of this record, I should like to have
you obtain the information respecting the Foundation Library Cen-
ter's "promotional mailing." Would you get that for us, please?
Mr. IIARDING. We will attempt to get that for you, yes sir.
(The information submitted by the IRS, under date of August 31,
1964, appears on page 209.)
The CHAIRMAN. The 1964 Foundation Directory sells for $10.
Would you agree that the Directory could be published by a tax-
paying publisher from whom the Government may collect some taxes?
Mr. HARDING. Yes, sir, I agree that it could be prepared by a profit-
making organization.
The CHAIRMAN. Secretary Dillon admitted during our hearing of
July 21, that the Treasury Department does not know how many
Foundations there are in the United States. Yet, the IRS repeatedly
uses the figure 15,000 foundations?which is the same figure being
promoted by the Foundation Library Center. How do you explain
this?
Mr. HARDING. A part of the difficulty, as I think I mentioned this
morning, Mr. Chairman, is the lack of a legal definition of the term
"foundation". The Foundation Library has adopted a definition of
foundation which for purposes of giving a figure can be used.
We do not necessarily subscribe to that definition. But it is a defini-
tion and lacking any other definition of the word "foundation", we
have used it in the past.
The CIIAIRMAN. You will recall that Secretary Dillon referred to
the IRS some questions that we had asked him on July 21. Because
of lack of time, we were unable to question Mr. Caplin on these matters
and so we shall put the questions to you.
Since 1960, has the IRS, on its own initiative, ever forwarded to the
FTC or the Antitrust Division information regarding the use of a
foundation as a device for engaging in various trade practices which
may be a violation of certain statutes administered by the Federal
Trade Commission or the Antitrust Division?
Mr. HARDING. Not to my knowledge, sir.
The CHAIRMAN. Since 1960, has the IRS, on its own initiative, ever
forwarded to Congressional committees, the White House or other
government departments information regarding contributions to
foundations by persons or organizations that supply goods or services
to companies interlocked with the foundation?
Mr. HARDING. Not to my knowledge, sir.
The CHAIRMAN Since 1960? has the IRS, on its own initiative,
found any cases where a contribution has been made to a foundation
for a business purpose rather than an eleemosynary purpose? For
example under the Robinson-Patman Act, business concerns are pro-
hibited from making disproportionate discriminatory discounts to par-
ticular buyers if the effect might be to substantially lessen competition
or tend to create a monopoly. Do you know of any cases where con-
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tributions to a foundation may have been a method of getting around
this provision of law?
Mr. HARDING. There have been cases, Mr. Chairman, of contribu-
tions made for a business purpose. This question, I think, could pos-
sibly go to the nature of the exempt organization, and we have un-
doubtedly in our examinations encountered instances of this sort.
The CHAIRMAN. Could you supply us with a list of those cases?
Mr. HARDING. We could perhaps supply you with some examples,
Mr. Chairman.
The CHAIRMAN. Suppose you supply US with a half dozen examples
and then we will determine whether or not they should?
Mr. HARDING. We Will do the best WO can.
(Following is the Information submitted by the IRS under dates of
October 2, 1964 and October 26, 1964:)
Prior to the change in the statute in 1935, which first provided for the
deductibility of charitable contributions made by corporations, amounts
paid over to charity could qualify for deduction on the showing that
they were ordinary necessary business expenses. Since then it has been
recognized that the deductibility of a charitable contribution does not
hinge upon the donor's motive as long as it is in fact a gift. In the light
of this background it is not unusual to find gifts to charity by business
firms motivated by elements of both buisness and charity. For example,
a public utility's annual donation to a local charity, while deducti-
ble as a charitable contribution for Federal tax purposes, is also justi-
fied under state law "because a refusal might bring on the loss of the
good will of the community it serves." Board of Supervisors v. Vepco,
196 Va. 1102 (1955).
To preclude the avoidance of the percentage limitations on the de-
ductibility of charitable contributions where the gift could be said to
bear this dual character, section 162(b) of the Code specifically denies
any business expense deduction where any part of the payment is
deductible as a charitable contribution. Thus, the characterization of
a payment as a charitable gift or a business expense relates to the tax
return of the payor and normally does not reflect upon the exempt
status of the recipient.
Where the payor makes a "contribution" which in fact reflects the
discharge of a business obligation to a third party growing out of the
rendition of personal services, his payment will be viewed as a con-
tribution, not by him, but upon behalf of the third party. While the
payor may well be entitled to a business deduction, the third party
will be deemed to be in constructive receipt of taxable income. Treas.
Reg. 1.61-2(c). See, Eugene T. Flewellen, 32 T.C. 317 (1959).
Other than the factual patterns set forth in the Oct. 16, 1963 report to
your Subcommittee which may reflect this type of transaction, the rec-
ords in the National Office do not disclose similar situations. As indi-
cated above, however, the law is clear in this respect and a revenue
agent coming upon such a transaction would attribute the income to the
party earning it. (IRS letter, October 2,1964.)
The last paragraph of the statement submitted with our letter of
October 2, 1964 concerning the type of case referred to at page 366 of
the transcript (see above) stated that "other than the factual pat-
terns set forth in the October 16, 1963 report to your Subcommittee
which may reflect this type of transaction, the records in the National
Office do not disclose similar situations." (Emphasis supplied.) As
set forth in the statement submitted in our letter of October 2nd (re-
garding the type of case referred to at page 369), (page 168 herein),
the potential conflict of interest described by you does not, in and of
itself, constitute a violation of the exemption provision of section
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TAX-EXEMPT FOUNDATIONS: IMPACT ON SMALL BUSINESS 167
501(c) (3). It does, however, constitute a circumstance warranting
greater Service scrutiny. Our failure to cite any particular case situ-
ation was intended to mean that records in the National Office do not
disclose any situations of this kind. (IRS letter, October 26, 1964.)
The CHAIRMAN. Since 1960, has the IRS, on its own initiative, ever
forwarded to the FTC or the Antitrust Division information regard-
ing foundations that may be parties to reciprocity arrangements? For
example, where a business affiliated with a foundation says to one
of its suppliers, "I will buy from you if you will contribute to such-
and-such a foundation." Or, "If you buy from me, such-and-such
foundation will make you a business loan at favorable terms"?
Mr. HARDING. Not to my knowledge, Mr. Chairman.
The CHAIRMAN. You will recall that, on July 21, we had discussed
with Mr. Dillon the Rogosin Foundation-Beaunit Mills-Goodyear
Tire and Rubber Company transactions. Has the IRS examined this
matter to determine whether the arrangement involved a price dis-
count from Rogosin to Goodyear, for which Goodyear (the buyer)
compensated Rogosin by making a contribution to the Rogosin
Foundation ?
Mr. HARDING. That, as I recall, Mr. Chairman, was in a 1952 trans-
action, and at this late date I am unable to determine whether this
particular transaction was subject to audit.
I have been informed that the 1956 return of the Foundation was
examined in 1959, and the 1961 and 1962 Foundation returns were
examined during the past year.
The latter examination took into consideration loans placed during
prior years to purchase the corporate stock.
The CHAIRMAN. Have you examined it since that time, Mr.
Harding?
Mr. HARDING. That is the latest examination of which I have a
record, Mr. Chairman.
The CHAIRMAN. If this were the case, would it not seem to raise
both tax and antitrust problems? First, is it a method whereby the
buyer compensates the seller by making a tax deductible contribution
to the Rogosin Foundation? Second, would not this practice, at best,
be a distortion of the pricing and exchange process in a free enterprise
economy? Third, might not this practice actually involve, ?it,) a vio-
lation of the Robinson-Patman Act because it involved discriminatory
pricing, or (b) a violation of section 3 of the Federal Trade Commis-
sion Act because it is an unfair method of competition?
Mr. HARDING. I think that is possible, Mr. Chairman. I think
that it might also involve tax consequences to non-exempt corpora-
tions.
The CHAIRMAN. Would the persons in the IRS who examine foun-
dation tax returns be sufficiently familiar with the antitrust laws to
know whether the practices I have cited may violate Section 5 of the
FTC Act or the Sherman Act. If they found such practices, to whom
would they report them?
Mr. HARDING. Mr. Chairman, I think some of our more sophisti-
cated revenue agents might recognize these transactions as being a
violation of other sections of the Code. Were they to determine such
violations we would attempt to communicate that information to the
appropriate sources.
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The CHAIRMAN. But, you don't recall any of it being communi-
cated?
Mr. HARDING. Our records do not disclose any such communications,
no, sir.
The CHAIRMAN. Are you familiar with any instances where indi-
viduals who are board members of foundations also sit on the boards
of competing companies?
Mr. HARDING. I am not sure what you mean by competing com-
panies, Mr. Chairman.
The CHAIRMAN. Well, I would think it would be rather obvious,
Mr. Harding. Are you familiar with any instances where individuals
who are board members of foundations also sit on the boards of com-
peting companies.
Mr. HARDING. This is where there is an unrelated business in con-
nection with it?
The CHAIRMAN. Take the case of persons sitting on the board of a
foundation who also sit on the board of companies that are in com-
petition with each other. Could there be a conflict of interest there?
Would you take notice of it?
Mr. HARDING. I think there would be no tax consequence in that,
Mr. Chairman. There may be other violations of law but I do not
offhand see any tax consequence.
The CHAIRMAN. Does the IRS examine the foundations to deter-
mine whether there are any actual or potential conflicts of interest
situations?
MT. HARDING. Yes sir, we do.
The CHAIRMAN. DC) you ever report on them, if there is a conflict?
Mr. HARDING. If the conflict relates to the purpose for which the
Foundation is granted an exemption we take action within the Revenue
Code.
The CHAIRMAN. Could you give us six examples?
Mr. HARDING. We will attempt to do that, Mr. Chairman.
(Following is the information submitted by the IRS under date of
October 2, 1964.)
Standing alone, the potential of a conflict of interest as described is
not, in and of itself, a violation of the exemption provision of section
501 (c) (3), since the fiduciary concept, found in state law, is not part
of the statutory framework for exemption. It does, however, constitute
a circumstance warranting greater Service scrutiny. Absent evidence of
activities by the board member violative of the statutory requirements
for exemption the described relationship alone would have no effect upon
the exempt status of the foundation. (IRS letter, October 2, 1964.)
The CHAIRMAN. Since 1960, has the IRS, on its own initiative ever
forwarded to the FTC or Justice information regarding actual and
potential conflict of interest situations in any foundation? That is
the question you said you would try to give us an illustration of.
Mr. HARDING. No, sir, this question related to forwarding to FTC
or Justice. And my answer to that question, sir, is that I had no
knowledge of such referrals.
The CHAIRMAN. Since 1960, has the IRS, on its own initiative, ever
forwarded to the SEC information regarding any foundation's viola-
tion of the Federal securities laws?
Mr. HARDING. Not to my knowledge, sir.
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The CHAIRMAN. Does the IRS examine the foundations to deter-
mine whether they are involved in any of the following activities: in-
sider stock deals?
Mr. HARDING. It is unlikely that our examination would uncover
that type of transaction, Mr. Chairman.
The CHAIRMAN. What about stock price manipulations?
Mr. HARDING. That is also unlikely.
The CHAIRMAN. Margin trading.
Mr. HARDING. Margin trading could relate to the tax exemption of
the organization and would therefore be subject to examination by the
Revenue Service.
The CniaRmAx. Speculation in commodity futures?
Mr. HARDING. To the extent that these speculations could relate to
the tax exemption, yes, sir.
The CHAIRMAN. Short sales?
Mr. HARDING. Yes sir.
The CHAIRMAN. Acting as unregulated sources of stock market
credit?
Mr. HARDING. It is unlikely in this area that our examination would
encompass these actions.
The CHAIRMAN. Speculation in oil wells?
Mr. HARDING. To the extent that these are highly speculative opera-
tions endangering the foundation and its exemption, yes, sir.
The CIIAIRMAN You don't find many oil well situations that are
not speculative, do you?
Mr. HARDING. Well, sir, we are both from Texas, and we probably
know a little bit about the oil business. Some of our friends have done
rather well in it.
The CHAIRMAN. Yes, sir, they have, and I can see where some would
not be considered too speculative, because they have been producing a
long time.
Mr. HARDING. I think the sort of wildcatting operations that you
have in mind could be highly speculative and we probably would
examine into it.
The CHAIRMAN. Involvement in corporate proxy fights for control of
companies whose securities are listed on the Exchanges?
Mr. HARDING. Yes, sir, we do have some cases that have arisen in
that particular area. This is not a normal course of investigation on
our part, but they have come about.
The CHAIRMAN. Since 1960, has the IRS, on its own initiative, ever
forwarded to the SEC information regarding foundation activities in
the following areas: involvement of foundations in corporate proxy
fights for control of companies whose securities are listed on Ex-
changes?
Mr. HARDING. No, sir.
The CIIAIRMAN. Involvement of foundations in insider stock deals ?
Mr. HARDING. NO, Sir.
The CHAIRMAN. Involvement of foundations in stock price manipu-
lations?
Mr. HARDING. Not to my knowledge.
The CHAIRMAN. Speculative activity and margin trading of foun-
dations?
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Mr. HARDING. Not to my knowledge.
The CHAIRMAN. Short sales by foundations?
Mr. HARDING. Not to my knowledge.
The CHAIRMAN. Foundations as unregulated sources of credit?
Mr. HARDING. Same answer.
The CHAIRMAN. Speculation in commodity futures?
Mr. HARDING. Same answer.
The CHAIRMAN. Does the IRS investigate foundation loans to deter-
mine whether statutory standards are being met?
Mr. HARDING. I tun not sure, Mr. Chairman. I am not an expert
in this field but it is my information that there are really no statutory
requirements covering the loans made by foundations, other than to the
extent that they would endanger the purpose for which the founda-
tion was granted an exemption.
The CHAIRMAN. How about cases where they failed to have col-
lateral?
Mr. HARDING. Oh, yes.
The CHAIRMAN. Or where they do any business with the donor?
Mr. HARDING. Yes, indeed, Mr. Chairman, I misunderstood your
question, in those cases we do indeed.
The CHAIRMAN. You do examine?
Mr. HARDING. Yes, sir.
The CHAIRMAN. Does the IRS examine the foundations to determine
whether they are violating any Civil Aeronautics Board regulations?
Mr. HARDING. No, sir.
The CHAIRMAN. Since 1960, has the IRS, on its own initiative, ever
forwarded to the CAB information regarding any foundation's viola-
tion of CAB regulations?
Mr. HARDING. Not to my knowledge.
The CHAIRMAN. Does the Treasury examine the foundations to de-
termine whether their foreign operations may be in conflict with gov-
ernment policies?
Mr. HARDING. No, sir.
The CHAIRMAN. Here is something I should like to ask you about.
A United States business corporation makes a gift to a United States
charitable trust. The charitable trust in turn makes a gift of such
funds to a United States charitable corporation. The charitable cor-
poration spends the money for charitable purposes abroad.
Have these funds been used within the United States or its posses-
sions when the charitable trust pays them over to the charitable
corporation?
Mr. HARDING. It would appear that the funds may not have been
used within the United States consistent with the requirements for a
deduction under Section 170 as set out in Revenue Service rulings.
In cases of this nature pre-arrangement is the factor which affects
deductibility.
If this was not part of a plan to avoid the restrictions of the statute
on corporate gifts and charitable trusts for foreign distribution but
was a bona fide grant of the trust to a charitable corporation there prob-
ably would be no challenge to its deductibility.
Mr. HARvEy. Mr. Chairman, might I intervene?
The CHAIRMAN. Yes, sir, Mr. Harvey.
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Mr. HARVEY. This, I think, would be an appropriate time, I believe
this is an apropos.
Mr. Harding, you know of the project that is under way whereby
the Rockefeller and Ford Foundations are joining hands in a terrific
effort to fight hunger in the so-called "rice bowl" area of the world.
I assume that during the next few years while this project is in being
considerable sums of money will be expended, all of it outside the
limits of our own country.
First of all, Mr. Chairman, is this the type of instance to which you
have referred?
The CHAIRMAN. I wasn't thinking about that specifically, no.
Mr. HARVEY. I wonder if that is a fairly (rood example. I would
like to ask Mr. Harding, if we can assume that it is at least a reasonable
example of the question posed by the Chairman, what your reaction
would be to it?
MT. HARDING. A charitable corporation, Mr. Harvey, is able to
make these foreign expenditures, and I would assume that these trans-
actions to which you refer are being made within the limits of the
statute.
Mr. HARVEY. In other words, are you saying that if the purposes for
which the foreign expenditures are made are in line with the same
purposes that would be approved domestically you would approve
them?
Mr. HARDI1c0. Well, sir, we don't, as I pointed out to the Chairman
earlier, we don't approve individual transactions. We examine the
foundation to determine whether or not it has acted in accordance
with the law.
This is a very peculiar little facet of the law that I think perhaps
could be explained to you somewhat more clearly by Mr. Rocrovin. It
distinguishes between charitable corporations and other .types of
organizations.
Mr. ROGOVIN. Since 1913 when the first income tax law came into
being, we have had tax exemption. In 1917, the law was amended to
provide individuals a deduction for charitable contributions.
In the 1930's there was a concern as to whether exempt organizations
should be allowed to use their funds abroad.
Congress considered the matter and it was the feeling at that time to
restrict such use to the boundaries of this country. Philosophically,
the concept was that the reason for tax deductibility and tax exemp-
tion was that this relieved the government of a burden it would other-
wise have to carry.
In the late thirties, the statute allowed organizations to make grants
overseas as long as they were for a charitable, educational or religious
purpose. Contributions to such organizations were deductible by in-
dividual contributors. The question was whether the same treatment
should be allowed corporate contributors.
At that time some of the missionary groups came in and pointed out
that any restriction in the statute as to the use of deductible funds
might redound to their detriment. The matter was considered at
length by Congress.
When Congress was through with the statute, the provisions allowed
a corporation to deduct a contribution made to another corporation for
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TAX-EXEMPT FOUNDATIONS : IMPACT ON SMALL BUSINESS
funds to be used abroad, but through perhaps an inadvertance in
drafting, trusts were not given the same preferred position. As a
consequence, under a literal reading of the statute today, a profit
corporation cannot deduct a contribution to a domestic "trust, chest,
fund or foundation" for use overseas.
I believe the question that the Chairman asked initially demon-
strates concern with efforts to get around this statutory provision by
way of a corporation giving to a foundation that is a charitable corpo-
ration which, in turn, would give to a charitable trust for use overseas.
If that were the case, if this were merely indirection, then the Service
would have to disallow deduction for that type of charitable contri-
bution.
In general response to your inquiry regarding the Rockefeller and
Ford Foundations, as long as the work, the grant, or the project is
charitable?and the relief of hunger has since the dawn of history
been a charitable purpose?the fact that this charity is being con-
ducted in Asia or anywhere else in the world would not in and of itself
permit the Service to conclude tins to be a non-exempt activity.
Mr. HARvEy. I want to make it perfectly clear I am not quarreling
with it.
Mr. Roaoym. Yes, sir.
Mr. II.ArtvEy. I have. just been trying to determine this, because I
thought the Chairman's question was a very pertinent one. I hap-
pen to know of this one instance, an area that involves mass hunger,
and which has received more attention than most any other large scale
effort, other than of a government undertaking. I think it is very
important that our subcommittee, have an understanding as to just
what the policy of IRS is to be in this particular type of program.
I would say that, as our own government has apparently embarked
in recent years on a policy of global efforts to relieve hunger, and
apparently is going to be committed to that sort of a policy, that this
is not out of keeping with our international policy.
I agree that the evolutionary changes you set forth, did occur in
the two decades from 1930 until 1950. That was why I voiced this
inquiry.
Mr. RoGovix. Yes, sir. I think the idiosyncrasy of the statute was
highlighted by the Chairman's question. But I don't believe it was
indicated in the question that there would or should be a flatfooted
prohibition of charity going 01:a side the boundaries of the country.
The recitation as to the statutory history was only to underscore the
distinction between trusts and corporations as to their use of funds
abroad.
Mr. HARVEY. Thank you, Mr. Chairman.
The CHAIRMAN. Thank you, Mr. Harvey.
Since 1960, has the IRS, on its own initiative, ever forwarded to
Congressional Committees, the White House, or other government
departments information regarding possible conflict of interest be-
tween the, advisory roles foundation individuals hold as trustees, di-
rectors, or officers and their private financial and business interests?
Mr. HARDING. Not to my knowledge, Mr. Chairman.
I would like to insert, however, at this point a general comment
which pertains to many of the questions which you have raised with
Secretary Dillon.
The CHAIRMAN. Yes, sir, go right ahead.
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Mr. HARDING. Yes, sir.
The Revenue Service is in a continuing relationship with the
Treasury Department on all matters of tax policy, in that we pro-
vide them with information for the purpose of making proposals
to the Congress.
As you know, the Revenue Service does not make any direct legis-
lative proposals to the Congress.
We do, however, provide information to the appropriate officers
within the office of the Secretary on matters of tax policy, and many
of the matters to which you refer are and have been in the past,
discussed with the Treasury staff for the purpose of consideration of
legislative tax policy.
The CHAIRMAN. Does the IRS examine the foundations to deter-
mine whether there is interlock between the foundation directors, their
in vestment counsels, and brokers?
Mr. HARDING. Only to the extent, sir, that such activity might en-
danger the exempt status of the foundation.
The CHAIRMAN. Since 1960, has the IRS, on its own initiative, ever
forwarded to Congressional Committees, the White House or other
government departments information regarding interlock between
foundation directors, their investment counsel and brokers?
Mr. HARDING. Not to my knowledge.
The CHAIRmAN. Does the IRS examine the foundations to deter-
mine whether there may be common action on the part of foundations
and associates in the purchase and sale of securities?
Mr. HARDING. Only to the extent that it would endanger the ex-
empt status of the foundations.
The CHAIRMAN. Since 1960, has the IRS, on its own initiative, over
forwarded to Congressional Committees, the White House or other
government departments information regarding common action on
the part of foundations and associates in the purchase and sale of
securities?
Mr. HARD-Iwo. Not to my knowledge.
The CHAIRMAN. Does the IRS examine the foundations to deter-
mine whether the foundations are channeling income and corpus in a
direction that may hurt competitors and investors?
Mr. HARDING. To the extent that it. would endanger the exempt
status of the foundation we do, sir.
Tho CHAIRMAN. But not to the extent it may be harmful to a small
businessman?
MT. HARDING. No, sir.
The CHAIRMAN. Since 1960, has the IRS, on its own initiative, ever
forwarded to Congressional Committees, the White House, or other
government departments information regarding foundations channel-
ing income and corpus in a direction that may hurt competitors and
their investors?
I believe you answered that when you said you do not examine
except where it involves their tax exempt status.
Mr. HARDING. That is right.
The CHAIRMAN. Does the IRS examine the foundations to deter-
mine whether a foundation's services?such a research, market stud-
ies, etc.?are being made available to certain businesses on a preferen-
tial basis?
MT. HARDING. Yes, sir. We do examine it for that purpose.
39-915-64-12
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174 TAX-EXEMPT FOUNDATIONS: IMPACT ON SMALL BUSINESS
The CHAIRMAN Have you found many of them?
Mr. HARDING. There have been some, yes, sir. There is a specific
provision in the statute regarding research organizations which do
research on a preferential basis, and we do7 therefore, in looking at
these prohibited transactions, examine into this area.
The CHAIRMAN. I yield.
Mr. HARVEY. I wonder if I might interpose a question at this junc-
ture as to what your procedural operation is. Are you going to ap-
proach these instances which you do bring to light on the oasis of call-
ing their attention to them, and asking them to desist or are you
going to proceed to prosecute them and make examples of them?
Mr. HARDING. Well, as far as I know there are no prosecutive ele-
ments in this Mr. Harvey. There is a basic for the revocation of the
exempt status for the research organization if we found these pro-
hibited transactions having taken place.
Mr. HARVEY. Well, I referred, in using the term "prosecution," to
vigorous enforcement of the law.
Mr. HARDING. I assure you, sir
Mr. HARVEY. I think it is important to this Committee to know at
this juncture just what the policy of the IRS is to be. It refers also
to several of these otl Lel. questions that our Chairman has asked you in
the past few minutes. They are probably a part of a?I am sure you
have?a, policy at IRS on this subject. Now, it is a good question.
You are the new administrator, are you not?
Mr. HARDING. I am the Acting Commissioner.
Mr. HARVEY. Well, you are making policy.
Mr. HARDING. Yes, sir.
Mr. HARVEY. Just what is your policy going to be?
Mr. HARDING. My policy, sir, is a continuation of the policy which
we have followed rather consistently for the last several years involv-
ing a very vigorous enforcement of the law as regards foundations,
exempt organizations of all types.
I would like to mention, however, that we are confronted with a very
difficult statute to administer. We have been notably unsuccessful
where we have brought these cases into court. We are doing, in my
opinion, a very vigorous job within the limitations of the law and the
limitations of the courts opinions on the law.
Mr. HARVEY. I think you have been very honest in your answer.
You are a competent executive, I am sure, and you say you have not
been too successful in prosecuting cases that were brought to your
attention. How successful have you been with this particular piece of
legislation? How successful have you been in the type of desist warn-
ings to them? Has that been tried?
Mr. HARDING. Oh, yes, sir.
Mr. HARVEY. Would you say that has beeen a very successful opera-
tion?
Mr. HARDING. I think that generally you could say that it has been
successful. Where these transactions are pointed out to them, their
exemption was threatened or where it has been suspended for one or
more years there have been a number of foundations and other exempt
organizations that have gotten into line. This area of activity is more
successful than our action in the courts.
Mr. HARVEY. Well, I think it is important for us to know that.
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TAX-EXEMPT FOUNDATIONS: IMPACT ON SMALL BUSINESS 175
Now are you ready to give the Subcommittee a definite recommenda-
tion with the regard to the amendment to the law that will make your
efforts more effective if you do have to prosecute?
MT. HARDING. AS I pointed out, Mr. Harvey, we are under somewhat
of a limitation on making legislative recommendations, since this is the
prerogative of the Treasury- Department.
I am informed by Mr. Dillon and Mr. Surrey, of his staff, that a
very intensive study of the law, of the problems inherent in the law is
currently underway, and that legislative recommendations to the Con-
gress will be forthcoming in the not too distant future. We will co-
operate and are cooperating with the Treasury Department in that
endeavor.
Mr. HARVEY. It would be inconceivable to me that the Treasury
Department?and this is in no sense downgrading their capabilities?
did not consult with you before making the recommendations.
Mr. HARDING. You can be assured, sir, this they do. They are con-
sulting with us continuously.
Mr. HARVEY. Thank you.
The CHAIRMAN. Since 1960, has the IRS, on its own initiative, ever
forwarded to Congressional Committees, the White House, or other
government departments information regarding foundations' serv-
ices?such as research, markets studies, etc., being made available to
certain businesses on a preferential basis? Did you answer that?
Mr. HARDING. I answered in-so-far as our examination practices are
concerned.
The CHAIRMAN. Would you give us examples of some cases?
MT. HARDING. We will attempt to find cases; yes, sir.
(Following is the information submitted by the IRS under date of
October 2,1964 :)
Four cases of the type suggested are outlined from Service files as
follows:
(1) An organization, which was first created by trust indenture, was
reorganized as a charitable corporation. Its stated aim is teaching
and disseminating economic knowledge with a view to advancing the
welfare of the American people. The organization's charter author-
izes it to do everything necessary, suitable and proper for accomplish-
ing its purposes.
"Members" of the corporation are those individuals who subscribe
to its publications. Subscription rates of publications are fixed to
yield a profit to the corporation. Periodicals contain articles con-
cerning current economic events, money-credit trends, reports, such
as statistical indicators of business-cycle changes, etc. Subscribers
are entitled to receive a quarterly list of recommended securities which
Is also published by the organization. A supervisory service is offered
by the organization to its members. This service consists of specific
recommendations for sale and purchase of securities making up a
specific portfolio. A charge of one-fourth of one percent of the
total value of the portfolio is charged for this service.
A sustaining membership is available to persons paying $35 an-
nually; this entitles them to receive all periodicals and books published
by the organization.
In comparison to the above services offered to members, the orga-
nization furnishes copies of its books to approximately 2000 libraries
and awards two-year scholarships for a course training in research and
advanced economics at a post graduate level to a limited number of
persons. In co-operation with three private foundations, the organiza-
tion was instrumental in establishing an Inter-Foundation Committee
for Economic Scholarships. Funds for these activities are realized
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176 TAX-EXEMPT FOUNDATIONS: IMPACT ON SMALL BUSINESS
from the organization's membership fees and from fees charged for
its investment services. (American Institute for Economic Research,
302 Fed. (26) 934.)
(2) A corporation was organized to encourage fine arts by providing
education and teaching of the art of architecture and collateral crafts.
An outstanding architect serves as both manager of the foundation and
director of all its activities.
The foundation's objectives are accomplished by selecting young men
and women for training as competent builders, architects and designers
for industry. Approximately fifty apprentices serve at one time. Tu-
ition of $1,500 a year is paid by each apprentice; this entitles him to
room and board and a small stipend. The manager and director selects
all apprentices and determines all activities undertaken by the founda-
tion while at the same time continuing his professional architectural
pursuits.
The foundation conducts a large architectural practice in all of its
phases, using its trainees to provide services for which it charges a fee.
(3) An organization was incorporated to promote increase of knowl-
edge of the applicability of dyes. and chemicals in the textile industry,
encourage practicable research work on chemical processes and ma-
terials of importance to the textile industry, and interchange the results,
of research and professional knowledge among its members. Member-
ship in the organization consists of individuals and companies repre-
senting substantially all of the textile industry. Research conducted
by the corporation is aimed at establishing tests and standards for the
industry with regard to sales promotion of particular products. Re-
sults of its research are printed in a technical journal. The organiza-
tion also publishes and sells a technical manual and a "color index."
The corporation has executed a contract with a commercial publisher to
which it makes available the results of its research for a specific con-
sidera don. By the terms of the agreement with the publisher, copies
of the magazine are distributed to each of the organization's members
at a stipulated price paid by the corporation. The corporation's re-
search materials ;ire published under a special heading in the commercial
magazine.
(4) A practicing physician, together with his father, and another
physician, executed a trust agreement establishing a foundation for
scientific purposes, including medical research. The foundation was
managed by the two physicians for the first two years during which
time they also engaged in the private practice of medicine. At the end
of the first two years, the physicians became full-time employees of
the foundation.
The foundation receives grants from pharmaceutical companies and
gifts from local physicians. The research conducted by the founda-
tion relates solely to the same medical specialization in which the
physician-trustees practice. The foundation is utilized to conduct
tests for patients of the physicians; the foundation charging a set fee
for them. The tests are used in the diagnosis and treatment of pa-
tients' illnesses as well as for research purposes. The foundation's
facilities are open to all practicing physicians in the area. The foun-
ation employs a nurse and a part-time research worker. Records and
studies of the foundation are used by one of the physicians in connec-
tion with a class taught by him at a medical school and as a basis for
a series of lectures given by the two physicians before medical associa-
tions, hospital staffs, and other organizations. Both of the physician-
trustees have made contributions to the foundation for which they
claim a charitable contributions deduction, notwithstanding that they
are now full-time employees there. (John Joseph Cranley, Jr., and
Helen Theresa Cranley (Cranley Research Foundation) Dec. 24,
809(m), T. C. Memo 1961-4) (IRS letter, October 2, 1964) .
The CHAIRMAN. Does the Treasury examine the foundations to
determine wl)ether foundation income or corpus is being used to grant
benefits to a company employee?
Mr. IIARDING. Yes, sir.
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The CHAIRMAN. Have you had any such cases?
Mr. HARDING. Yes sir. I am sure we have had instances.
The CHAIRMAN. 13?,7-ould you get up a half dozen samples or ex-
amples, please?
(Following is the information submitted by the IRS under date of
October 2, 1964:)
As indicated in the testimony, such grants may be permissible. One of
the basic problems has been whether the number of potential benefi-
ciaries is sufficient to form a charitable class.
The Service has argued that these arrangements are a means of sup-
plemental compensation and are motivated by business considerations
rather than a desire to accomplish some purpose described in section
501 (c) (3) of the Code. For the most part we have been unsuccessful.
( See, e.g., William B. Chase, 19 TOM 234 (1960) and T. J. Moss Tie Co. V.
Commissioner, 18 T.C. 188 (1952) .
In the case of Charleston Chair Company v. U.S., 203 Fed. Supp. 126
(E.D. S.C., 1962), however, where 80 percent of the foundation's avail-
able resources was used to provide a scholarship for the creator's son,
the Service successfully argued that a personal rather than charitable,
purpose had been served. (IRS letter, October 2, 1904).
Mr. HARDING. My lawyers are in a dispute, Mr. Chairman.
The CHAIRMAN. Yes, sir.
Mr. HARDING. Here again, Mr. Chairman' is a little nuance of the
law which I think some of my more learned colleagues could explain
better than I.
There is a problem here which we have encountered but, as a general
rule, the transactions to which you refer are not necessarily prohibited.
Mr. RoGoviN. Mr. Chairman?
The CHAIRMAN YOU may proceed.
Mr. ROGOVIN. A corporation could set up a private foundation and
could give, say, scholarships to an indefinite class such as the children
of the employees of that corporation. Certainly if this were, for ex-
ample, one of the large corporations in the United States with ten
thousand employees, this type of activity would be an exempt activity.
Now, when we find a company foundation making charitable con-
tributions or charitable grants to its employees, a problem may arise
with respect to the class of beneficiaries. If, for example, there are a
small number of potential beneficiaries, it may be determined that this
is merely a way of deflecting compensation without the employee hav-
ing to pick it up on his income tax return. This is the type of situa-
tion which we would certainly look into. We have one case of this
type in court. This is not to say, however, that company foundations
cannot make bona fide grants to employees or to their relatives.
Mr. HARDING. I believe I recall one case, Mr. Chairman, where some
80 percent of the foundation's income was devoted to the educational
endeavors of the son of the president of the corporation, and we looked
with great disfavor upon this transaction.
The CHAIRMAN. Mr. Roosevelt.
Mr. ROOSEVELT. Mr. Harding, may I ask one question that does not
bear directly on the problems here but more directly on some other
problems that I happen to be interested in.
Is part of your difficulty in following the requests of these founda-
tions to be certified as being eligible for tax exemption, due to the fact
that you do not have the personnel available to handle it with dispatch?
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Mr. HARDING. Well, sir, before you came in we discussed the fact
that the Revenue Service does not really examine these transactions as
they occur. We see them as part of the records of the organization
when we examine their returns.
On the general question, however, in terms of manpower limitations,
yes, sir, we do have a problem. We have a problem in all areas of the
tax field in terms of the availability of qualified personnel to make
the examinations necessary, in our view, to keep the system intact.
We have in the neighborhood of some 14,000 to 15,000 revenue
agents throughout the country. This is to do all types of examina-
tions of all individuals, corporations, tax exempt organizations and
all the rest, and we have been attempting over the last several years
to increase the size of that staff in order to do a larger percentage of
the total.
We are currently examining somewhere in the neighborhood of
5 percent of the returns filed with us and we think that this is too
low for effective administration of the lax law, and we are attempting
to increase the size of that staff. We are, of course, limited by the
appropriations made available to us.
Mr. ROOSEVELT. The thing I was referring to deals generally with
the area of fraternal organizations.
MT. HARDING. Fraternal
Mr. ROOSEVELT. Individual lodges.
Mr. HARDING. Yes, sir.
Mr. RoosEvFLT. Organizing a corporation. They apply to the
Treasury for a tax exempt certification. Have those types of organi-
zations been growing in the number as far as applications are
concerned ?
Mr. HARDING. We have had a general growth in the exempt organi-
zation field. I cannot testify as to the increase in fraternal organiza-
tions, but I would assume, just on the basis of the general growth of the
economy and of the population, there has been a sizable increase in
that area as well.
Mr. ROOSEVELT. You are pretty well understaffed in your ability
to handle these applications as they come in. How much do you
actually do in the way of field investigations on applications for an
exempt status?
Mr. HARDING. Well, these are relatively simple investigations in
terms of audits as compared to some of the more complicated financial
operations that you encounter in the foundation area. But we
typically will spend two or three man-days per examination.
Mr. ROOSEVELT. Even on an initial application?
Mr. HARDING. We make no examination on an initial application,
Mr. Roosevelt.
Mr. ROOSEVELT. Why do you have three or four months backlog on
initial applications?
Mr. HARDING. This is a limitation of staff for handling these ruling
requests as distinguished from our examination of the organizations,
once they are in being and are filing tax returns. There are two
separate problems.
Mr. ROOSEVELT. Yes, I recognize that. But, on the other hand,
when you grant them, which is the first problem, you then have a
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TAX-EXEMPT FOITNDATIONS : IMPACT ON SMALL BUSINESS 179
second problem. My real interest here is not only that I think it is a
little difficult to get individual applications delayed as long as they
seem to be delayedbut, secondly, whether we ought to look into the
tremendous growth in this area as something that should possibly be
discouraged. I happen to notice in the Los Angeles area that many of
the fraternal orders have turned to this method of doing good deeds,
making their donations tax exempt by organizing this kind of tax
exempt organization within the other organization which is frankly
for different purposes. I wondered if you had any comment as to
whether this is getting to be a problem.
Mr. HARDING. We are in very serious difficulty in processing the
entire field of exempt organization applications throughout the coun-
try. It is growing, as I said, in total tremendously. We are now
running in the neighborhood of 12,000 applications a year, and we
have a relatively small staff for the purpose of processing those appli-
cations. We have recently increased that staff, however.
Mr. ROOSEVELT. Yes, sir. Well thank you, Mr. Harding.
The CHAIRMAN. Mr. Harding, we have more questions we would like
to ask you. I conferred with you before we commenced this after-
noon, and you stated you could not conveniently be here Friday since
you are going on vacation commencing then. But you could be here,
say, the Monday following?
Mr. HARDING. I think we discussed the date of the 31st, Mr. Chair-
man. That being the last Monday of this month.
The CHAIRMAN. Yes, sir. Will that be satisfactory?
Mr. HARDING. That will be quite satisfactory.
The CHAIRMAN. We will be quite willing to do that, and I have
conferred with the members, and we will just recess your part of this
until Monday the 31st at 10 o'clock here in this room then, Mr.
Harding.
Mr. HARDING. That will be fine.
The CHAIRMAN. Thank you and the other gentlemen for your coop-
eration.
Mr. HARDING. Thank you for your courtesy.
The CHAIRMAN. We will see you then on the 31st.
(Whereupon at 3 :25 p.m., August 10, 1964 the subcommittee re-
cessed, to reconvene at 10 a.m., on Monday, August 31, 1964.)
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TAX-EXEMPT FOUNDATIONS: THEIR IMPACT ON
SMALL BUSINESS
MONDAY, AUGUST 31, 1964
HOUSE OF REPRESENTATIVES,
SUBCOMMITTEE NO, 1 ON FOUNDATIONS
OF THE SELECT COMMITTEE To CONDUCT STUDIES AND
INVESTIGATIONS OF THE PROBLEMS OF SMALL BUSINESS,
TV ashington,D.0 D.C.
The subcommittee met, pursuant to call, at 10 :10 a.m., in room 1301,
Longworth House Office Building, Hon. Wright Patman (chairman
of the subcommittee) presiding.
Present: Representatives Patman, and Roosevelt.
Also present: II. A. Olsher, Director of Foundation Studies; Myrtle
Ruth Foutch, Clerk; and Eugene Loehl, Assistant Minority Counsel.
The CHAIRMAN. The committee will please come to order.
This is the fifth session of hearings of Subcommittee No. 1 on the
subject of the Federal Government's supervision of tax exempt foun-
dations and charitable trusts.
On behalf of the subcommittee, I should like to welcome our witness,
Bertrand M. Harding, Acting Commissioner of the Internal Revenue
Service.
TESTIMONY OF BERTRAND M. H.ARDING, ACTING COMMISSIONER,
INTERNAL REVENUE SERVICE; ACCOMPANIED BY MITCHELL
ROGOVIN, ASSISTANT TO THE COMMISSIONER?Resumed
Mr. Harding, we are glad to have you, sir. I would rather have all
the members here, but they have their problems, and hence have asked
inc to go ahead and take the testimony. Of course, I shall be glad to
do it, although I would much prefer to have them present. The House
is not reconvening today, so many Members are away in their districts.
I shall start the questioning. Mr. Harding, do you feel that you
have a moral obligation to report to the appropriate governmental
departments violations of law by foundations?
Mr. HARDING. Yes, sir, Mr. Chairman.
The CHAIRMAN. You do have that obligation?
Mr. HARDING. Yes, sir. Within the limits of OUT disclosure statute,
of course.
The CHAIRMAN. Within the limits of what?
Mr. HARDING. Within the limits of our disclosure statute.
Tlle CHAIRMAN. Disclosure statute?
Mr. HARDING. Yes.
The CHAIRMAN. What does that mean?
181
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Mr. HARDING. There are prohibitions, as you well know, on the dis-
closure of information.
The CHAIRMAN. You will recall during our hearing of August 10 I
asked you to explain the fact that the IRS has taken no action on the
Kaplan Fund for several years, despite the fact that millions of dol-
lars in tax liabilities may be involved. Whereupon you requested that
Mr. Rogovin be permitted to consult with us privately, and I acceded
to your request.
After due consideration, I believe the public interest will be best
served if the information imparted to us by Mr. Rogovin is made part
of this hearing record. Mr. Rogovin informed us that the J. M. Kap-
lan Fund has been operating as a conduit for channeling CIA funds
and hence you would rather not discuss the matter for the public
record. He also indicated that the Fund's operations with the CIA
was the reason for the lack of action on the part of the IRS.
During our hearing of August 10, I asked you to obtain the complete
file on the J. M. Kaplan Fun, including correspondence, memoranda,
summaries of hearings, conferences, etc. Have you brought that file
with you,
Mr. Harding?
Mr. HARDING. Mr. Chairman, I have not brought the file with me.
It was my understanding from our last hearing that we were in agree-
ment that since the case was under active investigation by the Internal
Revenue Service that it would be improper for me to comment on the
material in that file.
The CHAIRMAN. For the moment, at that time, we passed it over.
But now, under the circumstances, we want you to produce the file
and, of course, there are two ways we can do that. One is by a re-
quest, and the other is by subpoena. I do not think you would want
a subpoena issued for the file. Are you going to produce it for us?
Mr. HARDING. Well, the investigative file, Mr. Chairman, is, as I
indicated, in New York.
The CHAIRMAN. It has been about three weeks, Mr. Harding.
Mr. HARDING. Mr. Chairman, my understanding was that we had
agreed between us -
The CHAIRMAN. I think, if you will read the record, we made it
rather plain that we wanted to have it at this time. We are going to
have to request you to produce that file. Will you do it?
Mr. HARDING. Mr. Chairman, I would like to consult, and answer
that question later. Would that request be satisfactory, sir?
The CHAIRMAN You mean this morning?
Mr. HARDING. Yes, sir.
The CHAIRMAN. That will be all right.
Did the CIA ask the IRS for its opinion as to whether the Kaplan
Fund should be used as a conduit to channel CIA funds?
Mr. HARDING. Mr. Chairman, I have no personal knowledge of the
CIA's connection with this case.
The CHAIRMAN. You have no personal knowledge?
MT. HARDING. No sir; I do not.
The CHAIRMAN. no you, Mr. Rogovin?
Mr. R000vinc. Yes sir; I have limited knowledge about it.
The CHAIRMAN. You have limited knowledge about it?
Mr. RoGovix. Yes, sir.
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The CHAIRMAN. Well, I shall ask you the question. Did the CIA
ask the IRS for its opinion as to whether the Kaplan Fund should be
used as a conduit to channel CIA funds?
Mr. ROGOVIN. It did not, to the best of my knowledge.
The CHAIRMAN. Did the IRS recommend to the CIA that the Kap-
lan Fund be used as a conduit to channel CIA funds?
Mr. ROGOVIN. Again, not to the best of my knowledge.
The CHAIRMAN. You don't know anything about it, Mr. Harding?
Mr. HARDING. No, sir; I have not been dealing with the CIA in any
matters.
The CHAIRMAN. Since this is a matter of such great importance, I
i
do not understand why you did not have something to do with t.
You were acting for the Director often times, were you not, Mr.
Harding?
Mr. HARDING. Yes sir, I was; for the Commissioner.
The CHAIRMAN. You have been there for 13 years, haven't you?
Mr. HARDING. Eleven years.
The CHAIRMAN. Eleven years?and you knew nothing about this?
Mr. HARDING. We have an arrangement, Mr. Chairman; in dealing
with the CIA we have to have very limited numbers of people in-
volved in these relationships, and Mr. Rogovin represented the Com-
missioner in all dealings with the CIA for our office.
The CHAIRMAN. He has all the information with reference to this?
Mr. HARDING. Well, he has such information as he has; yes, sir.
The CHAIRMAN. All right, I shall ask him.
At the time that the CIA-Kaplan Fund-IRS arrangement was be-
ing discussed, did the IRS inform the CIA that the Kaplan Fund
was under investigation by the IRS?
Mr. ROGOVIN. Mr. Chairman, the CIA did not advise us or ask us
for our advice regarding their dealings with the Kaplan Fund. We
became aware of the CIA's interest in the Kaplan Fund when they
contacted us to indicate that they had been led to believe that an audit
was beimg conducted of the Kaplan Fund. They were concerned as
to whether or not their interest in the Fund would be made public
and whether their interest in the Fund would to any degree jeopardize
the status of the Foundation.
The CHAIRMAN. When was that?
Mr. ROGOVIN. I believe it was in late 1961, I am not sure of the
date. I think Mr. Olsher
The CHAIRMAN. What is that now?
Mr. ROGOVIN. I believe it was in late 1961. I am not sure of the
date.
The CHAIRMAN. In May 1961 that is the first knowledge you had
of it?
Mr. ROGOVIN. No, I said late 1961. I am not sure of the date, no,
sir.
The CHAIRMAN. You had no knowledge of it before that time?
Mr. ROGOVIN. That is correct.
The CHAIRMAN. How long had it been carried on between the CIA
and the Kaplan Fund, to the best of your information, before you had
knowledge of it?
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184 TAX-EXEMPT FOUNDATIONS: IMPACT ON SMALL BUSINESS
Mr. ROGOVIN. I believe they indicated it was within a year or so
prior to that. I believe Mr. Olsher has the specific dates from dis-
cussions with CIA.
The CHAIRMAN. Let me see, this question was, at the time that the
CIA-Kaplan Fund-IRS arrangement was being discussed, did the
IRS inform the CIA that the Kaplan Fund was under investigation
by IRS? Did you inform them?
Mr. RouoviN. No, sir. First of all, there was no arrangement, and
if I could take a second to indicate, in our discussions of August 10, I
don't believe I indicated that
The CHAIRMAN. You put a specific date, I had not heard you men-
tion that before August 10.
Mr. R000viN. The fourth session of the Subcommittee.
The CHAIRMAN. Yes, Sir.
Mr. Rouovm When I approached the bench.
The CHAIRMAN. That is three weeks ago. That was not 1961.
Mr. Rouovn.r. That is right. I just wanted to revert back to that
point, to indicate if I could for a moment
The CHAIRMAN. Yes, sir.
Mr. ROGOVIN (continuing). That the Revenue Service's action with
respect to the Kaplan Fund has not been terminated nor have we
changed our legal opinion or conclusion because of the CIA. What I
was pointing out at that time was that it was a sensitive matter; we
were dealing with it in a sensitive fashion, and there was some time
delay as a result. But not that our decision was going to be changed
in any respect.
Now, going back specifically to the question asked, there was no ar-
rangement between the Revenue Service and the CIA dealing with the
Kaplan Fund. They advised us?
The CHAIRMAN. In other words, they just told you.
Mr. RoGovm. They told us that they had been dealing with the
Fund.
The CHAIRMAN. Yes.
Mr. ROGOVIN. And that they were not aware of the fact that the
Revenue Service, the New York District, was examining the Fund,
and they just wanted to alert the Washington Office of Internal
Revenue -
The CHAIRMAN. That was 1961?
Mr. ROGOVIN. Yes, sir; I believe it was.
The CHAIRMAN. And you did not inform them that the tax exempt
status of the Kaplan Fund had been recommended for revocation in
1957 and again in 1958?
Mr. RocroviN. I would assume that they knew at that time that we
were examining them for the possibility of revocation.
The CHAIRMAN. But you did not give them any information of the
1957 and 1958 action?
Mr. ROGOVIN. I believe I pointed out to them we had had problems
with this Fund before; yes, sir.
The CHAIRMAN. In view of the fact that the Kaplan Fund has been
under investigation by the IRS for a number of years prior to the
CIA-Kaplan Fund-IRS arrangement, can you tell us why the CIA
chose this Fund to operate as a conduit for channeling funds?
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Mr. ROGOVIN. I believe that would best be answered by a repre-
sentative of the agency, the CIA.
The CHMIIMAN. How many foundations have been used as con-
duits for channeling CIA funds during the years 1951 to date?
Mr. ROGOVIN. I don't know the answer to the question.
The CIIAIRMAN. Do you know the answer, Mr. Harding 9,
Mr. HARDING. No, sir; I do not.
The CHAIRMAN. Is there any representative of the CIA here?
Mr. HARDING. Not to my knowledge, sir.
(Laughter.)
The CHAIRMAN. Do you have a way of securing this information?
Mr. HARDING. I think that Mr. Rogovin suggested, Mr. Chairman,
if you desire testimony on this, the appropriate agency Would be the
CIA. I think we would feel a little delicate in passing this informa-
tion on even if we had it.
The CHAIRMAN. What are the names of the persons in the IRS who
participated in the CIA-Kaplan Fund-IRS arrangement at the out-
set?
Mr. HARDING. I think Mr. Rogovin stated there was no arrange-
ment, and he has, as I indicated to
'you,
you, Mr. Chairman, been our con-
tact n the national office for relationships with the CIA, so I think
that would be the name that we would supply to that question.
The CHAIRMAN. Mr. Rogovin, you are the one who talked to these
people. Who talked to you about it?
Mr. ROGOVIN. Who from the
The CHAIRMAN. CIA.
Mr. ROGOVIN (continuing) . CIA?representatives of their general
counsel's office
The CHAIRMAN. Who are they by name?
Mr. ROGOVIN. Milan Miskovsky.
The CHAIRMAN. Did you have one or more conversations with him?
Mr. ROGOVIN. More than one.
The CHAIRMAN. And you think that was in the latter part of 1961.
Have you had conversations with him subsequent to that time?
Mr. ROGOVIN. Yes,
sir; I have.
The CHAIRMAN. .E1, few times Or many times?
Mr. lIoGoviN. Many times.
The CHAIRMAN. You never did tell him that the Kaplan Fund was
in trouble with the IRS?
Mr. ROGOVIN. My answer to the earlier question was that I did.
The CHAIRMAN. You did tell him?
Mr. ROGOVIN. Yes sir.
The CHAIRMAN. _X_t the outset, Mr. Miskovsky is the gentleman to
whom you talked?
Mr. ROGOVIN. Yes, sir.
The CHAIRMAN. Who are the people at IRS whom you talked to
about this at the same time or subsequent times?
Mr. ROGOVIN. In speaking with people within the service, I spoke
to them with respect to this as another case within the Revenue Serv-
ice; to secure information as to the status, to look at the file when it
was in Washington, to generally acquaint myself with it. But there
was no need to discuss this aspect with individuals who were working
on the case within the Revenue Service.
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The CHAIRMAN. Mr. Harding said it was assigned to you and you
handled it
Mr. ROGOVIN. Yes, sir.
The CHAIRMAN (continuing). From the beginning. Was that true?
In other words?the latter part of 1961 was the first contact, to your
knowledge, that you had with CIA concerning the Kaplan Fund?
Mr. ROGOVIN. Yes, sir.
The CHAIRMAN. And nobody else in the department has handled it
except you since that time ?
Mr. ROGOVIN. This aspect of it; yes, sir.
The CHAIRMAN. Well, have you conferred with any of them about
it?
Mr. ROGOVIN. Well, I have conferred with people within the depart-
ment, within the Revenue Service, regarding the substantive issue of
the case, yes. But this is the normal proceeding within the Revenue
Service.
The CHAIRMAN. Was anybody connected with the IRS in touch
with the CIA regarding this Kaplan Fund prior to the time that you
were approached by the CIA representative the latter part of 1961?
Mr. ROGOVIN. I do not know, I am not sure.
The CHAIRMAN. Do you know, Mr. Harding?
Mr. HARDING. I do not, sir.
The CHAIRMAN. So far as you know then, you were the first one
approached in the latter part of 1961?
Mr. ROGOVIN. Yes, sir.
The CHAIRMAN. And you informed them then that the Kaplan
Fund was in trouble with the department, IRS?
Mr. ROGOVIN. Yes, sir.
The CHAIRMAN. What was their reaction as to proceeding with the
Kaplan Fund after having that knowledge? Did they make any state-
ment as to what their course would be in the future?
Mr. ROGOVIN. I do not recall any specific statement as to a course
of conduct on their part.
The CHAIRMAN. In what year and month was the CIA-Kaplan
Fund-IRS arrangement made? Of course, you have answered that, in
which you say there was no arrangement?but the discussion was the
latter part of 1961?
Mr. ROGOVIN. Yes sir.
The CHAIRMAN. -You deny there was any arrangement or discussion
before your discussion with the CIA representative in the latter part
of 1961?
Mr. R000vrx. Mr. Patman, all I can say is that I do not believe any
arrangement took place. I am not privy or knowledgeable of any ar-
rangement that took place at any time.
The CHAIRMAN. At any time?
Mr. ROGOVIN. Yes.
The CHAIRMAN. Prior to or subsequent to the latter part of 1961?
Mr. R,OGOVIN. Yes, Sir.
The CHAIRMAN. But there were discussions?of which you say there
were many, subsequent to your 1961 conversation or contact?
Mr. ROGOVIN. Let me put the record straight on that. There were
a number of discussions. I believe the question you asked before was
on how many occasions did I speak with Mr. Miskovsky, and I said
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on many occasions. With specific reference to the Kaplan Fund, I
believe there were something less than a half dozen or so discussions.
The CHAIRMAN. Yes. And, MT. }larding, you insist that you do not
know anything about any arrangement between CIA and IRS either
prior to the latter part of 1961 or subsequent to that time?
Mr. HARDING. That is correct, sir.
The CHAIRMAN. You do not know of any arrangement of any kind,
you had no discussion with CIA people about?
Mr. HARDING. No, sir; I have never discussed this matter with CIA
people.
The CHAIRMAN. In what year and month did the Kaplan Fund
make its first output of CIA funds?
Mr. ROGOVIN. I am not aware of that, Mr. Patman.
The CHAIRMAN. You do not have any knowledge of any funds being
used or how much or--
Mr. ROGOVIN. No, sir. I believe again CIA would be the appro-
priate witness.
The CHAIRMAN. In what year and month did the Kaplan Fund
make its last output of CIA funds? Were you in on that, Mr.
Rogovin?
MT. ROGOVIN. No, sir.
The CHAIRMAN. In what year and month was the CIA-Kaplan
Fund-IRS arrangement terminated? Well, of course, you deny there
was an arrangement. But has the discussion terminated between you
and the CIA, Mr. Rogovin?
Mr. R000vm. I do not believe that there has been a termination. I
believe after our last session before your Subcommittee I brought to
the CIA's attention your interest in this Fund.
The CIIAIR1VIAN. And is Mr. Miskovsky the gentleman you have
been in conversation with?
Mr. ROGOVIN. Yes sir.
The CHAIRMAN. .2ind he is the only one at CIA that you dealt with?
Mr. ROGOVIN. No I dealt with the general counsel, Mr. Houston.
The CHAIRMAN. What is his name?
Mr. ROGOVIN. Lawrence Houston.
The CHAIRMAN. A few times or many 2
Mr. ROGOVIN. Half a dozen times.
The CHAIRMAN. If the Kaplan Fund started to operate as a con-
duit for the channeling of CIA funds in 1961, why should this affect
any tax liabilities for the years prior to 1961?
Mr. ROGOVIN. I am not aware that it should.
The CHAIRMAN. According to the law it should not, should it?
Mr. ROGOVIN. That is right.
The CHAIRMAN. How much money did the CIA channel through
the J. M. Kaplan Fund, do you know, Mr. Rogovin?
Mr. ROGOVIN. No, I do not.
The CHAIRMAN. The IRS has the responsibility to see that a foun-
dation's funds are used in accordance with the law. Has the IRS
examined the Kaplan Fund to determine whether the CIA funds?
which are, of course, public funds?were actually disbursed by the
Kaplan Fund? Mr. Harding, will you answer that?
MT. HARDING. Not to my knowledge.
The CHAIRMAN. What about you, Mr. Rogovin.
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Mr. ROGOVIN. I believe during the audit examination one of the
items of the examination for determination was as to what funds went
where. And if these funds show up as receipts of the Foundation,
they would be traced through to determine what projects it supported.
The CHAIRMAN. Has the IRS vertified that the CIA funds were
actually disbursed by the Kaplan Fund, Mr. Harding?
Mr. HARDING. I do not know of any such verification.
The CHAIRMAN. Do you know anything about this?Mr. Rogovin ?
Mr. ROGOVIN. Again, as part of the audit examination, this would
be part of the vertification. The District Office did not know of the
agency's relationship with the Kaplan Fund, and audited the Kaplan
Fund just as they would audit any other exempt organization.
The CHAIRMAN. Mr. Harding, I cannot understand why it is that
you?who have been Acting Commissioner for so long?have no
knowledge of this at all and have delegated all to Mr. Rogovin.
Mr. HARDING. Mr. Chairman, I was appointed Acting Commis-
sioner on the 10th of July this year.
The CHAIRMAN. I know you were, but you signed the Commission-
er's name long before that, did you not?
Mr. HARDING. When the Commissioner was absent I acted in his
absence; yes, sir.
The CHAIRMAN. I know you did. But you signed his name and
acted for the Commissioner over a period of years, did you not?
Mr. HARDING. Did what, sir?
The CHAIRMAN You acted for the Commissioner over a period of
years.
Mr. HARDING. In his absence.
The CHAIRMAN. Yes. You know it was brought out here that his
name wa?s signed to documents that he said he did not sign at all.
Mr. HARDING. I never signed Mr. Caplin's name IG any document,
Mr. Chairman.
The CEAIRNAN. Who signed his name then when he did not sign it?
Mr. HARDING. I believe Mr. Caplin testified when he was here that
Mr. Edwin Perkins was authorized to sign his name to certain docu-
ments.
The CHAIRMAN. Has the IRS verified that the CIA funds were
actually disbursed by the Kaplan Fund, Mr. Rogovin ?
Mr. RoGovIN. I believe in response to this question I pointed out
that the District Office was not aware of any relationship between the
CIA and the Kaplan Fund.
The CHAIRMAN. When was that information given to you?that the
District Office had not verified?that they had no knowledge of it at
the District Office?
Mr. ROGOVIN. I have never advised the District Office of any rela-
tionship, and I do not believe the CIA has, and I do not believe that
the Kaplan Fund has, so that to the best of my knowledge until you
made the disclosure, public disclosure, some minutes ago, it was un-
known; and, as a consequence
The CHAIRMAN. Do you know' Mr. Harding, whether or not the
National Office, the office that you have charge of now, as Acting Com-
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raissioner?has verified that the CIA funds were actually disbursed by
the Kaplan Fund? You have not gone into that at all?
Mr. HARDING. No, sir; I have not.
The CHAIRMAN. You have no knowledge of it? i
Mr. HARDING. I have no knowledge of t.
The CHAIRMAN. What method did the IRS use to verify whether
the CIA funds were actually disbursed by the Kaplan Fund? Mr.
Rocrovin, do you know anything about that?
ROGOVIN. Yes, sir. As I pointed out, the District Office would
examine the Kaplan Fund in the same fashion that they examine any
other charitable foundation. They did not?they were not aware that
there was such a thin?. as CIA funds.
Now, I would think that the CIA would be a good organization to
question as to what methods they used to verify to see that their funds
were used to support the projects that they are interested in. But
the Revenue Service did not make any special efforts because the Dis-
trict was not aware of the significance of one set of dollars as compared
to another set.
The CHAIRMAN. I assume that you would be dealing with the right
people who would have knowledge of it at CIA, and I assume that
those people would be the two whose names you have mentioned earlier,
including, first, the general counsel.
MT. ROGOVIN. Yes, sir.
The CHAIRMAN. I have here the tax returns of the J. M. Kaplan
Fund for the years 19612 1962, and 1963. I shall hand you these tax
returns for your inspection, and we will recess for fifteen minutes in
order to give you an opportunity to examine them. Please examine
the income and contributions received columns and then tell us where
you find receipt of CIA funds. We will take a recess for, say, fifteen
minutes.
(At this point a short recess was taken.)
The CHAIRMAN. Have you concluded looking over it, Mr. Harding?
Mr. HARDING. I have, Mr. Chairman.
The CHAIRMAN. Do you find any information there which would
lead you to believe that any funds have been received from the CIA
or any government agency?
Mr. HARDING. As you might expect, Mr. Chairman, I see no indi-
cations of any CIA money on the returns.
The CHAIRMAN. And those are for what years?
Mr. HARDING. Form 990?A for 1961, 1962 and 1963.
The CHAIRMAN. Well, Mr. Rogovin has not returned
Mr. HARDING. Yes, sir; he will be right back.
The CHAIRMAN. I think I would like him to be here when I make
the next short statement preceding a question.
Are you ready to proceed, Mr. Rogovin ? Are you ready for us to
proceed?
Mr. ROGOVIN. Yes sir.
The CHAIRMAN. X. few days after our hearing of August 10, Mr.
George Cary, who described himself as assistant legislative counsel of
the CIA, called on me. Mr. Cary stated that the Jr. M. Kaplan Fund
39-915-64-,-13
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had been used as a conduit for channeling CIA funds but he knew
very little about it. Mr. Cary said he wasn't sure of the dates but he
guessed that the CIA-Kaplan Fund-IRS arrangement was made in
1960 and terminated in 1962. According to Mr. Cary, this was all he
knew about the arrangement. Hence, his visit to me didn't make
much sense.
I suggested that Mr. Cary also speak with Mr. Olsher. Mr. Cary
transmitted to Mr. Olsher the same earth-shaking information but
promised to phone-in the month and year in which the CIA-Kaplan
Fund-IRS arrangement was made as well as the month and year of
termination of the arrangement. A couple of weeks later, on August
25, Mr. Cary phoned Mr. Olsher to tell him that it appears as though
the CIA-Kaplan Fund-IRS arrangement was made in 1959 and
terminated in 1969. He did not know the month in which the arrange-
ment was made or the month in which it was terminated. Mr. Cary
also said that he thought Messrs. Rogovin, Dunlap and Worley of
the IRS handled the original arrangement, but the latter two gentle-
men were no longer with the IRS. When Mr. Olsher indicated that
he (Cary) was to give him the month and year of the arrangement and
the month and year of the termination, Mr. Cary answered that he
had misunderstood Mr. Olsher but would obtain the information.
Nothing has been heard from Mr. Cary since then. Now then, who is
Mr. Cary, Mr. Rogovin ?
Mr. ROGOVIN. I have only spoken with Mr. Cary on one occasion,
and he identified himself as assistant legislative counsel for the CIA.
That is the only knowledge I have.
The CHAIRMAN. I did not quite understand. As what?
Mr. ROGOVIN. I believe as assistant legislative counsel.
The CHAIRMAN. On the Hill or off the Hill?
Mr. ROGOVIN. I do not know where his specific duties are.
The CHAIRMAN. You do not know him?
Mr. ROGOVIN. I have only spoken to him on the telephone, and that
was for a brief conversation.
The CHAIRMAN. Now, these two gentlemen here who were mentioned
by Mr. Cary?Mr. Dunlap and Mr. Worley?they are not with the IRS
any longer?
Mr. ROGOVIN. That is correct; they are retired.
The CHAIRMAN. Are they around Washington?
Mr. ROGOVIN. I do not know, sir.
The CHAIRMAN. Do you know if they had any contacts with the
CIA preceding the time that you were contacted by the CIA?
Mr. ROGOVIN. I am not sure. I do not know, sir.
The CHAIRMAN. Either one of them?
Mr. ROGOVIN. I do not know.
The CHAIRMAN. Who in the IRS asked Mr. Cary to see me, do you
know that?
Mr. ROGOVIN. I spoke to Mr. Miskovsky after our last session and
advised him of the questioning and what I had spoken to you in
confidence about. And repeated what you had at that time said: in
essence that if they wanted to come and talk to you you would listen,
but that you had no?
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The CHAIRMAN. That is right, I did. that, too, and I considered it
confidential. But when they did not come forward with a person
who is in a position to give me information, and when they promise
to furnish information which they never follow through with?then,
I feel that they are trifling with me and I no longer have any obliga-
tion to them. They failed to furnish the necessary information
earlier, and they have not yet come through with it.
Mr. ROGOVIN. I am sure if Mr. Olsher has called or requested ad-
ditional information they would have been as cooperative as possible.
The 'CHAIRMAN Well, not only did Mr. Cary call me, but he also
called. Mr. Olsher. Mr. Cary called Mr. Olsher, and Mr. Olsher in-
quired about certain information which was to be furnished by Mr.
Cary?none of which has been submitted either to Mr. Olsher or to
me. It seems to me that this purported or alleged CIA-Kaplan Fund
arrangement is being used as a gimmick or diversionary tactic for the
purpose of attempting to stop this Subcommittee from proceeding
further on the subject of the Kaplan Fund.
I would give very careful consideration to the need for secrecy in
this matter if the CIA or the IRS had. presented information which
was meaningful and could be relied. upon. But, when the information
furnished by the IRS and CIA consists solely of a hint that I had bet-
ter not touch this because it involves foreign operations of the CIA,
this can hardly be classed as convincing evidence that secrecy is
required.
Additionally, our study of the J. M. Kaplan Fund's operations in-
dicates a large possible tax liability as well as violations of Treasury
regulations and abuse of its public trust, including self-dealing to
the detriment of the Fund's stated charitable purposes. Moreover,
the Congress provides the funds for CIA operations and has the re-
sponsibility to see that the funds are properly disbursed and ade-
quately supervised. I, personally, have the conviction that the ex-
penditure of public funds is the public's business.
The following is information I should like to have you submit for
this record respecting The Gotham Foundation, Michigan Fund,
Andrew Hamilton Fund, Borden Trust, The Price Fund, The Edsel
Fund, The Beacon Fund and The Kentfield Fund:
Addresses.
Names and addresses of the officers, directors, or trustees at the close
of each of the years 1951 through 1963.
Copies of exemption application (Form 1023) and supporting documents,
including subsequent amendments.
Copy of letter of Internal Revenue Service granting exemption.
Copy of charter or articles ,of incorporation (if the foundation is not
a corporation, please submit a copy of the trust instrument).
Copies of Form 990?A (or Form 1041?A, if applicable), including
attachments filed with the Internal Revenue Service for each year
beginning 1951.
Also, please advise as to (a) the years, beginning with 1952, during
which the Internal Revenue Service performed field audits of each
foundation; (b) the years covered in each such audit; (c) taxes
assessed, if any: by the Internal Revenue Service.
For your guidance, the contributions received by the J. M. Kaplan
Fund from the above organizations during the years 1961 through
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1963 are shown below. The addresses of these donors do not appear
on the Fund's tax returns, despite the fact that such information is
required by Treasury regulations.
Donor
Year
Amount
Donor
Year
Amount
Gotham Foundation__
1961
$83, 000
Andrew Hamilton
1962
Fund
1961
$62, 950
1963
1962
1963
83,000
62, 950
Michigan Fund_______
1961
63,000
50, 000
1962
Borden Trust
1961
1963
1962
1963
90, 000
63,000
140,000
The Price Fund__.___
1961
$50, 000
The Beacon Fund
1961
1962
75,000
1962
$30,000
1963
60,000
1963
100,000
185, 000
130, 000
The Edsel Fund
1961
The Kentfield Fund_
1961
1962
80,000
1962
35,000
1963
50, 000
1963
95,000
130, 000
130, 000
The CHAIRMAN. Will you submit the addresses right away, in other
words, by tomorrow, and the rest of it can come later on? But we
want all the information. Are you in a position to furnish that, Mr.
Harding?
Mr. HARDING. I am not sure where these returns are, Mr. Chairman,
at the moment. I will certainly do my very best, we will certainly
do our very best, to give you all the information we can as soon as
possible.
The CHAIRMAN. The addresses you would certainly be able to give.
Mr. HARDING. If we can locate the returns.
The CHAIRMAN Shouldn't there be some reference to them in the
National Office? I thought you had a file on all exempt organizations.
Mr. HARDING. This is true since 1962. From that date we started
accumulating copies of returns in the National Office.
Mr. ROOSEVELT. You would have an address for them in the Na-
tional Office.
Mr. ROGOVIN. To the extent they are exempt organizations. They
may well be private trusts that are not charitable trusts.
The CHAIRMAN But any of them that are exempt organizations you
would have them?
Mr. ROGOVIN. Yes, Sir.
The CHAIRMAN And the others, if you have them, you will furnish
them, let us say, by tomorrow?just the addresses?
Mr. ROGOVIN. Yes sir.
The CHAIRMAN. All right; fine.
(The information concerning the eight foundations was furnished
to the subcommittee in executive session.)
0101110'
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The following are among the questions I asked you during our hear-
ing of August 10 :
Has the IRS examined the movement of funds between Mr.
Kaplan and the Foundation to determine whether such activi-
ties were engaged in for the purpose of obtaining certain tax
advantages for Mr. Kaplan?
Would you agree that Mr. Kaplan has engaged in self-deal-
ing with his Fund?
What were the reasons for the substantial borrowing that
took place between the Fund and Mr. Kaplan or the companies
controlled by him?
Would you agree that the Fund has made speculative in-
vestments in companies operating at losses, paying little or
no dividends, and whose stocks have poor marketability?
Would you say that the investments made by the Fund are
typical of those which a trustee of a charitable foundation
usually makes in order to preserve the principal and to secure
reliable income?
If these speculative investments cannot be considered as
desirable for a charitable foundation, would you agree that
the size of such investments by the Fund indicate that the
basic intention may have been not one of investment but rather
an attempt to create business opportunities for Mr. Kaplan
through the utilization of the Fund's assets? For example,
the Lee National Corporation has a very thin market and has
not paid dividends since early 1962. The Illinois Brick Com-
pany is listed only on the Midwest Stock Exchange and has a
small amount of trading.
In your view, what is the justification for a foundation
making this type of investment?
Would you agree that the Fund's business activities may
have operated to the detriment of its primary purposes?
You answered these questions by stating that the Kaplan Fund is
under continuing investigation by the IRS and you preferred not to
comment on these matters while you are investigating them.
What is the scope of the IRS investigation of the Kaplan Fund? In
other words, what has the National Office of the IRS been investigating
since it became involved in this matter in 1958?
Mr. HARDING. Mr. Chairman, the scope of the investigation of the
Kaplan Fund is to determine whether or not it shall continue as an
exempt organization. The examination is not being made by the Na-
tional Office but is being made by our New York District Office.
The CHAIRMAN. Mr. Harding, the recommendation to revoke the
tax exemption of the Kaplan Fund was made in 1957 and repeated
again in 1958. The case was sent to the National Office in 1958. Now-
6-7 years later?you tell us that you are still investigating, investigat-
ing, and investigating. Why should it take six years to pass on some-
thing like that?
Mr. HARDING. Well, Mr. Chairman, as I recall, the final determina-
tion, the last determinationz made by our Third District Director, Mr.
Moe, was that the organization did retain its exempt status.
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The CHAIRMAN. When was that; what year was that?
Mr. HARDING. I believe it was in the chronology that you presented
for the record, Mr. Chairman. We can look it up.
The CHAIRMAN. Apparently, you didn't rely upon Mr. Moe'.s recom-
mendation or you would not have had a continuing investigation since
that time.
Mr. HARDING. We have some additional information, Mr. Chair-
man, as you will recall; we discussed that privately.
The CHAIRMAN. Do you have the conclusions of the recommenda-
tions made by the District Director in 1957 and 1958? Do you have
them with you?
Mr. HARDING. No, sir; I do not. We did see copies of their letters.
The CHAIRMAN. I think we have all of them, and also the one where
Mr. Moe, the Director, recommended against revoking the tax exemp-
tion, I believe, in 1960.
Is the IRS investigating the reasons for the National Office approval
of District Director Moe's recommendations of March 20, 1960?
Mr. HARDING. The reasons for the National Office approval?
The CHAIRMAN. Yes, did you actually approve it?
Mr. HARDING. Yes, sir; that was done.
The CHAIRMAN. How long did it take you to approve it?
Mr. HARDING. I do not recall the dates on that, Mr. Chairman.
The CHAIRMAN. Well, was it a few weeks or a few months?
Mr. HARDING. Well, the case was in process for several years, as
you will recall, with two denial letters and one approval letter, all of
those having been subject to National Office review.
The CHAIRMAN. And you are investigating that now?
Mr. HARDING. Yes, indeed, sir.
The CHAIRMAN Mr. Roosevelt.
Mr. ROOSEVELT. The 1957 and 1958 recommendations were over-
ruled, I believe, in 1960, is that correct, by the National Office?
Mr. HARDING. My recollection, Mr. Roosevelt, is that the District
Director came in a third time for technical advice to the National
Office. He received technical advice, and on the basis of that advice
he issued an approval letter.
Mr. ROOSEVELT. Is there any record of what that advice was?
Mr. HARDING. Yes, sir.
Mr. ROOSEVELT. Can you submit that for the committee?
Mr. HARDING. That was part of the material to be submitted, Mr.
Roosevelt, in response to your request, and added to the record. That
has not been submitted as yet.
Mr. ROOSEVELT. That has not been submitted?
Mr. HARDING. No, sir; it has not.
Mr. ROOSEVELT. What has happened to it? That was three weeks
ago.
Mr. HARDING. I am sorry, Mr. Roosevelt. I have been on vacation
and, with the Chairman's agreement, I was allowed to withhold the
submitting of that additional information until after I returned and
had an opportunity to review the work of the staff done in my absence,
and I returned to work this morning.
Mr. ROOSEVELT. Since I have been away a week myself, I guess I
cannot criticize that.
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(The information submitted by the IRS, under date of October 2,
1964, appears on page 196. Also, see Exhibits 12 through 25, pages
312-342.)
The CHAIRMAN. Is the IRS investigating possible tax liabilities of
the J. M. Kaplan Fund, Mr. Kaplan personally, or Kaplan-controlled
enterprises?
Mr. HARDING. I am not aware, sir, of whether we have investiga-
tions going on the taxable entities or not.
The CHAIRMAN. But you have it on the Fund?
Mr. HRDING. On the Fund; yes, sir.
The CHAIRMAN. The others would be somewhat related, would they
not?
Mr. HARDING. They might be related ;_yes, sir.
The CHAIRMAN. If they were related, I wish you would point it out.
Mr. HARDING. Yes sir. If there is something in the Fund's investi-
gation which disclosed personal liability.
The CHAIRMAN. For what years is the IRS investigating possible
tax liabilities of the J. M. Kaplan Fund, Mr. Kaplan personally, or
the Kaplan-controlled enterprises? What years are you investigating,
we will first say, the J. M. Kaplan Fund?
Mr. HARDING. We are looking into all of the open years. As you
will recall, Mr. Chairman, this was a question we did not resolve at
the last hearing as to which years were open, but we will have all open
years examined during the investigation.
During our hearing of August 10, I pointed out the following to
you:
Mr. Donald R. Moysey, District Director of Lower Man-
hattan, recommended that the Fund's tax exemption be
revoked retroactively. We also know that, by letter of Jan-
uary 7,1958, Mr. Raphael Meisels, successor to Mr. Moysey,
upheld the latter's recommendation that the Fund's tax ex-
emption be revoked "retroactively and progressively."
Then by letter of March 24, 1960, Mr. Kenneth W. Moe,
District Director of the Lower Manhattan District and suc-
cessor to Mr. Meisels overrode the recommendations of the
two previous District Directors, and advised the Kaplan
Fund that its tax returns for the years 1952 through 1956
"will be accepted as filed.", and that the Fund "was exempt
from Federal income taxes for such years".
The CHAIRMAN. Mr. Moe's letter of March 21,1960, to the Kaplan
Fund gives no indication of why the Fund's tax returns were accepted
as filed for the years 1952 through 1956. You stated that you would
supply for this record the reasons for the IRS decision that the Fund
"was exempt from Federal income taxes for such years". You may
now give us that information.
Mr. HARDING. Mr. Chairman, as I just pointed out, I have only
returned to the office this morning, and I have not had an opportunity
to review that information. I will supply it in accordance with our
agreement for your record.
The CHAIRMAN. Can you do that pretty soon, Mr. Harding?
Mr. HARDING. Just as soon as I have an opportunity to get to my
desk, sir, and review the material that was prepared in my absence.
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The CHAIRMAN Yes. We were very glad to agree that you would
have time for your vacation, and that you would return today. I
thought possibly you would have somebody in the office working on it
during your absence, and you would just have to look it over after you
had got back.
Mr. HARPING. We have had people working on it during my absence,
sir, but I have not had an opportunity to review the material.
(Following is the information submitted by the IRS under date of
October 2, 1964. Also, see Exhibits 12 through 25, pages 312-342:)
The District Director, Lower Manhattan, New York, initially asked for advice
and comments of the National Office on August 7, 1956 with respect to certain
transactions which in his opinion formed a basis for a recommended revocation
of the exempt status of The J. M. Kaplan Fund, Inc.
The National Office wrote to the District Director on December 31, 1956, indi-
cating agreement, but suggesting that certain aspects of the case be more fully
developed. It was also suggested that the District Director follow the estab-
lished procedures which provide for the organization to be notified of a proposal
to recommend revocation of its exempt status and to be given the opportunity to
a conference in the District office, as well as to file a brief in answer to the
proposed recommendation, indicating whether a conference in the National
Office might be desired prior to the issuance of any adverse ruling.
The District Director sent formal notice to the organization on March 29,
1957, setting forth certain facts and the reasons for his proposed revocation, and
offering the organization an opportunity to file a protest within thirty days.
A brief was duly filed by the organization which contended that it was
formed and operated exclusively for charitable purposes; that it had been the
recipient of benefactions throughout its history with little or no benefits accruing
to its creator and donors; that its investment practices had been those normally
incident to those of an investment portfolio; and that it had not engaged in
prohibited transactions within the meaning of section 503 of the Internal Revenue
Code.
By letter dated January 7, 1958, the organization was advised by the District
Director that after careful consideration of the brief and a thorough review of
the issues involved, it was the continued opinion of his office that the recom-
mendation of revocation was correct and that the file was being forwarded to
the National Office for further consideration.
A conference was- held in the National Office on July 8, 1958 at which time
all aspects of the case were discussed and representatives fof the organization
were granted the opportunity to file a supplemental brief. The supplemental
brief, signed by Mr. J. M. Kaplan on November 19, 1958, set forth, among other
things, a schedule of "Bargain Sales" to the organization, showing that only
one of these had been claimed as a contribution deduction by the seller; and a
schedule of the contribution deductions of the contributors of property to the
organization, showing that of non-cash contributions totaling $14,528,013.18, the
donors used as income tax deductions only $137,112.69. The supplemental brief
insisted that this did not represent a situation of a charitable organization
formed or used to create contribution deductions for the founder and his related
individuals and companies but rather, a charitable organization to which the
great bulk of the contributions has been made without regard to tax benefit
from contribution deductions and, in large part, without the benefit
of contribution deductions at all. In connection with the assets received by the
organization as a result of its owning 244,681 shares of Old Welch, Inc., and
receiving liquidating distributions, the supplemental brief maintained that the
liquidating distributions were capital gain and not accumulaton of income
subject to the provisions of section 504 of the Code. With regard to its port-
folio, the brief asserted that it is a proper exercise of discretion for a charitable
organization to determine, as a policy, that its charitable objectives are best
served by conservation and enhancement of its capital so as to provide a continu-
ing and increasing amount of income for expenditure in its charitable purposes,
and that this had been its policy.
On September 23, 1959, the National Office addressed a memorandum of tech-
nical advice to the District Director. He was informed that all of the facts in
the case, including the involved and complicated transactions set forth in his
letter to the organization had been carefully considered. The National Office
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memorandum advised, however, that even though some of the transactions, when
viewed separately, may appear to be without the scope of the exemption statute,
that in considering whether an organization is organized and operated exclusively
for charitable purposes it is necessary to study its entire operations. The mem-
orandum stated that while there is considerable doubt that a charitable purpose
is served if an exempt organization is an integral part of a scheme to avoid
tax or otherwise serve the private interests of its creators, that in some cases,
such may be incidental rather than substantial if the primary purpose is in
fact charitable rather than in furtherance of a selfish motive. The memorandum
of technical advice to the District Director concluded that upon a review of all
the facts in the case, the primary purpose of the organization itself, as evidenced
by its operations, was charitable.
The District Director was advised that if he agreed with the technical advice
furnished in the matter, the organization should be advised accordingly. If not,
the National Office invited further comments.
Thereafter, by letter dated March 24, 1960, the District Director advised the
Kaplan Fund that its returns for the years 1952 through 1956 would be accepted
as filed.
As has been brought out in the hearing record, there is currently pending a
recommendation by the District Director that the Fund's exempt status be re-
voked for the years 1958, 1959 and 1960. In consideration of the current case,
the position taken by the National Office in the technical advice memorandum of
September 23, 1959 is being reexamined, along with an examination of the
findings in pertinent court decisions, rulings, etc., since that date. (IRS letter,
October 2, 1964.)
The CHAIRMAN. During our hearing on August 10 I asked you the
following question: "Does the fact that Mr. Moe overrode the prior
recommendations of the District Director in 1960 mean that the Na-
tional Office of the IRS cannot do anything about any tax liability
that may exist for the years 1952 through 19569" In other words,
does the statute of limitations kill any possibility for assessing taxes
for those years? You stated that you did not know the answer to
that question but that you would submit it for the record at this
hearing. You may now supply that information.
Mr. HARDING. I am in the same position on this as in all the other
material, Mr. Chairman.
The CHAIRMAN. We would like to have this as soon as we can, Mr.
Harding. Would, say, Wednesday morning be unreasonable?
Mr. HARDING. This open year question?
The CHAIRMAN. Yes, sir.
Mr. HARDING. Yes, sir. I think we can probably get that for you
tomorrow.
The CHAIRMAN. Tomorrow would be better, if you please.
(Following is the information submitted by the IRS under dates
of September 1, 1964 and October 12, 1964. Also see Exhibits 12
through 25, pages 312-312.)
With regard to the J. M. Kaplan Fund, Inc. of New York, N.Y., the statute
of limitations has expired on returns filed by the Fund for the years 1954, 1955,
1956 and 1957 pursuant to the provisions of section 6501(g) (2) of the Internal
Revenue Code of 1954. There was, however, no provision corresponding to
section 6501(g) (2) in the prior Code and it has been held that the filing of an
information return for years prior to 1954 by an organization believing itself
to be exempt did not start the running of the statute of limitations. Thus,
returns filed by the Kaplan Fund for the years 1952 and 1953 would still be open
for assessment.
Returns for the years 1958, 1959, and 1960 are those presently under audit,
and they are open for assessment to June 30, 1965 under consents extending
the statute of limitations filed by the Fund. Returns for the years 1961, 1962
and 1963 are, of course, open under the normal three year period of limitations
to May 15, 1965, 1966, and 1967, respectively. (IRS letter, September 1, 1964).
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The Service audit of the returns for the J. M. Kaplan Fund for the years
1958 and 1959 commenced in January 1961 and its returns for the years 1960 and
1961 were later added to the audit. The scope of this audit also includes con-
sideration of all the matters on which you have reported or raised questions.
Completion of this audit is anticipated on or about December 31, 1964. (IRS
letter, October 12, 1964).
The CHAIRMAN. I understand Mr. J. M. Kaplan and affiliated
foundations, as well as several Kaplan-controlled enterprises have had
substantial stock trading accounts in New York City. Has the IRS
examined the stock trading accounts of Mr. J. M. Kaplan, J. M. Kap-
lan Fund, Navajo Corporation, Jerakap, Inc., Nivell Corporation, and
other Kaplan-controlled enterprises and foundations?
Mr. HARDING. I would assume, Mr. Chairman, that all of these
transactions would be incorporated in the investigation currently
underway in New York.
(See page 203 and Exhibit 12, page 312 for subsequent response by
Acting Commissioner Harding.)
The CHAIRMAN. Mr. Roosevelt.
Mr. ROOSEVELT. Mr. Chairman, I am sorry I was late and missed
some of the previous discussion. But I want to go back to some of the
statements previously made with reference to the CIA so that I can
understand the situation.
Mr. Rogovin, as I understand it, you are the only one now in the
Internal Revenue who has any information regarding this arrange-
ment that was supposedly made with the Kaplan Fund and CIA?
Mr. ROGOVIN. ./1r. Roosevelt, in partial answer to your question,
yes. I am liaison or the point of contact between the CIA and the
Revenue Service. But to correct the record, there was no arrangement
made regarding any special tax concessions or the like between the
three parties involved here.
Mr. ROOSEVELT. So that, if Mr. Cary told the Committee that there
was an arrangement, you are not a part of that arrangement and know
nothing about such an arrangement?
Mr. ROGOVIN. It would sound to me like a poor choice of words,
"arrangement", but I am not a party or aware of any arrangement.
Mr. ROOSEVELT. Are you able to tell us what the discussion was that
you had with Mr. Miskovsky, is that how you pronounce his name?
MT. ROGOVIN. Yes.
Mr. Roosevelt, when mentioning it the first time, I felt there was a
certain sense of confidentiality thal, we might attach to this type of in-
formation, and would again like to underscore this. I would be very
happy to discuss all of this material with you and the members of the
Subcommittee. But I am not sure what the advantage of a public
discussion of this would be, so I would leave it to your discretion.
Mr. ROOSEVELT. If counsel for this Committee has had discussions
with Mr. Cary, and there is no information so far of a specific nature,
is it not proper now that we turn to you and say?if you want to do it
confidentially, that is fine?but would you not agree that we should
now say to you, "All right, what is the understanding,"?or if you do
not like the word "arrangement"?what is the understanding that you
have on this matter and the materials affected?
Mr. ROGOVIN. Certainly, it is a very appropriate question, and I
would be most happy to discuss it with you and the members of the
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Subcommittee. But I would respectfully suggest that we not do it
in public hearing.
Mr. ROOSEVELT. Well, Mr. Chairman, I would then like to ask that
Mr. Rogovin be asked to do that this afternoon at the earliest pos-
sible time.
The CHAIRMAN. You mean at a private meeting?
Mr. ROOSEVEL/T. A private meeting with counsel, yourself, of course.
The CHAIRMAN. And yourself.
It is possible we can conclude before twelve o'clock in time to do
that.
Mr. HARDING. Mr. Chairman, I would respectfully suggest if such a
meeting is held that the CIA be represented at that meeting. I am a
little concerned that the Revenue Service divulge information even to
this Committee which has been given to us in confidence by the agency.
Mr. ROOSEVELT. Mr. Rogovin, in the questions that the Chairman
has already given you with respect to the list of foundations starting
with the Gotham Foundation and ending with Kentfield Foundation,
the Kentfield Fund, where there is an omission, as there is in this case,
of the addresses of these foundations would you normally have done
something to see that these residences were filled in?
Mr. ROGOVIN. In the audit of an exempt organization one of the
points of interest to the agent would be where the money comes from,
and to the extent that the return does not reflect the information, I
would assume that the agent would specifically ask the donee recipient
who these organizations are, and where they are. While this is tan-
gential to his examination, it is further information that the Service,
m general, would be interested in, so it would be part of the audit to
information.
Mr.for the
Mr. ROOSEVELT. It is required by the Treasury regulations.
Now, therefore, if it was not on the form as submitted to the Treas-
ury, is it not then information which would be on the examining
agent's form or materials, in some way within his material?
Mr. ROGOVIN. I would assume he would ask for it in the conduct
of a field examination. He starts with the return, but he goes to the
books and records of the foundation, and to the extent that the names
of these donors and the address of the donors are not on the return,
they may well be in the books and records of the foundation. And
if it is not, he would ask for them. An appropriate notation, I assume,
would be in his work papers.
Mr. ROOSEVELT. What I am getting at is we have asked you for the
addresses. You have said that you might not be able to supply them
unless they were tax deductible foundations or funds. What I am
getting at is that I do not think that is so, because if the agent had
done what is required of him by Treasury regulations, he certainly
must have gotten that information when in eight instances Treasury
regulations had been ignored and the addresses were not present. If
these are dummy corporations or if they are for some other reason
corporations which we do not want to talk about anyway, that is fine,
tell us. But they must be in your records, and I do not want you com-
ing back here and saying to me, "I am sorry, these are not foundations
which are tax exempt, and therefore we know nothing about them."
Your Treasury regulations require you to know something about
them; that is right, is it not
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Mr. R000viN. Basically, yes, and we will supply the information
by tomorrow morning.
The CHAIRMAN. Now, we will have this meeting this afternoon in
my office. Will 4 o'clock be all right, Mr. Harding?
Mr. HARDING. Yes sir; that will be satisfactory.
The CHAIRMAN. Would that be better than any other hour this
afternoon?
Mr. HARDING. It is at your pleasure, Mr. Chairman.
The CHAIRMAN. Will that be satisfactory to you, Mr. Rogovin?
Mr. ROGOVIN. Yes, sir.
The CHAIRMAN. We will have it in my office, Room 1136, House
Office Building, at 4 o'clock this afternoon.
(The information concerning the eight foundations was furnished
to the Subcommittee in Executive Session.)
The CHAIRMAN. Has the IRS examined the stock trading accounts
of Mr. Kaplan the J. M. Kaplan Fund, and other Kaplan-controlled
foundations and businesses to determine whether stock trading losses
of Mr. Kaplan or of Kaplan-controlled organizations were charged to
the J. M. Kaplan Fund or other Kaplan foundations?
Mr. HARDING. Again, Mr. Chairman, I would assume that is part
of the investigation in process.
(See page 203 and Exhibit 12, page 312 for subsequent response by
Acting Commissioner Harding.)
The CHAIRMAN. Does the IRS have any evidence that stock trading
losses of Mr. Kaplan or of Kaplan-controlled enterprises were charged
to the J. M. Kaplan Fund or other Kaplan foundations?
Mr. HAriniwo. We may develop such information. I do not have
any such information now, Mr. Chairman.
The CHAIRMAN. You do not have the information yourself at this
time?
Mr. HARDING. No, sir. Again I assume that this is part of the
investigation.
The CHAIRMAN Now, that investigation has been going on since
1957 and 1958, you know.
Mr. HARDING. This is the new phase of that investigation.
The CHAIRMAN New phase of it?
Mr. HARDING. Yes sir.
The CHAIRMAN. Did the old phase say anything about this or aren't
you saying?
Mr. HARDING. I am not aware of it, Mr. Chairman.
(See page 203 and Exhibit 12, page 312 for subsequent response by
Acting Commissioner Harding.)
The CHAIRMAN. Mr. J. M. Kaplan and his foundations have been
substantial contributors to the New School for Social Research of
New York City. Has the IRS examined the records of the School
to determine whether it has received grants from Mr. Kaplan or
Kaplan-controlled foundations which were to be used for the express
purpose of purchasing stock in companies in which Mr. Kaplan was
interested?
Mr. HARDING. Again, Mr. Chairman, that would have to be part of
this investigation that is under way.
The CHAIRMAN. And you are not in position to answer it at this
time?
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MT. HARDING. No, sir; I am not.
(See page 203 and Exhibit 12, page 312, for subsequent response by
Acting Commissioner Harding.)
The CHAIRMAN. Does the IRS have any evidence that the New
School for Social Research received grants which were used for the
purpose of purchasing stock in companies in which Mr. Kaplan was
interested?
Mr. HARDING. The same answer, Mr. Chairman.
(See page 203 and Exhibit 12, page 312, for subsequent response by
Acting .Commissioner Harding.)
The CHAIRMAN. Has the IRS examined the records of the New
School for Social Research to determine whether it has received
grants from Mr. Kaplan or Kaplan-controlled foundations which
were to be used for pdlitical purposes?
Mr. HARDING. Same answer, Mr. Chairman.
(See page 203 and Exhibit 12, page 312, for subsequent response by
Acting Commissioner Harding.)
The CHAIRMAN. Does the IRS have any evidence that the New
School for Social Research received grants from Mr. Kaplan or from
Kaplan-controlled foundations which were used for political pur-
poses?
Mr. HARDING. Same answer, Mr. Chairman.
(See page 203 and Exhibit 12, page 312, for subsequent response by
Acting Commissioner Harding.)
The CHAIRMAN. Has the IRS examined the records of the New
School for Social Research to determine whether the J. M. Kaplan
Fund or other Kaplan-controlled foundations made grants to the
school which, in turn, made payments to a relative of Mr. Kaplan's?
Mr. HARDING. Same answers.
(See page 203 and Exhibit 12, page 312, for subsequent response by
Acting 'Commissioner Harding.)
The CHAIRMAN. Does the IRS have any evidence that the J. M.
Kaplan Fund or other Kaplan-controlled foundations made grants
to the New School for Social Research which, in turn, made payments
to a relative of Mr. Kaplan's?
Mr. HARDING. Same answer, sir.
(See page 203 and Exhibit 12A, page 312, for subsequent response by
Acting Commissioner Harding.)
The CHAIRMAN. Has the IRS examined the records of the J. M.
Kaplan Fund or other Kaplan-controlled foundations to determine
whether any of Mr. Kaplan's personal entertainment bills or house-
hold expenses were paid by any of the foundations?
Mr. HARDING. Same answer' Mr. Chairman.
(See page 203 and Exhibit 12, page 312, for subsequent response by
Acting Commissioner Harding.)
The CHAIRMAN. Does the IRS have any evidence that Mr. Kaplan's
personal entertainment bills or household expenses were paid by the
J. M. Kaplan Fund or by other Kaplan-controlled foundations?
MT. HARDING. Same answer.
The CHAIRMAN. Do you actually have the evidence or are you just
stating that you do not want to answer until the investigation is over?
Mr. HARDING. I am stating, sir, that I personally do not know what
material is presently available to us in the New York investigation.
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The CHAIRMAN. You personally do not possess the information to
answer the question?
Mr. HARDING. I personally do not possess the information, sir ? and,
as we discussed before, I think it would be inappropriate, if I had it,
to disclose it during the process of the investigation.
The CHAIRMAN. It is in the file, I assume, one way or the other,
either?
Mr. HARDING. It certainly will be in the file, Mr. Chairman, in view
of this record.
The CHAIRMAN But you do not have it yourself and you cannot
answer it of your own knowledge?
Mr. HARDING. That is correct.
The CHAIRMAN. And that is part of the file. Are you going to
submit that file, have you decided that or not?
Mr. HARDING. I have not had an opportunity to consult with my
attorney, sir.
The CHAIRMAN. All right, sir. You can let us know this after-
noon at four o'clock.
Mr. HARDING. That will be fine.
(See page 203 and Exhibit 12, page 312 for subsequent response
by Acting
Commissioner Harding.)
The CHAIRMAN. Has the IRS examined the J. M. Kaplan Fund
and other Kaplan-controlled foundations to determine whether Mr.
Kaplan has utilized Foundation funds for personal purchases of
securities?
Mr. HARDING. Same answer, Mr. Chairman.
(See page 203 and Exhibit 12, page 312, for subsequent response
by Acting Commissioner Harding.)
The CHAIRMAN. Does the IRS have any evidence that Mr. Kaplan
utilized funds of Kaplan-controlled foundations for personal pur-
chases of securities?
Mr. HARDING. Same answer, sir.
(See page 203 and Exhibit 12, page 312 for subsequent response by
Acting Commissioner Harding.)
The CHAIRMAN. Has the IRS examined the J. M. Kaplan Fund
or other Kaplan-controlled foundations to determine whether the
foundations borrowed money from banks and then loaned the funds
to Mr. Kaplan without interest and without notes for the purpose of
Mr. Kaplan 's personal stock purchases?
Mr. HARDING. Same answer, sir.
(See page 203 and Exhibit 12, page 312 for subsequent response by
Acting Commissioner Harding.)
The CHAIRMAN. Does the IRS have any evidence that the J. M.
Kaplan Fund or other Kaplan-controlled foundations borrowed money
from banks and then loaned the funds to Mr. Kaplan without interest
and without notes for the purpose of Mr. Kaplan's personal stock
purchases?
Mr. HARDING. Same answer.
(See page 203 and Exhibit 12, page 312 for subsequent response
by Acting Commissioner Harding.)
The CHAIRMAN. Has the IRS examined the stock trading accounts
of Mr. Kaplan, the J. M. Kaplan Fund, and other Kaplan-controlled
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foundations and businesses to determine whether trade or confirma-
tion slips were altered at any time to show a change in ownership?
Mr. HARDING. Same answer, sir.
(See page 203 and Exhibit 12, page 312 for subsequent response by
Commissioner Harding.)
The CHAIRMAN. Does the IRS have any evidence that such trade or
confirmation slips were altered to show a change in ownership?
Mr. HARDING. Same answer, sir.
(By letter of October 12, 1964, Acting Commissioner Hardin ad-
vised Chairman Patman that such questions "relate to matters being
considered in the Service's audit." Mr. Harding indicated that it
would be inappropriate for him "to prejudge the tax consequences of
the various transactions" by responding to the questions "at this time."
He stated that he would be glad to respond to Chairman Patman's
questions "to the extent possible after the audit has been completed
and final decisions reached.") (Also, see Exhibit 12, page 312.)
The CHAIRMAN. Does the IRS have any evidence that the Kaplan
Fund, at one point, owned a newspaper in Middletown, New York,
which had substantial losses?
Mr. HARDING. Same answer, sir.
(See above Harding letter of October 12, 1964, and Exhibit 12, page
312 for subsequent response of Acting Commissioner Harding.)
The CHAIRMAN What happened to the Kaplan Fund's holdings in
that paper?
Mr. HARDING. Same answer, sir.
(See above Harding letter Of October 12, 1964, and Exhibit 12, page
312 for subsequent response of Acting Commissioner Harding.)
The CHAIRMAN. At this time, I wish to request that the IRS submit
to this Subcommittee by October 12, 1964 a complete written report of
its findings relating to the investigation of the J. M. Kaplan Fund.
Can you do that, Mr. Harding?
Mr. HARDING. We will do the very best we can, sir. I am not
acquainted with the time schedule on this investigation.
The CHAIRMAN. That seems like a reasonable time, does it not?
Mr. HARDING. Well, in view of all the material which you have
pointed to, you can see that there is a great deal of investigative mat-
ter which is necessary to look at after we can
The CHAIRMAN. _But you have had it since 1957,1958.
Mr. HARDING. Yes, sir. But not in this current phase, Mr. Chair-
man.
The CHAIRMAN. Not in this current phase. Mr. Roosevelt?
(See Exhibit 12, page 312, respecting status of IRS report.)
Mr. ROOSEVELT. Mr. Harding, just so that I understand the pro-
cedures, can you tell me how you go about closing a period. I have
gathered that you closed the investigation that was made on the years
that resulted in the adverse findings by the District Office in 1956 and
1957, which was reversed some years later.
What periods are still open now, how and when do you close them,
what years can you make a final report on, and which ones are you
keeping open?
Mr. _HARDING. Well, basically, Mr. Roosevelt, the statute closes the
years. After three years the statute runs on that particular year.
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Now, there is a way that the statute can be kept open, by consent
agreement with the taxpayer, and it was this information which we
discussed on the 10th of August at our last hearing, and. which I did
not have, and which I have agreed to submit for the record, and will
get to the Chairman by tomorrow.
Mr. ROOSEVELT. I think what I am getting at is, when you say to the
Chairman that you are conducting a continuing investigation, are you
then going to tell us that you are still holding all these years open?
Are you not going to tell us that you will be able to have a completed
file or not ask for a. continuation from the taxpayer (or not in this
instance a taxpayer, but a party), so that we can know what years
are still under investigation and what years are not under investiga-
tion?
Mr. HARDING. I think we will find, Mr. Roosevelt, that several of
the years that we have been talking about have rim, and that we are
not in a position to reopen those years. We will---
Mr. ROOSEVELT. Wait a minute. But if they have run, you can an-
swer these question for those years as to whether you did or you did
not do the things the Chairman has asked.
Mr. HARDING. Yes, sir; that would be true. But I do not know the
date of the transactions which the Chairman referred to. I assume
these are recent transactions.
Mr. ROOSEVELT. Let me take an example if it. You would know, for
instance' if you had examined whether ho was doing certain types of
things. That is part of the question. The question is did you examine
in those years whether he was getting loans from his foundation, just
as an example? Now, certainly for those years you will be able to
answer all of those questions, will you not ?
Mr. HARDING. To the extent that those items were examined in the
years that are now closed and are no longer under investigation.
Mr. ROOSEVELT. Or you can tell us you did not examine.
Mr. HARDING. Yes, sir; or we can tell you that we did not know of
that transaction at the time we examined for those years.
Mr. ROOSEVELT. So you will within a few days now be able to tell
us which years are still open, which years are closed, and what you
have done in the years that are closed and, presumably, in the years
that are open. You can then go forward and get the information that
the Chairman has asked, because the investigation is still open so that
you can make these examinations; is that right?
Mr. HARDING. If I understand your question, Mr. Roosevelt, for
those items which the Chairman has mentioned, which are involved in
open years, this is under an investigation, and as soon as we have
completed that investigation we will be in position to respond to those
questions.
Mr. ROOSEVELT. If any information has been available to you for
roughly a period of two years or slightly more, it would then be
reasonable to expect that you would have by now, even with a con-
tinuing investigation, been able to find out whether that information
was valid or not; isn't that correct?
Mr. HARDING. Some of that information should have been verified
one way or the other by now; yes, sir.
Mr. ROOSEVELT. So that if we have reason to believe you had that
information for two years, we could perfectly properly ask you what
you have done about this information.
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Mr. HARDING. In the larger view of things, however, Mr. Roosevelt,
as long as we are investigating a taxpayer to determine whether or not
his tax exemption may continue, we feel that it would be inappropriate
to publicly disclose details of that investigation until the culmination
of that investigation has been reached, and we have made a decision as
to whether or not the tax exemption is to be revoked or is to be con-
tinued. This is my basic reservation.
Mr. ROOSEVELT. Then you really are conducting: two kinds of an
investigation?one on the year-to-year basis of the individual returns,
and the other as to whether or not the exemption should be allowed to
:
remain.
Now, how long are you going to take to decide that?
Mr. HARDING. There are not really two investigations, Mr. Roosevelt.
Mr. ROOSEVELT. Two types of investigations.
Mr. HARDING. These are annual investigations of transactions con-
ducted by the Fund. The purpose of the investigation, unlike an
income tax investigation, however, is not to determine tax liability
basically, but to determine whether or not the taxpayer has conducted
his organization according to the law. If we find to the contrary, the
penalty we have is revocation of the exemption rather than assessment
of tax, ordinarily.
Mr. ROOSEVELT. I was getting down to what the exact meat of the
situation is, Mr. Harding. If you are examining returns for the year
1960 to try to find out whether this foundation has conducted itself in
a manner that warrants its continuing exemption as an organization,
certainly it should not be allowed to continue for four or five more
years during which you simply go on with an interminable examina-
tion, while the foundation can continue all the things it has been doing
in the past.
Certainly it seems to me reasonable that the phase regarding
whether the foundations are conducting themselves lawfully and are,
therefore, properly entitled to their exemption, should have a time
limit on it.
Mr. HARDING. Yes, sir; and the time limit is our ability to conclude
the investigation, reach a decision, and I assure you that that will be
as expeditiously done as humanly can be.
Mr. ROOSEVELT. Expeditiously does not mean so much. I have seen
things go through the court expeditiously in nine years. If we can
show you?if you want to do it in private session, executive session,
that is one thing?that you have had information for two years which
raised a very serious question as to whether or not this foundation
was acting legally and lawfully, I think this Committee would have
a right to severely censure the Internal Revenue Service if it were not
able within two years to decide whether this foundation should have
its exemption removed. Isn't that fair?
Mr. HARDING. I think a two-year period for examination is quite
adequate, Mr. Roosevelt.
I am not altogether sure, however, whether we undertook that in-
vestigation at the time we got the information, which you imply
we had two years ago. We have quite a number of examinations to
schedule and, as we discussed at our last session, we have limited per-
sonnel for the purpose of making those investigations, and precisely
when we undertook this current phase of the investigation would, I
39-915-.64-14
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think, be a fairer measure of the time necessary to complete it than
the time in which the information first became available.
Mr. ROOSEVELT. Will you submit to us the date when you did begin?
We know when you received this information. We would like to know
when you began.
Mr. HARDING. Yes, sir. I will be glad to submit to you the date on
which we undertook this current phase of the Kaplan audit.
Mr. ROOSEVELT. Thank you. Thank you, Mr. Chairman.
(See page 19'7, IRS letters of September 1, 1964, and October 12,
1964.)
The CHAIRMAN. During our hearing of August 10, you stated that
the IRS had approved 9;735 applications for tax exemption during
fiscal year 1963. How many foundation applications for exemption
were approved during fiscal year 1963?
Mr. HARDING. I gave you calendar figures, as I recall, Mr. Chair-
man.
The CHAIRMAN. The question was how many foundations among
that number were approved during fiscal year 1963.
Mr. HARDING. 1,395, sir.
The CHAIRMAN. During our hearing of August 102 I asked you to
submit the following information: (a ) Number of individuals who
made gifts and bequests of $1 million or more during 1962; (b) The
aggregate value of all such gifts and bequests.
Do you now have that information for this record, Mr. Harding,
or do you want time to look it over?
Mr. HARDING. I have the information, the information has been
accumulated, Mr. Chairman. I would like to look it over before I
submit it to your Committee.
The CHAIRMAN. All right, sir, you can submit it some time within
the next-some time tomorrow.
Mr. HARDING. At the very earliest we will submit it.
(Following is the information submitted by the IRS under date of
September 1, 1964.)
Federal gift and estate tao returns filed during 1963 reflecting charitable, public,
and similar gifts and requests more than, $1,000,000
Size of total charitable, public
and similar gifts and bequests
Total
Gift tax returns
Estate tax returns
Number
Amount
Number
Amount
Number
Amount
(1)
(2)
(3)
(4)
(5)
(6)
Total
179
$498, 123, 813
42
$133, 575, 826
137
$364,546,987
$1,000,000 under $1,500,000____ _
66
80,281, 673
14
16, 598, 419
52
63, 683, 154
$1,500,000 under $2,000,000
50
85, 750,911
12
21,360, 105
38
64, 390, 806
$2,000,000 under $3,000,000
21
50,383, 122
7
16, 439, 679
14
33, 943, 443
83,000,000 under $4,000,000
10
35, 225, 208
1
3, 259, 063
9
31, 966, 145
$4,000,000 under $5,000,000
12
55, 715,471
2
8,846, 130
10
46, 869, 341
$5,000,000 under $10,000,000._
16
108, 626, 943
4
31,806, 783
11
76, 728, 160
Over U0,000,000
5
82, 140,285
2
35, 174, 647
3
46,966, 638
NOTE.-The data are based on unaudited gift tax returns (Forms 709) and estate tax returns (Forms 706)
filed during 1963. The gift tax returns of a husband and wife who split their gifts are treated as
one. Amounts classified are totals of charitable, public, and similar gifts and bequests on returns (or pairs
of split-gift returns).
Source: Internal Revenue Service, Statistics Division, August 1964.
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TAX-EXEMPT FOUNDATIONS: IMPACT ON SMALL BUSINESS 207
The CHAIRM_AN. During our hearing of August 10, you were re-
quested to furnish us the following information: Six examples of
cases where contributions to foundations have been made for business
purposes; six examples of actual or potential conflict of interest situ-
ations; a few examples of instances where a foundation's services,
such as research, market studies, etc., have been made available to
certain businesses on a, preferential basis; six examples where founda-
tion funds have been made available to certain businesses on a prefer-
ential basis; six examples where foundation funds have been used to
grant benefits to company employees.
Do you have that information available or would you like to look
it over before you submit it?
Mr. HARDING. It is being worked on, Mr. Chairman. This part of
your material was a little bit more difficult to accumulate, as you can
imagine, and it may take us a few more days to ,cret this to you.
(The information submitted by the IRS, under date of October 2,
1961, appears on paces 166-168 and. 175-177.)
The CHAIRMAN. During our hearing on August 10, I asked you
whether you were familiar with any instances where individuals who
are board members of foundations also sit on the boards of competing
companies. Since I seemed to be unable to get through to you on that
question, I shall now rephrase it by citing an example: Messers Smith
and Jones sit on the board of a foundation, and also sit an the boards
of business firms that compete with each other. Do you know of any
such cases, Mr. Harding?
Mr. HARDING. NO; I do not.
The CHAIRMAN. During our hearing of August 10, you were asked
to advise us whether the Leonard C. Hanna, Jr. Fund of Cleveland,
which was liquidated on January 18,1963, has complied with all statu-
tory requirements. Do you now have that information?
Mr. HARDING. That is part of the information which I will submit
to you, sir.
The CHAIRMAN. That was prepared for you during your absence,
and you have not had time to look it over?
Mr. HARDING. Yes, sir; that is correct.
(Following is the information submitted by the IRS under dates
Of October 2,1964 and October 26,1964. Also, see Exhibits 6 and 12,
pages 302 and 312.)
The final return filed by the Leonard Cl. Hanna, Jr. Fund contained
all required information except for the schedule supporting compensa-
tion paid its officers. This schedule has been secured and has been at-
tached to the return. (IRS letter, October 2, 1964.)
We understood your question to be whether the Hanna Fund had
complied with all statutory requirements in filing its final return and,
as reported in our letter of October 2, 1964, all requirements were met
in this respect except for the schedule supporting compensation paid its
officers.
It is now assumed that you were asking whether the Fund had com-
plied with all statutory requirements with respect to its activities
as an exempt organization. The Service has not completed its consid-
eration of the Fund's operations and we are not in a position to respond
to the broader question at this time. (IRS letter, October 26, 1964.)
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The CHAIRMAN. During our hearing of August 10, I asked you to
furnish for this record a copy of the letter from the Stephens Foun-
dation of Nashville, or from its accounting firm, which indicates the
Foundation's intent to have the IRS make the information available
to public inspection. You stated that you would furnish us such a
letter from the Foundation's accounting firm. Do you have that letter
now, Mr. Harding?
Mr. HARDIN?. I have had an opportunity to look at that letter, Mr.
Chairman. It is very short, and I will be happy to submit it for the
record at this time.
The CHAIRMAN. An right, sir.
(The documents submitted by the IRS follow:)
PRICE WATERHOUSE & CO.,
Nashville, August 11, 1964.
MT. JAMES A. O'HARA.,
District Director, Internal Revenue Service,
Nashville, Tenn.
DEAR MR. O'HARA : This is to confirm the oral advice furnished your office in
connection with the income tax return form 990-A for Stephens Foundation, Inc.,
for the fiscal year ended June 30, 1963. It was intended that the listed names of
donors be included in the information to be made available to the public.
If we can be of service in any other way please call on us.
Yours very truly,
Hon. WRIGHT PATMAN,
Chairman, Subcommittee Foundation Study, Select Committee on Small Business,
Longworth Building, Washington, D.C.
DEAR Ma. PATMAN : In your letter of September 16, 1964, to Mr. Harding, you
asked to be advised as to the date on which Price Waterhouse & Co. advised the
IRS that the list of donors attached to the Form 990-A for the Stephens Founda-
tion, Inc., for the fiscal year ended June 30, 1963, would be open to public
inspection.
This is to advise that Mr. Mitchell Rogovin, Assistant to the Commissioner,
called our District Director's office in Nashville, Tenn., in this regard by tele-
phone on July 21, 1964. The Director's office called back the same day to advise
that Price Waterhouse & Co. had been contacted and had advised as indicated
above. This oral advice was confirmed by Price Waterhouse in their letter of
August 11, 1964, to the District Director and the letter was furnished you by
Mr. Harding at the hearing of your subcommittee on August 31, 1964.
Sincerely,
RAYMOND N. FOUST.
U.S. TREASURY DEPARTMENT,
INTERNAL REVENUE SERVICE,
Washington,, D.C., September 21, 1964.
DONALD W. BACON,
Acting Commissioner.
The CIIAIR1VIA IV. During our hearing of August 10, I stated that the
Foundation Library Center made a so-called "promotional mailing"
of 2,764 copies of its publication, Foundation News, and requested
that you advise us as to what the Foundation Library Center was pro-
moting and to whom this promotional mailing was sent. Do you have
that information?
Mr. HARDING. I have a letter from the Foundation Library, Mr.
Chairman, if I can put my fingers on it, which I did have an ?port-un-
ity to read before I appeared this morning, and I will be glad, if I
can find it here, to submit it.
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The CHAIRMAN. You may submit it for the record.
(The information submitted by the IRS follows:)
THE FOUNDATION LIBRARY CENTER,
New York,N.Y ., August 12, 1064.
Mr. WADE F. HOBBS,
Interna l Revenue Service Building,
Washington, D.C.
DEAR Mn. HOBBS : One of the few pleasures of a rather dreary Monday was
the chance to renew my acquaintance with you.
With reference to the "promotional mailing" of the January 1963 issue of
Foundation News we report as follows:
Free copies of this issue were sent to two lists, so that they might determine
from actual examination whether Foundation News was a publication to which
they ought to subscribe.
(1) Libraries: large public, college, governmental, excluding those already
subscribing.
(2) Trust officers of banks, selected to include those presumed to be
concerned with charitable trusts.
We do not have separate totals of these lists, but the complete total was 2,764.
Cordially,
F. ELMER ANDREWS, President.
The CHAIRMAN. Did the Longwood Foundation of Wilmington,
Delaware have an audit in any year beginning 1960? If the answer
is in the affirmative, what years were covered?
Mr. HARDING. I will have to supply that for the record, Sir. I do
not recall.
(Following is the information submitted by the IRS under date of
October 2, 1964:)
The Foundation was examined for the fiscal year ending September
30, 1961. The examination was initiated October 8, 1062, and completed
June 26, 1964. (IRS letter, October 2, 1964.)
The CHAIRMAN. This was the first audit of the Longwood Founda.
tion during the period of our study, which begins with 1951, is that
correct?
Mr. HARDING. This is one of the foundations on your list, Mr.
Chairman?
The CHAIRMAN. Yes, Sir.
Mr. HARDING. A_nd those were all audited, and I do not recall a
previous audit of that foundation.
The CHAIRMAN. Did the IRS find any violations by Longwood
respecting its responsibilities as an employer or respecting its opera-
tions as a charitable foundation?
Mr. HARDING. I would have to supply that for the record, Mr.
Chairman.
The CnArRmAN. You do not personally remember that or have
knowledge of it?
Mr. HARDING. No, sir; I do not.
(Following is the information submitted by the IRS under date
of October 2, 1964:)
We found certain travel expenses and a portion of the use of founda-
tion staff cars by certain employees to be personal in nature and, there-
fore, taxable to the recipients. Neither the amount involved as to travel
nor the use of the cars was considered to adversely affect the founda-
tion's exempt status. (IRS letter, October 2, 1964.)
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210 TAX-EXEMPT FOUNDATIONS: IMPACT ON SMALL BUSINESS
The CHAIRMAN. As you know, the Longwood Foundation failed to
file tax returns for the four years 1955 through 1958. Was a penalty
assessed for the foundation's failure to file?
Mr. HARDING. Mr. Chairman, I am not certain, but I do not believe
that there is a basis for assessment of a penalty for failure to file on a
tax exempt organization. I would have to check that.1
The CHAIRMAN. You mean to say they can just refuse or fail to file?
Mr. HARDING. I think the penalty, sir, is revocation of the exemp-
tion. I do not know a basis on which we can assess a penalty.
The CHAIRMAN. That would be a rather drastic remedy.
Mr. HARDING. That is one of our problems, Mr. Chairman, that in
most of these cases we are up against a black and white situation. Not
being taxable entities, not being able to impose penalties or assess a
tax on the basis of the records, we will either go along with the organi-
zation or we revoke its exemption. This is one of the problems we
have with the administration of the law.
The CHAIRMAN. Have any taxes been assessed on the Longwood
Foundation as a result of the fiscal year 1961 audit?
Mr. HARDING. I will have to supply that for the record.
(Following is the information submitted by the IRS under date
of October 2, 1964.)
No. The return was accepted as filed after field audit of the organi-
zation's activities for the fiscal year ended September 30, 1961. (IRS
letter, October 2, 1964.)
The CHAIRMAN. Were there any areas of expenditures by Longwood
which were disallowed by the IRS?such as travel and entertainment
expenses, personal use of staff cars by personnel, or other areas?
Mr. HARDING. Same answer.
(Following is the information submitted by the IRS under date of
October 2, 1964.)
No. In light of the determination to continue exempt status of the
foundation, such items would not be considered for allowance or disal-
lowance. See, however, the answer to the question at page 452, line 3,
regarding the tax effect to the recipients. (IRS letter, October 2, 1964.)
The CHAIRMAN. Were any of the Longwood Foundation's allow-
ances to employees for travel and entertainment ruled taxable to the
recipients?
Mr. HARDING. Same answer.
(Following is the information submitted by the IRS under date of
October 2, 1964:)
Yes, certain travel expenses and a portion of the use of foundation
staff cars by certain employees were found to be personal in nature and,
therefore, taxable to the recipients. (IRS letter, October 2, 1964.)
The CHAIRMAN. It appears that we are responsible, in part, for
your situation, Mr. Harding?in that we willingly acceded to your
request to be allowed to go on your vacation and to resume your testi-
mony today. In resuming the hearing today, we may have placed you
1 Correspondence between Chairman Patman and the Longwood Foundation discloses
that no penalty was assessed on the Foundation for failure to file tax returns for the four
years 1955 through 1958.
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in a disadvantageous position. Hence we will just ask you a few more
and then wait until you are in a position to answer the earlier ones.
Mr. HARDING. You are referring to the questions left over from
the August 10 hearing, Mr. Chairman?
The CHAIRMAN. Yes, sir.
Mr. HARDING. Yes, sir. I will assure you we will supply the infor-
mation to you within the next few days, and I appreciate your con-
sideration in allowing me this time to review the material rather than
sending it down to you as unreviewed staff work.
The CHAIRMAN. Please furnish on Wednesday whatever informa-
tion you cannot submit tomorrow.
Mr. HARDING. We Will do the best we can.
The CHAIRMAN. Since foundations are funded with tax deductible
contributions and earn tax-exempt income, would you agree that they
require supervision at the Federal level?
Mr. HARDING. Yes indeed, sir.
The CHAIRMAN. Some attorneys have advised me that a substantial
part of the emphasis of legal scholarship in the field of charities today
is to mitigate or avoid the studies of the House Small Business Com-
mittee. It is alleged that certain research, although sponsored by bar
associations and the various law schools, is being financed by founda-
tions. Can you or Mr. Rogovin tell us anything about this?
Mr. HARDING. Well, there is a great deal of private research being
funded by foundations, I know this to be a fact, Mr. Chairman.
The CHAIRMAN. Would you like to comment, Mr. Rogovin?
Mr. ROGOVIN. Mr. Patman, I am not aware of any situation where
foundations are supporting any type of research with a view toward
thwarting the activities of this Committee or of Congress.
Earlier in your statement you had said that attorneys had written,
and this is true, they have written extensively, on the status of the
existing law; pointing out in many instances manners in which tax-
payers can avail themselves to their undying benefit of the existing
statutes. But I am not aware of any program, conscious or otherwise,
to thwart your activities.
The CHAIRMAN. Well, suppose you gentlemen explore this matter
and report your findings to this Subcommittee.
Mr. HARDING. Yes.
(Following is the information submitted by the IRS under date
of September 25, 1964:)
With regard to the question you raised as to the possibility of research
being financed by foundations with a view to mitigating or avoiding the
studies of the House Small Business Committee, we have found no
evidence in our files of a foundation grant for such purpose.
The CHAIRMAN. What can you tell us about the Charitable Trusts
and Foundation Study being conducted by the Russell Sage Founda-
tion of New York City? For example, what is the purpose of this
study, do you know, Mr. Harding?
Mr. HARDING. I do not, sir.
The CHAIRMAN. Do you know, Mr. Rogovin?
Mr. ROGOVIN. I do not, sir.
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The CHAIRMAN. Can you tell us whether the Russell Sage Founda-
tion has made any grants to any states during the past two years?
Mr. HARDING. I do not know, sir.
The CHAIRMAN. Please furnish for this record full details of any
such grants made by the Russell Sage Foundation, including the name
of the donee, the amount of the grant, the purpose of this grant, etc.
Mr. HARDING. Those to states, Mr. Chairman?
(The information submitted by the IRS under date of September 22,
1964, appears in Exhibits 26 through 29, pages 343-365.)
The CamilmAN. Yes, sir. It is approaching the time when we will
have to go to the floor, so we will see you gentlemen then this after-
noon at four, and you will take responsibility of notifying the CIA.
Mr. HARDING. Yes sir; we will be happy to.
The CHAIRMAN. Without objection, the Committee will stand in
recess until ten o'clock tomorrow morning, at which time we will want
you back, Mr. Harding.
Mr. HARDING. In the morning?
The CHAIRMAN. Yes, sir.
(Whereupon, at 11 :40 a.m., August 31, 1964, the subcommittee was
recessed, to reconvene at 10 a.m., Tuesday, September 1, 1961.)
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TAX-EXEMPT FOUNDATIONS: THEIR IMPACT ON
SMALL BUSINESS
TUESDAY, SEPTEMBER 1, 1964
HOUSE OF REPRESENTATIVES,
SUBCOMMITTEE No. 1 ON FOUNDATIONS OF
SELECT C01VIMITTEE TO CONDUCT STUDIES AND
INVESTIGATIONS OF THE PROBLEMS OF SMALL BUSINESS,
Washington, D.C.
The subcommittee met, pursuant to recess, at 10:05 a.m., in room
1301, Longworth House Office Building, Hon. Wright Patman (chair-
man of the subcommittee) presiding.
Present: Representatives Patman and Roosevelt.
Also present: Representatives McCulloch (ex officio) and Steed of
the full committee, Representative Gonzalez, H. A. Olsher, Director
of Foundation Studies, and Eugene Loehl, Assistant Minority
Counsel.
The CHAIRMAN. The Committee will please come to order.
This is the sixth session of hearings of Subcommittee No. 1 on the
subject of the Federal Government's supervision of tax exempt foun-
dations and charitable trusts. On behalf of the Subcommittee, I
should like to welcome our witness, Mr. Bertrand M. Harding, Acting
Commissioner of the Internal Revenue Service.
We have with us this morning a member of the full Committee, the
Honorable Tom Steed from Oklahoma.
TESTIMONY OF BERTRAND M. HARDING, ACTING COMMISSIONER,
INTERNAL REVENUE SERVICE, ACCOMPANIED BY MITCHELL
ROGOVIN, ASSISTANT TO THE COMMISSIONER?Resumed
The CHAIRMAN The first question I would like to ask Mr. Harding
is?am I correct in my understanding that the application for tax
exemption (Form 1023) requires foundations to disclose full and com-
plete information concerning the purposes for which they are seeking
tax exemption?
MT. HARDING. Yes, Mr. Chairman.
The CHAIRMAN. Has the IRS compiled data on any of the follow-
ing :
(a) The number of tax exempt foundations which own and operate
commercial AM, FM, and TV broadcast stations;
(b) The number which own and operate non-commercial educa-
tional AM, FM, or TV broadcast stations;
(c) The number which engage in the production and distribution
of programs for radio and television stations?
213
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214 TAX-EXEMPT FOUNDATIONS: IMPACT ON SMALL BUSINESS
Mr. HARDING. I do not believe we have ever tabulated that informa-
tion in that form, Mr. Chairman.
The CHAIRMAN. DO you have it available where it could be
tabulated?
Mr. HARPING. No, sir, it would only be on the returns of those
foundations or those organizations. It would not be available in
tabular form.
The CHAIRMAN. Considering the wide and dynamic use of radio and
television, would you agree that the force of the dissemination of
political broadcast material to a large number of stations could, in
effect, constitute a network operation stretching out to every corner of
this country, and if this political program material is partisan?not
only would it be contrary to the public interest?it could well prove
disastrous?
Therefore, is it not incumbent upon the IRS to have the type of
information I just asked you about for purposes of determining
whether a foundation may not qualify for tax exemption because
a substantial portion of its activities are not for exempt purposes?
As you should know, the FCC has jurisdiction over broadcast sta-
tions only. It has no direct jurisdiction over producers or distributors
of program material, and it is, in most part, dependent upon public
complaints concerning the use of broadcast facilities for programs
involving controversial issues.
You agree with that, do you not, Mr. Harding?
Mr. HARDING. I agree with your premise, Mr. Chairman, that if
such a network existed, it could prove bad for the country, yes, sir.
Our responsibility, however, is to police the individual foundations.
The CHAIRMAN. Let me repeat this one item that I think you should
comment on and answer: Therefore, is it not incumbent upon the IRS
to have the type of information I have just asked you about for pur-
poses of determining whether a foundation may not qualify for tax
exemption because a substantial portion of its activities are not for
exempt purposes?
Mr. HARDING. It is certainly incumbent upon us to have informa-
tion on individual foundations about activites which might disqualify
them as exempt organizations; I agree thoroughly on that.
The CHAIRMAN. Please supply for the record of this hearing a com-
plete list of the names and addresses of tax exempt foundations which
(a) own and operate commercial AM, FM, and TV broadcast sta-
tions, including the call letters of the stations and place of location;
(b) own and operate non-commercial educational broadcast stations,
including the call letters and place of location of the stations; (c)
produce and distribute programs for the use of radio and television
stations, including the names of the programs and the call letters and
locations of the stations to which these programs are distributed.
You can supply that for the record, can you, Mr. Harding?
Mr. RkRDING. Mr. Chairman, as I pointed out, I think that that
information would involve a review of many thousands and thousands
of exempt organization files. I would respectfully suggest that per-
haps the FCC would have that information on the basis of ownership
of TV stations radio stations, and the like, much more readily than
the Internal Revenue Service.
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The CHAIRMAN. Do they have anything to do with the tax exemp-
tion of such organizations?
Mr. HARDING. No, sir; but their records disclose the ownership of
radio and TV stations.
The CHAIRMAN. We shall talk to you about that later, about how
it should be supplied.
(Following is the response of the IRS submitted under date of Sep-
tember 25, 1964, respecting the information requested:)
There is no feasible way for the Internal Revenue Service to obtain,
from its own records, information requested relative to ownership and
operation of broadcast stations, etc., by tax exempt foundations.
The Semice maintains no files on the basis of the various typos of
activities conducted by tax exempt foundations. Service files are
presently maintained solely on the basis of the name of the exempt
organization and it is not likely that a reliable listing of the particular
information requested could be developed from them.
Since, as stated above, the Service presently maintains no record
based on the types of activities engaged in by exempt foundations, it is
not presently feasible for the Service to develop a listing of those which
produce and distribute programs for radio and TV stations.
Mr. McGuiLoch. How about photographs during committee
meetings?
The CHAIRMAN. We do not have television. We permit still pic-
tures up to a point, usually, when the Committee starts. Under the
rules of the House, the televising of committee hearings is not per-
mitted, but still pictures are permitted.
Mr. McCuT.Loch. Mr. Chairman, to pursue the matter, that is not
my understanding. I hope that that does not become the rule of this
Committee. During the time that the Committee is in session, I must
respectfully lodge a protest against photographs. It is unfair to
witnesses and it is unfair to the Committee members when the Com-
mittee is in session.
The 'CHAIRMAN. Well, we can restrict it, then if you insist, Judge,
to before the session starts. But it is traditional in the Banking and
Currency Committee to permit still pictures up to a point, and that
point is determined by the Chairman which usually is for just a very
few minutes?two or three minutes after the session starts. Then the
photographers are asked to cease and desist.
But, in view of your request, we shall make sure that the Small
Business Subcommittee No. 1, in the future, will just permit still pic-
tures up to the opening of the hearing.
Does Section 501(c) (3) of the Internal Revenue Code require a
foundation to establish that it is exclusively organized and operated
for one or more of the purposes specified in that section of the law?
Mr. HARDING. Yes, sin
The CHAIRMAN Does the statute prohibit a foundation?which is
organized and operated exclusively for educational purposes?from
devoting any substantial part of its activities in carrying on propa-
ganda or otherwise attempting to influence legislation, and from par-
ticipating in or intervening in (including the publishing or distribut-
ing of statements) any political campaign on behalf of any candidate
for public office?
Mr. HARDING. It does, Mr. Chairman.
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The CHAIRMAN. Does the IRS examine the activities of tax exempt
foundations to determine whether they are engaging in political ac-
tivities in violation of the law?
Mr. HARDING. It does, Mr. Chairman.
The CHAIRMAN. Please describe the methods of investigation used
to determine whether a foundation is engaging in political activity.
Mr. HARDING. Mr. Chairman, we customarily will examine all of
the material?radio broadcasts, newsletters, publications of all sorts
put out by the foundation over a reasonably average period of time?
in order to determine whether or not the thrust of that material is in
fact consonant with the educational purposes of that foundation or
whether it is in violation thereof.
The CHAIRMAN. Section 315 (a) of the Communications Act re-
quires broadcast stations to accord equal broadcast opportunities to
political candidates. Section 315 (a), in pertinent part, reads as
follows:
"If any licensee shall permit any person who is a legally qualified
candidate for any public office to use a broadcasting station he shall
afford equal opportunities to all such candidates for that office in the
use of such broadcasting station * "."
Would an adverse ruling by the Federal Communications Commis-
sion be pertinent to your consideration to revoke a foundation's tax
exemption since it would then be crystal clear that the broadcasts in
question were not non-partisan, and the foundation itself may have
been an active participant in a political campaign on behalf of a candi-
date for public office, contrary to the express provision of the Internal
Revenue Code which prohibits tax exemption foundations from engag-
ing in political activities?
Mr. HARDING. I assume that your case, Mr. Chairman, assumes the
ownership of the station by an exempt organization.
The CHAIRMAN. It concerns an adverse ruling. Would an adverse
ruling by the Federal Communications Commission?
Mr. HARDING. Against the station, sir?
The CHAIRMAN. Yes.
Mr. HARDING. Unless the station were owned by an exempt orga-
nization, I cannot see how it would have an effect on the tax exemption
of the foundation.
The CHAIRMAN. But if it were owned by the tax exempt organiza-
tion?
Mr. HARDING. I think that this would certainly be a factor to be
considered in reviewing their tax exemption, yes, sir.
The CHAIRMAN. Are you familiar with the FCC fairness doctrine
in the handling of controversial issues of public importance?
Mr. HARDING. I am not personally familiar with it. Perhaps Mr.
Rogovin is familiar with it.
The CHAIRMAN. Are ,you familiar with it, Mr. Rogovin ?
Mr. RoGoviN. Yes, sir, I have spoken with the FCC general coun-
sel's office with respect to this matter.
The CHAIRMAN. The provision of Section 315 of the Communica-
tions Act, known as the "fairness doctrine" requires broadcast stations
"to operate in the public interest and to afford reasonable opportunity
for the discussion of conflicting views on issues of public importance."
Would repeated adverse rulings of the FCC, involving a tax exempt
foundation which either produces or broadcasts programs dealing with
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controversial political issues, be decisive in your consideration of
revocation of a tax exemption?
Mr. ROGOVIN. No, Mr. Patman, it wouldn't be decisive in view of
the interpretation that the FCC places on what amounts to contro-
versial. We would have to review the material and examine the
statements to determine whether, under our regulations, there has
been a political purpose subserving the statute, or whether this was a
matter of a station getting into a controversial matter and having a
complaint filed.
As I understand it, if a complaint letter comes in indicating that a
particular broadcast is controversial, the FCC would then write the
station and in effect say, "What about it?"
At that point, equal time may well be provided by the station. This
is necessarily the test that we would apply in determininc, whether
an exempt organization is in fact operating outside of the purview
of the statute.
Mr. STEED. Mr. Chairman?
The CHAIRMAN. Yes, sir, Mr. Steed.
Mr. STEED. Has there ever been an instance where you actually fol-
lowed the procedure?
Mr. ROGOVIN. We are currently examining a number of exempt
organizations who use radio and television media to distribute their
information and their so-called educational material to the public. We
have spoken with the FCC regarding their activities, and it is our
conclusion that we could not gain too much from using the test the
FCC uses. We have an independent test that our statute gives us.
Although we have talked with them, we have not found it to be, as the
Chairman asked, decisive in determining whether they should remain
exempt or not.
Mr. STEED. Is there an instance where you have revoked a tax
exempt foundation's status because of this situation?
Mr. ROGOVIN. I am currently unaware of any specific instance. If
a search of our files so indicates, we would be glad to supply it for the
record.
(Following is the information submitted by the IRS, under date of
September 25,1964 :)
With regard to the question raised as to whether we have ever revoked
a foundation's tax exempt status because of violation of Federal Com-
munication Commission rules, we have examined our records and find
no case where tax exempt status has been revoked solely on that basis.
Mr. STEED. How many such cases do you have under review at the
present time?
Mr. R000msr. We have approximately 24 cases of organizations that
use mass media. This includes not only television and radio but
publications. I know that all of them do not use the radio, but a
substantial number of them do. These are currently under study.
Mr. STEED. Could you furnish the Committee with a list of those you
are reviewing?
Mr. HARDING. If I might respond to that, Mr. Steed, we would
prefer not to announce publicly our investigative operations until such
time as they have reached a conclusion. As Mr. Rogovin indicates, a
number of these organizations are under very active investigation. I
would be happy to give you that information personally. I would
prefer not to put it in a public record.
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218 TAX-EXEMPT FOUNDATIONS: IMPACT ON SMALL BUSINESS
Mr. STEED. Can you give us any indication as to when you think you
will reach final conclusions regarding these 24 cases?
Mr. HARDING. They will not be all reached simultaneously, Mr.
Steed. There will be one or two of these cases concluded very shortly,
and our actions will be taken on those cases. The other cases will fol-
low along behind, in part based upon results in the lead cases.
Mr. STEED. Would it be a fair assumption to say that all 24 of these
cases have come up by reason of complaints that have been filed with
you by the public or some interested parties?
Mr. HARDING. They represent generally organizations which have
had publicity of one sort or another, much of it on the floor of the
Congress, complaining about their activities. Some of them have
been specifically complained about to the Internal Revenue Service.
Others we have gotten by virtue of the public record.
(Information, respecting the 24 cases, was submitted to the Sub-
committee in Executive Session.)
The CHAIRMAN. What type of regular liaison is there between the
IRS and the FCC in the latter's enforcement of Section 315 and your
enforcement of Section 501(c) of the Code? For example, since 1960,
has the IRS requested the FCC to submit to it any adverse rulings
under Section 315 involving a tax exempt organization, (a) operating
a broadcast station, or (b.) producing and distributing a program
involving controversial issues to broadcast stations?
Mr. HARDING. Mr. Rogovin has indicated he is in personal contact
with the officials of the FCC. Mr. Rogovin, as you may recall, is
chairman of our Exempt Organizations Council, and as such, is per-
haps the most knowledgeable person within the Revenue Service in
this particular area. He has maintained liaison with the FCC on a
general basis.
The CHAIRMAN. Since 1960, has the IRS requested the FCC to sub-
mit to it any adverse rulings under Section 315 involving a tax exempt
organization operating a broadcast station, producing and distributing
a program?
Would you answer that, Mr. Rogovin?
Mr. R000vi-N. Yes, sir. Mr. Chairman, the specific answer is no.
The background?
The CHAIRMAN. Well, that is all right. The answer is no?
Mr. ROGOVIN. The background to it, I think, may be helpful to the
Committee.
The CHAIRMAN. All right, sir.
Mr. ROGOVIN. I have met with Chairman Henry of the FCC and
we have discussed our mutual problems in this general area. We con-
cluded that the specific information, a specific action by the FCC,
would not be decisive in the Revenue Service's point of view, and we
have operated on the basis that they would bring to our attention
anything that they thought was relevant to the tax laws, and we would
also bring to their attention instances where we felt they might be
concerned.
The CHAIRMAN. I would like you to answer the other question, too.
Since 1960, has the IRS furnished the FCC with a list of names and
addresses of tax exempt foundations which produce and distribute
program material to broadcast stations, and the names of those
programs?
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TAX-EXEMPT FOUNDATIONS: IMPACT ON SMALL BUSLNESS 219
Mr. ROGOVIN. I believe we have given the FCC a list of the orga-
nizations that we are currently concerned with in this group of 24, yes,
sir.
The CHAIRMAN. The 21 that was mentioned by Mr. Harding?
Mr. ROGOVIN. Yes, sir.
The CHAIRMAN. Since 1960, has the IRS requested the FCC to sub-
mit to the IRS copies of any complaints which the FCC has received
against tax exempt foundations, (a) operating broadcast stations, or
(b) producing and distributing programs to broadcast stations?
Mr. ROGOVIN. Not specifically., no, sir.
The CHAIRMAN. Since 1960, how many foundation tax exemptions
have been revoked for violation of the political activities provisions of
the Code ?
Mr. ROGOVIN. A good number. I could not give you the specific
number, but we can supply it for the record.
The CHAIRMAN. Would you supply it for the record?
Mr. ROGOVIN. Yes, sir.
The CHAIRMAN. Please submit a list of these revocation cases for
this record, including a brief description of the nature of the violations
and the date of the revocation. Put that in your statement, too,
please.
(Following is the information submitted by the IRS, under date of
October 2, 1964:)
Since 1960, the Service has revoked tax exempt status of the following organiza-
lions because of political or legislative activities:
Name and Address
Date of
Action
Nature of Activities
1. Trustees for Conserva-
tion, San Francisco,
California.'
2. Arkansas Free Enter-
prise.'
3. Constitution and Free
Enterprise Associa-
tion, New York, New
York.
4. National Foundation
for Education in
American Citizen-
ship, Inc., Indianapo-
lis, Indiana.
5. Municipal League of
Spokane, Spokane,
Washington.
6. Vivisection Investiga-
tion League Anti-Viv-
isection Society of
New York, Inc., New
York, New York.
3-21-60
3-22-60
7-8-60
10-10-62
12-6-62
1-11-63
Advocating wilderness legislation and
distribution of literature pertaining to
pending legislation.
Advocating certain political, social and
economic reforms such as right to
work laws and labor legislation. Op-
position to certain Government poli-
cies against "state rights".
Advocating certain political, economic
and social reforms. Distribution of
literature to influence legislation and
political propaganda.
Advocating particular economic views
through the support of a widespread
publication.
Participation in campaign of candidates
for public office and evaluation of
candidates.
Advocating legislation to prevent vivi-
section of animals for scientific
experiment.
Exempt status under section 501(c)(3) of the Code revoked. Granted ex-
empt status under section 501(c) (4) concurrently. Under the latter classifica-
tion, contributions to the organization are not deductible by the donors.
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220 TAX-EXEMPT FOUNDATIONS: IMPACT ON SMALL BUSINESS
In addition to the six revocations, the Service has, since 1960, denied applica-
tions for exempt status from 32 additional organizations. These are listed by
type of organization, as follows:
Type of Organization
Date of
Action
Nature of Activities
1. Civil Rights
2. Partisan Ideological.. __
3. Educational____________
4. Partisan Ideological_ __
5. Civil Rights Group____
6. Partisan Ideological_ _ _
7. Partisan Ideological_ _ _
8. Citizens Association___
9. Citizens Association__ _
10. Research Commission__
11. Partisan Ideological_
12. Partisan Ideological_ _ _
13. Partisan Ideological_ _ _
14. Research Organization_
15. Partisan Ideological_ _ _
16. Partisan Ideological_ __
1-6-60
8-22-60
1-31-61
5-17-61
7-12-61
8-22-61
9? 5-61
9? 8-61
11-30-61
11-31-61
12-13-61
2-28-62
5-16-62
5-22-62
7-2-62
7-23-62
Advocating civil rights and social legis-
lation in appearances before congres-
sional committees.
Advocating the denial of admission of
Red China into the United Nations
and engaging in circulating a petition
to the President on their views.
To educate in the techniques of politics.
Advocating the single tax, which objec-
tive could only be accomplished by
legislation.
Advocating the passage of fair employ-
ment practice laws and the support
of certain candidates for public office.
Advocating the establishment of a
world government whose purpose can
only be accomplished through legis-
lation.
Advocating the organizations's views on
segregation of the races which purpose
can only be accomplished through
legislative and political activities.
Advocating ordinances before city coun-
cil to protect interest of residential
property owners.
Advocating certain states constitutional
amendments and supporting petitions
for their adoption.
Advocating certain government reforms
which can only be accomplished
through legislation.
Advocating and dissemination of litera-
ture supporting the organization's
cause without a full and fair explana-
tion of the facts to permit the public
to make an independent conclusion.
Advocating the repeal of the 16th
amendment to the constitution through
literature and appearances before
state legislature.
Advocating certain legislative action
through the publication and distribu-
tion of statements by the creator of
the organization.
Advocating atomic energy legislation
and supporting candidates for public
office.
Advocating the development of certain
fiscal policies by the Federal govern-
ment and requiring legislation to vote
for an amendment to the constitution.
Advocating the elimination of foreign
aid, the income tax, social security and
other legislation, supporting the elec-
tion;of conservative candidates.
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Type of Organization
Date of
Action
17. Partisan Ideological_ _ _
10-31-62
18. Political Action
12-18-62
19. Forinn
1-23-63
20, Partisan Ideological_
3-19-63
21. Partisan Ideological_ _ _
4-16-63
22. Conservation
7-17-63
23. Partisan Ideological_ _ _
8-6-63
24. Partisan Ideological_ _ _
11-4--63
25. Citizens Association__ _
12-4-63
26. Partisan Ideological
4-17-64
27. Forum
6-1-64
28. Partisan Ideological_ _ _
6-12-64
29. Partisan Ideological_ _ _
6-27-64
,
30. Anti-Vivisection As-
sociation.
7-14-64
31. Partisan Ideological_
6-29-64
32. Political Action
8-17-64
?Nature of Activities
Advocating constitutional reforms.
Endorsement of candidates for public
office; dissemination of literature per-
taining to legislative matters.
Advocating particular viewpoints on
disarmament through the dissemina-
tion of tapes, recordings and selected
speakers.
Dissemination of Anti-Catholic political
material.
Advocating particular philosophy which
can only be attained through legisla-
tion. Contemplated participation in
political campaigns.
Advocating legislation for state soil and
water conservation.
Advocating changes in the United Na-
tions and political actions in foreign
nations through direct action by the
organization or others.
Dissemination of periodicals pamphlets
and other printed matter pertaining
to education, segregation, national
economic policy, communism, etc.
Advocating the acquiring and operating
of public utilities and reducing real
property taxes, which objective can
only be accomplished by legislation.
Advocating through pamphlets and
publications the passage of a right to
work law.
Sponsoring forums and crusades con-
cerning anti-communism and politics.
Publishing of newspaper on these
subjects and disseminations of litera-
ture of a similar nature.
Advocating certain political, social, and
economic reforms based on views of
creator of organization.
Advocating certain views through the
publication of pamphlet.
Opposing legislation directed at anti-
vivisection.
Dissemination of information regarding
the constitution and the advocating
of a proposed constitutional amend-
ment.
Supporting the reelection of candidates
favoring the repeal of the 16th
amendment and other legislation
favored by the organization. Sup-
porting the candidacy of independent
Presidential and Vice Presidential
candidates.
39 915 64-15
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The CHAIRMAN. Does the Code give the IRS discretion in deter-
mining whether a foundation's tax exemption should be revoked be-
cause of a violation of the political activities provision? Please ex-
plain the standards which are used in determining whether or not to
revoke.
Mr. ROGOVIN. The term "discretion" is probably inappropriate in
this regard. We have a statutory standard, Mr. Chairman. I believe
you read it into the record a few minutes ago, that no substantial part
of the activities of the organization be carrying on propaganda, or
otherwise attempting to influence legislation.
Now, the key words here are "no substantial part." That came into
the law in 1934 and has been a very difficult quantitative test to apply
for the Service.
I might point out at the time that it came into the statute Senator
La Follette pointed out that the Administrator is going to be plagued
with difficulty in determining a "substantial part," and he pointed out
that perhaps an all-or-nothing rule would be more appropriate. In any
event, we have worked with the statute. We have a court decision,
the Seasongood case, where a Circuit Court concluded that something
approximating five per cent of the activities of the organization did
not represent a substantial part of their activities.
In applying the test, our revenue agent must look at all of the activi-
ties of the organization; then segregate those activities which con-
travene the statute. Anil then, the determination must be made as to
whether or not they are a substantial part of the total.
The CHAIRMAN. Since 1960, has the IRS made advisory or declara-
tory rulings to tax exempt foundations who inquire into the question
of whether certain activities are in violation of the political prohibi-
tions of the Code?
Mr. RoGOVIN. I believe we have, yes, sir.
The CHAIRMAN. Please supply for this record a list of sixth rulings,
identifying the tax exempt foundations and describing the rulings.
Mr. R000vix. We can supply the information dealing with the or-
ganization, the inquiry, and the result.
The CHAIRMAN. That is right.
Mr. ROGOVIN. The name of the organization may create a problem.
The CHAIRMAN Supply that for the record when you look over your
transcript.
What did you say about the name? We want to identify the founda-
tion. You could do that all right?
Mr. R000vix. We may have some difficulty, Mr. Patman, with re-
spect to our disclosure statutes.
The CHAIRMAN. Well, I am not sure that we would agree with you
on that, Mr. Rogovin.
Mr. IlAiumco. We may not have a problem, Mr. Chairman. If we
do we shall discuss it with you.
The CHAIRMAN. We shall discuss it later, fine.
(Following is the information submitted by the IRS, under date of
October 2, 1964:)
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TAX-EXEMPT FOUNDATIONS: IMPACT ON SMALL BUSINESS LO
Since 1960, the National Office of the Service has issued advisory rulings as to
whether certain activities would be in violation of the political prohibition provisions
of section 501(c) (3) of the Internal Revenue Code to the following organizations:
Name and Address
Date
Question Dealt With
1. National Society for
Medical Research
Chicago, Illinois.
2. The Texas Association
for Mental Health
Austin, Texas.
3. Council of Social
Agencies of Rochester
and Monroe County,
Inc. Rochester, New
York.
5-23-61
10-3-61
12-20-63
The extent to which an exempt organiza-
tion can engage in the support of
proposed legislation.
The extent to which an exempt organiza-
tion can engage in legislative activities
for improving treatment facilities for
the mentally ill.
The extent to which an exempt organiza-
tion can advocate the adoption of
pending legislation.
The CHAIRMAN. Following is the full content of a Public Notice
(Report No. 4468) of the Federal Communications Commission, dated
December 19, 1962, relating to "Noncommercial Stations and Political
Broadcasts." It reads as follows:
In response to an inquiry from the National Association of Educa-
tional Broadcasters as to whether the carrying of political programs
by educational TV stations would affect their tax-exempt status with
the Internal Revenue Service, the Commission obtained the views of
the latter agency and transmitted them in full to the NAEB for its
information.
In its letter of transmittal to the NAEB, the Commission further
stated:
"It would appear that the noncommercial educational station could
not, without jeopardizing its tax-exempt status, take sides in a political
campaign or 'editorialize'. But it would also appear that if the non-
commercial educational station presents political broadcasts in a truly
nonpartisan manner, acting 'entirely in the public interest' and with-
Out itself 'participating or intervening in a political campaign on
behalf of a candidate for public office' * " it would not run afoul of
the cited tax provisions."
Please submit for the record a copy of your memorandum or letter
replying to the Commission's inquiry, which resulted in the FCC's
pronouncement which I have just read into the record. You would
be willing to submit that?
MT. HARDING. Yes, sir.
(The information submitted by the IRS, under date of Septem-
ber 22, 1964, appears on pages 261-263.)
The 'CHAIRMAN. Based upon your reply to the FCC, I take it that
the Code and Treasury regulations, without question, prohibit tax
exempt foundations from engaging in partisan political activities.
Is this correct?
Mr, HARDING. That is correct.
One second, Mr. Chairman. Mr. Rogovin would like to add to that.
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Mr. ROGOVIN. Mr. Patman, the term and the language in the
statute?I think that is what we should hew to. The statute says,
"does not participate in, or intervene in, (including the publishing or
distributing of statements), any political campaign on behalf of any
candidate for public office."
So it is a political-type program that relates to a campaign for
public office as opposed to perhaps a politically oriented program
relating to legislation or something other than an election. It is as to
the latter that there is a flatfootarprohibition.
The CHAIRMAN. Am I also correct in my understanding that a tax
exempt foundation cannot urge, advocate, or otherwise endorse a par-
ticular view on a political issue?
Mr. HARDING. I think the prohibition there goes to the question of
its substantial nature, Mr. Chairman.
The CHAIRMAN. The rule that you mentioned a while ago?
Mr. HARDING. Yes sir, substantial nature.
'The CHAIRMAN. During the last few years, would you say that the
subject of the "nuclear weapons test ban treaty" constitutes a critical
political issue of our times?
Mr. HARDING. I think it does, Mr. Chairman.
The CHAIRMAN. Is this type of political issue encompassed within
the meaning of "political activities" prohibited by the Code?
Mr. HARDING. A substantial portion of it, yes, sir.
The CHAIRMAN. Would a partisan statement on the nuclear weapons
test ban treaty by a tax exempt foundation be encompassed within the
Treasury regulations forbidding such organizations from carrying on
propaganda or otherwise attempting to Influence legislation?
Mr. HARDING. If a substantial portion of the material fell into this
category, yes, sir, it would.
The CHAIRMAN. Would you say that, during the last few years,
such subjects as "aid to education," "highway spending," "urban
renewal," "curtailment of Federal Government activities in these
areas," "Federal farm program," "Medicare," and the "Supreme
Court's decision on integration" are political issues of our day?
Mr. HARDING. Yes sir; I would.
The CHAIRMAN. Would you say that a tax exempt foundation which
engages in the dissemination of partisan information to the public on
these subjects is violating the political activities prohibitions of the
Code?
Mr. HARDING. Not automatically, Mr. Chairman. The foundations
under our existing law and regulations are able to speak on these
subjects. If, however, we find that their legislative advocacy is sub-
stantial or their dissemination is not of an educational nature?that
is they are not presenting both sides of the question, they are not sup-
porting their position with factual data?then a serious question is
raised about their educational status.
The CHAIRMAN. I should like to ask you about Life Line Founda-
tion, Inc. (formerly Facts Forum, Inc.) of Dallas, Texas. I shall
ask Mr. Olsher to continue if he will, please.
Mr. OLSIIER. First, here is a summary of the Foundation's income
and expenditures for fiscal years 1951 through 1963:
? Total receipts were $5.1 million, including over $3 million con-
tributions received.
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? Administrative and Operating expenses totaled $4.9 million.
? Charitable contributions totaled $1,000.
? Awards and scholarship grants totaled $47,268. Awards were
made for the following activities: suggestions for questions to be dis-
cussed; best letters to editors on current events; largest group meet-
ing; best arranged group meeting; obtaining largest number of new
members; materials for Facts Forum News?including essays, prose
quotations, etc.; slogans for Facts Forum; suggested question for
Facts Forum poll cards; suggested topic questions for Facts Forum
television programs.
The details of the Foundation's income and expenditures are rather
lengthy so I shall insert them in the record at this point, instead of
reading them' and shall give you a copy.
( The insert follows :)
LIFE LINE FOUNDATION, INC. (FORMERLY FACTS FORUM, INC.)
Gross Income?Fiscal years ending Sept. 30, 1951 through Sept.
(excluding contributions received)
Interest
Year ending 9130 Amount
30,
1963
$623. 70
1952 $143.75
1953 479.95
$623. 70
Dividends
964.
71
Year ending 9130 Amount
1953 $119. 25
1954 174. 90
1955 278. 16
1956 294. 30
1957 98.10
$964. 71
Gain (or loss) from sale of assets
21,
690.
06
Year ending 9130 Amount
1954 $370. 52
1957 21, 531. 40
1959 (111. 52)
1960 (100. 34)
$21, 690. 06
Receipts from subscriptions to Facts Forum News
407,
787.
78
Year ending 9130 Amount
1953
1954 (including sale of
individual copies)
1955
1956 (including sale of
individual copies)_ _
1957
(Including dona-
tions for subscrip-
tions in amounts
less than $100
$3, 832. 80
64, 971. 99
204, 401. 43
87, 099. 67
47, 481. 89
$407, 787. 78
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Gross Income?Fiscal years ending Sept. SO, 1951 through Sept. 30, 1963
(excluding contributions received)?Continued
Receipts from advertisements in Facts Forum News $9, 992. 08
Year ending 9130 Amount
1954
$4, 371.
71
1955
4, 191.
05
1956
1, 381.
30
1957
48.
02
$9, 992.
08
Receipts from newspaper distribution
351,
230.
77
Year ending 9130
Amount
1960
$52, 690.
62
1961
71, 447.
75
1962
118, 071.
78
1963
109, 020.
62
$351, 230.
77
Receipts from rental of television films
4,
696.
00
Year ending 9130
Amount
1953
$1, 418.
00
1954
2, 238.
50
955
1, 039.
50
$4, 696.
00
Receipts from television
94,
199.
63
Year ending 9130
Amount
1962
$34, 377.
16
1963
59, 822.
47
$94, 199.
63
Receipts from rental of radio tape recordings
956,
447.
59
Year ending 9130
Amount
1953
$1, 422.
86
1954
12, 904.
35
1955
10, 927.
14
1956
1, 831.
00
1959
104, 387.
02
1960
126, 193.
57
1961
174, 343.
73
1962
242, 882.
49
1963
280, 835.
43
$956, 447.
59
Receipts from distribution of books and recordings
5,
265.
59
Year ending 9130
Amount
1953
$130.
10
1954
366.
21
1955
630.41
1956
100.
39
1957
4, 038.
48
$5, 265.
59
Receipts from distribution of books
79,
502.
72
Year ending 9130
Amount
1959
$57, 106.
05
1960
3, 176.
73
1961
1, 227.
87
1962
8, 487.
21
1963
9, 504.
86
$79, 502.
72
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TAX-EXEMPT FOUNDATIONS: IMPACT ON SMALL BUSINESS
Gross Income?Fiscal years ending Sept. 30, 1951 through Sept. SO, 1963
(excluding contributions recrimed)?Continued
Receipts from sale of transcript
Year ending 9130 Amount
$100,
894.
62
1959 $713. 35
1960 1, 599. 37
1961 15, 086. 03
1962 38, 136. 29
1963 45, 359. 58
$100, 894. 62
Receipts from sale of music rights?year ending 9/30/56
100.
00
Receipts from Life Line Links
4,
244.
14
Year ending 9130 Amount
1962 $2, 951. 39
1963 1, 292. 75
$4, 244. 14
Receipts from sale of article reprints?year ending 9/30/58
6.
50
Award received for slogan?year ending 9/30/53
100.
00
Receipts from collection of written-off debt?year ending 9/30/58_
173,
44
Commissions received?year ending 9/30/58
4,
604.
68
Miscellaneous receipts
4,
064.
51
Year ending 9130 Amount
1960 $21. 06
1961 874. 06
1962 2, 276, 98
1963 992. 41
$4, 064. 51
Total Gross Income?fiscal year 9/30/51 through 9/30/63_
$2,
046,
48&
52
Contributions received (including those less than $3,000 to 1953 and those less than
$100 beginning 1953, and excluding "donations" for subscriptions)
Contributions received
Year ending 9130
Amount
$3, 082, 598. 19
1951
$47,
543.
00
1952
181,
316.
88
1953
245,
810.
53
1954
688,
693.
25
1955
1,
224,
423.
56
1956
600,
285.
81
1957
65,
019.
00
1958
144.
40
1959
6,
463.
52
1960
22,
898.
24
1961
1962
1963
$3,
082,
598.
10
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228 TAX-EXEMPT FOUNDATIONS: IMPACT ON SMALL BUSINESS
Disbursements?fiscal years Sept. 80, 1951
Awards paid out
Year ending 9130
through Sept. 80, 1963
$45, 022. 65
Amount
1951
$2,
152.
00
1952
14,
764.
10
1953?Cash
326.
00
Merchandise
2,
344.
55
1954?Cash
6,
145.
00
U.S. Bonds
3,
375.
00
Merchandise
1,
355.
00
1955?Cash
3,
331.
00
U.S. Bonds
3,
862.
50
Merchandise
3,
244.
00
1956?Cash
2,
643.
00
U.S. Bonds
187.
50
Merchandise
1,
057.
00
1957?Cash
236.
00
$45,
022.
65
Scholarship grants paid_
Year ending 9130 Donee
1955? Karl Baarslag
Paul Crouch
Charitable contributions
Year ending 9180 Donee
1957? Wadley Blood Center,
D alias
Administrative and operating expenses
Amount
$1, 045.
1, 200.
2, 245. 00
00
00
$2, 245.
Amount
$1, 000.
00
1, 000. 00
00
$4, 939, 895. 83
Year ending 9130
Amount
1951
$34, 098.
79
1952
136, 771.
74
1953
268, 263.
17
1954
756, 746.
55
1955
1,
478, 915.
99
1956
684, 679.
68
1957
125, 975.
85
1958
10.
00
1959
184, 369.
50
1960
188, 656.
51
1961
225, 162.
84
1962
410, 795.
03
1963
445, 450.
18
$4,
939, 895.
83
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TAX-EXEMPT FOUNDATIONS: IMPACT ON SMALL BUSINESS 229
Assets, Liabilities, Net Worth
Date
Total assets
based on
Foundation's
carrying values
Total
liabilities
Net worth
based on
Foundation's
carrying values
6/22/51 . .. , ... .......... .. , .
$2,
500.
00
$2,
500.
00
10/1/51
11,
922.
71
$630.
50
11,
292.
21
10/1/52
41,
942.
25
725.
95
41,217.
30
10/1/53
25,
002.
04
1, 404.
97
23,
597.
07
10/1/54
33,
051.
54
1, 681.
89
31,
369.
65
10/1/55
103,
627.
62
117, 965.
21
(14,
337.
59)
9/30/56
69,
719.
55
80, 475.
05
(10,
755.
50)
9/30/57
249.
54
249.
54
9/30/58
563.
88
. ... . ... .
.. .
563.
88
9/30/59
52,
442.
42
63, 648.
82
(11,
206.
40)
9/30/60
69,
001.
68
61, 665.
44
7,
336.
24
9/30/61
79,
416.
59
34, 263.
75
45,
152.
84
9/30/62
128,
788.
49
47, 247.
38
81,
541.
11
9/30/63
176,
010.
64
33, 091.
59
142,
919.
05
The CHAIRMAN. By letter of September 28, 1062, the Baltimore
District Office of the IRS advised Life Line Foundation, Inc., of
Dallas that one of its examining officers had recommended that the
Foundation's tax exemption be revoked, based on an audit for fiscal
year ending September 30, 1961. The language is as follows:
It is recommended that the tax exemption granted under Section
501(e) (3) as an educational organization be revoked since it is deemed
that the organization fails to meet the definition of educational as de-
fined in Section 1.501(c) (3)-1 (d) (3) of the Regulations.
Does this mean that the recommendation applies only to the fiscal
year ending September 30, 1961 and subsequent years? Or is it
retroactive, Mr. IIarding ?
Mr. HARDING. Without examining the Baltimore letter in more
detail, Mr. Chairman, I am not sure I can answer that question.
The CHAIRMAN. This is all that there is. This is all that was said
by the Baltimore office.
Mr. HARDING. Generally, the denial of this sort would be a pro-
spective denial.
The CHAIRMAN. Would be a what?
Mr. HARDING. A prospective denial.
The CHAIRMAN. Life Line filed a protest. By letter of March 8,
1963, Mr. Irving Machiz, District Director, Baltimore, advised Life
Line as follows:
An informal conference was granted with respect to the matter and
the conferee sustained the findings of the Examining Officer. The recom-
mendations of the Examiner Office and the conferee have been carefully
reviewed and approved by this office. The matter will be referred to
our National Office for consideration. You will be granted a hearing in
that office prior to any issuance of an adverse ruling.
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What is the IRS national office decision in this matter?
Mr. HARDING. We have not yet reached a decision in this matter,
Mr. Chairman.
The CHAIRMAN. Let us see, it came to you March 8, 1963. This is
September 1, 1964. You say you have not reached a decision?
Mr. ITARDING. It was necessary in this connection, Mr. Chairman, for
the national office to obtain additional information beyond that which
was obtained by the Baltimore district. This information has been
obtained and is in the process of analysis and final conclusion.
The CHAIRMAN. If the Baltimore District Office recommendation to
revoke Life Line's tax exemption is upheld, would the Foundation
only be taxable for the years beginning fiscal year 1961? i
Mr. HARDING. That s generally the case, Mr. Chairman, yes.
The CHAIRMAN. Do you know whether the Life Line program ad-
vocates and urges a partisan vewpoint on such subjects as test bans
and disarmament, Medicare, aid to education, income taxes, mental
health, the Federal farm program, Federal welfare programs in
general, etc.
Mr. HARDING. Mr. Chairman, I am aware of the fact that they give
forth information on these subjects. I think for me to draw a con-
clusion that they have taken a partisan position would be preempting
the results of our study, since that would go the question of their
exemption.
The CHAIRMAN. Do you know whether the FCC has received com-
plaints concerning the Life Line program where complainants seek
radio time to reply to the controversial issues carried by the program?
Mr. HARDING. I have no personal knowledge of what has been re-
ceived by the FCC, Mr. Chairman.
The CHAIRM NN. Do the IRS records show any FCC rulings on the
question of whether a particular Life Line program constituted a
controversial issue requiring the radio station involved to afford a
reasonable opportunity to complainants for the presentation of con-
trasting viewpoints?
Mr. HARDING. Mr. Rogovin informs me that in connection with our
study, we are aware of this circumstance to which you refer.
The CHAIRMAN. It is being considered?
Mr. HARDING. Yes sir.
The CHAIRMAN. Has the IRS determined whether this foundation
is engaged in propaganda or political activities?
Mr. HARDING. We have not made that determination to the extent
that it would preclude their exemption.
The CHAIRMAN If the Foundation is shown to be involved in propa-
ganda or legislation, either one of those activities would disqualify it
for tax exemption, is that correct?
Mr. HARDING. It is the question of substantiality, Mr. Chairman.
The CHAIRMAN How do you explain the fact that the Life Line
Foundation still retains its tax exempt status despite the fact that the
FCC has interpreted a number of Life Line programs under its "fair-
ness doctrine" as programs involving controversial public issues re-
quiring radio stations carrying the particular Life Line program in
question to accord reasonable opportunity for the presentation of
conflicting or contrasting viewpoints?
Mr. HARDING. I would like Mr. Rogovin to respond to that question,
Mr. Chairman.
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Mr. ROGOVIN. Mr. Patma,n' if I may, the exemption is granted to
educational organizations; it must have an educational purpose ex-
clusively. Within the educational dichotomy, we have the university
and we have the type that does not have a faculty or curriculum.
This is what we are talking about in this latter category. In this
latter category, our regulations say that an organization may be
educational if its material relates to "the instruction of the public on
subjects useful to the individual and beneficial to the community."
We further say that "an organization may be educational even
though it advocates a particular position or viewpoint, so long as it
presents a sufficiently full and fair exposition of the pertinent facts
as to permit an individual or the public to form an independent
opinion or conclusion. On the other hand, an organization is not
educational if its principal function is the mere presentation of
unsupported opinion."
Now, in the case that you are referring to and in a number of other
cases, our analysis is an extremely deep one of a myriad of materials
that the organization has put out over a period of time. The decision
is not on the single question of whether or not they have been for or
against a particular piece of legislation. It is the manner in which
they take a position, whether they give a full and fair exposition or
whether they had a, bias. This is an extremely difficult determination
to make, because organizations quite often set up a format to make it
appear that both sides of the issue are being given. They may have
the arguments pro and the arguments con; yet the whole thing is
weighted so that their particular viewpoint emerges as the clear
choice.
Now, these are extremely difficult issues for our people to grapple
with and this is currently what is going on with respect to Life Line
and a number of other organizations. So there is no flat footed answer
as to any particular activity. It has to be held to the light of the
regulations.
The CIIAIII1VIAN. By letter of March 11, 1964, we asked the Founda-
tion to furnish the following information regarding donations
received for subscriptions to Facts Forum News.
Mr. Olsher, suppose you read this.
Mr. OLSHER (reading) :
1. Amount of cash received from each donor during each year.
2. Amount and description of other property received from each
donor during each year. If stocks, bonds or other securities were
received, please describe fully, including name of issuing company,
type of issue, number of shares or face amount, etc.
3. Number of subscriptions purchased during each year by each
of the purchasers.
4. The name and address of each person or organization receiving
a subscription as a result of each purchaser's payments, and the be-
ginning date and expiration date of each subscription.
5. Subscription rates for Facts Forum News during each year be-
ginning 1951.
6. Auditor's statements showing circulation of Facts Forum News
for each of the years beginning 1951, including number of subscribers
and single copy sales.
7. Copy of each advertising rate card used for Facts Forum News
beginning with the year 1951.
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232 TAX-EXEMPT FOUNDATIONS: IMPACT ON SMALL BUSINESS
The Foundation replied as follows by letters of April 2, 1964 and
April 20, 1964:
1. There were no contributions for subscriptions other than cash.
2. The information requested in the aforementioned items 3 and 4
was not available to the Foundation, and they had no knowledge as to
where we could obtain the information.
3. The subscription rate for Facts Forum News through May 1956
was $2 per year or $5 for throe years. The subscription rate
between June 1956 through December 1956 was $3 per year, $5 for
two years and $7 for three years. Publication of Facts Forum News
ceased the latter part of 1956.
4. There are no auditor's statements or advertising rate cards
avail able.
Here we have a situation where 114 known donors contributed to
the Foundation $273,691.01 for subscriptions to Facts Forum News
during the three years of 1954 through 1956, but the Foundation
claims that there is no record of (1) the number of subscriptions
purchased by each donor, (2) the names of the persons who received
these subscriptions, and (3) the beginning date and expiration date
of each subscription.
Each of the donors no doubt took the maximum charitable deduc-
tions on their income tax returns or deducted such contributions as
business expense.
Therefore, I suggest, Mr. Harding, that the IRS attempt to com-
pile the following information in connection with donations received
for subscriptions to Facts Forum News, and submit it to this Sub-
committee for purposes of the hearing record:
(a) Number of subscriptions purchased during each year by each
of the purchasers.
(b) The name and address of each person or organization receiving
a subscription as a result of each purchaser's payments, and the be-
ginning date and expiration date of each subscription.
(Following is the information submitted by the IRS, under date of
October 2, 1964:)
We have searched the Service's files and were not able to find detailed
information on payments made during the years 1954 through 1956 for
the Facts Forum News. Thus, to obtain the information requested, it
would be necessary to examine the records of the Life Line Foundation.
The Service is now in the process of considering a District Office pro-
posal to revoke the exempt status of the foundation for the year 1961
on which all field examination work has already been completed. In
light of this, an audit by the Service solely to obtain this particular
information for the years 1954 through 1956 would be an unwarranted
exercise of the Service's authority.
The CHAIRMAN. A number of other questions occur to me regard-
ing the operations of this foundation.
As stated earlier, the tax returns indicate that 114 individuals and
organizations contributed to the Foundation $273,691.01 for sub-
scriptions to Facts Forum News during fiscal years 1954 through 1956.
Following are the names and addresses of such donors and the
amounts they contributed for subscriptions to Facts Forum News,
excluding contributions of less than $100. Here again, I shall insert
the information in the record, and give you a copy.
(The insert follows:)
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TAX-EXEMPT FOUNDATIONS: IMPACT ON SMALL DUSINESS Z06
Vurchasor of subscriptions
Amount
Acme Steel Co. Riverdale Station, Chicago 74. 00
Leo Adler, Bake 0
Baker, Oregon 1, 000.00
American Snuff Co., Memphis 200. 00
Baker Oil & Tool Co., Box 2274, Terminal Annex, Los Angeles 300. 00
Harry. Bass Drilling Co., 1403 Magnolia Building, Dallas 100. 00
Bell Transportation Co., P. 0. Box 8598, Houston (300.00
L. M. Berry & Co., Hulman Bldg., Dayton 3, 596. 00
Blue Bell, Inc., E. W. Weant, Vice-Pres., Drawer 0-2, Greens-
boro, N.0 100.00
Blanton Drilling Co., 2323,-24 Gulf Building, IIouston - 100Q0
The Brewster Co., Shreveport 1, 000. 00
Brinkerhoff Dhilling Co., Denver, Colorado 300.00
Zack K. Brinkerhoff, Brinkerhoff Drilling Co., Continental Bldg.,
Dallas 250. 00
Enoch Brown, Memphis 125, 00
E. L. Bruce Co. Box 397, Memphis 100, 00
Brummer Seal 00., Chicago 276.00
G. H. Burnham, Tri-State Oil Tool Co., Inc., P. 0. Box 5588, Bossier
Branch, Shreveport 200. 00
J. P. Butler, Midland, Texas 100. 00
C. & H. Transportation, P. 0. Box 5976, Dallas 100. 00
H. E. Chiles, Jr., 12121 Cuthbert, Midland, Texas 100.00
C. Reid Clatterbuck, Bowles Livestock Commission Co. Omaha 200. 00
Commercial Print and Letter Service, 1015 North Hawkins Dallas 100.00
Continental National Bank, Fort Worth 372.00
Continental Supply Co., Dallas 35, 000. 00
Cotwell Manufacturing Co., 234 South Fairview Avenue, Spartan-
burg, S.0 442.00
Ed Cox Foundation, Magnolia Building, Dallas 100. 00
C. M. Crawford, Jr., 9606 Santa Monica Blvd., Beverly Hills, Cal 100.00
John F. Cuneo, 2242 South Grove Street, Chicago 250.00
Devin-Adair Co., 23 East 26th Street, New York 200.20
Dresser Industries, Republic Bank Bldg., Dallas 189. 00
R. B. Dresser, 15 Westminster, Providence, Rhode Island 250.00
Clem W. Drewett, Jena, Louisiana 100.00
Glen Drewett, Jena, Louisiana 100. 00
Duke Transportation Co., P. 0. Box 536, Jena, Louisiana 1, 350. 00
Empire Drilling Co., Dallas 1, 345. 00
Exchange Bank and Trust, El Dorado, Ark 100, 00
First National Bank, Dallas 33, 000. 00
First National Bank, Magnolia, Arkansas_ 100. 00
Foundation, Inc., Wichita, Kansas 100. 00
G. & H. Specialty Co., P. 0. Box 1362, Shreveport 650. 00
Gardner & Denver Co., P. 0. Box 5957, Dallas 100.00
Philip Geist, 227 Erne Street, Detroit 100.00
W. L. Goldston, Oil & Gas Building, Houston ?500. 00
H. A. Hardy, P. 0. Box 1237, Shreveport 100.00
II. R. Hayes, Monroe, La 120. 00
E. J. Hudson, Hudson Engineering Corp., IIouston 1, 500. 00
Hunsaker Trucking Co., P. 0. Box 97, Carrolton, Texas 146. 00
H. L. Hunt, 700 Mercantile Bank Building, Dallas 100, 000.00
Hunt Oil Company, 700 Mercantile Bank Bldg., Dallas 5, 870. 87
A. W. Hutchings, Suite 522, Fidelity Union Life Bldg., Dallas 200. 00
Ingersoll Corp., Shreveport 500. 00
Jones Apothecary, Inc., 2400 Rise Blvd., Houston 100. 00
P. G. Lake, Inc., Tyler, Texas 1,000. 00
Charles H. Lawrence, Jr., P. 0. Box 218, Lake Charles, La 2, 000.00
Lawton Oil Corp., Magnolia, Ark 100. 00
Levingston Shipbuilders, P.O. Box 411, Orange, Texas 875. 00
Lewis Sound Films, 71 West 45th St., New York 100. 00
Lion Oil Co., El Dorado, Ark 707. 00
Lone Star Cement Corp., New York 250. 00
Lone Star Steel Co., P.O. Box 8087, Dallas 10,200. 00
R. L. Lorel, First National Bank Bldg., Dallas 100. 00
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234 TAX-EXEMPT FOUNDATIONS: IMPACT ON SMALL BUSINESS
Purchaser of subscriptions-Continued
Amount
Gene McAdams, John Clay & Co. Live Stock Commission, Chicago___ $100.00
McAlester Fuel Co., Magnolia, Ark 165. 00
John A. McGuire, Pres., Three States Natural Gas Co., 17th Fl.,
Corrigan Tower Bldg., Dallas 100. 00
Memphis Clearing House, Memphis 300.00
Memphis Manufacturing Co., Memphis
200. 00
Mercantile National Bank, C. L. Thornton, Chairman of the Board,
Dallas
500. 00
The Mercantile National Bank, Dallas
500. 00
Mid-Continent Supply Co., Fort Worth
2,
000.00
Milwhite Mud .Sales Co., 1092 M & M Building, Houston
100. 00
Clifford Mooers, Walnut Spring Farm, Route 4, Washington
246. 00
Adrian Moore, 2512 Gulf Building, Houston
100. 00
Woodroe Moore, P. 0. Box 5006, Bossier City, La
121. 00
Murphy Corporation, El Dorado, Ark
270. 00
National Geophysical Co., Inc., 8800 Lemmon Ave., Dallas
714. 00
The New Seven Falls Co., Colorado Springs, Colo
5,
000. 00
Padgett Printing Co., Dallas
500. 00
Panola Pipeline Company, (Caroline Hunt Trust Estate), 700 Mer-
cantile Building, Dallas
1,
311. 00
Penrod Drilling Co., 418 Market St., Shreveport
1,
320. 00
Placid Oil Co., Shreveport
23,
489. 00
Railway Express Agency, New York
120.00
Ralston Feed Yard, 531 Exchange Building, Omaha
300. 00
J. B. Razier, Jr., 941 Jefferson, Memphis
200. 00
Reef Fields Gasoline Corp., J. R. Butler, Pres., P.O. Box 1661, Big
Spring, Texas
100.00
Reef Fields Gasoline Co., 2100 Esperson Building, Houston
100. 00
The Republic National Bank, Dallas
1,
000. 00
J. E. Rosenlind, Baker Oil Tools, Inc., P.O. Box 2274, Terminal
Annex, Los Angeles
150. 00
A. H. Rowan, 19th Floor, Fair Bldg., Fort Worth
200. 00
Caroline H. Sands, 3546 Caruth, Dallas
15,
000. 00
Sayles Biltmore Bleachery, Saylesville, R.I
250.00
Sayles Finishing Plant, Saylesville, R.I
250. 00
Clarence Scharbauer, Jr., Midland, Texas
162. 00
Seaboard Oil Co., Inc., Dallas
383. 00
Sears, Roebuck & Co., Chicago
2,
000. 00
Cruger T. Smith, Inc., Dallas
500. 00
Forest M. Smith, San Antonio
200. 00
L. C. Smith, Alabama Power Co., Birmingham, Ala
138. 00
Standard Oil Co., Chicago
1,
000. 00
Standard Oil Co. of Indiana, 910 South Michigan Avenue, Chicago
780. 00
Standard Oil & Gas Co., Tulsa, Okla
100. 00
Sunset News Co., 125 North Westmoreland, Los Angeles_
283. 59
Sweeney Bros. Tractor Co., Fargo, N. Dak
250. 00
Temple Hargrove, Box 395, Flidell, La
330. 00
Texas Bank & Trust Co., Dallas
100. 00
Tri State Oil Co., Box 5588, Shreveport
300. 00
Triangle Refineries, Inc., Houston
100, 00
United Tool Co., P.O. Box 1383, Shreveport
1,
500.00
U.S. Steel Corp., Oil Well Supply Div., P.O. Box 478, Dallas
500. 00
V. J. Waters, Dallas
420. 35
Welex Jet Services, Inc., 1400 East Berry St., Fort Worth, Texas_
200. 00
Wilson Supply Co., 1412 Maury St., Houston
300. 00
Wilson Supply Co., 1301 Canty St., Houston
300. 00
Wilson Supply Co., P.O. Drawer 19, Houston
300. 00
Morris K. Womack, Houston
100. 00
General R. E. Wood, Sears Roebuck, Inc., Chicago
1,
000. 00
Total
273,
691. 01
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TAX-EXEMPT FOUNDATIONS: IMPAuT u
Mr. HARDING. I should like to ask a question. Are these the totals
for those fiscal years for each of these contributors?
ME. OLSHER. Yes, that is correct.
Mr. HARDING. 1951 through '56?
Mr. OLSHER. For the purposes as identified.
Mr. HARDING. Yes, I understand.
Mr. OLSHER. On the tax returns.
Mr. HARDING. This was on the Form 990?A?
Mr. OLSHER. Yes, these figures come from their tax returns, as re-
ported on the Form 990?A.
Mr. HARDING. Yes.
The CHAIRMAN. Has the IRS determined whether the donors classi-
fied the "subscriptions donations" as a business expense or as a chari-
table deduction?
Mr. HARDING. No, sir, to my knowledge, we have not made this
analysis.
(Following is the information submitted by the IRS, under date of
October 12, 1964.)
The Service has not determined whether the donors (referred to at the
September 1 hearing), classified the "subscriptions donations" as a
business expense or as a charitable deduction. (The donors referred to
were set forth in a listing furnished by you of 114 individuals and or-
ganizations said to have contributed a total of $273,691.01 to the Life Line
Foundation for subscription to Facts Forum News during fiscal years
1954 through 1956.)
The question as to how these 144 may have classified such payments
during the years 1954 to 1056 is not considered germane to our current
consideration of the exempt status of the Life Line Foundation for the
fiscal year ended September 30, 1961. To the extent these amounts were
claimed as deductions on the income tax returns of the contributors, this
would have been an appropriate question at the time their returns were
subject to audit. The staute of limitations would, however, normally
have run on these returns during the year 1960, and no revenue purpose
would be served to have our various field offices search their files and,
where necessary, to audit the records of the various individuals and
organizations for information on this point.
Since this particular information is not germane to our consideration of
the status of the Foundation, as stated above, use of the Service's
manpower and audit authority solely to obtain this information does not
appear warranted.
The CHAIRMAN. I shall now give you a copy of the schedule show-
ing information we requested from Life Line regarding donations
received for subscriptions to Facts Forum News. (See exhibit 41,
page 382.)
Tax returns of the Life Line Foundation indicate that 23 donors
contributed to the Foundation $3,049,703.52 during fiscal years 1951
through 1960, excluding donations for subscriptions. According to
the Foundation, all such donations were made in cash, and no securities
or other property were involved.
Following are the names and addresses of the donors and the amounts
contributed to the Foundation, excluding amounts of under $3,000
received during 1951 and 1952 and excluding amounts of less than
$100 received during 1953 through 1960. In order to save time, I
shall insert the information in the record instead of reading it, and
give you a copy.
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(The insert follows:)
Donor Amount
Bright Star Foundation, Dallas $16, 750. 00
Worrard Cain, Mercantile Bldg., Dallas 100.00
Gulf Oil Corp., Houston 13,864. 70
Gulf Oil Corp., Pittsburgh 0, 000. 00
H. R. Hayes, c/o H. R. Hayes Lumber Co., P.O. Box 1461, Monroe,
Louisiana 2, 000. 00
A. G. Hill, Chapel 11111 Gas System, Dallas 5, 000.00
H. L. Hunt, 700 Mercantile Bank Bldg., Dallas 2,928, 500.00
N. B. Hunt, 700 Mercantile Bank Bldg., Dallas 35,000. 00
Stuart Hunt, Empire Drilling Co., 1507 Mercantile Bank Bldg.,
Dallas 100. 00
Dina F. Lee, Flowerland, Chamblee, Georgia 105.00
Lone Star Steel Co., Dallas 200.00
W. K. Manning, Fidelity Union Life Bldg., Dallas 100.00
George E. Mercer, T. E. Mercer Teaming & Trucking Contractor,
920 North Main Street, Fort Worth 500.00
National Geophysical Co., 8800 Lemmon Avenue, Dallas 100. 00
Ohio Oil Co., Findlay, Ohio 6, 500. 00
Placid Oil Co., Shreveport, Louisiana 5,000. 00
Querbes & Bourquin, Shreveport, Louisiana 200. 00
A. L. Reed, 4400 Westway, Dallas 100. 00
Eldred J. Robinson, Dallas 9, 883.82
Caroline H. Sands, 3546 Caruth, Dallas 10,000. 00
Sun Oil Co., Dallas 6, 500. 00
Joe C. Thompson, Southland Corp., 228 North Haskell, Dallas 100. 00
James Ralph Wood, Pres., Southwestern Life Ins. Co., Dallas 100.00
Total $3, 049, 703. 52
Mr. HARDING. Mr. Chairman, I wonder if that is a typographical
error on the 1951?
The CHAIRMAN Through 160?
Mr. HARDING. I wonder if that was not intended to be 1961.
The CHAIRMAN. No I think it is correct, 1951 through 1960. Have
you looked over the contributions there Mr. Harding?
Mr. HARDING. In this document that just got?
The CHAIRMAN Yes. We wanted you to have time to look at it.
Mr. HARDING. Yes, sir.
The CHAIRMAN If the Foundation's tag exemption is revoked
retroactively, would this affect the deductibility by the donors of the
amounts contributed to the Foundation? For example, Mr. H. L.
Hunt contributed $3,008,500 to the Foundation and, presumably, took
the maximum deduction on his personal income tax returns. So
the question is, if it is revoked retroactively, would this affect the
deductibility by the donors?
Mr. HARDING. My counsel informs me, Mr. Chairman, that gen-
erally, even though we revoke retroactively, we would not disallow
the deduction to the individual making the contribution. If there
is evidence of complicity or knowledge of the violation, we would go
back and disallow retroactively as to those doners. This would apply
to all types of 501(c) (3) organizations.
Mr. CHAIRMAN. You would construe they are made in good faith?
Mr. HARDING. That is the general situation, yes, sir. Since the
organization did not know at the time that it made the donation that
we were going to revoke' we would not go back on the donor.
The CHAIRMAN. In addition to producing and distributing the
program, Life Line, to broadcast stations, do you know that the
Life Line Foundation also publishes four pages of political com-
mentary three times weekly entitled, "Life Lines"?
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TAX-EXEMPT FOUNDATIONS: IMPACT ON SMALL BUSINESS 237
Mr. HARDING. I am aware that they issue a publication, yes sir.
The CHAIRMAN. According to the Foundation's application for tax
exemption, it was organized as an educational corporation for the
purpose of conducting small discussion groups. Would you say
that this foundation's activities have been confined to "small dis-
cussion groups" since these activities now embrace publications, radio,
television, and other mass media?
Mr. HARDING. It would not appear so, Mr. Chairman.
The CHAIRMAN. The Foundation's 1962 figures show a profit on
radio activities of $125,472.54 and on the Life Line newspaper of
$32,423.57. Since the Foundation's activities are supposed to be non-
profit, would you say that these operations are of such size that the
Foundation is now a business and taxable as such, or that these activ-
ities are subject to the unrelated business income tax?
Mr. R000viic. Mr. Patm an, without prejudicing the Government's
case in the Life Line Foundation' and certainly not being an apologist
for the organization, in general, the fact that an organization that is
otherwise exempt makes a profit, shows a plus figure at the end of the
year,. does not indicate that it is outside the purview of the exemption
provision. The unrelated business income provisions are a recogni-
tion that an organization can make a profit as long as it is otherwise
exempt both as to its purposes and the manner in which it conducts
itself. The unrelated business provisions, sections 511-13 of the
statute, also recognize that there are certain related activities.
If you had a foundation that was truly educational and it did pub-
lish a magazine and did make a profit, the publication and sale of the
editorial content of the magazine would be related and ergo, would
not be subject to the unrelated business income tax.
The CHAIRMAN. The Foundation shows travel expenses totaling
$60,124.32 for fiscal years 1954 through 1957. We have not as yet
been 'able to examine Life Line's travel expenses for 1958 through 1963.
Why should this Foundation need to incur such a large amount of
travel expenses?
Mr. HARDING. I cannot explain that at this point, MT. Chairman.
The CHAIRMAN. The Foundation's travel expenses include the fol-
lowing reimbursements to H. D. Smoot, Dallas:
Oct. 8. 1913
$270.
66
Oct. 20, 1953
270.
66
Nov. 3, 1913
270.
66
Nov. 22, 1353
270.
66
Dec. 2, 195:;
270.
66
Jan. 15, 1951
270.
66
Jan. 21, 1951
270.66
Feb. 3, 1951
270.
66
Feb. 23, 194
270.
66
March 10, -954
270.
66
March 19, 1954
270.00
April 8, 1954
270. 66
July 6, 1954_
270. 66
July 19, 1954
270.06
1954 (month tnd day is illegible)
270.66
Aug. 16,
195t
270.
66
Sept. 1,
1954_
270.
66
Sept. 13,
1951
270.
66
Sept. 24,
1951
270.
66
Would pu agree that it is a bit unusual to incur travel expenses
which are kentical to the penny in 19 instances?
39-915-64,-16
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5, TAX-EXEMPT FOUNDATIONS: IMPACT ON SMALL BUSINESS
Mr. HARDING. It strikes me as somewhat unusual unless he was go-
ing_ to the same places for precisely the same amount of time.
The CHAIRMAN. Has the IRS examined these travel expenses to
determine whether they may be taxable as income to the recipients?
Mr. HARDING. Not to my knowledge.
The CHAIRMAN. Agana as a time-saver2 I shall insert in the record
at this point details of travel expenses paid to each, individual for the
years 1954 through 1957, instead of reading them, and shall give you
a.copy.
MT. HARDING. Thank you.
The CHAIRMAN You have a copy there, Mr. Harding?
Mr. HARDING. Yes, sir.
(The insert follows:)
FACTS FORUM, INC.
Travel Expenses
YEAR ENDED 9/30/54
Date
Ref.
Payee
Amount
10- 8-53
2306
H. D. Smoot, 6038 Kenwood,
Dallas, Texas.
$270. 66
10- 8-53
2333
Robert H. Dedman, 6130 Delroy
9. 80
Drive, Dallas, Texas.
10- 8-53
2343
John Dale'
9. 60
10- 8-53
2353
Mercantile Commerce Garage,
Dallas, Texas.
108. 12
10- 8-53 __ ____
2357
Mayflower Hotel, Dallas Texas _
28. 30
10- 8-53
2362
William Sauhering, Jr., 342
99. 34
Madison Avenue, New York
City, New York.
10-14-53
2387
Mayflower Hotel
80. 80
10-16-53
2395
Peter Hoguet, 47 E. 92nd Street,
New York City, New York.
250. 00
10-20-53
2403
FI. D. Smoot
270. 66
10-20-53
2404
Robert H. Dedman
8. 95
10-23-53
2410
Peter Hoguet
225. 00
10-26-53
2416
Meredith Howard Harless, 2440
227. 96
Kalorama Road, N.W., Wash-
ington, D.C.
10-19-53
JE1 1
Jan Lindermann, Hotel Ansonia,
73rd and Broadway, New
250. 00
York City, New York.
11- 3-53
2426
H. D Smoot
270. 66
11- 3-53_ ___ __
2427
_do
43. 87
11- 9-53
2447
Mercantile Commerce Garage_ __
76. 09
11- 9-53
2489
William Sauhering, Jr
122. 35
11- 9-53
2494
H. L. Hunt, 700 Mercantile
75. 00
Bank Bldg., Dallas, Texas.
11- 9-53
2495
Felix Harris & Company
157.50
11-10-53
2497
Mayflower Hotel
65.69
11-11-53
2501
Meredith Howard Harless
263.45
11-17-53
2508
Guy Wallace, 191 Green Avenue,
Freeport, L.1., New York.
74.75
11-17-53
2509
Robert H. Dedman
10. 85
11-17-53
2510
Zell L. Howell, 6231 Vickery
25. 95
Blvd., Dallas, Texas.
11-18-53
2512
(1;P. Steighorst, 4241 Emerson
'255. 22
Avenue, Dallas, Texas.
11-19-53
2513
Mercantile National Bank
89. 13
(American Airlines for Wm.
McCallum).
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TAX-EXEMPT FOTJNDATIONS : IMPACT ON SMALL BUSINESS zou
FACTS FORUM, INC.-Continued
Travel Expenses-Continued
YEAR ENDED 9/30/54-Continued
Date
Ref.
Payee
Amount
11-19-53
11-22-53
11-24-53
11-25-53
11-27-53
11-27-53
2514
2526
2528
2529
2532
2534
Peter Hoguet
II. D. Smoot
G. P. Steighorst
Guy Wallace
H. D. Smoot
Wm. 0. McCallum, 519 E. 9th,
Irving, Texas.
398.27
270.66
211.11
174.43
66.45
347.05
12- 2-53
2546
Peter Hoguet
377.20
12- 2-53
2547
Mayflower Hotel
99.65
12- 2-53
2551
H D. Smoot
270.66
12- 2-53
2552
G. P. Steighorst
238.74
12- 4-53
2556
do
245.27
12- 4-53
2557
Guy Wallace
20.46
12- 7-53
2558
Petty Cash
2.00
12- 7-53
2574
Hine Pontiac, Dallas, Texas
18.50
12- 7-53
2580
Mercantile Commerce Garage___
125.42
12- 7-53
2605
Fan and Bill's Inc
4.95
12- 7-53
2623
Mohr Chevrolet Company,
Dallas, Texas.
9.82
12- 8-53
2637
Guy Wallace
88.06
12-15-53
2651
W. T. Hyde
304.84
12-15-53 _
2652
G P. Steighorst
436.73
12-16-53
2653
Guy Wallace
95.41
12-16-53
2654
H. D. Smoot
76.45
12-16-53
2655
Wm. Sauhering, Jr
154.43
12-18-53
2671
H. D. Smoot
270.00
12-18-53
2672
Wm. 0. McCallum
356.01
12-23-53
2674
Guy Wallace
80.75
12-23-53
2676
Meredith Howard Harless _
400.21
12-23-53
2681
Mayflower Hotel
60.07
12-31-53
2691
Peter Hoguet
463.02
12-31-53
2692
Meredith Howard Harless
281.81
12-31-53
2693
II. D. Smoot
104.45
1- 8-54
2720
Guy Wallace
80.59
1-12-54 _____
2729
Mohr Chevrolet Company
30.28
1-12-54_______
2730
Mercantile Commerce Garage___
80.36
1-12-54
2733
H. L. Hunt
211.63
1-12-54
2741
Advertising Specialty Co
37.84
1-12-54
2747
Hine Pontiac
5.25
1-12-54
2757
Stewart Office Supply Co.,
Dallas, Texas
36.29
1-12-54
2795
Pat Corder, 7020 Forest Lane,
Dallas, Texas
19.33
1-12-54
2798
Mayflower Hotel
45.83
1-12-54
2800
Pat Corder
15.00
1-15-54
2814
H. D. Smoot.
270.66
1-15-54
2816
Guy Wallace
79.32
1-18-54
2822
Wm. Sauhering, Jr
80.65
1-21-54
2824
H. D. Smoot
56.45
1-21-54
2825
do
270.66
1-21-54
2826
Peter Hoguet
933.31
1-21-54_ _ ____
2827
Meredith Howard Harless
273.03
1-26-54
2850
H. D. Smoot
76.45
1-26-54
2853
Robert H. Dedman
51.49
1-28-54
2866
Guy Wallace
84.39
2- 1-54
2868
H. D. Smoot
113.05
2- 1-54
2869
W. T. Hyde
415.74
2- 2-54
2871
Guy Wallace
69.82
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Z40 TAX-EXEMPT FOUNDATIONS: 11\IPAC2 ON SMALL BUSINESS
FACTS FORUM, INC.-Continued
Travel Expenses-Continued
YEAR ENDED 9/30/54-Continued
Date
Ref.
Payee
Amount
2- 3-54
2872
H. D. Smoot
270.66
2- 4-54
2883
do
152.93
2- 4-54
2885
Meredith Howard Harless
253.59
2- 4-54
2887
Guy Wallace
119.95
2- 5-54
2889
Mayflower Hotel
49.09
2- 5-54
2890
Fan and Bill's
29.56
2- 8-54
2906
Adolphus Hotel, Dallas, Texas_
79.14
2- 8-54
2907
Petty cash
20.00
2-8-54
2908
Karl Hess, Adolphus Hotel,
Dallas, Texas.
140.00
2-9-54
2936
Mercantile Commerce Garage___
98.88
2-10-54
2990
Clarence Streit
44. 42
2-10-54
2992
American Airlines
102.35
2-15-54
2996
John Patrick McCullough, 51
22.50
Greenwich Avenue, New York
City, New York.
2-18-54
3009
Robert H Dedman
7.15
2-18-54
3014
Mayflower Hotel
26.88
2-19-54_ _ _____
3019
Hotel Adolphus...
54.25
2-23-54
3024
H. D. Smoot
270.66
2-26-54
3033
do
144.25
2-26-54
3036
Peter Hoguet
173.39
2-27-54
3037
John Patrick McCullough
104.00
2- 5-54
Reimbursement
42.78
2-15-54
do
10.00
2-12-54
JE20
Karl Hess
95.00
2-28-54
JE21
H. D. Smoot
130.34
3- 4-54
3044
John Patrick McCullough
46.35
3-10-54
3047
H. D. Smoot
270.66
3-10-54
3085
Hine Pontiac
9.96
3-10-54
3089
Petty Cash
5.00
3-10-54
3111
Mercantile Commerce Garage___
93.86
3-10-54
3120
Fan and Bill's
19.50
3-13-54
3139
II. D. Smoot
90.00
3-17-54
3143
Meredith Howard Harless
118.73
3-18-54
3153
Mayflower Hotel
52.93
3-19-54
3167
H. D. Smoot
270.66
3-22-54
3170
Pat Corder
20.56
3-29-54
3181
Robert H Dedman
4.19
3-30-54
3185
H. D. Smoot
153.10
4- 2-54
3192
I. Keith Taylor
11.50
4- 5-54
3193
American Airlines
133.43
4- 8-54
3212
H. D. Smoot
270.66
4-12-54
3254
Mercantile Commerce Garage___
92.55
4-12-54
3255
Fan and Bill's, Inc
41.72
4-12-54
3256
Mayflower Hotel
30.08
4-12-54
3257
Mohr Chevrolet Company
50.01
4-12-54
3258
Sammy's Fine Restaurant, Dal-
las, Texas.
72.50
4-13-54
3286
Shirley Arnold Hobbs, 4718
292.04
LaHoma, Dallas, Texas.
4-15-54
3294
H. D. Smoot
345.75
4-15-54
3298
Robert H Dedman
113.89
4-19-54
3302
Hotel Statler, Dallas, Texas _
42.56
4-20-54 _
3318
Robert H. Dedman
7.15
5-3-54
3326
H. D. Smoot
55.15
5-7-54
3329
Meredith Howard Harless
113.97
5-11-54
3332
Petty Cash
1.35
Approved For Release 2004/04/08 : CIA-RDP67600446R000300020094-4
Approved For Release 2004/04/08 : CIA-RDP67600446R000300020094-4
TAX-EXEMPT FOUNDATIONS: IMPACT ON SMALL BUSINESS
FACTS FORUM, INC.-COritirilled
Travel Expenses-Continued
YEAR ENDED 9/30/64-Continued
241
Date
Ref.
Payee
Amount
5-11--54_
5-11-54
3376
3377
Fan & Bill's, Inc..
Mohr Chevrolet Company
3. 16
30.05
5-11-54
3378
The Mayflower
35. 65
5-11 54_
3379
Mercantile Commerce Garage___
89. 94
5-14-54
3418
H. D. Smoot
175. 35
5-14-54_ _ _____
3420
Zell Howell
23. 93
5-2F--54.
3442
H. L. Hunt
200. 00
5-28-54
3470
H. D. Smoot
201. 50
6- 2-54
3474
Zell Howell
23. 98
6- 7-54
3507
Mercantile Commerce Garage___
10L97
6- 7-54
3534
Robert H. Decimal).
5.12
6-25-54
3569
H. D. Smoot
326. 75
6-25-54
3571
Robert H. Dedman_
5. 18
6-25-54 _
3573
A. B. Cuddihy, Jr., 70 Pine-
wood Gardens, Hartsdale,
N.Y.
538. 36
6-26-54_
3577
Hardy Burt
413. 05
6-23-54
3595
Frances Crary, 2007 Hunting-
ton, Arlington, Texas.
6. 05
6-30-54
3603
Robert H. Dedman_
17. 75
6-30-54
3604
A. B. Cuddihy, Jr
44. 80
(I)
CR36
do
155. 28
7- 1-54
3613
IL D. Smoot
161 90
7- 6-54
3622
A. B. Cuddihy, Jr
41. 65
7-- 6-54
3623
H. D. Smoot
270. 66
7- 8-54
3626
Petty Cash
1. 95
7- 8-54
3662
Mohr Chevrolet Company
2.20
7- 8-54
3663
Mercantile Commerce Garage___
95. 62
7- 9-54
3689
L. W. Cameron
14. 30
7-13-54
3715
H. D. Smoot
75. 70
7-13-54
3716
Hardy Burt
82. 75
7-16-54--------3730
Hine Pontiac
9.55
3733
H. D. Smoot
270. 66
(1)
3749
A. B. Cuddihy, Jr
483. 64
(1)
3750
Mayflower Hotel
58. 49
(1)
3754
Arvo Goddens
21. 38
(1)
3758
H. D. Smoot
109. 65
(1)
8- 6-54 ______
3760
3774
do
Fan and Bill's, Inc
270. 66
14. 83
8- 6-54
3812
Mayflower Hotel
50. 26
8- 6-54
3813
Mohr Chevrolet Co
49. 50
8- 9-54
3834
H. D. Smoot
44. 44
8-10-54
3846
Hardy Burt
9& 08
8-11-54
3851
A. B. Cuddihy, Jr
79. 70
8-13-54
3852
Robert H. Dedman
10. 12
8-13-54
3859
Shank, Dedman and Payne,
Dallas, Texas.
3.63
8-16-54
3863
H. D. Smoot
270. 66
8-16-54
3864
do
73. 00
8-31-54_
3891
A. B. Cuddihy, Jr
96. 76
9- 1-54
3902
II. D. Smoot
270. 66
9- 1-54 _
3903
do
83. 25
9- 1-54
3904
Robert H. Dedman
7. 25
9- 1-54
3920
Mercantile Commerce Garage___
184. 57
9- 7-54
3943
The Mayflower_
114.33
9- 8-54
3961
Fan and Bill's
12. 22
1 Date not legible.
Approved For Release 2004/04/08 : CIA-RDP67600446R000300020094-4
Approved For Release 2004/04/08 : CIA-RDP67600446R000300020094-4
242
TAX-EXEMPT FOUNDATIONS: IMPACT ON SMALL BUSINESS
FACTS FORUM, INC.-CORtirilled
Travel Expenses-Continued
YEAR ENDED 9/30/54-Continued
Date
Ref.
Payee
Amount
9-13-54
3978
H. D. Smoot
*
270. 66
9-15-54
3980
do
*
77. 80
9-15-54
3900
Hardy Burt
116. 05
9-23-54
4008
Beth Anderson Rachal, 3109
70. 00
McKinney, Dallas, Texas.
9-23-54
4009
Frances Ferguson Crary
*
104, 88
9-24-54
4011
H. D. Smoot
*
270. 66
9-30-54
4016
Zell Howell
*
-36. 30
9-30-54
4018
H. D. Smoot
*
240. 60
9-30-54
4020
A. B. Cuddihy, Jr
*
298. 59
Total, Year Ended 9/30/54_
$25, 244. 45
YEAR ENDED 9/30/55
4024
4042
H. D. Smoot
Mercantile Commerce Garage
$91.69
95.60
(1)
4043
Mohr Chevrolet Company
43.93
(1)
4044
Greater Dallas Motors, Dallas,
Texas
16. 73
(1)
4107
H. D. Smoot
170. 38
10-29-54
4135
Medford Evans, Route 5, Box
53-K, Abilene, Texas
182.86
10-31-54
4140
H. D. Smoot
163.95
10-31-54_
CR40
do
(26.80)
11-9-54
4169
Hargett Electric Company, Inc.,
Dallas, Texas
19. 06
11-9-54
4186
Mercantile Commerce Garage_ __
108. 78
11-18-54
4272
H. D. Smoot
89. 50
11-19-54
4275
Robert H. Dedman
10. 35
11-19-54
4276
Marjorie K. Mars, 4731 W. Pur-
due, Dallas, Texas
102.76
11-24-54
4280
Medford B. Evans
265. 00
11-27-54
4285
John W. Manning, 35-13 76th
Street, Jackson Heights 72,
N.Y
99. 90
11-29-54
4288
William Fowler, 54-15 Gaston
Avenue, Dallas, Texas
11. 90
11-29-54
4289
Medford Evans
186. 01
11-29-54
4290
H. D. Smoot
140. 10
12-7-54
4304
John W Manning
167. 35
12,15-54
4408
H. D. Smoot
136. 60
12-15-54
4419
Mercantile Commerce Garage___
147. 18
12-21-54
4454
Robert H. Dedman
15. 10
12-28-54
4467
John Manning
98. 40
12-29-54
4479
H D. Smoot
165. 00
12-30-54
4482
Mary Graves, 6371 Oriole Drive,
Dallas, Texas.
6. 40
1-5-55
4497
0. M. Spence, 3927 Cole
3. 75
Avenue, Apt. 106, Dallas,
Texas.
1-6-55
4508
Marjorie K. Mars
186. 01
1-6-55
4511
Medford Evans
492. 40
1-6-55
4512
John Manning
40. 00
1-14-55
4532
H. D. Smoot
119. 65
1-27-55
4678
H. D. Smoot
91. 69
1 Date not legible.
Approved For Release 2004/04/08 : CIA-RDP67600446R000300020094-4
Approved For Release 2004/04/08 : CIA-RDP67600446R000300020094-4
TAX-EXEMPT FOUNDATIONS: IMPACT ON SMALL BUSINESS 243
FACTS FORUM, INC.-Continued
Travel Expenses-Continued
YEAR ENDED 9/30/55-Continued
Date
Ref.
Payee
Amount
1-28-55
1-14-55
1-18-55
1-18-55
1-18-55
1-27-55
1-28-55
1-31-55
1-31-55
(1)
(1)
(1)
4683
4532
4567
4643
4649
4678
4683
4687
4690
4705
4777
4778
Medford Evans
H. D. Smoot
Mercantile Commerce Garage
Medford Evans
Hine Pontiac
H. D. Smoot
Medford Evans
H. D. Smoot
0. M. Spence
John W. Manning
Mercantile Commerce Garage
Matthews Drive-Ur-Self Serv-
ices.
317.80
119.65
112.83
186.01
101.11
91.69
317.80
172.00
124,30
141.08
117.93
10.30
(1)
JE39
E. Howard Goodwin, 3709 Cole
610.49
Avenue, Dallas, Texas.
(1)
4716
0. M. Spence
139.69
(1)
4717
Dan Smoot
133.65
(1)
4829
Dayton Biltmore Hotel
58.32
(1)
4853
Medford Evans
66.66
(1)
4861
do
203.00
(1)
4862
Jan Lindermann
273.14
(1)
4866
H. D. Smoot
135.00
(1)
4870
Jan Lindermann
242.90
(1)
(1)
4884
4886
do
V. J. Waters
181.49
694.71
(1)
4893
Blackburn Hughes, P.O. Box
89.20
720, Memphis, Tenn.
(1)
4914
Robert H. Dedman
5.35
111)))
4919
Carey Drive-Ur-Self, Inc
34.25
4967
Mercantile Commerce Garage__ _
163.87
4976
Hine Pontiac
131.44
(1)
4978
Garrett Hotel
20.03
(1)
4980
Hotel Farraguet
20.31
(1)
4916
Robert H. Dedman
7.15
5000
0. M. Spence
66.66
11))
5003
5005
H. D. Smoot
James L. Ewing, III, 2216
151.50
152.50
Island Prince, Monroe, La.
5024
John Convery
134.23
5027
Jan Lindermann
189.13
5041
Robert H Dedman
12.95
5050
Medford Evans
28.27
5051
do
77.00
(1)
5053
Classified Parking System,
Dallas, Texas.
20.00
5054
Dr. Fred C. Schwarz
180.00
5059
Josephine Evans, 2242 S. 34th
11. OQ
St., Abilene, Texas.
5060
James L. Ewing, III
65.00
5062
Jan Lindermann
253.23
5079
H D. Smoot
116.00
(1)
(1)
(1)
(1)
(1)
(1)
5090
5091
5095
5099
5101
5109
Blackburn Hughes
John Convery
Ashbaugh Auto Rental Service_
0. M. Spence
Medford Evans
Jan Lindermann
99.34
336.02
29.56
133.07
35.00
348.57
1 Date not legible.
Approved For Release 2004/04/08 : CIA-RDP67600446R000300020094-4
Approved For Release 2004/04/08 : CIA-RDP67600446R000300020094-4
244
TAX-EXEMPT FOUNDATIONS: IMPACT ON SMALL BUSINESS
FACTS FORUM, INC.-Continued
Travel Expenses-Continued
YEAR ENDED 9/30/55-Continued
Date
11)5288
Ref.
Payee
Amount
5121
5136
5141
5152
5153
5180
5214
5236
A & P Drive-Ur-Self Co
Motorent, Inc
Hotel Jefferson, Dallas, Texas_
The Hotel Raleigh
Hotel Patton
Hotel Schroeder
Mercantile Commerce Gargae
The Conrad Hilton, Dallas,
Texas.
7.94
31.17
11.42
149.60
31.76
19.70
94.87
54.79
5264
The Shamrock Hotel
127.
37
JE63
E. Howard Goodwin
269.
51
JE64
Vic Waters
879.
65
4894
Jan Lindermann
180.
60
4902
Medford Evans
115.
00
4903
Jan Lindermann
160.
09
4906
John Convery
119.
91
5085
Marjorie Mars
133.
43
5106
Medford Evans
37.
00
5111
0. M. Spence
183.
81
5188
Robert H. Dedman_
12.
25
5189
Classified Parking System
20.
00
5202
John Convery
233.
20
5203
H. D. Smoot
122.
50
5233
Jan Lindermann
324.
14
5254
Medford Evans_
33.
00
5274
Hotel Washington
87.
22
5283
Jan Lindermann
283.
47
5284
H. D. Smoot
140.
00
John Convery
317.
71
5335
Blackburn Hughes
75.
30
5445
Mercantile Commerce Garage___
119.
66
5448
Hotel Commodore
100.
11
JE72
Medford Evans
500.
00
JE73
do
39.
50
JE74
Mrs. Josephine Evans
7,
00
JE75
John Manning
500.
00
JE76
Marjorie Mars
387.
47
JE88
0. M. Spence
1,
050.
00
5312
Josephine Evans
25.
00
5313
Medford Evans
20.
00
5314
Freda Uttey
165.
99
5329
Jan Lindermann_
340.
72
5348
H. D. Smoot
160.
35
5349
Jan Lindermann
194.
67
5353
Marjorie Mars
118.
80
5356
John Convery
313.
17
5398
Jan Lindermann
196.
47
5479
Mrs. R. S. Hjelmseth
27.
61
5491
H. D. Smoot
80.
85
5492
Medford Evans
78.
00
5499
John Convery
373.
54
5519
Blackburn Hughes
8&
32
5523
Wm H. Bertenshaw, 25 St.
33.
98
Lawrence Ave., Maplewood,
N.J.
Date not legible.
Approved For Release 2004/04/08 : CIA-RDP67600446R000300020094-4
Approved Fa..R.vanT2000fflimus9w) RENAK6Rmg, 022R94-4
FACTS FORUM, INC.-Continued
Travel Expenses-Continued
YEAR ENDED 9130/55-Continued
Date
Ref.
Payee
Amount
(1)
(0
(1)
(i)
(5)
(1)-
(1)
(0
(0
(0
1)
1)
(0
(1) -
(1)
(') -
1r
)
5563
5567
5570
5573
5635
5656
5674
5676
5704
5748
5642
5777
5785
5860
5878
5933
5971
6008
Hotel Statler
Jan Lindermann
Mercantile Commerce Garage
Hotel Adolphus
Robert H. Dedman
American Airlines
John Convery
do
Blackburn Hughes
Mercantile Commerce Garage
John Convery
do
Joan Powers, 7642 Eastern,
Apt. 6, Dallas, Texas.
John Convery
do
Shank, Dedman & Payne, Dal-
las, Texas.
John Convery
do
Total, Year Ended 9/30/55_
*
*
*
*
*
78. 11
330. 20
104. 21
93. 08
7. 00
163. 24
174. 35
285. 86
39. 27
45. 90
385. 27
275. 32
1. 40
172. 85
336.69
10. 40
303. 76
323. 43
822. 682. 23
YEAR ENDED 9/30/56
(1)
6046
American Airlines
8101. 75
(1)
6061
John Convery
308. 91
(1)
6094
Sherwood Entwhistle, 3755 Dun -
haven Rd., Dallas, Texas.
46. 00
(1)
6114
John Convery
369.41
(1)
6198
do
334.40
(1)
6216
do
355.20
(1)
6276
Z. E. Marvin, III, 3921 Euclid,
Dallas, Texas.
241. 13
(0
6295
John Convery
332. 04
(1)
6306
Z. E. Marvin, III
152. 19
(1)
6312
John Convery
316. 14
(1) -
6357
Z. E. Marvin, III
157. 06
(1)
6426
do
465. 23
(1)
6429
John Convery
310. 00
(1)
6482
do
150. 00
(0 -
6483
Z. E. Marvin, III
383. 08
(1)
6515
do
298. 09
(0
6519
John Convery
140. 00
(1)
6596
do
417. 08
(1)
6624
Z. E. Marvin, III
349. 23
(1)
6709
T. 0. K. Burleson, 6212 Junices,
Dallas, Texas.
39. 05
()
6712
Walter Schultz, 2305 S. Marsalis
34. 29
Ave., Dallas, Texas.
(1)
6728
Sherwood Entwistle
8.83
(1)
JE262
Z. E. Marvin, III
486.41
JE276
Dave Schaffnit, 5630 Stanford,
Dallas, Texas.
174.70
Date not legible.
Approved For Release 2004/04/08: CIA-RDP67600446R000300020094-4
Apipved For Release 2004/04/08 : CIA-RDP67600446R000300020094-4
0 TAX-EXEMPT FOUNDATIONS: IMPACT ON SMALL BUSINESS
FACTS FORUM, INC.-Continued
Travel Expenses-Continued
YEAR ENDED 9/30/56-Continued
Date
Ref.
Payee
Amount
(1)
6939
Pitney-Bowes, Inc., Dallas,
Texas.
2. 00
(1)
6924
Sherwood Entwistle
*
12.88
(1)
6963
_do
*
15. 17
(')
6972
John Convery
201. 05
(1)
6974
Z. E. Marvin, m
*
338. 68
(1)
JE287
Sherwood Entwistle
*
261. 37
(1)
7020
Z. E. Marvin, III
*
17. 19
(1)
7054
do
*
62.55
(1)
7055
Allen Hundley, 1723-D Pratt
30. 00
St., Dallas, Texas.
(1)
7146
Thomas Massey, 3856 Shore
_____
11. 24
Crest Dr., Dallas, Texas.
(1)
JE305
Dave Schaffnit
*
202. 43
(1)
JE306
Maurice Howell, Box 172,
Dallas, Texas.
223. 44
(1)
JE311
Thomas Massey
*
200. 00
(1)
JE321
Maurice Howell
*
69. 82
(1)
JE325
Allen Hundley
*
199. 96
(1)
7315
Jack McDowell, Jr., 4106 Pres-
cott Ave., Dallas, Texas.
119. 14
(1)
7331
Thomas Massey
*
7. 66
(1)
7347
Jack McDowell
*
147. 34
(1)
7348
Allen Hundley
*
13. 87
(1)
7349
Maurice Howell
*
112. 71
(1)
JE335
do
*
154. 05
(1)
JE336
Thomas Massey
*
350. 00
(1)
JE337
Allen Hundley
*
200. 00
(1)
JE338
P. L. Haney, 7422 Yamini Dr.,
Dallas, Texas.
265. 76
Total, Year Ended 9/30/56
$9, 189. 43
YEAR ENDED 9/30/57
10-15-56
7412
Thomas Massey
$12. 12
10-16-56
7415
Maurice Howell
227. 77
11- 2-56
7460
Jack McDowell
488. 00
11-15-56
7464
P. L. Haney
20. 67
11-15-56
7465
S. R Entwistle
11. 47
11-15-56
7466
Allen Hundley
6. 15
11-21-56
7530
Jack McDowell
42. 22
12- 3-56
7544
Maurice T. Howell
464. 87
Aug.-Oct. 1956_
JE358
Dave Schaffnit
176. 67
Oct. and Nov.
JE359
S. R. Entwistle
160. 00
1956.
Nov. 1956
JE360
Jack McDowell
300. 00
Oct. and Nov.
JE373
Maurice Howell
300. 00
1956.
JE384
Thomas Massey
400. 00
Nov. and Dec.
JE385
Dave Schaffnit
164. 03
1956.
Oct. and Nov.
JE383
P. L. Haney
234. 24
1956.
Total, Year Ended 9/30/
$3, 008. 21
57.
I Date not legible.
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Supplement to Travel Expenses Analysis
YEAR ENDED 9/30/54
Date
Ref.
Reimbursement of expenses for?
Amount
11- 9-b3
2494
Charles W. McBurney
$75. 00
1-12-54
2733
W. F. Hyde, 2015 Meriwether Road, Shreve-
port, Louisiana.
211. 63
5-21-54
3442
Karl Hess, Adolphus Hotel, Dallas, Texas__ _
200. 00
NOTE.?These amounts were originally reported to you as traveling expenses
of Mr. H. L. Hunt. Further examination shows that these amounts are reim-
bursements to Mr. Hunt for traveling expenses of the individuals named above.
Some contributions receive,d by the Life Line Foundation were in
odd amounts as shown below.
Donor
Year
Amount
Gulf Oil Corp., Houston
1952
$8,
864.
70
Eldred J. Robinson, Dallas
1960
9,
883.
82
Devon-Adair Co., 23 E. 26th Street, New York, N.Y
1955
200.
20
Hunt Oil Co., 700 Mercantile Bank Bldg., Dallas, Texas_ _ _ _
1955
1,
793.
37
1956
3,
236.
50
Sunset News Co., 125 N. Westmoreland, Los Angeles,
California
1955
283.
59
V. J. Waters, Dallas, Texas
1955
420.
35
Can you think of any reason as to why these contributions were
made in odd amounts?
Mr. HARDING. Not offhand, Mr. Chairman, I cannot.
The CHAIRMAN. We should like to have the IRS check the records
of the Life Line Foundation and submit an explanation of the odd
amounts for purposes of this hearing record. Can you do that?
Mr. HARDING. We shall do the best we can, Mr. Chairman.
(Following is the information submitted by the IRS, under date of
October 2, 1964.)
While this information is not available in the files of the Service, we
have, however, requested our field offices to attempt to obtain informa-
tion from certain of the "contributors" of these amounts. In one instance,
we have been advised that the amount listed represented the percent-
age due the foundation on a series of payments for the use of Life Line
broadcasts.
The CHAIRMAN. During fiscal year ending September 30, 1955, $13,-
794.21 was spent for Facts Forum poll cards. Please submit for pur-
poses of this hearing record the subject of each poll and the results
of each poll.
MT. HARDING. If we can obtain that information, we shall be happy
to submit it.
(Following is the information submitted by the IRS, under date of
October 2, 1964.)
The information is not available in the Service's files, and as previously
explained, an audit by the Service solely to obtain this particular infor-
mation does not seem warranted.
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248 TAX-EXEMPT FOUNDATIONS: IMPACT ON SMALL BUSINESS
The CHAIRMAN. You are hereby requested to submit to this Sub-
committee by October 12,1964 a written report of the IRS findings and
decision respecting the Life Line Foundation's tax exemption. Will
you be in a position to do that, Mr. Harding?
Mr. HARDING. Mr. Chairman, could we leave that open for discus-
sion between us?
The CHAIRMAN. We shall leave it open and discuss it with you, if
there is any doubt about it.
(Following is the information submitted by the IRS, under date of
October 12,1964.)
The Service's National office initiated an examination by the Balti-
more District office of this Foundation's activities and its qualifications
for continued exemption on June 4, 1962. As you were apparently ad-
vised by the organization, the District office completed its examination
of the Foundation's return for the fiscal year ended September 30, 1961,
and on March 8, 1963, forwarded a recommendation that its exemption
be withdrawn. Thereafter, the District office was requested to develop
certain additional information and this was submitted to the National
office on October 17, 1963.
Under our published procedures, the organization is entitled to sub-
mit a brief and appear in a conference here in the National office before
final action is taken on the District office recommendation.
The National office has completed its study of the District office report
and recommendation, and a brief filed with the District office by the
Foundation. By letter dated September 30, 1964, the Foundation was
advised of its right to submit an additional legal brief to the National
office and invited to a conference on the matter here on October 27, 1964.
At the request of representatives of the Foundation the conference was
rescheduled for November 17, 1964.
Again, I am not in position at this time to report to you on the issues
and findings in this case. Once the matter has been concluded and a
final decision reached, I shall be glad to furnish you with a more detailed
report, consistent with pertinent provisions of the disclosure statutes and
good administrative practices.
At this point, I shall insert in the record the following items regard-
ing Life Line Foundation, Inc.:
Exhibits 30 through 36. Correspondence between the Foundation and
the IRS, as submitted to us by the Foundation. (See pages 366-
375.)
Exhibit 37. Names, addresses and occupations of directors of the
Foundation at the close of each of years 1951 through 1962. (See
pages 376-377.)
Exhibit 38. Names and addresses of officers of the Foundation at the
close of each of the years 1951 through 1962. (See page 378.)
Exhibit 39. Schedule of the Foundation's loans and notes payable
during fiscal years 1951 through 1962. ( See page 379.)
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Exhibit 40. Schedule showing details of contributions received as
submittedby the Foundation, excluding amounts of under $3,000
received during 1951 and 1952 and excluding amounts of less
than $100 received during 1953 through 1960. (See pages
380-381.)
Exhibit 41. Schedule showing details of receipts from subscriptions to
Facts Forum News as submitted by the Foundation, excluding
contributions of less than $100. (See pages 382-392.)
The CHAIRMAN. We would like to take a 10-minute recess. Would
that be satisfactory?
Mr. HARDING. Certainly.
The CHAIRMAN. Very well, we shall resume here in ten minutes.
(At this point a short recess was taken.)
The CHAIRMAN. The Committee will resume. In view of our con-
versation, Mr. Harding, we shall recess the Committee until Friday
morning at 10 o'clock.
Thank you, gentlemen, both of you, for your attendance and your
appearance.
(Whereupon, at 11 :25 a.m., September 1, 1964, the subcommittee was
adjourned, to reconvene at 10 a.m., Friday, September 4, 1964.)
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TAX-EXEMPT FOUNDATIONS: THEIR IMPACT ON
SMALL BUSINESS
FRIDAY, SEPTEMBER 4, 1964
HOUSE OF REPRESENTATIVES,
SUBCOM1VIITTEE No. 1 ON: FOUNDATIONS
OF THE SELECT COMMITTEE, TO CONDUCT STUDIES AND
INVESTIGATIONS OF THE PROBLEMS OF SMALL BUSINESS,
Washington, D.C.
The subcommittee met, pursuant to recess at 10 a.m., in room 1301,
Longworth House Office Building, Hon. Wright Tatman (chairman
of the subcommittee) presiding.
Present: Representatives Tatman and Roosevelt.
Also Present: Representative Tom Steed, of the full committee;
H. A. Olsher, Director of Foundation Studios; and Eugene Loehl,
Assistant Minority Counsel.
The CHAIRMAN. The committee will please come to order.
This is the seventh session of hearings of Subcommittee Number 1
on the subject of the Federal Government's supervision of tax exempt
foundations and charitable trusts.
On behalf of the subcommittee, I would like to welcome our witness,
Mr. Bertrand M. Harding, Acting Commissioner of the Internal
Reveune Service. Please identify the two gentlemen with you, Mr.
Harding.
TESTIMONY OF BERTRAND M. HARDING, ACTING COMMISSIONER,
INTERNAL REVENUE SERVICE; ACCOMPANIED BY MITCHELL
ROGOVM, ASSISTANT TO THE COMMISSIONER., AND SHELDON S.
COHEN, CHIEF COUNSEL--Resumed
Mr. HARDING. Mr. Rogovin and Mr. Cohen, the Chief Counsel of
the Internal Revenue Service.
The CHAIRMAN. Fine, glad to have you.
Mr. Caplin stated in his testimony of July 22, that the Baird Foun-
dations are under intense audit examination to see that they are abid-
ing by every period and comma in that agreement," which was signed
by the Foundations on November 15-16, 1962, and approved by the
Commissioner on January 15, 1963.
I shall ask Mr. Olsher to continue.
Mr. OLsnEu. During Mr. Caplin's testimony, I summarized the
Baird Foundations?Lansall .Company?Lansall Corporation trans-
action of December 31, 1962, which involved the Winfield Baird
Foundation and the David, Josephine and Winfield Baird Foundation
allegedly selling their stock of the Lansall Corporation, plus other
251
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252 TAX-EXEMPT FOUNDATIONS: IMPACT ON SMALL BUSINESS
assets, to the Lansall Company for the sum of $5,333,615.83 (cost of
the assets to the Foundations) . You will recall that the two Founda-
tions received cash in the amount of $615.83, plus subordinated promis-
sory notes in the amount of $5,333,000 drawing only 4 percent interest
with no interest to be charged until January 1, 1966, and maturing
April 1, 1978.
Since we did not have enough time to conclude our questioning on
this subject, I shall pick it up here.
To sum it up, after the two Baird Foundations invested $5,333,000 in
the Lansall Corporation, they wound up holding promissory notes,
which are subordinated to all other liabilities of the Lansall Company
and drawing only 4 percent interest. It makes this investment by the
Foundations the most speculative of speculative investments. It
would also appear that the Lansall Company of Delaware was set up
for the express purpose of acquiring the entire assets of the Lansall
Corporation of New York from the Foundations with no initial capi-
tal outlay at all except the $200,000 capitalization of the Company.
Among the conditions incorporated in the Baird Foundations-IRS
closing agreements of November 1962 is the provision that each of the
Foundations (with the exception of $200,000 required to be paid cer-
tain persons by the deed of trust creating the Winfield Baird Founda-
tion) will, on or before December 31, 1965, have "completely disposed
and divested itself of its entire net assets to organizations organized
and operated exclusively for purposes described in Sec. 501(c) (3) of
the Internal Revenue Code of 1954 provided that such organizations
shall have obtained rulings or determinations from the Internal Rev-
enue Service that they are exempt from tax and satisfactorily estab-
lished that such exemption is still in effect."
Now, let me tell you about what has been going on during the "in-
tense audit examination" which Mr. Caplin says the Baird Founda-
tions have had since November 1962 (the date of the closing agree-
ment). You may be interested in knowing that these Foundations
failed to comply with Treasury regulations when they filed their 1962
and 1963 tax returns?and those returns were filed in May 1963 and
May 1964, many months after the closing agreement of November
1962. Yet, the Baird Foundations violated Treasury regulations
when they failed to report full information respecting sale of assets,
contributions paid out, holdings of 10 percent or more stock in cor-
porations, and donors' dealings with the Foundations.
With respect to donors' dealings, Treasury regulations require that
detailed statements be attached to foundation tax returns if a donor
receives any compensation for personal services from the foundation,
or if a donor receives any of the foundation's income or corpus in other
transactions.
Baird & Co. is a contributor to the Winfield Baird Foundation and to
the David, Josephine & Winfield Baird Foundation. Based on fig-
ures submitted to us by Mr. David G. Baird, Baird & Co. received Om-
missions totaling $73,367.87 in 1962 and commissions of $57,547.50 in
1963 from selling and purchasing securities for these two founda-
tions?and these transactions were not reported in the tax returns of
the foundations.
Moreover, according to data furnished by Mr. David G. Baird, Baird
& Co. received commissions totaling $8522107 from selling and pur-
chasing securities for the Baird Foundations during the years 1954
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through February 1961? and such transactions were not reported on
the Foundation's tax returns. Commissions for the earlier years 1951
through 1953 have not as yet been sub mitted by Mr. Baird.
Yet, Mr. Caplin talks about the "intense audit examination" the
Baird Foundations have been getting from the IRS.
Additionally, we have witnessed the Secretary of the Treasury com-
pletely changing a part of his testimony after he reviewed the tran-
script. During Mr. Dillon's testimony on July 21, I queried him as to
whether, in his view, the names and addresses of donors and the
amounts they contribute to a foundation should be open to public in-
spection. Mr. Dillon's answer was "Yes." However, when the tran-
script was returned to us by Mr. Dillon, we found that he had reversed
himself completely by saying "I think it quite proper that the names
and addresses of the original creators of a foundation should be made
public at the time the foundation receives its tax exemption."
This does not look good, Mr. Harding. Personally, I am fed up
with the hocus-pocus employed by Treasury and IRS officials. It has
long been apparent to me that you people who are supposed to be
protecting the public interest, are engaged in an unusual effort as
apologists and advocates for the large foundations.
For some reason, a number of Treasury and IRS officials feel com-
pelled to cover up the propaganda peddling of the elite bureaucrats
of the large foundations, their gravy trains, and their inefficiencies.
Yet, the activities of the large foundations involve more boondoggling
than exists in thousands of small foundations. This is something that
needs thorough investigation.
The CHAIRMAN. How do you explain the obvious contradiction that
exists between Mr. Caplin's intense audit examination of the Baird
Foundations and the continuing violations of law by those Founda-
tions, Mr. Harding
Mr. HARDING. fir. Chairman, I think Mr. Caplin's testimony could
be lout into the proper context. What he was attempting to convey
to the Committee was that after the information became available to
us, in large part through the report of your subcommittee, the Serv-
ice did undertake an intense reexamination of the closing agreement
which we had concluded with the Baird Foundations. That exam-
ination is currently in process.
The CHAIRMAN. You have now had five weeks to consider the Baird
Found ations-Lansall Company-Lansall Corporation. transaction of
December 31, 1962. As you know, the following is among the pro-
visions of the IRS?Baird Foundations closing agreement of Novem-
ber 1962:
Each of the Baird Foundations (with the exception of
$200,000 required to be paid certain persons by the deed of
trust creating the Winfield Baird Foundation) will, on or be-
fore December 31, 1965, have "completely disposed and di-
vested itself of its entire net assets to organizations organized
and operated exclusively for purposes described in Section 501
(c) (3) of the Internal Revenue Code of 1954 provided that
such organizations shall have obtained rulings or determina-
tions from the Internal Revenue Service that they are exempt
from tax and satisfactorily established that such exemption is
still in effect.
39-915-61-17
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254 TAX-EXEMPT FOUNDATIONS: IMPACT ON SMALL BUSINESS
As stated above' the agreement provides that each Baird Founda-
tion must donate its entire net assets to bona fide tax exempt organiza-
tions by December 31, 1965.
Yet, six weeks after the signing of the Baird Foundations?IRS
agreement the Foundations disposed of over $5 million in assets right
under the nose of the IRS. And to top it off, the assets were sold to
a company (Lansall Company) which can still be controlled by Mr.
David G. Baird.
In your view, does the Baird Foundations disposal of assets to the
Lansall Company conform to the above condition and the general
tenor of the Baird Foundation-IRS closing agreement of November
1962?
Mr. HARDING. Mr. Chairman, I think this is among the many ques-
tions that we will have to consider in our reconsideration of that
closing agreement with Baird.
(The information submitted by the IRS, under date of October 12,
1964, appears on p. 256. Also, see Exhibit 12, p. 312.)
The CHAIRMAN. Prior to approval of the IRS-Baird Foundations
closing agreements, did the IRS have knowledge of the Lansall Com-
pany-Baird Foundations disposal agreement of December 31, 1962?
Mr. HARDING. My recollection is that we did not have information
on it at that time, Mr. Chairman.
The CHAIRMAN. Are the closing agreements betweeen the IRS and
the Baird Foundations final and conclusive except upon a showing of
fraud or misrepresentation of a material fact?
Mr. HARDING. I believe, Mr. Chairman, that was one of the residual
questions from one of our prior sessions we were supplying for the
record.
The CHAIRMAN. We would like to have an answer to that. Are the
closing agreements between the IRS and the Baird Foundations final
and conclusive except upon a showing of fraud or misrepresentation
of a material fact? It occurs to me you would be in position to answer
that.
Mr. HARDING. I think, Mr. Chairman, that the answer to that ques-
tion would be that the closing agreement would not be valid if the
terms of that agreement were not compiled with by the Foundation.
The CHAIRMAN. Has the statute of limitations expired on tax assess-
ment and collection on the IRS-Baird Foundations agreement?
Mr. HARDING. The agreements holds those years open, Mr. Chair-
man.
The CHAIRMAN I did not hear that.
Mr. HARDING. The closing agreement holds the years open.
The CHAIRMAN. Holds the years open
Mr. HARDING. By agreements with the taxpayer, yes.
The CHAIRMAN. And they will not expire.
MT. HARDING. That is correct, sir.
The CHAIRMAN. All the years, all the years beginning 1951?
Mr. HARDING. All the years covered in the agreement.
The CHAIRMAN. From 1951 on?
Mr. HARDING. That is not my recollection, Mr. Chairman.
The CHAIRMAN. What years did it cover?
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TAX-EXEMPT FOUNDATIONS: IMPACT ON SMALL BUSINESS 255
Mr. HARDING. I think we will have to supply that for the record to
be precise, Mr. Chairman. As I recall it is '53 or '54 was the beginning
year covered by the agreement.
The CHAIRMAN. And all the years since that time the statute of lim-
itations is waived.
Mr. HARDING. This is according to my recollection of the circum-
stances.
(Following is the information submitted by the IRS, under date of
October 12, 1961. Also, see Exhibit 12, p. 312.)
The Closing Agreements of November, 1902, approved by the Com-
missioner January 15, 1963, covered the years 1951 through 1959 for the
three foundations: Winfield Baird; David, Josephine and Winfield
Baird; and Lansing.
The CHAIRMAN. Regarding the Baird Foundations, has the IRS
asked for waivers to December 31, 1967?
Mr. HARDING. The years are open, Mr. Chairman.
The CHAIRMAN. They are open so it would not be necessary to have
a waiver.
Mr. HARDING. It would not be necessary to ask waivers.
The CHAIRMAN. The agreement, you state, includes a statement to
the effect that the statute of limitations will not run and, therefore,
you say it is unnecessary to have a waiver to December 31, 1967.
Mr. HARDING. Well, of course, there is no problem about the last 3
years, and you are talking now about return years that are 2 years
ahead of us.
The CHAIRMAN. Earlier than that, yes, sir.
Mr. HARDING. Yes, Sir. So we will keep all years open?either un-
der the agreement or by waiver.
The CHAIRMAN. Is donation of subordinated notes considered char-
itable giving by the IRS?
Mr. HARDING. It Could be, Mr. Chairman.
The CHAIRMAN. In view of the fact that the Baird Foundations
invested $5,333,000 in the Lansall Corporation and, after holding the
stock for 10 years, sold it to allied persons at no profit, would you place
this in the realm of prudent investments?
Mr. HARDING. I think this is a matter for us to look into, Mr.
Chairman.
(The information submitted by the IRS, under date of October 12,
1961, appears on p. 256. Also see Exhibit 12, P. 312.)
The CHAIRMAN. Based on these facts, would you agree that Mr.
David G. Baird retains control and use of the assets transferred to
both the Lansall Corporation and the Lansall Company through the
50 percent interest in Lansall Company stock which is in the name
of Mr. Joseph Patrick, a general partner of Baird and Company, and
the two and a half percent of the Lansall Company stock still retained
by the Winfield Baird Foundation?
Mr. HARDING. The answer to that question, Mr. Chairman, might
relate to the propriety of the tax exemption of the Baird Foundation,
and I would respectfully avoid answering at this time in view of the
pending investigation.
(The information submitted by the IRS, under date of October 12,
1964, appears on p. 256. Also, see Exhibit 12, p. 312.)
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256 TAX-EXEMPT FOUNDATIONS: LIVIPACT ON SMALL BUSINESS
The CHAIRMAN. It seems to me that here we have a situation where
the Baird Foundations have failed to fulfill the obligations of tax
exempt organizations over a period of many years. So, as a reward
for such antics, the IRS permits them to donate $5,333,000 sub-
ordinated promissory notes as a method of fulfilling responsibilities.
Do you approve of this?
Mr. HARDING. We did not permit this transaction, Mr. Chair-
man, and we are, as I indicated, going to consider it in connection with
the Baird case.
(Following is the information submitted by the IRS, under date of
October 12, 1961. Also, see Exhibit 12, p. 312.)
In light of the procedural rules for dealing with issues raised in the
audit of returns, including rights of appeal available to taxpayers in
such cases, I am sure you will agree that it would be inappropriate for
me, as Acting Commissioner, to prejudge the tax consequences of the
various transactions you cite by responding to your questions at this
time. Once the Service audit has been concluded and final decisions
reached, I shall be glad to respond to the extent the disclosure statutes
and good administrative practices permit.
. The CHAIRMAN. Mr. Harding, you are hereby requested to fur-
nish this Subcommittee, by October 12, 1961, a written statement in-
forming us whether the Baird Foundations have thus far complied
with (1) the November, 1962 closing agreement, and, (2) Federal law
and Treasury regulations beginning 1960.
If the Baird Foundations have not complied with the November, 1962
agreement, or if they have not complied with Federal law or Treasury
regulations beginning 1960, you are requested to submit full details of
such violations. Will you undertake to furnish that to us, sir?
Mr. HARDING. Mr. Chairman, I would hope that we could give you
that information by that date. However, we do have the investiga-
tion underway, and I think we ought to conclude it before we supply
the information.
The CHAIRMAN. Do you contemplate finishing the Baird Foun-
dations matter before October 12?
Mr. HARDING. MT. Chairman, I would doubt seriously if that
matter could be concluded by October 12.
The CHAIRMAN How much time do you anticipate will be required?
Mr. HARDING. 1 have not gotten a recent estimate from the peo-
ple in New York on it. I would be happy to get that and see if I
could supply it for the record. Would that be satisfactory sir?
The CHAIRMAN. Yes, that will suffice.
(Following is i he information submitted by the IRS, under date
ofOctober 12, 1961. Also, see Exhibit 12, p. 312.)
The Service audit of returns of these three foundations for the years
1960 through 1963 commenced December 26, 1963. All of their returns
for the years 19:il through 1959 are also open for assessment of tax,
under consents filed. The scope of the audit includes the considera-
tion of all those matters on which you have reported or raised questions.
The Service is, however, unable to fix a date for the completion of
this audit. Aside from the large volume of complex transactions to be
considered, the audit has been delayed by the unavailability of records
maintained by the three foundations. We are advised that these records
were with your Subcommittee until approximately April 29, 1964, and
that they were then subpoenaed by the Securities and Exchange Com-
mission where they have been since on or about July 1, 1964. (Item
No. 7, Attachment A, to your letter.)
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The Life Line Foundation's tax returns
Mr. STEED. Before you go to that, could I ask a question ?
The CnAmmAx. Yes, sir.
Mr. STEED. Mr. Harding, since rather startling statements have
been made by the Chairman in connection with the Baird Foundation's
and since you say that it is currently being investigated by your
Agency, what would be the situation if you found these to be true,
and you issued an order canceling the Foundations' privileges, what
recourse in a situation of that sort would the Baird Foundations have
against you?
Mr. HARDING. Well, they have a recourse, of course, administrative
recourse, Mr. Steed. We always grant people in these circumstances
a hearing on the proposed revocation. In addition to that there. are
ways in which the Foundation can get its case into the courts, and
test our determination.
Mr. STEED. Since rather substantial sums of money are involved it
would probably be safe to assume if you did revoke that attempts would
be made by the Foundation to reduce the controversy to litigation,
if it couuld. Has this sort of thing happened in prior years in cases
of this sort?
. Mr. HARDING. Yes, sir. We have had a number of foundation cases
in court.
Mr. STEED. And what is the general historic outcome of that type
of situation?
Mr. HARDING. My legal counsel informs me that we have been ex-
ceedingly unsuccessful in most of our activities in the courts on foun-
dations and their activities. This is one of the matters which was
covered at some length in some of the earlier hearings. We pointed
out that there were very ()Teat difficulties in the law and the current
status. The Secretary testified that the matter was under study by
the Treasury with a view towards making recommendations to the next
session of Congress on this particular section of the law.
Mr. STEED. Obviously, this foundation problem in its entirety cries
out for some sort of redress and legislative action might be -part of
the answer, and strengthened work on the part of the IRS may be
part of the answer. I certainly hope that we have not drifted along
until we have gotten to a situation where the tail is wagging the dog.
That the power and influence of these foundations enjoying these
privileges will not be such that these reforms will be defeated.
It seems to me that the purpose for foundations is a very worth-
while one, and there are so many of these foundations of all sizes doing
such, so many worthwhile things that the least anyone could want to
do would be to clean up the situation so that legitimate foundations
would no longer be under the cloud that this sort of thing seems to
place on the whole program.
Mr. HARDING. I think we can identify completely with your state-
ment: Mr. Steed. I would like to point out that as Commissioner
Caphn testified, there has been a great intensification of our audit
of these foundations over the last three and a half.
The CHAIRMAN. The Life Line Foundation's tax returns show re-
ceipts from newspaper sales as follows: $52,690.62 (fiscal year ending
September 30, 1960), $71,447.75 (fiscal year ending September 30,
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1961), $118,071.78 (fiscal year ending September 30, 1962), and $109,-
020.62 (fiscal year ending September 30, 1963). According to in-
formation we obtained from the Foundation, the following are among
its newspaper sales during fiscal years ending September 30, 1960,
through September 30, 1963. We assume that the "newspaper sales"
refer to sales of the Life Line newspaper called "Life Lines" which
is published three times weekly.
I shall insert such newspaper sales for the record.
(The insert is as follows:)
Date
Buyer
Amount
Date
Buyer
Amount
Nov. 16, 1959
Hunt Oil Co
$409.00
Apr. 30,1962
HLH Products?Con.
$315. 00
Dec. 21, 1969
do
108.50
May 3,1962
do
998.50
Dec. 23, 1959
do
848.00
May 4, 1962
do
987.00
Jan. 18, 1960
do
1, 310. 00
May 24, 1962
do
78.50
Jan. 25, 1960
do
1,664. 00
June 1, 1962
do
612.00
Feb. 1, 1960
do
30. 00
June 11, 1962
do
447. 93
Feb- 6, 1960
_do
942.00
June 14,1962
do
137.50
Mar. 7,1960
do
195.00
June 19, 1962
do
609. 00
Mar. 8,1960
do
6.00
July 9,1963
do
919. 00
Mar. 24, 1960
do
5, 500. 00
Aug. 13, 1962
do
1, 087. 25
Apr. 16, 1960
_do
184.00
Sept. 18, 1962
do
615.00
Apr. 29,1960
do
10, 000. 00
Nov. 2, 1962
do
2.00
Apr. 30,1960
do
139.00
Nov. 15,1962
do
.50
May 12,1960
do
71.00
Nov. 26,1962
do
8, 170. 00
Nov. 17,1960
-----do
3,787. 00
Dec. 3, 1962
do
391.00
Feb. 20, 1961
_do
5.00
Dec. 14, 1962
do
807. 00
Feb. 20, 1961
do
37.00
San. 24, 1963
do
632.00
Mar. 8,1961
-----do
692,76
Feb. 14, 1963
do
347. 50
May 2,1981
do
6,717. 00
Feb. 25,1963
do
620. 00
May 24,1961
-----do
31.00
Apr. 8,1983
-----do
327.25
Sept. 5, 1961
do
1, 496. 00
Apr. 15,1963
do
88.00
Sept. 5, 1961
do
156.00
May 10,1963
do
279.25
Feb. 16, 1962
-----do
3, 070. 00
June 13,1963
do
18.50
Mar. 2, 1962
_do
938.00
July 12, 1963
do
183.00
Mar. 12, 1962
do
039.80
Aug. 12, 1963
do
531.00
Tune 1, 1962
_do
492. 00
Sept. 23, 1963
do
530.00
Tune 25, 1962
do
504.00
36, 651. 08
Aug. 13,1962
do
490.00
Total
Sept. 8,1962
-----do
490.00
850.00
Nov. 26, 1962
do
990.00
Feb. 15, 1961
11. L. Hunt
Tan. 24, 1963
do
483. 00
Feb. 16, 1962
2,335. 00
Feb. 14, 1963
do
480. 00
Feb. 26, 1962
HIM Parade
Max. 2,1962
do
1, 683.00
42,793. 11
Total
do
154.50
Mar. 12,1960
11LH Products
39.00
Total
4, 172.00
f une 27,1960
do__
6, 500. 00
Mar. 12, 1962
.00mm0000moo
viotisiode4cSoi
umoo,t
',nom co mn
Mar. 14, 1961
do
3, 033. 00
Nov. 14, 1962
Hassle Hunt Trust
May 4, 1961
do
536.00
Dec. 14, 1962
do
May 24, 1961
do
64.00
:fan. 25, 1963
do
May 24,1961
do
953.00
Feb. 14,1963
do
May 24, 1961
do
14.00
Feb. 26, 1963
do
fuly 13,1981
do
1, 088. 00
Apr. 8, 1963
do
Dot. 16, 1961
_do
340.00
Aug. 12,1963
do
Da. 16, 1961
do
100.00
Sept. 16,1983
do
Dot. 5, 1961
do
2, 444. 00
do
Mar. 12, 1962
do
1, 403.00
Mar. 23, 1962
__
do
452.40
Total
9,039. 51
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Additionally, we find that substantial amounts of books sales were
made to numerous business firms. Following is a sampling of a few
such purchases:
Date
Purchaser of books
Amount
Date
Purchaser of books
Amount
Feb. 9, 1959
Baroil Well Logging
$1, 000. 00
Dec. 19,1958
Hunt Oil Co.?Con.
$270.00
Service.
July 3, 1959
do
307.60
July 15, 1969
Black, Sivalls, & Bry-
1, 226. 40
Jan. 28, 1959
Jett Drilling Co
500. OC
son, Inc.
Feb. 12, 1959
Magnet Coro Barium
1, 000. OC
Jan. 28, 1959
Brewster Co
500.00
Corp.
Jan. 15, 1959
Continental-Emcee
5, 000. 00
Nov. 17, 1958
T. E. Mercer Trucking
1,000. 00
Dec. 23,1958
First National Bank of
5, 190. 00
Co.
Dallas.
Jan. 15, 1959
National Supply Co
2, 000. 00
Jan. 6, 1959
First National Bank of
500.00
Jan. 20, 1959
Oil Well Supply Co
500, 00
Shreveport.
Oct. 10, 1958
Penrod Drilling Co
1, 500. 00
Feb. 2, 1959
Halliburton Oil Well
250.00
Dec. 5, 1958
Placid Oil Co
1, 480. 00
Cementing Co.
Dec. 31, 1958
do
3, 320. 00
July 27, 1969
Hotel Adolphus
600. 00
Dec. 12, 1958
Querbes & Bourquin_ ___
500.00
Dec. 4, 1958
Hunt Oil Co
4,069. 00
Feb. 6, 1959
Reed Roller Bit Co
500.00
Dec. 8, 1958
do
5, 400. 00
Dec. 31, 1958
Stewart Office Supply
150. 0
Dec. 10, 1958
do
400. 00
Co.
Dec. 12, 1958
do
3,920. 00
Jan. 5, 1959
Tri-State Oil Tool Co_ __
609.00
Dec. 15, 1958
do
200.00
San. 28, 1959
United Engines, Inc
000.00
So hero we have substantial sums of money being spent by business
firms for purchases of the newspaper "Life Lines" and for purchases
of Life Line Foundation's books. For example' based on the afore-
mentioned purchases only, we know that the Hunt Oil Company spent
at least $42,793.11 for the purchase of the newspaper "Life Lines"
and $14,557.60 for purchases of the Life Line Foundation's books;
HLH Products spent $36,651.08 for purchases of the newspaper "Life
Lines"; HLH Parade spent $4,172.50 for purchases of the newspaper
"Life Lines"; Continental-Emsco spent $5,000 for purchases of the
Life Line Foundation's books; The First National Bank of Dallas
spent $5,190 for purchases of the Life Line Foundation's books; Na-
tional Supply Company spent $2,000 for purchases of the Life Line
Foundation's books; and Placid Oil Co. spent $4,800 for purchases
of the Life Line Foundation's books.
Would the IRS permit the purchaser to deduct as business expenses
such purchases of the newspaper "Life Lines" and Life Line Founda-
tion's books?
Mr. HARDING. Could I ask Mr. Rogovin to respond to that question,
Mr. Chairman?
The CHAIRMAN. Yes, sir.
Mr. RoGovng. Mr. Chairman, the question of the deductibility of
such expenses by the corporation is governed by Section 162 of the
Revenue Code. With respect to advertising, and more particularly
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260 TAX-EXEMPT FOUNDATIONS: IMPACT ON SMALL BUSINESS
the type of ideological advertising that this may represent, deduc-
tions for the costs of advertising are generally governed by regulation
section 1.162-15(c) (1). That section, after denying deductions for
expenditures for lobbying, for the promotion or defeat of legislation,
and for political campaign purposes (including advertising) related
to any of the foregoing, provides: "On the other hand, expenditures for
institutional or 'good will' advertising which keeps the taxpayer's
name before the public are generally deductible, as ordinary and neces-
sary business expenses, provided the expenditures are related to the
patronage the taxpayer might reasonably expect in the future * *.
In like fashion, expenditures for advertising which present views on
economic, financial, social or other subjects of a general nature but
which do not involve any of the activities specified in the first sentence
of this subparagraph [referring then to lobbying, promotion, or de-
feat of legislation, or political campaigns:] are deductible if they
otherwise meet the requirements of-the regulations under section 1e."
Thus, if the purchase of advertising or the purchase of the news-
papers or books referred to was used in an advertising sense we would
have to apply the test of our regulations. If, on the other hand, these
materials were merely distributed to the employee of the corporate
purchaser, we would then have to see if this served any ordinary and
necessary business purpose.
There was a case some years back where the corporate purchasing
of magazines for distribution to employees was considered not to be
a business purpose and the deduction denied. This is highly factual
question, Mr. Chairman, and would have to be resolved with respect
to the facts relating to each one of these purchasers, and the use they
put the material.
The CHAIRMAN. Since this has gone on over a long period of time,
it occurs to me that you must have been called upon to make a de-
cision on some of these contributions for purchases of subscriptions.
You mean to say you have not been called upon to decide a single
one of these I-Tunt eases?
Mr. Rociovng. I am not aware of a. Hunt case. I am aware of
situations, however, where we have disallowed purchases of magazines
of an ideological nature for distribution.
The CHAIRMAN. Would you check this out and when you look over
your transcript of testimony, state whether or not you have allowed
any of these to be deducted or if any of them have been refused.
Mr. HARDING. You are referring to an examination of the purchaser
here rather than examination of the foundation.
Tie CH ATRMA N. That is right, yes sir.
Mr. H G
ARDIN. Yes, sir; we would be happy to do that.
(Following is the information submitted by the IRS, under date
of October 2, 1964.)
Our field offices have disallowed portions of deductions claimed on
the basis of failure of certain of these companies prove such purchases
constitute ordinary and necessary business expenses.
The CH AIRMAN. With respect to the tax returns filed by the Life
Line Foundation for fiscal years ending September 30, 1951 through
fiscal year ending September 30, 1963, what years are still open for
assessment?
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Mr. HARDING. '61 through '63? I think they will all be open, Mr.
Chairman.
The CHAIRMAN. From September 30, 1951 through September 30,
1963.
MT. HARDING. Yes, sir, We Will supply -for the record the years
that are open, either under the statute or by agreement with the tax-
payer from 1951?
The CHAIRMAN. From September 30, 1951.
- Mr. HARDING. Well of course they are open since 1961.
(Following is the information submitted by the IRS, under date
of October 2, 1964.)
Returns filed for the fiscal years ending in 1961, 1962, mid 1963, are
open for assessment.
The CHAIRMAN. On September 1, 1964, I asked you to submit for
the record a copy of the IRS letter or memorandum to the FCC relat-
ing to "non-commercial stations and political 'broadcasts." Do you
now have that copy to submit, Mr. Harding?
Mr. HARDING. No, sir. We do not have it yet.
The CHAIRMAN. Well, when are you going to furnish that copy?
Mr. HARDING. We understood we would furnish it with the tran-
script coming back, Mr. Chairman.
The CHAIRMAN. With the transcript coming back.
. Mr. HARDING. Yes, sir.
The CHAIRMAN. And you will have it in the record at that time.
Mr. HARDING. Yes, sir, We Will have it in the record.
The 'CHAIRMAN. And you will submit it.
(Following is the information submitted by the IRS, under date
of September 22, 1964.)
U.S. TREASURY DEPARTMENT,
INTERNAL REVENUE SERVICE,
Washington, D.C., June 14, 1962.
Reference 8900.
HOD. NEWTON N. MINOW,
Chairman, Federal Communications Commission,
Washington, D.C.
DEAR Ma. Mutow : In your letter of April 23, 1962, you asked for an opinion
on the applicability of certain provisions of the Income Tax Regulations- to ac-
tivities of noncommercial broadcasting stations. You state that you have been
conducting 'a public inquiry into the local programming of Chicago television
stations, and that the noncommercial educational television 'station WTTIV has
informed you it has a policy of not carrying any political 'broadcasts. This
policy is 'stated to have been adopted not only because the Board of Trustees
considered that an educational station should not become involved in urging
any form of particular political action, but also because the Trustees found it
necessary to follow this policy under Treasury regulations providing tax exemp-
tion for "corporations organized and operated exclusively for educational pur-
poses no substantial part of the activities of which is carrying 'On propaganda
or otherwise 'attempting to influence legislation, and which does not participate
in or intervene in (including the publishing or distributing of statements), any
political campaign on 'behalf of any candidate for public office."
You have explained that the Federal Communications Commission has taken
the position that the carrying of political broadcasts is one of the major elements
usually necessary to meet the public interest, needs, and desires of 'the com-
munity in which a station is located. You point out that in the case of Farmers
Educational d Cooperative Union of America, North Dakota Division, v. WDAY,
Inc., 360 U.S. 525, the Supreme Court has recognized that the carrying of political
broadcasts is 'a public service criterion to be considered both in license renewal
proceedings, and in comparative contests for a radio or television construction
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262 TAX-EXEMPT FOUNDATIONS: IMPACT ON SMALL BUSINESS
permit. You also advised us that Section 315 of the Communications Act re-
quires a broadcasting station which makes its facilities available to legally
qualified candidates for political office to afford equal opportunities to all such
candidates for that office. Similarly, when a station carries programs dealing
with controversial issues of public importance, it has an obligation to be fair
and to afford reasonable opportunity for the presentation of conflicting views.
First, let me explain that the quoted portion in your letter relative to educa-
tional organizations is a part of the statutory language of section 501(c) (3) of
the Internal Revenue Code. The Income Tax Regulations (26 CFR 1.501) ap-
plicable to section 501(c) (3) were published as Treasury Decision 6391 in
Cumulative Bulletin 1959-2, beginning at page 139. As defined in the regula-
tions, the term "educational" relates to: (a) the instruction or training of the
individual for the purpose of improving his capabilities; or (b) the instruction
of the public on subjects useful to the individual and beneficial to the community.
The regulations further state that an organization may be educational even
though it advocates a particular position or viewpoint so long as it presents a
sufficiently full and fair exposition of the pertinent facts as to permit an indi-
vidual or the public to form an independent opinion or conclusion. On the
other hand, an organization is not educational if its principal function is the
mere presentation of unsupported opinion.
The explicit statutory limitation on legislative activity by charitable, educa-
tional and other organizations described in section 501(c) (3), was first included
in the Revenue Act of 1934. However, the 1954 Code added the further restric-
tion; "* * and which does not participate in, or intervene in (including the
publishing or distribution of statements), any political campaign on behalf of
any candidate for public office." To qualify for exemption under the provisions
of section 501(c) (3) of the Code, an organization must establish that it is exclu,-
sively organized and operated for one or more of the purposes specified in that
section of the law. Under the statute and the regulations, political activities
may result in the failure to qualify for, or loss of, tax exemption. This may
occur in three ways: First, political purposes may appear in the articles of
organization, thus disqualifying it as not being "organized exclusively" for the
requisite charitable, educational, or other exempt purpose. Secondly, an or-
ganization which actually engages in political activities (other than participation
or intervention in political campaigns in behalf of candidates for office), may not
be exempt because "substantially" all of its activities are not for an exempt
purpose or purposes (the regulations provide that an organization will not be
regarded as "operated exclusively" for one or more exempt purposes if "* * *
more than an insubstantial part of its activities is not in furtherance of an
exempt purpose") and thirdly, an organization may not be exempt because it
participates or intervenes, directly or indirectly, in a political campaign on
behalf of a candidate for public office.
As I stated above, section 501(c) (3) of the 1954 Code now expressly precludes
tax exemption in cases where an organization participates or intervenes in
political campaigns, without reference to the concept of substantiality. Section
1.501(c) (3)-1(c) (3) of the regulations in referring to these proscribed activities
provides that:
"An organization is an 'action' organization [and precluded from exemption]
if it participates or intervenes, directly or indirectly, in any political campaign
on behalf of or in opposition to any candidate for public office. The term 'candi-
date for public office' means an individual who offers himself, or is proposed by,
others, as a contestant for an elective public office, whether such office be na-
tional, State, or local. Activities which constitute participation or intervention
in a political campaign on behalf of or in opposition to a candidate include, but
are not limited to, the publication or distribution of written or printed state-
ments or the making of oral statements on behalf of or in opposition to such a
candidate."
To summarize, insubstantial legislative or political activities, other than
participation in or intervention in political campaigns on behalf of candidates for
public office, will not disqualify an educational organization such as an educa-
tional broadcasting station, from tax exemption, provided it otherwise meets the
exemption requirements of section 501(c) (3) of the Code. Further, the applica-
tion a section 501(c) (3) and the Income Tax Regulations thereunder does not
preclude a tax-exempt educational television station from presenting broadcasts
on political matters or political campaigns, if the broadcasts are nonpartisan, the
station is able to show that these programs were undertaken entirely in the
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public interest, and the station itself is not participating or intervening in a
political campaign on behalf of a candidate for public office. The mere fact that
such station affords equal opportunities to opposing views would not of itself
be sufficient to establish as a fact that the station is not so intervening or par-
ticipating, but would, of course, be pertinent to any such consideration. Thus,
the station would have to be prepared to establish factually that it does not
urge, advocate, or otherwise endorse the views presented.
Whether, and the extent to which, a particular program or activity falls
within the statutory proscriptions against legislative and political activities is
essentially one of fact to be determined on a case-by-case basis in the light of
the facts and circumstances presented. You will appreciate, I am sure, the com-
plexities and difficulties inherent in determining whether political activities of
this type are conducted in a nonpartisan manner. Similarly, where opposing
candidates for public office are being presented by the station for the educa-
tion of their viewers, the fact that equal time is granted to all legally qualified
candidates for a particular political office will not in itself usually be sufficient to
overcome these difficulties.
I have followed with a great deal of interest, the newspaper reports of the
new legislation which now makes possible Federal subsidies for educational
broadcasting. If you believe that Internal Revenue personnel can be of as-
sistance to you by meeting with members of your staff to discuss provisions
of the Internal Revenue Code which may affect educational broadcasting in
the public interest, please feel free to call upon us.
Sincerely yours,
(Signed) HAROLD T. SWARTZ,
Assistaat Commissioner.
Mr. STEED. Mr. Harding, I think I know a little bit about the oil
industry and some of the people who participate in it. Are you in
position to tell me how a drilling contractor could expect to enhance
his business opportunities by buying and circulating a lot of po-
litical blurb like this?
Mr. HARDING. Well, sir, as Mr. Rogovin tried to say, this is a
factual question which we have to look at in connection with the
activity of that particular taxpayer. Now, off the top of my hat I
would see two possibilities. One would Le a distribution among
employees, depending upon the size of his organization, and the
other would be distribution to customers of what we call "institutional
advertising."
Now this is without making any judgments on the nature of the
material which is being distributed.
Mr. STEED. Many drilling contractors, the only business they get is
by competitive bidding with some company wanting a well drilled.
How could the giving somebody a bunch of books help a man get some
business on a competitive bid?
Mr. HARDING. Mr. Steed, I have trouble answering your question,
sir. I do not know the answer.
Mr. STEED. Looking over this list, I am willing to concede that there
may be some firms here that might build some good will by dis-
tributing things of this sort. But then there are some others here, I
just cannot for the life of me see how they would expect to improve
their business opportunities with this sort of an operation, and if
they did get a tax deduction on this as a lousiness expense, it would
seem to me that the IRS is being a little more lenient with this kind
of taxpayer than with some others I know about.
Mr. HARDING. Well, let me also point out, Mr. Steed, that we have
i
a very limited audit of income tax returns n terms of total number
filed. Of those that we do examine, particularly corporations we
have to look at the major elements in their financial activities. Now
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264 TAX-EXEMPT FOUNDATIONS: IMPACT ON SMALL BUSINESS
whereas these items look large to you and to me, they may very well
be buried in a much larger advertising account. For example, with-
out a complete examination of that account by the agent, it might not
even come to his notice that there had been $1,000 or more involved in
the purchase of books from Life Line. So some of this undoubtedly
oversight on our part. Some of it may be our inability to determine
the proper deductibility of the borderline item in an examination of
the books.
Mr. STEED. I would assume that some of these companies listed here,
especially the Hunt Oil Company, and associated agencies, would
have come to the attention of the IRS in some of these years in a rather
detailed way.
Mr. HAnnixo. This is a question of what you mean by detail, Mr.
Steed. I am confident that many of these companies have been
examined over recent years.
Mr. STEED. I c,an assure you there are some oilmen in my State and
district who have come under very detailed scrutiny of the IRS, and
if the same careful attention is applied to some of these firms here
that have been to some taxpayers I know, I am sure all these details
would have been very clearly brought out.
I do not know how you could have a $10,000 book purchase item
of an oil company in one transaction and not have to show some indica-
tion of it in an incoine tax return.
Mr. HARDING. Well, sir, I agree with you when you look at these
particular items. For example, in some of our earlier hearings we
discussed a list of travel items from one of the foundation's travel
accounts. In a large corporation examination whereas we do typically
examine a travel account, we cannot with great precision validate each
and every trip that is taken.
Similarly in many cases their advertising account, although looking
big when totaled in this fashion, is, perhaps, not so big in terms of the
total activity of the corporation.
Mr. STEED. Is there any element?the fact that Life Line Publica-
tions are themselves produced by a tax-exempt foundation, does that
tax-exempt source of this material have any bearing on whether the
purchaser of that material gets tax exemption on it or just call it a
business exemption?
Mr. HARDING. If this is a purchase, no, sir; there would be no distinc-
tion between a foundation and a private publisher.
Mr. STEED. Could it be possible for someone to make a donation to
the foundation and receive this material in return, and for the transac-
tion to be filed in that way?
Mr. HARDING. It could be improperly reported on their books, yes,
sir, as a purchase rather than a donation.
The CHAIRMAN. Talking about donations to foundations, don't you
know of instances where individuals have made contributions or dona-
tions to foundations for the purpose of getting special benefits of dif-
ferent kinds? I shall be more specific by giving this illustration.
Don't you know of instances where a person controlling a foundation
as made contribin ions to a college for the purpose of getting a scholar-
ship for his son or a relative? Do you lmow of instances like that?
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Mr. HARDING. I think we previously discussed a somewhat similar
instance, Mr. Chairman, where the foundation paid the tuition of the
son of the creator.
The CHAIRMAN. That is right. We did. But don't you know of
instances where it has been sort of a turnkey job?
Mr. HARDING. I understand that there have been such circumstances,
yes, Mr. Chairman.
The CHAIRMAN. Mr. Steed.
Mr. STEED. Mr. Harding, would there be any way for your depart-
ment to find out, for instance, if the Reed Roller Bit Company made
sizable purchases of these items listed here, whether that would, give
them any advantage in selling their drilling bits to some of these oil
companies that seem to be so intensely interested in this particular
operation?
Mr. HARDING. It sounds like a little sophisticated item for a revenue
agent to Nover, Mr. Steed. I think our interest would be limited to
whether or not this was a bona fide business expense on the part of the
corporation. I grant you this inference, that there might have been
an ulterior motive behind the transaction. But I think our authority
would stop at the point that we determine that here either was or was
not a bona fide business expense connected with it.
Mr. STEED. If you found out or could prove that the controllers of
the foundation and the publishers of these documents did a lot of busi-
ness with some of these heavier contributors here, would that cause
you to be suspicious?
Mr. HARDING. Yes sir; it might.
The CHAIRMAN. Mr. Roosevelt.
Mr. ROOSVELT. Could I just ask, it intrigues me to know: In the
case of, for instance, a donation from, let us say, the Hunt Oil Co., of
$42,793.11, presumably for the purchase of newspapers, Life Lines--
is this in the form of control of the newspaper or in the form of indi-
vidual subscriptions, and, if so, what does Internal Revenue do to
find out what the oil company does with it?
Mr. IIARDING. We discussed at some length Mr. Roosevelt, the fact
that this is a factual question in the examination of the oil company
to determine whether or not the purchase of these publications and
their use by the corporation constituted a bona fide business purpose,
either of institutional advertising or some internal employee di stri
bution or something of this sort. This is our
Mr. ROOSEVELT. How could it be institutional advertising?
Mr. HARDING. I guess, Mr. Roosevelt, somewhat like passing out
matchboxes.
? Mr. ROOSEVELT. Yes, but I am advertising myself if T hand out
m atchboxes.
Mr. HARDING. Compliments of the purchaser, Mr. Roosevelt.
Mr. ROOSEVELT. Just compliments of the oil company?
Mr. HARDING. Yes, sir.
Mr. ROOSEVELT. And you would allow that as?
Mr. HARDING. I am not saying we would allow that, Mr. Roosevelt.
All I am saying is we were speculating on what might have been 11 i.
purported business purpose of these purchases.
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Mr. RoosEvniT. What I am trying to get at is what is the standard
which Internal Revenue will set for this kind of business expense?
Presumably you might say to me, "Well, this is a matter that the field
man wasn't competent to pass on."
But certainly somebody has to pass on it, and he must pass on it
upon the basis of some kind of criteria.
What would be the criteria that would be used?
Mr. HARDING. Maybe, perhaps, Mr. Rogovin could briefly sum-
marize his comments along this line just before you came in.
Mr. ROGOVIN. Mr. Roosevelt, one of the problems is that we have to
make a judgment, in terms of the statute, whether expenditures are
ordinary and necessary business expenses in relation to the particular
corporation and the use it puts such material.
In a related area--we contested the deductibility of expenditures
for advertisements in a political convention journal, some years back,
in 1957. We raised the question as to why a coal compery would
advertise in a national political convention journal. The matter went
to the Tax Court. The Court was very reluctant to question the busi-
ness judgment of the corporation and indicated that it was a deductible
form of advertising, even though it recognized the money went to the
political party and was used to defray political expenses. The Court
maintained the position that it wasn't going to second-guess a business
judgment. If a man is getting a dollar's worth of advertising for the
dollar he spends, that was sufficient for the Court. This setback was
accepted by the Revenue Service in 1958, and what we attempt to do
in these cases is to look with objective standards at the particular facts
of the case. I think that the case we are speculating on now, is per-
haps one that might well cause a disallowance. Where a magazine
or newspaper is being handed out to prospective purchasers or em-
ployees of the corporation, where it serves no business purpose, and
where it is material of a highly inflammatory nature, with the only
institutional advertising aspect a little box at the bottom "with the
compliments of the corporation," this may well lead to a disallowance
of that particular item, the deduction of that item.
Mr. ROOSEVELT. Do you tell us that you will test this?
Mr. ROGOVIN. Well, one of the difficulties is when the agent goes in
and looks at the books and records of the corporation, a $1,500, $10,000
item amono.b literally millions of dollars, just doesn't stand out.
A lot of these things are buried, and when we find them we raise
them. But finding them is very difficult.
We had an experience where we found purchases of the John Birch
Society magazine, American Opinion, by an oil company, and the pur-
chase was hidden in crude oil purchases.
Mr. ROOSEVELT. That would make you somewhat suspicious, wouldn't
it?
Mr. ROGOVIN. We tended to be * " I agree.
Mr. HARDING. And also difficult to locate.
Mr. ROGOVIN. This was a test, in which we traced it back from the
seller. We knew they had subscribed and knew they had made the
purchase, and wanted to find out where it showed up. It didn't show
up in any institutional advertising account, but in a crude oil account.
Mr. ROOSEVELT. Here it is quite open, there is no attempt to hide it.
It is quite open. This is a purchase.
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Mr. HARDING. These records, Mr. Roosevelt, COMO from the founda-
tion's side, not the corporations' sides. We do not know how this is
reflected in the corporate records.
Mr. ROOSEVELT. You are going to look into it?
Mr. HARDING. Yes, sir; we will look into these matters of exemption
of these purchases.
Mr. ROOSEVELT. I think that answers my question. Thank you, Mr.
Chairman.
The CHAIR1VIAN I would like to ask you about the Kaplan Fund,
Mr. Harding.
During our hearing of August 10, I asked you the following ques-
tion: Does the fact that Mr. Moe overrode the prior recommenda-
tions of the District Director in 1960 mean that the National Office of
the IRS cannot do anything about any tax liability that may exist
for the J. M. Kaplan Fund for the years 1952 through 1956? In
other words, does the statute of limitations kill any possibility for
assessing taxes for these years?
You stated that you did not know the answer to that question but
that you would submit it for the record on August 31. On the latter
date you advised us that the answer would be forthcoming very soon.
By letter of September 1, 1961 you submitted the following answer
to that question:
With regard to the J. M. Kaplan Fund, Inc. of New York, N.Y., the
statute of limitations has expired on returns filed by the Fund for the
years 1954, 1955, 1956 and 1957 pursuant to the provisions of section
6501(g) (2) of the Internal Revenue Code of 1954. There was, however,
no provision corresponding to section 0501(g) (2) in the prior Code and
it has been held that the filing of an information return for years prior
to 1954 by an organization believing itself to be exempt did not start
the running of the statute of limitations. Thus, returns filed by the
Kaplan Fund for the years 1952 and, 1953 would still be open for
assessment.
Returns for the years 1958, 1959, and 1960 are those presently under
audit, and they are open for assessment to June 30, 1965 under consents
extending the statute of limitations filed by the Fund. Returns for the
years 1961, 1962 and 196,3 are, of course, open under the normal three
year period of limitations to May 15, 1965, 1966 and 1967, respectively.
So you are now telling us that the statute of limitations has expired
on the tax returns filed by the Fund for the years 1954 through 1957?
How do you explain the fact that the statute of limitations was al-
lowed to expire for these years? These were part of the years that
were under so-called "intensive Investigation" by the IRS and for
which Messrs. Donald R. Moysey and Raphael Meisels, former Dis-
trict Directors of Lower Manhattan, recommended revocation of the
Fund's tax exemption.
How do you answer that, Mr. Harding?
Mr. HARDING. Mr. Chairman, the latter year, 1957, expired, of
course, in 1961. The reexamination, the intensive reexamination, of
this Fund, as we have testified, was subsequent to that date.
There was no reason, known to us in 1960, that those years should
have been held open.
The CHAIRMAN The recommendation for revocation of the tax
exemption by the District Director in 1957, did it state that it had
been under an intense investigation for a number of years or over a
long period of time?
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Mr. HARDING. Yes, sir. These years were, of course, open at that
time. But in 1960 the case was resolved, and the exemption was ex-
tended. There was, therefore, no apparent reason at that time for
keeping open those years through 1957.
The CHAIRMAN. That does not seem just a complete answer to me,
Mr. Harding. I cannot understand why they let that expire. You
knew it was going to expire. Why didn't you do something about it?
Mr. HARDING. Well, sir, in 1960 the case presumably was resolved.
This would have been the year to have sought an extension for the
year 1957. 1954, 1955, 1956 would have ftm.
The CHAIRMAN. I want to ask one other question. Are you saying
that the failure of the IRS to obtain an extension of the statute of
limitations was just an oversight on the part of the Revenue Service?
Mr. HARDING. No, sir; I am not saying that.
I am saying that in retrospect, in view of the material which has
been brought to our attention, it might have been desirable at that
time to have held those years open. But in terms of the status of the
case in 1960, I cannot question the judgment of the District Director
in allowing those years to expire after he had resolved the case, after
consultation with the national office.
Mr. STEED. As I understand it then, the third director involved in
Lower Manhattan, after consultation with the national office, reached
a determination that Kaplan was in compliance and, therefore, were
not going to revoke their tax exemption status.
Mr. }LIMING. Yes, sir; that is part of the record.
Mr. STEED. And due to that decision that covered these years.
Mr. HARDING. --they were allowed to run.
Mr. STEED. And the statute ran.
Mr. ROOSEVELT. I think we ought to go back on the record a little
bit, because the impression of some of us was, perhaps, erroneous, but
think we ought to check the record. I think, you previously testified
or our impression is that you previously testified, that all of these
years were presently under intensive investigation.
Mr. HARDING. If I so testified, Mr. Roosetelt
Mr. ROOSEVELT. Tf so the record ought to be corrected.
Mr. HARDING (continuing). I would certainly correct the record.
It was not my intention to so testify because, as I did testify, I did
not know at that time which years were open, and we made this deter-
mination and supplied this letter for the record.
I do not believe that in the context I could have testified to that,
but I may have misspoken Myself. If so, I apologize to the Commit-
tee.
Mr. ROOSEVELT. Thank you.
The CHAIRMAN. Have you finished? There was a possible tax
liability of substantial amounts for the years 1954 through 1957.
Wouldn't good judgment dictate that an extension of the statute of
limitations should be obtained for those years, Mr. Harding?
Mr. HARDING. I think I have answered that question, Mr. Chair-
man.
During our hearing of August 10, I pointed out the following
to you:
Mr. Donald R. Moysey, District Director of Lower Manhattan, rec-
ommended that the Fund's tax exemption be revoked retroactively. We
also know that, by letter of January 7, 1958, Mr. Raphael Meisels, sue-
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cessor to Mr. Moysey, upheld the latter's recommendation that the
Fund's tax exemption be revoked "retroactively and progressively."
Then by letter of March 24, 1960, Mr. Kenneth W. Moe, District
Director of the Lower Manhattan District and successor to Mr. Meisels,
overrode the recommendations of the two previous District Directors,
and advised the Kaplan Fund that its tax returns for the years 1952
through 1956 "will be accepted as filed.", and that the Fund "was
exempt from Federal income taxes for such years."
Mr. Moo's letter of March 24,1960 to the Kaplan Fund gives no
indication of why the Fund's tax returns were accepted as filed for
the years 1952 through 1956. You stated that you would supply for
this record the reasons for the IRS decision that the Fund was ex-
empt from Federal income taxes for such years."
On September 1 you stated that the information would be sub-
mitted to us shortly. Have you prepared that information?
MT. HARDING. NO, sir. That, among the other residual items of the
August 10 record, are in process for presentation to your Committee.
Could I make one statement, Mr. Chairman, that will, perhaps,
clarify to some extent some of the misapprehensions about this case?
The procedure which we followed in these cases involves a letter to
the taxpayer proposing the revocation. The taxpayer is afforded, and
I think we would all agree that every taxpayer should be afforded, an
opportunity to present his case back to the Service.
In this particular case, after the initial proposal, the taxpayer pre-
sented his case to the District Director. There had in the interim been
a change in District Directors. The District Director thereafter re-
affirmed his predecessor's finding in the case.
The taxpayer has, however, an additional element in his due process
involving an appeal to the national office by virtue of the fact that
final decision in these matters is within our jurisdiction here.
He made his appeal to the national office, and on the basis of his
appeal to the national office, our so-called technical advice to the then
Third District Director, Mr. Moe, recommended, if he so concurred,
the continuance of the tax exemption of the Foundation. This is the
reason, and this is the process through which we went in the case of
the Kaplan Fund. This is not, as it might appear, three independent
judgments.
Mr. ROOSEVELT. Mr. Harding, there is somewhat of an ambiguity?
Mr. Chairman, if I may?
The CTIAII1MAN. Yes, sir.
Mr. ROOSEVELT (continuing). Ambiguity in that statement, because
you say the taxpayer, in his due process, has an appeal to the national
office.
Mr. HARDIN?. First to the Director, MT. Roosevelt, and then to the
national office.
Mr. ROOSEVELT. Right.
And he took it to the Director first; he was turned down. Then
presumably from your statement he then took an appeal to the na-
tional office.
You then tell us that, unless I misunderstood your words just now,
that what the national office does is only to give technical advice upon
this to the Director, and does that make an independent judgment?
MT. HARDIN?. Our technical advice is very persuasive to OUT District
Directors, Mr. Roosevelt.
(Laughter.)
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Mr. ROOSEVELT. But the thing that intrigues me is, at the same time,
I think I am correct in stating, that the whole matter was then re-
ferred back to the District Office, and then the District Office pre-
sumably reversed itself upon your urging or, if that is the proper
word, upon your technical advice and urging.
Now, this is really then not the same as having the national office
make a clear-cut final appeal decision. It simply means that you put
pressure on the District Office to take your technical advice, and so it
is really the District Office that still does have the final say; is that
correct?
Mr. HARDING. Well, Mr. Rogovin will respond to that.
Mr. ROGOVIN. Mr. Roosevelt, the technical advice that emanates
from Washington is on the technical issue.
When the District Director's revenue agent makes his determina-
tion of a fact, no one in Washington is in any position to quarrel with
it nor do they intend to quarrel with it. It then becomes a question
of whether these facts reach a certain legal conclusion, and so when
the request for technical advice comes to Washington, with the facts
that exist, the Washington office says, "On the basis of these facts we
believe the answer should be thus and so."
Then this goes back as a matter of law, as a technical interpretation
of the existing law. Then it goes back to the District Director, and
within this memorandum of technical--
Mr. ROOSEVELT. is it binding on him or not binding?
Mr. RoGoviN. Well, as far as the law is concerned it is binding on
him. But it points out that we are giving this weight to these facts.
If the facts are not as have been initially indicated, or if there are
additional facts, why then, of course, this particular technical advice
will not be binding and the District Director would be free to say,
"In our judgment the facts do not demonstrate this."
So that the persuasive nature remains as long as it is a technical
or legal issue. But if the facts are found to be different then the Dis-
trict Director is perfectly privileged to make his own judgment.
Mr. ROOSEVELT. Well now, as I understand it, all of this Kaplan
Fund material was then sent back to the District office, and that is what
caused the delay in getting this other information to the Committee; is
that correct?
Mr. HARDING. There is a current investigation of the Kaplan Fund
in New York, and it is under investigation at that point; yes, sir.
Mr. ROOSEVELT. What has caused the delay in getting us the reasons
that are contained in this technical advice?
Mr. HARDING. Most of the delay, Mr. Roosevelt, is that I was on two
weeks' leave.
Mr. ROOSEVELT. It is not because it is in the New York office?
Mr. HARDING. No, sir. We are getting the information from New
York and from our own people here in the technical organization, and
we will supply the answer at the earliest possible date.
With the Chairman's permission, we were granted an extension of
two weeks in order for me to be able to review the material which we
propose to send to the Committee.
Now, since I have been back this week, as you know, I have been
otherwise occupied, and it has been difficult lor me to get over this
material.
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TAX-EXEMPT FOUNDATIONS: IMPACT ON SMALL BUSINESS 271
Mr. ROOSEVELT. I think the thing, the basic thing, that keeps bother-
ing me is that we have a reversal here of a District Office upon so-called
technical advice which you tell us is the result of an appeal by the
Kaplan Fund to the national office.
Now, on the other hand, if I understood Mr. Rogovin correctly, this
would be the normal process anyway. The set of facts would be for-
warded. to the national office, and then you would make in the national
office a determination as to whether the facts as presented justified a
certain specific finding under the law.
Mr. HARDING. That is right.
Mr. ROOSEVELT. So really this is not an appeal by the Kaplan Fund,
is it? Did they file an appeal?
Mr. HARDING. They are allowed to supply a brief based upon the
prior findings by the Director, and the entire record is considered by
the national office in giving its technical advice.
Mr. ROOSEVELT. IS that what took place?
Mr. HARDING. Yes, sir.
Mr. Roosnv-mr. You know as a fact that the Kaplan Fund did file
this brief from the opinion on the set of facts presented by the District
Office?
Mr. HARDING. It is my recollection of the case, Mr. Roosevelt, that
they did file a brief in this case.
Mr. ROOSEVELT. I yield to my friend.
(See pp. 196-197 and Exhibit 12, p. 312 for subsequent response
of Acting Commissioner Harding.)
Mr. STEED. Mr. Harding, in this case Mr. Kaplan had his day in
court before the District Director, and he lost. So he brought it to
the Washington office and presented his case there. Could it be pos-
sible that he was able to present additional or different or better mate-
rials at the level of the national case that did not appear in the case
at the District level?
Mr. HARDING. That is a possibility, yes, Mr. Steed.
Typically in these cases where we go through this revocation pro-
cedure, there are a number of stages involved, a number of briefs sub-
mitted, additional material requested and submitted before the tech-
nical advice is given by the national office.
But the crux of the matter is, I think, rather than the additional
material that might or might not be submitted, is the fact that the
national office has within its organization the particular expertise that
attempts to put these facts up alongside the law and the regulations,
and draw the conclusion from those facts in the light of those regu-
lations.
The CHAIRMAN. I would like to get a question clarified, Mr. Hard-
ing. With respect to the Life Line Foundation, an Examiner
recommended that their tax exemption be revoked, I believe, in Sep-
tember 1962, and this recommendation was affirmed by the Baltimore
District Director in March, I believe, 1963. Is that correct?
MT. HARDING. I do not recall the dates, MT. Chairman, but there was
such a proposal.
The CHAIRMAN Now, you testified yesterday--and I can see logic
and reason supporting what you said?that when you revoke a tax
exemption, the donors are not called upon for taxes. In other words,
the revocation does not affect the people who gave the money.
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Mr. HARDIN (;. Typically.
The CHAIRMAN. The people who gave the money to the founda-
tion will not be taxed because you presume?and I think you are
right?that they were acting in good faith since the foundation had
a tax exemption to show to prospective donors.
For that reason, don't you think that is more of a challenge to the
IRS to be on the alert and make sure that you quickly end a tax exemp-
tion when you are justified in doing so. If you do not revoke quickly
and you allow them to continue in business and to take donations, it
is a great disservice to everybody concerned. Do you agree with that?
Mr. HARDING. I agree, Mr. Chairman.
The CHAIRMAN. Now, this Life Line case looks to me like a pretty
clear ease. I cannot understand, for the life of me, why you would
hesitate on this at all.
Of course, Mr. H. L. Hunt says that this would deny people the
right of getting valuable information on matters of great importance,
on values that they should know about, including spiritual values and
everything else, and they should not be denied this information.
Well?Mr. Hunt is a man of great wealth, and I think he would
be able to struggle along for awhile if he had to furnish this informa-
tion to the people with his own money. He should not object to doing
this if he is the dedicated person that he claims to be and I am not
denying that he is a dedicated person.
If his wealth is as great as has been represented in the press?and
I have not seen any denial from Mr. Hunt on this?it probably runs
to $50 million?$100 million a year. Now, under favorable tax laws,
let us say that, at the end of a year, Mr. Hunt puts $100 million on
a table (even though I cannot conceive of $100 million on a table).
He first reaches out and pushes aside $27.5 million of that money
on which he pays no tax at all. So, that is not hurting him very
much. Then, he takes the remainder, and the deducts move in on it,
including the deductions for his contributions to his foundations. Well,
by the time the deducts get through with it, there is not much left for
Uncle Sam. Uncle Sam doesn't get anything.
That is happening all over the country, of course. In the case of
Mr. Hunt, the foundations that are carrying on his crusades should
not suffer for lack of funds for some time to come?if he is as dedicated
as he claims to be.
Mr. Roosevelt.
(Discussion off the record.)
Mr. ROOSEVELT. I want to go back a minute to this Kaplan thing.
As I understand it, the information on the 1957 return or recommen-
dation came into the national office in 1958, which passed on it in 1960,
is that correct?
Mr. HARDING. Well
Mr. ROOSEVELT. Just prior to the time limitation running out.
Mr. HARDING. You mean when the 1957 return came in would have
been about the time of the expiration of that year; yes, sir.
Mr. ROOSEVELT. No, no. The revocation recommendation or finding
which was appealed, that information came in to the national office in
1958, is that not correct?
Mr. HARDING. Some time subsequent to 1958, I do not know the date,
Mr. Roosevelt, but it would have been after the first denial.
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TAX-EXEMPT FOUNDATIONS : IMPACT ON SMALL BUSINESS 273
Mr. ROOSEVELT. I think it was September of 1958 to be specific.
Now, it was not passed on until some time in 1960, just prior to the
expiration of the statute of limitations; that is correct, is it not?
Mr. HARDING. Yes, sir; that would be right.
Mr. ROOSEVELT. Am I also correct in saying that, if fraud is found
at a later time, the statute of limitations, even though it has run, does
not apply, and you can go back?
Mr. HARDING. I have to ask my lawyers to answer that.
Mr. ROOSEVELT. I alla not a lawyer either; that is why I ask the
question.
Mr. ConEN. That is correct, Sir.
Mr. ROOSEVELT. Thank you.
I would just suggest that, perhaps, if we find fraud we might go
back, even though you have found the statute of limitations to run
in view of what has been presented, and we might make sure there
is not any fraud in those supposedly closed years.
Mr. HARDING. We always attempt to make sure about that.
The CHAIRMAN. The Secretary of the Treasury has testified that it
is the Treasury's duty to be alert to all possible violations of law.
The Secretary also says (1) he does not consider it proper for a
foundation to engage in insider's stock deals, stock price manipula-
tions, short sales, margin trading, speculation in commodity futures,
or to act as an unregulated source of stock market credit, and (2) the
SEC should be alerted to the possibility of a foundation's involvement
in insider deals and stock price manipulations.
Yet, testimony before this Subcommittee indicates the following:
? The IRS does not examine foundations to determine whether they
are violating any Federal securities laws including those relating to
insider's stock deals, stock price manipulations, and unregulated
sources of stock market credit.
? The IRS has not collected any information as to the extent that
foundations are involved in speculation and trading on margin.
? The IRS has not collected any data on the involvement of founda-
tions in corporate proxy fights.
? The IRS does not examine the foundations to determine whether
they are violating any CAB regulations.
? The IRS does not examine foundations to determine whether
their foreign operations may be in conflict with Government policies.
? The IRS does not examine foundations to determine whether
the foundations are channeling income and corpus in a direction that
may hurt competitors and investors.
? The IRS does not examine foundations to determine whether
they are being used as a device for engaging in various trade practice,s
which might be in violation of certain statutes administered by the
Federal Trade Commission or the Antitrust Division.
? Few of the persons in the IRS who examine foundation tax re-
turns would be sufficiently familiar with the antitrust law to know
whether the practices as cited may violate Section 5 of the FTC Act
or the Sherman Act.
? The IRS does not examine foundations to determine whether
there is a conflict of interest between the duties of a foundation's direc-
tors or trustees and their interests as officers, stockholders and em-
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ployees of business corporations whose stock is controlled by the foun-
dation.
Additionally. we have gleaned the following from the testimony:
? The Secretary of the Treasury says that the Treasury does not
know how many tax exempt foundations there are.
? You do not know how many IRS employees are assigned to super-
vising tax exempt foundations.
? The IRS generally leaves it up to the officers of a foundation to
decide what salaries they pay and the expenses they desire to pay.
? You do not know of any cases where compensation of officers,
directors or trustees among the large foundations has been unreason-
able or unjustified. Yet, Ali.. Benson Ford received $15,000 for at-
tending three meetings of the Ford Foundation.
? The IRS does not review a foundation's individual charitable
donations.
? The IRS has no rule of thumb regarding the precentage of in-
come that a foundation must spend for the purpose for which it was
granted tax exemption.
? The IRS does not examine foundations to determine whether con-
tributions are being made to the foundations by persons or organiza-
tions that supply goods or services to companies interlocked with the
foundations.
? The IRS does not know how much money was spent overseas by
U.S. foundations in 1963.
? The IRS does not examine foundations to determine whether they
are making loans overseas that may be contributing to our balance of
payments problems.
This is the most impressive record of do-nothing thatI have seen in
my 36 years in Congress. When it comes to the proper policing of tax
exempt foundations, the IRS appears to be totally impaled in the
quicksands of absolute inertia.
Mr. Roosevelt.
Mr. ROOSEVELT. Mr. Chairman, I have no question. I think, per-
haps, Mr. Harding might like to reply.
The CHAIRMAN Would you like to comment, Mr. Harding?
Mr. HARDING. Very briefly, Mr. Chairman.
In the first place, let me say to you as Mr. Caplin has said to you,
as I have said to you, that we are not exceedingly proud of our record
of the extent to which we have made tax examinations of foundations
in the years gone by.
As you are well aware, sir, we have greatly increased not only the
quantity but the quality of those examinations. Therefore, to the
extent that we can be criticized for past years in our examination or
the lack of our examinations or the quality of our examinations of
tax exempt foundations, I accept as the Acting Commissioner respon-
sibility for that failure.
On the other hand, sir, as regards many of the items, without getting
into any argument as to whether or not your list correctly reflects
the record, the Service cannot plead guilty to failure to enforce FTC
regulations, or CAB regulations, SEC regulations, et cetera, et cetera.
I feel that there has been perhaps, some misconception that the role
of the Revenue Service is that of a general policeman of all activities of
charitable foundations. I state to you, sir, as I have stated numerous
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times during the previous sessions, that we do not see that as our role;
that this is not our responsibility under the law and, therefore, I do not
accept responsibility for those items.
Mr. ROOSEVELT. Mr. Chairman, may I now ask questions?
The CHAIRMAN. Mr. Roosevelt.
Mr. ROOSEVELT. Mr. Harding, on the other hand, with the informa-
tion which Mr. Patman has read into the record, or the statement which
Mr. Patman has read into the record, would you not agree that the
present size of the business of tax exempt foundations justifies more
regulation than the examination you make for tax purposes? In other
words, you have said, in essence, to us that within the concept of the
IRS there is no proper responsibility for the accumulation of this
information or for the interchange of information with other gov-
ernment agencies which would enable the law of the land to be properly
enforced. Does that therefore not lead to the conclusion that either
the statute must instruct the IRS to do these things so that you are
responsible, and thereby pinpoint the responsibility, or take it away
from you altogether so that it is not left in limbo. Perhaps it might
be given to a special division of the Treasury or to some other govern-
mental agency where these responsibilities can be carried out.
I hope you would agree that it is in the public interest that this in-
formation is available. It affects the public interest very greatly,
the fiscal policy of the government and other areas. It would seem
vital that something be done about it if, as you may very properly
say, you refuse responsibility because there is no place where it is
directly handed to you?
Mr. HARDING. Well, Mr. Roosevelt, I think that it would be im-
proper for me to draw a conclusion as to whether or not there should
be a general policeman assigned to charitable foundations. I think
that is a matter for discussion between the executive and the legislative
branch.
Mr. ROOSEVELT. But you have said that you are not the policeman,
period.
Mr. HARDING. I have said, sir, and I think Mr. Caplin has said,
that we do not have responsibility.
I would like to correct, however, a bit of what you said. I did not
say that we would not turn information over to these agencies if it
came to us in the course of a tax examination. I also stated, however,
that we do not make our examinations for the purpose of determining
those violations. We leave that to the enforcement activities of those
other agencies.
Mr. ROOSEVELT. Let me put it this way: A field auditor does not have
the competence under normal circumstances to know whether an SEC
regulation has been violated, does he?
SIr. HARDING. I think I testified that certain of OUT more sophisti-
cated agents would probably recognize some of these violations; yes,
sir.
Mr. ROOSEVELT. Some of these. That is a relatively few of the
total.
Mr. HARDING. Not in great depth.
Mr. ROOSEVELT. And you do not supply sophisticated investigators
on the foundations.
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Mr. HARDING. We a re putting sophisticated ones into certain areas
of the country.
Mr. ROOSEVELT. Are you saying that you are capable of doing the
job if Congress gives it to you?
Mr. HARDING. No, sir; I am not saying that in all regards. I am
saying that certain obvious violations of other sections of the U.S.
Code, other than those which we are charged with administering,
might well be recognized by some of our more capable agents.
I am not saying, sir, that we have the competence or expertise to
police foundations for all of the myriad violations of Federal law
that they might become involved in.
The CHAIRMAN. If you would permit an interruption, Mr. Roose-
velt. Mr. Harding, you did testify that you feel morally bound to
submit to these agencies any information that comes to you in viola-
tion of the law or regulations ?
Mr. HARDING. Yes, sir; I did.
Mr. ROOSEVELT. Is there a direction to the field agent to that
effect?
Mr. HARDING. Yes, sir; there is.
Mr. ROOSEVELT. Would you supply it to the Committee?
Mr. HARDING. I would; yes, sir.
(The information submitted by the IRS, under date of September
22, 1964, appears as Exhibit 42, pp. 393-395.)
Mr. ROOSEVELT. The reason?counsel points out to me?the reason
behind my question was, that I think in previous testimony you
stated you had not forwarded any information of the possible viola-
tions to any of the agencies. My question is why was it not for-
warded?
Mr. HARDING. I assume it was not detected. I said we had no
record of any violations of these areas being forwarded.
Mr. ROOSEVELT. It would seem strange that an individual, such as
our counsel, who does not do this around the clock, could find things,
and yet your agent would not if he was under a directive to do it,
if he is as sophisticated as you say he is. I just happen to assume he
is not quite as sophisticated as you assume he is, and I am not placing
any blame on him. I think the IRS is not the place where the respon-
sibility should be placed. But it has to be placed, I think that will be
conceded.
Mr. STEED. Mr. Harding, in order to keep this whole thing in more
proper focus, I have been under the impression, and I would like for
you to correct me if I am in error, that part of this problem stems
from the fact that there has been an unprecedented increase in the
number of and activities of these foundations in recent years, and
that you are just now working up to the fact that we find ourselves
confronted with a myriad of problems that in the early days of tax
exempt foundations did not seem to exist. Is that a proper analysis
of part of the reason why we find ourselves currently confronted
with so many of these inequities and problems?
Mr. HARDING. There has been a tremendous growth in this area
both in terms of number of entities and in terms of size of the opera-
tions of those tax exempt organizations. It ha,s been a growth which
our examination forces have not kept up with, and it is certainly an
element in the problem. You are perfectly correct, sir.
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TAX-EXEMPT FOUNDATIONS: IMPACT ON SMALL BUSINESS 277
Mr. STEED. Doesn't that very fact though indicate that we are now
at a point where a revision and a redress and expansion of the gov-
ernment's capability of coping with this matter should be looked into
and something done about it ?
Mr. HARDING. I think on at least, certainly on one front, Mr. Steed,
* * to which the Secretary testified * * * that there needs to be
a clarification, some adjustment, in the basic law under which we
operate. This is one of the difficulties that we have had over the
years. So this certainly needs to be done, and the Secretary has testi-
fied that it will be done.
It certainly indicates also that as far as the Revenue Service is
concerned, and assuming we continue our present role of examining
these foundations for tax consequences that we need to continue to
devote the efforts that we have been devoting to this problem over
the last three years, and if at all possible within the limitations of
our budget, increase the funds available to us for making these
examinations.
This is all apart and aside from the more fundamental question
which the Chairman and Mr. Roosevelt raised as to whether or not
there needs to be some type of super police organization established
which would have responsibility for auditing these corporations, these
foundations, for all aspects of their activity involving all responsi-
bilities which they have under the laws of this country.
Mr. STEED. Well, I cannot help but feel that this unprecedented
growth of activity both in numbers and in size and all that in this
field, is a major contributor to our problem and, of course, I think it
is safe to assume if one wise guy thinks up one of these stunts and
it works, it encourages others to do likewise, so it is a rather snowball-
ing, cumulative sort of thing to play all these apparently fancy games
with tax exempt devices that we see revealed here as you go into the
case histories of some of them.
Mr. HARDING. This is, of course, true, Mr. Steed; and you, as a mem-
ber of our Subcommittee on Appropriations, are well aware of the
fact that we have a myriad of problems in the tax field as well as the
tax exempt field, and in this area, in the activities of corporations and
of individuals in a growing, expanding economy, and these problems
are becoming more acute.
The number of gimmicks, if you will, that are being thought up al-
most defy our ability to keep up with closing the loopholes. So that
what you say about tax exempt foundations is particularly true.
It is part of a general fabric of our economy, the growth of our
economy, and the growth of the problems we have in administering
the tax laws of this country.
Mr. STEED. I think if the Congress and the Administrative Branch
cannot get together and work out some better answers to this whole
thing, we are just going to wind up finding ourselves faced with a situ-
ation where you just have made a farce of a lot of these, what started
out to be, very worthwhile programs, and I think the public interest
cries out for a solution to it.
Mr. HARDING. I would certainly agree, Mr. Steed.
The CHAIRMAN. During our hearings of August 10, you indicated
that the Foundation Library Center had instructed Mrs. Tinsley to
photograph only schedules that were not prohibited. I have in my
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278 TAX-EXEMPT FOUNDATIONS : IMPACT ON SMALL BUSINESS
hand a copy of the Foundation Library Center's instructions to Mrs.
Tinsley and suggest that you have a look at them. Will you take this
to Mr. Harding, please.
(The documents referred to appear as Exhibits 43 through 46, pp.
396-399.)
Mr. HARDING. Mr. Chairman, I would be happy to do that. I
would like, however, specific reference to my testimony to that effect.
I have no recollection of making that statement at this time.
The CHAIRMAN. That was our interpretation.
Mr. HARDING. Well, sir, I frankly do not know what the instruc-
tions to Mrs. Tinsley were except those that involved us.
The CHAIRMAN. My information is that this Xerox copy is the state-
ment that was given to Mr. Olsher when you were present and as per
instructions. If you will notice on page 1, line 17, which deals with
contributions received, you will see the language "need schedules if
supplied." Yet you have indicated that the statute prohibits such
schedules from being made available for public inspection. How do
you explain the fact that Mrs. Tinsley was allowed to have the
schedules?
Mr. HARDING. I cannot explain that, Mr. Chairman. I am afraid
I don't--is this document which I am looking at a photocopy of some-
thing?
The CHAIRMAN. Yes, sir. It is a copy of the one that was given to
Mr. Olsher when you and he were talking to Mrs. Tinsley.
Mr. HARDING. The only copy
The CHAIRMAN. It is a copy of the original, that is what it is.
Mr. HARDING. Is this the Stephens Foundation? This is the only
document that was transmitted to Mr. Olsher.
The CHAIRMAN. No, the Library Center Foundation.
Mr. HARDING. The only copy of anything that I saw transmitted to
Mr. Olsher was a photocopy of a part 1 of the return of the Stephens
Foundation.
The CHAIRMAN. We are talking about the Library Center. You
see, the object
Mr. HARDING. Yes, sir. But we were in the Library Center at the
time.
The CHAIRMAN. Regardless of all that, the fact remains that this
was given to her by the Foundation Library Center as instructions for
photocopying foundation tax returns.
Mr. HARDING. Well, sir, if I understand what this document is, that
this is her guideline
The CHAIRMAN. That is right.
Mr. HARDING (continuing) . To what she reproduces.
The CHAIRMAN. That is right; that is correct.
Mr. HARDING. If I read this line 17 correctly, if the taxpayer, as
in the case of the Stephens Foundation, waived his right to hold con-
fidential the list of donors and attached it to part 2 of the 990, she
would, as she did in the case of the Stephens Foundation, reproduce
that copy and give it back to the Foundation.
The CHAIRMAN. You construe that to mean then only in cases where
she was permitted to do it?
Mr. HARDING. Of course, sir.
The CHAIRMAN (continuing) . By regulation?
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Mr. HARDING. Because this was all she would have, sir. Not hav-
ing part I (and if the taxpayer follows the rules he attaches the
list of donors only to part 1), she cannot therefore have access to that
section.
The CHAIRMAN. You insist she would not have it if it were un-
authorized?
Mr. HARDING. She would not have part 1, which is the file copy,
i
the Revenue Service copy, of the return; and f the taxpayer meticu-
lously followed the instructions, he would attach the list of donors
only to part 1.
In the case of the Stephens Foundation, knowingly their account-
ants attached it to part 2 as well, and that was the reason she had it
in that case.
The CHAIRMAN. Well, now, was consent given by implication?by
the fact they attached it to part 2, page 2?
Mr. HARDING. Yes, Sir. &) far as 1 know there was no
The CHAIRMAN. In other words, you presume this gave you the
right to have it copied because it appeared where they did not have
to insert it?
Mr. HARDING. Yes sir.
The CHAIRMAN. And that was the power of attorney, you might
say.
Mr. HARDING. We take the position realistically, Mr. Chairman,
that the taxpayer knowingly gives us part 2, he may have 50 sched-
ules attached to it; he knows this is a public document, he knows it is
going into our public disclosure records.
We are not m position to screen all of those and correct anything
that the taxpayer may have done, so we must accept?
The CHAIRMAN. You presume he expects it to be made public?
Mr. HARDING. Yes, sir; and, of course, in the Stephens Foundation
case we did supply you a letter which stated the accountant's intent
in that regard.
The CHAIRMAN. Did you say that the Stephens Foundation gave
you consent V
Mr. HARDING. No, sir. I said?
The CHAIRMAN Or that you got consent by reason of attaching it
to page 2 ?
Mr. HARDING (continuing). I said that we presumed their willing-
ness for public disclosure by their act of attaching it to part 2.
We subsequently, after t'he question was raised by Mr. Olsher, re-
ceived verbal communication from their accountant to the effect that
it was their intention. We subsequently had that confirmed by a letter
which has been submitted to this Subcommittee.
The CHAIRMAN. What is the date of the letter?
Mr. HARDING. I do not recall the date of it?August 11, I am in-
formed.
The CHAIRMAN. And you got the consent prior to that time ver-
bally?
Mr. HARDING. We had gotten the information from the accountant
that it was his intent to make that part of the public record.
The CHAIRMAN. Was that 2 or 3 weeks ahead of the letter or would
you know?
Mr. HARDING. This was before the letter. It was prior to testimony
by Commissioner Caplin on July 22.
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280 TAX-EXEMPT FOUNDATIONS: IMPACT ON SMALL BUSINESS
The CHAIRMAN. How many questionnaires did the IRS send to tax-
exempt organizations? What was the date of that questionnaire ?
Mr. HARDING. Could I supply that exact figure for the record, Mr.
Chairman?
The CHAIRMAN. Yes, sir.
(Following is the information submitted by the IRS, under date of
September 25, 1961. The questionnaire appears as Exhibit 17, pp.
400-030
In June, 1964 the Service developed the attached questionnaire (Form
M-0284 for use in obtaining certain current information from organiza-
tions exempt from tax under section 501(a) or 521 of the Internal
Revenue Code. The information sought is pertinent to our program to
convert our records on tax exempt organizations to the use of automatic
data processing equipment.
The questionnaire is being sent to exempt organization in the follow-
ing order:
1. 260,000 were mailed during the first two weeks of August, 1964 to
all exempt organizations filing annual returns, except for exempt
pension trusts filing on Form 990-P;
2. 200,000 are to be mailed during mid-October 1964 to those exempt
organizations which are not required to file annual returns; and
3. 80,000 are to be Mailed in the spring of 1965 to exempt pension
trusts filing on Form 990-P.
The CHAIRMAN. How many questionnaires did the Office of Tax
Analysis of the Treasury Department send out? Their questionnaire
carries the date of July 17, 1964.
Mr. HARDING. My recollection is, sir, it was approximately 1,300.
The CHAIRMAN. In your view, should income, gift and estate tax
deductions be allowed for contributions of corporate stock to a founda-
tion where the foundation receiving the stock and the corporation
issuing it are both controlled by the donor or his family?
Mr. IIARDiNc. Mr. Rogovin tells me that it is existing law that these
are deductible.
The CHAIRMAN. What is your view on it? Do you think it should
be existing law?
Mr. HARDT-Nor. Mr. Chairman, I would respectfully rather pass that
question as being a matter of tax policy and legislative policy.
The CHAIRMAN. Between the Executive and the Legislative Branch,
I assume?
Mr. HARDING. Yes, sir.
The CHAIRMAN. Do I understand correctly that the fair market
value of a gift to a charitable organization is deductible for income,
gift or estate tax purposes by the donor?
Mr. }TARRING. Yes sir.
The CHAIRMAN. The fair market value?
Mr. HARDING. Yes, sir.
The CHAIRMAN. Do you agree that the tax deduction feature of a
charitable contribution is a matter of considerable interest to a person
of wealth?
MT. HARDING. Yes, sir.
The CHAIRMAN. Would you agree that this is especially true in the
case of the estate tax which requires that all property owned by an
individual at his death be aggregated and taxed at its fair market
value?
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Mr. HARDING. Yes, sir.
The CITAIRmAN. Would you agree that foundations can contribute
to unfair disposition of power and influence arising from the use of
-foundations to maintain family control of businuesses?
Mr. HARDING. Here again, sir, I think that possibility exists. I
think it is primarily a legislative consideration, however.
The CHAIRMAN. Would, you agree that, although the immediate pur-
pose of the imposition of estate taxes in the United States was to raise
revenue, there is little doubt that the philosophical basis was a social
and economic one? As you know, the estate tax did not become a per-
manent part of the Federal reserve system until 1916. There had been
a long history of concern, however, over the concentration and per-
petuation of economic power.
One of the principal counter measures advocated was the estate tax,
and this had a broad spectrum of support from a wide variety of per-
sons of differing political views.
Mr. HARDING. I think that that was an element, Mr. Chairman, al-
though I am not really a very competent witness on that subject.
The CHAIRMAN. Would you agree that the accepted social purpose
of the estate tax is to break up concentrations of economic power?
MT. HARDING. I am not compet ant on that subject, Mr. Chairman.
The CHAIRMAN. Would you agree that private charitable founda-
tions are being widely used today to neutralize the social policy of
the estate tax as well as to reduce the tax due on large estates?
Mr. HARDING. I think that this is a tax legislative matter that really
I should not respond to.
The CIIAIRMAN. Would you agree that foundations are established,
at least in some cases, for the following purposes:
(1) to reduce estate taxes and thereby lessen, or do away with en-
tirely, the necessity for liquidating holdings in a family-owned or con-
trolled business; (2) to retain active control of a business, although
ownership is divested, by appointing family members or close associ-
ates as directors of the foundation?
Mt. HARDING. I think there has been some evidence to that effect,
Mr. Chairman,
The CHAIRMAN. Would you agree that the securities holdings of
foundations suggest that the desire to maintain control, while giving
up ownership, may be reasonably widespread?
Mr. HARDING. I cannot really respond to that, Mr. Chairman.
The CHAIRMAN. Would you agree that, in many cases, it is not
necessary to own a majority of a stock to have effective control?
Mr. HARDING. Yes, sir; this can be done.
The CHAIRMAN. Would you agree that it is possible to maintain
control by contributing non-voting stock which represents the princi-
pal share of the assets of a corporation while retaining the voting
stock?
MT. HARDING. This is a possibility, yes.
The CHAIRMAN. Would you agree that it is a simple matter for any-
one to form a foundation as a trust or non-profit corporation under
state law and personally to designate the trustees or directors to man-
age its affairs?
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Mr. HARDING. I think that is right, yes, sir.
The CHAIRMAN. Would you agree that a common non-charitable mo-
tivation for creating a foundation is to perpetuate family control of
a business?
Mr. HARDING. Well, Mr. Chairman, I think I have before asked
not to testify as to motivation of these creators, and I would respect-
fully ask not to respond to that.
The CHAIRMAN. In your view, does the charitable performance of
a foundation operating with the auxiliary purpose of holding stock
in a family business for the protection of the donor's family, justify
the allowance of tax deductions to the donor or to his estate for con-
tributions of the stock to the foundation?
Mr. HARDING. That, sir, I think is a tax policy question again.
The CHAIRMAN. In your view, should income and gift tax deduc-
tions be allowed for contributions of non-income-producing property
(other than money) to a foundation controlled by the donor or his
family when the foundation has no apparent use for the property?
Mr. HARDING. A tax policy question, Mr. Chairman.
The CHAIRMAN WOD111 you agree that frequently donors give to
their private foundations items of non-income-producing property
which obviously are useless for the foundation's purposes until the
property is sold and the proceeds either reinvested in income-produc-
ing assets or expended in charitable activities?
Mr. HARDING. I think this is correct, sir.
The CHAIRMAN. Would you agree that, when a donor-controlled
foundation retains gifts of non-income-producing property from the
donor for which the foundation has no apparent use, the implication
is that the foundation is doing so for the private advantage or en-
joyment of the donor?
Mr. HARDING. I guess that is possible, Mr. Chairman.
I think your previous question, however, stated that in many of
these instances the property was subsequently sold representing in-
come to the foundation.
The CHAIRMAN. That is right. In your view, should foundation
loans of money or other property to, and purchase, sale, exchange and
lease transactions with, donors, related persons, controlled businesses
and their employees and foundation trustees and directors, be pro-
hibited as a condition to continued tax exemption for the foundation?
Mr. HARDING. That is a tax policy question, Mr. Chairman.
The CHAIRMAN Would you agree that there is ample evidence that
some donors find it hard to forget that the foundation's assets once be-
longed to them?
Mr. HARDING. I think that we have seen some of that, yes, Mr.
Chairman.
The CHAIRMAN. Would you agree that there is ample evidence that
some donors seem to regard their foundations as reservoirs of capital
to be tapped in time of personal need?
Mr. HARDING. I think there has been some evidence along that line,
too, sir.
The CHAIRMAN. Would you agree that it is not at all unusual for a
donor to call upon "his" foundation to lend him money, to purchase
his property or to sell or to lease to him its property?
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Mr. HARDING. There have been indications; yes, sir.
The CHAIRMAN. Would you agree that there is a lack of legally en-
forcible fiduciary standards to restrict self-dealing by those in control
of foundations?
Mr. HARDING. Yes sir.
The CHAIRMAN. Would you agree that most state authorities evi-
dence almost no awareness of this responsibility?
Mr. HARDING. There seems to have been a certain lack of exercise of
responsibility in this area; yes, sir.
The CHAIRMAN. Since foundations are funded with tax deductible
contributions and earn tax exempt income, would you agree that the
problem of self-dealing may appropriately be considered at the Federal
level?
Mr. HARDING. Yes,sir.
The CHAIRMAN. ould you agree that although loans to a donor
must be at a "reasonable" rate of interest with "adequate security,"
and although his purchase and sale transactions with his foundation
must be at "adequate" consideration, these are hardly fiduciary stand-
ards?
Mr. HARDING. Yes, sir.
The CHAIRMAN. Would you agree that, when directors of a founda-
tion are selected because of their familial relationship or personal
loyalty to the donor, it is too much to expect that they will rigidly
adhere even to those guidelines in approving the donor's self-dealing?
Mr. HARDING. I think it raises a very difficult problem, Mr. Chair-
man.
The CHAIRMAN. Is it unreasonable to require the IRS to police such
transactions to insure that arm's length formalities are observed in
transactions which are not at arm's length?
Mr. HARDING. I think, Mr. Chairman, that we should be in a position
to so police the foundations.
The CHAIRMAN. In your view, are further statutory restrictions re-
quired with respect to the management and investment of foundation's
principal and income?
Mr. HARDING. I respectfully refer that to the Treasury Department,
sir.
The CHAIRMAN. Do I understand correctly that the Code does not
impose any specific restrictions on the manner in which a foundation
invests its principal except that a foundation may be subject to taxa-
tion on income from unrelated business activities carried on directly?
Mr. HARDING. Yes, Mr. Chairman.
The CHAIRMAN. Do I understand correctly that the Code does im-
pose certain limitations on reinvestment of foundation income?
Mr. HARDING. Yes.
The CHAIRMAN. What are the limitations generally?
Mr. HARDING. Just let Mr. Rogovin answer it. He remembers the
Code section better than I do.
Mr. R000vIN. With respect to the unreasonable accumulation provi-
sions, there is also reference to investments of income which would be
of such a speculative nature as to jeopardize the carrying out of the
organization's exempt purpose. This type of investment would be
prohibited, as well as an overall limitation on investments which
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284 TAX-EXEMPT FOUNDATIONS: IMPACT ON SMALL BUSINESS
reflect a non-exempt purpose or which subserve the legitimate in-
terests of the foundation.
The CHAIRMA/V. In your view, should a foundation?which is con-
ducting a substantial business operation be entitled to tax exemption
as an organization "organized and operated exclusively for charitable
purposes," even though the foundation may be willing to pay taxes on
its unrelated business income?
Mr. HARDING. I think that is a tax policy question too.
The CHAIRMAN. Would you agree that there is ample evidence that,
in order to avoid possible loss of tax exemption, some foundations,
which contemplate the operation of a business, find it expedient to in-
corporate their business ventures in the form of wholly-owned "feeder"
subsidiaries?
Mr. HARDING. Yes, there is that, Mr. Chairman.
The CHAIRMAN. Do I understand correctly that the business profits
of these corporate "feeders" are taxed at regular corporate rates and
only the dividends which they pay to their "parent" foundation are
exempt from income taxation?
Mr. HARDING. That is correct.
The CHAIRMAN Would you agree that there is ample evidence that
a substantial number of foundations are known to have tax-paying
subsidiaries which compete for business with other commercial enter-
prises which have taxpayers for shareholders?
Mr. HARDING. Yes, MT. Chairman.
The CHAIRMAN. Would you agree that the difference in tax liability
at the shareholder level may afford a competitive advantage to the
subsidiary of a foundation (through forbearance of dividend pay-
ments) ?
Mr. HARDING. I could have that result, Mr. Chairman.
The CHAIRMAN. I do not believe we can finish here by 12:30 or 1 :00
o'clock, Mr. Harding, and I suspect it would be in our interest to
come back at 2:30. Would that be satisfactory?
Mr. HARDING. Yes quite satisfactory.
The CHAIRMAN. that about 2:00 o'clock?
Mr. HARDING. At your pleasure.
The CHAIRMAN If it is all right with you gentlemen, make it 2 :00
o'clock.
Mr. HARDING. That will be fine.
The CHAIRMAN. We will recess until 2 o'clock.
(Whereupon, at 12:00 o'clock noon, the subcommittee recessed to
reconvene at 2 :00 p.m. the same day.)
AFTERNOON SESSION
TESTIMONY OP BERTRAND M. HARDING ACCOMPANIED BY
MITCHELL ROGOVIN AND SHELDON S. COHEN?Resumed
The CHAIRMAN. The, Committee will please come to order.
Do I understand correctly that, if a foundation acquires property
with borrowed money, sections 511-514 of the Code tax the rental
income as unrelated business income until the underlying indebted-
ness is satisfied?
Mr. HARDING. Yes, Mr. Chairman.
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The CHAIRMAN. Do I understand correctly that the purpose of this ,
rule is to impede a common foundation practice of 'bootstrap" ac-
quisitions of property_ paid for out of tax-exempt rents?
Mr. HARDING. Yes Mr. Chairman.
The CHAIRMAN. ii)0, I understand correctly that the practice is
still prevalent because of the statutory requirement that rental income
in these cases is not taxed if the lease involved is for a period of less
than five years?
Mr. HARDING. Yes, Mr. Chairman.
The CHAIRMAN. Would you agree that there is ample evidence that,
in order to avoid the tax, foundations have discovered that leases and
tenants can be arranged so as to come within the exemption without
necessitating payment of the underlying indebtedness out of prin-
cipal?
Mr. HARDING. Considerable evidence, Mr. Chairman.
The CHAIRMAN. Has the IRS experienced difficulty in carrying put
the provisions of section 511-514 of the Code?
Mr. HARDING. Mr. Chairman, under the provisions of the law, there
is difficulty in terms of what we see to be the equities of the situation.
We have tried to enforce it to the best of our ability, however.
The CHAIRMAN. But you have experienced difficulty?
Mr. HARDING. Yes sir.
The CHAIRMAN. Do you see any inconsistency in the fact that a
foundation's capital gains are entered for purposes of income report-
ing but are excluded for purposes of determining whether an accumu-
lation of income is unreasonable?
Mr. HARDING. Yes, sir; but I think that that is in accordance with
the statute.
The CHAIRMAN. In your view, should capital gains be included or
excluded for purposes of determining whether an accumulation of
income is unreasonable?
Mr. HARDING. I think that is a tax policy question, Mr. Chairman.
The CHAIRMAN. In your view, should contributions received be
classed as income and included in determining whether an accumula-
tion of income is reasonable?
Mr. HARDING. The same situation prevails.
The CHAIRMAN. What percentage of funds spent on research in the
U.S. was contributed by the Federal Government in 1963?
Mr. HARDING. I do not know the answer to that question.
The 'CHAIRMAN. Would you have an estimate or could you give us
an estimate?
Mr. HARDING. We shall attempt to give you an estimate, yes, sir;
based on the best information we have.
(Following is the information submitted by the IRS, under date of
September 28,1964.)
A Report to the President on Government Contracting for Research
and Development prepared by the Bureau of the Budget states on page
34:
Through its programs the Federal government now supports over
two-thirds of the research and development of the Nation. Of the
total Federal expenditures for this purpose about two-thirds are
1 Report submitted to the Congress and referred to the Committee on Government Opera-
tions, United States Senate, May 17, 1902; Senate Document No. 94, 87th Congress, 28
Session.
39-915-64-19
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made through contracts with private industry; over 10% through
grants and contracts with universities and other nonprofit institu-
tions; and the remainder by government scientists in Federal
facilities.
This statement was based on anticipated Federal net budget expendi-
tures for research and devlopment in fiscal year 1063 of $12,305 million.
The CHAIRMAN. Fine. Would you agree that research founda-
tions, which receive tax exemption as scientific organizations, present
problems unlike those of charitable and educational foundations?
Mr. HARDING. Yes, sir.
The 'CHAIRMAN. Would you agree that these organizations compete
with tax-paying business entities?
Mr. HARDING. That question is difficult, Mr. Chairman. I think
that possibility exists however.
The CHAIRMAN. W'ould you agree that there is ample evidence
that tax-exempt research foundations aggressively seek business
offering complete services in the development of new production
(such as market analyses, design, engineering and pilot production,
test marketing, tooling, etc.), and that they engage in investment
counseling, issue restricted patent licenses, manage patents, prosecute
infringers, and engage in other activities which are a far cry from
scientific research?
Mr. HARDING. I would say, Mr. Chairman, that there is some
evidence for that conclusion. I would not be able to say whether it is
ample evidence. That would be a legislative determination.
The CHAIRMAN. Do you see a need for a new statutory definition
of the term "unrelated trade or business" as it applies to scientific
research organizations?
MT. HARDING. May I consult with my staff?
The CHAIRMAN. Yes, sir.
Mr. HARDEN-G. Mr. Chairman, the problem seems to be in the area
of what is to be included in "unrelated business." That, I under-
stand, is not too difficult a question. It is a legislative policy question,
of course, as to whether or not that definition should be revised.
The CHAIRMAN. Would you agree that the present situation of
tax-exempt scientific organizations does not appear to be that intended
by Congress?
Mr. HARDING. I am afraid I cannot speak as to the intent of
Congress, Mr. Chairman.
Tile AIRMAN. Would you agree that Congressional intent to
tax some scientific research income of exempt organizations is indi-
cated by the Senate Report on the 1950 Amendment, which states
that? "* * * a 'grant' by a corporation to be used for research by a
foundation with the results of the research to be given only to the
grantor would clearly not be a gift and would constitute unrelated.
business income"?
Mr. HARDING. That would appear to be the Congressional in-
tent, although I am not really expert in that area.
The CHAIRMAN. Has this statutory framework been workable
from an administrative standpoint?
Mr. HARDING. It has been very difficult from an administrative
point of view, Mr. Chairman.
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The CHAIRMAN. Do the Treasury regulations define "fundamental
research"?
Mr, HARDING. There apparently is an attempt at defining' this, Mr.
Chairman. Mr. Rogovin informs me he does not think the definition
is particularly helpful.
The CHAIRMAN. As you know, there have been strong complaints
registered with this Subcommittee about? research foundations com-
peting with taxpaying businessmen. For example, just recently Mr.
F. C. Henriques, Chairman of Technical Operations, Inc., of Burling-
ton, Mass., complained to us about "the position of not-for-profit
research and development companies, such as Systems Development
Corporation and the MITRE Corporation, which charge fees and pay
no taxes." Mr. EIenriques added.
We are well aware of the recent trend toward the greater use by
the military and other Government agencies of not-for-profit organiza-
tions. We and other publicly-owned corporations are concerned over
the long-term effects of this trend.
We have long had an excellent record in providing systems analysis,
operations research, and computer programming services to the armed
services and are well aware of and have never violated the requisite
confidential relationships to sponsors. This reference has not been
made to aggrandize the accomplishments of Technical Operations, but
rather to emphasize that we are not afraid to stand on our, record of
performance or propriety as a Government contractor. We know that
we can successfully compete in providing professional services in those
areas where we have competence. The problem, and the one that trou-
bles us, is to ensure that we are not barred from competing in a "sup-
posedly" free enterprise economy.
Technical Operations, Inc. is an active member of Smaller Business
Association of New England, Inc. I have first-hand knowledge of
the impact of the not-for-profit organizations on small businesses in
severely limiting, or making impossible, their growth.
I shall also insert herewith copy of a complaint addressed to Sena-
tor Edward M. Kennedy by the Brewer Engineering Laboratories,
Inc. of Marion, Mass., and forwarded to us by the Senator.
(The insert is as follows.)
BREWER ENGINEERING LABORATORIES, INCORPORATED,
June 4, 1964.
E011. EDWARD M. KENNEDY,
Senate Offlce Building, Washington, D.C.
DEAR SENATOR KENNEDY : We have been meeting increasing competition from
Privately endowed tax-free research institutions. Two of these foundations are
aggressively seeking business in the field of private enterprise, and we have
recently lost a contract to the Illinois Institute of Technology because they bid
below cost to get the contract away from us. Since their losses will be made
up from the funds of the Institute, we cannot compete with them.
We bid the sum of $7831.00 on a stress analysis study of a Navy heat exchanger
for a nuclear submarine. This bid was given to the manufacturer of the vessel,
the Struthers Wells Corporation of Warren, Pennsylvania, a past client of ours.
The work was to be done under their specification NPD-7197---ESA. The Navy
required Struthers Wells to seek two other bids, and this they did with the
Illinois Institute of Technology bidding about $4800.00 for the test and the
Franklin Institute of Philadelphia (another endowed nonprofit foundation) bid-
ding about $11,800.00. IIT sent a sales agent to Struthers Wells who aggres-
sively promoted the cause of his foundation. The Navy insisted upon the lowest
bidder receiving the award, so HT won it.
We recently won a bid for stress investigation of axles on the Trans-Hudson
Subway for the Port of New York Authority. Again IIT bid against us, but
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our proposal was considered the best technically by the PNYA although our
price was higher than IIT. It is my understanding that IIT was sharply criti-
cal of the PNYA for awarding us the bid.
As you may see from these examples, IIT, a funded research organization with
a non-profit tax position, is aggressively competing with us. These foundations
should only enjoy a tax free position if they are engaged in basic laboratory
research. Since they are now actively competing in the field of practical en-
gineering, I think they should be required to pay taxes and be deprived of
foundation support.
I would appreciate the favor if you would call the attention of the Department
of Internal Revenue to the activities of the Illinois Institute of Technology and
also of the Franklin Institute.
Perhaps some division of your office could advise me as to the charters of
these foundations. It seems difficult to believe that foundations should be legally
permitted to compete with private industry.
The Navy should not be allowed to award engineering contracts to these
foundations when they compete with private industry. IIT can always underbid
me and ultimately perhaps force me out of business since their losses are made
up from foundation grants.
I will appreciate any assistance you can give me on these matters.
Yours very truly,
GIVEN A. BREWER,
Chief Engineer.
The CHAIRMAN. Would you agree that patent royalties are much
more like business income than investment income?
Mr. HARDING. There is a distinction in the statute, Mr. Chairman,
between the two.
The CHAIRMAN. Between patent royalties and investment income?
Mr. HARDING. Yes.
The CHAIRMAN. Would you agree that it is doubtful that Congress
intended to exempt patent royalties as another traditional form of
investment income for tax-exempt organizations?
Mr. HARDING. I am afraid I cannot make a conclusion as to the
congressional intent, sir.
The CHAIRMAN Would you agree that foundations have reached a
new level of importance and influence in the United States?
Mr. HARDING. I think the influence and importance of foundations
has increased in the United States.
The CuAramAN. Would you agree that the kind of routine charter-
ing followed in most States is not likely to bring out basic facts which
should be known before a charter is granted?
Mr. HARDING. I think that is a possibility, yes, Mr. Chairman.
The CHAIRMAN. Would you agree that the chartering process does
not provide protection beyond the initial step in the establishing of a
foundation?
Mr. HARDING. To the extent that the state does not police those
charters, yes, sir.
The CHAIRMAN. Would you agree that, in some states, the attorney
general is charged with the inspection duties, but usually the statute
charging him with that responsibility is without administrative pro-
visions?
Mr. HARDING. I believe that is generally correct, Mr. Chairman.
The CHAIRMAN Would you agree that the regulatory machinery
applicable to charitable trusts in such that the protection of equity
of trusts is more potential than real?
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Mr. HARDING. Yes, Mr. Chairman.
The CHAIRMAN Would you agree that similar enforcement difficul-
ties in the states exist with respect to charitable corporations?
Mr. HARDING. Yes Mr. Chairman.
The CHAIRMAN. Would you agree that the prevailing state statutes
with respect to charitable trusts and charitable corporations do not
prevent abuse?
Mr. HARDING. I think this is true, Mr. Chairman.
The CHAIRMAN. Would you agree that, in most cases, foundations
do not have parties with adverse interests policing their activities, since
foundation trustees are handling a donor's contribution for the bene-
fit of unnamed future beneficiaries who are in no position to claim
damages or to seek injunctive relief?
Mr. HARDING. Yes, Mr. Chairman.
The CHAIRMAN. Would you agree that the principal of a foundation
needs to be protected against malfeasance, nonfeasance, and incom-
petence on the part of trustees?
Mr. HARDING. Yes, Mr. Chairman.
The CHAIRMAN. Would you agree that?since grants have become
a form of public funds through tax exemption and deductibility?it is
not an invasion of sacroscant private areas to impose penalties for
fiduciary irresponsibility?
Mr. HARDING. I think that would be a matter to be left to the states,
Mr. Chairman. But as a personal opinion, I would agree with you,
sir.
The CHAIRMAN. Would you agree that new standards may be needed
to insure responsible management of the principal funds of founda-
tions?
Mr. HARDING. State standards, Mr. Chairman?
The CHAIRMAN. No; would you agree that new Federal standards
may be needed to insure responsible management of principal funds
of foundations?
Mr. HARDING. I think that is a tax policy question, Mr. Chairman.
The CHAIRMAN. Would you agree that an area that needs attention
involves a situation in which a foundation may be utilizing high pro-
portions of its income?and possibly its principal?in wasteful ways,
such as in overhead expenses? This situation may arise where the
foundation dispenses or directly utilizes only a small proportion of
available funds to achieve its stated purposes, and utilizes a relatively
high proportion for running the foundation. Thus there may be no
unreasonable accumulation of income.
Mr. HARDING. I think, Mr. Chairman, that to change that situa-
tion would be a tax policy consideration.
The CHAIRMAN. Would you agree that some guidelines are required
with respect to percentage of funds that should be disbursed by foun.
dations annually?
Mr. HARDING. Well, Mr. Ohairman, this gets back to this rule of
thumb matter.
The CHAIRMAN. Yes, we talked about it the other day.
Mr. HARDING. I would like to point out, sir, as I perhaps should
have pointed out at the time you asked me the question in previous
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meetings, that there are situations where a foundation, a perfectly
reasonable, rational foundation, is attempting to accumulate an amount
of funds for the purpose of doing a specific job.
Now, if we were to take the position that they could not make that
accumulation to build a hospital or to endow a seat in a university or
something of this sort with a rigid rule of thumb for each and every
year, I think we would be doing a great injustice to charitable opera-
tions in this country. So I would have some reservations about a flat
rule of thumb of this sort.
The CHAIRMAN. Well, subject to certain exceptions such as you
mentioned. In other words, you could have some flexibility there
that would permit it under certain conditions.
Mr. HARDING. Within reasonable ground, Mr. Chairman, I would
agree with you.
The CHAIRMAN Would you agree that one of the steps to guard
against potential abuse in the area of wasteful expenditures could be
(1) more complete reporting to the IRS of expenses properly classi-
fied in accordance with audit guidelines, and (2) the development of
criteria for the ratio of allowable expenses to total outgo, with appro-
priate penalties?
Mr. HARDING. Mr. Chairman, it is always difficult, not only in this
area but in the entire tax field, to determine how much of a burden
you put on each and every taxpayer in terms of reporting.
For example, an individual might be required to submit, as they do
in Canada
The Cif-AIRMAN. But these are not taxpayers.
Mr. HARDING. 1 realize that, but I am talking about a, matter of
general principle on reporting versus audit examination. We want
enough information to disclose to us where an organization needs
examination and yet not burden all the taxpayers with over reporting.
This is a problem other committees in the Congress are concerned
about?the paper work burden that we impose on taxpayers generally.
So I think we need to realize that there are two sides to that question.
The CHAIRMAN. Well, as it applies to taxpayers, I think your com-
ments are justified and worthwhile. But, it occurs to me that there
is a big difference between taxpayers and tax exempt foundations
which pay no taxes. I feel that you should not hesitate to require
foundations to submit the fullest information that it is necessary to
protect the public interest.
Mr. HARDING. Sir, I do not think we should hesitate to require the
information we need from any entity, be it tax paying or non-tax
paying. It is a question of judgment as to where you leave off in the
requirements for reporting and start to rely on audit examination.
The CHAIRMAN. Woul you agree that the possibility exists that
a wealthy person could use a foundation to exert influence in a field
selected by him?
Mr. HARDING. Yes, Mr. Chairman.
The CHAIR1VIAN. Would you agree that there is ample evidence that
contributions from one donor-controlled foundation to another found-
ation controlled by the same donor are being used as a device for avoid-
ing unreasonable accumulation of income?
Mr. HARDING. I think that possibility exists.
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The CHAIRMAN. Would you agree there should be a, prohibition
against contributions from one donor-controlled foundation to an-
other foundation controlled by the same donor?
Mr. HARDING. I think that is a possibility, Mr. Chairman.
The CHAIRMAN. Would you agree that a penetrating review of every
application for tax exemption is needed?
Mr. HARDING. Yes, Mr. Chairman.
The CHAIRMAN. Would you agree that a national registry of all tax
exempt foundations should be published annually, including their
names and addresses?
MT. HARDING. Mr. Chairman, we are in the process, as you know,
of accumulating a national registry on electronic tape. Its publica-
tion is perhaps another problem. I am not altogether sure that this
would be an economic expenditure of the public funds, to publish s-uch,
a large document, including names and addresses.
The CHAIRMAN. It would be rendering a public service, of course.
What is your latest estimate on the number of foundations?
Mr. HARDING. Approximately 15,000, Mr. Chairman.
The CHAIRMAN. What is that estimate based on?
Mr. HARDING. Primarily based upon the Foundation Libraries esti-
mate.
The CHAIRMAN. That is the Foundation Library Center of New
York?
Mr. HARDING. Yes, sir. We have not, as you know, an accepted
definition of "foundation," which causes our difficulty in making a
head count.
The CHAIRMAN. Well, I would look at that very closely. Would you
agree that the tax returns of foundations should require disclosure of
amount spent for instigating or promoting legislative or political
activities, or amounts paid to other organizations for that purpose?
MT. HARDING. Possibly, Mr. Chairman.
The CHAIRMAN. Would you agree that foundation tax returns should
likewise require disclosure of amounts spent for television, radio, and
newspaper advertising?
MT. HARDING. Possibly, MT. Chairman.
The CHAIRMAN I am going to ask you, Mr. Harding, some questions
involving the merger of the Delaware Steeplechase and Race Asso-
ciation and Delaware Park, Incorporated. If you do not know the
answers, you may submit them for this hearing record.
Do you know anything about this merger?
Mr. HARDING. No, MP. Chairman.
The CuAiRmAN. Mr. Harding, I understand that in August 1963, a
corporation merger involving the Delaware Steeplechase and Race
Association, the organization which conducts the Delaware Park horse
racing, and a subsidiary corporation, Deleware Park, Incorporated,
was effected. Are you familiar with this merger?
MT. HARDING. No sir, I am not.
The CHAIRMAN. At the time of this merger, it was reported that this
new corporation "will be in a tax-free status granted in January 1962
by the Internal Revenue Service."
Has federal tax exempt status been granted to this new corporation
and if so, from what date?
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MT. HARDING. We will supply that for the record.
(Following is the information submitted by the IRS, under date
of October 2, 1964.)
The newspaper article was misleading. Our Wilmington District
Office, which was aware of this entire matter, advises the facts are:
Delaware Parks, Inc., was incorporated as a nonprofit organiza-
tion on January 10, 1961. It was granted exempt status as of
that date by the Wilmington District in January 1962. During the
years 1962 and 1963 it was given 1,390 shares of Delaware Steeple-
chase and Race Association stock by various donors. At that time,
Delaware Steeplechase's outstanding stock totaled 1,519 shares.
Therefore, over 91 percent of Steeplechase stock was owned by
Delaware Parks, Inc.
Delaware Racing Association was incorporated as a taxable cor-
poration on September 11, 1962. It was relatively inactive until
July 23, 1963, at which time the 1,390 shares of Delaware Steeple-
chase stock were transferred to it by Delaware Parks. Delaware
Racing Association then merged Delaware Steeplechase into itself
and, on the same day, issued 1,390 shares of its own stock to Dela-
ware Parks. So actually, Delaware Parks exchanged stock of Dela-
ware Steeplechase (a taxable corporation) for stock of Delaware
Racing Association (also a taxable corporation) and, by this ex-
change, became sole owner of Delaware Racing Association.
Delaware Racing Association now owns the track property and
operates races in that area. This corporation filed a taxable Form
1120 for its initial period, from September 11, 1962 to July 31, 1963.
During this period the organization was engaged in limited activity
and had no tax liability. A return for the fiscal year ended July 31,
1964, due October 15, 1964, will reflect taxable race track operations
for 1964 and Will, of course, be subject to examination.
The CHAIRMAN. If the merger of these two corporations took place
as reported in the Wilmington, Delaware Morning News of August 2,
1963, what legal provisions authorize the IRS to grant tax exempt
status retroactively to January 1962, 18 months after the merger?
Mr. HA RDING. The same response, Mr. Chairman.
(Following is the information submitted by the IRS, under date of
October 2, 1964.)
Delaware Parks, Inc., was not a party to the merger of the two taxable
entities (Delaware Steeplechase and Race Association, and Delaware
Racing Association). Again, the newspaper article is very misleading.
Delaware Parks was incorporated as a nonprofit organization on Jan-
uary 10, 1901, and was granted exempt status on January 26, 1962.
When exempt status is granted, it is normally made retroactive to the
date of incorporation.
The CHAIRMAN. Does the new corporation hold stock ownership in
any other industrial or commercial enterprise such as the du Pont
Company or any of its subsidiaries and if so, how much?
Mr. HARDING. Same response.
The CHAIRMAN. You will supply that to us?
Mr. HARDINO. Yes, sir, to the extent that this information is avail-
able to us.
(Following is the information submitted by the IRS, under date of
October 2, 1964.)
The Form 990-A return of Delaware Parks, Inc. (the exempt organi-
zation), for the calendar year 1903 lists only the 1,399 shares of Dela-
ware Racing Association stock held, at a value of $2,126,700. Delaware
Racing Association is a taxable corporation; therefore, its stock holdings
are not a matter of public record.
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TAX-EXEMPT FOUNDATIONS: IMPACT ON SMALL BUSINESS 293
The CHAIRMAN. Are any officers and directors of the newly merged
corporation also officers and directors of the du Pont Company or any
of their subsidiaries, including the Delaware Realty Investment Com-
pany, Christiana Securities Company, or du Pont foundations such as
the Longwood Foundation, Incorporated, and the Winterthur Cor-
poration? If so who are they and on what boards do they sit?
Mr. HARDING. To the extent that it is available, we shall supply it.
(Following is the information submitted by the IRS, under date of
October 2, 1964.)
Neither the Service files nor the returns of Delaware Parks, Inc. or
Delaware Racing Association reflect this information.
The CHAIRMAN. Based on our studies, would you agree that the
accounting practices used by foundations are diverse and totally
inadequate?
Mr. HARDING. Mr. Chairman, I am sure that all organizations can
improve their accounting practices. I think that the major informa-
tion that I have gotten from your studies related to their activities
rather than to their accounting practices, however. There have been
some examples of inadequate accounting which you have pointed out,
but this is not peculiar with exempt organizations.
The CHAIRMAN. So it is the activities rather than accounting?
Mr. HARDING. I think this is the general thrust of your study, Mr.
Chairman.
The CHAIRMAN. Would you agree that it is important to classify
foundations for policy-making purposes?
Mr. HARDING. I do not believe I understand the question, sir.
The CHAIRMAN. Would you agree that it is important to classify
foundations for policy-making purposes?
Mr. HARDING. You mean foundations as distinguished from all
other tax-exempt organizations?
The CHAIRMAN. No, in other words, types of foundations?classify
them according to types.
Mr. HARDING. I am not sure Mr. Chairman, that that would serve
any particular tax purpose. There may be some other public purposes
that would be served by such classification.
The CHAIRMAN. You do not think, then, that that is necessarily
important?
Mr. HARDING. It has not been brought to my attention that this
would be of value to us.
The CHAIRMAN. Are you sending out questionnaires now dealing
with that subject?
Mr. HARDING. No, sir, not to my knowledge. We are getting in-
formation on the foundations.
The CHAIRMAN. For what purpose are you collecting that informa-
tion, Mr. Harding?
Mr. HARDING. Well, you are referring to the Treasury survey, Mr.
Chairman?
The CHAIRMAN. Yes.
MT. HARDING. This is for legislative purposes.
The CHAIRMAN. For legislative purposes?
MT. HARDING. Yes, sir.
The CHAIRMAN. Has the IRS sent out questionnaires, too?
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Mr. HARDING. The IRS is sending out questionnaires, Mr. Chair-
man, primarily for the purpose of accumulating the status of all tax-
exempt organizations in order to put on electronic tape.
The CHAIRMAN. Not for purposes of classification?
Mr. HARDING. Not to my knowledge, sir.
(Following is additional information on this subject, furnished by
Acting Commissioner Harding under date of September 16, 1964.)
During the months of July and August 1964 the Internal Revenue
Service circulated Form M-02.84 to all exempt organizations filing re-
turns on Form 990-A. The purpose of the questionnaire was 'to obtain
current information preparatory to converting Service records to auto-
matic data processing. Question 9 on page 3 of the form requires
exempt foundations to indicate whether they are "private" or "public".
For this purpose, the instructions define a private foundation as ". . .
one organized by an individual, a family, or a corporate or other busi-
ness undertaking which is substantially supported by such parties".
A public foundation is defined as ". . . one supported primarily by con-
tributions from the general public or governmental bodies.
The CHAIRMAN. Would you recommend differentiation of treatment
of the various classes of foundations?
Mr. HARDING. 1 am afraid that would be a legislative matter, Mr.
Chairman.
The CHAIRMAN. Am I correct in my understanding that the Treas-
ury has started a program to classify foundations so that it knows the
number of community foundations, company-sponsored foundations,
family foundations,. etc.
Mr. HARDING. If this is so, Mr. Chairman, it has escaped my notice.
The CHAIRMAN. You do not have any knowledge of it?
MT. HARDING. No, sir.
The 'CHAIRMAN. That is all the questions we have, Mr. Harding,
but we want to confer with you gentlemen. If it is all right, we will
do that down in my office, Room 1136. Will that be satisfactory?
Mr. HARDING. We shall be very pleased to.
The CHAIRMAN. Thank you very much for your attendance. Al-
though we might continue at a later date, we will discontinue for the
present?we will 'bring this session to an end.
Thank you very much.
Mr. HARDING. It was a very educational experience for the Internal
Revenue Service.
Mr. CHAIRMAN. And you have been very helpful. Thank you, sir.
(Whereupon at 2 :25 p.m., September 4, 1964, the subcommittee was
adjourned.)
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Approved For Release 2004/04/08 : CIA-RDP67600446R000300020094-4
EXHIBITS
295
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>
-o
-o
-,
o
g
a
m
o
-,
X
m
(7)
a) Exhibit 1
U)
m CARNEGIE CORPORATION OF NEW YORK, NEW YORK CITY
-0
0
CD
Name
John W. Gardner
James A. Perkins
Alan Pifer
Florence Anderson
James W. Campbell
Stephen N. Stackpole
William W. Marvel
Frederick H. Jackson
Lloyd N. Morrisett
Peter Caws
Arthur L. Singer, Jr
Margaret E. Mahoney
Helen Rowan
Frederic A. Mosher
Compensation of Officers (fiscal year ending Sept. 30,
Position
President
Vice President
_ ___ do
Secretary
Treasurer
Executive Associate
__ __ do
_ _ _ _ do
___ do
_
__do13,417
__ __do
Associate Secretary
Editor
Executive Associate
1963)
Sot
$5 00
303: 0333
25, 000
20, 000
18, 000
18, 500
1, 625
18, 875
17, 500
5, 833
14, 500
7, 000
10, 500
Time devoted to
position, months
12
10
12
12
12
12
1
12
12
12
4
12
6
12
Resigned.
Resigned.
New employee.
Half time.
to
oo
0
0
?-?1
CO
0
0
254, 083
>
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(7) en
a) CD
U) Exhibit 2 n.)
CD o
n.) THE COMMONWEALTH FUND, NEW YORK CITY o
o 4.
o 8
4=.
8
43.
8
03
? ?
0
Ts.
i 3
0
-0
a)
-.1
CO
Name
M. P. Aldrich
R. Heffron, M.D
L. V. Hammond
R. A. Crane
S. G. Putt
J. W. Wooster, Jr
Compensation of Officers, Etc. (fiscal year ending June 80, 1968)
Time devoted
to position
Position (percent)
President 100
Medical Associate.. 100
Director, Division International Fellowships 100
Recording Secretary, Director, Division Publications 100
Warden, Harkness House, London 100
Associate 100
Salary
$36,
22,
17,
17,
10,
4,
000.
000.
500.
000.
171.
333.
00
00
00
00
33
33
Expense and
travel account
allowances
$2, 204. 59
252. 76
6, 052. 42
29. 42
4, 345. 48
17. 45
Total
838,
22,
23,
17,
14,
4,
204.
252.
552.
029.
516.
350.
59
76
42
42
81
78
107,
004.
66
12,
902.
12
119,
906.
78
0 ?I=.
0 ?I=.
?I=. 0,
?I=. X
0, 0
X 0
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0 (-a
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(-) o
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o c.o
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4.
4.
Approved For Release 2004/04/08 : CIA-RDP67600446R000300020094-4
Exhibit 3
DUKE ENDOWMENT, CHARLOTTE, NORTH CAROLINA
Compensation of Officers, Etc. (196.9)
Trustees:
Fees paid in accordance with the terms of the
Trust Indenture and at the rate stated therein:
Norman A. Cocke
Wilburt C. Davison
Doris Duke
Benjamin F. Few
Bennette E. Geer
$29, 911. 56
29, 911. 56
29, 911. 56
29,911. 56
29,911. 56
Philip B. Heartt
29, 01.1.56
Thomas F. 11111
29, 911. 56
Amos R. Kearns
29,911. 56
Thomas L. Perkins
29,911. 56
Marshall I. Pickens
29, 911. 56
R. Grady Rankin
29,911. 56
Watson S. Rankin
29, 911. 56
William S. O'B. Robinson, Jr
29, 911. 56
Mary D. B. T. Semans
29,911. 56
Kenneth C. Towe
29,911. 56
$448,673.40
Officers?All of whom are full-time employees:
Marshall I. Pickens, Secretary
36,000. 00
Richard B. Henney, Treasurer
20, 333. 33
James R. Felts, Jr., Assistant Secretary
16, 437. 82
Catherine D. Horrigan, Assistant Secretary
8, 756. 41
John H. Boeckmann, Assistant Treasurer
15, 891. 02
John F. Day, Assistant Treasurer
13, 621. 79
111, 040. 37
559,713.77
299
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Approved For Release 2004/04/08 : CIA-RDP67600446R000300020094-4
Exhibit 4
ALFRED P. SLOAN FOUNDATION, NEW YORK CITY
Compensation of Officer8, Etc. (1968)
Expense
Compensation allowan
Everett N. Case, President, Full time
$46,
731
$1, 799
Arnold J. Zurcher, Executive Director and Vice-President?
Full time
37,
917
3, 226
Larkin II. Farinholt, Vice President?Full time
26,
000
4, 634
Warren Weaver, Vice President?Part time
20,
000
3, 032
James F. Kenney, Secretary and Treasurer?Full time
27,
083
None
Claire S. Armstrong, Assistant Treasurer?Full time
13,
542
None
Muriel Gaines, Assistant Secretary?Full time
10,
833
None
Total 182,106 12,691
300
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Approved For Release 2004/04/08 : CIA-RDP67600446R000300020094-4
Exhibit 5
ROCKEFELLER BROTHERS FUND, INC., NEW YORK CITY
Compensation of Officers, Etc. (1963)
Time devoted
to position. Salary
Dana S. Creel, Director Portion____ $25, 000
John E. Lockwood, Counsel do 10, 000
Robert C. Bates, Secretary do 14, 000
Daniel M. Brosnan, Assistant Treasurer do 11, 500
Total 60, 500
301
39-915-64--,20
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Approved For Release 2004/04/08 : CIA-RDP67600446R000300020094-4
Exhibit 6
LEONARD C. HANNA, JR., FUND, CLEVELAND, OHIO
Compensation of Officers and Trustees
Officer or trustee
Period
(fiscal years ending)
Compensation
Time spent
John C. Virden, Trustee
Sept. 1, 1958,
through
$161, 643.
43
Part time.
Aug. 31, 1962.
Sept. 1, 1962,
through
(I)
Do.
Jan. 18, 1963.
Harold T. Clark, President and
Trustee.
Sept. 1, 1958,
through
201, 393.
43
Do.
Aug. 31, 962.
Sept. 1, 1962,
through
(1)
Do.
Lewis B. Williams, Vice President,
Treasurer and Trustee.
Jan. 18, 1963,
Sept. 1, 1958,
through
207, 893.
43
Do.
Aug. 31, 1962.
Sept. 1, 1962.
through
(/)
Do.
Jan. 18, 1963.
M. J. Reigert, Secretary and Assistant
Treasurer,
Sept. 1, 1958,
through
Aug. 31, 1962.
38, 661.
66
Do.
Sept. 1, 1962,
through
Do.
Aug. 18, 1963.
609, 591.
95
Compensation for period of 9/1/62-1/18/63
1103, 395.
00
Total
712, 986.
95
1 This is the period of final liquidation of the Hanna Fund. Although the Fund
filed a tax return for this period, it failed to report details of compensation of
officers and trustees. Such details, which are required by Treasury regulations,
include the name of the officer or trustee, position, time devoted to position, salary,
and expense account allowance. Nor have we as yet received such details from
the Fund despite three requests, the first one dated January 25, 1964.
The tax return for the period of September 1, 1962, through January 18, 1963,
indicates that $103,395 was paid to officers and trustees during this short period
of 43 months.
302
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Approved For Release 2004/04/08 : CIA-RDP67600446R000300020094-4
Exhibit 7
THE ROBERT, A. WELCH FOUNDATION, HOUSTON, TEXAS
Compensation of Officers, Directors, Trustees, Etc. (fiscal year ending August 31,
1962)
Name
Daniel R. Bullard__ _
Wilfred T. Doherty__
Jesse Andrews
Lester Settegast
Roger J. Wolfe
Robert E. Wise
Position
Trustee and President
Trustee and Vice-President _
do
Trustee
do
Secretary and Treasurer
Time
devoted to
business
Part__
Compensation
$20, 800. 00
20, 800. 00
6, 250. 00
15, 600. 00
4, 239. 00
5, 720.00
73,409. 00
303
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Approved For Release 2004/04/08 : CIA-RDP67600446R000300020094-4
Exhibit 8
LILLY ENDOWMENT, INCORPORATED, INDIANAPOLIS,
INDIANA
Compensation of Officers (1968)
Name
Position
Time denoted Compensation
John S. Lynn
Secretary, General Manager_ _
Director for Community Serv-
ices.
Entire_ _ _ $30,
000.
00
G. Harold Duling
Director for Religion
_do 18,
149.
94
Kenneth S. Templeton,
Director for Education
do 18,
749.
94
Jr.
Total
66,
899.
88
304
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>
-o
-o
>
-, Exhibit 9
o -o
-o
CD THE FORD FOUNDATION, NEW YORK CITY -,
o
o.
-n Compensation of Officers, Etc., for the Year Ended September 30, 1963 g
o a
-,
Time devoted Conference -n
X
to position, Travel and meeting o
m Nam Position e percent AMOUTle expenses expenses n
(7) a) James M. Nicely Vice president and treasurer 100 $56, 000 $3, 992. 70 $555. 27 X
M
Cl) John E. Granger Assistant treasurer 100 21, 000 4, 635. 17 222. 75
(7)
M Thomas H. Lenagh ____do 100 20, 000 1, 034. 02 403. 91 a)
r.) Henry T. Heald President 100 75, 000 2, 215. 36 4, 024. 60 0
0 F. F. Hill Vice president 100 45, 000 1, 891. 83 303. 60 CD
0 William McPeak __ _do 100 45, 000 55. 53 r..)
4.
sa Clarence H. Faust _ __do 100 50, 000 2, 362. 79 485. 32 0
81. 34 0
4. F. Champion Ward Deputy vice president 1 100 20, 000 653. 13 4.
sa Joseph M. McDaniel, Jr Secretary 100 35, 000 3, 646. 33 1, 389. 30 a
co John J. McCloy Chairman of the board Part 25, 000 120. 85 4.
.. Donald K. David Vice chairman Part 20, 000 5, 000. 00 a
0 Leonard R. Leighton Assistant comptroller 100 17, 000 5, 891. 71 200. 00 00
Fs . William H. Nims
Assistant secretary
100 17, 000 531. 23 486. 40
Robert C. Schmid do ?
100 21, 500 802. 48 415. 11 0
X Dyke Brown Vice President 2 100 10, 000 430. 40 456. 20 ..=
.6.
0 Donald K. David Trustee Part 5,000
"CI John Cowles do Part 5, 000
a) Mark F. Ethredge do Part 5, 000 0
-4
"CI
CO Benson Ford do Part 5, 000 a)
o Henry Ford II do Part 5, 000 -4
0 Laurence M. Gould do Part 5, 000 CO
4.
4. Henry T. Heald do 100 5, 000 o
a) Roy E. Larson do Part 5, 000 0
?D.
X John J. MeCloy do Part 5, 000 4.
0 Julius A. Stratton do
o Part 5, 000 a)
o Charles E. Wyzanski do Part 5, 000 X
G.) Stephen D. Bechtel do Part 5, 000 0
0
0 J. Irwin Miller do Part 5, 000 0
0
0cc. Bethuel M. Webster do Part 5, 000 G.)
r.) a Eugene R. Black do Part 3, 750 0
0
0 ll
Stanley W. Gregory Comptroller 0 100 26, 000 105. 65 191. 46 0
r.)
to
4.
4. 1 Period April 1, 1963?September 30, 1963. 577, 250 28, 313. 65 14, 270. 79 00
to
2 Period October 1, 1962?December 31, 1962. 4.
4.
>
> TS
TS
TS n
TS 0
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< a
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Exhibit 10 o
-n n
0
n THE ROCKEFELLER FOUNDATION, NEW YORK CITY X
m
X
M Compensation of Officers, Etc.?Year 1963 a)
F (To
. en
a) (Note, No trustee or officer of the Foundation is related by blood, marriage, adoption or employment to any person who has made a CD
O substantial contribution to the Foundation, or to a corporation controlled by such contributor, except that John D. Rockefeller, III,
CD r..)
is a grandson of John D. Rockefeller, Sr., the founder of and principal contributor to the Foundation.) o
Is .) o
o Time devoted to 4=.
0 Name Position position' Salary 8
4:.
8 Trustees:
Barry Bingham As required__ None 4.
4:. 8
8 Lloyd D. Brace _do _do_ ___ co
Ralph J. Bunche _do _do____ ? ?
CO
? ? Lowell T. Coggeshall _do _do____ 0
O John S. Dickey _do _do_ __
Fs .
Ts . Lee A. Dubridge
Oliver S. Franks _do
_do
_do__ __ X
X Robert F. Goheen _do _do_ 0
O Clifford M. Hardin _do _do__
cr)
-0 J. George Harrar (See also "Officers" on next page) _do _do____ ???1
a) Theodore M. Hesburgh_ _do _do..___ CO
???1
CO Arthur A. Houghton, Jr_ _do _do__ o
0 Clark Kerr _do _do____ 0
4.
o John R. Kimberly _do
4. John D. Rockefeller III___ Chairman _do _do_ a^ )
4.
cr) Frank Stanton _do _do_ X
X Thomas J. Watson, Jr_ _do _do_ 0
0
o W. Barry Wood, Jr _do _do.. 0
o George D. Woods _do _do_ (.4
0 0
(.4 Also: 0
o Detlev W. Bronk Retired June 30, 1963 do _do_ 0
o Henry P. Van Dusen do _do _do_ r..)
o o
r..) Orvil E. Dryfoos Deceased May 25, 1963 _do _do_ 0
0 czi
0 4.
czi
4.
i'
4.
1717600Z000?000t1M008/9dCIU-VIO : 80/170/1700Z aseeieu -10d PeACLICIdV
Officers (See supplementary
schedule attached):
J. George Harrar President 96.00%
K. W. Thompson Vice President and Acting Director, Hu-
manities and Social Sciences.
K. Wernimont Vice President for Administration and 99.85%
Treasurer.
Flora M Rhind Secretary Indeterminate_
Rowe S. Steel Comptroller 95.45%
Robert S. Morison Director for Medical and Natural Sciences_
Albert H. Moseman Director for Agricultural Sciences
Janet M. Paine Assistant Secretary 93.16%
J. Kellum Smith, Jr Assistant Secretary and Assistant to the
President.
Theodore R. Frye Assistant Treasurer 99.05%
J. H. Greenfieldt Assistant Comptroller 92.66%
John H. Grevers Assistant Comptroller and Chief Account-
ant.
Edward Robinson Special Assistant to the President 99.90%
John C. Bugher* Consultant
Medical and Natural Sciences:
Richmond K. Anderson___ Associate Director
Virginia Arnold do
Wilbur G. Downs do
Lucien A. Gregg do
Henry W. Kumm do
John Maier do
Gerard R. Pomerat do
Virgil C. Scott do
Max Theiler do
Robert B. Watson* do
John M. Weir do
LeRoy R. Allen* do
Guy S. Hayes* do
Osier L. Peterson do
Full time unless otherwise indicated.
$48, 000. 00
33,750. 00
23 , 712. 50
24,750. 00
21 , 000. 00
28,250. 00
25, 750. 00
13 , 625. 00
15 , 750. 00
11,700. 00
12 , 625. 00
14,375. 00
21,979. 17
23 , 000. 00
21 , 000. 00
15 , 750. 00
21,500. 00
21 , 500. 00
17,416. 66
21 , 750. 00
21 , 750. 00
21 , 750. 00
22 , 750. 00
21 , 750. 00
24 , 750. 00
15 , 750. 00
17,000. 00
18,750. 00
13
13
CD
a.
11
1-3
to
1-3
0
4o.
oo
. .
4
0
-0
?-?1
CO
0
4 0
tc/
VI
CA)
020
CD 0
0
CAD 0
0 0
."^-1 CD
Approved For Release 2004/04/08 : CIA-RDP67600446R000300020094-4
Exhibit 10
THE ROCKEFELLER FOUNDATION, NEW YORK CITY
Compensation of Officers, Etc.?Year 1963?Continued
(Note: No trustee or officer of the Foundation is related by blood, marriage, adoption or employment to any person who has made a
substantial contribution to the Foundation, or to a coropration controlled by such contributor, except that John D. Rockefeller III.
is a grandson of John D. Rockefeller. Sr.. the founder of and principal contributor to the Foundation.)
Name
Humanities and Social Sciencies:
Time devoted to
Position position I
'Salary
Leland C. DeVinney
Deputy Director
$22,
000.
00
Chadbourne Gilpatric
Associate Director
21,
000.
00
R. K. Davidson*
_do
20,
000.
00
Charles M. Hardin
_do
19,
500.
00
John Marshall
do
19,
750.
00
B. R. Compton
Assistant Director
14,
000.
00
R. W. Crawford
_do
15,
500.
00
Gerald Freund
_do
15,
875.
00
Robert W. July*
_do
15,
000.
00
Robert L. West*
_do
3,
070.
83
Agricultural Sciences:
Norman E. Borlaug*
Associate Director
16,
125.
00
Robert F. Chandler*
_do
20,
750.
00
R. W. Cummings*
_do
20,
125.
00
Ulysses J. Grant*
_do
15,
750.
00
John J. McKelvey
_do
18,
750.
00
Dorothy Parker
_do
15,
750.
00
Lewis M. Roberts
_do
18,
500.
00
J. A. Rupert*
_do
14,
750.
00
E. J. Wellhausen*
_do
17,
750.
00
R. D. Osier
Assistant Director
16,
750.
00
Jesse P. Perry
_do
15,
750.
00
R. W. Richardson
_do
16,
750.
00
$974, 629. 16
n
00 0
CD
0-
0
oo
0
???1
CO
0
0
TAX-EXEMPT FOUNDATIONS: IMPACT ON SMALL BUSINESS
Approved For Release 2004/04/08 : CIA-RDP67600446R000300020094-4
*Overseas Service Allowances:
Allowances
LeRoy R. Allen
8, 876.
80
Norman E. Borlaug _
6, 743.
74
John C. Bugher
4, 703.
97
Robert F. Chandler _ _ __
4, 978.
87
Ralph W. Cummings
5, 527.
69
R. K. Davidson
1,920.
55
Ulysses J. Grant
4, 689.
24
Guy S. Hayes
7,338.
23
Robert W. July
1, 803.
77
J. A. Rupert
4, 180.
08
R. B. Watson
268.
33
E. J. Wellhausen
4, 485.
47
R. L. West
556.
11
56, 072. 85
Expense Allowances?No Ac-
counting to Employer:
Robert S. Morison
1, 000.
00
Albert H. Moseman
1, 000.
00
2, 000. 00
81,
032,
702.
01
1 Full time unless otherwise indicated.
Approved Fa?Ix'132AMVIRTISK9g'N:s9k4iiiiiNgTEAM44,6JR4iN990:.291304-4
Approved For Release 2004/04/08 : CIA-RDP67600446R000300020094-4
Exhibit 11
W. K. KELLOGG FOUNDATION, BATTLE CREEK,
MICHIGAN
Compensation of officers, year ended August 31, 1963
Name
Officers:
Emory W. Morris_
Glenn A. Cross__ _
Leonard L. White_
Orville L. DeBolt_
Directors None.
Trustees:
Philip E. Black-
erby.
W. P. Butler*
Glenn A. Cross___
Neva M. Kaga-
master.*
Matthew R.
Kinde.*
Emory W. Morris
Richard E.
Pritchard.*
Lyle C. Roll
John 0. Snook_
E. Gifford Up-
john.*
Henry F.
Vaughan.
Bessie Rogers
Young.*
Kenneth V.
Zwiener.
Finance Committee:
Glenn A. Cross__ _
Orville L. DeBolt_
Emory W. Morris_
Richard E.
Pritchard.*
Lyle C. Roll _
John 0. Snook*_ _
Title
Expense
Time devoted account
to position Honoraria Salary allowance
President and 90% "$70, 000 $3, 490
General
Director.
Vice President_ (3)
Secretary and 100% 14 15, 250 764
Assistant
Treasurer.
Treasurer and 100% 15 15, 450 787
Assistant
Secretary.
Chairman_ _ _
Secretary
Member
Member
Member
Member
See footnotes on following page.
310
(2)
(2)
(3)
(2)
(2)
(2)
(2)
(2)
(2)
(2)
(2)
(2)
(2)
$120 4 " 24, 500 1,710
80
120
40115 11,688
80 15 21, 250
0
20
110
120
40
110
10
90
(7)
(9)
20
198
160
64
141
940 158, 138 7, 334
940
159, 078
Approved For Release 2004/04/08 : CIA-RDP67600446R000300020094-4
Approved For Release 2004/04/08; CliA-EIKIKIERNK6MR99025Ipli4-4
TAX-EXEMPT FOUNDATIONS: M A
*Mr. Butler died May 27, 1963.
Miss Kagamaster elected an Honorary Trustee for one year through Decem-
ber 17, 1962.
Dr. Kinde dectedian Honorary Trustee for one year through December 16, 1963.
Mr. Pritchard died November 13, 1962.
Mr. Snook appointed December 17, 1962.
Dr. Upjohn appointed a Trustee May, 20, 1963.
Mrs. Young is an Honorary Trustee.
1 The Foundation does not provide "Expense Account Allowances." Instead,
it reimburses for actual expenses incurred in connection with necessary and
approved travel providing such expenses are considered by the Foundation's
General Director and the Foundation's Controller to be reasonable. Expenses
listed are thus "reimbursed expenses" rather than "allowances."
2 The Trustees met in Battle Creek twelve times, namely the third Monday of
each month. Approximately one week prior to each meeting the Secretary of the-
Foundation mailed to each Trustee extensive reports for review prior to the meet-
ing. These comprised by-monthly and annual reports of the officers of the
Foundation, an annual report on each program and project being assisted by the
Foundation during the year, bi-monthly requests for new appropriations, and
annual requests for appropriations and approval of payments on activities pro-
jected for the ensuing fiscal year. Each month it is necessary for each Trustee
to devote several hours to the review of these materials in order to exercise proper
judgment on matters to be considered by the Trustees at each of their meetings.
Advance preparation, travel and the meeting, itself, would consume two to three
days monthly, or 24 to 36 days per year.
3 Mr. Cross is a Trustee, Vice President, and Chairman of the Finance Com-
mittee of the W. K. Kellog Foundation. He is also a Co-Trustee of the W. K.
Kellog Foundation Trust. It is estimated that he devotes approximately 10%
of his time to the assumption of these several responsibilities in behalf of the
Foundation and the Trust.
$24,500 paid to Dr. Blackerby as Associate General Director of the Foundation
and as Director of the Foundation's Division of Dentistry. Dr. Blackerby de-
votes 100% of his time as an employee including his Trusteeship.
5 $11,688 paid to Miss Kagamaster as Controller of the Foundation. Miss
Kagamaster was a full-time Foundation employee until her retirement on July 31,
1963.
6 $21,250 paid to Dr. Kinde who, as a full-time employee, is Director of the
Foundation's Division of Medicine and Public Health.
7 Mr. Snook is also retained as the Foundation's legal couosel. $3,500 was paid
in fees and $342.28 for travel and expenses for legal services of the firm of Con-
cannon, Dillon, Snook & Morton, of which Mr. Snook is senior partner.
8 $360 was paid as a consultant to the Foundation's General Director.
9 $1,440 was paid as a consultant to the Foundation's Division of Medicine and
Public Health,
10 $810 was paid as a financial consultant and for investment counsel.
11 This function is considered a part of Mr. DeBolt's responsibilities as Treasurer
of the Foundation, Dr. Morris' responsibilities as President and General Director
and Mr. Snook's responsibilities as the Feundation's legal counsel.
12 Four one-day meetings of the Finance Committee were held during the year.
Innumerable telephone conferences were held to consider investment purchases
and sales.
13 Plus 7% of salary contributed to retirement-savings fund and $55,000 to a
reserve fund for retirement.
14 Plus 5% of salary contributed to retirement-savings fund.
15 Plus 7% of salary contributed to retirement-savings fund.
16 $180 was paid as a financial consultant and for investment counsel.
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Exhibit 12
U.S. TREASURY DEPARTMENT,
CO1VIMISSIONER OF INTERNAL REVENUE,
Washington, D .0 December 3, 1964.
Honorable WRIGHT PATMAN
Chairman, Subcom,mittee i'oundation Study, Select Committee on
Small Business, Room 1136, House Office Building, Washing-
ton,D.C.
DEAR MR. PATMAN : At our meeting in your office on November 19,
you asked to be advised as to the anticipated completion dates of Serv-
ice audits of the Baird and Lansing Foundations, the J. M. Kaplan
Fund, Inc., and the Leonard C. Hanna Jr., Fund.
We have reviewed the status of these audits with our field offices
and, in light of the remaining work to be done, we anticipate com-
pletion as follows:
1. Baird and Lansing Foundations June 30, 1965
2. J. M. Kaplan Fund, Inc July 31, 1965
3. Leonard C. Hanna, Jr., Fund Feb. 28, 1965
It should be understood that the above dates refer only to completion
of the field audit work.
As you know, these cases involve a substantial number of complex
transactions, covering a number of years. Further, because of the
interrelation of individuals and corporations, the returns of certain
other taxpayers are under examination. For example, the Baird-
Lansing inquiry alone now covers the activities of some 20 separate
entities.
Accordingly, in light of the procedural rules for dealing with issues
raised in the audit of returns, including rights of appeal available to
these organizations and related taxpayers, final determinations as to
the status of these cases will be considerably beyond the dates listed
for completion of the field audits. I do not believe it would serve any
useful purpose at this time to venture, even an estimate, as to these
dates.
Every effort is being made, however, to expedite conclusion of the
Service's examinations. The audits are being carried out by teams
of experienced Internal Revenue agents, working under the direction
of team captains carefully selected for their knowledge in these special-
ized areas of tax law administration. The District Directors respon-
sible are actively following the day-to-day progress being made.
Status reports are being furnished the National Office on a monthly
basis and are being carefully evaluated here, and we are consulting
with field officials where this appears necessary or desirable.
Please be assured these efforts will continue until these cases are
effectively concluded.
Sincerely,
BERTRAND M. IIARDING,
Acting Commissioner.
312
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1717600Z000?000t19V17008/9dCltl-VIO 90/170/1700Z eseeieu -10d peACLICIdV
CO
Co
Foundation (Name and address):
The J. M. Kaplan Fund, Inc.
55 Fifth Avenue Avenue
New York 3, New York
Exhibit 13
SCHEDULE 1
HOUSE SMALL BUSINESS COMMITTEE STUDY OF FOUNDATION
LOANS RECEIVABLE AND PAYABLE
Loans receivable, excluding Government obligations, during the years
1951 through 1962 (please print or type data)
(1)
Debtor (Name and address)
(2)
Purpose for which each loan
was used by debtor
(3)
Secured
by note
(4)
Date
made
(5)
Face amount
(6)
Interest
rate
(7)
Due date
(8)
Date paid in full
(9)
Collateral pledged for
each loan
Yes
No
j. M. Kaplan, 55 Fifth Avenue,
New York 3, New York.
Kenneth B. & Susan H. Weeb,
Woodstock, Vermont.
Diana Ross, 105 West 55th Street,
New York 15, New York.
I. M. Kaplan, 55 Fith Avenue,
New York 3, New York.
Etched Products Co., 39-01
Queens Boulevard, Long Island
City, New York.
Theodore D. Nierenberg as Execu-
tor of Estate of Albert Nieren-
berg, 8 Pine Tree Drive, Great
Neck, Long Island, N.Y.
Same
Theodore Nierenberg
Do
Felice T. Schwartz
A contribution by Navajo Cor-
poration, the payee.
To operate a camp
A contribution byJem.kap, Inc.,
the payee.
Business purposes
x
x
x
x
x
____
___
____
x
x
x
x
X
12/26/44
11/ 5/47
11/19/51
5/25/53
12/17/53
2/23/54
1119/55
2/23/11
1/19/55
2/23/54
**$720, 000.00
$11, 000. 00
$1, 000.00
**$967, 000.00
$400,000.00
$37, 426. 74
$6, 514.92
$6, 660. 51
$1, 758. 24
$6, 541.55
5%
0
0
5%
0
On death of J. M
Kaplan.
$880 on 11/1 of each
yr.
On demand
On death of J. M.
Kaplin.
11/2/52_
11124/52
(*)
12/29/54
2/14/55
12/29/51
2/14/55_
12/29/55_ _______ ___
None.
Mortgage on camp
property.
None.
None.
Mortgages on real
estate and factory
equipment.
None.
None.
None.
None.
None.
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17-17600Z000?000t1M008/9dCIU-VIO : 80/170/1700Z aseeieu -10d peACLICIdV
Foundation (Name and address):
The J. M. Kaplan Fund, Inc.
55 Fifth Avenue Avenue
New York 3, New York
SCHEDULE 1?Continued
HO USE SMALL BUSINESS COMMITTEE STUDY OF FOUNDATION
LOANS RECEIVABLE AND PAYABLE
Loans receivable, excluding Government obligations, during the years
1951 through 1962 (please print or type data)
(1)
Debtor (Name and address)
(2)
Purpose for which each loan
was used by debtor
(3)
Secured
by note
(4)
Date
made
(5)
Face amount
(6)
Interest
rate
(7)
Due date
(8)
Date paid in full
(9)
Collateral pledged for
each loan
Yes
No
Felice T. Schwartz 3950 Winding
x
1/19/55
$1, 726. 84
2/14/55
None.
Road, Cincinnati 29, Ohio.
Heller-Sperry, Inc., 411 Fifth Ave-
Working capital
2/25/54
$50, 000. 00
6%
On demand
9/20/56 by Trans-
None.
nue, New York 16, New York.
fer to Jemkap,
Inc.
New School for Social Research,
66 W. 12th Street, New York 11,
New York.
Purchase of 2500 shares of Min-
nesota and Ontario ? $60 per
share.
x
5/11/55
$150, 000.00
0
Payable out of
contributions to
Bldg. fund.
7/31/56
The securities in Col. 2,
Sally Horowitz, 2 West 67th
Street, New York, New York.
Purchase of 100 shares of Beau-
nit Mills.
x
6/13/55
$2, 829. 00
0
2/23/56
Welch Plants Corporation
ne, !
Liquidation of Welch Plants
Corp.
x
7/30/56
$2, 595, 987. 05
1 3%
9/1/63
12/5/59
Mortgage on Real Es-
Do
do
x
8/31/56
$5, 548, 377.00
13%
W1/63
12/5/59
tate and Equipments.
Do
__do
x
9/1/56
$271, 545. 68
1 3%
9/1/63
12/5/59
Westfield, New York.
New School for Social Research,
66 west 12th Street, New York
To continue with building pro-
gram.
x
11/ 5/58
12/ 3/58
$100, 000. 00
$100, 000. 00
0
0
On demand
do
7/21/60
7/21/60_
11, New York.
I
1717600Z000?000t1M008/9dCIU-VIO : 80/170/1700z aseeieu JOd 130A0iddV
Pacifica Foundation, 22-07 Slattud
Avenue, Berkeley 4, California.
(2) Acquisition & promotion of
a radio station.
x
1/22/60
$10, 000.00
0
None.
New School for Social Research,
66 W. 12th Street, New York 3,
(3) For investment in Real
Estate.
x
12/28/60
$75, 000.00
6/28/62
6/14/61
New York.
Hudson Guild, 436 West 27th
(3) None-profit middle income
x
f 4/20/61
$10, 000. 00
Street, New York 1, New York.
housing project.
1 / /61
$10, 000. 00
Lenox Hill Neighborhood Assc.,
331 East 70th Street, New York
(3) None-profit middle income
housing project.
x
f 5/31/61
1 3/28/62
$6, 000. 00
$9, 000. 00
City, New York.
New School for Social Research,
66 W. 12th Street, New York 11,
New York.
(3) To purchase 5900 shares of
Glen Alden Stock.
x
10/31/61
$77, 223.74
Securities trans-
ferred to fund
12/31/62.
5,900 Glen Alden.
Sherry Malkin, N.Y.C. Washing-
ton Square Col., New York,
Tuition fee at New York Univ_
x
1/19/62
$700.00
$5 per week
New York.
*75,000 remains open at this date
**These represented notes payable to Navajo Corporation & Jemkap, Inc., respectively
which these corporations donated to the J. M. Kaplan Fund, Inc.
I Received as distribution in liquidation on liquidation of Old Welch Company, Inc.
in which the J. M. Kaplan Fund, Inc. held stock.
1717600Z000?000t1M008/9dCIU-VIO : 80/170/1700z aseeieu JOd 130A0iddV
Foundation (Name and address):
The J. M. Kaplan Fund, Inc.
55 Fifth Avenue
New York 3, New York
Exhibit 14
SCHEDULE 2
HOUSE SMALL BUSINESS COMMITTEE STUDY OF FOUNDATION
LOANS RECEIVABLE AND PAYABLE
Loans payable during the years 1951 through 1962 (please print or type data)
(1)
Creditor (Name acid address)
(2)
Purpose for which each loan
was used by foundation
(3)
Secured
by note
(4)
Date
made
(5)
Face amount
(6)
Interest
rate
(7)
Due date
(8)
Date paid in full
(9)
Collateral pledged for
each loan
Yes
No
Hershey Trust Company, Her-
shey, Pennsylvania.
Bankers Trust Co. of New York,
16 Wall Street, New York 5,
New York.
Do
Do
Do
Do
Do
Do
Do
Do
Do
Do
Do
Do
Do
Do
Do
Navajo Corporation (related en-
tity).
Carl M. Loeb Rhodes Company,
42 Wall Street, New York 5,
New York.
Bankers Trust Co. of New York,
16 Wall Street, New York 5.
This has a mortgage subject to
which real property at 675-6th
Ave., N.Y.C. was donated to
the J. M. Kaplan Fund, Inc.
To purchase bonds as invest-
ment 1
do
do
do
do
do
do
do.
Renewals'
do'
do'
do'
do'
To pay other debts
For purchase of Old Welch
shares.
To pay other indebtedness
Loan subject to which life insur-
ance policies were received as
contributions.
x
____
x
x
a
a
x
x
x
____
____
____
____
x
____
8/25/49
__________
11/23/54
12/2/54
12/6/54
12/8/54
12/9/54
12/13/54
12/14/54
12/16/54
11/23/55
5/23/56
8/23/56
11/21/56
2/21/57
12/29/55
2/6/56
8/30/56
8/25/55
12/19/56
7/31/57
WO, 000. 00
$700, 000. 00
$200, 000. 00
$100, 000.00
$200, 000.00
$300, 000. 00
$100, 000. 00
$100, 000.00
$100, 000.00
$100, 000.00
$1, 200, 000. 00
*1,200, 000. 00
$1, 200, 000.00
$1, 200, 000. 00
$1, 200, 000. 00
$100, 000.00
$100, 000. 00
$3, 000, 000. 00
$5, 138, 483.00
$658, 000.00
$85, 000.00
5%
35%
34%
314%
3%%
4%
4%
Wit%
3,,34%
4%
6%
4%
11/31/57
Extended to
12/31/62
11/23/55
5/23/56
8/23/56
11/21/56
2/21/57
5/21/57
Renewed monthly.
do
9/10/56
2/25/56
8/25/56
8/25/57
7/31/57
7/21/60
(date of sale of
of property)
11/23/55 by re-
newal.
5/23/56 by renewal_
8/23/56 by renewal_
11/21/56 by renewal _
2/21/57 by renewal_
5/21/57
6/29/56
4/6/56
9/10/56
2/25/56
9/25/56
Transferred to
Jemkap Dec.
1956.
1/30/57
7/31/57
Mortgage on property
at 675-6th Avenue,
New York City.
Securities.
Securities.
Do.
Do.
$1,000,000.00.
$1,000,000.00.
$3,138,483.00.
136,575 Minnesota
Ontario Paper.
Life insurance policie
on the life of S. M
Kaplan.
1717600Z000?000t1M008/9dCIU-VIO : 80/170/1700z aseeieu JOd 130A0iddV
1717600Z000?000U9V17008/9dCIU-VIO : BONO/1700Z aseeieu -10d peACLICIdV
Foundation (Name and address): HOUSE SMALL BUSINESS COMMITTEE STUDY OF FOUNDATION
to The J. M. Kaplan Fund, Inc. LOANS RECEIVABLE AND PAYABLE
55 Fifth Avenue Loans payable, during the years 1951 through 196S
New York 3, New York (please print or type data)
(1)
Creditor (Name and address)
(2)
Purpose for which each loan
was used by foundation
(3)
Secured
by note
(4)
Date
made
(5)
Face amount
(6)
Interest
rate
(7)
Due date
(8)
Date paid in full
(9)
Collateral pledged for
each loan
Yes
No
Goldman, Sachs & Company
To purchase securities
X
4/1/59
$500,000.00
434%
On demand
4/8/59
$500,000 Niagara
Mohawk 4,5.4% cony.
Deb. due 2/1/72.
Bankers Trust Co., of New York,
do
X
6/12/59
$500,000.00
434%
do
7/2/59_
Securities.
16 Wall Street, New York 5,
New York.
Bankers Trust Co. of New York,
do
X
4/16/62
$750,000.00
434%
7/16/62
5/28/62
Do.
16 Wall Street, New York 5,
New York.
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Approved For Release 2004/04/08 : CIA-RDP67600446R000300020094-4
Via registered mail.
J. M. KAPLAN FUND, I NC.
55 Fifth, Avenue,
New Y ork,N .Y .
(Attention : Mr. J. M. Kaplan, President) .
GENTLEMEN: An examination of the activities of your organization
as disclosed by Forms 990?A filed by your organization for the calen-
dar years 194'7, 1949, 1950, 1951, 1952, 1953, 1954, 1955 and a detailed
examination of the books, minutes, correspondence and other related
data for the year 1953 discloses the following:
I. The J. M. Kaplan Fund, Inc. was organized on December 26,
1941, under the laws of the State of Delaware as a non-profit Member-
ship Corporation for the purpose of receiving contributions and mak-
ing donations to charitable and educational organizations.
Income tax exemption was granted to the Fund as a charitable and
educational organization under section 101(6) of the 1939 Code by
Commissioner's letter dated June 6, 1946.
II. The following substantial contributions were made to the Fund
in the years under examination:
Exhibit 15
U.S. TREASURY DEPARTMENT,
INTERNAL REVENUE SERVICE,
DISTRICT DIRECTOR,
New Y ork,N .Y M arch, 09 , 1957.
1944-1945
$1,
015,
312.
50
1949
435,
000.
00
1953
984,
001.
00
(a) On December 26, 1944, and during the first year of the Fund's
operation there was donated by the National Grape Corporation (a
wholly owned company of Mr. J. M. Kaplan), the following:
Promissory Note of Mr. J. M. Kaplan
$720,
000.
00
Book value of 17,500 shares of common stock of Vertientes
Caviaquery Sugar Company
45,
517.
50
Appreciated value of above
249,
795.
00
$1,
015,
312.
50
The note of $720,000 is unsecured and bears the signature of Mr.
Kaplan, as maker. The note was issued for money advanced to Mr.
Kaplan by and was payable to the order of National Grape Corpora-
tion. On December 26, 1944 the note was contributed to the J. M.
Kaplan Fund, Inc.
318
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TAX-EXEMPT FOUNDATIONS: IMPACT ON SMALL BUSINESS 319
The instrument is non-interest bearing, has no date of maturity, and
is payable upon the death of Mr. Kaplan. The contribution of the
note to the J. M. Kaplan Fund, Inc. was made to the Fund subject to
the following conditions:
(1) The note is to revert to National Grape Corporation (see letter
of National Grape Corporation dated December 26, 1944) in the event
that upon the death of Mr. Kaplan his net estate, after the payment of
all debts, taxes, funeral expenses, expenses of administration, and after
the deduction of the value of all residences and personal and household
effects and all debts owing to him by his relatives does not equal or ex-
ceed the sum of $2,100,000.
(2) The note is to be held until the death of Mr. Kaplan, and there-
after until same shall be paid, and shall not be assigned or transferred
without the consent of National Grape Corporation.
As at March 1, 1945, National Grape Corporation was succeeded by
Navajo Corporation (as a result of a non-taxable reorganization),
and the assets and liabilities were transferred to the latter corporation.
National Grape reflected a deficit of $1,113,282.65 at that time. In-
cluded in the deficit was the charge against surplus of $720,000 arising
from the transfer of the note by National Grape to the J. M. Kaplan
Fund, Inc. No deduction was claimed or allowed for the contribution
of the note.
At the end of the fiscal year, February 28, 1945, by virtue of the
transfer of the promissory note, the books and records of the National
Grape Corporation indicated that Mr. Kaplan did not owe the corpora-
tion anything.
(b) On August 25, 1949, Navajo Corporation (successor of National
Grape Corporation) donated real estate located at 675 Sixth Avenue
to the J. M. Kaplan Fund, Inc., having a stated value of $1,200,000
and subject to a mortgage of $800,000. The difference of $400,000 was
originally claimed as a contribution by Navajo Corporation. In a
subsequent tax examination of Navajo Corporation by the Internal
Revenue Service the value of the real estate was fixed at $900,000, and
the claimed contribution was reduced by $300,000. The result of this
adjustment was to increase the surplus account of Navajo Corporation
and its subsidiaries as at February 28,1950 by $300,000.
(c) In 1953, the Fund received contributions amounting to $984,001
from the following donors:
Neville Corporation
$17,
000
Jemkap, Inc
967,
000
J. M. Kaplan
1
Total
984,
001
The amount of $967,000 represents a promissory note made payable
to Jenakap, Inc. by Mr. J. M. Kaplan. The note is payable upon Mr.
Kaplan's death and is without interest. The instrument was given to
Jemkap, Inc. in satisfaction of monies advanced in 1952 to Mr. J. M.
Kaplan by Jemkap, Inc. and these advances were reflected on the books
of Jemkap, Inc. during the fiscal year ended February 23, 1953.
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320 TAX-EXEMPT FOUNDATIONS: IMPACT ON SMALL BUSINESS
Analysis of the consolidated surplus account for the year ended Feb-
ruary 28, 1954 of Navajo Corporation and Jemkap, Inc., as shown on
the books of the corporation and as adjusted are as follows:
Surplus March I, 1953
Additions:
J. M. Kaplan Notes Dated December 1,
1944, and charged against Surplus in the
As stated
5439,609.55
$439,609.55
As corrected
Fiscal Year Ended February 28, 1945_
720,
000.
00
Over-Valuation of Real Property Donated
in the Fiscal Year Ended February 28,
1949
300,
000.
00
Net Income
1,143.62
1,
143.
62
Total Credits
440, 753. 17
1,
460,
753.
17
Debits:
Dividends?Stock
9, 000. 00
9,
000.
00
Contribution in Excess
2, 700. 59
2,
700.
59
Federal Income Taxes
1, 419. 56
1,
419.
56
Loss on Sale of Mortgage?Sec. 24(b) (1) (a)
38, 850. 00
38,
850.
00
Contributions not deductible
967, 000. 00
967,
000.
00
Federal tax on original stock issue
13. 32
13.
32
Total Debits
1, 018, 983. 47
1,
018,
983.
47
Surplus?February 28, 1954
(578, 230. 30)
441,
769.
70
The surplus as adjusted amounting to $441,769.70 was arrived at
by crediting the account with the following items previously charged
off against surplus:
(1) Over-valuation of donation of real estate by Navajo Corpora-
tion in 1949, reflected originally as $400,000 and subsequently reduced
to $100,000, leaving a difference of $300,000.
(2) The promissory note amounting to $720,000 and donated to the
Fund by National Grape Corporation (predecessor of Navajo Corpo-
ration) on December 26, 1944.
This treatment of the $720,000 note is distinguishable from the
treatment of the $967,000 note because of conditions attached to the
former, specifically, the conditions restricting transfer and the possi-
bility of reversion if the net estate of Mr. Kaplan did not exceed
$2,100,000.
Ordinarily charges against surplus by a corporation which donates
part of its properties or assets to a charitable organization is proper
when an unconditional grant is made.
In the instant case National Grape Corporation did not make an
irrevocable grant to the J. M. Kaplan Fund, Inc. of the note for
$720,000, but retained all the indices of ownership. What it gave
was a remote future interest, subject also to the sole control by the
creator of the J. M. Kaplan Fund, Inc. and also subject to unforesee-
able contingencies.
Accordingly, since National Grape Corporation parted with nothing,
there was no justification for the charge-off against surplus of $720,000
and creating an even greater deficit than actually existed.
On June 26, 1953, Mr. J. M. Kaplan also donated 567.51 shares of
the common stock of Navajo Corporation. These securities are being
carried on the books of the Fund at $1.00.
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TAX-EXEMPT FOUNDATIONS: IMPACT ON SMALL BUSINESS 6
Acceptance of such stock by the Fund was conditioned upon four
(4) stipulations which are set forth in a letter, dated June 26, 1953,
signed by Mr. J. M. Kaplan, and accepted by Mr. Maurice Levin
(brother of Mr. Kaplan) as Vice President of the J. M. Kaplan Fund,
Inc. The transaction involved a contribution of the entire common
stock, issued and outstanding, subject to severe restrictions in trans-
ferability, voting rights (which were retained by Mr. Kaplan) and
preferential treatment of the entire outstanding preferred stock re-
tained by Mr. Kaplan. Thus, what was contributed to the Fund
represented rights of a very questionable value. All of the incidents
of ownership and control continued to reside in Mr. Kaplan.
It was stated by Mr. Maurice Austin, a trustee of the Fund, and
also the tax attorney of the Fund, that initially it had been Mr. Kap-
lan's intention to leave the bulk of his estate to the Fund. However,
because of the provisions of the Decedent Estate Law of New York
which provides that no person may leave more than half of his net
estate to charity if he leaves surviving a spouse, child, or other de-
scendant or parent, the Navajo common stock and the two notes were
transferred in order to insure his estate a value of $9,000,000 upon
his death (9,000 shares of Navajo preferred stock multiplied by $1,000)
and also to effectuate charges against the estate in the form of the two
notes, thereby circumventing the Decedent Estate Law.
III. Analysis of the Forms 990?A, the books of the Fund, and other
related data disclosed that extensive borrowing of moneys, to a large
extent from affiliated companies controlled by Mr. J. M. Kaplan, had
been made by the Fund in order to finance its manifold stock transac-
tions. The practice has been, and continues to be, one of holding
securities for short periods of time with repayment of indebtedness
from the proceeds of sale. Following are three (3) tables analyzing
certain financial transactions by year:
( a) Loans and Advances Payable?Table 1.
(b) Investment in Securities?Table 2.
(c) Stock Transactions?Table 3.
TABLE 1.?Loans and Advances Payable
Year
As at December 31
1947
$75,
000.
00
1949
1950
1951
1,
350,
000.
00
1952
1,
000,
000.
00
1953
1954
1,
474,
205.
39
1955
7,
811,
239.
90
Interrogation of Mr. Albert Arbor, an employee who handles the
buying and selling of securities for the Fund, disclosed that the pur-
poses of the loans were and are to enter into investment transactions
by the Fund. All of these transactions are directed by Mr. Kaplan.
As shown above the loan account was closed out at the end of 1953.
During the year this account showed a number of exchanges between
Jem Kap, Inc. (a wholly-owned subsidiary of Navajo Corporation),
and the Fund. Examination of the loan account during 1954 disclosed
the same pattern of exchanges.
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TABLE 2.-Investment in securities
Year As at January 1 As at December 81
1947 L $856, 923. 38 $1, 081, 499. 37
1949 935, 118. 73
1950 726, 746. 91
1951_ 726, 746. 91 2, 600, 258. 71
1952 2, 600, 258. 71 2, 370, 754. 02
1953 2, 370, 754. 02 1, 183, 605. 30
1954 1, 183, 605. 30 2, 917, 433. 05
1955 2, 917, 433. 05 9, 714, 120. 91
Tar a 3.-Stock transactions
Sold Approx-
imately Within
Number of One Year of
Two Years of
Year
Acquisition
Acquisition
Prior
1947
77 44
33
1949
62 62
1950
1 1
1951
132 132
1952
30 23
7
1953
21 15
5
1
1954
37 28
9
1955
46 45
1
Totals
406 350
54
2
Percent
100 86
13
1
As shown above 86% of the stock acquired over the years by the
Fund was sold within one year of acquisition. The effect of the
financial transactions referred to above follows:
(a) As at January 1, 1947 the Fund had completely turned over
its portfolios and reflected an investment of $1,081,499.37 in non-
governmental bonds.
The net result of the above transactions resulted in a capital loss
of $25,053.10.
(b) As at January 1, 1949 the Fund had invested in corporate secu-
rities the sum of $935,118.73. During the year, in the short period
April 20, 1949 to May 3, 1949, the Fund sold its entire portfolio. As
at December 31, 1949, Schedule A of Form 990-A showed a zero invest-
ment in securities and an increase of $896,000 in Notes and Accounts
Receivable. At the beginning of the year the latter account showed
$731,000 in receivables, and as at December 31, 1949 the account showed
$1,627,000 in receivables (which includes $720,000 represented by
the note discussed above).
The net result of the security transactions recited above was a capital
loss of $46,220.99.
(c) As at January 1, 1950, the account, Notes and Accounts Receiv-
able, showed a balance of $1,627,000. At December 31, 1950, the
account showed a balance of $727,000. The decrease shown was $900,-
000, which represents a repayment of loans outstanding, and the pro-
ceeds were used to purchase securities to the extent of $726,746.91 on
or about December 18, 1950.
The transactions in 1949 and 1950 resulted in a decrease in invest-
ment income (not including the capital loss of $46,220.99 incurred in
1949) of approximately $110,500, computed as follows:
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(1) Annualizing the dividends received in 1919, which amounted to
$23,597.75 for the first quarter of 1919, a projected figure would be
$96,000 ($24,000 X 4). The difference would be $72,000 ($96,000 ?
$24,000) .
(2) Using the annualized figure derived above, $96,000, and sub-
tracting the interest received amounting to $57,550 in 1950, results in
a difference of $38,450.
(3) Recapitulation of 1 and 2 above shows that investment income
was decreased substantially because of the conversion of the portfolio
in the short period April 20 to May 3, 1944, as follows:
Decrease 1949
$72,
000
Decrease 1950
38,
450
Total Decrease in Investment Income
110,
450
(d) As at January 1, 1951, the Fund had invested in corporate
securities $726,746.91. As at December 31, 1951, Schedule A of Form
990?A showed an increase in the portfolio of the organization amount-
ing to $1,873,511.80, and the Fund had at that date an investment
in marketable securities of $2,600,258.71. The increase in the port-
folio was primarily attributable to the investment of monies borrowed
from related corporations amounting to $1,350,000, and to a lesser ex-
tent to capital gains of $356,822.75. An analysis (as submitted) of
the Loans Receivable Account of Jemkap, Inc., disclosed that at the
end of the fiscal year, February 28, 1952, an indebtedness of $1,200,000
was shown due from the J. M. Kaplan Fund, Inc.
(e) As at January 1, 1952 the Fund had invested in corporate se-
curities S2,600,258.71. As at December 31, 1952, the Fund had de-
creased its portfolio by $229,501.69, leaving an investment as at De-
cember 31, 1952 of $2,370,754.02.
During the year the loan payable amounting to $1,350,000 at January
1, 1952, was reduced by $350,000, primarily by utilizing the proceeds
of securities sold.
(f) In 1953 the Fund showed a capital gain of 8402,184.83. The
g;ain was primarily attributable to the sale of 113,901 shares of Pitts-
burgh Steel Co. which was acquired in 1951 from corporations con-
trolled by the creator of the Fund.
As aforestated, the Fund had invested in securities as at Decem-
ber 31, 1951, $2,600,258.71, of which amount $12773,070.26 or approxi-
mately 70% of the portfolio was invested in Pittsburgh Steel.
The cashbook of the Fund for the month of April 1953 disclosed
that $26,149.39 was paid to various attorneys for the purpose of con-
ducting an investigation of the affairs of Pittsburgh Steel, because
it was stated that the management of said company had been mis-
managing its affairs to the detriment of the stockholders.
Moody's Industrial Manual, page 1433, 1955 edition, shows that
during the years 1951, 1952 and 1953, no dividends on common stock
were paid other than stock dividends. Stock dividends were paid as
follows:
2 percent in 1951.
8 percent in 1952.
8 percent in 1953.
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324 TAX-EXEMPT FOUNDATIONS: IMPACT ON SMALL BUSINESS
Prior to 1951, no dividends, cash or stock, were paid by Pittsburgh
Steel on its common stock.
Forms 990?A for 1951, 1952, and 1053 shows that income from divi-
dends decreased materially because of the investment practices of the
managers of the Fund as shown below:
Year
Amount
Received
Decrease Based
on 1951 Income
1951
$48,
335.
00
1952
21,
392.
86
$26,
942.
14
1953
16,
064.
75
32,
270.
25
Tot al Decrease
59,
212.
39
As aforestated, in 1951 the Fund borrowed $1,350,000 from its
creators for the purpose of acquiring additional securities. As at the
end of 1953 this indebtedness had been paid off from the proceeds of
the sale of these assets.
Notwithstanding the capital gains of $402,184.83 reflected in 1953,
the portfolio of the Fund decreased by the end of 1953 in the amount of
$787,148.72. As at January 1, 1953, the Fund had invested $2,370,-
754.02 in securities. As at December 31, 1953, the Fund had invested
in securities $1,183,605.30 and had made an advance of $400,000 to
Etched Products Corporation. The latter transaction will be com-
mented upon subsequently.
From the foregoing it is clearly evident that the investment in Pitts-
burgh Steel was made primarily for purposes of capital appreciation
rather than for investment in income-providing property to be used for
purposes specified in the exempting statutes.
(g) As at January 1, 1954, the Fund had invested in securities,
$1,183,605.30. As at December 31, 1954 the Fund had invested
$2,917,433.05, showing an increase in investments of $1,733,827.75.
The increase was primarily attributable to an increase in borrowed
funds amounting to S1,474,205.79 and to a lesser extent to capital gains
of $287,578.89.
(h) As at January 1, 1955 the Fund had invested $2,917,433.05. As
at December 31, 1955 the Fund had invested $9,631,553.96, showing an
increase in investments of $6,714,120.91.
The increase in the portfolio was primarily attributable to an in-
crease in, and use of, borrowed funds amounting to $6,337,034.11, and
to a lesser extent to capital gains and cash reserves.
As noted above (Table 3) forty-five (45) securities were sold within
one year of acquisition. Of this amount thirty-one (31) were acquired
in 1955. Fifteen (15) were sold within one month or less from the date
of acquisition. The balance of securities acquired in 1955, sixteen
(16), were sold within six months of acquisition. In one case (A. G.
Spalding Bros., stock) the Fund consummated a short sale.
Section 501(c) (3) of the 1954 Code (corresponding to section 101
(6) of the 1939 Code) describes certain organizations exempt from
Federal income tax, and reads, in part, as follows:
"Corporations, and any community chest, fund, or foundation,
organized and operated exclusively for religious, charitable, scientific,
testing for public safety, literary, or educational purposes, or for the
prevention of cruelty to children or animals: no part of the net earn-
ings of which inures to the benefit of any private shareholder or indi-
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TAX-EXEMPT FOUNDATIONS: IMPACT ON SMALL BUSINESS 325
vidual, no substantial part of the activities of which is carrying on
propaganda, or otherwise attempting, to influence legislation, "
In order to qualify for exemption an organization must show thaf it
is both organized and operated exclusively for one or more of the
specified purposes.
A review of the facts, as set forth above, shows that the J. M. Kaplan
Fund, Inc., is not operating exclusively within the specified purposes
of section 501 (c) (3) of the 1054 Code (corresponding to section 101(6)
of the 1939 Code), but is operating in the manner of an ordinary
investment enterprise.
It is the opinion of this office that where the security transactions
and portfolio changes of an organization are of the nature and of suf-
ficient frequency to indicate that the organization is not being oper-
ated for the purpose of acquiring property for bona fide investment
purposes to be held in good faith for the production of investment
income, that it is not entitled to exemption. This is particularly true
when:
(1) The bulk of the transactions are short term.
(2) A substantial part of the investment in stocks are pur-
chased anticipating capital gains, rather than for dividend in-
come; and the above are coupled with:
(3) Extensive borrowings of funds for the purpose of enter-
ing into speculative transactions; thereby
(4) Jeopardizing the carrying out of the charitable' educa-
tional, or other purpose or function constituting the basis for
exemption.
The J. M. Kaplan Fund, Inc. is clearly competing with others in
the market place, and since the business is speculative the whole of the
principal and profits may be wiped out. An organization, such as
this one, which over the years engages in trade, business, or specula-
tion, clearly does not come within the terms of the statute granting
exemption from Federal income taxes.
IV. In 1953, the Fund advanced $400,000 to the Etched Products
Corporation in the following amounts:
Date
Amount
December 14, 1953
$120,
000.
00
December 16, 1953
170,
714.
84
December 17, 1953
109,
285.
16
Total
400,
000.
00
The advances were secured by a second mortgage on realty and a
chattel mortgage upon all the machinery, equipment, furniture and
fixtures of Etched Products Corporation, together with any replace-
ments improvements, and subsequent acquisitions.
Title to the stock of Etched Products Corporation, at the time the
advances were made, was in the following individuals:
Class A
preferred
Class B
preferred
Common
Estate of Albert Nierenberg
37
1, 245
Theodore D. Nierenberg
336
Felice T. Schwartz
330
Others
32
232
184
Total
32
259
2, 095
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326 TAX-EXEMPT FOUNDATIONS: IMPACT ON SMALL BUSINESS
In fact, the real incidents of ownership (directly or indirectly, as
set forth in correspondence submitted to the examining officer) were
in the following:
Constructively
Rose Nierenberg (sister of J. M.
Directly
through estate
Total
Kaplan) one-third interest in estate_
415
415
Theodore D. Nierenberg (nephew of
J. M. Kaplan)
336
415
751
Felice T. Schwartz (niece of J. M.
Kaplan)
330
415
745
Others
184
184
Total
850
1 245
2, 095
The loan of $100,000 referred to above was to be payable as follows:
(1) $109,285.16 on April 17,1954,
(2) $3,000.00 in monthly installments beginning January
17, 1955,
(3) The unpaid balance due and payable on September 23,
1956, and
(4) Interest to be payable on the 17th day of each month
beginning January 17, 1954, at the rate of 10% per annum,
provided, however, that Etched Products Corporation is re-
quired to pay on account of said interest, a sum equal to 5%
per annum on account of interest until there is a default.
The Fund agrees to waive the balance of interest if the prin-
cipal is paid as provided for.
After the death of Alfred Nierenberg, his son Theodore Nieren-
berg took over the active management of Etched Products. At the
time the advance of $400,000 was made there was included in the lia-
bilities of Etched Products the Following:
(1) Advances made to the corporation by the Estate of Alfred
Nierenberg, including accrued interest, and amounting to $316,070.94.
(2) Notes payable to the Bankers Trust Company which were
secured by accounts receivables of the corporation amounting to
$118437.60.
(3) A first mortgage on the real estate owned by Epco Corpora-
tion, (wholly owned subsidiary of Etched Products) was held by the
Long Island City Savings Bank. The mortgage was security for a
loan of $128,150.
(4) Chattel mortgages on the equipment, and a second mortgage
on the real estate were held by the Reconstruction Finance Corpora-
tion. These mortgages were assigned to the J. M. Kaplan Fund, Inc.,
after the latter paid the R.F.C. the sum of $170,714.84.
(5) In addition, personal advances of $16,650 were made by Mr.
Theodore Nierenberg to Etched Products.
In order to "bail out" the indebtedness of Etched Products Mr.
Kaplan caused the Fund to advance monies to Etched Products Corpo-
ration to repay the loans and to relieve the company of financial pres-
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TAX-EXEMPT FOUNDATIONS: IMPACT ON SMALL B UbLINE*6
sures. As aforestated these monies were secured by a consolidated
second mortgage on real estate and chattel mortgages on the equip-
ment. Mr. Kaplan also personally guaranteed the obligation of
Etched Products to the Fund.
No interest was paid by Etched Products Corporation on its in-
debtedness for the period beginning December 17, 1953 and ending
February 23, 1954.
(1) On February 23, 1954 an agreement was entered into between
the Electra-Chemical Engraving Company and Theodore Nierenberg,
individually and as executor of the Estate of Albert Nierenberg, and
Felice T. Schwartz whereby Electro-Chemical Engraving Company
purchased their interest in Etched Products Corporation consisting of:
(a) 37 shares of Class B stock.
(b) 1,911 shares of Common stock (of a total of 2,095) ; and
(c) Assumption of payment of indebtedness of $317,330.94 due by
Etched Products Corporation to the Nierenberg Estate on February
23, 1954.
The price agreed upon was $800,000, $317,330.94 of which was paid
to the Estate on transfer of the indebtedness and the balance to the
stockholders (including shares held by the Estate). The debt of
$317,330.94 became owing to Electro-Chemical Engraving Company.
(2) In further consideration of this agreement Electro-Chemical
agreed to pay the indebtedness owing to the Fund if Etched Products
was unable to do so.
(3) The J. M. Kaplan Fund in turn agreed to release the security
behind the loan of $400,000 made by the Fund to Etched Products.
(4) The agreement further states that the indebtedness to the Fund
of $4007000 by Etched Products, and in the event of non-payment, the
obligation of Electro-Chemical to repay the $400,000 shall be subordi-
nated to the debts, liabilities and obligations owing to all trade and
bank creditors existing at the time of the agreement or which at any
time thereafter shall be created or incurred.
(5) The indebtedness of S400,000 and the interest thereon was to
be payable as follows:
(a) Minimum payments of $50,000 per annum. (It was stated by
Mr. Austin that payments on amount of principal were being made.)
(b) Interest payable at the rate of 4% per annum from February
26, 1954, payable on the 5th day of July, October, January and April
of each year commencing July 5, 1951.
The initial transaction in December of 1953 (the loan of $400,000 to
Etched Products Corporation) is questionable because of the financial
condition of Etched Products, the relationship of the parties, the fail-
ure to pay interest on the loan, the proviso for waiver of interest, and
the nature of the security behind the loan. The interests of the Fund
were further diminished by virtue of the agreement of February 23,
1954 because of:
(a) The material alteration of the terms of repayment and the rates
of interest as follows:
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328 TAX-EXEMPT FOUNDATIONS: IMPACT ON SMALL BUSINESS
Terms of Loan December, 19,53
Rate of Interest 10% per annum on 17th day
of each month commenc-
ing January 17, 1954.
5% per annum required
to be paid on account
until there is a default.
Balance of interest
waived if principal is
paid as provided for.
Repayment of Prin- To be fully paid by Sep-
cipal. tember 23, 1956 or a
period of 2 years, 9
months.
Terms of Agreement February, 1964
4% per annum commenc-
ing July 5, 1954 and
thereafter on the 5th
day of July, October,
January and April of
each year.
To be paid $50,000 per
annum for a period of
8 years.
(b) There was caused to be released the security (real and chattel
mortgages) and the loan was subordinated to all trade and bank credi-
tors of Etched Products and Electro-Chemical Engraving Cor-
porations present and in the future.
It would appear that the entire transaction was an integral part of
Mr. Kaplan's effort to provide for his sister's and nephew's and niece's
welfare when he became apprised of the financial condition of Etched
Products Corporation.
On the basis of the facts surrounding the advances of $400,000 made
by the Fund to Etched Products Corporation, it is the opinion of this
office that the transaction constituted a "prohibited transaction" with-
in the meaning of section 3813(b) (1) of the 1939 Code which states in
part as follows:
"For the purposes of this section, the term prohibited transaction
means any transaction in which an organization subject to the provi-
sions of this section?
"* * * ( L) Lends any part of its income or corpus, without the receipt
of adequate security and a reasonable rate of interest, to * * * a member
of the family (as defined in section 24(b) (2) (D)) of an individual
who is the creator of?or who has made a substantial contribution to
such organization * *
Section 24(b) (2) (D) of the 1939 Code, provides that:
"The family of an individual shall include only his brothers and
sisters (whether by the whole or half-blood) , spouse, ancestors, and
lineal descendants."
In the instant case section 24(b) (2) (D) controls as Rose Nierenberg
is a sister of J. M. Kaplan.
The provisions of section 3813 have been violated by reason of the
lending of monies to an organization which was financially foundering
and by the taking of security (chattel and real mortgages) of question-
able value. This is further evidenced by the agreement of February
23, 1954, wherein the security was released and the $400,000 indebted-
ness became subordinated to the trade and bank creditors of the bor-
rowing corporation.
V. In 1953, the Welch Grape Juice Company, Inc., sold to Jemkap,
Inc., certain of its products which were shipped to Essential Com-
modities for Israel. The Fund paid Jemkap, Inc., $46,403.26 for these
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TAX-EXEMPT FOUNDATIONS: IMPACT ON SMALL BUSINESS 329
products. The Fund received a credit of $48,451.50 in Israeli pounds
in the Union Bank of Israel, Ltd., by virtue of the sale to Essential
Commodities.
On August 28, 1953, the Fund purchased 33,125 shares of stock in
American Israeli Paper Mills in part from the blocked funds realized
on the sale to Essential Commodities.
The above transaction appears to be an isolated one. However, it
should be noted that if carried on regularly such transactions would
result in "unrelated business income" as defined in section 512 of the
1954 Code, and corresponding to section 422 of the 1939 Code.
Observations, Conclmsions and Recommendations
On the basis of the facts developed and enumerated above, it is the
opinion of this office that a substantial basis exists for the revocation of
exemption for the following reasons:
(1) The J. M. Kaplan Fund, Inc., was not organized and operated
exclusively for charitable, religious, educational or other exempt
purposes within the meaning' of section 101(6) of the 1939 Code (sec-
tion 501(c) (3) of the 1954 Code), but was availed by the creator for
self-motivating interests.
(2) The J. M. Kaplan Fund, Inc., from its inception has borrowed
considerable sums of money from organizations owned or controlled
by the creator for the purpose of carrying on a trade or business, name-
ly, that of an investment and/or trading enterprise, rather than those
activities usually associated with exempt organizations.
(3) The J. M. Kaplan Fund, Inc., in violation of section 3813 of
the 1939 Code (corresponding to section 503 of the 1954 Code) engaged
in prohibited transactions in 1953 and 1951 within the meaning of the
Code.
(4) The J. M. Kaplan Fund, Inc., on an overall basis, was never in-
tended to be, from its inception, availed of for purely charitable, edu-
cational or other exempt purposes, and in practice operated as the alter
ego of Mr. J. M. Kaplan.
Accordingly, it is the considered opinion of this office that the ex-
empt status of the J. M. Kaplan Fund, Inc., under the provisions of
section 101(6) of the 1939 Code and section 501(c) (3) of the 1954
Code, should be revoked, retroactively and prospectively.
Under established procedure this office will recommend to the Com-
missioner of Internal Revenue, Washington 25, D.C., that your exemp-
tion be revoked.
If you do not agree with the foregoing conclusions, you may, within
30 days from the date of this letter file a protest in accordance with the
enclosed instructions. Any protest will be given careful consideration
and a conference will be granted if requested.
Very truly yours,
DONALD R. MOYSEY,
District Director, L.M.
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Exhibit 16
-U.S. TREASURY DEPARTMENT,
INTERNAL REVENUE SERVICE,
DISTRICT DIRECTOR,
New York, N .Y January 7,1958.
The J. M. KAPLAN FUND, INC.,
55 Fifth Ave.,
N ewY ork,N .Y .
GENTLEMEN: This is to acknowledge receipt of your brief in pro-
test to our letter dated March 29, 1957 concerning the exempt status
of your organization.
After careful consideration of your brief, and a thorough review of
the issues involved, it is the opinion of this office that the recommenda-
tions made in the aforementioned letter are correct.
Accordingly, the case file has been forwarded to the Commissioner
of Internal Revenue, Washington 25, D.C., for final disposition.
A copy of this letter has been forwarded to Mr. Maurice Austin,
% Austin and Diamond, 350 Fifth Avenue, New York 1, New York,
in accordance with the authorization contained in a power of attorney
on file in this office.
Very truly yours,
330
RAPHAEL M_EISELS,
District Director, L. M
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Exhibit 17
U.S. TREASURY DEPARTMENT,
INTERNAL REVENUE SERVICE,
DISTRICT DIRECTOR,
NewY ork,N .Y .,March,24,1960.
Form 990?years 1952-53-55 and 56.
The J. M. KAPLAN FUND, INC.,
55 Fifth, Ave.,
New York, N :17 N.Y.
GENTLEMEN: Our recent examination of the above noted returns
for the years indicated discloses that your organization was exempt
from Federal income taxes for such years. Accordingly, the returns
will be accepted as filed.
Very truly yours,
KENNETH W. MOE,
District Director.
331
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Exhibit 18
AUSTIN 84 DIAMOND,
ATTORNEYS AND COUNSELLORS AT LAW,
New York, N.Y February 19, 1964.
DISTRICT DIRECTOR OF INTERNAL REVENUE,
Post Office Box 3100,
Church Street Station,
New York, N .Y .
Attention: Mr. Murray Sanders (Group 18) .
Sm: I enclose herewith, duly executed in triplicate, Forms 872 ex-
tending the statute of limitations to June 30, 1965, for the following:
(1) The J. M. Kaplan Fund, Inc., for the taxable year ended
December 31, 1958.
(2) The J. M. Kaplan Fund, Inc., for the taxable year ended
December 31, 1959.
(3) The J. M. Kaplan Fund, Inc., for the taxable year ended
December 31, 1960.
(4) Jemkap, Inc. and Subsidiary Companies, for the fiscal year
ended February 29, 1960.
Please acknowledge receipt of the foregoing and enclosures by
signing or stamping and returning the enclosed copy of this letter.
Very truly yours,
(Signed) MAI:TRICE AUSTIN.
Enclosures:
Receipt is acknowledged of the foregoing and enclosures.
332
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Exhibit 19
THE J. M. KAPLAN FUND, INC.,
NewY ork,N.Y .,211arch22, 1963.
[Certified return receipt requested]
Hon. WRIGHT PATIVIAN,
Select Committee on Small Business, House of Representatives of the
United States, 1136 House Office Building,Washington, D.C.
DEAR Sin: In response to your letter of March 15, 1963, this is to
advise as follows:
The examination of our various returns on Form 990A was com-
menced during 1956. The revenue agent's report on the examination
of all years through 1955 was sent to us under date of March 292 1957.
During the course of the consideration of this matter, within the
Internal Revenue Service, the return for the year 1956 was included.
Under date of March 24, 1960, we received a communication from
the office of the District Director of Internal Revenue referring to
Form 990 for the years 1952 through 1956, sustaining the exempt
status of our organization.
Very truly yours,
TIIE J. M. KAPLAN FUND, INC.
Samuel Berger, Assistant Treasurer.
333
39-915-64-22
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Exhibit 20
AUSTIN & DIAMOND,
ATTORNEYS AND COUNSELLORS AT LAW,
New For/c, N .Y January n, 1964.
Re The J. M. Kaplan Fund, Inc.
ROIL WRIGHT PATMAN,
Chairman, Subcommittee, Foundation Study Select Committee on
Small Business, House of Representatives, 1136 House Office
Building,Washington,D.C.
DEAR CONGRESSMAN PATMAN : This is in response to yours of January
11, 1964, re above.
I enclose herewith a Xerox copy of the Internal Revenue Service
letter of March 29, 1957, and a photostat negative of the memorandum
to the Internal Revenue Service dated July 26, 1962, which I trust
you will find readable.
There have been no conferences or hearings with the Internal Rev-
enue Service since July 26, 1962 with respect to the matters referred
to in the said July 26, 1962 memorandum or any other matters of the
J. M. Kaplan Fund, Inc.
At the time of submission of the analysis made by Mr. Bookbinder
with respect to the stock of Endicott-Johnson, Mr. Bookbinder was
employed by Jemkap, Inc. at 55 Fifth Avenue, New York, New York.
Please acknowledge receipt of the foregoing and enclosures by sign-
ing or stamping and returning the enclosed copy of this letter.
Respectfully,
MAURICE AUSTIN.
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Exhibit 21
AUSTIN 84 DIAMOND,
ATTORNEYS AND COUNSELLORS AT LAW,
NewYork, N .Y ., July 28,1964.
Re: The J. M. Kaplan Fund, Inc.
lion. WRIGIIT PATMAN,
Chairman
,
Subcommittee Foundations Study, Select Committee on
Small Business, 1136 Rouse Ogee Building, Washington, D.C.
SIR: This is in response to yours of July 27, 1964.
(1) There have been no conferences or hearings with the Internal
Revenue Service from January 22, 1961 to date.
(2) There has been no correspondence between the Internal Rev-
enue Service and The J. M. Kaplan Fund, Inc. from January 22, 1964
to date, except as follows, copies of which are attached:
(a) Letter from me, dated February 19, 1964, to the Internal
Revenue Service, enclosing Forms 872.
(b) Letter from The J. M. Kaplan Fund, Inc., to the Internal
Revenue Service' dated May 14, 1964, enclosing Form 990?A.
(3) The Internal Revenue Service has not assessed any taxes on
The J. M. Kaplan Fund, Inc. for the taxable years 1957 to date.
Please acknowledge receipt of the foregoing and enclosures by sign-
ing or stamping and returning the enclosed copy of this letter.
Very truly yours,
MA1JRICE AUSTIN.
835
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Exhibit 22
[From New York Journal-American, Jan. 5, 1061]
LESLIE GOULD, FINANCIAL EDITOR: BID FOR ENDICOTT JOHNSON "HOT
NEWS"?WAS IT LATE ?
The attempt to "take-over" the Endicott Johnson Corp. by Glen
Alden Corp. via a tender to stockholders raises some questions for the
Stock Exchange and the Securities and Exchange Commission.
Both companies have their shares listed on the Stock Exchange,
which has just inaugurated a new policy as to immediate release of
"hot news" that will influence a stock.
The SEC also has requirements for prompt disclosures, particularly
when a proxy fight threatens.
Endicott Johnson is an old line shoe maker, headquartered in up-
state New York in the Binghamton area. It is a major source of
employment in the area, which is already suffering considerable un-
employment.
Glen Alden?once an anthracite coal company?is now a complex
embracing coal, leather tanning, motion picture theatres and produc-
tion of aluminum and steel parts for the auto industry.
ACTIVE IN "TAKE-OVERS"
The head of Glen Alden is Albert A. List, who has been active in
the "take-over" field and who operates some times through a tax free
charitable foundation.
Another individual involved in the matter is Jacob M. Kaplan, a
director of Endicott. Kaplan, who also has a tax free charitable
foundation, made a fortune in Welch Grape Juice, following a take-
over in the 1930's.
Kaplan exchanged 60,000 Endicott Johnson shares held in his chari-
table trust and in another company for Glen Alden stock held by List's
foundation. So far, there has been no disclosure as to what kind of
a deal Mr. Kaplan made nor as to how many shares of Glen Alden
he received.
His deal was made on Dec. 29, after negotiations of a week or 10 days.
GLEN ALDEN OFFER FOLLOWS
Two days later--the 31st?Glen Alden mailed to Endicott Johnson
stockholders an offer of $30.50 a share, which was $3 above the close
for the stock Dec. 30. The shoe company stockholders got the offer
in the mail Monday?the second?or Tuesday?the third.
A question for the SEC is who supplied Glen Alden the Endicott
Johnson stockholder list? Endicott Johnson's president says Kaplan
did.
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TAX-EXEMPT FOUNDATIONS: IMPACT ON SMALL
Another question is did anyone connected with Endicott Johnson
supply Glen Alden confidential information as to the shoe company,
such as copies of an engineer report? Endicott Johnson's president
says Kaplan did.
In line with the Stock Exchange's "hot news" requirements and the
SEC's requirements as to disclosure when a proxy fight threatens, the
movements in the market call for some explaining.
Endicott Johnson closed Dec. 28 at $24.621/2, unchanged from the
previous day. Volume was 2,300 shares. The next day?the date of
Mr. Kaplan's deal?volume jumped to 4,600 and the price rose $1.371/2
to $26. The next day?the 30th?volume was 4,400 with the day's
close $27.50, up $1.50. It sold that day as high as $28.
The first day of trading of the new year the stock jumped to $31,
up $3.50 on a volume of 9,800 shares. The news was then out of the
Glen Alden offer. The next day?the 4th?the stock touched $31.121/2
and closed at $31.
In the same period Glen Alden did little, actually losing about 25
cents a share between Dec. 27 and Jan. 4.
TRYING A LONG TIME
Mr. Kaplan had been trying to dispose of his stock some time before
his deal with Glen Alden and List. Last Spring he reported to Endi-
cott Johnson that List might be interested in buying control. Then,
he wanted Endicott Johnson to buy his stock, either directly or use
pension fund money. Later he sought to arrange a secondary distribu-
tion of his stock through the company's bankers. Then, he made his
deal with List, followed by Glen Alden's offer for tenders of Endicott
Johnson stock.
Kaplan's deal for his stock and the Glen Alden offer did not become
public knowledge until after the Endicott Johnson stock started to
move.
The question for the Stock Exchange is was there any "leak" on
the tender offer?
Endicott Johnson Corp.
Dec. 27
Dec. 28
Dec. 29
Dec. 30
Jan. 3
Jan. 4
Dec. 27
Dec. 28
Dec. 29
Dec. 30
Jan. 3
Jan. 4
High
25%
25
26
28
31%
31%
Glen Alden Corp.
High
15%
15%
15%
15%
15%
14%
Low
24%
24%
24%
26%
30%
31
Low
15
14%
14%
15%
14%
14%
Close
24%
24%
26
27%
31
31
Close
15%
14%
15
15%
14%
14%
Net Chg.
+1%
+1%
+3%
Net Chg.
+%
-I-%
+%
?%
+ii
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Exhibit 23
[From New York Journal-American, Jan. 8, 1961]
LESLIE GOULD, FINANCIAL EDITOR: ENDICOTT JOHNSON A "RERUN" OF
DIRECTOR'S EARLIER DEAL
For Jacob Kaplan, the Endicott Johnson director who sold out to
the group seeking to take over the Nation's No. 2 shoe company, the
episode is almost a rerun of an earlier venture.
Then, Kaplan, who operates largely through one of those tax free
charitable foundations, set out to become a steel tycoon. The time was
1951.
In Endicott Johnson, Kaplan about two years ago acquired 60,000
shares or 7 percent of the shoe company's stock. He put 54,000 shares
in the charitable foundation. His next move was to demand and get
a place on the board, making him an "insider."
KAPLAN SHOULD DISCLOSE
He has just swapped his holdings for stock in Glen Alden, an
industrial complex, and two days later Glen Alden made an above-the-
market offer to Endicott Johnson stockholders for their holdings.
The yet to be answered question is what if any difference there is
between the deal made with Kaplan and the cash offer to Endicott
Johnson shareowners. Glen Alden is headed by Albert A. List, who
also has one of those tax free charitable foundations.
Kaplan made his fortune in Welsh Grape Juice and earlier in a
market coup in Cuban molasses.
In his bid to become a steel tycoon, Kaplan first bought into Pitts-
burgh Steel Co., which, like Endicott Johnson, is largely a family
run affair. The company then was dominated by J. H. Hillman, Jr.,
and his family.
HILLMAN PROVES ADROIT
Kaplan, as in Endicott Johnson, demanded and got a place on the
Pittsburgh board. Hillman instead of giving battle to Kaplan did an
adroit selling job. This was that since Hillman had 20 per cent of
Pittsburgh, maybe a more fertile field would be in Sharon Steel.
It just so happened that another Hillman enterprise?Pennsylvania
Industries?had 64,000 shares or 61/2 per cent of the Sharon stock.
The Hillmans might be persuaded to swap the Sharon stock for
Kaplan's holdings in Pittsburgh. Kaplan "bought" the deal. At
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TAX-BXEMPT FOUNDATIONS: IMPACT ON SMALL BUSINESS 6
the same time Sharon bought Pittsburgh Steel's holdings in National
Supply.
Kaplan demanded a place on the Sharon board, but after getting on
he had several run-ins with the two Roemers?H. A., Sr., and jr.?
who were chairman and president and who with their families had
20 per cent of the Sharon stock.
BLOCKED, SO JIB SELLS STOOK
Kaplan never got any further in his move to gain control, so an
arrangement was made for him to sell his holdings at virtually the
price he had paid. This was done through a secondary distribution.
Prior to this there were stories in Pittsburgh that Kaplan had plans
to head up a merger of Sharon and several other small independent
steel companies.
In his Welsh Grape Juice deal, Kaplan, who acquired control in
1945, made an unparalleled partnership agreement?turning Welsh
over to the 4,976 member National Grape Co-operative Association.
This was in 1952. The deal in effect provided for payment out of
Welsh profits, and Kaplan's return was handsome.
In Endicott Johnson, Kaplan first tried to have the company or
its employe pension fund buy him out. Next, he sought to make a
secondary distribution. Then, he made his swap deal with Albert
List and Glen Alden, controlled by List.
The market movements of Endicott Johnson shares on the Stock
Exchange are interesting. The directors, including Kaplan, on Dec. 9
voted to omit the 40-cent quarterly dividend. The stock that day
broke $3.50 to $25.50, and sold down later to a low for the year of
$23.50. Earlier in the year it had been as high as $38.50.
TWO QUESTIONS FOR SEC
The day before Kaplan closed his deal to get out the stock closed
at $24.621/2. The next day?the 29th?the day of his deal?it went
up $1.371/2 and $1.50 on Dec. 30 and on Jan. 3?when Glen Alden made
the $30.50 a share tender to stockholders?it jumped $3.50 to close at
$31. It closed last night at $31.621/2.
Two questions for the SEC are:
Who bought after the low was made on the dividend omission?
Who bought before the Glen Alden cash offer was made public?
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Exhibit 24
[From the Philadelphia Bulletin, Jan. 17, 1961]
THE BUSINESS U TLOOK : STOCK SWAP BY 2 CHARITIES LED To FIGHT
FOR SHOE FIRM
(By J. A. Livingston, financial editor)
Up in the Triple Cities area of New York State, citizens of Endi-
cott, Johnson City, and Binghamton have become Bunker Hillers?
but with stock certificates not muskets.
They have organized to repel a corporate invader armed with the
funds of a tax-free charitable foundation. So, you and I, as federal
taxpayers, are inadvertent participants in this struggle for control of
Endicott Johnson Corp., the nation's second largest shoe company.
As a first move toward acquiring Endicott Johnson, Albert A. List,
president of Glen Alden Corp., traded an unspecified number of Glen
Alden shares owned by Albert A. List Foundation, Inc., for the 60,000
Endicott Johnson shares controlled by J. M. Kaplan. Fifty-four
thousand of these came from the J. M. Kaplan Fund, Inc., also a
charitable foundation.
TOWNSPEOPLE ORGANIZE
Kaplan had controlled Welch Grape Juice, IIearn's Department
Stores, and other companies. Glen Alden, once primarily an anthra-
cite company, is now a corporate conglomerate of textiles, auto parts,
movie houses, real estate, oil and gas.
The skein of events began on November 12, 1959. According to a
court affidavit, Kaplan then presented himself to the Endicott Johnson
board of directors as the owner of 60,000 shares of stock through his
foundation and relatives. He was elected to the board. Once List
had Kaplan's stock in hand, he made an open offer to all Endicott
Johnson stockholders to buy them out at $30.50 a share.
Frank A. Johnson, president of Endicott Johnson, and townspeople
organized committees to buy up shares to vote against Glen Alden
in a proxy fight. They feared Glen Alden might liquidate the com-
pany and deprive the communities of their largest employer. List
denies any such intention. He says he wants to reorganize the com-
pany and rebuild its earning power.
Regardless of intent, the episode reveals in full nakedness how
charitable foundations can be misused. A charitable trust, or founda-
tion, is granted tax-free status by Congress solely for a charitable
purpose Assets are not to be employed to enrich the donors or
founders or to aggrandize their economic power.
340
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TAX-EXEMPT FOUNDATIONS : IMPACT ON SMALL BUSINESS 6
UNNECESSARY RISK?
A person can build up a foundation by contributing, every year,
part of his income. If the investments are well chosen, the fund may
grow rapidly through capital appreciation. Only income must be
disbursed.
The foundation's sponsor may be able to use the assets to buy control
of companies. In so doing, he becomes an indirect beneficiary of the
trust through the power it confers on him. He can install himself as
president of a corporation so acquired. He can find jobs for friends,
relatives and business associates. He can favor friends with business.
Kaplan has said that Endicott Johnson was a "dying company."
Therefore, he wanted to bring in Glen Alden's management to revive
it. That raises this question: Is it prudent and proper for a trustee
of a foundation to invest charitable funds in a company which he
thinks requires a managerial pulmotor? Isn't that taking a specu-
lative risk which a trustee ought to avoid?
Reports of charitable trusts to the Treasury do not easily disclose
how assets are being used. Information returns must be filed annually
disclosing income, disbursements, and assets. However, unless the
trust owns "10% or more of any class of stock of any corporation," it
doesn't have to disclose the name of the company. If a large tax-
payer sets up several trusts himself or through relatives, he could
without disclosure, easily control companies by confining holdings in
each trust to less than 10% of a company's stock.
MORE INFORMATION NEEDED
To guard against the use of charitable foundation assets for pur-
poses of corporate control, it might be well for the Treasury Depart-
ment to seek additional information to get behind a trust's facade. It
might ask:
Are any officers or trustees of the trust or foundation or any of its
major contributors officers, directors or principal (10%) stockholders
in a corporation in which the trust has an investment of more than 5%
of its net assets? If yes, who are they and which are the corpora-
tions? This would disclose control or influential relationships of offi-
cers, trustees, and contributors to corporations.
Furthermore, a list of stocks in which the trust has more than 5% of
its net assets invested ought to be required. Then, by inspection,
Treasury officials and the courts could determine whether a trust's
assets were diversified or were concentrated in a few stocks.
Kaplan and List may not have abused their trusts, but their trans-
action points up the manner in which a charity sometimes serves two
masters.
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Exhibit 25
U.S. TREASURY DEPARTMENT,
INTERNAL REVENUE SERVICE,
Washington, D .0 ., October 30,1964.
Hon. WRIGHT PATMAN,
Chairman, Subcommittee Foundation Study, Select C ommittee on
Small Business, Room 1136, House Office Building, Washington,
D.C.
DEAR MR. PATMAN : This is in further response to your letter of
October 9, 1964 in which you requested copies of four Revenue Service
documents dealing with the J. M. Kaplan Fund. Three of the docu-
ments in question (carrying August 7, 1956, December 31, 1956, and
September 23, 1959 dates) represent internal correspondence between
our district office in New York and the Rulings Division in the Na-
tional Office.
It has long been the position of the Treasury Department that
proper administration of the revenue laws requires such intra-agency
advisory opinions be kept within the confines of the Executive Branch.
Therefore, in the interest of maintaining free expression of opinion
within the Service, I am. not able to mare these documents available
to you.
We have no record that the fourth document, referred to by you
as a "July 8, 1958?Memoranda etc. of conferences at the National
Office," ever existed. At any rale it is not to be found in our files.
Sincerely,
BERTRAND M. HARDING,
Acting Commissioner.
342
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Exhibit 26
RUSSELL SAGE FOUNDATION,
New Y ork,N .Y .,September 17 , 1964.
MT. MITCHELL ROGOVIN,
Assistant Commissioner,
Office of internal Revenue,
12th Street and C onstitation Avenue,
Washington, D.C.
DEAR MR. ROGOVIN : I am replying to your inquiry concerning Rus-
sell Sage Foundation's appropriations to State agencies during the
past two years.
At its meeting of May 6, 1964 the Board of Trustees of Russell Sage
Foundation appropriated an amount not to exceed $50,000 in support
of an analysis of the operations of more than 5,000 charitable trusts
and corporations registered and filing financial reports with the At-
torney General of California. The objectives of the analysis are two-
fold: (1) to examine the nature and types of charitable organizations
in California, and (2) to devise a system for the annual compilation
of data that would reflect the evolution and growth of private chari-
table organizations.
General supervision of the study is provided by Wallace Rowland,
Assistant Attorney General; fiscal administration is provided by the
office of the State Controller; disbursements are made from a, special
account in the State Treasury for stated purposes by the Controller on
order of the Attorney General.
There is one other appropriation in which the recipient might be
viewed as a State agency. This appropriation was made to the Na-
tional Conference of Commissioners on Uniform State Laws. At its
meeting of May 6, 1964 the Board of Trustees of Russell Sage Founda-
tion appropriated an amount not to exceed $23,500 in support of an
analysis of the problem of uniform legislation in the field of consumer
credit and the preparation of a monograph.
General supervision of this study is provided by Professor Allison
Dunham of the University of Chicago Law School and Executive
Director of the National Conference of Commissioners on Uniform
State Laws; fiscal administration is provided by the National Con-
ference through their Treasurer Mr. Talbot Rain of Dallas, Texas.
The Foundation has not made other appropriations to State agen-
cies during the past two years. It has, of course, made many appropria-
tions to State-supported colleges and universities. These are not
ordinarily viewed as State agencies, so I am not including a description
of these appropriations in this letter.
343
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344 TAX-EXEMPT FOUNDATIONS: IMPACT ON SMALL BUSINESS
In the event that you wish further information concerning these
appropriations or any other activities of the Foundation, please let
me know.
Sincerely yours,
ORVILLE G. BRIM, Jr.
Enclosures:
1. Copy of request for grant to finance an analysis of charitable
trusts and corporations in California, March 31, 1964, to Russell
Sage Foundation, from Wallace Howland, Assistant Attorney
General, Department of Justice, State Building, San Francisco 2.
2. Copy of request for support of an analysis of the problem of
uniform legislation in the field of consumer credit and the prep-
aration of a monograph, March 23, 1964, to Russell Sage Foun-
dation, from Allison Dunham, Executive Director, National Con-
ference of Commissioners on Uniform State Laws.
STATE OF CALIFORNIA,
OFFICE OF THE ATTORNEY GENERAL,
DEPARTMENT OF JUSTICE,
San Francisco, March 31, 1964.
Re Request for Grant to Finance an Analysis of Charitable Trusts and
Corporations in California.
RUSSELL SAGE FOUNDATION,
WO Park Avenue,
New Y ork,N.Y.
GENTLEMEN : Request is made for a grant by Russell Sage Founda-
tion in an amount not to exceed $50,000 to finance an analysis of the
operations of more than 5,000 charitable trusts and corporations
presently registered and filing financial reports with the Attorney Gen-
eral of California.
The objectives of the proposed analysis would be twofold. First, it
would disclose the nature and dimensions of charitable organizations
at work in the most populous state of the Union. No study as compre-
hensive or in such depth as is here proposed has been made heretofore
for want of readily available source of material. Such material is
now contained in the Registry of Charitable Trusts, an agency of the
Office of the California Attorney General.
The second objective would be to devise a system for the annual
compilation of a continuing series of significant statistics and data
that would accurately reflect the evolution and growth of private
charitable organizations of all types. Such a system could be extended
to the increasing number of states which, in recent years, have fol-
lowed the lead of California in requiring registration and financial
reporting by charitable organizations to their respective Attorneys
Genera1.1 These states already comprise a group whose data, if com-
piled and reported on a uniform basis, would be of national signifi-
cance and importance.
1 The Uniform Act has been adopted, in some cases with modifications by California,
Iowa, Michigan, Illinois, Oregon. It is under consideration in Virginia, Washington, Wis-
consin, and Missouri. States having other forms of registration requirements include
New Hampshire, Rhode Island, and Pennsylvania.
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TAX-EXEMPT FOUNDATIONS: IMPACT ON SMALL BUSINESS 345
The background giving rise to the need for the proposed project is
as follows:
THE CALIFORNIA REGISTRY OF CHARITABLE TRUSTS AND ITS BACKGROUND
In 1955 California was the first state to enact the Uniform Super-
vision of Trustees for Charitable Purposes Act (Calif.Stats. 1955,
chap. 1820; Gov. Code, ?? 12580-95). In the drafting of this statute,
California worked closely with the Board of Commissioners on Uni-
form State Laws. First enacted for a trial period of two years, it was
extended in 1957 and made a permanent feature of California law in
1959 (Calif. Stats. 1959, chap. 1258). A copy of the Act and the
regulations issued thereunder is attached as Exhibit A.
Briefly stated, this Act is a registration and reporting statute. As
an aid to the Attorney General in his common law function of being
the legal representative of the beneficiaries of property dedicated to
charitable purposes, the Act requires every individual trustee and
charitable corporation holding property in trust for charitable pur-
poses to register, files its founding documents, and submit periodic
financial and other reports to the Attorney General. Excepted from
this requirement are religious organizations, educational institutions,
and hospitals. Bank Trustees must register but are not required to
file routine periodic reports.
By 1959 the volume of registrations and the resulting administrative
burden had risen to the point where Attorney General Stanley Mosk
created, as a part of his own Office, what has since been known as the
Registry of Charitable Trusts.
Located in Sacramento, the Registry is the centralized depository
of all registrations' periodic reports and documents pertaining thereto.
The staff of the Registry presently comprises the registrar, three
qualified auditors who make office examinations of the financial re-
ports, and four clerical assistants.
As of January 1, 1964, there were 5,203 charitable trusts and cor-
porations registered and filing periodic reports with the Registry; an
additional 550 is
registrations were in various stages of com-
pletion. 1963 s the first year during which there has been a decrease
in both the monthly and annual rate of registration. We are of the
opinion that present registrations comprise 90 per cent or better of
those presently required to register. The current rate of some 78
registrations each month for the most part reflects the creation of new
charitable trusts and corporations. We expect it to increase rather
than diminish in the years ahead.
By express provision in the Act, the register of charitable trusts, the
founding documents and periodic reports of registrants are open to
public inspection.
During 1963 examination of the public files in the Registry com-
prised 271 visitor days. Most of these examinations were for the
purpose of ascertaining sources of charitable funds available for pur-
poses in which the visitors were interested.
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346 TAX-EXEMPT FOUNDATIONS: IMPACT ON SMALL BUSINESS
THE NEED FOR A COMPREHENSIVE ANALYSIS OF THE FILES OF THE REGISTRY
The files of the Registry now contain complete data concerning the
type and purpose of each registrant and an up-to-date financial analy-
sis of its operations. Included is a complete schedule of investments
in all cases where the security portfolio is valued at $100,000 or more.
The actual register comprises a Kardex file in which are recorded
only basic information and a generic classification of purpose.
Examination of any file in the Registry will thus give a complete
picture of the nature and operations of each registrant. To date,
however, it has not been possible to analyze, classify, and tabulate the
available data. Consequently, it is quite impossible to know anything
of the nature and extent of private charity in California, taking it
as a whole.
The 5,200 registrants include both individual trustees and charitable
corporations of all types. They include both foundations and operat-
ing charities. As used here the term "foundations" refers to all types
of endowments and contributions of capital, the income from which
is distributed to others for actual expenditure; it thus includes both
incorporated foundations and testamentary trusts whose corpus is
permanently dedicated. The term "operating charities" refers to all
types of organizations and agencies engaged in the actual performance
of a charitable service or function, regardless of the source of their
funds or the manner of their procurement.
Based upon projections of samplings made some time ago, it is
estimated that the 5,200 registrants, in the aggregate, control fixed
capital of the order of $4 billion and have an annual income from all
sources in excess of $400 million. These estimates are significant in
evaluating the scope of the Attorney General's supervisory responsi-
bility. Note, however, that the estimates include transfers between
charitable organizations of an unknown amount. For example, a
foundation may grant money to a Community Chest which, in turn,
distributes a part of it to an operating charity such as a day nursery
for working mothers. One charitable dollar would thus be reported
three times.
At present, there is no way of knowing the extent of the foundation
movement: the number of incorporated foundations as compared to
unincorporated trust estates, their aggregate assets, income, or the
charitable purposes which they serve. Likewise unknown is the num-
ber and type of operating charities working in any given field of
endeavor, the relative importance of their different sources of income
and methods of fund raising.
To date there is no uniformity in the financial reporting practices
of charitable organizations, even among those of similar types work-
ing in the same or closely related fields. Until now, the Attorney
General of California has refrained from prescribing any specific
or uniform reporting system. It was felt that it would be premature
to move in this direction until the present actual practices were known
and could be evaluated. The administration of the Registry to date
has disclosed individual situations pointing to a need for legislative
changes in such widely varying fields as probate practice, corporation
law governing the formation and operation of nonprofit and chari-
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table corporations, and the statutes governing the administration of
charitable and other public trusts as distinguished from private trusts.
Until the files of the Registry are analyzed and classified, however, it
is impossible to quantify the extent of any given practice or the lack
thereof and otherwise to evaluate the importance and the need for
legislation action. One example of this should here suffice.
Lacking any statewide system of controlling abuses that have arisen
in the public solicitation of funds for charitable purposes by cam-
paigns and fund-raising drives, some 100 or more municipalities and
counties in California have established some type of permit or licens-
ing requirement for those engaged in public solicitation. The result-
ing duplication has created administrative difficulties and attendant
expense on the part of organizations operating throughout the state,
or even major portions thereof. Short of an analysis of the files of
the Registry, the number, size and relative importance of these organi-
zations is not known. Without such a frame of reference it is difficult
to evaluate the need for statewide licensing or estimate the cost there-
of, or to give adequate consideration to alternative suggestions, such
as statewide uniform licensing requirements to be locally administered.
Reference has already been made to the fact that the founding docu-
ments and financial reports of California registrants are open to public
inspection. At present there is no index to the files of the Registry
by specific purpose, type of organization, or the present availability
of funds or services of the type concerning which information is being
sought. For want of such classification and index there is a more or
less constant duplication of the research and examinations made by
interested persons. Recently the representatives of some six institu-
tion of higher learning were forced to make identical, time-consum-
ing examinations of several hundred files in order to obtain specific
information that should have been much more quickly and readily
available. Each of them, seriatim, duplicated the work done by the
others.
THE PROPOSED PROJECT AND THE NEED FOR PRIVATE FINANCING
During the past year considerable effort has been devoted to develop-
ing and listing the data that should be obtained from an overall analy-
sis of the Registry files. Several broad fields of inquiry are involved:
the nature, purpose, and structure of the organization; its control, with
reference to the persons or authority to which it is directly responsible;
the sources of its funds; the method and purpose of the distribution
or expenditure of funds; the nature and extent of its assets and invest-
ments, income and expenditures. Also of interest are the extent and
nature of certain powers, privileges, and rights granted by present law
whose propriety, while undoubted with respect to private trusts and
private corporations, may be questionable when applied to charitable
institutions.
It is practicable to put data extracted from the files on IBM punch
cards. This will permit data processing by the stag and equipment
already in the California Department of Justice. This is the overall
departmental structure of which the Attorney General is the head, and
which includes among its components the Office of the Attorney Gen-
eral and the Registry of Charitable Trusts.
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348 TAX-EXEMPT FOUNDATIONS: IMPACT ON SMALL BUSINESS
Much of the data desired is static. For example, the legal nature of
the organization seldom changes. On the other hand, it also comprises
financial information which is subject to annual change. This latter
aspect of the overall picture is scheduled to be arranged by data proc-
essing technicians so as to form a practical and convenient basis for
continuing series of annual statistics.
The examination of the source material contained in the 5,200 files
and the extraction and recording of the required data on worksheets is
a project of considerable magnitude in terms of the man-hours in-
volved. It is quite beyond the capability of the permanent staff of the
Registry to undertake it.
Consideration has been given to the various ways in which qualified
personnel could be obtained to extract the required data from the raw
source material. For all practical purposes the State Government of
California is on a civil service basis. For this and other reasons there
are substantial legal, as well as administrative, difficulties in recruit-
ing the various skills required for this project because of its short
duration. Moreover, it is impracticable to obtain the necessary man-
power on a short-term basis from other departments or agencies of
the State.
If the necessary funds can be obtained from private sources, there
are no legal obstacles to its receipt and use by the State of California
to defray the expenses of the proposed project. There is precedent
and established procedure for the deposit in a special account in the
State Treasury, somewhat akin to a trustee account in private usage,
of funds granted for a specified purpose. In this case, disbursements
from such a special account would be made for the stated purposes by
the State Controller on order of the Attorney General.
Investigation has revealed the availability of qualified personnel,
resident in Sacramento where the Registry is located, to undertake
this project. If funds are made available the Attorney General pro-
poses to contract with a qualified research organization to assume the
responsibility for the selection and employment of a project staff in-
cluding a project director who will give full time supervision to the
work. Several members of the faculty of Sacramento State College
with practical experience in research of this type have become inter-
ested in the project. Happily, it is feasible to conduct the examina-
tion of the Registry files during the coming summer months when
graduate students in accounting, several of them already qualified as
CPAs, would be available to do the actual work.
There are no legal problems involved in the Attorney General
contracting for the services outlined above and making payments there-
for from funds on deposit in a State Treasury Special Account. In
short, California law and the procedure already established thereunder
permits considerable flexibility.
Our studies and tentative selections of data to be compiled from
the files have gone as far as practicable with our own resources. By
letter dated February 3, 1964 addressed to Dr. Leonard Cottrell,
Assistant Director, Russell Sage Foundation, was furnished with the
then current listing of the data and information in which the Attorney
General is interested.
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TAX-EXEMPT FOUNDATIONS: IMPACT ON SMALL BUSINESS 349
If the project is to result in the greatest utility and benefit to
charitable organizations of all types and the interested public, it is
highly desirable that we be in a position to confer with and have the
assistance of consutants qualified in this field. We should like to
submit the classifications and other data we have tentatively selected
to the scrutiny., criticism and suggestions of a panel or committee of
qualified individuals. Such a panel would include representatives of
the major types of charitable organizations, viz., foundations, testa-
mentary trusts and operating charities. In this connection, it would be
most helpful if it could be arranged for us to have the benefit of Mr.
F. Emerson Andrews' broad experience.
After consultation with those who would be in charge of the actual
work, we estimate that the actual examination of files of the Registry
and the reduction of the desired data to work sheet form can be accom-
plished by the end of September providing that the work can be
planned to commence not later than June 1. A proposed budget cover-
ing the expenses to be paid with donated funds is attached hereto.
On its part, the State would expect to make available the services
of the Registrar and the Assistant Attorney General in Charge of
Charitable Trusts matters to give general direction to the project and
to resolve questions arising from the course of the work. In addition,
one or more of the clerical staff of the Registry familiar with the
files and existing procedures would guide and assist the project staff
in every way possible. The extensive data processing equipment of the
California Department of Justice would be made available as required.
Finally, the facilities of the State Printer would be available to print
whatever reports, directories or other publications may appear desir-
able concerning the results of project.
TI IE PROPOSED PROJECT WOULD COMPLEMENT OTHER STUDIES BEING MADE
BY RUSSELL SAGE FOUNDATION
We are aware of the work of Mrs. Marion R. Fremont-Sniith on
behalf of Russell Sage Foundation in making a study of Public Ac-
countability of Charitable Funds. We understand that this com-
prises a comprehensive survey of the existing programs of regula-
tion and supervision by the several states active in this field as well
as by the federal government.
We believe that the project here proposed would be a natural com-
plement to the present Study. By establishing for the first time
quantitative relationships which exists between important segments
of private charity, it would provide a valuable frame of references
for evaluating the need for and effectiveness of present regulatory
programs, both state and federal. The type and extent of the super-
vision -required by foundations and other endowed institutions and
trusts whose function is limited to the management of capital funds
and the distribution of income obviously differs from that required
by operating charities. Likewise, within the latter class, there are
self-evident differences between those which engage in their own
fund-raising activities and those which rely upon fund-raising orga-
nization. These, in turn, vary from Community Chests to prores-
39-915-64--,23
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sional fund-raisers who charge a fee for their services. The quanti-
tative extent and relative importance of these problems cannot be
evaluated until compilation of data as complete as that now contained
in the California Registry, such as is here proposed, has been made.
Equally unknown is the influence and importance of corporate endow-
ments as compared with testamentary trustees. Yet to all of these
and other classifications does the common law authority of a State
Attorney General extend. Until a perspective of the overall picture
of private charity i at work is obtained, there is grave danger of mis-
placed emphasis n regulatory legislation or supervisory activity.
It is in this sense that the proposed subject will implement and add
significance to the above-mentioned Study of Accountability of Char-
itable Funds.
Similarly2 we are aware of the Study of the Investment Policies
of Foundations currently being made for the Russell Sage Founda-
tion. The California Registry requires the annual filing of the com-
plete details of all investment portfolios of charitable trusts and
corporations having a value in excess of $100,000. While statements
of investment policies are not routinely required, analysis of the
portfolio schedules on file would throw significant light upon the
actual investment practices of many types and classifications of charit-
able organizations. It is believed that this would give added breadth
and statistical depth to the present Study of Investment Policies.
In view of the practice of Russell Sage Foundation in publishing
commentaries and reports of the many research projects it has under-
taken in the past, it is assumed that the Foundation might well desire
to follow a similar course upon completion of the project here pro-
posed. We foresee neither legal obstacles nor other objections, espe-
cially in view of the fact that the basic information to be surveyed is
presently contained in documents which, by mandate of the California
Statutes under which they are filed with the Registry, are open to
public examination. A matter of some priority with the California
Attorney General, however, is the availability of the project results
for consideration by his .Advisory Committee on Charitable Trust
Matters, now in process of formation. Therefore, it may well be that
the State will desire to reproduce and publish statistics, tables, charts
and other information in a format suitable for its own purposes well
in advance of the preparation of any publications that the Foundation
might desire to undertake.
So that you may understand the scope of our present plans we pro-
pose to appoint in the near future an Attorney General :Advisory
Committee on Charitable Organization. This will be a broadly based
Committee composed of outstanding civic leaders with experience and
who demonstrate an interest in charitable work representative of lead-
ing organizations of the several different types to be found within the
framework of the charitable movement and other qualified persons.
Similar committees have, in the past, made substantial contributions
in analyzing problems of public concern and formulating solutions
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TAX-EXEMPT FOUNDATIONS: IMPACT ON SMALL BUSINESS 351
thereto. Obviously the work of such a committee in the field of chari-
table activities would greatly benefit from the results from the project
here proposed.
We appreciate the interest in the Registry and the work of our office
as shown by Mr. Donald Young on his recent visit to California. He
can undoubtedly implement the proposal here made with his own ob-
servations. If any further information concerning this matter is de-
sired, it will be forthcoming promptly upon request. Supplementing
this proposal are the several documents that we sent with our letter of
February 3, 1964 addressed to Dr. Cottrell. Additional copies are
available if desired.
Sincerely yours,
STANLEY MOSK,
Attorney General.
By WALLACE HOWLAND,
Assistant Attorney General.
Proposed budget, California Registry of Charitable Trusts project?
Based on six months duration
Supervision
$5,
148
Working Staff
5200 files at 11/3 hours per examination is 6,916 man-
hours or 173 man-weeks at an average wage of $150 per
week or 'approximately $3.75 per hour.
25,
950
Administrative Overhead:
Payroll preparation and disbursing, 10% of labor; in-
cluding employer contributions for various tax pur-
poses, processing of withholding tax, etc
3,
110
Equipment rental, supplies, communications
2,
500
Rent
3,
600
Large, suitable workroom available in same building in
which the Registry is located. Includes light and heat
but no janitor services. $600 per month.
Consultants and Conferences
6,
000
Includes travel and subsistence for Consultants and
Committee members participating in project purposes.
Contingencies and Printing Expenses
3,
692
50,000
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Exhibit 27
NATIONAL CONFERENCE OF COMMISSIONERS
ON UNIFORM STATE LAWS,
March 23, 1964.
DT. LEONARD S. COTTRBLL,
Russell Sage Foundation,
230 Park Avenue,
New York, N. F.
DEAR DR. COTTRELL : As you recall, I wrote you on February 5 con-
cerning the possibility of the Russell Sage Foundation being interested
in helping the National Conference of Commissioners .on Uniform
State Laws finance the preliminary aspects of its project to draft
comprehensive legislation in the field of consumer credit. You kindly
invited me to New York to confer with you and Dr. Brim, and you
also helped me with my problem of securing a competent sociologist
to prepare the monograph referred to in my letter. As a result of
my consultations with prospective sociologists, it appears to me that
my original application was faulty in the request for funds. I had
omitted, for example, an item for the cost of purchasing monographs,
describing the results of research projects which are relevant to our
project. I had also underestimated the cost of a sociologist7 and more
particularly of the necessity of some assistants to help with the re-
search.
I am accordingly resubmitting the application, but have added
what I believe to be are sufficient funds. If it turns out that there
is available more sociological data than I presently believe, it may
be that the submission continues to be on the low side, and I accor
ingly would like to reserve the privilege of asking at a later date for
a small supplement of the funds requested herein. In my original
submission I asked for a total of $17,000 for the cost of the three
stages of the project outlined therein. My revised estimate increases
this amount by $6,500. I am therefore asking for $23,500 for the three
stages of the project. I have increased stages two and three $500 each,
and stage one I have increased $5,500 as a result of my discussions with
the sociologist.
In my original letter, I indicated on page four that I was in the
process of selecting competent academic personnel to undertake the
project. At this stage of the project I propose the lawyer consultant
for the sociological and economic _part of the project to be Professor
William Hogan, of Cornell Law School. At a later time we propose
also to use Professor William Warren, of the Law School of the Uni-
versity of California, at Los Angeles. For the economic research
project described in my letter, which is now underway, I have secured
the help of Professor Robert Johnson, of the Graduate School of Busi-
ness Administration, at Michigan State University. For the sociolo-
352
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gist for stage one of the project, and also for his consultive capacities
in stages two and three, I propose to employ, if funds are available,
Assistant Professor Terence Hopkins of Columbia University. If,
for any reason, there must be a change in the personnel suggested
above, I will, of course, consult with you and Dr. Brim.
Noitem has been included in the budget for publication. Ideally, a
publishable monograph should result from this project. Since, as I
understand it, the Russell Sage Foundation has facilities of its own for
publication, it goes without saying that the Foundation should have
the first right to publish anything publishable from the project sub-
mitted. If, for some reason, the Foundation decides not to publish
the monograph, Mr. Hopkins will, of course, be permitted by us to
publish if he wishes' and if publication does not result from either
of these sources, the National Conference of Commissioners will then
consider whether it wishes to publish the monograph. We will, of
course use the monographs and the results of research in connection
with die work of our special committee preparing comprehensive legis-
lation in the consumer credit field.
I am attaching hereto a copy of my letter of February 5, 1964, which
outlines the project as I see it at this time, and the project for which
we are requesting funds from the Russell Sage Foundation. As indi-
cated above, the attached letter has been modified by this letter in the
sense that the funds requested have been increased, and the proposed
personnel have now been selected. I am also attaching to this letter
copies of a statement which I prepared for the meetings of the Special
Committee of the Commissioners, and also a copy of a pamphlet ex-
plaining the history and work of the National Conference of Commis-
sioners on Uniform State Laws.
Sincerely yours,
ALLISON DUNHAM,
Executive Director.
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Exhibit 28
NATIONAL CONFERENCE OF COMMISSIONERS
ON UNIFORM STATE LAWS,
February 5,1964.
Mr. LEONARD S. COTTRELL,
Russell Sage Foundation,
230 Park Avenue, New York, N.Y.
DEAR MR. COTTRELL : Last November I spoke to Mr. Donald Young,
at the suggestion of Professor Harry Jones, about a project of the
National Conference of Commissioners on Uniform State Laws to
draft comprehensive legislation in the field of consumer credit. At
that time, the question whether the Conference would proceed with
such a large project was not decided. Mr. Young suggested that when
our plans were more firm that I should indicate to you certain areas,
particularly in the preliminary planning stage of the project, where
we needed financing and submit such areas to your Foundation for
consideration of a possible grant to the National Conference of Com-
missioners on Uniform State Laws.
I am enclosing with this letter a mimeographed copy of a statement
which I prepared for the meetings, which the Special Committee of
the Commissioners have been having, and which also indicates the
necessity of large scale financing and the sources from which we hoped
to receive funds. It now appears reasonably clear that for the cost
of drafting itself we will be able to obtain funds "without strings"
from various members of the industries involved in supplying credit
to consumers. For obvious reasons, it is important that there be some
nonindustry funds in the support of the project, and it appears to me
that we will be able to get some funds for this purpose from non-
industry sources. In this letter I am asking the Russell Sage Founda-
tion for money to help us complete the preliminary planning phases
of the project. It is my personal opinion that it is extremely impor-
tant for the Russell Sage Foundation to participate in this new ap-
proach to consumer credit. In a real sense of the word, the Russell
Sage Foundation created this industry, and more than that, its use of
"field studies" and other nonlawbook research in the early part of
this century has set the pattern for a great deal of law research since
that time. I do hope that the Russell Sage Foundation can see its
way clear to help us with the preliminary planning.
I am also enclosing a pamphlet which describes the National Confer-
ence of Commissioners on Uniform State Laws. Perhaps, the most
significant information in this pamphlet for your purposes is the refer-
ence to the fact that the National Conference is an organization of
state officials and has a ruling from the Internal Revenue Service that
contributions to the organization are tax deductible and exempt, even
though the organization drafts and promulgates legislation for adop-
tion by the states.
354
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By this letter, I am asking your Foundation for about $17,000 for
the purposes of preliminary planning in undertaking research lead-
ingto the preparation of a Uniform Act on Consumer Credit. We
envisage the preliminary planning to be in three stages and to supple-
ment the research which has either been completed by others or is now
under way for the National Conference of Commissioners. The
present situation of research in the field of consumer credit is this:
the American Bar Foundation has prepared and made available to
the National Conference of Commissioners on Uniform State Laws
(before publication) a comprehensive collection and analysis of all
of the existing legislation concerned with consumer credit, including
but not limited to the small loan laws originally initiated by the
Russell Sage Foundation. There is being prepared for the Conference
a similar analysis by an economist of all of the existing economic litera-
ture and research in the field of consumer credit. Analysis of the
available information in the legal literature, and the economic litera-
ture, and research is accordingly either substantially completed or well
under way.
Collection and analysis of a similar type is needed of the research
which has been undertaken in sociology and in social welfare work
concerning the poor and other sociological problems, which may be
relevant to our problem of consumer credit. While the structure of
the proposed uniform act cannot be determined definitely until the
completion of the preliminary planning, it is highly likely that draft-
ing will be concerned with one or more topics in the following phases
of the consumer credit process:
(1) The prenegotiation phase?activities such as advertising de-
signed to place the consumer and credit supplier in contact with each
other.
(2) Negotiating phase?the process in which the consumer and
credit institution work out and agree upon terms of a specific credit
arrangement, limited by whatever maximum terms existing legislation
imposes.
(3) Formalizing phase?reduction of the terms agreed upon to a
form and the manner prescribed by statute in which the form must
appear to the consumer and credit institution, and regulations of sig-
nature by the consumer and delivery of a copy to the consumer.
(4) Performing phase?concerned with such matters as the priv-
ilege of prepayment, the requirement of receipts for the consumer; the
privilege of the credit supplier to assign the credit to another credit
supplier; the regulation of the documents to be delivered to the con-
sumer on full performance of the contract.
(5) Collecting or liquidating phase?consideration of the remedies
available on default such as repossession, garnishment, wage earner
bankruptcy and wage assignments.
(6) Statutory enforcement phase?sanctions to observe the regu-
latory statute.
Most of the existing statutory material is concentrated in phases
2, 3 and 6. We suspect that much of the existing economic research
will be found in phases 2 and 5, concerned, for example, with the prob-
lems of the cost of supplying credit and the profits of credit suppliers,
particularly of the profits a the marginal supplier. We propose to
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find out what sociological research has been undertaken which is
relevant to all of the phases listed above, and any others if there should
be others. For example, sociological research concerned with con-
sumer behavior may, on analysis, give insight helpful in drafting leg-
islation. We propose to analyze both the published sociological ma-
terial and the material available, perhaps under the guise of "market
research" in the offices of such suppliers of credit as Household Fi-
nance, Beneficial Finance and Sears Roebuck. We believe that we
will be able to get access to these private studies. For the purpose of
collecting and analyzing the sociological material, we believe we will
need $4,000 to compensate the sociologist doing the analysis, and a
legal consultant to help direct his analysis, and to pay the cost of
typing, and any transportation to the sources of the materials which
may be necessary. This is stage one of the preliminary planning as
we envisage it.
Stage two proceeds with the material collected from the law, eco-
omi c and sociological resources. This stage consists of the prepara-
tionby a lawyer, economist and sociologist of a monograph outlining
a recommended scope and structure of a proposed act in the field of
consumer credit based on an analysis of the three separate papers
previously prepared, and a monograph which points out the policy
decisions which must be made by the National Conference in resolving
any of the problems disclosed by the literature. This monograph
would also point out the areas where the existing and available re-
search seems to be inadequate, and it would recommend types of eco-
nomic and other social science research, which has not been undertaken
and which would be of major importance as an aid in drafting new
legislation. As we envisage- this report, it would formulate problems
to the solution of which well constructed sociological or economic ex-
periments might contribute. For stage two of the preliminary plan-
ning, we estimate that we will need $8,500 to compensate the law pro-
fessor, economist and sociologist in preparing this monograph, to
finance one or two meetings of these three persons, and to pay the cost
of duplicating enough copies to be made available for the third stage
of the preliminary planning part of the consumer credit project.
The third stage would be a meeting or conference of the special com-
mittee of the National Conference of Commissioners on Uniform State
Laws in charge of drafting consumer credit legislation, the lawyer
economist and sociologist reporters mentioned in the preceding para-
graph, and experts in the field from among consumers counsel of var-
ious state governments, labor unions, settlement houses or other wel-
fare agencies, banks, personal finance companies, small loan companies,
credit unions, and retail stores using revolving credit where the mono-
graph previously prepared would be considered. As a result of this
conference or meeting the special committee of the Commissioners
and the draftsmen would then prepare a statement outlining the areas
they propose to cover in drafting legislation and recommending addi-
tional research directed toward finding answers or insights to specific
problems. For this stage of the project the National Conference of
Commissioners on Uniform State Laws needs $1,500 to cover the cost
of transportation and attendance at the meeting, preparation of notes
and a report of the meeting, and the cost of duplicating the necessary
copies of the statement resulting from the meeting.
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The time schedule for the project would be to complete the three
stages not later than October 1. We will commence work on stage one
almost immediately. Stage two should be begun in June, if not before,
and completed as soon thereafter as possible. Ideally, we would like to
complete stages one and two so that the Conference referred to in
stage three could be held in conjunction with the Annual Meeting of
the National Conference of Commissioners on Uniform State Laws in
New York City from August 3 to August 8. For various reasons, such
as duplicating time and the difficulty of securing additional hotel ac-
commodations in New York for the advisers not otherwise attending
the Bar Association meetings in New York, it may be advisable to
postpone this meeting of advisers until September.
The process of Zecting competent academic personnel for the
project is now under way. As Executive Director of the project,
I have been obtaining necessary information and consulting with
my colleagues in the world of law professors on which to make rec-
ommendations to the special committee of the Conference. For the
lawyer and economist members of the panel of reporters, we are, at
the moment, actively considering Professors William Hogan of Cor-
nell Law School, and William Warren of the Law School of the
University of California at Los Angeles, and Robert Johnson of the
Graduate School of Business Administration at Michigan State Uni-
versity. Professor David Caplovitz of the National Opinion Research
Center and the Department of Sociology of the University of Chi-
cago, and Professor Hans Zeisel of the Law School of the University
of Chicago, are helping the Director prepare a list of possible sociol-
ogists for that part of the project. At the moment, we have no list of
names to report, but are proceeding to prepare one.
To summarize : For the three stages of the preliminary drafting
to be completed by October 1, the National Conference of Commis-
sioners on Uniform State Laws needs $17,000 to pay the out of pocket
cost of the studies and meetings. No sum is included for overhead.
Stage one, consisting of the preparation of an analysis of existing
sociological literature would cost, we believe, $4,000. Stage two, the
preparation of a monograph outlining what the proposed legislation
and research should consist of, would cost $8,500. Stage three, con-
sisting of a conference of a special committee of the Commissioners,
the lawyer economist and sociologist reporter, and experts in the field
would cost, we estimate, $4,500.
If it would be helpful to you for me to supply additional informa-
tion, I would be glad to do so and also if it would be helpful, I would
be glad to arrange a trip to New York to consult with you. I do hope
the Russell Sage Foundation will contribute to this project, which
in my opinion will serve the public interest, particularly as part of a
much larger program of dealing of some of the problems of poverty
and ignorance.
Yours truly,
ALLISON DITNIIA1VI,
Emecutive Director.
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Exhibit 29
JANUARY 10,1964.
A PROJECT FOR A UNIFORM LAW ON CONSUMER CREDIT
The National Conference of Commissioners on Uniform State Laws
proposes to prepare for submission to the states a uniform or model
act or series of acts on all aspects of consumer credit, including retail
installment sales, small loans, personal loans, bank loans and usury.
The purpose of this memorandum is to submit a proposal for financial
aid for this project.
Because of the magnitude of the project, the Conference intends
to seek funds from many sources, including members of the financial
and business community involved with consumer credit. The project
is, however, the responsibility, of the Conference and is subject to its
control. It will use its regular drafting procedures, which include,
for major projects, the appointment of draftsmen, research associates
and reporters, who, under the direction of the special committee, will
be in charge of the project from research through completion of the
final draft to be submitted to the states. The conclusions on which
the legislation is based will be those of the Conference of Commission-
ers on Uniform State Laws. While experts from many groups, in-
cluding special interest groups will be consulted frequently, the Con-
ference makes the decisions as to the form and content which any
proposed legislation takes. While any social science and other re-
search undertaken for this project will be used by the Conference in
making decisions about the nature and scope of the legislation, any
reports and data will be available for publication either by the Con-
ference or, if the Conference decides not to publish the results of such
research, by the persons engaged in the research.
The Conference believes that persons and foundations encouraging
research which may be significant in solving major problems of urban
living should be interested in this project for it involves an area of
law which touches the lives of almost all of the American people.
The project should also commend itself to those interested in improv-
ing the rights and welfare of the less fortunate members of society.
Those interested in developing effective consumer and worker educa-
tion programs designed to help workers and others adjust more easily
to the complexities of urban living should also be interested in both
the research necessary for the project and the objective of the proj ect?
a simplified and understandable consumer credit law. For the above
reasons and for the reason a comprehensive and objective attack on
the problems of consumer credit through sound legislation may help
the consumer credit industry itself, members of the industry should
support the project.
358
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TAX-EXEMPT FOUNDATIONS: IMPACT ON SMALL BUSINESS 65
Before outlining the project a few words should be said about the
nature of the National Conference of Commissioners on Uniform State
Laws and its method of drafting uniform laws.
I. NATURE OF THE NATIONAL CONFERENCE OF COMMISSIONERS ON UNIFORM
STATE LAWS
The National Conference of Commissioners on Uniform State Laws,
although housed in the American Bar Center in Chicago, is a complete
independent association of state officials, the Commissioners on Uni-
form State Laws appointed by the governors of each state. It pro-
motes uniformity in state laws on all subjects where uniformity is
desirable and practicable and it effectuates this purpose by drafting
and proposing uniform laws which are then recommended for general
adoption by all states. Contributions or gifts to the Conference are
contributions to or for the use of state government for exclusively
public purposes and are therefore, according to the Internal Revenue
Service, tax exempt or deductible. C
The onference, organized in 1892, is one of the oldest organizations
encouraging interstate cooperation. A confusion of laws among the
several states presents in many fields a deterrent to the free movement
of goods, credit, services, and persons between the states and restrains
full economic and social development. Such confusion frequently
generates pressures for federal intervention to compel uniformity.
The Conference, organized to promote uniformity among the states
by voluntary action of each state government, has drafted in the al-
most seventy-five years of its existence over two hundred uniform
laws, many of which have been widely enacted. Probably, the single
greatest achievement of the Commissioners is the Uniform Commercial
Code promulgated in 1957 and now adopted by twenty-eight states and
the District of Columbia. This Act, prepared in cooperation with the
American Law Institute and with financial support from the Maurice
and Laura Falk Foundation and many financial and commercial inter-
ests, consolidates and modernizes a number of earlier Uniform Acts
and simplifies and expedites interstate commerce without the interven-
tion of any federal act.
The Conference, however, has not limited its activities to the com-
mercial field. It has drafted uniform and model acts on many prob-
lems that might be characterized as social problems of modern urban
society. Thus, the list of acts currently available for adoption by the
states includes acts on such subjects as adoption, desertion and non-
support, criminal extradition, postconviction procedure, acts for the
defense of indigent persons in criminal proceedings and acts concern-
ing uniform rules for voting by new residents. Currently the Confer-
ence has under consideration the question whether it should draft uni-
form acts on civil rights, and adequate representation of aged and in-
competent individuals in the assertion of small claims to pensions and
other similar payments.
The drafting procedures of the Conference and the nature of the
Conference itself tend to encourage full and non-partisan considera-
tion of controversial subjects. The governors of the states have ap-
pointed lawyers, judges, and law school professors as Commissioners
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T FOUNDATIONS: IMPACT ON SMALL BUSINESS
so that a wide representation of the legal profession is secured among
the Conference personnel. With respect to drafting the Conference
has always emphasized active participation by the Commissioners
themselves. If the Conference decides to take up a subject, a special
committee of state commissioners is appointed to prepare a draft of an
act. Sometimes the draft is prepared by a Commissioner, but for
longer and more complicated acts such as the proposed Consumer
Credit Act, it has been customary to secure the help of expert drafts-
men, usually law professors. In addition, the Commissioners seek
advisors from experts in the field under consideration. Tentative
drafts are not submitted to the Conference for consideration until they
have received extensive consideration by the advisors and by the spe-
cial drafting committee of the Conference. Unless otherwise author-
ized by the Executive Committee, a draft act submitted to the whole
Conference must be discussed and considered section by section by at
least two annual meetings before the Conference may decide by a vote
of states whether to promulgate the draft as a uniform or model act.
At its Annual Meeting in 1963, the Conference took additional steps
to insure full and deliberate consideration of all matters under con-
sideration by the Commissioners. As a result of this meeting, the
Conference has appointed an Executive Director to supervise, arrange
for and organize necessary research in connection with subjects on
which the Conference is considering drafting uniform legislation,
and to attempt to bring before the Conference all relevant policy
matters involved in any legislation. Professor Allison Dunham, of
the Law School of the University of Chicago, is the first to hold the
post of Executive Director. He has been a draftsman for the Com-
missioners for several of their recent acts including part of the Com-
mercial Code. Through his association with the University of Chicago
Law School, and through his own research activities, he has acquired
a sound knowledge of the use of the research techniques of the be-
havioral and economic sciences as an aid in legislative drafting. The
social science research activities of the Commissioners will, of course,
not be limited to the University of Chicago Law School, but the Con-
ference proposes to make use of the economic and other social science
research and personnel wherever available.
II. THE CONSUMER CREDIT PROJECT
As has been stated earlier in this memorandum, the National Con-
ference of Commissioners on Uniform State Laws proposes to prepare
for submission to the states a uniform or model act or series of acts
on all aspects of consumer credit, including retail installment sales,
personal loans, bank loans, and usury. The importance of this project
cannot be overstated. The impact of consumer credit on retail sales
and production and the consequent impact on the Nation's economy
is reflected in the space devoted to consumer credit in almost any
economic analysis of the Nation. The total dollar volume of consumer
credit in 1963 was approximately $60,000,000,000, and if residential
mortgage debt is added to this figure consumer credit approaches
$200,000,000,000. With the phenomenal increase in the number of
families living in single family housing in the past twenty-five years,
a larger and larger percentage of society is becoming involved in
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TAX-EXEMPT FOUNDATIONS: IMPACT ON SMALL BUSINEsS
acquiring consumer's durable goods, which in another era might have
been acquired only by others. According to a Federal Reserve Board
survey in 1959, 55 per cent of the Nation's consumers who purchased
furniture or major household appliances in 1958 used credit. The users
of consumer credit are not limited to middle and upper income buyers.
Low income consumers including those receiving public assistance--
those earning less than $6,000?used credit for from 58 to 65 per cent
of such purchases. The direct extension of credit to consumers to
purchase durable goods brings consumers into contact with suppliers
of credit, which, in turn, gives the marginal operators a chance to
take advantage of uninformed consumers.
A study by David Caplovitz entitled "The Poor Pay More" (The
Free Press, Glencoe, 1963) suggests that the abuses in consumer credit
are symptomatic of the major urban problems of adjusting the rela-
tionships of immigrants (for example those from Puerto Rico) to a
new society and between Negro and White citizens in our population.
An attack on the problem of consumer credit can therefore be viewed
as a facet in any comprehensive program attacking urban problems ;
perhaps, as important as research and activity attempting to attack the
housing problem, urban education and legal aid for the indigent, all of
which are now the concern of foundations and public spirited citi-
zens and business establishments in our society.
In the early 1900's when the Russell Sage Foundation pioneered
research and legislative drafting in the field of consumer credit, the
volume of consumer credit was less than $1,000,000,000, and there were
almost no financial institutions engaged in lending money to con-
sumers. Retail stores marketed their merchandise either for cash or
on a short term open charge account basis. There were few, if any,
laws addressed specifically to consumer credit. The then existing
legislation was limited to a general usury law in most states applicable
to all kinds of credit and to a chattel mortgage law regulating the
method of foreclosing or liquidating a defaulted secured debt.
When the Commissioners on Uniform State Laws began drafting
in the middle 1940's of a Uniform Commercial Code, in cooperation
with the American Law Institute, it was necessary to have an article
on secured commercial transactions. By that time, there had been
a substantial increase in the number and type of institutions par-
ticipating in consumer credit and in the number and type of legal de-
vices available for use by the creditor. Retailers, who formerly sold
only for cash or on open charge account, now offered also financing
arrangements that involved installment payment of the purchase
price. There were also small loan companies, largely the creature of
the statutes pioneered by the Russell Sage Foundation study. Com-
mercial banks which at an earlier time had limited their consumer
credit services to unsecured loans or real estate mortgages on resi-
dences, now purchased installment paper from retailers, and in addi-
tion were making direct installment loans, secured and unsecured, to
consumers; sales finance companies established in the second decade
of the 1900's to purchase consumer installment paper taken by auto-
mobile dealers were now purchasing all kinds of consumer installment
paper for both durable goods and services. Credit imions, first orga-
nized in the early 1900's competed with all of the above for the con-
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sumers credit business. In the late 1940's building and loan associa-
tions, traditionally limited to loans on security of real estate were be-
ginning to encourage consumers to borrow from them for the purchase
of durable goods or for the purchase of home improvements.
Of particular significance to the Commissioners on Uniform State
Laws in preparing the Uniform Commercial Code was the develop-
ment of different types of secured credit arrangements to compete with
the traditional chattel mortgage. Chattel mortgage legislation which
in many states had become too confining to permit use in the mer-
chandising of goods were now supplemented by legislation concern-
ing conditional sales contracts, trust receipts, bailment-leases and many
other credit arrangements, some of which differed among themselves
only in the proprietary names given to them by their inventors. In
Article 9 of the Uniform Commercial Code, the differences in legal
and technical form in these different security arrangements were elimi-
nated and lenders and creditors were freed from the straitjackets of
earlier chattel mortgage legislation by the establishment of one se-
curity devise with differences only to meet the needs of different func-
tions of credit.
The draftsmen of the Uniform Commercial Code also observed that
in the 1940's the states were beginning to enact laws in the field of
consumer credit. Sometimes these laws resulted from efforts of a
particular part of the credit industry to escape the straitjacket of
rigid statutory limits on rates of interest or charges for the use credit.
Frequently these laws also resulted from efforts to eliminate or curtail
abuses in the consumer credit fields. Some bills and legislation ap-
peared to be the result of attempts to make the subject a "political foot-
ball" for legislators looking for a "popular cause." Economists,
sociologists and others were beginning to undertake research projects
examining various aspects of consumer credit including details of
motivation, characteristics of consumer-debtors and the effects of credit
on the purchasers. Both the law and the research projects seemed
at this time to be in a highly undeveloped state with no clear trend
or pattern emerging. The draftsmen of the Uniform Commercial
Code recommended to the Commissioners that the Commercial Code,
already a massive project, should not be burdened with an area of the
law, not only controversial, but in such a state of flux and uncertainty
as to defy at that time reasonable classification. Partly for this rea-
son and partly because of the shortage of money, the Commissioners
and the _American Law Institute accepted the recommendations of
the draftsmen that a uniform regulatory law concerning consumer
credit be omitted from the Code and for the time being postponed.
Accordingly, Article 9 of the Commercial Code attempted only to
simplify the general rules concerning rights and duties of secured
creditors and debtors.
That this decision was well taken at the time can be seen from the
rapid development in numbers and types of law in the states regu-
lating consumer credit since the Commercial Code was drafted. What
is now clear to the Commissioners, however, is that the same serious
confusion resulting from different forms of credit transaction before
the Commercial Code was drafted now exists in the myriad of laws
regulating consumer credit. Thus, in some states there may be a
general usury law and a secured credit law, but in addition a special
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TAX-EXEMPT FOUNDATIONS: IMPAur
law for installment loans made by banks; another such law for install-
ment loans made by a licensee under a small loan law; and a further
law concerning loans made by credit unions. Furthermore, there may
be in the same state a special law concerned with installment credit
transactions to finance the 'purchase of automobiles, another law con-
cerned with installment credit to finance the purchase of home improve-
ments and even in the same state a general retail installment sales law
which overlaps these others.
When the Committee on Scope and Program of the Commissioners
began to reconsider the question whether it should undertake drafting
a uniform law in the field of consumer credit, it quickly became obvious
that the project was more substantial than the present organization
and limited resources of the Commissioners permitted. As a prelimi-
nary step, the Conference sought the aid of the American Bar Founda-
tion in undertaking the necessary legal studies and the Foundation
has now made available to the Conference a complete survey of the
existing legislation on the subject.
It was apparent to the Committee on Scope and Program and to the
Special Committee appointed to draft a uniform act on consumer
credit that much more was needed in order to have full consideration
of all policy matters involved in such a complex topic. A quick ex-
amination of the complex regulatory laws passed in many of the states
and of some of the literature on the subject would indicate that many
of the laws may actually work against the objectives of the legislation.
While much of the recent legislation is founded on the belief that the
consumer lacks sophistication about credit; that he is ignorant of
the complexities of commercial and credit law; that he is psycho-
logically and economically in an inferior bargaining position when he
enters upon credit negotiations it would appear that much of the
legislation is drafted without any clear understanding of the "cost"
of supplying credit. Furthermore, the legislation in many cases re-
flects lack of discernment as to the characteristics of consumers who
are psychologically or economically in an inferior bargaining position
and the characteristics of persons who supply goods services and credit
to this level of society. As a result of a failure to give discriminating
consideration to these problems many regulatory schemes do not give
thought to the impact of the scheme on transactions of consumers and
creditors who are not participants in the arena where abuses and over-
reaching occur. For example, have we adequately considered the "full
disclosure" aspects of some of these laws in light of marketing prac-
tices of some merchandisers in order to determine whether regulation
of credit, rather than regulation of merchandising is the best way to
attack the observed abuses? On a much simpler level, have we con-
sidered whether larger and blacker type at the beginning of the credit
contract or at its end communicate to the consumer that which the
sponsors of the legislation think essential for him to make a rational
judgment?.
Another important area where information is either inadequate
or not fully analysed concerns the "cost" of credit. Much of the exist-
ing legislation takes the form of a special exception to an ancient
usury law and permits various categories of lenders to charge for
credit more than the ancient rate, but still within some statutorily
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imposed maximum. Do we know what the impact of this maximum is
on the availability of credit for various types of consumers? On the
amounts actually charged the consumer, if there is competition for the
consumers merchandising and credit business? Is there a need for
different statutory maximums for different methods of supplying
credits? Are there any criteria determining where competitive
forces will not produce a charge for credit less than the statutory
maximum? Why is it, that for some kinds of credit sales such as
the sales of new automobiles or farm machinery the market rate for
the "cost" of credit seems to be less than the statutory maximum, but
for other types of consumer credit transaction the market effective rate
tends to be that of the statutory maximum?
A quick examination of the multitudinous legislation in the sub-
ject also indicates that inadequate consideration has been given to the
most effective and efficient way of enforcing the regulatory laws with-
out at the same time "drying up" reputable sources of credit. These
and other questions must be examined by the draftsmen before any
decision about what to recommend for legislation can most rationally
be made.
The Conference needs funds with which to undertake the project of
studying consumer credit and drafting legislation to meet the needs
for legislation, The Conference has already appointed a drafting
committee of Commissioners entitled "Special Committee on Retail
Installment Sales, Consumer Credit, Small Loans, and Usury." This
Committee has the following membership:
Alfred A. Buerger, Esq., Chairman, 1525 Marine Trust Building,
Buffalo 3, New York.
Walter D. Malcolm, Esq., 458 Federal Street, Boston 10, Massa-
chusetts.
George R. Richter, Jr., Esq., 458 South Spring Street, Los An-
geles 13, California.
Dean Russell N. Sullivan, College of Law, University of Illinois,
Urbana, Illinois.
William H. Wood, Esq., 210 Walnut Street, Harrisburg, Penn-
sylvania.
The Executive Director of the Conference working with this Special
Committee will endeavor to secure from among competent academic
personnel, lawyers, economists and sociologists who will be "co-
reporters" in charge, in the first instance, of evolving the framework
of the proposed legislation; of analysing the existing economic and
sociological surveys relevant to the consumer credit project; and rec-
ommending additional research where this appears to be necessary.
There has been a substantial amount of research work done in the
field of consumer motivation and comprehension and in the field
of describing the characteristics of consumers who appear to need
protection against abuse. There has also been a considerable amount
of research work done as to the cost of credit. An urgent task for the
draftsmen therefore is to examine this literature with an eye as to
what it contributes to decision making about the nature and scope
of legislation on the subject. To the extent that this existing re-
search should be found to be inadequate, specially designed research
projects should be undertaken to provide the necessary information.
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The Commissioners believe that the research activities of the economic
and sociological disciplines have proceeded so far that compilation and
analysis of the results of existing research rather than the commence-
ment of new original research projects may be sufficient to enable the
Commissioners to identify the problems clearly and to formulate the
needed policy conclusions. At a minimum, an analysis of existing
material will help determine whether new research ex-pressly under-
taken as an aid to legislative drafting must be 'undertaaen.
If further research is necessary, the Conference will employ com-
petent researchers or, if funds are available, the Conference will make
use of such research organizations as the Bureau of Applied Social Re-
search at Columbia University, the National Bureau of Economic Re-
search, the National Opinion Research Center at the University of
Chicago, and the Survey Research Center at the University of
Michigan.
While such research is proceeding, the co-reporters will proceed to
set forth for consideration by advisory committees and Commissioners
the basic policy issues for which conclusions must be reached in order
to proceed with drafting. Before presentation of these issues to the
Conference as a whole, the special committee, the advisory committees
and the draftsmen will have numerous meetings in which an attempt
is made to clarify the issues and to reduce the real issues of conflict
to a minimum.
A key factor, therefore, in the drafting procedure of the Commis-
sioners will be the provision of adequate funds for the appointment
and assembly of one or more advisory groups to advise the reporters
and the special committee both on policy matters and on practical de-
tails of operation of the industries involved. The advisory commit-
tees will consist of individuals from banks, finance companies, retail
installment sellers, small loan companies, credit unions, consumers'
organizations and representatives in order to acquaint the Commis-
sioners with the differing points of view and in order to iron out, if
possible, areas of apparent conflict where consensus can in reality be
obtained. These advisory committees will meet regularly with the
draftsmen and the special committees of the Conference.
The target for asking the Conference to approve finally a draft
law for submission to the states is the Annual Meeting in 1966, in
time for the major legislative year of 1967. The ability of the Con-
ference to meet this time schedule depends on the adequacy of the
funds which the Conference is able to secure.
To recapitulate: The Conference believes that a nonpartisan leg-
islative attack on the 'problem of consumer credit should be viewed
as an effort worthy of financial support both because of the im-
portance of consumer credit to the economy of the United States and
because of the importance of reducing or eliminating opportunities
for abuse and overreaching from the anxieties and insecurities which
at best are associated with the efforts of an urban worker and his family
to advance in providing for their material wants.
ALLISON DTJNIIAM,
Executive Director, National Conference of Commissioners on
Uniform State Laws, American Bar Center, 1155 East
Sixtieth Street, Chicago, Illinois.
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Exhibit 30
JULY 18, 1952.
Re: IT :TS :E0.
FV.
Facts Forum, Inc.
Exemption Application.
COMMISSIONER OF INTERNAL REVENUE,
U.S. Treasury Department,
ashington, D .0 .
SLR : We transmit herewith exemption application of Facts Forum,
Inc. on U.S. Treasury Department Form No. 1023, and other informa-
tion and materials hereinafter listed, as requested in your letter of
January 7, 1952. Facts Forum is a nonpartisan, nonprofit organiza-
tion for adult education. Its purpose is to conduct an orderly study
of the art of living and the science of government. It does this
through the medium of small forum study groups, periodic polls posing
the questions for study and debate, and a free circulating library.
The small study groups, called forums, meet once or more each
month to study and discuss the questions submitted in the periodic
polls. Each forum conducts its own meetings, decides the particular
questions it will study, and arranges for its own speakers and debators.
The forums are composed of recommended maximum memberships of
49 or less?small enough to encourage discussion and participation on
the part of each member, yet large enough to provide diversification
in opinion and experience. Each forum meets in a place of its own
selection, e.g., in homes, schools, churches, court houses, city halls,
office buildings, civic centers, etc. The public is invited to all forums
meeting in public places. All questions are discussed as fully as the
time permits. Most meetings last approximately two hours. Every-
one is encouraged to join in the discussion and give everyone else the
benefit of his study and research on the subject and opinions derived
therefrom. A description of a forum meeting may be found in an
article appearing at page 18 of the April 23, 1952 issue of Pathfinder
Magazine attached hereto as Exhibit "D-4". Facts Forum does not
attempt in any manner to influence the vote or study on any of the
questions submitted in the poll or on any other question.
A more complete statement of the organizational structure of Facts
Forum and its educational program will be found in the Prospectus
attached hereto as Exhibit "D-1".
The periodic polls lend an overall integrating and coordinating in-
fluence to the program, as well as to provide an invaluable service to
our law makers. Copies of the polls will be found in Exhibits "II-1"
through "H-4" attached hereto; and the results thereon will be found
in the Facts Forum NEWS attached hereto as Exhibit "F-1".
366
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The third. leg of Facts Forum's educational program is its free cir-
culating library. Facts Forum does not endorse any of the facts or
opinions contained in any of the books in the library but makes such
books available to the public to provoke thought and encourage addi-
tional reading on the subjects discussed therein. Such books afford
the participants a, point of departure for their study and research on
many of the questions submitted in the polls. A list of the books in
the library is attached hereto as "Exhibit "G-1". The circulation sys-
tem for such books is explained in the insertions therefor, attached
hereto as Exhibits "G-2" through "G-4".
Lists of magazines and other periodicals subscribed to by Facts
Forum are attached hereto as Exhibits "G-5", "G-6", and "G-7".
Dan Smoot, Facts Forum coordinator, has a fifteen minute pro-
gram over the Texas Quality Network at 9 :45 p.m. each Friday night,
which is rebroadcast by 30 additional stations. On each program Mr.
Smoot discusses the respective sides of a question submitted in the
poll, impartially devoting one half of the allotted time to relating the
arguments advanced by those supporting one side of the question and
using the other half to relate the arguments advanced by those sup-
porting the other side of the question. Transcripts of such programs,
mailed out each week to those who request them, are attached hereto
as Exhibit "I".
Facts Forum's awards program is explained on the leaflets attached
hereto as Exhibits "E-1" and "E-2". The recipients of such awards
are announced in each issue of the Facts Forum NEWS, Exhibit
"F-1", to which reference has hereinabove been made.
The names of the officers of Facts Forum, forum conductors and the
salaries paid to each are listed on Exhibit "B", attached hereto. Only
the coordinators and secretaries receive salaries from Facts Forum.
Additional and miscellaneous information, which may be pertinent
and helpful, is also included in the brochure attached hereto.
Very truly yours,
ROBERT H. DEDMAN,
President.
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Exhibit 31
U.S. TREASURY DEPARTMENT,
OFFICE OF THE DIRECTOR OF INTERNAL REVENUE,
Dallas, Tex., October 5, 1953.
MT. ROBERT H. DEDmAN-,
President, Facts Forum, Inc.,
730 Mercantile Securities Building,
Dallas, Tex.
DEAR MR. DEDMAN : I have been directed by the National Office of the
Internal Revenue Service to make an investigation of the activities
of Facts Forum, Inc. with a view to determining whether or not the
organization is entitled to retain its exempt status under Sec. 101 (6),
Internal Revenue Code and Sec. 29.101 (6)-1 of Regulations 111.
To supplement the information you have previously submitted,
would you please furnish the following items?
Copies of Facts Forum News issues from the beginning of the pub-
lication through September 30, 1953 except Vol. 1, issues 2, 3, 4, 6, 7,
and 8 which were previously submitted.)
A list of the books and periodicals presently available in the Facts
Forum library.
The last detailed statement of income and expenses in the file is
for the period ended June 30, 1952. Would you therefore furnish a
similar statement for the period since June 30, 1952?
From our telephone conversation of today I understand that tran-
scripts of most of your radio and television programs are published in
Facts Forum News.
If possible, I would like to secure for transmission to the National
Office transcripts of all programs presented through September 30,
1953 which were not published in Facts Forum News. I enclose here-
with a list of transcripts which were previously filed.
I have prepared the above list of desired information in accordance
with our telephone conversation of today. If you will let me know
when you have assembled these items, I will call on you at your office.
Very truly yours,
GORDON S. MOORE,
Internal Revenue Agent.
308
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Approved For Release 2004/04/08 : CIA-RDP67B00446R00030098094-4
TAX-EXEMPT FOUNDATIONS: IMPACT ON SMALL B U LN-tm 3
Radio Transcripts?Copies Preiviougly Filed
Station or
Station or
1951:1
network
1952:1
network
October 5
WFAA.
January 4
WFAA.
October 12
WFAA.
February 8
TQN.
October 19
WFAA.
February 15
TQN.
November 2
WFAA.
February 22
TQN.
November 9
WFAA.
February 29
TQN.
November 16
WFAA.
March 7
TQN.
November 23
WFAA.
March 14
TQN.
November 30
WFAA.
March 28
TQN.
December 7
WFAA.
April 4
TQN.
December 14
WFAA.
April 11
TQN.
December 21
WFAA.
May 2
TQN.
December 28
WFAA.
May 23
TQN.
June 6
TQN.
June 13
TQN.
June 20
TQN.
June 27
TQN.
July 4
TQN.
1 The year is not shown on some of the transcripts but apparently they covered
the latter part of 1951 and the first half of 1952.
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Approved For Release 2004/04/08 : CIA-RDP67600446R000300020094-4
U. S. TREASURY DEPARTMENT,
Office of the Director of Inte;nal Revenue,
2101 Pacific Avenue,
Dallas, T
(Attention: Mr. Gordon S. Moore, Internal Revenue Agent) .
DEAR MR. MOORE : We are transmitting herewith the following items
requested in your letter of October 5, 1953. Such materials will sup-
plement those previously submitted by us under cover letter dated
July 18, 1952.
Materials transmitted herewith:
1. Copies of Facts Forum NEWS-Vol. I, Nos. 5, 8, 9, 10, 11, 12,
13,15. Vol. II, Nos. 1, 2, 3, 4, 5, 6, 7, 8, 9.
2. A list of the books and periodicals presently available in the
Facts Forum library.
3. Copies of Facts Forum, Inc.' Balance Sheets dated September
30, 1952 and August 31, 1953, copy of Statement of Receipts
and Disbursements for year ended September 30, 1952, and
copy of Statement of Receipts and Disbursements for eleven
month period ending August 31, 1953.
4. Individual radio transcripts dated July 11, 18, August 1, 8, 15,
22, 29, September 5, 12, 1952, and numbered 44, 45, 46, 47, 48,
49, 50, 51, 52, 53,55 through 66.
5. Individual TV transcripts Nos. 3, 4, 6 through 16.
Transcripts of the other Facts Forum radio and TV programs are
included in the aforementioned copies of the Facts Forum NEWS
submitted herewith.
Believing that we have furnished all requested and that these mate-
rials will bring your file on our operations down to date, we remain
Very truly yours,
Exhibit 32
FACTS FORUM,
Dallas,T ex., October 9,1953.
By R. H. DEDMAN,
President.
370
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Approved For Release 2004/04/08: CIA-RDP67600446R000300020094-4
Exhibit 33
U.S. TREASURY DEPARTMENT,
INTERNAL REVENUE SERVICE,
DISTRICT DIRECTOR,
D alla8,T ex., J vine 24,1958.
In Re: Fiscal Year (s) ended: September 30,195G.
FACTS FORUM, INC.,
715 Mercantile Bank Building,
Dallas, Ter.
GENTLEMEN: Our recent examination of your tax liability for the
year (s) indicated above discloses that no change is necessary to the
tax reported. Accordingly, the return (s) will be accepted as filed.
I want to compliment you on the care which you have shown in the
preparation of your return (s) .
Sincerely yours,
ELLIS CAMPBELL, Jr.,
District Director.
371
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Approved For Release 2004/04/08 : CIA-RDP67600446R000300020094-4
Exhibit 34
U.S. TREASURY DEPARTMENT,
INTERNAL REVENUE SERVICE,
DISTRICT DIRECTOR,
Baltimore, Md., September 28,1962.
LIFE LINE FOUNDATION, INC.,
620 11th Street NW.,
Washington, D.C.
GENTLEMEN: During the recent examination of your tax liability,
the adjustments shown on the attached statement were proposed. You
did not agree with those marked with an (*) .
If you have since decided to accept these adjustments, we would
appreciate your notifying the conferee whose name and address are
shown below.
In the event you still do not agree to the adjustments, we would like
to arrange an in formed conference to give you an opportunity to
discuss these adjustments further and to submit additional or support-
ing information. A member of our staff would represent this office
at such a conference and he will have full authority to modify the
proposed adjustments to the extent warranted by law and regulations
on the basis of the information submitted.
If you would like such a conference, please telephone or write within
ten days from the date of this letter to the conferee assigned. He will
schedule the conference for a mutually convenient time and place.
We would appreciate your submission of a brief informal statement
of your position, with supporting information, in advance of the con-
ference. Although not required, such a written statement would assist
the conferee in resolving the issues. If necessary, you may request
additional time for submitting such a statement when you contact
the conferee to arrange for the conference.
If you desire you may be accompanied by anyone having knowledge
of the facts who can furnish information in support of your position.
However, if you want to be represented by an attorney or an agent
(whether or not you are personally present), he must be enrolled to
practice before the Treasury Department and he must file with the
conferee a power of attorney, in duplicate, authorizing him to act for
you. If more than one taxable year is involved, an exact copy of the
power of attorney should be furnished for each year.
If within the ten days you do not agree to the findings or request an
informal conference, you will be furnished a report of the proposed
adjustments and a notice giving you thirty days within which you may
submit a formal protest.
Very truly yours,
372
LOUIS KAPLAN,
Conference Coordinator.
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Approved fit.iiikkiikaptai29641%.444a g gikeRfictrWasiottfiatteen 002904-4
Enclosure: Statement of Examining Officer's Proposed Adj ust-
ments.
Name and address of conferee: Mr. Clarence W. Fulcher, Internal
Rev. Bldg., Room 1038, 12th & Constitution Ave., Washington 25, D.C.
Telephone number: Worth 1; extension 4333.
VOlTA 2808
U. ,,REASuTTY DEPAIT TM LP, . INTERNAL REVENUE SERVICE
STATEMENT OF EXAMINING OF7:10ER'S PROPOSED ADJUSTMENTS
'SAME AND ADDRESS OF TAXPAYER
INCOME
TAX
Life Line Foundation, Inc.
620 110 Street N. W.
,Washington, D. C. cii4
,
1 cArleNoxer.,,,,di
1. Adjusted gross or taxable incomeshown on return
$
$
2. Net adjustments as computed below.
3. Proposed adjusted gross or taxable income
I. Proposed increase (decrease) and explanation:
$
$.
S
It is recommended that the ta:_s_pth.on_granted_v,nder_,Section 501(c) (31_as_ari
educational organization be revoked since it is deagv,d_thxt_th.o_ierg.nivation
fails to meet the definition of educational as defined?in_Se_ction_1401(c)(31,
1(d).(3) of the Regulations.
Tonm2808(p.mui,m
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Approved For Release 2004/04/08 : CIA-RDP67600446R000300020094-4
Exhibit 35
PEAT, MARWIC'K, MITCHELL & CO.,
CERTIFIED PUBLIC ACCOUNTANTS,
Dallas, Tear., January 28, 1963.
Re Life Line Foundation, Inc., 620 Eleventh Street NW., Washing-
ton, D.C.
DISTRICT DIRECTOR OF INTERNAL REVENUE,
12th and Constitution Avenue,T17 ashimton,D.0 D.C.
(Attention: Mr. Clarence W. Fulcher).
DEAR SIR: Reference is made to a conference held in the Internal
Revenue Service Building, Room 1038, at 10:00 A.M., Tuesday, No-
vember 20, 1962, in which the following were present:
For the Internal Revenue Service:
Mr. Clarence W. Fulcher, Conferee.
Revenue Agent Santos.
For Life Line Foundationl Inc.:
Mr. Don Patterson, Director.
Mr. Ralph B. Shank, Mr. Clark W. Breeding, Mr. George M.
Terry, Attorneys in Fact.
The conference was arranged at the request of Life Line Founda-
tion, Inc., (Life Line), in response to a ten-day letter from the office
of the District Director of Internal Revenue, Baltimore 2, Maryland,
dated September 28, 1962, in which the Revenue Agent recommended:
that the tax exemption granted under Section 501(c) (3) as an educational
organization be revoked since it is deemed that the organization fails to meet
the definition of "educational" as defined in Section 1.501(c) (3)-1(d) (3) of the
Regulations.
Upon the completion of the conference, Mr. Clarence W. Fulcher
requested that Life Line submit a brief in support of their contentions
before February 1, 1963. Attached is the brief on the questions dis-
cussed prepared by Mr. Ralph B. Shank, attorney.
Should there be any question as to the favorable disposition of this
case, the representatives of Life Line would like an opportunity to
discuss further any questions that the Conferee might raise.
Very truly yours,
CLARK W. BREEDING,
Attorney-in-Fact for Life Line Foundation,, Inc.
Copies to:
Mr. Ralph B. Shank, Mercantile Securities Building, Dallas Tex.
Mr. Don Patterson, Director, Life Line Foundation, Inc., Dallas,
on, D.C.
Mr. eorge Terry, 512 American Security Building, Washington,
D.C.
874
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Approved For Release 2004/04/08 : CIA-RDP67600446R000300020094-4
Exhibit 36
U.S. TREASURY DEPARTMENT,
INTERNAL REVENUE SERVICE,
DISTRICT DIRECTOR,
Baltimore, Md., March 8,1963.
LIFE LINE FOUNDATION, INC.,
00 11th Street NW.,
Washington, D.0 .
GENTLEMEN: Your organization (formerly Facts Forum, Inc.) was
previously granted exemption from tax under the provisions of sec-
tion 101(6) of the Internal Revenue Code of 1939 (corresponding to
section 501(c) (3) of the Internal Revenue Code of 1954).
After an examination of the activities of your organization, a rep-
resentative of this office recommended that your exemption be re-
voked. An informal conference was granted with respect to the matter
and the conferee sustained the findings of the examining officer.
The recommendations of the examining officer and the conferee have
been carefully reviewed and approved by this office.
The matter will be referred to our National Office for consideration.
You will be granted a hearing in that office prior to any issuance of an
adverse ruling.
Very truly yours,
Cc: George M. Terry,
Peat Marwick, Mitchell & Co.,
512American Security Building,
Washington, D.C.
IRVING MACHIZ,
District Director.
375
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Approved For Release 2004/04/08 : CIA-RDP67600446R000300020094-4
Exhibit 37
LIFE LINE FOUNDATION, INC.
NAMES, ADDRESSES AND OCCUPATIONS OF DIRECTORS AT THE CLOSE OF EACH OF 1 E
YEARS 1951 THROUGH 1962
Name
Year Occupation
1951
Hal B. Barnes, Jr Dallas Power & Light Co.
Robert H. Dedman_ Attorney.
Mary E. Emison Secretary.
Sam H. Field Attorney.
Mrs. Sue McCrary Secretary.
Robert B. Gossett Salesman.
Marguerite Tankersley PBX Operator.
1952
Jack Dale Businessman.
Hal B. Barnes, Jr Above.
Warren Gilbert Bank Officer.
Sam H. Field Above.
Mrs. Sue McCrary Secretary.
Robert B. Gossett Above.
Robert H. Dedman Above.
1953
Jack Dale Above.
Mrs. E. P. Lamberth Housewife and Civic Leader.
Warren Gilbert Above.
Joe W. Nash, Jr Accountant.
Mrs. Sue McCrary Above.
Robert B. Gossett Above.
Robert H. Dedman Above.
1954
Same as 1953 Board
1955
Same as 1954 Board
1956
Same as 1955 Board
1957
Same as 1956 Board
376
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Approved For Release 2004/04/08 : CIA-RDP$718_0044,eRaQ081001y#94-4
TAX-EXEMPT FOUNDATIONS: IMPACT 0?N
1958
C. H. Dragert Businessman.
Edward R. Maher Automobile Dealer.
Earle Cabe11 Businessman.
Allen White Businessman.
Dr. Ridings Lee Physician.
William P. Billings Attorney.
John W. Mayo Businessman.
1959
Same as 1958 Board
1960
C. H. Dragert Above.
Edward It. Maher Above.
H. L. Hunt Businessman.
James B. Kuykendall Salesman.
Dr. Ridings Lee Above.
Henry Clay* Businessman.
Mrs. Dorothy Franey Langkop Housewife and Civic Leader.
Dr. Milford 0. Rouse Physician.
Mrs. Robert Fitch Housewife and Civic Leader.
1961
C. H. Dragert Above.
Edward R. Maher Above.
H. L. Hunt Above.
James B. Kuykendall Above.
Dr. Dan R. Sutherland Physician.
Henry Clay Above.
Mrs. Dorothy Franey Langkop Above.
Dr. Milford 0. Rouse Above.
Mrs. Robert Fitch Above.
1962
C. H. Dragert Above.
Edward It. Maher Above.
Yale B. Griffis Attorney.
James B. Kuykendall Above.
Jerome M. Fullenwider Businessman.
Henry Clay Above.
Mrs. Dorothy Franey Langkop Above.
Dr. Milford 0. Rouse Above.
Mrs. Robert Fitch Above.
*All Board members were residents of Dallas, Texas, except Mr. Henry Clay,
a resident of Shreveport, Louisiana.
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17-17600Z000?000t1M008/9dCIU-VIO : 80/170/1700Z aseeieu -10d peACLICIdV
Exhibit 38
LIFE LINE FOUNDATION, INC.
NAMES AND ADDRESSES OF THE OFFICERS OF THE FOUNDATION AT THE CLOSE OF EACH OF THE YEARS 1951 THROUGH 1962
Year
President
Vice-Pr esident
Secretary
Treasurer
1951__
Robert H. Dedman
Robert B. Gossett
Hal B. Barnes
Hal B. Barnes.
1952..
do
Jack Dale
Warren Gilbert
Warren Gilbert.
1953_
do
do
do
Joe Nash.
1954_
do
do
do
Do.
1955_
do
do
do
Do.
1956_
do
do
do
Do.
1957_
do
do
do
Do.
1958__
C. H. Dragert
John W Mayo
Edward R Maher
Edward R. Maher.
1959_
do
do
do
Do.
1960_
Henry Clay*
C. H Dragert_
do
Do.
1961_
do
do
do
Do.
1962__
Mrs. Dorothy Franey Langkop
do
Yale Griffis
Yale Griffis.
'All officers were residents of Dallas, Texas, except for Mr. Clay, a resident of Shreveport Lordqiana.
1717600Z000?000t191717008/9dCIU-VIO : 80/170/1700z aseeieu JOd peACLICIdV
17-17600Z000?000t19l7POWEIL9dCIU-VI3 : 80/170/1700Z aseeieu JOd peACLICIdV
Exhibit 39
LIFE LINE FOUNDATION, INC. (FORMERLY FACTS FORUM, INC.)
SCHEDULES OF THE FOUNDATION'S LOANS AND NOTES PAYABLE DURING THE COURSE OF THE YEARS 1951 THROUGH 1962
All of the Foundation's loans payable were evidenced by notes, the Foundation never having issued any bonds or mortgages. All notes,
except as otherwise indicated below, were payable to the order of First National Bank in Dallas, a national banking corporation doing
business in Dallas, Texas. Funds obtained under these loans were negotiated through regular banking channels and the funds obtained
under the loans were used to defray operating expenses of the debtor.
A. Notes payable to First National Bank in Dallas:
0
CD
0-
0
Serial number Date of note
(1) 10-28-58
Date due
4-28-59
Interest rate, percent
4
Amount Date paid or renewed
$25,000.00___ 4-28-59 renewed
to
(2) 2-5-59
6-5-59
4
5,000.00 6-5-59 renewed
(3) 4-28-59 (renewal of #1)
10-28-59_
4
25,000.00____ 10-28-59 renewed
(4) 6-5-59 (renewal of #2)
9-5-59
4/2
5,000.00 9-3-59 renewed
(5) 8-5-59
2-5-60
4%
20,000.00____ 2-5-60 renewed
(6) 256911_ ___ 9-3-59 (renewal of #4)
12-2-59
4y2
5,000.00 12-2-59 renewed
(7) 10-28-59 (renewal of #3)
4-28-60
5
25,000.00__ 4-28-60 renewed
(8) 12-2-59 (renewal of #6)
(9) 03364 2-5-60 (renewal of #5)
6-2-60
8-5-60
5
5
5,000.00 6-2-60 renewed
20,000.00 8-5-60 renewed
oo
. .
(10) 11181____ 4-28-60 (renewal of #7)
10-28-60_
5
25,000.00____ 10-28-60 renewed
(11) 14322_ __ _ 6-2-60 (renewal of #8)
12-2-60
5
$5,000.00__ --12-2-60 paid
(12) 20942_ _ _ _ 8-5-60 (renewal of #9)
2-6-61
5
20,000.00____ 1-9-61 $750.00 paid
1-17-61 $750.00 paid
2-6-61 $3,500.00 paid
0
2-6-61 remainder renewed
(13) 28339____ 10-28-60 (renewal of #10)
4-28-61
5
25,000.00 3-7-61 $750.00 paid
???1
4-10-61 $750.00 paid
4-17-61 $8,500.00 paid
CO
0
(14) 38012_ _ _ _ 2-6-61 (renewal of #12)
(15) 4-28-61 (renewal of #13)
8-7-61
10-28-61_
434
434
15,000.00___ _
15,000.00__ 5-30-61 $750.00 paid
0
4=?
4=?
6-16-61 $750.00 paid
7-26-61 $5,000.00 paid
8-31-61 $750.00 paid
10-30-61 $2,750.00 paid
10-30-61 remainder renewed
(16) 56250 8-7-61 (renewal of #12)
2-7-62
434
15,000.00__ _ _ 10-31-61 $750.00 paid
11-9-61 $750.00 paid
12-13-61 $750.00 paid
12-29-61 $12,750.00 paid
(17) 65459_ __ _ 10-30-61 (renewal of #15)
4-30-62
434
5,000.00 12-29-61 paid
(.0
B. $5,400.00 loan to Life Line Foundation, Inc., from H. L. Hunt, Dallas, Texas, evidenced by promissory note for $5,400.00, dated
'NI
September 16, 1960, and paid in full on May 5, 1962.
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Exhibit 40
SCHEDI_ILE 1 (PLEASE TYPE OR PRINT)
Life Line Foundation, Inc. (formerly Facts Forum, Inc.)?Contributions received
Donor
(1)
Year ending
9/30
(2)
Contributions received
Cash
(3)
Other property (please describe fully)
(4)
Total
(5)
Bright Star Foundation, Inc., Dallas
1959
$4,
250.
00
None
$4,
250.
00
1960
12,
500.
00
do
12,
500.
00
Woffard Cain, Mercantile Building, Dallas
1955
100.
00
do
100.
00
Gulf Oil Corp., Houston
1952
8,
864.
70
do
8,
864.
70
1953
5,
000.
00
do
5,
000.
00
Gulf Oil Corp., Pittsburgh
1953
9,
000.
00
do
9,
000.
00
H. R. Hayes, H. R. Hayes Lumber Co., Post Office
1954
2,
000.
00
do
2,
000.
00
Box 1461, Monroe, Louisiana.
A. G. Hill, Chapel Hill Gas System, Dallas
1953
5,
000.
00
do
5,
000.
00
H. L. Hunt, 700 Mercantile Bank Bldg., Dallas
1951
47,
500.
00
do
47,
500.
00
1952
137,
000.
00
do
137,
500.
00
1953
180,
500.
00
do
180,
500.
00
1954
674,
000.
00
do
674,
000.
00
1955
1,
224,
000.
00
do
1,
224,
000.
00
1956
600,
000.
00
do
600,
000.
00
1957
65,
000.
00
i do
65,
000.
00
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1717600Z000?000t1M008/9dCIU-VIO 80/170/1700Z aseeieu -10d PeACLICIdV
N. B. Hunt, 700 Mercantile Bank Bldg., Dallas
Stuart Hunt, Empire Drilling Company, 1507 Mer-
oz
op cantile Bank Bldg., Dallas.
ob Dina F. Lee, Flowerland, Chamblee, Georgia
gl Lone Star Steel Co., Dallas
W. K. Manning, Fidelity Union Life Bldg., Dallas
r George E. Mercer, T. E. Mercer Teaming & Trucking
Contractor, 920 North Main Street, Fort Worth.
National Geophysical Co., 8800 Lemmon Avenue,
Dallas.
Ohio Oil Co., Findlay, Ohio
Placid Oil Co., Shreveport, Louisiana
Querbes & Bourquin, Shreveport, Louisiana
A. L. Reed, 4400 West-cc-ay, Dallas
Eldred J. Robinson, Dallas
Caroline H. Sands, 3546 Caruth, Dallas
Sun Oil Co., Dallas
Joe C. Thompson, Southland Corp., 228 North Haskell,
Dallas.
James Ralph Wood, Pres., Southwestern Life Insur-
ance Co., Dallas.
1952
35,
000.
00
do
35,
000.
00
1954
100.
00
do
100.
00
1954
105.
00
do
105.
00
1954
200.
00
do
200.
00
1954
100.
00
do
100.
00
1954
500.00
do
500.
00
1954
100.
00
do
100.
00
1953
6,
500.
00
do
6,
500.
00
1953
5,
000.
00
do
5,
000.
00
1954
200.00
do
200.
00
1954
100.
00
do
100.
00
1960
9,
883.
82
do
9,
883.
82
1954
10,
000.
00
do
10,
000.
00
1953
6,
500.
00
do
6,
500.
00
1954
100.
00
do
100.
00
1954
100.
00
do
100.
00
0
es
a-
11
k-
me,
17-176b*oolfMAiMeacidWE
1717600Z000?000t19147008/9dCIU-VIO : 80/170/1700Z aseeieu JOd peACLICIdV
Exhibit 41
SCHEDULE 2 (PLEASE TYPE OR PRINT)
Life Line Foundation, Inc. (formerly Facts Forum, Inc.)?Receipts from subscriptions to Facts Forum News
Purchaser of subscriptions
(I)
Year
ending
9/30
(2)
Receipts from subscriptions
Number of
subscriptions
purchased by
each person or
organization
listed in
column I
(6)
Name and
address of each
person or organi-
zation receiving
subscriptions to
Facts Forum
News as a result
of each par-
chaser's pay-
meats'
(7)
Term of the subscription
received by each person
or organization listed in
column 7'
Cash
(3)
Other property
(please describe
fully)
(4)
Total (column 3+
column 4)
(5)
Beginning
date
(8)
Expiration
date
(9)
Acme Steel Co., Riverdale
1955
$574. 00
None
$574. 00
Station, Chicago 27, Ill.
Leo Adler, Baker, Oreg
1955
750. 00
do
750. 00
1956
250.00
_do
250.00
American Snuff Co., Mem-
phis, Tenn.
1955
200. 00
_do
200. 00
Baker Oil & Tool Co., Box
1955
150. 00
_do
150. 00
2274, Terminal Annex,
1956
150. 00
_do
150. 00
Los Angeles, Calif.
Harry Bass Drilling Co.,
1954
100. 00
_do
100. 00
1403 Magnolia Building,
Dallas, Tex.
Bell Transportation Co.,
1954
500. 00
_do
500. 00
Post Office Box 8598,
1955
100. 00
_do
100. 00
Houston, Tex.
L. M. Berry & Co., Hulman
1954
3,596. 00
_do
3, 596. 00
Building, Dayton' Ohio.
Blue Bell, Inc. E. W.
1954
100. 00
_do
100. 00
Weaiat, Vice-President,
Drawer C-2, Greensboro,
N.C.
1717600Z000?000t1M008/9dCIU-VIO 80/170/1700Z aseeieu -10d PeACLICIdV
Blanton Drilling Co., 2323-
24 Gulf Building,
1955
100. 00
_do
100.
00
Houston' Tex.
The Brewster Co., Shreve-
port; La.
1955
1,
000. 00
_do
1,
000.
00
Brinkerhoff Drilling Co.,
1955
300. 00
_do
300.
00
Denver, Colo.
Zack K. Brinkerhoff,
1954
250.00
_do
250.
00
Brinkerhoff Drilling Co.,
Continental Building,
Dallas, Tex.
Enoch Brown, Memphis,
1955
125. 00
do
125.
00
Tenn.
E. L. Bruce Co., Box 397,
1955
100. 00
do
100.
00
Memphis, Tenn.
Brummer Seal Co., Chicago,
1955
276. 00
do
276.
00
Ill.
G. H. Burnham, Tri-State
1954
200.00
do
200.
00
Oil Tool Co., Inc., Post
Office Box 5588, Bossier
Branch, Shreveport, La.
J. P. Butler, Midland, Tex
1955
100. 00
do
100.
00
C. & H. Transportation,
1955
100. 00
do
100.
00
Post Office Box 5976,
Dallas, Tex.
H. E. Chiles, Jr., 12121
1955
100. 00
_do
100.
00
Cuthbert, Midland, Tex.
C. Reid Clatterbuck,
1954
200. 00
_do
?
200.
00
Bowles Livestock Com-
mission Co., Omaha,
Nebr.
Commercial Print and Let-
ter Service, 1015 North
1955
100. 00
_do
100.
00
Hawkins, Dallas, Tex.
Continental National Bank,
1954
372. 00
___do
372.
00
Fort Worth, Tex.
See footnote at end of table.
17-17600Z000?000U9t17008/9dCIU-VIO : 80/170/1700z aseeieu -10d peACLICidV
Life Line Foundation, Inc. (formerly Facts Forum, Inc.)?Receipts from subscriptions to Facts Forum News?Continued
Name and
Term of the subscription
Receipts from subscriptions
Number of
address of each
received by each person
subscriptions
person or organi-
or organization listed in
Year
Purchased by
cation receiving
column 7'
Purchaser of subscriptions
ending
each person or
subscriptions to
9/30
organization
listed in
Facts Forum
News as a result
Cash
Other property
Total (column 3+
column 1
of each pur-
Beginning
Expiration
(please describe
fully)
column 4)
chaser's pay-
ments 1
date
date
(1)
(2)
(3)
(4)
(0
(6)
(7)
(9)
(9)
Continental Supply Co.,
1954
$10, 000. 00
None
$10, 000. 00
Dallas, Tex.
1955
12, 500. 00
_do
12, 500. 00
1956
12, 500. 00
_do
12, 500. 00
Cotwell Manufacturing Co.,
234 South Fairview Ave-
nue, Spartanburg, S.C.
1955
442. 00
_do
442. 00
Ed Cox Foundation, Mag-
nolia Building, Dallas,
1955
100. 00
_do
100. 00
Tex.
C. M. Crawford, Jr., 9606
1954
100. 00
do
100. 00
Santa Monica Boulevard,
Beverly Hills, Calif.
John F. Cun.eo, 2242 South
1955
250. 00
do
250. 00
Grove Street, Chicago,
In.
Devin-Adair Co. 23 East
1955
200. 20
do
200. 20
26th Street, New York,
N.Y.
1717600Z000?000t1M008/9dCIU-VIO 80/170/1700Z eseeieu -10d PeACLICidV
Dresser Industries, Repub-
lic Bank Building, Dallas,
1956
189. 00
do
189. 00
Tex.
R. B. Dresser, 15 West-
minster, Providence, R.I.
1955
250. 00
_do
250. 00
Clem W. Drewett, Jena, La__
Duke Transportation Co.,
1955
1954
100. 00
100. 00
_do
_do
100. 00
ioa 00
Post Office Box 536, Jena,
1955
750. 00
_do
750. 00
La.
1956
600. 00
_do
600. 00
Empire Drilling Co., Dallas,
1955
1, 345. 00
_do
1, 345. 00
Tex.
Exchange Bank and Trust,
1955
100.00
_do
100. 00
El Dorado, Ark.
First National Bank, Dal-
las. Tex.
1954
1955
18, 000. 00
10, 000. 00
_do
_do
18, 000. 00
10, 000. 00
1956
5, 000. 00
_do
5, 000. 00
First National Bank, Mag-
nolia, Ark.
1955
100.00
do
100. 00
Foundation, Inc., Wich-
ita, Kans.
1955
100. 00
_do
100. 00
G. & H. Specialty Co., Post
1955
400. 00
do
400. 00
Office Box 1362, Shreve-
port, La.
1956
250. 00
_do
250. 00
Gardner & Denver Co.,
1955
100. 00
_do
100. 00
Post Office Box 5957,
Dallas, Tex.
Philip Geist, 227 Erne Street,
1955
100.00
_do
100.00
Detroit, Mich.
W. L. Goldston, Oil & Gas
1955
500. 00
do
500. 00
Building, Houston, Tex.
B. A. Hardy, Post Office
1954
100.00
do
100. 00
Box 1237, Shreveport, La.
H. R. Hayes, Monroe, La_ _
1955
120. 00
_ do
120. 00
See footnote at end of table.
Approved riFolge4wieFWAyigs:: gbAwumitempapOVAO94-4
1717600Z000?000t1M008/9dCIU-VIO : 80/170/1700z aseeieu JOd 130A0iddV
Life Line Foundation, Inc. (formerly Facts Forum, Inc.)?Receipts from subscriptions to Facts Forum News?Continued
Name and
Term of the subscription
Receipts from subscriptions
Number of
address of each
received by each person
subscriptions
person or organi-
or organization listed in
Year
purchased by
zation receiving
column 7 1
Purchaser of subscriptions
ending
each person or
subscriptions to
9/30
organization
listed in
Facts Forum
News as a result
Cash
Other property
Total (column 3+
column 1
of each pur-
Beginning
Expiration
(please describe
fully)
column 4)
chaser's pay-
ments 1
date
date
(1)
(2)
(3)
(4)
(6)
(6)
(7)
(8)
(9)
E. J. Hudson, Hudson En-
gineering Corp., Hous-
ton, Tex.
1954
$1, 500. 00
None_ _ _ ___
$1, 500. 00
Hunsaker Trucking Co.,
1955
146. 00
do
146. 00
Post Office Box 97, Car-
rollton, Tex.
H. L. Hunt, 700 Mercantile
1955
100, 000. 00
do
100, 000. 00
Bank Building, Dallas,
Tex.
Hunt Oil Company, 700
1954
841. 00
do
841. 00
Mercantile Bank Build-
1955
1, 793. 37
_do
1, 793. 37
ing, Dallas, Tex.
1956
3, 236. 50
do
3, 236. 50
A. W. Hutchings, Suite 522,
1954
200. 00
_do
200. 00
Fidelity Union Life Build-
ing, Dallas, Tex.
Ingersoll Corp., Shreveport,
1955
500. 00
do
500. 00
La.
Jones Apothecary, Inc.,
2400 Rise Boulevard,
1955
100. 00
_do
100. 00
Houston, Tex.
cA50
a
s. -n
o
4J -1
k
t CD
H
Pt CD
t,
0
t
H 0
o
w Co
0
00
co
4co
e 0
4=.
CAtzjO
-ri
cSs'
LC 0
cd,)
0
0
0
CD
1717600Z000?000U9V17008/9dCIU-VIO : BONO/1700Z aseeieu -10d peACLICIdV
P. G. Lake, Inc., Tyler,
Tex.
1955
1, 000. 00
_ __do
1, 000. 00
Charles H. Lawrence, Jr.,
Post Office Box 218, Lake
1954
2, 000. 00
_ do
2, 000. 00
Charles, La.
Lawton Oil Corp., Mag-
nolia, Ark.
1955
100. 00
-_ -do
100. 00
Levingston Shipbuilders,
Post Office Box 411,
Orange Tex.
1955
1956
488. 00
387.00
_ _ _ do
___do
488. 00
387. 00
Lewis? Sound Films, 71
1955
100. 00
_do
100. 00
West 45th Street, New
York 19, N.Y.
Lion Oil Co., El Dorado,
1955
707. 00
_do
707. 00
Ark.
Lone Star Cement Corp.,
1955
250. 00
_do
250. 00
New York, N.Y.
Lone Star Steel Co., Post
1954
200. 00
_do
200. 00
Office Box 8087, Dallas,
1955
5, 000. 00
_do
5, 000. 00
Tex.
1956
5, 000. 00
_do
5, 000. 00
R. L. Lorel, First National
1955
100. 00
__ do
100. 00
Bank Building, Dallas,
Tex.
Gene McAdams, John Clay
and Co., Live Stock Com-
mi Chicago, Ill.
1954
100. 00
do
100. 00
McAlester Fuel Co., Mag-
nolia, Ark.
1955
165. 00
__do
165. 00
John A. McGuire, President
1954
100. 00
__ _do
100. 00
Three States Natural Gas
Co., 17th Floor, Corrigan
Tower Building, Dallas,
Tex.
Memphis Clearing House,
1955
300.00
_ _do
300. 00
Memphis, Tenn.
See footnote at end of table.
17-17600Z000?000t19l7P008/9dCIU-VI3 : 80/170/1700Z aseeieu -10d peACLIddV
L2fe Line Foundation, Inc. (formerly Facts Forum, Inc.)?Receipts from subscriptions to Facts Forum News?Continued
Name and
Term of the subscription
Receipts from subscriptions
Number of
address of each
received by each person
subscriptions
person or organi-
or organization listed in
Year
purchased by
zation receiving
column 7 1
Purchaser of subscriptions
ending
each person or
subscriptions to
9/30
organization
listed in
Facts Forum
News as a result
Cash
Other property
Total (column 3+
column 1
of each pur-
Beginning
Expiration
(please describe
fully)
column 4)
chaser's pay-
ments 1
date
date
(1)
(2)
(3)
(4)
(5)
(5)
(7)
(8)
(0)
Memphis Manufacturing
1955
$200. 00
None
$200. 00
Co., 712 North Camiado
Street, Memphis, Tenn.
Mercantile National Bank,
1954
500. 00
do
500. 00
R. L. Thornton Chair-
man of the Board, Dallas,
Tex.
The Mercantile National
1955
500. 00
_do
500. 00
Bank Dallas, Tex.
-
Mid-Continent Supply Co.,
1954
2, 000. 00
_do
2, 000. 00
Fort Worth, Tex.
Milwhite Mud Sales Co.,
1092 M & M Building,
1956
100. 00
__ _do
100. 00
Houston Tex.
Clifford .Mooers, Walnut
1954
246. 00
_do
246. 00
Spring Farm, Route 4,
Lexington, Ky.
Adrian Moore, 2512 Gulf
1955
100. 00
do
100. 00
Building, Houston, Tex.
Woodroe Moore, Post Office
Box 5006, Bossier City,
1955
121. 00
_ do
121. 00
La.
1717600Z000?000t1M008/9dCIU-VIO 80/170/1700z aseeieu JOd 130A0iddV
Murphy Corporation, El
1954
270. 00
_do
270.
00
Dorado, Ark.
National Geophysical Co.,
1954
414. 00
_do
414.
00
Inc., 8800 Lemmon Ave-
1955
200. 00
_do
200.
00
31 nue, Dallas, Tex.
The New Seven Falls Co.,
1956
1955
5,
100. 00
000. 00
_do
_do
5,
100.
000.
00
00
Colorado Springs, Colo.
Padgett Printing Co.,
1955
500. 00
_do
500.
00
Dallas, Tex.
Panola Pipeline Co. (Caro-
1955
1,
008. 00
_do
1,
008.
00
line Hunt Trust Estate),
1956
303.00..._do

303.
00
700 Mercantile Building,
920.00
_ do
920.
00
Dallas, Tex.
Penrod Drilling Co., 418
1955
400. 00
__do
400.
00
Market Street, Shreve-
port, La.
1956
1,
360. 00
_do
1,
360.
00
Placid Oil Co., Shreveport,
1953
6,
000. 00
_do
6,
000.
00
La.
1954
8,
129. 00
_do
8,
129.
00
1955
8,
000. 00
_do
8,
000.
00
1956
Railway Express Agency,
1955
120. 00
_do
120.
00
New York, N.Y.
Ralston Feed Yard, 531 Ex-
1955
200. 00
_do
200.
00
change Building, Omaha,
1956
100. 00
_do
100.
00
Nebr.
J. B. Razier, Jr., 941 Jeffer-
son, Memphis, Tenn.
1955
200. 00
_do
200.
00
Reef Fields Gasoline Corp.,
1954
100.00
_do
100.
00
J. R. Butler, President,
Post Office Box 1661, Big
Spring, Tex.
See footnote at end of table.
1717606600MWERecitigM::MageettaigiaiiiirpeAoiddv
17-17600Z000?000U9t17008/9dCIU-VIO : 80/170/1700Z aseeieu -10d peACLICidV
Life Line Foundation, Inc. (formerly Facts Forum, Inc.)?Receipts from subscriptions to Facts Forum News?Continued
Name and
Term of the subscription
Receipts from subscriptions
Number of
address of each
received by each person
subscriptions
person or organi-
or organization listed in
Purchaser of subscriptions
Year
ending
purchased by
each person or
action receiving
subscriptions to
column 71
9/30
organization
listed in
Facts Forum
News as a result
Cash
Other property
Total (column 3+
column I
of each pur-
Beginning
Expiration
(please describe
fully)
column 4)
chaser's pay-
ments 1
date
date
(I)
(2)
(3)
(4)
(5)
(8)
(7)
(8)
(9)
Reef Fields Gasoline Co.,
2100 Esperson Building,
1955
$100. 00
None
$100. 00
Houston, Tex.
The Republic National
1955
1, 000. 00
_ __do__ _ .__
1, 000. 00
Bank, Dallas, Tex.
J. E. Rosenlind, Baker Oil
1954
150. 00
_do
150. 00
Tools, Inc., Post Office
Box 2274, Terminal An-
nex, Los Angeles 54, Calif.
A. H. Rowan, 19t1uFloor,
1954
200. 00
_do
200. 00
Fair Building, Fort
Worth, Tex.
Caroline H. Sands, 3546
1955
15, 000. 00
_do
15, 000. 00
Caruth, Dallas, Tex.
Sayles Biltmore Bleachery,
1955
250. 00
_do
250. 00
Saylesville, R.I.
Sayles Finishing Plant,
1955
250. 00
_do
250. 00
Saylesville, R.I.
Clarence Scharbauer, Jr.,
1955
162. 00
_do
162. 00
Midland, Tex.
Seaboard Oil LCo., Inc.,
1955
383. 00
_do
383. 00
Dallas, Tex.
1717600Z000?000t19t17008/9dCIU-VIO : 80/170/1700Z aseeieu -10d peACLICidV
Sears, Roebuck & Co.,
1955
1, 000. 00
_do
1, 000. 00
Chicago, Ill.
1956
1, 000. 00
_do
1, 000. 00
Cruger T. Smith, Inc.,
1955
500. 00
_do
500. 00
Dallas, TeL
Forest M. Smith, San An-
tonio, Tex.
1955
200. 00
_do
200. 00
L. C. Smith, Alabama
1954
138. 00
_do
138. 00
Power Co., Birmingham,
Ala.
Standard Oil Co., Chicago,
1955
1, 000. 00
_do
1, 000. 00
Standard Oil Co. of In-
diana, 910 South Michi-
gan Avenue, Chicago, Ill.
1956
780. 00
_do
780. 00
Standard Oil & Gas Co.,
1955
100. 00
_do
100. 00
Tulsa, Okla.
Sunset News Co., 125 North
1955
283. 59
_do
283. 59
Westmoreland, Los
Angeles, Calif.
Sweeney Bros. Tractor Co.,
1955
250. 00
_do
250. 00
Fargo, N. Dak.
Temple Iargrove, Box 395
1956
330. 00
_do
330. 00
Flidell, La.
Texas Bank & Trust Co.,
1955
100. 00
_do
100.00
Dallas, Tex.
Tri State Oil Co., Box 5588,
1955
300. 00
_do
300. 00
Shreveport, La.
Triangle Refineries, Inc.,
1954
100. 00
_do
100.00
Houston, Tex.
Unite Tool Co., Post Office
1955
1, 500.00
_do
1, 500. 00
Box 1383, Shreveport, La.
U. S. Steel Corp., Oil Well
1954
500. 00
_do
500. 00
Supply Division, Post
Office Box 478, Dallas,
Tex.
V. 3'. Waters, Dallas, Tex__
1955
420. 35
_do
420. 35
See footnote at end of table.
1717600Z000?000t1M008/9dCIU-VIO : 80/170/1700z aseeieu JOd 130A0iddV
Life Line Foundation, Inc. (formerly Facts Forum, Inc.)?Receipts from subscriptions to Facts Forum News?Continued
Name and
Term of the subscription
Receipts from subscriptions
Number of
address of each
received by each person
subscriptions
person or organi-
or organization listed in
Year
purchased by
zation receiving
column 71
Purchaser of subscriptions
ending
each person or
subscriptions to
6/30
organization
listed in
Pacts Forum
News as a result
Cash
Other property
Total (column 3+
column 1
of each pnr-
Beginning
Expiration
(please describe
fully)
column 4)
chaser's pay-
ments 1
date
date
(1)
(2)
(3)
(4)
(8)
(6)
(7)
(8)
(3)
Welex Jet Services' Inc.,
1400 East Berry Street,
1954
1955
$100. 00
100. 00
None_
_do
$100. 00
100. 00
Fort Worth, Tex.
Wilson Supply Co., 1412
1954
300. 00
_do
300. 00
Maury Street, Houston,
Tex.
Wilson Supply Co., 1301
1955
300. 00
_do
300. 00
Conty Street, Houston,
Tex.
Wilson Supply Co., Post
1956
300. 00
_do
300. 00
Office Drawer 19, Hous-
ton, Tex.
Morris K. Womack, Hous-
1956
100. 00
_do
100. 00
ton' Tex.
General R. E. Wood, Sears
1954
1, 000. 00
_do
1, 000. 00
Roebuck, Inc., Chicago,
Ill.
1 Please submit the information for columns 7, 8, and 9 in duplicate on a separate sheet and identify as "Answers to columns 7, 8, and
9, Schedule 2."
e# =
Approved For Release 2004/04/08 : C1A-RDP671300446R000300020094-4
Exhibit 42
REPORTING ON POSSIBLE VIOLATIONS OF LAWS OF THE UNITED STATES
Officers and employees of the Service are required to be alert to, and
to report on indications of offenses against the United States regardless
of the Federal statute involved. Official instructions on this were set
forth in Manual Supplement 93G-33, dated July 17, 1961, and these
instructions are presently reflected in section 9382.7 of the Internal
Revenue Manual, as follows:
9382.7 Information Concerning Alleged Offenses Against the
United States.
In the performance of their official duties, officers and
employees shall be particularly alert for indications of
offenses committed against the United States whether they
pertain to violations of the Internal Revenue Code or to
violations of other Federal statutes. Information concern-
ing alleged violations of the Internal Revenue Code shall
be reported through channels in accordance with existing pro-
cedures. Upon receipt of information indicating violations
of Federal laws which are not administered by the Internal
Revenue Service, officers and employees, other than Alcohol
and Tobacco Tax personnel, shall set forth in a momorandum
the pertinent facts concerning the suspected violation and
promptly forward such memorandum through channels to
the Assistant Regional Commissioner (Intelligence) for re-
ferral to the Director, Intelligence Division. The memo-
randum shall contain the name, address and. any known
aliases of the alleged violator together with a summary of
available information with respect to the indicated offense,
including names and addresses of persons, if any, who can
furnish further details in connection with the matter.
Upon receipt of information indicating a violation of a federal
law not administered by the Internal Revenue Service, the Director,
Intelligence Division, immediately notifies the Attorney General, in
writing, of the name of the alleged violator, and the general nature
of the violation, informing him at the same time that further infor-
mation and cooperation will be provided by the Service upon receipt
of a request made in accordance with statutory requirements.
The attached Information Notice 64-34 is a recent example of how
the procedure is implemented from time to time. (The Directives
referred to on page 2 of the Information Notice for the Appellate,
Audit, and Collection Divisions reflect the same requirements as those
for the Intelligence Division in section 9382.7 of the Internal Revenue
Manual.)
893
Approved For Release 2004/04/08 : CIA-RDP67600446R000300020094-4
Ap1394/ecirariatittaterolke014A11:: gtheituRERWRIZIME11110000 20094-4
[No. 64-34]
U.S. TREASURY DEPARTMENT,
INTERNAL REVENUE SERVICE,
August 13, 1964.
INFORMATION NOTICE
Reporting Violations of Section 1952 of Title 18,U. S. Code, Involving
State Law Bribery Violations
The purpose of this Information Notice is to call attention of appro-
priate personnel in the Appellant, Audit, Collection and Intelligence
Divisions to the contents of a letter, dated May 18, 1964, to the Com-
missioner from Mr. Herbert J. Miller, Jr., Assistant Attorney General,
as quoted below:
DEPARTMENT OF JUSTICE,
Washington, May 18,1964.
Hon. MOR'fIM ER M. CAPLIN,
C ommissioner of Internal Revenue,
Washington, D .0 .
DEAR COMMISSIONER: I am writing to you in connection
with a phase of the enforcement of Section 1952 of Title 18,
U.S. Code, in which I think the Internal Revenue Service
may be in a position to be of even greater assistance to us.
Section 1952, as you know, prohibits the travel in interstate
commerce or the use of a facility in commerce to promote,
manage carry on, etc., of a bribery, in violation of the laws of
the state in which the bribery occurs or of the United States.
'While the Internal Revenue Service regularly reports to this
Division any violation of a federal statute which may come to
its attention in connection with its own investigations, it oc-
curred to me that where a bribery might occur in violation of
the laws of a state, the relationship of such criminal conduct
to 18 U.S.C. 1952 might not be entirely appreciated since this
is a relatively new statute. Whenever as a result of investi-
gations or inquiries conducted by your agents any such course
of conduct is disclosed, I would appreciate it if you would
have these facts brought to the attention of the Criminal
Division so that we may give prompt consideration to our
responsibilities under U.S.C. 1952.
Sincerely,
(Signed) HERBERT J. MILLER, Jr.,
Assistant Attorney General.
Approved For Release 2004/04/08 : CIA-RDP67600446R000300020094-4
Approved PAYORraigaMW2110441041018K5COPRDP67B110446R00086:00/9r94-4
In reporting a violation of Section 1952, the appropriate person-
nel of the following Divisions will follow the provisions of the current
directives indicated. below:
Division Directive
Appellate Division IRM 8 (23 ) 32.
Audit Division IRM 4097.
Collection Division CR. 51G-16 to Manual Supplement
93G-33, dated July 17, 1961 (prin-
cipal number previously superseded)
and IRM 240-2.02 (3)a. (d) and
240-3.02 ( 3 ) b.
Intelligence Division IRM 9382.7.
D. L. BALM,
Assistant Commissioner (C ompliance).
(Official Use Only)
Approved For Release 2004/04/08 : CIA-RDP67600446R000300020094-4
Approved For Release 2004/04/08 : CIA-RDP67600446R000300020094-4
Exhibit 43
Page 5
FORM 9904 RETURN OF ORGANIZATION EXEMPT FROM INCOME TAX
ILL Treasury Department
Section 501(c)(3) of the Internal Revenue Code
internal Revenue service
PART II For Calendar Year i%2?Or other taxable year beginning 1962, and ending , 19
1962
Part 11 iniormation equired pursuant to Section 60331b) and other applicable sections et the Internal Revenue Code must be submitted
in duplicate as part of your return. This part will be made available to the public.
Legal name I organtsarion Address (number. street Oliver town, postal none, and Stole) Tide return mord be filed on or before the
IBM di, silk, fifth month following the
dorm of the annual accounting Porthele
--I Return worst bo filed with the District Direc-
tor of Internal Revenue for Oh. district In
which is located the principal place of busier
Please nem or principal office of the organisation.
type or
print
clearly
Employer Identlicaton
Line tie.
1. Gross sales or receipts from business activities
2. Less: Cost of goods sold or of operations (Attach schedule)
3. Gross profit from business activities
1. Interest
5. Dividends
6. Rents
7. Royalties
8. Gain (or loss) from sale of assets, excluding inventory items (See Instruction 8)
9. Other Income (Attach schedule.?Do not include contributions. gifts, grants, etc. (See line 17.))
10. Total gross income ((ices 1 to 9, inclusive)
11. Expenses of earning gross income from column 3, Schedule A
DISBURSEMENTS MADE WITHIN THE YEAR OUT OF CURRENT OR ACCUMULATED INCOME
FOR PURPOSES FOR WHICH EXEMPT, AND ACCUMULATION OF INCOME
12. Expenses of distributing current or accumulated income from column 4, Schedule A
13. Contributions, gifts, grants, scholarships, etc. (See Instruction 13)
need schedule
14. Accumulation of income within the year (line 10 less the sum of lines II, 12, and 13)
19. Aggregate accumulation of income at beginning of the year (5
16. Aggregate accumulation of income at end of the year
RECEIPTS NOT schedule if 17. Contributions, gifts, grants, etc., received nee
18. Less: Expenses of raising and collecting amount on line 17, from column S. Schedule A
19. Net contributions, gifts, grants, etc
DISBURSEMENTS MADE OUT OF PRINCIPAL FOR PURPOSES FOR WHICH EXEMPT
20. Expenses of distributing principal from column 6, Schedule A
21. Contributions, gifts, grants, scholarships, etc.: (a) Paid out in prior years ($
001 Paid out within the year (See Instruction 21)
need ache
Schedule A?Allocation of Expenses (See Instructions)
1. Item
2. Total
"Werin="Lng
diliVrengT:ointe
aLlEglee'clill'gliZ !I
Mstr.iltElgrVAC:pal
(a) compensation of officers, etc. nee
(b) Other salaries and wages
(c) intered
(d) Taxes
(e) Rent
(f) Depreciation (and depletion) no se
(g) Miscellaneous expenses (Attach soh )
08 Totals
schedule
oduleeede
Enter en line II
Enter or line 12
Enter on lew 18
Enter on lino El
890
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Exhibit 44
Form 990-A1962 Schedule a-BALANCE SHEETS (See Instructions)
fiegInnIng of Year
ASSETS
1. Cash
2. Accounts receivable
Less: Reserve for bad debts
3. Notes receivable
Less: Reserve for bad debts
4. Inventories
S. Investments in governmental obligations
6. Investments in nongovernmental bonds, eta
7. Investments in corporate stocks (See Instructions) ?MO,
8. Mortgage loans
9. Other investments (Attach schedule)
10, Depreciable (and dep-letable) assets 4Illickaleelohedule)
, Less: Reserve for depreciation (and depletion)
11. Land
12. Other assets (Attach schedule)
13. Total assets
LIABILITIES AND NET WORTH
14. Accounts payable
15. Contributions, gifts, grants, etc., payable
16. Bonds, notes, and mortgages payable
17. Other liabilities (Attach schedule)
18. Capital stock: (a) Preferred stock
(b) Common stock
19. Membership certificates
20. Principal or other capital
21., Reserves (Attach schedule)
22. Accumulated income or earned surplus:
(a) Attributable to ordinary Income
(b) Attributable to gains from sale of assets
23. Total liabilities and net worth
Page 6
End of Year
Total
Total
schedule
I. Dotes: current exemption leder
/ 2. Attach a detailed etatement of the nature of your business.
charitable, and all other activities.
3. Woe a Form 990-A filed for the preceding year? 0 Too ONe
It "lee," where toed?
4. Nave you tiled aloe return on Form 990-T tor this year?. ? ? 0 Ten El No
If "Tee," where filed?
O. What le the legal fonn ol Your organtration IcorPoratton.
leash unincorporated association, etc.)?
E. In whet year woe your organisagon formed?
In what Slate or country?
7. If successor to previously oxisting organistation(e), give
name (s) and addreesIes) of the predeceseor Mganiretton4)
8. If you have capital stock issued and outstanding, elate with
remelt, to each class of dock-
fal The number of shares outstanding
lb) The number of shares held by Individuals
(o) The number, of shares held by organizations
91) The number of shareholders at end of year
(e) Whether any dividend., may be paid 0 Yee Otto
V. If Er ..aaf, ulrmeguenct11,:l arts out at Income, attach itemized
^ 10. "aRn,:vg:irodS=C: sb tlhe co' Interact
ernct?
uon or bylaw. or oillor Instrumento oz mmlLar'Itnn;erte.."? Dv.. 0 No
If 'Teo,. attach a copy of the amendment.
^ 11. Nave you had ace ...c.oe at income or enClaged to one
non.ee not previously reported to the Internal Revenue
Service? 0 Tee Des
It "Tee," attach detailed statement,
*11.3,2CNEMOSINTIWIT
11. Did youhold any realproperty for renialpurposeswithre pect
to which there is an indebtedness incurred in acquiring the
Property 00 10 making improvements thereto or which was
acquired subject too mortgage or similar hen? Dye. Otto
It "Yee,.? ottach detailed elalement.
13. Have you during the year either advocated or opposed
(including the publishing or dislxibutin?g of statements) 0 yo. 0 N.
any legislation, national, State, or local
If "Yes," attach a detailed description ol euch activities and
coplee of any much statements.
04. Hatir7cMod:rtltnej Ohs oar panic1 ted to, or tstnreeoed a
any political campaign on behall of any candidate tor 0 ye. 0 Ho
Pubito office?
If "Yee," attach a deluded description al such activities and
copies ol any etch statements.
IV. After Iuly 1,1500, did-
The creator of your oreanization, or
A contributor to your orgamzetion, er
A brother or sister (whole or half blood), spouse, ancestor
or lineal descendant ot such creator or contributor, or
A corporation owned We percent or more of voting stook or
SO percent or more of value of all stook) directly or
indirectly by such creator or conhibutor
(a) BOITOW any pad Oi yet* income Or COM1110
(b) Receive any compensation for pereonal service. from
' ou?
fo) Hoyye any part of your services or assets made avail-
able to him?
kit Purchase any peewit!. or other propertY from Yout?
le) Set use securities or other property torso?
(I) Receive any of your income or cornea in other trans-
?
it aunme,1,1%??pou;,e;311,c,:td?I.7I3e," attach detailed elatement
IS. Do you hold 10 percent or more of any ohms of stook In arl y.. 0 xo
It 'zia's:.r:'yt'eVinust submit the hilormation regMreoi by the
instructions for Sehodule B.
GOFFICHtl000-0-6403.10
307
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Exhibit 45
990-A's Not to be copied:
Alumnis and endowment funds or trusts for schools, colleges, etc.
Btnai RIrith Hillel Foundations
Community Centers
D. A. R.
Employee donation or contribution funds.
Employee welfare funds.
Health agencies: Arthritis and .Rheumatism Foundation Chapters
National Fdn. (for Infantile Paralysis) Chapters
Mental health associations or chapters
liyasthenaa Gravis Pdn., Inc.
Historical Societies
Hospitals, clinics, homes for orphans, aged, etc.
Riwanis foundations, unless assets over 41000000
Libraries
Nuscums
P. T. A.
Power Squadrons
Rotary foundations, unless assets over *100,000
Scholarship funds - when limited to graduates or students of a particular
community or for a particular achool or college.
Settlement houses
Youth agencies; Scouts
YMCA YWCA
Y MK A? YWE A. ETC.
898
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Exhibit 46
If called Foundation - make copy of 990-A even though it is a Fund raising
Foundation - no copy of attachments.
Always look on Statement of Nature of Activitles to be sure if its Fund
Raising.
Under Expenses it might list if it is Fund Raising
Look for Contributions.
The only time to make a copy covering letters is when signed by an individual
who is an officer or trustee of Foundation.
If printed form from Foundation is attached do not copy, but make note of it
on Xerox copy.
Always skip gain and loss report from sale of assets. Always line 8 and page
1 of 990-A.
Do not copy sheet with disbursements and income received.
Do not copy depreciation schedule.
Types to look for:
Foundation, Fund, Trust, Corporation and sometimes Association,
Societies, Chapters.
399
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AppetWd Feliik4IMMI2013=4:08rs:C1MeMiliftfinilikM$4499A0020094-4
Exhibit 47
Gentlemen:
U. S. TREASURY DEPARTMENT
INTERNAL REVENUE SERVICE
The Internal Revenue Service is converting its records of organi-
2ations exempt under Sections 501(a) or 521 of the Internal Revenue
Code so that the records can be maintained and processed on the Service's
Automatic Data Processing (ADP) equipment. Processing on ADP will better
serve the needs of the Government, exempt organizations, and the general
public and will facilitate the preparation of rosters and publications
listing exempt organizations, such as the Cumulative List of Organiza-
tions Contributions to Which Are Deductible (Publication 78).
Under the authority of Sections 6001 and 6033 of the Internal
Revenue Code and regulations issued thereunder, each exempt organization
is requested to complete the attached questionnaire and return it in the
enclosed pre-addressed envelope within 15 days in order to facilitate
this conversion.
It is important to your organization that the questionnaire be filled
in completely and accurately, and returned promptly. Please forward this
questionnaire immediately to the person authorized to act for the organi-
zation named on page 4, should this be necessary. Organizations which
are no longer active or are not currently in an exempt status should so
note as provided in the general instructions below and return it in the
enclosed envelope. Organizations not returning questionnaires will be
presumed either inactive or no longer interested in maintaining their
tax-exempt status.
Sincerely yours,
,:-2.4.4.4ee %en F44(a"td'ett.
Acting Commissioner
GENERAL INSTRUCTIONS
1. Complete this questionnaire promptly unless your orga-
nization:
a. Has previously submitted a completed copy of this
questionnaire to the Internal Revenue Service.
b. Has received a ruling or determination letter from the
Service dated after June 30, 1964.
2. If your organization is no longer active ores longer tax
exempt, so indicate in item I of the questionnaire in lieu of
the name and complete item 19 only.
3. The specific instructions are numbered to correspond
with the questionnaire. Your answers should relate only to
the organization to which this questionnaire is addressed. Use
page 4 to provide explanatory information. Attach additional
sheets if required.
4. Upon completion, detach and mail thp questionnaire in
the enclosed pre-addressed envelope.
FORM M-0284 1,08 1 (4-40
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Approved ,sifc_IAILplam ?,99401/Ackipilial3INPANEL4nEERRO0i8994-4
SPECIFIC INSTRUCTIONS
(Please Read All Instructions Carefully
I. race in item I the complete, unabbreviated name of your
organization. Examples: American Legion Shaw-Paulin Post
Number 241; First Baptist Church Missionary Society.
2. If your organization has been issued an Employer Identi-
fication Number, record it in item 2. If not, insert "None."
3. Enter in item 3 the exact address (include ZIP code) of
your organization. Whenever possible, use an address which
will not change from year to year. If the address given.' is
the business or home address of an individual, also include the
Caine of such individual. Examples:
c/o John Smith, Treasurer
650 E. Main Street 225 Central Avenue
Elmville, Arkansas 66666 Elmville, Arkansas 66666
4. Enter in item 4 any name other than that shown in
item I by which your organization is commonly known. Ex-
ample; Veterans Victory Club.
, 5. If your organization has received an individual ruling or
determination letter from the Internal Revenue Service; check
box 1 in item 5. If your organization is covered by a group
ruling, check box 2. Enter the date of the ruling or deter-
mination letter, if known, in she space provided. If you do
not know the basis of your organization's exemption, or if
the exemption is on some basis other than a ruling or determi-
nation letter, check box 3 and explain on page 4.
6. Enter in item 6 the subsection of the Internal Revenue
Code under which your organization is exempt.
7. Table 1 on page 2 is a classification of exempt organiza-
tions arranged according to the exemption subsections of the
Internal Revenue Code of 1954 and covers all of the
specific purposes for which an exempt status is authorized.
Select and circle the item or items that best describe your
organization. Most organizations will select only one item;
however, select all which apply. Then enter in item 7 the
numbenr of the selected items. Organizations with exemp-
tions under earlier provisions of law should disregard the
subsection numbers shown in Table I
8. Check the one box in item 8 which best describes the
legal form of your organization. If your organization is not
a corporation, a trust, a partnership, or a cooperative, check
box 5.
9. If your organization is a foundation, check box 1 or 2 as
appropriate in item 9. A private foundation is one organized
by an individual, a family, ors corporate or other business
undertaking which is substantially supported by such parties.
TABLE 1-CLASSIFICATION OF
Before Completing Questionnaire)
A public foundation is one supported primarily by contrib.!.
tions from the general public or governmental bodies. If your
organization is not a foundation, leave this item blank.
10. If your organization was organized or formed in the
United States, its possessions, or its territories, check box 1
in item 10. Otherwise, cheek box 2.
11. Table 2 on page 4 is a listing of major purposes, activi-
ties, operations or types of exempt organizations. Circle any
items listed in table 2 which describe the current major pur-
poses, activities, operations or types of your organization. Circle
as,many items as may apply. Then enter in item 11 the line
numbers of the the selected items.
12. Enter in item 12 the month in which your organiza-
tion's accounting year ends.
13. If yours is a central or parent organization of a
national, regional, or geographic grouping of organizations,
check box 1 in item 13. If yours is an intermediate organiza-
tion of a national, regional, or geographic grouping of
organizations, such as the state headquarters of a national
organization, check box 2. If yours is a local affiliate of a
national, regional, or geographic grouping of organizations,
neon auxiliary which is a local affiliate of a national, regional,
or geographic grouping of auxiliaries, check box 3. If yours
is an independent organization or independent auxiliary (i.e.,
not affiliated with a national, regional, or geographic grouping
of organizations), chock box 4.
14. If yours is a local or intermediate organization, give the
full name and address of the central organization in item 14;
if not leave this item blank.
15. If yours is a central or intermediate organization,
record the number of your Ideal affiliates in item 15; if not,
leave this item blank.
16. Check the applicable boxes in item 16? to indicate the
returns your organization has filed within the past three years.
17. If your organization filed a group return within the
past three years, enter the number of organizations included
in your latest return in item 17. Otherwise leave this item
blank.
18. Enter in item 18 the city in which is located the Dis-
trict Director's office with which your organization filed its
last return. If not required to file a return, enter the city of
the District Director's office in which is located your organiza-
tion's principal place of business (or address).
19. Enter signature, title; and date of signing in item 19.
EXEMPT ORGANIZATIONS
Line Na. Classi fication
010 GOVe11101011 instrumentality
020 Title-holding corporation
030 Charitable organization
031 Educational organization
032 Literary organization
033 Organization to prevent cruelty to animals
Organization to prevent cruelty to chil-
034 siren
035 Organization for public safety testing
036 Religious organization
037 Scientific organization
040 Civic league
041 Local association of employees
042 Social welfare organization
050 Agricultural organisation
051 Horticultural organization
052 Labor organization
060 Board of trade
061 Business league
062 Chamber of commerce
063 Real-estate board
070 Pleasure, recreational or social club
080 Fraternal beneficiary society, order or
association
Code subsection
501(c)(1)
550011((ec)) (23))
50I(c) (3)
501(c) (3)
501 (c) (3)
501 (c) (3)
501(c) (3)
50I(c) (3)
501(c) (3)
.501(e) (4)
501(c) (4)
501(c) (4)
501(c) (5)
581 (c) (5)
501(c)(5)
50I(c) (6)
501 (c) (6)
501(c)(6)
501(c) (6)
501 (c) (7)
501 (c) (8)
Line Na. Class;fication
090 Voluntary employees beneficiary associa-
tion (Nongovernmcnt epaployees)
100 Voluntary employees' beneficiary associa-
tion (Government employees)
110 Teachers retirement fund association
120 Benevolent life insurance association
121 Mutual ditch or irrigation company
122 Mutual or cooperative telephone company
123 Organization like those on lines 120,
121 or 122
130 Burial association
131 Cemetery company
140 Credit union
141 Other mutual corporation or association _
150 Mutual insurance company or association
other than life or marine ?
160 Corporation financing crop operations
170 Supplemental unemployment compensa-
tion trust or plan
180 Apostolic and religious organization
190 Farmers' cooperative
Code mb.rertiox
531(c) (9)
501(c)(10)
501(c)(11).
501(c) (12)
501(0(12)
501(c) (12)
501(0(12)
501(c)(13)
501(c)(13)
501(0(14)
50I(c) (14)
501(c) (15)
501 (c) (16)
501(c) (17)
501(d)
521
10,11.1 M-0204 roan (5.041
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READ THE INSTRUCTIONS ON PAGE 2 BEFORE ANSWERING QUESTIONS
(Use reverse side or attack additional sheets if necessary)
FOR INTERNAL REVENUE
?ERVICE USE ONLY
FOR IRO MIL ONLY
I. COMPLETE NAME Or TAX EXEMPT ORGANIZATION
2. %;L' ENT I " -tIA LITBER
S. ADDRESS ESTEEM CITY, STATE AND ZIP COEN
A. OTHER NAMES BY WHICH ORGANIZATION IS BROWN DOE REVERSE SIDE IF NECESSARY)
B. SARIS FOR EXEMPTION
SATE OF LETTER/RULING
INDIVIDUAL RULING
1 11. OR DETERMINATION 2 .E1 GROUP RULING 3 II OTHER
LETTER
S. SUBSECTION OF CODE UNDER WHICH YOUR ORGANIZATION IS EXEMPT:
7, CLASSIFICATION OF EXEMPT ORGANIZATIONS IENTER UNE ADMIXES FROM TAME II
( 5. 1 1. 1 1. 1 )
D. FORM OF ORGANIZATION
7 II CORPORATION 2 Ill TRUST 3 . COOPERATIVE 4 111 PARTNERSHIP B 111 ASSOCIATION
S. TYPE OF FOUNDATION
1 . PRIVATE 2 II PUBLIC
10. PLACE OF FORMATION
COUNTRY
I II U.S. IINCLUDING POSESSIONS & TERRITORIES) 2 II. FOREIGN
II. MAJOR PURPOSES. ACTIVITIES OR OPERATIONS ((NUR ONE NUMBERS FROM TABU SI
( ). ( 1. ( 1. I 1
IS. MONTH IN WHICH ACCOUNTING YEAR ENDS:
IS. AFFILIATION
INDEPENDENT
1 III CENTRAL 2 II INTERMEDIATE 3 . LOCAL 4 II
14. SPA LOCAL OR INTERMEDIATE, ENTER FULL NAME AND ADDRESS OF CENTRAL
58. IF CENTRAL OR INTERMEDIATE. ENTER NUMBER OF LOCAL AFFILIATES:
IS. ANNUAL RETURNS FILED
1 III 990 2 111 990-A 2 El 990-C 4 111 900-P 5 1. 990-T
S ? 1065 7 111 NONE
17. NrUtZET?N RETURN WAS FILED.I ENE THE1, LATEST GROUP RETURN:
15. CITY OF DISTRICT OFFICE:
IS. SIGNATURc AND TITLE
DATE
U.S. TREASURY DEPARTMENT INTERNAL REVENUE SERVICE
402
FORM m-02E4 PAGE 4054,
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APPrc4#51 F9X2R2kiLilotagiatatClgriscWWFONS9B02??94-4
ITKM NO.
REMARKS ISM ADDITIONAL REMARKS WHICH PERTAIN TO QUESTIONS ON REVERSE SIDE. SHOWING ITEM NUMBER)
TABLE 2?PURPOSES, ACTIVITIES, OPERATIONS OR
TYPES OF EXE
MPT ORGANIZATIONS
Eke No. Decagon Line Na. Dnciipiiaia Ho a No. Deeeriplion
01
Arts (Per(orming Arts, Fine Arts,
28
Exhibitions, Fairs, Trade Shows
59
Pension, Profit-Sharing Trust, etc.
etc.)
29
Fanning
60
Perpetual Care Fund
02
Advertising
30
Federal, State or Local Government
61
Professional Advancement
03
Alumni Activities
Agency
62
Public Safety
04
Association of Employees
31
Financial Services
63
Publishing, Radio, TV, etc.
05
Association of Employers
32
Fraternity or Sorority
64
Real Estate Activities
06
Athletics
33
Fund Raising
65
Recreation
07
Book Store
34
Garden Club
66
Religious Institution (Church,
08
Business Promotion
35
Gifts to Charitable Organizations
Synagogue, etc.)
09
Cafeteria, Restaurant, Snack But,
36
Gifts to Individuals
67
Religious (Other)
Food Services
37
Handicapped, Aid tb
68
Rental of Owned Property
10
Camp
38
Health Agency
69
Research and Development
11
Cemetery or Burial Association
39
Historical Sites, Historical Records,
70
Retirement Plan
12
Civic Welfare
?
Preservation of, etc.
71
Royalties, Receipt of
13
Civil Liberties or Rights
40
Hobby Club
72
Scholarships
14
Clinic
41
Hospital, Nursing Home, etc.
73
Senior Citizens or Retirees
15
Commemorative Organization (Cen-
42
Housing for Aged
74
Services to Members
tennial, Monument, etc.)
43
Housing (Other)
75
Sick or Death Benefits to Members
16
Commodity Exchange
44
Humanitarian Activities
76
Social Activities
17
Community Deterioration, Preven-
45
Indian (Tribe, Cultures, etc.)
77
Sports Activities
tion of
46
Industrial Development
78
Student Activities
18
Community Fund
47
Insurance
79
Testing
19
Conservation (Natural Resources,
48
International Operations
80
Thrift Shop, Retail Outlet, etc.
Wildlife)
49
Juvenile Dclinguency, Combating of
81
Traffic or Tariff Bureau
20
Country Club
50
Legislative Activities
82
Unemployment Benefits
21
22
23
24
Credit Reporting
Educational Institution
Educational (Other)
Emergency 'or Disaster Aid Fund
51
52
53
54
Library
Loans
Marketing Members' Products
Medical Care
83
84
85
Urban Renewal
Vacation Plan
Veterans Activities
25
Employees, Welfare of
55
Museum
86
Volunteer Firemen's Organization
26
Employment Assistance, Retraining,
56
Nursery
87
Voter Education
Apprentice or Vocational Train-
57
Parent or Parent-Teachers Associa-
88
World Peace, Promotion of
ing, etc.
tion
89
YMCA, YMI-IA, etc.
27
Endowment Fund
58
Patriotic Activities
90
Youth Activities
U.S, GOVERNMENT PRINTING 014=11064 0 - 136-072
/ORM M?0284 PA. 4 s0,34)
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Approved For Release 2004/04/08: CIA-RDP67600446R000300020094-4
Exhibit 48
[From the New York Times, Sept. 4, 1964]
MISUSING C.I.A. MONEY
Representative Wright Patman has disclosed that the Central Intel-
ligence Agency is giving money to, and working through, at least one
private foundation. And, if one, there must be others.
The practice ought to stop. Its continuation permits the Commu-
nists and the cynical everywhere to charge that American scholars,
scientists and writers going abroad on grants from foundations are
cover agents or spies for C.I.A. All scholars?especially those in-
volved in East-West exchanges?will suffer if the integrity of their
research is thus made suspect. What evidence can American pro-
fessors or field workers present to prove they are not engaged in under-
ground activities when it is known that the C.I.A. is using its money
to subsidize existing foundations, or is creating fictitious ones?
The use of Government intelligence funds to get foundations to
underwrite institutions, organizations, magazines and newspapers
abroad is a distortion a C.I.A.'s mission on gathering and evaluating
information. It means operating behind a mask to introduce gov-
ernmental direction into cultural and scientific spheres where it does
not belong?at least not in a democracy like ours.
Foundations, for their part, have no business accepting such money.
They will only end by destroying their reputations as private founda-
tions.
[From Pittsburgh Post Gazette & Sun Telegraph, Sept. 7, 1964]
THE ALMS OF CIA
The usually invisible tentacles of the Central Intelligence Agency
have now been found in the alms of a private foundation. This latest
unmasking of the CIA, by Congressman Wright Patman of Texas,
adds one more unsettling chapter to the story of questionable activi-
ties by the spy agency. However necessary the gathering of foreign
intelligence may be, the CIA's intrusion into policy-making, its re-
ported defiance of higher executive authority on occasion and its secret
operations in the domestic field are enough to make citizens wary of
its role in a democracy.
According to Representative Patman, the CIA, from 1959 until
sometime this year, used the J. M. Kaplan Fund of New York City
as a "secret conduit" for channeling funds for an unknown purpose.
Whatever the purpose was, the implications of this case are disturb-
ing. Twice during the 1950's district directors of the Internal Reve-
404
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Approved Pox-Release 2004t041e8rs:WeREIRWINAM46860M0040g94-4
nue Service recommended that the tax exempt status of the Kaplan
Fund be revoked. Then in 1960 a third director, after consultation
with IRS headquarters in Washington, recommended that the exemp-
tion remain in force. Although a spokesman for the IRS said the
tax agency had "no arrangement" with the CIA, the IRS was ad-
mittedly informed of the CIA's interest in the Kaplan Fund. Mean-
while, the IRS has still not made a final ruling on the Kaplan Fund's
tax status, and its investigation of the Fund is continuing.
As chairman of a House Small Business Subcommittee which has
been looking into foundation operations, Congressman Patman
charged on Aug. 10 that the Kaplan Fund's founder used the founda-
tion to further his business empire. He said the Fund's gross receipts
from 1951 through 1963 totaled $19.3 million, while disbursements
came to $6 million. This week Mr. Patman said the IRS investiga-
tion may involve "millions of dollars in tax liabilities."
Without full information on this case, we have no way of judging
the validity of the Kaplan Fund's claim to tax exempt status. But
we can hardly help wondering in the first place, why the CIA chose
a foundation that was under investigation and, second, how the In-
ternal Revenue Service could make an impartial finding on the Kaplan
Fund when it knew that the Fund was being used by another govern-
ment agency for unknown objectives. More important is a still larger
question raised by the Kaplan Fund revelation: How can citizens have
confidence in the integrity and benevolence of foundations when they
suddenly learn that a spy agency has been manipulating a foundation
whose organization aims were stated to be "exclusively" charitable
and designed "to strengthen democracy at home and abroad through
a general program of assistance to benevolent, charitable, educational,
scientific and literary activities, with some emphasis on intergroup
relations"?
Mr. Patman?who brought this story to light because he thought
he had been "trifled with" by the CIA?now seems to be satisfied that
his subcommittee need not pursue the CIA trail any farther in this
case. The American people, however, cannot be blamed for feeling
that they are being "trifled with" until they have a regular congres-
sional watchdog committee to keep an eye on the CIA's devious opera-
tions in a more systematic way than is possible with a group such as
Mr. Patman's.
39-915-64-2'T
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Exhibit 49
[From Evansville (Ind.) Press, Sept. 1,1964]
IT'S TAX MONEY? PUBLIC HAS RIGHT TO EXPECT SOMEBODY KEEP
TABS ON CIA
Congressman Wright Patman, in the course of his deep probe of
tax-exempt foundations, has given the Central Intelligence Agency
some embarrassment.
The congressman turned up information, verified by the Internal
Revenue Service, .,he CIA was giving money to the J. M. Kaplan
Fund, a New York foundation. Or, as Mr. Patman put it, the Kaplan
Fund was used "as a conduit for channeling CIA funds."
We don't know the purpose of this indirect use of taxpayer money.
And probably we don't want to know. We are not anxious to uncover
the legitimately secret operations of the CIA which of necessity must
be hush-hush.
But Mr. Patman was asking why the CIA was spending tax money
with a foundation which has been under intensive investigation by
both his congressional subcommittee and by the IRS.
When Mr. Patman first went to the CIA for an answer, he didn't
get it, he said.
"I feel like I've been trifled with," he said.
Then with the heat on, CIA officials met privately with Mr. Pat-
man Enid apparently convinced him that the matter should not be
aired publicly and was of no interest to the subcommittee's investiga-
tion.
Two different directors of IRS have recommended that the Kaplan
foundation's tax-exempt status be revoked, and IRS is still probing.
It does not necessarily follow that whatever service the KaPlan
Fund provided the CIA was not worth whatever CIA paid it. -But
somebody (not us) should have known all along.
Once again, we say Congress should set up a watchdog committee
to keep tabs on CIA and all the other hush-hush agencies. The pub-
lic doesn't ask what they are doing, but the public has a right to
believe that Congress knows what they are doing, and why. This
type of system has worked very well with the Atomic Energy Com-
mission, which is partly secret. It is even more important that there
be a check on CIA and like agencies.
The more secret an agency, the more liberties it is likely to take--
unless it is accountable to somebody who is accountable to the voters.
406
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Exhibit 50
TREASURY DEDARTMENT,
ASSISTANT SECRETARY,
Washington, July 17, 1964.
GENTLEMEN: The Treasury Department, in conjunction with its continuing
study of the operation of the tax laws, is currently compiling statistics with
respect to tax-exempt foundations. While some of the facts which are necessary
to complete this study are available from the 1962 return filed by your orga-
nization, there are certain items with respect to which we need more informa-
tion. Accordingly, you are requested to complete each of the questions on the
enclosed form and return one copy of the completed form within 30 days to the
Office of Tax Analysis, Room 4040, Main Treasury Building, Washington, D.C.,
20220.
It will be observed that some of this information is obtainable from the
schedules required to be submitted as a part of your annual return. These
schedules, however, are located around the country in the operating offices of
the Internal Revenue Service and thus are not readily available for this tabula-
tion. For the most part the data requested in this questionnaire were not pre-
viously requested.
This questionnaire is intended solely to obtain statistical information and does
not constitute an audit of your organization's activities. It should be noted that
the completion of this questionnaire does not excuse you from completing the form
which you have received (or will shortly receive) from the Internal Revenue
Service which is designed to obtain certain non-statistical information which
will permit the compilation of a "master list" of exempt organizations. This
master list will be placed upon magnetic tape and will be used with automatic
data processing equipment to facilitate the administration of the provisions of
the tax law dealing with exempt organizations.
The replies to the questions asked on this questionnaire are requested under
the authority of sections 6001 and 6033 of the Internal Revenue Code.
Sincerely yours,
STANLEY S. SURREY.
Bureau of Budget Approval
No. 48-6403
Expires Dec. 31, 1964.
TAX-EXEMPT FOUNDATION SURVEY
Name
Address
Officials, etc.
1. List below the name and position of each official (officer, director, or trustee,
etc.), whether or not compensated, of your organization at the end of the period
covered by your 1962 Form 990-A. (Please list all officers first, then directors,
then trustees, etc.) Use additional sheet if necessary.
Name
Investment
Relationship Polley
(see #2 below) (see #8 below)
Position None Type Yes (1) No (2)
1.
0
0
0
2.
0
0
0
3.
0
0
0
4.
0
0
0
5.
0
0
0
407
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2. For each official listed, indicate by entering the appropriate letter in the
column "Relationship?Type" which, if any, of the relationships listed below he
bears to the creator of the organization or to a substantial contributor (any
person who has contributed $1,000 or more to the organization). If none, check
the column "Relationship?None."
(a) He is the creator or a substantial contributor.
(b) He is related by blood, marriage, or adoption to the creator or to a
substantial contributor.
(c) He is an employee of the creator or of a substantial contributor.
(d) He is an attorney or accountant of the creator or substantial
contributor.
(e) He is an employee of a corporation owned (50 percent or more of vot-
ing stock or 50 percent or more of the value of all stock), directly or indi-
rectly, by the creator and/or substantial contributor.
(f) He is an employee of a partnership or other unincorporated business
venture in which the creator and/or substantial contributor owns 50 percent
or more of the capital interests or profits interests.
(g) He is a person who holds 20 percent or more of the voting stock or 20
percent or more of the value of all stock in any corporation in which the
creator and/or substantial contributor (and the wife and children of the
creator and/or substantial contributor) holds 20 percent or more of the
voting stock or 20 percent or more of the value of all stock.
(h) He is a person who holds 20 percent or more of the capital interests
or profits interests in any partnership or other unincorporated business ven-
ture in which the creator or substantial contributor (and the wife and chil-
dren of the creator or substantial contributor) holds 20 percent or more of
the capital interests or profits interests.
(i) He has another significant business relationship with the creator or a
substantial contributor.
(If the relationship (i) is indicated, please describe briefly on an attached
sheet. Such other significant business relationship would, for example, exist
where the official is an empioyee of a corporation or partnership in which the
creator or substantial contributor owns 20 percent or more of the stock or capital
or profits interests.)
3. Indicate by checking "yes" or "no" in the "Investment Policy" column
whether the individual official was authorized to participate in decisions relat-
ing to the handling of investments of your organization, or decisions relating to
the total amount of income, contributions, and corpus to be invested.
Question 15 on Form 990-A asks whether or not your organization engaged in
certain transactions with the creator of the organization with a substantial
contributor to the organization, or with certain parties related to either the crea-
tor or a substantial contributor. The following question (4) asks about such
transactions with officials of the organization and certain parties related to
such officials and deals only with transactions that were not involved in question
15 on Form 990-A. In answering this question do not take account of any trans-
actions involving individuals who are both creators or contributors (or related to
creators or contributors) and officials or related to officials.
4. Transactions with Officers, etc:
During the period covered by your 1962 Form 990-A, did?
Any of the officials of your organization;
The brothers, sisters, spouses, ancestors, or lineal descendants of the
officials;
Corporations owned (50 percent or more of voting stock or 50 percent
or more of value of all stock), directly or indirectly, by the officials; or
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Partnerships or other unincorporated business ventures in which the
officials owned 50 percent or more of the capital interests or profits interests:
(1) (2)
Yea No
(a) Borrow any part of your cash, securities, or
other property?
(b) Lend any cash, securities, or other property to you?
0
0
0
0
(c) Have any part of your services or assets (other
than compensation for personal services reported on
0
0
Schedule A of your 1962 Farm 990-A) made available to
them?
(d) Purchase any securities or other property from
you?
(e) Sell any securities or other property to you?
(f) Receive any of your cash, securities, or other prop-
erty in other transactions?
0
0
0
0
0
0
If the answer to any of the questions is "yes," attach a detailed explanation.
(Please mark this explanation "Schedule 4.")
5. Contributions Received During the Period Covered by Form 990-A for 1962:
(a) Enter the amount of contributions received during the period $
covered by your 1962 Form 990-A (line 17, page 1).
(b) Enter the amount of such contributions which were in the $
form of cash.
(c) Enter the amount of such contributions which were in the $
form of stock in any corporation with respect to which, at the end
of the period covered by your 1962 Form 990-A, your organization
held 10 percent or more of any class or stock.
6. Market Value of Assets at End of Period Covered by Form 990-A for 1962:
(Where no market quotations or detailed valuations are available to establish
market value of assets, an approximation will be satisfactory.)
(a) Total Assets
(b) Corporate Stack $
7. Certain Stock:
(a) During the period covered by your 1962 Form 990-A, did Yes (1) 0
your organization hold 10 percent or more of any class of stock in
any corporation? No (2) 0
If the answer is "yes," answer question 8 on page 4.
8. If you answered "yes" to question 7, on page 3, answer questions (a)
through (e) for each corporation in which your organization held 10 percent
or more of any class of stock during this period. If your organization held more
than one class of stock in such corporation, answer questions (a) through (e)
with respect to each class of stock In which your corporation held 10 percent
or more. Note that questions (d) and (e) refer to holdings at the end of the
period. If your organization held 10 percent or more during the period but
reduced this percentage (even below 10 percent) by sales during the period,
answer questions (d) and (e) with reference to the end-of-period holdings. (Use
additional sheets if necessary.)
(a) Name of corporation. (Abbreviate)
(b) Class of stock held (e.g. common, 6
percent preferred, etc.) .
(c) Did your organization sell, or other- 1. Yes 0 1. Yes 0 1. Yes 0
wise dispose of, any of this stock during the
period covered by your 1962 Form 990-A?
(Answer "yes" or "no.") 2. No 0 2. No 0 2. No 0
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(d) End of year holding?For
the shares of this class held by
your organization at the end of the
period covered by your 1962 Form
990-A give?
(i) Book value. $-
(ii) Market value.
(111) Approximate percen-
tage of total voting power.
(iv) Approximate percen-
tage of total value of all classes
of stock in the corporation.
(v) The total annual cash
dividend on shares held at the
end of the period.
(e) Give the approximate per-
centage of the total value of stock
In the corporation held at the end
of the period covered by your 1962
Form 990-A by the creator and sub-
stantial contributors to your or-
ganization and their brothers, sis-
ters, spouses, ancestors, lineal des-
cendants; corporations owned (50
percent or more of voting stock or
GO percent or more of the value of
all stock), directly or indirectly, by
such creator or substantial con-
tributors; and partnerships or
other unincorporated business ven-
tures in which the creator or sub-
stantial contributor owns 50 per-
cent or more of the capital inter-
ests or profits interests. (If this
Information is unknown and not
ascertainable, so indicate.)
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Exhibit 51
REPENT CHANGES IN TAX FORMS FILED BY FOUNDATIONS
num 990-A (ANNUAL INFORMATION RETURN)
Changes made on the 1962 form
1. Increased disclosure to the public of information concerning foundation
activities. Prior to the change in the 1962 Form 990-A, the "public" portion
of the return did not contain certain items, such as transactions between the
donor and his foundation, which were required to be submitted on the portion
of the form used by the Internal Revenue Service for audit and other purposes.
In addition, the "public" portion was only available in the district in which
the foundation filed its return. Starting with the 1962 form, however, the in-
formation which a foundation must supply on the "public" portion of its return
includes all the information contained on the "non-public" portion except an
Itemized list of contributions which it receives. (Requiring the public dis-
closure of this itemized list is believed to be inconsistent with the statute pro-
viding for public disclosure of returns filed by exempt organizations.) In ad-
dition, since 1962 foundations must submit two copies of the "public" portion
of their Form 990-A's. One copy is retained in the public disclosure files of the
district in which the return is filed; the other is transmitted to Washington,
D.O., where it is available for public inspection in the National Office of the In-
ternal Revenue Service.
2. A description of property, such as securities, received by foundations as
gifts is required. The pre-1962 Form 990-A only required the organization to
report the value of contributions it received, without indicating whether the
gift was in cash or property. The instructions to the 1962 form were the first
to require that where gifts to a foundation of $100 or more are in the form
of property, the description of the property received must be provided on the
separate schedule submitted to support the total contributions figure contained
on the face of the return. (This schedule is not made public.) This should
serve to "flag" gifts of property where it is likely that an inflated valuation
may be claimed. Prior to 1962 the foundation was required to indicate persons
from whom it received gifts of cash or property of $100 or more. This re-
quirement is retained.
3. Greater disclosure of gifts of income and principal made by the organiza-
tion is required. Prior to 1962 an organization was only required to supply
a list of organizations and individuals to whom payments of income and corpus
were made by the organization in furtherance of its exempt activities. However,
the 1962 form was the first to require not only the list of distributees, but also
the relationship (if any) of the distributees by blood, marriage, adoption, or
employment (including children of employees) to any person or corporation
having an interest in the foundation, such as the donor.
4. Breakdown of expenses of distributing income and principal is reqired.
Prior to 1962 the form required a breakdown (into compensation of officers,
other salaries, interest, taxes, rent, depreciation, and miscellaneous expenses)
of expenses incurred by the organization in (a) earning its income, but did
not require a breakdown of the expenses incurred in (b) distributing current or
accumulated income, (c) distributing principal, or (d) collecting contribu-
tions. Starting in 1962 a breakdown of expenses incurred in (b), (c) and (d)
was also required. The instructions in support of this breakdown allow the
expenses such as salaries, interest, etc., to be allocated between (a), (b), (c)
and (d) on "any reasonable basis".
411
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Changes- made on the 1963 form
The major change in the 1963 Form 990-A was a requirement that the orga-
nization list all of its directors, officers, trustees, etc., and indicate the rela-
tionship of such officials by blood, marriage, adoption, or employment to the
creator of the organizations, substantial contributors, and corporations con-
trolled by such creator or contributor. This information was designed to aid
In determining which foundations are in fact "donor controlled" and which
are not.
Our examination of some 1963 returns has indicated that this requirement,
which was only included in the instructions, has apparently been overlooked
in many cases. Therefore, the 1964 return will probably require the name of
each of the organization's officials to be listed on the face of the return, along
with the relationship of such officials to the organization's substantial donors,
etc. The final decision on this will, however, turn on whether the results of
our examination of the Form 990-A's and questionnaires currently being dis-
tributed indicate that there is a sufficient correlation between "donor-con-
trolled" foundations and foundations which engage in undesirable practices to
Justify the use of the limited amount of space on the return for such a list.
Additional changes
In the course of our study of this area, including the study of the information
which we will obtain from the questionnaires and the Form 990-A's, we may dis-
cover additional changes in the Form 990-A which would be helpful in admin-
istering the provisions of the tax law dealing with exempt organizations. Such
changes will be incorporated in the 1964 Form 990-A.
FORM 1028 (APPLIOATION FOR 1.2CEMPT STATUS)
Prior to 1963 the Service's position was that unless an organization qualified
as a "public type organization" (an organization with a governing board com-
prised of a cross section of persons in a community who represent the interests
of the community and which derives substantial financial support from the public
as opposed to a limited number of organizations or individuals), it was required
to actively operate for a period of at least 12 months before filing an exemp-
tion application. This position was based on the theory that the Service needed
to examine at least one year of the organization's actual operations before it con-
sidered itself able to determine whether the organization could be ruled exempt.
In December 1963 the Service announced that it would abandon the "12-months"
requirement and would issue a ruling in advance of the organization's opera-
tions if the organization could describe in sufficient detail its proposed operations
in a manner which would permit the Service to conclude whether the organization
would be clearly exempt. Following the announcement of this change in position,
the form which an organization must submit to obtain a ruling as to its tax-
exempt status (Form 1023) was revised so as to require the organization to indi-
cate the activities in which it expected to engage in the future. The new applica-
tion form is accompanied by an extensive instruction folder designed to clarify
the type of information needed to supplement the application and should sub-
stantially reduce the requests by the Service to an applying organization for addi-
tional information which in the past has been needed to perfect the organization's
application.
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Exhibit 52
BOARD OF GOVERNORS
OF THE FEDERAL RESERVE SYSTEM,
OFFICE OF THE CHAIRMAN,
W ashing on, January 17, 1964.
Hon. WRIGHT FATMAN,
Chairman Subcommittee Foundation Study, Select Committee on
Small Business, U.S. House of Representatives, W ashimton,
D.C.
DEAR MR. CHAIRMAN: This is in response to your inquiry of No-
vember 12, 1963, concerning possible violation of the Federal banking
laws administered by the Board or regulations issued thereunder,
arising out of certain financial transactions between Mr. Serge Semen-
enko, an officer and director of the First National Bank of Boston,
and the New York-based Baird Foundations. These transactions
are described in part 2 of a study of tax-exempt foundations and
charitable trusts, published by your Subcommittee under date of
October 16, 1963.
On the basis of the facts set forth in the said study, it would appear
that the failure of the Baird Foundations to report to the Board,
through the Federal Reserve Bank of New York, transactions during
fiscal year 1959 involving extensions of credit to Mr. Semenenko and
others for the purpose of purchasing or carrying securities registered
on a national securities exchange may have been a violation of the
Board's Regulation U.
Sections 7(a) and 17(b) of the Securities Exchange Act of 1934
(15 U.S.C. 78) authorize the Board to promulgate regulations for
the purpose of preventing excessive use of credit for the purchase
or carrying of securities and to require reports from persons subject
to such regulations. This statutory authority has been implemented
in the Board's Regulation U (12 CFR 221), and pursuant to published
rule (12 CFR 221.51) the Board, in 1960 requiredunregulated lenders
(i.e., those other than banks and securities brokers or dealers) who
on December 15, 1959, were in the business of extending credit and
who in the ordinary course of business extended credit for the purpose
of purchasing or carrying securities registered on a national exchange
to file, no later than May 15, 1960, a report of such transactions (on
Form F.R. 728) during the preceding fiscal year.
From the data contained in your Subcommittee report, it would
appear that during the period studied a significant part of the Baird
Foundations' activities involved extensions of credit, many of such
transactions being for the purchase or carry of listed securities.
413
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Of course, what constitutes "being in the business" of extending
credit is a factual determination, to be made in light of all relevant
circumstances. Since section 32 (a) of the Securities Exchange Act
of 1934 places responsibility for dealing with violations of the Act
and regulations promulgated thereunder with the Securities and Ex-
change Commission, determination of whether the Baird Foundations
were, in fact, engaged in the business of extending credit would ulti-
mately be a matter for that agency to decide. It appears, however,
that such a conclusion would be warranted, and the failure of the
Baird Foundations to file reports pursuant to 12 CFR 221.51 would,
therefore, seem to constitute a violation of the Board's Regulation U.
The foregoing matter is being referred to the Securities and. Ex-
change Commission for evaluation and appropriate disposition.
From the facts presented in your Subcommittee's report the Board
has concluded that, apart from the foregoing, the transactions in
question do not appear to conflict with any statutory or regulatory
provsions administered by the Board.
Sincerely yours,
WM. MCC. MARTIN., Jr.
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Exhibit 53
PRELIMINARY REPORT AND STATUS OF INVESTIGATION PREPARED BY
THE DIVISIONS OF TRADING 4.46 MARKETS AND CORPORATION FI-
NANCE RE DAVID G. BAIRD ET AL. FOR SUBCOMMITTEE No. 1 OF
THE SELECT COMMITTEE ON SMALL BUSINESS OF THE HOUSE OF
REPRESENTATIVES
(Submitted to the subcommittee under date of November 30, 1964)
The staff is presently engaged in a comprehensive study and re-
view of certain financial transactions of the Baird Foundations
(Foundations) ?Winfield Baird Foundation; David, Josephine &
Winfield Baird Foundation, Inc. ? and Lansing Foundation, Inc.
This study was prompted by the fuibdincrs of the second installment of
the Patman Report which dealt at great length with the activities of
these Foundations.
Our work has gone through several stages. Initially we reviewed
with great care the Patman Report and the Commission's records
which pertained to the Foundations' transactions described in the re-
port. In brief, we found that beginning in 1951 Baird and his Foun-
dations engaged in activities which may have involved violations of the
securities laws as more particularly set out below:
(1) The Foundations bought and sold securities for their own
accounts and for the accounts of others. Such purchases and
sales may have been made without compliance with the broker-
dealer requirements imposed by Section 15(a) of the Exchange
Act;
(2) The Foundations have extended credit to "customers" in
the purchase of securities. Such extensions of credit may have
violated the margin requirements as provided by Section 7(c) (1)
of the Exchange Act;
(3) The Foundations have participated with issuers and con-
trolling persons in the primary and secondary distribution of se-
curities without registration under Section 5 of the Securities Act,
which distributions may have been in violation thereof;
(4) The Foundations have participated with others in large
acquisitions leading to the control of listed companies. These
transactions may have been effected in violation of the disclosure
requirements of Sections 10(b), 13 and 14 of the Exchange Act in
connection with (a) stock purchases, (b) the filing of periodic
reports and (c) the use of proxy materials ? and
(5) The Foundations may have acquired and disposed of listed
securities without filing ownership reports as required by Section
16(a) of the Exchange Act.
415
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Based on the above, on March 5, 1964, the Commission directed the
staff to inquire into these matters and authorized the use of its subpoena
power for such purposes.
At the outset it became quite clear that in order to resolve the ques-
tions raised by our preliminary analysis, it would be necessary that
our investigation be quite comprehensive. This meant that there
would have to be a detailed analysis of the Foundations' books and
records and a very extensive field. investigation. This requires sub-
poenaing a vast amount of records and interviewing many witnesses
from all parts of the United States.
At the beginning of our investigation Mr. David G. Baird was
subpoenaed to testify and produce certain of his own records and those
of the Foundations. Mr. Baird's initial testimony proved rather in-
conclusive and it is anticipated that he will be recalled to further
testify.
To obtain the background and a clear understanding of the many
complicated transactions we were concerned with, it was necessary
to examine and analyze the financial records of the Foundations for
a number of past years extending back to the early 1950's. The
dimensions of this work can be somewhat understood by the number
of transactions involved. Since 1951 the Winfield Baird. Foundation
alone has had securities transactions with over 200 different persons
and corporations and over 40 broker-dealer firms. In addition, the
Foundation has purchased securities directly from over 40 issuers.
In 1956 alone the Winfield Baird Foundation had transactions in over
130 different securities totaling $21,711,221 in purchases and $11,581,-
699 in sales. In 1054 through 1963 the same Foundation purchased
$87,8'77,472 worth of securities, and sales during this period were
$86,000,299.
We have analyzed most of the more significant securities trans-
actions of the Foundations. An important objective of this work is to
segregate and identify (a) wash donations (inter-fund and individual
donors) ; (b) amount of ordinary income disguised as capital gains
(profit-sharing arrangements) ; (c) securities owned by the Founda-
tions from securities carried for the accounts of others (capital gains
versus loans) ; and (d) details of bank borrowing (margin require-
ments) .
We believe that this information will be particularly helpful in
determining whether the Foundations have been conducting directly
or indirectly a securities business as defined in our statutes. Because
of the complexity of the transactions, certain inaccuracies in the rec-
ords and in some instances their incompleteness, this work of necessity
is quite time consuming.
We also have given consideration to certain recent transactions of
the Foundations. We understand that under an arrangement with
the Internal Revenue Service the Foundations are to wind up their
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affairs by December 1965. It appears that during the latter part of
1963 the Foundations transferred certain of their securities to the
Maxwell Fund, Inc., a newly formed profit corporation organized
by Baird and wholly owned by the Foundations.1 Maxwell Fund
officials said the purpose of the transfer is to assist the Foundations
in disposing of their securities holdings which do not have a ready
market and which in all likelihood could not be liquidated without
substantial losses by December 1965. Our examination, however, indi-
cates that many, of the securities transferred from the Foundations to
Maxwell Fund appear to have a ready market and that some have
already been sold, although the proceeds have not been remitted to
the Foundations.2 It also appears that the Maxwell Fund has been
buying and selling securities for its own account and for the accounts
of others and has been generally engaging in although on a smaller
scale, the same kinds of activities as the Foundations.
In carrying out our field work we have been adhering to a strict
time schecaile. To date over 40 witnesses have been questioned, some
informally and others on the record. Witnesses already have been
seen in New York, New York; Philadelphia, Pennsylvania Boston,
Massachusetts ? Cleveland, Ohio; Chicago, Illinois. Los 'Angeles,
California; and Houston, Texas and more remain to Illinois;
questioned.
Our present schedule contemplates completion of our field work by
the end of December 1964. Thus should we be able to complete our
entire investigation by that time, we anticipate a report could be made
to the Commission sometime in early 1965.
1 The records of the Foundations at this time do not show the transfers of those securi-
ties and Maxwell Fund's records indicate that it gave no consideration for them.
2 A Maxwell Fund spokesman explained that no proceeds received from the sale of these
securities will be remitted until Maxwell Fund had wound up its business.
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Approved For Release 2004/04/08 : CIA-RDP67600446R000300020094-4
Exhibit 54
INFORMATION SUBMITTED TO THE SUBCOMMITTEE BY THE BAIRD FOUN-
DATIONS REGARDING THEIR TRANSFER OF ASSETS TO THE MAXWELL
FUND, INC.
The Maxwell Fund, Inc., 67 Broad St., New York City, is an in-
vestment company, organized on October 7, 1963, in the state of New
York.
The officers and directors of Maxwell Fund, Inc., are as follows:
David G. Baird, President; Norman H. Raskin, Vice President; Wm.
D. Brome, Vice President; Louis Morowitz, Secretary-Treasurer. All
are employees of Baird & Company-, 67 Broad St., New York City.
On January 2, 1964, 100 shares of common stock of Maxwell Fund.
Inc., were issued.
From inception to December 7, 1961, the David, Josephine & Win-
field Baird Foundation has owned 11 shares (11 percent) of the stock,
with carrying value and market value as follows:
Carrying value Janscvry 2, 1964 Carrying value December 7, 1964
$332,980.03 $295,967.11
Market value January 2, 1964 Market value December 7, 1964
$381,011.00 $352,304.75
From inception to December 7, 1964, the Winfield Baird Founda-
tion has owned 89 shares (89 percent) of the common stock, with
carrying value and market value as follows:
Carrying value January 2, 1964 Carrying value December 7, 1964
$2,684,159.21 $2,394,642.97
Market value January 2, 1964 Market value December 7, 1964
$2,872,235.38 $2,850,465.73
The assets transferred to the Maxwell Fund, Inc. (January 2, 1964)
by the two Baird Foundations are shown below. Certain information,
respecting the transfer of assets, has not as yet been submitted to the
Subcommittee by the Baird Foundations, i.e.?gross sales price; ex-
pense of sale; and seller's gain or loss.
418
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17-17600Z000?000t19pp008/9dCIU-VI3 : 80/170/1700Z aseeieu -10d PeACLICIdV
List of assets transferred
Foundation's
Number of carrying value Market value at
Seller shares Class of stock Issuing company 15181163 18/51/68'
DJ&WBF 1
2, 500
Common
American Book Stratford
$22,
983.
03
$14,
687.
50
700
_do
American Shipbuilding
13,
482.
00
7,
787.
50
1, 500
_do
Dulany Industries
8,
250.
00
5,
062.
50
7, 800
_do
Federal Resources
11,
212.
50
15,
600.
00
1, 562
_do
Interstate Bakeries
8,
750.
00
36,
316.
50
10, 000
Capital
Skyline Oil
40,
000.
00
100,
000.
00
9, 500
_do
Stanrock Uranium
22,
872.
50
5,
343.
75
2, 200
_do
U.S. Testing
23,
192.
50
25,
300.
00
20, 000
Common
Universal Controls
120,
000.
00
90,
000.
00
260
_do
Wilson Bros
4,
000.
00
1,
625.
00
4, 000
_do
Western Natural Gas
58,
237.
50
52,
500.
00
WBF 2
700
Capital
American News
30,
037.
00
14,
441-
00
232, 700
Common
Federal Resources
496,
978.
75
465,
400.
00
7, 600
_do
Crose United
35,
625.
00
21,
850.
00
350
_do
Flk Horn Coal
7,
487.
50
6,
475.
00
2, 500
_do
Hilton Hotels
50,
375.
00
39,
075.
00
10, 648
_do
Lincoln Printing
90,
414.
50
27,
951.
00
7, 725
_do
Rapid American
88,
193.
15
30,
900.
00
90, 000
Capital
Skyline Oil
360,
000.
00
900,
000.
00
6, 500
Common
Smith & Wesson
198,
250.
00
214,
500.
00
5, 000
_do
Rohr Corp
93,
711.
90
81,
875.
00
2, 500
_do
Sayre & Fisher
10,
906.
25
8,
437.
50
103
Capital
Frank G. Shattuck
1,
62&
69
1,
197.
38
2, 900
Common
Stanley Warner
93,
689.
45
76,
125.
00
20, 000
_do
Technicolor
157,
400.
00
372,
600.
00
92, 000
_do
Universal Controls
561,
56&
70
414,
000.
00
24, 000
_do
Wilson Bros
203,
760.
00
150,
000.
00
3, 200
_do
Western Natural Gas_
52,
375.
00
42,
000.
00
1, 000
_do
Winston Muss
6,
330.
00
2,
750.
00
$334
Oil Shale Corp. 41A% Cony. Debs
334.
00
Total
2,
872,
044.
92
3,
223,
799.
63
1 David, Josephine & Winfield Baird Foundation. 3 As submitted to the Subcommittee by the Baird Foundations. CD
1
2 Winfield Baird Foundation.
cs)