PAGENO="0001" 227 The voluntary control measures are applied by the Department of Commerce on the operations of American corporations in direct investments overseas; the operations of the interest equalization tax, which is the law concerning the making of overseas loans that might nifect our balance of payments; an& the voluntary program adminis- tered by the Federal I1e~rve ~Boar& in dealing with loans by b~iiks ~_~nifL nonbank financial irstitutions over~eas whicl~ you refer ti as~re-~ fleeting our balance-of-paymeILts program, all include ~vefy specifi- ~ ~tk~ ~ 050 programs of activity in the iess-deveIop~d ~ov:itries of the work., which it do not need to name. It IS geiievai cal egory. The concern of those progrems w~ h the flow of funds overseas am~. eny limitations thereon in these programs have been to the so-called developed or the powerful flnaneial countries. Now, you may find a foundation that has spent a few dollars in one - or another of the so-called developed countries. I think that of the list you reacT, Italy was the only developed country I recall. But by and large the activiries overseas of these foundations have been concerned with countries like India, which is prominent in the listing you gave, - which is a less-developed country which is exempt from these pro- grams and which as a matter of foreign policy of the United States ~nd foreign economic policy, we want to encourage our private founda- tions to help out, just as we encourage the private companies to invest in the development of those areas, and just as the Congress of the United States enact aid programs each year for making loans to these countries, their governments and their institutions. So, the question and the comment about the overseas operations of foundations completely misses the point of our concern. Mr. PA1~tAN. Thank you for your comment on that, but remember these are not the only ones. These are just typical of what has been done. Secretary Fowi~R. The characteristic operation - Mr. PAT~L&N. If you would like, we can document others, but we will not pursue that at this point. I want to get through with these policy questions. Secretary FowLnn. What was the next question? Mr. PATMAN. We all know that Mr. MeGeorge Bundy is now president of the Ford Foundation. Secretary FOWLER. Wait a minute. There was one question that you asked where there was a long series, and there was another one that I do not think I got a chanceeven to answer as you read the pre- vious statement, something about if I agreed to it. I do not know any- thing about the Indonesian matter referred to. I think I answered that *question. Mr. PATMAN. I said, would it be fair to say that if that spend- thrift is a tax-exempt foundation and not John Q. Public, the founda- tion culprit needs exposure and closer supervision. I just did not think you would differ with that. Secretary FownEn. I think the question you asked me was some- thing about a separate agency. Mr. PATMAN. Yes; I brought that up in my original statement. Secretary FOWLER. I think I should get that in the record. Would I agree that a separate agency should be establi~hed? PAGENO="0002" 228 If the reason for your proposed regulatory agency is to eliminate tax abuses among foundations, the answer is "No." We think that. the adoption of the foundation report recommendations would give In- ternal Revenue Service the necessary tools with which to ehinin ate tax ahu~es in the foundation area, aiid, therefore, no new regulatory - -- agency is necessary. Now, presumably any abuaes in the other fields that do exst, a~ ~ previoi~s ~ can and~slioukLhe handled by the agen- ctesthat Congress I~as ~ ~~r' ~-~a ~1 ~-~~--witii the resI)o1i~ ~` ihtv md provided staff and funds to enforce those laws. If those laws are inadequate to deal with the foundation part of SEC practice. then new laws should be enacted to deal with the problems. But one agency, a iie~ ~encv, set up to duplicate the w~rk of all the other agencies that ha ye appropriate junsdict~on in this cleid v:oold only, J think. be rcthmdant, involve dunlication aw1 interfere n'itit the nor~oal functions of the existing departments and agencies. - Mr. PAi'~ntN. It is not contemplated to do what you suggested, in the way in which you said ~t. Mr. Bundy has said that he is "determined to assure that there is Ford Foundation in your future." I gather he means by that that the Ford Foundation will keep most of its principal and spend only Income so that it can exist in perpetuity. I do not believe that the United States needs a Ford Foundation in perpetuity. In fact, I hope my grandchildren will not have it around. Mr. Bundy has forgotten, or perhaps never knew, that the Ford Foundation owes its very existence to the generosity of the Federal Government. Moreover, the control of the Ford Motor Co. would also have gone to the public were it not for the same generosity of the Federal Government. The Ford Foundation has assets valued conservatively at $3 billion. Since tax exemption for foundations is equivalent to an equal amount of taxation for those who do pay taxes, this $3 billion represents $15 for every American. According to an article in the New York Times of January 30, 1967, Mr. Bundy made the statement that th& Ford Foundation is small "compared with Gardner Howe, Weaver, Shriver and Webb Founda- tions." Of course his analogy is ridiculous when one considers that the Ford Foundation is controlled by an independent board of trustees while the funds of "Gardner, Howe, Weaver, Shriver and Webb" have been appropriated by the elected representatives of the people. I note that the Ford Foundation has recently completed a new build- ing in New York City costing millions of dollars. While this may add to the feeling of self importance of the Ford Foundation's top brass, do you believe that the taxpayers, who subsidize the Ford Foundation, really need a lavish building in an expensive area of New York City? I will finish this, and then you may reply. In his annual report for 1966, Mr. Bundy says: We find there is no present reason to believe that the world will have less need of a large foundation in 1980 than in 1967; the forces we help to counterbalance are not likely to be smaller-the need for an independent agency not likely to be less. So we accept, for now, a clear obligation to preserve our endowment for our successors. Mr. Secretary, what forces do you think the Ford Foundation counterbalances? PAGENO="0003" CONTENTS Hearing dates: Page October 30, 1967 1 October 31, 1967 45 November 6, 1967 81 November 7, 1967 : 125 November 13, 1967 169 November 14, 1967 199 November 15, 1967 217 November 16, 1967 235 November 17, 1967 277 Testimony of- Chartier, K. P., counsel to Robert D. Hayes, Americans Building Constitutionally 4,45,81,125 Cohen, Sheldon, Commissioner of Internal Revenue 220, 235 Crowley, George D., attorney, Americans Building Constitutionally, Chicago, Ill 200 Erie, Robert A., administrative assistant to Robert D. Hayes, Amer- icans Building Constitutionally 4,45,81, 125 Fowler, Henry M., Secretary of the Treasury 220 Hayes, Robert ID., trustee of the Americans Building Constitu- tionally 4,45,81, 125 Kurtz, Jerome, Tax Legislative Counsel, Department of the Treasury. 220 Lauren, J. Alton, Trustee, Americans Building Constitutionally, Chicago, Ill 200 Murphy, Hon. John M., a Member of Congress from the State of New York, prepared statement 279 Ray, William E., Jr., counsel to Robert D. Hayes, Americans Building Constitutionally 4,45, 81, 125, 169 Saxon, Michael R., medical administrator, Saxon Foundation, prepared statement 195 Schuyler, George, president, Philippa Schuyler Memorial Foundation, New York, N. Y 183 Smith, Turner L., attorney, Americans Building Constitutionally, Washington, D.C 200 Stephenson, Richard J., Trustee, Americans Building Constitutionally, Chicago, Ill 220 Surrey, Stanley S., Assistant Secretary of the Treasury for Tax Policy. 220 Walsh James R.., Walsh Family Foundation, Fontana, Wis 147, 169 Additional information: Agricultural Development Council grants, 1905 and 1900 226 Americans Building Constitutionally: Attachment A, information requested by House Small Business Committee 35 Declaration of trust 19 Members, list of alleged 40 Membership application and sponsoring agreement 31 Hough's Encyclopedia of American Woods Foundation, Inc_ 31 Kimsey, Herman E 90 Speller, Robert 94 Membership, list of alleged, with remarks by Internal Revenue Service 203 "Reduce estate tax" 53 Resolution, May 6, 1967 90 Resolution, May 19, 19 Baltimore News-American article "House Probers Seek Details- Doctor Says Foundation Slashes Taxes in Half" 87 III PAGENO="0004" IV CONTENTS Additional information-Continued Page Cohen, Sheldon S., letter to Hon. Wright Patman, December 6, 1967_ 254 Contributions, Charitable, list of, claimed on income tax returns 254 Forensic Science Institute, statement 45 Hayes, Robert D., trustee, Americans Building Constitutionally Subpena to hearings, October 13, 19 8 Summons from IRS, July 15, 1966 15 Excerpts from Internal Revenue Code 16 Attachment to summons 17 Hayes R. D., Family Foundation: Chart of stock conveyance 113 Reply to question concerning 83 Trustees 83 Hough's Encyclopedia of America Woods Foundation, Inc.: Disbursements 131 Letter to Hon. Wright Patman, October 23, 1967 30 House Small Business Committee letter to Dr. Michael J. Saxon, November 6, 19 278 Internal Revenue Service Letter and questions to ABC, September 12, 1967 14 Letter to Byron E. Calame, August 18, 19 271 Sheldon S. Cohen letters to I-Ion. Wright Patman: December 6, 1967 247, 254 December 8, 1967 260 Massner Foundation letter to Hon. Wright Patman, October 28, 1967_ 89 Murphy, Hon. John M., letter to Hon. Wright Patman, December 1, 1967 279 Sales Analysis Institute Foundation of Illinois, Inc.: Replies to questions concerning 84 Balance sheet, April 30, 1967 85 Saxon, Michael R.: Letter to Illinois State Medical Society 196 Editorial, "Vital Role of Foundations" 198 Telegram to Hon. Wright Patman, November 13, 1967 199 Summons, November 14, 1967 278 Schuyler, Philippa, Memorial Foundation: Press release 133 Donor list 137 Tax-exempt organizations, group list 248 Walsh Family Foundation, House Small Business Committee attach- ment A, requests for information 149, 182 Washington Star, November 1, 1967, article "ABC-Aided Foundation Centered in Hotel Room" 91 Watkins v. LT.~., citation 57 Wunsch Foundation letter to Hon. Wright Patman, October 24, 1967__ 88 Appendix: Exhibit 1-Americans Building Constitutionally 806 Exhibit 2-Declaration of Trust, Americans Building Constitu- tionally 936 Exhibit 3-Course material, Americans Building Constitutionally___ 946 Exhibit 4-Sales Analysis Institute of Illinois certificates of incorpora- tion 1018 Exhibit 5-Sales Analysis Institute of Illinois bylaws 1022 Exhibit 6-Americans Building Constitutionally advertisement 1027 Exhibit 7-Subpena for James R. Walsh, Jr., to appear before com- mittee 1092 Exhibit 8-Treasury Department Report on Private Foundations printed for House Committee on Ways and Means, 1965 1031 Exhibit 9-Form 990-A, Internal Revenue Service 1144 Exhibits 10-17-Articles from various newspapers and magazines_ 1152-1164 PAGENO="0005" TAX-EXEMPT FOTJNDATIONS: THEIR IMPACT ON SMALL BI~SINESS MONDAY, OCTOBER 30, 1967 * HousE or REPRESENTATIVES, * SuBCOMMITTEE No. 1 OF TIlE SELECT COMMITTEE ON SMALL BUSINESS, TVashington, D.C. The subcommittee met, pursuant to notice, at 10 :05 a.m., in room 2359, Rayburn House Office Building, Hon. Wright Patman (chair- man of the subcommittee) presiding. Present: Representatives Patman, Corman, Moore, Conte, and Morton. Also present: H. A. Olsher, director, Foundations Study; Myrtle Ruth Foutch, clerk; and John J. \Villiams, minority counsel. Mr. PATMAN. The committee will please come to order. This is the first session of this year's hearings of Subcommittee No. 1 on the subject of the impact of tax-exempt foundations and charitable trusts on the economy. The object of the hearings is to determine whether legislation is needed in order to provide effective controls over such organizations. These hearings will provide a base of information that can be used to formulate positive congressional action. Once again, because the Treasury Department has refused to assume its proper responsibilities in supervising and regulating tax-exempt foundations, another major move toward the undermining of our tax structure must be noted. Tax dodging that was inevitable because of the Treasury's indifference-yet, on a scale hardly imaginable to most taxpaying Americans-is now being forcefully promoted. Indeed, because the Treasury has tacitly encouraged tax dodging via the foun- dation gimmick, it was also inevitable that the Government would eventually be faced with "foundation factories." This has happened. Tax dodging, via foundations, is now an industry, for which the par- ticipants are prepared through a special kind of higher education with its own curriculum, its own faculty, its own diploma-the latter being an IRS-approved foundation certificate-and certainly its own very tangible rewards. Through the ingenuity of an organization known as Americans Building Constitutionally-also known as ABC-the upper middle- class citizen is learning the tax-avoidance tricks that were once thought to be reserved for the rich. Americans Building Constitutionally claim to have 800 persons who have paid to learn the ABC system. The pur- pose of ABC, as one trustee expressed it, is to "Henry Fordize" the tax-dodging specialties that were once associated only with million- aires. If a Rockefeller, Ford, or Mellon can avoid taxes under the guise (1) PAGENO="0006" 2 of "charity," why shouldii't every doctor, lawyer, and other profes- sional in the land who can afford the rather stiff tuition (at least $10,500) for the tax-ducking school? It is a harsh but logical question. Robert D. Hayes, of Barrington, Ill., one of ABC's trustees, has explained that the purpose of the venture is to "awaken the average creative person" to the benefits of "restructuring" his business and his estate on a nonprofit basis. In other words, his busiiiess and other af- fairs will be operated in the name of a tax-exempt foundation but lie will continue to reap the benefits, all in the name of "charity." If ABC does indeed have 800 members, then it may have produced for its promoters somewhere between $3 million to $8 million smce .July 1966. It is alleged that (1) some of the members are operating as tax-exempt foundations even though they have never filed an appli- cation for Federal tax exemption or received exemption, and (2) they have never filed a tax return form 990-A. According to the Wall Street Journal of August 28, 1967, James B. Walsh, Jr., a member of ABC, boasts that he has not paid any Federal income taxes since 194:7. No doubt about it, this tax-dodging scheme will snowball among professional and upper middle income grotips, unless meaningful re- forms are instituted in the foundation field very soon. If reforms are ignored, the Nation may be faced with a "revolt" among those tax- payers who are unable to take advantage of such contrivances. For years, the Treasury has given this problem the opportunity to develop and harden by pretending that it could not happen. A typical expression of the Treasury's head-in-the-clouds attitude appears in our 1964 hearings, when I asked Bertrand M. Harding, theii Acting Commissioner of the Internal Revenue Service, the following question: If every American had a tax-exempt foundation, where would the Federal, State and local governments obtain funds for their operations? Mr. Harding replied: That is a rather speculative question, Mr. Chairman. I am probably not compe- tent 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. He appeared to scoff at the notion of w-idespread grassroots founda- tions. As I was well aware at the time, the "speculative" quality of the question-a description by which Mr. Harding hoped to dismiss it- did not make it any less real. The justification for my question is now plainly evident with the discovery of the nationwide attempt to "mass produce" foundations as a tax-avoidance device. If this succeeds, the result, of course, will be the very thing that I have tried to drive home to the Treasury for 5 years, without the slightest realistic, corrective response from that agency; the result will be a disastrous erosion of our tax base and a crushing burden of extra taxes on those people, including millions of small businessmen, who, believing that good citizenship includes the payment of taxes, do not dodge their respon- sibilities. Putting the prospective danger more simply, it will mean that those best able to bear the burden of governmental costs will pay less, or will pay nothing, while those least able to shoulder the burden will in fact shoulder all of it. PAGENO="0007" 3 Higher posta.l rates, higher social security taxes, higher income and sales taxes-these are the prospects according to some experts: an in- crease of perhaps $17 billion in personal and business taxes. That's one side of the picture. It is sobering. On the other side, one witnesses an inebriated orgy of tax avoidance by multimilhion-dollar foundations as well as by "backyard founda- tions." While this type of organized tax dodging is something new and while it threatens in its own especially grotesque way, it should be remembered that the unrestricted growth of tax-exempt foundations is not new but has for several years been acknowledged to be out of control. For 3 years, the Treasury has admitted that it had no idea how many tax-exempt foundations there are in the country. For 3 years, the Treasury has acknowledged the threat of widespread misuse of tax-exempt privileges, and has promised that "We are looking into it," but it has achieved nothing from its investigation-if, indeed, the investigation was ever begun. Thousands of new, tax-exempt foundations are added to the Treas- ury's rolls each year without challenge. They are concocted by whim, almost overnight, with the assistance of the Treasury, which gives its approval to requests for foundation status almost automatically. The IRS tries to convey the impression that it doublechecks all foundation operations. Nothing could be further from the truth. A very small fraction of the known foundations are checked by the In- ternal Revenue Service in any given year. I repeat, of known founda- tions; some come into existence and claim tax-exempt privileges, with- out ever filing an application for tax exemption or a tax return. Apparently, this type of organized tax dodging will only be checked by the Congress. The Treasury will not act. It has ignored all warn- ings in the past. In 1963, we reported that "Our findings show that the Internal Revenue Service record-in terms of supervision of foundations-is a dud, a dismal failure." If the IRS was unhappy to be described in this way, it was not moved to reform. In 1964, I said, "More and more, the cream is slipping out of our tax system as the great fortunes go into tax-exempt foundations. The skim milk in- comes of average, hard-working families must then shoulder an increasing part of the tax burden, both Federal and State." Despite these facts, the Treasury Department has yet to submit effective legis- lation for halting this erosion of our tax base. Five years ago, in 1962, we began urging the Treasury to propose steps for tightening the law and supervision of tax-exempt foundations. In December 1966, we reported, "It is very possible, as some believe, that there are today hundreds of thousands of tax-exempt foundations operating in the country, some of them officially operating by exemptions and others enjoying a bootleg status with the same results. It is not likely that the Treasury will ever catch up with them, for of the many thousands of foundations in existence, it examines the books of only a few hundred each year." In other words, for 5 years we have been attempting, through a steady barrage of disclosures of tax-exempt abuses, to goad the Treasury into taking corrective action. It has balked all the way. Now, with the advent of a school for tax dodging, officials of the Department may be frightened. WTall Street Journal Reporter Janssen PAGENO="0008" 4 writes that the Internal Revenue Service is starting an "intensive investigation" of Americans Building Constitutionally, and he quotes one IRS official as saying, "We will attack * * * we sure as hell aren't going to let these things go unchallenged." But these spurts of bluster have become a pattern for the Internal Revenue Service; they mean nothing. Reform, if it comes, will have to be initiated by the Congress. We have had reports of foundation founders who live lives of luxury, send their offspring to college, and give bountiful gifts to friends through so-called charitable foundations. We will try to find out if these reports are true. If they are true, I hope Congress will do something to block these scandalous tax loopholes. On behalf of the subcommittee, I should like to welcome our first witness. We are glad to have you here, Mr. Robert P. Hayes. You will stand up, Mr. Hayes, and be sworn. Do you solemnly swear that this testimony which you shall give be- fore this subcommittee of the House Small Business Committee, the Subcommittee on Foundations, will be the truth, the whole truth and nothing but the truth, so help you God? Mr. HAYES. Ido. Mr. PATMAN. Take your seat. With your approval, Mr. Hayes, I will either insert your statement at this point and then we will ask you questions, or you can read your statement or any part of it now. Which would you prefer? TESTIMONY OF ROBERT D. HAYES, TRUSTEE OF THE AMERICANS BUILDING CONSTITUTIONALLY, A NOT-FOR-PROFIT TRUST, ACCOMPANIED BY K. P. CHARTIER, COUNSEL TO MR. HAYES; WILLIAM C. RAY, ER., COUNSEL TO MR. HAYES; AND ROBERT A. ERIE; ADMINISTRATIVE ASSISTANT TO MR. HAYES Mr. HAYES. I would prefer to read it now. Mr. PATMAN. You have that permission. Go ahead. Mr. HAYES. Thank you. Mr. PATMAN. Please identify the people here connected with you. Mr. HAYES. Yes, sir. On my right is Mr. William E. Ray, my at- torney. On my left is my personal consultant, a public actuary from Texas. Mr. Mooi~. His name? Mr. HAYES. Pardon me, Mr. K. P. Chartier. At the end of the table is my administrative assistant, Mr. Robert A. Erie. Mr. PATMAN. You may proceed in your own way, sir. Mr. HAYES. Thank you. Chairman Patman and members of the Small Business Subcommit- tee, your invitation to testify before this subcommittee on the impor- tant question of tax-exempt foundations is very much appreciated. We are wholly in accord with what we understand to be the purposes of this investigation; namely, to determine the impact of foundations on the national economy, and I compliment Chairman Patman on his de- cision to do so. For the past several years, the growth of foundations has been rapidly accelerating and it is my opinion that every effort should be PAGENO="0009" 5 made to keep their operations strictly within the rules-to the end that mankind is benefited. I am pleased that Chairman Patman openly recognized on the floor of the House on October 10 that Americans Building Constitutionally is operating under the same laws as the big foundations. It is a further satisfaction to us that he found it difficult to argue with our position in the field-particularly so since, in terms of economic size, we are by far the smallest segment in the foundation complex. Americans Building Constitutionally is a not-for-profit trust, the purpose of which is to help citizens of the United States make full use of the rights guaranteed them under the Constitution. Its membership is made up of other not-for-profit foundations in the fields of religion, education, science, literary, charity, testing for public safety, and prevention of cruelty to animals and children. These foundations are created under the law of the United States as set forth in the Internal Revenue Code and under the not-for-profit legislation of the 50 States. For the purposes of the public and for the edification of any inter- ested party, Americans Building Constitutionally is quite familiarly known by its initials "ABC." On behalf of an important TV and radio network, may I enlighten you that the use of the initials ABC at any time in this hearing does not allude to the American Broadcasting Co. In order to give the committee a clear visualization of how we in ABC view the activities of foundations, I should like to indicate what we use as a basis of our educating philosophy. Since most of the States have not-for-profit legislation, there must have been a reason why such legislation was desirable. I believe that reason is that foundations are a means of directing the thinking and activities of people to the areas of great need. The economy of a free market nation moves through recognized incentives. To direct the activities of people in any field of endeavor in any nation requires incentive. Statesmen recognized some time ago that in the free market there are areas of great need for which recognized incentives are either minor or nonexistent. The future of our country depends upon research and development. Basic research and development ofttimes appears to offer little, if any, reward. Today, for example, the doctor's education, to become a com- petent practioner, often requires as much as 10 years of higher educa- tion. This is undoubtedly one reason why today doctors are scarce. Young men feel that the incentive is lacking. Because of the great increase in alcoholism in this country, there is a great need for methods of rehabilitation of alcoholics. Yet, who can be interested in developing those means that are needed to correct this serious problem? Today, in the areas of health care we have a problem where hospital rooms are costing as much as $50 per day. Prices have risen because the demand for rooms exceeded the supply. I have been told by doctors that it should be possible, through proper research, to provide hospital roon'is for half that amount. In the field of education at all levels, everyone recognizes how the future progress of our Nation will be largely determined by our edu- cational facilities, which involve not only the development of the or- ganization of material taught, but the proper training of teachers, the PAGENO="0010" 6 supply of proper equipment and facilities, and above all, important improvement of teaching methods. Who is willing to spend the time and the money necessary to improve methods of teaching and curri- culum for the benefit and education of the children of others-with- out an incentive? We have in our prisons a greater number of prisoners today than at any time in history, which places the burden on the government and taxpayer-a tremendous financial burden, and an utter waste of man- power. Can any of these criminals be rehabilitated to take their proper place in society? Who is there available to undertake such a needed program? Would any members of this committee care to do so? It is well known that the soils across our country are being depleted of important chemical constituents that are detracting from the quan- tity and quality of food produced with the result that there is concern about the future ability to supply food that will safeguard the health and well-being of our citizens. Why has not this problem been solved? Could it be because the incentive is lacking or is not recognized? Some research has shown that alcoholism is ofttimes caused from malnutrition. Is it possible that our great increase in drug addicts might have some similar solution? Who would benefit the greatest from the solution to this problem-the one who achieved the solution or those who benefited from it? It is our belief that the position of tax-exempt foundations should be that of substantially contributing to the solution of these and thou- sands of other serious problems for the benefit of mankind. In ABC we teach our members that they must do those things which will bene- fit mankind, and that this is the only way in which the foundations can gain tax exemption. The manner in which they are taught to work for the benefit of mankind are those prescribed under the law; namely, in the field of charity, science, literature, education, testing for public safety, and prevention of cruelty to children and animals. I would like to stress at this time that we believe there is a distinct difference between "tax evasion" or "tax dodging" and "tax avoidance." We believe that "tax avoidance", as a term, is usually used as a means of doing those things to reduce one's taxes that are within the rules. As one of our great jurists, Judge Learned Hand, said, "Anyone may arrange his affairs that his taxes shall be as low as possible; lie is not bound to choose that pattern which best pays the Treasury; there is not even a patriotic duty to increase one's taxes. Over and over again courts have said that there is nothing sinister in so ar- ranging affairs as to keep taxes as low as possible. Everyone does it, rich and poor alike and all do right; for nobody owes any public duty to pay more than the law demands. "Taxes are an enforceable exaction, and not a voluntary contribu- tion." Halver~ng v. Gregory-69 Fed. (2d) 809-it is our contention that in order to fulfill its moral obligations a tax-exempt founda- tion should always produce benefits that are greater than the tax advantages it gains. In this way there could never be t.oo many foundations since the added benefits to mankind would contribute to the economy and further stimulate its gro~skh in those. areas of great need. Some of our prominent legislators, Robert Kennedy and Charles Percy, among others, because of the study they have given to founda- PAGENO="0011" 7 tions, have recently recommended that the only solution to some of the country's major problems lies through foundations-and the pri- vate sector. There are some striking examples of the accomplishment of founda- tions in areas of great need. The Mott Foundation, which began many years ago in a very small way, is making tremendous contributions in improving educational methods and facilities across the Nation. They have also undertaken rehabilitation of criminals with nearly a perfect record in regard to reversion. As you may know, the Battelle Institute of Ohio has done the research which resulted in the development of the Xerox copying machines, expediting office work and supplying jobs for thousands of people, and providing a pronounced stimulus to the economy of the country. Since ABC has been functioning slightly over a year, most of our members have had only a short time in which to get their founda- tions underway. We have the situation of one member who, in his early life as a doctor, was finally able to build, a small clinic which provided medical care for people in the community in which it was located. Because of increased taxes and expenses he was forced to sell his clinic and go back into private practice in an office. Since learning how he could greater benefit mankind with his talent and experience gained over the years, he has established a foundation and is now working on plans for a new and very profes- sional clinic which will help in the development of a medical staff and provide services for several hospitals in the area.. The people in his community will benefit to a far greater degree than there is any possibility from this doctor's benefiting from tax savings lie has earned. How many millions of people have benefited from the Salk vaccine which was developed by the Salk Polio Foundation? Several of our agricultural members are now setting up soil testing laboratories for the purpose of improving the quality and quantity of food produced, and thereby improving the health of those who use this food. Another group of doctors have plans drawn for building a. health center for the specific purpose of preventing disease. It is the belief of this particular group of doctors that if time were spent researching and developing methods for preventing disease, less time, effort, and mOney would need to be spent in curing disease. One of our members is the Philippa Schuyler Memorial Foundation, organized to carry on the work undertaken by a girl who lost her lif.e in South Vietnam "winning the peace." Through this foundation, grants were made by ABC's members to people in South Vietnam in attemptmg to prove what could be done through a people-to-people program in winning the peace elsewhere than on the battlefield. The purposes of the grants may range from medical aid through co- operative research on diseases common to South Vietnam, and agri- cultural research for increasing the yield and nutritive value for foods produced, to cooperative research in housing suitable for South Vietnam's climate and educational facilities for children. Another of ABC's members is setting up a foundation for the pur- pose of rehabilitating alcoholics through most unique and scientific methods involving not only nutritional aids but unusual methods of training. PAGENO="0012" 8 Several of our members are making substantial contributions in the field of educational research and development in teaching methods, the construction of texts concerned with rates of absorption and re- tention of information-many of these in areas that have never been covered before, with methods that are completely unique. I hope I have been able to make it clear that ABC's concept of foundations is definitely not how to dodge taxes, but how to benefit others and thereby gain tax benefits. We welcome this investigation, and should it be determined that our methods are improper or in any sense illegal, or that new legis- lation is required, and if the Congress determines that such legislation should be passed, we will give such legislation our full support. We believe, however, that the country can profit greatly, that the economy ca.n be stimulated by making our members aware of how they can organize their affairs under the law so that they can be more productive aiid benefit mankind. Mr. PATMAN. Thank you, Mr. Hayes. I would like, to ask you some questions as a basis for committee action. The answers may enable us to proceed more intelligently on this subject. Your full name is Robert ID. Hayes? Mr. HA~s. Yes, sir. Mr. PATMAN. What is your occupation and business address? Mr. HAYES. Box 575, Barrington, Ill. 60010. i\fr. PATMAN. You have identified your counsel, and also the gentle- man accompanying you at the. table. Mr. 1-IAYES. Right. Mr. PATMAN. You have read your prepared statement. I am not cer- tain that we can work this afternoon. The House is very busy now, of course, as you understand, and the only time that the committee can operate is to get unanimous consent to sit while the House is in session during general debate. General debate will very likely be very short, for the next few remaining days of this session, so we will iiot likely have an opportunity to meet in the afternoon. So we will ask you some questions now and proceed the best we can. We will refer to the name of your concern, Americans Building Constitutionally, as ABC, as you suggested in your prepared state- ment. By subpena dated October 13, 1967, a copy of which I am herewith placing in the record, and which was served on you on October 19, 1967, you were ordered to bring with you the following in- formation: 1. A financial statement of Americans Building Constitutionally for the 12 months ending September 30, 1967, including income and disbursements and a `balance sheet. 2: A list showing names and addresses of members of Americans Building Constitutionally and the membership fee received from each of them. IDo you have that information available, Mr. Hayes? (The documents referred to had not been received at the time of this printing.) (The subpena referred to follows:) BY AUTHORITY OF THE HOUSE OF REPRESENTATIVES OF THE CONGRESS OF THE UNITED STATES OF AMERICA To Mr. Joseph N. Tierney, United States Marshal: You are hereby commanded to summon Mr. Robert D. Hayes, Trustee, Arner- icans Building Constitutionally, c/o Sales Analysis Institute, Kelsey Road, Bar- PAGENO="0013" 9 rington, Illinois to be and appear before the Subcommittee No. 1 of the Select Committee on Small Business of the House of Representatives of the United States, of which the Hon. Wright Patman is chairman, and to bring with him the information described and set out in "Schedule 1," which is attached hereto and made a part of this subpoena, in Room 2359, Rayburn House Office Building in the city of Washington, on October 30, 1967, at the hour of 10:00 a.m. then and there to testify touching matters of inquiry committed to said Committee; and be is not to depart without leave of said Committee. Herein fail not, and make return of this summons. Witness my hand and the seal of the House of Representatives of the United States, at the city of Washington, this 13th day of October, 1967. WRIGHT PATMAN, Cha irnuin, Subcommittee No. 1. Attest: W. PAT JENNINGS, Clerk. Mr. RAY. Mr. Chairman, may I raise a point of personal privilege? Mr. PATMAN. Well, not personal privilege. If you want to protest it for your client, you may do so. Mr. RAY. I would just like to ask the committee a question. Mr. PATMAN. Only members can raise a question of personal privi- lege if I understand it correctly. Mr. RAY. May I ask the committee a question? Mr. PATMAN. Yes, sir. Mr. RAY. I have requested, sir, the resolution of the Select Com- mittee on Small Business, which created the Subcommittee for Foun- dation Study. Mr. PATMAN. When did you ask for that? Mr. RAY. I requested that this morning, sir. Mr. MOORE. Have you been furnished it? Mr. RAY. No, sir; I have not. Mr. MOORE. Mr. Bryan Jacques is the staff director of the com- mittee. He tells me he has given it to you. Mr. RAY. I have received House Resolution 53, which created I believe, the Select Committee on Small Business. Mr. MOORE. That is right. Mr. RAY. I do not have a resolution of that committee which created the Subcommittee for Foundation Study. Mr. PATMAN. Well, of course, the chairman of the committee has the pow~er, with the approval of the committee, to name certain sub- committees, and it is not new. It has been done over the years. It is traditional with this committee. There is nothing new this year com- pared to any other Congress. Now, what is the purpose of that? What is to be gained Are you protesting giving this information? Mr. RAY. Sir, I would just wish to see a copy of the exercise if the chairman of the select comn'iittee's power in this case. We are exer- cismg, or this commmittee is exercising- Mr. PATMAN. The courts would be the proper way to proceed there, if you have any just and legal ground. You could get the attention of some judge of a court., and ask for relief, but. I am in no position to give you relief on that. As chairman of the committee, and I am sure committee is legally constituted, that the committee was legally ap- pointed and that we are legally pursuing a course here that Congress gave us the power and right to proceed on. So I do not see why we PAGENO="0014" 10 should take up time on things like this, that are so unnecessary and do not relate to the merits of the controversy. Mr. RAY. I do not question you are legally proceeding, Mr. Chairn'ian. Mr. PATMAN. Well, if you are not questioning that we are proceed- iug legally, then what are you protesting? Mr. RAY. The chairman is exercising the subpena power. Mr. PATMAN. That is right; sure. Mr. RAY. Of a congressional committee. Mr. PATMAN. Yes, we have the power. Mr. RAY. I would just wish to see the exercise of the power of the chairman of the Select Committee on Small Business. Mr. PATMAN. Well, there is no doubt in my mind about it. It is done according to the rules of Congress, so if you are contesting the juris- diction of this committee or the legality of its proceedings, you have an opportunity to go to the courts with that. You have a copy of the reso- lution. It confers subpena power. What more do you want? Mr. RAY. All further questioning under this subpena arises from this resolution? Mr. PATMAN. That is your statement. You have a right to make it. Mr. RAY. Of the Subcommittee on Foundation Study? Mr. PATMAN. Yes, sir. Mr. RAY. Is that correct? Mr. PATMAN. You have a right to make any statement you desire. Mr. RAY. I am merely requesting- Mr. PATMAN. Your efforts seem to be directed in a direction opposite to determining the merits of the controversy. I would sug- gest that you give us an opportunity to develop the information that we would like to have answers to. Mr. MOORE. Mr. Chairman, do I understand correctly the counsel's position is that he wants something in writing, a report brought to his attention showing the implementation of- Mr. RAY. Yes, sir. Mr. MOORE. (continuing). The power to issue subpenas in that resolution? Mr. RAY. This is the resolution which created the Select Committee on Small Business. I would just like to see the resolution of that corn- mittee which created this committee. Mr. MoORE. We will bring that to you in a minute. Mr. PATMAN. How long have you been employed as counsel? Mr. RAY. I do not understand the purport of that question. Mr. PATMAN. `Well, the importance is if you had just been employed this morning you would prdbably have a right to ask us for this in- formation, but, if you had been employed a week or two, a month or two, of course a diligent attorney would have sought that informa- tion and obtained it himself. Mr. RAY. It is quite possible. I have been retained a month or so. Mr. PATMAN. Well, why haven't you gotten the information before? `Why do you wait until the proceedings come up and then delay the proceedings to seek out some detail that you should have gotten a month or two ago? I think we ought to go ahead, if that is all you have to offer. Your objections are overruled. PAGENO="0015" 11 Do you have that information, Mr. Hayes? Mr. HAYES. Mr. Chairman, on advice of counsel, I do not have that information for the reason that as trustee of ABC, I would be violat- ing my obligations to protect the privacy of our members by so pass- ing it out. Mr. PATMAN. Are you pleading the fifth amendment? Mr. HAYES. No, sir. Mr. PATMAN. You are not pleading the fifth amendment, but you are just refusing, upon advice from your counsel, to answer these questions. You refuse to give us the names, you refuse to give us a financial statement for the last 12 months. You did file a statement, didn't you, September 30, 1967? You filed a statement, didn't you, with the IRS? Mr. HAYES. No, we did not. Mr. PATMAN. You did not. Have you filed any statement or have you prepared any statement including income and disbursements and the balance sheet for the year preceding September 30, 1967? Mr. RAY. Objection. Mr. PATMAN. Have you done that, Mr. Hayes? Mr. RAY. Until, Mr. Chairman- Mr. PATMAN. I know, but let him answer the question or refuse to answer. If he refuses to answer, I would be glad `to hear from counsel. Are you doing it on the basis of the fifth amendment or are you doing it on the basis of advice from your counsel? if so, I would like to know the reasoning of your counsel. Mr. HAYES. I stand silent. Mr. PATMAN. All right. Remain silent. All right, Mr. Counsel, what is your reason for not furnishing this information? Mr. RAY. Until I see the resolution which empowers this subcom- mittee, I do not believe it would serve Mr. Hayes' best interests- Mr. PATMAN. Well, now, we are not just about to stop all these pro- ceedings and do something that you should have done as a lawyer. You are paid a fee I assume, and probably a darn good one. We are not going to do your work for you. Mr. RAY. There has been- Mr. PATMAN. You had the time to do this and you are paid for it, but you want to wait until the hearing and then stop the whole pro- ceedings. Mr. RAY. No-- Mr. PATMAN. And that is just asking a little bit too much. Mr. RAY. No, sir. Generally when you open these hearings you make a statement. Sir, may I quote- Mr. PATMAN. In other words, Mr. Hayes, you are refusing to comply with the subpena? Mr. RAY. May I quote from the hearings schedule in 1964, Mr. Pat- man, as you did in your statement? Mr. PATMAN. Yes, you may. Mr. RAY. Generally before you conduct these hearings you state, and I quote from page 63 of this Government release that- Our study is conllned ~olely 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 organizations, among others, charitable- PAGENO="0016" 12 no, pardon me- religious organizations, hospitals, educational institutions, charitable organiza- tions, which are supported in whole or part by Federal and State governmental units, or primarily by contributions from the general public, fraternal organiza- tions, etc. Mr. PATMAN. Yes, that is correct.. Now, you Jiave done some research? Mr. RAY. Thank you, Mr. Chairman. Mr. PATMAN. So you ought to have done something on this subpena business. Are you refusing to comply with the terms of the subpena, Mr. Hayes? You either refuse, not. refuse, or remain silent, which is the same as refusing. What is your attitude? Mr. RAY. May I have that resolution, Mr. Chairman? Mr. PATMAN. I want him to answer my question or refuse to answer it. Mr. RAY. Why does the committee not wish to reveal- Mr. PATMAN. There is no secret about it. It is in the public record. There is no record more public than the Congressional Record. There is where proceedings are out in the public to everybody, and not only that, they are printed and sent all over the Nation. You evidently have. done some research. It shows you have been trying to earn your money. Mr. RAY. Thank you again. Mr. PATMAN. Since you have done some research, I don't think you are ignorant about this thing. I do not think you are lacking in irifor- mation. I think you have it. You are not going to get this committee to suspend and try to run down something that you doubtless already have. Mr. RAY. Thank you for the compliment, Mr. Chairman, and may I respectfully ask that that statement which is quoted from the prior hearings is in substance- Mr. PATMAN. It was correct at that time. Mr. RAY (continuing). The resolution? Mr. PATMAN. Sure, that is what we were doing at that time. Mr. RAY. Fine, sir. `This is all I wish to establish. Mr. PATMAN. We have a little flexibility. Have you been engaged in illegal practices in the operation of ABC? Mr. RAY. No, sir. Mr. PATMAN. All right, if you have not been engaged in illegal prac- tices, then why would the disclosure of such information jeopardize you position and your problem with the Internal Revenue Service? ~ HAYES. Mr. Chairman, again as trustee of ABC, I have respon- sibilities to protect the privacy of our members. I respectfully suggest that `to deliver some of `the materiaj asked for would be a breach of my trust. Mr. PATMAN. And on that basis you refuse? Mr. HAYES. Correct. Mr. PATMAN. Well, we will probably have to have the House of Representatives pass on that. Mr. RAY. Mr. Chairman, in light of the fact that my client is not an attorney, may I state our position of what we are faced with to the committee so you will perhaps better understand our position? Mr. PATMAN. With his approval, yes. Mr. RAY. Do I have your approval? PAGENO="0017" 13 Mr. HAYES. You do. Mr. RAY. Mr. Chairman, as Mr. Hayes stated to the committee in his prepared statement, ABC is an educational institution, and was created for the purpose of helping citizens of the United States make full use of their rights guaranteed them under the Constitution. Mem- bership in ABC is available to every citizen. ABC, by contract, has a building, a faculty, a regular course of in- struction, and a student body in attendance. Such an educational in- stitution is, according to the Internal Revenue Code, tax exempt. Since this is clearly stated in the code, we did not request the Internal Rev- enue Service to make a ruling at the time the trust was created. Mr. PATMAN. Have you asked the Internal Revenue Service to make a ruling? Mr. RAY. If I may be permitted to continue. Mr. PATMAN. Can you answer that question? Mr. RAY. Yes, sir; I do. Mr. PATMAN. OK, go ahead. Mr. RAY. Since then requests communicated to an agent of the IRS that this matter be referred to the Commissioner of the Internal Rev- enue Service or an appropriate branch of the national office have ap- parently not been communicated to the Commissioner or appropriate branch of the national office as we have received no communication from either. Mr. PATMAN. State the office that you made the request of and the one that failed. Mr. RAY. This request was made of the intelligence division of the Chicago regional office. Mr. PATMAN. Who was the director of it? Mr. RAY. The director of the Chicago-the Chicago district director. Mr. PATMAN. What is his name? Mr. RAY. I do not know, sir. Mr. PATMAN. When was it made? Mr. RAY. Approximately September 25, 1967. Mr. PATMAN. September 25, 1967. Do you have a copy of it? Mr. RAY. Of what? Mr. PATMAN. Of the request. Mr. RAY. No, sir. I made an oral request to an agent. Mr. PATMAN. You mean you made it yourself. Now, you ought to know the name of the agent. What is the name of the agent? Mr. RAY. The name of the agent is Alan D. Cornue. Mr. PATMAN. How do you spell Cornue? Mr. RAY. C-o-r-n-u-e. Alan is spelled with one "1." Mr. PATMAN. C-o-r-n-u-e. Is he connected with the Chicago office? Mr. RAY. Yes, sir. Mr. PATMAN. Did you make it in his office? Mr. RAY. Yes, sir. Mr. PATMAN. But you did not make it in writing? Mr. RAY. No, sir. Mr. PATMAN. Have you ever heard from it? Mr. RAY. Yes, sir. Mr. PATMAN. What is the reply that you received? Mr. RAY. May I request that this letter from the Internal Revenue Service over Mr. Cornue's signature- 87-444-68----2 PAGENO="0018" 14 Mr. PATMAN. Let me see the letter first. This is from the U.S. Treas- ury Department, Internal Revenue Service, Chicago, Ill., Post Office Box 1101, dated September 12, 1067: In accordance with your request, the enclosed questions are being submitted to you in connection with an investigation by the Intelligence Division, Internal Revenue Service. Please answer the questions in detail, indicating names, dates and locations where appropriate. Also please indicate the individual supplying each answer or part of an answer where more than one person in answering a question. The answer should be prepared for submission to the mutual office in Barrington, Illinois on or before September 28, 1967. You may call me at 222-6985 when you are ready to have me pick up the answers. Sincerely yours, Alan D. Cornue, Special Agent. And also the questions, I will just insert all these in the record, in- cluding the question, "What is the origin of the idea of ABC," and so forth. Did you answer all that and send it to him? (The document referred to follows:) 1. What is the origin of the idea of ABC? 2. Who were the people involved and what events led to the creation of ABC? 3. Are there changes or addendums to the Declaration of Trust for ABC as filed with the County Recorder, Lake County, Illinois, on July 15, 1966? If so, include a copy of each. 4. Does ABC have bylaws in addition to the provisions of the Declaration of Trust? If so, include a copy. 5. Describe the duties and responsibilities of each and every trustee. 6. Who are the holders of the Certificates of Interest in ABC and what per- centage is held by each? 7. What is the basis for the issuance of a Certificate of Interest in ABC? 8. Who maintains the minutes of trustee meetings for ABC? 9. In whose custody and control are these minutes? 10. Are these minutes available for examination by the Internal Revenue Serv- ice? If not, why not? 11. List all books and records maintained for ABC and by whom. 12. In whose custody and control are these books and records? 13. Are these books and records available for examination by the Internal Revenue Service? If not, why not? 14. List all records maintained for ABC with regard to ABC members and by whom. 15. In whose custody and control are these records? 16. Are these records available for examination by the Internal Revenue Service? If not, why not? 17. What checking accounts, savings accounts, investment accounts and/or loan accounts are maintained by and/or for ABC? With whom are these accounts maintained? 18. Are all funds received by, entrusted to and/or in the possession of ABC cle- posited to one of the accounts referred to in question 17? If not, what is the dis- position of these funds? 19. What were the sources, amounts and reasons for the original funds and/or assets received by, entrusted to and/or in the possession of ABC? 20. From what sources and for what reasons does ABC now receive funds and/or assets? 21. For what reasons does ABC expend funds and/or dispose of assets? 22. Describe in detail the activities engaged in and/or sponsored by ABC, including the names of the person or persons responsible for and/or participating in these activities, as well as dates and location of occurrence? 23. List all course materials and/or any other teaching aids being used in the course of instruction given by ABC. 24. In whose custody and control are these materials? 25. Are these materials available for examination by the Internal Revenue Service? If not, why not? 26. What is the legal basis for the position that the law allows a self-deter- mination of tax exempt status which supersedes the requirement to make appli- cation to the Internal Revenue Service for a determination of tax exempt status? PAGENO="0019" 15 Include references to appropriate code sections, regulations and court decisions. 27. May an examination of the books and records of ABC by the Internal Revenue Service begin on October 2, 1967? If not, why not? Mr. RAY. Mr. Chairman, I requested at that time that the matter be referred to the national office. The answer to my request was a tele- phone call by that agent requesting me to arrange a meeting of the trustees of ABC so that the Internal Revenue Service could explain its position with regard to ABC. Mr. PATMAN. Did you ever get a hearing before the national office or any reply? Mr. RAY. Yes, sir. The reply-the reason at the meeting which arranged-the agent submitted summons to the three trustees. Mr. PATMAN. Hand it up here. This is a summons [reading]: United States Treasury Department Internal Revenue Service summons in the matter of tax liability of Americans Building Constitutionally, (A Trust) N.F.P. Barrington, Illinois. Period(s) July 15, 1966 through and including June 30, 1967. The Commissioner of Internal Revenue to Robert D. Hayes, Trustee, Barrington, Illinois. Greetings: You `are hereby summoned and required to appear before Alan D. Cornue, an officer of the Internal Revenue Service for collection of tax liability for the above-named period for the person designated... and to bring with you the following books, records and papers at the time and place hereinafter set forth as detailed in the attachment to this document. Place and time for `appearance: At Executive Manor, Kelsey Road, Barrington, Illinois on the 16th day of October, 1967, at 10:00 o'clock aim. Failure to comply with this summons will render you liable to proceedings in the district court of the United States or before a United States Commissioner to enforce obedience to the requirements of this summons, and to punish de- fault or disobedience. Issued under authority of the Internal Revenue Code this 5th day of October, 1967. Signature: Alan D. Cornue. Then you have attachment to summons: All books and records pertaining to the operation of the Trust known `as Americans Building Constitutionally (A Trust). It starts out "All resolutions of the Board "All recorded minutes . "All by-laws, rules or regulations" and so forth. I will just insert this in the record. (The document referred follows:) U.S. TREASURY DEPARTMENT-INTERNAL REVENUE SERVICE SUMMONS In the matter of the tax liability of Americans Building Constitutionality Trust) N.F.P., P. 0. Box 575, Kelsey Road, Barrington, Illinois. INTERNAL REVENUE DISTRICT OF CHICAGO, ILLINOIS (Period(s) July 15, 1966 through and including June 30, 1967) THE Co~rMIssIoNER OF INTERNAL REVENUE To: Robert D. Hayes, Trustee, P. 0. Box 575, Kelsey Road. At: Barrington, Illinois. (A Greetings: You are hereby summoned and required to appear before Alan D. Cornue an officer of the Internal Revenue Service, to give testimony relating to the tas liability or the collection of the tar~ liability above named person for the period(s) designated and to bring with you and produce for euamination time following books, records, and paper at the time and place hereinafter set forth: (As detailed in the attachment to this document.) PAGENO="0020" 16 Place and time for appearance: At Executive Manor, Kelsey Road, Barrington, Illinois, on the 16th day of October, 1967, at 10 :00 o'clock AM. Failure to comply with this summons will render you liable to proceedings in the district court of the United States or before a United States Commissioner to enforce obedience to the requirements of this summons, and to punish default or disobedience. Issued under authority of the Internal Revenue Code this 5th day of October. 1967. Attested copy: ALAN D. CORNUE, Special Agent. EXCERPTS FRoM THE INTERNAL REVENUE CODE SEC. 7602. ExAMINATION OF BOOKS AND WITNESSES For the purpose of ascertaining the correctness of any return, making a return where none has been made, determining the liability of any person for any internal revenue tax or the liability at law or in equity of any transferee or fiduciary of any person in respect of any internal revenue tax, or collecting any such liability, the Secretary or his delegate is authorized- (1) To examine any books, papers, records, or other data which may be relevant or material to such inquiry; (2) To summon the person liable for taa or required to perform the act, or any officer or employee of such person, or any person having possession, custody, or care of books of account containing entries relating to the business of the person liable for tax or required to perform the act, or any other person the Secretary or his delegate may deem proper to appeal before the Secretary or his delegate at a time and place named in the summons and to produce such books, papers, records, or other data, and to give such testimony, under oath, as may be relevant or material to such inquiry; and (3) To take such testimony of the person concerned, under oath, as may be relevant or material to such inquiry. SEC. 6420. GASOLINE USED ON FARMS * * * * * * (e) Applicable laws- (2) ExA~sINATIoN OF BOOKS AND wITNESsEs-For the purpose of ascertaining the correctness of any claim made under this section or the correctness of any payment made in respect of any such claim, the Secretary or his delegate shall have the authority granted by paragraphs (1), (2), and (3) of section 7602 (relating to examination of books and witnesses) as if the claimant were the person liable for tax. SEC. 6421. GASOLINE USED FOR CERTAIN NONHIGIIWAY PURPOSES OR BY LOCAL TRANSIT SYSTEMS (f) Applicable Laws- (2) EXAMINATION OF BOOKS AND WITNESSES-For the purpose of ascertaining the correctness of any claim made under this section, or the correctness of any payment made in respect of any such claim, the Secretary or his delegate shall have the authority granted by paragraphs (1), (2), and 3) of section 7602 (relating to examination of books and witnesses) as if the claimant were the person liable for tax. SEC. 7603. SERVICE OF SUMMONS A summons issued under section 0420(e) (2), 6421 (f) (2). or 7602 shall be served by the Secretary or his delegate, by an attested. copy delucred in hand to the person to whom it is directed, or left at his last and usual place of abode; and the certificate of service signed by the person serving the suipmons shall be evidence of the facts it states on the hearing of an application for the enforcement of the summons. `When the summons requires the production of books, papers, records, or other data, it shall be sufficient if such hooks, papers, records, or other data are described with reasonable certainty. SEC. 7604. ENFORCEMENT OF SUMMONS (a) JURISDICTION OF DISTRICT CoURT-If any person is summoned under the internal revenue laws to appear, to testify, or to produce books, papers, records, PAGENO="0021" 17 or other data, the United States district court for the district in which such person resides or is found shall have jurisdiction by appropriate process to compel such attendance, testimony, or production of books, papers, records, or other data. (b) ENFoRCEMENT-Whenever any person summoned under section 6420 (e) (2), 6421 (f) (2), or 7602 neglects or refuses to obey such summons, or to pro- duce books, papers, records, or other data, or to give testimony, as required, the Secretary or his delegate may apply to the judge of the district court or to a United States commissioner for the district wihin which the person so sum- moned resides or is found for an attachment against him as for a contempt. It shall be the duty of the judge or commissioner to hear the application, and, if satisfactory proof is made, to issue an attachment, directed to some proper officer. for the arrest of such person, and upon his being brought before him to proceed to a hearing of the case; and upon such hearing the judge or the United States commissioner shall have power to make such order as he shall deem proper, not inconsistent with the law for the punishment of contempts, to enforce obedience to the requirements of the summons and to punish such person for his default or disobedience. SEC. 7005. TIME AND PLACE OF EXAMINATION (a) TIME AND PLACE-The time and place of examination pursuant to the provisions of section 6420(e) (2), 0421 (f) (2), or 7602 shall be such time and Place as may be fixed by the Secretary or his delegate and as are reasonable under the circumstances. In the case of a summons under authority of para- graph (2) of section 7602, or under the corresponding authority of section 6420(e) (2) or 6421(f) (2), the date fiwed for appearance before the Secretary or his delegate shall not be less than 10 days from the date of the summons. SEC. 7210. FAILURE TO OBEY SUMMONS Any person who, being duly summoned to appear to testify, or to appear and produce books, accounts, records, memoranda, or other papers, as required under sections 6420(e) (2), 6421(f) (2), 7602, 7603, and 7604(b), neglects to appear or to produce such books, accounts, records, memoranda, or other papers, shall, upon conviction thereof, be fined not more than $1,000, or imprisoned not more than 1 year, or both, together with costs of prosecution. [Italics supplied.] ATTACHMENT TO SUMMONS FORM 2039 IN THE MATTER OF THE TAX LIABILITY OF AMERICANS BUILDING CONSTITUTIONALLY (A TRUST) N.F.P. All books and records pertaining to the operation of the Trust known as Americans Building Constitutionally (a trust) N.F.P., P. 0. Box 575, Kelsey Road, Barrington, Illinois, for the period beginning July 15, 1966 and ending September 30, 1967, including but not limited to, the following specific records: 1. All resolutions of the Board of Trustees governing the administration of the Trust for the above-described period; 2. All recorded minutes of the meetings of the Board of Trustees concern- ing the administration of the Trust for the above-described period; 3. All by-laws, rules or regulations governing the conduct of business for the above-described period; 4. All records of equitable or beneficial interests in the Trust, including any interim certificates issued with respect to subdivided interests in the Trust for the above-described period; 5. All applications for membership in the Trust known as Americans Building Constitutionally; all records relating to such applications for mem- bership; and the list or card files of members of the Trust known as Ameri- cans Building Constitutionally as of September 30, 1967; 6. All records and books which reflect cash receipts and disbursements, journals, general ledgers, bank statements, deposit slips and cancelled checks for the period beginning July 15, 1966 and ending September 30, 1967; and 7. All instruments of conveyance evidencing delivery of property to the trustees for the above-described period. If deemed necessary, the above-mentioned items will be duplicated by the Internal Revenue Service. PAGENO="0022" 18 Mr. RAY. In its entirety, Mr. Chairman. Mr. PATMAN. That was returnable the 16th of October. Did you furnish the information? Mr. RAY. No, sir; we did not. I wish to again express my- Mr. PATMAN. What was the reaction of the Internal Revenue Serv- ice? What did they say about your refusing? Mr. RAY. At this time, sir, I have had no communication. Mr. PATMAN. You just did not show up? Mr. RAY. Show up where? Mr. PATMAN. The 16th day of October at Barrington, Ill.? Mr. RAY. Yes, sir; there was a hearing that day, at which Mr. Cornue- Mr. PATMAN. We have some questions on that. Mr. MOORE. Mr. Chairman, may I ask the gentleman to pass that subpena to the table? May I look at it? Mr. PATMAN. May we have somebody, Mr. Jacques, to help us on these matters? Mr. RAY. May I continue with our position, our predicament, Mr. Chairman. Mr. PATMAN. Yes, sir; but I do not want you to filibuster on this thing. Mr. RAY. I am not. I have about three more- Mr. PATMAN. We do not allow filibusters in the House. That is over in the other body. Mr. RAY. I would respectfully request for the public record an op- portunity to be heard in Washington by the Commissioner or his appropriate representative to consider the tax-exempt status of ABC before any further conclusions are reached. To my knowledge, the IRS has made no ruling that ABC is not. tax exempt.. Instead a "crim- inal investigation" is proceeding, and the trustees have not been in- formed of what, if ally, possible charges there are or could be, and on what basis these charges would be made. There has merely been a sum- mons, a copy of which you have received. Mr. PATMAN. All right, sir; are you finished? Mr. RAY. Yes. sir. Mr. PATMAN. *We are trying to get a complete picture of ABC's operations, and you keep tossing "red herrings" at us, Mr. Haves. No part of our request can possibly jeopardize your position in your prob- lems with the Internal Revenue Service. Nor would the foundations associated with ABC suffer if it became public knowledge that they exist. Thus far we have been unable to find out whether or not they do in fact exist. Now, your counsel, Mr. Ray-is your name Ray ?- Mr. RAY. Yes, sir. Mr. PATMAN (continuing). Informed Mr. H. A. Olsher, who is the director of the staff of the foundation study, that ABC refused to furnish the Internal Revenue Service with documents and information requested by the Service and that the IRS served a. summons on ABC. Your counsel further stated that subsequently ABC agreed to give the IRS access to its records. Mr. RAY. I did not make that statement. Mr. PATMAN. You did not give access? Mr. RAY. No, sir; I have never made that statement. Mr. PATMAN. WTere you there at the hearing. Mr. Hayes? PAGENO="0023" 19 Mr. RAY. We do have a formal statement. Mr. PATMAN. What is your formal statement? Mr. RAY. This is a letter written by Mr. Robert D. Hayes to Mr. Sheldon S. Cohen, Commissioner of the Internal Revenue. Mr. PATMAN. Let me see that. Just bring it up here if you please, ma'arn. Thank you very much. This is from Mr. Hayes to Mr. Cohen, Commissioner of Internal Revenue: DEAR Mn. COHEN: Enclosed are manuals distributed by ABC to members and their attorneys including the presentation material for prospective members. Also enclosed is a certified true and correct copy of the ABC Not-for-profit Trust recorded in Waukegan, Lake County, Illinois. We believe that careful analysis of this information will disclose that neither attorneys nor members are advised to operate outside the income tax law and the regulations and cases pertaining thereto. We do not advise any member or his attorney to operate outside the scope of these laws. Since your office has seen fit to publicly state that there is `doubt as to the legality" of the procedures we form, I respectfully request that the Internal Revenue Service issue a ruling as to the legality of the enclosed material. Now, that is October 21, you probably haven't had time to hear- Mr. RAY. We do, Mr. Cohen has not received- Mr. PATMAN. We will put that in the record. (See appendix exhibit 1, p. 806.) Mr. PATMAN. You have not received a reply? Mr. RAY. No, sir. Mr. PATMAN. Is ABC giving the Internal Revenue Service a list of its members, Mr. Hayes? Mr. HAYES. No, Mr. Chairman, we are not. I have here in my hand the document which specifies the reason why we are declining to do that. If this committee would care to investigate this document, I would be glad to- Mr. PATMAN. We have one investigation going on, Mr. Hayes. We are not rum~rng off after another one. Mr. HAYES. Pardon me. Mr. RAY. These are the powers under which Mr. Hayes is required to operate as a trustee, Mr. Patman. Mr. PATMAN. Yes. We have that in other parts of our questions, and I would like to pass it over at this time, unless you want to put it in the record. Mr. RAY. Could we? Mr. PATMAN. We will put it in the record at this point. (The document referred to follows:) DECLARATION OF TRUST OF THIS CONSTITUTIONAL TRUST To Bn ADMINISTERED BY NATURAL PERsONs, HOLDING TITLE IN JOINT TENANCY, ACTING UNDER THEIR CONSTITUTIONAL RIGHTS As CITIZENS OF THE UNITED STATES OF AMERICA (This declaration of trust authorizes its Trustees to operate under the name of Americans Building Constitutionally (a trust) N.F.P. by this agreement, conveyance and acceptance, made and entered into at the time and on the date appearing in the acknowledgement hereto attacched, by and between Robert D. Hayes, Creator and Grantor hereof, and Richard J. Stephenson and J. Alton Lauren, Acceptors hereof in joint tenancy who shall compose the Board of Trustees and Executive Officers for conducting said business.) The Grantor, hereby constitutes and appoints the above designated Trustees to be, in fact. Trustees of the Trust hereby created and established. The Grantor for and in consideration of the objects and purposes herein set forth, the cash PAGENO="0024" 20 sum of One Dollar in hand paid and other considerations of value the receipt of which is hereby acknowledged, does hereby sell, assign, convey and deliver unto said Trustees, in TRUST-who are to hold legal title in joint tenancy and not as tenants in common, to collectively act by virtue of this covenant as a Board of Trustees under the name herein designated-certain properties, business projects, operations under way or contemplated, dealing in equities, formulae. entities, patents, copyrights, business good-will, or other business desired to be engaged in by said Trustees. The Trust name and other things of value to constitute a Trust (estate), including rights in reversion or remainder wherever situate, and other things of value too numerous to mention, and having its principal place of business in the State of Illinois, County of Lake, Barrington, Kelsey Road, P.O. Box 575, 60010. The above named Trustees, for themselves and their successors in trust, do hereby accept the conveyance in trust and acknowledge delivery of all the prop- erty specified, together with all the terms of the Trust herein set forth, agreeing to conserve and improve the Trust, to invest and reinvest the funds of said Trust in such manner as will increase the financial rating of the Trust (estate) during the period of outstanding liabilities of the various properties and enter- prises in commerce for gain, exercising their best judgment and discretion, in accordance with the Trust minutes, making distribution of portions of the proceeds and income as in their discretion, and according to the minutes, should be made, making complete periodic reports of business transactions, and upon final liquidation distributing the assets to the beneficiaries as their interests may appear; and in all other respects administering said Trust (estate) in good faith, strictly in conformity hereto. TRUSTEES Trustees shall he not less than two in number, but may be increased for prac- tical reasons beneficial to the Trust. The Trustees herein mentioned by name, or their successors elected to fill vacancies, shall hold office, have and exercise collectively the exclusive management and control of the Trust property and business affairs; Provided, where succession may be desired, the first named Trustee shall hold office for one year, the second, for two years, the third, for three years, in this manner using the same principle for additional Trustees, the successor to each Trustee beh~g elected for a full term of five years; Provided, however, that a Trustee may resign or be removed from office by a resolution of the Board of Trustees unanimously concurred in whenever in their opinion said Trustee shall have been guilty of fraud, malfeasance in office, gross neglect of duty, or for cause by the mandate of a court of competent jurisdiction; and Provided further, that in the event of death, removal from office, or resignation, the Trustees shall appoint or elect a successor by the unanimous concurrence of the remaining Trustees. Should the entire Board of Trustees become vacant, a court of equity may appoint one Trustee, who, in turn, shall appoint the addi- tional Trustees. Should objection be filed to appointment of additional Trustees, the Same shall be spread upon the minutes. Any such objection shall deprive the candidate from accepting the trusteeship. The signing and acknowledging of this Agreement by such Trustee or Trustees, elected or appointed, shall constitute their acceptance of this Trust; and the Trust property, assets and emoluments thereof shall immediately vest in the new Trustee or Trustees without any further act or conveyance. TRUSTEES' MEETINGS By a regular act of the Trustees they may provide for meetings at stated intervals without notice and special meetings may be called at any time by two or more Trustees upon three days' written notice. At any regular or special meeting a majority of the Trustees shall constitute a quorum for conducting business, Provided, affirmative action may only be had upon a majority vote of the Trustees. whether present or absent, except that at special meetings called for a special purpose the majority present may affirmatively act in emergency matters. PAGENO="0025" 21 POWERS OF TRUSTEE Trustees' powers shall be construed as general powers of citizens of the United States of America, to do anything any citizen may do in any state or country, subject to the restrictions herein noted. They shall continue in business, conserve the property, commercialize the resources, extend any established line of business in industry or investment, as herein specially noted, at their discretion for the benefit of this Trust, such as, viz.: buy, sell or lease land for surface or mineral rights; buy or sell mortgages, securities, bonds, notes, leases of all kinds, contracts or credits, of any form, patents, trademarks or copy- rights; buy, sell, or conduct mail-order business, or branches thereof; operate stores, shops, factories, warehouses, or other trading establishments or places of buiness of any kind; construct, buy, sell, lease or rent suitable buildings or other places of business; advertise different articles or business projects ; borrow money for any business project, pledging the Trust property for the payment thereof; bypothecate assets, property, or both, or the Trust in business projects; own stock in, or entire charters of corporations, or other such properties, com- panies, or associations as they may deem advantageous. Resolutions of the Board of Trustees authorizing a special thing to be done shall be evidence that such act is within its power. Any one lending or paying money to the Board of Trustees shall not be obliged to see the application thereof, all funds paid into the treasury are and become a part of the corpus of the Trust. ADMINISTRATION The Trustees shall regard this instrument as their sufficient guide, supple- mented from time to time by resolutions of their Board covering contingencies as they arise and recorded in the minutes of their meetings, or by-laws, rules or regulations, as deemed expedient and consistent with the orderly conduct of business. OFFICERS AND MANAGEMENT The Trustees may in their discretion elect among their number a President, Secretary and Treasurer, or any other officers they may deem expedient for proper functioning. Any Trustee may hold two, or more, offices simultaneously, their duties being such as are usual or are prescribed. They may employ agents, executives, or other employees, or designate third persons to hold funds for specific purposes. EXPENDITURES The Trustees shall fix and pay compensation of all officers, employees or agents in their discretion, and may pay themselves such reasonable compensation for their services as may be determined by the Board of Trustees. CONSTRUCTION The Trustees, officers, agents or employees possess only such authority as awarded them herein. Authority is understood and meant to be similar to that awarded an executor of an estate wherein the testator directs (illustration) "that my Executor is directed to handle the estate in the manner he thinks to be to the best interest, limited by the terms hereof, without the necessity of resort to the court for permission or approval of any transaction, intending herein to leave open for the court the question of conscientious dealing of my Executor only." TRUSTEES' DECLARATION OF PURPOSE or THIS CONSTITUTIONAL TRUST shall be to help citizens of the United States make full use of their rights guaran- teed them under the Constitution. Americans Building Constitutionally (a trust) N.F.P. hereby makes available membership to every citizen who is duly qualified. The trustees by their resolution of purpose may perform and function for any purpose on behalf of any individual, group or combination of individuals, severally or collectively. In such instances the powers and authority of the Trustees `shall be defined and limited to the general purposes set forth by the Declaration of Purpose. PAGENO="0026" 22 For these purposes the Trustees may have authority to take possession, man- agement and control of corpus, as agent, escrowee or trustee of the lawful holder of Interim Certificate, as issued by the Trust. The trustees may issue Interim Certificates, calling for as many subdivided units as a holder may be entitled to on a per cent basis of the whole. However, they may first allocate a per cent of subdivided units for purposes or activities as the nature of the Declaration of Purpose warrants. Under no circumstances shall the Trustees possess authority to sell or negotiate, directly or indirectly, Interim Certificate unit or units. The trust shall have authority to provide itself with operating funds through commercial loans, directly secured by assets or income of the Trust, provided such authority is possessed, in writing, from the principal. The trustees shall issue to individual persons interested in the premises, or groups. as the case may be, uniform Trust Interim Certificates, therein and thereby setting forth that the Trust is not the vendee or owner of the premises; that its sole activity consists of private, personal representation of individual Interim Certificate holders, as set forth in the Declaration of Purpose. LIABILITIES The Trustees shall, in the capacity of Trustees and not individually, assume only such liability as may attach to said Trust property assets. This Trustee liability shall not in any manner jeopardize their individual or personal holdings and for any losses they should suffer for any reason through services, they shall be reimbursed from Trust property to the same extent as would non-interested persons. NOTICE Notice is hereby given to all persons, companies or corporations extending credit to, contracting with, or having claims against this Trust or the Trustees hereof, that they must look only to the funds and property of the Trust for pay- inent or for settlement of any debt, tort, damage, judgment or decree, or for any indebtedness which may become payable hereunder; that the Trustees, officers or agents are mere employees and not personally liable when dealing with the Trust properties or matters. DOCUMENT It is expressly declared that a Trust, and not a partnership, is hereby created; that neither the Trustees, officers, or certificate holders, present or future, have or possess any beneficial interest in the property or assets of said Trust, nor shall they be personally liable hereunder, as partners or otherwise; that no Trustee shall be liable for the act or omission of his or her Co-trustee, or any other person, whatsoever, whether employed by such Trustee or not, or for any- thing other than his own, personal breach of Trust. CERTIFICATES OF INTEREST For convenience the equitable interests for distribution shall be divided into One Hundred units, substantially in the certificate form hereto attached. They shall be non-assessable, non-taxable and negotiable and the lawful possessor thereof shall be construed the true and lawful owner thereof. The lawful owner may, if he so desires, cause his beneficial certificate to be registered with the Secretary of the Board of Trustees. DEATH . . . INSOLVENCY . . . BANKRUPTCY Death, insolvency or bankruptcy of any certificate holder, or the transfer of his certificate by sale, gift, devise or descent, shall not operate as a dissolution of this Trust, or in any manner affect the Trust or its operation or mode of business. Ownership of beneficial certificate shall not entitle the holder to any legal title in or to the Trust property, nor any undivided interest therein, nor in the management thereof, nor shall the death of a holder entitle his heirs or legal representatives to demand any partition or division of the property of the Trust, nor any special accounting, but said successor may succeed to the same equitable or distributional interest upon the surrender of the certificate as held by the deceased for the purpose of re-issue to the then lawful holder or ow-ner. PAGENO="0027" 23 DURATION . . . CLOSURE This Trust shall continue for a period of twenty-five years from date, unless the Trustees shall unanimously determine upon an earlier date. The Trustees may at their discretion, because of threatened depreciation in values, or other good and sufficient reason, liquidate the assets, distribute and close the Trust at any earlier date determined by them. The Trust shall be proportionately and in a pro rata manner distributed to the beneficiaries. In the event this instrument has been recorded with the Recorder of Deeds, they shall then file with said Recorder a notice that the Trust shall cease and determine; and, thereupon, the Trustees shall automatically be further discharged hereunder, PROVIDED, their admin- istration and distribution has been made in good faith, otherwise a court of equity may be invoked to review and correct any tort or error. RENEWAL At the expiration of this Agreement the then Trustees, if they so desire and believe that said Trust should not be closed, may renew this Agreement for a like or shorter period. A resolution of said renewal shall be entered upon the minutes (and also recorded in the Recorder's Office in the event this Agreement has been recorded) at least 120 days prior to the expiration hereof, and publication shall be made in a newspaper of general circulation in the county of a copy of said resolution not less than 60 days prior to the expiration hereof. RESTRICTIONS Nothing herein contained shall be construed to authorize the Trust to issue beneficial certificates of interest in excess of the number herein provided, nor for a nominal value at variance with the provisions hereof. PURPORT The purport of this instrument is to convey property to Trustees to constitute a Trust (estate) for the benefit of the beneficiaries, held by the Trustees, in trust and in joint tenancy for the duration hereof, and to provide for a sane and eco- nomical administration by natural persons acting in a fiduciary capacity, to begin at once and not to be deferred until after the death of any creator, settler or maker, as occurs when such Trust Estates are created by Last Will and Testament, the settlers, creators or makers of this covenant preferring that the Trustees act solely within their constitutional rights as based upon their common law rights and immunities vouchsafed to citizens of the United States of America and de- fined in Article IV, Section 2, PROVIDING, that "Citizens of each state shall be entitled to all privileges and immunities of citizens in the several states," and Article VI, Section 2, PROVIDING, that "The Constitution of the United States and the laws made in pursuance thereof shall be the supreme law of the land ;" and the 14th Amendment thereof, PROVIDING, that "No state shall make or enforce any law which shall abridge the privileges or immunities of citizens of the United States." The administration of this Trust shall be amenable to judicial regulation on occasion arising and under the paternalism and protec- tion of the court. Citations applicable and various rulings pertaining to Trust Estates and constitutional rights of contract and collective bargaining (except copartnership relationship, which is not applicable) may be found. Nothing herein contained shall be construed as an intent to evade or to contra- vene any Federal or State Law, nor to delegate to Trustees any special power belonging exclusively to franchise of incorporation. In witness whereof the Grantor and Creator hereof and the Acceptors hereof, for themselves, their heirs and assigns, have hereunto set their bands and seals in token of the conveyance, delivery and acceptance of property, assets, or other things of value, and the obligations and duties as herein assumed as Trustees of said Trust and assent to all stipulations herein as imposed and expressed. [SEAL] ROBERT D. HAYES, Creator. COUNTY OF LAKE, State of Illinois, ss: I, Lorena Kohlman, a Notary Public, an officer authorized by law to administer oaths, do hereby certify that Robert D. Hayes, creator, and Robert D. Hayes, Richard 3. Stephenson and J. Alton Lauren as trustees of Americans Building PAGENO="0028" 24 Constitutionally (a trust) N.F.P., personally appeared before me this day and acknowledge that they signed, sealed and delivered the above and foregoing Trust Indenture for the uses and purposes therein set forth, and that the trustees by their signatures evidenced the acceptance of the duties, obligations and faith- ful performance of said Trust Indenture. Dated this Fifteenth day of July, 1966. [SEAL] LORENA KOULMAN. My Commission Expires April 16. 1967. Mr. PATMAN. Is the ABC making available to the Internal Revenue Service records that will reflect a list of the members? Mr. IHIAY1~s. Chairman Patman, the answer to that question is "No," because of the rules which the document just handed you covers. Mr. PATMAN. In other words, you feel that it would be outside the scope of your authority as trustee. How many trustees are there? Mr. HAYES. There are three. Mr. PATMAN. Three trustees? Mr. HAYES. Right. Mr. PATMAN. I believe the bylaws provide for one can run the business, do they not; one trustee? Mr. HAYES. Yes, that could be true; yes, sir. Mr. PATMAN. And then that one trustee could appoint the other trustees to serve with him, as a kind of a perpetual trust? Mr. HAYES. On advice of counsel, Mr. Chairman, I am declining to reveal the substance of the- Mr. PATMAN. Of course, we have it here and will reveal it., and that it what it says. Is ABC giving the Internal Revenue Service a finan- cial statelnent which will show income and disbursements for its first year of operations as well as a balance sheet ? Mr. HA1~s. No, sir. Mr. PATMAN. You are not. Now, you are not giving it to the IRS. You are not giving it to a congressional committee. Who will you give it to, nobody? Mr. HAYES. Nobody. Mr. PATMAN. If you can help it? Mr. HAYES. That is correct. Mr. PATMAN. That is the point that we are working on right now. Mr. HAYES. I appreciate it. Mr. RAY. I will say that. Mr. PATMAN. Is ABC making availalbe to the Internal Revenue Service records that will reflect income and disbursements since the date it began operations as well as assets and liabilities? I guess the same answer to that one. Mr. HAYES. Correct; that is correct, sir. Mr. PATMAN. That you are not making it available to anybody? Mr. HAYES. That is right. Mr. PATMAN. Because of that trust agreement. Do we understand correctly that the following are the trustees of ABC: Robert D. Hayes, J. Alton Lauren, Richard J. Stephenson; is that correct, t1~e three trustees? Mr. HAYES. That is correct. Mr. PATMAN. Does ABC have a bank account on which it draws checks? Mr. HAYES. Yes, sir; it does. PAGENO="0029" 25 Mr. PATMAN. How many persons must sign an ABC check and what are their names Mr. HAYES. This, Mr. Chairman, will be revealed in the bylaws. Mr. PATMAN. In the bylaws Mr. RAY. That was done by resolution of the trustees. Mr. PATMAN. Where are your bylaws? Let me see the bylaws. Mr. RAY. It was created by resolution to the bank of the trustees, Mr. Chairman. Mr. PATMAN. The bank has it but we cannot get it, is that right? Mr. RAY. The bank has a copy of the resolution of the trustees. Mr. PATMAN. You have a copy. You are refusing to let us see a copy of the resolution? Mr. RAY. It is at the bank, Your Honor, Mr. Chairman. Mr. PATMAN. Well, you said that you gave them a copy. You must have the original. Mr. RAY. It is a bank form. Mr. PATMAN. That does not. make any difference. Are you willing to let us see that resolution, Mr. Hayes? Mr. HAYES. We would be glad to get you a copy of it, sir. (The information has not been submitted to the subcommittee.) Mr. PATMAN. You said you gave the bank a copy. Evidently you have the original. Mr. HAYES. I am sorry, I do not have it here. Mr. PATMAN. Who signed the resolution? Mr. HAYES. The trustees signed it. Mr. PATMAN. All three trustees? Mr. HAYES. Yes, all three trustees. Mr. PATMAN. Now, evidently you can sign the checks. Is anyone else required to sign them before withdrawals of funds can be made? Mr. HAYES. Yes, sir. Mr. PATMAN. Or money obtained. Who else? Mr. HAYES. One other trustee. Mr. PATMAN. Would have to sign it? Mr. HAYES. Correct. Mr. PATMAN. Either one of the others? Mr. HAYES. Yes. Mr. PATMAN. He said either one of the others. That is either Ste- phenson or this other man. ~\That are the names and addreses of the banks or other financial in- stitutions in which ABC has accounts? Mr. HAYES. I am not permitted to reveal that, sir. Mr. PATMAN. Not permitted to reveal it, are there one or more? Mr. HAYES. I cannot reveal that. Mr. PATMAN. You cannot reveal it. Evidently the checks have the names of the banks on it, don't they; the different checks? Mr. HAYES. Yes; I would say so. Mr. PATMAN. Anybody that you issue a check to would know about it; wouldn't they? Mr. HAYES. I presume so. Mr. PATMAN. But you won't let us know and you won't let the IRS know. Mr. HAYES. They can check the bank records. PAGENO="0030" 26 Mr. PATMAN. Yes. What are the names and addresses of the in- vestment or brokerage firms in which ABC has accounts? Mr. HAYES. I cannot reveal that. Mr. PATMAN. Has ABC or any of its affiliates deposited any funds in foreign banks or in other foreign financial institutions? Mr. HAYES. Pardon me, sir? Mr. PATMAN. Has ABC or any of its affiliates deposited any funds in foreign banks outside of this country, or in other foreign financial institutions? Mr. HAYES. As a trustee I cannot reveal that information. Mr. PATMAN. What are the names and addresses of the foreign banks or other financial institutions in which ABC or its affiliates has de- posited funds? Mr. RAY. May I finish his answer to that question? Mr. PATMAN. He finished it. He said he couldn't reveal it. I would consider that a definite period there. If he has further answer, why you may go ahead and give it, Mr. Hayes. Mr. HAYES. I would add to my previous answer that so far as I know personally, none has been deposited. Mr. PATMAN. In foreign- Mr. HAYES. Correct. Mr. PATMAN. Now ABC, if I understand correctly, has three types of membership, one an educational membership for $1,050; another a foundation membership for $5,250; another full or senior membership, $10,500; is that correct? Mr. HAYES. That is correct, sir. Mr. PATMAN. Has anyone paid $10,500 for membership in ABC? Mr. HAYES. This, I cannot say. Mr. PATMAN. Yes or no. Has anyone paid $10,500 for membership in ABC? Mr. HAYES. As a trustee I am not permitted to reveal that, sir. Mr. PATMAN. I am not asking for names at this point. How many have paid $10,500? Mr. HAYES. As a trustee- Mr. PATMAN. How could you be violating a. trust if you said one or 99 or 550? What difference would that make on a trust? Mr. HAYES. The reason I cannot do that, sir, is because it violates the trust which I have assumed. Mr. PATMAN. Has anyone paid more than $10,500 for membership intheABC? Mr. HAYES. Not to my knowledge, sir. Mr. PATMAN. You would know it if they had, wouldn't you; be- cause you are the head of it? Mr. HAYES. Not necessarily. Mr. PATMAN. Who has power over you? Mr. HAYES. No one in the trust. Mr. PATMAN. That is right. I understand that the price of a senior membership in ABC was raised this year. Please give us the prices for a senior membership from the very begining of ABC's operations, as well as the dates on which those prices went into effect. Would you do that? Mr. HAYES. I do not have the dates on which the changes were made. Mr. PATMAN. Will you make that available to Mr. Olsher so we can put it in the. record at this point? PAGENO="0031" 27 Mr. HAYES. I will be glad to. (The information had not been received at time of printing.) Mr. PATMAN. You understand that we will put the prices in there and the dates. Mr. HAYES. Pardon? Mr.. PATMAN. Can you give us the prices now? I understood that you didn't have it all right now. Mr. HAYES. 1 don't have the dates. Mr. PATMAN. Do you have the prices? Mr. HAYES. The senior memberships originally to my knowledge were $7,000. Mr. PATMAN. And it was raised to- Mr. HAYES. 10.5. Mr. PATMAN. To 10.5. And that is the only change in the senior mem- bership. Mr. HAYES. So far as I know. Mr. PATMAN. And you don't recall the date of that. Mr. HAYES. No; I do not. Mr. PATMAN. And that is the date you will furnish Mr. Olsher to be put in the record. (The information has not been submitted to the subcommittee.) Mr. HAYES. I will do my best to determine it. Mr. PATMAN. Have any of the following foundations ever been a senior member of ABC? Just answer yes or no as I read the names. R. D. Hayes Family Foundation, is it a senior member of ABC? Mr. HAYES. I cannot reveal that, sir. Mr. PATMAN. Well, because it is your foundation or because you represent the parent organization? Mr. HAYES. Because I represent ABC. Mr. PATMAN. The parent organization. Mr. HAYES. Correct. Mr. PATMAN. And you wouldn't mind- Mr. HAYES. Not the parent organization. Mr. PATMAN. You wouldn't mind forgetting about that part and just reveal your own. How about that. Mr. RAY. Would you state the question formally, Mr. Chairman? Mr. PATMAN. Yes. The question is Have any of the following foun- dations ever been a senior member of ABC? One is B. D. Hayes Family Foundation. Has it ever been a member, a senior member of ABC? Mr. RAY. Are you addressing Mr. Hayes as trustee of the R. D. Hayes Family Foundation? Mr. PATMAN. I am addressing him as the head of the R. D. Hayes Family Foundation at this point. Mr. RAY. And you are requesting whether that family foundation is a member of ABC. Mr. PATMAN. Of ABC; yes. Mr. RAY. You may answer. Mr. HAYES. It is not a member of ABC. Mr. PATMAN. Was it ever? Mr. HAYES. It never was. Mr. PATMAN. And you are the head of ABC and this is your foundation. Mr. HAYES. Correct. PAGENO="0032" 28 Mr. PATMAN. The Sales Analysis Institute Foundation, has it ever been a member of ABC? Mr. RAY. Are you addressing him as a trustee? Mr. PATMAN. I am addressing any way you want to take it. Mr. RAY. Let's make it clear. Mr. PATMAN. He is connected with Sales Analysis and he is also connected with ABC. Mr. RAY. He is a trustee of Sales Analysis Institute Foundation. He will answer as a trustee of that foundation. Mr. PATMAN. All right; answer that then as trustee. I don't care how you answer it just so you answer it. Mr. 1-IAYE5. Sales Analysis Institute, Mr. Chairman, the Sales Anal- ysis Institute Foundation is not a member of ABC. Mr. PATMAN. All right. Now is the Walsh Family Foundation a member? Mr. HAYES. I cannot reveal that, sir. Mr. PATMAN. Is the Tudhope Foundation a member? Is it a member? Mr. HAYES. I am not at liberty, sir, to- Mr. PATMAN. Because you are trustee, one of the trustees of the parent organization. Mr. HAYES. Correct. Mr. PATMAN. The ABC. Mr. HAYES. This is correct; right. Mr. PATMAN. The Odell Tudhope Educational Trust, is it a member? Mr. HAYES. I cannot answer that, sir. Mr. PATMAN. Saxon Foundation? Mr. HAYES. I cannot-I cannot reveal any information about who is a member and who is not a member. Mr. PATMAN. Philippa Schuyler Memorial Foundation, is it a mem- ber of ABC? Mr. HAYES. I am not at liberty to answer that question. Mr. PATMAN. The Houghs- Mr. CORMAN. Mr. Chairman. Mr. PATMAN. Yes, Mr. Corman. Mr. CORMAN. Maybe my memory is wrong but I am wondering if he hasn't waived his right as to that. Mr. MOORE. Page 8 of his statement indicates that it is one of the members. Mr. PATMAN. The I-Tough's Encyclopedia of American Wood's Foun- dation. that is what I am asking. Is it a member? Is it as an entity a member of ABC or has it been? Mr. HAYES. I cannot answer that. Mr. PATMAN. I cannot answer that, sir. Mr. C0NYE. Mr. Chairman, can we go back to that Philippa Schuy- ler Memorial Foundation? Mr. PATMAN. Yes. Mr. CONTE. He said he couldn't answer that question, and yet, on page 8 of his original statement he said, "One of our members is the Philippa Schuyler Memorial Foundation." Mr. PATMAN. How you you reconcile that, Mr. Hayes? You already put it in your own statement. Mr. HAYES. Yes. PAGENO="0033" 29 Mr. PATMAN. That these people were members. Then you refuse under oath. Mr. HAYES. Because of public knowledge of the orgathzation of this particular foundation, it was public domain, and therefore we were ~t liberty to. . .: Mr. PATMAN. The only way it could get in the public domam was with your permission, wasn't it? Mr. CONTE. That isn't the point I am trying to make, Mr. Chairman. Under oath Mr. Hayes said~he couldn't disclose- Mr. PATMAN. That is right, I know he did. Mr. CON~E (continuing). Whether or not this foundation was a member or not. Mr. RAY. The trustees of the Philippa Schuyler Foundation have revealed their membership sometime ago. It was extensively covered in the press and has been ever since. Mr. CÔNTE. Counsel, that is not the point I am trying to make. The point I ani. trying to make is that your client said under oath that he couldn't answer whether or not it was a~ member, and here in his statement he says that they are a member. Mr. RAY. He.was not in his statement- Mr. `CON'~E.,. Did he. read this statement before he wrote it? Mr. RAY. Yes, sir. Mr. CONTE. He didn't allude to it. He mentioned it on page 8. Mr. RAY. It is. public knowledge. Mr. CONTE. Under oath he said he couldn't state whether or not it was a member. Yet he does to the chairman in his original statement. Mr. RAY. He can state that. . Mr. Moou~. R.ephrase the question. Mr. PATMAN. He couldn't but he did. Let me go ahead and ask these questions. How much did it cost each of these foundations to become a senior member of ABC? Please give the membership fee as I read their names: The R. D. Haye~ Family Foundation, how much is the membership fee? Mr. HAYES. I can't reveal that. Mr. PATMAN. Sales Analysis Institute Foundation. Mr. HAYES. I can't reveal that, sir. . Mr. PATMAN. Walsh Foundation, Family Foundation... Mr. H~s. I have no knowledge of that. Mr. PATMAN. Tudhôpe Foundation. . . Mi HAYES Can't reveal that, sir Mr. PTMAN. Odell Tudhope Educational Trust. . Mr. HAYES. As a trustee I can't reveal any of these. . Mr PATMAN Saxon Foundation Mi HAYES As `t trustee I can t reveal that Mr. PATMAN. Philippa Schuyler Memorial Foundation. Mr. HAYES. I can reveal that. Mr. PATMAN. All right, how much was it, membership fee? Mr. HAYES., I can't reveal the amount they paid, sir. . I can only reveal the fact that they are members Mr. PATMAN. it is like telling a fellow how far it is but not where to. Mr. HAYES. Yes, sir. . . , , .. . S7-444-6S---3 PAGENO="0034" 30 Mr. IRAY. This is public information. Mr. PATMAN. Are they still members, the Schuyler Foundation? Mr. HAYES. I can't reveal that. Mr. PATMAN. What about the Hough's Encyclopedia of American Wood's Foundation, Inc. What did it cost them to join? Mr. HAYES. As a trustee I can't reveal that. Mr. PATMAN. By letter of October 23, 1967, Mr. Robert Speller, president, Hough's Encyclopedia of American Wood's Foundation, New York City, sent us a copy of his application for membership in ABC, dated June 1, 1967. That application indicates that his member- ship fee was $10,500. Yet, in the same letter, Mr. Speller stated that his foundation "paid no fee to ABC." He enclosed a resolution adopted by ABC, dated June 5, 1967, "which indicates that ABC made a grant to this foundation covering full membership." How does it happen that some people have reportedly paid thou- sands of dollars to become members of ABC while others paid nothing? Is this not highly irregular practice and pricing? Mr. HAYES. As a trustee I can't reveal that information. Mr. PATMAN. I will not go to the trouble of reading the letter from this Encyclopedia of American Wood's Founda.tion, but it indicates exactly what I said, and I will place it in the record. (The letter referred to, with attachments, follows:) ROUGH'S ENCYCLOPEDIA OF AMERICAN WOODS FOUNDATION, INC.. ~\TC1V York, N.Y., October 23, 1967. Hon. WEIGHT PATMAN, Cli airman, Sn beommittee Foundation Study, Washington, D.C. DEAR MR. PATMAN: This is in reply to your letter of inquiry, dated October 19. We assume that this Foundation is a member of Americans Building Consti- tutionally, based upon the "Accepted Membership Application and Sponsoring Agreement" signed by me and by Mrs. Bertha Fields, the latter on behalf of A.B.C. I enclose a copy of the Application for your information. This Foun- dation paid no fee to ABC. A copy, Resolution dated 5 June 1967 of ABC, is enclosed, which indicates that ABC made a grant to this Foundation covering "full membership". Our financial statement, previously submitted, shows income of $5,000 from ABC. A copy of their Resolution making this Grant, is enclosed. It is clear that it was made for the purpose of assisting in the work of the Pliilippa Schuyler Memorial Foundation. Further, the $975.00 paid to Dorothy Waring Steiner by this Foundation was a public relations fee for her work involved in the `~Winning the Peace" Program of the Philippa Schuyler Memorial Foundation and for her work on the Town Hall, New York, Memorial Conc~rt of September 24th. For our part we have not received any further information from ABC as to what "full membership" constitutes, nor, in fact. by-laws. etc. We do regret that they ceased their activities almost just after the beginning on the "Winning the Peace" Program for reasons known only to them. We have had no communi- cation from ABC or any of its officers since mid-August of this year. Very truly yours, ROBERT SPELLER, President. I, Bertha Fields, Executive Secretary of Americans Building Constitutionally (a Trust), certify that the following Resolution was adopted at a duly held meeting of the Board of Trustees of Americans Building Constitutionally on the 5th day of June, 1967, to wit: Resolveã; That the Board of Trustees authorize to be made and hereby do make the grant of $10,500 in trust to be applied toward full membership in PAGENO="0035" 31 Americans Building Constitutionally to the Hough's Encyclopedia of American Woods Foundation, Inc. BERTHA FIELDs. Accepted and agreed to on behalf of the Rough Encyclopedia of American Woods Foundation, Inc. by Officer. Date I, Bertha Fields, Executive Secretary of American Building Constitutionally (a Trust), certify that the following Resolution was adopted at a duly held meeting of the Board of Trustees of Americans Building Constitutionally on the 10th day of July, 1967, to wit: Resolved, That Americans Building Constitutionally grants to the Rough's Encyclopedia of American Woods Foundation, Inc. the suni of $5,000 in trust to be administered by said Hough's Encyclopedia of American Woods Founda- tion, Inc. for and through the Philippa Schuyler Memorial Foundation, a member of Americans Building Constitutionally, for the great work carried out by the Phiippa Schuyler Memorial Foundation in conjunction with the other members of Americans Building Constitutionally in bringing understand- ing and cooperation to the peoples of the Republic of Viet Nam. BERTHA FIELDS. Accepted and agreed to on behalf of the Rough Encyclopedia of American Woods Foundation, Inc., by Robert Speller, Officer. JULY 12, 1967. AMERICANS BUILDING CONSTITUTIONALLY MEMBERSHIP APPLICATION AND SPONSORING AGREEMENT This application will create no rights, duties, or obligations in either the ap- plicant, his Sponsor, or Americans Building Constitutionally until accepted un- conditionally by both the Sponsor and Americans Building Constitutionally. The membership applicant submits that he is a citizen in good standing, that he wishes to ease the burdens of our government by working to benefit man- kind and to dedicate himself to that end, and that upon acceptance by the Sponsor and Americans Building Constitutionally, he will seek to fulfill through his to-be-formed, non-profit organization the qualifications for full membership iii both organizations and he will abide by the standards of sponsorship of Americans Building Constitutionally. Applicant represents that he intends to establish *a non-profit organization for the benefit of mankind and makes this agreement both personally and on behalf of that to-be-formed, non-profit organization. Acceptance by the Sponsor and Americans Building Constitutionally is conditioned upon the formation of that nonprofit organization and adoption by that nonprofit organization of this agreement. In the event the applicant fails to form the contemplated non~profit organiza- tion or that non-profit organiaztion fails to adopt this agreement, the applicant is released from any personal liability for sums as vet unpaid Notwithstanding this release, neither the Sponsor nor Americans Building Constitutionally is obligated to return any portion of the membership fee paid prior to notification of this failure. Upon receipt by the Sponsor of $10,500, the amount of the membership fee in Americans Building oCnstitutionally for a senior membership, the Americans Building Constitutionally agrees to act as applicant's agent in sponsoring ap- plicant's to-be-formed, non-profit organization for membership in Americans Building Constitutionally. Upon acceptance by both the sponsoring non-profit organization and Americans Building Constitutionally, said organizations agree to provide all things necessary by and with their information, methods, proce- dures and techniques to enable the applicant to more fully utilize and protect his constituitonal rights to the end that he may benefit mankind. It is understood that while access to these methods, procedures, or information is an incident to membership in Americans Building Constitutionally, that all property rights in all such material is reserved to Americans Building Constitutionally and time member is to receive only the opportunity to make use of that material in PAGENO="0036" 32 the course of his participation as a member of Americans Building Consti- tutionally. In further consideration of the acceptance of this application by the Sponsor and Americans Building Constitutionally of the applicant's to-be-formed, non- profit organization for membership, the applicant hereby agrees not to teach, give, lend, lease, sell, assign, or otherwise divulge or communicate any of the information, methods, procedures, or techniques furnished with the membership, without written consent of Americans Building Constitutionally. It is under- stood that violation of the provision of this paragraph will be a material breach sufficient to justify, among other things, revocation of membership privileges. Applicant understands that it is the policy of Americans Building Constitu- tionally to expand the field of private non-profit organizittion activity through grants and endowments to member organizations and it is the applicant's desire that a portion of his membership fee may be so used, subject to the discretion of the Trustees of Americans Building Constitutionally, to endow the activities of member organizations. The membership of the applicant's to-be-formed, non-profit organization in Americans Building Constitutionally shall be non-voting, non-transferrable and non-assessable, shall create no right of participation or control, and shall be con- ditioned upon the payment ~f the fee in full and completion of the membership requirements in both the sponsoring non-profit organization and Americans Build- ing Constitutionally (as stated in the Standards of Sponsorship). This agreement is personal and by the applicant's signature hereto, be makes his to-be-formed, non-profit organization and its membership a party to this agree- ment, which is not assignable and shall be construed as an Illinois contract, not- withstanding the place of delivery or performance. Execute in quadruplicate and forward to Americans Building Constitutionally. Name: Bough's Encyclopaedia of American Woods Foundation, Inc. Profession or Business: Business Address: Home Address: New York, N.Y. Date: June 1,1967. Signature of Membership Applicant: Robert Speller. Authorized Signature of Sponsor: R. D. Hayes, Trustee. Sponsoring Organization (to whom all membership fees are paid) Americans Building Constitutionally (A Trust). Address: P.O. Box 575, Barrington, Illinois. Accepted by: Bertha Fields; Americans Building Constitutionally (A TRUST) N.F.P., P.O. Box 575, Barrington, Illinois 60010. Mr. PATMAN. It would be a highly irregular procedure, would it not~ Mr. Hayes, for you to give free.memberships to some and not give it to all alike? Mr. HAnis. I am unable to answer that question. Mr. PATMAN. I will put it in the record and when you see the. tran- script maybe you would like to reveal it. Mr. HAYEs. All right. Mr. PATMAN. Has ABC invested any of its funds? Mr. HAYES. This is a question that I cannot reveal the answer to. Mr. PATMAN. You could reveal whether you have or you haven't. That wouldn't be giving any secret, would it? Mr. HAYES. No. Mr. PATMAN. You couldn't reveal either. Mr. HAYES. I couldn't reveal either. Mr. PATMAN. All right. What type of investments has ABC made; that is, are the investments in securities, real estate or what? Would you indicate the type? Mr. HAYES. I can't reveal that, sir. Mr. PATMAN.. Do the members of ABC receive a financial statement at any time? Mr. HAYES. I cannot reveal that. PAGENO="0037" 33 Mr. PATMAN. You can't reveal it. At what intervals do members of ABC receive a financial statement ? Mr. HAYES. I can't reveal that. Mr. PATMAN. You can't reveal that. Mr. HAYES. No. Mr. PATMAN. Do the members of ABC receive a financial statement annually, just once a year? Mr. HAYES. I cannot reveal. Mr. PATMAN. You can't reveal that. Will ABC give a member a financial statement upon his request? Will you give a member a finan- cial statement if the member requests it? Mr. HAYES. No, I ëannot reveal that. Mr. PATMAN. You can't reveal it. I-low many members does ABC have as of now? Mr. HAYES. As a trustee I can't reveal that. Mr. PATMAN. In how many States does ABC have members? Mr. HAYES. This is another question. Mr. PATMAN. That is highly secret I assume. Do you file a Federal income tax return as an individual? Mr. Hayes? Mr. HAYES. As an individual? Mr. PATMAN. Yes. Mr. HAYES. Yes, sir. Mr. PATMAN. You do file an individual income tax return. If I tin-. derstand your literature and the sales pitch correctly, if someone who attends your meetings pays $10,500, he joins your ABC association, the mother of the deal, the parent organization. For that fee, you will organize a foundation for that member, and that member, if he will transfer everything he has to that foundation, and handle his affairs as you tell him to, will not have to pay `any income tax, isn't `that your sales pitch? Mr. HAYES. ABC doesn't set up anything, Mr. Chairman- Mr. PATMAN. Listen, Mr. Hayes, you are under oath. Are you saying you don't agree `to set up a foundation for these people who pay you $10,500? `Mr. HAYES. That is correct. Mr. PATMAN. You don't agree to fix up a foundation for them. Mr. HAYES. We do not. Mr. PATMAN. All right then. Mr. HAYES. We teach procedures. We do not set up foundation or trusts. May I go a little further with that? Mr. PATMAN. Yes, if you will give us some enlightenment and not refuse. Mr. HA1~s. All right. ABC to begin with may not practice law. ABC is teaching citizens how under the present laws to manage their financial affairs for the benefit of mankind. They also become entitled to any attorney of theirs taught these procedures. Mr. PATMAN. Say that again please. Mr. HAYES. Pardon me, they also become entitled, I am talking about the members now- Mr. PATMAN. Yes. Mr. HAYES. To have their attorneys taught these procedures. We have invited agents of the IRS to attend these sessions where we teach. PAGENO="0038" 34 Mr. PATMAN. Have they attended? Mr. HAYES. They have attended, and, incidentally, for the benefit of this committee, I have brought the texts which we use in the seminars. Mr. PATMAN. That is wonderful. Mr. HAYES. Which I will be glad to turn over to the committee. Mr. PATMAN. May we have them? Mr. HAYES. Yes, sir. Mr. PATMAN. All right, give them to us. And you had about five meetings, did you? Mr. HAYES. No. We have more than five meetings. Mr. PATMAN. These are the seminars conducted when the IRS rep- resentatives were there. I hope it discloses the names of the IRS rep- resentatives who were there. This gives the proceedings? Mr. HAYES. Correct. I will now give you the names of those who attended if you wish them. Mr. PATMAN. I assume they are in the books~ aren't they? Mr. HAYES. No, sir. Mr. RAY. Those are just the instructions. Mr. HAYES. These are the texts. Mr. PATMAN. Those are the texts. Mr. HAYES. Which we use. Mr. PATMAN. In the seminar. Mr. HAYES. In the seminar. I might say there are. two types of sem- inars there. There is an attorney seminar. The.re is also a layman's seminar. Mr. PATMAN. That is the attorney; he. is your attorney though, isn't he? Mr. RAY. No. Mr. HAYES. No, no. These are attorneys who come to us for instruc- tion. Mr. PATMAN. How do you make them the lecturer all at once? I un- derstood this was a seminar conducted by your people. Mr. HAYES. We do not make them lecturers. The member may send in his attorney for education. Mr. PATMAN. For education. Mr. HAYES. Right. Mr. PATMAN. You give them a little brainwashing. Mr. HAYES. Education. Mr. PATMAN. All right then. Now I would like to ask you, I under- stand that you are connected with the following foundations: Amer- icans Buildllng Constitutionally; R. D. Hayes Family Founda.tmn, Wheaton, Ill.; Sales Analysis Institute Foundation, Barrington, Ill.; is that correct? You are connected with these foundations. Mr. RAY. Mr. Hayes is willing to state for the record the names of the Internal Revenue Service agents who attended our seminars. Mr. PATMAN. Answer this one first and then we will ask you to in- dicate the names of the Internal Revenue Service, or you can put. them clown and give them to the reporter or to Mr. Olsher and he will put them in the record at this point. (The names referred to follow:) Names of Agents attending Seminar: Alan D. Cornue; Ed Kaczmarck; Louis Adler. PAGENO="0039" 35 Mr. PATMAN. Answer these questions, please. I understand you are connected with these foundations. Are you or not, these three? Mr. IRAY. Which three? Would you please restate the question? Mr. PATMAN. Americans Building Constitutionally, Barrington, Ill.; R. D. Hayes Family Foundation, Wheaton, Ill.; Sales Analysis In- stitute Foundation, Barrington, Ill. I understand you are connected with~those:three. Are you or are you not? Mr. HAYES. I am, sir. Mr. PATMAN. You are. What other foundations are you connected with? Mr. HAYES. None. Mr. PATMAN. None, just those three. Mr. HAYES. Correct. Mr. PATMAN. Now James R. Walsh, Jr., is credited with creating the ABC package, and then selling the idea to you. Is this the way it actually happened? Mr. HAYES. This is correct. Mr. PATMAN. That is correct, all right. Mr. CONTE. Mr. Chairman, I wonder if we could identify the gentle- man sitting in the first row who keeps advising counsel. Mr. PATMAN. He was identified in the beginning. Mr. MooRE. No, not the one in the first row. Mr. CONTE. The man with the bow tie. Mr. PATMAN. That is Mr. Hayes, isn't it? Mr. WALSH. Walsh, W-a-l-s-h. Mr. PATMAN. He is the one that had the idea and sold it to Mr. Hayes. Mr. CONTE. I just wanted to know who he was. Mr. PATMAN. He is subpoenaed to be here. He is the only other wit- ness at this time. We requested, by letters dated October 3, 1967, and October 25, 1967, that you furnish us certain documents and information relating to the history and operations of ABC, the R. D. Hayes Family Foundation, and the Sales Analysis Institute Foundation. Will you please now send up the information and documents de- scribed in attachment "A" which accompanied our requests of October 3 and October 25? Would you furnish us that information, please? Mr. HAYES. As trustee, Mr. Chairman, I am not at liberty to do that, sir. Mr. PATMAN. I will place in the record at this point the attachment (The attachment referred to follows:) ATTACHMENT "A" 1. Legible copy of exemption application (Form 1023) and supporting docu- ments, including subsequent amendments. 2. Legible copy of letter of Internal Revenue Service granting exemption. 3. Legible copy of charter, or articles of incorporation. If the Foundation is not a corporation, please submit a copy of the trust instrument. 4. Legible copy of by-laws. 5. Balance sheet or itemized schedule of assets as of the date that the Founda- tion was first organized. 0. Legible copy of Form 990-A (or Form 1041-A, if applicable), including attachments, filed with the Internal Revenue Service for each year beginning 1951. PAGENO="0040" 36 7. Legible copy of Form 990-T, including attachments, filed with the Internal Revenue Service for each year beginning 1951. 8. Legible copy of accountant's financial statement for each year beginning 1951, including carrying values and market values of individual securities held at the close of the year. Re market value, if the stock is not traded, please fur- nish the Foundation's equity in the net assets of the corporation. : If the foundation has been in operation for less than a year, please submit (a) a current balance sheet, and (b) an income and disbursements staten~ënt for the period of operation, including names and addresses of donors, donees, and the amounts contributed. 9. Name and address of the accounting firm employed by the Foundation dur- ing each year. 10. Names and addresses of the officers of the Foundation at the close of each year. 11. Names, business addresses, and occupations of directors, trustees, and members of the finance committee at the close of each year. 12. Name and address of the bank, investment counsel, or broker, if any,V rendering financial investment services to the Foundation during each year. 13. If the Foundation owned 5% or more of any class of stock of any corpora- tion at the close of any of the years 1951 through 1966, please submit the fo1low~ ing information for each such year: (a) Name and address of the corporation. (b) Nature of the business. (c) Dates on which the stock was acquired by the Foundation, number of shares acquired, and manner of acquisition. V (d) Number of ~hares of each type of stock owned at the close of each year. (e) Percentage of each class of outstanding stock of the corporation owned by the Foundation at the close of each year. (f) Identification of the stock as voting or non-voting. (g) Book value and market value of the stock at the close of each year. Re market value, if the stock is not traded, please submit the Foundation's equity in the net assets of the corporation at the close of each year. 14. Please advise as to- (a) The years, beginning with 1951, during which the Internal Revenue' Service performed field audits of the Foundation; (b) The years covered in each such audit; and (c) Taxes asessed, if any, by the Internal Revenue Service. Mr. PATMAN. As you know, we had asked you to forward the infor- mation relating to the R. D. Hayes Family Foundation, and the Sales Analysis Institute Foundation not later than October 23, 1967. We have not as yet received the data. Please tell the committee why you have ignored these requests of October 3 and October 25. Will you do that, Mr. Hayes? Mr. hAYEs. Mr. Chairman, I have in no way ignored those requests. They will be in your hands- Mr. RAY. Wait, don't combine them. Mr. HAYEs. I am at liberty to reveal Sales Analysis Institute Foun- dation information. Mr. PATMAN. Do you have it with you? Mr. HAYES. I do not. Mr. RAY. It is under audit at this time. Mr. PATMAN. It is what? Mr. RAY. It is under audit at this time. Mr. PATMAN. Who is auditing it? Mr. RAY. Our CPA. Mr. PATMAN. Your CPA. Kind of an inside audit. Mr. RAY. Yes, sir. Mr. PATMAN. What about the other two? Mr. HAYES. The Family-the information on the Family Founda- tion, Mr. Chairman, I cannot reveal as a trustee. PAGENO="0041" 37 :Mr. PATMAN. Now when was the ABC, Americans Building Con- :stitutionally, established? Mr. HAYES. The document was filed July 15, 1966. Mr. PATMAN. Is ABC a philanthropic organization? Mr. HAYES. ABC is strictly an educational organization. Mr. PATMAN. Well, what about philanthropic? Does that include-, .Mr. HAYES. No. It's purpose is educational. Mr. PATMAN. And certain people are to benefit from it? Mr. HAYES. Yes. Mr. PATMAN. Who benefits from it? Mr. HAYES. No officer, no individual, benefits from it. Mr. PATMAN. Who does? Mr. HAYES. It was organized for the benefit of the membership. Mr. PATMAN. Well, the membership get- Mr. HAYES. Get the information. Mr. PATMAN. Get the benefit. Mr. HAYES. That is correct. Mr. PATMAN. What is the purpose of ABC? In other words, how would you define the purpose of ABC. Mr. HAYES. I will be glad to give it to you. Mr. PATMAN. All right, sir. Mr. HAYES. The purpose of ABC is to help citizens of the Tjnited States make full use of their rights guaranteed them under the Constitution. Mr. PATMAN. In other words, to carry out your theory of tax avoid- ance if necessary. People are not required to pay any more, which I agree with, than they are compelled to pay under the law. Mr. HAYES. Yes, sir. Mr. PATMAN. Now ABC operates in the same building in Barring- ton, Ill., as does the Sales Analysis Institute and the Sales Analysis Institute Foundation; is that correct? Mr. HAYES. That is correct. Mr. PATMAN. Has ABC filed an application for Federal tax exemption? Mr. HAYES. No, sir. Mr. PATMAN. Why hasn't ABC filed an application for Federal tax exemption? Mr. RAY. That was covered in my statement. Mr. PATMAN. Well, tell it again. Answer the question. Mr. HAYES. It was covered in Mr. Ray's original statement, the details of which I- Mr. PATMAN. Well, it would be a very simple answer I would think you know, why you haven't filed it. In other words, the question is, Why hasn't ABC filed an application for a Federal tax exemption? Mr. HAYES. It is our opinion that ABC is not required to file such an application. Mr. PATMAN. For exemption? Mr. HAYES. That is `correct. Mr. PATMAN. In other words, you can just create them out of thin air and nobody can pass on it? All right. Who `advised ABC that it does not have to file an application for a Federal tax exemption? Mr. HAYES. As a trustee I can't reveal that. PAGENO="0042" 38 Mr. PATMAN. ABC has been in business now for over a year. Has the organization filed a form 990-A tax return, which is required by law? Mr. HAYES. Not at this time. Mr. PATMAN. You will admit it is required by law? Mr. HAYES. I don't admit anything. Mr. PATMAN. Anything, all right, fine. That is a good way to put it. Mr. MOORE. He used the term, Mr. Chairman, "Not at this time." Do you anticipate the filing of the particular form about which the Chair inquires? Mr. HAYES. If the law requires it, we will do so at the proper time. Mr. MOORE. The question was asked in that context. Mr. HAYES. Yes. Mr. Moom~. Your answer was also given in a way which would in- dicate that that is what you intended to do, if required. Mr. HAYES. Correct. Mr. MOORE. You didn't respond. Mr. HAYES. Well, I am sorry. Mr. PATMAN. You stated that you hadn't filed a 990-A tax return. Now who advised you that ABC does not have to file a tax return form 990-A? Mr. HAYES. At the present time we are awaiting for a ruling from the Internal Revenue Service on the point. Mr. PATMAN. Did you ask for a ruling? Mr. HAYES. No. Mr. PATMAN. How do you expect a ruling if you haven't asked for it? Mr. HAYES. The Internal Revenue Service at this time is looking into the matter. Mr. PATMAN. Why are they looking into it? Mr. HAYES. This I don't know. Mr. PATMAN. You just don't know. You didn't make any applica- tion for a ruling? Mr. HAYES. No, we did not. Mr. PATMAN. And yet you are expecting one. Who advised you not to file the form? Mr. HAYES. As a trustee I can't reveal that. Mr. PATMAN. Does ABC have assets? Mr. HAYES. I can't reveal that, sir. Mr. PATMAN. How did ABC acquire those assets and from whom? Mr. HAYES. This is a question as a trustee I can't reveal. Mr. PATMAN. What is the asset value of ABC? Mr. HAYES. I cannot reveal that as a trustee. Mr. PATMAN. Has any member of ABC ever asked the ABC trustees to furnish him a financial statement, that is a statement of income and disbursements as well as a balance sheet? Mr. HAYES. Not to my knowledge. Mr. PATMAN. Has there been any request such as that? Mr. HAYES. As trustee. Mr. PATMAN. What type of tax return, if any, has ABC filed for its first year of operation? Mr. HAYES. What type? PAGENO="0043" 39 Mr. PATMAN. What type of tax return has ABC filed for its first year of operation? Mr. HAYES. At this time, Mr. Chairman, we have not filed such a statement. Mr. PATMAN. You are still waiting for that rulmg that you didn't~ ask for. Mr. HAYES. Correct. Mr. PATMAN. Have you filed any kind of tax return of any kind? Mr. HAYES. We have not. Mr. PATMAN. You have not, okay. How much Federal income tax has ABC paid since the date it was organized? If you haven't filed a return you evidently haven't paid anything. Mr. HAYES. I can't reveal that. Mr. PATMAN. You can't reveal it. Mi. HAYES. That information. Mr. PATMAN. How much `State income `and `other taxes has A'BC paid since the date it was organized? Mr. HAYES. Since this involves operations of the trust, as a trustee I can't reveal that information. Mr. PATMAN. How much local taxes such as real esta'te, has ABC paid since the date it was organized? Mr. HAYES. I can't reveal that as a trustee. Mr. PATMAN. Does ABC consider that it is exempt from paying gas- oline taxes? Mr. HAYES. I can't reveal that information as trustee. Mr. PATMAN. Well, you either pay gasoline taxes or don"t, `as `a foun- dation. Do you pay them or do you not pay them? Mr. HAYES. I can't reveal that information as trustee. Mr. MOORE. Have you made application to the appropriate `State agency for recoupment of any gasoline taxes paid by you as `trustee of this organization? Mr. HAYES. Again, sir, I `can't reveal the operations of the trust. Mr. Mooim~. Have you ever executed an application for recoupment of gasoline taxes paid to the State of Illinois? Mr. RAY. May I ask `a question of the committee? Wh'at does this line of questioning h'ave `to do with the purposes? Mr. MOORE. We haven't gotten very far with anything else so we might as well try this for awhile. All we want is an answer. Mr. RAY. I would like to `know how this applies to the purpose for which this committee was formed. Mr. MOORE. We are inquiring about tax-exempt organizations and their claims for recoupment. Mr. PATMAN. About gasoline right now only. Mr. MooRE. T'hat is right. Mr. HAYEs. I am sorry, sir, I cannot reveal this information. Mr. PATMAN. All right, that is all right. How many of the members of ABC have applied for Federal tax exemption, do you know? Mr. HAYES. I don't know the `answer to that one. `Mr. PATMAN. And if you did know you wouldn't reveal it? How many of those applications for tax exemption have been refused by the Internal Revenue Service? Mr. HAYES. I don't know. PAGENO="0044" 40 Mr. PATMAN. I have `here a list of 63 foundations which are allegedly members of ABC. I now hand you a copy of that list and ask you to read to the committee each of them that is a member of ABC. You need only read the name, city, and State. I have the list before me, so it start's off with the-would you identify any of them as members of ABC? (The list referred to follows:) NAME AND ADDRESS Barbara Wright Adams Foundation, P. 0. Box 1753, Newport Beach, Cali- fornia. The Alentar Foundation, Santa Fe Springs, `California. Kenneth B. Bernd Foundation of California, 541 Farmer's Lane, Santa Rosa, California. Stephen A. Duff Foundation, 1104 Irwin, San Rafael, California. The Fahy Foundation, 6 Rivo Alto Canal, Long Beach, California. S. 0. Forjays Foundation, 12501 Christy Lane, Los Alamitos, California. Foundation for Economic and Social Progress, 2812 Tigertail Drive, Rossmoor, California. Harkae Foundation, 55 Rosewood Drive, Atherton, California. David Heersink Foundation, 913 W. Roseburg Avenue, `Modesto, California. Husted Foundation, 12540 Hawthorne Boulevard, Hawthorne, California. Ives Foundation, 484 Clover Crest Drive, Cloverdale, `California. Johnson Foundation of `California, 801 Rosemout Road, Oakland, California. Carol Terrell H. Root Foundation, 1879 Newport, Costa Mesa, California. Les'ter M. Wyatt Foundation, 4228 5. Main, Sebastopol, California. Forensic Science Institute, Vivian Hotel, 1723 G Street NW., Washington, D.C. Americans Building Constitutionally, P. 0. Box 575, Barrington, Illinois. D. W. Anderson Foundation, 59 E. Downer Place, Aurora, Illinois. Chandler Foundation, 4901 Main Street, Downers Grove, Illinois. Robert W. Draege Foundation, Mount Vernon, Illinois. M. J. Harris Foundation, 742 W. Dempster, Mount Prospect, Illinois. R. D. Haye's Family Foundation, P.O. Box 575, Barrington, Illinois. Herbert M. Hines Foundation, 2114 N. Elmwood, Waukegan, Illinois. J. W. Hines Foundation, 2403 Cherry, Mount Vernon, Illinois. L. J. Hines Foundation, Whittington, Illinois. 0. V. `Hoskins Foun'dation, Mount Vernon, Illinois. Dr. Julia Hussman Foundation, 15 Park & Shop, Elk Grove Village, Illinois. Dr. Lother H. Hussman Found'a'tion, 111 5. Northwest Highway, Palatine, Illinois. Jefferson County Research Associated, 1101 Broadway, Mount Vernon, Illinois. Kellogg Foundation, Yorkville, Illinois. J.D. Kirk Foundation, 308 N. Forrest Avenue, Oak Park, Illinois. J. F. La Lum'ondier, Sr. Foundation, 107 South 20th, Mount Vernon, Illinois. J. Alton Lauren Foundation, 53 West Jackson Boulevard, Chicago, Illinois. Olarice McWilliams Foundation, do Americans Building Constitutionally, P.O. Box 575, Barrington, Illinois. Roy D. Massne~ Foundation, 4901 Main Street, Downers Grove, Illinois. S. B. K. Foundation, 675 5. Plum Grove Road, Palatine, Illinois. Sales Analysis Institute Foundation, P.O. Box 575, Barrington, Illinois. Dr. H. Lee Sargent Foundation,' 200 Brentwood Drive, Des Plaines, Illinois. Saxon Foundation, 143 5. Lincoln Avenue, Aurora, Illinois. Russell Spencer Foundation, Thompsonville, Illinois. Vernon Spencer Foundation, 602 South Russell Street, Marion, Illinois. Richard J. Stephenson Foundation, do Americans Building Constitutionally, P.O. Box 575, Barrington, Illinois. Tudhope Foundation, 511 Woodland Lane, Northfield, Illinois. Michael tishijuma Foundation, do Americans Building Constitutionally, P.O. Box 575, Barrington, Illinois. , Walsh Family Foundation, do Americans Building Constitutionally, P.O. Box 575, Barrington, Illinois. Wunsch Foundation, Yorkville, Illinois. " Massner Foundation, 130 B. 12th Street, Davenport, Iowa. H. E. Bolthouse Clinic, 2101 Peck Street, Muskegon Heights, Michigan. R. 0. Hayes Foundation, 4340 Crest Knoll Drive, Grand Blanc, Michigan. PAGENO="0045" 41 Mark D. Julian Foundation, 862 Juneau Road, Ypsilanti, Michigan. Lininger Foundation for Educational Exchange, West New York, New Jersey. J. T. C. Foundation, 210 W. 101 Street, New York, New York. Hough's Encyclopaedia of American Woods Foundation, Inc., 39 Gramercy Park, New York, N.Y. 10010. Philippa Schuyler Memorial Foundation, 270 Convent Avenue, New York, N.Y. The Foundation for the Advancement of the Civilizing Arts, New York, New York. H. G. Ferguson Foundation, 7103 Tifton Drive, Yakima, Washington. Glaspey Foundation, Yakima, Washington. Jere Irwin Foundation, Yakima, Washington. Layman Foundation, Union Gap, Washington. J. Orkney Foundation, 610 S. 32nd Avenue, Yakima, Washington. Syd Orkney Foundation, 2809 Summitview Avenue, Yakima, Washington. The Floyd Paxton Foundation, Yakima, Washington. Jerre H. Paxton Foundation, Yakima, Washington. Hap Robinson Foundation, 8503 Kail Drive, Yakima, Washington. Mr. HAYES. As trustee, Mr. Chairman, I am not at liberty to reveal any one of them. Mr. PATMAN. In other words, you have looked over the list, there are 63, and you are not willing, because you are trustee, to reveal the name of one of them that is a member of ABC; is that correct? Mr. HAYES. That is correct. Mr. Mooun. Even though you have heretofore testified that one or more of those listed in the chairman's question are members of ABC. Mr. HAYES. The only thing I have done, Mr. Chairman, is to testify ~o that which is public knowledge. Mr. MOORE. What is your answer to the question? Among these listed is the H. D. Hayes Family Foundation. Are you now refusing to disclose whether or not it is a member of ABC, even though you had previously indicated to us that it was? Mr. HAYES. Yes, I will not reveal that information. Mr. PATMAN. Let me ask you this question: 48 of these 63 founda- tions have failed to respond to our request for information regarding their history and operations. Have ABC officials-and you are the top man so I assume that you would know-advised them not to respond? If not, who has? Mr. HAYES. I don't know the answer. Mr. PATMAN. You haven't advised them not to respond? Mr. HAYES. No, sir. Mr. PATMAN. Almost one-half of these 63 donor-foundations are re- ported to have pledged grants to the Philippa Schuyler Memorial Foundation, according to a press release issued by this foundation on July 16, 1967. You and other ABC officials were active in the formation and endowment of the Philippa Schuyler Memorial Foundation; is that correct? You were interested in founding it. You helped to found it. Mr. HAYES. Personally I was interested; yes, sir. Mr. PATMAN. Yes, sir; so that is correct. In view of the fact that you helped form this Schuyler Foundation, how do you explain the fact that you can't identify the members of ABC on that list of 63 founda- tions which I just handed you? I handed you a list of 63 and the name of that foundation is on there, and you refuse to identify even one of them. Mr. BAY. He did state that in his previous testimony he had identi- fied that which was public knowledge, which was the Philippa Schuy- ler Foundation. PAGENO="0046" 42 Mr. PATMAN. There is another one, that Hough's Encyclopedia. Mr. RAY. We were not aware~ Mr. PATMAN. At this point I shall insert in the record a copy of ABC's declaration of trust, which was filed in Lake County, Ill., on July 15, 1966. It will be in there for the members to see in the morning. (See exhibit 2 in appendix, p. 936.) Mr. RAY. May I have the original? Mr. PATMAN. The original of what? Mr. RAY. Of that trust. Mr. PATMAN. No, it is in the court record. It goes in our record. Now, then, we have- Mr. CONTE. Mr. Chairman, in regard to that trust, may I ask a ques- tion? Mr. PATMAN. Yes, sir. Mr. CONTE. Mr. Hayes, what is there in this trust that prevents you from answering any of these questions that. the chairman has asked? Mr. HAYES. The trust speaks for itself. Mr. CONTE. I have read the trust statement.. I can't find a thing in here. Can you point out anything here that prevents you from answer- ang any of these questions? Mr. HAYES. Any trust- Mr. CoNTE. You point it out. Read it. Read for the record where there is something in this trust that prevents you from answering any of these questions that have been propounded to you by the chairman. Mr. HAYES. The secrecy or the privacy applies to all trusts. Mr. CONTE. That isn't so. You have a declaration of trust here, which has been filed, I imagine, with the State of Illinois, and it specifically spells out the terms of the trust. I have read it over several times, and I find nothing in the trust itself which gives you a license for secrecy before this committee here today, or any committee. I am asking you for the record to read it from the trust. Mr. RAY. May Mr. Chartier be permitted to answer your question, Mr. Conte, on behalf of Mr. Hayes? Mr. MOORE. He has been identified as his consultant. Mr. CONTE. Fine. Mr. CHARTIER. In a trust, whether it is made between you and I or a group of people, is a matter of trust. It means just exactly what it says. It is a trust, and a trustee who is placed in charge of that trust and the activities of that trust, if he violates that trusteeship, he has violated a very sacred trusteeship. It doesn't have to state it directly, Mr. Conte, I mean in the body of the trust. If you make an agreement with a bank to the effect that they will keep your records secret- Mr. PATMAN. Where is that agreement in that. trust? Mr. CHARTIER. It is not. It isn't necessary to be in any trust. It is a matter of accepted policy in a trust or in an agreement.. Mr. CONTE. I think you are reading something into the trust that isn't there. Have you had any understanding with the membership that this information will be kept secret? Mr. CHARTIER. That, you will have to ask Mr. Haves. Mr. C0NTE. Mr. Hayes? Mr. HAYES. Yes; there is such an understanding. Mr. CONTE. When? What date was that? PAGENO="0047" 43 Mr. CHARTIER. Mr. Conte, I might call your attention to the opera- tion of life insurance in the United States. Mr. CoN~uJ~. We are not talking about life insurance now. Mr. CHARTIER. Excuse me, sir, we are talking about contracts. Mr. CONTE. We are talking about a trust. Mr. CHARTIER. Excuse me, sir, a trust agreement is a contract be- ~ween the grantor and the trustees. Mr. CONTE. All right. Mr. CHARTIER. All right. Now, if you were to go to Metropolitan Life Insurance Co. and ask them the status of my life insurance con-j tract, you would play thunder getting it, because that is a trust that has been empowered to that company, and I can handle them every day in the week if they violate that trust. They cannot give out that information. Mr. CONTE. I am sure that if any reliable, old-line, insurance corn- pany was subpenaed before this committee to bring their records here, they would bring them, because they wouldn't have anything to hide. This is what I can't understand: why you are not bringing them forth. Mr. CI-IARTIER. Of course, the fact that this man is carrying out his trusteeship, you are construing it as having something to hide. Mr. CONTE. How else can I construe it? Mr. CHARTIER. Aren't you going a little far afield? Mr. CONTE. What is that? Mr. CHARTIER. Aren't you going a little far afield in that respect? Mr. CONTE. I don't think so. I think the subpena was very clear. Mr. CHARTIER. Right. Mr. CONTE. I believe you are hanging your hat on a very flimsy excuse not to bring forth this necessary evidence here today. Mr. CHARTIER. That is your opinion. Mr. CONTE. I can't draw any other conclusion. Mr. CHARTIER. In your opinion it is flimsy. Mr. CONTE. Why is it flimsy? Mr. CHARTIER. I say in your opinion it is flimsy. In our opinion it is not flimsy at all. Mr. CONTE. We could argue that point. Mr. CHARTIER. True. Mr. PATMAN. Go ahead, Mr. Morton. Mr. MORTON. In this question of helping people with their constitu- tional rights, are you in any other educational field other than that dealing with foundations? Are you in the business of educating people so that they can better handle their civil rights or their civil liberties that have nothing to do with foundations? Mr. HAYES. One does lead to the other, I think. Mr. MORTON. I didn't ask you whether or not one went to the other. I asked you whether or not you are in that business. Are you in the business of educating people, for example, in the question of their civil rights, in matters where segregation or integration might be involved? In other words, is the scope of your business beyond the limitations of education for the setting up of monetary foundations? Mr. HAYES. Yes. Mr. MORTON. This may not be so secretive. Tell us a little bit about it. Mr. HAYES. The purpose-may I repeat the purpose clause again as stated both in my previous statement and also as a part of our docu- PAGENO="0048" 44 ment that the purpose of ABC is to help American citizens, citizens of the United States, make full use of the rights guaranteed them under the Constitution. Mr. MORTON. That is exactly what I thought you said in the first place. Mr. H~n~s. Yes. Mr. MORTON. One of the ways you are helping educate people is so they can set up their financial affairs to this end. Is this not correct? Mr. ]EL~n~s. Of course, the answer to that is we want to make them. aware of what they can do within the law to benefit mankind and thereby earn tax advantages. Mr. MORTON. In other words, you are limited to the thereby earned tax advantages. Mr. HAYES. No, we are not. The purpose as stated is quite broad and I think quite clear. Mr. MORTON. I think it is pretty clear too. I can't understand why all the secretive attitude. I have sort of a trusteeship going with my district, but if I were as secretive with my people as you are with the Congress of the United States, I'd be in a bad fix. Do you have any business in ABC other than helping people set up tax-free trusts or tax-free foundations? Do you get into some of their other rights under the Constitution? Mr. Mooiu~. You don't deal and advise in domestic relations, I assume. Mr. HAYES. I beg your pardon. Mr. Mooiu~. You don't give advice in the domestic relations field or anything like that. Mr. HAYES. I don't know. I might add that I think some of the information we give has that effect, yes. Mr. PATMAN. Any other questions, Mr. Morton? Mr. MORTON. No, Mr. Chairman. (Discussion off the record.) Mr. PATMAN. The House will be in session in a very few minutes. The committee will have an executive session before tomorrow morn- ing I hope in which we will discuss the attitude of this witness, but tomorrow morning at 10 we hope to have Mr. Hayes back and Mr. Walsh at 10 o'clock. Without objection, the committee will stand in recess until 10 o'clock tomorrow morning here in this room. (Whereupon, at 11 :55 a.m., October 30, 1967, the subcommittee re- cessed until Tuesday, October 31, at 10 a.m.) PAGENO="0049" TAX EXEMPT FOTJNDATIONS: THEIR IMPACT ON SMALL BTJSINESS TUESDAY, OCTOBER 31, 1967 HOUSE OF REPRESENTATIVES, SUBCOMMITI'EE No. 1 OF THE SELECT COMMITTEE ON SMALL BUSINESS, Washington, D.C. The subcommittee met, pursuant to recess, at 10 :05 a.m., in room 2359 Bayburn House Office Building, Hon. Wright Patman (chair-. man of the subcommittee) presiding. Present: Representatives Patman, Corman, Irwin, Moore, Conte,. and Morton. Also present: H. A. Olsher, director, Foundations Study; Myrtle Ruth Foutch, clerk; and John J. Williams, minority counsel. Mr. PATMAN. The committee will please come to order. Mr. Hayes, on October 30, 1967, Mr. Herman E. Kimsey, presi- dent, Forensic Science Institute, Washington, D.C. gave us a signed statement to supplement his letter to us of October 24, 1967, which reads as follows: On July 12, 1967, I received a check from Americans Buildings Constitutionally in the sum of $10,500 with their stipulation that it be applied for membership of Forensic Science Institute in Americans Building Constitutionally. This check was endorsed by myself and returned to their records and entered in Forensic Science Institute's records with the copy of the membership application. This. sum does not appear in financial statements elsewhere in Forensic Science In- stitute's records as it was never entered as a deposit in the Foundation's books.. How do you explain that, Mr. Hayes? TESTIMONY OF ROBERT D. HAYES, TRUSTEE OF THE AMERICANS BUILDING CONSTITUTIONALLY, A NOT-FOR-PROFIT TRUST, ACCOMPANIED BY K. P. CHARTIER, COUNSEL TO MR. HAYES; WILLIAM C. RAY, 3~R., COUNSEL TO MR. HAYES; AND ROBERT A. ERIE, ADMINISTRATIVE ASSISTANT TO MR. HAYES, Resumed Mr. BAY. Is there going to be a quorum of the committee or one member? Mr. PATMAN. Listen, you are not running the committee, you know. You are a lawyer and you have a right to represent your client and I will respect you as such and make sure that you are given every right within my imowlecige. But now, this other is committee business, you know, and that is- Mr. RAY. May If have it entered in the record that there is not a quorum present? 45 87-444----68----4 PAGENO="0050" 46 Mr. PATMAN. You don't even know, probably, what a quoriun is, do you? How many is a quorum? Mr. OLSHER. Does he know whether a quorum is required? Mr. RAY. I believe it is. Mr. PATMAN. I do not want to be sharp with you, but we do not want any unnecessary or unusual delays here. How do you e~plain that, Mr. Hayes? That looks like kind of a game-wherein you are sending out checks, $10,500, and asking them to send it back to you in payment of their fee, $10,500, is that correct or not? Mr. RAY. Mr. Chairman, before Mr. Hayes answers that question, may I be permitted to speak? Mr. PATMAN. If you object to him answering it, and state your reasons, it will be all right. Mr. RAY. I do. Mr. PATMAN. Anything that a lawyer should do. Mr. RAY. I do object, sir. Mr. PATMAN. What are your objections? Mr. RAY. It is my understanding that this committee is acting in a representative capacity of the House of Representatives. Mr. PATMAN. Just state your objections. Yes. Mr. RAY. And the Congress of the United States. I have Public Law 89-487 of the 89th Congress, Senate bill 1160. This bill was approved July 4, 1966, effective date 1 year following the date of the enactment of this act. Mr. PATMAN. 1~That does that have to do with this? Mr. RAY. I will get to that, sir. "To amend section 3 of the Admin- istrative Procedure Act, chapter 324 of the act of June 11, 1946, to clarify and protect the right of the public to information, and for other purposes." I quote: "Be it enacted by the Senate"- Mr. PATMAN. That is the Freedom of Information Act, the Moss bill. HOW does that have anything to do with this? Mr. RAY. I believe it very definitely applies, sir. Mr. PATMAN. In what way? In what way does it apply? Mr. RAY. I will make that clear. Mr. PATMAN. That is the Freedom of Information Act. That is, in other words, about secrecy. Mr. RAY. Let me make that clear. Mr. PATMAN. Yes. Mr. CONTE. They are experts on that, Mr. Chairman. Mr. RAY. I know I am not regarded as an expert, Mr. Conte. Mr. CONTE. On secrecy. Mr. PATMAN. He means on secrecy. Mr. RAY. Section 3 of that bill says, "Every agency shall make avail- able to the public the following information: (a) Publication in the Federal Register," and it goes on to state what every committee must make public. Mr. PATMAN. We are not failing to make thin2s public. \~\Te are niaking things public that you are not making public. Mr. RAY. I would like to relate o the exceptions, exemptions, as they are called in section F, subsection (e). PAGENO="0051" 47 Mr. PATMAN. Listen, you cannot take up our time this way. That really does not relate to this. Mr. RAY. I believe they do. The exemptions state that "The pro~ visions of this section shall not be applicable to matters that are"- and I will quote subsection (4). Mr. PATMAN. I want to show you all due respect as a lawyer repre- senting your client. You have a right to speak up, but you have got to say something and say why. Mr. RAY. I am, sir, if you will permit me. Mr. PATMAN. I know, but it does not relate to this. You might as well be talking about the moon shots. Mr. RAY. The exemption states that no citizen may obtain infor- mation with regard to trade secrets and commercial or financial infor- mation obtained from any person and privileged and confidential. Subsection (6) states that personnel and medical and similar files, the disclosure of which would constitute a clearly unwarranted in- vasion of personal property, privacy, cannot be received, and subsec- tion (8) says, "that contained in or related to examination, operating, or condition reports prepared by, on behalf of, or for the use of any agency responsible for the regulation or supervision of financial institutions." None of that information is available. Mr. PATMAN. Of course your objection is overruled. I am acquainted with that law. It does not touch this. Now I will ask Mr. Hayes- Mr. HAYES. You are going to overrule my objection? Mr. PATMAN. Yes; overruled right now. Mr. RAY. And that this information is going to be made public? Mr. PATMAN. Just what you said will be put in the record. Mr. RAY. All right. Mr. PATMAN. And I hold it does not relate to this at all. Mr. RAY. You hold that? Mr. PATMAN. It is not germane to it. Mr. Hayes, are you willing to answer this question or do you want to take the fifth amendment, or do you want to refuse? Mr. CONTE. Mr. Chairman, may I ask a question at that point? Mr. PATMAN. Yes, sir. Mr. CONTE. Are you insinuating that you would be willing to give us this information in executive session? Mr. RAY. No, sir. I am not. I am saying no American citizen can obtain that information from a con'imittee or the U.S. Government, and that that information should not be made public. Mr. CONTE. I agree with the chairman; your objection should be overruled. Mr. RAY. It is an invasion of the personal privacy of these in- dividuals. Mr. PATMAN. Mr. Hayes, are you going to answer the question that I asked you? Mr. RAY. As trustee of ABC, I believe Mr. Hayes will have to stand on his rights. Mr. PATMAN. Well, of course, I asked Mr. Hayes that question. If he wants to give a reason for not answering it, it is up to him to do it. Mr. HAYES. On advice of counsel, I stand silent. PAGENO="0052" 48 Mr. PATMAN. Of course, this is signed by Herman E. Kimsey, presi- dent of the Forensic Science Institute, Vivien Hotel, 1723 G Street, N.W., Washington, D.C., so there is no fake about this, and there is no doubt about it. This man says that you sent him a check for $10,500 to send back to you in payment of the fee, I believe, for his association or foundation to belong to ABC, and you refuse to say whether or not that was done? Mr. RAY. Mr. Chairman- Mr. PATMAN. Let him answer. He is the witness. Mr. }IAn~s. I refer that to counsel, Mr. Chairman. Mr. RAY. Do you not believe that the ultimate question here is whether this investigation will deprive citizens of the due process of law under the 14th amendment by invading their right to privacy. Mr. PATMAN. All right, at the right time you will have an oppor- tunity- Mr. RAY. Will you please overrule my question or objection ? Mr. PATMAN. Yes, I will overrule it right now; yes. Mr. RAY. Thank you. Mr. PATMAN. Now, then, how does ABC recruit members? in other words, how do you sell the ABC plan, Mr. Hayes? Mr. HAYES. Mr. Chairman, ABC does not sell anything. ABC- Mr. PATMAN. It collects something for doing something, $10,500 each. You are surely going to do something- Mr. HAYES. That is correct. Mr. PATMAN. What do you do for it? Mr. HAYES. We teach and educate. Mr. PATMAN. Educate in what? Mr. HAYES. In the purpose that I described yesterday. Mr. PATMAN. All right. Do you sell this plan, ABC plan, by the way of seminars? Mr. HAYES. No, we do not sell it. Mr. PATMAN. Do you present it in seminars? Mr. HAYES. 1~\Te present it in seminars, yes, sir. Mr. PATMAN. We have heard about the introductory meetings. What is an ABC introductory meeting? Mr. HAYES. An introductory meeting is a form of seminar which may be conducted and usually is conducted by one of our members. Mr. PATMAN. What is the content of the presentation? Do you have a pitch, a type of statement where you cover certain points, or do you have a prepared statement to present to people who are assembled for the purpose of gaining this information, gaining knowledge about this information? Mr. HAYES. We, in these presentations of which you speak. sir; we teach them their rights. Mr. PATMAN. Their rights as American citizens? Mr. HAYES. Correct. Mr. PATMAN. Is the material presented by speakers or do you use films, also? Do you use films, charts? Mr. HAYES. We also use a film; yes, sir. Mr. PATMAN. You use film? Do you have the films available? Mr. HAYES. Yes. Mr. PATMAN. We would like to have a copy. Mr. HAYES. We would be glad to send you one, sir. PAGENO="0053" 49 Mr. PATMAN. Fine. Be sure and do that. What percentage of sales do you get when you conduct these semi- nars? In other words, if you have a hundred people attending a semi- nar, what percentage of those people buy the ABC plan, based on your past experience? Mr. HAYEs. This would, of course, be a question of how many people wish to become members. Mr. PATMAN. That is right. Mr. HAI-ns. And it would be very difficult for me to- Mr. PATMAN. Based on your past experience, about how many? WTould half of them or a quarter, 25 percent? Mr. HAYES. I think rather a high percentage. Mr. PATMAN. Ninety percent? Mr. HAYES. I hesitate to state a specific percent. Mr. PATMAN. Ninety percent. Mr. HAYES. I think so. Mr. PATMAN. And do they all pay $10,500? Mr. HAYES. No. Mr. PATMAN. Some of them pay a smaller amount? Mr. HAYEs.' Correct. Mr. PATMAN. For the five types of service? Mr. HAYES. Various types of membership; yes, sir. Mr. PATMAN. I have here a copy of ABC course material which has been used in California to recruit applicants for membership in ABC. I shall comment on it, first place it in the record, and then comment ~on it. (See exhibit No. 3, appendix p. 946.) Mr. PATMAN. The exhibit 1, the primary purpose of Americans Building Constitutionally, this, of course, is probably 50 or 60 pages or more, and certainly I shall not attempt to read it, but I do want to just bring ot~t some important facts. Mr. RAY. Mr. Chairman, may I ask if that has the ABC copyright `Oil it? Mr. PATMAN. Yes, it has, but it does not mean a thing. It does not mean a thing at all. Mr. RAY. Is that Mr. Douglas Fay's presentation of ABC's? Mr. PATMAN. ABC and it's copyrighted by ABC, but it does not mean anything to this committee. We are going to put it right in the record. First I will read this statement here. That selling material that I have just put in the record contains as gross a piece of misrepresenta- tion as has ever been conjured up. For example, you have taken ma- terial out of our studies, this committee's studies, `and created the impression that I approve and the other members of the committee approve of the abuses of the tax-exempt privilege. I shall not take the time to go into `all of those misrepresentations, but I shall give you one example. On page 2, under item A-2, you quote our 1962 study as follows: 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 control of heirs or their trustees. This enables a few individuals to control ever-increasing tax-exempt wealth. PAGENO="0054" 50 You, of course, failed to include the language I used just ahead of that quote and just back of that quote which expresses strong disap- proval of such control. My language just ahead of that quote reads as follows: Obviously, tax-exempt foundations 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 without limitations. Just back of your quote I said as follows: Foundations today bear a frightening resemblance to the bank holding com- panies that were invented by the champions of monopoly and combination in the early 1900's. Mr. RAY. Mr. Chairman, you will admit that we did correctly quote you in that sentence. Mr. PATMAN. Out of context, yes. That is often done to mislead people, out of context. 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. In my view, this is a dangerous situation with its boundless temptations and opportunities. I do not agree with the cheerful philos- ophy that the `situation will right itself. The law must properly safeguard the community against possible abuses of the tax exemption privilege by the "owners" of foundations or their successors. Does this sound to you as though I approve of perpetual control of business enterprises by tax-exempt foundations? Mr. RAY. Sir, we don't believe you do. Mr. PATMAN. I am not asking you. I am asking the witness. Mr. HAYES. I believe, Mr. Chairman, we no doubt but that you disapproved what you described there as having been done. Never- theless, you agree that it is being done. Mr. PATMAN. I know, but you didn't put what was before it or after. You used it out of context, which leaves an entirely different impres- sion. Mr. HAYES. This may be true. Mr. PATMAN. Yes. Mr. HAYES. But it is legal to do what is being done? Mr. PATMAN. Well, I am not testing the legality of it. That ques- tion doesn't occur to me at all. It is possible that you could do that. It is often done. You can take statements of people if they say much, write books, you can grove they are Communists, Fascists or any- thing else by taking things out of context, and of course some people do that, but it is not fair, do you? Mr. HAYES. I think it is fair, Mr. Chairman, to let the public know what is being done by the big foundations, and that it is also fair to let the little ones know that they can, too, do that. Mr. PATMAN. That is right. Mr. HAYES. That is one of the points- Mr. PATMAN. From your viewpoint that is what you say. Mr. HAYES. That is one of our points that we wish to make very clear here. Mr. RAY. Mr. Chairman, our own public- 1~'Ir. PATMAN. Wait just a minute. I want to describe this publication here. This is the exhibit 1, the primary purpose of Americans Build- ing Constitutionally, ABC, a trust, to help citizens of the United PAGENO="0055" 51 States make full use of their rights guaranteed them under the Con- stitution. Then exhibit 2,1 will just read part of this: The United States has spent over $700 billion since 1946 to fight the cold war, to prevent the spread of communism. This is more than the United States has spent in fighting all the hot wars including the War of Independence on up through World War II. Then it goes ahead to state what the results were, and about the average businessman paying 63 cents out of every dollar of income for taxes. You firstsay here: Today the average American pays 41 cents out of every dollar of income for direct and indirect taxes. He must work over 2 days out of every 5 for the Government before be can pay his own grocery bill or clothe his own children. Then you say: The average businessman pays 63 cents out of every $1 of income for taxes. He works 3 days out of 5 to pay his taxes before he can feed his family and clothe them. In one paragraph there you say he works 2 days, and in the next paragraph, 3 days. I don't understand that. Mr. ILA~I~s. May I explain tha.t, sir? Mr. PATMAN. Yes, sir, you may. Mr. HAYES. The reference to 2 days out of every 5 applies to the average American citizen. The second part of the statement applies to the average businessman. Mr. PATMAN. All right, I will take your explanation. Mr. HAYES. There is a difference. Mr. PATMAN. I will go through this hurriedly. Then in exhibit 4 you state to your seminar "what can be done, what can you do." Then you talk about how national security depends upon economic strength, and the ability of individuals to benefit from this work, and you make a statement, a pitch leading up to your main pitch here I assume. And you refer to the attitude of Government toward private foundations taken from congressional investigations of foundations by the congres- sional committee. And then you have another question in this connec- tion taken from the U.S. Treasury Department report on private foun- dations, and then you refer to benefits of NFP foundation procedures. What is NFP foundation procedures? Mr. HAYES. Not for profit. Mr. PATMAN. Not for profit foundation, and yours is not for profit, your foundation, ABC. Mr. HAYES. Yes, sir. Mr. PATMAN. And what about the people that you organize founda- tions for? They are not for profit? Mr. HAYES. Correct. Mr. PATMAN. Although they educate their children. Mr. HAYES. We don't organize them. Mr. PATMAN. You don't organize them. Mr. HAYES. I want to make that clear. Mr. PATMAN. And you stat.e here that they can do this. EXHIBIT 1 1. Benefits of N-F-P Foundation Procedures. A. Personal arid Family Benefits PAGENO="0056" 52 WHAT CAN BE ACCOMPLISHED BY CREATING A FOUNDATION? 1. Keep control of wealth. 2. Can keep for the donor many attributes of wealth by many means: (a) Designating the administrative management of the foundation. (b) Control over its investments. (c) Appointing relatives as directors of the foundation. (d) Foundation's assets can be used to borrow money to buy other property that does not jeopardize its purposes. Thus, foundation funds can be enhanced from the capitalization of its tax exemption. 3. The foundation can keep income in the family. 4. Family foundations can aid employees of the donor's business. 5. Foundations may be the method of insuring that funds will be available for use in new ventures in business. 6. We can avoid income from property while it is slowly being given to a~ foundation by a combination of a trust and the charitable foundation. 7. We can get the 20% charity deduction in other ways: (a) By giving away appreciated property to the foundation, we escape a tax on the realization of a gain. (b) We can give funds to a foundation to get charitable deduction currently in our most advantageous tax year. (c) Very often local personal and real property taxes can be avoided. (d) We can avoid speculative profits. (e) We can give away valuable "frozen assets," white elephant es- tates, residences, valuable works of art, and collections of all arts."- Chairman's Report to the Select Committee on Small Business (Patman Re- port) House of Representatives, 87th Congress (1962) page 17. This is a quote from Cleveland Marshall Law Review. Then, there is retention of control within the family. Then you dis- cuss perpetual family control and closed corporations. I just want to read two or three lines on that: Closed Corporations.-Perhaps the greatest advantage is afforded closed cor- porations. Through the use of a foundation the operator of a closed corporation may be able to keep voting control of the corporation in the family after the death of the principal stockholder. And then you tell them how to pay salaries to family. In other words, according to the way you explain this, foundations may hire people to work in political campaigns. Do you know of cases like that? Mr. HAYES. No. Mr. PATMAN. You don't know of any. Mr. HAYES. No case. Mr. PATMAN. Do you know of any cases where foundations have paid alimony to former wives? Mr. HAYEs. I do not. Mr. PATMAN. There are cases where not only one wife has been paid alimony from foundation funds without expense to the donor but as many as five ex-wives have been paid that way. Mr. HAYES. Mr. Chairman, we don't recommend that, and we never have. Mr. PATMAN. You don't say it can't be done, according to your statement. Mr. HAYES. It may be done. Do you say it is being done? Mr. PATMAN. I am sure it is being done. We will bring that out later. Mr. HAYES. All right. I would like to- Mr. PATMAN. You can rest assured that foundations are being used for many purposes, including campaign workers and paying alimony to ex-wives. And, according to your statement, remote relatives may PAGENO="0057" 53 be employed in the business, friends may be assisted, and business acquaintances may be accommodated. When we first started this thing, I saw one poop sheet ,~here a lawyer said. that a foundation wits `a good device for taking care of sorry relatives, if you happen to have any. Here you say you can "make grants not constituting income to family"; "look after family's pet charities or worthy causes"; "income splitting through salaries to family members"; and "use of foundation to improve your family's cash position.." All these are explained. I am just reading the hQad- ings: REDUCE ESTATE TAX 1. The family may remain in full voting control. 2. The family has a pleasant partner, managed by gentle hands. 3. The family may reap the benefit of any increases in the value of the equity. 4. If further inflation should come, it is the family which can become entitled to receive the benefit of the increase in monetary value of the company. 5. No working capital is lost by the venture; and 6. The foundation may even be used as a vehicle for the employment of asso- ciates and . relatives. House Report No. 2681-83rd Congress, Second Session, 1954, Page 6. Most useful, provide non-income corporation fringe benefits to family-employ- ees which reduces need for drawing taxable salary. Foundations may provide health insurance for an employee-family member. IRO 105 A foundation employee may live rent free. The Treasury department has this to say: The value of lodging furnished to an employee by an employer shall be ex- cluded from the employee's gross income if three tests are met: (1) the lodging is furnished on the business premises of the employer. (2) the lodging is furnished for the convenience of the employer. (3) the employee is required to accept such lodging as a condition of em- ployment. Regs. § 1.119-1(b) Not only may a creator draw benefits from his controlled foundation, but he may also draw benefits from `a foundation owned or controlled business corpora- tion. The corporation may `be used to satisfy dominant individual's desires, ranging from furnishing his home to allowing excessive `executive compensa- tion.-U.C.L.A. Law Review, May, 1966. Page 951 Business corporations can accumulate income since former Shareholders may, be employed at adequate salaries. Properly done you may even arrange for `an annuity to a family member of foundation. Use it to take advantage of high appreciation of assets. Use Foundation funds for investment to increase wealth under your control. The Foundation may provide "friendly" lo'an's. Benefits in operating business resulting from control over an exempt foundation. Keep control in friendly hands over the generations. Provide through deductions or other arrangements for reduction of corporation tax but keep money available. Provide "good-will" assistance to keep workers happy. Use it as source of "friendly financing" from tax-free accumulations. Foundation's name on public service activities can create good will for business (e.g., Ford Foundation & Ford Motor Company). Foundations can accumulate income and income so accumulated not subject to surtax and may be used for internal improvements. It is many times the case that a `business may be itself operated as an exempt organization. Favorable Postage Rate. May be exempt from certain state taxes, e.g., sales and realty taxes. An exempt organization may be eligible to receive surplus government propert y. A foundation need not pay social security tax, (i.e., the Federal Insurance Contributions Act). PAGENO="0058" 54 An exempt organization can receive special fares on overseas flights. It tells who to contact and how to do it, and says this: Savings on such arrangements may be substantial. For example, round trip charter flights from New York to London or Paris are available for less than one-half the usual minimum for such a trip. Then you talk about "miscellaneous benefits" and you go ahead and give the benefits that are considered under miscellaneous. Then you mention "selected bylaws of private foundations." That is exhibit 3. That is gotten up for the person who joins, I assume; is that right, Mr. Hayes? Mr. HAYES. No. This is merely an illustration of what has been done in some cases, purely educational. Mr. PATMAN. In other words, you give the form that is used for that purpose, that has been used in the past for that purpose, to create private foundations. Mr. HAYES. No; it is not a form, sir. It is simply a case of some of the things that are included. Mr. PATMAN. All right. In other words, it is a suggestion for their guidance. Mr. HAYES. Mr. Chairman, before we get off of this- Mr. PATMAN. That is correct, isn't it? It is a suggestion for their guidance. Mr. HAYES. Yes. Mr. PATMAN. Yes. Mr. HAYES. May I give to you also some indications as to what comes through the mail across my desk? Mr. PATMAN. All right, now wait just a minute, before you bring that up. What does this mean here "The IROAB Foundation. The board of directors and officers of the ROAB foundation duly organized under the laws of the State of Illinois do hereby declare that has been elected a member of the foundation and is entitled to retain all of the rights, powers and privileges appertaining thereto." What does that IROAB mean? Mr. HAYES. That is the name of the foundation. Mr. PATMAN. What does the R, 0, A, and B stand for? Mr. HAYES. In this case I don't know. Mr. PATMAN. But anyway that is a suggestion there of the for1n that you will use; is that correct? Mr. HAYES. No; that is not correct. Mr. PATMAN. What is the use of this? Mr. HAYES. Merely an example, an illustration of how somebody may become a member of a foundation. Mr. PATMAN. All right. Now then, here are the bylaws of a civic club, and then you talk about things to be considered in your em- ployment contract." You seem to be pretty thorough on this, I will say that. Next is "What to do when approved charter is returned to you"- you tell them exactly how to handle it. And then "What to prepare for the first board meeting." Here, you have the material that discloses what should be done at the first board meeting and about the officers and their duties. Mr. HAYES. Am I to- PAGENO="0059" 55 Mr. PATMAN. Then you have exhibit 10, "the records which the Treasury requires of grantors." You give them information of the things you think they should know, even including a sample applica- *tion for grants to students for special training. Do you have a form for that? You remember that, don't you? Mr. HAYES. A grant? Mr. PAmIAN. Yes. Mr. HAYES. Yes, I do. Mr. PATMAN. Next is "What foundations can and can't do." Mr. HAYES. Right. Mr. PATMAN. That is exhibit 11. You prepared that, I assume, for the purpose of giving them information. Next is "What reports a foundation must make and under what conditions." In this, do you refer to 990-A at any time? Mr. HAYES. I beg your pardon. Mr. PATMAN. Do you refer to the necessity of filing a report known as 990-A? Mr. HAYES. Yes. Mr. PATMAN. It is a two page~ Mr. HAYES. If the law calls for it, that is correct. Mr. PATMAN. The law does call for it, doesn't it? The law does call~ for it? Mr. HAYES. In some cases. Mr. PATMAN. And then you have other forms here, such as "some, disadvantages of a not-for-profit corporation foundation." I will not go into it further since it will be in the record. I know other members want to ask questions and you wanted to bring up some point yourself. Mr. HAYES. Mr. Chairman, may I suggest that the text we gave you yesterday is an improvement over that one. Mr. PATMAN. It is? Mr. HAYES. Yes, sir. Mr. PATMAN. The one in the volumes that you presented to us. Mr. HAYES. Correct. Mr. RAY. It is the most recent edition. Mr. HAYES. It is the most recent edition. Mr. PATMAN. We will pass on the question whether it is an improve- ment or not. Mr. HAYES. Good. May I read you some of the things that come across my desk? Mr. PATMAN. Well, what is the object of it? Mr. HAYES. To show-I am agreeing with many of the things that you have, Mr. Chairman, in your statements. Both on the floor of the House of Representatives and in the statements that you have ob- jected to- Mr. PATMAN. I am not asking you and I don't care for any support from you on this. If you want to support me that is all right, but I am not asking for it. Mr. HAYES. All right. Mr. PATMAX. And it is not pertinent here. It is not appropriate. Mr. HAYES. I believe there is something here that is pertinent. May I read it, sir? Mr. PATMAN. Mr. Conte has asked to be recognized, and I will recognize him at this point first. Then I will come back to you later. Mr. MOORE. WTiI1 the gentleman yield? PAGENO="0060" 56 Mr. CONTE. Yes, sir. Mr. Moonu. Mr. Chairman, I see no reason why the gentleman shOuldn't be able to respond. Mr. PATMAN. I was waiting until you gentlemen asked questions and then we will come back to him and have him do that. Mr. Moomc. I have no questions, thank you. Mr. CONTE. Mr. Hayes, yesterday you refused to `disclose certain in- formation to this committee. A subpena has been issued. You further refused to answer' just about all the questions raised by the conunittee concerning ABC. Incidentally, I mulled over the real meaning of ABC last night, and I though you might change the meaning of it, instead of Americans Buildings Constitutionally to A Better Chance-to beat the income tax. Mr. H~s. I hadn't thought of that one but that is pretty good. Mr. CoN'ri~. You di'd this on the grounds that to supply the informa- tion or answer the questions would breach your trust as trustee of ABC to protect the privacy of your members. Is that correct? Mr. HAYEs. Correct. Mr. CONTE. Now Mr. Hayes, I ask you, What basis in law are you relying on which specifically gives you the right to claim this privilege of privacy? Is there any State law that gives you this right? Is there any Federal law? Are you claiming it under the Constitution, and if so, under what provision? Mr. HAYES. I refer that question to counsel. Mr. CONTE. Counsel may answer. Mr. RAY. I believe that Mr. Chartier answered that question per- fectly yesterday, that any contract, and a trust is a form of a contract, can be private. Any citizen of this country can enter into a private contract. Mr. CONTE. Counsel, I did a little research last night. Let me cite to you, Wilson v. U.S., 221,361,379-386. Mr. RAY. Could you repeat that? Mr. CONTE. Wilson v. U.S. It will all be a part of `the record anyway. If the books and papers are held subject to examination by the demanding authority- which is this committee- the custodian has no privilege to refuse production. A corporation is a creature of the state, presumed to be incorporated for the benefit of the public. It receives certain privileges and franchises and holds them subject to the laws of the state and the limitations of its charter. There is a reserve right in the legislature to investigate its contracts and find out whether it has exceeded its powers. The general government possessses the same right to see that its own laWS are respected as the state would have with respect to the special franchises vested in it by the laws of the state. Powers of the general government in this particular is a vindication of its own laws, the same as if the corporation had been created by an act of Congress. (Citing Hale v. Henkel 201 U.S. 4374-75, 1900.) Therefore, if you are the creature of a State, the State of Illinois, and you set up these trust agreements under the laws of the State of Illinois, certainly we have the right to remove that veil to see whether you are performing according to the laws of the State of Illinois or the laws of the Federal Government. Mr. RAY. I believe, Mr. Conte, that we are not a creature of the State of Illinois. We are not a corporation. It was a trust created by one man. PAGENO="0061" 57~. Mr. CONTE. Are trusts governed at all by the. laws of Illinois? Mr. RAY. In some instances, some are. Mr. CONTE. Of course, they are. Mr. RAY. Not all of them, and not. this one. This is a private trust. Mr. C0NTE. We can remove that veil and ascertain whether or not you are violating the laws of t~e,Federal Government. , Mr. RAY. Is this a judicialbody? Are you going to hold that? Mr. CONTE. Quasi-judicial. .* . . Mr. RAY. Watkins v. U.S.. 351-178 where Chief Justice Warren, in delivering the opin~ion of the Court, stated in the second paragraph:, We start with several basic premises on which there is general agreement, the power of the Congress to conduct investigations is inherent in the legislative process. That power is broad. It encompasses inquiries concerning the adminis- tration of existing laws as well as proposed or possibly needed statutes. It in-' cludes surveys of defects in our social, economic or political system for the pur-' pose of enabling Congress to remedy them. It comprehends probes into depart-' ments of the Federal Government to expose corruption, inefficiency or waste, but~ broad as is this power of inquiry, it is not unlimited. There is no general author- ity to expose the private affairs of individuals without justification in terms of the functions of Congress. This was freely conceded by the Solicitor General in' his argument of the case of W'atkins. Nor is the Congress a law enforcement or, trial agency. These are functions of `the Executive and Judicial iDepartmentsof Government. No inquiry is an end in itself. It must be related to and in further- ance of a legitimate task of Congress. Investigations conducted solely for the', personal aggrandizement of the investigators or to punish in quotation marks' those investigated are indefensible. It is unquestionably the duty of all citizens to cooperate with the Congress in its efforts to obtain the facts needed for intelligent' legislative action. It is their unremitting obligation to respond to subpoenas, to respect the dignity of the Congress and its committees, and to testify fully with respect to matters within the province of proper investigaion. Mr. PATMAN. Read that last sentence over, if you do not mind. Mr. RAY. "It is their unremitting obligation to respond to subpenas, to respect the dignity of the Congress and its committees, and to testify fully with respect to matters within the province of pi oper investi gation." Mr. PATMAN. Testify fully, that is the point. Mr. RAY. "This of course assumes that the constitutional rights of witnesses will be respected by the Congress as they are in a court of justice. The Bill of Rights is applicable to investiagtions"- Mr. CONTE. May I interrupt you there? Are you claiming any constitutional rigf~ts here? Mr. RAY. Yes, sir, under the first amendment, if I may continue. Mr. CONTE. Why didn't you do that yesterday? You claimed it under a trust agreement then. That' is what `you claimed it'under yesterday, and you and I had quite a discussion on this. Mr RAY Now we are going to have the question May I ]ust finish this? , Mr. CONTE. If you want to plead the Constitution, .1 `respect your right to do so. Mr. RAY. May I finish? Mr. CONTE. DO you want to ple'ad'the Constitution? Mr. RAY. No, sir. ` V Mr. PATMAN. You said just now the first amendment. Mr. CONTE. Of course you do not want to. Mr. RAY. We have two cases here. We have Mr.- Mr. PATMAN. Which is correct; you are pleading the first amend- ment or you are not? PAGENO="0062" 58 Mr. RAY. I am pleading the right to privacy of the trust in regard to Mr. Hayes as trustee. Under the common law, he has the right to privacy. That trust can be private. It does not require it to be recorded anywhere. Mr. PATMAN. Where does the law say that? Mr. RAY. In cases for the last 600 years. Mr. PATMAN. Will you document that citation? Mr. RAY. There is no specific citation. Mr. CONTE. Of course there is not. ~`fr RAY. May I have Mr. Chartier explain that to you, Mr. Conte? Mr. CONTE. You are an attorney. You passed the bar. I think you should be able to find some citations. `Mr. RAY. All right. May I ask you the question if- Mr. CONTE. No; answer my question. Mr. RAY. All right; I will find you some cases on the right to privacy of contract. Mr. CONTE. I want it right now. You are an attorney, and I imagine you have passed the bar or you would not be here today. Mr. RAY. Yes, sir. Mr. CONTE. Therefore, you should be prepared to cite some cases or State or Federal laws which give you this right of secrecy. Mr. IRWIN. Mr. `Chairman? Mr. RAY. The courts take judicial notice of the right to privacy of contract.. Mr. CONTE. I yield to my friend from Connecticut. Mr. IRWIN. Do I understand that he is not invoking the first amend- ment? Mr. CONTE. No, sir; lie is not. He. did not yesterday. Mr. IRwIN. What was the reference to it for? Mr. CONTE. I ha.ve given him the opportunity on several occasions to invoke the first amendment, and he has not done so. Mr. RAY. If you want Mr. Hayes as an individual to stand on his rights uiider the first amendment to the Constitution, lie may to help' enforce the right to privacy. Mr. CONTE. Why does lie not do it? Mr. RAY. The right to privacy of contract falls under the provi- sions of the first amendment to the Constitution. Mr. CONTE. Tell him to plead the first amendment then, so we will have it. as a matter of record. Mr. RAY. All right, plead the first amendment. Mr. HAYES. I will, sir. Mr. MOORE. Mr. Chairman, I do not know whether to applaud or what to do. Have you now pleaded the first amendment? Mr. HAYES. I have. Mr. IRWIN. Yes, he has. Mr. CONTE. May I finish? As the reason that you refused to testify yesterday and today? Mr. Mooii~. That is what I wanted to ask. Mr. HAYES. To protect the privacy of our membership. Mr. RAY. Of contracts. Mr. HAYES. Contracts of members. PAGENO="0063" 59 Mr. CONTE. You have not answered my question. For the reason that you refused to testify yesterday and today you are pleading the first amendment? Let your client answer this, will you? Mr. RAY. My client is a layman, sir. Mr. CONTE. All right, advise him then. You were about to answer for him. Mr. PATMAN. OK, Mr. Hayes, you are directed to answer that question. Mr. RAY. Would you first explain carefully to Mr. Hayes how under the purpose clauses for which this committee was formed this question relates to the purposes for which this conimittee was formed, and he will answer the question. I believe that the Court, the Supreme Court, has held that the matter under inquiry and the pertinency of the question to the matter under inquiry must be made clear to the witness, held in Watkins, Barenblatt and Scull cases. The questions asked by a subcommittee must be within the scope of the inquiry authorized by the full committee and cites the case, and the committee must unambiguously require the question to be answered at the time. I asked for a purpose yesterday. Mr. CONTE. I am asking you these questions as an individual, as a Member of Congress, and as a member of this subcommittee. Based on what you have read here, I would say that t.his committee certainly is on solid ground to determine whether or not there have been viola- tions or abuses of our tax laws. If there are defects in our social and economic systems that need to be remedied by Congress, this committee can then recommend to the Congress that these loopholes be plugged so that these violations or abuses will not continue. Mr. RAY. Are you speaking as the committee or as an individual? Mr. CONTE. I am speaking as a Member of Congress now, and as a member of this committee, and I say that we are certainly on solid ground to ascertain whether there have been violations or abuses of our tax laws. Mr. RAY. I believe you are correct there, sir. Mr. CONTE. Of course we are correct. Mr. MOORE. Will the gentleman from Massachusetts yield for an ad- denda to the question- Mr. CONTE. Certainly. Mr. MooRE (continuing). And to add, "Which actions are prejudicial to the small business community of the country"? Mr. CONTE. Definitely so. Mr. RAY. The actions of ABC? Mr. MooRE. No, the actions of evasion, the abuse of tax laws, the various machinations by foundations which are prejudicial to the small business community of the country. Mr. RAY. How does this apply to ABC? Mr. MOORE. This gentleman is before us in two capacities, as I under- stand it. Mr. RAY. Yes, sir; as an individual and as- Mr. MOORE. He can answer this question in the negative for ABC or refuse to answer it for ABC, but he certainly is eligible to answer and capable of answering the question as far as the Robert D. Hayes Foundation is concerned. PAGENO="0064" 60 Mr. R~r. Yes, sir; he is.. Mr. Mooni~. All right. Mr. RAY. If that is going to have an impact on the economy and that is what we are looking into- Mr. MOORE. We are to decide this, sir. You are not to decide what is going to have an impact on the economy. As the counsel to a witness, you are not to presuppose how we are going to use . what we elicit from your client. If you want to refuse to answer the questions, do it on some simple, lOgical, constitutional ground. We will accept it and not argue with you. Mr. }IAn~s. Mr. Chairman, I believe I have .the right of privacy under the first amendment to the Constitution. Mr. RAY. HO is answering in his capacity as trustee now, gentlemen, subpenaed to appear before this committee as trustee of ABC. Mr. CONTE. In reading your trust agreement, I found nothing in it that would invoke that right of secrecy. The only thing tha.t I find would be in the contracts with the foundations that you recommend, give advice to, teach or whatever verbiage you want to use. I find that the applicants sign a contract with you that they will be pledged to secrecy with regard to the foundation. In other words, it works the other way around. You do not want anyone to know your trade secrets, so therefore you have the individual sign a contract, a membership application, saying that he will not divulge any information to anyone. Is that right? Mr. RAY. Can he not enter into that agreement? Mr. CONTE. I am asking you if that is right. Mr. RAY. I believe he does enter. It did enter into that. Mr. CONTE. He certainly does. It is right in this document here, "Americans Building Constitutionally, a Trust Membership Applica-. tion and Sponsoring Agreement." Mr. RAY. That is a sponsoring agreement to ABC. That contract does not run to ABC. It runs to the organization which sponsors that member. Mr. CONTE. Who is that? Mr. RAY. To ABC. Whatever qualified 501C3 ~r whatever the tax- exempt organization. Mr. CONTE. Do you use your own committees as sponsors.? Mr. RAY. Do we use our own committees? Mr. CONTE. Yes. Mr. RAY. We have no committees. . Mr. CONTE. How about your own foundation? Does that act as a sponsor? Mr. RAY~ It could. I as an individual can sponsor someone else if I were a member of ABC to become a member of ABC. Mr. CONTE. Let me ask Mr. Hayes that question. Have you ever sponsored anyone to become a member? Mr. HAYES. Yes; I have. Mr. CONTE. Could you name a few of. them?. Mr. HAYEs. No. As trustee I cannot reveal that information. Mr~ C0NTE. You do this as a trustee or under the first amendment? Do you plead the first amendment here? Mr. RAY. No. Why? Mr. HAYES. My right to privacy, sir. PAGENO="0065" 61 Mr. CONTE. I think you are wrong. I think I have proven that you are wrong, and I think your own counsel has proven that you are wrong. We are on solid ground to ask you these questions and to sub- pena these records. Yet you will not plead the Constitution. You plead the right of privacy, and I say that you are wrong. Mr. HAYEs. I did plead the Constitution. Mr. CONTE. I certainly feel that you are getting yourself in a pail of hot water here. Mr. R~y. I believe the first amendment refers to the freedom of speech and press. Mr. CONTE. Why does he not plead the first amendment? Mr. RAY. He has. Mr. HAYES. I did. Mr. CONTE. You pled the first amendment on that question? Mr. HAYES. Yes; I did. Mr. RAY. His right to privacy is guaranteed. Mr. PAT~AN. As I understand it, he pleads the first amendment for his failure to answer all the questions yesterday and today. Mr. RAY. No, sir. He is claiming his right to privacy. Mr. PATMAN. You claim that is the first amendment. Now what you are doing, are you pleading the first amendment or not? Mr. RAY. Would you ask a specific question? Mr. PATMAN. Yes. Are you pleading the first amendment in your failure to answer the questions yesterday and today? Are you or are you not? Mr. HAYES. I did not plead the first amendment yesterday. Mr. PATMAN. Do you now plead it? Mr. RAY. On what basis? Let's have grounds. Mr. PATMAN. On the basis of what you say, that it is a privilege that he does not have to disclose certain things as trustee. Mr. CONTE. Mr. Hayes, may I ask you a question? The committee has requested by letters dated October 3, 1967, and October 25, 1967, that you furnish us certain documents and information relating to the history and the operation of ABC, the R. D. Hayes Family Founda- tion and the Sales Analysis Institute Foundation. Will you please now send up the information and documents de- scribed in the attachment which accompanied our requests of October 3 and October 25? Will you send that up? Mr. RAY. Pardon me, sir? Mr. CONTE. Will you send that material up? Mr. RAY. These are just your letters from the committee, sent by Chairman Pat.man to the R. D. Hayes Family Foundation and to the Sales Analysis Institute Foundation. And you referred to a letter of? Mr. CONTE. October 3 and October 25. Mr. RAY. Of October 25. I have a letter to Mr. Robert. D. Hayes as trustee of Americans Building Constitutionally. Mr. CONTE. Right. You have an at~tachment there, attachment A. Mr. PATMAN. The attachment defines and indicates the type infor- mation that is desired by the committee. Mr. RAY. So you are requesting by these three letters three differ- ent things: The information attached. This letter is addressed to Mr. Robert D. Hayes. Mr. CONTE. Right. 87-444-68------5 PAGENO="0066" 62 iMir. RAY. Sales Analysis Institute Foundation requesting certain information. Mr. CONTE. Exactly right, as outlined in attachment A. Mr. RAY. We said yesterday that that is a- Mr. PATMAN. What did you say yesterday? Mr. RAY. That is a State-chartered not-for-profit foundation, and the records may be made available. Mr. PATMAN. Will be made available? Mr. RAY. Yes, sir. Mr. HAYES. That is correct. Mr. CONTE. All of the requests on attachment A will be made available? Mr. RAY. Yes, sir. Mr. PATMAN. He is doing that when he is under a different hat. You are wearing several hats here. Mr. RAY. He is appearing, Mr. Hayes, as trustee or director of Sales Analysis Institute Foundation. Mr. PATMAN. And you are answering as president of the Sales Analysis Institute of America, are you not? Mr. HAYES. That is correct. Mr. RAY. That is correct. Mr. PATMAN. You are not answering as ABC trustee? Mr. HAYES. No,sir. Mr. RAY. And he stat.ed yesterday unequivocally that the Sales Analysis Institi~te was not a member of ABC. Mr. CONTE. Mr. Hayes, are you now ready to supply the financial data and the membership list that was asked for in the subpena? Mr. RAY. Now we are back to Mr. Robert P. Hayes as trustee. Mr. CONTE. Yes. Mr. RAY. Of Americans Building Constitutionally? Mr. CONTE. Right. Mr. RAY. Or of the R. D. Hayes Family Foundation? Mr. CONTE. Mr. Hayes, as trustee of ABC, A Better Chance To Avoid Income Taxes. Mr. HAYES. As trustee of ABC, I cannot provide the information asked for. Mr. CONTE. On what basis? Mr. HAYES. I have a duty to protect the privacy of the membership. Mr. CONTE. I think we have gone over that and made it explicit, clear, that you do not have that duty, and that you have a. duty under the subpena issued by this con'imittee to provide that information. Now, do you plead the Constitution? Mr. HAYES. My duty- Mr. CONTE. Do you plead the Constitution? Mr. HAYES. My duty is to protect the rights of our members as to privacy. Mr. CONTE. We have a duty here to protect the citizens of the United States, the taxpayers of the United States. Now, I ask you to provide that information. Mr. PATMAN. Will my colleague yield briefly? As chairman of the committee, I direct you, Mr. Hayes, to supply the information asked you by the gentleman from Ma:sschusetts. Mr. RAY. Again may I ask the committee- PAGENO="0067" 63 Mr. CONTE. You cannot ask the committee. The committee has asked you for some information. The chairman has asked you for some information. We want an answer. Mr. RAY. The Supreme Court states that the pertinency~ of the question as it relates to the purpose clause which created this com- mittee must be made extremely clear. Mr. IRWIN. Mr. Chairman, will the gentleman yield? Mr. PATMAN. Will the gentleman yield? Mr. CONTE. Yes, I yield. Mr. IRWIN. It is not for counsel to decide whether this is pertinent to the committee-~or not. Eventually the courts will have to decide whether it is or not, and ypu~ have been directed to answer. Now I think you had better take that into consideration. You are not the judge of whether it is pertinent or not. We think that it is. Mr. CONTE. Exactly right. Mr. IRWIN. Now we may be wrong, and the court can decide that, but not you. Mr. RAY. I fully agree with you, sir. I only state that the Supreme Court has said that in order for a man to be able to understand what is being asked of him, he has the right to demand the pertinency of the question as it relates to the reasons for which this committee is questioning- Mr. CONTE. Counsel, may I interrupt you? From H.R. 53, which created this committee, let me read just one paragraph. There are many more. To study and investigate pro~b1ems of small business enterprises generally, and to obtain all facts possible in relation thereto which will not only be of public interest but which would aid the Congress in enacting remedial legislation. Mr. IRwIN. There it is. Mr. CONTE. Now, will you answer the question? Mr. RAY. I believe we are appearing before the Subcommittee for Foundation Study, not the Select Committee on Small Business. Mr. PATMAN. So what? That is it. Mr. MOORE. Do you attack the legitimacy of the subcommittee? I-low does the Congress set up a subcommittee, if it does not first generate a full committee. Mr. RAY. It confers the power on the full committee. The full com- mittee then confers power on subcommittees to do some of its work. I fully understand that. Mr. MOORE. That is why we are here. Mr. RAY. I would like to see the conferring of power on the sub- committee. Mr. PATMAN. If the gentleman is trying to delay this procedure for the purpose of maybe letting it kind of dry up on the vine, his efforts will be in vain. We are going to keep this going until we get the facts one way or another, and not only this week but next week and next week and whenever we have time to do it. We are going to continue on, so you are not getting anywhere by delay on frivolous matters. Mr. RAY. We are not- Mr. PATMAN. I respect you for any constitutional privilege you want to claim or any other privilege that is valid and legal and con- PAGENO="0068" 64 stitutional. But it occurs to me that you are engaging in tactics that are not too constructive even from your viewpoint. Mr. MOORE. Mr. Chairman, I wonder if we could proceed a little along "nonlegal" grounds just for a minute to learn more about the "foundation" business. Mr. CONTE. You have to get over this point I think you should insist on that. Mr. PATMAN. I have. I have directed him to answer. Do you refuse to answer or not? If you* refuse, make -it a matter of record. Mr. HA1~s. On advice of counsel, Mr. Chaiman, it is my belief that what the committee is asking ñ~e to do at this point is to commit an illegal act. Mr. PATMAN. No, we have not. That can be your con~truction. You have the right to do that, of course. Mr. IRwIN. He has to complete his response. It is not ~et complete. Mr. PATMAN. All right, go ahead. Mr. HAYES. Therefore, I am unable to render that- thaterial. Mr. IRWIN. For what reason? - Mr. PATMAN. Therefore, you refuse? : - Mr. HAYES. And to make that decision. Mr. IRWIN. Do you invoke the Constitution, Mr. Hayes? Mr. Hayes, do you invoke the Constitution? Have you been struck dumb, Mr. Hayes? - Mr. HAYES. I may be dumb; yes, sir. Mr. PATMAN. What? Mr. IRWIN. He has not answered the question. He has been directed to answer it. Do you invoke the Constitution in your refusal to answer further? Mr. RAY. May I submit this for the record? - Mr. IRWIN. No, the question is being directed to Mr. Hayes. Do you invoke the Constitution, Mr. Hayes? Mr. HAYES. I stand silent. Mr. CORMAN. Mr. Chairman? Mr. PATMAN. Yes, -sir. - Mr. MOORE. He answered. 1-Te said that he stood silent. Mr. PATMAN. He remains silent. Mr. MOORE. Let's go to the next question and see if he will elect to remain silent. Mr. IRWIN. May I say this, Mr. Chairman, he has not invoked the Constitution at this point. Mr. OLSIIER. That is right. Mr. PATMAN. He has not invoked the Constitution at this point. Mr. CONTE. Mr. 1-layes, ABC claims to be a nonprofit trust estab- lished for the purpose of helping citizens of the United States make full use of the rights available to them under the Constitution. Is that correct? Mr. HAYES. This is correct. Mr. CONTE. You claim t-o be exempt from paying taxes under the Internal Revenue Code. Is that correct? Mr. HAYES. Correct. Mr. C0NTE: What the ABC does is to inform individuals as to how, in ABC's opinion, they can best operate their affairs under the U.S. tax laws. Is that correct? PAGENO="0069" 65 Mr. HAYES. We believe we have the right to teach what the law is, sir. Mr. CONTE. I am just asking the question. Mr. HAYES. Yes. Mr. CONTE. That is correct? Mr. HAYES. Yes. Mr. CONTE. ABC receives a membership fee in return for this serv- ice. Is that correct? Mr. HAYES. Correct, for the education that is received; yes. Mr. CONTE. They receive a fee. Mr. HAYES. Yes. Mr. CONTE. Now, Mr. Hayes, doesn't a lawyer perform these same services for a fee? Doesn't he advise individuals how to make the best use of their rights under State and Federal tax laws and under the Constitution? Mr. HAYES. That is one of his obligations; yes. Mr. CONTE. You mean to tell us that you believe that the tax laws have been set up and do provide exemptions for all people who provide this kind of service from paying income taxes. on their fees merely by having the income go to the foundation and the foundation taking care of all the living expenses of the individual? Mr. HAYES. We have not made that statement, sir. Mr. CONTE. How does the individual avoid paying the taxes? Mr. HAYES. It is provided for in the law, and we-. Mr.CONTE. And you teach it. . Mr. . HAYES. Seminars, 30 hours. It is simply a matter of how to con- duct his affairs within the law. In those seminars we do not teach him how to establish a foundation. We simply teach him how he must operate under a foundation. Mr. CONTE. Every attorney does that. Mr. HAYES. No. Mr. RAY. No, sir. Mr. CONTE. How does the individual exist? Where does he get the funds to live on.? Mr. HAYES. He can contract .with his foundation for services where that is permissible under the law. Mr. CONTE. When he contracts with his foundation, does he pay any taxes on the revenue that he receives from the foundation? Mr. HAYES. Oh, yes; certainly, yes. Mr. CONTE. What other benefits does he receive? Mr. HAYES. Whatever his contradt calls for with his foundation.. Mr. CONTE. What do you recommend in these contracts? Do you have an example here? Mr. HAYES. No. I believe you will find some in the instruction manual. . . Mr. CONTE. You have been operating for about a year, so you must have some knowledge about some of these contracts. Give us an example. Mr. HAYES. What executives sometimes call fringe benefits. Mr. CONTE. Such as what.? Mr. HAYES. Oh, certain transportation costs. Mr. CONTE. Go ahead. PAGENO="0070" 66 Mr. HAYES. Our legal seminar teaches the attorney how to write these contracts. Mr. CONTE. Such as one of the benefits mentioned yesterday by Congressman Moore, exemption from State gasoline tax? Mr. 1-IAYEs. This might be one, only that wouldn't come under the employment contract. That comes under State law. Mr. CONTE. How about housing? Mr. HAYES. This could be in certain cases, yes. Mr. CONTE. How about social security payments? Mr. HAYES. That could be in certain cases. Although that again would not come under his employment contract. Mr. CONTE. That would come under what, the establishment of the foundation? Mr. RAY. I believe in general not for profit. Mr. CONTE. What is that? Mr. RAY. Not-for-profit corporations can elect I believe under the law to either pay or not pay social security. Once that election was macic, or in the event it is made, then every employee of a not-for-profit foundation must; comply with the social security laws. Mr. CONTE. The foundation, however, would pick up the tab for the employer's share of the social security tax. Mr. RAY. Yes, sir; it would have to pay, if it makes the election under the social security laws. Mr. CONTE. How about the use of an automobile? Mr. RAY. Well, if it is required as a condition of employment, as it is in many corporations in America, that a car be provided for the purposes of the corporation in the general case or for the purposes of the foundation. Mr. C0NTE. How about an example where you set up a foundation for a doctor, for medical research. In fact, Mr. Hayes mentioned set- ting up a clinic, where the doctor continues in the same practice that lie was in in the past. He doesn't change his practice at all. He then gets all these fringe benefits, however. Mr. RAY. He would have to operate his affairs. We try to teach him how the M'ayos, the Menningers and the great medical clinics manage their affairs. They hire doctors for a salary. The doctors are hired by the clinic. Mr. CONTE. Mr. Hayes is trustee. I would like to hear from him. Mr. HAYES. Fine. Mr. CONTE. A lot of people are interested in this. Could you tell us about it, Mr. Hayes? Give us some examples. Mr. RAY. Be careful. Mr. CONTE. Of course he will be careful. Mr. Hayes, how about edu- cational grants to the children of a doctor? Mr. HAYES. Yes. This can be done if it is done properly under the law, yes. Mr. CONTE. I am a little naive here. Tell me how you can do it prop- erly under the law? Mr. HAYES. Being a layman I would again like to refer that to coun- sel, because I am not- Mr. CONTE. You are more or less a salesman, aren't you, for ABC? Mr. HAYES. Salesman? Mr. CONTE. Yes. PAGENO="0071" 67 Mr. HAYrs. I am a teacher. Mr. CONTE. You are a teacher. All right. Now, will you teach me? Tell me all about it. I am the student `and I want to learn. I think we are finally getting down to something here. I am a prospective client, and I want to set up one of these foundations. I think, if your lawyer will let you alone, I might find out something about this foundation. I have four children, and they are all a'bo~t college age. I want to send them to college, and, of course, tuition is pretty high, as you know. The cost of living is high, and I want to set up a foundation so the foundation sends them to college. How can I do it? Mr. HAYES. Through a grant program that is qualified under the particular conditions that are involved. Mr. CONTE. Give me an example of a particular condition. Mr. Moom~. Do I have to pay $10,000 for that answer? Mr. HAYES. We will be glad to, if you come to the seminar- Mr. Moon~. I am not going to give you money for that kind of an answer. I'll tell you that. Mr. CONTE. Let's be a little more specific now. I am a Member of Congress. Let's nail it right down. I want to set up a foundation. What would you advise me to do? What kind of a foundation could I set up where I wouldn't have to pay any taxes? Mr. HAYES. I wouldn't even begin to.attempt totell you atthis point, until I knew more about your personal affairs. You would have to see your lawyer first. Mr. CONTE. Do you advise all of your clients to see their lawyers first? Mr. HAYES. We certainly do. Mr. CONTE. Is that in your literature? Mr. HAYES. Yes; it is. Mr. CONTE. Could we have an example of it right here? Mr. HAYES. In the teaching material it certainly is covered not once but many times. Mr. RAY. The layman is not taught the legal procedures. Mr. PATMAN. Wait just a minute. The witness is sworn to answer. You are not sworn. You talk to him, but let him talk to the interrogat- ing member. Mr. RAY. I like that term. Mr. HAYES. The layman is taught how to operate his affairs. The attorney is taught how to set them up. Mr. CONTE. Mr. Hayes- `Mr. HAYES. Pardon me, may I continue? Mr. CONTE. Yes, certainly, by all means. Mr. HAYES. In other words, the seminar would cover information on what he might include as certain expense item's and where it should be charged either to the foundation or to `a personal account, things of this nature. Mr. `CoNTE. From what you tell me, you can teach someone, just about `anyone, once you know his circumstances, to set up a foundation, which foundation could provide `all of his cost of living, provide an, automobile, send his children to college `and pay their tuition fee, en- able him to get tax-free gasoline, et cetera, et cetera. You `could set up this foundation or teach him how to operate under a foi,mdation, so PAGENO="0072" 68 that he will get all of his living costs out of the foundation and not pay any taxes at all. Mr. HAYES. That is not correct, sir. Mr. CONTE. All right, what did I say that was not correct? Mr. HAYES. He could only- Mr. C0NTE. I took you step by step, all except his income. His in- come will be taxable. Mr. HAYES. Right. Mr. CONTE. He could draw the smallest income possible. As long as everything is paid for, he doesn't need much of an income, does he. Mr. HAYES. Correct. Mr. CONTE. Is that right. Mr. HAYES. That is he is able- Mr. CONTE. We agree here. Mr. HAYES. He perhaps never can reduce his income to an absolute minimum, or to zero, I should say. Mr. C0NTE. No. All he will need is some pin money. Mr. RAY. Clothes and food. Mr. CONTE'. That is about it. Mr. HAYES. Clothes and food to be specific. Mr. CONTE. I imagine that for a doctor you could set up a founda- tion where even his clothes would be provided. The foundation could buy his clothes because they are needed in his profession. Mr. RAY. Uniforms. Mr. HAYES. Uniforms only. Mr. RAY. But not suits that can be worn normally. Mr. CoN~. We are getting down to pin money now, suits and a few odds and ends. You say that you advise your clients that they should seek an attorney. On October 30, 1967, a Mr. Herman E. Kimsey, president of Forensic Sciences Institute of Washington, D.C., gave us a signed `statement to supplement his letter to us of October 24, 1967. The statement reads as follows: On July 12, 1967, I received a cheek from the Americans Building Constitu- tionally in the sum of $10,500 with their stipulation that it be applied for mem- bership for Forensic Sciences Institute in Americans Building Constitutionally. This check was endorsed by myself and returned to their records and entered in Forensic Sëience Institute's records with a copy of the membership application. The sum does not appear in financial statements elsewhere in Forensic Science Institute's records, as it was never entered as a deposit' in the foundation books. Did you advise him that he could have an attorney and have his attorney check this out? Mr. HAYES. His attorney did check it out. Mr. RAY. He is qualified in Washington, D.C. Mr. CONTE. Did he approve it? Did he advise his client to get into this type of deal? Mr. I-IAYES. I wasn't present. Mr. CONTE. Mr. Hayes, what compensation and what benefits do Mr. Walsh and you receive from ABC and all connected nonprofit corporations? Mr. HAYES. Again, this is `a question of ABC acting as a trustee. I can't reveal that. Mr. PATMAN. As chairman I direct you to answer. Mr. HAYES. As trustee? PAGENO="0073" 69 Mr. PATMAN. Either speak up or bring the microphone closer to you. Mr. HAYES. As trustee do you ask me to? Mr. CONTE. I am asking you as an individual now, "How much compensation do you receive from ABC?" Mr. HAYES. None. Mr. CONTE. What do you receive from all connected foundations? Mr. HAYES. All connected foundations? Mr. MOORE. Or member foundations? Mr. CONTE. Or member foundations? Mr. HAYES. The question is not clear, Mr. Conte. Mr. IRwIN. Mr. Chairman, I have a feeling that the question was answered in a very limited scope. You answered as an individual you don't receive any money. Do you receive some money as trustee? Mr. HAYES. No; I do not. Mr. CONTE. WThere do you receive your compensation, and how do you receive it? Mr. HAYES. Where do I receive compensation? Mr. CONTE. Yes. Mr. HAYES. I receive compensation as a director and an officer of Sales Analysis Institute Foundation. Mr. CONTE. That is your only source of income? Mr. HAYES. Correct. Mr. CONTE. Do you receive other compensation? Do you receive any outside benefits, fringe benefits? Mr. HAYES. Yes; I receive certain fringe benefits. Mr. CONTE. Such as? Mr. HAYES. Part of my transportation, part of an insurance pro- gram. Mr. CONTE. Accident, health, and life? Mr. HAYES. No; not accident. Life, yes. Mr. CONTE. What amount would the life insurance program involve? Mr. HAYES. Sales Analysis Institute Foundation has insured my life, and this has been some years ago. Sales Analysis Institute Foun- dations owns the policy, and is the beneficiary of the policy. Mr. CONTE. You didn't tell me~ Mr. HAYES. You asked the amount? Mr. C~NTE. Yes. Mr. HAYES. $200,000. Mr. CONTE. Is Sales Institute Foundation a nonprofit or a profit foundation? Mr. HAYES. A not-for-profit foundation. Mr. CONTE. Nonprofit foundation. Mr. HAYES. Correct. Mr. CONTE. Any other fringe benefits? Mr. HAYES. Not that I think of at the moment. Mr. CONTE. How does Sales Analysis Institute obtain their funds? Mr. HAYES. Through fees for services rendered. Mr. CONTE. To whom? Mr. HAYES. General Motors, Chrysler Corp., General Electric Co. and many others. Mr. CONTE. Does it receive anything from ABC? Mr. HAYES. Yes, it does, under contract. Mr. CONTE. How much? PAGENO="0074" 70 Mr. HAYES. This depends on the amount of service rendered. This is covered by contract. Mr.C0NTE. 1n1966. Mr. HAYES. I hesitate to answer that question since the. books are being set U~ now, audited. I will be glad to give you an answer when that is complete. Mr. CONTE. That is the internal audit that you spoke about yester- day? Mr. HAYES. Correct. Mr. CONTE. Will you ~et that? Mr~ PATMAN. As Chairman I direct you to answer it, and if you can't furnish the information now, you can furnish it. for the record. Mr. HAYES. Yes, right. Mr. PATMAN. Will you do that? Mr. HAYES. I will. Mr. RAY. Yes, sir. (The information had not been submitted to the subcommittee at the time of this printing.) Mr. CONTE. Wasn't Sales Analysis Institute a profit foundation? Mr. HAYES. I beg your pardon? iMir. CONTE. Wasn't Sales Analysis Institute a. profit organization? Mr. HAYES. Yes, sir. Mr. CONTE. Why did it become a nonprofit organization within the last year? Mr. HAYES. Because it is qualified under the Internal Revenue Code. Mr. CONTE. Could you tell the committee what changes transpired in the past year making it a nonprofit organization? Mr. HAYES. I refer to counsel. Mr. RAY. May I answer. Mr. CONTE. You refer that to counsel? All right. Mr. RAY. The affairs of the corporation were wound up, dissolved with the Secretary of the State of Illinois. A not-for-profit corpora- tion State charter by the State of Illinois was established. It was be- lieved that since Sales Analysis Institute Foundation had a building, had a faculty, had a regular course of instruction, and a full-time stu- dent body in attendance, it qualified under all four principles of the code. Mr. CONTE. Counsel, have you been sworn in? Mr. PATMAN. He is not a witness, Mr. Conte. Mr. CONTE. I see. Mr. RAY. He referred it to counsel. Mr. PATMAN. He is not supposed to speak up and answer these questions. Mr. CONTE. I was just wondering. He answers so many. Mr. PATMAN. I know. He can give aiiy comments to his client that he wants tO. Mr. Mooin. Will you yield? Mr. Chairman, we are not getting much out of this as it is. The question has been asked; the answer has been given, and he tells us the reason that Sales Analysis is a nonprofit organization. I think the answer ought to go into the record. Mr. PATMAN. Mr. Hayes should repl~ though, I think. PAGENO="0075" 71 Mr. MOORE. I would agree it would be better if the witness would respond, but the question has been asked, and that answer has been given. Mr. PATMAN. He is the sworn witness, and he is the one that should testify, I think. Mr. HAYES. I am perfectly willing to agree with what counsel has~ said. Mr. MOORE. You adopt his statement as your answer to the question, sir? Mr. HAYES Correct. Mr. PATMAN. In the future you do the answering yourself. Mr. HAYES. I will when I feel I am capable. Mr. CONTE. Could you please answer my question as to what Sales Analysis Institute is doing now that they weren't doing before when they were a profit foundation? Mr. HAYES. Nothing. Mr. CONTE. Exactly the same thing. Mr. HAYES. Right. Mr. CONTE. Could you tell me whether the membership of Sales Analysis Foundation has changed? Mr. HAYES. The membership? Mr. CONTE. Yes. Mr. HAYES. You mean as to clients? Mr. CONTE. Not only as to clients, but as to who is presently in charge of Sales Analysis Institute. Mr. HAYES. I am. Mr. CONTE. Who was in charge of Sales Analysis Institute when it was a profit organization? Mr. HAYES. I was. Mr. CONTE. What does Sales Analysis do for ABC? Mr. HAYES. I beg your pardon? Mr. CONTE. You said that ABC makes a contribution to Sales Analysis. What does Sales Analysis Institute do for ABC? Mr. HAYES. ABC pays Sales Analysis Institute for services rendered. Mr. CONTE. Could you tell us about the services rendered? Mr. HAYES. Training of instructors is an important part of it. Mr. CONTE. Instructors for ABC. Mr. 1-IAYES. Correct; conducting seminars for the ABC in spine cases, the same things we do for General Motors. Mr. CONIT. Go ahead. Mr. HAYES. And Chrysler, Ford, and others. Mr. CONTE. Mr. Hayes, IRS regulations provide that a nonprofit trust in order to be tax free must provide that the funds upon dis- solution of the trust will go to another similar purpose. They cannot go back to the individual or his beneficiaries. How do you recom- mend that individuals provide for dissolution of their foundations? Mr. HAYES. To qualified 501 (C) (3) rules, credited under the In- ternal Revenue laws. Mr. CONTE. If you set up these foundations, or you instruct them to set up these family foundations, the doctors and the dentists that you mentioned here, and they dissolve the foundation, where do the funds go upon dissolution of the foundation? PAGENO="0076" 72 Mr. HAYES. To other qualified 501(0) (3) organizations. Mr. CONTE. I have no further questions. Mr. PATMAN. Mr. Corman. Mr. CORMAN. Thank you, Mr. Chairman. Mr. Hayes, it has been called to your attention before that under H.R. 53 this committee and this subcommittee is to study and investi- gate the problems of small business generally and to obtain a)ll facts in relation thereto which would not only be of public interest but would aid the Congress in enacting remedial legislation. I would like to point out to you that the committe has substantial evidence that this kind of operation may very well affect other small businesses which have not engaged in the practice of putting their assets in foundations. Now if we assume for the moment that all of your activities are within the law-and I make that assumption for the moment-we still need to know whether or not there ought to be changes in the law, and so I think it is proper that we ask the questions that relate to the setting up of these foundations and I think that you are obli- gated to answer. If any of your conduct is outside the law, with or without your knowledge of it, then that is a matter of importance to the committee because we want to know whether or not the executive agencies are properly enforcing the law. So we really have two reasons for our inquiry, both of which certainly have an impact on other small business. I would question whether you have a right just by claiming a right of privacy alone to deny answering questions about your specific clients. I would like to ask you some questions based on hypothetical cases to try to get at how money is involved in these foundations, with- out your disclosing the specific clients. I would like to know first of all how large would an individual's annual income have to be before it would be profitable for him to undertake a not-for-profit foundation? Mr. HAYES. Mr. Corman, this would be a very difficult answer for me to make without knowing a specific instance, because some of the things that are involved is not only source of income and how much income and what kind of income is invOlved, but also holdings, prop- erty held, and a multitude of things of that kind that will vary greatly from one member to another. I would hesitate very much to make a oeneral answer. Mr. ~ORMAN. Let's take the case of a doctor whose income is solely earned income from his practice. He gets $50,000 a year. He has no other assets that concern him at the moment. Is he a proper client for your school? Is there anything you are going to be able to help him with? Mr. HAYES. We have a doctor present here who can answer this far better than I could, sir. Mr. CORMAN. Mr. Hayes- Mr. HAYES. That is if you want real accurate information. Mr. CORMAN. Did the doctor come to you and ask to go to the school or did you go out and solicit him? I take it that you run the school. You have something to do with it. Mr. HAYES. Oh, yes. PAGENO="0077" 73 Mr. CORMAN. I must say that if I were a prospective student you haven't instilled much confidence in me yet about your ability. Mr. HAYES. I have had some of my students say the same thing, sir. Mr. CORMAN. You can't tell me if I have a $50,000 net income, no other assets, you can't tell me whether it would be advisable for me to consider a not-for-profit foundation. Mr. HAYES. If those were conditions I would say probably yes; you would be. Mr. CORMAN. Probably yes. Mr. HAYES. Correct. Mr. CORMAN. I am a doctor. My net imcome is all taxable as net income. Now what are `the mechanics for my setting up the founda- tion? Mr. HAYES. First `of all, you would consult your attorney, who would go into the details of your affairs, to see whether or not the things that you were willing to do to qualify under scientific research or some other of the accepted categories of activity would qualify you. Now this again would involve the determination of what income and how much of it, the source could be used for foundation purposes. Mr. CORMAN. We assume that I pass all those tests, and we do set up the foundation. Mr. HAYES. Yes. Mr. CORMAN. Make it Foundation X, not for profit. I keep on prac- ticing medicine. I keep on making $50,000 a year. Where does the $50,- 000 go? My client pays me, my patients pay me. Lawyers don't make that much. My patient pays me $1,000 for an operation I perform. Does he make the check payable to X Foundation? Mr. HAYES. He could. Mr. CORMAN. Is that the way the system works? Mr. HAYES. Yes; it could. Mr. CORMAN. I am an employee of the foundation, right? Mr. HAYES. Right. Mr. CORMAN. Do you have doctors who have created these not-for- profit foundations? Mr. HAYES. Yes. Mr. CORMAN. How many? Mr. HAYES. That I can't reveal, sir. `Mr. OLSHER. Speak up, please. Mr. HAYES. I'm sorry. Mr. PATMAN. As chairman of the committee I direct you to answer the question. Mr. HAYES. I am not at liberty, Mr. Chairman, to tell you how many doctors are involved. Mr. PATMAN. Then you refuse to answer the question. Mr. HAYES. I regret, sir, I can't divulge that information as trustee. Mr. PATMAN. And you refuse. Okay, go ahead. Mr. CORMAN. Now all of my income as a doctor goes to this founda- tion. Then I assume the foundation pays me a salary as an employee, is that the way the system works? Mr. HAYES. It could, yes. You would have to be a qualified medical foundation. Mr. CORMAN. Would there be any other public purposes required of this foundation, other than paying my salary? PAGENO="0078" 74 Mr. HAYES. Research definitely I think would be one, or would be one possibility. There are at least seven categories that I mentioned yesterday that might come into the picture. Mr. CORMAN. Well, let's take one of the actual cases of one of your doctors, without disclosing him. What are some of the things that their foundations do in the public interest? Mi. HAYES. Research. Mr. CORMAN. Specifically what kind of research? Mr. PATMAN. Speak up a little bit please, sir. Mr. CORMAN. What kind of research? Mr. HAYES. Medical, medical research. Mr. CORMAN. Treating my patients and keeping records on their progress, would that probably- Mr. HAYES. Testing various drugs, let's say. Mr. CORMAN. That must excite the patients. Mr. HAYES. Nevertheless, much research is done by doctors in the field. N:r. CORMAN. Is this doctor doing anything different from any other practitioner? Mr. HAYES. Pardon? Mr. CORMAN. Is this doctor who is now working for the foundation doing anything different from any other general practitioner? Mr. HAYES. Yes, lie must. He must do that. Mr. CORMAN. Let's assume that I prosper and I make more money and this foundation accumulates a half million dollars. Is that pos- sible? Mr. HAYES. I would say so. It depends, of course, on whether it was an unreasonable accumulation or not. Mr. CORMAN. \\Tould that be unreasonable in your view, a half mil- lion dollars, a good thriving practitioner who is probably getting a salary of $7,000 or $8,000 a year, struggling through on it? Mr. HAYES. If perhaps a hospital with a clinic was going to be built, that would not be unreasonable. Mr. CORMAN. Let's assume that now the foundation decides to invest that money in an electronics firm. The title of the firm is going to be held by this foundation. Now is the income from that electronics firm taxable? Mr. hAl-Es. If the income that comes in from that particular source is used for not-for-profit purposes, it wouldn't be taxable. Mr. CORMAN. Kept in the foundation, so long as the income is kept in the foundation, then the specific business, the electronics firm, it is not taxable like other electronics firms, so long as it is kept within the foundation. Mr. HAYES. You have a good illustration on this I think on the Mott-this is not a medical foundation-but the Mott Foundation, which has as it corpus the largest block of General Motors stock in the world, but the earnings and the growth of that corpus has been put to not-for-profit uses. Mr. CORMAN. I think the nub of it is what we all decide is not for profit, and I am afraid when we get to that you are just going to have to be specific about your answers and I think eventually we are going to have to get down to some cases, because the issue is whether or not it is your contention that you can run funds through a foundation, and PAGENO="0079" 75 have them tax exempt, that are not normally tax deductible under the Internal Revenue Code. Mr. HAYES. Well, we don't-pardon me. Mr. CORMAN. If I may just finish -and then you can respond. You imply in your literature that one n-lay take care of parts of his hous- ing expense and his transportation expense and his employees and a- number of things, and I would just like to get down specifically, what is the advantage to the foundation in those areas over the n~rrnal things that are tax deductible under the code? If my transportation is deductible, it is deductible when I file my individual tax return. If it is not deductible I don't see how it can be deductible by running the fund through the foundation. Mr. HAYES. It can't. Mr. CORMAN. Now what is it that you are telling your prospective students, your clients, in that brochure that you are offering them in those -areas? Mr. HAYES. We are very careful to make the distinctions that de- termine whether a certain item is tax deductible or not, and this is where we feel the education that we provide, our instructors provide, is important in this picture. Mr. CORMAN. But aren't you saying in your brochure that the man can save, avoid, not evade, avoid income taxes by creating this founcla- tion? That is your thesis, isn't it? Mr. HAYES. Only if he is willing to do those things which will qual- ify him. Mr. CORMAN. Assume that he is willing to do all that, but then how do we get down to this business of being able to take care of his em- ployees and under certain circumstances getting a part of his living expenses, his household expenses, his transportation expenses? When would those ever be deductible under -a foundation that they wouldn't be under normal tax laws, without treating the foundation? Mr. HAYES. May I call on counsel to explain that difference? Mr. PATMAN. We want you to explain it, because you are the sworn witness. Mr. CORMAN. May I inquire? The brochure that the chairman re- ferred to, where you set out in your sales promotion the things that you offer, are you familiar with that brochure? Mr. HAYES. I am not sure that I have ever seen the brochure that tile chairman- Mr. PATMAN. It is used by ABC, and you have one yourself. It is in the volume that you gave us yesterday that I assume is along the same lines. You say it is a revised edition. I believe you referred to it as a revision, isn't that right? Mr. HAYES. I think so. I think that is right. Mr. PATMAN. So you do know about it. Mr. CORMAN. Can you respond to the question? Mr. HAYES. Certainly. Mr. CORMAN. The question was what are you offering these people that you recite in your brochure? What is it that they can get through a tax-exempt foundation in this area of personal living expenses that they can't get under normal income tax laws without a foundation? Mr. HAYES. Perhaps I could best answer your question, or perhaps more clearly answer your question by saying exactly what I did with SAl. PAGENO="0080" 76 Mr. CORMAN. Fine. Mr. HAYES. Since SAT is strictly and always has been an educational organization under the code it, according to my understanding, qual- ifies for tax exemption per se. Certainly we engage in and are basically a research and educational organization which in itself fills the requirements. In this case we no longer pay corporation income tax, since we are a not-for-profit organization, although we did for many years. Mr. CORMAN. How long were you a profit organization? Mr. HAYES. Since 19-well, from 1946 to 1966,20 years. Mr. CORMAN. What was your net profit the last year that you were a for-profit corporation? Mr. HAYES. I believe about $46,000. Mr. CORMAN. What was the ownership of the corporation? Were you sole owner? Mr. HAYES. I was the sole owner of the corporation. Mr. CORMAN. All right. Go ahead and tell us what happened after you became a not-for-profit. Up to that year you paid taxes on your individual income from the corporation plus a tax on the balance that was left that was shown as corporate profit, right? Mr. HAYES. Yes. Mr. CORMAN. Then the next year what happened? Mr. HAYES. First, we of course dissolved the old corporation, the profit corporation, and conveyed the assets, and I have the assets. I had the assets, yes. Mr. RAY. He had them. Mr. CORMAN. It does make a difference doesn't it, Counsel? I think that the real question is who had and who has. Now who has the assets? Do you make a gift of the assets to the SAT not-for-profit foundation? Mr. HAYES. No. Mr. CORMAN. No. Mr. HAYES. I do not. Mr. CORMAN. You had a corporation making $46,000 a year. It must have been worth a fair amount of money. What happened at the time of the dissolution and the transfer to the not-for-profit trust. Mr. HAYES. I conveyed the assets of the old corporation to a for- profit trust. Mr. CORMAN. To a not-for-profit trust. Mr. HAYES. No, to a for-profit trust. Mr. CORMAN. Oh, to a for-profit trust. Was there any tax conse- quences in that transfer? Mr. HAYES. No, no tax consequence. Mr. CORMAN. All right, now you have got a for-profit trust. Mr. HAYES. Correct. Mr. RAY. A taxpaying entity. Mr. HAYES. A taxpaying entity. Mr. CORMAN. Is that what SAT is now? Mr. HAYES. No. Mr. C0RMAN. Take us through the next step. Mr. HAYES. SAT is an operating not-for-profit corporation, which conducts the business of the old SAT corporation. PAGENO="0081" 77 Mr. IRwIN. I think what we are trying to get to is how did you go from a for-profit trust to a not-for-profit trust, SAT. You have told us that SAT was a for-profit trust, that is what you made it. Mr. HAYES. Right. Mr. RAY. That is not SAT. Mr. HAYES. Not SAT. That is my personal trust. Mr. RAY. The R. D. Hayes Trust. Mr. CORMAN. We started way back there with SAT making $46,000 a year. Mr. HAYES. Right. Mr. CORMAN. I have lost it for the moment. Mr. IRwIN. That is right. Mr. HAYES. This is what takes us 30 hours. Mr. CORMAN. Well, we have got that much time. Mr. IRwIN. That is right. Mr. CORMAN. You had SAT, which is a for-profit business enterprise. I take it it was incorporated, was it? Mr. HAYES. Correct. Mr. CORMAN. You were sole owner. Mr. HAYES. Yes. Mr. CORMAN. You transferred that to a for-profit trust. Mr. RAY. Liquidated and took the assets. Mr. HAYES. Liquidated and took the assets. Mr. OLSHER. Will you speak up please? Mr. HAYES. T am sorry. Mr. CORMAN. At the moment SAT is a not for profit-is that what SAT is now, a for-profit trust? Mr. HAYES. No; SAT is a not-for-profit corporation. Mr. CORMAN. Now how do we get- Mr. RAY. You are skipping the middle step. Mr. CORMAN. I yield to the gentleman. Mr. IRWIN. I am very confused. We started out with SAT, T think is what the language was, SAT was your own company. Mr. HAYES. Correct. Mr. IRwIN. Then you made `a for-profit trust out of SAT. Mr. HAYES. No; not a trust. Mr. IRWIN. What was it that you said you made out of it? Mr. RAY. Could T explain the sequence of events? Mr. PATMAN. Let the witness explain. He did it. Mr. IRWIN. Have the witness say it because he is the sworn person here. You just tell him what it was. Mr. HAYES. We applied for a not-for-profit charter, State charter, in the State of the Sales Analysis Institute Foundation. Also the R. D. Hayes Family Estate, a trust, was organized. Mr. IRWIN. For trust and for profit or not for profit. Mr. HAYES. For profit. Mr. IRWIN. OK. Mr. HAYES. Taxpaying trust. Mr. CORMAN. Does that trust exist today? Mr. HAYES. It does. Mr. CORMAN. And what are the assets of that trust? Mr. HAYES. Include the former assets of the Sales Analysis Insti- tute plus personal assets. PAGENO="0082" 78 Mr. CORMAN. You have got a for-profit trust that holds the assets of Sales Analysis Institute which is operating as a not for profit? No; what is it operating as at the moment Mr. HAYES. It is a taxpaying personal trust. Mr. IRWIN. The SAT one is? Mr. 1-IAYE5. No. Mr. CORMAN. That is what I am asking you. Mr. HAYES. The R. D. Hayes Family Estate. Mr. CORMAN. I am not asking you about the R. D. Hayes. Mr. HAYES. Pardon me. Mr. CORMAN. At this moment, what is SAT? Does it exist at all? Mr. HAYES. Yes, sir; it does. Mr. C0RMAN. What does it exist as? Mr. HAYES. Sales Analysis Institute Foundation, a not-for-profit corporation, organized under Illinois law. Mr. IRWIN. Will the gentleman yield? Mr. CORMAN. I yield. Mr. IRwIN. Let's go back one step. What was it before it was that? Mr. HAYES. Sales Analysis Institute of Illinois, Inc., a for-profit corporation. Mr. IRWIN. Right. And before that? Mr. HAYES. Before that it was a Sole proprietorship. Mr. IRWIN. Thank you. Mr. CORMAN. We have got ofle missing link. You transferred the assets of that corporation when it was profit corporation to your per- sonal for-profit trust. It is operating at the moment as a not-for-profit foundation. Is it not? I am using your words I believe. Can we have the reporter read back the answer to what SAT is at the moment? Mr. IRwIN. Be careful where you read that. Mr. PATMAN. Our time is very limited, Mr. Corman. Could you `ask him to have that ready the next time please? Mr. RAY. We will provide that. Mr. HAYES. I will be glad to prepare a ske.tch to show you exactly what happened. Mr. PATMAN. And also include the assets that you actually trans- ferred each time. Mr. HAYES. All right. (The information referred to had not been received at the time of printing.) Mr. CORMAN. May I ask you one other question, Mr. Hayes. Is the pattern of your business activity similar to the pattern that is used by your clients? Mr. HAYES. Identical except with regard `to the nature of the busi- ness. Mr. CORMAN. I think it might be extremely helpful to us, Mr. Chair- man, if- Mr. HAYES. I would be glad to spend any amount of time on that area. Mr. CORMAN. At least so we can find out what happened to SAT. Mr. PATMAN. That is right, we must do that but we can't do it today because we'only have about 4 minutes, sir. Mr. CORMAN. Yes, sir. Mi~. PATMAN. May I interrupt? PAGENO="0083" 79 Mr. CORMAN. Yes, sir; I yield. Mr. PATMAN. Our hearings will resume next Monday, November 6. We will continue with Mr. Hayes and James R. Walsh, Jr. The sub- penas are in full force and effect until you and Mr. WTalsh are excused by the chairman as a witness before the committee. Hence, we will expect you to bring with you the records described in the subpenas, and particularly those records that you have promised to present. Mr. HAYES. Yes, sir. Mr. PATMAN. Following Mr. Walsh's testimony next week, the witness will be Dr. Michael Saxon. He is the doctor you referred to a while ago as here; isn't he? Mr. HAYES. Right. Mr. PATMAN. And Messrs. George Schuyler and J. Alton Lauren, trustee of ABC, and Richard Stephenson, trustee of ABC. Then on November 13 and 14, we expect to have Secretary Fowler and Commissioner Cohen as witnesses, and we will expect you and Mr. Walsh to be here next Monday, sir. Mr. HAYES. We will be here. Mr. PATMAN. With the records. Mr. HAYES. Yes. Mr. PATMAN. And without objection the committee will stand in recess until 10 o'clock next Monday here in this room. Mr. MORTON. Mr. Chairman, I yield the balance of my time. (Whereupon, at 11 :57 a.m., October 31, 1967, the subcommittee recessed until Monday, November 6, at 10 a.m.) PAGENO="0084" PAGENO="0085" TAX-EXEMPT FOUNDATIONS: THEIR IMPACT ON SMALL BUSINESS MONDAY, NOVEMBER 6, 1967 HoUsE OF REPRESENTATIVES, SUBCOMMITTEE No. 1 OF THE SELECT COMMITTEE ON SMALL BUSINESS, Washington, D.C. The subcommittee met, pursuant to recess, at 10 :12 a.m., in room 2359, Rayburn House Office Building, Hon. Wright Patman (chair- man of the subcommittee) presiding. Present: Representatives Patman, Irwin, Moore, Conte, and Morton. Also present: H. A. Olsher, director, Foundations Study; Myrtle Ruth Foutch, clerk; and John J. Williams, minority counsel. Mr. PATMAN. The committee will please come to order. Mr. Hayes, you are still our witness and still under oath. You real- ize that, don't you? TESTIMONY OP ROBERT D. HAYES, TRUSTEE OP THE AMERICANS BUILDING CONSTITUTIONALLY, A NOT-POR-PROPT TRUST, ACCOMPANIED BY K. P. CHARTIER, COUNSEL TO MR. HAYES; WILLIAM C. RAY, SR., COUNSEL TO MR. HAYES; AND ROBERT A. ERIE, ADMINISTRATIVE ASSISTANT TO MR. HAYES-Resumed Mr. HAYES. Yes, sir. Mr. PATMAN. The first question I would like to ask: By subpena which was served on you October 19. 1967, you were ordered to bring with you the following information: 1. A financial statement of Americans Building Constitutionally for the 12 months ending September 30, 1967, including income and disbursements and a balance sheet. 2. A list showing names and addresses of members of Americans Building Constitutionally and the membership fee received from each of them. You refused to submit such information on October 30 and Octo- ber 31. I am now asking you to furnish me the information. Will you do that? Mr. HAYES. Mr. Chairman, again as trustee of Americans Building Constitutionally, I would be violating my trust, the protection of pri- vacy of our members. Mr. PATMAN. Then you refuse to offer it. Mr. HAYES. Yes. Mr. PATMAN. I am now ordering you to again hand the information described in that snbpena to me, asking you to furnish it to me. 81 PAGENO="0086" 82 Mr. HAYES. I cannot do that., sir. Mr. PATMAN. Do you have custody of those records? Mr. HAYES. At this time I do not, Mr. Chairman. Mr. PATMAN. You do not. You are the head trustee, aren't you? You are the one in charge. Mr. HA1~s. I am one of the trustees. Mr. PATMAN. Who has custody of them? Obviously, the trustees have custody. Mr. HAYES. The executive secretary has custody of these records. Mr. PATMAN. Who is the executive secretary? Mr. HAYES. Mrs. Bertha Fields. Mr. PATMAN. Mrs. Bertha Fields. Mr. HAYES. Right. Mr. PATMAN. Is she at Barrington, Ill.? Mr. HAYES. She is. Mr. PATMAN. Could she get down here tomorrow? Mr. 1-L~YEs. I would have to check that, sir, to find out. Mr. PATMAX. You realize of course that you are responsible for your actions in refusing to comply with the subpena cluces tecum, and further that your refusal to answer pertinent questions may sub- ject you to criminal prosecution. You realize that. Mr. HAYES. No; I do not realize that. Where is the criminal prose- cution? Mr. PATMAN. WTell, contempt proceedings of course, if instituted by this committee and voted by the House, that will be in the direction of bringing you before a court of justice of which the end result would be either conviction or acquittal of the charges. Mr. HAYES. Under what section, Mr. Chairman, of criminal law would I be- Mr. PATMAX. Well, I am not dealing with that, with the details in it, but I can assure you that you woukl be subject to being put in jeopardy for your failure and refusal. We have requested by letters dated October 3, 1967, October 25. 1967, that you furnish us certain documents and information relating to the history and operations of ABC, the R. P. Hayes Family Foun- dation and the Sales Analysis Imustitute Foundation. You refused to furnish such information on October 30 and October 31. I am now ordering you again to hand me the information and docu- ments described in attachment A which accompanied our request of October 3 and October 25. Mr. HAYES. We have that information with regard to Sales Analysis Institute Foundation, and also the B. 1). Hayes Family Foundation. Mr. PATMAN. That is two of them. Now what about the ABC? Mr. T-IAYE5. I cannot as trustee provide that information. Mr. PATMAN. For two of them you have it. there now. Let us have it please. Let the clerk have it. That is all of it for the two but not for the third. That is all, of it for the Hayes Foundation and Sales Analysis, is that correct? Mr. HAYES. For Sales Analysis. Mr. PATMAN. What about the Hayes Foundation? Is that all for the Hayes Foundation and the Sales Analysis.. Mr. HAYES. Correct. Mr. PATMAN. And that is in compliance with our request. Mr. HAYES. Yes, sir. PAGENO="0087" 83 (The information follows:) REPLY TO QuEsTIONs CONCERNING THE R. D. HAYES FAMILY FOUNDATION (A TRUST), FOR THE SELECT COMMITTEE ON SMALL BUSINESS 1. Legible copy of exemption application (Form 1023) and supporting docu- ments, including subsequent amendments. Not applicable-no form has been submitted. 2. Legible copy of letter of Internal Revenue Service granting exemption. Not applicable. 3. Legible copy of charter, or articles of incorporation. If the Foundation is not a corporation, please submit a copy of the trust instrument. Foundation is not chartered. A copy of the trust instrument is attached. 4. Legible copy of by-laws. Not applicable. 5. Balance sheet or itemized schedule of assets as of the date that the Founda- tion was first organized. Not applicable. 6. Legible copy of Form 990-A (or Form 1041-A, if applicable), including at- tachments, filed with the Internal Revenue Service for each year beginning 1951. Not applicable. 7. Legible copy of Form 990-T, including attachments, filed with the Internal Revenue Service for each year beginning 1951. Not applicable. 8. Legible copy of accountant's financial statement for each year beginning 1951, including carrying values and market values of individuals securities held at the close of the year. Re market value, if the stock is not traded, please furnish the Foundation's equity in the net assets of the corporation. Not applicable. 9. Name and address of the accounting firm employed by the Foundation during each year. Not applicable. 10. Names and addresses of the officers of the Foundation at the close of each year. TRUSTEES R. D. Hayes, 3-S-550 Leask Lane, Route ~2, Wheaton, Illinois Edna H. Hayes, 3-S-550 Leask Lane, Route #2, Wheaton, Illinois R. 0. Hayes, 4340 Crest Knoll, Grand Blanc, Michigan J. D. Hayes, 3-S-550 Leask Lane, Route #2. Wheaton, Illinois T. S. Hayes, 210 W. 101st Street, Apt. 10-B, New York, New York 11. Names, business addresses, and occupations of directors, trustees, and members of the finance committee at the close of each year. R. D. Hayes-Executive, 3-S-550 Leask Lane, Route #2, Wheaton, Illinois Edna H. Hayes-Housewife, 3-S-550 Leask Lane, Route #2, Wheaton, Illinois R. 0. Hayes-Executive, 4340 Crest Knoll, Grand Blanc, Michigan J. D. Hayes-Office Employee, 3-S-550 Leask Lane, Wheaton, Illinois T. S. Hayes-Editor, 210 W. 101st Street, Apt. 10-B, New York, New York 12. Name and address of the bank, investment counsel, or broker, if any, rendering financial investment services to the Foundation during each year. Not applicable. 13. If the Foundation owned 5% or more of any class of stock of any corpo- ration at the close of any of the years 1951 through 1906, please submit the following information for each such year: (a) Name and address of the corporation. (b) Nature of the business. . (c) Dates on which the stock was acquired by the Foundation, number of shares acquired, and manner of acquisition. (d) Number of shares of each type of stock owned at the close of each year. (e) Percentage of .each class of outstanding stock of the corporation owned by the Foundation at the close of each year; . (f) Identification of the stock as voting or non-voting. (g) Book value and market value of the stock at the close of each year. Re niarket value, if the stock is not traded, please submit the Foundation's equity in the net assets of the corporation at the close of each year. Not applicable. . .. . .. ., . . ... PAGENO="0088" 84 14. Please advise as to: (a) The years, beginning with 1951, during which the Internal Revenue Serv- ice performed field audits of the Foundation. (b) The years covered in each such audit. (c) Taxes assessed, if any, by the Internal Revenue Service. Not applicable. _______ REPLY TO QUESTIONS CONCERNING THE SALES ANALYSIS INSTITUTE FOUNDATION OF ILLINOIS, INC., FOR THE SELECT COMMITTEE OF SMALL BUSINESSES, CONGRESS- MAN WRIGHT PATMAN, CHAIRMAN 1. Legible copy of exemption application (Form 1023) and supporting docu- ments, including subsequent amendments. Not applicable-no form has been submitted. It is believed that the right of self-determination applies in this case. 2. Legible copy of letter of Internal Revenue Service granting exemption. Not applicable. 3. Legible copy of charter, or articles of incorporation. If the Foundation is not a corporation, please submit a copy of the trust instrument. A copy of the Charter is being prepared for the Committee. (See Exhibit, p.1018.) 4. Legible copy of by-laws. By-laws are presentely in bands of attorneys. A copy will be forwarded to the Committee within the next two to three days. (See Exhibit 5, p. 1022.) 5. Balance sheet or itemized schedule of assets as of the date that the Foun- dation was first organized. A preliminary balance sheet is attached. A final one will be submitted as soon as the C.P.A. has completed it. 6. Legible copy of Form 990-A (or Form 1041-A, if applicable), including attachments, filed with the Internal Revenue Service for each year beginning 1951. Not applicable. It is our belief that not-for-profit corporations qualifying as educational and having a curriculum, a classroom, a student body, and a regular staff of instructors do not prepare Form 990-A. 7. Legible copy of Form 990-T, including attachments, filed with the Internal Revenue Service for each year beginning 1951. Not applicable. See above reason, #6. 8. Legible copy of accountant's financial statement for each year beginning 1951, including carrying values and market values of individual securities held at the close of the year. Re market value, if the stock is not traded, please furnish the Foundation's equity in the net assets of the corporation. A preliminary financial statement has been prepared and is attached. A final statement will be forwarded to the Committee as soon as the C.P.A. has finished the final draft. 9. Name and address of the accounting firm employed by the Foundation during each year. The accounting firm employed is P. C. Corrado and Company, 69 West Wash- ington Street, Chicago, Illinois 60602. 10. Names and addresses of the officers of the Foundation at the close of each year. R. D. Hayes, President-Box 575, Barrington, Ill. 60010; J. D. Kirk, Vice-Presi- dent and General Manager-Box 575, Barrington, Ill. 60010; Edna H. Hayes, Viee-President-3 5. 550. Leask Lane, Route #2, Wheaton, Ill. 60187; Lorena Kohiman, Secretary and Treasurer-Box 575, Barrington, Ill. 60010. 11. Names, business addresses, and occupations of directors, trustees, and members of the finance committee at the close of each year. R. D. Hayes, Director-Occupation: Executive-Box 575, Barrington, Ill. 60010; J. D. Kirk, Director-Occupation: Executive-Box 575, Barrington, Ill. 60010; Edna H. Hayes, Director-Occupation: Housewife-3 5. 550, Leask Lane, Route #2, Wheaton, Ill. 60187. 1~. Name and address of the bank, investment counsel, or broker, if any, rendering financial investment services to the Foundation during each year. Not applicable. 13. If the Foundation owned 5% or more of any class of stock of any cor- poration at the close of any years 1951 through 1966, please submit the fol- lowing information for each such year: PAGENO="0089" 85 (a) Name and address of the corporation. (b) Nature of the business. (c) Dates on which the stock was acquired by the Foundation, number of shares acquired, and manner of acquisition. (d) Number of shares of each type of stock owned at the close of each year. (e) Percentage of each class of outstanding stock of the corporation owned by the Foundation at the close of each year. (f) Identification of the stock as voting or non-voting. (g) Book value and market value of the stock at the close of each year. Re market value, if the stock is not traded, please submit the Foundation's equity in the net assets of the corporation at the close of each year. Not applicable. 14. Please advise as to: (a) The years, beginning with 1951, during which the Internal Revenue Service performed field audits of the Foundation. (b) The years covered in each such audit. (c) Taxes assessed, if any, by the International Revenue Service. Internal Revenue Service audit not completed as of this date. Sales Analysis Institute Foundation of Illinois, Inc.* Balance Sheet, Apr. 30, 1967 ASSETS Current assets: Cash $11, 199. 82 Accounts receivable 25, 614. 05 Less allowance for losses 400. 00 25, 214. 05 Prepaid interest 867.40 Advances 6, 791. 79 Total current assets 44, 073. 06 Other assets: Cash surrender value of life insurance 47, 611. 48 Deposit account 425. 00 Total other assets 48, 036. 48 Equipment: Furniture 1, 740.21 Less allowance for depreciation 87.00 1, 653. 21 Automobiles 53, 511.08 Less allowance for depreciation 11, 000. 97 42, 510. 11 Total assets 136, 272. 86 LIABILITIE5 Current liabilities: Notes payable 35, 075. 73 Account payable 19, 271. 49 Employee compensation 15, 750. 00 Taxes 3, 841. 34 Royalties 4, 166. 67 Total current liabilities 78, 105. 23 Total other liabilities: Total other liabilities: Loan on cash surrender value of life insurance 40, 924. 24 Earned and donated surplus 17, 243. 39 Total liabilities and donated surplus 136, 272. 86 *preljminary statement-Final statement is being prepared by CPA. PAGENO="0090" 86 Sales Analysis Institute Foundation of Illinois, Ine.* trial balance- opening journal entries, illay 20, 1966 ASSETS Current assets: Cash $17, 141. 61 Accounts receivable $103, 843. 20 Less allowance or losses 400. 00 - 103, 443. 20 Prepaid Interest 1, 000. 23 Advances to Employees 4, 540. 32 Total current assets 126,134.36 Other assets: Sundry 2, 142. 02 Equipment Automobiles $66, 670. 36 Less allowance for Depreciation 40, 507. 25 26, 163. 11 Total other assets and equipment 28,305.13 Total assets 154, 430.49 LIABILITIES Current liabilities: Notes payable to bank 53, 465. 74 Accounts payable 17, 001. 48 Employee compensation 16, 750. 00 Payroll taxes 1, 897. 89 Federal income taxes 11, 605. 53 Other taxes 2, 500. 00 Royalties 6, 249. 99 Accrued interest ~, 678. 16 Total current liabilities 118, 148. 79 Donated Surplus 36, 290. 70 Total liabilities and donated surplus 154, 439. 49 5Preliminary statement-Final statement is being prepared by CPA. Mr. PATMAN. On October 30 and October 31, I called attention to the fact that ABC had made grants to two foundations in the amount of $10,500 each to cover the cost of membership in ABC. Those two foundations were Hough's Encyclopedia of American Woods Founda - tion, New York City, and Forensic. Science Institute, Washington, D.C. Since then, Mr. Herbert. Mi. 1-limes, a chiropractor and executive director of the Herbert Ml. Himes Foundation, Waukegan, Ill., has informed us that his foundation "is a member organization of Ameri- cans Building Constitutionally. The fee for said membership was waived." So, flOW we know of three foundations who paid nothing for mem- bership in ABC, while you have admitted that thousands of dollars have been paid by other people. According to the Baltimore News American of November 1, 1967, Dr. D. W. Anderson, president., D. W. Anderson Foundation, Aurora, ill., paid $10,500 to ABC. I shall place the article in the record so that it will not be necesary for me to read it at this time. This business of tapping some people for $10,500 for services that others receive free of charge is a highly irregular practice, isn't it ~ PAGENO="0091" 87 (The article referred to follows:) [From. Baltimore News American, Nov~ 1, 1~67] I-lOUSE PROBERS SEEK DETAILS-DOCTOR SAYS FounDATIoN SLASHES TAXES IN HALF (By Leslie H. Whitten, News American Washington Bureau) WASHINGTON, Nov. 1-An Illinois doctor said today he has turned his practice into a tax-exempt foundation with himself as president, his wife as vice president and his 21-year-old daughter as secretary. As secretary, the daughter's tuition, hooks and housing is paid for at the Den- ver, Cob., school where she is a senior. The foundation pays for the doctor's transportation, housing and many other expenses as "fringe benefits," he said. Dr. D. W. Anderson said in a telephone interview from his office in Aurora, Ill., that he set up the D. W. Anderson Foundation just over a year ago with the help of Americans Building Constitutionally. ABC is currently under hot investigation by a House Small Business subcom- mittee. The Anderson foundation was one of 63 allegedly set up by ABC, accord- ing to subcommittee's two-day hearings on ABC. The hearings will resume on Monday. Secretary of the Treasury Henry Fowler and Internal Revenue Gominissioner Sheldon Cohen will be called on the carpet Nov. 13 by the subcommittee chairman, Wright Patman (D., Texas) to explain "how come." Dr. Anderson, "medical director" as well as president of his foundation, said he paid $10,500 to ABC and has already "amortized" the cost because he paid clou- ble that in income taxes before setting up the foundation. Now, the foundation pays him a modest salary-on which he still pays taxes-but much of his income of about $50,000 a year is tax free. Patman, in scathingly attacking the Treasury Department for not closing up tax-exempt loopholes, said the mini-foundations would further erode the tax base of the nation. "One witnesses an. . . orgy of tax-avoidance by multi-million dollar foundations as well as by `backyard foundations,'" Patman said. The little man, be said, winds up paying the tax bill. ABC trustee Robert D. Hayes told the subcommittee yesterday that he sets up foundations "exactly (like) the Kennedys have done." The Joseph P. Kennedy Jr. Foundation is the foundation of the Kennedy family, but is much larger than the ABC enterprises. Hayes has refused to answer some of the subcommittee's questions and to produce certain records. Patman said the subcommittee would hear more testi- mony before deciding whether to recommend that Congress cite him for contempt. Mr. HAYES. No, Mr. Chairman. For services rendered, these are entirely within reason. Mr. PATMAN. Here we have $31,500 which ABC donated to three foundations. From whom did ABC receive the funds that it contributed to these three foundations? From whom did ABC receive the funds that it contributed to these foundations? You state they didn't receive them, that it was just service rendered. Here we have $31,500 which ABC donated to three foundations. FrQm whom did ABC receive the funds that it contributed to these three foundations? Mr. HAYES. As trustee I can't reveal that information. Mr. PATMAN. According to the Wall Street Journal of October 25, 1967, your associate, James R. Walsh, Jr., has been linked "with a savings and loan association that had dealings with the Chicago under- world." Is this true? Mr. RAY. Objection, Mr. Patman, on the grounds of pertinency. Mr. PATMAN. Let me preface this. Did you Tead the Wall Street Journal of October 25, 1967, concerning your associate, James R. Walsh, Jr.? Mr. R~r. Objection. PAGENO="0092" 88 Mr. HAYES. I don't remember. Mr. PATMAN. Has ABC received any part of its funds from any person or organization connected with the underworld? Mr. HAYES. I can't reveal that information. Mr. PATMAN. Has ABC received any funds from sources that are engaged in illegal activities of any kind? Mr. HAYES. Not to my knowledge, Mr. Chairman. Mr. PATMAN. You are hereby ordered to furnish this subcommittee by Wednesday, November 8, 1967, the names and addresses of all orga- nizations that have obtained membership in ABC without cost. You will be expected to comply with that. You have the information, by November 8, the names and addresses of all organizations that have obtained membership in ABC without cost. You will be expected to present that. You are ordered to present it. It is true, is it not, that you have been putting pressure on trustees J. Alten Lauren and Richard J. Stephenson to keep them from disclos- ing information to this subcommittee? Mr. HAYES. No, sir.. Mr. PATMAN. That is not true. Mr HAl ES Not to my know ledge Mr. . PATMAN.. It is true, is it not, that you l~ave threatened trustees J. Alten Lauren and Richard J. Stephenson with dire consequences if they disclose information to this subcommittee? Mr HAYES Thisisnottrue Mr. PATMAN. You have hot threatened them. Mr. HAYES. No, sir. . . Mr. PATMAN. What did you tell Messrs. Lauren and Stephenson the results would be if they disclosed information to this subcommittee ? Mr HAlES I did not discuss it with them Mr. PATMAN... As I st.ated on October 30, we have asked 63 alleged members of ABC for information on the history and operations of their foundations, and 48 of t.hese 63 foundations failed to respnd to our request. . . . \Ve have now had responses from tw-o more foundations and they are worthy of a place in this record. The foundations involved are the lViansch Foundation, Yorkville, Ill., and the Massner Foundation, Davenport, Iowa. In order to save time, I shall only read oneletter, but put both of them in the record. In view of the fact that Mr. Robert P. Hayes, trustee of Americans Building Constitutionally, will appear before the Select Committee on Small Business on October 30, 1967, to answer questions which will not oniy be of public interest, but which will aid the Congress in enacting remedial legislation, I feel that your request for information is premature as to the Wunsch Foundation. I will place the other one in the record. (The letters referred to follow:) THE WUNSCH FOUNDATION, Yorkviile, Iii., October 24, 1967. Hon. WRIGHT PATMAN, Chairman, ~nbcorninittee Foundation ~tnd.y, Ray burn Building, Washington, D.C. CHAIRMAN PATMAN: In view of the fact that Mr. Robert D. Hayes, Trustee of Americans Building Constitutionally, will appear before the Select Committee on Small Business on October 30, 1987 to answer questions which will not only be of public interest, but which will aid the Congress in enacting remedial PAGENO="0093" 89 legislation, I feel that your request for information is premature as to the Wunsch Foundation. Very truly yours, L. A. WUNSOH, Ecoecutive Director. MASSNER FOUNDATION, Davenport, Iowa, October 28, 1967. Hon. WRIGHT PATMAN, : Chairman, Subcommittee Foundation Study, Rayburn B~iilding, Washington, D.C. CHAIRMAN PATMAN: In view of the fact that Mr. Robert D~ H~yes, Trustee of Americans Building Constitutionally, will appear before the Select Commit- tee on Small Business in October 30, 1967 to answer questions which will not, only be of public interest but which will aid the Congress in enacting remedial legislation, I feel that your request for information is premature as to the Massner Foundation. Very truly yours, R. C. MA55NER, D.C. Mr. PATMAN. Although these two foundations are located in differ- ent States, the letters are identical-word for word, and comma for comma. Is it not true that those letters were inspired by you or by some- one connected with ABC? Mr. HAYEs. Not to my knowledge. Mr. PATMAN. On October 30, 1967, I placed in the record a signed statement from Mr. Herman E. Kimsey, president, Forensic Science Institute, Washington, D.C., to the effect that, on. July 12, 1967, he had received a $10,500 check from ABC with the stipulation that the money be applied for membership of Forensic Science Institute in ABC. I now wish to place in the record additional documents which we received from Mr. Kimsey subsequent to our October 31 hearing. These documents include a copy of the Forensic Science Institute's application for membership in ABC which is sponsored by the Sci- entific Prayer Ministry Foundation, Inc., John P. Speller, D.D., presi- dent. The Scientific Prayer Ministry Foundation, Inc. is thus added to our list of alleged members of ABC bringing the total of such alleged members to 64. I will place in the record the correspondence, statements and affi- davits in connection therewith. (The documents referred to follow:) I, Bertha Fields, Executive Secretary of Americans Building Constitutionally (a Trust) certify that the following Resolution was adopted at a duly held meet- ing of the Board of Trustees of Americans Building Constitutionally held on the 1th day of May, 1967, to wit: 1?eso~ved, That the Board of Trustees authorize to be made and hereby do make a grant of $5,000 to be administered by Forensic Science Institute in advancing the purpose and program of Americans Building Constitutionally in all ways consistent with the Forensic Science Institute's purpose as may be from time to time assigned by Americans Building Constitutionally. BERTHA FIELDS. Accepted and agreed to on behalf of the Forensic Science Institute by Herman E. Kimsey. July 12, 1967. I, Bertha Fields, Executive Secretary of Americans Building Constitutionally (A Trust), certify that the following Resolution was adopted at a duly held PAGENO="0094" 90 meeting of the Board of Trustees of Americans Building Constitutionally (A Trust) on the 6th day of May, 1967, to wit: Resolved, That moved by the significant contribution of Herman E. Kimsey which has been embodied in the Forensic Science Institute which has made such important contributions and shall in the future make an even greater contribu- tion toward war against crime and the maintenance of civil order which is a pillar of this Republic, Americans Building Constitutionally (A Trust) author- izes and does hereby grant the sum of $10,500 in trust to be applied toward said Forensic Science Institute's membership in Americans Building Constitu- tionally (A Trust). BERTHA FIELDs. Accepted and agreed to on behalf of the Forensic Science Institute by Herman B. Kimsey. July 12, 1967. AMERICANS BUILDING CONSTITUTIONALLY, A TRUST MEMBERSHIP APPLICATION AND SPONSORING AGREEMENT This application will create no rights, duties, or obligations in either the ap- plicant, his Sponsor, or Americans Building Constitutionally until accepted un- conditionally by both the Sponsor and Americans Building Constitutionally. The membership applicant submits that he is a citizen in good standing, that he wishes to ease the burdens of our government by working to benefit mankind and to dedicate himself to that end, and that upon acceptance by the Sponsor and Americans Building Constitutionally, he will seek to fulfill through his to-be- formed, non-profit organization the qualifications for full membership in both organizations and he will abide by the standards of sponsorship of Americans Building Constitutionally. Applicant represents that he intends to establish a non-profit organization for the benefit of mankind and makes this agreement both personally and on behalf of that to-be-formed, non-profit organization. Acceptance by the Sponsor arid Americans Building Constitutionally is conditioned upon the formation of that non-profit organization and adoption by that non-profit organization of this agreement. In the event the applicant fails to form the contemplated non-profit organiza- tion or that non-profit organization fails to adopt this agreement, the applicant is released from any personal liability for sums as yet unpaid. Notwithstanding this release, neither the Sponsor nor Americans Building Constitutionally is ob- ligated to return any portion of the membership fee paid prior to notification of this failure. Upon receipt by the Sponsor of $10,500.00, the amount of the membership fee in Americans Building Constitutionally for a senior membership, the Scientific Prayer Ministry Foundation, Inc. agrees to act as applicant's agent in sponsor- ing applicant and the applicant's to-be-formed, non-profit organization for mem- bership in Americans Building Constitutionally. Upon acceptance by both the sponsoring non-profit organization and Americans Building Constitutionally, said organizations agree to provide all things necessary by and with their informa- tion, methods, procedures and techniques to enable the applicant to more fully utilize and protect his constitutional rights to the end that he may benefit man- kind. It is understood that while access to these methods, procedures, or informa- tion is an incident to membership in Americans Building Constitutionally, that all property rights in all such material is reserved to Americans Building Con- stitutionally and the member is to receive only the opportunity to make use of that material in the course of his participation as a member of Americans Build- ing Constitutionally. In further consideration of the acceptance of this application by the Sponsor and Americans Building Constitutionally of the applicant's to-be-formed, non- profit organization for membership, the applicant hereby agrees not to teach, give, lend, lease, sell, assign, or otherwise divulge or communicate any of the informa- tion, methods, procedures, or techniques furnished with the membership, without written consent of Americans Building Constitutionally. It is understood that violation of the provision of this paragraph will be a material breach sufficient to justify, among other things, revocation of membership privileges. Applicant understands that it is the policy of Americans Building Constitution- ally to expand the field of private non-profit organization activity through grants PAGENO="0095" 91 and endowments to member organizations and it is the applicant's desire that a portion of his membership fee may be so used, subject to the discretion of the Trustees of Americans Building Constitutionally, to endow the activities of mem- ber organizations. The membership of the applicant's to-be-formed, non-profit organization in Americans Building Constitutionally shall be non-voting, non-transferrable and non-assessable, shall create no right of participation or control, and shall be conditioned upon the payment of the fee in full and completion of the membership requirements in both the sponsoring non-profit organization and Americans Building Constitutionally (as stated in the Standards of Sponsorship). This agreement is personal and by the applicant's signature hereto, he makes his to-be-formed, non-profit organization and its membership a party to this agreement, which is not assignable and shall be construed as an Illinois contract, notwithstanding the place of delivery or performance. Execute in quadruplicate and forward to Americans Building Constitutionally., Name: Forensic Science Institute. Profession or Business: Intelligence Con- sultant and Public Safety. Business Address: 1723 G St. N.W. City: Washington. State: D.C. 20006. Home Address: Same. City: New York. State: New York. Date: May 4, 1967. Signature of Membership Applicant: Herman E. Kimsey. Authorized Signature of Sponsor: Jon P. Speller, D.D. Sponsoring Organization (to whom all membership fees are paid): Scientific Prayer Ministry Foundation, Inc. City: New York. State: New York. Accepted by: Bertha Fields. Americans Building Constitutionally (a Trust) N.F.P., P.O. Box 575, Barring- ton, Illinois 60010. APPLICANT'S COPY I, Bertha Fields, Executive Secretary of Americans Building Constitutionally (a Trust), certify that the following Resolution was adopted at a duly held meeting of the Board of Trustees of Americans Building Constitutionally held on the 11th day of July, 1967, to wit: ResOlved, That the sum of $2,500 be and hereby is authorized to be paid to the Forensic Science Institute to represent reimbursement for expenses incurred by the Institute in advancing the aims and goals of Americans Building Constitu- tionally and, more recently, the aims and goals of the Philippa Schuyler Memorial Foundation. BERTHA FIELDs. Accepted and agreed to on behalf of the Forensic Science Institute by Herman E. Kimsey. July 12, 1967. This grant is extended to include expenses and fees for services rendered until such date as this project is no longer in force. As of 30 Sept. 67, the additional amounts totalled $2308.04. _______ [From the Washington Star, Nov. .1, 1067J ABC-AIDED FOUNDATION CENTERED IN HOTEL Roo~r The international headquarters of the Forensic Science Institute, which its director describes as a research and development facility for modern crime- fighting techniques, is one hotel room at 17th and G Streets NW. The room, illuminated by a bare overhead light, serves as the hub of one of the foundations being investigated by a House subcommittee. It is an offspring of the Americans Building Constitutionally (ABC), which is under attack as a "school" for tax-free foundations. Yesterday Rep. Wright Patman, D.-Tex., said the ABC had given the in- stitute a "grant" of $10,500, which the institute then returned to the ABC as a membership fee. The disclosure came during the second day of hearings of the Patman's Small Business subcommittee on foundations. PAGENO="0096" 92 Director of the institute-and presently its sole member-is Herman E. Kimsey, who explained the gift yesterday: "ABC felt that I had made significant contributions in the field of forensic science, and that I would make more contributions in the future." He denied that the money was a loan, insisting it was "an outright grant." In Kimsey's signed statement to Patman, he said the check was "endorsed by myself and returned to their records." "That looks like kind of a game," Patman said yesterday. But Kimsey stuck by his explanation of the maneuver. Kimsey is a former CIA employee and was security officer for Barry Goldwater during the 1964 presidential campaign. Two years ago he was one of two in- structors who introduced a composite picture identification system to the Metro- politan Police Department-a system which is now in wide use throughout the country. He said his foundation researches ways to give police positive ways of solving crimes and identifying criminals. For example, he said, testimony by doctors is only opinion-even though expert. In contrast, fingerprinting is irrefutable fact. "The institute applies the physical laws of science to criminal investigation," he said. "We want to replace opinion by provable evidence." He received an initial $5,000 grant, in addition to the $10,500 membership fee, from the ABC, he said. "We hope in the future to receive more grants from ABC and others," he added. He said the foundation averages about $500 a month in spending. Mr. RAY. May I see the information being placed in the record? Mr. PATMAN. This is the one I just read. Hand this to him. We are trying to find-hand it to the attorney-we are trying to find the source of large funds which ABC seems to hand out freely to some foundations who have assumed tax exemption merely by the twist of a wrist. You refuse to furnish us information, so we have to ask questions. How many members of ABC, Mr. Hayes, have borrowed money from that organization? How many members have borrowed money from the ABC organization? Mr. HAYES. As trustee, I can't reveal that information. Mr. PATMAN. Do you have the information? Mr. HAYES. Not at the moment, sir. Mr. PATMAN. Well, you have it available. Mr. HAYES. Not that I know. Mr. PATMAN. The records of the fund disclose this information though. You admit that, don't you, Mr. Hayes? Bring this back up here, will you please? Mr. HAYES. Pardon me, would you restate that question, Mr. Chairman. Mr. PATMAN. How many members of ABC have borrowed money from that organization? Mr. HAYES. I can't reveal that, sir. Mr. PATMAN. How much money has ABC loaned to its members? Mr. HAYES. I can't reveal that. Mr. PATMAN. You are hereby ordered to furnish the following in- formation to this subcommitte& by November 13. That should be November 8, like it was awhile ago, 1967: 1. Name and address of every ABC debtor since date of organiza- tion. Name and address of every ABC debtor-and every ABC debtor. That should be name and address of every ABC debtor since date of organization. Do you have that down, Mr. lawyer, Mr. attorney? 2. Face amount of the loan. 3. Interest rate. PAGENO="0097" 93 4. Date loan was made. 5. Due date. (This information has not been received by the subcommittee.) Has ABC or authorized members contacted prospective applicants by mail? Has the ABC or authorized members contacted prospective applicants by mail? Mr. HAYES. Not that I know of. Mr. PATMAN. Does ABC use printed promotional material? Mr. HAYES. No. *Mr. PATMAN. It does not use printed promotional material. Mr. HAYES. It does not. Mr. PATMAN. Has ABC ever used any brochures as promotional material or for other uses? Mr. HAYES. Originally, there was a small pamphlet. This is no longer used. Mr. PATMAN. How long was it discontinued? Mr. HAYES. I don't know the exact time, but it has been a good many months. Mr. PATMAN. About a year? Mr. HAYES. About. Mr. PATMAN. About a year. I know his answer was they are not using it now. He said "No" and he explains now that it has been a year since they have used it. I have here a brochure which I understand was used as a mailing piece by ABC at one time. Are you familiar with it? Can you see it from here, to recognize it, or would you like to have it in hand? (See exhibit 6, appendix p. 1027.) Mr. RAY. Could we see it? Mr. 1-IAYEs. I am familiar with that piece, Mr. Chairman. To my knowledge it was never sent through the mail. Mr. PATMAN. It was never sent through the mail. Mr. HAYES. No. Mr. PATMAN. But it was used up until what time, about how long ago? Or is it used now? Mr. HAYES. It is not used now. Mr. PATMAN. It is not used now. Is it in the category that you men. tioned awhile ago? It has been a year since it was used. Mr. HAYES. Correct. Mr. PATMAN. On October 30 you presented us with a copy of a sales pitch that was used in a so-called seminar which you conducted for the benefit of IRS officials. The material you gave us was tailored for that seminar; is that correct? Mr. HAYES. No, sir. Mr. PATMAN. Who is the person in charge of ABC's accounting records? Mr. HAYES. Mr. Chairman, the lady mentioned a few moments ago, Mrs. Fields. Mr. PATMAN. She handles the records. Mr. HAYES. Correct. Mr. PATMAN. Do you have an independent audit of your records and expenditures, income and so forth? Have you had a certified public accountant audit your books within the last year? Mr. HAYES. We are in that process right at the moment. 87-444-68------7 PAGENO="0098" 94 Mr. PATMAN. `Who is the accountant? Mr. HAYES. I can't reveal his name. Mr. PATMAN. You mean there is a good reason why you can't name an accountant that is auditing your books? Who is he dealing with in connection with the company? Is he dealing with you in getting the books and records or with whom is he dealing, the accountant? Mr. HAYES. He is dealing with Mrs. Fields. Mr. PATMAN. Mrs. Fields. Mr. HAYES. Only. Mr. PATMAN. I `have here a copy of an ABC application form. I shaU place it in the record. (The form referred to follows:) AMERICANS BUmDING CONSTITUTIONALLY MEMBERSHIP APPLICATION AND SPONSORING AGREEMENT This application will create no rights, duties, or obligations in either the appli- cant, `his Sponsor, or Americans Building Constitutionally until accepted uncon- ditionally by both the Sponsor and Americans Building Constitutionally. The membership applicant submits that he is a `citizen in good standing, that he wishes to ease the burdens of our government by working to benefit mankind and to dedicate himself to that en'd, and that u'pon acceptance by the `Sponsor and Ameri'can's Building Constitutionally, he `will seek to `fulfill through his to-be- former, non-profit organization the qualifications for full membership in both organizations and he `will abide by the standards of s'pon'sorshi'p of Americans Building Constitutionally. Applicant represents that he intends to establish a non-profit o'rganization for `the benefit of mankind and makes this agreement both personally and on behalf: of that to~be-formed, non-profit organization. Acceptance by the Sponsor and American's Building `Constitutionally is conditioned upon the formation of the non~profit organization and a'doption by that non-profit organization of this agreement. In the event the applicant fail's to form the contemplated non-profit organiza- tion or that non-profit organization fails to adopt this agreement, the applicant is released from any personal liability for sums as yet unpaid. Notwithstanding this release, neither the Sponsor nor Americans Building Constitutionally is obli- gated to return any portion of the membership fee paid prior to notification of this failure. Upon receipt by the `Sponsor of $10,500.00, the amount of the membership fee in Americans Building Constitutionally for a senior membership, the Americans Building Constitutionally agrees `to act as applicant's agent in sponsoring appli- cant and the applicant's `to-'be4ormed, non-profit organization for membership in Americans Building Constitutionally. Upon a'cceptance `by both the `sponsoring' non~profit organization and Americans Building Constitutionally, sai'd organiza- tions agree to provide all things necessary `by and with their information, methods, procedures and techniques to enable the applicant to more fully utilize and protect hi's `con'stitutional rights to the end that he may `benefit mankind. It is understood that while acces's to these methods, procedures, or information is an in'ci'dent `to membership in American's Building Constitutionally, that all property rights in all such material i's reserved to Americans Building Constitutionally and the member is to receive only the oppo'rtunity to make u'se of that material in the course of his participation as a member of Americans Building Constitu- tionally. In further consideration of the a'c'ceptan'ce of this application `by the Sponsor and Americans Building Constitutionally of the applicant's to~be-forrned, non- profit organization for membership, the applicant hereby agrees not to teach, give, lend, lease, sell, assign, or otherwise divulge or communicate any of the in- formation, method's, procedures, or techniques furnished `with the membership, without written consent of Americans Building Constitutionally. It is understood that violation of the provision of this paragraph will be a material breach suffi- cient to justify, among other things, revocation of membership privileges. Applicant understands that it is the policy of Americans Building Constitu- tionally to expand the field of private non-profit organization a'ctivity through PAGENO="0099" 95 grants and endowments to member organizations and it is the applicant's desire that a portion of `his membership fee may be so used, subject to the discretion of the Trustees of Americans Building Constitutionally, to endow the, activities *of member organizations. The membership of the applicant's to~be-formed, non-profit o'rganization in Americans Building Constitutionally shall be non-voting, non-tran's'ferra'ble and non-assessable,shali create no right of participation or "control, and shall be con- ditioned upon the payment of the fee in full and completion of the membership requirements in both the sponsoring non-profit organization and Americans Building Constitutionally (a's stated in the Standard's of `Sponsorship). `This agreement is personal and by the applicant's signature `hereto, he make~ his to~be-formed, non-profit organization and its membership a party to this agreement, `which is not assignable and shall `be `construed as an Illinois `contract, notwithstanding the `place of delivery or performance. Execute in quadrupli'cate and `forward to American's Building Qonstitutional'ly. Name: Hough's Encyclopaedia of American, Woods Foundation, Inc. `City: New York. State: New York. Date: June 1, 1967,. `Signature of Membership Applicant: Robert Speller. (~SEAL) Authorized Signature of Sponsor: R. D. Hayes, Trustee. (SEAL) Sponsoring Organization (to `whom all membership fees are paid): Americans Building `Constitutionally (A Trust). Address: P.O. Box 5Th; `City: Barrington; State: Illinois. Accepted by: BertM Fields. Americans Building Constitutionally (A Trust) N.F.P. P.O. Box 575, Barrington, Illinois 60010. Mr. PATMAN. First, I would like to have you take a look at it. Please tell us whether it is the application form that is presently in use by ABC or has been in use by ABC in the past. Have you looked at it, Mr. Hayes? Mr. HAYES. Yes; this is the one. Mr. PATMAN. That is the one. Mr. HAYES. Correct. Mr. PATMAN. Let me have it back, please. I will have someone here in a moment that will do that work. Thanking you very much. Do you have a copy of the ABC application form now in use? Mr. HAYES. You have it there. Mr. PATMAN. This is it? Mr. HAYES. Yes. Mr. PATMAN. All right. When ABC accepts a foundation for mem- bership, who receives the fee? Mr. HAYES. ABC receives the fee, Mr. Chairman. Mr. PATMAN. Well, someone representing ABC obviously must re- ceive it. Who is that person? Mr. HAYES. Whoever is the sponsoring member. Mr. PATMAN. The sponsoring member. Mr. HAYES. Right. Mr. PATMAN. Do you give them a reduction? Mr. HAYES. No, sir. Mr. PATMAN. But anyone who is the sponsoring member is the one who receives the fee from the person who becomes a new member of ABC, the sponsoring member. Mr. HAYES. At this time, that is correct. Mr. PATMAN. In other words, all new members must be sponsored by some existing member. Mr. HAYES. That is correct. Mr. PATMAN. What are the qualifications for membership in ABC? PAGENO="0100" 96 Mr. I-L~yus. It is available to every American citizen in good standing. Mr. PATMAN. Who determines whether an individual has the neces- sary qualifications to become a member of ABC? Mr. HAYEs. The courts. Mr. PATMAN. The courts? You don't carry this to court. Mr. hAYEs. We haven't had occasion to at this time. Mr. PATMAN. I know, but someone must receive the fee, for instance, and someone must be accepted as members. Who in your organization ~tccepts them as a member in good standing? Mr. HAYES. The trustees. Mr. PATMAN. The trustees, three of you. Mr. HAYEs. Correct. Mr. PATMAN. Well, if there is just one present, who does it? Mr. HAYES. This is an act that all three trustees must pass on. Mr. PATMAN. They must pass on. Mr. HAYES. Right. Mr. PATMAN. Do you accept members who are not American citizens? Mr. HAYES. No. Mr. PATMAN. I note that the membership application requires a pledge of secrecy from the members. We have, for example, received a letter from an accounting firm which says as follows: For some time we have been trying to secure some factual information about the aims and purposes of Americans Building Constitutionally, and so far we have been unsuccessful in getting any written material which contains the kind of factual information which we would like to have. Why is it necessary for ABC to operate in secrecy? Mr. HAYES. Who wrote the letter, Mr. Chairman, if I might ask? Mr. PATMAN. Well, it is an accounting firm. What difference does it make? In fact, we could get you up a number of letters like this. Mr. HAYES. I imagine so. Mr. PATMAN. And the question is whether or not you operate in secret, and why is it necessary to operate in secrecy? Mr. HAYES. Who is the letter addressed to, Mr. Chairman? ABC isn't hiding. Mr. PATMAN. It is addressed to you. Mr. HAYEs. It is addressed to me? Mr. PATMAN. No; it was addressed to me. Mr. HAYES. Oh. Mr. PATMAN. But they have been trying to get the information from you, and they have been unable to do it. Mr. HAYES. The question that arises in my mind is why didn't they contact me. Mr. PATMAN. My information is that they did contact you. Mr. HAYES Not to my knowledge. Mr. PATMAN. The question is why is it necessary to operate in secrecy. Mr. RAY. Would you clarify that question, Mr. Chairman? Mr. PATMAN. I don't think it needs any clarification. Mr. RAY. The only requirement of secrecy to my knowledge is that they don't reveal the trust instrument. PAGENO="0101" 97 Mr. PATMAN. The trust instrument, I thought it had been recorded. Mr. RAY. Right. Mr. PATMAN. Well, that is in the public domain. There is no secrecy there, subject to the laws of Illinois as well as the Federal laws. Mr. HAYES. We reveal this information in our seminars. There is no secrecy involved except that people don't want their affairs spread all over the newspapers and in the hands of those who might use it to their disadvantage. Mr. PATMAN. Do I understand correctly that an ABC member must promise to never divulge any of ABC's methods or procedures or techniques or the identity of any other member? Mr. HAYES. All the information, Mr. Chairman, to that regard is on that application form. Mr. PATMAN. It is on the application. Mr. HAYES. Yes, sir. Mr. PATMAN. And it does have a statement in connection with that. Mr. HAYES. It has some such statement, not exactly as~ Mr. PATMAN. Of the $10,500 paid for senior membership, how much of it goes to ABC? Mr. HAYES. The entire amount is payable to ABC as a membership fee. Mr. PATMAN. Of the $10,500, who gets the portion that does not go to ABC and how much is that portion? Mr. HAYES. All of it goes to ABC. Mr. PATMAN. Don't you have-I wouldn't say kickback, that is kind of an undignified phrase-but don't you have some method of reim- bursing the member who brings the person in? Mr. HAYES. The trustees just as in any other not-for-profit, tax-ex- empt organization at their discretion may make endowments to any other qualified not-for-profit organization. Mr. PATMAN. Do any of the trustees- Mr. HAYES. Parden me-for services rendered. Mr. PATMAN. Do any of the trustees receive any money from ABC, such as a salary, fees, or expenses? Mr. HAYES. I can't answer that, Mr. Chairman. Mr. PATMAN. The membership application states that neither the sponsor nor ABC is obligated to return any portion of the member- ship fee if the member fails to go ahead with the ABC system. Who, if anyone, has dropped the ABC plan and requested that the fee be returned? Mr. HAYES. I can't reveal those facts, Mr. Chairman. Mr. PATMAN. Well, has anyone requested it? Mr. HAYES. I can't recall the names right now, although I do be- lieve there are two or three who have. Mr. PATMAN. Who have requested it. Mr. HAYES. Yes. Mr. PATMAN. All right. The membership application states as follows: It is understood that while access to these methods, procedures or informa~ tion is an incident to membership in Americans Building Constitutionally, that all property rights in all such material is reserved to Americans Building Con- stitutionally and the member is to receive only the opportunity to make use of that material in the course of his participation as a member of Americans Building Constitutionally. PAGENO="0102" 98 How do you enforce this? Mr. HAYES. I think it is impossible to enforce it. Nevertheless, it is in the- Mr. PATMAN. All right. The membership application states as follows: The applicant hereby agrees not to teach, give, lend, lease, sell, assign or otherwise divulge or communicate any of the information, methods, procedures or techniques furnished with the membership without written consent of Amer- icans Building Constitutionally. It is understood that violation of the provisions of this paragraph will be a material breach sufficient to justify, among other things, revocation of membership privileges. How do you enforce this? Mr. HAYES. So far as I know, Mr. Chairman, there has been no need for it. Mr. PATMAN. No need for it. The membership application states that a portion of the memberShip fee may be used, subject to the discretion of the trustees of the Americans Building Constitutionally to endow the activities of member organizations. What foundations have received grants from ABC? Mr. HAYES. As trustee, Mr. Chairman, I can't reveal that information. Mr. PATMAN. You refuse. As chairman, I specifically direct you to answer the question. Mr. HAYES. Mr. Chairman, I can only refuse as trustee on the basis that these people do not wish their names revealed. Mr. PATMAN. Let us say that I have enough money to become a member of ABC. Please tell us, step by step, just what the mechanics are for becoming a member of ABC, and the cost for each class of membership. Mr. HAYES. The first step, Mr. Chairman, would be to contact your lawyer. The next step would be to request sponsorship into member- ship by someone who is already a member of ABC. Mr. PATMAN. That is the only way they can get consideration? Mr. HAYES. That is correct. Mr. PATMAN. All right, go ahead. Mr. HAYES. The various fees for the various levels of membership, the educational membership, which consists of a 30-hour seminar covering the operation of not-for-profit structure, the operation, not the setting up of it. Mr. PATMAN. That is the 30-hour seminar. Mr. HAYES. Correct. Mr. PATMAN. How many hours a day? Mr. HAYES. Well, this depends on the wishes of those who arc enrolled. Oftentimes it may be 3 days in a row. Mr. PATMAN. All right, go ahead. Now what is after that? Mr. HAYES. $1,050 is that membership fee. ~\1Ir. PATMAN. $1,050 Mr. HAYES. Correct. Mr. PATMAN. That is the seminar membership fee. Mr. HAYES. This is the seminar membership fee. Mr. PATMAN. Educational. Mr. HAYES. Right. Mr. PATMAN. All right, go ahead. PAGENO="0103" 99 Mr. BIA~i~s. This covers as I stated the operation of the seminar or the entities themselves. If after seeing this seminar, this educational member desires to proceed further, he can go in either one or two di- rections. One is to be sponsored in the junior membership, in which case his attorney is given the know-how to set up his affairs in a not- for-profit corporation under State charter, if he is qualified. The addi- tional membership fee on that is $4,200 in addition to the $1,050. If then ~he desires to go on to full membership, which includes providing his attorney with the knowledge of how to set up the common law or own- ership trust or constitutional trust as it is sometimes called, the addi- tional fee for that is $5,250. If you add these up for the full member- ship overall, it comes out $10,500. Mr. PATMAN. All right. Now one of the benefits of a senior member- ship in ABC is that the senior member can sponsor applicants for membership; is that correct? Mr. IIAn~s. That is correct, sir. Mr. PATMAN. Are senior members of ABC the only ones who can sponsor other members? Mr. IIA~s. No. The junior member may sponsor other junior mem- bers or other senior members. Mr. PATMAN. At the present time, how many senior members does ABC have? Mr. IIA~s. That I cannot reveal, Mr. Chairman, as trustee. Mr. PATMAN. As chairman of the committee, I direct you to answer the question. Mr. IIA~s. I am sorry, sir; I can't do it. Mr. PATMAN. If an ABC member convinces another person to join ABC, the former's foundation receives a grant out of the fees paid by the new member; is that correct? Mr. H~vn~s. He can receive a grant at the discretion of the trustees. Mr. PATMAN. How much is that grant? Mr. 1-iA~n~s. This again would be at the discretion of the trustees. Mr. PATMAN. But never over how much? Mr. HAnDs. There again that is discretionary with the trustees. Mr. PATMAN. If an ABC member convinces another person to join ABC, the former also receives part of the fees paid by any members attracted by the second member; is that correct? Mr. HAin~s. No; this is not correct. Mr. PATMAN. In effect, one might say that ABC uses a commission system to attract members, is that true? Mr. HAYEs. No; this is not true. Mr. PATMAN. At the time a person applies for membership in ABC, he is known as an ABC applicant; is that correct? Mr. HAYEs. At the time he applies. Mr. PATMAN. Yes; for membership. Mr. HAYES. I would say that would be a fair statement. Mr. PATMAN. At the time that a person applies for menThership in ABC, does he pay a membership fee at that time; in other words, with his application? Mr. HAYEs. Yes. Mr. PATMAN. How much is it? Mr. HAYES. This depends on the class of membership. Mr. PATMAN. That is the $1,050 seminar and so forth. PAGENO="0104" 100 Mr. HAYES. Correct. Mr. PATMAN. To whom does the ABC applicant make his first check payable? Mr. HAYEs. To his sponsor. Mr. PATMAN. To his sponsor? Mr. HAYES. Correct. Mr. PATMAN. After the sponsor foundation receives the applicant's check, what does the sponsor foundation do with the check? Is the check deposited in the sponsor foundation's account? Mr. HAYES. Yes; that would probably be correct. Mr. PATMAN. To whom does the sponsor foundation transmit the money paid by the applicant? Mr. HAYES. He must transfer it to ABC. Mr. PATMAN. ABC; to whom is the cosponsor-no, not cosponsor- to whom is the sponsor foundation's check made out? Mr. HAYES. It would be made out to ABC. Mr. PATMAN. It is made out to the ABC trustees or just ABC? It would have to be the trustees, I assume? Mr. HAYES. No; it would be ABC. Mr. PATMAN. The sponsor foundation sends the applicant's money to ABC immediately; is that correct? Mr. HAYES. In most cases that is correct. Mr. PATMAN. In other words, the sponsor foundation does not wait until ABC informs it whether or not the applicant has been approved. It goes ahead and sends a check in? Mr. HAYES. Yes; that is correct. Mr. PATMAN. In other words, an application for membership is ac- companieci by a check from the sponsor foundation? Mr. HAYES. Correct. Mr. PATMAN. Why doesn't the sponsor foundation transmit the ap- plicant's check to ABC? Mr. HAYES. Why doesn't it? Mr. PATMAN. Yes. Mr. HAYES. Would you restate that question, please? Mr. PATMAN. Yes. In other words, the sponsor foundation does not wait until ABC informs it whether or not the applicant has been ap- proved. In other words, an application for membership is accompanied by a check from the sponsor foundation. Those have been answered. Then my question is why doesn't the sponsor foundation transmit the applicant's check to ABC instead of putting it into his account? Mr. HAYES. Might I inquire as to the purpose of this question, Mr. Chairman? Mr. PATMAN. Yes. The purpose is to find out the information that we are seeking as to how you operate, whether it is legal or illegal; whether or not your operations are in the public interest or against the public interest; whether or not you are violating laws, and if so, what should be done about it; and whether or not Congress should pass laws or whether or not present laws are sufficient. There are many questions that come up. A lot of people are convinced that, if your op- eration's are legal, then the laws have got to be changed very quickly or we won't have any government in the United States of America. Mr. HAYES. MTell, the check must go to someone who is a qualified- or some foundation, I should say, which is a qualified, not-for-profit organization. PAGENO="0105" 101 Mr. PATMAN. All right. When the sponsor foundation sends a check to ABC, is it the same~ amount of money that the applicant paid the sponsor foundation? Mr. hAYES. Yes;. it is, sir. Mr. PATMAN. What is done with that money when it reaches ABC? Mr. HAYES. This I cannot reveal, Mr. Chairman. Mr. PATMAN. Would you please give us the names and addresses of~, the applicants for membership in ABC that have been sponsored by. the Sales Analysis Institute Foundation? Mr. HAYES. I cannot reveal that information, Mr. Chairman, because again our members do not want to have their affairs made public. Mr. PATMAN. Remember, I am asking you about one of your founda- tions. Mr. HAYES. This is correct. Mr. PATMAN. Sponsored by the Sales Analysis Institute Foundation, and I direct you to answer that question, Mr. Witness. Mr. HAYES. I think I mentioned the other day, Mr. Chairman, that SAT Foundation is not a member of ABC. Mr. PATMAN. I thought you gave it as one of the three members that you sponsored. Mr. HAYES. No, sir. Mr. PATMAN. That you are in charge of. Mr. HAYES. No. Mr. PATMAN. All right. What is the total number of applicants for membership in ABC that have been approved, that have been spon- sored by the Sales Analysis Foundation. Mr. HAYES. Since Sales Analysis Institute Foundation is not a mem- ber, it could not sponsor it. Mr. PATMAN. It could not sponsor it? Mr. HAYES. No. Mr. PATMAN. What is the total amount of money received by the Sales Analysis Institute Foundation from applicants for membership in ABC? Mr. HAYES. None. Mr. PATMAN. How many of the applicants sponsored by the Sales Analysis Foundation have become senior members of ABC? Mr. HAYES. It again is not- Mr. PATMAN. Your answer is that they could not sponsor it because they are not a member? Mr. HAYES. Correct. Mr. PATMAN. How many applications sponsored by the Sales Anal- ysis Institute have been rejected by ABC? Obviously they haven't been re)ected because they could not present any. Mr. HAYES. Yes, sir. Mr. PATMAN. Has ABC ever accepted a note as payment for a mem- bership fee? Mr. HAYES. Yes, I believe it has. Mr. PATMAN. You have. What were the terms of that? Was it one note or more than one? Mr. HAYES. I will have to-I would like to withdraw that last an- swer, Mr. Chairman, because I do not recall a case where ABC has accepted such a note. They could. PAGENO="0106" 102 Mr. PATMAN. You do not have a note in mind that has ever been given to ABC? Mr. HAYES. No, sir; I do not. Mr. PATMAN. If you are mistaken about that, since you have with- drawn your question, would you correct it for the record? Mr. HAYES. I certainly would. Mr. PATMAN. And also the terms of the note including the interest rate and whether or not the note called for regular payments, if you have such a note. Mr. HAYES. All right. Mr. PATMAN. What was the due date of that note, in the event you discover one, and who was the note payable to, and so forth, in each case. Mr. HAYES. Yes. Mr. PATMAN. And whether or not it was secured. Has ABC ever per- mitted a senior member to earn credits toward paying off a note by way of sponsoring new members? Mr. HAYES. Not that I know of. Mr. PATMAN. How many applicants for senior membership in ABC have been turned down? Mr. HAYES. I do not know the answer to that. Mr. PATMAN. You do not know of any turned down? Mr. HAYES. No, I did not say it that way. I do not know the answer to that question. Mr. PATMAN. What do you tell an applicant who has been refused~ membership in ABC? Mr. HAYES. Not having had to do that unpleasant job, I am not aware of what I would say. Mr. PATMAN. What are the standards by which ABC refuses to accept applicants? Mr. HAYES. One is if his standing as a citizen of the United States is lacking. Of course, this would be a major reason for rejection. Mr. PATMAN. Does ABC investigate each applicant? Mr. HAYES. Yes, we do. Mr. PATMAN. Who does the investigating? Mr. HAYES. The sponsor. Mr. PATMAN. The sponsor? Mr. HAYES. Right. Mr. PATMAN. The sponsor is a member? Mr. HAYES. Correct. Mr. PATMAN. He gets a fee. He is a rather interested person, isn't he? Mr. HAYES. Not necessarily. Mr. PATMAN. What is that? Mr. HAYES. Not necessarily. Mr. PATMAN. Well, he gets a fee. Mr. HAYES. No. Mr. PATMAN. If it is accepted. He does not get a fee if it is not ac- cepted, does he? Mr. HAYES. This, again, is entirely up to the discretion of the trus- tees as to whether he gets an endowment or whether he does not. Mr. PATMAN. Did ABC investigate the Walsh Family Foundation of which James B. Walsh, Jr., is the principal? PAGENO="0107" 103 Mr. B~r~s. No. The Walsh Family Foundation is not a member of ABC. Mr. PATMAN. Does ABC tell the sponsor foundation why an appli- cant is refused membership? Mr. HAYES. No. Mr. PATMAN. Now, if we were attending a meeting right now, and I paid $1,000 and became a junior member, I believe I would have to pay ~1,050? Mr. HAYES. That would be an educational membership. Mr. PATMAN. What would I get for that $1,050? That is the seminar. That is the 30-hour educational campaign? Mr. HAYES. Yes. You would get the education that is in the texts, the layman's texts. Mr. PATMAN. That is in one of those volumes. Mr. HAYES. It is in several of the volumes. Mr. PATMAN. Yes. In other words, I would get an educational experience. Mr. HAYES. Correct. Mr. PATMAN. Will ABC help me set up a foundation? Mr. HAYES. No. Mr. PATMAN. What is the point of my giving you $1,050? Why don't I just give it to a lawyer and let him set one up for me? Mr. HAYES. Well, this, I think, is a very good question. If the lawyer had the know-how, there is no reason why you couldn't. Mr. PATMAN. Do I pay $1,050 to learn what to tell a lawyer? Mr. HAYES. No. Mr. PATMAN. Pardon me? Mr. HAYES. No. Mr. PATMAN. Does the lawyer attend the seminar? Mr. HAYES. He can. Mr. PATMAN. For that $1,050, the 30-hour seminar, your lawyer can be right with you? Mr. HAYES. Some of our members have brought their attorneys to those layman's seminars. Mr. PATMAN. And that is where you educate them as well as the member? Mr. HAYES. No. Here is the point I want to make clear. The educational seminar for laymen does not instruct how to set up the legal procedure for setting up not-for-profit structures. Mr. PATMAN. No. That comes later in the next category. Mr. HAYES. Well, the layman is not educated along that line. Now we have an attorney seminar in which those things are covered. Mr. PATMAN. In which fee category would he be? Obviously not in the $1,050. He would be in the other one, would he not? Mr. HAYES. Yes. Mr. PATMAN. What price is that, $4,200? Mr. HAYES. That is part of the total membership. Mr. PATMAN. I know, but he is ascending, you know. He starts at $1,050 and then you educate the member, the proposed member who has made an application, and you do not tell him how to set up a founda- tion, and you do not tell his lawyer. Mr. HAYES. Yes. PAGENO="0108" 104 Mr.. PATMAN. Although he attends the seminar. Mr. HAYES. No. Mr.. PATMAN. But in the next room we will say, in the next room you have another meeting. That is where they charge $4,200, is it not? Mr. HAYES. No. Mr. PAmIAN. How much do they charge where the lawyer goes in and is taught the mysterious way? Mr. HAYES. There is no fee for the lawyers. Mr. PATMAN. I know, but you said that you did not teach the appli- cant in this 30-hour seminar how to set up a foundation for himself, the applicant. Therefore, you had another seminar for the attorneys to teach them how to set up a foundation for their member client. But do they have to pay anything for this additional information? Mr. HAYES. No, they do not. Mr. PATMAN. Where does the $4,200 come in?. A while ago you said- Mr. HAYES. Well, the $4,200 is paid by the layman. Mr. PATMAN. For what purposes? What does he get for it? Mr. HAYES. For the membership fee. Mr. PATMAN. The membership? Mr. HAYES. Entitling him to the use of those instruments. Mr. PATMAN. Well, when is this member taught how to set up a foun- dation with his lawyer? He is not taught that in the first seminar, you said, the $1,050. Mr. HAYES. The layman is never taught how to set up one of these. Mr. PATMAN. You mean you leave the layman alone and call his lawyer? Mr. HAYES. Correct. He sends his lawyer. Mr. PATMAN. You do that without charge? Mr. HAYES. That is correct. Mr. PATMAN. Without charge? Mr. HAYES. Yes. That is without charge to the attorney. Mr. PATMAN. Without charge. What about the sponsoring member? What about the member? Is it without charge to him? Mr. HAYES. That is covered by the membership fee. Mr. PATMAN. The $1,050? Mr. HAYES. No, the $4,200. Mr. PATMAN. Now you are getting down to what I have been asking you all the time. Mr. HAYES. That is what I am trying to make clear. Mr. PATMAN. You said you did not teach him how- Mr. HAYES. Right. Mr. PATMAN (continuing). To set up a foundation in the 30-hour seminar that cost $1,050, but that comes later. Now you say the lawyer comes in and he is taught how to set it up. It does not cost the lawyer anything, but it costs the membership something. How much does it cost the member? Mr. HAYES. $4,200. Mr. PATMAN. That is what I asked you a while ago. Mr. HAYES. This is what I am trying to make clear. Mr. PATMAN. Yes. Mr. MORTON. Mr. Chairman, will you yield at that point? Mr. PATMAN. Yes. PAGENO="0109" 105 Mr. MORTON. If the lawyer sets up a foundation for party A, and then subsequently using the same information sets up a fundation for another client, party B, is he in violation of the terms of your application? Mr. HAYES. He can practice law, I believe, sir, any time he wants. Mr. MORTON. Thankyou, Mr. Chairman. Mr. PATMAN. In other words, you would not attempt to refuse him the right to use the same knowledge that he acquires from you with other clients? Mr. HAYES. I think that is correct; yes, sir. Mr. MORTON. Mr. Chairman, will you yield? Mr. PATMAN. Yes. Mr. MORTON. In that event, then, the terms of this application are really not realistic. If the lawyer, who really is the principal in creating this instrument, uses the information again, it is prefectly OK. Is that correct? Mr. PATMAN. Does ABC- Mr. HAYES. Pardon me. Mr. PATMAN. Answer his question. Mr. HAYES. The lawyer is not included in the application. Mr. PATMAN. And he is not obligated as the member is. Mr. HAYES. Correct. Mr. PATMAN. Does ABC have any members who are not professional people or independent businessmen, in other words, salaried em- ployees? Mr. HAYES. We could accept them; yes, sir. Mr. PATMAN. Do you have any? Mr. HAYES. I think so, yes. Mr. PATMAN. Just salaried employees? Mr. HAYES. Yes. Mr. PATMAN. What benefits would a salaried employee receive by becoming a member of ABC? Mr. H~&YES. Whatever the law provides for he could profit. Mr. PATMAN. What inducement could you have? How big a salary would he have to receive before it would be eco- nomically feasible for him to consider membership? Mr. HAYES. This is a question that I could not answer without com- plete details of the individual situation. Mr. PATMAN. The Wall Street Journal of August 28, 1967, states that: "Salaried individuals also could utilize the ABC concept by assign- ing future earnings to the foundation and having it vend their serv- ices to their employer." Will you explain that? Mr. HAYES. That is what the Wall Street Journal says. I am not sure I could explain it. Mr. PATMAN. How many employees does Sales Analysis Institute Foundation have? Mr. HAYES. Sales Analysis Institute has now, I believe, about eight employees. Mr. PATMAN. How many of them have foundations? Mr. HAYES. None. Mr. PATMAN. How many of these employee foundations are mem- bers of ABC? But you state there are none. Mr. HAYES. That is right. PAGENO="0110" 106 Mr. PATMAN. The are are none. Mr. HAYES. Right. Mr. PATMAN. Does any employee of Sales Analysis Institute Founda- tion have any part of his salary transmitted to a foundation? Mr. H~n~s. No employee. Mr. PATMAN. How many employees of Sales Analysis Institute Foundation have any part of their salaries transmitted to foundations? Your answer is none? Mr. HAYES. No employee. Mr. PATMAN. Now there are eight employees, are there not? Mr. HAYES. Who are employees- Mr. PAT1~IAN. That is right. Mr. HAYES (continuing). Of Sales Analysis Institute. Mr. PATMAN. That is right. That is what you said. Mr. HAYES. Right. Mr. PAmLkN. Now, how many of them have any part of their sal- aries transmitted to foundations? Mr. HAYES. None. Mr. PATMAN. You are sure about that? Mr. HAYES. Yes, sir. Mr. PATMAN. Mr. James T. Todhope, Jr., is an employee of Sales Analysis Institute Foundation? Mr. HAYES. No; he is not. Mr. PATMAN. Has he been? Mr. HAYES. He was at one time. Mr. PATMAN. Well, his salary was transmitted; was it not? Mr. HAYES. Not as an employee. These are private-his foundation is a private contractor. Mr. PATMAN. But he is not employed now? Mr. HAYES. That is right. Mr. PATMAN. Mr. Maurice J. Harris is an employee of the Sales Analysis Institute Foundation? Mr. HAYES. No; he is not. Mr. PATMAN. He has been employed? Mr. HAYES. He was at one time. Mr. PATMAN. Isn't it true that his salary was transmitted to his foundation by Sales Analysis Institute? Mr. HAYES. No. Mr. PATMAN. Mr. J. K. Kirk is an employee of the Sales Analysis Institute Foundation. It is true that his salary has been transmitted; is it not- Mr. HAYES. No. Mr. PATMAN (continuing). By the Sales Analysis Institute Foun- dation? Mr. HAYES. Not as an employee. Mr. PATMAN. Well, on what reason was it transmitted, then? ~sfr. HAYES. His foundation is a private contractor. Mr. PATMAN. Was it transmitted when he was an employee? Mr. HAYES. No; it was not. Mr. PATMAN. Mr. Fred Dell is an employee of the Sales Analysis Foundation. It is true, is it not, that his salary has been transmitted to his foundation by Sales Analysis Foundation? Mr. HAYES. He is not an employee of Sales Analysis. PAGENO="0111" 107 Mr. PATMAN. He was, though. Mr. HAYES. At one time. Mr. PATMAN. Did he transmit then? Mr. hAYES. No; he did not. Mr. PATMAN. I now order you to furnish us by November 8, 1967, the names and addresses of all employees of the Sales Analysis Insti- tute Foundation whose salaries are transmitted to a foundation or have been in the past. Will you furnish that information? Mr. HAYES. There are none, Mr. Chairman. Mr. PATMAN. Well, I know, but some of them that have been; you admit had their salaries transmitted. Mr. HAYES. Not as employees. Mr. PATMAN. As chairman of the committee, I order you to present that information for us by November 8. (This information has not been received by the subcommittee.) Which of the following pays you a salary, ABC, Sales Analysis Institute Foundation, B. D. Hayes Family Foundation? I am asking you now. Mr. HAYES. Yes. Mr. PATMAN. Robert D. Hayes, which of the following pays you a salary? Mr. HAYES. Sales Analysis Institute Foundation. Mr. PATMAN. Sales Analysis Institute Foundation. Do you receive any salary or fees from any of the other foundations? Mr. HAYES. I do not. Mr. PATMAN. What percentage of ABC members are medical men? Mr. HAYES. I do not know the answer to that, Mr. Chairman. Mr. PATMAN. You are connected with the following foundations: Americans Building Constitutionally, Barrington, Ill., Sales Analysis Institute Foundation, Barrington, Ill., B. D. Hayes Family Founda- tion, Wheaton, Ill. How much has each of them paid out in grants since their date of ~organization? Mr. HAYES. I cannot answer that. I do not know. Mr. PATMAN. Well, I will direct you, as chairman of the committee, to furnish that information to us. Will you do it by November 8? Mr. RAY. Mr. Chairman, would you clarify? You stated he was trustee of three different foundations. Mr. PATMAN. That is right. You are connected with the following Tfoundations: ABC, Sales Analysis, B. D. Hayes. Mr. RAY. And you want what information? Mr. PATMAN. Yes; the grants that have been paid out since the date of the organization of each one. Are the B. D. Hayes Family Foundation and the Sales Analysis ]Institute Foundation members of ABC? Mr. HAYES. They are not. Mr. PATMAN. Neither one? Mr. HAYES. Neither one. Mr. PATMAN. Do your recruiters tell people who join ABC that they will not be subject to Federal income tax so long as they stay with the ABC plan? Mr. HAYES. ABC has no recruiters, Mr. Chairman. PAGENO="0112" 108 Mr. PATMAN. We will change that word. We will say do you advo- cate and tell people who are members of the ABC that if they carry out the plan of the ABC, they will not have to pay income tax? Mr. HAY1~s. No; we do not. We never have made that statement. Mr. PATMAN. Do you tell the persons who join ABC that the philanthropic purposes of their foundations need not be fulfilled? Mr. HAYES. We have never made that statement. In fact. we have made the opposite. Mr. PATMAN. What personal benefits will a member of ABC derive from that organization? Mr. HAYES. Knowledge as to how to conduct his affairs. Mr. PATMAN. To do what? For what purpose? Mr. HAYES. Under the law as provided for not-for-profit structure. Mr. PATMAN. How will it benefit him? Mr. HAYES. This would depend entirely on his operation. It would be very difficult unless we had a specific case to tie it down and say exactly what the benefits would be in any one case. Mr. PATMAN. But it is designed for tax reduction; is it not, Mr. Hayes? Mr. HAYES. Only in part. Mr. PATMAN. That is the incentive for a person to pay out his money-his `out-of-pocket expense-to benefit in lower taxes; is it not? Mr. HAYES. No, sir. That may be only one of the advantages that he earns. Mr. PATMAN. What are the other advantages? Mr. HAYES. The other advantages are the opportunities to do some- thing for mankind in privacy that can in turn give him a chance to expand his ideals, his goals, and his aims. Mr. PATMAN. Gives him more money to do that with. Mr. HAYES. It might. Mr. PATMAN. In other words, money that would be paid to the Government he can keep and handle as he wants to. Mr. HAYES. Not necessarily. It might result in his being able to better direct the effort, his efforts, than he could unde~r some other form of organization. Mr. PATMAN. Now, you are talking about the individual, the mem- ber. What benefits will the member's family derive from the orga- nization? Mr. HAYES. This again is a-it cannot inure to the benefit of any member of his family. Mr. PATMAN. How do you expect people to pay out $1,050, or $10,500 and not get any benefits? Mr. HAYES. I think that in every case they feel they do get benefits. Mr. PATMAN. Is any portion of a member's fee put into a fund to defend him, if a tax principal that he adopts, pursuant to the recom- mendation of ABC, should be challenged? Mr. HAYEs. We are and have been trying to set up that type of fund. Mr. PATMAN. Haven't you set, it up already? Mr. HAYES. On a very limited basis, yes. Mr. PATMAN. How much money do you have in the fund now? Mr. HAYES. I cannot reveal that. PAGENO="0113" 109 Mr. PATMAN. You have some money in the fund? Mr. hAyEs. Yes, I think so. Mr. PATMAN. And that is for the purpose of defending in the court. You have a promise to a member that you will defend him in court if he is challenged by any representations you have made about the tax exemption? Mr. HATEs. As long as he operates under the law and does not per- form a wrongful act, we would do our best. Mr. PATMAN. You will defend him? Mr. HAYEs. To help him. Mr. PATMAN. You will put up money to defend him? You have lawyers for that purpose? Mr. h1IAn~s. ABC can retain lawyers. Mr. PATMAN. I mean ABC has lawyers now for that purpose, don't they? Mr. HAYES. Yes. Mr. PATMAN. You have lawyers? Mr. HAYES. Sure. Mr. PATMAN. For that purpose, obligated to defend him? Mr. HAn~is. Right. Mr. PATMAN. How much of the member's fee is set aside for this fund? Mr. HAYES. No specific amount. Mr. PATMAN. No percentage? Mr. HAYES. No percentage. Mr. PATMAN. That is a very poor guarantee, is it not, to promise a lot of people you will defend them and you are not setting aside an adequate amount to do it. Mr. HAYES. We do not believe that is true, Mr. Chairman. Mr. PATMAN. What is the present size of this fund? You do not know the size of it? Mr. HAYES. I do not. Mr. PATMAN. Is it $1,000, $10,000, $100,000? Mr. HAYES. I- Mr. PAThtAN. You would not know? Mr. HAYES. I have to admit I do not know. Mr. PATMAN. Are you the managing trustee? Mr. HAYES. Not necessarily. Mr. PATh[AN. Who is? Mr. HAYES. Three trustees. Mr. PAmw~. All working together? Mr. HAYES. Right. Mr. PATMAN. Do you have to have a vote two and one? Mr. HAYES. Oh, yes. I think the same as they do on any other committee. Mr. PATMAN. Is ABC paying the legal expenses of any of its mem- bers at the present time? Mr. HAYES. Paying the legal expenses? Mr. PATMAN. Yes, of any of its members at the present time, now. Mr. HAYES. Yes, it has retained attorneys. 87-444--68------8 PAGENO="0114" 110 Mr. PATMAN. For how many members? Mr. HA~Y1Es. I cannot reveal that information. Mr. PATMAN. But they are there to represent whoever qualifies? Mr. HA1~s. Yes. Mr. PATMAN. Who are these members for whom ABC is paying legal expenses at this time? Mr. HAYES. I would like to correct the answer to the preceding question, Mr. Chairman. There is no case that I know of now where ABC is paying. Mr. PATMAN. Has it in the past? Mr. Hangs. Not to my knowledge. Mr. PATMAN. What is your connection with the R. D. Hayes Family Foundation of Wheaton? Mr. HAYES. I am a trustee. Mr. PATMAN. Are you the managing trustee? Mr. HAYES. There are five trustees. Mr. PATMAN. Five trustees? Mr. HAYES. Yes. Mr. PATMAN. Do they operate as a board, majority rule? Mr. HAYES. Right. Mr. PATMAN. Who are they? Mr. HAYES. They are in the information that I have presented. Mr. PATMAN. In one of the five volumes that you gave us here the other day? Mr. HAYES. No; that we gave you today. Mr. PATMAN. Today. All right, then. Mr. HAYES. I would rather not make that known in public. Mr. PATMAN. Well, we have it here; yes, sir. When was the R. D. Hayes Family Foundation established? Mr. HAYES. I believe you have the record there. Mr. PATMAN. With reference to making that public, that is a matter for the committee to decide as to the question of confidentiality. Mr. RAY. On what `basis? Mr. PATMAN. I did not want to indicate to you that I am promising you it will not be made public. It depends upon the public interest involved and the desire of the committee. Mr. RAY. Mr. Chairman, am I to interpret that as meaning the committee decides whose private financial affairs it will reveal and not reveal? Mr. PATMAN. Yes. Mr. RAY. In the committee's sole discretion. Mr. PATMAN. Including the importance of. it, of course, and the pub- Tic nature and the public interest. Mr. RAY. I just wanted that for the record, Mr. Chairman. Mr. PATMAN. We have been doing that for the Congress. What is the address of the R.. D. Hayes Family Foundation? Mr. HAYES. 31550 Route 2, Leased Lane, Wheaton, Ill. PAGENO="0115" 111 Mr. PATMAN. Has the R. D. Hayes Family Foundation filed an ap- plication for Federal tax exemption? Mr. HAYES. It has not. Mr. PATMAN. Why hasn't the R. D. Hayes Family Foundation filed an application for Federal tax exemption? Do you mean to say that you are operating under a law that is above our U.S. Government laws and therefore you do not have to comply with the U.S. Government laws? Mr. RAY. Mr. Chairman, if he may be permitted to have the answers which he has submitted before him, he can answer these questions. Mr. PATMAN. Which? Mr. RAY. We presented all the information. Mr. PATMAN. You mean this morning? Mr. RAY. Yes, sir. Mr. PATMAN. About the Hayes Foundation? Mr. HAYES. Yes. Mr. RAY. The Hayes Family Foundation and SAIF, the answers to your series of questions. Mr. PATMAN. Anyway, you have not filed any application for tax exemption? Mr. HAYES. We have not. Mr. PATMAN. Do you contend that you do not have to file one? Mr. HAYES. No, no, we do not contend that. Mr. PATMAN. You do not contend that. Did anybody advise you not to file an application for tax exemption for the Hayes Foundation? Mr. HAYES. This is my understanding as to what the law reads. Mr. PATMAN. Did anybody advise you, though, that you did not have to file an application for tax exemption in order to get a tax exemption? Mr. HAYES. I believe not in this case. Mr. PATMAN. You do not think anybody did. HaS the R. D. Hayes Family Foundation filed a tax return form 990-A? Mr. HAYES. Not at this point. Mr. PATMAN. Why hasn't the Hayes Family Foundation filed a tax return form 990-A? Mr. HAYES. We do not believe it is required by law. Mr. PATMAN. The law says it, does it not? Mr. HAYES. No; I believe not. Mr. PATMAN. Who advised the Hayes Foundation that it does not have to file a tax return form 990-A? Mr. HAYES. They were advised by counsel. Mr. PATMAN. Who was the counsel? Mr. HAYES. I cannot reveal that. Mr. PATMAN. Why can't you? Mr. HAYES. It would lead to harassment. Mr. PATMAN. Harassment? Who would harass him? PAGENO="0116" 112 They might want business. They might want him as a lawyer. You~ will have to answer that, Mr. Hayes. I direct you to answer it. Mr. HAYES. I believe this is a matter of privacy. Mr. PATMAN. Why people go into court with their lawyers-they are proud of them. You refuse to answer who your lawyer was and who is your counsel who advised you of that? Mr. IIAiI~s. Well, if the chairman insists, I will be glad to tell him. Mr. PATMAN. All right, go ahead and give it to us. Mr. I-L~n~s. I was advised along this line by an attorney by the name of Mr. TJsbijima. Mr. PATMAN. How do you spell that? Mr. TIES (spelling). U-s-h-i-j-i-m-a. Mr. PATMAN. What is his first name? Mr. }IAY1~s. Michael. Mr. PATMAN. Where is his office? Mr. HAYES. I believe his office is in Des Plaines, Ill. I am not sure of that at the moment. Mr. PATMAN. If you have a better address there, I think we had. better get it. Mr. HAYEs. We will get it for you. Mr. PATMAN. I think we have it. Does the R. D. Hayes Family Foundation have assets? Mr. hAYES. Yes; it does. Mr. PATMAN. Who contributed those assets to the R. D. Hayes Fam- ily Foundation? Mr. HAYES. I think, Mr. Chairman, at the last session I promised to deliver to you a chart as to how this operates. Mr. PATMAN. I know, but I am more specific now, just on this R. D. Hayes Family Foundation. If you have a chart there I would be glad to see it. Mr. HAYES. All right. I think I- (The chart follows:) PAGENO="0117" ~) ~ ~ s*~ ~k 1~, ~ v~ E~ ~ [ ~) ~ ~fves ~ec~F,- /Oc~,~ 1~V~i2 ~ to tAut ~) Co~po~t,p~ d~e~u~d. - r F~ut~3dpit~o~ ~ d. _______________ ~CO~tR~t~ ~ SA~F ~ad - E~ ~ ~ ~ p _ Liii. PAGENO="0118" 114 Mr. PATMAN. Now, then, answer the question. Who contributed those assets to the R. D. Hayes Family Foundation? Mr. HAYEs. When you have your chart, I will explain this. If you will notice, Hayes as an individual- Mr. PATMAN. He was the 100-percent owner of all the assets; was he not? Mr. hAYES. Correct. Mr. PATMAN. That is you? Mr. hAyEs. That is correct. Mr. PATMAN. All right. Now, what does he do? Mr. HAYES. Now stock was contributed or exchanged to the Hayes Trust in exchange for beneficial interest in that trust. Mr. PATMAN. All right. Well, I am just unable to comprehend that in a short length of time. I will have to give it a little study, so in the meantime, you answer these questions. Mr. HAYES. All right. Mr. PATMAN. Now, you contributed the assets, did you not? Mr. HAYES. No, I did not. Mr. PATMAN. It shows there that you did, that you are the 100- percent contributor? Mr. HAYES. What I did was I traded the stock for the beneficial in- terest, and I contributed the beneficial interest certificates to the foundation, the R. D. Hayes Foundation. Mr. PATMAN. So in effect, it was your money that went into the' Hayes Foundation? Mr. HAYES. No, it was the certificates. Mr. PATMAN. What assets have you turned over to the R. D. Hayes Family Foundation? Have you turned the home over to them, automobile? Mr. HAYES. I prefer not to reveal the assets. Mr. PATMAN. Oh, we must have that, Mr. Hayes. We will just have to ask you to answer that. Mr. RAY. On what basis, Mr. Chairman? Mr. PATMAN. On the basis we are trying to get information that will be helpful to the committee for Congress. Mr. RAY. That the committee has the right to know what is in this man's trust? Mr. PATMAN. Certainly. Mr. RAY. His private trust? Mr. PATMAN. Certainly we have a right to know it. I am not charging him with being a tax evader, but if he were, don't you think it would be necessary to find out about these things, to determine whether or not the laws are sufficient to cope with it? Mr. RAY. I do not believe you could go to any bank in the land and demand of those trustees to reveal a man's information. Mr. PATMAN. Oh, yes, you can. The biggest bank in the Nation would have to give it over. There is no question about that now. You are taking a position that is obviously not correct Have you turned your home over to this foundation? Mr. HAYES. On advice of counsel, I refuse to answer. PAGENO="0119" 115 Mr. PATMAN. All right, have you turned your automobile over to the foundation or has the foundation been the ultimate recipient of it? You went through a lot of kind of monkey business, monkeyshines there. Mr. hAYEs. No monkey business. Mr. PATMAN. I will have to order you to answer the information as to whether or not you turned your home over to it. Mr. RAY. To what, the foundation? Mr. PATMAN. Over to any-in other words, was your home used as a part of the assets that found its way into the assets of the foundation? Mr. H~n~s. No, it was not. Mr. PATMAN. Was your automobile used, or any automobile? Mr. HAYES. No. Mr. PATMAN. Is was not turned over? Mr. HAYES. That is right. Mr. PATMAN. Neither your home nor the automobile? Mr. hAYES. Correct. Mr. PATMAN. What is the asset value of the R. D. Hayes Family Foundation? Mr. HAYES. The only assets, Mr. Chairman, that the foundation has are the beneficial certificates. Mr. PATMAN. Of course, I am not considering it based on that chart. You say you transferred the certificates and then you referred to bene- ficial ownership and the foundation finally owning it. I am not going through that rigmarole. I am just asking you the asset value of the Hayes Family Founda- tion, is it $5, $5 million? Mr. HAYES. It cannot be valued. Mr. PATMAN. It cannot be valued? Mr. HAYES. That is correct. Mr. PATMAN. What type of tax return, if any, has the R. D. Hayes Family Foundation filed for its first year of operation? Mr. HAYES. It has not been in operation a year, Mr. Chairman. Mr. PATMAN. How long has it been in operation? Mr. HAYES. I would guess about 8 months. Mr. PATMAN. Are you going to file one at the end of the year? Mr. HAYES. If it is required. Mr. PATMAN. By law? Mr. HAYES. Right. Mr. PATMAN. How much Federal income tax has the R. P. Hayes Foundation paid since the date of its organization? Mr. HAYES. No activity. Mr. PATMAN. How much State income and other taxes has the R. P. Hayes Family Foundation paid since the date it was organized? Mr. HAYES. No activity. Mr. PATMAN. What is that? Mr. HAYES. There has been no activity. Mr. PATMAN. No activity. Well, you have to pay State income taxes, do you not? Mr. HAYES. No; not in Illinois. Mr. PATMAN. Do you pay gasoline taxes and sales taxes? Mr. HAYES. No.. Mr. PATMAN. All right. PAGENO="0120" 116 How much local taxes such as real estate has the Hayes Foundation paid since it was organized? Mr. HAYES. None. Mr. PATMAN. Does it expect to pay any? Mr. HAYES. If the foundation acquires real estate and it is required to pay real estate tax, yes; it will. Mr. PATMAN. You are not admitting that you will unless it is under the specific provision of the law that it is required, of course. Mr. hAYEs. Correct. Mr. PATMAN. Does the R. D. Hayes Family Foundation consider that it is exempt from paying gasoline taxes? Mr. HAYES. Not necessarily. Mr. PATMAN. I believe in one of your statements you state that the foundation can be exempt from paying State taxes and gasoline taxes and things like that? It has no cars? Mr. HAYES. Well, it uses cars, I assume? Mr. PATMAN. You do not own any automobiles. You do not use transportation. What is the name and address of the individual or organization that sponsored the R. D. Hayes Family Foundation for membership in ABC? Mr. HAvES. We are not a member of ABC. Mr. PATMAN. How much did you say membership in ABC cost the Hayes Foundation? You say it is not amember? Mr. HAYES. Correct. Mr. PATMAN. Of course there is no cost. To whom did the R. D. Hayes-this one does not apply either because you are not a member. You state that you are a family foundation. Have you made any provision for the education of your children by the R. D. Hayes Family Foundation? Mr. HAYES. Unfortunately, Mr. Chairman, they are all past that age. Mr. PATMAN. In what way does a member make provisions for the education of his children under your plan? Mr. HAyrs. They make provisions according to what the law pro- vides, These again would vary from case to case. Mr. PATMAN. Has the R. D. Hayes Family Foundation received any grants from ABC? Mr. HAYES. The R D. Hayes Foundation? Mr. PATMAN. Yes. Mr. H~&i~s. No. Mr. PATMAN. Since it is not a member, it would not be entitled to any, I assume? Mr. HAYES. That is right. Well, it could, as a tax-exempt organization; it could. Mr. PATMAN. As a tax-exempt organization it would be eligible to receive grants. Mr. HAYES. That is correct. Mr. PATMAN. From ABC? Mr. HAYES. Yes. Mr. PATMAN. Would you please give us the names and addresses of the applicants for membership in ABC that have been sponsored by the B. D. Hayes Family Foundation? PAGENO="0121" 117 Mr. HAYES. It cannot sponsor. Mr. PATMAN. Only members can sponsor? Mr. HAYEs. Right. Mr. PATMAN. Only members. Have the R. D. Hayes Family Foun- dation or the Sales Analysis Institute Foundation received any money, other than grants, from ABC? Mr. HAYES. No. Mr. PATMAN. What is your connection with the Sales Analysis Institute Foundation? You state they are not members of the ABC. Mr. HAYES. That is right. Mr. PATMAN. You say they are not. Mr. HAYES. They are not members. Mr. PATMAN. They are not members. When was it established? Mr. HAYES. I believe May, sometime in- * Mr. PATMAN. May when? Mr. HAYES. I believe around May 15, 1966. Mr. PATMAN. 1966, over a year from- Mr. HAYEs. Right. Mr. PATMAN. Why is it that the two foundations that you control are not members of ABC? Yet you are a trustee of ABC and you are encouraging people to pay $10,500 to join ABC, but you don't join with the two foundations that you control? Have they ever been members in the past, Mr. Hayes? Mr. HAYES. No, sir. Mr. PATMAN. Neither one. Mr. HAYES. No. Mr. PATMAN. Yet, you are asking other people to join, pay $10,500, but you yourself, although one of the three managing trustees of ABC, have kept the two foundations controlled by you individually from~ joining. Mr. HAYES. My answer to that, Mr. Chairman, is that it was orig- inally set up this way to avoid any possibility of favoritism. Mr. PATMAN. Favoritism? Mr. HAYES. Yes, sir. Mr. PATMAN. It looks to me as though it is in the reverse. What is the address of the Sales Analysis Institute Foundation? Mr. HAYES. Box 575, Barrington, Ill. Mr. PATMAN. What is the purpose of the Sales Analysis Founda- tion? Mr. HAYES. An educational organization which has been in business in that field for about 35 years. Mr. PATMAN. Thirty-five years. Has the Sales Analysis Institute Foundation filed an application for Federal tax exemption? Mr. HAYES. It has not. Mr. PATMAN. Why hasn't the Sales Analysis Institute Foundation filed an application for Federal tax exemption? Mr. HAYES. Under the law, it is our belief that it is not necessary. Mr. PATMAN. Not necessary for what? Mr. HAYES. To file an application. Mr. PATMAN. Do you get tax exemption without it? Mr. HAYES. We believe so. Mr. PATMAN. And you have been operating that way for 18 months? Mr. HAYES. Correct. PAGENO="0122" 118 Mr. PATMAN. And you have paid no Federal income taxes? Mr. HAYEs. That is right. Mr. PATMAN. Yes. A pretty sweet deal. Who advised Sales Analysis Institute Foundation that it does not have to file an application for Federal tax exemption? Mr. HAYES. Our attorneys. Mr. PATMAN. Who are they? If it is a firm, just give the firm. If it is not a firm just give the individual. Mr. HAYES. TJshijima. Mr. PATMAN. The same one. Mr. HAYES. Yes. Mr. PATMAN. You will furnish us with his address to make sure we have it. Mr. HAYES. Right. Mr. PATMAN. Has the Sales Analysis Institute filed a tax return form 990A? Mr. HAYES. No; it has not. Mr. PATMAN. Why hasn't it filed such a return? Mr. HAYES. It is our understanding that the code does not require it. Mr. PATMAN. Have you read the code? Mr. HAYES. Our attorneys have. Mr. PATMAN. Who advised Sales Analysis Institute Foundation that it does not have to file a tax return form 990A? Mr. HAYES. The same one. Mr. PATMAN. The same attorney. Is he in a firm of attorneys? Mr. HAYES. He practices himself. Mr. PATMAN. You say he is in a firm? Mr. HAYES. No. Mr. PATMAN. Wasn't he formerly an employee of the Sales Analysis Institute Foundation? Mr. HAYES. No, sir. Mr. PATMAN. Was he an employee of any foundations that you had anything to do with, like ABC? Mr. HAYES. No. Mr. PATMAN. Or him personally? None of them. Mr. HAYEs. No. Mr. PATMAN. Does the Sales Analysis Institute Foundation have assets? Mr. HAYES. Yes, sir; it does. Mr. PATMAN. Who has contributed the assets? Mr. HAYES. They were not contributions. They were fees for services rendered. Mr. PATMAN. R. D. Hayes, did he present them? Did he furnish them? Mr. HAYES. No. Mr. PATMAN. Who furnished them? Mr. HAYES. Our clients. Mr. PATMAN. That is what I am talking about. Who furnished the fees? Your clients? Which clients? Did the foundation do it, ABC? Mr. HAYES. No; clients over the years. Mr. PATMAN. Over the years? Mr. HAYES. Yes. PAGENO="0123" 119 Mr. PATMAN. What assets have you donated to the Sales Analysis institute Foundation? Mr. HAYEs. None. Mr. PATMAN. Did you contribute a home? Mr. HAYEs. No. Mr. PATMAN. Cars, personal property ? Mr. }iAri~s. No. Mr. PATMAN. Nothing. What is the asset value of the Sales Analysis Institute Foundation? Mr. HAYES. You have those figures, Mr. Chairman. Mr. PATMAN. In the folder. Mr. H~n~s. Right. Mr. PATMAN. What type of tax return, if any, has the Sales Analysis Institute Foundation filed for its first year of operation? Mr. HAYES. None. Mr. PATMAN. None. How much Federal income tax has the Sales Analysis Institute Foundation paid since the date it was organized? Mr. HAYEs. It hasn't filed, so we haven't paid. Mr. PATMAN. You haven't paid anything? Mr. HAYES. Right. Mr. PATMAN. How much State income and other taxes has the Sales Analysis Institute Foundation paid since the date it was organized? Mr. HAYES. None. Mr. PATMAN. How much local taxes such as real estate has the Sales Analysis Institute Foundation paid since the date it was organized? Mr. HAYES. It is on the statement, Mr. Chairman. Mr. PATMAN. Is there anything; did you pay anything? Mr. HAYES. Oh, yes; sure. Mr. PATMAN. Did you pay real estate or local taxes or did you pay gasoline? Mr. HAYES. We paid some real estate and some personal property taxes. Mr. PATMAN. Di.d you pay sales taxes? Mr. HAYES. Sales taxes; yes. Mr. PATMAN. Does the Sales Analysis Institute Foundation con- sider that it is exempt from paying gasoline taxes? Mr. HAYES. We haven't considered that. Mr. PATMAN. Have you paid gasoline taxes for the foundation? Mr. HAYES. Yes. 1~Ir. PATMAN. Do you have automobiles? Mr. HAYES. Yes. Mr. PATMAN. What is the name and address of the individual or organization that sponsored the Sales Analysis Foundation for mem- bership in ABC? Mr. HAYES. It is not a member. Mr. PATMAN. I believe you said it was not a member. Mr. HAYES. Not a member. Mr. PATMAN. So it would not. In what way have you made provision for the education-i believe you said you didn't have any children who have not graduated? Mr. HAYES. That is right. Mr. PATMAN. Of school age. Has the Sales Analysis Institute Foun- dation received any grants from ABC? PAGENO="0124" 120 Mr. HAYES. No. Mr. PATMAN. It would be eligible to receive them but it has not received them. Mr. hAYES. It could. Mr. PATMAN. How many grants has the Sales Analysis Institute Foundation received from ABC? It received none I believe you said. Mr. HAYES. Right. Mr. PATMAN. What is the nature of the business of the Sales Analy- sis Institute? Mr. HAYES. Purely educational, in the field of communications. Mr. PATMAN. Does the Sales Analysis Institute supply instructors or speakers for ABC? Mr. HAYES. Yes. Mr. PATMAN. In other words, the seminar speakers are from the Sales Analysis Institute. Mr. HAYES. Some, and some Sales Analysis Institute has trained. Mr. PATMAN. Some they have trained. When was the Sales Analysis Institute founded? I believe you said about 18 months ago. Mr. HAYES. About. Mr. PATMAN. That was the other foundation; yes? Mr. HAYES. May 1966. Mr. PATMAN. When was the institute founded? Mr. HAYES. When was the institute founded? Mr. PATMAN. Yes; Sales Analysis Institute. Mr. HAYES. It was incorporated as a for-profit company I believe in 1946. Mr. PATMAN. Now it paid taxes then. Mr. HAYES. I beg your pardon? Mr. PATMAN. It was paying taxes up until that time. Mr. HAYES. When we earned enough to pay them. Mr. PATMAN. Tn 1946. Mr. HAYES. Yes. Mr. PATMAN. Has it paid taxes Since? Mr. HAYES. Yes; it has. Mr. PATMAN. According to the rate that everybody else pays? Mr. HAYES. I certainly think so. Mr. PATMAN. Well, it is a foundation, isn't it? Mr. HAYES. No, not at that time. Mr. PATMAN. Oh. that is an institute it is not a foundation. Mr. HAYES. It was a for-profit stock corporation at that. time. Mr. PATMAN. Until it became a foundation. Mr. HAYES. Correct. Mr. PATMAN. Do you mean to say it has paid taxes since it became a foundation? Mr. HAYES. No, not corporate income tax. Mr. PATMAN. Who owned the Sales Analysis Institute before it be- came a foundation? Mr. HAYES. I owned 100 percent of the stock in Sales Analysis Institute. Mr. PATMAN. How much of the Sales Analysis Institute did you own prior to the date when the foundation was organized? You say 100 percent. Mr. HAYES. One hundred percent. PAGENO="0125" 121 Mr. PATMAN. What was your position with the institute? Mr. HAYES. President. Mr. PATMAN. The Sales Analysis Institute was operated as a profit- making corporation I believe you said awhile ago. Mr. HAYEs. Yes, sir. Mr. PATMAN. Until 1946. Mr. HAYES. No. From 1946 to 1966. Mr. PATMAN. And then it became a foundation. Mr. HAYES. Correct. Mr. PATMAN. And it hasn't paid taxes since. Mr. HAYES. That is right. Mr. PATMAN. Did the Sales Analysis Institute ever pay any income taxes? Mr. HAYES. Yes; it certainly did. Mr. PATMAN. Prior to the time it was a foundation. Mr. HAYES. Yes, sir. Mr. PATMAN. What were the gross receipts of the Sales Analysis Institute during each of the last 2 years? Mr. HAYES. The last 2 years? I would have to refresh my memory. Mr. PATMAN. Will you furnish the information without directing youtodoit? Mr. HAYES. All right, good. Mr. PATMAN. Fine. What was the net profit of the Sales Analysis Institute during each of the last 2 years, net profit? Or, first, gross profit, gross receipts. Mr. HAYES. I will have to check that. Mr. PATMAN. And you will furnish this. Mr. HAYEs. Correct. Mr. PATMAN. How much Federal income tax did the Sales Analysis Institute pay during each of the past 2 years? Mr. HAYES. How much did it pay? Mr. PATMAN. Yes. Mr. HAYES. None. Mr. PATMAN. None. Mr. HAYES. Just t;he last year, Mr. Chairman. I believe we paid in 1966 something over $11,000 in Federal income tax. This was at the time we changed from profit to not for profit. Mr. PATMAN. I wa.nt the tax paid each of the 2 years before it became a foundation. Mr. HAYES. All right. Mr. PATMAN. You will furnish that information. (The information has not been received by the subcommittee.) Mr. PATMAN. Now what is the correct name of Mr. James A. Walsh, Jr. Foundation? Mr. H~&YEs. I don't know. Mr. PATMAN. You don't know. I believe you said it was not a mem- ber of the ABC. Mr. HAYES. That is right. Mr. PATMAN. Is he in the firm that you represent? Mr. HAYES. No, sir. Mr. PATMAN. I believe you said that he furnished you the package and sold you on it, that finally became ABC. PAGENO="0126" 122 Mr. HAYES. He explained what it could do for our organization, how it could make us more effective in our field, expand our research and things of this nature; yes, sir. Mr. PATMAN. And you don't knowthe name of his foundation. Mr. HAYES. I do not. Mr. PATMAN. Has the Walsh Foundation received any money from theABC? Mr. HAYES. I believe it has received a grant. Mr. PATMAN. And yet you don't know the name of the foundation? Mr. HAYES. No; I can't say that I recall it. Mr. PATMAN. Will you furnish us the information as to how much it has received the last 2 years, each of the last 2 years? Mr. HAYES. I think we can do that. Mr. PATMAN. You will do that, all right. (This information has not been received by the subcommittee.) Mr. PATMAN. Does the ABC have a staff, Mr. Hayes? Mr. HAYES. No. ABC has no employees. Mr. PATMAN. No employees. Mr. HAYES. That is right. Mr. PATMAN. You have the three trustees. Mr. HAYES. Right. They are not employees. Mr. PATMAN. They are not employees. Mr. HAYES. No. Mr. PATMAN. It doesn't have any research department. Does it have a research department? Mr. HAYES. It retained the services of a research organization; yes. Mr. PATMAN. You just pay them fees. Mr. HAYES. Correct. Mr. PATMAN. What is the name of the research department, the re- search organization that works for you or the ABC? Mr. HAYES. it was called the Barrington Institute. Mr. PATMAN. The Barrington Institute. Who is the head of it? Mr. HAYES. So far as I know, Richard J. Stephenson. Mr. PATMAN. Richard J. - he is also a trustee, isn't he? Mr. HAYES. Correct. Mr. PATMAN. No conflict of interest there? Mr. HAYES. He is not a member. Mr. PATMAN. You say he is not a member. Mr. HAYES. Barrington Institute is not a member of ABC. Mr. PATMAN. I know, but you employ one of the three trustees who owns the institute I believe you said. Mr. HAYES. No; he doesn't own it. Mr. PATMAN. Well, he owns an interest in it. Mr. HAYES. No. Mr. PATMAN. He is the head of it. Mr. HAYES. He is one of three directors of the Barrington Institute. Mr. PATMAN. One of the three directors. He is one of the three. Now then, the ABC, he is one of the three there, isn't he? Mr. HAYES. Correct. Trustee; one of the three. Mr. PATMAN. One of the trustees. Mr. HAYES. Yes. PAGENO="0127" 123 Mr. PATMAN. In other words, in ABC, he is one of t~he three trustees, ABC hires the Barrington Institute and he is one of the three trustees to control it and manage it. Mr. HAYES. On a:contractual- Mr. PATMAN. He is the president really, isn't he, of Barrington Institute? Mr. HAYES. I don't know. I can't answer what the title is. Mr. PATMAN. What are the duties of the ABC research department? Mr. HAYES. ABC doesn't have a research department. Mr. PATMAN. I mean the duties of the Barrington firm that is em- ployed; the Barrington Institute. Mr. HAYES. To provide educational material to be used. Mr. PATMAN. At your request. Mr. HAYES. Right. Mr. PATMAN. And how much have you paid them each of the last 2 years? Would you furnish that to us? Mr. HAYES. We will. (This information has not been received by the subcommittee.) Mr. PATMAN. What are the names of the lawyers on the ABC staff? Mr. HAYES. We have no staff lawyers. Mr. PATMAN. What is Bertha Fields? Isn't she the executive secre- tary of the Americans Building Constitutionally? Mr. HAYES. She is not an attorney. Mr. PATMAN. Well, she is an employee; isn't she? Mr. HAYES. No. Mr. PATMAN. What is she? You told me awhile ago she had the books. Why would you let people have the books who are not employees. Who pays her salary? Mr. HAYES. This again, Mr. Chairman, is a contractual relationship. Mr. PATMAN. That is all right. We don't object to that. Mr. HAYES. She is not an employee, however, of ABC. Mr. PATMAN. Who pays her social security? Mr. HAYES. I don't know. I imagine she does. Mr. PATMAN. Well, her employer is supposed to. Has Mr. Michael Ushijima of ABC, Barrington, Ill., served as counsel for any of the members of ABC? Mr. HAYES. I believe, certain members have retained him. Mr. PATMAN. The Wall Street Journal of August 28, 1967,1 states that Mr. Walsh said that "a summation of the information given new, members in the 30-hour ABC training course will be made available shortly to all State attorneys general." Which of the State attorneys general has ABC provided with this information? Mr. HAYES. We have offered it to the Illinois attorney general and any other attorney general that is interested. Mr. PATMAN. You now offer it to any attorney general of the United States. Mr. HAYES. Correct. Mr. PATMAN. Now how far would that go? Would that include your charter and the way you operate and would it include the information in the seminars? Mr. HAYES. Yes, sir. Mr. PATMAN. The seminars? 1 See p. ii52. PAGENO="0128" 124 Mr. HAYES. It would include the same material that we left with you. Mr. PATMAN. What about the $4,200 course? Would it include that? Mr. HAYES. The whole thing. Mr. PATMAN. The whole $10,500 package. Mr. HAYEs. The entire educational program. Mr. PATMAN. And that is everything. That is educational. Mr. HAYES. Yes, sir. Mr. PATMAN. That is what it is. Mr. HAYES. That is right. Mr. PATMAN. The whole thing? Mr. HAYES. Yes. Mr. PATMAN. Mr. Morton, sit down here just a minute. I don't thiiik we will be able to meet this afternoon because it takes unanimous consent of the House, and the House is not in a good mood. I would anticipate objection, so we will not undertake it. But we would like to have you, Mr. Hayes and Mr. Walsh, both back back tomorrow morning at 10 o'clock, so without objection we will stand in recess until tomorrow morning at 10 o'clock here in this room. (Whereupon, at 12 noon, November 6, 1967, the subcommittee re- cessed until Tuesday, November 7, at 10 a.m.) PAGENO="0129" TAX-EXEMPT FOUNDATIONS: THEIR IMPACT ON SMALL BUSINESS TUESDAY, NOVEMBER 7, 1967 HOUSE OF REPRESENTATIVES, * SUBCOMMITTEE No. 1 OF THE SELECT COMMITTEE ON SMALL BUSINESS, Washington, D.C. The subcommittee met, pursuant to recess, at 10 :05 a.m., in room 2359, Rayburn House Office Building, Hon. Wright Patman (chair- man of the subcommittee) presiding. Present: Representatives Patman, Corman, and Conte. Also present: H. A. Oisher, director, Foundations Study, Myrtle Ruth Foutch, clerk; and John J. Williams, minority counsel. Mr. PATMAN. The committee will please come to order. Yesterday, Mr. Hayes, I asked you some questions about Messrs. James B. Tudhope, Jr., Maurice J. Harris, J. D. Kirk, and Fred Deli. I want to ~o back to them for a minute. You know all four of these men; is that right? TESTIMONY OF ROBERT B. HAYES, TRUSTEE OF THE AMERICANS, BUILDING CONSTITUTIONALLY, A NOT-FOR-PROFIT TRUST, ACCOMPANIED BY K. P. CHARTIER AND WILLIAM C. RAY, ER.,' COUNSEL TO MR. HAYES, AND ROBERT A. ERIE, ADMINISTRA- TIVE ASSISTANT TO MR. HAYES~-~Resumed Mr. HAYES. I do. Mr. PATMAN. What kind of work does each one of them do? Mr. HAYES. They have done work as instructors in the area of training. Mr. PATMAN. What kind of training? Mr. HAYES. Communications training. `Mr. PATMAN. These four men are associates of yours at ABC; is that correct? Mr. HAYES. No, they are not employees of ABC. Mr. PATMAN. They are not. They are not employees of ABC. Mr. HAYES. Pardon me, they are not employees of SAIF. Mr. PATMAN. They are employees of- Mr. HAYES. They are not. Mr. PATMAN. Who are the employed by? They work, there every day; do they not? Mr. HAYES. They are employed by their foundation. Mr. PATMAN. Each one has a. foundation? Mr. HAYES. Yes. * * 125 87-444-68-9 PAGENO="0130" 126 Mr. PATMAN. Each one has a foundation, his own foundation. Mr. HAYES. Correct. Mr. PATMAN. The headquarters of these four gentlemen is in the same building on Kelsey Road in Barrington, Ill., that houses the headquarters of Sales Analysis Institute Foundation and ABC, is that correct? Mr. HAYES. Well, I would like a little clarification, Mr. Chairman, on what you mean by headquarters. Mr. PATMAN. Well, their principal place of business, and that is where the principal place of business of ABC is in the Sales Analysis Institute. Mr. HAYES. That is correct. Mr. PATMAN. They are there, aren't they, everyday? Mr. HAYES. No; not everyday. Mr. PATMAN. Well, that is their principal place of working. That is where their headquarters are. They go in and out of there, do they not? Mr. HAYES. They teach there, yes. Mr. PATMAN. They teach there. Mr. HAYES. They also teach many other places.. Mr. PATMAN. Yes; but they have seminars there, do they not? Mr. HAYES. Yes, yes. Mr. PATMAN. All right. How have these men been compensated for their services to Sales Analysis Institute Foundation, by fees or by salaries? Mr. HAYES. There is a. contract between Sales Analysis Institute Foundation and their foundation. Mr. PATMAN. And do you pay them by fees or salaries? I assume from what you say, you pay them by fees to each one's foundations, is that correct.? Mr. HAYES. The. pa~~me.nt Sales Analysis Institute makes is by con- tract to their foundation. Mr. PATMAN. WeH, in carrying out the contract., you make payments either by fees or salaries I assume. How do you pay them? How do you pay each one's foundation? Do you pay it by a fee to each one's founda- tion or by a salary to each one's foundation? Mr. HAYES. By a fee t.o each one's foundation. Mr. PATMAN. By a fee to each one's foundation. The compensation of these four men in the from of fees has been transmitted to their respective foundations by Sales Analysis Institute Foundation, is that correct? It is transmitted to each one's foundation by Sales Analysis? Mr. HAYES. Yes; that is what the contract calls for. Mr. PATMAN. All right. Now the contract also calls for ABC, I as- sume, to make the payment to the Sales Analysis Institute Foundation, in order to make the payment to each foundation. Mr. HAYES. No. Mr. PATMAN. That is not correct. Mr. HAYES. That is not correct. Mr. PATMAN. In other words, instead of paying salaries to these men, Sales Analysis Institute Foundation has paid fees to their re- spective foundations. I believe that is what you said. Mr. HAYES. Correct. In other words, their foundations are private contractors. PAGENO="0131" 127 Mr. PATMAN. They are the.private contractors, yes. These men have foundations of course of their own. Are any of their foundations members of ABC? Mr. hAYEs. I can't reveal that. Mr. PATMAN. You would assume that they are, wouldn't you? Mr. HAYEs. No, I wouldn't make that. assumption. Mr. PATMAN. Their contracts would indicate that they are. Mr. HAYEs. Not necessarily. Mr. PATMAN. Okay then. So here we have four of your associates who do not have enough confidence in the ABC scheme t.o lay out either $1,050 or $10,500. In addition, you said.yesterday that neither one of your two foundations were members of ABC. Siflce you too don't seem to have enough confidence in ABC's scheme to buy it, and you say tha.t you take no salary from ABC, what is in it for you? Mr. HAYES. Mr. Chairman, if I created ABC as a trust, why don't I have confidence in it? Mr. PATMAN. Well, you didn't have your own two foundations join. Mr. HAYEs. But I explained yesterday why I didn't. I created all three of them. Mr. PATMAN. All right, if that is the way you want to answer it, why that is all right. Does ABC have counsel in every State in which it operates?. M.r. HAYES. I beg your pardon?. Mr. PATMAN. Does ABC have counsel in every State in which it operates? Mr. HAYES. Its members have counsel. Mr. PATMAN. The members of ABC have counsel in each State. Mr. HAYES. Correct. Mr. PATMAN. Who are the ABC counsel throughout the United States? Do you have a list of them? Mr. HAYES. No, I do not. Mr. PATMAN. You say that your members have the counsel, I believe you said awhile ago. Mr. HAYES. Correct. Mr. PATMAN. You don't have the names of them yourself. Mr. HAYES. We do not. Mr. PATMAN. You do not have the name. Who provides the legal services for setting . up new member foundations. and trusts in the various States? Mr. HAYES. The members counsel. Mr. PATMAN. The members. In other words, the foundation that belonged to ABC. Mr. HAYES. Right. Mr. PATMAN. Each one takes care of his own foundation and trust papers and things like that, and organization. Mr. HAYES. That iscorrect. Mr. PATMAN. That is correct. Mr. HAYES. Yes. Mr. PATMAN. Does ABC recommend lawyers for such purposes in the various States? Mr. HAYES. Not necessarily. Mr. PATMAN. Well, have you at all? Mr. HAYES. No, I think not. PAGENO="0132" 128 Mr. PATMAN. Does ABC have what it refers to as associate counsel? Mr. HAYES. What do you mean, Mr. Chairman, by associate counsel? Mr. PATMAN. Well, using a phrase I think that you will find in your book, associate counsel. Do you have associate counsel in any State? Mr. HAYES We do at times retain counsel in various States. Mr. PATMAN. Do you call them associate counsel? Mr. HAYES. No. Mr. PATMAN. Do you call them- Mr. HAYES. I believe not. Mr. PATMAN. What is an associate counsel in the terms of the ABC? Mr. HAYES. I believe, if I read the question correctly, the members' counsel, the member's attorney that he retains might be called asso- ciate counsel.. Mr. PATMAN. Is he a lawyer? Mr. HAYES. Oh, yes. Mr. PATMAN. Always a lawyer. Mr. HAYES. I think so. Mr. PATMAN. Is that associate counsel trained in any way by the ABC? Mr. HAYES. On occasion, yes. Mr. PATMAN. How many associate counsels does ABC have through- out the United States. Mr. HAYES. I have no idea, sir. Mr. PATMAN. You don't have them a.t all. Mr. HAYES. No, I- Mr. PATMAN. They are not in your possession. Mr. HAYES. That is right. Mr. PATMAN. The names. Mr. HAYES. That is correct. Mr. PATMAN. The associat.e members, I mean the foundation mem- hers in each State take care of that themselves and you have no knowl- edge of it. Mr. HATES. That is right. Mr. PATMAN. Has each of these associate counsels set up his own foundation? Mr. HAYES. This-some might and some might not. Mr. PATMAN. Well, isn't it necessary to do that, in order `to pay the salaries or fees through the foundation? Mr. HAYES. No. Mr. PATMAN. Otherwise they would have to pay taxes on them. how do they get their pay then? The plan as you outlined it t.o me; I got the impression rather definitely that you use the foundation method to compensate them. Mr. HAYES. No. Mr. PATMAN. You didn't do it through the. payment of salaries. You did it through the payment of fees, and obviously that would be, the result would be no taxes, because it is paid to a foundation. Mr. HAYES. Lawyers, member's lawyers are paid t.heir fee by the usual, in the usual manner. Mr. PATMAN. That is by each foundation. Mr. HAYES. No, not necessarily. Mr. PATMAN. By ABC? Mr. HAYES. No. PAGENO="0133" 129 Mr. PATMAN. By whom? Mr. HAYES. By the member. Mr. PATMAN. Well, that is a foundation, isn't it? Mr. HAYES. It could be, yes. Mr. PATMAN. It. could be? Wouldn't it have to be? Mr. HAYES. Not necessarily. Mr. PATMAN. Well, the members are the ones who employ the counsel and the members are foundations, aren't they? Mr. HAYES. They can pay legal fees or they may put it in other ways. Mr. PATMAN. Mr. Hayes, of course you have a right to answer these as you choose, but it seems to me that you are going in a roundabout way and unnecessarily- Mr. HAYES. No. Mr. PATMAN. Consuming time, because we know- Mr. HAYES. Mr. Chairman, I am doing my best to be accurate. Mr. PATMAN. We know a lot of this to be correct. I wouldn't say you are evading questions but. you are. not being as forthright as I would expect you to be for a witness as knowledgeable as you are. I hope that you will be forthright with us. Mr. RAY. Mr. Hayes is attempting to be, Mr. Chairman. The ques- tions have not been put in a proper manner. He doesn't- Mr. PATMAN. Well, of course, we know a little about this too. Mr. RAY. A little. Mr. PATMAN. Does an associate counsel assist in the creation of foundations that are connected with ABC? Mr. HAYES. Yes, I would say so. Mr. PATMAN. Is an associate counsel as the term is used by ABC, a specialist in ABC procedures? Mr. HAYES. He usually is aware of the procedures; yes. Mr. PATMAN. And he has been trained through the seminars and in other ways I assume. Mr. HAYES. Not always. Sometimes. Mr. PATMAN. Do you have one in each State? Mr. HAYES. No, no. Mr. PATMAN. What function does an associate counsel serve? Just look after the foundations- Mr. HAYES. The same as any lawyer. Mr. PATMAN (continuiiig). Legal work for the foundation. Mr. HAYES. Correct. Mr. PATMAN. The member foundation. Mr. HAYES. I would say so. Mr. PATMAN. Yes. Is a member of ABC obligated to use that or- ganization's associate counsel? Mr. HAYES. No. Mr. PATMAN. Who pays the attorney for the work he does in set- ting up an applicant's foundation? Does the applicant pay it? Does the foundation pay it or does ABC pay it? Mr. HAYES. This depends on the nature of the- Mr. PATMAN. Well, from what you have told us in the past, I would assume that the foundation pays it. * Mr. HAYES. This is right. Mr. PATMAN. That is right, isn't it? PAGENO="0134" 130 Mr. HAYES. Usually that is correct, yes. Mr. PATMAN. To whom would the attorney's bill be sent? . WouM it be sent to ABC or would it be sent to the member? Mr. HAYES. It will vary frmn case to case. Mr. PATMAN. Does ABC have an associate counsel named Alfred J. Langmeyer? . - Mr. HAYES. The Barrington Institute has .one. Mr. PATMAN. The Barrington Institute has. That is the institute that is managed by. Stephenson who is also one of the three trustees. Mr. HAYES. I believe that is right, yes. Mr. PATMAN. Where does Mr. Langmeyer live? Mr~ HAYES. He lives, on the west coast.. I can't tell you his address. Mr. PATMAN. What city ? Do you know that? Is is Los Angeles? Mr. HAYES. I am not sure. Mr. PATMAN. But he lives on the west coast.. Does ABC have an as- sociate coimsel named Don Warden? Mr. HAYES. I am not aware of that one. Mr. PATMAN. And you wouldn't know where lie lives, of course. You don't know him. Mr. HAYES. No. Mr. PATMAN. You never heard his name before. Mr. HAYEs. .1 think I have heard the name but I have never met the gentleman. Mr. PATMAN. Did you train him? Did ABC train Mr. Warden in his procedures, in its procedures? Mr. HAYES. I am not sure about that. Mr. PATMAN. You don't know. Does ABC have an associate counsel named Louis C. Jones? Mr. HAYES. He must be an associate of Barrington Institute. Mr. PATMAN. You don't know him? Mr. HAYES. I do not. Mr. PATMAN.. All right. Now then, is Hough's Encyclopaedia of American Woods Foundation, Inc., a member of ABC? Mr. HAYES. I believe, Mr. Chairman, you stated that it was. As trustee, I cannot reveal that information. Mr. PATMAN. You refuse to give the information. Mr. HAYES. I can't as trustee.. Mr. PATMAN. I am ordering you to do it. Are you going to do it? Mr. HAYES. No. Mr. PATMAN. I am directing you to do it. You won't do it. AU right. Who sponsored I-Tough's Encyclopaedia of American Woods Founda- tion for membership in ABC? Mr. HAYES. I don't know. Mr. PATMAN. Do you'know or just won't tell?' Mr. HAYES. I don't know. Mr. PATMAN. You don't know. How much did it cost Hough's Encyclopaedia of American Woods Foundation, Inc., to become a member of ABC? Mr. HAYES. I am not aware of that.' Mr. PATMAN. According to Mr. Robert Speller, president of Hough's Encyclopaedia of American Woods Foundation, Inc., this founda- tion's income was as follows from date of organization, July 1967, to October 13, 1967: PAGENO="0135" 131 Americans Building Constitutionally, Barrington, Ill., $5,000. Mr. RAY. Pardon me, Mr. Chairman. Has Mr.. Speller been sworn as a witness or was that taken under deposition or is that a sworn state- ment, or is that merely a personal letter? Mr. PATMAN. Well, we have the information from him. Let me finish this. Mr. RAY. Mr. Hayes is a sworn witness and that man is not. Mr. PATMAN. Well, that is all right. You can make that point, which you are doing, which is all right and within your rights. Five thousand dollars. Robert Speller & Sons, Publishers, Inc., $756.75, or a total of $5,756.75. For what purpose did ABC give $5,000 to Hough's Encyclo- paedia of American Woods Foundation, Inc.? For what purpose did you give them that $5,000? Mr. HAYES. Mr. Chairman, under the circumstances I would suggest that the committee subpena Mr. Speller. Mr. PATMAN. Well, I am directing you to answer that question, Mr.. Hayes. Are .you going to comply? Mr. HAYES. As trustee, I can't supply that information. Mr. PATMAN. According to Mr. Robert Speller, president of Hough's Encyclopaedia of American Woods Foundation, Inc., his. foundation made no. grants from date of organizatiOn, July 1967, to October 13, 1967. Disbursement were, however, made for operating expenses of Hough's Encyclopaedia of American Woods Foundation, Inc., totaling $1,383.51, and for the Philippa Schuyler Memorial Foundation, total- ing $3,396.68, as follows: Disbursements for Hon gh's Encyclopaedia of American Woods Foundation, Inc. N. P. Stocker (rent) $472. 00 Bank charges 5. 17 New York Telephone Co 46. 34 Rough's Encyclopaedia (South Vietnam forestry) 860. 00 Total 1, 383. 51 Disbursements for Philippa ~5chuyler Memorial Foundation New York Telephone Co. (deposit) $50. 00 Columbia University Club (entertainment) 264. 88 A. & F. Photoprints (printing) 33. 10 Center Typographers (printing) 16. 50 Seymour Pugach (printing) 12. 00 Hy-print Cards (printing) 40. 00 Effective Impressions (printing) 121. 30 Rival Printing Co 24. 50 Leon Honigman (printing) 71. 00 Aldon Press 3. 82 1-larvey's Radio Co. (tapes) 15.00 Telephone Exchange Answering Service 21. 50 Diplomatic Press, Inc. (rent and furniture) 718. 50 Hildegarde (balance expenses) 150. 00 Cleve Backster (tapes) 24. 00 Linda Beerman (typist) 432. 50 Mary Ruth Cook (typist) 23. 75 Overseas Press Club (press conference) 28. 65 Western Union Telegraph Co 146. 99 Consolidated Edison 139. 52 Dorothy Waring Steiner (public relations fee) 975. 00 Dorothy Waring Steiner (expenses) 84.17 Total 3, 396. 68 PAGENO="0136" 132 I note the $975 public relations fee to Dorothy Waring Steiner, entertainment at the Columbia University Club totaling $264.88, and the $150 paid to Hildegarde. Would you say that Hough's Encyclo- paedia of American Woods Foundation, Inc., is fulifiling its purpose? Mr. HAYES. I have no way of knowing. Mr. PATMAN. The foregoing disbursern~nts include $860, which is identified as "Hough's Encyclopaedia *(South Vietnam forestry) ." What does this mean? Mr. HAYES. I have no idea. Mr. PATMAN. Mr. Robert Speller, president of Hough's Encyclo- paedia of American Woods Foundation, Inc., states that he has not received information from ABC "as to what full membership con- stitutes, nor, in fact, bylaws, et cetera." How do you explain that? Mr. HAYES. As far as I know we have never received a request from Mr. Speller for `that kind of information. Mr. PATMAN. As you know, Hough's Encyclopaedia of American Woods Foundation, Inc., is incorporated in Illinois. Why was this foundation incorporated in Illinois? Mr. HAYES. I can't answer that question; I don't know. Mr. PATMAN. The articles of incorporation of Hough's Encyclo- paedia of American Woods Foundation, Inc., shows the address of its registered office to be Box 575, Kelsey Road, Barrington, Ill. That is the ABC address also, isn't it? Mr. HAYES. That may be the registered agent. It could be. I don't know that it is. Mr. PATMAN. I have it as the registered address, the registered office. Mr. HAYEs. That could be. Mr. PATMAN. The base of operation of Hough's Encyclopaedia of American WToods Foundation appears to be the home of its presi- dent, Mr. Robert Speller, of Robert Speller & Sons, publishers. The foundation's address is 39 Gramercy Park, New York `City. Why wasn't this foundation incorporated in the State of New York? Mr. HAYES. I have no knowledo~e of that. Mr. PATMAN. Is the Philippa ~chuyler Memorial Foundation a member of ABC? Mr. HAYES. It is public knowledge; yes. Mr. PATMAN. Who sponsored the Philippa Schuyler Memorial Foundation for membership in ABC? Mr. HAYES. I don't know the answer to that. Mr. PATMAN. How much did you say it cost the Philippa Schuyler Memorial Foundation to become a member of ABC? You don't know? Mr. HAYES. I don't know. Mr. PATMAN. Who would know that? Would your secretary in the office of ABC in Barrmgton `know? Mr. H~&YEs. She would have access to the records. Mr. PAThIAN. He or she, isn't it? Mr. HAYES. `She. Mr. PATMAN. Well, we will have to get out-will you see that she comes down and brings the records or should we subpena her? Mr. RAY. I might mention, Mr. Chairman, that the executive secre- tary has no authority, responsibility, or obligation to reveal the records, and may not, except by resolution of the board of trustees. Mr. PATMAN. Or subpena. PAGENO="0137" 133 Mr. RAY. Well, she has no authority even in the face of a subpena. Mr. PATMAN. You see, the records don't belong to the trustees. They belong to the foundation. Mr. RAY. That is right. Have you subpenaed the foundation, ABC? Mr. PATMAN. Sure. Mr. RAY. You have? Mr. PATM4N. Yes, that will be done. Mr. RAY. It is all right in the record. Mr. PATMAN. Did you or your associates in ABC help the Phulippa Schuyler Memorial Foundation gather funds, Mr. Hayes? Mr. HAYES. Yes, we thought this was a worthwhile purpose. Mr. PATMAN. In what way did you assist in the gathering of funds? Mr. HAYES. We had conversations with some of our members whom we had reason to believe might also feel this was a worthy cause. Mr. PATMAN. And you had meetings with them and you attempted to raise funds for that particular foundation, is that correct? Mr. HAYES. That is correct. Mr. PATMAN. Did you ha've a successful meeting to raise the funds? Mr. HAYES. I don't know by what standards you can call it success- ful. Mr. PATMAN. Well, were all the foundations that pledged grants to the Philippa Sc.huyler Memorial Foundation-they were members of ABC, too, were they? Mr. HAYES. Not necessarily; no. Mr. PATMAN. Not necessa.rily. Mr. HAYES. No. Mr. PAThIAN. But members of ABC, I mean members of ABC did subscribe. Mr. HAYES. Some members did, yes. Mr. PATMAN. What was the express purpose of these grants? Iii other words, how were these funds to be disbursed by the Philippa Schuyler Memorial Foundation? To whom were they to be disbursed? Mr. HAYES. Each grant carried a specific purpose to which that grant was dedicated, and this was quite well spelled out in the grant itself. Mr. PATMAN. How much of these funds have been disbursed by this foundation that we are talking about and who are the clonees? Mr. HAYES. I don't know the answer to those two questions. Mr. PATMAN. I have here a copy of a press release dated July 16, 1967, which was sent out by the Philippa Schuyler Memorial Founda- tion. It lists more than 40 foundations which had pledged grants to the Philippa Schuyler Memorial Foundation. Subsequently, newspaper reports referred to those pledges as amounting to $30,000 to $40,000. \~That is the connection between ABC and these grants? Mr. HAYES. Mr. Chairman, I believe that Mr. George Schuyler has been subpenaed, has been asked to appear before this committee. I think he can answer those questions much more accurately than I can. Mr. PATMAN. I will place in the record the release gotten out by the Philippa Schuyler Memorial Foundation. (The document referred to follows:) NEWS FROM PHILIPPA SCHUYLER MEMORIAL FOUNDATION, NEW Yonx, N.Y. An organization devoted to the cause of winning the peace in South Vietnam in the same person-to-person style followed by the late Philippa Schuyler and set up in her memory, was announced yesterday in New York. PAGENO="0138" 134 Named the Philippa Schuyler Memorial Foundation, it has already received 43 grants for such varied objectives as food, education, musical instruments, books, cultural activities at the village level, etc. The foundation's advisory committee of 33 includes personalities from a broad spectrum of views about the Vietnamese War, some probably qualifying as "hawks," others as "doves." The fact that they have united on a common program to restore the village life in the war-racked country and make the prospect of peace more meaningful has demonstrated their consensus that no matter how Americans feel about the war itself, the time has come to start winning the peace on a simple, humanita- rian level and show the Vietnamese people that our interest in them extends far beyond the battlefields. This was one of the passionate beliefs of Philippa Schuyler, pianist, author and newspaper correspondent. On her concert tours and trips all over South Vietnam she somehow found the time to intercede with the Marine Corps to evacuate refugees of all ages from devastated areas. She was on just such a mission last May 9, having hitch-hiked a ride for a cabinful of orphans, when the Marine helicopter in which she was flying from Hue to DaNang exploded in the bay at DaNang. A child she was holding on her lap died with her. The winning-the-peace program has received the approval of South Vietnamese officials. The U.S. Government is co-operating. The foundation release emphasizes that none of the grants are to be expended in areas duplicating the work of the U.S. AID programs or any other govern- mental enterprises. Basically the areas for the grants are confined to the "little, all-important things which make all the difference in the world to the inhabitants of a small community. They must vary from one place to another as surely as places vary." The idea for the foundation came after attendance at Philippa Schuyler's funeral in St. Patrick's Cathedral in New York on May 18 which overflowed into the streets. People from all parts of New York's five boroughs, New Jersey, l,~\Testchester and Connecticut came to pay homage to the "beautiful American" who started her professional career as a child prodigy pianist. Present also was a Marine Corps honor guard. Several of her friends approached her parents after the funeral ceremonies with the plea that the example of her life be perpetuated in some constructive manner. It was agreed that the crux of the message of her life was "winning the peace." Her parents promptly gave their blessing to a foundation with that main ob- jective. Americans Building Constitutionally, an organization of smaller private foundations, of Barrington, Ill., was informed of the idea. ABC decided to back it. From then on the movement has grown rapidly. Grants have come in daily. No part of the money contributed is going to be used for administrative expenses. The chairman of the "Winning the Peace" Program is Mrs. Josephine Schuyler, mother of Philippa. The president of the Philippa Schuyler Memorial Founda- tion is Philippa's father, the well-known journalist George Schuyler. Mrs. Schuyler is also secretary-treasurer of the Foundation. The executive vice presi- dent is book publisher Robert Speller who is also vice chairman of the "Whining the Peace" program. The Advisory Board of the Foundation, all of whom are friends of Philippe's, consists of: Miss Olive Abbott, founder of the Musical Art Group, which has pre- sented many young artists at Town Hall, New York; Mr. lvi Allison of Austin, Texas, founder-president of the National Piano Teachers Guild, who was the discoverer of Philippa's musical genius; Mr. William F. Buckley, Jr., editor of the National Review and a prominent television personality; Mr. John Chamber- lain, well known columnist; Dr. B. H. Cogdell, prominent physician of Alma, Georgia; Mr. Milton J. Cross, outstanding radio personality best known as the Metropolitan Opera commentator; Mr. Leonard de Paur, symphony conductor; Mr. Leo Diamond, president, Eldee Music, who released Philippa's album "Piano- logue"; Supreme Court Justice of New York Edward Dudley, former borough president of Manhattan; Mr. Duke Eilington, composer and orchestra leader; Mr. Elton Fax, artist-lecturer; Hon. Hamilton Fish, former congressman and president-general of the Order of Lafayette; Dr. L. H. Foster, president, Tuskegee Institute; Mr. Devin A. Garrity, president, Devin-Adair Company, one of Phil- PAGENO="0139" 135 ippa s pubh hers Col James W Geraid Dr William Randolph Granger Di J. H. Jackson of Chicago, president, National Baptist Convention; Mr. Victor Lasky, author, journalist; Hon. Henry Cabot Lodge, former ambassador to South Vietnam and the United Nations; Mr. William Loeb, president of the Manchester (N.H.) Union-Leader-News of which paper Philippa was a correspondent in South Vietnam at the time of her death; Rev. Daniel Lyons, S.J., head of Twin Circle Publishing Co., another of Philippa's publishers; Rev. Dr. David Moore, associate minister of the Scientific Prayer Ministry; Mr. Benjamin Protter, sec-~ retary-general of the Society for French-American Affairs; Mr. A. Philip Ran- dolph. international president of the Brotherhood of Sleeping Car Porters; CoL Archibald Roosevelt; Mr. Noble Sissle, orchestera leader and composer; Mr. 1-lenry Steigner, philosopher and patron of the arts; composer William Grant Still, of Los Angeles: Mrs. Carl Van Vechten; Bishop W. J. Walls, of Chicago~ presiding bishop of the First Episcopal District, African Methodist Episcopal Zion Church; Mr. Roy Wilkins, executive director of the N.A.A.C.P.; Dr. Max Xergaa, international educator and former Y.M.C.A. director; and Mrs. Maude Files Zimmer, columnist, Hartford Times. More than forty grants have been made `to the Philippa Schulyer Memorial Foundation for transmission to South Vietnam. Among them are: The Faliy Foundation, 6 Rivo Alto Canal, Long Beach, California, Mr. Douglas Fahy. J.T.C. Foundation. 210 W. 101 Street, New York City, Mr. Thomas S. Hayes, president. J. W. Hines Foundation, 2403 Cherry. Mount Vernon, Illinois, Mr. J. W. Hines, president. Forensic Science Institute, Washington, D.C., Mr. Herman E. Kimsey. The S.B.K. Foundation, 65 `S. Plum Grove Road, Palatine, Illinois, Mrs. Bertha Fields. Syd Orkney Foundation, 2809 Summitview Avenue, Yakima, Washington, Mr. Syd Orkney. The Walsh Family Foundation. Barrington. Illinois, Mr. James R. Walsh. The Foundation for the Advancement of the Civilizing Arts, New York City, Mr. Norman Dodd. Jerre H. Paxton Foundation, Yakima. Washington, Mr. Jerre H. Paxton. Lininger Foundation for Educational Exchange, West New York, New Jersey, John B. Lininger. Jere Irwin Foundation, Yakima, Washington, Mr. Jere Irwin. Hough's Encyclopaedia of American Woods Foundation, New York City, Mr. Robert Speller. J. D. Kirk Foundation, 308 N. Forrest Avenue, Oak Park, Illinois, Mr. J. D. Kirk. The Tudhope Foundation, 511 Woodland Lane, Northfield, Illinois, Mr. James B. Tudhope, Jr., president. Hap Robinson Foundation, 8503 Kail Drive, Yakima, Washington, Mr. Hap Robinson. H. G. Ferguson Foundation, 7103 Tifton Drive, Yakima, Washington, Mr. Harvey Ferguson. Saxon Foundation, 143 S. Lincoln Avenue, Aurora, Illinois, M. R. Saxon, M.D., medical director. Massner Foundation, 130 E. 12th Street, Davenport, Iowa, R. C. Massner, D.C. D. W. Anderson Foundation, 59 E. Downer Place, Aurora, Illinois, D. W. Anderson, M.D., medical director. Mark D. Juhian Foundation, 862 Juneau Road, Ypsilanti, Michigan, Dr. Mark Julian, medical director. The Wunsch Foundation, Yorkville, Illinois, Dr. L. A. Wunsch, president. The Floyd Paxton Foundation. Yakima, Washington. R. D. Hayes Family Foundation, Wheaton, Illinois, Mr. Robert D. Hayes, president. M. J. Harris Foundation, 742 W. Dempster, MOunt Prospect, Illinois, Mr. M. J. Harris, executive director. R. 0. Hayes Foundation, 4340 Crest Knoll Drive, Grand Blanc, Michigan, Mr. R. 0. Hayes, manager. Vernon Spencer Foundation, 602 S. Russell Street, Marion, Illinois, Mr. Vernon Spencer, executive director. PAGENO="0140" 136 J. F. La Lumondier Sr. Foundation, 107 S. 20th, Mount Vernon, Illinois, J. F. La Lumondier Sr., exeeutive director. Jefferson County Research A~ssocia'ted. 1101 Broadway, Mount Vernon, liii- nois, Mr. William H. Piper, vice president. L. J. Hines Foundation, Whittington, Illinois, Dorothy Hines. secretary. C. V. Hoskins Foundation, Mount Vernon, Illinois, Mr. C. V. Hoskins, execu- tive director. Roy D. Massner Foundation, 4901 Main Street, Downers Grove, Illinois, Mr. Roy D. Massner, executive director. Robert W. Draege Foundation, Mount Vernon, Illinois, Mr. Robert W. Draege. Russell Spencer Foundation, Thompsonvflle, Illinois, Mr. Russell Spencer, executive director. The Kellogg Foundation, Yorkville, Illinois, Mr. Keith Kellogg, executive director. Layman Foundation, Union Gap, Washington, Mr. Stan Layman. Glaspey Foundation, Yakima, Washington, Mr. Bob Glaspey. J. Orkney Foundation, 610 5. 32d Avenue, Yakima, Washington, Mr. James Orkney. S. C. Forjays Foundation, 12501 Christy Lane, Los Alamitos, California, Charles R. Billings, president. Carol Terrell H. Root Foundation, 1879 New-port, Costa Mesa, California, Dr. Carol T. Root, president. Foundation for Economic and Social Progress, 2812 Tigertail Drive, Rossmoor, California, Mr. Frederick G. Allen. The Alentar Foundation, 9630 Santa Fe Springs, California, Mr. Ralph Monroe. Barbara Wright Adams Foundation, P.O. Box 1753, Newport Beach, California, Miss Barbara Wright Adams. Mrs. Schuyler, aeconipanied by Deputy Co-ordinator Herman E. Kimsey, and Field Co-ordinator Lt. Col. John B. Lininger, U.S. Army (Ret.~ will leave for Saigon on July 28th from San Francisco to deliver the initial grants to the people of South Vietnam. Mr. PATMAN. One question I think you could answ-er. What is the connection between ABC and these grants that were made by these member foundations? Mr. HAYES. No connection whatever. Mr. PATMAN. No connection at all. Mr. HAYES. No. Mr. PATMAN. I hold here in my hand a schedule submitted to us by Mr. George Schuyler, president, Philippa Schuyler Memorial Founda- tion of New York City. This schedule shows only 26 grants, totaling only $13,210. Subsequently, by letter of October 25, 1967, Mr. Schuyler advised us that the $500 grant from the Vernon Spencer Foundation of Marion, Ill., has not been received by the Philippa Schuyler Memorial Founda- tion. Mr. Schuyler also stated that the following additional donations had been received by the Philippa Schuyler Memorial Foundation: Saxon Foundation, 143 5. Lincoln Ave., Aurora, Ill $1, 000 M. J. Harris Foundation, 742 W. Dempster, Mount Prospect, Ill aOO Thus, the total contributions received from 28 foundations was $14,600. This is a far cry from $30,000 to $40,000. You know, it was advertised that $30,000 to $40,000 was raised, but the total contributions here from the 28 foundations was $14,600. How do you explain that, Mr. Hayes? Mr. HAYES. I wouldn't attempt to explain it, Mr. Chairman, because this is strictly up to the foundations who pledged the grants as to what finally came through. PAGENO="0141" 137 (The schedule referred to follows:) Donor Address Fred K. Dell Foundation Robert W. Draege Foundation R. 0. Hayes Foundation Herbert M. Hines Foundation J. W. Hines Foundation 1. J. Hines Foundation JTC Foundation Jefferson County Research Associa- tion, Inc., Mount Vernon, Ill. The Julian Foundation 86 Juneau Rd., Ypsilanti, Mich Kellogg Foundation Yorkville, Ill J. F. La Lumondier, Sr., Foundation_ 107 South 20th St., Mount Vernon, (IL - - Massner Foundation 130 East 12th St., Davenport, Iowa Roy D. Massner Foundation 4901 Main St., Downers Grove, Ill SBK Foundation 675 South Plum Grove Rd., Palatine, lll~_ Russell Spencer Foundation Rural Rotite No.3, Thompsorivulle, I IL -- - The Vernon Spencer Foundation - - 602 South Russell, Marion, Ill The Tudhope Foundation 511 Woodland Lane, Northfield, Ill Walsh Family Foundation Care of North Central Trust Co., Chicago, Yorkville, Ill 2101 Peck St., Muskegon Heights, Mich - 4901 Main St., Downers Grove, Ill 12540 Hawthorne Blvd., Post Office Box 187, Hawthorne, Calif. The J. D. Kirk Foundation 308 North Forest Ave., Oak Park, Ill Fahy Foundation H.T. Sargent, D.C. Sargent Founda- 1 Broadway, Des Plaines, Ill tion. H.D. Hayes Family Foundation Total Purpose Rural Route No. 2, Mount Vernon, 4340 Crestknoll Dr., Grand Blanc, Mich~ 2114 North Elmwood Waukegan, Ill 2403 Cherry, Mount Vernon, Ill Route No 1, Whittington, Ill 210 West lOlstSt, New York, N.Y 1101 Broadway, Mount Vernon, Ill Amount Wunsch Foundation R. E. Boithouse Clinic Chandler Foundation R. Paul Hosted, D.D.S Food research Animal husbandry Food for peace Reuniting families Animal husbandy Child welfare in Vietnam. - - Developing agriculture Medical research Agricultural research Nutritional research Neurological studies Nutritional development Teenage survey AgricultUral development_a - - Food and nutrition Pursuit of peace Cultural development Correcting physical defects - Broad use Neurological studies For developing program Improve communication Aid to orphans Aiding program $500 500 750 100 500 500 500 550 500 500 525 500 535 100 500 500 100 1, 000 250 100 500 500 sob 1,000 100 Food research 1,000 13,210 Note: Where address of a donor does not appear, it will be supplied by the attorney for the ABC Foundation, Attorney Michael M. Ushijima, Box 575, Barrington, Ill. Mr. PATMAN. Who writes the checks for grants made by the Philippa Schuyler Memorial Foundation? Mr. HAYES. I have no knowledge of that. Mr. PATMAN. In his letter of October 25, 1967, Mr. Schuyler seemed uncertain as to whether a. $500 donation by the Philippi Scliuy}er Me- morial Foundation for water purification in Vietnam had actually been paid. This would seem to indicate that Mr. Schuyler does riot sign the checks. You don't know about how they handle their finances? Mr. HAYES. I don't know that. Mr. PATMAN. The Philippa Schuyler Memorial Foundation's press release of July 16, 1967, shows the Alentar Foundation of Santa F~ Springs, Calif., as one of its donors. Yet our letter to the Alentar Foundation was returned to us marked "addressee unknown." i-low- would you explain that, Mr. Hayes? Mr. RAY. Mr. Chairman, may I object to this line of questioning? Mr. Schuyler has been requested to appear. He told me that he is going to appear. Mr. PATMAN. That. is no grounds at all. Tha,t is overruled. Mr. RAY. You are just. using Mr. Hayes to insert this information in the record when it could be taken from a sworn witness. Mr. PATMAX. Well, that is a matter for us to decide, Mr. Ray. You look after Mr. Hayes' business. Mr. RAY. I am trying to. Mr. PATMAN. We will look after ours. Mr. RAY. He does not run the Philippa Schuyler Foundation. Mr. PATMAX. Yes. Well, he has answered, you know, that he didn't know about this, which he had a right to do. We are not questioning PAGENO="0142" 138 that. The Philippa Schuyler Memorial Foundation's press release Of July 16, 1967, shows the Carol Terrell H. Root Foundation of Costa Mesa, Calif., as one of its donors. Yet Dr. Terrell H. Root has in- formed us that there is no such foundation. How do you explain that? You know we have written lots of letters, dozens of letters, that were. returned or people replied that they knew nothing about it. They were not members. And how did it get out, Mr. Hayes, that all these people were members when, in effect, they are not members? They denied it. Why would you say that certain people are members when they are not members? Mr. iL&~s. Mr. Chtiirman, I had nothing to do, and ABC had noth- mg to do, with putting out that information. I have no imowledge of the operation of the Philippa Schuyler Memorial Foundation. Mr. PATMAN. The Philippa Schuyler Memorial Foundation's press release of July 16, 1967, shows the Layman Foundation of Union Gap, Wash., as one of its donors. Yet, Mr. Stan Layman has informed us that there is no such foundation. How do you explain that? Mr. HAYES. I have no knowledge of that. Mr. PATMAN. And we get all kinds of replies like that, some denying it, some saying there is no such foundation, some the addressee is nnknown. Now the Philippa Schuyler Memorial Foundation press release of July 16, 1967, shows the J. Orkney Foundation of Yakima, Wash., as one of its donors. Yet Mr. Orkney has informed us there is no such foundation. That is just another one of these. And the same way with the Glaspey Foundation of Yakima, Wash. The Philippa Schuyler Memorial Foundation's press release of July 16, 1967, shows the Glaspey Foundation of Yakima, Wash., as one of its donors. Yet, Mr. Bob Glaspey has informed us that there is no such foundation. * How do you explain that? Mr. RAY. Mr. Chairman, may I suggest that- Mr. PATMAN. We are informed that there is no such foundation. Mr. RAY. Your committee wrote letters to these people, assuming the foundations would take the family name; many foundations in this country are not under family names. Mr. PATMAN. Mr. George S.. Schuyler, president of the Philippa Schuyler Memorial Foundation, has advised us that the following con- stitutes the total grants paid by the foundation as of October 29, 1967: The Foundation staged a Philippa Sehuyler Memorial Concert on September 24, 1967 at Town Hall in this city, and in this connection made expenditures totaling $4,916.04. This included payment for 37 Local 802 musicians for two rehearsals and performance music copying, printing, telephone, telegrams, cables, printing of programs, postage, office and Town Hall rentals, petty cash. Our first grant of $1,000 was made to the Saigon Music Conservatory consisting *~f violin and piano concerti, scores and orchestral parts, and needed instrumental parts: i.e., bows, strings, resin and reeds. To appear as surprise guest on the program, we brought a Vietnamese child piano prodigy from Saigon at an expense of $1269.50. Tickets worth several hundred dollars were donated to 300 young people from Haryou Act, Our Lady of Lourdes Church, St. Charles Church and the Church of the Master and the Protestant Welfare Council. Do you feel that the Philippa Schuyler Memorial Foundation is fulfilihig its purposes in programs like that? PAGENO="0143" 139 Mr. RAY. Objection, on the grounds of pertinency, Mr. Chairman. Mr. PATMAN. Let Mr. Hayes answer the question or refuse tO an- swer it. - Mr. RAY. Before I can object? Mr. PATMAN. What is that? Mr. RAY. Before 1 can object on the grounds of pertinency? Mr. PATMAN. You just objected. Mr~ RAY. All right. Mr~ PATMAN. It is a pertinent question. Do you feel that the founda- tion is fulfilling its purpose on programs of that type? Mr. HAYES. Mr. Chairman, I would appreciate a statement of how this ties in with the purposes of this committee. Mr. PATMAN. Well, that is what I am asking you. Mr. HAYES. How it ties in with the purposes of this committee. Mr. PATMAN. You caused this foundation to be organized. Now are programs like that carrying out the purposes of the foundation that you caused to be organized? Mr. HAYES. I have no right to render an opinion on that kind of a subject. That is up to the Philippa Schuyler Memorial Founda- tion, and its executive, to determine that fact. If it is improper, ëer- tainly the Internal Revenue will take such action as is necessary. Mr. PATMAN. The articles of incorporation of the Philippa Schuyler Memorial Foundation, Inc., were filed in the State of Illinois on May 25, 1967. Why was tl~is foundation incorporated in the State of. Illinois? Mr. HAYES. I have no knowledge of that. Mr. PATMAN. According~ to the articles of incorporation the addiess of the registered office of the Philippa Schuyler Memorial Founda- tion is Post Office Box 575, Kelsey Road, Barrington, Ill. This is also ABC's address, is that correct? Mr. HAYES. Box 575, Barrington, yes. Mr. PATMAN. The base of operations of the Schuyier MemOrial Foundation appears to be the home of George S. Schuyler, president of this foundation. Mr. Schuyler's address is 270 Convent Avei~ue, New York City. Why wasn't the Philippa Schuyler Memorial Founda- tion incorporated in the State of New York? Mr. HAYES. I would say that is entirely up to the Schuylers. Mr. PATMAN. According to the Chicago Tribune of July 26, 1967, members of the ABC were to contribute more than $30,000 to the Schuyler Memorial Foundation. Here is a list showing grants received by the Philippa Schuyler Memorial Foundation, totaling $13,210 as of October 11, 1967. ~. . By letter of October 20, 1967, Mr. Schuyler advised us that dona- tions received by the foundation had increased from $13,210 to $14,847. Please scan this list and tell us which of these foundations is a them- ber of ABC. There is the list. . . Mr. HAYES. Mr. Chairman, as trustee of ABC, I am not at liberty to reveal- . . . * . Mr. PATMAN. I direct you to answer the question, Mr. Hayes. - Mr. HAYES. I am sorry I can't answer. - - - - Mr. PATMAN. You refuse to answer. - . - - - Mr. CONTE. On what basis, Mr. Chairman? PAGENO="0144" 140 Mr. PATMAN. On what basis do you refuse to answer? Mr. Conte would like to know and I would like to know. Mr. HAYES. I refer that to counsel. Mr. CONTE. All right, let's hear from counsel. Mr. RAY. Mr. Hayes had stated for 2 or 3 days, Mr. Conte, that as trustee he does not believe that he has the right to allow the member- ship, its privacy, to be invaded, and on that basis has consistently re- fused to reveal who the members are, so that they may not be subject to harassment, and that is the basis- Mr. PATMAN. Be subject to what? Mr. RAY. Harassment. Mr. CONTE. You and I went through this at great length last week. Under what provisions of law, under what case or under what. part of the Constitution are you seeking to gain this "umbrella"? Mr. RAY. May I suggest that the Supreme Court itself- Mr. CONTE. In what case? Mr. RAY. In Gthwold V. Connecticut- Mr. CONTE. That is marital relationship, the right of privacy. Mr. RAY. It was the right of privacy. It raised it to a- Mr. CONTE. The courts spelled out a right of marital privacy as be- ing within the specific guarantees of the Bill of Rights. This is not a marital relationship here. Mr. RAY. The court also went on to state that the right of privacy was not even enumerated in the Constitution because it was retained by the people. Mr. CONTE. Do you agree with me that that was a marital case Mr. RAY. Yes, sir. Mr. CONTE (continuing). And therefore, not in point.. Mr. RAY. No, sir. Mr. CONTE. Do you have any other citations, counsel? Mr. RAY. On the right to privacy? Mr. CONTE. Yes. Mr. RAY. Or association or freedom of association? Mr. CONTE. You were pleading the right of privacy here, that his right not to answer these questions is based on the right of privacy. I have asked you to give me some citations. You gave me Griswold v. Coniweticut which was a. marital case, and which is not in point. It is not germane whatsoever. Do you have any other cases? Mr. RAY. Yes; the whole series of NA ACP cases. Mr. CONTE. That was altogether different also. You know that as a very learned attorney, Mr. Ray. The court very clearly stated that the revealing of the NAACP membership lists was an unwarranted inva- sion and would be depriving the people of their right to due process. Mr. PATMAN. Mr. Conte, I have finished asking questions of these gentlemen. You may proceed, if you like. Mr. CONTE. In the case of NAAUP v. Alabama, the case decided was in regard to the right of freedom of association; I quote: The exclusive beneficiary thereof has been the NAACP. a membership associa- tion. It has enjoyed the protection of that right in the form of an exemption from compelled disclosure of its members principally for the reason that it has engaged in the advocacy of particular beliefs. Unlike the NAACP, your organization, ABC, is not engaged in such advocacy, an activity protected by the first amendment. Mr. RAY. That is correct. PAGENO="0145" 141 Mi~ CO~TE~ You are engaged~in the rewarding, mercantile business of advising clients for a fee as to how the latter may obtain the most liberal exemptions from the Federal tax laws. Therefore, I maintain that that case is not in point. Mr. RAY. You may maintain that, Mr. Conte. Mr. CONTE. In other words, you are advising your client not to answer these questions, based on the first amendment. Mr. RAY. On the fourth amendment, the right to privacy, and that he has the nexus is sufficient- Mr. CONTE. Are you pleading the first amendment? Mr. RAY. You forced him under the first amendment to protect himself. Mr. CONTE. Wait a minute; I didn't force him into anything. We kicked this around for hours last week. He was not forced into any- thing. He wasn't coerced. You advised him as his attorney. You can go back and check the record. Mr. RAY. I have. Mr. CONTE. Well, don't use that word "force" loosely here. He was not forced into anything. Is that right? Mr. RAY. Mr. Patman referred to you as an interrogating member in that exchange. Mr. CONTE. I was question.inghim, and he was not forced. Will you go back and check the record and show me where he was forced? He did it under his own free will, of his own volition, and with advice of counsel. Is that correct? Mr. RAY. I believe- Mr. CONTE. Mr. Hayes, may I ask you the question: Were you forced in pleading the first amendment last week? Mr. HAYES. Will you state the question again, Mr. Conte? Mr. C0NTE. Mr. Hayes, were you forced by this committee to plead the first amendment last week? If so, will you read from the record as to just where you were forced. Mr. HAYES. I think the demand was made. Mr. CONTE. There was no demand made. I ask you whether or not you wanted to plead the first amendment, and you answered in the affirmative. Will you answer that? Mr. HAYES. I refer this to counsel. Mr. RAY. You st.ated after quoting Wilson v. The United States, Mr. Conte, which was a corporation case, about a creature of the State, and we suggested that the trust is not a creature of the State- Mr. CONTE. I suggested that a trust comes under the jurisdiction of a State. Mr. RAY. You also suggested- Mr. CONTE. Somewhat analogous; right? Mr. RAY (continuing). That this was a quasi-judicial body, and I interrupted with the Watkins v. The United States opinion, and you interrupted me right after I said that the Bill of Rights is applicable to these types of investigations, and you asked if we are claiming any constitutional rights. We said yes at that point, we will claim our first amendment rights. Mr. C0NTE. Exactly right. Where is the compulsion there? Mr. RAY. Then here you said "Do you want to plead"- 87-444-68-10 PAGENO="0146" 142 Mr. CoN1~. Wait a minute right there. At that point you claimed the first amendment. Mr. RAY. Right. We have the rightto- Mr. CQNTE. Where did we demand or compel him to plead the first amendment? Mr. RAY. The whole next- Mr. CONT:. Wait a minute. At~ that point he pled the first amend- ment. Where was he compelled to plead the first amendment prior to that? Mr. PATMAN. It was obvious, Mr. Conte, he was not compelled by you or any other person. Mr. CONTE. Of course not, but I want to give him every opportunity possible to try to explain that statement. Just don't bandy words around here. You know better than that. Can you find it? Mr. RAY. I will withdraw the word "forced." Mr. CONTE. All right, let's go on. Mr. RAY. If the committee will withdraw the- Mr. CONTE. I withdraw nothing. I leave this in the record. Mr. RAY. Yesterday my client was threatened with criminal * prosecution. Mr. PATMAN. That is not correct. * Mr. CONTE. Listen, let's not draw any "red herrings" over the issue here. You made a statement; your client made a statement. I asked you to prove it, and now you are fuzzing off on something else. I wasn't here yesterday. I was here, however, when he pled the first amend- ment. You said he was compelled to plead the first amendment, and now you have been proven wrong. Is that right? Mr. RAY. You may claim that; yes. Mr. CONTE. Well, can you claim otherwise? You have the record. Mr. RAY. I didn't continue with the rest of the record. Mr. CONTE. He pled the first amendment at that point. I asked you prior to his pleading the first amendment where did we, myself or any- one on this committee, compel him so to plead. Mr. RAY. There was constant objection to his pleading that he. had a right to privacy and that the members did. Mr. CONTE. I wanted to know on what grounds. That is a legitimate question, is it not? Mr. RAY. On what grounds? Mr. CONTE. That is right. Mr. RAY. Yes. Mr. CONTE. All right. Let's go on with the questioning. Mr. Hayes, how much effort has ABC made to help farmers establish their personal tax-exempt foundations? Mr. HAYES. How much effort? I would say very little, if any. Mr. C0NTE. Would you say, "None at all"? Mr. HAYES. I saidvery little, if any. Mr. CONTE. Well, how about the little part. Can you tell me som~- thing about that? Mr. HAYES. At the request of one of the spensors, ABC conductM a seminar, an educational seminar for a group of farmers. Mr. CONTE. Could you tell us who the sponsor was? PAGENO="0147" 143 Mr. HAYES. No; I can't tell you that. Mr. CONTE. Where was the meeting held? Mr. HAYES. The meeting was held in Mount Vernon, Ill. Mr; CONTE. Which, if any, Of the farm organizations have offered to help youpromote the ABC package? Mr. HAYES. None, officially. Mr. CONTE. How about unofficially? Mr. HAYES. I can't reveal that information. Mr. CONTE. Why can't you reveal that information? Mr. HAYES. They don't want their private affairs spread around the newspapers. Mr. CONTE. All right. Would you be willing, if we go into executive session, to tell us privately ~ Mr. HAYES. No; I couldii't reveal that in executive session any more than I can m open session Mr. CoNTE. Why can't yOu reveal it in executive session? You gave the. excuse that you didn't want it. spread in the ne~vspapers. Mr. HAvEs. This is up tO the farm organization's policy. Mr. PAT~rAN. Would you yield for a short question? Ni Co~ TE Ceit'iinly Mr. PATxAN..lt is a fact that you tried to sell that to one of the farm oiganií'tt'o is `ust `is Mi Walsh sold it to you, `is `i package and they refused to buy it? . . Mi H ~LS That is not coiiec~ Mr. PATMAN. Go ahead, Mr. Conte. ~ . ilr Co~ IE Mi Haves ~1 e Wail Sti cot Journal article of August 28, 1967, quo~e~ Yi \\TalsI as ~i ig Non-profit civic organizations are to be set up in every county in Illinois. The civic organization would recruit members, many of them farmers, who would set up foundations for research and development in food, nutrition and related areas such as cattle feeding ai~dsoilimprovement. How much progress has been made in setting up these civic organiza- tions? Mr. HAYES. I don't know. Mr. CONTE. Why don't you know? YOu are a trustee of ABC, aren't -vol'2 Hr HAUIS I am io~ aw'ue o~ `ill the details of these things that goon. . Mr. CONTE. As one of the three trustees? There are only three trustees in ABC Is that coriec Mr. HAYES. That is correct. Mr. CONTE. You have no knowledge of'this. Mr. HAYES. What sponsoring members are doing I have no way of knowing. . Mi Co~ TE In yo ii statement before this committee last week, on October 30, you stated on page 8: Several of our agricultural members are now setting up soil testing labora- tories for the purpos.e of improving the quality and the quantity of food pro- duced and thereby improving the health of those who use this food. These are your own words. Mr. 1-lAvus. The Jefferson County Civic Association is public knowl- cage. Mr. CONTE. In Illinois? . . . . PAGENO="0148" 144 Mr. HAYES. In Illinois. Mr. CONTE. In other words, if I may interrupt, what you are telling me here is that you are only gOil1g to tell me what is public knowledge. You have other knowledge and other information, but you won't dis- seminate that information here. Is that correct? Mr. HAYES. Some knowledge I have and some I don't have. Mr. CONTE. Could you give us the knowledge that you do have? Mr. HAYES. No, I cannot divulge the names of private foundations. Mr. CONTE. On what ground ? Mr. HAYEs. The members I believe have a right to privacy, and if I reveal it, that. right will be invaded and I don't believe I have that right to divulge that information. Mr. CONTE. AsI said-last week, Mr. Hayes, what the committee seeks to elicit from you and the other witnesses here is evidence of the scope of your operations, and the effect upon the administration of the Fed- eral tax system, more specifically the consequences in terms of the burden borne by the small taxpayer, to the end that it ultimately may be enabled to determine what corrective legislation, by way of more equitable reforms of that system, should be recommended. Therefore, I think it is highly essential that this information be given by you to this committee. What you are doing is either illegal or, if it is legal, there are loopholes in the tax laws that. must be plugged so that everyone carries their full share of the tax load. The only way I am going to find out whether it is legal or illegal is by your answers, aand so far you ha.ven't told us very much. Mr. RAY. If what is legal or illegal? You are going to find out if what is legal or illegal, the school, what we teach, our members? What do you seek to find out? Mr. CONTE. I must find out your members first of all, because it may be that the chairman may want to bring the members before this committee. Mr. RAY. Are you questioning whether what ABC does is legal or illegal? Mr. CONTE. And if there are loopholes. If it is legal, and if there are loopholes in the tax laws that have to be plugged. Mr. RAY. We will answer any of the questions on that. Mr. CONTE. No, you don't. answer it. You raise the cloak of secrecy. Mr. RAY. On a hypothetical basis and what we teach we~ Mr. CONTE. I didn't give you a hypothetical case. I have given you actual cases. Your own statement here and your own witnesses tells me that he is not going to tell me because of the right of secrecy. These are not. hypothetical questions. Mr. RAY. He is just protecting the members. Mr. PATMAN. Why should the members need protection if they are doing something that is legal, honorable, a.nd right? What protec- tion do they need? Mr. RAY. I might suggest that on one afternoon 15 agents of the Internal Revenue `Service approached 15 homes where housewives were present. Mr. PATMAN. Well, don't you think that is a good thing? Mr. RAY. Do you? Mr. PATMAN. Yes. Mr. RAY. I know their husbands sure didn't, Mr. Chairman. PAGENO="0149" 145 Mr. PATMAN. To see whether or not they were within the law. If they are not within the law, they should pay taxes like everybody else. Mr. RAY. Fifteen Federal criminal investigators knocked on the doOrs of homes, flashed their badges and demanded the books and records. Their husbands didn't care for this at all. They didn't go to their offices. Mr. PATMAN. `Who were those members? Mr. RAY. I am not going to reveal who the people were. The IRS knows who they are. Mr. CONTE. `Why don't you want to reveal that? Mr. PATMAN. Excuse me. The. IRS has demonstrated here that it is on the job more than I have heard about in many years. I didn't kiiow tha.t they were on the job. I never heard of anything like that before. It is really encouraging to know that, at least once, they attempted to do something about it. Mr. RAY. Attempt to do wha.t? Mr. PATMAN. It is encouraging to know that at least one time they tried to do something about you fellows, find out what makes you tick, whether or not you are evading the law', violating the law, or how you are doing it.. Looks to me like you set it up so that you pay every- thing through a foundation because the foundation doesn't have to pay taxes. Mr. RAY. `Well, the members- Mr. PATMAN. I doubt that you will get. by with it but maybe you will. Mr. RAY. The members believe that the proper place to decide whether they are doing anything legal or illegal is the court. Mr. PATMAN. Yes, after 20 years. Mr. CONTE. Mr. Hayes, how do you provide continued control over the family estate for the wife and the family of the individual setting up the trust? Mr. HAYES. The best a.nsw'er I can think of, Mr. Conte, to that, there, may be several ways involved, but. the trustees succeed at the death of the original trustee or the creator. I will read one of the clauses out of the trust document: The trustees herein mentioned by name or their successors elected to fill vacancies shall hold office, have and exercise collectively the exclusive manage- ment and control of the trust property and business affairs, provided where succession may be desired the first named trustee shall hold office for 1 year, the second for 2 years, the third for 3 years, in this manner using the same principle for additional trustees the successor to each trustee being elected for a full term of 5 years. Mr. CONTE. The trust goes on in perpetuity? Mr. HAYES. No, it has a definite- Mr. CONTE. Cutoff date? Mr. HAYES. Cutoff date. Mr. CONTE. When is the definite cutoff date? Mr. HAYES. Twenty-five years is the usual one. It can be renew-ed, however, for 25 more by the trustees. Mr. CONTE. Assuming that it is one of these medical foundations that we discussed last week, where you have the doctor who sets up the foundation, and the doctor dies, and assuming also that members of his family are trustees of the foundation, they would continue the trust. Is that right? PAGENO="0150" 146 Mr. H~n~s. That is a foundation. Mr. CONTE. That is a foundation. Mr. HAYES. Yes, that wouldbe under- Mr. CONTE. Is that basically correct? Mr. IRAY. Would you clarify the question? Mr. CONTE. Do you remember last week- Mr. RAY. Yes. Mr. CONTE (continuing) . When he gave me a hypothetical case where they set up a medical research foundation. * Mr. RAY. That would be a corporate form of foundation. This is a taxpaying trust. Mr. CONTE. I see. How about in a foundation? How would that operate? Mr. RAY. The code provides I believe that a corporate foundation may be perpetual. Mr. CONTE. Go ahead. I am sorry. Mr. RAY. The foundation may exist in perpetuity. Now whether it remains in family control depends on- Mr. CQNTE. All right. Now, if it is a medical research foundation, and the key individual in the foundation is the doctor, and he dies and leaves no one there to carry on his work~ what happens to the foundation at that point ? Do the funds remain in the fo~rndation and the foundation continue? Mr. RAY. The foundation can employ other physicians, research men, et cetera, to carry on the work of the foimdation. Mr. CoNm. They must employ other people, however. Mr. RAY. I don't believe that they would be able to accomplish medical research purpose without employing medical people. Mr. CONTE. With all the various benefits being received by the indi- vidual who sets up the trust and his family, how do you meet the Inter- nal Revenue requirements that the trust be organized and operated exclusively for the designated charitable or educational purpose? Mr. RAY. We don't set up charitable trusts. This is a taxpaying trust, Mr. Conte. Mr. CONTE. How about the foundation? Mr. RAY. There is a corporate foundation and a taxpaying trust., as explained in that diagram I handed out yesterday. Mr. CONTE. So, if you are going to set up a foundation for me, and I am a doctor, you first set up a trust. Is that correct? Mr. RAY. I could set up a foundation, a corporate foundation, first if you wished, or you could create a trust. The doctor doesn't operate within a trust. He can't. Mr. C0NTE. That is right. Mr. RAY. There is some question as to whether a doctor can operate within a foundation. Most don't. Mr. C0NTE. You gave me some examples last week that they did. Mr. RAY. They can; most as a matter of fact don't. Mr. CONTE. Has ABC made clear to their members what the l)OS- siNe liabilities or problems are, if the foundations established by their members are determined not to be tax free? Mr. HAYES. I think that, Mr. Conte, is quite well spelled out in the educational texts that we left with the committee last week. PAGENO="0151" 147 Mr Co~rE What is the ansv~'er ~ I haven't seen those books as yet. Mr. HAYES. There are several reasons, and one of the penalties of those reasons is loss of exemption. Mr. CONTE. You tell them this? Mr. HAYES. Absolutely. Mr. CONTE. Under the trust, does the individual ever lose control over his assets? Mr. HAYES. Under the trust not until he dies. Mr. CONTE. At that point does he lose his assets? Where do they go? Mr. HAYES. He can't take them with him. Mr. CONTE. No, he certainly can't, but it certainly could go to his family. Mr. HAYES. The trust, Mr. Conte, doesn't die. The trust continues,. and the trustees that remain control the assets. Mr. CONTE. I have no further questions, Mr. Chairman. Mr. PATMAN. Our next witness-tell Mr. Olsher to come back just a minute. Mr. Walsh, suppose you come around arid be sworn and occupy the table with Mr. Hayes. It is possible we will want to ask the two of you questions. Mr. RAY. Is Mr. Hayes relieved, Mr. Chairman? Mr. PATMAN. Not at this time; suppose. you get him a chair. Suppose you give your name to the reporter. Mr. WALSH. My name is James R. Walsh. Mr. PATMAN. Junior? Mr. \VALSH. You read that in the newspaper. My name is James R. Walsh Mr. PATMAN. What is your address? Mr. WALSH. Box 217, Fontana, Wis. Mr. PATMAN. Hold your right hand to be.sworn. Do you solemnly swear that the testimony that you shall give before this Subcommittee on Foundations of the House Small Business Com- mittee will be the truth, the whole truth and nothing but the truth, so help you God? Mr. WALSH.ICTo. Mr. PATMAN. Sit down. TESTIMONY OP J'AMES R. WALSH, PONTANA, WIS. Mr. WALSH. Thank you. Mr. C0NTE. Mr. Chairman off the record for a moment. (Discussion off the record.) Mr. PATMAN. You have identified yourself and your address. What is your occupation? Mr. WALSH. I work for the `Walsh Family Foundation. Mr. PATMAN. You work for the Walsh Family Foundation? Mr. `WALSH. Yes, sir. Mr. PATMAN. Do you own that foundation yourself? Mr. `WALSH. You can't own a foundation, Congressman Patman. This would be illegal. Mr. PATMAN. It would be illegal? PAGENO="0152" 148 Mr. WALSH. Yes; it would. Mr. PATMAN. Well, somebody has the ownership of an entity. It is an entity, isn't it? Mr. WALSH. No, sir; not as I understand the law. Mr. PATMAN. It is not an entity? Mr. WALSH. It. is an entity,. but it can't be owned by an individual. Mr. PATMAN. Well, it is controlled then according t.o your version I assume? Mr. WALSH. Wefl~~ Mr. PATMAN. It is managed and controlled by whom? Mr. WALSH. In the case of a corporate structure, it would be con- trolled by the trustees. Mr. PATMAN. How many trustees in your Walsh Foundation? Mr. WALSH. Three. Mr. PATMAN. `\Vlio are they? Mr. WAL5u. My wife, Kay, my mother Bertha, and myself. Mr. PATMAN. How much are the assets of the `Walsh Foundation? Mr. WALSH. That is a matter that I don't believe I care to reveal at this time. The Internal Revenue, incidentally, has the Walsh Foun- clation under criminal investigation, so we will leave that for them to determine. Mr. PATMAN. You wouldn't be in a. position to state the total assets of the `Walsh Foundation? Mr. `WALSH. I don't believe I care to. Mr. CORMAN. Would the chairman yield at that point? Mr. PATMAN. Yes, sir. Mr. CORMAN. Could we have his reason for not? Obviously if there is a criminal investigation pending and he wants to plead the fifth amendment it. is proper. Mr. `WALSH. No, sir. I am not going to plead the fifth amendment. Mr. CORMAN. Just the fact lie doesn't. want to answer doesn't seem to me to be a reason that. lie doesn't have to answer a. question. Mr. PATMAN. I think it would be worthwhile for you to give us ~i reason, Mr. Walsh, why you refuse to answer. Mr. WALSH. Prejudicing my rights. Mr. PATMAN. That is in view of the investigation? Mr. `\~\TALSH. Correct.. Mr. PATMAN. Made by the Internal Revenue Service? Mr. WALSH. That. is absolutely right.. Mr. P ATMA N. By subpen a-~- Mr. WALST-T. And this committee, by the way. Mr. PATMAN. On what. grounds would you have- Mr. WALSH. It is a. private, personal affair. Mr. PATMAN. Why you take a. lot of private personal affairs. Of course, I ~m not comparing you with hoodlums or law `violators but they have their private personal affairs, too. Mr. `WAI~siI. Please don't. insinuate it then, either. Mr. PATMAN. You mean to say. that. the Government wouldn't have a right, to go into their private personal affairs? Mr. WALSH. I will wait. until we get. into a court to decide that. I don't think this is a constituted court of law. Mr. `CORMAN. Mr. Chairman, it seems to me that at least this witness is ea.ger to get to court to test the jurisdiction of this committee and PAGENO="0153" 149 that might be the best next step and that is why it would seem to me at this point it might ~5e well to make the record very clear as to the grounds for his objection and then we can proceed to cite him for contempt and resolve the issue. Mr. PATMAN. Let me ask the questions, Mr. C.orman, if you please. Mr. CORMAN. Yes. Mr. PATMAN. By subpena dated October 13, 1967, a copy of which I am herewith placing in the record and which was served on you October 21, 1967, you were ordered to bring with you the following information: 1. A financial statement of Americans Building Constitutionally for the 12 months ending September 30, 1967, including income and disbursements and a balance sheet. 2. The list showing names and addresses of members of Americans Building Constitutionally and the membership fee received from each of them. (See exhibit 7, appendix p. 1029.) Mr. PATMAN. Are you ready to give us this information, Mr.. Walsh? Mr. WALSH. I don't want. to cause you to lose face, Congressman, but I have to tell you No. 1, I am not a trustee of Americans Building Constitutionally. I am not a member, and therefore I don't. have those records. I have no access to them, and consequently I couldn't comply with your request. It is that simple. What do you want from me? I am not. a trustee. Mr. PATMAN. You have no connection with ABC at all. Mr. WALSH. That is absolutely correct. Mr. PATMAN. We have requested by letter dated October 3, 1967, that you furnish us certain documents and information relating to the history and operations of the Walsh Family Foundation. (That information appears in our Attachment "A" which is as follows:) ATTACHMENT A 1. Legible copy of exemption application (Form 1023) and supporting docu- ments, including subsequent amendments. 2. Legible copy of letter of Internal Revenue Service granting exemption. 3. Legible copy of charter, or articles of incorporation. If the Foundation is not a corporation, please submit a copy of the trust instrument. 4. Legible copy of by-laws. 5. B.alance sheet or itemized schedule of assets as of the date that the Founda- tion was first organized. 6. Legible copy of Form 900-A (or Form 1041-A, if applicable), including at- tachments, filed with the Internal Revenue Service for each year beginning 1951. 7. Legible copy of Form 990-T, including attachments, filed with the Internal Revenue Service for each year beginning 1951. 8. Legible copy of accountant's financial statement for each year beginning 1951, including c.arrying values and market values of individual securities held a.t the close of the year. Re market value, if the stock is not traded, please furnish the Foundation's equity in the net assets of the corporation. If the foundati.on has .been in operati.on for less than a year, please submit (a) a current balance sheet, and (b) an income and disbursements statement for the period of operation, including names and .addresses of donors, donees, and the amounts contributed. 9. Name and address of the accounting firm employed l)y the Foundation dur- ing each year. 10. Names and addresses .of the officers of the Foundation at the close of each year. PAGENO="0154" 150 11. Names, business addresses, and occupations of directors, trustees, and inem- hers of the finance committee at the close of each year. 12. Name and address of the bank, investment counsel, or broker, if any, rendering financial investment services to the Foundation during each year. 13. If the Foundation owned 5% or more of any class of stock of any corpora- tion at the close of any of the years 1951 through 1966, please submit the follow- ing information for each such year; (a) Name and address of the corporation. (b) Nature of the business. (c) Dates on which the stock was acquired by the Foundation, number of shares acquired, and manner of acquisition. (d) Number of shares of each type of stock owned at the close of each year. (e) Percentage of each class of outstanding stock of the corporation owned by the Foundation at the close of each year. (f) Identification of the stock as voting or non-voting. (g) Book value and market value of the stock at the close of each year. Re market value, if the stock is not traded, please submit the Foundation's equity in the net assets of the corporation at the close of each year. 14. Please advise as to: (a) The years, beginning with 1951, during which the Internal Revenue Service performed field audits of the Foundation. (b) The years covered in each such audit. (c) Taxes assessed, if any, by the Internal Revenue Service. Mr. WALSH. If you would care to ask the questions I will attempt to answer them. Mr. PATMAN. In our letter dated October 3, we asked for certain documents, such as a legible' copy of the exemption application form 1023 and supporting documents including subsequent amendments. Do you have that information? Mr. WALSH. I don't recall ever receiving that letter. You people sent so many letters out to Box 575 that frankly 1 threw a lot of them in the floor file. Mr. PATMAN. They were sent certified mail, every letter we sent to you. Mr. WALSH. No; I didn't receive any certified mail to this effect; no. Mr. PATMAN. Evidently you are not looking after your box care- fully. Mr. WTALSH. I didn't receive a questionnaire relative to the Walsh Family Foundation. I received one relative to ABC. Mr. PATMAN. And second, a legible copy `of letter of Internal Rev- enue Service granting exemption. Did you get such a. letter from the Internal Revenue? Mr. WALSH. Congressman, I did not see a letter relating to the Walsh Family Foundation. I received one relating to the affairs of ABC which I stated I am not a' trustee, I am not a member, and therefore I don't have access to it. I would have no reason to answer it. Mr. PATMAN. Well, answer me this. Did you apply for an exemption for your foundation from the Internal Revenue Service? Mr. WALSH. I will `be delighted to answer that. `No; I did not. Mr. PATMAN. And you didn't `ask for any. Are you going t'o ask for any'? Mr. WALSH. No; I don't intend to. Mr. PATMAN. Well, by what provision of the law do you claim `tha't you are exempt from taxes, although you have not applied for any exemption from Internal Revenue? Mr. WALSH. That is taught in `the ABC material, and I think if you want to go through that, you can find it. PAGENO="0155" 151 Mr. PATMAN. Yes; I would like to go through it. That is the im- portant part. . . Mr.WAL5H.OK. . . Mr. PATMAN. It is my understanding that you insist that when- ever you can form a foundation, that you don't have to. apply to the Internal Revenue for exemption or to anyone else. You just don't pay taxes. Have you paid taxes in recent years, income taxes? Mr. WALSH. That I am going to stand on my. rights. I am under criminal investigation right at the moment, and I reserve the right to privacy. Mr. PATMAN. I understand. Mr. WALSH. In that respect. Mr. PATMAN. You brag about and boast about- Mr. WALSH. No, I have, never bragged about anything.. That was a statement you made that I boasted. I don't. boast about anything. Mr. PATMAN. That you haven't paid taxes. Mr. WALSH. I am a hunThle, meek man. Mr. PATMAN. That you haven't paid taxes since 1.946? Mr. WALSH. That is the irresponsible reporting of the Wall Street Journal reporter who put that in .t;here. I didn't make the statement. Mr. PATMAN. Well, have you paid taxes since 1946 to the Internal Revenue Service? . . . Mr. WALSH. I say that is a matter of my personal business and until Iget through *ith the. Internal Revenue .1 am going to stand on my rights to remain silent. Mr. PATMAN. Now, we asked you to furnish us . a legible copy of the charter or articles of incorporation. If, the foundation is not a corporation please submit a copy of the trust instrument. Are you in a position to furnish us that, relating to your own foundation? Mr. WALSH. I know what you' are getting at. I can start off and give you some answers. Mr. PATMAN. You will give us that?. .. Mr. WALSH. Yes. Mr. Olsher was out at Barrington on the day that we were launching the Schiller-you were mispronouneing' it Schiller, it is Skiller. . . . . Mr. .PATMAN. 1 will accept that. . . . . Mr. WALSH. We were launching the Skiller Memorial Foundation activity that day, and we invited Mr. Olsher to . attend it, but lie re- fused, and I know what you are getting at. I tOld him a:bout the Walsh Family FOundation, and I also told him, and he made notes, that I started off in 1947 right here in the District of Columbia, but he could not find it and I noticed the consternation on his face yesterday. NOw, the fact is that I organized the National Committee for Alcoholism in 1947 here in the District of Colun~tbia chartered by the District of Co- lumbia. That is what he was getting at. But he didn't hear the answer that day because he wa.s covering too much material and obviously didn't write the answer down. That is where I started.. I had the problem. I have helped solve it and you quote the Wall Street Journal. Today in the Journal, today's issue, on the front page- Mr. PATMAN. Wait ju~t a minute; you are getting clear off~ Mr. WALSH. Do you want me to give you the story? Mr. PATMAN. We are talking about `the Walsh Foundation. PAGENO="0156" 152 Mr. WALSH. Yes. Well, that was the beginning of it in 1947. Your Government, the Government today is starting investigation on the problem of alcoholism and that is where I started with t.he `Walsh- Mr. CONTE. What do you mean by "your" Government? Mr. WALSH. Twenty years. Mr. CONTE. What do you mean by "your" Government? Mr. WALSH. You are depriving me of my rights here and-you want the story-I am going to give it to you. Mr. CONTE. I would like to hear about "your" Government. Isn't it "your" Government, too? Mr. WALSH. I hope it still is. Mr. CONTE. Why did you use that phraseology, "your" Government? You disassociate yourself from this Government? Mr. WALSH. Not me, no. Mr. CONTE. That was a slip of the tongue, I imagine? Mr. WALSH. Thank you, Mr. Conte. Mr. PATMAN. Let's get back to the Walsh Foundation. Now, you are going to furnish us a copy of the foundation papers that you have? Mr. WALSH. You can get that from the record right here in the Dis- trict of Columbia. Mr. PATMAN. You mean the Walsh Foundation? When was it orga- nized? Mr. WALSH. May 12, 1947, and as such was the National Committee for Alcoholism. Mr. PATMAN. You mean that- Mr. WALSH. The Walsh Family Foundation evolved out of that. That was what I was going to attempt to tell you but. it is futile to try to point these things out to you, so I will let you go on. Mr. PATMAN. Where is it registered? Mr. `WALSH. Here in the District of Columbia. Mr. PATMAN. Where is the home office? Mr. WALSH. `With the recorder of deeds. Mr. PATMAN. `Where is the home office? Mr. WALSH. The home office was with the psychiatrist named Michael Miller at 1323 New Hampshire Avenue, when I organized it. Mr. PATMAN. `Where is it now? Mr. `WALSH. Pardon? Mr. PATMAN. `Where is it now? Mr. `WALSH. The outgrowth of that is a trust that is domiciled in Kane County, Ill. Mr. PATMAN. `What is the name of the trust? Mr. WALSH. Walsh Family Foundation. Mr. PATMAN. And you are one of the three trustees, you and your wife? Mr. `WALSH. That is correct. Mr. PATMAN. And your mother or mother-in-law? Mr. WALSH. My mother. Mr. PATMAN. Your mother? Mr. `WALSH. Yes. Be careful. Mr. PATMAN. And your mother and your wife? Mr. WALSH. That is right. Mr. PATMAN. Represent the foundation? Mr. WALSH. Yes. PAGENO="0157" 153 Mr. PATMAN. And that is the one that you refuse to give us the in- formation about? Mr. WALsh. That is correct. Mr. PATMAN. Now, I am asking you about the foundation. We want a balance sheet., itemized schedule of assets of your foundation. Are you going to give it to us or not? Mr. WALSH. I don't want to insult your intelligence, but I repeat that that is being investigated by the Internal Revenue. Mr. PATMAN. I direct you~ Mr. WALSH. When they are through with it I will give it to you, yes. Mr. PATMAN. I direct you now to answer the question. Mr. WALSH. I said I will give it to you when they are through with it. Mr. PATMAN. I know, but we ask .it.now. Mr. WALSu. I don't have itso how am I going to give it to you. Mr. PATMAN. So you couldn't furnish it? Mr. WALSH. I don'tknow. That is questionable. Mr. PATMAN. Have you been engaging in any illegal practice in the operation of ABC? Have you been engaged in any illegal practice, in connection with ABC? Mr. WALSH. How does that. relate to the scope of this committee's investigation? Mr. PATMAN. Well, of course, I think it does. Mr. WALSH. You are entitled to your- Mr. PATMAN. And we are asking you the question. Mr. CONTE. Mr. Chairman, I think we ought to again get into the record what the committee is trying to obtain here. Mr. PATMAN. All right.. Mr. CONTE. The committee seeks to elicit from the witness evidence as to the scope of his operations and the effect upon the administration of the Federal tax system or, more specifically, the consequences, in terms of the burden borne by the small taxpayers, to the end that it ultimately may be enabled to determine what corrective legislation by way of more equitable ref orni of that system should be recommended to the Congress. Mr. WALSH. I will answer it by simply saying that I am not engag- ing, and I haven't, in any illegal activity, but I still don't understand how this relates to the scope of this committee's investigation. Mr. C0NTE. I just told you. Mr. WAL5u. All right. . Mr. CONTE. You don't understand it? Mr. WALSH. I still don't understand it; no, I don't. Frankly I said I don't. . . Mr. PATMAN. Let me ask you a few more questions. Are you a practic- ing lawyer, Mr. Walsh? . . . . . Mr. WALSH. No; I am not. Mr. PATMAN. Do you have a law school degree?. Mr. WALSH. No; I do not. Mr. PATMAN. Did you ever go to law school?. . Mr. WALSH. Yes; I did. Mr. PATMAN. It is t.rue, isn't it, that you have been putting pressure on t.rustees J. Alton Lauren-. Mr. WALSH. It is not true; I heard the question yesterday. Mr. PATMAN (continuing). And Stephenson? PAGENO="0158" 154 Mr. WTALSH. No, sir; it is not true. Mr. PATMAN. To keep them from disclosing information to this com- mittee. You haven't talked to them about it? Mr. IVALSH. I haven't talked to them about this investigation at all. Mr. PATMAN. It is true, isn't it, that you have threatened trustees J. Alton Lauren and Richard J. Stephenson with dire consequences if they disclose information to this subcommittee. Is that true or false? Mr. WALSH. That is false. Mr. PATMAN. What did you tell Messrs. Lauren and Stephenson the results would be if they disclosed information to this subcommittee? Mr. WALSH. I haven't told them anything. Mr. PATMAN. According to the: Wall Street Journal of August 28, 1967, you haven't paid any Federal income tax since 1947, is that correct? Mr. WALSH. That is the Wall Street Journal again, and I am not going to admit to that. Mr. PATMAN. Is it correct or not correct? Mr. WALSH. I tell you that I am not going to a.dinit to something that was published in the paper. You can assume whatever you assume. Mr. PATMAN. Do you deny it? Mr. WALSH Yes; I do. Mr. PATMAN. 1 direct you now to answer the question. Have ou paid income tax, is that statement correct? Mr. WALSH. Tha.t is a matter of my personal privacy. I told you I was under investigation by the Internal Revenue. It is a criminal in- vestigation. I am going to stand silent. Mr. PATMAN. For that reason you do not answer the question? Mr. WALSH. That is correct. Mr. PATMAN. Upon what legal basis do you contend that you are exempt.from filing a personal incometax return? Mr. WALSH. I will have to refer thatright to the whole position that I take, that as long as this investigation by the Internal Revenue of the MTalsh Family Foundation-I am going to stand mute. Mr. PATMAN. Well, of course, that means that you would never furnish it because I assume- Mr. WAi~sI-I. All rhrht, if that has to be that way- Mr. PATMAN. (continuing). That the Internal ~evenue Service has all returns under investigation at all times, and any taxpayer could say that he is under investigation by the Internal Revenue Service? Mr. WALSH. Not ~iminal investigation, Mr. Patman. Mr. PATMAN. But you just refuse to answer. But you could state why you believe that you are exempt from the payment of Federal income taxes through your foundation, and things like that, and the basis for your knowledge? Mr. WALSH. I have a qualified foundation. Mr. PATMAN. You are credited with creating the ABC packageS and then selling the idea to Mr. Hayes. Is that the way it actually happened? Mr. WALSH. For more than 20 years I have researc.hed this field. I brought the concept to Mr. Hayes after looking far and wide for that period of 20 years for someone who could adequately present the idea to the American public. Mr. Hayes' personal philosophy is that a man is as good as his ability to present a sound idea and gain willing ac- PAGENO="0159" 155 ceptance of it, and we have seen this sou~d idea presented to the Amer- ican public. It is gaining willing acceptance all over the country; and yes, I presented it to Mr. Hayes. Mr. PATMAN. Has it gone into all 50 States? Mr. WALSH. No; it hasn't. It is getting close, though. Mr. PATMAN. What is your position with-I didn't hear that last answer. 0 Mr. CONTE. It is getting close. Mr. PATMAN. What is your position with Americans Building Con- stitutionally? Mr. WALSH. I have no position with them. Mr. CONTE. What kind of consideration was involved in your trans- ferring this package over to Mr. Hayes? Mr. WALSH. It is a private contract. Mr. CONTE. Do you have a royalty interest? Mr. WALSH. It is a private contract, Congressman. Mr. CONTE. A private contract? Mr. WALSH. That is right. Mr. CONTE. Do you have a copy of that contract? Mr. WALSH. No; I do not. Mr. CONTE. Does Mi~. Hayes have a copy of it? Mr. HAYES. I do not. Mr. WALSH. No. Mr. PATMAN. Who has? Mr. WALSH. Does it have to be written? Mr. PATMAN. I would think so. Mr. WTALSH. Well,. I trust this man implicitly, so you can figure out what kind of contract we have got. Mr. PATMAN. ~That was it then, since you remember it, you have it in your head. What were the terms of the contract? What were the. terms? Mr. WALSH. Well, there are millions of dollars' worth of business clone in this country every clay without written contracts. Mr. PATMAN. What was the contract between you and Mr. Hayes? That you would turn this package over to him? Mr. WALSH. It is a private matter. Mr. PATMAN. And I want to say now that I couldn't help but be amazed at the tremendous amount of work that was done on building this thing up~ Mr. WALSH. Twenty years. Mr. PATMAN. You see, it went back to my investigations. Mr. WALSH. It sure did. I have read eveything that you ever produced. Mr. PATMAN. And the investigation of a former member from Ten-. nessee, he had an investigation of foundations? Mr. WALSH. That is right. Mr. PATMAN. You pointed out everything and each one of them that you could use for your purpose? Mr. WALSH. That is exactly right. You hav.e got it all right here. Mr. PATMAN. And I am afraid you picked too much out of context. You didn't read what was just before and what was just after but you quoted the information- Mr. WALSH. The public information. Anyone could have done it. Mr. PATMAN. That would be favorable to you? PAGENO="0160" 156 Mr. WALsH. That is what we were looking for. Mr. PATMAN. Who were the parties to this contract besides you and Mr. Hayes? Mr. WALSH. That is a private matter between Mr. Hayes and myself. Mr. PATMAN. A private matter? Mr. WALSH. The fact is that the contract doesn't run between Mr. Hayes and myself. It runs between two organizations. One is ABC and one is the Walsh Family Foundation. Mr. PATMAN. Oh, a contract between the Walsh Family Foundation and ABC? Mr. WALSH. That. is right. Mr. PATMAN. So you do have a connection with ABC? Mr. WALSH. A contractual arrangement; yes. Mr. PATMAN. A contractual arrangement? Mr. WALSH. That is right. Mr. PATMAN. Do you get compensation from ABC? Mr. WALSH. Do I? No. Mr. PATMAN. Does your foundation? Mr. WALSH. My foundation has a contractual arrangement with ABC. Mr. PATMAN. How munch did they receive last year, in 1966, from ABC? Mr. WALSH. I won't tell you and I don't think Mr. Hayes is going to tell you, either. Mr. PATMAN. On what grounds would you refuse that? Mr. WALSH. I am refusing it on the grounds that we are under investigation at this time. Mr. PATMAN. That is not under investigation. Mr. WALSH. Yes; it is, too. Oh, yes; it is. Mr. PATMAN. We are talking about the foundation now. Mr. WALSH. They are both under criminal investigation and you know it. Mr. PATMAN. Well, I direct you to answer the question. Mr. WALSH. Well, I am going to refer- Mr. PATMAN. As to how much compensation your foundation re- ceived last year? Mr. WALSH. It didn't receive any compensation. Mr. PATMAN. From the ABC Foundation. You refuse to do that? Mr. WALSH. Yes, sir; I do. Mr. PATMAN. What was the consideration at the time the contract was agreed to? Mr. WALSH. $1. Mr. PATMAN. Between you and the ABC Foundation? Mr. WALSH. $1. Mr. PATMAN. But your foundation has been receiving compensa- tion since that time from ABC, which ultimately finds its way to you? Mr. WALSH. No; it doesn't find its way to me. Mr. PATMAN. Where does it go? Mr. WALSH. I draw no salary, if that. is what you are getting at. Mr. PATMAN. How do you earn a 1ir~n~, Mr. Walsh? Mr. WALSH. That is one of the things that will probably be very interesting to you and the rest of the members when you find out how these things operate, and at this time I will extend an invitation to PAGENO="0161" 157 you to give you that in our seminar and it may be of help to you, Mr. Conte, and the rest of the members of the connnittee in your- Mr. CONTE. It won't be any help. Mr. WALSH. You have got the books. Mr. CONTE. It won't be any help to me. Mr. WALSH. OK. Mr. CONTE. I know what I am going to do next year about these things. Mr. PATMAN. I ask you the question, How do you earn a living? Mr. WALSH. Bless you. Mr. PATMAN. How do you earn a living? Mr. WALSH. How do I earn a living? Mr. PATMAN. Yes. How do you earn a living now? Mr. WALSH. I have been assisting the people in this country through this activity for 20 years without any compensation, contrary to what you read in the newspaper. Mr. PATMAN. Well, how do you earn a living? Mr. WALSH. I am not in the business of earning a living. Mr. CONTE. Will you yield? Mr. PATMAN. Yes, sir. Mr. CONTE. Do you receive a fee? Mr. WALSH. No. Mr. CONTE. As a trustee- Mr. WALSH. No. Mr. CONTE (continuing). Of Walsh's Foundation? Mr. WALSH. No; I do not. Mr. CONTE. Does your mother of your wife receive a fee? Mr. WALSH. No. That would be the trustees and I am oniy one of three, so I won't reveal that to you. Mr. PATMAN. Mr. Conte, if you will pardon me, as chairman of the committee I direct you to answer that question of Mr. Conte's. Mr. IVALSH. I am referring to- Mr. PATMAN. You are refusing to answer? Mr. WALSH. Yes, I am; you bet. Mr. PATMAN. Go ahead, Mr. Conte. Mr. CONTE. That is all right. That is it. Mr. PATMAN. You refuse to state how you make a living? Mr. WALSH. I didn't say that. Mr. PATMAN. You have been working 25 years for nothing? Mr. WALSH. No, no; I didn't say I refuse to tell you how I am mak- ing a living. I contribute my services to the Walsh Family Foundation. Mr. PATMAN. That is what you are giving. Now, where do you get something? Mr. WALSH. I am not seeking to get anything. Mr. PATMAN. I know. Mr. WALSH. We are educating the American public as to what they can do to protect themselves against the erosion of these burden~ some taxes. That is what we are doing. And I am contributing my services. Mr. PATMAN. Do you have a family, Mr. Walsh? Mr. WALSH. I have a wife. Mr. PATMAN. It costs money to live. Mr. WALSH. Does it? 87-444--68----11 PAGENO="0162" 158 Mr. PATMAN. And how do you earn a living? Mr. `CONTE. Mr. Chairman, would you yield? Mr. PATMAN. Yes, sir. Mr. CONTE. Do you receive any personal expenses- Mr. WALSH. Personal expenses? Mr. CONTE (continuing). From the Walsh Foundation? Mr. WALSH. The Walsh Foundation is paying my expenses to this hearing. Mr. CONTE. Is it paying any other expenses? Mr. WALSH. There are others. Transportation; yes. Mr. CONTE. How about an automobile? Mr. WALSH. There is an automobile provided; yes. Three people use it. Mr. CONTE. How about a home? Mr. WALSH. No. That is provided through another contract. Mr. CONTE. Another foundation. How about other incidental expenses? Mr. WALSH. These are all incidents to a contract, and again I con- tribute my services. Mr. CONTE. I realize that. Could you tell me to whom the contract runs? It is between you and whom else? Mr. WALSH. My contract is between myself and the Walsh Family Foundation. I drew it. Mr. CONTE. The Walsh Foundation and yourself? Mr. WALSH. That is right. Mr. CONTE. That is the question I wanted to ask. Mr. WALSH. OK, fine. Mr. PATMAN. You have been trying to make a case for giving serv- ices and rendering services to the people for 25 years. From your statement you must have rendered a lot of service, but you don't tell where you have gotten your living during that time. Mr. WALSH. That is bothering you. I just this minute told you. Mr. PATMAN. You mean through the Walsh Foundation? Mr. WALSH. I answered-did I answer that question, Mr. Conte? Mr. CONTE. You received your personal expenses-- Mr. WALSH. That is right. Mr. CONTE (continuing). From the Walsh Foundation? Mr. WALSH. Yes. Mr. PATMAN. Personal expenses? Mr. WALSH. That is right. Mr. PATMAN. Just on the trip down here you said. Mr. CONTE. No, of automobile, house, living expenses. Mr. PATMAN. Is your home in the foundation? Mr. WALSH. No; it is not. Mr. PATMAN. Do you have a home? Mr. WALSH. It is under contract; yes. Mr. PATMAN. Under contract. With the foundation? So that is a lot of me-mg and me-ing there. Mr. WALSH. Again that is up to you. Mr. PATMAN. On the foundation assets? Mr. WALSH. You can draw your conclusions. PAGENO="0163" 159 Mr. PATMAN. Yes. It looks like it might involve a conflict of interest. Of course, I am not bringing that up. Mr. WALSH. Thank you very much. I appreciate your kindness. Mr. RAY. Do you want that to remain in the record, Mr. Chairman, that that insinuation was made? Mr. PATMAN. I beg your pardon? Mr. RAi~. Do you want the fact that that insinuation was made? Mr. PATMAN. That is so minor in comparison to the other I don't think it should be noticed. Go ahead, Mr. Corman. I~'ir. CORMAN. I think this whole committee is concerned about whether or not we need legislative changes in the laws that regulate the setting up of foundations, to ascertain whether or not the public interest benefit is worth the continuation of the, tax exemption, and in the light of that interest, I think that we can properly inquire in some detail as to the ownership and the operation of these foundations. Now I respect your right to refuse to answer questions that are pres- ently under criminal investigation, and I do not intend in my ques- tions to invade that field, but if I am going to avoid it I will need to know with some specificity th~ period of time that the investiga- tion is covering a.nd the individuals and the scope of the investigation, and so if you would give those to me, I will try to exclude those from my line of questions. Mr. WALSH. All right. To start off with, I don't believe that it was an accident that an Internal Revenue agent showed up at my house the Friday-it will be a week ago this past Friday preceding our first appearance here-and at 8 :30 in the morning. I live in a building where we have to press a buzzer, and if you don't have a key to get in- Mr. CORMAN. This is very interesting, but if you could tell me~ Mr. WALSH. No;' you asked now. I am delighted `to cooperate now if you~ will give me an opportunity. Mr. CORMAN. All right, sir, I don't mean to rush you. We have lots of time. Mr. WALSH. This joker from the IRS came up to my home and I live out in the country, and he demanded my presence and my wife said, "Well, lie leaves early," so he said, "Oh, no; his car is parked down there." Well it just happened that that day I left the car home that I use, took my wife's car. Well, since that time, in conjunction with this query, we have had all sorts of demands to show up and produce and so forth. To answer your question, I think we are in for a long pull. Time, I would have no idea, but I feel it very deeply that somebody is getting read to try to do something to someone. Mr. CORMAN. All right, sir. Now, if you would be responsive to the question. Mr. WALSH. So it would be impossible for me to tell you how long this is ~oing to take. Mr. CORMAN. Do you know the entities that are being investigated?' Are you as an individual being investigated? Mr. WALSH. Oh, definitely; yes. . Mr. CORMAN. Over what period of time? PAGENO="0164" 160 Mr. WALSH. I am delighted you asked that question, because- Mr. CORMAN. I am hopeful you will be responsive. Mr. WAL5I-I. It came to me through several people here in `Wash- ington that they were going to "get you," meaning me, and I said, "WTell, this is great." Mr. CORMAN. Now, sir, you are being investigated as an individual by the Internal Revenue Service? Mr. WALSH. Right. Mr. CORMAN. Is that correct? Mr. ~\TALSH That is correct. Mr. CORMAN. Over what period of time? Are they questioning your- Mr. WALSH. I have no way of knowing this. Mr. C0RMAN. You have been contacted by Internal Revenue agents, I assume. This is the way you know that you are under investi- gation. Did he indicate to you what period of time he wanted your records? Mr. `WALSH. Well, let's see. Alen Cornu, who is a special agent from Chicago- Mr. C0RMAN. You could almost respond to that question by giving me some dates or that no dates were suggested. Mr. WALSH. It would be a week ago this past Friday. He was in a big hurry to get a hold of us. Mr. CORMAN. Are they investigating your taxable income for the year 1947? Mr. WALSH. I don't know what they are investigating. I have no idea at the moment. Mr. CONTE. Will the gentleman yield? Mr. CORMAN. Yes. Mr. CONTE. Did he ask for records, your personal records? Mr. WALSH. He has been out to SAT Executive Manor in Barrington on several occasions. He has asked for a lot of things. Mr. CONTE. Has he asked for records? Mr. WALSH. No. The fact of the matter is he wanted to inform me of the posture that I would take under the investigation, and he de- manded that I come right in to see him and that was 5 o'clock in the afternoon and I said well, it would be nice if I could do it, but I think I was getting ready to go to dinner with my friends. Mr. Co~ue. Have you gone to see him? Mr. WALSH. Hell, no. Mr. C0NIT. I yield back. Mr. PATMAN. Mr. Corman. Mr. CORMAN. Sir, I wonder if- Mr. WALSH. I don't go running when people-people call me on the phone. Mr. CONTE. I know that you are very humble. I realize that. Mr. WALSH. I am a meek man. Mr. `Co~TE. You don't have to tell us how humble you are. You are terrific. Mr. WALSH. Thank you. Mr. CORMAN. I take it that the foundation that you created in 1947 to combat alcoholism-I don't recall the name. PAGENO="0165" 161 Mr. WALSH. National Committee for Alcoholism. Mr. CORMAN. That is not under investigation, right? Mr. WALSH. It well may be; it well may be. Mr. CORMAN. Have you been informed that it is? Mr. WALSH. Well, let me see if I can respond to your question now. I was at Lake Orion, Mich., the other night. Mr. CORMAN. Have you been informed by an official of the Internal Revenue Service that the National Alcoholism Foundation is under investigation? Mr. WALSH. Well, it would smack a lot of fine people if it does and I am afraid they would get involved too far there. No; 1 don't thmk they will. Mr. CORMAN. Then it would seem to me that you are under some obligation to answer questions concerning that foundation? Mr. WALSH. Would you like for me to explain what we do and so forth? Mr. OORMAN. Yes, sir, and what I would like is some specificity as to the amount of money that went into the foundation, where that money came from, and how it was spent? Mr. WALSH. OK. Mr. CORMAN. And I would be delighted to have some responsive answers to those questions. Mr. WALSH. All right. Mr. CORMAN. Who were the trustees; that might be a good place to start. Mr. WALSH. This is a corporate structure organized as I said here in 1947. Mr. CORMAN. That is a not-for-profit entity? Mr. WALSH. Oh, yes. The original incorporators were a man who at that time worked in the State Department named Rapapport, and the third incorporator was a woman named Ruth; since passed on. Mr. CONTE. Who was the second one? Mr. WALSH. I was the third one. Russe, Rapapport, and Walsh. Mr. Rapapport was head of the transportation desk, the oriental trans- portation desk in the State Department. I met him in an alcoholic sanitarium. He had the same problem I did. Mr. CORMAN. This is all very interesting but- Mr. WALSH. You want to know how we raised the money and so forth. Mr. CORMAN. How much there was, where it came from, and how you spent it; yes, sir. Mr. WALSH. Put this committee together and sought our support from industry, and when the people that I organized it with lost interest a short time after, maybe 6 or 8 months after it was organized, from that time to this time I have carried the work on by myself, supporting it with funds that I have been able to subscribe, and as a result of the effort being a sole effort, 3½ or 4 years ago, since we were carrying it, my family helping me- Mr. PATMAN. Would you yield to me, Mr. Corman? Mr. Walsh, you know what you sold to Mr. Hayes, the package? Mr. WALSH. You don't want to hear the story? Mr. PATMAN. You know the reason behind this whole scheme? PAGENO="0166" 162 Mr. WTALSH. It is not a scheme, Congressman Patman. Mr. PATMAN. Well, I will call it a better name if you will give me a name to call it. It would seem like a scheme. Mr. `WALSH. This is a technique for people to involve themselves in some logical problems. Mr. PATMAN. Public interest and everything Mr. WALSH. You bet. Mr. PATMAN. Yes. Mr. WALSH. Definitely; without 4uestion. * Mr. PATMAN. Yes; all right. Mr. WALSH. Without qualification. Mr. PATMAN. Now, let us look at it from your angle arid say that this is what you intend to do all the time. Mr. WALSH. I have been doing that. Mr. PATMAN. All right. Now, then, tell us about this wonderful scheme of yours. * Mr. WALSH. It is not a scheme, Congressman. Mr. PATMAN. `Well, the plan you have-I will change it to plan-. the plan that you have for people not to pay taxes. Mr. `WALSH. That isn't the first consideration. Mr. PATMAN. Andspend money- Mr. WALSH. That isn't it at all. Mr. PATMAN. It is one of the considerations. Mr. `WALSH. It is secondary, tertiary. Mr. PATMAN. Tell us about the secondary consideration of not pay- ing the taxes. That is the part we are going into here. Mr. WALSH. You can't gain that- Mr. PATMAN. Just tell us the scheme-I will change the word "scheme" again-the plan that you have. Mr. WALSH. Thank you, you are kind. Mr. PATMAN. That you sold to Mr. Hayes. Now, Mr. Hayes in your position, you have a great organization, you make speeches to people, you have groups, you have management, you have labor. Now~ will this fit right into what you are doing? Mr. WALSH. Definitely it does. * Mr. PATMAN. This wonderful plan? Mr. WALSH. Thank you. Mr. PATMAN. And it will enable people to save tax money? Mr. WALSH. That is a secondary or tertiary consideration. Mr. PATMAN. You said it was secondary. Let us say it is secondary. Mr. WALSH. If they are willing- * Mr. PATMAN. But it is one of the main things that they have in mind whenever you call people to meet, and then you have- Mr. WALSH.That is not true. Mr. PATMAN (continuing). A meeting with them? Mr. WALSH. Not true at all. Mr.. PATMAN. A secret meeting and you make them pay $1,050? Mr. WALSH. We don't make anybody pay anything. Mr. PATMAN. Just for a little seminar, 30-hour seminar, and then you make them pay $4,~00. The next step is for their lawyer to go in and be taught how to organize a foundation that will enable them not to pay taxes- PAGENO="0167" 103 Mr. WALSH. I think you are getting on the point. Mr. PATMAN. Wait aminute. Mr. WALSH. You are getting close. Mr. PATMAN. All right, you correct me then. Mr. WALSH. I am in just a minute when you get through. Mr. PATMAN. Go ahead and do it right now. Mr. WALSH. All right. You read that Wall Street Journal quite frequently. You said that the Journal quoted me as saying we wanted to Henry Fordize this idea, and that is precisely what we want to do. We want to get respon- sible people involved in sociological problems to respond to their re- sponsibility as individuals instead of expecting the Government to solve all these problems. Consequently, when they create an organiza- tion to undertake a facet or a specific part of a sociological problem, and they go out and they raise funds to undertake these projects, then as a secondary or a tertiary consideration there are tax benefits or alleviations. Mr. PATMAN. All right. Now then, if you have the rich take advan- tage of this-as many of them are doing, as you know-and then you have the more affluent people in the middle class, that puts all the bur- den on the very poor people, doesn't it, to pay the taxes? If the big oneS get exempt- Mr. WALSH. This is the furthest thing from the fact. If the broad, middle-income-producing class in this country are encouraged to be- come involved directly in helping to solve the sociological problems that exist today, it will relieve the burden on you men to have to pass more legislation, and we don't see any need for any more legislation. The fact of the matter is, personally I think we have got too much right now. Mr. PATMAN. We only have a very short time. Mr. Corman, you had not finished. Pardon me for interrupting, but you may proceed. Mr. CORMAN. Perhaps if I make the questions a little briefer. Let's start back with the Alcoholism Foundation in its initial stage in 1947. Mr. WALSH. Yes. Mr. CORMAN. What were the assets of that foundation at the time it was 6 months old? Mr. WALsH. We started it with an idea, a little scotch tape, some mucilage, and a few matchsticks. Mr. CORMAN. Let's talk about dollars. How many dollars? Mr. WALSH. None to start with. Mr. CORMAN. No dollars? Mr. WALSH. No. Mr. CORMAN. All right. How much did you have at the end of the first year? That would be 1948. Mr. WALSH. Whatever funds I had were funds I secured myself and put in. Mr. CORMAN. How much was it in dollars? Mr. WALSH. You know I can't remember what I did yesterday, this morning. How am I going to remember back 20 years? Mr. CORMAN. Would it have been probably $1,000? Mr. WALSH. Well, you were laboring the Schuyler thing here. I donated $1,000 for that music conservatory. I remember that. That was 6 weeks, 2 months, 3 months ago, but I don't remember 20 years ago. PAGENO="0168" 164 Bear in mind at that time I had a very severe problem known as alco- holism, and I don't remember a lot of things I did. Mr. CORMAN. Can you remember some specific expenditures that that foundation made? Mr. WALSH. Yes. Mr. CORMAN. To further its purposes of combating alcoholism? Mr. WALSH. We were following the tried and true method. Mr. CORMAN. Tell me in dollars and cents how much and the spe- cific expenditure. Mr. WALSH. We were using the tried method at that time of sending out letters. Most of the money went for postage, printing, bruchures, and one thing and another. It didn't produce much of a result, for expenses to promote the idea. Mr. CORMAN. You must have been young in 1947, Mr. Ray. Mr. RAY. Yes; I was real young. Mr. CORMAN. It is interesting to watch you help Mr. Walsh remem- ber what happened so long ago. Mr. Walsh, did you have any contract with that alcoholism foundation? Mr. WALSH. Contract? Mr. CORMAN. Contract between yourself and the foundation to pro- vide you with transportation? Mr. WALSH. I hadn't progressed that far in my research until I got ahold of all the material. Congressman Patman having developed these things for me at that time. No, I didn't. Mr. CORMAN. Now that foundation lasted until 4 years ago? Mr. WALSH. No, no. It is still in existence. Mr. CORMAN. Oh, it is still in existence? Mr. WALSH. Oh, very much so. Mr. CORMAN. Oh, well, that is fine. Let's talk about how much is in it now. Mr. WALSH. It is in perpetuity. Mr. CORMAN. What are the assets now? Mr. WALSH. You are looking at him right here. Mr. FOLEY. Nothing. Mr. WALSH. If I am nothing, then you are right, counsel. Mr. CORMAN. The alcoholic foundation exists today? Mr. WALSH. It sure does. I can tell you about the activity. If you will ask me I will tell you. I started to. I was at Lake Orion, Mich., 3 nights ago, and we have an agreement now to assist the man who heads up that organization to raise funds. His name is Arthur Ripley. He rehabilitates Catholic priests who have the problem and tackle with the Catholic Church and see where you get. Mr. CORMAN. This is an agreement between Ripley and- Mr. WALSH. We are working out the details of it right now; that is right. Mr. CORMAN. When is the last time before the Ripley contract that you had a contract with someone? Mr. WALSH. I am not going to take a contract from him. I am going to give him my time and services. The Walsh family- Mr. CORMAN. I am not asking you about him now. Mr. WALSH. I have never used any contracts to raise money. I told you that I gave my time and my services and whatever moneys came my way, I devoted to the activity. PAGENO="0169" 165 Mr. CORMAN. Well, now, in addition to scotch tape, mucilage, and postage, are there any other things that you have devoted foundation money to? Mr. WALSH. Well, if someone were to write a check today for $5,000, and I have friends who will do that, I would direct it to this activity. Mr. CORMAN. When was the last time a friend donated $5,000 to the alcoholic foundation? Mr. WALSH. We are approached every day with that sort of thing. Mr. CORMAN. Sir? Mr. WALSH. We are approached every day. Mr. CORMAN. When is the last time that it actually happened? Mr. WALSH. Oh, probably last week. Mr. CORMAN. Last week? Mr. WALSH. Yes. Mr. CORMAN. What was the name of the donor? Mr. `WALSH. Oh, well, wait a minute. Hold the order. Congressman, this is highly irregular. I am not going to-if the people that make contributions to this activity want to come in and tell-I have no desire to-that is what happened to the Philippa Schuyler Foundation. There was a lot of this sort of thing. Mr. CORMAN. Was the donation made to the National Alcoholism Foundation? Mr. WALSH. No; it was made to the Walsh Family Foundation, and I make my contribution through that. Oh, yes; that is right. `Where do you get these guys, pick them up off the street? Mr. CORMAN. I would like to know, Mr. Walsh, the name of the donor, the amount of the donation that went through the Walsh Foundation to the National Alcoholism Foundation. Mr. WALSH. The name of the donor was James H. Walsh. Mr. FOLEY. He gave it to the foundation? Mr. CORMAN. All right, Mr. Walsh. You gave that $5,000 to the foundation. That became tax exempt so far as your income was con- cerned; is that the understanding? Mr. WALSH. That had nothing to do with my income, nothing at all. Mr. CORMAN. You gave $5,000 to the foundation, you got it from some place. Mr. WALSH. $500,000? You are getting a little confused now, aren't you? Mr. CORMAN. Mr. Walsh, you said that you got $5,000. Mr. WALSH. You said $500,000. Mr. CORMAN. Every once in a while. I asked you when was the last time that you had gotten $5,000 for the National Alcoholism Foundation. Mr. WALSH. It was a contribution made to me, and I directed it into the Walsh foundation, and then will makc Mr. CORMAN. The contribution was made to you? Mr. WALSH. It was made to the foundation, not to me personally, that is right. Mr. CORMAN. You know, Counsel, I think it is perfectly proper for you to advise your client about his legal rights. Just as one attor- ney to another, I question whether or not you ought to answer the questions and change your witness' answers. PAGENO="0170" 166 Mr. WALSH. I didn't change the answers. Mr. CORMAN. In any sense. I really question that just as one attor- ney to another. Mr. RAY. I believe Mr. Walsh made a misstatement there when he said the check was payable to him when it was not. Mr. CORMAN. Counsel, if you want to testify as the witness, that is fine. You may be sworn. Mr. RAY. I am trying to protect the man, Mr. Corman. He made a statement that wasn't true, before a committee under oath. Mr. CORMAN. Counsel, I will ask you whether your duty as counsel is to decide whether your client's testimony is true and not true, or whether it is to advise him as to his legal rights to answer or to not answer. Now if you have facts contrary to your client's testimony, and want to be sworn as a witness, I think it would be fine if we get this record straightened out. But I think this committee and the people that have to write legislation are entitled to know where these funds come from and where they go to that purport to be tax exempt. Mr. RAY. If your client on the stand made an inadvertent state- ment, would you not try to correct him, if that statement could lead to his detriment? Mr. CORMAN. Counsel, if you were in a court of law and you tried to answer for your witness as much as you are now you would be in trouble. Now if the witness makes a mistake, he will have a chance to correct it. But I would like for this witness to answer these questions or re- fuse to, and if he refuses, I suggest you advise him as to the grounds on which he refuses. Mr. WALSH. I answered the question, sir. Mr. CORMAN. You answered the question that you gave some money, you, Mr. Walsh, an individual. Mr. WALSH. I didn't give any money. Mr. CORMAN. C-ave some money to the Walsh Foundation, which was then given to the National Alcoholism Foundation. Mr. WALSH. No, you have got it all backward. Mr. CORMAN. All right, let's start back with the National Alcohol- ism Foundation. Mr. WALSH. Not committee for alcoholism. Mr. CORMAN. Sir? Mr. WALSH. If you want to straighten it out, start straightening it out in the beginning. National Committee for Alcoholism. Mr. CORMAN. For or against? Mr. PATMAN. Speak in the mike, please. We can't hear you very well. Mr. CORMAN. The National Committee for Alcoholism solicited funds from the- Mr. WALSH. No, we do not solicit funds. Mr. CORMAN. All right, you don't solicit funds. Mr. WALSH. Stop that. I don't solicit any funds. Mr. CORMAN. Mr. Chairman, I am going to ask that either the attor- ney refrain from giving the witness answers to questions or that he be sworn himself and testify himself, if he has more credible informa- tion than the witness. The National C omni ittee for Alcoholism exists PAGENO="0171" 167 now and it accepts funds, it as a tax exempt foundation; is that correct Mr. WALSH. I believe I stated to you that about three, three and a half years ago, I created the Walsh Family Foundation. Mr. OLSHER. Can't hear you. Mr. WALSH. What? Mr. OLSHER. Can't year you. Mr. CORMAN. You said that you created the Walsh Foundation? Mr. WALSH. To take over the activity of the National Committee for Alcoholism, since I was the sole support of it. That is right. Mr. CORMAN. Then the Nationai Alcoholism Committee does not exist? Mr. WALSH. We function, yes, we function jointly. The funds are contributed to the Walsh Family Foundation, and we direct them out of that foundation to whatever activity in the judgment and wisdom of the trustees is needed. Mr. CONTE. Mr. Corman, may I ask a question there? Mr CORMAN. Surely. Mr. CoNai~. Why ar.en't funds solicited by, and why don't they go directly to, the Alcoholic Foundation? Mr. WALSH. Because we are not in the business of soliciting funds. We put ourselves in the category of every other fund-soliciting activ- ity and may put ourselves under the aegis of--you have been reading the papers recently, so that is the reason for that. We have never solicited funds as such. Mr. CONTE. What if someone wants to make a contribution? Mr. WALSH. Then I will direct it to whatever activity I think is in need of- Mr. CONTE. You haven't answered my question. Mr. WALSH. All right. Mr. CONTE. Why can't someone contribute directly to the foundation? Mr. WALSH. We are not interested in raising funds for the founda- tion per se. We are interesthd in raising funds to combat the problem. Mr. CONTE. Definitely. Mr. WALSH. That is my point. That is right, you are right. Mr. CONTE. I understand your point. Mr. WALSH. Okay, line. Mr. CONTE. What if someone wants to make a contribution ? Mr. W/ALSII. Like I told you one more time now, we are not out soliciting funds. I am not interested in that. Mr. CONTE. I am not speaking of solicitations. This is a voluntary contribution to the Alcoholic Foundation. Mr. WALSH. Maybe I will get them to make a contribution to some- one else. Mr. CORMAN. Mr. Walsh, just a few minutes ago you told me you were approached frequently. Mr. WALSH. Yes. Mr. CORMAN. By peoplewanting to give substantial- Mr. WALSH. As a result of my efforts. Mr. CORMAN. And you said you accepted them. Mr. WALSH. In instances where they want to make it out to meand let me have direction over it, through our board of trustees then we will accept the funds and as a condui b we will conduct them out. PAGENO="0172" 168 `Mr. CORMAN. This is *the crux of the matter. Then they make a `donation to you as a trustee for the Walsh Foundation. Mr. `WALSH. That is correct. Mr. COBMAN. Now, Counsel, let's let him answer that question or tell him that he can't, and tell me why, but don't give him the answer yourself. Mr. RAY. I haven't opened my mouth, Mr. Corman, in t.he last 5 minutes. Mr. CORMAN. Oh, yes, sir, you have talked to this gentleman every time he has responded to a question, he has responded to a question, he has changed three times in the middle of a sentence. Now, Mr. Walsh, do you care to answer that one? You don't remember what it is? We will have the clerk read it back. Mr. WALSH. Let the clerk read it back. Mr. PATMAN. We only~ have a couple of minutes, Mr. Corinan. Mr. CORMAN. Will the gentlemen be back tomorrow? Mr. PATMAN. `We will not be here tomorrow, but commencing Mon- day we have hearings Monday and Tuesday, and possibly `Wechmsday and Thursday. `We will have Mr. Michael Saxon among the witnesses after we get through with Mr. `Walsh. `We want to finish with him Monday if `we can. Mr. WALSH. You are going to ask me to come `back? Mr. PATMAN. Yes, sir, we expect you to come. And we also have Mr. Lauren, T. Alton Lauren, trustee of ABC, and Mr. Richard J. Stephenson, trustee of ABC. They are the only two trustees with N:r. Hayes, and Mr. George Schuyler, and then we will have Secretary Fowler, Secretary of the Treasury, `and Commissioner Cohen. But commencing Monday at 10 o'clock here in this room we expect to pro- ceed with Mr. Walsh as a witness. Mr. CONTE. Monday? Mr. PATMAN. Monday, yes. Mr. CORMAN. Mr. Chairman, may I ask that the Chair or the counsel ascertain from the Internal Revenue Service the entities that are under investigation and the period of time in which they are being investi- gated. Mr. PATMAN. `We will have them here. Mr. CoR~rAN. But before this witness gets back so we may Imow what he may properly refuse to answer, in view of the investigation `and when he must take the fifth and when he must answer. Mr. `WALSH. I am never going to take the fifth, so let's understand that right now, not before this committee. Mr. PATMAN. The committee will stand at recess, and your su'bpen'a will be continued. Mr. WALSH. I understand all that. Will you tell Mr. Hayes- Mr. PATMAN. And Mr. Hayes the same thing, until Monday at 10 o'clock here in this room. (`Whereupon, at 12 noon, November 7, 1967~ the subcommittee was re- cessed to reconvene on Monday, November 13, at 10 a.m.) PAGENO="0173" TAX-EXEMPT FOUNDATIONS: THEIR IMPACT ON SMALL BUSINESS MONDAY, NOVEMBE& 13, 1967 `HousE OF REPRESENTATIVES, SUBCOMMITTEE No. 1 ON FOUNDATIONS OF THE SELECT COMMITTEE ON SMALL BUSINESS, Washington, D.C. The subcommittee met, pursuant to recess, at 10:10 a.m., in room 2359 Rayburn House Office Building, Hon. Wright Patman (chair- man of the subcommittee) presiding. Present: Representatives Patman, Corman, Irwin, and Morton. Also present: H. A. Olsher, director, Foundations Study; Myrtle Ruth Foutch, clerk; and John J. Williams, minority counsel. Mr. PATMAN. The committee will please come to order. Dr. Saxon was subpenaed to be here this morning at 10 o'clock. Mr. Ray, you are his attorney, are you not, Dr. Saxon's? That is for the record, now. TESTIMONY OP ~AMES It. WALSH, ACCOMPANIED BY WILLIAM 0. ItAY, JIL-Itesumed Mr. RAY. I am representing Dr. Saxon before this committee. Mr. PATMAN. That is right. Well, he is not here. Mr. RAY. May I see a copy of the subpena, Mr. Patman? `Mr. PATMAN. I just wanted to know if he was here. Now then, Mr. Walsh is here, and Mr. Hayes, do you know about Mr. Hayes? Do you know about him, Mr. Ray? Mr. RAY. Yes, Mr. Patman, I do. Mr. PATMAN. He is supposed to be here. `Mr. RAY. That is correct. Mr. PATMAN. And he is not here. Mr. RAY. He is under doctor's care, Mr. Patman. Mr. PATMAN. Well, of course, if he has a doctor's statement, that is different. Is he in town? Mr. RAY. No, he is not. Mr. PATMAN. Of course, if he has a doctor's statement, why we would be very sympathetic toward whatever request he has made for him in view of that. My information was incorrect with respect to Dr. Saxon. I said that we had gotten out a subpena for Dr. Saxon return- able at 10 o'clock. Dr. Saxon told Mr. Olsher he didn't want a subpena, that he would rather come here voluntarily, and he would be here at 10 o'clock this morning. Therefore, we didn't have a subpena served on him. 169 PAGENO="0174" 170 We will proceed, if it is all right with the members of the committee, to finish interrogating Mr. Walsh. `Mr. Walsh has had the oath administered to him. He is a witness before the committee. On matters relating to the ABC scheme, Mr. Walsh, you have made your headquarters with the ABC offices on Kelsey Road in Barrington, IlL That is correct, is it not? Mr. WALSH. Last time I appeared before the conimittee, you agreed not to refer to this as a scheme. You agreed that it was a plan, and I am not going to agree to your calling this a scheme. Mr. PATMAN. Oh, excuse me. I will certainly correct that. Mr. WALSH., Thank you. Mr. PATMAN. Every time I say scheme, it is really a plan. Mr. WALSH. Thank you, Congressman. Mr. PATMAN. Fine. Mr. RAY. Chairman Patman, I have a statement from Mr. Robert D. Hayes to the committee, if I may be permitted to read it. `Mr. PATMAN. You mean it is a sworn statement? Mr. RAY. Yes, Mr. Chairman, it would be sworn. Mr. PATMAN. Let me see the statement. It might not be necessary to read it. `Mr. RAY. I would like to read it. Mr. PATMAN. Is it in connection with his illness? Mr. RAY. No, it is not, Mr. Patman. Mr. PATMAN. Well, that is all we want; a statement from him to be read by you. Now, of course, we want him here in person to deliver any state- ment, and if he is not able to be here in person, why, of course, we will have to fix another time for him. Mr. RAY. May I have his statement inserted in the record, Mr. Chairman ? Mr. PATMAN. All we want now is a statement about why he is not here, and you say he is ill, which is understandable. If he is ill he is not here, and if you want to file a statement about that, a doctor's statement, it will be perfectly all right. Do you have one like that? Mr. RAY. I don't have a doctor's statement with me. Mr. PATMAN. Well, you can get it sometime today maybe, so we will just say nothing about it today, with the understanding that you believe that he is ill and he is not able to be here. Mr. RAY. Mr. Chairman, because he was not able to be here, he prepared n statement to make to the committee which he asked that I deliver to you. Mr. PATMAN. Oh, no; we couldn't do that. That is substituting a witness, you know. We don't allow that, and he is under subpena. All right, Mr. Walsh, no matters relating to the ABC plan, you have made your headquarters at the ABC offices on Kelsey Road in Barringtoii, Ill.; is that correct? Mr. WALSH. My headquarters- Mr. CORMAN. Mr. Chairman, each time that the Chair asks a question, the counsel turns to the witness, the witness turns to counsel, the counsel tells him with `his lips what the answer should be and he then responds. PAGENO="0175" 171 I do not believe that is a proper role for counsel. If the advice of counsel is to refrain from answering the question, I suppose that would be proper depending on the ground, but I will not remain in this committee and have this witness or any other witness instructed on each answer by this counsel. We have done that for 3 days. It seems to me that we ought at this point to stop that practice. Mr. PATMAN. You will have to refrain from doing that, Mr. Ray. If you want to confer with the witness, of course you will be given an opportunity to do so. And that will be in order, and it is correct, there is no question about it. However, it is improper for you to prompt the witness, in other words, put words into his mouth. Mr. RAY. Mr. Chairman, I resent very much any insinuation by this committee that I am putting words in the witness' mouth. Mr. PATMAN. Well, that is my language. Mr. RAY. I have the right as counsel to advise this man. Mr. PATMAN. Of his constitutional rights. That is the advice, not factual information. Mr. RAY. I am not advising him as to' the facts. Mr. CORMAN. Mr. Chairman? Mr. PATMAN. Yes, Mr. Corman ~ Mr. CORMAN. Counsel, I don't want to let you think I am insinu- ating or implying. I am saying you are giving answers to your clients.: It is a matter of record, your own statement on the record if you will read it, where you said that your client had made a misstatement under oath, and you were correcting him. That is not the proper role of counsel. Mr. RAY. I believe it is to warn a client when he `has made an inadvertent statement for the record, that he had better get it cor- rected on the record, Mr. Corman. Mr. PATMAN. Instead you would just `ask for an opportunity to confer with your client, which would be granted every time. All right, are you ready to answer? Your address is the same as Kelsey Road in Barrington, Ill., address? Mr. WALSH. My address is Box 217, Fontana, Wis. Mr. PATMAN. Fontana, Wis.? Mr. WALSH. That is right. Mr. PATMAN. I am talking about your headquarters, where are your headquarters? Mr. WALSH. Box 217, Fontana, Wis. Mr. PATMAN. `You were present much of the time when Mr. Olsher, the director of the staff- Mr. WALSH. I was present all of the time. Mr. PATMA~- (continuing). Interviewed Mr. Hayes at the ABC offices in Barrington last July. You were present all the time? Mr. WALSH. All the time, that is right. Mr. PATMAN. Was there any reason why you should be there every time? Mr. WALSH. Every time? There is only one time. Mr. PATMAN. Have you been acting as Mr. Hayes' counsel, Mr. Walsh? Mr. WALSH. No, I am not acting as Mr. Hayes' counsel now nr have I ever acted. PAGENO="0176" 172 Mr. PATMAN. Who asked you to be present at these interviews? Mr. WALSH. I decided to be present. Mr. PATMAN. You decided to be present? Mr. WALSH. James Walsh, that is right. Mr. PATMAN. Just on your own? Mr. WALSH. That is exactly right. Mr. PATMAN. On November 7, you stated that you have had no connection with ABC. Isn't this somewhat inconsistent with the fact that you were answering questions for Mr. Hayes during the Olsher- Hayes interview last July? Mr. WALSH. I did not answer questions for Mr. Hayes. Mr. Olsher knows better than to say th'at. Mr. PATMAN. Well, you answered all the questions, didn't you? Mr. WALSH. Pardon? Mr. PATMAN. You answered all the questions. Mr. WALSH. I did not. Mr. PATMAN. You answered some of them. Mr. WALSH. The ones that pertained to me, yes. Mr. PATMAN. Is ABC a philanthropic organization? Mr. WALSH. I believe that ABC is an educational organization. Mr. PATMAN. Who benefits from ABC? Mr. WALSH. Its membership. Mr. PATMAN. Have you ever inspected ABC's accounting records? Mr. WALSH. No, sir. Mr. PATMAN. Have you ever seen an ABC financial statement? Mr. WALSH. I have not. Mr. PATMAN. Has anyone ever told you how much ABC's assets are worth? Mr. WALSH. I would like to remind the committee that I made the statement that I am not a trustee and I have no access to those records; no. Mr. PATMAN. Has anyone ever told you how much ABC is worth? Mr. WALSH. No sir. Mr. PATMAN. }~ave you ever inquired as to the value of ABC's assets? Mr. WALSH. Not concerned with that, Mr. Patman. Mr. PATMAN. Have you ever asked the trustees of the ABC for a copy of their organization's financial statements? Mr. WALSH. No, sir. Mr. PATMAN~ You do receive compensation, either fees or commis- sion, from ABC, do you not? Mr. WALSH. I told you that I did not. Mr. PATMAN. You do not receive anything from them, and have not in the past? Mr. WALSH. I am going to tell you what I said the last time I was here. There is a contract between ABC and the Walsh Family Foirnda- tion. There is a contract. Mr. PATMAN. All right; fine. Mr. WALSH. But it didn't run to Jim Walsh. Mr. PATMAN. Did you advise ABC that it does not have to file an application for Federal tax exemption? Mr. WALSH. I didn't advise ABC at all. They have attorneys that they employ from time to time for that purpose. Mr. PATMAN. And you did not advise them not to file tax returns 990(A)? PAGENO="0177" 173 Mr. WALSH. I am going to tell you again that I did not advise them, period. Mr. PATMAN. All right. Mr. WALSH. That includes form 990(A). Mr. PATMAN. Tell us again; what is the correct name of your1 foundation, Mr. Walsh. Mr. WALSH. Walsh Family Foundation. Mr. PATMAN. Walsh Family Foundation. Tinder what name was the foundation created; Walsh Family Foundation? Mr. WALSH. I think I told the committee when I was here last how that came about. Do you want me to reiterate it? Mr. PATMAN. Well, speak for the- Mr. WALSH. It evolved out of an organization that I created in 1947, known as the National Committee for Alcoholism. Mr. PATMAN. Yes; I remember. Mr. WALSH. Yes; okay, it still stands. I am not changing it. Mr. PATMAN. The Walsh Family Foundation. Mr. WALSH. Evolved out of that. Mr. PATMAN. That is right. Mr. WALSH. And I told you why. Mr. PATMAN. When was it created by the exact name, Walsh Fam- ily Foundation, last year, 1966? Mr. WALSH. It is recorded with the recorder of deeds in King County, Ill., 011 August 25, 1966. Mr. PATMAN. All right; that is the Walsh Family Foundation. Mr. WALSH. That is right. Mr. PATMAN. Is it a corporation or a trust? Mr. WALSH. A trust. Mr. PATMAN. A trust. As I understand it, your foundation, the Walsh Family Foundation, has not filed an application for Federal tax exemption, and has not filed a form 990 (A) tax return since the date of its incorporation; is that tr~ue or not true? Mr. WALSH. I think I told the committee the other day that during the Internal Revenue criminal investigation that I was not going to answer that question. Mr. PATMAN. Well, anyway, you have either filed or not filed. Mr. WALSH. I am going to say that I am not going to answer that question at this time, Mr. Patman. Mr. PATMAN. All right. Mr. WALSH. Okay. Mr. PATMAN. Who advised the Walsh Family Foundation that it does not have to file an application for Federal tax exemption? Mr. WALSH. I don't need any advise for that, Mr. Patman. Mr. PATMAN. You don't need it yourself? Mr. WALSH. No, sir; I read the law and I think I understand it. Mr. PATMAN. Well, what is your understanding of the law as to the reason why you haven't filed a Walsh Family Foundation- Mr. WALSH. I will remain silent on that one. Mr. PATMAN. Why hasn't the Walsh Family Foundation filed? Mr. WALSH. I will remain silent on that. Mr. PATMAN. Who advised the Walsh Family Foundation? Mr. WALSH. I just told you I didn't need any advise. Mr. PATMAN. What is your answer to that? Mr. WALSH. I said I read the law and I don't believe I need any advice on that one. 87_444_-68------12 PAGENO="0178" 174 Mr. PATMAN. As I understand it, your interpretation of the law is that, since foundations were authorized by law, they have tax exemp- tion without doing anything further, is that correct? Mr. WALSH. That is what you said; I didn't say that, Congressman. Mr. PATMAN. You didn't say that? Mr. WALsrr. No, sir; I sure didn't. Mr. PATMAN. I am now ordering you to answer the following ques- tions: what was the total income of the Walsh Family Foundation, excluding contributions, during 1966? Mr. WALSH. I am now refusing to answer your order. Mr. PATMAN. You are refusing? Mr. WALSH. That is correct. Mr. PATMAN. And although you are ordered to answer it, although you are directed to answer this one? Mr. WALsH. I said I am refusing. Mr. PATMAN. What is the total value of the contributions received by the Walsh Family Foundation during the year 1966? Mr. RAY. I will object, Mr. Patman, on the grounds of pertinency, for the purposes for which this committee was formed, I don't under- stand and I don't believe my client can understand. Mr. PATMAN. The total value of the contributions? Mr. RAY. No; how that question relates to the impact on the economy of small business in the purposes set forth in House Resolution 53. Mr. PATMAN. All right; you have made your point, and you are overruled, and the witness is directed to answer this question. Mr. WALSH. And I am refusing to answer. Mr. PATMAN. What is the total value of the contributions received by the Walsh Family Foundation during the year 1966? You refuse to answer? The witness remains silent. How much money has the Walsh Family Foundation received from ABC since January 1, 1966? Mr. RAY. Objection. Mr. PATMAN. You are directed to answer that, Mr. Walsh. Mr. WALSH. I am refusing. Mr. PATMAN. How much did the Walsh Family Foundation pay out in grants during the year 1966? Mr. RAY. Objection. Mr. WALSH. I will refuse. Mr. PATMAN. You are directed to answer that, Mr. Walsh. Mr. WALSH. I am refusing the direction. Mr. PATMAN. What were the total expenses of the Walsh Family Foundation during the year 1966, excluding the grants paid out? Mr. WALSH. I am refusing to answer. Mr. PATMAN. I am directing you to answer that, Mr. Walsh. Mr. WALSH. And I said, I am refusing to answer. Mr. PATMAN. All right. Mr. CORMAN. Mr. Chairman. Mr. PATMAN. Yes, sir. Mr. CORMAN. Sir, perhaps it would be useful if they stated the grounds on which they refuse. Mr. RAY. Pertinency. Mr. PATMAN. The attorney has pleaded the pertinency. Mr. IRWIN. I wonder, Mr. Chairman, if on every response you shouldn't have either Mr. Walsh or his attorney cite the grounds on PAGENO="0179" 175 which they are refusing, on every one. It seems to me that you want to lay down the- M~r. PATMAN. Yes; but where they just say, "pertinency," why the- Mr. IRwIN. Except he has answered about nine times and only said "pertinency" twice. Mr. PATMAN. That is right; if that is all the answer he wants to give, it is all right. Mr. IRwIN. Except there are some answers that he hasn't given the grounds for at all. Mr. PATMAN. That is the only answer that he has given. Mr. IRwIN. Except that on every single response I would think, Mr. Chairman- Mr. PATMAN. I would think from his standpoint he would want to do that, but if he doesn't want to do that, why he is restricted to that one. Mr. IRwIN. I guess we can assume every response has been "perti- nency"; is that correct? Mr. RAY. You may assume that, Mr. Irwin. Mr. CORMAN. Mr. Chairman, it seems to me that it is such a simple matter to establish the pertinency that perhaps he would be persuaded if the Chairman restated that, because it is so clear, it is pertinent. Mr. PATMAN. The way I construe it, Mr. Corman, if he wants to rely upon that himself, as an attorney representing his client, that is his privilege to do so. Mr. CORMAN. Yes. Mr. PATMAN. And he is restricting himself, and it is not my duty to try to enlarge it to help him. Mr. RAY. I will state the grounds upon which I object, Mr. Chair- man. As you know, I have apeared as representative for Mr. Hayes and Mr. Walsh before this distinguished subcommittee. My clients appeared pursuant to subpena and testified on four occasions, Octo- ber 30, October 31, November 6 and 7, 1967. My clients have responded under protest to many of the subcommittee's questions and produced certain records of organizations with which they were associated. Unfortunately, this subcommittee has failed to reciprocate my efforts, or my clients' efforts, at cooperation. Mr. PATM~N. Is that your statement? Whose statement is that? Mr. RAY. This is my statement, Mr. Patman. Mr. PATMAN. Your statement. You are not reading the statement of Mr. Hayes? Mr. RAY. I am reading my statement. Mr. PATMAN. Your statement, yes. Well, get right down to the point as to the objection. Mr. RAY. Mr. Hayes and I and Mr. Walsh have repeatedly asked the subcommittee to disclose the text of the resolution or other docu- ment authorizing it to conduct the present investigation. The subcom- mitee has refused to comply with this request. Accordingly, I am unable to determine whether the subcommittee is properly authorized or whether in questions put to me and my clients, and documents demanded, bear any relevancy to an authorized subject of inquiry. I was tendered House Resolution 53. However, that resolution is so vague and indefinite as to be of no aid. Furthermore, a supplementary written grant of authority from the select committee to the subcommit- PAGENO="0180" 176 tee is a necessary prerequisite to this subcommittee's power to conduct any inquiry. My clients are entitled to be advised of the text of that grant of authority, if it exists, before responding to this subcommittee's ques- tions or demands for documents. Furthermore, in violation of rule 11.26 (j) of the Rules of the House of Representatives, I have not been supplied with the rules of the select committee, of this committee, or of the House, so that I and my clients may be fully advised of our rights. The committee has also failed to consider and to grant me and my clients an evecutive hearing when it became apparent that defamatory and degrading matter might become involved. Another example of this subcommittee's failure- Mr. PATMAN. Wait just a minute. I never heard of that before. When did you make that request? Mr. RAY. If I may be permitted to continue. The committee re- quested my grounds for objection. Mr. PATMAN. You are raising a point that I take issue with ou on. I never heard of that before. Mr. RAY. We can discuss the issues when I complete the grounds for my objection. Mr. PATMAN. When did you make that request? Mr. RAY. I said, we will discuss the issues- Mr. PATMAN. I have no recollection of it. Mr. RAY (continuing). When I have completed the grounds for my objection. Mr. PATMAN. I have no recollection of that at all. Mr. RAY. Another example of this subcommittee's failure to treat my clients with cooperation and courtesy is the committee's persistent demands for lists of, and other information respecting, the members of Americans Building Constitutionally. The names of the members cannot conceivably advance a legitimate purpose of this investigation, nor has the subcommittee the power to compel Mr. Hayes to disclose the membership lists. The subcommittee's repeated demands for the membership lists, however, raises the implication that ABC either is ashamed of its membership or has something to hide. This is not true. But Mr. Hayes and I do intend, as is our right and duty, to protect the privacy of ABC and its members against unauthorized encroach- ments by the subcommittee. We will not expose them to unwarranted publicity or harrassment. Another example is the practice adopted by the subcommittee of putting questions to Mr. Hayes and Mr. Walsh, which contain asser- tions of supposed facts and damaging inuendoes. Such questions are purely outside any proper purpose of this investigation. These ques- tions appear to be designed to heap abuse upon my clients, and the organizations, and ideas with which they are associated, rather than to advance any proper legislative purpose. Legislative investigation committees may not engage in pilloring of witnesses or exposure for exposure's sake. Furthermore, if the sub- committee were properly authorized to conduct this investigation, and were conducting the investigation in a proper manner, my clients and I would question the validity of House Resolution 53 creating the Select Committee on Small Business. PAGENO="0181" 177 I submit that House Resolution 53 runs afoul of the principles an- nounced by the U.S. Supreme Court in cases such as Kilborn v. Thon-tp- son, 101 U.S. 168, an 1881 case; and Swazey v. New Hampshire, 354 U.S. 234-a 1957 case. The vagueness of this resolution creates the further problem to which I have alluded before. I am unable to determine, and my clients are unable to determine whether the subcommittee is authorized to conduct the present investigation, and whether questions put to them are pertinent to an authorized subject matter. Despite their misgivings and mine as to the legality of these hearings and my uncertainty as to just what is being investigated, we have co- operated to the utmost with this subcommittee, except when I have been prevented from doing so with Mr. Hayes from performing his fidu- ciary obligations and protecting his constitutional rights and the mem- bers of ABC. It has become increasingly clear that Mr. Hayes and my clients' presence before this subcommittee serves no purpose other than to permit the subcommittee to heap scorn and ridicule upon Mr. Hayes personally and upon the ideas and organizations which he represents and of which he is a symbol. The subcommittee has violated his rights and those of his associates and the members and potential members of ABC under article I sec- tion 9 of the U.S. Constitution and the first, fourth, fifth, sixth, eighth, ninth, 10th and 14th amendments to the U.S. Constitution. Mr. PATMAN. Did you say the fifth in there? Mr. RAY. The subcommittee has violated Mr. Hayes' rights and those of his associates and the members and potential members of ABC under article I, section 9, of the U.S. Constitution and the first, fourth, fifth, sixth, eighth, ninth, 10th and 14th amendments to the U.S. Constitution. Notwithstanding the serious incursions upon their constitutional rights, and upon the constitutional rights of those who have similar beliefs and ideals, Mr. Hayes and I will continue to attempt to answer any questions which the subcommittee may put pertaining to technical aspects of tax-free foundations, of which we have knowledge. We will, however, respectfully continue to decline to answer ques- tions or produce information with respect to the identity of members of ABC. 1\'ir. Hayes and I expressly state that our participation in these hearings heretofore and hereafter is not to be deemed a waiver of any `of the objections made by Mr. Hayes or by me to the authority and methods of the subcommittee and its parent select committee. Those are the grounds for my objections. Mr. PATMAN. Those are the grounds. And you represent Mr. Walsh, too, as well as Mr. Hayes? Mr. RAY. That is correct, Mr. Patman. Mr. PATMAN. Well, your objections are overruled, and Mr. Walsh, you are directed to answer this question. Mr. WALSH. And I am going to stand on that statement, Mr. Pat- man, as my statement. . Mr. PATMAN. What was the value of the Walsh Family Foundation ?~ Mr. WALSH. I am going to stand silent. Mr. PATMAN. What is that? PAGENO="0182" 178 Mr. WALSH. I don't care to answer I hat or any other question. Mr. RAY. Objection. Mr. WALSH. May we be excused, please? Mr. PATMAN. No, you can't be excused. Mr. WALSH. Well, then I am going to sit here and you can read. Mr. PATMAN. What was the value of the Walsh Family Foundation as of December 31, 1966? Mr. RAY. Objection. Mr. PATMAN. Could you answer that? Mr. WALSH. No, sir. Mr. PATMAN. You are directed to answer it. Mr. CORMAN. Mr. Chairman, so we can have the record complete, I wonder if counsel would tell us the time that he requested executive session, because I do not recall it, though I may not have been in the room. Did counsel make a request for executive session? Mr. RAY. I believe it is all in the transcript, Mr. Corman. Mr. CORMAN. Counsel, did you make a request for executive session of this committee since it started.? Mr. RAY. You may check the transcript, Mr. Corman. Mr. CORMAN. I am asking you to answer yes or no, counsel. It is a matter of a slip of the memory. Did you ask this committee for execu- tive session? You raised that as one of your objections. It seems to me that- Mr. RAY. I don't believe that is the proper forum for us to discuss this, Mr. Corman. It is in the transcript. Mr. CORMAN. You stated in your objections to this committee that you were denied executive session. I am asking you whether or not you made a request for it in writing or verbally when the committee was in session. I do not recall that you did. I have been here most of the time. Now, that really can't involve any of your constitutional rights to respond to that one. Mr. PATMAN. I have no recollection of any such request being inade~ and I believe I would remember it. Mr. CORMAN. Counsel, it would seem to me that you either ought to withdraw your objection to these hearings that you pose concerning denial of executive session, or tell us when you made the request, or if you made the request at all, because I believe you did not make it. If you are making it now, the chairman could consider it. Mr. IRwIN. Mr. Chairman? Mr. PATMAN. Yes, Mr. Irwin? Mr. IRwIN. I wonder if counsel would mind repeating his objection as read just now under oath. I am asking you a question. Mr. RAY. I am not a witness before this committee, Mr. Irwin. Mr. IRWIN. You are making a claim here about what you have done and haven't done before the subcommittee. Mr. RAY. I believe Mr. IRwIN. You just listen for a minute, young man, I am simply asking you whether you want to make that request, whether you will agree to make that request you just made now under oath. You don't have to argue with me. You can just ~ay "Yes, I will, Mr. Irwin," or "No, I won't, Mr. J~~jfl*~~ PAGENO="0183" 179 Mr. RAY. Mr. Irwin, I believe you are confused as to the right, duties, and obligations of people, witnesses, or committees. The courts consistently hold that we do not have to demand an executive session. It is the responsibility of the Representatives of Congress. Mr. IRWIN. I am not arguing with you about that. You try hard to keep your `cool, now. Mr. RAY. I am. Mr. IRwIN. You made an assertion about whether you did or not, and that is the question we are talking about now. We are not arguing about wheth'er you are obliged to ask for it, but whether you did ask for it as you assert you did. Now a way to get this clear and, you know, on the record, is to have you make that objection under oath. Now do you want to do that or don't you? Mr. RAY. I don't believe I have to, Mr. Irwin. Mr. PATMAN. May I make this suggestion. Mr. IRWIN. You don't have to. Mr. RAY. Thank you, sir. Mr. IRWIN. Do you want to? Mr. PATMAN. You are l:eaving your role as an attorney when you commence to testify as a wi'tness. Mr. RAY. I stated the grounds for my objection. Mr. PATMAN. You are now testifying as a witness. Mr. RAY. I am not. I was objecting as counsel. Mr. PATMAN. But you testimony was that you sought an executive session from this committee `and it was deni'ed, and members of the committee have no recollection of that. I personally have no recollec- tion of it, and I do not believe `it actually occurred. And a member of the committee just raised the question if you `would be willing to be sworn on that statement. Mr. RAY. Sir, I am going to remain in my role as counsel. Mr. CORMAN. Mr. `Chairman? Mr. PATMAN. Yes, sir? Mr. CORMAN. Mr. Chairman, here is one thing for the record that may help this `a little bit. This is the record of `October 31. Mr. Conte asked the question of Mr. `Ray: Are you insinuating you would be glad to give us this information in Executive Session? Mr. RAY. No, sir; I am not. Now, that is the only reference we have in the record to executive session. There is the clear implication that executive session really didn't seem to be very important to you at that time. `Counsel, you are the one that raised this in your objection. Mr. PATMAN. Until I can confer with the menThers of the committee in executive session, I will not pursue this matter further, but I will ask you to answer this question, Mr. Walsh. Mr. IRWIN. Mr. Chairman? Mr. PATMAN. Yes. Mr. IRwIN. Do we have copies of the `statement that he just read? Mr. PATMAN. Yes, we would like to-you read it all, I assume, for the record, and the reporter took it down, is that correct? Mr. IRWIN. I would like to be able to look at it right now if I may. PAGENO="0184" 180 Mr. RAY. You may not look at the copy. Mr. PATMAN. Let him have the copy. Mr. RAY. You may not have the copy. Mr. PATMAN. You mean you refuse to let us see a copy of it? Mr. RAY. Of my notes? Mr. PATMAN. Yes, of the statement that you read. Mr. RAY. Those are the notes, the basis for my objection. Mr. PATMAN. You were reading a statement there word by word. Mr. IRwIN. May I say this, Mr. Chairman. Mr. Ray, I think you are misconstruing, you know, the way we are trying to work with you here. We have the record and I will have a chance to read it later. I wonder whether you would be kind enough to let me read your state- ment now. I heard it but there `are certain parts that I would like to reread to make sure that my ears were serving me right. Will you let me see your `statement? Mr. RAY. The members of this committee's ears don't seem to fail them from any information over the past 3 or 4 days. Five minutes ago it is different. Mr. IRWIN. Now you are getting `argumentative. I am trying to ask you if you will let me look at your statement. Will you or won't you? Mr. RAY. I will not. Mr. PATMAN. All right. We did notice you pleading the fifth amendment. Mr. RAY. The statement is in the record. Mr. PATMAN. Are you going to answer this question, Mr. Walsh? Mr. WALSH. No, I am not. Mr. PATMAN. All right. You are directed to answer it, and you do not answer it. Mr. WALsH. That is what you said. Mr. PATMAN. What were the total liabilities of the Walsh Family Foundation as of December 31, 1966? You are directed to answer that question, Mr. Walsh. Mr. WALSH. I am not going to answer the question. Mr. PATMAN. All right. You are directed to answer this one. Who has the books and records of the Walsh Family Foundation as of today, November 13, 1967? Who has the books and records? Mr. WALSH. I am not going to answer that question, Mr. Patman. Mr. PATMAN. All right. You are directed to answer this one. Have the trustees of the Walsh Family Foundation kept minutes of their meetings and copies of the resolutions considered by them? Mr. WALSH. I am going to stand on that statement for my state- ment, the one that Bill Ray read. Mr. PATMAN. You refuse to answer? Mr. WALSH. That is right. Mr. PATMAN. You are directed to answer this one. Who has the minute book and supplementary records? Who has the minute book and supplementary records? Mr. WALSH. I think I am going to at this point refuse to answer all further questions. PAGENO="0185" 181 Mr. PATMAN. You are directed to answer this one. In your testimony of November 7, 1967, you stated there was a con- tract between the Walsh Family Foundation and ABC. I hereby order you to furnish this committee not later than No- vember 16, 1967, a copy of this contract as well as a copy of the trus- tees' resolution accepting the contract and copies of all contracts to which the Walsh Family Foundation is a party. Mr. RAY. Objection. Mr. PATMAN. That is by November 16. Mr. RAY. And I refer to my statement previously read. Mr. PATMAN. Objection overruled, and you are directed to answer this, Mr. Walsh. You refuse to answer? Mr. WALSH. No, I am not going to refuse to answer that because that is a few days down the road, and we might see some interesting developments between that time and now. Mr. PATMAN. Today is the 13th and that is the 16th. Mr. WALSH. All right. (The information has not been submitted to the subcommittee.) Mr. PATMAN. Also I now order you to furnish to this committee by November 16, 1967, the records of the Walsh Family Foundation which will disclose the following information- Mr. RAY. Objection. Mr. PATMAN. The same objection you had a while ago? Mr. RAY. That is correct. Mr. Chairman.. Mr. PATMAN. Objection overruled. Mr. RAY. I object on those grounds to any further questions to Mr. Walsh. Mr. PATMAN. Overruled and overruled before. Mr. Inwn~. Mr. Chairman, I think counsel left one little door open,. and that was that he would answer technical questions. The defense he is making against answering these questions is that he is not going to answer questions about people and their personal private problems and situations, but he will answer technical questions. Mr. Walsh, what makes you think that you don't have to go to IRS to ha~ve them clear your conviction that you don't have to get their clearance? Mr. WALSH. I am not going to answer you, Congressman. Mr. IRwIN. That is a technical question. Mr. WALSH. I refuse to answer. Mr. IRwIN. On what grounds? Mr. WALSH. Sufficient to say I refuse to answer. Mr. IRwIN. No, that is not sufficient. Mr. WALSH. Well, it is going to be sufficient for the time being right now. Mr. IRwIN. You just are simply refusing to answer at this point. You are not giving any grounds. Mr. WALSH. That is right, you got the message. Mr. IRwIN. Okay, all right. Mr. PATMAN. Now this statement, I will just ~ive you the statement, of the information that is desired by the committee by November 16.. Would one of you take that down to him, please, ma'am, and get another for the reporter. PAGENO="0186" 182 (The material referred to follows:) The Foundation's Articles of Incorporation or the trust instrument. The Foundation's by-laws. The Foundation's income and disbursements for the year 1966. The names and address of the Foundation's donees during the year 1966 and the amount contributed to each of them by the Foundation. An itemized schedule of the Foundation's assets and liabilities as of December 31, 1966. If the Foundation owned 5% or more of any class of stock of any corporation at the close of the year 1966, please submit the following information: (a) Name and address of the corporation. (b) Nature of the business. (c) Dates on which the stock was acquired by the Foundation, number of shares acquired, and manner of acquisition. (d) Number of shares of each type of stock owned at the close of the year. (e) Percentage of each class of outstanding stock of the corporation owned by the Foundation at the close of the year. (f) Identification of the stock as voting or non-voting. (g) Book value and market value of the stock at the close of the year. Re market value, if the stock is not traded, please submit the Foundation's equity in the net assets of the corporation at the close of the year. Minutes and supplementary information relating to the trustees' meetings beginning January 1, 1965. (The information has not been submitted to the subcommittee.) Mr. PATMAN. You are directed to answer this question. Have the trustees of the Walsh Family Foundation given the Inter- nal Revenue Service access to any of the foundation records? Mr. WALSH. Refuse to answer. Mr. PATMAN. You are directed to answer this one. Has the Internal Revenue Service taken any records or copies of records from the Walsh Family Foundation? Mr. RAY. Objection. Mr. PATMAN. Sa:me objection? Overruled. Answer the question. You are directed to. Mr. WALSH. I refuse to answer. Mr. PATMAN. You refuse to. You are directed to answer this one. What type of records has the Internal Revenue Service been per- mitted to inspect, Mr. Walsh? Mr. RAY. Objection. Mr. WALSH. Refuse to answer. Mr. PATMAN. Objection overruled, and you refuse to answer. You are directed to answer this one. What foundations other than the Walsh Family Foundation are you connected with? Mr. RAY. Mr. Chairman, objection, and if this committee persists in this line of questioning, you will leave us no choice except to leave this committee. Mr. PATMAN. Well, of course, you would certainly be in contempt, if you want to assume that burden. It is always availa~ble to people. What foundations other than the Walsh Family Foundation are you connected with? Mr. WALSH. I respectfully request to be excused. Thank you, gentlemen. Mr. RAY. As do I, Mr. Patman. Mr. PATMAN. You are not excused. If you wa~nt to leave- Mr. WALSH. That is up to you. PAGENO="0187" 183 Mr. PATMAN. That is up to you, but there will be another day on ~that. The record will disclose that the witnesses left the committee room and refused to answer questions or further participate in the proceedings of the committee, contrary to my instructions on behalf of the subcommittee. Is Mr. Schuyler here? Mr. SCHUYLER. Yes. Mr. PATMAN. Fine, come around. Will you stand up and be sworn, please? Do you solemnly swear that the testimony that you shall give before this committee, the subcommittee of the House Small Business Com- mittee, will be the truth, the whole truth, and nothing but the truth, *so help you God? Mr. SCHUYLER. I do. Mr. PATMAN. You may repeat your ilame and address too for the reporter, please. TESTIMONY OF GEORGE SCHUYLER, NEW YORX, N.Y. Mr. SOHTJYLER. I am George Schuyler, 270 Convent Avenue, New York City. Mr. PATMAN. What is your occupation? Mr. SOHUYLER. I am a writer and editor. Mr. PATMAN. Writer and editor? Mr. SCHUYLER. And president of the Philippa Schuyler Memorial Foundation. Mr. PATMAN. The officer of the Philippa Schuyler Memorial Foun- dation is yourself, you are president, is that right? Mr. Scirnmuu. Yes. Mr. PATMAN. Your wife is Josephine Schuyler, Secretary- Treasurer? Mr. Scirnm~R. Right. Mr. PATMAN. And Robert Speller, vice president? Mr. SCHUYLER. That is right. Mr. PATMAN. The same persons are also the directors and trustees of the foundation, is that correct? Mr. SOHUYLER. That is right. Mr. PATMAN. Now your foundation is a member, of ABC and its membership application dated May 16, 1967, shows a membership fee of 810,500. The sponsoring foundation is Rough's Encyclopedia of American Woods Foundation of New York City. From whom did your foundation receive the $10,500 to pay for its membership in ABC? Mr. SOHUYLER. I believe from the Rough's Encyclopedia Foundation. Mr. PATMAN. From Rough's Encyclopedia American Woods Foundation. Why did they furnish it to you, the $10,500? Mr. SOHUYLER. Well, I suppose in order to obtain membership. I am just really familiarizing myself with this whole thing, but that is the way it develops. Mr. PATMAN. You mean you wc re not acquainted with it at that time? PAGENO="0188" 184 Mr. SCHtJYLER. No. I never heard of this ABC before. Mr. PATMAN. Until $10,500 was furnished to you? Mr. SOHUTLER. Well, I won't say until that time. I heard of it before then because- Mr. PATMAN. Was the check from the ABC or form the Hough's Encyclopedia? Mr. SOHtTYLER. That I don't know. Mr. PATMAN. Did you endorse the check? Mr. SOHUYLER. No. Mr. PATMAN. Well, how was the $10,500 delivered to you? Mr. SOHUYLER. Well, I presume that it was signed for if signature was necessary by Mrs. Schuyler and Mr. Speller. Mr. PATMAN. They did sign for it? Mr. SOHUYLER. I presume they did. Mr. PATMAN. You presume they did, all right. Mr. Robert Speller, president of t.he Hough's Encyclopedia of American Woods Foundation says that his foundation hadn't paid a membership either. Yet other people are alleged to have paid $10,500 for membership in ABC. How do you explain this? Mr. SOHUYLER. I can't. Mr. PATMAN. You can't explain it. How did the organization Americans Building Constitutionally come to your attention? Mr. SCHUYLER. It came to my attention about the latter part. of May. Mr. PATMAN. Of 1967? Mr. SCHUYLER. 1967. Mr. PATMAN. 1966 or 1967? Mr. SOHtrYLER. 1967. Mr. PATMAN. 1967? Mr. SOHUYLER. This year. Mr. PATMAN. How did it come to your attention? Mr. SCHUYLER. Well, of course my daughter was killed in Vietnam on May 9, and she was buried in New York at the Cathedral on May 18, and then the Philippa Schuyler Foundation was incorporated under the laws of Illinois about May 21, so it had already been discussed before, that is---- Mr. PATMAN. With whom? Mr. SOHUYLER. With Speller. Mr. PATMAN. With Speller? Mr. SOHumEU. Yes. Mr. PATMAN. Was he connected with ABC? Mr. SOHUYLER. Well, now, I can't speak of the- Mr. PATMAN. I don't believe he was, but evidently Mr. Speller con- tacted, it must be been, Mr. Hayes, or someone of the trustees. Mr. SOHUYLER. I don't know the presidents of these things. All I know is that they happened. Mr. PATMAN. You don't know. All right. Why were you incorporating the foundation in Illinois when you lived in New York? Mr. SOHUYLER. Because I think the legal and clerical work connected with it was done. PAGENO="0189" 185 Mr. PATMAN. It was done there in the ABC offices? Mr. SOHITYLER. Yes. Mr. PATMAN. You didn't have anything to do with preparing that yourself? Mr. SoHumi?ai. Oh, no. Mr. PATMAN. You looked upon ABC as the one to do that? Mr. SOHUYLER. Yes. Mr. PATMAN. And they prepared it and ified it there? Mr. SOHUTLER. Yes, sir. Mr. PATMAN. You don't know whether any $10,500 was actually paid or not, do you? Mr. SOHUYLER. I didn't see it. Mr. PATMAN. You didn't see it. Has ABC imparted to you legal and tax expertise? I assume they did all the work, ABC, for your foundation? Mr. SOHUYLER. I have had some advice from a lawyer who was connected with ABC as to the line of procedure. Mr. PATMAN. The line of procedure. What is the purpose of your foundation? Mr. SOHUYLER. Well now, we are trying to carry forward the mem- ory of my daughter and what she accomplished. Mr. PATMAN. The one who was killed in Vietnam? Mr. SOHUYLER. Yes, and also her desire to help the people of South Vietnam, and to that we have sought to address ourselves in a very limited way so far. Mr. PATMAN. And who benefits from this foundation and who is to benefit from it, just the memory of your daughter, I- Mr. SOHUYLER. That is all, because we certainly haven't benefited from it. I am out. Mr. PATMAN. I beg your pardon? Mr. SOHTTYLER. I am out money on this, so that we haven't bene- fited, and that wasn't the intention. Mr. PATMAN. As I understand it, your foundation has not filed an application for Federal tax exemption. Is that true or not true? Mr. SCHUYLER. This is not true. Mr. PATMAN. You have filed? Mr. SOHUYLER. No; we have not. Mr. PATMAN. You have not? Mr. SOH1JYLER. For the reason- Mr. PATMAN. Why hasn't your foundation filed an application for Federal tax exemption? Mr. SOHUYLER. Well, I was told that the form 990 would not have to be- Mr. PATMAN. Would not have to be ified? Mr. SCHumER. Pleaded until around December, around the end of the year, and that the other form, 1093, for tax exemption would not necessarily have to be filed until near the end of the fiscal year, and- Mr. PATMAN. Therefore the time has not arrived. Mr. SOHUYLER. No, sir. Mr. PATMAN. According to the information you have. Mr. SOHUYLER. That is my understanding, sir. PAGENO="0190" 186 Mr. PATMAN. Who advised you, your foundation, that the applica- tion for Federal tax exemption doesn't have to be filed before the end of the fiscal year? Mr. SOHtTYLER. A lawyer who was connected with the- Mr. PATMAN. With ABC? Mr. SOHUYLER. ABC. Mr. PATMAN. Do you recall his name? Mr. SOHIJYLER. Michael M. Ushijima. Mr. PATMAN. Yes, his name was mentioned here the other day. Mr. SOHUTLER. Yes. Mr. PATMAN. As the attorney for the ABC. Mr. SCHUYLER. He was. I think he has now severed his connection. Mr. PATMAN. You think he has severed his connection? Mr. SOHUYLER. I think he has. Mr. PATMAN. Severed his connection. Did the organization known as ABC help the Philippa Schuyler Memorial Foundation raise funds? Mr. SCHUTLER. Yes. Mr. PATMAN. In what way did the ABC help your foundation to raise funds? Mr. SCHUTLER. Well, it prevailed upon foundations which were its members to make grants to the Philippa Schuyler Foundation. Mr. PATMAN. On July 27, 1967, ABC held a meeting in Barrington, Ill., relating to the Philippa Schuyler Memorial Foundation. Was it a successful meeting? Mr. SCHUYLER. Well, I presume so. I wasn't there, but my wife so reported to me that there were a great number of people there whom I suppose were connected with ABC. Mr. PATMAN. I understand a number of foundations pledged grants, is that correct? Mr. SCHtTYLER. That is true. Mr. PATMAN. Were all these foundations members of the ABC? Mr. SCHUYLER. Well now, that I can't say. I am speaking now of what I know, and I don't know that. Mr. PATMAN. That is all right; yes, sir. I have here a copy of a press release dated July 16, 1967, which was sent out by the Philippa Schuyler Memorial Foundation. It lists more than 40 foundations which had pledged grants to the Philippa Schuyler Memorial Founda- tion. Subsequently, newspaper reports referred to those pledges as amounting to $30,000 to $40,000. However, I understand that only $14,937 in pledges had been paid. What do you think is the reason for this? Mr. SCHUYLER. Well, that is a puzzle to me. I don't know why. There were a number of foundations which apparently pledged grants, but did not make them. Mr. PATMAN. But did not make them? Mr. SCHUYLER. Actually. Mr. PATMAN. Pledged them but did not make them. The Philippa Schuyler Memorial Foundation's press release of July 16, 1967, shows that the Alentar Foundation of Santa Fe Springs, Calif., is one of its donors. Yet, our letter to the Alentar Foundation was returned to us, marked "Address Unknown." Do you know anything about that? Mr. SCHUTLER. No, sir. PAGENO="0191" 187 Mr. PATMAN. Also, the foundation press release of July 16 shows a number of foundations, four in particular: The Carol Terrell II. Root, of Costa Mesa, Calif.; Layman Foundation of Union Gap, Wash.; J. Orkney Foundation, Yakirna, Wash.; Glaspey Foundation, Yakima, Wash.; each of the alleged founders said that he had no such foundation. Do you have any explanation for it, yourself Mr. SOHUYLER. No, sir; and we didn't receive anything from them, either. Mr. PATMAN. You didn't receive anything from them? Mr. SCIHTYLER. No, sir. Mr. PATMAN. The articles of incorporation of the Philippa Schuy- 1cr Memorial Foundation, Inc., were filed in the State of Illinois on May 25, 1967. Why was this foundation incorporated in the State of Illinois. I believe you have explained that, because the ABC people got it up for you and filed it and did everything themselves. Mr. SOHUYLER. I should say, "Yes," to that; yes. Mr. PATMAN. That is correct? Mr. SOH1JYLER. Yes. Mr. PATMAN. According to the articles of incorporation, the reg- istered office of the Philippa Schuyler Memorial Foundation is Post Office Box 575, Kelsey Road, Barrington, Ill. This is also ABC's ad- dress. You understand that, do you? Mr. SOHUYLER. Yes, sir. Mr. PATMAN. The base of operations of the Philippa Schuyler Memorial Foundation appears to be your home in New York City. ~\Thy wasn't the Philippa Schuyler Memorial Foundation incorpor- ated in the State of New York instead of in Illinois? I asked you that question awhile ago, and you explained that the papers were gotten up by ABC there in Illinois and filed by them in Illinois. Mr. SOHUYIJER. Yes, sir. Mr. PATMAN. That is correct, isn't it? Mr. SOHUTLER. Yes. Mr. PATMAN. Have you or your wife received any salary or expenses from the Phiippa Schuyle:r Memorial Foundation? Mr. SCHUYLER. No, sir. On the contrary, we spent money. Mr. PATMAN. Just the other way? Mr. SCHUTLER. Yes. Mr. PATMAN. Who writes the checks for grants made by the Phil- ippa Schuyler Memorial Foundation? Mr. SCHUYLER. Two members, two of the officers, have to do it. It could be Mr. Schuyler and Mr. Speller, or it could be Mrs. Schuy- ler and myself. Mr. PATMAN. All right. What foundations, other than your founda- tion, are you com~ected with? Mr. SCHUYLER. Well, I am not connected with anything. Mr. PATMAN. This is the only one? Mr. SCHUYLER. This is the only one. Mr.PATMAN. Did you ever meet James R. Walsh? Mr. SOHUYLER. Yes, sir. Mr. PATMAN. When and where did you meet him? Mr. SOHUTLER. Well, on the occasion that the Philippa Schuyler Memorial Foundation held a press conference at the Overseas IPress Club. PAGENO="0192" 188 Mr. PATMAN. Where did that happen? Mr. SCHUYLER. At the Overseas Press Club. Mr. PATMAN. In New York or Chicago? Mr. SOHDTLER. In New York City. Mr. PATMAN. In New York City. And Mr. Walsh was there? Mr. SCHUYLER. Yes, sir. Mr. PATMAN. Was he a participant in the ceremonies? Mr. SOHUYLER. No, sir; he wasn't a participant. He was just sit- ting there at the table. Mr. PATMAN. Was he with the ABC people, the officials? Mr. SCHUYLER. Yes. Mr. PATMAN. Is that the only time you met him? Mr. SCHUYLER. That is the only time. Mr. PATMAN. Did you have any conversation with him? Mr. SGIIUYLER. Yes. We had a brief conversation as one would when one first meets a person, but I don't think it was protracted. Mr. PATMAN. In what way did you think Mr. Wash was connected with ABC? Mr. SOHuYLER. Well, I presumed that he was an officer. I presumed that. I didn't know that because it wasn't~- Mr. PATMAN. Do you presume from your conversation, or his as- sociates at the time? Mr. SOHtIYLER. Well. I guess it was a matter of association. He was there with Mr. Hayes, and so I presumed that he was connected with ABC. Mr. PATMAN. How long have you known Robert D. Hayes? Mr. SOHIJYLER. Well, no longer than I have Mr. Walsh. I met him first at the same time. Mr. PATMAN. You met him at the same time? Mr. SCHUYLrn. At the Overseas Press Club in New York. Mr. PATMAN. In New York. Is there any statement that you would like to voluntarily make about this, that you have not been asked about? Mr. SOITUmER. No. I came here voluntarily to answer any questions that I could answer. Mr. PATMAN. You were very cooperative, I will say that. From the beginning, you said that you would be very glad to give any informa- tion you had concerning it. Mr. Sciiuxirn. Yes, sir. Mr. PATMAN. Are there any questions by members of the committee? Mr. CORMAN. Yes, sir. Mr. PATMAN. Go ahead. Mr. CORMAN. Is this our last witness for the day, or do we have others? Mr. PATMAN. This is the only witness we will have today. Mr. CORMAN. Yes, I would like to ask a few questions. Mr. PATMAN. We have witnesses for tomorrow, whom I will announce later. Mr. CORMAN. Mr. Schuyler, I would like to say as the chairman did, that I sincerely appreciate your cooperating with this committee. I realize that in some ways this must be a painful experience for you. We are attempting to ascertain whether or not existing statutes are being enforced in the area of tax exemption or alleged tax exemption PAGENO="0193" 189 of not-for-profit foundations, and whether or not there ought to be different laws passed. Our concern is what relationship you had with ABC and with the officers of ABC, so that we can ascertain how they operate. I wonder if you could tell me when you first became aware that there was such a thing as ABC, how you became aware of that? Mr. SCHUYLER. Well, let me see. it must have been in May after the organization was incorporated, and I- Mr. CORMAN. You mean after the memorial foundation for your daughter was incorporated? Mr. SCH1JTLER. Yes, or about that time. Mr. CORMAN. The thing I wasn't quite certain about is whether or not they had influenced you to create this foundation, or whether the foundation was already created and then they came along and gave advice. Mr. SOHUYLER. Well, I would like to answer that by saying that I thought of the idea of a foundation even while I had a speaking engagement in Florida, and en route I thought about it because it was just 2 or 3 days after she had died, and then when I came back, we held a gathering at my home and Mr. Speller was there and Mr. Speller felt that this was the thing to do, and I agree with him, so did everybody. Mr. CORMAN. Up to that point, you had had no contact with ABC? Mr. SCHUYLER. Oh, I didn't even know it existed. Mr. CORMAN. Yes, sir. Mr. Speller, what was your prior relations~iip with him? Mr. SCH1JTLER. Well, we have known Mr. Speller for about 8 to 10 years. Mr. CORMAN. I see. Mr. SOHUYLER. Because he was the publisher of my daughter's book. Mr. CORMAN. Yes, sir. All right, if you will go on after that step. Mr. SCHuYLER. Well, then they came up with the "Winning the Peace Program", which was of course all right with me, because it would carry out the ideals of my daughter, and Mrs.- Mr. CORMAN. Who was it that came up with this "Winning the Peace Program"? Was this one counected with ABC, or with no con- nection at all with ABC? Mr. SCHUYLER. The reason I can't answer that is because I don't know what Mr. Speller's relations with ABC was at that time, but I know that it all developed and on July 27, they had this big meeting in Barrington, Ill., and things went on from there. Mr. CORMAN. Do you know what Mr. Speller's relationship is with ABC? Mr. SCHUYLER. Well, except indirectly, that he is a director of the Philippa Schuyler Foundation-Memorial Foundation-and he also directed this Rough Foundation, which I presume is his foundation, and that is the only relationship that I know that he has. Now, he may have other relationships, but I am only speaking about what I know. Mr. CORMAN. Did you first become aware of the existence of ABC through Mr. Speller? Mr. SontryLuR. Yes. 87-444-68-13 PAGENO="0194" 190 `Mr. `CORMAN. Could you. relate to us, as well as you can remember, what the conversations were between yourself and Mr. Speller at that point, when you first became aware qf.the existence of ABC? Mr. SCHUYLER. No. Mr. CORMAN. Just. as clearly as you remember. Mr. Sc1IUYLER.: Well, it. was sometime back there in late May or June, and we `met on the occasions, sometimes at his home, sometimes at mine. . . Mr. CORMAN. Did he suggest to you that ABC might offer some services that you might need in setting up your foundation, or just. how did you become aware of ABC. through Mr. Speller, if in fact you did? Mr. SCHUYLER. Well, .1 am trying to remember. Now, I don't say that it is vague, but it is not very explicit in my mind. I was told that there were a large number of foundations that would want to contrib- ute, give grants to the Philippa Schuyler Memorial Foundation, and that. of course was all right with me. They specified what the money was to be for, and so finally the list was con'miled and then Mr. Speller had a public relations woman who prepared t.he release t.o go out to t.he press, listing all of these founda- tions that had made contributions, and then stating a flat sum that would be the total of what had been given, and of course, I did not know this for sure. I was just going by what they said, because most of-well, all of the foundations I had never heard of .before, but it was all right with me if they wanted to contribute to this. This was mutually advantageous. Mr. CORMAN. Was it your understanding that ABC was the one that was getting these foundations to make these contributions? Mr. SOHUTLER. I can only say that I presumed. I don't know from what other source it would have come, because we didn't know any foundations, `and no other foundations came forward to perpetuate the memory of this girl, and what she had done, and `all that, so naturally one is very favorably inclined toward ABC, because it was mutually advantageous. Mr. CORMAN. Was it ever suggested that you take an educational course from ABC, that they would give you `any instructional material t Mr. SOHUYLER. N'o. I have never received any instructional material, and it was never `suggested t'o me that I take any course. It is kind of old for me to be taking courses now in anything. (Whereupon, there was a short discussion off the record.) Mr. PATMAN. They had the $10,500. Mr. SOHUYLER. `Yes. This has never been explained or suggested. to me, nor did I request it. Mr. PATMAN. Would you yield just a second? Mr. CORMAN. Yes, sir. Mr. PATMAN. We don't have it very clear about the p'ayment of this $10,500, except that you didn't pay it. You made that very plain. You didn't know how it came about, but you thought the Hough Encyclo- pedia paid it. The truth is, we have it in the record here, documentary proof to the effect that they did not even pay t'heir own fee, and it would be unlikely that they would pay yours when they didn't pay their own. PAGENO="0195" 191 Mr. SCHUYLER. Well, the only thing that I can go by is the applica- tion `and of their granting the application. I have seen the copies of these documents, but as to the $10,500, I have never seen it, but seen it on the application, signed there. I presume that the transaction did occur, but I don't know that. Mr. PATMAN. Go ahead, Mr. Corman. Mr. CORMAN. All right, sir. After your initial contact with ABC, did you subsequently become a member, either yourself or your founda- tion, become a memjer of ABC? Mr. SOIItTYLER. Well, yes; that is the `application to which I refer. * Mr. CORMAN. And are you the one who filled out that application? Mr. SOHUYLER. No, sir; it was a form, and it was made out and signed by two of the three members. Mr. CORMAN. Were you a signator to that? Mr. SOHUYLER. No, sir. Mr. PATMAN. It is unnecessary for you to sign it, I assume? Mr. SOHUYLER. It was unnecessary. Mr. PATMAN. And they had it all filled out. Mr. SCHTJYLER. That is what was said. I don't know now. As you know, I am very busy at other things, and I. couldn't do everything myself. Mr. CORMAN. What was your understanding of what this member- ship meant to you? Now, you were a trustee of the foundation that became a member of ABC. You were aware of the fact that the mem- *bership fee was $10,500, laying aside for the moment who paid it. What was you understanding of what this meant? Mr. SOJIUYLER. That is what was said. I don't know now. As you know, I am very busy at other things, and I couldn't do everything copy of it myself, and then I discovered that such was in existence, and when I did, I immediately had copies made because I had informed Mr. Patman that I would send copies as soon as I could have them made, because I had just received the documents myself. Mr. CORMAN. When did you first become aware of the existence of the application and the purported transfer of the $10,500. Mr. SCHUYLER. Well, it must have been last month or maybe about the middle of October. 1 am not certain about the exact date, `but im- mediately I wrote to Mr. Patman and said that I would, I was looking it up, and that as soon as I got it, I would send him copies of it. Mr. CORMAN. Did you become aware of that reported transaction through this committee, or how did you become aware of it? Mr. SCI-TUTLER. Yes; the chairman~ Mr. Patman,. asked me when we had applied, or did we apply for membership in ABC. and so when I said to myself, you know, I had heard about this, so I asked Speller about it, and then `Speller got the documents and sent them to me, and I had copies made of them, whereupon I immediately sent them to the chairman. Mr. CORMAN. Was Speller one of the signators on the application? Mr. SCHUYLER. Yes. Mr. CORMAN. And your wife was the other? Mr. SCHUYLER. The other was Mrs. Schuyler, or at least it says on there that it was signed `by Mrs. Schuyler. Mr. CoR~rAN. Do you have any present knowledge of whether or not Mrs. Schuyler signed the document herself? PAGENO="0196" 192 Mr. SCHUYLBR. I think she did, but I think that she was very dis- traught at that time and she had lost her daughter. Mr. CORMAN. Yes, sir. Mr. SCHUTLER. Naturally she wasn't, her mind wasn't clear to go through a lawyer at that time, and she undoubtedly signed it, but I had never seen it originally. Mr. CORMAN. You didn't really know that you were a member of ABC until this committee contacted you? You weren't aware of your being a member of ABC? Mr. SOHUYLER. I wasn't aware that the Philippa Schuyler Memorial Foundation was a member of ABC until I was reminded, or rather asked about it by the chairman of the committee. Now that may be due to negligence on the part of the other two directors. With so much going on, after all, you know we put on one of the largest concerts in history there at Town Hall, playing Philippa Schuyler's music, compositions, and all that. It took a great deal of work, and any time you fill Town Hall, you have got to have a lot of people there. And so this was considerable work. And so there was really not much time to go into such details as that, not that I didn't want to go into them, but you can only want to go into something that you know about. Mr. CORMAN. Had you ever had any conversations with Mr. Speller about ABC, what the benefits might be of membership? Mr. SCHUYLER. Well, I lmew what the benefits would be, but as I say, we didn't converse about the membership, because I didn't know that we had any membership, and I wasn't consulted as to taking out membership, but I suppose it was just a formality. Mr. CORMAN. Yes, sir. The benefits that you anticipated were dona- tions to your daughter's memorial from other foundations? Mr. SCHUYLER. Yes. Mr. CORMAN. Nothing else? Mr. SCHUYLER. No. We weren't expecting to get anything out of it, except through whatever foundations were persuaded to make grants. Mr. CORMAN. Were you getting any advice from Mr. Speller or from anybody connected with ABC about how to conduct the financial trans- actions of the Philippa Schuyler Foundation? Mr. SOII1TYLER. Yes, sir. I got advice from Mr. Ushijirna, who was evidently the ABC attorney assigned to this foundation. Mr. CORMAN. What advice did he give you? Mr. ScHuYr~nR. Well, he told how the business of the foundation should be conducted, and that wasn't very much, but we were grateful for that. Mr. CORMAN. Did he indicate to you what expenditures could be made that would be tax exempt, and what expenditures might be made that would have tax consequences? Mr. SOHUYLER. Well, we presumed that such grants as we made would be tax exempt. That was our presumption. And we didn't antici- pate any other expenditures other than perhaps printing or reprinting some of her music. My daughter wrote music from the age of 5 years old on, and that music has been printed, but we have thought of printing some of it in a larger volume, so that piano students throughout the United Stath~s could play them~ PAGENO="0197" 193 Mr. CORMAN. Was there any specific discussion as to how the founda- tion-I am not talking about the money that you personally put into the foundation, but rather the expenditures of the foundations' funds- did he indicate to you what you had to do to be sure that the founda- tion's funds as they were spent would be tax exempt? Mr. SCHUYLER. Well, in the list that I received of donors of grants, it was explicitly stated what the grants were for. Mr. CORMAN. There was a specific purpose stated? Mr. SOHtTYLER. Yes. Mr. CORMAN. Could you give us an example? Mr. SCHUYLER. Well in music and music appreciation, and based on that we made contributions to the Saigon Conservatory of Music, and those contributions consisted of parts that they had been unable to get, concerto and other things that they needed for the instruction of their classes, owing to t.he war and those considerations they hadnV been able to get them, because I imagaine people are interested in whining the war, rather than playing Bach and Beethoven. And so Mrs. Schuyler bought those concerto, and she bought certain parts of not only music but of instruments, and took them to Saigon herself, and that was typical of it, because we couldn't use the money that was explicitly stated to be used for one purpose and used for another. We wouldn't be involved with anything like that. Mr. CORMAN. Sir, I don't mean by my questions to indicate that you did anything improper. The reason for my inquiry is to attempt to ascertain what ABC tells people they can do. Mr. SCHUYLER. Well, I don't know whether I should let that pass without saying that these explicit instructions that we got for the use of these grants were sent to us by ABC, but it was indicated that these foundations themselves had specified for what purpose the money was; to be used. Mr. COnMAN. Was there ever any discussion about your personal expenditure, your personal expense involved in carrying out the pur- poses of the trust? Mr. SCHUYLER. No, nothing was said about that. As a matter of fact, we have spent considerable money that nobody had given us' except we just saved it, because we got no insurance from my daughter's death, because of the circumstances under which it occurred, that is, it was in a military vehicle., and the vehicle collapsed over Pa Nang, and so the insurance company wouldn't pay for that because it was in a military vehicle, and under ordinary circumstances, an air accident, it would come to around $75,000 or $80,000, but we got none of that and on top of that, we had to pay all the expenses of a very elaborate funeral, and all that goes along with it. Mr. CORMAN. Is it fair to assume that you did not create this founda- tion as a method of attaining tax exemption? Mr. ScHUYLER. No, sir. We didn't have anything to exempt until we got. the grants that were given. Mr. PATMAN. Have you finished? Mr. CORMAN. Yes, sir. Mr. PATMAN. This $14,000 you received, that was all accounted for through your wife's efforts to get the music reprinted and get the different things made to carry out the object of the grant. That money was spent for that purpose, is that correct? PAGENO="0198" 194 Mr. SCHTJYLER. Well, less than $1,000 was spent for that purpose. Mr. PATMAN. Less than $1,000? Mr. SOHUYLER. Yes. Mr. PATMAN. What happened to the other? Mr. SCHUYLER. Well, it is still in the bank. Mr. PATMAN. Still in the bank? Mr. SOHUYLER. Yes. Mr. PATMAN. Now what happened to the money that was subscribed? Do you know whether it was ever paid to anyone? Tip to $40,000, the press release said, and it even gave the names of foundations that had subscribed the money. Since your foundation only got about $14,000, do you know if the other was actually paid to someone or whether ABC got it or what happened to it? Mr. SOHUYLER. No, sir, I don't know anything about that. All I know is that about 17 or 18 of the foundations which were listed as saying that they would make grants, I know that if t.hey had made them, at least we haven't received them. Mr. PATMAN. You had not received them? Mr. SOHnYLER. We have never received them. Mr. PATMAN. Although the information that was given out con- vinced you that they had actually made the grants? Mr. SCHUTLER. Yes, and I think that the person who prepared the news releases was a little too optimistic in that they listed all of these foundations. Mr. PATMAN. When they probably had not actually made the grants? Mr. SCHUYLER. IVeli, no. They might have made it, but they wouldn't know. Mr. PATMAN. Yes, sir. Mr. ScHuiI~ER. They had no way of knowing whether they made them or not. All we could go by was what we had listed, and the actual checks that were received. Mr. PATMAN. All right. We certainly appreciate your testimony and appreciate your coming here. You have cooperated every way in the world, and we appreciate that, and we are very sorry about your daughter, and we are glad that you are doing something to perpetuate her memory. Mr. SCHIJYLER. Thank you. Mr. PATMAN. Is your foundation presently a member of ABC? Mr. SGHUYLER. Well, I presume so from the forms that have been made out and signed. Mr. PATMAN. For you? Mr. SOHUYLER. Yes. Mr. PATMAN. In perfecting the organization for you and every- thing? Mr. SCHIJYLER. Yes, I presume so. Mr. PATMAN. You presume that it is? Mr. SCHnYLER. Yes. Mr. PATMAN. Well, thank you very much. We appreciate your testimony. Mr. SCHUYLER. Thank you. Mr. PATMAN. The committee will have a meeting soomi and decide our procedure on the walkout of the lawyer and the witness. On~ thing is certain about the lawyer's statement, he made it very plain that he PAGENO="0199" 195 was pleading the fifth `amendment,~~nd his clients were pleading the fifth amendment. He hadn't done that before, until this morning. Tomorrow we will have as witnesses subpenaed to be here at 10 o'clock the other two Trustees of ABC. `We have had Mr. Hayes, he is one of the three. Now then, we will have Mr. Richard' Stephenson, and Mr. J'. Alton Lauren, the other two trustees of ABC. We will have them here tomorrow. We will notify Dr. Saxon we will expect him here Friday, since lie was very positive that he would be here He just didn't want `t subpena As evidence of that fact, he `prepared `and sent to us a copy of his testimony, and since it was to be delivered today, it will be inserted in the record ~t this point ~nd èopies of it given to the press. (The material referred to follows:) PREPARED STATEMENT OF MICHAEL R. SAXON, M.D., MEDICAL ADMINISTRATOR, SAXON FOUNDATION Chairman Patman and members of the Small Business Subëoinmittee, Hon- orable congressmen, distinguished guests, members of the press and Americans all, in appearing before this committee to give tetimony regarding my foundation activities as a member of Americans Building Constitutionally, I would like to express my deep appreciation to Rep. Wright Patman and his associates for making possible this national platform. I come to Washington as a, respected citizen to fulfill my obligations and responsibilities in order that I and others might still retain those privileges inherent in our Constitution. Life, liberty and the pursuit of happiness as a right in our America are closely aligned with economic freedom and can only be preserved when citizens are willing to meet the challenge to preserve them. My testimony will be sincere, and the truth, as I know it, shall prevail. I trust that this committee will respect my position. At the outset, it is my impression that this committee is charged with the responsibility to study the influence of foundations on the economy and that such a study is in the p~ibhc interest It is also conceivable that those who participate in foundation activities in accord with legal permissibility do so In the best public interest. In order to discharge their responsibilities to the American people, this committee will have to decide whether foundations organized under the auspices of Americans Building Constitutionally serve to benefit mankind and whether they are entitled to equality under the law even though their individual assets are smaller than the giant foundations that apparently operate with immunity, glorification and respect. It has always been my feeling that not-for-profit procedure and corporate status is a state legislative authority relegated to the secretary `of a state. Permission to operate under this, authority is subject to acceptance by the secretary of state of every state' in' the Union. The Saxon Foundation now operates under an official charter in the State of Illinois and is fuffilling its obligations ~inder this charter It is also my impression that when a chartered NFP corporation participates in activities under Section 501(c) (3) of the IRS Code, it is also entitled to tax exemption Again the Saxon Foundation in my opinion qualifies for such exemption Furthermore I do not believe that it is in the public interest to disallow or delay approval of the Saxon Foundation and its program of activities. ` ` . ` ` ,, , `` . As a practitioner of the noble art and science of medicine, I would beg the indulgence of this committee in allowing me the privilege to relate the value and virtues of improved quantity and ~ua1ity of medical services that can be available to society through the, use of NFP procedure. (See attached exhibit: Improving Medical Services for the Public Welfare via Not-For-Profit Procedure.) The Mayo Clinic and Foundation, the *Ochsner Clinic and Foundation and many others have demonstrated the worth of medical foundations., If improved quantity and quality services ieseaich development and progress are possible in the field of medicine kinder foundation auspices those who pioduce other PAGENO="0200" 196 worthy and needed commodities and services could also bring many more benefits to mankind were they to use NFP procedures. In closing, I believe that America's greatest strength and resources are to be found in the talents, energies and will of its people to perform. I further believe that those who have a talent and a will to follow should be encouraged by government and supported by private foundations to make their major contributions to society. I further believe that ABC and its member fo~jndations are dedicated to assist such people, encourage economic growth, and bring abundance to society by assisting government in these good works. I believe further that Americans Building Constitutionally and Mr. Robert Hayes have furnished me a life preserver in a stormy sea, renewed my incentive and sparked my energies to bring improved medical services to my community. I believe that the foundation mechanism makes it possible to develop a fund to carry out these activities. I wo~ild beg the support of this committee for the program sponsored by Americans Building Constitutionally. SAXON FOUNDATION, Aurora, Iii. To: Responsible Officers of the Illinois State Medical Society Subject: Improving Medical Services for the Public Welfare via Not for Profit Procedure From: Michael R. Saxon, M.D. PHILOSOPHY 1. Public health agencies and the private sector of medical practice have a common goal-adequate medical services in quantity and quality for those in need. 2. Limitations of public health agencies: a. They are unable to Supply the needed services without contracting with practicing physicians. b. Fixed fees are essential for the establishment of budgets for most governmental agencies but are economically Freedom-eroding to the practicing physician. c. By design and intent, public health agencies are obligated and have passed laws to control, regulate, and expand medical services for the public and they propose extending this service to larger portions of our population. d. Monies for public health agencies like all other governmental agencies mflst come from taxation. Public agencies do not generate new money. e. Governmental health agencies are forceful, coercive and aggresive and will eventually lock the Free practice of Medicine out of the market place and discourage incentive and willingness of our doctors to perform. Force by economic need and survival into governmental medicine, our physicians will become unenthusiastic and unwilling dispensors of standardized medical care and restrictions of the system, will by their nature be unable to s~ipply adequate medical care to those in need. f. Governmental health agencies are encouraging contract medicine through the state societies and in so doing invite strikes by professionals who, by such actions, would be reduced to tradesmen. Homogenized medically talented protoplas~n bridled to perform for survival will destroy the corn-- petition necessary to supply quantity and quality medical care. g. A bridled and regimented existence does not entice students to study the art and science of medicine. Hence, a contin~.ious doctor shortage can be predicted under present plans. 3. Not for Profit .procedure could make possible maximum quantity and quality medical services and facilities to meet the need. a. Physicians by declaration of their interest and desire to benefit mankind can legally conduct their businesses under the Illinois State Not for Profit Corpora;tion Act. b. Seed money from dollars earned by contributing honest services, could be siphoned into Not for Profit foundations and furnish immediate resources for funds earmarked to expand and build medical facilities and hire personnel to meet the selective needs of all communities. c. Individual physicians would not have the fruit of their labors depleted by taxation and would by a purposeful commitment be able to assist the government in the promotion of the General-We~f are. PAGENO="0201" 197 d. Physician control and management of all facets of medical care would insure the best quality and quantity of medical care individually and col- lectively. e. There would never be a need for professional strikes under Not for Profit procedure. f; Taxation by all governmental agencies could be curtailed as the pri- vate sector increases its performance. Politicians are now at a point of distress politically and can regain and imporve their image by supporting lower taxes while still being able to insure a free flow of medical care to the public. g. Organized medicine and its leadership should encourage Not for Profit activity among their membership instead of bargaining away the medical freedom of their members under "usual and customary" or other fixed fee arrangements. h. Not for Profit procedure under proper guidance of the Illinois State Medical Society and organized medicine as a whole is the best bargaining tool we have against the forces that want to give us something we don't want and from which the public will not benefit. i. Public Health agencies will be given credit for promoting a strike free system and organized medicine will improve its image by providing better medical services. j. Free philanthropic physicians can and will supply more and better services than medically regimented paupers-success will be by-product of honest effort. Amen 4. Not for Profit procedure and reimbursement for public aid patients. a. Negotiations for the adjudication of fees by the Illinois State Medical Society for medical service is a dangerous precedent and a process to be discouraged. b. The Illinois State Medical Society would gain much favor with prac- ticing physicians if it allowed them to negotiate their own contracts with the public aid department. c. Physicians who practice either individually or in groups could nego- tiate as a group on a renewable contract basis to render services to public aid recipients. 5. Benefits to the Illinois State Medical Society. a. Illinois State Medical Society recognition `and improved respect from' their membership. b. Removal of Illinois State Medical Society responsibility from financial negotiations with pablic aid department. c. The Illinois State Medical Society could be free to promote better health care and, at the same time, furnish the physicians of the Illinois State Medical Society an incentive program to help provide this care. d. The Illinois State Medical Society `will set the pace for professionals across the land with a positive and bold approach to the medical problems of our time. (Times a wastin'__~Lets get on the road.) 6. Benefits to the physician. a. Financial freedom and ability to expand facilities to meet the need for community services will insure medical progress and physician gratification. b. Improvement in the physician's ability to meet his personal and family obligations (no one can adequately help anyone unless his personal respon- `sibilities are cared for). Family security could be vastly improved. c. Personal and not government control of the individuals financial affairs is always to be favored and can be assured every practitioner in Illinois. d. Physician control over all medical complexes. Schools, hospitals, etc., will be made possible by generating the necessary monies as a by product of service. (The Illinois State Medical Society should subscribe to this principle.) e. The unwarranted invasion of government into the lives of physicians~ as well as the progress of Socialism in our land will be reversed by these ideas. f. By using the law and the constitution, rights of citizenship would be strengthened by every doctor who subscribes to Not for Profit procedure. g. Finally, Not for Profit procedure will benefit society directly, medi- cal professionalism will be re-asserted and upheld, and politicians will be glorified for accomplishments. Amen Humbly submitted. MICHAEL R. SAXON, M.D., Medical Direttor, ~aaon Foundation. PAGENO="0202" 198 Editorial VITAL ROLE OF FOUNDATIoNs In his final report as president of the Ford Foundation, Dr. Henry T. Heald contrasts the position of private philanthrophy today with its status a century ago, when James Smithson made a $500,000 bequest for the founding of the Smith- sonian Institution. The question of accepting Smithson's contribution was bitterly debated in Congress for a long time. Many legislators feared that the endowment would be an opening wedge to a government-supported university. Today, billions of federal dollars are spent in aiding not only governmental but also private educational institutions. In the early days of the Carnegie and Rockefeller foundations, private philan- thropy dominated the fields of public health and scientific research. By 1930, how- ever, the distribution of public funds had greatly expanded as government took over responsibilities for libraries, rural health, and medical research that had initially been assumed by the private foundations. From 1930 to 1960, public expenditures in these fields increased tenfold. PIONEER PROJECTS SUPPORTED The private philanthropies may take satisfaction in the growing federal sup- port for preschool education, antipoverty programs, and the arts, Dr. Heald observes. But he emphasizes that the foundations have provided the cutting edge for social advances by calling attention to new problems and by supporting experimental projects later adopted on a national scale. "Private institutions can do much to assure that the American version of the welfare state remains free of the bleak connotations of that term-a supine citi- zenry, an overweening bureaucracy, and an erosion of individual initiative," Dr. Heald declares. "The foundations' great advantages are flewibility (which includes the ability to persist in an objective as well as to shift priorities), experience, independence, and the freedom to innovate, experiment, and concentrate on highly selective efforts." In contra~st, government programs, dependent on pnblic favor, are under close official surveillance. Even as this is written, congressional investigating commit- tees are scrutinizing the grant programs of the National Institutes of Health and other agencies. Government projects are under pressure for quick results. Because of the con- tinuous publicity given to each venture and the widespread condemnation of every failure, the government usually devotes itself to amplifying existing approaches and avoiding experimental innovations. The laboratory atmosphere is missing. The foundations, on the other hand, may support bolder and more creative efforts. Therefore, Dr. Heald stresses, the private philanthropies should not necessarily abandon any field simply because the government invades it. Especially important is the suggestion that "foundations can serve a major function in assisting evaluation, research, and monitoring of government efforts." As I have often said, I have yet to see an annual report of any governmental agency that frankly admitted its efforts had proved inadequate. Yet inadequacies and even failures do exist. Another disadvantage of government in this respect is that it must function on a national scale and cannot differentiate geographically. Perhaps the concept of matching funds is helping to overcome this disability, since those regions that have the most advanced medical education and research are at the same time the areas most likely to make matching funds available for still further expansion and development. [Italics supplied.] Mr. PATMAN. We have copies available which Dr. Saxon sent to us in advance for the press, so we will carry out his intention by deliv- ering the testimony to the press. It is very unusual for him not to be here, since he was so insistent that he didn't want to be subpenaed, and would be here in person to testify. The committee will stand in recess until 10 o'clock tomorrow. (Whereupon, at 11 :30 a.m., November 13, 1967, the subcommittee wa~ recessed, to reconvene Tuesday, November 14, at 10 a.m.) PAGENO="0203" TAX EXEMPT FOUNDATIONS: THEIR IMPACT ON SMALL BUSINESS TUESDAY, NOVEMBER 14, 1967 HO1:lsE OF REPRESENTATIVES, SUBCOMMITTEE No. 1 OF THE SELECT COMMITTEE ON SMALL Busn~ss, Washington, D.C. The subcommittee met, pursuant to recess, at 10:10 n.m., in room 2359, Rayburn House Office Building, Hon. Wright Patman (chair- man of the subcommittee) presiding. Present: Representatives Patman and Corman. Also present: H. A. Olsher, director, Foundations Study; Myrtle Ruth Foutch, clerk; and John J. Williams, minority counsel. Mr. PATMAN. The committee will please come to order. We had scheduled Dr. Michael R. Saxon to testify yesterday `but he failed to appear, despite the fact that by letter of October 16, 1967, he stated that: It will indeed be a privilege for me to discuss my activities with the Saxon Foundation and the program sponsored `by Americans Building Constitutionally. I shall now read a telegram we received from Dr. Saxon yesterday afternoon, and then place it in the record. The telegram is addressed to the chairman and says: Foundation Subcommittee Rayburn Bldg RM 2328 Wash. D.C. Because of current evaluation of the Saxon Foundation by IRS legal counsel advises me to refrain from testifying beyond written testimony submitted. M. R. Saxon, M.D., Medical Director, Saxon Foundation. (The telegram follows:) CHICAGO, ILL. Hon. WRIGHT PATMAN, Foundation ~8ubcommittee, Rayburn Building, Washington, D.C.: Because of current evaluation of the Saxon Foundation by IRS legal counsel advises me to refrain from testifying `beyond written testimony submitted. M. R. SAXON, M.D., Medical Director. ~awon Foundation. Mr. PATMAN. I also want the record to show that Dr. Saxon had been here as a spectator during our earlier hearings. Yesterday afternoon, we issued a subpen'a for Dr. Saxon to appear on Friday at 10 a.m., Novmber 17, 1967. Our witnesses `today are Mr. J. Alton Lauren and Mr. Richard J. Stephenson, trustees, two of the three trustees of ABC, Americans Building Constitutionally. If you gentlemen will come around to the table accompanied by your lawyers, it will be appreciated. 199 PAGENO="0204" 200 There are four of you and four chairs. I assume that will be sufficient. Which one is Mr. Lauren? And Mr. Stephenson? Mr. SMITH. He is right here, Mr. Chairman. Mr. PATMAN. Will you gentlemen stand and be sworn? Do you solemnly swear that the testimony that you shall give be- fore the House Subcommittee on Foundations of the House Small Business Committee will be the truth, the whole truth, and nothing but the truth, so help you God. Mr. STEPHENSON. I do. Mr. LAm~EN. I do. Mr. PATMAN. You may be seated. Please identify your counsel. Mr. Stephenson first. TESTIMONY OP 3. ALTON LAUREN AND RICHARD r. STEPHENSON, ACCO~IPANIED BY TURNER L. SMITH AND GEORGE D. CROWLEY, CHICAGO Mr. PATMAN. You are counsel for? Mr. CROWLEY. For Mr. Stephenson and Mr. Lauren individually and as trustees. Mr. PATMAN. And as trustee. All right. And Mr.- Mr. SMITH. Turner L. Smith, `attorney in Washington, D.C., 888 17th Street NW. Mr. PATMAN. Counsel for whom? Both of them? Mr. SMITH. I represent both of them and represent ABC, and represent them individually, too. Mr. PATMAN. All right, sir. Fine. I would like to ask Mr. Lauren some questions. Please state your full name and address, Mr. Lauren. Mr. LAUREN. J. Alton Lauren, 53 West Jackson Boulevard in Chicago. Mr. PATMAN. What is your occupation and business address? Mr. SMITH. Mr. Chairman, may I be permitted to make a very brief statement before you proceed with your questions? Mr. PATMAN. Yes, sir, you may proceed, sir. Mr. SMITH. I was employed by ABC as general counsel in Wash- ington, D.C. and any other place throughout the country earlier this year. It was at that time th'at I first met Mr. Stephenson on my right, and subsequently met Mr. Lauren, and from that point on I got engaged with -foundation questions, tax exempt questions, visited the Internal Revenue and the like. Then there came a time, as the chairman and as the committee and counsel and staff know, when Internal Revenue started an investiga- tion by its Intelligence Division, which because of my own experience within the Tax Division of the Justice Department we irnow them as special agents, and it is a criminal investigation. And because of those circumstance, and the fact that there is an investigation going which may very well involve their liberty, these two witnesses are going to plead the fifth amendment today; and they so advised me. Mr. George Crowley, whom I have known many, many years, is their Chicago counsel, and he is in a better position than I am to PAGENO="0205" 201 answer questions you may want to ask about the records and such as that, and as to that, why, I will defer to him. Mr. CROWLEY. Mr. Chairman, if I may be permitted a few remarks. Mr. PATMAN. Yes, sir, Mr. Crowley. Mr. CROWLEY. I have noted that a review of the prior testimony disclosed that the committee's authority to act was challenged. And at this time I respectfully ask the chairman to produce the empowering authorization to act. I respectfully ask that the chairman produce the authority winch delineates the scope of your inquiry, so that the witness and counsel may be in a position to determine the materiality and relevancy of a particular question. Mr. PATMAN. Well, of course we would expect the attorneys to do some work on their own about investigations, too. The record, it is a matter of public record that the House Small Business Committee was created by resolution which was authorized by the Rules Committee of the House of Representatives, and was adopted by a unanimous vote of the House of Representatives. The committee is permitted to engage in investigation of certain things that were set forth in the resolution, and to also appoiiit subcommittees and chairmen of subcommittees for the purpose of conducting investigations. The 1-lonorable Joe L. Evins of Tennessee was selected as chairman of the Small Business Committee, meetings were held, an organization meeting was held in particular, and certain subcommittees were appointed. One subcom- mittee was appomtecl on foundations, which we have had before in prior Congresses, in prior years. It was just a continuation, so there is nothing new about it. It is rather traditional for the committee to take up foundations, and we have been pursuing that about ~ ears, and this is just a continuation of it. I was selected as chairman of the committee, and other Members were placed on the committee to serve as representing the Foundation Study Committee of the House Small Business Committee. assume that you are acquainted with that. I assume that you have read these resolutions and that being true, I feel that it is as much documentation as we need under the law and the rulings of the courts in this country. Mr. CROWLEY. Thank you, Mr. Chairman. Mr. S1\nTrI. Pardon me. Now, Mr. Chairman, I take it that implicit. in what you say is that you are stating to these witnesses and to their counsel that the committee regards itself as well authorized to proceed. with the investigation. Mr. PATMAN. Yes, sir. Mr. SMITir. Now, may I complete my opening remarks. I was sav- ing it until that. In view of the Internal Revenue investigation now underway involving these two witnesses and their organizations, may I respectfully ask you, Mr. Chairman, and the committee to adjourn the: hearing or discontinue these inquiries for the immediate time being,: until we can clear up audi conclude the Chicago Internal Revenue, investigation. Mr. PATMAN. Well, of course that would necessarily be overruled because we can't wait on any Government agency to clear up anything,: because sometimes that runs into years. "We have out own responsibility outside of what any agency has, andi we dlo not. feel that we are obli- PAGENO="0206" 202 gated to wait for any Government agency action. Therefore your suggestion or motion is overruled. I have been told by the very high authority, the very, very highest, that there is no criminal investigation of the individual tax returns of Messrs. Lauren and Stephenson being conducted by the Service as of now. That information was available this morning. Mr. CORMAN. Mr. Patman. Mr. PATMAN. Mr. Corman. Mr. CORMAN. Mr. Chairman. I want to inquire whether counsel has been provided with a copy of House Resolution 53 and had an oppor- tunity to review it. Mr. CROWLEY. I have not; no. Mr. CORMAN. May I at this time, Mr. Chairman, give it to the gentleman? It is relatively short, but it is the empowering resolution for the investigation. Mr. CROWLEY. Thank you. Mr. PATMAN. I assume you have seen it, Mr. Smith. Mr. S~IITn. I have generally. Mr. CROWLEY. May I just make this brief comment. Mr. PATMAN. Yes. Mr. CROWLEY. That our clients, Messrs. Lauren and Stephenson, are here in response to a subpena served on them calling for the produc- tion of records of Americans Building Constitutionally. Upon my advice as counsel on November 3, 1967, whatever books or records were then in their possession of ABC were turned over to Mr. Robert Hayes, the managing trustee at the ABC offices. Mr. PATMAN. As of what date? Mr. CROWLEY. November 3, 1967, at the ABC offices in Barrington. At that time Mr. Hayes had given testimony and is still under subpena, and returned the following week to give further testimony. And as a result of this action, they are unable to produce and comply with your subpena demanding the records of ABC. Mr. PATMAN. They are two-thirds of the board. Mr. CROWLEY. That is correct; but I advised them- Mr. PATMAN. Why are they unable to get their own records? The two of them represent a majority and have charge of the records. Mr. CROWLEY. As a matter of fact, Mr. Chairman, since Mr. 1-layes was under subpena, and as I understood it was still under subpena, we turned over all the books to him, so that he might be in a position to act as he or his counsel saw fit in regard to the records and we were not to be called until after Mr. Hayes had we thought completed his testi- mony, but apparently he has not. Mr. PATMAN. I assume that you knew that he refused to present them. Mr. CROWLEY. I know that he did not present them. The date of his refusal I am not aware of. Mr. PATMAN. Don't you think that would require some effort on the part of the majority of the trustees to make them available, since they are required to furnish them and they have the power to furnish them? Mr. CROWLEY. Well, Mr. Hayes was testifying at the time, Your Honor. Mr. PATMAN. Mr. Hayes was not here yesterday. He was obligated to be here under subpena, and today, but he is not here today, I as- PAGENO="0207" 203 sume. At least I don't know anything about it if he is. But you repre- sent two-thirds of the three trustees, and under the law I assume that your majority would be construed as having charge and custody of the books and papers; wouldn't you? Mr. CROWLEY. Well, Mr. Hayes is the managing trustee and as such I assume that the managing trustee has control. Mr. PATMAN. In his testimony I think you will find that he denied that he was managing trustee. Mr. CROWLEY. I thought I read his testimony to the contrary. Mr. PATMAN. I am quite sure that what I said is correct. Now, Mr. Lauren, by subpena which was served on you, you were ordered to bring with you the following information: 1. A financial statement of Americans Building Constitutionally, for the 12 months ending September 30, 1967, including income and disbursements and balance sheet. 2. A list showing names and addresses of members of Americans Building Constitutionally, and the membership fee received from each one of them. I am now ordering you to hand me the information described in that subpena. Mr. LAUREN. I respectfully decline to answer, invoking protection of the fifth amendment on the ground that my answer might tend to incriminate me. Mr. PATMAN. You are directed to answer it, Mr. Lauren. Mr. LAUREN. I respectfully decline to answer, invoking the protec- tion of the fifth amendment, on the grounds that hiy answer may tend to incriminate me. Mr. PATMAN. We have requested by letter dated October 25, 1967, that you furnish us certain documents and information relating to the history and operations of your foundation. Will you please now send up the information and documents described in the attachment A which accompanied our request of October 25. You have that, I as- sume. It was furnished to you. Mr. CROWLEY. Mr. Chairman, in regard to that request- Mr. PATMAN. Yes, sir. Mr. CROWLEY. We recognize the authority of the committee to issue subpenas in connection with the production of records of the respec- tive individual foundations, and we shall honor such subpenas and produce the individual foundation records called for by a subpena issued by your committee. Mr. PATMAN. We assume that you have it now, and we would like to have it. Mr. CROWLEY. We do not have the records with us. Mr. PATMAN. Well, in the subpena duces tecum you were of course required to present this information. The questions are asked here iii attachment A. Mr. CROWLEY. I don't recall that a subpena was issued to Mr. Lauren in connection with these individual trusts. Mr. PATMAN. All right. You are directed to bring this information in, and I assume that you will, according to what you have just said. Mr. CROWLEY. That is correct, Mr. Chairman. This is under a subpena. Mr. PATMAN. Yes, sir. Mr. CROWLEY. Thank you. PAGENO="0208" 204 Mr. PATMAN. As you know, we had asked you to furnish the inf or- mation relating to your foundation not later than November 7, 1967. We have not as yet received the data. Now, when will you have this information available? We want a definite time. Mr. CROWLEY. How would 10 days be, Mr. Chairman? Mr. PATMAN. Today is the 14th, isn't it? By the 24th? Mr. CROWLEY. Produced by November 24. (The information had not been received at time of printing.) Mr. PATMAN. Thank you. By 10 o'clock in the morning of November 24. That will be satisfactory. I am informed that ABC-that is agree- able with you gentlemen, the witnesses, I mean Mr. Lauren. He is the one that we are interrogating about his foundation. This information relates to his foundation. I am informed that ABC has at various times had bank balances ranging from as high as six figures to seven figures. However, I am also informed at the present time ABC's bank balance is very small indeed. What has happened to all that money, Mr. Lauren? Mr. LAUREN. I respectfully decline to answer, invoking the protec- tion of the fifth amendment on the grounds that my answer may tend to incriminate me. Mr. PATMAN. How much money does ABC have in the bank today, Mr. Lauren? Mr. LAUREN. I respectfully decline to answer, invoking the pro- tection of the fifth amendment, on the grounds that my answer may tend to incriminate me. Mr. PATMAN. I direct you, as chairman of the committee, to answer the question. Mr. LAUREN. I respectfully decline to answer, invoking the pro- tection of the fifth amendment, on the grounds that my answer may tend to incriminate me. Mr. PATMAN. And I direct you to answer the following question: How many members does ABC have asof now? Mr. LAUREN. I respectfully decline to answer, invoking the pro- tection of the fifth amendment, on the grounds that my answer may tend to incriminate me. Mr. PATMAN. As chairman of the committee, you are directed to answer this question: How long have you been a trustee of ABC? Mr. LAUREN. I respectfully decline to answer, invoking the pro- tection of the fifth amendment, on the grounds that my answer may tend to incriminate me. Mr. PATMAN. I direct you to answer the following question: In how many States does ABC have members? Mr. LAUREN. I respectfully decline to answer, invoking the protec- tion of the fifth amendment, on the grounds that my answer may tend to incriminate me. Mr. PATMAN. You are directed by the chairman of the committee to answer this question: How long have you known Robert D. Hayes? Mr. LAUREN. I respectfully decline to answer, invoking the pro- tection of the fifth amendment, on the grounds that my answer may tend to incriminate me. Mr. PATMAN. You are directed to answer this question: Row long have you known James R. Walsh? PAGENO="0209" 205 Mr. LAUREN. I respectfully decline to answer, invoking the pro- tection of the fifth amendment, on the grounds that my answer may tend to incriminate me. Mr. PATMAN. You are directed to answer this question: Have the trustees of ABC kept minutes of their meetings and copies of the resolutions considered by them? Mr. LAUREN. I respectfully decline to answer, invoking the pro- tection of the fifth amendment, on the grounds that my answer may tend to incriminate me. Mr. PATMAN. You are directed to answer this question: Who has the minute book and supplementary records? Mr. LAUREN. I respectfully decline to answer, invoking the pro- tection of the fifth amendment, on the grounds that my answer may tend to incriminate me. Mr. PATMAN. You are directed to answer this question: In his testimony of November 7, 1967, Mr. James B. Walsh stated that there was a contract between the Walsh Family Foundation and ABC. I hereby order you to furnish this committee not later than November 16, 1967, a copy of this contract as well as a copy of the trustee's resolutions accepting the contract, and copies of all con- tracts to which ABC is a party. Mr. LAUREN. I respectfully decline to answer, invoking the pro- tection of the fifth amendment, on the grounds that my answer may tend to incriminate me. Mr. PATMAN. You are directed to answer this question: I am also ordering you to furnish this committee by November 16, 1967 copies of all minutes and supplementary information relating to the meetings of ABC trustees. Will you answer that question and will you furnish the information? Mr. LAUREN. I respectfully decline to answer, invoking the pro- tection of the fifth amendment, on the grounds that my answer may tend to incriminate me. Mr. PATMAN. You are directed to answer this question: Have the trustees of ABC given Internal Revenue Service access to any of ABC's records? Mr. LAUREN. I respectfully decline to answer, invoking the pro- tection of the fifth amendment, on the grounds that my answer may tend to incriminate me. Mr. PATMAN. You are directed to answer this question. Has the Internal Revenue Service taken any records or copies of records from ABC? Mr. LAUREN. I respectfully decline to answer, invoking the pro- tection of the fifth amendment, on the grounds that my answer may tend to incriminate me. Mr. PATMAN. You are directed to answer this question. Please describe the type of records that the Internal Revenue Serv- ice has been permitted to inspect. Mr. LAUREN. I respectfully decline to answer, invoking the pro- tection of the fifth amendment, on the grounds that my answer may tend to incriminate me. Mr. PATMAN. You are directed to answer this question. Have you been engaging in any illegal practices in the operation of ABC? 87-444-68---------14 PAGENO="0210" 206 Mr. LAUREN. I respectfully decline to answer, invoking the pro- tection of the fifth amendment, on the grounds that my answer may tend to incriminate me. Mr. PATMAN. You are directed to answer this question. If you haven't been engaging in illegal practices, then why would the disclosure of such information jeopardize your position? Mr. LAUREN. I respectfully decline to answer, invoking the pro- tection of the fifth amendment, on the grounds that my answer may tend to incriminate me. Mr. PATMAN. You are directed to answer this question, Mr. Lauren. It is true, is it not, that pressure has been put on you to keep you from disclosing information to the subconimittee? Mr. LAuREN. I respectfully decline to answer, invoking the pro- tection of the fifth amendment, on the grounds that my answer may tend to incriminate me. Mr. PATMAN. You are directed to answer this question. What kind of threats have you been subjected to? Mr. LAUREN. I respectfully decline to answer, invoking the pro- tection of the fifth amendment, on the grounds that my answer may tend to incriminate me. Mr. PATMAN. You are directed to answer this question. Has anyone threatened to use an injunction to keep you from disclos- ing information to the subcommittee? Mr. LAUREN. I respectfully decline to answer, invoking the pro- tection of the fifth amendment, on the grounds that my answer may tend to incriminate me. Mr. PATMAN. You are directed to answer this question. In what way has James B. Walsh been connected with ABC? Mr. LAUREN. I respectfully decline to answer, invoking the pro- tection of the fifth amendment, on the grounds that my answer may tend to incriminate me. Mr. PATMAN. You are directed to answer this question. Was James R. Walsh present at any of the meetings of the trustees of ABC? Mr. LAUREN. I respectfully decline to answer, invoking the pro- tection of the fifth amendment, on the grounds that my answer may tend to incriminate me. Mr. PATMAN. You are directed to answer this question~ How many times do you recall seeing Mr. Walsh at those meetings? Mr. LAUREN. I respectfully decline to answer, invoking the pro- tection of the fifth amendment, on the grounds that my answer may tend to incriminate me. Mr. PATMAN. You are directed to answer this question. Do you file a Federal income tax return as an individual? Mr. LAUREN. I respectfully decline to answer, invoking the pro- tection of the fifth amendment, on the grounds that my answer may tend to incriminate me. Mr. PATMAN. You are directed to answer this question. Upon what legal basis do you contend that you are exempt from filing a personal Federal income tax return? Mr. LAUREN. I respectfully decline to answer, invoking the pro- tection of the fifth amendment, on the grounds that my answer may tend to incriminate me. PAGENO="0211" 207 Mr. PATMAN. You are directed to answer this question. James B. Walsh is credited with creating the ABC package and then selling the idea to Mr. Hayes. Is this the way it actually happened? Mr. LAtm1~. I respectfully decline to answer, invoking the pro- tection of the fifth amendment, on the grounds that my answer may tend to incriminate me. Mr. PATMAN. You are directed to answer this question. What are the names and addresses of the banks or other financial institutions in which ABC has accounts? Mr. LAUREN. I respectfully decline to answer, invoking the pro- tection of the fifth amendment, on the grounds that my answer may tend to incriminate me. Mr. PATMAN. You are directed to answer this question. What are the names and addresses of the investment or brokerage firms in which ABC has accounts? Mr. LAUREN. I respectfully decline to answer, invoking the pro,- tection of the fifth amendment, on the grounds that my answer may tend to incriminate me. Mr. PATMAN. You are directed to answer this question. Has ABC or any of its affiliates deposited any funds in foreign banks or in other foreign financial institutions? Mr. LAUREN. I respectfully decline to answer, invoking the pro- tection of the fifth amendment, on `the grounds that my answer may tend to incriminate me. Mr. PATMAN. You are directed to answer this question. What are the names and addresses of the foreign banks or other foreign financial institutions in which ABC or its affiliates has deposited funds? Mr. LAUREN. I respectfully decline to answer, invoking the pro- tection of the fifth amendment, on the grounds that my answer may tend to incriminate me. Mr. PATMAN. You are directed to answer this question. According to the Wall Street Journal of October 25, 1967 your associate, James R. Walsh, Jr., has been linked "with a savings and loan association that had dealings with the Chicago underworld." Is this true? Mr. LAUREN. I respectfully decline to answer, invoking the pro- tection of the fifth amendment, on the grounds that my answer may tend to incriminate me. Mr. PATMAN. You are directed to answer this question. Has ABC received any part of its funds from any person or organi- zation connected with the underworld? Mr. LAUREN. I respectfully decline to answer, invoking the pro- tection of the fifth amendment, on the grounds that my answer may tend to incriminate me. Mr. PATMAN. You are directed to answer this question. Has ABC received any funds from sources that are engaged in illegal activities of any kind? Mr. LAUREN. I respectfully decline to answer, invoking the pro- tection of the fifth amendment, on the grounds that my answer may tend to incriminate me. Mr. PATMAN. You are directed to answer this question. PAGENO="0212" 208 You are hereby ordered to furnish the subcommittee by November 16, 1967 the names and addresses of all organizations that have ob- tained membership in ABC without cost. Mr. LAUREN. I respectfully decline to answer, invoking the pro- tection of the fifth amendment, on the grounds that my answer may tend to incriminate me. Mr. PATMAN. You are directed to answer this question. How many member's of ABC have borrowed money from the organization? Mr. LAUREN. I respectfully decline to answer, invoking the pro- tection of the fifth amendment, on the grounds that my answer may tend to incriminate me. Mr. PATMAN. You are directed to answer this question. How much money has ABC loaned to its members? Mr. LAUREN. I respectfully decline to answer, invoking the pro- tection of the fifth amendment, on the grounds that my answer may tend to incriminate me. Mr. PATMAN. You are hereby directed to furnish `the following in- formation to the subcommittee by November 16, 1967. 1. Name and address of every ABC debtor since date of organization. 2. Face amount of the loan. 3. Interest rate. 4. Date loan was made. 5. Due date. Mr. LAUREN. I respectfully decline to answer, invoking the pro- tection of the fifth amendment, on the grounds that my answer may tend to incriminate me. Mr. PATMAN. You are directed to answer this question. Has anyone paid $10,500 for a membership in ABC? Mr. LAUREN. I respectfully decline to answer, invoking the pro- tection of the fifth amendment, on the grounds that my answer may tend to incriminate me. Mr. PATMAN. You are directed to answer this question. How many people have paid $10,500? Mr. LAUREN. I respectfully decline to answer, invoking the pro- tection of the fifth amendment, on the grounds that my answer may tend to incriminate me. Mr. PATMAN. You are directed to answer this question. Has anyone paid more than $10,500 for a membership in ABC? Mr. LAUREN. I respectfully decline to answer, invoking the pro- tection of the fifth amendment, on the grounds that my answer may tend to incriminate me. Mr. PATMAN. You are directed to answer this question. How many people have paid more than $10,500? Mr. LAUREN. I respectfully decline to answer. invoking the pro- tection of the fifth amendment, on the grounds that my answer may tend to incriminate me. Mr. PATMAN. You are directed to answer the following: Have any of the following foundations ever been a seuior member of ABC? Just answer yes or no and I will read theiv names. B. D. Hayes Family Foundation, Sales Analysis Institute Founda- tion, Walsh Family Foundation. Tucihone Foundation. Odell Tiid- hope Educational Trust, Saxon Foundation, Philippa Schuyler Me- PAGENO="0213" 209 morial Foundation, Hough's Encyclopedia of American Woods Foun- dation, Inc. Mr. LAUREN. I respectfully decline to answer, invoking the protec- tion of the fifth amendment, on the ground that my answer may tend to incriminate me. Mr. PATMAN. You are directed to answer this question. How much did it cost each of those foundations to become a senior member of ABC? Please give me the membership fee as I read their names: R. D. Hayes Family Foundation, Sales Analysis Institute' Foundation, Walsh Family Foundation, Tudhope Foundation, Odell Tudhope Educational Trust, Saxon Foundation, Philippa Schuyler~ Memorial Foundation, Hough's Encyclopedia of American Woods Foundation, Inc. Mr. LAUREN. I respectfully decline to answer, invoking the protec-~ tion of the fifth amendment, on the grounds that my answer may tend' to incriminate me. Mr. PATMAN. You are directed to answer this question. Has ABC invested any of its funds? Mr. LAUREN. I respectfully decline to answer, invoking the protec- tion of the fifth amendment, on the grounds that my answer may tend to incriminate me. Mr. PATMAN. You are directed to answer this question. What type of investments has ABC made; that is, are the invest- ments in securities, real estate, or what? Mr. LAUREN. I respectfully decline to answer, invoking the protec- tion of the fifth amendment, on the grounds that my answer may tend to incriminate me. Mr. PATMAN. You are directed to answer this question. Do the members of ABC receive a financial `statement at any time? Mr. LAUREN. I respectfully decline to answer, invoking the protec- *tion of the fifth amendment, on the grounds that my answer may tend to incriminate me. Mr. PATMAN. You are directed to answer this question. At what intervals do members of ABC receive a financial statement? Mr. LAUREN. I respectfully decline to answer, invoking the protec- tion of the fifth amendment, on the grounds that my answer may tend to incriminate me. Mr. PATMAN. You are directed to answer the question: Do the mem- bers of ABC receive a financial statement annually? Mr. LAUREN. I respectfully decline to answer, invoking the pro- tection of the fifth `amendment, on the grounds that my answer may tend t'o incriminate me. Mr. PATMAN. You are directed to answer the question: Will ABC give a member a financial statement upon his request? Mr. LAUREN. I respectfully decline to answer, invoking the pro- tection of the fifth amendment, on the grounds that my answer may tend to incriminate me. Mr. PATMAN. You are directed to answer this question. Have you ever seen an ABC financial statement? Mr. LAUREN. I respectfully decline to answer, invoking the pro- tection of the fifth amendment, on the grounds that my answer may tend to incriminate me. Mr. PATMAN. You are `directed to answer this question. PAGENO="0214" 210 Have you ever inspected ABC's accounting records? Mr. LAUREN. I respectfully decline to answer, invoking the pro- tection of the fifth amendment, on the grounds that my answer may tend to incriminate me. Mr. PATMAN. You are directed to answer the question: Who is the person in charge of ABC's accounting records? Mr. LAUREN. I respectfully decline to answer, invoking the pro- tection of the fifth amendment, on the grounds that my answer may tend to incriminate me. Mr. PATMAN. You are directed to answer this question. As a trustee of ABC have you ever requested a certified financial statement of that organization? Mr. LAUREN. I respectfully decline to answer, invoking the pro- tection of the fifth `amendment, on the grounds that my answer may tend to incriminate me. Mr. PAT1~rAN. You are directed to `answer this question. As a trustee of ABC, have you ever requested an audit of that organization? Mr. LAUREN. I respectfully decline to answer, invoking the pro- tection of the fifth amendment, on the grounds that my answer may tend to incriminate me. Mr. PATMAN. You are directed to answer this question. Have you ever signed an ABC check? Mr. LAUREN. I respectfully decline to answer, invoking the pro- tection of the fifth amendment, on the grounds that my answer may tend to incriminate me. Mr. PATMAN. You are directed to `answer this question. How many ABC checks would you estimate that you have signed? Mr. LAUREN. I respectfully decline to answer, invoking the pro- tection of the fifth amendment, on the grounds that my answer may tend to incriminate me. Mr. PATMAN. How many ABC checks would you estimate you have signed since October 1, 1967? Mr. LAUREN. I respectfully decline to answer, invoking the pro- tection of the fifth amendment, on the grounds that my answer may tend to incriminate me. Mr. CORMAN. Mr. Chairman, may I inquire of counsel, first of all, have you had an opportunity to review House Besolution 53? Mr. CROWLEY. Yes, I have, Mr. Corman. Mr. CORMAN. You can see by that resolution the reason for an in- vestigation of this type is to ascertain, first of all, whether the execu- tive branch is enforcing the existing law and, secondly, whether we want to make recommendations to the Congress to change those laws. The tax laws go to the very heart of Federal responsibility. It may well be that there has been nothing improp.er done by these witnesses or any other, but we may want to recommend changes in the income taxiaws. I respect your advising your clients concerning the fifth amend- ment. I do not want to pursue a line of questions that will necessarily be responded to by the fifth. On the other hand, I would like to know whether you would advise your client if it would be proper for him to answer general questions PAGENO="0215" 211 in this area about the not-for-profit corporations and the foundations that are set up, to avoid taxes, and to answer them in hypothetical terms, without going into the specifics of ABC or any foundations that he has given some advice to, because we need to know, and we are going to find out one way or another, what is happening in this field. We can't intefligentlyrnake recommendations about changes, without knowing `w~hat the present system is, and what practices are. For instance, when your client was asked whether or not pressures or threats had been brought against him to prevent his testifying, he responded with the fifth. That seemed to me to be a peculiar re- sponse. I can't see how he would be intimidating himself, or, might be prejudicing his position by answering whether or not he had been threatened or pressured to refuse to appear before this committee. Now, maybe I have missed something. You as counsel might help me in this respect. Mr. CROWLEY. Well, giving a hypothetical answer, if pressures have been brought and if he acceded to pressures, why there may be some question of liability, and therefore I am respectfully advising him not to answer. Mr. CORMAN. All right. Now, the other question. Would you be in a position to advise him to answer hypothetical questions about the usefulness of tax-exempt foundations and the avoidance of income taxes? Mr. CROWLEY. May we have about 2 minutes to confer on this problem? Mr. PATMAN. What about having a 5-minute recess? Mr. CORMAN. All right. Mr. PATMAN. We will have a 5-minute recess. (A brief recess was taken.) Mr. PATMAN. The committee will come to order. Any statement which you desire to make, Mr. Counsel, you may do so. Mr. CROWLEY. Mr. Corman, in view of the authority set forth in United States v. Hoffman, 341 U.S. Reports, we believe that for the witness to answer any questions of a relevant nature, be they hypo- thetical or not, it might well be construed as a waiver of his rights, and any information that may provide a link in the chain might constitute a waiver. It is upon that thesis that I as counsel have rec~ ommended this action. Mr. C0RMAN. Yes, sir. Now, one further question. Would that be the same advice you would give him concerning his testimony about the Lauren Foundation? Is it the Lauren Family Foundation? Mr. CROWLEY. I believe it is the Lauren Family Foundation. Mr. OLSHER. Doesn't he know? Mr. CROWLEY. Yes; it is. As far as oral testimony; yes. As far as supplying the records, we would provide the committee, in response to a subpena, with the records of that foundation. Mr. PATMAN. Let me correct that. IHe is under subpena now. Mr. CROWLEY. That is correct. Mr. PATMAN. Being under subpena and subject to questioning by committee members, we are directing him to furnish that informa- tion. We consider that sufficient. Another subpena is unnecessary. D~ you accept that? PAGENO="0216" 212 Mr. CROWLEY. We will accede to the Chair's statement. Mr. PATMAN. All right, sir; fine. Have you finished? Mr. CORMAN. Yes, sir. I respect counsel's decision. I must say that it will be harder and it will take us longer, but we must find out how there foundations are operating. We may all be back together again some day, I suppose. Mr. PATMAN. Now, you are directed to answer this question. Does ABC have assets? Mr. LAUREN. I respectfully decline to answer, invoking the pro- tection of the fifth amendment, on the grounds that my answer may tend to incriminate me. Mr. PATMAN. How did ABC acquire those assets; from whom? Mr. LAUREN. I respectfully decline to answer, invoking the pro- tection of the fifth amendment, on the grounds that my answer may tend to incriminate me. Mr. PATMAN. You are directed to answer this question. What is the asset value of ABC? Mr. LAUREN. I respectfully decline to answer, invoking the pro- tection of the fifth amendment, on the grounds that my answer may tend to incriminate me. Mr. PATMAN. You are directed to answer the question has anyone ever told you how much ABC's assets are worth? Mr. LAUREN. I respectfully decline to answer, invoking the pro- kection of the fifth amendment, on the grounds that my answer may tend to incriminate me. Mr. PATMAN. You are directed to answer this question. Have you ever inquired as to the value of ABC's assets? Mr. LAUREN. I respectfully decline to answer, invoking the pro- te~tion of the fifth amendment, on the grounds that my answer may tend to incriminate me. Mr. PATMAN. You are directed io answer the question to whom would you make such inquiry. Mr. LAUREN. I respectfully decline to answer, invoking the pro- tection of the fifth amendment, on the grounds that my answer may tend to incriminate me. Mr. PATMAN. You are directed to answer the question Is ABC a philanthrophic organization? Mr. LAUREN. I respectfully decline to answer, invoking the pro- tection of the fifth amendment, on the grounds that my answer may tend to incriminate me. Mr. PATMAN. You are directed to answer the question Who benefits from it; from the ABC? Mr. LAUREN. I respectfully decline to answer, invoking the pro- tection of the fifth amendment, on the grounds that my answer may tend to incriminate me. Mr. PATMAN. You are directed to answer the question what is the purpose of ABO? Mr. LAUREN. I respectfully decline to answer, invoking the pro- tection of the fifth amendment, on the grounds that my answer may tend to incriminate me. Mr. PATMAN. You are directed to answer the question has ABC filed an application for Federal tax exemption? PAGENO="0217" 213 Mr. LAUREN. I respectfully decline to answer, invoking the pro- tection of the fifth amendment, on the grounds that my answer may tendto incriminate me. Mr. PATMAN. You are directed to answer the question: Why has&t ABC filed an application for Federal tax exemption? Mr. LAUREN. I respectfully decline to answer, invoking the pro- tection of the fifth amendment, on the grounds that my answer may tend to incriminate me. Mr. PATMAN. You are directed to answer: Who advised ABC that it does not have to file an application for Federal tax exemption? Mr. LAUREN. I respectfully decline to answer, invoking the pro- tection of the fifth amendment, on the grounds that my answer may tend to incriminate me. Mr. PATMAN. You are directed to answer: ABC has been in business now for over a year. Has the organization filed a form 990-A tax return? Mr. LAUREN. I respectfully decline to answer, invoking the pro- tection of the fifth amendment, on the grounds that my answer may tend to incriminate me. Mr. PATMAN. You are directed to answer this question. Why hasn't ABC ified a form 990-A tax return? Mr. LAUREN. I respectfully decline to answer, invoking the pro- tection of the fifth amendment, on the grounds that my answer may tend to incriminate me. Mr. PATMAN. You are directed to answer this question. Who advised ABC that it does not have to file a tax return form 990-A 2 Mr. LAUREN. I respectfully decline to answer, invoking the pro- tection of the fifth amendment, on the grounds that my answer may tend to incriminate me. Mr. PATMAN. You are directed to answer this question. What type of tax return, if any, has ABC filed for its first year of operal ion? Mr. LAUREN. I respectfully decline to answer, invoking the pro- tection of the fifth amendment, on the grounds that my answer may tend to incriminate me. Mr. PATMAN. You are directed to answer this question. How much Federal income tax has ABC paid since the date it was organized? Mr. LAUREN. I respectfully decline to answer, invoking the pro- tection of the fifth amendment, on the grounds that my answer may tend to incriminate me. Mr. PATMAN. You are directed to answer this question. How much State income and other taxes has ABC paid since the date it was organized? Mr. LAUREN. I respectfully decline to answer, invoking the pro- tection of the fifth amendment, on the grounds that my answer may tend to incriminate me. Mr. PATMAN. You are directed to answer this question. How much local taxes, such as real estate, has ABC paid since the date it was organized? Mr. LAUREN. I respectfully decline to answer, invoking the pro- tection of the fifth amendment, on the grounds that my answer may tend to incriminate me. PAGENO="0218" 214 Mr. PATMAN. You are directed to answer this question. Does ABC consider that it is exempt from paying gasoline taxes? Mr. LAUREN. I respectfully decline to answer, invoking the pro- tection of the fifth amendment, on the grounds that my answer may tend to incriminate me. Mr. PATMAN. You are directed to answer this question. How many of the members of ABC have applied for Federal income tax exemption? Mr. LAUREN. I respectfully decline to answer, invoking the pro- tection of the fifth amendment, on the grounds that my answer may tend to incriminate me. Mr. PATMAN. You are directed to answer this question. How many of those applications for tax exemptions have been refused by the Internal Revenue Service? Mr. LAUREN. I respect-fully decline to answer, invoking the pro- tection of the fifth amendment, on the grounds that. my answer may tend to incriminate me. Mr. PATMAN. You are directed to answer. What is your foundation, a corporation or a trust? Mr. LAUREN. I respectfully decline to answer, invoking the pro- tection of the fifth amendment, on the grounds that my answer may tend to incriminate me. Mr. PATMAN. You are directed to answer this question. Where and `when was your foundation created under that name? Mr. LAUREN. I respectfully decline to answer, invoking the pro- tection of the fifth amendment, on the grounds that my answer may tend to incriminate me. Mr. PATMAN. You are directed to answer: As I understand it, your foundation has not filed an application for Federal tax exemption, and it has not filed a form 990-A tax return since the date of its incor- poration. This is true, is it not? " Mr. LAUREN. I respectfully decline to answer, invoking the protec- tion of the fifth amendment, on the grounds that my answer may tend to incriminate me. ` Mr. PATMAN. You are directed to `answer this question. Why hasn't your foundation filed an application for Federal tax exemption'? Mr. LAUREN. I respectfully decline to `answer, invoking the protec- tion of the fifth amendment, on the grounds that my answer may tend to incriminate me. `Mr. PATMAN. You are directed to `answer the question. Who advised your foundation that it does not have to file an application for Federal tax exemption? , Mr. LAUREN. I respectfully decline to answer, invoking the protec- tion of the fifth amendment,' on the grounds that my answer may tend to incriminate me. Mr. PATMAN. You are directed tO answer: Why hasn't'your founda- tion filed a tax return form 990-A? ` , Mr. LAUREN. I respectfully decline to answer, invoking the `protec- tion of the fifth amendment,- on the grounds that my answer may tend to incriminate me.' ` Mr. PATMAN. You are directed to answer. Who advised your foun- dation that it does not have to file a tax return form 990-A? PAGENO="0219" 215 Mr. LATJREN. I respectfully decline to answer, invoking the protec- tion of the fifth amendment, on the grounds that my answer may tend to incriminate me. Mr. PATMAN. Now, you gentlemen, Mr. Lauren. and Mr. Stephen- :5Ofl~ will remain under subpena, and of course under the oaths that yoi~ have taken, and we will have to let you know when we want you back here. It appears right now, the House meeting at 11 o'clock, we will have to be over there sOon. We will be unable to sit this afternoon, ~because the House will certainly be in session, and in debate. Tomor- row we have the Secretary of the Treasury as a witness, and following him will be Mr. Cohen, Commissioner of the Internal Revenue Serv- ice, so that makes the ne~ct 2 days occupied. That will be including Thursday. Friday we have a subpena for Mr. Saxon to be here at 10 o'clock. Now, if your interpretation of the fifth amendment is correct, Mr. Counsel, Mr. Hayes has already waived i~ecause he answered a number of questionsthat he felt were important to him to answer. The same will apply to Dr. Saxon, because he not only has answered, he sent in testimony to be used in the proceedings, and they are in the proceedings as of yesterday. So that would of course cause them to lose their immunity, if your interpretation is correct. . I am not asking any question on that. I am just bringing it to your attention, sir. Do you have anything else, Mr. Corman, before we recess? Mr. CORMAN. I only would ask counsel if he might review again-I appreciate the fact that you did it very quickly here- the application -of the fifth amendment in this area of responding to hypothetical questions about setting up foundations and the tax consequences. .1 don't want to unduly burden you with having to respond with that answer to a long series of questions. On the other hand, as I pointed out to you, in the public interest we need badly to know what the situation is, and your clients may be some of the people who have some expertise in this field, and may be in a position to answer without incriminating themselves. I would just ask that you review that and if you can see any area in which in your view they can give us evidence, it will he appreciated by me and .1 think by the whole committee. Mr. CROWLEY. Mr. Corman, please be advised that we shall review the position that we have been taking, and Mr. Chairman, might I state, in the interests of saving the committee time and everyone's time that the same situation controls as far as Mr. Stephenson is con- cerned, and if he were called at this time to respond to a similar line of questioning his answers would be the same, on advice of counsel. Mr. CORMAN. It might be well for the record -for Mr. Stephenson to indicate that, I think, just for the record. Mr. STEPHENSON. My position, Mr. Charirnan, would be as counsel outlined, identical with J. Alton Lauren, trustee of ABC. Mr. PATMAN. I do not know of any other way to proceed except to ask you each question. Do you have any suggestion to make on that? Would you suggest that we read all the questions at one time and have them make one reply, or would the interpretation of the court not permit that? PAGENO="0220" 216 Mr. CROWLEY. I would think rather than laboriously going through that, if it is counsel's judgment as well as the chairman's judgment, that the questions could be drafted and stipulated, the answers thereto, rather than take up everyone's time to get the same end result. Mr. PATMAN. Before you return, which looks now as though it will be sometime after Thursday of next week, before we can get to you again, we will look into the question and see if there is some way to prevent asking the questions and demanding a reply to each one. If there is some way around, of course it is in the interests of both sides to use it. Mr. CROWLEY. Thank you, Mr. Chairman. Mr. PATMAN. Bight now I am under the impression we have to ask each question. That is the way I have been impressed. But if there is a way around it, we will do it. Mr. CROWLEY. Thank you, sir. Mr. PATMAN. Thank you gentlemen, very much, and your attorneys for coming. Mr. SMITH. Thank you, Mr. Chairman. Mr. PATMAN. We will see you at the first opportunity. The committee will stand in recess until tomorrow morning at 10 o'clock. (Whereupon, at 11 :05 a.m., November 14, 1967, the subcommittee recessed to reconvene at 10 a.m., Wednesday, November 15.) PAGENO="0221" TAX EXEMPT FOUNDATIONS: THEIR IMPACT ON SMALL BUSINESS WEDNESDAY, NOVEMBER 15, 1967 HOUSE OP REPRESENTATIVES, SUBCOMMITTEE No. 1 OF THE SELECT COMMITTEE ON SMALL BUSINESS, Wa8hington, D.C. The subcommittee met, pursuant to recess, at 10:05 a.m., in room 2359 Rayburn House Office Building, Hon. Wright Patman (chair- man of the subcommittee) presiding. Present: Representatives Patman, Corman, and Morton. Also present: H. A. Olsher, director, Foundations Study; Myrtle Ruth Foutch, clerk; and John J. Williams, minority counsel: Mr. PATMAN. The committee will please come to order. Today, we welcome Secretary of the Treasury Fowler. Aside from the fact that we try to be courteous to all who appear before this com- mittee, we welcome him also because it is very seldom that anyone in the Treasury Department, let alone the Secretary himself, shows enough interest in the massive problem of tax dodging via foundations to travel all the way to the Hill to discuss the matter with Members of Congress. During our 1964 hearings, I made the following statement: 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 manipulations, 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 foundations in cor- porate proxy fights. The IRS does not examine the foundations to determine whether they are violat- ing any CAB regulations. The IRS does not examine foundations to determine whether their foreign op- erations 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 practices which might be in viola- tion of certain statutes administered by the Federal Trade Commission or the Antitrust Division. 217 PAGENO="0222" 218 Few of the persons in the IRS who examine foundation tax returns 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 con- flict of interest between the duties of a foundation's directors or trustees and their interests as officers, stockholders and employees of business corporations whose stock is controlled by the foundation. The Secretary of the Treasury says that the Treasury does not know how many tax exempt foundations there are. The Acting Commissioner does not know how many IRS employees are assigned to supervising 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. The Acting Commissioner does not know of any cases where compensation of officers, directors or trustees among the large foundations has been unreasonable or unjustified. Yet, Mr. Benson Ford received $15,000 for attending three meet- ings of the Ford Foundation. The IRS does not review a foundation's individual charitable donations. The IRS has no rule of thumb regarding the percentage of income that a foun dation must spend for the purpose for which it was granted tax exemption. The IRS does not examine foundations to determine whether contributions are being made to the foundations by persons or organizations that supply goods or services to companies interlocked with the foundations. The IRS does not know how much money was spent overseas by 15.5. founda- tions 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 problem. This is the most impressive record of do-nothing that I 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. I regret to say that those observations are just as pertinent today as they were 3 years ago in 1964. The U.S. Treasury has distinguished itself by indifference, in- dolence and bungling in facing up to the problem of tax dodging via foundations. For 5 years, we have been trying to discover whether the Treasury is alive or dead when it comes to supervising and scruti- nizing the affairs of this Nation's tax exempt foundations. Up to this point, all I can say is that I hope the Treasury is not dead, but I have not detected any promising signs of life in its supervision of foundations. Because the Treasury has been so completely incapable of doing the job, I have, for 5 years, stated that a special Government agency should be established to oversee tax-exempt foundations. In May 1963, Morti- mer M. Caplin, then Commissioner of the Internal Revenue Service, publicly agreed with me that the IRS is not the proper agency to ex- ercise effective supervisory control of tax-exempt foundations, "if the kind of supervision and control exercised, for example, by the Securi- ties and Exchange Commission over investment companies and public utility holding companies, should ever become necessary." The success of the ABC scheme is proof enough that such supervi- sion is desperately needed. I should add, however, that, during our 1964 hearings, Secretary of the Treasury Dillon became very bold indeed and stated that "It may well be that, after considering the matter further, regulatory agency supervision will be considered a wise thing." Yet, the last 3 years, the PAGENO="0223" 219 Treasury has done nothing to takethe initiative so desperately needed in this area. In my view, the Treasury, itself, has hatched the ABC tax-dodging scheme. Since 1921, Treasury regulations have required the filing o~ some type of application for tax exemption. And, since 1941, the De- partment's regulations have required foundations to file an annual in- formation return. Yet, 46 years later, the exemption application is still required only by regulation and not by law. So, now the Treasury is faced with the ABC problem at the same time that it is trying to sell the Congress on a bigger tax bite. Coming now to the particulars of our investigation of the organiza- tion known as Americans Building Constitutionally, I think it has become quite evident that the promoters of ABC have flagrantly defied the Treasury as well as this committee. Their defiance, of course, is built on the assurance that the Treasury Department is sluggish, if not dead, and that their manipulation of Treasury regulations will probably not result in any crackdown by the Secretary's men. Indeed, we would not now be plagued by the ABC and by the threat of similar organizations springing up, if the Treasury had been on its toes instead of on its back. A POOR MAN'S LOOPHOLE IS NOW NEEDED Also, the ABC scheme is noteworthy because it reveals that the Treasury has also closed its eyes to the irregular conduct of the foun- dations of middle-income tax-dodgers. Ordinarily, it has reserved its favoritism for the rich tax-dodger. We all know that the Treasury has traditionally treated the foundation tycoons with great sympathy and understanding, as though they were the underprivileged class. Now, it appears that the Treasury has turned its misdirected sym- pathies to the defense of the creators of middle-income loopholes. That leaves only the poor class; if poor people can develop their own loopholes and receive the same compassionate treatment from the Treasury, then every economic class of our citizens will be taken care of and our tax base will be wiped out altogether. In anticipation of this eventuality, perhaps the Secretary will explain to us today how he proposes to support the Government in that not distant day when everyone-through the generosity of the Treasury-is permitted to have his own loophole. I should like to say only one other thing with respect to ABC at this time; that is, if the operations of the foundation members of ABC are legal, the Secretary must so inform the Members of Congress so that they can transmit the tax-avoidance scheme to their constitu- ents. We look forward to a statement of the Secretary's position on this with great eagerness, and hope that he can give it to us today in our discussion here. I want to emphasize that I have no personal feelings against Secre- tary Fowler. However, I do feel strongly that the Treasury Depart- ment has been derelict in its responsibilties in the foundation field. Mr. Secretary, we are delighted to have you today. And I believe PAGENO="0224" 220 you have a prepared statement; and you may proceed in your own way, sir. TESTIMONY OP HON. HENRY H. POWLER, SECRETARY OP THE TREASURY, ACCOMPANIED BY SHELDON COHEN, COMMISSIONER OP INTERNAL REVENUE; STANLEY S. SURREY, ASSISTANT SEC- RETARY OP THE TREASURY FOR TAX POLICY; AND JEROME KURTZ, TAX LEGISLATIVE COUNSEL, DEPARTMENT OF THE TREASURY Secretary FOWLER. Mr. Chairman and members of the subcommit- tee, I should like to take this opportunity to state, as succinctly and directly as I can, both the record and the position of the Treasury Department on legislative reform relating to private foundations. If you or your staff have any questions concerning the administration and application of existing laws in various individual cases and situa- tions, I shall refer all questions and leave the discussion to the Com- missioner of Internal Revenue, in whom I repose the highest confidence. Mr. PATMAN. 1~Vill you identify for the record, please, the gentle- men accompanying you? Secretary FOWLER. Commissioner of Internal Revenue, Mr. Sheldon Cohen at my right; Assistant Secretary of the Treasury for Tax Policy, Stanley Surrey at my left, and Mr. Jerome Kurtz who is the Tax Legislative Counsel of the Treasury. Mr. PATMAN. Yes, sir. Secretary FOWLER. As I stated, Mr. Chairman, if you or your staff have any questions concerning the administration of existing laws in various individual cases or situations, I shall refer all questions and leave the discussion to the Commissioner of Internal Revenue in whom I repose the highest confidence. He is in charge of the administration of tax laws. In his appearance before your committee in the summer of 1964, my predecessor Secretary Douglas Dillon stated: As a matter of personal practice, I do not associate myself, and have disasso- ciated 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 taxpayer, but has to file information returns, I would not have any action. This has been left entirely to the Internal Revenue Service. I, too, have followed Secretary Dillon's practice. On detailed questions as to the various choices of remedy through modification of the laws applying to foundations, I shall call upon Assistant Secretary of the Treasury for Tax Policy Stanley Surrey, who was in charge of the study which resulted in the submission of the Treasury Report on Foundations which contained the Treasury Department's recommendations for new legislation concerning foun- dations. I resigned from the Treasury as Under Secretary in April 1964 and returned as Secretary in April 1965. In that interval, the Treasury completed its report and Secretary Dillon submitted it to the appropriate committees of Congress for implementation. While I am not familiar in detail with all of the choices open at that time and the PAGENO="0225" 221 reasons for the selection of those which are included in the Treasury report, by reason of not being in the Treasury Department then, I endorse the principal recommendations and will support them if called before the House Ways and Means Committee and the Senate Finance Committee, the committees of appropriate jurisdiction in this matter. From 1961 through 1964 the Department conducted an extensive study of the activities of private foundations and the operation of the present laws governing the.m. It analyzed the relevant administrative and litigation experience of the Internal Revenue Service and th~ Department of Justice. It made a special survey of a selected sample of about 1,300 foundations to secure new data about their character- istics and perfo~rmance. Department representatives discussed the facts of the foundation world with lawyers, accountants, critics, admin- istrators, and others familiar with foundation operations. Careful attention was given to the work of other investigators, including this subcommittee. Drawing upon the information produced by this study, the Treas- ury Department concluded that six major problems exist among pri- vate foundations. The Department found, also, the presence of several additional problems of less general significance. In its Report on Private Foundations, submitted to the House Ways and Means Com- mittee and the Senate Finance Committee early in 1965, the Depart- ment described these problems in considerable detail, provided a series of illustrations of each of them, and recommended quite specific revi- sions of existing Federal laws to deal with them. That study did not conclude that the abuses outweighed the benefits to society of private foundations. Rather the report concluded, and I firmly believe, that private foundations fulfill a vital need of our society; the need for the pioneer and the vision of the experimenter. In this role, they both complement and supplement the services provided by government and by other nonprofit activities in general. Thus, our recommendations were conceived within the framework of preserving this vital philanthropic activity. Our objective is the elimi- nation of abuses engaged in by some and thereby to strengthen the institution itself. We should not be misled or diverted from this goal by those who operate on the fringes of philanthropy or with the cloak of philan- thropy but without philanthropic motive. The aberrations which they produce can be readily curbed either under existing law or if necessary by specific and selective legislative changes. It is a disservice to confuse those who pervert the law for private gain with those foundations which operate to sustain and advance philanthropy. The Senate Finance Committee published the Treasury report at once. Later in the year the House Ways and Means Committee solicited written comments on the report from the general public. It published those comments in November and December of 1965. In his 1966 Economic Report to the Congress, the President urged the Congress "to deal with abuses of tax-exempt foundations." In his Economic Report of 1967, the President again directed congressional attention to the need for reforms in this area. However, the Ways and Means Committee-its time during the past several years almost steadily occupied by other major tax and social security legislation-. has not yet taken further action on the Treasury report. 87-444--68-15 PAGENO="0226" 222 An examination of the record, then, makes the Treasury Depart- ment position on foundation reform quite clear. Having studied the field thoroughly, the Department reported its findings to the Con- gress, made specific and detailed recommendations for legislative ac- tion, and has strongly urged adoption of those recommendations. The President has twice recommended action. The Department presently awaits the attention of the tax-writing committees to this important matter and stands ready to work on this important phase of tax re- form with those committees in the customary manner and procedure when they are ready to proceed. Mr. Chairman, that concludes my formal statement, but, in view of the fact that you made some other comments that I was not aware of until I arrived and heard them, I will indulge in a few supple- mentary remarks. Mr. PATMAN. You may feel at liberty to do so. Secretary FOWLER. Whatever I have to say-as you said, sir-I have great respect for you and this committee, and nothing that I say will be personal. There was, I think, an early reference in your comments to "travel to the Hill" and a concern about tax dodging and the absence of such travel to the Hill by representati yes of the Treasury Department. I think that comment could only come from one most uninformed about the travels of the Treasury Department to Capitol Hill in recent years having to do with tax reform. Mr. PATMAN. Tax dodging. Secretary FOWLER. Tax reform is the device customarily used as far as Congress is concerned, to change and modify our laws to deal with tax dodging. That is what we come up to the Hill to get: changes in the laws to deal with that. And I might add that by the Revenue Act of 1962, and the Revenue Act of 1964, no matter how measured, far greater sums have been collected as the result of these extensive reforms than in all of the period of preceding history of the revenue or income tax laws, since they became a part of the law of the land in 1916. A careful examination of the details of those two laws, I think, would inform your staff, who have given you this type of comment. The number of days which were spent in appearances before the House Ways and Means Committee, formal appearances on those two acts by SecPetary Dillon, by me when I was Under Secretary, by Secretary Surrey, and others amount to hundreds and hundreds of days of hearing time. The collateral and informal colloquy with committee members concerning these laws, answering their questions, and dealing with their concerns about various aspects of them, would add many days to those totals of formal hearings. So, it is an uninformed comment to talk in a derogating fashion about travel to the Hill with the concern about tax dodging. It is a kind of comment, with references to whether or not the Treasury is dead, that one could equally well say: "Is Con- gress dead?" It does not advance the dialog to deal in these terms. No, the Treasury is not dead in this area any more than God is dead because some of his children occasionally are wayward in their activities. As you will see from the Treasury report, we readily recognize that there are serious abuses by various private foundations which are in PAGENO="0227" 223 serious need of correction, both by changes in law and by more effec- tive administration of existing laws which we have been earnestly trying to attain in recent years. But, in the words of the Treasury Department report, rn. dealing: with this problem I would like to say that looking at the vital role these institutions-private foundations-play in our society, in eval- uating the three broad criticisms that have been made of them and: analyzing those criticisms, it seems to us that the proper course is prompt and effective action to end the specific abuses extant among the foundations rather than to try to destroy them as institutions. I commend to you and your staff an excerpt from Sir Thomas More's "Utopia," which I think has some reference to the problem we are concerned with in our respective attitudes. Sir Thomas More said If evil persons cannot be quite rooted out, and if you cannot correct habitual attitudes as you wish, you must not therefore abandon the Commonwealth * * * you must strive to guide policy indirectly, so that you make the best of things and what you cannot turn to good, you can at least make less bad. For it is. impossible to do all things well unless all men are good, and this I do not expect to see tor a long time So said Sir Thomas More. Now, you also made some references to the fact that Internal Reve- nue agents did not examine foundations and report on the violations or gi ounds foi believeing thit they might ha~ e violated a large number of other Federal laws, such as your Rdbinson-Patman Act, such as the other antitrust laws, such . as the Securities and Exchange Ex- change Commission law, such as the CAB laws. Let me point out that the Internal Revenue Service does not exam~ me corporations on all of these subjects. They leave the primary responsibility for administration and enforcement of these laws to the duly constituted agencies that. have been provided by the Congress and directed to enforce these laws. And while I think there should be, and I hope there is, an adequate practice that whenever evidence of such a violation comes to the Internal Revenue Service, it would pass that information on to a sister agency, it is no reflection on the Internal Revenue Service that private foundations violate the anti- trust law, or that private foundations violate the Civil Aeronautics Board's regulations, or violate the laws enforced by the Securities and Exchange Commission or by the Federal Trade Commission. You should have before you the representatives of those agencies, to find out whether they have been enforcing the laws for which they have primary responsibility with regard to foundations. Now, with regard to what has been done in the last 3 years since the 1964 hearings, in the field of administration a.nd enforcement, I think the record will spea.k for itself. I will leave it to Commissioner Sheldon Cohen to develop the story and the account of what Internal Revenue Service has done to strengthen the enforcement of these laws. Let me say, Mr. Chairman, that when I first became familiar wit.h this problem, when coming into the Treasury Department as Under Secretary in 1961, in the light of my own examination and reading some of your early reports, I shared with you the conclusion of those early reports, that in the years prece.ding there had been a degree of laxity in enforcing the existing laws as regards private foundations.. I found that the degree of laxity could be corrected in some major respects. Efforts were undertaken and we have followed through 011 PAGENO="0228" 224 them in recent years. 1 think particularly, as Commissioner Cohen will indicate, this has been intensified as the Service has had increased personnel made available to it, and as the automatic data processing system, which has been in the process of installation and operation over the past years, has given the Service better tools to do the job. But I would agree with you that a grea~t deal needed to be done at the outset to improve the administration of the laws. I think a considerable amount of progress has been made. I would not contend that progress is sufficient for either you, or your committee, or Com- missioner Cohen and the Internal Revenue Service, to pause in the pursuit of a better enforcement pattern. I certainly do not think this progress allows us to abandon the effort to change the law to deal with the abuses to which the specific recom- mendations in this report are directed. I do believe that the effort to intensify the enforcement of existing laws in this area and to strengthen the legislation on the books is a desirable one, and I certainly have done everything I reasonably could to encourage. it. Now, let me say I do not think we will ever reach perfection in these matters. One could always use a great deal more manpower in enforc- ing Internal Revenue Service laws and achieve a higher state of per- fection. We have persistently appealed to the Congress for increased appropriations to make increased staff available, so that it could be reasonably allocated among the various responsibilities of the Service. We have sought diligently to obtain appropriations to install all the most modem and efficient mechanical devices in the so-called auto- inatic data processing system, and we shall continue to persist in that effort. There is a point at which one reaches the law of diminishing re- turns, and the appropriations committees, the appropriation authori- ties of the Congress, are quite proper in granting this increase in available manpower and equipment to the degree that they think is consonant with frugal administratiOn of this important phase of our activities. In this connection, we would always appreciate any assistance and support from this committee in encouraging increased availability of appropriations and manpower. With regard to the ABC matter which you made reference to on the mass foundation formation, I shall only call your attention to the news release of the Treasury of October 12, in which-and I quote: The Internal Revenue Service said today that for the past eight months it has been looking into widely promoted plans for tax avoidance through the use of private foundations or family trusts and is examining a number of foun- dations created under these plans. The IRS statement was made in response to inquiries resulting from Repre- sentative Wright Patman's announcement that the House Subcommittee on Foundations, which he chairs, will conduct hearings on "tax-dodging founda- tions" starting on October 30. IRS expressed doubts about the legality of this type of foundation and warned that the tax consquences to those who participate could be adverse. While it cannot discuss individual cases, IRS said the schemes for escaping tax follow a general pattern and usually involve creation of one or more private foundations. The taxpayer turns over to the foundation his business assets and all, or a substantial part of, his other assets and becomes the director or trustee of the foundation. PAGENO="0229" 225 The promoters of the plan usually represent that a taxpayer can operate his business under cover of the foundation a~ an "educational" or "research" activ-~ ity exempt from Federal income tax. IRS said, however, the mere coloration of an otherwise profit-making business with ostensibly exempt purposes does not make it exempt under the law. One of several things may happen as aresult of a tax examination, IRS said. All of the income may be taxed to the founder as being income earned by him, Or the foundation's alleged exempt status may not be recognized and the business income may be taxed in the usual way. Moreover, even if the foundation is recognized as exempt, its business income might nevertheless be subject to tax as unrelated business income. Also, bene- fits that the founder or his family receive from the foundation, whether ifl cash, property, or services, might be treated as taxable income to the founder. That is the end of the IRS release. I know that Commissioner Cohen, who is much more familiar than I would be, for reasons that I have just previously stated, is fully familiar with the operations of the IRS in this area, and in his statement tomorrow before the com- mittee, I believe he will deal with the so-called ABC or mass founda- tion matter. Mr. PATMAN. Mr. Secretary, I have some policy questions only you, I believe, would be competent `to answer, and I would like to ask them first and, then, of course, I would yield to the committee mem~ bers to ask such questions as they may desire next. Mr. Secretary, during our hearings in 1964, we asked Secretary Dillon how many private, tax-exempt foundations there were in the country. The Secretary finally admitted that the Treasury did not know how many foundations there were in existence. He said, however, that such information would be available in "about a year" when the Treasury will have installed all of its electronic data equipment. Mr. Secretary, this is 3 years later. How many private tax-exempt foundations do we have in this country? Secretary FOWLER. Our best estimate would be around 25,000. Mr. PATMAN. 25,000. You mean, that is all the foundations? Secretary FOWLER. That is right; private, tax-exempt foundations. Mr. PATMAN. Mr. Secretary, as we all Irnow, we have had a persist- ent balance-of-payments deficit for some years, and the Government has had to take a number of steps to try to improve that situation. All Americans were asked to help out because our payments deficit has been one of the most serious problems facing our Nation; isn't that correct, Mr. Scoretary? For example, the limit on `the amount which American tourists can bring into this country du'ty free `was lowered from $500 to $100 per person, effective September 9, 1961, and this lower limit was made permanent `by legislation approved June 30, 1965. In addition, the Government has `asked `industry to curtail spending and investments overseas. As I recall it, the Commerce Department and the Federal Reserve have furnished businessmen, `bank's, and other financial institutions with guidelines to reduce the flow of `capital abroad. `The spending of dollars by an American overseas `hurts our `balance of payments no matter who the spendthrift may be. I believe that you agree to t'hat, Mr. Secretary? Secretary FOWLER. I have some comments when you have finished your statement. Mr. PATMAN. Yes, sir. PAGENO="0230" 226 Would it be fair to say that, if that spendthrift is a tax exempt foun- dation and nOt John Q. Public, the foundation culprit needs exposure and closer supervision, Mr. Secretary? During our 1964 hearings I asked Secretary Dillon whether, during his term of office, the Treasury has, `on its own initiative, ever for- warded to congressional committees, the White House, or other Gov- ernment departments information regarding foundation activities which may be contributing to our balance-of-payment's problem. The Secretary's answer was that he didn't "know of any." Today, we are no further ahead than we were 3 years ago, in 1964, Mr.. Secretary. A quick review of the current records of on1y two of the 600 founda- dations we have under study shows that the Agricultural Develop- ment Council, Inc., of New York City, a Rockefeller-controlled foundation, made the following overseas grants, among others, in dollars during 1965 and 1966: Year Donee Amount 1965 India Society of Agricultural Economics, Bombay, India $50,000 1965 English Language Education Council, Inc., Tokyo, Japan 142,280 1966 do 169,000 1966 Indian Agricultural Research institute, New Delhi, India 47,000 1966 india international Center, New Delhi, India 10,006 1966 ` Sie Kwat Soon, Presidium of Vice Prime Minister of the Republic of Indonesia, Djakarta, 15, 6~4 Indonesia. The Agricultural Development Council, by the way, has not bee/n audited by the Internal Revenue Service since 1964. In 1966, the Pew Memorial Trust, of Philadelphia, handed $100,000 to the Asociazione per TJniversita International Degli Studi Sociale Pro Deo, Rome, Italy. Is there something I don't know about, Mr. Secretary, which puts a Rockefeller Foundation, or any other foundation, above the law? Would you agree, Mr. Secretary, that the present number and size of tax-exempt foundations dictates that consideration should be given to a regulatory agency approach for their supervision? By the way, as a footnoteto this $15,664 payment to Mr. Soen, I am informed `that Mr. Soen is something of. a `mystery man today. He was reportedly the principal economic adviser to Vice Prime Minister Djuanda who died in 1963, but since then Mr. Soen has dropped out of sight and no one knows exactly what has happened to him. Do you know anything about him, Mr. Secretary? Secretary FOWLER. No. Mr. PATMAN. Do you think, Mr. Secretary, that the extent to which tax-exempt foundations influence or control businesses, directly or indirectly, should be the object `of continuous public inquiry, so that both the stockholders, employees, and the general public have this information? Secretary FOWLER. You ask me a series of questions, you go on, and I can't keep tra'ck of them-I would like to take them one by one, Mr. Chairman. That is the only orderly way to proceed. Mr. PATMAN. I asked you things that I did not think there could be any serious question about. Secretary FOWLER. The one about the balance of payments. This is again the reflection of a complete ignorance of what is going on. PAGENO="0231" 229 Secretary FOWLER. Forces at home and abroad that are destructive of the society's values that the directors of the Ford Foundation think should be preserved. Mr. PATMAN. I have one other question about perpetuity and that is the only policy question that I want to ask at this time. It seems to me that our people have the right to expect that everyone should pay his fair share of taxes and not be allowed to avoid taxes through the device of tax dodging foundations. Hence, I believe, Mr. Secretary, that the time has arrived for the Treasury to examine criti- cally the basic question of foundations being permitted to exist in perpetuity. Mr. Secretary, since the law against perpetuities is enforced against individuals, why shouldn't it be enforced against these huge, impor- sonal foundations? The Treasury's proposed reforms of February 5, 1965, which were submitted to the Ways and Means Committee and the Senate Finance Committee, indicate that you are opposed to a limitation on the life of a foundation. Why do you favor perpetuities and object to the liquida- tion of these tax exempt titans within a reasonable period of time? Don't you think, for example, that the biggest of all foundations, the Ford Foundation, should be liquidated in some foreseeable time? Would you comment on that, Mr. Secretary? Secretary FOWLER. Yes, at some length, Mr. Chairman. The foundation report did not specifically recommend an absolute limit on the lives of private foundations. Mr. PATMAN. By the way, do you have a copy of that report that we may insert in the record? Secretary FOWLER. I would like to have it in the record. Mr. MORTON. Mr. Chairman, would the chairman yield? I have a copy here, and it is interesting that we had to send to the Ways and Means Committee to get it. Mr. PATMAN. Yes, we had them available through this committee- we did this report. Secretary FOWLER. There has been no lack of them at the Treasury Department. Mr. PATMAN. We just wanted the recommendations-not the report, yes. You have the report. We will insert it. (See exhibit No. 8, p. 1031.) Mr. PATMAN. These are available to all the members. Secretary FOWLER. The report did not recommend that a death sen- tence be imposed on foundations. It suggested a middle ground requir- ing the termination of the donor's control of his foundation after 25 years. Personally, I can see merit in the report's positions. In any event, it seems to us that termination of the life of the foun- dation itself after a prescribed period is not necessary. First, termination is not necessary to prevent foundations from accumulating income. Our recommendations in the foundation report which would require current distribution of income would maintain the benefits of foun- dation existence while assuring that charity and the other appropri- ate purposes of the foundation receive the income produced by the contributed funds. Second, termination is not necessary to prevent foundations from obtaining a disproportionately large share of our national economy. PAGENO="0232" 230 because the relevant data suggests that foundations are increasing in wealth only in proportion to the rest of the economy. While the available data is admittedly less than complete, the results of periodic surveys undertaken by the New York Stock Exchange, summarized in table 8, page 75, of the foundation report, shows that foundation ownership of total securities listed on the exchange was 2.6 percent in 1950 and the same, 2.6 percent, in 1963, with fluctuations between 2.8 and 2.5 percent during the intervening period. At the and of 1966, foundation ownership was down to 2.1 percent. Since it is reasonable to assume that foundations hold a large portion of their funds in listed securities, the New York Stock Exchange survey information reliably indicates that there have not been signif- icant changes in the relative size-the relative size, I emphasize-of foundations from 1950 to 1963. Thus, it would appear that the pro- posal for a death sentence for foundations is not necessary to prevent disproportionate foundation growth. Finally, third, termination is not necessary to eliminate any danger- ous concentration of uncontrolled economic and social power, because the larger foundations which might present this potential danger are already acting to broaden their staff and management to disinter- ested outside persons. While there may be specific instances to the contrary, the larger foundations have established independent boards of directors, hired professional staffs and accepted public scrutiny of their operations. Now, I have addressed myself to the three reasons usually advanced as to why there should be a 25-year life to the foundations and have indicated why, in view of their value as institutions in our society, we believe they should have a continuing role. Let me say, again, that private philanthropy plays a very special, a very vital role in our society, and besides providing for areas into which the Government cannot or should not advance, such as religion, private philanthropic organiztions can be uniquely qualified to initiate thought and action, experiment with new and untried ventures, dissent from pre vialing attitudes, and act quickly and flexibly. Private foundations have an important part in this work. Available even to those of relatively restricted means, they enable individuals or small groups to establish new charitable endeavors and to express their own bents, concerns, and experience. In doing so, they enrich the pluralism of our social order. Equally important, because their funds are frequently free of corn- *mitment to specific operating programs, they can shift the focus of their interest and their financial support from one charitable area to another. They can hence constitute a powerful instrument for evolu- tion, growth, and improvement in the shape and direction of charity. So run the conclusions, Mr. `Chairman, in the summary of the Treas- ury report. I would like to make several observations in the light of `the role of `these private foundations in line with what has been said. I think that they supply a very useful and necessary outlet `and supple- ment to the growing concern and role of Government at Federal State, and local levels. Mr. PATMAN. I dislike to interrupt you, Mr. Secretary, but I wanted to follow up with one question on that very point that you are touching right now, if I may do so, and that will be all the questions I want to ask. PAGENO="0233" `231 Secretary FOWLER. All right, sir. Mr. PATMAN. And that will be: In our hearings, the Acting `Corn- missioner of Internal Revenue, Mr. Harding, was asked this question right along the line you are talking about now. If every American had a tax exempt foundation, where would the federal, state and local governments obtain funds for their operations? Mr. Harding's answer was: This is a rather speculative question, Mr. `Ohairman. I am probably not com- petent to answer it, but I would assume if every American taxpayer was an exempt organizations, there would be no funds available at any of the levels for those operation's. I want to know if you agree with that ~ Secretary FOWLER. Mr. Chairman, your question `set up `a `strawman, and Commissioner Cohen will indicate that there is no possibility under the laws `as they exist today, and certainly this is a result, that Congress will not permit. You are setting up the possibility that all of the income would fit into exempt institutions and be exempt of taxes. Mr. PATMAN. Family income, Mr. Secretary, family income. Secretary FOWLER. Commissioner Cohen will deal tomorrow with the reason why that statement is a complete strawman and just draws an illusion across thi's whole subject that I think we can dispose of in the hearing t'omorrow. Mr. PATMAN. I hope you `are correct, but they have gone into 50 States with it. Secretary FOWLER. Well, the Revenue Service is `also `at work in 50 States, and I do not have any apprehensions that every American is going to have hi's family income `absorbed into `an exempt foundation. But `let me come `back to my basic point: These private institutions, `as I h'ave described, I think are `a modern reflection of something that i's very vital and important in Arneriea~ Do T'ocqueville, t'he French traveler, the French observer, whose writings and observations are well known to you, `said: These Americans are the most peculiar people in the world. In a local community in their country a citizen may conceive of some need `which is not being met. What does he do? He goes across the street `and discusses it with his neighbor. Then what happens? A committee comes into existence. Then the committee begins functioning on behalf of that need and-you won't believe this, but it is true-all of this is done without reference to any bureaucrat. So said de Tocqueville. Now, I am very much in favor of having bureaucrats concern them- selves with the problems of education, with the problems of health, with the problems of welfare, with the problems of charity, I am very much concerned that these activities at the Federal, State, and local government levels be adequately supported and organized. But I am also very much concerned that the private citizen be able to pursue his bent in dealing with these problems in thø areas where he believes that more needs to be done, or something different needs to be done; and I think the private foundations are a useful supple- mont, a desirable supplement, and, indeed, perform an essential role in the private sector in complementing the work that can be done in the public sector. In proposing a death sentence for a foundation at the end of 25 years, I think there could `be a certain analogy. It would be just as PAGENO="0234" 232 sensible to provide that a college or a university or a health organiza- tion or any organization organized to carry on a charitable educational work of that nature, or, indeed, a Government bureau be automatically terminated at the end of 25 years- Mr. PATMAN, I hope you will reexamine that statement. Secretary FOWLER (continuing). Its furniture distributed, its per- sonnel fired, its staffs dismembered, and so forth. Mr. PATMAN. I hope you will reexamine that statement. I do not believe you will agree with it. Secretary FOWLER. I will be willing to stand on it. Mr. MORTON. If the Chair will yield? Mr. PATMAN. I am going to ask that the gentleman from Maryland ask questions now, if he would like. Mr. Morton. Mr. MORTON. I am privileged to have the opportunity to meet here with the Secretary, and I hope, in reexamination of that state- ment, that he will reiterate it. I could not agree with him more. I think we are dealing with apples and oranges here. I am very much disturbed about the hearing, because we are indicting founda- tions, per se, and this to me is very uncomfortable. Let me ask you, Mr. Secretary, if, in the course of the submission of this report to the Ways and Means Committee of the House and to the Finance Committee of the Senate, have there been follow-on discussions as to whether in the near future legislation will be consid- ered that would implement the recommendations of this report? Secretary FOWLER. Yes, there have. Mr. PATMAN. In other words, this report did not end the matter as far as the relationship between the Treasury Department and the Congress is concerned? Secretary FOWLER. Not at all. As a matter of fact, it would be our expectation that our recommendation would be considered by the Ways and Means Committee in the near future. However, this is a decision ultimately for the House Ways and Means Committee. Under our constitutional setup, revenue legislation has its origin in the House of Representatives, and the timetable and schedule of such legislation are a matter for the House Ways and Means Committee to determine. This matter has been looked into by the House Ways a.nd Means Committee. The House Ways and Means Committee has elicited the comments from a variety of sources regarding the Treasury report, as I think is a preliminary to holding public hearings. Since these comments have been made and have been in hand for some time and we have all had a chance to analyze them and review our recommendations, I would think the next step would be public hearings. Mr. MORTON. We are probably going to have to close the hearing. May I ask one other question, however? In the course of developing these recommendations and this report, there seems to be a general opinion, and I think it is an erroneous opinion, that if foundations were liquidated, the Federal Government would receive a great deal more revenue because of a mysterious economic happening. Within the Treasury Department have economic studies been made that would actually reflect what effect on the Treasury of the United States would the liquidation of foundations or the cessation of not-for-profit foundations have? PAGENO="0235" 233 Secretary FOWLER. Let me give you some rough figures which I think will give you a measure of what will happen. In the calendar year 1967, the taxable income for individuals was $322 billiOn, for corporations, $73 billion. Our estimate of the income of foundations during that period was 1 to 1½ billion, the income that they earned on their properties. I think that gives you a measure, 1 to 1½ billion as against 400 billion. Mr. PATMAN. Mr. Morton has agreed to yield to Mr. Corman to make a brief comment, and then we have to go to the floor. Mr. CORMAN. Mr. Secretary, we, among other things, are concerned about economic concentration and its effect on small business which may, in reality, be in competition with foundations that are in busi- ness. Would that be a concern of your Department? Or would that lie in some other executive branch? Secretary FOWLER. Mr. Corman, the foundation involvement in business is a concern. It was the subject of intense examination by the Treasury, in the study I have referred to, and is the subject of one of the recommendations in the report. Specifically, the report proposes the imposition of an absolute limit upon the participation of private foundations in active business, whether presently owned or subsequently acquired. The recommenda-. tion would prohibit a foundation from owning, either directly or, through stockholdings, 20 percent or more of a business unrelated to the charitable activities of the foundation, within the meaning of section 501(c) (3) of the law. Foundations would be granted a pre- scribed reasonable period, subject to extension, in which to reduce their present or subsequently acquired bu~iness interests below the specified maximum limit. This is a concern of the Treasury Department and the Internal Reve- nue Service, not only in the field of foundations but as to business activities of an unrelated nature carried on by other tax-exempt or- ganizations and foundations. The recent UZay Brown case in the Supreme Court which ruled against the Internal Revenue Service in a given situation, has caused us great concern. Legislation is pending before the Congress to deal with a change in the law to, in effect, nieet the problem created by that Supreme Court decision. Mr. CORMAN. Yes. The other question is this: You indicated that one of the basic purposes of a tax-exethpt foundation is so that there can be activity in areas in which the Government should not enter, such as religion. But it seems to me that the moment you get tax exemp- tion the Government is, maybe indirectly, rather substantially in- volved in that there is revenue which would come to the Government which would be the subject of public expenditure that is not available for public expenditure but goes into an area that, as you indicated, the Government probably should not enter, and that seems to be the posi- tion of ABC in their brochures, that the people who do not like the way that the public expenditures are being made, that they can set up a tax-exempt foundation and control how the money is spent, and I assume this may be legitimately done. Doesn't that present us some problems? Secretary. FOWLER. My. assumptions and yours about the type of operation represented by the ABC are not the same, and Commissioner Cohen will deal with it. PAGENO="0236" 234 Mr. CoR~N. No, I did not say that; they said it. I did not agree with it. But that is the whole reason for their existence. They do not like the way we are spending the money. Secretary FOWLER. The motivations that cause a given donor to decide that he is going to create a foundation may be many. What the law requires is that the donation be dedicated to the types of activities prescribed by the law. Whether the donor has a motivation of doing that because he is concerned, let us say, about the field of which the foundation is dedi- cated or whether he would like to see the foundation obtain the funds spent in this particular activity, rather than to go to the Internal Revenue Service, are matters I do not think we inquire into and ana- lyze, saying, "Well, `he did it for this motive or that motive." Mr. CORMAN. Oh, no, sir. But that is my worry if he sets up a system which leaves that decision to him. Let's take the substantial taxpayer who may not' like the war in Vietnam, I take it he can set up a founda- tion. He sets it up properly and carries out the purposes required by the law and can see that his money does not come to the Federal Gov- ernment. It goes for some other charitable purpose. Is that correct statement? Secretary FOWLER. Well, I think my answer to that would be that the figures that we have that are developed in the appendix to this report, which are the most up-to-date figures we have, do not indicate any such trend. Mr. CORMAN. I do not mean to set up an unreasonable strawman. On the other hand, ABC has set it up for me. Secretary FowT~R. I think that it will be knocked down, too. Mr. PATMAN. We will have to go soon. Mr. Secretary, I have talked to Mr. Corman, and I have talked to Mr. Morton, and they do not wish to ask you to come back tomorrow for interrogation. They are willing to interrogate the members of your staff and Mr. Cohen, as you suggested. I do not want to ask you to place in the record the 25,000 founda- tions, but I do not want to make available to this coimmittee the names and addresses of those 25,000 foundations. * Secretary FOWLER. Commissioner Cohen, who will be here tomor- row to entertain you, who has the automatic data processing equipment- Mr. PATMAN. If it will be satisfactory, with you. Secr~tary FOWLER. He knows what the problems are. I will abide by his decision. Mr. PATMAN. It will be all right. There may be names we do not have. `Secretary FOWLER. It may well be. You may have the names of some people who should file tax returns who have not filed tax returns. We will be delighted to have them. Mr. PATMAN. Thank you very much for your appearance. Secretary FOWLER. Thank you, sir. Mr. PATMAN. We will look forward to having these gentlemen be- fore us tomorrow morning at 10 o'clock. The committee will stand in recess until tomorrow morning at 10 o'clock, here in this room. * (Whereupon, at 11 :15 a.m., November 15, 1967, a recess was taken until 10 a.m., Thursday, November 16.) PAGENO="0237" TAX EXEMPT FOUNDATIONS: THEIR IMPACT ON SMALL BUSINESS THURSDAY, NOVEMBER 16, 1967 HOUSE OF REPREsENTATIvEs, SUBCOMMITTEE No. 1 OP THE SELECT COMMITTEE ON SMALL BUSINESS, Washington, D.C.: The subcommittee met, pursuant to recess, at 10 05 a m, in room 2359 Rayburn House Office Building, Hon. Wright Patman (chairman of the subcommittee) presiding. Present: Representatives Patman, Corman, and Morton. Also present: H. A. Olsher, director, Foundations Study; Myrtle Ruth Foutch, clerk; and John J. Williams, minority counsel. Mr. PATMAN. The committee will please come to order. This morning we have a continuation of the hearing we had yester- day, and, first, we wOuld like to have a statement from Mr. Sheldon S. Cohen, Commissioner of Internal Revenue. Mr. Cohen, you may proceed in your own way. TESTIMONY OP SHELDON S. COHEN, COMMISSIONER OP INTERNAL REVENUE, ACCOMPANIED BY STANLEY S. SURREY, ASSISTANT SECRETARY OP THE TREASURY, DEPARTMENT OP THE TREASURY Mr. COHEN. Good Morning, Mr. Chairman. I am glad to be with you this morning to give you and up~to-date re- port on our activities as they relate to your field of interest, both in the private foundation area~ and in the more broadly based tax-exempt organization area. In the summer and early fall of 1964, former Commissioner Caplin and Acting Commissioner Harding appeaded before this subcommittee to discuss the administration of the tax laws as they may apply to tax-exempt organizations; in particular, as they apply to so-called pri- vate foundations. We ought to describe what we mean by "private foundation" since the statute nowhere defines the term. It is a term that is used and has no legal definition. By "private foundation" we mean organizations of the type described in section 501(c) (3) which are devoted to "charitable" purposes and which receive no substantial part of their support from the general public or governmental bodies. At that time it was pointed out that beginning in 1961 the Internal Revenue Service embarked on a many faceted program for strengthen- ing compliance with the tax law applicable to foundations and chari- table trusts. The major points of this program included: (1) expanding audit coverage of exempt organization; (2) greater service effort in 235 PAGENO="0238" 236 assisting exempt organizations in voluntarily complying with the law; (3) `improvement of the Service's internal controls and administrative procedures; and (4) and affirmative litigation policy designed to ob- tain judicial resolution of difficult legal issues and to give authorative guidance to field personnel in their administration of the law. Since my appointment to the office of Commissioner of Internal Revenue in J'anuary of 1965, we have carried on the pro~rain initiated by Mr. Caplin and Mr. H'arding and have tried to amplify and to un- prove on those programs where possible. I would preface my remarks on our administration of tax- exempt foundations with the assurance to the subcommittee that we are fully aware of the problems in this area, as developed `by this sub- committee, and have taken positive action to effectively deal with them. I will not comment on the hi'story of the law applicable to tax-exempt organizations or the historical difficulties of administering that law. These matters have been fully discussed in the hearings held by this subcommittee in 1964 and are a matter of public record. Many of the deficiencies of the statutory provisions we are operating under were also brought out in the Treasury Department report on private foiinda- tions. I will limit my remarks to the administrative improvements which have taken place during my tenure as Commissioner. The Service has conducted field audits of 47,754 returns of exempt organizations during fiscal years 1964-67. These audits involved 31,490 different organizations. As we discussed in the 1964 hearings, in order to select these returns for `audit many more were subject to our classi- fication pro'cedures. We estimate th'at we screen and review about 14 returns for each one chosen for field audit. Thus, approximately 500,000 exempt organization returns were screened during this 4-year period. These examinations resulted in recommended revocation of the tax- exempt status of some 930 organization's. In the area of so-called private foundations and charitable trusts, which account for fewer than 10 percent of the registered exempt organizations, we audited the books and records of 4,335 organizations during the same period. We screened about 14 times that many. These examinations represented about 14 percent of our total examination of exempt orgamzations. As a result of these audits, revocati'on of tax- exempt status was recommended in 82 cases, or about 2 percent of the total examinations. As this subcommittee knows, the examination of exempt organiza- tions is but one narrow area of a vast range of responsibilities assigned to the Internal Revenue Service. Because our resources are not suffi- cient for all purposes, we must constantly review the various alloca- ti'ons of our manpower in order to achieve the most efficient discharge of all responsibilities. To the extent that we can improve the allocation of resources to the problems of exempt organizations in general, and private foundations in particular, we will certainly do so. This is something that is always relative to `all of the problems before us that in varying degrees are not in need of `attention. In pursuing our active litigation program we have not been as suc- cessful as we would have hoped in securing judicial sanction of our in- terpretations of the law which would serve to limit the activities of an exempt organization. For example, in the Clay Brown litigation, which was heard by the Supreme Court, we lost the issue dealing with PAGENO="0239" 237 the validity of the so-called "bootstrap" acquisition of a going business by a charitable organization. A bill which would curtail this type of acquisition by an exempt organization is presently pending in the Con- gress. It is a joint effort of Mr. Surrey's staff, my staff, and the staff of the Joint Committee on Internal Revenue Taxation, in cooperation with the bar association and the accounting groups who all feel th'at this kind of activity is beyond the pale of activity for tax-exempt organizations. We are hopeful that it will be acted on promptly and favorably. We are continuing an active litigation policy in that area and have recently tried a case in the Tax Court on a similar issue in which we took the position that a so-called charitable organization which acquired a number of active businesses was not conducting its aff airs as the statute contemplated an exempt organization would. That case is now pending decision in the court. To return for a moment to our audit program, since 1964 we have been sharpening our audit guidelines on exempt organizations. Our aim is to make it easier for an agent to effeetively~ ~auciit an exempt organization with a minimum expenditure of time so that we may gain additional coverage within the limitations of available audit manpower. Four years ago we created a mandatory 2-week training course for new examiners and audit personnel engaged in the examination of exempt organizations. To date almost 500 employees of the Service have completed this course. Through this program, and our related activities and programs, we are developing a corps of revenue agents who are more familiar with exempt organizations and who are con- tributing to better administration of this particular phase of tax law. I do not intend to burden this subcommittee with statistics, but I think it puts our problems in perspective to note that in' 1964 Mr. Caplin pointed out that between 1939 and 1962 the number of "chari- table" tax-exempt organizations increased from 14,500 to 71,850. At the present time the ranks of this class of tax-exempt organization have swelled to approximately 100,000. Our files also show that the number of exempt organizations of all types are increasing at the rate of nearly 20,000 per year. Appropriations for audit manpower, however, have not increased comparably. Whatever added audit cover- age we have been able to achieve has come about through more' effec- tive use of our manpower-and this despite the complicated statutes which make administration difficult. Mr. Caplin also pointed out that between 1950 and 1962 the number of returns filed by tax-exempt organizations increased from slightly over 100,000 to over 250,000. In this past year alone we received over 309,000 returns from tax-exempt organizations. `These figures demonstrate that our administrative problems are becoming more difficult with each passing year. We are expanding the use of our data processing capabilities to help cope with the administrative problems created by the burgeoning number of exempt organizations. To this end we created an exempt organization master file (EOMF) in 1964. We presently have the records of approximately 325,000 organizations on this file. This facil- ity will give us the capacity for determining compliance with the filing requirements of the law and the means for economic and effective processing of returns. To some extent it has proved helpful in selecting organizations for audit examination. This is a developing capability and in time and with experience I am confident that we will be able 87-444-68-16 PAGENO="0240" 238 to improve substantially our internal management of our exempt organization system which `by its nature is nebulous and difficult. Although these entities pose more and different problems of admrnis- tration, our data processing history with respect to other returns fortifies this belief. As we gain experience with the use of the system, we have greater capabilities of analysis and examination. The EOMF facility is geared to identifying private foundations and should be of aid in identifying those organizations which should' be subjected to special examinations. There is a basic limitation, however. In our tax system based on the philosophy of voluntary compliance we must rely heavily on what the taxpayer (or tax-exempt organization) tells us. In the tax-exempt organization field, however, what we are told as facts concerning purpose, assets, and so forth, is not~ necessarily so important as what the organization does on a day-to-day basis. Activities as such are difficult to discern from financial statements. The best way to find out what an organization is doing is to have someone observe it in opera- tion. The point is, effective administration of the exempt organization area must be heavily based on manpower, not machine power. I do not intend to suggest that all or even a large percentage of the exempt organizations require constant surveillance. We believe our audit experience indicates rather conclusively that a great majority of the exempt organizations, including private foundations, are comply- ing with the requirements of the tax laws. In an attempt to promote voluntary compliance, the Service has, during the last 2 fiscal years, published 87 revenue rulings and revenue procedures relating to exempt organizations. In the first 4 months of fiscal year 1968 we have published 38 more rulings in the same area. The purpose of these rulings is to convey the limits of `the law to those persons involved with or planning the creation or operation of exempt organizations. The revenue ruling activity is carried out by our Assistant Commis- sioner (Technicai), all of whose employees are in the national office. In 1965, we reorganized our technical staff and in so doing, strength- ened the administration of exempt organizational work. At the present time, we have more than 100 employees in our technical organization who work exclusively on exempt organization matters. This represents the greatest allotment of technical manpower to a single area of re- sponsibility in the national office. I have only touched briefly on highlights in our exempt organization program. We feel that there has been steady and marked advancement toward achieving the goals of our program within the limitations im- posed on us by manpower and law. We will continue to pursue and refine this program. I might add that I have followed the proceedings of this subcomn- mittee with keen interest. One of the focal points `of attention in the last several weeks has been `the acquisition by grantor controlled tax- exempt private foundations of going businesses previously carried on by that grantor. In the past several years we have faced similar situations and have been successful in denying tax-exempt status to the organization. For example, in two recent cases, Ora~iiey v. Uornnrt~ssioner (20 TCM 20 (1961)) and ~Sonora Gomnwnity Hospital v. Com~irtissioner (46 TC 519 (1966)) the facts indicated that doctors had established purported PAGENO="0241" 239 charitable organizations by which they were employed to carry on activities related to their practice of medicine. In each case the tax- payers failed to show that the organization was operated exclusively ~or charitable purposes. This result was in large part dictated by the facts showing that the individual doctors themselves received sub- :stantiai benefits from the organizations they established. Without dwelling on the legal points involved, I think it fair to say that we ~anticipate equal success in denying tax-exempt status to any other organization set-up in the guise of a charitable organization but operating for the convenience of its founder. Thank you, Mr. Chairman. Mr. PATMAN. Thank you very much, Mr. Cohen. That~ is a very informative statement. We appreciate the information. I would like to ask you to break down these tax-exempt organiza- tions, with reference to foundations, the number of foundations in the several hundred thousand tax-exempt organizations. Mr. COHEN. The rough figures are approximately 42,000 or 43,000 foundations in general. The ones that we classify as private, that is, the ones controlled- Mr. PATMAN. Privately controlled. Mr. COHEN (continuing). Are slightly under 25,000. We think that that figure needs some purification, and our people have been working for the last several months and hope to be finished by the end of the year with the purification of that list. Mr. PATMAN. We want that list, Mr. Cohen. How soon can we get it. Mr. COHEN. If you would like the purified list, after we have gotten some of the bugs out of it, we probably can have it for you shortly after the first of the year. In 1964 we sent out a questionnaire to all of the exempt organizations that we had any record of and we asked them to self-classify themselves. Then, we fed this information into the computer. In studying the records, our people have determined that a number of organizations, for example; Veterans of Foreign Wars posts, have classified~themselves as foundations. It is an obvious error, and for your benefit as well as ours, we ought to purify that list. Mr. PATMAN. Yes, sir. Mr. COHEN. We could get you a record today of 325,000 exempt organizations less expensively than we can produce the smaller list, but if you want the list of foundations oniy we will need some time. Mr. PATMAN. We want the ones we are concerned .about, the pri- -vately controlled foundations. Yesterday, Mr. Morton had the floOr and he yielded to Mr. Corman. Mr. Corman, we will resume with Mr. Morton if he would like to ask ~questions at this time, and then we will continue with you. Mr. MORTON. Thank you, Mr. Chairman. First, Mr. Cohen, let me say that we are delighted to have you there. We appreciate your taking the time from what I know is a busy schedule. Is there any action that an organization must take in setting itself up as a not-for-profit foundation, or otherwise eleemosynary institu- tion with the Internal Revenue Service? Mr. COHEN. Yes, sir. Mr. MORTON. Specifically, what is that action? Mr. COHEN. The regulations provide that for an organization to qualify for exempt status it shall file an application for exemption. PAGENO="0242" 240 The application for the type of organizations which we are talking about in these hearings is called a form 1023 and is an application for tax exemption. That form requires specific information, the charter, names of the people involved, the type of activity or activities it in- tends to carry on, the bylaws, the way the State law will affect them, and so on. The organization can apply for that tax-exempt status. Generally, application is made before they begin activity. We formerly had a requirement that an organization operate for a year or more before making application, but that inhibited a great many-inhibited public organizations more than it inhibited private ones. So, we with- drew that preperformance test with the caveat that if we had any problems we would give a provisional ruling and come back and review it at the end of the year. The application is normally made some months before the organization wishes to begin activity. It is filed in our office in the locale in which the activity is to be performed, and if it is a clear-cut case our district offices are authorized to go ahead and rule. If it is a case which is out of the ordinary or unusual, it is forwarded to Washington. There is a conference procedure whereby we can re- quest additional information or the organization can request some guidance in what it can and cannot do. Eventually we will issue a rul- ing which indicates that the organization does comply with the law, and indicates what the organization must do to assure the continuance of its exempt status. Mr. MORTON. On that point, every foundation that is created is required to file form 1023. Mr. COHEN. That is right. If they do not, we presume they are not entitled to exemption. Mr. MORTON. As the result of the filing of that form, the Internal Revenue Service then makes a ruling? Mr. COHEN. Yes, sir. Mr. MORTON. Are decisions based on the application or on furthei~ investigation and conditions? Mr. COHEN. It is generally based on the application and letters of intended activity. In unusual cases we require the founders or officials of the organization to come in to discuss with us what they propose to do. Mr. MORTON. Any foundation, then, that is doing business as a foundation, that has not received that ruling and has not filed a form 1023, is operating illegally. Is that right? Mr. COHEN. The problem is that the statute is not as clear as you or I might like it. The statute and the regulations together do require this. There is no per se penalty that I can impose. Mr. MORTON. What does the statute actually say? Mr. COHEN. The statute describes those types of organizations which are entitled to tax exemption. Based on the statutory authority of the Commissioner to require returns and information, which is in the Internal Revenue Code, we have issued regulations which say that these organizations must report their activities to us. The onus that we put on them, and which requires this filing, is that our field forces will presume that anyone who has not gone through this procedure is not entitled to exemption. Therefore, if sonieone makes a contribution to them, we would normally disallow a tax deduction for that contribution. PAGENO="0243" 241 Mr. MORTON. Then, this list that you are going to furnish, pursuant to the request of the chairman, will be a list of foundations which have received this ruling and which have complied with this regula- tion. Is that correct? Mr. COHEN. Our list would only include those which have met the proper test. Mr. MORTON. Do you believe that there are many foundations or~ organizations operating as foundations under what they believe is a tax-free system which have never come to the attention of the IRS? Mr. COHEN. Not a great many. There are some, and one of the reasons for developing the list which has just recently been completed and, as I indicated, now being purified, is that we are now working printouts of that list for each of our districts. We can distribute to each district office the names of the organizations that are~ on our list which operate in their areas. The district office can verify the existence of thos~ organizations and, by various investigative techniques, verify if other organizations exist which should have filed. That kind of organization we would want to investigate. We have also instituted a program with several of the States' at- torneys general in which we have offered to suppiy them with lists of organizations operating within their States so they might aid us. This is, after all, primarily, a State responsibility, the creation of organiza- tions coming within the State law. For example, if an organization is operating under a Maryland charter, the Maryland authorities do have the basic responsibility for overseeing its activities. So, we have experi- mented, and I think, in at least two or three instances, the States have cooperated with us in making information available to the State attorney general. The Texas attorney general was the first one to ask for a list of all the exempt organizations operating in the State of Texas. We supplied him with the list and he is going to aid us in policing this field. Mr. MORTON. Mr. Commissioner, does this work in reverse? For example, we have had testimony here concerning the establishment of foundations in the State of Illinois. 1 assume that the office in the State of Illinois which would handle that would be the office of the secretary of state. Mr. COHEN. I believe so. Mr. MORTON. When these foundations are formed, is there liaison between IRS and the State governments which brings these founda- tions to your attention? Mr. COHEN. In this particular situation there was excellent coopera- tion between State authorities in both Oalifornia and in Illinois and our people beginning quite some time ago. We began getting reports about a year ago of the creation of numerous foundations that appeared to be out of the ordinary. We began a low-scale investiga- tion, because we did not realize the extent of it. Starting about 8 or 9 months ~go, we began a very intensive investigation to gather the names of any organizations that appeared to be operating in this pattern, and we had the cooperation of the State authorities in that effort. Mr. MORTON. As far as the operation of foundations, has this investi- gation brought to light considerable malpractice or practice which does not fall within the spirit of the regulations? PAGENO="0244" 242 Mr. COHEN. I would not like to get too much into the details of this particular investigation since it is still underway. I might say, how- ever, that in the case of ~ number of foundations involved in this particular operation which has been discussed before the committee for the last several weeks, we have conducted audits of the individual members of those organizations. A number of them have already agreed with us that what they did was entirely improper and have agreed to pay the tax on the income which was allegedly transferred to the foundation. We have already closed a number of cases on that basis. Mr. MORTON. The area that concerns me in this whole thing is that these foundations are providing services, travel, perhaps autornobiles,~ club memberships, and other fringe benefits that normally, if the foundation did not exist, would be acquired with after-tax incorne.~ That seems to be the real crux of this matter. Mr. COHEN. In the cases we have looked at so far, as I indicated, the taxpayer, the individual who created the foundation, has agreed with us that what he did was improper and has agreed to pay the tax on all of this income. It had been earned by him in the first instance, as if the foundation had not existed. Mr. MORTON. If the foundation has not filed a form 1023, and if it is in operatiOn without this ruling, what is the penalty that would be levied against such a foundation if this came to your knowledge? Mr.COHEN. The problem there is that our law today only has-I think it was the White Queen or the Red Queen-I was reading "Alice in Wonderland" to my child this summer, and she said, "Off with her head !" and the only punishment that we have under the present law is either to bless them or curse them. You chop off their heads or nothing. Under the foundation report, the Treasury has made recommenda- tions for imposition of a $10 a day penalty for every day that the proper reports are not filed. We think this type of penalty will go a long way toward improving compliance here. The problem here is that even with a valid foundation you sometimes get noncompliance in this area, and you do not want to deny exempt status for minor infrac- tions. When we are talking about fringe operators such as the ones we're discussing, where they are clearly beyond the statutory require- ments, we disallow the exempt status and, we disallow the deduction for any contributions made to it. In appropriate cases we may tax the income of the foundation to the grantor. He may or may not have civil penalties, and he may or may not have criminal penalties, depending on the extent of involvement. Mr. MORTON. You make an effort to recover back taxes? Mr. COHEN. Yes, sir; absolutely. Mr. MORTON. Now, let me ask you this, Mr. Commissioner: What is the annual requirement of a tax-free organization such as a foundation, as far as the IRS is concerned? Mr. COHEN. The organizations that we are talking about, are re- quired to file an annual form 990-A, which is an information return that gives us an outline of the activities that are carried on during the year. Mr. MORTON. We have received some testimony here from founda- tion operators that indicate that they do not believe that it is necessary PAGENO="0245" 243 to file an annual form 990. Is there some vagueness about the law? Is the regulation clear? Mr. COHEN. It is a rather curious thing. They may have said this, but most of the foundations we have found did ifie the 990-A's. One can speak a little more bravely than one can act on occasion, and the organizations, many of the organizations here were formed only recently. Most of them are less than a year old. So, I cannot tell you whether their 990-A is in the file or not until their year is u~, until their filing period has run its course. But several organizations like this that were organized by people who subscribe to this particular service have filed returns. Mr. MORTON. What about pension trusts and endowment funds of colleges, universities, churches, hospitals, and the like? Are they also required to file the same form? Mr. COHEN. Some are, and some are not. The general educational mstitutions are not. Pension trusts; yes, sir. We can give you, if you like, a list of those who are required and those who are not. The statute is specific on that. Mr. MORTON. For the foundations, there is no question? Mr. COHEN. No doubt about it at all. Mr. MORTON. What does this form include? What information is required? Mr. COHEN. In the general statute-and I will read what the statute says. The form is more expansive than this: The statute says that gross income for the year, expenses attributable to income, disbursements, accumulated income, accumulation at the beginning of the year, within the year and at the beginning of the year, its disbursements out of principal for this year and prior years, a balance sheet, and the total contributions and gifts received during the year. If you would like it for the record, we can submit a copy of the form 990-A. I think it might be helpful. Mr. PATMAN. Yes, sir; we would like to have it inserted `at this point, please. Mr. COHEN. We will supply one. (IRS Form 990-A appears as exhibit 9 at p. 1144.) Mr. MORTON. Mr. Commissioner, the form 1040, such as I file, in- cludes an addenda covering farm operations. It goes into great detail as to revenue and expenses of the farm I operate. Is there anything parallel to that in this form that goes into detail covering the expenses that are paid by a foundation, the principals, trustees or founders of the foundation, et cetera? Mr. COHEN. Yes, sir. I will read some of the lines: "Gross receipts, cost of operation, gross profit, interest, dividends, rents, royalties, gain from sale of any assets, other income, expenses of earning income, expenses of distributing current and accumulated income, contribu- tions, accumulation of income." The form has a supplemental schedule showing compensation of officers, other wages and salaries, interest, taxes, and rents that they might have paid. There are a number of questions on the back of the form. One of the questions relates to any benefits that the founder or any person closely related `to him might have received from the organiza- tion. If the box is checked, details are asked for. PAGENO="0246" 244 Mr. MORTON. If a foundation made a contribution to a university in any amount for endowment, for scholarship funds or for any legitimate purpose whatsoever, and a close relative of çne of the founders of that foundation or principals involved in that foundation had a son or a daughter who attended this college under some sort of special privilege, reduced tuition, or the like, would this show up on the form? Mr. COHEN. It should if they answered it properly. We have dis- covered such instances. These are prohibited transactions, and would generally cause the lifting of the exemption. The statute describes as a prohibited transaction the granting of certain types of benefits to the founder or close members of his family. Mr. MORTON. Yesterday, the Secretary discussed the report that was submitted to the Committee on Ways and Means of the House and the Finance Committee of the Senate. It apparently is the result of a great deal of work in this area. The Secretary also spoke of legislative recommendtions that were made. He also said that con- versations following that report were held with the proper people on those committees. Do you feel that there should be considerable legislative "tightening up" in this area? How do you appraise or evaluate the legislative requirements that you would like to have in this area? Mr. COHEN. I think Assistant Secretary Surrey who is in charge of the Treasury's tax legislative program can perhaps answer this better. From an administrator's point of view, the more explicit the statute and the more tools we have to work with and the more clearly the rules are spelled out, the more easily the statute is admininistered both from the governmental standpoint, and, indeed, from the private institution's standpoint. From our standpoint, we would like considerable tightening up in the area of business activity and certainly in the area of sanctions, as I mentioned. There must be some better means of controlling exempt organizations. We have a feeling-and this is a personal feeling as a lawyer and as an administrator, that the courts are somewhat liberal in their en- forcement of the cases we bring before them because the alternatives that they face are stark black or white. For minor transgressions, we are required to disallow the exemption, consequently the courts tend to give liberal interpretations to the law to cover the minor transgres- sion. That allows the next fellow who is not nearly so honest as the first one to try to take advantage of that minor expansion of the law that the courts have interpreted. To the extent that we can have rational and reasonable rules to operate under, we think that we could make our enforcement more effective with the same amount of manpower. Mr. SURREY. I might add, Mr. Morton, of course, I agree with the Commissioner, but I think there are certain abuses in this founda- tion area that even with the best enforcement he is not permitted to reach because the law does `not go that far, `and that a number of the recommendations in the Treasury's report are necessary to reach what the Treasury thinks are abuses under the law. That is not `said in relation to tIie ABC situation, which I think can be dealt with under PAGENO="0247" 245 existing law. But with respect to some of the other matters that this committee has referred to, involvement of foundations in business and the like, those matters do require legislation to be dealt with, and that is why the Treasury Department is very much interested in our recom- mendations proceeding to legislation. Mr. MORTON. `Commissioner, at your district office level, or even regional office level, do you have foundation specialists who handle the returns of tax-exempt organizations and who are really qualified in this particular area beyond their qualification in general Internal iRevenue matters? Mr. COHEN. Yes, sir. In each district office we have a group that deals with pension problems and exempt-organization problems. This is their area of responsibility. They study the exemption applications that come in. The agents in the field who look at the returns of these organizations are the agents who have been through the special train- ing course concerning exempt organizations. We do not have enough specialists yet, and we are training more. Also, the instructions to the field are: If the problem is new and unique and you think you need help, call on the national office. We have technical advice procedures whereby field personnel are au- thorized-and, indeed, are encouraged- to send the difficult problems to the national office, to the 100-man technician group that I mentioned who have a great deal of expertise in the exempt organization area. Thus, we can become aware of `the new problem nationally. This is the way we coordinate our procedures. If new problems come up, for example if this ABC problem comes up, the agent in the field will notify us immediately that this is something new, it is unique. We get a bulletin out to all of our other district offices that something out of the ordinary has been identified in one district and others should be aware of what is going on. Such a bulletin went out in this case. Mr. MORTON. To your knowledge, Mr. Commissioner, do the States which have income taxes require the same general type of reporting and ruling as far as State income taxes are concerned that you do? Mr. COHEN. Most of them do. A number of the States merely rely on our activities. But most of the States have their own supervision, and, indeed, some of them, for example Michigan, Ohio and California have a registration procedure. The Attorney General in New York is now instituting a more active program. I use those states as illustra- tions and do not intend to suggest that other states are not doing a great deal also. Those States are the ones that come to mind since they have been working with us and keeping us informed of their more vigorous activities in this area. Mr. PATMAN. Mr. Morton, would you find out if he is referring to foundation returns, now? Mr. MORTON. Yes, I think we ought to clarify this. Do the States* require the filing of annual returns by all tax-exempt organizations or just by foundations? Mr. COHEN. We are talking about 50 States, and we are probably talking about many different systems. So, it would be difficult to gen- eralize. By and large, they have some measure of control. Some have better procedures than others. Some have more effective registration systems; some less. Some States have done virtually nothing, and others have very sophisticated procedures. PAGENO="0248" 246 Mr. MORTON. In other words, there would be an advantage to set up the foundation in one State versus another, similar to the advantage in the setting up of corporations in some States as compared to others. Mr. COHEN. We have not noticed that, because I think the most effec- tive controls, at least to the present time, have been at the federal level and they are applied uniformly. I suspect, to the extent that some States are now beginning more vigorous enforcement, what you sug- gest could possibly become true. Mr. PATMAN. Will you yield there, sir? Mr. MORTON. One more question, and I will reserve the balance of my time, Mr. Chairman. Mr. PATMAN. All right. Mr. MORTON. Control activities, obviously, have been accelerated in the past few years. You have become more concerned. Has this acceleration of activity in the control of tax-exempt organi- zations, including foundations, been motivated by publicity or actions of this committee, or the chairman, or has there been a general pattern of tightening up and improving of the administrative procedures within the Service? Mr. COHEN. I think both have been contributing factors. Before World War II, we had virtually no foundations. There were a small number. It was not very popular. Advantages of these things have been pointed out. I suppose our society has, in many ways, been moving toward-at least I hope this is true-a more altruistic attitude toward life. At the same time, some attitudes may be becoming more crass. I know both of these developments are going on at the same time. After World War II `the number `of exempt organizations began to increase in an almost geometric progression. The Service began with little or no capability in this area but soon began to realize the dimensions of the problems presented by this expansion. This committee has been helpful in pointing out the problems peculiar to private foundations. We now have a fairly sophisticated knowledge of what is going on in the exempt organization universe, and we have developed a pretty good enforcement program. I will not pretend it is a perfect enforcement program. I am hoping next year it will be better, and to the extent we have greater manpower it certainly will be better. If you had said 25 years ago that we were going to have thousands of exempt organiza- tions in 1967-and I say, we have 325,000 names of such organizations on our files today-any employee of the IRS would have laughed. But it is true today, and we have to face the real problems presented `by this great number of organizations. Mr. MORTON. Thank you, Mr. Cohen. Thank you, Mr. Chairman. I will reserve the balance of my time. Mr. PATMAN. I want to just ask a few simple questions. Is it not true, Mr. Cohen, that fewer than probably 12 States have a `law requiring foundations to file any kind of a return? Mr. COHEN. There are not too many, sir. You probably have more up-to-date knowledge on that than I do. Mr. PATMAN. You can place it in the record, can you not? Mr. COHEN. Yes; we can check. Mr. PATMAN. Place the information in the record. (The information referred to follows:) PAGENO="0249" 247 U.S. TREASURY DEPARTMENT, INTERNAL REVENUE SERvIcE, Washington, D.C., December 6, 1967. flon. WRIGHT PATMAN, Chairman, ~v~bcommittee, Foandation Btndy, Select Committee on Small Bi~siness, Washington, D.C. DEAR MR. CHAIRMAN: During my appearance before your Subcommittee on November 16, 1967, you inquired as to the extent to which the 50 states and the District of Columbia have set up registration and reporting requirements that are applicable to various kinds of charitable organizations. As you will recall, I stated that all nonprofit entities being operated in the form of a corporation appeared to have a common registration requirement. My .~asic premise in this regard was that a filing of the original corporate charter or articles of incorporation with some public official has been universally made a condition to the initial creation of all kinds of corporations. Our survey con- firms this situation which is, of course, a matter of considerable importance in the present connection in view of the fact that an incorporated organization is far more common than an unincorporated one in the private foundation field. Our survey also discloses that there are only 11 jurisdictions which presently have any broad statutory programs in .force which require the trustees of an un- incorporated trust for charitable purposes to file a registration statement and periodic accountings with the state attorney general's office. As a general propo- sition, the statutes in this first principal group of 11 jurisdictions (California, Illinois, Massachusetts, Michigan, New Hampshire, New York, Ohio, Oregon, Rhode Island, South Carolina, and Washington) tend to follow the provisions of the Uniform Supervision of Trustees for Charitable Purposes Act (U.S.'T.C.P.A.) although several of them antedate the initial adoption of such Act which did not occur until 1954. In most instances, these statutes, which are generally applicable to corporate trustees as well as natural persons, provide for the exemption of several fairly broad classes of charitable institutions. Such an exemption is frequently provided for with respect to all incorporated educa- tional, religious and hospital organizations but there is otherwise very little uniformity in this first principal group as to the kinds of charitable organiza- tions so exempted. It is readily apparent that an attorney general in one of our first group of 11 jurisdictions can reasonably expect to have a distinct advantage over his counter- parts in most of the remaining states whenever he tries to assemble a useful body of enforcement information about the respective affairs of all the various affected trusts for charitable purposes which are being maintained within his state. Several other worthwhile local sources of information would nonetheless be available to an attorney general in the other 40 jurisdictions covered by our current study. it should be observed that courts of equity have traditionally entertained a wide variety of suits to enforce the proper use and application of any and all kinds of trust funds without `the benefit of any express statutory authority for such action. In any case involving a charitable trust, `the attorney general of the particular state concerned is ordinarily treated as an appropriate representa- tive of the `general public for the purpose of instituting and prosecuting such an enforcement suit. It is also an accepted general principle in `the law of decedents' estates that no testamentary provisions for the creation of a charitable trust can `become fully operative until after the will containing such provisions has been properly es- tablished by a statutory probate proceeding. A judicial accounting as to the re- ceipt and disposition of the assets in each estate is commonly required in con- nection with each probate proceeding, and a detailed study of the resulting local records could thus be expected to uncover the identity and general nature of a comparatively large number of charitable trusts. There are numerous differences in this extent to which the various states and `the District of Columbia have made statutory provision for the filing of some- `thing more than one final `accounting in connection with the administration of es- tates, or have imposed specific judicial accounting requirements for nontesta- mentary charitable trusts. Our survey indicates that 16 jurisdictions (Colorado, Delaware, Florida, Indiana, Kentucky, Louisiana, Maine, Nevada, New Mexico, New Jersey, North Carolina, Utah, Vermont, Virginia, West Virginia and Wis- PAGENO="0250" 248 consin) have statutory pi'ovisions which call for the submission of a periodic ju- dicial accounting Or some equivalent thereof at a local level with respect to one oi~ more major classe~ of ~tèstaméntary charitable trusts. Many of these same 16 jurisdictions have also imposed a similar statutory requirement with respect to all corresponding nontestamentar~ charitable trusts. In another 12 jurisdictions (Connecticut, District of Columbia, Hawaii, Iowa, Kansas, Maryland, Minnesota, Mississippi, Missouri, North Dakota, South Dakota, and Tennessee) the filing of one or more of such judicial accountings is directly provided for by statute or court rule `at certain times or under certain conditions with respect `to at least some classes of charitable trusts of both a testamentary and nontestamentary nature. There are several instances among our first 11 attorney general report states in which a broad statutory requirement for the submission of periodic financial reports to some essentially local court can be found in a state which also re- quires the filing of an identical type of financial report with the attorney general of that same state. No similar situation obtains elsewhere with the sole exception of Vermont where the pertinent statute provides for the filing of annual financial reports at the probate court level and also calls for the submission of copies of all such reports to the Department of Institutions, an independent administrative office at the state level. `Th~ere have `been some instances in which a state attorney general's office has carried on a broad supervisory program with respect to the affairs of charitable organizations without having the benefit of any special registration and reporting statute. `Such an `active supervisory program normally entails the creation of a separate charitable trust division in the attorney general's office and the assembly of factual information with regard to both the identity and current financial status of all known charitable organizations within the particular jurisdiction concerned. Both New York and Washington had already carried out an extensive amount of such work in advance of the times (1966 `and 1967, respectively) when the fairly comprehensive registration and reporting statutes referred to above were first enacted in such states. Other well-established supervisory programs of an essentially nonstatutory character are also being actively carried on at the present time in Hawaii, Pennsylvania, and Texas. A recent book, Foundations and Covernrnent, which was written by Marion R. Fremont-Smith of the New York bar (`Connecticut Printers, Inc., Hartford, Conn. 1965), contains a detailed and informed discussion of the registration and reporting requirements imposed on charitable organizations by the several states and the District of Columbia. With kind regards, Sincerely, SHELDON S. COHEN, Commissioner. Mr. PATMAN. Several years ago, former Commissioner Caplin in- formed us that there were 1,200,000 tax-exempt organizations of all types at the close of 1960. How many are there now? Mr. COHEN. We would `have to estimate how many such organiza- tions exist. Our *record's would not contain a complete list since organizations such as the Boy Scouts of America have a group ruling. Technically speaking, every Boy Scout troop is an exempt organization. Mr. PATMAN. Compared to 1,200,000 in 1960, would you pl'ace in the record the approximate number? Mr. COHEN. We can give you an approximation. We know that somewhere between 15,000 and 20,000 exemption applications are received by the Service each ye'ar. That is `a pretty solid figure. Mr. PATMAN. That would be about- Mr. COHEN. The number of registered exempt organizations grows at a rate of almost 20,000 a year. (The information referred to follows:) A comprehensive review of yearbooks, directories, and IRS records indicates there are over one million organizations exempt from income tax under sections 501 (a) and 521 of the Internal Revenue `Code. A reasonable estimate would place this universe somewhere between 1,300,000 and 1,600,000 organizations. PAGENO="0251" 249 This figure would not include certain church organizations (e.g., missionary societies, men's and women's clubs, organized Sunday School classes, etc.), and students' clubs (Science Clubs of America, honors society chapters, language clubs, etc.). The IRS Exempt Organization Master File (EOMF) contains entity records for approximately 325,000 tax exempt organizations, excluding pension trusts., This figure reflects all independent organizations exempt under individual rulings and determination letters, and subordinate organizations (other than 23,000 credit unions and Federal land bank associations) covered by group rulings which are required to file annual returns in the Form 990 series. Fraternal beneficiary associations exempt under section 501(c) (8) are not~ required to file returns and local units of such associations are no't included in the master file. Reference to IRS group ruling files and to the Encyclopedia of Associations indicates that there are approximately 144,000 local units in this category. While the master file reflects approximately 100,000 organizations exempt under section 501 (c) (3), this does not include a great majority of subordinates of such organizations not required to file returns. Reference to IRS group ruling files, the Encyclopedia of Associations, the Statistical Abstract of the United~ States, and church yearbooks and directories produce an estimate of organiza- tions in this category as follows: Churches 352, 000 Scouting organizations 298, 000~ Private schools 22,000 PTA's 55,000, Hospitals 7, 000 4-H Clubs and similar organizations 120, 000~ YMCA's `and similar organizations 4,000 Health organizations 15, 000 Community chests or funds 2, 500~ Social welfare type charities 26, 50G Education (noninstitutional) organizations 20, 000 Provisions for additions to dh~ectories 50, 000 Subtotal 972,000 Less section 501(c) (3) organizations on EOMF 100, 000 Total of 501(c) (3) organizations not on EOMF 872, 000 Adding the number of section 501 (c) (3) organizations not on th6 master ifie (872,000), the number of exempt organizations on the mas- ter file (325,000), the credit unions and Federal land bank associations (23,000), and the section 501(c) (8) organizations (144,000), gives us a revised estimate of 1,364,000 exempt organizations. However, it is reasonable to believe that there are still many organizations not ac-~ counted for. With some allowance for this latter group, it is estimated that one and a half million is a reasonable approximation of the uni- verse of tax-exempt organizations. Mr. PATMAN. Mr. Corman? Mr. CORMAN. Thank you, Mr. Chairman. Mr. Director, will you speak a moment about the family foundation? What is the test of their tax exemption? I assume that one of those tests is how they spend the money. Mr. COHEN. The code indicates that an organization operated ex- clusively for charitable, religious, or a number of other purposes, no part of the benefits or income of which inures to the private share- holder or individuai, is exempt from the income tax. The general test established by the code is that the organization must be organized and operated for charitable, religious, or educational purposes and its income must not benefit a private shareholder or individual. There PAGENO="0252" 250 is likewise a test that an organization exempt under section 501 (c) (3) must not be engaged in lobbying activities or political activities. Mr. CORMAN. The principal test, if not the sole test, goes to how they spend their funds? Mr. COHEN. That is right. But how they raise them is also considered. Mr. CORMAN. As I understand the 1023 and the 990, if one is setting up a legitimate foundation that is going to spend its funds for legiti- mate purposes specified in the code, the only consequence of a failure to file the forms is that he will have to rebut the presumption that he was not valid; is that correct? Mr. COHEN. That is correct. There is a penalty for willful failure to file returns. This is a crim- inal sanction for.willful failure to file a return. Mr. CORi~rAN. What is the criminal sanction? * We are assuming for the moment that he is complying with the law in every respect except that he has not filed a return. What is the penalty for not filing a return? Mr. COHEN. The return is different from the application. There is no sanction for failure to file the* application but there is a sanction for willful failure to file a return required by law; that is a criminal offense. The penalty specified is imprisonment for not more than 1 yea1~ or a fine not exceeding $10,000. It is a criminal sanction, and it is there- fore rarely, if ever, resorted to. Mr. CORMAN. Is there a statutory requirement to file a 990? Mr. COHEN. Yes, sir. Mr. PATMAN. Or by regulation? Mr. COHEN. There is a statutory requirement to file the 990. Mr. PATMAN. How about the application? Mr. COHEN. The application is required by regulation, but it is authorized under the code. The form 990-A is required to be filed by the code. Mr. PATMAN. Excuse me, Mr. Corman. Mr. CORMAN. This is an annual return? Mr. COHEN. An annual return. Mr. CORMAN. They cannot go longer than a year legally without some contact with IRS? Mr. COHEN. That is right. As I indicated, even these, where the advertisement said you do not have to file, the organizations that we have seen so far have filed. When you get to the end of the year and you know there is a. crim- inal sanction for failure to file, you may well be persuaded to file a return. Mr. CORMAN. Have there been advertisements concerning this? Mr. COHEN. In some of the material that I have seen that has been discussed before the committee there was a suggestion that returns do not have to be filed. Mr. CORMAN. Is it the 990 or the 1023? Mr. COHEN. I think they tried to give the impression that neither was required. * Mr. CORMAN. Might there be some efficacy in making the filing of the 1023 a condition precedent to the exemption? PAGENO="0253" 251 Mr. COHEN. I think it would be a fine idea. A good sanction there might be the same kind of civil sanction that is suggested in the Treasury report for failure to ifie, for the delinquent filing of a form 990. There it was recommended that a $10 penalty be imposed for every day that the return is delinquent, up to some maximum amount. It would certainly bring it forcibly to people's attention that one does not neglect this sort of obligation. Mr. CORMAN. If one attempted to set up a foundation and it turned out that it was not, that their expenditures were not properly exempt and that they owed taxes, is there any criminal consequence or is it all civil? Mr. COHEN. Most of the `sanctions are civil. I should mention that one of the consequences that has never been pointed out to the people who have been solicited by this recent group, one which is a very' real consequence, is that the attorney general, of almost all of the States~ has the authority, when someone abuses a charitable organization, to,' petition the court for the appointment of substitute trustees, That is,, the State attorney general can `petition a court for the abolition of the' existing board of directors or trustees and for the institution of a pub- lic board. We have had a case in Washington involving a hospital which at- tempted to distribute its assets to its founders. We are now pursuing a,' tax court case which has been tried. The attorney general of that State~ has petitioned the State court for the appointment of receivers, if you will, to recover the assets and to devote them to charitable purposes.,' This illustrates `the consequences that the people who would get in- volved in manipulation of supposedly charitable organizations might suffer-whether they recognize it or not. The possibility exists that should they abuse the trust and should the State exercise the proper authority, then the assets of the organization may be gone forever.' Mr. CORMAN. I take it that all Of these entities are a matter of public record at the State level when they are initiated? Mr. COHEN. Almost all of these organization's are operating in cor- porate form. Mr. CORMAN. Is it possible for a' tax-exempt foundation to be set up~ without there being a public record of it? Mr. COHEN. In some States, you can create a trust without a public record. We have discovered a couple of this type organization through other avenues. The first one that we discovered when an agent audited a doctor's return and saw that there was no income reported for the' last quarter of the year. The agent began to ask questionsand the whole thing unravelled. So that even though an organization may not show on State records, we may be able to find the organization through an audit of an individual's tax return. Mr. CORMAN. There was considerable advertising concerning the potential tax deductibility of benefit which might inure to the prin- cipal, such as the use of a car, the expenses of the home, if the founda- tion owner lived in his home. Is it fair to assume that no item that inures to the founder would be exempt through a tax-exempt founda- tion that would not be exempt on an individual tax return? Mr. COHEN. That is right. The rules here are the same rules that we apply across the board. If the individual receives his income by way PAGENO="0254" 252 of certain noncash benefits it is, nonetheless, income. In the two cases that I mentioned in my opening statement, the Cranley case and the Sonora case, the courts there found benefits inuring to the founder of the organization and just threw the whole thing out. Mr. CORMAN. So that as far as you can see-and as far as I can see- the only advantage of the foundation to the individual, assuming that it is legitimate, is that he gets around the percentage limitation that he is allowed as an individual for charitable contribution? Mr. COHEN. Well, if he devotes the assets to charity, he can take a deduction for assets contributed; yes, sir. If there is income flowing from those assets which is permanently devoted to charity, fine. That is what the law contemplates. There may be some advantage to that. Mr. CORMAN. As an individual, what is his limitation? Mr. COHEN. The limitation is in most cases 20 percent of the individ- ual's adjusted gross income for the year; In the case of contributions to certain types of charitable organizations, for example, educational organizations, the limitation is 30 percent of adjusted gross income. Mr. CORMAN. He can give that 30 percent of his gross-If he sets up a foundation there is no limit? Mr. COHEN. He is still limited in the number of dollars he can con- tribute to the foundation and deduct for income tax purposes. If the foundation has income, separate and apart from his own income, then the foundation, yes, sir, can have income of any amount without pay- ing tax. Mr. CORMAN. He can become an employee of the foundation, I take it. Let us assume for the moment that the doctor is trying to do this thing legitimately and he makes a hundred thousand dollars a year gross. Can his patientspay the foundation? Mr. COHEN. I think when we are talking about that kind of activity we are not talking about a reality. If the foundation's principal pur- pose is running a medical practice, it is not exempt from tax. Its prin- cipal purpose has to be an exempt purpose. So, you start from a falli- cious assumption and your result is a fallicious result. These people just assumed the fallacious assumption. Mr. CORMAN. That is very interesting. Mr. COHEN. If you were to tell me that you would contribute Gen- eral Motors stock, or the stock of a closely held company, to a founda- tion, the foundation can receive income from those assets without present limitations. There are ways it can be done. But you have given up your assets. You do not get them back. Mr. CORMAN. You do not see any possibility of their being able to legitimately create a foundation to absorb the income from personal services of a professional man? Mr. COHEN. I have not seen one yet. Mr. CORMAN. Hypothetically under the code? Mr. COHEN. I do not think so. Mr. CORMAN. I am assuming for the moment that everything else is proper-he really does devote all of that income to the foundation and the expenditures are proper under the code. Mr. COHEN. The end function can be charitable and the foundation can still be nonexempt, because its principal purpose is carrying on a PAGENO="0255" 253 business. The fact that I, as an individual, decide to devote 70 percent of my income to charity, that does not* make me a charitable organization. Mr. CORMAN. Is it fair to say that people are more altruistic before tax dollars than after tax dollars? Mr. COHEN. In most fundraising activities, in most communities, there is a good deal of social pressure involved here, also. Charities keep telling us that without the tax deduction they would have a dif- ficult time raising money. Mr. CORMAN. Yes. Mr. SURREY. If you will look at the percentage of income, national income, going to charities over the years, that percentage is amazingly constant regardless of the ebb and flow of the tax rates. Mr. COHEN. There are social motivations here beyond the tax moti- vation. If you are talking about an individual situation, it is somewhat different. Mr. CORMAN. What is the total tax base lost? Mr. COHEN. I think the amount of charitable deductions shown on returns is about $10 billion. I can give you the exact figure, but it is close to $10 billion. Mr. CORMAN. Would you speculate as to what income bracket that would generally fall in? In other words, if you took it across the board, where would you windup? Mr. COHEN. That is difficult to answer. In our compilation of the statistics of income, we have charts which would show by income class the dollar amounts of contributions. I would not like to speculate, but I think you would find, as with all things, cash contributions are made by people in all income classes. If you are talking about property contributions, then you are talking about the people in the middle and upper income brackets. Mr. SurnmeY. This is for 1962, and it is probably the same now. Then, the figure was $7.5 billion. Of that $7.5 billion, a billion dollars was from the group under $5,000. Nearly $3 billion in the class of $5,000 to $10,000, and a billion seven in the $10,000 to $20,000 class, and then about $800 million in the $20,000 to $50,000 class; then about $500 million in the $50,000 to $200,000 class; and then $200 million in the $200,000 to $1 million class, and $90 million over $1 million. So, the large bulk comes from below $10,000, which indicates in large part that a good deal of giving is unrelated to the tax inducement, since oniy the very large contributions are affected by the difference be- tween before-tax dollars and after-tax dollars. Mr. CORMAN. Trying to extrapolate those figures, you can figure a third of that $10 billion is lost taxes? Mr. CohEN. I think it would be slightly less than that. We could give you an estimate of that. Mr. CORMAN. It would be interesting to know. Not an exact figure but an estimate of the tax lost, and the tax base lost, in the last fiscal year that is available. Mr. COHEN. The latest statistics of income would be for 1965. Mr. CORMAN. That would be interesting to have. Mr. PATMAN. That may be inserted at this point. (The figures referred to follow:) 87-444---68------17 PAGENO="0256" 24, 051, 665 9, 831 319,519 867,973 1,427,592 1,963, 363 2, 507, 322 2,781,854 2,757,311 2, 407, 380 1,906, 584 4,645,655 1, 190, 218 1,079,926 151, 958 33,681 1,037 461 $7, 897, 858 725 35,190 119, 849 236,370 356,757 500,283 605,392 655, 577 624,600 548, 614 1,629,278 609, 562 987, 473 401, 686 392, 845 72,898 120, 759 Mr. CORMAN. I have no further questions. Mr. PATMAN. I would like to ask some questions. Maybe you will have some by the time I finish. Mr. CORMAN. Thank you, Mr. Chairman. Mr. PATMAN. Mr. Cohen, the IRS assessed five of the foundations in our study that we exposed about $28 million. You recall it. Three of these five foundations have been in the Tax Court for 2 years here in Washington. I understand that the delay has been clue to IRS. Is that correct ~ Mr. CohEN. I do not know that that is the case. I can find out from the Chief Counsel's office. Mr. PATMAN. You may extend your remarks in the record. (The information referred to follows:) DECEMBER 6, 1967. Re David, Josephine & Winfield Baird Foundation, Inc., Docket No. 7244-65. Winfield Baird Foundation, David G. Baird, Trustee, Docket No. 7245-65. Public Health Foundation For Cancer and Blood Pressure Research, Inc., Docket No. 3034-65. Hon. WRIGHT PATMAN, Chairman, Subcommittee No. 2, Foundation Study, Select Committee on Small Business, House of Representatives, Washington, D .C. Dear Mr. CHAIRMAn: At the hearing before your Subcommittee on November 16, 1967, you requested information as to the causes of delay in litigation in three of five foundation cases. Mr. harry Olsher subsequently indicated to a representa- tive of the Chief Councel's Office that the above-designated cases w-ere those to which you were referring in the discussion shown on page 530 of the transcript of the hearing. On August 4, 1965, letters were sent to the above Baird Foundations revoking their exempt status for the years 1960 to 1964, inclusive. Jeopardy assessments were made against the two Baird Foundations for these years. Statutory notices of deficiencies were issued to the Baird Foundations on October 1, 1965 and petitions therefrom were filed with the Tax Court on Decem- ber 30, 1965. For the Winfleid Baird Foundation, the petition was executed by David G. Baird, Trustee, and for the David, Josephine & Winfield Baird Founda- tion, Inc., the petition was executed by David G. Baird as President. The peti- 254 The following chart indicates the amount of charitable contributions claimed by individual taxpayers, separated Recording to the level of the adjusted gross income of the contributor. These statistics were taken from "Statistics of Income-1964-Individual Income Tax Returns" which contains the most recent information on this subject. Contributions Adjusted gross income classes Number of returns Amount (thousands) ~ Total, taxable returns Under $1,000 $1,000 under $2,000 $2,000 under $3,000 $3,000 under $4,000 $4,000 under $5,000 $5,000 under $6,000 $6,000 under $7,000 $7,000 under $8,000 $8,000 under$9,000 $9,000 under$10,000 $10,000 under $15,000 $15,000 under $20,000 $20,000 under $50,000 $50,000 under $100,000 $100,000 under $500,000 $500,000 under $1,000,000 $1,000,000 or more PAGENO="0257" 255 tioners were not represented in the Tax Court by an attorney of record at that time. On October 27, 1966 and August 8, 1967, conferences were held by the Service with Mr. Norman Raskin, an employee of the foundations. Atthe first conference in October of 1966, Mr. Raskin made certain contentions which necessitated a further examination by revenue agents. This examination was completed in May of 1967. At these conferences, Mr. Raskin was informed that we felt that it was almost impossible to discuss the legal questions involved and prepare the cases for trial under the rules of the Tax Court unless the petitioners were represented by counsel. These cases were first set for trial by the Tax Court on March 6, 1907 but were continued on the agreed motion of the parties due to the supplemental investiga- tion that was being made at that time. Under date of September 5, 1967, the Tax Court set the above cases for report as to their status at the New York session beginning December 4, 1967. It was not until September 15, 1967, that the petitioners employed counsel and he entered his appearance as attorney of record. At the report on the cases on December 4, 1967, we intend to request the Court to place the cases on a trial calendar in New York City. The Public Health Foundation For Cancer and Blood Pressure Research, Inc., Docket No. 3034-65, is related to several other cases now pending before the Tax Court. These other cases are: The Rock Ledge Institute, Inc., Docket No. 3035- 135, Falmouth, Ltd., Docket No. 3036-65, James H. Rand, Docket No. 4662~-65, Florida Oceanographic Society, Inc., as transferee of Public Health Foundation, Docket No. 2688-05, Evelyn H. Heerman, Docket No. 2950-65, the Estate of Ray- mond E. Hackett, et al., Docket No. 1441-05, and Winfred C. Hoyt, et ux, Docket No. 3085-65. Petitioners in Docket Nos. 2688-65, 1441-65 and 3085-65 have re- quested trial in Miami, Florida Docket No. 2950-65 is calendared for report to the Court on February 12, 1968. The statutory notices of deficiency were issued to the taxpayers in Docket Nos. 8034-65, 3035-65 and 3036-65 on March 5, 1965 and petitions therefrom were filed with the Tax Court on June 1, 1965. The respondent's answer in Docket No. 3035- 65 was filed with the Court on July 21, 1965. On August 2, 1965, the Court granted the respondent's motion to extend time for filing answer in Docket No. 3034-65 from the due date of August 2, 1905 to September 15, 1905. On August 3, 1965, the Court granted a similar motion to extend the time for filing answer in Docket No. 3036-65. The reasons for the motions were the substantial deficiencies in- volved in the two cases and the additional time needed to assemble the necessary data essential to preparing detailed affirmative pleadgings. On September 13, 1965, the respondent's answers in Docket Nos. 3034-65 and 3036-65 were filed with the Court. The petitioner's reply in Docket No. 3036-65 was filed on October 25, 1965. On October 8, 19135, the petitioner in Docket No. 3034-OS filed a motion to re- quire a more definite statement of affirmative allegations in answer, and on the same date filed a motion to extend time for filing reply pending disposition of motion to make more definite and certain. The latter motion was granted by the Court on October 11, 1955. The Court set a hearing on the motion for more definite statement for December 1, 1965, and provided for "proper amended pleadings" to be filed by November 17, 1965. On November 12, 1965, the Court granted the respondent's motion for exten- sion of time to December 22, 1965, to file amended pleadings and for continuance of hearing to January 12, 1966. The basis stated for the requested extension was the complexity of the transactions involved, as well as the minute detail requested by the petitioner. On December 10, 1905, an amended answer was filed in Docket No. 3034-65 and because of that filing, the Court, by Order dated December 23, 1965, denied the petitioner's motion for more definite statement. A reply was filed by the petitioner on January 28, 1966. A statutory notice of deficiency was issued to James H. Rand for protective purposes and is a duplication of the liability asserted in Docket No. 2950-65. In- asmuch as Mr. Rand was outside the United States at that time, the petition was governed by the 150-day filing requirement and was filed with the Gour:t timely on July 30, 1965 (Docket No. 4662-65). The respondent's answer thereto was filed on September 23, 1965. On October 8, 1965, petitioner filed a motion to require a more definite state- ment of affirmative allegations in the answer, as well as a motion to extend time for filing a reply pending disposition of the motion to make more definite and PAGENO="0258" 256 certain. The latter motion was granted by the Court on October 11, 1965. Hearing on the motion for more definite statement was set by the Court for December 1, .19G5, with November 17, 1965, being the due date for the respondent to file amended p1eadings.~ * On December 1, 1965, the respondent filed a notice of objection to the peti- tiOner's motion for more definite statement, alleging, in effect, "that the affirma- tive allOgátions of the answer" were adequate. On December 1, 1965, a hearing on the petitioner's motion and the respondent's notice of objection was held before Judge Dawson in Washington. Judge Dawson granted the petitioner's *motion and allowed the respondent 60 days within which to file an amended answer, as evidenced by an Order entered on December 1, 1965, extending the time to February 1, 1966. On February 1, 1966, the respondent's amended answer was filed with the Court, and the petitioner's reply thereto was filed on March 11, 1966. It was not until March 11, 1966, that this group of cases was, in its entirety, at issue. Henceforth, all action taken thOreafter relates to the entire group of cases unless otherwise specified. In spite of efforts on the part of the Offices of Regional Counsel and the Appellate Division, a joint settlement conference with the various attorneys and petitioners involved in these cases could not be arranged until May of 1966. On May 12 and 13, 1966, a settlement conference was held in Docket Nos. 3034-65, 3035-65, 3036-65 and 4662-OS. That conference was, to a large extent, exploratory in nature to discuss with petitioners' attorneys the adjustments made in the statutory notices of deficiency and the bases therefor. It was agreed at the end of that conference that a subsequent conference would be scheduled after further review of the approximately 300 or more exhibits for the purpose of tracing the numerous transactions involved in these cases through the books and records of the various organizations involved. The conference in Docket No. 2688-65 was held in May of 1966, and it was agreed that action in that case would be postponed until such time as the trans- feror case of Public Health Foundation, Docket No. 3034-65, had been disposed of. A further settlement conference was set in Docket Nos. 3034-65, 3035-65, 3036-65 and 4662-65 for the week of October 24, 1966. That conference was held on October 27 and 28, 1966. The transactions involved in these cases were at that conference discussed at greater length and in greater detail, with the petitioners being fully advised as to the bases for the adjustments. A. further conference was held in December. Certain major issues were again discussed, and the petitioners made an informal settlement proposal of these cases. The multiplicity of petitioners and their several representatives, the complexity and number of transactions involved, together with the multitude of books and records, and need to agree on the facts to be stipulated in event of trial, all have contributed to the time required to reach the proper decision regarding settlement or trial. On January 10, 1967, the petitioners' settlement proposal in Docket Nos. 3034-65, 3035-65, 3036-OS and 4662-65 was transmitted to the Appellate Branch Office, Miami, Florida. On January 30, 31, and February 1, 2 and 3 of 1967, dis- cussions were held with petitioners' counsel on the various issues involved in these cases. It was agreed that representatives of the parties would jointly examine the documents and records in the cases for the purpose of evaluating the petitioners' setlement proposal. Due to various other matters involving the convenience of both parties the representatives were unable to meet until October of this year. For a two-week period of October 16 through 27, 1967, repre- sentatives of the petitioners and the Service met for the purpose of evaluating these cases from both settlement and litigation aspects. A further conference in Docket Nos. 3034-65, 3035-OS, 3036-65 and 4662-65 has been set for December 6. 1967, at which time the petitioners' attorneys will be advised of the Service's view with respect to their settlement proposal. Throughout the entire history of these cases (the Public Health Foundation group), all of the petitioners' representatives have been thoroughly and com- pletely advised as to the status of the cases insofar as the consideration being given by the Offices of Regional Counsel and the Appellate Division. These cases have not appeared on any trial calendars. They have been reported as "not ready" by all parties concerned. I trust the foregoing answers your inquiries as to the status of these cases. Sincerely yours, SHELDON S. COHEN, Commissioner. PAGENO="0259" 257 Mr. COHEN. Generally, that type of case involves complex issues and a serious attempt is made by the parties to stipulate as many of the relevant facts as possible. The Tax `Court likes to get the case as clean as it can before trial, and requires stipulation and agreement of f acts. That, usually, is a long, ardous process when dealing with a group of attorneys. But we will find the exact reason for you, sir. Mr. PATMAN. The number of employees necessary to properly service and police these mftllion to a million and a half tax-exempt: organizations and foundations must be a tremendous number. How many would you say actually are required to properly police them? Mr. COHEN. Any figure that I give you is purely speculative. It is a question of what kind of organization we are talking about, what degree of supervision one needs. Mr. PATMAN. Depends upon the category? Mr. COHEN. I can tell you right now, every year for the last 3 years, I have gone to the Appropriations Committee, and I have asked for an increase in the number of revenue agents for `this and other areas.' Every year the committee has granted me some increase, but the num-, ber has been vastly smaller than the number that I think is required to' do the job. Mr. PATMAN. How many full-time employees do you have in the,' tax-exempt organization branch now? Mr. COHEN. In Washington? Mr. PATMAN. Yes, sir. Mr. COHEN. One hundred. That is, 100 of the 700 that exist in that whole organization. There are 700 employees in the national office in the technical organization, and 100 of them are involved in this one area, the largest single commitment of manpower. Mr. PATMAN. 700 in all? Mr. COHEN. Yes, sir. Mr. PATMAN. In the tax-exempt branch? Mr. COHEN. One hundred out of the 700. There are 700 people in that technical organization. Mr. PATMAN. I understood that the 700 relate to tax-exempt organizations. Mr. COHEN. The 700 relate to all of the rulings of any kind, and over 100 are devoted to this one area. Mr. PATMAN. Do you not think that that is a rather small number~? Mr. COHEN. When you think that 700 persons are devoted to all of the technical areas, covering the thousand pages of statutory material in the code, and one-seventh of those are devoted to the area covered by 10 pages of code, why, I think it is a fairly large commitment of manpower. Mr. PATMAN. It is not meaningful to me about pages of code, because one law can be rather long and not have too much in it, and another law can be `short and be pretty meaningful. Mr. COHEN. In your million figure, you are probably talking about thousands of organizations of one kind of denomination of church and thousands of another kind of denomination of church, and thousands of Boy Scout tr'oops, hundreds of secondary schools, hundreds of DAR chapters, Veterans of Foreign Wars posts, American Legion posts. This kind of organization requires little or no supervision and presents no problem. The category that you and I are generally talking about is PAGENO="0260" 258 a very limited category. I indicated we have picked up and looked at a half million returns involving foundations in the last 4 years. Mr. PATMAN. How many peopie do you have investigating, or called investigators or some name similar to that, to see if these foundations are doing their job properly or improperly? Mr. COHEN. As I indicated, we have trained 500 revenue agents specially for exempt organization work. Mr. PATMAN. Are they all working for you full time? Mr. COHEN. Every revenue agent has some knowledge of this par- ticular area. We try to train enough specialized manpower so that when we have a concentration of these organizations or where we have specialized problems, the personnel with specialized training can be used. We are going to increase the number of specially trained people this year. Any one of our 14,000 or 15,000 revenue agents is capable of look- ing at one of these organizations and can be called on if the need is there. Mr. PATMAN. I am sure that is correct. But I was just wondering how many actually had surveillance. Mr. COHEN. In effect, these 500 people are specially trained to do the job. Mr. PATMAN. In other words, they are dealing with 25,000 founda- tions, and also all the others? Mr. COHEN. Some of the others, yes. Mr. PATMAN. Some of the others. Mr. COHEN. When you look at it in terms of 14,000 revenue agents in charge of 72 million individuals `and about 2 million corporations, the allocation manpower to exempt organizations is probably greater. Mr. PATMAN. Suppose a foundation has one or more people on the payroll and their titles were a little cloudy, and you could not tell what they were doing, and they are in politics. How do you find out whether they are working in political campaigns? Mr. COHEN. We get `a lot of intelligence from each of our district officers around the country who `survey the newspapers each day to see what might be of interest. If you see someone engaged in politics and know his relationship with an exempt organization, you get a little worried. That might signal an audit. Mr. PATMAN. You would not want to rely on that means of enforce- ment, would you? Mr. COHEN. We have revenue `agents out in the field who inquire into the activities of the organizations in their jurisdiction. A number of the organizations whose exemptions have been lifted during the past few years were found to be engaging in lobbying or engaging in polit- ical activities which is beyond the pale. I can't say we have caught every organization which has done so, but we are alert to the problem. We welcome any help that anybody can give us. Mr. PATMAN. I wonder if you are alert to this area, where a founda- tion is being used to even pay the donor's alimony to ex-wives? Mr. COHEN. I think there is a particular case that you have in mind, which is in litigation. There a foundation was used for that purpose. Mr. PATMAN. I was discussing that with a foundation man the other day, and he said that he knew where one man in a foundation was pay- ing five wives. PAGENO="0261" 259 Mr. COHEN. We found the first one you mentioned, and if you sup- ply the name of this other one to me, I would like to look into it. Mr. CORMAN. Before we leave this area of politics, you must have some difficulty in deciding whether or not an activity is politics or whether is is education in patriotism. Mr. COHEN. It is not the easiest job in the world. Mr. CORMAN. For the record, could you give us some idea of just what you look at? Mr. COHEN. The question is really whether it is an action organi- zation. If it is an organization, for example, that invites people of all stamps of political opinion to come and discuss issues with it, that is one thing. If it is an organization that takes a position on legislation and says we advocate this legislation or that legislation or this view or that view, that is clearly lobbying activity or clearly political activity. If the organization endorses a candidate, that is clearly a political activity~ There are other areas where it becomes more of a judgmental factor. In one case we had a group of lawyers sit down and read everything that had been written by or about the organization, view every film that it had ever distributed, review every radio and TV pronouncement it had sponsored, and weigh all of this against the statutory requirements. It is a difficult job and requires an awful expenditure of manpower. Would that the Congress give us a clearer test? Mr. CORMAN. If we take the case that you have mentioned where you have a tremendous amount of investigation, if you determined from that, that all of the activity at one end of the spectrum of politics, whichever one it might be, then would that cause people to lose their tax-exempt status? Mr. COHEN. Yes. The more troublesome case involves lobbying ac- tivity which under the code, must be measured in terms of substan- tiality. When that provision was before the Congress, Senator La- Follette in clear and undeniable terms said that this was going to create administrative problems, and that Congress ought to deny exemptiOn to any organization which gets into lobbying to any extent-not to, a substantial extent-to any extent. Congress chose to adopt the sub- stantiality test. It does give us problems. Mr. CORMAN. Are there pending suggestions for statutory change concerning that aspect? Mr. COHEN. Not at the moment. Mr. PATMAN. Now, you mention on page 3 of your statement about revocations being recommended. What happened to those recom- mended revocations and to whom was the recommendation made? Mr. COHEN. Well, the District Director has recommended the revo- cation of exempt status. In each of the* cases the District Director served a notice on the organization. Mr. PATMAN. To whom did he make the revocation recommendatiOn, to a superior officer? Mr. COHEN. The procedure runs like this. The agent reviewing the organization reaches what to him is the proper determination. This decision is reviewed by his immediate supervisor, and that goes to the District Director. Then, assuming they all agree that exemption should be withdrawn, the organization is so notified. The notice advises the organization that we propose to deny it exempt status as of whatever PAGENO="0262" 260 given date it might be, and it has certain appellate rights, administra- tive appellate rights. Mr. PATMAN. In the courts? Mr. COHEN. Both administrative, and in the courts. Mr. PATMAN. But they have got to pursue their administrative rights first. Mr. COHEN. That is right. I was in error a minute ago. The District Director does not get involved in the proposal to deny exempt status. It is the supervisor who authorizes this. When the organization is notified of the proposal to revoke its exempt status it has two levels of appeal. An appeal may first proceed within the district office, and then on to the national office. If the organization is still unsatisfied, it can appeal to the courts. Mr. PATMAN. On page 4, you state that 82 cases were recommended for revocation. Now how many of those 82 cases stood up? Mr. COHEN. Most of them are still pending. The process is over a 3-year period here. Many of those cases are within the last year or two. Mr. PATMAN. We do not know where we stand on it. Mr. `COHEN. I can tell you how many final revocations there were. Mr. PATMAN. Tell me that. Mr. COHEN. I do not have the precise figure at this moment. Mr. PATMAN. Put them in the record, of the 82 how many are final and how many are pending. (The information follows:) LT. S. TREASURY DEPARTMENT, CoirMIssIoNER OF INTERNAL REVENUE, Washington, D.C., December 8, 1967. Hon. WRIGHT PATMAN. Chairman, Subcommittee, Foundation Study, Select Committee on Small Business, Washington, D.C. Dear Mr. CHAIRMAN: During my appearance before your Subcommittee on November 16, 1967, you asked for the final action taken on the 82 cases involving recommended revocation of exempt status arising in fiscal years 1964-1967. We have been unable to assemble the data you wish for the 32 cases which arose in fiscal year 1964. Of the remaining 50 cases (fiscal years 1965-1967), 28 resulted in revocation of exempt status, seven are presently pending in the courts or National Office, ~nd 15 were closed without denial of exempt status. With kind regards, Sincerely, SHELDON S. COHEN, Commissioner. Mr. PATMAN. On page 3, line 5, of your statement, in your reference to audits, you refer to fiscal years 1964-67. Do yo mean the 4 years, 1964 through 1967, or 3 years, 1964 to 1967? Mr. COHEN. I think 4 years. Mr. PATMAN. Three years; yes. In the last paragraph of page- Mr. COHEN. In 1964, we were just getting the program underway. Mr. PATMAN. Just getting it underway. In the last paragraph of page 3 of your statement, you say that the IRS' audited the books and records of 4,335 organizations and chari- table trusts. Were these field audits, Mr. Cohen? Mr. COHEN. Everyone of them. Everyone of them were field audits; yes, sir. I would say that this is the only area that we use solely field audits. ~We do not use office audits. PAGENO="0263" 261 Mr. PATMAN. How many field audits of foundations and charitable trusts, did the IRS conduct in each of the fiscal years 1964 through 1967? Mr. COHEN. You want the breakdown? Mr. PATMAN. That is foundations and charitable trusts. Mr. COHEN. The 4,300 is the total. Approximately 1,200 a year. Some years it is higher and some years it is a little lower. Mr. PATMAN. On page 3, the last paragraph of your statement, you say that private foundations and charitable trusts account for fewer than 10 percent of the registered exempt organizations. How do you know that foundations and charitable trusts account for fewer than 10 percent of the registered organizations? Has the IRS separated the foundations and charitable trusts from the other exempt organizations and counted them? Mr. COHEN. Yes, sir. Our exempt organization master file contains records on some 325,000 organizations. Of this total, approximately 25,000 are classified as private foundations. Mr. PATMAN. Now, with respect to this organization ABC, Ameri- cans Building Constitutionally, I will not ask you to disclose anything that would be harmful to you in your investigations which are being pursued now, but there are no doubt certain things you could probably tell us about and see if it coincides with the information we have. The information we have is that this organization first started over in Barrington, Ill., in about the spring of 1966-that is when there was talk about it. Mr. COHEN. It began in the summer of 1966, we think. Mr. PATMAN. And they began to have meetings of people who were affluent and had more than just the average income. The low-income group, they could not appeal to them because they could not make any irofit out of it. But, people making large salaries who had large incomes, they could be appealed to this way. We were told that they would start out by asking all the affluent people in that area to come to a certain meeting, very secretive, closed doors, nobody could get in unless they were identified. And, then, when they got in, they were given this sales talk, about how they could save taxes, if they would follow the recommendations of the ABC official and for $1,000, to $1,050, they would give them the first 30 hours of a pep talk or sales talk to try to convince them that they should become members. Does that coincide pretty well with your information? Mr. COHEN. That is the general pattern. Mr. PATMAN. They had 30 hours of-call it brainwashing, or what- ever you want to call it-of pitch from their salesmen about how they can save taxes. We would all agree that you are not expected to pay taxes that you are not legally required to pay. They said you can avoid taxes legally under the Constitution, and that is where they got their name, Americans Building Constitutionally. They say they are going according to the Constitution. If you want to go further, after the $1,050, they will take your lawyer and put him in a room and they will take all the lawyers at the same time for $4,050. Mr. COHEN. You know, Mr. Patman, I practiced law for a little while, and I think you could go to almost any reputable law firm and get a first-rate charter drafted for less money than any of these fees. PAGENO="0264" 262 Mr. PATMAN. I imow, but this is a kind of peculiar organization on a high-plane pitch, or bio money. After they got the $4,050, they were told that in order to be ~ull-fledged members they had to pay the ag- gregate of $10,500. Obviously, you would not get too many people in that, but they got quite a few people. Mr. COHEN. We have not found very many who went that far. Most of them were at the lower level. Mr. PATMAN. But they were promised: "If you bring in your neighbors who are in a position to take a membership and he pays us$10,500, we will pay you your $10,500 back." Mr. COHEN. It was not quite that way, as I understand it. They would apparently pay the original subscriber some portion of the fees collected from the member he brings in. Mr. PATMAN. Pay a portion of it back, and if you brought in two members, maybe he would get the whole amount back. Any way, they had an appeal, and it started over there, and they went to Barrington and put up their national office. They had quite fine headquarters over there. Have your agents reported to you? Mr. COHEN. Our agents have been there. I have not asked what kind of building it is. That kind of detail I was not concerned with. Mr. PATMAN. Anyway, it is a place that would impress you as being very important, from what I have been told. The founder of this plan, Mr. Walsh, started it in 1964, with the answers to questions: that were given to us by the IRS showing that certain tax exemption was legal, and so forth. He started from there and built it all up and put it in a package. Mr. COHEN. I think one of the things that has occurred here is that when one takes statements people make in isolation and lumps them with other statements that other people have made at other times, one comes to an illogical result, and, perhaps, they realize this proNein now. Also, the fact that a court would allow a foundation to do one thing and another one to do one other thing, and a third one to do another thing, and a fourth one to do a different thing does not mean any court will allow a single foundation to do all of them. Mr. PATMAN. Yes, sir. Now, Mr. Walsh, they did not put him in the foundation; he is not in the foundation. They bought his package; he has a contract. with them to pay back certain fees and take care of him that way. But he does not belong to the foundation. Of course, the `Wall Street Journal had some very interesting arti- cles about Mr. Walsh, and I asked Mr. Hayes if he investigated Mr~ Walsh before he accepted that package. He said that he did not investigate Mr. Walsh at all. Obviously, from the disclosures made by the Wall Street Journal, if Mr. Hayes had known all that he probably could not have accepted it. But at the same time, a lot of people have been out a lot of money. Now, suppose this results in it being just a big fraud and these people are being robbed or being defrauded of their money, are you going to make recommendations to the local district attorneys and to the Department of Justice? Mr. C0nEN. The attorney general, for example, in California, has already begun some independent investigation in which we are co- operating. We would welcome the cooperation of the other local PAGENO="0265" 263 authorities. Yes, sir; we would certainly hope that the appropriate~ local authorities would look into this scheme with us. Mr. PATMAN. Thank you,sir. I have three or four written questions I want to ask you. By letter of September 6, 1967, we asked the Internal Revenue Service-I should say that the letter is dated September 6, 1967. We asked the Internal Revenue Service to furnish us the names and ad- dresses of 800 members of ABC as well as copies of their applications for Federal tax exemption. About 7 weeks later, by a letter of October 23, 1967, the Internal Revenue Service, informed us that it had "not yet been successful in identifying the 800 members." How much closer are you in providing us the names and addresses' of the members of the ABC now, Mr. Cohen? Mr. COHEN. We have had a pretty active investigation going on for 8 months. Before that we were some 3 or 4 months in laying the groundwork for that investigation. Many organizations are con- cerned. I don't think there is anything like 800 members. There may be, but we have yet to discover that many. We have leads to a great many organizations. They are part of our active investigation. I d& not think it would be appropriate to make those names public. If, on a confidential basis, you or Mr. Olsher would like to discuss these names, I would be glad to discuss them. But I do not think we ought. to supply the names at this point in the investigation. Mr. PATMAN. We will accept your statement on that. We will. abide by it. In other correspondence, I asked you to send us applications of more than 60 alleged members of ABC and you furnished us a list showing the information which I should now like to place in the record, that is, the names of the foundations and `the other information. I will place that in the record. (The list referred to follows:) Name and address Remarks by IR~ Barbara Wright Adams Foundation, P.O. No record of exemption applica- Box 1753, Newport Beach, California. tion. The Alentar Foundation, Santa Fe Springs, Do. California. Kenneth E. Bernd Foundation of California, ` Do. 541 Farmer's Lane, Santa Rosa;" Cali-. ` fornia. Stephen A. Duff Foundation, 1104 Irwin, San Do. Rafael, California. ` ` The Fahy Foundation, 6 Rivo Alto Canal, Do. Long Beach, California. S. C. Forjays Foundation,~ `12501 Christy Do. Lane, `Los Alamitos, California. ` Foundation for Economic and Social Prog- Do. ress, 2812 Tigertail Drive,'Rossmoor, Cali- fornia ` Hark:ae Foundation, 55 Rosewood Drive, Do. Atherton, California. `~ David Heersink Foundation, 913 W. Rose- Do. burg Avenue, Modesto, California. Husted Foundation, 12540 Hawthorne Boule- ` IRS will advise the committee fur- void. Hawthorne, California. ther re this foundation. Ives Foundation, 484 Clover Crest Drive, No record of exemption applica- Cloverdale, California. tion. Johnson Foundation of California, `801 Rose- IRS will advise the committee fur- mont Road, Oakland, California. ther re this foundation. PAGENO="0266" 264 Name and address Remarks bi' IRS cCarol Terrell H. Root Foundation, 1879 New- No record of exemption applica- port, Costa Mesa, California. tion. Lester M. Wyatt Foundation, 4228 S. Main, Do. Sebastopol, California. Forensic Science Institute, Vivian Hotel, Do. 1723 G Street NW., Washington, D.C. Americans Building Constitutionally, P.O. Do. Box 575, Barrington, Illinois. D. W. Anderson Foundation, 59 E. Downer Do. Place, Aurora, Illinois. Chandler Foundation, 4901 Main Street, IRS comment has ilot as yet been Downers Grove, Illinois. received by the committee. Robert W. Draege Foundation, Mount Ver- No record of exemption applica- non, Illinois. tion. M. J. Harris Foundation, 742 W. Dempster, Do. Mount Prospect, Illinois. R. D. Hayes Family Foundation, P.O. Box Do. 575, Barrington, Illinois. herbert M. Hines Foundation, 2114 N. Elm- IRS comment has not as yet been wood, Waukegan, Illinois. received by the committee. T. W. Hines Foundation, 2403 Cherry, Mount No record of exemption applica- Vernon, Illinois. tion. L. J. Hines Foundation, Whittington, 1111- Do. nois. C. V. Hoskins Foundation, Mount Vernon, Do. Illinois. Dr. Julia Hussman Foundation, 15 Park & Do. Shop, Elk Grove Village, Illinois. Dr. Lothar H. Hussman Foundation, 111 S. Do. Northwest Highway, Palatine, Illinois. Jefferson County Research Associated, Do. 1101 Broadway, Mount Vernon, Illinois. Xellogg Foundation, Do. Yorkville, Illinois. .J. D. Kirk Foundation, Do. 308 N. Forrest Avenue, Oak Park, Illinois. J. F. La Lumondier, Sr., Foundation, Do. 107 South 20th, Mount Vernon, Illinois. J. Alton Lauren Foundation, Do. 53 West Jackson Boulevard, Chicago, Illinois. Clarice McWilliams Foundation, Do. do Americans Building Constitutionally, P.O. Box 575, Barrington, Illinois. ~Roy D. Massner Foundation, Do. 4901 Main Street Downers Grove,, Illinois. S. B. K. Foundation, Do. 675 S. Plum Grove Road, Palatine, Illinois. Sales Analysis Institute Foundation, IRS will advise the committee fur- P.O. Box 575 ther re this foundation. Barrington, Illinois. Dr. H. Lee Sargent Foundation, No record of exemption applica- 200 Brentwood Drive tion. Des Plaines, Illinois. ~Saxon Foundation, Do. 143 5. Lincoln Avenue, Aurora, Illinois. PAGENO="0267" 265 Name and address Russell Spencer Foundation, Thompsonvile, Illinois. Vernon Spencer Foundation, 602 South Russell Street, Marion, Illinois. Richard J. Stephenson Foundation, c/o Americans Building Constitutionally, P.O. Box 575 Barrington, Illinois. Tudhope Foundation, 511 Woodland Lane, Northfield, Illinois. Michael Tjshijiima Foundation, do Americans Building Constitutionally, P.O. Box 575. Barrington, Illinois. Walsh Family Foundation, do Americans Building Constitutionally, P.O. Box 575, Barrington, Illinois. Wunsch Foundation, Yorkville, Illinois. Massner Foundation, 130 E. 12th Street, Davenport, Iowa. R. E. Bolthouse Clinic, 2101 Peck Street, Muskegon Heights, Michigan. R. 0. Hayes Foundation, 4340 Crest Knoll Drive, Grand Blanc, Michigan. Mark D. Julian Foundation, 862 Juneau Road, Ypsilanti, Michigan. Lininger Foundation for Educational Exchange, West New York, New Jersey. J. T. C. Foundation, 210 W. 101 Street, New York, New York. Hough's Encyclopaedia of American Woods Foundation, Inc. 39 Gramercy Park, New York, N.Y. 10010. Philippa Schuyler Memorial Foundation, 270 Convent Avenue, New York, N.Y. The Foundation for the Advancemelit of the CivIlizing Arts, New York, New York. H. G. Ferguson Foundation, 7103 Tifton Drive, Yakima, Washington. Glaspey Foundation, Yakima, Washington__ Jere Irwin Foundation, Yakima, Washing- ton. Layman Foundation, Union Gap, Washing- ton. J. Orkney Foundation, 610 S. 32nd Avenue, Yakima, Washington. Syd Orkney Foundation, 2809 Summitview Avenue, Yakima, Washington. The Floyd Paxton Foundation, Yakima, Washington. Remarks by IR~ No record of exemption applica-- tion. Do. Do. Exemption application approved 6/27/67. Application now being: reviewed by IRS national offices. No record of exemption app1ica~ tion. Do. IRS will advise the committee fur- ther re this foundation. No record of exemption applica- tion. IRS comment has not as yet beeii received by the committee. No record of exemption applica- tion. Do. Do. Do. Do. IRS will advise the committee fur.. ther re this foundation. No record of exemption applica~ tion. Do. Do. Do. Do. Do. Do. Do. PAGENO="0268" 266 Name and addres8 Remarks by IRS .5erre H. Paxton Foundation, Yakima, Wash- No record of exemption applica- ington. tion. ~Hap Robinson Foundation, 8503 Kail Drive, Do. Yakima, Washington. flerbert M. Himes Foundation, 2114 N. Elm- Do. wood, Waukegan, Illinois. ,R. E. Boithouse Clinic, 2101 Peck' Street, Do. Muskegon Heights, Michigan. ~Chandler Foundation, 4901 Main Street, Do. Downers Grove, Illinois. Mr. PATMAN. Mr. Cohen, will you please tell this committee exactly what you are doing with respect to the organization known as Ameri- cans Building Constitutionally?. You have already explained pretty well what you have done on that. You expect to pursue it, I am sure, and do everything that is possible ±o unravel it. Mr. COHEN. There are both revenue agents and special ag~nts assigned to that investigation. Mr. PATMAN. I imagine you have your very special agents on that. Mr. MORTON. Mr. `Chairman, can we get back into this for a moment? Mr. PATMAN. Just a moment. Either exemption applications or foundation tax returns are required by law'; is that not correct? Mr. COHEN. Tax returns are required by law. Mr. PATMAN. They are required. That is 990? Mr. COHEN. Form 990-A, yes, sir. Mr. PATMAN. But the exemption application is not? Mr. COHEN. Well, the code authorizes the Secretary of the Treas- ury or his delegate, in this case, the Commissioner of Internal Revenue, to require anyone to file such returns or make such statements as may be necessary to show whether the person is liable for any income tax. In regulations issued under this authority we require the application for exemption. Mr. PATMAN. Mr. Morton, you may ask questions. Mr. MORTON. I understood that, in a reply to a question asked by the chairman and by the distinguished gentleman from California, you said that lobbying and political activities could not be done by a foundation. Is that not correct? Mr. COHEN. Not by any organization exempt under section 501 (c) (3) of the code. Mr. MORTON. What about COPE and its activities? Mr. COHEN. COPE is not exempt under section 501 (c) (3). Labor organizations are not exempt under that section. Business leagues are not exempt under that section. They are exempt but under other sec- tions of the law. Many people say to me: "Why can such and such a business league engage in lobbying?" Organizations such as the American Medical Association or the National Rifle Association, do not have exemption under the provision which imposes the restriction on political or lob- hying activities. Therefore, we do not have any recourse in the case of activities of organizations which do not claim to be charitable organizations. PAGENO="0269" 267 Mr. Srn~uny. The contributions to the charitable organizations are deductible by the individual contributor, but not the contribution to the organizations you mention, which are exempt under other sections. Mr. MORTON. I see what the difference is. Thank you very much. Mr. CORMAN. Mr. Chairman, I wanted to ask one further question'. The more I think about this: How difficult your job must be. Mr. COHEN. I get shot at from all sides. Mr. CORMAN. We really do get the Govermnent making some very substantial decisions concerning political activities, and I would think if you have any idea about legislative change that we really ought to get the administration off the hook if possible, or at least with a little bit more objective tests than the ones which apparently exist, because I think that is a very hazardous thing, and particularly con- sidering the fact that so much political activity today is in the form of `~education." I should think that your job would become more and more complex, in the greater and greater threat that you are either stifling patriotism or permitting tax dollars to go for political activities. Mr. SURREY. I might say that what you say has merit, Mr. Corman, but, on the other hand, this is a problem that a great many people have worried themselves about and concerned themselves about fOr *a great many years, and it is not easy to come up with more obj ectiye tests than are in the law today. I think, if we could reach new tests readily, we would have reached them some time ago. But you are dealing, essentially, with a concept that Congress has in mind. They do want to support education, and they do not want to support propaganda. It is very difficult to draw that line. The regulations provide considerably more detail than the statute and they have been available in the form they are now in for abOut 10 years, and yet I have not seen anybody suggest more objective tests than are contained in them. Given the basic concept, one can go just so far and the rest does fall upon the administrator and the courts to make these final decisions. Mr. CORMAN. We are satisfied you are doing the best you can. It is all right with me but it must be a tough job. Mr. PATMAN. Mr. Surrey, do you think that the extent to which tax-exempt foundations influence or control businesses, directly or in- directly, should be the object of continuous public inquiry so both the stockholders, employees, and the general public have this information? Mr. SURREY. Yes, sir. Of course, I think we would go further than that and I would say that we would very much prefer legislation that ends it. Mr. PATMAN. Have you made any such recommendation? Mr. SURREY. Yes, sir. Mr. PATMAN. Where are those recommendations? Mr. SURREY. Those recommendations are in the Treasury report, and one distinct recommendation- Mr. PATMAN. 1964? Mr. SURREY. 1965. Mr. PATMAN. 1965? Mr. SURREY. Yes, sir. PAGENO="0270" 268 Mr. PATMAN. All right, sir. I think I would send them up every now and then if you do not get any action on those. Mr. SnRREY. The President has referred to those twice and as Sec- retary Fowler said yesterday we are hoping for consideration in the near future. Mr. PATMAN. I understand you are going to send up a tax message in which, this would be involved? Mr. SURREY. The President has said that would be the case. Mr. PATMAN. Foundations today have tremendous influence on our economic, social, and educational lives. This vast accumulation of funds was made possible by the public (taxpayers and customers). But the public has nothing to say about their management even though the creators of these funds often escape Federal and State inheritance and estate taxes. I have heard it said many times that, if there were no tax-exempt foundations, the Government would have to increase taxes in order to do the job that the foundations are doing. The answer is that,. despite the work the foundations do, the Government seems to con- tinually need more and more taxes and the public must, of course, make up what these foundations fail to pay and what t'heir creators fail to pay. Is it not true, Mr. Surrey, that tax-exempt foundations are sub-- sidized by the people who do pay taxes? Mr. SuRREY. The Internal Revenue Code does allow a person to reduce his taxes by making contributions to philanthropic organiza- tions, including foundations. Also, the Internal Revenue Code does exempt from income tax the income of philanthropic organizations' along with other tax-exempt organizations and the philanthropic' group does include foundations. These are conscious decisions by the Congress that in the Unit-ed States our society is well served by this form of encouragement to philanthropy. On the other hand, as is true with many activities, over time one' sees that there are certain abuses which should be controlled and ended, and the Treasury Department study indicates that while Gov- ernment encouragement to philanthropy, the kind that exists in the Internal Revenue Code and is found in the foundation area is desirable,. nevertheless, there are patterns of abuse of that encouragement which should be ended. Mr. PATMAN. I want to say something for the record briefly in connection with one of the statements made by Secretary Fowler on' the balance-of-payments problem. Yesterday I mentioned that the Agricultural Development Council, Inc., of New York `City, a Rockefeller-controlled foundation, and the' Pew Memorial Trust, of Philadelphia, had made certain overseas grants, among others, in dollars totalling $533,950 during' 1965 and 1966. I listed those grants, which indicate that, of the $533,950, $311,- 000 was spent in Japan by the Agricultural Development Council and $100,000 was spent in Italy by the Pew Memorial Trust. After I made my statement, Secretary Fowler attempted to explain' by indicating that the underdeveloped countries of the world are- exempt from the voluntary control measures respecting the balance- of-payments problem. I wish to point out that Japan and' Italy,. which is where the bulk of this $533,950 went, can 1~ardIy be classed as underdeveloped countries. PAGENO="0271" 269 Secretary Fowler also failed to point out that any shipment of U.S. currency, be it in the form of an investment using U.S. dollars by a U.S. corporation in a foreign enterprise or the making of a grant in dollars by a U.S. foundation to a foreign entity, by definition adversely affects our balance of payments. In other words, any dollar outflow from the United States regardless of its intended purpose constitutes a negative entry in our balance-of-payments table and can very easily cause a further drain on our gold supply. This is so because of the simple fact that, when a dollar is invested overseas in a foreign corporation or when a grant is made overseas in dollars, they can be utilized-once they find their way into the central bank of that foreign country-to demand payment in gold for those dollars. If Secretary Fowler wants to comment on that, he is privileged to do so in the record. Mr. SURREY. I might just add, Mr. Chairman, that 1 would suppose one could also find a number of instances where other forms of philanthropy did involve expenditures of sums in countries, other than the less-developed countries, such as church groups, missionary groups or the like. There has never been a restriction on philanthropy as such. Mr. PATMAN. I am referring to investments abroad principally and I picked out those that are just isolated instances. What concerns me about the Treasury, and the great disappointment I have with the Treasury-is that we are the only country on earth that does not have some control* over the export of our capital. No other country fails to have some type of control over the export of its capital, its currency and its credit. Is that a correct statement, Mr. Surrey? Mr. SURREY. I would not want to say how detailed it is. Most of the countries have been attempting to move more and more to fewer and fewer controls. Mr. PAThtAN. I know, but they still have it. I asked Mr. Fowler that one time. I would like to bring it up when he is here, but he has been excused. However, he can answer it if he wants to. He thought there is another country and I said, "Well, Mr. Fowler, if you will let me know what country it is I would appreciate it," but he has never let me know. There is no other country. Since we are the only country doing that, it would certainly be to our benefit and a help to: our people to have some sort of export control, to keep a few big banks in New York from furnishing billions of dollars overseas when they want to. That is causing a lot of our problems, just a half dozen banks in this country. Yet we are not making any attempt at all to control the export of capital and credit. I hope that he remembers that other country, and I would like to have the name of it. Mr. SURREY. That is going into another issue, Mr. Chairman, than the one we have here today. Mr. PATMAN. That $500,000 is equal to the amount of duty-free goods that 5,000 Americans would be permitted to bring intO this country at $100 per person. They are restricted because of carrying out the policy that we have in mind. So that is one or two foundations getting as much benefit there, you might say, as 5,000 people. You are familiar, of course, with the Foundation Library Center which is the propaganda agency for the big foundations. Is the 87-444 O-68------i'S PAGENO="0272" 270 Foundation Library Center still photocopying tax records of the foundations at the IRS headquarters, Mr. Cohen? Mr. COHEN. Yes, sir. Mr. PATMAN. It is true that the IRS has not been charging the foundation for photocopying these records? Mr. COHEN. No, sir; we are charging them. Mr. PATMAN. You are charging them? Mr. COHEN. They are using their own equipment, but we charge them for whatever our people must do. Mr. PATMAN. How much do you charge them? Mr. COHEN. I have forgotten the amount. It was worked out. Mr. PATMAN. Put the amount in the record when you look over your transcript. Mr. COHEN. I think Mr. Harding testified to this. I doubt if the amount has changed since that time. I will verify it. Mr. PATMAN. It was 10 cents a page in 1964. Mr. COHEN. I believe it is still the same. (The information follows:) In 1963, under revised regulations designed to give greater public access to information reported by tax exempt organizations, the Internal Revenue Service agreed to permit the Foundation Library Center to copy, on a continuing basis, the public record portions of annual returns filed by foundations. Copying was to be performed by Library Center personnel using supplies and equipment pro- cured and paid for by the Center, which also would reimburse IRS for inci- dental expenses at the rate of $0.02 per reproduction per page. This agreement remains currently in effect. Mr. PATMAN. In mentioning the American Medical Association you did not elaborate and I want to point out that the American Banking Association is the biggest lobby in Washington or in the united States. They are a hundred years old and they have lots of knowledge about how to get things done. They are usually successful. Mr. COHEN. They are not exempt under section 501 (c) (3). Mr. PATMAN. But, do they not have a foundation? Mr. COHEN. I am not sure, sir. Mr. PATMAN. You might look into that. I have a feeling that the funds somehow or another get over from the foundation to the lobby- ing activities, and if you will take a close look at it I will appreciate it very much. The exemption applications subsequent to 1948 and the public por- tions of the foundation tax returns, the form 990-A, are open to public inspection at the IRS district offices as well as Washington, is that correct? Mr. COHEN. Yes, sir. Mr. PATMAN. That is public inspection? Mr. COHEN. Yes, sir. Mr. PATMAN. At either here in your office or in the district offices? Mr. COHEN. Yes. Mr. PATMAN. Open for public inspection? Mr. COHEN. Yes, sir. Mr. PATMAN. I am going to hand you a copy of a form letter which was received by Mr. Byron E. Calame, a member of the staff of the Wall Street Journal in Los Angeles, Calif. Then I shall read it to you and ask you whether this is in accord with the IRS policy of public in- spection of exemption applications. PAGENO="0273" 271 This is a letter to Mr. Byron Calame of the Wall Street Journal, who is the author of those two articles in the Wall Street Journal about the ABC and his request is dated-this letter is dated August 18, 1967, which was received, the request was received August 11, 1967. It is a request for the exemption application of a foundation by the name of Odell Tudhope Educational Trust of Northfield, Ill. The reply received by him from the district director said, "The informa- tion requested in your letter may be furnished only upon authoriza- tion of the taxpayer. If the taxpayer will write us a letter over his or her signature, authorizing us to give this information, we shall be glad to do so. Very truly yours, District Director." It says, "Your personal check is returned." And then, "Over." Then it says, "If you have authority to obtain a copy of the desired exemption application, please contact us again. Copies of records that are available to the public cost $1 a page. After the proper identifica- tion is furnished, and the desired copies are mailed to you, you will be billed." (The letter follows:) U.S. TREASURY DEPARTMENT, INTERNAL REVENUE SERVICE, August 18, 1967. Mr. BYRON E. CALAME, 6261 Vernon gtreet, Long Beach, Calif. Request received: August 11, 1967. Name: Odell Tudhope Educational Trust of Northfield, Ill. The information requested in your letter may be furnished only upon author- ization of the taxpayer. If the taxpayer will write us a letter over his or her signature, authorizing us to' give this information, we shall be glad to do so. Very truly yours, DISTRICT DIRECTOR. Your personal check is returned, No. 44. If you have authority to obtain a copy of the desired exemption application, please contact us again. Copies of records that are available to the public cost $1 a page. After the proper identification is furnished, and the desired copies are mailed to you, you will be billed. Mr. PATMAN. Is this in accord with your policy of public inspection? Mr. COHEN. He has written to the wrong office in the first place. Mr. PATMAN. Why did you not tell him that? Mr. COHEN. He didn't know that. Mr. PATMAN. The fellow who got the letter knew that, did he not? Mr. `COHEN. No, how would he know? Mr. PATMAN. The district director? Mr. COHEN. No. Mr. PATMAN. They mention the foundation. Mr. COHEN. You may apply to the district director in the district in which the organization is registered. Now, this particular organiza- ti'on was not registered with the district director in Los Angeles. Mr. PATMAN. Is it not the policy-is not the policy the same all over, a national policy? Mr. COHEN. We don't have files of all organizations in all offices. The district director in Illinois has the ones for Illinois, the district director in `California- Mr. PATMAN. Why did he not explain that to him? Here he is leading him to believe he has to get the consent of that organization. PAGENO="0274" 272 Mr. COHEN. The problem here is that, I am sure, the einploye just didn't recognize the name of the. organization, didn't have it on the list as an exempt organization, and just sent a form letter. If this letter had been sent to the proper office he would have gotten a proper reply. And the fact- Mr. PATMAN. He does not know which is the proper office. Mr. COHEN. This particular organization was under investigation at the time and the file wasn't even available in the Chicago office. Mr. PATMAN. I do not think that is a forthright answer, my dear sir. Mr. COHEN. Those are the facts, sir. Mr. PATMAN. If your system is like that, it ought to be changed. You are giving people the nmaround. Now, this fellow writes to this office, this district director, and he wants this information about this designated foundation. If the director does not `have it, it occurs to me that-if you want to be forthright with the people and give them the best information possible-the director should say it is not at this office, instead of giving them a runaround. Mr. COHEN. That is our normal procedure. As I indicated, the clerk made a mistake. Mr. PATMAN. The district director signed it. Mr. COHEN. Whoever supplied the letter for the district director made the mistake. The district director would not see every letter from his office. Mr. PATMAN. You take `a look at your system or policy. That could only impress someone as being a sort of runaround. You are not giving him the correct information he needs or as much as he should expect from the district director. By the way, we have had increasing complaints from the press about the delay and their inability to obtain access to the same type of IRS documents. How do you account for this? Mr. `COHEN. I haven't had any complaints on that subject so I can't speak to it. Mr. PATMAN. You are telling me again that these records are public, either through the Washington office or the district director having the records, and there is no charge for it, free examination. Mr. COHEN. Free examination. Mr. PATMAN. Free examination. All right, then, that makes it a lot better. As you know, Treasury regulations require a tax-exempt foundation to file a schedule with its tax return showing certain important in- formation when assets are sold or exchanged. The Henry Francis du Pont Winterthur Museum of Wilmington, Del., a Du Pont controlled foundation with assets of $66 million, had capital gains of $10,317,617 in 1965. I am going to hand you the foundation's 1965 tax return. Please ask your aids to check the return and then tell us whether it is correct that the foundation only submitted a schedule for $56,617 of that capital gain, and failed to submit a schedule for $10,261,000 of the gain? Mr. COHEN. I will take your word for it, sir. Mr. PATMAN. You have got it. It is right before you. Mr. COHEN. Which schedule is it? There are about 15 schedules attached to the return. I would be glad to check it. It may be they filed an incomplete return, in which case we would be glad to follow up on it. PAGENO="0275" 273 Mr. PATMAN. I assume you often have that. Mr. COHEN. It is not unknown. Mr. PATMAN. During our hearing on August 10, 1964 (page 137 of the printed record), I asked Acting Commissioner Harding whether the IRS has found that the Leonard C. Hanna, Jr., Fund of Cleve- land has complied with all statutory requirements in its final liquida- tion. By letter of October 26, 1964, the IRS informed us that it "has not completed its consideration of the fund's operations." On December 3, 1964, the IRS informed us that they expected to complete their field audit work on the fund by February 28, 1965. Now, by letter of October 12, 1967, 3 years after our request of Octo- ber 10, 1964, the IRS informed us as follows: "In accordance with requests made by you in connection with hear- ings conducted by your Subcommittee on Foundations, this is to advise that we have completed our audit of the Leonard C. Hanna, Jr., Fund, of Cleveland, Ohio, and have found the organization to have complied with provisions of the Internal Revenue Code applicable to such exempt organizations." Mr. Cohen, would you call this a dynamic performance, 3 years after we requested the information? Mr. COHEN. The audit was completed rather rapidly. The issue was, did the organization comply with the law. The matter was sub- mitted for complet~ legal review. There were a great many matters here involved. It was reviewed and additional information was re- quested and supplied. The activity went on. The organization has its right to make its views known. We have to sit and listen, we have to wait for briefs. Mr. PATMAN. You think they advised us as quickly- Mr. COHEN. I would like to say we would like to do everything within 30 or 60 days. Mr. PATMAN. You think 3 years is a reasonable time? Mr. COHEN. I would have preferred to have been able to provide you with the information more quickly. Mr. PATMAN. You think it is not uncommon for it to be 3 years? Mr. COHEN. It is not unknown. Mr. PATMAN. I wish to announce that the U.S. marshal in Chicago has informed us that he has served Dr. Michael R. Saxon for appear- ance here at 10 tomorrow. Dr. Saxon is the member of the ABC who failed to show up here on Tuesday when he promised to testify. However, we had his printed testimony and I believe you were furnished a copy of it the other day. Mr. COHEN. I haven't looked at it myself. I think our people have it. Mr. PATMAN. Mr. Corman? Mr. CORMAN. First of all, of the approximately $10 billion in chari- table contributions, I think that is only part of the total that I wanted to get at. What about the incQme of foundations that are exempt? Mr. COHEN. I think Mr. Surry suggested about a billion and a half dollars income of the various foundations. Mr. CORMAN. Is that the tax base or tax loss? Mr. SURREY. That was the income-the tax base in your terminology. In 1962 it was a little over a billion dollars. It may be up somewhere to a billion and a half today. PAGENO="0276" 274 Mr. CORMAN. Probably much of that would fall in the regular corporate rate. Mr. COHEN. Yes. Mr. CORMAN. Probably another half or three-quarters of a billion of tax loss. Mr. COIrE~N. Yes. Mr. CORMAN. A reasonable estimate? Mr. SURREY. As the Secretary indicated, we have to keep this in some perspective. Our tax on individuals runs to $64 billion on a calendar basis and nearly close to $30 billion on corporations. Mr. CORMAN. Just when we have so much trouble finding $400 million for the poverty program, and I wonder about the altruistic purposes of some of these foundations. From the filing of the form 1023 and form 990, if I could address the problem at the moment, not the foundation as such, but the donor giving to what he thinks is a tax-exempt foundation and it turns out it is not, what are the consequences for him? Mr. COHEN. The rules are different for different kinds of donors. We put out a publication called "Publication 78," which is a list of the exempt organizations to which contrib~tions may be made and deducted on the income tax return. The so-called third party, innocent donor, may rely on this list for purposes of determining whether his contributions are deductible, until we put out notice that there is a revocation of exempt status. That same assurance is not given to the so-called insider. The regulations provide that if a person closely as- sociated with a foundation is the one who causes, or has reason to know that there is a violation the deduction claimed for contributions made by him might be disallowed. We have two separate procedures. One is for the so-called innocent contributor and the other for the person who is in a position to know the exact status of the donee- organization. Mr. CORMAN. Are there civil and criminal consequences? Mr. COHEN. Civil consequences. There might or might not be crim- inal consequences, depending on the degree of the violation. Mr. CORMAN. There probably would be under this sole proprietor kind of information. They are clearly not tax exempt, but if he went on the assumption for a couple or 3 years? Mr. COHEN. Yes, sir; there is a greater possibility of asserting a criminal violation there. Mr. PATMAN. I would just like to make one statement about the ABC. I am glad that you are interested in that, and I am encouraged by the investigation that you are making. The way it looks to me, the ABC people based their appeal on the fact that rich people are getting tax exemptions through the foundation method and that they will use exactly the same method for less affluent people of our country, pro- vided they can pay $10,500 each for the knowledge and information. In other words, they promise the same benefit that the very rich get. Now, if the very rich and other affluent people get out of taxes through loopholes, do you not think that the poor man is entitled to a loophole, too, somewhere along the line? Because he cannot bear all these burdens. PAGENO="0277" 275 Mr. COHEN. I don't think the so-called affluent are getting any tre- inendous advantage out of this. I don't know what the advantage is. We hope there aren't too many abuses. We don't discover too many. We find some. Therefore, I hope we don't have to open up the tax law: to any more loopholes. I would characterize them as unjustified bene- fits since most of the so-called loopholes were consciously enacted by the Congress. Mr. PATMAN. That is correct, and I think it is the duty of IRS to point out these loopholes as quickly as you discover them. I am not on the tax writing committee, the Ways and Means Committee, that would have to do with these loopholes and gimmicks in the tax laws. But it appears to me that a report from the Secretary of the Treasury which goes to all Members of Congress would be very helpful in point- ing out things that needed to be done in order to stop loopholes. I wish the Secretary of the Treasury at the end of each year or better yet at the beginning of each Congress will point out to all Members of Con- gress the legislation that is needed to stop these loopholes and prevent their use against the public interest. Mr. SURREY. I think you will find, Mr. Chairman, that the Treasury has been very diligent in acting in this area to perform as the Secre- tary said the other day, and it is also our hope that there will be a tax reform program which the Ways and Means Committee can occupy itself with next year. Mr. PATMAN. Yes, sir. I appreciate the fact that that is being talked about, and I hope it materializes and is set for some time next year. The committees have more legislation all the time, and they do not always get around to some of these things. The tax writing commit- tees, the Ways and Means and the Finance Committee in the Senate, have been so busy in other matters, they just naturally could not get to it, and it is understandable that they did not. I appreciate very much the information you gentlemen have fur- nished and for your appearance and testimony. The committee will stand in recess until 10 o'clock in the morning here in this room. (Whereupon, at 12 noon, November 16, 1967, the subcommittee re- cessed, to reconvene on Friday, November 17, at 10 a.m.) PAGENO="0278" PAGENO="0279" TAX-EXEMPT FOUNDATIONS: THEIR IMPACT ON SMALL BUSINESS FRIDAY, NOVEMBER 17, 1967 HOUSE OF REPRESENTATIVES, SUBCOMMITTEE No. 1 OF THE SELECT COMMITTEE ON SMALL BUSINESS, Washington, D.C. The subcommittee met, pursuant to recess, at 10 :10 a.m., in room 2359 Rayburn House Office Building, Hon. Wright Patman (chairman of the subcommittee) presiding. Present: Representatives Patman and Corman. Also present: H. A. Olsher, director, Foundations Study, Myrtle Ruth Foutch, clerk; and John J. Williams, minority counsel. Mr. PATMAN. The committee will please come to order. I wonder if Dr. Michael R. Saxon is here or accounted for. Miss `Clerk, you know Dr. `Saxon, do you not? He was here the other day. Do you know him? Do you know his attorney? He is not here, is he? Miss FOUTCH. No, sir. Mr. PATMAN. All right. And Dr. Saxon doesn't answer, so he is not here. A subpena was served on Dr. Saxon on November 14, 1967. He was ordered to bring with him all books, documents, records, and papers of the Saxon Foundation which contain the following information: All contracts t'o is~hich the Saxon Foundation is a `party. The names and addresses of eath ABC applicant from whom the Saxon Foundation received fees and the amounts of each such fee. Names and addresses of the foundation's donors since date of or- ganization, including amount contributed by each donor. Names and addresses of donees since date of organization, including amount paid to each donee. Amount `of salary, fees, and expenses paid to Dr. Saxon by ~he foun- dation since date of organization, itemized so as to indicate whether the payment's were salary, fees, or expenses. Amount of salary, fees, and expenses paid to Mrs. Saxon by the foundation since date of organization, itemized so as to indicate whether the payments were salary, fees, or expenses. The income and disbursements statement which accompanied `Dr. Saxon's letter `of November `2, 1967, `show's that the Saxon Foundation received $31,500 in ABC membership fees. He was ordered to forward the names and addresses of each member from whom the Saxon Foun- dation received these fees and the `amount `of e'ach such fee. The income and disbursements statement, `which accompanied ,Dr. Saxon's letter of November 2, 1967, shows $28,760 as "paid to ABC and 277 PAGENO="0280" 278 other contributions." He was ordered to indicate how much of that $28,760 was paid to ABC and the amount that was paid out for "other contributions." Dr. `Saxon has not honored the subpena which was served on him 2 days ago in Ohicago, so we will insert here a copy of the subpena and a copy of the return of the marshal who served the subpena. The original will be retained here in this office subject `to review `by any interested person. (The documents referred to follow:) B~ AUTHORITY OF THE HOUSE or REPRESENTATIVES OF THE CONGRESS OF THE UNITED STATES OF AMERICA To: Mr. Joseph N. Tierney, United States Marshal. You are hereby commanded to summon Dr. Michael R. Saxon, 143 South Lincoln Avenue, Aurora, Illinois, to be and appear before the Subcommittee No. 1 of the Select Committee on Small Business of the House of Representatives of the United States, of which the Honorable Wright Patman is chairman, and to bring with him all books, documents, records and papers of the Saxon Foun- dation which contain the information requested, described and set out in Sched- ules 1 and 2, which are attached hereto and made a part of this subpoena, in Room 2359, Rayburn House Office Building in the city of Washington, on Novem- ber 17, 1967, at the hour of 10:00 a.m., then and there to testify touching matters of inquiry committed to said Committee'; and he is not to depart without leave of said Committee. Herein fail not, and make return of this summons. Witness my hand and the seal of the House of Representatives of the United States, at the city of Washington, this 13th day of November, 1967. WRIGHT PATMAN, Chairman, SMbcolnrnittee No. 1. Attest: W. PAT JENNINGS, Clerk. Served this writ on the within named Dr. Michael R. Saxon by delivering a copy thereof to him in person at 1306 W. Downer Place, Aurora, Illinois, this 14 day of Nov. A.D., 1967 and at the s~me time informing him of the contents thereof. J. N. TIERNEY, U. ~. Marshal (By R. REID, Deputy). SCHEDULE 1 All contracts to which the Saxon Foundation is a party. The names and addresses of each ABC applicant from whom the Saxon Foundation received fees and the amounts of each such fee. SCHEDULE 2 SELECT COMMITTEE ON SMALL BUSINESS, HOUSE OF REPRESENTATIVES OF THE UNITED STATES, Washington, D.C., November `6, 1.967. Dr. MICHEL R. SAXON, Medical Director, The ~acvon Foundation, Aurora, Ill. DEAR DR. SAXON: Thank you for the information enclosed with your letter of November 2, 1967. The following is additional information required in con- nection with our study of tax exempt foundations and charitable trusts: (1) Names and addresses of the Foundation's donors since date of organi- zation, including amount contributed by each donor. This was requested in Item 8 of our Attachment A of October 3, 1967. (2) Names and addresses of donees since date of organization, including amount paid to each donee. This was requested in Item 8 of our Attachment A of October 3, 1967. PAGENO="0281" 279 (3) Amount of salary, fees, and expenses paid to you `by the Foundation since date of organization. Please itemize so as to indicate whether the pay- ments were salary, fees, or expenses. (4) Amount of salary, fees, and expenses paid to Mrs. Saxon by the: FOundation since date of organization. Please itemize so as to indicate: whether the payments were `salary, fees, or expenses. (5) The income and disbursements statement which accompanied your let-: ter of November 2, 1967 shows that the Saxon Foundation received $31,500 in, ABC membership fees. Please forward the names and addresses of each: member from whom you received these fees and the amount of each such fee. (6) The income `and disbursements statement, which accompanied your letter of November 2, 1967, shows $28,760 as "paid to ABC and other con- tributions." Please indicate how much of that $28,760 was paid to ABC and the amount that was paid out for "other contributions." `Sincerely yours, WRIGHT PATMAN, Chairman Subcommittee No. 1. Mr. PATMAN. Mr. Corman, do you know of anything else we should do? Mr. CORMAN. No. Mr. PATMAN. Since our witness is not here and he `has refused to honor the subpena, the committee will stand adjourned subject to the call of the Chair. (Whereupon, at 10:15 a.m., November 17, 1967, the subcommittee adjourned, subject to the call of the Chair.) (The following was received subsequent to the hearings for inclu- sion in the record:) CONGRESS OF THE UNITED STATES, HOUSE OF REPRESENTATIVES, Washington, D.C., December 1, 1067.,: Hon. WRIGHT PATMAN, Chairman, Foundation Subcommittee of the Select Committee on Small Business, U.S. House of Representatives, Washington, D.C. DEAR MR. CHAIRMAN: I hereby request that `the attached copy of my statement on tax-exempt foundations `be included as part of the printed record of the hearings on tax-exempt foundations `being conducted by the Foundation Sub- committee of the Select `Committee on Small Business. Kind regards. Sincerely yours, JOHN M. MURPHY, Member of Congress. STATEMENT BY REPRESENTATIVE JOHN M. MURPHY OF NEW YORK Thank you, Mr. Chairman, for the opportunity to participate today `in these hearings on the tax-exempt status of private foundations. This subcommittee ha's made a valuable contribution over the years in investigating the abuses of certain tax~exempt organisaitions, and these `hearings will add to an already considerable accumulation of information on `t'hb subject. Hopefully, they will result `in legislative recommendations to correct `the present weaknesses `in our tax laws concerning tax-exempt organizations. I will not attempt to appear today as an expert on foundations, because the credentials of `this subcommittee are `such that I would be on V'ery unceitain ground from the `beginning. There is, however, one specific weakness in our' tax laws with which I am particularly concerned, and I will limit my statement to a discussion of that one subject. I am referring to that part of our tax laws dealing with businesses controlled and operated by tax-exbinpt foundations, and the competitive advantage such busine:s'ses have over regular taxpaying business firms. A foundation may own a controlling interest in a business, an interest of sufficient magnlaude `to exert considerable influence over `the conduct of the business, or it may own `and operate a business directly. In each case the PAGENO="0282" 280 foundation's tax-exempt status gives it an unfair advantage over its taxpaying competitors. For example, because contributions to tax-exempt foundations are deductible by the contributor for Federal income tax purposes, a foundation can capitalize its business much easier than a taxpaying business. Furthermore, when a founda- tion own:s or controls a `bushiest it is relatively free from the demands of share- holders for current income distribution, and thus can accumulate such income for investment in the business to improve its competitive position, or can absorb a loss when the businOss is declining; taxpaying busin~esses, on the other hand, are subject to pressure from stockholdeI~s and must usually return part of their current income to the stockholders. In addition, many tax-exempt foundations, particularly those involved in scientific research and development, actively compete for research and development contracts and are often able to bid for business act a break-even figure that cannot be matched by their taxpaying competitors. The only significant action taken to curb these abuses was the Revenue Act of 1950, which subjected the unrelated business income of foundations to ordinary taxes; Section 513 (a) of the act `defineS "unrelated trade or business" as "any trade or business the conduct of which is not substantially related (aside from the nhed of such organizations for income or funds or the u'se it makes of the profits derived) to the exercise or performance by such organization of its charitable, educational, or other purpose or function constituting the basis for its exemption." This section was written `to prevent tax-exempt organizations from competing unfairly with ordinary, taxpaying businesses. Experience has shown, however, that there are many loopholes in this restriction on the unrelated business income of tax-exempt foundations. For example, the 1950 statute does not apply to rhnts derived from unrelated business property. Foundations can rent business assets to one of their own business subsidiaries, receive most of the profits by charging high rent which is exempt from `the unrelated business tax, and thus accumulate large amounts of tax-free capital. The 1950 statutu also exempts rent from a lease that is not longer than five years if the lessor has an outstanding indebtedness with respect to the leased assets. This enables a foundation to obtain the `stock of a corporation, liquidate the corporation, and then lease the assets to a newly formed corporation for a five year period. The rent charged this new corporation is usually about 80% of its before-tax income, and thus the foundation is able to rake-off most of the in- come of the corporation without paying any tax. One side effect of this problem is that because foundations are able to get most of the income of a business operation through tax-exempt rent, they are able to pay a much higher price than a tax- paying business when they obtain new business property. One obvious remedy, of course, would be `to close the loopholes in the existing statute to insure that all unrelated business income is taxed. Such a remedy, however, is based on the assumption that `the only problem is tha't of loopholes in the existing law, and `such an assumption is not accurate. The fact is that even if foundation-owned businesses are subject to tax, the very fact the business is owned by a `tax-exempt organization gives it an unfair advantage over its com- petitors, for reasons I mentioned earlier. `The basic problem, therefore, since taxing unrelated business income is in- sufficient, is how to prevent foundation-owned and operated businesses from hold- ing an unfair competitive advantage over taxpaying business. The Treasury Department, in a 1965 study, recommended dealing with this problem by limiting participation by private foundations in active business. They recommended that foundations be prohibited from owning, either directly or through stock holdings, 20% or more of a business unrelated to the exempt functions for which the founda- tion received its tax-exempt status. The Treasury recommendation, however, is incomplete in at least two respects: it fails to deal with the foundational problem of defining "unrelated business", and fails to recognize that any business operated by a tax-exempt organization, unrelated or related, has a competitive advantage over taxpaying businesses. Officials of the Treasury Department and the Internal Revenue Service have testified before this Subcommittee about the difficulty of working with the present definition of "unrelated business." A related problem is that involving tax-exempt organizations `doing what is called "basic research." This type of activity is exempt from taxation, and yet it PAGENO="0283" 281 is often in competition with taxpaying businesses. Tax-exempt organizations such as the Rand Corporation and the Institute for Defense Analysis, both of which execute research contracts for the U.S. Government and particularly the Depart- ment of Defense, are in direct competition with many taxpaying companies. Why should these firms be accorded special tax advantages if their private competitors do not receive similar advantages? I submit that the legislation providing for tax- exempt organizations was never intended to create unfair competition and I see no reason why it should be allowed to'day. If the objective is to foster basic re- search for the benefit of the general public, then I have no objection, but when that research is turned into a profit-making business it should not be allowed~ In your Subcommittee study dated December 31, 1962, there are a number of examples of business activities of these tax-exempt research organizations which are in direct competition with taxpaying businesses. I would like to mention one as an example of this problem. The Stanford Research Institute of Menlo Park, California, a tax-exempt research organization, made a study entitled "An Economic Study of the Ventura River Municipal Water District" for a combine of oil and development companies for a reported fee of $60,000. This is work customarily performed by consulting engineers in private practice. Your report lists many similar cases, but the point is this: if our present law is so weak that these tax-exempt organizations are allowed to operate businesses in competition wth taxpaying businesses, then our tax laws need drastic reform. Such reform should be based on the following assumption: When a business is operated by a tax-exempt organization, regardless of whether it is related or un- related to the organization's exempt purpose, or whether its income is taxed or untaxed, it holds an unfair advantage over its taxpaying competitors. The dè- ciding factor, therefore, should not be whether a business is related to the or- ganization's exempt purpose, but whether it is in competition with taxpaying businesses. My proposal would prohibit a tax-exempt organization from owning, either directly or through stock holdings, 20% or more of any business. This is similar to the 1965 Treasury Department proposal I mentioned earlier, but it~is not limited to unrelated businesses. I would, however, agree to the exceptions recommended by the Treasury Department and to the time period given tax- exempt organizations to reduce their business holdings. Mr. Chairman, my statement today covers only a small part of the total prOb- lem of reforming our tax laws, but it is a very important part. It is the tax- paying businessman, and eventually the average taxpaying American, who must pick up the tab for the tax-exempt foundations. It is argued, and I think with ample justification, that tax-exempt foundations do things that would otherwise have to be done by government, or that cannot be done by anyone else; I would not challenge this argument, and I would not alolis'h tax-exemption for such ac- tivities. But this same argument cannot be used to justify businesses owned and operated by `tax-exempt organizations; it is this area of abuse th:at I would like to see eliminated. PAGENO="0284" 282 EXHIBIT 1 (PART 1) Americans Building Constitutionally A TRUST (Not for Profit) P.O. BOX §75, BARRINGTON, ILLINOIS 60010 CERTIFIED-REGISTERED MAIL TELEPHONE: BARRINGTON 13121 3516600 RETURN RECEIPT REQUESTED DELIVERED TO ADDRESSEE ONLY October 21, 1967 Mr. Sheldon S. Cohen Commissioner of Internal Revenue Washington, D. C. 20515 RE: Americans Building Constitutionally (A Not-for-profit Trust) Dear Mr. Cohen: Enclosed are manuals distributed by ABC to members and their attorneys including the presentation material for prospective members. Also enclosed is a certified true and correct copy of the ABC Not-for-profit Trust recorded in Waukegan, Lake County, Illinois. We believe that careful analysis of this information will disclose that neither attorneys nor members are advised to operate outside the income tax law and the regulations and cases pertaining thereto. We do not advise any member or his attorney to operate outside the scope of these laws. Since your office has seen fit to publicly state that there is as to the legality" of the procedures we form, I respect- fully request that the Internal Revenue Service issue a ruling as to the legality of the enclosed material. Very truly yours, Robert D. Hayes, rustee RDH/by end. PAGENO="0285" 283 A~l The Organizational Test ARTICLES OF INCORPORATION BY-lAWS i~'IkNkGEMENT CONTRA.CTS ACT IV ITY STRUCTURES AND EVIDENCE SPECIAL NON-PROFIT STRUCTURES Science Education Religion Qperat ~ PROH lB ITED TRP~NSACT IONS Political Action v. Political Education SeLC-Dealing (definitions) Dangerous Foundation Investments UNRElATED BUS ThTESS INCO~ Der mit ions Business Lease Proscription Deductions Recent Treasury Reg. Changes UNREP~SONkBLE ACCUi~'ItJLAT ION OF INCOi"IE~, Dei~ mit ions Limited Application ivIethods to Avoid Exemp~ion Proced~re~ WHY 1023 WHAT IS REQUIRED BY 1023 PAGENO="0286" 284 A.-2 ~ Pr~edures ADVERT IS ING PROPERTY THANSFERS, PURCHASES, SALES, AND M~N~GEMENT INVESTMENTS, SECURITIES, MORTGAGES, SAVINGS, DEDUCTION `TO SPECIFIC PURPOSES INSURANCE Health and Accident Disability LtCe SOCIAL SECURITY Elec1~ion ACCOUNT ING PRkCT ICES FEDERAL AND STATE REPORT ING REQUIREMENTS * * * * * PAGENO="0287" 285 A-3 TABLE OF CONTENTS A-i Outline B-i I.R.S. 500 Sections C-i illinois Not-For-Profit Act C-5 illinois Articles of Incorporation D- 1 Wisconsin Non-Stock Act D-4 Wisconsin Articles of Incorporation E-i Indiana Registration of Foreign Corporations F-i Purposes F-2 Ford Foundation G-i By-Laws H-i Membership Certificate I -i Civic Club By-Laws J-i Employment Practices K-i Board Meeting Checklist L-i Ratification of Membership M- 1 Letter of ~ ~ ,~ N-i Foundation Management Chart 0-i Foundation Economic Flow Chart P-i Grant Procedures Q-i Prohibited Transactions Q-3 New Treasury Regulations R-i Power of Attorney R-4 Form 1023 R-i5 Form 990-A R-i8 Form SS-4 R-20 Form 990-T S- 1 Reporting Requirements T- 1 Not-For-Profit Benefits and Ideas U-i Newspaper Articles V-i Not-For-Profit Bibliography W-i American Jurisprudence Text Summary AA-i Treasury Proposed Legislation BB-i California Annual Report Form CC-i California Charitable Trust Registration Forms DD-i Bibliography on State and Federal Regulations 87-444 0 - 68 - 19 PAGENO="0288" 286 INTERNAL REVENIJE CODE EXEMPT ORGANIZATIONS B-.-1 * SEC. 501. EXEMPTION FROM TAX ON CORPORATIONS, C1«=1<'1ALP4 * TRUSTS, ETC. [Sec. 501(a)] (a) ExFw"rioN Fiios~r TAx~rIoN.-An organization described in subsection (c) or (d) or section 401 (a) shall be exempt from taxation under this subtitle unless such exemption is denied under section 502, 503, or 504. Source: Sec. 101, 1939 Code. [Sec. 501(b)] * (b) TA o UNRELA ro Busisn~.ss I~cp~.~/tn organization exempt from taxatfon under subsection (a s a e subJ~èt to tax to the extent provided in part II of this subchapter (relating to tax on unrelated income), but, notwith- standing part II, shall be considered an organization exempt from income taxes for the purpose of any law which refers to organizations exempt from income taxes. Source: New. * - * .[Sec.501(c)] (c) LIST OF ExESIP'r ORcA~nzArIoNs.-The following organizations are referred to in subsection (a): (1) *Corporations organized under Act of Congress, if such corporations are instrumentalities of the United States and if, under such Act, as amended and supplemented, such corporations arc exempt from Federal income taxes. 1 (2) Corporations organized for the exclusive pur ose of holding title .j!p~p~o_pc.rfl~, collecting income therefrom, and turning over ie entire ãTh~~t * ~ijl~i~of. less expenses, to an organization which itself is exempt under this section. (3) 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 tIme net earnings of which inures to the benefit of any private shareholder or individual, no substantial part of the 7 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 cam- pagn on behalf of any candidate for public office. (4) je~es or orgrtization~ not organized for profit but operat ~ ~ycjfj~r,e, or local associations of employees, the membership of which is limited to the employees of a desig- nated person or persons in a particular municipality, and the net earnings of which are devoted exclusively to charitable, educational, or recreational purposes. (5) Labor, agricultural, or horticultural organizations. * (6) Business leagues, chambers of commerce, real-estate boards, or boards of trade, not organized for profit and no part of the net earnings of which inures to the benefit of any private shareholder or individual. (7) Clubs organized and operated exclusively for pleasure, recreation,\ and other nonprofitable purposes, no part of the net earnings of which inure~,,' to the benefit of any private shareholder. (8) Fraternal beneficiary societies, orders, or associations- - (A) operating under the lodge system or for the exclusive benefit of the members of a fraternity itself operating under the dodge system, and * (B) providing for the payment of life, sick, accident, or other bene- fits to the members of such society, order, or association or their dependents. (9) Voluntary employees' beneficiary associations providing for the payment of life, sick, accident, or other lencfits to the members of such association or their dependents, if- PAGENO="0289" 287 (A) no part of their net earnings inur~ (other than through such payments) to the benefit of any private shareholder or individual, and (B) 85 percent or more of the income consists of amounts collected from members and amounts contributed tc~ the association by the em- ployer oI the members for the sole purpose of making such payments * and meeting expenses. (10) Voluntary employees' beneficiary associations providing for the payment of life, sick, accident, or other benefits to the members of such association or their dependents or their designated beneficiaries, if- (A) admission to membership in such association is limited to indi- viduals who are officers or employees of the United States Government, and (B) no part of the net earnings of such association inurc~ (other than through such payments) to, the benefit of any private shareholder or individual. (11) Teachers' retirement fund associations of a purely local character, if- (A) `no part of their net earnings inures (other than through pay- snent of retirement benefits) to the benefit of any private shareholder or individual, and * (B) the income consists solely of amounts received from public * taxation, amounts received Irons assessments on the teaching salaries of members, and income in respect of investments. * (12) Benevolent life insuranc~ associations of a purely local characte,-, mutual ditch or irrigation companies, mutual or cooperative telephone com- panies, or like organizations; but only if 85 ?crccnt or more of the income consists of amounts collected from members for the sole purpose of meetIng losses and. expenses. (13) Cemetery companies owned and operated exclusively for the benefit of their members or which are not operated for profit; and any corporation chartered solely for burial purposes as a cemetery corporation and not permitted by its charter to engage in any business not necessarily incident to that purpose, no part of the net, earnings of which inurcs to the benefit of any private shareholder or individual. (14) Credit unions without capital stock organized and operated for mutual purposes and without profit; and corporations or associations without capital stock organized before September 1, 1957, and operated for mutual purposes and without profit for the purpose of providing reserve funds for, and insuranCe of, shares or deposits in- (A) donicst~c building and loan associations, (B) cooperative banks without capital stock organized and operated' for mutual purposes and without profit, or * `- (C) mutual savings' banks not having capital `stock represented by shares. . . ` (15) Mutual insurance com~anics or associations otlier than life or marine `(including interinsurers and reciprocal underwriters) ii the gross amount :rtCeiVed during the taxable year .from the items described in section 822(b) (other than paragraph (1)(D) thereof) and prcnuiurns (including deposits a~. assessments) does not exceed $150,000. * (16) .Coiporations organized by an association subject to part HI of this subchapter or members. thereof, for the purpose of financing the oudi- `nary crop operations of. such members or other producers, and operated in conjunction with such association. Exemption shall not be denied any such corporation because it has capital stock, if the dividend rate of such stock is fixed at not to exceed the legal rate of interest in the State of incorporation or 8 percent per annum, whichever is greater, on' the value of the considera- tion for which the stock was issued, and if substantially all such 5tock (other than nonvoting preferred stock, the owners of which are not entitled or permittedto participate, directly or indirectly, in the profits of the corpora- tion, on dissolution or otherwise, beyond the fixed dividends) us owned by such association, or members thereof; nor shall exemption be denied any such corporation because there is accumulated and maintained by it a reserve required by State law or a reasonable leserve for any necessary purpose. PAGENO="0290" 288 B -.3 (17).(A) A trust ~zr trusts forming part of a plan providing for the pay- ment of supplemental uncmploymcnt compensation benefits, if- * (i) under the plan, it is impossible, a; any time prior to the * satisfaction of all liabilities with respect to employees under the plan, for:any part pf the corpus or income to be (within the taxable year or thereafter) used for, or diverted to, any purpose other than the providing of supplemental unemployment compensation beaefits, - -z~ (ii) such benefits are payable to employees under a classification which is set forth in the plan and which is found by the Secretary or his delegate not to be discriminatory in favor of employees who * are officers, shareholders, persons whose principal duties consist of supervising the work of other employees, or highly compensated * employees, and * * (iii) such benefits do not discriminate in favor of employees who are officers, shareholders, persons whose principal duties con- sist of supervising the work of other employees, or highly conipcn- sated employees. A plan shall not be considered discriminatory within the meaning of this clause merely because the benefits re- ceived under the plan bear a uniform relationship to the total corn- pensation, or the basic or regular rate of compensation, of the eniployces covered by the plan. (B) In determining whether a plan meets the requirements of sub- paragraph (A), any benefits provided under any other plan shall not be taken into consideration, except that a plan shall not be considered * discriminatory- (i) merely because the benefits under the plan which are first * determined irs a nondiscrirn ~ory manner within the meaning of * subparagraph (A) arc then *:ced by any sick, accident, or uneni- ployment compensation bet its receved under State or Federal law. (or reduced by a portion of such benefits if determined in a nondiscriminatory manner), or - ~ (ii) merely because the plan provides only for employees who a~e not eligible to receive sick, accident, or unemployment conipen- sation benefits under State or Federal law the same benefits (or a portion of such benefits if determined in a nondiscriminatory manner) which such employees would receive under such laws ii such employees were eligible for such benefits, or (iii) merely because the plan provides only for employees who * are not eligible under another plan (which meets the requirements of subparagraph (A)) of supplemental, unemployment compensation * benefits provided wholly by the employer the same benefits (or a portion of such benefits if determined in a nondiscriminatory man- ner) which such employees would receive under such other plan if such employeeswerc eligible under such other plan, ~but only if the employees eligible under both plans would make a classification which would be nondiscriminatory within the meaning of sub- * paragraph (A). * - (C) A plan shall be considered to meet the requirements of sub- * paragraph (A) during the whole of any year of the plan if on one day * in each quarter ft satisfies such requirements. (D) The term "supplemental unemployment cthnpensation benefits" means only- (i) benefits which are paid to an employee because of his involuntary separation from the employment of the enmployer (whether or not such separation is temporary) resulting directly from a reduc- tion in force, the discontinuance of a plant or operation, or other similar conditions, and (ii) sick and accident benefits subordinate to the benefits described in clause (i). (E) Exemption shall not be denied under subsection (a) to any organization entitled to such exemption as an association described in paragraph (9) of this subsection merely because such organization provides for the payment of supplemental unemployment benefits (as defined iii subparagraph (D) (i)). PAGENO="0291" 289 B.-4 [Sec: 501(d)] (d) REucIous AND AIO~TOLIC ORGANIZATIONS.-ThC following organizations are rcfçrrcd to in subsection (a): Religous or apostolic a~5oc~atiQu5 or corporations, if such associations or corporations have a COh~r~ion treasury ci- coffluittinty treasury, cvcn ~f such associations or corporations engage in business for the common benefit of the members, but only if the members thereof include (at the time of filing their returns) in their gross income their entire pro rata shares, whether distributed or not, of the taxable income of the association or corpora- tion for such year. Any amount so included in the gross income of a menTher shall be treated as a dividend received. [Sec.50l(e)] - "(c) CROSS REFEREN&- : For nonexemption of Communist-controlled organizations, see section 11(b) of the Internal Security Act of 1950 (64 Stat. 997; 50 U. S. C. 790 (b)). (Sec. 502] SEc~, 502. FEEDER ORGANIZATIONS. - . An or pro sh~ not be exempt u o ~on operated for the in on a ______________________ tion `gui on t~~~i~at alT' ~business ~óf its pr~:~ payable to one or more organizations exempt under seCtion 501 from taxation. For purposes of this section, the terrn"trade~,ng.aine~,.s.l~a~i. not include the rental b an ~ (including persona! ~ (Sec. 503] SEC, 503. REQUIREMENTS FOR EXEMPTION. - (Sec. 503(a)] (a) DznAs. os' ExENFrIoN TO ORGANIZATIONS ENGAGED w PROHIBITED TIUN5. ACTIONS.- * . (1) GENERAL RULE.- (A) An organization described in section S01(c)(3) which is subject to the provisions of this section shall not bc.e~u»=tfrom taxation under Section 501(a) ii it has ~ ~ai~sa~1ion~ after July 1, 1950. (B) An organization described in section 501(c)(17) which is sub- * *ject to tile provisions of this section shall not be exempt from taxation * ~~`dunder section 501(a) if it has engaged in a prohibited transaction after December 31, 1959. (C) An organization described in sccton 401(a) which is subject to the provisions of this section shall not,be exempt from taxation under section 501(a) if it has engaged in a prohibited transaction after March 1, 1954. (2) TAXABLE YEARS AI?FEcTED.~Afl organization described in section 501 (c)(3) or (17) or section 401(a) shall be denied exemotion from taxation under section 501(a) by reason of ~ * taxable year ~ jt s~np tlcccretr j~lc~e that suci orga(ilzation entered rpose of diverting corpus or in- osuc pr come of the organization from its exempt purposes, and such transaction involved a substantial part of the corpus or income of such organization. [Sec. 503(b)]. (b) ORGAN ZA~~'A~S TO Wrncs SECrION APPuzs.-~j nshalL~& to any Organization described in section 501(c) (3) or (17) or section 401 ~ (1) a religious organization (other than a trust); $~rrudcnts i~i~enance laculty and curriculum and ~ * (2) an educational organization ~vhich normally maintains a place wher regularly carried on; * PAGENO="0292" 290 B-5 (3) an organization which normally receives a substantial part of its support (exclusive of income received in the ekercise or performance by such organization of its charitable, educational, or other purpose or function 1. constituting the basis for its exemption under section 501 (a)) from the United States or any State or political subdivision thereof or from direct or indirect contributions from the general public; (4) an organization which is operated, supervised, controlled, or prin- cipally supported by a religious organization (other than a trust) which is * itself not subject to the provisions of this section; and * (5) an organization the principal purposes or functions of which are the7t.~ providing of medical or hospital care or medical education or medica~4' research or agricultural research. - * (Sic. 503(c)] (c)P~pmmi~i~ ~~~AçJ1PJj~.-For purposes of tids section, the term "pro- hibited transaction" means any transaction iii which an organization subject to the provisions of this section- (1) lends any part of its income or corpus, without the receipt of adc- quatc security and a reasonable rate of interest, to; * (2) pays any compensation, in excess of a reasonable allowance for * salaries or other compensation for personal services actually rendered, to; 7~, . (3) makes any part of its services available on a preferential basis to; (4) makes any substaniiai purchase of securities or any other property, for more than adequate consideration in money or money's worth, from; (5) sdlls any substantial part of its securities or other property, for less than an adequate consideration in money or money's worth, to; or (6) engages in any other transaction which results in a substantial diversion of its income or corpus to; the creator of such organization (if a trust); a person who has made a substan- to such Organization; a member of the family (a~ defined in - section 267 (c) (4)) of an individual who is the creator of such trust or who has made a substantial eontr?bution to such organization; or a corporation controlled by such creator or person through the ownership, directly or indirectly, of SO percent or more of the total combined voting power of all classes of stock entitled to vote or 50 percent or more of the total value of shares of all classes of stock of the corporation. * (Sec. 503(d)~ (d) Futuiex STArUS OF ORGANIzATIoNs Dzx;r.o ExzsrrTIoN.~~ganiz~jon described in section 501 (c) (3) or (17) or section 401(a which igdcnicd ~ under section 501 (a) by reason of subsection (a) of t us section, witEr~cct to any taxable year following the t~xablc year in which notice of denial of exemption was received, ma , under regulations prescribed by the Secretary or his delegate, * file ci im or cxç~ptjoi~,aj~~ if the Secretary or his delegate, pursuant to such regu atton~is satisfied that such organizatipn will not knowingly again engage ~ [Sec. 503(c)i * (e) DISALLOWANCE OF CERTAIN CuARITARLE, crc., DFDucrIoxs.-~p_giLt.L. bequest for rcijiou charitable, scientific, literary, or cducat~rjurpOSeS ~ng tic encouragement of art and th~ 3revcntior ot cruelty w children or animals), otherwise allowable as a dcu~. - ~ion uncer section 170, 6~2 (c), 545 (b) (2), 2055, 2106 (a) (2), or 252~,~ha1i b~ allowed asa deduction u made to an or jzation described in section 501 (c) (3) ijeh,irt tho1ka ~e year o1thi~ organization in which the gift or bequest is made, 2~ ~ under - * section 501 (a) by reason of this section. With respect to any taxabe year or the organization for which the organization is not exempt pursuant to sunsee- PAGENO="0293" 291 tion (a) by reason of having engaged in a prohibited transaction with the pur- pose of clivcrting the corpus or income of such organization from its exempt purposes and such transaction involved a substan~ral part of such corpus or i,~omc, and which taxable year is the same, or. priof' to the, taxable year of the organizatIon in which such transaction occurred, such deduction sit- i al- Iowcd the onor onl if such donor or (if suc i onor is an individual) any mcns cr us launu y ~id~Tiñcd in section 267 (c) (4))w~,~~rtyt~,ju.ch prohibited transaction. -~- (Sec. 503(1)) (f) DEvuNrnoN~-For purposes of this sect~on, the term "gilt or bequest" means any gilt, contribution, bequest, devise, legacy, or transfer. (Scc 503(g)) I'~' (g) SPEctAL ~.ULZ FOR LoA~s.-For pur2oscs of ~hc application of subsection ~c) (1), in the case of a loan by a trus: described in section 401 (a), the following rules shall apply with respect to a bar, made before March 1, 1954, which would Constitute a prohibited transaction if made on or after March 1, 1954: (1) If any part of the loan is repayable prior to December 31, 1955, the renewal of such part of the loan for a period not extending beyond December 31, 1955, on the sante terms, shall not be considered a prohibited transaction. (2) 11 the loan is repayab~c o;~ demand, the continuation of the loan without thc receipt of adequate security and a reasonable rate of interest beyond D~ecmbcr 31, 1955, shall be considered a prohibited transaction. (Sec. 503(h)) (h) Sr,~ct,~a. RULES RELATItW ~ro Lzxnixc nv Sacriox 401(a) ~a~o SEcrioN 501(c)(17) TRUSTS TO CERTAIN PassoNs.-For purposes of subsection (c)(1), a bone!, debenture, note, or certificate or other evidence of indebtedness (hereinafter in this subsection referred to as "obligation") acquired by a trust described in ~cction 401(a) or section 501(c)(1~).shall i~ot be treated as a loan made without the receipt of adequate security i(~ (1) such obligation is acquired- (A) on the market, either (i) at the price of the obligation prevail- ing on a national securities exchange which is registered with the Securities and Exchange Commission, or (ii) if the obligation is not * traded on such a national securities exchange, at a price not less favor- able to the trust than the offering price for the obligation as established by current bid and asked prices quoted by persons independent of the issuer; (B) from an underwriter, at a price (i) not in excess of the public - offering pr,ice for the obligation as set forth in a prospectus or offering circular filed with the Securities and Exchange Commission, and (11) at which a substantial portion of the same issue is acquired by persons independent of the issuer; or * (C) directly from the issuer, a a price not les~' favorable to the trust than the price paid currently for a substantial portion of the same issue-by persons independent of the issuer; (2) immediately following acquisition of such obligation- (A) not more than 25 percent of the aggregate amount `of obliga- tions issued in such issue and outstanding at the time of' acquisition is held by the trust, and (B) at least 50 percent of the aggregate amount referred to in. subparagraph (A) is held by persons independent of the issuer; and (3) immediately following acquisition of the obligation, not more than 25 percent of the assets of the trust is invested in obligations of' persons ~h~d In subsection (c). PAGENO="0294" 292 B.-.? / (Sec. 503(i)) ~ (i) LOANS WITH REsrEcr TO WHxcn EMI'LOYF-RS ARE PRosliBImo FRoM PLEDG- ING CERTAIN ASSETS.-SubSeCtiOrL (c)(1) shall not~ apply to a loan made by a trust described in section 401(a) to the cmpioycr (or to a renewal of such a loan or, if the loan is repayable upon demand, to a continuation of such a loan) if the loan bears a reasonable rate of interest, and if (in the case of a making: or renewal)- - (1) the employer is prohibited (at the time of such making or renewal) by any law of the United States or regulation thereunder from directly or indirectly pledging, as security for such a loan, a particular class or classes of his assets the valUe of which (at'such time) represents more than one-half of the value of all his assets; (2) the making or renewal, as the case may be, is approved in writing as an investment which is consistent with the exempt purposes of the trust by a trustee who is independent of the employer, and no other such trustee had previously refused to give such written approval; and (3) immediately following the making or renewal, as the case may be, - the aggregate amount loaned by the trust to the employer, without the receipt of adequate security, does nof exceed 25 percent of the value of all the assets of the trust. For purposes of paragraph (2), the terns "trustee" means, with respect to any trust for which there is more than one trustee who is independent of the em- ployer, a majority of such independent trustees. For purposes of paragraph (3), the determination as to whether any amount loaned by tile trust to the employer is loaned without the receipt of adequate security shall be made without regard to subsection (h). * [Sec. 503(j)] ~ Ci) TRUSTS BENEFITING CERTAIN OWNER-EMPLOYEES.- * (1) PROHIBITED TRANSAcTIONS-In the ease of a trust described in Section * `401(a) which is part of a plan providing contributions or benefits for em- ployees some or all of whom are owner-employees (as defined in section ;40l(c)(3)) who control (within the meaning of section 401(d)(9)(B)) the * trade or business with respect to which the plan is established, the term "pro- - hibited transaction" also means any transaction in which such' trust, directly or indirectly- (A) lends any part of the corpus or income of the tru~t to; (B) pays any compensation for personal services rendered to the trust to; (C) makes any part of its services available on a `preferential basis to; or (D) acquires for the truss any property from, or sells any property to; any person described in subsection (c) or to any such owner-employee, a member of the family (as defined in se~tion 267(c)(4)) of any such owner- employee, or a corporation controlled by any such owner-employee through the ownership, directly or indirectly, of 50 percent or more of the total com- bined voting power of all classes of stock entitled to vote or 50 percent or more of the total value of shares of all classes of stock of the corporation. (2) SPEcIM. RULE FOR LOANS-For purposes of the application of paragrapi: (1)(A), the following rules shall apply with respect to a loan made bcfo;e the date of the enactment of this subsection which would be a prohibited transaction if made in a taxable year beginning after December 31, r962: (A) If any part of the loan is repayable prior to December 31, 1965, the renewal of such part of the loan for a period not extending beyond December 31, 1965, on the same terms, shall not be considered a pro- bibited. transaction.. * (B) If the loan is repayable on demand, the continuation of the loan beyond December 31,1965, shall be considered a prohibited transaction. PAGENO="0295" 293 B..-8 [Sec. 504) * SEC. 504. DENIAL OF EXEMPTION. [Sec. 504(a)) (a) Gzarsit~t RULE.-IrI the case of any organization described in section 501 *(c) (3) to which section 503 is Ikable, cxemptiod under section 501 shall ~ ~`nicd for tlic taxable year if the amounts accumulated out of income during the taxable year or any prior taxablc ycar and not actually paid out by the end* of the taxable year- (1) are unrc am nt or duration in order to carry out the charitab c, educatonal, or othcr~ purpose or function constituting the basis for exemption under section 501 (a) of an organization described in section 501 (c) (3);or . (2) arej~ dto a substantial degree for purposes or functions other than those co~fltuting the basis for exemption under section 501 (~) of an organ- ization described in section 501 (c) (3); or (3)~.J~ea.ts~eZ in such a manner as to jeopardize the carrying out of the charitable, educational, or other purpose or function constituting the basis for exemption under section 501 (a) of an Organization described in section 501 (c) (3). /~1frParagraph (1) shall not apply to income attributable to property of a decedent dying before January 1, 1951, which is transferred under his will to a trust created by such will. In the case of a trust created by the will of a decedent dying on or alter January 1, 1951, if income is required to be accumulated pm'. ~suant to the mandatory terms of the will creating the trust, paragraph (1) shall apply only to in~onIc accumulated during a taxable year of the trust beginning more than 21 years after the date of death of the last life in being designated in the trust instrument. [Sec. 504(b)) (b) Cnoss REFERENCES.- For limitation on charitable contributions in case of unreasonable ac- cumulations by certain trusts, see section 681 (c) (2). SEC. 511. IMPOSITION OF TAX ON UNRELATED BUSINESS IN- COME OF CHARITABLE, ETC., ORGANIZATIONS. [Sec. 51l~a)) (a) CHARITABLE, ETc., ORGANIZATIONS TAXABLE AT CORPORATION RATES.- (1) IMPOsITION ~F TAx.-There is hereby imposed for each taxable year on the ~ late usincas taxable in s dcfincd in section 512) of every organization escri c in paragraph (2) a normal tax and a surtax computed as provided in Section 11. In making BuCh computation for purposes of this section, the term "taxable income" as used in Section 11 shall be read as "unrelated business taxable income". (2) ORGANIZATIONS SUBJECT TO TAX,- * (A) ORGANIZATIONS DESCRIBED IN SECTION 501(c) (2), (3), (5), (6), AND (17), AND SECTION 401 (a).-The taxes imposed by paragraph (I) shall apply in the case of any organization (other than a church, a convention or association of churches, or a trust described in subsection (b)) which is exempt, except as provided in this part, from taxation under this subtitle by reason of section 401(a) or of paragraph (3), (5), (6), or (17) of section 501(c). Such taxes shall also apply in the case of a.co~poration described in section S01(c)(2) if the income is payable to an organization which, itself is subject to the taxes imposed by paragraph (1) or to a church or to a convention or association of churches. PAGENO="0296" 294 (B) STATE COLLEGES AND UNIVERSITIES-The taxes imposed by para- graph (~i halla2l in the case of any college or universit~\vhich is an agency or instruincntality of any government or any political sub- division thereof, or which is owned or operated by a government or any political subdivision thereof, or by any a~ency or instrumentality of one or more governments or political also a~~Ly in ~ or universities. (Sec. 511(b)) (b) TAX ON CHARITABLE, ETC., TRUSTS.- -. (1) IMPOSITIoN OF TAX.-There is hereby imposed for each taxable year on the unrelated business taxable income of every trust described in para- graph (2) a tax computed as provided in section 1. In making such com- putation for purposes of this section, the term "taxable income" as used in section 1 shall be read as "unrelated business taxable income" as defined in section 512. . (2) CHARiTABLE, ETC., TRUSTS SUBJECT TO. TAX.-The tz~ imposed by pars- * graph (1) shall apply in the case of any trust which is exempt, except as provided in this part, from taxation under this subtitle by reason of section 501(c)(3) or (17) or section 401(a) and which, if it were not for such ex- emption, would be subject to subchapter J (sec. 641 and following, relating to estates, trusts, beneficiaries, and decedents). - (Sec. 511(c)) (c) EFFECTIVE DATE.-The tax imposed by this section shall apply, in the case of ~ trust described in section 401 (a), only for taxable years beginning after June 30, 1954: * * (Sec. 512] SEC. 512. UNRELATED BUSINESS TAXABLE INCOME. (Sec. 512(a)) (a) DEFn.'rrloN.-The term "unrelated business taxable income" means the gross income derived by any organization from any unrelated trade or business (as defined in section 513) regularly carried on by it, less the deductions allowed by this chapter which are directly connected with the carrying on of such trade or business, both computed with the exceptions, additions, and, limitations provided in subsection (b). In the case of an organization described in section 511 which is a foreign organization, the unrelated business taxable income shall be its unrelated business taxable income derived from sources within the United States determined under subchapter N (sec. 861 and following, relating to tax based on income from sources within or without the United States). Source: Sees. 421(d), 422(a), 1939 Code, substantIally unchanged. (Sec. 512(b)] (b) ExcrzrtoNs, ADDITIONS, A~~D LIitrrAffrIoNS.-ThC exceptions, additions, and limitations applicable in determining unrelated business taxable income are the following:* (1) There shall be excluded all dividends, interest, and annuities, and all deductions directly connected with such income. (2) There shall be excluded alt royalties (including overriding royalties) whether measured by production or by gross or taxable income from the property, and all deductions directly connected with-such income. (3) There shall be excluded all rents from real property (including personal propcrt~,r leased with the real property), and all deductions directly connected with such rents. - (4) Notwithstanding paragraph (3), in the case of a business lease (as defined in section 514) there shall be included, as an item of gross income derived from an unrelated trade or business,, the amount ascertained under section 514 (a) (I), and there shall be allowed, as a deduction, the amount ascertained under section 514 (a) (2). PAGENO="0297" 295 B-1O (5) There shall be excluded all gains or losses,froin the sale, exchange, * or other disposition of prope'rty other than- (A) stock in trade or other property of a kind which would properly be includible in inventory if on hand at the clp~e of the tax'.blc year. or (B) property held primarily for sale to customers in the ordinary course of the trade or business. This paragraph shall not apply with respect to thecutting of timber which * is considered, on the application of section 631, as a sale or exchange of such timber. (6) The net operating loss deduction provided in section 172 shall be allowed, except that- (A) the net operating loss for any taxable year, the amount of the net operating loss carryback or carryover to any taxable year, and the * net operating loss deduction for any taxable year shall be determined * under section 172 without taking into account any amount of income or * deduction which is excluded under this part in computing the unrelated * business ta~able income; and (B) the terms "preceding taxable year" and "preceding taxable * years" as used in section 172 shall not include any taxable year for * which the organization was not subject to the provisions of this part. (7) There shall be excluded all income derived from research for (A) the United States, or any of its agencies or instrumentalities, or (B) any State or pol~tical subdivision thereof; and there shall be excluded all deduc. tions directly connected with such income. (8) In the case of a college, University, or hospital, there shall be excluded all, income derived from research performed for any person, and all deductions directly connected with such income. (9) In the case of an organizatior, operated primarily for purposes of carrying on fundamental research the results of which are freely available to the general public, there shall be excluded all income derived from research performed for any person, and all deductions directly connected with such income. (10) In time case of any organization described in section 511 (a), the deduction allowed by section 170 (relating to charitable etc. contributions and gifts) shall be allowed (whether or not directly connected with the carrying on of the trade or business), but shall not exceed 5 percent of the unrelated business taxable income computed without th~ benefit of this paragraph. (11) In time case of any trust described in section 511 (b), the deduction allowed by section 170 (relating to charitable etc. contributions and gifts) shall be allowed (whether or not directly connected with the carrying on of the trade or business), and for such purpose a distribution made by the trust to a benefidary described in section 170 shall be considered as a gift or contribution. The deduction allowed by this paragraph shall be allowed with the limitations prescribed in section 170 (b) (1) (A) and (B) deter. mined with reference to the unrelated business taxable income computed without the benefit of this paragraph (in lieu of with reference to adjusted gross income). (12) There shall be allowed a specific deduction of $1,000. (13) In the case of a trust- (A) created by virtue of the provisions of the will of an individual who died after August 16, 1954, and before January 1, 1957, (B) which, by virtue of the provisions of such will, is a limited partner in a partnership created under the laws of a State (i) providing for tIme creation of limited partnerships, and (ii) under which a limited partner has no right to take part in tIme control of the business without becoming liable as a general partner, PAGENO="0298" 296 B-li * (C) which, at no timç bcforc or during a taxable year of the part- nership ending within~ or with the taxable ycar of the trust, was (or was liable as) a general partner in such partnership, and (D) which is* required to distribute all of its income (within the * meaning of section 643(b)) currently exclusivdy for religious, charitable, scientific, literary, or educational purposes, and which is required to distribute all of the corpus exclusively for such purposes, thcr~ shall be excluded its share (determined under subsection (c) without regard to this paragraph and paragraph (11)) of gross income of the pat.t- nership as such limited partner and of the partnership deductions directly connected with such incorrre, but, if such share of gross income exceeds such share of deductions, only to the extent that the partnership makes distribu- tions during its taxable year which are attributable to such gross income. For purposes of the preceding sentence (i) any distribution made after the close of a partnership taxable year and on or before the 15th day of the fourth calendar month after the closii of such taxable year shall be treated as made on the last day of such taxable year, and (ii) distributions shall be treated as attributable first to gross income other than gross income described in the preceding sentence, and shall be properly adjusted (under regulations prescribed by the Secretary or his delegate) to the extent necessary to reflect capital contributions to the partnership made by the trust, income of the part- nership exempt from tax under this title, and other items. (14) In the case of an organization which is described in section 501 (c)(5), there shall be excluded all income used to establish, maintain, or operate a retirement home, hospital, or other similar facility for the exclusive use and benefit of the aged and infirm~ members of such an organization, which is derived from agricultural pursuits conducted on ground contiguous to the retirement home, hospital, or similar facility and further provided that such incothe does not provide more than 75 percent of the cost of maintaining and operating the retirement home, hospital, or similar facility; and there shall be excluded all deductions directly connected with such income. (Sec. 512(cfl (c) SrEciAL RULES APPL1C.\RLE TO PARTNERSHIPS.-If a trade oçbusiness regu- larly carried on by a partnership of which an organization is a member is an unrelated trade or business with respect to such organization, such organization in computing itsunrclatcd business taxable income shall, subject to the excep- tions, additions, and limitations contained in subsection (b), include its share (whether or not distributed) of the gross income of the partnership from such unrelated trade or business and its share of the partnership deductions directly éonnectecl with such gross income. If the taxable year of the organization is different from that of the partnership, the amounts to be so included or deducted in computing the unrelated business taxable income shall be based upon the income and deductions of the partnership for any taxable year of the partnership ending within or with the taxable year of the organization. [Sec. 513] SEC. 513. UNRELATED TRADE OR BUSINESS. * [Sec. 513(a)] (a) Gs~Ei~L RuLE.-The term "unrelated trade or business" means, in the case of any organization subject to the tax imposed by section 511, any trade or business the conduct of which is not substantially related (aside from the need of such organization for income or funds or the use it makes of the profits derived) t the exercise or performance by such organization of its charitable, educational, or other purpose or function constituting the basis for its exemption under section 501 (or, in the case of an organization described in section 511(a) (2) (B), to the exercise or performance of any purpose or function described in section 501 (c) (3)), except that such term does not include any trade or business- PAGENO="0299" 297 B~.12 (1) in which substantially all the work in carrying on such trade or business is performed for thc organization without compensation; or * (2) which is carried on, in the case of an organizatkii described in section 501 Cc) (3) or in the case of a college or university described in section 511 (a) (2) (B), by the organization primarily for the convenience of its members, students, patients, officers, or employees; or (3) which is the selling of merchandise, substantially all of which has been received by the organization as gifts or contributions. (Sec. 513(b)) - (b) SPECIAL Rul.E FoI~ TRUSTS.-The term ~unrelatcd trade or business" means mu the case of- (1) a trust computing its unrelated business taxable income under sec- tion 512 for purposes of section 681; or (2) a trust described in section 401(a), or section S01(c)(17), which is exempt from tax under section 501 (a); any trade or bus~ncss regularly carried on by ~"chi trust or by a partnership of which it is a member. -. (Sec. 513(c)) (c) SPEcIAL RuI~E FOR CERTAIN PUBLISHING BuslNEssEs.-If a publishing busi- ness carried on by an organization during a taxable year beginning before January 1, 1953, is, without regard to this subsection, an unrelated trade or business, but before the beginning of the third succeeding taxable year the business is carried on by it (or by a successor who acquired such business in a liquidation which would have constituted a tax-free exchange under section 112 (b) (6) of the Internal Revenue Code of 1939) in such manner that the conduct thereof is substantially related to the exercise or performance by such organi- zation (or such successor) of its educational or other purpose or function described in section 501 (c) (3), such publishing business shall not be considered, for the taxable year, as an unrelated trade or business. (Sec. 514) SEC. 514. BUSINESS LEASES. (Sec. 514(a)) (a) BusiNEss LEASE RENTs AND DEDUcTIoNs-In computing under section 51~ the unrelated business taxable income for any taxable year- (1) PERCENTAGE OF RENTS TAKEN INTO Accouwr.-There shall be included with respect to each business Tease, as an item of gross income derived - from an unrelated trade or business, an amount which is the same percentage (but not in excess of 100 percent) of the total rents derived during the taxable year under such lease as (A) the business lease indebtedness, at the close of the taxable year, with respect to thepremises covered by such lease is of (B) the adjusted basis, at the close of the taxable year, of such premises. (2) PERCENTAGE OF DEDUCTIONS TAKEN INTO AccouN-r.-Thcrc shall be allowed with respect to each business lease, as a deduction to be taken into account in computing unrelated business taxable income, an amount deterlnined by applying the percentage derived under paragraph (1) to the sum determined under paragraph (3). * (3) DEDUCTIONS Au~owAsLE.-The sum referred to in paragraph (2) is the * * sum of the following deductions allowable under this chapter: * * . (A) Taxes ai~d other expenses paid or accrued during the taxable * year on or with respect to the real property subject to the business lease. (B) Interest paid or accrued during the taxable year on the business lease indebtedness. (C) A reasonable allowance for exhaustion, wear and tcar~ (including a reasonable allowance for obsolescence) of the real property subject to such lease. * * Where only a portion of the real property is subject to the business lease, there shall be taken into account under subparagraphs (A), (B), and (C) only those amounts which are properly allocable to the premises covered by such lease. * PAGENO="0300" 298 B~13 [Sec. 514(b)] (b) D~INITIoN OF Bus1NEs~ LRAsE.- (1) GENERAL RULE.-FOr purposes of this section, thc term "business lease" means a lease for a term of more than 5 years of i-cal property by an organi- zation (or by a partnership of which it is a member), if at the close of the lessor's taxable year there is a business lease indebtedness (as defined ir~ ~ubscction (c)) with respect to such property. - (2) SPECiAL RULES FOR APPLYING PARAGRAPH (1)-For purposes of para- graph (1)- (A) in computing tl~c term of a lease which contains an option for renewal or extension, the term of such lease shall be considered as * including any period for which such option may be exercised; and the term of any lease made pursuant to an exercise ~of such option shall include the. period during which the prior lease was in effect.. If real * property is acquired subject to a lease, the term of such lease shall be * considered to begin on the date of such acquisition. * (B) If the property has been occupied by the same lessee for a * total period of more than 5 years commencing not earlier than the date of acquisition of the property by the organization or trust (whether such * occupancy is under one or more leases, renewals, extensions, or con- tinuations thereof), the occupancy of such lessee shall be considered to be under a lease for a term of more than 5 years within the meaning of paragraph (1). However, subsection (a). shall apply in the case of a tenancy described in this subparagraph (and not within subparagraph (A)) only with respect to the sixth and succeeding years of occupancy by. the same lessee. For purposes of this subparagraph, the term "same lessee" shall include any lessee of the property whose relationship with a lessee of the same property is such .that losses in respect of sales or exchanges of property between the 2 lessees would be disallowed under section 267 (a) .. (3) ExcEvrloNs.- (A) No lease shall be considered a business lease if- (i) sucb.ieasc is entered into primarily for purposes which are - substantially related (aside from the need of such organization for * income or funds or the use it makes of the rents derived) to the exercise or performance by such organization of its charitable, educational, or other purpose or function constituting the basis for its exemption under section 501, or (ii) the lease is of premises in a building primarily designed for occupancy, and occupied, by tile organization. * (B) if a lease for more than 5 years to a tenant is for only a portion of the real property, and space in the real property is rented during tile taxable year under a lease for not more than 5 years to any other tenant of tile organization, leases of the real property for more than S years shall be considered as business leases during-tile taxable year only if- (i) the rents derived froni the real property during the taxable year under leases for more than 5 years (not including, as a lease for more than 5 years, an occupancy which is considered as such a lease by reason of paragraph (2) (B)) represent 50 percent or more of tile total rents derived during thc taxable year from tIle real property; or tlic area of tile premises occupied under leases for more than 5 years (not including, as a lease for more than 5 years, an occupancy which is considered as such a lease by rcason of paragraph (2) (B)) represents, at any time during the taxable year, 50 percent or more of the total area of the real property rented at such time; or (ii) the rent derived from the real property during the taxable * year from aily tenant under a lease for more than 5 years (including as a lease for more than 5 years an occupancy which is considered PAGENO="0301" 299 B.~14 as such a lease by reason of paragraph (2) (B)), or from a group of tenants (under such leases) who are ~ithcr members of an affiliated group (as d'cfincd in section 1504) or partners, represents more than 10 percent of the total rents derivcd during the taxable year from such property; or the area of tI~e premises occupied by any one such tenant, or by any such group of tenants, represents at any time during the taxable year more than 10 percent of the total area of the real property rented at such time. ,~In the application of clause (), if during the, last half of the term of a* lease anew lease is made to take effect after the expiration of such lease, :the unexpired portion of such lease on the date the second lease is made - ::*. shall not be treated as a part of the term of the second lease. - * : . .. [Sec. 514(c)] ;. (c) ,BUSINESS LEASE INDEBTEDNESS.- * (1) GENERAL RUL.E.-The term "business lease indebtedness" means, with ;espect to. any real property leased for a term of more than 5 years, the unpaid amount of- * (A) the indebtedness incurred by the lessor in acquiring `or rnprov- ing such property; - * (B) the indebtedness incurred before the acquisition or improvement of such property if such indebtedness would not have been incurred but for such acquisition or improvement; and (C) the indebtedness incurred after the acquisition or improvement of such property if such indebtedness would not have been incurred but for such acquisition or~ improvement and the incurrence of such indebt- edness was reasonably foreseeable at the time of such acquisition or improvement. - .. (2) PROPERTY ACQUIRED SUBJECT TO MORTGAGE, rrc.-Whcre real property is acquired subject to a mortgage or other similar lien, the amount of the indebtedness secured by such mortgage or lien shall be considered (whether the acquisition was by gift, devise, or purchase) as an indebtedness of the lessor incurred in acquiring such property even though the lessor did not assume or agree to pay such indebtedness, except that where real property was acquired by gift, bequest, or devise before July 1, 1950, subject to a mortgage or other similar lien, tile amount of such mortgage or other similar lien shall not be considered as an indebtedness of the lessor incurred in acquiring such property. (3) CERTAIN PROPERTY ACQUIRED BY GIST, ETC.-Where real property was acquired by gift, bequest, or devise before July 1, 1950, subject to a lease requiring improvements insuch property on the happening of stated contin- gencies, indebtedness incurred in improving such property in accordance with the terms of such lease shall not be considered as an indebtedness for purposes of this subsection. (4) CERTAIN CORPORATIONS DESCRIBED IN SECTION 501 (c) (2).-In the case of a corporation described in section 501 (c) (2), all of the stock of which was acquired before July 1, 1950, by an organization described in paragraph (3), (5), or (6) of' section 501 Cc) (and more than one-third of such stock was acquired by such organization by gift or bequest), any indebtedness incurred by such corporation before July 1, 1950,. and any indebtedness incuricd by such corporation on or after such date in improving real prop- ert~' in accordance with the terlns of a lease entered into before such date, shall not be considered as an indebtedness with respect to such corporation or such organization for purposes of this subsection. (5) CERTAIN. TRUSTS DESCRIBED IN SECTION 40! (a).-In the case of a trust described in section 401 (a), or in tile CaSe of a corporation described In PAGENO="0302" 300 B-15 *sectkn 501 (c) (2) all of the stock of which w~ acquired prior to March 1, 1954, by a trust described in section 401 (a), any indebtedness incurred by such trust or such corporation before March 1, 1954, in connection with real property which is leased before March 1, 1954, and an~ indebtedness incurred by such trust or such corporation on or after. such date necessary to carry out the terms of such lease, shall not be considered as an indebted. ness with respect to such trust or such corporation for purposes of this subsection. (6) BusiNEss LEASE ON PORTION OF PROI'ERTY.-In determining the amount of the business lease indebtedisess where only a portion of the real property is subject to a business lease, proper allocation to the premises covered by- such lease shall be made of the indebtedness incurred by the lessor with respect to the real property. * (7). SPECIAL RULE APPUCAI3LE TO TRUSTS DESCRIBED.IN SECTION 401. (a).- In the application of paragraph (I), if a trust described in section 401 (a) forming part of a stock bonus, pension, or profit-sharing plan of an employer lends any money to another trust described in section 401 (a) forming part of a stock bonus, pension, or proflt.sharing plan of the same employer, such * loan shall not be treated as an indebtedness of the borrowing trust, except to the extent that the loaning trust- (A) incurs any indebtedness in order to make such loan; (B) incurred indebtedness before the making of such loan which would not have been incurred but for the making of such loan; or (C) incurred indebtedness after the making of such loan which woui¬ have been incurred but for the making of such loan and which was reasonably foresccable at the time of making such loan. (8) TRUSTS DESCRIBED IN SECTION 501 (c)(17).-- (A) In thc case of a trust described in section 501 (c) (17), or in the case of a corporation described in section 501 (c) (2), all of tile stock of which was acquired before January 1, 1960, by a trust described in section 501 * (c) (17), any indebtedness incurred by such trust or such corporation :before January 1, 1960, in connection with real property which is leased before January 1, 1960, and any indebtedness incurred by such trust or such corporation on or after such date necessary to carry out tile terms of such lease, shall not be considered as an nidchtcdncss with respect to such trust or such corporation for purposes of this subsection. (B) In the application of paragraph (1), if a trust described in sec- tion S0I(c)(17) forming part of a supplemental unemployment compcn- sation benefit plan lends any money to anothlcr trust described in section 5Ol(c)(17) forming part of tile same plan, such loan shall not be treated as an indebtedness of the borrowing trust, except to the extent that tile loaning trust- (i) incurs any indebtedness in order to make such loan, (ii) incurred indebtedness before tile making of such loan which would not have been incurred but for thi~ making of such loan, or (iii) incurred indebtedness after the making of such loan which would not have been incurred but for the making of such loan and which was reasonably foreseeable at the time of making such loan. - [Sec. 514(d)J . - (d) PERSONAL PROPERTY LEAseD Wins REAL PR0PERTY.-For purposes of this Section, the term "real property" and the terrh "premises" include, personal property of the lessor leased by it to a lessee of its real estate if -the lease of such personal property is made under, or in connection with, the lease of such real estate. - PAGENO="0303" 301 B~16 (Sec. 515] SEC. .515. TAXES OF FOREIGN COUNTRIES AND POSSESSIONS OF THE UNITED STATES. The amount of taxes imposed by foreign countries and possessions of the United States shall be allowed as a credit against the tax of an organization subject to the tax imposed by section 511 to the extent provided in section 901; and in the case of the tax imposed by section 511, the term "taxable incomt" as used in. section 901 shall be read as "unrelated business-t~xabJc4ncorne". 87-444 0-68-20 PAGENO="0304" 302 c.j I11ino~i ~ct For~~PrOr1t Corporation Act § 4. Purposes. Not for profit corporations may be organized under this Act for any one or more of the following or similar pur- poses: charitable; benevolent; eleemosynary ; educational; civic; pa- triotic; political; religious; social; literary; athletic; scientific; re- search; agricultural; horticultural; soil, crop, livestock and poultry improvement; professional, commercial, industrial or trade associa-. tion; electrification on a co-operative basis; telephone services on a mutual or co-operative basis; ownership and operation of water supply facilities for drinking and general domestic use on a mutual or co- operative basis; and ownership of residential property on a co-opera- tive baths. . - Any corporation may be organized hereunder for the purpose of promoting the development, establishment and expansion of industries and where such promotion is to be carried on in an area which adjoins or borders (exinpt for any intervening natural watercourse) an area located in an adjoining state intended to be included in such promo- tion such corporation may join with any corporation created by the adjoining state, having an identical purpose and organized as a not for profit corporation. Whenever any corporation organized under this Act for the purpose of promoting the development, establish- ment and expansion of industries joins with a foreign corporation having an identical purpose, such corporations shall be permitted to do business in Illinois as one corporation; provided: (1) that the name, by-law provisions, officers and directors of each corporation are identical, (2) that the foreign corporation complies with the pro- visions of this Act relating to the admission of foreign corporations, and (3) that the Illinois corporation file a statement with the Secre- tary of State indicating that it has joined ~. a foreign corporation setting forth the name thereof and the stat its incorporation. (As amended by Act approved June 16, 1953; ~ amended by Act ap- proved August 1 and August 8, 1961; as amcndcd by. Act approved August 23, 1963.) . - - § 5. General Powers. Each corporation shall have power: (a) To have perpetual succession by its corporate name unless a limited period of duration is stated in its articles of incorporation. (b) To sue and be sued, complain and defend, in its corporate name. (c) To have a corporate seal which may be altered at pleasure, and to use the same by causing it, or a facsimile thereof, to be im- pressed or affixed or in any other manner reproduced. (d) To purchase, take, receive, lease as lessee, take by gift, de- vise or bequest, or otherwise acquire, and to own, hold, use, and other- wise deal in and with any real or personal property, or any interest therein, situated in or out of this State. (e) To sell, convey, mortgage, pledge, lease as lessor, and other- wise dispose of all or any part of its property and assets. (f) To purchase, take, receive, subscribe for, or otherwise ac- quire, own, hold, vote, use or employ shares or other interests in or obligations of domestic or foreign corporations, whether for profit or not for profit, associations, partnerships, or indivith;ih. and to sell, mortgage, loan, pledge, or otherwise dispose of, such ~ nteresta or obligations; Provided that corporat;ons for agricultural purposes with members having voting rights, may acquire, by purchase or otherwise, stocks and evidences of indebtedness of other corporations, PAGENO="0305" 303 whether for profit or not for profit, or associations whose activities will directly or indirectly promote agriculture ~r the interests of those engaged in agriculture, only upon consent of a majority of the mem- bers present or represented by proxy, in quorum, in any annual or special meeting of its members to which the question of such acquisi- tion may be submitted. (g) To make contracts and incur liabilities which may be ap- propriate to enable it to accomplish any or all of its purposes; to bor- row money for its corporate purposes at such rates of interest as the corporation may determine; to issue its notes, bonds, and other obli- gations; and to secure any of its obligations by mortgage, pledge, or deed of trust of all or any of its property, franchises, and income. (h) To invest its funds from time to time in any real or per- sonal property~ to lend money for its corporate purposes; and to take and hold real and personal property as security for th.e payment of funds so invested or loaned. (i) To conduct its affairs, carry on its operations, and have o~ces within and without this State, and to exercise in any other state, territory, district or possession of the United States, or in any foreign country, the powers granted by this Act. (j) To elect or appoint officers and agent~ of the corporation, and to define their duties and fix their compensations. (k) T~ make and alter by-laws not inconsistent with its articles of incorporation or with the laws of this State, for the administration and the regulation of the affairs of the corporation. (1) To make donations in furtherance of any of ~ts purposes and in time of war to make donations to the United States or to associa- tions and organizations aiding the United States in war activities, and to lend money to the State or Fe~leral government for war purposes. (in) To cease its corporate activities and surrender its corporate franchise. (a) To have and exercise all powers necessary or convenient to effect any or all of the purposes for which the corporation ii~ or- ganized. § 8. Members. A corporation may have one or more classes of members. The designation of such class or classes and the qualifica- tions and rights of the members of each class shall be set forth in the articles of incorporation or the by-laws. A corporation may issue cer- tificates evidencing membership therein. § 15. Voting. The right of the members, or any class or classes of members, to vote may be limited, enlarged or denied to the extent specified in the articles of incorporation or the by-laws. Unless so limited, enlarged or denied, each member, regardless of class, shall be entitled to one vote on each matter submitted to a vote of members. A member may vote in person or, unless the articles or the by- laws otherwise provide, by proxy executed in writing by the member or by his duly authorized attorney-in-fact. No proxy shall be valid after 11 months from the date of its oxccutiun, u~1e~s otherwise pro. vided in the proxy. Where directors or officers are to be elected by members, the by-laws may provide that s~ elections may be con- ducted by mail. The articles of incorporation or the by-laws may provide that in all elections for directors every nember entitled to vote shall have the right to cumulate his vote and to give one candidate a number of PAGENO="0306" 304 C -..3 votes equal to his vote multiplied by the number of directors to be elected, or to distribute, such votes on the same principle among as many candidates as he shall think fit. [Amended by Act effective July 17, 1959.] § 17. Board of Directors. The affairs of a corporation shall be managed by a board of directors. Directors need not be residents o~ this State or members of the corporation unless the articles of incor- poration or by-laws so require.. The articles of incorporation or the by-laws may prescribe other qualifications for directors. § 18. Number and Election of Directors. The number of di- rectors of a corporation shall be not less than three. Subject to such limitation, the number of directors shall be fixed by the by-laws, except as to the number of the first board of directors which number shall be fixed by the articles of incorporation. The number of di- rectors may be increased or decreased from time to time by amend- ment to the by-laws, unless the articles of incarporation provide that a change in the number of directors shall be made only by amend- iaent of the articles of incorporation. In the absence of a by-law fixing the number of directors, the number shall be the same as that stated in the articles of incorporation. The directors constituting the first board of directors shall be named in the articles of incorporation and shall hold office until the first annual election of directors or for such other period as may be specified in the articles of incorporation or the by-laws. Thereafter, directors shall be elected or appointed in the manner and for the terms provided in the articles of incorporation or the by-laws. In the absence of a provision fixing the term of office, the term of office of a director shall be one year. Directors may be divided into classes and the terms of office of the several classes need not be uniform. Each director shall hold office for the term for which he is elected and until his successor shall have been elected and qualified. § 19. Vacancies. Any vacancy occurring in the board of di- rectors and any directorship to be filled by reason of an increase in the number of directOrs may be filled by the board of directors unless the articles of incorporation or the by-laws provide that a vacancy or directorship so created shall be filled ia some other manner, in which case such provision shall control. A director elected or appointed, as the case may be, to fill a vacancy shall be elected or appointed for the unexpired term of his predecessor in office. § 23. Officers. The officers of a corporation shall consist of a president, one or more vice-president-s a secretary, a treasurer and such other officers and assistant officers as may be deemed necessary, each of whom shall be elected or appointed at such time and in such manner and for such terms not exceeding three years as may be pre- ecrib~d in the articles of incorporation or the by-laws. In the absence of any such provision, all officers shall he elected or appointed an- nually by the board of directors. If the by.laws so provide, any two or more offices may be held by the same person, except the offices of president and secretary. PAGENO="0307" 305 C-4 The articles of incorporation or the by-laws may provide that any one or more officers of the corporation shalL~o ox of/icfo members of the board of directors. The o~cers of a corporation may also be designated by such other titles as may be provided in the articl~s of incorporation or the by4aws. § 44. Voluntary Dissolution. A corporation may dissolve and wind up its affairs in the following manner: (a) Where there are members having voting rights, the board of directors shall adopt a resolution recommendinr that the cornora- tion be dissolved, and directing that the question of such dissolution be submitted to a vote at a meeting of members having voting rights, which may be either an annual or a special meeting. Written or printed notice stating that the purpose, or one of the purposes, of such meeting is to consider the advisability of dissolving the corpora- tion, shall be given to each member entitled to vote at such meeting, within the time and in the manner provided in this Act for the giving of notice of meetings of members. A resolution to dissolve the cor poration shall be adopted upon receiving at least two-thirds of th~ votes entitled to be east by members present or represented by proxy. (b) Where there are no members having voting rights, the dis- solution of the corporation shall be authorized at a meetic f the boardof directors upon the adoption of a resolution to dissolve by the vote of a majority of the directors in office. Upon th~ adoption of such resolution by the members, or by the board of directors where there are no members having voting rights, the corporation shall cease to conduct its affairs except insofar as may be necessary for the proper winding up thereof, shall immediately cause a notice of the proposed dissolution to be mailed to each known creditor of the corporation, and shall proceed to collect its assets and apply and distribute them as provided in this Act. § 45. Distribution of Assets. The assets of a corporation in the process of dissolution shall be applied and distributed as follows: (a) All liabilities ui;d obligations of the corporation shall be paid, satisfied and discharged, or adequate provision shall be made therefor; (b) Assets held by the corpQration upon condition requiring re- turn, transfer or conveyance, which condition occurs by reason of the dissolution, shall be returned, transferred or conveyed in accordance with such requirements; (c) Assets held for a charitable, religious, eleemosynary, benevo- lent, education or similar use, but not held upon a condition requiring return, transfer or conveyance by reason of the dissolution, shall be transferred or conveyed to one or more domestic or foreign corpora- tions, societies or organizations engaged in activities substantially similar to those of the dissolving corporation, pursuant to ~ plan of distribution adopted as provided in this Act; (d) To the extent that the articles of incorporation or by-lawa determine the distributive rights of members, or any class or classes of members, or provide for distribution to others, other assets, if any, shall be distributed in accordance with such pro'i-isions; (e) Any remaining assets may be distributed tc such persona, societies, organizations or domestic or foreign corporations, whether for profit or not for p:ofit, as may be specified in a plan of distribu- tion adopted as provided in this Act. § 46. Plan of Distribution. A plan providing for the distri- bution of assets, not inconsistent with the provisions of this Act, may PAGENO="0308" 306 be adopted by a corporation in the process of dissolution and shall be adopted by a corporation for the purpose of authorizing any trans. fer or conveyance of assets for which this Act requires a plan of distribution, in the following manner: (a) Where there are members having voting rights, the board of directors shall adopt a resolution recommending a plan of distri- bution and directing the submission thereof to a vote at a meeting of members having voting rights, which may be either an annual or a special meeting. Written or printed notice setting forth the proposed plan of distribution or a summary thereof shall be given to each mem- ber entitled to vote at such meeting, within the time and in the manner provided in this Act for the giving of notice of meetings of members. Such plan of distribution shall be adopted upon receiving atleast two-thirds of the votes entitled to be cast by members present or represented by proxy at such meeting. (b) Where there are no members having voting rights, a plan of distribution shall be adopted at a meeting of the board of directors upon receiving the vote of a majority of the directors in ofi~ce. Filing Fee $10.00 FORM NP-29 ARTICLES OF INCORPORATION UNDER THE GENERAL NOT FOR PRO~1T CORPORATION ACT * (Tl~ ~a Must So Filed in Duplicate) (Do Not Write in This Space) Date Paid Filing Fee .5 To PAUL POWELL, Secretary of State, Springfield. Illinois. We, the undersigned. OSot Iota Sun thnn) . . . Addreen Name Number Street City * - State being naturslpe:sons of thc age of twenty-one years or more and citIzens of the United States, for the purpose of forming a corporation under the "General Not For Profit Corporation Act" of the State of Illinois, do hereby adopt the following Articles of Incorporation: 1;; The oasis of the corporation is:... PAGENO="0309" .2. The period of duration of the corporation is: 3. U~oaoo ototo `porpotoof' or dofinito orootbor of praoa) The address of its initial Registered Ofiic~ in the State of Illinois is: ________________________________ Street in the of L,.,-...-....-) County of _________________ .d the name of its initial Registenad Agent a: said Address is:. 4. The first Board of Directors shall bo fri number, their names and addresses being as follows: Odot f~ 5~ o5~) Addroao Name Number StreOt tlt7 State S. The purpose or purposcu for which the corporation is organized are: (NOTE: Any special provislox~ authorized or permitted by statute to. be contained in the Articles, of Incorporation, may be inserted above). . . . (INCORPORATORS MUST SIGN rFLOW) . ~. Incorporators ACKNOWLEDGMENT Jss. 307 STATE OF lWNOIS~ County oL_.,,..,,, _dsy oL ________ ~ Notary Public do hereby certify that on the Qda.oaes of Incorporator,) PLACE (NOTARIAL SEAL) PIERE personally appeared before me and being first duly sworn by me severally acknowledged that they signed the foregoing document in the respective capacities therein oct forth and declared that the statements therein contained are true. IN WITNESS WHEREOF, I have hereunto set my band and seal the day and year above written. Not.&t7 PnbUa. PAGENO="0310" 308 C~7 FORM N?~29,,. F ARTICLES OF ]~C3RPO~ATION tnde~ t~c~ GENERAL NOT FO~ PROFIT COItPORAT~ON ACT (These Articise Muzt Be Exocuted ~ P~1ed tn Duplicate) Filing Fee ~:o.oo ;rv. i, 114S (21~7&.-2OM-114S) ~ PAGENO="0311" 309 D..-J. J1scon~in Xon~Stock Act 181.03 Purposes. Corporations n~ay be organized undcr this chapter for any law. ful purpose whatever, except banking, insurance, and building or operating public rail- roads, but subject always to provisions elsewhere in the stntutcs relating to the orgamza- tion of specified kinds or classes of corporations. 181.04 Gcncra~ powers. Each corporation, when no inconsistent provision is made by law or by its articles of incorporation, shall have power: (1) To exist perpetually. (2) To sue and be sued, complain and defend, in its corporate name. (3) To have a corporate seal which may be altered at pleasure, and to ~se the same by causing it, or a facsimile thereof, to be impressed or affixed or in any other manna reproduced. (4) To purchase, take, receive, lease, take by gift, devise or bequest, or otherwise acquire, and to owns hold, improve, use and otherwise deal in and with real or personal property, or any interest therein,, wherever situated. (5) To sell, convey, mortgage, pledge, lcn~c, exchange, trau~fcr aiid otherwise din. ~O6C of nil or any part of its prupeity and assets. (6) !ro purchase, take, receive, subscribe for, or otherwise acquire, own, hold, vote~ use, employ, sell, mortgage, lend, pledge, or otherwise dispose of, and otherwise use and deal in and with, shares or other interests in, or obligations of, other corporations, how- ever or wherever organized, and of associations, trusts, partnerships, or individuals, or of the United States or of any government, state, territory, governmental district or mu- nicipality or of any instrumentality thereof. (7) To make contracts and incur liabili'ies; to borrow money at such rates of inter. est as the corporation may determine; to iss ie its notes, bonds and other obligations; and to secure any of its obligations by mortgagE or pledge of all or any of its property, fran. chises and income. `(8) To invest its funds from time to t~nie and to lend money for its corporate pnx~ poses, and to take and hold real and personal property as security for the payment of funds so invested or loaned. (9) To conduct its business and affairs, carry on its operations, and have offices and exercise the powers granted by this chapter in any state, territory, district, or possesaioA of the United States, or in any foreign country. (10) To elect or appoint officers and agents of the corporation, and to defino their duties and fix their compensation. (H) To make and alter by-laws not inconsistent with its articles of incorporation or with the laws of this state, for the administration and the regulation of the affairs of the corporation. (12) To make donations for the public welfare or for charitable, scientific, educa- tional or religious purposes. * (13) To indemnify any director or officer or former director or officer of the corpo.. ration, or any person who may have served at its request as a director or officer of an- other corporation in which it Owns shares of capital stock or of which it is a member or creditor, against expenses actually and necessarily incurred by him in connection with the defense of any action, suit or proceeding in which he is made a party by reason of being or having been such director'or officer, except in relation to matters as to which he shall be adjudged in such action, suit or proceeding to be liable for negligence or mis- conduct in the performance of duty; but such indemnification shall not ~e deemed ex- clusive of any other rights to which such director or officer may be entitled, under any bylaw, agreement, vote of members, or otherwise. (14) To cease its corporate activities and surrender its corporate franchise. (15) To have and exercise all powers necessary or convenient to effect any or efl 02 the purposes for which the corporation is organized. PAGENO="0312" 310 D-2 181.11 Members. Acorjörationrna7 have onc or n~ox~c classes of members or may bave norcembers. If the corporation has onèor more classes of members, the designa- tion of such class or classes, and the qualificatiàris, ~igbts. and method of acceptanc.e of tstethbers of-each da~s'shall be set forth in the articles of incorporation, or in the by-laws ~f the articlesco provide.. A corporation may issue certificates evidencing membership thertin. ~ .: .. :~ * . . 181.16 Voting. (1) ~l~he right of the members, or ziny class or classes of members, to vote may be limitCd, enlarged or denied to the extent specified in the articles of incor- poration or In the by.laws if the articles so provide. Uness so limited, enlarged or denied, each member, regardless of class,-shall be entitled to one vote on each matter submitted to a vote of members. - (2) A member may vote in person, or unless the articles of incorporation or by-laws provide otherwise, may vote by proxy executed in writing by the member or by his duly authorized a~torney.in-fact. No proxy shall be valid after 11 months from the date of ith execution, unless otherwiseprovided in the proxy. Where directors or officers arc to be elected by members, the by-laws spay provido that such eleptions may be conducted by mall. . . . . ~.. (3) A corporate membc~'s vote may be ~asf by the president of the u~mbsr corporo- tlon, or by any other officer or proxy appointed by the president of sue1~ corporation, in the absence of orpress notice of the desmgnatioh of come other person by the board of directors or by-laws of tho.zoembcr ~oi~poration~ . * ~... .`t.': *.* : 181.18 Board of directors. The affairs of a corporation shall be managed by a board of directors. Directors need not be residents of this state or members of the cor- poration unless the articles of incorporation or by-lawsso require. The by-laws may pr& `scrbc other qualifications for directors. 181.19 Directors' authority to establish compensation. Unless otherwise provided in the articles of incorporation or by-laws, the board of directors, by the affirmative vote of a majority of the directors then in office. and irrespective of any personal interest of any of its members, shall have authority to establish reasonable compensation of all direc- tors for services to the corporation as directors, officers or otherwise, or to delegate such authority to an appropriate committee. The board of directors also shall have autbority to provide for or to delegate authority to an appropriate committee to provide for rea- sonable pensions, disability or death benefits, and other benefits or payments, to directors, officers and employcs and to their estates, families, dependents or beneficiaries on account of prior services rendered by such directors, officers and cmploycs to the corporation. 181.20 Number and election of directors. (1) The number of directors of a cor- poration shall not be less than 3. Subject to such limitation, the number of directors shall be fixed by the articles of incorporation, or, if the articles of incorporation so provide, by the by~1ewe. (2) The directors constituting the first board of directors shall be named in the articles of incorporation and shall hold office until the first annual election of directors or for such other period as may be specified in the articles of incorporation or the by-laws. Thereafter, directors shall be elected- or appointed in the manner and for terms provided in the articles of incorporation or the by-laws. In the absence of a provision fixing the term of office, the term of oflicc of a director shall be one year. (3) Directors may be divided into classes and the terms of office of the several classes need not be uniform. Each director shall hold office for the term for which he is elected or appointed and ~nti1 his successor shall have been elected or appointed and qualified. (4) A director may be removed from office for cause, or for any reason provided in the articles of incorporation or bylaws. `The articles of incorporation or by-laws may provide the procedure for any such removal. 181.25 Officers. (1) The officers of a corporation shall consist of a president, one or wore vice presidents, a secretary, a treasurer and such other officers and assistant offl~ cers as may be deemed necessary, each of whom shall be elected or appointed at such time and in such manner and for such terns not exdeeding 3 years as may be prescribed in the PAGENO="0313" * 311 aticles of incorporation or the by-laws. In the absence of any sucl~ pro~ision, nil officers shall be elected or appointed annually' by the board of directors. If the by-laws so pro- vide, any 2 or more offices rosy be held by the same pcison, except the offices of president and secretary, and the offices of president and vice president. (2) All officers and agents of the corporation, as between themselves and the cor- poration, shall have such authority and perform such duties in the management of the corporation as may be provided in the articlesof incorporation or in the by-laws, or as may be deternined by resolution of the board of directors not inconsistent with the articles of incorporation or the by-laws. - (3) The articles of incorporation or f lie by-laws moy provide that any one or more officers of the corporation shall be cx officio members of the board of directors. (4) The officers of a corporation may be designated by such other titles as may be provided in the articles of incorporation or the by-laws; and in such case any document required or permitted by this chapter to he signed by the president, vice president, secre- tary or assistant secretary may be signcd by such officer as may be stated in such docu- men~ to correspond to the officer so required or permitted to sign. 181.51 Distribution of asset5. The assets of a corporation in the process of disso- lution shall be applied and distributed as follows: (1) All liabilities and obligations of the corporation shall be paid, satisfied and dis- charged, or adequate provision shall be made therefor; (2) Assets held by the corporation upon condition requiring return, transfer or con- veyance, which condition occurs by reason of the dissolution, shall be returned, trans. ferred or conveyed in accordance with such requirements; (3) Assets received and held by the corporation subject to limitations permitting their use only for charitable, religious, clccruosynary, benevolent, education or similar pur- poses, but not held upon a condition requiring return, transfer or conveyance by reason of the dissolution, shall be transferred or conveyed to one or more domestic or foreign corporations, societies or organizations engaged in activities substantially similar to those of the dissolving corporation, pursuant to a plan of distribution adopted as provided in this chapter; (4) Other assets, if `any, shall be distributed in accordance with the provisions of the articles of incorporation or the by-laws to the extent that the articles of incorporation or by-laws determine the distributive rights of members, or any class or classes of members, or provide for distribution to others; - (5) Any remaining assets may be distributed to such persons, societies, organizati~ns or domestic or foreign corporations, whether for profit or not for profit, as may be sped- fled in a plan of distribution adopted as ;rovidcd in this chapter, provided that assets received and held by corporations orgaut~d for charitable, religious, elcemosynary, be- nevolent, educational or similar purposes shall be transferred or conveyed to one or more domestic or foreign corporations, societies or organizations engaged in activities sub- stantially similar to those of the dissolving corporation. 181.52 Plan of distribution. Where the articles of incorporation do not provide for the distribution of assets on dissolution, a plan providing for the distribution of assets, not inconsistent with the provisions of this chapter, may be adopted by a corpora- tion in the process of dissolution and shall be adopted by a corporation for the purpose of authorizing any transfer or conveyance of assets for which this chapter requires a plan of distribution, in the following manner: (1) Where there are members having voting rights, any plan of distribution shall be submitted to a vote at a meeting of members having voting rights, which may be either a regular or a special meeting. Written notices setting forth the proposed plan of distribu- tion or a summary thereof shall be given to each member entitled to vote at such meeting, `within the time and in the manner provided in this chapter for the giving of notice of meetings of members. Such plan of distribution shall be adopted upon receiving at least two-thirds of the votes entitled to be cast by members present or represented by~ proxy at guch meeting. (2) Where there are no members having voting rights, a plan of distribution shall be adopted at a meeting of the board of directors upon receiving the vote of a majorityof the directors in olBee, - PAGENO="0314" 312 D-4 Form ios-e,~. st~w iges Sec suggestions 00 ARTICLES OF IN CORPORATIC Executed by the undersigned for the purpose of forming a Wisconsin corporation under Chapter 181 of the Wisconsin statutes, Without STOCK AND NOT FOR PROFiT. * Article 1. The name of the corporation shall be Article 2. Theperiod of existence shall be Article 3. The purposes shall be* Article 4. Location of the principal office Article 5.. Name of the initial registered agent Article 6. Address of the initial registered agent Article 7. The number of directors may be fixed by by-law but shall be not lees than three. Article 8. The number of directors constituting the initial board shall be ... Article 9. Names and addresses of the initial directors: PAGENO="0315" Article 10. (Memborchip provisions) Article 11. (Other provisions) 313 D-5 Article 12. Tho name and addreas of incorporator (or incorporators) are: NAME ADDRESS (nanthat, sfr~ot and cIty) Article 13. These articles may be amended in the manner authorized by law at the time ~if ~inendment. Executed in duplicate on the .. day of .. .. 19 PAGENO="0316" 314 D-6 STATE OF Ba, County of Personally came before me this -... day of A. D. 19 the above named ;.... .. .. .. .. -..`~` to me known to be the person.... who executed the foregoing instrument, and achnowledged the same. Notary Public. .(Notarial Seal.) My Commission expires .. .. INSTRUCTIONS AND SUGGESTIONS ~~Ar~1s 1. The name MUST contain "Corporation." "incorporated," or "Limited," or the abbreviation of c A 2. Article 2. Insert "perpetual" or insert any limitation desired. 8. Article 8. Must show definite purposes. (Tho statute expressly states that it is NOT necessary to enumerate the powers.) 4. Articles 5 and 6. The corporation MUST have a registered agent. Aiti~ Article 7. This article may be stricken if desired. In that case, the number of directors will remain as shown in 6. Article 10. This article must set out the method of accepting and discharging members, any denial or restriction Ovtmg rgi to nny clasaf f mereb ro (including d tmgu ohmg I shires of each class) OR the article must If the corporation is to have no members, Article 10 must so state. * PAGENO="0317" 315 D-7 7. Article 11 provides apace for inserting any other previsions which may be desired. 8. Articles must be executed and sent to the Secretary of State, Madison, Wisconsin 63702 in duplicate original - one t~Je flied in his office and one which will be certified and returned and ~vhichmust be recorded in the office of tho register ofdecds of the county wherein the principal office ii located. Corporate existence will commence when articles are lath for record with the register of deeds. lw 9. ~`iling fee is $20.00. Send with the articles. 0 0 0 O vs i .~ PAGENO="0318" 316 E-l Indiana Application to Peg~ster Foreign Corporation A-Il (Filing fee of $16.90 must necompany aj~jlicotfon) -a- Application for Admission _by Foreign Not for Profit Corporation City State (Date) To the Secretary of State, of the State of Indiana, Indianapolis, Indiana. -. -. , a foreign corporation incorporated on the day of ., 19 and existing under the laws of the State of in compliance with the provisions of Section 28 of an Act of the General Assembly of the State of Indiana entitled "An Act concerning domestic and foreign corporations not for profit, providing for fees, providing penalties for the violation thereof, and repealing certain laws," ap- proved March 7, 1985, hereby makes the following declaration: (1) The name of this corporation is (2) The location of its principal office or place of busi~iets outside the State of Indiana, is Street City - State. (3) It has been admitted or qualified to do business in the following states~ (4) The character of business under its articles of incorporation or association, which it intends to carry on in Indiana, is as follows: (5) The period during which it is to continue as a corporation is years. (6) a. The location of its proposed principal office in Indiana is Street or Building, City of County of Indiana. PAGENO="0319" Cotety State Cootty State 317 E-2 b. The name of the person permanently residing in Indiana upon whom, as the resident age- the corporation, until his successor shall have been appointed, service of legal process may be h . whose post office address is - .. Street or Buildfng, City of County of Indiana. (7) If the memberships are divided into classes the designations of the different classes, and a statement of the relative rights, preferences, limitations and restrictions of each class, together with a statement as to the voting rights of any such class. (8) The number of directors of this corporation is ....~.. ..... .. (9) The names and addresses of its board of directors are as follows: - Name Steeet city Coo,tty State Name Ste,,t City Cmnty State Ntme Street City Conety State Name Street City Cuuety Stat j Name Street City Coutty State Name Street City Couaty State - Name Street City County State Name Street City Canaty State Name Street City County Stat. (10) The name and post office addresses of its officers are as follows: Name Street City Name Street City 87-444 0-68-21 PAGENO="0320" 318 E-3 Name Street City County Stat. Name Street City Cuonty State Name Street City County State Name Street City County State (11) A statement of property in Indiana and an estimate of the value thereof, to be taken over by this corporation upon its admittance to Indiana: (12) Any other provisions, consistent with the laws of this state, for the regulation and conduct of the affairs of this corporation, and creating, defining, limiting or regulating the powers of this corpora- tion, of the directors or of the members or any class or classes of members: PAGENO="0321" 319 E -4 President or Vice-President (Strike out one) Secretary or Assistant Secretary (Strike out one) STATE OF ~ss: COUNTY OF Before me, a Notary Public in and for said County and State, personally appeared who is known to me to be President or Vice-President of Corporation, and Secretary or Assist- ant Secretary, who is known to me to be Secretary or Assistant Secretary of said Corporation, who being duly sworn upon oath state that they are duly authorized by the Board of Directors of said Coa-poration to make this application for admission of said Corporation to do business as a foreign corporation in the State of Indiana, and that the facts and figures given above are true, except that where the blank form calls for estimates, such estimates represent their best judgment. (Notarial Seal) .---.- - Notary Public My commission expires .. .. (Note: The above application shall be presented in triplicate to the Secretary of State together with a certified copy of the articles of incorporation or association and all amendments thereto.) PAGENO="0322" 320 ?J1~0SLS F~l To accomplish research and development exclusively in the fields of education, literature, science and religion. No part of the corporation's income or assets will Inure to the benefit of any individual. The corpo-. ration will not support any candidate for public office nor attempt to influence legislation. All scientific research will be made available on anon~~discr1minatorY basis. In the event of voluntary dissolution of the cor- porat ion the remaining assets after corporate obli- gations have been satisfied, will be distributed only to qualified institutions under Section 501 (c)(3) of the Internal Revenue Code of 1954, as amended. All activities of the corporation will be governed by applicable state and federal laws governing non-profit tax-exempt organizations. AGRICULTU1RE Agricultural science, animal husbandry, horticulture, etc. ~iEDICINE Medical science, health, chiropractic, optom-. etrics, dentistry, medical education, specific research projects, etc. E~ELIGI0N To promote through educatIon and development a better understanding of (name a religion or specific philosophy: LSD, Black Muslim, Baptists, Methodist, Catholic, Islam, Latter Day Saints, etc.---the criteria is the philosophy and not the validity or content of the philosophy.) PAGENO="0323" 321 FORD FOUNDATION The purpose or purposes of tMs corporation are as follows: To receive and administer funds for scientific, educational, and charitable purposes, all for the public welfare, and for no other purposes, and to that end to take and hold, by bequest, devise, gift, purchase, or lease, either absolutely or in trust for such objects and purposes or any of them, any property, real personal, or mixed, without limit- ation as to amount or value, except such limit-. ations, if any, as may be imposed by law; to sell, convey, and dispose of any such property and to invest and re-invest the principal thereof, and to deal with and expend the income therefrom for any of the before mentioned purposes, without limitation, except such limitations, if any, as may be contained: in the instrument under which such property is received; to receive any property, real, person, or mlixed, in trust, under the terms of any will, deed or trust, or other trust instrument for the foregoing purposes or any of them (but for no other purposes), and in administering the same to carry out the directions and exercise the powers contained in the trust instrument under which the property is received, including the expenditure of the prin-- cipal, as well as the income, for one or more of such purposes, if authorized or directed in the trust instrument under which it is received; to receive, take title to, hold, and use the proce~ds and income of stocks, bonds, obligatlons, or other securities of any corporation or corporations, domestic or foreigli, but only for the foregoing purposes, or some of them; and, in general, to exercise any, all and every power for which a non-. prof it corporation known as a Foundation, organized under the provisions of the Michigan General Corp.- oration Act for scientific, educational, and char.-- itable purposes, all for the public welfare aan be authorized to exercise, but not any other power. No part of the activities of this corporation shall be the carrying on of propaganda or otherwise attempting to inft~uence legislation. PAGENO="0324" 322 F-3 Said corporation is organized on a non-stock basis. The amount of assets which said corporation possesses is: Real Property, None; Personal Prooerty, twenty~-five thousand dollars cash. Said corporation is to be financed under the following general plan: By coritribtit ions to it of funds and property ab.- solutely or in trust for Its purposes as herein stated and for no other purpose. The number of Members of this corporation shall not be less than seven nor more than fifteen as may be fixed from time to time by the members. The members of this corporation shall also be the Trustees thereof, so that the number of members shall also be the number of Trustees. Members may be elected at any annual or special meeting of members held for that purpose, by vote of a maj- ority of the remaining members, although less than a quorum, or by a sole remaining member, and the admission of a person either as a member or as a Trustee shall constitute his election as both a member and as a Trustee. ~Vhen a person ceases to be a member or ceases to be a Trustee, he shall no longer be either a member or a Trustee. Members shall be elected for the same term as Trustees, i.e. three years, or until the expiration of their respective terms if elected to fill a vacancy, and until their respective successors are elected. The members and Trustees will accordingly always be the same persons'but will, because of distinctions drawn by the MIchigan statutes, act in different capacities. A person shall cease to be both a member and a Trustee upon his death, or upon his resignation or removal from either office as provided in the by-law. No membership, trustee-- ship or interest in this corporation shall be assignable intervivos, nor shall any membership, trusteeship or interest in this corporation pass to any personal representative, heir or devisee. PAGENO="0325" 323 F-4 This being a benevolent corporation, its term is unlimited and in perpetuity. All of the property of this corporation and accumulations thereof shall be held and administered to effectuate its purposes and to serve the general welfare of the people. * * * * * PAGENO="0326" 324 EXHIBIT 3 - ~ I BY-LAWS OF PRIVATE FOUNDATION ARTICLE I - DEFINITIONS The following words and terms, as used in the By-laws of. a California corporation not-for-profit, shall, unless the context shall other wise require, mean and be defined as: (a) `Foundationt: the afore said corporation. (b) "Member": the persons who are qualified and elected to member- ship as hereinafter provided. (c) `Directors": the duly constituted members of the Board of Directors. (d) "Certificate of Membership": a written instrument signed by the designated officers evidencing that the person named therein is a duly elected member. (e) "Registered Office": that office maintai'~d by the foundation in this state, and the address which is on file with the Secretary o~ State. ARTICLE II - OFFICES AND REGISTERED AGENT Sec. 1. Principal Office: the principal office of the foundation shall be located in , California, and there may be such other offices as the Board of Directors shall designate. Sec. 2. The Registered Office of the foundation and the registered agent may, from time to time, be changed by the Directors. ARTICLE III - MEMBERS Sec. 1. Election of members: Application for membership may be presented by members, and shall be elected by a vote not less than a majority of the Board of Directors. Sec. 2. Classes of Members: The Board of Directors may establish more than one class of members and determine the designation and their qualifications. PAGENO="0327" 325 (a) Sustaining members: Sustaining members shall be those members who enter the foundation upon payment of a membership fee and approval by the Executive Director. (b) Family Members: Family members shall be non-dues paying members of the foundation upon election by the Board of Directors. Sec. 3. No class of membership, however created, is entitled to vote on any matter. Sec. 4. Termination of Membership: (a) Upon charges preferred against any member, in writing, and filed with the Secretary, and upon consideration by the Directors, and the affirmative vote of not less than three-fourths of the Directors constituting a quorum at any regular meeting or a meeting called for such purpose, a member may be expelled or suspended for good cause shown. Any member so expeDed or sus- pended may have a rehearing before the Board of Directors at its next meeting, and the Board may then reconsider its prior action. (b) Resignation: The written resignation of any member shall be filed with the Secretary, and when accepted by the Board of Directors, shall become effective. (c) Any member who has resigned, been suspended or expelled, may be reinstated by the affirmative vote of three-fourths of the Directors çiresent at apy regular or special meeting called for such purpose, and upon such terms as the Directors may designate. Sec. 5. Transfer of Membership: Memberships may be transferred only upon the consent of, and upon such terms as shall be fixed by the Bbard of Directors. (a) Transfer of sustaining membership may be permitted upon the approval of the Board of Directors. (b) Family membership may not be transferred under any conditions. ARTICLE IV- MEETING OF MEMBERS Sec. 1. Place of Meetings: All meetings of the membership shall beheld at the registered office of the foundation or at such other place as the Direc-, tors or President. shall, from time to time, designate. Sec. 2. Meetings: The anm~al meeting of the membership will be held at a place designated by the ~oard of Directors on the day of of each calendar year. Failure to hold such a meeting will not cause forfeit- ure, failure or penalty on any rights, duties, power or obligation of the foundation, officers, directors or members. -2- PAGENO="0328" 326 Sec. 3. Notice of Meetings: Notice of meetings shall be written or printed and which shall be mailed to each member at the address shown on the foundation's books, except that if all members be present at any meeting and consent to such meeting, call and notice shall not be required. The notice shall state the place, day and hour of such meeting, and shall be deli- vered notless than five nor more than forty days before the date of the meet- ing, personally or by mail or notice may be waived by all the members in writing. Sec. 4. Quorum: No quorum is necessary for any meeting of the member- ship. ARTICLE V - THE DIRECTORS Sec. 1. Powers: The Board of Directors shall: (a) Manage the affairs of the foundation, except as otherwise provided in the Articles of Incorporation or By-laws. (b) Adopt a corporate seal as the seal of the foundation. (c) Designate a banking institution or institutions as depository for the foundation's funds; and the officers authorized to make withdrawals there- from, and to execute obligations on behalf of the foundation. Sec. 2. Number of Directors: The number of Directors shall be ______ in number. Sec. 3. Election and term: Directors subsequent to the initial Board of Directors named in the Articles of Incorporation shall be elected or appointed by the existing members of the Board of Directors at the time such election or appointment is necessary. Directors shall serve for a term of - years and may be reelected. Sec. 4. Qualifications: A Uirector subsequent to the initial Board, shall be a family member of the foundation, shall be aged twenty-one or over and a citizen of the United States. Sec. 5. Meetings: All meetings of the Directors shall be held upon call of the Executive Director, who shall act as the presiding officer, or of a majority of the Board of Directors, and shall be held at the Registered Office of the foundation, or the place designated in the call. Notice of such meetings may be given orally or in writing at least twenty-four hours prior to the meeting, or notice may be waived by the Directors in writing. Sec. 6. Quorum: A majority of the Directors shall constitute a quorum to transact business of the foundation. -3- PAGENO="0329" 327 ARTICLE VI - TEE OFFICERS Sec. 1. Theofficers of the foundation shall be: A President, Vice-Presi- dent, Treasurer and Secretary and Executive Director, .and such other officers as the Directors shall designate. As hereafter determined by the Directors, any one or more officers may be made ex-officio members of the Board of Directors Sec. 2. Election and term: The officers shall be elected at the meeting of'the Directors held inimediately after the annual meeting of the members or at such other meeting of the Directors as shall be called for such purpose, and officers elected shall hold office for the ensuing year and until their successors shall be elected. Sec. 3. Duties of Officers: *(a) The President shall manage the affairs of the foundation, except as shall be reserved by the By-laws or action of the Directors. He shall preside at the meetings of membership, and shall be vested with the powers and duties incident to the office of President. (b) The Vice-President: In the absence of the President, or of his in- ability or refusal to act, the Vice-President is empowered to act in lieu of and in the stead of the President, and shall thereupon be vested with all the powers and duties of the President. (c) The Secretary shall keep the minutes and a record of other matters transacted by the Members and the Directors; mail or cause to be mailed all ntices required by the By-laws; have custody of the corporate seal and records; maintain and have custody of names and addresses of the member- ship; and perform such other duties as are incident to the office of Secretary. (d) The Treasurer: The Treasurer shall have custody of the funds of the foundation, collect dues and other monies owed the foundation, and perform such other duties as are incident' to the office of Treasurer. In the discretion of the Directors, the Treasurer may be required to furnish bond for such amount and under such conditions as the Directors may see fit to impose. Sec 4. Executive DirectOr: The Executive Director shall serve under an employment contract executed between himself and the foundation and shall serve for a term to be agreed upon by the parties. The Executive Director shall be an ex-officio member of the Board of Directors and shall preside at all meetings of the Board of Directors. In his absence the President shall preside. ` -4- PAGENO="0330" 328 The duties of the Executive Director shall be to conduct all foundation affairs and his power shall supercede that of the President of the foundation in the normal day to day activities, financial affairs, employment practices, and all other business activities. Sec. 5. Removal of Officers: Any officer may be removed by the Direc- tors whenever in their judgment the best interests of the foundation will be served thereby. The removal of any officer shall be without prejudice to contract rights, if any, of such officer so removed. ARTICLE VII - CERTIFICATES OF MEMBERSHIP Sec. 1. Certificates of membership: The Board of Directors may, as it sees fit, provide for certificates of membership to be issued to duly elected members in good standing, and in such form as they shall determine. Such certificates shall be signed by the President and Secretary and shall bear the seal of the foundation. Sec. 2. Lost or destroyed Certificates: Upon receipt of an affidavit setting forth the loss or destruction of a Membership certificate, the Board of Direc- tors may order the Secretary to restore said lost or destroyed certificate. Sec. 3. Distinction of Different Classes of Membership: The Board of Directors shall issue certificates of membership in distinctive colors or forms, £`o as to clearly distinquish the class of each member. ARTICLE VIII - THE FISCAL PERIOD The fiscal year of the foundation shall begin on the ______day of _________ and end on the - day of________________ ARTICLE IX - AMENDMENTS The By-laws of the foundation may be amended, repealed or new By-laws adopted by the Directors. * * * ** -5- PAGENO="0331" THE R. 0. A. B. FOUNDATION THE BOARD OF DIRECTORS AND THE OFFICERS OF THE H. 0. A. B. FOUNDATION, DULY ORGANIZED UNDER THE LAWS OF THE STATE OF ILLINOIS, DO HEREBY DECLARE THAT ______________________HAS BEEN ELECTED A FAMILY MEMBER OF THE FOUNDATION, AND IS ENTITLED TO ALL OF THE RIGHTS, POWERS AND PRIVILEGES APPERTAINING THERETO. THE PURPOSE OF THE IIOAB FOUNDATION IS TO PROMOTE THE WELL BEING OF MANKIND WHEREVER LOCATED THROUGH CONTRIBUTIONS TO, AND PARTICIPATION IN A VARIETY OF ACTIVITIES BENEFICIAL TO MANKIND, WHICH SHALL INCLUDE, BUT NOT BE LIMITED TO EDU- CATION, ART, MUSIC, LITERATURE, RESEARCH AND DEVELOPMENT OF EFFICIENCY IN BUSINESS AND INDUSTRIAL COMMUNICATIONS, WELFARE AND RELIGIOUS, CIVIC AND CULTURAL ACTIVITIES, WITH INITIAL EMPHASIS ON CHARACTER DEVELOPMENT OF YOUTH AND RELATED PROJECTS. AND THE MEMBER PLEDGED HIS ENERGIES TO AID THE FOUNDATION IN SUCH ENDEAVOR. Effective this ______day of ________________, 1 9_. _________ Secretary MEMBERSHIP CERTIFICATE NO. President EXHIBIT 4 - ,,.t J,~ PAGENO="0332" 330 EXHIBIT 5 By-laws of a Civic Club. 1. Name: The name of this club is _________________incorporated under the State of _under the ___________law on the - day of _______________________,1967. 2. Objects: Objects of this club shall be to protect and promote the best inter- ests of the citizens of the nation, the state and this area, hereinafter set forth: to promote and strive for the improvement and betterment of all public facilities and services; to promote and encourage a better community and civic spirit and to foster good will and friendship between and among all the residents of said area, to cooperate with county, town, village, state and federal officials and with other civic and public organizations for the general welfare of the entire community. 3. Membership: Membership may be of several classes as provided by the Board of Directors and shall be initially of one class. (a) the initial class of members shall be those persons elected by the Board of Directors. 4. Dues: Annual dues may be assessed from each member equally by the Board of. Directors. 5. Fiscal Year: The fiscal year of the club shall commence on the ______day of * and end on the ________day of___________________ 6. Meetings: (a) The annual meeting of the members shall be held on the ______day of ________________-, of each calendar year for the express purpose of elect- ing directors and officers and for conducting such other business as may come before the members at that time. (b) Regular meetings of the members shall be held as per agreement and Resolution of the members. (c) Special meetings of the membership may be called by the President, whenever he shall deem the same necessary or whenever he shall be called upon to do so by two members of the Board of Directors or four members of the club. (d) Notices of all such annual and special meetings shall be in writing given or mailed to each member not less than 5 nor more than 10 days before the date set for any such meetings, but such notice may be waived in writing by agreement of 2/3 of the members at any such meet- ing. No notice is required for a regular meeting of the membership. 2/3 of the members shall constitute a quorum of the membership. Voting shall be by a majority vote cast in person or by proxy. Proxies shall be in writing subscribed by the member and shall be presented by the pre- siding official of the meeting, to be qualified. (over) PAGENO="0333" 331 7. Directors: The affairs and business of this club shall be managed by a Board of ______Directors elected by a plurality vote of the members pre- sent, at the annual meeting or such special meeting as may be called. Such Directors shall serve for the ensuing year or until their successors have been elected and qualified. Special or regular meetings of the Board of Directors shall be called by the President whenever he deems them. necessary or whenever he is called upon to do so by two of the Directors. 8. Officers: The officers of this club shall be four in number, a President, Vice President, Secretary and a Treasurer. No one person may hold more than one office. All officers must be members of the club. (a) The President shall be the chief executive of the club, charged with the duty of supervising all of its functions subject to the orders of its Board of Directors. He shall be an ex-officio member of all committees. (b) In the President's absence or in the event of his inability to act, the Vice President shall perform the duties of the President. He shall also perform such other functions as the Board of Directors may from time to time assign. (c) The Secretary shall conduct the correspondence of the club, issue notices and keep minutes of all meetings of the club, be custodian of the records, keep the roll of members and discharge such other duties as may be assigned to him by the Board of Directors or .the President. (d) The Treasurer shall collect all dues and shall have the care and custody of all funds and property of this club, which shall be disbursed by him only upon the order of the Board of Directors or of the Presi- dent. He shall submit a report for the preceding year at the annual meeting of the members and shall render special reports whenever requested to do so by the Board of Directors. He shall deposit all funds in the name of the club in such bank or banks as may be designa- ted by the Board of Directors. (e) Should any vacancy occur by death, resignation or otherwise, the same shall be filled without undo delay by the Board of Directors. 9. Committees: Committees shall be designated and appointed by the Presi- dent or the Board of Directors as may be required. lO~ Seal: The Board of Directors is empowered to design and accept a seal for the club and an impression thereof must be made at the margin of this page. 11. Amendments: By-laws of this club may be amended or revised by the Board of Directors, by 2/3 vote of all Directors and approval by the affirmative vote of a majority of the niembers present at the annual meeting or at any regular or special meeting, provided that notice of any such meeting con- tains a summary of the propose's amendment or amendments. PAGENO="0334" 332 JO.,' Board of Directors ROAB Foundation Address Dear Sirs: I hereby offer all my services to the ROAB Foundation in exchange for an employment (management) contract, the terms of which will be set out at a later date0 I understand that I would serve as Executive Director.~of the foundation.' I further under-S stand that as Executive Director I would conduct all foundat ion affairs. I promise to serve to the best of my ability0 I understand that the contract will provide for a salary and executive fringe benefits. Yours truly, J. B. Taxpayer (Corporate Resolution Form Accepting Services of Executive Director) MINUTES OF THE REGULAR ME~ETING OF THE BOARD OF DIRECTORS A meeting of the Board of the Directors of the ____________________Foundation, Corporation ~ authorized under the laws of the State of ~, said Directors properly holding'~!fl~e ü~'d~er the By-laws, was held on~id~L) , at the hour of'_________ at ~ pursii~nt to waiver of noUce executed by all members of the Board of Directors. PAGENO="0335" 333 The following members of the Board of Directors were present in person: Upon motion duly made and seconded, the following Resolution was unanimously adopted: "RESOLVED: That the off er~J~ame of ~ to serve 5lrector of th~ ___________________ Foundation, communIc~ed b~yletter dated________ is hereby accepted. The Executive Director shall serve until further notice is given by either the Board o:C Directors or the Executive Director to terminate their relationship. It is further RESOLVED that the Executive Director shall be authorized and empowered to conduct all Foundation affairs, including, but not limited to, finanacial, charitable, beneficial and other related activities of the Foundation. The Executive Director shall expressly have the power to employ other persons to assist in conducting Foundation affairs and to set the duties andcompensations o~ th~se persons. The compensation included in the employment contract with the Executive Director, may include such executive fringe benefits as may be agreed upon by the parties, and the Executive Director shall be reimbursed by the Treasurer for all expenses reasonably incurred in conducting Foundation affairs. It is further RESOLVED that the contract of employment and all terms therein may be revised or renewed periodically upon the agreement of the parties. The President or the Secretary of 87-444 0-68-22 PAGENO="0336" 334 J-3 the Foundation is authorized to execute the employment contract with the Executive Director. Be it further RESOLVED that the Board of Directors is not barred from creating offices or appointing persons to fill these offices, in addition to those who may be employed to assist the Executive Director. It is further RESOLVED that the Executive Director shall be an ex.-officio member of the Board of Directors." The Secretary is ordered to place a copy of these minutes In the By-law section of the corporation. There being, no further business to come before the meeting, a motion duly made and seconded and carried, the meeting was declared adjourned. ____________________(SEAL) Secretary CONTRACT OF EMPLOY1~ENT FOR THE ______________FOUNDATION This contract of employment between the~~ Foundation, (henceforth called the Foundation) and ______ , for and in consideration PAGENO="0337" 335 J-4 of the mutual promises and conditions below: 1. Term f_Off i~. The Foundation hereby agrees to employ _______________ for a term of one (1) year from the above date. _____________________ agrees to serve in the capacity of Executive Director for the same term. 2. DutIes. The Foundation authorized and delegates all authority to the Executive Director to help to perform all Foundation activities and manage, direct and perform all Foundation affairs. The Executive Director is expressly authorized to employ any persons to assist in the performance of Foundation affairs and to fix their duties and compensations. The Executive Director, in return, agrees to perform said activities and affairs to the best of his ability. 3. ComDen~t~Qa. The Foundation agrees to reimburse the Executive Director for any expenses incurred in the performance of PAGENO="0338" 336 J.~5 Foundation affairs, including, but not limited to, transportation, food, lodging, stationery, and postage, which may be incurred personally by the Executive Director. The Foundation further agrees to pay the salary of $ -~ per year, to the Executive Director, as reasonable compensation for his services. In addi-~ tion, the Foundation agrees to provide the following benefits in return for the services of the Executive Director: 4. R~n~walan~_Revis~Qp. This contract may be renewed pr revised at any time prior to the completion of the stated terms, or subsequent to the completion of the stated term, at the agreement of the parties. - If the contract is renewed or revised, subsequent to the completion of the stated term, such renewed or revised contract shall relate back to the end of the completed term, In no case shall the PAGENO="0339" 337 J-6 lapse of the term of this contract be construed as the termination of employ.- ment of the Executive Director. Said terminat ion may only be by express notice by either the Board of Directors or the express resignation or death of the Executive Director. This ~ntract of employment shall, however, be reviewed by the parties periodically, to make the proper adjust.- ments. This contract contains all of the terms of employment. _____ _(SEAL) Executive Director ____ JSEAL) President or Secretary of the Foundation SEAL "FRINGE BENEFITS" There are benefits to being an employee of a foundation that are not stated in the employment contract. Among these are: PAGENO="0340" 338 J-.7 1. Educational opportunities 2. Research projects 3. Research grants 4. Use oC roundation Cacilities and equipment Other benei~its are specifically stated in the employment contract and are usually govenned by the Internal Revenue Code. Among these are~ l~ Insurance (disability, lire, pro~es~ slonal liability, health, accldent, medical) 2. Vacations 3. Adequate housing 4. Reimbursement i~or business expenses 5. TIme ror educational actIvities 6. Professional membership fees 7. Retirement * * * * * PAGENO="0341" 339 EXHIBIT 8 1*L&T TO PREP EFOR TIE FIRST BOARD ME~4~ The first Board of Directors meeting constitutes a real or hypothetical meeting of the persons ~ho will begin the activities of the foundation. The 3 to ~ members of the initial Board of Directors should meet personalj.y, although it has been corporate practice merely to distribute papers for signatures after they have: been prepared. The meeting of the initial Board of Directors in person, is important so that all parties may become familiar with foundation..corporate procedures and with the initial aims and pDojects of the foundation. The Board of Directors should be pre- pared to meet regularly, even frequently, and any initial members who would not be able tO devote this time or concern for foundation activities ought to be replaced. The following steps should be taken prior to the first Board of Directors meeting to save time, prevent confusion, and eliminate any possible conficts: (a) A complete proposed draft of the By-Laws should be prepared. (b) The papers required for filing a Resolution with a Bank and opening a checking account should be fully prepared, minus the proper signatures. (c) A corporate seal should be obtained, (d) A corporate record book should be obtained. (e) The names and titles of the officers of the foundation should be determined, (f) If there is to be a change in the membership of the Board of Directors from the initial Board, the names and addresses of the new members should be prepared. (g) All procedures under State law concerning the foundation Charter and Articles of Incorporation should be completed prior to the first meeting of the Board, (h) The names of proposed family members other than the Board of Directors should be determined,, (i) A letter signed by the Proposed Executive Director offering his services in exchange for an employment contract should have been received prior to the meeting. (j) If there is to be an assistant Executive Director, a similar letter should have been received prior to the meeting, from this person. -1- o opyri~ht('c') 1967 Americans Zuildin~ Constitutionally (A 1ru~t) Printed in U.S.~1. PAGENO="0342" 340 (k) If there are any proposed sustained members, a list of the names, addresses and qualifications should be prepared. (1) It is highly recommended although not necessary that the president or proposed Executive Director prepare a possible grant program empowering the Executive Director to begin work on a general basis. This wodid enable the foundation to start activities immediately or at least to begin investi- gatory work and would not require a subsequent meeting within an unreasonable time. Cm) Prepare for signature, undated letters of resignation of mem~ bers of the Board where it is necoasary. Undated letters of resignation are recommended to be used where there are members of the Board serving as nominees or merely as place holders to fill out the State requirements. These persons generally are unrelated to the foundation creators and disinterested as to foundation activities and purposes and should have no real voice in the operation of the foundation. To prevent and discourage any attempt in the future for such outsiders to gain control of the foundation an undated letter of- resign.. ation might be signed effective as of the date placed at the top of the letter. The controlling individuals of the foundation could then date that letter whenever they wished the third party or nominee to resign. (n) ~M~st of this material should be included in previously drafted minutes of the first meeting of the Board of Directors and these minutes should merely be read for the information of the members present at the meeting, Few changes should be accepted and the proper signatures are all that is required0 Items that should be included are: (1) Ratification of Officers. (2) Ratification of the Seal. (3) Ratification of the bank Resolution. CL1.) Ratification of the filing of the charter and Articles of Incorporation. (S) Election of family members.' (6) Election of sustaining members, (7) Approval of any proposed grant program0 (8) Acceptance of the offer of the E~tecutive r~rector and Assistant Executive Director. (9) Ratification of any other actions by the prDmoters of * the foundation. (10) Ratification and approval of proposed draft of By.-Laws. Most of this information in the proper language is usually included in standard forms for the first minutes of the Board of Directors that are available from many form book companies. The language and form of other Resolurions that would have to be passed may be obtained from counsel or may be drafted with * guides of other material, Oo?yri~ht ~1967 Aiteric axis 3ui1din~ 0 onstitutionally (:~ Trust) Printed in U.S.X. PAGENO="0343" 341 (o) Prepare a waiver of notice of the first meeting of the Board of Directors prior to the meeting and before any other business is attempted have all of the members of the Board of Directors sign the waiver. This should be regular practice prior to ~fl meetings of the Board of Directors. When the minutes have been read and all of the business discussed and enacted, have the Secretary sign the prepared minutes and close the meeting. -3- Copyright (d~)1967 Americans ~ui1din: Constitutjona11~ ~ Trust) ?rinted in U., PAGENO="0344" 342 L-.J. RATIFICATION OF IVE1VIBERSHIP STANDARD lANGUAGE ON RL(~TIFICATION OF ACTS OF INCORPORA.TORS IN MINUTES OF THE FIRST I~4EETIN~ OF THE FOUNDATION. Upon motion duly made, seconded and carried, the rollowing Resolution was unanimously adopted: "RESOLVED: that the acts o:C the Incorporators, Orricers and Directors or the Loundation as set rorth in the minutes or_________________ l9~, be and the same hereby areratiried, approved and conrirmed in all respects and that the Treasurer is ordered to reimburse the Incorporators, Orricers and Directors Lor any expenses so incurred in these activities. Be it rurther Resolved that the application Cor membership and the membership in the not- ror.~prorit trust rand known as Americans Building Constitutionally be specirically ratiried, approved and conrirmed and that the Loundation approves and accepts the con- ditions or that membership and all costs incurred with the membership paid by the Incorporators, Orricers and Directors be and the same hereby are ratiried, approved and conrirmed. It is rurther Resolved that the Treasurer reimburse these persons ror said costs incurred with the membership." * * * * PAGENO="0345" 343 M.d LETTER OF BES~-I~N (DATE) To the Board or Directors or __________ ____________F oundat ion Address City, St~~ To Whom it ~`iay Concern: Due to circumstances beyond my control, I am unable to continue to serve as a Director or the ________________________Foundation. I regretrully submit this letter or resignation, which shall be effective upon acceptance by the Board or Directors as or the date above. (Name or Director) * * * * * PAGENO="0346" 344 N~.l FOUNDAT ION W~NAGE~M~NT CHART NFP CORPOR[~TE FOUNDATION BOARD OF DIRECTORS Created by By-laws and Articles 01' Incorporation Set policies, Approve action, Supervise activities, Direct Loundat ion mot ives OFF IC~R~ Created by By~laws and elected by Directors or members Administer Loundation day.-to~-day activities, Advise Board ol' Directors EPfPLOYEE~ iV~Iv~ER~ Hired under contract with Created by By-laws and foundation elected by Directors Work too accomplish 1' ound~ Participate in and at ion act iv it les in return support foundation for reasonable compensation activities * * * * * PAGENO="0347" FOUNDAT ION ECONOMIC FLOW CHART 0 TAX FREE INCOIv1~ 1. Related Fees 2. Rents 3. Royalties 4. Capital Gains * 5. Dividends 6. Interest 7. Contributions * Capital---- TAXABLE_INCOME 1. Unrelated business income 2. business lease NFP FOUNDATION PROPERT IES CO~4MONLY HELD ~ FOUNDAT IONS 1. Real Estate 2. Leases 3. SecuritieS 4. Mortgages 5. OLL1ce equipment 6. Research equipment 7. Insurance pol- icies on employ- ees and property 8. Cash 9. Motor Vehicles 10. (valuable educa- tional or histor- ical property) NORMAL OUTGO 1. Rents 2. Salaries (employees) 3, Fringe Benefitss (employees) 4. Mortgage payments 5. Brokerage Lees 6. Managment Lees 7. Equipment and property depreciation 8. Travel Expenses 9 * Insurance premiums 10. Taxes, licenses, legal ~ Lees and accountant 5 Lees 11. Maintenance 12 * Educat lonal projects I 13. ScienFiLic projects 14. Charitable projects 15. Religious projects 16. Literary pr~~jects 17. Testing Lor public saLety projects 18, OLLice supplies 19~ Utilities 20. Miscellaneous PAGENO="0348" 346 EXHIBIT 10 - Pi THE RECORDS WHI CH THE TREA JRYREQUIREL2FGRA.~.9E~ (a) Name and address of recipient (b) Amount of grant (c) Purpose of this disbursement (d) Relation, if any, to persons who created or controlled foundation. In addition to these skeletal records, good practice would suggest a procedure for processing grants by the fotu~daticn. Such procedures will both serve to assure the Treasury that yo~ are operating a bona fide program (and this may be prudent since the initial recipients of your philanthropy may tend to be ch~dren and relations, if not you yourself) and to make thin~3 e&~ ~3r in your relations with strangers whom you might want to cons~.cLer helping (i,e., it can make it more impersonal and easier to say no). Mr. Harvey B. Matthews, Jr. of the Ford Foundat!~ speaking at New York University's Conference on Charitable Foi~ti~ns, suggested these steps for processing grants: (1) A stated program containing some sort of guidelines for determining what sort of grants will be considered (e.g., tuition scholarship for college students). (2) Application - require some written application which makes clear that the person is applying for a grant and not just making an inquiry: The application should make clear what the money is wanted for so that the foundation can tell whether it falls within the founda.- tion's program and corporate purposes. (3) Action Control - Mr. Mathews suggests that a piece of paper be attached to the application to record every. thing that is done regarding the application, (Lb) Preliminary screening and review. At this stage the foundation compares the request with its prograra to see whether or not the request falls within the grant program. Copyright~19d7 (over) Americans Cuilding Constitutionally (~ Trust) Printed in U.S.A. PAGENO="0349" 347 (~) Final consideration. The merits of a proposed grant are compared against the availability of funds and a judgment made whether it is really worthwhile or des~rable on the part of the foundation. As a matter of form, the initial screening should be done by one officer who then refers those he considers worthwhile to the directors or some committee of directors who make the final decision on the grant and its terms. (6) The person in charge of the grant program notifies the recipient of the acceptance or rejection of his applica. tion by letter. (7) There should be in addition a follow up on the grar4.t~' a formal closing out of the terms of the grant, .~I~d~an evaluation of the benefits derived from the foundationts use of its money in this particular instance, As it was alluded before, the test of the propriety of a grant is whether it is in furtherance of the foundationTs exempt purpose. A child, spouse, or relative of a donor or Foundation officer may properly receive such a grant (and of course in those cases, ad- herence to form is more important). With proper planning, the grant may be made in such a way as to result in no taxable income to the recipient. Cf.~r 117 Revenue Code. Of course, since this is a grant rather than an expense account, the complicated rules relative to expense accounts have no application. * * * * * Copyright 1967 Atiericans ~ii1ding Constitutiona11~' (~ Trust) Printed in U.S,A. PAGENO="0350" 348 .Xntcraal i~evcnuc Code ::~. ~o ~ :p : [Sec. i~7) SEC. 117. SC1-IOLAI~SHI?S AND 1~ELLOWSN~? GRANTS. (a) Ge2~En/~t. B.ULE.-In the case of an individual, gross income ~oci not incudo- (1)' any amount rcccivcd~ . ?. b `(A) as a scli6larship at ar~ cducatonal institution (as dc~nçd in sec' tkts 151 (c) (4)),or. , `*" .,`~ (B) as ~i (cllowship grant *` i~c1udiñg the vahtc of contributcd services and accommodations; and.. (2) ~ry ~r-ouit received to cover expenses for- `~ $ (IL) travel, .. . ., A';. (fl) rcscarcli, (C) clerical help, or (D) c4uipmcnt, * which arc incidcntto such a scholarship or to a fclowsidp grant, but only to the extent that the amount is so expended by the recipient. So~xco: New. (Sec. 1~7ço)] (b) LIMITAtioNs.- (1) holv;ouAL«= wno ARC cANoIOA7.~s TOR nCcatzs.-tn th~ CSSC O~ en in- divi~ual who is a candidate (or a (legree at an educ;io institution (as ~e~ned in ~cc~ion 151 (e) (4)), subscction (a) shat not a7ply to that portion of any arnounf reccivccl which represents payment for tcach~ng, r~s~arch, or other services in the nature of part-time cmpioymcnt rertuired as a condi' tior. to receiving the schoarship or the (eUowship grar.t. tcachi~, ~earch, or ether services arc rcqt;ircd of a1 candidates (whether o~ no; r~cnts of scho!ars:d?~ or fd:o~vsh~ granz~) for a p~rz~euIar dc~rce z.; a ~orcceiving such degree, such teaching, research, or other services a;a~ no~ a~ regarded as part-time employment within the meaning of this paragZ.7h. (2) INDIVIDIJAT.5 WHO ARC NOT CAND.OATE5 FOR DttcRECS.-LR the case of ~ divkhtei who is not a candidate for a degree at an educational institution (as dedned in section 151 (e) (4)), subsection (a) shall appiy.only if the c~nd~tior~ in subparagraph (A) is satis~cd and titcn.oniy withinthe limita- tiq~s provided in subparagraph~(B). (A) CONDITIONS ros CXCLUsI0N.-The grantor of the scholarship or fellowship grant is-: (i) an organization described in section S0i(c)(~) which ii exempt from tax under section So: (a), (ii) a foreign government, (iii) an international organization, or a binatior.ai or multi-. national cducationa and cultural foundation or commission created or continued pursuant to the Mutual Educational and Cuhural Exchange Act of 1961, or (iv) the United States, or an inst cn;aiity or a~cncy thereof, or a State, a territory, or a.possessio:i of the Unl~ed States, or any. political sui)divlsion thereof, or tue Dist;ict of Coumbia. PAGENO="0351" (B) Exra~ or exci.us .-`The amount of th SC~O:~S:l~2 0 fc~OW. shp grant cxc.udec~ under ~ubsectior. (a) () ir. any ta~a~~ yea; sl~ii ~e lin~ited to an amour.t ~ to $~)3 ti~~ ~ of ~-.~o~:;s for w-iith the recipient received amotzits ~ the scho1a;ship or fellow. ship grant during such taXable ye~.;, except ;hat;no exclusion shall be ;~1Io~d under subscction. (a) after the rcc~pier1t has bcen enthied to exclude under this section for' a period of ~6 n1or.t'r~s (~hcthc;o; not con~ecutivc) amounts rcceivcd as a scholarsin? or £c1lows~iip g;~nt while not a candidate for a degree at an educational instit~1tion (as ilefincd in section 151 ~c) (4)).. : *. . Sonrco xa. originally enacted in tho 1054 Code: l'~ew.. Sec. da grant is on `organization desc;be1 in seo Amendment:: amended eitcctIvoi lion 501(c)(3) w~ic~. is excrn~t fron'. P.."~ 113~A) 162 ~-idorscc'o ,~. toi., ~ P. a'i.2~G, I aid(s): Amended Coda Soc. 117(b)(2)(A) to rono as nbovc. Prior to amendment, it read a.: follows: "(A) Condition: for exclusion. -.. Tho grantor of the scholarship or fellowship 349 P.4. .1; ~ . subdivision thcrcoi', or, the *Dat~*ict of Co1utiS~,ia." E((cdtiv~ for taxable * years bogInn1n~ aflet' 1061. * 87-444 0-68-23 PAGENO="0352" 350 EXHIBIT 1OA THE R 0 A B FOUNDATION SAMPLE APPLICATION FOR GRANT TO STUDENTS FOR SPECIAL TRAINING APPLICANTS NAME __________________________ ADDRESS AGE - OCCUPATION U. S. CITIZEN_____ GRANT FOR THE STUDY OF - INSTITUTION WHERE STUDY IS TO BE MADE - PREVIOUS GRANTS, AWARDS ___________________________ If Student, complete the following: PRESENT SCHOOL ____________________________________ MAJORING IN ________________________ OTHER COURSES OF STUDY IN RELATED FIELD _______________ Complete in own words, reason for request for grant and why you are qualified to receive special training. ~ THIS FORM IS ONLY TO BE USED FOR ILLUSTRATI~ PURPOSES. IN- [~IVIDUAL FORMS FOR INDIVIDUAL GRANT PROGRAMS SHOULD BE DRAFTEDj Recommendation of Present Teacher (If student) Oopyright® 1967 * * * * * Americoris Building Constitutionally (A Trust) Printed in U.S.A~ PAGENO="0353" 351 P.-6 "Be it RESOLVED: that to further the purposes of the Foundation that a program of grants, gifts, and endowments be instituted by the Foundation. That said grants and endowments be awarded only for such projects as serve to advance the stated purposes of the Foundation which are research, development and education in agriculture. That preference be given students in agriculture or related fields but in no ~ shall such grants be for purposes other than scientific education, religious or literary. That such grants may be received by any citizen, person or governmental unit of the United States That the Vice President be appointed as Chairman of the Committee on Grants, with the recommenda~ tion that other members be chosen from business or the professions, to serve at the Chairman's discretion. Said committee shall prepare forms and information for prospective applicants and ~reen all such applicants and recommend pros-S pective applicants to the Board of Directorè suëh applicant~ as the.. committee feels will best serve to further the purposes ~or which theFoundation was created. That upon approval of such application, by the Board of Directors, the Chairman of the committee on Grants may proceed tb administer such grant on such terms as are calculated to maximize the benefits of the Foundation's expenditure. That the Board of Directors or the Committee on Grants reserve at all times the right to modify, withdraw or cancel any part of any grant not paid out. That the Chairman of the Committee on Grants shall require an accounting from each recipient on terms he thinks appropriate regarding the PAGENO="0354" 352 expenditure of all grant monies and evidence of the results accomplished. That in the case of grants, gifts, or endowments not amounting to more than ~5O apiece, nor aggregating more than $1,000 per fiscal year, such disbursements may be made solely on the authority of the Chairman of the Committee." THE _________FOUNDATION A Non.-Prof it Institution fo~ Agriculthral Research and Education APPLICATION FOR SCHOLARSHIP To the Applicant: Please answer the following questions as fully as possible, using the reverse side if necessary. Type or print legibly. Hoover Scholarships are availabl.e to any seriou~ ~tudent, with preference being given to students working in the field of. agriculture.. 1. Name -~ Age 2. Purpose of Scholarship 3. Amount needed to supplement applicant's own funds (Note: ... scholarships. may be avail~M~6~ly for fixed sum). 4. Applicant's qualifications and past educational exper lence PAGENO="0355" 353 F.~8 5. Has applicant ever worked in agriculture?____ If so, explain. 6. Give names of two persons, not relatives, who can testify to applicant's character and ability. (name) * (address) (name~ (address) Applicant understand that any grant made may be subject to such terms as the Foundation may provide to insure the maxi~m usefulness of the funds awarded and that any funds awarded but not actually paid out are subject to cancellation or reduction by the Foundation in its sole discretion. Date Signed -~ (Applicant) A PROGRAM OF ~G~NTS A~S~HO~RSHIPS The Foundation was established to further research, development, and education in PAGENO="0356" 354 agriculturo, and in furtherance of that goal has instituted a program of grants and scholarships. Grants and scholarships are intended primarily to assist students working in the field of agriculture but will also be available to students in the other sciences and the humanities where qualified appli-. cants are not found in agricultural studies. ~ho Hay App~y~: Grants and scholarships' may be awarded to any person evincing a serious interest in education. It is not necessary that the applicant' be, in financial need although this factor will be considered. Criteria for Awards: Grants and scholarships are to be awarded to those students or .f or those projects `Which, in the opinion of the Foundation, most satisfactorily serve the purposes for which this Foundation was created. Terms of Awards: Grants and scholarships shall be awarded on such terms as the'Ohairmafl of the Committee on Grants determines to be most likely to maximize the use-. fulness and benéf it of the Found at ionT s expenditures. Such terms may include among other things, periodic payments of Rrants, accounting for expenditures and evidence of work accomplished. All grants and scholarships are subject to revision or cancellation with respect to any monies not as yet paid out to the recipient. ` ` Amount~of Awards~ Grants and scholarships may be made either in fixed sums allocated by the Committee on Grants or may be adjusted to the individual financial need. Jhena Jhere to ~pply: Applications ma~ be made at any time although a PAGENO="0357" 355 p-b sixty-day delay for processing should be expected. Applications should be addressed to: Chariman, Committee on Grants The Foundation (address) THE FOUNDATION A non-Profit Institution for Agricultural Research and F~ducation REFEEEN~E FORM To the Applicant: Fill in items 1 3. Then give a copy of this form to each of the persons whom you have listed on your application. 1 * Name of Applicant ________ _____ _________ 2. Home Address ________________________________ 3. School now attending _______________Class To person filling out this form: The above named student has applied for a schol- arship from the Foundation. We will appreciate your assistance in assessing this studentts character and qualifications. All inf or- mation will be held in confidence. 4. How long have you known the applicant? 5. In what capacity have you known applicant? PAGENO="0358" 356 p-al 6. What comments can you make regarding ?5 character and quali1~ications? 7~ Any additional statement regarding applicant's suitability Lor a Foundation scholarship would be appreciated. (signature) (address). (position) FOLLOW .-UP GR!~NT PROGRAIvI Dear We o~ the Foundation hope you have been success1~ul in your chosen project or studies. To judge the ei~ectiveneSS oI~ our program o~ grants and scholarships, we would appreciate your completing your obligation under this award and giving us your comments on the value o~ your grant. 1. What did you accomplish through your grant? PAGENO="0359" .357 P-~l2 2. Were you satisfied with the handling of this grant and have you any suggestions for improve~ ment? Please include with this report any additional material required under the terms of your grant. Yours very truly, The Foundation Chairman, Cornmitteeon Grant * * PAGENO="0360" 358 EXHIBIT 11 - WHAT FOUNDATIONS CAN AND CAN'T DO Being a corporation, the foundation normally will have all the rights and powers enjoyed by similar corporate organizations under State law and there is no need to enumerate them other than to say that they are almost invariably wide enough to allow any act desired by the directors0 For example, the Illinois General Not-For--Profit Corporation Act provides "Each corporation shall have power:0..to have and exercise all powers necessary or conven- ient to effect any or all of the purposes for which the corporation is organized0" IGNFPCA,~ S(n). For our purposes here, a more relevant question is: ~that acts should not be performed in order to preserve the foundation favor- able tax status. 1. A foundation is prohibited from entering into the following transactions with a substantial donor or his family. (a) lending any part of its income or corpus, without the receipt of adequate security and a reasonable rate of interest; (b) paying any compensation, in excess of a reasonable allow- ance for salaries or other compensation for personal services actually rendered; (c) mak±ng any part of its services available on a preferential basis; (d) making any substantial purchase of securities or any other property, for more than adequate consideration in money or money's worth; (e) selling any substantial part of its securities or other property, f or less than an adequate consideration in money or money's worth; (f) engaging in any other transaction which results in a substantial diversion of its income or corpus to such per- son. 2. The foundation is further prohibited from performing any of the following acts: (a) accumulating an unreasonable amount of income; (b) using its income to a substantial degree for purposes un- related to its exemption. Cop1rri~ht(c 1967 ~ericm~e ~ui1ding Constitutionally (over) (A Trust) Printed in U.S.A. PAGENO="0361" 359 (c) investing its income in such a way as to jeopardize its ability to carry out its purposes. (Note: these last threeprohibitions apply only~to income and not to corpus (c.g. gifts or donations received) and in practice present no particular problem with good counseling. 3. A foundation may not endorse a particular political candidate or advocate passage of a particular piece of legislation. It * may,however, advocate a particular point of view~ E.G., a * conservation group could advocate the desirability of conserve- * tion but could not advocate approval of a particular law to achieve conservation. . These are general descriptions of the activities which will imperil :a foundationis tax exempt status and are found in section 501 to :SOl~ of the Internal Revenue Code. Unrelated Business Income There is a situation in which a fbundation may be subject to income tax on certain of its earning without affecting its exempt status. This is called a tax on unrelated business income. Al- though there are a good many limitations on this tax, the general: rule is that an exempt organization is taxable at corporate rates, on the income from a trade or business regularly carried on by thó organization, the conduct of which is not substantially related to the performance of the organization'~ exempt purpose. For example, a tax-exempt clinic would pay no tax on its fees from patients but might be taxable on. the income of a restaurant operated by the clinic in its building which served the public. Of course, since income from investments is generally untaxed, the clinic could incorporate the restaurant, own all the stock, and pay no tax on the dividends received from the restaurant corporation, This tax on unrelated income does not apply to income from interest, dividends, royalties, mo~t rents, and passive investments generally. The only problem with rents may arise under certain types of leases on property which is subject to a debt incurred in purchasing it, The unrelated business tax is apparently not a major item in the tax treatment of exempt organizations. During the year 1962, for example, only l,6I~8 report forms (990-T) were filed with the Internal Revenue Service. ** * Copyright (~J1967 Americans Cui?dirig Constitutionally (A Trust) Printed in U.$.~. PAGENO="0362" 360 Q-3 Proposed Rule Making DEPARTMENT OF TUE TREASURY * Internal Revenue Service C26 CFR Pckrt 11 TREATMENT OF INCOME FROM UN. RELATED TRADE OR BUSINESS Notico of Proposed Rule Mokinçj Notice Is hereby given that the regula- tions set forth in tentative form below are proposed to be prcscribed by the Commissioner of Internal Revenue, with the approval of the Sccretary of the `l'reasury or his delegate. Prior to the final adoption of such regulations, con- ~idcratIon will be given to any comments or suggestions pertaining thereto which are submitted in writing, in duplicate, to the Commissioner of Internal Revenue, Attention: CC: LR: T, Washington, D.C. 20224, withIn the period of 30 days from the date of publication of this notice in .the FEDERAL REGISTER. Any person sub- miLLing written comments or suggestions who desires an opportunity to comment orally at a public hearing on these pro- posed regulations should submit his re- quest, in wilting, to the Commissioner within the 30-day period. In such case, a public hearing will be held, and notice of the time, place, and date will be pub- lished in a subsequent issue of the Fen- VSAL REGISTER. The proposed regula- tions arc to be issued under the authority co"tained in section 7805 of the Internal Ruienue Code of 1954 (68A Stat, 917; 26 U.S.C. 7805). (SEAn ShELDoN S. COHEN, Commisstoncro/ Infernal Revcnuc. Ire order to clarify the meaning of the terms "unrelated business taxable in- come" and "unrelated trade or business" as they relate to certain.exempt organi-'. zatlons, the IncomO Tax Regulations (26 CFR Part 1) under ~cctidns 513 and 512 of the Internal RCvemre Code of 1954: arc amended as fOllows:' * PARAGRAPH 1. Paragraphs (b) and(c) of * 1.513-1 are respectively redesignated as paragraphs Cc). and.(f), and § 1.513-1 is otherwise amended to read as follows: 6 1.513-1 Dcflnkon at' unrclntcjtrnde or bUSUICF~1* : (a) In general, As used In section 512 the term "unrelated business taxable In- come" means the gross income derived by an organization from any unrelated trade or business regularly carried on by It,. less the deductions and subject, to the exceptions, additions and limitations - provided in section 512. SectIon 513 specifies with certain exceptions that the. phrasc "unrelated trade, or business" `means, in the case of an organization subject to the tax Imposed by section 811, any trade or business the conduct * of which is not etibatantlaily related (aside from the need of such oe~gaiiiza- tion for income or funds or the use It n~sakes of the profits derived) to thd exercise or performance by such organi- zation of its charitable, educational or other purpose or function constituting the basis for its exemption under sec- tion 501 (or, in the case of an organiza- tion described in sec. 511(a) (2) (33), to the OXOiCIlO 01' paifoiinnnco of ~ny pur- ~osc or function described in sec. 501 (c) (3)), (For certain exceptions from this definition, and `a special rule for certain publishing businesses, see par- agraphs (e) and.(f) of this section, For a special definition of "unrelated trade or business" applicable to certain trusts, see * sec. 513(b).) Therefore, unless one of the specific exceptions of section 512 or 513 is applicable, gross incofne of an ex- empt organization subject to the tax Imposed by section 511 Is includible in the computation of unrelated business taxable incense if (1) It is income from trade or business, (2) the conduct of such trade or business is not substantially related (other than through the produc- tion of funds) to the organization's per- !ormance of its exempt functions and (3) such trade or business `Is regularly car- ried on by the organization. (b) Trade or business. For the pur- poses of section 513 the term "trade or business" has the same meaning It has In section 162, and generally includes any -activity carried on for the production of incense from `the sale of goods or performance of services, The term "trade or business" thus is not limited to integrated aggregates of assets, activ- ities and good-will which comprise busi- nesses for the purposes of certain other * provisions of the Internal Revenue Code. Activities of producing or distributing goods or performing servIces from which a particular amount of gross income is derived do not lose Identity as trade or EEDERAL IIEGISTEIh, VOL 32, 1~d.72~FalDAV,APaiCj41 `)9*67 PAGENO="0363" business merely because they are car- ried on within a larger `aggregate of similar activities or withii~ a larger com- plex of other endeavors which may, or * may not, be related to the exempt pur-. * poses .of the organization. Thus, for ex- ample, the regular .saleof pharmaccuti- ~.caI supplies to the general public by a hospital pharmacy does not lose Iden- tity as trade or business merely because* the pharmacy also furnishes supplies to the hospital in accordance with its cx- .empt purposes. Similprly, activities of soliciting, selling, and publishing com- mercial advertising: do not lose Identity as trade or business even though the advertising Is published in an exempt organization periodical which contains editorial matter related to the exempV purposes of the organization. Cc) Regularly carried on-(1) General~ principles. In determining . whether. trade or business from which a particular amount of gros.~ Income derives is "regularly carried on," within the mean- ing of section 512, regard must be had to the frequency and continuity with which the activities productive of the income are conducted and the manner in which they are pursued. This requirement must be applied in light Of the funda- mental purpose of the unrelated business ~ncomc tnx to pirice tim ~iisincsn ~c~lY~ UCI~ 81 CIhilbult oig~iih~.tttlW~ UIibII UI~ same tax basis as commercial endeavors with which they compete. Hence, for example, specinc busincss'activlties of an exempt organization will ordinarily be deemed to be "regularly carried on" if they manifest a frequency and conti- nuity, and are pursued in a manner, generally similar to comparable com- mercial activities of nonexempt orga- nizations. (2) ApplIcation of prlnclptcs-(i) Normal time span of activities. Whero income producing activities are of a kind normally conducted by nonexcmpt commercial organizations on a year- round basis, the conduct of such activl- tics by an exempt organization over a period of only a few weeks does riot constitute, the regular carrying on of * trade or business. For example, the operation of a sandwich stand by a hospital auxiliary for the 2-week period * of an annual state fair would not be the regular' conduct of trade or business. How,~ver, the conduct of year-round business activities for one day each week would constitute the regular carrying on of trade or business. Thus, the opera- tion of a commercial parking lot on Sat- urday of each week would be the regular conduct of trade or business. Where In- `coEneproducing activities are of a kind normally undertaken by nonexempt commercial organizations only on a sea- .sonal basis, the conduct of such activities by an exempt organization during a signincant portion of the season ordl- rtaliiy constitutes the regular conduct of trade or business. For example, the operation of a track for horse racing for several weeks each year would be con- sidered the regular conduct of trade or business' because it is usual to carry on such trade or business only during a particular season. (ii) Commercial attributes of inter- mittent activities. In deterining whether or not intermittently conducted activi- ties are regularly carried on, the man- ner of conduct of the activities must be compared with the manner in which commercial activities are normally pur- sued by noncxempt organizations. In general, . exempt organization business activities which arc engaged `in only discontinuously or periodically will not be considered regularly carried on if they are conducted without the com- petitive and promotional efforts typical of coxnxnercial endeavors. For example, the cab of adveriteingin programs for dporLs events or music or drama per- fornsances would not ordinarily be deemed to be the regular carrying on of business where no systematic endeavors are made to develop and promote this class of business in the manner of a commercial publication. Similarly, where the exempt function of an orga- nization involves the sale of certain types of goods or services to a particular class of persons (as, for example, sales of books by a college boohstore to stu- dent.s), casual sales in the course of such activity, which aie not related to the exempt function involved, do not gen- erally Constitute ~ ,`~;ilar coru~uct of unrelated hadi or business On the other hand, where the organization sys- tematically and consistently caters to a customer class unrelated to its exempt functions or sells products unrelated to the performance of such functions, the' unrelated selling activities meet the sec- tIon 512 requIrement of regularity. (iii) Occasional or sporadic activities, Income producing activities undertaken only occasIonally or sporadically gen- erally will not be regarded as trade or business regularly carried on. For this purpose, an Income producing or fund raising event lasting only a short period of time will not be regarded as regularly carried on merely L~cause It is conducted on an annually rcpurrcnt basis. Ac- corciingly, income.derived from the con- duct of an annual dance or similar fund raisIng event for charity would not be Income from trade ~: business regularly carried on. (d) Subsfanlialty relatcd-(1) In gen- eral. Gross lr.conse derives from `un- 361 Q-4 FEDERAL REGISTER, VOL 32, U9.' 72-FRJoAY,.ApalL~ 14, 1967 PAGENO="0364" 362 related trade or business," within the sneariing of sectJon 513(a) 11, the con- duct of the trade or business which pro- duces the income is not substantiallY related (other than through the produc- tion of funds) to the purposes for which exemption is granted. The presence of this requirement necessitates an ex- amination of the relationship between the business activities which gencrnto the particular income in question-~O activities, that is, of producing or distnb- uting the goods or performing the serv- ices involved-and the accomplishment of the organization's exempt purposes. (2) Type of relationship required. Trade or business is `related" to exempt purposes, in the relevant sense, only where the conduct.of the business activi- ties has causal relationship to the. achievement of exempt purposes (other than through the production of income) and it is "substantially related." for pur- poses of section 513, only if the causal relationship is a substantial one. For the conduct of trade or business from which a particular amount of gross in- come is derived to be substantially re- hued to purposes for whtch exemption is granted, the production or distributipn of the goods o~ the performance of the services from which the gross income Is derived must contribute importantly to the accomplishment of those purposes. Where the production or distribution of. the goods or the performance of the serv- ices does not contribute importantly to the accomplishment o the exempt pur- poses of an organization, the income from the sale of the goods or the per- formance of the services does not derive from the conduct of related trade or business. \Vhcthcr activities productive of gross income contribute importantly to the accomplishment of any purpose for which an organization is granted cx- emptiori depends in each ease upon the facts and circumstances involved. (3) Size and extent of activities. In determining whether activities contrib- ute importantly to the accomplishment of an exempt purpose, the size and extent of the activities involved must be con- airierrel in relaliqo to till Iw~tut0 anti `extent of the ci~empt function whieh thc~ purport to serve Thus, where income is realized by an exempt organization from activities which are in part related to the performance of its c>:empt functions, but which are conducted on a larger scale than is reasonably necessary for performance of such functions, the gross Income attributable to that portion of the activities in excess of the reeds of exempt functions constitutes gross in- come from the conduct of unrelated trade or business. Such income is not derived from the production or distribution of goods .~ he performance of services which en. bu~ im'ortantly to the ac- ,comp~shment of an~' exempt purpose of the organization. (4) Application of vr~ncipTcs-(l) In.. Cf,fl'~C stcinnhinfl directly front perform- aneecif exempt functions. Gross income derived directly from the performance of exempt fui~ctions does not constitute gross income from the conduct of unre- lated trade, or business. The following examples illustrate the appltcation of,, this principle: Example (1). M, an organization de- scribed in section 501(c)(3), operates a school for training chuciran. In the perform- ing arts, such as acting. sngtng. and danc- ing. It presents performances by Its stu- dents and derives gross Income from acimis- don charges for the performancCs. Tue students' participation in performances be- fore audiences is s.n essential part of their training. . Since the Income realized from the performances derives from activities which contribute Importantly to the accom- plishment of M's exempt purposes, It does not constitute gross Income from unrelated trade or business. (~or specurte exclusion applicable in certain cases of contributed services, see sectton 513(a) (1) and paragraph (e) (1) of this sectIon.) Example (2). N.ls a trade union qualified for exemption under section 501(c) (5). To Improve the trade skills of Its members. N conducts refresher training courses and sup- piles handbooks and technical manuals. N receives payments from its members for these services end materials. However, the devel- opment and Improvement of the slzlils of Its members is one of the purposss for which exemption Is granted N; and the activities described contribute importantly to that purpose. TherefOre,I the Income derived from these activitIes does not constituto gross ineoms from unrelated trade or business. - Example (3). 0 is an industry trade as- sociation qualified for exemption under sec- tion 501(c) (6). Ii presents a trade show In which members Of Its Industry jon to an exhIbition of Industry products. C. derives Income from charges made to exh.O. .srs for exhibit' space anti admission fcc~. ...targed patrons or viewers of the show. The show is not a sales facility for individual exhibi- tors; its purpose is the promotIon and stimu- lation of Interest In, anti demand for, the industry's products in general. and it is conducted in a manner reasonably calculated to achieve that purpose. The stimulation of demand for the Industry's products In gen- eral Is one of the purposes for which exemp- tion is granted 0. Consequently, the activ- ities productive of 0's gross income from the show-that Is, the promotion, organization and conduct of the cxhibitlon-COntrihUtc Importantly to the achievement of an exempt purpose, and the Income does not constitute grsss income from unrelated trade or business. (II) Dispo~f(ir'n of proslnc( of exempt functions~ Ordinarily, gross income from the sals of products which are a `direct result of the' performance of ex- empt functions do~s not constitute gross income from the conduct of unrelated trade or business if the product is ~Oid `°J. REGISTER, VOL. 32, NO. 72-FRIDAY, APRIL 14, 2967. PAGENO="0365" with Its program of public education in the arts and scicnccs. Theithcater is a principal feature of the museum and is in continuous operation during the hours the museum is open to the public. If the organization were to operate the theater as an ordinary motion picture theater for public entertainment during the eve- ning hours when the museum was closed. gross income from such operation would. be gross income from conduct of unre- lated trade or business. (iv) Exptoitation of excsnpt functions. In certain cases, activities carried on by an organization in the performance of exempt functions may generate goodwill or other int.nngIb1c~ whIch nrc Cnl)abIG of beli'sg exp1oi~ed iii cotutsiercial eiadcav~ ors. Where an organization exploits such an Intangible In commercial activities. the mere fact that the resultant income depends in part upon an exempt function of the organization does not make It gross income from related trade or busi- ness. In such cases, unless the conamer-- cial activities themselves contribute im- portantly to the accomplishment of an exempt purpose, the Income which they produce is gross income from the con- ,duct of unrelated trade or business. The application of this subdivision is Illus- trated in. the following examples: Example (1). U. an exempt scientific or- ganization, enjoys an excellent reputation in the field al biological research. it esploita this reputation regularly by calling oisdcrro- issonta of various items of laboratory equip- blent to manufacturers. The endorsing of laboratory cquiprnent does not contribute Importantly to the accomplishment of any purpose for which exemption is granted U. Accordingly, the income derived from the sale of endorsements is gross income from Un- * related trade or business. Example (2). V. an exempt university, has a large regularly enrolled student body. Dur- ing the school year, V sponsors the appear- ance of professional theater companies and symphony orchestras which present drama and musical performances to the students. V advertises these performances to its stu- dents, provides a university theater building for their presentation, and supervises ad- vance ticket sales at various university facil- ities, including the cafeteria and the uni- versity bookstore, V derives gross income from the conduct of the performances. How- ever, the presentation of drama- and music events contribute.s importantly to the overall educational function of the university. Therefore, the income which V receives does not constitute gross income from the con- duct of unrelated trade or business. Example (3). W is an exempt business league with a large membership. Under an arrangement with an advertising agency, tv regularly mails brochures, pamphlets, and other commercial sdvertlsing materials to its members, for which service W charges the agency an agreed amount per enclosure, The distribution of the advertising materials does not contribute importantly to the ac- complishment of any purpose for which W is granted exemption. Accordingly, the pay- ments made to \V by the sclvertlsirmg agency 363 constitute gresa income frsni unrelated trade or business. Example (4). X, an exempt organization for the advancement of public interest in classical music, owns a radIo station and operates it in a manner wislch.contributce importantly to the accomplishment of the * purposes for which the orgasalzauon is. * granted exemption, However, in the oour&e of the operation of the station the organiza- tion derives gross income from the regular sale of advertising time and services to com- mercial advertisers in the manner of r.n ordl-: nary commercial station. Neither the sale of such time nor tise performanco of such services contributes' Importantly to the ac- complishsncnt of any purpose for which the organization is granted exemption. Notwith- standIng the fact . that the production of the advertising income depends upon the existence of the listening audience resulting Irons performance of exempt functions, such income is gross income from unrelated trade or business. Example (5). Y, an exempt university, provides facilities, instruction and faculty supervisIon for a campus newspaper opcr~ sled by is riucienta, In athfltioii to news it~hi~ Mid edltoriai tOhsincntary, the news- paper publishes paid advertising. The solic- itation, sale, and publication of the adver- tising are conducted by students, under the supervision and instruction of the univer- sity. Although the services rendered to ad- Vertiscrs are of a commercial character, the advertising business contributes importantly to the university's educational program through the training of the students in- volved. Hence, none of the income derived from publication of the newspaper consti- tutes gross income from Unrelated trade or business. Excmple (6). Z, an exempt trade asso- ciation, publishes a monthly journal. The publication of tise articles and other editorial content of the jourssal contributes im- portantly to the accomplishment of purposes for which exemption is grs.nted tlse organi- zstioii, Income (roni the sale of aubtcrip. tiosis to incnibcrs anti others iss accordance with the organization's exempt purposes, therefore, does not constitute gross income from unrelated trade or business. Its con- nection with the publication of the journal, Z also derives income from the regular esle of advertising space and services to commercial advertisers. Neither the publication of ad- vertisements nor the pcrfornsance of services for commercial advertisers contributes im- portantly to the accomplishment of any pur- pose for which exemption is granted. There- fore, notwithstanding the fact that the pro- duction of income from advertising utilizes the circulatIon developed and maintained in the performance of exempt functions, such income Li gross income from unrelated trade or business. That result follows even though the advertisin~ is Of products~and services within the general area of profes- sional or business interest of the members and other readers. (e) (1) * PAR. 2. Section 1.512(a)-i is amended to read as follows: FEDERAL REGiSTER, VOL 32, NO. 7'2_,,-1R1DAY,' APRiL 14, 1967 PAGENO="0366" ~-. 7 .~ 1.512(n)-i Definition. (a) In general. Section 512 defines "unrelated business taxable Income" as the gross Income derived from any Un- * related trade or business regularly car- lied on, less those deductions allowed by. chapter 1 of the Code which are directly connected with the carrying on of such trade or business, subject to certain ex- ceptions, additions and limitations re- ferred to In § 1.512(b)-i. To be de- ductible In computing unrelated business taxable Income, therefore, expenses, de- preciation, and similar items not only * must qualify as deductions allowed by chapter 1 of the Code, but also must be directly connected with the carrying on of unrelated trade or business. Except as provided in subparagraPh (2) of para- * graph (d) of this scct~on, to be "directly connected with" the conduct of unrelated busiocss, for purposes of section 512. an item of deduction must have proximate and primary relationship to the carrying on of that business. In the case of an organization which derives gross income from the regular conduct of two or more unrelated business activities, unrelated business ta~ablc income is the ae~gatC of gross Income from all such u: :~ted business activities less the agg; c of the deductions allowed with re:, :t to all ~uch pnrelatcd business actlvlt~:.;. (Li) ~I~pCliiti UILrIbILLUWd solC1~. ~o related bu.sincss. Expenses, deprecia- tion and similar items attributable solely to the conduct of unrelated business are proximately and primarily related to that business and therefore qualify for deduction to the extent that they meet * the requirements of section 162, sectIon 167, or other relevant provisions of the Internal Revenue Code. Thus, for ex- ample, salaries of personnel employed full-time in carrying on unrelated busi- ness are directly connected with the con- duct of the unrelated business and are deductible In computing unrelated busi- ness taxable Income if they otherwise qualify for deduction under the require- Inents of section 162. SimIlarly, depre- ciation of a building used entirely in the conduct of unrelated business would be an allowable deduction to the extent otherwise permitted by section 167. Cc) Dual use of facilities or personnel. Where facilities or personnel are used both to carry on exempt functions and to conduct unrelated trade or business, ex- penses, depreciation, and similar items attributable to such facilities or person- nel (as, for example, items of overhead) shall be allocated between the two uses on a reasonable basis. The portion of any such item so allocated to the un- related trade or business is proximately* and primarily related to that business, ancf shall be allowable as a deduction in computing unrelated business taxable in- come in the manner and to the extent permitted by section 162, section 167, or other relevant sections of the Internal. Revenue Code. Thus, for example, as- sume that X, an exempt organization subject to the provisions of section 511, pays Its president a salary of $20,000 a year. X derives gross Income from the conduct of unrelated trade or business. The president devotes approximately 10 percent of his time during the year to the unrelated business. For purposes of computing X's unrelated business tax- able income, a deduction of $2,000 ($20,000 times 10 percent) would be allowable for the salary paid to its president. Cd) Exploitation of exempt /UflC- tions-(1) In general. In certain cases, gross income may be derived from un- related trade or business which exploits an exempt function. Except as spec- Ified in subparagraph (2) of this para- graph, In such cases expenses, deprecia- tion and similar Items attributable to the conduct of the exempt function ore not deductible in c6mpufing unrelated busi- ness taxable income. Since such Items are incident to a function of the type which it is the chief purpose of the or- ganization to conduct, they do not pos- sess proximate and primary relationship to the unrelated trade or business. Therefore, they do not qualify as directly connected with that business. (2) Allowable deductions. Where un- related trade or business is of a kind carried on for profit by taxable orga- nizations and where the exempt activity exploited by the business is a type of ac- tivity normally conducted by taxable or- grtnlzations in l)ursuanco of ouch busi- ness, the expenses, depreciation, and similar Items which are attributable to the exempt activity qualify as directly connected with the carrying on of the unrelated trade or business to the extent that: (I) The aggregate of such Items ex- ceeds the income (If any) derived from or attributable to the related activities; and (Ii) The allocation of such excess to the unrelated activities does not result In a loss from, such unrelated trade or business. Under the rule of the preceding scntenêe, expenses, depreciation and similar items paid or incurred in the performance of an exempt function znu.ct be allocated first to the exempt function to the ex- tent of the income derived from or attrib- utable to the performance of that func- tion. Furthermore, such items are in no event allocable to the unrelated business PAGENO="0367" activities to the extent that ~heir deduc- tion would result in a loss carryover or carryback with rcspcct to the particular conduct of trade or business involved. Similarly, they may not be taken Into account in computing unrelated business taxable Income attributable to the con- duct of unrelated trade or business not exploiting the same exempt activities. (3) Examples. The provisions of this paragmsph are illustrated by the follow- * IlIg examples: * Example (1). W is art exempt business league with a large membership. tinder an arrangement with an jsdvertising agency W regularly mails brochures. pamphlets ansi other commercial scivcrtising materials to Its members, charging the agency an agreed' amount per encldaure. The distribution of the advertising materials does not contribute importantly to the accomplishment of the purpose for which \V is granted exemption. Accordingly, the payments made to \V by the advertising agency constitute gross income from unrelated trade or business. In com- puting XV's unrelated busIness taxable in- come. the expenses attributable solely to the' conduct of the business arc allowable so de- ductions in accordance with the provisions of section 162. Such deductions include the costa of handling and mailing, the salaries of personnel u.sd full-time in the unrelated business and an allocable portion of the eateries of personnel used both to carry on exempt functions and to conduct the unre-, listed busIness. llowcver, costs of developing W'a membership and carryIng on Its exempt activities are not deductible. Thocs coats are UOCCsOai~ to the maintenanes of the Intan- gible asset exploited in the unrelated bust- depreciation, and similar Items related to the production and distribution of the edi- torial content of the journal are costa gen- erally Incurred by axable organizauono publishing journals with advertising, such items will be treated its directly connected with the conduct of the unrelated trade or business. Thus, subject to the limitations of subdivisions (1) and (ii) of subparagraph (2) of this paragraph, they woul~t be allow- able as deductions in computing Z'a un- `related business taxable income to the cx- ,tent provided in section 162, sectIon 167, and other relevant sections of the Internal .ltevctnue Code. (~.I?,, Doe. 07-4200: l'iled. Apr. 13, 1907; 11:16 a.m.J 365 Q-c ness--tV's membership-but axe incurred primarily in connection with \V'~ funda- mental status and functioning as an exempt organization. As a consequence. they do not have proximate and primary relationship to the conduct of thc unrelated business, and do not qualify as directly connected with it. Example (2). Z, an exempt business league, publislsss a monthly journal which it sells by subscription to members and others. The articles and other editorial con- tent of the journal contribute importantly to the accomplishment of Z'e exempt pur- poses. Therefore, the subscription income does not constitute gross income from un- related trade or business. In connection with the publication of the journal. Z de- rives IilColiiC from tile talc of advertising apace to co:nnscrciai advertisers ~incs the provision of commercial advertising space does not contribute lnsportantiy to the ac- complishment of Z'e exempt purposes. Z'e income from advertising constitutes gross income from unrelated trade or business. In computing Z'c unrelated business taxable income, allowable deeiuctiona would (sub- ject to the rules `provided in section 162 and other relevantsections of the Internal Rev- enue Code) include the epecific costs of the advertising activity, such as advertising copy and mechanical costs, advertising sales com-. missions and similar expenses. Also allow- able would be items of desluctiosa (such as general overhead expenses arid depreciation) allocable to the advertising activity in ac- cordance with the rule of paragraph (c) of this section. In addition, since expenses, 87-444 0-68-24 PAGENO="0368" Fe&~ra! xernotion auir~tm~nts TORM 2848 (Ese. Aug. 1004) Home and addreus of principal(s) hereby appoInt(s) (Name and oddres~ of appafnfue(s)) as attorney(s).in.fact to represent the principal(s) before any office of the Internal Revenue Service with respect to (specify Infernal Revenue tax matter(s) and year(s) orperiod(s)) SaId attorney(s).infact shall, subject to revocation, hove full power to perform any and all acts thot the principal(s) can perform, Including the power to receive (but not to endorse and collect) checks in payment of any refund of Internal Revenue taxes, penalties, or Interesk to delegate authority or to substitute another attorney or agent; to execute waivers of restrictions on assessment or collection of deficiencies in tax; to execute consentc extonding the srotutory pericei for assessment or collection of taxes; to execute a closIng agreement (under section 7121 of the Infernal Revesus Cods) in respect of a tax liability or a specific maitnr~ and to execute a protest to a dntnrmfnx* Lion of taxes by a district director. Copies of correspondenco addressed to the taxpayer in proceedings involving the above matter(s) should ho sent to; Any prior powers of attorney filed with thIs office by the principal(s) relating to the matter(s) and Lbs year(s) or period(s) rpecifted abovo are hereby revoked. SIGNATURE IF PRINCIPAL IS INDIVIDUAL OR HUSBAND AND WIFE Bigssutuse slVrisotpsl Outs Sigrruturs stPsinslpsl ` Dsts SIGNATURE IF PRINCIPAL IS PARTNERSHIP, ESTATE, CORPORATION. ETC. Under penalties oi perjury, I declare that I hove the authority to execute this power of attorney on behalf os ne principa._____________________________________________________ CORPORATE SEAL (II applicable) Sigssstsrs Los Prtscpst Till. Outs Sigsss5ur. tsr Psesolpal . Outs NOTARIZATION OR WITNESSING The obavenomed person(s) ,jstgntng as or for the prisctpal(s) This power of attorney was sIgned by or (or the principal(s) by appeared thIs day before me and acknowledged this power of attor. a person or persons known to, and in the presence of, Lbs two dis. ney 05 hts/'herfthelr voluntary act and deed, Interested witnesses whoxo sIgnatures appear below; $lsestvr. of !Islssy Slqrsoturs stWeerss Outs -. NOTARIAL SEAL __________________________________ ___________________________________________ (11 cequtred) Ours Slgeslsr. xl Wtbrsss Ours - 366 n-i US. Trss.ur~ Dsgsustrset-lslsresl Rsrscu. Surerns . - GENERAL POWER OF ATTORNEY (IMPORTAHT-Plsase read tnsfrucf);xs cx 1500113 bifors cemploftog B): form) PAGENO="0369" 367 CERTIFICATION BY ENROLLED ATTORNEY OR AGENT IN LIEU OF WITNESSING OR NOTARIZATION I certify that I am In good standing and ~nrolled to practice before the Internal Rek~nue Service (the following In applicable oni5 as the prIncIpal Is other than ale Individual or husband and who) and that to the best of my knowledge and belief, the peroon(s) sIgnIng above haefhcsve the authority to execute this power of attorney on behalf of the principal. Siqseluse of At5esss.~4nFssut Esrellnentcasd fleesbee Oie,sri' Expleense Dote ess Cord If a Limited Power of Attorney is Desired Use Form 2848-A INSTRUCTIONS GENERAL No format rules govern the preparation of a power of attorney other than that the instrument should clearly express the scope of the authority granted the attorney or agent, the fax matier~ and taxable years or periods to which it relates, and ihat it should follow the Instructions set forih In Subpart E, Conference and Practice Requirements of the Statement of Procedural Rules (Part 601, Title 26 of the COde of Federal Regulatioosl. This form is made available simply as a corsverstence. Its use, therefore, Is not mandatory. This form may be used wiih respect to any mailers affecting any lax Imposed by the Internal Revenue Code, except at cohol or tobacco faxes, If alcohol or tobacco taxes are involved, Form 1534 sfsoufd be used. If a prior power of attorney was filed, this form may be used to constitute a new authorization of alt attorneys or agents to represent the principal with respect to specified matters and years or periods before the ottice of the Internal Reeenue Service where this power Is filed. This will serve to automesiicolly revoke all prior powers of attorney with respectto the same maiters and years or periods filed In that oftice ot the Iniernal Revenue Service. A true copy of the power en attorney must be filed with each office of the Service in which the attorney or agent is to represent the prIncipal, together with one additional copy for each taxable year or perIod In encess of one. However; when a copy of the power Is filed with the ottice of a district director who has the matter under consideration, ii shall not be necessary to file anolher copy of the power whih the ottice 5t a regiooal commissioner or regional counxnl who subsequently has the matter under constderation, unless an additional copy is specifically requested. Copies repro. duced by photographic processes need not be certitied as true and correct. Copies reproduced by other methods must be certified either by the aitcrney or agent fit enrolled), or by a noiary public who shall state that he has personally compared the copy with the orIginal and found ii to be a true and correct copy. SPECIFIC INSTRUCTIONS P0mm 284U (0ev, P4.4) Ncassse and csddresa of peincipnl(s).-lta )oiet return is Invo,ved, enter the name and oddrcss lit ditterest) of both husband and wits. PAGENO="0370" 368 Example: "John 1. Smtth, 831 First Ave., Atlanta, Georgia' and Mary M. Smith, 1200 Pine St., Mtaml, Florida." azzoctatiors Is the prIncIpal, enter Example: "The A B C Corporation, (add~ess)" "A-B Partner' shtp, (address)"; etc. / If an exiate or trust Is the principal, enter the name, title and address of the executor, admtntotratar, musters, etc., and the name of the princIpal, Example: "Joseph Jonas, (address), Executor of the Estate of Ruth Green." Specify Intornal Revenue tax rncsttnr(s) and year(s) or period(s)-The year(s) or period(s) to which the power relates must be clearly identitied. Any number of specitied years or periada and typos of taxes may be listed in the same power, but a mere reference to "all years", "all periods", or "all taxes" will not be acceptable. It the matter relates to estate tax, enter the date of decedent's death instead of the year(s) or period(s). authority dnlpgated.-It this form Is used, noon of the deleqa' tlons of authority printed on the fats of the farm may be deleted. If a limited delegation of authority in desired, Form 2848-A may be used. Signature of principal(s)-If a joint return ts Involved, both husbcssd and wile must sign unless one spouse duly authorizes the other In writieg to sign for both. In such a rose, the authorization should accompany the power. If the principal is a partnership, all partners must sign unless one partner tn duty authorized to act in the name of the partnership. In such a case, unless the authorization is provided under local law, the authorization should accompany the power. If the principal is a corporation or an association, an otticer having authority to bind the entity must sign. Thy Internal Revenue Service doesnot require the allining of the carp --:10 coal. Space for gttixing the corporate coat Is provided as a convenience for coritorations required by charter, or by the law ot the jurisdiction irs which they are incorporated, to allis their corporate seats in the execution ot instruments. Aclsnswlsdgsnont, witnessing, or certification-A power of attorney must be either acknowledged betore a notary public or witnessed by two disinterested individuals, unless itis granted to an attorney or agent enrolled to practice belore the Internal Revenue Service who completes the certilication cit the bottom ci the form. If the certilication is compieied by an attorney or agest.whose enrollment card does not have a number (as is the case with those cards renewed in district ollices), enter "none" for the enrollment card number: Special cases-It the principal is deceased, Insolvent, or dis solved; or ito trustee, guardian, or other fiduciary is acting for the principal, see section 601.505 of Subpart E ci the Conlerence and Practice Requirements for further Instructions regarding the exerts' tion of a power ci attorney. ron~ 2848 (Per. 8-Ott PAGENO="0371" 369 R-4 FORM 1023 U.S. TREASURY OEPARTMENTZNTERNAL REVENUE SERVICE TbfldidFt (Rev. April 1965) (To be mode eeiy by a principal officer of tie orgeeizotioe olojcoing exemption) for your DisfihI. ) For use of organizations applying for exemption under section 501(a) and described is section SOt(c)(3) of the Internal Revenue Code, which are organized and operated (or will operate) exclusively for one or more of the following purposes (check purpose(s)): o Religious 0 Charitable 0 Scientific 0 Testing for Public Safety o Educational 0 For the prevention of cruelly to children or animals 0 Literary Every organization that clceirrss to be exempt must furnish the information end data specified in duplicate. If any organization fails to submit the information and data required, this application will not be considered on its merits and the organization will be notified accordingly. This application shall be open to public inspection tn accordance with section 6l04(a)(l) of the Internal Revenue Code. Sea separate instcustions f or Form 1023 to properly answer the questions below. Ia. Full name of organization .. b. Emptsyer idenfsfication number 2. Complete address (number, street, city or town, State and Postal ZIP code) 3a. Is the organization b. If "Yes," in which Stole and under which law fGeneral corporation, sot for profit, membership, educational, incorporated? eleemosynary, etc.)? Cite sfalutory provisions. DYes DNo 4a. If not incorporated, what is form of organization? b. Date incorporated or c. Month and day on which the organized annual accounting period ends Sa. Has organization filed Federal income tax b. !f"Yes," form number of return filed and Internal Revenue c. Yearls) filed refurnls)? 0 Yes LI No District where filed. 6. After July 1, 1950, did the creator of your organization f if a trust), or a contributor to your organization, or a brother or sister (whole or half blood), spouse, ancestor, or lineal descendant of such crcator or contributor, or a corporation controlled directly or indirectly by such creator or contributor, enter into any of the transactions or activities) enumerated below? NOTE: It you have any knowledge or con- template that you will be a party to any of the transactions (or activities) enumerated in 6a through 6), check "planncd" applicable blockfsl nod see instructions. / No .!~5od d. Purchase any securities or other prop. .!~!. ..!!2.. ~0OiL a. Borrow any port of your income or corpus? erfy from you? e. Sell any securities or other properly to b. Receive any compensation from you? you? c. Hove any part of your services made available to f. Receive any of your income or corpus him? is any other transaction? 7 Have you issued or do You " " `"~ ~ 5~5 ~55~ ~ ...:~..:..-. ,...i:.~-. ~ the organszafion? Yes No Ba, Arc you the outgrowth or continuation of any form of predecessorls)? b. Do you have capital stock issued and outstanding? - c. Have you made or do you plan to make any distribution of your property to shareholders or members? d. Didyou receive or do you expect to receive 10 percent or mere of your assets from any organization, group of affiliated or- ganizations faffilioled through slockholding, common ownership, or otherwise), any individual, or members of a famrly group (brother or sister whether whole or half blood, spouse, ancestor, or lineal descendant)? ` e. Does any port or wilt any port of your receipts represent payment for services of any character rendered or to be rendered by you? - PAGENO="0372" 370 R-5 1. Are you now, hove ever been, or do you plan to be engaged irs carrying on propaganda, or otherwise advocating or opposing pending or proposed legislation? -- - q. Do you participate or plan to participate in or intervene to (including the publishing o~ distributing of statements) any political campaign on behalt of or in opposition to any candidate for public office? Is. Hove you mode or do you plan to make any payments to members or shareholders for nervicesrendered or to be rendered? - I. Does any part or do you plan to have any part of your opt income inure to the benefit of any private shareholder or Individual? - - j. Are you now or are you planning to be affiliated in any manner with any orgunization(sl? - k. Do you hold or plan to hold 10 percent or more of any clans of stock or 10 percent or more of the total combined voting power of stock in any corporation. - - Page 2 9. Has any State or any court (including a Court of Probate, Surroqele's Court, etc.l ever declared whether you were or were not organized and operated for charitable, etc., purposes? 0 Yes 0 No. II "Yes," attach copies irs duplicate ot pertinent administrative or' judi- cial decisions. 10. Yeu as-rust attach espies irs duplicate of the follewing: a. It Incorporated, a copy of your articles of incorporation, or if not incorporated, a copy of your constitution, articles ot association., docla. ration of trust, or other documeni whereby you wete created netting torfh your aims and purposes, a copy of all amendments thereto, and any changes presently proposed. - b. A copy of your bylaws or other similar cede of regulations, ati amendments thereto, and any changes presently proposed. c. A complete statement of assets and liabilities as el the end of each annual accounting period (or as of the dale of the filing et this application, it you were in existence for less than a year). d. A statement of receipts and espendilures for each annual accounting period ot operation (or for the period for which you were in e-eisl- once, it less than a year). e. A statement which clearly indicates what State statutes or court decisions govern the distribution of assets upon dissolution. (This state. ment may be omitted it your charter, certificate, or other instrumersi ci organization makes provision for such distribution.) _________ I. A brief statement of the specific purposes for which you were formed. IDo ccl quote from or make reference to your articles of inccry-r' ration, constitution, articles of association, declaration of trust, or other document whereby you were created for this question.) g. A statement explaining in detail each fund-raising activity and each busieens enterprise you hove engaged in cv plan to encjage is-- accompanied by copies ci all agreements, it arsy, with other parties for the conduct of each lund-raising activity or business enterprise. Is. A statement which describes in detail the nature of each ot your activities which you hove checked on page 1, activities which you spcn oar, and proposed actieities. I. A sfotemenl which explains fully any specific activities that you have engaged in or sponsored nod `zhich hove been discontinued. Give dotes of commencement and terminnfion and the reasons for discontinuance. j. A statement which describes the purposes, other than in payment for services rendered or supplies lurnished, for schick your funds are expended or will be expended. _______________ PAGENO="0373" 371 R-6 k. A schedule indicating the name and position of each officer, director, trustee, etc., of the organization and the relationship, if blood, marriage, adoption, or employment, of each such persoo to the creator of ti-n organization (it a trust), to any person I~au made a subutanital contribution to the organization, or to a corporation controlted.(by o~enership of 50 percent or more of voting stuck or 50 percent or more of nafue of off stock), directly or indirectly, by such creator or contributor. The schedule shaft afar indicate the time devoted to position and compensation ftnctuding safary and expense accouni alfowoncef, it any, of each ofticer, director, trustee, etc., of the organization. I. A copy of each lease, if any, in which you are the lessee or fessor of property (real, personal, gas, oil, or minerof) or in which you oars an interest under such lease, together wills copies of all agreements with other parties for development of the property. SIGP~ATWI~ A(~0. V~Z1~1CAT[3~.3 Underpenafites of penury, Ideclare thallhave exassined this application, including accompanying statements, ondto the best of my knosrfedge and belief II is true, correct, and complete. Date - - Tots FORM 1023 155ev. 4.~51 IT~UC1~O~S ~ FORM ~ 1~MPTgO~ AP~LgCATfiOt~ GENERAL INSTRUCTIONS (References ore to the Internal Revenue Cods unleas otherwise indicated) A.-Who Must File-An organization desiring to establish ex~ emptionfromFederal Income taxasanorganicaliondescribed in nec- Son 50l(c)(3)of the Internal Revenue Code, must file this application form unless It has already obtained a ruling or determination letter holding It exempt from Federal income tax under such section of the low. Be certain, however, before filing that you have not already been ruled tax exempt through the efforts of some former officer or member. Youshouldbeequallycertainthatanysuchpriorexemplion was obtained by you as an entity and not by some predecessor organization cIa otmilar name. If you are subordinate ton parent organIzation, make sure that you are not already exempt under a group ruling Issued to your parent. Many fraterniltes, church groups, and functions of educational institutions are exempt under such group rulings. All subordinate units or activities of exempt parents may not th~mselves be exempt, however, and you should trot assume that you bee exempt without a careful examination of the ruling by which your parent received its exemption. Section 50l(c)(3) of the Code provides for the exemption of organizations which are organized and operated exclusively for religious, charitable, scientific, testing for public solely, literary, or educational purposes, or for the prevention of cruelly to children or anImals. In order to be exempt as on organization described In section 501(c)(3l, an organization must meet Iwo teslsr (11 it must be organized exclusively for one or more of the purposes in the. statute elated above, and (21 it must be operated exclusively for one or more of such purposes. If cuber of these tests is not mel, the organization will nd qualify for exempitos. Thus, even though an organizolton engages exclusively in exempt actinilies, it it is not organized exclusively for exempt purposes it will nol quality for exemption. In order tamed the organizational test, the purposes clan organi. zofion, as set forth in ifs creating instrument, con be no brooder than the purposes set forth in seclion SOl(c)f3l. The "creating instrument" is the documesi whereby the organization was created. For example, in the case of a cnrporalios the creating instrument would be its charter or articles ot incorporation, rather PAGENO="0374" 372 R-~7 than its bylaws. In addition, the powers given an organization to carry out its stated purposes may not expressly outhorize it to carry on, other than as a~s insubstantial part of its activities, activities which are not in furtherance of one or more exempt purposes. This applies even though the purposes are np broader than those set forth in section 501 (c) (3). A further requirement of the organizational test is that an organi. zation's assets must be irrevocably dedicated to an exempt purpose so that in the event of its dissolution, the assets will be distributed only for on exempt purpose. This requirement maybe met by a specific provision in the organization's creating document for the distribution of assets in the event of dissolution, or by evidence showing that by' operation of law, i.e., by state statute or judicial proceedings, the assets will be properly distributed. The second part of the dual test for exemption, the operational requirement, makes it essential that an organization's activities be in furtherance of one or mare of the purposes set forth in the statute. It is necessary, therefore, that an organization claiming exemption clearly establish that its operations or proposed opera- lions meet the requirements of the statute. B.-Signature and Verification.-The application must be signed by either the president, vice president, or other principal officer who is authorized to sign. If the application is filed on behalf of a trust, it must be signed by the authorized trustee or trustees. C.-Time and Place for Filing.-If you believe you are orgqnized so as to qualify for exemption and can show, either by your record of past operations or by your proposed method of future operations, that you meet the operational requirements for exemption, to obtain a ruling or determination you must complete and file in duplicate an exemption application with the District Director of In- ternal Revenue for the district in which you maintain your head- quarters or principal place of business. Allthe information requested in the application must be furnished, and the supporting documents and statements must be submitted in duplicate, or the application will not be considered on its merits and you will be notified accordingly. D.-Attachrnents.-All attachments and enclosures, including articles of incorporation, constitution, articles of association, dec. laration of trust, bylaws, financial statements, and other statements, must be filed in duplicate. Every attachment and enclosure should shaw the name and address of the organization, the dote, an identi- fiable heading showing the question number or subject matter to which it relates, and that it is an attachment to Form 1023. Do not submit original documents since all documents filed must be re- tained by the Service. In addition to.the documents and statements listed which must be filed, any additional information citing court decisions, rulings, opinions, etc., should be filed far purposes of expediting the process- ing of your application. E.-Power of Attorney.-If you expect to be represented in per. son or by correspondence by an agent or an attorney, a power of attorney authorizing the agent or attorney to represent you must be filed in duplicate. F.-Returns.-A mere claim or c~ntention by an organization that it `is exempt from income tax under section 501(a) will not relieve the or~onization from filing income tax returns and paying the tax. G.-Requests for Withholding of Inforrrtotion.-Any informo- lion which is submitted in the application or in support of it and which is determined by the Commissioner to relate to any trade PAGENO="0375" 373 R-8 secret, patent, process, style of woik, or apparatus, may upon request be withheld from public inspection i~ the Commissioner determines that the disclosure of such information would adversely affect the organization. Such request must (1) clearly identify the material to be withheld (the document, page, paragraph, ond line), (2) include the reosons for the organization's position that the information is of the type which may be withheld from public inspection, and (3) be filed with the documents in which the material to be withheld is contained, H.-Exnployei~ Identification Number.-Enter your employer idenUfication number an line lb. If you do not have an identifi- cation number, submit a completed Form SS-4, Application for Employer Identification Number, with this exemption application. * SPECIFIC INSTRUCTIONS (References are to lines on form) la.-List the name shown in your articles of incorporation, articles of association, constitution, declaration of trust, or other document whereby you were created. If you operate or plan to operate under a name other than that shown in your creating document, furnish an explanation. If your name has been officially changed by an amendment to your creating document, two copies of such amend- ment must be attached to this application. 6.-If the answer to any part of this question is "Yes," attach a detailed statement of each transaction showing: (a) names of the parties and their relationship or interest in your organization; (b) date of the transaction; (c) amount and nature of the property or services involved; Cd) in the case of loans, amount, interest, security received, terms of repayment, and attach copies of the note or other evidence of the debt; Ce) in the case of purchases, property purchased, value at date of purchase and how determined, pur- chase price, amount and nature of any encumbrances rind to whom owing, and attach copies of purchase contract or agreement and any appraisals made; and (I) in the case of sales, property sold, date acquired, from wham, manner of acquisition, cost or other basis at date of acquisition, date of sale, grass sales price, terms of sale, and attach copies of contract of sale. Inshuctioris-Form 1023 (4-65) If the answer to gay part of this question ti "Plaar-.ed," attach a statement explain~r,g the pIcn~.ed transaction and to the extent known include therein the same informattan required with respect to a completed tronsactian~ 7.-If the answer is "Yes," attach specimen copy thereof, state to whom issued ard whether zransferahe for money or other consideration. 8a.-If the answer is "Yes," attach a statement includtr.ç: (a) name of predecessor; (b) whether it ever received a ruling or de- termination that it was exempt from Federal tncOme tax, and, tf so, the date; Cc) its nature, i.e., sole proprietorship, partnership, un- incorporated association, carporcst;on, or trust; Cd) pertod af existence; aid Ce) reason for its terrn~nation. if your predecessor was a sole proprietorship, partnership, or other type oi prof:z-mck~ng organization, include in yo~:r statement the fo~lownç cdd:tionc information: (a) a ccmpsio explanation of your fonr~a;ion o.'.~ PAGENO="0376" 374 R-9 manner in which you acquired ar.y assets of your predecessor; (a) a list of all assets acquired showing those purchased and those do- noted. With respept to purchased assets, furnish the purchase price and how determined (fair market value, basis in hands of donor, etc.), the terms of payment, interest and any security given if purchased on an installment basis. With respect to donated assets, furnish the basis of such assets in the hands of the donor at the time of the gift; (a) if any property is being leased from your predecessor, the amount of the rent, how determined, and any optior.s or renewal privileges; (d) names of officers, directora or trustees of your predecessor, whother any ore preser.tiy employed by you and, if so, their capacity, compensation (including salary and expense account allowapce), services performed, and time devoted to pos:- tion. Also attach copies of all documents pertiner.t to the ocquis;ttan of your predecessor's assets, appraisals of property, leases, and a financial statement of your predecessor for its last full year of operation, including its lost balance sheet. 8b.-lf the answer is "Yes," attach a stotemer.: indicating: (a) class or classes of such stock; (b) number and par value of shores; (c) consideration for which issued; (ci) number of share. holders (if less than 10, names and number of shores held by each); and (e) whether ar.y dividends hove been patd or whether your certificate of organization authorizes such payment on any class of stock. 8c.-If the answer is "Yes," attach a statement containing full details, including: (a) nature of property; (b) amounts or value; (a) source of funds or property distributed or to be distributed; and (ci) basis-of and authority. for distribution or planned dtsiribution. 8d.-If the answer is "Yes," and you hove actually received such property, attach a statement showing: (a) nature of the property and from whom acquired; (b) date and r.:enner of acquisition; (a) value at dote of acquisition and how determined; (ci) any encumbrances on the properly and to whom owing; ar.d (e) ;f stack, the name of the corporation, class of stock, whether voting or nonvoting, the number of shares owned of each class at beg~nr.ir.g and er.ci of your last full year of operation, and total number of shares outstanding of each class. Also attach copies of all pertinent documents. The statement should include information with respect to Oil such property acquired even if net presently held by you. Where such property has been dtspased of, in addition to the informot~on re- quested above regarding its acquisition, ir,clude: (a) date of d~s- position; (`e) manner of dtsposition; (c) to whom oa~1eyee; Cd) con- slderotion received; and (e) copies of an'j documents evidencing the conveyance. If the answer is "Yes," and you expect to receive such property, attach a statement explatntng in deta:l. 8o.-If the answer is "Yes," attach a stotement explaining in detail. 8f.-An organizafior. which as a substantial part of its act.v~t:es attempts to insuence 1eg;~ation by propaganda or otherw1se is considered an "acuor~" orgonication and wsli nor quai~fy for exemp- tion under scatter. 501 (c)(3). For this purpose, on orgoniza. tion will ce regarded as a:terrp:ir.g to ir.fluence legislation tf' it contacts, or u:çes the pubhc to cor.tact, members of a legislative body far the purpe~e of propas:ng, supportirtg, or oppesir.g legisla~ tion, or ii it advocates the adaptior. or rcecton Oi legslation. The PAGENO="0377" 375 R40 term "legislation" as used hero includes~9ction by tho Congress, by any State leg~slciure, by any local council or similar governing body, or by the public in a referendum, initiative, constitutional amendment, or smiiar procedure. Even though or. organization does not eñgcige in direct attempts to influence legislation, if its main or primary oboctive may be attained only by legislation or a defeat of legislation, and it advo. cates or campaigns for the attainment of such main or primary objective, as distinguished from engaging in non~artison analysis, study, or research and making the results thereof available to the public, it will be considorod an "action" orgonizotion and oc~ cardlr~giy n6t exempt as an organization described in section 5Oi(c)(3). If the ar,swer to this question is "Yes," attach a statement describing fully all activities or planned activities in this connec- tion,,thoir frequency, the approximoie amount of time devoted or to be devoted thereto by your officers and members, and furnish copies of any literature distributed or to be distributed, and any other per- tinent material. 8g.-An organization will be considered an "action" organiza- tion and will not qualify for exemption if it participates or intervenes, directly or ir.directly, in any political campaign on behalf of or in opposition to any candidate for public offtce. "Candidate for public office" means an individual who offers himself, or is pro- posed by others, as a contestant for an elective public office, wJ~ether such office be rational, State, or local. Such porticipo-- tion includes, but is not limited to, the publicot;on or distribution of written or prir,;od statements or the making of oral statements for or against a candidate. If the answer to this question is "Yes," attach a statement describ- ing fully all such activities or planned activities and furnish copies of any literature d:s;ributed or to be distributed in this connection. 8h.-lf the answer is "Yes," attach a statement showing the names of the recipients, the amount paid or to be paid, the charac- ter of the services rer.dered or to be rendered, and the time devoted or to be devoted thereto. Ii amounts are paid or will be paid on other thor. a fixed compensation basis, for example, in payment of travel, livir.g, outomob:le, or other expenses, explain full'~ the no- t'ure of the expense, the amount (tf paid), how accounted for by the recipient, and by whom payment tsar will be. approved. 81.-A private shareholder or individual is one who has a. personal or private tnterest in on organization. If the answer is "Yes," and part of your net income inures to the benefit of a private shareholder ot tr.dividuai, attach a statement giving the name or names of the recipients, the omour.t received by each, and the reosor. for the payment. If the answer is "Yes," and you plan to have any ptirt of your net income inure to the benefit of a private shareholder or ir.dtvidual, attach a statement explaining in detati. 8j.-If the answer is "Yes," attach a statement showing the name of the orgonizatton(s) and the manner or nature of your actual or planned affiliation or relationship. 8lc.-If the answer is "Yes," and you actually hold 10 percent or more of any class of stock or 10 percent or more of the t~toi com- bined voting power of stock in any corporation, attach a state- ment showing: (1) name of corporation, class of stock and whether voting or nonvoting; (2) number of shores owned 05 eocn c.Oss at beginning and end of your latest annual accounting period; (3) total PAGENO="0378" 376 R-J1 number of shares outstanding of each class; (4) value of stock as recorded on your books and included in ypur .tatement of assets and liabilities; (5)' date acquired and from whore; and (6) manner of acquisition. if any stock is subect to voting rcotricttot~s, attach copy of agree' meat. If no written agreement exists, explain fully. If the answer is "Yes," and you plan to hold 10 percent or mare of any class of stack or 10 percent or mare of the total combined voting power of stock in any corporation, attach- d statement ex- plaining in detail. - 10 a. and b.-The copies required must conform in all respects as to text, dateof adaption, signature, etc. lOd.-A classified statement of receipts and disbursements must be furnished clearly reflecting the nature or source of each receipt, - the grass amount received from each source, the expenditures made, purpose, and the total amount expended for each purpose Neither bank - statements nor ledger sheets will be acceptable far this purpose since they are not classified; Profit cnd loss or other similar operating statements also are not acceptable since they do not show all receipts and expenditures. (1) Where funds have been loaned or borrowed, if not disclosed in answer to question 6, attach a statement showing: (a) names of the parties; (b) whether the lender or borrower is an officer, di- rector, trustee, member, shareholder, or employee; (c) reason for the loon; (d) period of the loan; (e) interest payable; and (I) security given, if any. (2) Where income is derived irom ticket sales or facilities fur- nished to nonmembers, explain fully and state the amount which represents such nonmember income. (3) Where rental income at: expense is involved, if not disclosed in the copy of the lease required to be filed with this application, or if there is no written lease, attach a statement showing: (a) names of the parties to the lease; (b) whether leased to or by an off icer, director, trustee, member, shareholder, employee, or contributor to you; (c) rental and how determined; (d) date tenancy began, and any extensions, renewals or options; and (e) amount of ar.y in- debtedness on the property, to whom owing, interest payable and term. (4) Where funds are distributed to other organizations, attach a statement showing the official name of each donee, its complete address, and the amount given to each. IOe.-In the event a dissolution clause is not included in your creating document (such a provision must be in the document whereby you were created rather than your bylaws or other code of regulations) and you ore relying on operation of law, you must attach a brief which outlines the State statutes and judicial decisions, If any, an which you rely. You must show that the State statutes clearly insure that your assets will be distributed only to a recipient that would qualify for exemption as an organization described in section 501 Cc) (3) or would escheat to the State for a public purpose. If reliance is placed on judicial decisions, the brief must show, with citation of case holdings, (1) that the doctrine of cypres has been adopted by the State and consistently applied in similar situanons (2) that ~`our creating instrument clearly manifests the general charitable inte~t required to insure application of cy ~res by the appropriate judicial authority to your assets, and (3) that the par- Ucular application of cy pus insures distribution oi your assets for exempt purposes within the meaning of section 501(c) (3). PAGENO="0379" 377 R~12 lOh.-The statement must be sufficiently detailed to show that each activity is clearly within the intent of the statute. A restote- rnent of your purppses or a statement that~'our activities or pro. posed activities are or will be in furtherance thereof is not sufficient. If you have not operated and are filing this application on the basis of proposed activities, the descriptiontdf your proposed activ- iUes must not only, describe the activities ~n which you expect to engage, but also how you expect to raise your funds, and the na- ture of your principal contemplated expenditures. If your proposed activities will encompass more than merely turn. Ing over funds to other exempt organizations, the standards, criteria, procedures, or other means adopted or planned by you for carrying them out must be stated. As to expected sources of funds, state whether support wiE be from public or private sources, i.e., from the public at large or governmental units or from your creator, members of a family group, or a few interested individuals; and the nature of the support, i.e., contribt,xtions, gifts, grants. or other. If income from fund raising events, ticket sales, rentals, or other business or investmentsources is anticipated, state the nature of the proposed venture and furnish any pertinent details. The statement of principal contemplated* expenditures should re- * flect administrative and operating expenses as well as expenditures * made directly in furtherance of exempt purposes. If grants, gifts, awards, etc., to individuals are planned, the selection criteria to be followed must be stated. II you are organized to operate a home for the aged, school, hospital, clinic, or bookstore; or to award scholarships, make loans, engage in or sponsor research, conduct educational activities other than a school; or to expend any par: of your funds in foreign coun- tries, the information called for below must be furnished. Horno for agcd.-If you are organized to operate a home for the aged, submit: (a) a description of the facilities and services pr~ vided or to be provided the residents, including the residential ca~ pacity of the home; (b) the criteria for admission to the home; (c) charges for admission (entrance fee and/or monthly charge) and whether payable in a lump sum or on an installment basis; (d) whether all residents are or will be required to pay fees; Ce) how charges ore or will be determined, i.e., on a profit basis, to recover costs, or at less than cost; (I) whether any residents are or will be accepted without pay and, if so, how many; (g) whether residents are or will be discharged if unable to pay; (h) whether Federal mortgage financing has been applied for and, if ~o, the type; and Ci) copies in duplicate of admission applications and/or any other literature or brochures descriptive of the home, its facilities, and admission requirements. Scholarships.-If you award or plan to award scholarships, submit: (a) criteria used or to be used for selection, including the rules of eligibility; (b) how and by whom the recipients are or will be selected; Cc) if awards are or will be mode directly to individuals, whether information is required assuring that the student remains in school; Cd) if awards are or will be made to recipients of a particular class, for example, children of employees of a particular employer, whether any preference is or will be accorded an applicant by reason of the parent's pos:tion, engzh of employment, or salary; whether as a condition of the award the recipient must upon graduation accept employment with the company, and whether the award will be conS tinued irrespective of termination of the parent's employment; and ~e) copies in duplicate of the scholarship application form and any brochures or literature describing the scholarship program. Loanc.-If you make or plan to make loansfor charitable and ed' ucctior.ci purposes, submit: (a) circumstances under which such loans PAGENO="0380" 378 R-13 are or will be made; (b) criteria for selection, including the rules of eligibility; (c) how and by whom the reripient is or will be selected; Cd) manner of repayment of the loon; Ce) security required, if any; (fi interest charged, if any, and when payable; and (g) copies in duplicate of loan application and any brochures or literature de- scribing the loon program. Research.-If you engage or plan to engage in research, sub- mit: (a) nature of research engaged in or contemplated; (b) a brief description of research projects completed or presently being en- gaged in; Cc) how and by whom research projects ore determined* and selected; Cd) whether you hove or contemplate having contract or sponsored research and, if so, names of past sponsors or grantors, terms of contract or grant, together with copies in duplicate of any executed contracts or grants; (e) disposition made or to be made of the results of your research, including whether preference has or will be given to any organization or individual, either as to results or time of ~eloase; (0 who will retain ownership or control of any patents, copyrights, processes, or formulae resulting from your research; and (g) copies in duplicate of publications or other media showing reports of your research activities. Only reports of your research activities or those conducted in your behalf as distinguished from those of your creators or members conducted in their individual capacities should be submitted. School.-If you ore organized to conduct a school, submit full information regarding your tuition charges, number of faculty mem- bers, number of full-time students enrolled, number of part-time students enrolled, courses of study, and degrees conferred, together with a copy of your school catalog. Education (other than school).-If you claim exemption as an - educational organization other than a school, submit complete in- formation as to the manner in which you carry on or plan to carry on your educational activities, i.e., by panels, discussions, lectures, forums, radio or television programs, or through various cultural media such as museums, symphony orchestras, art exhibits, etc. In each instance, exploit, by whom and where conducted, admission fees, if any, and submit, in duplicate, copies of pertinent contracts, agreements, publications, leaflets, pamphlets, programs, etc. Hospital.-If you are organized to operate a hospital, attach a statement including: (a) requirements for admission to practice on the staff; (b) your policy and practice with regard to charity patients; and Cc) if you hove operated. the number of patient days during your latest annual accounting period of full pay, part pay, and no pay patients. In case of part pay and no pay patients. state whether they were admitted regardless of their ability to pay or whether they were patients whose accounts were charged off as bad debts or uncollectible. If any part of your facilities are or will be used by or rented to others, for example, doctors, X-ray labora- tories, drugstore, or office space, describe fully the arrangements for use, the space and what percentage of your building it represents, terms of occupancy, occupants and their relation to or connection with your hospital and any services performed by them for you, and attach copies in duplicate of pertinent leases and contracts. Clinic.-If you are organized to operate a clinic, attach a state- ment including: (a) description of the facilities and servicesl (b) to PAGENO="0381" 379 R~-14 whom the services ore or will be offered, ~ the public at large or ci specific group; (c) how charges ore or will be determined, i.e., on a profit basis, to recover costs, or at less than cost; (d) by whom administered and controlled; (e) whethert any of the professional staff, that is, those who perform or will perform the clinical services, also serve or will serve in on administrative capacity; and (I) how compensation paid the professional staff is or will be determined. If any part of your facilities are or will be used by or rented to others, for example, doctors, X-ray laboratories, drugstore, or office space, describe fully the arrangements for use, the space and what percentage of your building it represents, terms of occupancy, occupants and their relation to or connection with your clinic and any services performed by them for you, and attach copies in du- plicate of pertinent leases andcontracts. Fcs~eIgn clistributions.-If any of your funds are or will be ex- pended in foreign countries, attach a statement including: (a) maimer in which and by whom recipients are or will be selected; (b) names of recipient organizations and/or purposes for which the funds are or will be expended; (c) extent to which, if any, you control or will control expenditure of funds donated by you to foreign orgonizo- lions, and whether there is or will be any required reporting of such expenditures to you; and (d) whether contributions are or will be solicited by you and earmarked for specific foreign distributees. Bookstore arid publishing.-If you are organized to operate a bookstore or engage in publishing activities of any nature (printing, publication, or distribution of your own material or that printed or published by others and distributed by you), explain fully the nature of the operations, including whether sales are or will be made to the general public, the type of literature involved, and how such activities are related to your stated purposes. PAGENO="0382" Return of Organ!zat!en ~xe~t Frc:~i !~scome Tax I Section 501(c)(3) of the Code I ~1(ThTh(~t FORM tLl0tbulu) For the year January 1-December 31. 1966, or other taxable year beginning I 1 IL.. I~ ....,..... ....... i. 1966. and ending 19.. U~)L.i"J PLEASE TYPE OR PR UT Name Embye cent/caPon Ember Number and street City or lawn, State, and ZIP code Enter the name and address used en your return for 1965 (if the same as abova, write "Same"). If none filed, give i PART Part I (pages 1 and 2) information required pursoant to sections 6001. 6033, and ether applicable sections ef the Internal Revenue Code. NOTE: One copy of Part and two copies of Part II must be filed. 1 Gross sales or receipts from business activities 2 Less: Cost of goods sold and/or of operatidns (attach schedule) 3 Gross profit from business activities 4 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 (lines 3 to 9, inclusive) 11 Eopenses of earning gross income from colunro 3, Schedule A DISBURSEMENTS MADE WITHIN THE YEAR OUT OF CURRENT OR ACCUf,IULATED INCOME FOR PURPOSES FOR WHICH EXEMPT, AND ACCUMULATION OF INCOME 12 Eopenses of distributing current or accumulated income from column 4, Schedule A 13 Contributions, gifts, grants, scholarships, etc. (See Instruction 13) 14 Accumulation of income within the year (line 10 less the sum of lines 11, 12, and 13) 15 Aggregate accumulation of income at bngrnnrng of the year ,, 16 Aggregate accumulation of income at end of the year , ( RECEIPTS NOT REPORTED ELSEWHERE 17 Contributions, gifts, grants, etc., received (See Instruction 17) 18 Less: Eupenses of raising and collecting amount on line 17. from column 5, Schedule A 19 Net contributions, gifts, grants, etc., received DISBURSEMENTS MADE OUT OF PRINCIPAL FOR PURPOSES FOR WHICH EXEMPT 20 Expenses of distributirrg principal from column 6, Schedule A 21 Contributions, gifts, grants, scholarships, etc.: (a) Paid out in prior years (b) Paid out within the year (See Instruction 21) . Schedule A-Allocation of Expenses (See Instructions for Attachments Required) 1. ten 2. Tolal 3. Expenseo at earning truss income 4. Expenses at distributing income 5. Expenses ol raising and collecting pninciput 6. Expenses xl distributing principal (a) Compensation of officers, etc (b) Other salaries and wages (C) Interest (d) Taxes (e) Rent (I) Depreciation (and depletion) fe) Miscellaneous expenses (attach schedule) (h) Totals 380 R~-15 Enter on line It PAGENO="0383" 381 Under penalties of perjury, declare that have exa mined this return, including accompanying schedules and statements, and to the best of my knowledge and belief it is true, correct, and complete. If prepared by a person other than taopayer. his declaration is based on all information of which he has any knowledge. CORPORA~l v " SE.~.I.] Date Signature of tflicer Title lnddlrtrlgnalurof;rer .t.& ~ ASSETS I Cacti 2 Accounts receivable (see instructions) (a) Less allowance for bed debts 3 Plotos receivable (see instructions) (a) Less allowance for bad debts 4 Inventories 5 Govt obligations: (a) U.S. and instrumentalities (b) State, subdivisions thereof, etc 6 Investments in nongovernmental bonds, etc 7 Investments in corporate stocks (see instructions) . 8 Mortgage loans (number of loans _________) 9 Other investments (attach schedule) 10 Depreciable (and depletable) assets (attach schedule) (a) Less accumulated depreciation (and deplntion) . 11 Land 12 Other assets (attach schedule) 13 Total assets LIABILITIES AND. NET WORTH 14 Accounts payable (see instructions) 15 Contributions, gifts, grants, etc., payable 16 (a) Bonds and notes payable (see instructions) (b) Mortgages payable 17 Other liabilities (attach schedule) 18 Capital stock: (a) Preferred stock (b) Common stock 19 Membership certificates 20 Paidin or capital surplus 21 Retained earnings-Appropriated (attach schedule) . 22 Retained earnings-Unappropriated: (a) Attributable to ordinary income (b) Attributable to gains from sale of assets 23 Less cost of treasury stock 24 Total liabilities and net worth Form 990-A'-i956 Schedulo O.-.-CALAttCL~ 5'tEETS (Sec inc~tructibns) Be~eaiog of Taxable Year - ted Dl TZO.hII Year Page 2 (A) Aenrtal (B) Total (C) Anavent (D)Tetal ) 87-444 0-68-25 PAGENO="0384" I Date of current eecrnptiott 1:11cc ~ - 2 Attach a detailed statement of she nature of your charitable, business, and all other activities. 3 Have you attached the information requited by: (a) lastroctioss ~ . 0 9.1 0 its (b) Instruction J? DYes OHs 4 Have you fled a tax return on Form 990-T foe this year? . 0 Yes 0 its If "Yes.' s'here fled? 5 Ia ~hal year was your organisasion formed? tat ~hst State or country? ~ If successor to ptrciuusly misting oeganiaatioo(s). gine name(s) and address(rs) of the peed crest or otganiratton(s) 7 If ~,ou hane etpitat stock isturd and outstanding., state mith respeca so each C ~ The number of shaera outstandtng (b) The number of shaees held by indtniduals . . . -- (c) The number of abates hrld by negantaattons . . _~ . (d) The nsmbrr of shatebtldees at end of year . . (e) Whether any ditidends may be paid . . . . 0 Yes 0 He O If~ou acquited capital assets out of income, attach temiaed (its and amount 9 H ave anj changes not preo)vusty reported to she lnteenal Reornue Srrvtce been made in youe aeticles of incoepotution or bylunos on othee totteuments of simdar import? DYes 0 Ito If "Yes," attach a copy of the amendments. 10 Have ou had any sootces of income or engaged in any acttn~ties ent - jt~~ta ~ Revenue Service? , DYss Oils *I?thO~ 0.S.000DtNftt ~mntrtntnG ncTtcr:tscs.~O-22nt-Oat 11 bid you hold any erat property for rris)al piseposni sct)lt srsprctto Rlocls three ss an sndebtedness sncorerd to acqutetno the peopeety or sn mokoc smpnnnements thereto or scl:ich vat acquired subtect to a morega e Os stmtlae tm? Dyes Otta If `Yes,' attach detailed statement. 12 )toce you doting the year adoocatrd or opposed (iocludtng the publtshivg or dtstetburing of statements) any nations). State, or local leg:slatoo? Dyes OHs If "Yes,' attach a detailed description of such actintttes and coptes of any 13 Hane you duein the year passiciputed in. or intervened in )tnclad:ng the pubftshing or ~isreibuting of srarrmentst an poltttcat camftatfe on bnt:at( nf or in opposition to any candidate for pubIc oIlier? . 0 Yen 0 Un If "Yes," attach a detailed description of such acttntttes and copes of any 14 After July 1, 1950. did: the creator of your otgantaaston: or a contetbutor to ynor osganiration: on a btothee orstssrr (whole or half blood), spouse, ancrstor, on lineal descendent of such cteatot or contetbutos; tee a cutpora' tion owned (50 petcent or more rf cohn stoch ot 50 percent or mote of value of all stock) disrctly or indinecely by such cseatct or conttbutor- (a) Botsuo' any pate of your income or cospus? . . . 0 Yes 0 ito (b) Recrior any compensation for petsoral setvccrs fnom you! 0 Yes 0 Ho (c) tIe scsy pats of your services or assets made aaad- 0 Yes 0 Ha (d) Punch ate any securities or other propeety from you? . 0 ~ 0 Ho (e) Sell any securities or other peopenty so you? . . . 0 Y~ 0 Hr foR yfy m p ~ D~ OH If anssuer to any question is "Yes," attach detailed statement unless perot nusly reposted. If preciously repntned, fine year(s). 15 Do you hold S peecent or mote of any class of stock in anycorporation? DYes 0 Ho If "Yes," you mute submit she infoemalion: required by she tosteuctions for Schedule B. 382 R-:L7 PAGENO="0385" 383 ?O-RM ss-s(1.6S1 PART I U.S. TREASURY DEPARTMENT - INTERNAL REVENUE SERVICE APPUCATION FOR EMPLOYER IDENTIFICATTON NUMBER PLEASE LEAVE BLANK R.48. I.NA.ME?TRUE came as disllagssiehcd from TRADE name.) -~ 2. TRADE NAME. IF ANY (Ester name undcr which business is operated. if diffct-cnt frocn item 1.) 3. ADDRESS OP PRINCIPAL PLACE OP BUSINESS `No. and STreeL City. State. Zip Code) 4. COUNTY 5. CHECK (X) TYPE OP ORGANIZATIONE(!f other specify, such as Estate, etc.) 5a.Eoding month oF ri TodI' 1"'l Corpor [f Porleor. [`~ Other accounting yea r L....J nTdcot L...J otion L..J ship L.J(Specify) 6.11 tndicldcol.eoturyeursouloT security account nombar 7. REASON FOR APPLYING (if `othcc apccify such as Corporctc structure 8. Dots you ocquitod or slotted Started chasgc. Acqucrcd by gift or trua4 etc.) buslneso(Mo.. dcsy, ycar) fl f"~ Purchased T'~'1 bustoess U goIng business U Olhsr 9. First dote yea poTd or cclii peycueges (Mo..dsy year) 10. NATURE OF BUSINESS (See !ossructiorce) itt. A I NUMBER I OP-~- 1!~APLOYEES ot business Is MANUFACTURING, list In order ot their Tssportaoco tho principal productsccaculauturodondtlcnestimoted percentago olItce Total nelsen otollproductoschlcheeuhrc presents. gclculturol Noo'sgtlcullurol PLEASE LEAVE BLANK A 2 %~3 % FR PRC 13.Do you operoto mota Lao one place ut~basincss? U Yes U No if Yee, attach a tInt showing for each scporatr establlehescnb a. Name sod address. b. Ncturs of buaiecas. e. Number of ecnploycea. . ~ 14.To sitcom do you soil most ot your products or serniuos? D BosTeess Goeasol Other eotahTishmenls public (Spccify) PLEASE Geo. lcd. Close Siss Ross. Fur Appt. Jius. Bir. Dote IA_AVE BLANK . I FORM SS.4(1.65) PART 2 00 NOT DETACH ANY PART OF THIS FORM. SEND AU COPIES TO THE DISTRICT DIRECTOR OP INTEENAL REVENUE PLEASE LEAVE BLANK 1. NAME (TRUE name os dietcsgolshcd frees TRADE same.) 2. TRADE NAME. IF ANY (Enter name under whIch business Is operated. If differecis from Item I.) NAME AND COMPLETE 3. ADDRESS OP PRINCIPAL PLACE OP BUSINESS (No. sod Slrcet) ADDRESS (City. State. Zip Code) . 4. COUNTY 5. CHECK IX) TYPE OP ORGANIZATION (If other specify, such as Essato. - etc.) 5 a. Ending menthol 6. II iedioiduol,entsr yoorsacTal f"'f edt' r'i Carper. [``f Pattnse- f') Other accountIng your security ocuount number L...Jstdunt L..Jotias L..J ship L...J(Syccclfy) 7, REASON FOR APPLYING (If othcrr specify such os Corporsteasructure 8. Data coo acquIred or started 9. First data you paId at suill StarTed Parchased `Acqtcsrcd by gift or 5rost. ito.) busloess GIT0.4ay. year) pay o.agsr(Mu..day. year) [3 Costoes.s Dgaieg~usteess [3 IO.NATURE OP BUSINESS (See Instrsscliocss) [~UMBES Agriuulturol - Noengrlcullurel OP-.~ EMPLOYERS 12.Hane yoa eoer applIed for on tdentiticution number tar this 01 any other business? [3Na Yes IfYes.seter nccnee and o'ode name (if sny). ,OIss sneer she apprnalenatc dog cIty. acd stats ssheroyua first opplied and DATE SIGNATURE TITLE PAGENO="0386" 384 R~~L9. INSTRUCTIONS WHO MUST FILE THIS APPLICATION? Every person who has not previously secures! an ldeoflflcezion nunoborand who (a) pays mcgee to one or more employees, or (b) to rcqulrcd to have sntldcntilice.Uoss number for Inclusion In any return, slatesnesst or other document. On)y one applicatIon for an identification number should ho filed, regardless of the number of estnbltohreseots operated. This is true even though the buetneos to conducted nuder one or more buttoner or lredn nsensas. Each corporation ot an arrillated group mutt be treated eepr.ralcly, and cccli must file a scparr.to application. tf a business Is sold or Iratcsierrad send the new owner ctoee not heve an identification number, hcshoutd not urn the tdantific~tton number ascigued to the preVIOUS owner, but must lie an application on Force SC-4 for a new IdentifIcatIon nsiesbtr. WHERE ?~hJST THIS APPLICI.TION BE FILED? With the U.S. District Director of Internal Revenue with whom the Federal tax returns ore flt.cd. WhEN MUST TillS APPLICATION Bit FILED? (a) By those who pry wages, on or before the seventh day after the unto on winless burmese begins. (b) By others in sufliciant these br the idcntiuica'.lon number to be Included to relurn, ctr.ts.tncoi,. or other document. HOW THIS API"I.ICATION SHOULD BE FILLED IN. All anoweeo should be iypearliien or printed plainly wIth balipoini pen ifl black or dark blue ink. Items I and 2. Enter Irs Item 1 the tree name of ihe applicant and enter in Item 2 the trade acme, if cay, adopted for business purposes. For example, if John V.. Jones, en tndivic'uai co-sear, Operates a restaurant under the trade muse of "iiuey Bce Restaurant,' `John W. Jones' should be entered in linen I and `Busy Bee Restaurant" in Item 2. NOTE- if crested by atatute, court order or decree, charter, oral or wrItten agreement, wIll, decteretton of trust, or other legal lnei.rumcssi, shier In Item 1 the fuit cease rceogntevct thcraundhr. If a eorporsrtiots, enter Sn Item 1 the corporate name as set forth In tie charter or ether iegr.l document issued by tine Government creating it. In lice case of a truth the niece of the trust estate should ha entered in Item 1, rod the ao.mo of Use trustee in Item 2. In the ease of so relate of a decedent, ineolvent, etc., the Orson of the estate should be entered In liens I end the name of the administrator or other fiduciary In tires 2. If the true name is ununuelly long, it ahcutd be shown Is a siatesnesst setteehud to lists forte. In such ease, a short verolos of the nasne should be adopted for purpoece of this forts cud entered in Item 1. DONOTDETACH - Item 10. Describe the kind of business carried on by applicant In Item 1. The following examples lituatrate the type of ttnformatioss needed. (a) MINING AND QUARRYING: Stale the pricers and the-principal product; to., missing bltu. nilnous coal, mining bauxite, contract driiling for oii, quarrying dimension stone, etc. (b) CONTRACT CONSTRUCTION: Stale whether general coetractor or special trade contractor and nhow type of work normally perforated; i.e., general contractor for residential buildings, general contractor on streets and higlsways: electrical subcontractor, plumbing subcontractor, sic. (c) TRADE: State the type of cole and tue principal lIne of goods sold; i.e., wholesale dairy prod. ucto, manufacturer's representative for mining machinery, wholesale petroleum-bulk station, retail hardware, retail men's clothing, etc. (d) MANUFACTURING: Stale type of estabiishnsenl operated: Le., sawmill, vegetable cannery, by.product coke oven, steel coid.rolting mlii, etc. to Item 12, Part 1, list the principal products manufactured. (c) GOVERNMENTAL: State type of governnsental organizalios, whether ,a State, County, School District, Municipality, etc., or relationship to such entities, i.e., County Hospital, City Library, etc. (f) NONPROFIT (OTHER THAN GOVERNMENTAL): State whether organized for religious, charitable, nciestifiz, literary, educational, or humane purposes and slate the principal activity; he., relt~ious organization - hospital; charitable organization - home for the aged, etc. (g) OTHER ACTIVITIES: State exact type of busiscss operated; i.e., advertteing agency, dry cleaning plassi, fans, labor union, motion picture theater, real estate agent, sham laundry, ressiai of coln.operaicd veteditsg machines, etc. RETURN AlL FOUR lARTS OF THIS FORM TO TIlE DISTRICT DIRECTOR OF INTRIINAL REVENUE. PAGENO="0387" Exempt Orga~zatio~B~th'~ess gncome Tax ~ethrn (Under Section 511 of the Internal Revenue Code) For the year January 1-December 31. 1966, or other taxable year beGInnIng 1966 end endinY - ___________________________ PLEASE TYPE OR PRINT Employer Identllicatlors Number NAME OF ORGANIZATION (In case of ernp?o1ees trust described In 501(a), glue the trusts ldenliflcatiO.1 ADDRESS (Number and sIred) (Cilyor town, StaIs, and ZIP code) NAME OF TRUSTS FIDUCIARY ADDRESS OF TRUST'S FIDUCIARY TAX COMPUTATION ORGANIZATIONS TAXABLE AS CORPORATIONS (See General Instruction A(1)) 1 Taxable income (lime 31, page 2) 2 Surtax exemption (line 5, $25,000, or amount apportIoned under sectIon 1561, whicheber Is looser) 3 LIne 1 less line 2 4 (e) 22 percent of tine S I (b) 26 percent Rf tine 3 (c) If multiple surtax exemption is elected under section 1562, enter 6 percent of line 2 5 If alternatIve tax computation is made In separate statement, enter xuch tax hero . 6 Total income tax (line 4 or 5. whichever is lesser) 7 Less: (a) Foreign tax credit (attaclr Form 1118) (b) Investment credit (attach Form 346R) 8 Balance of income tax 9 Tax from recomputing prior year investment credit (attach statement) 10 Total income tax (line 8 plus line 9. Enter here and on line 18) TRUSTS TAXABLE AT INDIVIDUAL RATES (Seo Gcnoral Instruction A(2)) 11 Tax on line 31, page 2 (from Tax Rate Schedule, page 4) - 12 If alternative tax computation is made in separate statement, enter such tax here ~ -~ 13 Total income tax (line 11 or 12, whichever is lesser) 14 Less: (a) Foreign tax credit (attach Form 1116) (b) Investment credit (attach Form 3468) 15 Balance of Income tax 1k Tax from recomputing prior year investment credit (attach statement) Total Income tax (line 15 plus line 16. Enter here and on line 18) _____________________ TOTAL INCOME TAX _____ ____________ 18 Total Income tax (from line 10 or 17, whichever is applicable). *. . . . . . . 19 Credits: (a) Credit from regulated investment companies (atlach Form 2439) (b) Tax paid with Form 7004 application for extension (attach copy) (c) Credit for U.S. tht on nonhighway gas. and lab. oil (attach Form 4136) . 20 If tax (line 18) Is larger than credits (line 19), thx balance is TAX DUE. Enter balance here .* . 21 If tax (line 18) Is tess than credits (line 19) Enter the OVERPAYMENT here . . - ) 385 FORM U.S. Treasury Department Internal Reeerue Service R~2O T) 19 PAGENO="0388" Under penalties of perjury, I declare that I have examined this return, Including accompanying schedules and statements, and to the best of my knowledge and belief It Is true corrcct, end complete. if prepared by a person other than ~aopayer. his declaration is based on all Information 01 which he has any knowledge. Dale Signature ot oflleer ` Tilt. Date IndIvIdual or lien signature nl preparer Address Form 990-1 (1966) UNRELATED BUSINESS TAXABLE INCOME COMPUTATION - - UNRELATED TRADE OR BUSINESS GROSS INCOME I Cross sales (where Inventories are Less: Returns end an Iecomodotermlnlng factor) allowances . 2 Less: Cost of goods sold (Schedule A) 3 Gross profit from sales 4 Gross receipts (where Inventories are not art Incomeduterminlog factor) 5 Less: Cost of operations (Schcdulv, B) ____________________ 6 Gross profit whcro inventories ore not an Iricomedetermlning factor 7 (a) Net capital gain from cutting timber (attach statement) (b) Net ordinary loss from cutting timber (attach statement) (c) Gain from disposition of depreciable property under sections 1245 and 1250 (uttuch ctatcmunt) . . 8 Income (or loss) from partnerships (attach statement) 9 Business tease rents (Schedule C) 10 Total unrelated trade or business Income on linas 3, pod 6 to 9, lecluslvo DEDUCTIONS * (Except contributiens, deductions must ba directly connected with the unrelated business) 11 CompensatIon of oflicnrs or trustees (Schedule E) 12 Salaries and wages (not deducted elsewhere) 13 Roots 14 Repairs (do not Includa cost of Improvemento or capital expenditures) . 15 Bad debts (Schedule F if reserve method Is used) 16 Interest (Schedule H) 17 Tacos (Schedule I) 18 Contributions (attach schedule-see Instructions for limitation) 19 Losses by fire, storm, shipwreck, other casualty, or theft (attach schedule) 20 Depreciation (Schedule C) 21 Amortizaton (attach schedule) 22 Depletion (attach schedule) 23 Advertising 24 (a) Pensian, profit-sharing, stock bonus, annuity plans (b) Other employee benefit plans 25 Other deductions (Schedule .1) _____________________ 26 Total dedactiens on lines 11 to 25, Inclusive _____________________ 27 Unrelated business tanabla iecoma before net operutiog loss deduction (iine 10 less 2.8 Less: Net operating loss deduction (attach statement) 29 Unrelated business tanabln income befara specific dedactior 30 Less: Specific deduCtion 31 Unrelated business tanabta Incoma __________ 386 1,000.00 lisa 26) PAGENO="0389" 387 Schedule A-COST OF GOODS SOLD (See Instruction 2) R-22 Schedule B-COST OF OPERATIONS Method of inventory valuation- i Salaries and wages I Inventory at beginning of year 2 Other costs (to be detailed): 2 MerchandIse bought for manufacture or sale . (a) 3 Salaries and wages .. ......... (b) ,, 4 Other costs (attach schedule) (c) 5 Total. .. ..... (d) S Less Inventory at end of year - (e) 7 Cost of goods sold (enter here end on lies 2. page 2) 3 Total (enter here and on line 5, page 2). Form 990-T (1966) Page3 Schedule C-BUSINESS LEASE RENTS (See Instruction 9) 1. e.~i~iIo~nl Leased Property 2. Total Sent Oeceived 3. Taxes and Oiher Eapentes 4. Interest (ExpinScfe ~ Continuation of Schedule C 6. Amount of UnpaId 7. Adjutied Saris ot Leased 8. Percenlage wlrlclr S. Cress Reniai income 10. Allacable Deduciions (Toialol II. Net Orniai income (no lost) in Indebtedness Prrpsriy (Aiiach Sialsmeni) Ccl. Sit 01 Coi. 7 (Cntumn 2 X Column 0) Columns 3. 4, led 5 X Column 0) ciudible (Column 9 lest Column 10) .: ...: , ,... ;. ;:. - a Total (enter here and on line 9, page 2) Schedule E-COMPENSATION OF OFFICERS 1. Ii Add d S IS Iiy N mb 1 10ff n 2 TIll SpIf 1 7 A S Total compensation of officers (enter here and on line 11. page 2) Schedule F-BAD DEBTS-RESERVE METHOD (See Ins 2. Trade cries and accounts re I Amount add~~ in reserve 1. Tsar caleable outaianding aterrd oiyear 3. a as on accrvni 4. ~ 5. Recoveries .. . t `Ction 15) 6. Amount changed against reserve 7. Reserve ion bad debts at and ot year - 1961 ......... 1962~ ., 1963~ ......... .. .. 1966. PAGENO="0390" Schedule G-DEPRECIATION (See Instruction 20) Taxpayers using Revenus Procedure 62-21: Make no entry in column 2. enter the cost er other basis of assets held at end of year In column 3. and enter the accumulated depreciation at end of year in column 4. 1. Group sod guideline etass . 2. Date 3. Cost or ~ Depnec:atton 5. Method of 6 truer er description xi property acquired ether basis a ounedorallowible depreclatintn rats 7. Depreciation fur this pear Total additional first.yeor depreciatto Dulidings Furniture and fixtures . Transportation equipment Machinery and other equipment do not include in items below) 2 Totots 3 Less emount of depreciation claimed in Schedule C end elsewhere on return u~Oelence-Enter here and online 20 pago2 Form 990-T (1965) (apianation Page 4 Schedule H-INTEREST ON INDEBTEDNESS (See Instruction 16) Total (enter here and on iine 16. oace 2) Amount Schedule f-TAXES (See Instruction 17) Total (enter here end on line 17 page 2) £apianatitn Amount 388 R.-23 Schedule .1-OTHER DEDUCTIONS (See Instruction 25) PAGENO="0391" 389 R-24 Explanation l *.mxunt Total (enter here and on line 25, page 2) . TAX RATE SCHEDULE FOR TRUSTS TAXABLE AT INDIVIDUAL RATES APPLICABLE ON AND AFTER JANUARY 1. 1955 lithe amount ox line 31. If the amount on line 31. page 2, is: Enter on line Ii, page 1: page 2, is: Enter ox line 11. page 1: 4os over $300 14% of the amount on tine 31. page 2. Over 320.000 but nut over $22,000_.. $6070, plot 48% of eocess over $20000. Doer $500 but not over $1,000 $70, plus 15% of covets oven $100. Oven $22,000 but not Over $26,000.... 37.030. plus 50% of excess over 322.000. Doer 31,000 but not over $1,500__. $143. plot 16% of rxccts over $1,000. Over 326.000 but 001 OVCC $32,000... $9,030. plus 33% of excess over $26,000. Doer $1,100 but rot over $2,000....- $225. plus 17% of excess oven 31.500. Ocre 332,000 but not oxer $3O,000~ $12,210. plot 55% of excess over $32,000. Deer $2,000 but not oxen 34.000..... $310. plus 19% of rocess over $2,000. Over $30,000 but not over $44,003... 315.510. plus 50% of recess over $30,000. Doer $4,000 but not over $6,000...- 3690. plus 22% of excess over $4,000. Oven $44,000 but not over $50,000... $18,990, plot 60% of excels over $44,000. Doer $6,000 but nut once 08.000....... 01.130. plus 25% of coccus ocrr $6,000. Oven 350,000 but non oven 360,g00_ $22,590, plus 62% of encess once 350,000. Doer $8,000 but out ovrr $10,000...... $1,630, plus 28% of excess over $0000. Over 360,000 but nut over $70,000... $20,790, plus 64% of excess over 360.000. Deer $10,000 but oot over $12,000... $2,190. plus 32% of rucrssvver ~ Ocee $70 ovo but roe over $00 000 $35 190 plus 66r7 of rscess over 3 Deer 312,000 hut 001 over 314.000..- $2,030. plus 36% of excess over 31,2,000. Over 300:000 but not over 390:000.: 341:790: plus 60% of excess over 3. Deer $14,000 but nor over $16,000... $3,550, plus 39% of excess once $14,000. Doer 016.000 but not over $18,000.. 34.330. plus 42% of excess ovrr 316.000. Once 390,000 but not over $100,000. 348,590. plus 69% of excess over $90,090. Dyer $18,000 but eel over $20,006.... 35.170, plus 45% of corest over $18,000. Over $100,000 $55,490, plus 70% of excess over $100,000 -s7tho~r8.o.coVc8tlMcNTPolOTtvG0rFIcc: Ce-220-055 PAGENO="0392" 390 EXHIBIT 12 ~ WHAT ~ 1. Federal reports. (a) Form 1023 application for recognition of exempt status. This report whichis filed orily once is not strictly necessary, but it makes things easier and gives the foundation an assurance of its status. (b) Form SS-4 Employer Identification Number. Must be shown on 1023 or applied for at the same time. (c) Form 990-A an annual information return for an organization exempt under Section 501 (C) (3). It is a two page simple information return. It is due on the 15 day of the 5th month after the end of the foundation's annual accounting period. (d) Form 990T - annual report of unrelated business income (or form 990-T-FY). This report should be filed even if no unrelated income is received since filing, will start the 3 year statute of limitations, thereby pro- viding you protection against errors made prior to that period. (e) Form 1099 and 1096. Exempt organization like all tax payers are required to report payments of rents, salaries, premiums, annuities, compensations, remunera'- tions, emoluments or other fixed or determinable gains, and income aggregating over ~600/year. This is to be~ filed on or before February 2~ in the year following the year of payment. Revenue Code IRC, Section 60L~l. (f) Foundation will also make withholding tax returns normally required under IRC Section 6051. 2. State Reports. (a) There is usually an annual report relative to your State charter. It is a simple report and self- explanatory, asking only the names of your officers and directors and a statement of the sort of activity you have been engaged in. (b) There may be in addition, one or two information requests from various State agencies. These are generally to determine if your activity brings you within their area of concern. A private foundation is usually not subject to these State regulatory agencies. YOU SHOULD CHECK WITH A LOCAL ATTORNEY FOR LOCAL LAW. Copyright `c'~ 1~. I Axnc~ricans ~ui1ding Constitutionally (A Trust) Printed in U.S.A. PAGENO="0393" 391 1. Benefits of N-F-P Foundation Procedures. EXHIBIT 1 ~Ti A. Personal and Family Benefits "What can be accomplished by creating a foundation? 1. Keep control of wealth. 2. Can keep for the donor many attributes of wealth by many means: a) Designating the administrative management of the foundation. b) Control over its investments. c) Appointing relatives as directors of the foundation. d) Foundation's assets can be used to borrow money to buy other property that does not jeopardize its purposes. Thus, foundation funds can be enhanced from the capitalization of its tax exemption. 3. The foundation can keep income in the family. L~. Family foundations can aid employees of the donor's business. 5. Foundations may be the method of insuring that funds will be available for use in new ventures in business. 6. We can avoid income from property while it is slowly being given to a foundation by a combination of a trust and the charitable foundation. 7.. We can get the 20% charity deduction in other ways: a) By giving away appreciated property to the founda- tion, we escape a tax on the realization of a gain. b) We can give funds to a foundation to get charitable deduction currently in our most advantageous tax year. c) Very often local personal and real property taxes can be avoided. d) We can avoid speculative profits. e) We can give away valuable "frozen assets," white elephant estates, residences, valuable works of art, and collections of all arts." Chairman's Report to th~ Select Committee on Small Business (Patman Report) House of Representatives, ~7th Congress çL962) Page 17. This is a quote from Cleveland Marshall Law Review. A-i Retention of control within famiiy. "Present law imposes no limit upon the period of time during which a donor or his family may exercise sub- stantial influence upon the affairs of a private founda- tion." TreasuryReport on Private Foundations, Senate Finance Committee, Feb. 1965, Page 9. Jopyrightc~ 1967 ~mericane Building Constitutionally Printed in U.S.A. - PAGENO="0394" 392 "In slightly over two-thirds of all foundations by number the donor or persons related in some way to the donor made up 50% of those trustees who take some voice in investment policy, including the decision of how much of the currently available funds will be re- invested and how much will be applied to charitable purposes." -- Treasury Report, Page ~LF "The foundation may aggregate the donations received, paying out merely the income which these aggregations earn and holding capital for some special purpose, per- haps to buy assets from the donorVs estate at his death." (i.e., where in the case of a closely held corporation, reasonable value of the stock might be much mo~'e thafi the actual market price in a forced sale to pay estate costs.)~ -- House Report No. 26~l, ~3rd Congress, Second Session, Page 5. A-2. ~~petuatefamilv coral "Perhaps the most frequent motivation in the creation of large foundations today is that the proprietor of a sub- stantial enterprise who wishes to have it continue after his death in the hands of his family has insufficient liquid means available to satisfy his estate obligations at his death." House Report 26~l - ~3rd Congress, Second Session, 1954. Page 6. (Refer to Ford Foundation.).. "There is nothing illegal about such a plan. It is entire- ly proper as the law now stands and is a mechanism to reach just the results which the Ford Family anticipated." House Report 26~l - Page 7. Supra. The use of a foundation to permit a family to control a business after the death of a proprietor is widelypro- moted. For example, the August 15, 1954 issue of the J. K. Lasser tax reports contained this statement~ "Note there is nothing wrong - morally or legally - in using a foundation to effectuate tax savings. A family can legitimately establish a foundation where charitable motives are closely tied to reduced costs of charitable giving because of income tax deductions allowed. Also, the owner ofa business may create a foundation so as to cut his estate and leave his family in control of the busi- ness after death ... "House Report 26~l, ~3rd Congress, Page 11. "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 - -2- 0opyright(~) 1967 Americans Building Constitutiollly (A Trust) Printed in U.S.A. PAGENO="0395" 393 by right of inheritance - to the control of heirs or their trustees. This enables a few individuals to control ever increasing tax exenpt wealth." Patman Report, Page l~ (1962) "The Ford Foundation offordsa good example of the u~e to solve the death tax problen and at the same tine the problem of how to retain control of a great enterprise in the hands of the family. 90% of the ownership of Ford Motor Company was transferred to theFord Foundation created for the pur- pose. Had it not been, it is almost certain that the - family would have lost control," -- House Report No. 26~l, ~3rd Congress, Second Session,.l954. Page 6. "Closed Corporations. Perhaps the greatest advantage is afforded closed corporations. Thrpugh the use of a founda- tion the operator of a closed..corporatlon may be able to keep voting control of the corporation in the family after the death of the principal stockholder. Estate and gift *taxes are frequently so high that sale of the stock is necessary in order to pay then, the result being that the family loses control of the. corporation. However, the principal stockholder can avoid this result by granting or bequeathing nonvoting stock in the corpo~'ation to the foundation. Since such a gift or bequest is deductible for estate or gift tax purposes, the result may be that the taxes will then be small enough so that they can be satisfied out of the other estate assets without selling the voting stock." - Patman Report, Page IX (1963) A-~3 Pay Salaries to Family The following answers are by former Commissioner Mortimer Caplin. Quoted in Patman. I. Page 73 (1962) "Q. Will-the IRS den~r exemption to a foundation solely on the ground that it is controlled by one family? A. No. The internal Revenue-Service Code provides no basis upon which the Service may deny exemption to a founda- tion solely on the ground that it is controlled by one family." - "Q. In what way, if any, does the code prohibit a donor or testator from transferring the -controlling stock of a business to a foundation and have it (the foundation) - hold the stock in perpetuity with self-perpetuating di- rectors or trustees voting the stock as they please? A. The code does not in any way prohibit an arrangement of this sort." "Q. Does the code permit a board of trustees and officers of a foundation to be staffed by the founder, his family and associates? A, Yes." Only judicial decision . on. "control." ~ery~ Edwar~; 130 F. Supp. ~3 (M.D.Ga 1955) Exemption upheld. Copyright c.1967 Americans uilding Constitutionally - 3 - (A Trust) Printed in U.S.A. PAGENO="0396" 394 "Remote relatives may be employed in the business; friends may be assisted business acquaintances may be accommodated." Treasury Report, Page 34. "Representative Patman questioned the compensation granted totrustees of the Ford Foundation who sometimes received ~5,OOO for attending a single meeting." Patman Report, 1964. Page 136. Former Commissioner of Internal Revenue, Mortimer C.aplifl, was asked abou~t salaries paid to a creator of a foundation or his family: "Q. Is a foundation generally required to pay Out all net income within a specified period of time after the close of the taxable year? - - A. No. Generally speaking, a foundation is required to pay out its income in furtherance of its exempt purposes and ~ without being limited to a specified period of time within which to accomplish the same, and* providing any accumulation is not unreasonable in amount or duration." "Q. May trustees and officers of foundations receive com- pensation? A. They may receive compensation commensurate with ser- vices rendereth" (Patman Report, Page 73, Page 74. (1962) "Employment of donor?s sister for life at ~l5,OOO per year was reasonable. (Home Oil Mill v. Willinghan, 6~ F. Supp. 525 (1946) A-4 Ma gr'ant~, no~ ~ "An exemption was upheld of a scholarship fund which was supposed to give preference to the relatives of the donor named "Gulentz." 57 F. Supp. 502 (191+4). Section 117 of the IR Code allows any person to receive tax-free incidental expenses in a grant to cover travel, research, clerical help or equipment. In another case an exemption was upheld where the persons receiving the benefits were all old and deserving family retainers. William B. Chase T.C.M. 234 (1960) scholarships could be awarded to anyone but were in fact awarded only to employees of related corporations and their children. A-5 Look rf~ilj!~_P~ ~ qr~ wQ~h~c~)A~a. A-6 Income s~ii~ipg~ ~ ~ Oopyright~~1967 - 4 - Americans Building Constitutionally (A Trust) Printed in U.S.A. PAGENO="0397" 395 A-7 Use of ~ciundatiQn to improveyour family's cash positjQfl. You can actually improve your family's current cash posi~ tion while building up the foundation. Let us say you give $12,000/year to your foundation. Instead of cash you give $12 000 worth of stock each year. Let us say you gave stock worth $670 per share on which you have the basis of $50. Your deduction is figured on the value of theproperty given rather than on its cost to you. Figuring a taxable income of $~0,000/year, this donation cuts your income tax and increases your family's after tax cash income by ~7,960. Compare this ~i~h5the $12,000 worth of stock to an outsider, you will lose the-stock entirely and improve the family cash position by $9,275 per year. With thO foundation it costs you $1,625 out of pocket to keep the stock and its income for future use in your foundation." Encyclopedia of Tax Shelter Practices - Prentice-Hall Inc. 1963. "Tax exemption is a costly thing. It explains in part why only one-third of the income of the Nation is actually taxed." Patman Report, Page 133 (1962) A-~ Reduce Estate~Tax "The gift to the foundation ~ifts a future estate State tax lien at 32% estate State tax rate. This charge will be some $2,900 (remember the gift of $12,000 value), so the foundation not only gives you liquidity, retainscontrol over the stocks, preserves assets and income for future use, but it actually does more for your family's ultimate asset position than any other disposition of the stock." -~ Encyclopedia of Tax Shelter Practices - Prentice-Hall, Inc. 1963 "The usual procedure then is tO transfei- (or ~ri~ange to transfer at death) to a foundation ci'eated for the purpose, enough of the ownership of a corporation to reduce the - estate tax impact to a point where the liquid assets of the proprietor (and other means he may have devised to solve the problem) are sufficient to meet the death taxes. Such * donations are usually in the form of preferred or non- voting stock. Combinations of these advantages result~ 1. The family may remain in full voting control. 2. The family has a pleasant partner, managed by gentle hands. 3. The family may reap the benefit of any increase in the value of the equity. * 4. If further inflation should come, it is the family which can become entitled to receive the benefit of the increase in monetary value of the company. 5. No working capital is lost by the venture; and 6. The foundation may even be used as a vehicle for the employment of associates-and relatives."- House Report No. 26d1 - ~3rd Congress, Second Session,1954, Page 6,. Oopyright'~T' 1967 Americans uilding Constitutionally (A Trust) Printed in U.S.A. PAGENO="0398" 396 `Moreover it is not only the enormously rich who create foundations today. Countless owners of substantial busi- ness enterprises are today planning to solve their estate problems through the use of foundations, and there is reason to believe that this tendency will continue and perhaps even increase. Ingenious experts in estate and tax planning have devised many interesting ways to use a foundation in an estate or business plan. ~ -- House Report No. 26~l - d3rd Congress, 2nd Session, Page 11. A-9 Most useful. provide iion_inc~o~e.cPrPPrati0n fringe bene fits to familv-emP~OV s~i.re ,ne~ed ~for drat~jp~ ~i~able sala~L. ~Nonethe1ess, the modes of human satisfaction have almost infinite diversity and the ways in which wealth can be employed for personal advantage are; consequently; multiple and highly varied. Many donors, too, have manifested a common and deep-seated tendency to regard a foundation which they have created as their own, to be availed of for their own ends where a contemplated use does not involve obvious and direct deflection of assets from charity and where no specific statutory prohibition lies in the way." Treasury Report, Page 51÷. Foundations may provide health insurance for an employee- family member. IRC 105 A foundation employee may live rent free. The Treasury department has this to say: "The value of lodging furnished to an employee by am em- ployer shall be excluded from the employee's gross income if three tests are met: 1) the lodging is furnished on the business premises of the employer. 2) the lodging is furnished for the convenience of the employer. 3) the employee is required to accept such lodging as a condition of employment." Regs.~J 1.119-1(b) "Not only may a creator draw benefits from his controlled foundation, but he may also draw benefits from a foundation owned or controlled business corporation. The 6orporation may be used to satisfy dominant individual's desires, ranging from furnishing his home to allowing excessive executive compensation." -- U.C.L.A. Law Review May 1966. Page 951 A-b "Business corporations can accumulate income since former Shareholders may be employed at adequate salaries." o opyright (~) 1967 Americans `~ui1ding Oonstitutionally (A Trust) Printed in U.S.A. --6 - PAGENO="0399" 397 A-li ~e~lv done you may even arrange for an an ity to a family member of foundation. "Apparently, private individuals may even receive annuities from a foundation's income. The position of the Internal Revenue Service is that private individuals may not receive annuities from a foundation's income, but there are however, court decisions which hold under the ?pre_ dominant purpose" doctrine that the payment of annuities from a foundation's income does not preclude exemption (Franci~_Edw Mc~~ick F~undatJ~on v ~ 27~F7~d) 61+3 affirming 30 T~C. 1130; ~mmjqi~~r.~f Internal Revenue v~ 0r~tnn, i73F. (2d) ~ affirming 9T.C.533T~--Patman Report, Page 16. 1962. In a 1960 case, a Federal Circuit Court h~id that an exemption was not affected even though the trust was charged with paying gifts, annuities, administration expenses, taxes, debts and salaries to or for the benefit of the donor's estate or family. a1.2d-6~.3. Lewis v. U.fl. l~9 F. Supp. 950 (1961) Trust held exempt despite provision to pay monthly annuity to decedent's grandniece. Generally, kedexer_y~._Stock~p~. - 1922 Supreme Court. A-l2 Use it to take advantage of high appreciation of assets For a long time the ~ Hanover bank held property with a basis of $2 1/2 million. Sudd~niy it donated to a Foundation it controlled - gaining a $ 5 1/2 million tax deduction. Immediately the Foundation sold it for $ 5 1/2 million. Result: Bank received a * $5 1/2 million tax deduction~ Foundation paid no tax on a $3 million (short term) capital gain; and the $5 1/2 million remained-in the Bank's control through the Foundation which, since it was capital gains, need never be distributed. Patman Report p. 6 (1966). "At present, when a contribution to a foundation is made in property as distinguished from cash, the donor's deduction is figured at value of the property on the date of the-donation instead of at donor'-s cost.".~- - Patman Report, Page ~3 (1963), A-13 Use Foundati~n funds for investment to increase wealth 3~fl~Z~_ypUr_control Let us take an example of a person with annual income from salary, dividends and investments of $~0,000 per year. Suppose you create a foundation and give it $12,000 Copyright® 1967 Americans Building Constitutionally (A Trust) Printed in U.S.A. 87-444 0-68-26 PAGENO="0400" 398 per year. Your annual income tax bill is cut from $39,L~0 to $31, 520, Of the $12,000 gift, $7,~OO is tax money $i+,200 comes out of your personal pocketbook. This ~,2OO kept in your personal portfolio earning i+% compouned, but taxed in the 66% bracket would accumulate to $47,L~OO in 10 years. The $12,000 in the foundation earning L~% compounded, tax free would accumulate to $lL~,3OO. So your comparison would be whether you would be prepared to exchange $47,L~00 free for personal use for $l4~,30O that you and your family can have to do the work that interests you. (Figures from Encyclopedia of Tax Shelter Practices, Prentice-Hall, Inc. 1963.) "Trustee Sturgis an attorney, interrogated concerning the advantage of the use of a trust, testified that if Mr. Little had made the investment himself without the use of the trust (i.e. foundation), the government would take about two-thirds of the profits in taxes." -- Senate Report #101, ~lst Congress, 1st Session, Page 13. (194.9). "How the principal trusts (i.e. foundations) under discus- sion in this report'were able to increase their original contributions to $1,100 to their present net worth of over $6,000,000 is an intriguing story. This can be understood by a few examples of the methods followed by trustees showing a plan obviously formulated in advance, whereby assets of the corporation would be converted into cash, the cash in turn being distributed in benefits to the trust. This cash received tax free by the trustees was then available to Textron for the purchase of Textron securities or physical assets." -- Senate Report #101, ~lst Congress, 1st Session, Page 20. "One of the most apparent loopholes in the foundation business involves the abuse of capital gains. According to the present laws that supposedly regulate foundations, capital gains not only escape taxation, but they also do not have to be given away to charity if they are reinvested within a reasonable period of time. To put this in prospective, it is just as though the typical wage earner was given an exemption from income tax so long as he doubles his payments on his home, or bought more U. S. Savings Bonds, or splurged in some certified diamonds for his wife: in other words so long as he invested a surplus from his salary he could escape taxes." -- Patman Report, kth installment, 1966, Page 1. "The ways and means committee hearings of l94~-49 revealed that educational institutions and private charitable foundations had moved into commercial and industrial fields, q Copyright'c.l967 Americans building Constitutionally (A Trust) Printed in U. S. A. PAGENO="0401" 399 Some had inheriteJ substantial interests in business, as was the case with the Ford Foundation. Others had pur- chase control of businesses. A Tax-exempt cancer research organization, for example, had acquired a variety of industrial firms. Mr. Royal Little and the operations of his Textron trusts were given due attention. In fact, the record lists about L~0 different types of businesses controlled by educational and charitable organizations.~ Patman Report, Page 1. (1962) :;Many foundations have become a vehicle for trading in securities and dodging the capital gain tax. Capital gains of foundations are not only tax exempt but they are permit-. ted to place them in the principal account instead of the income account.1 -- Patman Report, Page 130 (1962). A-14 The Fpundation~in~y provide FRIENDLY: loans. Speaking of loans to persons allowed by the tax law, the report says: The advantages to the borrower of such a loan by a foundation -- and the corollary value of the favor done by the foundation to the director or donor who arranged the loan - can, nevertheless, be considerable. The delays, inconveniences, and formalities of applying for a bank loan can be e1iminated~ embarrassing questions can be avoided~ the assurance that one's obligation resides in friendly hands can be secured. - Treasury Report, Page 51. i. benefits in operating business resulting from control over an exempt foundation. B-l ~p~.o~ontrol in_fri~d~y ~ "Foundations have commonly been established as convenient vehicles for maintaining control of a private corporation within a family while substantially diminishing the burden of income, gift~ and estate taxes for the family." - Treasury Report, Page 37. ~ It is true of course that the foundation's donor is parted with legal title to the money, securities or property donated and in that sense is no longer beneficial owner of the foundations, but there can be little doubt that the typical family foundation exists solely to accomplish the donor's goals. Its funds come-indirectly from him and were it not for the foundation, they would come directly from his pocket. In either case, the foundation's assets are directly and totally within his control. If the founda- tion owns securities, the donor-controller in effect can - vote the securities, can cause them to be sold or pledged, opyright® 1967 meric ans Building C onstitutionally A Trust) Printed in U.S.A. PAGENO="0402" 400 or direct the disposition of.their income. Thus, to a very great extent he has benefits substantially equivalent to those of ownership." U.C.L.A. Law Review, May, 1966, Page 960. "For all practical purposes, they are subject only to the authority of their own directors or trustees, who are not accountable to stockholders or to public regulatory agencies. . . . After the death of Edsel Ford in l9L~3, the Ford Foundation was used to save the Ford family from losing control of-the Ford Motor Company. If not for the foundation device, they would have had to sell stock to the public long before they did in order to pay estate taxes. The foundation permitted Henry Ford?s heirs to run the company for many years without the inconvenience of answering to stockholders or the Securities and Exchange Commission." - - Patman Report, Page 73. (1962) E-2 Provide through ~ reductjopof corp~r~Qfl~aX bp.t keep mon~y a7ail~~. "Mr. Ewing further testified that under the provisions of such a trust indenture, it would be feasible for a-manu- facturer in collusion with such a charitable trust, to avoid tax and thereby accumulate millions of dollars to gain a competitive advantage over orthodox manufacturers. He further contended that under such trust indenture, it would be possible for a manufacturer to create trusts with a preconceived plan of having bheir foundations at its beck and call with little of the trust capital ever paid to the beneficiaries." - ~- Senate Report #101, ~lst Congress, 1st session, Page 13, l9L~9. "The Internal Revenue Code contains no provision to prevent large funds from being built up by foundations from contri- butions received by them. Since a corporation's annual contribution to its foundation is capital in the hands of the foundation and only the income from these contribu- tions need be distributed, the Internal Revenue Service cannot prevent large funds from being built up by corpora- tion-created foundations. And, since contributions are- not subject to the provisions for distribution annually, the prohibition against- unreasonable accumulations does not apply." --Patman Report, P. 16. (1962) "Foundations have loaned money to their creators, traded stock and property with them, paid for insurance policies on the life of the donor, financed benefit programs for a contributor's employees, and engaged in many other activities whose relevance-to charity apd social welfare seems remote." --Patman Report, P.~ 71 (1962) - Copyright(c 1967 - 10 - Americans Building Constitutionally (A Trust) Printed in U.S.A. PAGENO="0403" 401 13-3. Provide "good-will" assist~nce to keep workers happy. "Allegedly the provisions of the Scholler trust also include the right to use the foundation as a conduit for employee benefits. When a foundation-controlled company is able to use tax-free funds for the benefit of its employees, the inherent competitive advantages to the company are obvious." ---Patman Report, P. 15 (1962) "Other foundations have been used to pay benefits to employees of a private company-. The Harnischfeger Foundation, Inc. of Milwaukee, has regularly contri- buted sums from ~l0O to $10,000 to employee organizations of the Harnischfeger Corp. From 1952 to l95~, the 1-Iarnischfeger Employees Benefit Association received - $40,500 from the foundation. The benefit association, the foreman's club, the engineers club, and the trap club and all benefited from the foundation's largess in 1959. Mr. -Walter Harnischfeger, himself, received a loan of $40,000 at 4 percent interest in 1955 from the foundation." ---Patman Report, P. ~O (1962) "The operations of the three Baird Foundations, of New York City, indicate clearly that control of foundation funds affords boundless opportunities for lavishing favors-upon business acquaintances and friends."--Patman Report, Page III. (1963) `The corporate foundation is formed for convenience, or, more likely, as an entity into which excess profits can be funnelled for later use.. On the business side, it can be used as a source of loans to the corporation or its officers, or to other corporations with which closer- dealings may be desired." --U.C.L.A. Law Review, May, 1966 Page 945. B-4 Use it as source of "friendly financing" from tax-free accumulations. In December, 1945, the Rhode Island Charities Trust (foundation controlled by Textron, Inc.)-purchased the Manville Mill, consisting of real estate, machinery and fixtures belonging to the Ivlanville-Jenckes corporation, which was a wholly owned Textron subsidiary, for $1,200,000. In this manner, Textron was able to secure a substantial amount of money from the trust to be used as working capital against its various operations. The Manville Mill was then leased back to Textron so that its use thereby could be continued without interruption." ----Senate Report #101, ~lst Congress, 1st Session P.13 (1949) o opyright(~) 1967 AnlericaflB Tüilding Constitutionally - 11 - (A Trust) Printed in U.S.~. PAGENO="0404" 402 - "The Sears Foundation is controlled by the Sears Company * . . the relationship of the foundation to the company should not be taken -lightly. When Sears needed a loan of 1.2 million dollars, it went to the Sears Foundation and obtained the money at 3% interest." . . *. U.C.L.A. Law Review, May, 19.66 Page 947.. "It is to be noted that these trusts were particularly helpful to Textron during the period of rapid expansion in 191+5 and 1946. It was during this period that Textron's credit was strained to the limit. It was questionable whether the company would have, been able to complete this expansion program, except by the use of these trust-funds~" - - -Senate Report #~01, ~lst Congress, 1st Session, 192+9, P. 16. "Such sale and lease-back deals are the equivalent of providing these companies with instant capital with which they can accelerate their growth in competion with inde- pendent. service station operators, arid small retailers~ This enables these big oil companies, General Electric, and the Woolworth chain to expand without having to go into the money market for capital." ---Patman Report, Page 14. (1962) "It is alleged that the Scholler Foundations' deed of trust, as amended, permits the foundation to make loans to the business corporations, which it controls, at such rates of interest as the-trustees see fit. This permits funds earmarked for charity to be used a~ venture capital. The foundation's business corporations are thus given a great advantage over other private business corporations by being able to make taxfree contributions to the founda- tion and thus build up a large reserve -which they may tap at will. How can private business-especially small business-compete with such an arrangement." -----Patman Report, Page 15. (1962) "At least three of the four Mott Foundation wholly-owned department stores, all competing with numerous small retailers, have used the Foundation as a handy source of cash. This of course adds up-to quite a competitive advantage." ----Patman Report, Page XII. (1963) ]3-5 foundation's name_o~~ çp.~r~iiq tj~,vities~an c~at,~ g~~od will_fpr business (e ~g. ~~ord Foundaj~ion & Ford Motor Bob Hope sold rights to publication of BOb's life story to Bob & Dolores Hope Foundation. Publicity to prit~ate party was an ancillary benefit not affecting exemption. (1961) Copyright® 1967 - 12 - Americans Building Constitutionally (A Trust) Printedin U.S.A. PAGENO="0405" 403 B-6 Foundations can accumulate~ixicgme ancjJ~ncome so_accumu~ ~ated not sub~cI_tp~rtp4y_b~ used_for internal ~provement~. "Another advantage which foundation businesses have over their taxable competitors is their freedom from the demands of shareholders for current distributions of earnings. A remarkable number of foundation-owned enterprises proceed from year to year realizing substantial profits, but making negligible or no distributions to their parent organizations." Treasury Report, Page 33. "This common willingness of foundations to defer inde- finitely the realization of profits from their commercial operations -- an attitude frequently not shared by the shareholders of other businesses -- makes it possible for the profits to be invested in modernization, expansion, and other programs which improve the competitive posture of the foundation-owned business." -- Treasury Report, Page 33. Tax on accumulatiàn of profits may riot apply to foundation owned businesses. "The restrictions of existing law upon accumulations of incOme by businesses become operative only where a corporation is "fo~rned or availed of for the purpose of avoiding the income tax with respect to its shareholders"; where the shareholders of the business are themselves tax exempt, the limitations may not apply. Similarly, the statute which prohibits unreasonable accumu- lations of income by foundations applies only to accumula- tions within the foundation itself;-it does not prevent retention of earnings in a separate, though controlled, entity. As a consequence, many foundations have permitted large amounts of income to accumulate in their business subsidiaries." --Treasury Report, Page 34. B-7 It is many times the_case that a_ siness ma~he itself ~peratedas an exempt organization. For example, Educational Testing Service of Princeton sells educational testing materials and enjoys tax exemp- tion, yet the California Testing Bureau of-Monterey, California sells the same type of material, yet must pay taxes. Patman Report, Page 9 (1962) It is well known that the Rand Corporation of Santa Monica performed research work yet because of its relation to its purpose it is tax free. ---Patman Report, P. 13 (1962) Business Week and Fortune report on American business-scene and must pay tax on the operations. Nations Business a publication of the U.S. Chamber of Commerce performs the same services in competition yet it is tax exempt. A - 13 - )opyright c 1967 ~xnericanB uilding Oon6titutionally (A Trust) Printed in U.S.A. PAGENO="0406" 404 similar situation obtains between the tax exempt Journal of the American Medical Association which last year had ~lO-l/2 million of advertising revenue and the tax pay- ing Medical Economics and Medical World-News. Thus, in large part due to its tax exempt status, the National Geographic is able to offer lower advertising rates-than its competitorsHolidaY and Venture. Time Magazine, October 7, 1966, p. 64. Advantages accrue to both the foundation and the donor: 1. The foundation pays no Federal income tax. 2. The donor neither pays gift tax nor estate tax on contributions to the-foundation. 3. For income tax purposes, an individual donor is granted a deduction up to 30 percent of his net income; a corporate donor is allowed to deduct up to 5 percent. L~. The donor?s contributions constitute capital to the foundation - not income -- so they need not be distributed. --Patman Report, Page 15-16.(l9o2) 0. Miscellaneous Benefits of Exempt Operation C-i Favorable Pg~tage Raj~,. Non-profit organizations often are eligible for redUction in postage rates. Eligibility may depend upon the type of organization, and the class and content of the material to be mailed. Reductions are available in 3rd and second class mailings. Specific details may be obtained from your postmaster. 0-2 May be~xempt from certa~ state taxes~ e.g.~ ~ a~ t~xe~. A foundation's exemption from the state taxes depends on the various state laws, but as a general rule will follow the results of a Treasury Department determination of your exemption from federal taxes. It is often the case that an exempt organization will voluntarily pa~ an amount in lieu of taxes to cover the benefits it receives from police and fire protection. This not-only seems a just arrangement to foundation managers, but also may cause the local taxing authorities to be more co-operative in recognizing a property tax exemption. Oopyric4it c 1967 Americ~nS uilding Constitutionally 14. - (A TruBt) Printed in U.S.a. PAGENO="0407" 405 C-3 An exempt_organizatiQ~~~Qy~e ejj~g~ible t~ receive ~~p~us gove nt pr~per~. Both real and personal surplus government property may be obtained at preferential rates by certain exempt organizations. Through a program administered by the Department of Health, Education, and Welfare, surplus federal property is allocated to state agencies for surplus property which distribute it for health or educational purposes. The Federal Property and Administrative Services Act of 1949 governs the dona- tion of surplus property to non-profit organizations. C-4 A foundation~~eed not pay social securit~r tax, ~ the Federai~surance Co~ibuti~ns Act.) The fourth paragraph of the standard determination letter issued by the Internal Revenue Service recognizing a claim for tax exemption provides: "You are not liable for the taxes imposed under the Federdi Insurance Contributions Act (social security taxes) unless you file a waiver of exemption certificate as provided in such act. You are not liable for the tax imposed under the Federal Unemployment Tax Act . . ." C-5 Anex~ptorg~anization can receive sp alfares on overseas flights. Generally speaking, these lower group fares may be available to membership organizations whose members have more in common than a mutual desire to travel cheaply. Details on the terms of special rates authorized by the Civil Aeronautics Board for overseas flights as well as an advisory opinion as to a group~s eligibility for special fares may be obtained from the Bureau of Air Opinions, CAB, Washington 25, D.C. Arrange- ments may also be handled through a travel agent. Savings-on such arrangements may be substantial. For example, round trip charter flights from New York to London or Paris are available for less than one-half the usual minimum for such a trip. - 15 - Copyright® 1967 Americans Building Constitutionally (A Trust) Printed in U,S.A. PAGENO="0408" 406 c-6 Miscellaneous Benefits of Foundat~~.fl Your n-f-p exempt status has financing advantages, (a) Federal financing under Small Business Act, National Housing Act, the National Institutes of Health, Hill-Burton Act and numerous others. (b) Financing through private sources is assisted by the foundation's freedom from tax liens and its inability to milk corporate assets through excessive salaries or high dividends. There is also the availability of not only your own un- taxed surplusses but that of other foundations. "Despite the fact that the IRS disapproves of the use of borrowed funds for the purpose of financing purchases of mortgages and other types of investments, the Noyes - Foundation has been constantly engaged in churning money by borrowing at one rate and lending it at a higher rate. From 1951 through 1962, the foundation borrowed over $5 million for such purposes. (See page 64 for details of such transactions." --Patman Report, Page VII. 2nd Installment. "On March 29, 1957, the Noyes Foundation borrowed from the Bankers Trust Co., $550,000 on a note due March 31, l95~, bearing interest at 4-1/2 percent annually. Payment of the note was guaranteed by Mr. Charles F. Noyes. This sum was borrowed fof~ the express purpose of making a loan in the same amount to the Glickman Corporation, of New York City, at 10 percent interest. The transaction enabled the Foundation to receive interest of $55,000 per year at an interest expense of only $24,750 annually. Hence, with no cash outlay the Foundation received a net return of $30,250 per year. At these interest rates, it is not surprising that the Glickman Corporation has been in deep financial distress. The loan was paid off in full by the Glickman-Corp. on February 1, 1960. (See pp. 61, 61)" --Patman Report, PP. VII and VIII. 2nd. - "Some Ford Foundation loans were made at what appear to be preferential rates of interest. Why, for example was the Duke PowerCo., of Charlotte, N. C., charged- only 2.65 percent interest on $3 million, 20 year loan, while other borrowers paid 6-1/2 percent? Duke Power, incidentall~r is owned 57% by Duke Endowment, another tax-exempt foundation." ---Patman Report, Page 79., 1st installment. * * * * * Oopyright®1967 - 16 - Amerie aflB Building Oonetitutionally (A Trust) Printed in U.S.A. PAGENO="0409" 407 WASHINGTON ~- Ac-. cording to report~ circu-.. lating here, Jolin T. (for; Tired): Taxpayer' Is threat.~ ening to set up his oWn private : tax-exempt bun-i dation and operate It on *the theory thátcharlty begins at home. If the reports were true, It would be enough to :panlc Washington. official-. doin. Fot If every taxpayer were to sot up his own pr~ ,vate foundation and oper-. ate It selfishly, there might be a significant drop-in ei~ ~ther federal tax'revenue or In the flow of money into charity', or both. Certainly, more money would go into the pc~l'~ of John T. Taxpayer. John Quizzed in view of the fiscal audI social Implications, John `P. Taxpayer was ques-. * tioned about his plans by a reporter In the foliowing~ Interview: Question-John, you're riot serious about setting * up your own private tax exempt foundation? Answer-I stare am. At fftst, It was just a joke. When I read about the CIA using foundations as conduits' to send money abroad, I told Mrs. Tax- payer that if there's any more surplus CIA money around, we might aswell get our share. A private * tax~excmpt foundatioit provides one of the few' ways still around of hay- * Ing your cake and eating It, too. * Contributes $2,000 1'or years I've been contributing $2,000 a year to my church and to charities arid I have noth- ing to show for it but some used~up tax deductions and a feeling of having performed my duty. Twenty years ago I should have re~ up my' own foundaik and appointed myself, ~ * wife and child- ren as t~ . .~ces. Anybody can `dr : ~ You fill' out Intern~? ~ CLiUC Service - Form?'~ ~o23. Q. Supj.'..e that for the last 20 ~:ars you had given yo~ $2,000 in con-. tributions to church and charity to the John T. Taxpayer Charity Fund, and claimed tax deduc- tions for it. `What differ- ence would it make? A. Well, by now I would have control of a fund of perhaps $60,000. As a trus- tee, I would have bought stocks and bonds for the fund with the $40,000 I had contributed to the fund and I would have plowed back Into, fund Investments the tax-free earnings of the fund. How About Charity? Q, How about charity? Wasn'tyour fund set up to make grants to religious charitable and, educational institutions? A. Sure, but not right away. In the first place the internal Revenue Service Isn't likely to know what rny,fund is doing. There's no penalty for failing to file reports every year. Some foundations don't bother to file reports. And the revenue agents Inspect very few reports. Besides the law `mei~ely bars un~ reasonable accumulations of capital In a private foundation. Who's to say what's un.re~sonable? One federal judge upheld a foundation's right to go for 10 years without rnak- ing any grants. I would go for 20 years. Q. What would you have `done with the $60,000 çund? You couldn't spend ~ny of the money on ~`ourseIf. $8,500 Profit "~A. Don't be so sure about that. Right now I would ~Ike to sell my house. I ~aid' $20,000 for it. It probably would bring $30,-. 000 on today's market. After the brokerage fee, I'd. net only $8,500 In profit. But If the John T. Taxpayer Charity Fund held $60,000, I would sell my house to my founda-. tion. i'm sure that ~he house is worth $40,000 to th'e foundation. So we'd have a $20,000 profit on .ihe house-no brokerage Lee and no tax on the ~ofIt because we'd Invest ~n1l of the $40,000 ma ~b1gget'~ house,', *.` ~1y. !oundaUon. t hon would lease the old house to me for $150 a month and I would sublease it to a thi~d patty for $250 a month. After mattagement expenses, I'd he making a modest sum ev~'ry month as a rnanagemettt fcc Q. But John, ~: that legal? A. The law says you mustn't have dealings * with your o~~'n foundation that result In a substantial NeWSDaDer ArticI'~s 1~ParI I-.McDN., FEB. 27,1967 lZn~ £Thgcie~~ ~Urne9'2* U-..' HIS OWN FOUNDATIOt\L loxpayer Tempted to Become Exempted BY .VINCEN~ 3. BURIfl~ TlrnQ3tILr?y,rJler . PAGENO="0410" 408 diversion of its funds into your pocket, anti that your foundation mustn't pay you more than adequate prices for atiythlng you sell to It, but who's to say what's substantial or adc~ ciuate. The Treasury says that many foundation operators have g o t t e n away with much worse than that. Charity Grants Q. What about some grants to charity? A. Yep. At this point, the fund would be earning $1~200 a year in rent on the house and we'd decide to grant that much to church anti charity every. year. 1i~ addition, the fund would be earning `about $1,000 a year on Its invest~ mei~t ofabout $20,000 In stocks and bonds. But ~ve'cl divert the $1,000 a year Into our own pockets. Q. How could you do~ that? * A. The trustees (Mrs. Taxpayer and thekids and 1) would vote to award a salary of $1,000 a year to Mrs. Taxpayer as a consul~ taut fee, or salary, for. reading the financial pa~ ges ~to keep us posted on ,what securities we should buy or sell. The law allows a reasonable allowance for services rendered to the foundation. * Q. It sounds pretty im~' moral to me. When are you going to set up the John T. Taxpayer *Foun~ dation and s t art you r :wheeler.dealer operati9n? A. I'm not sure I will. Q. Why not? A. I'm afraid my con~, science would bother me. There's anothe~ reason, too. . Q. What's that? A. The . Treasury has asked Congress to bar transactions b e t w e e n foundations and their do- n o r s a n d to generally tighten laws to eliminate what President Johnson says are foundation abu- ses. If the Treasurrs pro. .posals are approved by Congress, the John T. ~`I'axj)ayer `Charity Fund won't be able to wheel and deal for my own profit. I think I'll wait and see what Congressdoes. And a final point I'd like to make: Most foundations are conscientIouslY run ~nddo alot of good. It's the minority that are wheeling, and dealIng for their own profiL. U.-2 PAGENO="0411" Foundation Twist 409 HowFamilies Create I Organizations to Cut; Their Liability for Tax Group GiveS 30-Hour Course That Teaches Its Members Way to Revamp. Finances But Prober Doubts Legality By BYRoN E. CALtMx . * lOnff Rep"~P" `f Tan WAve. Sraenr Joensat. Dr. M. R. Saxon, a general practitioner In Aurora, Ill., took a job last year as the salaried "medical administrator" of a nonprofit founds' tion engaged In research and development in the fields of "health, education and welfare." Though Isis salary is less than the revenues from his medical practice. Dr. Saxon concedes that taking the job was no financial sacrifice. Why not? Dr. Saxon has continued to treat the same patients with the same equipment in the same office building as before. However. there's one big differesce: Now, the nonprofit foundation collects all his fees, ire turn provid. log him with a house, a car, a retiremcnt plan and insurance-all tax free. Mrs. Saxon. her husband's nurse, is employed as the founda- tion's "assistant medical administrator." And the Saxoss' four children are attending college on educational grants from the foundation. The foundation contributes more money tee charitable causes than Dr. Saxon did person' ally. But, the doctor says, he winds up paying "aubstantially" less in income taxes than he did before. - Easy a~ ABC Where did a medicaJ man pick:up such so- phistication in the nation's complex tax laws? Front a nonprofit membership trust called Americans Building constitutionally, or ABC. Dr. Saxon paid a S7,000 membership fee to join A'BC shortly after it was formed early in 1006. (The fee was raised to 610.500 last May 1.) An ABC trustee says the organization a "Henry Fordizing"-or mass producing-legal and tax expertise long available only to the wealthy. In little more than a year of exis- tence, this trustee says. ABC has helped more than 800 members in nearly all 30 states es- tablish nonprofit foundations and related tzi.est5 that lessen the income, property and estate taxes the members pay. ABC's purpose is to "awaken the average creative person" to the bonefits of "restructur~ log" his business and estate on a not.for'profit basis, says P.obert D. Hayes. a Barrington. Dl.. soles training expert and one of ABC's trus- tees. Wealthy families recognized early in this century, Mr. Hayes says, that the principle of tax exemption for nonprofit endeavors "pro. vtdes a means of giving people a chance in benefit mankind au(I hitCe certain advan' tages." He adds: "If it's legal. moral and cliii' cal for them, it ought to he ethicil for everyone else." At a. time when Congress is considering tighter controls over tax.exenept founiatiort'. ABC is attracting the attention of some state and Federal officials. California and Illinota of' ficials and a Congressional subcornmiltce are known to be poking into ABC's affairs. Unanswered Quesilonc . - In California, the stale attorney general has taken legal steps to try to requite two ABC members, B. Douglas Fahy and Charles H. Billings, both Long Beach insurance men, to answer 33 questibds about the trust's opera. tions. The members so far have declined. Dep. uty attorney general Lawrence H. Tapper has told a state court that he "had reason to be. lieve that information furnished by ABC to jts members regarding the creation and use of charitable trusts and foundations was false and misleading and thereby inclined to lead Its members into activities which would subject. them to civil and criminal liability." Messrs. Fahy and Billings have denied that Mr. Tapper's statement is accurate. In a reply dIed in the court by an attorney for the twh members, they deemed it "shocking that the citizens of the state of California. should be summoned to~ sweeping and undefined inquisi- tions such as is sought by the head of the (state) department of justice." Mr. Hayes, the ABC trustee, calls the organization's activities "legal and sound." James H. Walsh Jr. of Chi~ cago, a law school graduate who plays a big part in ABC though he has no title and isn't one of its three trustees, says the California attor. ney general is "whistling ire the dark." Mr. Walsh emphatically denies any su;ges. lion that ABC's plan is a tax dodge. "I'm going to program that out of your mind," he says to an interviewer. The consumer fraud section of the Illinois attorney general's office is Investigating ABC. which has its main office in Barrington, Ill. A. spokesman for the attorney general's office says the organization's activities were brought to Its attention this yeaz' by the Illinois Bar As. sociation, which had investigated the group. "We still are not sure what the plan consists of," says the spokesman. Wright Paints,,, Too A House of Representatives small business subcommittee, which has been studying pri- vate tax.exempt foundations since 1562, (s about to consider ABC's operations. "I am deeply concerned about it," says Rep. Wright Patman of Texas, who is chairman of the sub- committee. H. A. Olsher. the subcommittee-n director of foundation studies, has gone to Dli., erois to learn about ABC first hand. A spokesman for the Internal Revenue Ser~ vice says the IRS is "apprehensive" about ABC. But the ~S has taken no position toward it. "We expect an investigation of the whole or- ganization by the IRS," says ABC's Mr. Hayes. ABC's growing membership list is kept con- fidential, but it is known to include newly es- tablished foundations of some prominent professional men and women. It includes one foundation of some national repute, the Phi. lippa Schuyler Memorial Foundation, on whose advisory board sits Henry Cabot Lodge. Offi- cials of ABC have approached the National Farmers Organization INFO) about the possi- bility of helping farmers establish tax.exempt foundations for themselves. One organization has been set up in Illinois to help fqstcr such foundations. The NFO. however, has declined to connect ilself with the ABC program. * ABC recruits members by word of mouth. PAGENO="0412" Continued From First page Prospects get Invited to an introductory meet- thg. Art ABC representative spends three to four hours explaining the plan. If the prospect decides to Join ABC, he makes art Initial pay- snent of $1,050. This pays for 30 hours of In' sts'uctlon in how to use the complex legal web of foundations and trusts that ABC can create for him. But he is supposed to promise never to divulge any of the "methods, procedures or techniques" used, or the Identity of any other member. After instruction, the new member has the option of paying $4,200 more to have a non- profit foundation created for his benefit, or paying 59,540 more for the entire ABC "pack., age" that would take over his business and as- sets. The package normally would include aev-, * scat related foundations and trusts. A recent prospect for membership in ABC. describes what took place at his Introductory meeting. He first was introduced by an ABC member who told him the ABC plan was "not a* program to evade or avoid taxation. but rather a philosophy, a veritable way of life, by which one through serving himself and his family * would ultimately render a greater than normal benefit to mankind." . Then the prospect was given a paperof quo- tations about citizenship, including an excerpt lenin a decision by the late Federal Judge * Learned Hand on taxation: "Anyone may ar- ~nge hIs affairs that his taxes shall be as low as possible; he Is not bound to choose that pat. tern which best pays the Treasury; there is not even a patriotic duty to Increase one's taxes," The prospect says the ABC package plan was explained something like this-First, you establish a trust for a "recognized benefi- cial purpose" under your state's law. You give your home and car and possibly a money en- dowment to the trust: these assets are no lon- ger subject to state or local real or personal property taxes. Th5 trust establishes a nonprofit corpora- * eon, or foundation. You sign a contract with the nori'protit corporation that permits it to sell your services as a doctor, lawyer, engineer or whatever. Your patients, clients or employers pay the nonprofit corporation for your ser- vices; the income to the corporation isn't tax- able income. The nonprofit corporation pays you a small salary and reimburses you for most of your liv- Ing expenses ("just about everything except your booze and cigarets," says one man famil- iar with the setup). The rest of its income is transferred to a second nonprofit organization. The transaction by which it is transferred sup- posedly changes the income into capital, which La Invested. The capital accumulated he the second non- profit organization presumably could he used Iron time to time for your benefit or yot~r fan. Ily's-as in Dr. Saxon's case, for example, in) the form qf educational grants to children in collego. Joining ARC brings other benefits. If one member can convince another individual In Join, his foundation receives a $2,000 "endow.. m.nt" nut of the fees paid by the new member. The first member's foundation also gets 51,000, of the fees paid by any members attracted by the second member, and .5500 of the fees paid be the next "generation" of members, This arrangement, says ABC's Mr. Walsh, Is much like the "referral system" in many professions. "The Incentive (to bring in new members) had to be sfrbng," he says. An Hastern lawyer critical of ARC says, on the other hand, "It's the chain letter idea no a big scale," An Illinois doctor who is a member of ABC says, "I thought this (gndowdsent plant was not very professional."' L,egal services in setting up neW mem- ber's foundation or foundations, and his trusts are handled by lawyers in his state who are recommended by Barrington Institute, a non- profit organization that is itself a member of ABC. Mr. Walsh says the legal instruments that these lawyers tailor to each member's In. dividusl situation are an "amalgam" of knowl- edge that he-and an associate he declines to' name-pieced together over 40 years. Some of the l~gal expertise. he says, came indirectly from lawyers involved in some well.known foundations and trusts. Mr. Walsh figures it would take the average lawyer a year to duplicate the ABC package, and it would cost between $22,000 and $50,000 in * legal fees. One ABC member says a significant num- ber of iL~ members are medical men-chiro- practors, dentists, general practitioners, and osteopaths. He says that members are able to turn ever their assets to the ABC.created total, yet still control them. ABC members. houvever. nay that salaried Individuals also could utilize the ABC concept by assigning future earnings to their founds' tied and having it "vend" their services to their employer. The key is to relate the founda- tion's tax-exempt purpose to the business or profession of the member. For example. an in' surance man who is a member of ABC controls a foundation created for "research and devel- opment In the utilization and insuring pf human life values, both material and non.material. ." This, he says. describes his insurance sales work for a California insurance agency. Mr. Walsh says nonprofit "civic organiza'. finns" are to be set up in every county in Illi- nois. These civic organizations would recruit members, many of them farmers who would set up foundations for research and develop- ment in food nutrition and related areas such as cattle-feeding and soil improvement. Of the $10,500 membership fee paid to ABC. Mr. Walsh says. 53.500 goes in the form of an endowment to Barrington Institute and 53.550 for ABC. $3,500 is reserved for "endow- ments') Mr. Walsh says that SIr. Hayes and the two other trustees-Richard J. Stephenson end J. Alien Lauren, both of Chicago--tine the $3,300 paid to ~ to achieve the "highest and best good" for ABC's members. None of the truste.n receives any nwoey front ABC. says Mr. Walsh. However. Mr. Walsh sacs his own foundation, a member of ABC. receives money front ARC for certain services that his founda' finn provides. He declines to say how much I money. Mr. Hayes' foundation is railed Sales .t,naly. do Institute Foundation of Illinois Inc. Its em~ ployes teach the 30.hour course for new ABC members around the country. The fcuur.dation offices are in the same building in Barrtnzton as ABC. The institute is mitch older than AE.C. sod much of its business consists of providing training services (or large companies such as General Stotorn Corp. 410 Foundation Twist: Ho\v Families Use Nonprofit Groups to Cut rilaxes PAGENO="0413" 411 Mr. Hayes says the Sales Analysis Onstittite Iundatlon pays no income taxes and never has applied for a ruling from the Internal Revenue Service on its tax-exempt status. Many tax lawyers believe that a regular corpo- rate tax return ha3 to be filed, and Income taxes paid, unless an organization submits an application for a ruling. That doesn't bother Mr. Walsh. One group La isterpreting the law one way. and one group Is Interpreting the law another way," he says. He and Mr. Hayes both say they think the qpestion will wind up in a court sonic day. Mr. Hayes says an IRS representative has "vis* tted" his foundation. A disagreement over "the treatment of cer- tain tax items" has caused a falling-out be- tween Mr. Hayes' institute and the big account. * tog firm of Ernst & Ernst, according to an Ernst & Ernst spokesman In Chicago. The firm * dropped Mr. Hayes' outfit as a client six to nine months ago. -- Mr. Hayes fs not the only ABC member who has not applied for a Last exemption ruling from the IRS. The Saxon foundation hasn't filed either. "I don't have any intention to I file," says Dr. Saxon, who says he is taking that poaition on ABC's advice. Mr. Walsh nays part of the $3500 which goes to ABC from a membership fee is set aside in a legal defense fund. Money from the fund goes to protect ARC members from legal attack by the IRS or. any other governmental agency. he ~aays. ABC is paying the legal expenses of Mr. Fahy and Mr. Billings, the two l~ng Beach. Calif., members who have been subpoenaed by ,the California attorney gçncral in his investiga- Uow. - , Mr. Walsh says a summation of the infor- * mation given new members in the 30-hour ABC training course wilt be made available "shortly" to all state attorneys general. In its only formal public announcement to date, ABC said last month that more than 50 member organizations had made grants total- log about $30,000 for various research and de- velopment projects in Vietnam. The grants were alt made to the I'hilippa Schutyler Memo- rial P'nundetinn. which will supervise the use of the grants through a program called "Winning the Peace." Though he has a law decree. Mr. Watsh Is not a practicing lawyer. Neither is Mr. Ste- phenson. a trustee of ABC. though he also ha' a law school degree. Mr. Lauren, also an ABC trustee, is a real estate man. A person close to the operations of .~BC says Mr. Walsh originated the ABC concept and went looking for the "best training outfit in * the country" to sell it. Thus he met Mr. Hayes and learned about his sates trs,ning institute. Mr. Walsh says his own Walsh Foundation was `formed in the District of Columbia itt 1917. He hasn't paid any Federal income taxes since, he `says. He says his father, now dead, was active `in the establishment of pensinn funds. and' )dealt with some of the New York law firms that handled the establishment of nonprofit. `foundations. The Sates Analysis fostilute of Mr. Hayes was operated as a pmofit.nuskin~ corporation until it herame part of the Sites Analysis lnoti' ,tute Foundation ls~t vesr. "Bob Hayes is a very shrewd gentleman," says an old acqusin- I tanre. "hut he has never lied once in his life." Mr. Hayes says he had mauuy rinuihts about the ARC plan wh'n Mr. Walsh first rxpluinrd it to him, but he says he is wholly convinced now that it is perfectly legal, PAGENO="0414" 412 * Tuesday, August 25, 1967 - IRS I~Stari-in.g Incjuirjr Into Foui~dcttions Set Upby Indi'.viclualsto Pare Federal Ta% * . By ItICHAISO F. JANssEN' * Staff iceporter of Tote Wart. See erjornssat, WASHINGTOt~ - The Internal Revenue Service Is starting an intensive Investigation of a plan promoted by a Barrington, Ill., group for individuals to minimize Federal income taxes by setting up foundations to manage their business affairs, a high IRS official said.. As detailed in yesterday's Wall Street Jour- nal, the Illinois group, called Americans Build- tag Constitutionally, or ABC, advises individu- al! on how to channel most of their income through such foundations. Particularly In light of the new attention fo- cused on the opcration, the IRS offizial said, "we will attack , . we sure as hell aren't going to let these things go unchallenged." For one thing, the official said, IP.S agents will seek the membership list of ABC, which claims more than 800 members in nearly all sa states. The agents then will study the situations of the Individual risembcra to see if tax-exempt low rulings they've received should be kept in force or revoked In a civil proceeding. If any false statements are found in exemptiors.appli- catlons, criminal action could result, officials said. Robert B. Hayes, ABC trustee, noted In Barrington that the organizatIon had expected the IRS Investigation to conic "~ooncr or later." He said IRS officials had contacted ABC "about three days ago." The IRS has indi- cated it will aubnsit a list of questions it would like to have answered about ABC's activities, the trustee said. t'We haven't done anything illegal," Mr. Hayes declared. "And we're'going right ahead with what we're doing." he said. Mr. Hayes said AEC. officials had told the IRS that Its membership list waa regarded as `confidential" and that ABC "wouldn't di- vulge" any names. Sonic of the Individuals, according to the ac- count. haven't ever nought IRS rulings con- ferring tax-free status on their foundations. "Without a ruling, they're completely vul- nerable," the official maintained, The organization's comments Indicate, though, that it disputes the Idea that such rul- ings are necessary, and officials suspect ABC or its members might well fight any IRS chal- lenges in court. - The IF',S, however, maintains that Federal law authorizes the service's ruling on tax ex- emptions. "I suspect we're going to hare a good fight on our hands, but we won't lose It for lack of trying," an official said, When advance rulings are requested, the IRS usually issues them on tire strength of the organizers' own statements on the purposes of the foundation without taking time to thor- oughly check them, out. Such requests, num- bering more than 14,000 annually, usually ap- pear to be very "innocent," an official said, but he noted that whether a group is permitted to retain its exemptIon depends on its "actual operation" rather than just its stated purposes. - The matter of deternsining when tax-free status Is justified by art organization's activi- ties isn't a simple one, analysts conceded, and they aren't ruling out the possibility that they may have to seek a tougher law from Con- gress. * As an example of the foundations' workings. the Wall Street Journal story described one set up by a Midwest doctor who said his foundation. collects all his fees and in return provides hint, tax.free, with a house, a car, a retirement plait and Insurance, and is providing grants with which his four children are attending college. P.evenuenren believe the providing of ts,'. free housing leaves a foundation open to ques- tion. Generally. the only situation itt which housing cart be provided without giving rise to a tax liability, they say, is when the nature of the job requires the pcroon to live ott his duly post A doctor ordzred to live irs a hospital wouldn't be taxed on the value of his quarters. for example, one sass. "but if he starts living down the street. he's open to challenge." Another red flag to rcvenucro i~ svhe~t a foundation gives sortie of its nioiii'y to meni bets of the fantily that crealed it. They also are parlicutarly ~kcptic~l svlien a f,,iinilatioii "psyo" benefits that recipivitls in the family consider Its he lax-free, - PAGENO="0415" 413 V ...1 B IBLIOGBAPHY SUGGESTED READ~G U. S. Congress, Committee on Finance, Treasury Department Report on Private Foundations, 1965, Document NOD 42-863, February 2, 1965. U, S. Congress, Senate Subcommittee on Interstate and Foreign Commerce, "Investigation of Closing of Nashua, N. H0, Mills and Operation of Textron, Inc." 81st Congress, first session, Report 101, March 9, 1949 (Legislative Day, February 21). U, S. Congress, House, Reports of the Special Committee to Invesigate Tax-Exempt Foundations and Comparable Organizations (Reece Cornniittee) 1954, Document No, 55647, House Report No, 2681, U.C, L. A. Law Review, June, 1966, No, 4, Entire Issue devoted to review of law and activities of tax-exempt organizations, with emphasis on private foundation B. American Bar Association, Journal of Real Property, Probate and Trust Law, Report of the Committee on Exempt Organizations, concerning the Treasury RepOrt of February 2, 1965. December 1966, Fall Issue. (Opposes Treaury proposed changes as being unrealistic, unworkable, and not being applicable to the actual prob'ems in the field of tax-exempt organization). FoundationDrectory~ Edition , Foundation Lib~~enter, üñ~der the ~u~ices of Russell Sage Foundation, New York. 1965, contains brief review of 7000 foundations from 1962 records, Although the capitalization figures are usually inaccurate, the review of found~t ion activities is interesting. Foundat ions and ~ Federal ~ Marion Freemont-Smith, Russell Sage Foundation, 1965, New York. A critical review of foundation activity and an excellent historical survey of foundations and tax-exempt supervision at all major levels of government. 87-444 0-68-27 PAGENO="0416" 414 V-2 OAVEkT: Most of the material offered by the Russell Sage Foundation in their philanthropic library does not apply to present..day methods, nor to the type of foundations you will create. If, however, you wish to do scholarly research in the field, the R.S.F. material is of the highest caliber. A more complete list of Government PublIcations available from the U * S. Government Print ing Of f ice is available on request. In addition, selected reading lists concerning any special topic will be compiled upon a request relating the nature of the problem encountered by associate counsel. Excellent Basic Review material may be found in Prentice-Hall, American Jurisprudence Second, and the Treasury Pamphlet on How to Apply for Exemption. We must remind you, however, that this materlal Is basic and sometimes misleading. The scope of permissable foundation activity and "law" far exceeds the scope of this review material. ~ * * * * PAGENO="0417" 415 American Jurisprudence. Summary 34 Am Jur 2d w-.1 q7900-.Excmpt OrganizatIons ~ 7900. Exempt Organizations and Taxable Activities.. 34 Am Jut2d The Code exempts from income tax many types of organizations includ' ing religious, charitable, and educational organizations. Exemption depends on the facts of each case and is generally determined on application and * may be revoked. The conditions for exemption vary. Some organizations are exempt only if they don't engage in certain prohibited transactionS or don't unreasonably accumulate Income, In additIon, the unrelated business income of some otherwise exempt organizations is taxable. And business * organizations all of whose profits are paid to exempt organizations are geti. erally fully taxable. q 7901. Scope of tax exemption. So-called . . . Scientific tax-exempt organizations consist of a long . . . Testing for public safety list of organizations specified in the Code traditionally regarded as not organized for - Prevention of cruelty to children or private profit. In general. these organizations animals.' are exempt from income tax.' But neither the prohibited fransaction rule But tome of them are exempt only if they nor the rule against improper accumulation, refrain from engaging in certain prohibited use, or investment of income applies to the transactions and from unreasonably accumu- following: lating income, and others are exempt if they . . . Religious organizations other than trusts just refrain from prohibited transactions.2 . . Educational organizations with regular Also, some exempt organizations are never- faculty, curriculum, and enrolled student ody thclcss taxed on their unrelated business in. in attendance at a regular place. ~ome.5 Organizations normally receiving, from Exemption is denied to cc?mmunist-con- the U.S. or the general puolic, a substantial trolled organizations.4 portion of thcir support (other than income ,/ obiorvaflon: The fact that an organiza. from their exempt activities). tion is exempt from income tax doesn't relieve . . Organizationt operated, Cu ervised, con. it from the obligation to withhold income trolled, or principally supported ~y an exempt tax from its employee's wages. religious organization that isn't a trust. 1. Code See. 501(a). . . . Organizations the principal purpose of 2. Code Sees. 503 and 504. which is to provide medical or hospital care, 3. Code Sec. 5i1(a)(2). 4. Regs. 1.501(e)-i. medical education, or medical or agricultural S research.2 This doesn't include an organiza- doi~ 7902. Organizations exempt if they tion engaged primarily in making contributions engage in prohibited transactions and to tax-exempt hospitals but not itself providing don't accumulate income. The religious, clsarit- medical or hospital care.' able, and educational organization group is 1. Code See. 501(e)(3). 2. Code Sec~. 503(b) and 504(a). perhaps the most important category of cx- 3. Rev. Rul. 54-137, Ca 1954-I, 289; Samuel em?t organizations. With certain exceotions, Friedland Foundation v. US.. 144 F. Supp. 74. suc.. organizations are exempt only i~ they refrain from engaging in prohibited trans- q 7903. Other organizations exempt If actions and also refrain from improper ac- they don't engage in ~rohibited transactions. cumulation, use or inVestment of income. Two categories of emp oyee trusts are exempt These restrictions apply to corporations~ corn- only if they don't engage in prohibited trans- munity chests funds, or foundations, organized actions, namely:' and operated' for any of the following p~r - . - Employees' supplemental unemployment poses: ` ~~~iit trusts.2 Religious . . - Qualified employee pension, profit ahar- o . Charitable in~,, or stock bonus trusts.1 his rule is subject to certain exceptions of *. * Educational * limited application with respect to employee ..Literar3r - * trwts~' 640 - - Reproduced by special permission of the copy:ight owners. PAGENO="0418" 416 FEDERAL TAXATION `the rule against improper accumulation, use, or investment of income doesn't apply to either of these two types of employee trusts.5 1. Code Sec. 503(a)(1)(B) oed (C). * 2. Code Sec. 501(c)(17), 3, Code Sec. 401(a). 4. Code Sec. 503(b). 5. Code Sec. 504. q 7904. Other exempt organizations. Tile additional organizations listed below, which arc exempt from income tax, aren't subject to the rules against engaging in prohibited trans- actions or improper accumulation, use or in- vestment of income. These organizations arc generally of such a chsractcr that it isn't ordinarily possible for them to engage in those racticcs. This group of exempt organizations includes: * . . Religious organiz~tiona other than trusts.' Religious or apostolic associations or cor- porations that have a common or community treasury stsd are engaged in business for the comnson benefit of the members but only if the members include in their gross incomes their pro rats share of the taxable income. The in.':~ must bci reported by the members whetl `.; not it is distributed, and it is treste.' dividend received.2 - . . F.~ Tonal organizations with regular facult~', culum, and enrolled student body. in atte :c at a regular place.3 * . - Or~;nizstions normally receiving from the U.S. or the general public, a substantial portion of their support (other than income from their exempt activities) .4 * * Organizations operated, supervised, con- trolled, or principally supported by an exempt religious organization that isn't a trust.5 * . . Organizations the principal purpose of which is to provide medical or hospital care, medical education, or medical or agricultural research.6 - . - U.S. corporate instrumentalities organized under Act of Congress granting income tax exemption.7 * - * Corporations merely holding title to prop- city and collecting and turning over income, less expenses, to an exempt organization.° - . - Nonprofit civic organizations operated exclustvely for social welfare.0 * . - Labor, agricultural, or horticultural or- ganizations.'° * - . Chambers of commerce, business leagues, real estate boards, or boards of *trade not or- ganized for profit or private benefit." - * - Social and athletic clubs not organized for profit or for the benefit of private share- holders." Exempt Organizations.- q 7905 - , - Fraternal beneficiary societies, orders, or associations operating under the lodge aystcm and providing for benefit payments to mensbers and thetr dependents.15 - - - Local employees' associations whose net earnings are used solely for charitable, educa- tional, or recreational purposes.1.4 - - - Volunttiry employees' beneficiary associ- ations providing for benefit psyments to mem- bers sad their dependents provided 85% or more of the income is collected from members and the employer;" - - Voluntary employees' benaficiary as9cis- Lions limited to U. S. govcmtntcttt olilcete and employees.10 - - - Local teachers' retirement fund associa- tions.'7 - - - Local benevolent life insurance associa- tions, mutual ditch or irrigation companies, mutual or cooperative telephone companies or like organizations but only if 85% or more of the income is collected from members.'° - - - Nonprofit cemetery companies and burial corporations.13 - - - Credit unions and certain nonprofit cor- porations organized before Sept. 1, `57 to provide reserve funds and insurance of shares or deposits in building and loan associations, cooperative banks, and mutual savings banks.2° - . - Mutual insurance companies other than life or marine whose premium and investment income (other than capital gains) doesn't exceed $150,000.21 - - - Farmers cooperatives meeting certain quslifications.22 These organizstions are only technically exempt.23 For circumstances in which they are taxed, see ¶ ~i627 et seq. 1. Code Sec. 503(b)(t). 2. Code Soc. 301(d). 3. Code Sec. 903(b) (2), 4. Code 5cc. 505(b) (35. 5, Code Sec. 503(b)(4), 6. Code Sec. 503(b) (5). 7. Code Sec. SOt)c)(t). 8. Code Soc. 50)(c)(2). 9. Codc Scc. 301(c)(4). 10. Code 5cc. 30t(chs). It. Code Sec. 501(c)(6). 12. Code See. 301(c) (7). 13. Code Sec. 5(t(c)(8). 14. Codc 5cc. 501(c) (4). 1$. Code Sec. 501(c) (9). 16. Code Sec. 301(c)(10). 17, Code Sec. 50t(c)(tl). 18. Code Soc. 501(c)(12). 19. Code Sec. 501(c)(13). 25. Code Soc. 501(c)(t4). 21. Codc Soc. 50l(c)(13). 22. Code Sec. 50t(c)(16). 23. Code Sec. 521. ~ 7905. Exempt organizations taxable on unrealized business income. Some, but not alt, exempt organizations are nevertheless tax3ble on their unrelated business income. The fol- lowing exempt organizations are ao taxable:1 641 Reproduced by special permission of the copyright ownerse PAGENO="0419" dJ 7906-Exempt Organizations * . Corporations merely holding title to property and collecting and turning over in- come, less expenses, to an exempt organIza- tion but only if the income is psyable to an organization taxable on its unrelated busIness income or to a church or a convention or association of churches.2 - - - Corporations, community chests, funds, or foundations and trusts organized and operated for religious, charitable, educational (including state colleges and universities), literary, scientific, testing for public safety, or prevention of cruelty to children or animals other than a church or a convention or asso- ciation of churches.3 The tax on unrelated business income applies only to certain religious organizations. It doesn't apply to ~hurches and conventions or associations of churches, or to religious organizations (including religious orders) carrying out the functiona of a church by en- gaging in the ministration of sacerdotal func- tions and conduct of religious worship. The exemption extends to activities conducted through a separate wholly owned corporation other than one operated for the primary pur- pose of carrying on a trade -or business for profit.4 Only other religious organizations that don't satisfy the above requisites are taxable on unrelated business income. It doesn't mat- ter that they are operated under church aus- plces.5 A religious order cngo~ed primarily In teaching rather than the ministration of cacerdotal functions, was held to be taxable on income from operation of a winpry.6 * - - Labor, agricultural, or horticultural or- ganizations.7 - * - Chambers of commerce, business leagues, real estate boards, or boards of trade.8 - - - Employees' supplemental unemployment benefit trusts.0 - - - Qualified employee pension, profit shar- ing, or stock bonus trusts.'° - - - Pre-Sept. 1, `57 corporations or asso- ciations operated to provide reserve funds or both reserve funds and deposit insurance for building and loan associations and other coop- erative or mutual banl~ing institutions." 5~ Code Sec. 511. 2. Code Sec. Sti(a)(2). 3 Code Sec. Sti(a)(2) and (b) 4, Code Sec. Sii(a)(2)(A); flip. 1.511.2(a) 5. l~te3g',. 5 1.5I1-2(a)(3)(Il). - 6. 0. La Salte Institute v. U.S., 195 P..Supp. 891. 7. Code Sec. 511 a 2 - IL Code Sec. 513 a 2. 9. Code Sec. 511 a 2 and (b - - 16. Code See. 511 a 2 and (b - 11. Code Sec. Sit a (2)(A). 642 34ArnIur2d ~ 7906. Feeder organizations aren't exempt An organization ian'S exempt merely because all of its profits arc payable to exempt organi- zations. If such an organization is operated for the primary purpose of carrying on a, trade or bualneas for profit, it is fully taxable.1 It is taxable on all its income including passive investment income. Since It isn't an exempt organization, its taxability isn't limited to its "unrelated business income."2 The rega provide that an organization - owned by several unrelated exempt organiza- tions and operated for the purpose of furnish- ing essential services to each of them isn't exempt and that exempt organizations aren't related merely because they engage in the - same type of exempt activities.3 But the Court of Claims allowed the exemption to an organi- zation owned by a group of unrelated hospitals for which it bought hospital supplies under jobbing arrangements with suppliers. This case was decided before the regs expressly provided that organizations aren't related merely because they engage in the same activi- ties.4 The Treasury allows the exemption only if the organization is controfled by and furnishes its services solely to: - - - - A single tax exempt organization. - - - A parent organization and one or mors of its subsidiaries all of which are exempt. - - - Exempt subsidiary organizations having a common parent.' An organizat'~on that doesn't. engage in a trade or business but merely holds title to property and turns over its income to an exempt organization isn't a feeder organiza- tion and is exempt, but it may be taxable on unrelated business income.8 1. Code Sec. 502; Reg,. 9 1.502.1(a). 2. Sico Foundatloni v. U.S., 295 F. (2d) 924, reh. den. 297 F. (2d) 557. 3. Reg,. §1.502.1(b). 4. Hospital Oureau of Standard, and Supplies, Inc. v. U.S., 158 F. Supp. 560. 5. Regs. § 1.502.1(b). 6. Code Secs. 501(c)(2) and Sli(a)(2)(A). - q 7907. What is a feeder organization trade or business. For the purpose of the feeder organization rule, the following have been held not to be trades or businesses: - - - Rental of real property, including per- sonal property leased with the real property.' - - - Investments in oil and gas production payments.2 - , Casual sales ol real estate acquired by gift or for charitable purposes.3 But an organization was held to be engaged in business where it sold at wholesale and re- tail used clothing and household objects which were contributed to it by the public. It do- Reproduced by special permission of the copyright owners. 417 W-3 PAGENO="0420" 418 FEDERAL. TAXATION n~ted to an exempt charity its profits over and above -amounts paid on thc purchase price of Its stores.4 __________________________ 1. Code Sec. 552; Rets. § 1.502-1(a). 2. flrtght Star Foundation, Inc. v. Campbell. 191 F. Supp. 845; Southwest Endowment Corp. v. U.S., D.C. Tnt., 5/28/58. 3. Marion Foundation. T.C. Memo. 1960.18. 4. Veteran's Foundation, 38 T.C. 66, att'd (CA. 10) 5/14/63; Veteran's Foundation v. U.S.. 178 F. Supp. 234, afld 281 F. (24) 912. - q 1908. Investment activities may affect exemption. The investment ol its principal and income by an otherwise exenspt charitable or- ganization in stocks, bonds, mortgages and other personal properly or in real property won't ordinarily deprive the organization of its exemption. It is generally recognized that a charitable organization must invest its funds. This is only an incidental activity to its chari- table purpose.' And even a temporary invest- snent in merchandise (whiskey) acquired as a One group of religious organizations, namely religious and apostolic associations may be exempt even though not operated exclusively for religious purposes. g 7911. Requisites for exômption. Cor- porations, community chests, funds or foun- dations and other organizations arc exempt if~ - . . they support religious, charitable, sci- entifie, literary or educational activities, test- ing for public safety or the prevention of cruelty to children or animals, - . - they ore organized exclusively for these purposes. they operate exclusively for these pur- poses so that none of the net earnings benefits private shareholders of individuals. - . - they do not in substantial, ways attempt to influence legislation and do not intervene in political campaigns in support of a candi- date.~ _____________________ 1. Code Sec~ S01(c)(3). 2. Code See. 501(c)(3); Engr. 4.1.SOt(c)(3)-1. q 7912. Organized c~'~'.sively for the ex- empt purposes. To be e\.upt as a religious, charitable, educational orgdtization' or the like, the document which sets up the organization, Exempt Organizations- (J7912 dividend in kind paid on corporate stock doesn't affect its exemption.2 But the exemption may be lost if: - investment activities constitute a trade or business. The Ninth Circuit so held where a foundation with a vague charitable design traded in highly speculative securities which activities were conducted on itt behalf by the grantor in the same manner as they had been conducted for his personal benefit before creat- ing the foundation.3 - . - Investments of income are made in such a manner as to jeopardize the charitable pur- pose of the organizatiOn.4 This rule is fully discussed at ¶ 7995. 1. Samuel Friedtand FoundatIon v. U.S., 544 F. Supp. 14. 2. Alan Lenin FoundatIon, 24 T.C. 15. 3. Randall Foundation ,. Rtddett, 244 F. (24) 8s3. 4. Code See. 504(a)(3). - whether it be a trust instrument, corporate charter, articles of association or any other written document must meet certain Treasury standards. The regs say that the documents. must be drawn so that they: limit the organization's purposes to one or more of the exempt purposes and do not expressly empower the organization to engage, otherwise than as an insubsta~tisl part of its activities, in activitks which are not in themselves in furtherance of one or more exempt purposes. The instrument can express the limitation to exempt purposes by reference to the Code. For exanople a charitable corporation's chsrter may say that it is formed "for literary and scientific purposes within the meaning of Scc. 501 (c) (3) of the `54 Code." Or the instru- meat may specify a particular activity such as the operation of an adult education center and provide the details of the method of operation. Or the instrument may simply state that the organi~stion is being formed "for charitable purposes" and that will or- dinarily be sufficient.1 The organizing instrttment cannot give the organization the power to carry on in a sub- stantial way activities which are not in further- 643 Reproduced by special permission of the copyright owners. q 7910. Religious, Charitable, Educational, and Similar Excst;pt Organizations. The largest category of exempt organizations consi:- of those with religious, charitable, educat'. - al, literary, scientific, ci- and animal cruelty prevention, and testitl~ for public safety purposes. :;e exemption applies only if the organization is both organized and ope:.- :ed exclusively for one of these exempt purposes and doesn't engage in sstbsantial propa- - ganda. PAGENO="0421" q 7913-Exempt Orgonizations ance of its exempt purposes. Sc~, if its charter gives the charitable organization the power to engage in a manufacturing business or to bperatc a social club, the organization would generally not qualify for exemption. This would be so. even though the charter stated that its purposes were exempt.2 However, an organization may be exempt even though a trade or business is a substantial part of its operation, provided it is not organized and operated primarily to carry on an unrelated trade or business and the.trade or business furthers its exempt purposes. There are no hard and fast rules for determining whether. the trade or business Is related to the exempt purposes. Among the factors to be considered are the size and extent of the trade or busi. ness and the extent to which its activities further the exempt purposes.3 The Treasury has said that renting a commercisl building which the organization maintains to finance its charitable activities is sufficiently related to the exempt purposes.4 For further discussion of when a trade or business is unrelated, see ¶ 8002 et seq. Another aspect of the organizational test is the disposition of the exempt or~'anization's assets on its dissolution. To qusl'~fy for ex- emption, the charter cannot provide for a transfer to anyone except another exempt organization, or the federal, state, or local government for a public purpose. It is not, however, necessary to provide .for a disposi. tlon of the assets on dissolution if local law would require their permanent dedication to an exempt organization.6 The Treasury set up its organizational re- quirements in `59. Organizations which were granted exemption before July 27, `59, will not have their exemptions revoked tolely on the basis that their charters do not meet the organizational requirements. However, organi. zations applying for exetnptions after that date must meet these tests.° 1. Rep. § I.551(c)(3).t(b). 2. Rep. § titt(c)(3)-t(b). 3. Rep. iiOi(c)(3)-t(c). 4. Rev. Rut. 64.182, CS 1964.t, 186. S. Rep. §i.55i(c)(3).t(b)(4 6. Rep. ~ i.SOi(c)(3).i(b)(6 .~ q 7913. Operated excluaively for the ex- empt purposes. In addition to being organ- ized for sri exempt purpose, a religious, chari. table; educational, etc., organization must op. erate as an exempt organization. The regs say this means: - . - it engages primarily in activities which accomplish one or more exempt purposes. * * It does not function as an action organ- ization. * * - no Fart of its net earnings inure to the benefit Ou private shareholders Os- individuals. 644 34 Am Jur 2d An~organization that makes grants to indiv- iduals (writers, composers, painters, sculptors, scholars, etc.) for the purpose of assisting them to cs~ry on their creative efforts qualities for the exemption, where the results of the rc search and the rights to the artistic hnd schol- arly work belong to the recipient of the grant.' But an organization which makes funds avail- able to authors and editors for preparing teaching materials and writing textbooks does not qualify for the exemption where it receives a portion of the royalties earned by the authors and editors.2 Organizations were not considered operated exclusively for exempt charitable purposes where long-term credit was extended td the organization's founders after refusal by a bank even though the charity was repaid with an ample return.3 Publishers of educational and economic materials who operated on a com- petitive basis with other companies were held not to be operated exclusively for exempt pur- poses.4 An essential of qualifying for exemption is that no part of the organization's net earnings inure to the benefit of any private shareholders or private individuals,6 The by.laws may not permit the directors to declare dividends from profits,° fix shareholders' salaries in proportion to. their holdings7 or give them discretion to make or not make distributions to charities, so that the dedication is less than irrevocable.8 Many private schools will be taxable since they arc operated for the owners' profit.° This will also be true 9f many private hospitals.iO The benefit to the individual may be indi- rect such as excessive maintenance or similar allowances,1' excessive rent to the organiza- tions's managers,'2 reimbursement of expenses incurred by the founder before aetting up the organization.'3 The private benefit has taken the form of promoting the works of an author who was one of the organization's founders.'4 On the other hand a foundation devoted to the spread of scientific knowledge did not lose its exemption because an unrelated publisher made a profit from the distribution of its books.'3 The payme~t of reasonable compensation to the trustee, even though he is related to the founder will not disqualify the trust.'8 Nor will the organization be disqualified for rea- sonable payments to or on behalf of staff mem- bers who are needed to achieve the organiza- tion's exempt purposes.'7 The charity should keep records of its dii- bursements, showing the names and addresses of the payees and their relationship to the organization or its founder, the amounts and the purposes of the payments.18 A charitable organization may have an obli- gation to make annuity or other payments to Reproduccci by special permission of th.~ copyright owners. 419 PAGENO="0422" FEDERAL TAXATION 420 ~,lJ -& Excntpt Organizations- (T 7915 the founder or his relations or heirs. In one in- stance the annuities paid to the founder and his wife were large in comparison to the amounts distributed to charities and so the foundation was not exempt.'° However, the obligation to make payments to private persons need not affect the organization's exemption. Some courts, distinguishing between annuities which are charges on property given to the organization and those which are not, have allowed exemption in the case of annuities which are charges on the donated property.2° An annuity payable from a testamentary chari- table trust to a relative cf he testator was con- sidered a legacy rather ;` an interest in the Iruat's earnings.2' A f hipS did not boo Its exemption because It sos required to pay out annuities at the foui..cr'a death, Since the annuities were comparatively minor in relation to the foundation's assets, tax exemption would not primarily benefit the annuitants.22 How- ever, the charitable organization should seg- regate the assets which are charged with an annuity unless the difference between the in- come from the assets and the annuity is rein- tively slight23 I. Rev. Rut. 66.103, 11011 1966.10, 9. 2. Ron. Rut. 66.103, 11(11 196610, 10. 3, Stevens Duos. Foundation, Inc. a. Corn., 324 F. (3d) 633, cerl. don. 376 U.S. 769, ret,, duo. 377 U.S. 920. 4. American Institute fur Economic. t6csearctt a. U.s., 302 F. (3d) 934, cccl. den. 4/22/63, reh. den. 6/3/63; Roy. tOol. 60351, CD i96O~2, 169. 5. Code Sue. SOt (a) (3). 6. IT. 2937, CR XIV.2. 123 (1935). 7. Carter, T.C. Mcmo. 1930-166. I. C. F. Smllta Co., T.C. Mcrno. 1954-8 6. 9. Kempur Mitilocy School c. Ccutchlc~, 274 Fcd. 125. 10. Krnncc n. Com., 318 F. (2d) 632. Ii. Rikcr a. Cow., 244 F. (24) 220, aft'g T.C. * Mento. 1955-223, curl. den. 355 U.S. 839; Help Thu Childcco, Inc., 28 T.C. 1120. 12. Texas Trade School. 30 T.C. 642. att'd 272 F. (24) 168. IS. Ren. Rut. 55.610, Cl) 1955-2, 262. 14. Rev. Rut. 55-231, Ct) t965-1, 72. 15. Science and Research Foundation, Inc. n. U.S.. 191 F. Supp. 326. 16. Monte Oil Mitt a. Willioghunt. 68 F. Snpp. 525. 17. St. Gcrntain Foundation. 26 T.C. 648. 18. Rev, Rut. 56-304, CD 1956.2. 306. 19. Scholarship Eedowntcnt Foondalion v. Nicho- las, 106 F. (24) 552, ceet. dcn. sot u.s. 623. 20. Corn. v. Edward Oelon, ic. Ceramic Founda- tion, 173 F. (2d) 483, alt'g 9T.C. 533; Daven- port Foundation, T.C. Memo. 12/24/47, atl'd 170 F. (2d) `tO. 21. Lewis a, U.S., 189 F. Supp. 950. 22. Francis Edward McOillick Foundation n. o Cornh 278 F. (2d) 643, att'g and rcv'g 35 T.C. 1130. 23. William L. Fowett Foundation n, Corn., 222 F. (2d) 68. tJ 7914. Action or propaganda organiza- tions. A religious, charitable, etc., organization ant cxempt if, as a substantial part of its * .,tivlties, it earriea on propaganda, attempts to influence legislation, or participates or inter- venes tn any political campaign on behalf of any candidate for public oflice.' The Treasury describes an organization which carries on any of these activities in a substantial way as an action organization and denies it exemp- tion.2 An organization enters the political arena by contacting legislators or urging the public to contact legislators in support of or in opposition to legislation, by advocating the adoption or rejection of legislation, by making statements, written or oral, for or against a candid'tle for public office. Legislation means action by Congress, a state legislature or a local legislative body as well as action by the public in a sitnilar procedure. These activities, must be a substantial part of the orgsnizstiot's total activities in order to bar exemption. Insubstantial political activi- ties will not disqualify Iho orgoniootion, nor will activities which are in furtherance of Ito basic exempt purpose. In some instsncea it may be difficult to dis- tinguish between an organization which aims at inutuctscing political opipion and an educa- tional organization. The Treasury adtttits tltat an orgsnizslion which advocates a particular position may be educational provided it pre- sents all the pertinent facts (not mere un- supported views) so that an independent judgment can be made.3 But it will deny exemption if the doettine advocated by the organization can become effective only by the enactmetst of legislation.4 * e/ observation: Whether an organization is an action organization must be decided in the light of all its activities and all the surrounding circumatstices. 1. Code Sec. 501(c) (3). 2. Regs. § t.)Otle)(3)-t(c5(3). 3. Rcgs. 8 t.50l(c5(35-t(d5(3)(iil. 4. Rev. Rut. 62-71. CD t962-t, (5. q 7915. Cttariiable organizations. "Chari- table" is given its generally accepted legal meaning. It includes relief of the poor, dis- tressed or underprivileged, the advancement of religion, edoestion or scietsce, erecting and msinlaining public buildings, monuments and works, and lessening the burdens of govern- ment. The regs also say that the term may apply to bodies that promote social welfare by easing neighborhood tensions, eliminating prejudice and discrimination, defending human and civil rights or by conibaling community deterioration and juvenile delinquency. The organization may advocate social reform and attempt to forts public opinion on contro- versial issues, provided it doca undertake the functions of an action organization.t Gen- erally the charitable activities must benefit more than a narrow doss such as a family. Howevet-, the needy enployees of a particular business is a sufficiently public group.2 But a trust to provide pensions for all retired employees regardless of need doesn't qualify.3 645 Reproduced by special permission of the copyright owners. PAGENO="0423" q 7916-Exempt Organizations ___________ The beneficiaries of a charity may make contributions to it, but the organization can- not be an instrument for distributing addi- tional compensation and qualify for exemption as a charity,4 I. Regs. § 1.501(c)(3)'l(a)(2). 2. Harrison n. Barkcr Annuity Fund, 90 F. (2d) 286. 3. Watson v. U.s., 335 F. (2d) 269. 4. Dully v. Birmingham, 190 F. (24) 738. q 7916. Educational organizations. The regs say that education is tile instruction or training of the individual to improve or devel- op his capabilities or the instruction of the public on subjects useful to the individual and beneficial to the community.' The organi- zation need not be a'formsl institution such as a college; it may promote cultural appreci- ation, for example, on an informal basis.2 Nor Will the organization fail to qualify be- cause of incidental entertainment or recreation especially wlsere these activities promote in- .terest in the organization's educational pur- poses.3 __________________________ The regs give these examples of tax-exempt educational organizations.4 * . * Any school, whether primary, secondary, a college or university, professional or trade with a regular faculty and a student body regularly in attendance * * . A correspondence school * . . An organization which offers lectures and discussions, including broadcasta and tele- casts * . * Museums, zoos, plantariums, symphony orchestras and the like. These organizations have also been held to be tax exempt. * . . Organizations which operated a touring repertory theater company5 or which encour- aged interest in repertory theater without Sc. tually operating one.° * * . Organizations for promotion of group ____________________ harmony singing;7 of an appreciation of jazz as an American art form;8 * . An organization devoted to improvin the quality of radio and TV programs an raising the public's standards.9 * . * Organizations devoted to teaching sail. boat racingin and other sports." Auxiliary organizations. An organization may be exempt because it performs a function of an educational institution. Exempt organ- izations of this sort have: * . * Published a law journal for a university.12 * . . Made low.interest loans to atudents,'~ 646 Reproduced by special permission of the copyright owners. 421 W-7 34 Am Jun 2d - . . Qpcrated a campus . store and res- taurant under joint facul!~* .~ent control.'4 - . . Run a high school ~ : liolastic athletic associ9t3on.13 - . . Awarded fellowships to the undergrad- uate members of a fraternity.'8 Organized an alumni association under the control of the university's administration.'7 - . . Made scholarships available to the em- ployees or children of employees of business or group of businesses'8 provided there is no discrimination in favor of the owners or their children.'° - . . Provided post.graduate training for doc- tors through seminars and lectures,2° Exemption has been denied to: - . , fraternities, although they may be exempt as social cluba.2' an undergraduate discussion club whose members were chosen on the basis of com- patibility, rather than scholarship.22 - . . schools run to produce a profit for the operators and owners.23 1. Roes. § 1.501(c) (35-1(d) (3) (i) 2. IT. 147), CII 1-2. 1(4 (1922). 3. IT. 3)30, Cit t939-2, 1(5. 4. Rcgs. § 1.501(c) (55.1(d) (3) (ii). 5. (cv. Rut. 64.17), CII 1964-1, 185. 6. Rev. Rut. 64.174, CS 1964-1, 183. 7, Rev. Rut. 66.46, 11113 19669, 9. 8. Rcv. Rut. 65.271, CS 1965.2, 161. 9. Rev. Rut. 64.192, Ct) 1964-2, 136. 10. Rcv. Rut. 64.27). 11611 196-1-41, 15. 11, Rcv. Rut. 65.2. CII 1965.1. 227. 12. Rcv, Rut. 63-23), Cli 1965-2. 210. 13. Rev. Rut. 61-87, CS 1961-1, 191; Rev. Rut, 63.220. CS 1963.2; 208. 14. Ron, Rut. 58.194, CS 19)8.1, 240, revoking IT. 2636, CB X1-2. 102 (1932). IS. Rev. t(ut. 55-5(7, CS 1955-2, 261. 16. Roy. Rut. 56.403. CII 19)6-2, 307. 17, Rcv. Rut. 56-466, CR 1956-2, 309; Rev, Rut. 60.143, CD 1960-1, 192, rovok'g 0CM. 22116, CS 1940.2 150. 18. Chase, T.d. Memo. 1960-49; Gimbel v. Com., 54 F. (24) 780; Sibley, Soc., 16 STA 915; T. 3. Moss Tic Cv., 18 T,C. 188, pet. (or ccv. dism'd 201 F. (24) 512. 19. Charleston Chair Co. n. U.S., 203 F. Supp. 126. 20. Rcv. Rut, 65-290, CS 1965-2, 163. 21. Rev. Rut. 64-118, CS 1964-1, 182. 22. Rev. Rut. 64.117, CR 1964.1, 180. 23. Birmingham Business Cotteee, Inc. v. Cnm., 276 F. (2d) 476. ~ 7917. Professional organizstions. Bar associations are not exempt as charities scientific or educational organizations, accord- ing to the Treasury, even though they maintain a library and an auditorium for discussion of legal topics.' However, the Second Circuit ruled that contributions to bar associations were deductible as gifts to charity for estate tax purposes2 and the estate taç provision is similar to the income -tax provision. The Treasury has ruled that American Bar Founda- tion' and the American Bar Association Fund for Public Education4 are exempt educational organizations. PAGENO="0424" FEDERAL TAXATION 422 * The American Institute of AccoIritants is not a charitable organization for the deduction of contributions.0 1. 0CM. 4(05, CO V11.2, 58 (1928). * 2. DutIes, Exr. (Cr0 oweS ~ViIt), v. Johnson, 273 F. (24) 362, rco'g tM F. Supp. 275. 3. Letter to Foundirtion 12/24/52. 4. Letter ruOng 12/15/61. 5. Rev. Rut. 60143, CD 19601, 192, revok'g 0CM. 22116, CII 1940-2, 100. q 7918. Scientific research organizations. The scientific research may be basic or applied but it nnust be in the pul)lic interest rather than for the benefit of a private person or industry. The Treasury has these tests for determining whether research is in the public interest: (1) The results (including any copyrights, patents, processes or formulae) are made avail' able to the public on a nondiscriminatory basis; or (2) the research is performed for the United States, its instrumentalities or agencies or state or its subdivisions; or (3) tine research is directed toward benc. filing the public.1 Among research which is directed toward benefiting tine public, the Treasury hats: research in connection with tine scientific education of college and univeraity atudcnta research for obtaitning scicintific infornna. (ion which will be publialned or otherwise available to the public researcln to cure a disease research to help a connmunity attract, de. vciop or retain an industry. * Research for these purposes is carried on for tine public benefit even tlnougin a contract or agreenient gives tine aponsol:s tine right to any rcaulting copyriglnts, petents or tIne like,2 Research organizations will not be exempt if they perform work otnly for their creators whicln are not themselves exennpt charities. Nor will they be cxesnpt if tiney do not make tine results of their re~:arch available to the public on a nondiact~Jinatory basis. How- ever, if the research i~ r-.:ried on for a govern. ment or for one of t nods listed above, the research organizatio/ not lose its exemp- lion by turtling ove. results to only one person where tlnia is t inly practical way of exploiting the diacovcy `for the public.3 An exempt organiz~tktn such as a university or a college may carry on non.exempt research. It will not lose its cxcisnption if the non'exempt research rennains secondary to its exempt pur poses. However, any income from the non~ exempt research may be taxable as unrelated business inconne. See ¶ 8006. And in this cotn- ncctton the distinction between basic and op. plied research may be significant. Exempt Organizations- Here's how tine Treasury has applied these rules. - . - An organization winich performed social science r~tcarcln and made its findings avail- able to tine public was cxennpt.4 - . . An organization whicln designed and de- velopcci machinery in connection with a com- mercial operation wasn't exennpt.1 - - - An organization that prepared and distrib- uted free abstracts of scientific and medical literature was exempt.C 1. Regs. §t.05t(e)(3)'t(d)(S). - 2. Roes. 8 1.SOttc)(3t.t(d)(3)(iii)(C). 3. tOegs. § t.50t(c)(5)'t(dS(5)(iv). 4. tIny. Rut. 65-60, CII 1965.1. 2)1. 5. Rcv. Rut. 65.t, CD 1965.1. 226. 6. tIer. Rut. 66-147, IRIS 1966-22,15. ç 7919. Hospitals and isomes for the aged. An exennpt hospital must be organized as a non.profit organization for the care of the sick. While it nnsy clnarge fees for its services, to the extent of its financial ability it must admit for treattnnent those utnable to pay. It may not restrict tine use of its facilities to a particular group of physicians. PrQvisions for dividends in tine by.laws autotnoaticslly disqualifies a hos- pital. And s hospital will not be exeinnpt if tine salaries paid to its managers are designed to siphon off nnost of the income.1 While the hospital may have a prepayment plan, tine use of its facilities must be open to all the resi- dents of an area including those unable to pay.2 A hospital wotn't be detnied exemption merely because it charges doctors reasonable and non.discrinnitnatory fees for use of its facii' ities in order to ohtaitn funda to build a new hospital.3 A nonprofit hospital which fails to qualify as a clnaritable organization msy be exempt as a civic organizatiOn.4 Hontes for tine aged ~vill be exempt if serv- ices arc retodered to all the residents or a reasonable portion of them for fees substan- tially below coat to the extent of the organiza- tion's financial ability.5 To deternnine whether the fees are below coat, entrance fees and any other lutnnp sunn fees may be prorated over the resident's life expectancy based on the Treas- ury's annuity tables.e However, the home will not be denied exemption because some pay- ment is detnoandcd of all residents.7 1. Fore Scott Clinic nod Hospital Corp. v. Dead' rich. 90 F. Supp. 515. 2. Rev. Rut. 56-185. CII 956-1. 202. 3. Rev. Rut. 60-269. 3 1965-2. 159. 4. IRS Doe. 5-to. 5551. (10/65). p. 5. - 5. Roy. Rut. 61.72. CO 1961-1. 186. 6. Rev. Rut. 64-231, CD 1964.1, 139. 7. Rev. Rut. 61.72. CII 1961.1, 183. ~ 7920. Testing for public safety. An organization which does testing for public tafety is exettnpt.' This includes testing con- Reproduced by special pertnissiori of the copyright owners. PAGENO="0425" ~J 7~5&. Filing Requlietnenis of Exempt Organizations. An organization isn't exempt from income tax merely because it claims an exemption. Until the exemption is established, the organization must co~i;aue to file regular income tax returns or face possible penalties. Once the .:isapt slatus is established, the organization must generally file annual ml tion returns. The type of annual return required depends on the I exempt organization. Generally. usual returns must rcpott gross Income, rec;~ts, disburscnscnts, etc. lnfornsa- lion returns tequircd because tlse organization is privately supported must also include nsany other items, suclt as distribsttions for exeml)t purposes out of income and out of principal, accumulated incoriac, contribtttions and gifts received dttring the year, and a balance sheet. All exempt organizations must also keep ths records required by the Treasury.t Though exempt employee trusts must file annual information returns, the trustee needn't include atsy information in the return which the employer ststes, in a written notice to him, will be or has been reported in the employer's return.2 Annual returns must be filed by exempt or- ganizations regardless of the amount or source of income or receipts and regardless of whether it's a member of a group, unless it is included in a group return, see ¶ 7957. The return must be for the organization's established accounting period, or jilt lass none for the calendar year.3 * The tax exemption may be' revoked for fail. ure to file the required returns or statements or keep the required records.4 Identifying tttintbers. Exempt organizations need an employer identifying numb~r for any required information returns.0 They must also furntsh that number to payers of dividends or Interest, etc., and use it on payroll tax returns, For a dtacussion of whose number to use where an organization is required to file an information return with respect to payments to or transactions with third parties, see ¶ 2471. How to obtain numbers and the penalties for failure to use or furnish numbers where required, are explained at ¶a 1434 and 1435. 1. Code Sec. ems: flees. 11,6033.1. 2. Stegs. § 1.e033-tta). 3. flegs. § t.6033't(b). 4. Rcv. Rut. 5995, CD 1959-1, 627, 5. Rcgs. § t.6t09-ltb). ç 7956. Exempt organizations which ncedts't file annual returns. Tite following exempt organizations needn't file annual in- formation returns: I) Organizations organized and operated exclusively for rcligiotus purposes, including exempt organizations wlsicls tlsey supervise or control, 2) Edticatio,tal organizations which main- tain a faculty and curriculum and which have a regular atudetit body in attendance. If an organization meets these requirements. it needn't file even if it tetnporarily must diacon- tinue or curtail such activities. 3) Charitable organizations, or organiza- tions for tlte prevention of cruelty to children or animals if they (a) are wholly or partly supported by slate or federal funds or (b) receive half their income from voluntary public contributions. For (a) to apply, the govern- ment funds must be contributed without re~ quiring specific services of the charity. For (b) to apply, tlse 50% contributions tnust be from the general public and not from those connected wills the organization. 423 - ~- W-bJ ~J 7921-Excntpt Orgattizations 34 Am Jur2d sunzer products to determine whether they may be used by the public.2 An example of a consumer product would be comniercially manufactured safety equipment for pleasure boats,3 1. Code Sec. SOt (c) (3). 2. Regs. § t.55t(c)(3).t(d)(4). 3. Rev. Rut. 65.tt. IRS 1965.11, 14. q 7921. Religious organizations. Exemp- tion under this label permits great latitude for differences in creed and practices. However, the sect's itscotne must be used for aeltievitsg ill professed aims and not for the profit of an * individual. Thus, an organization which prac- ticed nsiraculous healing was exempt' while an orgattizstion which publislsed self-improve' ment booklets for profit was not.2 One re- -ligious organizatiota operated several cotsamer- * cial enterprises such as a nursery, a laundry and a hotel. However, they were not operated for profit but to demonstrate how the sect's teaching might be put into practice and so the sect was cxetsapt.3 I. A. A. Isttcn tlcvioats, Inc., T.C.MemO. 1963' 2et. 2. Fesunda,ton toe Divine Meditation, Inc., T.C. Memo: 995.177. 3. Ootdcn flute Church Ass's, 41 T.C. 719. (J 792~. Religiocts or apostolic associations or corisortttions. Religious orgatsizstions which carry on busi- ness activities aren't exempt as organizations organized and operated exclusively for religious purposes. But 6uch organizations may be cxcnipl untler a different clascificsUon, nanicly 6s religious or apostolic associatlOilt. . exemption applies only if: - . . the as6ociations have a common or corn- naunity treasury; - . - each member includes as a dividend his share of the income whether or not distrib- uted for the organization's taxable year end- ing with or within his tax year.1 I. Code Sec. 501(d); flees. §1.501(45.1. Reproduced by special permiss-lor of the copyright owners~ PAGENO="0426" 424 q 7957-Exempt Organizations 4) Fraternal organizations operating under the lodge systcm and furnishing life, sick, acci- -. dent or other benefits to nienibeis and dcpend- enta. 5) Organizations wholly oii'ned by the U.S. or its agencies (and their wholly owned subs). Changes in the character, operation. or purpose of the above organizations must be immediately rctvrtcd its writing to the district director for ii.: district where tlse organization has its principal 0111cc. Al! other infonnalion returns nsuat be filed by the above organizations in tise same way as any other taxpayer. They Sre excused only from the filing of the annual returns described in ¶ 7957. The infortssation tctttrns wlsicls all organizations must file include returns: * . . on payments of S600 or more in connec- tion with its operation's. see ¶ 1413. * * . on psynients of dividends and interest, see ¶5 2472 et seq. * * . on tax withheld, see ¶ 3700. For information returns on the payment of patronage dividends by cooperatives, see ¶ 7640. ___________________ 1. Codc Scc. 6533; Rc~s. § 1.6033-ttg5. q 7957. Annual reta of exempt organi- zations. Form 990 is the principal information return of exempt organizations. and muss be used unless tlse organization is required to file one of the special fortsis described below.' Labor organizations nssy use copies of De- partment of Labor Forms LM-2 and LM-3 in place of specific information required on the Form 990, though tlsc Form 990 must otiser- wise be completed and filed. Form 990-A msist be used by charitable and other Code Sec. 501 (c) (3) organizations whicls are required to file because they aren't sup- ported by government or public contributions, see 7956, A charitable foundation wlsich eases prop- erty rent-free to an educational organization may deduct tlse rental expenses oti Form 990-A as operating expenses or as a gift, providing the item is consistently treated, Form 990-C is used by "exempt" farmers' cooperative marketing and purcisasing associa- tions. Forns 990-C is actually an income lax returit, since farmers' cooperatives arc subject to tax and are only nonsinally exempt.2 Form 990-P is used by exempt employee trusts. * Form 990-T is used by otherwise exempt organizations which have unrelated business taxable income, see ¶ 8000. This too is really an income tax return, since the unrelated busi- ness income is taxed on the Form 990-T. 656 34AmJur2d Fornt 1065, the regstlsr partnerslsip return, must be filed by tax-cxenspt religious or ajsos' tolic associations or corporations lsaving a com- mon or cotssniunity treasury whose tnembera include in their gross income their pro rata share of ,tlsc organization's taxable income. As any partnership return, the Form 1065 must show gioss itscome, deductions, taxable inconsc, and tssensbers' names, addresses, and distribu- tive sissies. Group retutits. A central or parent exempt organization nsust file a separate annual return for itself, but it may also file a group return on Form 990 or 990-A for 2 or more of its local chapters, branches, etc., in place of their separate returns. The parent's year is tise reporting period. To be includible in a group return the local organization must be (a) chartered by or asso- ciated with the parent at the close of its year, (b) subject to the parent's supervision, and (c) exempt under the same law provision as the parent. The parent must advise each district director where a local would orditsarily file as to whetlser time local will or won't be included in a group return. Federal credit unions may have s group return filed with the district director, Balti- more, Mu.3 State-clssrtered exemnpt credit unions msy have a group return filed by the aisle agency controlling and supervising the grostp. The state agency tisust notify each appropriate dis- trict director, as `expisined sbove.4 For infornmatiomm remrmts of trusts claintimtg a charitable deduction under Code Sec. 642 (c) ace ¶ 1955. t. ttcgc. § t.6533-t(n). 2. Codc Sec. 522. 3. Ree. RI. 60.te9. CB 960-1, 621. 4. 16cc. ttui. 60364, CLI t9602, 382. ~ 7958, Whseus and where annual returns are filed. Otherwise exempt organizstions which are taxable as corporations on their tin- related busimtess imtcomste must file their Fotun 990-T on or before the 15th dsy of the 3rd month following the close of the taxable year (by the following Marcls 15th for calendar year organizations) "Exempt" farmers' cooperatis'es must file their Form 990-C by the 15th of the 9th month after the close of the taxable year (by the fol- lowing Sept. 15th for calendar year coopera- tives) 2 Religious or apostolic associations or cor- porcmtiomts required to file Form 1065 must file by the 15th day of the 4th'month following the close of the taxable year (by the following April 15th for calendar year associstions). `ii 10 Reproduced by special permission of the copyright ownersc PAGENO="0427" q 79~I. How cxcnsption is determined. An organization isn't exempt from income tax merely because it is neither organized nor op- erated for profit. It is exempt only if its or- ganization, purposes, and activities faIl within one of the exempt categories listed in the Code. The exempt categories and tlsc extent of the exemption applicable to each, hsve been pre- viously noted (~j 7900 ci seq.) The fact of exemption oust generally be es- tablished by applying- for and obtaining a Treasury ruling or determination to that effect. Until such a ruling or determination letter is issued, the organization must file' an income tax return and pay any tax due. But when it it issued, the ruling or determination letter is effective as of the date the organization was formed if its purposes and activities satisfied the exemption requirements from its inception.1 1. IRS Doe. No. 5551, (tO/64), p. 3. ~J 7962. Applieation for exemption ruling or determination letter. All applications for exemption rulings or deternsination letters arc filed with the local district director for the district in which is located the organization's office or place of business.1 Only requests for rulings concerning feeder corporations, pro. hibited transactions, income accumulation, and unrelated business income should be sent to Washington by tlse taxpayer. These should be addressed to the Commissioner of Internal Revenue, Washington, D. C. 20224.2 Exemption applications must always be writ- ten, even where no official forms are provided. Oral requests won't be considered.° Official application forms are provided for moat cases, Where provided, the form should be used and the accompanying instructions thould be followed. Two copies of each major document required 0 be furnished by the official application form should- be attached to the application. These include: Articles of incorporation or trust agree- ments. Bylaws. Classified receipts and expenditures for each year of operation and assets and liabilities at the end of each year. If the organization has cap~tsI stock, the application also should show: The number and par volt:. :~ shares of each class of stock. Consideration for which were is* sued. By whom held. Give shareh-.~r's names and number of shares held if less tl;n 10 share- holders. \Vhether organization certificate author- izes payment of dividends and whether any hove been paid. - Copy of stock certificates. Group rulings are issued for national organ- izations including churches, Boy Scouts, and fraternal organizations. Local branches or lodges don't have to file separate exemption applications if covered by the group ruling.4 Applications for exemption may be with- drawn at any time before inauance of a ruling or determination letters. But the information submitted won't be returned and may be used by the district director on audit of the organi. zation's tax returns.5 t. Roes. 9 i.501(a)-I(a)(2): Rcr. ?roc. 62.30, Cli 1962.2. 512. 2. Rer. Proc. 56.9, Cli 1956.1. 102. IRS Doe. No. 5551, (,i0/64). 3. IRS Doc. t'o. 5551, (10/64), p. 4. 4. IRS Doe. No. 5551, (101(4). 5. IRS Doe. No. 5551, (10/64). q 7963. Additional iflformation required from charitable, religious, educational, etc., organizations, The exemption application Reproduced by special permission of the copyright o~'mers. 425 FEDERAL TAXATION \A/ 1 Excnmt Ortzanizaf ions- (1 7963 Other exempt organizations must file their principal plate of business is located,4 information returns (Forms 990, 990.A, and For the rules as to filing extensions, payment 990-P) by the 15th day of the 5th full'calendar (where applicable) and filing requirements month following the close of their annual ac- generally, see ¶ 2445 ci seq. counting period (by the following May 15th R 1 6072 I for calendar year organizations) ~ 2. Re~s.tI:6O72-2. Annual returns are filed with the district di' 3. Rogs. 91.65)3.1(e). rector for the district where the organization's ~ Roes. 51.6053-i. ~ 7960. Determination, Revocation, and Recovery of ~xempt Status. - An-organization can't be sure it is exempt until a ruling or determination letter so stating is issued by the Treasury. This will irdinarily be issued only after the orgitnization has filed a detailed applicatioti; although tentative or advance rulings will frequently be isuod, Exemptions may be revoked or modified, and application may be filed to renew revoked exemptions. PAGENO="0428" q 7965-Exempt Organizations must include a detailed statement of the activ- ities or proposed activities of the following types of organizations:' * . . Religious organizations. * * * Hospitals. Clinics. * * . Old age homes. * . . Community nursing bureaus. * . * Community funds. * . . Charitable and educational loan organi- zations. * . * Charitable organizations supporting celu. cation. * . . Educational o~ganizatiPns including a museum, zoo, planetarium, symphony orches- tra and similar organizations. * . * College campus organizations. * . . Alumni associations. * . * Athletic organizations. - * * Scientific organizations. * * - Literary organizations. * * * Associations' for prevention of cruelty to children or animals. Consult your local district director for the specific information required with respect to any particular type of organization. 1. Rem. § 1.tOt(a).1(b)(t)(iii); IRS Do:. Na. 5351, (10/64). g 7964. Official application forms. 0111' cial exemption application forms are provided for the following categories: * * * Charitable, religious, educational, li:ersiry, scientific, etc., organizations. Form 1023. * . . Civic leagues, labor unions, local employ' Ce's associations, agricultucal or horticultural organizations, chambers of commerce and sim- ilar organizations. and fraternal beneficiary societies. Fçsrns 1024. * . . Social and athletic clubs. Form 1025. * . . Title holding companies, cemetery corn- panics, local benevolent life insurance associ- ations, mutual ditch, irrigation or telephone companies. Form 1026. - . - Voluntary employees' beneficiary ssaoci~ ations and supplemental unemployment bene11t trusts. Form 1027. In any case when no Official form of s~pIics- tion is provided, the local district director should be consulted for the information to be submitted and the procedure to be followed in establishing exemption.' 1. IRS Doc. No. 5551, (tO/64). q 7965. Tentative or advance determins' tion letters and rulings. In most cases, tentative 658 34AmJur2d determination letters or rulings will be issued - in advance of operation provided the organi zatiQn can describe its proposed operations in sufficient detail to convince the Treasury that they will be clearly exempt under,the law.' 1. Re:. Proc. 63.30. CD t91.1.2.7c9.supCrSC ding Scm. 2 and 4 of tic:. toc. 6235, Cii 1962.2, 312.. __________________________ ~ 7966. Revocation or modifiestion of cxemotion. Exemption rulings and determina- tion fetters may be revoked. Causes for revo- cation include failure to file annual informs' tion returns and material changes in the organ- ization's character, purpose. or ntethod of operation.' The revocation tnay be retroactive and defi- ciencies (and penalties) may be claimed for open yeats. But the Treasury may not abuse its discretion in this respect.2 The general policy of the Treasury is to limit retrosctive revocation to canes where:3 * * . A material fact wan omitted or misstated. - . - The organization operated in a manner materially different than that represented. - . - The organization engaged in a prohibited transaction. The foregoing policy is generally supported by the cases.4 It also has been held that the Commissioner iats't barred from revoking atm exemption retroactively to the time of material change in relevant facts or applicable law occurring after the ruling was issued.5 1. Proc. ISuics §60t.201(nS(tO); Rn:. Proc. 62. 30. 5cc. 6.03..C5 962-2, 5t2. 2. Auioncobiic Ch!h of .`.tichiicn :. Corn., 333 U.S. tOO, I L :4 2d 746, o5'g 230 F. (2d) 555. 3. Proc. Ruics 4 601.20t (o)(tO) (iii); Rc:. Proc. 62-35. 5cc. 8.113. Cli 1962-2, 312. 4. Lcsasoy Founducion :. Corn.. 238 F. (2d) 589; Loroino A:couc Clinic. 31 T.C. 14t. 5. Sienmns D:os. Foccdation, Inc., 39 T.C. 93. a5'd 324 F. (24) 633. ccci. dcn. 376 U.S. 969, reh. den. 377 U.S. 920. ç 7~57. Pro1esting adverse and revoked or modified dcterinir.siion letters and ruiin:s, A taxpayer is entitled to file a protest with t~ie district director if the determi;~:; : on letter or ruling issued denies his cxcnip application or if an exemption in later revoi~. modified. A timely protest sisrts the ad;: :rbtrative re~ view of the particular deternsii:a;~on.' 1 obscrvcflon: A protest consists of a state' ment of the facts and she law and the tax- payer's arguments in support of his contention. If the taxpayer's protest is unsuccessful a deficiency will eventually be assessed against him. At this point, the taxpayer will have the usual alternatives of. either contesting the defi- ciency in the Tax Court or paying it and filing a refund claim and thereafter suing for refund in the district court or the Court of Claims, 1. Proc. Rutcs t 60t.25t(n). Reproduced by special permission of the copyright owners. 426 V1-12 PAGENO="0429" FEDERAL TAXATION ~ 7968. Rcncwcd exemption applications. An organization whose exemption application has bccn denied or revoked can always file a new one. But if it is denied or revoked be~ausc of a prohibited transaction, a new exemption application can't be filed before the taxable year following that in which notice of denial or revocation was issued. And a new exemp- tion won't be granted before the beginning of the taxable year following that in which the new application is filed.' ,/ Itlusfraflon: In the case of a calendar year organization, exemption is revoked in `65. New application may not be filed before `66. 11 it Is filed in `66, lIsa first year for which exemp- tion may be granted ia-'67. 1. Proc. Rutes 5 601.201(o)(7)(nii). q 7969. Returns during exensption and after revocation. In general, exempt organiza- tions must file annual information returns. But Certain religious and charitable organizations are exempt from eveis this obligation.' This subject ia more fully discussed at ¶ 7956. The filing of information returns by an or- ganization that honestly believes itself to be ~ 7970. Prohibited Transactions. q 7971. Organizations affected. A requisite for exemption of an importatot group of organi- zations is that they don't engage in prohibted transactions. This rule applies to: Organizations in the religious, charitable, educational, literary, acientific, testing for pub. lie safety, and prevention of cruelty to children or animals category, subject to iinporta:tt ex- ceptions, listed at ¶ 7902. Employees' supplemental unemployment benefit trusts and qualified employee pension, profit sharing or stock bonus trusts, listed at ¶ 7903. The prohibited transaction rule doesn't apply to the large group of exempt organizations listed at ¶ 7904. q 7972. What'are prohibited transactions. The object of the prohibited transactions rule is to prevent the creator of, or a substantial contributor to. an exenopt organization from directly. or indirectly receiving financial benefit from dealings with the organization. Prohibited Transactions- ~7972 exempt ~tarts the period of limitations on ~ seasmenta and collection.2 But exempt organizations aren't excused from filiusg information or other retVrns con- cerning payments to employees and others.3 An orgatsization wlsose exemption is revoked must file incotne tax returns. Such returns must include all income thereafter received or accrued even though derived from contracts issued or assets acquired before the exemption was revoked.4 Loss of its exemption doesn't affect the or~ ganization'a accounting period. Unless the or- ganization becomes taxable on the first day of its taxable year, it must file a short taxable year return begissning with the first day It Is taxable and ending with the last day of that taxable year.' The income for such a short year may not be arrived at by prorating the full year's income.0 1. Codc Scc. 6033(a); Regs. 51.6533-8(g) and (h) 2. Code Sec. 650t(r.)(2). 3. Re~a. § 1.6033-1(5) (3). 4. Royal Highlandcrs. I T.C. 184(A), rend on othcr grounds t38 F. (2d) 245. 5. Royal ltigldandcrs, I T.C. 184(A), rend on other grounds 138 F. (2d) 240. 6. Economy Sanings & Loon Co., 5 T.C. 543 (NA), nOd and rend on other issues 158 F. (2d) 472. The prohibition applies to any transaction, between the organization and the creator or a substantial contributor to it or certain related persons, in which the exempt organization: Lends any part of its income or corpus without adequate security and reasonable in- (crest. Pays any compensation in excess of a reasonable allowance for personal services actually rendered. Makes any part of its services available on a preferential basis. .. Makes any substantial purchase of secu- rities or any other property for more than adequate consideration. Sells any substantial part of its securities or other property for less than an adequate consideration. Engages in any other transaction which results in substantial diversion of income or corpus.' `the prohibition applies only when the per. son who is the other party to, and who . re- Reproduced by special permission of the copyright owners. 427 W.-13 Sonic organizations will be denied any exemption if they engage in so-called prohibited transactions. These are tran~actions with an organiza- (ion from which its creator or a substantial contributor to it may benefit financially. Only real, not potential, prohibited transactions bar exemption. PAGENO="0430" ~J 7973-Prohibited Transactions ccivcs use benefit of, the transactipfi is one of the following: The creator of the organization (if a trust). * . . A substantial contributor to the organiza- tion. A rncmbcr of the family (brother, sister, spouse, ancestors, or lineal descendant) of the creator or of a substantial contributor. * . . A corporation controlled by the creator or a substantial contributor through direct or indirect ownership of 50% or more of the total combined voting power or of the total value of all the stock.2 1. Code Sec. 503(c). 2. Code Sec. 553(c). ~ 7973. Potential prohibited transactions don't bar exemption. The prohibited transac- tion bar is against actually engaging in pro- hibited transactions. The nscre fact that an organization has autlsority under its govern- ing instrument to enter into what would be prohibited transactions won't deprive it of its exemption as long as it doesn't actually en- gage in any prohibited transactions) I. Waiter. 39 T.C. 465(A). q 7974. Decisions, rulings, etc., on pro. hibitcd transactions. The following have been held not to constitute prohibited transactions: 5ndircct benefit derived, from, distribu- tions by an exempt trust, by relatives of em- ployees of use creator corporation' - A loan by an excnspt trust to a corpora- tion ti'Iticlt coitirols the creator corporation2 A loan to the creator wlso gave his note which required him to deliver as security, on requcat. mortgages on apccifii real catsie worth several tinses he amount of tb. an. The loan wasn't without adequate aces But tlse following have bce ri to be pro- hibited transactiosa: An unsecured loan to 1 creator of an exempt trust notwithstanding ~;t the creator was solvent and in sound fin.pt~ial condition. Adequate security refcra to collateral not to the creator's financial condition4 Loan to partnership by an exempt organ- ization to which the general partner waa a substantial contribottor, notwithstanding that the loan was the joint and several liability of all the partncra atsd each partner had sufficient asseta to satisfy the entire loan, where it wasn't otherwise secured,5 ~/ observation: `l'he Sixth Circuit, suggests that where an excnspt trust purchases equip- enent by borrowing under a chattel mortgage arrangement stsd then leases the mortgaged 660 34AmJur2d cqsuipnreist to tlte creator of foe trust, use trans- action 755)' constitute a prulsil)itcd loan.6 ,/ observation Sonse decisions have allowed cmplo~e?'s deductions for their unsecured notes given to an employee trust in payment of their contributions. \Vhcrc the deduction is 51- loved in one year and the tote isn't paid until the following year, the effect isthc same as if the enoploydr had borrowed from the trust for tlse period from tlse end of the year in whtch deduction is allowed until the note is paid. 1. Ocr'. RuL 06, Ctt t0(3-t, 264. 2, 6cc. (ui. 50.526, Ct) 958-2, 269. 3. \~ti Sirs,,, Ctay, Jr., Foundation v. U.S.. 233 F. Sui'p. 628. 4. Van Products, inc.. 40 T.C. tots. 5. Ocr. tOol. 65-202, Ct) 1965~2, 72. 6. Cooper Tire & Rubber Co. Emptoycc'n Retire- ~ccni Fund v,Com.. 306 F, (24) 20. ~ 7975. Security for loans by employee trusts. A special rule exempts certain loans by employee trusts from the adequate security requirensCnt. This exemption applies only to: - . - Employees' aupplersoental unemployment benefit trusts, described in Code See. 501 (c) (17). Qualified employee pension, profit alsaring or stock bonus trusts, described in Code Sec. 40 1(a). A bond, debenture, note, or certificate or other evidence of indcbtcdtoess a. quired by such an employee trust won't be treated as a loon noade without adequate security if: The obligatidn is, in general. acquired by the trust either in the market at the market price or Irons an underwriter in an SEC regis- tered offering at the public offering price at which a substantial portion of the same issue ia acquired by persona independent of the is. suer or frosso tire issuer at a price that isn't higher than that paid currently for a substan- tial portion of the same issue by persons inde- pendent of tire issuer. These rules are spelled out in detail in the Code and regs.' - Inomediately following the trust's aecluisi- lion of the obligation, it holds not more than 25%, and persons independent of the issuer hold at least 50%, of the aggregate amount of obligations issued, in such issue, and outstand- ing attire time of acquisition.2 * . , Inornediately following the trust'a acquisi- tion of the obligation not more than 25°/a of the trust's assets is invested in obligations of the creator of the trust or any other person or corporation with whom a prohibited transac- tion is barred.3 A change in the terms of an obligation is considered as the acquisition of a new obliga- tion to which the foregoing requirements sp- ply.6 Reproduced by special permission of the copyright owners. 428 W-14- PAGENO="0431" FEDERAL TAXATION I. Code Sec. 503(h)(1); ttc~s. 1.503(h).t(b) and 5 1,303(55-2(b). I 2. Codc Sec. 503(h)(2). 3. Code Sec. 303(h)(3); Rcgs. 1.503(55-2(d). 4. Regs. 5 t.503(h)-2(c). q 7976. Sccurity for loans by stock bro- kerage employee trusts. A second cxcmption from the adequate security requirement applies only to loans by the qualified employee pen. sion, profit sharing, or stock bonus trusts. This rule is aimed at giving relief to stock brokerage firms which are barred from pledging regis. tcred securities they own as collatersifor loans from persons other than banks or brokers. The rule exempts from the adequate sccttrity requirement, a loan (or renewal) by a qualified' employee trust to an employer-creator who is prohibited by any U.S. law or applicable regs from directly or indirectly pledging as security for a loan from the trust, sny of his assets representing more than half of the value of all his assets. But this exemption from the adequate secu- rity requirement applies only if the following conditions are sstiatied: - . . The loan bears a reasonable rate of inter- est. - . . It is approved in writing as an inve~tment consistent with the' exempt purposes of the trust by a trustee independent of the employer. If the trust has more than one independent trustee a majority of them must give the re- quired approval. * . * immedistely after the loan' (or renewal) the amount loaned to the employer, without adequate' security (including loans exempt from that requirement), doesn't exceed 25% of all the assets of the trust.1 - I, Code Sec. 503(i); Regs. § 1.503(~ q 7977. Owner-employee i are pro- hibited from engaging in o;h'. actions. A qualified employee pension, p. ;tring or stock bonus trust that inelud :tner-eln~ ployces who control the trade or d;ess with respect to which the plan is c~;~-lished is barred from engaging .in a second `group of prohibited transactions in addition to the reg- ular prohibited transactions described at ~ 7972. Under this second group of prohibited trans- actions, the trust may hOt, directly or indirect- ly: - lend any psrt of its corpus or income to; * . - pay any compensation for personal serv- ices to; * . - make any psrt of its services available on a preferential basis to; - acquire any property from; or - . - sell any property to, Any of the following: W~-J5 Proltibited Transactions- (J 7978 - . - any person with whom a regular pro- hibited transaction would be barred (~j 797 1); * . . the owner-employee, his brothers, sisters, spouse~ investors, and lineal descendants; or - - . a corporation controlled by an owner~ employee through direct or indirect ownership of 50% or more of the combined voting power or of the total value of all the stock.' The prohibition against aequiiition of prop- erty by tile trust doesn't include money. But it bars contribution of any other property to the trust by tile employer.2 An owner-employee is either: - . - an employee who owns the entire inter- est in an unincorporated trade or business, or - - is a partner who owns more than a 10% interest in either capital or profits.3 One or more owner-employees control an unincorporated trade or business if they: * . own the entire interest in the business; or - . . own more than a 50% interest in either capital or profits of a partnership that owns the trade or business or of a partnership that directly or indirectly owns such a 50% interest in a partnership that owns the trade or busi- ness.4 1, Code Sec. 503(j). - - 2. Rces. § t.503(j)-t(b). 3. Code See. 401(c) (3). 4. Code See. 40t(d)(9) (15). ~ 7978. Bank deposits as prohibited loans. Savings accounts and ordinary checking ac- counts aren't loctns for purposes of the pro- hibited transactions provisions. This rule ap- plies to such deposits in national banks, state banks, savings and loan associations, and build- ing and loan associations whose deposits are insured by tile Federal Deposit insurance Corp., the Federal Savings and Loan Insurance Corp., or their state equivalents, it applies notwithstanding that the bsmsk reserves the right to require 30 days' notice prior to with- drawal.1 Savings accounts in such banks aren't pro- hibited loans notwithstsmsding that they exceed the amount of deposit insurance.2 But ordinary checking accounts to the extent of aimy excess over time itsamtrcd ntaxinmmtsn apparently may be treated as violating the prohibition against other transactions resulting in substantial diver- sion of income or corpus if left on deposit for longer than tile period required for reasonably prompt investment.3 A time deposit, nansely one made for a fixed period .of time, is considered to be a loan. But the ruling so holding doesn't indicate whether such a deposit would be considered to' be adequately secured to the extent insured by the Federal Deposit Insurance Corp or tise Fed- Reproduced by special permission of the copyright owners. 429 87-444 0-68-28 PAGENO="0432" ~l 7979-Prohibited Transactions 430 34 Am Jur 2d * eral Savings and Loan Insurance Corp., or their state equivalents.' 1. Rev. Rut. 62-183, CII 1962-2. 143; Rcy. Ru1. 59-29, Cli 1959-1, 123. 2. Rev. Rut. 62-183. CI) 1)62-2, 143. 3. Rcy. Rut. 59-29, CII 1959-1, 123. 4. Rev. Rut. 62-183, CD 1962-2, 143. ~ 7979. Penalties where exempt organiza. lion engages in prohibited transactions. An otherwise exempt organization that engages in a prohibited transaction won't be granted an exemption application and, if-it has previously been granted an exemption application, will have its exemption revoked. Revocation isn't autonsatic. It applies only * after notification by the Treasury and only for * taxable years after that its whictu the organiza- tion is notified. But the revocation may apply to any taxable year during or prior to which the organization commenced the prohibited transaction if it entered into tlte transaction: with the purpose of diverting corpus or income of the organization from its exempt ~urpoaea aitd the transaction involved a subatatitial part of the corpus or incotite of the orgatiizs- ti~fl.~ Engaging in a prohibited transaction also re- sults in disallowance of the cltseitable contri- butions deductions for income, gift, and estateS tax purposes to individuals, corporations, or estates or t,nts that make donations to the organizstio;~ hat engaged in the prohibited transaction. he date from which deduction is denied di is on whether or not tlte or- ganizat ion c: i into a prohibited transac- tion delibere: id whether or not tlte dottor was a party I . 1 transaction. If the prol~f ~d transaction was engaged in with the purpuse of divertitig corpus or income of the organization from its exempt purpose and tlse.transaction involves a substatitial part of the corpus or income, charitable cotttrtbu- tion deductiotis are denied for donations made: - . . I~. the organization's taxable year in which it commenced such prohibited transac- tion or thereafter, by a donor tv/to was a party to it. This iticludes an itidividual who wasn't a party himself if any metuber of isis family was. Fatuity includes brother, tistera, spouse, ancestors, and lineal deacetidants. - - . After the organization's taxable year in which it ettgaged in such prohibited transac- tion, by a doitor tv/to wasn't a party to it (and no member of whose fatnily (as defined above) was a party to it) - Apparently the year in which the organization engaged in such pro- hibited transactioti is that in which the diver- sion of the corpus or income becomes substan- tial. If the prohibited transaction wasn't engaged in for the purpose of, and didn't involve, di- version of a substantial part of the organiza- tion's corpus or income frotti its exetnpt pur- poses, charitable contribution deductions are denied only for donations made in the organ- ization's taxable years after list in which it is notified by the Treasury that its exemption has been revoked.2 Although a transaction - between an other- wise excnil)t organization arid one in a fidu- ciary relation to it may not in particular cir- cuntatancea constitute a prohibited transactiots, it may still result in loss of the organization's exemption if it violates any of the basic req- uisites for exemption. Thus the transaction may show that the orgatuization isn't in fact being operated for the requisite exempt pur- pose.5 ___________________ 1. Code Sec. 533(u); Roes. t.503(a)-1(b). 2. Code Soc. 503(e) sod (1); Regs. § 1.503(e)-i. 3. Regs. § 5.503(u)-1(a). 7990. Unreasonable Accumulations and Insproper Use or Investment of Income. Exemption is denied to certain organizations in the broad religious, charitable, educational, etc. category if they improperly accumulate, use, or invest their income. An exetupt organization that does this will lose its exemption, but may file a ncv- exemption application when the improper accumulation, `use, or investm: has been corrected. 41 7991. Organizationa affected. The Coic public safety, and prevention of cruelty to bars improper accumulation, use, or investment children or animals categories, stub/eel to fin- of an exempt organization's income. This ritle portant exceptions, listed at c 7902. applies to a smaller group of exempt organi- It doesn't apply to employees' supplemental zations than the prohibited transactions rule, unemployment benefit trusts or qualified em* The unreasonable accumulatiotus rule applies ployee pension, profit sharing or stock bonus only to organizatiotus in the rchiceious, chsrita* trusts (~i 7903); or to the group of exempt or* ble, educational, literary, seienti&, testing for ganizations listed itt ç 7904. Reproduced by special permission of the copyright owners, PAGENO="0433" FEDERAL TAXATION ~ 7992. Barred sceumsilations, uses, and investments of income. The rule against im- proper accumulation, USC or invcatmcnt of in- come is violated if the amounts accumulated out of income in or prior to the taxable year and not actually paid out by the end of year are either: * - * Unreasonable in amount or duration in order to carry out thc exempt purpose of the organization. This provision doesn't apply (a) to income attributable to `property of a decedent dying before `St transferred under his will to a trust created by it and (b) to in- come accumulated after the end of 21 years following the death of the last life in being designated in a trust crested by thc will of a decedent dying after `50 if income stsust be ac- cumulated by the terms of the will creating the trust. - . * Used to a substantial degree for non- exempt purposes. * .. - Invested in a manner that jeopardizes the tax exempt purposes of the organization.t The following aren't income for purposes of the improper accumulations rule: - - - Contributions received by the exempt or- ganization.2 - - - Gain on sale or exchange of donated assets to, the extent of the excess of the fair ______________________ market value of the assets when donated over their substituted basis to the orgsnization. This gain doesn't have to be paid out.3 1. Code See. 5041,); Rcgs. § t.504-t(1)(t). 2. Roe. Rut. 51-535, CII 1958-2, 270. 3. Regs. 5 t.504-l(c)(1). q 7993. Unreasonable accumulation of in- come. The principal prohibition of the rule against improper accumulation, use, or invest- ment of incons~ bars accumulations of income that are unreasonable in amount or duration in order to carry out the purpsses or functions constituting the basis for the organization's ex- emption.1 The mere fact that an exempt or- ~anizstion may accumulate income won't bar its exemption. There must be an uhreasonable accumulation.2 Accumulations of income were held to be unreasonable where they were excessive in rela- tion to current expenditures and weren't other- wise justified by any specific prograns.3 But the following have been held not to be unreasonable income accumulations: - - - Temporary accumulation of any gain on sale or exchange of income producing invest- ment property, but only if such gains are rein- vested within a reasonable time in other in- come producing investment propert~'.4 * * .Accurnulations to restore capital distrib-. uted in prior years.0 Reproduced by special permission of the copyright owners. 431 W-17 Unreasonable Accttmulations- ~ 7994 - - - Accumulations held as a reserve for a specific aisd u,tco,tditional charitsble grant to be paid thler a fixed period, or over the period necessary to accomplish the specific purpose of the grant, extending beyond the year of the commitment to make the grant. Apparently any undistributed balance of the reserve would be treated as distributable income for the year in which the commitment was otherwise satisfied or released.0 - - - Accumulations to build a reserve fund for an employee pension plan.7 - - - Accumulations to pay off debt on corpus of an otherwise bons fide exempt organiza- tion.° - - - Accumulations over a period of aix or seven years to build up (through income plus additional contributions) a fund to be donated to Brandeis University for construction of a medical research center.0 ,/ recommendation: To protect deduction for charitable contributions to private foundations don't contribute more property than the foun- dation needs to meet the income requirements of its existing charitable program. The founda- tion, of course, can always prevent accumula- tions of excess income by contributing it to other exempt organizations. I. Code 5cc. 504(u)(i). 2. John Dane Charitable Trust, 32 T.C. 469, alt'd on other issues 2(4 F. (2d) 726. 3. Stcvcne Bros. Foundation, inc., 39 T.C. 93, alt'd 324 F. (24) 633, errs, den. 376 U.s. 969. rch. dust. 377 U.s. 920; Eric Endowment U.S., 316 F. (24) 151; Daororth Founds- sion v. U.S.. 222 F. Supp. 761. slid 347 F. (2d) 673. 4. Regs. § 1.304-t(c) (2). 5. Rev. Rot. 74.t37 CII 1934.1, 209; Rev. Rot. 74.227. Cii i954~t, 291. 6. Rev. Rot. 53-674, CII 1955.2, 264. 7. Truscoti v. us:, D.C. Pa., 4/1/50. 8. Tell Foundation v. \`/ood, D.C. Ariz., 11126/57; Randotl Foundation v. Riddc5, 244 F. (2d) 003. 9. Samuel Fricdtand Foundation v. U.S.. 144 F. Supp. 74. ~ 7994. Substantial nonexempt use of in- come. One of the prohibitions oi the rule against improper accumulation, use, or invest- ment of income bars use of income to a sub- stantial degree for purposes or functions ostaer than those constituting the basis for the organ- ization's exemption.' It has been held that use of income to pay indebtedness wasn't an improper use, where: - - - The indebtedness paid was incurred in acquiring income producing. property, the in- come from which was used to make the debt payments.2 - - * The indebtedness paid was secured by mortgages on income producing property that the organization received as a gift subject to such mortgage debt.a PAGENO="0434" I. Code Sec. 504(a) (2). * 2. ShitTm,n, 32 T.C. 1073(A). 3. Tett Foundation v. Wood, D.C. Ado., 11/26/57. ~ 7995. Investment of income jeopardiz- ing exempt purpose. Part of thc rule against improper accumulation, use, or investment of income bars int'cstincnt of accttintdritcd income in such a manner as to jeopardize the carrying out of the purpose or function constituting the basis for exemption of the organizstion.1 The test under this rule has been held to be whether whatever loss is lik~ly to occur would imperil the capability of the organization to carry out its charitable purposes. Ii was held that: * . .. Investments which would have no sub. stantisl adverse effect on the organization's continued operation even if totally lost could bedisregarded. * . . A very substantial stock investment made with borrowed funds wasn't objectionable, even though a 15% decline in the price of the stock would have wiped out the foundation, where the investment was made on the recoin- mendation of the grantor and principal stock. holder of the corporation who had inside knowledge of its atfairs and unquestioned in. vestment acumen.. q 8001. Organizations taxed on unrelated business income. The Code imposes income tax on the `unrelated business taxable in- come" of exempt organizations1 without otherwise affecting their tax exempt status.2 The tax applies only to unrelated business taxable income over $1,000.0 The cxcinpt organizations that are never- theless taxable on their unrelated business taxable income are listed at ¶ 7905. 1. Code See. 511. 2. Code See. 501(b). 3. Code See. 512(b) (12). q 8002. Unrelated trade or business of a trust. In the case of trusts, unreli~ted trade or business means any trade or business regu- larly carried on by the trust or by a partner. ship of which it is a member. This rule ap- plies to: W-18 34 Am Jur 2d - Investment in amply secured second and third'. mortgages subject only to limited amounts of prior mortgages in relation to the value of the property.2 1.1 Code See. 504(a)(3). 2. Samuel Friedtand Foundation v. U.S., 144 F. Supp. 74. ~ 7996. Penalty for improper accumula- 11018, usc or investment of incdme. An exempt organization that improperly accumulates, uses, or invests its income in violation of the rule against unreasonable accumulations is denied exemption for the tasoble year in which the Improper accumulation, Use, or itsveattnent occurs.' An organization that has lost Its cx- ensption under this provision may file a new application for exemption showing that the cause for the loss of the exemption no longer exists.2 But a contributor to an otherwise exempt organization isn't denied a charitable contri- bution's deduction for a donation made in the year in which the organization lost its exemp- tion solely for violation of tlte unreasonable income accumulation rule.8 1. Code Sec. 504(a). 2. Regs. (1.504.1(e). 3. Rees. § 1.504-1(1). - Exempt employees' supplemental unem- ployment compensation benefits trusts. - - - Exempt qualified employee pension, profit.aharing, and stock bonus plan trusts. - - - Non.exempt trusts.1 Under the forenoing rule, the following have been held to ~e taxable unrelated trades or businesses of trusts: - . - Leasing of railroad tank cars for a term of years with renewal option, by an exempt employee trust.2 - - - Leasing of tire manufacturing machinery by an exempt employee trust to the employer tire manufacturer.3 ,,/ observation: Noncs~empt trusts are tax* able under the general rules for taxation of estates and trusts. Those rules allow a de- duction for charitable contributions made by the trust. A limitation on that deduction bsra 432 ~1 7995-Unreasonahle Accumulations ç 8000. Unrelated Business Income. Virtually all exempt organizations, other than churches and certain other religious organizations, are taxable on their. unrelated business income over $1000. In general, the tax applies to a trade or business that isn't sub- stantially related to the organization's exempt purpose. Special rules apply to trusts that qualify as exempt organizations. Unrelated business incotne includes so-called "business lease" income. Reproduced by special permissior. of the copyright owners, PAGENO="0435" FEDERAL TAXATION any deduction allocable to income of the trust that would be unrclstcd business taxable in- come if thc trust were tax exempt.4 For tax- ation of non.cxempt trusts, see ¶ 1700 et seq. 1. Code Sec. 513(b). 2. Rev. Rut. 60.206. cii 960.1. 201. 3. Cooper Tire & Rubber Co. Emptoyces Retire. meni Fund v. Corn., 306 F. (2d) 20, utt'g 36 T.C. 96. 4. Code Sec. 681(a). q 8003. Unrelated trade or business of cxcmpt oresnizations other than trusts. In the case of all exempt organizations other than trusts a trade or business is unrelated only if it isn't substantially related (aside from the need of funds) to the exercise or performance of the purpose or function that is the basis of the organization's exenoption.' The Code expressly excludes from classifies. tion as an unrelated trade or business any trade or business: in which substantially all the work is per. formed for the organization without compen. sation;2 or which is carried on by an organization in the rehi~ious, charitable, educational, etc., cate. gory primarily for the convenience of its mem- bers, students, patients, officers, or employees;8 or which is the selling of merchandise sub. stantishly all of which has been icceived by the organization as gifts or contributions.4 The foregoing rules don't apply to trusts.6 I. Code Sec. 513(a); Regs. §1.513-I(s). 2. Code Soc. )13(a)(t); Rein. §1.513.1(b); Rev. Rot. 56-152, CD 1936.1. 56. 3. Code Sec. 513(s) (2); Itein. 1.513-1(b); Rev. Rut. 55-676. CD 1955.2. 266. 4. Code See. 513(u) (3); Reg,. 9 1.513.1(b). * 5. Cooper Tire & Robber Co. Ernptoyces Retire- ment Fund v. Corn., 306 F. (2d) 25, att'g 36 T.C. 96. q 8004. When is a trade or businesas sub- stantially related to exempt purpose. A trade or business is substantially related to an organ- ization's exempt purposes, and its income, therefore, isn't taxable, if the principal purpose of the trade or business is to further (other than through production of income) the organ. ization's exempt purpose. This ususlly requires a comparison of the nature and size of the trade or business with the nature and extent of the exempt activities.0 The following have- been held to be taxable unrelated trades or business; Photography and clectro-encephslogrsphy work performed by an exempt- medical and scientific research foundation, The work was performed at rates comparable to those charged by commercial enterprises and accounted for 75% of the foundation's gross receipts.2 Radio station operated by an exempt uni- *versity which carried its educational programs W.-:j9 Unrelated Business Income- t~ 8004 but was, largely operated as a commercial station.3 Cinder block plant originally acquired by an cxemflt university to supply its own con- struction needs and thereafter chiefly supplying the general public.4 Manufacturing business operated by an exempt college in which the students as part of their educational program perform clerical or bookkeeping functions.° Building and selling houscs where 9fl exempt foundation buIlt atid.sold 80 hous~~ Itt 18 months to raise revenue for a church.° Buying supplies for resale to members by an exempt agricultural organization crested for the purpose of improvement and advancement of agriculture.7 Farms and orchards operated by a char. itable trust.8 Bingo games, open to the public, run semi-weekly by an exempt labor organization.9 Restaurant, bar, and cocktail lounge which accounted for more than 50% of the income of an exempt horse-breeding orgsnizs- tiott.'° - . - Insurance promotion and property man- agement done for remuneration by an exempt agricultural organization.'1 Accounting and tax services performed for fees by an exempt labor organization for some of its members.'2 Management, for a fee, of health and wel- fare programs Tor employees of its members by an exempt business league.13 Sale of "call" options on stock invest- ments owned by an exempt organization.'4 But the following have been held to be non- taxable related trades or businesses. - Laundry operated by a university pri. manly for students and faculty though also open to the public.'5 - Renting farms and orchards to tenants by a charitable trust.'° Sale of articles made by handicapped per. sons as part of their rehabilitation trstnin? by an exempt organization engaged in rehabilita. tion of the handicapped.17 - . . Championship tournaments, grants of radio and television broadcasting rights, and sale of booklets on rules of the game by a national sports organization exempt as a busi- ness league. The income from radio and tele- vision rights was relatively insignificant.18 "Bowl" football game arranged annually by an exempt community organization.'9 - . . Lease of a building to a clinic by a foun- dation, organized in part for medical pur- poses.20 Reproduced by special permission of the copyright owners. 433 PAGENO="0436" 434 W-.20 005-Unrelated Business Income 1. Rcgs. §1.5l3-1(a)(4). 2. Rev. Rut. 57-313, CII 1957-2. 316~ 3. Regs. 8 1,513-1(a)(4). 4. Rcv. Rut. 55.676, CII 1955-2, 266. 5. Rem. § 1.513-1(5)64). 6. Rev. Rut. 55-449, Ca 1955-2, 599. 7. Rev. Rut. 57.466, CII 1957-2. 311. 8. Rev. Rut. 50-152, CII 1959-2, 273. 9. Rev. Rut. 59-330, Cit 1959-2, 153. 10. Rev. Rut. 6000, CII 19(0-1. 497. 11. Rev. Rut. 60-228, Ct) 960-I. 200. 12. Rev. Rut. 62.191, CD 1962-2. 146. 13. Rev. Rut. 66.151, 11913 1966.22. 20. 14. Rev. Rut. 66.47, 11613 1966-9, 10. 15. Rev. Rut. 55-676, CII 1955-2. 266. 16. Rev. Rut. 58-482, CB 1950-2,273. 17. Regs. 1.513-1(a) (4). 18. Rev. Rut. 56.502. CD 195t.2c 271. 19. Mobile Arts and Sports Asu'u v. U.S., 148 F. Supp. 311. 20. Huron Clinic Foundation v. U.S.. 212 F. Supp.. mmd on stIlt. 324 U.S. 43. q 8005. Unrelated business taxable income. Excludes inCOmC of tr..c.2 or sr..:;:.~e s;ot regularly carried ots. Tue `ur.tei~1C~ budness taxable. inCOme" of or. otherwise exempt or- ganizatiôn is comparable to the "taxable in- come" of a fully taxable organization.' Start- ing with the gross ineonse and deductions of the unrelated trade or business, the computa- tion of unrelated business taxable income is the aatne as the computation of taxable income subject to the additional exceptions, additions, and limitations heresfter explained. In the case of a foreign exempt orgatsization only in~ come (and related deductions) from U. S. sources is included in the computation.2 One of the principal exceptions `is that ootly the gross income and deduclions of an unre- lated trade or business regtdarly carried on by the exempt organization are included in comrn puting its unrelated business taxable income.3 A trade or business activity is reaularly car- tied on if it is conducted with suthcient con- sistency to indicate a continuing purpose to derive some of the organization's income from that activity even though- infrequent or sea- sonal.4 Casual sales of real property were held not to amount to a trade or business regularly carried on.° 1. Code Sec. Sit. 2. Code Sec. 512(a). 2. Code Sec. 512(a). 4. Regs. S 1.513.1(a)(3). 5. Marion Fuur.dation. T.C. Mcmo. 1960-18. q 8006. Research income excluded from unrelated business taxable income. Income from. research activities and directly connected deductions are excluded from unrelated busi- ness taxable income in the following cases: Income derived by a college, university, or hospital from research performed by any person.' ,. .. - Income derived from research performed for any person by an organization primarily carrying on fundamental research the results of which are freely available to the general pub- 34AmJur2d ~~~1~~~~~~~ lie.2 Fundamental research doesn't include rc~ search carried on for the primary purpose of commercial or industrial application.3 income derived by any exempt brganiza- tion from research performed for the U. S. or state or local governments.4 The regs state that excludable research docsn~t include activities incident to commer- cial or industrial operationa, such as ordinary inspection or testing of materials or products or the designing or construction of buildings, equipment, etc.13 - I. Code Sec. 512(b) (6). 2. Code Sec. 512(b) (9). 3. Rem. 1.512(b)-i(O(4). 4, Coils Sec. 512(h)(7). 5, Rem. §i.512(b).1(f)(4). 0207. ricor.te for labor or agricultural cigar.:2r.1iOr.'s retirement bonse or hospital. In the case of an exempt labor, agricultural or horticultural organization all income used to establish, maintain, or operate a retirement home, hospital or similar facility is excluded from unrelated business taxable income pro- vided all of the following requirements are met: The facility is for the exclusive use and benefit of the members of the exempt organ- ization. The income is derived from agricultural pursuits conducted on grounds contiguous to the facility. - Such income doesn'Lprovide more than 75% of the cost of maintaining and operating the facility. All deductions directly connected with such income must be excluded.1 1. Code Sec. $12(b)(t4). ~ 8008. Other income items excluded from unrelated business taxable income. The following items of income and all deductions directly connected with such income are ex- cluded in computing unrelated business tax- able income: - . . Dividends, interest, and annuities.1 This includes ordinary diatributions by real estate investment trusts.2 Capital gain distri- butions apparently alto would be excluded from unrelated business taxable inconse under the rule excluding gains and losses from sales or exchanges. - - Royalties (including overriding royal- ties) whether based on production or on gross or taxable income from the property.3 Rents from real'property (including per- sonal property leased with it) other than busi. ness lease rents a,td deductions.4 The Treasury holds that whether an item of income falls within one of the excluded Reproduced by special permission of the copyright owners. PAGENO="0437" 435 FEDERAL TAXATiON categories is to be determined from all the facts and circumstances of each case. Thus it will disallow exclusion of rents or royal- ties if it finds that they are in fact: * * . ~ return of profits by a person operating the property for the benefit of the exempt organization or * . . a share of profits retained by the exempt organization as a partner or joint venturer.6 But the Treasury's attempts `to bar exclu- sion of mineral royalties received by exempt organizations on the theory that, under the particular facts, they weren't really royalties haven't been sustained by the courts.° 1, Cods Ire. 512(b)(t). 2. l0c~. lOut. 66-tie, tiOll t966-t8, 15. 3. Codc Sec. 552(b)(2). 4. Codc Sec. 5t2(b)(3) and (4). 5. Regs. § t.5t2(b)-t; Rev. Rut. 54425, Ca 1954-2. 128. 6. U.S. v. Robert A. welch Foundation, 334 F. (2d) 774. att'g 228 F. Supp. 88t; Amon 0. Caner Foundation v. U.S., D.C. Tcx., 1/31/58. ~ 8009. Gains and losses front certain sales and exchanges are excluded. Unrelated business taxable income doesn't include gains or losses from sale, exchange or other dispo- sition of property oilier than: stock in trade, inventories, or property held primarily for sole to customers in the ordinary course of business. timber cutting treated as a Code Sec. 631 sale ot' exchange.' But unrelated business taxable income in- chides recapturable depreciation gain realized on sale or exchange of depreciable property. The regs so provide with respect to Sec. 1245 personal property and apparently the same rule applies_to Sec. 1250 real property.2 5. Code Scc.,5t2(b)(5). 2. Code Sec. 1250; Rees. § t.t245-6(b). q 8010. Deductions allowed in cotssputing - unrelated business taxable income. In com- puting unrelated business taxable income, all the same deductions as apply to the computa- tion of taxable income are allowed' subject to the following special rules: A $1,000 specific deduction is allowed.2 - . . The net operating loss deduction is cons- puted by taking imp account only those items included in the computation of unrelated busi- ness taxable income. Thus an unrelated trade or business operating loss isn't diminished by dividend income. Only years in which the exempt organization is subject to tax on unrc- lated business taxable income are included in computing an unrelated trade or business oper. atin~ loss. But all years are counted in deter- mining the span of years for which the loss may be carried back or forward.3 Unrelated Business Income- ~8012 The charitable contribution deduction limitation is 5% of unrelated business taxable income (before the charitable contribution de- duction) for those exempt organizations taxed at corporate rates and 20-30% for those exempt trusts taxed at individual rates.4 Bad debt.deduction may be tiiken as spe- cific deductions or under the reserve method subject to the ssnse rules as apply to other tax- payers. The exempt organization may choose either method in its first return of unrelated taxable income but only if it hasn't already selected a method in a prior year in which it mode a return of inconse subject to tax. In that event, it can't chsngc its niciltod without the Consmiasloner's priot consent8 5. Code Sec. Sit. 2. Code See. 5t2(b)(t2). 3. Cods Sec. 5t2(b)(6); Rees. § t.512(b)-t(e). 4. Code Sec. 5t2(b)(tO) and (it); Regs. §1.512 (b)-t(g). 5. Regs. §1.511-3(e). ~ 8011. Partnership unrelated trade or business taxable income. If an exempt organi- zation is a member of a partnership that carries on an unrelated trade or business, the exempt organization's share of the partnership incotne and deductions is included in the computation of its unrelated business taxable income, sub- ject to all the exceptions, additions, and limita- tions applicable to that computation. The part. nership items inclucd in the computation of the exempt organization's unrelated business tax' able income are those for the partnership tax- able year ending with or within the organiza' tion's taxable year.' A special rule applies to certain trusts cre- ated by the will of an individusl who died after Aug. 16, `54, and before `57 where by virtue of the provisions of the will the trust is a member of a limited partnership. Under this rule, the trust excludes its share of the partner- ship's income from an unrelated trade of busi- esess, but only to the extent thst partnership income is actually distributed.2 1. Code Soc. 5t2(c). - 2. Code Sec. 5t2(b)(t3). ~ 8012. "Business lease" income and de- ductioiss are included in unrelated business tax- able inconse. Business lease rents and deduc- tions are included in the computation of unre- lated business taxable income.1 A "business lease" is a lease of real property for a term of more than 5 years, by a tax cx- enspt organization or by ~ partnership of which the exempt organization it a member. The lease is a business lease only if at ~he end of the lessor's taxable year there is business lease indebtedness with respect to the leased prop- erty.2 Real property includes personal prop- Reproduced by special permission of the copyright owners. PAGENO="0438" d18013-Uns-clatcd Business Income crty leased under or in connection with the lease of real property.3 Distributions received on shares of a quali- fied Code Sec. 856 real estate investment trust aren't treated as lease income even though the real estate investment trust derives its income from rents received from nsortgaged real estate. The distributions are treated as corporate dis. tributions which are excluded from unrelsted business taxable income.4 Business lease deductions include: * . Taxes and other expenses with respect to the leased real property. * . - Interest on the business lease indebted- ness. Depreciation on the leased property.5 In general. only that percentage of the rents and deductions alloctible to the business lease indebtedness is included in computing unre- lated business taxable income. Thin is the same percentage (not over 100%) as the business lease indebtedness is of the adjusted basis of the leased premises, at the close of the taxable year.° Theadjuated basis of the leased premises is determined under the rules applicable to tax- pa~'era generally forthe entire period since ac- quisition of the property by the exempt organi- zation. Thus depreciation must be deducted for all taxable years whether or not the organi- zation was exempt in any year. And the entire amount of depreciation must be deducted from basis notwithstanding thst only a portion of the depreciation is taken into account in com- puting unrelated business taxable income.7 The Treasury regs contain examples illus- trating the computation of business lease in- come.° _______________________ 1. Code Secs. 512(b)(4) and 514(a). 2. Code Sec. 514(b)(i). 3. Code Sec. 514(d). 4. Rev. Rut. 66.106. 11013 1966.18, 12. S. Code Sec. 514(a) (3). 6. Code Sec. 514(a). 7. Rcgs. § 1.514(a)-i(s) (2). 8. Regs. §1.514(a)-1(b). q 8013. Leases related to exempt purpose aren't buainess leases. The following aren't "business leases": - - . Lease entered into primarily for purposes substantially related (apart from need for funds) to the purpose constituting the baais * for the organization's ex~smption. * . - Lease of premises in a building primarily designed for occupancy, and occupied, by the exempt organization.1 A lease, under ordinary commercial arrange- ments, by an exempt foundation of a school building to an exempt educational institution was held not to be for a purpose subatantially related to the foundation's exempt purposes notwithstanding that the foundation was or- 34AmJur2d ganized in part for educational purposes.2 But lease of a building by a foundstion, organized in part for medical purposes, to a clinic waa held not to be a business lease by a district court which found the lease to be within the ambit of the foundation's exempt purpose. This decision was later reversed on stipulation without consideration of its nscrita.3 1. Code Scc. 514(b) (3). 2. Rev. Rut. 53.547, C5 1958.2, 275. 3. Huron Chute Foundation v. U.S.. 212 F. Supp. 847. rand on slip. 324 F. (24) 43. c~ 8014. When is term of leans over 5 yeara. Only a lease for a term of more than 5 years is a business lease. The term of a lease includes:1 - - - Any period for which a renewal or exten- sion option may be exercised. This includes a renewal option in a separate agreetnent.2 * . - The period of the prior lease, in the case of a lease made by exercise of a renewal or extension option. If real property is acquired by the exempt organization subject to a lease, the term is deemed to begin on the date of acquisition. Even though there is no over-5 year lease or any lease at all, real property will be deemed to be occupied under a lease for a term of more than 5 years beginning with the 6th year of continuous occupancy by the aame tenant. Suc- cessive tenants are considered to be the same tenant where they are so related that losses on sales or exchanges between them would be dis- allowed under thq Code provision barring rec- ognition of losses in transactions between re- lated taxpayers.3 ,/ observation: The mere fact that the lease term isn't over 5 years doesn't necessarily mean that rents received by the tax exempt organization aren't taxable. The rents may be taxed under the general definitions of unre- lated businesa taxable income unless they fall within the Code Sec. 512(b) (3) exclusion for rents from real property. The Treasury may attempt to tax such rents if it determines that they are really profits rather than rents, as noted at ¶ 8008. 1. Code Sec. 514(b). 2. Chamber of Comnscrcc of 10ansas City, I(ans.. 35 T.C. 562. 3. Code Sec. 514(b)(2). q 8015. Property only partly leased for over 5 years. If real property is partly leased for a term of over 5 years and partly for 5 years or less, the over.5 year leases will be considered business leases during the taxable year only if one of the following requisites is satiafied: - . - The over-5 year leases account for 50% or more of the rents for the year. 436 W-22 Reproduced by special permisSior of the copyright owners. PAGENO="0439" 437 FEDERAL TAXATION Unrc~atcd Business Income- qsoi~ The over-5 year leases account `for 50% crty acquired on liquidation of a corpora- or mote of the total rented area at any time tion.~ But the Treasury holds that property during the year. received ~,t a corporate liquidation ia `ac- * . Any tenant (or group of tenants that are quired" within the meaning of the business members of the same consolidated return sf01- lease indebtedness provision.3 iatcd group or partnership) under an over-5 If only part of the real property is subject year lease accounts for more than 10% of the to a business lease, only part of the indebted- rents for the year. ness with respect to the property is business Any tenant (or group of tenants that are lease indebtedness. This is determined by members of the sante consolidated return aflil- making a proper allocation.4 iatcd grouj~ or partnership) under an ovcr-5 Special rules apply in the following cases: year lease accounts for more than 10% of the - . . Property subject to indebtedness acquired total rented area at any time during the year. by gift, bequest or devise before July 1, `50.' Over-5 years continuous occupsncy by the . . . Property subject to a lease requiring im- santa tenant is treated so an ovcr~5 year lease pt'ovcnscnla, acquired by gift, bequest, or under the two 10% rules above, but not under devise before July 1, `5Q,0 the two 50% rules. . . . Certain Code Sec. 501 (c) (2) title hold- Under the 50% rues only, the unexpired ing corporations.7 portion of a lease on the date that a new lease . Certain Code Sec. 401 (a) qualified pen. is made isn't tacked on to the second lease in sion, profit-sharing, and stock bonus trusts.° deterndning whether the term of the second lease is over 5 years. But this rule applies only . . - Code Sec. 501 (c) (17) employees supple. if the second lease takes effect after the end mental unentployment contpenastion trusts.9 of the first lease and is made during the last 1. Code Scc. 314(c)(t) and (2). half of the term of the first lease.1 2. Brodcrick v. U.S., D.C. Wash 6/19/64 _________________________ 3. Rev. Rut. 66-107. ITUI 1966-18: 13. 4. Code Scc. 514(c)(6). I. Code Sec. 514(b)(3)(B). 5. Code Sec. 514(c) (2). 6. Code Sec. 514(c)(3). 7. Code See. 514(c)(4) and (5); Regs. § 1.514 (c)-1(i). q 8016. Business lease indebtedness. Busi- Code S-cc. 5t4(c)(5) and (7). ness lease indebtedttess is the unpaid amount 9: Code Sec. 514(c)(8). of indebtedness with repect to real property - leased for a ternt of over 5 years.' It includes ~ 8017. Tax on unrelated business tax~ indebtedness: able income. The tax on unrelated business * . * Incurred by the lessor in acquiring the taxable inconse is contputed at the corporate property. income tax rates as if the exempt organization's Subject to which the property was ~ "unrelated business taxable income" is its "tax. guircd (whether the acquisition was by gifts, able income." But if, except for its exempt devise, or purchase). status, the organization would be taxable as an estate or trust, its tax on unrelated business * . . Incurred by the lessor in improving the taxable income is comnuted at the income tax property. rates applicable to individusls.~ * . * Incurred bc/ore acquisition or improve. In computing the limitation on the credit for ment of the property if it wouldn't have been taxes of foreign countries arid U. S. possessions, incurred but for such acquisition or improve, the exempt organization's "unrelated business ment. . taxable income" is used- instead of "taxable * . * Incurred a/tat acquisition or improve. income."3 ment of the property if it wouldn't have been ,/ obscrvaflon: The investment credit allowed incurred but fdr such acquisition or intprove- by Code Sec. 38 apparently also is allowed ment and its incurrcnce was reasonably fore. since that credit applies to the tax imposed by seeable at the time of the acquisition or im- Chapter I of the Code, and Code Sec. 511 provement.' which imposes the tax on unrelated business Whether indebtedness subject to which taxable income is part of that chapter. property is acquired on liquidation of a cor- I. Code See. Stt(a(51). poratton in which the exempt organization 2. Code Sec. 311(b). neld stock is business lease indebtedness 3. Code 5~e. 313. isn't settled. A district. court held that it isn't basing its decision on the ground that ç indebtedness subject to which property is ac- Form 8018. Returns and payment of tax. 990-T is used to report and pay tax on auired is business lease indebtedness only if unrelated business taxable income. The same the property was acquired by gi/t, devise, or form is used whether the tax is computed at purchase and that none of these includes prop- corporate or individual income tax rates.' Reproduced by special permission of the copyright owners. PAGENO="0440" 438 qsOsO-Forcign Inconse and Foreign Taxpayers 34 ~ returns are due and the tax due must be year org~tnizations). Alwaya consult the latest paid at the same time that corpdrate returns official instructions to Form 990*T, obtainable and income tax payments are due where the from your local district director. unrelated business inconse is taxable at the cor- The rules on assessment, collection, and porate rates (Mar. 15 for calendar year orpni- penalti~ applicable to ordinary income tax zationa) and at the same time that individual also apply to the tax on unrelated business in. returns and income tax payments arc due come.~ ___________________ where the unrelated business income ia taxable ~. ~ 51.60122(c) and 5 i.6012-3(a)(5). at the individual rates (Apr. 15 for calendar 2. Regs. 51.511-3(a). Reproduced by special permission of the copyright owners. PAGENO="0441" 439 TREASURY PROPOSALS ON~RIVATE FOUkTIONS A summary of the Treasury Proposals regarding changed in the law on private foundations from a report prepared by the Senate~ Finance Committee, dated February 2, 1965. I. There should be a general prohibition on self.- dealing more stringent than. the present Section 503. which would be expanded to include officers as well as donors and other related parties. This prohibition would be subject to the following exceptions: (a) A foundation may purchase mci.- dental supolies from such parties (b) Related parties may buy at fair market value assets from the found at ion in forced sales. (c) Related parties may make interest-. free loans where such loan is to be used for a bonafide charitable purpose. II. Private non-operating foundations should be required to distribute all of their current net income on a reasonably current basis. The purposes for which income would have to be expended are: (a) To publicly supported charities. (b) To privately supported operating organ-. izat ions. (c) On direct expenditures for charitable programs conducted by the foundation. PAGENO="0442" 440 AA.~-2 (ci) For the purchase o:C assets which the foundation uses as part of its program of charitable activities0 "Income" would include short-.term capital gains Current operating expenses would be treated as current expenditures for charitable purposes. Otherwise, net ordinary income is defined as total income (less capital gains), less expenses incurred in earning such income0 The income would have to be expended wIthin one year after the year of receipt. This would be subject to two exceptions (1) Funds could be accumulated for a definite charitable purpose, and (2) Funds could be accumulated to make up for past expenditures in excess of income. INCOIVE EQUIVALENT Because foundation ownership of growth assets or unproductive property may result in little "income" within the scope of this rule, the Secre~ tary of the Treasury should have regulatory authority to set a percentage rate called an "income equivalent", which will be charged on a foundation's assets and which would become a floor for distributable income under this rule. This would be figured at the fair market value of the foundation's investment assets~ III, A foundation should not own over 20 percent of the voting stock or equity of a corporation engaged in an unrelated business. Stock held "for the benefit of" a foundation should be attributed to it but that owned by officers, donors, etc., for their own benefit should not.= IV. Because a gift to a foundation of stock in a family business lacks a true element of finality, it would not be counted as a deductible contribution until: (a) The stock .was sold by the foundation. PAGENO="0443" 441 (b) The property was directly applied to charitable uses, (c) Donor control of the business ceases. These three occurrences are called "qual.- ifying actions". Until one of these qualfying actions occurs there would be (a) No charitable deduction, (b) No recognition of a gift. (C) Property would be included in the `s gross estate. V. RestrJ~ct1ons should be placed on financial transactions unrelated. to .tI~e foundation's char.- itable functions. k.., Borrowj~g All borrowing for investment purposes would be prohibited, ~. Loans Loans of private foundations should be limited to categories which are clearly necessary, safe and appropriate for charitable fiduciaries. C. Trading and Syeculatlon All trading and speculating, either with corpus or income, should be prohibited, vi, After the first 25 years, donor related parties should make up no more than 25 percent of the managing board of the foundation. ADDITIONAL PROPOSALS A. No deduction (or recognition of contribution) for unproductive property will be recognized until that property is (a~ made productive; (b) disposed of; (c) applied to charitable uses. B. Any contribution will be diminished by the amount of ordinary income wMch the donor would PAGENO="0444" 442 have received had he sold It0 This would include particularly Section 306 stock, collapsible corp-.~ oration stock or Inventory0 C. The marital estate tax deduction would be ZIg- ured without reference to amounts contributed to charity by will, etc0 D. There should be workable sanctions Lor Cailure to Lile annual returns0 Specifically, there should be a Line oL ~l0~00 a day, up to ~5,000~00, levied upon both the foundation and the officer responsible~ PAGENO="0445" 443 BB-1 JUB.6Z2 CrATE OF CALIFORNIA OFFICE OF THE ArrORNEY GENERAL. REGISTRAR OF CHARITABLE TRYSTS * RooM 300. 923 12TH STREET SACRAMENTO. CALIFORNIA 95814 PERIODIC REPORT OF CHARITABLE TRUST 1. Name Address City 2. Covering period of , 19___ to , 19_. 3. Financial Statement (Please refer to other side for instructions before preparation.) 4. Income: 5. Expenditures: 6. Name, address ~nd amount of benefits to rccipknts under Charitable Trust. PAGENO="0446" 444 BB-2 7. If during the period of this report there have been any chan~ds in the provisions of the Trust, psease explain. Attach list of present officers and directors with addresses. b.,~ladg. ..d b,fla1 I. . tfl., tad ~p!.t,t,patt. Date .~:;;;;- Data Trance P.te Registrar', Use Only Audit by: INSTRUCTIONS FOR PREPARING AND FILING PERIODIC REPORT OF CHARITABLE TRUST WHO MUST FILE Pursuant to Sec. 12586 of the Gov. Code and Sec. 301 of the Calif. Adm. Code, Title 11, every Trustee except those exempt under Secs. 12583 and 12586 of the Gov. Code must file with the Attorney General a periodic written report under oath or by declaration under penalty of perjury. WHEN TO FILE The first periodic report shall be filed as required by paragraph (d) of Section 12586 of the Gov- ernment Code Subsequent reports should be filcd on an annual basis not later than four niontha and fifteen days following the close of each calendar or fiscal year period. ALTERNATIVE METHOD OF FILING Section 12586, paragraph (a) of the Government Code and Section 303-b of the California Admin- istrative Code, Title 11, provide for an alternative method of filing report. CONTENTS OF REPORTS-Sections 3, Financial Statement; 4, Income; and 5, Expenditures Detailed statements of financial condition and operations are required which will result in a corn- * disclosure of the activities of tlse organization during the reporting period. PAGENO="0447" 445 BB-3 (a) A balance sheet including all assets, liabilities and a statement of the net worth at the end of the reporting period. Securities in an investment ,portfolio with a total market valuation in excess of $100,000 shall be scheduled on a form provided by the Attorney General. (b) A statement of all receipts or income during the period classified as business income, interest, dividends, rent, gain or loss from sale of assets, contributions, gifts or grants received, giving amount and source. (c) A statement of all disbursements and operating expenses during the period classified as salaries and wages, interest, taxes, rent, depreciation, contributions, and miscellaneous. (d) A statement of the purposes for which the distributions, donations or payments have been made giving the name, address and amount disbursed to each recipient of benefits under the Charitable Trust. Other pertinent information concerning the Trust and its administration. When requested by the Attorney General any periodic report shall be supplemented to include such additional information as the AttorneyGeneral deems necessary to enable him to ascertain whether the corporation, trust or other relationship is properly administered. MODIFICATION IN TRUST STRUCTURE (Item 7) Please submit a detailed report of any chang~s in trust indenture or any change of Trustee. In the case of a corporation formed for the administration of a charitable purpose, please submit any amendments to the Articles of Incorporation or changes in By-Laws; and any changes in officers or directors of the corporation. CERTIFICATION An officer of the organization, authorized to execute such documents, must certify to the correct- ness of the periodic report in the manner provided on the form under penalty of perjury, showing the date and place of such certification, or in lieu thereof may swear to the same before a notary public or other officer authorized to administer oaths. ~~HERE TO FILE Please forward (1) copy of completed form to the Registrar of Charitable Trusts, Room 300, 923 12th Street, Sacramento 95814. If additional information is required, please refer to the Uniform Supervision of Trustees for Charitable Purposes Ace (Secs. 12580-12595, Gov. Code) and the Administrative Rules and Regu- lations pursuant to the aforesaid Act (Secs. 300-310, Title 11, Calif. Adm. Code). 87-444 0-68-29 PAGENO="0448" 446 CO...]. STATE OF CALIFORNIA OFFICE OF THE ATTORNEY GENERAL REGISTRY OF CHARITABLE TRUSTS RooM 300. 923 12TH STREET OACIIAMENTO, CALIFORNIA 05014 * REGISTRATION OF CHARITABLE TRUST * *: * Date:~~ - -- Charitable Trust *.-- l,Nameof or Charitable Corporation Address of headquarters 2. Charitable Trust under: - A. Estate of Will probated County of Probate No. Last account rendered on B. Inter vivos trust o1~ * I Date of instrument C. Charitable Corporation or corporation formed for the administration of a Charitable Trust * Name of corporation: * Address: 3. Names and addresses of trustees or directors and officers of corporation: 4.. Attached hereto are the following documents: S. Description and value of Trust assets: 6. Purpose of the Trust: PAGENO="0449" 447 CC-2 7. Accounting Period: Calendar year ... Fiscal year ending_._ - ~,cnth . da~ Registration No. CT____.___. Executed by Date of Registration. For use of the Registrar's o~ce only Nate. Title Addee's SEE OTHER SIDE POSt INSTRUCTIONS - iNSTRUCTIONS FOR PREPARING AND FILING REGISTRATION FORM OF CHARITABLE TRUST WHO MUST FILE Pursuant to Sec. 12581 of the Gov. Code and Sec. 300 of the Calif. Adm. Code, Title 11, all Trustees holdmg property for charitable purposes in the State of California must register with the Registrar of Charitable Trusts except those parties exempt by Sec. 12583 of the Government Code. WHEN TO FILE Pursuant to Sec. 12585 of the Gov. Code and Sec. 300, Calif. Adm. Code, Title 11, every Trustee subject to. the Uniform Supervision of Trustees for Charitable Purposes Act shall file with the Attorney General within six months after any part of the income or principal is authorized or required to be applied to charitable purposes. NAMES AND ADDRESSES OF TRUSTEES OR CORPORATE OFFICERS (Item 3) In the case of a testamentary or inter vivos trust, please submit the names and addresses of all indi- vidual and corporate trustees. In the case of a Charitable Corporation or corporation created for the administration of a Chari~ Trust, please submit names, titles, and addresses of all corporate directors and officers. PAGENO="0450" 448 CC-3 DOCUMENTS REQUIRED TO BE ATTACHED (Item 4) Testamentary Trust: A certified copy of Will and Decree of Distribution Inter Vivos Trust: A certified copy of instrument creating Trust Corporate Trust: A certified copy af the Articles of Incorporation and amendments thereof and By-Laws. FINANCIAL STATEMENT (Item 5) Please present a detailed description of all assets and liabilities, including cash on hand and in banks, name and number of investment securities at cost or book value, personal and real property, etc. Attach separate sheets when necessary, to supply all information. EXECUTION oF REGISTRATION FORM Where there is a single trustee, the form is to be executed by that individual. Where there is a group of indi'~iduals or corporation holding as trustees, any one of the trustees may execute the form. In the case of a charitable corporation the form should be executed by an author- ized officer. WHERE TO FILE Please forward (I) copy of completed form to the Registrar of charitable Trusts, Room 306, 923 12th Street, Sacramento. If additional information is required, please refer to the Uniform Supervision of Trustees for Charitable Purposes Act (Sees. 12580-12595, Gov. Code) and the Administrative Rules andRegu- lations pursuant to the aforesaid Act (Sees. 300-310, Title Ii, Calif. Adm. Code). PAGENO="0451" 449 DD.-l STATE BEGUIAT ION OF FOUNDATIONS Jd,~D CHARITABLE TRUSTS -~ -~ Ball, Ralph K., "Acceptability or Charitable Trustees", Trusts & Estates, Vol. 98, 1959. Bogert, George G., "Proposed Legislation Regarding State Supervision or Charities", 52 Mich. law Rev. 633 (1954). Clark, William G., "The New Charitable Trust Act" Ill, Bar Journal Vol. 50, 1962, P. 753. Craig, A. F., "Charitable Trusts in Iowa", 9 Drake Law Review 90 (1960). Feldman, Irving, "Charitable Trusts: Whatts Happening to the Money?", 33 The Detroit Lawyer 37 (1965). Forer, Lois, "Forgotten Funds: Suggesting Disclosure Laws ror charitable Funda," Univ. or Penria. Law Rev., Vol. 105, 1957 Forer, Lois, "Revocation or tax Exemption~--Then What?", Foundation News, Vol. 4, September, 1963. Fremont-Smith, Marion, "Duties and Powers or Charitable Fiduciaries: The Law o~ Trusts and the Correction or Abuses", 13 UCLA Law Rev. 1041, (1966). Fremont-Smith, Marion, "Foundations and Government: State and Federal Law and Supervision", Russell Sage Foundation, New York, 1965. Karst, K. L0, "The Erriciency or the Charitable Dollar: An unruir illed State Respnsib ility", 73 Harvard Law Rev. 433. PAGENO="0452" 450 DD~~~2 Klapp & V~Tertz, "Supervision of Charitable Trusts in Ohio", 18 OhIo State Law Journal 181, (1957). Knecht, Lawrence G., "Report of the Committee on Char:Ltable Trusts and Foundations (of the ABA Section of Real Property, Probate, and Trust law)", Trusts and Estates, Vol. 100, 1961. Lees, Johns. "Governmental Supervision of Charitable ~ Trusts", Current Trends In State Leg1sla~- tion (l956.-7) Univ, of lvIlch. Law School Les, Res. Center, Ann Arbor, 1957. Taylor, Eleanor K., "Public A~countabIi~UQ~ Foundations anc1Chari~able Tru~~," Russell Sage Foundation, New York (1953). Taylor, EleanOr K., "Accoulitability of Charitable Trusts1t, 18 Ohio State Law Journal 157 (1957). Wynn, James 0., "AccountabilitY of Trustees of Charitable Trusts", Trusts and Estates, Vol. 93, 1954, p. 938. Zollmam'i, Carl, "~ rica lñL of Ch~it1~",BruCs Publishing Co. Milwaukee, 1924. "State Regulation of Foundations", (Panel Report) Bulletin of the Section of Taxation, ABA, Vol. 20, No. 3, p. 17 (April, 1967), * 4~ * * * PAGENO="0453" 451 EXHIBIT 1 (PART 2) (Section 1 has not been submitted to the subcommittee.) Section 2 0RG~N~TIONQ~ 5Q~ (c) (3) PRIVATE FOU~.~TIQN and DISCUSSION OF CIVIC LEAGUE 501 (c) (41 NFP_FOUNDATION_ivI~N~~iVENT Preface Last evening you began work on your foundat ion by briefly discussing the legal purpose of your found- ation. In addition, the preliminary reading material which you completed prior to the seminar gave you insight into the proper philosophy for managing found.- at ion activities to avoid questions, harassment or trouble. With these principles in mind, we would like to discuss and teach in a seminar style the procedures and principles which would best be employed to operate a small NFP tax-exempt corporation. These procedures will be discussed in three class if icat ions: 1. The organization of the foundation 2~ The operation of the fo~idation 3, Miscellaneous principles and rules to provide protection or ease of ope~~tion~ This will be basic material but it will be dis- cussed in some detail. Some subjects, however, may not be discussed as extensively as you desireS If you desire a deeper understanding of any subject, Copyright®1967 21 Americans Building Constitutionally (A Trust) Printed in U.S.A. PAGENO="0454" 452 we would suggest that you hold your questions until the end o~ this session or until the Lollow-up question meetings. ~e do not, however, desire to restrict your questions0 T~ ORC~NIZJ~T ION OF TF~: POUNDAT XON From this point on I recommend that you ask any and all questions that may occur to you as we discuss each subject, and that I~ you have an Idea Lor a solution or an answer to the question or a new idea that the instructor is not aware or, don't hesitate to bring it up, raise your hand or blurt it out. There are only 30 or 40 provisions in the Lederal code and eight or ten laws in each state which apply to non-profit organizations with any Lorce or eftect. There may be solutions to problems that are simply not covered by the law and require more prac- tical discussion than legal counsel often consider, arid since we are here to discuss basic principles which will guide a person to properly operate a Lound- ation, we desire that each o1 you ask questions until the method or procedure under discussion is completely understood. 2-2 Copyright ~ 1967 Amerinnas ~ui1ding Constitutionally (A Trust) Printed in U.S.A. PAGENO="0455" 453 ~Te will try to save your time and logically develop your understanding o1 the material by Lol- lowing a general outline. ir you see that some immediate question you have will be covered later in the seminar, you might write the question out and save it ror that time. ir we don't answer your ques- tion in the course or discussion please ask it then. Here is the outline, would you glance at it ror a rew minutes and then we will begin. D ISTR IBUTE E)~i lB IT #1 Federal Reqj~flernents or Creation ora Foundat ion Tax-exemption or a non-prorit organization is based upon two things: 1. That you are organized expressly Lor certain purposes 2. That you are operating exclusively Lor these same purposes. Basically this is a simple test, as the words mdi- cate. Starting with your purpose you must be recog.- nized under Section 501 (c) (3) or the Internal Revenue Code as being organized exclusively ror one 2-3 Copyright c 1967 Aniericnas uilding Constitutionally (A Trust) Printed in U.S.A. PAGENO="0456" EXHIBIT 1 Articles of incorporation The board of directors Off icers copyright ® 1967 Americans Building ConstitutionallY (A Trust) Printed in U.S.A. 454 OUTLINE OF SEMINAR I. Preface A. Overall objective of foundation material (to give basic information on management). B. Outline of foundation material. II. Organization of the foundation A. Explanation of the federal requirements for exemption. 13. C. D. E. F. G. H. Bylaws Meetings of the board of director~ Foundation bank account Additional corporate paper work 1. Waiver of notice to members of the board of directors 2. Corporate seal 3. Newspaper notices ~. Membership certificates I. The employment relationship and the executive director J. Federal tax exemption of the foundation K. Special types of foundations 1. Medical foundation 2. Agricultural foundation 3. Religious foundation between the foundation PAGENO="0457" 455 Lt. Educational foundation 5. Scientific foundation III. Civic League A. Benefits B. Organization C. Operation IV. The operation of the foundation A. Foundation income sources 1. Contributions 2. Fees 3. Investments, etc. ~. Buying and selling property 5. Other properties 6. Taxable income B. Restrictions of foundation activity 1. Prohibitive transactio'ns (a) Political activi.ty (b) Endangering foundation funds (c) Self-dealing 2. Distribution requirements C. Outgo 1. Grant programs and charity 2. Salary (relating to organizational material) 3. Frin~e benefits (a) Insurance (b) Foundation business (c) Hobbies (d) Retirement (e) Advertising (f) Other normal related expenses -2- Copyright ~ 1967 Americans Building Constitutionally (A Trust) Printed in U.S.A. PAGENO="0458" 456 D. continuing Management 1. Accounting practices (a) Corporate accounting (b) Foundation fund accounting 2. Continuing control E. Federal and state regulations 1 ~ securit3, ~nd federal withholding 2. State reporting requirements 3. State membership requirements 14~ Federal reporting requirements 5. State tax requirements V. Review of foundation material using structural chart TRUSTS I. Trust outline A. Introduction 1. Difference from foundation 2. Historical background 3. Purposes B. Organization of the trust C. Operations of the trust 1. Privacy 2. Economic operations D. Trust foundation 1. Organization 2. Operation II. Tandem operations outline A. Introduction Copyright~l967 Americans Building Constitutionally (A Trust) Printed in U.S.A. PAGENO="0459" 457 1. Purpose B. Management of property C. Management of activity D. Management of income .14 - Copyright ® 1967 Americans Building Constitutionally (A Trust) Printed in U.S.A. PAGENO="0460" 458 or more of the following purposes: 1. Education 2. Science 3. Religion 4. Charity 5. Literary 6. Testing for public safety, and 7. Prevention of cruelty to children and animals. Your desires for foundation activity will probably fall within the areas of education, religIon, science, or literary. If you decide to form your own founda- tion and are a Junior or Senior member, an attorney - and there are a number who are members of ABC and acquainted with foundations, who can heipyourcreate the proper purpose and other technical language required on your articles of incorporation. Articles of Incorporation The first step in organizing your foundation is to execute the articles Of incorporation f or a non- profit or non-stock corporation. In most states this is quite simple. Attorneys who are familiar with 2-4 Copyright cc) 1967 Americans ~ui1ding ConstitutionallY (A Trust) Printed in U.S.A. PAGENO="0461" 459 foundations, especially attorneys who are members of ABC, are aware, however, of many fine points which can aid the efficiency of your foundation without disclosing unnecessary information. For example, your foundation's purpose would conform to the require.- ments of federal law. Federal law is accepted by every state. Your attorney would know the precise words necessary to most efficiently qualify a foundation under both state and federal law. You, on the other hand, might have to read several books or try in.- corporation a few times to develop the most efficient organization. Once the articles of incorporation have been executed they are usually filed with the Secretary of State of your state with the proper fee. A complete charter is then issued by the Secretary of State and once this has been recorded under state law, your foundation is in business. Your next step is to complete the paper organization of your foundation. The attorney again is prepared to perform most of the paper work which will include the creation of your foundation records (i.e. the minutes of your board of directors, by-laws, the membership rules and 2.-5 Copyright ~)1967 Americans ~ui1ding Constitutionally (A Trust) Printed in U.S.A. PAGENO="0462" 460 t~he n~embership certificates and any other records required by state law). In this paper work your primary concern will be with choosing the right course of action and the right personnel to accom- plish your desires. An attorney who is knowledgeable in foundations is trained to use these ideas and personnel to create the proper paper work for your foundation. Even though the attorney will accomplish most of this organizational work, it is wise that you have personal understanding of some of the principles involved so that you will not be confused by legal language or be afraid to touch your corporate record books. The Board of Directors The board of directors of your foundation (not- for.-prof it corporation) has the ultimate control over the activities of the foundation. The minimum number is d ictated by the state law although maximum numbers are usually not limited. We recommend however that a comparatively small number of persons be placed on the board of directors. The husband and wife of a 2.-6 Copyright `~ 1967 Americna~ Building Constitutionally (A Trust) Printed in U.S.A. PAGENO="0463" .461 particular Lamily may both be on the same board o1~ directors as will children who have reached the age or maturity and perhaps collateral relatives such as aunts, mothers, cousins, etc. The board or directors would be chosen with two ideas in mind: 1 * The compatibility or the individuals, and 2. The geographic convenience or the individuals. Your board or directors may be required to "meet" rrequently in the initial rorming stages or the round- ation and therearter would meet regularly at a rate or once a month or rour times a year. This would normally require that the individuals be within the same geo- graphic area to racilitate the meetings and to avoid the so-called "paper meetings" that are conducted entirely by mail. However, compatibility or the members is much more important than the geographic convenience, and ir you desire rour or rive members on the board or directors who live in three or rour states, this is proper provided that they are compat- ible with your desires as rounder and a director or the roundation. Even though you might obtain an undated letter or resignation rrom other members or 2-7 Copyright (~) 1967 Americans Building Constitutionally (A Truat) Printed in U.S.A. 87-444 0-68-30 PAGENO="0464" 462 the board of directors, you would wish that they be familiar with and in accord with the purposes of the foundation as you have chosen them without forcing you to use the "influence" of the letter of resignation. Since it is more difficult to find five or seven compatible individuals than it is to find three or four, we recorrifflend a minimum nuñiber. Your purpose as a director of the foundation should be distinguished from your possible position as an officer or employee of the foundation. Your powers as a director are superior to that of an officer or employee, but are usually not exercised in any capacity other than ratification of the acts of employees and officers. The initial meetings of your board of directors will accomplish standard organizational acts enabling your foundation to operate. These acts will be dis.-. cussed later. Thereafter the minutes of the meetings of your board of directors will usually reflect only those activities which your foundation has accomplished. Attorneys are trained to maintain these minutes in proper language, but once the legal form is mastered, Copyright (c~ 1967 2-.8 Americans ~onstitutiona11y (A Trust) Printed in U.S.A. PAGENO="0465" 463 everyday English is quite sufficient to record the minutes of the board of directors. We will discuss these minutes in a few moments. Oi~f icers~ The officers of your foundation may be the same people as the board of directors. Just remember to keep the many hats of the various individuals on their proper racks. The capacities of the officers are different and distinct from those of directors. Officers are empowered by the board of directors to conduct the day-to-day activities of the foundation. You will probably have five officers under our recom- mended procedures. You may have more or less depending upon state law and your own desires. The five of- ficers recommended by ABC are president, vice- president, secretary, treasurer, and executive director. You are probably familiar with the general duties of the first four officers and we won't spend any time discussing the duties unless there are questions. Distribute collateral EXHIBIT #2 on L~ties of officers. 2-9 Copyright 1) 1967 Americans Building Constitutionally (A Trust) Printed in U.S.A. PAGENO="0466" 464 EXHIBIT 2 COLLATERAL EXHIBIT ON DUTIES OF OFFICERS OF CORPORATION FOUNDATION The duties of the various officers and the authority of the various officers of a corporate foundation are generally similar, if not identical, to those of the officers of a business corpora- tion. If a person is held out to the general public as a princi- pal officer of a corporate foundation, such as the president, vice president, secretary or treasurer, then that person has inherent powers and duties which would enable him to accomplish activities without further minutes or actual authorization from the board of directors. In other words, if you deal with a man who has offered a business card stating that he is president of the Smith Founda- tion, and you have no reason to doubt this, then for all practical purposes he is the president of the Smith Foundation and can do all things that any president of any foundation can do. Oddly enough, the legal view of the authority and powers of the various officers of a corporation is much more limited than that of the ordinary conception of the powers of presidents and other offi- cers. We will discuss briefly the duties and powers of each major officer, first in the strict legal sense, and second, in the general common understanding of such officers. ~e will not dis- cuss the authorities of the officers in terms of parliamentary procedure. If you are interested in discussion along these lines we recommend the appropriate sections cf Roberts Rules of Order. The President: The strict legal rule is that the president of any corporation does not have by virtue of his office alone any power to act for the corporation. His authority must be de- rived from the articles of incorporation, minutes of the board of directors or by state. You should check with your state's non- profit corporation act to determine if any statute gives the presi- dent any power. However, the broad view taken in most cases is that in the absence of a charter or bylaw provision to the con- trary, the president of the corporation is the general manager of the corporate affairs with the authority to act for the corpora- tion in its business. The president of the corporation is usu- ally presumed to have full authority to do acts within the general domain and business of the corporate purpose and objective. Of course, the board of directors may always vest the presi- dent with full authority to act as the chief executive officer of the company, and in fact, the initial bylaws of most corporate foundations do this automatically. Amy person dealing with the president of a corporate foundation in the usual manner is en- titled to assume that the president has actually been vested with full authority to manage the general affairs of the corporate foundation. In other words, a corporate foundation's president is usually considered its general manager and has the implied authority -1- Copyright ® 1967 Americans Building Constitutionally (A Trust) Printed in U.S.A. PAGENO="0467" 465 to perform any act in the ordinary course of business. In many foundations, the executive director may be expressly given su- perior powers to that of the president, but since inthese same cases thepresident and executive director are the same individual, there should be no conflict. The Vice-President: The inherent power of the vice presi- dent would seem merely to be to act in the absence of or during the vacancy in the office of the president. Frequently, however, the vice-president of a corporate foundation is given certain executive duties by the board of directors or bylaws of the corpo- ration. In addition, authority may be given to do whatever is necessary to effectuate the main authority conferred or duties delegated by the beard of directors. In other words, the board of directors usually sets out the duties of the vice president and he has the authority to carry these out. If, however, the office of the president is vacated or he is absent when some necessary business arises, the vice-president has the authority to take over. In some states, by law, a single individual may not beboth president and vice-president. You should check with your own sl~ate statutes. The Secretary: The primary function of the secretary of any corporation or corporate foundation is that of keeping a record of the busimess transactions conducted at membership, directors or committee meetings. The secretaries of most corporations, how- ever, are considered more than mere clerks or record-keepers. Secretaries of corporations often have the power to sign contracts and conduct other business. Secretaries of corporate foundations have been usually considered to be just as much general managing agents of the corporation as the president. In fact, the duties and powers of the president have often been conferred on secre- taries in interchangeable fashion. It is difficult to state pre- cisely what the implied powers of a secretary of a corporate foundation are. They seem to be fairly extensive, although not as extensive as those of the president. The Treasurer: The ordinary duties of a treasurer are to receive, safely keep,. and disburse the funds of the foundation under the supervisiom of the directors. The treasurer ordinarily does not have the power to sign contracts for the foundation with- out the express approval of the board of directors. The treasur- er, like any other officer, however, may be given special duties by the board of directors which may involve matters of general corporate business. Executive Director~ Administrator, Managing Director, Superintendent, etc.: The individual taking office under one or more of these titles or similar titles has only the power vested in him by the board of directors. These are special offices which are created under the power of the board of directors and -2- Copyright® 1967 Americans Building Constitutionally (A Trust) Printed in U.S.A. PAGENO="0468" 466 are solely dependent upon the minutes of the meeting of the board of directors which created the office. These offices may be created by bylaw or by corporate minute, and in no case have any implied powers under their title. If the offices and duties of the officers are created by bylaws, the powers are usually set out in these bylaws. An ex-- ample of such a bylaw is included below. (a) The president shall manage the affairs of the foundation, except as shall be reserved by the bylaws or action of the directors He shall preside at the meetings of membership, and shall be vested with the powers and duties incident to the office of president. (b) The vice-president, in the absence of the president, or his inability or refusal to act, is empowered to act in lieu of and in the stead of the president, and shall thereupon be vested with all the powers and duties of the president. (c) The secretary shall keep the minutes and a record of other matters transacted by the members and the directors; mail or cause to be mailed all notices required by the bylaws; have custody of the corporate seal and records; maintain and have custody of names and addresses of the membership; and perform such other duties as are incident to the office of secretary. (d) The treasurer shall have custody of the funds of the foundation, collect dues and other monies owed the foundation, and perform such other duties as are incident to the office of treasur- er. In the discretion of the directors, the treasurer may be required to furnish bond for such amount and under such conditions as the directors may see fit to impose. If you have any question concerning the duties, powers, or authority of any officer, you should consult with your attorney or a good book on corporate organization. Copyright ® 1967 -3- Americans Building Constitutionally (A Trust) Printed in U.S.A. PAGENO="0469" 467 The executive director, however, is an unusual position. Under our recommended procedures the executive director is empowered with general authority to conduct and oversee all foundation activities. Under the ABC recommended bylaws the executive director if the only officer working under an employment con- tract for a salary. The other officers are merely titular heads. The executive director IS clothed with the power to hire and fIre all other employees, sign checks and other contracts and geneRlly run the business. This office is created to centralize active authority in one individual. If you, as founder, decide not to be director and not to be a regular officer, you might wish to be executive director in order to malntain control over your found- ation. ~e will discuss this employment shortly. Bylaws The bylaws of your foundation are the rules and regulations of the corporation. The bylaws set out the rights and duties of the corporatlonmembers, officers and directors and may be considered as statues. Bylaws may be amended by the board of Copyright(~'.1967 Americans ~ui1ding Constitutionally (A Trust) Printed in U.S.A. PAGENO="0470" 468 directors but are usually not amended with any fre.- quency. Bylaws must be distinguished £rom resolutions, iVhlle a bylaw or a set or bylaws may be adopted by a resolution, a resolution is not necessarily a by-. law. A resolution may authorize a single corporate act or transaction where a bylaw is permanent and continuing rule. ir a resolution or the board or directors is inconsistent with a bylaw, the bylaw must prevail. The bylaws are secondary only to the charter or the organization; that is, the articles ot incorporat ion. In some states, the law requires that bylaws be adopted. These bylaws should govern the powers, rights and duties or various persons con- nected with the organization and the proper procedure Lor exercising these powers, rights and duties. Tailor your bylaws to your organization purposes and capabilities and make them realistic. Create only a charter and bylaws and do not create a third constitution. It only causes conrusion. Once your bylaws are adopted, ir any amendments are made, be certain to include these at the positions in your Copyright (~)1967 2-ll Americnas ~ui1ding Constitutionally (A Trust) Printed in U.S.A. PAGENO="0471" 469 corporate records. Keep your bylaws up-to--date to avoid conflict. Outsiders are not bound by what is in your foundat ion bylaws unless you can prove that they had actual or constructive knowledge of their con.-. tents. Careful drafting of your original bylaws is important because amendments should be made infre-. quently, if at all. ~stribute E)~IBIT #3 - illustrating bylaws 1 It is suggested, for exemption purposes, that your bylaws be as simple and concise as possible and that the language be drafted in general terms. You should have considered all possible activities without setting out special rules and limitations on each separate act ivity. Even though your foundation bylaws a~e general in nature your found at ion may act in a limited way. For example, we have passed out an illustrative set of bylaws. In this illustration you will not ice in article 3, section 2 that almost everybody in the world may be elected a member,of your foundation. It is obvious, however, that you will not elect 2-12 Copyright (~l967 Americans Building Constitutionally (A Trust) Printed in U.S.A. PAGENO="0472" * 470 EXHIBIT 3 ILLUSTRATIVE BYLAWS OF A PRIVATE FOUNDATION (T:~ese bylaws are for educational purposes only and are not to be used for any legal purpose. These bylaws are incomplete and are not necessarily applicable in any state.) The bylaws of a private foundation form the constitution of the foundation. Although they may be amended frequently and gener- ally at the will of the directors or members they should not be treated lightly. The bylaws will govern the operation of the foundation, particularly in terms of who has what powers to do what Therefore, the bylaws should be general in nature in order to pro- vide for flexibility and freedom of action. Bylaws seldom apply to any specific situation with detailed language but usually give general guidelines to govern every situation. The following are some examples of bylaws about which you may have question or which might help you in drafting additions or re- visions to the initial bylaws of your corporation. The initial bylaws of your corporate foundation will usually be drafted by the attorney who helped you create your foundation. ARTICLE I *- DEFINITIONS The following words and terms, as used in the Bylaws of am Alaska corporation not-for-profit, shall, ü~ñiess the context shall otherwise require, mean and be defined as: (a) Foundatlon the aforesaid corporation. (b) Member': the persons who are qualified and elected to membership as hereinafter provided. (c) Directors': the duly constituted members of the Board of Directors. (d) "Certificate of ?4embership a written instrument signed by the designated officers evidencing that the person named therein is a duly elected member. Ce) Registered Office': that office maintained by the foundation in this state, and the address which is on file with the Secretary of State. -1- Copyright c 1967 Americans uilding Constitutionally (A Trust) Printed in U.S.A. PAGENO="0473" 471 ARTICLE II - MEMBERS Sec. 1. Election of Members: Application for membership may be presented by members, and shall be elected by a vote not less than a majority of the Board of Directors. Sec. 2. Class of Members: The Board of Directors may estab- lish more than one class of members and determine the designation and their qualifications. (a) Sustaining Members: Sustaining members shall be those members who enter the foundation upon payment of a membership fee and approval by the Executive Director. (b) Family Members: Family members shall be non-dues paying members of the foundation upon election by the Board of Directors. Sec. 3. No class of membership, however created, is entitled to vote on any matter. Sec. 5. Transfer of Membership: Memberships may be trans- ferred only upon the consent of, and upon such terms as shall be fixed by the Board of Directors. (a) Transfer of sustaining membership may be permitted upon the approval of the Board of Directors. (b) Family membership may not be transferred under any condi- tioris. * ~ ARTICLE IV - flEETING OF MEMBERS Sec. 1. Place of Meetings: All meetings of the membership shall be held at the registered office of the foundation or at such other place as the Directors or President shall, from time to time~, designate. Sec. 2. Meetings: The annual meeting of the membership will be held at a place designated by the Board of Directors on the_ day of of each calendar year. Failure to hold such a meet- ing will not cause forfeiture, failure or penalty on any rights, duties, power or obligation of the foundation, officers, directors or members. -2-~ Copyright (~) 1967 Americans ~ui1ding Constitutionally (A Trust) Printed in U.S.1~. PAGENO="0474" 472 ARTICLEV - THE DIRECTORS Sec. 1. Powers: The Board of Directors shall: (a) Manage the affairs of the foundation, except as other* wise provided in the Articles of Incorporation or Bylaws. (b) Adopt a corporate seal as the seal of the foundation. (c) Designate a banking institution or institutions as deposi- tory for the foundation's funds; and the officers authorized to make withdrawals therefrom, and to execute obligations on behalf of the foundation. Sec. 2. Number of Directors: The number of directors shall be in number. Sec. 3. Election and Term: Directors subsequent to the initial Board of Directors named in the Articles of Incorporation shall be elected or appointed by the existing members of the Board of Directors at the tine such election or appointment is neces- sary. Directors shall serve for a term of years and may be reelected. Sec. 14~ Qualifications: A director subsequent to the ini- tial board, shall be a family member of the foundation, shall be aged twenty-one or over and a citizen of the United States. ARTICLE VI -- THE OFFICERS Sec. 1. The officers of the foundation shall be: a Presi- dent, Vice-President, Treasurer and Secretary and Executive Direc- tor, and such other officers as the directors shall designate. As hereafter determined by the directors) any one or more officers may be made ex-officio members of the Board of Directors. Sec. 2. Election and Term: The officers shall be elected at the meeting of the directors held immediately after the an- nual meeting of the members or at such other meeting of the directors as shall be called for such purpose, and officers elected shall hold office for the ensuing year and until their successors shall be elected.. -3-- Copyright c~ 1967 Americans Building Constitutionally (A Trust) Printed in U.S.A. PAGENO="0475" 473 a * * ARTICLE VII - CERTIFICATES OF MEMBERSHIP Sec. 1. Certificates of Membership: The Board of Directors may, as it sees fit, provide for certificates of membership to be issued to duly elected members in good standing, and in such form as they shall determine. Such certificates shall be signed by the president and secretary and shall bear the seal of the founda-~ tion. ARTICLE VIII THE FISCAL PERIOD The fIscal year of the foundation shall begin on the day of and end on the day of_______________ ARTICLE IX - AMENDMENTS The Bylaws of the foundation nay be amended, repealed or new Bylaws adopted by the directors. * * * * * ~J4- Copyright ~ 1967 Americans Building Constitutionally (A Trust) Printed in U.S.A. PAGENO="0476" 474 everybody in the world to membership in your foundat ion, but only those you desire as members. In article 5, section 4 of the illustration it seems that your foundation can elect anybody in the world as director. If this were the SmithFoundation, even though Jones and Anderson and others might qualify as directors, it would not be improper if only Smiths were elected as directors and only Smiths of a certain family. Broad by-laws give freedom to an operation withOut forcing you to employ the entire scope of each by-. law. Regardless of what tI~e particular bylaw is you may act as restrictively as you wish within the scope of the bylaw. The illustrative bylaws for the private foundation are designed to create and vest control in one in- dividual. They create a dictatorship. A second example of foundation bylaws, however, is that of a civic club, which you as a class may or may not wish to form. The civic club does not vest control in one person but acts on democratic theories with decisions being made by consent of the majority. Copyright®1967 2.43 Americans Building Constitutionally (A Trust) Printed in U.S.A. PAGENO="0477" 475 Minutes 0 Meetings or the Board of DirectoT~ Distribute EXHIBIT #4 Minutes of the meeting and some illustrative resolutions Minutes of the meetings of the board of directors of your foundat ion are among the most important records you will keep. The minutes will show clear authorization of the acts of the officers, employees and members of the foundation. The minutes should be kept up- to-date and accurately. They should not be abused or neglected. Minutes of your board of directors meetings will reflect only general statements of the activities of the board of directors. These minutes are not intended to be word-for-word records of discussions, nor should they contain any details of foundation activities with the possible except ion of annual financial report. Your minutes may in fact be prepared in advance of every meeting and agreed upon by the directors when they meet. As you may have noticed, all of the business of 2- Copyrightcl)67 Americans `~`ui1ding COflStitUtiOflällY (A Trust) Printed in U.S.A. PAGENO="0478" 476 EXHIBIT ~ ILLUSTRATIVE CORPORATE FOUNDATION MINUTES Corporate minutes of the meetings of the board of directors are usually general in nature and summarize what occurs at each meeting. Word-for-word discussions are almost never published in the minutes, nor are detailed discussions of the results of any transactions ever discussed. There are usually two kinds of corporate minutes. First, the authorizing minute, or that minute which empowers a director, officer or employee of the foundation to do something; and, second, the ratification minute, or a minute that approves of something already accomplished. (a) Examples of authorization minutes that might occur in the first few meetings of your foundati3n's board of directors might be as follows: (1) Upon motion duly made and seconded and carried, the following resolution was adopted: RESOLVED: That the foundation open a bank account with the First National Bank w~iich is hereby desig- nated as the depository of the funds of the founda- tion. That the forms of resolution required by the bank be hereby approved and adopted as a resolution of the directors as though set forth verbatim in these minutes. FURTHER RESOLVED: That the followin~ officers are authorized in the name of the foundation to with- draw funds from said depository, and to make loans on behalf of the foundation and to do and transact such other business with the depository as shall be required: the president, secretary, and treasurer. (2) Upon motion duly made and seconded and carried unanimously the following resolution was adopted: RESOLVED: That certificate of membership of the foundation shall be in the form of certificate sub- mitted to this meeting and that this certificate be inserted in the minutes of this meeting. As you will note, each of t~ese minutes authorizes soir~ebody to do something ir~ the future or at the tir~e the minute is eassed. Such minutes may be specific or general as required by the busi- ness of the foundation. Copyright c l~67 Americans uilding Constitutionally (A Trust) Printed in U.S.A. PAGENO="0479" 477 (b) The following are examples of ratification minutes that might be passed by your foundation's board of directors at the Initial meetings. (1) Upon notion duly made and seconded the following resolution was unanimously adopted: RESOLVED: That the articles' of incorporation filed with the Secretary of State and the provisions therefor be and the same is hereby approved. (2) Upon notion duly made, seconded and carried, the following resolution was unanimously adopted: RESOLVED: That the actions of the president and secretary in executing a lease with the John Smith Realty Corporation for the premises in which the principal office of the foundation is. located is hereby ratified and approved under the terms of said lease. The secretary is ordered to retain a copy of the lease in the foundation's permanent files. Ratification minutes nay also be specific or general In nature as each case or situation indicates. ~atificatiom minutes should never be passed more than six months after any act. In other words, your board .of directors should meet at least annually to review the foundation's business. Your board of directors, how- ever, should not meet any more frequently than is necessary to efficiently conduct foundation business. Other suggestions on corporate minutes: (1) Corporate minutes should be written as clearly as possible to avoid confusion. (2) Corporate minutes need not contain legal jargon. (3) If a vote on any proposition put before the board of directors is less than unanimous the dissenting directors should be named. (~l) Corporate minutes should always be signed and dated by the secretary of the organization. (5) The corporate seal is not necessar'~ but lends a touch of authenticity and finalization to any minutes. (6) Usually, several resolutions are included im every meeting. There is no need to hold a separate meeting for every resolution that you wish to pass. -2- Copyri3ht c lTh7 Americans uilding Constitutionally (A Trust) Printed in U.S.A. 87-444 0-68-3 1 PAGENO="0480" 478 (7) You should obtain a waiver of notice of the board of director's meeting signed by every director prior to holding any meeting. This serves as written evidence of the approval of the meeting by all directors and eliminates the necessity of sendIng registered notices of each meeting. Your attorney can explain this in detail. (8) Attendance of every director at each meeting should be kept by the secretary. The following language is commonly used to open and close a meeting of the board of directors. Included in this language is an illustrative resolution that was used to approve the enoloynent of an executive director. (This resolution is incomplete legally, and should not be used verbatim in any case.) MINUTES OF THE REGULAR MEETING OF THE BOARD OF DIRECTORS A meeting of the Board of the Directors of the____________ Foundation, Corporation Not--for-Profit, duly authorized under the laws of the State of_ * said Directors properly holding office under the Bylaws, was held on _________________ at the hour of -- , at__________________________________ pursuant to waI~ii' of notice executed by all members of the Board of Directors. The following members of the Board of Directors were present in person: Upon motion duly made and seconded, the following resolution was unanimously adopted: RESOLVED: That the offer of to serve as Executive Director of the Foundation, corn- municated by letter dated Is hereby accepted. The Executive Director shall serve until further notice is given by either the Board of Director or the Executive Di- rector to terminate their relationship. There being no further business to come before the meeting, a motion duly made and seconded and carried, the meeting was declared ad- journed. ____________________________ (SEAL) Secretary Copyright (c. 1967 Americans Building Constitutionally (A Trust) Printed in U.S.A. PAGENO="0481" 479 the foundation is conducted in the form of resolutions. The resolutions of the board of directors have the strength of contracts and do in fact empower and accomplish all the activities of the foundation. The resolutions of the foundation may be as specific or general as is required by the type of activity. For example, a resolution to enable the president of the foundation to create a grant program or a scholarship program may be a general resolution, but the resol- ution accepting the proposed program of the president or declaring the winner of a scholarship contest will be specific in nature, An attorney can always deter.- mine what type or resolution will be required and even to write the resolution. However, so called legal language and "whereas' and "wherefore" are not really required if the form is properly followed. If you write your own minutes, simple sentences and simple words are preferred to complex statements. If you refer the matter to your counsel, and if he has been properly trained, you need not concern yourself with the wordS- ing. You ought to be able to review the minutes of your foundation board of directors and understand 2~-l5 Copyright ~1967 Americans Building Constitutionally (A Trust) Printed in U.S.A. PAGENO="0482" 480 everything that has been accomplished or authorized. Foundation Bank Accounts Included as part of the organization of your foundation is the requirement that your foundation have a depository for its funds. This depository usually amounts to a checking account in the bank of your choice. Again, counsel or the man at the bank would be able to complete these simple papers at your request, but it is just as efficient for you to do it yourself. If you do decide to open your account without advice from counsel, then ABC suggests the following procedures: [~~ribute EXHIBIT #5 1 1. Shop around for a bank. Many banks do not charge not-f or-prof it corporations for checking services, but this is a local option with the bank and has nothing to do with state and federal law, Other banks charge a small fee which is usually less than charges made for a normal corporation account. Still other banks charge regular fees. 2. When you decide upon a bank obta~. the proper complete bank resolution papers f~r opening an account and for authorizing a ioan~ Most banks do not have specific resolution papers for not-for-profit corporations. If your 2-16 Copyright ® 1967 Americans Building Constitutionally (A Trust) Printed in U.S.A. PAGENO="0483" 481 EXHIBIT 5 FOUNDATION BANK ACCOUNTS The following steps may help you open a foundation bank ac- count. Your corporate foundation would use the standard forms available for other corporations. It is recommended that you pick a bank where your affairs will be kept private and not be discussed generally. If you do decide to open your account without advice from counsel then ABC suggests the following procedures: 1. Shop around for a bank. Many banks do not charge not- for--profit corporations for checking services, but this is a local option with the bank and has nothing to do with state and federal law. Other banks charge a small fee which is usually less than charges made for a normal corporation account. Still other banks charge regular fees. 2. When you decide upon a bank obtain the proper complete bank resolution papers for opening an account and for authorizing a loan. Most banks do not have specific reso-- lution papers for not-for--profit corporations. If your choice of banks does not use not-for--profit forms, then use normal corporate forms. Do not use the papers sup- plied for churches, clubs or hospitals. If business corporation resolution forms are used, then interline the words not-for-profit" or non-stock' In front of the first few liñis where the word ~~rporation' is used; that is, replace all words `corporation with the term "not-for-profit or non-stock corporation. 3. ABC recommends, for simplicity, that only one signature be required, but that at least two signatures be recog- nized. 14~ Printed checks, if they are to contain the name or names of the directors or officers, should be printed so that the foundation's name appears in a discernibly larger type than the names of the officers or directors. 5. It is suggested that a business bank book rather than a pocket bank book be obtained for your foundation's check- ing account for clarity in record keeping. 6. Your foundation account should not be opened initially with any great sum. No more than $50 to $500 should ever be placed in the foundation initially. Larger transfers would only cause the counsel additional and un- necessary work in obtaining exempt status recognition for your foundation. Copyright c 1967 ~caericans uilding Constitutionally (A Trust) Printed in U.S.A. PAGENO="0484" 482 ob~ice of banks ~O~$ not use not.-for-.prof it' forms, then use normal corporate forms. Do not use the papers supplied for churches, clubs or hospitals. If business corporation resolution forms are used, then underline the words not for~prq~i~ or non-stoci~. in front of the fIrst `few lineswhere the word "corporation" is used. That is, replace all words "corporation" with the term "not-for- profit or non-stock corporation'. 3. ABC recommends, for simplicity, that only one signature be required, but that at least two signatures be recognized. 4. Printed checks, if they are to contain the name or names of the directors or officers, should be printed so that the foundation's name appears in a discernibly larger type than the names of the officers or directors. 5. It is suggested that a business bank book rather than a pocket bank book be obtained for your foundation's checking account for clarity in record keeping. 6. Your foundation account should not be opened initially with any great sum. No more than ~h5O to ~5OO should ever be placed in the foundation initially. Larger transfers would only cause the counsel additional and un- necessary work in obtaining exempt status recognition for your foundation. Additional ~p~ate Paper work, to Complete OrganizatiQfl Most of the remainder of the corporate paper work, with the exception of the employment contracts, will be prepared or edited by courisel, but you should have some idea of what is involved and the significance of 2-17 Copyright C2) 1967 Americans ~ui1ding constitutionally (A Trust) Printed in U.S.A. PAGENO="0485" 483 each or the documents. 1. Waivers or notice tomeetin~s or the board or directors: These are simply papers Which give written evidence that all the directors or the roundat ion had knowledge that a meeting or the board or directors was held. It does not mean that all or the directors attended the meeting, but simply that no secret or ttrailroad" type meetings were held. 2. Corporate Seal: The corporate seal is an historic remainder rrom the days when seal rings were used by illiterate kings to sign papers. Since most business men, even kings, in the world today are literate, the use or the seal has lost importance. Nevertheless, the corporate seal still remains the legal signature or your round at ion arid it Bhould be respected in its use just as you would respect your own signature and its use * Do not idly impress blank sheets or paper with it or allow your children to use it as a nut cracker. You should use your corporate seal to endorse all publicaly riled material, major contracts arid meetings or the members and board 2~l8 Copyright ~c) 1967 Americans Building Constitutionally (A Trust) Printed in U.S.A. PAGENO="0486" 484 or directors. The seal should be entrusted to one person, preferably the secretary or the foundation. If your counsel is chosen to maintain the formal records and the corporate record book of the found- ation then he may have possession of the seal. Some states do not require corporate seals. 3. Newspaper Notices: In most cases legal notice of the creation or the foundation in newspapers is not required. There are however isolated juris- diction and isolated circumstances that do require public notice of the creation of foundations. These situations usually occur when a foundation takes over an existing business, not only in terms of own- ership, but also in terms of operation. You should consult with counsel to determine whether such legal notice is necessary. If it is, counsel is trained to prepare such notice. Public notice through classified advertisnients in newspapers may be necessary to inform creditors, suppliers and customers or patients of a change of business form or business name. It is necessary to 2-19 Copyright (c~ 1967 Americans T~ui1ding Constitutionally (A Trust) Printed in U.S.A. PAGENO="0487" 485 inform such persons to avoid confusion in business transactions. A published notice in a daily newspaper circulated locally is usually sufficient to con- structively notify the necessary persons. 4. Membership Certificates: Your foundation will issue membership certificates to all members of the foundation. These certificates will be initially o:C two or three classifications and may eventually be of many classifications. Your counsel will help you draft a membership certifcate that will con:Corm with your state law requirements and your foundation's structure. These certificates are similar to stock certificates. In the event of a dissolution of the foundation, members, as represented by the membership certificates, may have property rights in the assets of the foundation. Because the rights and identity of the members will be important to your control of the foundation, you will want to keep clear and care- ful records of the foundation's membership and you will want to issue distinctive membership certificates. These may be as detailed and elaborate as stock 2-20 Copyright ,~1967 Americans Building Constitutionally (A Trust) Printed in U.S.A. PAGENO="0488" 486 certificates and bonds, or they may merely consist of a clearly typed letter on your foundation1 s stationery. The language of the certificate may vary from state to state, but each certificate should be numbered and signed by both the secretary and president of the foundation, regardless of the state. One example of a membership certificate will be distributed for illustrative purposes. 1Distribute EXHIBIT ~6 showing membership Icertificate example The EmploYment~ Contract Betw~ri the Found ation~~d the Executive DirectQti One of the primary benefits of control of a private foundation is that you may be employed by that foundation and thereby obtain salary and fringe benefits in return for services actually rendered. The creation of this employment relationship may be handled in many ways. However, ABC suggests a three step approach to create a proper relationship, pro- viding flexibility in the relationship and providing 2.-21 Copyright ~~1967 Americans building Constitutionally (A Trust) Printed in U.S.A. PAGENO="0489" EXHIBIT #6 This exhibit has been prepared for educational purposes and should not be used for other purposes without the advice of counsel. THE ROAD FOUNDATION THE BOARD OF DIRECTORS AND THE OFFICERS OF THE ROAB FOUNDATION, DULY ORGANIZED UNDER THE LAWS CF THE STATE OF ILLINOIS, DO HEREBY DECLARE THAT _______________________ HAS BEEN ELECTED A SUSTAINING MEMBER OF THE FOUNDATION, AND IS ENTITLED TO ALL OF THE RIGHTS, POWERS AND PRIVILEGES APPERTAINING THERETO. Eflective. this _____day of __________, 19_. ___________________________________ Secretary PiEMBERSHIP CERTIFICATE NO. _________________ President Copyright ®].~è67 At~ericarLs Building Constitutionally (~ Trust-)--Printed in-U~S-.A.-----~--- - PAGENO="0490" 488 the clearest evidence of the relationship. These three steps include: 1. A letter from the individual orfering his services to the foundation in return for an employment or management contract. 2. A resolution by the board of directors ac- cepting this offer and authorizing the creation and execution of a contract. 3. The execution of the contract itself. Alternate methods for creating this employment relationship are: 1. The simple exchange of letters between the foundation and the individual which set out and confirm the terms of the contract. 2. The execution of a contract without an offer or acceptance between the board of directors or secretary of the foundation and the employee. 3. The deliverance of a memo from the found- ation to the employee evidencing in writing the existence of an oral agree- ment or working relationship. These methods are all legally sound and are being used all over the United States today. The first method, although more complex, provides better evidence and more flexibility for the relation5hiP~ An attorney 2-22 Copyright ~` 1967 Americans Building Constitutionally (A Trust) Printed in U.S.A. PAGENO="0491" 489 acquainted with foundations would have the proper language to be used in all three of the above doe-. unients. Your primary job, as an individual, will be to determine what fringe benefits you desire so that counsel may write them into the employment contract. Distri1~ute EXHIBIT #7 discussing the possible contractual benefits and what factors one must consider concerning each fringe benefit. We will discuss "fringe benefits" in detail at a later section of this seminar. Foundation Tax-Exempt ion ABC has available through its members extensive research material in the field of tax-exemption of foundations. Under section 501 (a) of the Internal Revenue Code, every organization which is properly organized and operating is tax-exempt. This particular Internal Revenue Code provision does not require found- ations to apply for exemption, nor does the Code give any authority to any government agency to absolutely determine a tax-exempt status.' In other words, under the law you are exempt if you have been properly 2-23 Copyright 1967 Americans ~Euilding Constitutionally (A Trust) Printed in U.S.A. PAGENO="0492" 490 EXHIBI~1 F1-(INGE~ BENEFITS There are benefits to being an employee of a foundation that are not stated in the employment contract. Among these are: 1. Educational opportunities 2. Research projects 3. Research grants Li. Use of foundation facilities and equipment Other benefits are specifically stated in the employment con- tract and are usually governed by the Internal Revenue Code. Among these are: 1. Insurance (disability, life, professional liability, health, accident, medical) 2. Vacations 3. Adequate housing LI. Reimbursement for business expenses 5. Time for educational activities 6. Professional membership fees 7. Retirement Copyright (~) 1967 Americans ~uilding Constitutionally (A Trust) Printed in U.S.A. PAGENO="0493" 491 organized and if you continue to properly operate. Up to this point in our coverage of foundation pro- cedures we have been properly organizing your found..- at ion. The next section will give you guides in how to properly operate. You may operate under the definitions of the Internal Revenue Code for as long as you wish without paying taxes, without paying social security and take advantage of all not-for--prof it tax.-exempt benefits without going to court or to the Internal Revenue Service for prior determination of tax-exempt status. The primary disadvant age of lack of government "notice" is that the federal, state and local tax agencies might not recognize~ this tax-exemption with- out some inconvenience. It is therefore advantageous to obtain tax-exempt recognition from your federal, state and local goverrnnnnts. Of the many methods tbat ABC has researched and developed, only four re- present practical methods to obtain tax-exempt re- cognition. These are determinations by: 1. State agencies 2. State courts Copyright'c 1967 224 Americans ~`ui1ding Constitutio~a11y (A Trust) Printed in U.S.A. PAGENO="0494" 492 3. Federal courts 4. Federal agencies. Stat~ Ageci~ State agencies may determine whether your :Cound- at ion is exempt or simply recognize the foundationts tax-exempt status. If you have not received prior recognition of the exempt status from other agencies or courts, then your state treasurer, secretary of state or state attorney general might be empowered to determine the exempt status of your foundation. This recognition or determination however is usually only valid as to that particular state agency and neither the federal government or other state agency is forced to recognize this determination. In prac- tice it is not unusual for the state treasurer to determine that a foundation is tax.-exempt, while at the same time the attorney general finds that the £ouñdation.iS not tax-~exempt. Applicaticn to state agencies is usually slow and is not efficient. It is, however, a valId method and has been employed by some rather large and famous foundations. Copyright ~ 1967 2~25 Americans Fuilding Constitutionally (A Trust) Printed in U.S.A. PAGENO="0495" 493 State Courts In most states a Probate or Surrogate court is empowered to determine the taxability status of a not-for--prof it corporation or determine the tax- exemption of an organization owned or controlled by a decedent. Since this method of obtaining tax-. exempt recognition usually requires that a director or officer of the foundation die, we don't recommend it. The death is often irrevocable and the deter- mination is often slow. Federal Courts For the individual who desires the most freedom from regulation and has the patience and courage to withstand pressure, the federal courts offer the most satisfactory place to adjudicate tax-exempt recogni- tion. The court order may be obtained from a federal court to determine whether an organization foundation is, in fact, both organized and operated exclusively for proper purposes. Such an order may be obtained upon petition by a single party (ex parte action), or may be obtained in an adversary proceeding (e.g. an attack by the internal Revenue Service on the exempt 2-26 Copyright `c 1967 Americans ~`ui1ding Constitutionally (A Trust) Printed in U.S.A. 87-444 0-68-32 PAGENO="0496" 494 status of your foundation). The court order is the strongest determination of exempt status. The disadvantage to this procedure is that the strongest pressure occurs when the Internal Revenue Service attacks. Great patience by the foundation executives :Ls usually necessary before the Internal Revenue Service does attack. During the last few years foundations have grown from approximately 7,000 in 1952 to an estimated 106,000 in 1966. During this time the Internal Revenue Service has followed the activities of less than a thousand foundations. The Internal Revenue Service has audited less than 500 foundations each year. The Internal Revenue Service has brought less than 100 cases or attacks against foundations each year. This would mean that unless your foundat ion was one of the fewer than 100 chosen out of 100,000 each year you would have to wait to get your court order. As you can see, the odds are against the IRS litigatIng your foundation, but, if you choose this procedure always keep in mind that you are exempt without a court order if you are organized and are operating 2...27 Copyright c 1967 AinericansBUildiflg Consitiutionally (A Trust) Printed in U.S.A. PAGENO="0497" 495 properly. You do not require determination by the court. Federal Agencies The only federal agency prepared to determine your foundation's exempt status is the United States Treasury through the Internal Revenue Service. The Treasury has in fact set up mechanical procedures to determine this exempt status, but the use of these mechanics is not required. Due to these mechanical procedures, however, determination by the Treasury Department is the fastest and most efficient means to obtain exempt recognition. Organizations formed under code Section 501 (c) (3) should use form 1023 to apply for exempt determination. Counsel who worked with ABC are often acquainted with the most efficient ways to complete and apply form 1023 to your foundation. If you choose form 1023, you will have to think out certain projects and assignments so that the counsel may in fact present a proper picture of your foundation's structure and intent to the Treasury to obtain a favorable determination. The primary disadvantage ~28 Copyright ~~l967 Americans Building Constitutionally (A Trust) Printed in U.S.A. PAGENO="0498" 496 of form 1023 is that a great amount of informat ion must usually be exposed for public record and that form 990-A must be riled by May 15th of each calendar year after Treasury determination. Form 990-A is a pain in the neck, but may be completed without too much trouble by a competent accountant. Determination through form 1023 usually takes about four months in a normal situation and might be completed in a shorter time. The time depends upon the speed of the IRS in receiving the application. In unusual situations where politics has entered the picture, form 1023 has taken up to three years, but because normal administrative procedures may be employed, determination can usually be forced one way or the other. The Treasury Department section on tax-exempt organizations has advised our research staff that they are most happy to help in any way they can in bonfide attempts to form foundations. (If you have questions you might obtain some inform- ation from the Internal Revenue Service itself such as ~reasury Document #5551). We have fo~id no hos- tility from the Treasury on this matter. 2-29 Copyright (~%~ 1967 Americans ~ui1ding Constitutionally Printed in U.S.A. PAGENO="0499" 497 Once tax~-exempt determination of your foundat ion has been made it is wise to immediately pursue all procedures required to get exempt recognition from state and local taxes. ~hile the "tax-exempt number" on your federal letter is still available (that is, if it hasn't been lost in your riles), all the pro.- cedures should be completed to eliminate future red tape. Such completion of procedures on a federal, state and local level will often prevent unnecessary harassment or questioning by government officers simply by having as evidence, letters by superiors or pre- decessors of these offices. What methods you will actually use to obtain exempt recognition locally depends entirely on your own circumstances. The "legal strategy" should be determined after a con- ference between you and your counsel S pec ial Typ~sof Operat ing Foundations (foundations wh limited purposes) Special structures or types of foundations have particular advantages in the view of the Internal Re~;3nue Code when the organization is d:~:ected to one particular activity or to one particular purpose. Copyright (c)1967 Americans Building Constitutionally (A Trust) Printed in U.S.A. PAGENO="0500" 498 Some of these advantages may make one or more of these structures desirable to you. One thought should be kept in mind, however, that because these special structures have limited purposes they also have limited scope of activity and flexibility. A. Medical Foundations Foundations formed primarily for medical or health purposes are sometimes given exemption from self-dealing and accumulation of income prohibitions. The Hughes Medical Institute was formed to take advantage of some of these advantages. Medical foundations may either conduct medical activity, (research or treatment) or primarily support organizations carrying on medical activity. The Salk Institute and the Mayo Clinic carry on direct medical activity. The Searle Foundation supports medical activity through medical contributions or scholarships. The granting of medical scholarships or nursing scholEvShiP5 may be one means of obtaining a medical exemption 2-31 Copyright ~:1967 Americans Building ConstitutionallY (A Trust) Printed in U.S.A. PAGENO="0501" 499 recognition. The advantages of a medical foundation are simply a lessening of appli.- cable regulations, but the "disadvantage" is that medical activities must be supported as a primary purpose of the foundation. B. Agricultural Foundations Foundations formed for agricultural research purposes have the same advantages as medical foundations (freedom from same regulations). Agricultural research, however, ~ be performed by the foundation. Support of agricultural research alone is generally not considered to be sufficient to meet the definition. ABC recognized that many persons working in agriculture seriously consider doing research and development to help solve the present food problem end the potential food problem that is being caused by the populät ion explosion. New and effective methods have increased both the quant ity and quality of agricu~Ltural produ:t ions, both plant and animal. This is a valid research 2-32 Copyright c~ 1967 Americans ~Bui1ding Constitutionally (A Trust) Printed in U.S.A. PAGENO="0502" 500 purpose which is especially recognized by the federal government and some individual states such as Wisconsin and Illinois through privileges granted under the law. C. Rei~iQ~5 Foundations Foundations formed exclusively for religious purposes or for actively advocating a religious philosophy are exempt from certain reporting requirements of the Internal Revenue Service. Such foundations may not advocate a philosophy developed by the founder alone, but must advocate an accepted reli- gious philosophy or a philosophy with a broad base. The Billy Graham Crusade, the Black Muslims, Tim O'Leary's LSD Reli- gion, the Knights of Columbus, the B'nai Brith, the Luther League and store front churches fall into this category. They all are considered religious foundations. If you have a real interest in a religious philosophy and wish to dedicate your life and activities to this purpose, then a foundation copyright(c~ 1967 2-33 Americans ~ui1ding Constitutionally (A Trust) Printed in U.S.A. PAGENO="0503" 501 formed exclusively for religious purposes, Would give you freedom and flexibility and would give you relief from annual 990.-A reporting requirements. D. Edoati~l Foundations A foundation formed exclusively for ed-. ucational purposes may secure many benefits if it meets the further test of being an `Education Institution". To do so it must have a faculty, an established curricula and a student body that meets regularly for a portion of the year at the place where the educational activities are normally carried on. This type of 501 (c) (3) or- ganization is excused from annual reporting requirements set by the Internal Revenue Code (990.-A). The foundation, however, must be a regular, bona fide institution to qualify for these advantages. All colleges and universities are, of course, this type of institution. Many training institutes, 2-34 Copyright'c; 1967 Americans "~ui1ding Constitutionally (A Trust) Printed in U.S.A. PAGENO="0504" 502 however, either are tax-exempt or could qualify for such tax-exemptions if they were organized under this la1~. The Sales Analysis Institute Foundation of Illinois, Inc. is one such organization. E. Scient~t~c Foundations There are no particular advantages to being form- ed exclusively for science, but there are some special requirements. A scientific foundation must make the results of its research available to some portion of the general public on a non-discriminatory basis. Such a scientific organization must demonstrate upon inquiry that its methods are directed to some scientific cause and that its methods are scientific in nature. A scientific foundation must be formed for one of the following three purposes. 1, For doing research excJ~sive~y for the United States Governxnen~. 2. For doing research exc~usively for a recognized educational institution. 3, For accomplishing research for the benefit of all mankind. 2..35 Copyright (E) 19ó7 Americans ~u!lding Constitutionally (A Trust) Printed in U.S.A. PAGENO="0505" 503 Vie recommend that your Loundat ion qualiry Lor a scientific organization in the third category. i;Iaklng research available on a non-discrim-- inatory basis does not mean that you must give away your reports. You may charge i~or your findings or sell patent rights on your developments but you cannot prerer one company or individual over others. Social Science, Management Science, the Science or Finances and other "pseudosciences" have been recognized by the Treasury as being valid sciences ror the purposes or the section. Civic Leag~ie Berore we go on to more detailed discussion or the roundation methods and benefits, ABC wishes to orrer as a membership benefit to this class aid and service in creating a Section 501 (c) (4) organization, known technically as a civic league or club. This is a tax-exempt structure which consists or two or more 2.-~36 Copyright (~ 1967 Americans Building Constitutionally (A Trust) Printed in U.S.A. PAGENO="0506" 504 persons interested in furthering "social welfare" or furthering an employment status. The members of this civic club v~ould include those members of this class, who would qualify either as employees of foundations or through interests in "social welfare'. The purpose of the organization could be any com- munity project or purpose decided upon by the members, but would normally include some phases such as com- munity uplift, education of civlc responsibilities, or to promote a better community and civic service. In terms of such emphasis the club would accomplish or improve itself and the community through many worthwhile projects. A 501 (c) (4) civic club has certain advantages and disadvantages that a 501 (c) (3) foundation does not have. For example, a civic club may participate in some political activities. A civic club may lobby for or against legislation where it aC~ects the club's program. However, con- tributions to a civic club are not tax deductible. Income, however, to the organization itself is tax- exempt. -. 2-37 Copyright C)l967 Americans Building Constitutionally (A Trust) Printed in U.S.A. PAGENO="0507" 505 Your civic club may decide not to participate in politics, and will probably not do so. However, the club may be formed for solely educational purposes. Your civic club could be a vehicle to bring special lecturers or programs from many sources, including, by the way, the ABC membership. Your civic club might decide to meet and discuss more detailed foundation and trust activity, once these o:Cficial seminars have been completed. Your civic club might obtain the services of a knowledgeable local attorney to further instruct on the methods of estate and foundation management and structure. Outsiders could be (perhaps should be) invited. A civic club is a non-profit corporation and is formed exactly like your private foundation. It varies, however, in the stated purpose of the organi- zation and in the bylaws. A civic club is normally a democratic organization rather than an organization controlled by a single person like ycur private found- ation. The board of directors of your civic club will probably be elected by the members, and, in fact, the board of directors could conceivably be all of Copyright ~c, 1967 238 Americans `~ui1ding Constitutionally (A Trust) Printed in U.S.A. PAGENO="0508" 506 the members. The civic club would have officers who would probably be elected annually. The civic club would have bylaws that would resemble those of many other similar organizations, with which you might be familiar. ABC would, through a friendly local counsel, be happy to rorm such a legal organization for the benefit of its members, provided they have this desire, but ABC does not wish to Lorce any person to join anything. If any educational, junior or senior member in this seminar does not wish to join this particular civic club he will not have to do so. ABC will provide the organization of the club and will help suggest ways and means for rounding the club and accomplishing its initial desires, but ABC will not control the club in any way. The civ it~ club will be considered an associate member of ABC for comrn- municat ion purposes only. If any of the class are interested in forming such an organization within your ~vn ranks, then a local attoriey will discuss the organization briefly with you now. 2.~39 Copyright (~:~) 1967 Americans building Constitutionally (A Trust) Printed in U.S.A. PAGENO="0509" 507 Yistrlbute EXHIBIT ~8 on civic club and attorney wlll explain details. Articles of incorporation will be drafted but other organization material will be left to a subsequent meeting. Suggest future pro- jects to be undertaken by Civic Club. * * * * 2-40 Copyright (s') 1967 Americans iluilding Constitutionally (A Trust) Printed in U.S.A. PAGENO="0510" 508 EXHIBIT 8 CIVIC LEAGUES Organization Civic leagues are tax-exempt organizations created under section 5Ol(c)(L~) of the Internal Revenue Code. This section defines the types of groups that are either employee organiza- tions or social welfare organizations. Most people are primarily concerned with the second definition, social welfare organizations Civic leagues formed for social welfare are usually created in the same way that corporate foundations are; that is, they are created through the formation of a non-profit corporation. The purpose clause of these civic league corporations, however, differs from that of a section 50l(c)(3) private foundation. If the purpose clause of a non-profit corporation's articles of incorporation contain the word `welfare' or gives enough scope so that the organization can deal with social welfare outside of the limits of science, education, etc. (section 50l(c)(3), then the Treasury will usually consider the organization to be a civic league. Differences Between a Private Foundation and a Civic League Other than the purpose clause difference) the civic league is generally more flexible in terms of operation than the private foundation. A civic league nay participate in most business ac- tivities without tax problems and a civic league nay, to a limited extent, participate actively in politics. The rule concerning political action is: if legislation would affect the ultimate social purpose of the civic league, then the organization may lobby for or against that legislation or support candidates who tend to support the objective of the civic league. Private founda- tions, as you night know, are barred from such activities. Civic leagues, however, cannot receive deductible charitable contributions; that is, an individual donating to a civic league may not deduct that donation from his income tax liability for that particular year. Civic leagues are not considered charities and are usually not controlled by any charitable trust acts. Common Examples of Modern Civic Leagues The following organizations have been found by the Treasury to be 50l(c)(14) civic leagues: 1. American Legion 2. U. S. Lawn Tennis Association 3. An organization concerned with the suppression and punishment of crime -1- Copyright c 1967 Americans uilding Constitutionally (A Trust) Printed in U.S.A. PAGENO="0511" 509 LI. An organization to promote financially sound and economical government 5. An organization created for the purpose of assisting members in time of sickness or distress 6. An organization to rehabilitate unemployed persons over a stated age 7. An organization to encourap~e greater participation in governmental or political affairs 8. An organization formed for the purpose of giving aid and advice in connection with the location and construction of homes for sale to low and middle in- come families in an area where no adequate housing existed. The following organizations were found not to be tax-exempt civic leagues: 1. A non-profit organization organized to provide low-cost cooperative housing to veterans and other * eligible tenants through the purchase and operation * of a housing project. 2. An organization formed to provide television reception to its members for a fee on a cooperative basis; in other words, a community antenna. 3. An organization formed to operate a semi-professional baseball club. L4~ A non-profit organization that conducted social wel.- fare activities but whose primary function was the operation of a summer home open to the general public at competitive rates. 5. Am organization of women buyers of ready-to~wear accessories which carried on no community-oriented functions and used its annual income to service Its members. What a Civic League Cam Do Your civic league, if you should decide to form one with your fellow classmates or others, would be able to accomplish a great deal of good in your community without becoming a chari- table orgamization. You could foster education, both of the members of the civic league and other persons in the community. You could promote legislation that would better your community or promote the repeal or defeat of legislation that would be detrimental to individuals and their freedoms. Your civic league would be a democratic society formed by those who wish to partici- pate in it for the sole purpose of accomplishing community uplift. The precise details of any project could be worked out by the boards of directors involved. -2-- Copyright ~`. 1967 Americans Building Constitutionally (A Trust) Printed in U.S.A. 87-444 0-68-33 PAGENO="0512" 510 Your civic league could be a vehicle for oroviding benefits in terms of self-education and practicing foundation techniques without endangering or implicating your own private foundation. Funding the Civic League Since contributions to a civic league are not tax-deductible, it is recommended that those interested in funding a civic league loan money to the league on a low-interest or interest-free basis. Another alternative would be to charge membership dues on an an- nual basis and begin funding in this method. If a small capital fund could be created, subsequent investments and operations might increase this fund through earnings and provide a broader base on which to operate. Principles of Civic League Management This topic is scheduled to be discussed in great depth at a later seminar which is being developed at the present time. How- ever, the general principles of private foundation management will apply in most cases to those of a civic club. Remember, however, that a civic league or civic club is not limited by unrelated busi- ness income, unreasonable accumulation of income, or the prohibited transactions that will be discussed in your foundation management education. These statutory laws only apply to section 50l(c)(3) organizations and not to section 50l(c)(14) civic leagues. Starting Procedures Your attorney is more than capable of creating a non-profit corporation based on section 5Ol(c)(~). He would also be able to supply you with the proper bylaws and minutes to begin your organi- zation. The following language, however, could be used for the bylaws of a civic league or civic organization. This language should, however, be discussed with an attorney before it is used to enable all the participants to understand the language in depth. These bylaws should never, in any case, be used as the bylaws for a private foundation. BYLAWS OF A CIVIC LEAGUE 1. Name: The name of this club is___________________________ Th~rporated under the State of under the ____________________law on the day of , 1967. 2. Objects: Objects of this club shall be to protect and promote the best interests of the citizens of the nation, the state and this area, hereinafter set forth: to promote and strive for the improvement and betterment of all public facilities and services; to promote and encourage a better community and civic spirit and to foster good will and friendship between and among all the residents of said area, to cooperate -3- Copyright c,1967 Americnas uilding Constitutionally (A Trust) Printed in U.S.A. PAGENO="0513" 511 with county, town, village, state and federal officials and with other c±vic and public organizations for the general welfare of the entire community. 3. Members~p: Membership ma~ be of several classes as provided by the Board of Directors and shall be initially of one class. (a) The initial class of members shall be those persons elected by the board of directors. L~. Dues: Annual dues may be assessed from each member equally by the board of directors. 5. Fiscal Year: The fiscal year of the club shall commence on the day of and end on the day of______ 6. Meetings: (a) The annual meeting of the members shall be held on the _____day of , of each calendar year for the ex- press purpose of electing directors and officers and for conducting such other business as may come before the members at that time. (b) Regular meetings of the members shall be held as per agree- ment and resolution of the members. (c) Special meetings of the membership may be called by the president, whenever he shall deem the same necessary or .whenever he shall be called upon to do so by two members of the board of directors or four members of the club. (d) Notices of all such annual and special meetings shall be in writing given or mailed to each member not less than five nor more than ten days before the date set for any such meetings, but such notice may be waived in writing by agreement of 2/3 of the members at amy such meeting. ITo notice is required for a regular meeting of the member- ship. Two-thirds of the members shall constitute a quorum of the membership. Voting shall be by a majority vote cast in person or by proxy. Proxies shall be in writing subscribed by the member and shall be presented by the presiding official of the meeting, to be qualified. 7. Directors: The affairs and business of this club shall be ~anaged by a board of directors elected by a plurality vote of the members present, at the annual meeting or such special meeting as may be called. Such directors shall serve for the ensuing year or until their successors have been elected and qualified. _L1 - Copyrigat® 1967 Americans Building ConstitutionallY (A Trust) Printed in U.S.A. PAGENO="0514" 512 Special or regular meetings of the board of directors shall be called by the president whenever he deems them necessary or whenever he is called upon to do so by two of the directors. 8. Officers: The officers of this club shall be four in number; a president, vice-president, secretary and a treasurer. No one person may hold more than one office. All officers must be members of the club. (a) The president shall be the chief executive of the club, charged with the duty of supervising all of its functions subject to the orders of its board of directors. He shall be am ex-officio member of all committees. (b) In the president's absence or in the event of his inability to act, the vice-president shall perform the duties of the president. He shall also perform such other functions as the board of directors may from time to time assign. (c) The secretary shall conduct the correspondence of the club, issue notices and keep minutes of all meetings of the club, be custodian of the records, keep the roll of members and discharge such other duties as may be assigned to him by the board of directors or the president. (d) The treasurer shall collect all dues and shall have the care and custody of all funds and property of this club, which shall be disbursed by him only upon the order of the board of directors or of the president. He shall submit a report for the preceding year at the annual meet- ing of the members and shall render special reports when- ever requested to do so by the board of directors. He shall deposit all funds in the mane of the club in such bank or banks as may be designated by the board of direc- tors. (e) Should any vacancy occur by death, resignation or other~ wise, the same shall be filled without undue delay by the board of directors. 9. Committees: Committees shall be designated and appointed by the president or the board of directors as may be required. 10. Seal: The board of directors is empowered to design and ac- cept a seal for the club and an impression thereof must be made at the margin of this page. 11. Amendments: Bylaws of this club may be amended or revised by the board of directors, by 2/3 vote of all directors and ap~ proval by the affirmative vote of a majority of the members present at the annual meeting or at any regular or special meeting, provided that notice of any such meeting contains a summary of the proposed amendment or amendments. Copyright c 1967 Americans uilding Constitutiona1~y (A Trust) Printed in U.S.A. PAGENO="0515" 513 Sect ic~3 Foundation Inme Sources ~fl~Oierp.t ~ Under section 501 of the Internal Revenue Code an organization properly organized and operating is entitled to tax-exemption for federal income tax purposes. Up to now, we have referred to the prin.- ciples and some of the documents involved in organ- izing a foundation for tax-exemption purposes. For the rest of this portion of the seminar we will consider methods applicable to proper operation of the found.-. ation. Your local counsel will accomplish much of the work in organizing your foundation, using your ideas. But your counsel will not be able to operate your foundation. He will only be able to advise and guide you in the proper operation of the foundation. The greater knowledge of the operational methods of foundations that you have, the greater will you 3-1 Copyright (~~) 1967 Americans Building Constitutionally (A Trust) Printed in U.S.A. PAGENO="0516" 514 potentially benefit the uorld and yourself as founder and executive director. The better you know how a foundation ought to operate the more chance there is that your foundation will significantly benefit man.- kind. Again I will welcome any questions on the material that we will discuss. Perfect understanding of these methods by you is an objective of ABC. `iVe hope to answer every question. We will cover the following areas of management. -~ Instructor should refer to EXHIBIT #1 ~ of th~ Foundation Your foundation, as a legal structure, Is only an alternate form of organization. Legally your foundation 15 no more special than a corporation, a partnership or a sole proprietorshiP. There are no particular mystical or magical business methods that apply to foundations which differ in any way from conventional responsible business management. You may, in fact, with very few differences, properly operate a foundation with the same business methods 3-2 Copyright~c~l967 Americans ~ui1ding Constitutionally (A Trust) Printed in U.S.A. PAGENO="0517" 515 that you use Lor a stock corporation. Our purpose, however, in spending the t line in this seminar discussing operating methods is not to teach you con.- ventional good business practices. Instead we would like to make you aware or certain applications, or normal buD mess practices that would be benericlal to the overall operation or the roundation either in terms o2 security rrom government regulations or the erriclent production or benerits. In each o~ our seminars we bring together mdi.- viduals o~ a wide variety or backgrounds. Due to this availability oC talent, I would like to conduct the management port ion or this seminar on the basis that each or us contributed ideas to the others. That is, I do not have all the answers to questions or manage- ment, and perhaps some or you have ideas that would work within the £ramework or the Loundatlon principles. I suggest that we go through the written material ror each subject and then discuss some ideas or practical application or the general rules or thumb that are presented which rn:Lght personally apply. 3..~ Copyright (c~) 1967 Americans Building Constitutionally (A Trust) Printed in U.S.A. PAGENO="0518" 516 Foundation Income Sources The first order of management of any business is capitalization. Your foundation is no different. In other words, before your foundation can begin to operate it must have capital assets with which to finance the operations. These capital assets will come primarily from one or more of three sources. The sources are: 1. Contributions 2. Loans 3. Purchases Contributions - The first tax.-exempt source of income is capital gains, which will be briefly discussed in the section on "buying and selling property. A more familiar concept of capitalization, however, is from contribu- tions. Contributions may be derived from many sources. It is recommended, however, that you do not create your foundation with intent to become a general solicitor, That is, ABC does not recoinnienci that your foundation become a `tin cup" foundation. There is usually no reason for an operating foundation 3.4 Copyright (c~ 1967 Americans Building Constitutionally (A Trust) Printed in U.S.A. PAGENO="0519" 517 to make general solicitations for contributions from the public at large. ABC does not recommend that a source of "charitable" activities, such as foundations should become the subject of charity. Your foundation should be dependent only upon its efficient operations and the energies and resources o:C its founders and employees. This is not to suggest, however, that ABC discourages foundations from receiving unsolicited endowments or from applying for special research grants from larger private and public sources. In addition, ABC also recommends that in some situations contributions from the founder to the foundation might be highly desirable to other parties. v~e will discuss contributions in this section only in terms of contributions to the foundation and we will reserve the procedures of contributions ~ the found.- ation to the section on grants and charity. We recommend that your foundation begin its activities with borrowed money rather than contri..- butions~ This is a general statement and, of course, has exceptions. But our reasoning for this general 3-.5 Copyright `~` 1967 Americans Building Constitutionally (A Trust) Printed in U.S.A. PAGENO="0520" 518 statement is as follows: You will start your foundation by placing some amount of money in your foundation! s bank account. This money will either be from your private income or from your business income. In either case, it is recommended that a promisory note should be executed by the foundation to the lender. Technically your foundation has not yet been recognized by the U.S Treasury as a qualifying organization to receive deductible contributions, and this original amount might not be recognized as a deductible charitable contribution. If these original funds are a loan then you will not be penalized in the event the amount is not recognized as a charitable deduction. This loan may or may not carry interest, may be short term or long term and may be converted into a contri~ but ion simply by marking the note `paid" and giving it back to the foundation. The foundation would then send a "thank you' note for the contribution as evidence of the transaction. Your foundation would then have capital to begin its operations. Another reason for loaning n~oney to the founda~- tion at first rather than contributing to it is that 3-6 copyright(~)1967 Americans Building ConstitutionallY (A Trust) Printed in U.S.A. PAGENO="0521" 519 this technically cuts down paper work on the form 1023 app:Licatiofl for exemption determination. Section 170 (b) of the Internal Revenue Code governs normal contributions to a foundation. There are also other sections of the Internal Revenue Code which govern special contributions in terms of the Federal Gift Tax, the Federal Estate Tax, Membership and Club dues, and certain trust procedures. Section 170 (b), however, will govern most of your activities in terms of contributing to your foundation. Under section 170 (b) you, as an individual, are allowed to deduct up to 20 percent of your adjusted gross income for contributions made to private charities. You are allowed to deduct up to an additional 10 percent if the contributions were made to a church, school or hospital. This does not mean that you are not allowed to contribute more of your salary or income, but only that you are allowed to deduct these percentages above for income tax purposes. In other words, there is no limit on what you can give - only on what you can deduct. 3-7 Copyright (c) 1967 Americans Building Constitutionally (A Trust) Printed in U.S.A. PAGENO="0522" 520 Corporations may contribute up to 5 percent of their adjusted gross income to any charity. It is recommended that corporations ~ exceed this limit in their gifts. A mere pledge is not considered to be a contri-. bution and a contribution must actually be paid to entitle the donor to a deduction. Gifts of appreci.- ated property generally avoid a tax on the attributed capital gains appreciation. All types of property may be used as glfts the most frequently used are stock, life insurance, bonds and other types of intangible interest. Life insurance may be given where there is an irrevocable assignment of the policy and the found-. ation is also named as irrevocable beneficiary. A transfer of property to a foundation may also be both a sale and a gift simultaneously. Where property is sold at less than market value the difference between the actual sale to the foundation and market value might be directed as a charitable gift; because recent cases have criticized or questioned charitable gifts made to foundations with limitations or strings 3-.8 Copyright (~`~ 1967 Americans 1~ui1ding Constitutionally (A Trust) Printed in U.S.A. PAGENO="0523" 521 attached, it is as a general rule recommended that gifts be made to a foundation without restrictive limitations. It must be pointed out, however, that it is quite permissible and sometimes desirable, to give property to a foundation or charity and retain a lifetime interest in that property; that is, upon your death the foundation or charity would gain out- right control of the property, but you retain the income of the property while you live. You may deduct the value of the foundation's Luture interest in the property immediately upon the creation of such a contract. It is recommended that in any unusual or complex contribution you refer this to a local attorney or a well qualif ied tax accountant. There are many special types or contributions that have been recognized by the Treasury as having tax consequences - some favorable and some unfavorable~ Before completing a contribution transaction of an unusual nature or large amount, you should consult with an attorney. For small amounts you would keep a record in the same way 3-9 Copyright (C' 1967 Americans Building Constitutionally (A Trust) Printed in U.S.A. PAGENO="0524" 522 that you presently keep a record of a contribution to your church, college, or local charity. Fees The primary reason that your foundation may ~QJ~ need to solicit contributions from the general public is that it may earn most of its initial capital through fees for services actually rendered. In other words, your foundation may provide certain services to the community at large for which .lt will be paid fees. If your present vocation is that of a doctor of med- icine or other member of the tthealing arts'~, then you may continue this type of service through your foundation with a few changes in structure and record keeping. You would form a `clinic~7, whether you use this name or not. You might offer some of your services to the general public, or a special portion of the public, as you wish, and charge fees based upon the services rendered to these people by your foundation. These fees may be based on the ability of your patients to pay. This standard is the one used by the Mayo Clinic in Rochester, Minnesota, which is associated with the iIiayo Brothers Foundation. 3.40 Copyright te; 1967 Americans Building Constitutionally (A Trust) Printed in U.S.A. PAGENO="0525" 523 Both of these organizations are foundations. If you are an educator or a scientist, or some other type of "self.-employed profQssional", some, if not all of your services, could be retained by your foundation and your expertise used to offer foundation services to the "general public". For example, if you are an expert in sales or distribution of pro... ducts, you might offer research and development in sales communicatlons or the science of transportation through your foundation. If any other business deS-. sired special research and development in these fields, they would contract with your foundation to provide them with answers to their questions, Your found-. ation would, however, have to make the results avail.- able on a non.-discriminatory basis, and you should check with a local attorney who could help you decide if your proposed operations would qualify as a foundation activity. ~e are simply suggesting that your foundation could offer services to the general public or some portion of the general public within the scope of the express purposes of the foundation. If your foundation Copyright c 1967 3.~ll Americans uilding Constitutionally (A Trust) Printed in U.S.A. PAGENO="0526" 524 i~ created exclusively for education, science, religion and literary purposes, then you might offer services within these fields. This is the precise method o:C operation that Educational Test lng Service, for example, offers standardized nationwide tests to enable students and institutions to judge the ability of any individual on a nationwide basis. ETS administers the College Board examination, which is off ered to every high school junior and senior in the country for about ~l2 to $20 per examination. Nearly half of the students in the country take this exam during the course of their high school years. Ob.- viously, Educational Testing Service, a foundation, does not need to solicit funds from the general publlc. The one principle to remember in structuring the services that your foundation might offer to the public is that these services must be related to the exempt purposes of your foundation or the income from these services will not be tax-exempt under the Internal Revenue Service Code. Normally, activities outside of education, scientific research, health copyright(~j1967 3-12 Atnericans Building Constitutionally (A Trust) Printed in U.S.A. PAGENO="0527" 525 care, or agricultural research are structured as pure basic research and development in the ~science! of the sub jBct matter most related to the interests of the foundation staff. In structuring the exact amount for the fees, care should be taken to avoid direct competitlon with local commercial institutions. Indirect competit~Ofl is permitted under the law. In other words, even though you may charge exactly the same fees as a local competitor for the services of your particular foundation, you might structure it as fees based upon the ability of the person to pay, or fees relating to the costs of the foundation (costs, of course, include the salaries necessary to pay foundation employees), or fees based upon the research value of the particular project for which the foundation contracted to study. 313 Copyright~d~ 1967 Americans Building Constitutionally (A Trust) Printed in U.S.A. 87-444 0-68-34 PAGENO="0528" 526 Investment~~urit iesL Mortgag~~ Rentals~ and ~re hava covered briefly two sources oL tax- exempt income Lor your Loundation. These two sources are contributions and related Lees. There are Live other sources oL tax-exempt income and these are: 1, Dividends 2. Most rents 3. Royalties 4. Interest 5. Short and long term capital gains. These are the Live "investment sources oL Loundation income. Your Loundation may invest in any security pro- gram that is reasonably secure. That is, it may invest in any listed security or approved bond and it may deal in almost all oL the major and minor sec- urities in over-the-counter market. Probably the only rule oL investment that should be kept in mind 3-14 Copyright (c;1967 Americans Building Constitutionally (1~ Prust) Printed in U.S.A. PAGENO="0529" 527 is tbat the foundation is barred :Crom "endangering the capital assets of the tax.-exempt organization." In other words, the Internal Revenue Code prohibits foundations from endangerlng the foundation funds through investment in extrenlell risky sltuations, It could be illegal for the fouridat ion to invest in highly speculative transactions such as wildcat oil companies or penny stocks in exotic mineral rIghts. However, conventional speculative investments as well as growth and blue.-chip income investments are quite permissible. Dividends, capital gains and interest from these normal security transactions are tax-exempt to your foundation under the Internal Revenue Code. The foundation through it's officers or directors may personally administer these security transactions. The foundation is not required to hold any invest.. ment for any mandatory or minimum period of t ime. Many foundations, in fact, do regularly trade on the nation's stock exchanges. In the alternative, a foundation may create a security account with an established broker and have that broker administer 3-15 Copyright (:~-) 1967 Americans ~ui1ding Constitutionally (A Trust) Printed in U.S.A. PAGENO="0530" 528 the account or give advice on various transactions. When such accounts are opened and established, the broker usually requires a resolution from the board of directors authorizing the account and naming an agent to represent the foundatlon. Thls named agent is usually the president or the executive director of the foundation, and he is usually empowered to buy, sell or purchase securities and pledge them for loans. Foundations may also invest in so-called un.~ conventional investments. The average person believes that mortgages must be made either by savinga and loan companies, banks or insurance companies. In fact, colleges and universities, churches and found- ations execute and establish just as many mortgages as banks and savings and loan companies. Your foundation may properly "invest in any mortgages, whether they be first, second or third mortgages, provided the security is sufficient to provide safety. You should consult an attorney about these transactions if you are not familiar with the proper papers or if the mortgage is unusually large. Rem- ember foundat ions may both loan funds and take 3-16 Copyright c~ 1967 Americans Bui1dir~g Constitutionally (A Trust) Printed in U.S.A~ PAGENO="0531" 529 mortgages as security and morgage foundation property. Your foundation might purchase time savings de~- posit certificates in large amounts. In addition, your foundat ion may have a normal savings account up to certain limits. The Treasury Department has md icated that they would frown on a foundation that had more than `~l5,OOO in an ordinary savings account, In other words, the Treasury seems to insist that foundations invest. To open a foundation "savings account you would sign a corporate resolution si.~ milar to the one you used to open your foundation checking account. Banks usually provide their own corporate resolutions for the foundation. E~aiIBIT #9 Some examples of current foundation in investment activitIes [~~u1dbe_dIscussed. ___ ~yingandSell in~ ~ Your foundation will buy or sell property as part of either its inital or subsequent activItIes in exactly the same way as any corporation. Your foundation may purchase property in its own a.~l7 Copyright® 1967 Americans Bui1d:~rtg Constitutionally (A Trust) Prin~d in U.S.A. PAGENO="0532" 530 EXHIBIT 9 FOUNDATION INVESTMENT A foundation investment memo is being prepared by an informed stock broker with a nationally-known firm. At the time of this seminar this neo had not yet been prepared. It will be forwarded to you as soon as it is available. Copyright ~ 1967 Americans Building Constitutionally (A Trust) Printed in U.S.A. PAGENO="0533" 531 name that is the Smith Foundation will take title to land rather than Mr. Smith, i~ir, Smith, however, as director or off leer of the foundation, will sign the proper papers. Authorization for such a pur- chase from the board of directors, is usually nec- essary, The financing of such a purchase, where necessary, would be conducted in the same way as the f inanc ing for any purchase by any party. The foundation, as a non-profit corporation, is empowered to borrow money and pledge as security foundation property, Thus any foundation may secure a real estate loan with the real estate purchased with the loan. The foundation may execute an Or- dinary automobile loan, The foundation may purchase or sell property from or to the founder of the foundation or major contributors of the foundation. In these cases, however, all such transactions must be at or near fair market value. This rule is to comply with the T!selfdealingtt provisions of the Internal Revenue Code~ It may be possible for your foundation to obtain exemption from state sales taxes; where local law Copyright ~l96~ Americans ~iild:~g Constitutionally (A Trust) Prin~d in U.s.A. PAGENO="0534" 532 permits, your foundation should apply for and receive such exemption in order to enjoy si~ificant savings. Such exemption is usually not automatic under the state law. Applications should be made through the State Treasurer, the Secretary of State or Attorney General, depending on local regulation. Please con- suit your associate counsel or write your State Attorney for the exact procedures applicable in your state. Some major retail outlets or merchandise distri- butors allow a discount to certain types of non-pro- fit organizations, generally related to educational, medical or welfare organizations, Nationwide concerns such as Montgomery Ward, Sears and large local dis- tributors such as Macy's, Hudson, and Marshall Field have given small discounts to non-profit organizations of these types. These discounts are private privileges offered by these companies and are not governed by any law. You would generally have to apply to the Credit Desk of the store or business in question before each purchase or series of purchases. If a store refuses 3~~l9 Copyright c 1967 Americans ui1d~ Constitutionally (A Trust) Print~ in U.S.A. PAGENO="0535" 533 such a request do not i~eel outraged this is their right. It is suggested that there should be no abuse or these privileges or they may be lost to all. iviost Loundat ions only take advantage o:C these discounts when they are engaged in non-income producing activities, such as youth projects, libraries, or weLCare. Your Loundation may occasionally sell equipment or small items or roundat ion property without a spec- ial resolution or the board oi~ directors, but such sales ir regularly carrled on, should be examined Lor possible unrelated business income, which is taxable, or ror collection and payment or state sales taxes £rom the purchaser~ Major sales, such as the con- veyance or real estate, large amounts or pieces or depreciable equipment, or large holdings or secur- ities or other investments should generally be au- thorized by either a special resolution or general resolution or the board or directors. Carerul records or capital gains on all sales and purchases should be kept ror two reasons. 1. The roundation should have accurate records 3-20 Copyright ® 1967 Americans Bui1d:~g Constitutionally (A Trust) Print d in U.SA PAGENO="0536" 534 to reflect its economic status at any given time and 2. Such records are highly use:Cul as protection in the event or Internal Revenue Service invest igat ion In most cases, your foundation1s purchases and sales will be made by orricers rather than by the directors. ir you are both an orricer and director or your roundat ion, remember to sign bills or sale or contracts to purchase as an orricer rather than a director. That is, sign John Smith, President, rather than John Smith, D irector, Generally, the execut ive director, the assistant executive director, the pre- sident, the secretary andtreasurer are usually empowered in normal practice to buy and sell corporate property, Orten vice-presidents, assistant secre- taries and treasurers are also empowered to sign contracts in a large business. The authorization or these other orricers is generally made by express resolution or the board or directors. Your roundat ion may grow rapidly through the proper buying and selllng or property, because cap- ital gains, both short term and long term~ are tax-. exempt sources or income and do not rall under any Copyright(~1967 321 Americans 5uilding Constitutionally (A Trust) Printed in U.S.A. PAGENO="0537" 535 distribution qualifications under federal law. Such income may be rapidly accumulated to increase the foundationt s net worth and optional endowment fund. To review a few of the principles: 1. Li3~k~ certain the foundation has auth.-. orized the purchase or sale of property through a proper resolution, 2. Use normal responsible business prac.- tices in completing any sale or purchase. ~5. Investigate state tax advantages and disadvantages 4. Watch for self-dealing problems in transactions with donors or founders. 5. Use, but do not abuse, discount privil- eges offered by private concerns. Other ~ Your foundation may execute leases with any other organization or individual. The only limitat ion on leases is that of self-.dealing. In cases where the foundation leases from a contributor or the founder of a foundation, the lease must be at local market- value and may not be inflated. Just as sales contracts Copyright (c) 1967 3-22 Americans ~Bui1ding Constitutionally (A Trust) Printed in U.S.A. PAGENO="0538" 536 and other normal business transactions are signed and executed by the officers, so will the leases, Generally, foundations own and operate all pro- perty leasehold interests that they may acquire. However, it is not unusual nor :Lmprobable for a foundation to contract with a for-profit independent agency to manage certain founclat ion property. For example, a foundation may contract wlth a real estate management company to manage foundation rental property. The foundation would receive as rental income that portion of the rents after expenses and the management Lee were deducted. As stated earlier, a foundat ion has the power to borrow money and pledge its assets to secure that loan, The foundation, as a borrower, has certain advantages that other corporate or individual borrowers do not have. Because of its tax-exempt status, a lender knows that he will not be in danger of taking a back seat to a government lien for taxes. Because the foundation is tax-exempt, the lender knows that his debtor cannot dissipate its assets, and the lenderts security, through large dividends or excessive salaries. 3-23 Copyright (!) 1967 Americans Building Constitutionally (A Trust) Printed in U.S.A. PAGENO="0539" 537 The foundation may borrow from its creator or officers. As stated earlier, this is frequently done to get the foundation under way and, because a deduction for contributions cannot be claimed until the IRS recognizes the foundation's exemption, the lender does not want to make a girt of the money. Such a loan should be shown by a simple note or memorandum signed by the foundations If made at not more than fair interest, there will be nothing wrong with such a loan. If a third party is asked to loan money, he will be mainly concerned about two questions: 1. Whether the person seeking to make the loan is authorized to act on behalf of the foundation, and 2. Whether the loan will be repaid. When a person deals with any corporation, he must be concerned with whether the person who seeks to make a contract (in this case a loan) binding the corporation has power to do so. For this reason, the form resolutions prepared by banks include an optional resolution authorizing some person or persons 3-24 Copyright ~ 1967 Americans uilding Constitutionally (A Trust) Printed in U.S.A. PAGENO="0540" 538 to borrow in the copporat ion's name In many oC the Loundation's initial dealings with such potential creditors as banks, brokers, savings and loan, and certain other large commercial institutions these organizations may ask ror a corporate resolution, so that they can be sure that the Loundation IS really going to be liable on the credit they are asked to advance Since these resolutions are Lor their own proS- tection, the creditors or lenders will usually provide their own Thrms which the foundation will merely till out and sign. In most cases, especially Cor small amounts or with persons Lamiliar with the creator or oflicer seeking to open the account in the ~oundationt5 name, nothing will be asked. On the foundation's part, it should authorize certain o~ its oUicers to incur debts in the name o~ the loundation to carry on the roundation's business. This will usually be done by a resolution oC the board o~ directors at their first meeting~ Like all such resolutions, the attorney will prepare it 3.-.25 Copyright (~) 1967 Americans Building Constitutionally (A Trust) Printed in U.S.A. PAGENO="0541" 539 ahead of time in exactly the form desired. There may be as many people authorized by the foundation as desired by the creator. A potential creditor's second consideration is whether he is likely to get his money back. For this reason he may ask the foundation to execute a mort- gage or pledge assets. This can be done either by a resolution of the directors or by some officer authorized by them and is done in exactly the same way as any sflnilar corporation. In addition, since the foundation may not have a great deal of equity to secure a loan, the lender may ask for additional security or a personal obligation from one of the officers or directors. Once again there is nothing unusual or unique about such an arrangement in normal business practice. Most experienced business people undoubtedly have enough personal skill to execute and administer small loans. It is recommended, however, that in all cases that involve large amounts of funds, complex transactions, significant purchases of real estate or Copyright(~') 1967 ~326 Americans `~ui1ding Constitutionally (A Trust) Printed in U.S.A. PAGENO="0542" 540 major items oC personal property (such as d iamond mines or major items of depreciable business equipment) that you consult with an attorney. A foundation may, under most state laws, own anything and everything that is ownable in the world. Once a foundation owns the world it may sell it. A foundation may also manage or use any properties that it owns or leases. Some rental transactions or leases, however, may involve taxable consequences to the foundation. These situations will be discussed later in this seminar. Copyright(~)1967 Americans Building Constitutiona~Iç7 (A Trust) Printed in U.S.A. PAGENO="0543" 541 Section 4 strictions on Found at ions There are three areas or government regulations which are 1 irnitat ions and restrict ions on round at ion management. These three areas are: 1. Prohibited transactions. 2. Unrelated business income or taxable income. 3. The unreasonable accumulation or inc ome or d istr ibut ion requirements. Prohibited transactions are divided into three areas: 1. Political activities. 2. Sndangering roundat ion Lunds 3. Selr-dealirig The £lrst two are relatively clear and simple to under... stand * The third, that or seir-deal ing, is much more complex and ~il1 require more detailed explanations. 4-1 Copyright c~ 1967 Americans ~ui1ding Constitutionally (A Trust) Printed in U.S.A. 8/-444 107/ 87-444 0-68-35 PAGENO="0544" 542 A. Political activities Your foundation is prohibited from politcal activities. Your foundation is prohibited by law from supporting any public cand id~te for off ice. Your foundation is prohibited by law from influencing legislation. If you desire to participate in politics, you may do so as an individual, even though you are an officer or director, but if your foundation participates in political action, it will lose your tax-exemption. In other words, you cannot support political act- ivities through a 501 (c) (3) organization. Education of the public about political ideas, however, is permitted. In other words, you may ed- ucate the public on political economics, policital science, jurisprudence or legislation, provided that it is education material and not propaganda. E~IiIBIT ~ 10 The article on political I propaganda vs political education from I the 1957 conference on trusts might be [~~ludedas an exhib it 4- 2 Copyright(~' 1967 Americans Building Constitutionally (A Trust) Printed in U.S.A. PAGENO="0545" 543 EXHIBIT 10 POLITICAL ACTION ~ropaganda v. Political Education An organization qualifying for tax-exempt status under section 50l(c)(3) of the Internal Revenue Code may not participate in po- litical activity. Tax exemption is granted by the Internal Revenue Code only to an organization where no substantial part of the ac- tivities carried on by the foundation is concerned with political propaganda to influence legislation or to influence any political campaign on behalf of any candidate for public office. This in- cludes a prohibition against publishing or distributing statements that may have effect on legislation or a political campaign. In addition, both the Treasury Department and the federal courts have found that indirect contacts with individuals to in- fluence legislation is also political activity. In other words, your foundation may not influence its contributors or members or customers to write their Congressmen. There is nothing wrong with these persons writing to their Congressmen, but the influence for the letter may not be deriVed, from activities of the foundation. Legislation has been define.d to include action by Congress, any state legislature, any local governing body or the public in a referendum, initiative, constitutional, amendment or other similar procedure. Under the Internal Revenue Code political activity must be substantial in order to bar an organization from exempt status, but since this is a question of fact, no legal guidelines can be give,n as to what is substantial or what is insubstantial. There have been no cases to date defining what is substantial or insubstantial political activity. The term propaganda~ has also never been defined clearly by the courts. It would seem that the legal definition of the word is much less general in scope than the dictionary meaning. However, a general guideline could be that propaganda is matter that is disseminated or distributed not primarily to benefit the individual receiving the information, but to accomplish the purpose or purposes of the person who instigated the propaganda. A 501(c)(3) organization, on the other hand, may be formed to accomplish political education. An early court case involved an institution that was organized and operated for the purpose of ad- vocating good municipal government and opposing measures of detri- mental nature to the municipality. This organization was found to be a political action organization. However, when this case was Copyright 0 1967 (oyer) Americans Building Constitutionally (A Trust) Printed in U.S.A. PAGENO="0546" 544 decided it was stated that if there was some element of education in the dissemination of information through the organization's publications that at least this portion was valid. The organiza- tion was the Civic Fund of the City Club of New York and they were found not to be tax-exempt or educational. The courts, how- ever, found that a foundation organized for the purpose of teach- ing, expounding and propagating the ideas of a particular philos- opher was a tax-exempt organization. Exemption was granted to the League for Industrial Democracy even though it encouraged definite social doctrines because it had no legislative program which it ad- vocated. Exemption was also granted to the World League Against Alcoholism because it had no legislative program and worked against alcoholism, which was defined as the abuse or disabuse of alcohol. The general guidelines that should be considered in political education is that if the material that is distributed or the per- sons involved in the seminar present both sides of a political issue so that an individual may reach his own conclusion from a fair hearing of the information, then this is considered to be education rather than propaganda. The fine line is not too clear. What, to some people, may be propaganda would to others present both sides of the story fairly. DUE TO THE GENERAL CRITICSM OF POLITICAL ACTIVITY ACCOI4PLISHED BY FOUNDATIONS WE RECOMMEND THAT NO POLITICAL ACTIVITY OF ANY NATURE BE ACCOMPLISHED BY A FOUNDATION. This would not bar a foundation from creating a library of politically-oriented books nor would it prevent the foundation from making this library available or even distributing books, such as t.he Making of the President3 or Profiles in Courage, but no foundation activity should mention or indirectly advocate any legislation, and in no case should any reference be made to a cur- rent political campaign, either for or against any candidate. (additional material on this subject may be distributed in the future.) Copyright ® 1967 Americans Building Constitutionally (A Trust) Printed in U.S.A. PAGENO="0547" 545 The text or the material must present the racts or an issue in a rair way so that the reader might reach an independent conclusion based on rair inror-. mation. This type or material is considered educational and not political propaganda. Any other type or political material will endanger the tax-exempt status or the roundation. The National Rifle Association has ror years distributed literature which educates the public on the pros and cons or the statutory regulation or rifles. The literature is "objective" and presents both sides of the story. And yet few readers can conclude that rifle legislation is good arter reading the literature. Perhpas the truth alone is the con-. vincing factor. I hope so. Due to recent Treasury criticism (which has strong legal basis) or politically active foundati-ons, it is not recommended that foundations participate in any political activity which might lead to harrassment or litigation. B. End~ngeringUnd~OnFUfl~ A foundation may lose its tax-exempt status ir it 4-.3 Copyright (c~ 1967 Americans Building Constitutionally (A Trust) Printed in U.S.A. PAGENO="0548" 546 uses it funds in such a way as to seriously endanger their application to proper tax.-exempt purposes. This would include unsecured loans, risky investments, and unwise overall planning and structure of invest- ments. The prohibition against endangering foundat ion funds is an unusual prohbition which seems to mdi- cate that, by law, a foundation may not go bankrupt. Of course there is no indemnity guarantee it merely means that if you do go bankrupt you become taxable. The prohibition against endangering foundation Lunds was created to discourage foundations from entering high risk ventures. The courts, however, have all but nullified this prohibition by consistently finding that if a venture is successful, it could not have been risky. If your investment in mineral rights turns out to be highly profitable, how could it have possibly been dangerous? If your foundation's invest- ment in growth securities of a perpetual motion machine makes millions, how could it have been risky? In other words, the courts have used hindsight to determine the risk of a venture. Copyright ~ 1967 Americans Building Constitutionally (A Trust) Printed in U.S.A. PAGENO="0549" 547. A few years ago the Internal Revenue Service attacked a foundation that had invested in securities in such a way and with such a risk that a 15 percant drop in the price of the securities would have wiped out the foundation investment. The 15 percent drop did not occur ~nd the foundation made a healthy return on its investment. The courts found that the foundation had not endangered the funds of the foundation and that its tax-exemption would stand. This rule should only caution you against con- sidering risks that are extremely unusual or even shady. The rule would not prevent you from investing in any security on the stock exchange, nor from investing in any bond of any registered company, nor from investing in mortgages of any nature where security was sufficient, nor from investment into research and development of an unusual character. Endangering foundation funds is essentially a caution sign against irresponsible activity. 4-5 Copyright ~ 1967 Americans Building Constitutionally (A Trust) Printed in U.S.A. PAGENO="0550" 548 C. Self-dealing The most complex area of prohibited transactions is self-dealing. We have briefly discussed some of the issues in prior sections of this class but perhaps we should review the rule in detail and even repeat ourselves to make the distinction clearer. The term "self-dealing" is misleading. The term does not mean that a foundation is barred from dealing with individuals who are closely related to it, but only that the foundation is barred favoring these individuals or sacrificing foundation funds. The rule against self-dealing simply states that a foundation is barred from entering into certain trans.-. actions with the founder of a foundation, the directors of a fouxldation, the contributors to a foundation, and their relatives, and, in some cases, the officers of the foundation, in such a way as to give preference 4-6 Copyright(c. 1967 Americans Building Constitutionally (A Trust) Printed in U.S.A. PAGENO="0551" 549 to these individuals or to cause the foundat ion to suffer a substantial loss in the transaction. To be specific, all of these individuals may sell or buy property from the foundation or borrow from or loan to the foundation, lease to or from the founda1~ion, or exchange properties with the foundation, provided that the terms or the transaction are with~- in the scope or the normal market values or a similar transaction. A contributor to the foundation may borrow money from the foundation provided that the contributor pledges adequate security for the loan, pays a reasonable interest and promises to return the loan by a specific date. Conversely, a director of the foundation may loan money to the foundation and ask security and charge a reasonable interest, but may not charge an exhorbitant interest outside the bounds of ordinary financing sources nor ask double or treble normal security. A foundation may not be used by a contributor or officers as a vehicle for personal gain - that is, an officer may not sell securities to the foundation 4....7 Copyright,c 1967 Americans Suilding Constitutionally (A Trust) Printed in U.S.A. PAGENO="0552" 550 at prices in excess of reasonable market valuation nor may an officer, through the foundat ion, purchase valuable securities or properties and have the foundation sell them to himself at substantially less than reasonable market value. In all cases of foundation transaction or dealing with officers, directors, founders or contrIbutors an arm's length status must be maintained. That is, the f oundat ion must deal with these md Iv iduals in the same way that it might deal with unrelated In- dividuals. Some examples should help illustrate the rule An officer of the foundation may sell or buy securities to or from the foundation, but he may not purchase penny stocks today and sell them for $20.00 a share tomorrow unless, of course, their values have risen that rapidly in the established market exchanges. In the same way, an executive director of the foundation cannot have the foundation purchase blue chip securities, like General Motors, and then buy them from the foundation for a few dollars 4.-8 Copyright (C') 1967 Americans ~ui1ding Constitutionally (A Trust) Printed in U.S.A. PAGENO="0553" 551 a share, The officers, directors, employees and creators may borrow some of the found at ion funds but they must provide security for the loan, sign proper papers illustrating the debt, pay a reasonable interest and pay the loan back by a set termination date. If the foundation borrows from a contributor, the contri- butor cannot charge an unreasonable amount of inter- est nor insist on double security , These related persons are not allowed to manipulate foundation mortgages so that individuals gain ownership of foundatIon property at substantially less than market value, The foundation may not prefer one of these related individuals in its activities - that is, although founders, contributors, directors and officers may win grants or awards generally they must do so as If they were in competition with unrelated individuals. The same standards and qualifications for any grant or award must be maintained where a "related individual is an applicant or competitor. 4-~9 Copyright c 1967 Americans Building Constitutionally (A Trust) Printed in U.S.A. PAGENO="0554" 552 If a better qualified individual unrelated to the foundation applies in competition with an employee of the foundation, the employee should not be given overriding preference. (In such cases the employee may always be trained as part of a training program of the foundation rather than awarded a specific grant). In other words, the same arm's length status must be maintained in grant or charity programs as it is in other financial transactions. These prohibitive activities only underscore the requirement that you consider your foundation as an independent person. Your foundation is not the same as yourself. Others may confuse the inentity of your foundat ion and yourself, but ~, should avoid this confusion. For example, when the Ford Foundation gives a major grant, most people think of the gift as coming from the Ford family. There is nothing wrong with this attitude, but the Ford Foundation maintains com- plex separate records that are co~npletely independent of the Ford family. 4...lO Copyright ~ 1967 Americans ~ui1ding Constitutionally (A Trust) Printed in U.S.A. PAGENO="0555" 553 In the same way your foundat ion records and £ lies should be kept completely apart from your personal files. Your :Coundatlon is under your control and usually accomplishes your beneficial and philanthropic desires, but it is not you yourself and should not be considered so. Your foundat ion would deal with you in the same way that it would deal with any other individual. As long as this internal relationship is kept clean and clear, it does not matter if the rest of the world believes that every gift from your foundation is a gift from you. In other words, evidence must be maintained to prove that your non-profit corporation is not confused with your personal existence. You are a taxable person - your £oundat ion is a tax-exempt person. If your records and your foundation's records are confused your foundation loses its tax-exemption, The rules against self-dealing are really good guides to prevent this confusion. No bona fide bene- fits are lost through complying with the rules against the existing prohibitive transactions. 4-li Copyright ~) 1967 Americans ~T3ui1ding Constitutionally (A Trust) Printed in U.S.A. PAGENO="0556" 554 Dl8tribute EXHIBIT #11. Distribution Requirements The Internal Revenue Code does require distri.- bution or income by a roundation. The rule is called the unreasonable accumulation or income prohibition, The rule is a roundat ion may lose its tax-exempt status rrom accumulating an unreasonable amount or income within a certain period or time without using, dis.- buraing or dedicating the runds ror an exempt purpose. This is the rule that seems to say that a Coundat ion must give all or its earnings away each year. ~ isnott. An examination or the various terms used within the rule in the light or the Treasury derinitions and court decisions should be made. First, the term "accumulation means that the Cunds in question must be surplus arter expenses and uses. A roundation might earn a million dollars, but ir it accumulates only $100,000 out or a million 4.-12 Copyright ~ 1967 Americans Building Constitutionally (A Trust) Printed in U.S.A. PAGENO="0557" 555 EXHIBIT 11 WHAT FOUNDATIONS CAN AND CAN'T DO Being a corporation, the foundation normally will have all the rights and powers enjoyed by similar corporate organizations under State law and there is no need to enunierate them other than to say that they are almost invariably wide enough to allow any act desired by the directors. For example, the Illinois General Not-For-Profit Corporation Act provides `Each corporation shall have power:...to have and exercise all powers necessary or conven- ient to effect any or all of the purposes for which the corporation is organized." IGNFPCA,~ 5(n). For our purposes here, a more relevant question is: that acts should not be performed in order to preserve the foundation favor- able tax status. 1. A foundation is prohibited from entering into the following transactions with a substantial donor or his family. (a) lending any part of its income or corpus, without the receipt of adequate security and a reasonable rate of interest; (b) paying any compensation, in excess of a reasonable allow- ance for salaries or other compensation for personal services actually rendered; (c) making any part of its services available on a preferential basis; (d) making any substantial purchase of securities or any other property, for more than adequate consideration in money or money's worth; (e) selling any substantial part of its securities or other property, for less than an adequate consideration in money or money's worth; (f) engaging in any other tra~saction which results in a substantial diversion of its income or corpus to such per- son. 2. The foundation is further prohibited from performing any of the following acts: (a) accumulating an unreasonable amount of income; (b) using its income to a substantial degree for purposes un- related to its exemption. Copyrigiit(~)19~7 (over) Americans ~ui1ding C onstitutionally (!~ Trust) Printed in U.S.A. PAGENO="0558" 556 (c) investing its income in such a way as to jeopardize its ability to carry out its purposes. (Note: these last three prohibitions ap~'Iy'onl~r'to income and not to corpus (c.g. gifts or donations receivedYi~~in practice present no particular problem with good counseling. 3. A foundation may not endorse a particular political candidate or advocate passage .0f a particular piece of legislation. It may, however, advocate a particular point of view. E.G., a `conservation gi~oup co~ild advocate the desirability of conserva- tion but co.uld not advocate approval of a particular law to achieve conservation. These are general descriptions of the activities which will imperil a foundation's tax ôxempt status and are found ii~ section 501 to 50L~ of the Internal Revenue Code. UnrelateA.Bu~iness Inc~~ ..`, There is a situation in which a foundation may be subject to income tax on certain of its earning without affecting its exempt status. This is called a tax on unrelated business income. Al- though there are a good many limitations on this tax, the general rule is that an exempt organization is tax~ble at corporate rates on the income from ~.trade or business regularly carried on by the organization, the `conduct of which is not substantially related to the performance of the organization's exempt purpose. For example, a tax-e.~ei~pt clinic would pay no tax on its fees from patients but might be taxable on the income of a restaurant operated by the clinic in its building which served the public. Of oourse, since income from investments is generally untaxed, the clinic could incorporate the restaurant, own all the stock, and pay no tax on the dividends received from the restaurant corporation. This tax on unrelated income `does not apply to income from interest, dividends, royalties, most rents, and passive investments generally. The only problem with rents may arise under certain types of leases on property which is subject to a debt incurred in purchasing it. The unrelated business tax is apparently not a major item in the tax treatment of exempt organizations. During the year 1962, forexample, only l,6L~8 report forms (990-.T) were filed with the Internal Revenue Service. Copyright(c) 1967 Amer ic ans Building C onstituti onally (A Trust) Printed in U.S.A. PAGENO="0559" 557 dollars, then only $100,000 is subject to the rule and not thb ~900,000 that was earned and disbursed. Second, the term unreasonable amount is entirely dependent upon the size of the foundation. One million dollars of accumulation might be unreasonable for your foundation, but it would be a mere drop in the bucket for the Ford Foundation and could not be con- sidered unreasonable. The term reasonable time has been construed to mean from one to ten years, so even if you were to accumulate a large amount of income you would still have, according to some court rulings up to ten years to use, disburse or dedicate the funds The term income" also has a special definition. Income does not include earnings or gains from short or long terra capital gains or contributions. In other words, if you receive funds as contributions or make capital gains earnings, these funds are not subject to this rule. Only income earned from rents, dividends, interest, royalties and related or unre- lated sources are considered incoi~ie. Finally, if you do use or disburse the funds 4-.l3 Copyright `C) 1967 Americans Building Constitutionally (A Trust) Printed in U.S.A. 87-444 0-68-36 PAGENO="0560" 558 within a reasonable time (1 to 10 years) the Lunds are no longer subject to criticism. You may also dedicate the Lunds to a speciLic purpose. For example, let us state that you wish to accumulate ~2,000 a year to an educational Lund Lor educational purposes. The Lunds may be accumulated Lor as long as the board oL directors desire or the Lund may be periodically drawn upon to Linance ed- ucational activities, The board oL directors under present law is not required to use the Lunds Lor educational purposes. The board oL directors may rededicate the Lunds to another exempt purpose. It is not recommended that such rededication be accom- pushed without bona Lide consideration and good intent. It is recommended that 1L the Lourid~tion wishes to dedicate Lunds Lor accumulative purposes that it explore a valid and serious dedication purposs prior to the dedidation, It is also suggested that the Loundat ion have an idea Lor what the Lunds will be used prior to the dedication. bvery time you remove Lunds Lrom a dedicated purpose without using 4-44 Copyright (c'~ 1967 Americans ~ui1ding Constitutionally (A Trust) Printed in U.S.A. PAGENO="0561" 559 them ror the purpose, the roundation becomes liable to criticism under the unreasonable accumulations rule. Since the reality or your roundation7s long..range dedication programs is relevant to the validity or a large dedication, care should be taken to choose projects that truly require a large amount or money to succeed. Building Lunds, giant, speciric scient.- inc projects, and the creation or schools are some conventional ideas. Libraries, museums, or large noli-.pronit racilities are some other ideas. Special Lunds, such as the educational accumulation rund, tend to grow rapidly due to the exemption rrom tax- ation. Nothing is wrong with this provided that the runds are later used ror a good purpose. The Ford Foundation has more than doubled its endowment since it was rounded. This has been in spite or the rule against accumulations and in spite or its substantial charitable activities. The Mott Foundation has grown nearly a thousand times since its rounding 30 years ago. Accumulation or income is allowed within the limits that have been stated. As long as 4-15 Copyright'c 1967 Americans ~ui1ding Constitutionally (A Trust) Printed in U.S.A. PAGENO="0562" 560 the foundation board of directors maintains a proper attitude no questions should be raised. The growth of your foundation and its endowment to permit greater flexibility, and to provide greater benefits to mankind, is not discouraged by the Treasury, nor prohibited by the Internal Revenue Code. Your foundation may accumulate large amounts of funds. It is recommended that if you do not disburse accumulated income to other foundations, that you dedicate the funds to a specific realistic purpose. It is also recommended that you review this fund periodically for possible use or change of dedication. It is also recommended that the funds be used for that purpose, at least in part, within the lifetime of any particular set of board of directors. ~"~- Distribute E)~iIBIT #12. 1 Taxabl~ inco~ Not all income to the foun~ation is tax-exempt. 4-16 Copyright (c~ 1967 Americans Building Constitutionally (A Trust) Printed in U.S.A. PAGENO="0563" 561 EXHIBIT 12 UNREASONABLE ACCUMULATION OF INCOME Section 5O~(a) of the Internal Revenue Code states that a section 50l(c)(3) organization shall be denied exemption if the amounts accumulated out of income during the taxable year or any prior taxable year and not actually paid out by the end of the~ taxable year are unreasonable in amount or duration in order to carry out the charitable, educational or other purpose or function constituting the basis for exemption undersection 5~l of the Internal Revenue Code. This language seems to indicate that unless you spend, use or give away all your money during any particular year, you will lose your tax exemption. This is not so. We will analyze in the fol-- lowing paragraphs each of the elements..of this rule toexplain in detail what the rule says; what must be done under the rule; and what might be done to avoid the rule. (a) Income - The Internal Revenue Code has severaldefinitions of income. Each of these definitions apply in different situations. The definition of income to a tax-exempt organization organized under section 50l(c)(3) of the Internal Revenue Code is as follows: Income shall include all unrelated business income, rents, royalties, dividends, interest and fees received related to the purpose of your organization. Income does not include contributions or capital gains. The term `income them does not include all the sources of funds. or earn- ings that your foundation might enjoy. Only those monies or pro- perties that could be classified as income under the above defini- tion are subject to the distribution requirements of the rule against unreasonable accumulation of income. (b) Unreasonable Amount - The amàunt of income accumulated in any year must be unreasonable. The term unreasonable is viewed in two lights. First, unreasonable in relation to the size of the foundation. Five thousand dollars is certainly a great deal of money. To many foundations, $5,000 would be an unreasonable amount if accumulated in a one-year period. However, $5,000 would be a drop in the bucket to the Ford or Rockefeller Foundations. The amount must then be measured against the size and scope of the foundation in question. Second, an unreasonable amount must be: unreasonable by other standards. The court standards used to date have indicated that $500,000 might not be an unreasonable amount. The Treasury has claimed that amounts as slow as $330~0O0 have been unreasonable accumulations of income. The courts have disagreed and have usually defined unreasonable accumu- lation violations only in terms of amounts exceeding $1,000,000. Copyright (~ 1967 ~ -1- Americans Building Constitutionally (A Trust) Printed in U.S.A. PAGENO="0564" 562 The actual limits of what unreasonable might be can only be determined on a case-by-case situation_by-situation basis. There are no arbitrary or clear standards in the law. (c) UnreasonahleT~T~ - If your foondation should earn a large amount of income within a single year it is given a reason- able time in which to do something with it. What is a reasonable tine? Courts have construed this to be as much as ten years. We recommend, however, that consideration of the proper use of the funds, particularly in terms of dedication to a long-range pur- pose which will be discussed later, be accomplished within two to three years after the funds have been earned. (d) Use, Disbursement, and Dedication of Income - If a large amount of income is earned in any year, itis not subject to the rule against unreasonable accumulation of income unless it is ac- tually accumulated. To avoid accumulation, a foundation must either use the funds or distribute the funds to other 50l(c)(3) organiza- tions or dedicate the funds to a proper long-range purpose. Most people understand what present use of income means and this will not be discussed in detail in this section. There should also be no problem with understanding the concept of distri- bution to other charitable organizations. In other words, your foundation would simply give the money away. The dedication of iarge amounts of income, however, is a technical procedure and should be discussed in some detail. A foundation may actually dedicate large amounts of income to a long- range purpose and accumulate the funds until it has enough to ac- complish that purpose. A famous example occurred when the Hulman Foundation dedicated funds amounting to over $3,000,000 over a period of several years toward building a racing museum at the Indianapolis `500 Race Track. The Treasury Department didn't think this was a proper purpose but the courts did. The Hulman Foundation won its case for accumulation of income. One principal guideline should be mentioned in dedicating funds. The dedication must be for a purpose that is realistically long-range, feasible, and practical. The Treasury has strenuously objected to ethereal dedications or long-range dedications for short-term projects. Secondary guidelines to be considered for dedicating funds for future purposes are: (a) The funds should be kept in a separate account. (This will enable the funds to be used for investment pur- poses apart from the other investment programs or savings programs of the foundation.) (b) The dedication should be stated clearly in a minute of the board of directors of the foundation and may even be communicated to the bank or securities dealer where the foundation account is kept. This is not required, however. Copyright ® 1967 --2- Americans Building ConstitutiOnallY (A Trust) Printed in U.S.A. PAGENO="0565" 563 Conclusion As you can see, the rule against the unreasonable accumula- tion of income is not as strenuous as it first seems. You do not have to give away all your money every year nor do you need dedicate it unless you feel the amount itself is unreasonable. Today, because the courts and the Treasury have never considered relatively small amounts to be unreasonable, it is safe to as- sume that accumulation up to a quarter of a million dollars could be accomplished without question, even without dedication. Copyright (~ 1967 -3- Americans Building Constitutionally (A Trust) Printed in U.S.A. PAGENO="0566" 564 Some o~ the income of your foundat ion may be taxed at corporate rates. This income is called unrelated business income and is usually derived from sources outside of the seven tax..exempt sources. To review, the seven tax-exempt sources of income are: 1. Related Fees 2.. Royalties 3. Most rents 4. Capital gains 5. Contr ibut ions 6. Dividends 7. Interest Unrelated business iri'come is income that is not derived Crom the exempt activities oC the foundation. The Treasury defines "unrelated trade or business" as income £rom any business activity regularly car- ried on that is not derived from an activity directly related to tax-exempt purpose. Since this definition might include your foundation's operations we must look to the mear~ing of "unrelated. Unrelated business 4-17 Copyright Cc~ 1967 Atnericans Building Constitutionally (A Trust) Printed in U.S.A. PAGENO="0567" 565 activity or trade is trade or business not substantially related to the organization's performance of its exempt functions, where the trade or business is regularly carried on by the organization. We should break down the meaning of this definition in detail. First of all, the unrelated business activities must be carried on regularly by the foundation. The periodic sale of real estate by a foundation will not necessarily make the foundat ion a real estate broker, unless the activities are carried on regulari~. In other words, if the foundation sells a piece of property, this sale would be a trade or business activity, but it is not a regular activity. There must be a frequency and continuity with which the activities productive of the income are conducted, and a regular manner in which they are pursued. S pec if ic business act iv it ies of an exempt organ- ization will be considered to be regularly carried on" if they occur frequently and may be compared to commercial activities of non-exempt organizations. But these business activities will only be taxable, 4-.~W Copyright ~ 1967 Americans Building Constitutionally (A Trust) Printed in U.S.A. PAGENO="0568" 566 ir they are unrelated to the exempt purposes or the organization. For example, the regular sale or drug supplies to the general public by a hospital pharmacy is not taxable since the hospital merely rarnishes supplies in accordance with its exempt purposes. In the same way, sales or books by a college book store to students or sales or goods, where the exempt runction or the organization involved the sale or goods, would not be unrelated business activity. ir the trade or business is substantially related to the exempt purpose there is no tax liability. The Treasury states that where the production or distribution or the goods or the perrorniance or services does contribute importantly to the accom- plishment or the exempt purpose or the organization, the income rrom the sale or the goods or the perrorm~ ance or the service is a related trade or business, but the relationship is a matter or ract in each case and the Treasury has rerused to~ lay down substantial standards or relation. They have chosen instead to review each case as it occurs. The Treasury is 4-19 Copyright~~ 1967 Americans Building Constitutionally (A Trust) Printed in U.S.A. PAGENO="0569" 567 unable to set out clear standards due to the variety of permissible foundation activities. vVhere questions have occurred in the past, special rulings have been requested and obtained by other organizations. Considerable pressure was placed upon the Treasury for favorable rulings in these cases. It is suggested that the standards set by the Treasury, regulations are ambiguous and vague and, therefore, may allow unreasonable arbitrary action by the Treasury. The Treasury, however, has given some examples and a few rules which may be helpful in detennining relation of a business activity to your foundation's exempt purpose. In one example the Treasury stated that where a school existed for training children in the performing arts, such as acting, singing and dancing, that income derived from admission charges for the performances of its students were tax-.exernpt and related, since the students' participation in the performance was an essential part or their training. In the same 4-20 Copyright ~c. 1967 Americans 1~ui1ding Constitutionally (A Trust) Printed in U.S.A. PAGENO="0570" 568 way, the sale of products and articles produced by handicapped persons being rehabilitated by a foundation was considered to be related income, since the sale in the product ion contributed importantly to the accomplishment of the rehabilitation of the handi- capped. In the case of an experimental dairy herd main- tained for scientific purposes by an organization described in section 501 (c) (3) foundation income from the sale of milk and cream produced in the or- dinary course of operation would not be gross income from unrelated sources of income. On the other hand, the Treasury stated that if the organiz~t ion were to manufacture ice cream, pastries and the like, that the sale would be considered income from these pro- ducts and would be unrelated trade or business income. The Treasury is constantly attempting to reduce the scope of related business income. In one of their recent attempts they revised the regulations on unrelated business income to include advertising revenue derived by tax-exempt ma~azines. The 4-21 ~ Copyright ~ 1967 Americans Building Constitutionally (A Trust) Printed in U.S.A. PAGENO="0571" 569 National Geographic, Nat ion's Business, and Journal oi~ American liedical Association are three or the largest magazines arrected. ir the regulation is upheld as being proper then the organization involved will pro- bably obtain special rules to exempt them £rom the regulations. This tends to show the sometimes arbitrary nature or the Treasury's regulations and rules. Special rulings may be obtained to exempt any person from any regulation proposed or used by the Treasury. Probably the most common situation which your foundation might encounter is the so-called "business lease1. Briefly stated, the business lease is a lease ror longer than five years on property owned by an exempt organization which is subject to a debt in- curred in its acquisition. In such a "business lease" situation, a portion or the rental received by the exempt organization is taxed as unrelated business income. ~Jhile this rule may seem a bit artitrary, its purpose is to discourage foundations from trading on their tax-exempt ion and " building1' by 4-22 Copyright rc 1967 Americans Building Constitutionally (A Trust) Printed in U.S.A. PAGENO="0572" 570 securing real estate purchases with long term leases. Your foundation, however, may conduct unrelated business activities without endangering or affecting the foundation's exempt status, if 1. the unrelated business activity does not constitute an overwhelming or primary part of the foundation's activities 2. the foundation reports and pays corporate taxes on the unrelated income by March 15 following every calendar fiscal year. This unrelated business income is reported and the taxes are paid on form 990-.T provided by the Internal Revenue Service. We do not have the time to discuss details of taxation of unrelated business income. It is recoin- mended that if you propose business activity that you consult with counsel to determine the tax status and reporting methods that are required. Your foundation has an automatic $1,000 exemption from unrelated business income, and since it is taxed at corporate rates on the rest of its unrelated business income, your foundation may also take advantage of all of the conventional corporate tax deductions and Copyright(c)1967 4~23 Americans ~ui1ding Constitutionally (A Trust) Printed in U.S.A. PAGENO="0573" 571 advantages. These deductions would include normal business expenses, capital losses, depreciation and any and all other normal business deductions. Your attorney should be able to advise you on what portions of your foundation's expenses might be used to of f.- set taxation of unrelated business income. The Treasury regulations are quite liberal in what they allow and quite often all or most of taxable unrelated business income can be offset by business deductions. Distribute E)~IB~ #13. * * * * * 4..~24 Copyright .`~ 1967 Americans ~ui1ding Constitutionally (A Trust) Printed in U.S.A. PAGENO="0574" ~cJ 0 0 w CD t~i. CD ~*, p. 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PS3U~Sb1~ JO 555(3 p"3°°I~~ S3qoooouuol 3300555 0 U3 P3u3oPuOo óci5~unpo1d 5315(4(435 134')24M `5S2U(5fl~ 53511 3')OUIO1d PUS (30(3/Op 0') OPUS! 310 pus `~oiouo2 u; o~oopo.zd s,1133sIupu; 30 33)51') P0)5131 JO 5313PU03 34') 553013 S2O/5333U3 3(')5W3')S115 051 313(3.4 ssou~snq ocj P050135 PUS UI 35305551 JO 001301 0112333 5051 S10~ 5331/135 343 JO 3355555135 JO UO 211(111103 15(5132 043 3(3 01 ~3(U3333 WI) P (5 (0 Situ 3 1 ~`)!~ 1 ~ 34') 30 p002 34') JO 1 3 55 510 3 055 ~I1 pio 2051 p35055 533 1 5103 510150 3~lL 0505(5 3511 JO 5504033 00 suoo~od 3510)05 34') `UO(')504U1321O 5311 JO 5350c1 -135.5 5(55133 20 3355(5 20 54U3A3 S')2OdJ51.~ ONI>(VW 31fl31 OlSOdO3ld * ~L9 PAGENO="0576" 574 PROPOSED RULE MAKING . 5995 with Its program of pubflc education In ofthcopcr~tIonofthc~at1onthcorgaflI~; of ~ ~ th t~t.s d I fth th tel ~ ~ ~ d ti gUm d I to m g ph (d) (thi ti Lob di tly piIncip~ mercI~1 ~dvcru~cr& 1i~ tho m~nncr of ~n ordi- d ith thc conduct of unrciatcd continuous op-oration during the hours nury coe~merc1~1 &t~t1on. Neither the cute . . 512 the museum Is open to the public. If the of such time our the performueco of ouch busi~css. for purposes o sec ~ ~ . .. organization were to operate the theater ocev000 eontrjbutch Importantly to the so- item O~ deduction must av p as on ordinary motion picture theater cuocpllshrneot of ony purpooc fur which the and primary relationship to t e carry g for public entertainment during the eve- orguolzatlon Is gcaotcd exemption. Notwith- on of that business. In the case o an ning hours when the museum was closed Et500log the fact that the peoduotlun of organization which derives gross income gross Income from such operation would the udsortislog loevmc depeode upon the from the regular conductof two or more .. be gross income from conduct of unre- ~olsteoeo of the l1st~nlng audleoeoreooltlng unrelated business activities, unrelated bLed t de or b si ~ OOP C gm05 ~ g ~ I I d t d bu I as t bi Inc me I th ggrcg to (lv) Exploitation of exempt funclions, orbuoloece of gross Income i~-m all such unre d In certain cascs, activities can-ted on by Example (5) Y, on cucmpt unlverelty. business activities less the aggregate of . an organization In the performance of provides facilItIes, lsistruotloii cod foeulty the deductions allowcd with rcspgct to exempt functions nay generate good will aopzroiriois Coy is eoOepiii iroizpeprr oprr- all puCli unrelstçd business icUvRICs. or othcr llll'SflgibiCS wh1~h arc galsalilo sled b7 lIz etiolcilla lii s5lUlilOll to llCWi (~j) ~yjj~~g~ &jj~ibl~abld oolc'!i) lo tln~ . , of 12*11511 ~tip1oIL~d lii comnielgial cisdeav- ltdhSl bred editorlol ebinmersiary, the news- rc~afgrz business. Expenses, deprecla- * ora. Where an organization exploits such paper publishes paid iiclveetioiog. The mile- ton and similar itesss attributable solely an tnt c bi In c mm ci 1 tI ti ~ d ~ ~ d to d tie t the co d t f I ted bu I the mere fact that the resultant income nupJvluion and instruction of the union- proximately and primarily related to depcnds In part upon an exempt function city. Although the services rendered to ad- that business and therefore qualify for of the organization does not make It verlisers are of o ounsnsreoioi ohovsetrr, the deduction to the extent -that they meet gross Income from related trade or busi- odvortluieg busboys contributes importantly the requirements of section 162, sectlon~ ness. In such cases, unless the comnser- to the sinioersitp'n educational peogram 167, or othier relevant provisions of the clal activities themselves contribute Im- through the training of the students in- Internal Revenue Code. Thus, for cx- p tantly to the omplisi m t f n I d ~ ~ tb a, en I ti~ aspi i i-i p 1 mployecl exempt purpose, the Inconse which they tuteu gross income from unrelated trodo or full-time In carrying on unrelated bust. * produce Is gross Income from the cots- bovtscsu. ness are directly gonesected with the con--- duct of unrelated trade or business. The :avbylr (6). 1, so cuempt trade neuo- duct of the unrelated business and are application of this subdivision Is Illus- eistton, pseblisises a xssonthly Journal. The deductible in computing unrelated busi- tried in the following examisles: publIcation or the artIcles and other editorial ness taxable Income If they otherwise aspi (1) U mpt I till p ~ ~ly t~e t~ ye1 mlsliti en ~lh~ ,~ qu lify fo d duct u der the eqs gsxalrstiun, coin ye on escrllerit reputstbon In for which rarnsptios in granted tlse~or~sal- ments of sectiots ltl. Similarly, dcpre- - the field of biological research. It exploits P511011. Incense Irons tile sale of iebscrlp. Clatlon ol a bulldliig used cistlicly In Itt this rcputstloni rggolsriy by ceiling eodor,s. tlotnu to Isserobers sod others In aecordsoce conduct of unrelated business would be inettt-u of vorlusne lirose of laboratory equip- witis tho oegaeelzstios'o eoeespt purposes, an allowable deduction to the extent * incnt to reiureufsetsrero. Tise endorsing of thrrrtorr. does out constitute grass Ineomo otherwise permitted by sectIon 107. * isboratory equipment does not cootributo from unrelated trade or business. In eon- Importantly to tue oceomplishnsrnt 01 nny nection with the publIcation of thr journal (c) Dual use of /ociiities or personnel. - puepose for which enrioptiun iu granted ~J Z 0150 donors income from the rrgular sale of Where facilities or personnel are tised - Aeeoi-elingly, the insonsr derived from tier role advertising spoor end services to oummrrcisi both to carry on exempt functions and to of endorsements is gross income from un- advertisers. Neither tlsr publication of ad- conduct unrelated trade or business, ox- related teode or business. vrrtisements nor the perforIssaocr of serviere penses, depreciation, and similar Items Example (2). V. on rormpt untverslty,hss for commcrciol advertisers contrIbutes len- -attributable to such facilities or person- al negr regularly enrolled student body. Due- portsntly to the accomplishment of any pue- f I .t *h d) I ~th~ pf I th Pt ~ lip d tlthsta dith r~tti~ ts~p ah Ii be II c ted bet e n th t u * * rymphooy oeciscstros wisich pvosrnt dm055 duetion of income from advertIsing utilizes on a reasonable basis. The portion of snd musical pr010r-mavees to the otudrnte. the circulation developed and malntoiocd in any such Item so allocated to the un- * V odvertisms these pcrform uncee to its stse the performance of 050mpt funotiona,. related trade or business Is proximately - * dents, provides s uoivcroity thsratcr building such income is gross income from unrelated and primarily related to that business, * for their presenthtioo, and supervises ad- tmode or bmlncss. That reuuhi follos-vo even and shall be allowable as a dccluction In ~u hg tht ~, I d tyfachi th ~ thd 01 ci 1 pod to d consputi gu elatedbusl est blein ity boo to V d I g Os I I I b I I f ~ P come In the manner nd to the emtcnt frons the conduct of the perforeon000s How- arid otherreadero r permitted by sectIon 162, sectIon 167. or -* ever, tier prrsmntstlonof drums- and menlo - other relevant sections of the Itsternal events contributes importantly to thr everali * * Revenue Code. Thus, for exaesple, m- educatlonol funstbo,s of the sinivresity. , he) * * sume that X, an exempt organization Therefore, the Inmose which V reeelvrs does (f) * * subject to the provisions of section 511 * * duct eon- Pien. 2. Section 1,512(a)-i Is amended pays Its president a salary of $20,000 a Example (3) W is sni eoempt ~susincse to rend as follows: year. X derives gross Income irons the leognir wIth s terge membershIp Under on . . conduct of unrelated trade or business. arrongrmrnt with an odseetisivg ogrncp, -v~ . ii) Dcl',esiiiori. -The president devotes approxisuately 10 * reguhorly msils brochures, pomphirts, nod Ca) In general Section 512 defines percent of his time during the year to other eoosmcrciul edoertiebsg matrolols to "unrelated busitsess taxable Income" as the unrelated business. For psi-poses of - - Its membrmn, for which service IV olssegrs tlso the gross Income derived from any un- computing X's unrelated business tax- o grncy on ogreed amount per end usuer. related trade or business regularly ear- able inconse, a deduction of 02,000 The distribution of tier oslseelisiesg osstorialo ned on, less those dedsictioss allowed by - ($20,000 tinses 10 percent) avould ho domsnsotconstributrinsspor.aes l~ wa0~ chapter 1 of tise Code which are diregtly allowable for the salary paid to Its Is gruntod rsrmptlon. Accordingly, thr ~ cosnected wmt)s the eariyiIsg on o such pr,sident. mont-s sssde to W by the odvyrhisbe coc000y trade or busimsess, subjegt to certain cx- - Cd) Exploitation of exeesipl IonIc- v conevitute gross income from u,errhulrd trode ceptioss, additions and limitations re- tions-tl) lee general. In ccriisin coxes, ortwtinnss. - -- - ferrech to Its 11512(b)-i. To hr the- gross Income mop be derised from ots- Ezumplc (4). X, on earmpt orgoolostlon ductible In computing unrelated busincss related trade or bsuslngss whIch exploits I 1 ~ I p bIb k t ble I om th Co p d n e empt fm I E cept ape ~erates It In a manner which eonteibulcu predation, and similar items not only Ificd In subparagraph (2) of this para- ,,Aasporkvntly to tho secompllvhment of tho nsust qualify as deductions allowed by graph, In such cases exycnses, depreela- purpoom for which tho oegnnlaauon i, chapter 1 of the Code, but also must be tion and sImilar items attributable 1cm the grantssl exmssptioca However iso the oouese directly connected with the carrying on conduct of the exempt function are nat F 0 nAt REG)I005 VOL 32 NO 72-FOIOAY APO1L 14 1967 PAGENO="0577" 575 5996 ~`s~j. PROPOSED RULE MAKING dcductlble in computing unrelatcd bus)- ness-W's esemhenhip-bat are Inecreed ness tsssblc Income. Since such Items priosarlis its e500ectises with to's funds- ore Incident to a function of the type isseatpl status cod lusesisniof as an eceospt whehltlt) fp a ft) ~ I d thycit .gnniestion to conduct, thcy do not ~m ue so act of the &srciatcii basines;. and seas praximaic and primary rclaticnahip do act qcauly no directly canoce ted with it. to thc unrclatcd tradc cm busincas; Exsesytc (2). Z, on esensyt business Therefore, they do not r,ualify as directly league, publIshes s nsuothly josrosl sehich * connccted with that busincsa. It sells by nobsceiptisis to nseinbces cod 12) Alhcwcblc dedaclioss. Wiscre un- The wecha and ousor esutorbst eons- relates trade or cuainesa is of a hind to the nceunspfiahnsent cC Zn eneropt poe- carried on for profit by taxable crea- poses. Theeefoee, the ssbseeiptina Income nieatians and svlsere the exempt activity dues not constitute gross Income ercm sin- exploited by the business Is a type of ac- related trade or busIsess. In connection tisity normally conducted by taxable or- wins tire pabliestion or the fosrnsl, Z de- ganieatisiea In pemxua:rce of cccli buxi- noes lcccrne fees tue she or osleeetisinf ness, the expenses, depreciation, and space commercial os,eer,iscea been thu * similar Items which are attributable to us cnntth spun h the exempt activity qualify as directly cccapiishnecnt of Z's eoeosfet pueWcco, Zn canneetod with the carrying on of the Income eesm nocerusing consututcc genus * unrelated trade or business to the extent lnccme from unrelated trade or business. that: In eompuung Z'c unrelated business tscshle ceed em 1 ny) d d f ~~Ia ;ec to es hip d ~ ~ e°t ~1ãre 0d or attributable to tIme related activities; enu Cude Include the syceilie coats of the and . ndserttsinf octisity, such m cdsertising copy * (ii) Tue allocation of such excess to and mechanical casts, adoerusiof osles cues- the sinrelu.ed activities doss not result in missions nnd sieoilcreapeoses. Also shone- a loss from such unrefated trade or able would be Iteoss of dedsothcs (ssch m bssinag genreslcccehrsdeayecseshOddepcccisncn) allaoabte to the odnertlsiog aetinity Is nc- Under the rule of the preceding sentence, noedance with the cute of paragraph )c) nf cxinensm, depreeiatisn and similar items this omhicn. In cddittoo, since capenses,. paid or Incurred in the per'forniniiee 0f deyceclauco, end obtuse Items related to an fa t ~ ~ be'illf I d cdi t rId b ~ ftis dl te t fth cm I dfcao tt phahigj iwh d if h triable to the performance of that func- Itcoss will be treated as dircetly eoascctcd tisn. Fcrthermaee, sceh items are In no with the conduct of the unrelated tesde or * event alloee.hie to the snrelstod btsineca bssiscss. Thus, oub(cct to thu limitations octimities is the extent that their dedue- of oubdinisicoc (II ned (II) of oabysrageoph * tion woskf result Ins loss carryover or 12) of thin paragraph, they wculd be allow- corrybeck with rexpdct to the particuf am l~ ~. c d toftd rbl d ~ peslddt niC U ad d Similarly, tuey may not c: ::..:e:: ratIo other relevant secuons of thu Interact accaunt in computing unrcL;t:~ ~ .Itovc005 Code. hat dt b t hal bu e (I'~R Dcc ci-uee I d Ày 11 tori cephcithse Uae acme exempt activities. . . . . * (3) Exaeaplce. tone pmnvfcf ens cf this ` * - paragraph are Illustrated by the fsf low- - * Inc ccamplco: . Ecowple l~) to Is on snempt bssicess * hesgue wIth a lsr~e membership. Under an arrangement with an adseetisiog agessy to . regsicniy mclls hooch sees, pamyhets and other cocsoseeclcl ddcemtlsing csauee:hs to Its mesesbers, chargIng the sara:: a. agreed . * .* onsosot per enclwscee. Ti. * :.. ,:atcs oC * ` * . - the odseethsing materials fe;, :. : ::..;acbsts ` . * impoetanny to the occace,s u.. ens cf the ` psepese 5cr waich W Is goanied eccmptlcn. Aceordioghy, tlme payments nssdc to to by the * adseetbnin e ogency constltcte gems lnecmc seam aoeelnted tcsete or bosinsess. In gem- * potlcg to's srneelsteri business tanchie ho- . ccme, the enpessen aileihatable natety to the - ccndnc s ne tire bnnfcess ore cftss'chte no de- - * daetiaas in ceecef case wIth the peccicions . or sechics 1f2. acca dsdncticns Incinde tho costs of hsndiisf and mailing, the sclnsies of peesosnel used ecu-time In the unrelated bsrsioess and on e.~nesble ycetisa of ths scinnles of peeaasncf oaed both to cwey on onencyt euncttoss nad to mndact the unee- lsted bosincas. alsacenee, ecats of dscctcytng W's membeeahlp e.nd cwraIag en ito eoewpt mtlctties sea act Ccsluctilfc. Tease casts sew necessary to thu malnsteasacu of ths mean- glblo ae.act raylclteum Iii ths unenlatcd bmh- . ., . - FfaffAt tCtZO, VOL 32, NO. 72-micA's', Aveit 1',, 19dm PAGENO="0578" 576 S~CTION5 Fo~nda~Q~ Q~p~rat Ion Guides Grant jrogram and Chari~ The most significant distinction between the Loundat ion as an alternate business form and other business forms is in the area of use of Lunds ~or non...lncome...producing purposes. A foundation, by definition, has a wide variety of reasons for which it may use its funds. The foundation may be active Copyrigbt(~)l967 5-i Americans Building Constitutionally (A Trust) Printed in U.S.A. PAGENO="0579" 577 in the broadest application of the terms religion, education, science, charity and literature. All forms of human progress and activity may be encouraged or invest igated by the found at ion. In order to avoid questions from the Internal Revenue Service or Congress as to the propriety of the disbursement of funds, proper procedures should be employec~t in a consistent fashion. In other words, although any reasearch development, inquiry, investS- igation, educational material, lectures, charity, welfare or philosophy may be promoted by a foundation. There are established methods for promoting these things that are accepted today as a matter of course by governments and others in this country. It is generally known that if activities are carried on in such a way as to avoid direct competition with the commercial world, or to avoid foundation funds inuring to the benefit of any individual, such procedures are approved. First, we should explore a few of the things you might accomplish through a proper grant structure or 5-2 Copyright ~) 1967 Anericans Building Constitutionally (A Trust) Printed in U.S.A. PAGENO="0580" 578 charity structure. Vie will then discuss how these things are accomplished. The most obvious foundation activities occur in the field of education. Foundations give scholarships and grants to students and educational institutions in great amounts. Any student of a bona f ide educa- tional institilit ion may be awarded a scholarship to pay tuition, books, fees and expenses incidental to that educational experience. The institution itself may, in fact, receive a grant or endowment for its general fund or for a particular purpose. In the same way, other educational experience may be supported, such as seminars and short courses in various subjects. The building or financing of an educational institution, the creation of a library in church, school, hospital or other institution, or the gathering together of notable people in any field to correlate information on that field for educational purposes are all educational proEjects. Grants may be given to accomplish research and/or development in all areas of human endeavor. We are all aware of grants for scientific purposes, particularly 5-3 Copyright (~) 1967 Americans Building Constitutionally (A Trust) Printed in U.S.A. PAGENO="0581" 579 in the medical field, but other subjects may be supported with equal flexibility. Social science has been recognized as a valid science, This field includes economics, history, political science, business relations, financial management, conservation and psychology, both academic and applied among the subjects. ScientiUc tax.-exempt grants have also been given to research methods for discovering oil or other valuable minerals, for developing higher yields of grain, fatter cattle, for developing a new metal alloy for a particular purpose or finding use for a part-. icular plastic. Foundation grants have been used to preserve dying or dead cultures, for establishing and pre-. serving historical landmarks, for researching methods of preventing the extinction of certain animals or plants, and of course, for pursuing basic research in all accepted sciences. ~Ve have briefly discussed what foundaUons have done to place you in a frame of mind to consider 5.4 Copyright ~) 1967 Americans Building Constitutionally (A Trust) Printed in U.S.A. PAGENO="0582" 580 what your foundation might do in terms of grants, scholarships or charity programs consistent with your personal desires, hobbles or academic interests. ~evelop possible outline for conducting a short discussion of not more than * hour on possible foundation programs. Primarily Objectives. This might also be tied in with the possible programs of the civic club or with an association of several foundations to accomplish a large project. The instructor should stress the complete freedom of this field, perhaps using hwnerous exam- plea or discussing complex structures. The possibility that this group might continue to meet four, five, or six times a year to continue this discus- sion might also be explored, Having discussed what the foundation can do and what your foundations want to do, our next step is to discuss in detail how foundations accomplish these things. Fortunately the basic structure for all of these complex programs may be created through a simple step-by-step framework that seldom needs to be varied (only the details and the words used within each step need be changed to reflect the specific activity). 5-5 Copyright `~) 1967 Aniericans ~ui1ding Constitutionally (A Trust) Printed in U.S.A. PAGENO="0583" 581 EistributeE)G~I~IT#l4. 1 The Treasury Department has very minimal standards to judge the propriety of grant procedures. The Treasury requires only four types of informat ion to be maintained for evidence of foundation grant activity. Grant programs ~q~pt have to be submitted to the Treasury for approval prior to their creation or operat ion * But if the Treasury should review a foundation's activities it would require four types of information about each grant. The Treasury requires; 1. The name and address of the recipient 2. The amount of the grant~ $. The purpose of the grant disbursement 4' The relation, if any, of the recepient to persons who granted or contributed to the foundation. Just as it is not Illegal for a foundation to 5-6 Copyright (~)l967 Americans Building Constitutionally (A Trust) Printed in U.S.A. PAGENO="0584" 582 EXHIBIT. ;LL~ GRANTS AND SCHOLARSHIPS The records which the Treasury requires of grantors: (a) Name and address of recipient (b) Amount of grant (c) Purpose of this disbursement (d) Relation, if any, to persons who created or controlled foundat ion In addition to these skeletal records, good practice would suggest a procedure for processing grants by the foundation. Such procedures will both serve to assure the Treasury that you are ope- rating a bona fide program (and this may be prudent since the ini- tial recipients of your philanthropy may tend to be children and relations, if not you, yourself) and to make things easier in your relations with strangers whom you might want to consAder helping (i.e., it can make it more impersonal and, easier to say no). Mr. Harvey B. Matthews, Jr., of the Ford Foundation,2 speaking at New York University's Conference on Charitable Foundations, suggested these steps for processing grants: (1) A stated program containing some sort of guidelines for determining what sor.t of grants will be con- sidered (e.g., tuition scholarship for college students). (2) Application - require some written application which makes clear that the person is applying for a grant and not just making an inquiry. The application should make clear what the money is wanted for so that the foundation can tell whether it falls within the founda- tion's program and corporate purposes. (3) Action Control - Mr. Mathews suggests that a piece of paper be attached to the application to record every- thing that is done regarding the application. (~) Preliminary screening and review. At this stage the foundation compares the request with its program to see whether or not the request falls within the grant program. (5) Final consideration. The merits of a proposed grant are compared against the availability of funds and a judgment made whether it is really worthwhile or desirable on the part of the foundation. -1- Copyright® 1967 Americans Building Constitutionally (A Trust) Printed in U.S.A. PAGENO="0585" 583 As a matter of form, the initial screening should be done by one officer who then refers those he considers worthwhile to the directors or some committee of directors who make the final decision on the grant and its terms. (6) The person in charge of the grant program notifies the recipient of the acceptance or rejection of his application by letter. (7) There should be in addition a follow-up on the grant, a formal closing out of the terms of the grant, and an evaluation of the benefits derived from the foundation's~ use of its money in this particular instance. As it was alluded to before, the test of the propriety of a grant is whether it is in furtherance of the foundation's exempt purpose. A child, spouse, or relative of a donor or foundation of~- ficer may properly receive such a grant.(amd, of course, in those cases, adherence to form is more important). With proper planning, the grant may be made in such a way as to result in no taxable in- come to-the recipient. See Section 117, Internal Revenue Code. Of course, since this isa grant rather than an expense account, the complicated rules relative to expense accounts have no applica~~ tion. Following are some illu~trative forms to aid you in developing your foundation's clerical work and necessary language to properly manage your foundation's grant and scholarship program: -2- Copyright (~%) 1967 Americans ~ui1ding Constitutionally (A Trust) Printed in U.S.A. PAGENO="0586" 584 SAMPLE APPLICATION FOR GRANT TO STUDENTS FOR SPECIAL TRAINING THE 5 0 A B FOUNDATION APPLICANT' S NAME. Ar~rvDt~QQ AGE OCCUPATION U .S. CITIZEN_________ .. GRANT FOR THE STUDY OF * INSTITUTION WHERE STUDY PREVIOUS GRANTS, AWARDS IS TO BE MADE . If student, complete the following: PRESENT SCHOOL MAJORING IN OTHER COURSES OF STUDY IN RELATED *. FIELD_______________________ Complete in own words, reason for request for grant and why you are qualified to receive special training. THIS FORM IS ONLY TO BE USED FOR ILLUSTRATIVE PURPOSES. INDIVIDUAL FORMS FOR INDIVIDUAL GRANT PROGRAMS SHOULD BE DRAFTED. Recommendation of Present Teacher (If student) -3- Copyright c 1967 Americans uilding Constitutionally (A Trust) Printed in U.S.A. PAGENO="0587" 585 SAMPLE CORPORATE FOUNDATION RESOLUTION TO AUTHORIZE GRANT AND SCHOLARSHIP PROGRAM BE IT RESOLVED: That to further the purposes of the foundation that a progran of grants, gifts, and endow- nents be instituted by the foundation. That said grants and endownents be awarded only for such projects as serve to advance the stated purposes of the foundation which are research, development and education in agriculture. That preference be given students in agriculture or re- lated fields but in no case shall such grants be for pur- poses other than scientific, ediucation, religious or lite- rary. That such grants may be received by any citizen, person or governmental unit of the United States. That the Vice-President be appointedas Chairman of the Committee on Grants, with the recommendation that other members be chosen from business or the professions, to serve at the Chairman's discretion. Said committee shall prepare forms and information for prospective applicants and screen all such applicants and recommend prospective applicants to the board of directors as the committee feels will best serve to further the purposes for which the foundation was created. That upon approval of such application, by the board of directors, the chairman of the committee on grants may proceed to administer such grant on such terms as are calculated to maximize the benefits of the foundation's expenditure. That the board of directors or the committee on grants reserve at all times the right to modify, withdraw or cancel any part of any grant not paid out. That the chairman of the committee on grants shall require am accounting from each recipient on terms he thinks ap- propriate regarding the expenditure of all grant monies and evidence of the results accomplished. That in the case of grants, gifts, or endowments not amounting to more than $50 each, nor aggregating more than $1,000 per fiscal year, such disbursements may be made solely on the authority of the chairman of the committee. _14... Copyright ~ 1967 Americans Buildingi Constitutionally (A Trust) Printed in U.S.A. PAGENO="0588" -5-- Copyright ~ 1967 Americans Building Constitutionally (A Trust) Printed in U.S.A. 586 ANOTHER SAMPLE APPLICATION THE FOUNDATION A Non-Profit Institution for Agricultural Research and Education APPLICATION FOR SCHOLARSHIP To the Applicant: Please answer the following questions as fully as possible, using the reverse side if necessary. Type or print legibly. Hoover Scholarships are available to any serious student, with preference being given to students working in the field of agri- culture. 1. Name Age - 2. Purpose of Scholarship (This form is provided for educational purposes only) 3. Amount needed to supplement applicant's own funds - (Note: Scholarships may be available only for fi~idsumT. 14~ Applicant's qualifications and past educational experience. 5. Has applicant every worked in agriculture?_________________ If so, explain. 6. Give names of two persons, not relatives, who can testify to applicant's character and ability. ~~ane~ (Narne~ (Address) (Address) - Applicant understands that any grant made may be subject to such terms as the foundation may provide to insure the maximum useful-- ness of the funds awarded and that any funds awarded but not ac~- tually paid out are subject to cancellation or reduction by the foundation in its sole discretion. (Signed) Date _____________ (Applicant) PAGENO="0589" 587 SAMPLE PUBLICITY RELEASE A PROGRAM OF GRANTS AND SCHOLARSHIPS The Foundation was established to further research, development, and education in agriculture, and in furtherance of that goal has instituted a program of grants and scholarships. Grants and scholarships are intended primarily to assist students working in the field of agriculture but will also be available to students in the other sciences and the hunanities where qualified applicants are not found in agricultural studies. Who May Apply: Grants and scholarships may be awarded to any person evincing~ a serious interest in education. It is not necessary that the ap-- plicant be in financial need although this factor will be con- sidered. Criteria for Awards: Grants and scholarships are to be awarded to those students or for those projects which, in the opinion of the foundation, most satisfactorily serve the purposes for which this foundation was created. Terms of Awards: Grants and scholarships shall be awarded on such terms as the: chairman of the committee on grants determines to be most likely to maximize the usefulness and benefit of the foundation's expendi- tures. Such terms may include among other things, periodic pay- ments of grants, accounting for expenditures and evidence of work accomplished. All grants and scholarships are subject to revision or cancellation with respect to any monies not as yet paid out to the recipient. Amount of Awards: Grants and scholarships may be made either in fixed sums al- located by the committee on grants or may be adjusted to the individual financial need. When and Where to Apply: Applications may be made at any tine although a 6O~-day delay for processing should be expected. Applications should be ad- dressed to: Chairman, Committee on Grants The Foundation (Address) Copyright c 1967 Americans uilding Constitutionally (A Trust) Printed in U.S.A. PAGENO="0590" 588 SAMPLE REFERENCE FORM THE _______FOUNDATION A Non-Profit Institution for Agricultural Research and Education REFERENCE FORM. To the Applicant: Fill in items 1-3. Then give a copy of this form to each of the persons whom you have listed on your application. 1. Name of Applicant 2. Home Address____________________________________________ 3. School now attending Class. To person filling out this form: The above-named student has applied for a scholarship from the ____________Foundation. We will appreciate your assistance in assessing this student's character and qualifications. All in- formation will be held in confidence. (This form is provided for educational purposes only). 14*. How long have you known the applicant? 5. In what capacity have you known applicant? 6. What comments can you make regarding applicant's character and qualifications? 7. Any' additional statement regarding applicant's suitability for a foundation scholarship would be appreciated. (Signature) (Address) ~~(Position) -7- Copyright ® 1967 Americans Building Constitutionally (A Trust) Printed in U.S.A. PAGENO="0591" 589 FOLLOW-UP EVALUATION OF GRANT PROGRAM Dear We of the Foundation hope you have been successful in your chosen project or studies. To judge the ef- fectiveness of our program of grants and scholarships,we would appreciate your completing your obligation under this award and giving us your comments on the value of your grant. 1. What did you accomplish through your grant? 2. Were you satisfied with the handling of this grant and have you had any suggestions for improvement? (This form is provided for educational purposes only) Please include with this report any additional material under the terms of your grant. Yours very truly, THE FOUNDATION Chairman, Committee on Grants Copyright (2'~ 1967 Americans ~uilding Constitutionally (A Trust) Printed in U.S.A. 87-444 O-68---38 PAGENO="0592" 590 sell property to a contributor or founder of a foundation, it is also not illegal or improper for a foundation to award a grant to these persons or their relatives, p~pyided that a clear set of standards for awarding the grant was established prior to the application and these standards were met by the v~rinning applicant. In other words, if your foundation creates a grant program with established standards and pur-. poses, and your child applies under these standards and meets them, it is not improper or illegal if the board of directors of your foundation should declare the child a winner. Among the major foundations in this country, there are nearly as many differnt methods of grant programs and procedures as there are foundations, because of the minimal and ambiguous Treasury require.- ments. Foundations, in line with good business practices, usually create grant procedures tbat are much more complex than the Treasury requirements. Of the many foundations that exist and their equally many variations of grant programs, we have found that 5-7 Copyright~c' 1967 Americans `~ui1ding Constitutionally (A Trust) Printed in U.S.A. PAGENO="0593" 591 the Ford Foundation (the world's largest funded foundation) has perhaps the grant program that could be best applied to smaller foundations. We recommend that, if any foundation uses the methods suggested by the Ford Foundation, such a grant pro- gram would meet little or no questioning from any regulating government, In your Exhibit you will find the seven stops that are recommended by the Ford Foundation in establishing the proper processing of a grant program. We will discuss each of these steps in detail. 1. A detailed stated program for the grant should be created by the executive director and approved by the board of directors. This program may be very broad or very limited depending upon the desires of the board of directors * We suggest that a broad program provides more flexibility and less red tape. Several examples of existing grant pro-. grams, both of members and non-members, should be included as an exhibit and perhaps a `model" grant program might be drafted. Copyright (a1967 Americans ~uilding Constitutionally (A Trust) Printed in U.S.A. PAGENO="0594" 592 Your application for grants which are available through the grant program may be as detailed or simple as ~)OU desire. The application is evidence that the person involved is applying for funds and not merely making an inquiry as to the availability of :Cunds. Your application may be 10 pages long and filed in triplicate or be one page long and filed in a single copy. That is, it may be as simple or complex as your board of directors desires. The application should realistically apply to the situation, that is, the more complex the grant program is the more exten- sive the application should be to meet the standards of the program. The information required by the Treasury should be a part of every application, but the application should also reasonably provide enough information so that the board of directors can inteL- ligently determine if the applicant meets the stan~- dards of the program. For example, an application from a student for a scholarship should include where the student went to school, where he intends to go to school, copies of transcripts of prior education, 5,-9 Copyright ~c'~' 1967 Americans ~ui1ding ConstitUtiOnallY (A Trust) Printed in U.S.A. PAGENO="0595" 593 references by teachers, what the student intends to study, time of study and statements or mater showing why the student believes he should receive the award. In other words, the application should not be ambiguous or facetIous or overly complex for its purpose. You would, for example, not require that an application for a $17.00.scholarship to a YMCA weekend youth conference include a 50 page essay or be 10 pages long. It would also be inappropriate if your foundation awarded a $15,000 research grant on the basis of a one page application. 2. It is highly recommended that a third-party reference or references be required of all applicants for whatever portion or nature your grant program might cover. That Is, a student would be required to submit references or names of teachers or prominent friends. In the same way, a scientist or researcher would be required to submit references who would be able to verify the applicant's qualifications for the ~,grant and/or the ability of the applicant to accomplish the proposed pesearch. Third-party references serve 5-10 Copyright c 1967 Americans `~ui1ding Constitutionally (A Trust) Printed in U.S.A. PAGENO="0596" 594 three purposes: 1. They establish valid information to make a proper determination on the application by the board of directors, 2. They lend credence to the actual award and lend status to your foundation's activities. 3, They publicize your foundation's grant pro- gram without cost. In fact, many subsequent applications are made through such third.-party references once these references discover that the grant program exists. 3~ Action Control This part of your grant's procedures depends entirely ~ipon your need for "crutches" in completing procedures. In this case, action control procedures include a check list of proper steps concerning every grant applicatipn. This check list would be attached to every file and application. The applicant's papers would be considered by the proper persons in the proper order, and notations would be made on every activity or action taken 5-11 Copyright ~) 1967 Americans `~ui1ding Constitutionally (A Trust) Printed in U.S.A. PAGENO="0597" 595 regarding application. It is only good business practice to keep close records of all ideas or letters sent to your foundation. In some cases your found-. ation may receive unsolicited applicaticns from unrelated third.-.parties. Many of these applica-. tions might include original ideas created by the applicant. To avoid potential copyright, patent or other infringments, action or actions for negli-. gence, great care should be taken in the handling of all letters and applications regarding grants. In or~Ier to provide consistency the same care should be taken for all grant applications, even though the applications may be from persons closely related to the foundation. It is recommended that correspond- ence be maintained with all persons who apply regard.- less of the final determination of the board of directors; that is, that a "thank you" note should be sent to all losers and all original material should be returned unless a grant is awarded. If your foundation is small and has only a limited endowment and limited desire to give away money, it is recommended that publicity about 5.~.l2 Copyright ~ 1967 Americans Building Constitutionally (A Trust) Printed in U.S.A. PAGENO="0598" 596 your grant program be limited. Foundat ions that get into newspaDers are often subjected to hundreds or unsolicited applicants most or these will be serious and wellmeaning, some will be humorous, some may have great potential and some may have no potential whatsoever. In any case, the time spent in processing these applications is considerable, and even though the evidence is desirable, the expense in time and funds may not justify the work. It is recommended that your roundation continue its grant program by the recommended methods, personally solicit applicants in specified areas, or inform a select group or students, if your program includes college scholarships. There are no Treasury requirements for publicity and we recommend that unless you wish a great number or applicants you do not publicize through an exten- sive, formal public relations program. The word will be passed fast enough by the people who write the references for your original applicants, regard.- less or any public relation activity on your part. 4. The foundation should now begin preliminary 5-l3 Copyright c" 1967 Americans Building Constitutionally (A Trust) Printed in U.S.A. PAGENO="0599" 597 screening ant. roview. That is, the directors or officers ShOUld consider all the applications. They should see: 1. Whether the applications fall within the purpose of the foundation. 2. Whether the applications are covered by the existing grant program. 3. ~Jhether the standards of the grant program are met. 4. Whether applicant both qualifies for the grant and looks like a good recipient. 5. One officer or director usually chooses the best or the best of the applicants for final screening by the board of directors. The board of directors reviews the recommendations of the president or other officers. A decision to grant or not to grant is then made. 6. A person in charge of the grant program should then notify the winners and the losers by letter. The winner should be informed of the next procedures to be taken, depending upon the nature of the grant program. 5~.l4 Copyright c 1967 Americans Building Constitutionally (A Trust) Printed in U.S.A. PAGENO="0600" 598 7. After all the applicable proced'~res relating to the actual grant itself and the accomplishment of the grant itself, there should be a clos:~ng out of the grant. This formal closing should include one or more of the following elements: 10 It is highly recommended that a complete accounting of the use of the grant funds be submitted by the winner. 2. It is highly recommended that a review of the grant program be made by one or more of the following persons: the officer in charge of the grant program, the recipient of the grant, or a third party reference who would have knowledge of the grant and who would be qualified to make such an appraisal, such as a dean of students, when a scholarship is awarded, or an expert scientist unrel.- ated to the project, where an appraisal of original research has to be made. 3, Except in cases o~ general scholarships, a detailed report by the grant recipient of the grant concerning the results of the grant is, of course, highly recom- mended, as evidence oi' proper foundatd~on activity. 5-15 Copyright c) 1967 Americans `~ui1ding Constitutionally (A Trust) Printed in U.S.A. PAGENO="0601" 599 Conth~ct scholarsh ipexam.DISTRiBUTE~ [~~IBIT #15. Not all disbursements of funds are aade under a grant program, but most are. I believe that we should use a practical example of an existing grant program to discuss some desirable activities and then discuss alternate methods to accomplish the same or similar goals. Your foundation is free to accomplish its goals through any of the procedures recommended in this material. As an example, let us set up a grant program with the following characteristics. Let us first create the Hope Foundation Grant program for scientific, educational and literary purposes. This grant program will authorize disbursement of foundation funds for any bona fide project or reason within the scope of this purpose. Let us also state that the program will authorize any disburse~ ments consistent with the purposes of the foundation. Now, let's give us some objectives. 5.-16 Copyright ~~c) 1967 Americans Building Constitutionally (A Trust) Printed in U.S.A. PAGENO="0602" 600 EXHIBIT 15 SCHOLARSHIPS AND STUDENT LOANS EXERCISE Your instructor will appoint several boards of directors among the students in each class. These are the instructions for each board of directors: 1. Your foundation is endowed with $25,000 which has been earmarked for scholarships and student loans. The board of directors has decided to assume the duties of the scholarship committee and now faces the following tasks: 2. The board of directors must allocate the funds between actual scholarship grants and student loans. 3. The board of directors must decide what area of education and level of education they wish to support. L~, The scholarship committee must decide on the administra- tive procedures with which they will govern the entire scholarship and student loan fund. 5. The following papers must be drafted: (a) The scholarship or student loan application. (b) The reference forms. (c) The scholarship or loan publicity folders. (d) The fcundation letters notifying the applicant of the receipt o~ the application and their rejection or acceptance as award winners. (e) The follow-up evaluation forms. 6. The board of directors must also decide what standards would be necessary to win a scholarship or student loan and what standards, if any, would be necessary to main- tain the loan or scholarship. 7. Finally, if the foundation board of directors decides to award or allow student loans, how should the student re- pay these loans, at what interest and under what pro- cedures? 8. The board of directors should also consider how much each scholarship would be worth or what is the limit on student loans. Each of the board of directors should work independently and avoid copying verbatim the illustrative forms supplied to you during the course of instruction. Duties should be delegated to save time. Each form and program should be as realistic~ as possible Copyright (5~ 1967 (over) Americans Building Constitutionally (A Trust) Printed in U.S.A. PAGENO="0603" 601 and applicable to the policy decisions of the board of directors. Your instructor will inforn you of the tine limits and other restrictions placed upon this exercise. All programs and forms will be compared and discussed follow- ing this session. Copyright ~ 1967 Americans Building Constitutionally (A Trust) Printed in U.S.A. PAGENO="0604" 602 1. Letts state that the Hope Foundation wishes to support higher education through (a) scholarships and (b) creation of special activities in certain colleges. 2. The Hope Foundation wishes to promote international relations on a broad plane. 3. The Hope Foundation wishes to promote and develop basic research on economic conditions and economic theory. 4. The Hope Foundation wishes to support a specific religion. 5. The Hope Foundation wishes to support a specific literary collection. 6 * The Hope Foundation wishes to promote and support art educat ion (music, or any other cultural art). With these objectives and the grant program proced~ ures we discussed we can explore in detail how the Hope Foundation will accomplish these activities and what the exact structure might be. We will also discuss alternative methods in some cases. I. Higher education includes two primary ob-. jectives. First, actually educating students in whom Copyright (~c5) 1967 5-.17 Americans B~ui1ding Constitutionally (A Trust) Printed in U.S.A. PAGENO="0605" 603 the foundation is interested and, second, actively supporting educational inst itut ions with which the foundation is intellectually in agre~men~;. A standardized scholarship program containing all the normal standards of any scholars~~ip program could be created. A~2~ high school senior could apply provided he or she qualified under the standardized program. For example, a scholarship program could be created *to provide limited scholarships to stu..- dents from a certain high school or city, or county or state or those intending to go to a certain col..- lege or for students who intend to study a certain subject or group of subjects. Those students who would be qualified for this particular scholarship might be notified of the ex- istence of the program through proper channels, such as the dean or principal of the high school. Then, these students would apply using the found.- ationts application blanks, The executive director would process the applications and recommend a winner to the board of directors. Provided that standards of the original program are met, any person regardless 5-iS Copyrightc~1967 Americans Constitutionally (A Trust) Printed in U.S.A. PAGENO="0606" 604 of his relationship to the donor, off leer or founder of the foundation may win the scholarship. The Treasury only requires that standards be set and main- tained in every grant or scholarship program. It is recommended that in the case of scholarships for the purpose of higher education that grade averages be required and "tight" accounting practices be maintained. The above procedures are the common steps taken where the foundation (REFEPENCE TO GRANT PACKAGE EXHIBIT FOR EXAMPLES) both funds and adriUnistrates the scholarship program. There are other ways to accomplish many of the same objectives. Perhaps an easier way would be for the college chosen by the foundation to receive the scholarship to administer the fund and recommend a winner. That is, the applications for the scholarship would go to the. college. The college would process the appl icat ions and recommend winners to the found- ation's board of directors, and then the board of directors would decide to accept or reject the decision of the college. 5-19 Copyright ~)l967 Americans Building Constitutionally (A Trust) Printed in U.S.A. PAGENO="0607" 605 Another method that is often used by foundationss is joint adminstration, joint funding, or even cooper- ative funding. The National iiierit Scholarship program is one example. The National Merit Foundation was formed by the Ford Foundation to coordinate scholarship activities of hundreds of businesses and foundations. Many of the scholarships available through the National Merit Scholarship program are awarded ~ to children of employees of the participating businesses. These scholarships must, however, be awarded on a standardized basis created by the National Merit Scholarship Foundation. Other smaller cooperative programs can be and have been easily created. where one foundation is unable to afford the cost of a total scholarship to a particular institution or program, several found-. ations might cooperate to meet the cost. In such a case all o~ the foundations would have to agree upon a winner. A foundation might also simply endow a college or university with scholarship runds and empower the college not only to administer the applications, but 5.-20 Copyright \C~ 1967 Americans Building Constitutionally (A Trust) Printed in U.S.A. 87-444 0-68-39 PAGENO="0608" 606 to declare the winners. General direction of the foundation as to the nature and identities of the initial winners might be discussed by the foundation and the college prior to the grant. Distribute EXHIBIT #16 and EXHIBIT #17. The second objective of a foundation in tenns of supporting higher education would be to encourage or support particular activities at colleges or univer~- sities. A common method is to give a grant for a particular purpose, such as to support religious education at Northwestern University. A grant of any amount may be either a general endowment to a college or university's general educational funds or the grant may have detailed requirements connected with it. For example, a grant was made to Wabash College in Crawfordsville, Indiana at the beginning of the century to create a chair of religion in the college. The grant required that the college make Copyright ~~q) 1967 Americans ~ui1ding Constitutionally (A Trust) Printed in U.S.A. PAGENO="0609" 607 EXHIBIT 16 SCHOLARSHIP PROGRAMS FOR ELEMENTARY OR HIGH SCHOOL STUDENTS (Or Other Programs of Special Education) Most scholarship programs offered by private and public sources today usually relate to college education, graduate school education, or special programs of training in Head Start pro- grams, poverty-stricken areas or other special situations, Al- though the procedures applicable to college and university scholar-~ ships would apply equally to high school or elementary school scholarships,the available information from such procedures upon which a foundation board of directors could decide a winner is usually insufficient. It is recommended that greater emphasis be placed on reference forms and the views of the parents of students applying for scholar- ships to high school or elementary private schools. The potential of these students to go on to higher education or the necessity of special training for the individual applicant would be stan - dards upon which a foundation could freely operate. The primary rule that should guide a foundation in creating a scholarship or grant program to make funds available for ele- mentary or high school educations is to tailor the procedures to the needs and available information of each particular class of applicant; that is, if your foundation were to provide scholar- ships to a private preparatory school, your scholarship committee would need to know the quality of the student, his aims and ambi- tions; and the opinion of others, particularly teachers; and possibly other guidance and counselors that have worked with that student in the past, such as scout leaders, boys' club leaders, Ll~H club leaders, etc. Other Special Scholarship Programs Your foundation may wish to sponsor or create scholarship loan or grant programs in other areas of activity, such as music, art, student leadership, LI~~H, YMCA, Boys' Club or other related organizations or activities. Generally, the cost of these pro- grams will be much lower than costs related to tuitions for formal education at the elementary, high school or college level. In addition, many of these programs, such as YMCA student leadership conference, would be a short-term, one-time award that would not involve either a great deal of money or paperwork. Generally, your application, reference blanks and follow-up forms for these types of programs would be much simpler than those necessary for a college scholarship, or even a high school scholarship. Never- theless, the standard procedures that are applicable to other scholarships and grants should be used, although in simplified Copyright ~ 1967 (over) Americans Building Constitutionally (A Trust) Printed in U.S.A. PAGENO="0610" 608 form. Some of the examples that have been presented to you in the prior exhibits on grants and scholarships were, in fact, designed for such simple pro~rrams rather than the more complex or scientific grant programs that you might envision. The rule here, as in other cases, is simply to use your common sense. Do not develop a 50-page application reference form and grant procedure for a $25.00 scholarship to a student leadership camp nor should you create a two-page application and reference blank for a $3,000 scholarship. The paperwork should conform to the needs and requirememtsof an objective scholarship committee. In- formation must be gathered to enable those committees to make an intelligent decision. * 3~ * * * Copyright (j:;~ 1967 Americans Building Constitutionally (A Trust) Printed in U.S.A. PAGENO="0611" 609 religion a required subject Lor graduation. The grant even went so Lar as to speciry the two initial courses to be oCfered by the proressor chosen to riii the chair These courses were a history or religion and bible study. Your particular grants to a college or univer.- sity may just as tightly restrict requirements or they may be as general as you wish, depending upon your objectives and those or the college or university. In such cases where you would wish to restrict the use or the runds, negotiations should be completed between the executive director or your roundation and the president or the institution or your choice. A third method or supporting higher education and simultaneously accomplishing your desires is in the rield or academic prizes and awards. You may have a problem racing you in your business or industry or a question that has arisen in your proressional prac-. tice that could be answered 17y basic research or academic analysis. Because students orten have or.- iginal ideas and approaches to problems and because 5-22 Copyright (~ 1967 Americans T~ui1ding Constitutionally (A Trust) Printed in U.S.A. PAGENO="0612" 610 they have access to some of the finest library and research equipment available to man, they are often In a better position to accomplish thls research than any other individuals. If your foundation offers a substantial prize for the "best paper" on any part~ icular subject, you might be the happy recipient of several excellent papers and discussions of a particu.- lar problem o~. interast to~ ~ Your foundat ion would simply initiate a contest at several colleges and universities of your choice for the best paper on a particular subject or subjects. Prizes of $250 to. ~l,000 are usually considered to be substantial awards to a poverty stricken student. It is possible to have the administration or faculty of each college or university involved act- ually screen the applications and only forward the best ones to you. A typical prize or award program might be created as follows: The Hope FoundatIon announces the following contest for the best paper on any subject concerned with the development of nutritional science in the United States. Announcements concerning this particular Copyright'? 1967 5~23 Atnericans Building Constitutionally (A Trust) Printed in U.S.A. PAGENO="0613" 611 contest could be mailed to various medical schools, nursing schools, or schools of home economics that you might consider to be qualified to produce these papers $100 prizes might be awarded to the best paper in each of five such schools, $50 second prizes and $10 third prizes in each of these schools. All three papers from each of the Live schools would be forwarded to the foundation for consideration. A $500 first prize and $250 second prize might then be awarded on a nat ional basis * The original judging at each school might be made by the professor of nutrition at that school and that professor would control the winners of the various prizes. Your found.- ation, however, would dedide the national winners and all winning papers might become the property of the foundation. For a total expense of about $1,500 to $2,000 you might collect fifteen separate and highly original answers to your question on nutrition. Further incentive to students might be made if your foundation could arrange for the publication of these papers in a national periodical. Such prizes - 5-24 Copyright `c 1967 Americans Building Constitutionally (A Trust) Printed In U.S.A. PAGENO="0614" 612 or awards might also be. available to employees of a business, professors at colleges or universities, or any industrial workers in a given field. The scope of the problem that might be offered as a topic has no bearing on the qualifications or validity of the contest. II. To promote international relations, travel might be required. All of the scholarship and ed.- ucational grant methods could, of course, be used by the international relations project and this program might also include other activities. Such projects as international correspondence, academic research and international relations supporting or attending international conferences and supporting or advising international cultural relations might be some of the activities your foundation might accomplish. The point is simply that international relations has a broad definition which can justify wide variety ~f interesting activities. Distribute E~1IBIT #180 5.~25 Copyright (~`) 1967 Americans ~ui1ding Constitutionally (A Trust) Printed in U.S.A. PAGENO="0615" 613 EXHIBIT 18 INTERNATIONAL PROJECTS I. As the manager of your foundation the scope of your thinking should not be limited to small projects nor limited by the boundaries of the continental United States. In fact, it is advisable to think in terms of international consequences of your projects and the possible effect on international rela- tions and the upgrading of world society, as a whole. We recommend that your foundation investigate foreign invest-- ments, foreign aid, foreign educational projects, and coopera- tive projects with an international scope. II. Foreip~n Investment - Your corporate foundation is not barred from investing in foreign countries. Your stock broker, how- ever, should be consulted for detailed information on what guidelines he would recommend *be considered in evaluating a foreign investment. Investment in new business in underdevel- oped countries might., in' fact, be considered initially a. philanthropic project which would support the growth of that underdeveloped nation. III. Private Foreign Aid- In July of 1965 the Advisory Committee on Private Enterprise in Foreign Aid reported to the Agency for International Development in Washington, D.C. Copies of this report are available from the Information Staff, Agency for International Development, Washington, D.C., 20523. We recommend that your foundation board of directors obtain this publication because it includes many interesting ideas on how a foundationmight develop international projects. The report includes an excellent analysis of the needs and possible means of meeting these needs of undeveloped nations and under- developed, geographic areas. The document, of course, recommends a number of government projects and government cooperative projects. Close working relationships with any government, however, are not required for a foundation to accomplish ef- fective results in liforeign aid.' In section Lj of the agency's report they particularly urge the development of educational programs to enable undeveloped nations to develop the neces- sary, skilled, cemiskilled, and unskilled workers to the level of modern technology. In this section the committee devoted an entire page to the role of non-profit institutions. They stated `we recommend that AID assist in financing the development of appropriate non-profit institutions in the less- developed countrIes and that they finance the development of links between such organizations and their counterparts in the Copyright ® 1967 (over) Americans Building Constitutionally (A Trust) Printed in U.S.A. PAGENO="0616" 614 United States through which technical assistance could be ef- fectively provided. Assistance of this sort could take many forms from such familiar activities as assisting educational institutions to supporting public forums and discussion groups. Apart from the committee's obsession with their government's ideas are essentially sound and provide an excellent source of projects and considerations for a private foundation in the United States. Certainly, your foundation board of directors has the talent available to develop an educational program or other cooperative project that could bring meaning and assis- tance to an undeveloped nation without great cost expended by the foundation. Such projects will generally take a great amount of time and effort if they are to be completed professionally and effective- ly, but they could be scheduled for a long-term run, and work could proceed at a realistic pace. IV. Constructing a Foreign Aid Progran - The following steps should 5ë considered by foundation boards of directors in initially creating a foreign aid project: (a) The scope of the project and target country should be chosen. (b) The amount of funds should be allocated. (c) The International Law of that country should be considered. (d) The time and personnel of the foundation should be allocated. (e) Contact should be made with that foreign nation to deter- mine its needs and available agency help if the foundation effort is to be on a cooperative basis. (f) If the foundation desires government aid contact should be made with both the United States Government and the govern- ment of the foreign nation involved. These are only the beginning considerations. Foreign projects generally involve much more detailed work and a greater under- standing of management Operations than do domestic projects. On the other hand, foreign projects generally provide for great flexibility and operation, satisfaction when the project is completed, and the opportunity to travel to foreign coun- tries. International relations can also be bettered as well as international education and understanding. Copyright ~ 1967 Americans Building Constitutionally (A Trust) Printed in U.S.A. PAGENO="0617" 615 III. The term °economics" particularly when applied to economic conditions or economic theory might seem to be hopelessly academic and impractical in terms or a practical roundation's goal. But economics has been chosen to illustrate the userulness or any approach based on original or basic research. For example, basic research in economics might include the collection or production data in a certain in-. dustry. Comparisons or these conditions, their international errect and an analysis or the reasons behind this errect could justiry a large number or varied activities to veriry or obtain this data. Interviews with leading industrialists or gov-. ernment orricials who are experts in this industry might be quite enlightening and valuable to the analysis. Basic research cannot be validly criticized ir it is bona ride and attempted by quali.ried persons. One or the great advantages or roundations to society is that the private roundat ion is rlexible and rree todo things that would otherwise not be supported. Governments are notoriously inrlexible. Quite often Copyright~c~l967 5...26 Americans Building Constitutionally (A Trust) Printed in U.S.A. PAGENO="0618" 616 valuable advancements have been ~nade through foundation activity where government or industry have criticized a project. Usually any criticism of basic research in any field back-fires on the critic * It is recom- mended that the program of basic research be included in your foundation's activities and grant program. It is also recommended that the area of research be chosen with great care so that the officers and dir- ectors of the foundation may pursue the research with personal enthusiasm and qualified ability. IV. If you personally wish to support a religion there are many advant ages in supporting that religion through your foundation. Of ccurse, there are certain limitations. It is recommended that your gifts to churches be made in lump sums, either quarterly, semi~annua1lY or annually. A few dollars grant each Sunday by your foundation is inefficient, Though such a grant program and religious intent the foundation may participate in any church activity, particularly in the academic or organizational level on a basis that usually waild not be open to individual. 5-27 Copyright (C; 1967 Americans ~ui1ding Constitutionally (A Trust) Printed in U.S.A. PAGENO="0619" 617 Foundations have prestige, and priests, ministers and rabbis have a greater awareness of foundation word than most other people. If a significant don... ation from a foundation should arrive in his office, that church leader will generally viish to cooperate closely with the foundation that gave it. This cooperation may take the form of invitations to con~ ferences, opportunities to attend special classes, and, of course, the opportunity to give further donations. In the same way that your foundation supports education or basic research, your foundation may support, and benefit by supporttng, religion. The same grant procedures apply. V. Your foundation may wish to create a library. Through a grant or special fund your foundation may support any literary activity and a library is among tbe best. Your foundation can collect books on any subject. it is recommended, however, that a care.~ ful plan of collection or a specific subject of col-. lection be maintained. Haphazard collecting of books generally does not provide eviaence of proper foundation~: 5..28 Copyright Kc, 1967 Americans ~ui1ding Constitutionally (A Trust) Printed in U.S.A. PAGENO="0620" 618 management. Your foundation's library may be housed anywhere, but it is recommended that the directors and officers of the foundation have ready access to the library. The foundation headquarters or officers are usually the best places. Of course, non.-fiction books of any subject may be collected, but fiction may also provide a worthwhile study, particularly if special areas of fiction are isolated or categorized for collection. Analysis of literature is a valid study, where the officers are qualified. VI. Special types of education, such as art or music, sometimes cause questions in the minds of directors and officers of foundations. Because these special forms of education are only extensions of "traditional" education, the support of these programs should not cause problems. Scholarships may be awarded t~ sup1crt music education or for art training or for any other special training. But just as stan~ dards are set and maintained for other educational scholarships, 50 must they be maintained in music 5.-29 Copyright ~ 1967 Americans Building Constitutionally (A Trust) Printed in U.S.A. PAGENO="0621" 619 or art scholarships. Scholarships for music should not be given to a tone dear child unless the music is prescribed therapy and the grant is considered a med ical welfare award and not an educational award. In the same way a found at ion may actually conduct music or art lessons. A found at ion may offer mus ic education, art education or religious educatIon or any other type of special education as part of its activities. You should consult an attorney to investigate local state licensing problems, but many foundations conduct these lessons as a normal part of their day-to--day activities. The income from these lessons is, of course, tuition, and tax-exempt to the foundation. The Trnin oC Ern~Dloyees A foundation is only as effective or active as its funding and employees allow. The non-charitable foundation is usually only as effective as the training of its employees permits. In other words, a foundation with a small budget may still accomplish a great amount of activity if the officers of the foundation are highly trained and have imagination. 5-30 Copyright (~) 1967 Aniericans ~uilding Constitutionally (A Trust) Printed in U.S.A. PAGENO="0622" 620 It is in the best interests of the foundation to train the officers and employees of the foundation to develop expertise in the fields in which the foundation is interested. Special training is a valid and just- If led foundation expense. Rather tha~a issuing a grant from the foundatibn to an of:Cicer it is recommended that an employee training fund be created for the same purpose (such special funds will be explalned later in terms of accounting practices). It should now be obvious that charity as a found~- ation activity is a much broader term than most people realize. Grant programs and charitable programs do not necessarily mean the unlimited giving away of funds. Specific objectives and activities may be most efficiently accomplished through careful use of "charity. Haphazard or general giving often results in inefficient use of available funds. Because most foundations have limited budgets and small endowments, greater thought and care concerning the use of these funds must be made. One of the best sources for new ideas in grant programs or charitable 5.-3l Copyright /c' 1967 Americans ~ui1ding Constitutionally (A Trust) Printed in U.S.A. PAGENO="0623" 621 programs is the daily newspaper. Giant foundations usually publish grants and ~ograms tI~ they initiated and you may use smaller variations of these same ideas to accomplish your objectives. It is recommended that you keep your eyes open for such interesting articles. * * 3~ * * 5~32 Copyright (~) 1967 Americans Building Constitutionally (A Trust) Printed in U.S.A. 87-444 0-68-40 PAGENO="0624" 622 Section 6 :.~4u~ Ben Salary The salary of any employee of a non-profit organization must be based on reasonable compensa- tion for services actually rendered; that is, services must be performed. These services are immaterial - but they must be performed. The com- pensation for these services must simply relate to the reasonable value of the services. Since value is purely subjective, the range of the possible salary for any employee is quite wide but there are ascertainable maximum limits. For example, if a foundation were structured to do medical research, and if the foundation earned $100,000 a year after expenses, then it would not be unreasonable depending upon the quantity and quality of his services if he were to receive up to $70,000. But if the only services performed by an employee were to look up foundation investments in the daily 6-1 Copyright (~)1967 Americans ~ui1ding Constitutionally (A Trust) Printed in U.S.A. PAGENO="0625" 623 newspapers and rile a report eac~h morning, then it would be obvious that a substantial salary would not be reasonable. However, even in this situation a reasonable salary such as $2,000 or even ~5,000 a year might be reaconable. ABC does not recommend that you pay a clerk $5,000 a year for this activity, but the point must be made that what is reasonable involves a wide range of possible compensation, As long as you and your foundation's other employees actually render services and help the foundation accomplish its purposes any reasonable salary may be paid by the foundation. The foundation, in order to obtain qualif led employees and maintain a continuing staff, must be able to compete with the commercial nErket for talent. In other words, the foundat ion might offer not only a salary, but also fringe benefits to an employee. These fringe benefits rray satisfy many of the living requirements of an employee such as the executive director, and be either tax-exempt or represent consider able tax saving. Because of this, the top employees, such as the 6-2 Copyright ~1967 Americans ~uilding Constitutionally (A Trust) Printed in U.S.A. PAGENO="0626" 624 executive director or chairman of the board of directors, may not require or desire a high income, which is taxable at ordinary income rates. These top employees may, in fact, wish to keep their salaries low and enjoy other tax-free benefits rather than subject themselves to confiscatory tax rates. There is no general rule as to what any executlve director might desire as a salary~ This amount would depend primarily on each individual's desires. For example, a person who would desire a large amount or personal entertainment would require a larger salary than a person who does not require abnormal amounts of entertainment. Personal entertainment is generally not provided for employees by foundations and ABC does not recommend that your foundation provide you With normal day.-to-day entertainment as a fringe benefit. You should instead provide yourself with a salary sufficient to provide for this portion of your standard or living, Use or foundation funds for personal ent3rtaifllflent would usually constitute self-dealing. 6-.3 Copyright (c~ 1967 Americans Building Constitutionally (A Trust) Printed in U.S.A. PAGENO="0627" 625 ABC does recommend that you break down your expenditures after taxes to determine what you would require in terms of salary and what otherwise might be provided by your employer. ~-- Distribute ~XHI BIT #19e -J !~ in~g~enef its In properly assessing your requirements for a salary you should be aware of what fringe benefits or other benefits of employment are possible through a foundation and what relation these benefits have to your economic planning. ABC recommends only those tax-exempt fringe benefits that are well established in tax law and may be accomplished with a minimum possibility of ques- tioning by the Treasury. A. Insurance It is recommended that you con- suit with your insurance broker or agent in properly planning and providing protection that you might obtain from insurance. Your insurable status will 6-4 Copyright (1') 1967 Americans Building Constitutionally (A Trust) Printed in U.S.A. PAGENO="0628" 626 EXHIBIT 19 BREAKDOWN CHART JF PERSONAL EXPENSES A. List your categories of expenses after taxes that must be maintained to enjoy your present standard of living. Hou~ing ___________________ Utilities ________________ Furniture ___________________ Insurance ____________________ Home _________________ Life ________________ Health ___________________ Car ___________________ Other ___________________ Transpor tat ion____________________ Recreation ___________________ Education __________________ Literature _____- Retirement ___________________ Savings Investment _____________________ Food ___________________ Clothing ______________- Luxuries ___________________ Other ___________________ Total . Copyright ~ 1967 S. * (over) Americans Building Constitutionally (A Trust) Printed in U.S.A. PAGENO="0629" 627 B. What categories might in whole or in part be provided to you as corporate fringe benefits by your foundation employer? C. Deduct this amount fr~om the total. D. What categories in whole or in part night you be able to pro- vide from your business, trust, or foundation through other methods. E. Deduct these from the total at paragraph "C.' F. Add $1,000 (for contingencies). This should give you a beginning guide to establish what your taxable salary needs night be. This salary" nay be paid from several sources (trust, foundation, business). 0. This is only a guideline. You may develop other methods to estimate your salary requirements. Copyright ~ 1967 Americans Building Constitutionally (A Trust) Printed in U.S.A. PAGENO="0630" 628 not change simply because you have used the foundation as an estate planning vehicle, but your needs may be altered. In addition, you may be able to afford more insurance coverage through a foundation than you would as an individual. p~rty~jnsuran~ and Q~U2~L~CC should be maintained for property ovmed or leased by the foundation * If the foundation has no property interest in the real estate in question, then it must not pay the premiums on the insurance, if, on the other hand, the foundat ion owns or leases the house, apartment, o!f ice or other property, then the found- at ion should properly insure the property against fire, theft and other liabilities. The individual should maintain any insurance protection that he may require for his own personal liability. This would include renterts insurance in some cases. HosDita1iZJ~ ~ ~ Dsabi~y~I~e. The foundation may prov ide all three of these insur - ance coverages to an employee and his family with no attributable taxable income to the employee. copyright (~c~ 1967 65 Americans Building Constitutior~all~ (A Trust) Printed in U.S.A. PAGENO="0631" 629 In addition, in the event of a disability, insurance payments to the employee are not taxable these provisions are exactly the same as in the case of any business corporation employer. In addition, your foundation may be able to take advantage of lower rates provided for group coverage or special offers made only to companies and not to individuals. LifejnsuranQe is obtained by people primarily to protect their loved ones from financial hardship in the event of premature death. Life insurance may also be used as a low.-risk means of savings or to fund particular projects that may be accomplished or developed in the future. Insurance men are aware of literally hundreds ol~ plans that are available to corporations .f or life insurance coverage on thelr employees. ~`Iany of these involve direct coverage of the employees with a wife or children named a beneficiary. These policies are usually taxable, in part, to the employee either upon payment of the premiums or when the benefits are paid to the employee's family, or both. Copyright ~) 1967 Americans fluilding Constitutionally (A Trust) Printed in U.S.A. PAGENO="0632" 630 Some of these plans provide significant ~ savings over more conventional methods of premium payment after taxes. Such plans may be developed through your insurance agent. However, there is one plan that generally pro- vides tax-free benefits' and tax-free coverage" through the foundation - this plan is called "key- man" insurance. Key man insurance provides life in- surance coverage on a top employee of the organization with the benefits of the policy returning to the foundaliofl upon the death of the employee. Such insurance provides cash compensation to the organiza- tion with a loss of a key individual. Premium pay- ments made by a business corporation employer are not deductible as business expenses and the corporation would pay taxes on this amount, but the benef its returning are tax-free. Since your foundation is tax~-exempt, this would permit your foundation to pay premiums before taxes thus making the entire policy tax-free. Since you might control the foundation as executive director and - 6-~7 Copyright (5; 1967 Americans Building Constitutionally (A Trust) Printed in U.S.A. PAGENO="0633" 631 and your wire or children might succeed you, it is possible to provide significant key" insurance pro- grams and still control the benefits when they are paid to your foundation, Such insurance benefits when they are paid to your foundation are not part of your taxable estate upon your death. The benefits are dedicated, however, to your foundation?s tax.~exempt purpose and not to your wife and children. In addition to property, health and lire insur.- ance, all varieties of retirement insurance plans are available through the foundation employer. The employee may enjoy deferred compensation, annuities, pension or other compensation benefits in the same way that the employee of a business corporation might enjoy them. Again it is recommended that you see your in- surance man to develop the most efficient plan for your organization and family. Finally, you should be aware that your foundation as an employer may pay up to $5,000 to a surviving spouse without it being taxable income to the spouse on your death, These funds do not have to come from 6-8 Copyright (CT') 1967 Americabs ~ui1ding Constitutionally (A Trust) Printed in U.S.A. PAGENO="0634" 632 an insurance policy nor do they have to be guar- anteed by prior contract. The ~;5,OOO is simply an allowable gift made by an employer to the em- ployee's spouse upon the death of the employee. [~t~buteEaiIBIT#2O~ ~e have been discussing types of insurance and insurance plans that would be made available by a foundation employer to its employees. Since you Will be the top employee of the foundation and may also direct the flexibility and scope of any foundation insurance program, you must make decisions concerning the precise limits of all foundation insurance. Although at first it may seem profitable, and even economical, to have the foundation own all of your life insurance as key man insurance, it is recommended that a more detailed analysis be completed before you make wholesale transfers of policies. Remember that all insurance that is owned by the foundation and paid to the foundation as beneficiary must be devoted to the benefit of all mankind. These Copyright (c~ 1967 Americans Building Constitutionally (A Trust) Printed in U.S.A. PAGENO="0635" 633 EXHIBIT 20 INSURANCE OUTLINE The following outline is provided to help organize your notes on insurance. The categories will be discussed by your instructor. I. Life Insurance A. Term insurance B. Other types of policies C. Foundation v. individual ownership II. Other Personal Insurance A. Health insurance B. Major medical insurance C. Liability insurance D. Personal property or renter's insurance III. Other Types of Insurance A. Automobile insurance B. Real estate insurance C. Mortgage insurance D. Other service1 insurance policies Copyright (~ 1967 Americans Building Constitutionally (A Trust) Printed in U.S.A. PAGENO="0636" 634 funds are dedicated to the specific purposes for which your foundation is formed. If it were any other way, the insurance would be taxable3 If the benefIciary of any life insurance policy is a taxable person, then, regardless of wh~ owns the policy~ incoriie taxes or estate taxes or both will be paid by someone * For example, if your foundation owned a life insurance policy on yourself as executive director, but the beneficiary was your wife or chlld, then you would have to pay income taxes each year on the amount of premiums paid by your foundation employer, and your wife would have to pay the Federal Estate taxes on the insurance benefits when they are paid at your death. In the same way, if you owned the in- surance policy, but the beneficiary was the found-. ation, you would still be liable for Federal Income taxes on the amount of premiums paid on that partIcular policy. However, under the law, if the beneficiary were irrevocable, you might deduct the amount of the premium as a charitable donation to the foundation. Insurance is a special contract which has special 6-.lO Copyright ~ 1967 Americans Building Constitutionally (A Trust) Printed in U.S.A. PAGENO="0637" 635 tax laws applicable to it. Due to these specIal laws, you may wish to take advantage of some of the benefits of personal insurance nership, even though you may have to bear certain taxes that might other~ wise be avoided. For example) it is the general law of most states that insurance benef Its paid upon the death of the insured do not pass through probate and are not governed by the Probate Court. Since there is no court delay in the payment of insurance benefits, there may be great advantages for part i~ular purposes in both owning an insurance policy and having it paid to your wIfe or children outsIde of the foundation. If your ran~Ily has unusual needs or a high standard of living, then it might be advisable to make some large amoi.~nts of liquid:capital available immediately after your death to take care of incidental expenses, burial, accelerated debts, and to maintain the family's standard of living during the trying months immediately following your death. Insurance would provide the most secure method of providing such capital. Even 6-11 copyright ~c) 1967 Americans ~ui1ding Constitutionally (A Trust) Printed in U.S.A. PAGENO="0638" 636 though the amount would be taxable under State Inheritance taxes or Federal Estate taxes, because of the substantial amount of exemption limits, you might give as much as $120,000 in insurance benefits to your wife or children without delay and with minimal tax loss. In Illinois, each heir of a decedent is allowed a certain exemption. Closely related heirs are allowed $20,000 exemption before taxes are imposed. If $120,000 in insurance was left to your wife she would actually be taxed on only $90,000 which under the pre.- sent tax rate amounts to about a ~4,000 to $5,000 total taxation. In terms of Federal Estate Taxes, the laws allow a $60,000 initial exemption and also allow a 50 percent deduction under the marital de- duction rule, if the property is left to a wife or spouse without limitation. Insurance qualifies under the particular rule. Since $60,000 is one-half of $120,000 and the remainder might qualify under the marital deduction rule there would be no Federal Estate taxes for the $120, 000 amount. This would mean 6-12 Copyright (&` 1967 Americans ~B~uilding Constitutionally (A Trust) Printed in U.S.A. PAGENO="0639" 637 that out of ~l20, 000 given to a wife entirely in insurance benefits, the total taxes might amount to less than ~5,O00. Nobody likes to give away $5,000 to anybody, but considering the percentages and con- sidering the fact that your wife would end up with $115,000 in cash, usually available within the first six months after your death, this might be a sizable *benefit without significant tax loss. There would be no delay, no attorney's fees and money would be available f or emergency purposes. Such funds would not be dedicated to all mankind, nor would there be any necessity for your wife or children to accomplish actual services to the foundation to be paid a salary. If the rest of your estate were protected through non-prof it procedures and trust procedTes, then these insurance benefits could accomplish considerably more than funds going directly to the foundation or trust. If your wife did not need the funds at the time of your death er had any surplus which she did not leave as part of her estate, she could easily donate it to the found at ion and then avoid estate taxes. - 6-13 Copyright c 1967 Americans uilding Constitutionally (A Trust) Printed in U.S.A. 87-444 0-68-41 PAGENO="0640" 638 Your children might also be satisfied in terms of their expected legacies without involving the foundation or the trust and without serious tax loss. As you can see, the use of the foundation and the trust procedures gives new meaning and greater flexibility to existing insurance protection plans and actually gives greater freedom to the handling and preservation of your estate, Before you place all of your life insurance in the foundation as key man insurance, it would be best to explore your part.- icular estate needs based upon your understanding of these new procedures with your insurance man so that a more efficient program might be created. Total tax savings or tax consequences should not dictate all economic planning. In many situations such as the life insurance plan outlined above, taxes might be paid in order to gain other substantial benefits. 6.-14 Copyright c) 1967 Americans Building Constitutionally (A Trust) Printed in U.S.A. PAGENO="0641" 639 sect ion7 Foundation Business Activities The accumulated inc ome and capital of your :Counda- tion is dedicated to proper foundation business activities. All of these activities must rail within the scope of your foundation's purpose or they will be either taxable or improper. Business activities mean any activity that promotes or develops the foundation's purpose. The Treasury and the Internal Revenue .Code have never placed any limitation on foundation business activity in terms of accomplishing a purpose; that is, neither the Internal Revenue Code nor the Treasury have ever defined the words "education, scientific, religion, literary, charity, testing for public safety, or prevention of cruelty to children or animals" in terms of what subjects or types of activity must be accomplished. Foundations are designed to respond to unusual needs or to explore unconventional procedures and methods to prove or dis.- prove their validity. Because of the desirability of freedom and flexibility for research, welfare, education and charity, no limit will probably ever be placed on these words. As outlined earlier, the Internal Revenue 7-1 Copyright (~~) 1967 Americans Building Constitutionally (A Trust) Printed in U.S.A. PAGENO="0642" 640 Code primarily Limits a foundation in three areas of prohibited transactions. The Code does not specify what activities a foundaticn must do. You can probably think of thousands of proper activities in which foundations, your foundation, might participate. If you can clear~~jUStify an activity in your own mind within the scope of your purpose, it will probably be legally sufficient to satisfy the requirements of the Internal Re~.teni~e Code. Your foundation activities will satisfy two basic requirements of the law arid your economic needs. First, your foundation's activities will clearly show that you are operating within the scope of Section 501 (c) (3) of the Internal Revenue Code, and second your foundation will do things of personal interest to yourseU and your family. Let's get down to cases. In other words, let's explore some foundation activities, principles and theories that will qualify under the Internal Revenue Code and will also satisfy personal desires. These 7.-2 Copyright c 1967 Ataericans uilding Constitutionally (A Trust) Printed in U.S.A. PAGENO="0643" 641 activities, because they are totally in line with the Board or Directors' desires, might be classed as `non.-prorit rringe benerits, but they will not be round in an employment contract nor will they be o~ rered to every employee or your roundation. Such "rringe benerits" as educational training grants, travel to do research, access to research racilities, libraries and other education benerits have already been explored. All oI~ these activities are clearly proper within the scope or roundation law. To make the point or roundat ion business act ivit ies clear, let's look at the clearest case or what a round- ation can provide ror its employees in terms or business activities and business racilities without being improper, illegal, or taxable. Our example will be the president or a large ~iidwestern university - the University or Illinois. The University or Illinois, located in Champaign-Urbana, Illinois, has tens or thousands or students. It has a campus tI~ sprawls over hundreds or acres and employs a raculty teaching a broad range of subjects. The president of the University has access to all or these racilities and has the benerit or the entire starr. Specirically, the president may play on the Univer~ity 7-3 Copyright (~)l967 Americans Building Constitutionally (A Trust) Printed in U.S.A. PAGENO="0644" 642 of Illinois golf course without paying a fee. The president may use the University dining rooms, meeting rooms and classrooms usually without cost for whatever purpose he desires. (University presidents are seldom accused of illicit activities.) If the president had ch ~uistry as a hobby he could use the University laboratories, chemicals, equipment and other supplies without cost to him, and without any criticism of acting improperly. The president could sit in on any lecture of any course being taught at the school without tuition charges without being criticized. He could use all of the athletic facilities, swimming pools, tennis courts, gymnasiums, training equipment, and the first aid equipment. He would be able to take flying lessons at the University airport. He would* be able to borr~ any book in the gigantic University library. He would have at his disposal some of the world's top authorities on almost every subject and would be able to use their advice for his own personal benefit. The president enjoys the finest seats at football and basketball games, concerts, plays, and other forms of entertainment occurring at the 7.4 Copyrig~it(~)l967 Americans Building Constitutionally (A Trust) Printed in U.S.A. PAGENO="0645" 643 University. The president is not taxed one penny on any or these activities, or course, with all this opportunity Lor personal benerit, the president or the University or Illinois bears a substantial amount or responsibility Lor the entire operation, but it is easy to see that even though he may own very little, he certainly could enjoy a high standard or living. As Executive Director or.your roundation, you would be able to enjoy the benerits or any and all or your roundation's activities, perhaps not directly, but certainly indirectly; and you would choose only those projects in which you had a personal interest. A roundat ion is not rorced by the law to accomplish any particular thing only to accomplish things. What these things might be is entirely up to the Board or Directors. It should be clear at this point that the rirst principle or proper roundation business activity is tbat the roundation's starr and Board or Directors take a personal interest in the project. The second principle has been emphasized berore and will only be stated here i~iithout rurther discussion. The second 7.-5 Copyright ~c 1967 Americans Building Constitutionally (A Trust) Printed in U.S.A. PAGENO="0646" 644 principle is that the Loundation business activity be rully within the scope or the Loundation's stated purpose. Examples or proper roundation activity should be developed here Lor an extensive exhibit which might include an outline or other roundat ion business activity principles relating to prior discussion, as well as local state law. Considerable time should be devoted to discussion or these activities to (a) train the mem- ber's mind to think or such activities in the proper sphere, (b) to give the mern- ber some idea or proper activities that have already been accomplished in the middle-income bracket, and (c) to create an outline to be considered to test the propriety and vaaue or every proposed business activity to avoid government questioning. Hobbies Among the r irst act ivit ies that a board or directors might consider as proper roundation activity would be the hobby interests or the various members or the board; that is, what are they most interested in in terms or their avocation. Generally, many hobbies can be so structured that they will clearly rall within the scope or education, science or 7-6 Copyright 1967 Americans Building Constitutionally (A Trust) Printed in U.S.A. PAGENO="0647" 645 literature, For example, a person interested in gardening might classify his or her activities as horticultural and actually do research in gardening methods or develop new strains of plants. A model airplane builder is certainly in a position to contri.-. bute to the science of aeronautics or, even more spec.-~ if ically, model airplanes, which is a worthwhile field in itself. Those interested in literature could contribute through the building of libraries, the assembling of critical reviews, the assembling of bibliographies, or, if the employees of the found-S ation are creative, through writing articles, books, stories, plays, etc. Expenses relating to an individual's hobby are not deductible for income tax purposes, but expenses of an activity pursued properly by a foundation, even though that activity may have been a hobby of one of the members of the board, is justifiable for tax exern pt ion purposes, and there would be no tax loss If you intend to transfer your personal interest Copyrigrit (~ 1967 Americans ~ui1ding Constitutionally (A Trust) Printed in U.S.A. PAGENO="0648" 646 or hobby from your individual list or activities to the list or activities or your foundation first justify the activity in terms of your foundatlon?s purpose0 If you find that thls causes you to stretch your imagination or if you have difficulty in such justification, consult an attorney immediately to provide either a proper structure in which to operate or advice as to the propriety of the activity. If no such stretch of imagination occurs, then you might look for existing foundation, particularly the famous ones th ich have pursued a similar activity. Even though they might have spent millions on this activity and you only have hundreds or thousands to spend, you may structure yours identically with that of the larger organization. For example, if you are an attorney and criminal law is one of your side interests (from an academic point of view), then you might struc-. ture part of your foundation~s activities in the same way as the Vera Foundation of New York0 The Vera Foundation, as you may know, has done extensive research and development in criminal law leading to the release of indigent criminals without bond Copyright `c~l967 Americans Building Consitiutionally (A Trust) Printed in U.S.A. PAGENO="0649" 647 where their background has shown that they would appear for trial. This has allowed many poor persons to avoid staying in jail for 30 or 40 days simply because they could not raise bond money, even though they mIght later be acquitted while wealthier crim.- inal defendants were often freed within hours of their arrest even though they had incriminating reputations and were, in fact, found guilty at their trial. The Vera Foundation has also promoted substantial benefits for indigent criminals which have resulted In such decisions as the famous Gideonvs.V~nw~j~ght case. Referenoe might be made at that point to the prior outline on proper foundation activity. Retirement A foundation employer may provide him with the standard retirement programs that other employers also provide * For example, a converr~ lonal pension program of any nature and of any amount commensurate with the services actaully rendered may be provided to an employee by a foundation. Th15 pension plan 7.-9 Copyright (~*) 1967 Americans ~ui1ding Con3titutionally (A Trust) Printed in U.S.A. PAGENO="0650" 648 may be based upon length of service, quality of ser- vice, or any other standard normally employed by such an employer. The pension plan may be funded by an independent insurer or may also be funded by a self- insurance program of the foundation, although this second alternative might not be practical in the long run. There is no law preventing a foundation employer from creating a pool of funds to be used for a pension program, but there is reason to believe that crit- icism might result because such funds are being tied up for non-foundation purposes, where an insurance alternative might be cheaper in the short run. In addition, a found~t ion may provide an annuity to an employee or a contributor under a large variety of plans. A foundation might, for example, purchase an annuity insurance policy from an insurance company and given the annuity to a contributor in return for certain properties and other funds transferred to the charitable organization. This is a complex alternative and should be thoroughly explored with your attorney, accountant and business manager. Federal income tax law allows a contributor to retain a life interest Copyright(c 1967 7l0 Americans Building Constitutiv (A Trust) Printed in U.S.A. PAGENO="0651" 649 in the income derived from the property contributed to the foundation. Such income is, of course, taxable to the individual as ordinary income, but the ~l- vidual may take a charitable deduction for the value of the property so transferX'~d to the charity or foundation. Other retirement plans are also possible along conventional contractual procedures. Of course, profit sharing is not allowed in the classic sense, but certainly an annuity or life interest type of plan is a form of `profit sharing' and variations on these plans might be employed to meet specific situations. The tax consequences of any innovation should be considered prior to its use by a foundation employer for its employees, but generally, you will find that income going to an employee as a retirement benefit will be fully taxed as ordinary income to the employee, except in the case of a true annuity. Usually capital gains tax rates do not apply to retirement. The definition of retirement, however, has changed considerably over the past years. Retirement today does not mean that an individual will suddent~i 7.-fl Copyright ~ 1967 Americans Building Constitutionally (A Trust) Printed in U.S.A. PAGENO="0652" 650 stop all business activities and isolate himself in a hammock for the remainder or his days. Retirement today generally indicates only a change or pace or a change or activities, or both. Retirement may also indicate a change or location or a change or standard or living, but retirement does not mean that one drops out of the human race or devotes himself entirely to frivolous purposes. Active executives today often deteriorate rapidly arter retirement because of a lack or something to do. The loss or the services and experience or such men is a serious loss to our country as a whole. A roundation may be used to prevent this loss and to accomplish significant bene- rita ror all concerned through a continuation or activities accomplished by that executive. For example, an executive or professional might build up a large fund within a roundation for a par- ticular purpose such as scientiric research, education, or literary developments. Such projects would have a large scope and would generally entail a broad purpose. These projects would be accomplished on a reasonable schedule by the "retired' executive or 7..-l2 Copyright t~$~ 1967 Americans Building ConstitutiO~1iY (A Trust) Printed in U.S.A. PAGENO="0653" 651 professional. A Doctor of Medicine might retire from the treatment of patients to a more leisurely invest-. igation of a pet research project. An executive or other self-employed professional might also engage in research in his particular field of expertise, or might launch himself into a new "career" in an avocation or hobby0 Such activities would not have to be carried on at the frenzied pace of modern corn- mercial activities, and because the foundation is already funded with the necessary capital to carry on such projects, income requirements to the foundation and to the executive director would not force fren- zied activity to bring in more funds. In other words, a large fund within a foundation could be drained for research purposes. ivIankind woufd benef it through the research developed by an experienced and able mdi.- vidual * The individual would be able to accomplish a worthwhile project, keep busy and at the same time change his pace or scope of activities to meet his desires. If an individual desires to retire within a foundation rather than retire from a foundation he should give the same consideration to proper scope of 7.-.l3 Copyright ~c 1967 Americans Suilding Constitutionally (A Trust) Printed in U.S.A. PAGENO="0654" 652 his proposed activities or projects as he would to any foundation business activity. Proper economic funding, a realistic statement of objectives and methods of accomplishing the goals should be stated in detail in order to accomplish the project most effioiently and to preserve capital for long.-term use for "re~~- tirement". Advert isin~ A foundation may advertise its services or activities in any way that is normally used by com- mercial enterprises. However, foundations generally do not advertise except for lectures, seminars or literature that might be available. Certainly, a foundation involved in a professional activitly such as medicine, law, optometrics, chiropracty, or related fields, would conform to the advertising prohibitions in the individual code of ethics for each Lield. In other words, a Doctor of Medicine, even though employed by a foundation, would not have that foundation advertise his services, because it would be a breach of the code of ethics of the medical profession. 7-14 Copyright ~ 1967 Americans `~ui1ding Constitutionally (A Trust) Printed in U.S.A. PAGENO="0655" 653 The name of the found at ion, however, should be prominently displayed where the foundation is con- duct ing activities or operating a clinic that is providing services to the general public. If the Smith Foundation f~ operating the Smith Medical Clinic and the Medical Director is Dr. A. Smith, then the Smith Foundation's name should certainly appear on the building and the stationery of the clinic and should also appear in the listing of the offices in the building in which the Smith Clinic is operating. Dr. Smith's name may also ap- pear but should be subordinated to the un' s name on all billing and stationery. Foundation stationery may include the names of all the directors or officers or may not use these names at all * The foundation may list one address or several addresses on its stationery. In all cases of foundation stationery, the name of the foundat ion should appear prominently and not be obscured or diminished in anyway by the names of individuals. You have probably received letters from foundations which contain a long list of prominent names in the 7-15 Copyright ~ 1967 Americans Building Constitutionally (A Trust) Printed in U.S.A. PAGENO="0656" 654 margin. These names have usually been listed as advisers or directors. If you wish, you might solicit such names for use with your foundation, although it is not generally necessary or advisable unless you are intending to solicit funds from the public at large. ~ Your foundation will have a number of expenses that may not seem proper in terms of their direct connection with the purpose of your foundation, but are nevertheless proper in terms of normal business expenses such things as normal office equipment, office supplies, travel expenses and other similar categories are, of course, necessary in the operation of any business, and a foundation does not vary from normal business practices. ~here a foundation spends money that is clearly related to the foundat ion as to its justification, but a clear record of the expenditure should be maintained. Normal accounting practices for foundations are discussed below, and once a system is begun it should be maintained for 7.-.l6 Copyright ~) 1967 Americans Building Constitutionally (A Trust) Printed in U.S.A. PAGENO="0657" 655 a substantial period to avoid confusion. If you should have any question about the propriety or any class of expenses you should ask a competent lawyer or accountant :Cor an opinion. Con ~ 1. Account i~g~Pract~~ If your economic situation presently requires the constant services of a Certified Public Account, the mere changing to a non-profit structure would probably not alleviate the situation, but if you only need an accountant for year-end review or monthly statements you would probably not need additional work in a foundation structure. If you do not now use an accountant or trained bookkeeper, it is advisable to look for such a person to handle at least year-end accounting procedures. It is recom- mended in addition that such an accountant be questioned as to his loyalty to his clients. Some accountants are more than willing to waive their client's con-- st itut ional rights and give up information to the IRS that their client is entitled to keep private in absence of judicial order. In other words, it is 7-i? Copyright (~ 1967 ~nericans Building Constitutionally (A Trust) Printed in U.S.A. PAGENO="0658" 656 advisable that your foundation retain an accountant or bookkeeper if only for year-end fiscal review, but it is also advisable to keep tight control over your records and over your accountant's activities. Two general methods of accounting are commonly used by foundations. The first is the normal corp.. orate accounting procedure used for small business; that is, items allocated to various categories as they are received or as expenditures are made. This type of system is common knowledge to all accountants and should present no problems. Two additional bookkeeping categories might be added to the normal corporate accounting system. These additional categories are contributions and charity. The second method is much preferred and is called* the `fund accounting system". It is analogous to the type of systems used by governnient agencies to handle their budget each year. The system works as follows: Various accounts or funds are created at the beginning of each fiscal year to cover the individual projects involved in foundation activities. An 7-18 Copyright ~) 1~)b7 Americans Building Constitutionally (A Trust) Printed in U.S.A. PAGENO="0659" 657 amount is budgeted to each fund. Unattributable expenses are gathered in an "overhead" fund. At the end: of each fiscal year, each expense fund will either have a surplus or a deficit. Surpluses are transferred to the foundation general Lund and deficits are sat- isf ied from the found at ion general fund. New budgeting is then made for the succeeding fiscal year. This type of accounting system is also generally common knowledge to most accountants, but is seldom employed in small business. It is recommended, however, for foundations because it presents clear evidence that the foundation is operating in a non-profit structure rather than as a commercial enterprise. For a more detailed explanation of the foundation fund accounting system, you should consult with a Certified Public Accountant or business management adviser. DietributeE)mIBIT #21. Continuing Control Your family may continue in control of your 7-l9 Copyrig~it (~~) 1967 Americans ~5ui1ding Constitutionally (A Trust) Printed in U.S~A. PAGENO="0660" 658 EXHIBIT 21 FOUNDATION ACCOUNTING SYSTEMS A SPECIAL EXHIBIT ON FOUNDATION ACCOUNTL~G IS PRESENTLY BEING PRE- PARED BUT WAS NOT AVAILABLE AT THE TIME OF THIS SEMINAR. IT WILL BE FORWARDED TO YOU AS SOON AS POSSIBLE. Two basic accounting systems can be employed by foundations to accurately reflect their economic positions for management evalu- ation of the foundation's efficiency and for tax purposes. The first system is that used by normal business corporations. Almost any accountant or CPA can establish a corporate accounting system that would accurately reflect your foundation's income, out- go, and assets and liabilities. If your foundation is relatively small, then your accounting review might be accomplished on a semi- annual basis and the rest of your accounting reflected in your corporate bank account. WE RECOMMEND THAT AN ACCOUNTING BE ACCOMPLISHED EVERY YEAR OF THE FOUNDATION'S OPERATION. The second accounting system that is often used by founda- tions is one that mot only reflects the expenditures made by a foundation, but also provides evidence of philanthropic operation. This is the so-called fund accounting system which is employed by governments and other non-profit institutions. Most accountants can explain this system to you in some detail. Under the fund accounting system a foundation would budget certain amounts to various funds which would be created to manage the individual foundation operations. First, there would be a general fund. Out of the ~enera1 fund would come the various other smaller funds which would topically cover all the foundation's activities. For example, there might be an educational fund, a scientific research fund or a student loan fund. Finally, there would be an overhead fund. Various amounts would be allocated to all of the funds from the general fund with the exception of the overhead fund. Nothing would be allocated to the overheac fund. As expenditures are made during any year, the amounts are allocated to the fund for which the expenditure was made. If no such allo- cation cam be made for any particular expenditure thiS bill is placed in the overhead fund. At the end of any fiscal year, the deficit in the overhead fund is usually proportionately distributed over the rest of the smaller funds. Upon review of each of the smaller funds it will be found that there is a deficit or surplus in each account or the (over) Copyright (~ 1967 Americans ~ui1ding Constitutionally (A Trust) Printed in U.S.A. PAGENO="0661" 659 fund ended with a zero balance. Deficits are made up by the general fund and surpluses are returned to the general fund. At this point the foundation creates a new budget and reallocates to the funds for the coming year. Due to the widespread use of this accounting system in govern- ment and other non-profit organizations ir provides evidence of philanthropic intent through normal institutional-type accounting. Copyright c 1967 Americans uilding Constitutionally (A Trust) Printed in U.S.A. PAGENO="0662" 660 foundation for as long as they desire. The passing of control of a foundation from generation to genera- tion is accomplished through normal corporate legal methods. It should be kept in mind, however, that regardless of who controls a foundation the funds are dedicated to the benefit of all mankind. ~fhen one passes control of a foundation to his son or daughter that person is not passing property for the use of that son or daughter, but merely passing administrative power to decide how these funds or properties will benefit all mankind. Property owned by a foundation is not property owned by an individual whether that thdiv.i~ual is ~an officer, director or contributor of that foundation. L~ the husband in a family is the executive director it is quite common for the wire to be the assisant executive director. Either by corporate minute or the board of directors or by corporation bylaw, the assistant executive director would normally assume the duties of the executive director, * or upon the death or resignation or the executive 7-20 Copyright® l~67 Anericans Building Constitutionally (~ Trust) Printed in U.S.A. PAGENO="0663" 661 director, if the assistant executive, director assumes the duties of the executive director, a new assistant is then elected. In your initial board of directors, there will normally be yourself and your wife * A third, fourth, or fifth member of your board might be a parent, brother or sister, or child who has reaced the age of competency in your state. As each of your children reach the age or 21 they might be elected to the board of directors of your foundation. There is no maximum limits to the number of people that may be on a board or directors. (This is not to encourage large families but merely a statement of fact.) Such election to the board of directors may be ac- complished as each child reaches his or her twenty- first birthday or may be provided far in advance by a corporate minute to that effect. Exhibits of corporate minutes with a clear' warning that they are not to be used word-f for-word and they are to be read only as educational material. 7~-2l Copyright (~) 1967 Americans Building Constitutionally (A Trust) Printed In U.S.A. PAGENO="0664" 662 In some states It Is proper to elect children, regardless of age, to membership in your foundation and to further isolate these children in a special class of membership with voting power apart from all other classes or membership. Thus an elite voting class could be created which would have sole power to elect officers and directors and prevent outsiders from gaining control of your foundation. Election to this class of membership could be strictly limited to members of your family or their blood relations. Such strict control on membership, however, is usually not necessary if the board or directors understands the principles or election and or the propriety or an irrevocable minute in the meeting of the board of directors and acts accordingly. In other words, the board of directors will generally decide the suc~.. cession status of other individuals connected with the foundation, The board of directors alone will decide who will control what in the foundation. Knowing that It has this power. the board may now create a long~.. line of succession which may not take effect for years. 7.-22 Copyright (a" 1967 Americans ~5~ii1ding Constitutionally (A Trust) Printed in U.S.A. PAGENO="0665" 663 In the event of an unexpected death or resignation by a member of the present board, the future directors would be already elected irrevocably. The activities and funds of a foundation may also be divided in the future to satisfy the desires of a large number of individuals. For example, suppose one son decides tbat he wishes the foundation to support athletic activities, while your daughter decides that art and music, are better activities for the found at ion to pursue * The board of d ire ctors would simply dec ide to split the funds of the found.-. ation to both of these proper~ purposes and let the son manage the funds devoted to the development of athletics while the daughter manages the funds devoted to the development of art and music. Reports would be made from each of these subsections of your foundation and separate accounting systems would also be used. The board of directors would ratify the actions of each of these co..executive directors. Depending upon the amount of funds involved and the number of divergent purposes that may be developed by 7-23 Copyright ~ 1967 Americans ~ui1ding Constitutio:ially (A Trust) Printed in U.S.A. PAGENO="0666" 664 a family, a :Coundation can be "divided" into as many sections as desirable. Each individual section, however, must maintain the overall purpose of the foundation and each section must be self-sufficient in terms of satisfying the legal purpose. In other words, Johnnle can't use his funds devoted to athletics solely to pay his way to professional football games and baseball games, while j~iIary is awarding art schol- arships and music scholarships. Both spheres of activity must qualify under the law if they are going to be actively pursued without criticism. An alternative to this subsidiary effect of the division of funds within a foundation would be to create a separate foundation for one or more of the children and fund this separate foundation through a grant, and then let the second foundation chart its own course. Thus, delinquency in terms of activities of the second foundation would have no effect upon the validity or. propriety of the parent foundation. The directors of the second foundation would also have complete freedom and would not be limited by the 7-24 Copyright (s') 1967 Am~ricaus ~`uilding Constitutionally (A Trust) Printed in U.S.A. PAGENO="0667" 665 purposes of the first found at ion. There are many examples of this second type of diversification that have been accomplished among famous foundations. The Rockefeller Foundations, in fact, do not hesitate in incorporating serarate smaller foundations for particular purposes. Foundation control should be maintained by careful structure of the legal framework of the foundation and by judicious use of the minutes of the board of directors of the foundation to assure a consistent irrevocable plan of succession. * * * copyright~) 1967 Americans Tuilding Constitutionally (A Trust) Printed in U.S.A. PAGENO="0668" 666 SECTION 8 FOUNDATION T AND REPORTING WI [Exhibit ~~22 not prepared - to come ia~j - Federal and State Regula14pj~. Each or the subjects in this section should be prepared and delivered by a local attorney, depending upon state law. Statements as to the interpretation or the statutes involved in this section would be clearly the practice or law and should not be accomplished by anyone other than a licensed attorney. Distribute E)~iIBIT ~24, 1. Social Security and Federal Withho~~~ Your roundation must rile ror an employer's identirication number or Form SS-4 rrom the Social Security Department or the U.S. Treasury ir it employs one or more persons. This number is to be used when reporting the withholding or Federal Income Tax rrom any salaries paid to an employee by the roundat ion. The executive director or a roundation is considered to be an employed individual and ir this executive director is receiving a salary it is considered to be taxable income and subject to Federal withholding requirements which should be reported on Form W-2. A tax.~exempt foundation is not, however, required to 8-1 Copyright c 1967 Americans ui1din~ Constitutionally (A Trust) Printed in U.S.A. PAGENO="0669" 667 EXHIBIT 22 SPECIAL MANAGEMENT PROCEDURES Special management problems common to most foundations are being presently reviewed, and a1~ernative solutions to these problems are being prepared by t:ie research staff. At the time of this seminar this exhibit was not yet prepared. It will be forwarded to you as soon as possible. Copyright® 1967 Americans Building Constitutionally (A Trust) Printed in U.S.A. PAGENO="0670" * 668 EXHIBIT 214 ATTORNEY PRESENTATION OUTLINE The following material should be discussed by the associate attorney at your seminar. The outline that follows was prepared to help you take notes and to enable you to develop intelligent questions to ask the attorney at this time. I. Federal and State Regulations A. Social security and federal withholding B. State reporting requirements C. State membership requirements D. Federal reporting requirements 1. Form 1023 2. Form ss-14 3. Form SS~-l5 14. Form 990-A 5. Form 990-T 6. Forms 1096 and 1099 7. Census Bureau reports II. State Tax Requirements A. Sales taxes B. State income taxes C. State and county real estate taxes D. State unemployment taxes E. State licenses F. State personal property taxes 0. Other local taxes * * ii C * Copyright c 1967 Americans uilding Constitutionally (A Trust) Printed in U.S.A. PAGENO="0671" 669 pay Federal Unemployment tax or Social Security tax unless it elects to do so. An employee may accept or waive Social Security benef its .at the time the foundat ion is inltially formed or initially receives tax-exempt recognition. If the employee elects not to contribute to Social Security then the foundation employer is also exempt from the Social Security contribution. If the employee decides to elect to take Social Security then the employer (foundation) is subject to all the normal tax requirements. If one employee out of several decides to elect to take Social Security then all employees subsequently hired must take Social Security In other words, once someone decides to pay Social Security all new employees must take Social Security. This election is filed on Form SS-..l5 with the In- ternal Revenue Service. IN ALL CASES IT MUST BE NGPED THAT WITHHOLDING OF FEDER!~L INCOI~ TAX MUST BE IVIADE FROM ALL SALAR~S PA ID TO ALL EMPLOYEES. Employees of foundations may be paid under any system convenient to the foundation. Payroll checks and accounting procedures would be the same for a a-2 Copyright (~~) 1967 Americans ~uildiag Constitutionally (A Trust) Printed In U. S.A. 87-444 O-68--43 PAGENO="0672" 670 foundat ion as for any organ izat ion. 2, State Reporti~1g Reguir~Lefl~S This section should be developed for each individual's state by a local attorney. In Illinois a not.$or..prof it corporation must file an annual report each year with the Secretary of State which lists the present officers, directors, registered agent and office of the not.-for~prof it corporation. A brief statement as to the nature of activities accomplished during the preceding year must also be made and the form must be filed with the Secretary of State with a two dollar fee between January 15 and February 28 of each calendar year. The Secretary of State usually supplies the required forms to the Registered Agent of each Illinois not.. for~prof it corporation and unless you lose the supplie form you would not have to write the Secretary of State for the proper form. Every Loundation in Illinois should comply with this requirement because delinquency might result in severe penalties. Americans Building Constitutionally (A Trust) Printed in U.S.A. PAGENO="0673" 671 Theoretically, the Secretary of State could dissolve your foundation against the will o:C its directors for failure to file such reports or forms. Since the fee is so small and the information required is so simple and does not disclose any embarrassing or private information, we can see no reason for failure to comply with this law. In some cases a foundation may have to register with the Attorney General of the State of Illinois under the Illinois Charitable Trust Act. Where the organization is formed essentially for charitable purposes and is holding property for specific charitable purposes, registration with the Attorney General is required. An annual report is also required to the Attorney General for organizations so registered. In addition, any organization soliciting funds from the general public is required to register under the Solicitation Act relating to charitable organizations. Such registration is with the Attorney General and normally requires an annual report to be filed. It .~-4 Copyright (?j 1967 Americans ~ui1din~, Con~titutior~a11y (A Trust) Printed in U.S.A. PAGENO="0674" 672 is not recommended that your organization solicit from the public at large, and if your organization does not so solicit but gains its funding through other methods, your foundation will not have to file under this law0 If you receive any correspondence from the Attorney General or Secretary of State which raises doubts in your mind as to the propriety of such correspondence or the applicability of any law cited by the Attorney General or Secretary of State, contact local counsel for an opinion. 3. State iviembership ~g~rement s In Illinois a foundation may have as many members or classes of members as it desires or it may have no members whatsoever. If there are members they may have equal voting rights, limited voting rights, discriminatory voting rights or no voting rights. It is generally recommended in Illinois that if you do have members that they have no voting rights. There is no requirements in the State of Illinois to have any membership whatsoever nor any require- ment to charge dues, nor any prohibition against charging dues. 4. Federa~~~porting Requirements The Internal Revenue Code requires reports of various natures from foundations. The Treasury 8-5 copyriç7ht 1967 Americans 1~ui1ding Constitutionally (A Trust) rtinted in U.S.A. PAGENO="0675" 673 Department, through the Internal Revenue Service or the Social Security Department, supplies all the necessary rorms that would have to be riled by the individual roundat ion. All or these rorms are assigned a number or code letter and the rererences and identirications or these rorms should be kept in mind. j~) Form 1023 This rorm is called the application ror recognition or the tax-exempt status or a private roundation organized and operated under Section 501 (c)(3) or the Internal Revenue Code. If this report is riled it must be riled only once and generally should be riled within the rirst 24 months or the roundation's existence. This report should be completed with the help of an attorney and is normally riled within the rirst two years of operat ion. Under the strict terms or Section 501 or the Internal Revenue Code, the determination or the tax-exempt status. or any organization is not~a11ocatèd to any court or government agency, even the Internal Revenue Service. Due to this lack or direction on the Copyrightç~ 1967 8~~6 Americans ~ui1ding Con~titutionai1y (A Trust) Printed in U.S.A. PAGENO="0676" 674 part or the Internal Revenue Code, it is not legally necessary to apply to any court or agency ror prior determination or tax-exempt status. In the opinion or many attorneys such determination or tax-exempt status may be made by the organization's officers or directors. The primary test to be kept in mind ir the organization desires selr-determinatiOn is whether the organization has met the legal requirements or proper operation and organization within the terms or Section 501 (c)(3) or the Internal Revenue Code. Official or government determination or tax- exempt status may be obtained rrorn one or more or rour primary sources. The rirst source is the state court through a probate proceeding or tax proceeding. The second source is determination by a state agency, ror example, the State Treasurer, the Attorney General, or the Secretary or State or rrom a rederal court, usually in an action by the Treasury Department, and rinally, rrom the U.S. Treasury (the only Federal Government agency that has the procedures available ror tax-exempt determination). 8-7 Copyright ® 1967 i~rnericaflS Euilding ConstitutionallY (A Trust) Printed i~ U.S.A. PAGENO="0677" 675 Since determination by state courts or agencies is usually inefficient or partially ineffective, the best source of goverrmi~nt recognition of tax.-exempt status is through a federal court or federal agency. Federal court proceedings are often expensive and time...con.- suming, or although if determination is favorable, it is usually considered to be the `strongest" determin- ation. The fastest determination is through the use of Form 1023, an application to the U.S. Treasury for determination. The disadvantages of Form 102.3 applications are the large amounts of information that must be dis..- closed in the application and then riled publicly, and the sometimes arbitrary actions of a federal agency in either "delaying the determination" or simply asking irrelevant questions. Generally, however, the exempt organization section of the Internal Revenue Service has been most cooperative with those organ- izations who earnestly desire to meet the standards and qualifications of Section 501 (c) (3). Their primary concern is to help structure the organization so that it may be properly tax-exempt and may carry on the opera- t ions to benefit all mankind. B-S Copyright® 1967 Americans Building Constitutionally (A Trust) Printed in U.S.A. PAGENO="0678" 676 Form 1023 can generally be completed, filed, and a determinat ion made within a matter of months and without any excessive costs. On the other hand, court proceed- ings generally take years and do involve a great deal of expense. In addition, there is an indeterminable wait before the Treasury may decide to bring action against the organization (found at ion). In the opinion of many attorneys, Form 1023 offers the most efficient means of obtaining recognition of tax exempt status. Since attor- neys familiar with the ABC program have been trained in the proper completion of Form 1023, it is not necessary to explain this application in detail. To help an attor- ney complete the application, however, it would be wise for you to consider the goals of your foundation and to compile some information that is required by the form. [ i~t~it~I On page 2 of Form 1023, question 10 f, g, h and j, ask for detailed discussions about the actual purposes of the foundation; how it intends to be funded; what it in- tends to accomplish with the funds; and in what d irect ion tim foundation intends to move. You would speed the com- pletion of this application and begin an efficient work- 8-9 Copyright ~~l967 Americans Building Constitutionally (A Trust) Printed in U.S.A. PAGENO="0679" 677 EXHIBIT #23 R-4 FORM 1C~3 U.S TREA~R~ ~r so tl~ fRee. April 1965) (To 6e mode only by oprioripol officer of She orgooiootion claiming exemption) for your DidrirL For use of organizations applying for exemption under section 501(a) and described in section S0l(c)(3) of the Internal Eevenue Code, which are organized and operated (or will operate) exclusively for one or snore of the following purposes (check purpose(s)): o Religious 0 Charitable 0 Scientific 0 Testing for Public Safety o Educational 0 For the prevention of cruelty to children or animals -0 Literary Every orgocsizntiors that ctnirrsn to be exempt must furnish the irsforrrsotion end dote specified in duplicote. If any orgo,stzotioos fails to submit the iosformolion and dote required, this application will not be considered on its merits end the orgenizotiors wilt be notified accordingly. This application shalt be open to public irsspoctloos in accordance with section 6104(a)(l) of the Internal Rreeenun Code. See separate instructions foe Form 1023 to properly onswer the questions below. la. Full name of organization tr. Employer identification number 2. Complete address (number. streeL oily or town, State and Postal ZIP code) 3a. Is the organization - - b. it "Yen," in which Stale and under which law (General corporation, not for profit, membership, educational, Incorporated? eleemosynary, etc.)? Cite statutory provisions. DYes DNo 4o. I! not incorporated, what is form of organization? b. Date incorporated or c. Month and day on which the organized annual accounting period ends So. Has organization filed Federal income lax b. If "Yes," force number of return filed and Internal Revonue c. Year(s) filed return(s)? 0 Yes 0 No -~ - District wher~ filed. 6. After July 1, 1950, did the creator of your organization (if a trust), or a contributor to your organization, or a brother or sister (who!c or half blood), spouse, ancestor, or linrat descendant of such creator or contributor, or a corporation controlled directly or ir.direclly by such creator or contributor, enter into any of the transactions for activities) enumerated below? NOTE: If you have any knosvled;e or con- template that you wilt be a party to any of the transactions (or activities) enumerated is 6a through 6f, check "planned" i"-' applicable block(s) and see instructions. ,!~. .!a. .!~cd d, Purchase any securities or other prop- !~J_!d_ a. Borrow any port of your income or corpus? erty from you? e. Sell any securities or other properly to b. Receive any compensation from you? you? c. Have any port of your services node available to I. Receive any of your ieresve cv enrpss hiss? ` to any other transaction? Yes lit 7. Hove you issued or do you plan to insue membership, stock, or other certificates evidencing voting power in the orgseizrotive? - So, Are you the outgrowth or continuation of onyform of predecessor(s)? - bOo you have capital stock issued and outstanding? - cRave you made or do you plan to make any distribution of your properly to shareholders or members? - d, Did you receive or do you expert to receive 10 percent or more of your assets from any organization, group of otl:liuhd cv- gonizations (affiliated through stockholding, common ownership, or othervciee), any indiriduot, or members eta tacoly grnup (brother or sister whether uhote or halt blcod, spouse, ancestor, or lineal descendant)? - -. -- a. Does any part or will any pan of your receipts represent poyment for services of any character rendered or to ha rer.dered by PAGENO="0680" 678 R-5 L Are you now, haveyou ever been, or do you plan to be engaged in carrying on propaganda or otherwise advocating or opposIng pending or proposed legislation. q. Do you participate or plan to participate In or Intervene in (including the publishing or distributing of statements) any political campaIgn on half of or in opposition to ony candidate for public office. Is. Have you made or do you plan to make any payments to members or shareho)dersfor services rendered or to be rendered? - - I. Doesonypart ordoyou plan to hove any part of your net income inure to the benefit of any private ntsorehn)dvr or individual? - - J. Are you now or ore you planning to be affiliated Irs any manner with any organization(s)? k. Do you hold or plan to hold 10 percent or mare of any clans of stocker (0 percent or more of the total combined voting power of stock in any corporation. - page 2 9. Has any State or any court (including a Court of Probute, Surrogate's Court, etc.) over declared whether you were or were rot organized and operated for charitable. etc., purposes? 0 Yes 0 No. ft "Yes," attach copies in duplicate of pertinent cdminrslrotsve or cdi' clot decisions. 10. You roust attuch cogrics in duplicate of lisa following: a. 1.1 Incorporated, a copy of your articles of incorporation, or if not Incorporated, a copy of your cor.stitslion, andes of ounc:iotinr., dec)o ration of trust, or other document nihereby you were created setting forth your aims and purposes, a copy of all ozuer.desnnls thereto, and any changes presently proposed. Is. A copy o! your bylaws or other similar cede ot regs(otions. all amendments thereto, and ony changes presently proposed. c. A complete statement of assets and liabilities as of the end of each annsat accounting period (or as of the dote of the lung of this application, it you were in existence for less than a year). - d. A statement of receipts and expenditures for each annual accounting period of operation (or for the per.od for nihich you corn in ee~sf' ence, if less than a year). a. A statement which clearly indicates what Slate statutes or court decisions govern the dislrrbslion of onsets upon d,vvvir.tice. lThrc slate' ment may be omitted it your charter, certificate, or other instrument of arcjonizolion makes pruvissor. for such drstribc.iiur.l f. A brief statement of the specific psrposes for which yos were fornrcd. (Do not quote from or make reference to cur srlic~es ci o'.ccnyc~ ratIon, constitution, articles of association, declaration of trust, or other document whereby you were created fur this .kne.l g. A statement explaining in deldif each furidroising activity and each bueiness enterprise you huve engaged in or y!ur. in vcgugr in. accompanied by copies of all agreements, if any, with other parties for the ccr,dsct of each f~p4rasrvg ccuvrly xr oe.iivvii ro:c rynive. h. A stotementwhichdencnibes in detail the nature of each of your oclivsties which you hove cinched on page 1. zztie,t.s sIn lou sac, and prcponed activities. I. A sfafement which explains fully any specific activities hot you hove engaged in on spnr.sured and. `ehich hdve bean .d'::rctsiiued. Glee dates of commencement and terminaficn ar,d the reasons for discontinuance. j. A statement which describe: the purpose:, other than In payment fnr services rendered or supplies fcrcish:d. for un.:ii icr L"ds are ~ or will be expended. . -- `--- -- PAGENO="0681" 679 - R.-6 k. A schedule indicating the name and position of each officer, director, trustee, etc., of the organization and the relationship, t anv, by blood, marrtage,'adoption, or employment, of eoch~ such person to the creator of the organization (it a trust), to any ynrvc:s - made a substantial cor,tribution to the organization, or to a corporation controlled (by ownership ot 50 percent or muse of vo~. ~ci cc 50 percent or more of value of all stock), directly or tndirectty, by such creator or contributor. The schedule sha)( aIrs :~::oie the time devoted to position and compensation (including salary and expense account allowance), tl any, of each olisrer, d;recIcr, fruslee, etc., of the organtzatton. I. A copy of each tease, tf any, to which you are the lessee or lessor of properly (coat, persossol, gas, ci), or mineral) or in which rue oem an interest under such tease, together with copies of alt agreesoests with other portico for development ol the property. SIGt~ATIJ7i~ AHO V Ii~i~A1I~)1 Underpenalfies of periury,Idecfarelhatlhave exomtnedtlsis application, tocluding accompanyingslalemenls, andlo the beulol my kn:.:ledge cad belief it to true, correct, and complete. Dctr Slqnasamntollicev Is. FORM 1023 spy, wee PAGENO="0682" 680 k{-Ib F~cturn o~ ~g ~it~o1 Ec~o~2 E~t'c~i ~r~coito~ Tcg Section 501(c)(3) of the Code FORM iE~/,u!) in) For the year January 1-December 31. 1900, on other tasabln year beginoing I It-, 1 _.,_,_.__._.._._._. 1906, end nedieti ,._..........._..- 19....... n~;- City on loon State, and ZIP onCe Enter the name and address used on your return for 1965 (if the same as above. wrdn "Same"). If none filed, give r eason. PART Part I (pages 1 and 2) information required pursuant to sectionS 6001. 6033. and ether applicable secl:ons of the Interval Rcvcnun Code. NOTEi One copy of Part I and two copies of Part II most be filed. 1 Gross safes or roteipts from business activihns , 2 Less: Cost of goods sold and/or of operations (attach schedule) 3 Gross profit from business achvities 4 Interest ,,..... 5 Dividends - LRents - 7 Royaftics - 8 Gain (or foss) front sale of assets. encluding inventory items (Sen Instruction 8) ... 9 Other income (attacft schedule-Do not include contributions, gifts, grants. etc. (Sm mo 17)) 10 Total gross income (lines 3 to 9. inclusive) 11 Expenses of earning gross income from c~lumn 3. ScheduleA DISI3UIISEMENTS MADE WITIf IN THE YEAR OUT OF CURRENT Cit 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) 14 Accumulation of income within the year (line 10 less the soot of lines 51, 12. and 13) 15 Aggregate accumulation of income at beginning of the year - - - 16 Aggregate accumulation of income at end of the year ,, .,..,..._ RECEIPTS NOT REPORTED ELSEWHERE 17 C000ributians, gifts, grants. etc., received (See fnstruc)ion 17) 18 Less: Expenses of raising and collecting amount on line 17. from column 5, Schedule A 19 Net contributions, gifts, grants. etc., received DISBURSEMENTS MADE OUT OF PRINCIPAL FOR PURPOSES FOR VIHICH EXE).) PT 20 Expenses of distributing principal from column 6. Schedu!e A 21 Contributions, gifts, grants, scholarships, etc.: (a) Paid out in prior years - (b) Paid out within the year (See Instruction 21) . . Sgheglofe A-Al location of Expcnses (Soc Iostroclioos for Attachmcots Reqoircd) Leon 3.Eoleron3ofeern:nZ diehibuhnjinenne C~d~OIi:PidO ________________ (a) Compensation of onficers, etc (b) Other salaries and wages - (c) Interest (d) Taons " . `.." (e) Rent (f) Depreciation (and depletion) - (g) Miscall aneous enpenses (aftach schedule) . _____-_ (1 n) Totals r_i~iiion ci i~ tnS on ire 15 ..L....6W o2.iWt_~_L___ft_, 2. Total PAGENO="0683" 681 Under penalties of p jury, declare that huueeoa mined this rtturn, inniadieg acnnmpesy:ng schedules and statowunts. and to the best of my knoenledge and belief it is tear. correct. and complete. If prepared by person other than t payer, his declaration is bated on all information of which he.has any knowledge. CORPORATE .. .. ...._ ,, SEAL Date Sigestue, ttchilcee TiRe ..... .... ;;::. pleporee ASSETS 1 Caeie 2 Accnonts receivable (see instructions) (a) Lets allowance for bed deb~s 3 Notes receivable (see instructions) (a) Less allowance for bad debts 4 Inventories 5 Gov't obtigatinns: (a) U.S. and instrumentalities (b) State, subdivisions themol, etc 6 Investments in nongovernmental bonds etc 7 Investments in corporate stocks (see instructions) . 8 Mortgage toans (number of toans ..._......-_._) 9 Other investments (attach schedule) 10 Depreciable (and depletable) assets (attach schedule) (a) Less accumulated depreciation (and depletion) . 11 Land 12 Other assets (attach schedule) 13 Totat assets LIABILITIES AND NET WORTH 14 Accounts payable (see instructions) 15 Contributions, gifts, grants, etc., payable 16 (a) Bonds and notes payable (see instructions) (b) Mortgages payable 17 Other tiabilities (attach schedule) 18 Capital stock: (a) Preferred stock (b) Common stock 19 Membership certificates 20 Paid-In or capitat surplus 21 Retained earnings-Appropriated (attach schedulc) . 22 Retained earnings-Unappropriated: (a) Attributable to ordinary income (b) Attributable to gains from sam of assets 23 Less cost of treasury stock 24 Totat liabilities and net worth (A)Aoecat (B) TaUt (C)umcuet ____ --n\- - R.-16 Form 050-A--tiltS - Schtt!o!c C.- ,LATCESItt.tttlS (Sets instrtmctionz) ga~Ladnz at Taaobte Year Page 2 PAGENO="0684" * Date of caetcnl exemption Teller . 2 Mteoh detailed statement of 1 eeany of mcaehable. bosinese and ott eehneacnio 3 Hue yea antoal:ed the ala medan enqaited by: (a) ice cation P . OTet Or). (b) in,encconian J? . Dyss On. 4 Rant pact fled sac seteen en Fonnt 990-T (on this yeae?. 0 Yet OHs UYet.ahoee(led? - - S Its ahat yeae oat pace oecsniesnian fanntnd? In ahss Stone en cacnnny? * It atctcesete Ce peeniatosly ecitnia; oeganiaanian(s). (ice name(s) and addeessles) of the peedeeeteat ongaaieanian(s) 7 I(~ota inane capinat teach stand ted eatenanding. stoee aith nespect to each C (a) The ecnnhee ol shaeet eansnanding . - - - (b) The eamhee of shone. held by ind:eidaalt - . . -- - (C) `((ne nombee of shanes held by enganisaeiens - . .__ - (ci) The eamhne at shaneh::ldees te end af yeae . . .. (e) Whethee any dinidnndt may be paid - - . . Ores OHs I(~tccacqaieed capital octets ear ef iaecme. aneach itemited (its ant) an,acnt S Han ~ of sinnilan impact? Oven Out U "Yes," attach a cepy of the amendments. 10 Rant cc had any seances of incamn on nn~a ml inanpaceininins net *pmvloao(yretnontt4~aflathttnnaal Renenan Snnctcs?. Ouss ON. *sh~c0.s.C0an~ttntanayPn~Yt0t0mnmttsts_0m.tat 682 11 bid yea bald any atal pncpnnny Ian ennial panpatet sum entpnts a n:lnic(t sheet is an indnbnednect inacnned in acqoinin shn Fayette an tn maknc ietpeenemnnnsshnnecaanol:ichnotacqainnS sabinceeaa mannecece (ten? OYns OPts U `Yet," anaab detailed statemenn. 12 Hone yoo dating she ynan adctteaned on appaend fittclcd:cg nbc eobl:chittc en disneibaning 01 st.onnments) ann natiatala State. en mat * : Open ON. Ul'et.':rn: o detailed deocnipnian ol each aanitit:ns and ecp:ns ed any l3Honeyaccdanin nhnynaepattic:*yanndic.ctintctacc~.din)in:lad:aathe pntblcshing en ~iettihaning a) snotcmnnntl an pal:t:cal caotratun an bcboll of en in appacitian to any candidate (an p~Sl:e atice? - 0 Yet ONe If `Yes," anach a detailed deoceiptian al scab atnicitins and cap:nn a) any 14 Altec Joly 5. 5950. did: she oneanan of yaan onganican:an: ansonntttbanan 50 yaae angayitanion; en a bnanhnn ant:ttnn )s.baln an boll bleed). syacte. an (meal don:nndene a) sach cceonan an ccnnt:hatat: an a ccnpatt sinnosned(50 encenncn manyefnanin enackannaxcccettncnmennaf of all snnck) dmneetly on mndmnnctlyby sach atnonot nn etnnn:b en- (s) Bantam any pans of pace ineame ancanpat? - . - OPen Den (b) Rnceine anty cnnnyensaliao (on petsanal snec,ans fnann otis o Nt (C) Hans any put of pace seenicesoeaonnsmo&auil o ~ oHs (ci) Ponchaon any secaninies on enhee ptepnnty (cam neat - o Yss OHs (ef Sell any seccninies on aetna pnnpanty to yea? . . - 0 Yet DOs (C) Recemneatnyofyaan incamo eanpas en my athno ~ys~ Duo If antane so any qaesnian io `Yen." annach dnnailnd statement comet pnen:. ocsly sepatned. If pnenieaelr enpaned. cite peon(s). 15 Do yea bald S pencent on mnne of any class of sneab in an canpananlan? LJYs5 Ott U "Yes," yea mctn sabmis the (ntotmanintc-enqaitnd by shn tnctncoti000 tan .Schsdole B. PAGENO="0685" 683 ROOM ~-stl4SI PART I U.S. TREASURY DEPARTMENT - INTERNAL REVENUE SERVICE APPUCATION FOR EMTLOYER IDENTIFICATION NWWER 1* PLEASE LEAVE Ri I.NAEE(TRUEsustoeos distieCtthhcd (,otts TRADE some.) 2. TRADE NAME. IF ANY (Eotee some utsdet which busistess is opeioted. if diffeteot hoot (ices I) - 3. AD~RE55 OF PRINCIPAL PLACE OF BUSINESS (No. coed SIt-eeL City. Scott. Zip Code) 4.COUNTY 5. CHECK (XJ TYPE OF OROANIZATIOT4(1( othet- spccify. such cot Estste. etc.) So. Ending monTh of f1 cdl- f~1 Cot-poe. f1 Pot-too,. f~j Othot 0000tJnl$ng ycol Li ,TdooT L..J otioo Li ship Li (Specify) . 6.IfIedI,Id~ot.ot~toe yoorsocI~I 5000city ocCo~ot oombce 7. REASON FOR APPLYING (If ~othes-~ speccfy ooch so ~CotpoeoIe sttoct~o-e 8. Dote yoc ocqolcod ott slotted Stoetod chooge."Aequi,-cd by gill ott t'ost. etc.) bosloossd'Mo..doy yeot-) U bte:Ioeos U goTt~ boslocs: U Otto, 9. Fit-it dots yoc ~ct.J cc oct11 poy'o~os (.tto..doy. yeoe) 10. NATURE OF BUSINESS (See losttoctiotso) I I. ~jAgeiccItoeoI Noo-opIcollocol OF-'- EMPLOYEES If eototo of bc:jny~j~MANUFACTUhINIO list iii cidot of hot, PLEASE LEAVE R1J.T-.i< IeoPOcToncOIhOpciycipoJPcott,ct%tnolloItctpt~do:dth~cMln5hcd . FR j~ii 13.Do yoo opocoio mote llsoo otto pIoc~ of bottooss? LJY.s ~J No 9~Yeo.seIoch o lIst shotetog too cocA ocpoeotecotobtLehoteo~ a. Noose and oddc..-oo. b. Notote of bcoicc.c. e. Nososbet- of employees. 14.To whom do yoo toll meet of you' pcodocts ott secolont? f~~l8oUonus rlGeo.cotrlOthoe L....Jet?obllohtttonts L...JpobIic LJ(llpccify) - PLEASE (iso. led. Clots Size coos, toe AppI. Sot. Ric. Dot. lEAVE BLANK POE?.i SS-4(145) PART 2 00 NOT DETACH ANY PART OFTHIS FORM. SEND ALL COlt-ITS TO DIE DISTRICT DIRECTOR OF INTERNAL REVENUE AND COMPlETE *000 ESS I. NAME(7RUE000seoodiotioguoishcdfeom TRADEtsottse.) 2. TRADE NAME. IF ANY (Estee otoose uodci which btssi,scos I. opet-occd. if diffe,-eot frosts (less I.) ~ 3. ADDRESS OF PRINCIPAL PLACE OF BUSINESS (No. sod Sited) (City. Stst~ Zip Code) &COUNTY 5. CHECK (X) TYPE OF ORGANIZATION (If oMet specify. soeh so Eot.ote. etc.) So. Ending mooch of 6. If iodi.iduot.sotsc coot fllod1~ lCoepoc. f~ Poctooc' f~~1 OIhue cccounllog yea? 500tittttOEtOostt outt-uhst L.Jotdool LJottoo Li ship Li (Specify) 7. REASON FOR APPLYING (If otheespcc:fy sec/s so CotporoTe strocTuee 8. Doto you oeqolesd or stat-tot 9. Ficst dci. coo °~) cc Stortod ~ dcqofrcd by gilt Ott O'tsot. etc.) bosioess (.Sto..dsy. yeoe) poy -~gottIMo..dsy. yecc) L_Jgostottns Dgoto~ boslittos [] Othot I0.NATURE OF RUST-lESS (See IsotuoctiooM . I I,~ Agciceltucol Nco.o;t:t.::.csl dv-.. Ec.tPl.OYEES I2.Hsoe p00.0cc oppltod lot so tdotttiEeotioo oomhuoe lot thIs ott sep oth., bosto.ss? [J No [JY., DYm~sstoeoomt oodOode toot-c (Sooy). Also coMe the spposto'sutcdct~ 0L% oesdstcy ~hectyoo ftcs: o;ptied sod ps-nt-tess. oteoScs'4'hc.oo.t. ORTE S1GNATURE TITLE PAGENO="0686" 684 R-19. INSTRUCTIONS WHO MUST P1LB TillS APPLICATION? Eiery pernon who has not prevlottoly eccured an idtificcUon * numtecr.cnd w~.o (a) pays wogo? to out or more coiplcyecc,. Cr (b) to rcçutrcd to have tlflcn.tioot number k: tocittoiou in auy rctcrrn, ctntn~ntut or other document Only one application for en idcutiltcr.Uoo number should Fe filed, regr.rdlcru of the member of ectrblt~hi-scuts * opcrat':d. Tbio t true even thuu~h thu buc!nc~r to conducted uodcr oct or more buehrrr or trade nu.ee. Each corporation or r.n c.Litt~ted group atect hr trtatcct empe-rc.hly, end each not-st file te e perato cppflc:.cion. .tf a. buolneer Is oeM or Unnoferred trod tht new owner does not have an IdentiLcotion toumhcr, bcrhoutd not ut-a the IdentIfication temtteb-cr zceigxacd to the pecutoers oan~r, but snout file en c.pplicntion on F'orr.s SS-4 for a new ideoltrication number. ~VHETeF~ ?C~UST THIS APPLICA' ION BE FILED? With the U.S. District Director of Internal Revenue with whom the Federal t:.x retutno crc Cbd. WHEN MUST THIS A?PLICATION LB FILED? (to) By those who pry wages, on or before the soveath day after the date on whIch buei:.cs~ b~gine. (b) Dy others In sufficient ttme for time ldcntiiicahou number to Included In rs.lurr.5 ClLtCme~fll,. or c-thu dc-consent / HOW THIS APPLiCATION SIIOtJLD BE FILLEi) IN. AU nnowers rhoerld be typewritten or printed plainly with batty-clot peat In black or cork blue ink. Items I sod 2. Ettttr irs Item I the true or-tue of the applicent end enter in lIens 2 the trade name, if tory, adopiu.l for buctoece purposes. For example, If John v:. Jones, en tndtvtfun.l owner, Operator a rcsteoraut under the trr-fe no-tiC of ~Botsy Eec Losterurart,' `John W. Jones' uheutd be ectusd in Item I ron! `ituey Bce Restaurant' to Item 2. NOTE- if crtatod by atettote, court order or dc~ra~. charter, oral or wrItten agreement, wIll, declaratIon cf hunt, or other leIf at lnosi.ruiuetot, ebter in Itcm 1 tie full name recognIzed thereunder. If te eor~ort!crs, eater ten lien-s 1 the corporste naz-:e r.s set forth in lie charter or other legal docur.oeut Irsued by the Goveroroont cecatinsg Ii. Inn time cate- cif a. trod, the canoe of the trust estnte chouli be entered Its 11cr. 1. etid tie r.r.rs-e of (he tcust~e In hots 2. lit the czr.t of an acute of a decedent, in:otvnot, etc., the nt-ott of the etc Ic should be entered In lIen 1 arid the urmo of the admInistrator or other fiduck.ty In Item 2. If the true erase is unueuelty beg, It should be eltosorn ln a stisItoCot cttzched to thin form. Ins such care, a short versIon of ttse aetna should be adoptcd for purpoeno of tint: form and entered to Item 1. DONOTDETACH Item 10. Deocrile (he kInd of buettoess carricd on by applicant in Item 1. The following examples illuatratc the type of Information necded. (a) MINING AND QUARRYING: State the process and the - principal prc-thtct; i.e., minIng bltu- minous coal, mining bauxtte, contract drilling for c-il, quarryttog dimension stone, etc. (b) CONTRACT CONSTRUCTION: Stale whether general contractor or special trade cototractor and show type of work normally performed; he., general contractor for residential buildings, general cootractor on streets and highways, electrical subcontractor, plumbing subcontractor, etc. (c) TRADE: State the type of sale and the principal line of goods sold; to., wholes-ale dsiry prod- ucts, manufacturer's repreecntatiue for mining machinery, wholesale peirolcum-bulk satiooi, retail hardeare, retaIl men's clothing, etc. (d) MANUFACTURING: State type of estab!ishntertt operated; I.e., sawmill, vegetab!c cannery, by.product coke oven, steel cold.rolling mill, etc. In Item 12, Part 1, list the principal products manufactured. (a) GOVERNMENTAL: State type, of goverrtntetttal organizatIon, whcrncr a State, County, School District, MunicipalIty, tic., or relationship to such enhties, he., County Hospital, City LIbrary, etc (fl NONPROFIT (OTFIEIC TitAN GOVERNMENTAL): State whether organized for religious, charitable, scIentific, literary, educnlio:ta!. or humane purposes and state the priticigni activity; Le., religious organim~tion - hospital; charitable organizatIon - hon-c fcc the a5ed, etc. (g) OTHER ACTIVITIES: S;atc exact type of business opneratnd; I.e., advertising agency, dry cleaning plant, farm, labor union, rnotictt picture theater, real eclair agent, steam laundry, mull of coln-opcrat':d vending no aclottocs. etc. RF.'I'URN ALL FOUR PARTS OF TIllS FORM TO TilE L'ISTlIlCT DIF.ECTOIt OF INTERNAL REVENUE. PAGENO="0687" Exempt Org~rnizat~on Buthiess FORM Income Tax ~ethrn .~ ~1 o (~ ~ U.l.T,.oso~D.patnenl (Under Section 511 of the Internal Revenue Code) U ~ (.1 lotaeesl Reneeoe Seonue For the yoar January 1-December 31. 1916 or othor taeabln year begleeleg PLEASE TYPE On PRINT . Employer ~ 5Ot(~9. flee tire tracts Idenblualios ,fotunsotuntelatodtnld000blIintIl$CIlntl Dot. of current ex!net on d.t.n.r~ jea ore oe.ept. NAME OP ORGAnIZATION ~ ADDRRSS(ttunber end street) - (Ellysetceeltote. and ZIP code) . fUME O~ TRUSTS FIDUCIARY - ADDRESS OP TRUSTS FIDUCIARY TAX COMPUTATtON ORGANIZATIONS TAXABLE AS CORPORATIONS (Sec General Instruction A(1)) I Taxable Income (line 31, P3Cc 2) -..-..--.. - 2 Surtax exemption (line 1,525,000. oromnont apportioned undcrsectlon 1561, wlnicheverls lesser) 3 LIne 1 less lion 2 4 (e) 22 percent of line I (b) 26 percent of line 3 (c) If multiple surtax exemption is elected onder section 1562, enter 6 percent ef line 2 . . - .-_ 5 II alternative tax computation Is mode In separate statement. gnter such tao here 6 Total inconre lan (line 4 or 5, whichever is tenser) 7 Less: (a) Foreign tan credit (altach Form 1118) - (b) Investment credit (attach Form 3466) . 8 Balance of incume tax -. 9 Tax from recompuling prior year investment c1edit (attach statement) 10 Total income tan (Ann 8 plus lineR. Enter here and oe live 18) TRUSTS TAXABLE AT INDIVIDUAL RATES (See General Instruction A(2)) 11 Tue on Ano 31. page 2 (from Tan Rate Schedule. page 4) 12 If alternative Ian cnmputalion is made in separate stateoreet. enter such tan here 13 Total Income Oax (Ane 11 or 12. whicheveris lesser) 14 Less: (a) Foreign lax credit (attach Form 1116) ~b) In,vcstment credit (attach Form 3468) .. 15 Balance of Income tax 1.6_Tao from rxeempating prior year Investment credit (attach statement) ~iTotal income tan (line 15 plus ilne 16. Ernter here and ox Ane 18) ... - . ~ 18 Total Income tan (frurn Ave 10 or 17, whithevel is apylicable). . . . 19 Credits: (a) Credit from regulated investment companies (attach Form 2439). ~b) Tax paid with Form 7004 applicAtion for extension (attacn coyy). (e) Credit for U.S. tan cv eenhigliviay gas. and lob. oil (attach Form 4136) 20 If lax (line 18) Is larger than credits (Are 19). the balance is TAX DUE. ,Eetrr oalance here 21 If lao (line 18) Iv tess than credits (Ann 19) Enter the OVERPAYMENT here 685 R~2O TOTAL INCOME TAX _____________ : ~:::r~~ ___ PAGENO="0688" 686 R-21 Under penalties oF perjury. I dcctare that havoenamleed thIs return louluding accomp yingschodulas and stt~menls. and to thn b:;t or my keocetedga and belieF It to true correct, and complete. It prepared by a parson utl:nr than taopayer, his declaration Is based on at tnlormatluet of Which he has any knootedga. F~oRPORA~i [ SEA~j - * orlT'"~irt~aT~~r ~ .-----.--------------~~~- Form 900-1 (1956) pica2 UNRELATED BUSINESS TAXABLE INCOME COMPUTATIOt1 __________ UNRELATED TRADE OR DUSINCSS GROSS INCOME 1 Gross solos (whero Invonlories ero Less: Returns and art Iocemednlormlnlng factor) ~ allowances 2 Less: Cost of goods sold (Schrdolo A) 3 Gross profit front sales 4 Gross receipts (s-ihero Inventories am cot an tncomo-dcterminlog factor) B Less: Lost of operations (Schedule, 13) 6 Gross profit where Inventories are cot an Ihcomndetormining factor 7 (a) Net capital gain from culling timber (ottach statrnrenl) (b) Net ordinary toss from coIling tlmbor (attach slalemcnl) _..... (C) Gain feum disposition ol depmeciablo property under sections 1245 and 1250 (utloch statement) B Income (er toss) from partnerships (attach statement) 9 Business nasa rents çllchcdulo C) 10 Total unrelated trado er buslnnss Incomo on inns 3. pnd 6 to 9, Incluclvo DEDUCTIONS V (Except contrIbutions, deductions must bo directly connected with tho unrelated busIness) 11 Compensation of officers or trustees (Schedule ~) 12 Salaries and wages (out deducted elsewhere) 13 Roots 14 Repairs (do eat Includo cost of tmprovemeols er capital eaprnd:taros) _.. 15 Bad dobts (Scheduln F if resume mothod is usod) _...~..... 16 Interest (Schedulo Fl) 17 Tours (Schedule I) 18 Contributions (ottach schedule-Sen Instrl.Ictlnns for limitation) 19 Losses by fire, storm, shipwrecb, olher casoalty. or theft (attach schedule) 20 Depreciation (Schedule C) 21 Amoetieattt (attach schedule) 22 Depletion (attach schedule) 23 Advertising 24 (a) Pens:on. peolit-shae:ng. stocb bonus, annuity plans .. (b) Other employee benefit plans -. -. 25 Other deduct:oes (Schedule .1) , V 26 Total deductions en lines 1110 25 fnclus:vu 27 Unrelated business taoabla lecoma before ee opvraling loss deduction (Soc 10 less tine 26) 28 Less: Net operating loss deduclioie (altacn statemeni) 39 Uneelated business tuoeble iecnme befora specific deductlor. ... 30 Less: Specific dellulion . 1000.00 31 Unrelated buslvess tanabla Incoma PAGENO="0689" Schedute A-COST OF GOODS SOLD (Sec Instruction 2) Method of Inuuntnny valuation- i Salaries and wages ...... 1 Inventory at beginning of year ........_............... 2 Other costs (to be detailed): 2 MerchandIse bought for manufacture or sala . ...._......... (a) ... ...~..... ............ 3 Sataries and wages ... ..... (b) ..~....-. ----.-..-..-.- 4 Other costs (attach schedule) (e) ......_...__..,_...._._.-.-.... .. ....... 5 Total - ..... (d) - ......_.. ........ .. .._ - 6 Less Inventory at cod of your (e) - ... .... . 7 Cost of goods told (enter hero end en tins 2. page 2) 3 Totaf (enterheru andes fIns 5 ~3fIO 2). Farm 990-T (19661 Page 3 Schedule C-BUSINESS LEASE RENTS (See Instruction 9) - - I. tessrlptianatLaseed Pnpcrly Stahl Rent Receiee.d 3. Taees and tlhee Eapenses 4. Interest Continuetion of Schedule C 1. ?anaurtot Unpaid 7. Adjusled tans nt maced a. Percentage nblch 0. Cress Rental arena Indebtedness Pcopetlp(Altachtlatcvent) Cnl. eli at Cal. 1 (Celcnni X Celcnn 0) it. Allecable Deduntiune (Intel at Cetonne 3.4. and 0 X Catsnrt) it. flat Rental neon, (educe) tv eludibta (Calane 9 less Culanelt) - -..- -....-....-.,, - -....- *~.............. *.. . .. .. *..... - -..- -.- -..--- - --- -....----.. - - .. --- - - -..-..-..-.- - - .-- :......: - - - - - ~."-..- - -..-..- - - -...- ¶6 Totat (enter hera and nn tine 9. page 2) Schedule E-COMPENSATION OF OFFICERS 1. Nan,. Addrese and Sselatleciritp flonherat fIlficar STies ::::::t::::::::::::::::::::::::::::::: 687 R.-22 Sctscduto B-COST OF OPERATIONS 3. Tine toasted to 7. (sparse Aceecnt Totaf corn nrnsa inn of officers (enter here and en live it. page 2) 2.Trsd.rslesard e:eunnnleei e,ieablesitatsvding etend stpear 1961 1962 3. Sates en encesn Schedule F-BAD DEBTS-RESERVE METHOD (See InstruCtion 15) 4. Ccnenlyra:a 5.fecaaenlag 6. Ansnnnt surged 7. Reserve for bed denS ageinalesserse stand glenn 1 - 1966.! PAGENO="0690" Totet udditionot firstyear deyrcciatii Buildings . Furniture and fixtures . . . Transportation equipment . Machinery end other equipmc nt Other ton~~~,i do not tnciude tens below) - - 3. Group end guideline oboe 2. Dot. e deexeiptino of ptopetiy *couieed 3. Coot en 4. D.etee. hon 5. Oiethnd ci ~ Li..eel.DeC;eniai;na *thee b.eio S neth*th: depeei.tix~n e.t& fox th~ ycor 2 Taints I ---_-.*.. 3 Less umountof depreciation claimed in Scheduin C end eiscwitere on return ~Butence-Entnr hero ond ontino 20. page 2 Foxenuill-T(htGt) . Schedule H-INTEREST ON INDEBTEDNESS (See Instruction 16) . (opicnzcoe (epi,n,Uae Amount Total (enter here and on tine 17 pace 2) Amour! 688 R-23 Schedule G-DEPRECIATION (See Instruction 20) T.epayexs using.Reeenoo Peoceduxe c2-2o: Make eo entry in koiume 2. -ecter the nest or other basis ef assets held at end or year in cotunto 3. -. .edoetcrthe.ccomuiateddnpreciationaiendoiyeuxinouiumn4. Total (enter here and en ton 16. pare 2). Schedule I-TAXES (See Instruction 17) Schedule J-OTHER DEDUCTIONS ~Sce Instruction 20) PAGENO="0691" 689 R-24 oooon:) Total (enter here end on lice 25. page 2). ________________ TAX RATE SCHEDULE FOR TRUSTS TAXABLE AT INDIVIDUAL RATES APPLICABLE ON AND AFTER JANUARY 1. 1965 U the anneont on line 31. U the ann000 nn line 31. page 2. a: - Ectec on line Ii. page 1: page 2. to: Encec on line It. page 1: Not oeèe $300 14% nO the annnnnt nn line 31. page 2. Dccc 320.000 hot nec once $22.000_. $0070. plot 40% oF encntt nOte 320.000. Once 3300 bat net once 31.000 $70. plot 10% of condo once $900. Once 322.000 hot nnc ooec 326.000.. sense. plot 90% nf onceco onto 222.000. Once 31.000 but cot once 30.900.-.. 3143. pluo 16% of coneot once 30.000. Once 326.000 bat not once 332.000.. 37.030. plut 35% of coecto once 326000. Once $0000 bet ccc onec 32.000.-.- 3223. plot 07% of condo once $1.tOO. Once 302.000 hot cut nero 331.000... 212.210. plot 99% of coned onto 332000. Once $7000 boo ono once 34.000..-- 3310. pint 19%.of eoneot onec $2000. Ocec 331003 bet cot once 344.000... 319.910. plot 30% of condo onto 331.000. Once 34.000 boo oat once 36.000....- 3090. Plo 22% of 1c,nctt once 34.000. Onct 344.000 but oat once 190.000... 310.990. plot 60% of cocoa once $44000. Onec 36.000 bet 001 ocec 2 - ._~ $ . 3 . P1nt cc o $ - . Once 370.000 hot cot once 160.000.. 322.990. pint 67% of cnnctt occo 390.000. Once $ . 00 bet ccl once 3 - --- . 3 . P700 % n coed, note - * ~ 360.000 but 000 n.e. 370003... 370.790. pta, 64% of coccet ocec 360.000. Once $ 00 cot once . ._ ,. . Pot 3 % eccoteco - Once 270.000 bnc not ocec 300.000... 339.190. plot 66% of condo once 270.000. Once 312.000 00 ccl once . ._ .. 3 . pot 3 % a condo note S~ . . Once 300.000 hoc coo once 397.000... 341.790. plot 60% of concto once 300 cen Once 214.000 bat cot once 316.000.. 23.300. plot 39% of conrad ooec 314000. Once $16000 hoc coo once 310.000.. 24.330. plot 42% oE coneto once 216.000. Once 300.000 boo 000 00cc 3100.000. 340.990. plot 69% of 100001 once 29. - Once 310.000 hoc eec 0000 300000... 39.170. plot 43% of cone,, once 310.000. Once 3000.009 Stt.490. plot 70% of condo once 5000.020 *#~the~o3.,ennnnedtnneu0ooocemnc:c0tt-0-22u-4nt PAGENO="0692" 690 ing relationship with your attorney tC you could assemble some or the in.tormation prior to your initial conrerence on Form 1023. First, you should think about the detailed purposes or your £oundatiofl. In other words, why was your Lounda- tion rormed; what do you want to do with it; what do you want it to do in the ftture. Second, how will your roundation obtain the runds with which it will operate? Will it provide services to the general purblic or to other roundat ions? Will it invest runds? Will it re- ceive contributions? Will it manage real estate or will it merely purchase and sell securities? Third, what are some or the projects that your roundation will initially attempt? For example, will your roundation do scientiric research? Will it create a~grant program or a scholar- ship program? Will it create a library? Will it educate persons either through rormal schools or seminars or lecture or distribution or literary material? Simply, what will your round at ion do? Fourth, once you have decided what your roundation will do, you must set out some or the detailed structure or these projects. For example, ir your roundation intends to award grants or scholarship, you will need to prepare the standards 8-10 Copyright ~)19~7 Americans Building ConstitutionallY (A Trust) Printed in U.S./~. PAGENO="0693" 691 which will guide the board or directors in determining tI~ winners or such grants or scholarships. You will need to prepare the applications ror such grants or scholarships. Also, the rererence blanks, the rollow-. up questionnaires and perhaps, even the account ing pro.- cedures. You should also prepare a detailed explanation or such a program. ir your roundation decides to accomp- lish scientiric research, you might prepare a detailed outline or discussion or the purpose or the research, the methods, and personnel ror obtaining data, the methods or determining results, and then what will be done with t1~e results and who will have access to them. Form 1023, in other words, asks why you think your roundat ion is charitable, scientiric, religious, literary, educational, etc. You will answer this question only in those categories that directly apply to your roundation. You will not discuss charity ir your roundation does not intend to be charitable, nor will you discuss testing ror public sarety. ir your roundation does not intend to test ror public sarety. The preparation or this material and some clear consideration or what your roundation will do will greatly speed the preparation or Form 1023 by your attorneyS i'ilany or the remaining questions involve the answering or certain questions that contain a number or technical 8-11 Copyright ~ 1967 Americans uilding Constitutionally (A Trust) Printed in U.S.A. PAGENO="0694" 692 legal terms * To prevent delay in processing and to avoid mistakes in answering these questions, you should consult with an attorney. Upon a favorable deterrainat ion by the Internal Revenue Service, based upon the information submitted on Form 1023, your foundation will receive a letter recognizing the tax.- exempt status of your foundation. This letter is extreme- ly valuable and, depending on local law, might be used to obtain exemption from State Unemployment Tax, some state sales taxes and other state and local taxes and regula.- tions. The presentation of the federal Treasury letter is the best evidence to be used in such proceedings. This letter will also be of possible use in obtaining advantageous prices or services from private sources, s~th as discounts from major retail firms, possible say.- ings in book stores or from pub1isI~ors, and may also be usoful in other legal proceedings as bona fide evidence of tax-exempt status recognized by all. At the top of each letter of determination issued by the Treasury Depart.- ment, there is a code number. This is the so.-called "tax exemption number" that some people may mention. This number might be used to some advantage in correspondence with state or federal government agencies who may be concerned with yourfoundation's activities. The value 8-12 Copyright ~l~67 Anericans Building Constitutionally (A Trust) Printed in U.S.A. PAGENO="0695" 693 or this letter is solely limited to dealings with third parties. In other words, a determination by the Treasury is valuable only ir your Loundat ion intends to deal with independent, unrelated persons or organizations rrequently~ Since ABC recommends that your corporate Loundatlon be used as the vehicle ror public operations, it is re~ commended that your corporate roundation obtain recogni- tion or its tax exempt status rrom some government source (one or more or the Lour sources named above). The mechanical details or obtaining reco~it ion rrom state courts, rederal courts or state agencies varies £rorn locale to locale. Ir~you are not interested in using Form 1023 ar~ wish to obtain recognition or yourrounda- ii on's tax exempt status rrom one or the other three governmental sources, you should consult with your attor- ney ror the most erricient course or action. (b) Form SS.-4. ir your Coundation pays a salary to any employee or is required to rile a rederal report to the Treasury, then your Loundation must rile ror an employer's identirication number on Form SS-4. You may obtain this Corm rrom the local Internal Revenue Service or Social Security orrice. Form SS-4 is very simple to complete and you do not need any special consultation with yoi r 8-13 Copyright c 1967 Americans uilding C3nstitutionally (A Trust) Printed in U.S.A. PAGENO="0696" 694 attorney to complete it. Unless your foundation is an agricultural research farm, it will probably not have any agricultural employees. Generally, your foundation will be a new business. Your foundation is a category "F" organization. Category "F" is a non-profit organization devoted to one of the seven permissible ~iirposes in Sec.- t~i 501 (c) (3) of the internal Revenue Code. You would explain this on Form SS...4. If you intend to submit a Form 1023 shortly after the incorporation of your foundation, you should not submit Form SS-4 prior to submission of Form 1023. Form 1023 allows you to file Form 33-4 with Form 1023. The Social Security office usually takes two weeks to two months to issue an employer identification number. To avoid holding up your Form 1023 application while you are waiting for an employer identification number, you should file Form SS-4 and 1023 together. Once you receive an employer identification number, you must file withholding tax returns using that identif 1- cation number for the income tax due and owing on the salary of any employee. You will file and keep records for Forms W-2, etc. Depending upon the number of employees and the amounts involved, you will file monthly or quar- terly just as any other employer. 8-14 Copyright c 1967 Americans uilding Constitutionally (A Trust) Printed in U.S.A. PAGENO="0697" 695 (c) Social Security - As discussed earlier, your Loundation employees may elect or rei'use Social Security coverage. I~ your employees reruse Social Security cover- age, you do not have to' deduct this amount or contribute tI~ employer's share Lor these employees. LC your em- ployees choose to be covered by Social Security you will file Form SS-15 with yair local Social Security orrice ar~1 then you must deduct the employees' contribution and make the employer contribution Lor each or those employees. ir any employee chooses to be covered by Social Security, tI-en all employees subsequently hired must be covered by Social Security. (d) Form 990-A This i~orm is not a tax return. The Internal Revenue Code calls it an Annual Inrormatlon Re- turn Lor an Organization Tax Exempt under Section 501 (c) (3). It is a two-page simple inrormati on return which must be Liled in triplicate berore the rirteenth day or the i~ i~th month arter the end ol' the Lound ati on' s annual acc- ounting period. It consists or a financial report coupled with about 20 questions which are similar to those asked on Form 1023. Under the Internal Revenue Code every 501 (c) (3) organization, with a Lew exceptions, must rile this return. The statutory penalty ror railure to 8-15 Copyright(C) 1967 Americans Building Constitutionally (A Trust) Printed in ~.S.A. PAGENO="0698" 696 file this return is ~l0,OO0 Line plus one year in jail for the responsible officer. This penalty has never been enforced. In tile Opinlofl of some attorneys, it is seriously questioned whether this penalty, as a practical matter, could ever be enforced. Technically, to avoid harassment or any future changes in the law or its en- forcement, it seems to be advisable to file Form 990-A. A major disadvantage of filing Form 990-A is that all the inf ormat ion becomes public record on £ ile in the local District. Director's office and any citizen of the United States may request that information and use it. (e) Form 990.-T - This report is a tax return. As explained earlier, a foundation may hate taxable income. A foundation is taxed at corporate rates on unrelated bi~1ne~e inc ome for any amounts over the original $1000 deductions. If your foundation earns any funds which may be classed as unrolated business income, you must re-. port these funds if they total more than $1000. You must also pay taxes at corporate rates on these a~nounts aLter you have deducted normal business deductions, exemptions and credits related to those earnings. In other words, because you are taxed at corporate rates, you are entitled to take all normal business and corporate deductions, etc., 8-16 Copyright c 1967 americans uilding Constitutionally (A Trust) Printed in U.S.A. PAGENO="0699" 697 on the activities that produced the unrelated business income. Since this is a tax return, if you are unfamiliar with detailed accounting or business tax returns, it would be advisable to obtain expert help on the initial returns, If you have filed several business tax returns for your own business activities in the past, and feel tI~a t you have no need £ or an account ant or bookkee per under normal circumstances, then you will probably not need an accountant or bookkeeper for this return. If you have any quest ions, you should see your attorney or ac- countant. Remember that Form 990-T is a tax return and is sub- ject to all the other penalties and regulations pertain- ing to tax returns. Form 990-A is an informational tax return and should not be confused with Form 990-T. You must file Form 990-T by the fifteenth day of the third month after the end of the foundationT a annual accounting period. If your foundation has a calendar fiscal year, you waild file this report by March 15. in most case~ however, a foundation will not have unrelated business income. in the opinion of some attorneys it has been suggest-- ed that Form 990-T might be filed even though a founda- 8-i? Copyrights 1967 Americans Building Constitutionally (A Trust) Printed in U.S.A. PAGENO="0700" 698 tion does not have unrelated business income. It has been suggested that as a point or legal strategy that Form 990.-T might be riled with a lot or zeroes, thus invoking the three.-year statute or limitations on possible actions by the Internal Revenue; that is, unless the In- ternal Revenue Service acts within three years arter the riling or Form 990-T it is barred by law rrom rurther action as to that taxable year, except in the cases or rraud. This idea is one or legal strategy and is not a requirement. It is only an idea and should be discussed thoroughly with your attorney. (r) Form 1096 - Exempt Organizations. Exempt or- ganizat ions must report payments or rents, salaries, çremiums, annuities, compensations, remunerations, emo- luments or other rixed or determinable gains or income aggregating over $600 a year to any individual or organi- zatioñ who would normally be a taxpayer. This is to be riled on or berore February 28 in the year rollowing the year or payment. These reports aid the Internal Revenue Service in reviewing the returns or other taxpayers. They do not rerlect upon the roundation's activities or operations, nor do they invoke any liabilities upon the roundation. They might be rererred to as "stool pigeon 8-18 Copyright (~ 1967 Ati~ericans Building Constitutionally (A Trust) Printed in U.S.A. PAGENO="0701" 699 reports". (g) Occasionally, a foundation may also have to rile a census report with the U. S. Census Bureau. The Census Bureau often asks businesses of all kinds to supply the information for their records so that they may compile their information pamphlets and maintain up-to--date statistical records in their offices. The Census Bureau has the power to enforce various penalties for failure to rile these returns. Very few foundatirns are ever asked to file such returns, but you should be aware of their existence. It is not recommended that you volunteer to file a census return. Y0ur foundation should only do so if requested. (h) Your foundation will not file corporate tax re- turns, individual tax returns, fiduciary tax returns, or other forms relating to other types of organizations. If t1~ Internal Revenue Service should request your founda- tion to file any of these other returns, you should in- lb nu the service that your organizat ion is a 501 (c) (3) organization and is only required to file on form 990-A, 990-T, or 1023. If the Internal Revenue Service persists in erroneous or harrassing action, consult your attorney. 8-19 Copyright (~)1967 Atn2ricans Building Constitutionally (A Trust) Printed in U.S.A. PAGENO="0702" 700 Furthermore, your Loundation is not under any requireS- ment to show its books or records to any person without suCi~icient cause Your Loundat ion enjoys the same consti- tutional rights as other corporations or the United States. In other words, you should not be upset or pressured by the appearance or an Internal Revenue Service agent or other government agent. You should inquire politely ror proper identirication by the Internal Revenue Service agent or other government official and should politely request the reasons for the investigation and under what authority they are acting. It is your constitutional right to have proper advice and counsel whenever a govern- nnnt takes action. If you are so questioned, you should call your attorney ~or further advice. You, as executive director of your fouridat ion, are responsible for the activities and operations of your foundation and any disclosures made by you as executive director, may be used as evidence in any action against the foundation. If the foundation is operating properly under all the re-. commended procedures you have learned today and at other times, you should not be concerned by any investigation by anyone. ABC firmly believes, however, in the right o:C privacy of the individual and our suggested methods to maintain this privacy are offered for your protection0 Copyrighc (~)l967 8-20 Americans ~ui1ding Constitutionally (A Trust) Printed in U.S.A. PAGENO="0703" 701 STATE TAX REQj1IPEMENTS (This portion or the material should be prepared by each consulting attorney ror the state in which the satinar is being held or states in which the attending membership resides). (The rollowing material is an incomplete summary ol' Illinois State tax requirements as they relate to 501 (c) (3) organizations). Foundations in the State or Illinois are required to pay State Sales Taxes on all purchases and charge State Sales Taxes on all sales or merchandise unless expressly exempted under the Illinois State Tax Codes. To obtain sales tax exemption either rrom payment or charging or sales taxes, the roundation must apply to the state treasurer's orrice on rorms provided by the State or Illinois. Normally, roundat ions cannot be exempted rrom charging sales tax (use or occupation tax) on the sale or merchandise in the State or Illinois, but many classirications or roundat ions can obtain some re- her in the payment or sales tax on certain purchases. Such relier will either take the rorm or an absolute exempt ion rrom payment or through the rebate o1~ sales taxes paid during the fiscal year. 8.-2l Copyright (c~) 1967 Americans wuilding Constitutionally (A Trust) Printed in U.S.A. 87-444 0-68-45 PAGENO="0704" 702 Normally day-to-day purchases might be exempted from state sales tax for educatbnal, charitable or research organizations, but sales tax on gasoline purchases would be rebated at the end of each year. Forms for rebate may be obtained from the state treasurer?s office, Since there is no state income tax for individuals or corporations in the State of Illinois, foundations do not have to apply for exemption from these taxes. If the Illinois legislature ever passes a state income tax bill, the foundation should apply for express exemption from these income taxes. Property owned by a 501 (c) (3) organization in being actively used by that organization for tax exempt purposes (this normally does not include property held for rental or investment purposes) may be exempt from real estate taxes under Illinois law. You should apply to your local county assessor for such exemption. Normally, county assessors are very difficult to convice and it may take some reeducation on your part to accomplish tax exemption for property qualified as real estate, If your real estate taxes are high and your property is be- ing used for exempt purposes then the reluctance of the tax assessor should not deter you from your lawful right. If further action in the courts is necessary to enforce 8-22 Copyright c 1967 Americans uilding Constitutionally (A Trust) Printed in U.S.A. PAGENO="0705" 703 your rights you should consult with your attorney to determine the economic advisability or such rurther action. If you are operating an agricultural research farm, it is highly recommended that you pursue exemption from real estate taxes. All employees or a 501 (c) (3) tax exempt organization are exempt from contributing to the Illinois State Unem- ployment Tax. Likewise, all foundation employers are exempt from payment or employers' contributions to the State Unemployment tax. Foundations must generally pay all licenses or riling rees within a state although special rates are orten ob- tainable. Before paying any license or riling fee you should inquire ror special rates available only to Loan- dat ions. Property owned by a roundat ion is not subject to personal property tax. Such property is also not consid- ered to be the property or the orricers or directors or the roundation and should not be included in assessments ror personal property tax or an individual. In some cases, special rulings may be necessary to exempt the round ation from payment or personal property tax. ir 8-23 Copyright c 1967 Americans uilding Constitutionally (A Trust) Printed in U.S.A. PAGENO="0706" 704 court action is considered you should consult with yoir attorney as to the economic advisability of such action. Foundations often make "in lieu of" payments to various government agencies for services actually ren- dered to the foundation, e.g., fire and police protection~ Such payments often reflect the foundation's opinion of t1~ value of such services rendered and usually replace the real estate or personal property taxes formerly assessed on foundation-owned property. Such payments should only be considered or made if the foundation ~.s been expressly exempted from real estate and personal property taxes. ABC firmly believes that one should pay for services received and recommends such `in lieu of" payments where the foundation has been exempted from a great burden of local taxes. If a foundation seriously cmsiders "in lieu of" payments, the anount is solely at tIe discretion of the Board of Directors of the founda- tion. In some locales it may be possible to obtain tax exemption for real estate held by the foundation for in- vestment purposes. This is often accomplished for medi- cal service organizations, some churches or religious organizations and some educational organizations. This 8-24 Copyright~~ 1967 Americans Building Constitutionally (A Trust) Printed in U.S.A. PAGENO="0707" 705 preferential treatment ~uould not be expected for all found at ions. If you have any questions concerning any state tax situat ion you should consult an attorney. Distribute Attorney's Exhibit Review of foundation material using struc- tural charts. If time allows, it would be very valuable for the instructor to review the organization and operation of the foundations as a whole. No detail should be developed at this point in the program, but references to earlier mater- ial might be made to refresh the memories of the students. Such a review would help place each of the various details that have been covered into the overall organization and per- spective of the foundation. The foundation is a new concept to most people and some of ABC'S ideas are wholly new in the field of foundation activity. If the student can put together the pieces of the foundation puzzle in an organized fashion, then he will probably be able to oper- ate quite efficiently without continued advice of counsel and without fear of barassment or charges of evasion from the Internal Revenue Service. In addition, if the student can under- stand the scope and purposes of his foundation and carry through with the proper operations, both he and society in general will greatly benefit through the development and progress made by his found at ion in the foundation' 5 chosen field. The foundation examination might be administered at this point. * * * * * 8-25 Copyright 1967 Anie~ican3 Buiding Constitutionally (A Trust) Printed in U.S.A. PAGENO="0708" 706 3ec~ion 9 ~AT.IOILR~V]EW~ L]l~ITATIONS AND ALTERkQN~ The organizational structural chart and the economic flow chart would best be used at this point to conduct this review. These should be prepared as exhibits and not merely used on a blackboard. At this point, each of the members should be reminded that he or she will be wearing several hats simultaneously and that, the duties and powers of each of the positions represented by these hats should be be clearly understood. For example, one person might be a director of the foundation, presi- dent of the foundation, and executive director of the foundation. Each of these offices has different rights and duties. DISTRIBUTE #25 & #26 vi. Inspirational talk on the virtues of the ABC program and how support of the ABCprogram will help fund the individual, foundation for the various beneficial projects that each member might develop. All the details of the program should be discussed and other ideas should be used to motivate each student member to increase the ABC membership. If any member at this time desires to begin the formation of another class, it would be advisable to aid hire in this direc- tion in every way possible. If a new class should be formed through that memberts contact, such information should be immediately forwarded to the ABC Executive Secretary. The details of this particular part of the program should be carefully developed with consideration for time and motive. Up to this point we have discussed the basic prin- ciples and information necessary to conduct the opera- tions of a private foundation. You will probably develop many questions concerning detailed projects, wording of various minutes and detailed management questions that 9.-i Copyright (Z)1967 Americans ~ui1ding Constitutionally (A Trust) Printed in U.S.A. PAGENO="0709" 707 occur in the starting ot any new business. Your founda- tion is a new business for you. You have probably never operated one before and some of the procedures may be completely unfamiliar to you. As you gain experience, you will be able to handle small problems with great ease, but until you do, you should rely on the advice of experts. Your associate attorney will be a good source of informa- tion. If you feel you understand the principles well enough to operate you need not retain or refer to any attorney. lWe believe that the information developed in this course, coupled with more detailed procedures which will be taught at a later time, will enable any person of reasonable intelligence to operate a foundation on a day-to-day basis without constant consultation with an attorney. If you have any quest ions at this point, you should ask them. If the instructor has time and knowledge to answer them, he will be more than glad to answer them at this time. If not, your question will be answered by either the attorney or the instructor by letter at a future date. The benefits of the foundation can only be enjoyed to the extent t1~t a person is willing to devote his en- 9-2 Copyright c11967 Americans uilding Constitutionally (A Trust) Printed in U.S.A. PAGENO="0710" 708 ergies to the foundation and gain the knowledge necessary to :Cunction properly. Here is a list o:C published literS- ature which may be of some help in some situations to those of you who are l~aniing foundation management for the first time. - Include the standard bibliography of foundation management material. Exclude all references to legal form material. Distribute E)OiIBIT ~:27 Conduct Foundation Management Exercise EJ~-IIBIT #28. Conduct Foundation Examination before pro.- ceeding to Section 10. Your foundation may provide you with a great many benefits at the same time that it is benefiting mankind. You will be able to accomplish personal philanthropic desires, employ your energies most efficiently and gener- ally save money. But the foundation is not the sole an~er to an individualts economic problems. There are several shortcomings to total dependence upon foundations for the structuring of your personal estate * Foundat ions are potentially subject to restrictive government scrutiny and in some states, to government management. All proper- ty owned by the foundation and all income received by the foundation is technically devoted to public purposes. 9-3 Copyright "~ 1967 Americans Building Constitutionally (A Trust) Printed in U.S.A. PAGENO="0711" 709 Unless you truly wish to dedicate all your property and energies to the public good, then the foundation is not the sole answer to your :Camily's needs. It is highly valuable but must be used with other instruments and vehicles to gain maximum efficiency and protection to an individual's estate. In other words, you may own proper- ty which you would not desire to dedicate to the tenefit of all mankind * Such things as your family's jewelry, heirlooms and other similar property would be best controlled by non-foundation owners. In addition, the foundation is subject to disclosure requir~ents which make public such information as officer's salaries, property holdings and persons doing business with the foundation. ABC firmly believes in the privacy of the individual. Because of this belief, ABC does not want to leave you with the impression that the founda- tion is the best way to protect this right of privacy. Finally, the foundation may be of limited use to many people due to the inability of these persons to transfer 100 percent of their income into the foundation. Fiany idnviduals may only b.c able to initially transfer 20 percent of the ir income or estate into the foundation, thus leaving 80 percent unprotected. Since this is not 9-4 Copyright ®1967 Americans Building Constitutionally hA Trust) Printed in U.S.A. PAGENO="0712" 710 conducive to absolute protection of an individual family's property, other instruments and vehicles should be em- ployed to overcome these "deficienc1es~of the foundation. It is not recommended that an exhibit be pre- pared on this material, but it is suggested that the instructor could lead a discussion on some of the disadvantages to individuals of foundations. For example, a discussion of the whims and vagaries of some of the state administrators of foundations and the possible frequent changes of state law on foundations. In addition, the arbitrary nature of the Inter- nal Revenue Service with regard to foundations might be discussed, The discussion on these points should clearly relate only to the possible action, since, in most cases, such action is not probable. To enjoy maximum benefits of the not-for-profit procedures and yet minimize their disadvantages, an- other organization is required. For example, should a person feel that the wide range of conduct permissible within the tax exempt sphere of activity is not as broad as he might like, he might seriously consider holding property or operating under a non-exempt, tax-paying arrangement which might be connected with a foundation in such a way that substantial benefit of tax-exemption could be enjoyed without being subject to the prohibitions imposed upon tax-exempt foundations. Certain securities, if purchased by a foundation, might be considered highly Copyright() 1967 Americans fl~uilding Constitutionally (A Trsut) Printed in U.S.A. PAGENO="0713" 711 risky investments and woinid thus be subject to the rule against endangering foundation f~unds. If, on the other hand, these securities were held by a tax.-paying corp~ oration, there would be no prohibitions against such ownership regardless of the risk of the venture. Taxes would have to be paid, but if deductible contributions r expenses were made to the foundation, some savings would result. We should not confuse t1~ means with the end. If our purpose is tax savings, then we should be alert to albrnate uses of the foundation to achieve that end. The device of holding property in a taxable entity, yet eliminating the tax burden through deductions whether for operating expenses or contributions, not only elim.- mates all the restrictions on an individual's use of the funds, but also makes it unnecessary to file public information returns on these activities. To illustrate alternate uses of the foundatbn, let's create a hypothetical case and apply some foundation theory. Imagine an individual with income.-producing property (real estate or securities) yielding $50,000 per year. Allowing for no deductions, the individual maximum tax rate on &:50,000 is presently $23,940. If 9.-6 Copyright® 1967 Americans Building Constitutionally (A Trust) Printed in U.S.A. PAGENO="0714" 712 we assume that tbm property producing the income was held by the individual and that the $50,000 also rep- resented the basis on which the individual's 20 percent deduction was figured, his taxable income could be re- duced by a charitable donation to his foundation to $40,000. This would reduce his taxes to a maximum of ~IL 7,690 or a savings of $6,000. On the other hand, if all the property were owned and administered by the foundation, there would be no taxes on the income to the foundation. All the property, however, would be dedicated to benefiting mankind in one of the tax-exempt purposes for which the foundation was fcr med. If the $50,000 of income were produced by a corpora- tion owned or controlled by an individual, then five ~rcent could be deducted from the corporation's income and donated directly to the foundation. The remaining $47, 500 might then be paid to the md ividual as a salary and he would then donate 20 percent of this amount, or ~9,000 to the foundation. His taxable income w~jld be $38,000, and the foundation would enjoy $12,000 of tax- free income. The individual would have to pay a maximum of $14,600 in income tax. This would be $8,700 less than 9-7 Copyright® 1367 Americans Building Constitutionally (A Trust) Printed in U.S.A. PAGENO="0715" 713 the maximum tax rate on $50,000. Note that in the cases where the individual received a gross of $45,000 or $50,000 in income, he retained after taxes and contributions, $23,000 to $24,000 for whatever purpose he wished. He could use this money far frivolous purposes, risky investments, completely personal benefits and expenses without criticism and without limitation. At the same time, the Coundat ion received $10,000 to $14,000 in income for purposes beneficial to mankind, while only $12,000 to $17,000 was lost to the federal government. Thus, we see that there are many alternate applica- tions of the foundation to the simplest of situations. If we add other types of organizations and legal instru- ments, we multiply the number of alternate applications of the foundations to any particular situation. Our flexibility increases as we use other organizations and our freedom of choosing where each dollar is to go is also increased. ABC suggests the use of a second instrument with your foundat ion to provide for the continuing support of that foundation, and incidentally, to maximize the protection for your estate. A second organization should then be 9-8 Copyright(~) 1967 Americans ~ui1ding Constitutionally (A Trust) Printed in U.S.A. PAGENO="0716" 714 formed as part of your fatally organization to enable you to have comple te choice of the use of your property. The characteristics of your organization are quite different from those of the foundation. Of course, the second or- ganization should be controlled by the same persons or family as the foundation, to insure consistency of man- agement. The second organization should have complimen- tary tax advantages when compared to the foundation. The second organization should be able to contract with the farndation and yet remain legally independent and separateS The second organization should be of a different nature 11-ian the non-profit corporation so that it might be un- affected by any changes or disadvantages in state or federal law applicable to non-profit corporate procedures. The second organization should be relatively uncomplex so that the foundation and the second organizatin may be managed as simply as possible. The second organization like the foundation, however, should be created and rranaged on a long-term basis. The creation oC the second organization like the foundation, should indicate a per- petual type of management. There are many types of alternate organizations that could be used. ABC research has investigated most of 9-9 Copyright~J 1967 Ainericans Building Constitutionally (A Trust) Printed in U.S.A. PAGENO="0717" 715 these alternates and has discarded or rejected all but one. Berore we discuss the single organization that we believe is best suited to compliment the activities or tiDroundation and the protection or your estate we should briefly discuss some or the rejected alternates so that you will not be misled by suggestions or others as to the erriciency or these rejected alternate solutions. First, partnerships, stock corporations, sole propriet- orships, and other common profit-making business rorms have been rejected because they are subject to inaximuni regulation by both rederal and state governments~ These organizations do not, by themselves, preserve assets rrom taxation or protect the longevity or an individual's estate tax laws and other regulations. Tax laws and other regulations haveinhibited the rree.-. dom and flexibility or these prorit-making organizations so that their original advantages have been all but lost. A second Loundation is a usetul concept but to go beyond two roundations would create a very complex or- ganizational problem. It is true that many prominent fimilies have used multiple roundatlon systems to protect their assets. For example, the Rockereller £aanily has interests in two giant roundations. The Rockereller 9-10 Copyright (~~\ 1967 Americans Building Constitutionally (A Trust) Printed In U.S.A. PAGENO="0718" 716 Foundation and the Rockefeller Brothers Fund. Both of these giants have formed countless small, related founda- tions to receive and disburse funds for particular proj- ects. A few years ago the Rockefeller Brothers Fund allocated nearly ~;2OO,OO0 to rehabilitate an~ operate a "slum tenement apartment house'. They wanted to prove that a properly run, low-rent apartment could be operated healthfully, pleasantly and profitably. A smaller founda- tion was created, qualified and endowed by the large tbundation. This small foundation was separately charter- ed from the giant Rockefeller Brothers Fund. This was to enable the small foundation to operate without creating legal liability for the giant foundation~ Incidentally, the smaller foundation failed to ac- complish its purpose due to the destructive nature of the tenants. The foundation-run apartment ended up with al- most as many building code violations as its non-charitable neighbors. The Ford family has 20 or more foundations and H. L. Hunt reportedly has over 35 foundations. i~ach of these fami1~.es can afford the staff of attorneys, counselors and managing directors to properly operab each of the foundations. You, as an individual, may not have the 9-11 Copyright ~~1967 Americans Building Constitutionally (A Trust) Printed in U~S.A. PAGENO="0719" 717 funds or resources or time to manage more than one or two or three foundations. Each foundation must be maintained separately with complete records and proper activities. If you do not have considerable resources this is not an easy task. ABC does not recommend that you incorporate 40 or 50 foundations simply because it seems like a good idea. Other exotic types of business forms, such as associa~ tions, labor unions, limited partnerships, special corp.- orations, etc. generally do not apply to most individual's interests or property holdings. Consequently, ABC does not recommend them. Copyright ® 1967 9-12 Americans Building Constitutionally (A Trust) Printed in U.S.A. 87-444 0-68-46 PAGENO="0720" 718 SECTION ~Q TRUST IN~RODUCTj~. If you have not conducted the Foundation ~ex~~tion conduct it at this time. The one complimentary organizational form that ABC does recommend is the trust. The trust is one or the oldest legal concepts in history~ Trusts were formed~ in England 400 years before the first corporation was formed. The oldest continuous trust on American soil was chartered nine years berore the United States declared its independence. This trust is still in operation. ~e have chosen the trust as the second organization because of its historical stability and because it has all or the desired characteristics which we discussed earlier. The term `trust" is widely used today to describe a wide variety or legal instruments. You have probably heard the term from insurance men, bankers, real estate brokers, accountants, as well as lawyers. Each or these professions dealing in trusts have one variety or another or trusts, but all of these variations stem from a basic concept which was developed in Germany and which traveled to England with the Norman comquest. These early English trusts were modeled after the 10-1 Copyright c 1967 Americans ~i1ding Constitutionally (A Trust) Printed in U.S.A. PAGENO="0721" 719 ancient German legal receiver called the `salman". The "salman" was a person to whom land was transferred in order that he might make a conveyance according to the former owner's wishes. Although this might seem a devious and in~ efficient way of transferring property, a review of the conditions in medieval times should show the reasons for this procedure. In England many burdens and conditions fell upon the holder of legal title to real estate. For example, the lord of the land was entitled to relief or money payments; when the land was passed to an heir of full age. The lord was entltled to wardship fees when the son of the former owner was a minor. The lord was also entitled to aid or tax money to pay for the marriage of the lord's daughter or the knighting of the ~ s eldest son ~. In addition, the owner of the land was usually prohibited from selling the land or dividing the land among his children or grandchildren~ If the owner of the land was convicted of a crime he forfeited all he owned to the lord or king, thereby leaving his family impoverished. These were the major restrictions There were nearly 100 other taxes and limitations on the owners of lands. To avoid these restrictions under the 1 w, the trust was developed. It works as follows. The owner contracted 10-2 Copyright (~)l967 Americans B~.i~1ding Constitutionally (A Trust) Printed in U.S.A. PAGENO="0722" 720 with two trustees t~ convey the property for the beneficial use of another person or beneficiary. This fourth person was generally the owner's son or the per- son to whom the owner wished to sell the land. The trustees were literally trusted with the proper use of the property. In the twelfth and thirteenth centuries there were no legal methods to enforce the trust con- tract. If the trustees during these years decided to use the property for themselves there was nothing the former owner could do. Eventually, however, the courts began to enforce these contracts. Because the contracts were not sales they were not illegal transfers of land. Because the contracts were not wills they were not im- proper transfers to children or grandchildren. The trusts had many advantages. They could be kept secret. The king did not have to know of the transfer, but by law the taxes and other limitations could be ignored. For example, if the grantor of property placed in trust were conviced of a crime, he would not forfeit the property since he no longer owned it. His family as beneficiaries of the trust would continue to enjoy the property. SInce beneficiaries of a trust were not limited in number a man might distribute the benefit of the property to all of his children while under the law 10-3 Copyright ® 1967 Americans Building Constitutionally (A Trust) PrInted in U.S.A. PAGENO="0723" 721 he could only pass it by will to his eldest son. The trustees and beneficiaries in each of these trusts controlled the land, planted it, reaped the har- vest, sold or used the results for profit and by law could ignore almost all other restrictions on the use o:C the land. The trustees usually did not participate in this use but allowed the beneficiaries to do as they wished. The beneficial or equitable interests in these trusts could be sold at will with no.change in the trus.- tees and usually without taxation. Normal sales of pro perty had to be made public and were usually accomp- lished by elaborate procedures, Beneficial interests in trusts could te created and transferred secretly. Early in the fifteenth century the n's chancellor began to enforce such trusted contracts and agreements in the king's own court. The relief offered by the chancery court was usually in the form of an order to refrain the trustees from doing some act, such as evict- ing the beneficiary or laying waste to the land. By the sixteenth century the concept of the trust was well developed. The king having lost many of the former rights to lands held in trust, publicly criticized them. There were probably many abuses of the trust which led to this Copy~1ght ()1967 10-4 Americans Building Constitutionally (a Trust) Printed in U.S.A. PAGENO="0724" 722 criticism but since the nobility was being severely pinched with respect to their traditional rights and powers, their criticism is more understandable. For example, religious orders which had pledged themselves to poverty often held hundreds of thousands of acres of land in trust and enjoyed their use, even though the priests themselves did not "own" a thing. In 1535 the Statute of Uses was passed to prohibit the use of certain trust instruments. The law required that the beneficiary of certain trusts would be consider- ed the legal owner whenever such a trust was made and that the trustees would be considered to be mere conduits or passive parties. The preamble of this law set out the "evils" that had been possible through the use of the trust. Among these "evils" were privacy of transfer, legal avoidance of taxes and other regulations, preservation of the estate of convicted criminals, and most signifi- cantly, the loss of revenue to the lords. The common law judges of England who had sole Juris- diction over legal estates were faced with the tas~: of interpreting the Statute of Uses. They had to det:rmine what trusts were legal ar~ what were dissolved. T~:.e 10-5 Copyright® 1967 Americans Building Constitutionally (A Trust) Printed in U.S.A. PAGENO="0725" 723 judges decided to restrict the application of the Statute of Uses to limited circumstances. Only one trust out of five was found to be illegal and the rest were enforced. Vlithin five years, the Statute of Uses was all but out of use, Suffice to say that the Statute at the har~s of the common law judges did not achieve what the king and his nobles had hoped. A large number of trusts were left un-S affected by the statute and were recognized and enforced by the Court of Chancery. It is these interests arxl trusts which were preserved in spite of the Statute of Uses which traveled to America with the English Colonies and which formed the very base of our modern trust. The advantages of the ancient trust are obvious. The trust enabled a person to enjoy privacy under a sys.- tern that usually demanded disclosure. The trust enabled a person to avoid some of the burdens of special taxes. The trust enabled individuals to "sell" land and to pass it to those they wished. Obviously, the same goals are desirable today. The present tax system, however, has imposed certain burdens and restrictions on the citizens of our country that are comparable to the burdens and restrictions that limited the citizens o~ ancient Eng- land. lO..~6 Copyright® 1967 Americans Building Constitutionally (A Trust) Printed in U.S.A. PAGENO="0726" 724 For example, if we own real estate and we wish to sell it, then we must disclose ourselves as the owners, pay license and stamp taxes and filing fees. All of these costs are taxes on the right to own and sell property. Although we may pass ~nership of property to anyone we choose and any nurnbef of people we choose, upon our death there are often heavy taxes to be paid where the amounts range above stated limits. In addi.~. t ion, we cannot even give away sizable amounts of prop.- erty without paying taxes or reporting the gift to some agency. Just as the lords of England had the right to appoint the guardians of minor heirs of property, so our government has the right to appoint guardians of minor heirs in modern courts. It is easy to see that many of the conditions today are not too different from those of medieval England. The solution remains the same also. The trust can provide relative privacy in a system that demands disclosures and the trust can avoid some of the burdens of estate taxation. This, of course, enables an individual to have more control over property even though he may not own it. Before we examine the modern ownership or equity trust in detail, it should be distinguished from other modern lO.-7 Copyright c 1967 Americans uilding Constitutionally (A Trust) Printed in U.S.A. PAGENO="0727" 725 trusts that are prevalent. These other trusts are legally special trusts which exist for specific short terms with limited purposes and special duties and linii- tations placed upon the trustees. 1. Real estate ~sj~ Many states allow creation of land holding trusts for various purposes. The Illinois Passive Land Trust is one example. This trust is a spec- ial temporary trust created solely for the holding of title to land for a limited period. This trust has limited tax and control advantages. 2. Insur~ice Trus~p~ - A trust may be made the bene- ficiary of a life insurance policy upon the death of the insured. The fund will then be administered for the benefit of the beneficiaries of the trust * These b ene- ficiaries are usually the wife and children of the in- sured. Upon the death 01' the original trust beneficiary, usually the wife, the remaining trust funds are then distributed to designated parties, usually children. Tax savings are possible in the transfer from the husband to the wife, but the children must often bear the full brunt of taxation, when ti-is remaining assets of the trust are transferred to them. Trustees of insurance trusts are almost always either banks or insurance companies. 10-8 Copyright (~")l967 Americans Iluilding Constitutionally (A Trust) Printed in U.S.A. PAGENO="0728" 726 These organizations are often under tight state regula- tory control and may only invest Lunds in a certain way. 3. Bank ts Bank trusts like insurance trusts are primarily created to preserve assets from shrinkage. They are usually involved with special pre-drafted wills which create a trust upon the death or the individual. The banks act as trustees. Substantial savings in estate taxes are possible through the proper use or the marital deduction and certain trust advantages. One or the advantages or the bank trust is that the trustees are usually conservative and employ experienced persons to manage the trust runds * This same advantage, however, is also a disadvantage. Most or the runds held in trust by a bank are mixed together in one large rund rorniass management; that is, your trust runds are not handled any dirrerently rrom other trust runds held by the bank in. most ca8ee.. Due to the usual conservative man.- agenient or most banks, your trust earnings will not be great. In ract, the management ree paid to the trustees will orten take a sizable percentage or the annual earn- ings. In add it ion, the beneric iaries have little or no control over the management or the trust rund properties. These ractors are orten great disadvantages in the 10-9 Copyright c 1967 Americans uilding Constitutionally (A Trust) Printed in U.S.A. PAGENO="0729" 727 eyes of persons who wish to preserve their families' property, but do not wish to give up control. Most banks have found great value in these trusts and "advertise" their use continually. You may lBve heard some of these advertisements. They say `trusts can save si~iificant amounts of state taxes" and "trusts can provide your family with security through sound financial management". In fact, a large bank in Chicago has stated "Trusts should not be created solely for tax purposes, but nevertheless, large amounts of taxes can be saved through llieir proper use". All of these statements are true but we believe that the ownership or equity trust is far more efficient than t1~ trusts the banks offer. 4. Escrowjreement~~.~~- Whenever you entrust a person with valuable property and place conditions on its future use, you create a trust. Escrow agreements are short term trusts. So are street account securities transactions with your broker * In each of these trust situations, the individual places definite limitations on the powers of the trustees and the individual retains the equitable and taxable interest in the property. These short term limited trusts are useful but they should not lO..lO Copyright c 1967 Americans uilding Constitutionally (A Trust) Printed in U.S.A. PAGENO="0730" p728 be confused with the type of trusts we are about to discuss. Trus~~~ - Vie will use the term "ovmership or equity trust" in talking about the type of organiza- tion suggested by ABC. Although we will discuss ti-is principles of management applicable to this organization alone, these principles and rules of thumb are applicable tonlarLy other business situations and to most other trusts; that is, even though you may never form or create an ownership or equity trust you may be able to apply this inrormati'on to other activities and businesses with which you work. The purpose of the modern ownership equity trust is to preserve control in property in an organization that is perpetual in nature and yet retains its flexibility. The modern ownership equity trust is ~gj~ a vehicle which will save in income taxes. The trust itself is liable for income taxes (we will discuss this liability in some detail later), and must usually file tax reports each year. The trust, however, is not subject to probate nor is the property owned and used by the trust taxable in the estate of any individual however closely related to the trust. In order to gain these benefits an individ- Copyright(~)l967 10-11 Americans liiilding Constitutionally (A Trust) Printed in U.S.A. PAGENO="0731" 729 ual who creates such a trust must do so in the proper fashion, and like the foundat ion, must continue to operate it within the proper terms and principles that we will discuss in this seminar. By now you should be familIar with the concept that ownership is not necessarily desirable, if control of property may be otherwise maintained; that is, even tl'ough y~ do not own any prope~y which is actually owned by your foundation you do control it. Your control is limited by the purposes for which your foundallon is ~rmed, but it is control, nonetheless. In the same way, you will not own any property which is owned by a trust. Uany individuals are reluctant to give up complete title or ownership of property to a trust without retaining some "strings". This is a normal reaction. The citizens of this country have historically wanted to own property. Pioneers moved West in order to claim and work a piece of land that they could call their own. This tradition has been passed down through the years from generation to generation and is part of our inbred culture. Yet today, ownership does not necessarily mean control. You may own large amounts of property and yet be taxed so heavily or restricted by government regulations so as lO-.l2 Copyright c 1967 Aniericans uilding ConstitutiOnallY (A Trust) Printed in U.S.A. PAGENO="0732" 730 to be out of control of the actual use and values of the property. If, on the other hand, you control the owner you may not personally bear the burdens of taxation and regulation and may enjoy some of the important benefits of the remaining values of the property. This idea of control, rather than ownership, is what we have stressed in the foundation and what we will continue to~stress in the trust. The trust is a self-perpetuating legal organization. It is completely independent and separate from you as an individual. You may, however, at the discretion of the trustees, acquire some control over the properties and activities of the trust. This is only a possibility and is not a mandatory limitation upon the trustees. If, however, you do acquire control of the trust properties it may be complete control. You will be able to use the trust *pr~~rtiesiflways that are beneficial to the trust and to the trust beneficiaries and you will be able to develop the trust properties to increase their worth and utility. In review, the trust purpose is quite simple. The trust will own and use property to increase and preserve values for the benefit of those individuals or organizations who hold the beneficial interest in that turst. The properties Copyright (~) 1967 lO~l3 Americans ~ui1ding Constitutionally (A Trust) Printed in U.S.A. PAGENO="0733" 731 and energies of the trust are not dedicated to all man- kind nor are they dedicated to government action nor are they dedicated to public good. The trust is set up for the sole benefit of the trust itself and the holders of the beneficial interests in that trust. 3~ * * * * 10-14 Copyright R) 1967 Americans Building Constititic~aliY (A Trust) Printed in U.S.A. PAGENO="0734" 732 SECTION 11 BAS IQ TRUST OI~RAT IONS AND DEFfl\TIT IONS Qrg~anizat ion o~the Trust- As with the foundation, your understanding o~ the devices and procedures used to create the trust is not as vital as your understanding oC continuing management principles. Your attorney is the man to organize your trust. He will prepare your trust's initial documents, explain them to you and show you where to sign. Once these initial documents are signed and, iC necessary, recorded, your trust is in existence. You should have some understanding, however, or some or the initial creating documents so that you will be able to pass this knowledge on and re:Cer to these docu- ment s by name. Trusts are created through simple step by step proced- ures. These steps must be in chronological order, however, or the c~gan1zation is not legally complete. This order is quite simple to rollow. First, an individual whom we will call the creator, contracts in writlng with two or mc~l~e other individuals, the trustees, to create a bus- iness organlzatlon to own property and conduct activities ror the benefit or other individuals or organizations. These other individuals or organizations are not his berie- Liciaries in most cases. The written contract known as Copyright(~)1967 11-1 Americans ~ui1ding Constitutionally (A Trust) Printed in U.S.A. PAGENO="0735" 733 the trust agreement sets out the powers and limitations of the trustees, clearly indicates the identity of the beneficiaries (the trust agreement usually describes the characteristics of the beneficiaries rather than id entifying these part ies by name), and designates the duration of the contract and otherminor details of manage-~ ment * The initial life of a trust may be any duration consistent with state law. Most state laws allow trusts to be formed for a maximum of 15 to 30 years. When trustees of a trust take title to the property they often take title through deeds in trust which state that the individual trustees hold t~.tle for the trust. Where personal property alone is involved (any propertyexcept real estate) the trustees usually take title through acceptances of bills of sale whIch convey the title to the ~rsonal property into the trust itself. The deeds in trust and the bills of sale are called transfer docu- ments or conveyance documents. Since trusts are not uaially required to register under state law, and since the public should be aware of the creation of the new business organIzation, trusts often publish legal notices of their existence. These are usually published in daily newspapers and are called legal notices.'- Copyright c 1967 - Americans uilding Constitutionally (A Trust) Printed in U.S.A. 87-444 0-68-47 PAGENO="0736" 734 Once these original organizat ional documents and procedures are completed, the trust is empowered to begin operations. From that point on the trustees conduct all business Lor the trust and channel benerits to the bene- riciaries. This is the general picture or the organization oC the trust. You should next have a detailed understanding or the various elements we have Just reviewed. (1) The Trust A~r~~t The trust agreement is the initial contract and the most important document involved in trust procedures. The trust agreement is actually "the trust". The trust agreement generally sets out all the general rules and principles by which the trust is governed. The agreement, however, usually does not attempt to supply detailed management rules ror every situation. The trust agreement is analogous to the Articles or Incorporation and the state statutes which govern your corporation roundation. In the modern ownership or equity trust, the trustees are empowered with ultimate control over all the activities or the trust. They have been given the right to act with all the powers or any citizen or the United States. The trust is given an initial liretime of between 20 aixl 30 years and is given the power to renew this life 11-3 Copyright ~ 1967 Americans Building Constitutionally (A Trust) Printed in U.S.A. PAGENO="0737" 735 at the discretion or the trustees. The powers of the trust to accomplish activities, buy and sell properties ani make contracts is usually set up in the trust agree- ment. These powers are us~lly supplied by statutes in the case of the corporate foundation, Since rew state statutes govern these trusts it is necessary to prepare more ext ~sive wording in trust agreements. The trust agreement is a contract between the creator and the trustees. Since it is often awkward to prove that you contracted with yourself, an individual is usually not both a creator and an initial trustee or any trust or- ganization. Depending upon local law, the trust agree.- ment would be signed, dated, notarized and possibly re- corded with a local government orrice. In most states, however, the trust is not required to rile with a state orricer. 2. The Trust~ The trustees or the trust may be compared to the board or directors or the corporate foundation. The trustees have the ultimate authority to conduct the foundationts activities. The trustees are also responsible ror the erriciency or the organization. Unlike the board or directors or most corporate organi- azations, the trustees or a trust generally participate directly in the trust activities rather than delegate Copyright (c) 1967 11-4 Americans ~ui1ding Constitutionally (A Trust) Printed in U.S.A. PAGENO="0738" 736 the authority to accomplish activities to other officers. The trust, however, may have other officers, such as, a trust manager, secretary, treasurer or administrator. These other officers are elected by the trustees and are responsible to the trustees for their actions. The trustees generally sign all contracts, dra:Ct all checks and represent the foundation in all activities. The of:Cicers are generally assistants to the trustees to provide efficient management. 3. Trans~erDoj~fl~ The transfer documents are highly valuable and should be respected just as you would respect bearer bonds or valuable insurance policies. Transfer documents are usually signed only by the "seller" Unless a long term agreement is created. Transfers may be made through sales contracts,. bills of sale, c ond it ional sales agreements, installment sales agreements, lease sale agreements, contribution agreements, and any other rorms of transfer that are prevalent in the law. Each of them methods of transfer involve different tax con-. sequences and will be discussed later in some detail. 4. Minutes o~t e~g~_of~e ~ Truste~. These minutes are of greater Importance than the mm- utes of your corporate foundation. Where the foundation's copyright ~ 1967 ll5 Americans uilding Constitutionally (A Trust) Printed in U.S.A. PAGENO="0739" 737 board or directors niay meet monthly or quarterly or semi-annually to ratiry or authorize the activities oI~ the corporate orricers, the bcard or trustees or a trust might meet daily or weekly in order to accomplish the business activities or the trust. Where the minutes or the roundation are usually arterthoughts to authorize what has already been done, nothing should be done in the trust without the minutes or meetings or the board or trustees having been executed. Furthermore, the minutes or the trust should be numbered and set out in the proper chronological order. The trust minutes cannot show that you accepted property until your trust minutes show that such property was orrered. Your trust cannot sellproperty until the trust minutes show that such property was ror sale. Care must be taken not to ac- complish any activity in the minutes or the trust in an improper order. More discussion about the minutes or the trust will be developed at a later time. In review, the creation or your trust is accomplished through a contract which is signed by the creator and the trustees. The trust is runded through conveyances or property to the trust either by deed in trust, bill or sale, exchange, or combinations or these transrer ll.-6 Copyright (c) 1967 Americans ~ui1~ng Constitutionally (A Trust) Printed in U.S.A. PAGENO="0740" 738 methods. Your trust operates through the trustees; their activities are recorded in chronological order in min- utes. Your trust is a ~LegaJ. citizen of the United States, recognized by the courts and operated as a separate legal entity. The purpose of the trust is simply to protect the property involved, from the ravages of succession and death taxes which are assessed against property owned by individuals at their death. * * * * * Copyright G~:j 1967 ll.~7 9iuericans ~ui]ding Constitutionally (A Trust) Printed in U.S.A. PAGENO="0741" 739 SECTION_12 PROBATE AND ESTATE TAXES Perhaps you are wondering whether this protection is really necessary. We believe that a few moments spent in discussing potential losses through death taxes is valuable time to understand the conditions and potential losses that you and your family may face upon death. First, we must consider federal estate taxes. These apply in every state of the Union and are assessed by the U.S. Government upon the death of an individual. If the value of a property owned by that individual exceeds $60,000, then the estate is potentially liable for some federal estate taxes. Federal taxes begin at three percent of the first ~5,O00 of the taxable assets of an estate and presently go as high as 77 peroent on all property over $10,000,000. The maximum federal estate tax on an estate of ~10,000,000 is $6~8B6,200. Your estate may not exceed $10,000,000, but most families in the middle income bracket have estates whose total assets easily exceed ~;60,000 or $lOO,000e On an estate of ~;1,000,000 federal taxes may total $320,000 or more~ In aC.clit ion tc federal taxes, upon your death~, your personal fortune will also be taxed by the state *;r 12-i Copyright c 1967 Americans uilding ConstitutiOnallY (A Trust) Printed in U.S.A. PAGENO="0742" 740 states in which the property is located. In Illinois, for example, this tax is levied against all recipients or heirs of an individual's estate. This tax starts at two percent of all property over the exemption limits and may run as high as 30 percent. The attorney general of Illinois estimated in 1966 that $106,296 might be assessed against an estate of $1,000,000 in Illinois. Some of the state taxes are deductible against federal taxes, but it is easy to see that 30 to 40 percent of a $1,000,000 estate might go to taxes alone upon your death. The amount of tax liability may be reduced significantly through convention- al estate planning practices, but in no case will conven- tlonal practice eliminate sizable amounts of taxation from substantial estates. In addit~.on to taxes other expenses will crop up. For example, upon your death all of your creditors must be paid off within a reasonable time. Income taxes are still due and owing on lncome earned during the last year of the decedent and on income earned by the estate. For major expenses ani debts you probably haveS paid for credit life insurance; that is, in most cases, if you die, your mortgage will be paid through life insurance. However, 12-2 Copyright )l967 Americans Building ConstitutionallY (A Trust) Printed in U.S.A. PAGENO="0743" 741 for most other debts, you will not have provided any automatic payments. All o:C these debts, regardless of the contracts, will generally accelerate and become due and owing against your estate upon your death. These debts often demand great amounts of cash. Many estates do not have this much cash available. Quick sales of property and securities might be necessary to pay off these accelerated debts. These sales are usually at less than the true value and are generally accompanied by high income taxes. If your estate is probated and an administrator of your estate or executor of your will is chosen, then probate fees and/or probate taxes and fees for the ex.-- ecutor and administrator must also be paid. These amounts are separate from federal and state inheritance taxes. Finally, you must consider the costs of legal ser- vices, Your attorney is entitled to fees for the proper planning of your estate and the proper execution of that estate plan, Proper planning, using co::~vent ional tech.- niques and procedures under ordinary circumstances can reduce tax liability significantly. In other words, a $1,000,000 estate may eventually lose as little as ~)l0O;OOO to $200,000 in taxes. Thls Is still a su3~- l2-.-3 pyright c 1967 ericans uilding Constitutionally Trust) Printed in U.S.A. PAGENO="0744" 742 stantial amount, but is a great savin~ over the $400,000 maximum loss. The attorney is entitled to a reasonable fee for his services which might also include manage. ment of the estate for the bereaved widow, who is too upset to sensibly handle all of the thousands of details necessary in settling an ordinary estate. The attorney is, of course, entitled to reasonable compensation, but sometimes minds differ as to the amount. Attorney's are on record as receiving as high as one.-half of the estate. This is, of course, an extraordinary amount and in most cases is not even approached. But fees are generally significant and often run about 10 to 20 percent of the gross estate. Other problems connected with the death of a man with a valuable estate are primarily related to the time required to settle the estate. For example, on August 29, 1966 the Chicago Daily News published an art- icle concerning a man who died in June, 1964. The man died with an estate of ~75,000 which by his will was to go to his five children in equal shares. As of August, 1966, more than two years after the man had died, the estate had not been settled; no money had been distri-. buted to the heirs and expenses, taxes and fees had re-- duced the estate by ~l2,000. The attorney's fee was a reasonable $1600. 12-4 Copyright c 1967 Americans uilding Constitutionally (A Trust) Printed in U.S.A. PAGENO="0745" 743 These are just some or the economic problems that i~amilies race upon the death or the breadwinner. There are other emotional problems which always accompany a death and these cannot be avoided in any situation. However, ir there are methods available by which the economic losses can be minimized then certainly these methods should be used. There is no good reason to multiply the problems or a ramily situation upon the death or a raniily breadwinner, when these problems can be avoided. You may have noticed that these problems concerning inheritances and succession taxes only occur when the estates are above certain values. ir what you own is or relatively low value, then many or the economic problems simply can be avoided. [Iiii~~ it~~ lii Owner~i~P and Ngn~-Ow~iSh~a At this time you should have enough understanding or the roundation and a good idea or what the trust is and what it might be used ror. Berore we discuss the principles or trust management and operation and the principles or cooperative activities l2.-5 Copyright c 1967 Americans uilding Constitutionally (A Trust) Printed in U.S.A. PAGENO="0746" EXHIBIT 29 SPECIAL EXHIBIT YOUR ESTATE IS PROBABLY "Estate planning" is not just for the wealthy. As the accompanying table shows, families of modest means can be hit with substantial tax. More important, there is a general tendency for families in all brackets to underestimate the size of the estate and the amount of tax that will be due. For example, a great many husbands overlook the full valueof goodwill in listing their business assets when making an "inventory" of their wealth. Cash Bank Accounts Checking Savings Savings bonds Other bonds and notes Stocks Stock options Mortgages Residence *(house and lot) Summer home Other real estate Life insurance (including employee insurance) Trust Interests LARGER THAN YOU THINK The following summary will help you approximate your estate bracket. Include not only property which you own separately but also jointly-owned property (joint-tenancy, tenancy by the entirety, joint bank accounts) to the extent that you furnished the purchase price or bank deposits. If you have substantial mortgages on your property, or other liabilities, deduct them from your total. Expected inheritances Business interests Corporation (closely held Partnership Proprietorship Other Home furnishings Personal possessions (auto, boat, Jewelry, art objects, etc.) Other assets (including survivor annuities, employee benefits, payable after death, etc.) Total Now In 10 years Reprinted from the Tax Coordinator with the permission of the Copyright owner, The Research Institute of America, Inc., 589 Fifth Avenue, New York, N.Y. 10017, from its July 29 Report on Tax Wise Use of the Marital Deduction. Now In 10 years PAGENO="0747" 745 between the trust and the roundation, a brier review or your personal estate and economic situation should answer several questions you may have. I don't think there is any doubt that legal avoidance or probate and estate and inher~ itance taxes is desirable. Your next questions, however, might be ~What activities and property might I place in a trust or Loundation?" "Which properties go where?" What errect does this have on my ramily and my rinancial situat ion?" "What are the tax consequences?" "What control will I have over the eventual use of my property?' These questions will be discussed in their proper order. I think we should start with ycur present situa- tion and discuss what it might become. As we said before, major economic 1 oases in terms of estate taxes and inheritance taxes, lawyerst fees and other "shrinkage" of an estate at the death of the owner only occur if the value of the owned estate is high. The smaller the estate the smaller will be the actual losses both in amount and percentage. One possible way or avoid- ing major losses is obviously not to own very much proper.~. ty. This does not mean that you could not control it through various other legal n~ans, but you must not own it or retain such control that it is the same as personal 12-6 Copyright (~l967 Americans Building Constitutionally (A Trust) Printed in U.S.A. PAGENO="0748" 746 ownership. First, let's discuss the ~oundation. We are all Camiliar with the structures of colleges and universities. We discussed the benefits available to the president of a university. Does anybody in this seminar feel that the president of the University of Illinois or the Uni- versity of California or any college or university aCt- ually owns that college or university? The answer is obviously ~No". The trustees of these various insti- tutions likewise do not own these institutions. In Lact, no private person actually owns the college or university in most cases. It is clear, however, that the president, the trustees, and the other officers of the university do, in fact, totally control the activities, finances and philosopby of that school. They have complete access to the facilities and have great freedom provided that they keep the university on its chosen course of pro- vid ing educational benefits to all mankind. Private schools are essentially operated along the same legal lines as any state university. Of course, private schools often select their own trustees through elections held by the alumni, where public school trustees are elected by the general public, but the control aspects are the same, 12-? Copyright c 1967 Americans uilding Constitutionally (A Trust) Printed in U.S.A. PAGENO="0749" 747 Your foundation is analagous to the college or uni.- versity. Just as the private college or state university is dedicated to doing good for mankind ar~1 is not owned by the board of trustees or officers, your foundation is also dedicated to the good of mankind and is not owned by the board of directors or the officers. If a legal "owner" could be found, it would be the foundation itself as defined by its purpose. You may ask "Can the founda.- tbn own itself"? Philosophically, the answer would have to be "yes". The foundation "owns" itself just as you "own" yourself. The foundation, however, is strictly limited to activities and operations for the benefit of all mankind in accordance with its purpose. You as an individual, even though you may be a direc.. tor of a foundation, or president of the foundation, or executive director of the foundation, do not own any of the foundation's properties. Your control may be total, but at no time could anyone claim that you own the foun- dation property. Since you do not own it, it is not included in your estate. As you will recall, when we formed the trust, we gave total rights of control and ownership to the trustees. If you were to give your property to a trust, you would 12-8 pyright c,1967 Lericans uilding Constitutionally Trust) Printed in U.S.A. PAGENO="0750" 748 not own it. The trust would. The trustees are merely officers of the foundation. The trustees of the trust may, in ract, have title to properties owned by the trust but the trustees have the title for the use of the beneficiary or beneficiaries of the trust; that is, the trustees cannot use the property for their own purposes, but only for the purposes of the trust. Because of these legal limitations the trustees' type of "ownership" is certainly not the same as ordinary personal ownership. You are probably using a pencil or pen to take notes on this seminar. You probably own that pencil or pen. You, as owner, are not restricted in what you write with that pen or pencil, nor must you only use it for specific purposes or at specific times of the day. Without any- one else's permission you might break the pen or pencil, burn it, melt it, use it to stir your coffee, or employ it in any other personal activity. Of course, you couldn't attack another person with it or spray ink on someone else, or toss the pen into the gears of a complex machine owned by another person, but as far as your per~ sonal use is concerned, that writing instrument is yours; you own it and there are no legal restrictions on its use. However, if that pencil or pen were owned by the 12-9 Copyright c 1967 Aniericans uilding Constitutionally (A Trust) Printed in U.S.A. PAGENO="0751" 749 trust, technically you could only use it for trust pur.-. poses. It could only be used, for example, in writing trust minutes or in accomplishing trust business. If the foundation owned that pen or pencil, technically it could only be used to accomplish foundation business in the same way that a foundation..owned typewriter, labora- tory or library might be used. Although this analogy is a simple one, I think it points out the differences be- tween foundation or trust ownership which has a great deal of limitation, and the ordinary personal ownership with which we are more familiar. The main point of all this discussion is simply that you as an individual do not own property owned by a trust or a foundation. Even though you might be a trustee or a director of these organizations, theproperty owned by these organizations ~iOUld not be included 1n your estate provided these organizations were properly created and operated. The proper creation and operation is t1~ key. Your attorneys or other counsel can certainly create the proper legal words and instruments to meet the defini- tions of trusts and foundations, but it is solely your responsibility to operate these organizations correctly. If you do operate these organizations correctly, you will have total control over the property owned by the trust 12-10 pyright c 1967 ericans uilding Constitutionally Trust) Printed in U.S.A. 87-444 0-68-48 PAGENO="0752" 750 or foundation, but you will never own it. The conclusion is obvious. If you don't own it, you can't be personally taxed for it. At this time one might conclude that he should put all of his property into either the trust or foundation and own nothing. A few persons might, in fact, do this, but because the trust and the foundation cannot provide every detail and aspect of an individual's standard of living, that individual must own something to provide for these other details. For example, most of your food will be paid for by your- self.. Although the foundation will of course reimburse you for your meal expenses while on foundation business and your trust may reimburse you for meal expenses while you are on trust business, you will not always be on either trust or foundation business. Ycu will be paid a salary by either the foundation or the trust, or both, for services rendered, and you would use this salary just as you would use any salary for personal expenses, such as food. Personal entertainment, clothing, toiletries, and so-called frivolous expenses would also probably be provided out of your salary. Even though this income may be a comparatively small amount, it might still be quite substantial and might, over a period of years, l2-ll Copyright c 1967 Americans uilding Constitutionally (A Trust) Printed in U.S.A. PAGENO="0753" 751 create a taxable estate. As an illustration, let us consider an individual with a rarnily or three children and an estate or one-hair mil- lion dollars. He might decide to place $400,000 in trust and $100,000 in the roundation. He might decide to earn a salary or only $4,000 rrom the roundation and have $16,000 rrom the trust. This is an aimual income or only Lour percent or the total value or the estate. ir the estate were all cash and were placed in a bank or savings and loan, the interest~there alone would be more than rour percent. Naturally, all the estate is not cash or liquid assets, but the activities of the roundation and the earning capacity or the liquid assets or the trust would certainly bring in a steady and substantial return - probably in excess or the $20,000 the individual is earn- ing as a salary. This ramily would have a very comrort- able standard or living. Through rringe benefits and other procedures, this family might enjoy most or the elements or its standard or living through the trust or foundation. The $20,000 annual income would provide the rest. Obviously, arter individual deductions (5) ror the husband, wire and three children, the maximum federal 12-12 ~opyright (~g:~~ 1967 ~mericans Building Constitutionally (A Trust) Printed in U.S.A. PAGENO="0754" 752 income tax on a $20,000 income is $3,540.00. This would leave over $16,000 o:C funds, for personal use by this family. Over a ten-year period, if tax rates were to remain at about the 1966 level, this family would have about $160,000 for its personal use. Even if the family spent $10,000 a year on food, clothing and personal enter-S tainnient, they would still have $6,000 a year for other purposes. Over a ten-year period, that would be $60,000. By today's standards, $60,000 is not a major fortune but it is a substantial amount. If placed in a savings account at 4-1/2 percent interest, after ten years, the total amount saved would be over $70,000.* This would qualify as a taxable estate for both federal and state inheritance purposes. The point is simply that because of your salary from your trust or foundation, or both, you may accumulate a personal estate that is not owned by your trust or your foundation. Of course, you might give some of this money to your foundation or to your children or to other people and this would keep your ac- cumulation low, but it is not necessary to do this. There ~Nine year interest, compounded annually at 4.5% would bring the total saved to $73,741.71 - the tenth year of interest (eleventh year of saving) would total ~83,06O.09 (or interest of $17,060.09). 12-13 Copyright c 1967 Americans uilding Constitutionally (A Trust) Printed in U.S.A. PAGENO="0755" 753 are many alternate methods that are available Lor the employment or runds either through investment, special projects or hobbies. You1mlght decide to start another roundation or you might decide to start another trust at the end or ten years. Regardless or what you might use this "second accumulation" or property ror, you should be aware that you will own some other property In the ruture as part or your personal estate even though you might totally divest yourselr or all your holdings today. Some people might question whether $10,000 is surf icient to provide rood, clothing and enter.- tainment ror an average ramily of rive persons. First, ir our family were to spend $60.00 per week on rood, they would still only spend $3,120 ror the year. Our research has rurther shown that rew ramilies spend more than $2500 a year on ordinary clothing. (Special rurs, jewelry and most men's suits are userul over more than a single year and thererore must be depreciated over their userul time period. Jewelry is usually an investment where the costs are high. Costume jewelry has been in.- cluded as part or the clothing expense). This leaves $4,380.00 for personal entertainment, toiletries and other minor expenses. This is about $350 per month or $70 per person per month. By today's standards a whale or a lot or entertainment and toiletries can be pur-. chased with this amount. 12-14 opyright c 1967 mericans uilding Constitutionally A Trust) Printed in U.S.A. PAGENO="0756" 754 Now that we have cUscussed what you dontt own what you may come to own £rom your Loundat ion salary, I think it is clear that we have opened up a number or choices Lor the placement or your property. 12-.l5 Copyright c 1967 Americans uilding Constitutionally (A Trust) Printed in U.S.A. PAGENO="0757" 755 SECTION 13 POSSIBLE APPLICATIONS OF FOUNDAT IONS AND TRUSTS TO INDIVIDUAL ESTATES. A brief glimpse into alternate uses of foundations and trusts to most efficiently create a productive estate will give us an overall view of some of the possibilities and freedom of choice that is n~ a7ailable to you. If we can suggest the various possible methods that ~iight apply to a common situation and discuss the benefits and disadvantages of the use of each alternate solu- tion, then this should give us greater understanding of the objectivity of efficient estate planning. Once we have discussed some of the overall plans then the management details of either the trust or the founda.-. tion will become more logical in relationship to your own goals. Let us again create a fictional family with a common economic condition. Our family's name will be the Riches family and we will give 1~r~ Ribhes lovely wife and three lovely children. The eldest child is 18 and about to enter college. The next child is 15 and involved in high school. The youngest l3-.l Copyright (~) 1967 Americans ~ui1ding Constitutionally (A Trust) Printed in U.S.A. PAGENO="0758" 756 child is eight years old. The Riches own their home and are carrying a mortgage of about half the value of the house. The Riches are fairly substantial individuals and own two cars and three television sets. Mr. Riches is a sales manager for a large manufacturing company in his home town. ivJr. Riches is 45 years old and has the following properties in his estate. In addition to the home and cars, Mr. Riches owns a small portif~1io of securities and mutual funds, valued at about $5,000. Mr. and i~irs. Riches have saved about ~3,000 which they plan to use for their eldest child's first year in college. Mr. and Mrs. Riches have believed in the values of in- surance and he is insured for $100,000 and Mrs. Riches is insured for $50,000. The Riches have a reasonable amount of clothing and other incidental properties that enable them to live quite comfortably. The Riches have had a desire to help society for many years, but due to the high tax rate and the necessity to first secure the welfare of their child- ren, they have been unable to devote either substan- tial time or funds to philanthropic purposes. Now that their youngest child is becoming more self sustain- l3~.2 Copyright c 1967 Americans uilding Constitutionally (A Trust) Printed in U.S.A. PAGENO="0759" 757 ing in his individual activities and the two older children are able to manage their own aLfairs without total dependence upon their parents, and because Mr. Riches has recently enjoyed a raise in income they have decided to investigate :Coundations and trusts in an eLLort to channel their energies into broader :Cields oL activity. iir. Riches joined ABC through local attorneys and created his Loundatinn and trust. He now Laces a decision. What properties that he owns should go in which organization? He has many alternate possibili.. ties. For example, he could place his home in either the trust or the Loundation. He could place his securi- ties in either the trust or Loundation or split them up and give a portion to each organization. He could put his and his wiLe's insurance policies into either the trust or Loundation, or provide that either organi- zation, or both, be beneLiciaries. He could transLer title to his cars and other personal property to either organization or maintain ownership himselL. His sav- ings account could be distributed to either the trust or Loundation and Linally, Riches could have a 13-3 Copyright `~ 1967 Americans uilding Constitutionally (A Trust) Printed in U.S.A. PAGENO="0760" 758 substantial portion of his salary directed to the foundation from his employer, if the employer agrees. The path that Mr. Riches will choose for his family's estate will depend entirely upon what he intends to do with the funds and which alternate wIll provide the most efficient means to obtatn that objectively. If Mr. Riches sole concern is for estate protection with~- out preservation or protection from income tax and without intent to accomplish any significant philan.- thropic activity, then he would probably place most, if not all, of his wealth in a trust. If, on the other hand Mr. Riches and his family were totally dedicated to accomplishing significant philanthropic contributions to society, he would probably direct almost all of his energy and properties to the founda.- tion. Few people have objectives in either of these extremes. Most poeple, in fact, pleasantly combine self-seeking motives and philanthropic motives. It is natural and moral in today's society for men to seek security for themselves and their family. One must be certain of a comfortable material life for one's family and self, usually before one is willing to seek to help others. One the other hand, It is also a natural 13-4 Copyright c 1967 Americans uilding Constitutionally (A Trust) Printed in U.S.A. PAGENO="0761" 759 desire for most people to seek methods, procedures and projects which will cOntribute significantly to their fellowman, whether or not any personal gain is achieved~ Many philosophers, historians and observers have been amazed by the willingness o:C people in this country to help their fellowman0 Combining the best aspects of the trust and the foundation and allocating properties between the two in realistic proportion to the individual's intent, is the primary guideline for estate planning. Let us assume that Mr. and Mrs. Riches have a healthy combination of security interests and philanthropic desires. First, we would want to protect the Rich family in terms of their present standard of living and future C onifort. Their home would certainly be placed in the trust. It would not contribute much to foundation growth or activity, and in fact would probably be a heavy expense to the foundation. Because expenses are connected with home ownership; we would have to put some income-producing property in the trust with the home. Let's split Mr. ~ invest~ ment portfolio down the middle and place half of it in the trust and half in the foundation. Mr. Rich - 13-5 Copyright (~) 1967 Americans Building Constitutionally (A Trust) Printed in U.S.A. PAGENO="0762" 760 further desires to provide some vehicle other than insurance which will protect his wife in the event of his death. He has requested of his employer, and his employer agreed, to pay $5,000 a year to the Riches Foundation. The employer is entitled to take a chari- table deduction.~ Mr. Riches is not charged with attri- butable income and the Riches Foundation is funded to accomplish its proper purposes. ~`Ir. Riches' insurance policy has been amended so that a part-beneficiary be the Riches Foundation and the re- mainder would go to his trust, One of the Riches' auto- mobiles was purchased by the foundat ion, The other automobile remained in Mr. Riches' ownership and control. Since the ~$3,O0O the Riches had saved was already tax-free money, that is, taxes had already been paId to produce the savings, it was decided that the funds would remain in the Riches' personal savings account. However, all earnings from the securities or insurance policies that the Riches had transferred to their foundation and trust, would remain in the organiza- tioiis themselves and would not be paid to any one of the family. 13-6 Copyright c 1967 Americans uilding Constitutionally (A Trust) Printed in U.S.A. PAGENO="0763" 761 Because Mr. Riches was still earning a substantial salary rrom his employer, he decided not to take any particular salary or compensation rrorn either the trust or Loundation which he controlled. Let us review this common allocation or properties. iir. Riches has protected his home and some substantial incomeS-producing properties through the use or a trust. No income-tax savings would accrue to this portion or his estate, but because he neither owns the property nor has incidence or ownership, it would not be pro- bated or taxed upon his death. His ramily could re- c~ive the benerits or this property long arter his death. On the other hand, he has provided ror working in- come to the roundat ion that could be used to accomplish the various projects and activities that the roundatlon's board or directors determines rrom practically the time the roundat ion was created. Let us assume that Mr. Riches is chairman or the board and president or the Riches roundation. Mrs~, Riches is also involved as a director and orricer or the Riches Foundation. The projects that they would develop as controlling parties or the Riches Foundation would be rinanced by the contributions rrom Mr. - l~-7 Copyright c 1967 Americans uilding Constitutionally (A Trust) Printed in U.S.A. PAGENO="0764" 762 Riches' employer; Crom the securities that were owned by the Riches Foundation; and in the event or Mr. Riches' death, £rom the insurance benerits. At the discretion or the board or directors or the Riches Foundation, the Riches' children would be elected to the board or directors upon reaching a certain age, We have so rar briefly reviewed two extreme p0551-. bilities or estate planning and a common middle-or--the-- road possibility, There are many alternate plans rall- ing on either side or this middle-or-the--road type or plan that could have been used. There are also other various plans that could accomplish the same thing as the middle-or--the--road plan. For example, all or the property could have been placed in a trust and halr or t1~ income rrom these properties could have been direct- ed to the roundation, either through donation, contract or ror services rendered. On the other hand, all or the income-producing properties could have been placed in the roundatlon and only the home and motor vehicles placed in the trust. The trust would have created lncoriie by leasing orr ice space to the roundat ion and renting a car to the roundation The foundation and would Copyright(~196~1 13-6 Americans Building Constitutionally (A Trust) PrInted in U.S.A. PAGENO="0765" 763 pay reasonable rent to the trust thereby creating income to the trust. At the same time, the foundation would enjoy the remainder for philanthropic activity. Economically, each of these alternates would provide about the same result. The use of these alternates, how- ever, would be determined solely by t1~management desires of the individuals involved and their overall objectives. I think it is clear by now that the methods and pro-. cedures that would be used in your own estate pattern would be determined solely by your own desires. We hope that these desires have become clearer through the dis- cussion we have had on the foundation, and that your decision will be based on all the available information once you have been exposed to the trust management pro-. cedures. Once this basic seminar has been completed, you will be familiar with three fields of management individual economic management you have learned through experience prior to this seminar; foundation manage-. ment which has been discussed in basic principles in earlier sessions; and trust management which we are about to discuss. You can then determine your own de- sires and direct your property to those entities which will be most efficient in reaching your goals. 13-9 Copyright ® 1967 Americans Building Constitutionally (A Trust) Printed in U.S.A. PAGENO="0766" 764 y~iils Up to now, we have completely avoided discussion of tI~ most common tool in estate planning. You have prob.- ably heard more about wills in school and since you graduated from formal education than any other legal device, with the possible exception of the contract. Almost every attorney insists that you need a will to properly plan your estate. Attorneys and economic ad- visors state that it is impossible to properly direct your properties without a will. This is true in part. On the other hand, many of you are probably familiar with the book that was published recently entitled "How to Avoid Probate" by Mr. Norman Dacy. Mr. Dacy serious- ly indicted the probate system of three states and casti- gated estate planning by will in every state of the Union. His primary criticism was leveled against the potential fantastic delays before estate property was passed to the heirs and in the actual and potential scavenger actions of the attorneys and public officials who might have access to the estate funds prior to their distribution to the heirs. Mr. Dacy thoroughly stated that because all wills must be validated by some agency of the govern- ment (usually a state probate or surrogate court) that 13-10 Copyright c 1967 Americans uilding Constitutionally (A Trust) Printed in U.S.A. PAGENO="0767" 765 the will allows predators to ravage substantial estates a-id disenfranchise the rightful heirs. Mr. Dacy suggested trust techniques to avoid probate. hiT. Dacy's comments, however, had no respect to the ravages of state inheritance or federal estate taxes. In fact, his methods could impose maximum liability on estates that use them even though probate might be avoided. Trust companies, banks, insurance companies and estate planning attorneys usually direct their pro... cedures, which involve both wills and trusts, toward monetary savin~of taxes and providing liquidity for settling an estate. * I believe that both qf these factions are correct, but only half correct. In properly planning an estate, one has to look at all of the potential obstacles to getting the property in quest ion to the intended part ies. Very Lew individuals desire their attorneys or unrelated judges or state officials to share in the fruits of their labor. In addition, most individuals desire their heirs to have the full use and benefit of estate property as soon as physically possible. (It is true that in some families the husband has little or no confidence in the wife's ability to manage the estate and therefore provide l3.~.ll Copyright c 1967 Americans uilding Constitutionally )A Trust) Printed in U.S.A. 87-444 0-68-49 PAGENO="0768" 766 outside management advice or control over large sums oL money. Nevertheless, husbands still desire their wives to have the Lull beneLit oL these properties even though they have no conLidence in the wiLe's management ability.) Trusts do avoid probate. Under the law, property placed in trust by an individual prior to his death is not governed by probate courts unless the will so pro- vides. `iVills do direct property toward the persons ex- pressly intended to receive them by the deceased owner. Starting the property towards these persons does not necessarily mean that it will get there. Neither does avoidance oL probate insure that the properties will arrive in the hands oL the intended parties. \~1ithout proper procedures, Lederal and state laws may intervene or mismanagement may cause an estate to be directed by government oLLicials. All contingencies should there- Lore be considered. ABC heartily endorses the use oL trusts where they are properly created and managed to efLect the preser- vation oL an individual's estate. ABC also recommends that a will be used to provide Lor either unusual occur- rences or incidental properties. 13-12 Copyright ® 1967 Americans Building Constitutionally (A Trust) Printed in U.S.A. PAGENO="0769" 767 We discussed earlier the possibility of an individual having substantial properties held outside of either trusts or foundatiobs even though that individual might initially place all of his properties in trusts or foundations. A simple will would provide for such `excess" property holdings. ABC recommended procedures will certainly minimize the amount of property that would be controlled by a will and would thus have to go through probate, but in large estates or in rapidly growing economic conditions, the initial instruments that are recommended by ABC would not provide for all circumstances. Clothing and other incidental proper..- t:!esare seldom transferred to either trusts or founda- tions, although in most families, clothing has very little value in comparison to the overall value of the estate. Nevertheless, it does have some value and should be considered in esta~ planning. Therefore, all those other incidentals, knicknacks, sentimental items, etc., that may in fact have more considerable value,would not be placed in trusts or foundations. Man has also been found to be an acquisitive animal; that is, a being that desires to acquire material ob.- jects and possess and control them. If you are among 13.-l3 Copyright c 1967 Americans uilding Constitutionally (A Trust) Printed in U.S.A. PAGENO="0770" 768 the majority, you also have this desire and will continue to acquire properties at various natures. lIany of these, in tact, most of these properties, you might acquire through yair trust or toundation. On the other hand, you might acquire some highly valuable properties as an individual. If a distant cousin or your aunt or your a'randmother, or even your Lather and mother, or sisters and brothers, should die, they might leave part of their property, if not all of it, to you. They would not leave it to your trust or toundation, but to you as an mdi- vidual. Some people, in tact, shortly after divesting themselves of all their properties to trusts or founda- tions, suddenly find themselves holding considerable sums ot money that were lett to them trom unexpected sources. Trust procedures and foundation procedures usually take a considerable amount of time to complete, at least initially. Thus, an individual receiving or purchasing or acquiring a large amount at property as an individual, may actually hold that property tar sometime before transferring it to a trust or foundation, even though he pursues such transter at the tastest possible pace. Considering the worst possible event that could occur, l3-l4 Copyright c 1967 Americans uilding Constitutionally (A Trust) Printed in U.S.A. PAGENO="0771" 769 ii~ that individual died without a will while holding considerable amounts o:C property as an individual, then the state laws and the probate courts wald control those properties 100 percent, and without a will, there would not even be evidence or what the ownert S intentions were toward that property. It is conceivable that in.~ dividual might have desired to transrer the property to his Loundation, but without a will, the probate couft will seldom, ir ever, accept outside evidence or that intent. In other words, a will is the best possible way to ~rovide the evidence or your intentions as to who should share in your property upon your death. ABC recommends a will even though your estate may be valued at only a rew thousand dollars. In the event or unex- pected or unusual occurrences, there would at least be some provision and some evidence or what action should be taken, apart rrom state and rederal law. ir you rully concur, however, in the wh1m~ and directions or a state or rederal orricer, then or course, you would not need a will. Few people, however,are so inclined. ir you are employing part or all or the ABC recorn- mended procedures and instruments in regard to your l3-15 Copyright c' 1967 Americans uilding Constitutionally (A Trust) Prin ad in U.S.A. PAGENO="0772" 770 affairs, you should, upon completion of those procedures, review your estate plan and will, and redraft the will to meet your present and probable future needs. If you have had a complex will structure prior to your employ- trig trust and foundation techniques, you may find that your will has absolutely no relation to the new status of your affairs. Your new will might be quite simple. It might, for example, leave all of your property to your wife or your children or your foundation without any part icu- lar specific provisions or complex structures involved. On the other hand, it might provide for traditional marital deduction trusts or educational trusts, or a ser ies of owners of your property. Your will, however, will only apply to the property that is held in your name or that you control * It will not apply to property owned and used by a properly created trust or foundation. You would probably provide for insurance benefits S~rri policies you own as an individual to go into an insurance trust" to avoid probate. Since insurance benefits do not have to go through probate, there is no reason to send them through. Again, your attorney anc~ insurance man and any other economic advisors that l3-16 Copyright (~) 19~7 Americans ~ui1 :ng Constitutionally (A Trust) Printed in U.S.A. PAGENO="0773" 771 you may presently employ should review your estate to adjust its need for liquid assets. Trusts and foundations certainly minimize the need for a will, but two things must be stressed. First, your present will structure should not be changed or thrown out until you have completed all the necessary procedures which make that will inapplicable, unrealistic or Un- ~iecessary. Your estate should he protected at all times. Your intention should be clear at all times, otherwise you will subject your heirs to the whims of government officials and the ravages of maximum taxation. Second, the trust and foundation procedures do not minimize or override the values of a will as an estate planning device nor do the trust and foundation proced... ure s eliminate the necessity for a will in an intelli.. gently planned estate. Trusts and foundations do, how- ever, significantly minimize the amount of property that is controlled by a will. If your present estate and potential future estate (that is, property you hold as an individual) is ex- tremely small after you have completed trust and founda- tion procedures, then you might fall under some of the 13-17 Copyright c 1967 Americans uilding Constitutionally (A Trust) Printed in U.S.A. PAGENO="0774" 772 state laws which govern a "small estate'. In many states, if the deceased person's estate is less than $5,000 or $6,000, probate and tax procedures are usually completed within a matter of days or weeks. In these cases, quite often wills might be superfluous or involve disadvantages and procedures. Nevertheless, the will should be considered and perhaps even drafted. In these cases, it is suggested that small estates might be given entirely to foundations to avoid any federal or state inheritance taxes. Remember that in most states no inheritance taxes are owed if the estate is worth less than $20,000. No federal taxes are ever due if the estate is valued at less than $60,000. The only other concern of your administrator or your executor would then be with payment of income taxes during the last year of your life. Under the present tax system, it seems that these income taxes are more certain than death. 13.-lB Copyright c 1967 Americans uilding Constitutionally (A Trust) Printed in U.S.A. PAGENO="0775" 773 SECTION 14 TRUST BUSfl\ESS ACTWITIES Q~~on of the Trust The trust is like a business organization. It may not sell anything to the general public nor will it generally manufacture anything or provide a service, but it is a business entity in that it requires sound business manage- roent. The success of any organization is directly trace- able to the experience, intelligence and ability of the persons who manage it. If we treat both the trust and the foundation as business organizations in this light, then our primary concern would be toward finding, learning and using the proper management techniques in conducting the operations of the trust and foundation. Vie have discussed some of the basic principles of foundation management. In future meetings or seminars or discussions with attorneys, accountants or business ad- visors, you might go into greater depth on some of these basic principles, and perhaps learn some ideas and secrets of more detailed management operations. This system will be continued in our discussion of trust methods. We will review basic trust management principles and give some examples and details of how these are applied. It is hoped that they will generally apply to most of the con~ l'~--l Copyright (~1967 Americans Building Constitutionally (A Trust) Printed in U.S.A. PAGENO="0776" 774 ditions that exist in this country, but if our details do not directly apply to your situation, it is hoped that you will apply the principles directly to your individual af- fairs. Trust Clerical Wpr}~ The most important evidence of proper operation that any organization maintains is the paper work related to its organizational structure and accounting. In the foundat ion, the articles of incorporation, bylaws, and the minutes of the board of directors' meetings were the basis for the operations of the foundation. These papers re- flected the powers and limitations placed upon the board of directors and also reflected the decisions and opera- tion of the board of directors. Next in importance were the papers that related to the properties and contractual int3rests that involved the foundation. For example, the deeds to land, the certificates of securities that the foundation owns, the leas3s in which the foundation was involved, and the employment contracts between the foundation and its employees. In addition to these pa- pers, the foundation has maintained receipts and account- ing books and systems that would reflect its economic position at any time during its operation. Thesc are the same papers essentially that would be kept by any business 14-2 Copyrigh (~)l967 AmericansThuilding Constitutionally (A Trust) Printed in U.S.A. PAGENO="0777" 775 organization. Correspondence, reports, memoranda, bro.- chures, etc., are merely evidence of the details o:C what is reflected in these first three categories of paper work. The paper work involved in trust management is exactly the same. In the case of the trust, however, the first category of papers includes the trust agreement and the minutes of the meetings of the board of trustees. The minutes of the board of trustees are the bylaws of the trust the rules governing the operation of the trust, as long as they conform to the trust agreement, will operate as the bylaws of the trust. They may be amended or changed at the discretion of the trustees. The trustees have the sole power and authorization to conduct the trust business. They may delegate this power and authority but no one may supersede them. Trusts do not have shareholders which vote on any matter and most trusts do not even allow beneficiaries to have a right in management. Thus, the trustees form the supreme authority for the management of all trust business. The trust minutes are therefore of great importance. Once the trust agreement has been signed, this agreement is generally inflexible and may not be revised or changed in any way. Only the trust minutes are flexible. 14-3 Copyright (~"l967 Americans Building Constitutionally (A Trust) Printed in U.S.A. PAGENO="0778" 776 The trust minutes are written in similar style to foundation resolutions. Although trust minutes do not have to start off with the word Resolved as most corporate foundation minutes do, they must accurately and concisely reflect the business of the trust either through ratifying business already completed or authorizing business to be completed. Trust minutes may be very broad in nature or be quite specific. Examples of a broad minute would be: 1. The ivlain Street Trust hereby authorizes the trustees to own such bank accouiats as may be necessary to accomplish trust business, or 2. The Main Street Trust hereby authorizes the trust manager to establish securities accounts for investment purposes with such brokers or dealers as may be necessary, and to do all things necessary to conduct a prudent and profi.-. table investment program. On the other hand, a trust minute may be quite specific~ For example: 1. The Main Street Trust hereby authorizes John* Smith, Trustee, to open a checking account with the First National Bank of Chicago, Illinois, to provide for funds to repair and maintain the trustS-owned real estate located at 100 North La Salle Street in Chicago, Illinois. Such trust account would not exceed at any time the amount of $10,000 nor would such trust account fall below a balance of ~l00. If at any time this account requires funds to maintain its proper balance, the trust manager is authorized to request such amount from the board of trustees, or 2. The Main Street Trust hereby authorizes John Smith, Trust Manager, to open an account with A. G. Becker Inc., a Chicago securities dealer, to maintain a 14-4 Copyright,c 1967 Americans uilding Constitutionally (A Tiust) Printed in U.S.A. PAGENO="0779" 777 securities account which would consist or blue chip" securities with an initial valuation or $10,000. The trust manager is hereby authorized to do all things necessary to maintain said mini- mum valuation or such other minimum valuations as may later be set concerning thi5 securities account As you can see, the £irst two general minutes ac- complish essentially the same thing as the more speciI'ic minutes that Lollow. The dirrerences are that tIle de-. tails or operation are clearly set out by the trustees in the second minutes where general carte blanche authori- zation is given to the trustees in the £irst two minutes. It is recommended that general minutes be used more orten than speciric minutes. General minutes provide greater flexibility and enable the authorized parties to react to unusual circumstances that may occur. DISTRIBUTE E)Gi IBIT #30 The property interest documents a trust would keep are 3xactly the same as any other business organization; that is, deeds, stock certificates, insurance policies, leases, employment contracts, etc., should be kept in 14-5 Copyright ~~l967 Americans Building Constitutionally (A Tiust) Printed in U.S.A. PAGENO="0780" 778 EXJII3IT 30 TRUST MINUTES The minutes of the meetings of the board of trustees of any trust are among the most important documents drafted for that trust. Initially, the ninutes of the meetings of the board of trustees constitute both the bylaws and the resolutions of the trust. Unlike corporate minutes the resolutions passed by your board of trustees have full force and authority of àontracts and of bylaw- type guidelines. In other words, the minutes of your board of trustees will not only ratify and authorize specific acts but also create guidelines for all future actions unless overcome by a subsequent resolution or minute. riechanically, trust minutes look different from corporate minutes. Trust minutes are numbered and the numbers in each rreet- ing begin where the prior meeting ended. For example, if 14 minutes are passed at the first meeting of the board of trustees, then the first minute of the second meeting of the board of trustees ~7ill be numbered 15. Trustees should consider and vote on all minutes. If any trustee dissents from the ~.ajority he should sign the individual minute and write Dissenting' after his name; otherwise it `iill me assumed that the trustee does not object to any particular minute. Trust minutes, like the minutes of the board of trustees of your corporate foundation, need not be written by an attorney hut may be drafted by the secretary of the organization and still he proper, provided the minutes are clear and concise. Some Examples of Trust Minutes It is recommended that you refer to the corporate minute E~iiibit No. 4. Trust minutes and corporate minutes often use the same language. Trust minutes, however, do not require that a vote be counted on each minute nor that the word Resolved be used prior to recordation. The following are some examoles of trust authorization minutes~ 1. The trustees of the Light Bulb Trust hereby authorize A. J. Light Bulb, trustee, to make the purchase of 100 acres of real estate in Nestchester County in the name of the trust. The trustee so designated has full authority to do all things necessary to cor~plete this transaction. -1- Copyright (~)1967 Americans ~ui1ding Constitutionally (A Trust) Printed in U.S.A. PAGENO="0781" 779 2. The trustees of the Light Bulb Trust hereby elect Jane Light Bulb as the fourth trustee. She is hereby authorized to con- duct all necessary acts required of trustees subject only to the limitations set forth in prior minutes and in the trust agreement. 3. The trustees of the Light Bulb Trust hereby authorize A. J. Light Bulb and Jane Light Bulb, trustees, to open a checking account at the Light Bulb National Bank in the name of the trust and to conduct all trust business through this account. The desig- nated trustees are hereby empowered to do all things necessary to accomplish said acts. 4. The trustees hereby elect A. J. Light Bulb as managing trustee and appoint him with all powers to preserve and protect trust property for the coming year. flr. Light Bulb, the designated managing trustee, will be compensated for all expenses incurred in said management duties and will be authorized to do all things necessary to carry out his duties. From the above examples it is clear that the trustees can authorize much more sweeping and significant acts for the trust in one minute of few words than a corporation can through its board of directors. The trustees -~r-~ Lot subject t~ ma:v state laws. Of cours~; the ~~oard of trustees must conform to state criminal laws; that is, they cannot accomplish anything that is illegal, but except for the trust agreement there is nothing that prevents a board of trustees from authorizing any legal or proper act. Nost trust minutes should be authorization minutes rather than ratification minutes, that is, contemplation of most transactions should be accomplished prior to the act rather than reflection after it. Some transactions, however, are accomplished by trustees with- out actual authorization. In these cases, ratification by the board of trustees is important and should be acco~pli Thed as soon as possible. Some examples of ratification minutes are as follows: 1. The board of trustees of the Light Bulb Trust hereby ratify the actions of A. J. Light Bulb, trustee, in purchasing the Empire State Building two weeks prior to this meeting. The actions of Nr. Light Bulb, trustee, are expressly ratified and approved and the trust assumes all liabilities and responsibilities for these acts. 2. The board of trustees of the Light Bulb Trust hereby approve and ratify the filing of income tax return Form 1041 for the fiscal year 1966 by Arthur andersen & Associates, Certified Public Accountants. (The above resolution is only an example of the ratification and would probably not be necessary for the particular act used as an illustration.) -2- Copyright C. 1967 Americans Building Constitutionally (A Trust) Printed in U.S.A. PAGENO="0782" 780 3. The board of trustees of the Light Bulb Trust hereby ratify and approve all the acts of A. J. Light Bulb, trust manager, accomplished during the past fiscal year. The board of trustees expressly assumes all liabilities and responsibilities connected with these transactions. As you can see, the language in each of these ratification minutes is about the same. The board of trustees merely says everything that was done in the past was correct, proper and ap- proved. When this happens, the trust assumes all the liabilities and responsibilities for acts that were accomplished by trustees in the name of the trust without prior authorization from the trust. Your trust minutes should be preserved in as safe a spot as possible and perhaps duplicates kept elsewhere. If duolicates are kept, however, one should make clear which is the official copy and which is the duplicate. Notarized copies of some of your trust minutes might be used in certain cases to accomplish the opening of stockbroker accounts, bank accounts, and to ratify or approve contracts for sale or other similar instruments. Always keep your trust minutes near, up-to~date ,and properly signed. The validity of your trust depends upon such record keep- ing. Do not, under any circumstances, place a minute in the trust that would seem to say something other than what you want to do. If this happens, unnecessary taxes or invalidation of contracts might result. If you can clearly state whatever you want your trust to do or approve what your trust already has done there is probably no reason for you to consult an attorney in drafting proper trust minutes. The following rules should he kept in mind. 1. The trust minutes should be clear and concise. 2. Trust minutes should be numbered in consecutive order regardless of the meeting. 3. Trust minutes should generally authorize acts rather than ratify them. 4. Where ratification is necessary it should be ac- complished as soon after the act as possible. 5. In creating general rules governing the trust behavior flexibility should be considered. 6. In creating lines of succession for trust managers or trusteeships one should not go beyond 21 years in the future. 7. Trust minUtes should be kept in a safe place. ** * ** Copyright ®l967 Americana Building Constitutionally (A Trust) Printed in U.S.A. PAGENO="0783" 781 a safe place in proper order and in proper files. No time will be spent discussing what these proper methods involve, since all of you have had experience in keep-S ing important papers in proper places. We can only suggest that if you have been remiss in providing proper storage space for such papers in the past that you attempt to cultivate a batter habit. Experts have told us that there are well over 150 possible filing systems that are available in standard-. ized forms to properly organize correspondence, reports, receipts, billings, etc. Since the trust is not tax-. exempt or limited by any special rules in the scope of its activity, probably any one of these standard systems, or even one that you might personally devise, would do quite well to provide some organization to your trust's detailed paper work. Again, we must emphasize the nec- essity for proper organization in conducting the affairs of any business organization. Neatness does count, not only in efficiency and economy, but also in terms of providing proper evidence if and when it is necessary to present it. Distribute EXFiIB11~ #31 14-S Copyright (~ 1967 Americans Building Constitutionally (A Trust) Printed in U.S.A. 87-444 0-68-50 PAGENO="0784" 782 EXHIBIT 31 BASIC FILING SYSTEMS Trusts and foundations have five major areas of filing for which to provide: 1. Billings and other accounting functions. 2. Correspondence. 3. Scientific research reports. 4. Scholarship akmrninations. 5. Research reports based on scholarship. Billings and accounting-records are filed according to the accounting procedures you are using. The various systems of filing are described later and can be adapted to your accounting system. For your scholarships, you will want to maintain a record of all applications received and rejected as well as those awarded. The rejected applications may be important in many ways, and should be kept for several years and not discarded too soon without legal advice. Why an applicant is rejected should be carefully noted, avoiding reference to racial, ethnic or religio~.is aspects. The reasons for this should be obvious. The scholarships awarded become rather dormant until a parti- cular tine at which they should be followed up. For instance, insure that grade standards are being maintained or regular reports submitted. A follow-up system using index cards can be rciaintained chronologically so that when the date in question arrives, you will see immediately what action you should take. The follow-up for research reports can also be provided for in this way. A suggested type of index card is a part of the discourse. In conjunction with your trusts and foundations, a great deal of literature, scientific reports, reprints, brochures, and assorted documents will be received which must be maintained for many pur- poses. Included in this will be the research reports based on the scholarships awarded. To keep this material filed by subject matter is possible, but somewhat cumbersome at times. It might be more advisable and much more flexible to make a subject index card for each n.atter as it is received. The documents will be numbered and filed in numerical order. The index cards will keep the related subjects together for finding purposes even though the documents themselves are widely separated. The index card may contain a simple heading for the subject matter involved, but in many cases it may have to contain a summary of the document. This may piove a little di~f$.cult ~n~' in :~Qx~e -1- Copyright (~Jl967 Americans Building Constitutionally (A Trust) Printed in U.S.A. PAGENO="0785" 783 cases almost impossible unless the person creating the document also furnishes the summary for reference purposes. This is espe- cially true in scientific matters. NEil CLIENT RECORD Client Transfer File No. Name Location Client Address Phone Date File Source of Business Date Issued Issued By A good example of a multipurpose index card is exhibited here. It can be adapted to a great many uses in the filing operatiors of trusts and foundations. ~7hile it was used for a large legal firm and is presented in its original form as they used it, you can see the variety of information contained therein which is very much the same as used in your work. It was printed in sets of four, each copy being of a different color. The original became the rain index copy and the others were used for secondary index locations or for cross-reference purposes. For instance, a scholarship could be a~iarded to a person and the other copies used for follow-up on progress, or grade maintenance. Another copy could show the nature of his research and the titles or subject matter or any reports submitted. The form itself could be used for a multitude of purposes in- cluding a capsule file of the rejected applicants. Cards like this are useful in compiling reports that might someday be called for as to your activity and its results if they are properly r~aintained. -2- Copyright ~l967 Americans Building Constitutionally (A Trust) Printed in U.S.A. File Title Cross Ref. Service to Be Performed Partner in Charge Billing Attorney Date Client Papers Returned Date File ~~ned Date Ret'd to Trans fer Initial ~1ork To Fee Memo Filed In Fee File? PAGENO="0786" 784 Incidentally, there is no law against using the back of an index card if more space is needed. In the event of the formation of a complex or even a very simple foundation, it is often good to give it a master file number which will he its permanent identity number for filing and accounting purposes. A decimal number should be used ~.iith that basic number to identify additional developments within or under that main founda* tion. The number 254 could be given to a particular foundation. Everything under that main heading could he 254.1, 254.2, etc. This helps tremendously in the accounting process, as well as enabling everything to be filed and referred to by number. The criteria for any filing system is can you fine something when you want it. This sounds so simple, but keep it in mind when- ever you consider the type of filing system you should have. There are a great many concepts to take into account. Some of them are: ~hat are the expansion possibilities or problems if your operation becomes a great deal larger or more complex than it is now? If a paper is worth filing at all, it is worth filing properly. Otherwise throw it away. Is the system designed for a real pro at filing or is it something that a girl fresh out of school can cope with? Is the system dependent on someone's memory, possi- bly your own? If it is, it is probably not a good system. Are you indulging in short range expediencies at the risk of long-range efficiency? Is the system and the way you maintain it a reflection of your overall business efficiency and attention to detail? Or is it a hodgepodge in which you can find something eventually if you look long enough and hard enough? Volumes could be written about the eventual problems that have developed because this rather mundane and low priority subject was glossed over lightly in the development of your business. Some of these problems have proven disastrous for firms of all sizes. ~1ost of these situations can he traced to lack of intelligent planning or plain sloppy filing. Let us consider the basic filing svstem3: alphabetical, geographical, numerical and decimal. Systems such as terminal digit or Dewey decimal systems are only for certain types -3- Copyright (~)l967 Americans ~uilding Constitutionally (A Trust) Printed in U.S.A. - PAGENO="0787" 785 of large couplex trusts or foundations that can afford trained records supervisors. If your operation is as complex as an insurance firm or an engineering organization, then professional file help should be consulted. This is not always expensive. Filing equip- raent vendors, commercial school teachers, and public librarians can give considerable guidance. ~7e will concern ourselves with systems other than these two. Alphabetical filing is almost self-explanatory. It consists of merely heading up the file folders and arranging them in alphabeti- cal order. This is extremely simple, up to a point. It requires no separate index card setuo and can be changed to a more sophisti- cated system rather easily at a later date. However, extensive cross filing and/or making of additional copies for various related files may be required. The point at which it becomes more com~licated occurs when the files become somewhat voluminous. Several manuals have been written on how to file alphabetically. A good reputable booklet on this sub- ject should be purchased and i~ade the basis of your system so that succeeding clerks won't inject their own ideas into this fairly simple system. This is especially true when you are dealing primarily with names of persons or business firms as opposed to academic sub- jects. Numerical filing systems are used a great deal in legal firms, trusts and foundations and others. Such a system requires an alphabetical index card system which will refer you to a properly numbered file. The files are maintained in numerical order so that the final search for a file is relatively simple. One theory being that it is easier to rearrange index cards than it is to rearrange the files. This system can be expanded indefinitely and makes for accurate and rapid filing. Geographical filing is used primarily for trusts and foundations having extensive operations or ~7idespread activity on a continuing basis throughout a large geographical area. Each geographical location can and usually does have alphabeti- cal or numerical sub-files. In your initial search you find the area in which you are interested and then the subject ~`atter within that area. This system should also be used with a good index card system and possibly a rather extensive cross-index system. In many trusts and foundations the various systems are usually combined when they have a sophisticated file system. There is a time and place for all of then. Lowever, keep the system simple and accurate until experience dictates the appropriate route for you to follow. -a - Copyright :~ 1967 Americans Building Constitutionally (A Trust) Printed in U.S.A. PAGENO="0788" 786 Name files are used in obvious situations. In the early stages, ~I~iders listing the letters of the alphabet are sufficient, but as the volume increases, such as in the case of stud9nt records, the basic letters can be further broken do~m to expedite filing and searching. Every segment of a file will probably require a miscellaneous folder for one or two page items under that category. I!owever, don't wait too long before making a separate folder for any item that begins to accumulate papers. Usually when a subject filed under miscellaneous gets up to about five or more items, it should get its own folder. Correspondence files for the same person or firm that have no readily discernible breaking point should be broken down into time segments. In most file folders the material is arranged in chronological order. In the miscellaneous file the material is arranged in al- nhabetical order according to subject. A main file may have several sub-files or inserts when the work can be broken down into specific functions which are related hut not a part of other sections. Color coding of files can be very useful to expedite filing and information retrieval. Sometimes the file tab can be color coded or the entire folder can be of a specific color to attract attention or to identify the material. For instance, in one~ founda- tion all the correspondence files of the clients had a blue tab. In another case, a red tab cautioned the searcher or file clerk to be aware of the fact that this material was also cros3 filed else- where or merely that this file had something special about it. If red and black typewriter ribbons are used, the main heading of a folder can be typed in black and the subheading in red. A card index for subject files is highly desirable to prevent filing material under a new heading when you already have a folder for the subject and to enable other workers to locate material in the file~ !lake an index card for each subject heading and subheading. Thow for each subheading the main heading under t,hich it is classi- fied. Ithen a subject is not self--explanatory, describe on the card the material covered by it. Also, make cross-reference cards for subjects on which there is insufficient material to justify a separate folder and for subjects under which material mig'~it logi- cally have been classified, but for which you ciose some other heading. A small firm with unknown growth potential may find it very worthwhile to start a card index very early in its existence. Name and subject files can or must oftentimes be combined to make the information more functional, hut this is an easy variation of the basic systems. Keep in mind the basic criteria of a file system. Copyright (:~~:: 1967 Americans Building Constitutionally (A Trust) Printed in U.S.A. PAGENO="0789" Physical Aspects of Files 787 When typing index tabs and labels, use the briefest possible designations. Abbreviate whenever possible, omitting punctuation marks- whenever possible. Index tabs sho'ild be legible only at normal reading distance. Guide labels should be legible at b'io or three feet. File drawer labels should be legible at six to ten feet. All of the labels and tabs should be uniform and present an air of efficiency.. There is a temptation to put things together rather hurriedly in the early stages of a business. Some files will have neatly typed labels, while some created in a hurry will be penciled or written in ink. Some files will not be labeled because anyone can see at a glance what they are. Soon a rather ragged looking file drawer begins to show results. Misfiles and lost files become a little too routine and disharmony is created needlessly. Do not always buy the least expensive equipment or file folders. Lightweight file folders have a tendency to curl under and slide under other files, becoming lost for all practical purposes. File guides come loose and are lost, or snag fingers and documents if they are metal rimmed. Not an important point, hut just the source of more disharmony. It is highly recommended that a good filing equipment vendor be selected and consulted. He can advise you a great deal on proper filing systems and equipment. Almost any experienced vendor~ is required to become knowledgeable about filing systems in order to attract your goodwill. It is a little trite to remind you that his time is also valuable. There is something a little dishonest about milking a vendor of his information and then buying from your "in--law" to save a few dollars. Working with the same supplier can assure you of standard filing equipment over the years rather than the weird assortments you see in some offices that indicate that the cheapest available equipment was purchased each year with no regard to continuity. One of the poorest investments you can make is to buy cheap file cabinets. They are fine sitting in a showroom, but once they are ~-ieighted with records, things start to happen. If your firm. grows with resultant moves to larger ouarLers, the file cabinets deteriorate quickly. The appearance they present in your office is very important. Once again, it is good to deal with one sup- plier to maintain a uniform appearance throughout your offices, especially in regard to color and file cabinet height. Not all four-drawer file cabinets are the sane height. Serious thought and consultation with vendors should occur to consider the feasibility of five--drawer file cabinets or open-shelf -6- Copyright c)l967 Americans `~uilding Constitutionally (A Trust) Printed in U.S.A. PAGENO="0790" 788 filing. Open-shelf filing is very desirable because of the ease of handling large ixilky files and the minimum amount of floor space required. Despite the tern open-shelf" they do come with doors that can be locked for security if necessary. Yhether you use file cabinets or open-shelves, the filing system can remain the same. ~7ith some open-shelf filing, the tabs are placed on the end of the file folder, but not always if proper file guides are adapted to your use. The matter of fire protection as well as protection from other hazards may indicate the need for fire resistant, locked file cabinets. These are relatively expensive and very heavy. Their weight may be a factor considering the floor-load capacity of your building. The expense is relative to the risk. T7hat would happen if your building was destroyed by fire? Possibly there is a need to keep duplicate copies of vital files at an alternate location. This is relatively inexpensive and a good alternative to fireproof file equipment. This discourse has been kept as simple as possible for a reason. Filing is simple, keep it that way. If your system gets too complicated, there is good cause to suspect you are doing some- thing wrong. This subject is the opening move into the field of Records Management which is a rather lengthy topic in itself. Records Management is a matter with which you should become familiar as soon as possible. It has to do with the creation of paper within the firm as well as its receipt into the firm, its flow during its active life, and its eventual disposition. Microfilming has a great deal of application in modern business but for a great many reasons should be approached with caution and made the subject of a great deal of study. It has certain hazards as well, being rather expensive. It is not the panacea that some would have you believe. Retention Schedules should be developed as soon as possible to prevent the unnecessary accumulation of files beyond their useful life. At the sane time, these schedules should insure that nothing is destroyed prematurely. The modern tax structure and the great many government suits involving price fixing, anti-trust actions, etc., ad inf ad nauseum, make this a rather delicate subject. In fact, in some cases, you are better off if you destroy some records a little prematurely. Any retention schedule has an element of a `calculated' risk involved. In the area of Records Management, expert help should be obtained. If any specific advice is desired on any related subject, please feel free to contact the author for such guidance as might be possible. Joseph A. Greene Records Management Services,inc. 809 T'~est Chicago Avenue Chicago, Illinois 60622 ***** Copyright 1967 Americans ~uilding Constitutionally (A Trust) Printed in U.S.A. PAGENO="0791" 789 Although it would probably not be necessary for you to rnn out and purchase a brand-new bank or riling cab~- mets or invest a great amount of money in fireproof safes or other such equipment, it would be wise to de- vote a specific place and drawer that would be safe, either in your business office or home for the proper riling of initial records concerning your trust and foundat ion. It is also highly recommended that each organization's records be kept in a separate drawer or separate place, or otherwise separated, so that records cannot be intermingled. Whether you are involved in a trust or foundation, or both, or connected with a bus- iness corporation, partnership, joint venture or other similar organization, it is imperative that you keep all records separate. Your trust is not yourself Your foundation is not yourself, and neither are any o~ the other business organizations in which you deal. They should be res- pected as independent organizations. We have emphasized this before and can only emphasize it again, that clear, neat and organized records showing your clear relations apart from those of the organizations' themselves must be kept. If you as an individual write a letter to 14-7 Copyright (~`)l967 Americans ~T'ui1ding Constitutionally (A Trust) Printed in U.S.A. PAGENO="0792" 790 the board of directors of your foundation, it might physically involve only passing a letter from your left hand to your right hand. However, you should keep a copy of the letter in your records and file the letter you want the foundation to recognize in the foundation's file, just as if the foundationwanm located thousands of miles from your home. This may seem like extra work that is unnecessary, but it is only good business practice. If you treat your founda-. tion, your trust and any other organization with which you are connected as you would treat your plumber or General Motors or the New York Stock Exchange or some other related, independent person, then you should have no trouble in maintaining clear, concise, and proper re- cords of the operations of your organizations. By in-. stilling this habit in yourself with correspondence and other caper records, you should have no trouble in handling the more important income and funds of these independent organizations. Later on we will discuss which organizations should, in fact, pay for certain expenses and the primary guidelines which will govern these payments, but for now, we can only suggest that it is highly improner for the foundation to pay trust Copyright(~)1967 14-8 Americans JIuilding Constitutionally (A Trust) Printed in U.S.A. PAGENO="0793" 791 expenses or vice versa. This is obvious, but we wish to make it quite clear. Prpprty_Mafl~~~~~~ The trust deals with real estate exactly as an in- dividual deals with real ~state. A trust may own or lease real estate and a trust may manage real estate for busi- ness purposes. A trust may be a landlord or a tenant, and a trust may use I'or its own purposes, property that it owns. A trust may pay all the taxes that an individual must pay concerning the ownership or management of real estate. A trust, furthermore, should have `5 inC- surance or renter's insurance for property it owns or leases. A Trust would have to complete all the documents and pay necessary taxes on any properties it buys or sells It accomplishes all of these transactions however, in the name of the trust, and not in the name of any individ- ual. The trustees of the trust sign all the important documents as trustees. Trusts generally do riot have seals or special signatures and all transactions are accomplished through the handwritten signatures of the trustees. In most states arrI under most laws of all 14-9 Copyright (~)1967 Americans Building Constitutionally (A Trust) Printed in U.S.A. PAGENO="0794" 792 nations, trusts enjoy no special benefits different from Individuals. There may be some exceptions to this rule of thumb, but these are usually local in nature and ~rould have to be investigated by local experts or attorneys. ISTRIBUTE EXHIBIT ~32 Property Mana~~ment - Personal Property Trusts may own all kinds of personal property in the same way as individuals. Trusts should obtain bills of sale when they purchase, exchange or trade for any significant amount of property, and trusts should obtain receipts for any large payments. Trusts may also give receipts and bills of sale to others when they are in- volved in similar transactions. Again, the procedures and records that would have to be accomplished or main- tained are exactly the same as those that are required of individuals. D ISTRIB~ EXHIBIT ~3 l4~-~iO Copyright (~)1967 Americans ~ui1ding Constitutionally (A Trust) Printed in U.S.A. PAGENO="0795" 793 EXHIBIT 32 TRUST O.7NERSHIP OF REAL ESTATE by. Walter J. Janus Janus Realty Institute I. BENEFITS A. Privacy ?rovided Since your trust is not required to disclose confidential trust affairs to the public, the purchase or sale of real estate can be carried on in privacy. A trust provides an anonymity which is possible in no other way. As the trust owns the property, the grantor is shielded from possible harassment from opportunists, developers, schemers, and even from friends and relatives. B, Personal Liability Eliminated As with corporation-owned real estate, trust ownership provides relief from personal liability. C. ~ssured Distribution The trust gives the grantor creating it assurance that uoon his demise, his property will be dealt with precisely as he wishes. Thus, the property is protected against falling into the wrong hands, and you have greater assurance that your intended provisions will he faithfully carried out, particularly in providing support for your primary beneficiary who receives income for life, and security for those who receive principal and income later. B. Financing and Development Acquisition of real estate by a trust provides a modus operandi for financing and orderly improvement and development. E. Improved ianagement Trust ownership enables trustees either to manage pro- perties theirselves or to emiDloy professional management, which-- ever is deemed most feasible by trustees. Copyright®l967 - 1 - Americans Building Constitutionally (A Trust) Printed in U.S.A. PAGENO="0796" 794 Regardless of method of management selected, procedures for development, conservation and enhancement can be outlined and authority granted by the action of the trustees and recorded in trust minutes. F. Perpetuity Trust ownership of real estate unlike individual owner- ship or partnership ownership is not subject to death, dis- agreements and possible litigation. G. Simplified Conveyance In the disposition of `roperty, when assets are conveyed it is not necessary to go through the added expense of title searches and title insurance and all other expenses incidental to the transfer of ownership. Having been paid when the property was conveyed into the trust, at the time of acquisition, there is no repetition of these expenses upon the demise of the grantor all that is required is for the simultaneous resignation of the outgoing trustees and the appointment of new trustees. II. TRUST USES OF REAL ESTATE Trusts use real estate in much the same way business and professional men do to carry on their operations and activities, which generate income or carr1 out the ~ur~oses and objectives o~ their orçanization. A trust can do any and all things relating to real estate than an individual can. For this reason trusts fall into the private sector's sphere of operations. Eli. ~4ARKETIL~G ACTIVITIES Trust owned real estate may involve the trust in~ marketing, financing, development, and maintenance. In addition to buying and selling decisions, marketing activities may include leasing, renting, trading and exchanging. Decisions to acquire or dispose of property may be made by the managing trustee or any- one he may choose. He may delegate such authority to an associate trustee, a member of the family or to a Real Estate Broker who does this for a fee. IV. ~ROKERACE Small family trusts as a rule do not do a sufficient volume of business to afford the heavy load of a full time salaried Peal Estate ~3roker. Therefore, an outside broker is called in as needed. This is usually the most efficient way for a small trust to handle their real estate transactions. Copyright c 1967 2 - Americans uilding Constitutionally (A Trust) Printed in U.S.A. PAGENO="0797" 795 A licensed Real Estate Eroker Pealtor T:ho acts as an agent for a buyer and seller is required by a code of ethics to keep himself informed as to movements affecting real estate in his community as to property interests, market values, etc. They are usually professionally competent in the technical matters of handling ~roperty ~dchss listing, advertising, amd showing He is knowledgable concerning paper work that goes with th~ selling or buying of property. He will also have the information about the current mortgage market. V. PROPERTY ~1ANAGEI~ENT Effective utilization of real estate requires good adminis- tration. 7hen a trustee accepts the responsibility of the rsanage~ent of the family estate, he is subject to an ii~plied pledge to protect and promote the interests of the tru~t. The growing comolexity of the problems involved in planning, operating, and maintaining trust property and real estate in general has resulted in the growth of ~roperty management specialists, and the trust manager nay at soire time or another leave the management of a particular building in the hands of a certified property manager. Typically, the property manager acts for the trust in all matters pertaining to the operation of the property which is under his direction, including leasing, renting, rental collection, selection of tenants, repair, maintenance, renovation, grounds maintenance, and even in issuing an auditor's report on the operating cost and surplus income. The entire portfolio of properties may be placed in the hands of an agent, or sometimes only a single property. The choice will be at the discretion of the trustees, or directors, whichever the case may be. VI. FINANCING Acquiring property by purchase, gift or grant, provides a modus operandi for financing the orderly development anci con- servation of trust assets resulting in a faster build-up of the estate. The financing of the ownership of trust properties and the use of its holdinga is carried on by financial insti- tutions, or private investors, or by loans from other not-for- prof it organizations or other trusts. . As a rule, real estate type of financing is long range in character and usually provides for the pledge of greater or lesser degrees of interest in real property as security for the loan. Copyright c~ 1967 Americans Building Constitutionally (A Trust) Printed in U.S.A. PAGENO="0798" 796 VII. APPRAISING Any Trustee's decision about the value of real estate held by the Trust must be based on an appraisal. An appraisal is an opinion of value and its accuracy depends upon the basic competence and integrity of the ap~raiser. The fundamental purpose of an appraisal of Trust property is to estimate value. The value most commonly sought is market- value, or, the amount of dollars a parcel will bring in the open- market. However, there are other types of value depending on the use for which the client requires the appraisal. An aopraisal also provides an authoritative basis for taking an action or establishing a policy. The need for an appraisal of trust property may arise for any of many reasons,including the following 1. In connection with a transfer of o~mership. 2. As a requirement related to financing or crecit. 3. To establish just compensation in condemnation proceedings. 4. To arrive at an insurable value. 5. Liquidation value for forced-sale or auction proceedings. 6. To assess value for ~axation. 7. To merge with other trusts or other business entity. The above list does not include all the functions of appraisals but does indicate the broad scope o~ professional aopraisers' activities in which the trust ray have occasion to play a part. VIII. RECORDATION ~?hen real estate is bought, the deed should be recorded in the County Recorder's office to protect the new owners. This recording of real estate transactions is usually handled, in some states such as Illinois, by the lawyer representing tile buyer. In other states, this may be part of the Real Estate Broker's service or if there is a mortgage involved, tile financing institution who makes the mortgage for the buyer takes care of these details. Clear title to property is very im!Dortant. Before a real estate sale is closed, title to the property is brought down by the title company in that county and that service is charged to the seller. The lawyer for the seller or the financing company may order this to be done. Copyright c 1967 - 4 Americans uilding Constitutionally (A Trust) Printed in U.S.A. PAGENO="0799" 797 At the closing of the sale, when clear title is turned over to the buyer, along with other documents, inclu~in deed papers, showing taxes paid, etc., Federal Revenue stamps are affixed to the documents. Stam:s indicating more than th~ 3ale price nay be put on. Copyright "E' 1967 - 5 - Americans uilding Constitutiona~J.Y (A Trust) Printed ~.n U.S.A~ 87-444 0-68-5 1 PAGENO="0800" 798 EXHIBIT 33 PURCiASE AND SALE OF PERSONAL PROPERTY Trusts may own all kinds of personal property in exactly the same way as individuals. The sale of any personal property is quite simple. Legally, it is accomplished in the following four steps: 1. Offer - The person who owns the property usually offers it for sale, or the person who desires to purchase the property submits his bid for the property. Specifically, if you owned a large piano you might place an ad in the newspaper offering the piano for sale, or a friend of yours might see the piano in your home and offer you a specific price for the piano, even though you may not have indicated that it was for sale. 2. Acceptance - Once an offer is made by either a buyer or a seller, the other person nay either accept or reject the offer. For example, someone may answer your ad in the newspaper and accept your price for the piano you advertised, or you may decide that the price offered by the potential buyer in the second example is nore than adequate for the piano and you would sell it to him. Either of these acts is acceptance of the original offer. 3. Transfer of Property - The third step involves the ~üal exchange of the piece of property for the money or funds constituting the purchase price. In other words, you would give the piano to the buyer in exchange for his cash or check for the agreed price. 4. Legal Instruments of the Transfer In most sales of personal property the only legal document that might appear would be the bill of sale, but in small sales, this is not necessary. For example, when you purchase groceries at the corner store you do not ask for any receipt or complex contracts of sale. You put down the money on the counter and the grocer hands you the bread and milk. He may also hand you a receipt but he does not have to. You have got the bread and milk; he has your money and the sale is essentially completed. In cash sales of larger items a bill of sale is often exchanged; that is, the seller usually signs a piece of paper that indicates that he releases all title to -1- Copyright (~)l967 Americans Building Constitutionally (A Trust) Printed in U.S.A. PAGENO="0801" 799 the goods (usually a car or other large piece of property) in exchange for a certain price. The bill of sale acknowledges that that price has been paid and that the holder of the bill of sale is a proper titleholder. In more complex sales `.of personal property there may be a time sale basis for the transaction; that is, a conditional sale contract or installment credit contract might be executed which would force the buyer to make payments on a periodic basis and not assume title to the property until those payments were completed. There are several other variations of this type of contract which we will not discuss. Offers and Sales by Trusts A trust will own personal property, such as stocks, bonds, and other similar items just as an individual will own them. The trust personal property will be kept in trust-owned storage space or leased space. The trust will keen records on the values and descriptions of the personal property it owns. The trust may offer such property for sale in all the conventional ways. For example, classified advertisements, notices of sales, and oral announcements to the trustees. These offers are just as valid by a trust as by an individual. Sales by Trusts The trust will sell property and should execute a bill of sale in all cases where theproperty sold or purchased was of sub- stantial value. The board of trustees of each trust may establish what is substantial value or not, but for a beginning guideline we would suggest $100 as a valuation limit. In other words, sale of property under $100 would probably not require a bill of *$ale, but any valuations in excess of $100 would require a bill of sale. Recording of Sales or Personal Property With the exception of securities, cash sales do not have to he recorded to make them valid. If a bill of sale is given, this is sufficient, but in terms of personal property the old saying that `possession is nine-tenths of the law" is true. Securities, because of their unusual nature, usually have to be recorded with the transfer agent of the corporation in question whenever they are sold. This should be accomplished by the buyer regardless of his identity. Stockbrokers will often accomplish this paper work at small or nominal charges uoon notif i- cation by the purchaser. Tine sales are a different story. In most states governed by the Uniform Commercial Code, time sales of certain property should Copyright ~l967 2 Americans Building Constitutionally (A Trust) Printed in U.S.A. : PAGENO="0802" 800 be recorded at a local state recording office (usually the County Recorder of Deeds) in order to protect the lien title of the seller until the contract is satisfied. This is often the law where automobiles are involved or large electrical utilities. Usually the seller has the burden of recording such instruments. In some states time recording is only required where the seller is a regular dealer, since most trusts are not dealers that would not be governed by such laws. It is recommended in the case of tine sales of large valua- tions that you consult with an attorney in order to comply with all recording laws to make the sale valid. Use of Personal Property~ Since all personal property owned by a trust is owned by a legal entity and not any individual, in order for an individual to properly use the personal property owned by the trust for his personal benefit, a lease should be executed or express permission be granted by the trustees through a trust minute for the use of such property by an individual. Either way is acceptable under the law, but some legal evidence of approval must be given. -3.- Copyright® 1967 Americans Building Constitutionally (A Trust) Printed in U.S.A. PAGENO="0803" 801 mit ial Management Procedures ora Trust In starting any organization certain steps must always be accomplished beI~ore actual operations can efficiently begin. Some person has to be given authority to accomplish business. Accounts have to be opened with creditors, depositaries and other related business organizations. Forms have to be prepared; letterheads have to be ordered; and an accounting system must be started. Although trusts, once they are ini- tially begun, operate under normal business practices associated with individuals, because they are fictional organizations (that is, not natural persons) they must use special procedures to accomplish these initial steps,~ ~ Accounts - Trusts may open checking accounts or savings accounts in banks usually without too many problems. However, banks are generally over-cautious in allowing trusts to open bank accounts. Bank off i- cers and employees have been indoctrinated with pro- cedures that were developed during the Seventeenth Century and have not varied much since. They usually desire a copy of the trust instrument which created the trust before they will authorize a new checking account for a trust. They usually attempt to photostat 14-il Copyright (~)1967 Americans ~ui1ding Constitutionally (A Trust) Printed in U.S.A. PAGENO="0804" 802 or otherwise copy the trust agreement ror their own records and research. This is due to the Lact that banks sell trusts and they wish to be aware or any new developments in the rield. Since the trust agree- ment explicitly relates to property in which you have an interest, you may not desire your trust agreement to be on public record. Generally, most bank em- ployees use little, ir any, discretion in discussing the arrairs or an account. It is the rare bank starr that has been properly trained to respect the privacy and intimate dealings or its customers, large and small. Due to these common practices, we recommend that ir you can resist publishing your arrairs in a bank's records, that you avoid it with all possible strength. Banks do not need your trust agreement nor a copy or your trust agreement to open a trust account. They do need clear authorization to open an account in a rictional name, but this can be provided by a nota- rized statement through the trustees or the trust or through rererence to a public recordation or the trust, ir this has already been accomplished. As a last resort, you would orrer your trust agreement to open the account. However, we would caution you that there 14-12 Copyright ~~)1967 Americans ~uilding Constitutionally (A Trust) Printed in U.S.A. PAGENO="0805" 803 is usually more than one bank in your geographic area and that you might make this Lact quite clear to the orricers or the bank or your choice. Do not hesitate to shop around ror the best possible terms in which to open a trust account. ir your trust is erriciently operated and successrul, there is a high probability that great sums or money will* be transrerred through your trust checking and savings accounts. These sums would bring in a substantial return to the bank involved. Remember, banks do not pay any interest on runds in checking accounts, but nevertheless earn sub... stantial income on runds deposited in checking accounts. Always remember that you are a potential customer and they are a potential servant. Don't be burraloed by marble halls or obnoxious bank employees. In no case, need you show any bank orricer trust minutes, trust account records, or trust employment contracts. Benericial interest certiricates and property deeds also have no bearing on any bank operation. Your bank need not know your trust~s insurance company, agent or securities broker unless you desire to tell him. The only inrormation your trust's bank needs is the authori- zation to open the account in the proper name and the Copyright (~)1967 l4-l3 Anericans ~ui1ding Coustitutionally (A Trust) Printed in U.S.A. PAGENO="0806" 804 required funds to meet all withdrawals. Eventually, if not immediately, your trust might establish a sub-. stantial line of credit with various banks which it would use to finance major transactions. Trust Ma~ag~ - Every organization that does busi- ness with unrelated parties requires an agent or someone that will assume the responsibility of conducting the negotiations, signing the contracts, and dealing with all other persons. He is sometimes called the presi- dent, executive director, or administrator, or in the case of a trust, might be called the first trustee, or trust manager, or any other name indicating his position. The board of trustees of any trust has the power to designate any person to be trust manager. That person may either be a trustee or may be hired as an employee. Compensation should be paid for services rendered where such services are extensive. If the trust manager is a trustee, that person may decide to waive any corn-. pensation, or he may be paid as if he were an indepen- dent employee. The trust manager would have all authority necessary to conduct trust business. He would be the person who would examine properties, sign most of the checks, and 14-14 Copyright (~) 1967 Americans ~uilding Constitutionally (A Trust) Printed in U.S.A. PAGENO="0807" 805 report to the trustees on the proper operations and transactions which involve the trust. The trust manager would, in coordination with the rest of the trustees and any other subordinate employees, coordinate all the records, maintain the accounting system, and use his best efforts to insure the efficient and economical operation of the trust. The trust manager is elected through a minute of the board of trustees. Such a minute may be either specific or general in nature. Trust Office Space The trust may pay a trustee for the use of space to keep the trust records and from which to conduct trust business. ABC firmly believes that one should pay for services rendered. If the trust uses space owned by another organization or indi- vidual, it should seriously consider paying some form or rent or compensation. If the owner of that space or utility being used decides to donate the space for the use of the trust or waive the rent for a period of time, the trust should note this in a minute and grace- fully accept the donation. It must be emphasized, however, that there is nothing wrong legally or morally for the trust paying for space it occupies or uses. l4.-15 Copyright ~ 1967 Americans Building Constitutionally (A Trust) Printed in U.S.A. PAGENO="0808" 806 This would also include reimbursement or paying ~or utili- ties or other equipment. Buying and ~ Leaeho1dInt~r~- The trust is able to buy and sell and lease property in the same way that an individual does. The trustees or delegated officer (like the trust agent or manager) will sign all the contracts and will bind the trust in pur- chasing and sales contracts arid in any lease contracts that might be executed, whether the trust is a landlord or tenant. The trust name, such as the Main Street Trust or Anderson Family Estate (a Trust) will be used as the primary contracting party. In other words, where you would Lise your own name when you sign a lease, the trustees would sign in their own names Lor the trust names when they sign a lease Lor a trust. Again, we are simply applying a principle that a trust is a diUerent person than you as an individual. The trust will sign contracts in its own name just as you would sign con- tracts in your own name. Trusts may buy and sell and lease property in all legal ways. Trusts are not exempt Crom personal property or real estate taxes and where state or local law require tax 14.46 Copyright (Z~)l967 Americans Building Constitutionally (A Trust) Printed in U.S.A. PAGENO="0809" 807 payments, there is usually no exception made to property owned by a trust. The trust not being a tax~-exempt insti- tution would, of course, pay all transfer taxes or re- cording fees, where necessary, upon the purchase of any property. If the trust leases property it is recommended that renters' insurance be obtained to protect the trust's interest in the leased property. These statements concerning trust procedures may seem simpleminded and because they are quite easy to state we cannot devote a great amount of time nor do we wish to devote a great amount of material to these statements. ~e do, however, wish to emphasize their importance. The trust is not tax-exempt nor is the trust involved in any procedures that are significantly dif- ferent from those that an individual would use in good business practice. If this basic rule of thumb is remembered or applied in all business transactions the trust will not violate any laws. Two other things must be emphasized. First, your trust is different and independent of the trust founda- tion (the family foundation). Whenever the word foundation" is used we are discussing a 50l(c)(3) tax-exempt organization. The management procedures 14-17 Copyright ~) 1967 Americans Building Constitutionally (A Trust) Printed in U.S.A. PAGENO="0810" 808 for this type of organization were discussed in the mi.- tial sections of this seminar. Those procedures apply to any organization that is tax-exempt under Section 50l(c)(3) of the Internal Revenue Code, regardless of how the organization was created. Second, trust-owned property or trust-leased property is not owned or leased by any individual. Even if you are a trustee of a trust owning or leasing substantial amounts of real estate or other property, you cannot treat this property as your own. It must be respected as the property of another separate organization. You, as a trustee or trust manager, may have access to this property or use of the property under advantageous cir- cuinstances. Nevertheless, it is not yours and should never be claimed to be yours. If a person does claim trust property to be their own, this claim might be used to throw the property into probate upon that per- sonts death. The disadvantages of probate have already been discussed. Taxes - As stated earlier, the trust is not tax- exempt and must pay all normal income taxes, excise taxes, personal property taxes, real estate taxes, etc., as levied under federal and state law. Trusts under the 14-lB Copyright (~Jl967 Anericans Building Constitutionally (A Trust) Printed in U.S.A. PAGENO="0811" 809 federal income tax law, however, enjoy the few procedural benefits that individuals do not. Trusts, for example, are not required to pay income tax on income received and disbursed to beneficiaries within the same fiscal year. That is, any income earned by the trust, if distri-. buted within that same fiscal year, is not taxable on that yearts return. If the trust retains income, how.- ever, (over $100 in any particular year) it must pay income taxes at individual rates. Since the trust is liable for income taxes, it may also take advantage of the standard business deductions and other exemptions allowed by the Internal Revenue Code. Any taxes paid are deductible from gross income. Charitable contribu- tions are deductible. Interest on loans is deductible. However, mortgage payments or capital improvements on trust-owned real estate are not deductible. One sug- gested method of avoiding capital improvements would be to classify one trust checking account as a repairs account to accomplish the repairs and maintenance of real estate. If the activities connected with main- taining or repairing trust real estate are not obvious capital improvements, then the repairs and maintenance costs are also deductible. 14-19 Copyright (~)1967 Americans B~ii1ding Constitutionally (A Trust) Printed in U.S.A. PAGENO="0812" 810 ABC does not and cannot teach its members tax law or tax riling principles, and therefore we must recommend you to your tax lawyer or accountant for more detailed and specific advice on the actual conditions and status of your trust properties and business activities. States do not usually levy any special taxes against trusts, but trusts are liable for real estate and per.- sonal property taxes in most locales. Reference should be made to state law in each situation to determine the actual liabilities for these taxes. Few states require annual reports and those states that do, only apply this law to certain kinds of trusts. Normally, ABC does not recommend trusts in these part i- cular categories and would, therefore, advise you that your trust would usually not file any annual returns or reports with your state. The Internal Revenue Code, however, requires that trusts file an income tax report if they earn $100 or more in any fiscal year. This would be filed on Form 1041. Many attorneys recommend that every organization or person file a return every year, regardless of the amount of income that is earned by that person or organization; that is, even if your trust were to earn less than ~l00 in any year, it is l4.-20 Copyright (~`)1967 Americans Building Constitutionally (A Trust) Printed in U.S.A. PAGENO="0813" 811 recommended that your trust file a return showing a large number o:C zeros. ~Ihen a return is filed, the Treasury must act on that return within three years or forfeit all right to do so except in cases of fraud. Consequently, the filing o:C an annual return, regardless of the amount of income, is advisable. Use of Trust ProDer~y~ Valuable personal property is often transferred into trusts. Usually, clothing or costume jewelry or utilitarian small appliances are not transferred into trusts, but mink stoles, engagement rings, or highly valuable jewelry are usually protected from probate and liquidation by trust procedures. Quite often, jewelry that is purchased amounts to investment, where gem values appreciate. Any person may use the furs or jewelry placed in trust upon the express permission of the trustees. This permission is usually evidenced by a lease agreement, a note of permission, a minute of the board of trustees, or combinations of these procedures. The trustees may lease properties owned by the trust for any values con- sidered reasonable by the trustees. Again, this only applies the principle that the trustees control all trust activities, and that nothing may be properly done Copyright®l967 1421 Americans Building Constitutionally (A Trust) Printed in U.S.A. PAGENO="0814" 812 without their permission. It is recommended that the lease procedure be used, coupled with an authorizing minute in the records of the board of trustees in all cases where an individual desires to use trust property. The identity of the individual is immaterial. If the trust property is leased to a business, nor- xnal credit lines and credit procedures should be observed; that is, if the trust is leasing to a business that is just starting, it would obtain co-signatures from the individual officers or directors of that business as well as executing the lease in the name of that business. This is the same procedure that is used by a bank or other large management companies and should be used even though the officers and directors of the tenant business are closely related or identical to the trustees of the trust. Here we are only applying common business practice to further evidence that the trust is a separate and independent person from the corporate business that might be renting the property or the individual Who comprises the trustees or officers and directors of the corporation. If any questions arise, it is strongly urged that you consult with a knowledgeable attorney. l4-22 Copyright (Z)1967 Americans fl~ui1ding Constitutionally (A Trust) Printed in U.S.A. PAGENO="0815" 813 The Use of Attorneys and Accountants - Modern legislations have created an extremely complex legal system in every state in this country and in the Federal Govern- ment system which controls every individual in this country. It has been estimated by the Yale Law School that well over one million laws affect every single indi- vidual in the country from the time of their birth until the time of their death. These laws emanate from not only the U. S. Congress and the hundreds of agencies that are formed and administered by the President of the United States, but also those created and governed by state legislators and governors; by county commissioners and county management boards; by city councils, local real estate tax commissions; consolidated district boards (most commonly found in rural school systems); zoning boards; and the hundreds and thousands of other small government-like agencies that derive their power from various laws and regulations. It has been estimated that a citizen living in a suburb of Chicago, Illinois may be subject to the laws and regulations of over 117 lawmaking bodies, such as, elementary school districts, high school districts, junior college school districts, city water commissions, county water commissions, county sewage 14-23 Copyright "~ 1967 Americans Building Constitutionally (A Trust) Printed in U.S.A. 87-444 0-68-52 PAGENO="0816" 814 commissions, county industrial waste commissions, city air pollution commissions, city council, zoning boards, city police systems, county sheriff's office, state police organization, and the Illinois Crime Commission. It is obvious that from even this partial list of "governments" that have some control over a portion of your lire that many or them overlap in their jurisdiction and fields or interest. This does not necessarily mean that they are consistent in their determination of what the law should be. In fact, it is quite the contrary. Often you will rind conflicting regulations and laws which govern the very same action or activity in which you wish to engage. These conditions seem to imply that you would require an attorney to advise you before you ever stepped out or your bed in the morning or took a deep breath or what might be polluted air. Obviously, this is not true. Most people, even those involved in substantial business and financial transactions do not need nor request an attorney's advice for every- thing they accomplish. Once an attorney has advised you on establishing a proper system of action or procedures which will guide you, it is generally not necessary to call him up every time you want to do something. You do, 14-24 Copyright (~)1967 Americans ~uilding Constitutionally (A Trust) Printed in U.S.A. PAGENO="0817" 815 however, call an attorney when an emergency arises or when you contemplate a complex or specific transaction. The same will be true of the trust. You will call an attorney to help establish the procedures at the creation of the foundation, but once these are established and you are able to meet the day-.to-day demands of operation, you will norr~ially not require expert advice. However, if an emergency should arise or an unusual transaction should develop you would call an attorney. The same is true of the trust. Once procedures have been established, you do not need to call an attorney every other day f or advice. It is Important, however, that the proper procedures be established quite early in the operation of the trust or foundation and that those administering these procedures understand the reasoning and alternatives that form the inherent elements of the procedures. In other words, if you know what you are doing, in terms of basic methods, you should not have to call for help very often. You may wish, however, to retain an attorney or other management counsel to keep up the paper work of your trust or foundation or other business entitles. Quite often people are unwilling to take the time to write out the paper work, minutes or contracts or leases, or are simply l4~-25 Coyright ® 1967 Americans Building Constitutionally (A Trust) Printed in U.S.A. PAGENO="0818" 816 unsure ol' themselves in attempting to draft such language. For annual retainers, most attorneys are quite willing to maintain such records Lor their clients. The choice 01' a knowledgeable counselor is the most important criteria to be considered if this method suits your intentions. The Internal Revenue Code has been criticized as the most complex and ambiguous legal system ever devised by an American citizen. The blame clearly rests on the shoulders of thousands oL individuals who have written and interpreted the code. It can be said without Lear 01' contradiction that no one person in the entire United States understands the entire Internal Revenue Code in any depth. There are experts on various sections oL the code and there are clear interpretations oL a few pro- visions, but generally, even the experts Lail to agree on any single interpretation and contradictory case decisions can be found on practically any point of the code. Consequently, to suggest that a layman, or even an expert tax lawyer or accountant, would be able to give ironclad advice on the Internal Revenue Code would be presumptuous, if not mythical. It is clear, however, that the, code does require certain things. First, it requires that logical records 14.-26 Copyright (p1967 Americans ~ui1ding Constitutionally (A Trust) Printed in U.S.A. PAGENO="0819" 817 be maintained of some sort. Second, it requires annual reports on financial transactions of almost all kinds that occur during any particular fiscal year. Third, it requires tax payments based upon ambiguous formulas from those who are expressly liable for payment of these taxes at the end of each fiscal year. These requirements have created the industry of accounting in the sophistication it enjoys today. Prior to extensive taxation, bookkeepers and accountants were maintained primarily to supply inf or-. mation relating to the economic conditions of a business at any particular time; that is, they would be able to relate all the figures and transactions involved in a business situation and report on the profit or loss of a company's entire operations or the profit or loss of any individual operation. As the tax system became more com- plex, the accountant's job became equally complex. Today an accountant must not only be able to compute the profit or loss of a company's operations, but also to classify or characterize each of these operations into a definition that would provide maximum tax advantages under the Internal Revenue Code. Because the trust is a taxpaying entity, accounting procedures that have been developed to save taxes or to clarify tax situations are valuable, and 14-27 Copyright (~~) 1967 Americans Building Constitutionally (A Trust) Printed in U.S.A. PAGENO="0820" 818 in addition, even though the roundation is tax~-exempt rrom most rederal income taxes, it should stlll maintain account- ing records that would take maximum advantage or the Internal Revenue Code's procedures in the event or loss or tax~-exompt status. ABC thus advises and recommends that an accountant or bookkeeper or some skill be maintained ror any trust or roundat ion that has substantial assets and a large number or transactions. ir your roundation or trust maintains a simple bookkeeping system and does not involve itselr in any operations or more than rour rigures, then an accoun- tant's skills would not seem to be as required as in more substantial economic conditions. Trusts would rile Form 1041 to the Internal Revenue Service. Foundations would rile Form 990-A and possibly 990.-T, as conditions require. These rorms vary signiricantly and contain great quantities or technical terms which persons not acqualnted with modern accounting procedures would probably be unable to decipher, Even though your trust or roundation may not retain an accountant on a weekly or monthly basis, it is advisable that a trusted accountant be maintained or retained to review the organization's economic condition annually. 14-28 Copyright (a') 1967 Americans Suilding Constitutionally (A Trust) Printed in U.S.A. PAGENO="0821" 819 SECTION 15 PRIVACY Details on the Privacy Aspects of the Trust We have stated that privacy in relation to your financial transactions and property holdings is possible through the use of the trust. The methods employed are not original to this era, nor are they magical in any way. The legal relationship between the creator and beneficiaries of the trust and the trustees form the basis and strength of the benefits of privacy. To enable the laymen to understand exactly why privacy and secrecy are possible, a brief review of the law of con- tracts must be made. When two parties enter into an agreeS- ment there is an exchange of promises and benefits accruing to each. In addition, limitations and proscriptions against certain activities also govern the relationships of the contracting parties. Because every agreement is personal to the parties and because the enforcement of these agreements is vital to the efficient operation of any economic system, it has been the tradition for the law to recognize, enforce and strictly construe all provisions of contractual agreements that are not against public policy. Literally, thousands of such agreements are made orally 15-1 Copyright ~)1967 Americans Building Constitutionally (A Trust) Printed in U.S.A. PAGENO="0822" 820 and in writing every minute of every day in the year in the United States. For example, if you agree to sell your house to another person you will first enter into negotia- tions with that other person either directly or through a broker. Upon the completion of the negotiations, the deed to your house will usually be placed in escrow with a corporate escrow trustee, such as a bank. By a contractual agreement with that corporate trust, your deed will not be transferred to the buyer of your house until full payment has been made to that escrow trustee. In the same way, the buyer of your house will transfer his funds to that escrow trust in an agreement with that trust, that the funds are not to be paid to you until the deed has been properly executed and transferred. This escrow type of trust is, as you can see, nothing more than a contractual agreement between the beneficiaries (you and the buyer) and the corporate trust. Limitations are placed on activi- ties; that is, you would not allow your deed to be trans- ferred until the funds are presented and no court will force or can force a contrary act by the trustee. Contracts at law are so revered that there is an evidenciary rule which bars any evidence of an oral nature from being admitted to trial in cases where a 15-2 Copyright c 1967 Americans uilding Constitutionally (A Trust) Printed in U.S.A. PAGENO="0823" 821 written contract clearly sets out all duties, rights and limitations between parties. This rule of law has very few exceptions and is Universally invoked in the United States. In light of this discussion we can now examine the trust as a contract between the creator, the trustees and the beneficiaries or holders of beneficial certificates. The cmator executes an agreement which may, among other things, place the duty of protection of the trust proper~ ties on the trustee. In other words, the trustees agree to protect the properties of the trust to the limitations of their abilities. The creator may state expressly that the beneficiaries may not be. disclosed and that the trust shall remain inviolate against unauthorized and undesirable outside investigation. The creator may even go so far as to not require an accounting of any of the funds to anyone by the trustee. If the trustees agree to this by signing a trust agreement, then this forms a binding written con- tract which is subject to all of the rules of contract law that were outlined above. As you can see, the trustees would have to breach the contract in order to disclose any information about the trust or beneficiaries to parties outside of the trust l5.-3 Copyright ~`) 1967 Americans Building Constitutionally (A Trust) Printed in U.S.A. PAGENO="0824" 822 agreement. There are, hoviever, limitations on the trustees' ability to completely isolate the trust; for example, fed~ eral law demands that most trusts file income tax returns concerning major classifications of trusts' financial activities. No agreement under the law can prevent this type of disclosure. In a similar way, if the trust in- jurc3s a third party or commits a fraud against a third party, then the protection of the trust agreement ceases insofar as that transaction is concerned. In other words, if an outside party has a bona fide serious complaint against a trust concerning transactions or property holding by the trust, the courts will force disclosure of inf or- mation related solely to that transaction or property. Emphasis must be placed on two elements of this type of disclosure, First, properties unrelated to the ques.- tionable transaction or property will not be forced into the open. Second, the courts throughout the long history of Anglo.-American law have consistently demanded that complaints against trusts be supported with substantial evidence and charges of a serious nature, before they would even consider forcing the trustees to violate the trust agreement. Of all the contracts that are recognized under the law, the trust is most respected and most 15-4 Copyright ~ 1967 Americans Building Constitutionally (A Trust) Printed in U.S.A. PAGENO="0825" 823 consistently upheld. Through the exercise or proper discretion by the trustees and the managing orricers or the trust, rew trans.- actions or property holdings would ever be Liled or clis- closed in any way that would be open to public investiga- tion. For example, the trust could enter into an agreement with the bank where the trust accounts are deposited to require the bank to rerer all inquiries concerning trust properties and transactions to the trustees~ The bank could also be prohibited by agreement from disclosing any inrormation to unauthorized persons concerning the trust accounts, The same types or agreements can be entered into with securities brokers, insurance agents and companies, real estate brokers, suppliers and any and all persons with whom the trust might ordinarily deal. Attorneys are by the law, prohibited £rom disclosing inrormation concerning clients, but the trust may emphasize this law by entering into an express agreement with attorneys. ~1 DISTRIBUTg EXHIBIT ~34 15-5 Copyright (Z')l967 Americans Suilding Constitutionally (A Trust) Printed in U.S.A. PAGENO="0826" 824 .~B 34 NEGOTIATION OF PRIVACY I. Privacy today is possible only in relative teems. Due to the lack of respect of many people for private property and individual privacy it is all: but impossible to assure com- plete privacy of anyone's affairs. Countless credit checks and other investigations are accomplished without the per- mission or knowledge of people being investigated. In addition, the development of electronic eavesdropping equip- ment and other devices have made all of us wary of saying things in insecure places. Industrial espionage is as prevalent as government `big brother' harassment and spying. Investigations of other people's business is being accom- plished by both private and government sources each day with- out respect for property rights, privacy, or any other courtesies of traditional human behavior. It is all but im- possible to stop this sort of activity. ~1hat you can do is make it difficult for these people to pursue this activity. Given enough money and enough time I am certain that anybody can find out all there is to know ab~ut somebody else, even Howard Hughes. Privacy is attained, however, when the cost of such an in- vestigation in time and in money is so high as to make it unprofitable. It would probably take many hundreds of thousands of dollars, and years, to find out all there is to know about Howard Hughes, and by the time you found out, most of the information would be inaccurate. Consequently, it is unprofitable to investigate Mr. Hughes' affairs. He has, therefore, attained relative privacy, even though he is world famous and has a reputation for notorious and f lam- boyant acts. Even though your reputation and estate may not reach the proportion of worldwide significance as Mr. Hughes, Mr. Rockefeller, and others of that type, you are still en~- titled to privacy and may still attain privacy by using techniques developed by Mr. Hughes and others. II. Simple procedures have been developed to help you attain privacy. Certainly, other people will know of your affairs. You are probably not completely self-supporting or self- sufficient. In other words, you will depend on others for certain services. When this occurs they will know about part of your affairs. It is your job, if you wish to pro- tect your privacy, to clearly negotiate for their discretion. -1- Copyright c 1967 Americans uilding Constitutionally (A Trust) Printed in U.S.A. PAGENO="0827" 825 This will be attained in one or more ways, depending upon your personal and individual relationship with these men. If you are on good terms with a banker, stockbroker, insurance man or other person with whom you deal financially, you may often reach ai~ oral negotiation of privacy which, when ap- proached in good faith, will protect you as well as any other agreement. For example, if you suggest to your insurance man that your affairs are to be kept private and that you want his assurance that they will be kept private and not be used as examples in articles, speeches, sales talks, or any other publication, either within the industry or of a general nature, and that you will be more than happy to change your insurance if he does not agree, then this might put him on his guard. Uhen you discuss privacy with such men it is recommended that you first get their opinion toward privacy. If they do not respect it as a personal attitude, then a promise from their lips that they would respect it would probably be worthless. Stockbrokers and insurance men have a general reputation for discretion and can usually be trusted without further agree- ments. Banks, on the other hand, have a widespread reputa- tion for discussing clients' affairs as general knowledge. They have developed this reputation through their inability to employ and maintain well-trained and well-educated em- ployees. Turnover of bank employees is often high and where this occurs, respect for privacy is low. It is recommended that in these cases written instruments of privacy might be employed. III. One type of provision or contract that could be obtained from a bank would be a so-called resolution of confidence. Just as your corporate foundation passed a resolution to open a bank account at a particular bank you may ask the bank's board of directors to pass a resolution and give you a copy. Such resolutions are binding contracts. The resolution might be stated as follows: 1. RESOLVED that the First National Bank respect the privacy of the Light Bulb Trust and agree not to disclose any information to others without the ex- press permission of the trustees of the Light Bulb Trust. 2. BE IT FURTHER RESOLVED that any inquirers of information about the Light Bulb Trust account or accounts will be referred directly to the First Trustee of the Light Bulb Trust. Copyright (~)l967 Americans Building Constitutionally (A Trust) Printed in U.S.A. PAGENO="0828" 826 3. BE IT FURTHER RESOLVED that notice of all inquirers of information pertaining to the Light Bulh Trust ac- counts will be given to the trustees of the Light Bulb Trust so that they may know who is asking questions. 4. BE IT FURTHER RESOLVED that in the event of the breach of these resolutions that the bank shall agree to have breached their fiduciary responsibility and agree to be subject to all damages therefrom. The last provision in the above resolution of confidence is called a damage provision. There are several variations of this provision which would include everything from an agreed liquidated damage provision which would provide for cash settle- ment for.such breaches to the above resultant damage clause whióh would merely force the bank to pay for damages which resulted from their improper acts. - Many other kinds of written instruments can be proVided for the protection in written form of the privacy of your affairs, either through the corporate foundation or through your trust. IV.Some people believe that expressly askingfor privacy make's the listener suspicious of your affairs and would cause himto- dis- cusS your affairs with, others where he might otherwise not~ do so. This has happened on occasion and will probably happeh in the future. For this reason, it is important to obtain the attitudes of the listener toward privacy before you discuss your affairs. . If a person thinks that everyone should disclose his affairs if he isn't doing anything wrong, you should not deal with this person, if you want your privacy respected. Just because you are doing nothing illegal, improper or immoral doesn't mean that.your affairs should be published in the daily newspaper or discussed as back fence gossip by everyone in town. You are ertitled to your privacy even though you are accomplishing nothing illegal. In fact, it would seen to go the other way. The only time that someone else should know what you are doing is when you are doing something illegal. If you are doing something proper and within the law, it is nobody's business but your own. If the persons you deal with share your attitudes toward privacy, then you should have no problems with your affairs. V.Discussion of your affairs by others is often caused by state- ments made by your children or relatives. When your children are old enough to understand, a discussion of privacy might be attempted. If they are to understand that your fartily's affairs are only your family's business and no one else's, then they won't discuss the old man's salary or "what we just purchased last week' or `how Dad avoids taxes." In the same way, some of your relatives might have over-active mouths. If they do, we re- commend that you not tell them what you are doing. You arent going to start or stop them talking regardless of what you do, so Copyright c 1967 Americans uilding Constitutionally (A Trust) Printed in U.S.A. PAGENO="0829" 827 there should be no exchange of information so that what they talk about is definitely not based on fact. Rumors and gossip may fly around regardless of your attenpts, but if no one really knows what you are doing it doesn't make much difference. There are as many rumors and myths circulating about the Fords and Rockefellers as any family in the United States. The Fords and Rockefellers are unable to take any steps to stop these, but very few of these stories are true. There are an equal number of stories circulating about Howard Hughes, and yet Mr. Hughes doesn't stop them, doesn't make any shouts, but doesn't verify them in any way. If you train your children not to answer the questions of any strangers about your family's affairs or to volunteer any information under any circumstances, whether in class or out, and if you discuss your attitude toward privacy with your relatives or refrain from giving your particularly noisy relatives any information, then your privacy will be protected even though others may talk about you. VI. Government investigators have limited rights and you should not be buffaloed by their officiousness, gruff attitude or discourtesy. Keep in mind that you are entitled to an attorney at all times even in civil discussions; that is, if an agent from the Internal Revenue Service should appear at your home to discuss a civil liability, you, nevertheless, have the right to call your attorney and withhold discussion until he gets there. The difference between civil and crimi- nal is not important if you want an attorney. It is every person's right to be counseled by anyone who is in the proper position to counsel and no one can stop you in this country - yet. Your attitude toward government investigations, however, should be courteous, not necessarily totally cooperative or willingly cooperative, but courteous. There is no reason to personally antagonize any government agent, but neither should you giveup any individual rights that you have as a citizen. The government does, under certain circumstances, have the right to review your economic con- dition and some of your affairs, but not all of them, and they must bring specific charges or discuss specific areas of investigation. They just can't come in on a `fishing expedition' to see what might be wrong or right about your affairs. Remember that until proven guilty you are assumed innocent and, if necessary, express this attitude in no uncertain terms. This is not to say that you are doing anything wrong, but just to guard you against the attitudes of many officious government agents. -4- Copyright ~l967 Americans Building Constitutionally (A Trust) Printed in U.S.A. PAGENO="0830" 828 VII. Finally, if there is one source of information that is hard to control, it is your own mouth. People have a tendency to discuss new toys' or new things they are involved in too freely for the sake of their own privacy. If you are interested in privacy, then wear a tight-lipped smile and go about your affairs in your own way. If you are not interested in privacy then do not first discuss things with others and then complain about your lack of privacy or unauthorized investigations. I am certain that you know many people who discuss their personal affairs as if they were the Suez crisis or similar points of international discussion. These people are often the same ones who yell loudest about a credit check when, in fact, all the investi- gator had to do was call the man on the telephone to get all the information he needed. In other words, if you are sincerely concerned about privacy, the first step in attaining privacy is controlling your own attitudes toward disclosure. If you don't disclose any information about your affairs it becomes extremely difficult for others to find out about your affairs. ***** Copyright c 1967 Americans uilding Constitutionally (A Trust) Printed in U.S.A. -5- PAGENO="0831" 829 or course, real estate deals must be recorded with local o:Cricials, ir encumbered; securities must be recorded with the respective corporations and insurance companies are orten required by law to register their insured ac~ counts with a state agency. Since this inrormation is usually not Liled with a central agency it becomes almost impossible to conduct an investigation or trust properties and transactions in a reasonable time. Your trust's agreements or privacy with all or the people with whom it deals, bars the registration or the trust accounts rrom ever being riled with a private central agency or credit bureau. Thus, there is no central private source or inrormation, and ir there is a blessing to bureaucracy it is the ract that investigations in the gigantic and usually conrused records or public agencies are extremely dirricult. Copyright (a-\ 1967 Americans ~S~ui1ding Constitutionally (A Trust) Printed in U.S.A. 87~444 136S 15-S 87-444 0-68-53 PAGENO="0832" 830 SECTION 16 TRUST FOUNDATION The Organizatlo rCreatlon of the Trust Foundation- The trust foundation is a natural element of the equity trust operation0 It is not a required element nor would it be necessary in the proper operation of any trust, but since tax-exempt, non-profit operations and benefits are highly desirable, then certainly we should have the trust make use of these procedures in the same way that you as an in- dividual have made use of these procedures. The trustees of an equity trust would take advantage of their ability to operate within the defined limits of a constitutional citizen. All constitutional citizens may create foundations or business entities to accomplish their activities. The trust would create a foundation under a trust indenture or agreement which would be executed and signed by the trustees. This trust agreement is similar to the agreement that originally created the parent trust. The language of the trust foundation agreement, however, will vary considerably from that of the parent. The trust foundation agreement will set out in detail those elements of a tax-exempt organization under Section 501 (c) (3) of the Internal Revenue 16-1 Copyright ®1967 Americans Building Constitutionally (A Trust) Printed in U.S.A. PAGENO="0833" 831 Code. The trust foundation agreement will have to be different and usually more extensive in its language than the language of the articles of incorporation which created your corporate foundation. The reason for the more exten- sive language necessary in the trust foundation agreement is that the trust foundation is not governed by a state corporate law and therefore must repeat all of the powers and qualifications necessary for the proper operation of a tax-exempt foundation without reference to any state law. Your corporate foundation, on the other hand, referred directly to your state law and incorporated by reference all of the language of that statute. Most state laws set out all the powers and duties of foundations and this language need not be repeated in articles of incorporation. Once the trust foundation is created, however, it must operate within the same guidelines and principles that affect the corporate foundation. All of the definitions and procedures that were discussed in the first sessions of this seminar apply equally well to the trust foundation, There are a few detailed changes and these will be ex- plained. Before we discuss the detailed operations of the tru~ foundation as they may differ from those of the corporate 16-2 Copyright (~3 1967 Americans Building Constitutionally (A Trust) Printed in U.S.A. PAGENO="0834" 832 foundation, two principles must be emphasized. First, the trust foundation, once created, is an entirely separate organization from the trust or the corporate foundation~ Records are not commingled; accounting is kept entirely separate; and minutes of the board of trustees of the trust foundation are kept separate and are recorded differently from those of the parent trust. Second, the trust foundation, once initially created and operated, must be dedicated to the benefit of mankind within the limits of the seven permissible purposes of Section 50l(c)(3) of the Internal Revenue Code, The dif.- ference between the trust foundation and the corporate foundation in operation, however, arises in two areas. The trust foundation usually operates in a different way or field than does the corporate foundation, and the trust foundation usually operates more quietly than the corporate foundation. N~IBUTEE~GiIBIT;~35 ___ Initlal Operations f~he~ Tru~~flQa - The major difference in setting up the initla accounts and l6...3 Copyright (Z) 1967 Americans `~ui1ding Constitutionally (A Trust) Printed in U.S.A. PAGENO="0835" 833 EXHIBIT 35 DIFFERENCES BETWEEN THE TRUST, CORPORATION FOUNDATION AND TRUST FOUNDATION I. The Trust A. Formed through a trust agreement contract created between a creator and two or three trustees (minimum). B. A taxpaying entity to the extent it retains income in excess of $100.00. C. An entity of limited duration which is renewable upon the discretion of the trustees. D. Not generally governed by any specific state act, but controllable under general state l~i. II. The Corporate Foundation A. Created under state law - usually a state non-profit corporation act or non-stock corporation act. 13. A tex-exempt organization qualified under Section 50.1(c) (3) of the Federal Internal aevent~e Code of 1954. C. An organization with a perpetual life. D. Usually subject to state regulation from both the Secretary of State under the corporation act and the Att~ney Gene~-dl under charities law, e~.ther express or implied. III. The Trust Foundation A. Created by trust agreement in the same way that any trust is created. B. Tax-~exempt as crual.lfied under Sect&on 501(c) (3) of the Federal I~iternal Ru~enue Code of 1954. C. An organization of limited duration renewable upon the discretion of the trustees. D. Generally subject only to the state attorney general in cases of gross misconduct by the trustees. (over) Copyright (~l967 Americans Building Constitutionally (A Trust) Printed in U.S.A. PAGENO="0836" 834 Each of these organizations is an entirely separate and independent entity. If they are used as elements of your particular estate plan, the independence and separateness should be respected in order to gain maximum benefit. Accounting should be kept en- tirely separate and different filing cabinets or drawers should be maintained for each organization. Remember that the foundations are tax-exempt because they are dedicated to the proper purposes as defined by Section 501(c) (3) of the Internal Revenue Code. Unless these purposes are maintained and supported tax exemption is not possible. Copyright ~)l967 Americans Building Constitutionally (A Trust) Printed in U.S.A. PAGENO="0837" 835 records of the trust foundation from that of a corporate foundation will be found in business procedures. You will use trust business procedures to set up the proper papers for the trust foundation rather than corporate business procedures. For example, in opening the trust foundation checking account, you would normally show the entire trust foundation agreement to the bank to open the account. You would not file a "corporate resolution" form to open a bank account, but instead use the trust procedures. In the same way, you would execute the trust minutes and sign contracts in the name of the trust rather than using cor- porate procedures and corporate officers. A trust foundation may have officers and, in fact, most trust foundations usually do. These are elected by the board of trustees of the trust foundation. The initial board of trustees of the trust foundation will generally be identical to the board of trustees of the parent trust, but changes in the board of trustees of the parent trust may or may not affect the actual names and identities of the board of trustees of the trust foundation. In fact, after a few years' operation, the boards of trust~ees of the parent trust and the trust foundation may, in fact, involve different parties. Essentially, this just means 16.-4 Copyright (~~) 1967 Americans Huilding Constitutionally (A Trust) Printed in U.S.A. PAGENO="0838" 836 that the trust Loundat ion is an indep3ndJnt organization after the first steps taken by the parent trust. Generally, however, the boards of trustees of the parent trust and the trust foundation are usually kept identical for ease of management~ Charitable Contribpt ions - The parent trust may con- tribute to the trust foundation. ABC generally does not recommend this procedure, however, primarily due to the close relationship of the parent trust and the trust founda- tion. Rather, we recommend that the parent trust loan initial capital to the trust foundation. The trust founda- tion, however, may receive contributions from any other source as any pràper 501(c)(3) organization. The corporate foundation could, in fact, contribute to the trust founda- tion for various reasons or just to generally endow the trust foundation. This would be accomplished through a resolution by the corporate foundation and a general grant or unrestricted endowment. Standard procedures would be used between the corporate foundation and the trust founda-~ tion in the same way that the corporate foundation would do business with any other unrelated foundation. The trust foundation would itself accomplish chari- table grants or activities in much the aamo procedures l6.-5 Copyright (~)1967 Americans Building Constituti'nally (A T:ust) Printed in U.S.A. PAGENO="0839" 837 as the corporate foundation. Trust minutes of the board of trustees of the trust foundation would record all trust foundation charitable activities just as minutes of the board of directors of the corporate foundation record corporation activity. ~~rting Requirements Trust foundations because they are not created under a state's corporate laws are not required to file annual reports with the Secretary of State. Trust foundations, however, may fall within the scope of the charitable trust acts in the 11 states where they are statutory law and enforced vigorously. These states in.- dude Illinois, California, Michigan and Louisiana. In these states, annual reports to the attorney general's office may be required, depending upon local administration. You should consult with your local attorney to determine whether your trust foundation is a charitable trust or whether it is required under state law to register with the attorney general and file annual reports. Your trust foundation is required to file all of the federal reports that your corporate foundation is required to file. All of the techniques and reasoning discussed in relation to federal forms concerning the corporate founda- tion apply in exactly the same way to trust foundations. 16-6 Copyright c~)l957 Amer~cans Building Constitutionally (A Trust) Printed in U.S.A. PAGENO="0840" 838 Trust Foundation Investrp~fi Under an unusual quirk of the Internal Revenue Code, trust foundations are seem~* ingly prohibited from investing in foreign countries. This does not bar the trust foundation from accomplishing char1-~ table activities or research and development in foreign countries. It merely prohibits investment in foreign countries. Consequently, trust foundation investment should be limited to United States and its territories. If you are interested in foreign investments, your corporate foundation and the original equity trust are more than capable of accomplishing these investments without loss of benefit. ral Recommendat~iQfls on Trust Foundation~ Op~ration~ Because your trust foundation is generally used as a receptacle for "surplus" earnings developed in other enti-- ties under your control, such as the parent trust or corporate foundation, the trust foundation would generally have a large amount of capital available for philanthropic activity. Philanthropic activity must, under the law, be accomplished in one or more of the seven fields outlined in Section 50l(c)(3) of the Internal Revenue Code, but the method of accomplishing philanthropic actlvity in the trust foundation should differ significantly from the method of 16-7 Copyright ~ 1967 Amer:~ans Building Constitutic~na11Y (AT~st) Prin_ed in U.S.A. PAGENO="0841" 839 operation in the corporate roundation. There does not seem to be any real need ror wide publicity or the good works or the trust roundat ion. In ract, we recommend that gifts made, however, signir leant, be accomplished in such a rashlon that the outside world is unaware or the identity or the giver. This does not mean that you would send Cashiers~ Checks to colleges and universities without them being aware or the source. It would mean, however, that you would request the identity or the giver be kept private rrom unrelated parties to each charitable transaction. For example, ir you were to make a sizable donation to the college or university or your choice, you would negotiate with the president and the board or trustees or that college or university to make the girt, and then require the parties who know or the girt to report that they received it anonymously; that is, your trust roundation would receive acknowledgment rrom the college or university or the girt; your board or trustees would record the girt in trust roundation minutes, and the college would use the runds in any way that they relt were appropriate. However, the students or that college or university or inquiring reporters would be unable to discover the source or the 16.-8 Copyright c~ 1967 Americans Building Constitutionally (A Trust) Printed in U.S.A. PAGENO="0842" 840 funds. Athletic stadiums, libraries, college classrooms, and other facilities have been constructed by such anonymous gifts in practically every college in the United States0 It is recommended jhat all research and development and substantial philanthropic programs involving large numbers of persons be accomplished through your corporate foundation. If the corporate foundation is unable to finance these operations, then a grant from the trust foundation or a loan from the trust foundation to the corporate foundation could be quietly made. Thus, your affairs would be like an iceberg. Ninety percent would be out of the view of the general public and ten percent in the form of your corporate foundation would be there for all to see. This, we believe, is as it should be. No other person has any right to know about your affairs unless you decide to tell hula L~IRIB~ E)~1IBIT~36 - Thus, the operations of your trust foundation, al- though perhaps more effective and more far-reaching than l6.-9 Copyright (~)l967 Americans Building Constitutionally (A Trust) Printed in U.S.A. PAGENO="0843" 841 EXHIBIT .36 OUTLINE OF FOUNDATION `!ANAG±~NLNT ON AL~ ANONY'~:OUs LEVEL I. Operating a philanthropic organization on an anonymous level is difficult if the management intends to raaintain the good faith levels of publicity and accomplishment that are an inherent part of proper management of a 501(c) (3) tax-exempt organization. One must always remember that the purposes of tie organization must be maintained within the law re~rdless of the method of creation of the o~qoniz~tion or go~'ernoent r~cognition. In other words, if the foundation i~ to claim tax-exemption under Section 501(c) (3), it must meet the definition of that section and operate exclusively for the proper purposes. II. It is impossible to operate compl2tely in secret and still maintain proper operations. How~:~r, if the followina con- siderations ore satisfied, then your trust foundation or any foundation might operate as quietly as possible and avoid the glare of publicity or notoriety. A. Nhat programs n'ight be accomplished by a foundation that can aid or develop or solve programs or orobler.s involving a large number of pc~ople without the knowledge of the pooplc? B. How many people must know of the foundation's participa- tion in the program? C. Agreements of confidence and anonymity should be com~ pleted with the individuals who are aware of the foundation's participation. D. Careful records of all corre~oondence should be main- tained to give clear evidence of the actual operations of the anonymous" type foundation. The above suggestions are only starting points in formulating quiet-type' programs. III. Some thought starter ideas on quiet-type programs include the following: 7~.. Scholarship programs wher.e the college or university administers the program without revealing the name of the fund. 13. Religious grants where only the minister, priest or rabbi is aware of the donor. Copyright~c11967 . (over) Americans ~uilding Constitutionally (A Trust) Printed in U.S.A. PAGENO="0844" 842 C. Literary programs involving the distribution of litera- ture or providing of libraries on an anonymous basis. As you can see, most of these programs are charitable in nature and this is usually the case when anonymity is desired. However, more experience with foundation programs should give you ideas and innovations to accomplish other programs on an anonymous level. Copyright (SI?) 1967 Americans ~uilding Constitutionally (A Trust) Printed in U.S.A. PAGENO="0845" 843 those of your corporate foundat ion, would nevertheless never meet the public eye nor would the trust foundation be subjected to any great amounts of solicitations from other organizations. These solicitations would be referred to or handled by your corporate foundat ion. DISTRIB~ E)~IBIT ~37 Members~p~ Your trust foundation would generally not have any memberships nor would your trust foundation generally have any employees; that is to say, no persons receiving compensation for the work. Your board of trustees of the foundation or officers of the trust Lounda.- tion would often accomplish considerable work, but since they may also receive compensatlon from the trust or in- cidentally be employed elsewhere, it would be expected that they would not receive compensation £rom the trust founda- tion. This would eliminate any possibility that your trust foundation would have to file ~-.2 forms or pay social security or unemployment taxes. The rule of thumb that should constantly be kept in mind in terms of the trust foundation is to operate it as simply as possible with no employees, no complex 16-10 Copyright (~jl967 Americans Building Constitutionally (A Trust) Printed in U.S.A. PAGENO="0846" 844 EXHIBIT 37 NEGOTIATING ANONYIOUS GIFTS AND GRANTS TO OTHER ORGANIZATIONS This exhibit was not completed at the time of this seminar. It will be r~iailed to you upon completion. ***** Copyright c 1967 Americans uilding Constitutionally (A Trust) Printed in U.S.A. PAGENO="0847" 845 solicitations, no complex research or development projects, but simple, though. effective, philanthropic operation. Your trust foundation can operate without extensive super- vision, generally without any detailed law work and with a very simple accounting system. It may be possible that your trust foundation will be the most wealthy of all your organizations. Nevertheless, simplicity of operation is still recommended. If you have any questions concerning operation of the trust foundation, please ask them now because our next step is to discuss the general principles of relating the parent trust, the trust foundation, the corporate founda- tion, and yourself into an effective and economical opera-. t ion. 16-11 Copyright c~l967 Americans Building Constitutionally (A Trust) Printed in U.S.A. 87-444 0-68-54 PAGENO="0848" 846 SECTION 17 TANDEM OPERATIONS (Coordinated Function of Trusts and Foundations) By now most of you are familiar with what we call the tandem organization of estate plans. This term simply means that two spheres of activity are created to segregate the operations of your estate so that you might be more effective in your foundation activity. The first sphere is called the "public sphereS" The public sphere includes a corporate foundation and any other business entity with which you might work. The second sphere is called the `private sphere" and this would normally include only a trust and trust foundation. You, as an individual, are not assigned to either sphere but operate in both. By definition a tandem organlzation or your estate simply involves the coordinated operations of two separate spheres of activity. The overall objectives are efficiency and economy for philanthropic and private interests and the means to these objectives are found in the management principles we have discussed. In order to better understand some of the management principles related to coordinated operations of trusts and Copyright(c)1967 l7l Americans ~uilding Constitutionally (A Trust) Printed in U.S.A. PAGENO="0849" 847 I~oundations, we should £irst briefly discuss the purposes o~ each o~ the spheres o1 activity that Lorm the tandem estate plan. (a) The private sphere The private sphere is dedi- cated to the preservation o~ the property that you have ac-. quired during your ltCe Lor the comi'ort and security oi~ your rainily. A man cannot think philanthropically unless he and his Lamily are personally secure. The private sphere is created to protect property Srom the ravages oC estate tax, inheritance procedures and undesired third parties. The private sphere is directed toward accomplish- ing good things ~or yourself and your ramily and to pro- vide the ready reserves and resources necessary to accomplish all things i~or the sai~ety and security oi~ your £anuily. No one other than your family has any business with how you accomplish various projects for your family unless you are doing something in an illegal mariner or a manner that directly injures someone else. Assuming that illegal or harmful methods are not within your consideration, we sug- gest that the private sphere is just that - the sphere of activity which is private to you and your family and which should remain so. Copyright ~1967 17 2 Americans Bui1di~g consritut~onaTry (A Trust) Printed in U.S.A. PAGENO="0850" 848 (b) The public sphere - Your corporate foundation, however, and any other business entity with which you are associated, are created to deal with the public and to accomplish good things for society. These organizations are likely to advertise their accomplishments, available services, merchandise, and successful projects. These organizations form your public spheres that sphere which relates to all other people and which provides the economic relationships with which you build your security. ii~geffl~pt~ of Property ~Tandem Estatej In properly coordinating the activities of a tandem operation one principle must constantly be emphasized. You have heard it before atid you will hear it again, and the reason it is repeated so often is that it is the most important principle involved in proper estate management. This principle is simply each of your organizations is a separate, independent body apart from yourself and must be treated as such to maintain individual benefits. To be specific, you must not at any time confuse or commingle any of the property assets or transactions of the various elements of the tandem estate plan. Money in the corporate foundation bank account must never be used to pay for repairs on property owned and used solely by the trust. 17-3 Copyright (c) 1967 Americans Building Constitutionally (A Trust) Printed in U.S.A. PAGENO="0851" 849 ~Joney in the trust bank account must never be used to buy gasoline for automobiles owned by yourself and never used on trust business. These seem like simple enough examples, but they have been violated and confused in several cases. The primary rule to keep in mind in managing property involved in a tandem operation is as follows: `If an entity has no property interest in a particular asset or transaction, it may never contribute funds toward the support, maintenance, or continuation of that property or transaction.' In other words, if your foundation does not either own or lease a certain piece of real estate, it may not pay for the mortgage, real estate taxes, maintenance, or insurance on that property. To do so would endanger the legality of the foundation. Perhaps this principle can be best illustrated in yet another way. Every person in this room is an independent entity, a human legal organization. None of you owns any percentage of the Merchandise Mart in Downtown Chicago. The L[erchandise Mart annually pays about $300,000 in real estate taxes (or has paid this since 1960). Does any person here feel that they should pay the real estate taxes or any part of the real estate taxes on the Merchandise Mart? The answer is obviously `No" - you don't own it. Copyright(~)1967 17-4 Americans B~ui1ding Constitutionally (A Trust) Printed in U.S.A. PAGENO="0852" 850 Some of you, however, might lease some office or show- room space in the ivierchandise Mart. If you do, and you wish to redesign your ~articular leased space, then I don't believe you would object to paying at least a portion, if not the entire bill, for the redecoration. This is because you have a property interest in the form of a lease in that particular space. If we remember that the corporate foundation, the trust, and the trust foundat ion are just as independent and separate from us as we are from every other person, then handling property should not create any problems. Treat foundation property or leasehold interests entirely as foundation assets. These assets are dedicated to philanthropy. Just because you might have your trust checkbook available and your foundation checkbook in another purse or pocket, you should not pay foundation bills with trust checks. Neither should trust taxes be paid with foundation funds simply because the foundation has more money than the trust. These are simple examples. The more complex an es- tate becomes through contracts or other documents, the easier it is to confuse assets and funds. For example, at some time in the near future you might find that you own 17-5 Copyright (~ 1967 Americans Building Constitutionally (A Trust) Printed in U.S.A. PAGENO="0853" 851 or control securities in four separate accounts; mdlvi- dually, your trust, your corporate foundation, and your trust foundation. You might decide that it would be easier to handle your portfolio through a single account~ This might lead you to believe that all you would need to do is transfer title. Because your trust is obviously an easy place in which to operate an investment program you might decide to place every single security that you presently own or ever acquire through all entities in your trust. v~ithout proper consideration, however, you may have the following problems. First, how would you justify the transfers from your trust foundation and your corporate foundation to a profit-making, taxpaying entity? Second, would you be involved in owing transfer taxes and transfer payments to your broker because of this simple transaction? Third, would you be liable for attributable capital gains on the securities you transferred from your individual ownership to the trust? Fourth, would your foundations be guilty of any prohibited transaction? Even though your securities did not leave your control, you may have caused a great deal of trouble through your treatment of individual, independent, legal entities as 17-6 Copyright (~ 1967 Americans Building Constitutionally (A Trust) Printed in U.S.A. PAGENO="0854" 852 completely under your ownership. Remember you may have control of each of these legal instruments, but you do not own them. If every person in this room owned ~l,OOO in "blue chip' investments it would be possible to transfer a great number of these investments from person to person in this room without any actual gain or loss attributable to any person. I doubt, however, whether any person in this room would make these transfers without serious considera- tion. The same serious consideration that you would display in dealing with unrelated parties should be die-- played in dealing with your tandem estate elements. All of this merely emphasizes the point at which we started. We must treat each legal element of the estate plan as a separate and independent body in order to gain full advantage of each of the instruments. DI8TRIBUT~ EXHIBIT #38 -/~1- c ~ Liana~ement of AcUvity~ The proper management of activities is a little easier to keep in proper order than the principles of management of property. The rule here is quite simple. "If the activity solely relates to a f~m1ly project~9 it should be Copyright c 1967 17-? Americans ~ui1ding Constitutionally (A Trust) Printed in U.S.A. PAGENO="0855" EXHIBIT #38 Copyright ®1967 Americans Building Constitutionally (A Trust) Printed in U.S.A. 853 I. PIGGY BANK L4ETHOD -1- PAGENO="0856" II. ~IILT~ING OPERATION 854 * * * * * :oj~r1ght fl ~67 Arne.~icans 13u~. ~g Constitutiona11~ ~ ~ust) r.~t. n ~ A.- \c~ _____ //~ TPYJST `~Stock in ( Business f [~corPora~i PAGENO="0857" 855 accomplished within the private sphere. If., however~ the activity relates to outsiders in terms or benefits and con.- tracts, then it should be accomplished in the public sphere. A few illustrations of this principle should make it very easy to apply. If the activity that you~conteniplate concerns only your family, such as the purchase of a new home or summer home or a boat or something else for purely family enjoyment and pleasure, then quite obviously it should be accomplished in your private sphere, and since these acquisitions do not involve any philanthropic activity they would probably be acquired by your trust or yourself, as an individual, after taxes have been paid. If the activity you wish to accomplish relates only to your family and is philanthropic, such as creation or a family scholarship rand at a local college or university, or the creation of a civic project in the name of your family, or to honor one of the family, then the trust foundation may accoxnpl ish it. Clothing and incidentals would obviously be purchased and acquired by the individuals with funds earned as an officer or employee of any one of the elements of your estate. Activities that relate to other people, such as any business transactions or commercial services that might be Copyright®1967 178 Americans Building Constitutionally (A Trust) Printed in U.S.A. PAGENO="0858" 856 provided or philanthropic cooperative programs with outside agencies, should be accOmplished in your public sphere. As outlined earlier, your trust foundation, as a part of your private sphere, would generally accomplish things quietly and anonymously. Your corporate foundation, on the other hand, would seek the publicity and accomplish the public relations part of your philanthropic activities. General scholarship programs relating to YMCA camps, 4-H programs, colleges, high schools, art, music, etc., which would be available to all comers,would be created through your corporate foundation. Generally, most of your acti- vities will be accomplished in your public sphere. Unless the proposed activity or transaction relates solely to your family, you will accomplish the transaction or acti- vity through your public sphere instruments. The private sphere will eventually protect the result of such trans- actions through income channels. Uanag~ent of Inc omeJI~n~ Pl~I (The instructor should refer to the prior exhibit on the elements of common estate plans to illustrate the potential income relationships between each of the elements.) Before I discuss the actual relationships between the public and private spheres of your tandem estate plan, we Copyrigl~t c 1967 l7~9 Americans uilding Cons titut Lonally (A Trust) Printed in U.S.A. PAGENO="0859" 857 should clearly define the types of relationships that are possible. These relationships will fall into familiar categories and transactions. Nothing magical, mysterious, or technical is involved. Leases - All of you at one time or another have prob- ably leased either an apartment or a car or some other piece of equipment of property. Leases are very flexible forms of income management. Leases are formed between tenants and landlords and we will discuss the relationship of these two parties, using these terms. The costs of maintenance of any piece of property may be placed upon the shoulders of either the tenants or the landlord. If the landlord bears the burden of the maintenance and upkeep, then the tenant usually pays a higher rent. If, on the other hand, the tenant bears almost all the cost, then the rent is usually much lower. Real estate taxes are almost always paid by the owner of the property, although the cost is generally included in the rent. Leased property may be subleased at the discre.- tion of both the landlord and the tenant. Approval of both parties is required before any sublease is usually effective. Under general law, a lease may be for any rent, regardless of the value of the property. In other - 17-10 Copyright ~c) 19~7 Americans ~ui1ding Cons titutionally (A Trust) Printed in U.S.A. PAGENO="0860" 858 words, the rent need not relate to the actual fair market value of the property unless the lease also contains a purchase option agreement. Leases will form the most corn- mon type of income management device used in a tandem estate plan. _____ The secOnd most common type of income manage- ment device is the sale of property. Sales may be made at any reasonable valuation. Sales may be made for out- right cash and immediate transfer or on a time basis with installment credit buying allowed by the seller. Care must be taken in accomplishing any sale between the entities to avoid what is known as depreciation re- capture if the seller is a taxable entity. If you have any questions concerning this term, please ask your at- torney. Sales should be evidenced by bills of sale or official title transfer documents. If land is being sold, then quit claim deeds or deed transfers should be executed. Service Contr~ - If any of the elements in your estate plan accomplish a service for another element, then compensation ought to be paid. Service contracts should be in writing to provide the best evidence of the proper transaction, but since contracts may also be oral, it would not be necessary to draft a contract for every Copyright~1967 17-il Americans Bui~ding Constitutionally (A Trust) Printed in U.S.A. PAGENO="0861" 859 service transaction. If, however, the amount of compensa- tion is large, ranging over $1,000, it is highly recommended that such contracts be in writing. Gifts and Contributions - We have discussed charitable contributions in prior sessions of the seminar. In review, generally you will only transfer gifts or contributions from~ taxpaying bodies into tax-exempt organizations. Gifts or contributions are almost never accomplished from tax-exempt organizations to taxpaying entitites. We do not recommend giving or contributing any property from a tax-exempt or- ~anizat ion to a taxpaying organization. ~o~s - The third most common method of income manage- ment is in the form of loans. Loans should always be evidenced by a written instrument. Generally a promissory note is the first step. Substantial loans should be secured by some property owned by the borrower. The lender should charge some interest of a reasonable nature unless the lender desires to make an interest-free loan to a tax-- exempt organization. If the lender is a foundation or other tax-exempt organization and the borrower is a tax-- paying entity, such as a trust or individual, then reason-- able interest of at least 3% to 5% should always be charged. If the loan is for a substantial amount (generall~ Copyright®l967 17-12 Americans Building Constitutionally (A Trust) Printed in U.s.A. PAGENO="0862" 860 in excess of $1,000) you should consult an attorney to draft the proper papers unless you feel you have the sklll to draft them yourself. * ~? * * * 17-13 Copyright `~ 1967 Americans uildiflg Cons titut ionaL.y (A Trust) printed in U.S.A. PAGENO="0863" 861 SECTION 18 311 .IPLE ESTATE PLANS TO FUND FOUNDAT ION ACT IV IT ]ES Now we should explore some or the variations that might be used in creating relationships between your pub- 1 ic and private spheres. (a) Allocations or property, as discussed earlier, may be accomplished in hundreds or ways. The exact and precise allocation or your property will depend on your personal intent and objectives. However, we have developed general rules that should help you in initially allocating property. First, your trust should include property that would tend to preserve and protect your ratnily's security without creating liabilities. Some income-producing property should be placed in the trust. For example, your home and all real estate might be owned by the trust; some securi- ties and valuable jewelry and other substantial items that should remain in the ramily may be owned by the trustS Automobiles should not be placed in the trust since they are normally not capital equity properties and because they produce high liabilities ror the owners in most cases (with the exception or antique classic cars). Like all business organizations, your trust would need some 10-1 Copyright c 1967 Americans uilding Constitutionally (A Trust) Printed in U.S.A. 87-444 0-68-55 PAGENO="0864" 862 operating capital and some cash should be placed in the trust to allow it to begin operations. Your foundation might own some securities and other business properties, but generally your foundation would lease its facilities and equipment from other sources, such as the trust. Your foundation should essentially become a "shell" used to create and channel income Lor philanthro- pic purposes. The trust foundation, on the other hand, is not used primarily as a shell, but as a receptacle for funds de- veloped in both the trust and the corporate foundation. (b) Income Transfers Within These Three Elements. First, your trust might lease all necessary facilities and properties to the corporate foundation and perhaps to the trust foundation, although we generally recommend that space be donated to the trust foundation for its records and transactions. Second, loans at reasonable rates of interest and properly secured, if necessary, would be executed between any and all of the three organizations as required by the scope of operations of any of the three organizations; that is, if the trust were to purchase some real estate and required funds from the trust foundation it would generally borrow the funds and secure the loan with Copyright(~1967 182 Americans B~uilding Constitutionally (A Trust) Printed in U.S.A. PAGENO="0865" 863 the property purchased0 Third, where it is round that the corporate Loundation is the sole user or a piece or busi- ness equipment (not real estate) and it is highly inS- erricient to maintain a lease situation, the trust should sell that equipment to the Loundat ion. This sale should be at reasonable value, and perhaps at a low value to avoid tax consequences and depreciation recapture. (c) Perhaps the most common situation in income channeling, however, occurs when one deals with other business organ izat ions ~e. have developed three common situations with variation~s to apply to most income con- ditions. We would like to close the seminar with a short discussion or these three methods or income channeling. We call them the tax~exemptpiggy bank method, the dairy or milking operation, and the clinic operation. (Note to Instructor. Since this next section in- volves advice on the reasonable errect or legal instru- ments, it is advised that you allow ~7our associate counsel to explain these various estate plans. In the State or Connecticut, New York, Calirornia, and Illinoi~s direct advice concerning the legal consequences derived rrom the use or a technical instrument has been construed as the practice or law, and in these rour states such advice Copyright (c~ 1967 18-3 Americans Building Constitutionally (A Trust) Printed in U.S.A. PAGENO="0866" 864 from unlicensed persons is illegal and carries with it both criminal and civil penalties. This is a new doctrine of unauthorized practice of law and may be followed in other states. It is recommended that you avoid this practice until the U.S. Supreme Court makes a final de.- cision in the case of the New York Lawyers' Association v. Norman Dacy which is presently pending in the United States Supreme Court. Your associate counsel should be trained in these three basic estate plans. Notify him ahead of the seminar of your intention to refer to him on this section to enable him to prepare properly.) (1) Tax-exempt piggy bank procedure - The basic and minimal estate procedure that would be used to fund your foundation and through the foundation your private sphere, is through the use of the charitable deduction allowed under the Internal Revenue Code Section 170(b). This section allows any individual to deduct up to 20 percent of his adjusted gross income for donations made to private charities. If you are presently employed by a large organization over which you have little or no control, this procedure would enable you to fund your foundation with a maximum of 20 percent o.~ your income without loss in terms or fedbral income taxes. You may, of course, donate more than 20 percent to your foundation, but you may not deduct Copyright®1967 1B-4 Americans Building Constitutionally (A Trust) Printed in U.S.A. PAGENO="0867" 865 more than 20 percent from your income taxes in an~~ year. Your foundation would then accomplish pror~ r projects with these funds and might transfer some of the funds to your trust foundation. Generally, however, where this is the sole method of funding a foundation, the amounts do not initially create an unreasonable accumulation of income (for two reasons; one, the contributions are not income; and two, the earnings on these contributions are usually quite small). ~re do not generally recommend this procedure, however, unless it is the only one available In a recent Treasury ruling, the Internal Revenue Service approved another type of plan. If your employer will cooperate, you might direct him to contribute to your foundation, You might take a cut in salary to make this contribution equitable in terms of the employer7s long-range economic planning~ Such a contribution by the employer would not be deductible from your income nor would it be attrlbutable as income to you. Instead, the employer would take a charitable deduction up to 5 percent of his adjusted gross income. An illustratIon of this plan would occur where an employee is earning $30,000 a year but decides to take a cut to $20,000 a year, if the employer v~ill donate $10,000 to a private charity directly. The employer would take a $10,000 deduction for charitable Copyright'~)1967 18-5 Atnericns B'~ii1ding Constitutionally (A Trust) Printed in U.S.A. PAGENO="0868" 866 donations from his income tax liabilities and the employee would receive $20,000 in taxable income; the foundat ion would receive ~l0,000 in contributions from the employer. The net effect of this particular operation would allow the employee to produce for the overall estate plan much more than he would be able to preserve from a standard $30,000 salary and 20 percent donation to his foundation. (Twenty percent of ~30,000 is $6,000, and if the employer donates to the foundation, the foundation would be endowed tax-free with $4,000 more.) Donations of this type from the employer must not be in consideration of services rendered by the employee or the foundation but must be made under an oral or written request as a gift and not for services rendered. If the money paid by the employer to the foundation is classified or categorized as funds paid for the services of the employee, then the tax-exempt status of the foundation may be endangered. This variation, however, is extremely useful in the initial funding of a foundation, particularly where the employer has generally few charitable deductions during the year and a large ad- justed gross incomef (2) The da iry ormilki~g qparat ion - This type of procedure is applicable where the individual owns or la-6 Copyright c 1967 Americans uilding Constitutionally (A Trust) Printed in U.S.A. PAGENO="0869" 867 controls the business employer; that is, if you own or control your own business, you might milk the taxable profit out of it through deductible methods and direct the funds to the foundation. If you operate a corporation you might contribute five percent of your corporation's adjusted gross income to the foundation. The stock in your corporation might be transferred to the foundation (although this is not generally recommended). In addition, the foundat ion could perform research and development services for a contract price which would be deductible by your corporation and received as related Lees by the foundation. Finally, you might additionally take advantage of the piggy-bank procedures. (The instructor or attorney should chart these on a blackboard or other visual aid to show the directions and percentages of each payment.) (The attorney or instructor explaining these should go into greater detail than these paragraphs indicate, but should not involve himself with any technical language or technical explanation of detailed legal instruments or language. If the instructor explaining this portion of the seminar is not a local attorney, great care should be taken to avoid specific advice to individuals concerning 18-7 Copyright~ 1967 Americans Building Constitut~ona1lY (A Trust) Printed in U.S.A. PAGENO="0870" 868 their estate plan. This would definitely be construed as unauthorized practice of law.) ~ Bibliography -(Pass out management bibliography and suggested read ing~ ~xplain some of the indlvidual items, their value, their content and portions that are recom- mended. A short discussion about newspaper articles and other sources of information relating to trusts and founda- tions might be pursued.) 18-8 Copyright (c) 1967 Americans ~9ui1ding Constitutionally (A Trust) Printed in U.S.A~ PAGENO="0871" 869 EXHIBIT 39 MANAGEMENT BIBLIOGI~PHY Ti bibliography on business management books is being prepared. Since there are few non-legal materials relating to trusts and no good books at all relating to trusts in the legal field, we cannot supply you with any information or further reading to in- crease your kno~iledge. You may, however, be interested in some of the other mana'i~:r~nt principles, secrets and techniques that are valuable in any business situation, trust corporation, or otherwise. For this reason, we are assembling various titles that may be of interest to managers of foundations and trusts. If you have any suggestions, do not hesitate to give them to your instructor or mail them to Box 575, Barrington, Illinois 60010. *** ** Copyright 1967 Americans Building Constitutionally (A Trust) Printed in U.S.A. PAGENO="0872" 870 SECTION 19 CLOSE OF PROGRAM (The instructor should prepare this section ahead of time with the associate attorney or attorneys and should lead a short discussion in where do we go from here. Ther~ are no hard and fast rules as to how to proceed from this point. This depends upon the attorneys and the instructor~ The following items should be discussed.) (a) Instructions as to working wlth the attorney for junior and senior members. (b) The final topic should be an inspirational talk, deslgned to help encourage and bring in new members. Some of this material should have been covered in prior sessions, but this one should discuss in detail (1) the incentive program, and (2) the relation of membership to other ABC programs. Copyrig~kt c)1967 Americaas Tuilding ConstitutiOnallY (A Trust) Printed in U.S.A. PAGENO="0873" 871 EXHIBIT 1 The Primary Purpose of Americans Building Constitutionally (ABC). (A Trust) To help citizens of the United States make full use of their rights guaranteed them under the Constitution. * * * * * Copyright: ;~, 1967 A~rioanB Building ConBtitutionally (A Tru6t) Printed in U.S.A. PAGENO="0874" 872 EXHIBIT 2 The United States has spent over $700,000,000,000? since 1946 to fight the "cold war" -~ "to prevent the spread of communism." This is more than the United States has spent in fighting all the "hot wars" including the War of Independence on up through World War II. It is enough to pay the private indebtedness of every man, woman, and child in the United States plus over half of the corporate indebt~dness. We have given over $150,000,000,000 since 1946 in foreign aid "to prevent the spread of communism." What have been the Results? Since 1946 over ~00,000,000 have been enslaved by communism - an increase of over 500%. Today the average American pays 41 cents out of every dollar of income for direct and indirect taxes. He must wcrk over two days out of every five for the government before he can pay his own grocery bill or clothe his own children. The average business man pays 63 cents out of every dollar of income for taxes. He works over three days out of five to pay his taxes before he can feed his family and clothe them -- or think about capital for expanding his business -- or providing (over) Oop~rrig1~tCc) 19~7 Ameuic ens ~ui1din~ Constitutionally (!~ Trust) printed in U.S.A. PAGENO="0875" 873 jobs for others. If he made $10,000 in 1939, today he must earn over $27,000 to have the same purchasing power as he had in 1939. This is due to increased taxation and inflation -- from spending programs which dontinue to exceed government income ~ rapidly increased taxation. It is destroying incentive for research and development, thus making it more and more difficult to maintain our lead over our foreign competition in the areas of both commerce and armaments -- on both of which depends our national security. * * * * * o opyright~c) 19d7 Aniericafls Building C onstitutionally (!~ Trust) Printed in U.S.A. PAGENO="0876" 874 EXHIBI7~ ~ it ~? In 1966 our rate of inflation has been 5 percent. This means that if you earned $7600 in 1965, in 1966 you would have to earn a raise of $3d0 to break even. The trouble would be that you would then be in a higher income tax bracket so that you would have to have $72.20 more to pay the higher income taxI Already another substantial income tax increase is being considered for 1967. Our government indebtedness is the highest in history. Our government expenditures are the highest ever, ap- proaching $175 billion per year -- and yet deficit spending continues. * * * * * Copyright~ 1967 Americans 3uilding Constitutionally (~ Trust) Printed in U.S.A. PAGENO="0877" 875 EXHIBIT 4 How much control have you been able to exercise in the decisions which have lead to these conditions? In the light of what has happened can we afford to leave it to government to solve the problem? What can be done? What can you do? * * * * * ~opyri3httc, 1967 Americans Juilding C onstitutionally (:~ Trust) Printed in U.S.A. PAGENO="0878" 876 EXHIBIT 5 National security Depends upon econonic strength Depends upon motivation of those who produce Depends upon the ability of the individual to benefit from his work Depends upon the ability of the individual to control the fruits of his labor Depends upon the degree to which his property and earnings are taxed away * * * * * Copyright~j 1967 Aneric 5113 Building C onstiiutionally (.~ Trust) Printed in U.S.A. PAGENO="0879" 877 EXHIBIT 6 Attitude of government toward private foundation taken from Congressional Investigation of Foundations by the Cox Committee, "It appears that the present need for foundations is even greater than it has been in the past and there is a great likelihood that the need will increase in the future The foundation, once considered a boon to society, seems to be a vital and essential factor in our progress." Another quotation in this connection taken from the Ti. S. Treasury Department Report on Private Foundations on Page 12. "Private philanthropic organizations can possess im- portant characteristics which modern government neces- sarily lacks. They may be many centered, free of administrative super structure, subject to the readily exercised control of individuals with widely diversified views and interests.. .precisely because they can be initiated and controlled by a single person or a small group, they may evoke great intensity of interest and dedication of energy. These values, in themselves, justify the tax exemptions and deductions which the law provides these philanthropic activities." Copyright c'1967 Arneric ens 3uiidi~ig C onstitutionally (~ Trust) ?rinted. in U.S.A. 87-444 O-68--56 PAGENO="0880" 878 EXHIBIT_i Fringe benefits your not-for profit foundation may provide for you: Your - home investments automobile pension plan (retirement income) children's education insurance premiums philanthropies medical care many others recreation Food, clothing and miscellaneous would be paid out of person- al income for which you would be taxed and which you would draw as salary from your not-for-profit organization. As a result of these fringe benefits, the following taxes would be reduced or eliminated: Income Personal Property Federal Estate Excise Tariffs Eliminate Probate Costs Sales Capital Gains Social Security State Inheritance Under most other forms, at death one-third to two-thirds of your estate is given to people you don't even know. * * * * * ~opyright~c 1967 Ariericans ~3ui1ding C onstitutionally (. Trust) Printed in U.S.A. PAGENO="0881" 879 EXHIBIT 2. Some examples of Purp~~ 1. The purpose of the ____________Foundation is to promote well being of mankind wherever located through contribu- tions to and participation in a variety of activities bdneficial to mankind which shall include but not be limited to education, art, literature, music, research and development of efficiency in business and industrial communications, welfare and religious, civic and cultural activities with initial emphasis of character development of youth and related projects. 2. To promote the well being of humankind wherever located through contributions to and participating in a variety of beneficial activities established in the fields of health, education and welfare, with initial emphasis on education, research and development and in the sciences, methods, practice of philosophy, of nursing, geriatrics, medicine, medical science, pharmacy, vocations and other related activities, studies and philosophies concerned with the physical and mental well being of mankind, in- terest in the fields of health activity as especially concerned with general study and activity in regard to geriatrics, mental retardation and persons requiring in- tensive care and aid. Such studies will consider related physical and therapeutic methods and diagnoses including but not limited to non sectarian, religious and philo- sophical studies amd also group and individual activities. 3. To benefit all of mankind wherever located, through re- search of medicine and medical science and contributions to the advancement of education, religion and cultural tradition. which will include initial activities in research and development in the proper use of Community resources, both private and public, promotion of the values of responsible citizenship in the family unit through re- search, development and education in the insuring of human life and property values and the promotion of and contribution to religious, civic and cultural activities and education of all other diverse fields. * * * * * Copyright~c; 1967 Ar~ericanD Building Constitutionally Printed in U.S.A. PAGENO="0882" 880 EXHIBITI WHAT TO DO WHEN APPROVED CHARTER IS RETURNED TO YOU* Under most State laws, ~hen your incorporation charter is returned to you b~r the Secretary of State, you are normally re- quired to file the charter and a copy of the Articles of Incorpora- tion with a local County ~ecorder of Deeds. You must generally do this within a stated time period (i,e. 1S days in Illinois, 10 days in Wisconsin). Be certain you do this as soon as it is practically possible. If these procedures are not completed in order, the Secretary of State or the Attorney General of your State may be empowered by law to take control of your foundation or dissolve your foundation due to improper filing.. There is no reason to open your foundation to these penalties because of procrastination, Once these legal requirements are satisfied, you may turn to more practical procedures to begin your foundation activities. (a) Choose a bank that would be a depository of your foundation. It is.suggested that you shop around for a bank that does not charge any service fees for your foundation account. Many banks do not charge n-f-p corporations for checking services, but this is a local option with the bank and has nothing to do with State law. Other banks might charge a smaller fee then thöy would for an individual or corporate account and still other banks charge full fees f or not-for-profit check- ing ~accounts, When you decide upon a bank, obtain the corp- orate Resolution papers for opening an account and the signature cards from the bank. This should be obtained in duplicate to enable you to retain a copy. Most banks do not have n-f-p corporate forms, but if yours does, these are the proper forms to use. If your bank does not have n-f-p corp- orate forms then obtain the business corporation Resolution forms, Do not use the forms employed for clubs, churches and civic associations. Fill out the proper Resolution forms according to instructions. (b) Obtain a corporate book and a corporate seal making certain that the seal states "Not-For-Profit Corporation." (c) Have the proposed Executive Director and the Assistant Executive Director, if any, mail their letters offering their ser\ribeb in exchange f~ an. emplo~yment contract, This should generally be done by certified or registered mail. (d) Prepare in advance the minutes of your first meeting of the Board of Directors and the Waiver of Notice. Copyright(c) 1967 Americans Building C onstitutionally (!~ Trust) printed in U.S.A. PAGENO="0883" 881 (e) Prepare in advance all other papers f or signing by foundation- corporate officials, such as membership certificates, employment contracts, stationery orders, etc. (f) In some cases it will.be neceseary for. your foundation to file legal notice in the newspapers to indicate the beginning of your foundation. In some States this is required by State law, but generally it need only be performed by those foundations performing business activities of the sàm~ nature as the Creator's prior business activities. Public notice in this case is necessary to give construc~ive notice to creditors, customers and other interested business. Such legal notice of "change of business form" should be placed in the classified ads of a local newspaper serving ,thQ County or counties, in which the foundation is active. A daily newspaper is preferred under t1~ law, but if no such daily is available or the rates are prohibitive then a * weekly newspaper is sufficient. (1) If the prior business form was a partnership, limited partnership, corporation or a business operating under a fictitious name then the following language is usually mandatory: "The XYZ Company formerly doing business at 123 Main Street, hereby gives notice to all inter- * ested parties thatas of January'l, 1967, it will be doing business as the XYZ Foundation duly organized * under the not-for-profit corporation laws of the State of California," (2) If the prior business conditions were ~chat of a profes- sional, doctor, dentist, chiropractor, optometrist, etc., serving as a sple proprietor `or non-fictional name, then the following form is proper: "The Smith Founda- tion is pleased to announce that Dr. Smith is now serving as Executive Director (Medióal Director, Medical Administrator, Dental Administrator) of the Smith Foundation, as of January 1, 1967. (3) If none of the above conditions apply to your particular business situation and you are an employee of a large corporation or retired, or unemployed, then no legal notice is generally required in most States0 State law should be examined to determine whether you must publish a public notice. If you are required to publish public notice and no language is given by the State Co~de then we suggest the following language be used: ~We are pleased to annoithce the' incorporation of the XYZ Foundation, whose general activities will be of the following nature ("summary of purpose"). The following people will serve as the initial Board ot Directd~s: (names of initial Board of Directors). - 2' - ~opyrigrYt~ C) 19o7 Amer IC ans dull ding Constitutionally (!~ Trust) Printed in U.S.A. PAGENO="0884" 882 (Lb) In all cases the legal notice should be prepared and signed by the Secretary of the foundation. Quite frequently, local papers, particularly weeklies in small towns, will pick up the incorporation of the foundation and will publish this news without cost to the creator. If a notice is published, or if you find an article about your foundation creation, save several copies of this for your files for future refer- ence. A copy should also be giv~ to your attorney for his files, * * * .~. *1 Copyright® 1967 Americans Buildin: Constitutionally (A Trust) ?rin~ed in U.3,A. PAGENO="0885" 883 EXHIBIT 9 HOW THE FOUNDATION BUYS PROPERTY There are no mystical or unusu~.l methods by which a founda- tion can buy or obtain property. Standard accounting and legal practices and good business management are as im- portant here, as in other business forms. There are some considerations however, that must be made in foundation pur- chases and sales to enable the foundation in which the in- dividual is involved, to enjoy maximum tax and legal ad- vantages. a. The purchase of property whether tangible or in- tangible from third parties totally unrelated to the foundation, is carried on in exactly the same way as in other purchases. If financing is re- quired for purchases such as a large piece of real estate or an automobile, the financing would be made in the name of the foundation. All con- tracts and titles would be within the foundation and payment for purchases, mortgages, loans, etc., must be by foundation check. These procedures would make the foundation sole owner without "strings" of any kind, of properties and interests so acquired. A problem might arise where a foundation has not been long established, in obtaining financing through most banks or savings and loan associations. Here the officers of the foundation might be forced to co-sign as an individual, for loans made to the foundation. This is normal business practice and serves to create credit standing for your foundation upon completion of the transaction. Any other ~e- tails connected with normal purchases from third parties should be qualified and arranged with your attorney and/or accountant. In many purchases, considerable savings might be possible for a tax exempt institution, in rebates for sales tax, exclusion from excise tax, and per- haps lower prices from private companies to not- for-profit tax exempt organizations. Inquiries should be made as to the proper procedures in each State for obtaining these tax savings and inquiry should be made of the proprietors of each business for price savings. b. Purchases from the creator or officers of a founda- tion, present different problems. The primary situa- tion to avoid is "self-dealing" in terms of the IRS Code. Generally stated, this rule prohibits trans- actions between foundations and their creators and co~yright(&\1967 -1- Anerican~ ~ui1d~tng C onstitutionally Printed in U.S.A. PAGENO="0886" 884 officers, which do nothing more than enhance the position of the creator and officers. This might involve, if carried to abusive levels, in the re- fusal or retraction of tax exempt determination * and.general~ liability for taxes and other penalties for all persons invplved. In the case of most small pieces of property, it is suggested that outright gifts be made of these properties to the foundation,. rather than sale, but where sales are desired and * x~epresent. substantial financial savings, it is sug- gested that outright gifts be made of these propertiës~. to the foundation, rather than sale, but where sales; are desired and represent substantial financial sav- ings, it is suggested that the seller (creator- individual) sell at a loss to the foundation, of from 10 to 25%. This normally takes the taint of self-dealing off the transaction, and no attempt should be made by the seller to deduct his loss as a charitable deduction. c. This process should be reversed where the creator might purchase properties.from the foundation, but itis not recommended as part of standard procedures that the creator purchase any properties or receive any services from the foundation. d. The best way for a creator to transfer properties to a foundation is by outright cc5nveyance. The following information might be a guide for such charitable contributions, although great care and~ analysis should be made of each individUal contribu- tion for tax purposes, since the Treasury has gone to a great deal of pains in recent jears to dis- tinguish various types. of property contributions fr~orn each other. . 1.. It has been suggested by some writers that the courts could hold that there is a realization of income by the owner by the transfer of property to charity. However, in view of re- cent cases, this would seem to be an unlikely possibility, particularly because of the clear public policy of encouraging charitable :com_ tributions. Most of the cases involving such donations would have ended in adverse rulings for the taxpayer if involved in private rather than "Charitable transfers." 2. Because recent cases have criticized or ques- tioned charitable gifts made to foundations with limitations or ~strings" attached, it is recommended that gifts made to a foundation be outright without limitations, copyrig~it(c~ 1967 -2- A~ericaflS ~ui1ding Constitutionally - ~ Trust) Printed in U.S.A. PAGENO="0887" 885 3. ~f a charitable contribution is made in the form of property which the taxpayer sells in the course of his trade or business, he is entitled to a deduction for it. i~. In general, the donation of appreciated pro- perty to a charity does not cat~se a donor to realize income. Appreciated property which is subject to the deduction for depre- ciation falls within the scepe of that general rule, thus, for example, a charitable contribu - tion of a L~0 year old building with a value of ~20,000 and original cost of ~50,O00 and in the tax basis of ~lO,000 due to prior deprecia- tion deductions, would not cause a realization of any taxable income by the donor, even though he had already deducted ~L~O,00O through de- preciation allowances. 5. Individuals may contribute 20% of the adjusted gross income for any taxable year (Code Section 170(b) (1) ). Either spouse under a joint re- turn can give the full percentage. An addition- al 10% above the 20% limit to private founda- tion may be given to churches, educational or- ganizations or hospital. Corporation may give 5% of the taxable income for each year. (Code Section 170 (b) (2) ). A mere pledge is not a contribution and the contribution must ac- tually be paid to entitle the donor to a de- duction. Gifts of appreciated property generally avoids a tax on appreciation. Other types of property that may be considered business pro- perties: stock rights, life insurance, where there is an irrevocable assignment of the policy with the foundation named as irrevocable beneficiary and the gift sale of appreciated property where the transfer of the property is in part a sale and in part a gift (however, beware of self-dealing). There are approximately 10 other classifications that are recognized as different types of gifts under the IRS Code. Oopyright c 1967 ~ Americans ~ui1ding Constitutionally (~. Trust) ?rinted in U,3.A. -3- PAGENO="0888" 886 EXHIBIT 13 TRAVEL AND EXPENSES: ________ ~ ~ho pays for: Car expense ____________________ Gas expense ___________________ Hotel and meais _______________ Cab or car rentals What reports do I keep On a pleasure trip: Car expense Gas expense Hotel and meals CopyriCht® 1967 Americars Building Constitutionally (A Trust) Printed in U.S.A. HOW DO I CHARGE THESE EXPENSES: Foundation Personal HOME EXPENSES: . . . . 1. When my home needs - paintiflg - repairs -or .. service of any type (plumber, ele6t~'ic1an, carpenter . . .. 2. When my home requires a full-time housekeeper _________ _______ 3. When my home requires a part-time servant _________ _______ L~. When my home requires a pert - or full-time gardener ___________________________________ _________ ________ 5 When my home requires new furniture _________ 6. When my home requires garden supplies (fertilizer, plants) ___________________________ ___________ ________ INSURANCE: 1. Who pays fire insurance policy ______________ __________ _______ 2. Who pays life insurance policy _____________ __________ _______ 3..- Is the Foundation oi~am Ithd beneficiary ________ ______ L~. Should I notify my insuranoe companies _____ __________ _______ 5 How about accident insurance _________________ ___________ ________ 6. Is a Will necessary _________ _______ On a business 1. 2. (Over) PAGENO="0889" Copyrigh c 1967 Americans uilding Constitutionally (A Trust) Printed in U.S. A. 887 Foundation Personal OTHER EXPENSES: Car repairs ________________________ Car license _________________________ New car _____________________ Home water bills ___________________ Home electric bills ________________ Home telephone bills _______________ COST OF HOUSEHOLD: Food _______________________________________ ___________ _______ Clothing . Doctor bills . - ____________ _______ Medicine ______________________________________ _____________ ________ Entertainment (friends) ___________________ ____________ _______ Entertainment (business assoc1ati~J _______ ____________ _______ Books, Magazines,.Papers - To make a Foundation profitable, how large should the yearly earnings be, and how sizable should the real estate be? Is there a time limit on a Foundation ~then it is possible f or the Government to cancel the Foundation? _________________________________ Is it necessary to make contributions from the Foundation to non- profit organizations? . Has the Government the right to check Foundation records? ___________ Is it possible for the State or Federal Government to annul Founda- tions? How about bookkeeping? _______________________________________________ PAGENO="0890" 888 SOME DISADVANTAGES OF A NOT~FOR-PROFIT CORPORATION FOUNDATION. 1. Since any corporation receives its charter from the State, the State claims the right to require reports of the corporation's activities, and on occasion question its officers, at the dis- cretion of such officials as.the Attorney General and others. However, this affair is usually a simple one even though the power to do so exists. 2. The right claimed by the State to dissolve the corporation under certain grounds such as those listed in Section 50 of the Illinois General Not-For-Profit Corporation Act. However, the performance of the Act which brought about the dissolution will in some circumstances abate any action by the State (e.g. Illinois N.F.P. Act, Section 51.) Consult your own State Law and Counsel for interpretation. 3. Foundations must spend their money for so-called "exempt purposes" -- nevertheless, the foundation may operate in a very wide sphere of activity in furthering its exempt purposes. 4. Dispositions of property of a highly personal nature are prohibit- ed by law and should not be done with foundation money, such as -- gifts to friends or family with no restriction as to purpose, or an entirely personal purpose, such as payment of a gambling debt, loan money to a family member or a friend for a highly speculative business venture, etc. One should avoid situations which might be helpful to a friend yet could cause trouble for his foundation. Copyright c 1967 Americans uilding Constitutionally (over) (A Trust) Printed in U.S.A. PAGENO="0891" 889 5. Annual report form, Internal Revenue Service, 990-A, makes it a matter of public record: (a) Foundation's officers' salaries. (b) Foundation's holding of stock and other investments. Cc) Its accumulations of capital gains and other income. Cd) Dealings and relationships with contributors. (e) Names and addresses of persons receiving grants. Cf)* Their relationships to benefactors of the foundation. 6. IndIvidual's deductions which h~ can clai~n for contHbutions to privately supported exempt organization limited to 20% of his adjusted gross income. * * * * *. Copyright c 1967 Americans Building Constitutionally (A Trust) Printed in U.S.A. PAGENO="0892" 890 EXHIBIT 2 THE CHARACTERISTICS OF THE SECOND ORGANIZATION (a) The second organization should be controlled by the same persons as the foundation to insure consistency of management and no loss of tine in negotiations, contractual agreements or other forms of "red tape." (b) The second organization should be as free as practically possible from taxes. (c) The second organization should be able to receive and retain disbursements from the foundation, and yet remain legally independent and separate to limit the liability of both organizations. (d) The second organization should be ideally of a different nature than the not-for-profit corporation, so that it might be unaffected by any changes or disadvantages of not-for- profit corporate procedures and yet, the second organization should be in a position to take advantage of these procedures where desirable. (e) The second organization should be ideally able to benefit the creator in as many ways as possible, regardless of taxation, and still preserve the creator's estate. (f) The second organization should be relatively uncomplex, so that constant administration by counsel is unnecessary. (g) The second organization should be legally suitable, proven and court-tested to insure longevity, legality and safety. (h) And the second organization should be as flexible and adapt- able as the foundation. * * * * * Copyright(~) 1967 Americans Z~ui1ding Constitutionally (A Trust) Printed in U.S.A. PAGENO="0893" 891 EXHIBIT~1 PARTNERSHIP~ Partnerships consisting of two partners entering any one of many common business undertakings. Some Disadvantages Pride of seeming ownership and achievement, responsibility and reward. Property may be easily conveyed in and out of a Partnership. Can make advance arrangements for distribution of profits and losses based on a division of each Part- ner's contribution (i.e. services, capital, etc. and various combina- tions of each) to the success or failure of the partnership. No double taxation of earnings as in a corporation. No franchise or stock tax, and no corporation filing fees or reports. Not subject to or dependent upon the State unless you seek to limit your liability, use a fictitious name or employ other privileges granted by the State in its Partnership Act. Copyright (~)l967 Americans Suilding Constitutionally (A Trust) Printed in U.S. Illusory ownership soon becomes a pronounced liability. Partners are liable for Partnership activ- ities as well as taxes. Partnership earnings are taxed to individual partners and may raise personal income taxes to a highly confiscatory level - even above corporate rates. Partnership orpartners may pay income, excise, inventory, license,, real estate, social security, and unemployment compensation taxes as well as partnership filing fees if the~ partnership seeks State priv- ileges. Deceased partner's interest in the partnership devolves to the family~ as a part of his estate often forcing immediate liquidation at unfavorable prices. If the partnership is a success and otherwise an asset of the family, it is none-the-less lost to them upon the death of the partner re- lated to them, as the death of a partner serves to force a dis- solution of the partnership. Creditors may proceed to obtain a lien on the partner's assets, and, one partner's reckless driving may cause a judgment to be had against the remaining innocent partner's home and other assers. -l - PAGENO="0894" - Some Advantages Ownership may be divided among many people in varying amounts. Each family member has his own separate share which he rday dis- pose as he wishes. corporate earnings to the individual A corporation has limited liabil- ity and may operate under its corporate name. The corporation may have perpetual existence Outsiders may be kept out through requirement of first refusal on all stock to the corporation or other stockholders. Copyright(~ 1967 Ajnerican8 Building OonBtttutionally (A Trust) Printed in U.S.A. Some_Disadvantages Persons owning small amounts of ownership may interfere by legal right in your management. A family member's share may pass to a stranger who can disrupt your management and there are taxes on each m~mber's share of ownership. A creditor may seize his shares to satisfy his debts. When the creator dies the value of the business imposes a huge estate tax liability which may force the family to sell control of the business. The corporation pays a tax on its earnings and the share holder must pay another tax on his re- ceipt of the dividend. Should the corporation accumulate earnings the government may claim that it is being used to avoid tax on its shareholders àndb6 sub~jeôt to a surtax.. Should it neglect to maintain its corporate agent, it night be subject to a default judgment on the basis of a process served on the Secretary of State about which it has never heard. Whenever any share holder dies his part of the corporation is taxed and subject to probate. Should a stockholder die or his stock be seized by a creditor, the corporation would have to find a large sum of money on short notice. 892 Corporations are very flexible business organizations and it is con- sequently very difficult to make general statements true of all cor- porations. For convenience we will take a single type of corporation form, the closely held stock corporation with only one class of stock, the type most commonly used in family owned businesses. The person who creates a business may see his estate growin size as the value of the business increas-. es. . . Undistributed are not taxed owner -2- PAGENO="0895" ~Q~E PROPRIETORSHIP 893 (e.g. - Small grocery store owned and operated by man and wife with no formal agreements or conditions on operations.) Some Disadvantac~es No need to separate income or ex- penditures of business into class- ifications of source or use. Minimum necessary tax reports are required. No franchise taxes Freedom to decide what to do with property without reference to other investors (stockholders). Minimum of contracts to be execut- ed (employees are hired orally and purchases and sales are usually made by simple receipts). Simplicity of operations Ownership (perhaps an illusory ad- vantage). ASSOCIATIONS No benefits of separation of in- come into tax-exempt classifica- tions and capital gains catagories. Maximum taxation and regulation. Licenses to operate are usually required. Total liability of individuals for business debts and expenses. No possible avoidance of social security or advantages of "corpor- ate fringe benefits." Mixing of personal and business records. Loss of control to the extent of the extensive taxes and regula- tions placed on such business forms. Not-for-profit organizations generally similar to Trade Associations, complex church structures or Unions. So~n~Advantag~ Some~D~isad~zan~ ges Require to form and clarify the Association lest it be taxed as a partnership or a corporation. difficult to maintain control as there are multiple positions of authority. Subject to limits that apply to all independent not-for-profit foundations, including disclosure of assets. May take advantage of laws govern- ing their operations as distinguish ed from rules governing private foundations. 3opyri~ht c 1967 - 3 - !tr~cricana Building Constitutionally (: Trust) Printed in U.S.A. 87-444 0-68-57 PAGENO="0896" 894 ASSOCIATIONS (Cont.) Som~nt&~s~ ~ ~j~dvantages~ Should be in agreement between two or more entities to pursue proper objectives. * May lose its exemption if no real activities are accomplished to ~further industry.' * * ?c * * * Oopyright® 1967 Americans 3uilding Constitutionally (A Trust) Printed inU.S,A. PAGENO="0897" 895 EXHIBIT #~ Advantages and disadjrantazea of different forms of Trust. 1. REAL ESTATE TRUSTS: Many States allow creation of land holding trusts for various purposes. The Illinois passive Land Trust is one for example. In spite of the name of this Trust, it is actually a special temporary trust created solely for the holding of title to land for a limited period. Trustees under the law, may not gener- ally convey the property or deal with it without violating the trust. This type of trust has only limited tax and control advantages. 2. INSURANCE TRUSTS: The proceeds of a life insurance policy may be placed in an insurance Trust created during the life of the insured. Upon the death of the insured, the fund will then be administered for the benefit of the benefici- ary of the Trust, often the wife of the insured, and upon the death of the trust beneficiary, the trust funds would be distributed to designated parties -- usually the child- ren. Substantial tax savings are possible for the transfer to the wife of the beneficial interest, but the children must often bear the full brunt of taxation on the assets transferred to them. The Trustees of the insurance Trust are limited in their activities by many guide lines set out in both the State law and under the Trust agreement. Trust-, ees are almost always either corporate Trustees, such as banks, insurance companies or individual lawyers. The in- surance Trusts are not perpetual in nature and must term- inate at a specified time, under the terms of the Trust agreement. Coyriht®19~7 -1- Atiericans ~ui1din~ ~onstitutiona11y (.~ :ruct) P:inted in i.S.A. PAGENO="0898" 896 Renewal is usually impossible and undesirable or illegal. The insurance Trusts are usually created in relation to wills or refer to the Trust as *the receptacle. Thus the estate of the decedent is "poured over" by the will into a Trust created' for the specific purpose of isolating the decedent's property for tax savings and conservative management by banks or lawyers. Properly created insurance Trusts can provide many conventional benefits, death tax ~avings, but they have only limited efficiency in not-for- profit procedures. The drawback to insurance Trusts is that the distant heirs such as grand-children or great- grandchildren may be taxed an amount greater than the original tax saving provided by the Trust, due to the fact that tax rates have consistently increased over the years and will probably continue to do so. In other words, there is no continuing protection. 3. BANK TRUSTS: Bank Trusts, like insurance Trusts, are pri- marily created to preserve assets from shrinkage. Bank Trusts vary greatly, but they usually involve a special pre-drafted form will, which creates two or more Trusts i~pon the death of the creator, these Trusts to be adminis- tered by the bank as Trustee. Such Trusts often take ad- vantage of the marital deductions for federal estate ta.c savings, and they provide limited protection in other areas of estate planning. Again, like Estate Trusts, the bank Trusts are usually severely limited by State law, business practice and the Trust agreement. Usually the beneficiary has little or no control over the Copyright (E) 1967 Americans Building Constitutionally - 2 - (A Trust) Printed in U.S.A. PAGENO="0899" 897 management of the Trust fund properties, since the beneficiary is not a Trustee. In both the bank Trust and the insurance Trust, the creator or the creator's estate retains some "strings" of interest and control. These "strings" are the reason that taxes are properly assessed against the Trust properties upon the death of the creator. Most banks have found great value in limited Trusts. They advertise their use continually, and the Trust Department often constitutes the second largest department in a bank, second only to the savings department. You may have heard some of their advertisements, they say . "Trusts can save significant amounts of estate taxes," and "Trusts can provide your family with security through sound financial management." A large bank in Chicago has stated . . . "Trusts should not be created solely for tax purposes, but nevertheless, large amounts of taxes can be saved through their proper use." (Northern Trust Company.) All of these statements are true, but we believe that an Ownership Trust is far more efficient for these purposes than the Trusts that banks offer. Because most people do not wish to give up complete ownership, these limited Trusts sometimes provided by banks in which individuals have some "strings" of control, are popular. When such limitations occur, then a temporary Trust is created and the more significant benefits of the ownership Trust are forfeited. Copyrighted~1967 - 3 - Americans Building Constitutionally (A Trust) ?rinted in U.S.A. PAGENO="0900" 898 4. ESCROW AGREE~NTS, ETC: Whenever you entrust a person with valuable property, and place conditions on its use and direction, you usually create a special Trust, Escrow agreements are short term Trusts as are "street account" securities transactions with your broker. In each of these Trust situations, the creator places defin- ite limitations on the Trustee and the "equitable" interest and taxable interest remains in the creator. These short term limited Trusts are of great value for their purposes, but they should not be cbnfused with the type of Trust we are about to discuss. * * * * * ~o~yrig.~t(~)1967 A~erica~is uiiding Oo~stitutioflaiiy (it :rust) Printed in U.3.it. PAGENO="0901" 899 EXHIBIT S AN ANALYSIS OF THE OWNERSHIP TRUST ADVANTAGES Since the Trust o~~ns property, it nay buy, sell, lease, loan and otherwise deal with the property for the purpose of building, expanding and strength- ening the Trust in the interest of the beneficiaries. It is self perpetuating in na- ture which adds security. A Trust will protect and pre- serve properties and values for the beneficiary. Since the creator nay be a bene- ficiary, the craator also may enjoy the advantages of Trust procedures. The Trustees are empowered to employ all persons necessary to preserve and build the assets of the Trust. Since Executive Director of the Foundation and the Managing Trustee may be one and the same person, there is consistency of management. It is possible to reduce tax- able income of the Trust to near zero. A Trust can lower tax liability by making use of Not-For-Profit laws just as an individual may. A Trust may form divisions and agreements with other legal entities for protection of lia- bility and reduction of taxes. The Trustees may decide to par- ticipate jointly with another business or they may decide to incorporate a stock corporation to accomplish Trust business, all of the stock being held by the Trust or the Trust may go into partnership with another Trust, Corporation, partnei~ship, Foundation, etc.~, for the pur- pose of accomplishing some common objective. Copyright ~ 1967 Americans ~ui1ding Constitutionally (A Trust) Printed in U.S.A. DISADVANTAGES Having to make the mental adjustment of giving up legal title of property in favor of control and use of property. PAGENO="0902" 900 ADVANTAGES(CONTINUED) -- ~ The Foundation within the Trust is controlled, cp],ei~e- ly by the Trustees to strengthen the purposQ~f the ~ist totake advantage of Not-For-Profit procedures to qualify for tax exemption. * The Trust Foundation may re- ceive any properties or bene- fits in any amounts at any time without tax consequences from another Not-For-Profit quali- fied tax empt Foundation Gifts or endowments received by the Trust Foundation are not considered income under the Internal Revenue Code. The Trust through the Trust Foundation may receive and re- tain disbursements of accumu- lated income from a State Chartered Private Foundation and yet remain legally independ- ent and separate from this State Chartered Foundation. While State Chartered Founda- tions may be subject to change, the Trust is not so affected and may operate regardless of changes in N-F-P corporate proceedings. A Trust is in a position to take advantage of favorable changes in N-F-P practices through the use of a multiple Foundation system. On a ~lO,OOO,OOO estate, a Trust can save $6,886,200. In the State of Illinois, the Attorney General estimated on an estate of $1,000,000, for state taxes alone, an estate would pay $106,296.00. Es- timates of Federal taxation on $1,000,000 estate could amount to as much as $320,000 or more - a Trust would save all of this. -2- Copyright C 1967 AxCericane Building Constitutionally (i~ Trust) i~rinted in U.S.A. PAGENO="0903" 901 ADVANTAGES (coritinue4) -~ DISADVANTAGES (Co~tinuedJ A Trust removes the need f or forced sales of property often required under probate, and thus preserves values of pro- perty in addition to the taxes. A Trust eliminates probate fees and probate taxes. A Trust eliminates fees for the Executor or Administrator. A Trust also eliminates attorneys fees for probate, etc., which have been know to run as high as 1/3 to 1/2 of the estate after taxes. A Trust often saves months and even years of time often re- quired to settle an estate. A Trust is able to protect the Creator's estate from all death taxes and death procedures. A Trust enables control of the Trust properties to be trans- ferred to heirs or anyone else the Creator may desire. Probate and tieups are completely eliminated, A Trust provides the highest degree of privacy for ones' financial affairs available in any legal instance. This privacy may be maintained without a battery of attorneys. A Trust does not have to dis- close the beneficiaries. * * * * * Copyright~' 1967 Americans Building Constitutionally (A Trust) Printed in U.S.A. -3- PAGENO="0904" 902 EXHIBIT 6 $1,056.00 ~US~NG TAXES: ~ THERE IL A~ END? $32 33IIloo bood loo~o 013302 6333 of ho 003thoOl Co1itooo1~ $662.00 TAXES 1940 $150.00 F=:6~L p PAGENO="0905" 903 QUESTIONS AND ANSWERS Question: UNDER WHAT CIRCUMSTANCES ARE ASSETS HELD IN ANY #1 OTHER THAN THE TRUST? If wealth is generated outside the trust, it may be added to the Trust by gift at a later date, subject to gift taxes, or may be donated or sold to the foundation as the situation might require Since the most important functions of the foundations are generating tax-free income or absorbing through deductible con- tributions income otherwise taxable, there is no pressing need to transfer property to the foundation until it is to your advantage to get credit for a deduction. The consideration for delaying conveyance to a foundation is that, Once received by the foundation, property must be used in furtherance of the foundation's exempt purpose. Although this is very broad and also includes investment and overhead, there remain the rules discussed in Exhibit #11 of Lecture 2 which will apply when the property is held by an exempt organiza- tion but not, of course, when held by an individual or Trust. Questioi~i #2: COULD YOU GIVE US SOME SUGGESTED EXAMPLES OF THE BEST WAYS OF PLACING OUR HOMES, OUR INSURANCE AND OUR CARS IN THE TRUST OR FOUNDATION? a) Home - assuming that you have a reasonable equity in it, it might best be held in the Trust and leased to the foundation. This will allow you to tap foundation earnings without any restriction as to use and at the same time probably convert the Copyright c 1967 - 1 - A~aericans .~ui1dirig Ponstitutionally (A Trust) ?rinted in U.S.A. PAGENO="0906" 904 home into a capital asset for a subsequent capital gains sale. Where the home is leased by the foundation its rental will reduce the foundation's income account, yet still allow the foundation to pay utilities and upkeep. Your accountant can show you how to fix a rental price by balancing income against deductions so as to give the Trust (or you yourself, if you are not using a Trust) a maximum dollar return without increasing your taxable income. E.g. rent interest, plus taxes, plus depreciation. Such rental must not exceed a "fair rental value" in the local market. b) Car -- Since your active operations will probably be carried on by the foundation, the car should be provided by it. The foundation may buy or lease an auto for the use of its employees though purely as a matter of form, it might be best not to lease the car from yourself. For this same considera- tion of avoiding threshhold questions, it might be best if neither the car nor home were provided until after exemption is recognized. c) Insurance -- The general rule is that any employer -- be it a corporation or Trust -- has an insurable interest in its employee for the purpose of life insurance. You may want to have a large amount of term insurance in the beginning to fund your foundation in case anuthing should happen to you before your family was secure. A discussion of your goals with your insurance planner would be a good start on this question. Health and Accident Insurance is a pernissible fringe benefit. Copyright c 1967 Am ricans BuildinC Constitutionally - 2 - (A Trust) Printed in U.S.A. PAGENO="0907" 905 Question #3: HOW DOES ONE KNOW THAT THE FAMILY TRUST OR FOUNDATION IS EXEMPT? The family Trust is generally a non-exempt entity. It is its non-exempt nature that gives it certain advantages -- e.g., freedom from the rules of self-dealing or limitations as to purpose - that has caused it to be included in this model arrangement. The family foundation may apply for and receive a determina- tion of exemption like any other foundation, (See #5551 of I.R.S.) Question #L~: CHARITABLE FOUNDATIONS ARE ALWAYS REFERRED TO. DO WE NEED MORE EVIDENCE CONCERNING EDUCATIONAL RESEARCH AND DEVELOPMENT? No, "Charitable" is a shorthand expression for all organiza- tions exempt under Section 501 (c) (3) of the Internal Revenue Code, the section which exempts, among other things, the charities, as well as scientific, educational, religious, literary, etc. The expression is used for convenience and even encouraged by some because they feel it hides the true nature of those organizations. Question #5: EXPLAIN BY EXAMPLES WHEN A PAYMENT OR INVESTMENT IS MADE BY EACH OF THE THREE ENTITIES, OR BY YOU, WHICH ENTITY SHOULD MAKE THE PAYMENT? As a general rule is that the party who benefits or who has the property interest, is the party who makes the payment. For examples, if a foundation is leasing property it is normal to expect the foundation like any lessee to pay for up-keep, utilities, Copyright C 1967 ;rnericans Building Constitutionally (A Trust) Brinted in U.S.A. PAGENO="0908" 906 custodial care or the like. A lessee would not normally make expenditures on property which const~.tuteS a capital invest- ment, as for example, a lessee with a one year least would not build a new wing on the building. Investments may be made by any entity. However, a tax exempt entity should not make highly speculative investments which would imperil its ability to per- form its exempt purposes. Where the foundation owns or leases an automobile, the foundation may make payments for gasoline, minor repairs and general up-keep, but where they are paying you for the use of a car owned by you, as for example 10 or l5~ per mile on company business, they could not make car payments, just as the foundation occupying your property under a short term lease could not make morthage payments for your benefit. You would have to receive rental payments from the foundation, assum- ing that you are renting to the foundation, and then you would make the mortgage payment. For an explanation of how you can make the most out of these payments, refer to the discussion in question two above. Question #6~ CAN CHILDREN AS I~MBERS OF THE FOUNDATION RECEIVE AN ALLOWANCE TO HELP THEM EDUCATE THEMSELVES IN THE USE OF CAPITAL? No, although like any other person they may receive educational grants which can have the same result. (Recall the use of beneficial certificates of the Trust.) -L~ - Copyright c 1967 Americans guilding Constitutionally (i~ Truct) Printed in U. ~.A. PAGENO="0909" 907 Question #7: CAN THE EDUCATIONAL FUND BE USED IN CURRENT EDUCATION EXPENSES FOR CHILDREN OF THE FOUNDATION WHO ARE IN PRIVATE ELEMENTARY AND SECONDARY SCHOOLS? To begin with, the expression "children of the foundation" does not have legal significance. A relevant classification might be "children of a donor or officer of the foundation." Even these persons are eligibleto receive educational grants. Refer your accountant to Section 117 of the Internal Revenue Code for an explanation of how such monies may be received by those children tax free to them. Whether or not it is taxable to them does not effect the foundation~s ability to make such grants. Question #~: WHAT CONSTITUTES SELF-DEALING? Refer to exhibit 11 of Lecture III. Question #9: MAY I LOAN THE FOUNDATION OR TRUST X DOLLARS TO PURCHASE MY HOME OR OTHER PROPERTY, THUS CREATING A CREDIT AGAINST WHICH I MAY DRAW? Yes, the foundation or Trust may borrow from you as any other person mar do. Due to the exempt nature of the foundation, such loans must be at no more than fair interest. In either case, the interest on that loan is taxable to the lender. Question #10: WE NEED THE STATE RULES OF PRIVATE EDUCATIONAL, SCIENTIFIC, HEALTH AND WELFARE FOUNDATIONS. IS THERE A BOOKLET BY THE STATE? -5- Copyright C 1967 Americans Building Con~titutiona11y (A Truet) Printed in U.S.A. PAGENO="0910" 908 State rules of private, educational, scientific, health and welfare foundations is generally the state non-profit corporation law which is almost always available in pamphlet form. There are generally no other state laws applicable. Question #11: WE NEED COPIES OF ALL STATE AND FEDERAL FORMS REQUIRED The state non-profit corporation law will tell you what reports such corporations have to make to the state. These are frequently mailed out by the state as a matter of course. You might inquire of your Secretary of State if this is your state's practice. The federal forms pertain only to taxation and may be obtained from the IRS on request. These forms were discussed in a hand out in Lecture III. Question #12: WHAT HAPPENS TO THE GAIN WHEN THE TRUST SELLS PROPERTY, OR DOES IT CONVEY TO THE FOUNDATION FIRST? The Trust is taxable an that gain, unless it avoids such tax. There are two ways in which a Trust may avoid that tax. First, it may pay the money out to beneficiaries in which case the Trust can deduct what monies it pays out and reduce its tax to zero, or two, exercise it unlimited deduction for contribu- tions and achieve the same result. Question #13: MUST THE TRUST FOUNDATION HAVE THE SAME, OR SIMILAR PURPOSE TO THAT OF THE NOT-FOR-PROFIT? It need not have, though of course, where their purposes over- lap this will make it convenient for cross endowments. Copyright®1967 - 6 - Ajecricans Building Con$titutionally (A Trust) Printed in U.s.A. PAGENO="0911" 909 Question #l4~ HOW IS THE TRUST REGISTERED? THROUGH COURT ORDER CF COUNTY CLRK? The Trust need only be recorded in a county wherein it owns encumbered real estate. Question #15: WHAT ABOUT NOT-FOR-PROFIT MAILING PRIVILEGES? This information was covered in Exhibit 1, part Cc) of the second lecture material. (Bulk mailings of 200 pieces or more may qualify for this privilege) Question #16: A REQUEST ON SOCIAL SECURITY INFORMATION. PLEASE OBTAIN THE NAIVE AND NUMBER OF FORMS REQUIRED TO INFORM THE SOCIAL SECURITY BOARD TO EXEMPT BOTH EMPLOYER AND EMPLOYEE FROM PAYING THE SOCIAL SECURITY TAX, AND THE ADDRESS OF THE DEPARTMENT WHICH MUST BE CONTACTED ON THIS SUBJECT AND HOW IS THIS INITIATED? By virtue of the exemption ruling, the employer is exempt from federal insurance contribution act, FICA (social security). Other information regarding your specific case may be obtained through your local social security office. Question #l~: IS NOT THE TRUST FOUNDATION REVEALED WHEN X DOLLARS ARE ENDOWED, GIVEN OR TRANSFERRED TO IT BY THE NOT- FOR-PROFIT FOUNDATION, OR WHEN INVESTMENTS ARE MADE (PRIVACY)? Not to any more exposure than is normal, Question #19: IS NOT THE TRUST FOUNDATION REVEALED WHEN A BANK ACCOUNT IS SET UP OR WHEN TRANSFERS ARE MADE TO IT (PRIVACY)? See Answer to Question #l~. Copyright (~)1967 ~erjcans ~ui1din~ Conctitutionally - 7 - (A Trust) ?rinted in U.S.A. 87-444 0-68-58 PAGENO="0912" 910 Question #20: WHAT CAN BE DONE WITH PRESENT INCOME PROPERTY AND HOW DO YOU SUGGEST CONVEYANCE - BY DEED, BY GRANT OR SALE TO THE TRUST OR FOUNDATION? ON INCOME PROPERTY, WHICH IS HELD FOR THE BENEFIT OF THE FOUNDATION - WHICH FOR THE TRUST? The not-for-profit corporate foundation serves its highest and best use creating and generating cash flows The Trust on the other hand is the ideal legal instrument to own property - which may be conveyed by deed in Trust, Grant, gift, etcl Of course the Trust can and may have a foundation within its framework. Question #21: EXHIBIT 9, PAGE 3, ITEMS 3 AND L~. CHARITABLE CONTRI BUTIONS MEANS CONTRIBUTIONS TO OUR FOUNDATION? AND IS PROPERTY REFERRED TO IN I9EM 3 INCOME PROPERTY THAT THE DONOR WISHES THE FOUNDATION TO HOLD? WOULDN'T IT BE BETTER PLACED IN THE TRUST? "Charitable contributions" is that contribution to any organization where contributions may be legally deductable from your income tax, that includes, foundations, churches, schools, hospitals, etc., and you or your Trust can make contributions to any of these entities. No, by "property which the tax-payer sells in the course of his trade or business", we mean inventory. No, inventory is not usually placed in the Trust. Question #22: EXPLAIN CONVEYANCE OF ENCUMBERED PROPERTY ON EXHIBIT 11, PAGE 2 WHERE YOU SAY "CERTAIN TYPES OF LEASES?" Page 2 of Exhibit 11, refers to the so called "business lease.' These are leases, the income of which is not entirely tax exempt. Copyright `~1967 Ajoericans 3ui1~ng Con~titut13iia11y - (A Trut) ?rinLed in U.S.A. PAGENO="0913" 911 These leases, generally speaking, are leases which run for more than 5 years on property which is subject to a debt incurred in its purchase,! Question~#23: SINCE THE TRUST IS A FOR-PROFIT STRUCTURE, HOW IS IT THAT ASSETS ARE NOT TAXABLE, AND ARE INSURANCE PROCEEDS TAX FREE? The Trust is a taxable entity. It may however, avoid its tax burden th~ough the device of its 100% "charitable" deductions. Thus, any taxable income which might accrue to the Trust can be set. off by a deduction of a like amount. This deduction may be either for "charitable" contributions or for distribution to beneficiaries. It is the general rule that death benefits paid on an insurance policy do not constitute taxable income. Question #214.: PREPARE A SAMPLE EMPLOYMENT CONTRACT. DO WE NEED EMPLOYMENT CONTRACTS FOR OUR TRUST? We do not have a sample employment contract, tht it would be a simple matter for you and your counsel to draw one up, In light of your individual circumstances and desires. Question #25: WHAT ARE CALIFORNIA LAWS FOR STATE OR INDIVIDUALS TO DISSOLVE THE FOUNDATION OR TRUST? See Associate Counsel. -9 - Copyright C 1967 Aelericans uilIng Constit~.tiOna11y (~j Tru~t) Printed in U.3~A. PAGENO="0914" 912 EXHIBIT 2 QUESTIOLAND ANSIJER #l WHEN YOU PUT MONEY INTO A FOUNDATION, THERE IS NO WAY TO GET IT OUT. It does seem that it might be difficult to get money out of a foundation. In fact some attorneys have even asked this question. The important thing to keep in mind is to what use do you want to put the money? -- in the given case. You naturally want to use it for those things which will be of the greatest value. Money belonging to the foundation is usable for all of the purposes for which the organization was created. Funds may be deployed consistent with the purposes as outlined by the individual who created the foundation. From this you can see that it is necessary for the creator to give ample thought and care to the purpose for which he is creating the foundation, If he does this, the money in the foundation will serve very well the purpose the creator originally had in mind. * * * Copyright ~1967 ~AJjierjcans Building Constitutionally (A Trust) ?rinted in U, ~.A. PAGENO="0915" 913 EXEIBIT 2 ~UDSTIO~Lj~P~ ANii'~jL#~ I DON'T LIKE THIS IDEA OF GIVING UP OWNERSHIP OF MY PROPERTY. Yes, you are right. The foundation or trust will own the property. Am I right in assuming that what you want is con- trol of the property? It is true that most people associate ownership with control, however, under the present legal system, absolute ownership by an individual can in certain cases mean that property can be taxed and taxed and taxed, until the owner has lost all control. Hov~ever, the creator of a foundation can control property and maintain that con- trol by transferring ownership. to a foundation because third parties such as creditors and governm'ent regulating agencies do not have primary legal rights to state what should be done with property owned by the foundation. If you desire legal title rather than control of property, then foundation not- for-profit methods would be of little interest to you. Owner- ship by a foundation gives the creator directionand control of the property to do with as he sees fit in carrying out the purposes for which it, the foundation, was created. Isn't this what you want? * * ~c Copyright ®1967 ~nericans Cuilding ConLtitutionally (~ Trust) Printed in U.S.A. PAGENO="0916" 914 EXHIBIT ~ QUESTION AND ANSWER #3 FOUNDATIONS ARE FOR CHARITABLE PURPOSES. You are right, there are many foundations which have been created for charitable purposes, and the common use of the term "charitable" has led many people to feel that all foundations are created for this purpose. However, the not- for-profit laws that are in use by all of the states have many other purposes for which foundations may be established. Some of these are research, education, religious, cultural purposes, promoting civic activities, developing the health and welfare of the nation, testing for public safety and also in raising the general standard of living. This of course means that you can establish a not-for-profit corporation, using any or all of these different purposes that would best suit your activities and desires. This is one of the reasons why so many people want to understand how they can establish foundations within the law. * * * Copyright ~1967 Americans ~ui1ding Conctitutionally (A Trust) i~rinted in U.S.A. PAGENO="0917" 915 EXHIBIT 2 QUESTION AND ANSWER #~k I JUST CAN~T SEE HOW MY WORK AND BACKGROUND CAN POSSIBLY QUALIFY I~ FOR ALL THESE BENEFITS. It is true that there are some lines of activity which possibly would not qualify one for establishment of a not-for-profit corporation. At first it sometimes seems difficult to see just how one's activities would make it possible to gain the benefits that are available. One way that has been found which helps along this line is to think over and write down all of the benefits that people derive from the use of your product or service. When this has been thoroughly thought through, it becomes obvious that many types of activities, professions and business qualify. For the reason that foundations are created to do ~ work and are granted charters on the basis of benefit- ing mankind in general, experience has shown that there is no legitimate product or service that does not benefit mankind. Shall we take a little time to work out a purpose under which your activities might qualify? * * * Copyright (~)1967 Americans ~ui1ding Constitutionally (A Trust) Printed in U.S.A. PAGENO="0918" 916 EXHIBIT 2 QUESTION AND ANSWER #5 IT SOUNDS TOO GOOD TO BE TRUE. I will agree that it does sound too good to be true. With well over one million laws affecting each and every individual in the U.S. either directly or indirectly, it is understand- able why many people are skeptical on this subject. Many people have not had an opportunity to become familiar with or understand the laws that govern not-for-profit procedure and yet the foundations in the U.S. number in the tens of thousands and may number well over 100,000. The people who have establish- ed these foundations are reaping the many benefits available. For the most part none of the persons involved in these thou- sands of foundations would ever desire to break the law. During the past 22~ months there has been a very rapid growth of the foundation activity under the laws provided for their establish- ment. From this evidence there can be no doubt that there is a sound legal basis which is valid, permissible, and tested. Foundation methods have been tried and tested in the courts and the legal precedences are as old as corporate law. There are no penalties for proper foundation management and on the other hand, there are a multiplicity of benefits, not only for you but for mankind in general. Copyright 1967 k~iericans Ouilding Constitutionally (A T~ust) Printed in U.3.A. PAGENO="0919" 917 EXHIBIT 2 QUESTION AND ANSWER #~ IF THE IRS CONES IN 5 YEARS FROM NOW AND SAYS: "YOU OWE US ~6,OOO - WHAT DO I DO THEN?" This is a disturbing thing to have happen to anyone and I must agree that certain IRS agents have in the past attempted to impress the taxpayer with their authority and power. There are, however, laws which govern and limit their power. You have the right as a citizen to ask any IRS agent for complete identification, and then you have the further right to be represented by your counsel. Should such a thing ever happen to you, by all means insist on complete identification from the agent and then call your attorney. If you have followed the rules and purposes under which your foundation has been organized, you need have little fear, since you are protected under the law and the rights guaranteed you by the Constitution. * * * Oopyright(~ 1967 Anericans Building Constitutionally (A Trust) Printed in U.S.A. PAGENO="0920" 918 EXHIBIT 2 QUESTION AND ANSWER #7 I'VE TALKED TO MY ATTORNEY AND HE SAYS IT CAN'T BE DONE. Well, of course, your attorney has a right to his opinion and I must admit that none of us ever won any beauty contests. Un- doubtedly your attorney is a very intelligent and capable man. This is fortunate because attorneys do have to deal with all of the millions of laws. Like several other professions, the legal profession demands that most attorneys be specialists. Legal specialists who are involved with activities other than estate planning or taxation would have no opportunity to examine the legal basis or procedures of foundations, and most attorneys specializing in tax or estate planning have not had the oppor- tunity to do deep research on this topic. It is not a question of lack of intelligence of training. It is simply that the bulk of the law is so vast that it is very difficult to begin research in an unfamiliar area. There is no question, but that any intelligent, well trained attorney after considerable re- search and experimentation could discover the proper procedures and methods and so advise you. We, however, are fortunate in that we have access to approximately 40 years of research that has already been done. Most attorneys are unable to undertake or complete this type of research in a reasonable length of time without the aid of experienced men. ABC has experienced men. It is human nature to doubt that with which we are unfamiliar. Since most attorneys are actually unfamiliar with nfp procedures, they doubt the values or practicability of the foundation. Copyright®1967 * * * Americans 3ui1din~ Constitutionally (~ Trust) printed in U.S.A. PAGENO="0921" 919 EXHIBIT 2 QUESTION AND ANSWE~j~. I CAN'T BELIEVE IT IS LEGAL Sinde most people have not had their attention called to not- fox'-profit procedures, it is understandable that they would be thought to be illegal. Yet the 1965 U.S. Treasury Report states that there are tens of thousands of tax exempt organizations which report each year. The Treasur~r agrees that these entities are operating within the law, and that they render a tremendous *service for mankind. When such organizations as the Ford Motor Company, Mott Industries, the Mayo Clinic and many others, have determined that foundation procedures are beneficial, and, at the same time tens of thousands of others, both large and small, have reached the same conclusion the evidence exists to prove legality. Under the principle of equality under the law, you are entitled to the same opportunities and control of your af- fairs that these organizations have achieved. In addition, in the last two years foundation activity has increased so remarkably, that there can be no doubt as to the legal basis of these methods -- they are sound, valid, permissible and tested. Courts through- out the nation have upheld their validity. * * * Copyright C 1967 isiericans Building constitutionally (A Truct) :~rinted in U.S.A. PAGENO="0922" 920 QUESTION AND ANSWER #9 IF IT IS LEGAL, WHY CAN'T MY ATTORNEY FIND OUT ABOUT IT AND ADVISE ME ON IT? I am sure your attorney could find out about not-for--profit procedures and would then be in a position to advise you of it. I am sure your attorney is thoroughly capable. The question, which I believe you might want to settle in your own mind is, "how long might I have to wait to get accurate information and how much would I have to gain by moving quickly with tried, tested and proven procedures?" You see there are well over one million laws which effect every individual in the United States in one way or another. This means that it is physically impos- sible for an attorney to be an authority on ~ the laws at any given time. The legal profession then must be specialized in each phase of the law in which it deals. Unless a specialist is involved in estate planning or taxation, he would have no opportunity to examine the legal basis or procedures of founda- tions. Most attorneys specializing in tax or estate planning simply have not made themselves familiar with, or have not had the time to deeply research this topic. Because of the vast bulk of the law, it would require a great deal of time for an inexperienced attorney to do this. There is no doubt that any intelligent well-trained attorney, after long research and experimentation would be able to discover proper not-for-profit procedures and methods. However, in the interest of saving you time and money, ABC has provided experienced men who have access to more than 40 years of research in not-for-profit procedures, Copyright(~ 1967 Americans Building Oonstitutionally (over) (A Trust) Printed in U.S.AO PAGENO="0923" 921 that have been used in setting up these.other.organizatiofls. Thus, you have the opportunity to save a great deal of time and money. Copyrigh~ 1967 AI~NRIO~NS BUILDING CONSTITUTIONALLY (A Trust) Printed in U.S.A. PAGENO="0924" 922 EXHIBIT 2 QUESTION AND ANSWER #10 THE MORE I LOOK INTO THIS, THE MORE I AM CONVINCED THAT I WILL HAVE AN UNBEARABLE AMOUNT OF LEGAL AND ACCOUNTING DETAILS TO HANDLE It does seem that there is a considerable amount of detail and bookkeeping to handle. I can readily understand your concern. When amy procedure involves a change in thinking and application there is some re-education that has to be completed. The truth of the matter is, however, that the details to be handled can be car- ried out quickly and easily since there are no unusual or complex legal procedures with which you, as a modern businessman, would not ordinarily be familiar. ABC will refer you to legal and accounting experts that have been trained to handle your questions, should any occur in the future. The actual operation of your not-for-profit organization may actually require fewer records and therefore will be simpler than those you have been required to use under "for-profit operations, particularly if you have had a stock corporation. As an idea which lends proof to this statement, there are many more laws which must be followed under "for-profit" procedure than there are required for not-for-profit operation. This means less bookkeeping and fewer reports, which again saves you time and money and greatly *reduces the chance of error. Does this seem like a reasonable conclus ion? CopyrightY'~) 1967 * 4 * ~1cricans Building Constitutionally (`. Trust) Printed in U.S.A. PAGENO="0925" 923 EXHIBIT 2 QUESTION AND ANSWER #~ THE PENALTIES FOR TAX EVASION ARE STRICT AND VERY SEVERE. Yes, I agree that the penalties for tax evasion are strict and severe, as are the penalties in many other areas where the laws are broken, and you are to be complimented on your concern about avoid- ing that type of situation. Your foundation methods of operation have been tried and tested in the law, and precedences have been established that are as old as corporation law. As you know there are no penalties for keeping taxes as low as possible, as long as it is done within the law -- "Anyone may arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which best pays the treasury; there is not even a patriotic duty to increase one?s taxes. "Over and over again courts have said that there is nothing sinister in so arranging affairs as to keep taxes as low as possible. Everyone does it, rich and poor alike and all do right; for nobody owes any public duty to pay more than the law demands. - "Taxes are an enforceable exation, and not a voluntary con- tribution." Judge Learned Hand, Halvering vs. Gregory 69 Federal (2nd) ~O9 Every state in the union has laws design?d to promote the operation of not-for-profit foundations for worthy causes, and this permits you to do so if you wish. Copyright® 1967 ~nericane Suilding Constitutional)* `~ * (A Trust) Printed in U.S.A. PAGENO="0926" 924 EXHIBIT 2 QUESTION AND ANSWER #12 I WOULDN~T WANT MY FREINDS TO KNOW I AM NOT PAYING MY SHARE OF THE TAX LOAD There is nothing wrong in wanting to bear your share of a consumer burden. You are to be complimented on wanting to carry your share of the tax load. Many other good Americans feel the same way about it. Your share of the tax burden, however, is only as great as you decide by the method in which you choose to organize your economic affairs under the law. To show you how some of the leaders of our nation have felt about this, let me point out that Presidents Johnson, Eisenhower, Kennedy and Roosevelt, as well as Harry Truman and Herbert Hoover created their respective founda- tions for the purpose of promoting projects of their choice. You have as much an obligation to avoid paying too much tax as you do to avoid paying too little. Perhaps more of us could benefit mankind to a greater degree by taking these steps to keep taxes as low as possible. Oopyr~ht® 1967 An~ricane Building Constitutionally (A Trust) Printed in U.S.A. PAGENO="0927" 925 EXHIBIT 2 QUESTION AND ANSWER #13 WHAT IS GOING TO HAPPEN WHEN IRS REALLY FINDS OUT YOU ARE MASS MERCHANDISING THIS AND DRYING UP THEIR SOURCE OF INCOME? Off hand, it would seem that making a great effort to inform citizens of their rights under the Constitution is a little un- usual and might attract the attention of those who collect taxes. In a situation of this kind one must consider the re- sponsibility of the various governmental bodies and how they fit into the picture. For example, the Congress, and not the IRS, has primary government jurisdiction over the ways and means that the countryts resources are employed. The IRS is charged solely with enforcing the laws legislated by the Congress, and consequently the IRS may not internally legislate as to the growth and development of not-for-profit organizations. It is the business of the Congress to provide an answer as to the source of tax income. In the long run, the attitude of the citizens determines the attitude of Congress. * * * Copyright(~) 19~S7 J~ericans `~ui1ding Constitutionally (A Trust) ?rinted in U.S.A. 87-444 0-68-59 PAGENO="0928" 926 EXHIBIT 2 QUESTION AND ANSWER #1k I HAVEN'T GOT $7,000. I am sure there are many people who do not have $7,000. Today with the rise of inflatioi, the decrease in the purchasing power of money and the increase in taxation, it becomes more and more difficult to accumulate even a part of this amount. I am sure that anything you can do that would result in saving all, or part of $7,000 would be of interest. Many people have found that they save many times $7,000 in the first year, by being able to better control their finances, reduce taxes and more efficiently arrange their financial affairs. Then too, under ~ membership program, it may be possible to earn a member- ship starting with as little as $1,000 and working with others to build membership. Where it is decided to gain membership in this manner a little more time and energy is required, but it is a thoroughly practical and sound way to become a member of ABC and gain the benefits available in this membership, as so many others are now doing. If you are interested, I would be glad to show you the details of how this may be done. * * * I Copyright ®1967 ~nericans Building Constitutionally (A Trust) irinted in U.S.A. PAGENO="0929" 927 EXHIBIT 2 QUESTION AND ANSWER #15 WHY ARE YOU GUYS SO SECRETIVE ABOUT THE PEOPLE IN YOUR ORGAN- IZATION This is an intelligent question and deserves a sound answer. It involves your personal privacy and that of others in ABC. As you know, ABC is a membership organization and one of the benefits of ABC membership is to help members protect and maintain their privacy -- one of the basic fundamental rights of citizenship. On occasions when names have been mentioned, certain individuals connected with ABC and many who are not so connected, were interrupted in their work or their rest, by phone and letter to verify information and to make dis- closures. Naturally, they have asked us not to disclose their names~ and we respect their request. It may be of help to you to know that any information you may require concerning ABC memb~ship program may be obtained through someone who is already a member. If you were in the position of these men would you like to have your privacy similarly protected? * * * Oopyri~ht (~)1967 i~eric*~ns Building Constitutionally (A Trust) Frinted in U.S.A. PAGENO="0930" 928 EXHIBIT 2 QUESTION AND AWSWE~i1~ AFTER I SIGN UP HOW DO I KNOW I WILL GET SERVICE W~N I NEED IT? I appreciate your concern about the service you would need and get after signing up for membership in ABC. This is something to which you are entitled. One reason that I am sure you can get the service you need is that responsible professional and businessmen are charged with the leadership in this organiza- tion. Your sponsor is a responsible individual and has certain standards of responsibilities which he is expected to satisfy. ABC has many members who have `much to gain by seeing that new members are properly serviced. I believe that this is one of the best reasons why you can expect the kind of service you need and want. * * * Copyright ®1967 Americans Building Constitutionally (A Trust) Printed in U.s.A. PAGENO="0931" 929 EXHIBIT 2 QUESTION AND ANSWER #17 I HAVE A LOT OF CONFIDENCE IN YOU -- BUT NOBODY CAN BUCK UNCLE SAM I appreciate your confidence and also the fact that nobody has yet been able to successfully buck Uncle Sam and I for one hope that it stays that way. In fact, if it was a case of bucking Uncle Sam then I would say that our membership was due for a quick and drastic decline. Let me see if I can explain it this way. The primary purpose of not-for-profit procedures is to benefit mankind in general. Foundations are created to do ggç~, work. With experience over the years it has been found that not-for-profit procedure lifts certain burdens from government that otherwise government would be required to carry. This means a saving both to government and the tax payer. As a result every State in the Union has laws designed to promote the establishment of not-for-profit corporations. In fact, Congress and other law making bodies within the states have recognized the good that foundation procedures can produce. This is good for the private economy of the country and accomplishes many things that could not be done otherwise. Not-for-profit procedures have been tested in the law and are as old as corporation law. It has the support of Congress even though many attorneys and others have not been made aware of this type of support. Have I made it clear how we are working ~JJ~ Uncle Sam instead of buckiflg Uncle Sam? * * * Copyright® 1967 Americans ~ui1ding Constitutionally (A Trust) Printed in U. S. A. PAGENO="0932" 930 QUESTION AND ANS~ER #l~ MY ATTORNEY CAN DO THIS - WHY PAY YOU ~7,OOO? I have no doubt your attorney could handle the matter for you, particularly if you can spare the time and the money required to carry on the research and investigation involved. Undoubtedly your attorney is a capable man with a fine education and good background. Am I right, in assuming that you are interested in saving the greatest amount of money in the shortest length of time? There are millions of laws which require that attorneys, among other professionals, must be speciali~ed. Specialists not involved in estate planning ortaxation have little opportunity to examine legal bases or procedures of foundations. Most attorneys specializing in tax or estate planning have been unable to spend the time to deeply research the topic of foundations. This means that the client of an attorney might have to wait many weeks and months to have his affairs properly arranged. There is no doubt that any intelligent attorney could, after considerable research and experimentation, discover the proper procedures and methods and so advise you. We, however, are in a position to save you a great deal of time and money since our attorneys are experienced and can pass this information along to associate counsel so that your work can be done quickly and in most cases can save you a great deal of time and money. Copyright ~ 1967 Americans Building C onstitutionally (A Trust) Printed in U.S.A. PAGENO="0933" 931 QUESTION AND ANSWER ~l9 I SIGNED UP A MONTH AGO, WHEN AND HOW AM I GOING TO GET TAX EXEMPTION? I don?t blame you for wanting to get your tax exemption, and a month seems like quite a period of time. The law governing federal tax exemption is quite clear and when the proper amount of time has elapsed, and the applicant has properly satisfied both the time and action requirements, the exemption will be recognized. One of several procedures is open to your founda- tion. Your attorney can advise you. * * * Copyright('~ 1967 Aj~aericans ~Iui1ding Constitutionally (A Trust) Printed in U.S.A. PAGENO="0934" 932 QUESTION AND ANSWER #20 IS THIS ANOTHER CHAIN LETTER PROGRAM? Chain Letter? If you feel that this is being used as a chain letter program, I can understand your concern. Actually nothing resembling a chain letter is included in ABC's membership plan. It is nothing more than a sponsorship program wherein one mem- ber may sponsor an applicant into membership. This is done for many reasons to strengthen the quality of the membership and also to build membership, since there is strength in numbers. This is the same principle used in building the membership of social clubs, golf clubs, country clubs, etc., and this method of sponsorship is employed to save you time and money. o opyright ~1967 pjnericans. ~ui1ding Constitutionally (A Trust) ~rintod in U.S.A. PAGENO="0935" 933 QUESTION AND ANSWER ~#2l I AM AFRAID THE $7,000 MIGHT NOT BE ENOUGH TO PROTECT ME $7,000 does not seem to be a tremendous amount to protect your rights as a citizen. You may, of course, pay any amount that you believe will be sufficient to protect you, over and above the $7,000 fee. As you know there is strength in numbers and as the membership continues to grow, the strength of your protection grows with it. Also, when you realize that not-for-profit pro- cedure is encouraged by both State and Federal law-making bodies, the chance of your being challenged is greatly reduced, as long as you adhere to the rules and live within the purpose of your foundation. Of 12,000 (?) not-for-profit organizations chartered in l962~, only 239 were disallowed tax-exempt recognition and many of these were later approved. Self-responsibility is the key. If you are aware of the few pitfalls in foundation manage- ment, you will be able to avoid them. All of mankind and your family may benefit greatly from proper foundation procedures and abuse is not necessary. With this knowledge and practice great amounts of funds are not necessary to provide protection. Have I made it clear how your rights can and will be protected? Copyright ~)1967 Anericans 3uiiding Constitutionally (A Trust) Printcd in U.S.A. PAGENO="0936" 934. QUESTION AND ANS~?J~ WHO DO I CALL WHEN QUESTIONS CONE UP? You may call your sponsor, your attorney, your accountant, or all three, when questions arise, These people will be qualified to answer your questions about the allocation of expense items and can guide you in making future plans. As time goes on there will be more and more attorneys in each area who will be qualified to answer questions concerning not-for-profit procedure. ~opyri~t (~,1967 An~ericans 31~i1ti:1~COf1Stit1tiOfla1iy (:~ T~-~ct) Printed in U.S.A. PAGENO="0937" 935 QUESTION AND ANS~TER #23 WHAT PROOF HAVE YOU GOT THAT ABC METHODS WILL WORK? ABC uses only established not-for-profit procedures, coupled with sound business practice and methods well within statutory limits of approved activities. You may ask your sponsor if they are working for him. Perhaps the best proof that ABC methods will work, are that such foundations as the Kennedy, Mott, Ford and hundreds of others were originally organized under the same principles now in use by ABC. Not only have these foundations stood the test of time, but they have pros- pered and continue to render enormous and increasing benefits to mankind. The number of such organizations is rapidly increas- ing. Reports of the U.S. Treasury agree that these methods work and that they produce benefits for those who create them. The last six Presidents of the United States have had their not-for- profit organizations. The best proof that is available, of course, is not our promises as to what the methods will do but what these procedures have done and are continuing to do. Does it seem reasonable to you that this is evidence that they will continue to work in the future? * ~: * Copyright® 1967 Americans Building Constitutionally (A Trust) Printed in U.S.A. PAGENO="0938" 936 EXHIBIT NO. 2 ~~ic~1©~ of T~i~t of thu; Co~~ T~i~.t TO BE ADMINISTERED DY NATURAL PERSONS, HOLDING TITLE IN JOINT TENANCY, ACTING UNDER THEIR CONSTITUTIONAL RIGHTS AS CITIZENS OF THE UNITED STATES OF AMERICA. ~L!~J. THIS DECLARATION OF TRUST AUTHORIZES ITS TRUSTEES TO OPERATE UNDER THE NAME OF AI~RICANS BUILDING CONSTITUTIONALLY (A TRUST) N.F.P. by `~`THIS AGREEMENT, CONVEYANCE and ACCEPTANCE, me.d~ and entared into at the time ar.d on the dnto tip- pearin~ in the ecknowlndgr'.'int hutoto attoc~:ed, by and botwoon POBEIT D. H~YN3, Creator and Gruntor hereof, and RICIiARI) J STEIJIENSON and 3. ALTOR LAUREN, Acccptor~ hereof in Joint tenancy who ehaul ccmpoao the floerd of Truetoos and Executive Officere for conducting eaid buaircse. PAGENO="0939" 937 ~ The Grantor herehv constitutes and appoints hi' ii vi' tie sigtiati'd Teas - tt'e~ to ia', in fact. Trustees of the Trust hereh~ ereited tail est.iiiti~hi'ii, The Grantor for and in consideration of the' objects mu tuirposes herein net forth. the cash stint of One Dotiar in hand paid and other considerations of value the receipt of which is hereby acknowledged, does hereby sell, assign, convey and deliver unto snict Trustees. in TRUST-who are to hotd legal title in joint ten- ancy and not as tenants in common, to cottectively act by virtue of this cov- enant as a Board of Trustees under the name herein designated-certain prop~rtiea. business projects, operations under way or contemplated, dealing In equities. formulae, entities, patents, copyrights, business good-will, or other business desired to be engaged in by said Trustees. The Trust name and other things of value to constitut~ a Trust Cestatet, including rights in rcveraion or remainder wherever aituate, atid other things of value too numerous to mention, and having its' principal place of buatneas in the. State of I1],tnois, County of Lake, Barrington, }~e1sey Road, P.O. Bo~c 575, 60010 The above named T~'ustees. for themselves and their successors In trust, do hereby accept the conveyance In trust ard acknowledge delivery of all the ,~?operty specified, together with alt the terms of the Trust hereIn set forth, hgiu'eeing to conserve and improve the Trust, to invest and reinvest the funds of said Trust In auch manner as will increase the fin~incial rating of thn Trust (estatei during the period of outstanding liabilities of the various properties and enterprises in commerce for gain, exerctstng their bent judgment end dis- cretion, in accordance with the Trust minutes, making dittrlbuition of portions of the proceeds end income as In their discretion, and according to the min- utes, should be made, making complete periodic reports of boniness trannac- tionu, and upon final liquidation dintrtbuting the assets to the beneficiarIes as their interents may appear; and In cit other renpects admlntetcrir.g said Trust (estate) In good faith, strictly in conformity hereto, PAGENO="0940" 938 C©~s~rt~mi~ TflJJSt Trustoos Trustees shalt be not te~~ than two in number, but may be increased for practical reasons beneficial to the Trust. The Trustees herein mentioned by name, or their successors elected to fill vacancies. shall hotd office'. have' and exercise cottectivety the exclusive manngement and control of the Trust prop- erty'ond business affairs; PROVIDED, where succession may be desired, the first named Trustee shati hold office for one year. the second, for two years. the third, for three years, In this manner us ng the same principle for additional Trustees, the successor to each Trustee being elected for a full term of five years; PROVIDED, HOWEVER, that a Trustee may resign or be removed from office by a resolution of the Hoard of Trustees unanimously concurred in whenever in their opinion said Trustee shall have been guilty of fraud, mal- feasance in office, gross neglect of duty, or for caune by the mandate of a court of competent jurisdiction; and PROVIDED FURTHER, that dn the event of death, removal from office, or resignation, the Trustees shall appoint or elect a successor by the ur.ami- mous concurrence of the ren~aining Truolees, Should the entire Board of Trus- tees become vacant, a court of equity may appoInt one Trustee, `who, In turn, shall appoInt the, additional Trustees, Should objection be filed to appoint- mont of additional Trustees, the Same shall be spread upon the minutes, Any such objection shalt deprive the candidate from accepting the trusteeship. The sIgnIng end acknowledging of this Agreement by such Trustee or Trustees, elected or appointed, shall constitute theIr acceptance of this Trust; and the Trust property, assets and emoluments thereof shall iinmcdiately vest In the now Te'uutce or Trustees wlthwst ray further act or conveyance. PAGENO="0941" 939 *cM~n~ T~1fl~t Trustees' Meetings By~ regular act of the Trustees they may tirovicte for nicetings at stated intervats without notice and special meetings may be catted at any tLme by two or more Trustees upon three days' written notice. At any regutar ox'~pc- dxl meeting a majority of the Trustees shall constitute a quoruns for condtci- leg business, PFtOVtDED, affirmative `action may only be had upon a mafority vote of the Trustees, whether present or absent, except that at special meet- ings called for a special purpose the majority present may affirmatively act in emergency matters, Powers of Trustee Trustees' powers shatt be construed as general powers of citizens of the United States of America, to do anything any citizen may do in any state or country, subject to the restrlctions herein noted. They shall continue in busi- ness,' c~nserve the property, commercialize the resources, extend say estab- lished tine of business in industry or laveatment, as herein speciatty noted, at their discretion for the benefit of this Trust, such as, viz,: buy, sell or lease land for surface or mineral rights; buy or salt mortgages, securities, bonds, notes, leases of alt kinds, contracts or credits, of any form, patents, trade- marks or copyrights; buy, sell, or conduct malt-order business, or branches thereof; operate stores, shops, factories, warehouses, or Other trading estab- lishments or places of business of ary kind; construct, buy, sell, lease or rent suittbte buildings or other places of business; advertise different articles or business projects; borro.v money for any business project, ptedgisg the Trust property for the payment thereof; hypothecate assets, property, or both, or the Trust in business projects; own stock in, or entire charters of corporations, or other such properties, companies, or associations as they may deem advantageous. Resolutions of the Board of Trustees authorizing a special thing to be done shall be evidence inst cuch act is v.'ithin its power. Any one lending or paying money is the Board of Trustc-ee shalt not be obliged to see the appli- cation thereof, all funds paid into the treasury are and become a part of the corpus of the Trust, PAGENO="0942" 940 Admini a trcrlion Thet iruetets shalt eegar1 thea iee~t r ueean see their sufficient geeth'. sup- pteneente'd front inn' to (tote' tee re.aeeinttons ci (feel heart e'eev,rteeg ceen tiogen - etc's as they aria' and recorded in the' neiout~'ee of their sect' toga, er tea te~ -isa a. rules or regeetaticens is faceted ,`s1s'ctlen( tenet consistent tb t eat rete'rt~ conduct of busine'uee. Officers crid Mvro~nn'~nnl The' Trustee's may in their discretion elect nieng their auteeteer a Presi- dent. Secretory and Treasurer. or any other offi eta they teesy deem e'npe'die'ttt for eropear functioning. Any Trustee' stay hold I `o, or noire, offices aimuitet- neousty, their duties bring such as are u~ust or are' prescribed. They may emptoy agents. esecuttve'ti, or tether eteeptoye'e's. r desigeeste third persons tee hotd funds for specific purteoses. Expondituron "The Trustees shntt fix and pay compensation of atl officers, employees or agents in their discrytion. and rosy pay thcmsetvcs such reasonable compensa- tion for their services as may be determined by the Board of Trustees. Construction - The Trustees, officers, agents or employees posacas only such authority as awarded them herein. Autteority is understood and meant to be similar to that awarded as executor of an estate whercitt the testotor directs (ittustra- tioni `that my Executor is directed to hendte the este.tc In ths rotanner he Ic treks to be to the best interest, limited by the terms hereof, without the nccc:nity of resort to the court for permission or approval of any trnaoacticn, tntcndtog herein to leave open for the court the quention of conscicetious dealing of my Executor only.' PAGENO="0943" 941 C©k'n~ll Tr~st Liabilities - The Trustees shall, in the capacity of Trustees and not individually, assume only such liability as may attach to said Trust property assets. This Trustee liability shall not in any manner jeopardize their individual or personal hold- ings and for any losses they should suffer for any reason through services, they 1shall be reimbursed from Trust property to the same extent as would non-in- - terested persons. Notico Notice is hereby given to all persons, companies or corporations extend- ing credit to, contracting with, or having claims against this Trust or the Trus- tees hereof, that they must look only to the funds and property of the `l'ruat for payment or for settlement of any debt, tort, damage, judgment or decree, or for any indebtedness which may become payable hereunder; that the Trustees, officers or agents are mere employees and not personally liable when dealing * with the Trust properties or matters. Document it 18 expressly declared that a Trust, and not a partnership i~ hereby cre- ated; that neither the Trustees, officers, or certificate holders, present or fu- t~tre, have or possess any beneficial interest ire the property or assets of said Trust, nor shall they be pereonatly liable hereunder, as partners or otherwise; that no Trustee shall be liable for the act or omiselon of his or her ~o-tril.stee, or any other person, whatsoever, whether employed by such Trustee or not, or for anything other than his own, personal breach of Trust. Certificates of Intorost / For convenience the equitable interests for dictributlon shall be d1~tdad into One Hundred unite, eubsthnUally In the certlflcato form bar-eta attached. They shall be non-ascessable, non-taxable and negotiable and the lawful pan- sensor thereof shall be construed the trio and lawful on'ner thereof. The law- ful owner may, 1! he so denirca, cauco bin beneficial certiricate t~ be re~1ctercd with the Secretary of the Board of Truntecee. * * f **. * - 87-444 0-68-60 PAGENO="0944" 942 c_~ That Death... Insolvency... Bankruptcy Death, insolvency or bankruptcy of any certificate holder, or the transfer of his ~ertificate by sale, gift, devise or descent, shall not operate as a dissolu- tion of this Trust, or in any msnne? affect the Trust or its operation or mode of business. Ownership of beneficial certificate shall not entitle the holder to any legal title in or to the Trust property, nor any undivided interest therein. nor in the management thereof, nor shall the death of a holder entitle his heirs or legal representatives to demand any partition or division of the prOperty of the Trust, nor any special accounting. but said successor rosy succeed to the same equitable or distributional interest upon the surrender of the certificate as held by the deceased for the purpose of re-issue to the then lawful holder or Duratlon,..Cloeure This Trust shall continue for aperiodof twenty-five years from date, unless the Trustees shall unanimously determine upon an earlier date. The Trustees may at their discretion, because of threatened depreciation in values, or other good and sufficient reason, liquidate the assets, distribute and close the Trust at any earlipr date determined by them,' The Trust shall be proportionately and in a pro rats manner distributed to the beneficiaries. In the event this instrument has been recorded with the Recorder of Deeds, they shall then file with said Recorder a notice that the Trust shall cease and determine; and, thereupon, the Trustees shall aut~matically be further discharged hereunder, PROVIDED, their adminIstration and distribution has been made In good faith, otherwise a court of equity may be invoked to review and correcta.ny tort or error. Renowal At the expiration of this Agreufnent the thou Trustees, i.f they so desire and . believe that eaid Trust. should not be closed, ma~ renew this `Agreement for a like or shorter ported. A resolution of said rccewal sht.il be entered upon the minutes (end also recorded in the Recorder's bLfice in the event this Agreement has been recorded) at least 120 days prior to the expiration hereof, and publication shall be made in a newepepor of ger.arsi circulation In tbn' county of a copy of sold resolution not ices than CD days ~erior'to the expiration', `berectf. . .7 . PAGENO="0945" 943 C©2~~ll Trust T~!c~s' c~I~o~ oj P~p~ * c~ this Co 2~dic~aI T~sI SHALL To help citizens of the trr)Ited Statee make full use of their rights guarantoed~them under the Constitution, ABERICANS BUILDING CONSTIT1~TIONALLY (A TRUST) N.F.P. `bbreb~ makes available mem~erohip to every citizen who ia,duly qualified. THE(CRLB'TEES by their reaoletimc ci purpjJse may perform and fescctim for, any ~arpoas. mc behalf ci any individual, greç~ or rorobinaticsv of hatielduati. seeeralty or eotlectieeiy. IN SUCH INSTANCES the pomersaoda~ rity of the Trceetees shaiibedefioedand Hoeitedlothegooeralpurpoeee setforthbytheDeclaratiunofPurpoc5c~ FOR TRESS PURPOSES the Trustees may bane authority to to],, possessicn, manage- ment and ruatrol ci corpus, as egret, escroace or trustee of the luerful boteioro( Iot~t&~Certrtcutq, as Iaeuod by the Tract, `THE TRUSTEES~,S/ [eeoc Interim Certificates, caiiirg for as many subdivided emits as a botde~'Aua,y be entitled to on aper rent beats o(the echote, lfoeeeror, they may first altocatu a per cent of aututirided emits for purposes or aettritos as the nature of the Dccturetimc ci Porpoce ecorrocta, Uro~r on circumstances aisati the Truotees poe sees a~rity to anti or negntiute,diaoctiyor indirectly, Interim Ccc. tificate emit or emits. THE TRUST SHALL have auihority to provide fteetf with operatira funds titroagh commercial loans, directly aeecued by aeeetsor teconceof the Trust, peovtded such aattmrtty Is possessed, Is writing, from the priocipuL THE TRUSTEES SHALL Issue to Individual perauos Interested In the pe'entiaes, or grmcps, as the case may be, ostiforet Trust Interim Certificates, therein cad there- by setting forth ti-at the Trust l.a rat the ectoiste or owner of the precuicee; that Its ante activity consists of private, personal reyreaetetsttan ci Lrutivtubuvi Interim Certiflcute butlers, as eetforth In the DecLeraticn ci Purpoue. PAGENO="0946" 944 Co~istmnll Tn~st Re,y('rlctlons Nothii~g herein contained sI~tl be construed to authorize the Trust to issue beneficial certiftcates of lnt~rest In excess of the number herein provided. nor for a nominal value at variance with the provisions hereof. Purport The purport o(thls instrument is to convey property to Trustees to con- stitute a Trust (estate) for the benefit of the beneficiaries, held by the Trustees. in trust and in joint tenancy for the duration hereof, and to provide for a sane and economical administration by natural persons acting in a fiduciary cal)ac- ity, to begin at once and not to be deferred until after the death of any creator. settler or maker, as occurs when such Trust Estates are created by Last Will and Testament, the settlers, creators or makers of this covenant preferring that the Trustees ad solely within their constitutional rights as based upon their common law rights and immunities vouchsafed to citizens of the United Stales of America and defined in Article IV, Section 2, PROVIDING, that ~Citizens of each state shall be entitled to all privileges and immunities of citizens is the several states,' and Article VI, Section 2, PROVIDING, that `The Constitution of the United States and the laws made in pursuance thereof shall be the supreme law of the, land;' and the 14th Amendment thereof, PROVIDING, that `No state shall make or enforce any law which shall abridge the privileges or immunities of citizens of the United States.' The adminis- tration of this Trust shall be amenable to judicial regulation on occasion aris- ing and under the paternalism and protectIon of the court. Citations applicable and various rulings pertaining to Trust Estates and constitutional rights of contract and collective bargaining (except copartnershtp relationshIp, which Is not applicable) may be found. Nothing herein contained shall be construed as an intent to evade or to contravene any Federal or State Law, nor to delegate to Trustees any special. power belonging exclusively to franchise of incorporation. PAGENO="0947" 945 C~L~t~~ll Tr~st IN WITNESS WHEREOF the Grantor and Creator hereof and the ~eoptors hereof, for themselves, their heirs and assigns, have hereunto set their haniW~- and seals in token of the conveyance, delivery and acceptance of property. assets, or other things of value, and the obligations and duties as herein' assumed as Trustees of said Trust and assent to all stipulations herein as imposed and expressed. Z,Qfd2~EAL) ~ 1' ~~L~EAL~ `C4Z~NTY OF Lake ~ STATE OF_I1].lnOis J I,,-~~t--v~.uJ ` ~/LLsu ~ . ~ an officer authorized by law to administer oaths, do her y certify that _Q1f~ U * RAYES . creator_. and ROBERT I) * RICHARD J STEPHENSON and J. ALTON LAUREN `as trustees of t~ JJ,,rEIGAHd Jfl~flfliU.QQ1tRflI3,~TkORALLY ( A TRUST) N.F.P. ~ personally appeared before me this thy and acknowled"e that they signed, sealed and delivered the above and foregoing Trust inciceture for the uses and purposes therein act forth, and that the trustees by theIr signatures evidenced L'~. acceptance of the dutico, obligations had faithfui performance of said Trust t:denture. this t FIFTE~i~DI day of _JLI7~Y imirsion expIres / -~ Il. thE? 0.,. .,,nt~ws ,1~,y 6?~. ~ ~2O/O ~%9 /7, ~FO5tE OATECE LACE COUNTY, ILtINOeI J11566-4~Pu PAGENO="0948" 946 EXHIBIT NO. 3 EXHIBIT I The Primary Purpose of Americans Building Constitutionally (ABC), (A. Trust) To help citizens of the United States make full use of their rights guaranteed them under the Constitution * * * * *. PAGENO="0949" 947 EXHIBIT 2 The United States has spent over ~7OO,OOO,OOO,OOO. since 194.6 to fight the "cold war" -- "to prevent the sp±'ead of communism." This is more than the United States has spent in fighting all the "hot wars" including the War of Independence on up through World War II. It is enough to pay the private indebtedness of every man, woman, and child in the United States plus over half of the corporate indebtedness. We have given over *~l5O,OCO,COO,COO since 1946 in foreign aid "to prevent the spread of communism." What have been t~e Results? Since 1946 over dOO,000,000 have been ensJ.aved by communism - an increase of over 500%. Today the average American pays U cents out of every dollar of income for direct and indirect taxes. He must work over t-~ro days out of every five for the government before he can pay his own grocery bill or clothe his own children. The average business man pays 63 cents out of every dollar of inccrne for taxes * He works over three days out of five to pay his taxes before he can feed his family and clothe them -- or think about capital for expanding his business -- or providing (over) PAGENO="0950" 948 jobs for others. If he made ~1O,OOO in 1939, today he must earn over ~27,OOO to `nave the same purchasing power as he had in 1939. This is due to increased taxation and inflation -- from spending programs which dontinue to exceed government income p..~. rapidly increased taxation. It is destroying incentive for research and development, thus making it more and more difficult to maintain our lead over our foreign competition in the areas of both commerce and armaments -- on both of which depends our national security. * * * * * PAGENO="0951" 949 EXHIBIT 3 Where will it stan? In 1966 our rate of inflation has been 5 percent. This means that if you earned ~76CO in 1965, in 1966 you would have to earn a raise of .~3dO to break even. The trouble would be that you would then be in a higher inccme tax bracket so that you would have to have S72.20 more to pay the higher income tax! Already another substantial income tax increase is being considered for 1967. Our government indebtedness is the highest in history. Our government expenditures are the highest ever, ap- proaching ~:l75 billion per year -- and yet deficit spending continues. * * * * * PAGENO="0952" 950 EXHIBIT ~ Ho~r much contr1 have you been able to exercise in the decisions ~,hich have lead to these conditions? In the light of what has happened can we afford to leave it to government to solve the p~oblen? ~That can be done? What can you do? * * * * * PAGENO="0953" 951 EXHIBIT 5 National security Depends upon economic strength Depends upon motivation of those who produce Depends upon the ability of the individual to benefit fron his work Depends upon the ability of the individual to control the fruits of his labor Depends upon the degree to which his property and earnings are taxed away * * * * * PAGENO="0954" 952 EXHIBIT 6 Attitude of government toward private foundation taken from Congressional Investigation of Foundations by the Ccx Committee. "It appears that the present need for foundations is even greater than it has been in the past and there is a great likelihood that th3 need ;~`ill increase in the future..,.. The foundation, once considered a boon to society, seems to be a vital and essential factor in our progress." Another quotation in this connection taken from the Ti. S. Treasury Department Report on Private Foundations on Page 12. "Private philanthropic organizations can possess im- portant characteristics which modern gcvernnert neces- sarily lacks. They nay be many centered, free of administrative super structure, subject to uhe readily exercised control of individuals with widely diversified views and interests.. .precisely because they can be initiated and controlled by a single person or a small group, they may evoke great intensity of interest and dedication of energy. These values, in themselves, justify the tax exemptions and deductions which the law provides these philanthropic activities." * * * * PAGENO="0955" 953 1. Benefits of n-F-P Foundation Procedures. ~ A. Personal and Family Benefits "What can be accomplished by creating a foundation? 1. Keep control of wealth. 2. Can keep for the donor many attributes of wealth ~oy many ri~eans~ a) Designating the administrative nanagenent of the foundation. b) Control ova: its investments. - c) Anpointing relatives as directors of the foundation. d) Foundation's assets can be used to borrow money to buy other property that does not jeopardize its purposes. Thus, foundation funds can be enhanced from the capitalization of its tax exemption. 3. The foundation can keep income in the family. 4. Family foundations can aid employees of the donor's business.. 5. Foundations rosy be the method of insuring that funds will be available for use in rie~i vent as in busisess. 6. We can avoid income from property c.thile it is ~1o:riy beins: given to a foundation by a conbiostiom of a trust and the charitable foundation. 7. We can get the 2C~ charity deduction in other ;rays~ a) By giving away appreciated prarerty to the founda- tion, we escape a tax on the realization of a gain. b) We can give funds to a foundation to get charitable deduction currently in our roost acivomoateous ta:: year. a) Very often local personal and real proserty tunas can be avoide:i. d) We can avoid speculative profits. e) We can give a'iayvaluable "frozen assets," whIte elephant estates, residences, valuable works of art, and collections of all arts." Chairman's Report to the Select Committee on Sn-all Business (Patroan Report) House of Reoresentatives. ~7th Congress ~962) Page 17. This is a quote fran Cleveland Marshall Law Review. A-l Retention of control within family, "Present law imposes no limit upon the period of time during which a donor or his family may exercise sub- stantial influence upon the affairs of a private founda- tion." TreasuryReport on Private Foundations, Senate Finance Committee, Feb. 1965, Page 9. Copyright c 1967 Americans Building 000stitutionally Printed in U.S.a. PAGENO="0956" 954 "In slightly over two-thir~ds of all foundations by number, the donor or persons related in some way to the donor made uo 5O~ of those trustees who take sane voice in investment policy, including the decision of how much of the currently available funds will be re- invested and how much will be applied to charitable purposes.1 -- Treasury Report, Page ~4 "The founda~ionmay aggregate the donations received, paying out merely the income which these aggregations earn an~ holding capftal for scme special purrose, per- haps to buy assets from the donor1s estate at has deato. (i.e., where. in the case of a closely held oorporation, * reasomabla value, of the stock. night. be much more than the actual market price in a forced sale to pay estate casts.)' -- House Report No. 2621,. 23rd Congrcss, Second Session, Page .5. A-2. Perootu~t~ fo'-iilv control "Perhaps the most frequent motivation in the creation cf large fomdatic:~s tcWiy is t~at the proprieu6c of a sub.- stantial enterprise who wishes to have it cc~~5inue after his deathl in the hands of his family has insufficient liquid, means available to sat:bsfy his estate obligations at his death." House Report 2oSl - 23rd Congress, Secor.t Session, 1954. Page 6. (Refer to Fo~d ~oundaticn). "There is nothing illegal.ahout such a plan, it is entire- ly proper' as the law now stanjo and is a moch.anisn mu reach just t'~ ~s~lts icr tlr cr~ Th .~ rc-~ House Report 2661 - Page 7. Sioj~ra. - The use of a foundation to permit a family to control a business after the death of a proprietor is widely pro- moted. ~or example, the August 15, 1954 issue of the J. K.' Lasser tax reports contained this statement~ "Note there is ncthing wrong - mora1~y or legally - in using a foundation to effectuate tax orvings. A family can legitimately, establish a foundation where charitable motives are. closely tied to reduced co.sts.of charitable giving because of income tax deductions allowed. Also, `the owner of'a business may. create a foundation so as to cut his estate and leave his family in control of the busi- ness after death ...* `!House Report 2681, 83rd çon~ress, Page 11. . "So substantial parts of the great fortunes of those who have profited by the enQrmOus expansion of Ame~ican industry have found their way into tax-exempt foundations. These foundations have already passed and will continue to pass - -2- PAGENO="0957" 955 by right of inheritance - to the control of heirs or their trustees. This enables a few individuals to control ever increasing tax exempt wealth." Patman Report, Page id (1962) "The Ford Foundation offordsagood example of the use to solve the death tax problem and at the same time the problem of how to retain control of a great enterprise in the hands of the family. 90% of the ownership of Ford Motor Company was transferred to the Ford Foundation created for the pur- pose. Had it not been, it is almost certain that the family would have lost control." -- House Report No. 26dl, ~3rd Congress, Second Session, 1951k. Page 6. c~sedC~~.tions. Perhaps the greatest advantage is afforded closed corporations. Through the use of a founda- tion the operator of a closed corporation maybe able to keep voting control of the corporation in the family after the death of the principal stockholder. Estate and gift taxes are frequently so high that sale of the stock is necessary in order to pay them, the result being that the fanily loses control of the corporation. However, the principal stockholder can avoid this result by granting or bequeathing nonvoting stock in the corporation to the foundation. Since such a gift or bequest is deductible for estate or gift tax purposes, the result may be that the taxes will then be small enough so that they can be satisfied out of the other estate assets without selling the voting *stock.' - Patman Report, Page IX (1963). Pay Salaries to Farni~ The following answers are by former Commissioner M9rtiner Caplin. Quoted in Patman. I. Page 73 (1962) "Q. Will the IRS deny exemption to a foundation solely on the ground that it is controlled by one family? A. No. The internal Revenue Service Code provides no basis upon which the Service may deny exemption to a founda- tion solely on the ground that it is controlled by one family." "Q. In what way, if any; does the code prohibit a donor or teatator from transferring the controlling stock of a business to a foundation and have it (the foundatLon) hold the stock in perpetuity with self-perpetuating di- rectors or trustees voting the stock as they please? A. The code does not in any way prohibit an arrangement of this sort." "Q. Does the code permit a board of trustees and officers of a foundation to be staffed by the founder, his family and associates? A. Yes." Only judicial decision on "control" ~arber_y~ Edwarda, 130 F. Supp. ~3 (M.D.Ga 1955) Exemption upheld. -3- PAGENO="0958" 956 TTRemote relatives may be employed in the business~ friends may be assisted~ business acquaintances may be accommodated. Treasury Report, Page 3/f. "Representative Patman questioned the compensation granted to-trustees of the Ford Foundation who sometimes received ~5,OCO for attending a single nesoing." Patman Report, 1961+ Page 136. Former Commissioner of Internal Revenue, Mortimor Caplin, was asked aooiat salaries paid to a creator of a fonndation or his family~ "Q. Is a foundation generally required to piy out all net income within a specified perJcd of tine after the close of the taxable year? S - A. No, Generally speaking, a foundation is recuired to pay cut its income in Liuthewanac of its exemot purposes ~dtomeet~:r~es, without being l.~m~aed to a spocified pericd of t.Lue wichan wh~cii to ~-~ccc~il±sh she sane, and providing an:T accuisulation is not Ilojacassnable in amount or duration. "Q. May trustees and officers of foundations receive com- pensation? S A. They may receive compensation commensurate with ser- vices renderad-." S (Pabrsan Report, Page 73, Page 71+. (1962) "Emplo~ent of donor?s sister for life at ~l5, 000 oar year was reasonable. S (Home Oil Mill v. ~;Jillin~ham, 6d F. Supp. 525 (19t6) A-4 Ma~gr~s not con~~t~ no inco~e~~~y. "An exemption was upheld of a scholarship fund which was supposed to give preference to the relatives of the donor named "Gulentz.1' 57 F. Supp. 502 (191+1+). Section 117 of the IR Code allows any person to receive tax-free incidentaJ. expenses in a grant to cover travel, research, clerical help or equipment. In another case an exemption was upheld where the persons receiving the benefits were all old and deserving famiLy retainers. William B. Chase T.C.M. 231+ (1960) scholarehirs could be awarded to anyone but were in fact awar'sd oniy to employees of related corporations and their childoen. A-5 Look after fanllv~~et charities orwptthv_çs~ieS. A-6 Income solittino_~of~.saJ~yie~~f~Lp.~Gm~ll. PAGENO="0959" 957 A-? J~ç~f' Fmundatioj. t~9 imcro~ your fas cash ace itiof,. You can actually improve your fam~1y's current cash posi~ tion while building up the foundation. Let us say you gave $12 000/year to your foundation. Instead of cash you giv~ $12 000 worth of stock each year. Let u~ say you give stock worth $670 per share on which you have the basis of $50. Your deduction is figured on the value of theproperty given rather than on its cost to you. Figuring a taxable income of 3dO,000/year, this donation cuts your income tax and increases your family's after tax cash income cy $7,960. Compare this with the ~l2,C00 worth of stock to an outsider, you will lose the- stock entirely and itprcve the famil3r cash po~iti~n by 09,275 per year, Yith the foundation it costs you 31,625 out of pocket to keep the stock and its income for future use in your foundeition." Encyclopedia of Tax Shelter Practices Frentice-Hall Inc. 1963. "Tax exemption is a costly thing. It explains in part why only one-third of the income of the Nation is actually taxed," Patroan Report, Page 133 (1962) A-~ Reduce Estate Tax "The gift to the foundation lift.: a future estate State tax lien at 325~ estate State tax rate, This charce viii be some $2,900 (remember the gift of 312,000 value), so the foundation not only gives you liquidity, retaThscoo~brol over the stocks, preserves assets and income for future use, but it actually does more for your family's ultimate asset position than any other disposition of the stock~ -~ Encyclopedia of Tax Shelter Practices - Prentice -dall, Inc. 1963 "The usual procedure then is tO transfer (or arrange to transfer at death) to a foundation cPeated for the purpose, enouE~1 of the ownei~ship of ~ corporation to reduce the - estate tax Impact to a point where the liquid assets of the propo aetor (and other means he may have devised to solve the problem) are sufficient to meet the death taxes. Such donations are usually in the form of preferred or non~ voting stock. Combinations of these advantages result~ 1. The fomily may remain in fullvoting control. 2. The family h.as a pleasant partner, managed by gobntle ho.nds. 3. The family may reap the benefit of any increase in the value of the equity. - Lf. If further inflation should come, it is the family which can become entitled to receive the benefit of the increase in monetary value of the company. 5. No working capital is lost by the venture; and 6. The foundation nay even be used as a vehicle for the employment of associates-and relatives.'- House Report No. 26dl - d3rd Congress, Second Session,195L~, Page 6. -5- 87-444 0-68-6 1 PAGENO="0960" 958 ~Moreover, it is not only the enormously rich who create. * foundation~ today. Countless b~jners of substantial busi- neSs ente±'prises are today pl~Oning to solve their estate problems through the use of foundations, and there is reason to believe that this tendency will continue and perhaps even increase. Ingenious experts in estate and tax planning have devised many interesting ways to use * a foundation in an estate or business plan. -- House ~eport No. 26d1 - d3rd Congress, 2pd Session, Page 11. A-9 ;.icstu~e~i" r~videccm-io~c~f rnoretiomiO~~OmIo Z fits to ~ taxable ~`~ir, - ~Nonetheless, the nodes of human satisfaction have almoct infinite diversity; and the ways in which ve-elth can be employed for personal adrantage are; consequently, multiple and highly varied. i-~amy donors, too, have manifested a common and deep-seated tendency to regard a foundation which they have created as their own, to be availed of for their own ends whore a contemplated use does not involve obvious and direct deflection of assets from charity and where no specific statutory prohibition lies in the way. Treasury Report, Page 54. Foundations nay provide health insurance for an employee- family nenber. IRC 105 A foundation employee may live rent free. The Treasury department has this to say: The value cf lodging furnished to an emrloyea by an em- ployer shall be excluded from the ernoloyas's income if three tests are met! 1) the lodging is furnished on the business premises of the employer. 2) the lodging is furnished for the convenience of the employer. 3) the employee is required to accept such lodging as a condition of employment." Regs. 5 1.119-1(b) / "Not only nay a creator draw benefits from his controlled foundation, but he may also draw benefits from a foundation owned or controlled business corporation. The Ocrporation may be. used to satisfy dominant individual's desires, ranging from furnishing his home to allowing excessive executive compensation." -- U.C.L.A. Law Review May 1966. Page 951 - A-lO "Business cGrnorations can accumulate incoree since former Shareholders nay he eo~p~~~red at adeq~uate selaries.!~ * --6- PAGENO="0961" 959 A-il ~ :~`~rrnnt ~r en `I1t.~T no a family rgor `Apparently private individuals nay even receive annuities from a foundation's income. The position of the Internal Revenue Service is that orivate individuals nay not receive annuities from afoundationts income, but there are however, court decisions which hold under the ~pre- dominant curoose~ docnrir.e than the naynent cf annuities from a foum tionis moons does not oreolode exemption (Francis 2/SF(~a~i~~ L __~ ~ ~ternal F remus v~n, 103F. (2d) ~ affirming 9 T.C. 533).---Patroan Fecora, Page 16. i9~2. In a 1950 case, a Federal Circuit Court held that an exemption was not affectei even though tha trust was charged with paying gifts, annuities, administration expenses, taxes, debts and salaries to or for the benefit of the donor's estate or family. 2?d F. 2d-6LJ, Levip T.U.5. l~9 F. Suno. 950 (1961) Trust held exempt despite provision to pay monthly annuity to decedent's grandniece. Generally, ~~erer~. non - 1922 Supreme Court. A-12 Use it to take_advantace of hiob anoreciatiom of assets For a l~ng time the ::anufactorer's Pamover `rank held property with a basis of ~2 1/2 million. Suddenly it donated to a Foundation it controlled - gaining a rp 5 1/2 million tax deduction. Inonediately the Foundation sold it for $ 5 1/2 million. Result~ Sank received a $5 1/2 million tax deduction; Foundation paid no tax on a $3 million (short tern) capital gain; and the 35 1/2 million remained in the Bank's control through the Foundation which, since it was capital gains, need never be distributed. Patman Report p. 6 (1966). "At present, when a contribution to a foundation is made in property as distinguished from cash, the donor's deduction is figured at value of the property on the date Of the donation instead of at donor's cost.' - Patnam Report, Page d3 (l963)~ A-l3 Use Foundation funds for investment to increase wealth under_your control Let us take am example of a person with annual income from salary, dividends and investments of $~0,000 per year. Suppose you create a foundation and give it $12,000 - 7* - PAGENO="0962" 960 per ye~: Your annual income tax bill is cut from ~39,4d0 to ~l,520. Of the ~l2,OOO gift, ~7,dOO is tax inoney,$4,200 ~c~es out of your personal pocketoock. This 4 200 keot in :-`~ur personal portfolio ear~Ing 4% compounded, but taxed ii the 66% bracket would accumulate to ~47,40O in 10 years. The .~2,COO in the foundation earning 4% compounded, tax free would accurnula~o to ~l4d,3OO. So your comparison would be whether you would be prepared to excoange *::47,400 ~~ee ~cr pe~ ~ ~ for *3l4~,3OO that you and your family can howe to do the work that interests you. (Pigures from Encyclopedia of Tax Shelter Practices, Prentice-Hall, Inc. l9b3.) "~Trustee Sturgis an attorney, interrogated concerning the advantage of the use of a trust, testified that if Mr. Little had made the investoent himself without the use of the trust (i.e. foundation), the government would take about two-thirds of the profits in taxes." -- Senate Report #101, ~lst Congress, 1st Session, Page 13. (1949). `How the principal trusts (i.e. foundatioms)und.er discus- sion in this report were able to increase their original contributions to ~l,lO0to their present net worth of over $6,000,000 is an intriguing story. This can be understood by a few examples of the methods followed by trustees showing a plan obviously formulated in advance, whereby assets of the corporation wce1~ he er~c~ -~ ~r -~ ~ - ~ -~-~ -~ ~ ~ Tr ~ a - - ava~Iable to Textron for the purchase of Textron seouritias or physioalassets." -- Senate Report #101, glst Congress, 1st Session, Page 20. "One of the most apparent loopholes in the foundation business involves the abuse of capital gains. According- to the present laws that supposedly regulate foundations, capital gains not only escape taxation, but they also do not have to be given away to charity if they are reinvested within a reasonable period of time. To put this in prospective, it is just as though the typical wage earner was given an exemption from income tax so long as he doubles his payments on his home, or bought more U.S. Savings Bonds, or splurged in some certified diamonds for his wife: in other words so long as he invested a surplus from his salary-he could escape taxes.'--Patnan Report, 4th installment, 1966, Page 1. "The ways and means committee hearings of l94d-49 revealed that educational institutions and private charitable foundations had moved into commercial and industrial fields. PAGENO="0963" 961 Some had inherited substaittial interests in business, as was the case with the Ford Foundation. Others had pur- chase control of businesses. ~ Tax-exempt cancer research organization, for example, had acquired a variety of industrial firms. Mr. Royal Little and the operations of his Textron trusts were given due attention. In fact, the record lists about 40 different types of businesses controlled by educational and charitable organizations.*' Patman Report, Page 1. (1962) Many foundaticos have become a vehicle for tradinp in securities ~Oi dodg~nc the capital aain tax. Cavital gains of foundations are not only tax exear t hot they are permit.-. ted to place then in the princical account instead of the income account. -- Patman Report, Page 130 (1962), A-14 The Found at*irn~av orovide -FRIRPOLY loans, Speaking of loans to oersons aflowed by the tax law, the report says The advanta~es to the borrower of such a loan by a foundation -- and the corollary value of the favor done by the foundation to the director or donor who arranged the loan - can, nevertheless, be considerabid. The delays, inconveniences, and formalities of applying for a bank loan can be eliminatod~ embarrassing cuostions can be avoided' the assurance that one's obligation resides in friendly hands can be secured. - Treasury Report, Page 51. B. Benefits in operating business resulting from control over an exempt foundation. B-i p~q~trol in ~ "Foundations have commonly been established as convenient vehicles for maintaining control of a private corporation within a family while substantially diminishing the burden of income, gift; and estate taxes for the family.1~ - Treasury Report, Page 37. "It is true of course that the foundation's donor is parted with legal title to the money, securities or property donated and in that sense is flQ longer beneficial owner of the foundations, but there can be little .doubt that the typical family foundation exists solely to accomplish the donor's goals. Its funds come-indirectly from him and, were it not for the foundation, they would come directly from his pocket. In either case, the foundation's assets are directly and totally within his control. If the founda- tion owns securities, the donor-controller in effect can vote the securities, can cause then to be sold or pledged, -9- PAGENO="0964" 962 or direct the disposition of their income. Thus, to a very great extent he has benefits substantially etuivasent to those cf cwnership. 1J.C.L.~A. Law Review, ::ay, 1966, Page 960. `For all practical purposes, they are subject only to the ~uthcrity of their cwn directors or trustees, who are not accountable to stockbtlders or to public regulatory a~encies. $ . After the doath of E~eal Ford in. l9L.3, the Ford Foundation sc us ad cc cave the Ford fanily from losing control of the Foni ~T:::r Ocroany. if not for the foundation device, they cult have hat to s~li stock to the public long before they did in. .:rter to ray estate * taxes. The foundation permitted nenry cord's nears to run the ccnpany for many years without the inoonranience of ans ~ ~o s~o~ ~_~e s or ~eccc~ .es a~-i Conmission,'~ - - Patnian Report, Page 73. (1962) B-2 ~ reduction pcOOf~llO tc'~_hen.: "Mr. Ewing further testified that under the provisions of such a trust indentuc~e, it would be feasible for a facturer in collusion with such a charitable trust, to avoid tax and thereby accumulate millions of dollars to gain a competitive advantage over orthodox manufacturers. He further contended that under such trust indenture, it would he possible fcc a roaoufao tuner to create trusts with a preconceived plan of having their foundations at ito eec' a~u1 nail u~ _~l c~ - cum~ - paid to the beneficiaries." - -~~- Senate Retort ~lCi, dlst Congress, 1st session, Page 13, l9L~9. "The Internal Revenue Code contains no provision to prevent large funds frcn being built up by foundations from contri- butions r~ceived by them. Since a corporation's annual contribution to its foundation is capital in the hands of the foundation and only the income from these ccntribu- tions heed be distributed, the Internal Revenue Service cannot prevent large funds from being built up by corpora- tion-created foundations. And, since contributions are- hot subject to the provisions for distribution annually, the prohibitionagainstunreasonable accumulations does not apply." --Patman Report, P. 16. (1962) "Foundatior~s have loaned money to their creators, traded stock and property with them, paid for insurance policies on the life of the donor, financed benefit programs for a contributor's employees, and engaged in many other activities whose relevance-to charity and social welfare seems remote." --Patrnan Report, P. 71 (1962) - 10 - PAGENO="0965" 963 B-3. Provide "sood-vil].' si5.ce to keen workers hapox. Alle~edlv the provisions of the Scholler trust also include the right to use the foundation as a conduit for enployee benefits. ~ihen. a foundation-controlled com~any 13 able to use tax-free funds for the benefat of its employees, the inherent competitive advantages to the company are obvious." ---Patman Report, P. 15 (l9o~) "Other foundations have `teen used to pay benefits to emolovess of a orivace company; The Harnischfeger Foindation, Inc.~ of iilvaukee, has regularly contri- buted sums from $100 to $10,000 to employee crganizations of the Harnischfeger Corp. From 1952 to 1950, the Harni~c~fe~' _~i~ Bere ssoc_at~or re~e_a~J 340 500 from the foundation. The benefit association, the foreman's club, the engineers club, and the trap club and all benefited from, the four.dation's largess in 1959. Mr. ~1alter Harnischfeger, himself, received a loan of 34.0,000 at 4. nercant intereot in 1955 from the foundation." ---Patman F.eport, P. 00 (1962) The operation.s of the three Baird Foundations, cf New York City, indicate clearly that control of foundation funds affords boundless opportunities for lavishing favors ucon business acconintances and friends.'--Patman Report, Page III. (1963) The corporate foundation is formed for convenience, or, more likely, as an entity into which excess nrofits can be funnelled for later use. On the business side, it can be used ac a source cf loans to the corporation or its officers, or to other corporations with which closer' dealings may be desired." --U.C.L.A. Law Review, May, 1966 Page 945. B-4 Use it as source of "friendly financinr" from tax-free accumulations. In December, 1945, the Rhode Island Charities Trust (foundation controlled by Textron, Inc.)-purchased~ the Manville Mill, consisting of real estate, machinery and fixtures belonging to the Manvilie-Jenckes corporation, which was a wholly oimed Textron subsidiary, for $1,200,000. In this manner, Textron was able to secure a substantial amount of money from the trust to be used as working capital against its various operations. The Manville Mill was then leased back to Textron so that its use thereby could be continued without interruption. ----Senate Report ~tl0l, 01st Congresd, 1st Session, P.13, (1949) - 11 - PAGENO="0966" 964 `~The Sears Foundation is controlled by the Sears Company * . .the relatior.shio of the foundation to the company should not be oaken lightly. Uhen Sears needed a loan of 1.2 million dollars it went to th~ Sears Foundation and obtained the money at 3% interest.' . * * U.C.L.A. Law Review, May, 1966 Page 947. "It is to be noted that these trusts were particularly helpful to Textron d~rioo the rerioi of rapid expansion in 192÷5 and 19L6. it ~as during this period that Textron's credit was strained to the limit. It was questionable whether the comoamy would ha'r-a been able to complete this expansion program, except by the use of these trust funds.' - - -Senate Report ~lCl, ~lst Congress, 1st Session, l92÷~, P. 16. "Such sale and lease-back deals are the equivalent of providing these companies with instant capital with whicn they can accelerate their growth in competion with inde- pendent service station operators, and small retailers. This enables these big oil companies, General Electric, and the ~Too1worth chain to excand ;:itho~t having to go into the money market for caoital." --~Patman Retort, Page 14 (1962) "It is alleged that the Scholler Foundations1 deed of trust, as amended, permits the foundation to make loans to the business corporations, which it controls, at such rates of interest as the trustees see fit. This oconits funds earmarked for charity to be used as venture capital. The foundatio&s business corporations are thus given a * great advantage over other private business corporations * by being able to e~ake taxfree contributions to the founda- : tion and thus build up a large reserve -which they may tap at will. How can private business-especially small business-compete with such an arrangement. ----Patman Report, Page 15. (1962) * "At least three of the four r-iott Foundation wholly-o~rned department stores, all competing with numerous small retailers, have used the Foundation as a handy source of cash. This of course adds up- to quite a competitive advantage.' ----Patnan Report, Page XII. (1963) B-5 ~ * g~ will for business Lq~. z .~ Ford F~~~atior_FcJTo~ ~Q~PDrn:.J~ Bob Hope sold rights to publication of Bob's life story to Bob & Dolores Hope Foundation. Publicity tc private narty was an ancillary benefit not affecting e~eemption. (l9~l) - 12 - PAGENO="0967" 965 * ~-6 Foundations can accumulate_income and income so ac~umu * ____ inorovenents. "Another advantage which foundation businesses have over their taxable corcoetitors is their freedom from the demands of shareholders for current distributions of earnings. A remarkable number of foundation-O~'IflGd enterprises proceed from year to year realizing substantial profits, but making negligible or no distributions to thear parent organizations." - Treasury Report, Page 33. "This common willingness of foundations to defer inde- finitely the realization of profits from their commercial operations -- an attitude freauently not shared by the shareholders of other businesses -- makes it possible for the profits to be invested in modernization, expansion, arxd other programs which improve the competitive posture of the foundation-owned business." -- Treasury Report, Page 33. Tax on accunulatidn of profits may not apply to foundatith owned businesses. "The restrictions of~ existing 1t~r upon accumulations of incOme by businesses become cparative only where a corporation is "foOmed or availed of for the purpose of avoiding the income tax with respect to its shareholders"~ where the shareholders of the business are themselves tax exempt, the limitations may not apply. * Similarly, the statute which prohibits unreasonable accumu- * lations of income by foundations applies only to accum~la- tions within the foundation itself~it does not prevent retention of earnings in a separate, though controlled, entity. As a consequence, many foundations have permitted large amounts of income to accumulate in their business subsidiaries." --Treasury Report, Page 3L~. ~- B-? It is many tines the Ca that ahusines~e~itq~~ ~~~g'atedas an exenot orzanizat~~. For example, Educational Testing Service of Princeton sells educational testing materials and enjoys tax exemp- tion, yet the California Testing Bureau ofMonterev California sells the same type of material, yet muct pay taxes.' Patman Report, Page 9 (1962) It is well 1~nown that the Rand Corporation of Santa Monica performed researc~n work yet because of its relation to its purpose it is tax free. ---Patnan Report, P. 13 (1962) Business Week and Fortune report on American business scene and must pay ta~ on the operations. Nations Business a publication of the U.S. Chamber of Commerce perfomms the sane sev~v.ces ~n ccmre~~Y.o:~ it is tax exempt. A PAGENO="0968" 966 similar situation obtains between the tax exempt Journal of the American ~.iedical Association which last year had ~1O-l/2 million of advertising revenue and the tax pay- ing Medical Economics and Medical WorldNews. Thus, in large part due to its tax exempt status, the National Geographic is able tO offer lower advertising rates than its competitors Holiday and Venture. Time Magazine, October 7, 1966, p. 61k. "Advantages accrue to both the foundation and the donor: 1. The foundation pays no Federal inccme tax. 2. The donor neither pays gift tax nor estate tax on contributions to the foundation. 3. For incone tax purposec, an individual donor is granted a deduction up to 30 percent of his net income; a corporate donor is allowed to deduct up to 5 percent. 4. The donor7s contributions constitute capital to the foundation - not inccme -- so they need not be distributed.~ --Patman Report, Fage l5-l6.U902 C. Miscellaneous Eenefits of Exempt Operation C-i ~ Non-profit organizations often are eligible for red'~ction in postage rates. Eligibility muir derend upon the type of organization, and the class and content of the material to be mailed. Reductions are available in 3rd amd second class nailings. Specific details rria:r be obtained from your postroa~ster. 0-2 ~av be_exemot from certain state taxes, e.z. sales and realty taxes. A foundation?s exemption from the state taxes depends on the various state laws, but as a general rule will follow the results of a Treasury Departnent determination of your exemption from federal taxes. It is often the case that an exempt organization will voiuntaril~ ~ an amount in lieu of taxes to cover the benefits it receives from police and fire protection. This mot only seems a just arrangement to foundation - managers, but also may cause the local taxing authorities to be more co-operative in recognizing a property tax exemption. - 14 - PAGENO="0969" 967 C-3 An et orari:'nnei eli re oei~e 7 surplus ~ Both real and personal surplus government property nay be obtained at preferential rates by certain exempt organizations. Through a program administered by the Department of Health, cation, and `Telfare, surplus federal prorerty is allocated cc atace oncies far surplus property rhich die :ribc for health or educational purposes. The yederal Prcceray and ~d~_ois~at_~ ~ c ll~D -~ a- tion of surplus property to mcm-rrof~t. organizations. C-L~ A found at ion ed not .~v s~cial securito tax. ~ the Fed~l~g.slranca Contoibutions Act.) The fourth paragraph of the standard deterninetAon letter issued by the Internal Pevenue 3ervics recognizing a claim for.tax exemption provides~ "You are not liable icr the taxes inoosef under the Federal Insurance Contributions Act (social security taxes) unless you ile a raiver of exemptior~ certificate as provided in such act. You are not liable for the tax imposed under the Federal Unenplo~veent Tax Act... C-5 An ex~not orcanization cnn rsceives cial facts on overseas fliahts. GeneralJ.y speaking, these lover group fares nay be available to membership organizations whose nen'cers have more in coomon than a mutual desire to travel cheap~y. Details on the terms of special rates authorized by the Civil Aeronautics Board for overseas flights as well as an advisory opinion as to a group's eligibility for special fares may be obtained from the Bureau of Air Opinions, CAB, ~Tashington 25, D.C. Arrange- ments may also be handled through a travel a~ent~ ,` Savings on such arrangements may be substantial. For example, round trip charter flights from If e;r York to London or Paris are available for lass than one-half the usual minimum for such a trip. - 15 - PAGENO="0970" 968 C-6 ?1~sc~lgflep~s. ?~t~ ofF ndt±o.a Your n-f-c exemot status has f~nancins advantages, - (a) Federal financing under Snaaa eussnessAco, National Housing Act, the National Institutes of Health, Hill-Burton Act and numerous ctners, (b) Financing through private sources is assista~ by the foundation's freedom from tax liens arc its ir~ ~o ~ excessivO ~aLereS or boon da~ader.:5. also the availability oC not only your CurUO-- taxed surplus sea but that of otmer ourco.tc :na. `Descite the fact ti-at the IF~S disapproves of the use of borrc e~ f~c~ f~ ~e o f_ ~- ~ t-~~s ~r mortgages and other types of investments, the Noyes Foundation has been ccostantly engared in churning mondy by borrowing at one rate and lending ix at a hi~har rats. Fro-' lcd tc~'~a l0-~ t~C _o~~_ ~o~' -d cze~ $5 nillion for such purposes. (See page 6i~ for details of such transactions --Patnan Report, Page VII. 2nd Installment. "On March 29, 1957, the Noyes Foundation borrowed fror; the Bankers Trust Co., -?550,CCO on a note due March 31, l95~, bearing interest at L~-l/2 percent annually. Pa:noent of the note was guaranteed by Mr. Charles F'. byes, This sum was borrowed fot toe express puroose of making a loan in the sane amount to the Glicknan Corpora binn, of New York City, at 10 percent interest. The transaction enabled the Foundation to receive interest of $55,000 per year at an interest expense of only ~2J+,?50 annually. Hence, with nc cash outlay the Foundation received a net return of $30,250 per year. At these interest rates, it is not surprising that the Glicknan Corporation has been in deep financial distress, The loan ~ias paid off in full by the Glicknan-Corp. on February 1, 1960. (See pp. 61, 61)" -.-Patman Report, PP. VII and VIII. 2nd. - `Some Ford Foundation loans were made at what appear to he preferential rates of interest. TJhy, for example, was the Duke Power Co., of Charlotte, N. C., charged-only 2.65 percent interest on -~3 million. 20 year loan, while other borrowers paid 6-1/2 percentC Duke Power, incidentally, is owned 57% by Duke Endowment, another tax-exempt foundation," ---Patnan Report, Page 79., 1st installment, * * * C * - 16 - PAGENO="0971" 969 EXHIBIT 3 SELECTED BY-L~.NS OF PRIVATE FOUNDATION * * * ARTICLE III - Sec. 1. Election of members: Appl±cat~on for membership may e presented by members, and shall be elected by a vote not less han a majority of the Board of Directors. Sec. 2. Classes of members: The Board of Directors nay establish ore than one class of members and determine the designation and heir qual~f1cat1ons. (a) SustaInIng members: SustaIning members shall be those embers who enter the foundatIon upon payment of a membership fee nd approval by. the Executive Director. (b) FamIly Members: Family members shall be non-dues paying embers of the foundation upon electIon by the Board of Directors. Sec. 3. No class of membershIp, ho~;cver created, is entitled to ote cm any matter. * * * Sec. 5. Transfer of Membership: Memberships may be transferred fly upon the consent of, and upon such terms as shall be fixed by he Board. of Directors. (a) Transfer of sustaining membership may be permItted upon the pproval of the Board of Directors. (b) Family membership may not be transferred under any conditIons. ARTICLE IV - MEETING OF MEMBERS Sec. 1. Place of Meetings: All meetings of the membership shall e held at the registered office of the foundation or at such other lace as the Directors or President shall, from tIne to tIme designate. * * * -1- PAGENO="0972" 970 ARTICLE V - Sec. 1. Powers: The Board of D~rec~ors shall: (a) Manage the affairs of the foundation, except as otherwIse provided in the ArtIcles of IncorporatIon or By-laws. (b) Adopt a corporate seal as the seal of the foundation. (c) Deslgnace a bankIn~ ~ton or i tu~ions as derository for tne o~nda _o~'~ ~ - o~: `o withdrawals oherefron, and to exee ooiigoolons on behalf of she foundation. Sec. 2. Number of Directors: The nunber of Dlrectcrs shal~l be _____in number. Sec. 3. Election and tern: DIrectors subseccent to the inIblel Board of DIrectors naned In the ArtIcles of Ir.cor~oratIcr. shall he elected or appoInted by the exIsting nenbers of tIcs bard of D~rec- tors at the tine such election or arpointnenz is necessary. Clean- tors shall serve for a tern cf years and nay be re-elected. Sec. L~. QualIfIcations: A DIrector subseccsr.t to the Initial Board, shall be a famIly member of the foondaslon, shall be age twenty-one or over and a citizen of the UnIted States. * * * Sec. 6. Quorum: A majorIty of the Directors shall const±tu~:e a quorum to transact business of the foundatIon. ARTICLE VI - THE OFFICERS Sec. 1. The officers of the foundation shall be: A PresIdent, Vice-President, Treasurer and Secretary and Executive DIrector, and such other officers as the Directors shall desIgnate. As hereafter determined by the Directors, any one or more offIcers nay be made ex-officio members of the Board of Directors. Sec. 2. Election and term: The offIcers shall be elected at the meeting of the Directors held immediately after the annual meet- ing of the members or at such other meeting of the Directors as shall be called for such purpose, and officers elected shall. hold office for the ensuing year and until their successors shall be elected. * * * -2- PAGENO="0973" 971 Sec. L~, ExecutIve DIrector: The Executive Dlrectcr shall serve under an employment contract executed bet~ieen himself and the founda- bion and shall serve for a term to be agreed upon by the parties. rhe ExecutIve Director shall be an ex-officlo member of the Board of Directors and shall preside at all meetings of the Board of Directors. En his absence the President shall preside. The duties of the Executive Director shall be to conduct all foundat~ on affairs and hIs power shall suDerceda that of the PresIdent Df the foux~.dation in the normal day to day actIvIties, fInancIal affairs, employment practIces, and all other busIness actIvities. * * ~ ARTICLE VII - CERTIFICATES OF MENBERSHIP Sec. 1. Certificates of membership: The board of DIrectors may, as it See3 fIt, provide for certificates of membership to be Issued ;o duly elected members in good standing, and in such form as they 3hall determIne. Such certifIcates shall be sIgned by the PresIdent and Secretary and shall bear the seal of the foundatIon. * ft ft ARTICLE VIII - THE FISCAi~ PERIOD The fiscal year of the foundation shall be~In on the day of ________and end on the day of ____ ____ ARTICLE IX - AMENDMENTS The By-laws of the foundatIon may be amended, repealed or new 3y-laws adopted by the DIrectors. THESE BY-LAWS ARE INCOMPLETE AND ARE TO BE USED ONLY FOR EDUCATIONAL PURPOSES. * * * ft -3- PAGENO="0974" EXHIBIT L~ THE R.O.A.B.~ LINDATION ).. THE BOARD OF DIRECTORS AND THE OFFICERS OF THE R.O. A. B. FOUNDATION, DULY ORGANIZED UNDER THE LAWS OF THE STATE OF * ILLINOIS, DO HEREBY DECLARE THAT - HAS BEEN ELECTED A FAMILY MEMBER OF THE FOUNDATION, AND IS ENTITLED TO ALL OF THE RIGHTS, POWERS AND PRIVILEGES APPERTAINING THERETO. * THE PURPOSE OFTHE ROAB FOUNDATION IS TOPROMOTE THE WELL BEING OF MANKIND WHEREVER LOCATED THROUGH CONTRIBUTIONS TO. AND PARTICIPATION IN A VARIETY OF ACTIVITIES BENEFICAL TO MANKIND, WHICH SHALL INCLUDE, BUT NOT BE LIMITED TO EDU- CATION, ART, MUSIC, LITERATURE, RESEARCH AND DEVELOPMENT OF EFFICIENCY IN BUSINESS AND INDUSTRIAL COMMUNICATIONS, WELFARE AND RELIGIOUS, CIVIC AND CULTURAL ACTIVITIES, WITH INITIAL EMPHASIS ON CHARACTER DEVELOPMENT OF YOUTH AND RELATED PROJECTS. AND THE MEMBER PLEDGED HIS ENERGIES TO AID THE FOUNDATION IN SUCH ENDEAVoR,. * Effective this day of ________________, 1966. ______________ * Secretary MEMBERShIP CERTIFICATE NO. ___________ k~restdent PAGENO="0975" 973 EXHIBIT 5 By-laws of a Civic Club. 1. Name: The name of this club is _________________incorporated under the State of ______________under the ___________law on the _________day of ________________________,1967. 2. Objects: Objects of this club shall be to protect and promote the best inter- ests of the citizens of the nation, the state and this area, hereinafter set forth: to promote and strive for the improvement and betterment of all. public facilities and services; to promote and encourage a better community and civic spirit and to foster good `will and friendship between and among all the residents of said area, to cooperate with county, town, village, state and federal officials and with other civic and public organizations for the general welfare of the entire community. 3. Membership: Membership may be of several classes as provided by the Board of Directors and shall be initially of one class. (a) the initial class of members shall be those persons elected by the Board of Directors. 4. Dues: Annual dues may be assessed from each member equally by the Board of Directors. * * * 6. Meetings: (a) The annual meeting of the members shall be held on the ______day of ________________ of each calendar year for the express purpose of elect- ing directors and officers and for conducting such other business as may come before the members at that time. (b) Regular meetings of the members shall be held as per agreement and Resolution of the members. (c) Special meetings of the membership may be called by the President, whenever he shall deem the same necessary or whenever he shall be called upon to do so by two members of the Board of Directors or four members of the club. (d) Notices of all such annual and special meetings shall be in writing given or mailed to each member not less than 5 nor more than 10 days before the date set for any such meetings, but such notice may be waived in writing by agreement of 2/3 of the members at any such meet- ing. No notice is required for a regular meeting of the membership. 2/3 of the members shall constitute a quorum of the membership. Voting shall be by a majority vote cast in person or by proxy. Proxies shall be in writing subscribed by the member and shall be presented by the pre- siding official of the meeting, to be qualified. (over) 87-444 0-68-62 PAGENO="0976" 974 7, Directors: The affaIrs and business of thIs club shall be managed by a Board of _Directors elected by a plurality vote of the members present, at the annual meeting or such special meeting as nay be called. Such Directors shall serve for the ensuing year or until their successors have been elected and qualified. * * * 8. Officers: The officers of thIs club shall be four In number, a President, Vice President, Secretary and a TreasurerS No one person may hold more than one office. All officers must be members of the club. * * * 9. Committees: Committees shall be desIgnated and appointed by the President or the Board of Directors as nay be required. * * * 11. Amendments: By-laws of this club may be anended or revised by the Board of Directors, by 2/3 vote of all Directors and approva: by the affirmative vote of a majority of the members present at the annual meeting or at any regular or special meetIng, provide~ that motice of any such meeting contaIns a summary of the propos amendment or amendments. THESE BY-LAWS ARE Ii;CO;:?LETE A~D ARE TO BE USED ONLY FOR EDUCATIONAL PURPOSES. e * * * PAGENO="0977" 975 EXHiBIT 6 THINGS TO BE CONSIERgD IN YOUR E~LO~JT CONTRACT A Break down your personal expenses for taxes into cate- gories of types of expenditures, and after each category set out the amount spent each year~ namely, home, food, clothing, furnishings, utilities, education, entertain- ment and insurance. B With your activities, consider what expenses might be properly assumed under foundation-corporation practice without taxes or with some tax saving. Not every fringe benefit is tax free, but some may be accomplished under the foimdation at an over-all tax saving. For example, if the home is conveyed to the foundation, the following advantages might be possi'cle~ Upkeep of the home and the utilities would be paid by the foundation: the insurance on the home would be paid by the foundation; ownership and value of the home would not be includable in a creator1s estate for inheritance or death tax pur- poses, thereby saving these important taxes, and the sale of a home end the purchasing of a no;: one would not fall under the eighteen month income tax rue, which would mean that any profit made in the transaotion could he bc-pt in the foundation without. taxes. You, as tne foundation executive, could be permitted to live in the home as part of your employment contract in return for services ren- dered. In some cases, this could be accomplished tax free, but at the ;-orst the er:;plcyee ;~ould be forced to pay taxes on a reasonable rental value of his living quarters as ordinary income. This tax payment would not necessarily be a disadvantage if, for example, a reasonable rental value of the home was found to be $200 per month, the taxes would be paid on $2,400 income per year for the hcme. -A taxpayer normally in-the 50% bracket would pay $1,200 taxes on this amount, but since foundation prooedures might lower his taxable income, subsequently he night end up in the 30% or 22~% bracket and a tax payment due on a reasonable rent value of the hone amount to ;~72O for the year. This amounts to $dO per month rent. In some localities, depending upon state and county law and the interpreta- tion of these laws by county real estate boards, it may be possible to exempt the foundation headquarters (the home) from real estate taxes ordinarily assessed. This might result in a savings in excess of the tax payment on living quarters. Thus, even in the wcrst situation an overall tax saving is derived. Copyright `~` 1967 Americans Building Constitutionally Printed Li U.S.A. (A Trust) ~over PAGENO="0978" 976 C All major charitable contributions ought to be made through the foundation, and if this category occurred i~n the breakdown, you.would not have to pay this am- ount to yourself in salary. This would result in a further reduction in income tax you would need to pay. D Education expenses, acadernic-type hobbies, library and.scientific repearch equipment and materials would be owhed and supplied to the employee (Executive Director) as a normal rart of the foundation activities, Such items would not be included in the employment con- tract and, of course, would not have to be considered *as a necessity by the Executive irector when he totals * his salary. This would result- in further savings in * income tax. All of the tangible icens could, of course, be kept at the foundation headquarters for use by foundation employees. Tangi~ole expenses such as educa- tion and research trips are ccnnonly borne by foundations as contrasted with the fact that they are not commonly assumed by business corporations or individuals before * --taxes. E * After complete consideration of all expense items and determination of which items can `cc assumed by the foundation, Executive ~irector should total the amount not assumed by the foundation, and this should be the amount paid in salary. Computation of the new tax bracket should then be made to deter~ine the overall possible tax saving of th~ other ite::s. F Methods have been developed by which the following items may be borne by foundation-corporations; home, furnish- ings, utilities, education, medical expenses, insurance, transportation, and scme entertainment. Generall~; food, clothing and most entertainment cannot be orovided by foundations although in some situations these have been provided by foundations. G * A m~re detailed tax breakdown and possible further sav- ings snould be discussed with your accountant and/or attorney. C * C Oo2yritht® 1p67 Americ ans 3ui1di~~ ~onstitutiona11y (~. Trust) Printed in U,S,~. PAGENO="0979" 977 EXHIBIT 7 WHAT TO DO WI~N APPROVED CHARTER IS RET~F1~ED TO YOU Under most State 1a~s, ~ien your incorporation charter is returned to you by the Secretary of State, you are normally re- quired to file the charter and a copy of the Articles of Incorpora- tion with a local County Rocorder of Deeds. You must generally do this within a stated time period (iQG, l~ days in IllInois, 10 days in ~TisconsIn). Be certain you do this as soon as it Is practically possible, If these procedures are not completed in order, the Secretary of State or the Attorney General of your State may be empowered by law to take control of your foundation or dissolve your foundation due to improper filing. There Is no reason to open your foundation to these penalties because of procrastination. Once these legal requirements are satisfied, you may turn to more praotical procedures to begin your foundatIon activities. (a) Choose a bank that would be a depository of your foundation. It Is suggested that you shop around for a bank that does not charge any service fees for your foundation account. Many banks do not charge n-f-p corporatIons for checking services, but this is a local option with the bank and has nothing to do with State law. Other banks might charge a smaller fee than they would for an individual or oornorate account and still other banks charge full fees for not-for-profit check- ing accounts, when you decIde upon a bank, obtain the corp- orate Resolution papers for opening an account and the signature cards from the bank. This should be obtained in duplloate to enable you to retaIn a copy. Most banks do not have n-f-p corporate forms, but if yours does, these are the proper forms to use. If your bank doss not have n-f-p corp- orate forms then obtain the business corporation Resolution forms. Do not use the forms employed for clubs, churches and civic associatIons. Fill out the proper Resolution forms according to instructions, (b) Obtain a corporate book and a corporate seal making certain that the seal states "Not-For-Profit Corporation." (c) Have the proposed Executive Director and the Assistant Executive Director, If any, mall their letters offering theIr services In exchange for an employment contract, This should generally be done by certified or registered mail, (d) Prepare In advance the minutes of your first meeting of the Board of Directors and the Waiver of Notice, Copyright (~l967 Americans Building Conatitutioi~a11y (~ Trust) Printed in U.S.A. - 1 - PAGENO="0980" 978 (e) Prepare in advance all other' papers for signing by foundation- corporate officials., such as membership certificates, employment contracts, stationery orders, etc. (1') In some cases it will be necessary fcr your foundation to fileiegal notice in the newspapers. to.indicate the begInning of your foundation~ In some States this is required by State law, but generally it need only be performed by those foundations performing business activitIes of the same nature as the ~~eat~r~g prior business activitIes. PublIc notice in this case is necessary to give ccnstruetlve notice to credItors, customers and other Interested busIness. Such legal notice of "change of business form" should be placed in the classified ads of a local newspaper serving the County or counties in which the foundatIon is active. A daily newspaper is preferred under the law, but if no such daily is avaIlable or the rates ar's prchibitive then a weekly newspaper is sufficient. (1) If'the prior business form was a partnership, limited partnership, corporation or a busIness operatIng under a fictitious name then the following language is usually mandatory: UThe XYZ Company formerly doing business * at 123 Nain Street, hereby gives notice to all Inter- * estad partie~ that as of January i, 1967, it wIll be * doing busin&ss as the XYZ Foundation duly organIzed under the not~for~prcfit corporation laws of the State * of California." (2) If the prior business condItions ~re that nf a prof~s- *sional, doctor, dentist, chIropractor, optometrist, etc., * serving as a sole proprietor or non-fIctional name, then the following form is proper: "The Smith Founta- * tion is pleased to announce that Do, Smith Is now * serving as Executive Director (Medical Director, * Medical Administrator, Dental AdminIstrator) of the Smith Foundation, as of January 1, l967~ (3) If none of the above conditions apply to your particular business situation and you are an employee of a large corporation or retired, or unemployed, then no legal * notice is generally required in most States. State law sho~a1d be examined to determine thether you must publish e public notice, If you are required to publish public notIce and no language is given by the * State Code then we suggest the following language be used: "We are pleased to announce the incorooration of the XYZ Foundation, whose general activities will be of the following nature ("surrsnary of purpose"), The following people will serve as the inItial Board of Directors: (names of Initial Board of Directors). Copyright®1967 - 2 - J~ericans duilding Constitutionally (A Trust) Printed in U.S. A. PAGENO="0981" 979 (4) In all cases the legal ntoice should be prepared and signed by the Secretary of the foundation. Quite frequently, local papers, particularly weeklies in small towns, will pick up the incorporation of the foundation and will publish this news without cost to the creator. If a notice is published, or if you find an article about your foundatIon creation, save several copies of thIs for your flies for future reference. A copy should als9 be given to your attorney for his file. THE INFORMATION MAY SE INCOMPLETE IN SOME STATES. FOR MORE COMPLETE AND ACCURATE INFORMATION PLEASE CONSULT WITH LOCAL COUNSEL. THIS LIST IS FOR INSTRUCTIONAL PURPOSES ONLY. Copyright @1967 Americans Building Constitutionally (A Turst) Printed in U.S.A. PAGENO="0982" 980 E:~:BIT 8 ~4~.&T TO PREPA~E FOB T~ ~I°ST ~O~FD 1TTN~ The first Board of Directors meeting constitutes a real or hypothetical meeting of the persons who will begin the activities of the foundation, The 3 to ~ members of the initial Board of Directors should meet personallr, aitho h it has been corpoi'ate practice merely to distribute paoers for signatures after they ha7e been prepared. The meeting of the InItial Board of Directors In person, is important so that all partIes nay become familiar with foundation-corporate procedures and with the InItial aims and projects of the foundation. The Board cC Directors should be pre- pared to meet regularly, even frequently, and any initial mambers who would not be able to devote this time or concern for foundation activities ought to be replaced. The followIng steps should be taken prior to the first Board of Directors meeting to save tIme, prevent confusion, and eliminate any possIble conficts: (a) A complete proposed draft of the By-Laws should be prepared. (b) The papers required for filing a Resolution wIth a Bank and opening a checkIng account s~iould be fully prepared, mInus the proper signatures, (c) A corporate seal should be obtaIned, (a) A corporate record book should be obtained. (e) The names and titles of the cfficors of the foundation should be determined, (f) If there is to b-c a change in the membership of the Board of Directcrs from the Initial Board, the names and addresses of the new members should be prepared. (g) All procedures under State law concerning the foundation Charter and Articles of Incorporation should be completed prior to the fIrst meeting of the Board. (h) The names of proposed family members other than the Board of Directors should be determIned. (1) A letter signed by the Proposed Executive Director offering his services in exchange for an employment contract should have been received prior to the meetIng. (j) If there iS to be an assistant Executive Director, a sImilar letter should have been reoeived prior to the meeting, from this person, -1- Oopyri:ht® 1967 Anericana nuildin- ~cnstitutional1y (A Trust) Printed in U.S.~. PAGENO="0983" 981 (k) If there are any proposed suetalned merthars, a list of the names, address~s and qualifications should be prepared. (1) It is highly recommended although not necessary that the prestdent or proposed ExecutIve DIrector prepare a possible grant program empowering the Executive Director to basin work on a general basis. This would enable the foundation to start activities immediately cr at least to begin investi- * gatory work and would riot require a si~ibsequent meeting within an unreasonable time. (m) Prepare for signature, undated letters of resignation of mem- bers of the Board ~hare it ~s nacossary. Undated letters of resignation ar~ recommended to be used ~ere there are members * of the Board serving as non!nees or merely as place holders to fill out the State requIrements. These persons generally are unrelated to the foundation creators and disinterested. as to foundation activities and purposes and should have no real voice in the operation of the foundation. Tc prevent and discourage any attempt in the futhre for such outsiders to gain control, of the foundatIon an undated letter of resign- ation right be signed effective as of the date placed at the top of the letter. The controllIng Individuals of the foundation could then date that letter whenever they wished the third party or nominee to resign. (n) Most of this material should be included In previously drafted minutes of the first' meeting of the Board of Directors and these minutes should merely be read for the information of the members present at the meetIng. Few changes should be accepted and the proper signatures are all that is required. Items that should be included are: (1) Ratification of Officers. (2) Ratification of the Seal. (3) Ratification of the bank Resolution. (Lj) Ratification of the filing of the charter and Articles of Incorporation. (~) Election of family members. (6) Election of sustaining members. (7) Approval of any proposed grant program. (8) Acceptance of the offer of the ExecutIve Director and Assistant Executive Director. (9) Ratification of any other actions by the promoters of the foundation~ (10) Ratification arid approval of proposed draft of By-Laws. Most of this information in the proper language is usually Included in standard forms for the first minutes of the Board of Directors that are available from many form book companies. The language and form of other Resolutions that would have to be passed may be obtained from counsel or may be drafted with guides of other material. Co2yri~'ht ~3l967 Ai~ericans Building Constitutionally (.~ Trust) Printed in U.S.A. PAGENO="0984" 982 HOW THE FOL~2ATiO~ ~UY3 PROPERTY There are no mystical or unusual methods by which a founda- tion can buy or obtain property. Standard accounting and legal practices and good business management are as im- portant here as in other business forms. There are some considerations however, that must be made in foundation pur- chases and sales to enable the foundation in which the in- dividual is involved, to enjoy maximum tax and legal ad- vantages. a. The purchase of property uhether tangible or in- tangible from third parties totally unrelated to the foundation, is carried cm in exactly the same way as in other purchases. If financing is re- quired for purchases such as a large piece of real estate or an automobile, the financing ~rould be made in the name of the foundation. All con- tracts and titles would be crithin the foundation and payment for purchases, mortgages, loans, etc., must be by foundation check. These procedures would make the foundation sole o~mer ~:ithout "strings7 of any kind, of properties and interests so acquired. A problem might arise where a foundation has not beeh long established, in obtainin.g financing through most banks or savings and loan associations. Here the officers of the foundation mioht be forced to co-sign as an indixidual, for loans made to the foundation. This is noro.al business practice ard serves to crease credit soandinr for your foundation upon completion of the transaction. Any other de- tails connected with normal purchases from third parties should be qualified and arranged with your attorney and/or accountant. In many purchases, considerable savings might be possible for a tax exempt institution, in rebates for sales tax, exclusion from excise tax, and per- haps lower prices from private companies to not- for-profit tax exempt organizations. Inquiries should be made as to the proper procedures in each State for obtaining these tax savings and inquiry should be made of the proprietors of each business for price savings. b. Purchases from the creator or officers of a founda- tion, present different problems. The primary situa- tion to avoid is "self-dealing" in terms of the IRS Code. Generally stated, this rule prohibits trans- actions between foundations and their creators and 0opyright(~ 1967 -1- Americans ~td1d~ng C onctitutionally Printed, in U.S.A. (A Trust) PAGENO="0985" 983 officers, which do nothing more than enhance the position of the creator and officers. This might - involve, if carried to abusive levels, in the re- *fusal or retraction of tax exempt determination and general liability for taxes and other penalties * for all persons involved. In the case of most snail pieces of property., `it.is suggested that outright gifts be made of these properties to the foundation,. rather than sale, hut where sales are desired and represent substantial financial savin~s, it is sug- gested that outright gifts be aade of thess crcperties to---th~. foundation, rather than sale, b~t where saies are desired and represent su'cstantial financial sav- ings, it is suggested that the seller (creator- individual) sell at a lOSS to the foundation, of from 10 to 25~. This normally takes the taint of self-dealing off the transaction, and no attempt should be made by the seller to deduct his loss as a charitable deduction~ c. This proce~s should be reversed where the creator might purchase prsrerties from the foundation, but it is not reccmrer.dod as part of standard procedures that the creator purchase any properties or receive any services from the foundation.. - d. The best way for a creator to transfer properties to a foundation is by outright conveyance. The following inCcrmation might be a guide for such charitable contributions, although great care and analysis should be rode of each individual contribu- tion for tax purposes, since the Treasury has gone to a great deaJ of pains in recent years to.dis- tinguish various types of property contributions from each other. 1. It has been suggested.by some writers that the courts could hold that there is a realization of income by the owner by the transfer of property to charity. However, in view of re- cent cases, this would seem to be an unlikely possibility, particularly because of the clear public policy of encouraging charitable con- * . tributions. Most of the cases involving such donations would have ended in adverse rulings for the taxpayer if involved in private ~`ather than "Charitable transfers.?? 2. Because recent cases have criticized or ques- tioned charitable gifts ma~e -to foundations * ~th limitations or ~strings? attached, it is recommended that gifts made to a foundation be outright without limitations. Copyright c 1967 -2- - Asericans 3uiHing Constitutionally (A Trust) ?rinte~ in U.S.A. PAGENO="0986" 984 3. ~f a charitable cc notion made in the form of property the tanrayer sells in the course of his trade or business, ice is entitled to a deduction for it. 4. In general, the donation of appreciated pro- perty to a charity does not cause a donor to realize jñcorne. Appreciated property which is subject to the deduction for depre- ciation falls within the sc~oe cC that general rule, thus, for exany~s, a onan:tao_e ccmtr~bu - tion of a !~0 year cli buildioc with a value of ~20,00C and oric~inal cost of .35C,300 and in the tax basis of ~lO,CCG due to prior deprecia- tion deductions, would not cause a realization of any taxable income by the donor, even thouvh he had already deducted .3L:.0,00C through de- preciation allowances. 5. Individuals maw contribute 2C~ of the adjusted gross income for any taxable year (Code Section 170(b) (1) ). Either spouse under a joint re- turn can give the full percentane. An addition- al l0~ above the 2C~~ limit tc private founda- tion may be given to churches, educational or- ganizations cr hosoital. Corocration maw ~ive 5~ of the taxable income for each year. (Code Section 170 (b) (2) ). A mere pledoe is not a contribution and the contribution must ac- tually be paid to entitle the donor to a de- duction. Gifts of apcreciated :rcoerty generally avoids a tax on appreciation. Cther types of property that may be considered business pro- perties stock rights, life insurance, where there is an irrevocable assignment of the policy with the foundation named as irrevocable beneficiary and the gift sale of appreciated property where the transfer of the property is in part a sale and in part a gift (however, beware of self-dealing). There are approximately 10 other classifications that are recognized as different types of gifts under the IRS Code. * * * * * Copyrignt c 1967 Axericans uilding Constitutionally (~. Trust) ?rinte~ in U.S.A. -3- PAGENO="0987" 985 (o) Prepare a waiver of notice of the first meetin,~ of the Board of Directors prior to ~he mesti~g and before any other busIness is attempted have all of the members of the Bcard of Directors sign the waiver. This should be regular practice prior to all meetings of the Board of D~rectora. When the minutes have been x~ead and all of the business discussed and enacted, have the Secretary sign the prepared minutes and close the meeting. THIS INFORLTIO~ ~ lCC~I?~l2E 0?. UNNECESSARY IN SONE STATES. PLEASE CONSULT ~iITE LOCAL ATTORNEYS FOR NOES co~~p~:m: o ~ ~: ~iI0 LIST IS FOR INSTRUCTIONAL PURPOSES ONLY. * * * * * -3- Co~yritht (~)1967 America.-is Suildin-- ons~iitutic~afl-r (i~. Trust) Rrinz~din U.. ... PAGENO="0988" 986 EXHISIT 10 THE RECORDS ~THICH T:~ TREASURY RE-~UIRES OF ORAi~T0RS (a) Name and address of recipient (b) Amount of grant (c) Purpose of this disbursement (d) Relation, if any, to persons who created or contrclled foundatIon. In addition to these skeletal records, good practIce would suggest a procedure for processIng grants by the foundation. Such procedures will both serve to assure the Treasury that you are operating a bona I ide program (and this may be prudent since the initial recipients ~f your philanthrory nay tend to be chIldren and relatlcms, if not you yourself) and to make thIngs easIer In your relations with strangers whom you mIght want to consider helping (i,e., it can make it more Impersonal and easier to say no). Mr. Harvey B. Matthews, Jr. of the Ford Foundatlcn, oreaklng at New York UnIversity's Conference cn Charitable FoundatIons, suggested these steps for processing grants: (1) A stated prcgran containing some sort of guId~lineo for determining what sort of grants will be ccnoldere*J (e.g., tuition scholarshlr for college .studemt.~). (2) Application - require some written applIcatIon which makes clear that the person is applying for a grant and not just making an inquiry. The application should make clear what the money is wanted for so that the foundation can toll whether it falls within the founda- tionts program and corporate purposes. (3) Action Control - Mr. Mathews suggests that a piece of paper be attached to the application to record every- thIng that is done regarding the application. (Lb) Preliminary screening and review. At this stage the foundation compares the request with its program to see whether or not the request falls withIn the grant program. Copyright c 1967 (over) Anericans ui1din~ Constituticna1l~r (~ Trust) Printed in ~ PAGENO="0989" 987 (5) Final consideratidri.' The merits of a proposed grant are compared against the availability of funds and a judt3ment made whether it is really worthwhile or desii'able on th~p~art of~'the~foundation. As a matter of form, the initial screening should be done by one officer who then refers those he considers worthwhile to the directors or some committee of directors who make the final decision on the grant and its terms. (6) The parson in charge of the grant program notifies the recipient of the acceptance or rejection of his applica- tion by letter. (7)' There should be `in addition a follow up on the grant, a formal closing out of the terms of the grant, and an evaluation of the benefits derived from the foundation's use of its money in this particular instance. As it was alluded before, the test of the propriety of a grant is whether it is in furtherance of the foundation's exempt purpose. A child, spouse, or relative of adonor or Foundation officer may properly receive such a grant (and of course in those cases, ad.- herence to form is more important). 1~Tith proper planning, the .grantmay `be madein such a way as to result in no taxable, income to the recipient. *Cf.~iT 117 Revenue Code. Of course, since this is a grant rather than an expense account, the complicated rules relative to expense accounts have no application. * 4}, * * * Copyright a 1967 Americans Bui1din~ Conetitutjona11~' (~ Trust) Printed io IJ.S,A. PAGENO="0990" *988 EXHIBIT IO~. THE B 0 A B FOUNDATION SAMPLE APPLICATION FOR GRANT TO STUDENTS FOR SPECIAL TRAINING APPLICANT'S NAME ___________________________ ADDRESS AGE OCCUPATION - U. S. CITIZEN______ GRANT FOR THE STUDY OF _____________________________ INSTITUTION WHERE STUDY IS TO BE MADE - PREVIOUS GRANTS, AWARDS ___________________________ If Student, complete the following: PRESENT SCHOOL _____________________________ ________ MAJORING IN ________ OTHER COURSES OF STUDY IN RELATED FIELD - -_____ Complete in own words, reason for request for grant and why you are qualified to receive special training. THIS FORM IS ONLY TO BE USED FOR ILLUSTRATIVE PURPOSES. IN- DIVIDUAL FORIIS FOR INDIVIDUAL GRANT PROGRAIIS SHOULD BE DP.AFTED Recommendation of Present Teacher (If student) Copyright® 1967 * * * * AnericQns Building Constitutionally (A Trust) Printed in U.S.A. PAGENO="0991" 989 E)OiIBIT 11 WHAT FOUNDATIONS C~N AND CAN'T DO Being a corporation, the foundation normally will have all the rights and powers enjoyed by similar corporate organizations -under-State law and there is no need to enumerate them other than to say that they are almost invarIably wIde enough to allow any act desired by the directors. For example, the IllInolo ~eneral Not-For-Profit Corporation ~ct provideo P?Each corporation shell have power:...to have and exercise all powers necessary or conven- ient to effect any or all of the purposes for which the corporatIon is organized." IGNFPCA,~ 5(n). For our purposes here, a more relevant question Is: ~that acts should not be performed in order to preserve the foundation favor- able tax status. 1. A foundntion is prohIbited from entering Into the following transactions with a substantial donor or hIs family. (a) lending any part -of it~ income -or corpus, -without the receipt of adequate security and a-reasonable rate of interest; (b) payIng any compensation, in excess of a reasonable allow- ance for salaries or other compensation for personal services actually rendered; making any part of its services avaIl~.ble on a preferential basIs; - -. -- - e~akiflg any.substantlal purchase of securities or any other property, for more than adequate consideratIon ifl money or money's worth, -~e) -~e1ling any substantial part ef its~êcurItiesbr other p~roperty,-for less than an adequate consideration in money or money's worth; .~r) ~n~ag1~ig -in- any other t~'ansaction which results -in a substantial diversion of its -income or corpus ~to.- such per- - son. - 2. The foundation is further prohibIted from performing any of the following acts: (a) accumulating an unreasonable amount of income; (b) using its income to a substantial degree for purposes un- related to its exemption. Cop~rri-tht(Tc' 1967 Americans ~ui1ding Constitutionally (over) (A Trust) Printed in U.S.A. 87-444 0-68-63 PAGENO="0992" 990 (c) investing its income in such a way as to jeopardize its ability to carry out its purposes. (Note: these last three prohibitions apply only to Income and not to corpus (e.g. gifts or donations receIved) and in practice present z,o particular problem with good counseling.. 3. Afoundationjnay not endorse a particular politIcal candidate or advocate passage of a particular piece of legislation. It may, however advocate a particular point of view. E.G., a conservation group could advccate the desirability of conserva- tion but could not advocate approval of a particular law to achieve conservation. These are general descriptIons of the activIties which will imperil a foundation's tax exempt status and are found in section 501 to 5oL~ of the Internal Revenue Code. Unrelated Business Income There is a situation in which a foundation may be subject ~ income t~x on certain of itS earning without affecting its exempt status. This Is called a tax on unrelated business Income. Al- though there are a good many limitatIons on this tax, the general rule is that an exempt organization is taxable at coi~porate rates on the income from a trade or business regularly carried on by the organization, the conduct of which is not sub3tant±aily related to the performance of the organizatIon's exempt purposeS For example, a tax-exempt clinic would pay no tax on its fees from patients but might be taxable on the income of a restaurant operated by the clinic in its buIlding which served.the public. Of course, since income from invest~cents is generally untaxed, the clinic could ipcorpcrate the restaurant, own all the stock, and pay no tax on the dividends received from the restaurant corporatIon. This tax on unrelated Income does not apply to income from lni~erest, dividends, royalties, most rents, and passive investments generally. The only problem with rents may arise under certain types of leases on property which is subject to a debt incurred in purchasing it. The unrelated business taxis apparently not a major item in the tax treatment of exempt organizations. During the year 1962, for example, only i,6L~8 report forms (990-T) were flied with the Internal Revenue Service. * * * *;~~ * Copyriht (~)i967 Aaericans uilding Constitutionalll7 (A Trust) Prinied in U. S. ~. PAGENO="0993" 991 EXHIBIT 12 WHAT REPORTS A ~ ~ WHAT CONDITIQ~ Federal reports. - (a) FOrm 1023 application for recognition of exempt statu~. This report whichis filed ofily once is not strictly necessary, but it makes things easier and gives the foundation an assurance of its status. (b) Form SS~~L~ Employer Identification Number. Must be shown on 1023 or applied for at the same time. (c) Form 990-A an annual information return for an organization exempt under Section 501 (C) (3). It is a two page simple information return. It is due on the 15 day of the 5th month after the end of the foundation's annual accounting period. (d) Form 990T - annual report of unrelated business income (or form 990-T-FY). This report should be filed even if nO unrelated income is received since filing will start the 3 year statute of limitations, thereby pro- viding you protection against errors made prior to that period. (e) Form 1099 and 1096. Exempt organization like all tax payers are required to report payments of rents, salaries, premiums, annuities, compensations, remunera~- tions, emoluments or other fixed or determinable gains, and income aggregating over $600/year. This is to be filed on or before February 2d in the year following the year of payment. Revenue Code IRC, Section 6041. (f) Foundation will also make withholding tax returns normally required under IRC Section 6051. 2. State Reports. (a) There is usually an annual report relative to your State charter. It is a simple report and self- explanatory, asking only the names of your officers and directors and a statement of the sort of activity you have been engaged in. (b) There may be in addition, one or two information requests from various State agencies. These are generally to determine if your activity brings you within their area of concern. A private foundation is usually not subject to these State regulatory agencies. YOU SHOULD CHECK WITH A LOCAL ATTORNEY FOR LOCAL LAW. Copyright ~`c'è1~s. / Americana ~uilding Constitutionally (A Trust) Printed in U.S.A. PAGENO="0994" 992 EXHIBIT 13 HOW DOICHARSE THESE EXPENSES: HOME EXPENSES: 1. When my home needs - painting - re-pairs - or service of any type (plumber, electrician, carpenter ____________________________________ 2. When my home requires a full-time housekeeper 3. When my hone requires a part-time servant L~. When-myhome requires a pert - or ftill-time gardener ______________________________________ 5. When my home requires new furniture 6. When my home requires garden supplies (fertilizer, plants) ________________________ INSURANCE: -. 1. Who pays fire insurance policy __________ 2. Who pays life insurance policy _______________ 3. Is the Foundation or am I the beneficiary L~. Should I notify my insurance companies ______ 5. How about accident insurance _________________ 6. Is a Will necessary ________________________ TRAVEL AND EXPENSES: 1. On a business trip, tho pays f or: Car expense _____________________ Gas expense ____________________ Hotel and meals _______________ Cab or car rentais_____________ What reports do I keep ________ 2. On a pleasure trip: Car expense ____________________ Gas expense - Hotel and meals Copyright(~ 1967 Arnericexis ~ui1di~g Oor.stitutionally (A Truet) Pri~~~d in U.S. Foundation Personal -J____ - -T - L - (Over) PAGENO="0995" 993 Foundation Perscr~l OT~R EXPENSES: Car repairs ______________________ Car license ________________________ New car ____________________ Home water biils ___________________ Hom~. electric bills ________________ Home telephone bills~ COST OF HOUSEHOLD: Food _____________________________________ ___________ _______ - Clothing ____________- Doctor bills . - - Medicine ________________________________ ___________ ______ Entertainment (friends) ___________________ ___________ _______ Entertainment (busIness assocfatesF______ - Books, Magazines, Papers - _______ To make a Foundation profItable, how large should t~ie yearly earnings --be~--andhow sizable should the real estate be? ________________ Is there a time limit on a Foundation when it is possible for the Government to cancel the Foundation? _________________________________ Is it necessary to make contributions from the FoundatIon to non- profit organizations? _____________________________________________ Has the Government the right to check Foundation records? ___________ Is it possible for the State or Federal Government to annul Founda- tions? . How about bookkeeping? . Copyrighk~~1967 Americans ouiiding Constitutionally (A Trust) Printed in U.s.A. PAGENO="0996" 994 EXHIBIT 1 3'~E DISA~V~GES OF A NCT~FOR PROFIT COP.P3RATIO~FoU~A~Q~j. 1. Since any corporation receives its charter from the State, the State claims the right to require reports of the corporation's activities, and on occasion question its officers, at the dis- cretion of such officials as the Attorney General and others. However, this affair is usually a simple one even though the power to do so exists. 2. The right claimed by the State to dissolve the corporation under certain grounds such as those listed in Section 50 of the Illinois General Not-For-Profit Corporation Act. However, the performance of the Act which brought about the dissolution will in sone circumstances abate any action by the State (e.g. Illinois N.F.P. Act, Section 51.) Consult your o~rn State Law and Counsel for interpretation. 3. Foundations must spend their money for so~alled "exempt purpoces -- nevertheless~ the foundation may operate in a very wide sphere of activity in furthering its exempt purposes. 4. Dispositions of property of a highly personal aature are prohibit- ed by law and should not be done with foundation money, such as -- gifts to friends or family with no restriction as to purpose, or an entirely personal purpose, such as payment of a gambling debt~ loan money to a family member or a friend for a highly speculative business venture, etc4 One should avoid situations which might be helpful to a friend yet could cause trouble for his foundation. Copyright c 1967 Americans uilding Constitutionally (over) (A Trust) Printed in U~ 3.A. PAGENO="0997" 995 5. Annual report form, Internal Revenue Service, 990-A, makes it a matter of public record: (a) Foundationts officers' salaries. (b) Foundation's holding of stock and other investments. (c) Its accumulations of capital gains and other income. (d) Dealings and relationships with contributors. Ce) Names and addresses of persons receiving grants. (f) Th~r relationships to benefacto:.~ of the fo. .~ation. 6. ~ deductions which ha can claim for contributions to privately supported exempt organization limited to 20% of his adjusted gross income. * * * * * Copy:i~r. c 19~7 ~ri~an: 3u~1~iin~ C'nztititionall1r (:` Tru.i.) ?:intoã ~ ~ PAGENO="0998" 996 EXHIBIT 2 THE CHARACTERISTICS OF THE SECOND ORGANIZA~Q~r (a) The second organization should be controlled by the same persons as the foundation to insure consistency of management and no loss of tine in negotiations, contractual agreements or other forms of "red tape." (b) The second organization should be as free as practically possible from taxes. (c) The second organization should be able to receive and retain disburseme:.ts from the foundation, and yet remain legally independent and separate to limit the liability of both organizations. Cd) The second organization should be.ideally of a different nature than the not-for-profit corporation, so that it night be unaffected by any changes or disadvantages of not-for- profit corporate procedures and yet, the second organization should be in a position to take advantage of these proceaures where desirable. (e) The second organization should be ideally able to benefit the creator in as many ways as possible, regardless of taxation, and still preserve the creator's estate. (f) The second organization should be relatively unconpiex, so that constant administration by counsel is unnecessary. (g) The second organization should be legally suitable; proven and court-tested to insure longevity, legalIty and safety. (h) And the second organization should be as flexible ar±d adapt- able as the foundation. * * * * * ~ ~7': / ~ ~ (Z f.~/ ~* PAGENO="0999" PARTNERSHIPS Pride of seeming ownership and achievement, responsibility and reward. Property may be easily conveyed in and out of a Partnership. Can make advance arrangements for distribution of profits and losses based on a division of each Part-- ner's contribution (i.e. services, capital, etc. and various combina- tions of each) to the success or failure of the partnership. No double taxation of earnings as in a corporation. No franchise or stock tax, and no corporation filing fees *or reports. Not subject to or dependent upon the State unless you seek to limit your liability, use a fictitious name or employ other privileges granted by .the State in its Partnership Act. Copyright (~)l967 Americans Suilding Constitutionally (A Trust) Printed in u.s.;. Snm~ Disv~nt.ae~ Illusory ownership soon becomes a pronounced liability.. Partners are liable for Partnership activ- ities as well as taxes. Partnership earnin~s are taxed to individual partners and may raise personal income taxes to a highly confiscatory level - even above corporate rates. Partnership Or-partners may pay income, excise, inventory, license, real estate, social security, and unemployment compensation taxes as well as partnership filing fees if the partnership seeks State priv- ileges. Deceased partner's interest in the partnership devolves to the family as a part of his estate often forcing immediate liquidation at unfavorable prices. If the partnership is a success an:~ otherwise an asset of the family, it is none-the-less lost to then upon thCdeath of the partner re- lated to them, as the death of ~a partner serves to force a dis- solution of the partnership. Creditors may proceed to obtain a lien on the partner~s assets, and one partner's reckless driving ma~ cause a judgment to be had against the remaining innocent partner's home and. other assers. 997 EXHIBIT 3~ Partnerships consisting of two partners common business undertakings. entering any one of many 1 PAGENO="1000" Ohmership may be divided among many people in varying amounts. Each family member has his own separate share which he may dis- pose. as he wishes. The person who creates a business may see his estate grow in size as the value of the business increas- es. The corporation may have perpetual existence Outsiders may be kept out through requirement of first refusal on all stock to the corporation or other stockholders. Copyright® 1967 ~cericans Suil4ing Const~tutiona11y (4~. Trust) Printed in U.S.A. * Persons owning small amounts of ownership may interfere by legal right in your management. A family member?s share may pass to a stranger who can disrupt your management and there are taxes on each member's share of ownership. A creditor may seize his shares to satisfy his debts. When the creator dies the value of the business imposes a huge estate tax liability which may force the family to sell control of the business. The corporation pays a tax on its earnings and the share holder must pay another tax on his re- ceipt of the dividend. Should the corporation accumulate earnings the government may claim that it is being used to avoid tax on its shareholders and be subject to a surtax.. Should it neglect to maintain its corporate agent, it might be subject to a default judgment on the basis of a process served on the Secretary of State about which it has never heard. Whenever any share holder dies his part of the corporation is taxed and subject to probate. Should a stockholder die or his stock be seized by a creditor, thE~ corporation would have to find a large sum of money on short notics. 998 CflP.POR4TTfl~S Corporations are very flexible business organizations and it is con- sequently very difficult to make general statements true of all cor- porations. For convenience we will take a single type of corporation form, the closely held stock corporation with only one class of stoci' the type most commonly used in family owned businesses. Some Advantames Some Disadvartames Undistributed corporate earnings a~'e not taxed to the individual owner A corporatIon has limited liabil- ity and may operate under its corporate name. -2- PAGENO="1001" Freedom to decide what to do with property without rs~erence to other investors (scockholders). Minimum of contracts to be execut- ed (employees a~e*hired orally and purchases and sales are usually made by simple receipts). Simplicity of operations Ownership (perhaps an illusory ad- vantage). ASSOCIATIONS May take advantage of laws govern- ing their operations as distinguish ed from rules governing private foundations. Some~ Disadventa~es No benefits of separation of in- come into tax-exempt classifica- tions and capital gains catagorie~. Maximum taxation and regulation. Licenses to operate are usually required. Total liability of individuals for business debts and expenses. No possible avoidance of social security or advantages of `~corpor- ate fringe benefits." Mixing of personal and business records, Loss of control to the extent of the extensive taxes and regula- tions placed on such business forms. Require to form and clarify the Association lest it be taxed as a partnership or a corporation. difficult to maintain control as there are multiple positions of authority. Subject to limits that apply to all independent not-for-profit foundations, including disclosure of assets. SflT.~ PPCPRT~"~'t1TP 999 (e.g. - Small grocery.store owned and operated by man and wife with no fdrmal agreements or conditions on operations~) Some Advanta~es * No need to separate income or ex- penditures of business into class- ifications of source or use. Minimum necessary taxreports are required. No franchise taxes Not-for-profit organizations generally similar to Trade Associations, complex church structures or Unions. Some Advanta~ea ~ CoPyri:ht o 1962 - 3 - Sales ~alysis Institute, Inc. Prir~ted ifl U.9..~, PAGENO="1002" 1000 ASSOCIATIONS (Cont.) Some Advantages Some Disadvantames Should be in agreement between two or. nçre entities to pursue - proper objectives. May lose its exemption if no real activities are accomplished .to "further industry~" * * * * / . L ,~ ( :~*. -- -~. .. ( L ( / - ~~-/ L~47<~ 2.~ ;~ ~ ~ -- I- . / / _~-~ ~- J~ ~L( ~ C:~~-~-~- Copyright® 1967 Anericans 3uilding Constitutioiially (. Trust) Printed in.U.S.A. ~1- PAGENO="1003" 1001 Advante~es and disadv~ta~ns ~f ffer~nt f~rus of Tr~ist. 1. REAL ESTATE T:~iJ3TS: i~iany States allow creation of land holding trusts for various purposes. The Illinois passive Land Trust is one for example. In spite of the name of this Trust, it is actually a special tth~iporary. tnist created solely for the holding o~ title to land for a limited period. Trustees under the law, may not gener- ~lly convey the property or deal with it without violating the trust. This type of trust has only limited tax and control advantages. 2. INSURANCE TRUSTS: The proceeds of a life insurance policy may be placed in an insurance Trust created during the life àf the insured. Upon the death of the insured, the fund will then be administered for the benefit of the benefici- ary of the Trust, often the wife of the insured, and upon the death of the trust beneficiary, the trust funds would be dis~ributed to designated parties -- usually the child- ren. Substantial tax savingsarè possible for the transfer to the wife of the beneficial interest, but the children must often bear the full brunt of taxation on the assets transferred to them. The Trustees of the insurance Trust are litdted in their activities by many guide lines set out in both the State law and under the Trust agreement. Trust- ees are almost always efther dbrporate Trustees~ such as banks, insth'ance companies or !ndividuei lawyers. The in- surance Trusts ~re not perpetual in nature and must term- inate at a specified time, under the terms of the Trust agreement. Co,-ri ht(~)1967 -1- ~neric~s ui1dir~ Jcnstitu~iooal1r (;~ ~i-u~t) ?:i~e~ PAGENO="1004" 1002 Renewal is usually impossible and unde9irable or illegal. The insurance Trusts are usually created in relation to wLlls or refer to the Trust as thereceptacle. Thus the estate of the decedent is "poured over" by the will into a Trust created' for the specific purpo3e of isolating the decedent's property for tax savings and conservative management by banks or lawyers. Properly created insurance Trusts can provide many conventional benefits, death tax savings, but they have only limited efficiency in not-for- profit procedures. The drawback to insurance Trusts is * that the distant heirs such as g±~and-children or great- grandchildren may be taxed an amount greater than the original tax saving provided by the Trust, due to the fact that tax rates have consistently increased over the years and will probably continue to do so. In other words, there is no continuing protectionS 3. BANK TRUSTS: Bank Trusts, like insurance Trusts, are pri- marily created to preserve assets from shrinkage. Bank Trusts vary greatly, but they usually involve a special pre-drafted form will, which creates two or more Trusts upon the death of the creator, these Trusts to be adminis- tered by the bank as Trustee. Such Trusts often take ad- vantage of the marital deductions for federal estate ta~ savings, and they provide limited protection in other areas of estate planning. Again, like Estate Trusts, the bank Trusts are usually severely limited by State law, business practice and the Trust agreement. Usually the bene~~iary has little or no control over the tTh Copyr~gr~ ~C; A~rican3 ~Uiii~1 ~on~i1y - 2 (. ~r~~t) Frir~t~ PAGENO="1005" 1003 management of the Trust fund properties, since the beneficiary is not a Trustee. In both the bank Trust and the insurance Trust, the creator o± the creator's estate retains some "strings"., of interest and control. These "strings" are the reason that taxes a~e properly assessed against the Trust properties upon the death of the creator. Most banks have found great value in limited Trusts. They advertise their use continually, and the Trust Departrn~nt often constitutes the second largest department in a bank, second only to the savings department. You may have heard some of their advertisaments, they say . "Trusts can save significant ~`~~ts of estate taxes," and "Trusts can provide your family with security through sound financial management." A large bank in Chicage has ~tated . . . "Trusts should not be created solely for tax purposes, but nevertheless, large amounts of taxes can be saved through their proper use." (Northern Trust Company~) All of these statements are true, but we believe that an OwnershipTrust is far more efficient for these purposes than the Trusts that banks offer. Because most people do not wish to give up complete ownership, these limited Trusts sometimes provided by banks in which individuals have some "strings" of control, are popular. When such limitations occur, then a temporary Trust is created and the more significant benefits of the ownership Trust are forfeited. Copyrighted~1967 - 3 A~eric an3 Building Con~itutiona1ly (A Trust) printed in U~S.A. PAGENO="1006" 1004 4. ESCROW AGREE~NTS, ETC: Whenever you entrust a person with vaJu~ble~roperty, and place conditions on its use and direction, you usually create a special Trust, Escrow agreements are shcrt term Trusts as are "street account" securities transactions with your broker. In * each of these Trust situations, the creator places defin- ite limitations on the Trustee and the "equitable" interest and taxable interest remains in the creator. These short * term limited Trusts are of great value for their purposes, but they should not be confused with the type of Trust we are about to discuss. Copyr.ig.~t 01967 A~erica~s ~ui1dL~ Co~stitutional1y (~ ~fuSt) ?ri:ted ~ U, , A. PAGENO="1007" 1005 EXHIBIT 5 AN ANALYSIS OF THE O~:!NERSHIP TRUST ADVANTAGES Since the Trust owns property, it may buy, sell, lease, loan and otherwise deal with the property for the purpose of building, expandIng and strength- ening the Trust in the interest of the beneficiaries. It is self perpetua~irig in na- ture whIch adds securIty. A Trust will protect and pre- serve properties and values for the benefIciary. Since the creator may be a bene- ficiary, the creator also may enjoy the advantages of Trust procedures. The Trustees are empowered to * employ all persons necessary to preserve and build the assets of the Trust. Since Executive Director of the FoundatIon and the Panaglng Truste3 may be one and the same person, there is consistency of management, * It Is possIble to reduce tax- able income of the Trust to near zero. A Trust can lower tax liability by making use of Not-For-Profit laws just as an individual may. A Trust may form divisions and agreements with other legal entities for protection of lia- bility and reduction of taxes. .. The Trustees may decide to par- ticipate jointly with another business or they may decide to incorporate a stock corporation to accomplish Trust business, all of the stock being held by the Trust or the Trust may go into partnership with another Trust, Corporation, partnership, Foundation, etc,, fcr the pur- pose of accomplishing some common objective. Copyright~ 1967 Arcericans Building Constitutionally (A Trust) Printed in U.S. A. DISADVANTAGES Having to make the mental adjustment of giving up legal title of property in favor of control and use of property. 87-444 0-68-64 PAGENO="1008" 1006 ADVANT~GE3(CONTI~IJE~) DISADV~NL~C-3 ~Ccnt~nued) .. The- Foundation within the Trust is controlled complete- * ly by the Trustees to strengthen the purpose of the Trust to take ad~antage of Not-For-Profit procedures tequalify for tax * exemption. The Trust Foundation may re- ceive any properties or bene- fits in any amounts at an~ without tax consequences from another Not-For-Profit qualI- fied tax empt Foundation ., Gifts or endovments received by the Trust Foundation are not considered income under the Internal Revenue Code. The Trust through the Trust Foundation may receive and re- tain disbursoments of accumu- lated income from a State Chartered Private Foundation and yet remain legally independ- ent and separate frcm this State Chartered Foundation. While State Chartered Founda- tions may be subject to change, the Trust is not so affected and may operate regardless of - changes in N-F-F corporate proceedings. A Trust is in a position to take advantage of favorable changes in N-F-P practices through the use of a multiple Foundation system. On a $10,000,000 estate, a Trust can save $6,686,200. In the State of IllInois, the Attorney General estimated on an estate of $1,000,000, for state taxes alone, an estate would pay $106,296.00. Es- timates of Federal taxation on $1,000,000 estate could amount to as much as $320,000 or more - a Trust would save all of this. Copyright c 1967 Anericans Building Constitutionally (A T~ist) Fri:ited in U.S. A. PAGENO="1009" 1007 ADVANTAGES (continued) DISADVANTAGES (Continued) A Trust removes the need for forced sales of property often required under probate, and * thus preserves values of pro- perty in addition to the taxes. A Trust eliminates probate fees and probate taxes. A Trust eliminates fees for the Executor or ~drninistrator~ A Trust also eliminates attorneys fees for probate, etc., thich have been know to run as high as 1/3 to 1/2 of the estate after taxes. A Trust often saves months and even years of time often re- quired to settle an estate, ~A Trust is able to protect the Creator's estate fron all death taxes and death procedures. A Trust enables control of the Trust properties to be trans- ferred to heirs or anyone else the Creator may desire. Probate and tieups are completely e1im~nated A Trust provides the highest degree of privacy for onesT financial affairs available in any legal inetance~ This privacy may be maintained without a battery of attorneys, A Trust does not have to dis- close the beneficiaries. -3- ~O~~i'j ht o i9c2 Sales ~al cic. i:~stitute,iic. Printed in U. PAGENO="1010" 1008 Question #1: HO~ DOES ONE KiC~T THAT THE ?~i~ILY TRUST OP. FOUNDATION IS ExE;~?T? The family Trust is generally a non-exempt enticy. It is its non-exempt nature that gives it certain advantages -- e.g., freedOm from the rules~ of self-dealing or limitations as to purpose - that has caused it to be included in this model arrangement. The fami'y foundation may apply for and receive a determina- tion of exemption like any other foundation. (See #5551 of I.R.S.) Question #2: CHARITABLE FOUNDATIONS ARE AL~!AYS REFERRED TO. DO WE NEED MORE EVIDENCE CONCERNING EDUCATIONAL RESEARCH AND DEVELOPI~NT?. No, "Charitable" is a shorthand expression for all organiza- tions exempt under Section. 501 (c) (3) of the Internal Revenue Code, the section which exempts, among other things, the charities, as well as scientific, educational, religious, literary, etc. The expression is used for convenience and e~ren encouraged by some because they feel it hides the true nature of those organizations. Question #3: EXPLAIN BY EXAMPLES WHEN A PA~LI~NT OR INVEST?~NT IS MADE BY EACH OF THE THREE ENTITIES, OR BY YOU, WHICH ENTITY SHOULD MAI~ THE PAY~NT? As a general rule is that the party who benefits or who has the property interest, is the party who makes the payment. For examples, if a foundation is leasing property it is normal to expect the foundation like any lessee to pay for up-keep, utilities, 0opyri~ht c 1967 1 Amsricans Building Constitutionally (A Trust) ?rinted in U.S.A. PAGENO="1011" 1009 custodial care or the like. A lessee would not normally make expenditures on property thich constitutes a capital invest- ment, as for example, a lessee with a one year least would not build a new wing on the building. Investrnen~s may be made by any entity. However, a tax exempt entity should not make highly speculative investments which would imperil its ability to per- form its exempt purposes. Where the foundation owns or leases an automobile, the foundation nay make payments for gasoline, minor repairs and general up-keep, but where they are paying you for the use of a car owned by you, as for example 10 or l5,~ per mile ~on company business~ they could net make car payments, just as the foundation occupying your property under a short term le~se could not make morthage payments for your benefit. You would have to receive rental payments from the foundation, assum- ing that you are renting to the foundation, and then you would make the mortgage payment. For an explanation of how you can make the most out of these payments, refer to the discussion -in - question two above. Question #~ CAN CHILDREN AS HEMBERS OF TF~ FOUNDATION RECEIVE AN ALLOWANCE TO HELP THEM EDUCATE THEMSELVES IN THE USE OF CAPITAL? No, although like any other person they may receive educational grants which can have the bame result. (Recall the use of beneficial certificates of the Trust.) - --2- Copyright c 1967 Americans ~ui1din~ Canstitutionall.y (A Trust) Printed ir5 U.~3.A. PAGENO="1012" 1010 Question #5~ CAN THE EDUCATIONAL FUND BE USED IN CURRENT * EDUCATION EXPENSES FOR CHILDREN OF T~ FOUIIDATION WHO ARE IN PRIVATE ELE~NTARY AND SECONDARY SCHOOLS? To begin with, the expression `children of the foundation" does not have legal significance. A relevant classification might be "children of a donor or officer of the foundation." Even these persons are eligible to receive educational grants. Refer your accountant to Section 117 of the Internal Revenue Code for an explanation of how such monies nay be rece-ived by those children tax free to them. Whether or not it is taxable to them does not effect the foundation~s ability to make such grants. Question #6~ WHAT CONSTITUTES SELF-DEALING? Refer to exhibit 11 of Lecture III. Question #7~ MAY I LOAN THE FOUNDATION OR TRUST 1 DOLLARS TO PURCHASE MY HOI OR OTHER PROPERTY, THUS CREATING A CREDIT AGAINST WHICH I MAY DRA~I? Yes, the foundation or Trust may borrow from you as any other person may do. Due to the exempt nature of the foundation, such loans must be at no more than fair interest. In either case, the interest on that loan is taxable to the lender. Question #8: WE NEED THE STATE RULES OF PRIVATE EDUCATIONAL SCIENTIFIC, ~ALTH AND WELFARE FOUNDATIONS. IS THERE A BOOKLET BY TRE STATE? Copyright C 19~7 Americans 3uilding Con~titutiona11y (A Tn~tet) Pcin~ed in U. ~. A. PAGENO="1013" 1011 State rules of private, educational, scientific, health and welfare foundations is generally the state non~-profit corporation law. which is almost always available in pamphlet form. There are generally no other state laws applicable. Question :59 WE NEED COPIES OF ALL STATE AND I~DERAL FOPJ~S R~QULRED .The state non-profit corporation law will tell you what reports such corporations have to make to the state. These are frequently mailed out by the state as a matter of course. You night inquire of your Secretary of State if this is your state's practice. The federal forms pertain only to taxation and may be obtained from the IRS on request. These forms were discussed in a hand out in Lecture III. Question #10: WHAT HAPPENS TO THE GAIN WHEN THE TRUST SELLS PROPERTY, OR DOES IT CONVEY TO THE FOUNDATION FIRST? The Trust is taxable oti that gain, un~ess it avoids such tax, There are two ways in which a Trust thay avoid that tax. First, it may pay the money out to beneficiaries in which case the Trust can deduct what monies it pays out and reduce its tax to zero, or two, exercise it unlimited deduction for contribu- tions and achieve the same result. Question #ii: MUST THE TRUST FOUNDATION HAVE' THE SAME, OR Sfl4ILAR PURPOSE TO THAT OF THE NOT-FOR-PROFIT? It need not have, though of course, where their purposes over- lap this will make it convenient for cross endowments. Cop~rri5ht('~1967 - ~iriCans uilaLi1 Oor~tftutiona11y (~ T:~.'t) u. PAGENO="1014" 1012 * Question #12: HOW IS THE TEUST REGISTERED? THROUGH COURT ORDER CF COUNTY CLEK? The Trust need only be recorded in a county wherein it owns encumbered real estate. Question #13: WHAT ABOUT NOT-FOR-PROPI? ~iAILI~G PRIVILEGES? This information was covered in Exhibit 1, part (c) of the second lecture material. (Hulk mailings of 200 pieces or more may qualify for this privilege) Question #1LI: A REQUEST ON SOCIAL SECTJP.ITE i:rFcHI.TATIOJ. PLEASE CB'~I~ Th~ _E~ 3 I CE. o ~uI~3 TO ~ S0CI~L SO~'ITT F ~J ~3 :~`~ EMPLOiE~ A~D E °LO~: F°O P : C -~ so:i~ SE~~I~ TAX AND TFE ~`~J~os o~' ~ `~:° F'~ - ~Ir- T~.5 CONTACTED ON THIS SUBJECT AND HcL'i IS THIS INITIATED? By virtue of the exemption ruling, the employer ~s exempt from federal insurance contribution act, PICA (social security). Other information regarding your specific case may be obtained through your local social security office. Question #15: IS NOT THE TRUST FOUNDATION REVEALED WEED X DOLLARS ARE ENDOWED, GIVEN OR TRANSFERRED TO IT BY THE NOT- FOR-PROFIT FOUNDATION, OR WHEN INVEST~NTS ARE MADE (PRIVACY)? Not to any more exposure than is normal. Question #16: IS NOT THE TRUST FOUNDATION REVEALED TTHEN A BANK * ACCOUNT IS SET UP OR WHEN TRANSFERS ARE MADE TO IT (PRIVACY)? See Answer to Question #l~. Copyri~ht(~)1967 j~ricans Sui1di~i: Co~i:titutiona11i - 5 - (A 1~ust) ?rin~ed in U.S.A. PAGENO="1015" 1013 Question #17: WHAT CAN BE DONE WITH PRESENT INCO?'~ PROPERTY AND HOW DO YOU SUGGEST CONVEYANCE - BY DEED, BY GRANT * OR SALE TO THE TRUST OR FOUNDATION? ON INCO~ PROPERTY, WHICH IS HELD FOR THE BENEFIT OF THE FOUNDATION - WHICH FOR THE TRUST? * The not-for-profit corporate foundation serves its highest and best use creating and generating cash flow!. The Trust on the other hand is the ideal legal instrument to own property - which may be conveyed by deed in Trust, Grant, gift, etc! Of course the Trust can and may have a~ foun.at~on within its framework. Question #18: EXHIBIT 9, PAGE 3, ITEMS 3 AND ~. CHARITABLE CONTRI- BUTIONS I~ANS CONTRIBUTIONS. TO OUR FOUNDATION? AND IS PROPERTY REFERRED TO IN I?EM 3 INCO~ PROPERTY THAT THE DONOR WISHES THE FOUNDATION TO HOLD? WOULDN'T IT BE BETTER PLACED IN THE TRUST? * 1lCh~~ft~bl~ contributions" is that contribution to any organization where contributions may be legally deductable fron your income tax, that includes, foundations, churches, schools, hospitals, etc., and you or your Trust can rnake contributions to anyof these entities. Nb, by "property which the tax-payer sells in the course of his trade or business", we mean inventory. No, inventory is not usually placed in the Trust. Question #19: EXPLAIN CONVEYANCE OF ENCUMBERED PROPERTY ON EXHIBIT 11, PAGE 2 WHERE YOU SAY `CERTAIN TYPES * OF LEASES?" Page 2of Exhibit 11, refers to the so called "business lease." These are leases, the incorr~e of which is not entirely tax exempt. copyright.'~)1967 AusriCana 3ut1~g Conztitut:.3uially - 6 - (A Tru..t) ?rin~ed in U.s.A. PAGENO="1016" 1014 These leases, generally speaking, are 1e~ses which run for more than 5 years on property which is subject to a debt incurred `in its purchase~ Question~#2o: SINCE T~ TRUST IS A FOR-PROFIT STRUCTURE, HOW IS IT THAT ASSETS ARE NOT TAXABLE, AND ARE INSURANCE PROCEEDS TAX FREE? The Trust is a taxable entity. it may however, avoid its tax burden th~'ough the device of its 100% ~charitable" deductions. Thus, any taxable income which might accrue to the Trust can be set off by a deduction of a like amount. This deduction may be either for "charitable~'. contributions or for distribution to beneficiaries, It is the general rule that death benefits paid on an insurancE policy do not constitute taxable incone. Question #21: PREPARE A SAMPLE ENPLOYWENT CONTRACT. DO WE NEED E~PL0YWENT CONTRACTS FOR OUR TRUST? We do not have a sample employment contract, hit it would be a simple matter for you and your counsel to draw one up, in light of your individual circumstances and desires. Question #22:. WHAT ARE CALIFORNIA LAWS FOR STATE OR INDIVIDUALS TO DISSOLVE THE FOUNDATION OR TRUST? See Associate Counsel. -7- Copyri~1it (~~`19d7 Aneric~xis 3~ii1i~; C~.iitit.t1ona11y (:~ Tru~t) Printed in U.3.A. PAGENO="1017" 1015 L~\.~(~L' 1 .~ ~~`7~3 -~ r~ H ~i ..j J~~'z~ 1) H pfl TAXES - 1940 ~T~G S1.~0.0D 201 C- $17500 ~ PAGENO="1018" By DICK HOUDEK * . ~ lIII!lIIII0II;IIIIIIaIIIIIIOhIlP!.t `t ~j ~ 1 ~`l r"'-~ r-i r 0 ~ t( `~ ` ISCALL't SPEAKIIOG tl th t 15t0 twos "M/ 1 "°\ o i y P bt J ~ d C g t p d Lot~~o1 d LI L~ ~ Sootat Security boorfits by 50.1 btiiioo to be tinaxced by in- To pnropioroso Mario T,~ In, oeoryo;ro ~ creased poyroll bases. Ox Tucedsv, toe President called too "a meadure of ~ complains oboot oxen t at nobody doss o ~ r-~ r-s, ~ I t ti tt5 tt b g t b d t A 6 p rtax yb 5 I p 1 tim p 1 t 00 pce'cbu coarser taxes neuld help, he ould. Tin iPnrold-Exnmtncr occpiorcs psssihlo . L ~ \ I) ~ *~-- On Wooicocsday, tho Ca~!~~ yb Conxooiosioo on Eduenttoool 5 sstottnns~o.tbo boxing po'slom of banns? L L U ba ~ 0 ~ Trhvh!eo soloed Cooyrexe to ic'ooo"o on excire too oo alt tile- 6 0 `.O S .0" . S PAGENO="1019" on `riruuuoy, a .o.s ,..~,.. council committee recommended lady of a $32 million bond issue Ia offset op- seating looses of the Southern California RapId Transit District. Taxes will help retire bonded Indebtedness. On Friday, the battle of warns be. tns'en Gao. Ronald Reagan and the stu- dents cautioned oxer whether students should pay tuition or the taxpayers ohosfd praa'ide she romplrie rapport of~ tlse Culi100nata uoia'eesity aod state col- lege synt ems. On Saturday, tanpayrra were asfalog each olhar where Ii all would end, Is there a way to survive in an economy of war, poverty and cultural demands; of income, sales and property taoes? tlcna,sder Smith, the 10th century Scaf itch poet, advised us ta serfs the ,thnugtets of osen uf letters in matters at ignuruore, war and tunes. Hou'evee, Smith'scousasol olleec a baste dtlemms o.-'a to that corn the uesdenstrtaos fati to agree an a sulnttaa to ear tax problems. ado -a PAGENO="1020" 1018 EXHIBIT NO. 4 Gertilicale Xuml)o1 2021 ~W~Z~9 SALES ANALYSIS_INSTITUTE FOTJNDATION OF ILLINOIS_________ ________ NOT FOR PROFIT CORPORATION ACTc ~ict3;. f~m.t2I~iI9~ ~v~erefoze.~PAuL POWELL. ii. iiie. ~ c/~%~'c~. 3.Jte'~ t~~/Ø~ae~/ ~ ~1~flJ~P~ ~ _______ ~~110/19 ,~/~/A; ~%c%/ieiit-/eiice A~/f~/~/7/~J ,/i~o)/e/A'~)/de71/c/.~. ~ .~Th ___ ICc2 ~ - PAGENO="1021" 1019 ARTICLES OF INCORPORATION UNDER THE GENERAL NOT FOR PROFIT CORPORATION ACT (These Articles Must So Filed in Duplicate) (Do Not Write in This Space) Date Paid /2-- ~` ~ Filing Fee I ,"C~. To PAUL POWELL, Secretary of State, Springfield, Illinois. Clerk We the undersigned. thtat less thee theoe) Addreos Name - Number Street City State P. Hayes Kels-ey Road Rarrington, Illinois Edna FL. Hayes Kelcoy Road Barrington, Illinois Kelcey Road Barrington, Illinois being natural persons of the age of twenty.one years or more and citizens of the United States, for the purpose of forming a corporation under the "General Not For Profit Corporation Act" of the State of Illinois, do hereby adopt the following Articles of Incorporation: 1. Thcnameofthecorporationis: Sales Analysis Institute Foundation of Illinois 2. The period of duration of the corporation is: Perpetual 3. The address of its initial Registered Office in the State of Slime:';: ..P;~cPot;cr ue~ ;raaee~~ean~e: ~ in the of Barr in ~` ton (..~Qfii.~ County oLin k e and auce the name of its initial Registered Agent at said Address is: ~ohert D. Flayes - 4. The first Board of Directors shall be in number, their namcs and addresses being as fotlows: Ceo) less then thee,) - Address Name Number Street City State - Robert D. Ilayes Kelsey Road Barrington, Illinois Edna F!. Hayes Kelsey Road Barrington, Illin~is 3. Douglass Kirk Kelsey Road Barrington, Illinois 5. The purpose or purposes for which the corporation is organized are: To contribute to effective research and develo"rnent in the science and art of coarnunication. To teach and promote be~ter understanding between hutnan beings, PAGENO="1022" 1020 0 Certificate of Incorporation of S~F~E~ OFJ~LLINOI:S; ~ ~ ~ r-ç~ Office of [he S~:cretai~y~oJ2Stäfë~ ~ % ~W'~~c (I ót::::::7 (I". 7' I PAGENO="1023" a -~ ~° (NOTE: Any special provision authorized or permitted by statute to be contained in the Articles of Incorporation, may be inserted above.) (INCORPORATORS MUST SIGN BELOW) DOC. 12~3i7 ... ,. FILED FOR r C~D H rFC RDER~ _________ - ~j,., .~-jj `/. - r)Ec2o1~5~2~11 .* ~ at / .`.., Incorpuralors ~24~e~l .1 ~ ACKNOWLEDG~LENT STATE OF ILLINOIS, 1 las. County 0f~__*Lake~ I. ~ a Notary Public do hereby certify that on the -. day of...........P.i~_c.~.k2~er__________ 19..~5.. ..J~QhCI.t....D. !OyeS, mnn,,nfxe,aspneeo Edna H, lla"es and J. Doticlass Kirk :perko ally appeared before rue and being first duly sworn by etc severally acknowledged that they signed the foregoing adveoment in the respective capacities therein set forth and declared that the statements therein contained are true. II's \SIT'1E$S WI-IrREOF I h e h t I y h d d al lb d y d y b It 1 i ~ .... .,," Pj O.'r,v?u's~r. F,~!-,r C.s,'t ~6, ncez t,1 `II z S 0 I,. 0 F~ ~ ~:ifl~I~' nit ~Ui Ud ~tU ~, U (S ~ a~ E-a~ ~c ~: <~ u~ s. -cc *~t: 45 ~f~43 cc 1' PAGENO="1024" 1022 EXHIBIT NO. 5 BY-LAWS OF ARTICLE I - DEFINITIONS The following words and terms, as used in the By-laws of SALES ANALYSIS INSTITUTE FOUNDATION OF ILLINOIS, INC. an Illinois corporation not for profit, shall, unless the context shall other- wise require, mean and be defined as: (a) "Corporation": the aforesaid corporation. (b) "Member": the persons who are qualified and elected to membership as hereinafter provided. (c) "Directors"; The duly constituted members of the Board of Directors. (d) `~Certificate of Membership": A written instrument signed by the de- signated officers evidencing that the person named therein is a duly elected member. (e) "Registered office": that office maintained by the corporation in this state, and the address which is onfile with the Secretary of State. ARTICLE II - OFFICES AND REGISTERED AGENT Sec. 1. Principal Office: The principal office of the corporation shall be located in Barrington , Illinois, and there may be such other offices as the Board of Directors shall designate. Sec. 2. The Registered office of the corporation and the registered agent may, from time to time, be changed by the Directors. ARTiCLE Ill -MEMBERS Sec. 1. Election of members: Application for membership may be pre- sented by members, and shall be elected by a vote not less than of the Board of Directors. Sec. 2. Classes of Members : The Board of Directors may establish more than one class of members and determine the designation and their qualifica- tions. PAGENO="1025" 1023 Sec. 3. Voting Rights: The Directors may establish the voting rights ~. the respective clas~ .s of members established. If there be but one class of members, each member shall be entitled to one vote on matters which shall be submitted to the membership. Sec. 4. Termination of Membership: (a) Upon charges preferred against any member, in writing, and filed with the Secretary, and upon consideration by the Directors, and the affirmative vote of not less than three-fourths of the Directors constituting a quorum at any regular meeting or a meeting called fo~ such purpose, a member may expelled or suspended for good cause shown. Any member so expelled or suspended have a rehearing before the membership at its next Annual Meet- ing, and if by an affirmative two-thirds vote of members present to set aside such expulsion or suspension, the resolution of the Board of Directors shall then be void. (b) Resignation: The written resignation of any member shall be filed with the Secretary, and when accepted by the Board of Directors, shall become effective. (c) Any merñber who has resigned, been suspended or expelled, maybe reinstated by the affirmative vote of three-fourths of the Directors present at any regular or special meeting called for such purpose, and upon such terms as the Directors may designate. Sec. 5. Transfer of membership: Memberships may be transferred c~ty upon the consent of, and upon such terms as shall be fixed by the Board of Directors. ARTICLE IV -MEETINGS OF MEMBERS Sec. 1. Place of Meetings: All meetings of the membership shall be held at the registered office of the corporation, or at such other place as the Di- rectors or President shall, from time to time, designate. - Sec. 2. Meetings: The annual meeting of the membership shall be held on the 16th of May , of each year, commencing ~!ay 16 1936 , at the hour of 10:00 A .M., o'clock, unless otherwise designated by the Directors. Special meetings may be called at such times as the President, a majority of the Directors, or not less than 20% of the membership, shall elect. Sec. 3. Notice of Meetings: Notice of meetings shall be written or printed and which shall be mailed to each member at the address shown on the cor- poration's books, except that if all members be present at any meetir.g and consent to such meeting, call and notice shall not be required. The notice PAGENO="1026" 1024 shall state the place, day and hour of such meeting, and shall be delivered not less than five nor more than forty days before the date of the meeting, personally or by mail or notice maybe waived by all the members in writing. Sec. 4. Quorum: A majority of members entitled to vote, represented in person or by proxy, shall constitute a quorum at any meeting of the member- ship. Sec. 5. Voting: At meetings of the membership each member entitled to vote shall have one vote on any matter submitted, and may be by voice unless twenty per-cent of the members present at such meeting shall demand voting by written ballot. In the election of Directors, such election may be conduc- ted by mail by the Directors. Voting may be in person or by proxy, provided that only a member may be designated to act as proxy, and that authorization to vote on behalf of another shall be in writing, and filed with the Secretary prior to or at the meeting for which the proxy is given, and that no proxy shall be valid after eleven months from the date of its execution. Sec. 6. Cumulative voting: The Board of Directors may provide for cu- mulative voting in the election for Directors, in the manner as is set forth by statute. ARTICLE V - THE DIRECTORS Sec. 1. Powers: The Board of Directors shall: (a) Manage the affairs of the corporation, except as otherwise provided in the Articles of Incorporation or By-laws. (b) Adopt a corporate seal as the seal of the corporation. (c) Designate a banking institution or institutions as depository for the cor- poration's funds; and the officers authorized to make withdrawals therefrom, and to execute obligations on behalf of the corporation. Sec. 2. Number of Directors: The number of Directors shall be 3 in number. - Sec. 3. Election and term: The Directors shall be elected by the Mem- bership at the Annual Meeting or at such other meeting as shall be called for such purpose by the Directors or President, and they shall hold office until their successors shall have been elected; provided that if a vacancy shall occur among the Directors prior to an Annual Meeting, the Directors may fill such vacancy for the balance of the term of such office. Sec. 4. Qualifications: A Director shall be a member of the corporation, shall be age 21 or over, and a resident of the State of Illinois. PAGENO="1027" 1025 Sec. 5. Meetings: All meetings of the Directors shall be held upon call of the President, who shall act as the presiding officer, or of a majority of the Board of Directors, and shall he held as the registered office of the corpo- ration, or the place designated in the call. Notice of such meetings may be given orally or in writing at least twenty-four hours prior to the meeting, or aotice may be waived by the Directors in writing. Sec. 6. Quorum: A majority of the Directors shall constitute a quorum to ~ransact business of the corporation. - ARTICLE VI - THE OFFICERS Sec. 1. The officers of the corporation shall be: aPresident, Vice-Presi- lent, Treasurer and Secretary, and such other officers as the Directors ;hall designate. Two or more offices may be. held by the same person, cx- ~ept that of President and Secretary. As hereafter determined by the Direc- ~ors, any one or more officers may be made ex-officio members of the Board )f Directors. - Sec. 2. Election and term: The officers shall be elected at the meeting of the Directors held immediately after the Annual Meeting of the Shareholders, r at such other meeting of the Directors as shall be called for such purpose, ~nd officers elected shall hold office for the ensuing year and until their suc- ~escors shall be elected. Sec. 3. Duties of officers: (a) The president shall manage the affairs of the corporation, except as shall be reserved by the By-laws or action of the Directors. He shall pre- 3ide at the meetings of membership and the Directors; and shall be vested ~vith the powers and duties incident to the office of President. - (14 The Vice-President: In the absence of the President, or of his inability r refusal to act, the Vice-President is empowered to act in lieu of and in the stead of the President, and shall thereupon be vested with all the powers uid duties of the President. (c) The Secretary shall keep the minutes and a record of other tnatters ~ransacted by the Members and the Directors; mail or cause to be mailed all iotices required by the By-laws; have custody of the corporate seal and rec- )rds; maintain and have custody of names and addresses of the membership; uid perform such other duties as are incident to the office of Secretary. (d) The Treasurer: The Treasurer shall have custody of the funds of the. ~orporation, collect dues and other monies owed the corporation, and per- orm such other duties as are incident to the office of Treasurer. In the dlis- :retion of the Directors, the Treasurer may be required to furnish bond for ;uch amount and under such conditions as the DireCtors may see fit to im- )ose. - PAGENO="1028" 1026 Sec. 4. Removal of Officers: Anyofficer maybe removed by the Directors whenever in their judgment the best interests of the corporation will be served thereby. The removal of any officer shall be without prejudice to contract rights, if any, of such officer so removed. ARTICLE VII - CERTIFICATES OF MEMBERSHIP Sec. 1. Certificates of membership: The Board of Directors may, as it sees fit, provide for certificates of member ship to be issued to duly elected members in good standing, and in such form as they shall determine. Such certificates shall be signed by the President and Secretary and shall bear the seal of the corporation. Sec. 2. Transfer of Membership: Membership in the corporation may be transferred only upon affirmative action by the Board of Directors. Sec. 3. Lost or destroyed Certifica~es: Upon receipt of an affidavit setting forth the loss or destruction of a Membership Certificates, the Board of Di- rectors may order the Secretaryto restore said lost ordestroyed certificate. ARTICLE V1II - DUES Sec. 1. Annual Dues: The Board of Directors may establish an initiation fee and annual dues for members, if there be. one class, or for each c1ast of members if there be more than one class. Sec. 2. Payment of Dues: The initiation fee and annual dues if any, shall be payable as the Directors shall determine. Sec. 3. Default in payment of dues: If any member shall fail to pay the dues within the time provided by the Directors, and shall remain in default thereof for a period of 60 days, such member may be suspended or expelled as the Directors see fit. ARTICLE IX - THE FISCAL PERIOD The fiscal year of the corporation shall begin on the 1st day of October 1966 and shall end on the 30th day of September 1957 ARTiCLE X -APENDMENTS The By-laws of the corporation may be amended, repealed or new By-laws adopted by the Directors upon approval of the Members. PAGENO="1029" ~i-"Thc improvemeist of our way of life is more important then the spreading of it. If we i-sake it satisfactory enough it will spread automatically. If we do not, no-strengtls of arms can permanently impose it." Charles A. Lindbergh * fg'Tho only freeeions that deserves the nanse is that ol pumuing our own good in our own ss'ay, so long as we do not attempt to depris'e others of theirs or impede their efforts to obtain it." J. S. Mill fs"We figist sot to enslave, but to set a country li-ce, and to osaka room upon the earth for honest mon to live in." Thomas Paine *"Covernnsent is a trust and the officers of the government are trustees; and both the trusL and the trustees are created for the benefit of the people." - - Henry Clay Ashland, Kentuchy March,1829 - Uoarck oil Tataa5eoa Robert D. Hayes J, Alton Lauren RichardS. Stephenson 2~- C (ATRUST) Box 575 Barrington, Illinois Casio Robert D. Hayes * Trusfee I ~ `~r~'~ ..~ g~7 *~~~`f/ ~ ~ _::~.- \ CONSTITUTION of j f/ic UNITED STATES H We the People of the / United States, in order. - - / to form a more perfect - `i / union, estabhisls justice, - ~ insure domestic tran. i ~ quihity, provide for the con'.mon defense, - 4 promote the general ~ "I believe there ark more instances of the abridgensent of the freedom of the people by gradual and silent encroachments of those in posver than by sudden and violent usurpa. 4 tions." - Jars cc Madison * June 16,1738 - :~. - __ *"Tlse ss'orld has never had a good definition of tile word liberty, and the American I'eople, just nose, are much in scant of one." Abraham Lincoln - April 18, 1864 :~;~;1(/~' PAGENO="1030" ~"Those who expect to reap the blessings of freedom must, like men, undergo the fatigue of supporting it."~ Thomas Paine *"Ail our freedoms are a single bundle, all must be secure if any is to be preserved." Dwight D. Eisenhower -f,~"Anyone may arrange his affairs that his t.;xes shall be as low as possible; he is not bound to choose that pattern wlsich best ~says the treasury; there is not even a patri- otic duty to increase ones taxes. Over and ever again courts have said that tlsare is noting sinister in so arranging affairs as to keep taxes as low as possible. Everyone (toes it, rich and poor alike and all do right; for nobody owes any public duty to pay more than the law demands. Taxes are an enforceable exactir,n, and not voluntary contribution." Judge Learned hand rla!uering vs. Qregory 59 Federal (2nd) 809 *"Enflghten people generally and tyranny and oppressions of the body and mind wilL vaniah like evil spirits at the dawn of day." Thomas Jefferson Jan. 6, 1816 To Iselp citirens of the United States make full use of their rights guaranteed them under the Constitution. ~* WL:35 in Par.tassiupmg Americans Building Constitutionally is a trust consisting of a memnberslsip svho isave subscribed to an estate and business planning service using constitutionally ac- ceptable instruments legally upiseld and sus- tamed by the Supreme Court of the United Siates to protect your property and your income. \~T~;t5g Ocavicu 1. ABC soul help you do all tlse planning r.aresaary to place your business and your propeties into an estate in accord. ance witls your wishes to best preserve and perpetuate their value. 2. To secure your rights ABC -will aid you in taking full advantage of tise guaran- tees made you under the Constitution of the United States. This will be done by supplying your foundation with the best talent available-at no additional cost. AI3C is a national movement conducted by responsible people. - Membership in ABC is only available by sponsorship of another member. Further information can be obtained by coiling or svriting: - Americans Building Csnstitutionally Box 575 Barrington, Illinois 60010 Barrington Phone 3S1-6600. Chicago Phone 763-7375. Area Code 332 tb `(7-' Ecu;; thu Cbdixt~;; ci the bfcEbasb Blabums eta < "No state shall. . . pass any bill . . . or law impairing the obligations of contracts.. ." Articlel,Sectionl0. - Constitution of the. United States PAGENO="1031" 1029 EXHIBIT NO. 7 OR!GINAL BY AUTHOR1 fT OF TIlE HOUSE OF REI'RESENTATIVE~ OF THE CORCRESS OF THE UNiTED STATES OF AMERICA To 1 r sjte~ft R-L9:9a~IN4~:bhnL You arc hereby commanded to summoc~ Mr~e~ae~a~nn, Wjsco~sin (Telephone Numb A de 4,275-3122) to be and appear before the .~9~9~F° 9 Bus mess /E;':~~ee of the House of Representatives of the United States, ef which the Hon. is chairman, iid to hiu the infoinstion described ~nd set out in `Schedule 1," which is ft subpocnn, - Rooi 2359, Ravbu~c Houce Offi'ce building ir~'~~hezk;:ob:r ini~tbe cty of \Vash~ngioo. on ~ .. ,atthehourof (22 then arid. there to testify tcuching matters of inquiry comn$tted to s~id Coninatlc:c; and he is not to dep~ct without leave of rc1d Committee. Herein fail not, and roche return cf this summons. \Vitrieso my hard and the cccl of the 1 1OUSC of Representatives of the United States, at the city of \Vashington, ths clay of 19~L Chc!irn!e-?. Suhconoiittec No. I Attest: ~ .1. / ~-z~i-*-~ PAGENO="1032" 1030 SC}IET)ULE 1 (1) A fiii~nc.i.a1 statement of Americans Building Con- stitutionally for the twelve months ending September 30, 1967, including inCOme and disbursements and a balance sheet. (2) A its t showing names and addresses of members of Americana Bui Iding Constitutionally and the mam~ership fee received from each of them. PAGENO="1033" 1031 EXHIBIT NO. 8 89th Congress } COMMITTEE PRINT TREASURY DEPARTMENT REPORT ON PRIVATE FOUNDATIONS COMMITTEE ON WAYS AND MEANS U.S. HOUSE OF REPRESENTATIVES FEBRUARY 2, 1965 NoTE: This report has not been considered by the `Committee on Ways and Means or any member thereof. It is `being printed for informa't~iona1 purposes only. Printed for the use of the Committee on Ways and Means U.S. GOVERNMENT PRiNTING OFFICE 42-663 WASHINGTON: 1965 PAGENO="1034" CECIL R. KING, California HALE BOGGS, Louisiana EUGENE J. KEOGH, New York FRANK M. KARSTEN, Missouri A. S. HERLONG, JR., Florida JOHN C. WATTS, Kentucky AL ULLMAN, Oregon JAMES A. BURKE, Massachusetts CLARK W. THOMPSON, Texas MARTHA W. GRIFFITHS, Michigan W. PAT JENNINGS, Virginia GEORGE M. RHODES, Pennsylvania DAN ROSTENKOWSKI, Illinois PHIL M. LANDRUM, Georgia CHARLES A. VANIK, Ohio RICHARD H. FULTON, Tennessee JOHN W. BYRNES, Wisconsin THOMAS B. CURTIS, Missouri JAMES B. UTT, California JACKSON E. BETTS, Ohio HERMAN T. SCHNEEBELI, Pennsylvania HAROLD R. COLLIER, Illinois JOEL T. BROYHILL, Virginia JAMES F. BATTIN, Montana 1032 COMMITTEE ON WAYS AND MEANS WILBUR D. MILLS, Arkansas, Chairman LEO H. IRWIN, Chief Counsel Jonw M. MARTIN, JR., Assistant Chief Counsel WIlLIAM H. QUEALY, Minority Counsel U PAGENO="1035" 1033 LETTER OF TRANSMITTAL THE SECRETARY OF THE TREASURY, Washington, February 2, 1965. Hon. HARRY F. BYRD, Chairman, Committee on Finance, U.S. Senate, Washington, D.C. Hon. WILBUR C. MILLS, Chairman, Committee on Ways and Meaus, House of Representatives, Washington, D. C. DEAR MR. CHAIRMEN: I am transmitting herewith the report of the Treasury Department on private foundations. This report re- sponds to requests by the Committee on Finance of the Senate and the Committee on Ways and Means of the House of Representatives that the Treasury Department examine the activities of private foundations for possible tax abuses and report its conclusions and rec- ommendations to the committees. The report contains the results of an extensi~c study made by the Department pursuant to such requests and contains proposals for correction by legislation of in- adequacies of the law disclosed by the study. Sincerely yours, DOUGLAS DILLON. In PAGENO="1036" 1034 TABLE OF CONTENTS Page Introduction 1 Summary of report 5 Part I. Appraisal of private foundations 11 A. Philanthropic values and private foundations 12 B. Evaluation of general criticisms of foundations 13 Part II. Major problems 15 A. Self-dealing 15 1. The existing situation 15 2. Consequences of existing situation 15 3. Prior attempt to solve problem-1950 legislation 17 4. Evaluation of existing law 17 5. Possible solution 21 B. Delay in benefit to charity._ 23 1. Introduction 23 2. 1950 legislation-Existing law 24 3. Evaluation of existing law 25 4. Possible solution 26 a. Distribution of realized income 26 b. Income equivalent 28 C. Foundation involvement in business 30 1. The existing situation 30 2. Evaluation 31 3. Possible solution 36 D. Family use of foundations to control corporate and other property. 37 1. Two widely practiced tax devices 37 2. Evaluation 39 3. Possible solution 41 4. Possible restriction of this solution 43 E. Financial transactions unrelated to charitable functions 45 1. Foundation borrowing 45 2. Foundation lending 50 3. Trading and speculation by foundations 52 F. Broadening of foundation management 54 1. Abuse potentialities of donor influence 54 2. Perpetual existence of foundations 55 3. Possibilities for narrowness of foundation management____ 56 4. Possible solution 56 Part III. Additional problems 58 A. Contributions of unproductive property 58 B. Contributions of section 306 stock and other ordinary income assets 60 1. Section 306 stock 60 2. Other ordinary income assets 62. C. Correction of computation of estate tax martial deduction 63 D. Sanctions for failure to file information returns 64 Appendixes 65 A. Statistical appendix 65 1. Historical pattern of total contributions 65 2. Contributions by type of recipient 69 3. The size and growth of foundations 72 4. 1964 survey of foundations 76 5. The income of foundations 78 6. The wealth of foundations 82 7. Certain ratios with respect to foundations 84 8. Frequency of certain transactions 88 9. Foundation payout ratios to assets 92 10. Foundation involvement in business 96 11. FoundatiOns and type of charity 100 B. Internal Revenue Service administrative activity 109 V PAGENO="1037" 1035 U.S. TREASURY DEPARTMENT REPORT ON PRIVATE FOUNDATIONS INTRODUCTION Because of the importance which this Nation attaches to private philanthropy, the Federal Government has long made generous pro- vision for tax exemptions of charitable l organizations and tax de- ductions for the contributors to such organizations. Since the Federal tax laws in this way encourage and, in substantial measure, finance private charity, it is altogether proper-indeed, it is imperative- for Congress and the Treasury Department periodically to reexamine the character of these laws and their impact upon the persons to which they apply to insure that they do, in fact, promote the values associated with philanthropy and that they do not afford scope for abuse or unwarranted private advantage. This Report responds to requests by the Committee on Finance of the U.S. Senate and the Committee on Ways and Means of the House of Representatives that the Treasury Department examine the ac- tivities of private foundations for tax abuses and report its conclusions and recommendations. Both the Congress and the Treasury Depart- ment have investigated these problem areas in the past. A major study resulted in important legislation in 1950, when opportunities for self-dealing and the accumulation of income were restricted and, in addition, the income of feeder organizations and the unrelated business income of certain classes of organizations were subjected to tax. The Revenue Act of 1964 imposed further restrictions on foundations seeking to qualify as recipients of unlimited charitable contributions. However, the major revisions of 1950 have not been comprehensively reviewed since their enactment. In its present study, the Treasury Department has sought to determine whether existing legislation has eliminated the abuses with which it was de- signed to cope, and whether additional abuses have developed which require cOrrection by legislative action. In keeping with the congressional requests which prompted it, the scope of this Report is limited to private foundations. The discussion of problems and proposed solutions, thus, is confined to that context. The restriction of the Report to private foundations does not indicate any judgment upon whether or not similar or other types of problems may exist among other classes of exempt organizations. For purposes of this Report, the term "private foundation" designates: (1) Organizations of the type granted tax exemption by section 501 (c)(3) (that is, generally, corporations or trusts formed and 1 The terms "charity" and "charitable" are used in their generic sense in this Report, including all phil- anthropic activities upon which the relevant portion of the Internal Revenue Code of 1954 (sec. 501(c) (3)) confers exemption. Unless otherwise indicated, all statutory references are to the Internal Revenue Code Of 1954, as amended. 1 PAGENO="1038" 1036 2 TREASURY DEPARTMENT REPORT ON PRIVATE FOUNDATIONS operated for religious, charitable, scientific, literary, or educa-. tional purposes, or for testing for public safety or the prevention of cruelty to children or animals), with the exception of- (a) Organizations which normally receive a substantial part of their support from the general public or governmental bodies;2 (b) Churches or conventions or associations of churches; (c) Educational organizations with regular faculties, curriculums, and student bodies;3 and (d) Organizations whose purpose is testing for public safety;4 and (2) Nonexempt trusts empowered by their governing instru- ments to pay or permanently to set aside amounts for certain charitable purposes. In carrying forward its study, the Treasury Department has con- ducted an extensive examination of the charactistics and activities of private foundations. It has investigated and evaluated the experi- ence of the Internal Revenue Service and the Department of Justice in the administration of the laws governing the taxation of foundations, their contributors, and related parties. Its study has drawn upon pertinent information assembled in investigations conducted by other * groups.5 It has conducted a special canvass of approximately 1,300 selected foundations. From these and other sources, it has compiled and tabulated a variety of classes of relevant statistical data. It has discussed the area with an Informal Advisory Committee on Foundations appointed by Secretary Dfflon.° It has, further, con- sidered a broad range of proposals for reform, extending from remedies narrowly tailored to end specific abuses to sweeping recommendations for the elimination or restriction of tax exemptions and deductions for certain classes of foundations. The Department's investigation has revealed that the preponder- ant number of private foundations perform their functions without tax abuse. However, its study has also produced evidence of serious faults among a minority of such organizations. Six major classes of problems exist; other problems are also present. While the Internal Revenue Service has taken vigorous action in recent years to improve its administration of the existing laws which govern foundations and their contributors,7 additional legislative measures appear neces- sary to resolve these problems. This Report seeks first to place private foundations in general perspective, by considering the values associated with philanthropy and the part played by private foundations in realizing those values. Against this background, it explores the major problems in detail and 2 Described in sec. 503(b) (3). $ Described in sec. 503(b) (2). .4 While organizations within this minor category are exempt from tax, contributions to them are not de- ductible; and they would therefore appear to be more closely analogous to business leagues, social welfare organizations, and similar exempt groups than to foundations. `E.g., Subcommittee No. 1, Select Committee on Small Business of the House of Representatives, whose chairman is Representative Wright Patman. The reports of the investigations of this subcommittee, entitled "Tax-Exempt Foundations and Charitable Trusts: Their Impact on Our Economy," have been published in three Installments (dated, respectively, Dcc. 31, 1982, Oct. 16, 1983, and Mar. 20, 1964) and are hereinafter referred to as the "Patman Reports." A transcript of hearings held by the group In 1964 has been published recently. See "Tax-Exempt Foundations: Their Impact on Small Business," hearings before subcommittee No. 1 on Foundations, 88th Cong., 2d sess., 1964. 6 This Committee met with Treasury officials on several occasions, and was a valuable source of Informed opinion; but the conclusions and recommendations of this Report are those of the Treasury Department, and are, of course, based on facts and views drawn from many additional sources. 7 AppendIx B summarizes the administrative Improvements which have been effected by the Internal Revenue Service. PAGENO="1039" 1037 TREASURY DEPARTMENT REPORT ON PRJNATE FOUNDATIONS 3 presents possible solutions.8 in a separate part it describes addi- bional problems of less general significance and recommends approaches bo deal with them.° Appendixes present tables of relevant statistics md other information. 8 The Report does not deal with the problem of distinguishing between permissible educational activities )f foundations and dissemination of propaganda. The distinction is drawn by existing law. The Internal tevenue Service has been investigating situations of questionable operations and taking the action appro- )riate under presently applicable rules. This program will continue. 8 The provisions designed to insure compliance with existing law will have to be reexamined to determine heir adequacy to the task of securing compliance with the rules proposed in this Report. The fundamental )bjective of such provisions should be to make certain that funds which have been committed to charity md for which tax benefits have been granted will in fact be devoted to charitable ends. Also, effective nforcement of the rules recommended here will require the filing of information returns by the organiza- ions to which the rules apply. Since certain private foundations are not now required to file such returns, uitable revisions will have to be made in the relevant provisions of existing law. 87-444 0-68-66 PAGENO="1040" 1038 SUMMARY OF REPORT I. AN APPRAISAL OF PRIVATE FOUNDATIONS While private foundations have generally been accorded the same favorable tax treatment granted other philanthropic organizations- exemption from tax and the privilege of receiving donations deductible by the donors-previous legislation has placed several special re- strictions upon them. To determine whether additional restrictions are necessary, one must first inquire into the character of the con- tribution which private foundations make to private philanthropy and the validity of the general criticisms which have been leveled at them. A. PHILANTHROPIC VALUES AND PRIVATE FOUNDATIONS Private philanthropy plays a special and vital role in our society. Beyond providing for areas into which government cannot or should not advance (such as religion), private philanthropic organizations can be uniquely qualified to initiate thought and action, experiment with new and untried ventures, dissent from prevailing attitudes, and act quickly and flexibly. Private foundations have an important part in this work. Avail- able even to those of relatively restricted means, they enable indi- viduals or small groups to establish new charitable endeavors and to express their own bents, concerns, and experience. In doing so, they enrich the pluralism of our social order. Equally important, because their funds are frequently free of commitment to specific operating programs, they can shift the focus of their interest and their financial support from one charitable area to another. They can, hence, constitute a powerful instrument for evolution, growth, and improve- ment in the shape and direction of charity. B. EVALUATION OF GENERAL CRITICISMS OF PRIVATE FOUNDATIONS Three broad criticisms have been directed at private foundations. It has been contended that the interposition of the foundation be- tween the donor and active charitable pursuits entails undue delay in the transmission of the benefits which society should derive from charitable contributions; that foundations are becoming a dispropor- tionately large segment of our national economy; and that founda- tions represent dangerous concentrations of economic and social power. Upon the basis of these contentions, some persons have argued that a time limit should be imposed on the lives of all foundations. Anal- ysis of these criticisms, however, demonstrates that the first appears to be susceptible of solution by a measure of specific design and lim- ited scope, the second lacks factual basis, and the third is, for the present, being amply met by foundations themselves. As a conse- quence, the Treasury Department has concluded that prompt and effective action to end the specific abuses extant among foundations is preferable to a general limitation upon foundation lives. 5 PAGENO="1041" 1039 6 TREASURY DEPARTME~NT REPORT ON PRIVATE FOUNDATIONS II. MAJOR PROBLEMS The Treasury Department's study of private foundations has revealed the existence of six categories of major problems. A. SELF-DEALING Some donors who create or make substantial contributions to a private foundation have engaged in other transactions with the foun- dation. Property may be rented to or from it; assets may be sold to it or purchased from it; money may be borrowed from it or loaned to it. These transactions are rarely necessary to the discharge of the foundation's charitable objectives; and they give rise to very real danger of diversion of foundation assets to private advantage. Cognizant of this danger, the House of Representatives in 1950 approved a bifi which would have imposed absolute prohibitions upon most financial intercourse between foundations and donors or related parties, and which would have severely restricted other such dealings. However, the measure finally adopted, which has been carried without material change into present law, prohibits only loans which do not bear a "reasonable" rate of interest and do not have "adequate" security, "substantial" purchases of property for more than "ade- quate" consideration, "substantial" sales of property for less than "adequate" consideration, and certain other transactions. Fourteen years of experience have demonstrated that the impreci- sion of this statute makes the law difficult and expensive to administer, hard to enforce in litigation, and otherwise insufficient to prevent abuses. Whatever minor advantages charity may occasionally derive from the opportunity for free dealings between foundations and donors are too slight to overcome the weight of these considerations. Con- sequently, the Report recommends legislative rules patterned on the total prohibitions of the 1950 House bill. The effect of this recom- mendation would, generally, be to prevent private foundations from dealing with any substantial contributor, any officer, director, or trustee of the foundation, or any party related to them, except to pay reasonable compensation for necessary services and to make incidental purchases of supplies. B. DELAY IN BENEFIT TO CHARITY The tax laws grant current deductions for charitable contributions upon the assumption that the funds will benefit the public welfare. This aim can be thwarted when the benefits are too long delayed. Typically, cOntributions to a foundation are retained as capital, rather than distributed. While this procedure is justified by the advantages which private foundations can bring to our society, in few situations is there justification for the retention of income (except long-term capital gains) by foundations over extended periods. Similarly, the purposes of charity are not well served when a foundation's charitable disbursements are restricted by the investment of its funds in assets which produce little or no current income. Taking note of the disadvantages to charity of permitting un- restricted accumulations of income, Congress in 1950 enacted the predecessor of section 504 of the present Internal Revenue Code, which denies an organization's exemption for any year in which its PAGENO="1042" 1040 TREASURY DEPARTMRNT REPORT ON PRIVATE FOUNDATIONS 7 income accumulations ~re (a) "unreasonable" in amount or. duration for accomplishing its exempt purposes, (b) used to a "substantial" degree for other purposes, or (c) invested in a way which "jeopardizes" the achievement of its charitable objectives;1 The indefiniteness of the section's standards, however, has rendered this provision difficult to apply and even more difficult to enforce. Two changes in the law are needed for private foundations which do not carry on substantial active charitable endeavors of their own. First, such private foundations should be required to devote all of their net income2 to active charitable operations (whether conducted by themselves or by other charitable organizations) on a reasonably current basis. To afford flexibifity, the requirement should be tem- pered by a 5-year carryforward provision and a rule permitting accu- mulation for a specified reasonable period if their purpose is clearly designated in advance and accumulation by the foundation is necessary to that purpose. Second, in the case of nonoperating private foundations which minimize their regular income by concentrating their investments in low yielding assets, an "income equivalent" formula should be pro- vided to place them on a parity with foundations having more diversi- fied portfolios. This result can be accomplished by requiring that they disburse an amount equal either to actual foundation net income2 or to a fixed percentage of foundation asset value, whichever is greater. C. FOUNDATION INVOLVEMENT IN BUSINESS Many private foundations have become deeply involved in the active conduct of business enterprises. Ordinarily, the involvement takes the form of ownership of a controlling interest in one or more corporations which operate businesses; occasionally, a foundation owns and operates a business directly. Interests which do not con- stitute control may nonetheless be of sufficient magnitude to produce involvement in the affairs of the business. Serious difficulties result from foundation commitment to business endeavors. Regular business enterprises may suffer serious competi- tive disadvantage. Moreover, opportunities and temptations for subtle and varied forms of self-dealing-difficult to detect and impos- sible completely to proscribe-proliferate. Foundation management may be drawn from concern with charitable activities to time-con- suming concentration on the affairs and problems of the commercial enterprise. For these reasons, the Report proposes the imposition of an absolute limit upon the participation of private foundations in active business, whether presently owned or subsequently acquired. This recom- mendation would prohibit a foundation from owning, either directly or through stock holdings, 20 percent or more of a business unrelated to the charitable activities of the foundation (within the meaning of sec. 513). Foundations would be granted a prescribed reasonable period, subject to extension, in which to reduce their present or sub- sequently acquired business interests below the specified maximum limit. 1 SectIon 681 imposes similar restrictions upon nonexempt trusts which, under section 642(c), claim chari- table deductions in excess of the ordinary percentage limitations on individuals' deductible contributions. 2Except long-term capital gains. PAGENO="1043" 1041 8 TREASURY DEPARTMENT REPORT ON PRIVATE ~)UNDATIONS D. FAMILY USE OF FOUNDATIONS TO CONTROL CORPORATE AND OTHER PROPERTY Donors have frequently transf&red to private foundations stock of corporations over which the donor maintains control. The resulting relationships among the foundation, corporation, and donor have serious undesirable consequences which require correction. Similar problems arise when a donor contributes an interest in an unincor- porated business, or an undivided interest in property, in which he or related parties continue to have substantial rights. In all of these situations, there is substantial likelihood that private interests will be preferred at the expense of charity. Indeed, each of the three major abuses discussed thus far may be presented in acute form here. The problems here are sufficiently intensified, complex, and possessed of novel ramifications to require a special remedy. To provide such a remedy, the Treasury Department recommends the adoption of legislation which, for gifts made in the future, would recognize that the transfer of an interest in a family corporation or other controlled property lacks the finality which should characterize a deductible charitable contribution. Under this recommendation, where the donor and related parties maintain control of a business or other property after the contribution of an interest in it to a private foundation, no income tax deduction would be permitted for the gift until (a) the foundation disposes of the contributed asset, (b) the foundation devotes the property to active charitable operations, or (c) donor control over the business or property terminates. Cor- relatively, the recommended legislation would treat transfers of such interests, made at or before death, as incomplete for all estate tax purposes unless one of the three qualifying events occurs within a specified period (subject to limited extension) after the donor's death. For the purposes of this rule, control would be presumed to exist if the donor and related parties own 20 percent of the voting power of a corporation or a 20 percent interest in an unincorporated business or other property. This presumption could be rebutted by a showing that a particular interest does not constitute control. In determining whether or not the donor and related parties possess control, interests held by the foundation would be attributed to them until all of their own rights in the business or other underlying property cease. The Treasury Department has given careful consideration to a mod- ification of this proposal which would postpone the donor's deduction only where, after the contribution, he and related parties control the business or other underlying property and, in addition, exercise substantial influence upon the foundation to which the contribution was made. Such a rule would permit an immediate deduction to a donor who transfers controlled property to a foundation over which he does not have substantial influence. Analysis of this modification indicates that it possesses both advantages and disadvantages. Con- gressional evaluation of the matter, hence, will require careful balanc- ing of the two. PAGENO="1044" 1042 TREASURY DEPARTMENT REPORT ON PRIVATE FOUNDATIONS 9 E. FINANCIAL TRANSACTIONS UNRELATED TO CHARITABLE FUNCTIONS Private foundations necessarily engage in many financial transac- tions connected with the investment of their funds. Experience has, however, indicated that unrestricted foundation participation in three classes of financial activities which are not essential to charitable operations or investment programs can produce seriously unfortunate results. Some foundations have borrowed heavily to acquire productive assets. In doing so, they have often permitted diversions of a portion of the benefit of their tax exemptions to private parties, and they have been able to swell their holdings markedly without dependence upon contributors. Certain foundations have made loans whose fundamental motivation was the creation of unwarranted private advantage. The borrowers, however, were beyond the scope of reasonable and administrable prohibitions on foundation self-dealing, and the benefits accruing to the foundation's managers or donors were sufficiently nebulous and removed from the loan transactions them- selves to be difficult to discover, identify, and prove. Some founda- tions have participated in active trading of securities or speculative practices. The Treasury Department recommends special rules to deal with each of these three classes of unrelated financial transactions. First, it proposes that all borrowing by private foundations for investment purposes be prohibited.3 Second, it recommends that foundation loans be confined to categories which are clearly necessary, safe, and appropriate for charitable fiduciaries. Third, it proposes that foundations be prohibited from trading activities and speculative practices. F. BROADENING OF FOUNDATION MANAGEMENT Present law imposes no limit upon the period of time during which a donor or his family may exercise substantial influence upon the affairs of a private foundation. While close donor involvement with a foundation during its early years can provide uniq~ue direction for the foundation's activities and infuse spirit and enthusiasm into its charitable endeavors, these effects tend to diminish with the passage of time, and are likely to disappear altogether with the donor's death. On the other hand, influence by a donor or his family presents oppor- tunities for private advantage and public detriment which are too subtle and refined for specific prohibitions to prevent; it provides no assurance that the foundation will receive objective evaluation by private parties who can terminate the organization if, after a reason- able period of time, it has not proved itself; and it permits the develop- ment of narrowness of view and inflexibility in foundation manage~ ment. Consequently, the Treasury Department recommends an approach which would broaden the base of foundation management after the first 25 years of the foundation's life. Under this proposal, * the donor and related parties would not be permitted to constitute more than 25 percent of the foundation's governing body after the 3 This recommendation would not prevent foundations from borrowing money to carry on their exempt functions. PAGENO="1045" 1043 10 TREASURY DEPARTMENT REPORT ON PRIVATE FOUNDATIONS expiration of the prescribed period of time. Foundations which have now been in existence for 25 years would be permitted to con- tinue subject to substantial donor influence for a period of from 5 to 10 years from the present. time. III. ADDITIONAL PROBLEMS Review of the practices of private foundations and their contributors discloses the existence of several problems which have less general significance than those discussed in Part II of the report. Part III of the report draws the following conclusions about these problems: A. Gifts to private foundations of certain classes of unproductive property should not be deductible until the foundation sells the property, makes it productive, applies it to a charitable activity, or transmits it to a charitable organization other than a private foundation. B. Charitable deductions for the contribution to private founda- tions of section 306 stock (generally, preferred stock of a corporation whose common stock is owned by the donor) and other assets should be reduced by the amount of the ordinary income which the donor would have realized if he had sold them. C. Reforms of a technical nature should be made in certain estate tax provisions which govern tax incidents of contributions to private foundations. D. A sanction less severe than the criminal penalty of existing law should apply for the failure to file a return required of a private foundation. *. .* * * * *.. These Treasury Department proposals are based upon a recognition that private foundations can and do make a major contribution to our society. The proposals have been carefully devised to eliminate s ub- ordination of charitable interests to personal interests, to stimulate the flow of foundation funds to active, useful programs, and to focus the energies of foundation fiduciaries upon their philanthropic func- tions. The recommendations seek not only to end diversions, distrac- tions, and abuses, but to stimulate and foster the active pursuit of charitable ends which the tax laws seek to encourage. Any restraints which the proposals may impose on the flow of funds to private foundations will be far outweighed by the benefits which will accrue to charity from the removal of abuses and from the elimination of the shadow which the existence of abuse now casts upon the private foundation area. PAGENO="1046" 1044 PART I. APPRAISAL OF PRIVATE FOUNDATIONS The Internal Revenue Code provides very significant preferential treatment for philanthropic organizations. Not only does it exempt such organizations from income tax (a status they share with many other nonprofit organizations), but it grants income, gift, and estate tax deductions to persons contributing funds to them. The allowance of these deductions results in a very sizable reduction in tax revenues. In 1963, for example, the charitable deductions claimed by individuals, corporations, and estates diminished Federal revenues by a total of approximately $2,800 million.1 While private foundations have, in general, received the same favorable treatment accorded all philanthropic organizations, several noteworthy qualifications have been made for them. In 1950 rules concerning prohibited transactions (now secs. 503 and 681(b)) and unreasonabl~ accumulation of income (now sees. 504 and 681(c)) were applied to foundations. In 1964, when Congress increased the general limitation i~pon the amount of deductible charitable contributions which individuals can make each year from 20 percent of adjusted gross income to 30 percent, it excluded donations to private founda- tions from the increase (continuing the 20 percent ceiling on them). At the same time, Congress placed special limitations upon the kinds of foundations which can qualify to receive the unlimited charitable contributions permitted to individuals in certain instances. The limitations were designed, generally, to confine this privilege to founda- tions which do not engage in financial transactions with their donors or related parties, and which actively engage in charitable operations or which pass funds on to active charities without undue delay. A third differentiation between private foundations and other classes of philanthropic organizations occurred in 1964 legislation: in initiating a provision allowing individuals a 5-year carryover of charitable contributions which, in a particular year, exceed deductible limits, Congress did not extend this benefit to contributions made to foundations. The 1964 decisions by Congress restricting the favorable tax treatment accorded private foundations represent a carefully con- sidered balancing of the relative needs and values of foundations against those of other kinds of charitable organizations. The Treas- ury Department concurs in the judgment of Congress on these matters; it should be allowed to stand. The vital present question is whether or not additional restrictions are necessary. To provide an informed response to this question, one must inquire into several fundamental problems. What are the values of private philanthropy? Do private foundations contribute to them? If so, what is the character of that contribution? Is it likely to be attended by undesirable consequences? Are specific measures available to 1 This total does not, of course, represent a net loss to the Government. As Is pointed out in greater detail below, private charitable expenditures reduce the need for Government spending. 11 PAGENO="1047" 1045 12 TREASURY DEPARTMENT REPORT ON PRIVATE FOUNDATIONS forestall such consequences, or can they be dealt with only by provisions of general scope? A. PHILANTHROPIC VALUES AND PRIVATE FOUNDATIONS The income tax deduction for individuals' gifts to charity was added to the law in 1917, at a time when income tax rates were being raised to meet the expense of war. The addition was justified on the ground that heavy income taxes might cause reductions in donations to charity. Similar considerations subsequently led to the enactment of gift and estate tax deductions for charitable transfers and the ex- tension, of the income tax deduction to corporations. It is impossible accurately to assess the gain or loss in Government funds resulting from the charitable deduction. We cannot know by what amount charitable contributions would be reduced if there were no tax deductions for them. Similarly, we cannot know what increase in Government spending would be required to compensate for re- duced charitable spending. A more important imponderable exists-the distinctive value of private philanthropy. Such philanthropy plays a special and vital role in our society; Government services cannot provide a satisfactory substitute. Religious activity is perhaps unique, because Govern- ment is constitutionally barred from undertaking it. Here, private freedom of choice is the preeminent consideration. But in other fields, too, Government is best restricted to a partial and, perhaps, minor role. Research in some of the more controversial areas of the social sciences is an example. Even with respect to activities in which Government must take a major part today-such as education, social security, relief and elimination of poverty-charitable organizations may make vital and unique contributions. Private philanthropic organizations can possess important charac- teristics which modern government necessarily lacks. They may be many-centered, fr~e of administrative superstructure, subject to the readily exercised control of individuals with widely diversified views and interests. Such characteristics give these organizations great opportunity to initiate thought and action, to experiment with new and untried ventures, to dissent from prevailing attitudes, and to act quickly and flexibly. Precisely because they can be initiated and controlled by~ a single person or a small group, they may evoke great intensity of interest and dedication of energy. These values, in them- selves, justify the tax exemptions and deductions which the law pro- vides for philanthropic activity. Private foundations play a significant part in the work of philan- thropy. While the foundation is a relatively modern development, its predecessor, the trust, has ancient vintage. Like its antecedent, the foundation permits a donor to commit to special uses the funds which he gives to charity. Rather than being compelled to choose among the existing operating organizations, he can create a new fund, with its own areas of interest and emphasis. His foundation may encourage existing operating organizations to develop in new direc- tions, or it may lead to the formation of new organizations. Even if it does neither, it reflects the bents, the concerns, and the experience of its creator; and it thereby increases the diversity of charitable works. In these ways, foundations have enriched and strengthened the plural- ism of our social order. PAGENO="1048" 1046 TREASURY DEPARTMENT REPORT ON PRIVATE FOuNDATIONS 13 Private foundations have also preserved fluidity and provided impetus for change within the structure of American philanthropy. Operating charitable organizations tend to establish and work within defined patterns. The areas of their concern become fixed, their goals set, their major efforts directed to the improvement of efficiency and effectiveness within an accepted framework. Their funds are typically consigned to definite-and growing-budgets. The assets of private foundations, on the other hand, are frequently free of commitment to specific operating programs or projects; and that freedom permits foundations relative ease in the shift of their focus of interest and their financial support from one charitable area to another. New ventures can be assisted, new areas explored, new concepts developed, new causes advanced. Because of its unique flexibility, then, the private foundation can constitute a powerful instrument for evolution, growth, and improvement in the shape and direction of charity. B. EVALUATION OF GENERAL CRITICISMS OF FOUNDATIONS Several serious general criticisms have been leveled at the private foundation. Some argue that the interposition of the foundation be- tween the donor and active charitable pursuits entails undue delay in the transmission of the benefits which society should derive from charitable contributions. Others contend that foundations are coming to constitute a disproportionately large share of our national economy and hence, among other things, are biting deeply into our tax base. Still others urge that foundations represent dangerous concentrations of uncontrolled economic and social power. Such contentions have led to proposals that a time limit be imposed on the life of private foundations. The Treasury Department does not believe that a case for this pro- posal has been made. Its investigation has indicated that most private foundations act responsibly and contribute significantly to the improvement of our society. Because of the very nature of their activities and aims, precise judgment is impossible upon the extent to which foundations have realized their potentialities for creative and dynamic charitable works. It seems quite clear, however, that their endeavors have been conducive to important advancements in education, health, science, the arts, religion, and assistance to the needy and unfortunate. The argument that foundations can occasion unwarranted delay in benefits to charity possesses considerable force; for, in particular situa- tions, there have been aggravated instances of such delay. But the appropriate solution would appear to be a measure specifically designed to deal directly with this problem-not a rule, like the proposal for limiting foundation life, whose impact would extend well beyond the boundaries of the problem itself. Part IT-B of the report outlines a recommendation framed to meet the specific exigencies of the delay problem; and the Treasury Department believes that the measure will prove adequate to its task. The contention that foundation holdings have become an excessively large part of the national economy in recent years finds little support in the relevant data. Appendix A explores this matter in some detail. While the available information is far from definitive, it suggests that, PAGENO="1049" 1047 14 TREASURY DEPART1\~LE~2 REPORT ON PRIVATE FOUNDATIONS since 1950, foundation wealth has not grown appreciably faster than other segments of the economy which have substantial investments in common stocks. The existing restrictions on charitable deductions for contributions to foundations would seem to provide a significant restraint upon abnormal growth. Hence, there would appear to be little present factual basis for the assertion that foundation lives should be limited because foundation wealth has become dispropor- tionate. To be sure, the powers of foundations present potential dangers. Many foundations have recognized that fact themselves. The larger foundations have acknowledged and responded to their obligations to the public. They have, in the main, established boards .of inde- pendent, disinterested trustees, and have attracted skilled professional staffs. They have developed procedures which safeguard the inde- pendence of their grantees. Quite generally, they have accepted- and often encouraged-public scrutiny of their operations. Undoubt- edly there have been individual instances of questionable expenditure; but, upon the whole, the record of foundation disbursements is one of solid accomplishment. Serious abuses do exist among a minority of private foundations, and they require correction and restraint. They interfere with the application of the funds of some foundations to their proper charitable purposes. Since the Federal tax laws have played a significant part in the growth of foundations, an unavoidable responsibility rests upon the Federal Government to do what it reasonably can to insure that these organizations operate in a manner conducive to the fulfillment of their purposes. The Treasury Department does not, however, recommend that any separate Federal regulatory agency be created to supervise foundations. Rather, the Department is of the view that the effort should be made to frame the tax laws themselves to curb abuses. Succeeding Parts of this report analyze the character of the abuses which have arisen and recommend remedies for them. The Treasury Department believes that vigorous and fully effective action can and should be taken to end these abuses. It considers such action to be preferable to measures of broader scope and more fundamental impact, such as some limitation upon the lives of all private foundations. PAGENO="1050" 1048 PART II. MAJOR PROBLEMS A. SELF-DEALING (1) The existing situation Existing law does not prohibit donor-foundation transactions. As a result, it is presently possible for a donor to enter into a number of transactions with a foundation to which he has made substantial con- tributions. For example, he may borrow the foundation's funds or have the foundation lend its funds to a business which he controls. He may have the foundation use its liquid assets to purchase either his property or property owned by others which he wishes to keep from being acquired by competitors or other unfriendly parties. He may have his foundation rent its property to him. He may purchase the foundation's assets. The lack of a prohibition upon donor-foundation transactions has led some donors to believe that although the foundation has legal title to assets which they have contributed, such assets still "belong" to them. Such a donor often thinks of a foundation as "his" foundation and feels free to engage in any transaction with it that does not shock the conscience-and even some that do. This same belief may be shared by some foundation officials who do not object when the donor wishes to engage in financial transactions with "his" own foundation. These officials apparently feel that the foundation's funds belong to the donor and should be handled in the manner which the donor wishes, rather than in the manner which would benefit the public. (~) Consequences of existing situation The ability of a donor to deal with his foundation has several undesirable consequences. First, the donor's knowledge that he may call upon his foundation's assets for his personal purposes will often affect the exercise of his discretion as an official of the foundation in determining how much of the foundation's income and corpus should be distributed to charity on a current basis. The extent to which the failure of some private foundations to distribute their entire income to public charities is traceable to the desires of their trustees to have funds available for the needs of the donor is unascertainable. However, it is likely that it is not an unimportant consideration in some cases. Second, transactions between a donor and his foundation often provide subtle private advantages to the donor. For example, even if a donor who borrows the foundation's funds is willing to pay the same rate of interest and to provide the same security as would be reqmred by a bank, he usually can be sure that the foundation would not request a detailed financial statement or ask the personal and often embarrassing questions, such as the use to which the funds will be put, that are usually asked when one borrows from a bank. In addition, it is likely that the foundation will always be willing to lend its funds to the donor and process the donor's "loan application" without any of the delay which might take place if the donor were to 15 PAGENO="1051" 1049 [6 TREASURY DEPARTMENT REPORT ON PRIVATE FOUNDATIONS borrow from a bank. Thus existing law can provide a donor with a ~ertain source of capital upon which he can call in time of need. U'urthermore, the foundation might be more willing to withhold ~ollection of the loan at its maturity-especially if it would embarrass bhe donor-than would be the case if the loan were made by a bank whose obligation to protect its depositors and shareholders would riot permit an extension merely to accommodate the borrower. While ill of these advantages are intangible, they do provide the donor who bakes advantage of the opportunity with a substantial and valuable benefit. Third, the knowledge that his foundation can be used as a source DI capital-even at the prevailing interest rates-can influence the ~Iecisions of the donor in his capacity as an official of the foundation ~s to the assets which the foundation should hold in its portfolio. A lonor who thinks that he may want to call upon his foundation for funds at some future date may have the foundation keep its funds in a form readily convertible into cash so as to be. immediately available for his use, rather than placed in an investment which would be more appropriate for the production of income, but which would not be readily convertible into the liquid funds which the donor may need. Such action would, in many cases, decrease the amount of income which the foundation would be able to expend for charitable purposes. Fourth, the ability of a donor to engage in financial transactions with his foundation results in discrimination between taxpayers. For example, if taxpayer A wants to make his funds available to his business he must do so out of after-tax dollars. However, if taxpayer B, who has established a private foundation, wishes to do the same thing he may "donate" cash (or appreciated property) to his founda- tion and have the foundation inimediately lend the "contribution" to B's business. Assuming that B is in the 50-percent bracket, he can place twice as much cash at the disposal of his business as A, even though both have decreased their disposable funds by the same amount. It is true that the amount borrowed by the B company will have to be paid to the B foundation and not to B. However, the present value to B of being able to put twice as much capital mto his busmess than would otherwise be possible may often exceed the value of the right to collect the debt at some time in the future. Similarly, taxpayer 0 cannot claim as a deduction an amount which he has pledged to his favorite charity, even though the pledge may be en- forceable by the charity. On the other hand, taxpayer D, who has established a private foundation, can "contribute" the same amount to his foundation and then borrow the "contribution" from the foundation. Under these facts D could deduct the contribution but o could not, even though in both cases charity has received the same thing-an obligation of the donor. Finally, the ability of donors to engage in financial transactions with their foundations is adversely affecting taxpayer morale. Many feel that allowing contributions to a foundation to be deductible in situations in which the donor has not irrevocably parted with the "donated" property is improper. The belief is becoming more wide- spread that the creation of a private foundation is a tax dodge used by some taxpayers to obtain tax advantages, much as expense account living was regarded. Under our self-assessment tax system it is important that the public have confidence in the fact that every tax- payer is paying his fair share of the cost of government. PAGENO="1052" 1050 TREASURY DEPARTMENT REPORT ON PRIVATE FOUNDATIONS 17 (3) Prior attempt to solve problem-.1950 legislation The abuses which may exist where a donor is able to enter into finan- cial transactions with his private foundation were recognized by the House of Representatives in 1950. In that year the Ways and Means Committee approved, and the House adopted, a provision which, generally, would have prohibited foundations from entering into financial transactions with (1) its contributors, (2) its officers, direc- tors, and trustees, and (3) certain parties related to its contributors, officers, directors, and trustees. The Senate Finance Committee, after considering this problem, agreed that there were abuses under the law as it had existed prior to the Revenue Act of 1950. However, the committee believed that the abuses could be prevented without prohibiting transactions which are at arm's length. Therefore, the Finance Committee approved, and the Senate adopted, a provision which would only prohibit a foundation from- (1) lending any part of its income or corpus without receipt of adequate securily and a reasorable rate of interest; (2) paying any compensation in excess of a reasonable allow- ance for salaries or other compensation for personal services actually rendered; (3) making any p~rt of its services available on a preferential basis; (4) making any substantial purchase of securities or any other property for more than adequate consideration in money or money's worth; (5) selling any substantial part of its securities or other property for less than adequate consideration in money or money's worth; and (6) engaging in any other transaction which results in a substantial diversion of its income or corpus. These prohibitions applied only to transactions between a foundation and its donor (and certain related parties); they were not made applicable to transactions between a foundation and its officers, directors, or trustees. Tn conference, the Senate version was adopted. The rules adopted in 1950 can presently be found in sections 503 and 681 of the Internal Revenue Code. It is now almost 15 years since the enactment of the Revenue Act of 1950. At this time, it is appropriate-indeed necessary-to reexamine the action taken in 1950. (4) Evaluation of existing law A careful study of the self-dealing transactions which take place under existing law indicates that the 1950 legislation-which only prohibits donor-foundation transactions which violate an arm's length standard-provides unsatisfactory results. When a person is asked to represent two confficting interests in the same transaction it is likely that he wifi, consciously or unconsciously, favor one side over the other. Where one of the interests involved is his own, and if his action will not be questioned by a charitable beneficiary, it is likely that the donor will resolve all close questions m his own favor. For example, it is likely that a donor would be willing to give himself the benefit of the doubt as to "reasonableness" PAGENO="1053" 1051 18 TREASURY DEPARTMENT REPORT ON PRIVATE FOUNDATIONS of the interest and "adequacy" of the security provided for in donor- foundation loans. Anglo-American trust law has long recognized the impossibility of insuring that a trustee who is permitted to deal with himself wifi act fairly to the trust. As `a result, the courts have refused to inquire as to the fairness of dealings between a trustee and a trust and have generally barred such transactions. Because of the potential private benefit which may result from self-dealing, it is imperative that the Internal Revenue Service examine such transactions in detail in order to determine whether there has been a violation of the existing rules. However, such examinations require the skill of highly trained revenue agents and are both time consuming and expensive. The Internal Revenue Service has estimated that the "cost" (both direct costs and the amount of revenue which would be produced if the agent were free to spend his time on matters involving the collection of taxes) of 1 man-year of an experienced revenue agent's time exceeds $320,000. Much of the Service's problem in policing self-dealing transactions is traceable to concepts such as "reasonableness" and "adequacy" and measures such as "substantial" which are contained in the existing self-dealing rules. The administrative problems created by the use of such terms are severe in the foundation area. This is largely attributable to the fact that often no one is looking over the shoulder of the trustee of a private foundation to make sure that the trans- action is, in fact, at arm's length. Indeed, the "arms" involved may both belong to the same person who is both donor andtrustee. More- over, the possibility of arranging transactions with a foundation to suit the needs of the donor are more numerous than in other areas. For example, if a donor wishes to obtain the use of the foundation's funds at a minimum cost he will arrange for the loan to bear a low rate of interest. On the other hand, if a donor wishes to make a deductible contribution to his foundation which is in excess of the generally applicable percentage limitation, it would be possible for him to set a high rate of interest. The following examples indicate the types of self-dealing cases which are being entered into and the difficulty which the Internal Revenue Service has in applying the arm's length test contained in existing law: Example 1.-The A foundation made a loan to a business cor- poration controlled by its donor. The security for the loan con- sisted of an oral promise made by the donor as an officer of the corporation to execute a mortgage on certain of the real property owned by the corporation, but only if the foundation requested such a mortgage. The foundation, however, never requested the donor's corporation to execute such a mortgage. The Internal Revenue Service challenged the exemption of the founda- tion on the grounds that the organization had made a loan without the receipt of "adequate" security. The Service argued that if the corporation were to become insolvent, the foundation, with only an unrecorded promise to execute a mortgage in the future, would be in the same position as any other unsecured creditor. However, the court, although recognizing that the security in- terest of the foundation would be ineffective if the corporation disposed of the real property, felt that a mere promise to execute a mortgage in the future constituted "adequate" security. Thus, PAGENO="1054" 1052 TREASURY DEPARTME~NT REPORT ON PRIVATE FOUNDATIONS 19 the foundation's exemption was upheld. William Clay, Jr. Foundation v. United States (64-2 TJSTC ¶ 9650 (N.D. Tex. 1964) (COH). Example ~.-The B foundation was able to make 12 loans totaling over $200,000 to the donor, his relatives, and corpora- tions controlled by the donor without losing its exempt status. Griswold v. Commissioner 39 T.C. 620 (1962). Example 3.-The donor contributed $65,000 to the C founda- tion. These funds were immediately lent to a corporation owned by the donor. Thus, the donor was able to claim an immediate deduction for funds which were invested in his business. Example 4.-The D foundation lent a substantial portion of its cash to its donor on negotiable demand notes bearing interest at 534 percent. The collateral for this loan was common stock in one of the donor's closely held corporations. The examining agent stated that the donor was using the foundation "as a bank or checking account." Example 5.-The E foundation, during the 5-year period 1955- 59, made 29 loans to its donor. These loans, totaling approxi- mately $145,000, bore interest at the rate of 4 percent and were secured by stock in a closely held corporation. Although each of these loans were repaid by the end of the foundation's account- ing period, some of the funds were "relent" to the donor in the opening days of the following year. Since there were no open loans as of the last day of the foundation's accounting period, the presence of such loans was not disclosed by its balance sheet. Example 6.-The donor to the F foundation organized a sepa- rate corporation for the purpose of manufacturing an article on which he owned the patent. He borrowed money from a bank, lent it to the corporation, and received secured promissory notes as evidence of the debt. Shortly thereafter, the donor contributed (and deducted) certain of these notes-amounting to $27,500- to the foundation. The corporation subsequently abandoned the attempt to manufacture the patented article and the notes became worthless. This transaction permitted the taxpayer to obtain a large contribution deduction for what was essentially "risk capi- tal" for his new business. If the corporation had proved to be successful, the donor, as its stockholder, would have benefited from the additional capital which was made available. However, since the corporation did not prove to be successful, it was only the charity that suffered-the donor had already obtained a de- duction for his gift of the corporation's notes. Example 7.-A donor contributed real estate to the G founda- tion. Shortly thereafter the foundation leased these properties back to the donor for rentals of approximately $10,000 and $12,000 for 1960 and 1961, respectively. The donor then sublet these properties to third parties for approximately $12,000 and $20,000 for 1960 and 1961, respectively. The donor alleged that the gain which he received was attributable to management services which he performed. Example 8.-The H foundation received approximately $400,000 in deductible contributions from the owners of a retail and wholesale grocery concern. The foundation distributed a small portion of these contributions to operating charitable PAGENO="1055" 1053 20 TREASURY DEPART1\~NT REPORT ON PRIVATE FOUNDATIONS organizations. The remainder of the contributions were used to construct buildings which were leased to the donors' retail grocery. Example 9.-In 1950 the corporate donor to the I foundation purchased land adj acent to its property for future plant expan- sion. In 1951 the company donated to the foundation the por- tion of this land which it did not need in the near future. This gave the company a deduction of approximately $10,000. Some 11 years later, consistent with the company's expansion plans, the property was sold back to the company for an amount equal to approximately $900 more than the amount claimed as a contribution. Example 10.-The J foundation purchased 20,000 shares of common stock in a publicly held corporation from its donor at $20 per share. On the date of the sale, the stock traded on the New York Stock Exchange at $18 per share. However, because of the number of shares involved and the fact that four brokerage houses stated that $20 per share was not more than adequate consideration, a violation of the arm's-length standard could not be proved. Example 11.-The K foundation received gifts of "blue chip" stocks valued at $1.2 mffiion from its principal donor. Im- mediately after receipt the securities were sold by the foundation and all but approximately $50,000 of the proceeds were used to purchase stock in a closely held corporation from members of the donor's family. Exa.~inple U3.-The L foundation received stock in a family corporation which was subject to a 10-year option exercisable by the donor's children to repurchase the stock. At the time of the gift the stock was worth approximately $500,000 and the option price was approximately $700,000. Six years later the value of stock had risen to approximately $5,500,000 and the donor's children exercised their right to purchase the stock for $700,000. The use of a repurchase option permitted the donor to divert any substantial appreciation in the value of the donated asset to private parties. Since the foundation could not have received more than $700,000 for the stock, the retention of the stock-in order to accommodate the donor's children-tied up its funds and prevented it from investing in assets which might provide more income for charity. The foundation, at the same time, bore the risk of loss on the stock. Under existing law, some of these transactions may jeopardize the deductibility of the donor's contribution or the foundation's exemption. Others have received the approval of the courts. However even with respect to those which are not permitted under existing law, the problems of obtaining all of the facts surrounding these transactions often make it extremely difficult, if not impossible, for the Internal Revenue Service to administer the existing law in a manner which prevents foundations from engaging in self-dealing transactions pro- viding a special benefit to the donor ~t the expense of charity. Presumably the only justification for~continuing to pay the high cost of a rigorous enforcement program which the existing self-dealing rules require would be that charity benefits from allowing a donor to deal with "his" foundation and that this benefit is so substantial and 87-444 0-68-67 PAGENO="1056" 1054 TREASURY DEPARTMENT REPORT ON PRIVATE FOUNDATIONS 21 important that it warrants the high cost of administering existing law. However, after a careful review of this subject, it is clear that while there may be a few isolated cases in which charity does benefit by allowing a foundation to enter into financial transactions with its contributors, the benefit which may accrue to charity from such transactions is far outweighed by the inherent potential for private benefit (with a corresponding loss to charity), by the cost of enforcing an arm's-length standard, and by the damage to the confidence of all taxpayers in the fairness of the tax laws. (5) Possible solution Since examination of this area has revealed that the public does not receive an over-all benefit from allowing a donor to deal with hi~ private foundation, it is recommended that a general prohibition on self-dealing be adopted, applicable to future transactions. This rule would not only eliminate the undue burden of administering an arm's- length test but would also eliminate the potential for abuse whicl exists under present law. It would also be desirable from the stand- point of over-all tax policy since it would eliminate the ability of s person who presently enters into financial transactions with hi~ private foundation to obtain an immediate charitable deduction without fully parting with his property. Moreover, such a rule would eliminate the undesirable influence~ which the ability to engage in self-dealing may have upon a foun. dation's charitable activities. Such a prohibition would be consistent with the long-established nontax law which bans all self-dealing between a trustee and the trust with respect to which it is a fiduciary~ Such a rule would also be consistent with the trend of tax provisions enacted by the Congress since 1950 relating to exempt organizations. More specifically, it is recommended that private foundations b prohibited from engaging in any transaction with a donor or parties related to the donor involving the transfer or use of the foundation's assets.2 Illustrative of the self-dealing transactions which a private foundation would be prohibited from entering into under this genera: rule (though the rule would not be limited to these transactiOns~ would be- (1) lending any part of its income or corpus to; (2) paying compensation (other than reasonable compensatioi~ for personal services actually rendered) to; (3) making any of its services available on a preferential basis to; 1 In 1962 the Congress, concerned with the possibility of self-dealing in the case of pension trusts established by self-employed taxpayers, placed a general prohibition on self-dealing between the self-employed persor and his pension trust. Briefly, this provision prevented such a trust from- (1) lending any part of its income or corpus to; (2) paying any compensation for personal services to; (3) selling any of its property to; and (4) acquiring any property for the trust from- a self-employed person covered by the trust or certain parties connected with such persons (sec. 503(j)). The Revenue Act of 1964 also imposed a general prohibition on self-dealing transactions in the case o~ private foundations eligible to receive "unlimited contributions." Under these rules such a private foundation may not- (1) lend any part of its income or corpus to; (2) purchase more than a minimal amount of property from; or (3) sell more than a minimal amount of property to- the donor and certain parties connected with the donor (sec. 170(g) (4)). 2 The definition of a private foundation should include a trust which makes distributions to charitabb and noncbaritable parties. The absolute prohibition on donor-foundation transactions would not, o course, prevent such a trust from making distributions to the donor or members of his family which ar required under the terms of the trust instrument. PAGENO="1057" 1055 22 TREASURY DEPARTMENT REPORT ON PRIVATE FOUNDATIONS (4) purchasing or leasing its property from; and (5) selling or leasing its property to- the donor and certain parties who are so closely connected with the foundation as to lead to potential abuse. Indirect transactions, such as a loan by the donor to a corporation which he controls- followed by a gift of the corporation's note to the foundation, would also be prohibited. A permissible exception to this rule would allow a foundation to purchase incidental supplies from the donor or business organizations with which he may be connected. Thjs would, for example, allow a foundation to purchase its office supplies from a statioi~ery concern owned by a contributor. A second exception which may be appropriate would permit the donor and certain donor-related parties to purchase at fair market value those assets which the foundation would be required to dispose of under the recommendations set forth in subsequent portions of this report. The only other exception which should be made would allow a donor to make an interest-free loan to a foundation if such a loan were to be used for bona fide charitable purposes. Such a transaction would not appear to raise a danger of abuse. The desirability of permitting a foundation to purchase property from a donor where the market value of the property can clearly be established and the purchase price is substantially less than such market value has been considered. Such an exception, however, would be unwise. First, it would encourage a donor to sell appre- ciated property to a foundation for an amount equal to his cost and claim as a charitable contribution the difference between his cost and market value. Such transactions, commonly referred to as "bargain sales," allow a donor to contribute only the portion of the value of the property which represents unrealized (and untaxed) appreciation and to obtain cash equal to his cost without the imposition of any tax on the untaxed appreciation. Such transactions give Linusual benefits to the donor and, at least in the area of private ~oundations, should not be encouraged. Second, and perhaps more important, it is not always possible to distinguish between property whose value can be readily ascertained and property whose value it is difficult to ascertain. Such a rule, therefore, would be difficult to administer. Furthermore, a distinction between stocks which are traded on a stock exchangs~ or in an over-the-counter market and stocks which are not, as such a rule would probably entail, would introduce a discriminatory feature into the law of private foundations. For these reasons the exception would not be desirable. To make these suggested rules fully effective, the existing defini- Lion of parties who are considered to be related to the donor should ~e expanded somewhat to include corporations in which the donor and bhe members of his family own 20 percent or more of the stock. Directors, officers, and persons who hold 20 percent or more of the ;tock oi a corporation which is a substantial contributor to a founda- Lion should also be considered donor-related parties. This would, n effect, prevent a company foundation from lending its funds to an )fficer of its major contributor. In addition, a donor to a private ~oundation should not be permitted to enter into financial transactions ~vith a business corporation which the foundation controls. Thus, if PAGENO="1058" 1056 TREASURY DEPARTME~ REPORT ON PRIVATE FOUNDATIONS 23 a foundation owns a building, the donor should not be able to avoid the self-dealing rules by having the foundation place the building in a separate corporation which would then rent the building to the donor. Furthermore, this prohibition of financial transactions should be applied with respect to officials (directors, officers, trustees, etc.) of the foundation and parties who are related to such officials. The imposition of a general prohibition of self-dealing, to be applied only to future transactions, would eliminate an unduly burdensome portion of the Internal Revenue Service's responsibility in auditing private foundations. Such a general prohibition would avoid the invitation to abuse now inherent in the present permissive standards and, coupled with strict sanctions for filing false information returns, would tend to be self-policing. Finally, the lessening of the opportunity to use charitable funds for personal purposes should speed the flow of funds into the charitable stream. These suggested rules would introduce into the tax law the concept which is fundamental to the law of private trusts: it is better to forbid self-dealing and to strike down all such transactions rather than to attempt to separate those transactions which are harmful from those which are not by permitting a fiduciary (as is the donor when he is dealing with charitable funds) to justify his representation of two interests. From the standpoint of society as a whole, little if anything would be lost if a general ban upon self-dealing were adopted and much would be gained. A private foundation, especially if it is in corporate form, is usually not limited to the "legal list" from which trustees must choose their investments. Since a foundation may choose from a wide range of possible investments, it is not necessary for it to invest in the business of its donor, or to lend him any money. Similarly, a party who engages in transactions with the foundation on a truly arm's-length basis could, by definition, engage in the same transac- tions, on the same terms, with strangers. Accordingly, there appears to be no sound reason to allow donor- private foundation transactions. The imposition of a general prohibi- tion of self-dealing properly limits the deduction for charitable donations to only those situations in which the donor has completely parted with the donated property and thus has committed it without reservation to charitable purposes. B. DELAY IN BENEFIT TO CHARITY (1) Introduction Under existing law an immediate deduction is allowed for gifts to both operating ~ and nonoperating private foundations. In the case of contributions to operating foundations, an immediate deduction is considered appropriate because the funds generally find their way into the charitable stream within a short period after they are received by the foundation. Thus the delay between the loss of tax revenue and the benefit which accrues to the public from having an equivalent amount of funds devoted to an active charitable program is often not substantial. The Revenue Act of 1964 contains special rules for "unlimited gifts" to private operating foundations For the purpose of such rules a private operating foundation Is defined as a privately supported organization which has substantially more than one-half of its assets directly devoted to active charitable activities (sec. 170(g)(2)(B)). Such an organization must also expend substantially all of Its income for charitable purposes on a current basis. This definition could also be used to distinguish between operating and nonoperating private foundations for purposes of this section. PAGENO="1059" 1057 24 TREASURY DEPARTMUNT REPORT ON-PRIVATE FOUNDATIONS Contributions to nonoperating foundations, however, are often neither devoted to an active charitable program nor distributed to operating charities. Instead, such contributions are often retained by the foundation as principal, to be used to generate income which is to be distributed to operating charities as it is received. In such cases there is usually a significant lag between the time of the con- tribution, with its immediate effect upon tax revenues, and the time when the public benefits by having an equivalent amount of funds devoted to charitable activities.4 Many assert that the value of hav- ing a source of uncommitted funds which can easily move from one charitable area to another outweighs this delay. Under this approach it is sufficient if the private nonoperating foundation invests the con- tributions which it receives in assets which generate a reasonable amount of income and distributes such income to operating charities on a reasonably current basis. Where, however, a nonoperating foundation invests its funds in assets which do not generate a reasonable amount of current income or retains the income generated by its investments (except for situa- tions in which income is accumulated for a specific charitable purpose), the justification for the present treatment does not apply. In such a case the need for corrective action is evident. While the causes of undesirable delay in benefit to charity are closely related, they can be more easily identified if they are examined separately. Therefore, this section of the Report will first consider whether existing law relating to the withholding from charity by private nonoperating foundations of their current realized income is adequate. The discussion will then proceed to a consideration of the desirability of rules which would deal with situations in which the managers of a private nonoperating foundation invest the foiinda- tion's funds in non-income-producing assets. (~) 1950 legislation-existing law The undesirable delay .in benefit to the public which results when a private nonoperating foundation is permitted to retain a substantial portion of its current income was recognized by the Congress when it enacted the Revenue Act of 1950. In considering the problems which arise when a foundation is permitted to retain its income, the Ways and Means Committee expressed its view that- the tax-exemption privileges with respect to investment income should be re- stricted to that portion of the income which [foundationsi demonstrate that they are using to fulfill their charitable, etc., purposes by actual distribution to charity as the income is received by them (H. Rept. 2319, 81st Cong., 40 (1950), 1950- 2 Cum. Bull. 411). The House in 1950 believed that the ability to accumulate income often delays the time when charity and hence the public can receive the benefits which preferential tax treatment is intended to foster. To eliminate this delay, the House version of the Revenue Act of 1950 would have generally taxed the portion of an exempt organization's investment income (excluding capital gains) which the. organization did not currently distribute for the charitable purpose for which it was granted an exemption. One exception to this general rule would 4 The delay in benefit to charity which is Inherent where the contributed funds are retained as principal has led to suggestions that since charity must wait for its benefit, the donor's benefit-the tax eleduction for the amounts which he contributed to the foundation-should also be delayed. The adoption of this proposal, which would generally require a private nonoperatthg foundation to expend its principal. Is not recommended by the Treasury Department. PAGENO="1060" 1058 TREASURY DEPARTMENT REPORT ON PRIVATE FOUNDATIONS 2~ have permitted tax-free accumulations of current income to the exteni such accumulations were placed into special 5-year trusts which spec* ified the purpose for which the accumulated funds were to be used Another exception would have allowed a tax-free accumulation equa: to 1 year's rnvestment income. The Senate, although recognizing that some organizations ha~ abused the privilege of tax exemption by accumulating large amount~ of income, rejected the direct tax on accumulations favored by tin House. Instead it adopted a rule requiring that information dis. closing the extent of an exempt organization's accumulations be mad available to the public. In conference, the present rules were adopted as a compromise. These rules, which are now contained in sections 504 and 681 of th code, provide that exempt status shall be denied to an otherwis qualifying organization for the year that its accumulated income is- (1) unreasonable in amount or duration, (2) used to a substantial degree for purposes other than thos constituting the basis for the organization's exemption, or (3) invested in such a manner as to jeopardize the carrying out of the function constituting the basis for the organization'~ exemption. The regulations implementing these provisions generally exclude a foundation's capital gains in determining whether its accumulated income is unreasonable. (3) Evaluation of existing law Fourteen years of experience have indicated that in this contexi standards such as "unreasonable," "substantial," and "jeopardize' are inadequate as well as difficult and expensive to administer. Th( lack of definite rules leads to uncertainty, not only in the minds 0: those charged with the responsibility of. administering this provi. sion, but also in the minds of foundation managers who are awar that departure from the uncertain path of "reasonable" accumulatiom may result in loss of exemption. The difficulty in administering current law can be illustrated by ~ recent Tax Court case in which a foundation with a net worth o: approximately $1,000 purchased a 34-acre tract of industrial rea property for $1.15 million. This purchase was financed with advanc( rentals of $154,000 received from a lessee and by loans of $1 mfflion Since the foundation used approximately 80 percent of its income fo the 5 years following the purchase of the property to retire its debt the Service revoked the foundation's exemption ruling on the ground~ of an "unreasonable" accumulation. However, the Service's revoca tion was reversed by the court which held that the accumulation wa~ neither "unreasonable in amount or duration" nor used to any "sub. stantial degree for purposes or functions other than those constituting the basis foi~ such organization's exemption." Shiffman v. Commis s'ioner, 32 T.C. 1073 (1959). Another litigated case involved a foundation which was established to provide pensions to the employees of an investment company ir which the donor was a minority shareholder. If the income generatec by the donated assets would have been used to provide an immediat benefit to eligible employees, payments of approximately $15 pe month could have been provided. To increase the benefits to $6( per month, the trustees decided to retain and add to corpus the incom PAGENO="1061" 1059 TREASURY DEPARTMENT REPORT ON PRIVATE FOUNDATIONS ~enerated by the foundation's assets during a 10-year period. The [nternal Revenue Service contended that such an accumulation was mreasonable. A Federal district court, however, felt that the tccumulation of income for the purpose of increasing the amount of ncome which could be distributed for exempt purposes in the future lid not constitute an unreasonable accumulation. Trwscott v. United S'tates, 58-1 USTC ¶ 9515 (E.D. Pa. 1958) (CCII). The reasoning )f the court's decision has been interpreted by some as sanctioning a ~0-year accumulation of income merely to increase the size of a oundation's cor~pus. These court decisions, in effect, tend to frustrate the present ban in "unreasonable" accumulations except in the most blatant cases. They also indicate that existing law does not provide the results ntended by Congress in 1950. The survey of tax-exempt foundations recently completed by the Treasury Department indicated that in 1962 approximately one-fourth ~f all private foundations did not expend for charitable purposes an imount equal to their net ordinary income.5 For example, the A ~ouudation accumulated virtually all of its 1962 net ordinary income Df approximately $600,000. The B foundation accumulated virtually ~Jl of its 1962 net ordinary income of $2 million. The C foundation ~ccumulated approximately $900,000 of its 1962 net ordinary income )f approximately $1.6 infflion. The D foundation accumulated ~pproximately $1.3 million of its 1962 net ordinary income of approx- mately $2.5 mfflion. The retention of income in situations such as ~hese deprives the public of the benefit expected in exchange for the ~mount of current tax revenue which has been given up; namely, the ~xpectation that an offsetting current charitable benefit would be rovided by the foundation. ~4) Possible solution (a) Distribution of realized income.-Because of the inadequacy of Ixisting law and the Service's difficulty in administering the present permissive rules, it would be appropriate to adopt a rule which would ~ive both taxpayers and the Service workable objective standards. [t is therefore recommended that all private nonoperating foundations ~e required to distribute all of their current net income on a reason- ~bly current basis. Such a requirement would insure that the inter- position of a private nonoperating foundation between the donor and ±aritable activities will not result in undue delay in the transmission Df benefits to their charitable destination. Under this proposal a private nonoperating foundation would ~enerally be required to expend the full amount of its current net ncome by the end of the year following the year such income is re- ~eived. For this purpose income would include investment income ;uch as rents, interest, dividends and short-term capital gains. 6 Long-term capital gains (including capital gain dividends paid by .egulated investment companies) and contributions received by the ~oundation would not have to be distributed on a current basis. The purposes for which the income would have to be expended would be (1) contributions to publicly supported charitable organizations, `For these purposes net ordinary income was defined as total income (excluding capital gains) less expenses ucurred in earning such income. 6 Net income would be total income after deduction of expenses of earning such income. Current opera. lug expenses would be treated as a current expenditure for charitable purposes. PAGENO="1062" 1060 TREASURY DEPARTMENT REPORT ON PRIVATE FOUNDATIONS 27 (2) contributions to privately supported operating organizations (but not privately supported nonoperating organizations), (3) direct expend- itures for charitable programs, and (4) purchases of assets which the foundation uses as part of its program of charitable activities. This proposal is ill ttd by the following example: In 1966 the X foundation received dividend and interest income of $100,000, realized a long-term capital gain of $50,000 and received contributions of $25,000. The foundation would be required to expend $100,000 for the purposes described in the preceding paragraph. This expendi- ture could be made in 1966 or 1967, or part in each year. However, if all or a part of the expenditure is made in 1967, such expenditure could not be treated as satisfying the expenditure requirement for that year. Thus, if the foundation made no distributions in 1966 but expended $100,000 in 1967, such expenditure could not be used to satisfy the expenditure requirement for both 1966 and 1967. Assuming `that the foundation received investment income of $110,000 in 1967, the foundation would have to expend an additional $110,000 (making a total of $210,000) in 1967 or $100,000 in 1967 and $110,000 in 1968. The allowance to private nonoperating foundations of an additional year after receiving income in which to make the necessary expendi- tures will permit such foundations to budget their expenditures and to investigate various uses for their funds before having to make the required outlays. Two exceptions to this rule seem desirable. The first would allow a foundation to treat as an expenditure amounts which are set aside for a definite charitable purpose which the organization must identify at the time the funds are set aside, provided the purpose requires accumulation by the foundation for its accomplishment rather than, for example, by the intended charitable recipient. Such earmarked funds, however, would have to be actually expended within a specific period-such as 5 years-with an extension to be granted if the organization can demonstrate good cause. A second exception would allow a private nonoperating foundation to accumulate its income to the extent that it had, during a prior specified period-such as 5 years-expended amounts in excess of its income for such period. This exception, which would act as an averag- ing mechanism, would allow a foundation to make an immediate gift to an operating charity out of corpus and recoup its expenditure out of future earnings. In an appropriate case, both exceptions could be combined. A requirement that all private nonoperating foundations distribute their income on a reasonably current basis would be consistent with those provisions in the Revenue Act of 1964 relating to private non- operating foundations which can receive unlimited contributions. Such a rule would not require most foundations to change their existing distribution patterns. As noted above, approximately three-fourths of all foundations would have met the requirement suggested above in 1962. Some of the remaining one-fourth would have met the test if they were allowed to treat earmarked accumula- `The abuse which exists when a private nonoperating foundation does not distribute all of its ordinar Income on a reasonably current basis was recognized by the Congress when it enacted rules dealing wit unlimited contributions to such organizations. The approach contained in the 1964 act requires private nonoporating foundations receiving unlimited contributions to distribute not only all their income but one.hallof such unlimited contributions as well. [Sec. 170(g) (3).] The recommendation explained above would not require a foundation to expend funds received as contributions. PAGENO="1063" 1061 ~8 TREASURY DEPARTMENT REPORT ON PRIVATE FOUNDATIONS ions and charitable expenditures made in 1963 as distributions made n respect of 1962, as would be permitted under the recommendation Liscussed above. Of those who would not have met the requirement, aany would have had to increase their charitable expenditures only ~y relatively small amounts. `While this recommendation, therefore, i~ould not affect the vast majority of foundations, its adoption would revent extreme accumulation situations (unless they involved the xceptions noted above) such as those described earlier in this section. (b) Income equivalent.-The ability of foundation directors to with- told current charitable benefits from the public merely to build a ~rger fund of capital-even though the purpose of the accumulation ; to increase the amount of income which the foundation will receive and distribute to charity) at some date in the future-constitutes an buse. The recommendation described above is designed to eliminate his abuse when it takes the form of a direct accumulation-the ~uilding up of corpus out of retained interest, rents, dividends, and o forth. However, that recommendation in itself will not prevent oundation officials from engaging in indirect accumulations-the uilding up of a foundation's capital by investing in or retaining assets uch as unimproved real estate, growth stocks and other assets which iiay not generate substantial amounts of current income but which ften compensate for the forbearance of current income in the form f future capital appreciation.8 The ability to increase the size of a tonoperating foundation's corpus by withholding a current benefit rom the public is as much an abuse when it takes the form of an ridirect accumulation as when it takes the form of a direct accumula- ion. In order to eliminate the problems in this area, therefore, it is iso necessary to prevent indirect accumulations. To insure that all private nonoperating foundations provide at least minimum current benefit to charity it is recommended that there be stablished a "floor" below which the current benefits provided by he foundation to the public would not be permitted to drop. Such an pproach could provide that if a private nonoperating foundation's icome, and therefore its required payment to charity under the direct- ccumulation proposal, falls below a specified percentage of the value fits holdings, the foundation would have to pay to charity, from its orpus, an amount which would approximate the income which it Tould have received had it invested its funds in the type of assets Leld by comparable organizations. If the foundation's current in- ome (and therefore the amount required to be distributed to charity) xceeded this income equivalent, no distributions out of corpus would e required. Thus, the combination of the direct accumulation and he indirect-accumulation proposals would generally require a private ionoperating foundation to currently distribute its actual ordinary cicome or the foundation's "income equivalent," whichever is higher. The minimum level of charitable expenditures-i.e., the income quivalent-should be comparable to the yield on investment funds teld by comparable organizations-such as universities. To provide 8 It has been suggested that assets such as growth stocks increase in value faster than income securities and ierefore wifi, In the long run, produce more income for charity than income securities. Recent stock market istory, however, has indicated that all growth stocks do not necessarily increase in value faster than blue- lip income securities. Moreover, even if growth stocks do increase in value faster than income securities, io proceeds which the foundation would receive upon the disposition of growth stocks would usually present long-term capital gains which could be retained by the foundation under the direct-accumulation roposal. Finally, even if growth stocks do increase in value faster than income securities and the trustees rthe foundation distribute the proceeds from the sale of the growth stocks to charity, the benefit to charity ould be delayed until some indefinite date in the future when the trustees decided to sell the appreciated owth stock. This indefinite postponement of benefit to charity Is inconsistent with the principle that iarity should receive some current benefit from gifts made to private nonoperating foundations. PAGENO="1064" 1062 TREASURY DEPARTMENT REPORT ON PRIVATE FOUNDATIONS 2~ f or changing imarket conditions, the Secretary of the Treasury should b given regulatory authority to determine this rate on an annual bash Based upon existing market conditions, it would appear that a reason able income equivalent would be in the range of 3 to 33/~ percent The income equivalent would only be applied against a foundation' investment assets.9 It would not be applied against assets whic] the foundation uses for its own charitable program. Assets which cai be valued by referenôe to regularly available sources, such as quota tions on a stock exchange or in an over-the-counter market, woul be valued at their market value at the beginning of the foundation' annual accounting period. For other assets it will be necessar: initially to use the value of the asset at the time it was acquired b: the foundation. In the case of contributed assets, this value wil be the same as the amount claimed by the donor as a contributio deduction. However with the passage of time such valu~ is typicall~ less than market value where the foundation continues to hold th asset. Therefore it will be necessary to revalue such assets periodi cally-perhaps every 5 years-and to use the value determined a such time until the next required revaluation. By using the marke value as of the beginning of the year for assets which can easily b valued and a relatively constant value for all other assets, a founda tion would always be able to determine well in advance of the end o its accounting period the amount which it would have to expend. An exception for situations in which the foundation wishes to se aside its income equivalent for a definite charitable purpose which i can identify at that time should also be adopted. Such an exceptio] would be similar to the exception suggested earlier with respect t accumulations of realized income. Both the direct accumulation and income equivalent recommenda tions should apply to private nonoperating foundations which ar presently in existence, as well as those created in the future. Exist ing organizations, however, should be permitted a reasonable perio4 in which to adjust their investments in order to avoid having to spen corpus to satisfy the income equivalent requirement.'° It is recognized that the income equivalent proposal does not pro vide an adequate solution in all cases." The fact that this pro posal does not always assure that charity will receive a curren benefit merely points out the need for special rules, such as thos recommended in parts 11(D) and 111(A) of this Report, where th asset contributed to the foundation often does not generate an: current income. The two approaches described in this section are complementar: and both are needed to prevent inappropriate delay in charitabi benefits. These recommendations, together with those dealing wit the treatment of specific types of assets, would provide a moderat and generally effective solution to the problems in this area. Th combination of these approaches would impress upon the truste of foundations the principle that fiduciaries should not ignore th present needs of charity in favor of concentrating on an increase i the size of the fund under their control merely to provide for som 0 The income equivalent would not be applied against assets with respect to which, under the recomme~ dations set forth in subsequent portions of this report, the donor's contribution deduction has been ~05 poned. 10 Provisions for existing organizations whose underlying instruments require an accumulation of currei income or prohibit an invasion of corpus may be desirable. 11 For example, one asset may provide enough income to completely shelter a nonincome producing asse In such a case charity would only receive funds generated by the income producing asset. Charity won not benefit from the nonincome producing asset, even though the public has paid for the receipt of tir asset through a contribution deduction. PAGENO="1065" 1063 30 TREASURY DEPARTME»=Pr REPORT ON PRIVATE FOUNDATIONS innamed cause at some indefinite time in the future. These ap- )roaches would ~o far in reminding trustees that foundations are ~xpected to provide a source of current funds for charity and that they should not be used as vehicles to further delay the flow of funds ~rom the original donor to operating charities. C. FOUNDATION INVOLVEMENT IN BUSINESS ~1) The existing situation A number of private foundations have become deeply involved in the conduct of active business enterprises. Ordinarily, the involve- nent takes the form of ownership of a controlling interest in one or nore corporations which operate businesses; occasionally, a founda- `ion owns and operates a business directly. Interests which do not ~onstitute control may nonetheless be of sufficient magnitude to nvolve foundations in the affairs of businesses. Example 1 .-The A foundation holds controlling interests in 26 separate corporations, 18 of which operate going businesses. One of the businesses is a large and aggressively competitive metropolitan newspaper, with assets reported at a book value of approximately $10,500,000 at the end of 1962 and with gross receipts of more than $17 million for that year. Another of the corporations operates the largest radio broadcasting station in the State. A third, sold to a national concern as of the beginning of 1965, carried on a life insurance business whose total assets had a reported book value of more than $20 million at the end of 1962. Among the other businesses controlled by the foun- dation are a lumber company, several banks, three large hotels, a garage, and a variety of office buildings. Concentrated largely in one city, these properties present an economic empire of substantial power and influence. Example 2.-The B foundation controls 45 business corpora- tions. Fifteen of the corporations are clothing manufacturers; seven conduct real estate businesses; six operate retail stores; one owns and manages a hotel; others carry on printing, hardware, and jewelry businesses. Example 3.-The C foundation has acquired the operating assets of 18 different businesses, including dairies, foundries, a lumber mifi, and a window manufacturing establishment. At the present time it owns the properties of seven of these businesses. Its practice has been to lease its commercial assets by short-term arrangements under which its rent consists of a share of the profits of the leased enterprise. By means of frequent reports and in- spections, it maintains close check upon its lessees' operations. Example 4.-The D foundation owns a crude oil refining com- pany to which it assigns a book value in excess of $32 million. Example 5.-The E foundation controls a corporation which operates a large metropolitan department store. For its fiscal year ended January 31, 1963, the store reported gross sales of $78,395,052, gross profit of $32,062,405, and paid wages and salaries of $17,488,211. It stated the book value of its assets at that time to be $55,091,820. Example 6.-Among the business interests owned by the F foundation is a substantial holding in a corporation which con- structs machines for the manufacture of concrete blocks. The corporation has approximately 800 employees; its annual sales have ranged from $12 to $15 mfflion in recent years. PAGENO="1066" 1064 TREASURY DEPARTMENTI' REPORT ON PRIVATE FOtINDATIONS 31 These striking illustrations of foundation participation in business are not isolated phenomena, peculiar to a limited group of very unusual private foundations. On the contrary, the available information indicates that the involvement of foundations in business activities is frequent. Of approximately 1,300 private foundations recently surveyed by the Treasury Department, about 180 reported ownership of 10 percent or more of at least one class of the outstanding stock of a corporation. One hundred and nine foundations in this group own 20 percent or larger interests; 12 40 hold 100 percent interests. Forty- three foundations reported that they possess 10 percent or larger interests in two or more corporations. A recent report on founda- tions states that, of 543 foundations studied, 111 owned 10 percent or more of at least one class of stock of a corporation.'3 Together these 111 foundations held interests of not less than the described magnitude (most were in fact considerably larger than 10 percent) in 263 separate corporations. In other cases, of course, foundations own and operate businesses directly.'4 (2) Evaluation Examination of any broad sampling of the commercial ventures of foundations reveals that several kinds of undesirable results frequently follow from them. In the first place, taxable businesses are often placed at a serious competitive disadvantage. Congress recognized this problem in 1950, and, by the Revenue Act of that year, aimed at solving it. The statute which resulted subjects the so-called unrelated business income of foundations and certain other exempt organizations to tax at ordinary rates and removes the immunity formerly enjoyed by "feeder" organizations-entities primarily engaged in business, whose sole claim to exemption is the turning over of profits to exempt entities. Fourteen years of experience under £hese rules, however, has demonstrated that organizations which pay careful heed to the excep- tions prescribed by the 1950 act and retained in the 1954 code can frequently shield their commercial enterprises from tax. Because of the fact that the unrelated business income tax does not, for example, apply to rents derived from property with respect to which the lessor has no outstanding indebtedness, foundations are able to lease business assets owned free of debt to operating subsidiaries, siphon off most or all of the business profits by means of rent which is deductible by the subsidiary but not taxable to the parent foundation, and thereby accumulate large reservoirs of untaxed capital which can be used to support the future operations of the business. Another exception to the unrelated business income tax immunizes rents stemming from a lease whose term is not longer than 5 years even if the lessor has an outstanding indebtedness with respect to the leased assets. The C foundation, referred to in example 3, is typical of the private founda- tions which have tailored their acquisitions of businesses to make use 12 Further information about the business ownership of those of these foundations which have assets valued In excess of $10 million is set forth in Appendix A. 13 Patman Report, 1st installment, supra, p. 8. 14 The transfer of businesses to foundations and other exempt organizations has been encouraged by deci- sions of several courts that, under the arrangements ordinarily employed for these transfers, the trans- ferors are entitled to treat the proceeds which they receive as capital gains. E.g., Union Bank v. United States, 285 F. 2d 126 (Ct. Cls.); Andersen Dairy, Inc. v. Commissioner, 40 P.C. 172; Cemmissioner v. Brown 325 F. 2d 313 (C.A. 0th). The Supreme Court now has under consideration the question of whether or not, after such a transaction, the former owners of the business receive capital gains treatment where the exempt organization makes no downpayment other than from the assets of the business itself, has no fixed personal obligation to pay a purchase price, and is required simply to turn over a specified proportion of the future earnings of the business. Commissioner v. Brown, supra, certiorari granted June 8, 1964. Whatever the outcome of that case, however, it seems clear that substantial inducements for the transfer of businesses to foundations will remain. PAGENO="1067" 1065 32 TREASURY DEPARTMENT REPORT ON PRIVATE FOUNDATIONS of this exception. In the ordinary pattern of these acquisitions, the foundation contracts to purchase the stock of a business corporation for future payments, liquidates the corporation, leases its assets to a newly formed operating company for a 5-year term,'5 and applies the rents- usually fixed at 80 percent of the before-tax `profits of the business- to the discharge of the stock purchase obligation. The ability of the foundation to receive the proceeds of the business operations in the form of tax-free rent enables it to pay a much higher price for the corporation than a nonexempt purchaser could afford.'6 A third and rather elaborate exception to the unrelated business income tax immunizes rental income which foundations realize in certain sorts of situations not qualifying for the first two exceptions.'7 All of these foundations compete with similar businesses owned by nonexempt taxpayers, who must pay for their acquisitions, finance their opera- tions, and support their expansion programs with the funds which remain after taxes have been paid. Moreover, even if the laws governing the taxation of unrelated business income of foundations and feeder organizations contained no avenues permitting business profits to escape tax, commercial enter- prises conducted or controlled by private foundations would stifi possess significant competitive advantges over those owned by tax- able entities. Because -contributions to foundations may be deducted by the contributors for Federal income tax purposes, the capitaliza- tion of foundation businesses is accomplished with tax-free dollars, rather than after-tax dollars. A corporation which wishes to allo- cate $1 million of its gross earnings to the establishment of a taxable business subsidiary, for example, would be able to contribute only $500,000 of capital to the subsidiary after Federal income taxes have been paid; but the same corporation could create a foundation to operate the business, deduct its capital contribution, and have a full $1 million available for the business operation. Again, the tax immunity of dividends, interest, and other proceeds st~mming from passive sources enables foundations to supply capital to their business endeavors with exempt income. Neither of these benefits is available to nonexempt commercial enterprises. Both benefits contribute materially to the ability of a foundation to subsidize its businesses during periods of difficulty and to expand them during periods of growth. Example 7.-When modernization of its textile mill facilities appeared desirable in 1958, the G foundation had sufficient funds * available to make an additional $4 million capital contribution to its operating subsidiary. Example 8.-The H foundation has been able to sustain the operations of one of its department store subsidiaries with a 1956 loan of $1,400,000 (at 43/~ percent interest) and a currently outstanding loan of $200,000 (which bears no interest). Example 9.-The I foundation has advanced more than $3 million to support the business of one of its foreign subsidiaries. 13 The foundation may or may not control the lessee corporation; the C foundation's practice is to lease to an independent corporation. In either event, the connection of the foundation with the business remains a close one. Since the lease bases the determination of rent upon the profits of the business, the foundation has a direct financial reason to be concerned with the conduct of the enterprise. Because of this mterest, the foundation customarily reserves and exercises a right to maintain close supervision over the manage- ment of the business. The C foundation typically retains the additional right to approve the holders of a majority of the lessee's stock. 16Transactions of this kind have received widespread attention-and recommendation-rn tax literature and other publications. See e.g., "Boosting Profits: Have You Put a Price on Your Busmess? You May Be Able To Double It-By Selling to a Charity," Prentice-Hall Executives Tax Report, June 24, 1963, p.6; "Recent Oases Show How Best To Sell a Business to a Tax-Exempt Organization," Journal of Taxa- ~1A (h~F~ PAGENO="1068" 1066 TREASURY DEPARTME~NT REPORT ON PRIVATE FOUNDATIONS 3~ Example 10.-A recent report on foundations sets forth detaiL of the numerous loans which the J, K, and L foundations mad during the period from 1951 through 1961 to various of th( business corporations in which they held controffing or sub stantial interests. 18 The total of this indebtedness on Decembe 31, 1956, was $1,897,605. These foundations appear to hav entered into at least 36 separate loan transactions with their cor porations during the designated period, many involving sums ii excess of $100,000.19 Another advantage which foundation businesses have over thei] taxable competitors is their freedom from the demands of share holders for current distributions of earnings. A remarkable numbe: of foundation-owned enterprises proceed from year to year realizin~ substantial profits, but making negligible or no distributions to thei parent organizations. Example 11.-The A foundation, referred to in example 1, re ceived no dividends for either 1961 or 1962 from its newspape corporation, its lumber company, or its S, T, or U real estat~ corporations, despite the fact that all of those companies earne substantial profits during both years. Example 12.-The M company, a department store, entered it fiscal year ending in 1961 with a retained earned surplus of almos $4 mfflion. During that year and the 2 following years it en larged this surplus with earnings of $365,819, $193,450, an $149,320, respectively. It paid no dividends to its parent foun dation during any of these years. Example 13.-The dividends which the E foundation, referre( to in example 5, has received from its department store subsidiar~ for the years 1960 through 1963 have ranged from less than to 1 3'~ percent of the book value of its equity in the corporation as reflected on the corporation's February 1, 1962, balance sheet In each of these years the store's after-tax net income has beei considerably more than twice as much as the total dividend~ paid. This common willingness of foundations to defer indefinitely th realization of profits from their commercial operations-an attitud frequently not shared by the shareholders of other businesses-make~ it possible for the profits to be invested in modernization, expansion and other programs which improve the competitive posture of th foundation-owned business.20 The various advantages of foundation-held businesses can mak them formidable and successful competitors. Example 14.-The X evening newspaper, owned by a founda tion, has one competitor, the Z morning newspaper. Z has bee] in operation for a number of years and has very substantia financial resources. X, however, appears to have made corn petitive efforts which neither Z nor other newspapers of corn 18 Patman Report, 2d installment, supra, pp. 44-45. 19 The recommendation of Part II-E(2) of this report-that restrictions be imposed upon foundatio lending practices-deals with problems fundamentally different from that of unfair competition, and woul have limited effect in the area of the present inquiry. Foundation loans to affiliated businesses coul frequently he brought within exceptions to that recommendation (as, for example, private placements c obligations secured by first mortgages). and if, in a particular situation, the proposed limitations appeare troublesome, the foundation might well simply decide to furnish funds to its business by means of a capits contribution, rather than a loan. 20'The requirement recommended in the preceding section of this report-that foundations make annum charitable disbursements at least equivalent to a prescribed percentage of the value of their assets-woul not remove this advantage of foundation businesses. In many cases foundations will be able to comply wit this requirement by making payments from contributions, income derived from nonbusiness assets, proceeds arising from the liquidation of other holdings. Such foundations `cviii have no greater reason I make demands upon their commercial subsidiaries for the distribution of business earnings. PAGENO="1069" 1067 ~4 TREASURY DEPARTMENT REPORT ON PRIVATE FOUNDATIONS parable size elsewhere in the country have been able to duplicate. X utilizes seven wire services; other newspapers of similar size have from one to three. X publishes seven separate editions each day; Z publishes five; no comparable evening newspaper in the country publishes seven. X's normal subscription rate is $2 a month; Z's has been forced down to $2.25; those of newspapers in comparable cities range from $2.20 to $3. X recently pur- chased the only other evening newspaper in the city. Its advertising rates appear to remain substantially lower than those of any similar newspaper in the country. In addition to having adverse effects upon competitors, foundation rivolvement in business may occasion other, equally objectionable esults. Opportunities for abuses of the kind with which parts II A ~nd B of this report deal specifically are frequently greatest where a oundation conducts or controls a business. Temptation for subtle ~nd varied forms of self-dealing proliferate in such a situation. Re- note relatives may be employed in the business; friends may be ssisted; business acquaintances may be accommodated. However )roadly drawn the restrictions upon self-dealing may be, many of the onfficts of interest arising in this area are likely to be sufficiently bscure or sufficiently beyond the realm of reasonable definition to scape the practical impact of the limitations. Making certain that ione of the 800 employees of the F foundation's manufacturing )usiness receive special benefits because of a relationship to one of the oundation's donors, or that none of the D foundation's $32 million il refining business involves the transfer or use of money or property o or by parties related to the creator of the foundation, would entail normous administrative burdens in itself, even if the danger of less Lefinable abuses were not present. Again, the problem of deferral of charitable benefits has been articularly pronounced in the foundation business setting. We have Jready noted the competitive advantage which foundation-controlled )usinesses commonly derive from the wfflingness of their owners to orego distributions of current profits. That same unconcern with the resent realization of business earnings, manifested by many founda- ions, often delays the progress of funds to charity even when accumu- ation has no reasonable relation to business needs. The restrictions f existing law upon accumulations of income by businesses become perative oniy where a corporation is "formed or availed of for the urpose of avoiding the income tax with respect to its shareholders"; ~here the shareholders of the business are themselves tax exempt, he limitations may not apply. Similarly, the statute which prohibits inreasonable accumulations of income by foundations applies only to ccumulations within the foundation itself; it does not prevent reten- ion of earnings in a separate, though controlled, entity.2' As a onsequence, many foundations have permitted large amounts of ncome to accumulate in their business subsidiaries. Example 15.-In 1962 the Y foundation had amassed almost $9,700,000 of undistributed earnings in one of its business sub- sidiaries, and more than $5,800,000 in another. Example 16.-By the end of 1963 the 0 foundation had accu- mulated profits of $3,808,957 in its department store subsidiary. When these funds will find their way to charity is, at best, a matter f conjecture. The moderate pressure provided by the payout re- 21 Even if the accumulation restrictions of existing law were extended to these situations, their enforcement ould require an arduous, case-by-case examination of each separate set of facts. PAGENO="1070" 1068 TREASURY DEPARTME~NT REPORT ON PRIVATE FOUNDATIONS 35 quirement recommended in the preceding section of this report- which, after all, merely fixes a basic floor for foundation performance in distributions-affords only a partial solution to the aggravated deferral problem which exists in the foundation business context. The problem has another facet. A number of foundations have revealed a willingness to commit charitable funds to business opera- tions which are failing or, at least, producing consistent losses. Example 17.-The P foundation continues a printing and lithographing business which lost $66,000 in 1959, $36,000 in 1960, $142,000 in 1961, $150,000 in 1962, and an additional amount in 1963. Example 18.-Twenty-four of the 53 business corporationE controlled by the B foundation referred to in example 2, in 1956 lost money in that year, and most of those 24 showed net earnings deficits from previous years' operations. Fifteen of the 4~ corporations which the foundation controlled in 1963 either had net losses in that year or had net operating loss carryovers to that year. Example 19.-A construction subsidiary of the F foundation referred to in example 6, lost $22,920 in 1960, $17,133 in 1961 $41,023 in 1962, and $49,408 in 1963. At the end of 1962 th corporation's earned surplus account showed a net deficit oi $199,818. In all of these situations, charity bears the loss. Participation by foundations in active business endeavors may alsc give rise to a problem of a different character. As the Introductior to this Report has pointed out, the private foundation is uniquel3 qualified to provide a basis for individual experimentation and tin exercise of creative imagination. The framework of institutionalizec charities can, in the nature of things, afford only limited scope foi the development of individual insights, the testing of new approaches the exploration of uncharted areas. But the private foundation- easily established, inherently flexible, and available even to those witi relatively restricted means-can be utilized for precisely these ends Indeed, many would argue that the private foundation derives th( principal justification for the favorable tax treatment accorded it fron its particular suitability for use by those who are concerned with and devoted to the development of, new areas for social improvement This special virtue of the foundation assumes that the individual oi group in control will, in fact, be devoted to the development of thes( new areas; that the primary concern will be with social aims. Bui where a foundation becomes heavily involved in business activities the charitable pursuits which constitute the real reason for its exist ence may be submerged by the pressures and demands of the com mercial enterprise. The directors of a foundation which owns 2( widely diverse businesses must of necessity devote a very consider. able portion of their time and energies to the supervision of busines~ affairs; and charity's claim upon their attention may well suffer Business may become the end of the organization; charity, an insuffi. ciently considered and mechanically accomplished afterthought. Lit. tle may remain to distinguish the directors of such a foundation fron the self_perpetuating management of a publicly owned business cor poration, without the balance supplied by watchful shareholders Unrestricted involvement in business may, then, undermine the ver ability of the private foundation to make its unique contribution t our society. PAGENO="1071" 1069 36 TREASURY DEPARTMENT REPORT ON PRIVATE FOUNDATIONS It is quite true that, occasionally, beneficial consequences have stemmed from the business activities of a particular foundation. The Internal Revenue Service has, for example, discovered several in- stances in which foundation businesses have been profitable, their proceeds have been applied to charitable operations without undue delay, and private benefits for the foundation's donors or controllers have, been avoided. In these situations it may well be true that charity has been advanced, and no one else harmed, by the ability of the foundation to carry on business endeavors. On the other hand, the fact that the large majority of private foundations do not own businesses-and that their charitable endeav- ors suffer no noticeable disadvantage from the lack of business owner- ship-suggests persuasively that foundations have no real need to engage in business. Other sources of income and other kinds of in- vestments, less inimical to the accomplishment of their charitable objectives, are available to them. Indeed, the Treasury Department has encountered widespread opinion, among foundations themselves and those familiar with their affairs, that business participation is altogether inappropriate for private foundations. Hence, the obvious, fundamental, and common abuses which attend the involvement of foundations in commercial endeavors would appear far to outweigh the minor and occasional benefits which particular foundations have sometimes derived from business ownership. (3) Possible solution For these reasons, the Treasury Department recommends the imposition of an absolute limit upon the involvement of private foundations in active business. Since effective control of a corpora- tion very frequently resides in a body of stock representing 20 percent of its voting power,22 and since ownership of a 20-percent interest almost necessarily entails close involvement in the affairs of the business whether or not the interest possesses control of the enterprise, it would seem appropriate to fix the limit at that level. This proposal would, then, prevent foundations from owning 20 percent or more of the total combined voting power, or 20 percent or more of the total value of the equity, of a corporation conducting a business which is not substantially related (other than through the production of funds) to the exempt functions of the foundation. A similar prohibition should apply to the ownership by a foundation, either directly or through a partnership, of a 20-percent or larger interest in the capital or profits of such a business. In determining the quantum of a foundation's stock or business ownership, interests held for the benefit of the foundation (whether by trusts, corporations, or others) should be attributed to it, but interests owned by donors, officers, directors, trustees, or employees for their own benefit should not. Three carefully restricted forms of income production which are of a passive character should be excluded from the definition of "business." Except where active commercial lending or banking is involved, the earning of interest should not be considered to constitute a business. The holding of royalties and mineral production payments as inactive investments should be accorded similar treatment. Appropriate standards should be developed to identify leases of real property (and 22 Indeed, In special situations a much smaller share of voting power may constitute control. Large publicly held corporations may be controlled by blocks of stock which represent 2, 3, or 4 percent of the voting shares. PAGENO="1072" 1070 TREASURY DEPARTMEI~P REPORT ON PRIVATE FOUNDATIONS 3 associated personal property) which are of a clearly passive nature and rent arising from such leases should not be deemed to derive fron the conduct of a business.23 Rules similar to those of section 513 of the present Internal Revenu~ Code should be used to distinguish businesses which are substantiall~ related to the foundation's exempt operations from those which ar~ not. The three specific exceptions of section 513 should be continued a business should not be considered unrelated if (1) substantialb all of the work in carrying it on is performed without compensation (2) it is carried on primarily for the convenience of the members officers, or employees of the foundation; or (3) it consists of sellin~ merchandise substantially all of which has been received as gifts o: contributions to the foundation. Under the section 513 rules, a num ber of activities would fall beyond the ambit of the recommende prohibition. A foundation which solicits and receives as contribution old clothes, books, or furniture, for example, could conduct a busines of selling those articles to the general public. A foundation engage in the rehabilitation of handicapped persons could maintain a stor to sell items made in the course of the rehabilitation training. Founda tions would be permitted to operate cafeterias or restaurants primaril~ for the convenience of their employees. Foundations should be afforded a specified reasonable period o: time in which to reduce their unrelated business interests below th( prescribed maximum limit. To provide flexibility to deal with situa tions in which the specified disposition period might work hardship the Secretary of the Treasury should be given power to extend tin period for a limited additional time in appropriate cases. Simila periods for disposition, similarly subject to extension, should appl~ in the future when a foundation receives a gift, devise, or bequesi which involves business ownership beyond the permissible level. Ai exception to the general disposition requirement would seem advisabl4 for existing foundations whose governing instruments, as presentl~ drawn, compel them to hold specified business interests, if relevan local law prevents suitable revision of the controlling document Foundations created in the future should, to qualify for tax exemption be required to include appropriate prohibitions against business owner ship in the documents under which they are organized. D. FAMILY USE OF FOUNDATIONS TO CONTROL CORPORATE AND OTHE PROPERTY (1) Two widely practiced tax devices Foundations have commonly been established as convenient vehicle for maintaining control of a private corporation within a family whil substantially diminishing the burden of income, gift, and estate taxe for the family. Two somewhat different techniques have been usei to accomplish this result. Some taxpayers have contributed votin~ stock in a corporation which their family controls to a foundatioj which the family also controls. In this way, they obtain income- am gift-tax deductions for the donations, eliminate the impact of th estate tax upon the value of the contributed stock, and achieve tax-fre transfer of dominion over the corporation to the younger members c 23 A specific exception would also seem advisable for the incidental rental of assets (real or personal) use primarily in a foundation's charitable operations. PAGENO="1073" 1071 38 TREASURY DEPARTMENI' REPORT ON PRIVATE FOUNDATIONS the family by subsequently shifting control of the foundation to them. Other taxpayers have caused family corporations to be capitalized or recapitalized with substantial blocks of nonvoting stock. By con- tributing that stock to a foundation, the older generation secures the current income and gift tax advantages of the contribution and then transmits the voting stock-now representing a diminished proportion of the value of the equity of the corporation and, therefore, largely or entirely sheltered from gift or estate taxes-to the younger generation. The availability of these devices has received widespread attention in tax and business publications. An excerpt from the May 7, 1960, issue of Business Week magazine (p. 153) is ifiustrative: Have you ever thought about setting up a "family foundation"? * * * * * * * However, before you get serious, there are two prime questions: First, are there certain philanthropies (religious, educational, medical, etc.) that you'd willingly devote considerable time and money to in later years? And second, do you have a sizable family business that you want to pass control of to your heirs, despite crippling Federal estate taxes? If your answers are "yes," then a private foundation could be a way to give your "estate plan" an entirely new outlook, What is a foundation? It's a nonprofit organization with its own capital fund, that uses its resources solely for public welfare. It can be a State-chartered corporation, or a trust, or an unincorporated association. If properly set up (with special Treasury-approved tax status) it pays no Federal taxes at all; yet it can be kept entirely under the control of its founder and his family. The real motive behind most private foundations is keeping control of wealth (even while the wealth itself is given away). Take the typical case: Say the bulk of your property is in a family business. When you die, if you have a high-bracket estate, the estate tax could cause a forced sale of part or even all of the business-your children might lose control of the company, as well as have to sell their shares at a poor price. A foundation can prevent this. You set it up, dedicated to charity. Year by year, you make gifts of company stock to it, until the value of your remaining holdings is down to the point where eventual estate taxes could be paid without undue strain, or until the foundation's holdings constitute firm control of the company. You maintain control of the foundation while you live; you direct its charitable activi- ties-and so, indirectly, you control the shares in your company that have been donated. When you die, control of the foundation passes from you to your family or other persons youtrust and thus they, in turn, keep reins on the business. [The italics are those of the original.] Recurrent advice of this kind appears to have led many taxpayers to establish and utilize private foundations for the purposes suggested. The recent Treasury Department survey described in Appendix A disclosed a large number of foundations whose principal asset consists of stock in a corporation in which the foundation's donors, officers, or related parties retain substantial interests. Of the approximately 180 surveyed foundations 24 which hold 10 percent or more of at least 1 class of stock of a corporation, 121 reported ownership of family corporation stock.25 Such ownership appears to be particularly concentrated among foundations of medium size-those whose total asset value is between $100,000 and $1 million. Of the 39 such foundations canvassed which have stock holdings of the noted magni- tude, 32 own family corporation stock. 24 A total of approximately 1,300 foundations were covered by the survey. "The term "family corporation stock" is used here in a sense consistent with the recommendation out.. lined later in this section. The situations to which the text refers, hence, are those in which both the founda- tion and a donor (and/or related parties) own stock in a given corporation and, together or separately, they bold at least 20 percent of the corporation's voting power. PAGENO="1074" 1072 TREASURY DEPARTME~2 REPORT ON PRIVATE FOUNDATIONS 39 Example 1.-The A foundation holds approximately 21 percent of the common stock of the A corporation, possessing a book value of more than $2 mfflion. Substantial contributors to the A foundation and related parties own approximately 60 percent of the corporation's common stock. Example 2.-By both inter vivos and testamentary transfers, the B foundation has received substantial holdings of the non- voting common stock of two corporations which continue to be controlled by the B family. Example 3.-The C and D foundations' principal donor owns all of the voting stock of the C corporation. Members of his family and he have given 106,000 shares of that corporation's class B nonvoting stock to the C foundation; they have given 80,000 shares of this stock to the D foundation. (2) Evaluation The use of private foundations to perpetuate family dominion over business creates situations which frequently contain, in their most aggravated form, problems of the sort which have been discussed in the preceding sections of this part. Plainly enough, the dangers of foundation involvement in business are at least potentially present in all of these situations. Moreover, because of the donor's retention of control over the dividend distribution policy of the corporation, the benefits which charity ought to receive from the contribution of stock to the foundation are frequently deferred indefinitely or absent alto- gether. Since the stock is closely held and ordinarily unmarketable, the foundation-even if it is not subject to the donor's influence-has little choice but to hold the shares and hope for dividends; and the donor often proves unwilling-or the corporation unable-to pay them. Yet, by arranging redemption of token amounts of the stock or by causing an atypical, but strategically timed dividend distri- bution, the donor may very well be able to sustain his claim that the stock has substantial value and entitles him to a large deduction on its contribution to the foundation. Example 4.-The recent Tax Court case of Pullman v. Com- missioner, T.C. Memo. Dec. 1964-2 18, affords an excellent illustration of these problems. The taxpayers there, in control of a clothing corporation, arranged the recapitalization of the corporation with 8 percent preferred stock, nonvoting common stock, and voting common stock. They then made gifts of the preferred stock to various relatives and donated large portions of the nonvoting common stock to a family foundation. They also donated small blocks of the nonvoting common stock to two independent charities, and had the corporation redeem these blocks shortly after the contributions at approximately book value. In its 19-year history the corporation had paid dividends of more than 8 percent only once: in 1959-which was one of the years in which a major contribution of stock was made to the foundation-8 percent was paid on the preferred stock and an additional 3 percent was paid on the nonvoting common stock. Nonetheless, despite the existence of the preferred stock, with its large prior claim upon the profits of the corporation and the consequent unlikelihood that the common stock would ever receive significant dividends, the Tax Court held that the trans- PAGENO="1075" 1073 40 TREASTJRY DEPARTh[ENT REPORT ON PRIVATE FOUNDATIONS fers to the foundation qualified for charitable deductions only slightly smaller in amount than the book value of the transferred stock. Example 5.-Members of the A family claimed deductions of almost $2 million for their contributions of A corporation stock to the A foundation, referred to in example 1. The stock of this corporation paid no dividends from 1948 through 1957, and none for 1962 or 1963.26 While small dividends were declared in the years 1958 through 1961, they appear to have produced less than $5,000 a year for the foundation. Example 6.-Beyond the immediate members of the B family, no market exists for the stock owned by the B foundation (re- ferred to in example 2) in two family corporations, and the foundation has never received any dividend on either holding. Example 7.-In only 1 of the last 6 years have the C and D foundations, referred to in example 3, received dividends on their large holdings of nonvoting stock in a corporation controlled by their principal donor. Extreme delay or entire absence of benefit to charity, then, is common in family corporation cases. Also present in these cases-often with unusual severity and com- plexity-are the confficts of interest characteristic of the self-dealing problems discussed in part hA of the Report. Where the donor exercises decisive influence over both the foundation and the corpora- tion, he faces difficult divisions of responsibility. When the corpora- tion encounters financial difficulties, for example, his duty to the foundation may dictate efforts to dispose of its shares without delay; but liquidation of the foundation's interest may occasion adverse market consequences and thereby run counter to his obligation to other shareholders or his own self-interest. Example 8.-The E foundation suffered heavily from the di- vided loyalties of its creators and managers. In 1953 substan- tially all of its assets were invested in the preferred stock of a corporation 50 percent of whose common stock was owned by these persons. The corporation's prospects appear even then to have been far from bright. As matters grew worse, the founda- tion maintained its holdings. In 1962, at the time of the last available information, the preferred stock had never paid any dividends, the corporation was on the verge of bankruptcy, and the assets of the foundation had become virtually worthless. The donor's retention of a personal interest in the corporation may place him at odds with the welfare of the foundation in other ways. If he is in a high personal tax bracket, he may wish to have the corpora- tion accumulate its earnings so that he can realize his gains by future sale of his stock and confine his tax to the rate prescribed for capital gains; but the foundation may require present funds for its charitable program. He may wish the corporation to employ his relatives; it may be best for the foundation that they not be employed. The donor will generally find it in his interest to have the corporate salary levels of family members fixed as high as is consistent with the requirement of the tax law that deductible compensation be "reason- able," for it makes little difference to them whether they receive the earnings of the corporation as dividends or salary, and the corpora- 28 The foundation received its stock in the latter 1960's, 1960, and 1961. PAGENO="1076" 1074 TREASURY DEPARTMENT REPORT ON PRIVATE FOUNDATIONS 41 tion may deduct only the latter. The interest of the foundation, on the other hand, lies in keeping salaries as low as is consonant with the employment of competent personnel. The requirements of charity may dictate current expenditures by the foundation; the donor may be tempted to have the foundation retain its funds to meet the possible future needs of the business. In all of these situations it is unrealistic to expect the donor, as director of the foundations, to bring to bear upon problems which involve his personal interest the same judgment which an independent party, concerned only with the welfare of charity, would employ. Problems of the same nature arise where the donor contributes to a private foundation an interest in an unincorporated business, or an undivided interest in property, in which he or those related to him retain substantial rights. Current tax deductions have been claimed, for example, for contributions of rights in the air space over the donor's land, water rights adjacent to a private beach which the donor owns, or fractional interests in vacant land which the donor controls. Here again, because of the donor's close continuing connection with the property, it is hardly realistic to expect the foundation to make independent decisions about its use and disposition of the property. While the abuses generated by family dominion over foundation property in many respects are similar to those dealt with by other portions of this Report, the problems here are sufficiently intensified, complex, and possessed of novel ramifications to require a special remedy. This Report elsewhere recommends that foundations be required to pay out annually at least a minimum approximation of a normal return upon their assets; but that requirement cannot obviate the need for foundations to have sufficient independent command over their assets to enable them to realize-whether by sale, conversion to more productive investments, or otherwise-the means to exceed the minimum when their charitable obj ectives demand it. Indeed, the payout rule may create pressures upon a foundation to liquidate other, useful assets in order to preserve its holdings of unproductive family corporation stock; or the rule may be satisfied simply by the donor employing the foundation as a conduit for his ordinary annual char- itable giving-while charity continues to derive no benefit from the foundation's family corporation stock. Similarly, rules concrete enough to possess real efficacy in the prohibition of specific self-dealing practices cannot cope successfully and decisively with the subtle and continuing conflicts of interest which arise in the family stock situation. Finally, a foundation which is itself under the influence of a donor and which holds stock in a corporation controlled by the donor will, even where its stock holdings amount to less than 20 percent of the corporate equity, almost necessarily find itself involved in the business affairs of the corporation: for the foundation's stock will be used in combination with that of the donor and related parties to govern the commercial enterprise. (3) Possible solution To deal directly with the problems in this area, the Treasury Department recommends consideration of an approach which, for gifts made to private foundations in the future, would recognize that the transfer of an interest in a family corporation or other controlled property lacks the finality which should characterize a deductible PAGENO="1077" 1075 ~2 TREASURY DEPARTMENT REPORT ON PRIVATE FOUNDATIONS tharitable contribution. Under this recommendation, where the lonor and related parties maintain control of a business or other Droperty after the contribution of an interest in it to a private founda- ion, no income tax deduction would be permitted for the gift until a) the foundation disposes of the contributed asset, (b) the founda- ~ion devotes the property to active charitable operations, or (c) donor ~ontrol over the business or property terminates. If disposition, ~pplication to active charitable uses, or cessation of control occurs ~fter the donor's death but within 3 years of the date of death, the leduction would be granted for the donor's last taxable year; if none )f the three qualifying events takes place within that period, the ~ontribution would not be deductible for income tax purposes. Cor- L'elatively, this approach would treat transfers of such interests, made it or before death, as incomplete for all estate tax purposes unless one )f the qualifying events occurs within 3 years after the donor's death ~or an extension of that period determined by the Secretary of the Freasury to be appropriate). Absent such a post-transfer qualifica- bion, the contributed asset would be included in the donor's gross 3state and would not give rise to an estate tax charitable deduction. such transfers, similarly, would not be deemed to constitute gifts, ~vithin the meaning of the gift tax statute, until a qualifying event )ccurs. For the purposes of this recommendation, control of an incorporated business would be presumed to consist of ownership of 20 percent or more of the total combined voting power of the corporation; control of an unincorporated business or other property would be presumed bo consist of ownership of a 20 percent or larger interest in it. The presumption could be rebutted by a showing that a particular interest does not constitute control. In determining whether or not the donor and related parties possess control, interests held by the foundation should be attributed to them until all of their own rights in the business or other underlying property cease. A qualifying disposition of contributed property by a foundation could consist of a gift to another organization, in harmony with the foundation's own purposes, or a sale; but it would not include a gift to another private foundation, since the donor could not have secured a deduction by making a direct contribution of the controlled interest to such an organization. An application of contributed property to active charitable operations would occur through the permanent and direct commitment of the asset to use in the conduct of the active charitable pursuits for which the foundation was organized, if it was organized for such pursuits. Water. rights or land, for example, would be applied to charitable uses when they are employed in the activities of a foundation which operates a beach or a park. Because of the rule requiring attribution of ownership from the foundaton to the donor, a termination of con- trol, in the relevant sense, could come about by a reduction in the holdings of either the foundation or the donor and related parties; but the termination would be recognized only where no offsetting reacquisition by one of the specified parties occurs within a prescribed subsequent period. The value of the contributed property at the time of disposition, devotion to cha~ritable use, or cessation of con- trol would determine the amount of the income tax deduction to which the donor would become entitled. The amount deductible for estate tax purposes would be the value of the property on the date of PAGENO="1078" 1076 TREASURY DEPARTMENT REPORT ON PRIVATE FOUNDATIONS 43 the donor's death or other governing date under the ordinary princi- ples of estate tax law. If only a portion of the controlled property is disposed of or devoted to active charitable use, the donor would receive a deduction pro tanto. Since they are designed to deal with different problems, the rule suggested here differs in a number of respects from the rule recom- mended in section C of this Part. The rule of section C would become operative where a foundation owns, in its own right, a 20 percent or larger interest in a business; the rule of the present section would be applicable even where the foundation's own interest in the business is less than 20 percent, if the total interests of the foundation, donor, and related parties constitute controL The two rules would overlap where a foundation has a 20 percent or greater interest in the business and a donor and related parties also have interests in it which, when combined with the foundation's ownership, amount to control. The rules would, however, have different consequences: the section C rule would require the foundation to reduce its ownership below 20 percent within a specified period of time; the section D rule would simply defer the donor's deduction for the contribution of an interest in the business until the foundation disposes of the contributed interest or donor control of the business terminates. The section C provision would apply both to the existing holdings of foundations and to those acquired in the future. The section D rule would apply only to con- tributions made to foundations in the future. (4) Possible restriction of this solution A possible modification of the proposal of the present section would postpone the donor's deduction only where, after the contribution, he and related parties control the business or other underlying prop- erty and, in addition, exercise substantial influence upon the founda- tion to which the contribution was made. Such a rule would permit an immediate deduction to a donor who transfers controlled property to a private foundation if he and related parties do not constitute more than a specified percentage of the foundation's governing body. Since many of the most troublesome problems in the family corpora- tion-controlled property area are traceable to the conflicts of interests which result where the donor both dominates the corporation and has significant influence upon foundation decisions, this rule would confine the corrective measure to situations in which both of those elements are present. The Treasury Department has analyzed this variation of the pro- posal with considerable care. Its examination of the matter has indicated that the modification would have the advantage of per- mitting immediate deductions in a limited number of situations in which gifts of controlled property to private foundations produce clear charitable benefits and appear to be accompanied by no con- comitant abuses. On the other hand, two rather serious difficulties are inherent in the modification. First, the task of achieving a satisfactory definition of "substantial donor influence" presents formidable problems. In proposing the imposition of a 25-year limit upon substantial donor influence over private foundations, Part TI-F of this report suggests that a foundation be considered subject to such influence where a donor, members of his family, those with whom he has a direct or indirect employment PAGENO="1079" 1077 44 TREASURY DEPARTMENT REPORT ON PRIVATE FOUNDATIONS relationship, and those with whom he has a continuing business or professional relationship compose more than 25 percent of the group which manages the foundation. The approach employed by this definition has a number of advantages over others which have been considered. Yet, as the discussion in section F recognizes, it leaves open significant avenues for the exertion of donor influence. By appointing friends, neighbors, business acquaintances, or other persons beyond the enumerated categories to the foundation's board, a donor may be able to elude the impact of the rule even while he maintains real and effective influence upon foundation decisions. The availability of these techniques for avoidance does not constitute a substantial defect in a rule whose aim, like that of the Part TI-F proposal, is to broaden the base of participation in the affairs of the foundation, bring fresh views to its councils, and, over time, remove it from the wing of the donor and his family. Even where the newly appointed board members are the donor's friends and neighbors, some of these objectives are likely to be attained immediately. With the passage of time, others will follow: neighbors and friends do not remain subject to the will of one's family permanently. Equally important, a donor who has been permitted to shape the nature of a foundation by specifying the terms of its organizational instruments and supervising its activities for 25 years will ordinarily have little motivation to circumvent the rule: with the advance of age and the imprint of his personality firiuly fixed upon the foundation, he wifi be quite likely to follow the easier course of taking the law at its word and passing the management of the foundation to independent parties. The considerations which make this definition adequate for the purposes of the Part IT-F recommendation, however, possess dimin- ished vitality when one turns to the family corporation situation. Here the tax benefits to be derived from avoidance of the deduction- deferral rule are considerable; and the motivation for avoidance is correspondingly great. To sustain this rule against manipulation, therefore, a definition of "substantial donor influence" would have to be capable of bearing greater stress than the time limitation provision could be expected to generate. Because of its inapplicability to the less easily identified areas of donor influence, the definition of part IT-F might prove only partially sufficient to withstand the pressures created by inventive planners. Further, as the preceding discussion has suggested, the conflict-of-interest abuses in the family corpora- tion area have been acute and aggravated; and a measure which re- quires an indeterminate period of time to reach complete effectiveness might permit some of those abuses to continue in the interim. Upon both Qf these grounds, the adequacy of the Part IT-F definition to the needs of the remedy under this section appears subject to some question. A second problem confronts the restriction of the controlled property rule to situations in which the recipient foundation is under donor influence. While conflict of interest is one of the arguments in favor of the controlled property rule, it is not the only one. Of equal force is the argument that retention of donor control over the corporation whose stock has been contributed makes the real value of what has passed to the foundation too subject to the continuing volition of the donor, too far within his future discretion, too completely within his persisting power, to justify the grant of an immediate tax benefit. PAGENO="1080" 1078 TREASURY DEPARTMENT REPORT ON PRIVATE FOTJNDATIONS 45 Since the donor has not yet conferred a clear and definite present benefit upon charity-so the argument proceeds-he has done nothing to warrant a present tax deduction. To this contention-based, as it is, upon a considerable body of experience to the effect that charity very frequently benefits little or not at all from gifts of controlled corporation stock-the suggested modification provides no answer; for the donor's continuing power over the corporation exists whether the foundation to which he gives the stock is subject to his influence or not. To limit the impact of the remedial measure to gifts to in-. fluenced foundations, then, may confine the remedy to only a part of the abuse. The existence of these problems does not compel the conclusion that such a limitation is unworkable. After deliberation, Congress may determine that the possibilities for avoiding the definition of donor influence are not serious. A somewhat stricter definition than that used in Part IT-F-perhaps restricting the donor and related parties to a smaller percentage of participation in the foundation's governing body-may reduce those possibilities significantly. Con- sideration of specific instances of the controlled property abuse may lead Congress to conclude that the portion of the problem to which the restricted rule would apply is the portion of major practica] importance, and that the disadvantage of the broader rule-which may, concededly, defer deductions in a limited number of situations where no abuse is present-outweighs the advantage to be achieved by seeking to cover the remaining part of the problem. The controlled property rule should not, however, be restricted to gifts to influenced foundations without complete awareness of the difficulties which that restriction may entail and without clear assurance that adoption of the restriction will cause no serious impediment to the operation of the rule itself. B. FINANCIAL TRANSACTIONS UNRELATED TO CHARITABLE FUNCTIONS Private foundations necessarily engage in a number of financial transactions connected with the investment of their funds. However, experience has indicated that unrestricted participation by founda- tions in three classes of transactions which are iiot essential to their charitable or investment activities can produce seriously unfortunate results. (1) Foundation borrowing The great majority of private foundations appear to borrow very little money. The Treasury Department's survey of the character and value of foundation assets and liabilities has disclosed that, at the end of 1962, while foundations held assets reported to have a total book value of approximately $10,713 mifiion, they had total liabilities 27 of only $244 mifiion. Borrowings, in other words, accounted for less than 2~ percent of total foundation assets. On the other hand, a limited number of private foundations have borrowed heavily, for a wide range of purposes not related to the conduct of their charitable functions. Example 1.-Tn the years 1951 through 1962 the A, B, and C foundations, established and dominated by one person, borrowed "Other than liabilities with respect to grants payable. The latter class of liabilities does not, of course, represent borrowing in any usual sense of the term. PAGENO="1081" 1079 46 TREASURY DEPARTMENT REPORT ON PRIVATE FOUNDATIONS money from 17 different institutions and a variety of individuals to acquire investment assets. On December 31, 1956, the total outstanding indebtedness which the foundations had incurred for this purpose appears to have been approximately $14,200,000. A recent report indicates that, during the 12-year period covered, the foundations entered into 130 separate investment borrowing transactions. Many of the transactions involved amounts of more than $100,000; several involved more than $1 million.28 Example 2.-The D foundation has also engaged in extensive borrowing. On March 29, 1957, the foundation borrowed $550,000 from a trust company at 43'2 percent interest and used the proceeds to make a loan of the same amount to a corporation at an interest rate of 10 percent. On November 18, 1957, the foundation borrowed $450,000 from a trust company at 4~ percent interest to make a $500,000 loan to two corporations at 10 percent interest. A three-page schedule in a recent report on foundations lists the other borrowing transactions into which this foundation entered from 1951 to 1962 to obtain funds for investment.29 Example 3.-In one jurisdiction a number of foundations, organized with little or no capital funds of their own, have carried on extensive practices of purchasing oil payments with funds borrowed, from banks. Liens on the oil payments secure the loans. The foundations retain, as their fee for acting as inter- mediary, the excess of the gross proceeds of the production pay- ments over the principal and interest required to be paid to the banks. The E foundation is typical of this group. Organized in 1954 with no funds of its own, E had by 1961 incurred indebted- ness of more than $14 mfflion in connection with its oil payment transactions. Its net income from these ventures was $58,352 in 1959 and $68,510 in 1960. Example 4.-A foundation involved in recent Tax Court liti- gation was established in 1948 with a $1,000 contribution. Its net worth remained at approximately that figure until 1951. In the latter year the foundation contracted to purchase a 34-acre tract of industrial real property for $1,150,000, and borrowed virtually all of 4he purchase price. Leasing the property back to the former owners and 11 other tenants under an arrange- ment carefully fashioned to protect all of its rental proceeds from tax, the foundation was able to discharge its purchase obligation in 5 years. In that span, therefore, the foundation had ex- panded the value of its holdings from a thousand dollars to more than a mfflion dollars-without the necessity of seeking or receiv- ing contributions. S/tiff man v. Gommissioner, 32 T.C. 1073.~° Example 5.-The F foundation typifies the private foundations which have acquired productive properties by means of so-called bootstrap transactions. In their usual form, F's bootstrap acqui- sitions have consisted of an agreement by the owners of productive property to transfer the property to the foundation for a price payable entirely, or almost entirely, from a specified share of the 2~ Patman Report, second installment, supra, pp. 46-47, 54, 59. 28 Patman Report, second installment, supra, pp. 61, 63-65. 30 In the cited litigation the Tax Court upheld the foundation's claim to exemption against the Govern- ment's contention that, in applying approximately 80 percent of the rental proceeds from the property to the satisfaction of its loan obligation, the foundation had accumulated Its income improperly. PAGENO="1082" 1080 TREASURY DEPARTMENT RBPORT ON PRIVATE FOUNDATIONS 47 future earnings of the property. The foundation ordinarily makes little or no down payment from its own assets and has no hide- pendent personal obligation for the unpaid portion of the price: If earnings are insufficient to enable it to make the payments required by the contract, the transferors' only rights are against the property itself. The foundation contrives to realize the earnings in tax-exempt form, commonly by leasing the property to an operating entity under terms intended to shelter the rent from unrelated business income tax. The F foundation has employed this technique to acquire most or all of the underlying assets of 18 separate commercial enterprises.31 By arrangements of this sort, other foundations have been able to swell their holdings without risk to themselves or dependence upon con- tributors. Foundation borrowing to secure funds for investment may have several unfortunate consequences. In many of the transactions of this class, private parties are able to shift a substantial measure of the financial benefit of the foundation's tax exemption to themselves. A foundation which can amortize a purchase obligation with tax-free proceeds from the purchased property, and which therefore will be able to acquire the property with little or no expenditure from its own assets, can frequently be induced to agree to a much higher purchase price than a taxable buyer would accept. Indeed, in the typical bootstrap sale of productive property to a foundation, where the foundation has no personal obligation for the purchase price and the only security for payment is the transferred property itself, the only contribution which the foundation makes to the arrangement is its tax exemption. The seller, already possessed of complete owner- ship of the property and an unrestricted right to all of its future earnings, would not enter into the transaction at all if tax considera- tions were absent; and the foundation can have only marginal bar- gaining power. Quite naturally, the resultant agreement diverts to the seller-by means of an inflated purchase price or, where a lease- back is involved, reduced rentals-a significant share of the advantage which the foundation derives from its ability to receive the income produced by the property free of tax. In other situations, one who lends money to a foundation may be able to insist upon an abnormal interest rate because of the foundation's power to realize a greater net return upon the money than a taxable borrower could. In these ways, foundation borrowing for investment uses can deflect, to the personal benefit of private parties, a portion of the advantage which tax exemp- tion was intended to produce for charity. But, though a part of the benefit of its exemption may escape the foundation, much remains. The foundation, after all, wifi ultimately secure unencumbered ownership of the property if a bootstrap opera- tion works; it will earn the differential between the proceeds of a production payment purchased with borrowed funds and the cost of the loan which provided those funds; it may realize substantial profit from securities purchased on margin. These facts are the source of a 11 While F has pursued a practice of leasing the acquired assets to operating organizations in which it has little or no direct ownership interest, the terms of the leases in at least many instances have given the foundation sufficient connection with the business enterprises to bring the arrangements within the scope of the business limitation recommended in Part TI-C of this Report. The connection does not, however, appear to have been an indispensible element of the transactions; and appropriate modifications of the lease relationships would seem to make it possible for F to accomplish these acquisitions even if a restriction upon foundation participation in business were in effect. F has also used the bootstrap technique to acquire productive assets which were not parts of a business enterprise. PAGENO="1083" 1081 48 TREASURY DEPARTMEN1I' REPORT ON PRIVATE FOUNDATIONS second-and basic-objection to foundation investment borrowing: It enables the foundation to convert its tax exemption into a self- sufficient device for the production of capital. By borrowing, the foundation can extend the function of its exemption beyond the protection of income stemming from charitable gifts; it can use the exemption to develop funds even where there are no charitable gifts. Commentators have referred to this activity as trading upon or capitalizing upon the tax exemption. The foundation which makes such use of its exemption can sever itself from reliance upon contribu- tors and eliminate the healthful scrutiny of its purposes and activities which that reliance implies.32 By this expansion of its exemption privilege to borrowed assets and this divorce from dependence upon contributors, the foundation begins a multiplication of its holdings which bears no relation to the community's evaluation of its charitable works; it embarks upon an extension of its economic empire which is limited only by the financial acumen and commercial skills of its managers. The foundation described in example 4, which began with a net worth of $1,000 and within 5 years had increased its domain to include a 34-acre tract of industrial real property worth $1,150,000, is an extreme, but not atypical, ifiustration of the consequences of unrestricted foundation borrowing for investment purposes. In 1950 Congress recognized the impropriety and danger inherent in such exploitation of the tax exemption privilege. Concerned with a proliferation of situations in which exempt organizations were pur- chasing commercial property with borrowed funds and utilizing future rents from the property to pay the purchase loan, both the House Committee on Ways and Means and the Senate Finance Committee offered the following observations: The fact that under present law an exempt institution need not use any of its own funds in acquiring property through leasebacks-borrowed funds may represent 100 percent of the purchase price-indicates that there is no limit to the property an exempt institution may acquire in this manner. Such acquisitions are not in any way limited by the funds available for investment on the part of the exempt institution. This explains why particular attention should be given to leasebacks which involve the use of borrowed funds. Where an exempt organi- zation uses its own funds, expansion of its property holdings through the leaseback device must necessarily proceed at a much slower pace, H. Rept. No. 2319, 81st Cong., 2d sess., p. 39 (1950), 1950-2 Cum. Bull. 410; S. Rept. No. 2375, 81st Cong., 2d sess., p. 31 (1950), 1950-2 Cum. Bull 506. To deal with the problem, the Revenue Act of 1950 provided, generally, for the taxation of a portion of the rent which foundations received from property acquired with borrowed funds. The measure (continued without material change in the present Internal Revenue Code) has proved to possess two defects. It has, first, been crippled by the presence of an exception which permits rents from leases whose terms are not longer than 5 years to be received without tax. The cases set out in examples 4 and 5 typify a growing body of transactions in which foundations have been able to frame their acquisitions of productive property to take advantage of this exception. More 32 It is, of course, true that many foundations ultimately develop funds of sufficient size to free themselves from reliance upon contributors. Foundations created by large testamentary gifts may never have to seek money from others. In all of these situations, however, the foundation's basic endowment stems from per- sons who have sufficient regard for its aims to give it property; its structure and purposes are framed or evaluated by those who have a direct economic concern in the matter. The bootstrap foundation, on the other hand, can be organized with little or no capital. It proceeds to grow from within, independent of outside review. Even though no member of the public ever has sufficient interest in any of the organiza- tion's endeavors to contribute to it, the personal motivations of its managers can, where investment borrow- Ingis permitted, be enough to build it to very large proportions. PAGENO="1084" 1082~ TREASURY DEPARTMENT REPORT ON PRIVATE FOUNDATIONS 49 fundamentally, the 1950 provision suffers from the narrowness of its scope. Operative only where the property purchased with borrowed money is rental property, it affords no solution to the same problems of diversion of exemption benefits to private parties and financial empire building which exists where borrowed funds are invested in royalties, oil payments, securities, or loans. The recommendations made by other sections of this report will not provide satisfactory answers to these problems. The proposal to restrict the participation of private foundations in active business does not apply where the foundation's return from its investment is passive. Even if the purchased assets are business assets, when the foundation detaches itself from the conduct of the commercial enter- prise by entering into a passive lease to an independently controlled operating entity, the abuses become essentially different from those with which the recommendation of Part IT-C is designed to deal; and that recommendation is, properly, inapplicable. The lending pro- posal of the following section would leave substantial areas in which foundations could continue to make loans, without reference to the source from which the loaned funds stem. The income payout and income equivalent rules suggested in Part IT-B are similarly, of little assistance here. Since the payout rule applies only to the net income of foundations, depreciation or depletion would ordinarily shield much of the profit of property purchased with borrowed funds from the thrust of the requirement. Further, under the report's recommenda- tion the "income equivalent" would be determined by reference to a foundation's net equity, rather than its gross asset value; and, as a consequence, this rule also would have limited impact upon assets acquired with borrowed money. Without supplementation, then, both existing law and other sec- tions of this report would still permit dangerous abuses through founda- tion borrowing. To foreclose the continuation of these abuses and to forestall the development of new ones, the Treasury Department recommends that, for the future, all borrowing by private foundations for investment purposes be prohibited. This recommendation would not prevent foundations from borrowing money to carry on their exempt functions: it would have no effect upon borrowing to make gifts to other charitable organizations, to defray the expenses of active charitable operations, or to acquire assets for use in the conduct of such operations. It would not, again, apply to investment transactions which are already in progress. For the future, however, it would confine foundation investments to funds stemming from contributions or from income produced by contributions.33 A proscription of foundation investment borrowing would have no practical effect upon the activities of the great majority of private foundations; for, as has been pointed out, they have not borrowed to invest even when they were free to do so. Indeed, the fact that these foundations have found no difficulty in carrying on their affairs and accomplishing their obj ectives without investment borrowing con- stitutes convincing evidence that foundations need not borrow for ~3 In doing so, the proposal would in the future, for private foundations, supersede both the partial attack upon this problem made in the 1950 legislation and the much-criticized 5-year exception embodied in that legislation. The business limitation proposed in Part 11-C of this Report would require either disposition or appropriate modification of existing foundation leases which do not qualify as passive. A number of the leases now in effect which have been drawn to take advantage of the 5-year exception would be subject to this requirement. PAGENO="1085" 1083 50 TREASURY DEPARTMENT REPORT ON PRIVATE FOUNDATIONS such purposes. A number of persons familiar with the operations of private foundations have indicated precisely that view to the Treasury Department. To curtail abuses by the minority of foundations, however, legislative adoption of the recommended rule is necessary. (2) Foundation lending Many private foundations put portions of their funds to use in the making of loans which are not secured by mortgages and not evidenced by government or other bonds.34 While much of this lending repre- sents altogether proper and legitimate investment of foundation funds, some does not. Example 6.-The A, B, and C foundations, referred to in example 1, all controlled by a single individual, made many loans to that individual's friends and business acquaintances. On December 31, 1956, one businessman owed these foundations $6,571,448. At the end of the years 1951 through 1961 another owed the foundations amounts ranging from $1,193,000 to $2,057,000. The indebtedness of various other businessmen to the foundations was, on the dates noted, as follows: Individual A, Dec. 31, 1954 $138, 000. 00 Individual B, Oct. 27, 1954 1, 519, 000. 00 Individual 0, Dec. 31, 1961 39, 210. 00 Individual D, Dec. 31, 1962 80, 246. 92 Individual E, Dec. 31, 1962 39, 027. 50 Individual F, Dec. 31, 1953 247, 084. 75 Individual G, Dec. 31, 1962 54, 000. 00 Individual II, Dec. 31, 1962 50, 154. 32 The loans to these and other businessmen ordinarily arose through transactions in which the foundations purchased and carried (often for several years) large amounts of securities for the accounts of the borrowers. Where the documents recording the arrangements specified interest rates, the rates prescribed were sometimes as low as 3, 33~2, or 4 percent. In other cases, however, the rates were higher; and in many situations the foundations were entitled to share in the profits of sales of the securities.35 Example 7.-The 0 foundation had the following loans to various individuals outstanding at the end of each of the indicated years:36 Year ending Dec. 31 Makers Interest rate (percent) Amount 1952 1953 1954 1955 1956 1957 1958 1959 1960 1961 Individual I do do..~ do Individuals I and K Individual I do do do Individuals L and M do Individual I Individuals L and M Individual I . $11,600 11,050 10,600 9,400 1,111,500 8,800 7,900 6,200 5,000 15,900 10,300 4,000 3,700 1,000 `~ Table 11 of the Statistical Appendix to the report presents information on the total amounts of various classes of foundation loans outstanding at the end of 1962. "Patman Report, 2d installment, supra, e.g., pp. iv, 24-27, 29, 31, 32. `~ Patman Report, 2d installment, supra, p. 12. PAGENO="1086" 1084 TREASURY DEPARTMENT REPORT ON PRIVATE FOUNDATIONS 51 Example 8.-The H foundation borrowed money from banks and used the proceeds to make loans to three trusts and several individuals. The borrowers were, in some instances, closely enough related to the corporate creator of the foundation to be within the ambit of the expanded self-dealing rules suggested in Part TI-A of this Report; in other instances, no identifiable relationship appeared. The interest rates for most of -the loans were fixed from 1 to 2 percent higher than the rates which the foundation was obligated to pay the banks. One loan, however, bore interest at only 3 percent, and another at 4 percent. The facts surrounding these transactions make it evident that the fundamental motivation for at least most of the loans was not the desire to find a secure and profitable investment for charitable funds but, rather, the wish on the part of the foundation's managers to assist parties whom they had some particular, private reason to benefit. Yet, with the exceptions noted in example 8, the borrowers were beyond the reach of any administrable and reasonable self- dealing prohibitions and the benefits accruing to the foundation's managers or donors were sufficiently nebulous and removed from the loan transactions themselves to be difficult to discover, identify, and prove. The task of isolating and demonstrating private benefit or noncharitable purpose-the only avenues of attack open to the gov- ernment under existing law-becomes arduous and uncertain when the interest rate and the other terms of the loan accord with the standards of ordinary commercial practice. The advantages to the borrower of such a loan by a foundation-and the corollary value of the favor done by the foundation to the director or donor who arranged the loan-can, nevertheless, be considerable. The delays, inconven- iences, and formalities of applying for a bank loan can be eliminated; embarrassing questions can be avoided; the assurance that one's obligation resides in friendly hands can be secured. - Charity may suffer two very real detriments from the absence of an effective proscription against privately motivated foundation lending. Because the safety of the obligation is not among the primary con- siderations leading the foundation to make the loan, charitable funds can be put to unusual and unnecessary hazard. Indeed, the same personal considerations which impel the foundation director or donor to cause the loan wifi quite probably dissuade him from enforcing its terms with vigor and dispassion when collection difficulties arise. But whether or not the foundation loses money on a particular loan, the very fact that such loans can be made may lead foundation man- agers to a broad range of decisions which do not comport with the interests of charity. Funds may be retained in liquid form, rather than being placed in more productive investments, so that they wifi be available for lending when the occasion arises. Charitable programs may be rejected because they would draw too heavily upon lending capital. Expenditures for the charitable projects undertaken may be restricted parsimoniously for the same reason. To free foundation assets from the dangers inherent in privately motivated lending and to protect foundation decisions from the im- proper pressures which the availability of such lending may generate, the Treasury Department recommends that, for the future, the loans of private foundations be confined to categories which are clearly necessary, safe, and appropriate for charitable fiduciaries. Loans PAGENO="1087" 1085 .52 TREASURY DEPARTMENT REPORT ON PRIVATE FOUNDATIONS made by foundations in pursuance of their exempt functions-such as loans to students-should, of course, be permitted. Similarly, foundations should be allowed to make bank deposits, loans which are evidenced by securities of a type regularly traded upon an exchange or in an over-the-counter market, loans to governmental units, loans fully secured by first mortgages upon real estate, and other loans determined, under regulations prescribed by the Secretary of the Treasury, to be of substantially similar quality and character.37 Examples of loans of the latter class would be short-term loans repre- sented by the marketable commercial paper of prime borrowers and loans forming parts of sound private placements. Reference to the accepted lending practices of educational institutions and comparable organizations could furnish guidelines for the standards to be developed in the regulations. Beyond areas of the enumerated character, however, lending by private foundations ought to be prohibited. (3) Trading and speculation by foundations Certain private foundations have engaged in active trading of securities or have participated in speculative investments. Example 9.-The A, B, and C foundations carried on lively, extensive, and often speculative securities dealings. They entered into puts and calls, purchased a large volume of unlisted securities, and frequently acquired stock on margin. They agreed to a number of arrangements under which they carried securities for the accounts of individuals in exchange for the right to share in any profits which might be realized upon dis- position of the securities. They sometimes sold stock within a period of from one to several days after acquiring it.38 Example 10.-The I foundation reported securities sales in 1963 which amounted to a turnover of approximately 20 percent of its stockholdings in that year. A recent Securities and Ex- change Commission report39 indicates average rates of turnover for foundations to be from 1 to 2 percent. All but four of the positions liquidated by the I [foundation's 1963 sales had been purchased by the foundation after 1960; approximately half had been held for less than 6 months. The foundation realized a total gain of $2,342,067 from the sales. Eaample 11.-The J foundation invested in a syndicate formed by several taxable corporations to purchase a ranch, hoping to profit from a sharp rise in land values which might take place if an adjacent city happened to expand in the direction of the property. The urban expansion did not occur. The syndicate operated the ranch at a loss for several years, and finally disposed of it. The foundation sustained a substantial loss on the transaction. While it is difficult to assemble information upon the precise extent of trading or speculation among private foundations, the Treasury Department has encountered a substantial body of opinion, among persons familiar with the activities and practices of foundations, to the effect that the problem is of sufficient importance to require legislative attention. 3701 course, where foundation lending activities constitute a business, the recommendation of Part Il-C would become applicable. `~ Patman Report, 2d installment, supra, e.g., pp. 23, 2.5, 26, 33, 34, 37, 38, 40. ~` Securities and Exchange Commission Report of Special Studies of the Securities Market, July 17, 1963, pp. 864 and 1062. PAGENO="1088" 1086 TREASURY DEPARTMENT REPORT ON PRIVATE FOUNDATIONS 53 Three kinds of dangers are inherent in foundation trading and speculation. Obviously enough, operations of this character ordi- narily entail greater risk of loss than do prudently chosen long-term investments. Assets which have been committed to charity should not be subjected to that hazard. Conversely, these practices may be spectacularly successful; and where they are, they make possible both the financial empire building and the severance of a foundation from dependence upon contributors which have been criticized in the section of the Report dealing with foundation borrowing. A third danger is less obvious but equally significant. Foundation trustees or directors who attempt to predict hourly, daily, or weekly market fluctuations, who purchase puts, calls, and straddles in an effort to profit from those fluctuations, who shift their positions in securities frequently, and who endeavor to assay the potentialities of untried businesses, the worth of untested mineral land, or the future value of unproven building locations must necessarily expend considerable amounts of their time and attention in those endeavors. Little scope is likely to remain for charity. Charitable enterprises deserve- indeed, they require-analysis, evaluation, planning; they are not matters to be lightly undertaken or perfunctorily carried on; they merit the genuine interest and undivided attention of the persons to whom society has entrusted their accomplishment. Consequently, the efforts of the speculator or the trader-whether successful or unsuccessful-are intrinsically inconsistent with the proper manage- ment of the affairs of a foundation. The present law on this subject contains several deficiencies. Section 504(a)(3) of the Internal Revenue Code proscribes invest- ment of- amounts accumulated out of income during the taxable year or any prior taxable year and not actually paid out by the end of the taxable year * * * in such a manner as to jeopardize the carrying out of the chañtable, educational, or other purpose or function constituting the basis for exemption under section 501(a) of an organization described in section 501(c) (3) ~40 One basic weakness of the section, of course, is that it applies only to income accumulations; it does not govern the manner in which corpus is managed. A second defect is that, by its reference to "jeopardy," the provision tends to make the success of a venture decisive of its permissibility: undertakings which turn ~ut well are, with the benefit of hindsight, quite likely to seem sound, whatever risks they may have presented while they were in progress. Hence, the section affords only an imperfect device for dealing with the foundation which successfully utilizes trading or speculative practices to multiply its holdings and extend its financial domain. Third, as we have seen, speculation and trading entail an unfortunate conse- quence which has no relationship to the presence or absence of eopardy: even where they involve no unusual hazards, they are likely to make greater demands upon the time, interest, and abffities of foundation trustees and directors than is consistent with the attentive and informed conduct of the affairs of charity. For this problem the present section 504 provides no solution. In view of these considerations, the Treasury Department recom- mends that private foundations be directly prohibited from participat- ing in any kind of trading or speculation with any of their assets, whether derived from corpus or from income. The prohibition `° SectIon 681(c) contaIns a similar provision. PAGENO="1089" 1087 54 TREASURY DEPARTMENT REPORT ON PRIVATE FOUNDATIONS should include specific interdiction of devices ordinarily deemed inherently speculative-as, for example, the purchase of "puts," "calls," "straddles," "spreads," "strips," "straps," and "special options," selling short, and trading in commodity futures.4' Like the borrowing and lending reeommendations of the two preceding portions of the present section, this measure would exclude foundations from a class of financial transactions in which they ought not to be engaged. When combined with the business and self- dealing restrictions proposed elsewhere in the report, these rules would confine the unrelated financial activities of private foundations to areas which are appropriate for organizations whose assets have been committed to the advancement of the public welfare and whose concerns should be exclusively with the attainment of charitable aims. F. BROADENING OF FOUNDATION MANAGEMENT The Treasury Department's study of private foundations has revealed the existence of a group of interrelated problems which are at once more pervasive and more fundamental, but less concrete, less easy to identify, and less susceptible of isolation, than those with which the preceding sections of this Part have dealt. By their very nature, these problems evade precise definition and quantitative analysis. One cannot compile statistics which demonstrate their character and extent. In the main, one cannot report individual instances of their effect. For all of these attributes, however, they possess both reality and significance. For the purposes of discussion, one may separate these problems into three general categories. (1) Abuse potentialities of donor influence The ability of a donor to wield substantial influence over the management of a private foundation which he has established or en- dowed presents continuing opportunities for the diversion of the foundation to purposes which are not wholly charitable. General prohibition of financial intercourse between donor and foundation, as Part TI-A of this Report recommends, would, it is true, foreclose the most palpable abuses which have arisen in this area. Restrictions of foundation ownership of businesses and postponement of deductions for contributions of interests in controlled property would further reduce the possibilities for diversion and conflicts of responsibility. Nonetheless, the modes of human satisfaction have almost infinite diversity; and the ways in which wealth can be employed for personal advantage are, consequently, multiple and highly varied. Many donors, too, have manifested a common and deep-seated tendency to regard foundations which they have created as their own, to be availed of for their own ends where a contemplated use does not involve obvious and direct deflection of assets from charity and where no specific statutory prohibition lies in the way. Combination of these facts makes it difficult to escape the conclusion that real danger of abuse through substantial donor influence-albeit in forms less straightforward and apparent than those which have thus far occupied the attention of the Treasury Department and the Congress-wifi survive the restrictions proposed by other portions of this Report. 41 The suggestions advanced in Part II-E (1) above for the restriction of foundation borrowing would pre- vent margin purchases of securities. PAGENO="1090" 1088 TREASURY DEPARTMUNT REPORT ON PRIVATE FOUNDATIONS 55 Accurate appraisal of this problem is complicated by the fact that, as Part I of the Report has explained, the private foundation can de- rive important values from donor influence. The donor can bring imagination and creativity to the foundation, infuse spirit and drive into its operations, give unique focus to its efforts. But the fact that donor influence contains potentialities both for benefit and for detri- ment does not present a permanent dilemma: for its dangers and its values do not subsist equally throughout the life cycle of the founda- tion. While possibilities for abuse remain relatively unchanged, ad- vantages tend to decline sharply with the passage of time. The donor can frame the fundamental structure of the foundation in its organi- zational documents; he can set the pattern for its activities and inter- ests in the early years of its operations; he can establish its character by example, custom, and usage as it matures. Thereafter the magni- tude of his contribution must, almost necessarily, diminish. In view of these facts, the present problem would seem capable of solution by a rule which confines substantial donor influence to the develop- mental and maturation stages of foundation life: such a rule would preserve the primary benefits of influence, and would eliminate a large measure of its possible detriments. (~) Perpetual existence of foundations A different, but related problem arises from the proliferation and perpetual existence of private foundations. By 1962 there appear to have been approximately 15,000 foundations in the United States. Current information indicates that an average of about 1,200 new foundations are being formed every year. The Foundation Library Center estimates that, of the foundations in existence in 1962, 72 percent of those with assets of less than $100,000 had been established since 1950, and 56 percent of those with assets of more than $100,000 had been created since 1950. Most of these foundations are estab- lished under organizational documents which place no limitation upon the period of their existence; and while satisfactory data upon founda- tion terminations is not available, it seems relatively clear that deaths are a good deal less frequent than births. The continued existence of foundations whose number is constantly increasing generates a number of administrative burdens. Returns must be processed; questionable transactions must be investigated; compliance with legal requirements must be secured, sometimes through litigation. All of these activities cost the Federal Govern- ment considerable sums of money. Part I of this Report has explored at some length the reasons why, despite these facts, the imposition of a general limitation upon the lives of foundations is inadvisable. In specific situations, however, it may be far from clear that the per- petuation of an individual foundation justifies the attendant adminis- trative burdens. It seems plain, at least, that many foundations continue in existence year after year without achieving any of the external indicia' of unique advancement of philanthropy. They attract no public attention; their endeavors gain no public support; they appear to open no new areas, develop no new vistas, create no rearrangements or alterations of focus among charitable enterprises generally. Hence, while a universal restriction upon foundation lives is undesirable, a method of winnowing the useful from the superfluous- of evaluating the accomplishments, nature, and status of each private PAGENO="1091" 1089 56 TREASURY DEPARTME~ REPORT ON PRIVATE FOUNDATIONS foundation at some point in its existence, with a view to a judgment upon the advisability of continuing it-would possess real utility. Such a task would require a multitude of difficult and delicate value judgments, and should, therefore, not be undertaken by a govern- mental body without grounds considerably more pressing than those which obtain in the present situation. On the other hand, a founda- tion's creator, or those related to him, may not approach an endeavor of this kind with detachment. Consequently, satisfactory solution of this problem would seem to demand a rule permitting independent private parties to examine a foundation after it has had a reasonable *period of time within which to prove itself. If their review leads them to conclude that the organization's record and capabilities do not justify its continuation, they should have power to wind up its affairs, distribute its assets in accordance with its purposes, and dissolve it. (3) Possibilities for narrowness of foundation management Under present law it is possible for an individual to establish a private foundation, dominate its affairs throughout his life, and pass its management to members of his family upon his death. In such a system supervision of the activities of a foundation may remain within the power of a very limited and homogenous group for an indefinite period of time; there is, indeed, no assurance that persons more broadly representative of the public will ever be introduced into the organization's governing body. The disadvantages of the system are apparent. All of the dangers of narrowness of view and parochialism can persist in perpetuity. A foundation's motive force can, over time, become dissipated; and it is not guaranteed a source of replenishment. Attitudes may harden into prejudices; approaches may solidify; the responsiveness which this branch of philanthropy should have to the changing needs of our society may suffer. Projects which were useful and desirable when when they were undertaken may be continued long after they have become outmoded. Recognizing the dangers intrinsic in narrowness of base, many of our colleges and universities take pains to secure personnel who have been trained at other institutions or who have drawn experience from different academic communities. Some of our great corporations have, in their hiring policies, manifested a consciousness of the same problem. Consequently, it would seem altogether inappropriate to permit this defect to insinuate itself into the management of one of the important areas of private philanthropy. (4) Possible solution To ~resolve these three problems, the Treasury Department recom- mends that provision be made to convert private foundations, after they have been in existence for 25 years, to management which is independent of their donors and parties related to donors. Without the harshness of requiring a complete severance of the donor from the foundation, this result can be accomplished by placing a limit upon the part which the donor and related parties can play in the management of the foundation. For several reasons, however, the fixing of the quantitative level of this limit requires some care. PAGENO="1092" 1090 TREASURY DEPARTMENT REPORT ON PRIVATE FOUNDATIONS 57 The level should be set high enough to permit the donor significant representation on the foundation's governing body. On the other hand, imperfections necessarily inherent in the definition of the class of donor-related parties-parties who have sufficient connection with the donor to be likely to be subject to his influence-make it essential to confine donor participation to a relatively small percentage if effective prevention of substantial donor influence upon foundation decisions is to be attained. Administrative considerations make it impracticable to include, within the category of donor-related parties, more than the following: (1) members of the donor's family, (2) per- sons with whom the donor has a direct or indirect employment relationship, and (3) persons with whom the donor has a continuing business or professional relationship. Yet substantial areas of practical donor influence lie beyond the boundaries of this definition. Friends, neighbors, business acquaintances, and others may well be wffling to accept the donor's judgment on matters pertaining to a foundation which he has established and whose assets he has con- tributed. Hence, if an approach is to be made to workable and effective prohibition of substantial donor influence over a foundation, the limit upon participation of the donor and related parties on the foundation's governing body should be fixed no higher than 25 percent.~ A rule which, after the first 25 years of the existence of a private foundation,43 would prevent the donor and related parties from com- posing more than 25 percent of the managing board of the foundation would deal effectively with each of the three problems which have been described in the present section. It would limit the time period within which abuses could occur through the exercise of substantial donor influence; and, by assuring the donor that his actions would ultimately be subject to independent review, it would tend to protect the foundation from abuse even during its first 25 years. By enabling independent private parties to evaluate the performance and poten- tiality of the foundation after 25 years of operation and granting them power to terminate the organization, then or later, the measure would provide a method for eliminating foundation which have doubtful or minimal utility. Finally, in broadening the base of foundation management, the recommendation would bring fresh views to the foundation's councils, combat parochialism, and augment the flexi- bility of the organization in responding to social needs and changes. 42 Even with the limit upon identifiable donor representation set at this level, passage of control to hide. pendent parties may not be immediate. The donor may, for a time, be able to retain effective control through persons who do not fall within the definition of donor-related parties. But friends, neighbors, and others are unlikely to remain subject to the influence of the donor and his family indefinitely; and, with a 25-percent ceiling upon participation by more closely related parties, actual independent dominion over the foundation should ensue without undue delay. 4' To avoid possible disruption of foundation affairs by requiring an abrupt, unanticipated change in management, foundations which have already been in existence for 25 years or more should be permitted to continue subject to substantial donor influence for an additional period of from 5 to 10 years. PAGENO="1093" 1091 PART III. ADDITIONAL PROBLEMS In the course of its review of private foundations and the tax laws which apply to them, the Treasury Department has encountered several problems which, while possessing less general significance than the problems discussed in part II of the report, are sufficiently serious to warrant remedial action. Some donors have been able to secure substantial deductions for contributing to foundations assets which produce no benefit whatever for charity. Other donors have reduced their personal taxes by accomplishing tax-free bailouts of corporate earnings to foundations or by making contributions of other property which would have generated ordinary income upon sale. A defect in the computation of the estate tax marital deduction has permitted taxpayers unjustifiable enlargements in the tax benefits of bequests to their spouses through various devices involving foundations. Proper enforcement of reporting rules has been hampered by the absence of an effective sanction for failure to file the information returns required of foundations. This Part of the Report sets forth ifiustrations of these problems, analyzes them, and suggests appropriate remedies. A. CONTRIBUTIONS OF UNPRODUCTIVE PROPERTY The Internal Revenue Service has discovered a number of situations in which very substantial income tax deductions have been claimed for contributions to private foundations of property which does not produce income and which the foundation does not, or cannot, devote to charitable uses. Example 1.-One taxpayer, for example, claimed a charitable deduction of $39,500 for the gift of family jewelry to her husband's foundation. The jewelry was placed in a safe deposit box listed in the name of the foundation, and at last report it has been held there for more than 6 years. Example 2.-Other taxpayers have secured significant tax savings by contributing paintings and other artworks to controlled foundations which do not maintain museums. Example 3.-A company donated vacant land adjoining its plant facilities to its foundation. During the 11 years for which the foundation held the property, it produced no income whatever. Example 4.-A man and his wife contributed the remainder interest in their personal residence to a foundation. Difficult valuation problems frequently attend the donor's assertion of a right to a charitable deduction in these cases. More fundamental, however, is the criticism that the donor obtains a current tax advantage for a transfer which confers no concomitant benefit upon charity. The Government, in effect, pays the donor for his act; but the jewelry remains in the safe deposit box, the painting in the warehouse, and the land unused. As other portions of this report have noted, the presupposition of the tax statute is that the cost of the charitable 58 PAGENO="1094" 1092 TREASURY DEPARTMENT REPORT ON PRIVATE FOUNDATIONS 59 deduction to the Government will be justified by its correlative benefit to charity. Here, plainly, the result is not worth the price. The recommendations of other sections of this Report bear upon the present problem; but, designed to deal with difficulties of broader thrust, they do not provide an entirely satisfactory solution tO it. A requirement that foundations disburse annually at least a minimum approximation of a normal return upon their property cannot convert an unproductive asset into a productive one. A foundation utilized as a conduit for its donor's normal annual charitable gifts may well be able to comply with this requirement year after year without ever being compelled to apply an unproductive asset to uses which benefit charity. Again, many contributions of unproductive property would appear to be made only because the donor has practical assurance that he will continue to enjoy the use of the property; and this Report's self-dealing recommendations, which would proscribe such use, might be expected to inhibit these contributions.' But the Internal Revenue Service should not be compelled to assign revenue agents to make certain that the jewels remain in the safe deposit box, or the painting in the storeroom, when their former owner entertains. And self- dealing rules can, by their very nature, have no impact upon those situations in which the unproductive asset is transferred to the foundation precisely because the donor has no further use for it. Hence, the Part TI-A proposals will not, in themselves, be sufficient to eliminate abuses of the sort with which we are presently concerned. Similarly, while the rules suggested in'Part II-D of the report cope adequately with the major abuses which have arisen through contri- butions of unproductive interests in property over which the donor maintains control (principally stock in controlled corporations), they do not apply to gifts of other kinds of unproductive assets. Where property unproductive of income is transferred to a private foundation, the policy reason underlying the grant of the charitable deduction does not become operative until the asset is (a) made productive, (b) disposed of, or (c) applied to charitable uses. Con- sequently, the Treasury Department recommends that, with the limited exceptions described below, the donor's income tax deduction for such a contribution be postponed until one of those three events occurs. This measure would defer the deduction to the point in time at which it becomes justified, and, in addition, would re~olve a number of complex valuation problems.2 Rules similar to those explained in Part II-D in connection with the controlled property provision should, for this purpose, govern the definition of "disposition" and "applica- tion to charitable use"; the determination of the amount of the donor's deduction when he becomes entitled to one; and the length of the period within which qualification for a deduction could occur. An asset should be considered unproductive of income unless substantial income is regularly derived from it. Since the controlled property rule of Part II-D affords ample solution for the problems to which it 1 Sec. 170(1), added to the Internal Revenue Code in 1064, might also be expected to have this effect for similarly motivated donations of tangible personal property. That section provides that contributions of future interests in such property shall become deductible only upon the expiration of Intervening rights held by the donor or related parties. Where the donor retains a real ability to use the contributed property, whether or not his power is set forth In any of the legal documents governing the transfer, the arrangement can be argued to constitute, in substance, the gilt of a future interest. But the criticisms of the utility of the self-dealing rules in this area, explained in the text above, would seem to apply with equal force to the use. fulness of sec. 170(f) here. 2 Where the foundation sells the property, valuation would, of course, present no difficulty; where it makes the property productive, valuation should be easier; and where It does nothing with the property, valuation would never have to be undertaken. PAGENO="1095" 1093 60 TREASURY DEPARTMENT REPORT ON PRIVATE FOUNDATIONS applies and since, beyond the situations governed by that rule, there would appear to be little room for abuse through gifts of stock, evidences of indebtedness, or cash, these areas should be excepted from the proposed measure. For estate tax purposes, this recommendation would not require unproductive property which has been the subject of a completed inter vivos transfer to a private foundation to be included in the donor's gross estate; but it would permit the testamentary transfer of such property to a foundation to qualify for an estate tax deduction only under rules similar to those suggested in the controlled property section of the Report. Gift tax treatment would complement that prescribed by the estate tax statute: a completed lifetime conveyance of unproductive property would constitute a taxable gift, accorded a charitable deduction only upon the occurrence of one of the three qualifying events within a specified period after the transfer. In its discussion of the problems presented by contributions of family controlled property, Part II-D of the report has indicated that valid arguments exist both for and against restricting the measure directed at those problems to the context of donor-influenced founda- tions. The problems of the present section are, in many ways, analogous to those of controlled property. Consequently, if the Congress concludes that it is desirable to limit the scope of the con- trolled property remedy to contributions made to donor-influenced foundations, it may also wish to consider such a restriction of the rules recommended in the present section. B. CONTRIBUTIONS OF SECTION 306 STOCK AND OTHER ORDINARY INCOME ASSETS (1) Section 306 stock In 1954 Congress addressed itself directly and specifically to the problem of the so-called preferred stock bailout. Concerned with the obvious tax avoidance inherent in situations in which the share- holders of a corporation distributed preferred or other special stock to themselves as a tax-free dividend, realized capital gains upon selling this stock to a third party, and then had the corporation redeem the stock with earnings and profits-thereby accomplishing the distribu- tion of corporate profits at the tax rate prescribed for capital gains- Congress determined to withdraw the favorable treatment accorded the earnings bailout. To that end, it adopted legislation providing, generally, that the amount which a shareholder realizes upon the sale, redemption, or other disposition of certain types of stock- designated "section 306 stock"-will be taxed to him as ordinary income. The typical situation covered by the legislation involves distribution of a preferred stock dividend to the holders of a cor- poration's common stock. Since 1954 it has become apparent that, while this provision seals off avoidance possibilities for those who wish to sell or redeem section 306 stock, it does not foreclose the bailout device for taxpayers who contribute such stock to charity. Judicial authority has held that a person does not "realize" anything, within the technical meaning of the tax statute, when he makes a deductible charitable contribution. Hence, because the terms of section 306 become operative only where a disposition of stock occasions a "realization" for its former owner, they do not apply where the owner donates the stock to charity. As a PAGENO="1096" 1094 TREASURY DEPARTMENT REPORT ON PRIVATE FOUNDATIONS 61 consequence, a shareholder in a corporation which has substantial undistributed earnings can, without tax, receive a dividend of re- redeemable preferred stock, secure a deduction for the full value of the stock by contributing it to a private foundation, and, if no prear- ranged plan for redemption exists, experience no tax consequences when the corporation redeems the stock from the foundation. The corporate profits have thus traveled a route leading from the corpora- tion, through the shareholder, to the foundation; but the shareholder has never been taxed on them, and he has been able to reduce his tax- able income by the entire amount of their value. Indeed, if the stockholder is in a relatively high income tax bracket, he may well find significantly more cash in his pocket after the dona- tion of section 306 stock to a foundation than he would be able to retain if he sold the stock for its full value. If, for example, a taxpayer in the 60 percent bracket sold section 306 stock for $20,000, he would pay a tax of $12,000 on the proceeds and be able to retain a net profit of $8,000.~ If, on the other hand, he were to donate his stock to a foun- dation, his $20,000 deduction would diminish the tax which he would otherwise have to pay by $12,000. IE[e would, then, be $4,000 richer if he gave the stock to a foundation than if he sold it. The bailout potentialities of charitable contributions of section 306 stock have not escaped the notice of tax planners and advisers. A recent article in Taxes magazine describes the advantages to be derived from such contributions with clinical particularity. Rabinowitz and Dick, "Charitable Contributions of Section 306 Stock," Taxes, April 1964, page 220. Other articles describing the device are abundant.4 The Treasury Department's recent survey of private foundations suggests that a substantial number of taxpayers have made practical use of the often-repeated advice that the antibaiout statute can be circumvented by giving section 306 stock to charity. Among the approximately 180 surveyed foundations which own 10 percent or more of at least 1 class of stock in a corporation, there are 74 separate holdings of what, from the reported information, appears to be section 306 stock. The continued availability of the bailout device in the charitable contribution area has evoked criticism from a number of independent commentators. See Bittker, "Federal Income Taxation of Corpora- tions and Shareholders" (1959 ed., p. 251). In its revised report of December 11, 1958, the House Ways and Means Committee Advisory Group on Subchapter C of the Internal Revenue Code of 1954 described the disposition of section 306 stock by donation to charity as an "abuse," and recommended that the problem be dealt with by reduc- ing the donor's allowable charitable deduction by the amount which, under section 306, would have been taxed as ordinary income if the donor had sold the stock for fair market value. The working view developed on this subject by the American Law Institute Tax Proj- ect was to the same effect. 14 Tax Law Review 1, 5 (1958). 3 This example assumes that the stock's ratable share of the earnings and Profits of the corporation at the time of distribution was at least equal to the proceeds of the sale. Cutler, "Various Aspects of Contributions to Charity," 17 New York University Annual Institute on Federal Taxation 1117, 1136 (1959); Lowndes, "Tax Advantages of Charitable Gifts," 46 Virginia Law Re - view 394, 413 (1960); Merritt, "The Tax Incentives for Lifetime Gifts to Charity," 39 Taxes-The Tax Maga- zine 104, 118 (1961); Quiggle and Myers, "Tax Aspects of Charitable Contributions by Individuals," 28 Fordham Law Review 579, 604-605 (1960); Ray and Oliver, "How to Choose Right Property and Method of Giving to Benefit from Gifts to Charity," 10 Journal of Taxation 118 (1959); Rudick and Gray, "Bounty Twice Blessed: Tax Consequences of Gifts of Property to or in Trust for Charity," 16 Tax Law Review 273, 280 (1961); Sugarman, "Charitable Giving Development in Tax Planning," 39 Taxes 1027, 1029 (1961); "Estate Planners Note: Contributions of Section 306 Stock Not Taxable," 7 Journal of Taxation 133 (1957). PAGENO="1097" 1095 62 TREASURY DE'PARTMENI' REPORT ON PRIVATE FOUNDATIONS The Treasury Department is of the opinion that the recommenda- tion of the Ways and Means Committee Advisory Group is a sound one. Restriction of the charitable deduction which a donor receives on the contribution of section 306 stock to a private foundation ~ is consonant with the particular concern which Congress has, by the adoption of section 306, manifested for the earnings bailout problem. Measuring the reduction in the allowable charitable deduction by the amount of the ordinary income upon which the donor would have been taxed if he had sold the contributed stock makes the approach consistent with the provisions of section 306 itself. Furthermore, this approach is precisely that which Congress recently twice applied to analogous problems. In its 1962 enactment of section 1245 of the Internal Revenue Code, providing rules to insure ordinary income treatment of gain attributable to post-1962 depreciation of tangible personal and certain other property, and in its 1964 enactment of section 1250, prescribing rules of broadly the same direction for depre- ciable real property, Congress took care to specify that deductions for charitable contributions of such property should be diminished by the amounts which the new sections would characterize as ordinary income if the property were sold at fair market value.6 For these reasons, the Treasury Department recommends applica- tion of the Advisory Group proposal to contributions of section 306 stock to private foundations. (2) Other ordinary income assets When donors secure deductions for contributing to private founda- tions other classes of property which would have produced ordinary income upon sale, problems fundamentally analogous to those present in the section 306 stock context arise. Items includible in the donor's inventory and stock in collapsible corporations afford examples. In all of these cases the full amount of value which the donor would normally have had to include in his ordinary income is permitted both to escape taxation itself and to reduce the amount of his other taxable income. In many of these situations there exists the same anomaly pointed out above in connection with section 306 stock: the donor can make more profit by giving the asset to a foundation than he would have been able to retain if he had sold it. Because of the basic similarity of the present problems to those generated by section 306 stock and because of the direct relevance here of the recent congressional action on the closely related ordinary `The Advisory Group proposal is not limited to situations in which the recipient charitable organization is a private foundation: thc group's recommendation would apply wherever a donation of sec. 306 stock gives rise to a charitable deduction. The American Law Institute Tax Project working view and Professor Bittker's discussion, similarly, treat the problem as one whose nature does not depend upon the character of the charitable organization involved. By its observation that the problem exists within the area to which the present report applies, the Treasury Department intends no implication that these views are in error. 6 The American Bar Association in 1959 offered two objections to the Advisory Group proposal. Hearings on Advisory Group recommendations on Suhehapters C, F, and K of the Internal Revenue Code, House Ways and Means Committee, 86th Cong., 1st sess.. pp. 923, 931-933 (1959). One, advanced by some mem- bers of the Committee on Corporate Shareholder Relationships, was that the contribution of sec. 306 stock to charity represents only one facet of the broad problem presented by donations of appreciated property. The members who entertained this view were of the opinion that all aspects of the general question should be examined before action is taken upon any particular portion of it. This objection has, in a large measure, been undercut by the congressional decisions with respect to sees. 1245 and 1250. In both instances, Con- gress recognized that specific restriction of the charitable deduction affords an appropriate method of dealing with the problems posed by particular classes of assets. A second objection, made by other members of the Bar Association committee, was that the proper method of curbing abuses in this area is to grant a full charitable deduction for the donation of sec. 306 stock, but to tax the donor as though he had realized the entire fair market value of the stock at that time. Such a rule would be more stringent than that recom- mended by the advisory group: it would, like the Advisory Group proposal, cancel that portion of the donor's charitable deduction attributable to corporate earnings at the time of the distribution of the stock; but, in addition, it might occasion a capital gains tax where the stock has appreciated in value after its distribution to the donor. Without passing on the merits of this proposal, the Treasury Department is of the view that the less rigorous approach of the Advisory Group is sufficient to foreclose the sec. 306 stOck, abuse in the pri- vate foundation area. PAGENO="1098" 1096 TREASTJRY DEPARTh~NT RE~POET ON ?RIVATE FOUNDATIONS 63 income situations arising under sections 1245 and 1250, the Treasury Department recommends that the rule proposed for section 306 stock be applied to this area also. Under this recommendation, the income tax deduction accorded for the gift of any asset to a private foundation would be diminished by the amount of the ordinary income which the donor would have realized if he had sold the asset for fair market value at the time of the contribution. C. CORRECTION OF COMPUTATION OF ESTATE TAX MARITAL DEDUCTION When a donor makes an unrestricted contribution of property to a private foundation whose selection of charitable beneficiaries he has power to influence, he secures a current income tax deduction for the full value of the property. The existence of his power over the founda- tion confers an additional benefit upon him: under existing estate tax law, the value of the asset remains in the base upon which his marital deduction is computed.7 Its presence in that base increases, by a sum equal to one-half the asset's value, the amount which the donor can bequeath to his wife free of estate tax-even while the asset itself escapes estate tax through the operation of the charitable deduction. On the other hand, the donor who contributes to a foundation over which he has no power receives no such enlargement of his marital deduction: the property which he has contributed does not bear upon his estate tax computations, and the tax advantage of his contribution is limited to the deduction provided by the income tax law. This differentiation in the estate tax law between charitable donors who possess power to influence the foundations to which they con- tribute and donors who do not is quite inadvertent: it arises from the application, to the situation of the donor-influenced foundation, of principles designed to deal with entirely different problems. More significantly, it creates a preference which there is no reason for the tax laws to create. It establishes, through the mechanism of the estate tax, an artificial inducement, which has no necessary relation- ship to charitable inclinations or interests, for the retention of donor influence over private foundations. Certain other sections of the estate tax law give rise to analogous incongruities. Under them, transfers which produce current charita- ble income tax deductions can be arranged to maintain sufficient donor involvement with the contributed property to increase the donor's marital deduction. The section dealing with life insurance has, in particular, been the subject of considerable manipulation designed to produce such double tax benefits.8 The provisions govern- ing retained life estates and transfers in contemplation of death may occasion similar problems.9 In all of these situations, lifetime chari- 7 Sees. 2036 and 2038 of the present Internal Revenue Code require that property transferred intervivos be included in the transferor's gross estate if he retains for life the power to designate the beneficiaries of its income or corpus. Both sections apply whether the transferor may exercise his power alone or in conjunction with other parties, and whether he possesses the power in a fiduciary capacity or not. Hence, in the usual situation, where at the time of his death a donor has a power to control or influence the decisions which a private foundation makes about the amounts and recipients of its distributions, all property which he has contributed to the foundation during his life would be required to be included in his gross estate. The so-called "adjusted gross estate"-which provides the base for the computation of the marital deduction-is determined from the gross estate without subtraction of the charitable deduc- tion. As a consequence, the marital deduction base would include the value of the property contributed to the foundation. (The discussion here assumes that the contributed assets are not community property.) S The effectiveness of the various life insurance devices has not yet been tested by litigation. The recommendation of Part Ill-A would postpone the income tax deduction for the gift of a remainder interest to a private foundation until the interest becomes possessory and productive or is disposed of by the foundation. By doing so, that proposal would, in the private foundation area, eliminate most possi- bIlities for using retained life interests to achieve the described double tax benefits. PAGENO="1099" 1097 4 TREASURY DEPARTMENT REPORT ON PRIVATE FOUNDATIONS able transfers, treated as incomplete for estate tax purposes, gain an ntirely unintended tax advantage over outright gifts. To remove these unjustified and incongruous tax preferences, the `reasury Department recommends that, where a donor secures an ~come tax deduction for the transfer of an interest in property to a rivate foundation, the value of the property be excluded from the ase upon which his estate tax marital deduction is computed.'° ~y placing contributions to donor-influenced foundations upon the ame estate tax footing as those to foundations which the donor does ot influence, such legislation would confine the tax reward for both lasses of transfers to the income tax benefits which they were spe- ifically intended to receive. Similarly, where the recipient charitable rganization is a private foundation, it would eliminate the advantage rhich lifetime charitable transfers, framed to retain donor connection rith the contributed asset, have over outright and unrestricted gifts. D. SANCTIONS FOR FAILURE TO FILE INFORMATION RETURNS To proceed with effective administration of the tax laws governing rivate foundations, the Internal Revenue Service must obtain ompleted copies of the annual information returns required of Dundations. Unfortunately, not all foundations comply with the eporting rules prescribed by the Internal Revenue Code and the nplementing regulations. While the Internal Revenue Service has aken what steps it can to cope with this problem-it has, among ther things, undertaken the compilation of a master list of tax- xempt organizations which will permit use of automatic data proces- ing equipment to facilitate identification of the nonifiers-its efforts ave been hampered by the absence of an effective sanction for non-. ompliance. Under present law, the wififul failure to file any return required y law is a criminal offense. The penalty provided is imprisonment ot exceeding 1 year and a fine not exceeding $10,000. This criminal enaLity is the only sanction available in cases involving the failure to Lie foundation information returns. Plainly, its severity makes it riappropriate in most such cases. To overcome this defect of existing law, the Treasuiy Department ecommends that private foundations which fail, without reasonable ause, to make timely and complete ffling of a required information eturn be subjected to a penalty of $10 for each day of delay beyond he prescribed filing date. The penalty should be subject to a maxi- cium limit of $5,000. A similar penalty, with a sirailar maximum Lmt, should be imposed upon officers, directors, or trustees responsible or filing private foundation returns if, after notice from the Internal ~evenue Service of failure to make a complete and timely return, hey omit (without reasonable cause) to remedy the defect within specified reasonable time. Measured by the seriousness of the ioncompliance in individual cases and sufficiently moderate to be ppropriate in situations not warranting criminal treatment, these auctions would afford the Internal Revenue Service considerable ssistance in securing adherence to private foundation reporting equirements. 10 Commentators upon the problems of the present section have treated them in a context wider than oat of private foundations. By restricting its recommendation to the area of the present Report, the ~reasury Department intends no implication that such views are in error. PAGENO="1100" 1098 APPENDIX A STATISTICAL APPENDIX This appendix presents statistical estimates of the operation of th charitable contribution provisions of present law. It also contaim information on the growth, the present size, and operations of founda tions. 1. Historical pattern of total contributions It is not easy to determine just what has been the effect of the ta provisions relating to charitable organizations. One would naturall~ look first at the size of the contribution deduction. This is sum marized in table 1 for selected years. The difficulty of year-to-year comparisons from the data in table I is the differing coverage of income tax returns in various years. Ir the 1920's, tax returns covered a far smaller portion of the populatior than they did in the 1950's. Also, when the standard deduction wa~ introduced or increased, many contributors stopped listing contribu tions. But with any given standard deduction a smaller portion oi taxpayers use it, more itemize each year, and thus itemized contribu tion deductions go up more than contributions. Table 2 shows several long-term comparisons of the contributions oi living individuals. So far as the tax-deductible contributions ar concerned, the table shows the figures adjusted to include estimatec contributions of nonfilers and of individuals using the standard de duction. These adjustments have been estimated by C. Harry Kahr~ for earlier years.1 The 1956 and 1962 adjustments were made follow ing Kahn's technique. To provide conceptual correspondence witi estimated contributions received by operating charities, the table alsc includes charitable bequests and corporate contributions. 1 C. Harry Kahn, "Personal Deductions in the Federal Income Tax," National Bureau of Economb Research, Princeton university Press, 1960. Kahn's technique on nonfilers involved applying to thei] estimated income the ratio of contributions to income of the low-income filers. The estimate of contribu tions by standard deduction takers was based on changes in reported contributions at times when th standard deduction was expanded. 65 PAGENO="1101" 1099 66 TREASURY DEPARTME~2 REPORT ON PRIVATE FOUNDATIONS TABLE 1.-Amount of charitable deductions on tax returns of individuals, corpora- tions, and estates, selected years [Millions of dollars] Year Individuals Estat Cs I Corporations Total 1962 1961 1960 1958 1956 1954 1952 1950 1948 1946 1944 1942 1940 1938 1936 1934 1932 1930 1929 1924 $7 516 (2) ` 6,750 5,694 4,878 3,891 3,114 2,260 1,881 1,639 1,258 1,450 740 414 390 280 317 434 540 533 (2) (2) $951 669 2534 398 336 274 296 186 202 155 143 200 128 146 191 223 154 116 (2) (2) $512 482 395 415 314 398 252 239 211 234 98 38 27 30 27 31 35 32 (2 (2 $8, 183 6,758 5,827 4,603 3,848 2,786 2,416 2,036 1,694 1,703 921 641 548 453 539 692 726 649 `Estate tax deductions listed for the year In which the estate return was filed. ~ Not available. Source: "Statistics of Income," except corporations before 1936 which are taken from "National Income," 1954 edition, Department of Commerce. PAGENO="1102" 1100 TREASURY DEPARTMENT REPORT ON PRIVATE FOUNDATIONS 67 Go 0) 0) 0) 0) 0) Go 0) 0) Go Co C) C) *~G C) Co C) C) 0) C) ~ C) C) C) 0) Go 0 Go C) PAGENO="1103" 1101 68 TREASURY DEPARTMENT REPORT ON PRIVATE FOUNDATIONS The other statistical difficulty involves the accuracy of contribu- tions reported on tax returns. ("Statistics of Income for Individuals" includes unaudited data.) Several authorities in the field have attempted to estimate charitable contributions received by collecting this information from the charities. In some cases estimates have to be reconstructed from estimated expenditures of charitable organiza- tions and changes in endowments. The most reliable of these esti- mates is a series prepared by Ralph Nelson from which preliminary figures have been published by the National Bureau of Economic Research. Table 2 shows that there has been some relative growth in contributions over time. The ratio of contributions of living in- dividuals based on tax return data shows a growth from the 1920's to recent years from about 1.5 percent of adjusted gross income to about 2.5 percent, roughly an increase of two-thirds. The other series suggest much less growth. The recipient estimate for 1930 is con- spicuously high and probably overstates the actual figure. The donor figure is inflated relative to AGI for 1930 because it includes bequests from persons whose deaths occurred (and whose wills were written) in the different atmosphere of the 1920's. Table 3 presents more detail on estate tax charitable deductions. Here the raw data show little trend because of two offsetting tenden- cies. By 1959-61, due to growing wealth levels, the United States reached the point where estate tax returns were filed with respect to about 33/~ percent of all decedents. The number of returns filed in the 1920's and 1930's covered on the average about 0.9 percent of the decedents. At the same time charitable bequests account for a significantly greater part of the estate for large estates compared to small estates. The broadening of the estate tax coverage brought in relatively more small estates where charitable bequests were less com- mon, thus holding down the contribution ratio. TABLE 3.-Charitable bequests reported on estate tax returns [Dollar amounts in millions] Filing year Gross estate Charitable bequests Ratio to gross estate of- Total Educational, scien- tific or literary institutions Publicly Privately owned owned * Religious Other Total charitable bequests Other charitable bequests 1961 `_._.. 1961 1959 1955 1954 1951 1950 1949 1948 1944 1939 1934 1929 1924 $9, 362 14,622 11,648 7 467 7 411 5, 505 4, 918 4,933 4,774 2,907 2,746 2 244 3 844 2,350 $850 951 669 398 354 274 206 296 223 202 178 146 154 66 $33 31 (2) (2) (2) 17 16 19 18 7 (2) (2) (2) $81 117 (2) (2) (2) 38 98 30 32 44 (2) (2) (2) $89 86 (2) (2) (2) 22 35 25 16 16 (2) (2) (2) $683 748 435 (2) (2) (2) 129 147 151 135 111 (2) (2) (2) Percent 9. 1 6.5 5.7 5. 3 4. 8 5. 0 4. 2 6.0 4.7 6.9 6.5 6. 5 4 0 2. 8 Percent 7. 3 5.1 3.7 (2) (2) (2) 2. 6 3.0 3.2 4. 6 4.0 (2) (2) (2) 1 Top quarter of returns. 2 Not available. Source: "Statistics of Income", various years. 87-444 0-68-70 PAGENO="1104" 1102 TREASURY DEPARTME~~ REPORT ON PRIVATE FOUNDATIONS 69 The top line of table 3 shows a computation for estate tax returns ified in 1961 where the gross estate was over $200,000. This accounts for about 0.9 percent of all decedents and is thus roughly comparable to the data for the 1920's and 1930's. On this basis the charitable bequests, as a percentage of estates, show an appreciable growth. Robert Lampman's data 2 show that the share of total wealth of the top 1 percent of estate holders declined slightly from the 1920's through 1956.~ This share is, however, quite sensitive to common stock prices. The fact that common stock prices have risen more than other prices since 1956 would roughly serve to restore the relative share of wealth held by the top 1 percent. On balance it is likely that a larger portion of the property changing hands at death goes into charitable hands via bequests now than was the case in the 1920's. In 1929 the portion might have been 1.5 percent. Presently, it might be 3 percent. The growth is sharper when comparison is made with the early 1920's. 2. Contributions by type of recipient The data on the types of recipients of charitable contributions are extremely scarce. Table 3 shows a breakdown by broad categories for estate tax deductions for various years. Presumably, the category "other" charitable bequests is made up to a significant extent by bequests to foundations. Kahn, on the basis of very skimpy data, guessed that the bequests to foundations in 1952 may have been in the vicinity of $40 million.4 A special tabulation of estate tax returns ified in 1957 and 1959 suggests that the annual bequests to "private" organizations might have been about $150 million. The size of "other" bequests has risen from about 60 percent of charitable bequests in 1939 and 1944 to about 80 percent in 1961. All one can say is that this is consistent with a growing tendency to leave property to foundations, but the evidence is not conclusive. The only tabulation of individual income tax charitable contribu- tions by type of recipient was made for 1962 returns. It is sum- marized in table 4 which shows the increasing importance of the contribution deduction in the upper brackets, and particularly, the increasing importance of the contributions to "other organizations." This category covers literary, educational, and scientific foundations, libraries, museums, zoos, and other such institutions, including charitable foundations in general. 2 Lampman has made the principal analysis of changes in the size distribution of wealth holdings over time. (Robert Lampman, "The 5hare of Top Wealth Holders in National Wealth," 1922-56, National Bureau of Economic Research, Princeton University Press.) 3 From about 33 percent to 26 percent, ibid, p. 204. Kahn, op. cit., p. 225. PAGENO="1105" 1103 70 TREASURY DEPARTMENT REPORT ON PRIVATE FOUNDATIONS .9 0 ~ 0 E .0 0~0 0~) 0 `0 `0 0 0 .~ :~ ~ 0 ~ E~E; 0-c.- IJ~ ~ ~_)`~ Q~- o c~ .~0 *9.~ ~ ~ ~` ~ c~ 0 o 0 0 ~ `~ `0 ~0 `0 ~0 0 ~0 0 C,) 0 `O 0 0 E 0 0 0 `0 `0 0 0 0 0 E (`C ~ ~ ~ 000000C'(' ~ 0 c~ `-4 00~~ `0.9 -7.~+3 0000©©C~ ~ 0 ~ c~ 0 I4z~ ~ ~ ,~0 000000 ~4 ~ ~ 0 ~ E `-4 , ~ ~ *~b'C~ c~ 000000 (`0 cr3c'i ~ ~ 0 oS ~;, ~( 0 0 0 rr~ 0 0 `C) ("C 0 0 (`:1:1 0 `0 0 0 0 0 0 0 `0 `0 `0 0 H ~ .~ 0 I. 00 CC 0 `ok._. 0~_0$(' ~ c0,.4C0~ -`C'~,-4 0'Cc00~4'-4 0 CC 0 ~~1 :dS -4ECC~E0~ 0 00.50 000 CC 00000 `0° ~ -CC) 0 Soo 00 ~ PAGENO="1106" 1104 TREASURY DEPARTMENT REPORT ON PRIVATE FOUNDATIONS 71 TABLE 5.-Estimated total amount of philanthropic contributions by individuals, classified by area of service, 195~ and 1954 [In millions of dollars] Area of service 1952 1954 1. Religion 2. Education 3. Health and hospitals 4. Social welfare - 2,281 114 259-303 323 44-91 153 122-138 2, 776 143 283-369 465 60-139 160 156-187 5. Private foreign aid - 6. Foundations - 7. Miscellaneous - Total 3,296-3,403 4,043-4,239 Source: C. Harry Kaim, Personal Deductions in the Federal Income Tax, National Bureau of Economic Research, 1960, p. 218. Table 5, taken directly from C. Harry Kahn, provides an estimate of the breakdown by type of recipient of charitable contribution deductions of living individual donors in 1952 and 1954. These estimates were pieced together by Kahn from material drawn from the charitable organizations. His estimate of contributions to founda- tions is $160 million, or 3 percent of total contributions.5 This figure is made up of an estimated $47 million channeled through foundations and $106 million added to foundation capital.6 Kahn's estimate of contributions received by foundations in 1952, $40 million from bequests, and $153 miffion from living donors, also includes an estimated $24 mfflion from corporations. This is Kahn's breakdown of $221 million of contributions to foundations in 1952, a figure estimated by Emerson Andrews (Philanthropic Foundations, p. 17). This total is only one-fourth the size of the $833 million of contributions received by foundations in 1962 based on the Treasury survey in 1964 (cf. discussion infra and table 10). The higher Treasury survey figure is due in part to the broader covefage. This remarkable growth over 10 years, however, is an indication of increasing use of foundations. This estimate of contributions to foundations in 1962 may be broken down by sources, as follows: Millions Bequests 1 8175 Corporations 2 200 Living individuals 450 1 Based on a special tabulation (unpublished) of estate tax returns ified in 1957 and 1959. The figure tabulated from those returns was contributions to organizations that did not appeal to the general public for funds. The figure was scaled up to 1962 levels and rounded. It is a figure particularly subject to erratic year-to-year changes. 2 This is the Foundation Library Center's estimate of contributions received by "company-sponsored" foundations ("foundations known to have been organized by a business corporation or partnership or to have such an organization as a direct contributor"). Foundation Directory 2, pp. 29-30. The statistic includes some individual contributions, but the definition also has the result of excluding some corporate contributions to noncompany sponsored foundations. 3 Obtained by subtracting line 1 and 2 from the total contributions received in 1962, as estimated by the Treasury survey. These components pooled from various sources are extremely rough since the foundation reports themselves do not indicate type of donor. The pattern is roughly consistent with the patterns that Professor Kahn found for 1952, except that this estimate would mark corpora- `Kahn's estimate in turn is based mostly on Andrew's Philanthropic Giving, cf. Kahn, op. cit., pp. 224-5 6 Ibid., p. 225. PAGENO="1107" 1105 72 TREASURY DEPARTMENT REPORT ON PRIVATE FOUNDATIONS tions as more important contributors than they appeared to be in the earlier year. Table 6 contains a breakdown of total private giving for 1956 by both sources and uses. This is Ralph Nelson's estimate. Foundation income, as well as the income of endowments of operating charities, is here shown as a source of charitable funds. TABLE 6.-The composition of private giving, 1956, donors and recipients, pre- liminary estimate ~Dollar values in millions] Sources (donors) Amount Percent Uses (recipients) Amount Percent Living donors (persons and families) Bequests - Corporations Foundation endowment in- $7,317 534 418 82.3 6.0 4. 7 Religious organizations 1 Private primary and second- aryschools Higher education Secular health $3, 569 802 929 808 47.9 10.8 12. 5 10.8 come Other endowment income 407 220 8,896 4.6 2. 5 100. 0 Secularwelfare Miscellaneous . 1,015 335 7,458 13.6 4. 5 100. 0 1 Includes church-supported health and welfare, and excludes parochial schools. Source: Annual Report of the National Bureau of Economic Research, June 1962, p. 59. 3. The size and growth of foundations There are no reliable estimates of the growth of the total wealth of charitable organizations including foundations. (Such an estimate would involve, for example, an estimate of the current value of church buildings.) As to the specific subject of this study, private founda- tions, there are oniy isolated pieces of information about the ac- cumulated financial holdings; that is, their endowments. One piece is provided by the periodic surveys of share ownership of listed stocks, undertaken by the New York Stock Exchange. Another is provided by studies of total assets of foundations. It is, of course, rather meaningless to point out that foundations and endowments have been growing. The more important point is how this growth compares with that of the total economy; that is, has the position of foundations grown relative to other charitable organi- zations, or relative to the total private wealth? The total asset data on foundations are the result of periodic surveys undertaken by private researchers. The early foundation surveys were based upon information that the surveyors could glean from newspaper reports, correspondence, guessing at the importance of small foundations, and the like. This kind of approach is quite likely to include the large well-known organizations, but it becomes very spotty as an estimate of the small ones. Since 1950, these data have been strengthened by the availability of annual information returns under the Internal Revenue Code from many foundations. Table 7 contains some information on the available survey-type information on total asset holdings of foundations. For comparison these are shown along with an estimate of endowments of institutions of higher education and of the total value of assets of individuals, including nonprofit institutions. The figures in table 7 indicate considerable growth of foundations relative to the aggregate individual total wealth. The size of foun- dations since 1930 would seem to be increasing 17 times while the PAGENO="1108" 1106 TREASURY DEPARTMENT REPORT ON PRIVATE FOUNDATIONS 73 aggregate individual wealth was increasing 4 times. The faster growth of foundations appears to persist throughout the period. The real question is how reliable the early figures are. Two conspicuous defects are coverage and valuation methods. Coverage.-The rrreas1B~y~s 1964 survey indicated that in the aggre- gate the small foundations do not make much contribution to the size of total foundation assets. The 1930 study, for example, grossly underestimates the number of foundations, giving a figure of 122. The 1964 Foundation Directory, however, lists 165 foundations which had assets over $1 million in 1962 and were organized before 1930. The procedure followed in 1930, presumably, should have identified and included the large well-known foundations. If the excluded ones were equivalent to the aggregate of the medium and small groups in the 1964 figures, it would be reasonable to raise the $950 million estimate to $1,100 million; that is, by 15 percent, to cover the addi- tional foundations. Valuation.-The 1930 study requested only ledger values of assets. The 1931 study requested market values as well, but only eight foundations gave both ledger and market values. For these eight, the aggregate market value was about 12 percent below ledger value. Market values of stocks in 1931, however, were only two-thirds of values in 1930. Assuming that most of the assets were in stocks, it is a guess that the market value of all foundations (i.e., including the above adjustment for the small foundations) was about $1,300 million. These adjustments have been very rough. It would be better to conclude that the value of foundation assets in 1930 was $1-$2 billion. Even if we take the top of this range, foundation assets in the aggregate have multiplied eight times in value since 1930 while total wealth has increased four times. From the lower end of this range the increase was 16 times for foundations. Table 7 would indicate that since 1930 foundations have increased their share of the total wealth of individuals from 0.25 percent to about 0.8 percent. If we use the previously derived estimate of $1.3 billion as the market value of foundation wealth in 1930, the share of founda- tions was then 0.33 percent. Higher education endowments increased roughly in proportion to total individual wealth. Table 8 shows some information on the holdings of stock registered on the New York Stock Exchange (NYSE). In the aggregate the por- tion of total stocks registered on the NYSE owned by foundations is 2.6 percent.7 The figure would seem to be high in relation to the indica- tion of table 7 that foundations own slightly under 1 percent of the total wealth of individuals. The principal explanation is that founda- tions hold over twice as high a proportion of their wealth (about two-thirds) in the form of common stock than is the case for all indi- viduals (about one-third). Further, foundations have a higher pro- portion of their stockholdings in the form of stocks listed on the NYSE (after the inclusion of Ford stock) than is true of individuals generally.8 7 The Ford Motor Co. stock held by the Ford Foundation is a special class of nonvoting common which is not listed on the NYSE. When the Ford Foundation sells any stock, the shares to be sold are exchanged for the listed common stock and delivered. Since the concern of the immediate inquiry is the wealth of foundations, rather than voting power, it is useful to add the Ford Foundation holdings of Ford stock to the listed holdings. Both figures are shown in table 8. The Ford figures were obtained from the Ford Foundation. 8 An SEC study indicated that in a sample of foundations, covering 56 percent of foundation holdings, 87 percent of foundation stock investments was in shares listed on the NYSE. "Report of Special Study of Securities Markets," pt. II, p. 838. PAGENO="1109" 1107 74 TREASURY DEPARTME~ REPORT ON PRIVATE FOUNDATIONS Two striking indications from the stockholding data should be noted: (1) There has been no significant growth in the stockownership of foundations relative to the total market since 1949; and (2) there has been a small decline in the share of college and university endowments. The total share of all tax-exempt organizations (other than pension funds) was almost unchanged but down slightly. TABLE 7.-Data on total assets of foundations and higher education endowments [Dollar amounts In bifilons] Year Number (1) Assets of foundations (2) Endow- ments of colleges and universities I (3) Total assets of Individ- uals (4) 1930 - 1944 - 19i0 1954 - 1959 - 122 505 1,007 4,164 5,202 6,007 15,000 $0.95 1. ~2 2.57 4.52 11.52 14.51 16.26 $1.3 2.4 5.0 6.4 6. 4 $380 600 921 1,200 1,670 1,930 1,930 1962 . 1962 2 I This refers only to the endowment in investment assets. Physical plant of colleges and universities also serves as endowments, yielding services rather than cash. If these were included, higher education endowments would exceed those of foundations. 2 1964 Treasury Department Survey of Private Foundations. SOURCES Cols. (1) and (2): 1930: "American Foundations and Their Fields," Twentieth Century Fund. The tabulation con- tained in this report lists foundations with assets of $853,000,000, but 17 of the 122 foundations did not submit asset figures. The report contains the estimate that for all 122 foundations an asset figure of $950,000,000 "is probably not wide of the mark." 1944: "American Foundations for Social Welfare," Harrison and Andrews, Russell Sage Foundation, 1946, p. 58. 1950: "Philanthropic Giving," Andrews, Russell Sage Foundation, 1953, p. 93. 1954: "American Foundations and Their Fields," 7th ed. 1959: "Foundation Directory 1," Russell Sage Foundation, 1960. 1962: "Foundation Directory 2," Russell Sage Foundation, 1964. Col. (3,): 1930-59: Office of Education. 1962: "Giving U.S.A.," 1963 ed., p. 14, American Association of Fund Raising Counsel. Col. (4): 1930-54: "Studies in National Balance Sheet of United States," Goldsmith, vol. II, pp. 124-125. The 1930 figures were interpolated between Goldsmith's estimates for 1929 and 1932 on the basis of aggregate value of corporate shares. 1959-62: "Flow of Funds Accounts," FRB. Total assets were estimated using observed trend of ratio of total to intangible in Goldsmith's data. PAGENO="1110" 1108 TREASURY DEPARTMENT REPORT ON PRIVATE FOUNDATIONS 75 TABLE 8.-Estimated holdings of New York Stock Exchange listed stocks by certain exempt institutions [Dollar amounts In billions] DOLLAR HOLDINGS 1049 1950 1960 1961 1962 1963 Foundations: Listed stocks Ford stock held by Ford Foundation $1. 1 .9 $4. 1 2. 1 $5.3 2.3 $7. 2 3. 1 $6. 7 2. 1 $8.0 2.7 Total 2.0 1. 1 1. 0 .5 77.2 6.2 2. 4 3. 1 5.8 221.3 7. 6 2. 9 4.4 (1) 309.3 10. 3 3. 7 5. 6 18. 9 390. 1 8.8 3.3 5. 0 18. 2 347.9 10. 7 4.0 5.9 23.4 414.0 College and university endowments Other nonprofit organizations Noninsured pension funds Market value of all listed stocks 2 PERCENTAGES 2 Foundations (including Ford stock) College and university endowments Other nonprofit organizations 2.6 1. 4 1.3 2.8 1. 1 1.4 2.5 . 9 1. 4 2.6 . 9 1. 4 2. 5 .9 1. 5 2.6 1.0 1.4 Total nonprofit organizations Noninsured pension funds 5.3 . 7 5.3 2.6 4.8 (1) 5. 0 4.8 4. 9 5. 2 5.0 5.7 1 Comparable figure not available. 2lncludes Ford stock held by Ford Foundation. Source: "NYSE Fact Book," 1963 and 1964. Ford figures obtained from Ford Foundation. The 1949 figure was obtained using the book equity of the Ford Motor Co. The two sets of data in tables 7 and 8 seem to suggest two different conclusions about the relative growth of foundations. The total esti- mates in table 7 suggest a growth in the relative share continuing through the 1950's. The stockholding data in table 8, however, sug- gest a cessation in the growth in the relative share of foundations after 1950. The quality of the data available does not admit of any precise reconciliation of these two sets of statistics. The early survey was admittedly incomplete as to coverage of foundations, and this coverage gradually improved. Also, the later surveys reflected a mixture of market values and ledger values. The stockholding data are based on a limited sample. A large part of the discrepancy is accounted for by the fact that foundations have a very large portion of their investment in common stock compared to individuals and even compared to higher education endowments. Common stock has advanced far more in price in the last 15 years than other assets. This has been caused by both the growth in dividends and an increase in the price-earnings ratio. The implications of the stockholding data are that stock investments of foundations were not growing faster than the stock investments of other stock investors. All stock investors were gaining compared to people who owned just bonds, bank accounts, and insurance. Since foundations are heavily invested in stocks, this resulted in better than average growth for foundations, compared to total individual wealth. If foundations were growing faster than other investors due to either an increasing flow of contributions or due to a parsimonious policy of distribution to charity, this should show up in the NYSE data as growth relative to other stock investors. It is significant that there is so little growth of this sort in the NYSE data. PAGENO="1111" 1109 76 TREASURY DEPARTMENT REPORT ON PRIVATE FOUNDATIONS Another evidence of foundation growth is afforded by recording the Drgamzation dates of presently large foundations. This serves to [dentify the 1940's and 1950's as the period of rapid foundation growth, oithough it is striking that the foundations established since 1950 are relatively small compared to those established before 1950. These ~ata are contained in table 9. On the basis of the meager evidence available, the following con- ~lusions are suggested about private foundation growth: (a) There was some growth of foundations relative to the rest of the economy in the 1930's and 1940's. This can be associated with the adoption of increased progressivity in estate and income taxes in the early 1930's plus the charitable contribution deduc- tion under each tax. (b) Since 1950, the total wealth of foundations has grown faster than the rest of the economy, but in this period the faster growth was probably due to the fact that their principal assets and corporate stocks were increasing in price faster than other assets. In terms of values of shares owned, the proportion owned by fouildations appears to have been quite stable. TABLE 9.-Period of establishment of 5,050 foundations, by decades after 1900: by latest asset classes 1 Period Number Percent Latest asset classes $10 million or more $1 million under $10 million Less than $1 milion Number Percent Number Percent Number Percent Total Before 1900 1900 to 1909 1910 to 1919 1920 to 1929 1930 to 1939 1940 to 1949 1950 to 1959 3 5, 050 100 175 100 800 100 4, 075 100 18 18 76 173 288 1,638 2,839 (2) (2) 2 3 6 32 56 1 8 14 27 45 54 26 1 5 8 15 26 31 15 9 5 36 65 100 299 286 1 1 4 8 12 38 36 8 5 26 81 143 1,285 2, 527 (2) (2) 1 2 3 32 62 I The 5,050 foundations tabulated here are those that had at least $100,000 of assets in 1962 and were thus [neluded in the "Foundation Directory" and which also provided information to the Foundation Library Center as to date of organization. 2 Less than 0.5 percent. 3 Record incomplete; the fragmentary 1960-record (45 foundations) not included in table. Source: "Foundation Directory," ed. 2, p. 13. 4. 1964 survey of foundations In 1964 the Treasury Department conducted a survey of certain financial aspects of private foundations.9 The survey involved initially selecting a sample of approximately 1,300 organizations whose Form 990-A was available (principally at the Foundation Library Center office in Washington, D.C.). Certain parts of the information return, Form 990-A, are required by law to be made available to the public. The Foundation Library Center, a private, nonprofit organization, maintains a file of copies of this public part of the tax return for those exempt organizatioiis which meet their definition of a foundation. The "Foundation Directory," In the conduct of this survey assistance was obtained from the Internal Revenue Service and the Foun- dation Library Center offices in Washington, D.C., and New York City. PAGENO="1112" 1110 TREASURY DEPARTMENT REPORT ON PRIVATE FOUNDATIONS 77 edition 2, page 9, published in 1964, explains the definition of a foundation used by the Center as follows: For purposes of this directory a foundation may be defined as a nongovern- mental, nonprofit organization having a principal fund of its own, managed by its own trustees or directors, and established to maintain or aid social, educational, charitable, religious, or other activities serving the common welfare. Both charitable trusts and corporations are included. As previously, the new directory excludes "foundations" which make a general appeal to the public for funds; which act as trade associations for industrial or other special groups; which are restricted by charter solely to aiding one or several named institutions; or which function as endowments set up for special purposes within colleges, churches, or other organizations and are governed by the trustees of the parent institution. Obviously, many "foundations" fall in a gray area, with most of the characteristics of regular foundations but some disqualifications; edition 2 interprets the exclusions more rigidly than did its predecessor. The "Foundation Directory" published by the Foundation Library Center omits "very small" foundations. The files of the Foundation Library Center do, however, contain copies of the Form 990-A for many of these very small foundations. Since the word "foundation" is not technically defined for tax purposes, there is no ready way to separate those organizations called foundations from other tax-exempt organizations so far as tax informa- tion returns are concerned. As a means of obtaining a body of statistical information, it seemed necessary to utilize the classification which had been established by the Foundation Library Center. Data have been added for certain very large organizations which one might want to define as a foundation where these could be identified.'° No effort was made to expand the center's definition in the other size categories. The Foundation Library Center indicates that their records show that there were approximately 15,000 foundations, according to their definition, in existence around the end of 1962. Of these, an estimated 9,000 were below $100,000 in total assets. A stratified sampling design was adopted that would produce a sample of about 1,300 foundations. It developed that the 1962 Form 990-A was available in the Foundation Library Center for only about one-half of the total number of foundations. This was princi- pally due to delays involved in obtaining and reproducing the returns. The sampling rates for the foundations below $1 million in size were accordingly doubled, and in the group of foundations with assets size of over $10 million other sources were utilized to obtain the Fornis 990-A for the year 1962 in order to carry out the plan to have 100 percent coverage in this area. Information was taken from the Form 990-A, and a supplementary questionnaire was sent to each of the foundations whose return was selected." In the aggregate a response rate of close to 98 percent was realized.'2 10 Since the particular concern of the present study was private foundations, several community founda- tions which could be readily identified were omitted from the tabulation. 11 Copies of the Form 990-A (including instructions) and the supplemental questionnaire are attached as exhibits 1 and 2, respectively. 12 When the initial machine tabulation of results was run, the response rate to the questionnaire was about 96 percent. Those organizations from which a questionnaire was not received were tabulated in a special category called unclassified. The results of the initial run were adjusted in the very large category so as to shift several foundations from unclassified to the appropriate donor influence category on the basis of the questionnaire when it was received. Further, for several tabulations of market value asset data, the 2 percent of questionnaires received after the initial tabulations were taken into account. In the remaining cases where negligible effects would be involved, these last 2 percent of questionnaires received were not reallocated from the unclassified category tabulated. The total market value of assets of the unclassified category was calculated, where necessary, by raising the ledger values on stockholdings on the basis of market to ledger ratios for stockholdings on those foundations reporting market values. PAGENO="1113" 1111 78 TREASURY DEPARTMENT REPORT ON PRIVATE FOUNDATIONS The discussion in the following sections is based upon a tabulation )f the return forms and questionnaire results. The statistics collected n the sample have been blown up to provide an estimate of the data ~or all 15,000 foundations. In the tables the small foundations are bhose whose assets at the beginning of 1962 were under $100,000. The medium foundations had assets of $l00,O00 to $1 million. The Large foundations had assets of $1 mfflion to $10 mfflion. The very Large foundations had assets over $10 million. 5. The income of foundations In 1962 foundations in the aggregate had $1,065 million of total ncome after investment expenses, but including capital gains. Some naterial on the aggregate income of foundations is given in table 10. PAGENO="1114" TABLE 10.-Aggregate income of foundations Percent of donor-related influence over invest- ~ ment policy Unclassi- fled Id 525 ~- (2) $1 (2) 1 Id 10 0 ____ ____ ____ 13 ~ ____ ____ ____ ____ ~ 21 w [Dollar amounts in millions] Total Asset size Very large over $10,000,000 Large, $1,000,000 to $10,000,000 Medium, $100,000 to $1,000,000 Small under $100,000 50 per- cent or more Over 33 percent but not over 50 percent Over 20 percent but not over 33 percent Not over 20 percent Number of foundations 14,855 175 800 4,010 980 11,000 $1 47 125 18 30 28 810 $1 12 28 1 5 5 RECEIPTS 1. Gross profit from business activities 1 2. Interest - 3. DIvidends 4. Rents 5. Other ordinary income 6. Less expenses of earning gross Income 7. Net ordinary income 8. Gains from sale of assets, excluding inventory 9. Total net ordinary Income plus gains 10. Contributions received (net) $8 159 374 43 57 62 $3 104 268 21 39 35 $3 35 67 16 5 13 $1 18 36 5 12 11 - 8, $1.7 2.1 3.1 . 7 1.2 2.6 100 $1 8 18 9 3 8 2,430 $6 91 197 14 20 20 580 484 400 434 113 33 61 15 6. 2 1. 0 194 45 42 14 31 3 307 419 1, 065 833 834 290 146 251 76 235 7. 2 239 56 34 726 11. Total receipts (ordinary Income, capital gains and contribu- tions received) GRANTS FROM INCOME 12. Net 13. Cost of distribution 1,898 1,124 397 311 57. 64.6 536 775 30 86 18 52 238 964 693 64 478 36 139 16 68 11 ~ 8. 1 .8 233 20 40 4 30 2 381 38 14. Gross GRANTS FROM PRINCIPAL 15. Net 16. Cost of distribution 17. Gross 18. Total grants 757 514 155 8.9 253 44 418 239 16 32 1 68 5 111 7 28. 1 2. 5 174 4 11 2 6 3 41 5 46 255 33 73 118 30.6 178 12 8 1,012 547 228 197 39.5 431 56 40 464 I Gross sales or receipts from related and unrelated business activities less cost of goods Details may not add to totals due to rounding. sold or of operations. 2 Less than $500,000. Source: 1964 Treasury Department Survey of Private Foundations. PAGENO="1115" 1113 80 TREASURY DEPARTMENT REPORT ON PRIVATE FOUNDATIONS Some summary figures on income and outgo of all foundations are given below. The total is shown with and without the Ford Foundation. [Dollar amounts in millions] Total, including the Ford Foundation Total, excluding the Ford Foundation Net ordinary income Capital gain Total income $580 $484 $444 $157 $1,065 $757 $833 $255 $10,856 5.6 $15,470 3. 7 6. 5 $601 $534 $833 $255 $8,480 5.4 $12,430 3. 6 6.3 Grants out of current and accumulated income 1 Contributions received Grants out of principal 1 Net worth (ledger values) Rate of return (ordinary income) on ledger values (average beginning and end of year) (percent) Net worth (market values) Rate of return on market values (excluding capital gain) (percent) Rate of grants to market net worth (end of year) (percent) 1 Includes direct expenditure on charitable purposes and costs of making grants. The total income of all foundations in 1962 was greatly affected by the large capital gains realized by the Ford Foundation. If the Ford Foundation had realized capital gains only in the same relationship to total assets as all the other foundations, the aggregate income of foundations would have been reduced by almost $300 million to about $780 million. In the aggregate Foundations made grants of $693 million which were reported as coming out of income. These grants involved a distribution cost of $64 million, and consequently, $757 million was spent in making distributions to charitable beneficiaries from current and accumulated income, about $320 million less than the current income including capital gains. (About $230 million of this excess of current income including capital gains over distributions came from the Ford Foundation, where there were relatively larger capital gains as defined above of about $300 million.) During 1962, foundations received additional gifts of $833 mfflion. In addition, the returns indicate that $239 million of grants were made to charitable beneficiaries from principal. These grants involved a distribution cost of $16 million, and thus, $255 million was spent making distributions from principal. In the aggregate, all grants including distribution costs exceeded current ordinary income by about $430 mfflion. The following is offered as a way of getting these aggregate statistics into some general perspective; other perspectives are possible. In 1962, if capital appreciation is temporarily left aside, foundations earned ordinary income of $580 mfflion. At the same time the total outlay on grants, including distribution costs, was about $1,100 million, or about $520 million more than the total ordinary income. At the same time, foundations received contributions from outsiders of $833 million. Out of current ordinary income and contributions (i.e., excluding capital appreciation and realization of capital gains) about $300 million was set aside for growth of the foundations. This amounted to just about 2 percent of the net worth at the beginning of 1962. PAGENO="1116" 1114 TREASURY DEPARTMENT REPORT ON PRIVATE FOUNDATIONS 81 In addition to this current income, foundations were able to enjoy some appreciation of their wealth holdings. To take a longrun view of this, the matter of how much of this appreciation occurred or was realized in 1962 may be put aside in order to concentrate on the expected value of the appreciation itself. About two-thirds of the current market value of the assets of foundations was represented by investment in corporate stock. Over the long rim, it is not unrealistic to expect corporate stock to appreciate in value at a rate of about 5 percent a year.'3 With about two-thirds of the assets invested in common stock, the annual appreciation on total assets in the long run ought to be about two-thirds of 5 percent or about 3 percent a year. This when combined with the previously calculated 2 percent of net worth addition from current operations and contributions would indicate a rate of growth for the existing foundations of about 5 percent a year. This is itself in line with the common expectation of the growth in the gross national product, and if all foundations taken together grew at this rate, they would simply maintain their present relative importance compared to other wealthholders. They would heither get comparatively larger nor smaller. Foundations with their heavy investment in common stock would still gain if stock prices advance relative to other prices, or would lose ground if stock prices fall. As was seen in the prior analysis of the New York Stock Exchange data, foundations do not appear to have changed their relative share of stockholdings since 1950. It was also argued that much of the growth of foundations' share of total wealth relative to the rest of the society could be explained by the abnormal capital appreciation in their major investment, stocks, since World War II. The foregoing analysis of the 1962 income account does not purport by itself to show that foundations will not expand relative to the rest of the economy. It indicates that in a general way the 1962 income account seems to be consistent with the New York Stock Exchange data suggesting no significant growth of foundations in the aggregate rela- tive to the rest of the economy. With the kind of investment port- folio foundations have, normal capital appreciation will be about 3 percent a year. Foundations in the aggregate, by retaining in 1962 out of new contributions and income (other than capital gains) about 2 percent of their net worth, grew at a rate equivalent to the rest of the society.'4 It should be quickly added that much of the annual contribution is for newly established foundations. If foundations, taken in the aggregate, are not to grow at a faster rate than the rest of the society while new foundations are being formed, then existing foundations will have to grow at well under 5 percent a year. Also, it should be added that it is not here proposed that founda- tions in the aggregate should grow at exactly the same rate as the private sector. This analysis only goes to throwing some light on the rate of growth that does exist. 13 This is consistent with the aggregate value of corporations increasing in proportion to the aggregate profit of corporations, which ought to increase in proportion to the gross national product, which is corn- monly expected to increase at about 5 percent a year. 14 Clearly, many foundations accumulated more of this out of ordinary income and contributions. If we examine all foundations except Ford, the accumulation out of ordinary income plus contributions was 4 percent of market value. PAGENO="1117" 1115 82 TREASIJRY DEPARTMENT REPORT ON PRIVATE FOWThATIONS As will be seen from table 10, about two-thirds of the ordinary income of foundations came from dividends. The bulk of the re- mainder came from interest. Only 10 percent came from rents, and only 1 percent from the direct conduct of business activities. The relative shares of different sources were about the same for various size foundations with the exception of the small foundations where the dividend portion of the ordinary income was only about one-half, and the profit from direct business activity was about one~quarter. It should be observed in table 10 that the data with respect to small foundations are given in tenths of millions of dollars compared to the other statistics which are given in round millions of dollars. An additional decimal point is carried for the small foundation data only to give a better perspective of the relative size of various entries. 6. The wealth of foundations Table 11 summarizes some balance sheet and related wealth infor- mation for foundations on the basis of the 1964 Treasury survey. In terms of the values which foundations carry on their books, gen- erally the value when contributed or cost if acquired later, but some- times market, the total assets of foundations were $11.6 billion, and the net worth was $10.9 bfflion at the end of the 1962 reporting year. In terms of the foundations' estimates of market values of their assets, the total assets were $16.3 billion and net worth was $15.5 biffion. About two-thirds of this wealth was owned by the largest 175 foundations each of which exceeded in size $10 million measured by total assets at book (or ledger) value. The small foundations, those with assets under $100,000, comprising about 60 percent of all foundations, held slightly less than 2 percent of the assets of all foundations. PAGENO="1118" TABLE 11.-Assets of foundations, beginning of tax year 1962 1 Less than $0.5 million. 2 This Is almost all bonds. `.3 Percent of donor-related Influence over investment policy Unclassified `.~ 525 ~ ______ ______ ______ ______ ______ `.3 00 z $14 4 00 (1) 00 1 ~ 103 0 35 00 138 `.~ 0 1 `~d (1) 136 ______ ______ ______ ______ _______ 00 [Dollar amounts in millions] Total Asset size Very large, over $10,000,000 Large, $1,000,000 to $10,000,000 Medium, $100,000 to $1,000,000 Small, under $100,000 50 percent or more Over 33 percent, not over 50 percent Over 20 percent, not over 33 percent Not over 20 percent Number of foundations 14,865 175 800 4,910 8,980 11,000 810 100 2,430 ASSETS 1, Cash 2. Accounts receivable LEDGER VALUES, END OF THE YEAR $443 50 189 149 6,529 5, 119 11, 648 17 524 137 114 10, 856 $110 12 118 63 4,409 3, 174 7, 583 8 488 73 53 6,961 $124 9 30 61 1, 237 1, 095 2, 332 6 31 32 42 2,221 $166 25 35 19 783 744 1, 527 3 5 27 15 1,477 $43 4 6 6 100 106 206 (1) (1) 5 4 197 $268 32 117 60 2,620 1, 728 4, 348 8 75 101 44 4, 120 $31 1 32 13 488 351 839 1 10 4 3 821 $21 (1) 18 (1) 249 266 515 1 20 11 2 481 $100 14 21 77 3, 072 2, 737 5,809 7 419 22 64 5,297 3. Notes receivable 4. Mortgage loans . 5. Corporation stock~~ - 6. Other assets 2 7. Total assets - LIABILITIES 8. Accounts payable 9. Grants payable 10. Bonds, etc., payable 11. Other liabilities . 12. Net worth (L) 13. Corporation stock (M) 14. Total assets (M) 15. Net worth (M) MARKET VALUES, END OF THE YEAR 10,896 8,050 1,783 16, 262 11, 331 2,940 15,470 10, 709 2,829 955 1, 773 1,723 108 218 209 3,880 5, 666 5, 438 860 1, 270 1,252 668 945 911 5,331 8, 180 7,668 Source: 1964 Treasury Department Survey of Private Foundations. 199 PAGENO="1119" 1117 ~4 TREASURY DEPARTMENT REPORT ON PRIVATE FOUNDATIONS In slightly over two-thirds of all foundations by number, the donor r persons related in some way to the donor made up 50 percent of those trustees who take some voice in investment policy, including the lecision of how much of the currently available funds will be re- iivested and how much will be applied to charitable purposes. (A ~rustee whose sole participation involves selecting which charitable ictivity gets the money was not taken into account.) Foundations ~vere classified by the portion of trustees who participated in invest- nent policy, as defined above, who were related in any way to the lonor, including his lawyers, his accountant, distant relatives, and ~mpioyees. The number in each classification would be affected very little if a narrower definition of donor-related trustee were itilized, since in most cases the influence was exercised through rnmediate family members on the board. In dollar terms the ~oundations with less than 20 percent influence were slightly more mportant than the foundations with 50 percent or more donor nfluence because of the presence of some very large foundations, such is Ford in the former category. Foundations have extremely little indebtedness. Excluding grants Dayable, the total liabilities of foundations amount to barely more than ~ percent of ledger assets. ~. Certain ratios with respect to foundations Table 12 classifies the foundations by certain ratios involving ~rants, income, and assets. The table gives estimated figures for all ~oundations, that is, the sample portion of the survey was blown up. I'he first four banks of the table show the ratio of grants to various ;ources of income. The next four banks deal with various ratios of ncome to net worth. The last two show ratios of grants made to ~et worth. In the aggregate the average ratio of ordinary income net) to book value was 5.6 percent and to market value 3.7 percent. The average rates of total income (ordinary income plus capital ~ains) to book and market values, respectively, were 10.6 percent md 6.8 percent. Grants were on the average 172 percent of ordinary ncome and 94 percent of total income. They were equal to 120 Dercent of contributions received and 53 percent of total sources total income plus contributions received). On the average, grants ~rere 10 percent of book net worth and 6.4 percent of market net ~rorth 87-444 0-68-7 1 PAGENO="1120" 1118 TREASURY DEPARTME~1~ REPORT ON PRIVATE FOUNDATIONS 85 PAGENO="1121" 1119 86 TREASURY DEPARTM1~NT REPOET ON PRIVATE FOtINDATION~ CC 0000CC ~CCCC c~CC -0 ~ CC CC CC CC CC CC CC CC CC CC CC CC CC CC CC CC CC CC CC CC E CC) C- 0 CC) CCC 0 CC) CC) CC CC 000000 0000000 0000000 C)~CCS ~CCCC ~CC- CC C) ~CC - 0 C) 0 0 CC ~ ,0 0 - 0 C) - CCCCCCCCCCCC CCCCCCCCCCCCCC o ~0CC0 C) CC) CC CC COO 0 CC) C~ CC CC CC 0 $- Z~ CC j ~ _______ ________ ________ CCCCCCCCCCCC CCCCOCCCCCCCC CCC CCCCCCCCCC ~-~-CC) CC CC CC) 010CC) c:3 CCCCCCCCCCCC CCCCCC000CC CCCCCCCCCCCCCC CCC- 000(0 00(0 C-CC 0CC) CCCCC,-CCC!C ~ :~ :~ -9 :0 C) ~ 0CC)' .~ :0 *~ ,0 ~ ::~S ~ j 0000CCOC 0C~~~C)CC0 CCC)C)0,,~ a~CCE ~C-CC) 0 - 0 0 C) CC ~C) - ~0000~ ~0OO0~~ -~ E~0-~0oZ 0 PAGENO="1122" 1120 TREASURY DEPARTMENI' REPORT ON PRIVATE FOUNDATIONS 87 C) C) C) C) C) C) C) C) C) C) C) C) C) C) C) C) C) C) C) C) C) C) CC ~ ~ CC C) C) ~ CC CC CC C) ~ C) C) ~- C) C) CC CCC)C) C) C) C) C) C) C) C) C) C) C) C) C) C) C) C) C) C) C) C) C) C) C) ~ CC CC CC C) C) )Q C) C) C) CCC) C) C) C) C) C) C) C) C) - `~COOC~ ~COCCC~0 OCOC~ OOCC~~ ©C),-)CCC)OZ OC)~C)C)CZ C),-CCC)OZ C)~CCC)OZ C PAGENO="1123" 1121 ~8 TREASURY DEPARTMENT REPORT ON PRIVATE FOUNDATIONS Frequency of certain transactions Table 13 summarizes the answers to a number of questions asked n the Form 990-A concerning the occurrence of various transactions etween the foundation and a substantial donor, and various persons elated to the donor. Under present law, the transactions involved in question 2 might be onsidered prohibited transactions, a cause for denial of the charitable xemption, only if the price involved in the transaction was not an rm's-length price. The question is designed to call the attention of revenue agent to a particular transaction that might need to be in- estigated further. A foundation answering "yes" to any part of his question does not indict itself as having forfeited its exemption, ut it is possible that some of these transactions go unreported in rder to avoid having questions raised by revenue agents. Because of his possibility the answers to question 2 on table 13 may understate he frequency of these transactions. The answers to question 3 on table 13 are in response to a question n the supplemental questionnaire, relating to the occurrence of trans- ctions between the foundation and its officials (and parties related o such officials). Present law does not contain a specific prohibition n these types of transactions. Occurrence of one of the listed trans- ctions between a foundation and an official, or a party related to an fficial of the foundation would be indicated by a "yes" answer to hat part of question 3. Question 4 dealing with holdings of 10 percent or more of any class f stock was also taken from the supplemental questionnaire. TABLE 13--Responses to questions concerning certain transactions, etc. 1. Did you hold any real property for rental purposes with respect to which aere is an indebtedness incurred in acquiring the property or in making improve- ients thereto or which was acquired subject to a mortgage or similar lien? [In percent] Yes No No answer otal 1.2 97.1 0.7 erylarge 3.7 92.1 4.3 arge [edium 3.5 2.6 95.5 96.4 1.0 1.0 nail .2 99.4 .4 onor influence 50 percent or over onor influence under 50 percent, over 20 percent 1. 1 .4 94. 6 98.3 4.3 1.2 onor influence not over 20 percent 2. 1 96. 0 1.9 nclassifled 2.3 97.7 0 PAGENO="1124" 1122 TREASURY DEPARTMENT REPORT ON PRIVATE FOUNDATIONS 89 2. After July 1, 1950, did- The creator of your organization, or A contributor to your organization, or A brother or sister (whole or half blood), spouse, ancestor, or lineal descend- ant of such creator or contributor, or - A corporation owned (50 percent or more of voting stock or 50 percent oi more of value of all stock) directly or indirectly by such creator or contributoi (a) Borrow any part of your income or corpus? [In percent] Yes No No answer Total verylarge Large . Medium Small Donor influence 50 percent or over Donor influence under 50 percent, over 20 percent Donor influence not over 20 percent Unclassifled~ 0.9 1.2 1.5 1.6 .4 1.3 . 1 .8 0 98.2 94.4 96.0 97.2 99.2 98. 1 98.7 .97. 0 100.0 0.1 41 2.~ . 1.1 2. 1 0 (b) Receive any compensation for personal services from you? [In percent] Yes 1.4 No 97.7 No answer Total Very large Large Medium Small Donor influence 50 percent or over Donor influence under 50 percent, over 20 percent Donor influence not over 20 percent Unclassified 5. 5 4.0 2.4 4 1. 4 3. 8 . 7 .2 90.3 94.0 96.4 99.0 . 98. 0 94.9 97.2 99.8 4. 2. 1. 2.. 0 (c) Have any part of your services or assets madd~available to him? [In percent] Yes No No answer Total Very large Large - Medium . Small - Donor influence 50 percent or over Donor influence under 50 percent, over 20 percent Donor influence not over 20 percent Unclassified 0.2 1. 2 1.0 .4 0 . 2 .4 (1) 0 98.8 93.9 97. 0 98.4 99.3 99. 1 98.3 97.9 100. 0 1. 4. 2. 1. . . 1. 2. 0 1 Less than 0.05 percent. (d) Purchase any securities or other property from you? [In percent] Yes 1. 4 No 97.7 No answer 0. Total Very large Large Medium Small Donor influence 50 percent or over Donor influence under 50 percent. over 20 percent Donor influence not over 20 percent Unclassified -.--------------------.---------------------------- 2.4 4. 5 2. 6 .4 1.9 . 5 0 .2 92.7 93. 5 96. 4 99.2 97. 5 98.3 97.9 98.2 4. 2. 1. . . 1. 2. 0 PAGENO="1125" 1123 90 TREASURY DEPARTME»=~P REPORT ON PRIVATE FOUNDATIONS 2. (e) Sell any securities or other property to you? [In percent] Yes No No answer Total . Very large . Large . Medium . Small Donor influence 50 percent or over . Donor influence under 50 percent, over 20 percent Donor influence not over 20 percent . Unclassified . 4.2 4.9 7. 5 5.9 2.9 5.0 5.3 .8 .2 94.9 90.2 92.5 92.7 96. 7 94.3 93.5 97.0 99.8 0.9 4.9 2.0 1.4 .4 .7 1.2 2. 1 0 (f) Receive any of your income or corpus in other transactions? [In percent] Yes No No answer Total Very large Large Medium Small Donor influence 50 percent or over Donor influence under 50 percent, over 20 percent Donor influence not over 20 percent Unclassified 0.4 1.8 1.5 1.0 .0 .4 .4 .6 0 98.7 93.3 96.0 97.6 99.6 98.9 98.3 97.3 100.0 0.9 4.9 2.5 1.4 .4 .7 1.2 2.1 0 3. During the period covered by your 1962 Form 990-A, did- Any of the officials of your organization, or The brothers, sisters, spouses, ancestors, or lineal descendants of the officials, or 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 Partnerships of other unincorporated business ventures in which the officials owned 50 percent or more of the capital interests or profits interests- (a) Borrow any part of your cash, securities, or other property? [In percent] Yes No No answer Total Very large Large Medium Small Donor influence 50 percent or over Donor influence under 50 percent, over 20 percent Donor influence not over 20 percent Unclassified 0.3 3.0 0 .4 .2 .4 .2 .1 0 94.7 94.5 97.0 95.1 94.2 98.2 99.8 96.9 0 1 5. 0 2.4 3.0 4.5 5.6 1.4 0 3.1 100.0 1 Includes cases where no questionnaire was received. (b) Lend any cash, securities, or other property to you? [In percent] Yes No No answer Total Very large Large Medium Small Donor influence 50 percent or over Donor influence under 50 percent, over 20 percent Donor influence not over 20 percent Unclassified 1.6 .2 1. 5 2.0 1.3 2.0 1. 1 (2) 0 93.5 97.4 95. 5 93.3 93.4 96.7 89.9 96. 9 0 15.0 2.4 3. 0 ~*7 5.3 1.3 0 3. 1 100. 0 1 Includes cases where no questionnaire was received. 2 Less than 0.05 percent. PAGENO="1126" 1124 TREASURY DEPARTMENT REPORT ON PRIVATE FOUNDATIONS 91 3. (c) Have any part of your services or assets (other than compensation for personal services reported on schedule A of your 1962 Form 990-A) made available to them? [In Percent] Yes No No answer `5.1 2.4 3.0 ~ 5.6 1.3 0 3. 9 100.0 Total Verylarge Large Medium - Small Donor influence 50 percent or over Donor influence under 50 percent, over 20 percent Donor influence not over 20 percent Unclassified 0.2 .1 .5 ~ 0 .2 . 4 0 0 94.7 97.5 96.5 ~ 94.4 98. 5 99. 6 96. 1 0 Includes cases where no questionnaire was received. (d) Purchase any securities or other property from you? [In percent] Yes No No answer Total Very large . Large . Medium Small . Donor influence 50 percent or over Donor influence under 50 percent, over 20 percent Donor influence not over 20 percent Unclassified . 0.6 0 1. 5 . 6 .4 . 7 0 . 4 0 94.3 97. 6 95. 5 94. 5 94. 3 97.8 100. 0 96. 9 0 15.0 2. 4 3. 0 4.9 5.3 1. 5 0 2. 6 100. 0 I Includes cases where no questionnaire was received. (e) Sell any securities or other property to you? [In percent] Yes No No answer Total . Very large Large Medium Small Donor influence 50 percent or over Donor influence under 50 percent, over 20 percent Donor influence not over 20 percent Unclassified 1.1 3.0 0 1. 6 .9 1. 2 . 2 1. 2 0 93.9 94. 6 97.0 93. 5 93.8 97. 3 99. 8 96. 1 0 15.0 2. 4 3.0 4.9 5.3 1. 5 0 2. 6 100. 0 `Includes cases where no questionnaire was received. (f) Receive any of your cash, securities, or other property in other transac- tions? [In percent] Yes No No answer Total Very large Large Medium Small Donor influence 50 percent or over Donor influence under 50 percent, over 20 percent Donor influence not over 20 percent Unclassified 0. 5 1.2 . 5 . 2 . 7 . 7 . 1 0 0 94 5 96. 4 96. 5 94. 9 94. 0 97. 9 99. 9 96. 9 0 1 5. 0 2. 4 3.0 4.9 5.3 1. 4 0 3. 1 100. 0 1 Includes cases where no questionnaire was received. PAGENO="1127" 1125 )2 TREASURY DEPARTMEN1~ REPORT ON PRIVATE FOUNDATIONS 4. During the period covered by your 1962 Form 990-A, did your organization Lold 10 percent or more of any class of stock in any corporation? [In percent] Yes No No answer ~otal 7.3 88.9 3.8 Very large . 44. 6 20. 4 11.0 53. 0 77.5 85. 1 2.4 2. 0 3.9 `arge . ledium . mall . 3.3 8. 5 6.9 3.0 0 92.7 91.2 93. 1 96.2 0 4.0 .3 0 .7 100.0 )onor influence 50 percent or over . )onor influence under 50 percent, over 20 percent )onor influence not over 20 percent Jnclassifled - Source: 1964 Treasury Department Survey of Private Foundations. ~. Foundation payout ratios to assets Tables 14 and 15 expand upon the information contained in table L2 as to the relationships between grants and net worth of foundations md between ordinary income and net worth. Table 14 shows the )ercentage of foundations whose total grants are equal to or less han various percentages of net worth. In the top line, for example, he table shows that 10 percent of all foundations in 1962 paid out ms grants, including the cost of distributing grants, 1 percent or less ~f their market net worth. An additional 12 percent of foundations )aid out more than 1 percent but less than 3 percent of market net vorth. Combining these groups, as is done in the table, 22 percent of dl foundations paid out 3 percent or less of their market net worth. ~`orty percent of all foundations paid out as grants 6 percent or less )f their market net worth. It would appear reasonable to interpolate )etween these figures, and thus it could be estimated that 25 percent )f all foundations paid out as grants less than 33~2 percent of market set worth. These ratios of grants to net worth are tabulated for 7arious degrees of donor influence and for various sizes of foundations. Table 15 provides similar information about the relationship between )rdinary income and net worth. Of all foundations, 3 percent had no )rdinary income. An additional 26 percent had ordinary income )etween zero and 1 percent of market net worth, making 29 percent hat had an ordinary income rate of return of 1 percent or less. A otal of 57 percent had a rate of 3 percent or less, and only 10 percent sad a return of over 6 percent. Generally, foundations with high ~onor influence had lower rates of return than other foundations. imilarly, large foundations had better rates of return than small nes. (Many small foundations, which operate as conduits, normally told their assets in cash.) PAGENO="1128" 1126 TREASURY DEPARTMENT REPORT ON PRIVATE FOUNDATIONS 93 TABLE 14.-Percent of foundations in various categories whose total grants were less than certain percentages of net worth Foundations whose grants were less than- 1 per- 3 per- 6 per- 10 per- cent- cent- cent- cent- 1 per- 3 per- 6 per- 10 per- cent- cent- cent- cent- of market net worth of book net worth All foundations Foundations with donor-related influence- Over 50 percent 33 percent to 50 percent 20 percent to 33 percent 0 to 20 percent Very large Large Medium Small All foundations except small: Total Foundations with donor-related influence- Over SOpercent 20 percent to 50 percent 0 to 20 percent 10 7 15 21 21 5 4 6 12 5 4 10 8 22 18 35 43 37 29 24 22 21 22 20 39 25 40 34 59 57 63 76 57 50 33 51 48 68 60 1 52 47 64 59 72 93 76 66 41 68 67 74 72 9 7 15 21 19 5 2 6 12 5 4 10 8 19 16 28 41 30 14 14 19 20 18 16 26 19 38 33 51 52 38 54 49 48 32 48 45 57 56 46 61 58 68 81 70 65 40 66 1 The remaining 48 percent of foundations contibuted 10 percent or more of their market net worth, 60 percent contributed 6 percent or more, 78 percent contributed 3 percent or more, etc. Source: 1964 Treasury Department Survey of Private Foundations. TABLE 15.-Percent of foundations in various categories whose ordinary incomes were less than certain percentages of market net worth Foundations whose ordinary Incomes were less than- 0 per- 1 per- 3 per- 6 per- 10 per- cent- cent- cent- cent- cent- of market net worth All foundations 3 2 3 0 1 4 2 29 31 19 6 5 13 40 57 59 45 31 32 44 66 90 91 87 89 89 91 90 94 94 96 93 98 93 95 93 Foundations with donor-related influence- Over 50 percent 33 percent to 50 percent 20 percent to 33 percent Under 20 percent Very large foundations Large foundations Medium foundations Small foundations 64 72 71 Source: 1964 Treasury Department Survey of Private Foundations. A certain number of foundations are so-called conduit foundations which are organized simply to receive contributions and more or less immediately distribute these to charitable recipients. These founda- tions are likely to have very little in the way of net worth, and almost necessarily their ratio of total grants to net worth would be very high. One device for separating out many of the conduit foundations is to eliminate from consideration all foundations with total assets of less than $100,000. The resulting calculations are shown on the bottom four lines of table 14. Looking at the line for the total of all foundations with assets of over $100,000, it wifi be seen that the percentage of foundations that distributed in grants less than 1 percent 50 PAGENO="1129" 1127 94 TREASURY DEPART~ENT REPORT ON PRIVATE FOUNDATIONS of market net worth is only 5 percent. The percentage of foundations distributing less than 3 percent of market net worth is 22 percent whether or not the small foundations are included. The percentage of foundations distributing less than 6 percent of net worth rises from 40 to 51 percent when the small foundations are excluded. The percentage distributing less than 10 percent of net worth rises from 52 to 68 percent when the small foundations are excluded. Another attempt was made to eliminate the influence of conduit foundations on asset payout ratios. This was done by preparing an analysis of the data limited only to those foundations that reported no contributions received in 1962. As in the prior tabulations, the sample results for large, medium, and small foundations with no contributions have been blown up. It is estimated that about one- third of foundations had no contributions received in 1962. Since the Ford Foundation would be included in this category, and would tend to dominate the figures, table 16, which presents some summary figures on foundations receiving no contributions in 1962, contains the data excluding the Ford Foundation. This subsample, even though it is based only on about 400 foundation returns, is quite useful in illustrating the behavior pattern of foundations with respect to the handling of income. TABLE 16.-Aggregate data on foundations reporting no contributions received in 196~d [Dollar amounts in millions] Foundations with no contributions received in 1962 Percent of donor-related influence over investment policy All except Ford Ford Over 50 percent Over 33 percent- not over 50 percent trncer 30 percent, all except Ford Number of foundations Net ordinary income (after expenses) - Capitalgain Totalincome Grants from current and accumulated income 1 Grants from capital 1 Totalgrants Net worth (ledger) Networth (market) 4,595 1 3, 155 333 1,107 $149.8 45.7 $136.4 327.2 $56.4 20.4 $10. 7 4.9 $82. 7 20.3 195.5 463.6 76.8 15.6 103.0 158.7 26.5 233.4 66. 8 15.0 12. 6 1.2 79. 4 10.3 185.2 2, 723. 0 4,010.0 233.4 2,217.0 3,114.0 81.8 1,051. 0 1,612.0 13.8 234. 0 342.0 89.7 1,437. 0 2,056.0 1 Includes cost of making grants. Source: 1964 Treasury Department Survey of Private Foundations. It is interesting that in the aggregate, foundations that received no contributions still made grants in excess of current income. An appreciable amount of grants were presumably in excess of accumulated income and were therefore marked as coming from capital. In the aggregate, grants were not as large as the sum of ordinary income and capital gains. In the aggregate figures the volume of grants relative to income was higher for those foundations where donor influence exceeded 50 percent than it was for others. PAGENO="1130" 1128 TREASURY DEPARTMENT REPORT ON PRIVATE FOUNDATIONS 95 Table 17 shows some percentage calculations based on the calcula- tion of ratios between grants to net worth and ordinary income to net worth for those foundations receiving no current contributions in 1962. As would be expected, a higher percentage of these foundations would be affected by a requirement that grants be a certain percentage of net worth than was true when this requirement was tested against all foundations. In this case about 40 percent of these foundations would be affected by a 33/~ percent payout requirement while the percentage was about 25 percent for all foundations. It might be noted also that the earnings experience is somewhat better when one looks at foundations without contributions because, by and large, less of the assets tend to be invested in highly liquid forms as might be appropriate where the foundation is serving only as a conduit. Most likely about 40 percent of these foundations have a current earnings rate in terms of ordinary income in excess of 33'~ percent of market net worth. It would be expected that those foundations whose rate of return on net worth was relatively high should pretty much correspond to those foundations whose ratio of grants to net worth was also high. Nevertheless there would be some of the foundations whose rate of return was in excess of 33~ percent who would not have made a correspondingly high ratio of grants to net worth. The combined test of a volume of grants equal to the higher of 33'~ percent of market net worth or ordinary income might affect about 50 percent of these foundations. TABLE 17.-Percent of foundations receiving no current contributions whose total grants and ordinary income were less than certain percentages of net worth Foundations whose grants were less than- Foundations whose ordinary income was less than- 1 per- 3 per- 6 per- 10 per- cent- cent- cent- cent- 0 1 per- 3 per- 6 per- 10 per. cent- cent- cent- cent- of market net worth of market net worth All foundationsreceiving no current contributions Foundations with no con- tributions received whose donor related influence was- over 50 percenL 33 percent to 50 percent 0 to 33 percent Foundations with assets over $100,000 with no con- tributions received whose donor related influence was- over 50 percent_ 33 percent to 50 percent_ 0 to 33 peacent 19 17 27 24 8 5 10 35 29 39 49 24 38 33 59 49 67 84 62 74 78 69 61 82 98 77 79 87 2 2 6 1 3 0 2 24 29 20 11 10 5 5 49 53 40 41 36 42 25 87 88 88 84 91 99 87 92 92 94 92 94 100 94 Source: 1964 TreasuryDepartmentSurvey of Private Foundations. Even in this group of foundations with no contributions received in 1962, it is likely that some conduit foundations are included, that is, foundations which were distributing contributions received in 1961. Including these in the tabulations continues to distort the relationship between capital and payout. (Nearly half of the small foundations with donor influence over 50 percent distributed over 10 PAGENO="1131" 1129 96 TREASURY DEPARTMENT REPORT ON PRIVATE FOUNDATIONS percent of net worth in grants and thus apparently got contributions in previous years. None of the small foundations with donor influence less than 33 percent without contributions showed this pattern of contributions over 10 percent of net worth.) A more revealing set of figures on the relationship of grants to market net worth for founda- tions not receiving contributions is shown in the bottom bank of table 17 which eliminates foundations receiving contributions in 1962 and foundations with assets under $100,000. In these figures founda- tions with high donor-related influence show a slightly better payout performance, despite showing a somewhat poorer record on earning income. The differences in payout, however, are quite small, and at this point the sample of foundations receiving no contributions in 1962 and having assets over $100,000 is fairly small. The sample includes 142 foundations in the over-50-percent category, 31 in the 33- to 50-percent category, and 117 in the under-33-percent category. It is not clear why, in these various sets of ratios, the foundations with a high proportion of donor-related trustees appear to show a somewhat better payout performance. It may be that this group contains many situations where future contributions from the donor or his family are stifi expected which induces the trustees to be more liberal with available assets. 10. Foundation involvement in business Table 18 lists those foundations with assets of $10 million or more which own 20 percent or more of the stock of business corporations. The table sets forth the foundations' holding of the stock of the businesses as of the end of 1962, cash dividends paid on such stock in 1962, yield, and the total assets of the foundations as of the end of 1962. This table was prepared from data obtained from the Form ~90-A and supplemental questionnaire. PAGENO="1132" TABLE 18.-Ownership of more than 20 percent of the stock of business corporations by foundations with assets $10 million or more [In millions of dollars] . Name of foundation Stockholding, end of 1962 Approximate value of stock, end of 1962 1962 cash dividends I. Donor and donor-related parties represent 3~ or more of foundation's trustees, etc., who control invest- ment policy: Alcoa foundation - Winfield Baird foundation Charles Ulrick and Josephine Bay Foundation.~.. ~ Yield Total assets of founda- end of tion, 1962 Amon G. Carter Foundation De :Rance, Inc El Pomar Foundation General Electric Foundation Herrick Foundation Houston Endowment, Inc Kresge foundation - LnTourneau foundation Lilly Endowment, Inc 24 percent of Nalco Chemical Co. common stock 24 percent of Skyline Oil Co. common stock 73 percent of voting power (through common and voting pre- ferred stock) of Connecticut Railway and Lighting Co. 39 percent of Imperial Cotton Mills Co. common stock 42 percent of Social Circle Cotton Mills Co. common stock -- - 46 percent of Amazon Cotton Mills Co. common stock Preferred and nonvoting common stock of Concord Telephone Co.; foundation's holding represents 33 percent of value of all shares of Concord Telephone Co. stock. 100 percent of Carter Foundation Production Co. common stock. 50 percent of Citizens Hotel Corp. common stock 23 percent of Ralston Purina Co. common stock 47 percent of Miller Brewing Co. common stock 100 percent of common stock and 86 percent of preferred stock of El Pomar Investment Co. 100 percent of Broadmoor Drug Co. common stock 30 percent of Stevens Paper Mills, Inc., common stock 23 percent of Tecumseh Products Co. common stock 100 percent of Cpmmercial & Industrial Life Insurance Co. common stock. 100 percent of Commerce Co. common stock 94 percent of Commerce Co. preferred stock 51 percent of Airline State Bank, Houston, common stock 42 percent of Reagan State Bank Houston, common stock - - - 26 percent of National Bank of (iommerce, Houston common stock. 100 percent of Kresge-Newark, Inc. common stock 34 percent of S. S. Kresge Co. common stock 86 percent of R. G. LeTourneau, Inc. common stock 45 percent of Eli Lfflyand Co. commonstock Nonvoting common stock of Eli Lilly and Co.; foundation's holding of nonvoting common stock represents 7 percent of value of all shares of Eli Lilly and Co. stock. $0.58 .36 .01 .01 .03 06 0 0 2.43 .44 66 0 .04 1.0 .03 - 12 .11 0 0 .42 .00 2.84 0 3.39 1.32 2 $26. 1 ~ 2. 1 ~6.6 8.6 ~ .6 31.0 8~1.0 21.5 2.6 2 97~4 215.0 2 50. 8 2.1 31.3 2 25. 1 2 1. 5 2 15. 2 2 2. 8 2*5 2*5 227.8 3 3. 0 2 40. 1 34.7 2108.1 242.0 00 d I~j 0 0 I I. Percent 2.2 0 5.5 1.7 L 7 3.0 6.0 0 0 2.5 2.9 1.3 0 3. 1 4.0 2.0 .8 3.9 0 0 1.5 0 7.1 0 3.1 3. 1 2 $43*3 17.5 ~ 10. 1 2 25. 2 2 33.2 125. 2 215.0 2 60. 5 2 25. 0 2 25. 2 2 90. 4 ~11.6 2151.5 See foctnotes at:end of table, p. 99. PAGENO="1133" .LA~IJ~ L~.UW7&CT8flip oy more uian ~u percent oj use 8tOCIf of bUsifle88 corporation8 by foundation8 with aS8et8 ~1O million or more `-Continued Name of foundation Stockholding, end of 1962 Approximate value of stock, end of 1962 1962 cash dividends Yield Total assets of founda.. tion, end of 1962 I. Donor and donor-related parties, reprcsent 3'~ or more of foundation's trustees, etc., who control investment policy-Continued Moody foundation Charles Stewart Mott Foundation Sid W. Richardson Foundation.. Rogosln Foundation Scriven Foundation William Volker Fund Wifflam K. Warren Foundation Woods Charitable Fund II. Donor and donor-related partIes represent more than 3~, but less than 3~ of foundation's trustees, etc., who control investment policy: Louis Calder Foundation John A. Hartford Foundation Wffliam Randolph Hearst Foundation Charles F. Kettering Foundation Samuel Roberts Noble Foundation.. 50 percent of Gal-Tex Hotel Corp. common stock 50 percent of Silver Lake Ranches Co. common stock 100 percent of Texas National Hotel Co. common stock 35 percent of American National Insurance Co. common stocL 44 percent of Hotel Wade Hampton, Inc., common stock 40 percent of Moody National Bank common stock 35 percent of National Hotel Co. common stock 100 percent of D. M. Christian Co. common stock 100 percent of 3. W. Knapp Co. common stock 100 percent of Smith Bridgman & Co. common stock 100 percent of L. W. Robinson Co. common stock 61 percent of Wayne Oakland Bank common stock 48 percent of TJ.S. Sugar Corp. common stock 100 percent of Richardson Oils, Inc. common stock 75 percent of Sid W. Richardson Carbon & Gasoline Co. com- mon stock. 69 percent of Texas State Network, Inc., common stock 49 percent of Citizens Hotel Co. common stock 23 percent of Beaunit Corp. common stock 100 percent of Leatherstocking Corp. capital stock 23 percent of Joanna Western Mills Co. common stock 34 percent of Natural Gasoline Co. common stock 24 percent of Sahara Coal Co. common stock Preferred stock of Sahara Coal Co.; foundation's holding of preferred stock represents 14 percent of value of all shares of Sahara Coal Co. stock. 30 percent of Perkins-Goothvin common stock 33 percent of Great A & P Tea Co. common stock Nonvoting common stock of Hearst Corp.; foundation's hold- ing represents 54 percent of value of all shares of Hearst Corp. stock. 30 percent of C. F. Kettering, Inc., common stock 100 percent of Noble Drilling Corp. common stock 100 percent of Samedan Oil Co. common stock 100 percent of B. F. Walker, Inc., common stock 50 percent of Lenox Square, Inc., common stock 75 percent of preferred stock of Lenox Square, Inc.; founda- tion's holding of preferred stock represents 25 percent of value of all classes of Lenox Square. Inc., stock. t~j 0 `-3 0 z `$1.4 37 81.3 2167.3 3~3 5 2. 5 3~4 ~ 4. 7 ~ 3. 2 81.0 27.6 2 23. 7 `11.7 37~4 ~1.3 37 2 9~ 7 23.0 ~ 1.5 2.3 `2. 1 `2.3 2 9. 1 2314.3 8 43. 6 2 62.8 27~3 2 17.0 8*5 21.0 8.8 0 0 0 $2.42 .00 .01 .00 .00 .00 .00 .00 .00 .75 0 0 0 0 .08 .01 .48 12 02 10. 34 .15 2.79 0 0 0 0 0 Percent .4 .3 .2 0 0 5. 5 5.3 .4 22. 9 6.2 .2 3.3 .3 4.4 0 0 0 0 0 2 $189. 3 2112.3 2 95.0 2 10. 5 2 14. 4 2 14.3 2 35. 5 2 13.4 2 46. 1 2 360. 2 `43.8 2 74.0 2 32.8 PAGENO="1134" III. Donor and donor-related parties represent more than ~, but not more than ~á of foundation's trustees, etc. who control investment policy: Blakely-Braniff Foundation Duke Endowment Fred L. Emerson Foundation Lettie Pate Evans Foundation Louis W. & Maud Hill Family Foundation Samuel H. Kress Foundation Olin Foundation IV. Donor and donor-related parties represent ~8 or less of foundation's trustees, etc. who control Invest- ment policy: Altman Foundation Callaway Foundation Samuel S. Fels Fund Ford Foundation Josephine B. Gordon Foundation Gulf Oil Foundation Charles Hayden Foundation Independence Foundation W. K. Kellogg Foundation (and W. K. Kellogg Foundation Trust). Pew Memorial Trust Pittsburgh Plate Glass Foundation Research Corp Alexander & Margaret Stewart Trust Robert A. Welch Foundation 100 percent of Girard Insurance Group common stock 57 percent of Duke Power Co. common stock 82 percent of Duke Power Co. preferred stock 22 percent of Piedmont & Northern Ry. Co. common stock -- 100 percent of Duncar Corp. common stock 100 percent of Euna Jettick Corp. capital stock 42 percent of Whitehead Holding Co. common stock 100 percent of Hill Foundation Co. common stock 42 percent of S. H. Kress & Co. common stock 100 percent of Federal Cartridge Corp. common stock 95 percent of B. Altman & Co. capital stock 100 percent of Callaway Mills Co. common stock 86 percent of Fels & Co. common stock Class A (nonvoting) stock of Ford Motor Co.; foundation's holding of class A stock represents 46 percent of the value of all shares of Ford Motor Co. stock. 100 percent of Gordon Baking Co. common stock 100 percent of Pontiac Refining Co. common stock 100 percent of Hayfund, Inc., capital stock Preferred nonvoting stock In Band-It, Inc.; foundation's hold- ing of preferred stock represents 79 percent of value of all shares of Band-It, Inc., stock. 45 percent of Kellogg Co. preferred stock 51 percent of Kellogg Co. common stock 100 percent of Minerals Development Co. common stock 21 percent of Sun Oil Co. common stock 46 percent of Cavanaugh Co. common stock 100 percent of Research Cottrell, Inc. common stock 47 percent of Midland Building Industries, Inc., common stock. 50 percent of Midland Building Industries, Inc., preferred stock. 70 percent of Mound Co. common stock 64 percent of the preferred stock of Mound Co.; foundation's holding of preferred stock represents 28 percent of value of all shares of Mound Co. stock. 212.0 2 366.6 2~ 4 22.3 2 9 2 4 2 7.5 21.5 218.0 2 14.3 2 35. 1 2377 2 2.9 22,095.2 2 9.0 $32.2 24.6 2 334.6 21.5 2 138.2 3*4 8 2.9 2 1. 2 2~3 81.2 0 11.1 .02 .13 .02 0 .58 0 .25 1.02 .46 .00 .02 91.15 .03 .75 .00 .05 19 7.2 .99 3.10 0 8 01 .05 .04 0 3.0 5.0 5.7 2.2 0 7. 7 0 1.4 7.1 1.3 0 .7 4. 4 .3 2.3 0 6.3 4. 1 2.2 66.0 2.2 0 0 0 3.3 4.2 5.0 8 37. 1 24754 220.6 212.2 2 59.4 2 28.5 2547 239.6 2 42. 1 219.2 2 3,320.4 8 9.0 8 32. 6 2 76.2 2 20.3 2 380.3 2 141. 5 2 16. 1 211.4 8 7~9 2 55.8 L~1 L~i tn 0 0 1* I This table excludes stock of corporations which, it appears, hold assets, such as real estate, the Income from which would not be treated as unrelated business income If the asset were owned directly by the foundation. It also excludes stock of corporations where the value of the stock in excess of 20 percent of the corporation's outstanding stock Is less than $100,000. 2 Market value. 8 Value on fuundatlon's books (value of assets at date of acquisition by foundation). Source: 1964 Treasury Department Survey of Private Foundations. Similar informa- tion may be found in the Patman Report, 1st installment, supra, See pp. 35-50. PAGENO="1135" 1133 LOO TREASURY DEPARTMENT REPORT ON PRIVATE FOUNDATIONS J, Fo'undations and type of charity. Table 19 provides some estimates of the grants of foundations by )hilanthropic field involved. The estimates are by the Foundation ~ibrary Center. These are strikingly different in distribution from ndividual contributions in the aggregate, involving a much lower ~ontribution to religion and higher contributions to education and uternational activities. This cannot be taken directly as a measure f the redirection effect of foundations. Foundations handle the ontributions of the wealthy, by and large, and the pattern of reduced ~ntribution to religion and increased contribution to education ~mong the wealthy is seen in table 4. TABLE 19.-Grants of 6,007 foundations, by major fields in 196~2 1 [Dollar figures In millions] Fields 176 large founda- tions 2 847 Inter- mediate founds- tions ~ 4,984 small founds- tions 6,007 total founda- tions ~ducatlon Percent $201 46 $74 17 $26 6 $44 10 $61 14 $9 2 $22 5 $76 46 $28 17 $10 6 $16 10 $23 14 $3 2 $8 5 $38 21 $4 2 $60 34 $30 17 $3 1 $34 19 $10 6 $315 40 $106 14 $96 12 $90 12 $86 11 $46 6 $40 5 uternatlonal activities Percent 7elfare Percent [ealth Percent ciences Percent teligion Percent lumanities Percent Total $436 56 $165 21 $179 23 $779 100 Percent of grants 1 Possessing assets of $10,000,000 or more. `Possessing assets between $1,000,000 and $10,000,000. 1Possessing assets under $1,000,000. 46,007 foundatIons Included In the 1962 directory. Generally, these had assets over $100,000. Source: "The Foundation Directory," ed. 2, p. 44. NOTE.-DetaIl may not add to totals because of rounding. 87-444 0-68-72 PAGENO="1136" 1134 TREASURY DEPARTMENT REPORT ON PRIVATE FOUNDATIONS 101 APPENDIX A-ExHmIT 1 FORM °990-A RETURN OF ORGANIZATION EXEMPT FROM INCOME TAX UI~Otet Section 501(c)(3) of the Internai Revenue Code 1962 PART II For Caterdar Yen 1962-or other arabIc year begirnirg 19~2, api erthru . . 19 Part 11 information required pursuant to Section 6033(b) and other applicable sections p1 (he nternal Revenue Code must be submiltet mis part nut ne mooe covouuc:e su sir puiais. t.aqsi race eicygsetooboa Address (suober. street, city nr sore, pustsisoee. sed Stat.) -~ . . Please type or print clearly L . Thu caracas crust b. 0usd on no b.Ooo. Oh. 15th dxysf Sloe Wilt enexils foilneeiasg fur sins, of Oh. oa.nnrasl oocnuering p.oioif ~ h. 0Usd ~ithth. Diateietflie.e Sm of Ie,t.onsl Rse.nsa. foe She di..Ooiof ta oehiohtslncot.dth. prieteipol place of husi 0.t*Oe poineipol nf5ies of Ohs ocsoonuaxouon Eeplu~er Id.nsbouhno Nc, Line No. 1. Gross roles or receipts from business activities *,. . g,,_,_ 2. Less: Coot of goods sold or of operations (Attach schedule) 3. Gross profit from business activities $. 4. Interest 5. DivIdends 6. Rents 7. Royalties 8. Gain (or loss) from sale of assets, excluding inventory items (See Ir~sfrucff en 8) 9 0th a (Attah hdul -D nt nlud ntrsbuts as gifts grants t (Seeln 17)) 10. Total gross income (lines ito 9 inclusive) .. $ II. 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) 14. Accumulation of income within the year (line 10 less the sum of lInes 11, 12, and 13) 15. Aggregate accumulation of income at begsssnlng of the year (S 16. Aggregate accumulation of income at end of the year 1$ RECEIPTS NOT REPORTED ELSEWHERE 17. ContrIbutions, gifts, grants, etc., received $ 18. Less: Expenses of raising and collecting amount on line 17, from column 5, Schedule A 19. Net contributions, gifts, grants, etc S________________ DISBURSEMENTS MADE OUT OF PRINCIPAL FOR PURPOSES FOR WHICH EXEMPT 20. Expenses of diotributing principal from column 6, Schedule A $_______________ 21. Contributions, gifts, grants, scholarships, etc.: (a) Paid out In prior years (5 (b) Paid out within the year (See Instruction 21) S module A-Altoc: "c~n.of Expenses `~ee Instructionsl 1 . 2 0 * 3. (sierras 00 esreirg gross iecsrrc 4. Eepee.es ot :stribut:rg resets 5. Eapetrsesofrs:s:rg erd ositeoOirrg prcri:pai 6. Eaperoeo 01 d:str:but:rg prircipat (a) Compensation of officers, etc (hI Other salaries and wages (c) Inlerest (d) Taxes . . , Ce) Rent (I) Depreciation (and depletion) (g) Miscellaneous expenses (Attach ech (hI Totals .-~ i:rs 20 Ester a lee ii Errer or ire 12 Octet or tire 5 er PAGENO="1137" 1135 102 TREAS1JRY DEPARTMEI~I' REPORT ON PRIVATE FOUNDATIONS ASSETS 1. Cash 2. Accounts receivable Less: Reserve for bad debts - 3. Notes receivable Less: Reserve for bad debts - 4. Inventories 5. Investments in governmental obligations 6. Investments in nongovernmental bands, etc 7. Investments in corporate stocks (See Instructions) 8. Mortgage loans 9. Other investments (Attach schedule) 10. Depreciable (and depletable) assets (Attach schedule).. 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 (hI Attributable to gains from sale of assets 23. Total liabilities and net worth 1. Dotes) ourteot eceeptim letter - 2. Attaah a detailed .tsteeeot ot the ostiire si your bsstoees, oharitable, sod all other aatiriae.. 3. Wa. sForci 990-A tiled toy the prevedlog year? DYes DIts I) Ye." ehere tiled? 4. dose yoa bird a ton estate so Forte 990-lbs hi. year?... 0 Yes 0 its ti"Yc.,"erhetetlled? 5. What is the legal terra ot your orgaoitatioe loerporstloo. Fsrg 990-A-l962 Sehsdule B-BALANCE SHEETS (See Instructions) Page 4 teg:rrirg ot vest I Ltd tt Osts TotsI~ Amtstt Tttst `7. Ii successor to preetoiisly soittieg ergssttstisel.t, glee pastyaria,askiacpesesoOtttrrtsat0rkiah55$ Dy OIls li"Ycs,"sttaahdstailedttsteoooL 13. Hsns you diiriog the yesr eIther odrsested or opposed (ioalsd:eg the pablishlog or disttibiitiog ot soy legittstioo. ostiooal, Stats, at oval? 0 Yes 0 lb Ii "Its." sttaoh a detailed deseriptiso attsoh sotioitiee sod rapist si soy tush ttateeteots, 14. lIsts yoa dusiag tho year psrtistpsted to, or ioterosood to tioaliidiag the pabli.hiag or distrihatiog oi ,tstsoeotst oar palitasi asapsiga so behali si say modidats toe pablia other? 0 ~ D lOs It "Yet," sttseh a dctailed doeertptisoattssh sotialilos used 15. Attsrluly 1, 1950, did- lbs armtsr at your orgsriitstios. or P. oaotabiitor a your argaoitatiso. Or tb bratheror sistet choir at halt hiasdl, .pvittc. stvettoi', srl:oosldstaredaotoltuah areatotor aavtyibutar. or ,Poorparstioaoosed (50 oraeatarvcareataatiogstsekst' 50 pererot or ease at astor at sit stark) direatly so todireatty by tush armtar or vootribstsr tat Saeao soy part at yost ioraes or asses.? 0 Yes 0 lOs Ib) Scenes say asepsosstiss tar persaaai .cto:ast tao yes? DYne Otis tat ttseessypsst at past .oroiaee or osrets toads sosil' * able to hta? 0 Yt5 0 tto (dl Psrohasc soy .eoiirltirsor athrr property teso you?.. 0 Yes 0 lbs tel Sell soy scasrtttee or other prspsrty to you? 0 Yes 0 is ttl Re Yss ~ Dyes 0 Its ltsots,rytosargsrtttstt. "Yee,"sttsahdttsiledststttatOt aatett presiostly reported. ~ DYes Oils Ii "Yr.." yas roost tabroit the toisrest:so required by ths tar Sohrdsts 9, `5. II yoa bass ospital stark isssrd sod oststaadieq. stats oith respect tseaah elate at .tsek- Is) The osebersi share. astetaridlog hI The riaeber ot share, held by todieidsslt al The oseber et share. held hr ergsrumems _.- (dl The osraher a) shareholders at rod ot year tel Whether say dirideod. rosy be pstd 0 Yes 0 its * 5. It you saqsired capital ossrttaut otiororor, sttseh itceltrd list srid seosot thereat. 10. taos ooyahsogrteiotpeseiosslyesrortsdtsthtltt5i'tO5t * Le'eeesc Scorers bees trade it roar atheist at var as' iso or bylsos at other iosteueerits at crailsy repaSS.,., 0 Yet 0 Ns Ii "Yes." srsah s espy ci ths sramdiascits, 11. Hoes you hod soy tasters at loeoroe or eogsgsd is soy ae5aaes not pe.riossir stpsrtsd tathsiatrrosllcseosc Serota.? 0 1.. D Ils 1) "Yss," stsah detailed ststt,oeot. PAGENO="1138" 1136 TREASURY DEPARTME~NT REPORT ON PRIVATE FOUNDATIONS 103 INSTRUCTIONS FOR FORM 990-A (1962) RETURN OF ORGANIZATION EXEMPT FROM INCOME TAX Section 5O1(c)(3) of the Internal Revenue Code GENERAL INSTRUCTIONS A. Who must file Form 990-A-An annual state- ment, Part I of this form, of gross income, receipts, dis- bursements, etc., is required by law of every organiza- tion which is exempt from tax as described in section 501(c)(3) of the Code, excepting only (1) a religious organization; (2) an educational organization if it nor- mally maintains a regular faculty and curriculum and normally has a regularly organized body of pupils or students in attendance at the place where its educa- tional activities ore regularly carried on; (3) a char- itable organization, or an organization for the preven- tion of cruelty to children or animals, if supported in whale or in part by funds contributed by the United States or any State or political subdivision thereof, or primarily supported by contributions of the general public; (4) or an organization operated, supervised, or controlled by or in connection with a religious organi. zation described in section 501(c)(3). In addition to Port I, such organizations are also required by law to file certain information on Part II of this form which is made available to the public. In connection with Part If of this form all required information must be sub. mitted except that the organization may omit any information relating to a trade secret, patent, process, style of work, or apparatus which would adversely affect the organization, or any information which would adversely affect the notional defense, In such cases, the organization must submit this type of information only with Port I, together with a statement identifying which items are being withheld from Port II and the reasons for doing so. The law provides penalties for failure to furnish the information required by this form. B. Signature and verification-The return must be signed either by the president, vice president, treas- urer, assistant treasurer or chief accounting officer, or other corporate officer (such as tax officer) who is authorized to sign. A receiver, trustee, or assignee must sign any return which he is required to file on behalf of a corporation. The return must also be signed by any person, firm, or corporation who pre- pared the return. If the return is prepared by a firm or corporation, it should be signed in the name of the firm or corporation. The verification is not required if the return is prepared by a regular, full-time employee of the organization. C. Form 990-T.-Section 511 of the Code imposes a tax in case of certain organizations described in sec- lions 401(a) and 501 (c)(2), (3), (5), (6), and (17), on income derived (a) from operation of a business enter- prise which is unrelated to the purpose for which such organization received an exemption or (b) from certain rentals from property leased to others on a long-term basis. (Use Form 990-T.) D. Form 1099.-Every organization engaged in a trade or business (which includes for this purpose all exempt functions) making payments in the course of such trade or business of interest, rents, commissions, salaries or wages (not reported on Form W-2), or other fixed or determinable income (including allowances for expenses) of amounts of $600 or more during the cal- endar year to on individual, a partnership, or a fiduci- ary shall make returns on Forms 1096 and 1099. (See section 1.6041-1 of the regulations.) Effective January 1, 1963 Forms 1099 and 1096 are required to be sub- mitted for payments of interest aggregating $10 or more. A copy of any information return (Form 1099) is required to be furnished to the payee. E. Attachments-The schedules contained on the official form should be used unless the entry spaces provided are not sufficient for your needs. Attachments must contain the name and address of the organization as well as the required information and must follow the format of the schedules and must be presented in the same sequence as the lines of the form. SPECIFIC INSTRUCTIONS (References are to lines or schedules on form) 8. Attach a schedule to pages 1, 3, and 5 showing 13. Attach a schedule to pages 1, 3, and 5 in support with respect to each asset sold or exchanged: (a) Date of contributions, gifts, grants, scholarships, etc., show- acquired, manner of acquisition, dote sold, and to whom ing: (a) each class of activity: (b) separate total for sold; (b) Gross sales price; (c) Cost, other basis, or value each activity; (c) name and address of donee and amount at time of ocquisition if donated (stole which); (d) Ex- of distribution to donee; and (d) relationship of donee, ii pense of sale and cost of improvements subsequent to related by blocd, marriage, adoption, or employment acquisition; (e) Depreciation since acquisition; and If) (including children of employees) to any person or corpo- Gain or Ioss-(b) plus ~e) minus the sum of (c) and Id). ration having an interest in the organization such as PAGENO="1139" 1137 104 TREASURY DEPARTMENT REPORT ON PRIVATE FOUNDATIONS creotor, donor, director, trustee, officer, etc. Activities should ~e classified occording to purpose in greoter deti~iil thon merely choritoble, educotionol, religious, or scientific. For exomple, poyments for nursing service, for loborotory construction, for fellowships, or for ossist- once to indigent fomilies should be so identified. Although the octual distribution of cosh, securities or other property is to be entered on this line the expenses in connection with the distributions ond those expenses incurred for philanthropic progroms operoted by the orgonizotion itself ore not to be included on this line but shoUld be entered on line 12 ond in column 4 of Schedule A. Where the foir morket volue of the property ot the time of disbursement is the meosure of the contribution and is used in orriving at the omount to be entered on this line the schedule must also show: (1) description of the contributed property; (2) book value of the con- tributed property; and (3) the method used to determine the book value. In such case the difference between fair market value and book value should be reflected in the books of account. 17. In all cases where money, securities or other prop- erty aggregating $100 or more is received directly or indirectly from one person in one or more transactions during the year attach an itemized schedule to page 1 showing the name, address, dote received, and the total amount received from each such person. If the contri bution is in the form of property the description and the fair market value of such property shall also be fur- nished. (The term "person" includes individuals, fiduciaries, partnerships, corporations, associations, and other organizations.) 21. Attach a schedule to pages 1, 3, and 5 for contri- butions, gifts. grants, scholarships, etc., which were paid out within the year, showing the same information required in instruction 13. For those disbursements made in prior years only the total need be shown. Schedule A--Attach a schedule in support of line (a) to pages 1, 3, and 5 for compensation of officers, direc. tors, trustees, etc., showing name, position, time devoted to position, salary, and expense account allowances. For depreciation attach a schedule to pages 1, 3, and 5 showing: (a) kind of property; b) dote acquired; (c) cost or other basis (exclude land); (d) depreciation token in prior years; (e) method of computation; (f) rote (%) or life (years); and (g) depreciation this year. Expenses to be entered in column 2 of Schedule A should be extended to columns 3 through 6 on the basis of accounting records, If such records do not provide for this division, expenses may be divided on any reasonable basis, such as on approximation of the use of a facility or the time spent by an individual. Schedule B-The balance sheet should agree with the books of account or any differences should be reconciled. In all cases where investments in corporate stocks at the close of the taxable year include 10 percent or more of any class of stock of any corporation, attach a schedule to pages 2, 4, and 6 showing; (a) name of corporation, class of stock and whether the stock is voting or nonvoting; (b) number of shores owned of each class at beginning and end of the taxable year; (c) total number of shores outstanding of each class; (d) value of stock as recorded in the books and included in line 7; (e) dote acquired; and (f) manner of acquisition. Insfructiorts 990-A (1962) PAGENO="1140" 1138 TREASURY DEPARTME~N1' REPORT ON PRIVATE FOUNDATIONS 105 APPENDIX A-EXHIBIT 2 Bureau of Budget Approva No. 1~8~64O3 Expires Dec. 31, l961~ QUESTIONDAIRE TAX-EXEMPT FOUNDATION SURVEY BARE ADDRESS.. Officials, etc. 1. List belo~t 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. Belationship Investment Dame position (see #2 below) Policy Done Type Ees(l) bel~w~ 1. ____ a a a 2.____ ____ 0 a 3.____ ____ L7 ._LJ 0 ____ ____ a _a a 5. ____ a ._..L7 a 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 - Done." (a) He is the creator or a ~ubstantial contributor. (b) He is related by blood, marriage, or adoption to the creator or to a substantial contributor. (c) Be 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 voting stock or 50 percent or more of the value of all stock), directly or indirectly, `by the creator and/or substantIal contributor. (r) Be 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. (QuestIon 2 continued on page 2.) PAGENO="1141" 1139 106 TREASURY DEPARTMENT REPORT ON PRIVATE FOUNDATIONS -2- (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 venture in which the creator or substantial contributor (and the wife and children 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 employee 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 relating 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 ir~ certain transactions with the creator of the organization, with a substantial contributor to the organization, or with certain parties related to either the creator or a substantial contributor. The following question (14) 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 questioz~ 1~ on Form 990-A. In aswering this question do not take account of any transactions involving individuals who are bothcreators or contributors (or related to creatora or contributors) and officials or related to officials. 14. 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 -partnerships or other unincorporated business ventures in which the officials owned 50 percent or more of the capital interests or profits interests: (1) (2) Yes No (a)Borrow any part of your cash, securities, or other property? Q~ /J (b) Lend any cash, securities, or other property to you? (c) Have any part of your services or assets (other than compensation for personal services reported on - Schedule A of your 1962 Form 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, seeurities,or other property in other transactions? If the answer to any of the questions is "yes," attach a detailed explanation. (Please mark this explanation "Schedule 14.") PAGENO="1142" 1140 TREASURY DEPARTMENT REPORT ON PRIVATE FOUNDATIONS 107 1~A~Z.1. ADDRESS. ~. Contributions Deceived 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 of stock. _______________ 6. Narket 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 Stock $ 7. Certain Stock (a) During the period covered by your 1962 Form 990-A, did Yes (1) ~7 your organization hold 10 percent or more of any class of stock in any corporation? No (2) ~7 If the answer is yes~tt answer question 6 o~ page ~. PAGENO="1143" 1141 108 TREASURY DEPARTMENT REPORT ON PRIVATE FOUNDATIONS 8. If you answered yes' to question-T, 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 (a) refer to holdings at the end of the period. If youi~ 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 otherwise 1. Yes ~7 1. Yes /7 1. Yes L7 dispose of, any of this stock during the period covered by your 1962 Form 990-A? (Answer "yes" or "no.") 2. No U 2. No ~7 2. No L7 (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. ___________ ___________ $ (iii) - Approximate percentage of total voting power. (iv) - Approximate percentage 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 percentage 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 substantial contributors to your organization and their brothers, sisters, spouses, ancestors, lineal descendants; corporations owned (50 percent or more of voting stock or 50 percent or more of the value of all stock), directly or indirectly, by such creator or substantial contributors; and partnerships or other unincorporated business ventures in which the creator or substantial contributor owns 50 percent or more of the capital interests or profits interests. (If this information is unknown and not ascertainable, so indicate.) PAGENO="1144" 1142 APPENDIX B INTERNAL REVENUE SERVICE ADMINISTRATIVE ACTIVITY The Internal Revenue Service has taken significant administrative measures directed at insuring that private foundations, and also other types of exempt organizations, operate in a manner consistent with the provisions of existing law. These additional efforts have taken five forms. The first has been to increase the number of exempt organization returns which are audited each year. Whereas only approximately 2,000 of such returns per year were audited in the 1950's, over 10,000 exempt organization returns were examined in fiscal year 1964. As part of its increased examination program, the Service has improved the quality of each audit. Special classes to teach selected agents to deal with the special problems which are raised in an examination of a tax-exempt organization have been held. Special audit guidelines, which will permit agents to complete a thorough examination of a foundation's activities in a reasonable period of time, have also been prepared. The Revenue Service's second major effort has been to increase the amount of available information concerning foundation behavior. This information wifi be useful to determine whether foundations are operating within the principles of existing law and, if not, the type of abuses which exist. The additional information wifi also be used to select certain returns for examination as well as for future statistical studies. Consistent with the objective of obtaining more information, the Service has made substantial revisions in the information returns (Form 990-A) which private foundations are required to file. For example, the 1964 return requires private foundations to supply information with respect to the market value of their assets and detailed schedules of their accounts (and notes) receivable and pay- able. This information was not previously available from a founda- tion's return. The new form also substantially increases the amount of data which foundations must supply with respect to situations in which a foundation owns a significant-5 percent or more-portion of a corporation's stock. To the extent permitted by existing law, this new information will be made available to the public. Third, improvements have been made in the Service's internal controls and procedures in the exempt organization area. For ex- ample, a check on delinquent and incomplete returns is now being performed in all district offices. This has contributed to the increase in the quality and quantity of exempt organization returns which are currently being filed. Similarly, an Exempt Organization Master File system-which will contain a list of the names and addresses of all exempt organizations-is presently being established. This list, which will be placed on magnetic tape, will permit the use of electronic data 109 PAGENO="1145" 1143 110 TREASURY DEPARTMENT REPORT ON PRIVATE FOUNDATIONS processing equipment to facilitate the administration of the tax laws dealing with exempt organizations. The fourth major administrative effort being undertaken is to determine the scope of existing law through litigation. Appropriate cases are being diligently litigated by the Office of Chief Counsel of the Internal Revenue Service and by the Tax Division of the Depart- ment of Justice. A survey conducted during the spring of 1964 indicated there were approximately 250 cases involving exempt organizations in various stages of litigation. One of these is a case pending before the Supreme Court relating to the purchases of business corporations by private foundations. The decisions which will be rendered by the courts in these cases may help to provide valuable guidelines. Fifth, the Service has increased its efforts to improve voluntary compliance with existing law. It was felt that many of the unin- tentional violations found upon audit are attributable to the organi- zation not knowing what was expected of it. In order to educate the public the Service during 1964 published 25 Revenue Rulings, Revenue Procedures, and announcements relating to exempt organi- zations. Many others are currently under study. In addition, the Service has published a booklet entitled "How To Apply for Exemp-~ tion for Your Organization," which is made available for distribution to interested parties. A more detailed booklet, similar to "Your Federal Income Tax," is now under active consideration. It is intended to provide more comprehensive guidance in complying with~ the law, and to do so in as simplified a style as is consistent with the~ complexities of the subject. It is hoped that these measures will sufficiently educate exempt organizations as to what is expected of them and will decrease the number of unintentional and technical violations of the law. This will permit the Service to devote its main efforts to cases involving intentional violations. PAGENO="1146" 1144 EXHIBIT NO. 9 Return of Organization Exempt From Income Tax Section 501(c)(3) of the Code Fe, the year Jaeuury 1-December 31, 1966. en other taxable year beginn:ng 1966, and ending 19 PLEASE TYPE OR PRINT PART I Part I (pages 1 and 2) informatinn nequired pursuant to sections 6001, 6033, and othnr applicable sections of the Infernal R ncnnue Code. NOTE: One copy of Pant I and two copies of Part II most be filed. 1 Grososa les or reneipts from b csiness anticitins 2 Less: Cost of goods sold and/or of operations (attach schedule) 3 Gross profit from bosiness activities 4 Interest 5 Dividends 6 Rents 7 Royalties 8 Gain (or loss) from sale of a(sets, eocluding inventory items (See Instruction 8) . 9 Other income (attach schedule-Do not include contributions, gifts, grants, etc. (See line 17)) 10 Total gross income (lines 3 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 Eu penses of distributing current or accumulated income from column 4, Schedule A 13 Contributions, gifts, grants, scholarships, etc. (See Instruction 13) 14 Accumulation of income within the year (tine SO less the sum of lines 11, 12, and 13) 15 Aggregate accumulation of income at beginning of the year 16 Aggregate accumulation of income at end of the year RECEIPTS NOT REPORTED ELSEWHERE' 17 Contributions, gifts, grants, etc., received (See Instruction 17) 18 Less: Expenses of raising and collecting amount on line 17, from column 5, Schedule A . 19 Net contributions, gifts, grants, etc., received DISBURSEMENTS MADE OUT OF PRINCIPAL FOR PURPOSES FOR WHICH EXEMPT 20 Eopenses of distributing principal from column 6, Schedule A 21 Contributions, gifts, grants, scholarships, etc.: (a) Paid out in prior years ____________________________________________ (b) Paid out within the year (See Instruction 2tl Schedule A-Allocation of Expenses (See Instructions for Attachments Required) lIen . Tutal 3. cS peeses tf earning 4. ~spenses of urxasinrrne d:atr:but:rg ircryne 5. crpemres of raisin ard cxllrctirg prirrip g 6. Es perot of distribut:rg principal (a) Compensafion of oRicers, etc (b) Other salaries and wages (c) Interest (d) Taxes (e) Rent (I) Depreciation (and depletion) (g) Miscellaneous expenses (attach sch (h) Totals edole) . I________________ I I Under penalties of penury. I declare that I have eoa mined this return, including acuxrnpanying schedules and stateermets, and mx the bmst cf my knowledgeandbel:enirisence.cxrrectandyxmple~e ~ which he has any knooledge. CORPORATE I SEAL ,,j Date t:grsture xt vlrittt Title Pate Itdiuidual tt t:tn elgrature of preparer uddrese Sane Deptorer Ideetitrsvae NseNr tfurnb,rard,tteet City or trot, State, ard ZIP ode Enter the name and address used on your return for 1965 (if the same as above, write "Same"). If none bled, give reason. PAGENO="1147" Form 990-A-1966 ASSETS 1 Cash 2 Accounts receivable (see instructions) (a) Less allowance for bad debts 3 Notes receivable (see instructions) (a) Less allowance for bad debts 4 Inventories 5 Govt obligations: (a) U.S. and instrumentalities (b) State, subdivisions thereof, etc 6 Investments in nongovernmental bonds, etc 7 Investments in corporate stocks (see instructions) . 8 Mortgage loans (number of loans ,_) 9 Other investments (attach schedule) 10 Depreciable (and depletable) assets (attach schedule) (a) Less accumulated depreciation (and depletion) . 11 Land 12 Other assets (attach schedule) 13 Total assets LIABILITIES AND NET WORTH 14 Accounts payable (see instructions) 15 Contributions, gills, grants, etc., payable 16 (a) Bonds and notes payable (see instructions) (b) Mortgages payable 17 Other liabilities (attach schedule) 18 Capital stock: (a) Preferred stock (b) Common stock 19 Membership certificates 20 Paidin or capital surplus 21 Retained earnings-Appropriated (attach schedule) . 22 Retained earnings -Unappropriated: (a) Attributable to ordinary income (b) Attributable to gains from sale of assets 23 Less cost of treasury stock 24 Total liabilities and net worth 1 Dote vi vunent enevytivn lettec 2 Attach u detailed ttutetoent vi the nutute vi yvuc vhaoitable, buaineao and all othetuotititiet, 3 Have yvu uttavhed the ivlvowutivntequ ted by: I? E1 Yes 0 fIt (hi lnottootivv 3? DYes 0 Nt 4 Have yvu filod a tao tetutn on Fotot 99O-T lot this neat? . 0 Yes 0 Nt II "Yea," wheor bled? 5 In what yrat tax yvut vcganitutioo lvtvord? In what State 0, Oouotty? 6 II 500vrtaot tv pteoioutty euiating oogun:tutioulol, gice vatoelti acid addceaoleal vi the ptedecrsaot vogunicationlal 711 uuhaceoupitalotookittuedandvutttandicg,ttates'ithtnoyeottoeuvh vi atock: (al The covvbet vi ahatex uutotuotdivg (hi Tl:n number vi shates held by indiuidualt . . . -- lvi The vunobec vi abates held by voganivat:ona . . -- (dl The cuvobec vi absorheldeoc at end vi Seat . . -- el Whcthec any dividenda way be paid . . . . 0 Yes DOt 8 II ~vu ovquited capital attets vet vi incvwe, attacb itewiced lttt and anivunt N H ace any thanges cot previously eeported to the Intetnal cecente Seen,ve been mode in youeacticlra vi i000tpvtativtt vt bylaws cc cthre intttonoento vi similat itnpo DYes Duo II Yea,' attavh a copy ci the umnndwento, 10 Hate vu had any soucuet vi invowe ntengaged in any avtinities cot ceneotue Seecive? . DYes 090 cu.S.soucRNMcnTPntNTtNuoeFtm0505-O"0o"0'05 (A) Anount (B) Total (C) Anount (Dl Total 14 Altec July t, oyso, did: ohevteatvt u( pout utgan:catton; vo a vontt:butot tv yoot vtgaeioation; vo a btvthee vo atotee lobule vo ball blvod(, apouar, litoeul detcetdent vi ouch vceutoc cc vonto:butoe; oc u coopota ion voted 150 Covent 00 mete vi cody sooth cc 50 peoveot vo mete oalueo(ullstovk( ditevtlyveinditrvtlybysuvhvceut0000v000ttbu000- (a( Ococon' any putt ci yvue invome to voopuot DYes DUo (hi fleceio: ao:y vooopettaation too petsontI seecioe: front Dyes Duo (ci H~e ~?t~PaO 0:1 you: o:t'uicro cc osotto w:d: aca:l- DYes 0 No (dl Pooch use toy aevucitiro ye othec poopecty loom you? . o ~ 0 No (ci Sell any oe000ities cc vthec poopecty to you? . . . DYes 0 No (l( Re~i ~~tt~~(Yo:tc incom: 0: totytas n toty the: Dyes DNa II ananet to any question is ``Yea,'' attach detailed statement unleot poet,. vuoly tepooted. II pteciously tepocted, gice yeuo(s(, 15 Do you hold 5 petveno no mote cI any class ni stovk loan voopotatton? Yes DNa If "Yea," you must submio the ioluemaoion tequiced by the i0500uvti005 lot Schedule B. 1145 Schedule B-BALANCE SHEETS (See instructions) Beginning of Taxable tese Eett at Taxable Yost Page 2 ( ) ( it Did you hold any crut poopeoty bc tental pucyoteo w:tt: teoyect to nhiuh theor is an indebtednetotncutted lot acquitin the pcoyecty oc in couk:yv ittcp000'entetttt theceto ye which n'as avqu iced subievt to a tn0000age 00 lien? Dyes DNa II ``Yes,'' attach detailed statemetyt, 12 Hate you doting the ycac cdcocuted 00 oppoond (includ:yg the publtobtog cc ditocibuting ol otuoetttenot( any national, State, no local legtolutton? Dyes DNa II ``Yea," attuch u detoiled desvcipticn vI suvh avtiottieo and topics ol any 13 Hate you doom the yeae pooticipated io, on iotecoened in (includ:oa the publtthittg oc dittoibuting ol soatetneoos( any pot:oicul catopuign nn behull 00 in vpyooiticn to uny candidate toe pubttv office? . DYes 0 Nn It "Yet," uttach u detailed deocoiption 01 suoh acoic:tict end vop:es v( otty PAGENO="1148" 1146 Page 3 Return of Organization Exempt From Income Tax 9 9O~A Section 501(c)(3) of the Code ~(] o I R 0 PS F h y J rp 1 Deob 19cc h bi y b 19 ~ P SETYPEORPR ____________ hone tnployet Iteelitoctice fluotet hunter and street City or taan, State, and ZIP code Enter the name and address ased err yoar return for 1965 (if the same as abave, write `Same"). It neon filed, give reasan. PART I! Part It information required pursuant Ia section 6033(b) and other applicahln sections of the Internal Revenue Code mast he submitted in duplicate as part of your retam. This part wit be made available to the public. 1 Grass sales or receipts from business activities 2 Less: Cyst of goods sold and/er of operations (attach schedule) 3 Gross profit from business activities 4 Interest 5 Dividends 6 Rents 7 Royalties 8 Gain (or loss) from sale at assets, excluding inventory items (See Instruction 0) 9 Other incame (attach schedule--Do nut include contributions, gifts, grants. etc. (See line 17)) 10 Total grass income (lines 3 to 9, inclusive) 11 Expenses of earning gross income tram column 3, Schedule A DtSBURSEMENTS MADE WITHIN THE YEAR OUT OF CURRENT OR ACCUMULATED INCOME FOR PURPOSES FOR WHICH EXEMPT, AND ACCUMULATION OF INCOME 12 Expenses at distributing current yr accumulated incame tram column 4, Schedule A _____________________ 13 Contributions, gifts, grants, scholarships, etc. (See Instruction 13) ______________________ 14 Accumulation at incama within Ihe year (line 10 less the sum at lines 11, 02, and 13) _____________________ 15 Aggregate accumulation at income at beginning at the year 16 Aggregate accumulation at income at end at the year RECEIPTS NOT REPORTED ELSEWHERE 17 Contributions, gifts, grants, etc., received (See Instruction 17) 18 Less: Expenses at raising and collecting amount an line 17, tram column 5, Schedule A . 19 Net contributions, gitts, grants, etc., received DISBURSEMENTS MADE OUT OF PRINCIPAL FOR PURPOSES FOR WHICH EXEMPT 20 Expenses at distnibatinff principal tram calumn 6, Schedule A 21 Contributions, gifts, grants, scholarships, eta.: (a) Paid out in prior years (b) Paid out within the year (See Instruction 211 . Schedate A.-Aftocation of Expenses (See Instractions for Attachments Required) 1.11cc 2.10101 Eaperimo at earring 4. E~mceo at andol~leclivgprincip~l dichibul~ngpAecipol (a) Compensation at officers, etc (b) Other salaries and wages (c) Interest (d)Taxes (e) Rent I I (I) Depreciation (and depletion) (g) Miscellaneous cx moses (attach (h) Totals schedale) . ,~ Enter on line 11 Enler an line 12 I Enter en line 10 Enter en line 20 PAGENO="1149" 1147 Schedule B-BALANCE SHEETS (See instructions) End rf Tesobte Yes, (0) Octet (A) Aeysunt (0) (0(c) (C) Ansunt ) Begicring of Teeeb)e Y~sr Fonn 990-A-1966 ASSETS 1 Cash 2 Accounts receivab)e (see onstructions) (a) Less a))owance for bad debts 3 Not es receivable (see instructions) (a) Less a))owance for bad debts 4 Inventories 5 Govt ob)igations: (a) U.S. and instrument~)ities (b) State, subdivisions thereof. etc 6 Investments in nongovernmental bonds, etc 7 (nvestments in corporate stocks (see instructions) . 8 Mortgage )oans (number of loans .~._. ) 9 Other investments (attach schedu)e) 10 Depreciab(e (and dep)etab)e) assets (attach schedule) (a) Less accumu(afed depreciation (and drp)etion) . 11 Land 12 Other assets (attach schedu)e) 13 Total assets LIABILITIES AND NET WORTH 14 Accounts payab)e (see instructions) 15 Contributions, gifts, gracts, etc., payab)e 16 (a) Bonds and notes payab)e (seriestructions) (b) Mortgages payab)e 17 Other Iiabi)ities (attach schedu)e) 18 Capita) stock: (a) Preferred stock (b)Commonstock 19 Membership certificates 20 Paid-in or capita) surplus 21 Retained earniogs-Appropriated (attach schedu)e) - 22 Retained earnings-Unappropriated: (a) Atfrobutab)e to ordinary tncome (b) Aftrobutable to gains from sa)e of assets 23 Less cost of treasury stock 24 Iota) )iabi)ities and net worth 1 Durc tot ou00000 vecottptiov (otter 2 Atoo~):udrfu'~)r~ sr00000ect of thrcuru,ro)yuurohurbo b)r. business, sod 3 Hooc ) vu utrutdtcd (to ir)t0000yi.on roquoood by: I? Lines Dos )b) to 000ucfion J? Li yes Liso 4 1 ste you tiled o so rer000 00 Por:v 990-T (or t),ie yes,? - Li Oss 0 No I) ``Yet,'' n)orrr bled? . 5 (or robot ynur too, ) our orgur otuftooc loroot',)? 6 (1 suuurs,oortuptr,,.ou,ly ruos)ovg vrguoisuttuo)rl, k-toy otuvo(s) und uddtrss(us 0 vi rite prrdruesst:roouuvosor:toc)s) 11 Did Otto told ury too) property (or rcnrsl purposes ostt)t copout to 5 00 indrhrydcrso iruurrrd in 005utrtrc the pr:operty or to couktog ioop r.ttr0000ts t)octcto to ut,:,), our tuquoed suhyvut to u w,ort0000 `or Lines Dos (t"Yrt," orrsoitdetoited s)s)rmevt, 12 H ute you d,riyo hr yrsr sd,oyuyod too toppoosvt) )icolod:oou be pub)irhioo dittrobuying v) stufoweots) soy curtotrol, Story, or toosi tcvosiutton? Does List ()"Yes,"uttsohudctviieddrsOriptiuov)suOttuOrtottt0t50tt000Ptes0~)5cO 13 H uoo yoou dorio the your purt,t,psred in, or toterteood to )tooiudtog site pubiishiro or d,striburooo to) stvrrweots) uny pootisioui 000tpuigc or brholf or ir oppoositior to roy ouodtdste too pubito ,ol)ote? . Li Yes 0 So (t `Yes," trts,h e dersiiod t)ett'riptionu)suoh 000totttes urd ooptrs ot try 14 A)ter July 5, 1050, did: toe otestor u) yuuo vrgsoosf000 or u o,ootr,but:,r so hrtotioor or ststee (nhotie tot iou)) bitoot)), scouse, 000000, or hoeui dotuondoor ti tool, 000utt,r or oonttibutur; `to u ooorporu' otto toyed (50 erkeor tot moore too otto sroouk or 50 p000cnr or wore 00 oil sotook) direotly vo iodi roorio `by suoit orvutoor to ryooto ibuyotr- )u) Boor.,,, toy purr to) yotur tn:towr000torpus? . . ` Li Ow Dos )b) Ottoioo 000 oonoporsurioo t,:r prrsooul you? Does List )o) Hc~tc vt,'purt to) yt)u: oorootoo 00 uoott rtyt)e uoutt Li Yes Li Os )d) Puroi,,ty ,noyteturiyies or otloor p000p000y toovr 000?, Li Yes Li No (ci Soil try r0000ttics or ,otboer nooporty to y000? .,. Lives Dot Do Do outly repooted. It prooioutly oepvrted, gioc ycvr(s). 15 Dv yo:u hold S peroer t 00 woro o) voy o)sss ot sro:ok in any 000rp000uot000 DYes Dos I) "Yes," you must submit she iy)vrmutivc tequirud by the ,or00000tons (or Sobrubulr 0. 7 Ii you bun toupitsi troth issued vod toursrsod:og, store citit respeus too (hr ruo,beo ,,( s)o,toes 0O rouoo doog (b( Tior ruooober vi sltuors ),rtd by ,rdioidusis ,,, (to) Tioeouotbrr o) si,srrt bold by oouurot00000s , , (0) Ti:,' t',ooobor ot siosoel,.oideos uy en.) 00) rrsr , , -- (r( \\`i,etl,or toy dioideods wuy he psod Li Yes Li No Of)youuoquiordospitut.oooots ,,ur,o)oou,,ooe,u:tuolttyoootoodtttruydooooouor therco), 9 Huoc .nn~ dotoyot not presiousty reported 0 boo (oyooosi Ooteoue Soottor 10000 w,dy ioy000r ortiobes ol iooooopoorut,00 or hyious or orhorinrrruweos of somoiv :wport? y ` t~ ~w `n nr~rs' ` ` ` ` Li Ocr Li °o 10 Hsoe yoou loud any sourucs ot i0000we vroogsged ,000yeotioortrs not 1~ ~ Oroonue S,.oo,yrt ` Li Ces Dos ~obt~o~t us. PAGENO="1150" 1148 Return of Organization Exempt From Income Tax - Section 501(c)(3) of the Code fORM For the year January 1-December 31, 1966, or other taoable year beginr:ng U.S. Tre.txuty Deportnenl Intetnal Rtutnv~ Setuiun 1966, aed ending 19 Nunbo and etreet City or tour, State, ord ZIP tode Enter the name and address used on your return for 1965 (if the same as above, write "Same"). If none hind, give r eason. PART II Part II information required pursuant to section 6033(b) and other applicable sections of the tetereal Reoccur Code most be submitted in duplicate as part of your return. This part wilt be made available to the public. - 1 Gross sates or receipts from business activities 2 Less: Cost of goods sold and/or of oyerations (attach schedule) 3 Gross proht from b usiness activities 4 Interest 5 Dividends 6 Rents - 7 Royalties 8 Gain (or toss) from sate of assets, excluding inventory items (See Instruction 8) 9 Other income (attach schedule-Do out include contributions, gifts, grants, etc. (See line 17)) 10 Total gross incnme (lines 3 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) 14 Accumulation of income within the year (line 10 less the sum of lines 11, 12, and 13) . 15 Aggregate accumulation of income at beginning of the year 16 Aggregate accumulation of income at end of the year RECEIPTS NOT REPORTED ELSEWHERE 17 Contributions, gifts, grants, etc., received (See Instruction 17) 18 Less: Eu penses of raising and collecting amount on hue 17, from column 5, Schedule A 19 Net contributions, gilts, grants, etc., received 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 tInt Puint ,,,,t oiithin the year (See Instruction 21) Schedule A-Allocation of Expenses (See Instructions for Attachments Required) I. lIen 2. Tttal ~ ca~ ::~~ ~a~n:ng I d:~i ~ aud cttirgpt:n:p~i dittuibu~iugptinoipal (a) Compersation of officers, etc (b) Other salaries and wages (c) Interest (d) Taues (e) Rent (f) Depreciatiun (and depletion) (g) Miscellaneous expenses (attach schedule) (h) Totals Erter on line 11 Entet un line 12 Enter cn line 18 Enter tr line 20 PAGENO="1151" Porn, 990-A---1966 ASSETS 1 Cash 2 Accounts receivable (see instructions) (a) Less allowance for bad debts 3 Notes eeceiuable (see insteuclions) (a) Less allowance for bad debts 4 Inventories 5 Gout obligations: (a) U.S. and insteumentalities (b) State, subdivisions theeeot, etc 6 Investments in nongovernmental bonds, etc. 7 Investments in corporate stocks (see instructions) . 8 Mortgage loans (number ot loans I 9 Other investments (attach schedule) 10 Depreciable (and depletable) assets (attach schedule) (a) Less accumulated depreciation (and depletion) 11 Land 12 Other assets (attach schedule) 13 Total assets LIABILITIES AND NET WORTH 14 Accounts payable (see instructions) 15 Contributions, gifts, grants, etc., payable 16 (a) Bonds and notes payable (see instructions) (b) Mortgages payable 17 Other liabilities (attach schedule) 18 Capital stuck: (a) Preferred stock (b) Common stuck 19 Membership certificates 20 Paid.in or capital surplus 21 Retained earnings-Appropriated (attach schedule) . 22 Retained eamings-Unapprupriated: (a) Attributable tu ordinary income (b) Attributable tu gains frum sale of assets 23 Less cost of treasury stuck 24 Total liabilities and net worth 1 Date vi vustcntecetvptivo leon, 2 Attach a deea,led ntatcment vI the catu,r ul yvur ct,s,itable bvsine,s und all uahce uvtiv,ties. 3 Have nyu uttuvbed the intvtmstivn ,eqv tyd by: LI nec LI ns IbI tosatucrivo J? LI nes ~J No 4 Have yvu filed a tao aetunc cc Fuew 99v-T lye thic year? . LI nec 0 Ne II "Yes,' obree filed? 5 In what lea, usa nyu, ctganisa ivy Ivewed? lv chat State ct cuuntey? 6 II succnnsvc tv p,ncivu,lv euiativg ctgavisutivvlsl, gtve vanvc(,) and addeessleal ul the peedr~et,v, u,guc iaativc(s) 7 II vu have capital stuck issued and vutstuedicg, rate vith respect tv each class clnrvck: ui Tl,e number ,l sl,utes vutstacdivg hi The oumbee ci shares held by indioiduajs . , . _ (ci The vumbee vI chutes htld by vtganiaattvns . , -- dl The number ul nhutntcvldets at nod vI yrur . , -- el Whethee any dicidecds may be paid . . . . LI Yes LI 95 8 II you acqu ited cupital u,,ets ,,ut vI incywe, uttuch itemisrd list acd amyunt 9 ~ ci simtlae impv . LI n~c LI Na It "Yen," attach a copy ci she awyodwect,. 10 Have yvu had any svu,ces vi incvme ye engaged in scyacticitit, eat tl~'Yes'~ach~rrailedstatyntyvt cevevur Se,vtce? . LInes LI Na ~tfr1yo.n.sounenoennPmnrtncoertv0:tcns_aa-2vn-van Page 6 Oeginetng ct Yasable lest End vt Tcssble lest (~( Oncuet 101 Tutal (Cl unaunt (Dl Tstsl 14 Altn, July 5, aytv, lid: be ceeatv, vi yvut veguv!aativn; :t u cvnteibutvt tv yvve vtganiaattvv; ,,c a bevtltr,,:rstste, (n'hvlc ye halt bl~~vd(, spcusr. l'veul deecyvdent vi such cteutvt vt c:,cttibutut; ye u cusputu- t:vy ,,acrd (5y etcent,:, yyy,e vi vvttc stuck or 5v percent yr mvee ci vi all stvck( dteectly ut icditnctly by suclt ceeu t::e ye cvyr,ibutvt- al Ovtt,,u any putt vI ycut ivcvwrvec,:epus? ` . . LI nec LI Na (hi cecyicc uvy cvtypynsutivc lv, petsvnal 5ev-ices nyu' LInes LINe cl H~tv ~tty,leu,t cci yvuts~evccc,vtvatets wak, avail: o nec LI No (dl Putch gay avy sect itien ot vibee ptvpctty le::m y,,u? ` LI nec LI Na (ci Sell uvy secue it, es ye ~thet ptvpytty tv y:tu? .. LI t'ec LI No Ill Re~ecvva~t?y~lyvcce ccvw~ v: ccctpu, in ~ny ,:thcy LInes LINs It anso-ee cc, uny questcvc a "Yes," uttvvh detailed stutectent unless peru:. t:usly erpveted. II peevivusly eepvetnd, give yeae(sl. 15 Dv ycv hvld 5 petceytv t myee yf ccc class vi st::ck iv any cvtpceatcvn? LInes LIsa II ``Yes,'' tvu must submct lie cnlvywstivn tequtenci bc the :v Schedule 0. 1149 Schedule B-BALANCE SHEETS (See instructions) ( ) 11 D:d etcu hyld coy ecu I ptvpyety Ice cccv I puepvaca with ,espcce tu o-l,ich cndrhycdneea cv cuterd in u,quitiny the ptvpetty cc tn muhcny twpvccewevtt ehyyet:c ye c'hc,t, tcaa ucquited cvbjcct LInes LIN5 II ``Yes,'' attach detuiled statrmrvt, 12 Huvy yvu dyeing the yea, adcc'cutcd v,',cppvsed (icclc,tcyv tt,e publvtccvg disteibuyivg ci sturywycts) uvyvativyal, State, tyt lvcal leyislativn? LIves LIsa II "Yet,' uttuch u dctvilrd dreceipeivvvteuch scti,iycy,v nd cvpcvs vi any 13 Huuc yc:u dutcn the year paee:cipated iv, ye ,ntetcened iv (icclud,vg the pvblisl,icy cc d,,e,ibucivy cI statecvects) any p,clcticul catypyign cv behall cc in vppvaitivv tv avy ccv didate lye public vihcy' . LI nec LI Na It "Yes," uttach a detailyd desceiptivv vi such activities and cccpies vi any 87-444 0-68-73 PAGENO="1152" A. Who must file Form 990-A-An annual statement of gross income, receipts, disbursements, etc., is required by law of every organization which is exempt from tax as described in section 50l(c)(3) of the Code, excepting only: (a) a religious organization; (b) an educational organization if it normally maintains a regular faculty and curriculum and normally has a regularly organized body of pupils or students in attendance at the place where its educa- tional activities are regularly carried on; Ic) a charitable organiza- tion, or an organization for the prevention of cruelty to children or animals, if supported in whole or in part by funds contributed by the United States or any State or political subdivision thereof, or primarily supported by contributions of the general public; and td) an organiza- tion operated, supervised, or controlled by or in connection with a religious organization described in section 50l(c)(3), This return most be filed on or before the 15th day of the fifth month following the close of the annual accounting period with fhe District Director of Internal Revenue f or the district in which is located the principal place of business or principal office of the organization It the re turn is tiled for other than a calendar year, fill in taxable year space at fop of form. An organization having no place of business or prin' cipal office in any internal revenue district in the United States must tile with the Director of International Operations, Internal Revenue Service, Washington, D.C. 20225. The law provides penalties for failure to furnish the information required by this form, B. Group returns-A group return on this form may be tiled by a central, parent, or like organization for two or more local or- ganizations which: (a) are chartered by, or affiliated or associated with, the central nrganization at the close of the central orgassza- lion's annual accounting period; (b) are oubject to the general super- vision and examination of the central organization; and cl are exempt from tax under a group ruling which is currently in effect, Each local organization annually must authorize the central organization to in- clude it in the group return and must also annuallytile statements veri- fied under oath or affirmation with the central organization ot the information required to be included in the group return, The group return shall be in addition to the separate return of the central office organization but in lieu of separate returns by the local organizations included in the group return, There shall be attached to such group return schedules showing separately (a) the total number, names, ad' dresses, and employer identification numbers of the local organizations included; and Its) the same information for those not included therein, Prior to, or simultaneous with, the filing of a group return, the central organization must notify each District Director for the district in which is located the principal place of business or principal oftice of each local organization included in or excluded from such group return that the local organization has echos not been, or will or will not be, included is such group return. The filing with each District Director concerned, of a copy of the schedules listing the organizations included in and excluded from the group return, constitutes notice as required by the preceding sentence. C. Public inspention of Form 990-A-In addition to Pan I, organizations described in A above are also required by law to file certain information on Part II of this form which is made available to the public. In conneclion with Part II of this form all required information must be submitted except that the organization may omit any information relating to a trade secret, patent, process, style of work, or apparatus which would adversely affect the organi- zation, or any information which would adcersely affect the national defense. In ouch cases, the organization must submit this type of information only with Part I, together with a statement identifying which items are being withheld from Port II and the reasons for doing so. Schedules supporting specific entries or other information limited to Part I must be attached only to Part I of the return. These schedules must not be included on the same sheet scith those applica- ble to Part II since this information is open to public inspection. D. Signature and verification-The return must be signed either by the president, vice president, treasurer, assistant treasurer, chief accounting officer, or other corporate officer (such as tax officer) who is authorized to sign. A receiver, trustee, or assignee most sign any return which he is required to file on behalf of a cor- poration. If the return is filed on beisalt of a trust, it must be signed by the duly authorized trustee or trustees. The return must also be 1150 INSTRUCTIONS FOR FORM 990-A (1966) RETURN OF ORGANIZATION EXEMPT FROM INCOME TAX Section 5O1(c)(3) of the Internal Revenue Code GENERAL INSTRUCTIONS signed by any person, firm, or corperatios who prepared the return. tithe return is prepared by a firm or corporation. it should be signed in the name of the firm or corporation. The verification is not re- quired if the return is prepared by a regular fult-time employee of the organization. E. Form 990-T.-Seclion 511 of the Code imposes a tax is the case of certain organizations described in sections 401(a) and 501(c) (2), (3), (5), (6), (14) (B) or (C) with respect to taxable years beginning after February 2, 1966. and (17), on income derived: (a) from business which is unrelated to the purpose for whch such orga- nization received an exemption; or (hI from certain rentals from property leased to others on a long-term basis. (Use Form 990-T.) F. Form 1099.-Every organization engaged in a trade or busi- ness (s'ihich includes for this purpose all exempt functions) shall make information returns on Forms 1099 asd 1096 with respect to pay- ments made during the calendar year is the course of such trade or business concerning certain dividends, earnings, interest, rents, royalties, annuities, pensions, foreign items; and prizes, awards, and commissions to nonemployees. (See Section l.604t-l,.Income Tax Regulations.) Forms 1099 and 1096 are required to be submitted for payments ol dividends or interest aggregating $10 or move. (See Sections 1.6042-2 and 1.6049-1, Income Tax Regulations.) G. Attachments-The schedules contained on the otticiat form must be used unless the entry spaces provided are not sufficient br your needs. Attachments must contain the name and address ci Ihe organization as well as the required information and must follow the format of the schedules and must be presented in the same se- quence as the tines of the form. See General Instruclios C relating to information subject to public inspection. H. Organizations organised or created in a foreign country or United States poseession.-Amounts must be reported in United Stat en currency (state conversion rate used) and information must be tarnished is the English language. All items must be reported in aggregate including amounts from both within and without the United States. I. Officers, direntors, trustees, etc-Attach a schedule to pages 2, 4, and 6 indicating: (01 the name and position of each official (officer, director, trustee, etc.) of your organization (whether or not compensated); (b) the time each devoted to his position; and cl the compensation (including salary and expense account allowoncel, if any, paid to each. In addition, the schedule affached to page 2, but not to pages 4 and 6. shall indicate (by placing the appropriate letter nest to the name of each official) whether the ofticial was: (a) the creator or a substantial contributor; (b) a brother or sister, speuse, onceslor. or lineal descendent cl the creator or substantial contributor; Ic) an employee of the creator or substantial contributor or of a business venture owned (50 percent or more of voting stock or 50 percent or more of value of all stock of a corpo- ration, or a 50 percent or larger interest in the capitol or profits of an unincorporated business venture), directly or indirectly, by the creator and/or substantial contributor; (dl an attorney or accountant cf the creator or substantial con- tributor or of a business venture owned (50 percent or more of voting stock or SO percent or more of the value ci all stock of a corporation, or a 50 percent or larger interest in the capital or protits of an unincorporated business venture), directly or indirectly, by Ihe creator and/or substantial contributor; or el none of the above. 5. Market value of assets-Attach a statement to pages 2, 4, and 6 showing as of the end of the year: (a) the total market value of your investments in governmental bonds, etc., nooguveromental bonds and corporate stocks which are regularly traded in an over-the-counter market or on a stock exchange; (b( your estimate of Ihe total fair market value cf your other assets (including, but not limited to, governmental bonds, etc., nongovern- mental bonds and corporate stocks which are not regularly traded in an over-the-counter market or on a stock exchange); and Ic) the total of (a) and (b(, PAGENO="1153" 8. Attach a schedule to pages 1, 3, and 5 showing with respect to each asset (whether or not depreciable) sold or exchanged: (a) date acquired, manner of acquisition, date sold, and to whom sold; )b) gross sales price; (c) cost, other basis, or value at time nt acqui- sition it donated (state which); (d) expense xl sale and cost of im- provements subsequent to acquisition; (e) it depreciable property, depreciation since acquisition; and If) gain or loss-)b) plus el minus the sum xl (c) and (dl. 13. Attach a schedule to pages 1, 3, and 5 in support of contribu- tions, gitts, grants, scholarships, etc., showing: (a) each class at activity; (b) separate total (or each activity; )c) name and address ot donee and amount ot distribution to donee; and (d) relationship ot donee, it related by blood, marriage, adoption, or employment (including children at employees) to any person or corporation having on interest in the organization such as creator, donor, director, trustee, otticer, etc. Activities should be classified according to pur- pose in greater detail than merely charitable, educational, religious, or ocientitic. For example, paymenb tor nursing service, tar labora- tory construction, tar fellowships, or (or assistance to indigent families should be so identitied. Although the actual distribution of cash, securities or other prop- erty iota be entered on this line, the expenses in connection with the distributions and those expenses incurred for philanthropic programs operated by the organization itselt are not to be included on this line but should be entered on line 12 and in column 4 of Schedule A. Where the fair market value ct the property at the time of disburse- ment is the measure ot the contribution and is used in arriving at the amount to be entered on this line the schedule must also show: (a) description ct the contributed properly; (b) book value 01 the con- tributed property; (c) the method used to determine the book value; and (d) the date of the gift. In such case the difference between fair market value and book value should be reflected in the books 17. In all cases where money, securities, or other property aggre- gating $100 or more is received directly or indirectly from one person in one or more transactions during the year, attach an itemized schedule to page 1 (not to pages 3 and 5) showing the name, address, date received, and the total amount received from each such person. It the contribution is in the form of property the description and the fair market value of such property shall also be furnished. (The term "person" includes individuals, fiduciaries, partnerships, corpo- rations, associations, and other organizations.) 21. Attach a schedule to pages 1, 3, and 5 for contributions, gifts, grants, scholarships, etc., which were paid nut within the year, showing the same information required in Instruction 13. For those disbursements made in prior years only the total need be shown. Schedule A-See Genera) Instruction I for schedule required to be submitted concerning the officers, directors, and trustees of your ~or depreciation attach a schedule to pages 1, 3, and S showing: (a) description of property; (b) date acquired: (c) cost or other basis (exclude land); )d) depreciation allowed or a(lowab)e in prior years; (e) method of computation; if) rate (%) or life (years); and (g) depreci- ation this year (total additional first-year depreciation claimed must be shown on a separate line of the depreciation schedule). Expenses to be entered in column 2 of Schedule A should be ex- tended to columns 3 through 6 on the basis of accounting records. If such records do not provide for this division, expenses may be di' vfded on any reasonable basis, such as an approximation of the use of a facility or the time spent by an individual. 4~444o.s.sooEssrsisre:5siisoFriCE: Schedule B-The balance sheet should agree with the books of account or any differences should be reconciled. The total assets, line 13, and total liabilities and set worth, line 24. must be shown on the balance sheet. (1) In all cases where investments is corporate stocks of the close of the taxable year include 5 percent or niore of any class of stock of any corporation, attach a schedule to pages 2, 4, and 6 showing: (a) name of corporation, class of stock and whether the stock is voting or nonvoting; (b) number ot shares owned of each class at beginning and end of the taxable year; (ci total number of shares outstanding of each class; (dl value of stock as recorded in the books and f n- cluded is line 7; Ic) estimate of fair market value of slack; if) date acquired; )g) manner of acquisition; and (h) div:dends received on each class of such stock. (2) In any case in which you hold 5 percent or more of any class of stock of any corporation, indicate those in which your hold- ings plus the sum of the holdings of the following' (a) the creator 01 your organization; (b) a substantial contributor to your organization; (c) a brother or sister, speuse, ancestor or lineal descendent of such creator or substantial contributor; and (dl a business venture owned (50 percent or more of voting stock or 50 percent or more of value of all stock of a cor- poration, or a 50 percent oi larger interest in the capitol or profib of an unincorporated business venture), directly or indirectly, by any of the above; constitute 50 percent or more of the voting stock or 50 percent or more of value of al) stork of the corporation. Attach to page 2, but not to pages 4 and 6, a schedule showing the class of stork and number of shares owned (if known) in such corporation at the be- ginning and end of the year by the parties described in (a) through Id) of this instruction and designate the parties by relationship to your organization, not by individual names. (3) If your total accounts and notes receivable exceed $5,000. attach a schedule to pages 2, 4, and 6 indicating the total amount of accounts receivable and/sr notes receivable as of the end of the year which are attributable to each of the following categories: (a) receivables arising in connection with your organization's exempt activities, for example, scholarship loans; (b) receivables arising out of related or unrelated business activities; (c) receivables arising out of transactions in an account with a securities broker-dealer; and (dl other receivables. With respect to receivables described in (d), indicate for each receivable of $1,000 or more: (1) name of debtor; (2) amount of debt; (3) rate of interest, if any; and (4) cir- cumstances out of which such debt arose including, in the case of funds lent by your organization, the use, if known, to which the borrower intended to put the borrowed funds, (4) If your total accounts, bonds, and notes payable exceed $5,000, attach a schedule to pages 2, 4, and 6 indicating the total amount 01 accounts payable and/or bonds and notes payable as of the end of the year which are attributable to each of the following categories: (a) the purchase of supplies and services used in con- nection with your organization's exempt activities; )b) debts arising, out of related or unrelated business activities; (01 the purchase of securities from a securities broker-dealer; and dl other debts. With' respect to debts described in (dl, indicate for each debt of $l,000~ or more: (1) name of creditor; (2) amount of debt; (31 rate of interest, if any; and (4) circumstances out ot which such debt arose including, in the case 01 funds borrowed by your organization, the use to which you put the borrowed funds. Iristeuctions 990-A (19661 1151 SPECIFtC INSTRUCTIONS (References arc to tines or schedules on form) PAGENO="1154" 1L~2 EXHIBIT NO. 10 [From the Wall Street Journal, August 28, 19(371 FOUNDATION TWIST: How FAMILIES CREATE ORGANIZATIONS To CUT THEIR LIABILITY FOR PAR; GROUP GIVES 30-HOUR COURSE THAT PEACHES ITS MEM- BERS WAY To REVAMP FINANCES; BUT PROBER DOUBTS LEGALITY (By Byron B. Calame) Dr. M. R. Saxon, a general practitioner in Aurora, Ill., took a job last year as the salaried "medical aclniinistrator" of a nonprofit foundation engaged in research and development in the fields of "health, education and welfare." Though his salary is less than the rev~nues from his medical practice, Dr. Saxon concedes that taking the job was no financial sacrifice. Why not? Dr. Saxon has continued to treat the same patients with the same equipment in the same office building as before. However, there's one big differ- ence: Now, the nonprofit foundation collects all his fees, in turn providing him with a house, a car, a retirement plan and insurance-all tax free. Mrs. Saxon, her husband's nurse, is employed as the foundation's "assistant medical adminis- trator." And the Saxons' four children are attending college on educational grants from the foundation. The foundation contribiltes more money to charitable causes than Dr. Saxon did personally. But, the doctor says, he winds up paying "substantially" less in income taxes than he did before. EASY AS ABC Where did a medical man pick up such sophistication in the nation's complex tax laws? From a nonprofit membership trust called Americans Building Constitu- tionally, or ABC. Dr. Saxon paid a $7,000 membership fee to join ABC shortly after it was formed early in 1966. (The fee was raised to $10,500 last May 1.) An ABC trustee says the organization is "Henry Fordizing"-or mass produc- ing-legal and tax expertise long available only to the wealthy. In little more than a year of existence, this trustee says, ABC has helped more than 800 mem- bers in nearly all 50 states establish nonprofit foundations and related trusts that lessen the income, property and estate taxes the members pay. ABC's purpose is to "awaken the average creative person" to the benefits o. "restructuring" his business and estate on a not-for-profit basis, says Robert D. Hayes, a Barrington, Ill., sales training expert and one of ABC's trustees. Wealthy families recognized early in this century, Mr. Hayes says, that the principle of tax exemption for nonprofit endeavors "provides a means of giving people a chance to benefit mankind and have certain advantages." He adds: "If it's legal, moral and ethical for them, it ought to be ethical for everyone else." At a time when Congress is considering tighter controls over tax-exempt foun- dations, ABC is attracting the attention of some state and Federal officials. Cali- fornia and Illinois officials and a Congressional subcommittee are known to be poking into ABC's affairs. UNANSWERED QUESTIONS In California, the state attorney general has taken legal steps to try to require two ABC members, B. Douglas Fahy and Charles H. Billings, both Long Beach insurance men, to answer 33 questions about the trust's operations. Phe members so far have declined. Deputy Attorney General Lawrence H. Tapper has told a state court that he "had reason to believe that information furnished by ABC to its members regarding the creation and use of charitable trusts and founda- tions was false and misleading and thereby inclined to lead its members into activities which would subject them to civil and criminal liability." Messrs. Fahy and Billings have denied that Mr. Tapper's statement is accurate. In a reply filed in the court by an attorney for the two members, they deemed it "shocking that the citizens of the state of California should be summoned to sweeping and undefined inquisitions such as is sought by the head of the (state) department of justice." Mr. Hayes, the ABC trustee, calls the organization's activi- ties "legal and sound." James R. Walsh Jr. of Chicago, a law school graduate who plays a big part in ABC though he has no title and isn't one of its three trustees, says the California attornely general is "whistling in the dark." Mr. Walsh emphatically denies any suggestion that ABC's plan is a tax dodge. "I'm going to program that out of your mind," he says to an interviewer. PAGENO="1155" 11t53~ The consumer fraud section of the Illinois attorney general's office is investigat- ing ABC, which has its main office in Barrington, Ill. A spokesman for the attor- ney general's office says the organization's activities were brought to its attention this year by the Illinois Bar Association, which had investigated the group. "We still are not sure what the plan consists of," says the spokesman. WRIGHT PATMAN, TOO A House of Representatives small business subcommittee, which has been study- ing private tax-exempt foundations since 1962, is about to consider ABC's opera- tions. "I am deeply concerned about it," says Rep. Wright Patman of Texas, who is chairman of the subcommittee. H. A. Olsher, the subcommittee's director of foundation studies, has gone to Illinois to learn about ABC first hand. A spokesman for the Internal Revenue Service says the IRS is "apprehensive" about ABC. But the IRS has taken no position toward it. "We expect an investi- gation of the whole organization by the IRS," says ABC's Mr. Hayes. ABC's growing membership list is kept confidential, but it is known to include newly established foundations of some prominent professional men and women. It includes one foundation of some national repute, the Philippa Schuyler Me- morial Foundation, on whose advisory board sits Henry Cabot Lodge. Officials of ABC have approached the National Farmers Organization (NFO) about the pos- sibility of helping farmers establish tax-exempt foundations for themselves. One organization has been set up in Illinois to help foster such foundations. The NFO, however, has declined to connect itself with the ABC program. ABC recruits members by word of mouth. Prospects get invited to an intro- ductory meeting. An ABC representative spends three to four hours explaining the plan. If the prospect decides to join ABC, he makes an initial payment of $1,050, This pays for 30 hours of instruction in how to use the complex legal web of foundations and trusts that ABC can create for him. But he is supposed to promise never to divulge any of the "methods, procedures or techniques" used, or the identity of any other member. After instruction, the new member has the option of paying $4,200 more to have a non-profit foundation created for his benefit, or paying $9,540 more for the entire ABC "package" that would take over his business and assets. The package normally would include several related foundations and trusts. A recent prospect for membership in ABC describes what took place at his in- troductory meeting. He first was introduced by an ABC member who told him the ABC plan was "not a program to evade or avoid taxation, but rather a philosophy, a veritable way of life, by which one through serving himself and his family would ultimately render a greater than normal benefit to mankind." Then the prospect was given a paper of quotations about citizenship, including an excerpt from a decision by the late Federal Judge Learned Hand on taxation: "Anyone may arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which best pays the Treasury; there is not even a patriotic duty to increase one's taxes." The prospect says the ABC package plan was explained something like this: First, you establish a trust for a "recognized beneficial purpose" under your state's law. You give your home and car and possibly a money endowment to the trust; these assets are no longer subject to state or local real or personal property taxes. WORKING FOR YOUR FOUNDATION The trust establishes a nonprofit corporation, or foundation. You sign a con- tract with the nonprofit corporation that permits it to sell your services as a doctor, lawyer, engineer or what ever. Your patients, clients or employers pay the nonprofit corporation for your services; the income to the corporation isn't taxable income. The nonprofit corporation pays you a small salary and reimburses you for most of your living expenses ("just about everything except your booze and cigarettes," says one an familiar with the setup. The rest of its income is trans- ferred to a second nonprofit organization. The transaction by which it is trans- ferred supposedly changes the income into capital, which is invested. The capital accumulated by the second nonprofit organization presumably could be used from time to time for your benefit or your family's-as in Dr. Saxon's case, for example, in the form of educational grants to children in college. Joining ABC brings other benefits. If one member can convince another indi- vidual to join, his foundation receives a $2,000 "endowment" out of the fees PAGENO="1156" 1154 paid by the new member. The first member's foundation also gets $1,000 of the fees paid by any members attracted by the s~cond member, and $500 of the fees paid by the next "generation" of members. This arrangement, say's ABC's Mr. Walsh, is much like the "referral system" in many professions. "The incentive (to bring in new members) had to be strong," he says. - "CHAIN LETrER?" An Illastern lawyer critical of ABC says, on the other hand. "Its the chain letter idea on a big scale." An Illinois `doctor who is a member of ABC says, "I thought this (endowment plan) was not very professional." Legal services in setting up a new member's foundation or foundations, and his trusts are handled by lawyers in his state who are recommended by Barrington Institute, a nonprofit organization that is itself a member of ABC, Mr. Walsh says the legal instruments that these lawyers tailor to each member's individual situation are an "amalgam" of knowledge that he-and an associate he declines to name-pieced together over 40 years. `Some of the legal expertise, he says, came indirectly from lawyers involved in some well-known foundations and trusts. Mr. Walsh figures it would take the average lawyer a year to duplicate the ABC package, and it would cost between $25,000 and $50,000 in legal fees. One ABC member says a significant number of its members are medical men-chiropractors, dentists, general practitioners, and osteopaths. He says that members are able to turn over their assets to the ABC-created trust, yet still control them. ABC members, however, say that salaried individuals also could utilize the ABC concept by assigning future earnings to their foundation and having it "vend" their services to their employer. The key is to relate the foundation's `tax-exempt purpose to the business or profession of the member. For example, an insurance man who is a member of ABC controls a foundation created for "re- search and development in the utilization and insuring of human life values, both material and non-material. . . ." This he says, describes his insurance sales work for a CalifOrnia insurance agency. FARM RESEARCH Mr. Walsh says nonprofit "civic organizations" are to be set up in every county in Illinois. These civic organizations would recruit members, many of them farmers who would set up foundations for research and development in food nutrition and related areas such as cattle-feeding and soil improvement. Of the $10,500 membership fee paid to ABC, Mr. Walsh says, $3,500 goes in the form of an endowment to Barrington Institute and $3,500 for ABC. ($3,500 is reserved for "endowments.") Mr. Walsh says that Mr. Hayes and the two other trustees-Richard J. Stephenson and J. Alton Lauren, both of Chicago- use the $3,500 paid to ABC to achieve the "highest and best good" for ABC's members. None of the trustees receives any money from ABC, says Mr. Walsh. However, Mr. Walsh says his own foundation, a member of ABC, receives money from ABC for certain services that his foundation provides. He declines to say how much money. Mr. Hayes' foundation is called Sales Analysis Institute Foundation of Illinois Inc. Its employes teach the 30-hour course for new ABC members around the country. The foundation offices are in the same building in Barrington as ABC. The institute is much older than ABC, and much of its business consists of providing training services for large companies such as General Motors Corp. NO TAX-EXEMPT RULING Mr. Hayes says the Sales Analysis Institute Foundation pays no income taxes and never has applied for a ruling from the Internal Revenue Service on its tax-exempt status. Many tax lawyers believe that a regular corporate tax return has to be filed, and income taxes paid, unless an organization submits an appli- cation for a ruling. That doesn't bother. Mr. Walsh. "One group is interpreting the law one way, and one group is interpreting the law another way," he says. He and Mr. Hayes both say they think the question will wind up in a court some day. Mr. Hayes says an IRS representative has "visited" his foundation. A disagreement over "the treatment of certain tax items has caused a falling- out. between Mr. Hayes' institute and the big accounting firm of Ernst & Ernst, PAGENO="1157" 1155 according to an Ernst & Ernst spokesman in Chicago. The firm dropped Mr. Hayes' outfit as a client six to nine months ago.. Mr. Hayes is not the only ABC member who has not applied for a tax exemp- tion ruling from the IRS. The Saxon foundation hasn't filed either. "I don't have any intention to file," says Dr. Saxon, who says he is taking that position on ABC's advice. Mr. Walsh says part of the $3,500 which goes to ABC from a membership fee is set aside in a legal defense fund. Money from the fund goes to protect ABC members from legal attack by the IRS or any other governmental agency, he says. ABC is paying the legal expenses of Mr. Fahy and Mr. Billings, the two Long Beach, Calif., members who have been subpoenaed by the California attorney general in his investigation. Mr. Walsh says a summation of the information given new members in the 30-hour ABC training course will be made available "shortly" to all state attor- neys general. AIDS TO VIETNAM In its only formal public announcement to date, ABC said last month that more than 50 member organizations had made grants totaling about $30,000 for various research and development projects in Vietnam. The grants were all made to the Philippa Schuyler Memorial Foundation, which will supervise the use of the grants~ through a program called "Winning the Peace." Though he has a law degree, Mr. Walsh is not a practicing lawyer. Neither is Mr. Stephenson, a trustee of ABC, though he also has a law school degree. Mr. Lauren, also an ABC trustee, is a real estate man. A person close to the operations of ABC says Mr. Walsh originated the ABC concept and went looking for the "best training outfit in the country" to sell it. Thus he met Mr. Hayes and learned about his sales training institute. Mr. Walsh says his own Walsh Foundation was formed in the District of Columbia in 1947. He hasn't paid any Federal income taxes since, he says. He says his father, now dead, was active in the establishment of pension funds, and dealt with some of the New York law firms that handled the establishment of nonprofit foundations. The Sales Analysis Institute of Mr. Hayes was operated as a profit-making corporation until it became part of the Sales Analysis Institute Foundation last year. "Bob Hayes is a very shrewd gentleman," says an old acquaintance, "but he has never lied once in his life." Mr. Hayes says he had many doubts about the ABC plan when Mr. Walsh first explained it to him, but he says he is wholly convinced now that it is perfectly legal. EXHIBIT NO. 11 [From the Wall Street Fournal, Aug. 29, 19671 IRS Is STARTING INQUIRY INTO FOUNDATIONS SET UP BY INDIVIDUALS TO PARE FEimi~L TAX (By Richard F. J~anssen) WA5HINGT0N.-The Internal Revenue Service is starting an intensive in- vesigation of a plan promoted by a Barrington, Ill., group for individuals to minimize Federal Income taxes by setting up foundations to manage their business affairs, a high IRS official said. As detailed in yesterday's Wall Street Journal, the Illinois group, called Americans Building Constitutionally, or ABC, advises individuals on how to channel most of their income through such foundations. Particularly in light of the new attention focused on the operation, the IRS official said, "we will attack . . . we sure as hell aren't going to let these things go unchallenged." * For one thing, the official said, IRS agents will seek the membership list of ABC, which claims more than 800 members in nearly all 50 states. The agents then will study the situations of the individual members to see if tax exemp- tion rulings they've received should be kept in force or revoked in a civil proceeding. If any false statements are found in exemption applications, criminal action could result, officials said. Robert D. Hayes, ABC trustee, noted in Barrington that the organization had expected the IRS investigation to come "sooner or later." He said IRS officials had contacted ABC "about three days ago." The IRS has indicated it will sub- PAGENO="1158" 1 1~56 mit a list of questions it would like to have answered about ABC's activities, the trustee said. "We haven't done anything illegal," Mr. Hayes declared. "And we're going right ahead with what we're doing," he said. Mr. Hayes said ABC officials had told the IRS that its membership list was regarded as "confidential" and that ABC "wouldn't divulge" any names. Some of the individuals, according to the account, haven't ever sought IRS rulings conferring tax-free status on their foundations. "Without a ruling, they're completely vulnerable," the official maintained. The organization's comments indicate, though, that it disputes the idea that such rulings are necessary, and officials suspect ABC or its members might well fight any IRS challenges in court. The IRS, however, maintains that Federal law authorizes the service's rul- ing on tax exemptions. "I suspect we're going to have a good fight on our hands, but we won't lose it for lack of trying," an official said. When advance rulings are requested, the IRS usually issues them on the strength of the organizers' own statements on the purposes of the foundation without taking time to thoroghly check them out. Such requests, numbering more than 14,000 annually, usually appear to be very "innocent," an official said, but he noted that whether a group is permitted to retain its exemption depends on its "actual operation" rather than just its stated purposes. The matter of determining when tax-free status is justified by an organization's activities isn't a simple one, analysts conceded, and they aren't ruling out the possibility that they may have to seek a tougher law from Congress. As an example of the foundations' workings, the Wall Street Journal story described one set up by a Midwest doctor who said his foundation collects all his fees and in return provides him, tax-free, with a house, a car, a retirement plan and insurance, and is providing grants with which his four children are attending college. Revenuemen believe the providing of tax-free housing leaves a foundation open to question. Generally, the only situation in which housing can be provided with- out giving rise to a tax liability, they say, is when the nature of the job requires the person to live on his duty post. A doctor ordered to live in a hospital wouldn't be taxed on the value of his quarters, for example, one says, "but if he starts living down the street, he's open to challenge." Another red flag to revenuers is when a foundation gives some of its money to members of the family that created it. They also are particularly skeptical when a foundation "pays" benefits that recipients in the family considered to be tax- free. EXHIBIT NO. 12 [From the Washington Post, Oct. 11, 19671 TAX-EXEMPT FUND PROBE SET (By Morton Mintz) Rep. Wright Patman (D-Tex.) set hearings yesterday on possible "massive tax-dodging" by foundations that are produced on an "assembly line" and sold with a simple and appealing argument-that tax minimization in a democracy should not be for millionaires alone. The first witnesses will be trustees and members of the pioneer foundation- manufacturing enterprise, the year-old Americans Building Constitutionally (ABC) of the Chicago suburb of Barrington. If ABC's success tempts others into the field, Patman said, tax-exempt founda- tions could become as commonplace "as bathtub distilleries were during the prohibition era"-and could lead to "chaos for the Nation's tax structure." The hearings, which will begin Oct. 30, will be held by Patman as Chairman of the House Small Business Subcommittee on Foundation. He has contended for years that the Treasury Department has made-and then only after "repeated goadings"-a "minimum effort" to curb abuses by tax-exempt foundations. In announcing the hearings, Patman said that ABC's promoters "take the position that tax-dodging-via the foundation gimmick-should not accrue solely to the Rockefellers, the Fords, the Mellons, the Carnegies and other million- aires," and that "ordinary business and professional men should be allowed to do the same on a smaller scale. It is an argument that is hard to answer. . . PAGENO="1159" 1157 In Barrington, Robert D. Hayes, ABC's trustee and chief administrator, said in a phone interview, "That is exactly what we believe, and that is the basis for our operation." A different view of the operation may be taken, however, by the Internal Revenue Service, which began an investigation in August after a lengthy story on ABC appeared in the Wall Street Journal. On the ground that it is not required by law, ABC has not filed an application for tax exemption. For the Patman hearing, invitations to testify have been sent to Hayes, who said he would accept; to James R. Walsh Jr., also of Barrington, who is credited with conceiving the grand plan for ABC; to George Schuyler, president of the Philippa Schuyler Memorial Foundation of New York City, and to Dr. Michael R. Saxon, medical administrator of the Saxon Foundation of Aurora, Ill. Philippa Schuyler, a 34-year-old concert pianist, was killed recently in a helicopter crash in Vietnam. Dr. Saxon is one of more than 800 persons throughout the Nation who, Hayes said, have paid ABC up to $10,500 each to obtain legal advice and expertise on tax-exempt foundations. According to the Subcommittee, one such ABC-tutored organization, the Forensic Science Institute, is headed by Herman B. Kimsey of 1723 G st. nw. A former Central Intelligence Agency official, he handled security for Barry M. Goldwater in the 1964 Presidential campaign and was a volunteer for the Schuyler Foundation. For $1050, Hayes said, an "educational" membership can be bought in ABC. The buyer gets about 40 hours of instruction on how to use the intricate complex of trusts and foundations ABC can set up for him. He promises never to divulge ABO's trade secrets. "Why should we educate the competition ?" Hayes asked. For an additional $5250, ABC will set up a specially tailored nonprofit founda- tion. For a total payment that has ranged between $7000 and $10,500, the buyer gets the complete ABC package. One incentive to buy the full package is that the buyer's foundation becomes eligible for a $2000 "endowment" out of fees paid by a new member he brings into ABC, plus $1000 out of fees paid by those the new (second) member brings in, plus $500 of fees paid by the following generation. This arrangement is compared by ABC's Hayes to country club's. Some in- vestigators take a less benign view. Of the $3500 retained by ABC from a membership fee, part is set aside for defense against legal attacks. Hayes said ABC is paying the legal expenses of B. Douglas Fahy and Charles R. Billings, Long Beach (Calif.) insurance men. They have refused to answer a total of 33 questions, some dealing with financial aspects, in an investigation by State Deputy Attorney General Lawrence R. Tapper. The dispute is in the courts. Another, continuing investigation is being made by the consumer frauds section of the office of the Illinois Attorney General. Subcommittee investigator Harry A. Olsher said that in Aurora, Ill., Dr. Saxon's foundation collects his fees, employs his wife as "assistant medical administrator," has made grants for the college education of their children and provides the physician with a house, a car, insurance and a retirement plan. EXHIBIT NO. 13 [From the Philadelphia Inquirer, Oct. 11, 1967] PATMAN PROBES THE ABC WAY OF How TO AvoID TAXES: BECOME A FOUNDATION (By Joseph C. Goulden) WASHINGTON, October 10.-Rep. Wright Patman (D., Tex.) announced hearings Tuesday into what he called "the mass production of tax-dodging foundations that could conceivably wreck the (U.S.) Treasury." Hearings opening Oct. 30 will center upon an outfit called "Americans Building Constitionally" (ABC), of Barrington, Ill. Patman says ABC has taught some 800 physicians, dentists and other profes- sional people to create their personal, tax-exempt foundations which enable them to avoid payment of any personal income taxes. ABC charges as much as $14,000 for what Patman calls "instruction in tax- avoiding techniques." PAGENO="1160" 1'Th8 Robert P. Hayes and James R. Walsh, ABC organizers from Barrington, a Chicago suburb, are to be the first witnesses. "Officials of this outfit are quite frank to admit they are attempting to mass produce the tax-dodging specialties that were once associated only with million- aires," Patman said in a statement announcing the hearings. "It looks as if this group has set up a mammoth assembly line for turning out foundations. "If it continues to operate, and, if its success is what I think it could be, other groups will undoubtedly go into the same business. Tax-exempt foundations will be as commonplace in this country as bathtub distilleries were during the Probi,bition Era." Patman is chairman of a subcommittee of the House Small Business Committee that has been probing foundations for five years. The committee director, H. A. Olsher, estimated Tuesday that its disclosures have resulted in tax collections of some $28 million from seven of the (300 foundations studied. In essence, ABC shows upper-middle income persons how to establish a "trust" which assumes title to most of their property, and which collects their professional fees. In return, the "beneficiaries" draw a small salary and living expenses. All funds paid directly to the foundation which "employs" them under contract are tax-free. Patman is worried about the ABC deal because "it gets right into the possi~bility of massive and popular tax-dodging."~ INCOME "PERILED" He says, "When millionaires set up tax-dodging foundations, that's bad enough, but when foundations become as common as the Model T once was, then the Government's income faces a real and grave peril." ABC officers have been guarded in their interviews with Patman's investigators. However, their 800 clients are said to come from most of the 50 States, and to include some salaried persons. The officers also insist their operation is perfectly legal-and no one has been ajile to prove otherwise, although ABC is under attack in California for what a deputy attorney general calls "false and misleading" statement to potential members. Under the ABC system, the "private" foundations do not apply for tax-exempt status from the Internal Revenue Service. Its officers told Patman's men they don't feel they are required to do so-and that they expect a court test of their contention shortly. IRS began its own probe of ABC and its client-foundations in August after Olsher, of Patman's staff, opened the subcommittee investigation. IRS wants to determine if the foundations have a legitimate claim to tax-exempt status. Another investigation is being run by the consumer fraud section of the Illinois State Attorney General's office, the result of complaints by the Illinois Bar Association. One person familiar with the investigations said a ruling that the foundations are illegal under tax laws could open a Pandora's Box of troubles for the persons who created them. "A doctor who set up one of these things surrenders title to everything he owns-house, car, and personal possessions. CONFUSION FORECAST "He still controls them through the foundation, but what if the foundation turns out to be an illegal creature? Regardless of the ultimate ruling, we are go- ing to have some confusion." The subcommittee is also to hear testimony from George Schuyler, the New York journalist, concerning a foundation honoring his daughter, Philippa, who was killed in Vietnam in May. ABC helped Schuyler create the foundation. Henry Cabot Lodge, onetime Ambassador to South Vietnam, has been listed as a member of the Schuyler Foundation's advisory board. ART OF KEEPING IT WASHINGTON, October 10.-Americans Building Constitutionally, the Illinois group under Congressional study for the alleged "mass production of tax-dodging foundations," uses a quote from the late Judge Learned Hand in its promotional material: PAGENO="1161" 1i5~ "Anyone may arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which best pays the Treasury; there is not even a patriotic duty to increase one's taxes." According to investigators for Rep. Wright Patman (D., Tex.), ABC is teaching ordinary business and professional men to employ the same techniques which enabled the Fords, the Mellons, the Carnegies and the Rockefellers to put much of their money beyond the tax collector's reach. A case history to be aired in public hearings beginning Oct. 30 is that of Dr. Michael R; Saxon, who is listed as "medical director" of the "Saxon Foundation" of Aurora, Ill. The foundation was created under Illinois law to do research and develop- ment in "health, education and welfare." It claims tax-exempt status. Dr. Saxon's role as "medical director" of the foundation permits him to do pretty much what he did before it was founded-~to work as a general practitioner, with the same office, :same patients, and same fees. Only the fees are paid to the foundation. In return, Dr. Saxon receives a house, a car, retirement benefits and insurance, all tax free. Previously, Mrs. Saxon had been her husband's nurse. Now she is "assistant medical administrator," and shares in the benefits.~ The foundation has made "educational grants" that pay college bills for the Saxons' four children. Dr. Saxon's patients receive bills from the foundation, Whose income is not taxable. Patman investigators report that Dr. Saxon formed the foundation with the aid of ABC, and that neither he nor ABC officers see anything wrong with the arrangement. ABC offers members a "start-to-finish" foundation plan similar to that created for Dr. Saxon. Persons who join receive some 30 hours of instruction in how to take advantage of tax and foundation laws. The most complete package deal costs menibers up to $14,000. However, a person with a six-figure income is said to be able to save much more than that amount in taxes in a single year. Salaried persons can participate if their employers are willing to assign their earnings to the beneficiary foundation. In return, the employee draws a living stipend from the foundation. EXHIBIT NO. 14 [From the Washington Post, Oct. 13, 19671 IRS CAUTIONS ON LEGALITY OF PRIVATE TRUSTS (By Morton Mintz) The Internal Revenue Service expressed doubts yesterday about the legality of widely promoted plans for tax avoidance that involve setting up private founda- tion for doctors, lawyers and others in the upper-middle income brackets. The IRS also warned participants that they may yet have to pay the taxes they are trying to escape by operating a business "under cover of the foundation as an `educational' or `research' activity." The "mere coloration of an otherwise profit-making business with ostensibly exempt purposes does not make it exempt under the law," the agency said. REPLY TO INQUIRIES The IRS statement was issued in response to inquiries made after Tuesday's announcement by Rep. Wright Patman (D-Tex.) that on Oct. 30 hearings will be started by his House Small Business subcommittee on foundations. Patman said the inquiry will concern "massive tax dodging" by mass-produced foundations and will lead off with testimony from members and trustees of the pioneer merchandiser in the field, Americans Building Constitutionally (ABC) of the Chicago suburb of Barrington. ABC is itself "a trust (not for profit) ." Robert D. Hayes, chief administrator and one of three trustees, has an "educational" foundation of his own, the R. D. Hayes Family Foundation. In a phone interview Tuesday, Hayes said PAGENO="1162" 11&~ that in the belief it was unnecessary he has filed no application for Federal tax exemption for the Foundation. TRUSTEE EXPELLED A second trustee, J. Alton Lauren of Chicago, it was learned, was expelled in November, 1965, from the American Institute of Real Estate Appraisers for viola- tion, of its "Bylaws, Code of Ethics, and Regulation No. 10 (Standards of Professional Conduct.)" The action against Lauren, an investment and real estate broker, was taken in confidential proceedings by the Institute's governing council. Lauren failed to return phone calls placed by The Washington Post yesterday and Wednesday. Although not listed as an officer, James R. Walsh Jr., about 50, is credited by Harry A. Olsher, director of the Subcommittee, with being "the principal archi- tect" of ABC. At a meeting in Barrington, Olsher told a reporter, many of the questions he put to administrator Hayes were answered by Walsh. Government investigators believe that this is the same man as the James Roberts Walsh, Jr., who pleaded innocent to indictments returned by grand juries here-and dismissed on motion of the Government-more than a decade ago. On Tuesday, Hayes said he "most certainly will" ask Walsh `about the D.C. indictments. Since then, neither he nor Walsh has responded to phone calls. In an indictment returned in December, 1964, James Roberts Walsh, Jr., 38, and another man were charged in the fraudulent sale of a widow's oil leases. A year later, Walsh and his late father were indicted for conspiracy, false pretense and larceny in connection with a `scheme to build the "Skyline Country Club" on a tract in Loudoun County, Va., `and Jefferson County, W. Va. The IRS statement said the agency has been checking for eight months "a number of foundations" set up as family trusts for tax avoidance. Usually, the taxpayer turns over to the foundation his business `assets and all, or a substantial part of, hi's other assets. Then he becomes the foundation's director or trustee. POSSIBLE ACTIONS As a result of a tax examination, IRS said, "one of several things may happen." The possibilties: "All of the income may be taxed to the founder as income earned by him, or the foundation's alleged exempt status may not be recognized and the business income may be taxed in the usual way." If an exemption is approved, IRS said, business income might be ruled "unrelated" and taxed `anyway and benefits-cash, property or services-flowing from the foundation to the founder or his family might be treated as taxable income to the founder. EXHIBIT NO. 15 [From Medical Economics, Oct. 16, 1967] How TAx-FREE CAN You GE'r? While many doctors dream of a tax-sheltered life, Dr. Michael R. Saxon, an Aurora, Ill., general practitioner, seems to be living it. Dr. Saxon has set up his own nonprofit foundation to run his practice. Instead of paying fees to him, his patients pay them to the foundation. The foundation, in turn, pays him a salary. Though that taxable salary is much lower than he formerly netted from his practice, the doctor also draws many fringe benefits from the foundation, and he pays no income tax on them. Among those fringe benefits are maintenance `and upkeep on his house and car, insurance, a pension fund, and college tuition for his four children. Since `he pays no tax on these, Dr. Saxon is quite satisfied with a modest salary. Even after the foundation pays his fringe benefits, salary, and expenses, there's still some money left over. But the foundation pays no income tax on that surplus because of its status as a nonprofit organization. The G.P. says he's planning to use that `accumulated capital to improve his medical facilities. Dr. Saxon's foundation was described by The Wall Street Journal recently in an article about an organization known as Americans Building Constitutionally, or A.B.C. That organization, in Barrington, Ill., is engaged in setting up founda- PAGENO="1163" 1161 tions for people like Dr. Saxon. It charges a fee of $10,500, which is partially refundable if the client gets another person to take the organization's services. For that $10,500, A.B.C. gives instructions in how to set up a nonprofit foun- dation. It also provides the legal expertise that a local lawyer can use to set up a foundation according to the laws of his home state. Part of A.B.C.'s counsel is that a foundation should not seek a ruling from the Internal Revenue Service approving its tax-free status. Dr. Saxon has followed that advice. Many lawyers feel, however, that a foundation cannot legally claim tax-free status unless it has gotten such a ruling from the I.R.S. Gustave Simons, a New York attorney with considerable experience in setting up foundations, agrees with A.B.C. that a ruling isn't legally necessary, but feels that it's a practical necessity. "Without a ruling," he says, "the I.R.S. can always claim that a founda- tion was not in fact entitled to its~ tax-free status and can then assess taxes for any number of past years." Ordinarily, three years after a tax return has been filed, it can no longer be questioned by the I.R.S. Simons has more serious reservations about foundations of the type set up by Dr. Saxon. These reservations concern the extent of fringe benefits the founda- tion supplies. "The tuition payments alone could cause the I.R.S. to disqualify the foundation," Simons says, "and through the foundation could reimburse a doctor for ordinary and necessary expenses, it couldn't pay for more of his house or car than he could justify as practice-connected. It's just the same as a doctor in pri- vate practice claiming all of his home and car as professional expenses without being able to back up the claims. The I.R.S. wouldn't stand for it." The I.R.S., in fact, has said that it plans to investigate the A.B.C. foundation setup. As one I.R.S. spokesman puts it: "We're not going to let those things go unchallenged." Simons adds, however, that while some foundations' practices may be ques- tionable, a properly set up foundation "could be the best way to solve some M.D.s' tax. problems." In many states, he says, medical care foundations may be organized by qualified groups who maintain a hospital-like facility, such as a clinic. Doctors involved could benefit from tax-free accumulation of income in a retirement fund, along with reasonable salaries and payment of bona fide expenses. Dr. Saxon says he's not worried by the I.R.S. threat. "I'm sure that what I'm doing is permitted by law," he says. "It's the same thing, but on a smaller scale, as the Mayo Clinic. It enables me to provide for my own and my family's modest needs and then to make a contribution to so~iety. I'd welcome the opportunity to show other doctors how to do it." EXHIBIT NO. 16 [From the Wall Street Journal, Oct. 25, 1967] TRIBULATIONS FOR TRUSTS: MARKETER OF TAX-SAVING FOUNDATIONS FOR INDIVIDUALS FACES RISING TROUBLE (By Byron E. Calame) BARRINGTON, 111.-Troubles are mounting for American Building knstitution- ally, the organization that claims to be mass-producing tax-saving foundations and trusts for hundreds of middle-income Americans. ABC members pay $10,500 for the creation of a package of foundations and trusts that supposedly will minimize thejr income and estate taxes. This is usually accomplished by setting up a nonprofit foundation that takes over the in- dividual's business (supposedly making all, the income tax-free) and then hires him to operate it. There are other mechanisms for taking the ABC member's house, stocks and other assets off the tax lists. Now, however, the legality of the tax benefits offered by ABC is under invest- igation by the Internal Revenue Service, a Congressional subcommittee and attorneys-general in California and Illinois. One man the various investigators are particularly interested in questioning is James R. Walsh Jr., who is generally credited with being one of the principal architects of ABC. It has been learned that Mr. Walsh, about 50 years old, previously has been involved in legal difficulties and that apparent discrepancies exist in certain representations he has made to prospective ABC members and others about his personal background and experience with foundations and trusts. PAGENO="1164" 111i62 UNDERWORLD LINKS Mr. Walsh has been linked, in one deposition prepared for the Cook County (Ill.) Circuit Court, with a savings and loan association that had dealings with the Chicago underworld. In another proceeding, the same court found that Mr. Walsh participated in a 1963 scheme to "misappropriate" a total of $365,090 from the owners of a suburban Chicago apartment project. Long before this, Mr. Walsh apparently had problems in the courts. He and another individual were indicted in the District of Columbia in 1954 for allegedly "tricking" a widow into giving him $3,500 in connection with the sale of certain oil leases she owned; however the indictment was later dismissed. In 1955, Mr. Walsh. and his father, James R. Walsh Sr., were indicted on charges of grand larceny after they allegedly took several thousand dollars from a number of individuals for the development of a country club in Virginia that never ma- terialized. But this indictment also was dismissed by the Government. Even before-that, police records in Hot Springs, Ark., show that Mr. Walsh was convicted on-a loitering charge in March 1910, and served 90 days in jail. In December 1944, .Mr~ Walsh was arrested in the District of Columbia and charged with "assault with intent to kill." However, the charges were never formally pressed in court, according to the court records. Mr. Walsh couldn't be reached for comment on these two incidents. On earlier occasions, Mr. Walsh, who doesn't have any official position with ABC, has declined tO discuss his past or other matters relating to the organization. "I've had a lot of problems in my life, but you are invading my privacy. At the proper time, I'll make an explanation." - Robert D. Hayes, managing trustee of ABC, denies any knowledge of most of Mr. Walsh's legal difficulties. But he says he plans to check into them and will `be "most concerned" if they are true. Meanwhile, Mr. Hayes, who is 66 years old, says he has complete confidence in the "character" and "reputation" of Mr. Walsh. A sales training expert for 35 years, Mr. Hayes says he was introduced to Mr. Walsh and his "exciting idea" in 1965 and together they created ABC in early 1966. Despite Mr. Hayes' imperturbability, a visit to ABC's plush headquarters in a converted mansion in this Chicago surburb indicates a few cracks in ABC's struc- ture. The Philippa Schuyler Memorial Foundation, which is named for the Negro pianist killed in Vietnam earlier this year and whose advisory board included such prestigious names as Henry Cabot Lodge, William F. Buckley, editor of The National Review, and former Congressman Hamilton Fish, has quietly severed its ties with ABC. ABC, which had helped finance the establishment of the Schuyler foundation, denies that the break with its most prominent member foundation is final. Under the guidance of ABC, the Schuyler foundation had launched a Vietnamese aid program last June called "Winning the Peace." The program attracted nation- wide attention to ABC, which said last July 26 that member foundations had made grants totaling more than $30,000 to the program. However, it has been learned from an officer of the Schuyler Foundation that only about $15,000 in grant money has actually reached it. Mr. Hayes says ABC has no control over individual ABC- member foundations that may have failed so far to meet their grant pledges. Last August, M.essrs, Walsh and Hayes told this newspaper that ABC then had "in excess" of 800 members. Mr. Hayes now concedes that the estimate was "slightly optimistic." Other sources close to ABC suggest that the total number of members is closer to 250. HOUSE PANEL TO START HEARINGS Rep. Patman's House subcommittee on foundations has subpoenaed certain rec- ords of ABC for hearings that will begin next week. Mr. Hayes and Mr. Walsh both have been served with subpoenas to testify. In the civil suit against Mr. Walsh and seven other defendants, in which a Cook County circuit court judge awarded the owners of the Boxwood Apartment project in Mount Prospect, Ill., a $365,000 judgment, attorneys for the plantiffs say the judgment hasn't- been satisfied. Mr. Walsh has declined to comment on whether he plans to appeal. The civil court decree states that Mr. Walsh and an associate, George Stan- aszek, "fraudulently misappropriated or otherwise secreted for their own per- sonal use and benefit" $100,000 in rent proceeds they had collected while em- ployed to manage the apartment from early 1963 to February 1964. The decree PAGENO="1165" 1(1ì~3 says that Messrs. Walsh and Stanaszek, "acting in consort" with Louis Verive, a Chicago area contractor, fraudulently obtained construction loans totaling $140,000 from Marshall Savings & Loan Association, Chicago, that should have gone to the owners of Boxwood. The decree also states that Messrs. Walsh and Stanaszek, their wives, and three other defendants misuppropriated $25,000 in cash and personal property from the Boxwood project. According to a sworn deposition by Charles N. Debes, one owner of the Box- wood project, taken in another court proceeding dealing with the financially troubled Marshall Savings & Loan in Cooke County Circuit Court, Mr. Walsh had been "working for . . . or with" Marshall Savings & Loan in getting the present owners to acquire the then uncompleted project. Marshall was taken over by Illinois state savings and loan officials in January 1905. It has been disclosed that Marshall made loans on property owned by the late Manny Skiar, asserted to have been an associate of syndicate gangsters. He was found dead in a Chicago alley about two years ago. Mr. Walsh has been linked to another troubled savings and loan association in the Chicago area. He was subpoenaed in May 1904 to testify in connection with the Federal indictment of several officials of Concord Savings & Loan Associa- tion, which was closed by the state in 1964. The defendants included Frank Graves and his son, James, and the indictment involved loans made to the two Graves by Concord to enable them to take over the association. Informed sources say that Mr. Walsh is a friend of the Graves. All five defendants charged in the indictment were found guilty by a jury. DEFENSE WITNESS' ROLE ABC is related to the Concord case `in anOther way. J. Alton Lauren, one of ABC's three trustees, was a defense witness in the trial and testified in regard to inflated appraisals on the property on which the loans were based. Mr. Lauren recalls that some of his fellow appraisers felt the appraisals he offered during his testimony was too high. As a result, he says, he resigned from the American Institute of Real Estate Appraisers in "early December 1965." However, the records of the appraisers' institute state that Mr. Lauren was expelled at a meeting of its governing board on Nov. 15, 1965, for violations of the group's code of ethics. The package of legal documents that ABC supplies to its members represents an "amalgam" of knowledge that Mr. Walsh and an associate had pieced to- gether over several decades, Mr. Walsh said in an interview last August. Mr. Walsh declined to identify his associate other than to say he is a disbarred Illinois lawyer now in his 90s. He said his elderly associate had been retained by some prominent New York law firms to help structure some well-known foundations and trusts. It has been determined that the associate to whom Mr. Walsh referred was Harry Morgan Phipps, a 91-year-old disbarred lawyer, who claims to have drafted the basic trust form being used by ABC. However, he says he only met Mr. Walsh on April 30, 1960, and knew him for no more than eight months. Mr. Phipps, who holds a copyright on the so-called "pure trust" form, maintains that Mr. Walsh and ABC have no right to use the form. However, Mr. Hayes main- tains that Mr. Walsh has an agreement with Mr. Phipps that permits ABC's use of the form. Mr. Phipps also says he has never been retained by any law firm to create any foundations or trusts. A California appeals court recently upheld an injunction against the use of certain misleading and false statements about the benefits resulting from the use of a Phipps-authored "pure trust" form. The injunction specifically forbids the use of the statement that no state could regulate the operation of a "pure trust" because such action would be in contravention of provisions of the U.S. Constitution. (Mr. Hayes said in a recent interview that one advantage of an ABC trust created with the "pure trust" form is that the state can't regu- late its use because it is based on the constituional right of contract.) When first filed in October 1963, the California attorney general's complaint named Mr. Phipps as a defendant, but Mr. Phipps was dropped from the case after he left the state in 1965. Certain aspects of Mr. Walsh's background prove difficult to confirm. Mr. Ha~res says he recalls Mr. Walsh telling him that he is the son of a former Congressman from Colorado, appointed to serve out an unexpired term. Mr. Walsh also made this comment to a reporter last August. He later Said it was PAGENO="1166" 1164 his stepfather who served in that capacity but he refuses to give his step- father's name. Colorado state offici0is say no Congressman can be appointed in their state; a vacancy must be filled by an election. Mr. Hayes and several other ABC members say it is their "understanding" that Mr. Walsh received a degree from Fordham Law School. But the law school says no James R. Walsh, Jr. has ever been graduated. At least one early member of ABC* claims he was specifically told by Mr. Walsh that Mr. Walsh had helped set up the Mesabi Trust, whose shares are traded on the New York Stock Exchange. However, a spokesman for the Mesabi Trustee and a partner in the New York law firm that drafted the trust say they have never heard of Mr. Walsh. EXHIBIT NO. 17 [From the Washington Star, Nov. 1, 1067] ABC-AmED FOUNDATION CENTERED IN HOTEL RooM The international headquarters of the ~orensic Science Institute, which its director describes `as a research and development facility for modern crime-fight- ing techniques, is one hotel room at 17th `and G Streets NW. The room, illuminated by a bare overhead light, serves as the hub of one of the foundations being investigated by a House subcommittee. It is an offspring of the Americans Building Constitutionally (ABC), which is under attack as a "school" for tax-free foundations. Yesterday Rep. Wright Patman, D.-Tex., said the ABC had given the institute a "grant" of $10,500, which the institute then returned to the ABC as a member- ship fee. The disclosure came during the second day of hearings of the Patman's Small Business subcommittee on foundations. Director of the' institute-and presently its sole member-is Herman E. Kimsey, who explained the gift yesterday: "ABC felt that I had made significant contributions in the field of forensic science, and that I would make more contributions in the future." He denied that the money was a loan, insisting it was "an outright grant." In Kimsey's signed statement to Patman, he said the check was "endorsed by myself and returned to their records." "That looks like kind of a game," Patman said yesterday. But Kimsey stuck by his explanation of the maneuver. Kimsey is a former CIA employee and was security officer for Barry Goldwater during the 1964 presidential campaign. Two years ago he was one of two in- structors who introduced a composite picture identification~ system to the Metropolitan Police Department-a system which is now in wide use throughout the country. He said his foundation researches ways to give police positive ways of solving crimes and identifying criminals. For example, he said, testimony by doctors is only opinion-even though expert. In contrast, fingerprinting is irrefutable fact. "The institute applies the physical laws of science to criminal investigation," lie said. "We want to replace opinion by provable evidence." He received an initial $5,000 grant, in addition to the $10,500 membership fee, from the ABC, he said. "We hope in the future to receive more grants from ABC and others," he added. He said the foundation averages about $500 a month in spending. C