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,
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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.
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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?
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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
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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.
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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.
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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.
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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"
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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.
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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.
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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"
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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.
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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
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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
* * * * *
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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
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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-
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(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.
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(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)).
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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; *
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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-
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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).
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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.
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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.
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(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).
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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,
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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-
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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. *
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[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
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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
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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. -
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(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
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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,
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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"
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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"
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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.
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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, -
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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:
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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"
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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"
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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.
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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,.
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`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."
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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
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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,
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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,
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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) -
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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)
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"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)
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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
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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.
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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.
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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.
* * * * *
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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 - -
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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
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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
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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
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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"
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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"
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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"
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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~
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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"
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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"
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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:
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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"
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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"
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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"
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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"
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~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"
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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
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Americans ~ui1ding ConstitutionallY
(A Trust) Printed in U.S.A.
PAGENO="0461"
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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
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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
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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
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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,
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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.
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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
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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
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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.
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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
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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
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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
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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.
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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.
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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..
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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.
* * * * *
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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.
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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
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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.
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(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.
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(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
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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
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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
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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 $500 should
ever be placed in the foundation initially. Larger
transfers would only cause the counsel additional and un-
necessary work in obtaining exempt status recognition
for your foundation.
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ob~ice of banks ~O~$ 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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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.
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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
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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
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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
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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.
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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.
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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
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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
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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
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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,
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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.
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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
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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.
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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
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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.
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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.
* * * *
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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
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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.
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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
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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.
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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.
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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
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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
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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.
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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
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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
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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
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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.
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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
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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
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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.
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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
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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
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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.
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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
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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
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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
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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
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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.
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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
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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
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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
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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
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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
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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.
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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
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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
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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
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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.
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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.
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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
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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
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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.)
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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
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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.
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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.
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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
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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
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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
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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.
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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.
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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.
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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
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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.
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(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.
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Amer ic ans Building C onstituti onally
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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
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(A Trust) Printed in U.S.A.
87-444 0-68-36
PAGENO="0560"
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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"
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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
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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"
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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-
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(A Trust) Printed in U.S.A.
PAGENO="0564"
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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"
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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"
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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
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(A Trust) Printed in U.S.A.
PAGENO="0567"
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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
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(A Trust) Printed in U.S.A.
PAGENO="0569"
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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
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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
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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- . ., .
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PAGENO="0578"
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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
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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
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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
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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
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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).
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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
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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.
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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:
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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)
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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.
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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)
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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)
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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)
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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
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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
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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.
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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,
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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
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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
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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
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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
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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.
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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.
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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.
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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
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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.
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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
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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
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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.
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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
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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
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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
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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.
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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
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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
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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
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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
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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
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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.
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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
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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.
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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~:
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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
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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.
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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
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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~ * *
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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
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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
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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.
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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
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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 .
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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.
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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.
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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.
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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
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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
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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
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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
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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
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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
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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
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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.
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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.
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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.
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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
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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
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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
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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
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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
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Americans ~5ui1ding Constitutionally
(A Trust) Printed in U.S~A.
PAGENO="0660"
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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)
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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.
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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
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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.
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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.
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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
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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
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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.
* * *
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Americans Tuilding Constitutionally
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PAGENO="0668"
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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
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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
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(A Trust) Printed in U.S.A.
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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 *
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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
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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.
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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
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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
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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
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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).
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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.
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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-
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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"
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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"
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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"
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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
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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
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PAGENO="0694"
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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
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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
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PAGENO="0696"
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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.
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PAGENO="0697"
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(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
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Americans Building Constitutionally
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PAGENO="0698"
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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.,
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PAGENO="0699"
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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?
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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
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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.
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PAGENO="0702"
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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
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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.
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PAGENO="0704"
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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
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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
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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
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PAGENO="0707"
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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.
* * * * *
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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
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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-
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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.
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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
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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
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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
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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
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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
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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
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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
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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
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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.
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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
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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
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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
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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
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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
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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.
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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
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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.
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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
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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
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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-
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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
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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
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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~ * * * *
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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
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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.'-
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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
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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
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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
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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
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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.
* * * * *
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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
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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,
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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~-
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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.
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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
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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
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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
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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,
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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
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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
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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
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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,
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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
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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).
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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.
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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.
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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
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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-
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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
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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
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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
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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.
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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.
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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
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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.
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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
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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
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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.
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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
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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,
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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
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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
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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
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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.
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PAGENO="0775"
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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~
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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
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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.
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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
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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.
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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.)
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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
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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.
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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
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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
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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.
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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.
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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.
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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.
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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.
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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
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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
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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.
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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
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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
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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
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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
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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.
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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
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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
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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
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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.
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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
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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
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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.
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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
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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,
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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
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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
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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
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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.
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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
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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
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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
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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
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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.
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DISTRIBUTg EXHIBIT ~34
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.~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.
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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.
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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
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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.
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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.
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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.
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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
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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
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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
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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)
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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.
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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
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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
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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.
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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
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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
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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
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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.
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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.
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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
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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.
*****
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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.
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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
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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.
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(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.
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~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.
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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
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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
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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
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I. PIGGY BANK L4ETHOD
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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
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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
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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
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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
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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~
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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.
* ~? * * *
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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
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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
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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
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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"
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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"
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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"
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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"
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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"
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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"
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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"
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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.
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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
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[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.
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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"
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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,
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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
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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
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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"
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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"
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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"
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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"
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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"
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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"
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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"
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~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"
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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"
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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"
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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"
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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"
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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"
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~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"
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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"
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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.
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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"
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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"
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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"
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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"
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~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"
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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.
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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.
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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.
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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.
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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"
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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.
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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"
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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
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.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.
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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.
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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.
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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
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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.
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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.
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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
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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.
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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
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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).
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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
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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~
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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)
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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)
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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"
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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"
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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."
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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:
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"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
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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-
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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.
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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
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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
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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