Why the Treasury is opposed to this I don't understand. It is an excellent bill. And I hope it will be adopted. Chairman STARK. Thank you very much. [The prepared statement follows:] STATEMENT OF DONALD C. ALEXANDER, COUnsel, Disabled AMERICAN VETERANS SUMMARY OF TESTIMONY The DAV supports passage of H.R. 1773. Contrary to recent IRS and judicial determinations, we believe that the rental or exchange of mailing lists is substantially related to the exempt activities of nonprofit organizations, which depend upon maintenance of up-to-date mailing lists to solicit contributions. We believe Congress should therefore provide an exception from the UBTI provisions for mailing list transactions, particularly in view of the increased burdens faced by private nonprofit organizations as a result of cutbacks in federally-funded social programs. STATEMENT I am Donald C. Alexander, a partner in the law firm of Morgan, Lewis and Bockius, Washington, D.C. I appreciate the opportunity to testify today on behalf of the Disabled American Veterans in support of H.R. 1773, and I commend Chairman Stark and the sponsors of the bill for their efforts to correct a serious problem facing nonprofit organizations. Nonprofit organizations are exempt from federal income tax under section 501 of the Internal Revenue Code, thereby enabling these organizations to carry out their educational, charitable, civic and other socially-beneficial functions. However, a nonprofit organization is exempt from tax only with respect to income derived from activities related to the purpose for which the organization was established. Under Code sections 511 through 513, a tax is imposed, at regular corporate rates, on the "unrelated business taxable income" of an exempt organization, meaning income from a trade or business, which, apart from the need to raise money, is not substantially related to the organization's exempt functions. The so-called UBTI provisions were enacted in 1950 to prevent nonprofit organizations from deriving an unfair competitive advantage over taxable organizations engaged in the same trade or business. S. Rep. No. 2375, 81st Cong., 2d Sess. 28-29 (1950). H.R. 1773 addresses a problem facing nonprofit organizations because of recent IRS and judicial interpretations of the UBTI provisions. IRS has privately ruled on three separate occasions that a nonprofit organization does not derive UBTI from the exchange of a mailing list with another exempt organization. See LTR 8101002, LTR 8127019 and LTR 8128004. However, the Court of Claims held in 1981 that the DAV was subject to UBTI tax on income derived from renting its mailing lists, and in a private letter ruling addressed to the DAV, IRS later held that "the exchange of mailing lists should be treated the same as cash rentals." Thus, nonprofit organizations are faced with UBTI tax on income they receive from renting their mailing lists and IRS has taken the position that exchanges of mailing lists should be treated as taxable transactions as well. We question whether the UBTI provisions were intended to have this result, and we believe Congress should take the lead in protecting nonprofit organizations from tax on mailing list transactions. Nonprofit organizations are, of course, heavily dependent on direct solicitation from the public to fulfill their tax-exempt functions, and therefore maintenance of up-to-date mailing lists is critical to the survival of these organizations. As the members of this Subcommittee are probably aware, attrition rapidly takes its toll on any mailing list, in part because of the high mobility of our society, and the direct and indirect costs associated with a mailing are very high. The DAV, which has a significantly larger mailing list than other tax-exempt organizations, containing over 5.5 million names, is now experiencing an annual loss of 15-17% of the names on its list. To ensure that solicitations are properly targeted, and to avoid costly and wasteful undelivered mail, an organization must continually update its mailing list and add new names to replace those lost through attrition. The DAV, like many nonprofit organizations, accomplishes this "donor list maintenance" through list exchanges, principally with other nonprofit organizations. The DAV also rents it list, again primarily to other tax-exempt organizations. Although such rentals do not directly result in the addition of new names to the list, the funds DAV derives from renting its list defray the cost of acquiring additional names. Thus, where a direct exchange is not feasible (by reason of the DAV's list being much larger than that of another exempt organization) a rental can achieve the same basic goal. List rentals and exchanges could be viewed as sales of limited rights to the use of the names on the list. However, the DAV does not engage in sales in the sense of parting with all rights to the names, which an organization might do if it were discontinuing its activities. Testifying on behalf of the Treasury last year on a bill similar to H.R. 1773, then Acting Deputy Assistant Secretary (Tax Policy) William S. McKee argued against the bill on the basis, in part, that sales, rentals and exchanges of mailing lists were common commercial practices and that tax-exempt organizations should be on the same competitive footing as taxable organizations with respect to these activities. I testified then, and I continue to believe, that there is no basis in fact for equating commercial and tax-exempt mailing list activities or for assuming, as Treasury apparently did, that the two are in competition with one another. The Disabled American Veterans simply does not compete with Tiffany's or Horchow's. Thus, the underlying purpose of the UBTI provisions-to prevent nonprofits from exploiting their tax-exempt status to the disadvantage of their taxable competitors-would not be served by subjecting nonprofit organizations to tax on mailing list activities. Rather, such activities should be recognized for what they are: activities substantially related to the exempt functions of nonprofit organizations and therefore exempt from the UBTI provisions. The recent attempts by IRS and the courts to characterize mailing list activities as an unrelated trade or business of a nonprofit organization come at a particularly bad time. The Administration's commitment to controlling government spending has resulted in a marked reduction in the level of federal participation in the social services arena, increasing the pressure on private nonprofit organizations such as the DAV to continue their important work. In areas where the government and the private nonprofit sector both provide services, it is estimated on the basis of current budget projections that funding for government programs will have been reduced by over $50 billion by FY 1987, as compared to FY 1980 levels, and the value of federal support to nonprofit organizations will have dropped 22 percent below FY 1980 levels by FY 1986. To compensate for these reductions and permit the maintenance of 1980 levels of activity, private giving to nonprofit organizations will need to grow an estimated 30 percent per year through 1986, taking into account inflation and other factors. Thus, the pressure on private nonprofit organizations to deliver needed services has never been greater and the need for contributions has never been greater. Further burdening nonprofit organizations by imposing tax on mailing list activities is clearly a step in the wrong direction, particularly since the revenue likely to be derived could not offset the ultimate cost to government if these organizations were unable to continue their work. H.R. 1773 would avoid this by amending the definition of unrelated trade of business to exclude exchanges, rentals and sales of names from donor lists and membership list. The exclusion would apply only in the case of a tax-exempt organization, contributions to which are tax-deductible, and thus would be targeted to those organizations dependent upon donor list maintenance for solicitation purposes. This legislation would permit nonprofit organizations to enter into exchange or rental agreements to generate names, and, in turn, the contributions necessary to continue their vital work. We urge its passage. Chairman STARK. Mr. Heilman. STATEMENT OF JOHN F. HEILMAN, DIRECTOR, NATIONAL Mr. HEILMAN. Yes, Mr. Chairman. Let me say at the outset we do appreciate the fact that you have scheduled H.R. 1773 for this hearing. I may also say to you, Mr. Duncan, as the primary sponsor of this bill, that our organization does appreciate your advocacy on this issue. I will summarize my statement, Mr. Chairman. The DAV is a congressionally chartered, nonprofit veterans service organization. We are exempt under section 501(c)(4) of title 26. Our membership is composed of wartime veterans who have in curred a service-related wound, injury, or disease, during their active military service, and presently our membership is some 580,000 veterans. Mr. Chairman, the DAV provides a variety of services and programs for all of our Nation's veterans irrespective of their membership or eligibility of membership to the DAV, as well as their family members and survivors. We provide direct representation before the VA for benefit entitlement, we participate in the Veterans' Administration voluntary service program and provide hundreds of thousands of man hours and voluntary work in hospitals and monetary and material contributions to hospitals. We administer scholarship programs to children of needy veterans, provide direct monetary relief to veterans who are victims of disasters or in emergency situations. In a nutshell, our annual programs of service to our membership and to all veterans is currently in excess of $21 million per year. The DAV receives the funds, as Mr. Alexander indicated, through a direct solicitation to the general public. Our funding effort is entirely in-house. We employ no outside fund raisers. We maintain our own donor list and make annual solicitations from that list. Currently our donor list is 5.7 million names. The DAV has perhaps one of the largest donor lists of all nonprofits in the country. And we do have an annual attrition rate that impacts on that list, as Mr. Alexander indicated, folks die, they move away with no forwarding address, they cease contributing, they request no longer to be solicited. Therefore, we purge such names from our list. And that translates to a loss of over 900,000 names per year from the list. Obviously they have to be replaced or in a very short period of time the list would disappear. We do this through the renting and exchanging of names and addresses to and with other nonprofit organizations primarily, and to a smaller degree with also some commercial entities. The DAV, by the way, does not sell its names. It was in 1974 that IRS said to us that our rental income from this list maintenance activity was UBTI. We went to court on this issue and in 1981, received an adverse decision from the U.S. Court of Claims. Also in 1981, through a later ruling, IRS said that the exchange of names, when no money changes hands, is also UBTI. Mr. Chairman, as we understand it, UBTI was put in the statute books to prevent nonprofit organizations from having an unfair competitive edge over commercial groups who might be engaging in the same type of activity. UBTI statute also says that something will not be considered as taxable income if it is substantially related to the tax exempt purpose for which the organization received its exemption in the first place. We contend that this court decision and the IRS ruling subverts the intent of Congress. List maintenance activity is very much substantially related to the tax exempt purpose of the DAV—if we were not able to maintain our list, the funds would cease to exist and we would not be able to operate our programs. We don't engage in this activity to make money, although we do have a rental income-that income is far and away offset each year by the costs involved in terms of our mailing out to the names we receive to identify potential donors. Finally, I do want to make the point, as Mr. Alexander indicated, nonprofit organizations in this country provide a myriad of services that duplicate or are similar to Federal efforts providing benefits and services to a broad category of beneficiaries, and we think they should be encouraged to continue this type of work and to expand upon their programs. So we would urge the subcommittee to give favorable consideration to the bill. Thank you. Chairman STARK. Thank you very much. [The prepared statement follows:] STATEMENT OF JOHN F. HEILMAN, NATIONAL LEGISLATIVE DIRECTOR, DISABLED AMERICAN VETERANS SUMMARY The principle source of revenue for the Disabled American Veterans (DAV) is achieved through direct solicitations to the general public. Currently, the DAV's donor list suffers from an attrition rate (loss of names) of approximately 15%-17% per year (prior to 1984, the annual rate of attrition was 12%). Donor list maintenance is achieved by the DAV through the renting and exchanging of manes from its donor list to and with other groups and organizations, primarily nonprofit groups. By virtue of an IRS ruling and Court of Claims decision, it has been determined that the list rental income of DAV is Unrelated Business Taxable Income (UBTI) and therefore subject to taxation. IRS, through a later ruling, has also expanded this decision to encompass DAV list exchange activity and also render it subject to UBTI. The DAV believes these decisions subvert the original intent of Congress with regard to the UBTI statute. We believe the Congress intended this statute to prevent tax exempt organization from conducting business operations with an unfair competitive edge over taxable businesses engaged in similar activity. The DAV maintains: 1. The exchanging and renting of donor names by nonprofit groups is not competitive with the private sector (this point was conceded in the Court of Claims decision); 2. List rental/exchange activity (donor list maintenance) is very much related to the purposes which constitute the basis for the tax exempt status of nonprofit organizations; and 3. The charitable programs of nonprofit groups fill a vital need for many categories of deserving and needy Americans. In may cases, they supplement and/or take the place of similar local, state and federal efforts. Promotion and support of these charitable efforts and the value derived from them far outweigh the relatively modest impact of H.R. 1773 on federal revenues. STATEMENT Mr. Chairman and Members of the Subcommittee, on behalf of the entire national membership of the Disabled American Veterans, may I say that we deeply appreciate the opportunity to present our views on H.R. 1773, a measure introduced in the House by Representative John Duncan and cosponsored by Representative Frank Guarini, which proposes to amend the Internal Revenue Code of 1954 with respect to the Unrelated Business Taxable Income of certain nonprofit charitable organizations. Mr. Chairman, the Disabled American Veterans supports Congressional passage of H.R. 1773, which Representatives Duncan and Guarini were so kind to introduce at our request. In addition to Representatives Duncan and Guarini, 18 members of the full Committee, including seven members of the Subcommittee, are cosponsors of either H.R. 1773 or H.R. 4287 (a bill similar in purpose but narrower in scope). Before commenting upon the bill itself and stating why we believe it merits favorable action, I believe it is pertinent to provide the Subcommittee with a few words of background information concerning our organization. Background information on the Disabled American Veterans The Disabled American Veterans (DAV) was formed by a group of disabled World War I veterans in 1920. It was chartered by Act of Congress on June 17, 1932 and was incorporated in the state of Ohio in 1938. The DAV has been granted an exemption from taxation under Section 501(c)(4) of Title 26, United States Code, as amended, and its principal office is located at 3725 Alexandria Pike, Cold Spring, Kentucky. The purposes of the DAV, as set forth in its Constitution and By-Laws, are to uphold and maintain the Constitution and laws of the United States; to realize the true American ideals and aims for which those eligible to membership fought; and to advance the interests and work for the betterment of all those who have become wounded, injured and otherwise disabled as a result of wartime military service in our nation's Armed Forces, as well as their dependents and survivors. Eligibility for membership in the DAV is restricted to veterans of honorable wartime military service who have incurred a service-related wound, injury or disease. At present, the national membership of the DAV is 853,854, with a ladies' Auxiliary of 88,899. The most important program of the DAV is its National Service Program. This program involves employment of some 249 National Service Officers (NSOs) who are also service-connected disabled veterans. These NSOs are recognized by Congress as "attorneys-in-fact" and, as such, are authorized to represent veterans (both disabled and non-disabled), their dependents and survivors before the Veterans Administration's Rating Boards in determining compensation, pension, hospitalization and other benefit entitlement. This representation is offered free of charge to all veterans, their dependents and survivors as the expenses of the National Service Program-which presently require $21 million per year-are paid for by funds raised by the DAV. The National Service Program has offices located in every Veterans Administration Regional or District Office in the United States and DAV NSOS regularly visit every VA hospital. In addition, the DAV has a large staff in Washington, D.C. to handle the appeals of veterans, their dependents and survivors who have received adverse benefit determinations by VA agencies of local jurisdiction. The DAV also maintains other programs which provide services and benefits to its membership and/or the veteran community at large. Among these programs are: a National Employment Program, a National Legislative Program, a fleet of Field Service Units which seek out veterans who do not have access to VA Regional Offices, participation in the Veterans Administration's Volunteer Services Program (VAVS), an Educational Scholarship Program for the children of needy disabled veterans and programs of financial relief for victims of natural disasters and those in need of "emergency" assistance. SOURCE OF DAV REVENUE Mr. Chairman, the DAV's primary source of revenue to conduct its tax-exempt operations is realized through an entirely “in-house” administration of direct solicitations to the general public. Contributions to the DAV are deductible pursuant to the provisions of Section 170 of Title 26, USC. The DAV maintains a "donor list" and conducts annual mailing solicitations from that list (due to increased program costs, in 1983 the DAV commenced three solicitations annually). Public support is broad based in the form of relatively small individual contributions-the average contribution is currently running at slightly under five dollars. DONOR LIST MAINTENANCE The size of the DAV donor list in recent years has been in the area of six million names and declining slightly (5.7 million in the Fall of 1984). Periodically, the DAV removes the names of individuals from its list who: 1. Are deceased, 2. Have moved with no forwarding address, 3. Have not responded to recent solicitations, and 4. Have requested not to be solicited. This donor list "attrition" occurs at the rate of 15-17 percent per year, translating into an annual loss of over 900,000 names from the list. These names have to be |