replaced. If replacement did not occur, contributions would drop dramatically and program operations would be placed in serious jeopardy. Therefore, donor list maintenance, i.e., name acquisition activity, inust be engaged in by the DAV. Name acquisition is the only way to maintain viability of the donor list.

Name acquisition is achieved by the DAV through the rental and exchange of names from its list to and with other groups or organizations. The DAV has been engaged in this list acquisition activity since the early 1960's. The DAV does not sell its names.

As stated, the DAV rents and exchanges names from its donor list primarily to and with other tax-exempt organizations but also, to a limited degree, to and with the private sector. During the last ten years, our rental/exchange activity has been 80%-90% with other 501 organizations and 10%-20% with commercial groups. In 1983, the ratio was 85% to 501 organizations, 15% to commercial organizations.

I wish to underscore, Mr. Chairman, that the DAV solicitation operation is entirely "in-house" and, though we do have the capability of providing complete mailing services to other organizations, to avoid direct competition with commercial mailing organizations, the DAV does not make such mailing services available to any group.

TAX STATUS OF INCOME RECEIVED FROM DONOR LIST RENTAL/EXCHANGE

Mr. Chairman, under present law (Section 511-13, Title 26, USC), organizations such as the DAV, though generally tax-exempt as 501 organizations, are subject to tax with regard to income received from unrelated trade of business activity (UBTI). Section 513 of the IRS Code defines an unrelated trade or business activity as: any trade or business the conduct of which is not substantially related (aside from the need of such organization for income of funds or the use it makes of the profit derived) to the exercise of performance by such organization or its charitable, educational, or other purposes or function constituting the basis for its exemption under Section 501... (emphasis added).

In 1974, the Internal Revenue Service determined that DAV's income from donor list rental activity is subject to taxation as UBTI. In response to this determination, the DAV initiated legal action asserting, among other things, that its income from list rental activity should not be regarded as UBTI. A decision was rendered on May 20, 1981 unfavorable to the DAV (Disabled American Veterans v. United States 605F .2d 1178[Ct.Cls.1981]). Furthermore, by means of a 1981 ruling, IRS has expanded this court decision to also encompass DAV's list exchange and likewise render this activity subject to UBTI.

Mr. Chairman, the DAV believes these decisions are not in keeping with the stated intent of Congress when it placed Section 511-13 in the statute books. As we understand it, the unrelated business income tax was imposed to prevent taxexempt organizations from conducting business operations with an unfair competitive edge over taxable businesses engaged in conducting similar activity in the pri

vate sector.

We do not believe that our list rental/exchange activity falls within such a category. We do believe that it is very much related to the performance of the charitable programs which constitute the basis for our 501 exemption.

H.R. 1773

In view of the above, Mr. Chairman, the DAV is seeking Congressional relief from the Court of Claims Decision and IRS Ruling and the pending measure, 1773, would extend that relief.

Briefly, the measure provides that in cases of nonprofit "501" organizations, contributions to which are deductible under Section 170 (of the IRS Code), the term "trade or business" does not include that which consists of exchanging, renting or selling names and addresses of donors to, or members of, such organizations.

I do wish to point out, Mr. Chairman, that such a modification of law would not be precedential in nature. An example of recent, similar Congressional intervention on behalf of charitable organizations is seen in Public Law 95-502 (enacted 10/21/ 78) where income received through the conducting of "bingo" games by certain nonprofit groups was determined not to be in competition with the private sector and therefore not subject ot UBTI.

We would like to point out that should 501 organizations be granted the tax relief sought, the annual decrease in federal tax revenues would be quite small.

Against such a minor revenue impact we ask the Subcommittee to consider the services rendered and benefits offered to vast categories of deserving and needy people by charitable organizations. Some groups-and the DAV is a prime example-actually save our government and the American taxpayer millions of dollars of

expenditures through the performance of programs which supplement and/or take place of similar federal efforts.

For example, those 249 DAV claims representatives (NSOs) mentioned earlier perform the exact same services as do contact representatives and benefit counselors employed by the Veterans Administration. The VA has informed us that should they be required to enlarge their staff by the same number of DAV NOSs and supportive clerical personnel, an additional direct expenditure of $7.7 million would be required (in the VA budget).

Also, during calendar year 1983, the DAV provided:

1. Almost one half million manhours of voluntary service and over $500,000 in monetary/material contributions to VA hospitals through the VAVS program.

2. Over $530,000 in college scholarship assistance to the children of needy disabled

veterans.

3. Over $750,000 in direct monetary assistance to veterans in financially precarious situations.

4. Over $99,000 in direct monetary assistance to veterans who fell victim to “natural disasters."

In summation, Mr. Chairman, the exchanging and renting of donor list names by nonprofit groups is not competitive with the private sector. It is engaged in for a reason substantially related to the charitable works of 501 organizations. And, finally, while exempting such revenue from taxation would have no significant impact on federal revenues, it would encourage the continued existence and expansion of many beneficial programs and services of charitable organizations.

We therefore respectfully urge the Subcommittee to take favorable action on H.R. 1773.

This completes my statement, Mr. Chariman. Again, on behalf of the DAV, I wish to thank you and the members of the Subcommittee for the opportunity to present our view on this most important subject.

Chairman STARK. MS. Hatch.

STATEMENT OF ELLEN KAY HATCH, NATIONAL EXECUTIVE DIRECTOR, AMERICAN KIDNEY FUND

Ms. HATCH. Yes, Mr. Chairman. Thank you very much for the opportunity to be here before your committee.

I am not going to give a statement. Mr. Lehrfeld is giving a statement, both for American Kidney Fund and Amvets. I am here to answer any questions should you need them.

I would also like to thank Mr. Duncan for introducing this bill. Chairman STARK. Welcome to the committee, Mr. Lehrfeld.

STATEMENT OF WILLIAM J. LEHRFELD, COUNSEL, AMVETS NATIONAL SERVICE FOUNDATION AND THE AMERICAN KIDNEY FUND

Mr. LEHRFELD. Mr. Chairman, thank you.

I would just like to build on what Mr. Alexander said and bring to the attention of the committee some anomalies in the current taxation of exempt organizations.

If either one of you gentleman donated a suit or other item of property to the Amvets thriftshops, we could sell that donated suit to the public tax free. If we took your name and address down and wrote you a thank you letter for that contribution, and kept that name and address in our files, and then sold that name and address, the Government's position is that the name is not donated merchandise and its sale is taxable.

That is a very unique kind of construction of what is an unrelated and related business.

Second, the Government has told us that if an exempt organization sells the natural byproduct of an exempt function, it is not unrelated business income. If you have an agricultural college in Cali

fornia or Tennessee which maintains a dairy herd for the teaching of students, the agricultural college can sell the milk of the dairy herd tax free.

What we are saying in this presentation basically is there is no distinction between the byproduct exemption given colleges when they sell the milk of a dairy herd and the byproduct exemption which you would, in effect, be legislating on here if we turn around and sell a donor's name which is the byproduct of his gift.

Lastly, I don't know that we need to put this card in the recordI have some Christmas cards here-the Internal Revenue Service has told exempt organizations such as the Metropolitan Museum of Art that they can sell the cards tax free.

A revenue ruling they published, and I think it is pertinent— says the fact that the cards are promoted and sold in a clearly commercial manner at a profit and in competition with commercial greeting card publishers does not alter the fact of the activities being related to the museum's exempt purpose.

In ruling 73-104 the Service is saying you can be as commercial as you choose in selling a greeting card, especially during the holidays, and that does not affect whether it is related or unrelated. In turn, they argue here as they did in their attempt last year on S. 825, that anything that smacks of a commercial purpose is per se unrelated.

Perhaps they have some secret knowledge that we are not privy to on how they can discern what is a good commercial purpose for museums and what is a bad commercial purpose for other types of exempt organizations.

But they have yet to share their information with us. These kinds of anomalies creep into IRS judgments and I think it is appropriate that the committee consider the lack of commercial opportunities for organizations to sell our mailing list. As Mr. Alexander and others have noted, nobody else has our mailing list of donors.

Nobody can compete with the exempt organization, because we are the only ones that have the list of the donors. So if we chose to sell it, we are not unfairly competing with anybody else as to this particular product.

Thank you, Mr. Chairman.

[The prepared statement follows:]

STATEMENT OF WILLIAM J. LEHRFELD, COUNSEL, AMERICAN KIDNEY FUND, AND AMVETS NATIONAL SERVICE FOUNDATION

A. INTRODUCTION

My name is William J. Lehrfeld of the firm of Lehrfeld & Henzke, Washington, D.C. Our firm represents numerous Sec. 501(c)(3) and Sec. 501(c)(4) organizations which may be affected by this legislation, including the American Kidney Fund and the AMVETS National Service Foundation.

The purpose of this written testimony is to set out, for the record, the position of both these organizations on the amendments proposed to Sec. 513 of the Internal Revenue Code by H.R. 1773. Sec. 513 of the Code contains various special exemptions from the tax for certain revenues derived by exempt organizations from programs which are offered to the general public, members of the organizations, or students, patients, etc. If an exempt organization described in Sec. 501(c) receives (or is deemed to receive) gross income from its exchange, sale or rental of mailing lists of donors or members, the net income may be, or may not be, subject to tax according to the Internal Revenue Service, based upon the specific facts and circumstances.

H.R. 1773 would establish a blanket exemption from tax for list dispositions without regard to the limited exemptions which may exist today.

B. PURPOSE OF AMERICAN KIDNEY FUND

The American Kidney Fund was founded in February of 1971. Its purpose is to provide direct financial assistance to kidney patients for the cost of dialysis and transplantation. Other patient costs are subsidized including transportation to and from the dialysis center, medications, the 20% balance left by medicare for home dialysis supplies, payments for home dialysis machines, not covered by medicare, and temporary financial assistance for living expenses.

Last year AKF assisted about 12% of the end stage renal disease population and our average grant was about $300 though some people may receive as much as $5,000 or $6,000.

AKF receives no governmental financial support; revenues are from contributions by the public (through direct mail) and AKF is a member of the Combined Federal Campaign. AKF mails to its donor list about 6 or 7 times a year; it spends $30,000 or $40,000 a year to buy new names; and it pays about another $30,000 in data processing charges to make our donor "exchangeable" with lists AKF obtains from other charities.

AKF does not now sell or rent its list.

C. PURPOSES OF AMVETS NATIONAL SERVICE FOUNDATION

AMVETS was originally organized under an Act of Congress for the support and benefit of veterans of World War II. Its membership is now open to veterans of Korea and Viet Nam. The basic purposes of the AMVETS are to serve the welfare and assist in the rehabilitation of disabled veterans and to establish facilities for the assistance of all veterans and to represent them in their claims before the Veterans Administration and other governmental organizations without charge; to dedicate its membership to the service and best interests of the community, State and Nation; and to advocate the development and means by which all Americans may become informed citizens and participate fully in the functions of democracy.

AMVETS National Service Foundation is the arm of AMVETS which has the primary responsibility for raising monies from the general public through direct mail appeals for contributions and through its thrift stores. It is tax-exempt under Code Sec. 501(c)(4), and is eligible to receive tax deductible contributions under Sec. 170(c)(3).

D. SUPPORT FOR S. 1773

We appear today because of our concern about the privileges and immunities contained in the Internal Revenue Code relating to charities and veterans' organizations. There is no specific current exemption of income from the sale, rental or exchange of donor names by a nonprofit organization owning such lists. The taxability of such income under current law and administrative rulings is unclear made more so by an actual conflict of views between the Internal Revenue Service and the Treasury Department. We support enactment of H.R. 1773 and its treatment of income derived from the sale, rental or exchange of lists of names and addresses of donors and members.

In 1983, the American Kidney Fund raised over $3 million in contributions from the public using, among other means, direct mail solicitation. In 1983, the AMVETS Foundation raised over $3 million in contributions by soliciting the public and raised another $700,000 from its thrift stores. These contributions are clearly not subject to the unrelated business income tax. Neither organization, as yet, has rented its donor mailing list because of the concern over the Internal Revenue Service's published position contained in Rev. Rul. 72-431, 1972-2 C.B. 281, despite the fact that the sale or rental of such lists would yield additional revenues for their programs.

In order to raise funds to support its activities, AMVETS buys, "mailing lists" composed of thousands of names of potential contributors, of varying characteristics, at various times, for what the market demands. AKF, on the other hand, obtains new names by exchanging its 700,000 or so donor list with other medical-research charities. Both must continue to do so since each house list of current donors gradually wears out and must be constantly replenished. AMVETS also receives some new names and addresses of prospects through exchanges.

Once an individual on a prospect list makes a contribution, the donor's name is then placed on a "house list". Neither organization exchanges its house list with

commercial brokers or agent or with non-charitable organizations. The even up exchange of donor names is common in the nonprofit community for groups which rely on direct mail for their contributions and which have similar exempt interests. We have not treated our exchange of mailing lists as a taxable event for several reasons. Section 1031(a) of the Code exempts from income tax the gain on like-kind exchanges of productive property. Also, we exchange only with charities which are enhancing the by-product of their own exempt function of raising funds, so that such activity comes within the "substantially related" exception in the unrelated business tax regulations on by-product sales. In some transactions, we have treated the exchange transaction as a wash because the value of what we receive from the other charity in the trade equals the actual cash basis of what we give up. Lastly, in any year where we have only one or two exchanges, the discontinuous nature of the transaction makes it an "irregular" business activity-whether or not related.

E. CURRENT ADMINISTRATIVE AND LEGAL INTERPRETATIONS

The administrative position of the Internal Revenue Service is confused. Some private ruling letters take the position that exchanges of mailing lists by publicly supported exempt organizations do not give rise to unrelated business income. (P.L.R. 8101002, 8127019, 8128004.) Another ruling appears to hold the opposite. (P.L.R. 8216009) Contrarily, the Treasury Department has taken the position that even up exchanges among exempt organizations give rise to unrelated business income.1 This confusion in the private rulings process indicates that the agency hasn't put its house in order on this point of exchanges. Until the Internal Revenue Service publishes a ruling on exchanges, as it did with the commercial sale of membership listings (Rev. Rul. 72-431, 1972-2, C.B. 281), the public cannot safely rely on either the favorable or adverse private rulings due to Sec. 6110(j)(3) of the Code. And public charities are made more uncomfortable by the failure of the Treasury to formally disapprove the favorable rulings by putting its unrelated argument in the context of existing regulations oir published rulings.

Enacting H.R. 1773 will nullify the decision rendered in 1981 by the Court of Claims involving the Disabled American Veterans, 650 F.2d 1178 (1981). Although our solicitations of gifts from the public and current exchanges of donor lists are carried out in a different manner than was involved in the DAV case, both organizations are very concerned that the DAV case may be construed to create a per se rule that all sales, rentals and exchanges of donor lists by charitable organziations will generate unrelated business taxable income. We believe that not only would this be an overbroad reading of the case,2 but also that this approach is not justified by a thoughtful construction of the applicable sections of the Internal Revenue Code as originally enacted in 1950 and as extended to veterans' organziations in 1969.

For example, Sec. 513(a)(3) of the Internal Revenue Code states that the term “unrelated trade or business" does not include a trade or business, "which is the selling of merchandise substantially all of which has been received by the organziation as gifts or constributions."

Thus, an exempt organization's income which is derived from the sale of donated merchandise cannot be categorized as an unrelated business income. Revenues are excluded from tax regardless of the unrelated nature of the income producing activity. It is our belief that the individual names and addresses which, when aggregated, compose the AKF and AMVETS' "house lists", could well be regarded as constributions or gifts of merchandise from the individual donors within the meaning of Code Sec. 513(a)(3). See, eg., Gordan, "Right of Property in Name, Personality and History", 55 Northwestern Law Review 553 (1960). As a result, when AKF and AMVETS takes the names and addresses of indiviidual donors and formulates them into a computerized mailing list, such a list could reasonably be deemed "merchandise" under excising law; the sale of a list of names should not generate unrelated business income because of the exception provided by Code Sec. 513(a)(3). Some IRS agents may think that a "name" is not "merchandise" and even if it were, Congress didn't intend to strain the exception for sale of donated goods to such a unique format of gifted property.

1 Statement of Hon. William S. McKee, Acting Deputy Assistant Secretary (Tax Policy) before the Subcom. on Taxation and Debt Management Senate Finance Comm., on S. 825, S. Hrg. 98186, at 18 (Apr. 29, 1983). The testimony appears only to focus on the "related" vs. "unrelated" aspect without regard to other specific or general exceptions.

2 The Court of Claims opinion noted several times that the DAV had presented "no evidence" that their sale of lists was related to their exempt veterans function.