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of the income. Interestingly there is no provision for pass through of losses or numerous other provisions that complicate the rules for Subchapter S for participants. When the investment credit was introduced provision was made for the pass through of the credit from a partnership to a partner, from a trust to the beneficiary and from an S corporation to the shareholders. We believe that the failure to cover the members of an electing religious community was an oversight easily understandable in view of the small number of communities involved and their relatively small size.

The regulations have for many years required the organization to file a partnership return. Since this return provides for the pass through of investment credit, many communities assumed that this also applied to them. However, the Internal Revenue Service and the Ninth Circuit disagreed. The opinion in Kleinsasser, 707 F.2d 1024 (9th Cir., 1983), states:

"Reluctantly, we affirm.

"Our conclusion from this brief statutory exegesis is that the exclusion of § 501(d) organizations from the tax credit offered by § 38(a) does not seem to advance any articulated legislative purpose. But it is equally clear that there is nothing in the legislative record to suggest that Congress meant to exempt § 501(d) organizations from the sweep of § 48(a)(4). The lack of clear contrary legislative intent gives us no choice but to enforce the plain language of the statute.

"We cannot put an equitable gloss on the clear language of the Internal Revenue Code. The statutory inequity involved in this case, if there is one, may only be remedied by Congress. We realize that, in light of the Hutterites' religiously based abstention from secular politics, it may ring hollow to advise the members of Milford Colony to go to Congress for relief. But it is from that body alone that relief is available."

This legislative effort is a response to the suggestion by the Court that Congressional relief is appropriate.

The economic activity of each of the three groups is one that would require investments that would qualify for the investment credit if made by any other organization, the income of which is taxed either to the organization or by reason of pass through provisions to others.

The Hutterian Brethren of Washington live in four communities. Their economic activity is farming. Both the raising of potatoes and wheat require large investments in farm machinery.

Three communities of the Order of the Cistercians of the Strict Observance have made the election under § 501(d). The Cistercians are better known as Trappists. Each of the three communities conducts an economic activity that is designed to support the community. The community at Red Bluff, California raises nuts and dates. The community at Lafayette, Oregon farms and binds books as well as making fruitcakes. The community at Trappist, Kentucky, makes cheese and fruitcakes, as well as farming.

The three communities of the Hutterian Society of Brethren engage in an integrated economic activity. For over 25 years they have manufactured and sold playthings for use in kindergartens, nursery schools, and the like. More recently they have begun manufacturing special tables, chairs, and other special devices for use by the handicapped. One community is in New York, near Kingston, one in Connecticut, near Norfolk and one in Pennsylvania, near Scottsdale.

These communities share several important characteristics. (1) The members of each are united by a common religious philosophy and desire to witness their faith by living in community. Each of the communities is relatively secluded, and the community lives apart. (2) The comment to the community is generally a life-long commitment. The membership is very stable. (3) The members live a very simple life that is shared by all the members. (4) Each community seeks not only to support itself, but makes an effort to create an excess that can be used for charitable and religious purposes. The community does not want to be dependent on the charity of others. The work is carried on in the community using the services of the community members as much as possible.

H.R. 4507 was drafted with the assistance of the staff of this subcommittee. We are pleased that the chairman, and Mrs. Kennelly and Mr. Schulze are co-sponsors to the bill introduced by Mr. Foley. In addition, Mr. Rangel and Mr. Boland are cosponsors. Communities that are supporting this legislation are located in the states of each of the sponsors and the cosponsors.

In our discussions with tax specialists we have found that not many have any experience with § 501(d). At a meeting of the American Bar Association Tax Section Committee on Tax Exempt Organizations this proposal was discussed and we found a necessity to introduce even these specialists to this problem, but at the conclusion,

an overwhelming endorsement of the bill was given by the committee. We perceive no legislative policy for not allowing the credit to be claimed by the members since they are being taxed on the income.


The bill proposes to add new Subsection 48(r). Section 48 contains the special rules for investment credit property. Generally it provides for the pass through of the credit for organizations the income of which is taxed to another person but provides that no credit is permissible when the income is not taxable. Thus, for tax-exempt organizations the credit is only allowable for investments related to unrelated business income.

Proposed Subparagraph (r)(1)(A) will define a community business of an "eligible § 501(d) organization" as an unrelated business for purposes of § 48(A)(4). The provision will not apply to any non-business investments.

Subparagraph (r)(1)(B) provides that the qualified investment is apportioned pro rata among the members in the same manner as the income. Thus, if a member is allocated one percent of the income for his share, he would be allocated one percent of the investment.

Subparagraph (r)(1)(C) tracks provisions related to pass through for other types of organizations so that qualified investment by the organization is treated as new property by the member if it was new property at the outset.

Paragraph (r)(2) applies the used property limitation at the organization level. This makes it unnecessary to provide a separate limitation at the individual level when no credit would be allowed to a member in Paragraph (4) if he claims credit for investments other than investments by the § 501(d). This simplification of the statute is possible since a member of the religious community is by his membership in the community excluded from investment in property other than through the community. In the relatively rare instance when a member changes communities during the year, the member would be required to choose, since he would not be able to claim for both communities.

Subparagraph 3 provides for recapture to be determined at the organization level. The burden is to be borne in the same way the income for the year of recapture is allocated. This avoids any problems of tracing.

The scope of the Section is limited by Paragraph (5) to the organizaations that have demonstrated a stability, so that the Service would not be facing the problem of a short-lived community that had claimed the credit and then had disappeared. The suggested test is that the religious community must have been in existence for more than five years, or more than one-half of its members have been a member of a religious community for more than five years.

Our attention has been directed to the apparent anomaly of a pro rata allocation of credit and income when a religious community maintains one or more persons at a sustantially higher standard of living than most members. Therefore, we propose a new Subparagraph 5(c) be added to exclude the term "501(d) eligible organization." Any organization that provides a substantially higher standard of living for any person or persons than it does for the majority of the community could not avail itself of the pass through. The person supported in the manner substantially higher than the members as a whole could be a person other than a member.

The effective date of the bill will make it applicable to periods beginning after december 31, 1978. This is based upon our belief that the omission of a specific provision in the statute is merely an oversight and most of the corrections in the 1982 Technical Corrections Act and other similar bills have had the same effective date as a legislation that was being corrected. However, the oversight in this instance is of such duration that this seems improper. Therefore, we have suggested an effective date that would be applicable to those years that would normally be open at the time of the decision in Kleinsasser.

We appreciate this opportunity to present our sttement. We look forward to working with the staff to perfect this legislation and to its early reporting, passage and enactment.

Chairman STARK. Proceed.


Brother WOLLMAN. My name is Jacob Wollman, president of Warden Hutterian Brethren. We are a community which lives in the State of Washington which is about 100 miles south of Spokane.

We are a farming community and we derive all of our income from agriculture. We are not a community which is based on material things.

We are a community which provides for our members because we believe that is the way the Lord has put the way before us.

We believe the command of love and we have to do what we are doing. That is why we are having communal cooperation and that is why in this case everybody works at the communal task and we have all of our income put together.

Being that we are farmers in the State of Washington, we do a lot of extensive farming. I have with me here a display of 10 different crops which we in our own community raise right now.

To raise crops like that takes a lot of equipment. There are different crops of many varieties.

We have over the years been recognized in the State of Washington to be very efficient farmers and stewards of the land. We can only do that if we are able to purchase equipment and facilities and keep these crops in good order whereby we can have investment tax credits like other people.

We pay taxes on this-pay taxes like other Americans do. We pay taxes on our income. Naturally right now the farming industry is at a very, very low ebb.

I don't have to tell you that agriculture is in a very, very tough situation. Our farm prices are low. We need these tax credits for survival.

We need to be able to spend our moneys, put our moneys back into our land and equipment and facilities whereby we can provide for our people.

We take care of our own people. We believe that we should be no burden to the Government whatsoever.

We educate our children with State accredited teachers. We teach honesty, respect for law and order, and all that I am asking is that we get a fair break.

We want to have and be able to spend our money like all other organizations can spend and get the benefits whereby we are then an asset to our area when we can buy equipment and have the latest in equipment and get the advantage which we absolutely need.

Thank you for letting me testify.

Chairman STARK. Thank you very much. Do you want to proceed with whom?

Mr. HUFFAKER. I would like Father Paschal Phillips to relate the situation in the Trappist monasteries.


Father PHILLIPS. I am Paschal Phillips, business manager of the Trappist Monastery in Oregon. Our rules were written about the year 530.

The Trappists came to the United States in 1849 and we have been established in my community for 40 years. The point being that we are stable communities which need to invest in a regular manner to stay alive.

We are a Roman Catholic organization. You are probably aware that most Roman Catholic organizations are listed under 501(c)(3). We found that it didn't fit us which emphasizes the fact that it is not a denominational question, it is a question of the internal organization of the community.

We found the section 501(d) fits what we really are. We really divide all the income. That is the reality of it.

So it fits. But we cannot understand why we can't get the investment tax credit because the purpose of the investment credit was to stimulate the purchase of productive equipment.

The purpose is equally well satisfied whether it is a Trappist community or some other group that buys.

There doesn't seem to be any-like the ninth circuit, there seemed to be no reason whatever. All the monks work, the income is very limited, partly because we only work 4 hours a day, and what surplus we have is distributed to the poor.

So the community lives a very modest life. Nevertheless, we do produce in my community a fruitcake. I also gave you all a booklet where the centerfold shows the monks working. We have a forest industry and we are bookbinders. We are all commercial and we don't object to paying taxes, never have. That is fine. All we ask that we be taxed in the same basis as our neighbor down the street. Thank you for this opportunity.

Chairman STARK. Thank you, Father Phillips.

Mr. HUFFAKER. The remaining group which is the Society of Brothers, have communities in Connecticut which explains Mrs. Kennelly's sponsorship, one in Pennsylvania, which exlpains Mr. Schulze's cosponsorship, and one in New York.

Alan Stevenson will explain to you how these communities conduct themselves.


Brother STEVENSON. My name is Alan Stevenson, and I represent the three Hutterian Societies of Brothers Communities in New York, Pennsylvania, and Connecticut. We do belong to the Hutterian Church of which Jake Wollman has told us, but we evolved differently.

We evolved in Germany, and with a total commitment to a Christian life and were expelled under Hitler and after some wanderings we settled in America where we were very gratified to have religious freedom.

We have been here for 30 years and in that time we have built up a business of supplying kindergarten equipment and school equipment to schools and kindergartens and day care centers and church schools all over the country.

In recent years we have also manufactured equipment for handicapped people. I think there is a catalogue of just our handicapped items.

This enterprise has supported us over the years and we do buy machinery, of course, for our workshops, which are woodwork and metal shops. Since we buy the machinery, it would help us to have the pass through of the investment credit.

I thank you.

Chairman STARK. Thank you, Mr. Stevenson.

Did the Bruderhof grow out of the Catholic religion in Germany or Lutheran or what?

Mr. STEVENSON. No. Independently, separately.
Chairman STARK. Independently, OK.

Mr. HUFFAKER. Jacob Huter was martyred in the 16th century and the Huterites have been persecuted by the Catholics and Lutherans, whoever was in power at the moment, but it was Hitler who finally chased them out.

But they are very close to the Mennonites in theology. In conclusion, Mr. Chairman, we don't see an unfair advantage in providing the ITC, we see removal of what was really an unintended disadvantage.

There are very few of these communities, they are small, don't represent big dollars, don't have a regular congressional presence, we think it was basically an oversight and I am pleased to announce that Mr. Foley will be submitting a statement for the record, also former Governor Brown of California will be submitting a statement for the record.

I am pleased to announce that Mr. Foley is going to reintroduce the bill next year and we hope that all who are cosponsors this year will again cosponsor if we are not so fortunate to get it through this Congress. Thank you very much.

Chairman STARK. Thank you, Mr. Huffaker.

If I understand this, of the approximately-how many societies would fall under this particular provision? How many communities are there in the United States?

Mr. HUFFAKER. I asked IRS some time ago, and they told me 75. Someone else has indicated a few more. But that is the range.

Chairman STARK. Do they all, from time to time, or regularly, pay taxes? Or do some just break even year after year after year? Mr. HUFFAKER. If you only break even, there would be no way to feed the members. Part of this, with both the Hutterite community and the Trappist community, they are not living on charity; they must support themselves.

Since your personal living expenses are not deductible, you have got to be making money in order to feed yourself and house yourself and clothe yourself.

So, yes, it is quite possible it may not make enough money to reach out and help others. But on a regular basis, they are going to be at least self-supporting.

Chairman STARK. That was my question.

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