First of all, I commend you all for your basic philosophy. And also I am sorry that it is necessary for you all to make this journey. I am sure there are more productive things you could be doing today. But, for the Chair's part, your testimony falls on receptive ears. It is a bill which enjoys much support in the committee, and my hope is that we can pass it. I must say there is a chance many of us on the committee might like to eliminate the investment tax credit altogether, which would be another way of solving your problem. Although I might say, concomitant with that, we would lower your tax rates. Again, I am not sure that is as desirable to you, but that might indeed be another result. We await the Treasury's submission to us of a plan later this year or next year, whichever Treasury it may be or under whichever administration it may be, for some type of tax reform. And that may be another way of solving it. But I assure you that it would be my intention at the proper time in the next Congress, if I am fortunate enough to return, that we would like to look at this issue. Mr. Duncan. Mr. DUNCAN. Thank you, Mr. Chairman. I want to thank you for being here. In fact, the chairman mentioned you coming a long distance to be with us. But let me say, I understand your problem much greater by you being here personally than I would have just by reading about it. You have been most helpful, and I look forward to some help being afforded you folks in the next year, anyway. Mr. HUFFAKER. Thank you very much. Chairman STARK. Thank you all very much. Mr. Odegard, vice president of the University of Minnesota Foundation; Mr. Edward Cain of the Apache Corp.; Mr. C. Andrew Graham, EMCOR Petroleum, on behalf of the Oil Investment Institute. I think those are all the witnesses. Mr. Scoggins has already testified earlier on H.R. 4147, and I am told he will not return. Again, your entire testimony and any exhibits appended thereto, or any testimony of other members of other organizations will appear in the record in their entirety. I would ask you to summarize or add any additional comments you would like to make to your prepared testimony. Also, as you may be aware, the Treasury opposes H.R. 4167, as was outlined this morning in their presentation. I would say—and I am not sure that I have any feeling about their opposition—but I have a concern that I am faced with, and you might want to address that, and that is, I have felt a little like a racist at the bridge or Custer leading the troops, depending on which way you want to view it, in trying to stem the pressure to exempt certain foundations from unrelated business income due to owning control of other corporations. So the fear that I would have, from a tax theory basis, is that if we allowed this, at what point do we say you are not operating a business, like a newspaper or resort hotel or whatever, is the issue that people are suggesting we exempt certain foundations for, because the newspapers are good for America, and so are oil wells good for America, and I suppose so is the Broadmoor Hotel. That is a concern that I have, and that is just that if we allow this exemption, are we in fact allowing operating businesses to be controlled by foundations or charitable institutions? So I guess-who is up first? Mr. Odegard. STATEMENT OF ROBERT J. ODEGARD, VICE PRESIDENT AND EXECUTIVE DIRECTOR, UNIVERSITY OF MINNESOTA FOUNDATION Mr. ODEGARD. Thank you, Mr. Chairman. I appreciate the chance to appear here. I am Bob Odegard, vice president and executive director of the University of Minnesota Foundation. I speak only for the educational institutions represented here. As you know, private fund raising has become a more and more important part of the funding of all educational institutions, both public and private. At the University of Minnesota, for example, we received $62.6 million in voluntary support last year, which is quite a substantial help to the taxpayers of the State. Most of our contributions come from large contributors, as you can understand. Many of these people have investments in oil and gas exploration companies. The objective of this bill is, as I understand it, threefold. The first is to help attract capital to the domestic oil and gas industry; second, to enable educational organizations to diversify their portfolios, an increasingly urgent need in recent years when the stock market performance has not been spectacular; and three, to encourage people to give these gifts of oil and gas interests to educational institutions without the necessity that they be dumped on the market at very depressed prices. Usually the income stream is worth more than the liquid value. There are a number of provisions in the bill to prevent abuses. I think you probably are more familiar with those than I am. I would just like to say that all the colleagues I have talked to in the educational establishment I think would find this bill very helpful. We do have written testimony from a number of institutions, and will be able to get more. I have letters here, which I think the staff has copies of, from the University of Southern California, the University of Pennsylvania, Emory University in Atlanta, University of Arkansas, Cornell, University of Oklahoma, Yale University, Brown University, and a letter of endorsement from the American Council on Education, which represents some 1,700 colleges and universities throughout the country. I think you would find this a very popular measure with the educators around the country. [The prepared statement follows:] STATEMENT OF ROBERT J. ODEGARD, VICE PRESIDENT AND EXECUTIVE DIRECTOR, UNIVERSITY OF MINNESOTA FOUNDATION My name is Robert J. Odegard. I am Vice President and Executive Director of the University of Minnesota Foundation, 120 Merrill Hall, 100 Church Street, S.E., University of Minnesota, Minneapolis, Minnesota 55455. I appear today in support of H.R. 4167, an amendment to the Internal Revenue Code of 1954 that would permit certain educational organizations-of which my foundation is one-to invest in, and receive gifts of, oil and gas working interests held as a limited partner. All of us in education find ourselves in the midst of one of the most unsettled and challenging periods in our history. Were it not for generous financial support from the private sector, some of our problems might be insurmountable. At the University of Minnesota, private support plays a vital part in helping to maintain the quality of this great educational enterprise. In 1983, the University of Minnesota received a total of $62.6 million in voluntary support. Public institutions, like ours, will continue to be increasingly dependent upon private support for a larger share of their resources. Many of our large contributions come from people of considerable means and most of these people have some investments in oil and gas development or exploration activities. These investments are relatively illiquid, difficult to dispose of, but very valuable in terms of the income they generate. It seems to me only fair and equitable that educational institutions be allowed to invest in, or hold onto, contributed units in such investments without being subject to the unrelated business taxable income tax. Accordingly, I strongly urge your favorable consideration of H.R. 4176. The objective of H.R. 4167 is threefold. The first, as I understand it, is to attract needed capital to the domestic oil and gas industry. The second is to enable educational organizations and qualified trusts to diversify their portfolios, and to obtain new long-term investment opportunities, by being permitted to invest a prudent portion of their funds in oil and gas activities without incurring a tax. The third is to encourage gifts of oil and gas working interests held in limited partnership form to colleges and universities to whom such income is now subject to tax. I cannot speak to the first point but I certainly believe that this proposed legislation would advance the second and third objectives. I am aware that concern has been expressed that exemption of investments in oil and gas working interests from the unrelated business income tax may present a potential for abuse of the tax-exempt status of entities making such investments. Although I leave it to the lawyers to analyze these provisions in greater detail, I note that H.R. 4167 contains a number of safeguards that are designed to prevent any abuse of exempt status. These safeguards include provisions which— (1) prevent the utilization whether by the exempt investor partner or any other partner of the deductions and credits attributable to the exempt investor partner's share of partnership income; (2) prohibit the allocation of a disproportionate share of income to exempt investor partners and a disproportionate share of deductions to taxable partners; (3) restrict exempt investors to investing in bona fide commercially managed partnerships by eliminating the exemption from unrelated business income tax if the exempt investor is related to the general partner; and (4) prevent abusive arrangements, such as saleleasebacks, between taxable and nontaxable entitles. I suggest that H.R. 4167 in no way alters the policies underlying the unrelated business income tax, i.e., that exempt organizations should not be permitted to use their exempt status to invest in a business so as to give that business an unfair competitive advantage over taxpaying entities. It does so by limiting qualified investment to that of a passive limited partner and making that investment available to all oil and gas commercial operators who want to employ the traditional format of a limited partnership to raise capital. In doing so, the Bill substantially enlarges the investment opportunities of exempt organizations that are now foreclosed from enjoying the same participation in the long-term growth of the oil and gas industry as those afforded other portfolio investors. There seems no justifiable reason why income from a diversified program of passive investments in carefully selected working interests should any more be subject to tax than investments in oil and gas royalties, which are not now subject to tax. H.R. 4167, accordingly, eliminates this unwarranted tax distinction. Today, we managers of exempt educational endowment funds are subject to prudent investment standards under state law. H.R. 4167 would not alter these standards. They would continue to require us to make prudent, diversified investments in the oil and gas area as we must do in all other investment areas. There is no reason to preclude managers from making such investments, which may produce a greater rate of return than other types of investment and expose the institution to less risk than, say, an investment in corporate stocks producing comparable rates of return. In addition, there is no reason to require investment managers, purely for tax reasons, to sell gifts of oil and gas interests made to the fund at, usually, prices far below the present value of the income they generate. In conclusion, I hope very much that this Subcommittee will report favorably on H.R. 4167. HON. ROBERT PACKWOOD, UNIVERSITY OF MINNESOTA FOUNDATION, Chairman Senate Finance Subcommittee on Taxation and Debt Management, DEAR SENATOR PACKWOOD: I hope you can support Senate File 1549 which would amend the Internal Revenue Code of 1954 to permit certain education organizations to invest in, or receive gifts from, oil and gas working interests. All of us in education find ourselves in the midst of one of the most unsettled and challenging periods in our history. Were it not for the generous financial support from the private sector, some of our problems might be insurmountable. At the University of Minnesota private support plays a vital part in helping to maintain the quality of the educational enterprise. Last year the University of Minnesota received a total of $54.8 million in voluntary support. I know I don't need to remind you of how the downturn in the economy has effected legislative appropriations. You are also aware of the demographics which will mean that our available supply of students will be declining throughout the next decade or two. Public institutions, like ours, will be increasingly dependent upon private support for a larger share of their resources. Most of our large contributions from people of considerable means and most such people have some investments in oil and gas development or exploration activities. They are relatively illiquid, difficult to dispose of, but very valuable in terms of the income generation. It would seem to me only fair and equitable that educational institutions be allowed to invest in, or hold onto, contributed units in such investments without being subject to the Unrelated Business Taxable Income Tax. I strongly urge your favorable consideration. On a personal note, I enjoyed the opportunity to have breakfast with you and Wendell Anderson when you were in Minneapolis last year. I enjoyed your half hour discourse on the history of western civilization. Cordially, ROBERT J. ODEGARD, Chairman STARK. Thank you very much. STATEMENT OF EDWIN E. CAIN, VICE PRESIDENT FOR Mr. CAIN. Thank you, Mr. Chairman. I appreciate the opportunity to be here today, and I would like to request that I have the opportunity to revise and extend my remarks. Chairman STARK. Without objection, the record stays open for a while a week or so, anyway. So we are happy to have any additional information or comments that you would like to submit for the record. Mr. CAIN. Thank you, Mr. Chairman. I am representing Apache Corp. as vice president for government relations. Apache Corp., oddly enough, is an oil and gas company located in the State of Minnesota not known for its production of oil and gas. We have been rather adept, however, at producing Presidential candidates over the past several years. We are a gas and oil exploration, development and production company, and our primary focus has been on oil and gas investment programs. Apache has offered registered drilling programs since 1956, and is one of the first companies to offer such investment opportunities. Apache's 26-year history has been a good one in the public programs, and has given us the experience of working with tens of thousands of investors. We fully support H.R. 4167 and feel that it would be a good piece of legislation, for a number of reasons. Let me outline them briefly. First of all, in the area of equal access to capital, the lack of new capital has contributed to some of the recent sharp reductions in oil and gas exploration and development. Apache, 3 years ago, managed nearly $100 million in investors' dollars in oil and gas drilling and income funds. This year, the drilling fund closed at less than $10 million. This is a significant drop over a period of 3 years and this is, I believe, a relatively consistent trend throughout the industry. While this is a concern for the industry today, it will be a serious problem for the Nation 2 or 3 years from now. Chairman STARK. Isn't that-just unless I am missing something isn't that primarily because of the oil price? Mr. CAIN. I think in part. That is true, in part. But I think we will find that there is a tendency for- Chairman STARK [continuing]. $40 a barrel-doesn't investor interest kind of pick up? Mr. CAIN. Pardon? Chairman STARK. At $40 a barrel, don't you find investor interest kind of picking up dramatically? Mr. CAIN. I think that may be true. Chairman STARK. If we take the regulation off gas prices, wouldn't that kind of spur investment? Mr. CAIN. I think at the present time if the regulation was taken off all gas-while perhaps this is not the hearing to discuss thatthat you would find a drop in gas prices rather than an increase, because the demand for natural gas simply doesn't exist at this time. Chairman STARK. OK. Thanks. Mr. CAIN. In the current unrelated business taxable income provisions we realize through taxation, college endowments and pension funds, and those who choose to invest in oil and gas working interests—yet, if made as limited partners they are equally as passive as other investment-we would like to respond to some of the statements of Treasury in regard to that particular issue, as well. The other major point I wanted to discuss was the need for broad diversification of investments for pension funds and college endowments. They deserve to have the opportunity to invest in a balanced program which will provide sufficient income to support their retirees and to provide a good income for their endowments. Currently, many small pension funds are deprived of the opportunity of investing in oil and gas interests because of the UBTI. There was a statement made in the Senate hearings by Paul Overgard that bears repeating. He is the manager of small pension funds through his organization, Independent Service Co., He stated, "This legislation will make prudent diversification possible, and will be of particular interest to the kind of plan that we serve.' There are millions of small employers in this country, and a great many of them will welcome this change as an opportunity to diversify investments and hopefully achieve a better rate of return and, thus, a better retirement for their employees. The larger pension funds have a better opportunity to customize their own investments. They can do this, to some extent in gas and oil. But the smaller pensions do not have that capability. |