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To amend the Internal Revenue Code of 1954 with respect to the unrelated business taxable income of certain nonprofit charitable organizations.

IN THE HOUSE OF REPRESENTATIVES

MARCH 2, 1983

Mr. DUNCAN (for himself and Mr. GUARINI) introduced the following bill; which was referred to the Committee on Ways and Means

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A BILL

To amend the Internal Revenue Code of 1954 with respect to

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the unrelated business taxable income of certain nonprofit charitable organizations.

Be it enacted by the Senate and House of Representa2 tives of the United States of America in Congress assembled, 3 That (a) section 513 of the Internal Revenue Code of 1954

4 (relating to unrelated trade or business) is amended by adding 5 at the end thereof the following new subsection:

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"(h) EXCHANGES, RENTALS, AND SALES OF NAMES

7 FROM DONOR LISTS OR MEMBERSHIP LISTS.-In the case 8 of an organization described in section 501 contributions to 9 which are deductible under section 170, the term 'trade or 10 business' does not include any trade or business of such orga

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1 nization which consists of exchanging, renting, or selling

2 names and addresses of donors to, or members of, such orga3 nization."

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(b) The amendment made by subsection (a) shall apply

5 to taxable years ending after the date of the enactment of this 6 Act.

SUMMARY AND DESCRIPTION

PRESENT LAW

General rule

Under present law, certain organizations are generally exempt from Federal income tax because of their charitable, eductional, religious, or other nonprofit purposes and functions. However, in light of examples of tax-exempt organizations which had been acquiring and operating, on a tax-free basis, businesses unrelated to their exempt purposes or functions, the Congress enacted the unrelated business income provisions in 1950. These provisions (Code secs. 511-514) impose a tax on the unrelated business income of exempt organizations, primarily in order to remove any unfair advantage which tax-exempt organizations otherwise would have over taxable competitors (S. Rep. No. 2375, 81st Cong., 2d Sess. 28-29 (1950)).

The tax applies to gross income derived by an exempt organization from any unrelated trade or business regularly carried on by it, less allowable deductions directly connected with the carrying on of such trade or business, both subject to certain modifications. Under one such modification (sec. 512(b)(2)), dividends, interest, annuities, royalties, and, generally, rents from real property are exempted from the tax. Also, there are special rules with regard to rents from personal property leased with real property.

Definition of unrelated business

Under present law, an unrelated trade or business is defined as any trade or business of a tax-exempt organization 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) to the exercise or performance by such organization of its charitable, educational, religious, or other nonprofit purpose and function constituting the basis for its exemption (sec. 513(a)).

The U.S. Court of Claims held in 1981 that income received by the Disabled American Veterans from other exempt organizations and commercial businesses for the use of its mailing lists constitutes unrelated business taxable income, and does not consitute "royalties" expressly exempted from the tax under section 512(b)(1) (Disabled American Veterans v. U.S., 650 F.2d 1128 (1981)). The court found that in renting its donor lists, the DAV operated in a competitive, commercial manner with respect to taxable firms in the direct mail industry; that these rental activities were regularly carried on; and that the rental activities were not substantially related to accomplishment of exempt purposes (apart from the organization's need for or use of funds derived from renting the mailing lists).

EXPLANATION OF THE BILL

In the case of any organization exempt from tax under section 501 which is eligible to receive tax-deductible charitable contributions under section 170, the bill would exclude from the term unrelated trade or business any trade or business of such organization that consists of exchanging, renting, or selling names and addresses of donors to, or members of, such organization. The categories of organizations to which the bill would apply would include (1) tax-exempt charitable, educational, religious, etc. organizations formed in the United States; (2) certain organizations of war veterans and their auxiliary units; and (3) certain domestic fraternal organizations (which are eligible to receive tax-deductible contributions for gifts is used exclusively for charitable, educational, religious, etc., purposes); and (4) certain nonprofit cemetery companies.

EFFECTIVE DATE

The provisions of the bill would apply to taxable years ending after the date of enactment.

REVENUE EFFECT

The provisions of the bill are estimated to reduce budget receipts by $10 million annually.

PRIOR CONGRESSIONAL ACTION

H.R. 4170 (the Deficit Reduction Act of 1984), as passed by the Senate, included a provision (adopted as a floor amendment by Senator Pryor) providing an exemption from the unrelated business income tax for amounts received by certain Federally

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chartered corporations (named in 36 U.S. Code sec. 1101) for renting or exchanging lists of their donors or members with organizations contributions to which are eligible for charitable deductions. This provision was deleted from the bill in conference.

STATEMENT OF THE AMERICAN SOCIETY OF ASSOCIATION EXECUTIVES

The American Society of Association Executives (ASAE), the professional society for over 10,000 executives and other high level management personnel of taxexempt and nonprofit organizations, supports enactment of H.R. 1773, a bill to exempt certain organizations from the unrelated business income tax (UBIT) on sales of their membership lists. ASAE further supports an amendment to H.R. 1773 which would extend the provisions of the bill to all tax exempt organizations, including business leagues, chambers of commerce and other trade and professional associations which are exempt from taxation under section 501(c)(6) of the Internal Revenue Code.

ASAE supports an exemption from the UBIT for the sale of membership lists for all nonprofit organizations for the following reasons:

1. Nonprofit organizations such as trade and professional organizations are as important, valuable and essential as the types of organizations currently covered in H.R. 1773 and their need to supplement their income from sources other than dues is as great as other types of organizations. It is illogical and unfair to discriminate against them by excluding them from coverage under this bill.

2. Similarly, nonprofit organizations other than charitable organizations such as those covered by H.R. 1773 perform equally valuable services and functions, both for their own members and for the general public and various governmental agencies as do the charitable types of organizations specifically covered in H.R. 1773.

3. The sale of membership lists is not unrelated to the exempt purposes for which nonprofit organizations exist:

Under the Internal Revenue Code, one of the requirements for obtaining tax exempt status is that an applicant organization serve the common interests of its members generally; one way in which an association does this is by informing its members of products, services and ideas that may be of particular interest to them; one way of so informing its members, in turn, is for the association to permit the originators of those products, services or ideas communicate information directly to the members by providing its membership mailing list.

4. The sale of membership lists does not compete with regular for profit commercial enterprise and thus give nonprofits an unfair advantage because these lists are either readily available from public sources, such as telephone or zip code directories; or because the association represents such a precisely defined interest that no commercial organization is willing or interested enough to put together a list of people with that interest for sale to others.

5. Any income derived by an association from the sale of its membership list is likely to be modest, so that any loss to the Treasury is likely to be de minimis and offset by the value of the services the nonprofit will be able to continue to perform as a result of meeting its financial needs, in part through income from the sale of membership lists.

6. Many associations operate on low budgets, so that even modest amounts of income derived from sources other than members dues become important, if not critical, to the continued operation of the organization. Under current administration policy, which is to rely more heavily on the private sector and to rely on volunteers to do work that formerly the government was asked to perform, it is all the more important to give associations as much as possible in remaining solvent and viable so that they can carry out the tasks the government would like to see private and volunteer groups assume.

7. Conceptually and practically, income derived from the sale of an association's mailing list is the same as other possible income derived from rent or royalty payments; yet income from these latter categories is tax exempt and is not considered unrelated business income: applying the principle of treating like things alike, neither should income from the sale of a membership list be considered unrelated business income.

8. The case in the U.S. Claims Court holding that sales of mailing lists constitute unrelated business income (Disabled American Veterans v. U.S., 650 F.2d 1178 (Ct. Cl., 1981)) has in effect been overruled by a recent decision of the U.S. Court of Appeals for the Federal Circuit, which can review decisions of the U.S. Claims Court. This case is American College of Physicians v. U.S.,-F.2d-(Fed. Cir., Sept. 17,

1984). Although this case relates to advertising income, the import to revenues from membership lists is manifest.

STATEMENT OF HON. DAVID H. PRYOR, A U.S. SENATOR FROM THE STATE OF ARKANSAS

Mr. Chairman, I commend you for calling this hearing today to examine several tax measures that have been referred to your subcommittee. I have an interest in one of them, H.R. 1773, and my remarks will relate solely to that bill.

Before I speak on this issue, Mr. Chairman, I would first like to commend the efforts of the Gentleman from Tennessee, Mr. Duncan, the Ranking Member of the Subcommittee. He is the sponsor of H.R. 1773, and he's been very instrumental in seeking to have this measure enacted into law.

Mr. Chairman, H.R. 1773 would correct what I sincerely believe to be an incorrect interpretation of our tax code by both the Internal Revenue Service and the U.S. Court of Claims in the area of what constitutes unrelated business income. The rules of the tax code dealing with unrelated business income are there for a good reason to tax charitable organizations like any other business when they engage in activities that aren't directly related to their charitable work. Also, the rules are designed to prevent a tax-exempt organization from gaining an unfair competitive advantage if they were to sell products that compete against taxable entities.

The problem with the case of mailing lists, Mr. Chairman, is that the Service and the courts have incorrectly interpreted the intent of Congress. H.R. 1773, and S. 2908, a bill I've introduced in the Senate will correct the problem.

The U.S. Court of Claims a few years ago held that income received by the Disabled American Veterans was unrelated business income, and therefore, taxable when the money was received from the rental or sale of the DAV's mailing list. Further, it's my understanding that it's the position of the Treasury Department that even the exchange (or barter) of a list between two tax-exempt organizations would give rise to UBTI. This thwarts what I believe to be the intent of Congress, Mr. Chairman, and I hope we can correct it.

Most non-profit organizations in this country rely on contributions for their existence, and the best way to continue to have steady contributors is through an up-todate mailing list. In order to maintain a good mailing list, as Mr. Heilman pointed out, you need to exchange with other non-profit organizations. This isn't done for any reason other than to keep the mailing list up-to-date. Therefore, it seems to me that money, or the fair market value, in the case of a pure exchange, should not be UBTI, because the transaction is “directly related to" the activities of the charitable organization. That's what H.R. 1773, any my bill, S. 2908, seek to accomplish.

The bill I introduced would provide an exemption for UBTI for the rental or exchange (but not the sale) of a mailing list by a congressionally-chartered organization with another non-organization. Also, it would provide an exemption for the exchange between two non-profit organizations, deductions to which are tax deductible under Section 170. My bill would still make the sale of a list taxable as UBTI. Therefore, it is narrowly drawn so that organizations like the DAV, the Kidney Fund, and many other charitable organizations can continue to raise money to carry on their important work.

A version of my bill, Mr. Chairman, was adopted by the Senate during our consideration of the Deficit Reduction Act, but was dropped in conference.

I continue to hope that either the legislation I've introduced in the Senate, or the bill before the committee today, H.R. 1773, can be enacted into law next year. I think it is wise from a tax policy standpoint, will lose hardly any money, and more importantly, will conform with what I believe we intended when we enacted the unrelated business income tax rules.

Mr. Chairman, that concludes my statement. Again, I commend you for holding this hearing today. I look forward to working with you on this issue, and once again, I want to thank the Gentleman from Tennessee, Mr. Duncan, for his work in this area. Thank you.

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