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CUMBERLAND UNIVERSITY, Lebanon, TN, October 10, 1984.

Congressman ALBERT GORE, Jr.,

Longworth Building,

Washington, DC.

Dear Al: I am writing to request your support of S. 1549 and H.R. 4167. These Bills would allow tax exempt pension funds, colleges, and universities to invest in limited partnership and holding oil and gas working interests without sustaining income taxes for unrelated business ventures.

In essence, this legislation would provide the same treatment for oil and gas limited partnerships as that currently being used for investment in stocks and bonds. This would allow universities to establish a more diversified investment portfolio and provide incentives for movement of capital into domestic oil and gas productions.

Your support of this legislation will be appreciated.

Sincerely,

BOB CLEMENT, President.

EMORY UNIVERSITY,

OFFICE OF THE PRESIDENT, Atlanta, GA, September 28, 1984.

Hon. ED JENKINS,

House of Representatives,
Washington, DC.

DEAR CONGRESSMAN JENKINS: I am writing to record Emory University's support of H.R. 4167 (S. 1549), the proposed legislation which would permit pension funds, colleges and universities to invest in oil and gas limited partnerships without the unrelated business tax penalty.

As the members of the Select Revenue Subcommittee of Ways and Means consider this matter in early October, I hope they will support this important investment alternative for colleges and universities at a time when the effects of diminishing federal assistance for higher education are being sorely felt on our campuses.

Sincerely,

JAMES T. LANEY, President.

UNIVERSITY OF CALIFORNIA,

HASTINGS COLLEGE OF THE LAW,

San Francisco, CA, October 11, 1984.

Hon. ROBERT DOLE,

Senate Hart Office Building,
Washington, DC.

DEAR SENATOR DOLE: This note is to request your support for Senate Bill 1549 which would amend the Internal Revenue Code of 1954 to permit tax exempt pension funds, colleges and universities to invest in limited partnerships holding oil and gas working interests without becoming the subject of unrelated business income taxes.

The above referenced Bill is clearly in the public interest as seen from the standpoint of higher education striving to maintain its independence from government subsidies. Your help will be deeply appreciated. Sincerely,

BERT S. PRUNTY, Dean.

UNIVERSITY OF SOUTHERN California,
UNIVERSITY PARK,
Los Angeles, CA, June 22, 1984.

Hon. DAN ROSTENKOWSKI,
Rayburn House Office Building,
Washington, DC.

DEAR CONGRESSMAN ROSTENKOWSKI: I am writing to request your support of H.R. 4167 which would amend the Internal Revenue Code of 1954 to permit qualified retirement trusts and educational organizations to treat income received from oil and

gas working interests in the same manner as income earned from stock and bonds. This legislation would allow colleges and universities to accept and retain gifts of oil and gas working interests without having to arrange forced sales to avoid the Unrelated Business Taxable Income (UBTI). Additionally, by permitting passive investment in this form of asset, college endowments would be better able to diversify their investment portfolios thereby reducing total portfolio risk without sacrificing total returns.

In the treatment of investment income earned by educational organizations, the Internal Revenue Code distinguishes between passive income and unrelated business taxable income. All income not specifically exempt from section 512, for example, income from stocks, bonds and oil royalties, is investment and penalize through taxation active management of unrelated investment and penalize through taxation active management of unrelated businesses. The proposed legislation will not damage the original intent of the UBTI; the statutory language proposed will allow investment only in the form most like passive stock ownership and expressively forbids the exercise of any control over the entity of participation in management decisions with regard to the business of the entity.

The investment objectives of educational organizations such as the University of Southern California have had to adapt to changing economic conditions to deal with inflation and increased funding requirements. Considerable financial support from the private sector and an economic return on the prudent investment of that private financial support, is necessary to maintain the quality of our educational enterprise. Over the last decade, returns from traditional investments-stocks and bonds-have failed to earn an economic rate of return equal to the rate of inflation; the purchasing power of our endowment has declined. Over the same period, direct investment in oil and gas and activities from non-industry sources have proved to be low risk, consistent performing assets generating rates of return in excess of the rate of inflation.

Inasmuch as this legislation will permit educational institutions to diversify their investment portfolios, provide a greater hedge against inflation, increase the gift opportunities to colleges and universities from the private sector and make available additional sources of capital for the domestic oil industry, we urge your consideration and support of this legislation.

Sincerely,

LYN HUTTON, Treasurer.

UNIVERSITY OF SOUTH CAROLINA,
Columbia, SC, October 2, 1984.

Hon. CARROLL A. CAMPBELL,
Cannon House Office Building,
Washington, DC.

DEAR CARROLL: It has been brought to my attention that a bill is before the House of Representatives (H.R. 4167) and the Senate (S. 1549) which amends Sections 512 and 514 of the Internal Revenue Code to permit colleges and universities to invest in limited partnerships holding oil and gas working interests without becoming subject to unrelated business income tax. At the current time, institutions of higher education are subject to unrelated business income tax at corporate rates on income from investments in limited partnerships holding oil and gas working interests. This tax discourages colleges and universities from diversifying their portfolio through investments in the oil and gas industry. It seems reasonable that institutiosn of higher education can receive the same consideration for investment in limited partnerships in the oil and gas industry as they now receive with investments in stocks, bonds and royalties. Furthermore, through investments by colleges and universities, the oil and gas industry will have another source of capital while producing no significant revenue loss for the federal government.

Finally, changes in Sections 512 and 514 of the Internal Revenue Code will allow colleges and universities to be in a more beneficial position when receiving gifts and contributions of this type of property. As you know, the University of South Carolina is in the planning stages of a new complex named for John E. Swearingen, Carolina Alumnus and former Chairman of the Board of Standard Oil of Indiana. The Swearingen Center will be the second largest engineering center in the Southeast and will be built totally with private contributions. Most of the gifts for construction of this center are from Mr. Swearingen's strong friends and associates in the oil industry. Therefore, the University has particular interest in the outcome of this legislation.

Through your support of H.R. 4167 you can provide additional resources for the University and other colleges and universities in the State of South Carolina. If I can provide additional information, please do not hesitate to call upon me.

Sincerely,

JAMES B. HOLDERMAN.

THE UNIVERSITY OF TENNESSEE,
Knoxville, TN, October 5, 1984.

Congressman DAN ROSTENKOWSKI,
Rayburn House Office Building,
Washington, DC.

DEAR CONGRESSMAN ROSTENKOWSKI: House Bill 4167 has come to the attention of the University of Tennessee. According to our review, it appears that this is very beneficial legislation which would permit University endowments to treat, for tax purposes, income for oil and gas production exactly like income earned from stocks, bonds and royalties. In that regard, it would remove its present tax treatment as unrelated business income and give it the same standing as passive income comparable to interest and dividends earned on stocks, bonds, and royalties.

By permitting passive investment in this form, institutional endowments will be better able to diversity their investment portfolios, thereby reducing total portfolio risk without sacrificing total return. Besides providing alternative investment opportunities, this legislation would allow colleges and universities to accept and retain donations of oil and gas working interest held as a limited partner without exposure to the unrelated business income tax.

It is my understanding that this legislation will achieve these results for higher education without causing a loss of revenue to the Treasury and, at the same time, create a new source of capital for domestic independent petroleum companies.

I personally support this legislation and urge your careful review of its positive effects for higher education and the independent oil industry. I respectfully request that this letter be made a part of the record for the House hearings on this Bill. Sincerely yours,

A. DAVID MARTIN, Treasurer.

Chairman FORTNEY H. STARK,

Subcommittee on Select Revenue Measures,

YALE UNIVERSITY, New Haven, CT, October 11, 1984.

Longworth House Office Building, Washington, DC.

DEAR REPRESENTATIVE STARK: I submit the following comments in support of H.R. 4167 on behalf of Yale University. H.R. 4167 would amend sections 512 and 514 of the Internal Revenue Code to permit educational institutions to treat income derived from oil and and gas interests as passive-hence untaxable-income. This change would enable universities to diversify investments and retain gifts of income producing oil and gas interest.

Yale University is an independent, non-sectarian institution of higher education founded in 1701. We currently educate approximately 5,000 undergraduate students and 5,000 graduate and professional students in eleven programs. Yale educates both men and women in all its academic departments.

We attempt to utilize as productively as possible our financial resources, including Yale's endowment. The endowment, which is made up of capital gifts over many years, is currently worth about $1.1 billion. We drew from that last year about $40 million, or about 10% of the University budget. In 1970, by contrast, the endowment supported 25% of Yale's budget. The reason for this sharp decline is that returns on endowment investments, primarily stock and bond investments, have fallen far short of inflation. We have concluded that we should significantly diversify the portfolio into a number of other investment areas.

Like other nonprofit education institutions, our ability to expand our portfolioand in fact even to accept gifts which would diversify our portfolio-is limited by the Internal Revenue Code's designation of some forms of alternative investments as "unreleated business taxable interest"-income derived from a business or investment not directly related to the purposes of the tax-exempt institution which is taxed at corporate rates—and "passive income"-specific statutory exemptions for

interest and dividends earned on stocks, bonds, and royalties which are therefore not taxed to the institution.

When this legal distinction was created over thirty years ago, oil and gas interests were designated "UBTI," primarily because of the need to ensure that nonprofits were not given unfair investment advantage in these developing investments. Since that time, economic conditions and new investment opportunities have changed, but the legal categories have not. The traditionally passive investment (bond and stocks) no longer maintain the relatively stable economic rate of return whereas direct investments in oil and gas producing properties have turned in to low risk, consistently performing assets. Thus, the UBTI treatment of oil and gas investments no longer protects unfair competition, but instead locks universities and pension plans out of these lucrative, yet truly passive investments.

H.R. 4167 would correct the miscategorization of oil and gas investments, and includes safeguards which will prevent unfair competition by the nonprofit sector. Educational institutions, under this bill, could not take part in the control of the business of producing oil or gas; if an institution should do so, it would be subject to UBTI in the same manner as if it undertook a controlling interest in another type of business effort. In fact, all investments will be restricted to investments in limited partnership interests, and the legislation further prevents abuse of the nonprofit investor by the limited or general partner. Thus, this bill is consistent with the principle which underlies the UBTI concept.

Perhaps more important, H.R. 4167 would permit universities like Yale to receive and retain as a passive investment any gifts of oil and gas interests. Under current law, gifts of oil and gas interests would have to be converted to cash through a forced sale. These interests are relatively illiquid and forced sales typically reduce their immediate value. Furthermore, the university donee has lost permanently the longer-lasting value from income generation. Although there is no way of knowing the full extent to which the existing law has discouraged gifts of these valuable interests to Yale and other universities, there can be no doubt that the few donors possessing these valuable assets would be discouraged from making such a donation. It is not often that the Congress has the opportunity simultaneously to meet educational needs and encourage capital investment in important energy development interests. H.R. 4167 clearly addresses both of these needs. I urge you to adopt this innovative bill in order to remove outdated and inconsistent restraints on university investments and receipts of gifts.

Sincerely,

JOHN W. BUCKMAN.

98TH CONGRESS

1ST SESSION

H.R. 4507

I

To amend the Internal Revenue Code of 1954 to allow the investment credit with respect to taxable businesses conducted by certain religious communities exempt from tax under section 501(d) of such Code.

IN THE HOUSE OF REPRESENTATIVES

NOVEMBER 18, 1983

Mr. FOLEY (for himself, Mr. RANGEL, Mr. STARK, and Mrs. KENNELLY) introduced the following bill; which was referred to the Committee on Ways and Means

A BILL

To amend the Internal Revenue Code of 1954 to allow the investment credit with respect to taxable businesses conducted by certain religious communities exempt from tax under section 501(d) of such Code.

1 Be it enacted by the Senate and House of Representa2 tives of the United States of America in Congress assembled,

3 SECTION 1. ALLOWANCE OF INVESTMENT CREDIT TO ELIGI

4

5

BLE SECTION 501(d) ORGANIZATIONS.

(a) IN GENERAL.-Section 48 of the Internal Revenue 6 Code of 1954 (relating to definitions and special rules) is 7 amended by redesignating subsection (r) as subsection (s) and 8 by inserting after subsection (q) the following new subsection:

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