associated with the program, but for substantial expansion, there probably will need to be some form of Federal assistance to the programs. Senator JAVITS. Is there any other legislation which the unions or employers would require to facilitate the establishment of day care facilities? Do they need tax deductions for example? Mr. SUGARMAN. There is a piece of legislation which is pending in the Congress now which will authorize day care as one of the items which may be subject to joint management-labor trust funds agreements, similar to the health programs that are already available. Our expectation is that that legislation will pass the Congress this year. Tax incentives, of course, are another possibility, and one of the many things that we would hope to include in the Office of Child Development study of the need for future programs. Senator JAVITS. Well, in your discussions, have you found that industrial firms are allowed to deduct the day care as a business expenses? Mr. SUGARMAN. The Internal Revenue Service has advised us that under certain circumstances, that day care may be considered as a business expense. However, it is a very complicated situation, and depends on a whole series of factors in individual cases, as to what proportion of the costs are deductible, and what the impact on the individual employee is, whether it is considered as compensation to the employee, for example. Senator JAVITS. Mr. Farmer, would you submit for the record, a statement by the Department of Health, Education, and Welfare which will analyze what inducements exist, or are needed, for American business to establish day care centers, considering those aspects which Mr. Sugarman has just mentioned, to wit: Is day care deductible as a business expense, to what extent is it taxable to the beneficiary, et cetera. The potential for involvement of private industry, you say, is great. Is that correct? Mr. FARMER. Yes, sir. Senator JAVITS. You are assuming that business is not disadvantaged by virtue of its expenditures for day care? Is that correct? Mr. FARMER. Senator, we would be pleased to submit for the record such a statement. Senator JAVITS. I ask unanimous consent that the statement be submitted for the record. (The information subsequently supplied follows:) INCENTIVES TO BUSINESS PARTICIPATION IN DAY CARE Business participation in day care has taken a variety of forms. Those employers seeking to serve their employees directly have established nonprofit corporations, with business financing, or have hired staff on the payrolls of their companies to establish and run day care programs. Others have made contributions to private, non-profit charitable or educational organizations to encourage the establishment of day care facilities which the children of their employees can use. Still others have made contributions to local or State welfare agencies to foster the growth of day care operations in their communities. Where businesses have been too small to support such programs individually, small employers have grouped together to provide the service which would be uneconomical otherwise. Joint union-management agreements for the provision of day care under trust fund arrangements is another alternative. The primary inducements to encourage business involvement in these operations are tax deductions. There are two sections of the Internal Revenue Code of 1954, as amended, which appear to authorize deductions from gross taxable business income of contributions or expenses related to day care. Section 170 of the Code authorizes the deduction of charitable contributions to an organization which obtains an exemption from Federal income tax as a non-profit organization. In such a case, a contribution either in cash or kind may be deducted from the Federal income tax of the individual or corporate donor. This deduction is limited to 5% of a corporation's taxable income or 20% (or 30% under certain circumstances) of an individual taxpayer's adjusted gross income. Since such contributions must be included with all other charitable contributions for other purposes, it is obvious that the incentives for a given employer to contribute under this provision is quite limited. However, it has been used, as in the case of the KLH Child Development Center (see attachment #1) to obtain contributions from multiple sources. Under Section 162 of the Internal Revenue Code, corporations may deduct the full amount of business expenses. This would appear to offer far more incentive than the charitable contribution approach. However, the Internal Revenue Service must ascertain that contributions to the operation of day care facilities, in order to be deductible under this provision, were made for business reasons and with the view of deriving some particular business benefit rather than from charitable intentions. In other words, a business cannot consider part of its contribution and part as a business expense-it is an either/or proposition. The difficulty in application of Section 162 lies in the lack of general guidelines for the judgment of whether the day care is necessary to derive some particular business benefit for the employer. In an effort to clarify the application of both Section 170 and Section 162, we wrote to the Internal Revenue Service, posing a series of questions (see attachment #2). IRS, while providing some general information, declined to provide answers to the questions, stating it was "unable to provide definite answers to the questions since we would need a complete statement of all the facts of each situation in order to do so." (see attachment #3). We replied to IRS, indicating that we have no one case but seek guidelines for general applicability, much as individual taxpayers are assisted in determining whether a person for whom they provide some measure of support qualifies as a "dependent." (see attachment #4). In an informal reply via telephone, confirmed by letter (see attachment #5) we were advised that IRS could not expand on its prior ruling. In summary, then, the current provisions of the Internal Revenue Code appear to offer incentives to business to participate in day care programs, particularly those for their own employees; however, the lack of clear-cut guidelines and the insistence by IRS on judging each individual case in the absence of general rulings tend to discourage rather than encourage employers to become involved in child care operations. Attachments. KLH CHILD DEVELOPMENT CENTER, INC., INTERNAL REVENUE SERVICE, Washington, D.C., April 25, 1969. GENTLEMEN: This is in reference to your application for exemption from Federal income tax as an organization described in section 501(c)(3) of the Internal Revenue Code. You were organized on a nonprofit basis to operate an educational day care school in Cambridge for children primarily of persons employed in nearby industries and to examine the impact of the school on its pupils, their parents, the employers of such parents and the community with a view to assisting others to organize and operate similar day care schools. You have established such a school through the cooperation and support of the KLH Research and Development Corporation as a demonstration research project pursuant to grants received from the Children's Bureau of the Department of Health, Education, and Welfare. To achieve your goal of giving the children a high-quality education, you intend to maintain a professional staff of highly qualified and experienced teachers. The evidence you have submitted indicates that the current staff is composed of highly educated individuals with vast experience in areas such as the Headstart Program and the education of pre-school age children. Your educational program recognizes the vital role nutrition plays in the develop ment and education of children and you plan to furnish 70% of the daily nutritional requirements of the children enrolled. Your program also includes teach. ing the children proper hygiene and a registered nurse from the business corporation and a medical aide will be available to look after the medical needs of the children. You have stated enrollment in your center will be available to the children of KLH Research and Development Corporation employees, children of parents employed in nearby industries, and children of parents recommended through contacts with anti-poverty and welfare agencies. You have further stated enrollment in the center will not be a privilege of employment at KLH Corporation, thus employment by that firm will not give any employee the right to have his child accepted for enrollment. Children will be selected based on the financial need of the family and the need of a child for your program. The evidence submitted indicated the parents of enrolled children automatically become members of the Center. The members of the center fully control the policies and workings of the center and therefore it is the parents of children enrolled in the center who will be in control of the center. Based upon the facts set out above, we conclude that you are organized and operated exclusively for charitable and educational purposes within the meaning of section 501(c)(3) of the Code and we hold accordingly that you are exempt from Federal income tax as an organization described in that section. This ruling is based on the proposed operations outlined above, and it may not be relied upon if your future operations diverge substantially from those proposed. You are not required to file Federal income tax returns so long as you retain exempt status, unless you are subject to the tax on unrelated business income imposed by section 511 of the Code and are required to file Form 990-T for the purpose of reporting unrelated business taxable income. Any changes in your character, purposes or method of operation should be reported immediately to your District Director for consideration of their effect upon your exempt status. You should also report any change in your name or address. You are required to file the annual information return, Form 990-A, after the close of your annual accounting period. Contributions made to you are deductible by donors as provided in section 170 of the Code. Bequests, legacies, devises, transfers or gifts to you or for your use are deductible for Federal estate and gift tax purposes under the provisions of sections 2055, 2106 and 2522 of the Code. You are not liable for the taxes imposed under the Federal Insurance Contribtions Act (social security taxes) unless you file a waiver of exemption certificate as provided in such act. You are not liable for the tax imposed under the Federal Unemployment Tax Act. Inquiries about the waiver of exemption certificate for social security taxes should be addressed to your District Directors. Your District Director is being advised of this action. JOHN R. BARBER, DEPARTMENT OF HEALTH, EDUCATION, AND WELFARE, Mr. FRED ZUCKERMAN, DEAR MR. ZUCKERMAN: The Federal Panel on Early Childhood is an interagency committee responsible for coordinating Federal efforts with respect to early childhood programs. As a part of that effort we are exploring ways in which business and labor can be more substantially involved in the provision of day care. In our discussion with leaders from these two groups we find that there is great confusion about the application of the tax laws to such activities. Therefore, I would appreciate your reply to the following questions concerning the application of the Internal Revenue Code to various forms of funding of day care programs for children. 1. When a business firm makes a contribution to a private, non-profit charitable or educational organization for the purpose of providing day care fo children, can the firm deduct the full amount as a charitable contribution under Section 170? 2. When a business firm makes a contribution in cash or in kind to a local or State welfare agency or day care purposes, can the full amount or value of the contribution be deductible as a charitable contribution under Section 170? 3. When a business firm establishes a non-profit corporation and finances it for the purpose of providing day care for the children of its employees, to what extent and under what circumstances can the firm's costs for this purpose be deductible as (a) charitable contributions under Section 170; (b) business expenses under Section 162? 4. Given the same action as in #3 above, if the day care was provided both for children of employees and for the poor, to what extent and under what circumstances could the firm's costs be charged as (a) charitable contributions ; (b) business expenses? 5. Given the same action as in #3 above, if the day care was provided exclusively for the poor, to what extent and under what circumstances could the firm's costs be charged as (a) charitable contribution; (b) business expenses? 6. If an employee, as a condition of employment, receives day care for her children, is the value of the day care services subject to Federal personal income tax? If you have any questions concerning the situations outlined above, or if we can provide any additional information for you, please contact Mrs. Elsten of my staff, code 13, extension 26021. We are anxious to obtain your reply as soon as possible since we wish to incorporate the information in material we are preparing for a conference next month. Sincerely, JULE M. SUGARMAN, and Chairman, Federal Panel on Early Childhood. Mr. JULE M. SUGARMAN, INTERNAL REVENUE SERVICE, Chairman, Federal Panel on Early Childhood, DEAR MR. SUGARMAN: This is in reply to your letter of January 30, 1969, requesting information as to the consequences, for Federal income tax purposes, resulting from contributions by business firms to early childhood programs established or promoted by your agency. Your letter presents the following questions: 1. When a business firm makes a contribution to a private, nonprofit charitable or educational organization for the purpose of providing day care for children, can the firm deduct the full amount as a charitable contribution under section 170? 2. When a business firm makes a contribution in cash or in kind to a local or State welfare agency for day care purposes, can the full amount or value of the contribution be deductible as a charitable contribution under section 170? 3. When a business firm establishes a nonprofit corporation and finances it for the purpose of providing day care for the children of its employees, to what extent and under what circumstances can the firm's costs for this purpose be deductible as (a) charitable contributions under section 170; (b) business expenses under section 162? 4. Given the same action as in #3 above, if the day care was provided both for children of employees and for the poor, to what extent and under what circumstances could the firm's costs be charged as (a) charitable contributions; (b) business expenses? 5. Given the same action as in #3 above, if the day care was provided exclusively for the poor, to what extent and under what circumstances could the firm's costs be charged as (a) charitable contributions: (b) business expenses? 6. If an employee, as a condition of employment, receives day care for her children, is the value of the day care services subject to Federal personal income tax? We are unable to provide definite answers to the questions indicated above since we would need a complete statement of all the facts of each situation in order to do so. However, we are providing the following general information which, we feel will be helpful. Section 170 of the Internal Revenue Code of 1954 provides for the deduction of charitable contributions, as defined in section 170 (c) of the Code, payment of which is made within the taxable year, subject to the limitations provided in section 170(b) of the Code. Section 170 (c) (1) of the Code defines a charitable contribution, in part, as a contribution to or for the use of a State, a Territory, a possession of the United States, or any political subdivision of any of the foregoing or the District of Columbia, but only if the contribution or gift is made for exclusively public purposes. Section 170(c) (2) of the Code further defines a charitable contribution, in part, as a contribution or gift made to or for the use of a corporation, trust, or community chest, fund, or foundation (A) created or organized in the United States, any State or Territory, the District of Columbia, or any possession of the United States, (B) organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes or for the prevention of cruelty to children or animals, (C) no part of the net earnings of which inures to the benefit of any private shareholder or individual, and (D) no substantial part of the activities of which is carrying on propaganda, or otherwise attempting, to influence legislation. Section 170(b)(1)(B) provides the general limitation that an individual's contribution is limited to an amount not in excess of 20 percent of the taxpayer's adjusted gross income while section 170(b)(1) (A) of the Code provides an additional deduction to individuals of 10 percent of the taxpayer's adjusted gross income for contributions to organizations described in that section. Section 170 (b) (2) prescribes the rules for determining the amount deductible by a contributing corporation and provides that a corporate donor can deduct the amount of any contribution up to 5 percent of the corporation's taxable income, as computed under section 170 (b) (2) of the Code. With regard to the first question, if the donee organization is one described in section 170(c) (2) of the Code, and the contribution is made for charitable as opposed to business purposes, then the corporate donor can deduct the amount of any contribution up to 5 percent of the corporation's taxable income, as computed under section 170(b)(2)' of the Code. An individual may deduct the amount of the contribution up to 20 percent of his adjusted gross income unless the organization is one described in section 170(b) (1) (A) of the Code, in which event, the deduction will be limited to 30 percent of the individual taxpayer's adjusted gross income. Similarly, if a contribution in cash or in kind were made to a local or state welfare agency, an organization described in section 170(c) (1) of the Code, and the gift were made "for exclusively public purposes," then the individual donor will be entitled to a deduction limited to 30 percent of his adjusted gross income while the corporate donor's deduction will be limited to 5 percent of its taxable income as indicated above. The following relates to questions 3, 4, and 5 respectively. Section 162 of the Code provides that there shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business. Section 1.162-15 of the Income Tax Regulations states that no deduction is allowable under section 162 (a) for a contribution or gift by an individual or a corporation if any part thereof is deductible under section 170. It further states that this limitation applies only to payments which are in fact contributions or gifts. In other words, a payment by an individual or a corporate donor to an organization described in section 170 of the Code, if made for business purposes, would not be a contribution deductible under sectin 170 of the Code but rather, it would be deductible under section 162 if the requirements of that section were otherwise met. Therefore, if a business firm establishes a non-profit corporation, the corporation would have to be one described in section 170 (c) of the Code in order for a payment to it by the firm to qualify as a charitable contribution. It is advisable for such organization to establish an exempt status under the provisions of section 501(c)(3) of the Code, the procedure for which is explained in Revenue Procedure 69-3, published in Internal Revenue Cumulative Bulletin 1969–1, 16, a copy of which is enclosed. Once the exemption has been obtained, then the question of whether a particular payment to such corporation would be a char |