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Mr. MOORHEAD. I am vice chairman of the Petro-Lewis Corp. I think an adequate description of Petro-Lewis and its activities in oil and gas operations and investment management is pretty abundant in the prepared testimony. I am also the chairman of an ad hoc committee called The Investment Equity Committee, formed of people in the securities, pension fund management and advisory industries, to forward this legislation, believing it is in the public interest. I am also a governor of the Oil Investment Institute, a trade association which has endorsed this legislation in principle, and will meet next Tuesday to specifically consider, and I trust, endorse the specific legislation represented by S. 1549.

Rather than try to summarize the testimony in prepared form submitted previously, I would like to comment on a few highlight issues. The temptation has been from the opponents, including Treasury this morning, to compare this legislation to some ideal standard rather than to the practical circumstances that exist today. As a practical matter, there is no impediment now for tax exempts to invest free of the UBTI problem. There is simply an impediment to doing so in conventional formats, the conventional format being investing through limited partnerships which own working interests. That is the standard form of nonindustry participation in the oil industry, and it is denied to the tax exempt industry under present law because of the tax impediment. Further, the opponents choose to compare the abuse standard to some ideal. There is the full potential for abuse, and I think abuse is invited, under the situation that exists today with substantial amounts of money being channeled from tax-exempt institutions into oil and gas investments through tax avoidance structures rather than the straightforward conventional way the industry has developed over the decades. We would favor any improvements that can be offered. We would be prepared and are prepared to work with Treasury and other opponents to the bill as presently written to achieve the elimination of the abuse potential that has been alleged.

Finally, the bill does include-specifically addressing the Treasury's concerns-a provision that Treasury should promulgate regulations and rules that would tend to obviate some of the abuses that have been set up, perhaps as strawmen. The issue here I believe is one of competition. Petro-Lewis undertook this legislative initiative because we believed that there was no reasonable basis for anyone to oppose it. We find, to our dismay, that there are people who oppose it, as nearly as we can tell, because of a preference for keeping the situation as it is and avoiding further competition. We personally believe that competition and the access to the industry to new sources of capital is going to be very healthy for this country and for our industry in the long term. With that, sir, I invite your questions in the appropriate time.

Senator ARMSTRONG. Thank you, Mr. Moorhead. Mr. Brumley?

STATEMENT OF I. JON BRUMLEY, PRESIDENT, SOUTHLAND ROYALTY CO., FORT WORTH, TEX.

Mr. BRUMLEY. Thank you, Mr. Chairman. My name is Jon Brumley. I am president of Southland Royalty Company. I am here on behalf of Southland Royalty Company to testify against S. 1549, a

bill to amend the Internal Revenue Code of 1954, to permit individual retirement accounts, qualified retirement trusts, and certain educational organizations to invest in working interests in oil and gas properties without incurring unrelated business taxable income. I would like copy of my written statement included in

the record.

Senator ARMSTRONG. We will be happy to have it.

[The prepared statement of I. Jon Brumley follows:]

STATEMENT OF 1. JON BRUMLEY

SOUTHLAND ROYALTY COMPANY

ON

S. 1549

This written statement is submitted on behalf of Southland Royalty Company of Fort Worth, Texas in response to Senate Finance Subcommittee on Taxation and Debt Management Chairman Robert Packwood's announcement of hearings on five miscellaneous tax bills including S. 1549, the subject of this statement.

Southland Royalty Company

General Information

Southland Royalty Company was founded in 1924. Southland is the 15th largest independent domestic oil and gas producer and it has operations in almost all of the major oil and gas provinces in the United States including Alabama, Arkansas, California, Colorado, Illinois, Kansas, Louisiana, Mississippi, Montana, Nebraska, New Mexico, North Dakota, Ohio, Oklahoma, Texas, Utah and Wyoming. Southland Royalty is a member of the Domestic Petroleum Council ("DPC"). DPC is also opposed to this bill.

Southland's Position Regarding S. 1549

S. 1549 will amend the Internal Revenue Code of 1954 to provide that income from an investment in an oil and gas "working interest" by certain tax-exempt entities, such as qualified retirement trusts, individual retirement accounts and college endowments, is exempt from federal income tax.

Southland is

opposed to enactment of S. 1549 for the following reasons:

Competition with Taxpaying Entities

The taxation of unrelated business taxable income ("UBTI") which has been in the Internal Revenue Code since 1950, is based

on the concept that tax-exempt entities are taxable at regular corporate rates on "active" business income which arises from activities which are unrelated to the entities' tax-exempt purposes. The tax on UBTI is imposed on nearly all exempt organizations as its coverage was extended by the Tax Reform Act of 1969.

The primary objective of UBTI is to eliminate unfair competition by placing the unrelated business activities of covered exempt organizations on the same tax basis as the nonexempt business entities with which they compete. The House Ways and Means Committee report on the Revenue Act of 1950 states:

The problem at which the tax on unrelated
business income is directed here is pri-
marily that of unfair competition. The tax-
free status of . organizations enables
them to use their profits tax-free to ex-
pand operations, while their competitors
can expand only with the profits remaining
after taxes. Also, a number of examples
have arisen where these organizations have,
in effect, used their tax exemption to buy
an ordinary business. That is, they have
acquired the business with no investment on
their own part and paid for it in install-
ments out of subsequent earnings a pro-
cedure which usually could not be followed
if the business were taxable.

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The Senate Finance Committee commented that one major purpose of UBTI tax is to "make certain that an exempt organization does not commercially exploit its exempt status for the purpose of unfairly competing with taxpaying organizations." (See Rep. No. 94-938, 94th Cong., 2d Sess. (1976) at 601).

One of the specific problems and concerns Congress sought to address in the taxation of UBTI was the availability of pools or the accumulations of tax-exempt income which confer upon nontaxable entities an "unfair and harmful competitive advantage"

over taxable entities. (S. Rep. No. 2375, 81st Cong., 2d Sess. (1950)).

In the case of an oil and gas drilling partnerships, pools of income created in the partnership, which would otherwise need to be withdrawn each year to pay tax on the partners' shares of partnership income, do not need to be distributed because taxexempt entities have no income tax liability. The result of such a tax-free pooling of funds is that the tax-exempt partner in effect controls the underlying partnership business because it controls the capital in the business.

This bill will reverse a basic tax policy against unfair competition by tax-exempt entities which has been consistently applied for more than 30 years. This bill takes the position that invest

ment in oil and gas working interests should be excluded from the UBTI tax because such investments are passive in nature and are not involved in the active conduct of a trade or business. As outlined above, the investments in oil and gas working interests are not passive because they would be directly in competition with taxable entities.

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Southland, as well as other independents, depends on taxexempt organizations to provide capital to fund operations but the capital is obtained through the traditionally allowed "passive" investments the purchase of common stocks and bonds. The proponents of this bill erred in comparing oil and gas investments in working interests specifically to stock and bond investments because comparing such investments is like comparing apples and oranges. Similarly, the tax law should recognize the differ

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