working interests are generally highly speculative and risky. It is not sound tax policy that pension funds and college endowment funds should be invested in an oil and gas working interest where the entire amount of the investment can be lost if ail or gas is not found in quantities which can be produced in a economically feasible manner. Congress should encourage tax-exempt entities to invest in more conservative investments rather than risky and highly speculative investments, such as, direct investments in oil and gas. The risks of the investment in oil and gas working interests are recognized in other parts of the tax code as there are special tax incentives for taxable investors. These incentives include the write off of intangible drilling costs, percentage depletion and the treatment of drilling funds as partnerships. Related to the Exempt Purpose The tax policy for allowing tax exemption is to encourage taxexempt entities to concentrate on their purpose and not on business matters necessary to make a profit. For this reason, tax-exempt entities are prohibited from concentrating their efforts on business unrelated to their purpose for existence. The complexities of an investment in oil and gas working interest require that a taxexempt entity become extensively involved in the oil and gas business just to make the decisions necessary to make prudent investments and to protect their capital. Tax-exempt entities should concentrate their efforts on their exempt purposes rather than the intricacies of the oil and gas business. for all industries of 8.5% for the Fortune 500 which the proponents of the bill are apparently referencing. There is no evidence that the rates of return for direct investment in oil and gas working interests exceed the rates of return for common stock investments in the oil producing industry over any five or ten-year period of measurement. Discrimination Against Other Tax-exempt Entities This bill discriminates between types of tax-exempt entities. Only pension plans and college endowments can receive oil and gas production income tax free. All other tax-exempt entities are unfairly required to compete on the same uneven playing field with taxable entities in favor of pension plans and college endowments, despite the fact that both pension plans and college endowments already receive tax-deductible contributions. This bill provides a direct federal subsidy to these entities to the exclusion of other worthy non-taxable entities. There is no apparent justification for this distinction. Risk Factors of Oil and Gas Working Interests Assets which are owned by pension plans are used to provide pensions for the participants in the plan. The participants are staking their future well-being on the pension assets being there when the participant wants to retire. If the assets are not available to pay the pension, the participant must either rely on the public funds available or continue to work to provide support to live on. It is well known that direct investments in oil and gas working interests are generally highly speculative and risky. It is not sound tax policy that pension funds and college endowment funds should be invested in an oil and gas working interest where the entire amount of the investment can be lost if oil or gas is not found in quantities which can be produced in a economically feasible manner. Congress should encourage tax-exempt entities to invest in more conservative investments rather than risky and highly speculative investments, such as, direct investments in oil and gas. The risks of the investment in oil and gas working interests are recognized in other parts of the tax code as there are special tax incentives for taxable investors. These incentives include the write off of intangible drilling costs, percentage depletion and the treatment of drilling funds as partnerships. Related to the Exempt Purpose The tax policy for allowing tax exemption is to encourage taxexempt entities to concentrate on their purpose and not on business matters necessary to make a profit. For this reason, tax-exempt entities are prohibited from concentrating their efforts on business unrelated to their purpose for existence. The complexities of an investment in oil and gas working interest require that a taxexempt entity become extensively involved in the oil and gas business just to make the decisions necessary to make prudent investments and to protect their capital. Tax-exempt entities should concentrate their efforts on their exempt purposes rather than the intricacies of the oil and gas business. Acquisition Indebtedness The bill's proposed acquisition indebtedness provisions, allowing borrowing to acquire oil and gas working interests, invites the precise abuses the various UBTI provisions have been enacted to deter. Before the provision was enacted in 1969, tax-exempt entities used their tax status to acquire business through debt financing. The acquisition of an oil and gas working interests with debt allows exempt organizations to trade on their tax exemptions. This again results in an escalation in prices of acquiring oil and gas properties by taxable entities. If this provision is enacted, the price of acquiring oil and gas properties for taxable entities will be higher than tax-exempt entities. This higher price to taxable entities is the unfairness that the UBTI tax should be preserved to prevent. Partnership Allocations The bill contains provisions that purport to preclude tax sheltering abuses through special allocations. The bill still has the potential for creating generous tax shelter deductions for taxable limited and general partners through the use of special allocations, multiple entities and other techniques. The bill does not prevent special allocations between general and limited partners or between the limited partnership and other partnerships, trusts or S corporations, which are in partnership with tax-exempt entities. Also the rules do not prohibit changes in the sharing of profits ("flip flops") and the reallocation of income. The bill does not prevent the partnerships from staggering entry dates of various limited partners which will produce profit allocations through the use of distributions and contributions by the limited partners. Combining a taxpaying entity with a non-taxpaying entity through a tax partnership creates a situation fertile for tax abuse. Such artificial shelters should be discouraged. Investment Credit Section 48(a)(4) of the Internal Revenue Code of 1954 and Section 1.48-1(j) of the Treasury Regulations excludes from the use of investment tax credit any property, which is used by a taxexempt organization, unless the property is used in an unrelated trade or business and its income is subject to UBTI tax. It is unclear if property held by a partnership which has tax-exempt organizations as limited partners qualifies for the investment tax credit for all of the partners or none of the partners. Permanent Deferrals The funds invested by educational institutions and the income which is earned thereon does not constitute merely an income deferral with an eventual taxable payout to the beneficiaries but a permanent deferral of taxable income. Money can be contributed (while receiving a tax deduction) to entities, which qualify for this exemption. The entities invest the money in oil and gas business and it will never be paid out to |