a taxable donor. Thus, this bill grants a complete exemption to the income even though the income is earned by operating a profitable business activity. This is poor tax policy because it reduces the charities responsiveness to the public because the charity is selfsufficient. Limited Partner Status The bill attempts to base its "passive" theory on the requirement in the bill that the tax-exempt entity must be a limited partner. The distinction between general and limited partners is irrelevant because the target of the UBTI is the "unfair competition" element of the business activity conducted by the partnership not the partner. Conclusion The exclusion of investments in oil and gas working interests from UBTI tax would be a reversal of a Congressional policy against unfair competition by tax-exempt entities which has been consistently applied for the last 30 years. The enactment of this bill into law would siphon investment capital of tax-exempt entities away from traditional passive investments in stocks and bonds of domestic independent oil and gas companies and channel them to the investment in working oil and gas interests. Overall, this shifting of funds will be harmful to the oil and gas industry. This bill also encourages pension funds and college endowment funds to be invested in inherently risky businesses where the entire investment can be lost if oil or gas is not produced in commercially economic quantities. Additionally, the legislation is riddled with technical problems which encourage planning by taxable entities using tax planning techniques to take advantage of an entity's tax-exempt status. For these reasons, this legislation should not be adopted. Mr. BRUMLEY. Thank you, sir. The proposed legislation is not needed by the domestic oil and gas industry and will not provide incremental funds to the industry as proponents of the bill advocate. Rather, I believe, it would result in a reallocation of funds toward inappropriate, high risk investments. Southland Royalty Company, of which I am president, ranks fifteenth in size among U.S. independent producers. Southland, as well as other independents, depends on tax exempt organizations to provide capital through the traditionally allowed investments for tax exempt organizations: the purchase of common stocks and bonds. Allowing tax exempt organizations to invest in oil and gas working interests through limited partnerships would siphon off a portion of traditional sources of capital to the industry. When this legislation was introduced, it was justified by the proponents on the basis that the tax exempt institutions could avail themselves of greater rates of return through more direct investment, and that the traditionally permitted investments--stocks and bonds--have provided low rates of return. The proponents erred in comparing oil and gas investments specifically to stock and bond investments generally, an apples and oranges comparison. The comparison should have been oil and gas investments, specifically, to oil and gas, stock and bond investments, specifically, not to all stocks and bonds. I am doubtful that tax exempt organizations can achieve better rates of return through direct investments as they could by providing equity in the form of common stock investments in the independent oil and gas industry. Fortune magazine reported that the mining and crude oil producing industry provided a return to common stock investors over the period of 1971 to 1981 of 15.4 percent for the Fortune 500, and 17.4 percent for the Fortune second 500. Both rates of return over the 10-year period ranked our industry second among all industries. The rate of return was practically double the median for all industries of 8.5 percent for the Fortune 500 which the proponents of the bill are apparently referencing. I would challenge the proponents of this legislation to produce evidence that the rates of return for direct investment in oil and gas exceed these rates of return for common stock investments in the oil and gas producing industry over any 5 to 10-year period of measurement. The original reason for the unrelated business taxable income provision was to prevent unfair competition by a tax exempt entity and an otherwise taxable business. The proposed change would allow competition in the direct investment of oil and gas properties by tax exempt institutions, whose after tax rates of return are considerably different than those required by tax paying businesses. Such a change would therefore overturn the tax policy which for the past 30 years has prevented a distortion of relative competitive positions in our industry. Another reason I oppose this legislation is that direct investment in oil and gas properties is inherently risky. The nature of the risk of the business is recognized by our current tax laws which provide tax incentives for investment in oil and gas ventures. The concept of S. 1549 suggests that direct oil investments are not risky, and that special tax incentives for oil and gas investors are unnecessary. This is simply not the case. It is not appropriate nor should it be public policy to encourage tax exempt institutions to incur a high degree of risk and possible loss of money at the expense of their beneficiaries while trying to attain a rate of return which might not be higher than the returns available to traditionally allowed investments. In summary, the basic tenets of this legislation are inherently unsound. I have highlighted a few arguments against this bill in my oral testimony and my written statement contains many more. The Treasury Department has also sugg ted several flaws in the legislation which makes this bill controversial. Pension plan managers have a fiduciary obligation to the working men and women of the United States. The actuarial assumptions used in estimating costs of pensions have historically been conservative. I believe that the investments made by those plans should match that conservatism. This legislation should not be adopted. I thank you, sir. Senator ARMSTRONG. Thank you. Mr. Overgaard? STATEMENT OF PAUL F. OVERGAARD, VICE PRESIDENT, Mr. OVERGAARD. Mr. Chairman and members of the committee, I want to express my appreciation for this opportunity, the first opportunity I have had, to appear before a Senate committee. My name is Paul Overgaard. I am the vice president and coowner of Independent Service Co., Inc., a firm engaged in the design of pension and profit-sharing plans for small corporations. My firm also provides administrative assistance to small companies in the handling of their plans. Our salesmen are licensed as insurance representatives and as sales representatives for a broker/dealer offering mutual funds and limited partnerships. Our pension clients fund their plans in a variety of ways. They use bank deposits, money market accounts, mutual funds, both equity and bond, life insurance contracts, guarantee investment contracts, and contracts for deed. A few are now investing in oil and gas income funds sponsored by the Damson Corp. In fact, it was Damson's reasonable and sound arguments for its product that was one of the principal reasons I became interested in oil and gas investments for qualified plans. Mr. Chairman, I have a copy of a bulletin issued by Damson entitled "Why Damson Institutional Oil and Gas Income Funds?" which describes why oil and gas income funds constitute sound investments for pension funds, and I would like to submit that bulletin for inclusion in the record for your benefit. Senator ARMSTRONG. We would welcome that. [The prepared statement of Paul F. Overgaard and the bulletin follow:] 352 TESTIMONY OF PAUL OVERGAARD VICE PRESIDENT AND CO-OWNER BEFORE THE SENATE FINANCE SUBCOMMITTEE My name is Paul Overgaard. I am the Vice President and Co-Owner of Independent Service Company, Inc., a firm engaged in the design of pension and profit-sharing plans for small corporations. My firm also provides administrative assistance to small companies in the handling of their plans. Our salesmen are also licensed as insurance representatives and as sales representatives for a broker/dealer offering of mutual funds and limited partnerships. of ways: Our pension clients fund their plans in a variety bank deposits, money market accounts, mutual funds (both equity and bond), life insurance contracts, guaranteed investment contracts, and contracts for deed. A few are now investing in oil and gas income funds sponsored by Damson Corporation. In fact, Damson's reasonable and sound arguments for its product were one of the principal reasons I became interested in oil and gas investments for qualified plans. Mr. Chairman, I have a copy of a bulletin issued by Damson entitled "Why Damson Institutional Oil and Gas Income Funds?" which describes why oil and gas income funds constitute sound investments for pension funds. I submit this bulletin for inclusion in the record of these hearings on S. 1549. During the more than 20 years I have been serving the small investor and especially the small corporation retirement plan, I (and my clients) have learned many things. One is that there certainly is no single investment for all times. At one time most pension plans were funded with endowment insurance policies. Then, came the modernization through use of annuity contracts. Common stocks had their day in the sun in the mid to late 1960's, and I believe it was in 1968 that certain publications speculated as to the possibility that there might be a permanent shortage of common stocks because retirement plans would become such a huge market for them. This was followed in 1974-75 by equally ridiculous speculation that the equity markets were dead. What the passage of time has really taught me is that diversification, expert selection and full-time supervision are the most important considerations in prudently managing assets. This is certainly true in accumulating assets for retirement. Comingled accounts (mutual funds) have provided a way for these small plans to establish an equity position that meets the test of diversification, expert selection, |