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Mr. OVERGAARD. 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 the use of annuity contracts. Common stocks had their day in the sun in the mid to late 1960s, and I believe it was in 1968 that certain publications speculated as to the possibility that there might even be a permanent shortage of common stock because retirement plans were becoming such a huge market for them. That was followed in 1974 and 1975 by the equally ridiculous speculation that the equity market was 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.

Commingled accounts-mutual funds-have provided a way for small plans to establish an equity position that meets the test of diversification, expert selection and full-time supervision. Publicly offered limited partnerships investing in income producing oil and gas properties also offer a vehicle that will permit small plans to diversify those investments even further.

One of the concerns I have in the pension business is the need to offer a broad range of prudent investments. A prudent investment is one that will meet the test of time, and the test of quality, and those characteristics cannot easily be defined. For instance, there are some mutual funds which do not meet these requirements in my opinion. There are many other investments which are not subject to the unrelated business income tax which, in my opinion, would not meet the fiduciary requirements under ERISA. On the other hand, investments in many oil and gas limited partnerships would constitute a prudent investment under ERISA.

This legislation will make prudent diversification possible and will be of particular interest to the kind of plan that I serve. There are millions of small employers in this country, and a great many of them will welcome this change as an opportunity to diversify their plan investments and hopefully achieve a better rate of return and thus, a better retirement for their employees. I think this legislation gives opportunities for greater diversification and, importantly, it allows us in the marketplace more sources of supply for this type of product. Thank you, Mr. Chairman.

Senator ARMSTRONG. Thank you very much.

Mr. Cain?


Mr. CAIN. Thank you, Mr. Chairman, Senator Long, and Senator Matsunaga. I am also entering written testimony which I would appreciate being placed into the record.

Senator ARMSTRONG. It will be placed in the record in its entire


[The prepared written statement of Edwin E. Cain follows:]


ON S. 1549


Mr. Chairman, I am representing Apache Corporation as Vice President for Government Relations. Apache Corporation, an oil and gas exploration, development and production company with both industrial and agricultural operations, has offered registered drilling limited partnerships to the investing public since 1956. Apache's corporate headquarters are located in Minneapolis, Minnesota, and it has operations in more than 30 states.

Apache's twenty-six year history in oil and gas investments and the company's experience in working with tens of thousands of investors, has developed for the corporation a reputation for sound, careful management. Based on our experience and our knowledge of the industry, Apache fully supports S. 1549, introduced by Senator Armstrong and co-sponsored by nine of his colleagues on the Senate Finance Committee.

This bill permits qualified trusts and certain educational organizations to receive income from limited partnerships that own working interests in domestic oil and gas properties without being subject to a tax penalty

under the unrelated business taxable income provisions of the Internal Revenue Code.

At the present time, both pension trusts and college endowments make passive investments in stocks, bonds, gas and oil royalties, and other options without being subject to the tax penalty. Pension funds can now invest in real estate limited partnerships, but not in mainstream oil and gas limited partnerships. A purpose of the tax on unrelated business income was to prevent unfair competition between tax exempt and taxable entities. It was not the purpose of the tax to penalize specific types of passive investments or to differentiate between specific investments in a particular industry. Yet this situation exists today.

It is illogical to distinguish between investments in oil and gas royalty and net profits interests and investments in oil and gas working interests when the latter are held in passive form. S. 1549 insures that qualified oil and gas investments are truly passive by requiring that they be held in limited partnership form. For this reason, S. 1549 is consistent with current tax policy and maintains and strengthens that policy.

Furthermore, S. 1549 should result in no loss of income to the federal government. It is likely that the increased investment in oil and gas working interests by pensions and universities will result in additional investments by other taxpaying limited partners and the taxable general partner. Other passive investments currently exempted from tax require no similar investment by taxpaying entities.

S. 1549 permits pension trusts to diversify their portfolios to include working interests in oil and gas operations. This diversification should result in greater returns on their investment dollar, which in turn will provide a stronger retirement program for the participants in the pension program.

A major concern of Apache is the inability of investors to contribute oil and gas properties to college and university endowments. A recent experience by an Apache corporate officer resulted in a significant donation to a major university being rejected on the basis that it would produce unrelated business income tax. This is neither a unique nor an unusual situation. Currently, when a tax-exempt organization accepts gifts of oil and gas properties owned in limited partnership form, they must be sold at a

considerable loss in order for the organization to avoid being subject to the unrelated business income tax.

Higher education has been confronted with severe economic problems during the past few years. sources of revenue have been greatly reduced at the very time that greater demands are being made on these institutions. S. 1549 permits college and university endowments to receive gifts of oil and gas limited partnership interests, thus providing a much needed, new

source of revenue.


The petroleum exploration and production industry is capital intensive, and requires continuous infusions of new capital. Pension funds hold a growing proportion of investment capital; in fact pension and thrift plan assets have been estimated at $940 billion in 1982. The oil and gas industry is at a considerable disadvantage in attracting capital because pension funds are not available to them. The lack of capital in the oil and gas industry has contributed to a depression in drilling activities among the 10,000 independent producers who are responsible for nearly 90% of our country's gas and oil exploration and development. Drilling activity dropped 40% in 1982, and investments in drilling in 1983 are a fraction of past years. Apache in particular has reduced drilling expenditures

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