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. Traditional 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 from over $70 million in 1981, to $37 million in 1982, to less than $25 million planned for 1983, and we are one of the more aggressive independent producers. It is imperative that new sources of capital be made available and pension funds are clearly major potential investors. This proposed legislation offers beneficial results to colleges and universities, pension funds, and the oil and gas industry. It is therefore difficult to find a valid basis for objection, since the vast majority of independent gas and oil producers support S. 1549. The Oil Investment Institute voted unanimously in 1982 to support the changes now articulated in S. 1549. appears to have developed only in the case of those companies who perceive that their existing investment offerings to exempt organizations would be threatened by S. 1549, which widens those opportunities. For example, opposition now seems to come from some companies that have established royalty trusts. Objection Royalty trusts work in the following manner. They either purchase or acquire by way of distribution from oil and gas operators royalty interests in both producing and non-producing oil and gas properties. Typically, the trustee receives royalty income and distributes it to 24-860 O 84 24 the holder of the trust unit, who reports the income as Thus, if the unit is held by an exempt royalty income. organization, this income is not treated as unrelated business taxable income. Nevertheless, the income is entirely dependent on the extent to which oil and gas is produced from the underlying properties, and in the case of non-producing properties, this return is dependent upon oil and gas yet to be produced. If the underlying properties are held by a limited partnership instead of a royalty trust, the income allocated to an exempt investor who is a limited partner constitutes unrelated business taxable income. This is because the partnership's income is income from a working interest rather than from a royalty. In both cases, the. role of the investor is entirely passive and the rate of return is dependent on whether or not oil and gas is or will be produced by the operator from the underlying properties. There should be no arbitrary tax distinctions drawn between these essentially similar types of investments. It has also been stated that S. 1549 will permit exempt organizations to obtain an "unfair advantage" over taxpaying entities in the acquisition both of producing and non-producing oil and gas properties. However, It this bill in no way affects the direct acquisition of oil and gas properties by an exempt organization. simply enlarges the opportunities for exempt organizations to invest passively in oil and gas properties by permitting them to invest as limited partners in partnerships that have a taxable general partner. Under the bill, the general partner must be unrelated to and not controlled by any exempt limited partner. All oil and gas operators will now have equal access to a new source of capital. Accordingly, S. 1549 will not only eliminate the unfair discrimination that today exists between passive investments in oil and gas but will do so in a way that will stimulate, not restrict, competition in the oil and gas industry. Mr. Chairman, it is my hope that your Committee will soon act favorably in reporting this most desirable legislation. CORPORATE HEADQUARTERS / FOSHAY TOWER / MINNEAPOLIS, MINNESOTA 55402 EDWIN E. CAIN, Vice President-Government Relations Apache CORPORATION 612/332-7222 BY HAND September 15, 1983 The Honorable Bob Packwood Chairman Senate Finance Subcommittee on Taxation and Debt Management Dear Senator Packwood: On behalf of Apache Corporation, I had the In addition, Mr. Pearlman raised the spectre |