pretty closely the policies laid down by the Bureau as I understand; is that correct? Commissioner ANDREWS. That, Mr. Hays, is true as to all of our operations. The field has not been turned loose on its own. One of the fundamental aspects of our form of organization, with the planning and control headquarters in Washington, and the decentralization of operations to the field, is to enable us to better review the decisions of the operating officials and be certain that proper principles and policies are being followed. That would be true in this case. Mr. HAYS. Thank you. I have just one other question. I understood, I think, you to say that once the tax-exempt status is granted, that you continue to keep a constant surveillance on that operation, that you don't keep checking them constantly to see whether they are violating their exempt privileges, because, I believe you said, it was a rather sterile operation. But I do assume, if you have any complaint at all, that you give it a recheck; is that correct? Commissioner ANDREWS. First of all, let me correct the impression I seem to have given you. I don't mean that we don't keep check on them. It is a part of our duty to compare from time to time what is actually taking place with what these organizations said in their charters and other documents they intended to do and upon which their exemption was granted. We will and are carrying out a review of their operations to the extent that we can, and we expect to be able to step that up somewhat considerably from here on out. Mr. HAYS. Thank you. That does clear it, because I had the other impression. The CHAIRMAN. In your statement, Mr. Commissioner, you referred to the fact that there were in excess of 100,000 tax-exempt activities of all types. It was my information that there were some 300,000 tax-exempt organizations of all types. I am wondering if that figure is high? Commissioner ANDREWS. Actually we have not made any detailed analysis of it, but I inquired about that before we came over here, and our present estimate is in the neighborhood of 120,000 of all kinds. That would be churches and colleges and universities and chambers of commerce, and community funds, and that sort of thing. Mr. Sugarman corrects me to say that would not include all the churches. Mr. KOCH. Will you venture a guess as to how many are operating under 101, subdivision (6), that being the category we seem to be particularly interested in? Commissioner ANDREWS. I could not answer that as of today because we have not yet completed our study of that. But in 1946, I believe there were some 14,000 in that category. Of course, it has increased some since then. Mr. WORMSER. Isn't it true, Mr. Andrews, that the category is so allinclusive that it makes it rather difficult to extract statistical information about foundations? It includes colleges and various other institutions which are not from the public standpoint foundations. Commissioner ANDREWS. Yes, that is true. This is one type of activity, frankly, which almost defies accurate statistical analysis. I think the figures that you have already before you, which I understand were put in some time ago, may be relied upon as being at least substantially correct. The CHAIRMAN. We thank you very kindly, then, if you will be available. You may be seated wherever you think it is most comfortable, or we would be glad to have you sit there with Mr. Sugar man. Commissioner ANDREWS. If it is agreeable to the chairman, I will stay where I am. The CHAIRMAN. Very good. The chairman wants to make this one observation, before Mr. Sugarman begins. The difficulty of gathering the statistical data to which the Commissioner referred was one of the reasons that the chairman had in mind, as constituting a basis for this inquiry, the uncertainty of it all, and in view of the importance it was my idea that we ought to get into a postion of being able to draw a more accurate picture of it all. You may proceed. Commissioner ANDREWS. Mr. Chairman, if I may, I would like to add one thing with respect to what you said. To the extent that we are able to do so, we are ready, willing and anxious to help the committee clarify some of the mystery of this thing. We will do what we can in that direction. The CHAIRMAN. Thank you. Do you have any preliminary statement to make in connection with this statement? Mr. WORMSER. No. I have a number of questions which I think will bring out additional material after Mr. Sugarman has read his statement. The CHAIRMAN. If it is agreeable to the committee, the committee will permit Mr. Sugarman to complete his statement and then subject himself to inquiry. You may complete your statement uninterrupted. Mr. SUGARMAN. Thank you, Mr. Chairman. I apprecite your courtesy in letting me read the statement without interruption. I am happy to have the opportunity to appear before your committee to make this statement as to the application of the tax laws relating to exempt organizations. We in the Revenue Service have been very much interested in your study and are glad to make whatever contribution we can to your deliberations. We have had several meetings with your counsel, Mr. Wormser, and members of the staff, to explore the background of the matter. I believe that these meetings have been helpful in relating the work of the Revenue Service in the exempt organizations field to the overall responsibilities of the Service. I would like, therefore, to take a few moments at this time to indicate what that relationship is. I. THE RESPONSIBILITIES OF THE REVENUE SERVICE FOR TAX COLLECTION AND ADMINISTRATION The basic job of the Internal Revenue Service is the collection of taxes to finance the operations of Government. The proper performance of this function must not only be the principal concern of the Revenue Service but it is also a matter of vital interest to the Nation. The taxes and therefore our principal functions are imposed by laws enacted by the Congress. There are more than 70 different Federal internal revenue taxes so imposed. These range all the way from taxes on adulterated butter to the surtax on personal holding companies, from taxes on wagers to taxes on wines, and from the taxes you pay on the wages of your household help to taxes on the millions of income of our larger corporations. The collection of these taxes involves the processing of nearly 95 million tax returns. It includes the examination of these returns, the assertion of deficiencies, penalties, and interest, the allowance of refunds, the collection of delinquencies and the conduct of litigation wherever necessary. Back of this, however, is our tremendous job of maintaining voluntary compliance by providing tax forms, instructions and other types of taxpayer assistance. In seeing that the taxes levied by Congress are paid, the Revenue Service does not seek to act as a regulatory agency. We know full well the importance of taxes in the conduct of business and in other activities; but we do not attempt to tell anyone how to run his business or what financial or personal decisions he should make. Our job is to determine the tax consequences of decisions and actions of others and in so doing to apply the tax laws fairly in accordance with the terms of the statute. Each of the many tax laws we administer has provisions imposing tax as well as provisions exempting various persons, organizations and transactions from tax. These exemptions are not uniform for all taxes and it is necessary in each instance to determine their application in accordance with the particular rules laid down by Congress as construed by the courts. The function which these exemption provisions perform in the tax system is to establish the areas of nonliability for tax, and conversely to limit or define the taxable persons or objects. The determination of exemption, therefore, is an adjunct of the machinery for placing all taxable persons and objects on the tax rolls and determining their liability. In the administration of the tax laws, the determination of exemption follows the pattern generally of procedures for other determinations. The national office of the Revenue Service prepares tax regulations, which are issued with the approval of the Secretary of the Treasury, setting forth the statutory provisions and the basic rules for their implementation. The national office also prepares the forms and instructions which are used by all taxpayers and exempt organi zations required to file tax returns, information returns and applications for exemption. The national office also issues rulings and other technical guide materials indicating the application of principles and official interpretations to the facts of various categories of cases. The national office also develops the nationwide policies and objectives of programs for audit and enforcement of liability under the law. The Revenue Service has a system of regional administration under the general direction of the national office. There are nine regional commissioners each of whom carries out the policies and programs of the national office through field operations conducted by district directors. The district directors have responsibility for the enforcement of the tax laws in their districts. They receive and process tax returns, conduct the necessary audits and examinations to determine liability, provide taxpayers with opportunities for hearings where there is disagreement, and assess and collect the taxes that are due and owing the Government. It is incumbent upon persons and organizations claiming exemption from tax to establish their exemption. Organizations claiming exemption must file their applications with district directors' offices. District directors are authorized to determine exemption in routine. cases where the application of the statute is clear under already issued regulations and rulings of the national office. Cases which present involved or questionable issues and do not fall in the routine category are referred to the national office for the issuance of a ruling as to whether exemption is proper under the law. Certain exempt organizations are required to file annual information returns. These are checked against the list of such organizations in the district director's office. The district directors have the responsibility for examining these returns and determining whether the organization is entitled to continued exemption under the law. If upon such examination and review, it is determined that the organization is not entitled to exemption, then the organization is subject to the usual provisions and liability applicable to taxable organizations. The Internal Revenue Service, however, does not have the final authority to deny exemption to any organization. Where the Service asserts that a tax is owing, its determination may be appealed to one of several courts. This appeal may be made by either of the following procedures: The disputed tax liability may be paid and then suit brought by the taxpayer for refund in a United States district court or in the United States Court of Claims. On the other hand, the party has the right under existing law to choose to appeal an asserted income, estate or gift tax deficiency prior to paying the tax, in which case an appeal is taken to the Tax Court of the United States. An adverse decision rendered by a district court, the Court of Claims, or the Tax Court may be appealed to a higher court in such cases, just as in other tax cases. Accordingly, judicial interpretations play an important role in determining the course of administration of the exemption provisions. II. TAX LAW PROVISIONS FOR EXEMPTION As previously indicated the revenue laws contain numerous provisions providing and affecting the exemption of many kinds of organizations and activities. In testimony in 1952 before the Cox committee we filed a compilation, 50 pages in length, containing the text of the various tax law provisions. This indicates the volume and scope of the statutes on this subject which we are obliged to interpret and administer. The terms of each of these provisions are, of course, of paramount importance because they state the tests which the Revenue Service has available to it by statute for determining exemption. However, I shall confine my remarks today to the provisions of law relating to exemption of organizations from the income tax since I believe that these are the provisions in which you are most interested in your current study. In general, the statutory pattern under the income tax exemption provisions may be described as follows: (a) The granting of exemption to certain organizations; (b) the allowance of related tax benefits in the form of deductions for contributions; (c) limitations imposed on exemption and related tax benefits; and (d) filing and publicity requirements. A. EXEMPTION PROVISIONS The principal provisions of the present law governing exemption from tax of organizations, including foundations, are found in section 101 of the Internal Revenue Code. This section exempts from the income tax 18 types of organizations, which come within the limitations stated in the statute. These organizations may be generally described as follows: Labor, agricultural, and horticultural organizations.1 Fraternal beneficiary societies.2 Credit unions and certain mutual reserve fund organizations." Business leagues, chambers of commerce, real estate boards, and broads of trades.5 Civic leagues, and local associations of employees with charitable or educational purposes. Clubs organized for recreation and pleasure." Local benevolent life insurance associations, and mutual ditch, irrigation, or telephone companies. Mutual nonlife insurance companies with gross income $75,000 or under." Farmers' cooperatives (which are subject to tax, however, on income not allocated to patrons).10 Crop financing organizations for farmers' cooperatives." 1 See sec. 101 (1). |