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    "title": "1976/10/20 HR1144 Tax Code Amendments and Study of Tax Incentives for Recycling",
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    "ocrText": "The original documents are located in Box 67, folder \"1976/10/20 HR1144 Tax Code\nAmendments and Study of Tax Incentives for Recycling\" of the White House Records\nOffice: Legislation Case Files at the Gerald R. Ford Presidential Library.\nCopyright Notice\nThe copyright law of the United States (Title 17, United States Code) governs the making of\nphotocopies or other reproductions of copyrighted material. Gerald R. Ford donated to the United\nStates of America his copyrights in all of his unpublished writings in National Archives collections.\nWorks prepared by U.S. Government employees as part of their official duties are in the public\ndomain. The copyrights to materials written by other individuals or organizations are presumed to\nremain with them. If you think any of the information displayed in the PDF is subject to a valid\ncopyright claim, please contact the Gerald R. Ford Presidential Library.\nExact duplicates within this folder were not digitized.\nDigitized from Box 67 of the White House Records Office Legislation Case Files at the Gerald R. Ford Presidential Library\nACT201978\n$10/20/76\nTHE WHITE HOUSE\nACTION\nWASHINGTON\nLast Day: October 20\nOctober 19, 1976\nMEMORANDUM FOR\nTHE PRESIDENT\nFROM:\n10/21/76\nPosted\nJIM CANNON AntiDuern\nSUBJECT:\nH.R. 1144 - Tax Code Amendments and\nStudy of Tax Incentives for Recycling\nAttached for your consideration is H.R. 1144, sponsored by\narchros 01/0/196\nRepresentative Waggonner.\nUnder current tax law, social clubs, fraternities and similar\norganizations are tax-exempt provided (1) they are organized\nand operated \"exclusively\" for pleasure, recreation and\nother non-profit purposes, and (2) no part of their net\nearnings inures to the benefit of any particular shareholder.\nThe enrolled bill would:\n-- substitute, in lieu of the \"exclusive\" criterion, the\nrequirement that \"substantially all\" of a social club's\nactivities must be for non-profit purposes.\n-- disallow the corporate dividends received deduction in\nthe case of tax-exempt social clubs, voluntary employees'\nbenefit associations and taxable membership organizations\nin computing their taxable investment income.\n-- deny tax-exempt status to organizations which have a\nwritten policy of discrimination on the basis of race,\ncolor or religion.\n-- amend the Tax Reform Act of 1976 to delay the effective\ndate of the repeal of the tax carry-over provision of the\nminimum tax for corporations from taxable years beginning\nafter December 31, 1975 to taxable years beginning after\nJune 30, 1976.\n2\n---\nrequire the Secretary of the Treasury, in cooperation\nwith the Administrator of the Environmental Protection\nAgency, to study and report on the effect of tax\nprovisions on recycling solid waste materials.\nA detailed discussion of the provisions of the enrolled bill\nis provided in OMB's enrolled bill report at Tab A.\nOMB, Max Friedersdorf, Counsel's Office (Lazarus) and I\nrecommend approval of the enrolled bill.\nRECOMMENDATION\nThat you sign H.R. 1144 at Tab B.\nOF THE\nEXECUTIVE OFFICE OF THE PRESIDENT\nUNITED\nOFFICE OF MANAGEMENT AND BUDGET\nDESUTIVE\nSTATES\nWASHINGTON, D.C. 20503\nOCT 14 1976\nMEMORANDUM FOR THE PRESIDENT\nSubject: Enrolled Bill H.R. 1144 - Tax Code Amendments and\nStudy of Tax Incentives for Recycling\nSponsor - Rep. Waggonner (D) Louisiana\nLast Day for Action\nOctober 20, 1976 - Wednesday\nPurpose\nAllows tax-exempt social clubs to earn limited income\nfrom nonmember sources; clarifies that the corporate\ndividends received deduction may not be taken by such\norganizations; disallows tax-exempt status to social\nclubs if they discriminate on the basis of race, color,\nor religion; amends the minimum tax provisions of the\nTax Reform Act of 1976; and requires the Secretary of\nthe Treasury, in cooperation with the Administrator of\nthe Environmental Protection Agency, to study and report\non the effect of tax provisions on recycling solid waste\nmaterials.\nAgency Recommendations\nOffice of Management and Budget\nApproval\nDepartment of the Treasury\nApproval\nEnvironmental Protection Agency\nNo objection\nDepartment of Justice\nDefers to Treasury\nUnited States Commission on\nCivil Rights\nNo comment\n2\nDiscussion\nTax Treatment of Social Clubs\nUnder current tax law, social clubs, fraternities and\nsimilar organizations are tax-exempt provided (1) they\nare organized and operated \"exclusively\" for pleasure,\nrecreation and other non-profit purposes, and (2) no\npart of their net earnings inures to the benefit of\nany particular shareholder. As a practical matter, the\nInternal Revenue Service has generally not disturbed a\nsocial club's tax-exempt status if its income from\noutside sources is not more than the higher of $2500\nor 5 percent of the total gross receipts of the organization.\nThe enrolled bill would substitute, in lieu of the\n\"exclusive\" criterion, the requirement that \"substantially\nall\" of a social club's activities must be for non-profit\npurposes. The effect of this change would be to allow\nsocial clubs to receive up to 25 percent of their annual\ngross receipts (including investment income) from\nsources outside their membership without losing their\ntax-exempt status. However, such nonmember income,\nincluding investment income, would still be subject\nto tax under the unrelated income tax provisions of the\nTax Reform Act of 1969.\nThe bill would also disallow the corporate dividends\nreceived deduction in the case of tax-exempt social clubs,\nvoluntary employees' benefit associations and taxable\nmembership organizations in computing their taxable\ninvestment income; this would resolve questions raised\nregarding IRS treatment of dividend income received\nby such organizations. Treasury supports these two\nprovisions of the bill, which would result in a revenue\ngain of about $100,000 per year.\nAnother provision of the bill would deny tax-exempt status\nto organizations which have a written policy of discrimi-\nnation on the basis of race, color, or religion. About\none-quarter of the 40,000 tax-exempt social clubs are\norganized on the basis of a common bond of religion or\nethnic origin. There is no apparent reason for\ndiscouraging social clubs organized on such a basis.\nThe consequences of denying tax-exempt status to these\n3\nsocial clubs would be to compel them to file corporate\ntax returns. Since such clubs would seldom, if ever,\nhave any taxable net income, the practical effect would\nsimply be an increased paperwork burden imposed on\nboth the clubs and the Internal Revenue Service. How-\never, the attached Treasury views letter notes that the\ndetermination of whether an organization has a written\npolicy of discrimination does not, in the view of IRS,\npresent significant problems of administration.\nTax Reform Act Amendments\nThe bill would amend the Tax Reform Act of 1976 to delay\nthe effective date of the repeal of the tax carry-over\nprovision of the minimum tax for corporations from\ntaxable years beginning after December 31, 1975, to\ntaxable years beginning after June 30, 1976. Treasury\nsupports this provision, noting that a delay in the\neffective date is warranted because of the hardship\n(lack of notice) that would otherwise be inflicted\non affected taxpayers.\nStudy of Tax Incentives for Recycling\nIn cooperation with the Administrator of the Environmental\nProtection Agency, the Secretary of Treasury would have\nto study and report to the President and the Congress,\nwithin six months of the bill's enactment, on all provisions\nof the Tax Code which impede or discourage the recycling\nof solid waste materials. The Secretary's report shall\ninclude detailed revenue cost estimates and specific\nlegislative proposals to encourage such recycling.\nTreasury states that it has no objection to this provision,\nbut notes that the Department has \"already studied the\nrole of tax incentives in encouraging the recycling of\nsolid waste and have found them to be costly and\nineffec-\ntive. A further study of the tax incentives for recycling\nis not likely to change these findings.\"\nDirector James T. Lynn\nEnclosures\nSigned - 10/20\nEXECUTIVE OFFICE OF THE PRESIDENT\nOFFICE OF MANAGEMENT AND BUDGET\nWASHINGTON, D.C. 20503\nOCT 14 1976\nMEMORANDUM FOR THE PRESIDENT\nSubject: Enrolled Bill H.R. 1144 - Tax Code Amendments and\nStudy of Tax Incentives for Recycling\nSponsor - Rep. Waggonner (D) Louisiana\nLast Day for Action\nOctober 20, 1976 - Wednesday\nPurpose\nAllows tax-exempt social clubs to earn limited income\nfrom nonmember sources; clarifies that the corporate\ndividends received deduction may not be taken by such\norganizations; disallows tax-exempt status to social\nclubs if they discriminate on the basis of race, color,\nor religion; amends the minimum tax provisions of the\nTax Reform Act of 1976; and requires the Secretary of\nthe Treasury, in cooperation with the Administrator of\nthe Environmental Protection Agency, to study and report\non the effect of tax provisions on recycling solid waste\nmaterials.\nAgency Recommendations\nOffice of Management and Budget\nApproval\nDepartment of the Treasury\nApproval\nEnvironmental Protection Agency\nNo objection\nDepartment of Justice\nDefers to Treasury\nUnited States Commission on\nCivil Rights\nNo comment\nTHE WHITE HOUSE\nACTION MEMORANDUM\nWASHINGTON\nLOG NO.:\nDate:\nTime:\nOctober 15\n1245pm\nFOR ACTION:\nPaul Leach an\nCC (for information):\nJack Marsh\nBill Seidman\nn\nEd Schmults\nMax Friedersdorf on\nBobbie Kilberg\non\nSteve Mike Duval McConahey degr\nAlan Greenspan approval\nFROM THE STAFF SECRETARY\nDUE: Date:\nOctober 16\nTime:\n930am\nSUBJECT:\nH.R.1144-Tax Code Amendments and Study of\nTax Incentives for Recycling\nACTION REQUESTED:\nFor Necessary Action\nFor Your Recommendations\nPrepare Agenda and Brief\nDraft Reply\nX\nFor Your Comments\nDraft Remarks\nREMARKS:\nplease return to judyjjohnston,gronnd floor west wing\nPLEASE ATTACH THIS COPY TO MATERIAL SUBMITTED.\nIf you have any questions or if you anticipate a\ndelay in submitting the required material, please\nK. R. COLE, JR.\ntelephone the Staff Secretary immediately.\nFor the President\nOF\nTHE\nTREASURY\nDEPARTMENT OF THE TREASURY\nTHE\nWASHINGTON, D.C. 20220\n1789\nASSISTANT SECRETARY\nOCT 07 1976\nDear Sir:\nThis is in response to your request for the views of\nthe Treasury Department on the enrolled bill H.R. 1144.\nSection one of the enrolled bill would amend section\n501 (c) (7) of the Internal Revenue Code of 1954, as amended\n(\"Code\"). Under existing law a social club is exempt from\ntaxation if it is \"organized and operated exclusively for\npleasure, recreation, and other nonprofitable purposes, no\npart of the net earnings of which inures to the benefit of\nany private shareholder.\" (Emphasis added.) H.R. 1144\namends Code section 501 (c) (7) to provide an exemption from\ntaxation for a social club \"organized for pleasure, recrea-\ntion, and other nonprofitable purposes, substantially all\nof the activities of which are for such purposes and no part\nof the net earnings of which inures to the benefit of any\nprivate shareholder. \" (Emphasis added.) The Treasury\nDepartment has supported this provision since it makes clear\nthat social clubs may receive some outside income, including\ninvestment income, without suffering the loss of their tax-\nexempt status.\nSection one of the enrolled bill also denies the inter-\ncorporate dividends received deduction to voluntary employees'\nbeneficiary associations described in Code section 501 (c) (9)\nand to tax-exempt social clubs described in Code section\n501 (c) (7) in computing their \"unrelated business income\",\nthat is, their taxable investment income, and denies such\ndeduction to taxable social clubs or other membership organ-\nizations operated primarily to furnish services or goods to\nmembers. The Treasury Department has also supported these\nprovisions.\nSection two of the enrolled bill provides that organiza-\ntions which have a written policy of discrimination on the\nbasis of race, color or religion would lose their tax-exempt\nstatus under Code section 501 (c) (7). The Treasury Department\nhas opposed this provision since approximately one-quarter of\nthe 40,000 social clubs, which are exempt under Code section\n501 (c) (7), are organized on the basis of a common bond of\n- 2 -\nreligion or ethnic origin. There is no apparent reason to\ndiscourage social clubs organized on the basis of a common\nbond. The practical consequences of denying tax-exempt\nstatus to social clubs would be that they would have to file\ncorporate tax returns. Since such clubs would seldom, if\never, have any taxable net income, paperwork burdens would\nbe imposed on both the clubs and the Internal Revenue Service.\nHowever, we have been advised by the Internal Revenue Service\nthat the determination of whether an organization has a\nwritten policy of discrimination does not present significant\nproblems of administration.\nSection three of the enrolled bill amends section (g)\nof H.R. 10612, the Tax Reform Act of 1976, relating to the\neffective date of the elimination of the tax carryover\nallowed under present law. Under H.R. 10612 the carryover\nof unused regular taxes provided by Code section 56 (c) from\na taxable year beginning before January 1, 1976 shall not be\nallowed as a tax carryover for any taxable year beginning\nafter December 31, 1975. Section three of H.R. 1144 changes\nthis effective date in the case of corporations which are\nnot electing subchapter S corporations from December 31, 1975\nto June 30, 1976. Thus, in the case of such corporations the\namount of any tax carryover under Code section 56 (c) from a\ntaxable year beginning before July 1, 1976 shall not be\nallowed as a tax carryover for any taxable year beginning\nafter June 30, 1976. The Treasury Department believes that\nsection three of the enrolled bill is meritorious. The\ncorporate minimum tax amendments of H.R. 10612 were adopted\nby the Senate on June 24, 1976 as part of a floor amendment.\nThe January 1, 1976 effective date would work a hardship on\nthose taxpayers who had entered into transactions on the\nbasis of then existing law. It was only after the June 24,\n1976 decision of the Senate that taxpayers were put on\nnotice that amendment of the corporate minimum tax was anti-\ncipated.\nSection four of the enrolled bill provides that the\nSecretary of the Treasury, in cooperation with the Adminis-\ntrator of the Environmental Protection Agency, shall make a\nstudy of all provisions of the Code which currently impede\nor discourage the recycling of solid waste materials, and\nshall determine what actions Congress may take under the\ninternal revenue laws to increase and encourage the recycling\nof solid waste materials. The study must be submitted to\nthe President and the Congress \"at the earliest practicable\ndate, but not later than six months after the date of the\nenactment of this Act.\" The Treasury Department has no ob-\njection to this provision. We have already studied the role\n- 3 -\nof tax incentives in encouraging the recycling of solid waste\nand have found them to be very costly and, in our opinion,\nineffective. A further study of the tax incentives for re-\ncycling is not likely to change these findings.\nThe Treasury Department recommends that the President\napprove H.R. 1144.\nSincerely yours,\nChances m- Walhen\nCharles M. Walker\nAssistant Secretary\nDirector, Office of Management and Budget\nAttention: Assistant Director for Legislative\nReference, Legislative Reference\nDivision\nWashington, D. C. 20503\nUNITED PROTECTION STATES. AGENCY\nUNITED STATES ENVIRONMENTAL PROTECTION AGENCY\nWASHINGTON, D.C. 20460\nOCT 12 1976\nOFFICE OF THE\nADMINISTRATOR\nDear Mr. Lynn:\nThis is in response to your request of October 5, 1976,\nfor the Environmental Protection Agency's views and comments\non H.R. 1144, an enrolled bill to amend section 501 (c) (7) of\nthe Internal Revenue Code of 1954.\nSection 4 of this bill provides that the Secretary of\nthe Treasury, in cooperation with the Administrator of the\nEPA, shall survey and study all provisions of the Internal\nRevenue Code of 1954 which inhibit resource recovery and\nconservation and determine what methods under the tax code\nmay be used to enhance the recycling of solid waste materials.\nNot later than six months after enactment the Secretary would\nreport the conclusions of this study, together with legis-\nlative proposals and revenue cost estimates, to the President\nand the Congress.\nOther provisions of H.R. 1144 amend the Code to\nprovide that the deductions allowed under sections 243, 244,\nand 245 shall be treated as not directly connected with the\nproduction of gross income, that deductions relating to\ndividends received by corporations shall be disallowed to\norganizations to which the provisions apply, that non-\nprofitable organizations shall not be tax-exempt if they\npractice discrimination, and that certain tax carryovers\nwill be disallowed. We defer comment to the Department of\nthe Treasury and other concerned agencies on these provisions.\nWith regard to section 4, we support the policy study\nrequirement of the provision. We believe that a resolution\nof the conflict over whether current tax policy should be\nmodified to ensure a more efficient use of resources is\nlong overdue. EPA and the Department of the Treasury\nhave already given some consideration to tax obstacles to\nrecycling and resource recovery.\n2\nThe Environmental Protection Agency has no objection\nto this bill being signed by the President.\nSincerely yours,\nJohn Russell Administrator 2 warles E. Train\nHonorable James T. Lynn\nDirector, Office of Management\nand Budget\nWashington, D.C.\n20503\nASSISTANT ATTORNEY GENERAL\nLEGISLATIVE AFFAIRS\nDepartment of Justice\nWashington, D.C. 20530\nOctober 6, 1976\nHonorable James T. Lynn\nDirector, Office of\nManagement and Budget\nWashington, D. C. 20503\nDear Mr. Lynn:\nIn compliance with your request, I have examined a facsimile of the\nenrolled bill (H.R. 1144) \"To amend the Internal Revenue Code of 1954\nwith respect to the tax treatment of social clubs and certain other\nmembership organizations, to provide for a study of tax incentives for\nrecycling, and for other purposes.\"\nThe bill would modify in two respects the requirements which a social\nclub must meet in order to qualify for tax-exempt status. First, Section\n501(c)(7) of the Code would be amended to require that \"substantially all\"\nof the activities are for pleasure, recreation and other nonprofitable\npurposes. The present statute requires that the organization be organized\nand operated \"exclusively\" for those purposes. While the amendment would\npermit social clubs to engage in a greater amount of nonexempt activities\nwithout risking their exempt status, it appears to be justifiable in view\nof the provisions of the Tax Reform Act of 1969 which expanded the reach\nof the tax on unrelated business income.\nSecond, the bill would deny exempt status to a social organization if\nits charter, bylaws, or other governing instrument or any written policy\nstatement of the organization includes a provision which provides for\ndiscrimination on the basis of race, color or religion. In McGlotten V.\nConnally, 338 F. Supp. 448 (D.C. D.C., 1972), the Court held that the\npresent statutory scheme was not unconstitutional by reason of failing to\ntax discrimination by Section 501(c) (7) organizations. The stated purpose\nof the amendment is that \"it is inappropriate for a social club or similar\norganization described in Sections 501(c) (7) to be exempt from income\ntaxation if its written policy is to discriminate. * * *.\" H. Rep.\nNo. 94-1353, supra, P. 8. This limited modification of the existing\nstatutory scheme is desirable.\nThe bill would deny corporate dividends received deductions to exempt\nsocial clubs (for purposes of computing unrelated business income) and\nnonexempt social and membership organizations. These amendments were\napparently drafted at the suggestion of the Department of the Treasury.\nWe agree that the current provisions, which allow such deductions, are\nundesirable, and that their amendment is desirable.\nAMERICAN REVOLUTION INTENTENNAL\n1776 1976\n- 2 -\nThe bill also includes two provisions nongermane to the main thrust\nof the legislation. One of these provisions modifies the effective\ndate provisions contained in Section 301(g) (2) of the Tax Reform Act\nof 1976, concerning the phase-out of tax carryovers for minimum tax\npurposes. This amendment appears to extend for six months the phase-out\nrelative to all corporations other than Subchapter S corporations and\npersonal holding companies. We do not know the rationale for this\nprovision or whether it is intended to benefit a specific taxpayer.\nThe other nongermane provision would require the Secretary of the\nTreasury to submit a report to the President and the Congress concerning\nprovisions of the Internal Revenue Code which currently impede or discourage\nthe recycling of solid waste materials.\nIn view of the two nongermane provisions of the bill, the Department of\nJustice defers to the Department of the Treasury as to whether this bill\nshould receive Executive approval.\nMichael\nyours, We\nMichael M. Uhlmann\nAssistant Attorney General\nOffice of Legislative Affairs\nUNITED STATES COMMISSION ON CIVIL RIGHTS\nWashington, D. C. 20425\nOctober 5, 1976\nMr. James M. Frey\nOffice of Management and Budget\nAssistant Director for\nLegislative Reference\n7201 New Executive Office Bldg.\nWashington, D.C. 20503\nDear Mr. Frey:\nWithin the last two working days, your office, in accordance with\nOMB Circular A-19, has requested the views and recommendations of\nthe Commission on Civil Rights on five enrolled bills. The\nenrolled bills are: H.R. 13367, the \"State and Local Fiscal\nAssistance Amendments of 1976\"; H.R. 12566, the \"National Science\nFoundation Authorization Act, 1977\"; S. 2278, the \"Civil Rights\nAttorney's Fees Awards Act of 1976\"; H.R. 11337, amendment of\nTitle 13, United States Code to provide for a mid-decade census\nof population and for other purposes; and H.R. 1144 which amends\nthe Internal Revenue Code of 1954 with respect to the tax treat-\nment of social clubs and certain other membership organizations.\nAlthough the Commission on Civil Rights appreciates the opportunity\nand recognizes its responsibility to comment on pending legislation\nrelated to its substantive jurisdiction, I must inform you that we\ncannot comply with your requests for views on the five enrolled\nbills. Several of the enrolled bills involve matters which have\nnot been formally considered by the Commission and which cannot be\nconsidered by the Commission within the specified two-day reply\nperiod. Moreover, the Staff Director's absence from the office\nbecause of previously scheduled Commission business makes it\nimpractical for the agency to comment within the specified period\non those bills which involve matters of established Commission\npolicy.\nIf you have any technical questions about the enrolled bills which\nappropriately can be answered by Commission staff, please contact\nme at 254-6626.\nSincerely,\nJAMES J. LYONS\nActing Director\nCongressional Liaison\nREC'S\nTHE WHITE HOUSE\nACTION MEMORANDUM\nWASHINGTON\nLOG NO.:\nDate:\nTime:\nOctober 15\n1245pm\nFOR ACTION:\nPaul Leach\nCC (for information):\nJack Marsh\nBill Seidman\nEd Schmults\nMax Friedersdorf\nSteve McConahey\nBobbie Kilberg\nMike Duval\nAlan Greenspan\nFROM THE STAFF SECRETARY\nDUE: Date:\nOctober 18\nTime: 930am\nSUBJECT:\nH.R.1144-Tax Code Amendments and Study of\nTax Incentives for Recycling\nACTION REQUESTED:\nFor Necessary Action\nFor Your Recommendations\nPrepare Agenda and Brief\nDraft Reply\nX\nFor Your Comments\nDraft Remarks\nREMARKS:\nplease return to judy johnston, ground floor west wing\nSign\njw3\nPLEASE ATTACH THIS COPY TO MATERIAL SUBMITTED.\nIf you have any questions or if you anticipate a\nJames M. Cannon\ndelay in submitting the required material, please\nFor the President\ntelephone the Staff Secretary immediately.\nTHE WHITE HOUSE\n[ORANDUM\nWASHINGTON\nLOG NO.:\n10/15\nDu\nTime:\nctober 15\n1245pm\nFOR ACTION:\nPaul Leach\nCC (for information): Jack Marsh\nBill Seidman\nEd Schmults\nMax Friedersdorf\nSteve McConahey\nBobbie Kilberg\nMike Duval\nAlan Greenspan\nFROM THE STAFF SECRETARY\nDUE: Date:\nOctober 18\nTime:\n930am\nSUBJECT:\nH.R.1144-Tax Code Amendments and Study of\nTax Incentives for Recycling\nACTION REQUESTED:\nFor Necessary Action\nFor Your Recommendations\nPrepare Agenda and Brief\nDraft Reply\nX\nFor Your Comments\nDraft Remarks\nREMARKS:\nplease return to judy johnston, ground floor west wing\nPLEASE ATTACH THIS COPY TO MATERIAL SUBMITTED.\nIf you have any questions or if you anticipate a\nJames M. Cannon\ndelay in submitting the required material, please\nFor the Presid\ntelephone th Staff Secretary immediately.\nTHE WHITE HOUSE\nACTION MEMORANDUM\nWASHINGTON\nLOG NO.:\nDate:\nTime:\nOctober 15\n1245pm\nFOR ACTION:\nPaul Leach\nCC (for information): Jack Marsh\nBill Seidman\nEd Schmults\nMax Friedersdorf\nSteve McConahey\nBobbie Kilberg\nMike Duval\nAlan Greenspan\nFROM THE STAFF SECRETARY\nDUE: Date:\nOctober 18\nTime: 930am\nSUBJECT:\nH.R.1144-Tax Code Amendments and Study of\nTax Incentives for Recycling\nACTION REQUESTED:\nFor Necessary Action\nFor Your Recommendations\nPrepare Agenda and Brief\nDraft Reply\nX\nFor Your Comments\nDraft Remarks\nREMARKS:\nplease return to judy johnston, ground floor west wing\nNo objection . -- Ken Lazarus 10/15/76\nPLEASE ATTACH THIS COPY TO MATERIAL SUBMITTED.\nIf you have any questions or if you anticipate a\nJames M. Cannon\ndelay in submitting the required material, please\nFor the Presid\ntelephone the Staff Secretary immediately.\nTHE WHITE HOUSE\nACTION MEMORANDUM\nWASHINGTON\nLOG NO.:\nDate:\nTime:\nOctober 15\n1245pm\nFOR ACTION:\nPaul Leach\nCC (for information): Jack Marsh\nBill Seidman\nEd Schmults\nMax Friedersdorf\nSteve McConahey\nBobbie Kilberg\nMike Duval\nAlan Greenspan\nFROM THE STAFF SECRETARY\nDUE: Date:\nOctober 18\nTime:\n930am\nSUBJECT:\nH.R. 1144-Tax Code Amendments and Study of\nTax Incentives for Recycling\nACTION REQUESTED:\nFor Necessary Action\nFor Your Recommendations\nPrepare Agenda and Brief\nDraft Reply\nX\nFor Your Comments\nDraft Remarks\nREMARKS:\nplease return to judy johnston, ground floor west wing\nRecommend approval. mep\nPLEASE ATTACH THIS COPY TO MATERIAL SUBMITTED.\nIf you have any questions or if you antici bate a\nJames L. Cannon\ndelay in submitting the required material, please\nFor the President\ntelephone the Staff Secretary immediately.\n:TION MEMORANDUM\nWASHINGTON\nLOG NO.:\nuté:\nTime:\nOctober 15\n1245pm\nFOR ACTION:\nPaul Leach\ncc (for information):\nJack Marsh\nBill Seidman\nEd Schmults\nMax Friedersdorf\nGeorge Humphreys\nSteve McConahey\nBobbie Kilberg\nMike Duval\nAlan Greenspan\nFROM THE STAFF SECRETARY\nDUE: Date:\nOctober 18\nTime:\n930am\nSUBJECT:\nH.R.1144-Tax Code Amendments and Study of\nTax Incentives for Recycling\nACTION REQUESTED:\nFor Necessary Action\nFor Your Recommendations\nPrepare Agenda and Brief\nDraft Reply\nx\nFor Your Comments\nDraft Remarks\nREMARKS:\nplease return to judy johnston, ground floor west wing\nI would\nPLEASE ATTACH THIS COPY TO MATERIAL SUBMITTED.\nIf you have any questions or if you anticipate a\nJames M. Cannon\ndelay in submitting the required material, please\n;\nFor the President -\ntelephone the Staff Secretary immediately.\nTHE CHAIRMAN OF THE\nCOUNCIL OF ECONOMIC ADVISERS\nWASHINGTON\nOctober 20, 1976\nMEMORANDUM FOR JAMES M. CANNON\nFROM: ALAN GREENSPAN\nThis is in response to your request for the views of\nthe Council of Economic Advisers on enrolled bill H. R. 1144\n\"to amend the Internal Revenue Code of 1954 and to provide\nfor a study of tax incentives for recycling.\"\nThis bill would:\n(1) allow tax-exempt social clubs to receive up to\n25% of their income outside their membership\nwith such income being subject to tax;\n(2) disallow the corporate dividend deduction now\navailable to tax exempt social clubs;\n(3) disallow tax-exempt status to social clubs which\ndiscriminate on the basis of race, color, or\nreligion;\n(4) delay the effective date by six months of a\nprovision contained in the Tax Reform Act of\n1976 relating to the minimum tax paid by corpora-\ntions; and\n(5) require the Treasury Department and the Environ-\nmental Protection Agency to report on any disin-\ncentive effects the current tax code may have on\nthe recycling of solid waste materials.\nThe Council of Economic Advisers recommends that the\nPresident sign H. R. 1144.\nREVOLUTION\nAMERICAN\nBICENTENNIAL\n7776-1976\n94TH CONGRESS\nHOUSE OF REPRESENTATIVES\n2d Session\n~\nREPORT\nNo. 94-1353\nTAX TREATMENT OF SOCIAL CLUBS AND OTHER\nMEMBERSHIP ORGANIZATIONS\nJULY 21, 1976.-Committed to the Committee of the Whole House on the State\nof the Union and ordered to be printed\nMr. ULLMAN, from the Committee on Ways and Means,\nsubmitted the following\nREPORT\n[To accompany H.R. 1144]\nThe Committee on Ways and Means, to whom was referred the bill\n(H.R. 1144) to amend the Internal Revenue Code of 1954 with re-\nspect to the tax treatment of social clubs and certain other member-\nship organizations, having considered the same, reports favorably\nthereon with an amendment and recommends that the bill as amended\ndo pass.\nThe amendment is as follows:\nPage 2, strike out line 15 and all that follows down through line 18,\nand insert:\n(d) The amendments made by this section shall apply to\ntaxable years beginning after the date of the enactment of\nthis Act.\nSEC. 2. (a) Section 501 of the Internal Revenue Code of\n1954 (relating to exemption from tax on corporations, certain\ntrusts, etc.) is amended by redesignating subsection (g) as\nsubsection (h) and by inserting after subsection (f) the fol-\nlowing new subsection:\n(g) PROHIBITION OF DISCRIMINATION BY CERTAIN SOCIAL\nCLUBs.-Notwithstanding subsection (a), an organization\nwhich is described in subsection (c) (7) shall not be exempt\nfrom taxation under subsection (a) for any taxable year if,\nat any time during such taxable year, the charter, bylaws, or\nother governing instrument, of such organization or any\nwritten policy statement of such organization contains a pro-\nvision which provides for discrimination against any person\non the basis of race, color, or religion.\"\n(b) The amendment made by subsection (a) shall apply to\ntaxable years beginning after the date of the enactment of\nthis Act.\n57-006\n3\nclubs, certain fraternities and sororities, and employees' beneficiary\nif the club's annual income from outside sources either is not more\nthan $2,500 or is not more than 5 percent of the total gross receipts\nof the organization. Where gross receipts from nonmember dealings\nI. SUMMARY\nexceed this 5-percent figure, all facts and circumstances are taken\ninto account in determining whether the organization continues to\nThis bill amends the requirements for tax exemption for social clubs\nqualify for exempt status. In the case of investment income, the\nand similar organizations (including college fraternities and sorori-\nService applies no percentage rule, but instead looks to whether a\nties) in two respects. First, the bill provides that \"substantially all\"\nsubstantial part of the club's income is from investment sources\nof such an organization's activities must be for pleasure, recreation,\nclub's exempt status solely on the basis of its nonmember activities\nand other nonprofitable purposes. This change (present law requires\n(Rev. Rul. 66-149, 1966-1 CB 146).\nsuch an organization to be organized and operated \"exclusively\" for\nReasons for change\nthese purposes) allows the organization to earn income from nonmem-\nIn the Revenue Act of 1950, because of the competitive problem with\nber sources to a limited extent and to have a limited amount of invest-\ntaxable businesses, Congress imposed the regular income tax on the\nment income (both types of income being subject to tax) without losing\nincome certain tax-exempt organizations receive from active business\nits general exemption from income tax. The second change made by\nenterprises which are unrelated to their exempt purposes. Social clubs,\nthis bill provides that such an organization is to lose its tax-exempt\nnational organizations of college fraternities and sororities, and cer-\nstatus if its charter, by-laws, or other governing instrument or any\ntain other types of tax-exempt organizations were not subjected to\nof its written policy statements contains a provision which provides\nthe unrelated business income tax imposed at that time.\nfor discrimination against any person on the basis of race, color, or\nIn its consideration of the Tax Reform Act of 1969, however, be-\nreligion.\ncause many of the exempt organizations not subject to the unrelated\nIn addition, the bill resolves a question about the corporate divi-\nbusiness income tax were engaging in substantial business activity,\ndends-received deduction in the case of organizations which are gen-\nCongress extended the unrelated business income tax to virtually all\nerally exempt but which nevertheless are taxed on their investment\nof the exempt organizations not already subject to that tax. As a re-\nincome. It disallows this deduction in computing the taxable invest-\nsult, social clubs and national organizations of college fraternities and\nment income of social clubs and similar organizations, and of employee\nsororities became taxable on all of their unrelated business income.\nbeneficiary associations. Similarly, the bill denies the dividends re-\nIn addition, the 1969 Act extended the unrelated business income\nceived deduction for investment income of taxable membership\ntax, in the case of these social clubs and national organizations of\norganizations.\ncollege fraternities and sororities, to cover investment income as well\nII. GENERAL STATEMENT\nas unrelated business income. Investment income was made taxable\nin the case of these membership organizations because not to do SO\n1. Income From Nonmembers And Investment Sources (subsec.\nwould have permitted them to provide recreational or social facilities\n(a) of the bill and sec. 501(c)(7) of the Code)\nand services out of revenues other than membership fees and as a\nPresent law\nresult would have permitted individuals to devote investment income,\nAmong the present law categories of exempt organizations are social\nfree of tax, to personal activities.\nclubs and other somewhat similar nonprofit organizations, such as\nBecause of the personal nature of these organizations, the Internal\nnational organizations of college fraternities and sororities. Present\nRevenue Service in prior years developed the 5-percent test referred\nlaw (sec. 501 (c) (7)) provides that these organizations must be orga-\nto above in determining whether a social club was properly exempt\nnized and operated exclusively for pleasure, recreation, and other non-\nfrom tax. Not to have significantly limited the income which could be\nprofitable purposes with no part of the net earnings inuring to the\nderived from nonmembers, under the conditions prevailing at that\nbenefit of any private shareholder. The regulations under this pro-\ntime, would have resulted in nontaxed income being devoted to the\nvision (Regs. § 1.501 (c) (7)-1(b)) state that a club which engages in\npersonal, recreational, or social benefit of the members of these clubs.\nbusiness is not organized and operated exclusively for nonprofitable\nHowever, since the passage of the 1969 Act, this strict line of de-\npurposes and, therefore, is not exempt.\nmarcation between the exempt and nonexempt activities of social clubs\nGenerally, the Internal Revenue Service has not challenged the\nappears unnecessary. Since the passage of the 1969 Act all of the\nexempt status of these organizations if the income derived from pro-\nincome derived from nonmembers as well as investment income is sub-\nviding goods and services to persons other than members and their\nject to tax, even though the organization itself is still classified as an\nguests is small in relation to the total activities of the organization.\nexempt organization. Thus, while it is necessary to require that a social\nThus, as an audit standard (Rev. Proc. 71-17, 1971-1 CB 683),\nclub must still be substantially devoted to the personal, recreational,\nthe Service has indicated that it generally will not disturb a social\nor social benefit of members, the extent to which such a club can obtain\nincome from nonmember sources can be somewhat liberalized. In view\n(2)\nof these considerations your committee's bill clarifies existing law to\n4\n5\npermit somewhat larger amounts of income to be derived by exempt\npercent allowances, income from the active conduct of businesses not\nsocial clubs from nonmembers and also from investment income\ntraditionally carried on by these organizations.\nsources.\nYour committee intends that a social club, national organization of\nExplanation of provision\na college fraternity or sorority, and any other organization exempt\nThe first amendment made by the bill substitutes for the require-\nunder section 501 (c) (7), may receive the full 35-percent amount of\nment of existing law that clubs which are exempt from tax under sec.\nits gross receipts from investment income sources (reduced by any\n501 (c) (7) must be organized and operated \"exclusively\" for pleasure,\namount of nonmember income, discussed above). This means that a\nrecreation, and other nonprofitable purposes, the new requirement that\nnational organization of a college fraternity or sorority that has no\n\"substantially all\" of such a club's activities must be for these\noutside income from permitting the general public to use its facilities\nmay receive investment income up to the full 35-percent amount of its\npurposes.¹ The effect of this change is twofold. First, it is intended to make\ngross receipts. On the other hand, in the case where a social club per-\nit clear that these organizations may receive some outside income,\nmits nonmembers to use its club facilities and receives 15 percent of\nincluding investment income, without losing their exempt status. Sec-\nits gross receipts from these nonmember sources, it may receive only\nond, it is intended that a social club be permitted to derive a some-\nup to 20 percent of its gross receipts from investment income.\nwhat higher level of income than was previously allowed from the\nIn the case of the application of the unrelated business income tax\nuse of its facilities or services by nonmembers without the club losing\nto investment income of these organizations, present law (sec. 512\nits exempt status. The decision in each case as to whether substantially\n(a) (3)) exempts that income which is set aside to be used for reli-\ngious, charitable, scientific, literary, educational, etc., purposes (the\nall of the organization's activities are related to its exempt purposes\nis to continue to be based on all the facts and circumstances. However,\npurposes specified in sec. 170(c) (4)) or the reasonable cost of admin-\nistration of these activities. For purposes of the 35-percent test, your\nthe facts and circumstances approach is to apply only if the club\ncommittee intends that this exempt function income be included in\nearns more than is permitted under the new guidelines. If the outside\nboth the numerator and the denominator, and if this exempt function\nincome is less than the guidelines permit, then the club's exempt\nincome causes the organization to exceed the 35-percent limit, the\nstatus will not be lost on account of nonmember income.\norganization is to lose its exempt status (unless the facts and circum-\nYour committee intends that these organizations be permitted to\nstances of the case warrant otherwise).\nreceive up to 35 percent of their gross receipts, including investment\nIf an organization has outside income in excess of the 35-percent\nincome, from sources outside of their membership without losing\nlimit (or 15-percent limit in the case of gross receipts derived from\ntheir tax-exempt status. Your committee also intends that within\nnonmember use of a club's facilities), all the facts and circumstances\nthis 35-percent amount not more than 15 percent of the gross receipts\nare to be taken into account in determining whether the organization\nshould be derived from the use of a social club's facilities or services\nqualifies for exempt status. If it is determined that the organization\nby the general public. In effect, this latter modification increases from\nis to lose its exempt status for that year, all of its income, even that\n5 percent (current audit standard: Rev. Proc. 71-17) to 15 percent\nreceived from its membership, is to be subject to tax in that year. In\nthe proportion of gross receipts a club may receive from making its\nsuch a case the income received from the club's members (but only\nclub facilities available to the general public without losing its exempt\nthis income) could be offset by the cost of services and goods furnished\nstatus. This also means that a club exempt from taxation described in\nthe members (sec. 277).\nsec. 501 (c) (7) is to be permitted to receive up to 35 percent of its\ngross receipts from a combination of investment income and receipts\n2. Dividends Received Deduction for Exempt Social Clubs, etc.\nfrom nonmembers SO long as the latter do not represent more than 15\n(subsec. (b) of the bill and sec. 512(a)(3)(A) of the Code)\npercent of total receipts.\nPresent law\nGross receipts are defined for this purpose as those receipts from\nGenerally, the tax on unrelated business income does not apply to\nnormal and usual activities of the club (that is, those activities they\ninvestment income.² However, in the case of social clubs, certain fra-\nhave traditionally conducted) including charges, admissions, member-\nternities and sororities, and employees' beneficiary associations, \"in-\nship fees, dues, assessments, investment income (such as dividends,\nvestment income\" is included in the tax base. This result is accom-\nrents, and similar receipts), and normal recurring capital gains on\nplished in the case of these organizations by defining their unrelated\ninvestments, but excluding initiation fees and capital contributions.\nbusiness taxable income (sec. (3)) as meaning gross income\nHowever, where a club receives unusual amounts of income, such as\n(other than exempt function income) 3 less allowable deductions di-\nfrom the sale of its clubhouse or similar facility, that income is not\nrectly connected with the production of gross income (again excluding\nto be included in the formula; that is, such unusual income is not to be\nexempt function income).\nincluded in either the gross receipts of the club or in the permitted 35-\nor 15-percent allowances. Your committee does not intend that these\n2 Section 512(b) generally excludes from the term \"unrelated business taxable income\"\norganizations should be permitted to receive, within the 15- or 35-\npassive investment income such as dividends, Interest. royalties. and capital gains.\n3 Exempt function income is defined in section 512(a) (3) (B) as gross income from dues,\nfees, charges, or similar amounts paid by members in connection with the purposes con-\n1 The bill continues the present law requirement that no part of the net earnings of\nstituting the basis for the exemption of the organization.\nthe organization may inure to the benefit of any private shareholder.\n6\n7\nOne of the deductions allowed corporations in the computation of\nthe regular corporate income tax is the dividends received deduction.\n\"which are directly connected with the production of the grossincome\"\nGenerally, this allows corporations a deduction equal to 85 percent of\n(again excluding exempt function income). The bill specifically pro-\ndividends received from taxable domestic corporations. The proposed\nvides that the corporate dividends received deduction is not to be con-\nTreasury regulations on social clubs, certain fraternities and sorori-\nsidered as a deduction which is \"directly connected with the production\nties, and employees' beneficiary associations provide that the divi-\nof gross income.\"\ndends received deduction is not allowed for purposes of computing\n3. Dividends Received Deduction for Nonexempt Membership\nunrelated business taxable income for those organizations, because\nOrganizations (subsec. (c) of the bill and sec. 277(a) of the\nthat deduction is not an expense directly connected with the produc-\nCode)\ntion of income.\nPresent law\nReasons for change\nUnder present law (sec. 277, enacted as part of the Tax Reform Act\nTreasury representatives have informed your committee that ques-\nof 1969), in the case of taxable membership organizations the deduc-\ntions have been raised with respect to these proposed regulations, as to\ntion for expenses incurred in supplying services, facilities, or goods\nwhether Congress intended to disallow the dividends received deduc-\nto the members is to be allowed only to the extent of the income\ntion. To clarify this point the Treasury Department has requested\nreceived from these members. This was provided in order to prevent\nCongress to state specifically that the dividends received deduction is\ntaxable membership organizations from escaping tax on business or\nnot available in the case of investment income of tax-exempt social\ninvestment income by using this income to provide services, facili-\nclubs, certain fraternities and sororities, and employees' beneficiary\nties, or goods to its members at less than cost and then deducting the\nassociations.\nloss from the membership activity against the business or investment\nThe major reason for the dividends received deduction is to avoid\nincome.\ntwo or more corporate taxes on corporate earnings as the income is\npassed from one corporation to another, in addition to taxing the\nReasons for change\nsame amount to individual shareholders when the earnings are paid\nTo the extent these organizations receive dividend income which is\nout as dividends to them. In the case of social clubs, certain fraterni-\nused to provide services, facilities, or goods to the members the same\nties and sororities, and employees' beneficiary associations, however,\nproblem arises in connection with these taxable membership organiza-\nthe individual income tax on shareholders does not apply, since the\ntions as in the case of the tax-exempt membership organizations\ndividend income received by these organizations is not distributed to\ndescribed above (sec. 2. Dividends Received Deduction for Exempt\nthe members. In this case since the exempt organization is in effect\nSocial Clubs, etc.). If the dividends received deduction were available\ntaking the place of the individual member for tax purposes, it seems\nin the case of the tax on the membership organization (in effect pro-\nappropriate that the tax apply to these organizations in much the same\nviding a substitute for the dividend tax on shareholders) the second, or\nmanner as in the case of individual shareholders.\nindividual, tax on this income would be avoided in substantially the\nFor reasons indicated above, your committee believes that the pro-\nsame way as in the case of the exempt membership organizations (were\nposed Treasury regulations disallowing the dividends received deduc-\nthe provision described above not to be added). Moreover, if nothing\ntion are consistent with the intent and structure of the provision (sec.\nwere done in this regard in the case of taxable membership orga-\n512 (a) (3)) enacted in the Tax Reform Act of 1969, which allows de-\nnizations, the nontaxable organizations by revoking their exempt sta-\nductions in the case of investment income of social clubs, certain\ntus could avoid the tax on this dividend income in this manner.\nfraternities and sororities, and employees' beneficiary associations only\nFor the reasons indicated above your committee believes it is appro-\nin the case of deductions directly connected with the production of\npriate to disallow the dividends received deductions in the case of\nincome. Your committee's bill specifically clarifies this point by pro-\nthese taxable membership organizations in the same manner as in the\nviding that in these cases the dividends received deduction is not to be\ncase of the tax-exempt membership organizations referred to above.\nconsidered as directly connected with the production of gross income.\nExplanation of provision\nExplanation of provision\nThe third amendment made by this bill denies a corporate dividends\nThe second amendment made by this bill denies a corporate dividends\nreceived deduction to taxable social clubs and other membership\nreceived deduction to tax-exempt social clubs, certain fraternities and\norganizations operated primarily to furnish services or goods to mem-\nsororities, and voluntary employees' beneficiary associations (described\nbers (referred to in sec. 277). These organizations, with certain\nin secs. 501 (c) (7) and (9)) in computing their \"unrelated business\nexceptions set forth in present law, are permitted deductions attribut-\ntaxable income.\" Under present law the unrelated business taxable in-\nable to furnishing services, insurance, goods, or other items of value\ncome of these organizations is defined as their gross income (excluding\nto their members only to the extent of the income derived from mem-\nany exempt function income) less the deductions under this chapter\nbers or transactions with members. The bill specifically provides that\nthe corporate dividends received deduction (secs. 243, 244, and 245)\n4 Proposed Reg. § 1.512(a)-3(b) (2), published on May 13, 1971 (36 Fed. Reg. 8808,\nis not to be allowed to these organizations.\n8809).\n8\n9\n4. Prohibition of Discrimination by Social Clubs, etc. (sec. 2(a)\nIn compliance with clause 2(1) (2) (B) of Rule XI of the Rules\nof the bill and new sec. (g) of the Code)\nof the House of Representatives, the following statement is made\nPresent law\nrelative to the vote of the Committee on the motion to report the bill.\nThe Internal Revenue Code does not deal explicitly with the ques-\nThis bill, as amended, was ordered reported by voice vote.\ntion of whether an income tax exemption for social clubs, etc. (i.e.,\norganizations described in sec. 501 (c) (7) which are exempt under sec.\nIV. OTHER MATTERS REQUIRED TO BE DISCUSSED\n(a)), is incompatible with discrimination on account of race, color,\nUNDER HOUSE RULES\nor religion.\nIt has been held (McGlotten V. Connally, 338 F. Supp. 448 (D.C.,\nIn compliance with clause 2(1) (3) of Rule XI of the Rules of the\nD.C. 1972)) that, in light of the present statutory scheme of income\nHouse of Representatives, the following statements are made:\ntax treatment of social clubs, etc. (including their treatment under the\nWith respect to subdivision (A), relating to oversight findings, it\nunrelated business income tax provisions described above), discrimi-\nwas as a result of your committee's oversight activity concerning the\nnation on account of race is not prevented under the Constitution in\neffects of the Tax Reform Act of 1969 on certain types of exempt\nthe case of an exempt organization merely because described in section\norganizations and nonexempt membership corporations that the com-\n501 (c) (7).\nmittee concluded that the provisions of this bill are appropriate so as\nto clarify the status and tax liability of those organizations.\nReasons for change\nWith respect to subdivision (B), after consultation with the Direc-\nYour committee concluded that it is inappropriate for a social club\ntor of the Congressional Budget Office, your committee states that the\nor similar organization described in section 501 (c) (7) to be exempt\nchanges made to existing law by this bill involve no new budget au-\nfrom income taxation if its written policy is to discriminate on ac-\nthority or new or increased tax expenditures.\ncount of race, color, or religion.\nWith respect to subdivision (C), the Director of the Congressional\nExplanation of provision\nBudget Office has not made an estimate or comparison of the esti-\nmates of the cost of H.R. 1144 but has examined the committee's\nUnder the bill, an organization otherwise exempt from income tax\nestimates and agrees with the methods and the dollar estimates result-\nas an organization described in section 501 (c) (7) is to lose its exempt\ning therefrom.\nstatus for any taxable year if, at any time during that year, the orga-\nWith respect to subdivision (D), your committee advises that no\nnization's charter, by-laws, or other governing instrument, or any\nwritten policy statement contains a provision which provides for dis-\noversight findings or recommendations have been submitted to your\ncrimination against any person on the basis of race, color, or religion.\ncommittee by the Committee on Government Operations with respect\nto the subject matter of H.R. 1144.\n5. Effective dates (subsec. (d) of the first sec. and sec. 2(b) of\nIn compliance with clause 2(1) (4) of Rule XI of the Rules of the\nthe bill)\nHouse of Representatives, your committee states that the enactment\nThe amendments made by this bill apply to taxable years beginning\nof this bill is not expected to have an inflationary impact on prices\nafter the date of enactment of this Act.\nand costs in the operation of the national economy.\nThe amendment as to income from nonmembers and investment\nsources, and the amendments as to the corporate dividends received\ndeduction are clarifications of existing law under the Tax Reform Act\nof 1969.\nIII. EFFECT OF THE BILL ON THE REVENUES AND VOTE\nOF THE COMMITTEE IN REPORTING THE BILL\nIn compliance with clause 7 of Rule XIII of the Rules of the House\nof Representatives, the following statement is made relative to the\neffect of this bill on the revenues. Your committee estimates that this\nbill will result in a small revenue gain, probably less than $100,000\nper year. The Treasury Department agrees with this statement.\n5 In that same decision, the court held that, in the case of fraternal beneficiary societies\noperating under the lodge system, discrimination on account of race is inconsistent both\nwith such an organization's tax-exempt status (sec. 501(c)(8) this may also apply as to\nsec. ((c)(10)) and also with its status as a limited charitable contribution donee (sec.\n170(c)(4)).\nAlso, the Supreme Court has affirmed (Coit V. Green, 404 U.S. 997 (1971)) a decision\n(Green V. Connally, 330 F. Supp. 1150 (D.C., D.C. 1971)) that discrimination on account\nof race is inconsistent with an educational institution's tax-exempt status (sec. 501 (c) (3))\nand also with its status as a charitable contribution donee (sec. 170(c)(2)).\nH. Rept. 94-1353-2\n11\nSubchapter F-Exempt Organizations\nPART I-GENERAL RULE\nV. CHANGES IN EXISTING LAW MADE BY THE BILL, AS REPORTED\nIn compliance with clause 3 of Rule XIII of the Rules of the House\nSEC. 501. EXEMPTION FROM TAX ON CORPORATIONS, CERTAIN\nof Representatives, changes in existing law made by the bill, as re-\nTRUSTS, ETC.\nported, are shown as follows (existing law proposed to be omitted\n(a) EXEMPTION FROM TAXATION.-An organization described in\nis enclosed in black brackets, new matter is printed in italics, existing\nsubsection (c) or (d) or section 401 (a) shall be exempt from taxation\nlaw in which no change is proposed is shown in roman) :\nunder this subtitle unless such exemption is denied under section 502\nor 503.\nINTERNAL REVENUE CODE OF 1954\n(b) TAX ON UNRELATED BUSINESS INCOME AND CERTAIN OTHER\nACTIVITIES.-An organization exempt from taxation under subsection\n*\n(a) shall be subject to tax to the extent provided in parts II, III, and\nSubtitle A-Income Taxes\nVI of this subchapter. but (notwithstanding parts II, III, and VI of\nthis subchapter) shall be considered an organization exempt from in-\ncome taxes for the purpose of any law which refers to organizations\nexempt from income taxes.\nCHAPTER 1-NORMAL TAXES AND SURTAXES\n(c) LIST OF EXEMPT ORGANIZATIONS.-The following organizations\nare referred to in subsection (a) :\n(1) Corporations organized under Act of Congress, if such\n*\ncorporations are instrumentalities of the United States and if,\nSubchapter B-Computation of Taxable Income\nunder such Act, as amended and supplemented, such corporations\nare exempt from Federal income taxes.\n(2) Corporations organized for the exclusive purpose of hold-\ning title to property, collecting income therefrom, and turning\nPART IX-ITEMS NOT DEDUCTIBLE\nover the entire amount thereof, less expenses, to an organization\nwhich itself is exempt under this section.\n*\n*\n(3) Corporations, and any community chest, fund, or founda-\nSEC. 277. DEDUCTIONS INCURRED BY CERTAIN MEMBERSHIP ORGA-\ntion, organized and operated exclusively for religious, charitable,\nNIZATIONS IN TRANSACTIONS WITH MEMBERS.\nscientific, testing for public safety, literary, or educational pur-\n(a) GENERAL RULE.-In the case of a social club or other member-\nposes, or for the prevention of cruelty to children or animals, no\nship organization which is operated primarily to furnish services or\npart of the net earnings of which inures to the benefit of any pri-\ngoods to members and which is not exempt from taxation, deductions\nvate shareholder or individual, no substantial part of the activities\nfor the taxable year attributable to furnishing services, insurance,\nof which is carrying on propaganda, or otherwise attempting, to\ngoods, or other items of value to members shall be allowed only to\ninfluence legislation, and which does not participate in, or inter-\nthe extent of income derived during such year from members or trans-\nvene in (including the publishing or distributing of statements),\nactions with members (including income derived during such year\nany political campaign on behalf of any candidate for public\noffice.\nfrom institutes and trade shows which are primarily for the educa-\ntion of members). If for any taxable year such deductions exceed such\n(4) Civic leagues or organizations not organized for profit but\nincome, the excess shall be treated as a deduction attributable to\noperated exclusively for the promotion of social welfare, or local\nfurnishing services, insurance, goods, or other items of value to mem-\nassociations of employees, the membership of which is limited to\nbers paid or incurred in the succeeding taxable year. The deductions\nthe employees of a designated person or persons in a particular\nprovided by sections 243, 244, and 245 (relating to dividends received\nmunicipality, and the net earnings of which are devoted exclu-\nsively to charitable, educational, or recreational purposes.\nby corporations) shall not be allowed to any organization to which\n(5) Labor, agricultural, or horticultural organizations.\nthis section applies for the taxable year.\n(6) Business leagues, chambers of commerce, real-estate boards,\nboards of trade, or professional football leagues (whether or not\n(10)\nadministering a pension fund for football players), not organized\nfor profit and no part of the net earnings of which inures to the\nbenefit of any private shareholder or individual.\n12\n13\n(7) Clubs organized [and operated exclusively for pleasure, rec-\n(ii) cooperative banks without capital stock organized and\nreation, and other nonprofitable purposes] for pleasure, recrea-\noperated for mutual purposes and without profit, or\ntion, and other nonprofitable purposes, substantially all of the ac-\n(iii) mutual savings banks not having capital stock repre-\ntivities of which are for such purposes and no part of the net earn-\nsented by shares.\nings of which inures to the benefit of any private shareholder.\n(C) Corporations or associations organized before September 1,\n(8) Fraternal beneficiary societies, orders, or associations—\n1957, and operated for mutual purposes and without profit for the\n(A) operating under the lodge system or for the exclusive\npurpose of providing reserve funds for associations or banks\nbenefit of the members of a fraternity itself operating under\ndescribed in clause (i), (ii), or (iii) of subparagraph (B) ; but\nthe lodge system, and\nonly if 85 percent or more of the income is attributable to provid-\n(B) providing for the payment of life, sick, accident, or\ning such reserve funds and to investments. This subparagraph\nother benefits to the members of such society, order, or asso-\nshall not apply to any corporation or association entitled to\nciation or their dependents.\nexemption under subparagraph (B).\n(9) Voluntary employees' beneficiary associations providing for\n(15) Mutual insurance companies or associations other than\nthe payment of life, sick, accident, or other benefits to the members\nlife or marine (including interinsurers and reciprocal underwrit-\nof such association or their dependents or designated beneficiaries,\ners) if the gross amount received during the taxable year from the\nif no part of the net earnings of such association inures (other\nitems described in section 822 (b) (other than paragraph (1) (D)\nthan through such payments) to the benefit of any private share-\nthereof) and premiums (including deposits and assessments) does\nholder or individual.\nnot exceed $150,000.\n(10) Domestic fraternal societies, orders, or associations, operat-\n(16) Corporations organized by an association subject to part\ning under the lodge system—\nIV of this subchapter or members thereof, for the purpose of fi-\n(A) the net earnings of which are devoted exclusively to\nnancing the ordinary crop operations of such members or other\nreligious, charitable, scientific, literary, educational, and fra-\nproducers and operated in conjunction with such association. Ex-\nternal purposes, and\nemption shall not be denied any such corporation because it has\n(B) which do not provide for the payment of life, sick, ac-\ncapital stock, if the dividend rate of such stock is fixed at not to\ncident, or other benefits.\nexceed the legal rate of interest in the State of incorporation or 8\n(11) Teachers' retirement fund associations of a purely local\npercent per annum, whichever is greater, on the value of the con-\ncharacter, if-\nsideration for which the stock was issued, and if substantially all\n(A) no part of their net earnings inures (other than\nsuch stock (other than nonvoting preferred stock, the owners of\nthrough payment of retirement benefits) to the benefit of any\nwhich are not entitled or permitted to participate, directly or indi-\nprivate shareholder or individual, and\nrectly, in the profits of the corporation, on dissolution or other-\n(B) the income consists solely of amounts received from\nwise, beyond the fixed dividends) is owned by such association, or\npublic taxation, amounts received from assessments on the\nmembers thereof; nor shall exemption be denied any such corpo-\nteaching salaries of members, and income in respect of\nration because there is accumulated and maintained by it a reserve\ninvestments.\nrequired by State law or a reasonable reserve for any necessary\n(12) Benevolent life insurance associations of a purely local\npurpose.\ncharacter, mutual ditch or irrigation companies, mutual or co-\n(17) (A) A trust or trusts forming part of a plan providing for\noperative telephone companies, or like organizations; but only if\nthe payment of supplemental unemployment compensation bene-\n85 percent or more of the income consists of amounts collected\nfits, if-\nfrom members for the sole purpose of meeting losses and expenses.\n(i) under the plan, it is impossible, at any time prior to the\n(13) Cemetery companies owned and operated exclusively for\nsatisfaction of all liabilities with respect to employees under\nthe benefit of their members or which are not operated for profit;\nthe plan, for any part of the corpus or income to be (within\nand any corporation chartered solely for the purpose of the dis-\nthe taxable year or thereafter) used for, or diverted to, any\nposal of bodies by burial or cremation which is not permitted by its\npurpose other than the providing of supplemental unemploy-\ncharter to engage in any business not necessarily incident to that\nment compensation benefits,\npurpose, no part of the net earnings of which inures to the bene-\n(ii) such benefits are payable to employees under a classifi-\nfit of any private shareholder or individual.\ncation which is set forth in the plan and which is found by the\n(14) (A) Credit unions without capital stock organized and\nSecretary or his delegate not to be discriminatory in favor of\noperated for mutual purposes and without profit.\nemployees who are officers, shareholders, persons whose prin-\n(B) Corporations or associations without capital stock orga-\ncipal duties consist of supervising the work of other employ-\nnized before September 1, 1957, and operated for mutual purposes\nees, or highly compensated employees, and\nand without profit for the purpose of providing reserve funds for,\n(iii) such benefits do not discriminate in favor of employ-\nand insurance of, shares or deposits in-\nees who are officers, shareholders, persons whose principal\n(i) domestic building and loan associations,\nduties consist of supervising the work of other employees, or\n14\n15\nhighly compensated employees. A plan shall not be considered\n(A) under the plan, it is impossible, at any time prior to\ndiscriminatory within the meaning of this clause merely be-\nthe satisfaction of all liabilities with respect to employees\ncause the benefits received under the plan bear a uniform rela-\nunder the plan, for any part of the corpus or income to be\ntionship to the total compensation, or the basic or regular\n(within the taxable year or thereafter) used for, or diverted\nrate of compensation, of the employees covered by the plan.\nto, any purpose other than the providing of benefits under the\n(B) In determining whether a plan meets the requirements of\nplan.\nsubparagraph (A), any benefits provided under any other plan\n(B) such benefits are payable to employees under a classi-\nshall not be taken into consideration, except that a plan shall not\nfication which is set forth in the plan and which is found\nbe considered discriminatory-\nby the Secretary or his delegate not to be discriminatory in\n(i) merely because the benefits under the plan which are\nfavor of employees who are officers, shareholders, persons\nfirst determined in a nondiscriminatory manner within the\nwhose principal duties consist of supervising the work of\nmeaning of subparagraph (A) are then reduced by any sick,\nother employees, or highly compensated employees, and\naccident, or unemployment compensation benefits received\n(C) such benefits do not discriminate in favor of employees\nunder State or Federal law (or reduced by a portion of such\nwho are officers, shareholders, persons whose principal duties\nbenefits if determined in a nondiscriminatory manner), or\nconsist of supervising the work of other employees, or highly\n(ii) merely because the plan provides only for employees\ncompensated employees. A plan shall not be considered dis-\nwho are not eligible to receive sick, accident, or unemploy-\ncriminatory within the meaning of this subparagraph merely\nment compensation benefits under State or Federal law the\nbecause the benefits received under the plan bear a uniform\nsame benefits (or a portion of such benefits if determined in\nrelationship to the total compensation, or the basic or regular\na nondiscriminatory manner) which such employees would\nrate of compensation. of the employees covered by the plan.\nreceive under such laws if such employees were eligible for\n(19) A post or organization of war veterans, or an auxiliary\nsuch benefits, or\nunit or society of, or a trust or foundation for, any such post or\n(iii) merely because the plan provides only for employees\norganization-\nwho are not eligible under another plan (which meets the\n(A) organized in the United States or any of its\nrequirements of subparagraph (A)) of supplemental unem-\npossessions,\nployment compensation benefits provided wholly by the em-\n(B) at least 75 percent of the members of which are war\nployer the same benefits (or a portion of such benefits if\nveterans and substantially all of the other members of which\ndetermined in a nondiscriminatory manner) which such\nare individuals who are veterans (but not war veterans), or\nemployees would receive under such other plan if such em-\nare cadets, or are spouses, widows, or widowers of war vet-\nployees were eligible under such other plan, but only if the\nerans of such individuals, and\nemployees eligible under both plans would make a classifica-\n(C) no part of the net earnings of which inures to the bene-\ntion which would be nondiscriminatory within the meaning\nfit of any private shareholder or individual.\nof subparagraph (A).\n(d) RELIGIOUS AND APOSTOLIC ORGANIZATIONS.-The following or-\n(C) A plan shall be considered to meet the requirements of sub-\nganizations are referred to in subsection (a) Religious or apostolic as-\nparagraph (A) during the whole of any year of the plan if on\nsociations or corporations, if such associations or corporations have a\none day in each quarter it satisfies such requirements.\ncommon treasury or community treasury, even if such associations or\n(D) The term \"supplemental unemployment compensation\ncorporations engage in business for the common benefit of the mem-\nbenefits\" means only-\nbers, but only if the members thereof include (at the time of filing\n(i) benefits which are paid to an employee because of his\ntheir returns) in their gross income their entire pro rata shares,\ninvoluntary separation from the employment of the employer\nwhether distributed or not, of the taxable income of the association\n(whether or not such separation is temporary) resulting di-\nor corporation for such year. Any amount SO included in the gross in-\nrectly from a reduction in force, the discontinuance of a plant\ncome of a member shall be treated as a dividend received.\nor operation, or other similar conditions, and\n(e) COOPERATIVE HOSPITAL SERVICE ORGANIZATIONS.-For purposes\n(ii) sick and accident benefits subordinate to the benefits\nof this title, an organization shall be treated as an organization orga-\ndescribed in clause (i).\nnized and operated exclusively for charitable purposes, if-\n(E) Exemption shall not be denied under subsection (a) to any\n(1) such organization is organized and operated solely-\norganization entitled to such exemption as an association de-\n(A) to perform, on a centralized basis, one or more of the\nscribed in paragraph (9) of this subsection merely because such\nfollowing services which, if performed on its own behalf by a\norganization provides for the payment of supplemental unemploy-\nhospital which is an organization described in subsection (c)\nment benefits (as defined in subparagraph (D) (i)).\n(3) and exempt from taxation under subsection (a), would\n(18) A trust or trusts created before June 25, 1959, forming\nconstitute activities in exercising or performing the purpose\npart of a plan providing for the payment of benefits under a\nor function constituting the basis for its exemption; data\npension plan funded only by contributions of employees, if-\nprocessing, purchasing. warehousing. billing and collection,\n16\n17\nfood, industrial engineering, laboratory, printing, communi-\ntains a provision which provides for discrimination against any person\ncations, record center, and personnel (including selection,\non the basis of race, color, or religion.\ntesting, training, and education of personnel) services; and\n[(g)] (h) CROSS REFERENCE.-\n(B) to perform such services solely for two or more hos-\nFor nonexemption of Communist-controlled organizations, see section 11\npitals each of which is-\n(b) of the Internal Security Act of 1950 (64 Stat. 997; 50 U.S.C. 790(b)).\n(i) an organization described in subsection (c) (3)\n*\n*\n*\n*\n*\nwhich is exempt from taxation under subsection (a),\n(ii) a constituent part of an organization described in\nPART III-TAXATION OF BUSINESS INCOME OF CERTAIN\nsubsection (c) (3) which is exempt from taxation under\nEXEMPT ORGANIZATIONS\nsubsection (a) and which, if organized and operated as\na separate entity, would constitute an organization de-\nscribed in subsection (c) (3), or\nSEC. 512. UNRELATED BUSINESS TAXABLE INCOME.\n(iii) owned and operated by the United States, a\n(a) DEFINITION.-For purposes of this title—\nState, the District of Columbia, or a possession of the\n(1) GENERAL RULE.-Except as otherwise provided in this sub-\nUnited States, or a political subdivision or an agency or\nsection, the term \"unrelated business taxable income\" means the\ninstrumentality of any of the foregoing;\ngross income derived by any organization from any unrelated\n(2) such organization is organized and operated on a corpora-\ntrade or business (as defined in section 513) regularly carried on\ntive basis and allocates or pays, within 81/2 months after the close\nby it, less the deductions allowed by this chapter which are\nof its taxable year, all net earnings to patrons on the basis of\ndirectly connected with the carrying on of such trade or business,\nservices performed for them; and\nboth computed with the modifications provided in subsection (b).\n(3) if such organization has capital stock, all of such stock\n(2) SPECIAL RULE FOR FOREIGN ORGANIZATIONS.-In the case of\noutstanding is owned by its patrons.\nan organization described in section 511 which is a foreign orga-\nFor purposes of this title, any organization which, by reason of the\nnization, the unrelated business taxable income shall be\npreceding sentence, is an organization described in subsection (c) (3)\n(A) its unrelated business taxable income which is derived\nand exempt from taxation under subsection (a), shall be treated as a\nfrom sources within the United States and which is not effec-\nhospital and as an organization referred to in section 170(b) (1) (A)\ntively connected with the conduct of a trade or business\n(iii).\nwithin the United States, plus\n(f) COOPERATIVE SERVICE ORGANIZATIONS OF OPERATING EDUCA-\n(B) its unrelated business taxable income which is effec-\nTIONAL ORGANIZATIONS.-For purposes of this title, if an organiza-\ntively connected with the conduct of a trade or business\ntion is—\nwithin the United States.\n(1) organized and operated solely to hold, commingle, and col-\n(3) SPECIAL RULES APPLICABLE TO ORGANIZATIONS DESCRIBED IN\nlectively invest and reinvest (including arranging for and su-\nSECTION 501 (C) (7) OR (9)\npervising the performance by independent contractors of invest-\n(A) GENERAL RULE.-In the case of an organization de-\nment services related thereto) in stocks and securities, the moneys\nscribed in section 501 (c) (7) or (9), the term \"unrelated\ncontributed thereto by each of the members of such organization,\nbusiness taxable income\" means the gross income (excluding\nand to collect income therefrom and turn over the entire amount\nany exempt function income), less the deductions allowed\nthereof, less expenses, to such members,\nby this chapter which are directly connected with the pro-\n(2) organized and controlled by one or more such members,\nduction of the gross income (excluding exempt function in-\nand\ncome), both computed with the modifications provided in\n(3) comprised solely of members that are organizations de-\nparagraphs (6), (10), (11), and (12) of subsection (b). For\nscribed in clause (ii) or (iv) of section 170(b) (1) (A)-\npurposes of the preceding sentence, the deductions provided\n(A) which are exempt from taxation under subsection\nby sections 243, 244, and 245 (relating to dividends received\n(a), or\nby corporations) shall be treated as not directly connected\n(B) the income of which is excluded from taxation under\nwith the production of gross income.\nsection 115 (a),\n(B) EXEMPT FUNCTION INCOME.-For purposes of subpara-\nthen such organization shall be treated as an organization organized\ngraph (A), the term \"exempt function income\" means the\nand operated exclusively for charitable purposes.\ngross income from dues, fees, charges, or similar amounts\n(g) PROHIBITION OF DISCRIMINATION BY CERTAIN SOCIAL CLUBS.-\nIpaid by members of the organization as consideration for\nNotwithstanding subsection (a), an organization which is described\nproviding such members or their dependents or guests goods,\nin subsection (c) (7) shall not be exempt from taxation under sub-\nfacilities, or services in furtherance of the purposes consti-\nsection (a) for any taxable year if, at any time during such taxable\ntuting the basis for the exemption of the organization to\nyear, the charter, bylaws, or other governing instrument, of such or-\nwhich such income is paid. Such term also means all income\nganization or any written policy statement of such organization con-\n(other than an amount equal to the gross income derived\n18\nfrom any unrelated trade or business regularly carried on by\nsuch organization computed as if the organization were sub-\nject to paragraph (1)), which is set aside-\n(i) for a purpose specified in section 170 (c) (4), or\n(ii) in the case of an organization described in section\n501 (c) (9), to provide for the payment of life, sick, acci-\ndent, or other benefits,\nincluding reasonable costs of administration directly con-\nnected with a purpose described in clause (i) or (ii). If\nduring the taxable year, an amount which is attributable to\nincome SO set aside is used for a purpose other than that\ndescribed in clause (i) or (ii), such amount shall be included,\nunder subparagraph (A), in unrelated business taxable in-\ncome for the taxable year.\n(C) APPLICABILITY TO CERTAIN CORPORATIONS DESCRIBED IN\nSECTION 501 (C) (2) .-In the case of a corporation described\nin section 501 (c) (2), the income of which is payable to an\norganization described in section 501 (c) (7) or (9), subpara-\ngraph (A) shall apply as if such corporation were the orga-\nnization to which the income is payable. For purposes of the\npreceding sentence, such corporation shall be treated as hav-\ning exempt function income for a taxable year only if it files\na consolidated return with such organization for such year.\n(D) NONRECOGNITION OF GAIN.-If property used directly\nin the performance of the exempt function of an organiza-\ntion described in section 501 (c) (7) or (9) is sold by such\norganization, and within a period beginning 1 year before\nthe date of such sale, and ending 3 years after such date,\nother property is purchased and used by such organization\ndirectly in the performance of its exempt function, gain (if\nany) from such sale shall be recognized only to the extent\nthat such organization's sales price of the old property ex-\nceeds the organization's cost of purchasing the other prop-\nerty. For purposes of this subparagraph, the destruction in\nwhole or in part, theft, seizure, requisition, or condemnation\nof property, shall be treated as the sale of such property,\nand rules similar to the rules provided by subsections (b),\n(c), (e), and (j) of section 1034 shall apply.\n(4) SPECIAL RULE APPLICABLE TO ORGANIZATIONS DESCRIBED IN\nSECTION 501 (c) (19).-In the case of an organization described\nin section 501 (c) (19), the term \"unrelated business taxable in-\ncome\" does not include any amount attributable to payments for\nlife, sick, accident, or health insurance with respect to members\nof such organizations or their dependents which is set aside for\nthe purpose of providing for the payment of insurance benefits\nor for a purpose specified in section (c) (4). If an amount\nset aside under the preceding sentence is used during the tax-\nable year for a purpose other than a purpose described in the\npreceding sentence, such amount shall be included, under para-\ngraph (1), in unrelated business taxable income for the taxable\nyear.\nCORRECTED SHEET\nH.R. 1144\nAinety-fourth Congress of the United States of America\nAT THE SECOND SESSION\nBegun and held at the City of Washington on Monday, the nineteenth day of January,\none thousand nine hundred and seventy-six\nAn Art\nTo amend the Internal Revenue Code of 1954 with respect to the tax treatment\nof social clubs and certain other membership organizations, to provide for a\nstudy of tax incentives for recycling, and for other purposes.\nBe it enacted by the Senate and House of Representatives of the\nUnited States of America in Congress assembled, That (a) section\n501 (c) (7) of the Internal Revenue Code of 1954 (relating to exempt\norganizations) is amended to read as follows:\n\"(7) Clubs organized for pleasure, recreation, and other non-\nprofitable purposes, substantially all of the activities of which are\nfor such purposes and no part of the net earnings of which inures\nto the benefit of any private shareholder.\"\n(b) Section 512(a) (3) (A) of such Code (relating to unrelated\nbusiness taxable income) is amended by adding at the end thereof the\nfollowing new sentence: \"For purposes of the preceding sentence, the\ndeductions provided by sections 243, 244, and 245 (relating to dividends\nreceived by corporations) shall be treated as not directly connected\nwith the production of gross income.\"\n(c) Section 277 (a) of such Code (relating to deductions incurred\nby certain membership organizations in transactions with members)\nis amended by adding at the end thereof the following new sentence:\n\"The deductions provided by sections 243, 244, and 245 (relating to\ndividends received by corporations) shall not be allowed to any orga-\nnization to which this section applies for the taxable year.\"\n(d) The amendments made by this section shall apply to taxable\nyears beginning after the date of the enactment of this Act.\nSEC. 2. (a) Section 501 of the Internal Revenue Code of 1954 (relat-\ning to exemption from tax on corporations, certain trusts, etc.) is\namended by redesignating subsection (h) as subsection (i) and by\ninserting after subsection (g) the following new subsection:\n\"(g) PROHIBITION OF DISCRIMINATION BY CERTAIN SOCIAL CLUBS.-\nNotwithstanding subsection (a), an organization which is described\nin subsection (c) (7) shall not be exempt from taxation under sub-\nsection (a) for any taxable year if, at any time during such taxable\nyear, the charter, bylaws, or other governing instrument, of such orga-\nnization or any written policy statement of such organization contains\na provision which provides for discrimination against any person\non the basis of race, color, or religion.\".\n(b) The amendment made by subsection (a) shall apply to taxable\nyears begining after the date of the enactment of this Act.\nSEC. 3. (a) Paragraph (2) of section 301 (g) of the Tax Reform\nAct of 1976 (relating to effective date for minimum tax provisions) is\namended to read as follows:\n\"(2) Tax CARRYOVER.\n\"(A) IN GENERAL.-Except as provided in subparagraph\n(B), the amount of any tax carryover under section 56(c)\nof the Internal Revenue Code of 1954 from a taxable year\nbeginning before January 1, 1976, shall not be allowed as a tax\ncarryover for any taxable year beginning after December 31,\n1975.\nH. R. 1144-2\n\"(B) Except as provided by paragraph (4) and in section\n56(e) of the Internal Revenue Code of 1954, in the case of\nof a corporation which is not an electing small business cor-\nporation (as defined in section 1371 (b) of such Code) or a\npersonal holding company (as defined in section 524 of such\nCode), the amount of any tax carryover under section 56(c)\nof such Code from a taxable year beginning before July 1,\n1976, shall not be allowed as a tax carryover for any taxable\nyear beginning after June 30, 1976.\".\n(b) The amendments made by subsection (a) shall take effect on\nthe date of the enactment of the Tax Reform Act of 1976.\nSEC. 4. (a) The Secretary of the Treasury, in cooperation with the\nAdministrator of the Environmental Protection Agency, shall make a\nthorough and complete study and investigation of all provisions of the\nInternal Revenue Code of 1954 which currently impede or discourage\nthe recycling of solid waste materials, and shall determine what actions\nCongress may take under the internal revenue laws to increase and\nencourage the recycling of solid waste materials.\n(b) The Secretary of the Treasury shall report his findings, together\nwith specific legislative proposals and detailed revenue cost estimates,\nto the President and to the Congress at the earliest practicable date,\nbut not later than six months after the date of the enactment of this\nAct.\nSpeaker of the House of Representatives.\nVice President of the United States and\nPresident of the Senate."
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