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1976/10/20 HR1144 Tax Code Amendments and Study of Tax Incentives for Recycling
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1976/10/20 HR1144 Tax Code Amendments and Study of Tax Incentives for Recycling
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The original documents are located in Box 67, folder "1976/10/20 HR1144 Tax Code
Amendments and Study of Tax Incentives for Recycling" of the White House Records
Office: Legislation Case Files at the Gerald R. Ford Presidential Library.
Copyright Notice
The copyright law of the United States (Title 17, United States Code) governs the making of
photocopies or other reproductions of copyrighted material. Gerald R. Ford donated to the United
States of America his copyrights in all of his unpublished writings in National Archives collections.
Works prepared by U.S. Government employees as part of their official duties are in the public
domain. The copyrights to materials written by other individuals or organizations are presumed to
remain with them. If you think any of the information displayed in the PDF is subject to a valid
copyright claim, please contact the Gerald R. Ford Presidential Library.
Exact duplicates within this folder were not digitized.
Digitized from Box 67 of the White House Records Office Legislation Case Files at the Gerald R. Ford Presidential Library
ACT201978
$10/20/76
THE WHITE HOUSE
ACTION
WASHINGTON
Last Day: October 20
October 19, 1976
MEMORANDUM FOR
THE PRESIDENT
FROM:
10/21/76
Posted
JIM CANNON AntiDuern
SUBJECT:
H.R. 1144 - Tax Code Amendments and
Study of Tax Incentives for Recycling
Attached for your consideration is H.R. 1144, sponsored by
archros 01/0/196
Representative Waggonner.
Under current tax law, social clubs, fraternities and similar
organizations are tax-exempt provided (1) they are organized
and operated "exclusively" for pleasure, recreation and
other non-profit purposes, and (2) no part of their net
earnings inures to the benefit of any particular shareholder.
The enrolled bill would:
-- substitute, in lieu of the "exclusive" criterion, the
requirement that "substantially all" of a social club's
activities must be for non-profit purposes.
-- disallow the corporate dividends received deduction in
the case of tax-exempt social clubs, voluntary employees'
benefit associations and taxable membership organizations
in computing their taxable investment income.
-- deny tax-exempt status to organizations which have a
written policy of discrimination on the basis of race,
color or religion.
-- amend the Tax Reform Act of 1976 to delay the effective
date of the repeal of the tax carry-over provision of the
minimum tax for corporations from taxable years beginning
after December 31, 1975 to taxable years beginning after
June 30, 1976.
2
---
require the Secretary of the Treasury, in cooperation
with the Administrator of the Environmental Protection
Agency, to study and report on the effect of tax
provisions on recycling solid waste materials.
A detailed discussion of the provisions of the enrolled bill
is provided in OMB's enrolled bill report at Tab A.
OMB, Max Friedersdorf, Counsel's Office (Lazarus) and I
recommend approval of the enrolled bill.
RECOMMENDATION
That you sign H.R. 1144 at Tab B.
OF THE
EXECUTIVE OFFICE OF THE PRESIDENT
UNITED
OFFICE OF MANAGEMENT AND BUDGET
DESUTIVE
STATES
WASHINGTON, D.C. 20503
OCT 14 1976
MEMORANDUM FOR THE PRESIDENT
Subject: Enrolled Bill H.R. 1144 - Tax Code Amendments and
Study of Tax Incentives for Recycling
Sponsor - Rep. Waggonner (D) Louisiana
Last Day for Action
October 20, 1976 - Wednesday
Purpose
Allows tax-exempt social clubs to earn limited income
from nonmember sources; clarifies that the corporate
dividends received deduction may not be taken by such
organizations; disallows tax-exempt status to social
clubs if they discriminate on the basis of race, color,
or religion; amends the minimum tax provisions of the
Tax Reform Act of 1976; and requires the Secretary of
the Treasury, in cooperation with the Administrator of
the Environmental Protection Agency, to study and report
on the effect of tax provisions on recycling solid waste
materials.
Agency Recommendations
Office of Management and Budget
Approval
Department of the Treasury
Approval
Environmental Protection Agency
No objection
Department of Justice
Defers to Treasury
United States Commission on
Civil Rights
No comment
2
Discussion
Tax Treatment of Social Clubs
Under current tax law, social clubs, fraternities and
similar organizations are tax-exempt provided (1) they
are organized and operated "exclusively" for pleasure,
recreation and other non-profit purposes, and (2) no
part of their net earnings inures to the benefit of
any particular shareholder. As a practical matter, the
Internal Revenue Service has generally not disturbed a
social club's tax-exempt status if its income from
outside sources is not more than the higher of $2500
or 5 percent of the total gross receipts of the organization.
The enrolled bill would substitute, in lieu of the
"exclusive" criterion, the requirement that "substantially
all" of a social club's activities must be for non-profit
purposes. The effect of this change would be to allow
social clubs to receive up to 25 percent of their annual
gross receipts (including investment income) from
sources outside their membership without losing their
tax-exempt status. However, such nonmember income,
including investment income, would still be subject
to tax under the unrelated income tax provisions of the
Tax Reform Act of 1969.
The bill would also disallow the corporate dividends
received deduction in the case of tax-exempt social clubs,
voluntary employees' benefit associations and taxable
membership organizations in computing their taxable
investment income; this would resolve questions raised
regarding IRS treatment of dividend income received
by such organizations. Treasury supports these two
provisions of the bill, which would result in a revenue
gain of about $100,000 per year.
Another provision of the bill would deny tax-exempt status
to organizations which have a written policy of discrimi-
nation on the basis of race, color, or religion. About
one-quarter of the 40,000 tax-exempt social clubs are
organized on the basis of a common bond of religion or
ethnic origin. There is no apparent reason for
discouraging social clubs organized on such a basis.
The consequences of denying tax-exempt status to these
3
social clubs would be to compel them to file corporate
tax returns. Since such clubs would seldom, if ever,
have any taxable net income, the practical effect would
simply be an increased paperwork burden imposed on
both the clubs and the Internal Revenue Service. How-
ever, the attached Treasury views letter notes that the
determination of whether an organization has a written
policy of discrimination does not, in the view of IRS,
present significant problems of administration.
Tax Reform Act Amendments
The bill would amend the Tax Reform Act of 1976 to delay
the effective date of the repeal of the tax carry-over
provision of the minimum tax for corporations from
taxable years beginning after December 31, 1975, to
taxable years beginning after June 30, 1976. Treasury
supports this provision, noting that a delay in the
effective date is warranted because of the hardship
(lack of notice) that would otherwise be inflicted
on affected taxpayers.
Study of Tax Incentives for Recycling
In cooperation with the Administrator of the Environmental
Protection Agency, the Secretary of Treasury would have
to study and report to the President and the Congress,
within six months of the bill's enactment, on all provisions
of the Tax Code which impede or discourage the recycling
of solid waste materials. The Secretary's report shall
include detailed revenue cost estimates and specific
legislative proposals to encourage such recycling.
Treasury states that it has no objection to this provision,
but notes that the Department has "already studied the
role of tax incentives in encouraging the recycling of
solid waste and have found them to be costly and
ineffec-
tive. A further study of the tax incentives for recycling
is not likely to change these findings."
Director James T. Lynn
Enclosures
Signed - 10/20
EXECUTIVE OFFICE OF THE PRESIDENT
OFFICE OF MANAGEMENT AND BUDGET
WASHINGTON, D.C. 20503
OCT 14 1976
MEMORANDUM FOR THE PRESIDENT
Subject: Enrolled Bill H.R. 1144 - Tax Code Amendments and
Study of Tax Incentives for Recycling
Sponsor - Rep. Waggonner (D) Louisiana
Last Day for Action
October 20, 1976 - Wednesday
Purpose
Allows tax-exempt social clubs to earn limited income
from nonmember sources; clarifies that the corporate
dividends received deduction may not be taken by such
organizations; disallows tax-exempt status to social
clubs if they discriminate on the basis of race, color,
or religion; amends the minimum tax provisions of the
Tax Reform Act of 1976; and requires the Secretary of
the Treasury, in cooperation with the Administrator of
the Environmental Protection Agency, to study and report
on the effect of tax provisions on recycling solid waste
materials.
Agency Recommendations
Office of Management and Budget
Approval
Department of the Treasury
Approval
Environmental Protection Agency
No objection
Department of Justice
Defers to Treasury
United States Commission on
Civil Rights
No comment
THE WHITE HOUSE
ACTION MEMORANDUM
WASHINGTON
LOG NO.:
Date:
Time:
October 15
1245pm
FOR ACTION:
Paul Leach an
CC (for information):
Jack Marsh
Bill Seidman
n
Ed Schmults
Max Friedersdorf on
Bobbie Kilberg
on
Steve Mike Duval McConahey degr
Alan Greenspan approval
FROM THE STAFF SECRETARY
DUE: Date:
October 16
Time:
930am
SUBJECT:
H.R.1144-Tax Code Amendments and Study of
Tax Incentives for Recycling
ACTION REQUESTED:
For Necessary Action
For Your Recommendations
Prepare Agenda and Brief
Draft Reply
X
For Your Comments
Draft Remarks
REMARKS:
please return to judyjjohnston,gronnd floor west wing
PLEASE ATTACH THIS COPY TO MATERIAL SUBMITTED.
If you have any questions or if you anticipate a
delay in submitting the required material, please
K. R. COLE, JR.
telephone the Staff Secretary immediately.
For the President
OF
THE
TREASURY
DEPARTMENT OF THE TREASURY
THE
WASHINGTON, D.C. 20220
1789
ASSISTANT SECRETARY
OCT 07 1976
Dear Sir:
This is in response to your request for the views of
the Treasury Department on the enrolled bill H.R. 1144.
Section one of the enrolled bill would amend section
501 (c) (7) of the Internal Revenue Code of 1954, as amended
("Code"). Under existing law a social club is exempt from
taxation if it is "organized and operated exclusively for
pleasure, recreation, and other nonprofitable purposes, no
part of the net earnings of which inures to the benefit of
any private shareholder." (Emphasis added.) H.R. 1144
amends Code section 501 (c) (7) to provide an exemption from
taxation for a social club "organized for pleasure, recrea-
tion, and other nonprofitable purposes, substantially all
of the activities of which are for such purposes and no part
of the net earnings of which inures to the benefit of any
private shareholder. " (Emphasis added.) The Treasury
Department has supported this provision since it makes clear
that social clubs may receive some outside income, including
investment income, without suffering the loss of their tax-
exempt status.
Section one of the enrolled bill also denies the inter-
corporate dividends received deduction to voluntary employees'
beneficiary associations described in Code section 501 (c) (9)
and to tax-exempt social clubs described in Code section
501 (c) (7) in computing their "unrelated business income",
that is, their taxable investment income, and denies such
deduction to taxable social clubs or other membership organ-
izations operated primarily to furnish services or goods to
members. The Treasury Department has also supported these
provisions.
Section two of the enrolled bill provides that organiza-
tions which have a written policy of discrimination on the
basis of race, color or religion would lose their tax-exempt
status under Code section 501 (c) (7). The Treasury Department
has opposed this provision since approximately one-quarter of
the 40,000 social clubs, which are exempt under Code section
501 (c) (7), are organized on the basis of a common bond of
- 2 -
religion or ethnic origin. There is no apparent reason to
discourage social clubs organized on the basis of a common
bond. The practical consequences of denying tax-exempt
status to social clubs would be that they would have to file
corporate tax returns. Since such clubs would seldom, if
ever, have any taxable net income, paperwork burdens would
be imposed on both the clubs and the Internal Revenue Service.
However, we have been advised by the Internal Revenue Service
that the determination of whether an organization has a
written policy of discrimination does not present significant
problems of administration.
Section three of the enrolled bill amends section (g)
of H.R. 10612, the Tax Reform Act of 1976, relating to the
effective date of the elimination of the tax carryover
allowed under present law. Under H.R. 10612 the carryover
of unused regular taxes provided by Code section 56 (c) from
a taxable year beginning before January 1, 1976 shall not be
allowed as a tax carryover for any taxable year beginning
after December 31, 1975. Section three of H.R. 1144 changes
this effective date in the case of corporations which are
not electing subchapter S corporations from December 31, 1975
to June 30, 1976. Thus, in the case of such corporations the
amount of any tax carryover under Code section 56 (c) from a
taxable year beginning before July 1, 1976 shall not be
allowed as a tax carryover for any taxable year beginning
after June 30, 1976. The Treasury Department believes that
section three of the enrolled bill is meritorious. The
corporate minimum tax amendments of H.R. 10612 were adopted
by the Senate on June 24, 1976 as part of a floor amendment.
The January 1, 1976 effective date would work a hardship on
those taxpayers who had entered into transactions on the
basis of then existing law. It was only after the June 24,
1976 decision of the Senate that taxpayers were put on
notice that amendment of the corporate minimum tax was anti-
cipated.
Section four of the enrolled bill provides that the
Secretary of the Treasury, in cooperation with the Adminis-
trator of the Environmental Protection Agency, shall make a
study of all provisions of the Code which currently impede
or discourage the recycling of solid waste materials, and
shall determine what actions Congress may take under the
internal revenue laws to increase and encourage the recycling
of solid waste materials. The study must be submitted to
the President and the Congress "at the earliest practicable
date, but not later than six months after the date of the
enactment of this Act." The Treasury Department has no ob-
jection to this provision. We have already studied the role
- 3 -
of tax incentives in encouraging the recycling of solid waste
and have found them to be very costly and, in our opinion,
ineffective. A further study of the tax incentives for re-
cycling is not likely to change these findings.
The Treasury Department recommends that the President
approve H.R. 1144.
Sincerely yours,
Chances m- Walhen
Charles M. Walker
Assistant Secretary
Director, Office of Management and Budget
Attention: Assistant Director for Legislative
Reference, Legislative Reference
Division
Washington, D. C. 20503
UNITED PROTECTION STATES. AGENCY
UNITED STATES ENVIRONMENTAL PROTECTION AGENCY
WASHINGTON, D.C. 20460
OCT 12 1976
OFFICE OF THE
ADMINISTRATOR
Dear Mr. Lynn:
This is in response to your request of October 5, 1976,
for the Environmental Protection Agency's views and comments
on H.R. 1144, an enrolled bill to amend section 501 (c) (7) of
the Internal Revenue Code of 1954.
Section 4 of this bill provides that the Secretary of
the Treasury, in cooperation with the Administrator of the
EPA, shall survey and study all provisions of the Internal
Revenue Code of 1954 which inhibit resource recovery and
conservation and determine what methods under the tax code
may be used to enhance the recycling of solid waste materials.
Not later than six months after enactment the Secretary would
report the conclusions of this study, together with legis-
lative proposals and revenue cost estimates, to the President
and the Congress.
Other provisions of H.R. 1144 amend the Code to
provide that the deductions allowed under sections 243, 244,
and 245 shall be treated as not directly connected with the
production of gross income, that deductions relating to
dividends received by corporations shall be disallowed to
organizations to which the provisions apply, that non-
profitable organizations shall not be tax-exempt if they
practice discrimination, and that certain tax carryovers
will be disallowed. We defer comment to the Department of
the Treasury and other concerned agencies on these provisions.
With regard to section 4, we support the policy study
requirement of the provision. We believe that a resolution
of the conflict over whether current tax policy should be
modified to ensure a more efficient use of resources is
long overdue. EPA and the Department of the Treasury
have already given some consideration to tax obstacles to
recycling and resource recovery.
2
The Environmental Protection Agency has no objection
to this bill being signed by the President.
Sincerely yours,
John Russell Administrator 2 warles E. Train
Honorable James T. Lynn
Director, Office of Management
and Budget
Washington, D.C.
20503
ASSISTANT ATTORNEY GENERAL
LEGISLATIVE AFFAIRS
Department of Justice
Washington, D.C. 20530
October 6, 1976
Honorable James T. Lynn
Director, Office of
Management and Budget
Washington, D. C. 20503
Dear Mr. Lynn:
In compliance with your request, I have examined a facsimile of the
enrolled bill (H.R. 1144) "To amend the Internal Revenue Code of 1954
with respect to the tax treatment of social clubs and certain other
membership organizations, to provide for a study of tax incentives for
recycling, and for other purposes."
The bill would modify in two respects the requirements which a social
club must meet in order to qualify for tax-exempt status. First, Section
501(c)(7) of the Code would be amended to require that "substantially all"
of the activities are for pleasure, recreation and other nonprofitable
purposes. The present statute requires that the organization be organized
and operated "exclusively" for those purposes. While the amendment would
permit social clubs to engage in a greater amount of nonexempt activities
without risking their exempt status, it appears to be justifiable in view
of the provisions of the Tax Reform Act of 1969 which expanded the reach
of the tax on unrelated business income.
Second, the bill would deny exempt status to a social organization if
its charter, bylaws, or other governing instrument or any written policy
statement of the organization includes a provision which provides for
discrimination on the basis of race, color or religion. In McGlotten V.
Connally, 338 F. Supp. 448 (D.C. D.C., 1972), the Court held that the
present statutory scheme was not unconstitutional by reason of failing to
tax discrimination by Section 501(c) (7) organizations. The stated purpose
of the amendment is that "it is inappropriate for a social club or similar
organization described in Sections 501(c) (7) to be exempt from income
taxation if its written policy is to discriminate. * * *." H. Rep.
No. 94-1353, supra, P. 8. This limited modification of the existing
statutory scheme is desirable.
The bill would deny corporate dividends received deductions to exempt
social clubs (for purposes of computing unrelated business income) and
nonexempt social and membership organizations. These amendments were
apparently drafted at the suggestion of the Department of the Treasury.
We agree that the current provisions, which allow such deductions, are
undesirable, and that their amendment is desirable.
AMERICAN REVOLUTION INTENTENNAL
1776 1976
- 2 -
The bill also includes two provisions nongermane to the main thrust
of the legislation. One of these provisions modifies the effective
date provisions contained in Section 301(g) (2) of the Tax Reform Act
of 1976, concerning the phase-out of tax carryovers for minimum tax
purposes. This amendment appears to extend for six months the phase-out
relative to all corporations other than Subchapter S corporations and
personal holding companies. We do not know the rationale for this
provision or whether it is intended to benefit a specific taxpayer.
The other nongermane provision would require the Secretary of the
Treasury to submit a report to the President and the Congress concerning
provisions of the Internal Revenue Code which currently impede or discourage
the recycling of solid waste materials.
In view of the two nongermane provisions of the bill, the Department of
Justice defers to the Department of the Treasury as to whether this bill
should receive Executive approval.
Michael
yours, We
Michael M. Uhlmann
Assistant Attorney General
Office of Legislative Affairs
UNITED STATES COMMISSION ON CIVIL RIGHTS
Washington, D. C. 20425
October 5, 1976
Mr. James M. Frey
Office of Management and Budget
Assistant Director for
Legislative Reference
7201 New Executive Office Bldg.
Washington, D.C. 20503
Dear Mr. Frey:
Within the last two working days, your office, in accordance with
OMB Circular A-19, has requested the views and recommendations of
the Commission on Civil Rights on five enrolled bills. The
enrolled bills are: H.R. 13367, the "State and Local Fiscal
Assistance Amendments of 1976"; H.R. 12566, the "National Science
Foundation Authorization Act, 1977"; S. 2278, the "Civil Rights
Attorney's Fees Awards Act of 1976"; H.R. 11337, amendment of
Title 13, United States Code to provide for a mid-decade census
of population and for other purposes; and H.R. 1144 which amends
the Internal Revenue Code of 1954 with respect to the tax treat-
ment of social clubs and certain other membership organizations.
Although the Commission on Civil Rights appreciates the opportunity
and recognizes its responsibility to comment on pending legislation
related to its substantive jurisdiction, I must inform you that we
cannot comply with your requests for views on the five enrolled
bills. Several of the enrolled bills involve matters which have
not been formally considered by the Commission and which cannot be
considered by the Commission within the specified two-day reply
period. Moreover, the Staff Director's absence from the office
because of previously scheduled Commission business makes it
impractical for the agency to comment within the specified period
on those bills which involve matters of established Commission
policy.
If you have any technical questions about the enrolled bills which
appropriately can be answered by Commission staff, please contact
me at 254-6626.
Sincerely,
JAMES J. LYONS
Acting Director
Congressional Liaison
REC'S
THE WHITE HOUSE
ACTION MEMORANDUM
WASHINGTON
LOG NO.:
Date:
Time:
October 15
1245pm
FOR ACTION:
Paul Leach
CC (for information):
Jack Marsh
Bill Seidman
Ed Schmults
Max Friedersdorf
Steve McConahey
Bobbie Kilberg
Mike Duval
Alan Greenspan
FROM THE STAFF SECRETARY
DUE: Date:
October 18
Time: 930am
SUBJECT:
H.R.1144-Tax Code Amendments and Study of
Tax Incentives for Recycling
ACTION REQUESTED:
For Necessary Action
For Your Recommendations
Prepare Agenda and Brief
Draft Reply
X
For Your Comments
Draft Remarks
REMARKS:
please return to judy johnston, ground floor west wing
Sign
jw3
PLEASE ATTACH THIS COPY TO MATERIAL SUBMITTED.
If you have any questions or if you anticipate a
James M. Cannon
delay in submitting the required material, please
For the President
telephone the Staff Secretary immediately.
THE WHITE HOUSE
[ORANDUM
WASHINGTON
LOG NO.:
10/15
Du
Time:
ctober 15
1245pm
FOR ACTION:
Paul Leach
CC (for information): Jack Marsh
Bill Seidman
Ed Schmults
Max Friedersdorf
Steve McConahey
Bobbie Kilberg
Mike Duval
Alan Greenspan
FROM THE STAFF SECRETARY
DUE: Date:
October 18
Time:
930am
SUBJECT:
H.R.1144-Tax Code Amendments and Study of
Tax Incentives for Recycling
ACTION REQUESTED:
For Necessary Action
For Your Recommendations
Prepare Agenda and Brief
Draft Reply
X
For Your Comments
Draft Remarks
REMARKS:
please return to judy johnston, ground floor west wing
PLEASE ATTACH THIS COPY TO MATERIAL SUBMITTED.
If you have any questions or if you anticipate a
James M. Cannon
delay in submitting the required material, please
For the Presid
telephone th Staff Secretary immediately.
THE WHITE HOUSE
ACTION MEMORANDUM
WASHINGTON
LOG NO.:
Date:
Time:
October 15
1245pm
FOR ACTION:
Paul Leach
CC (for information): Jack Marsh
Bill Seidman
Ed Schmults
Max Friedersdorf
Steve McConahey
Bobbie Kilberg
Mike Duval
Alan Greenspan
FROM THE STAFF SECRETARY
DUE: Date:
October 18
Time: 930am
SUBJECT:
H.R.1144-Tax Code Amendments and Study of
Tax Incentives for Recycling
ACTION REQUESTED:
For Necessary Action
For Your Recommendations
Prepare Agenda and Brief
Draft Reply
X
For Your Comments
Draft Remarks
REMARKS:
please return to judy johnston, ground floor west wing
No objection . -- Ken Lazarus 10/15/76
PLEASE ATTACH THIS COPY TO MATERIAL SUBMITTED.
If you have any questions or if you anticipate a
James M. Cannon
delay in submitting the required material, please
For the Presid
telephone the Staff Secretary immediately.
THE WHITE HOUSE
ACTION MEMORANDUM
WASHINGTON
LOG NO.:
Date:
Time:
October 15
1245pm
FOR ACTION:
Paul Leach
CC (for information): Jack Marsh
Bill Seidman
Ed Schmults
Max Friedersdorf
Steve McConahey
Bobbie Kilberg
Mike Duval
Alan Greenspan
FROM THE STAFF SECRETARY
DUE: Date:
October 18
Time:
930am
SUBJECT:
H.R. 1144-Tax Code Amendments and Study of
Tax Incentives for Recycling
ACTION REQUESTED:
For Necessary Action
For Your Recommendations
Prepare Agenda and Brief
Draft Reply
X
For Your Comments
Draft Remarks
REMARKS:
please return to judy johnston, ground floor west wing
Recommend approval. mep
PLEASE ATTACH THIS COPY TO MATERIAL SUBMITTED.
If you have any questions or if you antici bate a
James L. Cannon
delay in submitting the required material, please
For the President
telephone the Staff Secretary immediately.
:TION MEMORANDUM
WASHINGTON
LOG NO.:
uté:
Time:
October 15
1245pm
FOR ACTION:
Paul Leach
cc (for information):
Jack Marsh
Bill Seidman
Ed Schmults
Max Friedersdorf
George Humphreys
Steve McConahey
Bobbie Kilberg
Mike Duval
Alan Greenspan
FROM THE STAFF SECRETARY
DUE: Date:
October 18
Time:
930am
SUBJECT:
H.R.1144-Tax Code Amendments and Study of
Tax Incentives for Recycling
ACTION REQUESTED:
For Necessary Action
For Your Recommendations
Prepare Agenda and Brief
Draft Reply
x
For Your Comments
Draft Remarks
REMARKS:
please return to judy johnston, ground floor west wing
I would
PLEASE ATTACH THIS COPY TO MATERIAL SUBMITTED.
If you have any questions or if you anticipate a
James M. Cannon
delay in submitting the required material, please
;
For the President -
telephone the Staff Secretary immediately.
THE CHAIRMAN OF THE
COUNCIL OF ECONOMIC ADVISERS
WASHINGTON
October 20, 1976
MEMORANDUM FOR JAMES M. CANNON
FROM: ALAN GREENSPAN
This is in response to your request for the views of
the Council of Economic Advisers on enrolled bill H. R. 1144
"to amend the Internal Revenue Code of 1954 and to provide
for a study of tax incentives for recycling."
This bill would:
(1) allow tax-exempt social clubs to receive up to
25% of their income outside their membership
with such income being subject to tax;
(2) disallow the corporate dividend deduction now
available to tax exempt social clubs;
(3) disallow tax-exempt status to social clubs which
discriminate on the basis of race, color, or
religion;
(4) delay the effective date by six months of a
provision contained in the Tax Reform Act of
1976 relating to the minimum tax paid by corpora-
tions; and
(5) require the Treasury Department and the Environ-
mental Protection Agency to report on any disin-
centive effects the current tax code may have on
the recycling of solid waste materials.
The Council of Economic Advisers recommends that the
President sign H. R. 1144.
REVOLUTION
AMERICAN
BICENTENNIAL
7776-1976
94TH CONGRESS
HOUSE OF REPRESENTATIVES
2d Session
~
REPORT
No. 94-1353
TAX TREATMENT OF SOCIAL CLUBS AND OTHER
MEMBERSHIP ORGANIZATIONS
JULY 21, 1976.-Committed to the Committee of the Whole House on the State
of the Union and ordered to be printed
Mr. ULLMAN, from the Committee on Ways and Means,
submitted the following
REPORT
[To accompany H.R. 1144]
The Committee on Ways and Means, to whom was referred the bill
(H.R. 1144) to amend the Internal Revenue Code of 1954 with re-
spect to the tax treatment of social clubs and certain other member-
ship organizations, having considered the same, reports favorably
thereon with an amendment and recommends that the bill as amended
do pass.
The amendment is as follows:
Page 2, strike out line 15 and all that follows down through line 18,
and insert:
(d) The amendments made by this section shall apply to
taxable years beginning after the date of the enactment of
this Act.
SEC. 2. (a) Section 501 of the Internal Revenue Code of
1954 (relating to exemption from tax on corporations, certain
trusts, etc.) is amended by redesignating subsection (g) as
subsection (h) and by inserting after subsection (f) the fol-
lowing new subsection:
(g) PROHIBITION OF DISCRIMINATION BY CERTAIN SOCIAL
CLUBs.-Notwithstanding subsection (a), an organization
which is described in subsection (c) (7) shall not be exempt
from taxation under subsection (a) for any taxable year if,
at any time during such taxable year, the charter, bylaws, or
other governing instrument, of such organization or any
written policy statement of such organization contains a pro-
vision which provides for discrimination against any person
on the basis of race, color, or religion."
(b) The amendment made by subsection (a) shall apply to
taxable years beginning after the date of the enactment of
this Act.
57-006
3
clubs, certain fraternities and sororities, and employees' beneficiary
if the club's annual income from outside sources either is not more
than $2,500 or is not more than 5 percent of the total gross receipts
of the organization. Where gross receipts from nonmember dealings
I. SUMMARY
exceed this 5-percent figure, all facts and circumstances are taken
into account in determining whether the organization continues to
This bill amends the requirements for tax exemption for social clubs
qualify for exempt status. In the case of investment income, the
and similar organizations (including college fraternities and sorori-
Service applies no percentage rule, but instead looks to whether a
ties) in two respects. First, the bill provides that "substantially all"
substantial part of the club's income is from investment sources
of such an organization's activities must be for pleasure, recreation,
club's exempt status solely on the basis of its nonmember activities
and other nonprofitable purposes. This change (present law requires
(Rev. Rul. 66-149, 1966-1 CB 146).
such an organization to be organized and operated "exclusively" for
Reasons for change
these purposes) allows the organization to earn income from nonmem-
In the Revenue Act of 1950, because of the competitive problem with
ber sources to a limited extent and to have a limited amount of invest-
taxable businesses, Congress imposed the regular income tax on the
ment income (both types of income being subject to tax) without losing
income certain tax-exempt organizations receive from active business
its general exemption from income tax. The second change made by
enterprises which are unrelated to their exempt purposes. Social clubs,
this bill provides that such an organization is to lose its tax-exempt
national organizations of college fraternities and sororities, and cer-
status if its charter, by-laws, or other governing instrument or any
tain other types of tax-exempt organizations were not subjected to
of its written policy statements contains a provision which provides
the unrelated business income tax imposed at that time.
for discrimination against any person on the basis of race, color, or
In its consideration of the Tax Reform Act of 1969, however, be-
religion.
cause many of the exempt organizations not subject to the unrelated
In addition, the bill resolves a question about the corporate divi-
business income tax were engaging in substantial business activity,
dends-received deduction in the case of organizations which are gen-
Congress extended the unrelated business income tax to virtually all
erally exempt but which nevertheless are taxed on their investment
of the exempt organizations not already subject to that tax. As a re-
income. It disallows this deduction in computing the taxable invest-
sult, social clubs and national organizations of college fraternities and
ment income of social clubs and similar organizations, and of employee
sororities became taxable on all of their unrelated business income.
beneficiary associations. Similarly, the bill denies the dividends re-
In addition, the 1969 Act extended the unrelated business income
ceived deduction for investment income of taxable membership
tax, in the case of these social clubs and national organizations of
organizations.
college fraternities and sororities, to cover investment income as well
II. GENERAL STATEMENT
as unrelated business income. Investment income was made taxable
in the case of these membership organizations because not to do SO
1. Income From Nonmembers And Investment Sources (subsec.
would have permitted them to provide recreational or social facilities
(a) of the bill and sec. 501(c)(7) of the Code)
and services out of revenues other than membership fees and as a
Present law
result would have permitted individuals to devote investment income,
Among the present law categories of exempt organizations are social
free of tax, to personal activities.
clubs and other somewhat similar nonprofit organizations, such as
Because of the personal nature of these organizations, the Internal
national organizations of college fraternities and sororities. Present
Revenue Service in prior years developed the 5-percent test referred
law (sec. 501 (c) (7)) provides that these organizations must be orga-
to above in determining whether a social club was properly exempt
nized and operated exclusively for pleasure, recreation, and other non-
from tax. Not to have significantly limited the income which could be
profitable purposes with no part of the net earnings inuring to the
derived from nonmembers, under the conditions prevailing at that
benefit of any private shareholder. The regulations under this pro-
time, would have resulted in nontaxed income being devoted to the
vision (Regs. § 1.501 (c) (7)-1(b)) state that a club which engages in
personal, recreational, or social benefit of the members of these clubs.
business is not organized and operated exclusively for nonprofitable
However, since the passage of the 1969 Act, this strict line of de-
purposes and, therefore, is not exempt.
marcation between the exempt and nonexempt activities of social clubs
Generally, the Internal Revenue Service has not challenged the
appears unnecessary. Since the passage of the 1969 Act all of the
exempt status of these organizations if the income derived from pro-
income derived from nonmembers as well as investment income is sub-
viding goods and services to persons other than members and their
ject to tax, even though the organization itself is still classified as an
guests is small in relation to the total activities of the organization.
exempt organization. Thus, while it is necessary to require that a social
Thus, as an audit standard (Rev. Proc. 71-17, 1971-1 CB 683),
club must still be substantially devoted to the personal, recreational,
the Service has indicated that it generally will not disturb a social
or social benefit of members, the extent to which such a club can obtain
income from nonmember sources can be somewhat liberalized. In view
(2)
of these considerations your committee's bill clarifies existing law to
4
5
permit somewhat larger amounts of income to be derived by exempt
percent allowances, income from the active conduct of businesses not
social clubs from nonmembers and also from investment income
traditionally carried on by these organizations.
sources.
Your committee intends that a social club, national organization of
Explanation of provision
a college fraternity or sorority, and any other organization exempt
The first amendment made by the bill substitutes for the require-
under section 501 (c) (7), may receive the full 35-percent amount of
ment of existing law that clubs which are exempt from tax under sec.
its gross receipts from investment income sources (reduced by any
501 (c) (7) must be organized and operated "exclusively" for pleasure,
amount of nonmember income, discussed above). This means that a
recreation, and other nonprofitable purposes, the new requirement that
national organization of a college fraternity or sorority that has no
"substantially all" of such a club's activities must be for these
outside income from permitting the general public to use its facilities
may receive investment income up to the full 35-percent amount of its
purposes.¹ The effect of this change is twofold. First, it is intended to make
gross receipts. On the other hand, in the case where a social club per-
it clear that these organizations may receive some outside income,
mits nonmembers to use its club facilities and receives 15 percent of
including investment income, without losing their exempt status. Sec-
its gross receipts from these nonmember sources, it may receive only
ond, it is intended that a social club be permitted to derive a some-
up to 20 percent of its gross receipts from investment income.
what higher level of income than was previously allowed from the
In the case of the application of the unrelated business income tax
use of its facilities or services by nonmembers without the club losing
to investment income of these organizations, present law (sec. 512
its exempt status. The decision in each case as to whether substantially
(a) (3)) exempts that income which is set aside to be used for reli-
gious, charitable, scientific, literary, educational, etc., purposes (the
all of the organization's activities are related to its exempt purposes
is to continue to be based on all the facts and circumstances. However,
purposes specified in sec. 170(c) (4)) or the reasonable cost of admin-
istration of these activities. For purposes of the 35-percent test, your
the facts and circumstances approach is to apply only if the club
committee intends that this exempt function income be included in
earns more than is permitted under the new guidelines. If the outside
both the numerator and the denominator, and if this exempt function
income is less than the guidelines permit, then the club's exempt
income causes the organization to exceed the 35-percent limit, the
status will not be lost on account of nonmember income.
organization is to lose its exempt status (unless the facts and circum-
Your committee intends that these organizations be permitted to
stances of the case warrant otherwise).
receive up to 35 percent of their gross receipts, including investment
If an organization has outside income in excess of the 35-percent
income, from sources outside of their membership without losing
limit (or 15-percent limit in the case of gross receipts derived from
their tax-exempt status. Your committee also intends that within
nonmember use of a club's facilities), all the facts and circumstances
this 35-percent amount not more than 15 percent of the gross receipts
are to be taken into account in determining whether the organization
should be derived from the use of a social club's facilities or services
qualifies for exempt status. If it is determined that the organization
by the general public. In effect, this latter modification increases from
is to lose its exempt status for that year, all of its income, even that
5 percent (current audit standard: Rev. Proc. 71-17) to 15 percent
received from its membership, is to be subject to tax in that year. In
the proportion of gross receipts a club may receive from making its
such a case the income received from the club's members (but only
club facilities available to the general public without losing its exempt
this income) could be offset by the cost of services and goods furnished
status. This also means that a club exempt from taxation described in
the members (sec. 277).
sec. 501 (c) (7) is to be permitted to receive up to 35 percent of its
gross receipts from a combination of investment income and receipts
2. Dividends Received Deduction for Exempt Social Clubs, etc.
from nonmembers SO long as the latter do not represent more than 15
(subsec. (b) of the bill and sec. 512(a)(3)(A) of the Code)
percent of total receipts.
Present law
Gross receipts are defined for this purpose as those receipts from
Generally, the tax on unrelated business income does not apply to
normal and usual activities of the club (that is, those activities they
investment income.² However, in the case of social clubs, certain fra-
have traditionally conducted) including charges, admissions, member-
ternities and sororities, and employees' beneficiary associations, "in-
ship fees, dues, assessments, investment income (such as dividends,
vestment income" is included in the tax base. This result is accom-
rents, and similar receipts), and normal recurring capital gains on
plished in the case of these organizations by defining their unrelated
investments, but excluding initiation fees and capital contributions.
business taxable income (sec. (3)) as meaning gross income
However, where a club receives unusual amounts of income, such as
(other than exempt function income) 3 less allowable deductions di-
from the sale of its clubhouse or similar facility, that income is not
rectly connected with the production of gross income (again excluding
to be included in the formula; that is, such unusual income is not to be
exempt function income).
included in either the gross receipts of the club or in the permitted 35-
or 15-percent allowances. Your committee does not intend that these
2 Section 512(b) generally excludes from the term "unrelated business taxable income"
organizations should be permitted to receive, within the 15- or 35-
passive investment income such as dividends, Interest. royalties. and capital gains.
3 Exempt function income is defined in section 512(a) (3) (B) as gross income from dues,
fees, charges, or similar amounts paid by members in connection with the purposes con-
1 The bill continues the present law requirement that no part of the net earnings of
stituting the basis for the exemption of the organization.
the organization may inure to the benefit of any private shareholder.
6
7
One of the deductions allowed corporations in the computation of
the regular corporate income tax is the dividends received deduction.
"which are directly connected with the production of the grossincome"
Generally, this allows corporations a deduction equal to 85 percent of
(again excluding exempt function income). The bill specifically pro-
dividends received from taxable domestic corporations. The proposed
vides that the corporate dividends received deduction is not to be con-
Treasury regulations on social clubs, certain fraternities and sorori-
sidered as a deduction which is "directly connected with the production
ties, and employees' beneficiary associations provide that the divi-
of gross income."
dends received deduction is not allowed for purposes of computing
3. Dividends Received Deduction for Nonexempt Membership
unrelated business taxable income for those organizations, because
Organizations (subsec. (c) of the bill and sec. 277(a) of the
that deduction is not an expense directly connected with the produc-
Code)
tion of income.
Present law
Reasons for change
Under present law (sec. 277, enacted as part of the Tax Reform Act
Treasury representatives have informed your committee that ques-
of 1969), in the case of taxable membership organizations the deduc-
tions have been raised with respect to these proposed regulations, as to
tion for expenses incurred in supplying services, facilities, or goods
whether Congress intended to disallow the dividends received deduc-
to the members is to be allowed only to the extent of the income
tion. To clarify this point the Treasury Department has requested
received from these members. This was provided in order to prevent
Congress to state specifically that the dividends received deduction is
taxable membership organizations from escaping tax on business or
not available in the case of investment income of tax-exempt social
investment income by using this income to provide services, facili-
clubs, certain fraternities and sororities, and employees' beneficiary
ties, or goods to its members at less than cost and then deducting the
associations.
loss from the membership activity against the business or investment
The major reason for the dividends received deduction is to avoid
income.
two or more corporate taxes on corporate earnings as the income is
passed from one corporation to another, in addition to taxing the
Reasons for change
same amount to individual shareholders when the earnings are paid
To the extent these organizations receive dividend income which is
out as dividends to them. In the case of social clubs, certain fraterni-
used to provide services, facilities, or goods to the members the same
ties and sororities, and employees' beneficiary associations, however,
problem arises in connection with these taxable membership organiza-
the individual income tax on shareholders does not apply, since the
tions as in the case of the tax-exempt membership organizations
dividend income received by these organizations is not distributed to
described above (sec. 2. Dividends Received Deduction for Exempt
the members. In this case since the exempt organization is in effect
Social Clubs, etc.). If the dividends received deduction were available
taking the place of the individual member for tax purposes, it seems
in the case of the tax on the membership organization (in effect pro-
appropriate that the tax apply to these organizations in much the same
viding a substitute for the dividend tax on shareholders) the second, or
manner as in the case of individual shareholders.
individual, tax on this income would be avoided in substantially the
For reasons indicated above, your committee believes that the pro-
same way as in the case of the exempt membership organizations (were
posed Treasury regulations disallowing the dividends received deduc-
the provision described above not to be added). Moreover, if nothing
tion are consistent with the intent and structure of the provision (sec.
were done in this regard in the case of taxable membership orga-
512 (a) (3)) enacted in the Tax Reform Act of 1969, which allows de-
nizations, the nontaxable organizations by revoking their exempt sta-
ductions in the case of investment income of social clubs, certain
tus could avoid the tax on this dividend income in this manner.
fraternities and sororities, and employees' beneficiary associations only
For the reasons indicated above your committee believes it is appro-
in the case of deductions directly connected with the production of
priate to disallow the dividends received deductions in the case of
income. Your committee's bill specifically clarifies this point by pro-
these taxable membership organizations in the same manner as in the
viding that in these cases the dividends received deduction is not to be
case of the tax-exempt membership organizations referred to above.
considered as directly connected with the production of gross income.
Explanation of provision
Explanation of provision
The third amendment made by this bill denies a corporate dividends
The second amendment made by this bill denies a corporate dividends
received deduction to taxable social clubs and other membership
received deduction to tax-exempt social clubs, certain fraternities and
organizations operated primarily to furnish services or goods to mem-
sororities, and voluntary employees' beneficiary associations (described
bers (referred to in sec. 277). These organizations, with certain
in secs. 501 (c) (7) and (9)) in computing their "unrelated business
exceptions set forth in present law, are permitted deductions attribut-
taxable income." Under present law the unrelated business taxable in-
able to furnishing services, insurance, goods, or other items of value
come of these organizations is defined as their gross income (excluding
to their members only to the extent of the income derived from mem-
any exempt function income) less the deductions under this chapter
bers or transactions with members. The bill specifically provides that
the corporate dividends received deduction (secs. 243, 244, and 245)
4 Proposed Reg. § 1.512(a)-3(b) (2), published on May 13, 1971 (36 Fed. Reg. 8808,
is not to be allowed to these organizations.
8809).
8
9
4. Prohibition of Discrimination by Social Clubs, etc. (sec. 2(a)
In compliance with clause 2(1) (2) (B) of Rule XI of the Rules
of the bill and new sec. (g) of the Code)
of the House of Representatives, the following statement is made
Present law
relative to the vote of the Committee on the motion to report the bill.
The Internal Revenue Code does not deal explicitly with the ques-
This bill, as amended, was ordered reported by voice vote.
tion of whether an income tax exemption for social clubs, etc. (i.e.,
organizations described in sec. 501 (c) (7) which are exempt under sec.
IV. OTHER MATTERS REQUIRED TO BE DISCUSSED
(a)), is incompatible with discrimination on account of race, color,
UNDER HOUSE RULES
or religion.
It has been held (McGlotten V. Connally, 338 F. Supp. 448 (D.C.,
In compliance with clause 2(1) (3) of Rule XI of the Rules of the
D.C. 1972)) that, in light of the present statutory scheme of income
House of Representatives, the following statements are made:
tax treatment of social clubs, etc. (including their treatment under the
With respect to subdivision (A), relating to oversight findings, it
unrelated business income tax provisions described above), discrimi-
was as a result of your committee's oversight activity concerning the
nation on account of race is not prevented under the Constitution in
effects of the Tax Reform Act of 1969 on certain types of exempt
the case of an exempt organization merely because described in section
organizations and nonexempt membership corporations that the com-
501 (c) (7).
mittee concluded that the provisions of this bill are appropriate so as
to clarify the status and tax liability of those organizations.
Reasons for change
With respect to subdivision (B), after consultation with the Direc-
Your committee concluded that it is inappropriate for a social club
tor of the Congressional Budget Office, your committee states that the
or similar organization described in section 501 (c) (7) to be exempt
changes made to existing law by this bill involve no new budget au-
from income taxation if its written policy is to discriminate on ac-
thority or new or increased tax expenditures.
count of race, color, or religion.
With respect to subdivision (C), the Director of the Congressional
Explanation of provision
Budget Office has not made an estimate or comparison of the esti-
mates of the cost of H.R. 1144 but has examined the committee's
Under the bill, an organization otherwise exempt from income tax
estimates and agrees with the methods and the dollar estimates result-
as an organization described in section 501 (c) (7) is to lose its exempt
ing therefrom.
status for any taxable year if, at any time during that year, the orga-
With respect to subdivision (D), your committee advises that no
nization's charter, by-laws, or other governing instrument, or any
written policy statement contains a provision which provides for dis-
oversight findings or recommendations have been submitted to your
crimination against any person on the basis of race, color, or religion.
committee by the Committee on Government Operations with respect
to the subject matter of H.R. 1144.
5. Effective dates (subsec. (d) of the first sec. and sec. 2(b) of
In compliance with clause 2(1) (4) of Rule XI of the Rules of the
the bill)
House of Representatives, your committee states that the enactment
The amendments made by this bill apply to taxable years beginning
of this bill is not expected to have an inflationary impact on prices
after the date of enactment of this Act.
and costs in the operation of the national economy.
The amendment as to income from nonmembers and investment
sources, and the amendments as to the corporate dividends received
deduction are clarifications of existing law under the Tax Reform Act
of 1969.
III. EFFECT OF THE BILL ON THE REVENUES AND VOTE
OF THE COMMITTEE IN REPORTING THE BILL
In compliance with clause 7 of Rule XIII of the Rules of the House
of Representatives, the following statement is made relative to the
effect of this bill on the revenues. Your committee estimates that this
bill will result in a small revenue gain, probably less than $100,000
per year. The Treasury Department agrees with this statement.
5 In that same decision, the court held that, in the case of fraternal beneficiary societies
operating under the lodge system, discrimination on account of race is inconsistent both
with such an organization's tax-exempt status (sec. 501(c)(8) this may also apply as to
sec. ((c)(10)) and also with its status as a limited charitable contribution donee (sec.
170(c)(4)).
Also, the Supreme Court has affirmed (Coit V. Green, 404 U.S. 997 (1971)) a decision
(Green V. Connally, 330 F. Supp. 1150 (D.C., D.C. 1971)) that discrimination on account
of race is inconsistent with an educational institution's tax-exempt status (sec. 501 (c) (3))
and also with its status as a charitable contribution donee (sec. 170(c)(2)).
H. Rept. 94-1353-2
11
Subchapter F-Exempt Organizations
PART I-GENERAL RULE
V. CHANGES IN EXISTING LAW MADE BY THE BILL, AS REPORTED
In compliance with clause 3 of Rule XIII of the Rules of the House
SEC. 501. EXEMPTION FROM TAX ON CORPORATIONS, CERTAIN
of Representatives, changes in existing law made by the bill, as re-
TRUSTS, ETC.
ported, are shown as follows (existing law proposed to be omitted
(a) EXEMPTION FROM TAXATION.-An organization described in
is enclosed in black brackets, new matter is printed in italics, existing
subsection (c) or (d) or section 401 (a) shall be exempt from taxation
law in which no change is proposed is shown in roman) :
under this subtitle unless such exemption is denied under section 502
or 503.
INTERNAL REVENUE CODE OF 1954
(b) TAX ON UNRELATED BUSINESS INCOME AND CERTAIN OTHER
ACTIVITIES.-An organization exempt from taxation under subsection
*
(a) shall be subject to tax to the extent provided in parts II, III, and
Subtitle A-Income Taxes
VI of this subchapter. but (notwithstanding parts II, III, and VI of
this subchapter) shall be considered an organization exempt from in-
come taxes for the purpose of any law which refers to organizations
exempt from income taxes.
CHAPTER 1-NORMAL TAXES AND SURTAXES
(c) LIST OF EXEMPT ORGANIZATIONS.-The following organizations
are referred to in subsection (a) :
(1) Corporations organized under Act of Congress, if such
*
corporations are instrumentalities of the United States and if,
Subchapter B-Computation of Taxable Income
under such Act, as amended and supplemented, such corporations
are exempt from Federal income taxes.
(2) Corporations organized for the exclusive purpose of hold-
ing title to property, collecting income therefrom, and turning
PART IX-ITEMS NOT DEDUCTIBLE
over the entire amount thereof, less expenses, to an organization
which itself is exempt under this section.
*
*
(3) Corporations, and any community chest, fund, or founda-
SEC. 277. DEDUCTIONS INCURRED BY CERTAIN MEMBERSHIP ORGA-
tion, organized and operated exclusively for religious, charitable,
NIZATIONS IN TRANSACTIONS WITH MEMBERS.
scientific, testing for public safety, literary, or educational pur-
(a) GENERAL RULE.-In the case of a social club or other member-
poses, or for the prevention of cruelty to children or animals, no
ship organization which is operated primarily to furnish services or
part of the net earnings of which inures to the benefit of any pri-
goods to members and which is not exempt from taxation, deductions
vate shareholder or individual, no substantial part of the activities
for the taxable year attributable to furnishing services, insurance,
of which is carrying on propaganda, or otherwise attempting, to
goods, or other items of value to members shall be allowed only to
influence legislation, and which does not participate in, or inter-
the extent of income derived during such year from members or trans-
vene in (including the publishing or distributing of statements),
actions with members (including income derived during such year
any political campaign on behalf of any candidate for public
office.
from institutes and trade shows which are primarily for the educa-
tion of members). If for any taxable year such deductions exceed such
(4) Civic leagues or organizations not organized for profit but
income, the excess shall be treated as a deduction attributable to
operated exclusively for the promotion of social welfare, or local
furnishing services, insurance, goods, or other items of value to mem-
associations of employees, the membership of which is limited to
bers paid or incurred in the succeeding taxable year. The deductions
the employees of a designated person or persons in a particular
provided by sections 243, 244, and 245 (relating to dividends received
municipality, and the net earnings of which are devoted exclu-
sively to charitable, educational, or recreational purposes.
by corporations) shall not be allowed to any organization to which
(5) Labor, agricultural, or horticultural organizations.
this section applies for the taxable year.
(6) Business leagues, chambers of commerce, real-estate boards,
boards of trade, or professional football leagues (whether or not
(10)
administering a pension fund for football players), not organized
for profit and no part of the net earnings of which inures to the
benefit of any private shareholder or individual.
12
13
(7) Clubs organized [and operated exclusively for pleasure, rec-
(ii) cooperative banks without capital stock organized and
reation, and other nonprofitable purposes] for pleasure, recrea-
operated for mutual purposes and without profit, or
tion, and other nonprofitable purposes, substantially all of the ac-
(iii) mutual savings banks not having capital stock repre-
tivities of which are for such purposes and no part of the net earn-
sented by shares.
ings of which inures to the benefit of any private shareholder.
(C) Corporations or associations organized before September 1,
(8) Fraternal beneficiary societies, orders, or associations—
1957, and operated for mutual purposes and without profit for the
(A) operating under the lodge system or for the exclusive
purpose of providing reserve funds for associations or banks
benefit of the members of a fraternity itself operating under
described in clause (i), (ii), or (iii) of subparagraph (B) ; but
the lodge system, and
only if 85 percent or more of the income is attributable to provid-
(B) providing for the payment of life, sick, accident, or
ing such reserve funds and to investments. This subparagraph
other benefits to the members of such society, order, or asso-
shall not apply to any corporation or association entitled to
ciation or their dependents.
exemption under subparagraph (B).
(9) Voluntary employees' beneficiary associations providing for
(15) Mutual insurance companies or associations other than
the payment of life, sick, accident, or other benefits to the members
life or marine (including interinsurers and reciprocal underwrit-
of such association or their dependents or designated beneficiaries,
ers) if the gross amount received during the taxable year from the
if no part of the net earnings of such association inures (other
items described in section 822 (b) (other than paragraph (1) (D)
than through such payments) to the benefit of any private share-
thereof) and premiums (including deposits and assessments) does
holder or individual.
not exceed $150,000.
(10) Domestic fraternal societies, orders, or associations, operat-
(16) Corporations organized by an association subject to part
ing under the lodge system—
IV of this subchapter or members thereof, for the purpose of fi-
(A) the net earnings of which are devoted exclusively to
nancing the ordinary crop operations of such members or other
religious, charitable, scientific, literary, educational, and fra-
producers and operated in conjunction with such association. Ex-
ternal purposes, and
emption shall not be denied any such corporation because it has
(B) which do not provide for the payment of life, sick, ac-
capital stock, if the dividend rate of such stock is fixed at not to
cident, or other benefits.
exceed the legal rate of interest in the State of incorporation or 8
(11) Teachers' retirement fund associations of a purely local
percent per annum, whichever is greater, on the value of the con-
character, if-
sideration for which the stock was issued, and if substantially all
(A) no part of their net earnings inures (other than
such stock (other than nonvoting preferred stock, the owners of
through payment of retirement benefits) to the benefit of any
which are not entitled or permitted to participate, directly or indi-
private shareholder or individual, and
rectly, in the profits of the corporation, on dissolution or other-
(B) the income consists solely of amounts received from
wise, beyond the fixed dividends) is owned by such association, or
public taxation, amounts received from assessments on the
members thereof; nor shall exemption be denied any such corpo-
teaching salaries of members, and income in respect of
ration because there is accumulated and maintained by it a reserve
investments.
required by State law or a reasonable reserve for any necessary
(12) Benevolent life insurance associations of a purely local
purpose.
character, mutual ditch or irrigation companies, mutual or co-
(17) (A) A trust or trusts forming part of a plan providing for
operative telephone companies, or like organizations; but only if
the payment of supplemental unemployment compensation bene-
85 percent or more of the income consists of amounts collected
fits, if-
from members for the sole purpose of meeting losses and expenses.
(i) under the plan, it is impossible, at any time prior to the
(13) Cemetery companies owned and operated exclusively for
satisfaction of all liabilities with respect to employees under
the benefit of their members or which are not operated for profit;
the plan, for any part of the corpus or income to be (within
and any corporation chartered solely for the purpose of the dis-
the taxable year or thereafter) used for, or diverted to, any
posal of bodies by burial or cremation which is not permitted by its
purpose other than the providing of supplemental unemploy-
charter to engage in any business not necessarily incident to that
ment compensation benefits,
purpose, no part of the net earnings of which inures to the bene-
(ii) such benefits are payable to employees under a classifi-
fit of any private shareholder or individual.
cation which is set forth in the plan and which is found by the
(14) (A) Credit unions without capital stock organized and
Secretary or his delegate not to be discriminatory in favor of
operated for mutual purposes and without profit.
employees who are officers, shareholders, persons whose prin-
(B) Corporations or associations without capital stock orga-
cipal duties consist of supervising the work of other employ-
nized before September 1, 1957, and operated for mutual purposes
ees, or highly compensated employees, and
and without profit for the purpose of providing reserve funds for,
(iii) such benefits do not discriminate in favor of employ-
and insurance of, shares or deposits in-
ees who are officers, shareholders, persons whose principal
(i) domestic building and loan associations,
duties consist of supervising the work of other employees, or
14
15
highly compensated employees. A plan shall not be considered
(A) under the plan, it is impossible, at any time prior to
discriminatory within the meaning of this clause merely be-
the satisfaction of all liabilities with respect to employees
cause the benefits received under the plan bear a uniform rela-
under the plan, for any part of the corpus or income to be
tionship to the total compensation, or the basic or regular
(within the taxable year or thereafter) used for, or diverted
rate of compensation, of the employees covered by the plan.
to, any purpose other than the providing of benefits under the
(B) In determining whether a plan meets the requirements of
plan.
subparagraph (A), any benefits provided under any other plan
(B) such benefits are payable to employees under a classi-
shall not be taken into consideration, except that a plan shall not
fication which is set forth in the plan and which is found
be considered discriminatory-
by the Secretary or his delegate not to be discriminatory in
(i) merely because the benefits under the plan which are
favor of employees who are officers, shareholders, persons
first determined in a nondiscriminatory manner within the
whose principal duties consist of supervising the work of
meaning of subparagraph (A) are then reduced by any sick,
other employees, or highly compensated employees, and
accident, or unemployment compensation benefits received
(C) such benefits do not discriminate in favor of employees
under State or Federal law (or reduced by a portion of such
who are officers, shareholders, persons whose principal duties
benefits if determined in a nondiscriminatory manner), or
consist of supervising the work of other employees, or highly
(ii) merely because the plan provides only for employees
compensated employees. A plan shall not be considered dis-
who are not eligible to receive sick, accident, or unemploy-
criminatory within the meaning of this subparagraph merely
ment compensation benefits under State or Federal law the
because the benefits received under the plan bear a uniform
same benefits (or a portion of such benefits if determined in
relationship to the total compensation, or the basic or regular
a nondiscriminatory manner) which such employees would
rate of compensation. of the employees covered by the plan.
receive under such laws if such employees were eligible for
(19) A post or organization of war veterans, or an auxiliary
such benefits, or
unit or society of, or a trust or foundation for, any such post or
(iii) merely because the plan provides only for employees
organization-
who are not eligible under another plan (which meets the
(A) organized in the United States or any of its
requirements of subparagraph (A)) of supplemental unem-
possessions,
ployment compensation benefits provided wholly by the em-
(B) at least 75 percent of the members of which are war
ployer the same benefits (or a portion of such benefits if
veterans and substantially all of the other members of which
determined in a nondiscriminatory manner) which such
are individuals who are veterans (but not war veterans), or
employees would receive under such other plan if such em-
are cadets, or are spouses, widows, or widowers of war vet-
ployees were eligible under such other plan, but only if the
erans of such individuals, and
employees eligible under both plans would make a classifica-
(C) no part of the net earnings of which inures to the bene-
tion which would be nondiscriminatory within the meaning
fit of any private shareholder or individual.
of subparagraph (A).
(d) RELIGIOUS AND APOSTOLIC ORGANIZATIONS.-The following or-
(C) A plan shall be considered to meet the requirements of sub-
ganizations are referred to in subsection (a) Religious or apostolic as-
paragraph (A) during the whole of any year of the plan if on
sociations or corporations, if such associations or corporations have a
one day in each quarter it satisfies such requirements.
common treasury or community treasury, even if such associations or
(D) The term "supplemental unemployment compensation
corporations engage in business for the common benefit of the mem-
benefits" means only-
bers, but only if the members thereof include (at the time of filing
(i) benefits which are paid to an employee because of his
their returns) in their gross income their entire pro rata shares,
involuntary separation from the employment of the employer
whether distributed or not, of the taxable income of the association
(whether or not such separation is temporary) resulting di-
or corporation for such year. Any amount SO included in the gross in-
rectly from a reduction in force, the discontinuance of a plant
come of a member shall be treated as a dividend received.
or operation, or other similar conditions, and
(e) COOPERATIVE HOSPITAL SERVICE ORGANIZATIONS.-For purposes
(ii) sick and accident benefits subordinate to the benefits
of this title, an organization shall be treated as an organization orga-
described in clause (i).
nized and operated exclusively for charitable purposes, if-
(E) Exemption shall not be denied under subsection (a) to any
(1) such organization is organized and operated solely-
organization entitled to such exemption as an association de-
(A) to perform, on a centralized basis, one or more of the
scribed in paragraph (9) of this subsection merely because such
following services which, if performed on its own behalf by a
organization provides for the payment of supplemental unemploy-
hospital which is an organization described in subsection (c)
ment benefits (as defined in subparagraph (D) (i)).
(3) and exempt from taxation under subsection (a), would
(18) A trust or trusts created before June 25, 1959, forming
constitute activities in exercising or performing the purpose
part of a plan providing for the payment of benefits under a
or function constituting the basis for its exemption; data
pension plan funded only by contributions of employees, if-
processing, purchasing. warehousing. billing and collection,
16
17
food, industrial engineering, laboratory, printing, communi-
tains a provision which provides for discrimination against any person
cations, record center, and personnel (including selection,
on the basis of race, color, or religion.
testing, training, and education of personnel) services; and
[(g)] (h) CROSS REFERENCE.-
(B) to perform such services solely for two or more hos-
For nonexemption of Communist-controlled organizations, see section 11
pitals each of which is-
(b) of the Internal Security Act of 1950 (64 Stat. 997; 50 U.S.C. 790(b)).
(i) an organization described in subsection (c) (3)
*
*
*
*
*
which is exempt from taxation under subsection (a),
(ii) a constituent part of an organization described in
PART III-TAXATION OF BUSINESS INCOME OF CERTAIN
subsection (c) (3) which is exempt from taxation under
EXEMPT ORGANIZATIONS
subsection (a) and which, if organized and operated as
a separate entity, would constitute an organization de-
scribed in subsection (c) (3), or
SEC. 512. UNRELATED BUSINESS TAXABLE INCOME.
(iii) owned and operated by the United States, a
(a) DEFINITION.-For purposes of this title—
State, the District of Columbia, or a possession of the
(1) GENERAL RULE.-Except as otherwise provided in this sub-
United States, or a political subdivision or an agency or
section, the term "unrelated business taxable income" means the
instrumentality of any of the foregoing;
gross income derived by any organization from any unrelated
(2) such organization is organized and operated on a corpora-
trade or business (as defined in section 513) regularly carried on
tive basis and allocates or pays, within 81/2 months after the close
by it, less the deductions allowed by this chapter which are
of its taxable year, all net earnings to patrons on the basis of
directly connected with the carrying on of such trade or business,
services performed for them; and
both computed with the modifications provided in subsection (b).
(3) if such organization has capital stock, all of such stock
(2) SPECIAL RULE FOR FOREIGN ORGANIZATIONS.-In the case of
outstanding is owned by its patrons.
an organization described in section 511 which is a foreign orga-
For purposes of this title, any organization which, by reason of the
nization, the unrelated business taxable income shall be
preceding sentence, is an organization described in subsection (c) (3)
(A) its unrelated business taxable income which is derived
and exempt from taxation under subsection (a), shall be treated as a
from sources within the United States and which is not effec-
hospital and as an organization referred to in section 170(b) (1) (A)
tively connected with the conduct of a trade or business
(iii).
within the United States, plus
(f) COOPERATIVE SERVICE ORGANIZATIONS OF OPERATING EDUCA-
(B) its unrelated business taxable income which is effec-
TIONAL ORGANIZATIONS.-For purposes of this title, if an organiza-
tively connected with the conduct of a trade or business
tion is—
within the United States.
(1) organized and operated solely to hold, commingle, and col-
(3) SPECIAL RULES APPLICABLE TO ORGANIZATIONS DESCRIBED IN
lectively invest and reinvest (including arranging for and su-
SECTION 501 (C) (7) OR (9)
pervising the performance by independent contractors of invest-
(A) GENERAL RULE.-In the case of an organization de-
ment services related thereto) in stocks and securities, the moneys
scribed in section 501 (c) (7) or (9), the term "unrelated
contributed thereto by each of the members of such organization,
business taxable income" means the gross income (excluding
and to collect income therefrom and turn over the entire amount
any exempt function income), less the deductions allowed
thereof, less expenses, to such members,
by this chapter which are directly connected with the pro-
(2) organized and controlled by one or more such members,
duction of the gross income (excluding exempt function in-
and
come), both computed with the modifications provided in
(3) comprised solely of members that are organizations de-
paragraphs (6), (10), (11), and (12) of subsection (b). For
scribed in clause (ii) or (iv) of section 170(b) (1) (A)-
purposes of the preceding sentence, the deductions provided
(A) which are exempt from taxation under subsection
by sections 243, 244, and 245 (relating to dividends received
(a), or
by corporations) shall be treated as not directly connected
(B) the income of which is excluded from taxation under
with the production of gross income.
section 115 (a),
(B) EXEMPT FUNCTION INCOME.-For purposes of subpara-
then such organization shall be treated as an organization organized
graph (A), the term "exempt function income" means the
and operated exclusively for charitable purposes.
gross income from dues, fees, charges, or similar amounts
(g) PROHIBITION OF DISCRIMINATION BY CERTAIN SOCIAL CLUBS.-
Ipaid by members of the organization as consideration for
Notwithstanding subsection (a), an organization which is described
providing such members or their dependents or guests goods,
in subsection (c) (7) shall not be exempt from taxation under sub-
facilities, or services in furtherance of the purposes consti-
section (a) for any taxable year if, at any time during such taxable
tuting the basis for the exemption of the organization to
year, the charter, bylaws, or other governing instrument, of such or-
which such income is paid. Such term also means all income
ganization or any written policy statement of such organization con-
(other than an amount equal to the gross income derived
18
from any unrelated trade or business regularly carried on by
such organization computed as if the organization were sub-
ject to paragraph (1)), which is set aside-
(i) for a purpose specified in section 170 (c) (4), or
(ii) in the case of an organization described in section
501 (c) (9), to provide for the payment of life, sick, acci-
dent, or other benefits,
including reasonable costs of administration directly con-
nected with a purpose described in clause (i) or (ii). If
during the taxable year, an amount which is attributable to
income SO set aside is used for a purpose other than that
described in clause (i) or (ii), such amount shall be included,
under subparagraph (A), in unrelated business taxable in-
come for the taxable year.
(C) APPLICABILITY TO CERTAIN CORPORATIONS DESCRIBED IN
SECTION 501 (C) (2) .-In the case of a corporation described
in section 501 (c) (2), the income of which is payable to an
organization described in section 501 (c) (7) or (9), subpara-
graph (A) shall apply as if such corporation were the orga-
nization to which the income is payable. For purposes of the
preceding sentence, such corporation shall be treated as hav-
ing exempt function income for a taxable year only if it files
a consolidated return with such organization for such year.
(D) NONRECOGNITION OF GAIN.-If property used directly
in the performance of the exempt function of an organiza-
tion described in section 501 (c) (7) or (9) is sold by such
organization, and within a period beginning 1 year before
the date of such sale, and ending 3 years after such date,
other property is purchased and used by such organization
directly in the performance of its exempt function, gain (if
any) from such sale shall be recognized only to the extent
that such organization's sales price of the old property ex-
ceeds the organization's cost of purchasing the other prop-
erty. For purposes of this subparagraph, the destruction in
whole or in part, theft, seizure, requisition, or condemnation
of property, shall be treated as the sale of such property,
and rules similar to the rules provided by subsections (b),
(c), (e), and (j) of section 1034 shall apply.
(4) SPECIAL RULE APPLICABLE TO ORGANIZATIONS DESCRIBED IN
SECTION 501 (c) (19).-In the case of an organization described
in section 501 (c) (19), the term "unrelated business taxable in-
come" does not include any amount attributable to payments for
life, sick, accident, or health insurance with respect to members
of such organizations or their dependents which is set aside for
the purpose of providing for the payment of insurance benefits
or for a purpose specified in section (c) (4). If an amount
set aside under the preceding sentence is used during the tax-
able year for a purpose other than a purpose described in the
preceding sentence, such amount shall be included, under para-
graph (1), in unrelated business taxable income for the taxable
year.
CORRECTED SHEET
H.R. 1144
Ainety-fourth Congress of the United States of America
AT THE SECOND SESSION
Begun and held at the City of Washington on Monday, the nineteenth day of January,
one thousand nine hundred and seventy-six
An Art
To amend the Internal Revenue Code of 1954 with respect to the tax treatment
of social clubs and certain other membership organizations, to provide for a
study of tax incentives for recycling, and for other purposes.
Be it enacted by the Senate and House of Representatives of the
United States of America in Congress assembled, That (a) section
501 (c) (7) of the Internal Revenue Code of 1954 (relating to exempt
organizations) is amended to read as follows:
"(7) Clubs organized for pleasure, recreation, and other non-
profitable purposes, substantially all of the activities of which are
for such purposes and no part of the net earnings of which inures
to the benefit of any private shareholder."
(b) Section 512(a) (3) (A) of such Code (relating to unrelated
business taxable income) is amended by adding at the end thereof the
following new sentence: "For purposes of the preceding sentence, the
deductions provided by sections 243, 244, and 245 (relating to dividends
received by corporations) shall be treated as not directly connected
with the production of gross income."
(c) Section 277 (a) of such Code (relating to deductions incurred
by certain membership organizations in transactions with members)
is amended by adding at the end thereof the following new sentence:
"The deductions provided by sections 243, 244, and 245 (relating to
dividends received by corporations) shall not be allowed to any orga-
nization to which this section applies for the taxable year."
(d) The amendments made by this section shall apply to taxable
years beginning after the date of the enactment of this Act.
SEC. 2. (a) Section 501 of the Internal Revenue Code of 1954 (relat-
ing to exemption from tax on corporations, certain trusts, etc.) is
amended by redesignating subsection (h) as subsection (i) and by
inserting after subsection (g) the following new subsection:
"(g) PROHIBITION OF DISCRIMINATION BY CERTAIN SOCIAL CLUBS.-
Notwithstanding subsection (a), an organization which is described
in subsection (c) (7) shall not be exempt from taxation under sub-
section (a) for any taxable year if, at any time during such taxable
year, the charter, bylaws, or other governing instrument, of such orga-
nization or any written policy statement of such organization contains
a provision which provides for discrimination against any person
on the basis of race, color, or religion.".
(b) The amendment made by subsection (a) shall apply to taxable
years begining after the date of the enactment of this Act.
SEC. 3. (a) Paragraph (2) of section 301 (g) of the Tax Reform
Act of 1976 (relating to effective date for minimum tax provisions) is
amended to read as follows:
"(2) Tax CARRYOVER.
"(A) IN GENERAL.-Except as provided in subparagraph
(B), the amount of any tax carryover under section 56(c)
of the Internal Revenue Code of 1954 from a taxable year
beginning before January 1, 1976, shall not be allowed as a tax
carryover for any taxable year beginning after December 31,
1975.
H. R. 1144-2
"(B) Except as provided by paragraph (4) and in section
56(e) of the Internal Revenue Code of 1954, in the case of
of a corporation which is not an electing small business cor-
poration (as defined in section 1371 (b) of such Code) or a
personal holding company (as defined in section 524 of such
Code), the amount of any tax carryover under section 56(c)
of such Code from a taxable year beginning before July 1,
1976, shall not be allowed as a tax carryover for any taxable
year beginning after June 30, 1976.".
(b) The amendments made by subsection (a) shall take effect on
the date of the enactment of the Tax Reform Act of 1976.
SEC. 4. (a) The Secretary of the Treasury, in cooperation with the
Administrator of the Environmental Protection Agency, shall make a
thorough and complete study and investigation of all provisions of the
Internal Revenue Code of 1954 which currently impede or discourage
the recycling of solid waste materials, and shall determine what actions
Congress may take under the internal revenue laws to increase and
encourage the recycling of solid waste materials.
(b) The Secretary of the Treasury shall report his findings, together
with specific legislative proposals and detailed revenue cost estimates,
to the President and to the Congress at the earliest practicable date,
but not later than six months after the date of the enactment of this
Act.
Speaker of the House of Representatives.
Vice President of the United States and
President of the Senate.