CONTRARY TO INTENT OF CONGRESS, TAX-EXEMPT ORGANIZATIONS ARE DERIVING PRINCIPAL INCOME FROM ORDINARY BUSINESS TRANSACTIONS We believe that the committee will agree with us that the original intent of the Congress in establishing the list of exempt organizations was to allow the benefit to organizations not engaged in ordinary commercial transactions. The concept appeared to us to favor only those groups not generally engaged in the marts of trade. This position is substantiated by the fact that in the Revenue Act of 1950 the Congress recognized that certain exempt organizations had turned to commercial transactions for revenue and made provision for the taxation of those commercial transactions. In that act, organizations exempt under four specific categories had subjected to taxation that part of their income derived from a trade or business, the conduct of which is not substantially related to the exercise or performance by such organization of its purposes which form the basis for the exemption. Carried forward into the present code, the tax on the unrelated business income is assessed on those organizations exempt under the provisions of section 501 (c) (2), (3), (5), and (6). Our purpose here today is to ask that this same principle of taxation be applied to organizations exempt by the provisions of section 501 c) (4), (7), and (8). We do not have access to the books and records of tax-exempt organizations, but our members, as businessmen, from personal observation have been able to establish to their own satisfaction the pattern of business engaged in by such groups. The amount of advertising for public patronage, and the actual numbers of patrons observed in the bars and dining rooms maintained by the tax exempts indicate their business operations in many cases to be their principal source of income. Their tax-free net profits from their restaurant, bar, and cabaret operations are far in excess of their annual collection of membership dues. TAXPAYING FOOD AND BEVERAGE RETAILERS CANNOT AFFORD UNFAIR COMPETITION FROM TAX-EXEMPTS Competition from the tax-exempts is difficult to meet. In many States they are able to use business stimulators, such as bingo games, which the licensed on-premise industry is denied. In many States they are not restricted as to hours of operation as is the licensed taxpaying industry. Further, from their tax-free status, their pricing pattern for both food and beverages is one that cannot be met by the licensed industry. The on-premise food-and-beverage industry is now in a squeeze between rising overhead costs and a declining patronage. From a survey made last year we know that our overhead costs are up 38 percent from what they were 8 years ago. At the same time, home television and the technological advancement in pre-prepared and ready-cooked food has reduced the number of patrons available. Our profits are on a small margin, and we must depend upon serving large numbers in order to stay in business and pay the taxes now on the books. We need the patrons which are attracted to the facilities provided and advertised by the tax-exempts. TAX-EXEMPT ORGANIZATIONS ARE ADVERTISING FOR PUBLIC PATRONAGE Our members throughout the country have complained of this competition from the tax-exempt groups and have been sending to us examples of the advertising efforts made by such groups to get public patronage. We have attempted to show a cross-section of such advertising by an exhibit which is attached to my statement. The examples which we submit were selected to show the geographic spread of such competition as well as the different types of advertising used. All examples have one thing in common-an invitation to the general public to patronize the facilities maintained by a tax-exempt organization in direct competition with a taxpaying industry of retailers. From the exhibit attached hereto it can be seen that newspaper advertising is the most common medium used. Most such advertising shows clearly that the general public is invited to use their facilities. In some cases the ads carry a notation "members and guests," but in actual practice we find the general public responding. In those ads which appear to limit patronage to members and guests no one is misled into thinking there is a limitation, since it is unreasonable to suppose that in the towns and small cities where most of this takes place it is necessary to advise their members by newspaper of the facilities and activities available to them. In many cases the advertising does not even purport to be directed to members only. For example, the exhibit contains a picture of a sign on such an establishment inviting the public to the facilities offered. In another example, a tax-exempt found it worthwhile to invite the general public by an advertisement in the "yellow pages" of the local telephone directory. When we ask the Congress to apply the Federal income tax to the unrelated business income of our tax-exempt competitors, we believe our request is fair. We do not ask that their facilities be closed, and have no objection to services rendered their members and bona fide guests of members. We ask only that when they solicit public patronage and serve the general public in competition with taxpaying retailers, they too, pay a Federal income tax on the profits they derive from that public patronage. AMENDMENTS NECESSARY SECTIONS 511, 512, AND 6033 In order to establish the tax equality sought herein we believe it will be necessary to amend the Internal Revenue Code of 1954 as follows: Amend section 511 (a) (2) by adding organizations now exempt under section 501 (c) (4), (7), and (8). Amend section 512 to provide that any advertisement or other solicitation for patronage from the general public for any service, facility, or activity shall be prima facie evidence that the income derived from such service, facility, or activity is unrelated business taxable income. Amend section 512 to provide that income derived from the service of food and beverages to persons other than members and their bona fide guests shall be deemed to be unrelated business taxable income. In defining a "bona fide" guest it is suggested that a "bona fide" guest is a person who is actually a house guest of a member, or a person whose presence as a guest is in response to a specific invitation for the specific occasion and for whom the host member assumes responsibility. Amend section 6033 (a) by deleting subparagraph (5). SUMMARY In summary, the taxpaying on-premise food and beverage industry is being subjected to an increasing amount of competition from their preferred tax-free status by the veterans' organizations, private clubs. and fraternal orders. They not only maintain facilities to serve food and beverages to the general public, but engage in extensive advertising campaigns to solicit public patronage. We earnestly ask that when they solicit public patronage and serve the general public they be required to pay the Federal income tax on their income derived from public patronage. The CHAIRMAN. Would you like us to include the affiliates of the National Licensed Beverage Association, this page? Mr. FELEMAN. I would, sir. The CHAIRMAN. I don't think it would be proper to include all the various excerpts appended here because we don't have the facilities for reproducing the pictures. Without objection then, that list will be included with your state ment. Are there any questions? If not, we thank you very much for your appearance and the information given the committee. The document referred to follows:) AFFILIATES OF NATIONAL LICENSED BEVERAGE ASSOCIATION Arizona Retail Licensed Beverage Association, Inc. California Licensed Beverage Association California Tavern Association Colorado Licensed Beverage Association Florida Retail Liquor Dealers Association, Inc. Idaho Licensed Beverage Association Chicago Tavern Owners Association Licensed Beverage Association of Illinois Indiana Licensed Beverage Association, Inc. Campbell County Cafe Owners Protective Association, Inc. (Kentucky) Maryland State Licensed Beverage Association Massachusetts Retail Liquor Dealers Board of Trade Michigan Table-Top Licensees' Congress Minnesota Licensed Liquor Retailers, Inc. On-Sale Liquor Dealers of Minneapolis, Inc. St. Paul On-Sale Liquor Dealers Association Nevada Licensed Beverage Association United Tavern Owners of New Jersey New Mexico Retail Licensed Beverage Association State Restaurant Liquor Dealers Association of New York, Inc. North Dakota Beverage Dealers Association Buckeye Retail Liquor Dealers Association (Ohio) Oregon Licensed Beverage Association Pennsylvania Tavern Association United Tavern Owners of Philadelphia Rhode Island Retail Liquor Dealers Association, Inc. South Dakota Retail Liquor Dealers Association Associated Tavern Owners of Utah, Inc. Restaurant Beverage Association of Washington, D. C. Washington State Licensed Beverage Association Wisconsin Tavern Keepers Association, Inc. Tavern League of Wisconsin, Inc. Wyoming State Liquor Dealers Association, Inc. The CHAIRMAN. The Chair understands that Mr. Kenneth Holum had to leave before he could be reached on the calendar. Without objection the information he intended to present to the committee will be included in the record at this point. (The statement referred to follows:) STATEMENT OF KENNETH HOLUM, SECRETARY OF SOUTH DAKOTA ASSOCIATION OF COOPERATIVES Gentlemen of the Committee, my name is Kenneth Holum. I am a South Dakota farmer and executive secretary of the South Dakota Association of Cooperatives. As secretary of the South Dakota Association of Cooperatives, I speak for the 550 farmer cooperatives in my State. You will understand, I am sure, that we are interested in any proposals that might affect cooperatives' tax status. We feel very strongly that it is completely unfair to attempt to collect income. taxes from any organization that operates on a non-profit basis. American farmers have always worked together for mutual advantage. Many machines needed in modern farming operations are too costly for the individual farmer. We often solve that problem by joint ownership. Too, three or four farmers buy and operate a baler, combine, dryer or corn-picker together. As joint owners each pays a tax on the income the machine produces for him. It would be completely unreasonable to expect him to pay another income tax as joint owner. Our cooperatives are just another example of the same type of operation. Instead of each farmer attempting to own a grain elevator to store and load grain, we own those facilities together. Individual farmers cannot afford to own gas stations, bulk delivery trucks and transports, so we organize cooperatives, adopt bylaws and own those facilities together and operate them for mutual advantage instead of for profit. The principle on which cooperatives are founded is somewhat similar to that of partnerships whereby several individuals pool their economic resources in order to gain certain economic advantages or buying power and savings on their business operations which they would not enjoy if they operated individually. The members of a partnership, of course, pay taxes as do the members of a cooperative. Any saving which is distributed to the members of the cooperative is taxed to the member and not to the cooperative. The cooperative, in most instances, has no income or if it does, is taxed as is the income of other corporations. To levy a tax on patronage refunds in addition to the tax which the individual member pays on them would not only be double taxation but would be unethical, since patronage refunds, by definition, are not income and therefore should not be taxed as income. It should be emphasized that farmers who are members of cooperatives pay taxes on their own income which includes any patronage refunds which they receive. The farmer's income, tax-wise, is actually in many instances subject to more drastic taxation, as compared with other entrepeneurs. The farmer cannot charge off his own labor or the labor of his family as a business expense when he is computing his income tax liability to the Federal Government. Consequently, a farmer who owns his farm and hires little labor, pays proportionately a much greater tax than do other businesses. When the individual farmer goes to market-either to buy or sellhe has a very weak bargaining position. Corporate giants determine the prices on what we buy and indirectly on what we sell. By bargaining together through our cooperatives we improve our bargaining position. Evidently there are those who resent our improved bargaining position. Proposals that require the cooperative owner to pay multiple taxes on his farm operations, his service cooperative, his marketing facilities and his rural electric facilities impose upon the farmer the same type of tax structure that we would never consider levying against other businesses. No one can deny that we farmers are in a desperate cost-price squeeze. Regardless of what your individual ideas might be concerning farm legislation, you all recognize that falling prices and rising costs have adversely affected farm income and perhaps even more important from the point of view of the national economy much of our buying power has disappeared. A cursory glance at figures published by the Department of Agriculture shows to what an extent inflation has affected the buying power of the farmer's dollar and also indicates that the farmer has not only suffered from inflation but has experienced sharp declines in net income during the last few years. Index of prices paid by farmers in December, 1957, stood at a record high of 299 as compared to an index of 125 during the period 1935 to 1939. Another factor adversely affecting the farmer's economic position has been the decline of his share of the consumer's dollar during the last few years. During the period 1947 to 1949, the farmer's share of the consumer's dollar invested in the farm food market basket was 50 cents. By August of 1957 it had declined to 40 cents and by December there was a further decline to 38 cents. The reason for this unsatisfactory economic relationship was that profits and labor costs and the cost of distributing had steadily gone up and farm prices had steadily declined. The result has been that while other economic groups have been improving their position or holding their own, the farmer has suffered economically. One of the reasons for rising farm costs, including that part of the farmer's gross income required to maintain his farm plant in efficient production, and to maintain his family at a decent standard of living, is that price and production of farm supplies, machinery and other items are controlled to a great extent by giant corporations. The farmer is formed to operate in a sellers' market when he buys and in a buyers' market when he sells. This stated in another way, amounts to a system of privately administered price control and production in regard to items the farmer buys and a system of free competition in regard to the sale of farm products. A few examples will suffice to indicate that this is true. Recently the steel industry increased the price of steel $6.00 per ton and at the same time held down production, although the industry had been operating at around 70 percent of capac ity for some time. The prices of steel and products made from steel have been increasing during the last few years. For example, in South Dakota prices of farm machinery during the past 5 years have gone up about 7 percent |