per year. The percentage increase over the last 5 years has been approximately 40 percent. Information received from other areas indicates that price increases on farm machinery have been general. For example, it is estimated that prices of tractors in the neighboring State of Minnesota have gone up from $2.624 to $3,685, or 40 percent. During the 5-year period 1952-57, the price of discs has increased from $370 to $500, or 35 percent; hay balers from $1,550 to $2,050, or 32 percent; and corn-pickers from $1,540 to $2,000, or 32 percent.

At the time prices of farm machinery and others items were increasing by leaps and bounds, farm prices and income declined sharply. Farm prices have declined 22 percent since 1951 and farm net income has declined 26 percent during the same period. Here are the figures on farm net income with percentage of decline based on the year 1952, of $15.1 billion; 1953, $13.3 billion, percent decline from 1952, 12 percent; 1954, $12.5 billion, percent of decline from 1952, 17 percent; 1955, $11.7 billion, percent of decline from 1952, 23 percent; 1956, $11.6 billion, percent of decline from 1952, 26 percent.

It should be pointed out that there were drastic declines in farm net income previous to that time. Farm net income in 1946 amounted to over $17 billion and purchasing power of the dollar was far greater than it has been during the last few years.

Looking at the economic position of the farmer from another point of view, per capita income of farm and nonfarm persons during the years 1952-56 is as follows:

You all agree that in the public interest something should be done to permit the farmer to participate more equitably in the good things our economy produces. When farm-buying power declines in South Dakota, it soon affects our cities. Minneapolis and St. Paul soon feel the pinch, and as we learned in the thirties the decline soon snowballs through the whole economy.

Either you believe that the Federal Government should have a strong farm program to protect the farmer's place in our economy or you believe that the farmer must help himself. If you believe that the farmer must do more to help himself, then you must recognize that his cooperatives which help him reduce his costs and gain some control over his markets are the only self-help tools that he has.

I cannot believe that the Congress which is certainly well aware of the farmer's economic hardship, will seriously consider any legislation that will increase his costs and weaken his already inadequate bargaining position.

Instead of considering legislation designed by the few who want to profiteer at the farmer's expense, I hope that the Congress in 1958 will seriously consider national programs to strengthen and foster cooperatives so that the farmer will soon be in a position to do much more than he is doing today to help himself in his business operation by controlling his supplies and his markets as other segments of the economy have been doing for so long.

Mr. KEOGH. Mr. Chairman, may I be permitted at this point to insert a telegram which I received from the Food and Drug Research Laboratories in Maspeth, N. Y., commending to the committee the testimony which Mr. Harris, the next witness, is about to give.

The CHAIRMAN. Yes, without objection that will be included. (The telegram referred to follows:)

Hon. EUGENE H. KEOGH,

House Office Building, Washington, D.C.:

MASPETH, N. Y., January 21, 1958.

We respectfully urge your close attention to the oral testimony to be given by Mr. Lewis Harris of the American Council of Independent Laboratories before the Ways and Means Committee hearing on tax revision January 23. Important aspects of our national research effort will be discussed in relationship to the need for modifying the testing for public safety section of the tax code. FOOD AND DRUG RESEARCH LABORATORIES.

MASPETH, N. Y.

The CHAIRMAN. Mr. Harris, will you identify yourself for the record by giving your name, address, and the capacity in which you appear?

STATEMENT OF LEWIS E. HARRIS, REPRESENTING THE AMERICAN COUNCIL OF INDEPENDENT LABORATORIES

Mr. HARRIS. My name is Lewis E. Harris. I am president of Harris Laboratories, an independent, taxpaying, research and testing laboratory located at Lincoln, Nebr.

The CHAIRMAN. Can you conclude your statement in the 15 minutes alloted?

Mr. HARRIS. I can.

The CHAIRMAN. You are recognized for 15 minutes.

Mr. HARRIS. I am appearing here as a representative of and spokesman for the American Council of Independent Laboratories which is an organization comprised of 72 of the leading independent taxpaying laboratories in the United States. These laboratories are located in all major cities and several of them operate branch laboratories. They provide services covering nearly every scientific need of industry and government. I am chairman of the committee on legislation and tax-favored competition of the American Council of Independent Laboratories.

At this point I want to introduce the following exhibits and make them a part of the record and supplemental to this?

1. Directory of the ACIL. This outlines the objectives of our organization, the facilities and services of member laboratories, and also includes an index of over 400 types of services available.

2. The bylaws of ACIL.

3. ACIL Bulletin, August 1954.

4. ACIL Bulletin, April 1954, a bulletin prepared especially for the pharmaceutical and allied industries wherein those specialized services available from ACIL members are tabulated. All these services could properly be classified as "testing for public safety." The CHAIRMAN. How voluminous is it, sir?

Mr. HARRIS. Some 40 pages, possibly.

The CHAIRMAN. Would it not be satisfactory to you, Mr. Harris, to leave that so that it may be available to the members of the committee and not be included in the record?

Mr. HARRIS. Yes.

The CHAIRMAN. Fine. Then it will be accepted as an exhibit for the information of the committee.

Mr. HARRIS. Thank you.

(The above-mentioned statement is on file with the committee.) Mr. HARRIS. This statement now refers to portions of subchapter F of chapter 1 of the Internal Revenue Code of 1954. It includes data, views, and arguments pertaining to the sections of this subchapter F. Regarding section 1.501 (c) (3)-1 which provides 4 tests which must be met in order for an organization to be exempt. Part (a) (i) (ii) of this section provides:

Its net earnings must not inure in whole or in part to the benefit of private shareholders or individuals.

This part should be expanded to prohibit the payment of excessively high salaries in nonprofit organizations and to prevent siphoning of otherwise reportable profits.

Regarding Section 1.501 (c) (3)-1 (d): Testing for Public Safety: The proposed regulation now provides:

An organization formed to test consumer products, such as electrical products, to determine whether they are safe for use by the general public, qualifies as an exempt organization under section 501 (c) (3) provided it meets the four requirements set forth in paragraph (a) (1) of this section.

We object to this entire section and strongly urge that it be deleted for the reasons that it serves no constructive tax function; its language is indefinite; there is no record to show need for such exemption as provided therein; and it merely provides an opportunity for tax evasion, unfair tax-favored competition, and for the loss of proper tax

revenue.

Historically, it should be mentioned that this broad field of testing was opened up in the Internal Revenue Code for 1954 without any open hearings or debate in Congress upon the subject despite the fact that the courts had held a different point of view for many years. On January 5, 1955, the American Council of Independent Laboratories submitted a letter and statement to the Bureau of Internal Revenue in which the following questions were stated:

(1) Why was not an issue which has long been debated in the courts not made subject to debate in Congress?

(2) Why was the issue decided in closed executive session of the Senate Finance Committee?

(3) Why was the action withheld until the closing days of code revision when it was not possible for all parties interested in the issue to present their points of view?

(4) Did the Joint Committee on Internal Revenue consider the fact that this amendment breached the barrier which the Bureau of Internal Revenue has raised to deny exemption to nonprofit organizations engaged in activities incident to commercial or industrial operations such as ordinary testing?

(5) On what basis will the Bureau of Internal Revenue interpret the phrase "testing for public safety"? Does the phrase include all items tested for national defense, civil defense, disaster or emergency situations, medical formulas, public housing, highway construction, prevention of disease? What is intended by the phrase "public safety"? Did the staff of the Joint Committee on Internal Revenue examine the meaning of this phrase? What records are available to show what was intended or what the limitations would be?

Further background of this issue should be studied carefully. In conference with members of the staff of the Joint Committee on Internal Revenue Taxation, the executive secretary of the American Council of Independent Laboratories was informed that the case of Underwriters Laboratories was pointed out as relevant to this decision. Underwriters Laboratories appealed to the Tax Court for the tax years 1936, 1937, and 1938 on the basis that their testing was in the interest of public safety and that their laboratories were organized exclusively for charitable, educational, or scientific purposes. This appeal was denied and the reason given as follows:

We know judicially that many business concerns conduct commercial testing laboratories for profit. The business in which the petitioner was engaged was a commercial testing laboratory and of a kind usually conducted for profit and is not exempt.

Thus we have what appears to be an attempt to obtain legislation to circumvent the decisions developed by the Tax Court after thorough study of the matter. The proposed rule is based on legislative action taken by Congress without open hearing on petition of Underwriters Laboratories whose efforts to obtain exemption in regular courts of law were repeatedly denied. Why now, through legislation and a promulgation of a ruling of the Bureau, should this one organization be favored? Surely the Congress and the Bureau would not propose to legislate and promulgate a special section and ruling for every firm or association which desires special treatment.

Paragraph (f) under section 1.501 (c) (3)-1 declares:

Since an organization exempt under section 501 (c) (3) must be organized and operated exclusively for one or more of the specified purposes, an organization organized or operated for the primary purpose of carrying on a trade or business for profit is not exempt thereunder.

The Tax Court has already found that the Underwriters Laboratories was engaged in a business of a commercial testing laboratory and a kind usually conducted for profit. The very fact that it has continued in business for many years is further indication that it operates at a profit. To permit it or any other organization doing testing for public safety to have exemption as a nonprofit or other exempt organization appears a violation of accepted and approved tax practices.

Attention is called to section 1.512 (b)-1-(f) (4), which states: For the purposes of section 1.512 (a)-1 and this section, the term "research" does not include activities of a type ordinarily carried on as an incident to commercial or industrial operations; for example, the ordinary testing or inspection of material or products or the designing or construction of equipment, buildings, et cetera. The term "fundamental research" does not include research carried on for the primary purpose of commercial or industrial application.

Thus ordinary testing of material or products is not considered as research and, therefore, not exempt.

Since "ordinary testing of material or products" is generally identical with "testing for public safety," why should one be exempt and the other nonexempt?

The question now arises that if an exemption is made for those who do testing for public safety, why should not exemption be given to those who wish to do testing for highway efficiency, standardization improvement, market surveys, international trade, and many other worthy and socially desirable objectives? Why should an exemption be

given to testing solely for public safety? Are there not many other fields of interest and propriety equally important?

The broad scope of business activity which could be included under "testing for public safety," as now so loosely defined, should be of great concern to all persons interested in fair taxation. While the testing of "electrical products" is stated as an example of "testing for public safety," it should be pointed out that the testing of foods, drugs, construction and building materials, insecticides, certain fabrics, component parts aof automobiles, planes, and many other consumer products is certainly equally important in determining whether they are safe for use by the general public. Therefore, it is obvious that this paragraph on "testing for public safety" provides a tax loophole which could deprive the Government of very large sums of tax moneys rightfully theirs.

We recognize that this may now be a relatively small sum of tax money in relation to the overall problem. However, if this tax loophole is permitted, it may provide a means for the eventual loss of large tax sums and may set a precedent which will result in the loss of millions of dollars of tax revenue.

To exempt commercial activities which might be considered "testing for public safety" could exempt a considerable portion of our industry. For example, all testing in quality control and products development in almost any industry could be set up as a separate organization for any manufacturer or organization and all such activities be so arranged to be exempt. As a matter of fact, the Underwriters Laboratories is a quality control laboratory for a number of manufacturers and its function parallels those of quality control laboratories operated by many manufacturers or those operated as independent laboratories serving such manufacturers.

"Testing for public safety" is not new. It is a function of business and has long been practiced by reputable manufacturers of consumer products in almost every field of activity. With most manufacturers, "testing for public safety" is as much an integral part of the business as is sales, production or accounting. "Testing for public safety" is known by other terms such as "quality control," "safety of new products," "raw material testing," "physical testing," "toxicity testing," et cetera. Such activities are either carried out by independent laboratories for their clients or by laboratories operated by the manufacturers. Testing for public safety is considered as necessary in most businesses to protect the health and safety of the consumer, to insure uniformity, to assure giving the consumer the best quality, to guard against possible errors in production, to check new product development, and to withstand competition.

Thus, unless this attempt to evade taxation is thwarted, an opportunity is provided for tax-exemption on matters related to commercial operations and serious unfair competition is developed for those taxpaying independent laboratories who are now providing similar services.

We respect fully request that careful consideration be given the data, views, and arguments presented in this statement and further request that the entire section 1.501 (c) (3)-1 (d), "Testing for public safety" be deleted from subchapter F of chapter 1 of the Internal Revenue Code of 1954 for the reasons outlined in this statement showing that

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