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it provides unintended tax benefits, it serves no constructive tas function, it provides opportunities for tax evasion, there is no record to show the need for such exemption, it provides unfair tax-favored competition, and it would result in loss of proper tax revenue.

Gentlemen, I pass on to a second portion relating to research, and I have identified this section within the statement itself.

For the reference of the committee I would like to file two other reference documents:

1. Research and Development by Nonprofit Research Institutes and Commercial Laboratories, 1953, published by National Science Foundation.

2. Basic Research-A National Resource, published by National Science Foundation.

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 sections of said subchapter F.

Regarding section 1.512 (b)-1-(g) “Research": Part (2) of this section states:

In the case of a college, university, or hospital, all income derived from research performed for any person and all deductions directly connected with such income, shall be excluded in computing unrelated business taxable income.

We object to this section as now written and urge its modification for the reasons that it is now too broad, it enables colleges and universities to operate applied research businesses without taxation, it provides unfair competition, it encourages educational institutions to devote excessive attention to the operation of profitable applied research business with a marked decrease in attention to the basic research and academic functions for which they were established, and it results in the loss of large sums of proper tax moneys.

There can be no valid objection to tax exemption on the income to colleges and universities for fundamental or basic research when the results of such research are immediately published and are freely available to the general public; however, every effort must be made to prevent such tax-exempt colleges and universities from operating profitable businesses in the fields of applied research, the results of which are invariably provided exclusively for the sponsor or withheld for a sufficient time to enable the sponsor to establish commercial operations and such research results are not freely available for public good. As a matter of fact many universities and colleges even obtain or assist in obtaining patents as result of their applied sponsored research with such patent assigned directly to the sponsor or sublicensed to sponsors under a variety of contractual arrangements. Surely this cannot be considered for the public good, it is not fundamental research, and should not be a tax-exempt operation.

The Government publication, Basic Research-A, National Resource, points out the improper use of college and university personnel and facilities for commercial research or what is known as applied research. It further indicates that the use of such personnel and facilities has materially reduced the efforts in developing basic research and in carrying out proper academic functions. The report states that such college and university facilities has materially reduced the efforts in developing basic research and in carrying out proper academic functions. The report states that such college and university facilities

should not be diverted to applied research when facilities for such business research are available from independent sources.

To reduce the tendency for colleges and universities to engage in tax-exempt business research operations, we urge that section 1.512 (b)-1-(f) (2) be strengthened and clarified by the addition of this or a similar sentence:

To qualify for such exclusion of research income, the results of such research work must be immediately published or available for public inspection, except where national security is directly involved.

A further and equally serious problem is involved in relation to the tax-exempt status of so-called nonprofit research institutes. These institutes were organized to function for the public food and have obtained tax-exempt status on this basis. These nonprofit institutes include such companies as Stanford Research, Armour Research Institute, Battelle, Southwest Research.

A Government publication, Research and Development by NonProfit Research Institutes and Commercial Laboratories, 1953, has clearly shown that institutes allocate only 6 percent of their expenditures to basic research, or research for the public good." The other 94 percent of these so-called nonprofit research institutes business is in applied or business research fields. The 94 percent volume of research is of a type in which the results are kept confidential for the sponsor and in many instances such research results in the issuing of patents which are assigned exclusively to the sponsor. This 94 percent of the millions of dollars of research business volume handled by research institutes is not fundamental research, it is not for the public good, and should not be exempt from any form of taxation.

To prevent this continued loss of tax revenue from business research conducted by so-called nonprofit research institutes, we recommend the addition of a new part under section 1.512 (b)-1-(f) which would state:

In the case of an organization operated primarily for the purpose of research (fundamental or applied) all income derived from such research performed for any person and all deductions directly connected with such income shall be excluded in computing unrelated business taxable income only in those instances where the results of such research are immediately published or otherwise made available to the general public, except in instances where national security is involved.

The CHAIRMAN. We thank you, sir, for your appearance and the information given the committee. Are there any questions? (The following letter was received by the committee :)


January 28, 1958. Hon. WILBUR D. MILLS, Chairman, Committee on Ways and Means,

House of Representatives, Washington, D. C. DEAR SIR: The testimony before the Committee on Ways and Means last week by Mr. Lewis E. Harris, representing an association of commercial laboratories, was of particular interest to Underwriters' Laboratories because of specific mention of them and the suggestion that 501 (C) (3) of the Internal Revenue Code should not have recognized their unusual character as an organization testing solely for public safety. It is hoped that it may be in order to present some facts that throw further light on the situation.

The concern expressed by Mr. Harris over the possibility that the recognition in 501 (c)(3) of organizations testing for public safety might be indefinitely extended has been competently covered by the ruling of the Internal Revenue Seryice that this provision is applicable only to an organization, organized and operated exclusively for the purpose of testing for public safety.

The information in Mr. Harris' testimony with respect to rulings of the Tax Court on the previous Internal Revenue Code was contained in the original petition to the Congress for a modification of the law to include testing for public safety as a qualification for a tax-exempt organization.

Perhaps it should also be pointed out that the tax exemption applies only to money set aside for the purpose of additional facilities for safety testing, because Underwriters' Laboratories was established, and is maintained, as a nonprofit organization for the sole purpose of testing for public safety and no portion of its net earnings may be used for the benefit of any individual. It has no shareholders, and differs greatly, therefore, from commercial testing laboratories.

So far as is known, every other organization in the world established and operated exclusively for testing for public safety, with the exception of Underwriters' Laboratories of Canada, a similar organization, is directly supported in part or completely by the government of the country in which it operates. Most of these other testing organizations have been patterned after Underwriters' Laboratories, Inc., which has freely shared its knowledge and experience with them. It is, therefore, believed to be the oldest organization of its kind in operation today.

Inspection authorities throughout the United States look to Underwriters' Laboratories for guidance as to the safety of equipment used by the general public and this wide acceptance is due in no small part to the over 60 years of competent, unbiased, testing by Underwriters' Laboratories, both on the original equipment and on subsequent factory production so long as listing of such equipment is continued by Underwriters' Laboratories as an indication of compliance with its requirements for safety. It is extremely doubtful that a variety of commercial laboratories, regardless of their testing ability and integrity, could achieve the same nationwide acceptance now accorded Underwriters' Laboratories by State and municipal authorities and the Federal Gorernment and without such acceptance, mass distribution and production would be hindered, to the detriment of our standard of living.

We entertain no thoughts, however, that others are unable to do the test work in the fire and accident protection and prevention field. As a matter of fact, we have cooperated with other laboratories by supplying construction detalls of our test facilities in order that they might do engineering test work by methods similar to ours. Also, while a unique phase of Underwriters' Laboratories' operations is its factory inspection service, we make no claims that others are unable to do a similar job, although some who have tried it have failed.

In addition to information on the acceptability of specific equipment issued by Underwriters' Laboratories, through printed cards and its freely distributed lists of inspected equipment, basic information on items relating to public safety is published and freely distributed in the form of research bulletins, such as the accompanying Bulletin of Research No. 50, covering A Study of the Corrosion of Vaporizing-Liquid Type Fire Extinguishers.

The foregoing information is a greatly condensed summary of Underwriters' Laboratories' activities in the field of public safety and if greater detail is desired, it will be gladly furnished.

It is respectfully requested that this letter be placed in the record immediately following Mr. Harris' testimony, if that be proper. This request, of course, does not cover Research Bulletin No. 50, because that is freely available from Underwriters' Laboratories, Inc. Respectfully,

MERWIN BRANDON, Vice President. The CHAIRMAN. Our next witness is Dr. C. C. Furnas. Dr. Furnas, will you identify yourself for the record by giving us your name, address, and the capacity in which you appear?



Dr. FURNAS. My name is Dr. Clifford C. Furnas. I appear before you as the chief executive officer-chancellor of the University of Buffalo, and as a member of the boards of directors of the Cornell Aeronautical Laboratory, Inc., of Buffalo, N. Y., and of the Purdue University Research Foundation, Lafayette, Ind.

The CHAIRMAN. Mr. Reed desires to be recognized.
Mr. REED. You are a sort of neighbor of mine.
Dr. FURNAS. I know that, Mr. Reed.

Mr. REED. I have a letter here commending you very highly from
Mr. Newberry, who pays you a fine compliment. I join him in those
Dr. Furnas. Thank you, Mr. Reed.
I am submitting a biographical sketch for the record.

The CHAIRMAN. Without objection that will be included in the record.


BUFFALO Dr. Clifford C. Furnas was born October 24, 1900, at Sheridan, Ind. He holds the degree of bachelor of science, with honors, from Purdue, 1922, of doctor of philosophy from the University of Michigan, 1926, and of honorary doctor of engineering from Purdue, 1946, and from the University of Michigan, 1957. While in school he was a long-distance runner of distinction, and competed in the 5,000 meter event at the Olympic Games in Antwerp in 1920. In 1922 he was awarded the Big 10 Conference Medal for the best combined scholastic and athletic record.

He has always had a sustained interest in both research and education and his working career reflects this duality. From 1926 to 1931 he conducted research work on metallurgical processes at the United States Bureau of Mines at Minneapolis, Minn. In the latter year he joined Yale University as associate professor in chemical engineering. In 1941 and 1942 he worked for the National Defense Research Committee, coordinating a large research and development program. He was appointed by Curtiss-Wright as director of its aeronautical research laboratory in Buffalo in February, 1943. This laboratory was given to Cornell University on January 1, 1946, and he became director and executive vice president of Cornell Aeronautical Laboratory. He assumed the post of chancellor of the University of Buffalo, September 1, 1954. On December 1, 1955, Dr. Furnas was granted a leave of absence by the university to serve as Assistant Secretary of Defense for Research and Development in Washington, D. C. He returned to his University of Buffalo post, February 15, 1957. For a number of years he has been an active member of various technical boards and panels for the Government, particularly in the Department of Defense.

While Dr. Furnas has conducted a great deal of research in the fields of process metallurgy, he has specialized in and has written many technical articles on chemical and chemical engineering subjects as well as on phases of research related to aviation. In addition to technical and educational articles he has written several books, including America's Tomorrow (1932); The Next Hundred Years, a Book-of-the-Month Club selection in January 1936; Man, Bread, and Destiny, written with his wife, S. M. Furnas (1937); and The Storehouse of Civilization (1939). He was editor of the sixth edition of Roger's Manual of Industrial Chemistry (1942). He was also editor of the Industrial Research Institute Monograph on Industrial Research-Its Organization and Man. agement (1948),

He is a member of Theta Chi, social fraternity, various honorary fraternities, social clubs in New York and Washington and of sereral scientific and engineering societies. He is a registered professional engineer in the States of New York and Connecticut.

Dr. FURNAS. As I understand it, certain proponents of changed legislation wish to remove the presently justified tax-exemption status from any scientific organization, or from certain segments of its operation, if it engages in any scientific activity other than basic research, which they arbitrarily define as undirected research pursued solely for satisfying human curiosity and with no direct practical application intended, or in mind. It is contended that scientists engaged in research with practical applications in mind degrade their efforts in basic research and hence are not operating in the public interest to the extent which would justify tax-exempt status for their institutions. Such an attitude represents a most grevious and serious error in concept and philosophy and can lead to absurd and dangerous results.

It is probably appropriate that I should indicate my qualifications for speaking to this point. My entire professional life has been devoted to scientific research and to teaching. My experience includes: 5 years of research in process metallurgy with the United States Bureau of Mines; 12 years as associate professor of chemical engineering at Yale University, which post embodied substantial research activity as well as teaching; 18 months as technical aid in the National Defense Research Committee, coordinating and supervising Government contract research during World War II; 3 years as director of research of the airplane division of the Curtiss-Wright Corp.; 8 years as director and executive vice president of Cornell Aeronautical Laboratory, Inc., a not-for-profit scientific research organization: and 15 months as Assistant Secretary of Defense for Research and Development.

Presently, as chancellor of the University of Buffalo, I head an institution which engages continuously in many and varied scientific activities in addition to academic instruction. I feel that these experiences furnish an adequate background from which to judge the proper place and treatment of scientific activities in the national

scene. Science is not an activity which can be segmented and compartmented. It is a continuum involving activities from pure abstraction to clinical testing, or to engineering, construction and testing of new apparatus, all of which may be essential for a contribution to human knowledge. The various segments of the activities required to advance the frontiers of knowledge may be carried out by one individual or by many, but to limit the progress of science by any arbitrary distinctions between basic and applied work would be to choke the child while it was still a-borning and thus deprive the Nation of its benefits. Many of the most essential contributions to human welfare have been realizable only when the scientific efforts have been pursued well into the practical applications.

The importance of pursuing scientific ideas through to their application was probably best expressed by one of the most eminent scientists of the past, Louis Pasteur, who probably contributed more to the basic understanding of disease and to human health than did any other one man. Wrote Pasteur:

To him who devotes his life to science, nothing can give more happiness than increasing the number of discoveries, but his cup of joy is full when the results of his studies immediately find practical application,

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