Mr. EBERHARTER. They pay a fee over a certain percentage of income to have protection in the group insurance organization, do they not?

Mr. HANSEN. The nature of the plan is that a group of people, let us say the members of a cooperative, may put their capital together and build a health center which may have some hospital beds and some clinical facilities, and then they pay monthly dues to this organization, for which they receive hospital and medical care on a direct service basis. This is not like Blue Cross or insurance indemnity plans.

Mr. EBERHARTER. It is not the same as the Blue Cross organizations or other organizations?

Mr. HANSEN. That is true. The Keogh bill, H. R. 1162, now introduced in this session, is broad enough to cover not only the direct service facilities I discussed, but also the indemnity type plans, like Blue Cross and nonprofit insurance plans.

Our proposal is that this treatment, tax treatment, should extend only to those who operate regularly actual facilities for the furnishing of hospital medical care like hospitals and clinics.

Mr. EBERHARTER. Thank you. I just wanted to clear it up for the record.

The CHAIRMAN. Are there any further questions?

If not, again we thank you, Mr. Hansen.

Mr. HANSEN. Thank, you Mr. Chairman.

(The following letter was received by the committee:)

C/H/A COMMUNITY HEALTH ASSOCIATION,

8143 East Jefferson Avenue, Detroit, Mich., January 29, 1958.

Mr. LEO IRWIN,

Clerk, House Ways and Means Committee,

House of Representatives, Washington, D. C.

DEAR MR. IRWIN : Nonprofit organizations providing hospital and medical care are confronted with certain problems as a result of provisions of the Internal Revenue Code of 1954 which govern the deductibility for donors of gifts to these organizations.

These provisions as interpreted by the Internal Revenue Service effectively preclude grants by tax-exempt foundations or trusts to assist in the establishment or maintenance of some nonprofit health associations which operate for the benefit of the public, and at the same time facilitate such grants to other health organizations which have virtually the same purpose and function.

Under the income, estate and gift tax sections of the 1954 code there are two classes of exemption. The first class of exemptions includes so-called charitable organizations (under sec. 501 (c) (3)), and gifts to these are tax deductible by donors. The second class includes so-called social welfare organizations (under sec. 501 (c) (4)), and gifts to these are not tax deductible by donors. Some health organizations are placed under the first class and others under the second.

The distinction between the two classes is neither clear nor logical when applied to nonprofit health organizations. For example, a so-called conventional hospital will ordinarily be tax exempt under section 501 (c) (3) while another equally nonprofit hospital, which provides care for an equal or greater number of charity patients, may be placed under section 501 (c) (4). Both of these hospitals make the same kind of contribution to the well-being of society and both have the same status for grants under the Hill-Burton Act. In distinguishing between the two classes of hospitals the Internal Revenue Service considers a number of factors which have no logical connection with the matter. These factors include such things as the nature of the membership of the organization, the method of charging for its services, and whether its patients come mainly from its membership or from the general public. These considerations overlook the fact that both types operate in the public interest,

are equally nonprofit and exist solely for the treatment of illness and preservation of health.

Under the 1954 code, also, an unincorporated nonprofit association, which exists to provide medical and hospital care for the public on a prepayment basis, will ordinarily be classed under section 501 (c) (4), while a nonprofit incorporated hospital which works closely with the association (perhaps even to the extent of having the same board of directors) in making hospital care available to its subscribers, might be classed under section 501 (c) (3). It is illogical that 1 of 2 such affiliated nonprofit organizations should be permitted to receive grants from foundations on a tax-exempt basis while the other may not. In the case of nonprofit organizations devoted to the preservation of health and care of illness, tax exemption should be granted on the basis of the obvious contribution to the welfare of society, and not denied in some cases because of the form used in making the contribution. We should not be concerned with the method of electing the trustees, with whether the bills are paid before or after service is rendered, with the precise number of charity beds available, or with the proportion of patients coming from the membership and from the general public. The important matters are the nonprofit nature and the devotion of the organization to serving people's health needs. These two considerations should be the only criteria.

These criteria can be established by amending the Internal Revenue Code of 1954 so as to provide that deductions shall be allowed donors for gifts to nonprofit hospitals and/or medical care organizations which are classified for tax exemption either under section 501 (c) (3) or section 501 (c) (4). The required amendments would affect sections 170 (c) (income), and 2055 (a) (estates), and 2522 (a) (gifts), in the form of a new section added to each to include such organizations.

These recommended amendments would mean little or no loss in tax revenues. The type of donor primarily affected by these amendments will in any case make gifts to organizations to which such gifts can be made on a tax-deductible basis.

Passage of such amendments would insure that the sections of the income, gift, and estate tax laws now granting exemption for gifts to nonprofit organizations will cover nonprofit health organizations on a logical basis. It would also eliminate the situation in which criteria are more restrictive for deductibility of gifts than for the payment of grants under the Hill-Burton Act to the same organization.

Yours sincerely,

F. D. MOTT, M. D., Executive Director.

STATEMENT OF HENRY A. BUBB, LEGISLATIVE COMMITTEE CHAIRMAN, UNITED STATES SAVINGS AND LOAN LEAGUE

Mr. BUBB. Mr. Chairman and gentlemen, I am Henry A. Bubb of Topeka, Kans. I appreciate this opportunity to testify as chairman of the legislative committee, United States Savings and Loan League, which represents 90 percent of all the savings and loan assets in the United States.

The CHAIRMAN. Mr. Bubb, can you complete your statement in the 10 minutes allotted to you?

Mr. BUBB. Yes, sir. I would appreciate it, Mr. Chairman, if the long statement could be filed in the record. I will try to skip some of the short statement to get it in.

The CHAIRMAN. I have your short statement. Where is the long statement?

Mr. BUBB. It was filed last Thursday with the committee.

The Chairman. How voluminous is it?

Mr. BUBB. Seventeen pages.

The CHAIRMAN. Without objection, it will be included in the record. (The statement referred to is as follows:)

STATEMENT OF HENRY A. BUBB, LEGISLATIVE COMMITTEE CHAIRMAN, UNITED STATES SAVINGS AND LOAN LEAGUE, RE SAVINGS AND LOAN TAXATION

The United States Savings and Loan League' appreciates the opportunity to file this statement in connection with the general tax hearings conducted by the Committee on Ways and Means of the House of Representatives during the month of January 1958.

Description of savings and loan business

The first savings and loan association in the United States was formed in 1831 and its purpose then, as now, was to provide savings facilities and to lend money on the security of homes. Today there are 6,000 savings and loan associations with assets of approximately $48 billion. Thus, the average savings and loan association has $8 million in assets and employs between 8 and 10 persons. These institutions are truly an example of small business. Some 22 million Americans having savings accounts in savings and loan associations. One-half of these accounts are small accounts of less than $900.

Savings and loan associations are the largest single source of mortgage credit, each year over the past decade having made between 35 and 40 percent of all of the home loans in the country. In 1957 the ratio was 38 percent. The vast majority of these loans are conventional loans-not insured or guaranteed by the FHA or VA. In 1956, 84 percent of loans by savings and loan associations were uninsured and only 16 percent were guaranteed by the FHA or VA. Tax provisions

For many years savings and loan associations were exempt from Federal income taxation. In 1951 the Revenue Code was amended to subject associations to the full corporate income tax provisions. Exactly like other corporate taxpayers, savings and loan associations are permitted to deduct business expenses and the cost of money. Like other financial corporations, they are permitted a reserve for bad debts which is set under section 593 as an amount not to exceed 12 percent of total savings. Thus, savings and loan associations must (a) distribute their net earnings to the savers where it is subject to full taxation, or (b) place it in a reserve solely for the absorption of losses, or (c) pay the regular corporate income tax up to 52 percent. It should be emphasized that no earnings may be retained for purposes other than meeting losses except after the payment of taxes, regardless of the amount or percentage of reserves held by the association. As is demonstrated later in this statement, the present tax provisions produce a larger tax revenue per dollar of savings and loan assets than is produced per dollar of commercial bank or life insurance assets. Adequate reserves are essential to the safety of the savings and loan business Since approximately 85 percent of their assets are invested in mortgage loans, the solvency of the savings and loan associations is largely dependent on the soundness of its loans and its ability to absorb the losses which will inevitably occur in this form of long-term lending. Unlike short-term commercial loans and personal loans where losses occur over a fairly regular pattern, there are virtually no losses on real-estate loans in times of prosperity and very heavy losses in times or recession or depression. It is imperative that adequate reserves be developed during the good times to meet the heavy losses which occur during bad times.

Determination of the reserves ncessary to meet future losses involves essentially an estimate of probable losses on real-estate loans, which in turn is dependent on a wide variety of factors such as the national income, local economic conditions, trends in residential preferences, trends in population shifts, etc. Because sav ings and loan associations invest in home loans in their own locality, it is possible

1 The United States Savings and Loan League, founded in 1892. is the nationwide trade association for the savings and loan business. The league membership consists of over 4,400 savings and loan associations (also known as building and loan associations, cooperative banks, and homestead associations), with total assets amounting to over 90 percent of all savings and loan assets in the country. The league membership is a true cross section of the savings and loan business, with both Federal and State chartered institutions, insured and uninsured institutions, and the very largest associations as well as the small part-time associations. The league headquarters office is at 221 North LaSalle Street. Chicago, Ill., and its Washington office is at 425 13th Street NW., Washington. D. C. Principal officers are: Joseph Holzka, president, Staten Island N. Y. C. R. Mitchell, vice president, Kansas City, Mo.; Henry A. Bubb, legislative chairman, Topeka, Kans. Norman Strunk, executive vice president, Chicago, Ill.; and Stephen Slipher, manager of Washington office, Washington, D. C.

for an individual association in a town hit by disaster, or by major unemployment, to suffer losses even in generally prosperous times. Obviously there is no way of accurately predicting all of these factors which bear on mortgage losses. It follows that one must analyze past experience and/or rely on the best estimates of experts in the field.

Past history shows that thousands of the Nation's building and loan associations underestimated the need for reserves in the past depression and became insolvent and were liquidated with losses to the savings public. Specifically, some 2,094 associations were reported as failed during the depression and an indeterminable number were otherwise liquidated and merged with loss to the public or long delay in repayment of savings. In the year 1933 alone, associations with assets of $215 million failed with estimated loss of $44 million.

An analysis of the losses of savings and loan associations which failed from 1930 to 1940 shows that the losses sustained by these associations during the first 7 years of the period exceeded the total of all of the reserves held by associations at the beginning of the period.

While it may be impossible to determine scientifically what reserve is required to survive a depression, it is incontestable that the reserves have been insufficient in all of the previous depressions, with great economic and financial consequences. History shows it is clearly more likely that management will underestimate the need for reserves rather than overestimate.

An idea of the magnitude of the losses on real estate loans is gained from a paragraph in a study of the Home Owners' Loan Corporation:

"The average capital loss was computed by the HOLC at $1,698 per property, which was 42 percent of the original amount loaned on these properties, 38 percent of the total amount loaned when the property was acquired, and 33 percent of the net investment in the property at time of sale. In New York State the average loss per property was $3,360 **; in New Jersey the loss averaged about $3,000 *** loss, as a percentage of the total net investment at the time of sale, was highest in these 2 States-42 percent and 41 percent, respectively. The lowest average loss was in the State of Washington$600; loss was not more than one-fifth of the total net investment at the time of sale in California, Delaware, the District of Columbia, Illinois, Minnesota, New Mexico, and Washington."

The above, of course, refers to the losses taken by the Home Owners' Loan Corporation on the loans on which the borrowers defaulted to the Corporation and which the Corporation had to foreclose. The aggregate losses of the Home Owners' Loan Corporation were $336,562,852 on a total of $198,215 defaulted loans which the Home Owners' Loan Corporation foreclosed. The Corporation made 1,017,821 loans for a total amount of $3,093,451,321. The losses of the Home Owners' Loan Corporation were thus approximately 11 percent of the total amount of loans made.

In addition, considering the depression losses in the home mortgage business as measured by the experience of the Home Owners' Loan Corporation, it is necessary to add to the 11 percent figure mentioned above, the writedown on loans taken over by the Home Owners' Loan Corporation. The following is quoted from page 70 of the Sixth Annual Report of the Federal Home Loan Bank Board:

"In many instances, the mortgage debts originally owed by HOLC borrowers were scaled down in the process of refinancing. In all, it is estimated that this reduction was in the neighborhood of $200 million or about 7 percent of the original debt."

The record of the Home Owners' Loan Corporation indicates, thus, that the total losses in the mortgage business was approximately 18 percent.

Prof. John Lintner, of Harvard University, after 3 years of research on mutual savings banks, determined that the savings banks of Massachusetts between 1931 and 1945 foreclosed on mortgages of over $1.5 billion with a resulting loss of 27.2 percent of the total principal amount foreclosed. He computed that this was a loss of approximately 17.4 percent on the average mortgage portfolio outstanding during that period. Another 4.4 percent loss was taken on loans not actually foreclosed.

2 History and Policies of the Home Owners' Loan Corporation, Harriss, p. 120. Final Report to the Congress of the United States Relating to the Home Owners' Loan Corporation. March 1, 1952, p. 3.

John Lintner, Mutual Savings Banks in the Savings and Mortgage Markets, p. 304.

To quote directly from Lintner:

"These losses on mortgages alone were substantially larger than the entire current operating expenses of al 1the banks in the State for the entire 15-year period, and these net losses on mortgages alone were larger than the stated book surplus of all the banks together on October 31, 1930."*

At another point in his study, Lintner comments again on the inadequacy of reserves:

"The inadequacy of such available provision is shown by the fact that the net losses over and above these reserves absorbed in the following 5 years averaged nearly 35 percent, and the $10.8 million in the reserve at the end of 1940 was less than one-seventh of the additional net losses of $76.6 million remaining to be taken in the following 5 years. The inadequacy of the reserve provision is further shown by the fact that in 1939 and in each succeeding year through 1944 the losses charged off at the time of sale on the properties sold during the year were larger even after crediting all profits and recoveries, than the balance in the foreclosure reserve account at the beginning of the year."

6

In another study it has been shown that the average loss by commercial banks on foreclosed loans over a full 27-year period (1920-47) was 23.5 percent of the original loan amount and 20.6 percent of the investment at foreclosure. It should be noted that bank loans are a smaller percent to value than savings and loan loans, and a large percent of bank loans are commercial loans.

It is clear from these and other studies that very substantial losses occurred on real estate loans in the last depression. An examination of lending practices indicates that the same decline in the economy would produce even greater losses under today's lending practices. Savings and loan associations now make conventional loans of up to 75 to 80 percent of value for 25-year maturities; whereas the predepression practice was about 60 to 65 percent of value with 11-year maturities. The potential loss is tremendously greater under present practices. For example: Assume that foreclosure was necessary 2 years after making a loan on a $10,000 property and that the property produced a net of exactly $5,000. A 65 percent, 11-year loan would show a loss of about $600 and an 80 percent 25-year loan would show a loss of $2,700, or about 41⁄2 times as great. In other words, there is a leverage which causes a slight increase in loan percentage to very substantially increase the loss potential. It should be noted that the high percentage long-term loans are used primarily because of the competition of the very liberal FHA and VA loans. Without these high percentage loans, there would be fewer houses built and the economy of the country would suffer.

The paramount importance of adequate reserves has long been recognized by State and Federal law and State and Federal supervisors. All institutions insured by the Federal Savings and Loan Insurance Corporation (representing 90 percent of all savings and loan assets) are required by regulation to make annual allocations to reserves until reserves equal 12 percent of savings. It is the belief of both the supervisors and the United States Savings and Loan League that a 15 percent requirement would be more in keeping with prudent finance and in the future it may be desirable to amend the Revenue Code to permit associations to accumulate reserves up to 15 percent before taxation. It should be recognized that in a mutual institution all accumulations in reserves belong to the mutual savers, and there is no possibility of profit for individual stock holders.

Home financing would be seriously affected by taxation of reserves

Any reduction in the allowable reserve for savings and loan associations or limitation on the deduction for dividends, would necessarily adversely affect the associations' home financing service. This would occur for two reasons: First, the associations' sole source of revenue is interest on home loans and to meet increased costs (taxation) interest rates would have to be increased. Secondly, it would decrease the dividend which could be paid to the savers, thus retarding the savings inflow with the result that a smaller volume of funds would be available for lending on homes. The adverse effects of this diminution of home financing are extremely significant. The Congress has repeatedly recognized that good housing and an adequate level of home building are of major importance to the economy and the national welfare. Obviously it is

Ibid., p. 304.

Thid., pp. 290–291.

Carl F. Behrens, Commercial Bank Activities in Urban Mortgage Financing, p. 67.