tax on credit unions it would be so small and the number of them is so large that in trying to process it the Government would lose money. Now credit unions have proved a great asset to industry because industry has been relieved of constant pressure placed upon it by financial problems of its employees, which have been costly and demoralizing. In 1929 a company which organized 16 credit unions in its industry, told us that it immediately relieved itself of a department that cost $78,000 a year to operate. Technically speaking, this industry was able to pay to the Government, taxes on $78,000 more income. We earnestly believe credit unions are an economic necessity, that they have proved beneficial to the individual, to industry, to the community, and to the Government. It would be disturbing the economic equilibrium of the masses of the people should this tax be imposed. The CHAIRMAN. We thank you for your statement and the information given the committee. Mr. Mason will inquire. Mr. MASON. As I gather from your statement and analyzed it, you say that these loan sharks that have been charging 32 percent a month are the ones that you with your 1 percent a month are putting out of business. Mr. CAMPANA. We are not putting them out of business, sir. We are making them to do a better business. Mr. MASON. If I have to pay 312 percent a month and I can get it for 1 percent a month, naturally I would turn to the 1 percent a month. Mr. CAMPANA. Correct. Mr. MASON. So in that sense you are doing a service, shall we say, to those that you are lending money to. Mr. CAMPANA. May I amplify on your statement, sir, that in Massachusetts where they started with 36 percent per annum, now they are doing it at from 18 to 24 percent per annum. Mr. MASON. You have cut down the loan sharks in the amount they charge the poor people who have to borrow. Mr. CAMPANA. That is right. Mr. MASON. That is a good thing. Now the second thing I gather from your statement is that you are so small, and you cannot expand very much, you are doing 1 percent of the business of lending money in Massachusetts, that we don't have to worry too much about it for the next 20 or 30 years. Is that about it? Mr. CAMPANA. Correct. Mr. MASON. That is all. The CHAIRMAN. We thank you again. (The committee received the following letters and enclosures for the record :) Hon. WILBUR MILLS, Chairman, Ways and Means Committee, HOUSE OF REPRESENTATIVES, Washington, D. C., February 4, 1958. House of Representatives, Washington, D. C. MY DEAR COLLEAGUE: There is enclosed herewith a telegram from Mr. W. B. Uptagrafft, president of the Friends Credit Union, Mobile, Ala., which union services 3,500 employees of the International Paper Co. in Mobile. I shall appreciate your including this wire with the hearings on H. R. 502. With kind personal regards, I am, Sincerely yours, 20675-58-pt. 2--52 FRANK W. BOYKIN, MOBILE, ALA. Hon. FRANK W. BOYKIN, House of Representatives, Washington, D. C. DEAR MR. BOYKIN: The Friends Credit Union servicing the 3,500 employees of International Paper Co. in Mobile strongly requests your support in defeating H. R. 502, called the Mason bill. Our credit union, nonprofit by nature, serves only the employees of International Paper Co. and by law we are not allowed to reimburse any officer or committeemen for their services. Our earnings are returned to the members in the form of taxable dividends except for additions to our reserves as required by law. We will appreciate your help in bringing these acts to the attention of the House Ways and Means Committee. Sincerely, W. B. UPTAGRAFFT, President. Hon. WILBUR D. MILLS, HOUSE OF REPRESENTATIVES Washington, D. C., February 19, 1958. Chairman, Ways and Means Committee, House of Representatives, Washington, D. C. DEAR MR. CHAIRMAN: Attached hereto is a letter I received from 10 citizens of Winston-Salem, N. C., relative to H. R. 502. I will appreciate it very much if the contents of the letter are included in the record hearings of the general revenue revision legislation. Thank you very much and with my very best wishes and kindest regards, I am, Sincerely yours, Hon. ALTON A. LENNON, House of Representatives, ALTON LENNON. WINSTON-SALEM, N. C., February 17, 1958. Washington, D. C. DEAR SIR: It is our understanding that the Ways and Means Committee will make a decision in the next few weeks regarding the Mason bill (H. R. 502). Since we are members of a credit union, we strongly feel credit unions should remain tax exempt for the following reasons: 1. Credit unions are non-profit associations. 2. They serve only their members. 3. Officers, directors and committee members serve without pay. 4. By law, the maximum interest rate is 1 percent per month on the unpaid balance. 5. Earnings are returned to members in the form of taxable dividends. 6. More and more, members are receiving interest refunds. Your opposition to this bill and influence with the members of the Ways and Means Committee will be greatly appreciated. Yours very truly, Howard T. Walton, 2870 Monticello Drive, Winston-Salem, N. C.; W. The CHAIRMAN. Our next witness is Mr. Paul Blanshard. Mr. Blanshard, will you please come forward and identify yourself for the record by giving your name, address, and the capacity in which you appear? STATEMENT OF PAUL BLANSHARD, SPECIAL COUNSEL, PROTESTANTS AND OTHER AMERICANS UNITED FOR SEPARATION OF CHURCH AND STATE Mr. BLANSHARD. My name is Paul Blanshard, special counsel for the national organization known as Protestants and Other Americans United for Separation of Church and State. We are a national organization with branches in many States and offices at 1633 Massachusetts Avenue NW. The CHAIRMAN. Can you complete your statement in the 10 minutes alloted to you? Mr. BLANCHARD. I think so, sir. In a sense, of course, this is a very delicate and difficult subject I am bringing up-the tax exemption of churches-from an organization which is largely composed of churchmen. Our top 3 officers are former presidents of the 3 largest Protestant denominations in this country: Methodist, Baptist, and Presbyterian. We have thought very carefully before we came forward today to submit a program which in a sense limits some of the exemption privileges of churches, if these suggestions I am making are carried out. I appeared before the Mills subcommittee 2 years ago on November 1956 and gave some of the details. So I assume that the committee will be made familiar with some of those details. I want to launch today into a statement of principles on three general propositions: A church's tax exemption on unrelated business income, the withholding tax on the income of members of religious orders, and the income-tax exemptions for charity contributions to religious orders. I should say parenthetically at the beginning that we are not opposed to the principle of tax exemption. Our criticisms are directed to what we think are defects in the present law and certain defects in the administration. We do not believe that the Internal Revenue Code is now being administered in such a way as to guarantee equal treatment among the faiths. We also believe that taxpayers are being unduly exploited because of unjustified exemptions which have been permitted under the spreading tax-exemption umbrella of the word "church." Today we wish to go considerably beyond our testimony of 1956. We wish to suggest not only three amendments to the Internal Revenue Code designed to make tax exemptions of religious organizations more equitable, but also a number of changes in the basic principles of tax-exemption policy. Concerning general principles, we wish to make five points: First, we believe that there should be a full and fair investigation of all tax-exemption practices in the field of religious organizations, with a view to eliminating present abuses and injustices. The admirable work of the Mills subcommittee has not yet included this area, and it needs to be studied carefully. We suggest that such an investigation should begin by making public the names of all subordinate religious organizations which claim tax exemption as organic parts of a church. At present the cumulative list of organizations claiming tax exemptions as churches is by no means complete. Here, for example, is the cumulative list. You will find many of the big denominations of the country are simply described in one general phrase, and there may be a whole group of subsidiary bodies that are not listed. Second, we believe that no church should claim any exemption from corporate taxes on unrelated business income merely because it is a church. If a church steps out so far from its accepted moral and spiritual role in our society as to compete with private business in the race for commercial profits, then we believe that it should pay taxes on those profits as any other business is compelled to pay. We believe that this principle should apply with equal force to all Protestant, Catholic and Jewish organizations. I think I should say parenthetically that we would be inclined to be very charitable about publishing enterprises because in a sense the printed word in our modern civilization, to quite an extent, supplants the pulpit word. Therefore, if publishing has any moral content, it deserves the presumption that it is part of the work of the church. Third, we believe that any person who receives an income which is large enough to bring him within the operation of the income-tax law, and then turns that income over to a religious order, should be treated exactly as any other person is treated who gives his income to religious or charitable causes. He should be granted only standard exemptions and nothing more. He should not be exempted from income tax altogether. Fourth, we believe that tax exemption in the field of religion should be based upon the religious nature of the exempt activity, and not upon the fact of ecclesiastical control or direction over that activity. In other words, we suggest that a "functional" test be substituted for the present "directive" test which the Internal Revenue Service is attempting to write into tax regulations applying to religious orders. It also applies to churches in general. That is a regulation which was printed in the January 21, 1956, Register. Fifth, we believe that religious denominations which have religious orders should receive no special favors because of their tightly controlled, centralized form of government. Unless this principle is recognized, the present religious exemption policy will reward centralized authoritarian government in a church while penalizing the more loosely organized and democratic forms of sectarian organization. To accomplish these five basic purposes it will be necessary, of course, to make a number of changes in the Internal Revenue Code and the regulations written for that code. The Internal Revenue Service has many experts in this field, and we do not presume to suggest a complete program for statutory changes. However, we do venture to suggest three changes which are important in themselves, and may well serve as guideposts for other necessary changes based upon the same principles. In suggesting these three changes, I wish to say that my suggestions are not original, and that I have had the advice of one of the best tax attorneys in the United States in the drafting of these proposed changes. 1. We suggest that section 511 (a) (2) (A) should be changed by dropping out the words "a church, a convention or association of churches." In previous testimony we have described the glaring abuses which now exist in the tax exemption field because exemption has been granted in the past, or would be granted in the future under proposed regulations, to such nonreligious anomalies as brandy manufacturing, the sale of commercial time on radio stations, and the commercial sale of baked goods. We do not believe that Congress ever intended to exempt such activities from corporate taxes in the name of religion. In interpreting the present section 511, the Internal Revenue Service has made matters worse by attempting to promuglate a special regulation, which was published in the Federal Register, January 21, 1956, which allows a religious order to do almost anything under the sun and still secure exemption from corporate taxes on unrelated business income, provided only the activity engaged in is directed by a superior of that religious order. In that proposed regulation the Internal Revenue Service has attempted to make a distinction between religious orders having a sacerdotal function and those which do not. This regulation, suggested in January 1956, and held up ever since, would grant a special exemption to such large sacerdotal orders as the Jesuits, while subjecting some nonsacerdotal religious orders to the tax liabilities of this section. If our proposed amendment is adopted, this whole impractical distinction will be wiped out, and the Internal Revenue Service will treat Catholic, Protestant, and Jewish industries conducted for profit under the same general rule. I can call attention to several industries. Here is an advertisement from the last issue of Holiday. "America's Fastest Selling BrandyChristian Brothers of California." Here is an advertisement from the last issue of the New Yorker, "America's Largest Selling Premium Wines." You see, I am quite impartial. There was alleged to have been 540 bottles of Christian Brothers wine on the tables of the last Republican rally in Chicago. I am sure an investigation of this should be entirely impartial. Mr. FORAND. Are you telling the committee now that they are not paying taxes? Mr. BLANSHARD. They are suggesting Mr. FORAND. They have paid taxes, have they not? Mr. BLANSHARD. We cannot get a definite answer about the present status. Mr. FORAND. I can give you an answer. They have paid a tax. Mr. BLANSHARD. They paid taxes once, in 1952, but they are suing for recovery now in a suit, civil action 7499, in the San Francisco Federal court. They claim that they are an exempt church under section 511. I presume that collection has been held up until this suit is settled. I hope that the inquiry of the committee will include the defense of that suit. The amendment to section 511 which we suggest has been supported in principle by such widely diverse organizations as the Presbyterian Church, USA, and the section on taxation of the American Bar Association. Unfortunately the recommendation of the section on taxation of the American Bar Association was not finally implemented at the Association's last annual convention, but the recommendation by a special committee is significant. The section on taxation, although it praised the Internal Revenue Service for attempting to find a solution |