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when the "losses" in supplying its members water offset its investment income. Other courts have held to the contrary.

House solution-The House bill provides that in the case of a taxable membership organization the deduction for expenses incurred in supplying services, facilities or goods to members is allowed only to the extent of the income from such members. Thus, no membership organization will be permitted to escape tax on business or investment income by using this income to serve its members at less than cost and deducting the book "loss."

Arguments For.-(1) To permit a membership organization to offset investment or business income against a loss arising from services provided to members is the same as if an individual were allowed to offset his personal or recreational expenses against his investment income.

(2) This provision is necessary to prevent exempt membership organizations from attempting to avoid the effect of the unrelated business income rule by giving up their exempt status and deducting the cost of providing services for members from its investment or *mbership income.

mens Against-(1) There is nothing reprehensible about a empt membership organization offsetting the expense of proses to members against investment income or income derowd from services to nonmembers. The Courts have upheld this

To deny an offset of membership losses and investment income is to aux a membership organization on income when it has no profit. & Income From Advertising

Present law-Late in 1967 the Treasury promulgated regulations under which the income from advertising was treated as unrelated business income" even though such advertising appeared, for example, in a periodical related to the educational or other exempt purpose of the organization

Problem-While the House concluded that the regulations reached 44 appropriate result in specifying that in carrying on an advertising business in competition with other taxpaying advertising businesses a tax should be paid nevertheless, the statutory language on which the regulations were based was sufficiently unclear so that substantial litigation could have resulted from these regulations. To overcome this problem the regulations were placed in the tax law.

House solution-The House bill provides that income from advertising (or a similar activity) is included in unrelated business income even though the advertising is carried on in connection with activities related to the exempt purpose.

Arguments For (1) Advertising in a journal published by an exempt organization competes with tax-paying organizations that sell advertising, and this bill properly taxes the advertising income of the exempt organization

(2) Activity such as advertising should not lose its identity as s trade or business because it is carried on within a larger scope of similar activities which may be related to the purpose of the organization.

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Arguments Against.—(1) Advertising in trade journals does not normally compete to any great extent with tax-paying corporations, publishing commercial magazines because it is usually of a technical nature, and attracts the attention only of those people interested in the professional aspects of the publication.

(2) This bill ignores the fact that it is difficult to separate technical comment (such as where technical benefits of a pharmaceutical product is described in an advertisement in a medical journal) from pure advertising.

(3) Many trade organizations depend on advertising income heavily, and the taxing of that income will seriously hamper their exempt endeavors.

C. CHARITABLE CONTRIBUTIONS

1. 50 Percent Charitable Limitation Deduction

Present law. Under present law, the charitable contributions deductions allowed individuals generally is limited to 30 percent of a taxpayer's adjusted gross income. In the case of gifts to certain private foundations, however, the deduction is limited to 20 percent of a taxpayer's adjusted gross income. (In addition, in limited circumstances, a taxpayer is allowed an unlimited charitable contributions deduction.)

Problem. It has been suggested that it would be desirable to strengthen the incentive for charitable giving by increasing the present 30 percent limitation on the charitable contribution to 50 percent of a taxpayer's income. Moreover, it was hoped that this increase would offset any decreased incentive resulting from the repeal of the unlimited charitable contributions deduction (see page 32). In addition, the combination of these two actions means that charity (on a taxfree basis) can remain an equal partner with respect to an individual's income but cannot reduce an individual's tax base by more than onehalf.

House solution.-The House bill increases the general 30 percent limitation on an individual's charitable contribution deduction to 50 percent. The 20 percent charitable contribution deduction limitation in the case of gifts to private foundations is not increased by the bill. Also, contributions of appreciated property would continue to be subject to the present 30 percent limitation. These changes apply to taxable years beginning after 1969.

Arguments For.-(1) It is more appropriate to have a general limitation of 50 percent with no unlimited charitable contribution deduction so that all taxpayers may be treated equally with respect to charitable giving.

(2) Limiting the additional contribution deduction to cases where no appreciation is involved will prevent any further increase in advantages arising from the omission of income given to charity from an individual's tax base.

Arguments Against.-(1) This provision benefits a particular class of taxpayers who already are able to take advantage of tax privileges that are not available to lower income taxpayers.

(2) The justification for increasing the limit was to provide a greater incentive to offset the disincentive resulting from a series of

30

when the "losses" in supplying its members water offset its investment income. Other courts have held to the contrary.

House solution.-The House bill provides that in the case of a taxable membership organization the deduction for expenses incurred in supplying services, facilities or goods to members is allowed only to the extent of the income from such members. Thus, no membership organization will be permitted to escape tax on business or investment income by using this income to serve its members at less than cost and deducting the book "loss."

Arguments For.-(1) To permit a membership organization to offset investment or business income against a loss arising from services provided to members is the same as if an individual were allowed to offset his personal or recreational expenses against his investment income.

(2) This provision is necessary to prevent exempt membership organizations from attempting to avoid the effect of the unrelated business income rule by giving up their exempt status and deducting the cost of providing services for members from its investment or nonmembership income.

Argument Against.-(1) There is nothing reprehensible about a non-exempt membership organization offsetting the expense of providing services to members against investment income or income derived from services to nonmembers. The Courts have upheld this approach.

(2) To deny an offset of membership losses and investment income is to tax a membership organization on income when it has no profit. 6. Income From Advertising

Present law. Late in 1967 the Treasury promulgated regulations under which the income from advertising was treated as "unrelated business income" even though such advertising appeared, for example, in a periodical related to the educational or other exempt purpose of the organization.

Problem. While the House concluded that the regulations reached an appropriate result in specifying that in carrying on an advertising business in competition with other taxpaying advertising businesses, a tax should be paid, nevertheless, the statutory language on which the regulations were based was sufficiently unclear so that substantial litigation could have resulted from these regulations. To overcome this problem the regulations were placed in the tax law.

House solution.-The House bill provides that income from advertising (or a similar activity) is included in unrelated business income even though the advertising is carried on in connection with activities related to the exempt purpose.

Arguments For.-(1) Advertising in a journal published by an exempt organization competes with tax-paying organizations that sell advertising, and this bill properly taxes the advertising income of the exempt organization.

(2) Activity such as advertising should not lose its identity as a trade or business because it is carried on within a larger scope of similar activities which may be related to the exempt purpose of the organization.

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Arguments Against.-(1) Advertising in trade journals does not normally compete to any great extent with tax-paying corporations, publishing commercial magazines because it is usually of a technical nature, and attracts the attention only of those people interested in the professional aspects of the publication.

(2) This bill ignores the fact that it is difficult to separate technical comment (such as where technical benefits of a pharmaceutical product is described in an advertisement in a medical journal) from pure advertising.

(3) Many trade organizations depend on advertising income heavily, and the taxing of that income will seriously hamper their exempt endeavors.

C. CHARITABLE CONTRIBUTIONS

1. 50 Percent Charitable Limitation Deduction

Present law. Under present law, the charitable contributions deductions allowed individuals generally is limited to 30 percent of a taxpayer's adjusted gross income. In the case of gifts to certain private foundations, however, the deduction is limited to 20 percent of a taxpayer's adjusted gross income. (In addition, in limited circumstances, a taxpayer is allowed an unlimited charitable contributions deduction.)

Problem. It has been suggested that it would be desirable to strengthen the incentive for charitable giving by increasing the present 30 percent limitation on the charitable contribution to 50 percent of a taxpayer's income. Moreover, it was hoped that this increase would offset any decreased incentive resulting from the repeal of the unlimited charitable contributions deduction (see page 32). In addition, the combination of these two actions means that charity (on a taxfree basis) can remain an equal partner with respect to an individual's income but cannot reduce an individual's tax base by more than onehalf.

House solution.-The House bill increases the general 30 percent limitation on an individual's charitable contribution deduction to 50 percent. The 20 percent charitable contribution deduction limitation in the case of gifts to private foundations is not increased by the bill. Also, contributions of appreciated property would continue to be subject to the present 30 percent limitation. These changes apply to taxable years beginning after 1969.

Arguments For.-(1) It is more appropriate to have a general limitation of 50 percent with no unlimited charitable contribution deduction so that all taxpayers may be treated equally with respect to charitable giving.

(2) Limiting the additional contribution deduction to cases where no appreciation is involved will prevent any further increase in advantages arising from the omission of income given to charity from an individual's tax base.

Arguments Against.—(1) This provision benefits a particular class of taxpayers who already are able to take advantage of tax privileges that are not available to lower income taxpayers.

(2) The justification for increasing the limit was to provide a greater incentive to offiset the disincentive resulting from a series of

30

when the "losses" in supplying its members water offset its investment income. Other courts have held to the contrary.

House solution.-The House bill provides that in the case of a taxable membership organization the deduction for expenses incurred in supplying services, facilities or goods to members is allowed only to the extent of the income from such members. Thus, no membership organization will be permitted to escape tax on business or investment income by using this income to serve its members at less than cost and deducting the book "loss."

Arguments For.-(1) To permit a membership organization to offset investment or business income against a loss arising from services provided to members is the same as if an individual were allowed to offset his personal or recreational expenses against his investment income.

(2) This provision is necessary to prevent exempt membership organizations from attempting to avoid the effect of the unrelated business income rule by giving up their exempt status and deducting the cost of providing services for members from its investment or nonmembership income.

Argument Against.-(1) There is nothing reprehensible about a non-exempt membership organization offsetting the expense of providing services to members against investment income or income derived from services to nonmembers. The Courts have upheld this approach.

(2) To deny an offset of membership losses and investment income is to tax a membership organization on income when it has no profit. 6. Income From Advertising

Present law. Late in 1967 the Treasury promulgated regulations under which the income from advertising was treated as "unrelated business income" even though such advertising appeared, for example, in a periodical related to the educational or other exempt purpose of the organization.

Problem. While the House concluded that the regulations reached an appropriate result in specifying that in carrying on an advertising business in competition with other taxpaying advertising businesses, a tax should be paid, nevertheless, the statutory language on which the regulations were based was sufficiently unclear so that substantial litigation could have resulted from these regulations. To overcome this problem the regulations were placed in the tax law.

House solution.-The House bill provides that income from advertising (or a similar activity) is included in unrelated business income even though the advertising is carried on in connection with activities related to the exempt purpose.

Arguments For.-(1) Advertising in a journal published by an exempt organization competes with tax-paying organizations that sell advertising, and this bill properly taxes the advertising income of the exempt organization.

(2) Activity such as advertising should not lose its identity as a trade or business because it is carried on within a larger scope of similar activities which may be related to the exempt purpose of the organization.