SENATE BILL NO. 170

(b) retaining any "excess business holdings" (as defined in Section 4943 (c) of the Internal Revenue Code of 1954) which would give rise to any liability for the tax imposed by Section 4943(a) of the Internal Revenue code of 1954;

(c) making any investments which would jeopardize the carrying out of any of the exempt purposes of the trust, within the meaning of Section 4944 of the Internal Revenue Code of 1954, so as to give rise to any liability for the tax imposed by Section 4944(a) of the Internal Revenue code of 1954; and

(d) making any "taxable expenditures" (as defined in Section 4945 (d) of the Internal Revenue Code of 1954) which would give rise to any liability for the tax imposed by Section 4945 (a) of the Internal Revenue Code of 1954;

provided, however, that this section shall not apply either to those split-interest trusts or to amounts thereof which are not subject to the prohibitions applicable to private foundations by reason of the provisions of Section 4947 of the Internal Revenue Code of 1954.

199E.

In the administration of any trust which is a "private foundation" as defined in Section 509 of the Internal Revenue Code of 1954, or which is a "charitable trust" as defined in Section 4947(a)(1) of the Internal Revenue Code of 1954, there shall be distributed, for the purposes specified in the trust instrument, for each taxable year, amounts at least sufficient to avoid liability for the tax imposed by Section 4942(a) of the Internal Revenue Code of 1954.

199F.

The provisions of Sections 199D and 199E of this Article shall not apply to any trust to the extent that a court of competent jurisdiction shall determine that such application would be contrary to the terms of the instrument governing such trust and that the same may not properly be changed to conform to such sections.

199G.

Nothing in this act shall impair the rights and powers of the courts or the attorney general of this state with respect to any trust.

199H.

All references to sections of the Internal Revenue Code of 1954 shall include future amendments to such sections and corresponding provisions of future Internal Revenue Code.

199-I.

If any provision of this Act or the application thereof to any circumstance is held to be invalid such invalidity shall not affect the validity of the other provisions or any other application of this Act which can be given effect without the invalid provision or application, and to this end, all the provisions of this Act are hereby declared to be severable.

SENATE BILL NO. 170

SEC. 2. And be it further enacted, That this Act is hereby declared to be an emergency measure and necessary for the immediate preservation of the public health and safety, and having been passed by a yea and nay vote supported by three-fifths of the members elected to each of the two Houses of the General Assembly, the same shall take effect from the date of its passage. Approved:

Governor.

President of the Senate.

Speaker of the House of Delegates.

EMERGENCY BILL

Senate Bill No. 169-By Senator Conroy.

A BILL ENTITLED

AN ACT to add new Sections 445 to 450, inclusive, to Article 23 of the Annotated Code of Maryland (1970 Supplement), title "Corporations," to follow immediately after Section 444 thereof and to be under the new subtitle "Charitable Corporations," "PRIVATE FOUNDATIONS," to regulate the activities of any corporation which is a private foundation as defined in Section 509 (a) of the Internal Revenue Code of 1954 by prohibiting self-dealing, retention of excess business holdings, improper investments and improper expenditures, and by requiring minimum annual distributions, all as defined and provided by Sections 4941 (d), 4943(c), 4944, 4945(d) and 4942(a), respectively, of the Internal Revenue Code of 1954.

SECTION 1. Be it enacted by the General Assembly of Maryland, That new Sections 445 through 450 be and they are hereby added to Article 23 of the Annotated Code of Maryland (1970 Supplement), title "Corporations," to follow immediately after Section 444 thereof, and to be under the new substitle "Charitable Corporations," "PRIVATE FOUNDATIONS," and to read as follows:

445.

Charitable Corporations PRIVATE FOUNDATIONS

No corporation which is a "private foundation" as defined in Section 509(a) of the Internal Revenue Code of 1954, shall

(a) engage in any act of "self-dealing" (as defined in Section 4941(d) of the Internal Revenue Code of 1954), which would give rise to any liability for the tax imposed by Section 4941(a) of the Internal Revenue Code of 1954;

(b) retain any "excess business holdings" (as defined in Section 4943(c) of the Internal Revenue Code of 1954), which would give rise to any liability for the tax imposed by Section 4943(a) of the Internal Revenue Code of 1954;

EXPLANATION: Italics indicate new matter added to existing law. [Brackets]-indicate matter stricken from existing law. CAPITALS indicate amendments to bill.

Strike out indicates matter stricken out of bill.

SENATE BILL NO. 169

(c) make any investment which would jeopardize the carrying out of any of its exempt purposes, within the meaning of Section 4944 of the Internal Revenue Code of 1954, so as to give rise to any liability for the tax imposed by Section 4944(a) of the Internal Revenue Code of 1954; and

(d) make any "taxable expenditures" (as defined in Section 4945 (d) of the Internal Revenue Code of 1954) which would give rise to any liability for the tax imposed by Section 4945 (a) of the Internal Revenue Code of 1954.

446.

Each corporation which is a "private foundation" as defined in Section 509 of the Internal Revenue Code of 1954 shall distribute for the purposes specified in its articles of organization, for each taxable year, amounts at least sufficient to avoid liability for the tax imposed by Section 4942(a) of the Internal Revenue Code of 1954.

447.

The provisions of Sections 445 and 446 shall not apply to any corporation to the extent that a court of competent jurisdiction, pursuant to a judicial proceeding begun by such corporation before January 1, 1972, shall determine that such application would be contrary to the terms of the articles of organization or other instrument governing such corporation or governing the administration of charitable funds held by it and that the same may not properly be changed to conform to such sections. 448.

Nothing in this Act shall impair the rights and powers of the courts or the attorney general of this state with respect to any corporation.

449.

All references to sections of the Internal Revenue Code of 1954 shall include future amendments to such sections and corresponding provisions of future Internal Revenue laws.

450.

If any provision of this Act or the application thereof to any circumstance is held to be invalid such invalidity shall not affect the validity of the other provisions or any

other application of this Act which can be given effect without the invalid provision or application, and to this end, all the provisions of this Act are hereby declared to be severable.

SEC. 2. And be it further enacted, That this Act is hereby declared to be an emergency measure and necessary for the immediate preservation of the public health and safety, and having been passed by a yea and nay vote supported by three-fifths of the members elected to each of the two Houses of the General Assembly, the same shall take effect from the date of its passage.

STATEMENT OF WILLIAM J. LEHRFELD, ESQ., CHAIRMAN, EXEMPT ORGANIZATIONS COMMITTEE, SECTION OF TAXATION, AMERICAN BAR ASSOCIATION

Mr. LEHRFELD. Mr. Chairman, my name is William J. Lehrfeld. I am in private practice in the District of Columbia and I serve as Chairman of the Exempt Organizations Committee of the Section of Taxation of the American Bar Association.

Due to the shortness of time, neither the Section of Taxation nor the Association has had the opportunity to review model legislation of this type.

As a consequence I cannot offer their support in a representative fashion for this particular type of bill. However, we are in the process of developing a model act which will follow very closely the provisions contained in H.R. 9172 and H.R. 10790. I would say that the model act that we are using at the present time is that drafted by the State of Texas. It is probably the best bill, other than the present bill, that we have seen to accomodate the needs of charitable trusts and charitable corporations.

Since we and the Association are in the process of developing this model legislation, I think that we can say that we would support enactment of this type of legislation. I would expect that once the Association's processes go through that our model legislation will coincide with that and the Committee would have the support of the Association.

At this point I would like to say that I have been asked by the Shriners Hospitals for Crippled Children to testify on behalf of the peculiar provision-according to my friends here of H.R. 10790, which deals with the charitable remainder trust amendments.

80-578 - 72 - 4

As you know, Shriners Hospitals for Crippled Children is a very large charitable organization operating 22 charitable hospitals throughout the United States, Canada, and Mexico. It is entirely supported by the charity of the Shriners and their endowment funds. Approximately 100 wills per month are received in Shriner offices, leaving bequests and demises of property. Part of these testamentary dispositions include what we call today charitable remainder trusts, with an income interest going to the relative of the decedent, the remainder going, for example, to Shriners Hospitals.

One of the provisions of the Tax Reform Act of 1969 required that before having a tax deduction for the value of the remainder interest the charity trust must be in the form of a unitrust or an annuity trust which guaranteed the income beneficiary a specified amount and also protected the remainder interest of the charity. In that way the Government's revenues would be protected because they would be assured there would be some remainder available for charity.

It has come to the attention of the Shriners that a number of wills drafted after the effective date of the Tax Reform Act have contained unqualified charitable remainder provisions. As a consequence, for example, in the State of Maryland, we have an estate of approximately $1.5 million, where an estate tax deduction could be lost of almost half a million dollars for the failure of the remainder interest to properly qualify in the present Internal Revenue Code provisions. The Treasury Department is very sympathetic and they have promulgated a proposed regulation which permits the trustee or executor of the estate to conform testamentary disposition of the provisions of section 664 and thereby obtain the charitable deduction for the estate.

This requires on the part of the executor or trustee to file an action in a court of law requiring judicial reformation. What we are seeking to do under subsection (d) of H.R. 10790 is to permit the trustee and all interested beneficiaries to, among themselves, conform the instrument to section 664 and thereby foregoing a proceeding in court, because it cannot be shown consistently that the District of Columbia courts will permit the reformation of a testamentary instrument.

By allowing, through the statute, this confirmation of a testamentary remainder trust, we would thereby assist public charities in general to facilitate the transition from an unqualified remainder trust to a qualified remainder trust and obtain additional funds for public charity.

At the present time Shriners Hospitals have approximately eleven wills throughout the United States and it has instituted proceedings throughout the United States to facilitate the transition from an unqualified remainder trust to a qualified remainder trust.

We have a proceeding in Maryland, in Baltimore County, set for hearing very shortly. We anticipate that the court will reform the

instrument.

If we show the legislatures of the various states that the Congress has enacted a provision like this, we feel we can have a provision added to the present legislation that has been referred to by Mr. Corey that will facilitate this type of reformation and thereby assist all public charities with respect to defective wills.

That concludes my statement.

(Mr. Lehrfeld's prepared statement follows:)

Hon. JOHN L. MCMILLAN,

ARENT, Fox, Kintner, PlotKIN & KAHN,

Washington, D.C., October 6, 1971.

Chairman, Committee on the District of Columbia,
U.S. House of Representatives,

Washington, D.C.

STATEMENT BEFORE SUBCOMMITTEE ON HEALTH, WELFARE, HOUSING AND YOUTH AFFAIRS ON H.R. 9172 AND H.R. 10790

DEAR SIR: My name is William J. Lehrfeld. I am an attorney with the Washington, D.C. law firm of Arent, Fox, Kintner, Plotkin and Kahn and current Chairman of the Exempt Organizations Committee of the Section of Taxation of the American Bar Association. Due to the shortness of time, neither the Section of Taxation nor the Association has taken an official position on the proposed legislation. Accordingly, my views may not coincide with a position later adopted by either the Association or the Section of Taxation on this type of legislation. My views are certainly consistent with the well established position of the Association relating to the prevention of excessive litigation and the lessening of congestion in the courts. H.R. 9172 and H.R. 10790, by providing a legislative solution to a legislative requirement, will save the judicial branch a great deal of time and effort. Since I fully support this approach, I shall keep my comments to a minimum.

TAX REFORM ACT REQUIREMENTS

Sections 508 (d) and (e) of the Internal Revenue Code of 1954, added by the Tax Reform Act of 1969 (P.L. 91-172), provide that certain charitable trusts and corporations which are treated as "private foundations" will lose their right to full deductions for charitable contributions as well as their exemption from federal income tax unless their governing instruments (i.e., corporate charter or trust indenture) include, by December 31, 1971, certain limitations on their activities. Recognizing the problems created by these Code sections, the Internal Revenue Service, on May 9, 1970, issued Temporary Regulation 13.8 (35 Fed. Reg. 7300) which declares that a statute which deems the required provisions to be contained in the foundation's governing instrument will satisfy the governing instrument rule of 508 (d) and (e) of the Code. To date, at least 35 states (including Maryland, Virginia, North and South Carolina, Georgia) have enacted such "deeming" statutes identical or similar to the ones here proposed. My research indicates that states which are represented by all members of this Committee have enacted similar laws except for California and Mississippi.

SUPPORT FOR PROPOSED LEGISLATION

H.R. 9172 and H.R. 10790 are designed to enable certain charitable trusts and corporations of the District of Columbia to meet the requirements of §§ 508 (d) and (e) without the necessity of amending their governing instruments. The bills do this by deeming the required provisions to be contained within the governing instrument of a District of Columbia foundation, whether it is a corporation or a trust (unless a court determines that the inclusion of such provisions is contrary to the terms of the governing instrument.) For a charitable corporation or trust organized prior to January 1, 1970, the bills would apply to taxable years beginning on or after January 1, 1972.

Unless one of these bills is enacted, ordinary corporate foundations would have to retain local counsel to file amendments with the District of Columbia Recorder of Deeds office and pay the legal and administrative fees charged for such services. Of much more importance is the fact that probably all testamentary charitable trusts, most inter-vivos charitable trusts, and some charitable corporations would be required to institute separate court proceedings in the Superior Court to amend their charters or trust indentures to comply with the requirements of the Internal Revenue Code. This is because the trustees of such entities, generally speaking, lack authority to make the necessary conforming changes because their instruments are unamendable except pursuant to court-authorized decree.

According to material released in 1967 by Subcommittee No. 1 on Foundations of the Select Committee on Small Business, there are more than 1,000 "private foundations" in the Washington area. I believe, but cannot document, that there are at least that number of charitable trusts. The numerous law suits filed to amend governing instruments would burden court dockets in the District of