Mr. CARTWRIGHT. I have the terms here of the particular sections of the Internal Revenue Code. Mr. FINE. Would you like to hear it, Mr. Chairman? I would like to hear it. I think it is important enough. Mr. HOFFMAN. I want a "yes" or "no" answer. Mr. FINE. It cannot be "yes" or "no." Government rules are never "yes" or "no." Mr. BONNER. Let us hear this. Mr. CARTWRIGHT. Internal Revenue Code, section 54 (f) provides that Every organization, except as hereinafter provided, exempt from taxation under section 101, shall file an annual return, which shall contain or be verified by a written declaration that it is made under the penalties of perjury No such annual return need be filed under this subsection by any organization exempt from taxation under the provisions of section 101 * Section 54 (f) (2) provides: Every organization which is an educational organization exempt under section 101 (6), if such organization normally maintains a regular faculty and curriculum and normally has a regularly organized body of pupils or students in attendance at the place where its educational activities are regularly carried on ; The letter from Mr. McLarney of the Internal Revenue Bureau dated March 21, 1947, to the Bunker Hill School of Aeronautics, Inc., which is in the record, Mr. Bonner, I believe has been construed as an "if" exemption to the Bunker Hill School of Aeronautics. Mr. BONNER. That is the usual letter that is sent to all applicants for exemption. Now you may proceed, Mr. Hoffman. Mr. HOFFMAN. It is so close to 12 o'clock. Mr. BONNER. We will be there. We have 10 minutes. I want to go as far in hearing as we can. Mr. HOFFMAN. I do not want to get into it, because I have just started. Mr. BONNER. Go ahead. I want the hearings to run for a while. Mr. HOFFMAN. I would prefer to catch my breath and let someone else go on. Mr. BONNER. Mrs. Harden, do you have a question? Mrs. HARDEN. Mr. Cartwright, on page 2 of your supplemental report, there is a statement: It may be also true that some of the items listed were not actually transferred to the school. Could you explain that a little further? Mr. CARTWRIGHT. That is in there because we have ascertained, and I believe in the testimony on Thursday it was brought out, Mrs. Harden, that in some instances a sales document may have been issued from War Assets listing certain property and the amounts thereof, but when the boxes were opened, it turned out to be something else. I believe Mr. Pemberton referred to an old tire or something. I do not know if those are in there. I have never seen any. But realizing that that possibility existed, that is why that statement was made. Mrs. HARDEN. But there was something sent? Mr. CARTWRIGHT. That is true. I do not know that they did not get exactly what they wanted, but I put that in there because of the reser vation that has been found generally. In some shipments from War Assets, the specific property designated was not included, but other property may have been. Mrs. HARDEN. Thank you. Mr. ELLIS. In conclusion, I have just 30 seconds of testimony to offer. We started this preliminary investigation last fall when the information came. When the subcommittee was given a very brief preliminary report in December, I understood that we were asked to go ahead and complete the investigation. That we have been doing as economically as possible. In view of the question raised, I think I should have directions from the subcommittee now as to whether to proceed. As far as we were concerned, I think we have done all we had in mind to do with the exception of answering the further questions that were raised this morning. But I want to point out, I understood we were doing this because the committee asked us to do it in December. Mr. BONNER. Your statement is absolutely correct. General Accounting did this investigation at the request of the subcommittee, and we thanked the General Accounting Office for its cooperation, and we asked you to continue the investigation. So there is no question as to why you were in the picture, other than at the request of an official committee of the Congress. Mr. SHELLEY. I think it is important, Mr. Chairman, that this investigation be continued. Mr. BONNER. Mrs. Harden? Mrs. HARDEN. I have no further questions. Mr. BONNER. Now, is there any further statement from the representatives of the Accounting Office? Mr. CARTWRIGHT. No, Mr. Bonner. Mr. BONNER. Do you have any further statement, Mr. Ellis, at this time? Mr. ELLIS. No, thank you, sir. Mr. BONNER. The subcommittee will stand adjourned until further notice. (The supplemental report on the acquisition of surplus property, by the Bunker Hill School of Aeronautics, Inc., by the General Accounting Office, February 28, 1951, marked "Exhibit 27," follows:) EXHIBIT 27 SUPPLEMENTAL REPORT ON THE ACQUISITION OF SURPLUS PROPERTY BY THE BUNKER HILL SCHOOL OF AERONAUTICS, INC. (General Accounting Office, February 28, 1951) SUMMARY Property obtained from Government sources by the Bunker Hill School of Aeronautics, Inc. Explanation of property acquired under Regulations 4 and 14, War Assets Administration. Total Government cost $4,939,117.10, according to General Accounting Office schedule attached as schedule A. General Services Administration restatement of account sets out total Government cost as $4,045,397.29, reflecting balance of $1,265.04 as still owed. General Services Administration restatement of account does not include two sales documents noted and raises the question as to whether further documents are not included therein. Property obtained from Army Air Force General Accounting Schedule B reflects planes and component parts, and so forth, totaling Government cost of $566,047.07 transferred to the school by Army Air Forces June 19, 1947, and later under War Department regulations pertaining. Status and location of surplus property transferred to Bunker Hill School of Aeronautics, Inc. Property transferred to school by War Assets Administration and Army Air Forces and undisposed of located in various points in Michigan, Indiana, Ohio, and Illinois. Federal Security Agency attempting to recover available property and school officials agree as to return but require reimbursement in amount of $35,000 representing cost of transportation to points of maintenance, and so forth. Comment on degree of care by school in maintaining property. Property disposed of by Bunker Hill School of Aeronautics, Inc.-Details as to sale of 26 engines for profit and other sales, trades, and joint ventures involving school property described. Qualification and certification of Bunker Hill School of Aeronautics, Inc., for acquisition from War Assets Administration War Assets regulations.-WAA Regulations 4 and 14 covering basis of certification. Background.-Background information as to genesis and development of Bunker Hill School Aeronautics. Certification of Bunker Hill School of Aeronautics with War Assets Administration. Initial agreement with WAA executed in name of Bunker Hill School, a nonexistent school. Formal agreement certified by county official having jurisdiction over Bunker Hill High School. Bunker Hill School for Aeronautics certified by Indiana State Industrial Agency prior to its incorporation. Bunker Hill School of Aeronautics agreement executed in its own name in June 1947 and certified by Indiana State Educational Agency as a tax-supported instrumentality June 13, 1947. Property transferred from Bunker Hill School to Bunker Hill School of Aeronautics by WAA June 18, 1947, and property continued to be shipped in name of Bunker Hill School. Tax exemption status of Bunker Hill School of Aeronautics.-Requirements of 101 (6) Internal Revenue Code in connection with requirements for qualification to receive surplus property. Details of representations to WAA as a taxexempt institution and invalidity of "if" exemption. Data re non-tax-exempt status of school. Donable property Authorization for donated property to educational institutions.-War Procurement Regulations requirements set out. State of Indiana application for Army donable property form.-Requirements of State of Indiana application form set out. Details of withholding of approval by United States Office of Education, Federal Security Agency for receipt of donable property by school prior to June 23, 1947. After this date Office of Education approved release of Air Force property for donation to school. School representations for qualification to receive donable property inconsistent with facts. Miscellaneous Statement of Harry R. Curran, Jr.-Signed statement of Curran furnished General Accounting Office developing facts of organization of Bunker Hill Corp. and air school and substance of conversations with Harrah and Pemberton as to relationships with War Assets Administration, plans for air school, favoritism in acquiring surplus property, and excessive amounts of property so acquired. Information as to employment of Reginald I. Heath with War Assets Arministration and later with Bunker Hill School of Aeronautics, Inc. Statement of Wayne M. Ladd.-Signed statement of Wayne M. Ladd furnished General Accounting Office setting out early formulation of Bunker Hill Corp. and plans for air school; facts of original agreement executed in name of Bunker Hill School; letter of June 19, 1947, from Heddleston to L. E. Smith transferring property from Bunker Hill School to Bunker Hill School of Aeronautics, Inc. Statement of D. W. Detray.-Detray, vice president of Bunker Hill School of Aeronautics, made a statement to General Accounting Office representatives setting out early formulation of air school indicating original interest developed by Pemberton who introduced him to Harrah; briefly reviews difficulties of school and Bunker Hill Corp.; states no connection between Bunker Hill School and Bunker Hill School of Aeronautics and his understanding that aeronautics school had independent certification with War Assets Administration. Navy Department interest.-Information from Navy memoranda dated November 20 and December 3, 1947, from Doyle and Manning, respectively, setting out noncompliance with terms of lease of airfield; excessive equipment obtained and conclusions as to favorable position of school in acquiring such property. SUPPLEMENTAL REPORT ON THE ACQUISITION OF SURPLUS PROPERTY BY THE BUNKER HILL SCHOOL OF AERONAUTICS, INC. On December 7, 1950, a statement was presented to the Subcommittee on Intergovernmental Relations, Committee on Expenditures in the Executive Departments, House of Representatives, on the above matter, and was introduced with the qualification that the investigation had not been completed, that it was continuing, and that the statement as submitted contained only data developed to that date. The following additional data has been developed. PROPERTY OBTAINED FROM GOVERNMENT SOURCES BY THE BUNKER HILL SCHOOL OF AERONAUTICS, INC. Property obtained from War Assets Administration Schedule A attached hereto consists of a listing and description of the property acquired by Bunker Hill School of Aeronautics, Inc., from War Assets Administration between December of 1946 and August of 1947. This listing was prepared by the General Accounting Office from inventory material and sales documents furnished by the Compliance Division of the General Services Administration. The property was transferred under Regulations Nos. 4 and 14 of the War Assets Administration. Regulation No. 4 concerned material distributed under the Educational Aircraft Disposal Division of the Office of Aircraft Disposal, War Assets Administration, which during the period concerned was under the direction of Russell A. Heddleston. Under this regulation, items were listed for sale at arbitrarily fixed prices and were not on a percentage basis. For example, in the property received under this program by Bunker Hill School of Aeronautics, Inc., there were a number of Lycoming airplane engines, type 0-435, for which the school was billed in the amount of $10 each. As will be noted later, a number of these engines were sold by C. C. Harrah, president of the Bunker Hill School of Aeronautics, Inc., for $175 each. Under Regulation No. 14 of War Assets Administration items were sold to nonprofit institutions at percentage discounts, and the Bunker Hill School of Aeronautics, Inc., received property of this nature. For example, one sales document, No. 2885878, reflects transfers of tools of various kinds from War Assets Administration to Bunker Hill School of Aeronautics, Inc., aggregating a total cost of $5,404.67. The amount billed to the school in this connection was $270.23, representing a 95 percent discount to the school. It is understood that under Regulation No. 14 the 95 percent discount was allowable to educational institutions offering courses in training to veterans. It is also understood that to educational institutions, not offering veterans' training, a discount of 40 percent was allowable. Information has been obtained from the Veterans' Administration regional office of Indianapolis, Ind., and from the Indiana State department of veterans' affairs, to the effect that the Bunker Hill School of Aeronautics, Inc., had never been approved for veterans' training and had never applied for such approval. Copies of letters from these organizations, dated December 14, 1950, are included in schedule A-1 attached. Sales document No. 2885736 reflects the transfer of tools and equipment aggregating a total of $2,480.48. Of this total amount, the 95-percent discount was allowable on $1,832.08 and the 40-percent discount was allowable on $648.40. The total amount billed to Bunker Hill School of Aeronautics, Inc., was $480.64. Schedue A, attached, has been made as complete as possible from the documents available. It is to be noted that in view of the time interval since the transfers were made, and the attendant difficulty of locating basic records, there is some uncertainty as to whether all items transferred to Bunker Hill School of Aeronautics, Inc., by War Assets Administration are included. It may be also true that some of the items listed were not actually transferred to the school, but it is felt that the listing is substantially accurate to the extent possible. The school had apparently not maintained an inventory of the property, but it is understood that copies of the sales documents, bills of lading, and similar material may still be in the possession of officers of the school. Schedule A, attached, reflects a total Government cost of the property included to be $4,939,117.10. A restatement of account between the General Services Administration and Bunker Hill School of Aeronautics, Inc., also attached as part of schedule A, lists the total Government cost us $4,045,397.29, and reflects a balance of $1,265.04 as being still owed to the Government. It is to be noted that this restatement of account does not include sales documents Nos. 2885736 and 2885878, cited above. Inclusion of these items would increase the balance due the Government. They further raise the question as to whether there are similar imperfections in the restatement of accounts as it is constituted in the General Services Administration. PROPERTY OBTAINED FROM ARMY AIR FORCE The Bunker Hill School of Aeronautics, Inc., received a substantial amount of property from the Army Air Force in June and succeeding months of 1947. These transfers were effected under the provisions of War Department Procurement Regulation No. 7, paragraph 7-316. This regulation referred to donations to educational institutions approved by the Federal Security Agency, Office of Education. The requirements were similar to those necessary for qualification under the War Assets Administration regulations and included the necessity for a tax-exempt status under section 101 (6) of the Internal Revenue Code. The property transferred by the Army Air Force to the Bunker Hill School of Aeronautics, Inc., included airplanes and airplane component parts, various heavy equipment, tools, instruments, etc. There is attached hereto a listing, designated as schedule B, which has been prepared by the General Accounting Office from documents at Wright-Patterson Air Force Base, Dayton, Chio, which it is believed accurately sets out the property obtained by Bunker Hill School of Aeronautics, Inc., from the Army Air Force. The aggregate Government cost, as reflected in schedule B, is $566,047.07. STATUS AND LOCATION OF SURPLUS PROPERTY TRANSFERRED TO BUNKER HILL SCHOOL OF AERONAUTICS, INC. C. C. Harrah, president of Bunker Hill School of Aeronautics, Inc., maintains an office and warehouses in Niles, Mich., at four different addresses. A substantial amount of the subject property is stored at these locations. Attached hereto as exhibit 1 is a copy of a letter and enclosures from Paul R. Moo, of the law firm of Seebirt, Oare and Deahl, South Bend, Ind., to Federal Security Agency, dated January 12, 1951, which in brief terms describes materials in the custody of Bunker Hill School of Aeronautics, Inc., and its locations at Kalamazoo, Mich.; Bunker Hill, Ind.; Cincinnati, Ohio; Lansing, Ill.; Seymour, Ind. ; and Niles, Mich. It is understood that the Federal Security Agency has gone forward with its efforts to recover the available property for the Government, and it is further understood from conversations between C. C. Harrah and representatives of the General Accounting Office that the Bunker Hill School of Aeronautics, Inc., is willing to return property presently in its possession to the Government, in consideration of being reimbursed by the Government in the amount of approximately $35,000. This amount, according to Mr. Harrah, represents various costs to the school in connection with the original transportation of the property to the school and its retransportation to various points of present maintenance. Other considerations in this amount, according to Mr. Harrah, would be the efforts made by Bunker Hill School of Aeronautics, Inc., to maintain the property in good condition. There are attached hereto, as exhibit 2, various photographs of parts of the property at locations in Kalamazoo and Niles, Mich., and at Seymour, Ind. These photographs were obtained by the General Accounting Office during December 1950 and reflect that at least parts of the property are not being maintained in a secure or careful condition. As a further commentary on the character of the maintenance of equipment in the possession of Bunker Hill School of Aeronautics, Inc., there is attached hereto, as exhibit 3, a report of investigation made by Sergeant Robert L. Bennett, of the Indiana State Police, at Seymour, Ind., in January 1950, of the burglary by unknown individuals resulting in the loss of various radio equipment belonging to Bunker Hill School of Aeronautics, Inc., and stored at Freeman Field, Seymour, Ind. This report evaluates the stolen property in the amount of $3,000. |