revenues received for advertising presentations in association

journals, the over extension of the heading for subsection 513(c) of the Code, and the provisions limiting the deductions of nonexempt membership organizations.

Very often a membership organization will form a foundation

for eleemosynary purposes. These foundations are funded by members contributions and are exempt from tax under section 501(c)(3). Frequently the smaller contributions of the members are paid to the member organization which in turn makes one large payment to the charitable organization it has formed.

Under the Act all section 501(c)(3) organizations are private foundations unless they fall within four prescribed exceptions. These exceptions are:

1. That class of organization which will qualify

for the 30% charitable contribution limitation under the

Act,

2. Organizations which meet the statutory test established to implement the concept of broadly supported organizations,

3. Organizations which exist to perform the functions, etc., of the above two classes of organizations or

which are operated, supervised, or controlled by one of

these types of organizations and which are not controlled

by "disqualified persons" as defined by the Act, and

4. Organizations operating exclusively for testing

for public safety purposes.

Under the Act it is possible that a foundation created by a member organization would fail to meet any of these exceptions. Exceptions 1, 3 and 4 would never apply simply by definition. The second exception would not apply where a number of members made contributions aggregating more than $5,000 to the membership organization for the express purpose of passing the funds on to the charitable organization. The membership organization would be considered a "disqualified person" when the funds were contributed to the charitable foundation and the charitable foundation would be a

private foundation. Thus, an organization which receives support indirectly from a very broad base and which is not likely to be able to commit any of the culpable acts which the Act is intended to police becomes subject to restrictions which do not cure ills but

rather frustrate charitable activities.

It is respectfully submitted that this result could be avoided by the simple addition of language to the support tests found in

proposed section 509(a)(2) indicating that the test is to be applied on a direct or an indirect basis.

For some time the Internal Revenue Service has attempted to advance an argument that advertising fees for presentations in association journals constitute income which is subject to income tax because it is unrelated to the exempt functions of the organization publishing the periodical. This argument was never successful until the House passed section 121(c) of the Tax Reform Act amending section 513(c) of the Code. This provision accepts the premise that the sale of advertising space in a magazine can be fragmented from the publication of the magazine. The advertising then becomes subject to the tax even though it cannot, without resort to this new fiction, be divorced from the publication of a magazine which is confessedly in furtherance of the exempt functions of the publisher. I submit that the underlying policy considerations will not support the legislation in point.

A magazine or journal is a unit composed of both the editorial and advertising activities. When these two elements are fragmented by a fiction it then becomes necessary to test each element in terms of its affect on the exempt function of the publishing organization. This means each advertisement must be scrutinized to de

termine its relationship. To draw the line on an individual basis of advertising and to say that this is advertising which is unrelated and that advertising is related is to open the door to subjective

judgment and would present to the IRS and taxpayers generally, an almost insurmountable audit problem and would only breed litiga

tion since in effect each piece of advertising would be another case, i.e., as to whether the advertising was related to the exempt functions of the organization.

Accordingly, the proper measure of the unrelated business

tax as applied to the advertising revenues of association publications, should be whether or not the magazine itself is related to the exempt functions of the organization involved, and if it is related in the main to the exempt functions, then no part of its net revenues

should be taxed.

It should be further emphasized to this committee that I am advised by my membership that in general there is little net revenue involved in this area. A summary of our membership of over 2,000

industry and professional association executives indicates the

4. 60% of the 20% have a loss operation after a proper

allocation of expenses.

Any tax which is imposed on the operation of an association journal is an increase in the cost of membership, and thus it is a tax on small association members for acting collectively to advance the interests which each could advance acting alone only at much greater expense. In the main our membership is not composed of the large industry and professional associations but is composed of smaller groups. Of our 2, 900 members, over half of the membership involved are associations which have budgets of less than $100,000 per year.

These publications take the form of weekly newspapers and magazines which are generally the spokesmen for the industry as well as also being the educational catalysts for the industry. The magazine and publications of my members are devoted exclusively to reporting news of real importance and general significance to the membership of the particular organization involved. In the case of magazines run by the associations, their chief interest is to carry out the exempt purposes of the particular organization involved. These magazines are not competitive with any other publication because there can be no commercial equivalent to

the particular magazines or publications involved. Thr commercial