Federal Tax Exemption and Tax Avoidance
Congress and Question of Tax-Exempt Foundations
The Tax-Exempt position of foundations and trusts organized on a non-profit basis but actively engaged in profit-making financial and business operations will be carefully scrutinized by the 81st Congress. More than a year ago the House Ways and Means Committee inquired into the activities of various college alumni foundations which were operating competitive business enterprises free of income tax. Hearings conducted recently by a Senate subcommittee headed by Sen. Tobey (R., N. H.) disclosed that several trusts, organized directly or indirectly by the president of Textron Incorporated, had made phenomenal profits through intricate financial deals with that corporation and its subsidiaries and, while claiming exemption from all federal income taxes, had donated only relatively small amounts to the charitable and educational organizations which they had been set up to aid.
Activities of the Textron trusts and of the college alumni foundations have been so foreign to the common concept of charitable trusts and educational foundations as to raise the question of whether they are rightfully entitled to full tax exemption. In the light of strong doubts that the privilege of tax exemption, extended by the revenue laws to certain organizations, was intended to cover such operations, it may be taken for granted that Congress will examine the whole problem with a view to closing loopholes for tax avoidance. And its inquiry may be expected to include so-called “family foundations,” conducted along more conventional lines, as well as foundations and trusts active in business and finance.
High Taxes as Spur to Use of Tax Avoidance Devices
High taxes always stimulate a search for loopholes in the law that may be legally utilized to reduce the amounts due to the tax collector, and there are abundant signs that the present era of high federal income taxes is not exceptional in this respect. Individuals, no less than business taxpayers, have reacted normally to the heavy impact of war and postwar imposts. Gen. Eisenhower, for example, reportedly put himself in line for a considerable tax saving on receipts from his recently published book by making an outright sale of the copyright instead of entering into the usual royalties arrangement. By holding the completed manuscript for six months and then selling it for a lump sum, the General could treat the proceeds as a long-term capital gain, subject to a tax of only 25 per cent, rather than as income taxable at much higher graduated rates. Several prominent radio entertainers, who recently contracted to switch networks, also have sought to arrange the transactions in such a way as to make the large lump-sum payments involved taxable as capital gains at 25 per cent instead of as income which might be subject in these cases to the maximum effective rate of 77 per cent.