necessarily involved in our consideration of the problems that confront us, we appreciate your kindness in telling us something about the tax phases of that welfare fund.

The CHAIRMAN. Senator Robertson, I would like to say to Mr. Oliphant I will have to leave, but I will read his testimony with much interest. I have an appointment at the White House.

Mr. OLIPHANT. Mr. Chairman, it is a pleasure to be here in response to your request. I have with me Mr. William Loeb of my office. Our appearance here this morning, of course, could only be in the nature of what might be technical advice as to pension trusts in general, and other welfare funds.

Your record will show, as I understand it, that a request for a ruling is pending before the Bureau of Internal Revenue with respect to the welfare fund. Of course, you understand that we are under the limitations prescribed in the code as to discussion of any particular

case.

Senator ROBERTSON. We are perfectly aware of that. We did not expect you to tell us this morning what your final ruling is going to be upon the tax status of the miners' welfare fund.

But we did want to know some of the general legal principles that confront the Treasury Department with respect to all welfare funds, and possibly you could give us some details of the problems that confront you with respect to this particular fund.

Mr. OLIPHANT. All right. Let me proceed, as far as I can, to answer any questions you may have; and where the statute requires it, I will beg your indulgence in not replying.

If you want to proceed on the basis of your asking me questions, go right ahead.

Senator ROBERTSON. I would rather you make a preliminary statement, and then I will ask you some questions.

Mr. OLIPHANT. The subject of welfare funds and pension arrangements has been before the Bureau in several instances. All of them raised intricate and technical questions.

The provisions of law with which we are dealing are technical in themselves, and a problem of any welfare fund generally resolves itself into three aspects.

First, whether the fund itself is exempt, either as a qualified trust under section 165, or otherwise exempt under section 101 of the code.

The second question is: What happens as far as the deduction by the employer to the funds is concerned; that is, whether or not it is deductible in whole or deductible in part?

The third question that is always presented is: What happens as far as the employee is concerned? Namely, at what point and to what extent is the employee required to take the amount of payments to him into income or into a pension or welfare fund?

I might say that generally welfare funds that have been referred to us might be characterized as being in the nature of a sport situation, in that there is a combination of what may well be a pension fund as well as a fund for the payment or reimbursement for welfare expenses generally.

The problems that the Bureau faces in all of these situations are, in a little more detail, something like this. The fund itself may claim that it is exempt from tax under, say, section 101 (6). That immedi

ately raises the point, if it is under 101 (6), that the fund is exempt, that payments by the employer would necessarily be contributions and hence would be limited by the restriction contained in the code as to the amount.

Senator ROBERTSON. May I interrupt you to identify 101 (6), because 101 deals with a large number of classified groups that are not subject to taxation, like churches, charitable institutions, schools, and things of that kind.

Which particular exemption is subsection 6?

Mr. OLIPHANT. Subsection 6 provides that an organization that is organized and operated exclusively for religious, educational, or charitable purposes, no part of the net earnings of which inure to the benefit of a stockholder, and no substantial part of the activities of which are attempted to influence legislation, are exempt from the payment of all taxes.

At the same time, and as a companion to that section, it provides for a deduction by the individual or the corporation of amounts contributed to each organization; that is, the 101 (6) section, the section which generally educational, religious, and scientific and charitable organizations try to come under for the purpose of obtaining charitable deductions.

Senator ROBERTSON. Those charitable deductions are limited to 5 percent of what?

Mr. OLIPHANT. Five percent of the income of a corporation.

Senator ROBERTSON. Is that the net income before taxes of the corporation?

Mr. OLIPHANT. That is net income before taxes, the net income computed without regard to the charitable contributor; that is correct. Senator ROBERTSON. I was under the impression that none of these charitable organizations were permitted to use their funds for political purposes. If they did, they would lose their tax-exempt status.

Did I understand you to say that the statute provides that they must not substantially do that, or just what did you say or what did you mean to say?

Mr. OLIPHANT. I was trying to quote verbatim from section 101 (6). Probably I had better read the section into the record, if you will bear with me:

Corporations or any community-chest fund or foundation organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes, or for the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private shareholder or individual, and no substantial part of the activities of which is carrying on propaganda or otherwise attempting to influence legislation

So that the phrase you had in mind, Mr. Chairman, is that—

no substantial part of the activities of which is carrying on propaganda or otherwise attempting to influence legislation.

Senator ROBERTSON. Now, let us see if we can differentiate between "substantial part of the activities of the organization to influence legislation" and the use of a part of the charity funds for that purpose.

Is it permissible for any part of a charitable fund to be used for political purposes and still claim the characteristics of tax-exempt status of a charity fund?

Mr. OLIPHANT. I would answer that by saying what is obvious, namely, that trying to draw a line as to what is substantial and what

94422-49-pt. 2-6

is not substantial is always a very difficult thing. We are faced with it every day in thousands of cases of requests for exemption.

We try, insofar as possible, to interpret the words of the statutes just as they are given. If a small part of the funds or of the activities of the organization are devoted to propaganda, attempting to influence legislation, it would have to be such a minor part as to really be insignificant.

In general, we hold that section 101 (6) is not open to any operations for propaganda purposes or for attempting to influence legislation.

Senator ROBERTSON. Let us take a hypothetical case, which probably never will occur, but just to use it for an illustration to get an enunciation of the principle.

Suppose the trustees of a charitable fund should vote to appropriate 10 percent of the fund to a political campaign. Would that be a substantial part of their activities for charity?

Mr. OLIPHANT. In my opinion that would be a substantial part of the fund and would preclude exemption.

Senator ROBERTSON. Suppose they used only 1 percent, but that 1 percent amounted to $1,000,000. Would that be political activity that would affect the tax status?

Mr. OLIPHANT. In that illustration, I would again say that that would be sufficient to preclude exemption.

Senator ROBERTSON. You may proceed, then, with your general discussion of charitable trusts, and then I want you to discuss pension plans; because apparently in the welfare fund we are immediately dealing with, there are two phases of it, according to the minutes of the trustees of the miners' welfare fund.

They make appropriations to help those who have been injured in the coal mines. They give medical services, and they give contributions to widows. And then they have a plan of $100 a month as a pension for those who have been retired.

That prevents two different facets of this tax question, does it not? Mr. OLIPHANT. That is correct. The general treatment of pension funds is somewhat as follows, if you will bear with me in a very technical field.

If an employer sets up, or there is set up, a fund which qualifies under section 165 of the code, then payments to that fund by the employer are deductible, and amounts received by the employee are postponed as far as income tax inclusion purposes are concerned.

Section 165 (a), in dealing with what the attributes of the so-called exempt funds, generally requires that the plan must not be discriminatory in that its advantages go to high-salaried executives or persons of that character, namely, the plan must be of broad, general coverage.

Second, until such time as all of the liabilities of the pension trust are satisfied, no part of the amounts contributed to the pension fund by the employer may come back to the employer in any form.

Those are generally the two basic principles involved in what is termed to be an exempt fund.

Senator ROBERTSON. How about the vested right of the worker in the fund? Is that involved?

Mr. OLIPHANT. The employee does not have to have a vested right in any part of the fund in order for it to be exempt from section 165.

I may say in that connection that some years ago I believe it was in 1942-the Department urged that such a provision be included; but the law as it now reads does not so include it.

Senator ROBERTSON. Do I understand if an employer who is contributing all of a pension fund makes that contribution to trustees for a specified rate of pension based partly upon longevity and partly upon previous earnings, and so forth, and it is to apply as you say uniformly to all employees, do the trustees then have the privilege of denying the pension to the men and using the fund for something else?

Mr. OLIPHANT. Let me answer your question this way. The agreement under which the fund of the pension trust is set up will require payments to employees. A fund does not lose its exempt status merely because the trustees may allocate payments among different beneficiaries.

The scheme of the statute, of course, is that the trustees are trustees as such, and that they hold the administration of the trust subject to the agreement under which it was set up.

Senator ROBERTSON. When a pension fund is created, does the employer become a party to the agreement, or does he just contribute to the fund and leave it to somebody else to work out the plan and do largely what they please with the money?

Mr. OLIPHANT. The employer is a party to the agreement setting up the fund.

Senator ROBERTSON. But I am talking about an agreement that goes beyond the contribution, let us say, of 20 cents a ton on all the coal we mine. We agree to pay 20 cents a ton, and we pay it through three trustees.

To make that a pension plan, does that contributing company have a right to be a party to an agreement concerning the pension that goes to the men or not?

Mr. OLIPHANT. Ordinarily I would say in answer to your question, Senator, you always have the employer and the trust and the beneficiary. The employee, of course, has his rights to compel performance by the trustees in accordance with the provisions of the trust agree

ment.

At the same time, it would seem to me that if there is a violation of the trust provision as far as the trustees are concerned, the employers would equally have a right to compel performance.

Senator ROBERTSON. Now, the testimony before us on the miners' welfare fund was that when the Government took over the mines, the Government agreed to a 5 percent royalty to be paid into the welfare fund, and then turned the mines back to the operators and said, "This is your contract."

Then on a subsequent occasion, after agreeing to a wage increase, they were told, “We will also have to have a 10-cent royalty on coal," and they paid then 10 cents.

On a still subsequent occasion they were told that, "This is your contract," and that included a 20 cents royalty on coal. One witness stated the contract was put up to them, "Take it or leave it; but if you don't take it, you don't operate."

Apparently until Miss Josephine Roche disclosed the disbursements from this fund, those contributing to it did not know anything about how this welfare fund was being handled or operated.

Therefore, I was asking you, if it is to be a pension fund, whether or not those who contributed to it are supposed to have some voice in setting up the pension fund.

Mr. OLIPHANT. The best answer to that, Mr. Chairman, under the general law of trusts, is that anybody who was injured by the trust would presumably have a cause of action to enforce the performance of its terms.

The Bureau's part in a pension fund is strictly defined by statute; and as I say, it goes mainly to determining whether or not there is discrimination in setting up the fund and whether or not the employer can get any of it back. We do not have any jurisdiction

Senator ROBERTSON. I do not think, in reference to the miners' welfare fund, there is any question about the employers getting any of it back. I think it is irrevocable so far as they are concerned. When they pay it in, it is gone from them forever. So the fund would certainly meet the pension test in that respect. As far as the man who contributes it is concerned, it is irrevocable.

What has been the previous ruling of the Treasury Department with respect to the taxability of a pension in the hands of the recipient?

Mr. OLIPHANT. The scheme of taxation of payments by a pension fund to the beneficiary, is to tax him when he begins to get payment. Senator ROBERTSON. It is on the theory, then, of deferred compensation?

Mr. OLIPHANT. That is correct, sir, in general.

Senator ROBERTSON. If I am a worker and I get taxed on a payment that comes to me after retirement on the basis of receiving deferred compensation, would I not have a vested interest in the fund from which the payment is to be made?

Mr. OLIPHANT. Well, that would depend upon, it seems to me, what is recited in the trust instrument. If, for instance, the trust instrument provided-to use an absurd example-that my grandmother must predecease me in order for me to receive payment, and the plan is still qualified as a pension plan, my rights would be forfeitable if she did not predecease me and I would not get my money.

Senator ROBERTSON. I will read you some sections from the plan of the welfare and retirement fund of the United Mine Workers of America, which were attached to the minutes furnished us by Miss Josephine Roche, and I quote:

Title to all the moneys paid into said fund shall be vested in and remain exclusively in the trustees of the fund; and it is the intention of the parties hereto that said fund shall constitute an irrevocable trust and that no benefits or moneys payable from this fund shall be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, or charge, and any attempt to so anticipate, alienate, sell, transfer, assign, pledge, or encumber, or charge the same shall be void.

The moneys to be paid into said fund shall not constitute or be deemed wages due to the individual mine worker, nor shall said moneys in any manner be liable for or subject to the debts, contracts, liabilities, or torts of the parties entitled to such money; that is, the beneficiaries of said trust under the terms of this agreement.

Now, I skip down to subsection (b):

It is hereby stipulated and agreed by the contracting parties with respect to the fund created by section 4 (a) of the national bituminous coal wage agreement, dated May 29, 1946, commonly known as the Krug-Lewis agreement, as follows