Comments on Budget Proposal to Tax the Investment Income of Section 501(c) (6) Organizations.

March 8, 2000

On March 8, 2000, Tax Executives Institute sent the following comments to Senator William V. Roth, Chairman of the Senate Finance Committee, and Representative Bill Archer, Chairman of the House Ways and Means Committee, concerning the Clinton Administration's proposal to tax the investment income of section 501(c)(6) organizations.

On February 7, 2000, President Clinton released his budget proposals for the fiscal year 2001. Included in those proposals was a provision to tax the investment income of organizations exempt from tax under section 501(c)(6) of the Internal Revenue Code. For the reasons set forth below, Tax Executives Institute strongly opposes the enactment of the proposal.

Background

Tax Executives Institute is the preeminent association of corporate tax professionals in North America. TEI has 5,000 individual members who represent more than 2,800 of the leading corporations in the United States, Canada, and Europe. As a professional association, TEI is dedicated to the development and implementation of sound tax policy, to promoting the uniform and equitable enforcement of the tax laws, and to reducing the cost and burden of administration and compliance to the benefit of both government and taxpayers. The companies represented by TEI members belong (either directly or through their employees) to numerous associations, including the Institute itself, that would be subject to the Administration's proposal.

The President's Proposal Should Be Rejected

Section 501(c)(6) of the Internal Revenue Code provides an exemption from income tax for nonprofit business leagues, chambers of commerce, and professional and trade associations. Such organizations are not taxed on the revenues derived from membership dues and exempt purpose activities. Income derived from unrelated business activities, however, is taxed under section 511 at the regular corporate rate, but an exclusion is provided for investment income derived from interest, dividends, rents, and royalties.

The Administration's fiscal year 2001 budget package exhumes a proposal to eliminate the current exclusion from unrelated business income tax (UBIT) in respect of investment income in excess of $10,000 earned by section 501(c)(6) organizations (such as TEI). The Administration explained the rationale for the proposal, as follows:

The current-law exclusion from the UBIT for certain investment income of a trade association allows the organization's members to obtain...