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was a political advertisement as such, I assume that would be the answer to it.

Our approach to it is on the basis of whether it is an ordinary and necessary business expense under the standards applied that I have attempted to explain here. If it is political advertising, the expense is not deductible.

The CHAIRMAN. How do you determine whether it is political advertising or not? Let us say that one corporation was favorable to the Democratic cause and pointed to the tragedies of the depression some years back, and then one which was favorable to the Republican cause would run one pointing out the evils of socialism; would those be political ads?

Mr. SUGARMAN. Mr. Chairman, as you know, that is a very difficult question in a very difficult field. It is a field in which no general rule can be laid down. It has long been recognized that institutional advertising in which the advertiser will carry his name without naming a specific product is a legitimate form of advertising and a recognized business device, so that the very fact that the advertisement carries a message rather than the name of a particular product would not prevent it from being a business expense.

We do attempt to watch those situations where advertising will take on a political flavor, but we do not want to be in the position of censoring advertising or telling the businessman how to run his business, so that what we attempt to do is apply the standards I have been referring to on a case-by-case basis, depending on the actual nature of the advertising. It is a matter of surveying the words used and the effect of them, but it has always to be kept in mind that there are business advantages in almost any type of advertising, and we do not want to be in the position of second-guessing the businessman if he expects a return from his advertising. So, the rule is whether the advertisement is an ordinary and necessary type of expenditure, and whether it is reasonable considering the advertising budget of the taxpayer, and whether or not commensurate financial return can be expected therefrom.

The CHAIRMAN. Do you feel that the present tax laws are adequate in this field ?

Mr. SUGARMAN. Mr. Chairman, that is a field in which I do not feel I am particularly competent to testify in the sense of the basic policy that may be involved depending upon the objectives which the Congress may have in connection with the tax laws. I only want to make this one comment, and this from an administrative standpoint: That matters of this nature, of course, are troublesome to the Bureau of Internal Revenue because the types of questions which arise are not the usual tax questions that an accountant or lawyer has had experience in approaching; so that, when you get into problems which hạve political, economic, social, and other objectives, it is not only difficult, of course, to write but to interpret statutes of that sort. I say that only in that sense.

The CHAIRMAN. Do you feel that the statutes are not quite specific enough?

Mr. SUGARMAN. I would not want to put it that way so much as 1 would want to put it this way: That any move in the direction of additional statutes should be most carefully considered from the

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standpoint of the basic objectives of internal-revenue laws and the objectives of the particular statute.

The CHAIRMAN. Have you had any problems arising in the case of business organizations or any kind of organizations which have indulged in lobbying activities? Have you had trouble of defining that line, of attempting to influence legislation ?

Mr. SUGARMAN. That does cause difficulty in some cases, but there have been court decisions in that field. As I indicated in my statement, there is a Supreme Court case involving just that type of situation, of a business concern which was opposing particular legislation. It comes up in connection with legislation in the Congress or in the indiivdual State governments. Following the line of that Supreme Court decision where expenses are detected to be those in the form of propaganda for particular legislation, those expenditures are denied.

The CHAIRMAN. That is all. Mr. Karsten.
Mr. KARSTEN. I have no questions, Mr. Chairman.
The CHAIRMAN. Mr. Long.

Mr. Long. I have one question, Mr. Chairman. Mr. Sugarman, while I realize the usual surplus remaining after a political campaign is concluded is small, what would be the statuts of such a surplus taxwise in the event one did exist?

Mr. SUGARMAN. It is difficult to answer that question without having the complete facts as to the real situation. I say that for this reason: The considerations involved in making a determination in a case of that sort would depend first of all upon knowing the purpose for which the fund was created, and the purpose of the donors in contributing the money. Consideration then would have to be taken into account as to whether or not the contributions were made only for the campaign or with the view that there would be such a carry-over fund.

Then, on the other hand, we would also have to know the uses to which the money is put. To the extent to which the money is used for the payment for services, such as clerk help paid out of the fund during the campaign, such payments when received by the persons rendering the service would be income to them. However, when the money merely remains in the fund and is available for the next campaign, then it would have to have the original characteristics as stated earlier. Generally such contributions are considered as gifts, and for that reason not taxable as income, because section 23 (c) of the Internal Revenue Code expressly excludes gifts from taxable income, but they would, of course, be subject to the usual gift-tax rules.

Mr. WARNER. Under the Revenue Code, section 101 (6), gifts to charitable organizations are deductible; is that correct?

Mr. SUGARMAN. That is right.

Mr. WARNER. Sections 101 (7) and 101 (8) provide for organizations which may enjoy tax-exempt status with respect to their own activities, but that gifts or contributions to them are not deductible because of some activity such as propagandizing that they may engage in which prevents their coming under 101 (6)?

Mr. SUGARMAN. If I may clarify that, it should be explained, as provided in the exhibit that the deductions for contributions to these organizations are actually allowed not in section 101 (6) but in sections 23 (o) and 23 (9). Sections 23 (o) and 23 (9) establish their


own standards, which, for the most part, are the same as 101 (6), but these organizations do not happen to fall into the 23 (o) and 23 (q) category. So, the reasons for deducting contributions to such organizations are really found in the 23 (o) and 23 (9) provisions.

Mr. WARNER. I am wondering about a particular situation which has come to our attention in the past. I recall a particular organization, which it so happened was under section 101 (8), and enjoyed a tax-exempt status. It advised one of its so-called subscribers that gifts to the organization were not deductible, but suggested that gifts to regularly constituted charitable organizations, which would presumably be under 101 (6), the funds of which were to be used for purchase of the organization's literature, would be deductible. It went further to state that a list of such organizations could be furnished upon request. That appeared to me to be a tax-avoidance device more than anything else. I wonder if that situation has been brought to your attention, and if you have made any rulings in connection with it.

Mr. SUGARMAN. The Bureau has been aware of that situation and has looked into it. The problem involved is somewhat similar to the problem which the chairman referred to earlier; that is, knowing what the real facts are as to whether there is a contribution to one organization or another. I might explain somewhat this way: that if I were to go to a store and order a set of, say, the Encyclopedia Britannica and then send it to the Washington (D. C.) Library as a gift, I could report in my tax return the gift to the Washington (D. C.) Library is the value or price of the encyclopedia, even though I bought that set of books from a department store or some other commercial source as to which the amount I paid is clearly established.

Those facts may be varied a little bit, and that is where the difficulty arises in this particular situation.

The other facts which would be important in the case that you mention, Mr. Warner, would be the fact as to whether the books that I purchased were really worth the price I paid, and also whether or not the books which I ordered sent to the particular library in question were received and recognized by the library as a gift or something that they would throw in the wastebasket or refuse to accept. The question of whether I made a gift to the publisher or whether I made one to a tax-exempt library will depend upon the consideration of those facts, as well as, of course, other relevant facts, such as determining just what the real intent of the donor was; so that our investigation of problems of that sort has been an investigation to determine what the facts were. If the facts show that a contribution has actually been made to the publisher, of course, the deduction is disallowed, but if the facts are the other way it will be treated basically the same as the case I originally described; and, of course, there may be variations, depending upon the actual determination of those factors that I mentioned.

Mr. WARNER. Would the political nature of the literature purchased have any significance in that question?

Mr. SUGARMAN. It would have significance, and it would be a very important factor as to whether or not the library, let us say, accepted it as educational material which it would keep on its shelves or whether it was something they would throw into the wastebasket.


Mr. WARNER. Supposing they distributed the literature and made it available for distribution to anyone coming into the library, so that they could take it home with them if they desired ?

Mr. SUGARMAN. Again I think the question is basically the same. In other words, if it is a type of literature which is of a factual nature, which you would normally expect to have on a library shelf, if it is educational in the usual standards we would apply to 101 (6) organizations then the answer would be, of course, that we would treat it as such, educational literature.

Mr. WARNER. That is all.

The CHAIRMAN. Thank you very much for your statement, Mr. Sugarman.

Mr. SUGARMAN. Thank you Mr. Chairman and gentlemen of the committee.


IN CONGRESS FROM THE STATE OF MICHIGAN The CHAIRMAN. Mr. Hoffman, the committee will be glad to hear you at this time.

Mr. HOFFMAN. Mr. Chairman, and members of the committee, in view of the fact that rule 11, section H-2 (b) and (d) gives the Committee on Government Operations jurisdiction over this same subject matter, I want to supplement my statement and so perhaps avoid any hearings by that committee or any of its subcommittees.

The Associated Press carries this statement (Washington Star, December 3, 1952):

A suggestion that Congress seek by law to limit the editorial space a newspaper may devote to a political candidate today was emphatically opposed by members of a congressional committee.

That is followed by the statement that the suggestion was made by me, and adds quotations of comments by some members of the committee. I quote:

"It's just unconstitutional," said Chairman Boggs when asked what he thought about Mr. Hoffman's proposal.

“Impractical,” commented Representative Keating of New York, the Republican member.

“It's unworkable and unconstitutional” was the reaction of Representative Karsten.

"You can't do anything about it if a paper wants to favor one candidate editorially,” said Representative McCulloch. “The Constitution guarantees the freedom of the press to print what it wants.”

By those comments my colleagues, who are members of the committee, freely, through a free press, expressed their opinions about one suggestion I made. And, exercising the same right, permit me to call attention to the well-known fact that the guarantee of free speech and a free press, carried by the first amendment, or under any other provision of the Constitution, is not an unlimited, uncircumscribed right, as the publisher-editor of the Kinston (N. C.) Daily Free Press seemed to assume when he wrote the following editorial, and I quote:



The Special House Committee on Campaign Spending promptly rejected a proposal by Representative Clare E. Hoffman, Republican of Michigan, to limit editorial space in a newspaper given to any particular candidate or party.


Of all the asinine, foolish proposals, that have come from some Congressmen, whose smartness has never been their chief characteristic, this takes the cake. Indeed it is asininity aggravated and personified.

We are wondering if Representative Hcffman ever read the Constitution of the United States. If so if he knows anything about what is commonly known as the Bill of Rights, which distinctly says that Congress cannot make any laws affecting the freedom of the press. In order for Mr. Hoffman to get a proper perspective, somebody ought to tell him that the editorial page of a newspaper belongs to the editor of that paper and it is his prerogative solely to say what shall go on that page and how much. Representative Hoffman, nor any other asinine Congressman has an infernal thing to do with it.

The Free Press at least is gratified that the committee of which Mr. Hoffman is a member had sense enough to discard the proposal which we believe will take second place to none in the category of as nine, foolish, and nonsensical ideas.

The writer of this editorial which I have just read, and some other publishers, editors, and individuals holding the same view, overlook the fact that the constitutional guaranty of free speech and a free press is not absolute. That is, that it means that anyone can any time in any place say and write what he pleases.

To make the issue simple and clear, let me repeat one sentence of this North Carolina publisher's and editor's statement. I quote:

In order for Mr. Hoffman to get a proper perspective, somebody ought to tell him that the editorial page of a newspaper belongs to the editor of that paper, and it is his prerogative solely to say what shall go on that page and how much.

Anyone giving that sentence a moment's thought knows it is not true. So far as I know, every State law prohibits the speaking in public or the publication of obscene matter, of views tending to encourage crime or the forcible destruction of our Government.

Moreover, the Federal Government-and that is the field in which we are now interested-has adopted legislation held valid by the Supreme Court—which, after all, ultimately passes upon the question as to whether an individual has been deprived of a right which, in effect, limits the constitutional guaranty of free speech and a free press.

Let us take a look at some of the provisions of title 18 of the United States Code. There are many State laws that limit—and this Federal statute (section 608)-places a limitation on-political contributions and procedure. Does anyone contend that a financial limitation upon one's activities is not a limitation upon speech and a free press?

The statute (sec. 591) defines contributions as follows:

The term “contributions” includes a gift, subscription, loan, advance, or de. posit or money or anything of value. [Italics mine.]

May I here suggest that no one denies that a political editorial has value, a value measured not by the space it occupies but only by the influence of the writer and the publication in which it appears?

Note these other valid sections which restrict the constitutional guaranty of free speech, a free press:

Section 594 denies to everyone the right to even "attempt to intimidate, threaten, or coerce” any person for the purpose of interfering with that person's right to vote as he may choose.

The press has carried stories to the effect that votes for delegates charged with selection of a presidential candidate have been influenced by verbal threats, of loss of position, and by written offers of remuneration.

Remember the Hanley case in New York?

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