JOHN D. and CATHERINE T. MacARTHUR FOUNDATION

Board of Directors

John E. Corbally, Former President of the University of Illinois

Robert P. Ewing, Retired Chairman of Bankers Life and Casualty Company

William H. Foege, M.D., Executive Director of the Carter Center of Emory University

James M. Furman, Retired Executive Vice President of the Foundation

Murray Gell-Mann, Millikan Professor of Theoretical Physics, California Institute of Technology, Nobel Laureate

Alan M. Hallene, Retired President, Montgomery Elevator International

Paul Harvey, News Commentator, American Broadcasting Company

John P. Holdren, Professor of Energy and Resources, University of California, Berkeley

Shirley Mount Hufstedler, Attorney-at-Law

Sara Lawrence Lightfoot, Professor of Education, Harvard Graduate School of Education

Margaret E. Mahoney, President, The Commonwealth Fund

Elizabeth J. McCormack, Associate, Rockefeller Family & Associates

George A. Ranney, Jr., Attorney-at-Law

Adele Simmons, President of the Foundation

Thomas C. Theobald, Partner and investor at William Blair Capital Partners, Former Chairman of Continental Bank.

No member of the Board of Directors is in any way related to John D. and Catherine T. MacArthur, founders of the Foundation

"EXHIBIT 9"

STATEMENT FOR THE PRINTED RECORD OF RUTH M. ONO, PH.D. WITH RESPECT TO THE HEARINGS ON MISCELLANEOUS TAX MEASURES HELD ON JULY 11 - 13, 1995

THE HOUSE COMMITTEE ON WAYS AND MEANS

JULY 26, 1995

The Queen Emma Foundation of Honolulu, Hawaii (the "Foundation") commends the Committee for considering a proposal to treat private foundations like educational organizations and pension funds for purposes of the unrelated business income rules governing debt-financed property. We ask that the Committee also consider extending this treatment to organizations like The Queen Emma Foundation.

BACKGROUND

The Queen Emma Foundation is a nonprofit, tax-exempt, public charity. Its purpose is to support and improve health care services in Hawaii by committing funds generated by Foundation-owned properties to The Queen's Medical Center (the "Medical Center").

The Queen's Medical Center

The Queen's Medical Center began operations in 1860 as a two-story, 124-bed hospital located in Honolulu. The Medical Center has grown to become a 536-bed accredited teaching hospital, accommodating nearly 19,000 inpatient admissions and 172,000 outpatient visits per year. The Medical Center maintains an open emergency room, and admits Medicare and Medicaid patients. It has more than 1,200 physicians on staff, and over 2,800 full-time employees.

The Queen's Health Systems, through The Medical Center, The Foundation, and its other members, provides health care services that benefit residents of all of the Hawaiian Islands. For example, The Queen's operates Molokai General Hospital, a small community hospital on the remote island of Molokai. The Queen's also operates clinics on various islands, provides home health care services, supports nursing programs at Hawaiian colleges and universities, operates a medical library, and holds health fairs and other educational events for the benefit of the community.

The Queen Emma Foundation

The Foundation's assets consist largely of land bequeathed in 1885 by Queen Emma Kaleleonalani, wife of King Kamehameha IV. Most of The Foundation's land is encumbered by long-term, fixed-rent commercial and industrial ground leases. The return produced by these leases is extremely low, as The Foundation is unable, under these leases, to increase rents to keep pace with the rapid appreciation in land values in Hawaii. This severely limits The Foundation's ability to provide funding to The Medical Center.

The Foundation could increase the funds available to support The Medical Center's health care endeavors by buying out the leases of current lessees, and leasing the land, together with any buildings on the land, at current market rates. The Foundation also could upgrade the improvements on its land to further enhance its revenue-generating potential. However, doing this on a scale that would appreciably increase the funds available to support the Medical Center would require more cash than the Foundation has available or could prudently generate by selling assets.

The best solution to this problem would be for the Foundation to borrow the necessary funds. Were the Foundation to do this, however, the debt-financed property rules under the unrelated business income tax would subject the income earned by the Foundation to income tax, greatly reducing the funds ultimately available to meet its charitable mission.

OVERVIEW OF THE DEBT-FINANCED INCOME RULES

Unrelated Business Income Tax

The unrelated business income tax ("UBIT") applies, under sections 511 through 514 of the Internal Revenue Code', to certain otherwise tax-exempt organizations. The UBIT generally imposes a tax on the net income earned by a tax-exempt organization from trade or business activities that are "regularly carried on" and that are not "substantially related" to the organization's exempt purpose.

In enacting the UBIT, Congress specifically excluded from tax certain types of investment income. Congress did this because, in its view, such income is "passive in character", "not likely to result in serious competition for taxable businesses", and has "long been recognized as a proper source of revenue for educational and charitable organizations and trusts."2

One of the categories of passive investment income normally not subject to UBIT is rents from real property. Gains from the disposition of property is another category of income normally not subject to UBIT. The exclusion for gains from the disposition of property does not apply if the property is inventory or held primarily for sale to customers in the ordinary course of the trade or business.

Debt-Financed Income

Congress was concerned, when it enacted the UBIT, with sale-leaseback transactions involving tax-exempt organizations. Congress was particularly concerned with transactions where tax-exempt organizations purchased properties for little or no money down and leased them back to the sellers. Under this scenario, the tax-exempt organization could "trade" on its tax exemption by paying an inflated price for the asset or charging a below-market rent. The tax-exempt organization could do this, while still meeting its installment obligations, because it did not have to pay taxes.

To counter this perceived abuse, the 1950 UBIT contained special rules which subjected to tax certain otherwise excludible passive income derived from debt-financed property. These rules were modified in 1969 in response to what Congress saw as continued problems in the area, particularly with so-called "Clay Brown" or "bootstrap" transactions. In this variation on a sale-leaseback transaction, the tax-exempt organization would pay the purchase price as a percentage of the rental income it earned from leasing the property back to the seller.

The rules enacted in 1969 are codified in section 514. Under section 514, for most types of tax-exempt organizations, the rules exempting from UBIT rents and gains from sale do not apply to the extent such rents and gains are derived from debt-financed property.

Qualified Organizations

Congress amended the debt-financed income rules in 1980 by enacting section 514(c)(9). Section 514(c)(9), as originally enacted, provided an exception to the debt-financed income rules for certain real estate investments of qualified pension trusts, subject to various restrictions intended to prevent abuses.

'All section references hereafter are to the Internal Revenue Code of 1986.

'Senate Report No. 2375, 1950-2 C.B. 483.