What's in a Loophole?

When the Commissioner of Internal Revenue has lunch with the ex-Commissioner of Internal Revenue, it's a good possibility that Topic A will be taxes. So it was last week in a private Washington, D.C., dining room where ex-Commissioner Mortimer Caplin broke bread with Sheldon Cohen, the man who succeeded him last year. One issue Caplin wanted to talk about was lack of taxes, specifically from the tax-exempt organizations that profit so neatly from their publications.

That tax loophole allows "educational" and other nonprofit groups to escape any Government bite on their publishing income. Caplin is not alone in his complaint. Democratic Congressman John Schmidhauser of Iowa has been prodding the IRS and the Treasury Department for months, pleading with them to tap a source of revenue he estimates at $110 million yearly. The stalling, suggested Schmidhauser in a House speech, comes from senior bureaucrats' "unwillingness to step on powerful toes." Republican Glenn Cunningham of Nebraska made it a bipartisan fight. "This is no matter on which reasonable men can differ," said he. "It is now time for action."

Hidden Subsidy. In 1950, only 202 publications enjoyed tax-exempt status; today, 700 periodicals, ranging from the National Geographic to Knitted Outerwear Times, are spared taxation. Educational some may be, but what upsets the congressional critics is the fact that a growing number of such publications solicit advertising in direct competition with taxpaying magazines. And since tax exemption effectively enlarges income, it amounts to a hidden subsidy that allows the tax-exempt magazines to cut their prices for ad space.

Nation's Business, the publication of the U.S. Chamber of Commerce, pays no taxes and gets the jump on Business Week and FORTUNE, which do. The tax-exempt Journal of the American Medical Association, which rang up a record $10.5 million in advertising revenue last year, drains pharmaceutical advertising from tax-paying Medical Economics and Medical World News; by running ads for such products as soft drinks, margarine and soap, it also competes with general-circulation magazines. Thanks in large part to its tax-exempt status, the National Geographic is able to offer lower advertising rates than its competitors, Holiday and Venture. Much of this untaxed income, to be sure, is plowed back into exploration and research that are not always written up in the magazine. Still, Geographic's competitors insist that the deal is unfair.

Window Dressing? As long ago as 1960, Associated Business Publications, a group composed of taxpaying journals, asked the Internal Revenue Service to exercise its authority to close the tax loophole. After sitting on the request for five years, IRS--under Caplin's regime--finally approved it and sent it along to the Treasury Department. There the matter still rests.

Critics are quick to point out that over the years the tax-exempt publications have won numerous influential friends. National Geographic, for example, has many VIPs on its board of trustees. "Generally," says former Commissioner Caplin, "such boards are window dressing." But, he adds, they serve to make Government investigators reviewing the tax status of such organizations "very cautious." Caplin, a lawyer who now represents the National Tax Equality Association, says that the investigators "are certainly not unaware of the line-up and the numbers of the players."

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