Moola for Boola

In Manhattan last week, an obscure company named Connecticut Boola, Inc. paid $4,500,000 to R. H. Macy & Co., to buy Macy's spanking new nine-story building in San Francisco. But there is nothing obscure about Connecticut Boola's parent: Boola is the wholly owned subsidiary of Yale University. The new owner promptly leased the store back to Macy's for 31 years and two months, at an average annual rental of $240,000. Thus Yale became Macy's San Francisco landlord.

The "sell & leaseback" deal was doubly advantageous. Yale would get a fairly sure tax-exempt income of 5.3% on its investment. Macy's would get its $4,500,000 out of dead brick & mortar into lively working capital, still have the use of the building. Since the rent is taxexempt, it is probably lower than Macy's would have to pay to a taxpaying owner.

Unhappy Treasury. But the U.S. Treasury was not quite so happy about the deal. It has been concerned about the problem of "sell & leaseback" since 1945, when Union College of Schenectady bought, for $16,150,000, the buildings of Allied Stores Inc., and leased them back to the company. Soon other colleges were buying not only real estate but commercial businesses as well. So many U.S. stores and other enterprises have sold their property to tax-exempt institutions* that the Treasury is now losing an estimated $1 billion a year in income taxes. A survey by the American Council of Education shows that about 40% of all university and college endowment funds are now invested in such private enterprises, compared to only 20% before the war.

The Treasury's biggest headache has come from deals where tax-exempt institutions acquire not only the property, but the actual business as well. The Council found that 159 colleges and universities are buying commercial enterprises out of endowment funds or with the tax-exempt earnings of businesses they have taken over. Example: New York University takes all the profits from the C. F. Mueller Co. (macaroni, spaghetti & noodles), Ramsey Corp. (piston rings), the $3,300,000 American Limoges China Inc. and the $35 million Howes Leather Co. On their earnings the companies would be paying all told an estimated $1,500,000 a year in federal taxes, if they were still privately held.

Educational Noodles. In cases where companies lease their properties and still continue to operate as taxpaying private ventures, the Government has not interfered so far. But it has already ordered the Mueller Co. to pay up its income taxes. There is nothing in making noodles, the Government contends, that is "charitable, scientific, literary or educational" (the statutory requirement for tax exemption for colleges). A court test, brought by Mueller, has not been decided. If the Government wins the case, it will slap a bill for back taxes on all the company's profits since the sale, and presumably go after some of the other big deals.

* Among the deals: Manhattan's Western Union Bldg. to Omaha's tax-exempt Woodmen of the World Life Insurance Society, for $12.5 million; Philadelphia's Lit Bros. store to the University of Pennsylvania, for $3,000,000. Wheat Farmer Thomas D. Campbell's huge Montana ranch to the U.S. Wheat Corp. of Omaha, owned by a Catholic foundation.

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