(The following letter and statement were received by the committee :) NEW YORK STATE RETAIL HARDWARE ASSOCIATION, INC., WAYS AND MEANS COMMITTEE, House of Representatives, Washington, D. C. GENTLEMEN: We have been given the opportunity of reading the statement of Robert H. North, executive secretary of the International Association of Ice Cream Manufacturers, to be made before your committee presenting the views of trade associations on equal taxation for cooperatives. This association, composed of 1,400 independent hardware dealers, some of them located in every county of the State, has long been on record as favoring the taxation of cooperative corporations on an equal basis with other forms of business. We heartily endorse that part of Mr. North's statement calling for such equal taxation. A large majority of our members find themselves in competition with cooperatives which presently enjoy certain tax advantages. We believe any group is entitled to go into business and divide the profits as they see fit. But we do not see any justification in preferred treatment for any such group. We have never officially discussed that portion of Mr. North's statement which suggests specific legislation to correct the present inequality. We have every confidence that your committee knows what equality is and request that you shape legislation to give it to the hard-pressed independent businessman. Very truly yours, N. H. KILEY, Executive Secretary. STATEMENT OF R. H. RowE, VICE PRESIDENT AND SECRETARY, UNITED STATES WHOLESALE GROCERS' ASSOCIATION, ON TAXATION OF COOPERATIVES My name is R. H. Rowe. I am vice president and secretary of the United States Wholesale Grocers' Association, a national trade organization of independent wholesale food and grocery distributors, with headquarters in Washington, D. C. The position of our association on the subject of equitable taxation of cooperatives has already briefly been made known to the committee. To the testimony of R. H. North given to the committee January 23, 1958 is appended a statement of our endorsement. We desire, however, to offer for the record this supplemental statement. From our memorandum of endorsement we quote as follows: "A large segment of our wholesale grocer members throughout the United States are in daily competition with cooperative organizations enjoying tax and other legal advantages that are inequitable and afford them competitive superiority in the market place." We consider legislation for adequate taxation of cooperatives a survival measure so far as independent food wholesalers are concerned-not that it will guarantee to them survival and progress but that it will most assuredly furnish a firm foundation for both. Such wholesalers operate on a very narrow margin of net profit. Surveys of wholesale grocers' profit and loss figures conducted by our association show that the average net profit of the wholesalers participating in the surveys for the 5 years 1951 through 1955 was 1.29 percent of sales before taxes. Hence any discrimination in taxes to their disadvantage and to the advantage of their cooperative competitors can ultimately spell disaster for them. The testimony of Secretary of the Treasury Robert B. Anderson before the committee on January 16, 1958, clearly shows a loophole in present tax laws as interpreted by the courts whereby both cooperative corporations and their members can escape taxation on the corporations' earnings. From the viewpoint of simple equity among taxpayers and from the viewpoint of added revenue for the Government to which in all good conscience it is entitled, this startling deficiency in the tax laws should be remedied. The tax credit plan which we have endorsed and which has been ably and fully presented to the committee would serve to close this harmful loophole in a way that would be fair to all taxpayers that may be affected. In view of the program that will begin on the floor of the House at 11 o'clock, it will be necessary for the committee to recess until 1:30. The hearing will resume at 1:30. Mr. Castle will be the first witness. (Thereupon, at 11 a. m., the committee recessed, to reconvene at 1:30 p. m.) AFTERNOON SESSION The CHAIRMAN. The committee will please come to order. The next witness on the calendar is Mr. Benjamin F. Castle. Mr. Castle, for purposes of the record will you identify yourself by giving your name, address and the capacity in which you appear? STATEMENT OF BENJAMIN F. CASTLE, EXECUTIVE VICE PRESIDENT, MILK INDUSTRY FOUNDATION, WASHINGTON, D. C. Mr. CASTLE. Yes, sir. Mr. Chairman, my name is Benjamin F. Castle, vice president of the Milk Industry Foundation of this city. I have been told by your very competent secretary that the committee is really faced with tremendous pressure on its time and therefore I am going to summarize the testimony which would have been given here by Mr. Garrecht, our president, if he had not been called away to make a speech in North Carolina. Mr. Garrecht, as president, received letters from members in 20 or more States and because the Milk Industry Foundation is a trade association and responsive to its members he built his testimony around these letters. I mentioned the fact that the Milk Industry Foundation is a trade association of the fluid milk industry and I want to point out to you that we have quite a number of members who are co-ops. They understand that we oppose the further continuation of the exemption of co-ops from Federal taxation, but I want to make it clear that they do not necessarily agree with the views which I will present here today, in all fairness to them. They are a small proportion of our membership to be sure and our board has voted unanimously to make this presentation to you gentlemen, but I say I do not purport to represent the views of our members who are co-ops. The following points which have been made by members in their letters addressed to this committee through Mr. Garrecht, our president, are as follows: 1. The growth of cooperatives under the present tax-free situation. has been tremendous. 2. This growth has been largely by acquisitions at prices higher than tax-paying competitors could pay. An example was the absorption of the Embassy Dairy in Washington, D. C. The Embassy Dairy also affords an example of a cooperative monopoly of supply and distribution in that the Virginia-Maryland Milk Producers Cooperative not only has the raw milk to sell to milk processors in the Washington area, but naturally provides its own wholly owned Embassy Dairy with raw milk. 3. Another point brought out by letters from our members was the fact that tax exemption of cooperatives is a long step toward socialism and away from private enterprise. There is a constant and increasing diversion of business to tax-free cooperatives with an ever increasing loss of revenue to the Government. At this point, gentlemen, I would like to interject this fact: That in Sweden, the home of co-ops, the Swedish co-ops pay taxes to the Swedish Government. In explanation of that, one of the high officials of the Swedish Government said: "Our opinion is that if a co-op cannot stand on its own feet as a commercial enterprise it deserves not to continue." Hundreds of millions of dollars of additional revenue would be obtained by the Government by taxing the earnings of cooperatives. The greatness of this country has been built by the private enterprise system. The rebuilding of West Germany is a fine example of what the private enterprise system can do compared with socialistic systems. 4. It would be commensurate with our position to have special consideration for small cooperatives and we wish to point out that they already have special consideration in the lower tax rate for small-business organizations who do not have earnings in excess of $25,000. That means if they pay taxes they will have that. 5. Bargaining cooperatives are not involved in this question which we raise. 6. There is no justification for a tax program which helps tax-free cooperatives take business away from tax-paying proprietary organizations. No important profit-making member of our economy should want to avoid paying his share of the costs of our Government when competing with fully taxed organizations. 7. Patronage dividends are distributions of profits not price adjustments. Gentlemen, this statement outlines briefly the points in the position taken by our members. I request permission to file with the record the original statement by Mr. Garrecht which he was unable to present in person because of the commitment to speak in North Carolina. And I also request permission to file letters from members in 20 States on this subject, the views of these members having been summarized by me, sir. The CHAIRMAN. How voluminous are the letters? Mr. CASTLE. Here they are, sir. They are all from separate companies and I would say there are about 30 or 40 of them. The CHAIRMAN. Without objection, Mr. Garrecht's statement will be filed in the record, and the letters, in support of your position will be filed with the committee. Mr. CASTLE. Thank you, sir. (The above-mentioned letters are on file and the statement referred to is printed below:) TESTIMONY OF COL. BENJAMIN F. CASTLE, PRESIDENT OF THE MILK INDUSTRY FOUNDATION, WASHINGTON, D. C., AND PRESIDENT OF KLINKE-REED DAIRY, MEMPHIS, TENN., BEFORE THE HOUSE WAYS AND MEANS COMMITTEE, JANUARY 23, 1958 Mr. Chairman and members of the House Ways and Means Committee-My name is Benjamin F. Castle. I am president of Klinke-Reed Dairy, 1039 South Bellevue Boulevard, Memphis, Tenn. I am also president of the Milk Industry Foundation of Washington, D. C. This is an elective office and I serve without salary. In appearing before you today I come not only in my individual capacity as an active executive of a dairy company but in my official position as president of the Milk Industry Foundation. In Memphis where I operate a milk processing and distributing company, we have not as yet been subjected to the tax-free competition of a cooperative which sells milk at retail. There is a bargaining cooperative in our territory and it is obvious when one considers the trend of co-op expansion into wholesale and retail processing and marketing fields, that we have a sword of Damocles hanging over our head. As a small-business man, I am acutely conscious of the constant drain on cash resources of a small company. After payment of Federal income taxes, we do not have enough cash left to modernize our plant as it should be modernized to meet the highest present day standards of efficiency. This reference should not be construed as a plea on my part for escape from Federal income taxes it is, on the other hand, a strong plea for equalization of Federal income taxes as between operating co-ops and small private companies like my ownin other words-a plea for "an even break" in competition. A word of explanation with respect to the scope of the activities of the Milk Industry Foundation appears to be important so that you may have an idea of the nationwide interest in the subject of Federal tax exemption of dairy cooperatives who compete in the market place in the processing and the distribution of milk and milk products with private firms. The Milk Industry Foundation is a trade association of the fresh fluid milk industry. This branch of the great dairy industry processes and distributes about 60 percent of the gigantic total of milk produced in the United States. The fresh fluid milk industry pays the highest price for fresh milk which meets the rigid sanitary regulations of cities in the United States. This price is, generally speaking, about one and a half dollars a hundredweight higher than that paid for milk which forms the basis for dairy products such as butter, cheese, and evaporated milk. The Milk Industry Foundation is a nonprofit membership corporation with members in every State in the Union and with many members in Canada and several foreign countries. The foundation furnishes technical services to its members such as plant-operation manuals, accounting manuals, laboratory manuals, accident-prevention forms, annual analyses of costs and profits, and conducts annually a convention where highly technical sections listen to especially selected speakers deliver previously prepared papers. The foundation also conducts a sales-training institute and a merchandising institute. It publishes a weekly newsletter and maintains an information service concerning Federal departments and the Congress. At this point I should mention the fact that the foundation numbers in its membership dairy cooperatives who do not necessarily agree with the position unanimously taken by the board of directors of the foundation as evidenced by its instructions to the joint committee of the International Association of Ice Cream Manufacturers and the foundation. This committee was enjoined to present the view that Federal tax exemption of dairy cooperatives operating in unfair competition with privately owned firms is tending to create a monopoly in various sections of the country, is permitting one segment of business to escape taxation, and is drying up sources of Federal revenue to the extent that dairy cooperatives buy out tax-paying companies with surplus funds accumulated as a result of the exemption from taxes. So I repeat that my views are not necessarily shared by the small percentage of our membership classified as dairy cooperatives. Your late chairman, the Honorable Jere Cooper, is reported to have been dedicated to the principle that "all citizens and corporations should pay their fair share of taxes." I think that view accurately reflects our feeling with respect to the present exemption of operating cooperatives from Federal taxes. You have heard (or will hear) a statement by Mr. Robert North, executive director of the International Association of Ice Cream Manufacturers. Mr. North has discussed (or will discuss) the legal and legislative aspects of this important question as well as the competitive effect of cooperative tax exemption on private enterprise. Believing that you will give close attention to Mr. North's statement and that it is comprehensive in its treatment of the question before us, I shall confine myself to giving you quotations from letters received by the foundation from members in various parts of the country who feel, as you will see, very deeply aggrieved by the unfair competition which they now face with tax subsidized dairy cooperatives. I sincerely hope that the members of this committee do not still cling to the emotional view that cooperatives as a group are so frail that they must be coddled. That view is a plain misreading 20675-58-pt. 2-15 of facts. Few private organizations in this country today come close to equalling the economic power of cooperatives which engage in business operations in the market place. I want to emphasize that to the best of my knowledge no member of the foundation or the State associations with which it is affiliated throughout the country desires to do anything which can lead to "the destruction of cooperatives." We have no quarrel with cooperatives as such, believing that the original purpose--namely, to provide farmers with bargaining power in the sale of their commodities-was sound. However, we most emphatically be lieve that cooperatives today who engage in business operations on a tax exempt basis are not in any sense, with respect to these operations, entitled to a subsidy in the form of a tax exemption. With your indulgence I shall now read extracts from letters received from various parts of the country which will give the members of this committee a clear picture of the feeling of some of their constituents in particular and of many milk plant operators in general. Let me first quote from a letter dated December 13 from T. A. Turner of Turner's Dairy, Covington, Tenn.: "I hope you *** will explain at the hearing that those of us who operate proprietary dairies who are not allowed to accumulate capital without paying a high rate of income tax, feel that it is entirely unfair to allow cooperatives to pile up earnings as revolving capital without paying any tax thereon." A letter from Robert E. Cleary, president of Welsh Farms, Inc., of Long Valley, N. J.: "Here in northern New Jersey, over the years, we have had to face numerous incidents of unfair competition arising from that tax-empt situation. "The most recent (and current) case is a serious one. Since last summer, the Lehigh Valley Cooperative Farmers of Allentown, Pa., has been selling milk in the western section of this State at prices 2 to 3 cents per quart below those of its taxpaying competitors. *** We, along with other taxpaying concerns in the industry, have lost substantial volume because of such unfair pricing. "Even though the Lehigh Valley Cooperative, or other competing cooperatives, charge the prevailing market price we face inequitable competition. No matter what profit we make, we must pay 52 percent of that amount to the Federal Government as income tax. The cooperatives pay no such tax. Hence, more than half of our otherwise retainable funds goes out as tax. Our ability to purchase more efficient equipment, to undertake intelligent, long range advertising campaigns, to acquire additional volume and to thus achieve lower operating costs, is cut in half. "With twice as much retainable funds, the cooperative obviously can do more than its taxpaying competitor. Why should one segment in American industry enjoy such an advantage? And why, in heaven's name, should the advantage continue when the Nation so desperately needs revenue? "I do not object to the payment of taxes. I do most strenuously object to having to compete with tax-exempt cooperatives with one hand tied behind my back." A letter from R. W. McKenna, Arden Farms Co., Centralia, Wash., gives in considerable detail an analysis of the so-called patronage refunds saying that "in an impartial analysis they should be considered as net profits and should be taxable as such." A copy of this letter is hereto attached and marked "Exhibit No. 1." A letter from William C. Burtis, Crowley's Milk Co., Inc., Binghamton, N. Y.: "It is our firm opinion that Crowley's Milk Co., Inc., is placed in an unfair competitive position in its dealings in the States of New York, Pennsylvania. New Jersey, Connecticut, Massachusetts, and New Hampshire because of the preferential tax treatment afforded cooperatives. "We oppose any situation which permits the accumulation of unnecessarily high reserves as well as any system which permits the payment of dividends on stock to be considered as a reduction of income rather than a distribution of profits." A letter from P. E. Carney, Brighton Place Dairy of Rochester, N. Y., says: "The total number of milk distributors in this market is about 65, of which members about one-third perform the actual processing and bottling functions. Three of these processing and bottling plants are owned and operated by dairy cooperatives and bottle for about 15 dairies." A letter from Alfred W. Brown, Brown's Velvet Dairy Products, Inc., New Orleans, La., says in part: "The exemption from income tax is a very serious problem and places individual distributors and companies at a tremendous disadvantage. Most well operated co-ops make money, and they do build up an equity for their producers |