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 believe 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

in their properties, but they very seldom distribute this equity and when they do distribute cash or certificates, the co-op is not taxed but the individual producer becomes taxed. Therefore, the co-op is not out of pocket any tax money whatsoever, and it gives them a decided advantage.

"The second advantage of a co-op, particularly if it is under a Federal Order market, is it can pay the membership pretty much what he feels for their milk which the co-op purchases, and in turn, sell processed dairy products under a regular handler's price, which makes it pretty hard to compete with.”

Edwin B. Fitchett, Fitchett Bros. Lakeview Dairy, Poughkeepsie, N. Y.: "There has been a great deal of talk on the part of political leaders and the Government that the small-business man would be given consideration which would permit him to survive.

"We in the dairy industry are faced with the competition of a giant in the form of co-ops whose growth is nourished by the conduct of governmental agencies in the form of tax exemptions and special financial concessions or rebates. "We do not disagree with the basic intent of co-ops provided that the co-ops do not, under the protective veil which the Government has drawn over them, conduct themselves in a manner far removed from their original purposes and intent.

"Co-ops are tax exempt. Because of this position which they enjoy, they can and have engaged in the following practices:

"A. Expanded on a nationwide scale. Because of their spread in territory they are able to engage in unfair competitive practice, since they can pay different prices for products in different areas. In other words, they can pay higher producer premiums at their will, to eliminate competition. This, of course, would not be possible if they could not balance off excess costs of one area with lower costs in other areas.

"B. They have engaged in price reduction practices during seasons and periods when other costs have gone up. For example, in our area we were faced with increased costs for milk recently. In addition, we are faced with very high pay increases which there is no question we must accept. Why, then, have the local co-ops seen fit to reduce the selling price of milk to stores by 12 cents per quart and by 2 cents in vending machines?

"C. By retaining earnings because they are not subject to taxes and because they do not have to make timely distributions to members, they have built up enormous surpluses and working funds. Surely these enormous accumulations, if properly reviewed, would be termed unreasonable and taxable accumulations. With these surplus funds they have been able to expand and modernize their plants. In addition they have in other areas actually engaged in the practice of purchasing milk routes and milk plants. Is this an act to be sanctioned? How can a proprietary dealer meet the unfair competition sponsored by the Government? The proprietary dealer can only expand soundly if he has earnings and if there are moneys remaining after the payment of income taxes

We

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"Free enterprise will be destroyed insofar as the small milk producers are concerned unless specific steps are taken to correct the above evils * are not asking for any benefits not due us under our system of Government. do, however, feel that it is wrong and possibly unconstitutional for the Treasury Department and other governmental agencies to favor the co-ops as they have." Harold A. Hameline, Hameline's Dairies, Utica, N. Y. :

“As a taxpaying corporation, we have been concerned for some years about the growth of farm co-ops who have become processors and distributors in the milk business. Due to the present tax structure, we feel that the day of the independent milk processor and distributor is a limited one. Each year we see the co-ops buying up more and more competitors. As each taxpaying business is absorbed by the co-ops, we realize that the tax burden on independent businessmen is going to be greater and greater. Someone has to make up that lost tax money, while the co-op is out buying up still more independents with the money saved on the tax gimmick. I understand that on a profit of $1 million, the co-op saves over a half million dollars in taxes. They handle milk the same as us; they sell the milk the same as us. They are our main competitors. Why aren't they taxed the same as us? It is no wonder that phoney co-ops have been set up by sharp businessmen to beat the tax burden.

"In our own area, we have seen the co-ops grow from an unknown to the point where they control more than half the entire market in the Greater Utica area. I understand that one co-op has purchased four good sized milk businesses in upstate New York in the last 4 months. This rapid growth is not due to just good business management. The co-ops have been nursed by a Government policy until they have reached a size that, protected by their

built-in tax advantage, they just can't lose. Taxpaying competitors must eventually give way to the virtually tax-free giants called farm co-ops.

"We beg you to do all in your power to rectify this situation before it is too late. It is only fair that competitors should operate under the same tax law." I give you in full the statement by John R. Kinnett of Kinnett Dairies, Columbus, Ga.:

"My name is John R. Kinnett, and I am president of Kinnett Dairies, Inc., of Columbus, Ga. The company which I head manufactures ice cream which it sells only to wholesale dealers. It also processes a fluid milk which it distributes to both the wholesale and retail trade.

"My principal competition in this area comes from the Wells Dairies Cooperative, a local concern organized in 1936, with a capital stock of only $10,000. On October 31, 1955, the capital stock of this concern was $87,500, although at that time their surplus was $1,995,164. In less than 20 years this concern has been able to build a surplus of this size due to the fact that practically no income tax has been paid on the profit made.

"In 1953, this concern began building a new plant which cost to build and equip in excess of 2 million tax-free dollars. In addition to the new plant built through their ability to retain most of their profit, they are able to spend large sums for advertising in addition to the amount that a proprietary concern would be justified in spending. This is just one means of securing business from the taxpaying concerns and gives the co-ops a tremendous advantage.

"In addition to the above-mentioned concern, there are 13 other cooperatives distributing dairy products in Georgia, and who are not subject to either State or Federal income taxes, and in most cases are exempt from local taxes and licenses.

"This competition is a serious threat to those of us who are subject to these taxes; and if the trend continues, there will be no taxpaying dairy concerns in Georgia within a comparatively short time."

L. A. Wolfe, Sunrise Dairy, Gastonia, N. C.:

"We are a small, independent dairy. Milk and milk products we process and distribute come from 80 farmer producers in this area. Our investments, plant, payroll, all contribute to the economy of the area. Doubtless we are typical of the large number of small and independent dairies throughout the country.

"Congress, we take it, is favorable to, and sympathizes with our proved system of private enterprise. To assume otherwise is to admit that we are headed for an even deeper excursion into socialism, regimentation, the resulting chaos sure to bring about a condition wherein there will be no one from whom to collect taxes.

"Frankly, we can think of no possible rhyme or reason in exempting any cooperative from an equal contribution of taxes in support of our Government, 'cooperative,' a title easily assumed, should not necessarily clothe a group with a mantle of special privilege at the direct expense of the many, many farmers who do not choose to join a 'cooperative.'

"Farmers have every right to form farmer-owned, farmer-controlled and farmer-financed cooperatives. Our observation is that a negligible percentage of present-day cooperatives qualify in this respect, despite vociferous and extravagant claims to the contrary. We know of none.

"We, and other independents, can compete if placed on the same basis as these cooperatives. If by subsidy, special privileges, tax exemptions, these groups are enabled to operate without the checks and tests private business is subject to, it simply means the extinction of private enterprise-taxpaying enterprise. It's that simple.

"If Congress wishes to 'aid small business,' an equitable tax adjustment with respect to these cooperatives furnishes an opportunity for accomplishment, and with a unique angle, that angle being not one penny of Government appropriations or funds would be necessary."

A telegram from C. R. Wilson, Blu-Ribbon Dairies, Inc., Alexandria, La.: "Have just heard of a proposed hearing on subject of unfair advantage that farmer cooperatives, have in not paying normal income tax on their income. As part owner of a small dairy plant I urge every action be taken to correct this inequity in the dairy industry."

H. H. Holdson, Conneaut Creamery Co., Conneaut, Ohio:

"We are operating in an area which includes a fair-sized cooperative in the milk business and which is a competitor in both buying and selling.

"We can see no reason or justice in allowing a cooperative organization to be exempt from income taxes.

"Such an organization likely has many worthy aims, but we believe that it should operate on the same basis taxwise as a private enterprise—without this unfair advantage."

Now, Mr. Chairman, in the foregoing quotations you have heard references to the expansion into private business by co-ops through the acquisition of existing businesses. We have recently learned from a reliable source that the following dairy plants were purchased in North Carolina namely: Mooresville Creamery, Mooresville, N. C., by Rowan Cooperative Dairy of Salisbury, N. C.; Kalmia Dairy, Hendersonville, N. C., and Hillside Dairy, Boone, N. C., the latter being purchased by Catawba Cooperative Dairy of Hickory, N. C.

We have a letter from Ardmore, Okla., sent by R. W. Colvert, from the Colvert Dairy Products Co., enumerating processing plants owned and operated by dairy cooperatives. Specifically he mentions the following: one in Enid, Okla., Oklahoma City, Okla., Stillwater, Oklahoma, and Paris, Tex.

Complaints have reached us from Judson Squires, Roberts Dairy Co., of Omaha, Nebr., of unfair competition by co-ops in Springfield, Mo., Hull, Iowa, and Sabetha, Kans.

From Edward J. Sale, Will's Dairy in Baltimore, Md., under date of December 9, we have the following:

"Competition from tax-exempt cooperatives operating in our industry is a constant potential threat to our business. Cooperatives that do not compete with us as processors and/or distributors have, of course, a place in our economy. However, when these same groups, organized for bargaining purposes, use their surpluses to build plants and enter into profit-making activities, they should pay their share of the taxes.

"This is obvious to us and it is difficult to understand, from our viewpoint, why our lawmakers do not take the required action to eliminate this unfair condition." A two-page letter from Grant Dougall, Idaho Creameries, of Boise, Idaho, describes the cooperatives operating in that territory and names six large ones respectively in Caldwell, Meridian, Jerome, Idaho Falls, and Smithfield, Utah, and in conclusion says: "*** it is readily apparent that the dairy cooperatives in our area are a dominating factor in the dairy industry and account for a sizable share of the dairy products in the State."

I have been asked by Mr. Bruce Werden, president of Sunshine Dairy, Burlington, Iowa, to read his brief statement of four paragraphs.

"To Whom It May Concern:

"My name is Bruce Werden, president of Sunshine Dairy, Burlington, Iowa. We process 20,000 pounds of milk daily into strictly bottled milk and products. We employ 35 people, operate 10 retail routes and 5 wholesale routes. We have approximately $100,000 investment. Our building and equipment are old and because of zoning ordinance we must build a new building which calls for new equipment, the total of which will amount to $250,000.

"We deal with a milk bargaining [cooperative] association and every time we do not do what they want, they threaten us that they will go into the milk processing operation, which they can do with money they have not paid an income tax on. "We compete with another co-op milk processor and the last bad deal with them was this September when they cut the price of half-pint chocolate milk (not chocolate drink), in paper cartons to schools at 5 cents.

"To compete with co-ops under the present tax setup does not enocurage one to be progressive and provide continued employment for our present staff." An impressive letter from J. L. Sinner, Sunny Brook Farms, of Portland, Oreg., reports the competitive situation in their territory emphatically as follows. Referring to the large dairy cooperative and its subsidiary, he says:

"On this market alone they have purchased no less than 25 small and large competitors and have taken them from tax rolls. Recently 'savings' have been used in a most unfair competitive way to purchase small grocery store milk accounts by loaning equipment and money. At their present rate of growth due to these unfair advantages and tactics, the tax paying dairy industry does not appear to have a very substantial future unless this monster under the guise of a cooperative is made to pay his tax responsibilities the same as this small dairy business must do."

H. E. Gallagher, Damascus-Carnation Co., in another letter from Portland, Oreg., says:

"For the past 18 years I have been associated with the dairy industry, and in a good position to appreciate the rapid growth of processing and distributing farmer co-ops through the retention of untaxed income for working capital and

issuance of 'paper dividends' or retention certificates. This source of untaxed capital has enabled many local farmer co-ops to purchase numerous privately owned processing and distribution businesses which will be paid for out of untaxed profits.

"A private milk dealer purchasing another distribution business must pay for such business out of net earnings after taxes, which may be at a 52-percent rate. In case of the co-op, the 52-percent tax rate they avoid paying will soon liquidate any profitable acquisition.

"I have no quarrel with the original concept that co-ops organized to assemble farm commodities and market them without processing for benefit of members possibly should enjoy some income tax immunity. However, when a co-op engages in extensive processing, manufacturing, or distribution operations in direct competition with private companies, I feel they should pay comparable income tax rates."

I am especially pleased to read to you a letter from John D. Simpson, one of my fellow directors, the president of Superior Dairies, in Austin, Tex.: "As a matter of democratic principle, I will say that, although the legal mortar may be of different composition which is used to build and bind various types of business structures, the structures themselves are substantially similar. Both co-ops and private businesses are structures of people-people with a common interest in acquiring economic benefit to themselves. Benefit is that difference resulting when outgo is less than income. Call it 'overage,' 'excess,' 'surplus,' 'dividend,' or 'profit,' the opportunity of benefit to the people of both structures is or should be the same if they are performing the same service, distributing the same product and competing for the same public consumer dollar. "There should be no difference in the tax treatment where and when a co-op goes beyond its legitimate membership and competes with private business in any field catering to the public. In this instance, there is no justification for a tax subsidy, a tax 'handicap,' a concession or any policy other than the tax load and the opportunity for benefit for all types of business structures competing for the same consumer dollar should be equal."

C. R. Roberts, the president of Sheffield Farms, in New York City, comments as follows:

"Proprietary corporations like ourselves, as you well know, are subject to a tax of 52 percent of their gross profits, but cooperatives which may be in competition with such a concern are completely free from such taxes. We are very willing to stand our proportionate share of the taxes which are necessary to carry on the activities of our Government, but we certainly believe that it is no more than fair that other people be required to do the same and that certain privileged groups should not be allowed to carry on their operations with this freedom of taxation and be in competition with us in the same area.

"The matter does not even stop here. We also find that tax-exempt cooperatives are in effect subsidized by the Government in buying up proprietary businesses and thus are able to pay more than proprietary concerns can pay for such acquisitions. This is true in view of the fact that any profits that they make from such recently acquired corporations are not subject to income taxes. It also means that proprietary corporations which have been paying taxes to the Government are purchased by tax-free cooperatives and thus are removed from the taxpaying rolls.

"To give you a few examples of what has occurred within our own industry, I would like to cite the following:

"In Washington, D. C., the Maryland-Virginia Milk Producers Cooperative bought out the Embassy Dairy Co., in Washington, D. C., thus transferring a taxpaying corporation into the hands of a coperative with its freedom from taxes.

"The same thing occurred in North Carolina by the acquisition of Coble Dairy Products Co. by a cooperative group.

"It also happened a couple of years ago through the purchase of Fred Beers, Inc., on Long Island by the Dairymen's League Cooperative Association, Inc., thus removing a proprietary corporation which had been paying taxes and placing it in the hands of a cooperative not paying income taxes.

"If these practices are allowed to continue unabated, it is very obvious that the burden on those who are left to pay the taxes must be greatly increased." A letter to us from the Foremost Dairies, of San Francisco, Calif., signed by the president, Grover D. Turnbow, brings out the fact that the cooperatives with whom his company deals have no desire to be given special privileges. He continues, saying, "I would be opposed to anything that has for its purpose