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the destruction of cooperatives, but certainly their paying their fair share of the tax load will not destroy them. In fact, in my opinion, it would remove a stigma."
Parenthetically, I would like to say that in Sweden, which is regarded as a country having many and very progressive cooperatives, the cooperatives are required to pay taxes on their earnings. In explanation of this, a Swedish statesman said that if cooperatives could not exist without a tax subsidy, then in the opinion of the hardheaded Swedish economists, they were unworthy of continued existence.
Adverting again to the letter from Mr. Turnbow, I quote: “Many cooperatives with whom we deal do a wonderful job and render a fine service and are of real help to the dairy industry. May I urge that cooperatives of every kind be treated the same as individuals and corporations, who are also an important segment of our commonwealth.”
A letter from I. Beeghly, Golden State Co., of Sacramento, Calif., refers to the purchase of privately owned taxpaying dairy plants with “tax-free surplus of a large cooperative of Modesto, Calif." The writer of this letter continues :
"The loophole in the tax laws which permits a cooperative to accumulate tax-free capital funds puts private enterprise paying normal corporate income tax rates at a distinct disadvantage. It is as a result of the difficulty that these privately run businesses experienced in financing normal capital requirements that they were induced to sell out to the cooperative.
"We believe that it has been the intent of Congress to assist the small selfhelp type of cooperative, and not to subsidize multimillion-dollar enterprises operated as cooperatives primarily for the purpose of evading corporate tax liability. Not only does this give this type of business an undue advantage but it throws their just burden of taxation on to the other already heavily burdened taxpayers of the State.
"In conclusion, we are not opposed to cooperatives which are organized to assist the farmer to solve his problems. We are merely asking that when they elect to compete with privately owned business, they be subject to the same rules."
A letter from George H. Stueber, Jr., Stueber Dairy Co., of Wausau, Wis., well illustrates the growth of a dairy cooperative enjoying tax advantages. It says in part that they (the cooperative) "started in the retail milk business about 5 years ago, with their base at DePere, Wis., and at present cover about one-third of the State with about two-thirds of the population. They have bought out about four independent dairies so far, and the rumor is now that they just bought out another large independent. That's pretty easy for them to do, inasmuch as they don't have to worry about Federal income taxes.
"I have an operating statement in front of me from a local co-op, not a dairy, that made a profit of $34,445.63 in 1952. On their statement there is a provision for Federal income taxes of $3,350. If a private corporation had the same type of 'savings' (cooperative language), its Federal taxes would have been about $18,000. In just this one case, the Government lost over $14,500, and the worst part of it is that this amount had to be made up by people who pay their fair share of the taxes. To me, this is the most unfair tax advantage that there is.
"I would certainly appreciate it if something could be done about seeing to it that cooperatives be made to pay their fair share of Federal income taxes, the same as other businesses."
I note that one of our members from Connecticut, Harvey G. Turner, Sheffield Farms Co., Inc., has written to a member of this committee, Hon. Antoni Sadlak, in the following tenor:
“As a private milk dealer operating in the field of processing and distribution of dairy products, I wish to protest the unfair competitive advantage which farmer cooperatives have in exemption from income taxes.
"I hope that you will lend your support to legislation which will give tax equality to the proprietary dairy industry and put dairy co-ops on the same tax basis as private industry."
A letter from F. W. Rueter, Rueter's Dairy Co., of Evergreen Park, II., says in part:
"We wish to emphasize very strongly that something be done to equal the tax burden in business by taxing these cooperatives which are in essence large corporations free of the tax burden
"We understand the underlying historical reasons for the first tax exemptions by the Congress and by the executive branch. The problem is not vastly different. Since the first exemptions were granted, tax rates have increased tremendously. What was a small tax advantage then is a huge one now. Then the organizations that were being developed were small—now many of them are multi-million-dollar cooperatives."
The letter from which the foregoing brief quotation has been made is hereto attached, and as it is an independent exposition of the competitive situation in the Chicago market as well as a very complete study of all the facts of this problem, we strongly recommend it to your attention.
Gentlemen, in concluding my statement, I want to reiterate what is the plain intent of the Milk Industry Foundation in sending its president before you to testify in this important question. The reasons are as follows:
1. We are faced with unfair competition due to the tax advantages enjoyed by dairy cooperatives which compete in the market place with privately owned firms.
2. We have no animus against cooperatives as such, believing that their original purpose filled a need in the farm economy by giving farmer-producers effective bargaining power in the market place.
3. We emphatically subscribe to the principle that all individuals and corporate entities in the United States should help support the activities of the Federal Government.
4. We sincerely believe that the original concept of co-ops as bargaining agents has been greatly distorted and extended as a result of the present tax exemption.
5. We believe the alarming trend of acquisition of taxpaying organizations by co-ops through their accumulation of cash surpluses should cease at once, and that the law should be such that the United States Treasury will receive its share of tax money and private business will not be unfairly handicapped in competition.
I thank the chairman and the members of this committee for the privilege of appearing, and assure them that we stand ready to furnish any additional information of a factual nature which may be required. The proprietary segment of the great dairy industry expects this committee to come forth with a recommendation which will result in the termination of the present tax exemption enjoyed by operating cooperatives.
The CHAIRMAN. Are there any questions?
Mr. Mason. Your first point was that this growth of cooperatives under the present tax-free situation has been tremendous. How tremendous? Specify.
Mr. CASTLE. For your information, 20 years ago tax-exempt cooperatives did about a billion dollars' worth of business. Today they are doing much better than $20 billion. They have been growing like a snowball rolling down the mountainside.
The CHAIRMAN. Are there any further questions of Mr. Castle!
If not, Mr. Castle, we thank you, sir, for your appearance and the information given the committee.
(The following letters and enclosures were received by the committee.)
MILK INDUSTRY FOUNDATION,
Washington, D.O., February 12, 1958. Hon. WILBUR MILLS, Chairman, House Ways and Means Committee,
Washington, D. 0. DEAR MR. MILLS : When I had the privilege of appearing before your committee to testify with relation to the position of the Milk Industry Foundation toward the present legal mechanisms which permit large dairy product marketing coops to escape Federal corporate taxation, I did not have time to give you some figures which are taken from reports available from the USDA.
These figures show that there are far more farmers with milk cows than there are farmer memberships in the dairy products marketing co-ops. The actual figures as given to me are as follows: Memberships in dairy products marketing co-ops, 620,416; number of farms with milk cows, 2,956,900.
These figures simply show that if a Member of Congress charged with drafting legislation on the subject of co-op taxes is under the impression that all dairy farmers are members of co-ops, he is laboring under an erroneous impression.
I had with me at the time that I appeared before your committee another paper which I did not refer to, but which I think would be of great interest to you, especially, as I said the present trend of dairy co-op marketing organizations in our industry is toward the creation of monopolies.
The enclosed report from the State of Kansas shows that the Federal Trade Commission evidently shares the view which I expressed to your committee.
If feasible, I would appreciate your having the two enclosures made a part of the record of the hearing. Respectfully yours,
BENJAMIN F. CASTLE,
Statistics relating to dairy products marketing cooperatives and to numbers of
farms and dairy farms 1 Dairy products marketing cooperatives, 1954–55:8 Number--
1, 621 Memberships---
620, 416 Dairy products bargaining cooperatives, 1954–55: Number-
198, 554 All farmer marketing cooperatives, 1954–55: Number
6, 316 Memberships----
4, 212, 890 Number of dairy farms, 1954
548, 767 Number of farms with milk cows, 1954
2, 956, 900 Number of commercial farms in the United States, 1954...
3, 327, 889 Number of all farms in the United States, 1954.
4, 782, 416 1 Figures for cooperative memberships contain duplications, as many farmers are members of more than 1 cooperative.
* Comprises what is generally called operating or handling cooperatives. Excludes bargaining cooperatives.
3 As classified by the Bureau of the Census. All dairy farms are also classified as commercial farms.
Aside from the commercial dairy farms, this includes other types of commercial farms, as well as noncommercial farms having milk cows.
Source: Statistics of Farm Cooperatives, 1954-55, by Anne L. Gessner, Farmer Cooperative Service, U. S. Department of Agriculture, General Rept. 31, June 1957 ; 1954 Census of Agriculture, Farmers and Farm Production in the United States, Special Reports, vol. III, pt. 9, chs. V and IX; and unpublished data from the Department of Agriculture.
FEDERAL TRADE COMMISSION, OFFICE OF INFORMATION, WASHINGTON, D. C.
(For release in morning newspapers of Thursday, September 12, 1957) The Federal Trade Commission today approved a consent order prohibiting Arkansas City, Cooperative Milk Association, Inc., 615 West Chestnut Avenue, Arkansas City, Kans., from discriminating in price among its customers.
The Commission adopted an initial decision by Hearing Examiner Abner E. Lipscomb containing an order agreed to by the co-op and the Commission's Bureau of Litigation.
A Commission complaint, issued September 24, 1956, had charged the co-op with favoring its Arkansas City wholesale customers with prices ranging from 1 to 3 cents less per quart of milk than that charged their competitors throughout the rest of the co-op's territory.
In addition, the complaint charged, the co-op maintains a delivery service to private homes in Arkansas City and, as such, competes not only with two local dairies selling to consumers on a cash-and-carry basis but also with the retail grocery stores. In 1954 the co-op reduced its delivered retail prices by 13 cents per gallon.
These price disciminations, the complaint alleged, may substantially lessen competition in violation of section 2 (a) of the Robinson-Patman amendment to the Clayton Act.
According to the order, the co-op and its manager, Carl Fitzgerald, (1) may meet--but must not undercut-prices charged by other milk sellers, and (2) must charge the same prices to customers who compete with each other in retailing milk.
The order dismissed the complaint as to Homer S. Call, Ivan J. Scott, and John Weir, Jr., individually and as representative of the entire membership of the co-op. The examiner said it is believed that adequate relief will be secured by the order against the co-op and Mr. Fitzgerald, who personally directed its operations.
The agreement is for settlement purposes only and does not constitute an admission by the company or Mr. Fitzgerald that they have violated the law.
FAIRMONT FOODS Co.,
Lawton, Okla., January 6, 1958. Hon. TOBY MORRIS, House of Representatives,
Washington, D. C. DEAR TOBY: In my opinion the time has come when new legislation should be introduced concerning the unjust tax exemption of cooperatives. Recent surveys show a definite trend toward cooperatives' growth and influence in the Nation's business. Such a trend is potentially dangerous in that the loss of revenue to the Government can ill be afforded, and the competitiveness in the industry is becoming increasingly unfair since the cooperative processors and distributors of dairy products have such a big tax advantage.
Undoubtedly at the time the cooperative taxation law was passed the intention of Congress was to aid small cooperatives throughout the country. Apparently the law has not only had its desired effect but has furnished the encouragement for many cooperatives to become multi-million-dollar businesses. I question seriously that this latter development was either foreseen or desired by the Congress, for cooperatives with all their maniacal ramifications are threatening the existence of privately established businesses.
I fully believe that in the interest of preserving free enterprise legislation should be enacted that will equalize the tax responsibility of cooperatives and proprietary operators. Since a hearing has been scheduled before the Ways and Means Committee on taxation during the period January 7 to February 7, I would appreciate your transmitting these opinions to the committee. Sincerely yours,
J. E. CARTER, Manager. The CHAIRMAN. Our next witness is Mr. Harold Bobier. Is Mr. Bobier here?
Mr. Bobier, for purposes of the record, please identify yourself by giving your name, address, and the capacity in which you appear. STATEMENT OF HAROLD H. BOBIER, PURE SEAL DAIRY, INC.,
FLINT, MICH. Mr. BOBIER. Mr. Chairman and gentlemen of the committee: My name is Harold H. Bobier. I am associated with the Pure Seal Dairy of Flint, Mich. I am accompanied by Mr. Forbes K. Merkley, of the Genesee Dairy Co., Mr. Ronald Warren of the Pure Seal Dairy, and Mr. John Wernicke, secretary and general manager of the George W. Hubbard Hardware Co., all of Flint, Mich.
The CHAIRMAN. Mr. Bobier, you are recognized for 10 minutes. Proceed in your on way.
Mr. BOBIER. Thank you, sir.
We are here today to do what we can to bring about equality of taxation.
First, let me say that we are not against cooperatives, and we do not seek to destroy them. We do seek to have cooperatives taxed on the
same basis as we are, their competitors. We are seeking only equality of taxation and, we believe, the opportunity to stay in business.
I think the best way to illustrate our position, and our dilemma, is to describe to you how a cooperative affects the dairy business Í represent.
In 1943 the then McDonald Dairy Co. was owned by two brothers, and was in bad financial straits. A cooperative was formed: the St. Paul Bank of Cooperatives provided the capital from which the cooperative purchased the brothers' interests, and the brothers continued to manage the dairy, but as a cooperative.
Of the 8 dairies delivering in the city of Flint, 4 would be considered large by the standards of our community, and 4 would be considered very small. The cooperative is named “McDonald Cooperative Dairy Co., Inc.” Recently it has dropped the use of the word "cooperative from all of its advertising and truck lettering, although it still maintains the word "cooperative" on its dairy sign on its processing plant. Prior to becoming a cooperative, the McDonald Dairy Co. had been doing business in the city of Flint since about 1928.
Freedom from taxation: With the freedom from taxation, which the McDonald Cooperative Dairy obtained by becoming a cooperative, the business has been transformed into a large and prosperous business, making large annual net profits. During the years since becoming a cooperative, up to and including 1954, with the exception of 1953, for which we have no statement, the McDonald Cooperative Dairy Co., as shown by the attached statements, earned net profits in the amount of $3,474,037.85. On these earnings, it should have paid Federal income taxes in the amount of $1,778,750. It paid none. In 1943, its first year as a cooperative, it processed 36,481,221 pounds of milk; in 1954, since becoming a cooperative, it processed 148,189,977 poundsover 400 percent more.
Management of retained profits: The cooperative has added to its plant facilities so that it has more than doubled in area. In addition, the cooperative has purchased other businesses in allied fields, and has consolidated them into its activities. This, of course, has deprived the Government of income-tax moneys from the businesses purchased.
The cooperative has made its relief from taxation felt in direct business competition with the other dairies in Flint, and vicinity, who are proprietary taxpaying processors and distributors.
For the past several years, the cooperative has engaged in a course of ruinous discounts and trade favors in order to gain trade advantages over its competitors. The cooperative can do this, because it retains out of each profit dollar approximately 52 cents more than its taxpaying competitors. By way of illustration, but not limitation, the cooperative has financed dairy bars, soda fountains, drugstores, taken over distress paper of grocery stores, and repaired beer coolers. As an illustration of how these tactics affect its competitors, the cooperative serves 57 drugstores in Flint, Sealtest serves 7, Swift serves 6, and the Pure Seal none.
The cooperative has steadily decreased the profit margin in the wholesaling of processed fresh milk, by offering trade discounts to grocers and other outlets, in order to gain exclusive patronage, or to make the business less profitable for its competitors. In order to save our businesses, we have been forced, where we could, to match the figures of the cooperative. It has been a ruinous trail. Since the