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Washington, D. C., January 6, 1958. Hon. WILBUR MILLS, Chairman, Committee on Ways and Means,

House of Representatives, Washington, D. C. DEAR COLLEAGUE: I am enclosing a letter which I have received from Mr. Adolph Skinner, president, Anthony Pure Milk Co., Inc., Nashville, Tenn., concerning the taxing of cooperatives.

I feel sure that Mr. Skinner's letter will be of interest to you and your committee and hope that you will have it made a part of the record when hearings start on the tax situation. With best wishes, I am Sincerely,



Nashville, Tenn., December 30, 1957. Hon. CARLTON LOSER,

House Office Building, Washington, D. C. DEAR CARLTON: Before stating what is on my mind, I want to wish you and yours a healthful and happy new year, and from the looks of things, we are going to have to do a lot of things that we haven't gone through with in the past.

Our Government is not like a business; when certain phases of it do not justify the expenses, we immediately split it up into sections where it can be taken care of with lots less expense. I have not had a chance to talk to you very much, but I believe I have discussed with you the tax-free cooperatives, and, as I have explained, that it is unfair for such a business to operate in direct competition with another. All it takes is to have a co-op sign on the business and be free from the normal individual corporation income tax.

We do not have a co-op at present, but the Nashville Milk Producers Association has purchased 10 acres of ground in the edge of the city and are planning to build a milk plant in direct competition with the taxpayers of Nashville an) vicinity. They are able to do this because they have been deducting $0.06 a hundredweight from the producers of this community for over 10 years. This has run into a sizable sum, and the business manager is about the only one that really gets any money out of the association funds. They are able to borrow at a low rate of interest for this project, and, of course, the land they have purchased will be tax exempt.

Just as an example, the U. S. D. A. statistics show that local dairy co-ops in 1954 only paid three-fourths of 1 percent of their earnings in income taxes while they retained over 70 percent of their earnings. In a sample of 215 dairy co-ops, 136 followed the revolving capital from 6514 million at the end of the fiscal year 1949 with over 105 million in the fiscal year ending 1954. As you can see, this averaged an annual increase in revolving equity of capital of nearly $60,00) per dairy co-op. If the 1,670 dairy co-ops all do this well over a period of a year, it does not seem to me a very rosy future for the privately owned dairy.

I have been informed that a hearing will be conducted early in January on the unfair advantage of farm co-ops operating and distributing milk and dairy products exempt from income tax equal to those paid by myself, and it certainly will be appreciated if you will state our views to the new chairman of the Ways and Means Committee, Hon. Wilbur Mills.

I feel that this additional income that the individuals have been paying for the co-ops will certainly be of help to raising additional money for improving our defense against Russia in the cold war. With all good wishes, I am Sincerely yours,



House of Representatives,

Washington, D. C., February 14, 1958. Hon. WILBUR D. MILLS, Chairman, House Committee on Ways and Means,

Washington, D. C. DEAR MR. CHAIRMAN : I would like to go on record as being opposed to the Mason bill, H. R. 502, which would alter the tax-exempt status of cooperatives. Sincerely,

USHER L. BURDICK. The CHAIRMAN. Our next witness is Mr. Roswell Magill.

While I have known you for a great number of years, for the purpose of this record, Mr. Magill, will you give your name, address, and the capacity in which you appear?

Mr. Mason. May I say, Mr. Chairman, that I knew his father quite well when I was superintendent of schools.

The CHAIRMAN. You knew his father before I knew Mr. Magill; I knew him in 1930. He is one of my former law professors. I am glad to see you.


DEALERS NATIONAL ASSOCIATION, WASHINGTON, D. C. Mr. MAGILL. Mr. Chairman and gentlemen of the committee: I am a New York lawyer. My address is 15 Broad Street, New York City. I appear here on behalf of the Grain & Feed Dealers National Association.

I think it will probably save time if I simply present to you the statement which I have prepared for this occasion. You already have in your hands I believe a considerable statement filed by the Grain & Feed Dealers Association designed to give the facts with respect to the problem with which we are involved.

The CHAIRMAN. Mr. Magill, I take it you want your statement included in the record.

Mr. MAGILL. I would appreciate that.
The CHAIRMAN. Without objection it will be included in the record.
You are recognized to proceed in your own way for 15 minutes.
Mr. MAGILL. I hope I can get done before that time.

The primary point that I wish to make is that the income of grain elevators should all be subjected to tax in the same fashion, whether such elevators are owned by individuals, partnerships, corporations, or cooperatives. On its face, that proposition seems self-evident; yet under the current law as interpreted by the Internal Revenue Service, the income of grain elevators owned by individuals, partnerships, or corporations is taxed at the standard rates applicable to individuals and corporations, respectively; while the income of grain elevators owned by cooperatives is taxed very little or not at all. The statement of facts which we have filed with the committee shows that as a result, as would be expected, cooperatively owned elevators flourish and expand using untaxed income; while individually owned elevators are gradually disappearing.

Our statement shows that ordinarily the farmer sells his grain to the elevator at the current market price, less a small operating margin, whether the elevator is individually or cooperatively owned. If the elevator has calculated the operating margin wisely, at the end of the year it will have some excess of receipts over expenses. In the case of an elevator owned by an individual, partnership, or corporation, that excess will constitute its taxable income.

In the case of a cooperatively owned elevator, however, that income can be made to disappear for tax purposes, by the issuance of a paper certificate in some form, allocating such income in whole or in part to the cooperators as a patronage dividend. It is not essential that the paper certificate be payable in cash at any definite time; nor that it have any ascertainable value. The usual term of the certificates is the pleasure of the directors of the cooperative. Hence, the certificates usually are not paid or redeemed in cash, and possess no market value. Thus, the paper certificate does not constitute income to the recipient, as the courts have held. Yet the cooperative is entitled to deduct the face amount of such certificates. Thereby it wipes out such part of its income as it chooses. By the same token, the cooperative thereby retains for its own expansion, tax-free, such of its earnings as it chooses.

The figures which we have submitted show how important this special deduction granted only to cooperatives has proved to be. Grain-marketing cooperatives now do about one-third of that type of business and now occupy a dominant position in many areas. The volume of business of grain-marketing cooperatives was 107 percent larger in 1955 than in 1926 and 60 percent larger than in 1945. Farm Credit Administration statistics show that total assets of regional gram-marketing cooperatives grew from $812 million in 1939-40 to $11212 million in 1950–51. During the same period, members' equities in the cooperatives, that is, untaxed retained income, grew from $3,397,000 to $51,437,000.

We have figures for two particular cooperatives, the Farmers Union Grain Terminal Association and the Farmers Cooperative Co. of Britt, Iowa, the first a large cooperative and the second a smaller one. FUGTA's total assets have grown between May 31, 1939, and May 31, 1956, from $1,355,758 to $48,533,646. Its members' equities, the untaxed and undistributed income, have grown from $314,503 to $31,031,139.

The sales of the Britt, Iowa, company in 1933 were $68,025.13, and in 1956 were $1,377,475.83. The members' equities, untaxed and undistributed income, grew from $28,195 to $571,151.

After extensive consideration of the problem, Congress decided in 1951 to tax the income of cooperatives--the so-called net margin. That intention is stated specifically in the report of the Committee on Finance of the Senate; and is clearly evident from the debates in the Senate. The tax was to be levied upon the cooperative on that portion of its net income not allocated to patrons. A deduction was allowed to the cooperative corporation for that portion of the cooperative's net income which was allocated and distributed to patrons. The congressional intention was that such distributed income should be taxable to the recipient.

By virtue of the deduction for distributed income, a cooperative corporation is enabled to reduce its taxable income to an amount materially less than the taxable income of another business corporation, for the latter is granted no similar deduction for distributions of income. Moreover, the deduction is allowable whether or not the distribution of the net income of the cooperative corporation is made in cash, notes, certificates, or merely in credits to patrons on the books of the cooperative corporation. Thus, cooperative corporations are enabled to escape the income tax entirely by the issuance of some form of paper certificates to patrons redeemable at the discretion of the directors of the cooperative corporation. To be sure, cooperatives are required to file information returns, in which all patronage dividends in excess of $100 are required to be reported. In the light of the substantive provisions of the law, however, the information return provision has required merely that the Internal Revenue Service be informed of paper distributions that, in fact, it cannot tax.

It has been found that the announced congressional intent to impose an income tax on the net income of cooperative corporations can readily be avoided by the loophole in the legislation which grants to cooperative corporations a deduction for earnings allocated to patrons, even allocations by means of paper certificates which possess no market value because they contain no due date. In this fashion, the discrimination against individually owned grain elevators and in favor of cooperatively owned elevators, for example, has been perpetuated in fact. The purposes of the statute to exact a tax on the income of cooperative corporations is realized only when the cooperative corporation so elects; either by choosing to retain all or a part of its income without issuing paper certificates to its patrons, a very unlikely procedure; or by choosing to distribute all or part of its income in cash.

If the cooperative corporation chooses to retain its earnings for expansion, or our statement shows has generally been the case; and if it gives its patrons a paper allocation possessing no market value because not payable at any specified time; when the cooperative corporation itself is not taxable on its income, nor are its patrons required to include any part of the allocation in their incomes. In this manner, large amounts of income are entirely escaping the income tax, as our statement shows.

The phenomenal growth of cooperative corporations through the use of tax-free, retained earnings has been brought about at the cost of a loss of revenue which has been conservatively estimated at around $150 million; a loss which has had to be made up by other taxpayers, including competitive elevators and merchants. In view of the Government's enormous needs for revenue at the present time, it is obviously unfair to permit substantial amounts of business income to escape the income tax entirely through an unintended loophole.

Congress has already demonstrated its intent to tax the entire net income of cooperatives. The approach of taxing part of the income to the cooperative corporation and part to the patron has proved unworkable. The only fair and effective way of achieving the congressional intent is to levy the tax on the cooperative corporation on its entire net income, with no exclusion or deduction for patronage dividends regardless of their form. The taxation of the entire net income of cooperative corporations is justified on various grounds.

In the first place, income realized by cooperative corporations should in fairness be taxed on the same basis as the income realized by other competing corporations. There seems to be no good reason for making a tax distinction between cooperative corporations actively engaged in business and other kinds of corporations competing actively with them. Each is a legal entity engaged in an enterprise for profit.

Consequently, the proposal to tax cooperative corporations upon the portion of their net incomes remaining after a deduction or exclusion from income of patronage dividends paid in cash or in notes possessing a readily determinable market value, while ordinary business corporations remain taxable upon their entire net incomes with no deduction for dividends distributed in cash or its equivalent, is seriously objectionable. The net income realized by a cooperative with no exclusion or deduction for patronage dividends in reality constitutes its income for tax purposes as it does for other purposes. There is no legitimate reason, in my opinion, for discriminating in favor of cooperative corporations and against other business corporations that must compete with them directly.

In the second place, the Federal income tax is levied generally on the basis that a corporation is an entity distinct from its shareholders or patrons; and therefore that it should bear a tax upon its own income, whether that income be distributed or not. So long as ordinary business corporations are taxed in this way, cooperative corporations engaged in similar business activities should be taxed in the same way.

In these days when the revenue needs of the United States are so great and so pressing, there is no justification for the continuation of a loophole under which many millions of dollars of income are completely escaping tax. The continuance of the present loophole would be grossly unfair to competitive corporations which are fully subject to the income tax. The continuance of the loophole would be grossly unfair to the United States Treasury, which badly needs all the revenue that the income tax can produce.

The CHAIRMAN. Are there any questions of Mr. Magill ?
Mr. MASON. Mr. Chairman.
The CHAIRMAN. Mr. Mason.

Mr. Mason. Is it not true, Mr. Magill, that most co-ops are organized as corporations and possess State corporation charters?

Mr. Magill. That is my understanding, Mr. Mason.

Mr. Mason. Therefore if they are organized as corporations they should be taxed as corporations.

Mr. MAGILL. That is the view which I have tried to present.

The CHAIRMAN. We thank you very much for your appearance and the information given the committee. (Statement presented by Mr. Magill follows:)

JANUARY 20, 1958. To the House Ways and Means Committee:




Introductory remarks which state the position of the association that cooperative corporations should be subjected to income taxes upon the same basis and in the same manner as are their fully taxed corporate competitors.

II. THE PRESENT SIZE, IMPORTANCE, AND GROWTH OF COOPERATIVES The present size, importance, and growth of cooperatives is discussed because proponents of the cooperative point of view often plead smallness and inconsequence in defense of their position. That this is not the case is shown by reference to

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