when the CPA acquired the Georgia Peanut Co. group, the CPA did not have any members among the peanut growers in Oklahoma and

Texas.

The southwestern peanut growers did not put up the money for the CPA to go into business in the southwest. The CPA was using largely tax-free earnings retained from farmers in other parts of the country to invade another industry and a new section of the country. It should be noted that practically any grower that markets his peanuts through the CPA is treated as a member. There is no membership fee and no requirement that stock be purchased.

In addition to the advantage that the CPA has over other peanut shellers, with respect to income tax payments, it has two other types of material advantages-both of which are given by the Federal Government. One relates to the peanut price support program and the other relates to credit.

As private businessmen we don't like the Government-favored type of unfair competition represented by the tax-free cooperatives. They are now growing by leaps and bounds and unless they are stopped, we will all be forced to change our business to a co-op. We urge that this committee recommend to Congress that cooperatives and their members be treated in exactly the same way with respect to income taxes, as are other forms of business organizations and their owners.

The CHAIRMAN. Thank you, Mr. Moake, for your appearance and the information given the committee.

Are there any questions?

If not, we thank you, sir.

Mr. MOAKE. Sir, we would like to ask that the detailed statement we sent in be put in the record.

The CHAIRMAN. Without objection that will be included in the record.

(The statement referred to follows:)

STATEMENT OF A. S. MOAKE, SOUTHWESTERN PEANUT SHELLERS ASSOCIATION My name is A. S. Moake. I am president of the Bain Peanut Co. of San Antonio, Tex., and am immediate past president of the Southwestern Peanut Shellers Association. I represent the Southwestern Peanut Shellers Assocaition consisting of 18 shellers of peanuts in the States of Oklahoma and Texas. The members of the association buy peanuts from farmers, remove the hulls and clean the peanuts, and sell them to manufacturers of peanut butter, peanut candy, and other peanut products. With two exceptions all of our members are small-business men.

GENERAL BECOMMENDATIONS

Our association recommends the elimination of the income-tax advantages now enjoyed by cooperative corporations.

We recommend that all businesses be treated exactly alike under the incometax laws. The mere fact that a business is organized as a cooperative corporation is no justification for that business to fail to pay income taxes or for the receivers of dividends or patronage refunds or any other type of payments to escape taxation.

Cooperative corporations should be required to pay income taxes on all their earnings just like any other business and individuals receiving payments from cooperative corporations should also pay income taxes on such payments just like the receivers of dividends from corporations. If double taxation is justifiled in the case of noncooperative businesses, then it is equally justified in the case of cooperative businesses.

JUSTIFICATION FOR RECOMMENDATIONS

The present law provides one of the biggest loopholes in the income-tax structure.

This loophole deprives the Federal Government of much-needed revenue. With the prospect of increased defense spending to meet the Russian threat, the Federal Government should look to cooperative corporations as a new source of

revenue.

This loophole places private business enterprise in a most unfair position when competing with cooperative corporations. Private business enterprise pays the income taxes, while the cooperative corporations largely escape them. By this device, the development of the cooperative form of organization is promoted and the noncooperative form of organization is discouraged. This loophole encourages private businesses to sell out to cooperative corporations, thus reducing further the tax paying segment of our economy and shifting more of the tax burden onto the remaining noncooperative corporations.

This loophole permits the accumulating of funds by cooperative corporations through the retention of earnings for expansion through internal growth and through purchases of noncooperative corporations.

This loophole has resulted in the development of large corporate holdings in the name of cooperatives that were certainly not contemplated by the persons who originally gave certain advantages to cooperatives through various laws. The large cooperative corporations that we have in our economy today are a far cry from the original concept of a group of farmers getting together to market their produce.

If this loophole is not plugged, the end result will be the substitution of the cooperative way for the free private enterprise way. We know this is not the end result desired by Congress.

To illustrate the practical significance of this loophole, we want to discuss with you the growth, development, and ramifications of one giant cooperative corporation-the Cotton Producers Association.

COTTON PRODUCERS ASSOCIATION

The Cotton Producers Association with headquarters in Atlanta, Ga., today is the largest sheller of peanuts in the United States. Thirteen months ago it was not in the peanut-shelling business. It got into the peanut-shelling business by buying out the largest shelling organization in the country.

Let me give you more of the background of this organization and of its dealings in peanuts.

The CPA was formed in 1937 and up until it got into peanuts was engaged largely in storing and marketing of cotton, manufacturing fertilizer, and selling fertilizer and other supplies to farmers, operating cotton gins, processing and marketing pecans, cleaning, drying, storing, and marketing grain, processing and marketing poultry, and operating a poultry hatchery. Using retained earnings from these enterprises, the CPA has also branched out into the insurance business.

According to our best estimates the CPA from 1937 to 1957 retained earnings of roughly $7 million. During this same period, roughly $1 million was returned to members. This, gentlemen, is big business and by no stretch of the imagination can be described as merely farmers getting together to market their produce. In early 1957 the CPA purchased the Georgia Peanut Co. and its 11 affiliated companies. This group of companies represented by far the largest peanutshelling capacity under the control of any one group in the United States. From the best information available to us it appears the CPA paid in the neighborhood of $5 million for these companies. In the Moultrie (Georgia) Observer on January 5, 1957, a news story attributed to the Cotton Producers Association and the Georgia Peanut Co. announced the merger of the two groups. The manager of the Cotton Producers Association stated that "it is expected that the present employees of the Georgia Peanut Co. will continue in their present capacities." The story continued with the statement that the "Character of the business will continue practically unchanged."

The CPA is operating in both the southeastern peanut-producing area (Georgia, Florida, and Alabama) and in the southwestern peanut-producing area (Oklahoma and Texas), yet when the CPA acquired the Georgia Peanut Co. group the CPA did not have any members among the peanut growers in Oklahoma and Texas. The southwestern peanut growers did not put up the money for

the CPA to go into business in the Southwest. The CPA came into the Southwest to get business just like any other business organization. The CPA was using largely tax-free earnings retained from farmers in other parts of the country to invade another industry and a new section of the country.

In addition to the advantage that the CPA has over other peanut shellers with respect to income-tax payments, it has two other types of material advantages-both of which were given by the Federal Government. One relates to the peanut price-support program and the other relates to credit.

The price of peanuts to growers is maintained by the Department of Agriculture through a price-support program. The storage facilities of peanut shellers are used by the Department of Agriculture in carrying out the price-support program. In each of the three peanut-producing areas there were already well established grower cooperatives satisfactorily carrying out the peanut pricesupport program for the Department of Agriculture.

Yet the CPA asked the Department of Agriculture for a special contract with respect to carrying out the peanut price-support program and it was granted a special contract by the established grower cooperatives at the insistence of the Department of Agriculture. The effect of this contract is for the Federal Government to finance the inventory of peanuts held by the CPA and to bear the risk on such peanuts as the CPA chooses to place under loan to the Government. This special contract is not available to businessmen shellers.

The Government through the Farm Credit Administration provides special credit facilities to the CPA which are denied to businessmen shellers. It should be noted that practically any grower that markets his peanuts through the CPA is treated as a member. There is no membership fee and no requirement that stock be purchased.

MINGLING OF PRIVATE AND COOPERATIVE INTERESTS

In at least one operation that has come to our attention, it appears that the officers of the CPA have mingled their own private business interests and the business interests of CPA. This is another example of the use of capital built up as a result of the present tax advantages enjoyed by cooperatives. We wish to point out this situation to the committee and suggest that the committee with its more effective powers of investigation pursue this matter further.

The Cotton States Life & Health Insurance Co. was organized as a stock company under the laws of the State of Georgia in November 1955, with the stated object of "pecuniary gain to its members." Its chief stockholder, Cotton States Mutual Insurance Association, holds 15,001 shares out of the initial issue of 30,000 shares. The Cotton States Mutual Insurance Association reported to the insurance commissioner that the stock cost it $150,010. The president of the Cotton States Life & Health Insurance Co. is also the general manager and head of the CPA. The president owns 750 shares of stock. The executive vice president and secretary of the Cotton States Life & Health Insurance Co. is also treasurer of the CPA. He likewise owns 750 shares of stock.

The Cotton States Mutual Insurance Association is sponsored by the CPA. We are uncertain how much of the funds to start the Cotton States Mutual Insurance Association was put up by the CPA, but there is evidence that the CPA put up $315,000 out of a total of $328,500. The general manager of the CPA is president of the Cotton States Mutual Insurance Association. The treasurer of the CPA is general manager and secretary of the Cotton States Mutual Insurance Association.

Both the general manager and the treasurer of CPA are on the board of directors of the Cotton States Life & Health Insurance Co. and the Cotton States Mutual Insurance Association.

We have here what appears to be a clear-cut case of the management of a cooperative corporation using the funds of the cooperative corporation to start a mutual-insurance company, and then using the funds of that mutual-insurance company to provide risk capital for a stock-insurance company organized for "pecuniary gain to its members," with the officers of the cooperative corporation being organizers, officers, and stockholders in the stock company. It should be noted that although as initially organized the Cotton States Mutual Insurance Association owned a majority by 1 share of the Cotton States Life & Health Insurance Co.'s stock, that (1) the initial issuance of 30,000 shares of capital stock is less than one-sixth of the 200,000 shares authorized, (2) the corporation is authorized to use its surplus to purchase its shares, (3) the directors have sweeping authority to create stock options "upon such terms and at such time

or times which may be limited or unlimited in duration and at such price or prices as may be determined by its board of directors ***."

SUMMARY OF RECOMMENDATIONS

If the Federal Government does not treat cooperative corporations the same as other business organizations with respect to income taxes, then we may expect a continued shift of business enterprises to the cooperative form of organization. We confidently expect in the peanut-shelling industry for a number of shellers to convert to cooperative corporations unless relief is given.

As more businesses shift to the cooperative form, there will be fewer taxpaying businesses. Where will our tax revenues come from to meet the burden of national defense?

The income-tax system should be neutral with respect to various ways of doing business. At the present time cooperative corporations are definitely favored. We urge that this committee recommend to Congress that cooperative corporations and their members be treated in exactly the same way with respect to income taxes as are other forms of business organizations and their owners. Thank you.

The CHAIRMAN. Our next witness is Mr. C. K. Elliott.

Mr. Elliott, please come forward and give us your name, address, and the capacity in which you appear for the benefit of the record. STATEMENT OF C. K. ELLIOTT, REPRESENTING AMERICAN NATIONAL LIVESTOCK ASSOCIATION, KANSAS CITY, MO., AND INDEPENDENT LIVESTOCK MARKETING ASSOCIATION, OF COLUMBUS, OHIO

Mr. ELLIOTT. I am C. K. Elliott of Mount Victory, Ohio. I am a farmer and small-business man operating livestock yards and doing a livestock order buying business.

The CHAIRMAN. Mr. Elliott, can you complete your statement in 5 minutes allotted to you?

Mr. ELLIOTT. I can, sir.

The CHAIRMAN. You are recognized, sir.

Mr. ELLIOTT. I am appearing before you on behalf of the membership of the American National Livestock Auction Association, of Kansas City, Mo., and that of the Independent Livestock Marketing Association, of Columbus, Ohio.

As the names imply, these organizations are composed of individuals and independent organizations that gain their livelihood from the operation of stockyards, livestock auction markets, and livestock order buying agencies.

Incidentally, I recall quite vividly having appeared before this committee a decade ago and especially do I recall having been questioned by my good friend and fellow Ohioan Congressman Tom Jenkins.

At that time it was my personal feeling that sufficient evidence had been presented by various individuals and organizations to fully convince the members of this committee that our laws relative to the taxation of cooperatives were not only inadequate but unjust, and that they should be revised if we were to maintain our system of free enterprise.

I felt further that immediate action would be taken in order that our democratic way of life might be preserved; but to date, as you know, very little has been done to alleviate the situation.

Now, gentlemen, please understand that I am not opposed to any specific form or type of business enterprise, be it individual, corporate,

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or cooperative. As a matter of fact, I am a charter member of the farm bureau of my county. I am also a member of several cooperatives as well as being a small-business man. So I am in no way prejudiced to any particular type of business venture; however, I am first an American and as such I and the membership of the organizations which I represent here feel duty bound to oppose any law, be it taxwise or otherwise, which becomes a threat to our democratic way of life.

Many of you know that the original intent of Congress in granting tax exemption to cooperatives was to help the farmer. Supposedly he was to receive the earnings that his business with the cooperative generated. But that is not the case today. Unfortunately many cooperatives keep their profits and use them to operate business ventures not allied to the interest of the farmer. All that the farmer gets is a patronage dividend in the form of a paper allocation or in some instances a certificate of equity or stock of doubtful value. Nevertheless, this subterfuge enables the cooperative to shift its tax liability to the farmer who, according to Treasury regulations, must reach into his own pocket to pay the tax.

The retention of tax-free earnings gives cooperatives a tremendous advantage over other forms of enterprise. Visualize, gentlemen, if you will, what an individual corporation could accomplish if granted the same immunity from taxation and may I ask were this so, where would we obtain the funds to carry on the functions of government? Gentlemen, a few years ago the business transacted by cooperatives totaled only a few million dollars. Today it is estimated in billions. As a more specific example, in the State of Ohio, 40 years ago, traffic in livestock on a cooperative basis was infinitesimal, even unknown in many sections of the State. Today, 1 cooperative organization alone which trafficks in livestock claims a membership of over 100,000 members. With this 100,000 membership in mind, let me call to your attention that, according to a recent brochure published by the Ohio Department of Agriculture, there are only 177,074 farms in the State of Ohio, many of which do not produce livestock. In this connection, we question the method of obtaining members of this particular association because a producer, whether he sells one head or a carload, automatically becomes a member by endorsing their check. We happen to know that many members, even though using the organization, do not sanction this matter of tax favoritism.

It is our belief that this phenomenal growth, as claimed, can be attributed only to the unfair tax advantage afforded cooperatives. When I appeared before you a decade ago, our national tax bill was approximately $40 billion. If my memory serves me correctly, it is now estimated at around $73 billion.

prave

Gentlemen, the ever-increasing demand for Federal funds and the phenomenal growth of tax-exempt organizations in every field of endeavor places a very grave responsibility on those of us who still believe in democracy. I am in communication with a great many farmers each year. I trade with them, and we discuss mutual problems. They most certainly believe in the right of free enterprise, and I say to you gentlemen of the Congress that they are willing to pay their fair share of the cost of good government and they are vociferously demanding that tax favoritism be eliminated.