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Poultrymens Cooperative Association of Southern California, Box 23415, Lugo

Station, Los Angeles 23, Calif. San Diego Cooperative Poultry Association, Post Office Box 468, San Diego, Calif. San Joaquin Valley Poultry Producers Association, Post Office Box 1829, Fresno,

Calif. Utah Poultry and Farmers Cooperative, Post Office Box 1620, Salt Lake City

10, Utah Washington Co-Operative Farmers Association, 201 Elliott Avenue West, Seattle 99, Wash.

PROCESSED FRUITS AND VEGETABLES DIVISION Berks-Lehigh Cooperative Fruit Growers, 130 East Locust Street, Fleetwood, Pa. Blue Lake Packers, Inc., Post Office Box 1038, Salem, Oreg. California Prune and Apricot Growers Association, Post Office Box 670, San

Jose, Calif. Florida Citrus Canners Cooperative, Post Office Box 1111, Lake Wales, Fla. Knouse Foods Cooperative, Inc., Peach Glen, Pa. National Cranberry Association, Hanson, Mass. North Pacific Canners and Packers, Inc., 5200 South-East McLoughlin Boule

vard, Portland 2, Oreg. Sun-Maid Raisin Growers of California, Fresno, Calif. Tri-Valley Packing Association, 240 Battery Street, San Francisco 11, Calif. Turlock Cooperative Growers, Box 948, Modesto, Calif. Willamette Cherry Growers, Inc., Post Office Box 283, Salem, Oreg.

PURCHASING DIVISION

Associated Cooperatives, Inc., Post Office Box 911, Sheffield, Ala.
Centrala Farmers Co-Op., Inc., Selma, Ala.
Consumers Cooperative Association, Post Office Box 7305, Kansas City 16, Mo.
Eastern States Farmers' Exchange, Inc., West Springfield, Mass.
Farm Bureau Cooperative Association, Inc., 245 North High Street, Columbus

16, Ohio Farm Bureau Services, Inc., 4000 North Grand River Avenue, Post Office Box

960, Lansing 4, Mich. Farmers Cooperative Exchange, Inc., Raleigh, N. C. Fruit Growers Supply Company, Box 2706, Terminal Annex, Los Angeles 54,

Calif. Illinois Farm Supply Company, 100 East Ohio Street, Chicago 11, III. Louisiana Agricultural Cooperative, Inc., Baton Rouge, La. Minnesota Farm Bureau Service Company, 101 East Fairfield Avenue, St. Paul

1, Minn.
Mississippi Chemical Corporation, Yazoo City, Miss.
Northwest Wholesale, Incorporated, Post Office Box 1649, Wenatchee, Wash.
Pacific Supply Cooperative, Box 1004, Walla Walla, Wash.
Pennsylvania Farm Bureau Cooperative Association, Post Office Box 23, Har-

risburg, Pa.
Tennessee Farmers Cooperative, La Vergne, Tenn.
Tennessee Valley Cooperative, Inc., Post Office Box 291, Decatur, Ala.
United Co-Operatives, Inc., 111 Glamorgan Street, Alliance, Ohio

STATE COUNCILS DIVISION Agricultural Conference Board of Virginia, 602 Mountain Trust Building, Roa

noke 11, Va. Agricultural Cooperative Council of Oregon, 345 West 31st Street, Corvallis,

Oreg. Agricultural Council of California, 1400 10th Street, Sacramento 14, Calif. Delaware Council of Farmer Cooperatives, Route 2, Elkton, Md. Farmers Cooperative Council of North Carolina, Box H-1, Greensboro, N.C. Florida Council of Farmer Cooperatives, Care of College of Agriculture, Gaines

ville, Fla. Georgia Council of Farmer Cooperatives, Lexington Road, Athens, Ga. Idaho Cooperative Council, 31712 North 8th Street, Boise, Idaho Iowa Institute of Cooperation, 307 Kellogg Avenue, Post Office Box 169, Ames,

Towa. Kansas Cooperative Council, 701 Jackson Street, Topeka, Kans. Kentucky Cooperative Council, care of Producers Livestock Marketing Associa

tion, 120 Bourbon Stockyards, Louisville, Ky.

Louisiana Council of Farmer Cooperatives, University Station, Baton Rouge, La. Maine Cooperative Council, care of College of Agriculture, University of Maine,

Orono, Maine Michigan Association of Farmer Cooperatives, 4000 North Grand River Avenue,

Post Office Box 960, Lansing 4, Mich. Minnesota Association of Cooperatives, 2651 University Avenue, St. Paul 14,

Minn. Mississippi Council of Farmer Cooperatives (AAL), Post Office Box 449, Jack

son, Miss. Nebraska Cooperative Council, 3275 Holdrege Street, Lincoln 3, Nebr. New Jersey State Council of Farmer Cooperatives, 168 West State Street,

Trenton, N. J. New Mexico Cooperative Council, Post Office Box 425, State College, N. Mex. New York State Council of Farmer Cooperatives, Inc., 203 Warren Hall, Cor

nell University, Ithaca, N. Y. Ohio Council of Farmer Cooperatives, Inc., 309–311 Brunson Building, 145 North

High Street, Columbus 16, Ohio Oklahoma Agricultural Cooperative Council, care of Oklahoma Agricultural and

Mechanical College, Stillwater, Okla. Pennsylvania Association of Farmer Cooperatives, Post Office Box 23, Harris

burg, Pa. South Carolina Council of Farmer Cooperatives, Post Office Box 948, Green

wood, S.C. Texas Federation of Cooperatives, 307 Nash Building, Austin, Tex. Utah Council of Farmer Cooperatives, care of Utah State Agricultural College,

Logan, Utah Vermont Cooperative Council, Box 107, Barre, Vt. Washington State Council of Farmer Cooperatives, 4119 Arcade Building,

Seattle 1, Wash. Wisconsin Council of Agriculture Cooperative, 205 Tenney Building, Madison 3, Wis.

TOBACCO DIVISION Puerto Rico Tobacco Marketing Cooperative Association, Post Office Box 331,

San Juan, P. R. Tennessee Burley Tobacco Growers Association, Post Office Box 390, Greeneville, Tenn.

WOOL DIVISION American Angora Rabbit Breeders Cooperative, Post Office Box 351, Palmer

Lake, Colo. National Wool Marketing Corporation, 281 Summer Street, Boston 10, Mass. Pacific Wool Growers, 734 Northwest 14th Avenue, Portland 9, Oreg.

ASSOCIATE MEMBERS Colorado Cooperative Council, Inc., 2800 South Broadway, Englewood, Colo. South Dakota Association of Cooperatives, Post Office Box 472, Aberdeen,

S. Dak. Tennessee Council of Farmer Cooperatives, care of Tennessee Farmers Coopera

tive, La Vergne, Tenn. Wyoming Cooperative Council, 712 South 12th Street, Laramie, Wyo.

PAST HEARINGS

Mr. BEERNINK. I certainly do not want to impose today upon your time or your patience by repetition of information on this subject which you have heard time and again in the past. You know the basic economic issues involved in this whole problem between the farmers and their associations on one side, and on the other those who want to handle the farmers' products for their own, and not the farmers' profit.

I would like to remind you, however, that the objective today of many of those who are advocating a drastic change in the tax treatment of cooperatives is the same as in November 1947, when your

committee devoted 17 hearing days, filling 1,295 pages of printed testimony, to this subject. Their objective then and now is quite clear: To try to persuade Congress to pass legislation under the guise of tax equality which will make it difficult if not impossible for the farmer to finance and conduct successfully on a self-help group basis the purchasing and marketing business operations of his farm.

Again, in 1950 and 1951, your committee held hearings on this subject. In the 1950–51 hearings, 4 hearing days were devoted to this subject, filling 608 additional pages of testimony. In fact, beginning with the hearings before your committee in 1947, there have been 31 days, filling 2,956 pages of testimony on the cooperative tax question before congressional committees. So it can be truly said that this subject has been afforded exhaustive hearings and discussion.

CHANGE IN TAXATION OF EXEMPT COOPERATIVES IN 1951

In both 1950 and 1951, your committee decided, on the basis of all the facts before it, that there should be no change in the tax treatment of farmers' cooperatives. Some of you who are members of the committee today participated actively and personally in those decisions. But the Senate Finance Committee, in 1951, approved a change in the statute with respect to so-called exempt cooperatives, designed to impose a single tax on all margins.

Theretofore, so-called exempt cooperatives had been permitted under the law to set aside reasonable reserves for any necessary purpose without such reserves being subject to a Federal income tax. This was denied to so-called exempt cooperatives after 1951. The conferees finally acceded to the Senate position in 1951, and the law which then was section 101 (12) of the 1939 code-sections 521 and 522 of the 1954 code—was amended to require exempt cooperatives to pay a corporate tax on any margins arising from their operations unless allocated in such a manner as to disclose to each patron the dollar amount of his share of such margins. Congress then acted on the assumption that such allocated margins not taxable to the cooperative would be taxable income to its patrons.

Your committee was told, in 1951, that any amount which the cooperative was obligated to return to the farmer patron as a patronage refund was taxable income to the farmer, even though the farmer had, in the articles of incorporation or bylaws or a separate agreement, authorized the cooperative to retain a part or all of the farmer's refund as capital and to issue to the farmer either shares of stock, a revolving-fund credit, or some other kind of an investment interest

. Since 1951, however, in some decisions by the Tax Court of the United States and by several circuit courts of appeals, it was held that if, instead of paying the patronage refund in cash, the cooperative, in accordance with the previous authorization by the farmer patron, invested the amount of the refund in its capital stock, revolving fund, or other kind of capital and issued to the farmer shares of stock, a revolving-fund credit or an interest in some other kind of capital, then the farmer patron is currently taxable on only the fair market value of the shares of stock, revolving-fund credit, or other capital interest which the cooperative issued to him. Even in some cases where the cooperative had a record of regular cash retirement of its stock, revolving-fund credits, or other capital interests, the court

held that the patronage refund did not constitute taxable income to the farmer patron until the cooperative redeemed its stock or capital credits in cash.

That is the dilemma which the courts have handed to farmer cooperatives and their farmer patrons since 1951. That is the problem and the only problem, as I see it, which is now before you with respect to cooperatives and their patrons. We can all agree, certainly, that the business operations of a cooperative may result in income. The net amount, if any, which remains after deducting the cooperative's deductible expenses, whether you call that net amount earnings, savings, margins, profits, or whatever you desire to call what, if anything, remains, is income to someone. The question in controversy, however, is whose income it is, the cooperative's or the farmers'.

Where is the line between the income of the cooperative and the income of the patrons ? What is the quantitative measure of that income for Federal tax purposes? Some of the anticooperative spokesmen say that regardless of the terms of the contracts or agreements between the patrons and the cooperative imposing upon the cooperative an enforceable legal obligation to distribute the net earnings to the patrons on a patronage basis, all the net earnings should be regarded as the cooperative's profits and should be subjected to a corporate tax. Still others say that some specific and arbitrary criteria should be set up by Congress prescribing the minimum requirements as to a due date or the payment of interest on the cooperative's securities issued to its patrons in order for the noncash patronage refunds to be excludible by the cooperative and taxable to its patrons.

We are opposed to all these proposals, because we believe they are wrong in principle, would destroy sound and well-established criteria for determining what is income to whom, and would inject the Federal Government into the control and regulation of matters of private business which are outside of the proper scope of governmental authority.

We are opposed to these and all other similar proposals because they are arbitrary and have no sound legal basis. They are not designed to accomplish either tax equality or equity. Rather, they are designed to subject cooperatives to a corporate tax on money which properly is income only to the farmer patrons and to subject the farmer patrons to an individual tax on what remains of their patronage refunds after the cooperative pays a corporate tax.

The purpose is, and the effect will be, to take away most of the farmers' financial benefit of having a nonprofit cooperative corporation handle their off-the-farm business at cost for the increased profit of the farmers, and thereby pressure the farmers into patronizing businessmen and corporations which operate to make a profit out of the farmer instead of for the farmer.

We realize that many conscientious people, genuinely concerned about the mounting costs of defense, have swallowed the tax-equality line. They sincerely support proposals to subject the farmers' cooperatives to corporate tax on their patrons' refunds. We respectfully question, however, whether such people have thought through the problem.

Certainly they do not believe that the courts should be permitted to legislate tax policy by either ignoring or failing to recognize the

bona fide contractual relationships between a cooperative and its patrons under which farmers either invest or lend their patronage refund income to their cooperatives to provide them with capital. Some tax experts and propagandists call this tax dodging.

I say to you that farmers investments of a part of their earnings in their own organizations is the very life-blood of farmer cooperatives. It is essential for the successful functioning of these organizations. Without it, the substantial amounts of cash which cooperatives now pay to the farmers and which now increase the farmers' cash incomes and personal income taxes, will ultimately have to be replaced by even more expensive governmental farm programs.

I submit that the farmers' best interests, the Government's fiscal needs, and the general public interest are all best served by continuing to encourage farmers' private financing of their privately owned and operated cooperatives, rather than by subjecting the farmers to both a corporate and a personal income tax on that part of their income which they now derive from purchasing their supplies and marketing their products through their own cooperatives at cost. To subject farmers to such double taxation will tend to drive them back to the dark days of buying their supplies at retail and selling their products at wholesale for the profit of people and corporations whose only interest in agriculture is to make a profit out of the people who earn their living on the farm.

COUNCIL POLICY

The council in 1955, through a special tax policy committee, made a thorough study of this problem and reported to the council delegate body at its annual meeting in January 1956. There is attached to this statement a copy of the report of the special tax policy committee and the policy resolution adopted by the delegate body.

Mr. Chairman, may that report be included as part of the record! The CHAIRMAN. Without objection, the report will be made a part of the record.

(The report is as follows :) REPORT OF THE SPECIAL Tax POLICY COMMITTEE, NATIONAL COUNCIL OF FARMER

COOPERATIVES, PRESENTED AT ANNUAL MEETING, JANUARY 17, 1956 In another important field—that of taxation-farmer cooperatives are faced today with important decisions. Failure to get together and make wise de cisions well might be costly and lead to adverse administrative policies by the Government or expensive litigation.

The Revenue Act of 1951 provided that patronage refunds of the so-called exempt cooperative should be taken into account in computing its net income in the same manner as in the case of a nonexempt cooperative. This meant that the patronage refunds could be excluded from the gross income of the cooperative if the cooperative was under a legal obligation to distribute these amounts to the patron.

The 1951 act said nothing directly about the taxability to the patrons of these patronage distributions. However, the Treasury Department for many years has enunciated the policy, although not generally followed in all internal revenue districts, that any funds which the cooperative, pursuant to a mandatory obligation, distributes on a patronage basis, regardless of the form of distribution, and which the patron authorizes the cooperative by agreement in the articles, bylaws, or separate agreement to retain as capitai, are currently taxable to the patron at base mount.

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