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mentary form. In the latter instance, the market value, at a given moment, of the certificate received is not a relevant consideration." As to Time of Taxability

The foregoing would appear to set forth a reasonable mode of treatment of patronage allocations, producing a single tax on cooperatives' earnings realized for the patron's benefit. On the other hand the consequence of its application imposes a tax on a patron who at the moment of taxability may not receive the cash with respect to which the tax is payable. This results from the fact that the cooperative, in order to maintain its own financial responsibilities for credit purposes and otherwise, may restrict the transferability of the documents, or pay little or no dividends or interest with respect to them. The date for retirement of the paper may likewise be indefinite. As a result, a patron in such cases cannot himself sell or dispose of the documents and the market value is accordingly depressed below the face amount of the certificate. This situation may be equitably improved with many other taxing provisions of the code, simply by deferring the tax impact to the patron until such time as the paper is in fact redeemed or satisfied in cash or its equivalent by the cooperative.

In most practical terms, the statute could give the patron an option to pay the tax either for the year in which he received the noncash allocation or for the later year in which it is redeemed or satisfied. In order to protect the revenues fully and prevent indefinite deferral, a time limit could also be set upon the period within which the actual tax payment could be extended. Thus, a patron could either return the allocation as income in the year in which he received the paper or at a later point when he received cash, but not later than a specified period of years after receipt of the paper. In no case would tax be avoided. In effect, all that occurs would be that time of payment would be extended, but there would be no loss of revenue or violation of the single-tax policy.

I am sure that this committee is well aware of a variety of provisions in the Internal Revenue Code having a similar effect. Thus, there is no necessary correspondence during the time the same item is taken into account by unrelated taxpayers. As is well known, an accrual basis taxpayer accrues and deducts expenses in the year in which the liability for them is fixed,13 even though the amount so deducted may not be included in the income of the payee until a later year when cash payment for those expenses is in fact made and received. 14 Similarly, when property is sold on the installment basis at a profit, no tax is payable in that year when the profit is in fact realized. Under the statute,15 a taxpayer is permitted to defer inclusion in income of the amount of the profit until the later taxable year or years when the cash payments are in fact received. Another common instance occurs in connection with the sale of residence where the profit actually realized in cash can be deferred if and to the extent that the funds are reinvested in another home for the taxpayer.16 Tax arises only as, if and when the funds are uninvested from their commitment for residential use.17

There are numerous other situations of similar effect, where tax from the profits of an economic transaction is not avoided, but merely deferred until a later date when the taxpayer is more nearly able economically to bear the tax burden.

In summation, the above principle can be coupled with a recognition of the total cooperative taxing pattern. Altogether, an equitable statute could result which should settle cooperative taxing problems for many years to come.

18

13 Actually, there is longstanding statutory precedent for taxing the face amount of obligations even though their fair ‘market value may be a different amount. See, e. g., sec. 453, I. R. C., 1954.

13 See sec. 461 and regulations therein.
14 See sec. 451, I. R. C. 1954.
15 See sec. 453, I. R. C. 1952.
16 See sec. 1034, I. R. C. 1954.

17 There are, of course, other instances of tax deferral of reinvested funds in the case of involuntary conversions (sec. 1033), exchanges made to effectuate FCC policy (sec. 1071), exchanges made in obedience to SEC orders (sec. 1081).

18 See e. g., secs. 401-404 deferring tax on contributions to pension, profit-sharing, etc., plans ; secs. 301-395, deferring recognition of gain in reorganization transactions ; sec. 472, permitting, in effect, deferral of tax on appreciation in inventory ; sec. 1031, deferring tax on exchange of property of like kind held for productive use or investment; sec. 1035, deferring tax on exchanges of certain insurance policies ; secs. 1301-1305, permitting the spreading of income realized from inventions, artistic works, back pay, and compensatory damages from patent infringement.

Mr. BEERNINK. I would like to add just a few words concerning this matter of bigness and the allegation that farmer cooperatives are on the way to taking over American business, which I am told was asserted pretty vigorously and frequently before your committee last Thursday. While much was said about several of the largest farmer cooperatives in the country, little or nothing in the way of facts was presented to give you a true picture of the situation on a national scale.

What are the facts ?

For the year 1953–54, the latest year for which the figures are available, 82.2 percent of the 10,056 farmer cooperatives in the country had a volume of business less than $1 million each; 19.1 percent did a volume of less than $100,000. Less than 2 percent of the farmer cooperatives in the country did a volume of $9 million or more.

Let us look at the comparative growth of farmer cooperatives with the rest of the economy from 1950 to 1954.

Between 1950 and 1954 the gross national product rose from $285.1 billion to $361.2 billion or, taking 1950 as the base, from an index of 100 to 127. During the same period, the gross volume of all farmer cooperatives rose from $10.5 billion to $12.5 billion, or from 100 to an index of 119. In 1950, the total farm cooperative volume was 3.7 percent of the gross national product, compared to 3.5 percent in 1954.

Conclusion: We are not unmindful that new and unparalleled challenges face our Nation today which have created new and heavy demands for Federal revenue. Farmers, individually and as groups, want to shoulder and will shoulder their full measure of responsibility and sacrifice as loyal and patriotic citizens in meeting these challenges to the Nation's welfare. But those millions of farmers who have learned that their most reliable chance for individual and national economic survival is through their own self-help efforts will not stand idly by and see the service institutions which they have built, in many cases through years of sacrifice and toil, rendered ineffective by those who are trying to enrich themselves at the farmer's expense.

So, in conclusion, we ask no special favors for farmers or for their cooperatives. We do ask, however, that the Congress continue its longstanding policy of encouraging farmers to solve their marketing and purchasing business problems through their own efforts, and that the Government assist in providing an economic climate in which they can capitalize and operate their off-the-farm business institutions without being subjected to discriminatory and punitive taxes. To this end, we pledge to your committee and staff the continued full cooperation of the Council, its officers and staff.

Thank you.

Mr. HOLMES. Mr. Chairman?
The CHAIRMAN. Mr. Holmes will inquire.

Mr. HOLMES. Mr. Chairman, I would like to insert these remarks into the record.

Mr. Harry Beernink is not only president of the National Council of Farmer Cooperatives, he is a distinguished citizen of the State of Washington and resident of the city of Seattle. He also heads up a cooperative organization well known and thoroughly established in the State of Washington, known as the Washington Co-op Aid.

I would like to salute you, sir, as a member of the Ways and Means Committee from the State of Washington, in relation to your state

ment, which I have listened to and read as you were reading it, with a great deal of interest. The CHAIRMAN. Are there any further questions? Mr. Mason. Mr. Chairman? The CHAIRMAN. Mr. Mason will inquire.

Mr. Mason. Mr. Beernink, brushing all verbiage aside pro and con that has been uttered on this problem of taxing co-ops, is it not a fact that the majority of co-ops are organized as corporations and are functioning under corporate charters granted by the State?

Mr. BEERNINK. That I think is correct, sir.

Mr. Mason. Is it not also a fact that in the definition for tax purposes, those co-ops that are not organized as corporations but organized as associations, under the tax laws shall be treated for tax purposes as corporations?

Mr. BEERNINK. I do not feel I am qualified, Mr. Mason, to answer that.

Mr. Mason. The Joint Committee on Internal Revenue answered that a few years ago and said that that was the fact.

If the majority are organized as corporations and acting under a corporate charter, and if the others are defined for tax purposes as corporations, then why, legally, should they not be taxed as corporations?

Mr. BEERNINK. Mr. Chairman, could I refer that question to Mr. Silverstein?

Mr. Mason. Yes.

Mr. SILVERSTEIN. Mr. Mason, let me say this: I know you are fully familiar with cooperative tax problems. The cooperative differs from the ordinary business corporation in one vital respect, and that is that the people that own the business, the people who derive the benefits from the fruits of the cooperative's activities, are their customers. They are not the owners in the sense of an ordinary business corporation. No stockholder sits back and collects dividends without doing anything about it. In cooperatives, the people who derive the dividends are the people who do their business with the cooperatives.

Mr. Mason. That, of course, is the stock sophistry that is usually uttered. But when they are organized as corporations, performing functions under corporate charters, legally they can and should be taxed as corporations are taxed.

That is all I have to say, Mr. Chairman.
The CHAIRMAN. Mr. Herlong will inquire, Mr. Beernink.
Mr. HERLONG. Mr. Silverstein might answer this question.

In the testimony that has gone on before, we have heard a great deal about farmer cooperatives, and people have testified in favor of what they called tax equality, saying, “We are in favor of cooperatives, but-" They qualified their statement in every instance.

Do you draw any distinction between farmer cooperatives and other cooperatives that they have been talking about, as far as the right to what they call tax equality is concerned ?

Mr. SILVERSTEIN. Of course, I think this committee has before it problems of tax policy and can properly take into account the fact that many, many cooperatives, probably the basic form of cooperatives, are those involved in servicing the farm elements of the economy. If there are problems with the farm elements of the economy which are entitled to certain tax considerations different from others, this committee can take it into account.

But from a technical tax standpoint, I believe that the principles of taxing cooperatives could apply under normal circumstances to any form of cooperative organization.

In other words, I think there are two questions: One of tax policy, and one of the legal power of the Congress to treat the cooperative type of corporation differently from other corporations.

Mr. HERLONG. Thank you, sir.
That is all.
The CHAIRMAN. Are there any further questions !
Mr. Eberharter will inquire.

Mr. EBERHARTER. I think, Mr. Silverstein, I would like a little clarification along the lines that Mr. Herlong questioned you.

Mr. SILVERSTEIN. Yes, sir.

Mr. EBERHARTER. There is a real difference between the consumer cooperative and a so-called farmers' cooperative, is there not? Are there not some cooperatives that are formed solely for the purpose of the consuming public?

Mr. SILVERSTEIN. Yes, sir.

Mr. EBERHARTER. And they sell to anybody, not only their own membership

So there is a distinction there, is there not?

Mr. SILVERSTEIN. Yes. And the tax laws have for years recognized, as a matter of tax policy, that the chief benefits properly inure to farmer cooperatives, those organizations which market the products of the farm and those organizations which purchase supplies and equipment for a farmer. A special tax exemption which was accorded them in 1951, and which still obtains in some degree, is available only to farm organizations and primarily the cooperative farm organizations.

Mr. EBERHARTER. Then, would you agree that perhaps we should make a very clear distinction between consumer cooperatives and farmers' cooperatives, solely on the basis of how they do business and how they distribute their earnings? There should be a difference between them, should there not?

Mr. SILVERSTEIN. I would certainly agree that as a matter of policy before this committee they are entirely different considerations; yes, sir.

Mr. EBERHARTER. Thank you very much.
The CHAIRMAN. Mr. Reed will inquire.
Mr. REED. I would just like to make a statement here.

I have fought against the taxation of the farmer cooperatives ever since I have been here. I was brought up on a farm. Before we had any farm cooperatives, we were very fortunate if we got $15 a ton for grapes. The farmers today, with the marketing farm cooperative to do their marketing, are now getting over $100 a ton for grapes. Consequently, they are in better shape financially, able to send their children to college, and they are thriving.

There is an element in this country that vigorously opposes the cooperatives or anything else that is for the benefit of farmers. They play up to him when they want his votes, but when it comes to a question of looking after his interests, they are not so keen.

The farmers could not develop many of their processing plants, such as we have in my district, were it not for the fact that they are able simply to allow the cooperative to take a part of their money and furnish it the capital for them to build up their processing plants and their marketing plants. They have some very fine ones in my district.

Farmers in many sections, it has been brought out here, such as down around Mississippi, they claim, are worth millions. They had it blacked out on the map. I maintain that with all that rich soil down there, the farmers would still be, generally speaking, as poor as church mice, were it not for these cooperatives.

In other words, the cooperatives have created wealth down there, and the farmers generally speaking have profited by it. Is that not true?

(Mr. Beernink nodded his head.)

Mr. REED. You just nodded your head, but I would like to have you say something so that the stenographer could get it.

Mr. SILVERSTEIN. I would like to add one point in response, Mr. Reed, and in response to some of the other questions.

Farmer cooperatives, as you know so weil, derive their capital from their customers, the people with whom they do business. It is the only means whereby a farmer cooperative organization can have the funds with which it can serve the customers properly. Unlike ordinary business corporations, they cannot go out in the market and receive their equity capital.

Mr. REED. That is a splendid point.

Mr. BEERNINK. Referring to Mr. Reed's question of me, I certainly concur in your statement, and could relate, if time permitted, many similar circumstances that you referred to in your statement.

Thank you, sir.
Mr. REED. Thank you very much.

The CHAIRMAN. Mr. Beernink, as I understand your presentation this morning, and as I understand from conversations I have had in the past with representatives of your organizations to which you refer in your statement, your organization goes along with the idea that whatever profit is made through any type of business operation, regardless of the form in which it operates, ought to be taxed at least once.

That is your general position?
Mr. BEERNINK. Yes, I would.

The CHAIRMAN. That is the position that we took when we were in conference in 1951.

You would then go along with the committee in a general way in the approach, if the committee decided that there was now necessity for further legislation to carry out the intention which the Congress had in connection with the 1951 law.

Mr. BEERNINK. That is correct, sir.

The CHAIRMAN. And you have suggested to us in some detail the way the Congress might arrive at that objective and better carry out the intent expressed in 1951. That is what you have told us today.

Mr. BEERNINK. We are in accord with the intent of the 1951 act, and our staff would be most happy to cooperate and work with the committee or any of your staff in attempting to implement that principle. The CHAIRMAN. We appreciate that offer of cooperation. Are there any further questions?

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