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If not, Mr. Beernink, we thank you, sir, and those with you at the witness table, for your appearance this morning and the information that you have given the committee on this subject.

Mr. BEERNINK. Thank you, Mr. Chairman.

The CHAIRMAN. Thank you very much.

(The following letters were received by the committee:)

Hon. WILBUR MILLS,

NATIONAL WHOLESALE HARDWARE ASSOCIATION,

Philadelphia, Pa., February 17, 1958.

Chairman, Committee on Ways and Means, Washington, D. C. DEAR CONGRESSMAN MILLS: I am vice chairman of the Committee on Cooperatives of the National Wholesale Hardware Association. Our Chairman, Mr. Seth Marshall, is presently away from his office. As you know, General Royall of the legal firm of Royall, Koegel, Harris & Caskey represented our association and presented testimony before your Committee on Ways and Means on January 23. He emphasized in his testimony the unfairness of the present competition we have from the tax-favored hardware wholesale cooperatives who are competing with the members of the National Wholesale Hardware Association.

The cooperatives testified on January 27, and it is concerning the testimony of Mr. Harry J. Beernink, president of the National Council of Farmer Cooperatives, that I am now writing. Mr. Beernink stated in his testimony that: 66**** representatives of the Council and other national cooperative groups, with the knowledge and approval of the late esteemed chairman of your committee, Mr. Cooper, and the present chairman, Mr. Mills, who was then Chairman of your Subcommittee on Internal Revenue Taxation, held several conferences with Mr. Colin Stam, Chief of Staff of the Joint Committee on Internal Revenue Taxation and his staff during the first six months of 1956 in an effort to develop statutory language to carry out the indicated intent of Congress in 1951 to levy a single tax at either the cooperative or patron level on the margins resulting from the cooperative's operations *

"Briefly, the draft worked on would have given statutory recognition to the right of farmers to enter into any lawful contract or agreement with their cooperative that they desired and, in effect, would provide that an agreement by the patron for a part or all of his patronage refund income to be retained by the cooperative and evidenced to him in some noncash form would not change the status of such amounts as current income to the patron. The draft would have insured the imposition of a single tax on all margins arising from a farmer cooperative's operations."

I have two comments, Mr. Chairman, on Mr. Beernink's statement: First, I suggest that the proponents of tax equality as well as representatives of cooperatives be called into consultation with your technical experts in future consideration of legislation to tax cooperatives on a more realistic basis.

The second point, Mr. Chairman, is that the taxation of patronage dividends in the hands of recipients would in no way stop the present unfair competition that cooperative tax-favoritism makes possible at the corporate level. If a single tax is to be imposed on cooperative earnings, it must be imposed on the cooperative corporation to remove the unfair competitive advantage that they enjoy. Imposition of the tax on the recipients of patronage dividends would leave our industry at the mercy of competitors who have a tremendous competitive advantage due to discriminatory taxes.

I attach an analysis of H. R. 4265, the Davis bill, which we believe would be a much better solution to this problem than the one suggested by our cooperative friends. Although it imposes only a single tax on cooperative earnings, the tax is levied against the cooperative corporation and, therefore, removes their competitive advantage. At the same time, it gives a tax credit to patronage dividend recipients and in that way insures that they receive something of value from their cooperative corporation.

Sincerely yours,

H. L. THOMPSON, Jr., Vice Chairman, Committee on Cooperatives.

H. R. 4265-THE TAX CREDIT PLAN TO TAX COOPERATIVES

H. R. 4265, by Representative Clifford Davis of Tennessee, is entitled "A bill to provide tax equity through the taxation of cooperative corporations and to provide tax credits for recipients of dividends from genuine cooperatives."

If adopted by Congress, this bill would accomplish two highly desirable results: (1) It would give to farmer members of cooperatives a credit against the individual income taxes that they must pay--such credits being the equivalent of extra income. (2) It would equalize the Federal income tax requirements of proprietary and cooperative businesses. It is the first cooperative tax proposal that would benefit the farmer members of cooperatives by actually adding to their income. The plan would work like this:

1. Total earnings of a cooperative corporation would be taxed before patronage distributions at the regular corporate income tax rate. The bill says: "The taxable income of a cooperative corporation shall be determined without the deduction of any patronage dividends paid or payable to patrons."

2. If patronage dividends were then distributed, in any form which makes recipients taxable, they would include the amount in their individual income tax returns, along with a credit for the amount of tax paid by the co-op on the recipient's share of earnings. The bill says: "There shall be allowed as a credit against the tax of such recipient an amount equal to the tax imposed on the Cooperative in respect of the portion of the income of the cooperative represented by such dividend, if the recipient includes in his gross income *** an amount equal to the tax so imposed on the cooperative."

In other words: On each $100 that a cooperative earned, it would pay corporate income tax of $52. If it distributed the remaining $48 to members, the members would report on their individual income tax returns $100 of income from the cooperative-and claim a tax credit of $52, representing the tax already paid by the cooperative corporation. If the member himself was in the 20 percent tax bracket, instead of the 52 percent tax bracket, his own tax liability attributable to the $100 would be only $20 and he would be entitled to use the excess of $32 as a credit against other income tax liability or as a claim for a refund. H. R. 4265 says: "If the credit provided by this subsection exceeds the income tax otherwise payable by such recipient, the excess shall be treated as an overpayment of tax by such recipient."

The 1951 law, the intent of which has been virtually nullified by the courts, left the co-op tax free and made the farmer recipient of a patronage dividend liable for income tax on it, whether it was paid in cash or in paper of no tangible worth. The co-op corporation was practically exempt from income tax, but this law created an unfair hardship on the individual farmer. However, the courts held farmers not taxable on "paper" allocations. H. R. 4265 eliminates this inequity. It makes the cooperative corporation liable for tax on all earnings at regular corporate rates but gives the farmer member tax credit for his share of such payment if the co-op allocates him his share in cash or other form taxable to him.

The tax-credit plan would unquestionably increase the revenue that the Treasury receives from cooperative corporations. At the same time, it would stimulate the filing of returns by patron members, as the benefits of the taxcredit plan would be available only upon the filing of a return. Most patron members would receive substantial benefits in that the tax liability on their patronage dividends would be more than offset by their tax credits.

H. R. 4265 has been endorsed by 164 trade associations, representing more than half a million taxpaying businessmen. Farmer members of cooperatives favor it because it adds to their income and lessens their income tax liability. It is the soundest approach to a single tax on cooperative earnings.

Hon. WILBUR D. MILLS,

LUBBOCK, TEX., January 21, 1958.

Chairman, Ways and Means Committee, Washington, D. C.

DEAR MR. MILLS: It is hoped that this letter will assist you and your committee in arriving at a tax bill which will be fair and equitable to as many people in our Nation as possible. Our information and arguments have to do specifiically with farmers' cooperatives and with the patrons of these cooperatives.

We wish to urge that section 522 of the 1954 Internal Revenue Code be retained in its present form, as our rather wide experiences with farmers' cooperatives

and farmers have shown that this section of the code is workable and is working in this part of the Nation.

Our observations are made from the following experiences and authority: our accounting firm in Lubbock, with two related accounting offices in Brownfield and Muleshoe, Tex., has specialized in cooperative accounting since about 1935. We perform the audits for 73 farmers' cooperatives in Texas and New Mexico, 67 of which are local cooperatives and 6 of which are regional cooperatives. These associations have a combined membership of approximately 15,000 farmers. Also, our accounting firm makes personal income tax returns for about 2,000 farmers each year, these farmers coming from all over the plains of west Texas and eastern New Mexico.

Since the passage of the 1951 code, with its new provisions for cooperatives reporting to the Government on form 1099 all earnings allocated, and with the further provision that all cooperative patrons must report and pay income tax on the total allocations, whether paid in cash or not, we have urged all our cooperatives and their patrons to follow these provisions. It is our observation that practically all these cooperatives and their patrons in this large area are complying with these provisions. The Government is not losing taxes in this area from noncompliance with the laws and regulations as presently written.

We feel that the code as it now stands is equitable-all earnings of a cooperative are taxed once, either to the cooperative or to the patron. We feel that it is workable-it is working smoothly among thousands here. And we feel that it is fair-it is fair to the cooperative patrons in that they are not estopped from having their own organization, and it is fair to their competitors in that the competition is on an equal tax basis.

The placing of additional taxes on farmers and their cooperatives would be unfair to them; additional taxes probably would cause a change in their method of operations, thereby harming their competitors who have to operate at a profit to stay in business. Under the present taxing laws competition is brisk, and this situation is good for the public generally and for our entire economic system. Respectfully yours,

EDWIN E. MERRIMAN, DOUGLAS & ABBE,
EDWIN E. MERRIMAN.

The Chair understands that Mr. Ronald Reagan, who was called initially this morning, is now present.

Mr. Reagan, will you please come forward and identify yourself for the record by giving your name, address, and the capacity in which you appear.

STATEMENT OF RONALD REAGAN, MOTION PICTURE INDUSTRY COUNCIL AND HOLLYWOOD AFL FILM COUNCIL

Mr. REAGAN. Mr. Chairman and gentlemen, I want to thank you for the courtesy of allowing me to appear here. I am from Hollywood, Calif., and the organizations I represent are the Motion Picture Industry Council and the Hollywood AFL Film Council. These organizations support the principles of tax reduction contained in H. R. 6452 and H. R. 9119, popularly known as the Sadlak-Herlong bill.

The organizations that I represent include virtually all the people engaged in the production of motion pictures in Hollywood. On the side of management, the Motion Picture Industry Council is composed of the Association of Motion Picture Producers, Independent Motion Picture Producers Association, and the Society of Independent Motion Picture Producers; and of the following talent and employee groups: the American Society of Cinematographers, Independent Office Workers, Screen Actors Guild, Screen Producers Guild, Society of Motion Picture Art Directors, Story Analysts Guild, and Writers Guild of America, West.

The Hollywood AFL Film Council consists of 28 local unions affiliated with 4 AFL-CIO international unions: the Associated Actors

and Artistes of America, the International Alliance of Theatrical Stage Employees, the International Brotherhood of Electrical Workers, and the Joint Board of Culinary Workers.

STIFLING OF PRODUCTION

We believe the schedule of surtaxes in the personal income tax structure is unrealistic, confiscatory, and contrary to the principles of free enterprise.

In our industry, the motion-picture industry, this tax structure has constantly tended to stifle and reduce overall production of motion pictures in this country. The high tax rates and limitations imposed by the capital-gains structure tend to make futile the capital investment required in the production of a motion picture, particularly when such an investment involves a very great risk without a comparable payoff for success.

An even greater deterrent to motion-picture production in this country is the reluctance of high-income earners in the talent field to make more than 1 or 2 pictures a year. Good story material has always been scarce. It is doubly so when successful writers curtail their output because of the diminishing returns due to excessive surtax rates.

The most publicized people in our business, of course, are the highsalaried stars. These people have reached that economic plateau mainly because they can sell tickets. They are not paid for just the services rendered or the time put into the production. The basis of their pay is, How many people will go to the box office and buy a ticket to see them? Such payoff guaranties are few, and when one refuses to play in a picture because to do so would only net him 9 cents on the dollar, the picture just is not made.

WORKERS SUFFER UNEMPLOYMENT

Our business is peculiar in that way. We have no assembly line operation where so many units must be made to meet a predetermined market demand. When this picture is not produced, anywhere from one to three or four million dollars of investment capital does not go to work, nor do several hundred craftsmen, technicians, and other artists.

It is a strange paradox that in these last several years of prosperity in our Nation, the workers in the motion-picture industry have known unemployment and hardship. You might be interested to know that the total earnings of actors in the theatrical motion-picture industry have decreased from an annnual $33 million to less than $25 million. I am sure this figure can be matched in percentage of decrease in income by all the other people in our industry.

So much publicity has been given to a supposed swimming pool and palace existance in our motion-picture community that perhaps a moment spent on the true economic picture is overdue.

First of all, ours is a free-lance business in which there is comparatively very little regular employment of either technicians or artists. When a picture is ready to roll, the telephones start ringing and the lucky ones go to work. Then, when the picture is finished, they are again unemployed and back all alone by the telephone.

It is true that when our people work, in almost every phase of picture making they make a lot of money. As I say, it is a good paying industry. But it is a feast or famine existence. Last year, of the 11,704 members of the Screen Actors Guild, 85 percent of them grossed less than $7,500, and 65 percent grossed less than $3,000.

Now, note that I did not say they averaged this. They grossed less than those two figures.

One of the rewards of course, keeping them in our business is that it is sort of like drilling for oil or prospecting for gold. Most of these people are waiting, hoping for a break, that combination of the right part and the successful picture that will elevate them.

But one of the hazards of our business, now complicated by the added tax problem, is this thing called overexposure. It is the greatest fear of most performers. In the old days before movies, an actor could get a job in a theater, and he could play that town as long as people would buy his wares, and when he began to sense that they were getting a little tired of him, he moved to another town and had a new audience.

Now, with motion pictures, he has no place to go, and when the audience gets tired of him, now, they are tired all over.

Jimmy Cagney once said, "An actor is like a bucket. He has only so much in the bucket to sell, and he can stick around just as long as he regulates how fast he empties that bucket."

Our screen Actors Guild figures indicate that the average actor empties the bucket in 511⁄2 years. And we have no depletion allowance to compensate for the diminishing market value.

WIDE FLUCTUATION IN INCOME

These characteristic feast or famine features are standard in our profession. An artist in any of our creative fields struggles for a long time and studies pretty hard. He gets virtually no return on his output for a long time, and then he scores, lightning strikes, and he jumps into a top earnings bracket and he also jumps into a top tax bracket. Because of this high tax bracket, he cannot really cash in on his windfall in the way that a businessman could. He is sort of in the position of the storekeeper who is the only one in town with overshoes when an out-of-season snowstorm comes along; only if the actor sells all his stock at once, he just hastens the day that he is out of business and he doesn't have anything to show for it. He has increased the overexposure and by condensing his earnings into 1 year has put himself into a tax bracket often as high as 91 percent.

Being in great demand this way, he is offered more pictures than he can possibly take. The usual procedure of a performer-not only a performer but also a writer, director, and other people in our business is to choose 1 or 2 of these offers and hope that the rest will be around in the next tax year. But unfortunately, the ticket buyers' memories are a little short, and the studios' memories are even shorter, and by the next year someone else has gotten very hot at the box office and is on the front page. Thus, he has missed his chance at a windfall by trying to regulate his career and control this overexposure factor. It is not unusual for a performer to go from a 6-figure income to 1 or 2 years of no employment at all.

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