(made by all of them) is understood—that money received by the cooperative and distributed at the end of the year is received and held by the cooperative pursuant to binding obligation to hand it over to the patrons as soon as the exact amount has been determined. It is that obligation which, from the moment of its receipt, impresses that money with a trust, agency, bailment, or indebtedness relationship, thus making it neither the property nor the income of the cooperative.

4. THE INTENT OF CONGRESS WHEN THE 1951 AMENDMENT WAS ENACTED AND THE EFFECT UPON THAT INTENT OF SUBSEQUENT COURT DECISIONS When the 1951 amendment of the code was adopted, Congress intended that the earnings of a cooperative should be taxed once only, either to the cooperative or to the patron, and that earnings distributed to patrons as patronage refunds should be taxed only to the patron. With this intent, most cooperatives agree. President Eisenhower in 1952 said that he agreed that the action and intent of Congress was entirely satisfactory to him. Unfortunately, since the enactment of the amendment several reputable United States appellate courts have flatly held that patronage refunds of cooperatives are taxable to the recipient of the refund only to the extent of their actual market value.10 In his decision in the Long Poultry Farms case, Judge Parker cites all of the other Federal decisions on the point decided since the 1951 amendment. The result confessedly has been to thwart the intent of Congress to tax distributions of cooperatives to their patrons. We cannot emphasize too strongly, however, that neither these decisions nor any other decisions have changed the concept either of Congress or of the Treasury Department as to the proper and appropriate method of taxing to the cooperative its earnings. The law in this respect remains as stated in the 1951 amendment. There is no occasion to change it. In my opinion, farmers, at least in our section of the country, have long acquiesced in the view that patronage refunds distributed in any of the forms authorized by the 1951 amendment should be taxed to patron recipients and not to the cooperative. Cooperatives are as important today, and perhaps more important than ever before, to their farmer owners. Certainly, the condition of the farmers in this country is not such that this Congress should take any action which might handicap Cooperatives in the performance of marketing and purchasing services and thereby further enlarge the presently existing spread between what the farmer secures for his products and what he pays for the instrumentalities necessary in that production. President Eisenhower in his farm message to Congress of January 16, 1958, said:

"With Government help, farm people, in the best American tradition, have gained bargaining power through their own farmer-owned and farmer-controlled cooperatives.

"Yet key problems remain unresolved.

"Rising production costs continue to limit net farm income. Prices of articles farmers buy more than doubled from 1939 to 1952. Since then, they have risen 3 percent. Prices received by farmers have not kept pace with their increased production costs. These are hard facts every farmer faces."

That the taxation of cooperatives in line with the recommendations of the National Tax Equality Association and other groups whose members are in competition with cooperatives would seriously limit and perhaps destroy the effectiveness of farm cooperatives to their farmer patrons cannot be denied. The enormous amounts of money spent by such organizations in their efforts to impose punitive taxation upon cooperatives is all the evidence needed to establish this fact.

In what I am now about to say I speak only for myself. I have been a participant in hearings on the cooperative-tax question before this committee on several other occasions. In 1951 I believed, as this committee did, that the earnings of cooperatives which are distributed or allocated to its patrons pursuant to a legal obligation upon the cooperative to do so should be taxed to the recipient of the distribution. That is still my view. I realize that the recent court decisions have accomplished a result never intended by Congress and have, in effect, enabled at least a part of the earnings of cooperatives to escape taxation in the year in which earned (those distributed to patrons in paper having no market value). I firmly believe that legislation can be drafted which would

40 Long Poultry Farms, Incorporated v. Commissioner of Internal Revenue, U. S. Circuit Court of Appeals, 4th Circuit, November 8, 1957.

carry out the intent of Congress in this respect and which would not be subject to constitutional objection.

SUMMARY

Notwithstanding the many arguments which have been made to this committee during past years upon this subject, and despite the intemperate propaganda of the National Tax Equality Association and other groups antagonistic to cooperatives, it is indisputable

(1) So-called exempt farmer cooperatives have been given by Congress privileges not extended to other cooperatives or private business corporations, i. e., the limited dividends they are permitted to pay stockholders are not subject to tax nor are allocated nonoperating earnings. Otherwise their status is the same as that of all other nonexempt cooperatives.

(2) Nonexempt cooperatives and private business corporations are treated alike for income-tax purposes. The cooperatives, however, pay less income tax than their comparable private business corporation competitors. This is not due to the fact that one corporation is a cooperative and the other a privately owned business corporation, but is due solely to a fundamental difference in the objectives of the two types of corporation. The cooperative is in business only for the purpose of benefiting its customers. The private business corporation is in business only for the purpose of benefiting its stockholders. The cooperative returns its net margins to the customers who produce the net margins. The private business corporation returns its net margins to its stockholders, who had nothing whatever to do with earning the net margins or with the transactions which created them.

(3) Every court which has ever considered the question has squarely held that net margins of a corporation (whether a cooperative or private business corportion) which are returned to customers pursuant to a legally binding contract in effect at the time the margins are returned are not taxable income of the corporation.

And it seems to me that although there is no decision squarely in point on the question whether net margins of a cooperative are income to it within the 16th amendment to the Constitution of the United States, the cases holding that margins are not income of the corporation and the decisions of the Supreme Court of the United States in the Eisner and Wilcox cases require the conclusion that Congress cannot tax to the cooperative the distributed net margins because they are not profit income of the cooperative.

Finally, I think it is clear that Congress can by simple amendment of sections 521 and 522 subject to tax in the hands of the recipients the patronage distributions of cooperatives whose members determine that their earnings should be taxed to them and not to the cooperative.

Mr. RUMBLE. Thank you, sir.

The CHAIRMAN. You are recognized to proceed in your own way for 10 minutes.

Mr. RUMBLE. In the short time available to the committee, and to me, I desire now only to briefly comment on several points which seem to me to be important.

One, not enough emphasis in these hearings has been laid upon the fact that a farmer cooperative and a private corporation are completely different forms of organizations.

The farm cooperative is a group of farmers attempting to help themselves to secure better prices for their products or to secure supplies or services needed in their business at lower prices than are otherwise obtainable.

The private corporation is organized solely to make money for its shareholders.

It is entirely right and proper for Congress to classify the two forms of corporations differently for tax purposes, just as it taxes differently a stock insurance company than it does a mutual insurance company. As a matter of fact, a mutual insurance company is a form of cooperative. For more than 40 years Congress has made this classification.

There is no present need to change it even if some tax revenue is lost by doing so.

Every one of us knows of the great difference there is between what the farmer is paid for his product and what he must pay for his business supplies.

For years the prices of farm supplies have steadily increased while those of farm products have in most cases lessened or remained about the same. The present tax treatment of farm cooperatives does offset to a small degree this great inequality.

Two, it is claimed by our opponents that it is unfair to tax paper patronage refunds to the recipients of the refund.

Significantly, I have heard no cooperative patron make that complaint. It is without foundation anyway.

The cooperative member, himself, makes the election to be taxed. He, himself, puts into the articles of incorporation or bylaws of his cooperative or his contract with the cooperative the provisions which produce that result. He knows what he is doing. He attends the meetings of his cooperative when the matter is frequently under discussion. He cannot be represented at those meetings by a proxy.

In both large and small cooperatives a very large proportion of the membership attend all meetings.

In addition, many cooperatives have publications which go to their patrons and, of course, for many years now the National Tax Equality Association has flooded the country with literature dealing with the subject.

In face of all this it is idle to say that the patrons of cooperatives are unaware of the matter.

In my part of the country patrons of cooperatives follow the Treasury regulations and do include patronage refunds in their gross income in accordance with those regulations.

In any cooperatives, the members, are not satisfied with this tax treatment, it is wholly within their power to quickly change it.

In this connection I would like to say that the larger federated type of cooperatives which I represent for some years have been distributing approximately 25 percent, or substantially more, of their net margins in cash.

I believe this is now a fairly common practice among all cooperatives. In almost every instance it is ample to pay the tax upon the refund.

Three, many figures have been quoted to you which it is claimed show that cooperatives have grown tremendously in the past 20 years at the expense of their competitors. And I think it has even been suggested that unless restrained the cooperatives will eventually eliminate the private corporations with which they compete.

These figures should be viewed with care. Unquestionably they involve many duplications because of a doubling up of the business which practically all local cooperatives do through their regional cooperatives.

But, more to the point, the figures used are on a dollar basis and not on a volume basis. They give no weight to the enormous increase in the production of the individual farmer during the period due to mechanization, improved techniques, the use of fertilizer, and so forth. Nor do they consider the effect of inflation upon the dollar figure.

It is true that there has been some increase in the volume of business done by cooperatives, but it is not nearly as great as claimed, especially in the local cooperatives.

In my judgment much of the increase is due to the fact that cooperatives like their competitors have entered new fields of business activity, and I venture to assert that most well managed profit corporations have increased their business at a far greater pace than have their cooperative competitors during the past 20 years.

Finally, I comment on the argument of the National Tax Equality Association that because of the tax situation a large number of cooperatives have purchased competitors and thus have removed from the tax rolls a substantial amount of revenue. Purchase by a cooperative does not change real or personal property taxes. They are the same for each.

If taxes are affected at all, it is only income taxes. A number of such purchasers mentioned, among them that of the St. Anthony & Dakota Elevator Co. by the Farmers Grain Union Terminal Association.

I know something about that transaction. The elevators involved were largely small wooden structures, badly run down and old. Few of the original owners or the sellers were still active.

The properties had been offered to others before the purchase by the grain elevator association. St. Anthony & Dakota served a large number of farmers in areas where, if it goes down, no other service would be available except at unreasonable distances and considerable hardship to the farmers of the locality.

The Grain Terminal Association bought these properties to render the required service to the farmers in the communities, the very purpose for which it was organized and for which it exists.

I do not know what taxes are being paid by the seller, but I doubt if any tax revenue was lost by this purchase. Nor do I know how many substantially similar cases are included in the National Tax Equality Association list of cooperative purchasers.

But certainly it is not safe to assume either that substantial taxpayers were removed from the tax rolls by the sales to cooperatives or that the sales were forced by cooperative competition.

Thank you very much.

The CHAIRMAN. Are there any questions of Mr. Rumble? If not, we thank you, sir, for your appearance and the information given the committee.

Mr. RUMBLE. Thank you.

The CHAIRMAN. The next witness is Mr. D. W. Brooks. For the purpose of the record, will you identify yourself, giving your name, address, and the capacity in which you appear.

STATEMENT OF D. W. BROOKS, GENERAL MANAGER, COTTON PRODUCERS ASSOCIATION, ATLANTA, GA.

Mr. BROOKS. Mr. Chairman, my name is D. W. Brooks. I am general manager of the Cotton Producers Association, with headquarters in Atlanta, Ga.

I also served for two terms as president of the National Council of Farmer Cooperatives and in my statement to you gentlemen today I will want to discuss the passage of the 1951 tax law which happened

during one of my terms as president of the National Council of Farmer Cooperatives.

I might say, gentlemen, this is my second appearance. I was here in 1951, and I had the privilege of meeting with you gentlemen.

Of course, I am sorry I am back this time, but I am hoping we can work out a tax law that is fair and equitable and that is the basis on which I want to make my statement today.

The CHAIRMAN. Mr. Brooks, you are recognized for 15 minutes. We do recall that you were here in 1951.

Mr. BROOKS. Thank you, sir.

Although I realize that you gentlemen are primarily interested in the tax status of farmers and farmer cooperatives, I also know that one of the methods of attack on farmers and their cooperatives is through an attack on different cooperative associations, and in some instances even upon the personnel who are connected with them.

For that reason, I would like to spend a few minutes of my time and tell you something about Cotton Producers Association, how it came into being, and what it has tried to do to raise the income level of farmers in the area in which it operates.

In the year 1932 the per capita income of farmers in the State of Georgia reached $72. This meant that a farmer with a wife and two children had a total of $288 on which to live for an entire year. This $288 covered the total cost of the rent on the building that he lived in and also all the food that he and his family consumed off the farm. We were being described in all the newspapers of the country as the "economic problem No. 1 of the Nation."

Under those conditions it was only natural that farmers had a desire to do something for themselves to improve their income level.

My personal background was that I was reared on a farm. I went to college, to the College of Agriculture at Athens, and after finishing there I taught in the agronomy division for 4 years. My studies at the college indicated that there were many things that farmers needed to do in the Southeast to raise their income which they could not do individually. Consequently, I had met with many farm groups and had encouraged them to at least try to do some of these jobs together. It was probably on this basis that when farmers of the Southeast had this difficulty they came to me and asked me to serve as their general

manager.

In starting Cotton Producers Association we developed a number of definite policies of operation. We believed if all we did was to go out and compete with someone who was already in business and operate in the same way, although we might save some money for our members, we would not have the impact we should have on the income of our members.

We felt that our greatest hope for increasing income of farmers was by changing some of the patterns of agriculture. And if we did a good job in changing the pattern, we would not only increase the income of farmers, but we would raise the income level of the business people of the area in which we operated. Of necessity we might compete with some of them, and we might even upset some of the monopolistic practices which had developed in some parts of agriculture, but if we did a good job both farmers and businessmen would benefit in the end.