amount materially less than the taxable income of any other business corporation, for the latter is granted no similar deduction for distributions of income. Moreover, the deduction is allowable whether or not the distribution of the net income of the cooperative corporation is made in cash, notes, certificates, or merely in credits to patrons on the books of the cooperative corporation. Thus, cooperative corporations are enabled to escape the income tax entirely by the issuance of some form of paper certificates to patrons, redeemable at the discretion of the directors of the cooperative corporation. To be sure, cooperatives are required to file information returns, in which all patronage dividends in excess of $100 are required to be reported. In the light of the substantive provisions of the law, however, the information return provision has required merely that the Internal Revenue Service be informed of paper distributions that, in fact, it cannot tax.

Congress demonstrated its intent to tax the entire net income of cooperatives in 1951. The approach of taxing part of the income to the cooperative corporation and part to the patron has proved unworkable. The fair and effective way of achieving the congressional intent is to levy the tax on the cooperative corporation on its entire net income, with no exclusion or deduction for patronage dividends, regardless of their form.

The taxation of the entire net income of cooperative corporations is justifiable on several grounds. In the first place, in fairness, income realized by cooperative corporations should be taxed on the same basis as income realized by corporations that compete with cooperatives. There seems to be no good reason for making a tax distinction between cooperative corporations actively engaged in business and other kinds of corporations competing actively with them. Each is a legal entity engaged in an enterprise for profit. Consequently, the proposal to tax cooperative corporations upon the portion of their net incomes remaining after a deduction or exclusion from income of patronage dividends paid in cash or in notes possessing a readily determinable market value, while ordinary business corporations remain taxable upon their entire net incomes with no deduction for dividends distributed in cash or its equivalent, is seriously objectionable. The net income realized by a cooperative with no exclusion or deduction for patronage dividends in reality constitutes its income for tax purposes as it does for other purposes. There is no legitimate reason, in my opinion, for discriminating in favor of cooperative corporations and against other business corporations that must compete with them directly.

In the second place, the Federal income tax is levied generally on the basis that a corporation is an entity distinct from its shareholders or patrons, and should bear a tax upon its own income, whether that income be distributed or not. So long as ordinary business corporations are taxed in this way, cooperative corporations engaged in similar business activities should be taxed in the same way.

The early stages of the forthcoming proposed revision of Federal revenue laws will demonstrate how much Congress is in earnest in its expressed desire to reduce taxes on citizens generally by closing loopholes, eliminating inequities, and generally broadening the base. The exemption of cooperatives is an exemption which crept into the law

at a time when income tax rates were low. It was not recognized then that an exemption granted to A may very well mean that B, C, D, and E have to pay more taxes. It is reasonably clear now that the taxes of B, C, D, and E, high as they are, cannot be reduced unless A is required to pay the same tax on its business income that B, C, D, and E have to pay.

Cooperatives are conspicuous beneficiaries of an exemption which their competitors do not enjoy. The exemption may have been necessary in the infancy of cooperatives. Now that cooperatives have come of age, it is quite unnecessary to their continued growth and health. The exemption deprives the Treasury of some hundreds of millions of dollars of needed revenue, and gives one form of business organization a wholly unfair competitive advantage over other forms of business organization. In the interests of greater equality of taxation in this country, the exemption from the income tax of the income of cooperatives should be abolished.

COOPERATIVES AND FEDERAL INCOME TAXES

Wilfrid E. Rumble*

Heretofore my appearances before the committee have been as an advocate for cooperatives. On this occasion the chairman has requested me to assist the committee in determining what, if any, changes should be made in the income tax treatment of cooperatives. In what follows I have endeavored to present factual information concerning cooperatives, their method of operation, their importance to the economy, and the past and present income tax treatment of cooperatives and their patrons by Congress and the courts and the Treasury Department, an understanding of all of which is, I believe, essential in order to arrive at sound conclusions. I shall also give my own views as to "which differential treatment on the basis of the source of income or the circumstances of the taxpayer receiving it is justified or required in the light of equity, fairness, and economic needs." Some of my views will meet with the approval of all cooperatives and some, I am sure, will be supported by part of the cooperatives and objected to by others.

I

Cooperatives are business entities. They have existed in Great Britain and the Scandinavian countries for a great many years. In the United States there were a few doing business prior to the Civil War and closely following the war a fairly large number of farmer cooperatives were organized in New York, Wisconsin, and Minnesota, These were almost entirely small, local dairy and livestock associations. At about this time various agricultural States adopted the first statutes providing for the incorporation of cooperative associations, all of which bore little resemblance to the modern cooperative statutes except in the effort to provide for democratic control. It was not until the early 20th century that large numbers of cooperatives were organized and again these were farmers' cooperatives designed to assist farmers in marketing their products and securing their supplies. By 1926 there were over 10,000 farmer cooperatives actively engaged in business. Not until much later were there any substantial number of the so-called consumer and service cooperatives.

Farmer cooperatives outnumber all other cooperatives and have more members than all other cooperatives. More emphasis, therefore, should be placed upon the reasons for their existence, their nature, and their effect upon the economy. In addition, more accurate information concerning them is available.

Every individual farmer is a capitalist. He owns and operates, or operates under the ownership of another, his own farm factory. Nor

*Member of the law firm of Doherty, Rumble & Butler, St. Paul, Minn., counsel for several farmer cooperatives.

mally he is far from the principal markets for his products. Alone he has no bargaining power. He is not expert in the grading, merchandising, or distribution of his products. He has no research facilities. His products are sold to well-organized, well-capitalized, and skillfully managed organizations. He sells his products at wholesale but buys his business supplies and equipment at retail. Few, if any, other producers operate on such a basis. Without cooperatives farmers would be at a hopeless disadvantage in our present-day economy. And yet no other business is so important to our people as that which produces our food. Farmer cooperatives overcome to some extent at least these disadvantages of farmers and that is the chief reason for their existence and the reason why Congress has always sought to aid farmer cooperatives. The historic position of Congress and the Department of Agriculture has been one of support and stimulation of farm cooperatives.

Congress enacted the Agricultural Marketing Act in 1929 (46 Stat. 11, 12 USCA 1141). It created the Federal Farm Board and authorized that Board to make loans to cooperative associations of farmers. Section 1 of the act provides:

That it is hereby declared to be the policy of Congress to promote the effective merchandising of agricultural commodities in interstate and foreign commerce, so that the industry of agriculture will be placed on a basis of economic equality with other industries, and to that end to protect, control, and stabilize the currents of interstate and foreign commerce in the marketing of agricultural commodities and their food products * * *

(3) by encouraging the organization of producers into effective associations or corporations under their own control for greater unity of effort in marketing and by promoting the establishment and financing of a farm marketing system of producer-owned and producer-controlled cooperative associations and other agencies.

Secretaries of Agriculture, both Democrats and Republicans, since the formation of the Department of Agriculture with Cabinet status have encouraged farmers to organize cooperative business enterprises. They have uniformly regarded them as useful and important instruments for effecting improvements in farm income. This has continued to the present day.

Just a short time ago Secretary of Agriculture Benson said of farmer cooperatives:

They are democracy in action. They provide the vehicle whereby the individual farmer can join with his neighbors to gain the advantages of volume and marketing strength without sacrificing his independence. They are a self-help tool that allows him to command the strength necessary to compete in our big business economy.

There are four general types of cooperatives: Farmers marketing cooperatives; farmers purchasing cooperatives; urban cooperatives (sometimes called consumer cooperatives); and service cooperatives. Some marketing cooperatives also engage in purchasing activities and some purchasing cooperatives engage in marketing.

Generally speaking, the marketing cooperatives market or sell the products of their farmer members and patrons and the farmer purchasing cooperatives engage in buying or purchasing for their members and patrons supplies, goods, and equipment necessary to the operation of the farm factory. The chief purpose of the marketing cooperative is, of course, to secure for farmers a higher price for his products, and that of the purchasing cooperatives, the urban cooperatives and the