After adjusting for transactions between cooperatives, the net business of the three groups in the 1956-57 year amounted to $10.4 billion. (Based upon Treasury figures given above, this represented an increase over 1946 of $3.9 billion and over 1953 of $3 billion. It should be noted, however, that the Department of Agriculture figure is an estimate which may be high and that no adjustment is made for inflation.)

In relative importance of the groups, again adjusting for duplication of intercooperative business, marketing cooperatives did 77 percent of this business, farm supply 20.7 percent, and service 2.3 percent ($7,980,709,000, $2,144,027,000, $234,573,000, respectively).

Based upon a survey of 1,157 farmers cooperative associations, the equity capital of all such cooperatives may fairly be said to be divided about as follows:

4 Farmers Cooperatives Service, U.S. Department of Agriculture General Rept. No. 32, June 1957.

I think the foregoing figures are probably substantially accurate. It is my judgment that a very large part of the equity capital of these cooperatives represents patronage refunds not distributed in cash or merchandise. Perhaps 50 percent of the capital stock represents actual purchases through deductions and otherwise.

The largest group of farmer cooperatives, and the oldest, is the dairy group. Yet on August 13, 1959, Frank A. Barrett, General Counsel of the U.S. Department of Agriculture, made this statement to a subcommittee of the Senate Committee on Agriculture and Forestry:

Despite substantial increases in membership and business volume farmer cooperatives have not kept pace either in size or resources with the demands imposed upon them by rapidly changing conditions. In terms of proportion of farm products handled, marketed, services performed and extent of vertical economic integration between the farmer and the consumer, dairy cooperatives are the leaders in the farmer cooperative field. Yet let us see what some comparisons in this area show. In 1924 the three largest cooperative dairies had $48 in sales to every $100 in sales of the three largest noncooperatives. By 1955 this figure had dropped to $14 for the cooperatives as against every $100 in sales of the noncooperatives. Moreover since the 1920's, additional large noncooperatives have come on the scene and there are now eight with annual sales of over $100 million. Yet today only two cooperatives are in this class. One national noncooperative dairy corporation grew from $14 million in sales in 1924 to $1.3 billion in 1955, a figure as great as the net sales of the countries 1,600-odd local and regional dairy cooperative associations (excluding bargaining associations). Although specific information is not available, general market data indicates that similar examples could be found in other major food and fibre groups. More than one-half of the marketing cooperatives in 1955-6 had business volume below $500,000 and more than three-fourths below $1 million.

The average annual net values of farm products marketed by farm cooperatives for the period 1950-57, adjusted to avoid duplication but not for changes in price levels, was $7,328 million. During the same period the total average annual cash receipts of all farmers were $30,907 million. Thus, during this period farmer marketing cooperatives handled less than 25 percent of the total farm production.

During the same period the average annual net values of farm supplies and equipment procured for farmers by farmers cooperatives was $1,971 million, and the average annual cash expenditures by all farmers for supplies and equipment was $13,014 million. So farmer cooperatives during the period handled substantially less than onesixth of the supplies and equipment sold to farmers."

I do not have statistics similar to the above for urban cooperative or service cooperatives. The urban cooperatives, however, handle principally grocery items. They operate on a small margin and are in competition with the great grocery chainstores any one of which undoubtedly does more business in a year than all the urban cooperatives combined. They are growing in number and volume but are still and probably for years to come will be an insignificant factor in their field of operation. I have taken from publications of the Cooperative League of U.S.A. the following figures, stated to be 1957 estimates:

There were 1,050 consumer stores in the United States, with a membership of 700,000 and a gross dollar volume of sales of $170 million. Rural electric cooperatives did a gross volume of $500 million and rural telephone cooperatives $7 million.

In 1958 the sales of all retail grocery stores in the United States were $48,275 million and the sales of chainstores $18,625 million. The sales of the 26 leading retail cooperatives in 1958 were $75,485,781. Incidentally, the net savings of these 26 cooperatives was $1,721,175. As appears they did more than 40 percent of all cooperative grocery business.

The foregoing figures for cooperatives might well be compared with the following figures (taken from published annual statements of the respective companies):

[In thousands of dollars]

1 Fiscal years ending Feb. 28, 1959, and Feb. 28, 1949. Fiscal years ending Oct. 31, 1958, and Oct. 31, 1948.

Since 1946 the gross national product has more than doubled (index 1947-49-100; 1946, 210.7; 1959 (estimated), 485)-(taken from Investors Reader, Sept. 2, 1959).

It will be observed that

In 1958 Standard Oil of New Jersey sales exceeded the average annual total sales of all farmer cooperatives for the period 195157; exceeded the average annual total sales of all farmers purchasing coperatives for the same period by more than $5 billion, and exceeded the petroleum products sales of all farmer supply

5 Figures prepared by Farmers Cooperative Service, U.S. Department of Agriculture, July 1959.

cooperatives in 1956-57 ($529,679,000) by more than $61⁄2 billion; in 1958 its net earnings after taxes were $562 million, almost twice the total patronage earnings of all farmers cooperatives in 1954.

In 1958 the Great Atlantic & Pacific Tea Co. sales were $5,094,741,000, more than 30 times the sales of all consumer-urban cooperatives in 1957 ($170 million); its net earnings after taxes in 1958 were $53,905,000 (as compared with $1,721,175 in 1957, for the 26 leading consumer cooperatives).

In 1958 National Dairy Products sales were $1,451,245,000; the sales of all farmer marketing dairy cooperatives for 1956-57 were $2,759,409,000. National Dairy Products Co. alone did approximately three-fifths as much in dollar volume as all the dairy cooperatives.

In 1958 the sales of International Harvester Co. exceeded by more than 10 times the farm machinery and equipment sales of all farmer supply cooperatives and were only slightly less than one-half as much as the total sales of all farmer supply cooperatives.

In the period from 1948 to 1958 the business of Standard Oil Co. of New Jersey more than doubled, and its earnings after taxes increased roughly 55 percent; the business of Great Atlantic & Pacific Tea Co. almost doubled, and its earnings after taxes increased by roughly three-sevenths, while the business of National Dairy Products Co. increased almost 50 percent, and its earnings before taxes increased by about four-fifths.

In a speech made at Portsmouth, N.H., on September 20, 1959, Under Secretary of the Treasury Fred A. Scribner, Jr., said that corporations had paid $10,356 million of dividends in 1956; that only $8,892 million of this amount was reported on individual tax returns (a gap of $1,464 million) and that more than $3 billion of interest paid to individuals was not reported by them on their individual tax returns for that year.

The total unreported income ($4,464 million) substantially exceeded the net worth of all types of farmer cooperatives on January 1, 1957, ($3,468 million) and was almost 20 times the total patronage refunds of all farmer cooperatives in 1954.

It seems clear to me that (a) cooperatives still do only a small part of the total business of the United States, and their share of that business is not likely to increase greatly in the future; (b) that their earnings (net margins) are relatively small, and that even if all patronage distributions were taxed at regular corporate rates the revenue gained would not be significantly large-not nearly large enough to justify the harm which would be done to farmers and others by such action. As the Treasury said in its 1947 study in respect to the repeal of the exemption:

Considerations of revenue and equity must be weighed against the advantages to the economy as a whole which result from this particular form of encouragement to the flow of capital and effort into cooperative associations.

III

Ever since we have had Federal income tax laws Congress has by express provisions in the Revenue Codes exempted, wholly or par

tially, farmers cooperatives from the tax. Even the War Revenue Act of 1898 and the corporation tax statute of 1909 contained such provisions.

The

The Revenue Act of 1913 which imposed the first income tax after adoption of the 16th amendment provided that nothing in the act should apply to "agricultural or horticultural organizations." Revenue Act of 1916 spelled out the exemption in more detail and provided

farmers, fruitgrowers or like associations organized and operated as a sales agent for the purpose of marketing the products of its members and turning back to them the proceeds of sales, less the necessary selling expenses, on the basis of the quantity of produce furnished by them.

should be exempt from tax. It will be noted that the exemption applied only to marketing associations. No material changes were made thereafter until the Revenue Act of 1921 which broadened the exemption to include

associations organized and operated as purchasing agents for the purpose of purchasing supplies and equipment for the use of members and turning over such supplies and equipment to members at actual cost, plus necessary expenses. Thus, purchasing cooperatives were brought under the exemption. In 1926 the exemption provision was completely recast so as to provide (Revenue Act 1926, sec. 231 (12)):

Farmers', fruit growers', or like associations organized and operated on a cooperative basis (a) for the purpose of marketing the products of members or other producers, and turning back to them the proceeds of sales, less the necessary marketing expenses, on the basis of either the quantity or the value of the products furnished by them, or (b) for the purpose of purchasing supplies and equipment for the use of members or other persons, and turning over such supplies and equipment to them at actual cost, plus necessary expenses. Exemption shall not be denied any such association because it has capital stock, if the dividend rate of such stock is fixed at not to exceed the legal rate of interest in the State of incorporation or 8 per centum per annum, whichever is greater, on the value of the consideration for which the stock was issued, and if substantially all such stock (other than nonvoting preferred stock, the owners of which are not entitled or permitted to participate, directly or indirectly, in the profits of the association, upon dissolution or otherwise, beyond the fixed dividends) is owned by producers who market their products or purchase their supplies and equipment through the association; nor shall exemption be denied any such association because there is accumulated and maintained by it a reserve required by State law or a reasonable reserve for any necessary purpose. Such an association may market the products of nonmembers in an amount the value of which does not exceed the value of the products marketed for members, and may purchase supplies and equipment for nonmembers in an amount the value of which does not exceed the value of the supplies and equipment purchased for members, provided the value of the purchases made for persons who are neither members nor producers does not exceed 15 per centum of the value of all its purchases;.

It is interesting to observe that in the debate in the Senate which preceded adoption of the bill and in response to questions from other Senators, Senator Smith of South Carolina said:

The agricultural business needs priming. This country has to do something to bring about a condition by which agriculture can meet competitive conditions in the market on the basis of organized business; and even if it costs us a few country stores, even if it costs us a few middlemen, even if it costs us all the middlemen, if we can encourage the farmers of this country to get together on a business basis and learn how to market their stuff and to distribute

it over the period of distribution, we will have accomplished that which perhaps may save this Government."

In the 1934 Revenue Act a provision was added to section 101 (12) to the effect that "business done for the United States or any of its agencies should be disregarded in determining the right to exemption." No other changes were made in the Revenue Code until 1951.

In 1951 extensive hearings were held by this committee and by the Senate Finance Committee dealing with the question of cooperative income taxation. Similar hearings were held by this committee in November 1947.

Following the 1951 hearings Congress determined once again that cooperatives and other business corporations operating on a cooperative basis were entitled to special income tax treatment and that the earnings of a true cooperative actually distributed to patrons on a patronage basis in whatever form-cash, paper, or merchandise should be taxed to the patron (at face value in the case of paper) in the year in which the distribution was received by him, and should not be taxed to the cooperative, provided that the cooperative was legally obligated to distribute its earnings to patrons annually or oftener on a patronage basis. Pursuant to this determination the former exemption section of the code (101(12)) were amended by adding a new section which in the 1954 revision of the code was renumbered 522, which reads:

SEC. 522. Tax on Farmers' Cooperatives.

"(a) Imposition of Tax.-An organization exempt from taxation under section 521 shall be subject to the taxes imposed by section 11 or section 1201. (b) Computation of Taxable Income.

(1) General Rule.-In computing the taxable income of such an organization there shall be allowed as deductions from gross income (in addition to other deductions allowable under this chapter)—

(A) amounts paid as dividends during the taxable year on its capital stock, and

(B) amounts allocated during the taxable year to patrons with respect to its income not derived from patronage (whether or not such income was derived during such taxable year) whether paid in cash, merchandise, capital stock, revolving fund certificates, retain certificates, certificates of indebtedness, letters of advice, or in some other manner that discloses to each patron the dollar amount allocated to him. Allocations made after the close of the taxable year and on or before the 15th day of the 9th month following the close of such year shall be considered as made on the last day of such taxable year to the extent the allocations are attributable to income derived before the close of such year.

(2) Patronage Dividends, Etc.-Patronage dividends, refunds, and rebates to patrons with respect to their patronage in the same or preceding years (whether paid in cash, merchandise, capital stock, revolving fund certificates, retain certificates, certificates of indebtedness, letters of advice, or in some other manner that discloses to each patron the dollar amount of such dividend, refund, or rebate) shall be taken into account in computing taxable income in the same manner as in the case of a cooperative organization not exempt under section 521. Such dividends, refunds, and rebates made after the close of the taxable year and on or before the 15th day of the 9th month following the close of such year shall be considered as made on the last day of such taxable year to the extent the dividends, refunds, or rebates, are attributable to patronage occurring before the close of such year.

"Seidmans Legislative History of Federal Income Tax Laws," pp. 614-618.

See hearings before the Committee on Ways and Means, House of Representatives, 82d Cong., pt. 2, and hearings before the Committee on Finance, U.S. Senate, 82d Cong., pt. 2.