UPPER SNAKE RIVER VALLEY DAIRYMEN'S ASSOCIATION, INC.
Member Challenge Cream and Butter Association

I. Introduction:

IDAHO FALLS, IDAHO, October 28, 1947.

(a) Upper Snake River Valley Dairymen's Association, Inc. General office, Idaho Falls, Idaho. Branch plant, Rexburg, Idaho. E. S. Trask, general

manager.

(b) The association has an average of about 2,600 active members living in the Upper Snake River Valley in Bingham, Bonneville, Jefferson, Madison, and Fremont Counties of Idaho.

II. History of organization:

(a)_Organization work for the Upper Snake River Valley Dairymen's Association, Inc., was started in the latter part of 1929 with the certificate of incorporation being filed in the office of the secretary of State on the 22d of November 1929. (b) The organization is the result_principally of underpayment for butterfat n this territory in comparison to the Boise Valley and Twin Falls-Jerome sections of Idaho where cooperatives were going concerns in 1929. After a small group of interested dairymen and others visited the above named sections, it was decided to organize the Upper Snake River Valley for dairymen-one of the principal reasons being that from 2 to 7 cents more was being paid by some of the same concerns in other parts of the State than was being paid in our own section.

(c) After raising about $20,000 from businessmen and nearly a like amount of money from farmers the plants at Idaho Falls and Rexburg were started in the early part of 1930 and made ready for processing in February 1931. An application was made to the Federal Farm Board for an $80,000 loan. This application was contested by Salt Lake Creameries and also by the Pocatello Chamber of Commerce, but finally a $70,000 loan was granted our association at an interest rate of 11⁄2 percent. This rate was protested by some as being too low; however, they were reminded that competitors such as Kraft Cheese, Armours, and Swift & Co. were undoubtedly borrowing larger amounts of money at this rate or even lower and that a group of farmers should have the same privilege in a free country. The opposition of our competition was as keen as they could make it and many wild statements put out to farmers; however, the cooperative spirit prevailed to the extent that at the opening of the plants in 1931 about 1,600 members were signed up. The association started under very trying circumstances as it was formed just before the stock market crash in 1929 and if those who were responsible for the organization and promotion of it had known what was to follow during the early 1930's, undoubtedly the organization would not have been started.

Just at the time when the first butter was made and shipped to California the markets not only for butter but all byproducts dropped drastically and continued to drop from month to month and with a heavy debt facing the association, the operating statement showed a loss month after month until June of 1932 when the original manager, R. E. Sorenson, was relieved of his duties. This loss month after month gave the association a bad name because of the fact that it was unable to keep up payments to producers comparable to competitors who had had the field for years.

The number of patrons a year after the association started instead of being 1,600 was less than 800 in February of 1932. The current liabilities were $83,732.53 and the current quick assets were $8,023.45. The association had notes and contracts due for equipment which threatened its very existence and through the help of the Challenge Cream & Butter Association who endorsed a loan for $38,000 in the spring of 1933, the Upper Snake River Valley Dairymen's Association, Inc., was able to settle with creditors who held notes and contracts on the basis of 50 and 55 percent on the dollar.

From that time on the association has gradually increased in volume of products received as well as membership and in 1946 was able to pay off all mortgages. Although the debt to the creditors who had settled for 50 and 55 percent in the dark days of 1932 and 1933 was not a legal debt, it was considered a moral debt by the association and in 1946 the association was able to reimburse those creditors in full.

The association now manufactures butter, cottage cheese, spray process nonfat dry milk solids, casein and whey powder at its Idaho Falls plant and manufactures American cheddar cheese exclusively at the Rexburg plant.

The association is served by 34 contract milk routes which bring milk to the two plants from an area 120 miles long and about 40 miles wide.

III. How individual farmers participate in the affairs of the Association:

(a) The nine directors of this association are elected from five counties-two each from Bingham, Bonneville, Jefferson, and Madison and one from Fremont County. Their terms are rotated on a 3-year basis-three being elected each year. Nominating meetings for directors are held each year in the county represented by the director whose term expires. These meetings are handled in a very democratic manner. All active members are given a chance to nominate and vote for their choice.

These nominations are presented for confirmation or rejection at the annual meeting where final vote of the entire membership present is made. Directorships on our association's board are highly prized as it is very seldom but what a director feels very honored to be reelected. The annual meeting of the associa tion is held in August each year at which time the manager's report for the year is presented and such other business as may properly come before the membership.

(b) The officers of the association are elected by the members of the board of directors who are chosen by the membership. The board of directors meet every month and hear the written report of the manager. Matters of volume, markets, improvement, and anything else which may properly come before the board are presented by the manager and ample time given for the board to decide on the policy that the manager is to follow.

IV. Detailed statement of financial structure:

(a) Capital accounts. (See Seventeenth Annual Report for year ending December 31, 1946.)

(b) Rates and amounts of interest or dividends paid on capital: None. (c) Reserves required:

1. By State law: None.

2. For efficient operation: None, except possibly a sufficient amount to carry current year's losses.

(d) Amount of patronage refunds paid, credited or allocated to members for the past year or so. (See Seventeenth Annual Report for year ending December 31, 1946.)

(e) Assuming a general recession in prices, what reserves will be necessary to carry you through: None, except a sufficient amount to cover a portion of the recession in price.

V. For statement showing the association has complied with exemption section of Internal Revenue Code and regulations thereto, see copy of letter from Treasury Department dated June 18, 1946, which follows:

TREASURY DEPARTMENT,
Washington 25, June 18, 1946.

UPPER SNAKE RIVER VALLEY DAIRYMEN'S ASSOCIATION, INC.,

Idaho Falls, Idaho.

GENTLEMEN: It is the opinion of this office, based upon the evidence presented, that you are exempt from Federal income tax under the provisions of section 101 (12) of the Internal Revenue Code and corresponding provisions of prior revenue acts. Bureau ruling dated May 20, 1931, holding that you are entitled to exemption from Federal income tax under the provisions of section 103 (12) of the Revenue Act of 1928, is hereby affirmed.

Accordingly, you will not be required to file Federal income tax returns unless you change the character of your organization, the purposes for which you were organized, or your method of operation. Any such changes should be reported immediately to the collector of internal revenue for your district in order that their effect upon your exempt status may be determined. The requirement with respect to reporting the changes referred to has particular reference to the ownership of your common stock by nonproducers and any dealings with nonmembers, since your articles of incorporation and bylaws make no provision for nonmembers to share in your profits.

You are required, however, to file annually an information return on Form 990 with the collector of internal revenue for your district so long as this exemption remains in effect. This form may be obtained from the collector and is required to be filed on or before the 15th day of the fifth month following the close of your annual accounting period.

The collector of internal revenue for your district is being advised of this action. By direction of the Commissioner.

Very truly yours,

E. I. MCLARNEY,
Deputy Commissioner.

(Other matter submitted by Mr. Morrison including certain exhibits, have been filed with the committee and incorporated in the record by this reference.)

The CHAIRMAN. We thank you for your statement, Mr. Morrison. The next witness is Mr. Eugene Hensel, counsel of the National Association of Cooperatives. Mr. Hensel, give your name and state whom you represent for the record.

STATEMENT OF EUGENE L. HENSEL, COUNSEL FOR NATIONAL ASSOCIATION OF COOPERATIVES, CHICAGO, ILL.

Mr. HENSEL. Mr. Chairman and gentlemen, my name is Eugene L. Hensel, Columbus, Ohio. I appear here as counsel for the National Association of Cooperatives.

Mr. GEARHART. Mr. Chairman, I understand the witness has been allowed an hour. If he has not finished in that time, is it understood that his complete brief will be in the record? It is a magnificent job. The CHAIRMAN. Yes.

Mr. HENSEL. I think this is the only legal presentation in behalf of the cooperatives.

The National Association of Cooperatives consists of 20 cooperatives who serve farmers representing about one-third of the farmers who are served by cooperatives in the country. It is a temporary organization set up to combat the attacks made upon the cooperatives by the NTA. We hope it will not have to be in existence very much longer. Mr. Clark L. Brody, of Michigan, is president of the association which I represent. I shall now go to my formal statement, Mr. Chairman.

TRUE TAX POSITION OF COOPERATIVES UNDER THE FEDERAL INCOME TAX LAW AND FEDERAL CONSTITUTION

In order to intelligently appraise and evaluate the true tax position of cooperatives under Federal law, there must be a complete understanding with respect to these organizations. Many of the most severe critics of the tax position of cooperatives are either ignorant of the subject, or, being fully informed, deliberately misrepresent or misinterpret the facts.

Broad generalities have been stated with reference to cooperatives as a whole, without any apparent accompanying statement of facts upon which such abstract generalizations are predicated. To state it differently, conclusions have been reached, and changes in the law have been advocated, without the slightest degree of supporting evidence having been advanced as to the soundness of the conclusions or the justification of the advocated changes.

It should be obvious that under the accepted rules of logic and reason, if an investigation is based upon an erroneous premise, none but an erroneous conclusion will be reached. In view of this fact, it is appreciated that a responsibility rests upon every witness who appears before the Ways and Means Committee, during the course of the hearings on the taxation of cooperatives, to present all factual data with as accurate precision as is humanly possible. It is essential that the analysts of the tax subject must be fully informed factually as to the various kinds of cooperatives, their respective legal

structures, their organization and operation; and the functions which they are designed to perform, before an accurate picture maybe reflected as to the true tax position of these cooperatives.

Opponents of the cooperative method of transacting business are prone to shun the facts and to urge conclusions, no matter how erroneour or unsound. It is obvious that the obligation to lay the facts before the committee rests upon the cooperatives themselves. This obligation, we are more than willing to assume and discharge.

Kinds or types of cooperatives

Essentially, there are four basic types of cooperatives in the United States. They are listed as follows:

(1) Farmers' marketing cooperatives;
(2) Farmers' purchasing cooperatives;

(3) Wholesale industrial or business cooperatives; and
(4) Urban consumers' cooperatives.

Farmers' marketing cooperatives are organized for the purpose of collectively marketing the farm products produced by individual farmers. The voting control of such cooperatives rests exclusively in the farmer producers.

Farmers' purchasing cooperatives are organized and operated to purchase and distribute farm supplies to farmers. The voting control of such cooperatives, likewise, rests exclusively in the farmer producers. Sometimes, these purchasing cooperatives, in lieu of purchasing and distributing completely manufactured articles to the farmers, elect to purchase the raw materials and to fabricate or manufacture the necessary supplies, for use by farmers.

Wholesale industrial or business cooperatives are organized and operated to furnish wholesale distributing, manufacturing, or other services to their members. The most common organizations of this type are the wholesales owned by retail hardware dealers, retail grocers, retail druggists, retail department stores, etc. There are many other types of industrial cooperatives other than those enumerated. One of the oldest, and most successful, of this type of service cooperative is the Associated Press.

Generally, the voting control or stock ownership of such a cooperative is vested in the retail dealers, or retail service agencies, who purchase their supplies, or obtain their services, at wholesale, for resale or use through the dealer-owned, wholesale cooperatives.

Urban consumers' cooperatives are organized and operated generally in the cities, and their function is to furnish consumer goods for their members or patrons, at the lowest obtainable cost.

The three types of cooperatives first named fall in the same bracket with reference to their aims, functions, and objectives. They form an integral part of the industrial and commercial mechanism, and are not, in and of themselves, a final objective. They perform a part in the production, manufacture, fabrication, and distribution of goods, wares, and commodities. After their functions have been performed, other functions are still necessary by other agencies, to get the goods, wares, and merchandise in the hands of the ultimate consumer.

On the other hand, urban consumers' cooperatives are, in and of themselves, a complete and final operation. When their function has been completed, the goods, wares, or merchandise are in the hands of the final consumer. They have, generally speaking, what is

known as an "open membership," by which is meant that they, generally, do not limit their members or voting stockholders to any specified group, trade, profession, or industry. Any ultimate consumer of goods may become a member or patron of the urban consumers' cooperative.

All classifications of cooperatives follow, in many respects, the same basic pattern with reference to their operations. There are many differences in the methods of organization and operation, which will be observed later. But, basically, they all have a common objective, to wit, either the increase of income of the individuals whom they serve, or, a reduction in costs to the individuals whom they serve; both of which, from an economic point of view, are one and the same objective. All types of cooperatives herein mentioned have another common characteristic, and that is the location of the point at which income, if any, is realized. The routes by which the various types of cooperatives travel to attain this common objective differ, but the end is always the same. Some more detailed discussion of these routes will be discussed hereinafter.

State laws governing organization of farmers' cooperatives

During the period from 1919 to 1930, practically every State in the Union adopted corporation laws authorizing the organization and operation of farmers' cooperatives, both marketing and purchasing cooperatives. The State acts have been more or less uniform in their general provisions. The so-called Uniform Cooperative Marketing Acts are referred to variously as the Shapiro Act, the Standard Cooperative Marketing Act, and the Bingham Act. Some of the requirements of the standard act, with reference to farmers' cooperatives of both types, are briefly enumerated as follows:

(1) All voting control must be vested in bona fide producers of agricultural products, who market their products or purchase their supplies through the cooperative.

(2) The cooperative corporation is authorized to engage in any activity in connection with the collective marketing, selling, harvesting preserving, drying, processing, canning, packing, grading, storing, handling, shipping, or utilization of agricultural products of its members and other farmers, or, in manufacturing, selling, or supplying, to its members and others, supplies, machinery, and equipment.

I want to interpolate at this point that they are limited to handling the farm products that are produced by their members or other producers. They cannot buy them on the market and remarket them. (3) Such cooperatives may elect to limit their transactions to members alone; or, they may elect to serve members and other farmers; provided, however, that the annual volume of business done with nonmembers shall not exceed the volume done with members.

(4) If the corporation is organized on a stock basis, rather than a membership basis, the maximum dividends on common or preferred shares are restricted to not to exceed 8 percent per annum.

(5) Provision may be made whereby a certain number of the board of directors may be appointed by public officials, or commissions, to represent primarily the interest of the general public in the cooperative. Such directors may have no direct financial, or other interest, in the cooperative.