ting such legislation introduced in the State legislatures. Those same organizations have been engaged for some little time in telling the American people that cooperatives do not pay taxes, which is not a true statement, and have been doing their very best to induce the introduction of legislation.

You have a Nation-wide organization for that purpose right now. Naturally, Mr. Chairman, if these people are deceived into believing that cooperatives do not pay taxes, they get angry. Certainly they do. They do not like it. No one can blame them.

On the other hand, we try to do the best we can to counteract some of this misinformation, and we are not always successful in counteracting it effectively.

The CHAIRMAN. I should like to read from a telegram I received this morning from Montana. It reads as follows:

Chairman ROBERT L. DOUGHTON,

Committee on Ways and Means,

MISSOULA, MONT., February 28, 1951.

House Office Building, Washington, D. C.

May we again commend your stand on taxing the co-ops and other tax-free competitive business enterprises.

I have taken no particular stand, but I have made some statements about them.

A bill to tax all of these exempt enterprises passed the House of Representatives of the State of Montana, 35 to 50, and, after a bitter fight in the Senate this week, resulting in a tie vote, met defeat in the hands of the Democratie Lieutenant Governor presiding.

In other words, it passed the house of representatives by a vote of 50 to 35, a tie vote resulted in the senate, and the bill met defeat by the vote cast by the Lieutenant Governor.

We forward this information to you to indicate the high degree of sentiment in this agricultural and stock-raising State in favor of the taxation of this group.

TAX EQUALITY ASSOCIATION OF MONTANA,
W. J. HowARD.

Mr. VOORHIS. Mr. Chairman, by the fact that cooperatives in Montana have attained some strength, you must bear in mind that that means those cooperatives are, to a greater degree than what otherwise might be the case, turning back into the hands of individual farmers a considerable amount of what used to be commission margins to other people, and those other people maybe do not like that very well. My only answer to it is that I think it is darn good for the State of Montana to have some of that money returned to the farmers, and I think they have a right to their own businesses.

The CHAIRMAN. I do not desire to provoke an argument, but I read that telegram to show that there is a feeling that there is some inequity under the exemptions enjoyed by cooperatives, and it is not confined to Washington. This telegram says there is a "high degree of sentiment in this agricultural and stock-raising State in favor of the taxation of the group."

It shows that there is this feeling throughout the country that something should be done to ascertain if there is an inequity and, if there is, we should do something about it.

Mr. VOORHIS. No one is more conscious than I am of the fact that there is a great deal of excitement over this matter.

The CHAIRMAN. I believe that, as far as possible, all profits made in business should be taxed on the same basis.

Mr. VOORHIS. Mr. Chairman, I agree with that, and I have said. so in my statement. There is no disagreement with me on that point. The CHAIRMAN. You seem to have no disagreement with the general principles of the Secretary of the Treasury, but you differ with him on the conclusions which he has reached on the facts he has gathered.

Mr. VOORHIS. I part from him on his facts when he implies that cooperatives universally do have tax-free income on which to expand. My point is that very few of them do, and to a very small extent is that true. I am not arguing with him on that principle.

The CHAIRMAN. Are the net margins of the business done by the cooperatives subject to tax in the hands of the cooperatives?

Mr. VOORHIS. That depends, Mr. Chairman. If those margins are previously obligated by that cooperative to be paid to their patrons, if the cooperative has no discretion over the disposal of those funds, if they literally and legally belong to the patrons and the cooperative must pay them to the patrons, then they are not taxed against the cooperative.

But unless such an obligation exists, then they are taxed against the cooperative as income except in the case of the cooperatives that are governed by section 101 (12).

As to all the other cooperatives, and as to practically every one of them that is a member of my organization, they would have to pay, and they do pay right now, operation income taxes on all those margins except only that portion of them which they are previously legally bound to pay to the patrons, which they do.

The CHAIRMAN. They are not legally bound by Federal law.

Mr. VOORHIS. In practical effect. They are bound by their own charters, Mr. Chairman, and they could not continue to operate those cooperatives if they did not do it that way.

The CHAIRMAN. If they are exactly on the same basis, I do not see the reason why those who favor taxing them, and those who oppose taxing them did not get together.

Mr. VOORHIS. I think they ought to. The difference is the manner in which the cooperative chooses to treat its patrons and the other businesses choose to treat their patrons. Any other business can do exactly what the cooperatives do, if it wants to do so.

The CHAIRMAN. Suppose they did, what would become of the revenue that should be paid the Government? If they all did that, how much revenue would the Government lose?

Mr. VOORHIS. I think the Federal Government would be at least as well off from a revenue point of view, Mr. Chairman. All those distributions that represent any effect on the taxable income of the recipients of those distributions are taxable against those recipients. in their individual income taxes.

Now, then, as a matter of actual fact, the ultimate source of revenue is the people of the country. You might have to raise individual income taxes some, but you would have a broader base to tax. You would have more people with substantial incomes to tax as individuals. I do not think it is going to make too much difference just where you get the money. Indeed, I think you are better off if you get it on a broad base from many people who are well able to pay tax.

79120-51-pt. 2—44

The CHAIRMAN. Then we could go to a general sales tax, but you do not favor that?

Mr. VOORHIS. I said I would not under present circumstances oppose a broad excise tax. I do not think it ought to fall on food, clothing, and basic necessities of life, Mr. Chairman. I do not think it needs to. The CHAIRMAN. I am just asking you questions for information. Do you believe that there is competition between cooperatives and private business?

Mr. VOORHIS. Certainly there is competition between them.

The CHAIRMAN. If so, do the cooperatives have an advantage over private business due to the fact that the cooperatives do not pay a tax on the amounts which they give their patrons as dividends?

Mr. VOORHIS. No, sir; I do not think they do, Mr. Chairman. The CHAIRMAN. That is the crux of the whole question right now. Mr. VOORHIS. Yes, sir. I do not think they have a tax advantage there at all.

In the first place, that cooperative has to make a decision as to how it is going to operate, and so does the other business. The money that the cooperative pays in patronage refunds it pays to its members, and it does not belong to the cooperative. The coperative necessarily does divest itself of substantial ownership of that money.

The other business does not. Now any business that chooses to pay patronage refunds does not tax it on the patronage refunds. If the cooperative retains income in its own name and does not distribute, the cooperative is taxed on it.

I cannot see where there is any tax advantage one way or another. The CHAIRMAN. Do you think that there should be a tax on all the reserves, whether allocated or not allocated?

Mr. VOORHIS. The whole burden of my testimony was to the effect that when cooperatives pay patronage refunds, that that is an entirely different operation from a profit operation or when any other business pays the patronage refund it is a different operation from a profit operation.

The CHAIRMAN. From a tax standpoint, are the cooperatives on precisely the same basis so far as Federal tax is concerned as those corporations with which they are in competition?

Mr. VOORHIS. So far as the law is concerned.

The CHAIRMAN. Are they on precisely the same basis as the corporations with which they are in competition?

I am not arguing with you. I am just asking you for information. Mr. VOORHIS. Mr. Chairman, I am going to try to answer it. In the first place, you have the 101 (12) provision for farm cooperatives which I have not discussed at any length, but which I would be glad to do, if you want me to. I think others are more qualified.

But outside of that one provision, Mr. Chairman, as I said in my testimony, there is nothing either in the law or the regulations that proposes to treat cooperatives any differently than the way in which other businesses are treated.

Now, let us take two businesses over here, neither of which are cooperatives. One of those businesses operates on a basis of distributing to its customers a certain proportion of the price that they pay through trading stamps or some other manner. This business does not do that.

One business has chosen to distribute back part of what would be its profits to its customers and this other business chooses not to do that.

Are you supposed to tax this business over here that does distribute part back to its customers on a different basis from this one here or should you leave it on the same basis?

It seems to me you should leave it on the same basis and this business here is not taxed on the money it returns to its customers on the basis of prior obligations, or prior agreement to do it.

The same way with cooperatives. It depends on how they treat their patrons.

The CHAIRMAN. You have answered my question in such a roundabout way that no one can determine whether you are saying yes or no. Mr. VOORHIS. Mr. Chairman, I am sorry. My answer is that cooperatives in the United States are treated by the tax regulations in just the same manner that other businesses are treated.

The CHAIRMAN. There is some suggestion now to change the law of the United States.

Mr. VOORHIS. That is right.

The CHAIRMAN. That is what you oppose? That is a fair question, is it not?

Mr. VOORHIS. Yes, sir.

Mr. Chairman, I would not oppose anything being done which might clarify the basic principle which I state, which is that if any business, whether it be a cooperative or otherwise, has income which it is not obligated to pay to its patrons, and which it does not pay, that much constitutes income to the business and I would not personally object to that being taxed as any other business is taxed, but my contention is that in substantial effect that is done right now.

The CHAIRMAN. The question of allocated and unallocated reserves confuses the situation, does it not?

Mr. VOORHIS. I am talking about the difference whether they decide they are going to allocate, or whether they cannot decide. I have said that if the board of directors of the cooperative has discretion over that money, if they can decide to allocate or not to allocate, then it is income to the cooperative and should be taxed, but where they have a prior obligation to pay it on the basis of the patronage refund, it is not their money at all; it belongs to the patron and it is not money belonging to the cooperative.

The CHAIRMAN. There is profit; is there not? We are talking about profit.

Mr. VOORHIS. No, sir; the whole burden of my statement is to the effect that it is not a profit.

The CHAIRMAN. You could not allocate it if it were not profit.
Mr. VOORHIS. Yes, you could, Mr. Chairman.

The CHAIRMAN. How could you allocate it if it was not profit? Mr. VOORHIS. It is the margin between the money received by the cooperative and the money paid out in cost. It is a margin.

The CHAIRMAN. What is the difference between margin and profit? Mr. VOORHIS. In my judgment there is a good deal of difference, Mr. Chairman. If there is money that does not belong to me, but belongs to somebody else, I do not see how it can be regarded as a profit in my hands.

The CHAIRMAN. It is a profit in somebody's hands?

Mr. VOORHIS. Yes, sir; in the hands of the person to whom it is ultimately paid.

The CHAIRMAN. It has not gotten there yet.

Mr. VOORHIS. It is going to be put there and it will be taxed after it does.

The CHAIRMAN. What about taxing it before it gets there?

Mr. VOORHIS. If you are going to do that with the cooperative, you have to do that with every business in the country. You just cannot do that with the cooperative alone. You cannot say as to one kind of business, if this business obligates itself to divest itself of a part of the money that it receives and to put the ownership of that money into the hands of somebody else, you cannot just say you are going to do that with a cooperative unless you take the whole pattern of rebates and discounts and every other kind of back payment to a patron and make it taxable against the business that pays it.

The CHAIRMAN. I have just one other question, Mr. Voorhis. Do you, or do you not, think it would be fair to tax the cooperatives on the net margins from the business done by them where the net margins are not actually paid out?

Mr. VOORHIS. I think that question is a little bit loaded, Mr. Chairman. I think that question really means this: I think it wants to know whether it would be just to tax them on patronage refunds that are distributed in some other form than cash, distributed in the form of certificates of ownership or of stock. I am going to interpret the question as meaning that, in any case.

I do not think it makes any difference, Mr. Chairman, in what form the payment is made. If the payment is made in some other form than cash, nonetheless, the ownership of that property passes to the hands of the patron and it does not any longer belong to the cooperative.

I do not think you can make a distinction between the particular method in which that payment is made.

Furthermore, the reason why that is suggested is because the people who are opposed to cooperatives know good and well that if all of these cooperatives-who, as I say, do not have access to the normal source of finances, that are financed by the small investments of their members who are usually not very well to do people they know good and well if the cooperatives paid out all the money in cash that they would never grow.

Now, Mr. Chairman, there are cooperatives in this country that pay every bit of cash and then every member of the cooperative turns around and reinvests that money.

There are other cooperatives where the members agree ahead of time that they will reinvest a certain percentage of those patronage refunds. There is not any substantial difference. That is nothing in the world except a reinvestment of money that belongs not to the cooperative, but to its patrons.

The CHAIRMAN. But the question is on taxing the margins which are not actually paid out. That gets down to the meat of it, whether or not you favor taxes on those margins which are related very closely to profits if they are not paid out to patrons.