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and Means Committee generally because these people down there are just beginning to hound us every time we put our foot on the train.
I have been in my own district just recently. I was down there for 3 days. A man called me on the telephone and I think that if I could have seen him, if there had been a television method of seeing him, he would have been frothing at the mouth. He said, “I look right across the street from me, and there is a hardware store getting all of my customers. Yet you are taxing me and fixing to raise my taxes, and that fellow isn't paying a cent."
That is the way he talked and this man believes that. Now you folks cannot meet this thing by just trying to explain it every time. It is a broader question than that. The cooperatives can take care of it.
Mr. Stam told us that there were from $18 million to $25 million in these allocated dividends. You could pay the tax on that and it would be much more of a help than raising the money to form an organization to fight this organization that Mr. Reed has just described. You could do it by paying the taxes and it would be cheaper for you. It is in that way that I hope the cooperatives will get together and help up solve this problem which reoccurs here every year.
Mr. Voorhis. Well, Mr. Camp, I would like to just say one or two things. In the first place. I would like to point out that the last time I was before the committee the chairman made a suggestion. He asked whether I would be in favor of having the federation commission, or some similar body-and he did not specify just which onemake a thorough study of this matter and come in with a report on what should be done. I said that I would be very, very much in favor of that--and I would be. I would be in favor of having legislation passed to completely clarify this whole business, as far as I am concerned.
I have already testified that where the cooperative has funds which it does not pay or allocate to its members, I think that is a proper subject for taxation. The only thing that I want to make clear is that that is taxed as of now. Mr. CAMP. I think it is, but when you said "paid or allocated”— Mr. VOORHIS. All right, I would like to speak to that.
Mr. Camp. Here is what our folks say. Let me tell you this—and, as Mr. Doughton said, I am not arguing it, but am rather just giving you our side of this picture—and I would like to say parenthetically that I think the cooperative movement in this country has done a wonderful job. As a former fruit grower, we used to ship our fruit and sometimes we never heard of it any more. The cooperatives have saved the fruit business for the farmer and they have aided other businesses. They have done a wonderful job in other areas and in many farm groups.
But they are faced with this criticism and they can correct it. They can do it as sure as I am talking, and they can do it by just saying, “We are going to pay these profits or whatever they are to the farmer. If we don't pay them we will retain them for expansion and we will pay the taxes on those funds."
Now, if they will do that, you won't hear any more because there will be no grounds for any more talk.
Mr. VOORHIS. Now, of course, the farmer would have a perfect right to reinvest part of that money in the co-ops, would he not?
Mr. CAMP. Yes; but let him first receive it. Then let him send the money back. But this assigning a piece of paper is just not right.
Mr. VOORHIs. But, Mr. Camp, you realize that the farmer is taxable regardless of the form in which he receives that. It doesn't matter whether he receives it in cash or in paper.
Mr. CAMP. I realize he is taxable, but then I realize he is not being taxed. That is the point. It is not true in every case, of course. Some of them really are paying it,
Mr. VOORHIS. Well, the farmers should be paying those taxes, and that is what the law says.
Mr. CAMP. Certainly he should be, and I have thought that it could be done very simply by just letting those dividends be paid in cash, which cash would be taxed, and as to that proportion which is retained for expansion purposes let there be some sort of legislation to definitely say what is to be done with it. Now I think you folks yourselves could work that out.
Mr. Voorhis. I certainly would welcome an opportunity to have this situation clarified in law. I would only like to point out that if all of the past refunds had been paid in cash and not reinvested, you would not have this structure of cooperatives to do the very jobs that you are talking about because it was the reinvestment of funds on the part of their members into cooperatives that made it possible for the cooperatives to perform the services that they have performed.
Mr. CAMP. Well, you speak as though the Government would take all that in taxes.
Mr. VOORHIS. No, sir.
Mr. CAMP. The Government would not tax that expansion. The rates would not be that high. They could still expand, and I want to see them expand.
Mr. VOORHIS. Let me point out this one thing, that whereas in the case of a corporation, if the corporation retains the funds for expansion, the corporation pays a tax but the stockholders do not. In the case of the cooperative, if it pays its patronage refunds in a form other than cash, the members are taxable on that as income against them even though the cooperative is not. So in order to put it on all fours, if you are going to tax that money which the cooperative receives back, you will be taxing both the member and the co-op because the member owns it.
Mr. Camp, I never would suggest that at all. I would have the member of the cooperative pay the tax on the actual cash he receives and not have the co-ops pay à tax on that money which is sent back for expansion. It would be only taxed one time.
Mr. Voorhis. Well, basically I am for you, Mr. Camp; but if you are saying now that we should tax a co-op by an income tax on money that is simply an investment in the co-op, I think we would have to talk about that a long time.
Mr. Camp. I never would agree to that.
Mr. Camp. But I think you could simplify this whole thing by letting the co-op member pay his tax on the amount of cash dividend which he receives and is not sent back to the co-op. Then let the co-op pay a tax on that only which they retain. Therefore, the money would be taxed just one time.
Mr. Voorhis. On any money that the co-op retains on its own name with that I thoroughly agree.
Mr. Camp. That is all, Mr. Chairman.
Mr. KEAN. If a nonexempt cooperative does business with a nonmember and pays the patronage dividends only to members, does the cooperative pay the corporate income tax on the profit it makes from the nonmember business? Mr. Voorhis. Yes, sir. Every dime of it at regular rates. Mr. Kean. Whether it is distributed or not to the members?
Mr. Voorhis. Whether or not it is distributed to the members. It cannot distribute that money to the members without first paying the corporate income tax.
Mr. Kean. Now if the profits are distributed to the members in proportion to their patronage, the members pay income tax on the distribution, do they not?
Mr. Voorhis. I'he members pay it if it affects their taxable income. Let me explain that just a moment. If you receive a discount on purchases at the stationary room, for example, of if my wife buys a dress that is marked down from $19.99 to $13.99, we don't regard that as generating taxable income because it simply' is a reduction of the cost of a consumable item.
Mr. KEAN. Well, I am talking about nonmember business. I am talking about business that they do with nonmembers.
Mr. VOORHIS. And where they do not distribute? Mr. KEAN. No. If profits on nonmember business are distributed, will the members pay income tax.
Mr. VOORHIS. In that case that would be income to the members. Mr. KEAN. It would be income to the members?
Mr. VOORHIS. Yes; and the members should be taxable on that as income to them in all cases.
Mr. KEAN. How do you notify the people who do pay these taxes that there is a tax due? For instance, when something is credited on the books to someone and he never sees it, how does he know that he has to pay income tax on that? Do you actually send out notices that there is income tax due on these things?
Mr. Voorhis. In most cases, yes. I think that practice should be improved in some instances. But he always receives a notice that he has received this form of refund. He always receives that.
Now, whether in every single case he is advised in that notice that this is taxable income to him, I cannot tell you that in every single case I know that is done. I do know that he is always notified-and I think personally that he should always be notified and that in most cases by all of the well-run co-ops he is notified--that this represents an addition to his taxable income.
Mr. KEAN. Thank you.
Mr. VOORHIS. The Cooperative League is an association that has member organizations. Thirteen of those member organizations are regional wholesale cooperatives and they pay dues to the league at the rate of 10 cents per year for each of their members. The other two members are mutual insurance companies. They pay at the rate of 5 cents for each of their members.
Mr. Curtis. Now what do you mean by "wholesale cooperatives"?
Mr. Voorhis. I mean the cooperatives like the Consumers Cooperalive Association of Kansas City and the Midland Cooperative Wholesale Association. I mean one like the Farmers Union Exchange in Nebraska, except that they do not have to be a member of the league. But that is what I mean, just to identify it.
Mr. CURTIS. Are any of them marketing cooperatives?
Mr. Voorhis. Not in the Cooperative League. But may I make it clear that some of them do a degree of marketing. The Farm Bureau Cooperatives Association of Ohio does a considerable amount of grain marketing, but the bulk of its business is a supply business or a purchasing business. No purely marketing cooperatives are members of Cooperative League.
Mr. Curtis. If a purchasing cooperative is purchasing supplies to be used in a farmer's business, the savings or refunds, or whatever we might choose to call them, do come in most instances into the taxable income of the farmer member, do they not?
Mr. VOORHIS. In all cases where it is a farm supply; yes.
Mr. CURTIS. That is because it lessens the amount of business deduetions?
Mr. Voornis. Basically, that is right.
Mr. CURTIS. How long have you been associated with the Cooperative League?
Mr. VOORHIS. For 4 years, ever since I was beaten for Congress.
Mr. GRANGER. Mr. Voorhis, regardless of the merits of the case, I think you have made the best possible case that could be made for your organization. Whatever your salary is, I think you are earning it,
But I think Mr. Camp put his finger on one of the difficulties. I think there are people in small communities, businessmen who think that the co-ops do not even pay any property taxes, let alone income taxes. They do not think they pay any taxes at all. I think it is this misunderstanding of the cooperatives that is giving you most of the trouble.
Mr. VOORHIS. So do I.
Mr. Granger. I suppose there may be some abuses in the cooperative movement some places.
Mr. Voorhis. Well, I think nothing is perfect, Mr. Granger. In my last appearance before this committee and I was reading over that statement before I came down here and I have a copy of it before me—I said, "No human institutions are perfect." I said, "There are things that need to be improved about taxes," and so forth. And I said further, "We would be glad to sit down with the committee and see where any of those things are subject to proper legislative clarification," and we would.
Mr. GRANGER. Well, I think every member of this committee is receiving letters, as the chairman has indicated, saying, “I refuse to pay any more taxes until all people are taxed,” indicating that there are some people who are evading taxes. That is what I understood the chairman to say, and I understood him to say further that he agreed with that, and so do I.
Mr. VOORHIS. Well, now, Mr. Granger, what are you going to do about local property taxes?' Are you going to pass a law in Congress
a saying that all co-ops shall pay local property taxes like they do now, which is all you can say, because they pay all local property taxes.
I have a paper here from the former cooperative exchange of Raleigh, N. C., which says that they paid $554,000 in the last 5 years.
Mr. GRANGER. I am not speaķing about the property taxes. If those people wanted to find out for themselves, they could go to the tax rolls and find out.
Mr. VOORHis. They certainly could.
Mr. GRANGER. But it seems to me that if all these so-called refunds, and I mean all of them were refunded to the customers, there would not be any question about tax evasion. Now, why could that not be done?
Mr. VOORHIS. It could be done. It would mean a lot more expense. It could be done, and in many cases, as I testified, it is done, that is, they actually pay out every cent in cash and it is received by the members. That would certainly make my job a lot easier. It would make the job of the manager of the co-op a lot harder. He would have a lot more paper work to do and a lot more red tape to go through. But may I say this: that I think that is all right, and it certainly would be helpful to me and it would be helpful to the members of this committee, but it will not stop this attack on cooperatives, in my judgment, because that is motivated by different sources, Mr. Granger, than from an examination of the real facts in the case.
Even if we did that, they would be still coming here and saying that the patronage refunds, in whatever form they are paid, in cash or in any other way, should be taxed against the cooperative. The main argument that I am making is that they shouldn't be.
Now, as to clarifying and all that, I am for it. I would like to see everything in that respect done, but I don't think it will stop the complaint because I think it stems from the desire of certain people to eliminate the competition of cooperatives.
Mr. GRANGER. What I was saying and what I have said to people who have written to me, and I think the chairman has so said, and correctly has said, is that if there are loopholes, if people are evading taxes who are subject to taxes, they should be taxed.
Mr. Voorhis. There is no doubt about that.
Mr. GRANGER. But it is your claim that your organization and the cooperatives generally are paying the taxes that are due the government.
Mr. VOORHIS. That is right.