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Now I have this question: Are you familiar with the principle of income-tax law to the effect that a person cannot avoid a tax on his income by assigning it to another person, even though the assignment is legally binding and is made before the income tax is earned? Let's assume that I have an income and I contract with you to assign to you, ahead of time, 20 percent of that income. Do I avoid payment on that 20 percent that I am assigning to you in a contract?
Mr. Voorhis. I can't answer that, Mr. Mason. I don't know. Mr. Mason. They won't let me do it. They won't let me assign any of my
income to someone else and take that deduction. Mr. Voorhis. What I do know is that through the years, as to any business in this country, regardless of what kind or form of organization it is, if that business makes a tie or binding obligation to distribute, in the form of patronage refunds to its customers, certain money, that money has never been regarded as income for that business and it has been excludable from computation of gross income. I am certain of that.
Mr. Mason. I know that is the ruling, but I am still keeping my mind on the question that if all business organizations made that kind of a contract with their customers, then we wouldn't be receiving $20,000,000,000 from corporations, the taxable corporations, as we are today, approximately.
Mr. VOORHis. You might not from the corporations as we are today, approximately.
Mr. Mason. Then we would have to depend on a levy from individuals, or on an excise tax or a general sales tax, would we not?
Mr. Voorhis. Yes, if it reduced its corporation income taxes that much you would have to. I frankly don't think that you need to be alarmed about that, Mr. Mason. I don't think that is liable to happen.
I am concerned about the fact that co-ops are not growing fast enough. We are having quite a time to try to push them forward. They now do about 2 percent of the Nation's business. We would like to see them do about 10 percent. We think they would be a helping influence. There are not so many people in the country who are willing to take the trouble of taking the responsibility for business control and management like co-op members have to do. It is a job to build them up.
Mr. Mason. I am not saying that I am greatly worried that all business organizations will contract in advance with their customers to hand back the dividends. I am not worried about that. But I am saying that that is the ultimate if you push your co-op proposition and take up all the other businesses through it. I am saying that that is the ultimate result.
Mr. Voornis. But that is not my proposal, Mr. Mason. My proposal is simply one of equitable treatment of two different kinds of things one, profits, and, the second, patronage refunds. That is all I am saying
Mr. Mason. Profits and patronage refunds, to me, to my mind, are practically the same. They are the results of doing business. And why we tax proprietorships and partnerships and corporations on different bases, we tax them because they have different immunities and different privileges and different opportunities. When we lery the tax on their profits, that is the actual way of measuring how much tax we, in theory, levy on their right to do business.
Mr. Voorhis. Well, now, we are talking about something entirely different, are we not! We are talking about franchise taxes, or things like that.
Mr. Mason. No; I know what a franchise tax is. Really, the reason we collect income taxes from corporations, and the reason we collect income taxes from partnerships is that we give them protection in their business and we give them immunities so that they cannot be sued if they are stockholders in a corporation, and a lot of other things. So, in actuality, we are really taxing them on their right to do business under laws.
Mr. Voorhis. You don't levy income taxes on partnerships. You levy those taxes on the theory that the ultimate recipient of the income should be the one to pay the tax, which is just exactly what happens in a co-op right now.
Mr. MASON. That is all, Mr. Chairman.
Mr. COOPER. I have just one word on that point, Mr. Voorhis. Onehalf of the corporations of this country don't pay any income tax. They get all the same protection and immunities as the taxpaying corporations, do they not?
Mr. VOORHIS. Exactly the same.
Mr. COOPER. So that takes care of that line of questioning, it seems to me. Thank you very much.
The CHAIRMAN. While those corporations do not pay any taxes when they do not make any profits, neither do these other people pay any taxes if they do not make any profits.
Mr. COOPER. You did not catch the line or argument Mr. Mason was advancing
Mr. MARTIN. Mr. Chairman.
Mr. MARTIN. Mr. Voorhis, I noticed in your closing statement you said that other witnesses would discuss section 101 (12) ?
Mr. VOORHIS. That is right.
Mr. MARTIN. But you said that you would answer questions about it even though you had not discussed it.
Mr. VOORHIS. I will be glad to.
Mr. MARTIN. How extensively are the large co-ops relying on or using 101 (12)?
Mr. Voorhis. In terms of numbers, I think I am correct in saying that less than half of the farmers co-ops that could qualify under 101 (12) do so. By volume of business, I would judge that more than half of the business is done by those who do qualify under 101 (12). But those figures, I believe, will be available from those people who are more familiar with them.
Mr. MARTIN. I ask you the question now in the hope of getting this information either from you or from one of the later witnesses. I have the impression that several of the larger co-ops have discontinued doing that.
Mr. Voorhis. The Grange League Federation has, and the Consumers Cooperative here in the city has recently done so. The Enid Cooperative that Mr. Mason mentioned has done so, and a great many more have done so in recent years.
So that, as I said, there is only one member of the Cooperative League, or I think maybe two, that still qualify under it. But I think it is important, Mr. Martin, to bear in mind that actually qualification under 101 (12) is essentially an agreement between that cooperative and the Government that they will operate on a nonprofit basis, and I think that ought to be borne in mind. If they don't, they lose the exemption.
Mr. MARTIN. There is one other point I would like to ask about 101 (12). The wording of that is:
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.
That leaves it within the power of the administrative agency, does it not, to limit that somewhat?
Mr. Voorhis. Completely, it seems to me. It leaves it up to them to make the right decision about what those reserves ought properly to be.
Mr. Martin. It has always been my view that the administrative agency has that power to adopt any reasonable limitations in the application of that. Mr. VOORHIS. That is correct.
Mr. MARTIN. The wording of it is very general, but I have seen other cases—say, for instance, the “Buy America” clause in the stockpiling program. The Government here wrote a regulation limiting the interpretation of that to 25 percent. They arrived at that; we did not put it in the law. It seems as though the agency has the same power here, without any change in the law by Congress; and if there is objection to the extension of this section 101 (12) to the larger co-ops, that could well be handled by the administrative agency without
any change in the law. Mr. VOORHIS. I think it could, Mr. Martin.
Mr. MARTIN. I am glad to have that view from you because I know there has been quite a little discussion about a change or the need for the change of 101 (12), that is, the clause that I have read. It has always been my opinion that that does not require congressional action, and that there is plenty of power there to limit. Of course if that is not exercised at all, and cooperatives and the Government agency get out of bounds in the use of 101 (12), it may be that Congress will have to consider limiting it. There are several ways it could do that.
I am particularly interested in keeping to the original conception of 101 (12). I feel that it has a very real place in the law. It came in there not at all by accident. I lived through that very really when I was a young man on a farm. I know something of the background of the warehousing acts and of the cooperatives in Iowa, and they have much the same approach. I would hate to see any gigantic organizations so use 101 (12) as to place the application of it or the availability of it to our farm marketing co-ops in jeopardy.
Mr. VOORHIS. Yes.
Mr. BYRNES. Mr. Voorhis, we have heard a lot about tax exemptions, and the implication is that in the field of cooperatives the
Internal Revenue Code is full of various provisions exempting co-ops from tax provisions of the code. Am I correct when I say that there is only one statutory exemption?
Mr. VOORHIS. You are absolutely correct.
Mr. BYRNES. In the whole Internal Revenue Code, and that is section 101 (12)?
Mr. VOORHIS. You are absolutely correct.
Mr. BYRNES. So that as far as any discussion of special statutory tax treatment is concerned for co-ops, it is limited to that one small area and that one individual exemption?
Mr. Voorhis. It is completely limited to that. That is the only place you can find any reference to it. Mr. BYRNES. That is all, Mr. Chairman.
Mr. MARTIN. Mr. Chairman, I have received a statement from Mr. 0. S. Swift of Des Moines, Iowa, with reference to the exemptions of section 101 (18) of the Internal Revenue Code. I ask unanimous consent to have this statement included in the record at this point. The CHAIRMAN. Without objection, it is so ordered. (The statement referred to follows:)
STATEMENT OF ORAL S. SWIFT, DES MOINES, IOWA, AS GENERAL COUNSEL OF AMANA
SOCIETY, AN Iowa CORPORATION OF Iowa COUNTY, IOWA This statement is made by one who has, as a lawyer, been connected with the Amana Society for the past two decades.
It should perhaps be suggested that the writer of this statement has never been a member of the Amana Society, does not profess the religious belief of its membership, but who has acted as its attorney and general counsel since prior to its reorganization in 1932. He has been primarily concerned with the legal aspects of the evolution of the group of members hereinafter referred to, as gleaned from his association with and knowledge of some of the more intimate facts in its economic, historical, and religious details, and with some of the legal and economic difficulties that have been encountered in the relationship between the old and the new organization, as well as the new organization and its stockholders-members. Facts of the past 20 years contained herein are set down by the writer of this statement from his personal knowledge hereof.
Prior to the reorganization of 1932 the predecessor corporation functioned in a manner similar to that of a large family of approximately 1,400 adults and minors for the spiritual and economic benefit and welfare of its entire membership. Because the organization competed in its economic endeavors with the world outside and because the various members held noninterest bearing trust certificate of the old society in unequal amounts—representing the amount deposited with the society by that member or his ancestors upon their admission to membership, the society was not in any sense internally communistic. Its internal functions, however, followed the "group benefit” method and plan; all worked for the common good; all members possessed the same religious belief, which was a religion peculiar to the society; all the earnings of the society went into a common treasury; the common treasury assumed liability for the well-being of the member to the extent of providing food, lodging, medical care, and other necessities of living, and all of the profits of the society were held to the common good in equal shares. Prior to the reorganization the activities of the Amana Society were substantially as the activities of the present Amana Society, although prior to 1932 there was lacking the unity of organization and function, centralized control and direction that now exist.
The present corporation continues, through its corporate structure, most of the functions and membership concepts of the former organization insofar as corporate activities are concerned, and they are reflected in the financial interest of the member in the corporate earnings and the voice of the individual member in the management of the business.
The group at Amana originated in Western Germany about the year 1714 as a Christian religious organization and the immigration to this country was for the purpose of escaping religious persecution in the old World (see A Brief History of the Amana Society or Community of True Inspiration, published prior to the reorganization in 1932). That religion remains the religion of the membership at Amana and its functions since the year 1932 are carried on by an affiliated nonprofit corporation named “Amana Church Society," which owns churches and a small amount of other property within the territory of Amana. It was found necessary for legal reasons to separate the secular from the temporal activities of the old corporation, but the religious aspects of the old corporation function today as they did throughout the history of the Amana people.
Each member of the present corporation owns one share of class A common stock therein, which entitles him to only one vote. (See par. (a), art. 3 of the articles of incorro 'ation.) There are approximately 800 members with 300 dependents, all of which are residents of the Amana territory.
This share of stock is not transferable but in the event of the death of the member or his removal from the territory of the corporation, this share must be surrendered to the corporation, which is, in turn, required to purchase and retire it or hold it as treasury stock, as provided in paragraph (b) and paragraph (d), article 3 of articles of incorporation of the society.
Dependents of members may, upon the payment of book value therefor, receive one share of this voting stock as a matter of right under certain conditions, as provided in paragraph (g) and paragraph (h), article 3 of the articles of incorporation.
This class A common stock is participating stock and it is the only participating stock and the only voting stock ever issued. Reduced to its elements, class A common stock is but a certificate of membership of the owner-member in the corporation, to which certificate there is attached a value reflecting the net worth of the corporation.
The only remaining stock ever issued is the prior distributive shares. These shares are prior in liquidation to the voting shares and now have a total value of less than one-half of the total value of the class A common shares. This stock pays a dividend of approximately 5 percent on its actual value only if and when earned during the calendar year, and this dividend does not accumulate. (See art. 3, articles of incorporation.) This stock was issued in 1932 to the membership upon the basis of years of service under the communistic form. It was intended to be and is a certificate showing the ownership by the individual of his undivided interest in the property of the corporation. It pays interest by way of dividend within a fixed limitation. All profits in excess thereof and all funds set up as reserves inure solely to the individual class A common shareholder. Because of reserves and payment of funded debts (in which the class A common shareholder solely participated), and because of increases in salaries to member-workers and a few nonmembers who are employed by the society, dividends paid on this low-grade security have been meager, and only one annual dividend has been paid in full.
As suggested above, in its functions and operations the Amana Society is but a large copartnership engaged in a common religious and economic venture, the members thereof being the class A common shareholders who participate equally in the profits of the enterprise and who have an equal voice in its management.
This quality has often been recognized by those who know the Amana Society best. Bertha M. H. Shambaugh in her article Amana in Transition, in the l'alimpsest (an official publication of the State Historical Society of Iowa) of May 1936, states: "In this corporation the stockholders, who are both owners and employees, have two main objects: remunerative employment under an individualistic wage system, and industrial profits sufficient to pay a reasonable rate of interest on capital investment."
Later in the same article it is stated :
“There is a growing realization that the economic prosperity of each individual member of the society depends large upon the economic prosperity of the business corporation.
“But a member of this new joint-stock company has this advantage over his brother of the outside world-he has a job, his wages are going up, he shares in any profit the corporation may make
*. It (the reorganization] meant the passing of the old communism and the adoption of a new order, characterized by a unique combination of capitalism, cooperation, and individualism.
"Oddly enough while following no pattern or precedent and with no intention of promoting a theory, the new Amana Society-with its one-man-one-vote democracy, ownership of the corporation by the workers in it, representation of the major industries on the board of directors, individual freedom that does not endanger the welfare of the group, and provision for the safeguarding of