They are not little lambs. And these big wolves in sheep's clothing, as I put it, are destroying legitimate taxpaying organizations, one after another, swallowing them up, buying them off. And yet these wolves in sheep's clothing, masquerading as such, claim the protection and encouragement and the tax immunity that was granted in the first place to those lambs, those small farm groups that had banded together to get better prices for their crops.

Mr. VOORHIS. May I comment?

Mr. MASON. And it is a situation that has to be corrected, because these wolves have to be separated from the sheep.

Mr. VOORHIS. Mr. Mason, this wolf of Kansas City that you mention, as it happens did buy a refinery once from a very big oil company. It happens that prior to that purchase the property taxes paid on that refinery amounted to $35,000 a year, and afterward they went back to $65,000 and the co-op paid the taxes.

Mr. MASON. Keep property taxes out of this because we grant that they all pay property taxes.

Mr. VOORHIS. All right. Then, in the second place, that co-op is in the petroleum business. It enables some 300,000 farm families to own their own sources of petroleum. It adds to farm income all over that area.

In the next place and mark this carfully-the total volume of business that the CCA in 1948 did was about $55,000,000, which was equal to the net profit after taxes of one major oil company in 55 days.

Mr. MASON. Now, you are comparing it with major oil companies that do pay taxes. Let's keep to this one issue, that the Consumer Cooperative Association in Kansas City made a certain profit and paid, as I get it

Mr. VOORHIS. Paid a full tax on it.

Mr. MASON. No; they paid $400,000 in taxes to the Treasury. If they had paid on the same basis as the competing corporations, they would have had to pay about $2,000,000.

Mr. VOORHIS. No, sir; they did pay on the same basis of competing corporations, Mr. Mason. They had no exemption whatsoever. They were taxable on every dime of money that passed through their hands execpting that which was disposed of in patronage refunds. Mr. MASON. Yes; that is right; I will agree with that. But they did not pay on what was disposed of in patronage refunds, while their competitors have to do that.

Mr. VOORHIS. But their competitors have the money. Now, let us take an example

Mr. MASON. No; I have your theory, and that is that what it handed out does not belong to them and they should not pay on it. That is true. We will say that is true, we will agree on that. But the other fellow has to pay on it and then hand it out.

Mr. VOORHIS. All I am saying is that the CCA is treating with a bunch of local co-op filling stations, while their competitors are treating with local filling station outlets. If CCA pays back patronage refunds to those local co-op filling stations, CCA does not pay a tax on those patronage refunds, but the local filling station does. Their competitors don't pay those back in patronage refunds to the local filling stations, they keep it and that is the difference. If

they keep it, they are taxable on it because it is a profit to them. They don't dispose of ownership. They don't give it back to the local filling stations. If they did, it wouldn't matter whether they were a co-op or not, they would be no more taxable than the cooperative on

it.

Mr. MASON. That is true. We will agree to that, and we have repeated that. That is, if they hand it out and they don't pay on it. But if all of them did that, where would we get our taxes from? Mr. VOORHIS. The local filling station would be that much better off.

Mr. MASON. Now I want to take up a little analysis of Mr. Loos' testimony before the Senate Finance Committee, testifying against withholding on cooperative dividends last year. He cited tables

and I have them here-and I cited them in a speech I made on the floor a week or two ago. One table covers the Southern States Cooperative for the year ending June 1949. That table shows that out of $240,000-and I am just using odd figures-in patronage dividends paid out, $228,000 of them were for less than $10.

Mr. VOORHIS. Yes.

Mr. MASON. There is another one, the Missouri Farm Association. Of their $255,000 in patronage refunds, $12,000 were for less than a dollar, and $9,000 were from $1 to $10. Practically all of them were down there in those low amounts. I summarize his testimony with this statement:

According to the summary prepared and presented by Mr. Loos himself, out of a total of $929,000 in individual payments made by various co-ops of patronage dividends, $563,000, or 60 percent of the total, were for less than $1, and $285,000 of them, or 31 percent of the total, ranged from $1 to $10.

The significant fact in his summary, Mr. Voorhis, was this: Of the total amount of money represented by these $849,000 payments, only 23.8 percent went to the farmers themselves. One out of 334 of the earnings, more than 76 percent, were distributed to the recipients of less than 8.6 percent of the payments.

In other words, the farmer patron gets practically nothing out of it in the way of dividends, $1 to $10, while the few at the top get the bulk of the money.

Mr. VOORHIS. Well, those are all farmers.

Mr. MASON. You mean the few at the top are farmers?

Mr. VOORHIS. They are farmers whose purchases were larger. Mr. MASON. Then, Mr. Voorhis, what is the difference between a farmer co-op where the 10 percent gets the 76 percent of the proceeds, and the 90 percent get the 24 percent of the proceeds? What is the difference between that and the corporation which pays its stockholders 70 or 80 percent and the customers get nothing!

Mr. VOORHIS. Well, the difference is that in the co-op it all depends on how much patronage was had. It all depends on how much the various farmers bought from that co-op, and that is the whole basis of patronage refunds.

If one farmer bought much more than another one, his patronage refund would be accordingly greater. That is all.

All that those figures show me is the very wide spread of the benefits among lots of people in small amounts. I don't see a darn thing the matter with it, frankly.

Mr. MASON. It looks a bit different to me on that basis.

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. VOORHIS. 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 levy 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. Mr. Chairman.

The CHAIRMAN. Mr. Cooper.

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.

The CHAIRMAN. Mr. Martin.

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.

79120-51-pt. 2- -46

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 accumu lated 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. MARTIN. That is all, Mr. Chairman.

Mr. BYRNES. Mr. Chairman.

The CHAIRMAN. Mr. Byrnes.

Mr. BYRNES. Mr. Voorhis, we have heard a lot about tax exemp tions, and the implication is that in the field of cooperatives the