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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. O. 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 Palimpsest (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 2/2 * * 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

not only the economic life but spiritual and cultural values as well-incorporates many of the ideas suggested by modern economists for the regeneration of the outside world."

To permit a correct interpretation of Amana in Transition it must be understood that commencing with the reorganization of 1932 the individual members have worked for the society for wages or salary; that almost all able-bodied members are employees, servants, or executives of the society (which fact is necessarily true because each must live in society territory to retain his membership) and there is today but little difference between the wage paid for the most menial labor and the salary or compensation of the highest-paid executive.

In various of its economic activities the Amana Society is largely noncompetitive with outside industries or enterprises. It operates about 25,000 acres of land, situated in Iowa County in eastern Iowa. This real estate consists of farm land, timber pasture, and timber tracts. In excess of 50 percent of the capital investment of the Amana Society is in this real estate, including buildings, and machinery and equipment used in connection therewith-all of which, excepting for a few acres, was owned by the predecessor corporation. The greater portion of the net income from this land comes from agricultural pursuits and is derived from the raising of corn and small grains, livestock, dairying, and other agricultural enterprise directly connected with or incidental to a large farming operation. The timberland, in addition to furnishing fuel to the membership and their dependents, furnishes lumber for the mills and factories. It is readily recognized that an agricultural pursuit within the United States is not a competitive enterprise under present marketing conditions or any marketing conditions that have ever prevailed in this country.

Other of the principal present enterprises of the society are the operation of the woolen mill, meat-curing establishments, bakery, and cabinet shop. These operations also are largely noncompetitive activities. Neither the mill nor the cabinet shop have been modernized because of the necessity of furnishing employment to the membership. At the mill one individual operates a limited number of looms; whereas, in the modernized mill one individual may operate 10 or more looms. At the cabinet shop the furniture built is custom made, There is no quantity production, and the cabinet work and the finishing of the products are largely performed by hand. Accordingly, the products of the mill and the shop are placed upon the market on a quality basis, and little, if any, attempt is made to market the products of either of these industries on the basis of price competition.

There are within the Amana Society several small retail outlets established primarily for the purpose of serving the residents of the Amana territory and the farm lands adjoining and abutting it. Since these are the only retail outlets in the vicinity, it is readily seen that these enterprises are noncompetitive.

The Amana Society has long been recognized as a religious or apostolic organization for the purpose of income taxation under the provisions of the Internal Revenue Code, such classification having been recognized by the Treasury Department (under the provisions of subsec. 18 of sec. 101 of that code) in the year 1938.

Under the provisions of this subsection 18, section 101, every member of the Amana Society reports his share in the profits of the corporation, whether the same is distributed or not, as a part of his income and personally pays the tax thereon. In each calendar year payments by members upon this profit which was not distributed in that year amount in the aggregate to many thousands of dollars.

We believe that this corporation is in an unique position insofar as its purposes and objects are concerned, and that because of the fact that it is in effect a copartnership operating within a corporate structure and is largely noncompetitive, the present method of Federal income taxation is fair to the corporation and to its membership. That method of taxation should, in all fairness, continue, either in the present form or a substitute therefor.

The matter is of concern to the society and its membership. It is only fair to say that it is doubtful that the society can continue to exist if it is required, under its unique form of individualistic organization, to conform to the identical tax pattern of orthodox corporations.

For the benefit of those members of the Ways and Means Committee of the House of Representatives who may have had occasion to inquire into the somewhat intriguing history of the Amana Soicety, it should be stated that the ideas of the maker of this statement concerning the organization are perhaps more coldly analytical and objective than the writers of the various histories and

treatises available concerning the Amana Society whose authors have been concerned primarily and almost solely with the sociological and religious development of the organization.

The society will thank the committee for such consideration as may be given this statement.

The CHAIRMAN. The committee will recess at this time until 1:30 o'clock this afternoon.

(Whereupon, at 12: 40 p. m., a recess was taken, the committee to reconvene at 1:30 p. m. the same day.)

(The following statement was submitted for the record:)

STATEMENT OF WILLIAM W. PRATT, EXECUTIVE DIRECTOR, PENNSYLVANIA CREDIT UNION LEAGUE

To the Honorable Chairman and Members of the House Ways and Means Committee of the Congress of the United States of America:

The undersigned, the executive director of the Pennsylvania Credit Union League of 1522 Cherry Street, Philadelphia, Pa., submits the following in opposition to the repeal of the tax-exemption provision of the Federal Credit Union Act as intended by H. R. 240.

PENNSYLVANIA CREDIT UNION LEAGUE REPRESENTATION

The Pennsylvania Credit Union League represents the majority of the 670 credit unions operating in the Commonwealth of Pennsylvania, of which 575 are chartered under the Federal law. The 670 credit unions having approximately 350,000 members, the majority of whom are wage earners in the lower middle and low-income groups.

CREDIT UNIONS ARE NOT IN GENERAL COMPETITION WITH TAXPAYING BUSINESSES

A credit union is defined by the laws of Pennsylvania and the United States as "cooperative associations or society-for the purpose of promoting thrift among its members and creating a source of credit for them." A credit union cannot carry on its activities outside its field of membership, hence, it is not in general competition with other forms of business which extend credit.

The field of membership of a credit union is limited to groups having a common bond by reason of occupation or association within a well-defined group or area. This has been interpreted by the governmental administrative authorities to mean having a common employer and the situs of employment within a particularly defined area. The other groups falling under the term "common bond" by reason of association are church or fraternal groups. The groups eligible for charters are limited by a strict interpretation of the law.

Credit unions because of the integrated nature of their membership are limited by law, extend credit on the basis of security extending by reason of the common bond of the membership. Such a lending policy is certainly not in competition with the lending agencies engaged in doing business with the general public. The income earned by a credit union are substantially the result of the voluntary and uncompensated services of its officers and directors, as the majority of the administrative officers and directors of a credit union are wholly uncompensated or partially uncompensated. It is for that reason a greater majority of the credit unions are able to distribute dividends (interest) to their members and to build up the minimum reserves required by law. Hence, taxes on the earnings of a credit union will be a tax resulting from the wholly or partially gratuity services rendered by one human being interested in the welfare of his fellow human being who form the membership of the credit union. Such a tax would obviously be unfair.

A TAX ON THE TAXABLE INCOME OF CREDIT UNIONS WILL NOT BE PRODUCTIVE A tax imposed on a credit union's earnings will in effect be one on surplus only. Thus if a tax is imposed it undoubtedly will allow the deductions of dividends (interest) paid to members in the same manner as a bank or saving fund society is permitted to deduct interest paid to depositors. A deduction will also be allowed for the minimum reserve required by law.

Federal credit unions have been in existence since 1934, and only a very few of all the credit unions were in operation prior to that date. At this time the average accumulated surplus represents only 3 percent of the invested capital of the average credit union. This means that there is only about $200 per year per credit union of net taxable earnings.

The repeal exemption provided by section 18 of the Federal Credit Union Act will open Federal credit unions to taxation by every State and local taxing authority. Hence, in States where legislature may be hostile to credit unions (usually at the interest of those who oppose credit-union operations) credit unions may be taxed to such an extent that they could not continue to serve their members.

SUMMARIZATION

It is submitted that credit unions should not be taxed because

1. Credit unions are not in general competition with taxpaying loan businesses. 2. The taxable income of a credit union is produced by the wholly uncompensated and partially uncompensated services of the administrative officers and directors.

3. The tax will not be productive to the degree that those who advocate the tax would lead you to assume.

AFTERNOON SESSION

The committee reconvened at 1:30 p. m., upon the expiration of the

recess.

The CHAIRMAN. The committee will be in order.

The first witness on the calendar this afternoon is Mr. Hubert M. Rhodes, Credit Union National Association, Washington, D. C.

Will you please give your name and address to the stenographer, for the benefit of the record, and the capacity in which you appear.

STATEMENT OF HUBERT M. RHODES, REPRESENTATIVE OF THE CREDIT UNION NATIONAL ASSOCIATION, WASHINGTON, D. C.

Mr. RHODES. My name is Hubert M. Rhodes, representative of the Credit Union National Association, with headquarters in Madison, Wis., but I am located in Washington, D. C., as the Washington representative.

Mr. Chairman and gentlemen, at this hearing I am representing the Credit Union National Association, which has as its members approximately 8,000 of the 10,000 credit unions and Federal credit unions operating in the United States. We have credit unions in every State in the Union. The legal structure of credit unions and Federal credit unions is for all practical purposes identical. Approximately half of our credit unions operate under State law and half under the Federal Credit Union Act.

The Federal Credit Union Act which was passed by Congress and became law in June of 1934, defines a Federal credit union as follows:

A Federal credit union is hereby defined as a cooperative association organized in accordance with the provisions of this chapter for the purpose of promoting thrift among its members and creating a source of credit for provident or productive purposes.

The Federal Credit Union Act and various State laws under which credit unions function exempt credit unions from taxation except that they do pay taxes on real property and on tangible personal property. The 10,000 credit unions operating in the United States are opposed to any legislation which would alter their present tax status.

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