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We are unalterably opposed to this suggestion. There are many arguments to be listed in support of our view which, however, I believe has been exceptionally well stated in the official view of the United States Department of Agriculture, as set forth in a statement by the Secretary of Agriculture in February 1950. I quote:

There is, of course, no legal or moral basis for taxing patronage dividends or refunds. These belong to farmers as a result of (a) underpayments by a market. ing cooperative to the agricultural producers who market their products through the cooperative, or (b) overpayments made by the patrons of a purchasing or service cooperative.

The law is now well established that any organization, cooperative or otherwise, that is under a legally binding contractual obligation to pay patronage dividends or refunds may exclude them in computing its income-tax liability. This is true because the contractual obligation prevents the amounts in question from ever having the status of income, and income taxes may be required under the sixteenth amendment only on income.

The patronage dividends or refunds are not and cannot be income to the cooperative any more than trade discounts or rebates are income to an ordinary corporation. Just as trade discounts and rebates are reflected in increased income of the recipients through decreased costs of doing business, so, too, are patronage refunds reflected in the increased income of cooperative patrons either through a decrease in the cost of doing businss or an increase in the prices received for the members' products.

These increased incomes to the recipients are, of course, subject to Federal income taxes. It should be noted that any business concern desiring to do so may by appropriate contracts with its customers place itself in a status comparable to that of a cooperative insofar as the exclusion of patronage dividends or refunds in computing income taxes is concerned.

In the report issued by the Treasury Department in October 1947, entitled, “The Taxation of Farmers' Cooperative Associations,” the point that patronage refunds can be excluded by others than cooperatives from gross income is well stated, as follows:

The exclusion of patronage dividends from corporate gross income is not the exclusive privilege of cooperation (cooperative) associations. Any corporation making payments to its customers under the conditions prescribed by the Commissioner of Internal Revenue and the courts is granted the same treatment. It should be noted, however, that in the case of cooperatives, unlike the case of the typical ordinary corporation, patrons receiving rebates are also the owners of the business,

The conditions which the cooperative associations must meet if refunds made to their patrons are to be excluded from the gross income of the association may be briefly stated. First, there must have existed at the time of the transaction with the patrons a contractual or other definite obligation on the part of the cooperative to return any net proceeds to him in proportion to patronage without further corporate action.

Second, if only members of the association are eligible to receive patronage dividends, exclusion is not allowed on that portion of such distribution which represents profits from transactions with nonmembers. On the other hand, it is held to be immaterial whether refunds are distributed in the form of cash, stock, certificates of indebtedness, or credit notices. All such forms of payment are regarded as the equivalent of cash distributions in the hands of patrons, the theory being that they are cash payments automatically reinvested under provisions of the charter, bylaws, or other contracts previously agreed to by the patrons.

If there is a new factor in the situation today, aside from the great need for revenue, it is the reference to taxation of cooperatives made recently before this committee by Secretary Snyder, when he said:

To the extent that collective buying and selling results in lower buying prices or larger income to patrons or members, these savings enter into their taxable income as individuals.

However, funds which are not returned to members of these mutual enterprises are available tax-free for expansion in competition with other taxable businesses.

We should seek to apply the corporation income tax to such retained funds. This would not impair the ability of cooperatives and mutual savings and credit institutions to perform their traditional functions of collective buying and selling or pooling of savings for investment.

It is not entirely clear just what Secretary Snyder proposes. Certainly, patronage refunds of a member, on which he pays an income tax even though reinvested in a cooperative, are not tax free. These are allocated reserves of which the patron is notified.

In any event, it is clear that Secretary Snyder's views and that of Secretary Brannan last year are not in complete harmony. Because of the large responsibility for the promotion of farm cooperatives vested in the Secretary of Agriculture by the Congress, and because Secretary Brannan understands this subject exceptionally well, it seems entirely fitting and proper that the Secretary of Agriculture should be requested by this committee to present his views.

Grain cooperatives, who are still fighting an uphill battle for farmers to improve the efficiency of grain marketing, favor no change in the present law. Their members believe that cooperatives are improving, and will continue to improve, the ability of farmer members to pay Federal income taxes.

They believe that the improvement of marketing efficiency and of farm income are the chief reasons for the existence of local and regional cooperative grain marketing associations which they have created.

Grain cooperatives began in the 1880's. Laws had been passed chartering the grain exchanges, and farmers came to the conclusion that as these exchanges grew stronger the farmer's bargaining power was weakened. They felt that prices for their grain were being set without their having a voice in the matter, often by a small group

of traders with no real interest in the economic welfare of farmers.

Warehouse charges were high, weights and grades were often crooked, and margins in the handling of grain between the farm and the consumer were excessive. The middlemen often took margins of 15 to 25 cents a bushel for doing practically nothing.

Great fortunes were accumulated in the cities by grain handlers in a time when there were no income taxes. The farmer decided to do two things: To protest politically and to organize cooperatives to capture for himself any excess in margins.

The first grain cooperatives were started by farmers to provide local agencies for marketing grain. Farmers wanted, and got, honest weight, honest grades, an honest appraisal of the dockage and dirt in their grain which had always been exaggerated. Farmers wanted to get back for themselves the maximum market price for their grain.

They had some successes, but a lot of failures, too. The failures were often due to underfinancing, poor management, and inexperience.

One of the chief weaknesses was that the type of organization they wanted and needed required a different type of charter than was available under the standard corporation laws, and the number of members was too large to form an ordinary partnership arrangement.

Finally laws were passed to charter cooperatives, to legalize what are really economic partnerships. The requirements of these charters vary considerably under the various State laws.

The local grain cooperatives and their members soon recognized that control of their local marketing machinery was not enough.

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They needed a voice at the big terminal market places, and so local cooperatives organized regional or federated sales agencies with representatives at Minneapolis, Chicago, Kansas City, Omaha, Indianapolis, Portland, and other centers.

I should like to say here that I think members of this committee should at all times have in mind, so far as section 101 (12) is concerned, that although there are some 10,000 farmer marketing cooperatives in the United States, there are only a few, a very few, of these so-called large cooperative marketing organizations. Practically 90 percent of the cooperatives that are helped by section 101 (12) are small creameries, elevators, filling stations, and organizations of that sort, many of whom do not have capital of much more than $50,000, if that.

Some of the exchanges refused to give them membership, but an amendment to the Commodity Exchange Act adopted by Congress finally took care of that after a struggle of 25 years or more.

What have these grain cooperatives done?

1. They have greatly improved the reliability of weights and grades—helping the whole grain industry, as well as the farmer.

2. They have set the pace in cutting margins for handling grain. This has benefited noncooperators, as well as cooperative members.

3. They have paid back to farmers millions of dollars which they have realized through hiring experts to merchandise grain at local, subterminal, and terminal marketing centers.

4. They have made it possible through building programs to provide for more storage space so that farmers could hold their grain for marketing throughout the year, rather than glutting the market at harvest time when prices are usually lowest.

Have farmers escaped taxation in this process of building marketing institutions which constitute one of the finest achievements in American agriculture? The answer is "No," for the following reasons:

At the conclusion of each fiscal year, the grain cooperative adds up what it has gained for its members through expert merchandising, through standard storage charges, and other services. Then, after having paid its expenses, if there is any balance remaining it is distributed to the people the balance belongs to—the patrons-in proportion to the business each contributed to the total volume of business done by the cooperative. On this share of patronage that each farmer receives he pays taxes.

Notice that I said "any balance remaining." There are times when, for the year, there is no balance-there is sometimes a deficit. In that case, money has to be borrowed, or the members assessed, to provide more working capital.

The financial success of a farm cooperative is not a certainty. Many of the early mistakes, especially those of the early wheat pools, have been corrected. Many members regard their cooperatives as successful even if patronage distributed is not substantial. They remember the days when they were at the mercy of men in the market place, when often false and misleadling information was spread to extract from the farmer his wheat, corn, barley, oats, rye, flaxseed, and soybeans at unreasonably low prices.

Every grain cooperative has at least one annual meeting. At these meetings you have free speech at its best. Decisions are made, after discussion, by majority vote.

At most of these some, if not a majority, of the members want some improvement in service. In recent years, since the coming of combines and a series of good crops, the big demand has been for more elevator space. A lot of grain is harvested while it is damp, or even wet. It will spoil in a farmer's bin unless he is prepared to move it repeatedly so as to dry it out.

Farmers know that you can do the same job cheaper and better in a big local or terminal elevator run mostly by machinery, supervised by an expert.

So, instead of accepting their patronage credit in cash, they have often voted—and it is usually unanimously—to have patronage issued in stock or certificates of indebtedness. Sometimes interest is paid on this money which is, in effect, lent to the cooperative.

Farmers feel that it is fair to do it this way because the amount each farmer lends to his cooperative is in proportion to the use each makes of the cooperative.

Now, whether the farmer gets his patronage credit in cash, in stock, or a certificate of indebtedness, or by credit to an allocated reserve, he must put this credit in his personal income tax return for the year in which it is paid to him, and at its full face value. It is part of his profit on the year's business.

It was not entirely clear to him for some years because internal revenue collectors interpreted the matter differently. It is clear now, entirely clear, since the issuance on April 13, 1950, by Mr. E. I. McLarney, Deputy Commissioner of the Income Tax Unit, Bureau of Internal Revenue, of Income Tax Information Release No. 2, entitled “Patronage Dividends," as follows:

The earnings (savings) of farmers' cooperative marketing and purchasing associations, distributable to their patrons on the basis of the amount or value of produce furnished by them to the cooperatives or the value of supplies and equipment purchased by them from the cooperatives, generally are distributed to the patrons as patronage dividends in the form of cash or in one or more of the following forms:

Capital stock of the cooperative;
Revolving-fund certificates;
Retain certificates;
Certificates of indebtedness;

Letters of advice as to net amount retained. For Federal income-tax purposes, the amounts which are includible in the gross income of the patrons to whom such distributions are made are not restricted to amounts distributed in cash. Distributions by cooperatives in the form of capital stock, or in any form other than cash, should be included in the gross income of the patrons to the same extent that such distributions would be included if paid in cash. This rule is applicable to patrons who file their Federal income-tax returns on the basis of cash receipts and disbursements as well as those who file their returns on the accrual basis.

I might here answer a question that was asked by a member of the committee this morning. This ruling was secured largely as the result of the efforts of the farmers' cooperatives. There was a good deal of confusion among farmers as to what should be included in income, and what should not. This ruling settled it.

All of the cooperative organizations that I am familiar with immediately published the ruling, so that I am sure the farmers up in the Northwest anyway, know what they have to pay a tax on, what they have to include in their income-tax returns.

I believe farmers as a group are very conscientious in making out their income-tax returns. At the annual meetings I attend in the principal grain-producing areas, I find that they are eager to get the facts and that they want to do the right thing in making an accurate report of income and in paying the tax due to the Government.

It is true that cooperatives through loyal membership, good management, and expert salesmanship have introduced tremendous competition into the handling of grain. The farmer has profited greatly through this system of doing business at cost instead of paying out a big margin for the service. The consumer has also benefited because quality has been improved and standardized and the flow of grain to market is more orderly.

It has been obvious for some time that it is the competition which farmers have introduced through their cooperatives that has caused complaints.

If the opposition to cooperatives confined themselves to complaints, it would not be too serious. Actually, however, they have libeled cooperatives, accusing them of being “IV-F dodgers," and even of being communistic, when the truth is that cooperatives are a self-help device promoted and approved by American farmers—the ablest group of farmers in any country of the world, and the most independent.

More than a million American farmers market grain cooperatively through 2,500 local associations and 20 regional, federated cooperatives.

If these farmers can increase their net returns, their profits, through marketing through their own agencies, they will be better able to pay the higher taxes which are inevitable under the present emergency. They will not be able to do that if the marketing machinery which they have so laboriously built is destroyed to satisfy their competitors

. That would mean a return to the days when the grain farmer was voiceless in the market place, when margins were high and often unreasonable.

Now, Mr. Chairman, I had to get ready for this hearing on very short notice. Some time ago I wrote an article for the Duke University School of Law, which was published in their symposium issued in the summer of 1948. That article is written in objective fashion. I should like very much to simply file it and make it a part of the statement I am making to you

today.
The CHAIRMAN. Is it a duplication of what you have said?
Mr. RUMBLE. No, sir; it is not.
The CHAIRMAN. How much is there of it?
Mr. RUMBLE. About 11 pages.

The CHAIRMAN. Without objection, it is so ordered, and you may file it as part of your statement.

Mr. Mason. Mr. Chairman, since that article which you have consented to put in the record is a part of the symposium of Duke University, it seems to me that the argument on the other side that is in that symposium should also be a part of the record as a comparison between his argument and the other.

The CHAIRMAN. If there is a request, we will do that.
Mr. Mason. There is an argument on the other side of the question?
Mr. RUMBLE. Yes, there is.

Mr. Mason. Then I ask that the argument on the other side of the question also be included in the record.

The CHAIRMAN. Without objection, that will be done at this point.

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