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STATEMENT OF CHARLES W. HOLMAN, SECRETARY, NATIONAL MILK PRODUCERS FEDERATION, WASHINGTON, D. C.

Mr. HOLMAN. My name is Charles W. Holman, and I am secretary of the National Milk Producers Federation.

The CHAIRMAN. Will you give us the name of the gentleman who is seated to your left?

Mr. HOLMAN. I am accompanied by Mr. H. Willis Tobler, who may or may not answer some questions, if there are any asked.

The CHAIRMAN. About how much time will you require, Mr. Holman, for your statement?

Mr. HOLMAN. Considerably less time than it took Mr. Heinkle. I did not calculate the time, but I have a very short statement here of seven pages.

The CHAIRMAN. All right, you may proceed.

Mr. HOLMAN. I am appearing before your committee on behalf of the dairy farmer members of the federation. Our organization consists of 89 member cooperative associations and approximately 600 submember cooperative associations in 47 States. These member associations are owned by approximately 450,000 farm families engaged in dairying and producing approximately one-fifth of the production of milk and cream from farms in America. That totals, Mr. Chairman, something over 21 billion pounds of whole milk equivalent, as it is called by the technicians.

My appearance before your committee this morning is directed specifically to opposing any repeal or modification of section 101 (12) of the Internal Revenue Code. For several years, the voting delegates of the National Milk Producers Federation have adopted resolutions on this subject. Our position on this matter was reiterated at our thirty-fourth annual meeting held in Minneapolis in November 1950. At that time the following resolution was adopted:

During recent years the National Milk Producers Federation has led the fight against the proposal to double-tax producer members of bona fide farmer-owned and farmer-controlled cooperative associations. We pledge the continuance of this effort, and we oppose any change in sections 101 (12) and (13) of the Internal Revenue Code.

Our organization is fully cognizant of the problem confronting this committee in its efforts to secure the necessary revenue with which to place our Federal Government on a sound fiscal basis. In this connection, the following resolution was adopted at our recent annual meeting:

We view with deep concern the ever-increasing national debt. We believe that a sound national fiscal policy should provide for the necessary taxes to balance the budget and allow for the general reduction of the national debt. However, such taxes must be reasonable and nondiscriminatory. They should not unduly discourage private initiative. Neither should such taxes be used as a means of social reform.

We are cognizant of the fact that exceptions must be made during abnormal times such as are confronting the Nation today in its rearmament program. However, even under such circumstances, every effort should be made to be on a payas-you-go basis. Although it appears that (because of the critical international situation and the Government domestic policies) deficit financing will be continued, we urge that all nonessential governmental expenditures be eliminated. With the present high level of employment, the tax base should be broadened and tax rates placed high enough to balance the budget as nearly as possible. Also during a period of inflation as at present a sufficiently high tax rate will

contribute greatly to controlling further inflationary pressures and may avoid imposition of price ceilings and wage controls.

Between the two resolutions I have just quoted we maintain that there is no contradiction of position.

As to the type of organizations making up the National Milk Producers Federation, they are incorporated either as nonstock or stock cooperatives. Practically all of those engaged in marketing fluid milk and cream are nonstock cooperatives. They have no capital except that provided by loans from the members for capital purposes, or such necessary reserves as are required for bad debts, depreciation, and so forth. The loans for capital purposes are usually deducted from proceeds of sales of milk and cream, and are represented by interestbearing certificates of indebtedness issued to each member at the end of a fiscal year. These certificates are usually maturable at the end of from 5 to 10 years, and are on a revolving basis.

Our members engaged in the manufacture and marketing of dairy products are usually set up on a stock basis, but frequently the amount of stock which any member can own is very limited. Irrespective of the amount of stock held by individual farmers, these cooperatives are operated on the basis of one-man one-vote. Also, the stock capitalization of these cooperatives, whether they are the locals or the central sales agency for the locals, is usually too small to permit adequate and efficient business operations. Consequently, the capital usually is augmented by issuance of preferred stock, or by borrowings from both private and Federal cooperative banks.

Such cooperatives must necessarily finance their operations from the proceeds of the sales of the products handled. Because of the continuous uncertainty of market prices, these proceeds must provide not only the reserves which the fluid milk nonstock cooperatives must have, but also additional reserves to allow for depreciation in the value of the product either in warehouses or en route to markets, but not sold. For example, I know of several large-scale cooperative butter-handling organizations which must take all of their members' product in the spring when production is flush. They must store it, generally in public warehouses. They must defray the costs of storage and risk possible changes in prices to lower levels than those at which the product was acquired. This obligation to accept all of the product shipped by members is not shared by the cooperatives' commercial competitors, who at any time may exercise their power to refuse shipments of milk or cream from farmers. Also, these organizations customarily pay their members monthly, even though all of the butter on which payments are made may not have been sold at the time the payments were declared.

That is true throughout all of the cooperative operations that I know of where the sales are made by central selling agencies, such as Land O'Lakes Creameries in Minnesota, United Dairy Farmers Association of Washington State, Challenge Cream & Butter Association of California, and the Iowa State Brand Creameries of Iowa.

It should be readily seen that there is a great deal of ebb and flow in this type of operation, and the balancing of books at the end of the fiscal year does not mean that all transactions have been completed. Organizations of this type may also suffer unforeseeable operating losses due to price changes among the several manufactured dairy products. That is particularly true in States like Wisconsin, where a

shift in the price of cheese may suddenly cause a flow from a creamery or the shift in the price of evaporated milk might cause extra milk from both the members of cheese factories and the members of creameries.

Consequently, unless the dairy cooperative plant is equipped to manufacture and handle practically every type of the major dairy products, it stands to lose by shrinkage in volume due to loss of patrons. Hence the need for reserves to offset such losses.

Amid all the hubbub which has been created by enemies of the cooperative movement, let us raise the question as to why, in earlier years, the Congress granted exemption to bona fide farmer-owned and farmer-controlled cooperative associations organized as described in the present internal-revenue law. This exemption states:

For the purpose of marketing the products of members or other producers and turning back to them the proceeds of sales less the necessary marketing expenses on the basis of either the quantity or the volume of the products furnished by them, (b) for the purpose of purchasing supplies and equipment for the use of members or other persons and turning over such supplies and equipment to them at actual cost plus necessary expenses.

It should be noted that this language closely follows the spirit and language of the Capper-Volstead Act of 1922, which gave Federal authorization to agricultural producers organized for the collective processing and marketing of their products. To me, it seems noteworthy that the congressional conception of the Capper-Volstead Act has affected many other laws, including those governing the raising of taxes and the legislative framework of the governmental institutions engaged in the lending of money to cooperatives. Aside from that, the Capper-Volstead principles have affected State legislation and even the interpretations of the courts.

I speak of this because, from time to time, I have been asked by various friends of mine who are members of the Congress as to whether it would be wise to establish a line of demarcation between little cooperatives and big cooperatives. The answer to that question is "No," because the Congress, in enacting the Capper-Volstead Act, recognized the quasi-public character of our agricultural cooperatives. It recognized that they perform a very broad community service. It recognized that they serve to discourage the imposition of undue margins and spreads by proprietary handlers, who, until the advent of the cooperatives, were accustomed to paying farmers any price they pleased and raising all the possible profits that the traffic would bear. The history of the development of the cooperative movement in this and other lands is that the presence of a cooperative in a community enables both member and nonmember producers to obtain consistently fairer returns out of the so-called consumer's dollar. So, if a line of demarcation were made between small and large cooperatives, it would be easy to find hundreds of thousands of cases where neighbors on farms would receive unequal treatment. If an exemption were given to a smaller cooperative, this of course would be reflected back to the member of the farm. Across the road his neighbor who belonged to a larger cooperative handling the same commodity would find his organization under a competitive handicap because of the failure of the Government to grant equal rights.

It is therefore imperative that bona fide farmer cooperatives have the right to set up reserves that are exempt from Federal income taxes.

To require such reserves to be allocated in order to be given tax exemption would destroy the very purpose of such reserves. I want to make it very clear that I am talking about reasonable reserves. If there is any criticism with respect to the size of such reserves, the decision rests with the Bureau of Internal Revenue as to what constitutes a reasonable reserve under section 101 (12).

It has been brought out in testimony before this committee and elsewhere that if these reserves were to be taxed because of the repeal or modification of section 101 (12), the amount so paid to the Federal Treasury would be relatively a very small amount. I believe it has been estimated to be about $18,000,000 annually. This being the case, it has been urged that the amount of money so involved "would not hurt" any cooperative. I want to emphasize that the amount of money involved is not the issue. The harm to cooperatives would not be in dollars and cents, but in crippling their operations by taking away their right to set up reasonable tax-exempt reserves. Also, such action would put them into an unfair competitive relationship with their competitors engaged in private, profit-making business.

Furthermore, to repeal or modify the provisions of section 101 (12) so as to impose Federal income taxes on certain reserves would be most unfair in view of the mandatory requirements of some State laws for the establishment of reserves by farmer cooperatives. It has been customary for some of these State laws to specify the amount of reserves that are to be set up.

I will cite an actual case in another field which is typical of a number of our milk-bargaining cooperatives. These organizations as a rule do not own any plant facilities but bargain for their milk with the commercial distributors. Sometimes this is done under the Federal milk-order system, but more frequently it is done outside of that system. Because of the fact that the daily commercial life of many distributors is in jeopardy, no one knows when one of the smaller ones will turn turtle into bankruptcy. It has been necessary for these milk-bargaining associations to set up a type of insurance reserve against losses to cover this and other contingencies. To illustrate further, the average milk producer always has a 6-week supply of milk unpaid for in the hands of the dealer. Consequently, if a dealer fails in business, the producers supplying him stand to lose a considerable portion of their gross income unless revolving reserve funds are set up by the association for the payment of losses of this character. The case I have in mind is an association of less than two thousand producers supplying a very large market who have found it necessary to build a reserve of more than a million dollars. The money to build this reserve is taken each month on an equalized basis from the paychecks of each producer. The deduction is recorded on the books of the association and the fund is revolved on a 6-year basis. It is really administered as a trust fund although, of course, the fund is held in the name of the association and most of it is invested in Government bonds.

About 6 years ago a dealer purchasing milk from the association failed. Immediately the association paid off its member producers in full for the milk owed them by this bankrupt. One of the officers of the association appeared before the court and was made an administrator of the business. After its affairs were put in order the asso

ciation attempted to negotiate the sale of the property, but no distributor in the community would buy it at that time. To salvage losses, the association took over the property and managed it for 412 years, putting it on its feet. At the end of that time there were buyers in plenty. The property was sold and the net profits put into the revolving fund.

This is a case wherein it would have been against the interest of the farmers themselves for the association to have given them notices of allocation of the amounts withheld. Those amounts were taken only from what the association could save on the handling rates charged to each member on each hundredweight of milk. The custom of the association in this case is to prorate the losses incurred in each fiscal period and, should there be any gains, to prorate them also. In no case does the association have anything for itself, but its producers have an excellent insurance fund on which they annually paid income taxes as they receive their rotated payments.

I have intentionally refrained from re-presenting evidence heard on prior occasions by this committee. Voluminous testimony has been given as recently as February 1950 with respect to the growth of farmer cooperatives and the volume of business transacted. I have made no attempt to touch on the technical or legal aspects of this subject. My statement has been specifically limited to unallocated reserves as provided for in section 101 (12). That appears to me at least to be the issue that this committee is considering.

We recognize that, under our present defense emergency, sacrifices must be made by everyone. The individual farmer members of the National Milk Producers Federation are willing to and are making such sacrifices. This, however, does not mean that we accept the doctrine that "the end justifies the means." To increase the tax burden of the individual dairy farmer is one thing, but to compromise a principle by imposing Federal income taxes on the savings of farmer cooperatives is entirely another matter.

We oppose any attempt to sabotage a principle that is as right today as when it was originally enunciated by the Congress. We therefore suggest to the committee that it continue to leave unchanged the principle embodied in the Capper-Volstead Act and section 101 (12) of the Internal Revenue Code. We always have had and will continue to have complete confidence that this committee will not succumb to the propaganda of the enemies of farmer cooperatives who ostensibly advocate "tax equality"-in quotes I might say-but in reality have as their direct objective crippling and annihilating farmer cooperatives.

That completes my direct statement.

Mr. EBERHARTER. Mr. Chairman.

The CHAIRMAN. Mr. Eberharter.

Mr. EBERHARTER. Mr. Holman, on page 6 of your statement you say:

I want to make it very clear that I am talking about reasonable reserves. If there is any criticism with respect to the size of such reserves, the decision rests with the Bureau of Internal Revenue as to what constitutes a reasonable reserve under section 101 (12).

What yardstick is used in arriving at the decision as to what is and what is not a reasonable reserve?

Mr. HOLMAN. I do not know what principles the Bureau uses, but I do know that they look into this question and they discuss it

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