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à community, does it not? It puts dollars into the hands of the customers of the local merchants. Isn't that true? And those are dollars that otherwise would not be there?

Mr. HOLMAN. That is correct. Mr. HARRISON. And it adds to the wealth of the community by handling the selling of the farmer's products; isn't that true?

Mr. HOLMAN. That is true. We think that in most communities local merchants

are among our best friends. Mr. HARRISON. Well, I don't know about your particular case. The local merchant has his difficulties. Then you add dollars into the hands of the customers of the local merchant ?

Mr. HOLMAN. That is correct.

Mr. HARRISON. And you in no way compete with him; is that correct?

Mr. HOLM AN. That is correct.
Mr. HARRISON. Now, you do compete with certain purchasers of

? the farmer's products to some extent, do you not?

Mr. HOLMAN. Yes. Mr. HARRISON. Now, who would they be? Mr. HOLM AN. Those would be the commercial handlers. Mr. HARRISON. And they buy from the farmer? Mr. HOLM AN. Yes, sir. Mr. HARRISON. Now, of course, in doing so they are not the agent for the farmer; is not that true? Mr. HoLMAN. No, sir; they purchase direct. Mr. HARRISON. And you are an agent for the farmer in disposing Mr. HOLMAN. That is correct, sir. Mr: HARRISON. And you pass on to him the proceeds of what you sell his product for?

Mr. HOLMAN. Yes. sir. Mr. HARRISON. Part of the money you give him cash and the other part of it you give him later?

Mr. HARRISON. Mr. Holman, the position you take as to unallocated income tax, is at variance with the position taken by the Farm Bureau inserves, that is

, that unallocated reserves should not be subject to and the Grange, is it not?

Mr. HOLMAN. We are simply enunciating our position. Mr. HARRISON. And that is a different position than that assumed by the farm organizations I have named, isn't that correct?

Mr. HOLMAN, I understand they have a slightly modified position. tax while you are against it. Mr. HARRISON. Well, it is modified enough that they advocate the That is all, Mr. Chairman. Mr. CURTIS, Mr. Chairman. Mr. CURTIS, Mr. Holman, in regard to your revolving fund that

The CHAIRMAN. Mr. Curtis. tive who owns the revolving fund? you mentioned as being 6 years in length, in the case of that cooperaMr. HOLMAN. The producers. However, I explained that in this

association has to serve as their agent and have the

of his product?

Mr. HOLMAN. Yes.

instance the

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money or the securities in its own name, but it is owned by the producers.

Mr. CURTIS. Will the additions to the revolving fund that will be made, say, at the end of this fiscal year, belong to the members who do business with them?

Mr. HOLMAN. I didn't get that. Mr. CURTIS. The point I am getting at is this: You say it is a period of 6 years. There will be a different group of farmers, a certain amount of changes.

Mr. HOLMAN. That is true; there may be quite a few.

Mr. CURTIS. The way you handle that is that those funds are earmarked to the exact farmers that did the business in the year that the addition was made to he revolving fund; isn't that correct?

Mr. HOLMAN. That is true. The new one is blended in as the old is retired out, but they all get their money back.

Mr. CURTIS. In other words, when in 1950 you pay out some money that you have held since 1944, it will not go to the members on the membership list as of 1950, but to those on the membership list of 1944?

Mr. HOLMAN. It goes to the person or his heirs from whom it was taken.

Mr. CURTIS. I think that is all I will take time for.
Mr. GRANGER. Mr. Chairman.
The CHAIRMAN. Mr. Granger.

Mr. GRANGER. Mr. Holman, I noticed that when you were making your statement you referred to bona fide farm cooperatives, and that especially on page 6 you say:

6 It is therefore imperative that bona fide farm cooperatives have the right to set up the reserves that are exempt from Federal income taxes. Are we to assume the repetition of the term "bona fide farmer cooperatives” there may be some organizations claiming to be farm cooperatives who are not?

Mr. HOLMAN. There may be.
Mr. GRANGER. Was the language you used there used deliberately?

Mr. HOLMAN. Yes; it is a term which has grown up in the cooperative movement so as to be perfectly sure that an organization that calls itself a cooperative is a cooperative. There are a lot of farmers

' business organizations that don't necessarily qualify as cooperatives.

Mr. GRANGER. But you did not intend to infer in using that language that there are any farmers' cooperatives that are operating that are not bona fide farmers' cooperatives?

Mr. HOLMAN. Well, as I just said, there are a lot of farmer cooperatives

Mr. GRANGER. I will put it this way: Do you know of any organizations that are operating as cooperatives which are not, in fact, farmer cooperatives?

Mr. Holman. I know of a great many cooperatives or, rather. organizations that were incorporated under the old corporation laws before there were any cooperative laws and who, in their bylaws hare brought about cooperative practices. Now, I would be the last one in the world to say that those organizations are not cooperatives just because the haven't changed over technically under the law.

Mr. GRANGER. I see. That is all, Mr. Chairman.

Mr. HOLMAN. I might say that I know several thousand.
Mr. Mason. Mr. Chairman.
The CHAIRMAN. Mr. Mason.

Mr. Mason. I have just one question, Mr. Holman. On the bottom of page 4 and at the top of page 5 of your statement, you quote the present internal revenue law that covers farmer-owned and farmer-controlled cooperative associations. That is a very simple law and it is very plan and specific. Would you be willing to have your exemptions come outside of this particular quotation pruned down to this language

Mr. HOLMAN. No, Mr. Mason. I only used that quotation to show the similarity of philosophy between the present internal revenue law under 101 (12) and the Capper-Volstead Act.

Mr. Mason. Why didn't you quote other parts of the law which are not as clear as this and are not as reasonable as this?

Mr. HOLMAN. At the time I wrote this paper—and I wrote it rather hurriedly in about an hour and a half—it did not seem to me it was decessary to quote all of the portions of a section which the committee is so familiar with.

Mr. Mason. If the exemption for farmer-owned and farmer-controlled cooperatives were limited to this particular thing that you cite, we wouldn't have any trouble with this whole problem.

That is all, Mr. Chairman.
Mr. MARTIN. Mr. Chairman.
The CHAIRMAN. Mr. Martin.

Mr. Martin. Mr. Holman, from your testimoney I take it that you do not know just what the Internal Revenue officials are apt to call a reasonable reserve nor what purpose they consider a necessary purpose?

Mr. HOLMAN. No, sir: I do not.

Mr. MARTIN. Would you say that it was generally true throughout the cooperatives that there is no clear-cut idea what they might consider reasonable and necessary?

Mr. HOLMAN. I know that each cooperative knows what it needs, as a rule. Most of these problems are very difficult and very complicated from the standpoint of setting them down into usage. It becomes a matter, as one of the Congressmen said, of the members themselves seeing to it that the reserves are not excessive.

Mr. MARTIN. Do you think it will be possible for the internal revenue officials to furnish the cooperatives and this committee with some indication of what they think the yardstick should be?

Mr. HOLMAN. I think that is pretty hard to give you. I don't think you have a rule for the price of milk in every district. I don't think that you can have a national price on milk nor do I think you can have a National or Federal ordinance for milk. I think it would be very difficult to have a very broad rule limiting the reserves. But it . might be possible that the Treasury has in its possession evidence that will completely controvert my present belief.

Mr. MARTIN. From that viewpoint it would be most difficult for Congress to attempt to write any yardstick into the law, would it not?

Mr. HOLMAN. I think so. I think it is a regulatory responsibility rather than a legislative one.

Mr. MARTIN. Whenever I read this section of the law I think of it as a rather definite statement of the view of Congress providing for the exemption of reasonable reserves for necessary purposes.

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The only thing that makes me ask this question of you about the possibility of Congress acting on the matter is the fact that apparently the officials administering the law have not given much indication to the co-ops just what their interpretation of those terms is.

Mr. HOLMAN. They have been folowing this pretty closely, considering the type of cases that we are called to help our member associations with. Many of those cases have to do with violations of the provisions with regard to equal treatment of nonmembers with the members. I have know cases where some of our own organizations were trying to hold for themselves all of the returns, and the Treasury picked them right up. I know of one case where there was $10,000 in back taxes called for because of infringements.

Mr. MARTIN. The handling of a reserve could have considerable interest in that way also.

Mr. HOLMAN. You see, the Treasury has its men all over the country, and these cooperatives are pretty well combed from time to time. "I think there would not be any great difficulty in establishing regulations, but not a national uniform regulation.

MARTIN. I feel it would be most difficult for Congress to be more specific. On the other hand, I have a feeling that the Internal Revenue officials have not given the cooperatives themselves any yardstick or guide. Then the question comes up as to whether the field is so complex that it is too difficult to do that.

Mr. Holman. Here is what I suspect is happening. In the earlier years many cooperatives applied for letters of exemption, about half of them in all. After they got letters of exemption, the Treasury just forgot about them. But since this agitation has been on, I think the Treasury has begun to pick out and has begun to study the actual operations of these organizations more carefully than it did in the past.

Mr. MARTIN. Have they restricted or forced the discontinuance of practices by some of the cooperatives with regard to the reserves?

Mr. HOLMAN. As to reserves I don't know. But I do know as to some of the other practices that they have. Many of these practices resulted largely from the fact that the people did not know what the regulations were.

Mr. MARTIN. From the testimony given in these hearings so far, I would still be somewhat at sea, if I were asked myself, to state what the cooperatives should expect to be able to put into a reserve under this exemption. I haven't any clear-cut idea myself right now from the testimony today what any yardstick might be. I have an idea that they do oversee and inspect it, but I haven't been informed what they consider a yardstick. I don't even know whether they can. I know it is a vastly complicated field because of the range of operations.

If I thought that the Treasury Department officials could recommend some yardstick or outline some yardstick to us, I would ask for it as a part of our hearings, because I think we ought to know. But I don't want to ask them for an impossible thing. I just don't want to be unreasonable about the matter myself. But it strikes me that we need information regarding the potential yardstick. For my part, unless it were very clear-cut, I would rather leave the law as it is now than attempt to write those yardsticks into the law through congressional enactment.

That is all, Mr. Chairman.

Mr. HARRISON (presiding). Are there any further questions? If not, Mr. Holman, we thank you for the information you have given the committee.

Mr. HOLMAN. I wish to thank the committee for its courtesy.

Mr. Reed. I would like to ask a question. Is Mr. Karl Loos in the room?

Mr. Loos. Yes, sir.
Mr. REED. I would like to have you step up just for a minute.

Mr. HARRISON. Mr. Loos, will you come forward, please? Will you state your name and address for the record ?

STATEMENT OF KARL D. LOOS, WASHINGTON, D. C.

Mr. Loos. My name is Karl D. Loos. I live here in Washington707 Munsey Building, Washington, D. C.

Mr. HARRISON. What is your occupation?
Mr. Loos. I am a lawyer.
Mr. HARRISON. All right, Mr. Reed.

Mr. REED. Mr. Loos, there seems to be a little confusion in the questions that have arisen as to the difference between profits and margins. Will you just throw a little light on that subject?

Mr. Loos. I will be glad to try, Mr. Reed.

The patronage refund is paid out of the margin that the cooperative receives, which is the difference between what it may receive and what its expenses are. The profits of the corporation are also the difference between what the corporation receives in its ordinary business and what its expenses are. But there is this essential and fundamental difference: In the case of a cooperative, there is a preexisting agreement, a binding obligation, whereby that margin between the receipts and expenses is to go back to the customer, to the patron, usually the member of the cooperative or the nonmember patron, as the case may be. So that difference never becomes the property of the cooperative as an entity separate and distinct from the members.

On the other hand, in the case of the ordinary business corporation, that difference is the property of the business corporation; and it goes to it, and through it to its investors and not to the patrons, or customers, from whom it originally came.

Now, that is the essential, fundamental difference. Perhaps it can best be illustrated if we take a marketing cooperative which is one type, while a purchasing cooperative is another. I think you must keep them separate because their transactions are so different.

Take a marketing cooperative that receives goods, let's say apples, which it sells for its members, and which it is obligated to pay to its members

Mr. REED. Under its contract.

Mr. Loos. Under contract. At the time it receives the apples all the proceeds of that marketing less the marketing expenses, so that every payment it makes, the initial advance and every other payment, is just another payment on that obligation to pay the proceeds less expenses.

It is just exactly the same as Railway Express Agency, for example, which is composed of railroad corporations that sell their transportation services in small packages to the Railway Express Agency. The Railway Express Agency is a cooperative, and the agreement between

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