annual meeting the other day. Incidentally, while I am on that, may I divert a minute to say that I think Mr. Mason is somewhat wrong in his conception of the nature of the lawsuits that the Government brought against the Maryland-Virginia Milk Producers' Association. Judge Holtzoff's ruling, as I recall it, was primarily not about pricing but about the fact that the milk was sold on a classified-use plan. He held that that plan, not being under the Federal order system, was not legal. Of course, that case is going up, we think, to the United States Supreme Court and it has by no means been determined that Judge Holtzoff is right, because if it is right we will have to go back and revert to the infamous old one-price plan which prevailed from the sixties to the nineties, in which the dealer paid the farmer just a flat price and put more profit than you can imagine in the way he handled the milk. It was the cooperatives of the country who were responsible for the inauguration for this classified-use plan.. Pardon me, I just wanted to get that into the record before I forgot about it.

Mr. KEAN. I am glad to hear about the participation of your members. I only wish that the stockholders of corporations would take a like interest because I think then the management of corporations would be a great deal better if the stockholders, instead of mailing proxies, actually attended and studied the questions of the corporation management.

I have one more question: You have discussed reserves for protection against losses, and you say that these should not be taxed. Would you consider a reserve for expansion a reasonable reserve, and should it be tax-exempt?

Mr. HOLMAN. Do you mean allocated or unallocated?

Mr. KEAN. Well, either one. If it were allocated it would now be tax-exempt. If it were unallocated in many cases it would be taxable. Mr. HOLMAN. I am not very familiar with some of these very large cooperatives that were started originally as cooperatives but which have given up their exemptions. Some of them have been mentioned in this present hearing. I know positively that they got to where they were and it was a business proposition for them to hold their exemptions.

Take, for example, Kansas City, or take GLF, of New York State. When they gave up their exemptions they also gave up the necessity which Congress put upon them of paying their nonmember patrons equally with the payments made to the members. So they simply became a big chain store, a rural chain store operation by giving up the exemption.

In our old organization, when we make loans for expansion purposes, we usually get the funds from the Government or from a private bank or both. If we get it in any part from members, it is always represented by certificates of some kind.

Mr. KEAN. Of course, when you borrow from the bank, it has to be paid back.

Mr. HOLMAN. Yes.

Mr. KEAN. And you pay back out of earnings?

Mr. HOLMAN. Yes.

Mr. KEAN. Now, the thing that has been bothering me

Mr. HOLMAN. May I interrupt to say that we pay that on deductions on earnings.

Mr. KEAN. Well, that is a matter of definition.

Mr. HOLMAN. No; it is an entirely different thing.

Mr. KEAN. The thing that has been bothering me is this matter of allowing a cooperative organization to expand all over the lot on tax-exempt earnings in competition with earnings of businesses that are taxed.

Mr. HOLMAN. I don't see why a cooperative doesn't have a right to expand if it borrows money.

Mr. KEAN. I think it has a right to expand, but I also think that on that portion that it uses to expand it ought to pay taxes the same as everybody else does.

Mr. HOLMAN. I can say that when you undertake an expansion project you can't undertake it on the month-to-month deductions from your members except as security. You have to borrow. Consequently, all borrowing has to be paid back, but you don't pay it back out of earnings, you pay it back out of deductions from the price of milk.

Mr. KEAN. That is all. Thank you.

Mr. HARRISON. Mr. Chairman.

The CHAIRMAN. Mr. Harrison.

Mr. HARRISON. Mr. Holman, referring to this matter of competition with taxable business, of course, that is the basis upon which the most of the complaints I get on this business are founded. The local merchant feels that it is an unfair advantage that the cooperative has against him. He feels that he has to compete with the cooperative, yet he is taxed and his competitor is not.

Now, you are a marketing cooperative; is that not correct?
Mr. HOLMAN. Yes, sir.

Mr. HARRISON. Are there any local dry-goods salesmen in the rural towns where you compete for the farmers' dollar?

Mr. HOLMAN. I don't know.

Mr. HARRISON. I mean that you don't sell to the farmer, do you? Mr. HOLMAN. The only purchases that any of our organizations do is the purchasing of plant machinery and milk cans and sometimes boilers and things of that kind.

Mr. HARRISON. Now, what is it that you sell to the farmer-I mean that any of your cooperatives could sell to the farmer?

Mr. HOLMAN. The only thing that we would sell to the farmer would be milk cans, and in this particuluar community boilers, because the health department requires the milk cans to be sterilized by steam in most cases. I don't think, as far as I know, that there is any fertilizer handled. There may be.

Mr. HARRISON. How about cattle feed?

Mr. HOLMAN. Sir?

Mr. HARRISON. You sell cattle feed to the farmers?

Mr. HOLMAN. Yes; one or two of our organizations. What they do, of course, is that they are not actually selling to the farmers. They are simply buying this thing for the farmers and handling it for them. Mr. HARRISON. On the whole, your operation is that of a marketing cooperative.

Mr. HOLMAN. They sell to their members. They do not do business with nonmembers.

Mr. HARRISON. But on the whole your operation is that of a marketing cooperative and that operation produces increased wealth in

a 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. HOLMAN. 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. HOLMAN. Those would be the commercial handlers.

Mr. HARRISON. And they buy from the farmer?

Mr. HOLMAN. 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 of his product?

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. HOLMAN. Yes.

Mr. HARRISON. Mr. Holman, the position you take as to unallocated reserves, that is, that unallocated reserves should not be subject to income tax, is at variance with the position taken by the Farm Bureau 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. Mr. HARRISON. Well, it is modified enough that they advocate the tax while you are against it.

That is all, Mr. Chairman.
Mr. CURTIS. Mr. Chairman.
The CHAIRMAN. Mr. Curtis.

Mr. CURTIS. Mr. Holman, in regard to your revolving fund that you mentioned as being 6 years in length, in the case of that cooperative who owns the revolving fund?

Mr. HOLMAN. The producers. However, I explained that in this instance the association has to serve as their agent and have the

79120-51-pt. 2-55

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:

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 have 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 necessary 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.