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the railroads that form the cooperative and the Express Agency is that all proceeds which the Railway Express Agency may receive are refunded to the railroad corporations that are members in proportion to the transportation they furnish.
Now, that is just an additional payment for that transportation, and it isn't any profit to the cooperative—the Express Agency—as is the case with the apples, or anything else, that the farmer cooperative may sell for its members.
Now, take the case of the purchasing cooperative. The purchasing cooperative buys articles, such as fertilizer, for example, and distributes it to the members under contract that they will purchase that and deliver it to the members at cost, which is what the fertilizer costs them less their operating expenses.
Now, for purposes of convenience, at the time they distribute the fertilizer, at the time they send it to the member, they bill him for the price; and that is more than they know it is going to cost. There is a margin in there, and the difference between that billed price and the final margin, which they are obligated to return to that member, is the margin. It is no more profit to the cooperative than would be the case of General Motors, for example, buying a part from somebody under a contract under which the parts manufacturer agrees to make that part at cost plus a 6 percent profit, or some other percentage of profit. If at the end of the year it is found that the parts manufacturer has received more than its contract called for, more than cost plus a 6 percent profit, the portion that is above that is refunded to General Motors and isn't income to the parts manufacturer.
It is just like the renegotiation of contracts by the Government. It is like that in essence except that in the case of the cooperative you have the contract before the transaction occurs and you don't renegotiate. There is an absolute contract to return everything above cost.
Mr. REED. The whole basis of law and the whole basis of civilization rests upon contracts; does it not?
Mr. Loos. That is correct.
Mr. Mason. Mr. Loos, while you are testifying I want to ask you a question. Suppose we have price ceilings—and it begins to look as though we are going to have them and a person receives a ceiling price for his product from the cooperative and then receives a subsequent patronage dividend. Would that be a violation of the ceiling price law?
Mr. Loos. No, the first idea is not correct; that is, that he receives the ceiling price from the co-op. There isn't any sale from the farmer to the co-op. It is something that is sometimes stated in terms of a sale, but the real sale that will be governed by the price ceiling will be the sale that the cooperative makes to the trade.
Mr. Mason. But the cooperative makes the sale to the farmer of fertilizer and a lot of other things.
Mr. Loos. Well, you are talking now about a purchasing cooperative. I thought we were talking about a marketing cooperative.
Mr. Mason. I am talking about the farmer and the consumer, and I am wondering whether a price ceiling law would be violated if a subsequent patronage dividend was handed out.
Mr. Loos. Of course, if you are talking about the purchasing cooperative which has, we will say, sold some fertilizer to a farmer and
charged the price ceiling for it, and then made a refund to him later on, that would be a reduction in price below the price ceiling, and that would not be in violation of a price ceiling law. The only place where any question could occur, it seems to me, would be in the case of a marketing cooperative.
Mr. MASON. Take the case of a marketing cooperative that buys wheat from its members at the ceiling price
Mr. Loos. Yes, but that is just what I say you do not do when you give your wheat to the cooperative. You are giving your wheat to the cooperative to sell for you, and the cooperative is bound by the price ceiling
Mr. Mason. The cooperative does not take possession?
Mr. Loos. Well, whether it takes possession or not, it is making the sale; and the only sale that is governed by the price ceiling and the only thing that is a sale within the price ceiling law that existed under the OPA-of course, that question has not been raised yet, but that is the way it was under the former price regulations—the only price that would be subject to control would be the price at which the cocperative sold the wheat to the buyer.
Now, whatever it could get out of the price, it could refund to the farmer.
Mr. Mason. Were you present yesterday when Dr. Saxon analyzed this situation?
Mr. Loos. Yes, I was. I do not remember that he said anything about price ceilings.
Mr. Mason. No, he did not; but he did analyze what you are trying to analyze, and that is the difference between a margin and a profit. He made an analysis exactly opposite to that of yours, which shows that two great minds can work in opposite directions.
Mr. Loos. I do not think it shows that, Mr. Mason, so much as it would indicate to me that Dr. Saxon is not familiar with the way cooperatives operate.
As I understood his economic analysis, he said that you have riskless interest, riskless wages, riskless rent; that everything else above that is profit for the assumption of risk, and he assumed that a cooperative assumes the same risk that a business corporation does. That is not true at all. There are a lot of cooperatives that operate without assuming any risk whatever.
Furthermore, he made the statement that the rule with respect to patronage refunds was just the result of a lot of double talk. Now, that is not the case at all. There are a lot of eminent judges and decisions of the circuit courts of appeals that have held to that rule. There are a lot of eminent lawyers who have sat in the general counsel's office of the Bureau of Internal Revenue and have issued these rulings over a period of 20 years or more; and there is no double talk there at all.
If anybody would do a little straight thinking, he would see what the difference is; and it is a very fundamental and complete difference.
I think Dr. Saxon was entirely wrong, but because of his unfamiliarity with the way cooperatives actually work.
Mr. Mason. Mr. Loos, you testified before the Senate Finance Cominittee against deductions from the dividends of cooperatives last year, and you did a magnificent job of proving, from your standpoint, that it would not be practical. You really won your battle, because you had that provision removed from the law. I give you credit for that.
Mr. Loos. Well, I think you are giving me a lot of credit that I am not entitled to.
Mr. Mason. I think, however, that when you won that battle, you went a long way toward losing your case-or losing the war, shall we put it that way—on this equal taxation question, because of the figures you cited. I have used them a dozen times to prove that the farmer himself, so far as his receipts in patronage dividends are concerned, gets very little.
Ninety percent of the farmers, according to your own figures, get from $10 down, and 10 percent of them get the bulk of the profits, if we call them profits.
Mr. Loos. Yes, that is quite true, Mr. Mason, that those are the figures; but I think you have drawn erroneous conclusions from them. Of course, these cooperatives that were represented in that testimony-I have forgotten how many there were, although I think there were 10 or 12 regional cooperatives, some of them very large purchasing cooperatives, having a great many members, or rather, a great many patrons.
Now, many of those patrons of those large purchasing cooperatives are not farmers. Many of them, by number, are people who will go into one of those places and buy something or other, maybe some fertilizer for the lawn, or something like that. Not everybody that comes in is a true farmer.
Now, the volume of that business is very small in percentage to the total volume. It is very much less than the 15 percent that is allowed for that type of business. But the total number of individuals involved is very large, and many of these dollar refunds go to that type of individuals. It is not the farmers. If you added all of the patronage refunds made by all of the cooperatives—that is, the total number of checks issued-you would have a great many times as many checks as there are farmers in the country.
Now, the farmers, the real farmers that are in farming for a living, are the ones that are in this 10 percent. Of course, there are a lot of them in the other group, too. But you must always remember that many of these farmers belong to more than one cooperative. Many of them belong to half a dozen, and they may get $10 from this one, $50 from another, a dollar from another, and so on. You cannot judge simply by the total number of patronage refund checks issued by a few cooperatives. Even this small percantage represents, for just a few cooperatives, over 80,000 farmers who are benefiting by patronage refunds to the extent of $10 or more.
Mr. Mason. You stated, Mr. Loos, or at least I thought you stated, that the co-ops do not take risks and that they do not have risk capital.
Mr. Loos. I said that many co-ops do not take risks. Many do take some risks, but the risk that they take is much less than the risk that the man who buys and resells takes.
Mr. Mason. It is not a question of degree of risk. It is a question of trying to arrive at what is the proper term for the gains from capital invested. According to Professor Saxon, wherever you have invested capital and take a risk, that is a profit.
Now, we have had testimony here that they have to set up reserves to take care of losses, and that means risks.
Mr. Loos. Certainly that type of cooperative that has to set up reserves to anticipate possible losses is one which has an inventory, for example, or one, such as in the case Mr. Holman spoke about-the butter cooperative—that makes its payments monthly to its patrons before they sell all of their butter. They have a risk; yet just think how much less that risk is.
You see, the cooperative has a contract under which its members take just the difference between what the cooperative gets and what its expenses are. Think how much less that risk is than the risk that the dealer takes or the commercial manufacturer who goes out and buys milk and manufactures butter and maybe a month later gets it all sold. He has taken all of the risk of possible decline in the market.
Mr. Masox. Let us forget about the degree of risk, because there are various degrees, and let us stick to the point that if capital is invested and a risk is taken, that means profit. Now, Mr. Holman said it did not mean profit.
Mr. Loos. It does not necessarily mean a risk, because there are thousands of corporations that
Mr. MASON. There might be a loss.
Mr. Loos. Yes; and the degree of risk is in proportion to the degree of profit.
Mr. Mason. You can have a loss, on the one hand, and you can have a profit, on the other, and you cannot separate the two at all from invested capital.
Mr. Loos. Well, I think you can, Mr. Mason. I do not think it follows at all that because economic profits flow from capital, from risk capital, you cannot make an agreement, as a cooperative does, under which their total cost of operation will be deducted from their proceeds of marketing or their expenses of the distribution of supplies, and any economic profit that there may be in that transaction becomes a part of the obligation of the cooperative to make the refund to the patron, so there is nothing left for the cooperative.
Mr. Masok. Mr. Loos, I studied economics some years ago, and I learned the truth of certain fundamental principles. I will have to say that you are an excellent-what is that old Greek—Sophicles.
Mr. Loos. I am sorry, but I did not study Greek enough to recognize just what that means.
Mr. Mason. That is the word from which the word “sophistry”
Mr. Loos. Well, I rather gathered it was along that line. But I assure you, Mr. Mason, that I am not endeavoring to speak in that vein. I believe, I firmly believe, that if you will just analyze these transactions one by one and follow them through to the result, you will reach the same conclusion that I have, that is, that when you make a refund to the customer, to the patron, there just is not any income to the cooperative.
Mr. Mason. That is all. Mr. HARRISON. Mr. Loos, maybe we can help Mr. Mason a little bit. He referred to this sale that the farmer makes to the marketing cooperative. Now, in the good old days when the English people had
enough money to buy some of our Virginia apples, the orchardist used to ship his apples to importing houses who sold them on the auction in Liverpool. The importing house would give that orchardist an advance on these apples. Then, when they were sold on the auction, sometimes the sale was bad and the man who made the advance would not come out very well. In other words, there was that risk. He took the risk when he made the advance.
At other times, not frequently enough, unfortunately, the fruit would sell at the auction at a substantial advance, and the commission merchant would deduct his commission and pay the rest of the purchase price to the farmer.
Now, certainly that farmer did not sell his fruit to that commission merchant. You certainly would not charge income taxes to the commission merchant based on a percentage of what he sold these fruits for over and above the advance, would you?
Mr. Loos. No, sir.
Mr. Loos. It is exactly parallel to the situation of the cooperative as a selling agency.
Mr. REED. Reference has been made here to the professor. I have great respect for professors, but sometimes, you know, they are a little bit absent-minded. I remember the case of a professor of Cornell who was explaining gravitation. He went out to a bridge about 125 feet above a gorge; he held his watch in one hand and a stone in the other hand, and said to his class, “Now, you observe.” He dropped his watch, and held tight to the stone.
Mr. MARTIN. I will not ask any questions at this point. I do want to take this opportunity to tell the committee that Mr. Loos is one of our great Iowans. His father was the head of the department of economics of the University of Iowa and made a distinguished record there. He was head of the department at the time I was a student there before World War I. I have known Mr. Loos since our school days there together at the University of Iowa, and he rates as a great economist and a great lawyer, and we are very proud of him.
Mr. Loos. Thank you very much, Mr. Martin.
By direction of the chairman, the committee will now adjourn until 1:30 o'clock. (The following was submitted for the record :)
HOUSE OF REPRESENTATIVES,
Washington, D. C., March 7, 1951. Hon. ROBERT L. DOUGHTON, Chairman, Ways and Means Committee,
House Office Building, Washington, D. C. DEAR COLLEAGUE: Enclosed is copy of a letter from John M. Van Horn, secte tary, Mutual Orange Distributors, Redlands, Calif.
May I request that it be made a part of your record when the matter is brought before the committee. Sincerely yours,
HAROLD A. PATTEN,
Member of Congress.