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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 $40,000 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.

Mr. 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

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 aboye 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. REED. Thank you very much.

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 cooperative 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.

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