Now add $1,000,000,000 as the Labor Department's estimate of business done by city consumer cooperatives and $500,000,000 as the volume of business being done by dealer-owned cooperatives and we arrive at a minimum grand total of about $14,000,000,000. Even this omits the large commission business done by cooperatives.

Profits on this volume of business may be assumed to be the same as in the case of most taxpaying corporations in the wholesale and retail fields. Official figures indicate that profit per dollar of sales has varied between slightly more than 4 percent and slightly more than 6 percent. Assuming an average of 5 percent, the taxable income of all cooperative corporations would have amounted to $700 million in 1949. The present corporate income tax rate scales up to 47 percent. Assuming an effective rate of 42 percent as the average on large and small corporations, the tax collection possible from cooperative business is about $294 million and if the corporate rate is increased to 55 percent, as has been proposed, the collection would exceed $350,000,000 a year.

This, gentlemen, is the figure that you should consider in your deliberations. It is the realistic sum that cooperatives should pay in income tax to the Government. It has not been adjusted for the $2,000,000 to $4,000,000 of income tax presently paid by nonexempt cooperatives that escape full taxation by the patronage-dividend route. The amount involved is small and is more than offset by factors which tend to minimize and understate cooperative profits. Completely exempt cooperatives use abnormally high depreciation rates since they are not bound to keep their books in accordance with statutory practice. Others create capital reserves out of income that would not be recognized by the tax collectors. Still others deduct as expenses amounts spent for capital improvements.

A defense tactic that is frequently used these days by the cooperatives in the effort to retain their full tax exemption is the attempt to direct attention to other loopholes in the tax laws and their suggestion that these should be closed before the section 101 organizations are touched.

The low taxation of life insurance companies is a case in point. But, may I call your attention to the salient fact that no competitive situation is involved. The big life insurance companies, both stock companies and mutuals, are taxed on exactly the same basis-and if the amount is smaller than it should be, as some Members of the Congress have been known to state, it is still true that no one in the life insurance business is being hurt because his competitor has an unfair advantage, as is the case where regular corporations and cooperative corporations are concerned.

Attention is called too by the cooperatives to the amount of revenue that is being lost through the failure of stockholders to report dividends that they receive and to pay tax on those receipts. Last year, when the revenue bill of 1950 was being written, the Treasury reported that some $170,000,000 of new revenue would be collected if the Congress would provide a withholding tax of 10 percent on all dividends paid by corporations to their stockholders, and the Ways and Means Committee wrote into the bill exactly that provision.

What the cooperatives conveniently forget is that your committee provided that the 10 percent withholding tax should apply also to the patronage dividends paid by cooperatives to members and patrons, and that this part of the tax would produce some $30,000,000.

Cooperative spokesmen fought the withholding tax vigorously in the Senate Finance Committee. I have seen no recent suggestion from them that it be instituted now along with the tax on corporate dividends. It seems that the shoe pinches on that foot.

There are other so-called loopholes that have recently been widely advertised and discussed in the cooperative press, but I think I have given you sufficient examples to demonstrate clearly that they are brought up at this particular time in an effort to take the attention of your committee off this problem of competitive tax exemption and steer it into less controversial directions. It is likely that in the natural course of these hearings you will look into all such extraneous matters, but I ask you not to be diverted from this important matter of tax-exempt business income and the billion dollars of new revenue that can be had by closing the loopholes which I have discussed with you.

Cooperatives escaped taxes on $32,600,000,000 of business volume during World War II, and in those 4 years avoided taxes amounting to nearly $1 billion, while other businesses were paying up to 80 percent. That gave the cooperatives the ability to expand on tax-free income during wartime and gave the cooperative corporations an overwhelming advantage with respect to growth possibilities.

Since World War II, cooperatives have gone into a multitude of new businesses and have expanded their operations all down the line. The tremendous tax advantage that they have is a continuous incentive for them to gradually take over more and more business, taking more and more corporations off the income taxpaying rolls, and making the tax burden to be carried by the rest of us all the more difficult to bear.

The three cooperative corporations I have discussed would, if fully taxed under present rates, have paid nearly $4 million more than they did pay in Federal income taxes. Then there is the case of the Union Equity Cooperative Grain Exchange of Enid, Okla., which announced last summer that it would voluntarily pay an income tax of $1 million on the profits it earned in its dealings with the Commodity Credit Corporation. The amount of income taxes to be gained by fully taxing all of the 10,000 or more farmer marketing and purchasing cooperatives, the city consumer cooperatives, the dealer-owned wholesale cooperatives, etc., would amount to a sum which this committee cannot overlook in its search for additional revenue. Our figure of $294 million for the revenue to be gained by taxing all cooperatives may be compared with the $25,000,000 which was suggested by Secretary Snyder. The discrepancies between these figures is based on the fact that different types of taxes are under consideration. Our figure is based on the assumption that cooperative corporations are to be taxed in the same manner and on the same basis as other corporations are and that the passage of a "mere token tax" is not worth while considering.

If the type of law recommended by the Treasury were to be enacted, it would not raise any substantial amount of income-the Treasury says so, cooperative spokesmen say so, and we agree.

For example, a law which, instead of attempting to plug this loophole, would create a new loophole by allowing corporate income distributed as a cash patronage dividend to be excluded or deducted from gross income, would merely make clear how cooperatives must act to avoid income taxes and would not make them pay income taxes. Such inadequate compromise legislation would, according to the Division of Tax Research of the Treasury Department, continue to permit cooperatives to expand on taxfree income. The revenue it would raise would be negligible and the tax-subsidized competition that businessmen are objecting to would continue. Such legislation would not in any way satisfy the hundreds of business organizations and their members who are asking for full tax equality. In view of these facts, it would be of little use for the committee to consider legislation of that type.

Cooperative spokesmen have long claimed that taxing the income of their corporations before the distribution of patronage dividends would be unconstitutional. They have claimed that such corporations act as mere agents and when the agency theory has been refuted, they have claimed that the distribution of dividends on patronage constituted a price adjustment. These various cooperative contentions have now been completely and finally refuted by the experts who have studied the matter.

You have heard Mr. Joseph J. O'Connell, Jr., who was general counsel of the Treasury Department, take up the principle contentions of the co-op and demonstrate the fallacies on which they are based. He has also filed a complete and fully documented legal opinion which takes up the various cooperative contentions in detail. He stated, "In view of the fact that the cooperative, as a distinct entity, earns the profits distributed in patronage. dividends just as it earns profits distributed as dividends on capital stock, the amounts of patronage dividends should be included in its income."

An article on the taxable income of cooperatives, whose coauthor is Roswell Magill, has been published in the Michigan Law Review. Mr. Magill is probably one of the foremost authorities on the nature of taxable income in the United States today. He has written several books on the subject and was appointed chairman of the special Tax Study Committee, which was constituted by your committee in June 1947. He was Under Secretary of the United States Treasury in 1937-38.

In his article, Mr. Magill traces the history of cooperative tax exemption from the beginning in 1916, and points out that from these modest beginnings modern giant co-ops have sprung up, branching into every conceivable form of enterprise, strangling competitive taxpaying corporations out of existence, and, to use his own words, "leaving the State with no support" from their fast-growing businesses.

Mr. Magill irrefutably denies the oft-repeated claim of the cooperatives that they have no income and that their patronage dividends are not, therefore, taxable before distribution to members. He says:

"The so-called net margins of cooperative corporations constitute in reality the net income of such corporations. * The net margin is quite as much the net profit of the cooperative as the exactly similar net margin of operating income of the stock corporation buying or selling goods next door. * * It should pay a Federal income tax on its gain, just as its competitor must do." "Equity would not be established by taxing to the cooperatives merely that part of their income which is accumulated, or is reinvested in corporate stock or obligations, while exempting cash distributions from income tax, for their actual income consists as well of the net profits or net margins distributed in cash, as of amounts reinvested in the cooperative."

Mr. Magill concludes:

"Tax gratuities, or subsidies, in favor of worth-while social experiments, such as cooperatives, may have been sound and desirable under the low tax rates prevailing during the first two decades of the income tax. They cannot be justified, however, in the political, economic, and tax climate of the 1950's."

I offer reprints of Mr. Magill's article and request that they be printed in the record of these hearings as a part of my testimony.

Another expert who has studied this problem is Robert H. Montgomery, whose book on the taxation of corporate income, which is annually republished and brought up to date, appears in the library of practically every tax lawyer in the country. In the legal opinion which he prepared, Mr. Montgomery puts his conclusion in the following words:

"Cooperatives have become large and powerful organizations engaging in a variety of business enterprises and, in some cases, in complicated corporate forms. Any remote resemblance of an agency between the cooperative and its patrons which might have originally existed has long since disappeared. The cooperatives operate in direct competition with other forms of business. They realize large profits from their transactions, which they retain and invest in other profitmaking activities from which it is hoped that even larger profits will accrue. To believe that such an organization has not made profits and is not operating at a profit requires one to close his eyes to realities. That the exemption from tax on its profits gives the cooperative a decided advantage over its competitors is obvious. The competitive business which wishes to expand or to acquire more efficient machinery and equipment to reduce its costs and its prices must accumulate sufficient funds "net of taxes. The cooperative, on the fiction that the money which it earns and keeps does not belong to it but to somebody else, pays no taxes."

This is the recommendation that Mr. Montgomery makes:

"The Internal Revenue Code should be amended to require that cooperatives be subjected to the same taxes in the same manner and at the same rates as other business organizations constituting corporations for tax purposes, without any exclusions or deductions for patronage dividends."

Prof. Harry G. Guthmann, of the school of commerce of Northwestern University, made a study of this issue and presented his findings for a joint meeting of the American Finance Association and the American Economic Association in Chicago 2 months ago. In his paper, which was printed in the Commercial and Financial Chronicle on January 11, 1951, Professor Guthmann concluded:

"The amounts distributed in cash or allocated as patronage dividends should be included in the taxable net income of the cooperative and made subject to the same corporate income tax as the return earned for its members on their stock investment."

The expert opinion of the afore-mentioned men demonstrates that the so-called savings or net margins of cooperative corporations can constitutionally be taxed by the Congress.

Granting that the net margins of cooperative corporations are taxable, the question may be asked as to whether or not they constitute economic income to the cooperative. That they do was clearly demonstrated by Dr. O. Glenn Saxon, professor of economics at Yale University, who spoke to you yesterday. In the study written by Dr. Saxon he stated:

"From this economic analysis it should be clear that each cooperative corporation has its own risks, its own capital, its own gross receipts, its own gross income, its own costs, and its own net profits. It should pay any income taxes levied on it out of such net profits. There is no basis in law, equity, economics, or logic for any cooperative corporation to deny that it absorbs risks, creates

economic capital, income, and profits through the use of its own management, labor, land, and capital. If successful, it has both gross and net profits which are not its members' profits, and, if unsuccessful, has gross profits less than its operating costs, or net losses which are not its members' losses. Nor can it deny that it creates-in addition to income and new wealth-new jobs, as does any ordinary corporation, unless it merely replaces other organizations. It, therefore, produces dollar income, economic income, and taxable income

* *

"The code should be amended by a redefinition of corporate gross and net income so as to include specifically all so-called patronage or member rebates or dividends in any form, whatever they may be called or whatever their so-called justification, now used by any type of mutual or cooperative. This step is necessary to prevent their exclusion or deduction under present or future Treasury rulings from taxable income."

The purpose of these hearings is to help the Ways and Means Committee find ways to raise $16,000,000,000 in additional taxes. To obtain this amount of money it will be necessary for the committee to "tax until it hurts" every possible source of revenue. Well qualified experts have shown the committee that the net margins of cooperative corporations constitute the taxable net income of those corporations and that both from an economic point of view and a legal point of view, they can and should be taxed without being diminished by amounts distributed as so-called patronage refunds.

Another matter that is more or less constantly dangled before the eyes of every Congressman is the political threat that if you tax the cooperatives the farmers will refuse to vote for you at the next election and you will be defeated. I should like to discuss that with you briefly, using as the basis of my testimony certain figures and tables that were offered to the Senate Finance Committee in July 1950, by two eminent spokesmen for the cooperatives. At that hearing, Mr. Karl D. Loos, representing four national cooperative organizations, and Mr. Jerry Voorhis, speaking as executive secretary of the cooperative league, were arguing against the application of a withholding tax to patronage dividends, which the Ways and Means Committee and the House had approved and which the Senate was already determined to reject.

Both Mr. Voorhis and Mr. Loos presented convincing statistics to prove that both dividends on capital stock and patronage dividends on sales and purchases were, in the cases of various highly successful cooperatives, so small as to be of practically no account, either to the recipient or to the Treasury as a source of revenue.

Mr. Voorhis, without naming any specific organizations, presented testimony to the effect that "one typical, very well-run cooperative in rural Wisconsin" with 1,645 stockholders, paid total dividends in one recent year of $12,881 and he stated that 1,135 of the payments were for less than $5; that only 10 payments were for more than $50 and that the larest payment to any one individual was only $80.

To demonstrate that patronage dividends were in about the same proportion of small to large, Mr. Voorhis presented the figures on the same "typical, very well-run cooperative in rural Wisconsin"; 64 percent of the patrons-1,566-received less than $5 in patronage dividends, and only 4 percent, or 103 patrons, received more than $50.

Mr. Loos was more specific. He named the big Southern States Cooperative, with headquarters in Richmond, Va., and business operations extending over four States, and presented to the committee a table analyzing its patronage refunds and dividends on capital stock for the fiscal year ended June 30, 1949. The story is much like that offered by Mr. Voorhis:

In the matter of patronage dividends, 126,821 payments were for less than $1; 101,974 more were for less than $10; and only 163 were for $100 and over. The average of 240,267 payments was $4,41. As for dividends on capital stock, 176,482 were for an average of 27 cents, and the average of the whole number of 228,577 payments was $1.65.

Other tables presented by Mr. Loos for cooperatives in Ohio, North Carolina, Missouri, Michigan, Washington, and Pennsylvania-a very fair cross section of the country-merely served to confirm the Southern States distribution. The members of your committee may find them all on pages 735 to 754 of the printed Hearings before the Committee on Finance of the United States Senate. Eight-first Congress, second session, on H. R. 8920, July 5 to 13, 1950.

But Mr. Loos' summary is significant in showing how little effect on the farmer's income would result from the taxation of cooperative earnings before distribution of patronage dividends. I quote:

"We have received reports that represent an aggregate of 929,000 payments of patronage refunds and dividends, 921,000 individual payments. These aggregate results are important, I think. * Of the 929,000, 563,000 were less than $1-60 percent; 285,000 were between $1 and $10; 849,000 in round numbers were less than $10, out of the 929,000 or 91.4 percent.

"Now, of the money that is involved, while some 91.4 percent of the returns would be in the bracket below $10, only 23.8 percent of the money would be in that bracket, so that 8.6 percent of the returns would give a report on 76 percent of the total money involved and that is where your taxable money is, if there is any—that is, taxable to the individual recipients."

Economically, it is interesting to learn that so very large a part of the profits of cooperative business inures to the benefit of so very few members.

Politically, it is significant that cooperative leaders have sought to impress the Congress and probably their own members as well-by the assertion that great numbers of little farmers derive substantial benefits for dealing with their cooperatives and would vote against any Congressman who tried to tax their business organizations.

Te fact is, as Mr. Loos now reveals, that 91.4 percent of the co-op patrons derive so little financial benefit that their political bias need not be fearedand the substantial beneficiaries of co-op business are so few in number as to be politically impotent.

Many other examples of specious cooperative reasoning might be offered, but I shall take your committee's time for only one-the very frequently made assertion of co-op managers and publicists that "Paying taxes would destroy the co-ops," or its corollary to the effect that "The National Tax Equality Association isn't interested in tax equality; it is trying to destroy the cooperative movement."

I have too high a regard for the innate honesty and intelligence of this committee to believe that any member would be deceived by so patently unreasonable a statement, but it is still made so often that it must be answered once again. The best and most conclusive answer may be found from case studies of the type made by Profesor Guthmann. He pointed out that the Union Equity Cooperative Exchange, under existing exemption laws, reported a ratio of net income to investment of 40 percent. If that cooperative had been subjected to a corporate income tax of 38 percent, that ratio would have become one of 25 percent. In other words, the cooperative would have continued to have net earnings after taxes of 25 cents for each dollar invested. Would an annual increment of 25 percent indicate that the cooperative is being destroyed? Doesn't the fact that it could double its size every 4 years demonstrate that it would not be destroyed by the tax?

Under similar conditions the ratio of net income to investment of Southern States Cooperative, Inc., was 13.5 percent. After a 38 percent income tax it would be 8.4 percent. The ratio of net income to investment for the Eastern States Farmers Exchange was 28 percent. If it had been required to pay a corporate income tax of 38 percent, it still would have been earning 17.4 percent on every dollar of investment.

For the Farmers Union Central Exchange, the net income to investment ratio was 19.5 percent; subject to tax it would have been 12.1 percent.

The same ratios could be worked out for all successful cooperative and other tax-exempt business corporations. They prove that cooperatives would be no more destroyed, or hurt, by paying taxes than are the other businesses with which they are competing.

Some Congressmen have said that they would not hesitate to tax some of the largest cooperative corporations with their many subsidiary and affiliated corporations, their various classes of outstanding capital stock, their millions of dollars worth of capital assets, their many manufacturing, processing and service facilities, etc., but they wondered whether it would be equitable to tax a simple farmers marketing cooperative corporation that engages in no other activities. They have in mind a so-called pure or true cooperative corporation that has a small amount of oustanding capital stock and that operates very simply by buying members' produce, marketing it and after deducting expenses, setting up various types of reserves and paying limited dividends on outstanding capital stock, distributes the remainder of its net margins to its patrons as patronage refunds. We submit that inasmuch as such a corporation has all the attributes of a taxable corporation it should be taxed like other corporations. It may be true that such an association is small and renders a definite and valuable service to its members, but so do other small corporations. When the country store