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not only the economic life but spiritual and cultural values as well-incorporates many of the ideas suggested by modern economists for the regeneration of the outside world."
To permit a correct interpretation of Amana in Transition it must be understood that commencing with the reorganization of 1932 the individual members have worked for the society for wages or salary; that almost all able-bodied members are employees, servants, or executives of the society (which fact is necessarily true because each must live in society territory to retain his membership) and there is today but little difference between the wage paid for the most menial labor and the salary or compensation of the highest-paid executive.
In various of its economic activities the Amana Society is largely noncompetitive with outside industries or enterprises. It operates about 25,000 acres of land, situated in Iowa County in eastern Iowa. This real estate consists of farm land, timber pasture, and timber tracts. In excess of 50 percent of the capital investment of the Amana Society is in this real estate, including buildings, and machinery and equipment used in connection therewith-all of which, excepting for a few acres, was owned by the predecessor corporation. The greater portion of the net income from this land comes from agricultural pursuits and is derived from the raising of corn and small grains, livestock, dairying, and other agricultural enterprise directly connected with or incidental to a large farming operation. The timberland, in addition to furnishing fuel to the membership and their dependents, furnishes lumber for the mills and factories.
It is readily recognized that an agricultural pursuit within the United States is not a competitive enterprise under present marketing conditions or any marketing conditions that have ever prevailed in this country.
Other of the principal present enterprises of the society are the operation of the woolen mill, meat-curing establishments, bakery, and cabinet shop. These operations also are largely noncompetitive activities. Neither the mill nor the cabinet shop have been modernized because of the necessity of furnishing employment to the membership. At the mill one individual operates a limited number of looms; whereas, in the modernized mill one individual may operate 10 or more looms. At the cabinet shop the furniture built is custom made, There is no quantity production, and the cabinet work and the finishing of the products are largely performed by hand. Accordingly, the products of the mill and the shop are placed upon the market on a quality basis, and little, if any, attempt is made to market the products of either of these industries on the basis of price competition.
There are within the Amana Society several small retail outlets established primarily for the purpose of serving the residents of the Amana territory and the farm lands adjoining and abutting it. Since these are the only retail outlets in the vicinity, it is readily seen that these enterprises are noncompetitive.
The Amana Society has long been recognized as a religious or apostolic organization for the purpose of income taxation under the provisions of the Internal Revenue Code, such classification having been recognized by the Treasury Department (under the provisions of subsec. 18 of sec. 101 of that code) in the year 1938.
Under the provisions of this subsection 18, section 101, every member of the Amana Society reports his share in the profits of the corporation, whether the same is distributed or not, as a part of his income and personally pays the tax thereon. In each calendar year payments by members upon this profit which was not distributed in that year amount in the aggregate to many thousands of dollars.
We believe that this corporation is in an unique position insofar as its purposes and objects are concerned, and that because of the fact that it is in effect a copartnership operating within a corporate structure and is largely noncompetitive, the present method of Federal income taxation is fair to the corporation and to its membership. That method of taxation should, in all fairness, continue, either in the present form or a substitute therefor.
The matter is of concern to the society and its membership. It is only fair to say that it is doubtful that the society can continue to exist if it is required, under its unique form of individualistic organization, to conform to the identical tax pattern of orthodox corporations.
For the benefit of those members of the Ways and Means Committee of the House of Representatives who may have had occasion to inquire into the somewhat intriguing history of the Amana Soicety, it should be stated that the ideas of the maker of this statement concerning the organization are perhaps more coldly analytical and objective than the writers of the various histories and
1 treatises available concerning the Amana Society whose authors have been concerned primarily and almost solely with the sociological and religious development of the organization.
The society will thank the committee for such consideration as may be given this statement.
The CHAIRMAN. The committee will recess at this time until 1:30 o'clock this afternoon.
(Whereupon, at 12:40 p. m., a recess was taken, the committee to reconvene at 1:30 p. m. the same day.)
(The following statement was submitted for the record :)
STATEMENT OF WILLIAM W. PRATT, EXECUTIVE DIRECTOR, PENNSYLVANIA CREDIT
To the Honorable Chairman and Members of the House Ways and Means Com
mittee of the Congress of the United States of America: The undersigned, the executive director of the Pennsylvania Credit Union League of 1522 Cherry Street, Philadelphia, Pa., submits the following in opper sition to the repeal of the tax-exemption provision of the Federal Credit Union Act as intended by H. R. 240.
PENNSYLVANIA CREDIT UNION LEAGUE REPRESENTATION The Pennsylvania Credit Union League represents the majority of the 670 credit unions operating in the Commonwealth of Pennsylvania, of which 575 are chartered under the Federal law. The 670 credit unions having approximately 350,000 members, the majority of whom are wage earners in the lower middle and low-income groups.
CREDIT UNIONS ARE NOT IN GENERAL COMPETITION WITH TAXPAYING BUSINESSES
A credit union is defined by the laws of Pennsylvania and the United States as "cooperative associations or society-for the purpose of promoting thrift among its members and creating a source of credit for them.” A credit union cannot carry on its activities outside its field of membership, hence, it is not in general competition with other forms of business which extend credit.
The field of membership of a credit union is limited to groups having a common bond by reason of occupation or association within a well-defined group or area. This has been interpreted by the governmental administrative authorities to mean having a common employer and the situs of employment within a particularly defined area. The other groups falling under the term "common bond" by reason of association are church or fraternal groups. The groups eligible for charters are limited by a strict interpretation of the law.
Credit unions because of the integrated nature of their membership are limited by law, extend credit on the basis of security extending by reason of the common bond of the membership. Such a lending policy is certainly not in competition with the lending agencies engaged in doing business with the general public.
The income earned by a credit union are substantially the result of the voluntary and uncompensated services of its officers and directors, as the majority of the administrative officers and directors of a credit union are wholly uncompensated or partially uncompensated. It is for that reason a greater majority of the credit unions are able to distribute dividends (interest) to their members and to build up the minimum reserves required by law. Hence, taxes on the earnings of a credit union will be a tax resulting from the wholly or partially gratuity services rendered by one human being interested in the welfare of his fellow human being who form the membership of the credit union. Such a tar would obviously be unfair.
A TAX ON THE TAXABLE INCOME OF CREDIT UNIONS WILL NOT BE PRODUCTIVE A tax imposed on a credit union's earnings will in effect be one on surplus only. Thus if a tax is imposed it undoubtedly will allow the deductions of dividende (interest) paid to members in the same manner as a bank or saving fund society is permitted to deduct interest paid to depositors. A deduction will also be allowed for the minimum reserve required by law.
Federal credit unions have been in existence since 1934, and only a very few of all the credit unions were in operation prior to that date. At this time the average accumulated surplus represents only 3 percent of the invested capital of the average credit union. This means that there is only about $200 per year per credit union of net taxable earnings.
The repeal exemption provided by section 18 of the Federal Credit Union Act will open Federal credit unions to taxation by every State and local taxing authority. Hence, in States where legislature may be hostile to credit unions (usually at the interest of those who oppose credit-union operations) credit unions may be taxed to such an extent that they could not continue to serve their members.
It is submitted that credit unions should not be taxed because 1. Credit unions are not in general competition with taxpaying loan businesses.
2. The taxable income of a credit union is produced by the wholly uncompensated and partially uncompensated services of the administrative officers and directors.
3. The tax will not be productive to the degree that those who advocate the tax would lead you to assume.
The committee reconvened at 1:30 p. m., upon the expiration of the recess.
The CHAIRMAN. The committee will be in order.
The first witness on the calendar this afternoon is Mr. Hubert M. Rhodes, Credit Union National Association, Washington, D. C.
Will you please give your name and address to the stenographer, for the benefit of the record, and the capacity in which you appear.
STATEMENT OF HUBERT M. RHODES, REPRESENTATIVE OF THE
CREDIT UNION NATIONAL ASSOCIATION, WASHINGTON, D. C.
Mr. RHODES. My name is Hubert M. Rhodes, representative of the Credit Union National Association, with headquarters in Madison, Wis., but I am located in Washington, D. C., as the Washington representative.
Mr. Chairman and gentlemen, at this hearing I am representing the Credit Union National Association, which has as its members approximately 8,000 of the 10,000 credit unions and Federal credit unions operating in the United States. We have credit unions in every State in the Union. The legal structure of credit unions and Federal credit unions is for all practical purposes identical. Approximately half of our credit unions operate under State law and half under the Federal Credit Union Act.
The Federal Credit Union Act which was passed by Congress and became law in June of 1934, defines a Federal credit union as follows:
a A Federal credit union is hereby defined as a cooperative association organized in accordance with the provisions of this chapter for the purpose of promoting thrift among its members and creating a source of credit for provident or productive purposes.
The Federal Credit Union Act and various State laws under which credit unions function exempt credit unions from taxation except that they do pay taxes on real property and on tangible personal property. The 10,000 credit unions operating in the United States are opposed to any legislation which would alter their present tax status.
Credit unions have been brought into being for the purpose of eliminating usury. Each credit union accepts the savings of its members in what is known as a share account, and uses these savings in making loans to those same members at low rates of interest, the maximum rate permitted under the law being 1 percent per month on unpaid balances.
We realize the difficult position of your committee. We realize that sufficient funds must be raised through taxation to support the Government amply during the present emergency.
We feel, however, that direct taxation is the best form of taxation and that Government income should be increased by increasing the personal income tax. Our 10,000 credit unions with their more than 5,000,000 members have done much to promote habits of thrift among those 5,000,000 people, thereby placing those people in better condition to meet the demands of Government insofar as taxation is concerned.
Although the credit union accepts the savings of its members in the share account, and although the $5 units in this share account are referred to as shares, in actuality these savings are recognized by an entry in a passbook the same as a bank passbook and the funds are withdrawable on demand.
No share certificate is issued. The credit union charges a low rate of interest on its loans, and from that income pays its expense of operation; sets aside a portion of the earnings each year as a reserve against bad loans; and distributes the balance of its earnings among its members in the form of interest on their savings.
The credit union is a nonprofit organization limited in its sphere of operation to a specific group of people.
The credit union does not do business with the general public and does not in the usual sense earn a profit. The credit union is one enterprise which the Government, industry, the churches, organized labor, and the people, operate jointly for the benefit of all.
We feel very strongly that the present tax position of the credit union should be maintained and, therefore, we wish to record our opposition toward any legislation which would in any way alter this position.
Thank you very much.
Mr. RHODES. I live in Arlington, Va. I am domiciled in Washington.
Mr. Curtis. Are you a full-time employee of the Credit Union National Association?
Mr. Rhodes. Yes, sir; I am.
Mr. RHODES. I have been employed by the national association since September 1936.
I was in the field, however, in most of the southern area of the country, and I have been here in Washington since the fall of 1946.
Mr. CURTIS. That is your principal employment?
Mr. RHODES. Yes; I have an expense account for actual expenses incurred, say, on trips over here, such as I might have on legislative work.
Mr. REED. Do you go outside the city?
Mr. Ruodes. Yes; my own work has been in a way as field representative of the organization. I attend meetings elsewhere, go out to organize credit unions in other States. I do have an expense account.
Mr. REED. How much allowance do you get on your expense account?
Mr. RHODES. Actual expenditures. As far as the part is concerned which has to do with any expenses incurred incident to work right in Washington, I report those as a registrant under the Lobbying Act. It has been pretty small
. The record is available. It mostly concerns taxicab fares coming over here and back to my office. .
The CHAIRMAN. If there are no further questions, we thank you for your appearance and the information given the committee.
Mr. RHODES. Thank you, Mr. Chairman.
The CHAIRMAX. The next witness is Mr. Wilfred E. Rumble, representing the National Federation of Grain Cooperatives.
Will you please give your name and address to the stenographer, for the benefit of the record, and the capacity in which you appear? STATEMENT OF WILFRED E. RUMBLE, ST. PAUL, MINN.,
REPRESENTING THE NATIONAL FEDERATION OF GRAIN COOPERATIVES
Mr. RUMBLE. My name is Wilfred E. Rumble. I am a lawyer of St. Paul, Minn. My office address is 1006 First National Bank Building, in that city.
I represent the National Federation of Grain Cooperatives which has as its members 16 regional or federated associations of farmerowned grain marketing associations in all of the principal grain-producing areas of the United States. I also represent other regional farm cooperatives in the Northwest.
Changes in the tax treatment of farm cooperatives has been discussed before this committee before. I testified personally during the extended hearings in 1947, and have read the testimony presented at the brief 2-day hearings last year. The evidence already before the committee, especially that of Mr. Karl Loos, adequately covers the legal questions involved, and I will not attempt to discuss them.
The chief proponent of a change in the law has been the National Tax Equality Association. The Grain and Feed Dealers National Association has also urged changes, as has an organization known as the National Associated Businessmen, Inc.
Unfortunately, because I have been scheduled to testify first, I am not in a position to know whether any new proposals will be made on behalf of these organizations, but should new arguments be presented, we would like at least the opportunity to file a reply.
However, if witnesses for these organizations present the same program as before, the chief proposal will be to advocate the application of corporation tax rates to funds earned by a farm cooperative for its members before these funds, pursuant to contract, are distributed as patronage credits, rebates, or refunds, to members.