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.

The CHAIRMAN. Mr. Curtis.

Mr. CURTIS. Mr. Rhodes, where do you live?

Mr. RHODES. I live in Árlington, 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. CURTIS. How long have you held that job?

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, sir; it is my entire employment.

Mr. CURTIS. That is all.

The CHAIRMAN. Mr. Reed.

Mr. REED. Do you have an expense

account?

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. RHODES. 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 CHAIRMAN. 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.

We are unalterably opposed to this suggestion. There are many arguments to be listed in support of our view which, however, I believe has been exceptionally well stated in the official view of the United States Department of Agriculture, as set forth in a statement by the Secretary of Agriculture in February 1950. I quote:

There is, of course, no legal or moral basis for taxing patronage dividends or refunds. These belong to farmers as a result of (a) underpayments by a marketing cooperative to the agricultural producers who market their products through the cooperative, or (b) overpayments made by the patrons of a purchasing or service cooperative.

The law is now well established that any organization, cooperative or otherwise, that is under a legally binding contractual obligation to pay patronage dividends or refunds may exclude them in computing its income-tax liability. This is true because the contractual obligation prevents the amounts in question from ever having the status of income, and income taxes may be required under the sixteenth amendment only on income.

The patronage dividends or refunds are not and cannot be income to the cooperative any more than trade discounts or rebates are income to an ordinary corporation. Just as trade discounts and rebates are reflected in increased income of the recipients through decreased costs of doing business, so, too, are patronage refunds reflected in the increased income of cooperative patrons either through a decrease in the cost of doing businss or an increase in the prices received for the members' products.

These increased incomes to the recipients are, of course, subject to Federal income taxes. It should be noted that any business concern desiring to do so may by appropriate contracts with its customers place itself in a status comparable to that of a cooperative insofar as the exclusion of patronage dividends or refunds in computing income taxes is concerned.

In the report issued by the Treasury Department in October 1947, entitled, "The Taxation of Farmers' Cooperative Associations," the point that patronage refunds can be excluded by others than cooperatives from gross income is well stated, as follows:

The exclusion of patronage dividends from corporate gross income is not the exclusive privilege of cooperation (cooperative) associations. Any corporation making payments to its customers under the conditions prescribed by the Commissioner of Internal Revenue and the courts is granted the same treatment. It should be noted, however, that in the case of cooperatives, unlike the case of the typical ordinary corporation, patrons receiving rebates are also the owners of the business.

The conditions which the cooperative associations must meet if refunds made to their patrons are to be excluded from the gross income of the association may be briefly stated. First, there must have existed at the time of the transaction with the patrons a contractual or other definite obligation on the part of the cooperative to return any net proceeds to him in proportion to patronage without further corporate action.

Second, if only members of the association are eligible to receive patronage dividends, exclusion is not allowed on that portion of such distribution which represents profits from transactions with nonmembers. On the other hand, it is held to be immaterial whether refunds are distributed in the form of cash, stock, certificates of indebtedness, or credit notices. All such forms of payment are regarded as the equivalent of cash distributions in the hands of patrons, the theory being that they are cash payments automatically reinvested under provisions of the charter, bylaws, or other contracts previously agreed to by the patrons.

If there is a new factor in the situation today, aside from the great need for revenue, it is the reference to taxation of cooperatives made recently before this committee by Secretary Snyder, when he said:

To the extent that collective buying and selling results in lower buying prices or larger income to patrons or members, these savings enter into their taxable income as individuals.

However, funds which are not returned to members of these mutual enterprises are available tax-free for expansion in competition with other taxable businesses.

We should seek to apply the corporation income tax to such retained funds. This would not impair the ability of cooperatives and mutual savings and credit institutions to perform their traditional functions of collective buying and selling or pooling of savings for investment.

It is not entirely clear just what Secretary Snyder proposes. Certainly, patronage refunds of a member, on which he pays an income tax even though reinvested in a cooperative, are not tax free. These are allocated reserves of which the patron is notified.

In any event, it is clear that Secretary Snyder's views and that of Secretary Brannan last year are not in complete harmony. Because of the large responsibility for the promotion of farm cooperatives vested in the Secretary of Agriculture by the Congress, and because Secretary Brannan understands this subject exceptionally well, it seems entirely fitting and proper that the Secretary of Agriculture should be requested by this committee to present his views.

Grain cooperatives, who are still fighting an uphill battle for farmers to improve the efficiency of grain marketing, favor no change in the present law. Their members believe that cooperatives are improving, and will continue to improve, the ability of farmer members to pay Federal income taxes.

They believe that the improvement of marketing efficiency and of farm income are the chief reasons for the existence of local and regional cooperative grain marketing associations which they have created.

Grain cooperatives began in the 1880's. Laws had been passed chartering the grain exchanges, and farmers came to the conclusion that as these exchanges grew stronger the farmer's bargaining power was weakened. They felt that prices for their grain were being set without their having a voice in the matter, often by a small group of traders with no real interest in the economic welfare of farmers.

Warehouse charges were high, weights and grades were often crooked, and margins in the handling of grain between the farm and the consumer were excessive. The middlemen often took margins of 15 to 25 cents a bushel for doing practically nothing.

Great fortunes were accumulated in the cities by grain handlers in a time when there were no income taxes. The farmer decided to do two things: To protest politically and to organize cooperatives to capture for himself any excess in margins.

The first grain cooperatives were started by farmers to provide local agencies for marketing grain. Farmers wanted, and got, honest weight, honest grades, an honest appraisal of the dockage and dirt in their grain which had always been exaggerated. Farmers wanted to get back for themselves the maximum market price for their grain. They had some successes, but a lot of failures, too. The failures were often due to underfinancing, poor management, and inexperience. One of the chief weaknesses was that the type of organization they wanted and needed required a different type of charter than was available under the standard corporation laws, and the number of members was too large to form an ordinary partnership arrangement.

Finally laws were passed to charter cooperatives, to legalize what are really economic partnerships. The requirements of these charters vary considerably under the various State laws.

The local grain cooperatives and their members soon recognized that control of their local marketing machinery was not enough.

They needed a voice at the big terminal market places, and so local cooperatives organized regional or federated sales agencies with representatives at Minneapolis, Chicago, Kansas City, Omaha, Indianapolis, Portland, and other centers.

I should like to say here that I think members of this committee should at all times have in mind, so far as section 101 (12) is concerned, that although there are some 10,000 farmer marketing cooperatives in the United States, there are only a few, a very few, of these so-called large cooperative marketing organizations. Practically 90 percent of the cooperatives that are helped by section 101 (12) are small creameries, elevators, filling stations, and organizations of that sort, many of whom do not have capital of much more than $50,000, if that.

Some of the exchanges refused to give them membership, but an amendment to the Commodity Exchange Act adopted by Congress finally took care of that after a struggle of 25 years or more.

What have these grain cooperatives done?

1. They have greatly improved the reliability of weights and grades helping the whole grain industry, as well as the farmer.

2. They have set the pace in cutting margins for handling grain. This has benefited noncooperators, as well as cooperative members. 3. They have paid back to farmers millions of dollars which they have realized through hiring experts to merchandise grain at local, subterminal, and terminal marketing centers.

4. They have made it possible through building programs to provide for more storage space so that farmers could hold their grain for marketing throughout the year, rather than glutting the market at harvest time when prices are usually lowest.

Have farmers escaped taxation in this process of building marketing institutions which constitute one of the finest achievements in American agriculture? The answer is "No," for the following reasons: At the conclusion of each fiscal year, the grain cooperative adds up what it has gained for its members through expert merchandising, through standard storage charges, and other services. Then, after having paid its expenses, if there is any balance remaining it is distributed to the people the balance belongs to the patrons-in proportion to the business each contributed to the total volume of business done by the cooperative. On this share of patronage that each farmer receives he pays taxes.

Notice that I said "any balance remaining." There are times when, for the year, there is no balance-there is sometimes a deficit. In that case, money has to be borrowed, or the members assessed, to provide more working capital.

The financial success of a farm cooperative is not a certainty. Many of the early mistakes, especially those of the early wheat pools, have been corrected. Many members regard their cooperatives as successful even if patronage distributed is not substantial. They remember the days when they were at the mercy of men in the market place, when often false and misleading information was spread to extract from the farmer his wheat, corn, barley, oats, rye, flaxseed, and soybeans at unreasonably low prices.

Every grain cooperative has at least one annual meeting. At these meetings you have free speech at its best. Decisions are made, after discussion, by majority vote.