eral income tax returns on the basis of cash receipts and disbursements as well as those who file their returns on the accrual basis." (3) May 28, 1953: The Treasury issued as Treasury Decision 6014 under section 314 of the Revenue Act of 1951 final regulations which provided that noncash patronage refunds were currently taxable at face amount to the patron recipients. This was the first time that the Treasury ever issued final regulations specifically covering this subject. (4) January 11, 1954: Revenue Ruling 54-10 was published in the Internal Revenue Bulletin, confirming and clarifying the policy set forth in the regulations referred to in item (3) above. (5) Pertinent Court Decisions: (a) B. A. Carpenter v. Commissioner (20 T.C. 603, affirmed 219 F. 2d 635 (C.A. 5, 1955)). April 1952-First hearing held at Miami, Fla., before Tax Court of the United States. June 15, 1953-Decision by Tax Court holding that a cash-basis taxpayer need not include in his gross income the face amount of revolving fund certificates issued by a farmer cooperative and held that the certificates had no fair market value at time of issue. March 2, 1955-Decision of Tax Court affirmed by U.S. Court of Appeals for the Fifth Circuit. (b) Long Poultry Farms, Inc. v. Commissioner (249 F. 2d 726 (C.A. 4, 1957), reversing 27 T.C. 985). March 21, 1957-Tax Court of the United States held that a patronage refund credit allocated to the account of a member who kept his books and reported his income on an accrual basis was a properly accruable item of income during the year in which the allocation was made. November 8, 1957-U.S. Court of Appeals for the Fourth Circuit overruled the Tax Court and held that the patronage refund credit allocated to the taxpayer's account by the marketing cooperative in this case was not accruable as income to the taxpayer in the year of allocation. (c) Estate of Caswell v. Commissioner (211 F. 2d 693 (C.A. 9, 1954), reversing 17 T.C. 1190). January 18, 1952-Tax Court of the United States held that certain retain certificates constituted income to the patrons in year of issue to extent of their fair market value and that the fair market value of the certificates was equal to their face value. April 1, 1954-Circuit Court of Appeals for the Ninth Circuit reversed the Tax Court and held that the certificates did not constitute taxable income to the recipients to any extent whatever in the year of issue. (d) Moe v. Earle ((C.A. 9) 226 F. 2d. 583, cert. den, 350 U.S. 1013). October 12, 1954-U.S. District Court for the District of Oregon held that certain revolving fund certificates issued to taxpayer Moe represented no income to him in year of receipt of certificates. October 28, 1955-Decision affirmed by Ninth Circuit Court of Appeals. March 1956-The Government filed a brief in opposition to Moe's petition for a writ of certiorari in the Supreme Court of United States. April 9, 1956-Supreme Court of the United States denied certiorari. (6) February 14, 1958: The Treasury issued Technical Information Release 69 announcing that the Internal Revenue Service would follow the decisions in Long Poultry Farms, Inc. v. Commissioner, and Commissioner v. B. A. Carpenter, in connection with the tax treatment of allocations of patronage refunds by cooperative associations to their patrons. The release said steps will be taken to dispose of pending litigation and claims involving this issue in conformity with the principle enunciated in these decisions and to conform Treasury regulations and outstanding rulings to these decisions at the earliest practicable date. Thus the Treasury announced its decision to abandon its longstanding policy of requiring noncash patronage refunds to be reported currently by the patrons at face amount and its intention to embrace the "fair market value" theory enunciated in the Carpenter and Long Poultry Farms decisions. (7) March 11, 1959: Publication of proposed amendments to existing Treasury regulations for adoption of new policy for tax treatment of noncash patronage refunds to patrons on basis of "fair market value" theory. (8) December 3, 1959: Publication of final amendments to existing regulations adopting "fair market value" theory as applied to tax treatment to patrons of noncash patronage refunds. APPENDIX III Analysis of cash and noncash patronage refunds distributed to individual farmer patrons by 385 marketing and farm supply cooperatives as reported by the associations in April 1961 for recent fiscal years1 1 Dominantly for fiscal years ending in 1960 or 1961 with a few reporting for earlier years. Replies were received from 178 individual associations; 1 State cooperative council submitted a summary report with combined figures for 46 member associations; and 1 regional cooperative submitted 2 combined reports, 1 covering 132 and the other 29 local member associations. The CHAIRMAN. Our next witness, by arrangement with Mr. Burger, is Mr. Voorhis. Mr. Voorhis is a former colleague of ours from the State of California who is presently the executive director of the Cooperative League with headquarters in Chicago, I believe; is that right? STATEMENT OF JERRY VOORHIS, EXECUTIVE DIRECTOR, ACCOM- Mr. VOORHIS. That is right. Thank you very much, Mr. Chairman. I would like to have Mr. Townsend, who is the director of our Washington office, sit with me if he may. I would like to have the committee know him. The CHAIRMAN. You are recognized. Mr. VOORHIS. Thank you very much, Mr. Chairman, and I would like to thank Mr. Burger for letting me go on now. I appreciate it very much. The CHAIRMAN. You will find Mr. Burger does this just as often as he can. He is very generous. Mr. KEOGH. Mr. Burger is a native New Yorker. The CHAIRMAN. I am glad to hear you say that. Mr. VOORHIS. Mr. Chairman and members of the committee, cooperation is the little man's chance in a world of bigness. Cooperation is the small community's chance in a world of great cities. Cooperative enterprises are businesses that belong to the people who use their services. Therefore they are, and must always continue to be, locally owned institutions. A majority of the farmers in the United States are affiliated with the Cooperative League through one or another of our member organizations. And we believe one of the greatest of all present values of cooperative ownership is the opportunity it offers to the inde pendent farmer to join with other farmers in owning off-the-farm related enterprises and thus regaining some of the economic bargaining power of which our present-day economy has so largely robbed him. I would like to start off, if I may, by giving you three reasons why cooperative enterprise, as part of our American free economy, is of great importance right at the moment. The first reason is because cooperative businesses owned by farmers are the best single means whereby farmers can regain a degree of economic bargaining power, both when they sell and when they buy. The food business generally is a very profitable business. It is only the primary production that is not. Cooperatives make it possible for farmers to share to a degree in ownership of related businesses and thus to put them in a better economic bargaining position. Cooperatives enable many small economic units to act together and without loss of their independence, stand on reasonably equal terms. with the economic giants with which they must deal. Cooperatives, therefore, offer the best, if not the only, method whereby the American pattern of agriculture can be preserved and practiced, dependence on governmental programs reduced, and a degree of economic justice restored to our agriculture. This cannot be done unless the farmer cooperatives are viable enterprises. It cannot be done if their growth is stunted. It cannot be done if they are told that all they may do is buy from suppliers and sell to farmers or to take the first step in marketing. If we believe cooperatives are a good thing at all, we must accord them the opportunity to carry on their business activities in a reasonable way and I can see no ground for objection to, for instance, a farm supply cooperative going back to primary sources of raw materials in order further to benefit its farmer members. In the second place, I believe cooperative enterprises are important because, as our industry falls more and more under monopolistic control, it becomes more and more necessary that an orderly way, fully in accord with the principles of our American economy, be employed for asserting the patrons' and consumers' interest and enabling large numbers of people to participate in significant ownership of business enterprises. Cooperatives offer such a means. They enable large numbers of people, even though their resources are small, to own and effectively control even sizable economic services and enterprises. Third, the health and vigor of cooperatives in the United States are important because our one best chance of counteracting communism in the newly developing countries of the world lies in assisting people of those countries to develop cooperative and mutual economic institutions. The cooperative is a form of free, privately owned business which is acceptable in these countries. In many places it is the only such form that is acceptable. Already our cooperative organizations are doing considerable work in a number of countries along these lines. We should do much more. For, if freedom is to be preserved there, it will not be done through institutions which those people regard as colonial or foreign controlled. It can only be done through institutions which the people themselves own. Cooperatives here or elsewhere always must belong, by definition, to the local people who use their services. But unless our cooperatives at home are strong and vigorous, we cannot do much to help build voluntary cooperative institutions abroad. Therefore the question of fair, equitable, nondiscriminatory taxation of cooperative businesses in the United States is a matter of the greatest moment. Our basic position is simple and, I think, easily understood. We ask no special tax privileges for cooperatives. We believe they have none of any consequence today. We want no tax advantages, but we will resist with all our strength attempts to impose penalty taxation upon the right of our people to carry on business by cooperative methods. I would like to point out if I may, Mr. Chairman, that, so far as I know, in the course of these hearings very little if anything has been said about the factor of revenue to the Government. As a matter of fact very little such revenue is involved. Most of the testimony has come from competitors of cooperatives and competition has actually been made the principal issue. Suggestions that cooperatives be denied opportunity to have equity investment made in them when their members reinvest their patronage refunds; proposals for special taxes on their manufacturing or production activities, all are evidence of this. One trouble is that the cooperatives have in certain lines of business become rather effective, that they do build plants when they can, that they do try to see that a plentiful supply of the products that they attempt to supply their members is available. For example, when one cooperative's nitrate plant was being built the price of nitrogen fertilizer in that area was $158 a ton. After it was built the price went down to $100 and today it is less than $85. Somebody says that patronage refunds were not paid to those members. Those patronage refunds were paid to those members in ownership of that fertilizer plant. The market value of the share of stock may not have been an ordinary market value because it was only worth something to the people who were in position to own and patronize their own fertilizer plant. But to say that patronage refunds of great value were not paid is certainly wrong. After all, the question is and the objective of the committee is to be sure that everybody is equitably taxed. That is what we are about. I would like to refer to a quotation from the Farm Bureau's testimony which they in turn took from the Supreme Court. They said, "What is not in fact income cannot be made income by legislative act." That is exactly our position and we will stand on that. They further pointed out that, in order for something to be income to a taxpayer, the taxpayer must have complete dominion over that money. We ask only that co-ops not be taxed on funds over which they have no dominion because that money is obligated to be paid, and the obligation has to be discharged, to their patrons. Because something is income to a cooperative does not, necessarily mean that it is not also income to a patron. For example, most cooperativesall except those coming under section 521-pay taxes on the money that they use to pay dividends to their shareholders; and their shareholders and members pay taxes on the dividends they receive as well. Most of the cooperatives have to pay that tax, too. So this is double taxation in that case and we are not complaining about that. We are only pointing out that the fact that it was taxable income to one party did not necessarily mean that it was not taxable income to the other party in the case of cooperatives as well as other businesses. On the other hand, just because something is not income to a patron does not necessarily make it income to a cooperative. In all cases we have to see what the facts really are. For example, here is a business that sells a certain product to patrons at cost. The business cannot have income from those sales because they were made at cost. Neither can the patron be considered to have income simply because he got a low price. Another business does not want to do that and sells at a profit. But they have no right thereby to say that the business that sells at cost should be taxed as if it had made a profit, which it did not. The patronage refund is simply a device and means whereby the cooperative is enabled to do business at cost with its patrons. Patronage refunds are taxable income to cooperative patrons if the patron has previously deducted the total price paid for an item from business income. Otherwise taxable income is simply not involved. Where the patronage refund is not paid as a matter of clear obligation the cooperative pays a full tax on any income which it receives. For example, Consumers Cooperative Association of Kansas City was referred to several times this morning and I believe a member of the committee requested that a certain report from that organization be placed in the record. Well, Mr. Chairman, I have it right here and I would be glad to give it to the committee. I would like it to go in with my testimony but, if it is more orderly for it to go in this morning where it was asked for, it can go in there. The CHAIRMAN. Leave it and we will get it in the record. (The report referred to follows:) |