"(d) AUTHORITY OF SECRETARY.-The Secretary or his delegate may by regulation prescribe the manner in which income from manufacturing, mining or processing may be determined and may distribute, apportion or allocate gross income, deductions, credits or allowances in order properly to reflect such income."

SEC. 3. The amendments made by the first section and section 2 of this Act shall apply with respect to taxable years beginning after December 31. 1960.

The CHAIRMAN. Mr. Lanahan, we thank you, sir, for coming to the committee again to give us the benefit of your thinking on this matter. We recall your previous appearances before the committee. Mr. LANAHAN. Thank you, sir.

The CHAIRMAN. Are there any questions of Mr. Lanahan?

If not, sir, we thank you again. We have a quorum call and it will be necessary for us to recess for a little while. I suggest we come back at 1:30.

The committee will resume at 1:30. Mr. Rumble, you will be the first witness.

(Whereupon, at 12:10 p.m., the committee recessed, to reconvene at 1:30 p.m., the same day.)

AFTERNOON SESSION

The CHAIRMAN. The committee will please be in order.

Mr. Rumble, will you identify yourself for the record, although we do recall your previous appearances before the committee.

STATEMENT OF WILFRID E. RUMBLE ON BEHALF OF NATIONAL FEDERATION OF GRAIN COOPERATIVES, LAND O’LAKES CREAMERIES, INC., FARMERS UNION GRAIN TERMINAL ASSOCIATION, AND FARMERS UNION CENTRAL EXCHANGE, INC.

Mr. RUMBLE. I will do that. I am Wilfrid E. Rumble of the law firm of Doherty, Rumble & Butler, of St. Paul, Minn. I represent and this statement is presented on behalf of the National Federation of Grain Cooperatives, a federation of 27 regional or federated grain marketing cooperatives which are farmers marketing organizations serving approximately 2,700 local farmers marketing associations. I also speak on behalf of Land O'Lakes Creameries, Inc., a federation of dairy cooperatives and individual dairy farmers located in Minnesota, Wisconsin, Iowa, North and South Dakota, and a few other Western States; the Farmers Union Grain Terminal Association, a federated marketing cooperative whose members are cooperative elevator associations and individual producers of grain located principally in Minnesota, North and South Dakota, and Montana; and the Farmers Union Central Exchange, Inc., a farmers supply cooperative whose members are composed solely of local cooperative associations engaged in selling petroleum products and other articles used by farmers in the production of food and located principally in Wisconsin, Minnesota, North and South Dakota, and Montana. The total farmer membership of these organizations and their member associations exceeds a million farmers.

The cooperatives named above have appeared before this committee on several occasions during the past 15 years and have presented testimony and statements with respect to the proper and fair taxation of

the earnings of farmer cooperatives by the U.S. Government. Those statements have dealt with the nature of a farmers cooperative, the manner in which it operates, the income-tax treatment of them by Congress and the Internal Revenue Service since 1913, the volume of business done by them, the reasons why we have felt that the earnings of a farmer cooperative which are refunded to its members and patrons pursuant to a binding legal obligation created prior to the transactions out of which the earnings grew should be taxed to the patrons and not to the cooperatives, and other factors bearing upon the situation. There is no need for me to repeat any of that information and I shall not do so.

I would like to say here, Mr. Chairman, parenthetically, that I think the presentation made by both sides during the symposium which you conducted in December of 1959 is about as thorough and clear and unprejudiced a one on both sides as you can get. In the statements that there were filed I think this committee has the information it needs to decide the questions that may be involved here.

The cooperatives I represent here unqualifiedly support the recommendations made to this committee by the Secretary of the Treasury for the taxation of cooperatives and their patrons. We believe the suggestions of the Secretary are fair and reasonable, that a bill embodying those proposals will be accepted by the great majority of the farmers of this country and will be enforceable in the courts. It will end the unfortunate dilemma in which the Revenue Service has found itself since the 1951 amendment of the Revenue Code. It will undoubtedly result in some additional revenue for the Government.

Right there I would like to interpolate and say in regard to some of the testimony I heard here this morning, that despite the concern which opponents of cooperatives seem to feel for farmers in respect to the suggestion that a tax be imposed upon them for cooperative earnings, out in the areas in which we operate we have thousands of farmers attending our annual meetings, members of these cooperatives. At those meetings, year after year, resolutions have been adopted supporting the position which we have taken here in recent years, 10 years anyway, and which the Secretary of the Treasury now takes, and very, very few have opposed that suggestion, so I don't think the farmers need anybody to look after them on this matter. They know what it is all about. They are willing to have the tax imposed on them rather than on their cooperatives and the reason is simple. They know that doing it that way their cooperative will have a far better opportunity to serve them and do the things they want their cooperative to do and which they really, even today, so badly need.

Unfortunately I cannot include in the foregoing approval the recommendations of the Secretary for the application of a withholding tax system to farmers cooperatives. Insofar as I personally am concerned I stated to this committee in 1959, with respect to a withholding tax, that I personally do not object to the idea provided that a reasonable floor is fixed, that intercooperative distributions are eliminated they have to be-and that the tax is made applicable to all dividend distributions of other corporations. I have not changed that opinion. However, in such surveys as we have been able to make among the members of the cooperatives I represent at

this hearing since the Secretary appeared before the committee on May 3, 1961, which was the first intimation we had that a withholding system was going to be recommended, it is apparent that a substantial number of farmer cooperatives strongly oppose the withholding tax system recommended by the Secretary or any withholding tax.

The Secretary has dealt with one of the conditions I attached to my endorsement of a withholding tax system, that is, he has proposed that the same withholding tax be imposed upon all corporation dividends and interest payments as is proposed for cooperatives and I am sure that under these circumstances, if the committee recommends legislation along these lines, the Secretary's recommendation in that respect will be followed, or if not, that no withholding tax system will be applied to cooperatives. There would, of course, be some difficulties in the application of a withholding tax system to cooperatives, as there surely will be in applying such a system to ordinary business or profit corporation dividends. Here the most important problem, that is, as to cooperatives, would be the avoidance of a double withholding on the same earnings. This problem would not arise with local cooperatives whose members are limited to individual farmers. It would, however, arise in respect to all federated cooperatives whether their members were limited to local cooperative associations or to a combination of such associations and individual farmers. Substantially all of the patronage and dividend distributions of federated cooperatives which are made to their members are immediately distributed by the member to its farmer patrons in the form of patronage dividends and refunds. It seems obvious that it would be wrong and not at all in accord with the Secretary's theory if a tax were withheld both at the regional level and at the local level. In most instances, of course, the cooperative association members of the regional organization will not be subject to income tax in any amount because they will be exempt cooperatives, and therefore there should be no withholding upon distributions to it.

I should think that all dividend and patronage distributions made by one cooperative to another should be excluded from withholding. Similarly, I think all income distributions from one profit corporation to another should be excluded from withholding. If this were done, the withholding tax would, of course, be applied only at the local level which is the point where it should attach, and this would follow even as to individual members of federated cooperatives. There may be other and better ways of meeting this problem. The important thing is that it be met.

If withholding is applied only at the local level I think the regional or federated cooperatives will, as a practical matter, be required to pay 20 percent of their dividends in cash or at least pay in cash to their patron cooperatives annually an amount equal to 20 percent of the dividends paid in scrip in order that their cooperative patrons may have sufficient cash with which to pay the withholding tax upon their members. As a matter of fact a number of federated cooperatives now pay in cash to their cooperative members and patrons annually amounts equal to or greater than 20 percent of their dividend distributions.

As the chairman knows, and I think the members of this committee know, there are now in our area a number of associations, regional associations, which pay 20 percent or more of their current annual income to their patrons in cash. The three individual regionals that I represent here this afternoon each do that. One pays it as part of their straight patronage refund, 22 percent; another pays it by way of retiring capital stock issued 8, 9, or 10 years before; and the third one has a sort of combination of that, but one way or another, those three organizations now get out to their members 20 percent or more of their annual earnings in cash.

The Secretary seems to feel confident that the withholding system would impose no burden upon farmer patrons who might not be subject to income tax or whose total income tax might be less than the amount withheld. I am not at all sure that this will be true. As a matter of fact that, I think, is the principal reason why many, many farmer patrons oppose the withholding. I believe the record of 1959 and February 1960 will show that from authoritative sources this committee has been informed that probably half of all of the patronage refunds made by farmer cooperatives are less than $10 per annum. That is a surprising statement, but apparently it is true. If it is true, then there should be no attempt to impose a withholding on amounts like that. It seems to me that it is still probable that the average farmer will need the assistance of a lawyer in order to insure that he receives his refund if one is due him and this will recur year after year.

Mr. Chairman and gentlemen, there has been a lot of talk during this hearing about the right of Congress to impose an income tax upon recipients of patronage refunds. The constitutional question has been discussed by able, reputable, and competent lawyers for what I will call the opposition, those who say that Congress cannot constitutionally do that. They have given you their opinion to that effect. Equally able, competent, and reputable lawyers for the cooperative position have given you their opinion that Congress can do it. I happen to be one of those, although I don't classify myself in that fashion, but I am in that group, let's say. I want to say to you there is no lawyer in the United States today who can, and if he is a reputable and a competent lawyer, who will, say to you with certainty that the Supreme Court will either strike down such a law or uphold it. That cannot be done. I filed with this committee in 1959 or early in 1960 at the public hearings the memorandum prepared by my partner, Irving Clark, on that question. In my mind that is a persuasive memorandum as to the constitutionality of this action or such action by this committee. Personally, I think the approach to it taken by the Secretary of the Treasury is sound. I would be confident that such a law would be sustained, but I say again that I do not say with certainty to you that that will happen. Neither can any other person say to you with certainty that it won't happen. My principal idea about that constitutional question is this: We have been before this committee year after year-I don't know how many times, since 1947 or 1948-trying to resolve this question about the taxation of earned income of cooperatives and to whom it should be taxed. Let's dispose of it once and for all. We know that the

present situation is wrong, for one of us. Somebody ought to pay a tax on these earnings. The question is who.

I would like to see this committee adopt the view which we take as to this situation. Go ahead and enact a statute and let's litigate it. In that litigation, which perhaps might take 3 years, during which the Government would get this revenue, I believe there will be determined by the Supreme Court the various questions that have been argued to you down through the years and we will have certainty about this situation. I should like to call your attention in that connection to a statement made by Justice Brandeis and Justice Clarke in the Eisner case, which is so often referred to in these hearings. Those two Justices of the Supreme Court said:

It surely is not clear that the enactment * * *

which they then were considering

exceeds the prerogatives granted by the 16th amendment and, as this Court has so often said, the high prerogative of declaring an act of Congress invalid should never be exercised except in a clear case. It is but a decent respect due to the wisdom, the integrity, and the patriotism of the elective body by which any law is passed, to presume in favor of its validity until its violation of the Constitution is proved beyond all reasonable doubt.

This I think is the star which should guide this committee in dealing with this constitutional question.

One other point, if I may be excused. There is one phase of this tax situation that I don't believe has really been called to the attention of this committee by me or by any of the other persons who have testified either at this hearing or at prior hearings, and I am not going into a long recital now, but since 1913, the cooperatives have been led to believe by Congress, and by the Revenue Department, and by the courts, that patronage refunds made under the technical conditions which we all know must be taken, are to be excluded from figuring their taxable income. That situation has led bankers, other investment people, patrons of cooperatives, and farmers who are not patrons or members of cooperatives, to believe that there will be available to creditors, those creditors of cooperatives, the earnings of the cooperative which are distributed in what I will now call scrip, as the Secretary had done, and that has been true down through the years, and right to this moment. It makes the credit of these cooperatives far greater than it otherwise would be. That is important, but what is more important is that many of these cooperatives now have outstanding obligations which if they continue to be taxed as they are now will in all reasonable probability be paid, and they will be able to pay them, but I would have much fear that if that situation is changed, that situation would not obtain. Tremendous hardships might very well be imposed as a result of any such change in the taxation of cooperatives.

That is all I have to say, Mr. Chairman. I appreciate the opportunity to be here and your courtesy in and consideration in listening

to me.

The CHAIRMAN. Mr. Rumble, you are always helpful to us. We appreciate your coming back to the committee. As I say, we have had this matter before us for a great number of years and you generally testified at each of these hearings, and we certainly always look for