ing another section following section 77 which would read substantially as follows:

Section 78. Non-Cash Patronage Allocations.

(a) All amounts allocated to patrons of farmer cooperatives in accordance with the provisions of section 522(B) (1) or section 522(B) (2) shall be deemed to have been received by the patron in the taxable year of the patron in which he received notice or evidence of such allocations and shall be included in the gross income of the patron at the dollar amount of such allocations, for such taxable year without regard to method of accounting employed by the patron.

In other words, we realize that this present state of confusion relative to the taxation of farmer cooperatives needs to be resolved and we, of the Texas Federation of Cooperatives, feel that somebody should pay the tax on the earnings in the year that they are earned.

We find ourselves in accord with Secretary Dillon's statement with respect to the manner in which cooperative patronage refunds should be taxed. Insofar as his discussion dealing with withholding tax, we are not in a position to favor it or disfavor it. I think, personally, that if this committee deems it wise and equitable to pass a withholding tax, we will not oppose it, even though the Federation has no official position on that part of the Secretary's message to you folks at the present time, but we at the Federation believe that somewhere all the earnings should be taxed.

If the amendment suggested above, or a similar one, should become effective, it would put to rest questions concerning the taxability of margins or earnings made by farmer cooperative associations coming within the purview of sections 521 and 522 of the Internal Revenue Code of 1954.

From the 80th through succeeding Congresses down to the present date, we have consistently asked that the earnings of a cooperative be taxed in the hands of the recipient of its allocations in the taxable year of the patron in which he received notice of such allocations. We believe that our position is in keeping with what was the manifested intent of Congress when it passed the legislation which resulted in sections 521 and 522 of the Internal Revenue Code of 1954.

Now, if I may, Mr. Chairman, I would like to speak for just a moment as a farmer and as a member of the Board of Directors of Plains Cooperative Oil Mill, a cooperative organization at Lubbock, Tex., with a membership of some 12 to 15,000 farmers. A week before last at our regular board meeting, we did take a position on the Secretary's recommendation to this committee. While we are not asking for a withholding tax on retains that the cooperatives might have, if you folks in your wisdom should deem that that is the correct way to get taxes paid on all the earnings of a cooperative, we will heartily support such legislation.

Thank you so much for the opportunity of appearing here.

The CHAIRMAN. Thank you, Mr. Smith, for coming to the committee as well as you, Mr. Schroeder.

Now, Mr. Horace Smith.

Mr. HORACE SMITH. Mr. Chairman, and gentlemen of the committee. My name is Horace Smith. I reside in Miami, Tex., where I am engaged in the business of farming and ranching. I grow wheat and

raise cattle. I am a member of Laketon Wheat Growers, a local grain and supply cooperative, and serve on the Board of Directors of Producers Grain Corp. which was organized in 1938.

This corporation is a regional cooperative engaged in the business of storing and marketing grain for some 120 local grain cooperatives making up its membership. In turn, these local grain cooperatives serve some 30,000 farmers who are grain producers.

I have read wth a great deal of interest the testimony of the Secretary of the Treasury of the United States before this honorable committee, wherein he has recommended legislation which is designed to eliminate the existing state of confusion with respect to the taxation of margins made on business done by farmer cooperatives.

He has recognized the long-established principle of cooperative endeavor whereby patrons and their cooperative organizations can, through mutual contractual agreements, obligate the cooperative corporation to pass on to its patrons the margins made on business done for them and also obligate the patron to reinvest in the cooperative such amounts of the patronage refunds as may be needed by the cooperative to meet its capital requirements.

Every farmers' cooperative organization with which I am acquainted obtains most of its capital in this manner. Obviously it cannot exist without capital, and this capital must be supplied by its members and patrons through investments.

For many years I have been processing and marketing my production through cooperatives, and consequently, I have been making investments in their capital. I have done this both by purchasing stock for cash and by permitting all or a portion of my patronage refunds to be retained in the business. Where my margins have been retained, it was done pursuant to a contract with my cooperative and I have been issued capital stock for the amount involved. Where I have received my patronage allocation in capital stock, I have considered the transaction to be the same as though the patronage refund had been paid to me in cash and I had reinvested the money by purchasing the stock. Indeed, my contract with my cooperative provides that funds withheld for capital investment shall be considered as having been constructively delivered to me and by me reinvested.

This is a fair method of contracting. If I don't want to be obligated to invest in the capital of the cooperative, I don't have to deal with it. If I elect to do business with it, I should, as one of its owners and patrons, contribute to its capital needs.

Under this type of arrangement I acquire an ownership interest in the facilities and properties of the organization through my investment and I have actually invested money in the business even though the money did not actually pass through my hands in a physical way.

How can anyone say that patronage refunds made in capital stock, equity certificates, or other noncash media pursuant to such a binding contract of reinvestment have no value? They may not have a market value, but they definitely have a value because they represent evidence of ownership in property and property rights.

Now if I buy a tractor, I must invest in it dollars upon which I have paid an income tax. If I build a farm, I must do likewise. To me, there would seem to be no distinction between these transactions and one whereby my neighbors and I elect to own a grain elevator or a cotton gin.

I think Mr. Dillon has recognized this fact, and we are in accord with his views. Our cooperatives in Texas have consistently recommended that all patronage refunds should be taken into tax accountability at the patrons' levels regardless of whether the patronage refunds are in cash, capital stock, or other noncash media.

With regard to the proposed withholding tax on patronage refunds, it is our view that if such withholding provisions are made applicable to all corporations and businesses they should likewise apply to cooperatives, but that the withholding tax should not be made applicable to cooperatives alone.

Thank you.

The CHAIRMAN. Mr. Smith, your statement sounds to me like statements that I have had made to me by many, many people who are cooperators in my own district. It sounds exactly like their description to me of what ought to be done.

Mr. HORACE SMITH. I am happy to be acquainted with some of your cooperatives in your area.

The CHAIRMAN. I want to thank all three of you for your state

ments.

Mr. Mason, do you have any questions?

Mr. MASON. No.

The CHAIRMAN. Any questions?

Thank you very much.

Mr. HORACE SMITH. Thank you.

The CHAIRMAN. Mr. Healy, you have been before the committee before, but for purposes of this record, will you again identify yourself, sir.

STATEMENTS OF PATRICK B. HEALY AND M. R. GARSTANG, NATIONAL MILK PRODUCERS FEDERATION

Mr. HEALY. Yes, sir. I am Patrick B. Healy. I am the assistant secretary of the National Milk Producers Federation with offices at 30 F Street NW., Washington, D.C.

The CHAIRMAN. You are recognized, sir.

Mr. HEALY. Mr. Chairman, I would like to present to you and to the committee, Mr. M. R. Garstang, who is general counsel of our federation, and to ask that he be allowed to participate with me in this statement.

The CHAIRMAN. Fine, sir. You are recognized. We are glad to have you with us.

Mr. HEALY. Mr. Chairman, I would like to file my statement for the record and comment briefly on some of the points in it that we consider to be most pertinent.

The CHAIRMAN. Without objection, your entire statement will be made a part of the record.

Mr. HEALY. Thank you, sir.

The National Milk Producers Federation is the oldest and largest of the National Farm Commodity Organizations. We have dairy farmer cooperative membership in all 48 of the continental United States. We represent dairy farmers and the cooperatives through which they, the dairy farmers, act together to process and market at cost milk produced on their farms. Our bylaws require that 75 per70510-C1-pt. 3- 36

cent of our board of directors be active dairy farmers. We think this is an important consideration in this hearing because of the proposals contained in the President's message.

As a group we support the President's tax proposals with respect to the taxation of farmer cooperatives. Basically, the President's proposal calls for a return to the principles of the 1951 law under which one tax would be collected currently on savings made by farmers when they processed their own commodities through their own plants at cost.

Now, we have consistently taken the position that this is a fair and just solution to the cooperative tax problem. There is no tax deferment called for in the President's proposal and we do not ask that one be granted. We believe that one tax is due on these savings currently in the year in which the saving is made. This tax should be paid at the patron level on all allocated net savings, no matter how the savings are distributed, whether in cash, capital stock, equity certificates, or other forms of retained capital.

As regards the withholding tax, that presents some very real problems to farmer cooperatives and there are many reasons why patronage refunds, which, in effect, are a part of the farmer's gross selling price, should not be treated in the same manner as corporate dividends, which are distributions of net profits. We would prefer to let the farmers themselves solve the matter of how much cash they want their cooperatives to pay them and how the distribution is to be made.

Nevertheless, we have weighed all of these matters-we did this no less than three weeks ago our board of directors met here in Washington to consider these proposals and reviewed them completely, and we are prepared to go along with a general withholding tax applied across the board to patronage refunds of cooperatives and to corporate dividends and interest as well. We are not overly thrilled with having a withholding tax, but we do this because we believe that the present tax muddle resulting from the court cases should be corrected. If, as we believe, the acceptance of this withholding tax will aid in getting this problem solved once and for all, it is a small price to pay to be certain before the Congress and before the courts just where we do stand on this very important question.

Much of the opposition to farmers cooperatives which has been expressed to this committee has come from processors and other middlemen whose opportunities for excessive profits are greatest when farmers are disorganized, when there are no farmer checks on weights and measures and tests, and when there are no cooperatives to provide a regulating influence on the margins that can be taken between the prices that farmers receive and the prices that consumers pay. Therefore, we hope that the committee will weigh the personal interests of such witnesses when they make proposals which would impair farmers' cooperatives.

Very briefly, in summation, the position of dairy farmers on the cooperative tax is as follows:

1. One tax should be paid currently on net savings made by farmers when they process their own commodities in their own plants at cost. 2. The tax should be paid by the farmers on amounts which are allocated to them and by the cooperatives on the amounts which are not allocated.

3. The tax should be based on the full amount of the net savings realized without regard to whether the allocations are made in cash. or in the form of retained equity capital.

4. As long as one tax is paid currently in the year in which the saving is effected, farmers should be free to determine for themselves, by democratic processes available to them in their own cooperatives, how they want to handle their own funds.

These remarks, Mr. Chairman, are necessarily made on the basis of the President's message. We do not have the details of the legislation. We are assuming that the legislation which is presented will carry out the intent of the message. If it does not, of course, we would like to reserve the right to revise our remarks.

One more thing. We have attached to this statement a draft of a proposed amendment relating to the taxation of farmer cooperatives. This committee has had presented to it in times past similar drafts prepared by Mr. Rumble, who appeared just before me. Both his draft and this draft accomplish the same thing. This is presented in that spirit. Either one, we believe, will accomplish what we want and what he wants, and we hope that you will accept one or the other.

That concludes what I have to say, Mr. Chairman.

We thank you for having the opportunity to appear. (The statement of Mr. Healy, referred to, follows:)

STATEMENT OF THE NATIONAL MILK PRODUCERS FEDERATION BY PATRICK B. HEALY, ASSISTANT SECRETARY, MAY 24, 1961

On behalf of American dairy farmers, I want to express again our sincere appreciation for the privilege of appearing before this committee.

SUMMARY

We support the President's tax proposal with respect to the taxation of farmers cooperatives.

Basically, the President's proposal calls for a return to the principles of the 1951 law under which one tax would be collected currently on savings made by farmers when they process their own commodities through their own plants at cost.

We have consistently taken the position that this is a fair and just solution to the cooperative tax problem.

There is no tax deferment in the President's tax proposal, and we do not ask for one.

While a withholding tax applied to patronage refunds would cause some hardship for farmers cooperatives, we are willing to go along with a general withholding provision applied across the board to corporation dividends, interest, and patronage refunds.

Our bylaws require 75 percent of our board of directors to be active dairy farmers. Our testimony, therefore, carries special significance, because it reflects the willingness of dairy farmers to pay tax currently and at face value on allocations which they retain in their own cooperatives for use as equity capital. Much of the opposition to farmers cooperatives which has been expressed before this committee has come from processors and middlemen whose opportunities for excessive profits are greatest when farmers are disorgonized, when there are no farmer checks on the accuracy of weights and tests, and when there are no cooperatives to provide a regulating influence on the margins that can be taken between the prices that farmers receive and the prices consumers pay. Cooperatives have been reasonably successful in the agricultural field, as Congress intended they should be, and they have made important and valuable contributions to the agricultural economy. Their expansion into other areas is quite insignificant.