business in competition with an established location; but after we have risked our capital to build the market, the cooperatives with their tax advantage are able to come in and take out their investment quickly with very little risk and still less taxes. When I first started this business in 1952, in the State of Nebraska, there were in the whole State fewer than 12 ammonia tanks and all of them owned by private business struggling to build a new market. In 1952 there were many cooperatives in Nebraska but they apparently did not want to take a chance on this new development although it offered substantial savings to the farmer. Even in 1956, there were only a few cooperative locations handling anhydrous ammonia. By 1959, when the ammonia business was accepted, the cooperatives had 25 percent of the tank installations and more than 40 percent of the business. Projecting their rate of growth, I estimate that by 1965 they will have in excess of two-thirds of the business. Although this doesn't seem possible, ammonia tonnage in the State of Nebraska from 1956 through 1959 in Nebraska increased almost 250 percent but the independent owned distributor's average tonnage actually decreased 22 percent. This was their reward for pioneering a new market. In a nearby town, an aggressive independent distributor's business today is only one-third of what it was in 1956. Prior to 1956 the cooperative in this area did not risk the investment in ammonia facilities, but it now does 88 percent of the business. Right now they are expanding in a general store, hardware, propane and feed. Why shouldn't they, since they keep practically all of the profit for expansion and don't have to pay a Federal income tax like I have to pay. Through this method they can quickly expand and gradually force out present independent businessmen who have to pay taxes prior to any expansion program. Still less tax revenue will be forthcoming to our Federal Government when we are gone. Cooperatives invest money in processing, manufacturing and distributing facilities to make a profit for their owners. That's the reason I invest my money, too. If my investment earns any income, the law of this land requires me to pay a tax on that income, first in the corporate structure, and then on dividends, if any. The cooperative sits there in exactly the same business and has no tax responsibility at all for the income that their investment earns. This is such a good deal that they are now building a huge multimillion-dollar nitrogen plant at Hastings, Nebr., a few miles from me. The money to build this plant, I imagine, came primarily from untaxed earnings. I am no expert on tax laws. I know they are complicated and affect many things. Perhaps at one time cooperatives needed to be protected from taxes. But today I have to operate under present corporate rates which have increased substantially in the last 25 years. Protection granted cooperatives years ago under perhaps extenuating circumstances but which no longer exist today, are about to destroy a small business like mine. When President Kennedy submitted his message on taxes, I noticed that he felt the loophole whereby cooperatives avoid taxes and still keep the money should be closed. I certainly agree with this and I also agree with him that if this committee recommends a withholding tax on dividends, it should apply to cooperative refunds as well. If it doesn't, the competitive advantage will only get wider. Cooperatives should be taxed just like my business, which simply means payment of federal income taxes prior to distribution of dividends. If co-op taxes are not changed and since we must compete against each other, the tax structure should be amended and reduce my taxes down to the cooperative level. One of the two must be done. Gentlemen, I don't know if I have accomplished anything being here, but I did want you to know that my business and all of those like mine cannot exist if this tax problem isn't fully corrected. I am not afraid of competition. This is what helps the farmer, my customer. But what good is it going to be when the unfair tax laws run me out of business and there is only one supplier in my community? Who is going to offer competition in service and price then? Individual businesses such as mine can compete if taxes are the same for everyone. We have no objection to paying taxes on profit and income earned and realize that additional tax monies are going to be required in future years for the survival and freedom of our country. We do feel, however, that comparable units of our economy should be taxed in a like manner. If this doesn't happen, tax revenue will be wanting and the future of our country will be jeopardized. Gentlemen, I can't see how asking for equal application of tax laws is anything but asking for fair play in the best American tradition. Thank you. The CHAIRMAN. Mr. Gallup, we appreciate, sir, your coming to the committee and I assure you that it has been worth your while to come and discuss these matters with us. We are very diligently trying to find an answer to this question of the taxation of cooperative earnings. Are there any questions? Mr. Curtis? Mr. CURTIS. I was just wondering about this. Were these co-ops that went into this business already existing co-ops? Mr. GALLUP. Primarily, yes. Mr. CURTIS. There have not been any new co-ops that have been created to go into this business? Mr. GALLUP. I would say in very, very few instances. They were in you might say an allied business prior to that time. Mr. CURTIS. Of course, there are many that were existing and just were in different areas. Mr. GALLUP. Oh, definitely so. Mr. ALGER. Mr. Chairman. The CHAIRMAN. Mr. Alger. Mr. ALGER. Mr. Chairman, I want to ask a question of you. I have just seen the joint committee study of 1951 on co-ops by the staff of the Joint Committee on Internal Revenue. Is the committee procedure to reprint those along with the co-op hearings now, or is that out of order? The CHAIRMAN. Those were not distributed publicly as I recall. That was made for the benefit of the committee members at that time. Mr. ALGER. I am asking for information. I am not suggesting it. I just wonder what you think because I know that I would like a copy. The CHAIRMAN. You may have a copy. Mr. ALGER. It is in the compendium, is it not, of last November! The CHAIRMAN. Wait just a minute. I did overlook the fact that we included it in last year's hearings. Mr. ALGER. Would it be inappropriate to include it at this time on these more complete hearings? The CHAIRMAN. Would you like to have it included at the end of today's session? Mr. CURTIS. I would like to join in that request and point out the fact that that is a very interesting compendium that cites a number of cases on this point. The CHAIRMAN. I had forgotten that we made it available to the public last year. Mr. MASON. Mr. Chairman, I would like to join in the request to have it included. The CHAIRMAN. Without objection, it will be included at the conclusion of the proceedings of today. Mr. ALGER. Thank you, Mr. Chairman. The CHAIRMAN. Are there any questions now of Mr. Gallup? Mr. GALLUP. Thank you. (The compendium referred to follows:) PART 3 THE POWER OF CONGRESS TO TAX COOPERATIVES ON NET MARGINS 81736 PREPARED BY THE STAFFS OF THE TREASURY AND THE JOINT COMMITTEE ON INTERNAL APRIL 1951 UNITED STATES GOVERNMENT PRINTING OFFICE WASHINGTON: 1951 70510 0-61-pt. 3--37 THE POWER OF CONGRESS TO TAX COOPERATIVES ON NET MARGINS I. CONGRESS MAY CONSTITUTIONALLY TAX COOPERATIVES AS CORPORATIONS The fact that cooperatives are corporations and that Congress has the constitutional power to tax them as corporations may appear so obvious that discussion of the proposition is unnecessary. However, general statements have been made to the effect that the cooperatives are only agents, partnerships, or trusts, with the implication that they are not entities in their own right capable of having income subject to tax. For this reason it is necessary to establish beyond question the fact that the cooperatives are separate corporate entities which are taxable as such. The most obvious proof that the cooperatives are corporate entities is the fact that in most cases they are organized under corporate charters granted to them by the various States. In some cases they are organized under the States' regular incorporation statutes. In many States there are special statutes for the incorporation of cooperatives. Whether or not the cooperatives are officially incorporated under State law they are treated as corporations for Federal tax purposes, since the definition of a corporation in section 3797 (a) (3) of the Internal Revenue Code includes an association. So far as is known there has been no instance in the history of Federal taxation since the enactment of the corporation excise tax in 1909 where a cooperative association, other than one which has been specifically exempted from tax, has contended that it should not file tax returns as a corporation. In 1946, for example, the Bureau of Internal Revenue computed that 6,000 exempt farm cooperatives filed information returns on Form 990 and that 2,344 taxable farm cooperatives filed corporate income tax returns on Form 1120. It should also be noted that Congress for many years has considered cooperatives as corporations, since, in exempting certain farm cooperatives from tax, it has exempted them from the corporate tax. In the light of the fact that the cooperatives are organized as corporations and meet the definition of corporations for Federal tax purposes, decisions by some State courts in which cooperatives have been called agents, partnerships, or trustees, or have been said to be analogous to agents, partnerships, or trustees, are immaterial in an analysis of the Federal taxing power. The courts have held repeatedly that the Federal taxing power is not restricted by definition or status determined under State law. This principle was stated definitely by the Supreme Court in the case of Burk-Waggoner Oil Association v. Hopkins (269 U. S. 110 (1925)), where it held that Congress had the right to tax as a corporation a "Massachusetts trust" which was technically a partnership under State law. At that time the Court said: |