An effective single income tax would result. This appears to be the objective of the present administration and the solution we sug gest can make the accomplishment of this objective relatively easy. We do want to reiterate an important qualification. The term "cash" as used in our proposal must be interpreted and defined to mean only those distributions paid in cash as that term is commonly understood in commercial usage.

Moreover, the distribution must be made in such a manner that when received the money is subject to the complete dominion and control of the patron-recipient and not subject to any preexisting legal obligation regarding its disposition or reinvestment. This is an important qualification in view of the judicially repudiated “reinvestment theory" advanced by the cooperative proponents. We would also add to this recommendation a recommendation that the statutory exemption presently accorded certain kinds of cooperatives should be repealed.

Under our cash patronage dividend deduction proposal, cooperative corporations will enjoy a substantial advantage as compared with their noncooperative corporated competitors. We see no particular reason why this advantage should be further compounded by the additional privileges presently accorded the so-called exempt cooperatives.

The main privileges of exemption permit the deduction by the cooperative corporation of dividends on its capital stock and allocations of income which the cooperative receives from sources other than patronage. The net effect of this exemption is the direct subsidy of qualifying farmer cooperatives regardless of need or size or general benefit to agriculture as a whole. Conditions have changed immeasurably during the past few decades and we see little reason to continue to extend the privileges of exemption to multimillion-dollar cooperatives where need is a minor factor.

I might add in this respect, that when the exemption was originally granted cooperatives, we were dealing, perhaps, with a theory and using an argument that this is protection or subsidy to an infant industry. It is a common infant industry approach. I think it is generally recognized that most cooperatives have now reached a stage of maturity. I doubt very much that the exemption as such is needed to further stimulate their growth or to permit new cooperative organizations to be formed to come into business in the agricultural marketing area.

TAX WITHHOLDING

We have not earlier commented specifically about the use of 20 percent withholding to collect at the corporate level a tax liability which may or may not exist at the patron level. To the extent that such a tax liability does legally exist, the withholding device is a convenient one for the partial collection of tax. But we will not know for years if Congress has the power to constitutionally tax patrons for patronage dividends received in noncash form.

Withholding in such a situation does not therefore decide in any degree the fundamental legal decision involved and has the additional disability of exposing the Treasury Department to wholesale refund claims if the courts eventually decide that the patron-recipient of a noncash dividend is not subject to income tax thereon.

Our reservation regarding the Treasury proposal is directed primarily at the Treasury's reliance upon withholding as a technique for providing some degree of tax equality between cooperatives and their noncooperative competitors. This overlooks the fundamental problem and thus has a tendency to cloud the real issues involved.

CONCLUSION

There is one last, concluding point in connection with our proposal which we consider important and with respect to which cooperative spokesmen have never provided a satisfactory answer. We wish to make it entirely clear that our cash dividend deduction plan is not designed to prevent a patron from investing in his cooperative all or any part of the cash he receives. Consequently, we have never been able to understand why coopertaive management does not wish to subject its performance to the same careful scrutiny as that applied to the management of competing business corporations.

The real test of a corporation's success is its ability to attract additional investment capital. Any cooperative which is doing its job well can attract money for its capital needs and expansion requirements as these develop. They can attract the cash dividends which they have paid to their farmer customers if they are doing their job well and doing it right.

Therefore, a cooperative which is performing a real service to farmers should have no difficulty whatsoever in attracting the investment by these farmer customers of the cash patronage distributions which they receive.

We believe, therefore, that our proposal in addition to promoting some degree of competitive equality between cooperative and noncooperative competitors has the added longrun advantage of making cooperative business more completely responsible to their farmer owners a thoroughly desirable objective.

This concludes the prepared statement.

Just before I left Minneapolis, I picked up, or received a recent publication of the Farm Credit Administration entitled "Bank for Cooperatives, A Quarter Century of Progress." I would like to call your attention to an insert for the record, table C, which I will hand to the reporter; I think it is interesting to note the net effect of table C which relates to loans outstanding from 13 banks for cooperatives by principal product or service. In 1955, there was a total of 2,129 loans involving $316 million. By 1960, the number of loans outstanding by the bank for cooperatives to cooperative associations had increased to 2,745 and involved $550 million. This money provides long-term capital for financing and continued growth of cooperative associations. Cooperatives are able to tap investment markets available for their noncooperative competitors.

I will not ask that this be placed or inserted in the record at this. point, but I did want to call your attention and would ask you to, if you would, take a look at the 1960 hearings statement. We provided you at that time with some charts which I thought were interesting regarding the comparative growth possible with respect to cooperative corporations and their noncooperative competitors. I am looking here at a chart which I prepared projecting growth and net

worth, 1960 to 1970, of again the large Grain Terminal Regional Cooperative, the Grain Terminal Association.

Based on a net worth in 1960 of $38.8 million and assuming the same compounding rate of investment return as they have had in the past 10 years, and assuming continuation of their present status, and continuing the same type of earnings performance, this would permit growth from $38.8 million to $90.1 million in a 10-year period of time.

A taxpaying competitor corporation earning identically the same rate of pretax earning rate, 11 percent, and starting with the same identical networth, $38.8 million, would be able to acquire or reach a net worth position of $54.5 million by 1970, $90.1 million as compared with $54.9 million.

(Table C referred to follows:)

TABLE C.-Loans outstanding from 13 banks for cooperatives by principal product or service, June 30, 1955, and 1960

1 Represents number of cooperative associations having loans outstanding.

The CHAIRMAN. Without objection, the table that you referred to earlier will be included in the record at the point which

to it.

Mr. GIEBINK. Thank you very much, sir.

you referred

The CHAIRMAN. Mr. Giebink, there is just one question that I have. The spokesmen for the cooperatives have repeatedly said that they do not have access to the money markets that the proprietary corporations have; that that is one of the reasons why they think there is some justification for some special treatment, apparently.

You say that they do have access to the money markets just as any other corporation would have. Spell that out just a little bit for us, will you? How do they get money from the money market? Mr. GIEBINK. Long-term debt market?

The CHAIRMAN. Do they issue some type of debenture or some note or stock or what?

Mr. GIEBINK. The Bank for Cooperatives is available, of course, to cooperative associations.

The CHAIRMAN. Do they have access to moneys that you and I might, or some bank might have?

Mr. GIEBINK. Or that our company might have access to?
The CHAIRMAN. That is right.

Mr. GIEBINK. Certainly, with respect to again what I refer to as the long-term money market. I am talking about access to the insurance lender market, the bank market, this type of thing. They have equally as good an access to that market as we do on the basis of the financial statements that they can present. You are familiar, I am sure, that a number of cooperatives are presently borrowers from insurance companies. Smaller cooperatives are borrowers from many local banks in the country.

Many of the cooperative associations in the upper midwest area are borrowers from grain commission firms in the Minneapolis-Duluth markets, which in turn, obtain those funds from private banking channels. By and large, therefore, I am persuaded that cooperative associations which are doing a job, which are well managed, which are developing something at the end of the year for distribution to their patrons, have access to these capital markets just as we do. The CHAIRMAN. Do cooperatives sign a mortgage when they borrow money from a bank or insurance company?

Mr. GIEBINK. Yes, they do.

The CHAIRMAN. What evidence of indebtedness do they use?

Mr. GIEBINK. Again, I cannot speak with complete authority on this, Mr. Chairman, but I would assume that the mortgage loan route would be available to them. Their properties are substantial and rather extensive and are ideal security. They can, of course, borrow against accounts receivable. They can borrow generally against working capital position and obtain unsecured bank lines of credit, which I know in previous years have been extended, for example, to the Farmers Union Grain Terminal Association, and to GLF.

The CHAIRMAN. Do they issue any such thing as a corporation might issue in the way of preferred stock?

Mr. GIEBINK. The Farmers Union Grain Terminal Association does issue preferred stock in payment of their patronage distributions. The CHAIRMAN. Is that preferred stock interest-bearing?

Mr. GIEBINK. As a general rule preferred stock is noninterest, or nondividend paying.

The CHAIRMAN. I do not have any answers. I am trying to get information. I do not know. However, you come from an area where there are a great number of cooperatives, you say, and I am sure you are familiar with the way they operate. Do they issue preferred stock to obtain funds from people who are not their customers and on which they pay interest?

Mr. GIEBINK. As a general rule, no. We do find that some cooperative associations in our area do attract this type of investment funds, but by and large, I think you are entirely correct. I think you may be correct in assuming that they do attract to them the patronage distributions which are left with the cooperative association and in many instances revolve over a period of years.

The CHAIRMAN. You say they do actually with respect to some of the noncash allocations of patrons issue a form of preferred stock! Mr. GIEBINK. Yes. I am not sure that a large number of local cooperatives do this; but I know recently the Farmers Union Grain Terminal Association was issuing preferred stock in payment of its dividend.

The CHAIRMAN. Does that have marketable value when it is issued in your area?

Mr. GIEBINK. No readily available market value. It is not traded. It is not redeemable.

The CHAIRMAN. It is more than the type of paper that some have referred to in the hearings as scrip issued by a cooperative?

Mr. GIEBINK. Not necessarily, Mr. Chairman. No. The scrip I think which was referred to by many of the people who have appeared before you is paper which involves the so-called type of revolving fund certificate. Much of this scrip is subordinated evidence of indebtedness of some kind or another, payable after the repayment of the other debts of the cooperative. În some instances, the scrip involves the use of preferred stock or various classifications of stock of some kind or another, which depend for their value upon the net worth of the cooperative corporation.

The CHAIRMAN. Mr. Schneebeli?

Mr. SCHNEEBELI. Could you tell me, are there any restrictions in state law or in the charter setting up a cooperative that restrict them as to public borrowing?

Mr. GIEBINK. None that I know of.

Mr. SCHNEEBELI. Are there no restrictions or any legal qualifications that restrict their public borrowing?

Mr. GIEBINK. None that I know of, sir, other than the fact, that in order to qualify for exemption, as I recall, they work on the one member-one vote basis. On the other hand, there would be nothing which would restrict their ability to use a preferred stock issue, for example, to borrow money.

Mr. SCHNEEBELI. Thank you.

The CHAIRMAN. Mr. Utt?

Mr. UTT. Mr. Giebink, is it not a fact that the main burden of your testimony is the tax differential from a competitive standpoint? Mr. GIEBINK. The competitive standpoint entirely.