in the new development of city cooperatives. The LP-Gas Co-op is basically a purchasing cooperative. Our comments have equal application to the "tax exempt" and the so-called taxable co-op and we propose similar tax treatment. We are not in any sense suggesting that the marketing co-op be treated similarly or that co-ops be eliminated. Unquestionably, the small farmer needs the benefit of the co-op form of organization for his marketing, but my observation is that it is not small, that it has broadened out by handling seeds, building supplies, and so forth. We are suggesting that the purchasing co-op pay their fair share of the tax burden for the privileges they enjoy on the basis comparable to private industry. The purchasing co-op, of course, differs radically in the scope of their functioning. The purchasing co-op today is in most instances peforming the same functions as private business and for the same purpose-profit. The profit of its members and not society. It should not be permitted to hide behind the economic screen of the marketing cooperative. Its economic purposes are dissimilar. There is no reason why they cannot be separated for tax purposes. Equity and logic demand it. The present law is divisible between the marketing and the purchasing co-op and the objective can be accomplished by striking out section 521 (b) (1) (a) (B) in the present law and treating these business enterprises on the same tax plane as other businesses that are obliged to compete with a present tax advantage granted under Federal law. A tax advantage that is now resulting in substantial tax erosion will create further erosion unless this tax loophole is fully plugged—and now. The CHAIRMAN. Thank you, Mr. Holden. Are there any questions of these two witnesses? Mr. Derounian? Mr. DEROUNIAN. Mr. Kreutzer and Mr. Holden, they are both excellent statements. They are rather shocking. Mr. KREUTZER. We so intended them. Mr. DEROUNIAN. I would say that I am certainly in favor of the taxing of these cooperatives. I am in favor of that part of the administration's tax message. However, the administration goes in the other direction when I read the Wall Street Journal this morning that they plan to spend a billion dollars for further encroachment of public power on private power, so the only way this thing is going to be stopped, this whole philosophy, is by angry reaction from the public and private enterprise interests, and you better get on the ball because it is already too late. Mr. HOLDEN. That is right. We have been too timid in the past and I think it is high time we speak out against something as vicious as this. The CHAIRMAN. Any further questions? Mr. Betts. Mr. BETTS. How do the rates charged by an REA cooperative compare with the rates charged by private enterprise in this utility? Mr. KREUTZER. As far as electric utilities are concerned? Mr. BETTS. Yes. Mr. KREUTZER. I am not completely competent to speak on electric rates that is not our area. LP-Gas rates are the ones that I am familiar with. All I can speak from is from general knowledge. The REA co-op and the rates of electricity privately owned are generally competitive except in the areas where you have publicly owned power. Mr. BETTS. Thank you. Mr. KREUTZER. As far as the LP-gas supplier, generally the rates are competitive, again depending on the public power areas. The CHAIRMAN. Any further questions? If not, we thank you, gentlemen, for bringing us this discussion of your views. Thank you very much. Mr. KREUTZER. Thank you. Mr. HOLDEN. Thank you. The CHAIRMAN. Mr. Ellis will not appear in person, but he would like to have a statement filed in the record. Without objection, his statement will appear in the record at this point. (Statement referred to was not available as of June 9, 1961.) The CHAIRMAN. It will be necessary for us to recess until 2 o'clock. Without objection, we will return at 2 o'clock this afternoon. (Whereupon, at 12:05 p.m., the committee recessed, to reconvene at 2 p.m., the same day.) AFTERNOON SESSION The CHAIRMAN. The committee will please be in order. If you will identify yourself for the record by giving us your name, address, and capacity in which you appear, we will appreciate it. STATEMENT OF WILLIAM B. POINSETT III, PRESIDENT, MYERSCOX CO., DUBUQUE, IOWA, CHAIRMAN, COMMITTEE ON LEGISLATION AND TAXATION OF THE NATIONAL ASSOCIATION OF TOBACCO DISTRIBUTORS Mr. POINSETT. I am William B. Poinsett, president of Myers-Cox Co. in Dubuque, and the chairman of the committee on legislation and taxation of the National Association of Tobacco Distributors. The CHAIRMAN. You are recognized, sir. Mr. POINSETT. Thank you, Mr. Chairman. I am in the unique position of being a resident of a Democratic county in a Republican State, which may give me a fairly rounded picture of the problem I should like to present to this honorable body. My company has operated for the past 95 years in the midwest, having branches in Iowa, Illinois, and Wisconsin. As I said, I am chairman of the committee on legislation and taxation of the National Association of Tobacco Distributors and in speaking to you, I represent not only my company, but the Association which has delegated me to make this presentation. The National Association of Tobacco Distributors represents wholesale tobacco people throughout the country who serve approximately 11⁄2 million independent retailers in the United States. These inde pendent retailers are, in the main, small and completely dependent upon independent wholesalers in order to survive, since it is the independent wholesaler, through their services rendered, such as the extension of credit, the breaking of bulk, sales and distribution, who afford these small independents an opportunity to stay in business and compete with the larger direct buying retail chains, supermarkets and discount houses. The marketing or distributive cooperative and I am excluding from my remarks both farming and rural electrification cooperatives for the reason that different considerations apply in their case-is also basically engaged in servicing the small independent retail dealer. To the extent that we are both interested in strengthening the hand of the individual entrepreneur in his struggle against overwhelming odds, our interests are the same. To the extent, however, that both of us solicit the trade of the same type of customer, we are competitors. I personally, and the organization I represent collectively, have deep commitments and attachments to the principle of competition. We believe in maximizing competition. However, for competition to be healthy, it must be fair. There are many areas in which the competition of the marketing cooperative is not characterized by fairness and equality of opportunity. I live in an area that can properly be called the home of cooperative growth and I have made a very careful study of their development. The cooperative essentially is an organization that plows back profits on sale as a substitute for investment capital. Customers or buyers from the cooperative ordinarily supply the initial capital and take their returns in the form of a discount or rebate from the purchase price of products they buy from the cooperative. These discounts, however, are customarily not paid over to the member purchaser, but rather retained by the cooperative as additional investment capital. Particularly in the early stages, the percentage of earnings left in the cooperative by the patron is usually not less than 50 percent and often as high as 100 percent. Although a cooperative is in essence a form of corporation, these retained earnings are not taxed to the cooperative, as they are in the case of all other corporations, where the patron member receives allocations of income in the form of scrip or other patronage noncash dividends. Thus, the cooperative is, in effect, afforded a tax exemption to enable it to grow, which is currently not available to the independent wholesaler doing the identical job of servicing the small retail merchant. This, in effect, means that one competitor, the independent wholesaler, is called upon to subsidize his rival, the cooperative while attempting to meet the market competition of that rival for the trade which they both depend upon to survive. Commonsense shows this situation to be insufferable. I speak in this instance as though the services rendered by the independent wholesaler were in all respects comparable or equal to those rendered by the cooperative. In actual fact, and viewed in the broad national perspective, the services rendered by an independent wholesaler are of incomparably greater value to the economy as a whole and to the small merchant in particular than those undertaken by the cooperative, valuable though these latter may be. The independent wholesaler is essentially a venture capitalist willing to undertake speculative activities. In my own field, for example, it is because we are willing to underwrite the sale of new products that we now see a proliferation of forty different brands and types of cigarettes, where previously only six dominated the field. By contrast, the cooperative usually dominated by small buying committees constituted of the larger retail members, are conservative in their operation and take on a brand or product, only after its value has been demonstrated through the channels of the independent wholesaler. Thus, progress in distribution is an inevitable concomitant of the activities of the independent wholesaler, while the cooperatives tend, through their unwieldy size, to gravitate to a monopolistic position in some areas such as the Pacific coast where, we understand. they now account for some 60 percent to 75 percent of all retail business done. But putting these factors aside, even if the services of independent wholesaler and marketing cooperative were equal in value, is it fair to saddle one of these equal competitors with the costs that are properly to be borne by the other? We believe our competition with cooperatives is an efficient one. Department of Commerce figures indicate that our net profit margins are less than 1 percent and that our cost of doing business averages out to something under 7 percent. On these narrow survival margins, we are nevertheless called upon not only to pay our share of the tax burden, but also our prorata share of our competitors' tax burden. The bald statement of this fact is enough to reveal the inequity of our present tax laws. President Kennedy has heartened all independent wholesale distributors in his recent tax message to Congress in which he proposed a change in the present method of taxing cooperatives. These proposals, if adopted, will aid in redressing the present tax in balance between these two competitors. Under President Kennedy's proposals, members of cooperatives will be taxed at their usual income-tax rates, on all income allocations made to them, whether in the form of cash, property or scrip. To the extent that the same is not taxable to the member, it will be taxable to the cooperative. This seems to be a simple expression of fairness and equity. It does not go as far as the tax laws applicable to all corporations other than cooperatives, which makes corporate income taxable both to the corporation and to the stockholder when the same is declared in dividends, but at last it makes sure that one tax will be paid, either by the cooperative with respect to unallocated income or by the cooperative member with respect to allocated cooperative income. While we have been advised of more comprehensive and complete recommended solutions to the cooperative tax problem-and we refer with particular approval to the plan of the counsel to the Joint Committee on Taxation of the milk industry-we nevertheless believe that the administration's proposal represent a sound and constructive first step towards the resolution of the present inequities. It is for that reason that we strongly recommend to this honorable committee that it adopt the President's program with respect to cooperative taxation, since it is in the best interests, not only of the wholesalers for whom I speak, but also for all those interested in the preservation of American small business. In closing, may I quote the resolution overwhelmingly adopted at our national convention last month: We shall vigorously support the several bills already in the congressional hopper to hasten the day when the glorious American competitive system will reign unhindered and unmolested by any tax-favored economic blocs, particularly the preferential tax position enjoyed by merchandising cooperatives. We unreservedly support the recommendation of the last budget message to the effect: "That the Congress favorably consider amending the laws on taxation of cooperatives to provide for more equitable taxation, by insuring that taxes are paid on the income of the business either by the cooperatives or by its members." Thank you. The CHAIRMAN. Mr. Poinsett, we thank you, sir, for your discussion of these matters before the committee. Let me ask you, Mr. Poinsett, are these cooperative wholesale tobacco operations that you refer to? Mr. POINSETT. No, Mr. Chairman. They are cooperative wholesale grocery-type operations who handle a good percentage of our product, cigarettes, for example, candy, and some of the allied food items that we get into. The CHAIRMAN. Mr. Mason. Mr. MASON. Mr. Poinsett, you spoke of the President in his message, a few moments ago, asking for $1,900 million and recommending that we close loopholes. The biggest loophole of all that could be closed is this loophole that you have been discussing, and if we close that, in my opinion, and I have given it some study, we would collect at least a billion dollars in revenue that is now escaping because of this loophole, a legal loophole, by the way, at present. Mr. POINSETT. Yes, sir. Mr. MASON. That is all, Mr. Chairman. Mr. POINSETT. That is a lot of money. The CHAIRMAN. Any further observations, or statements, or questions? Thank you, Mr. Poinsett. Mr. POINSETT. Thank you very much. The CHAIRMAN. Mr. Thompson. Mr. Thompson, you have Mr. Fernley with you, do you not? STATEMENTS OF H. L. THOMPSON, JR., VICE PRESIDENT, THOMAS I believe you want to make the statement. Mr. THOMPSON. Yes, sir. The CHAIRMAN. Then we recognize you, sir. Mr. THOMPSON. My name is Henry L. Thompson, Jr. I reside in Perrysburg, Ohio, but conduct my business in Toledo, Ohio. I am representing the National Wholesale Hardware Association. I should |