also escape completely the Federal income tax. The consumer cooperatives have far flung enterprises and of course are not building supermarkets as rapidly as they can. You will note from Secretary Dillon's answers to questions by members of this committee that because of the price adjustment fiction he takes the position that consumer cooperatives earnings cannot be reached because the purchases made by the consumers are for personal goods as opposed to those purchases of equipment and materials that might be used in business or farming enterprises. Gentlemen, if we are stockholders of a large department store and purchase our clothes there, we are owners of a commercial enterprise which is taxed at its corporate level, and again we are taxed on dividend distributions that our business and businesses of other citizens have made possible. Why should we allow the same kind of corporation to escape taxes completely because of a discredited fiction?

It is our considered opinion that the continuance of these fictions and the allowance of these people to escape their burden of taxation will bring nothing but contempt for the whole tax structure, and this should not be.

We are basing our tax system largely on an honor basis. It is a self-assessing principle and if the tax laws are made equitable and fair, then there will be greater voluntary compliance than we get now. and certainly there will emerge a new respect for tax law and regulations.

To an interested observer it is almost impossible to really rationalize the emotion that seems to exist around this issue. We are firmly convinced that the rank and file of the farmers want to pay their taxes. We are equally convinced that they want their business enterprises the cooperatives-to pay their fair share of the tax load. We believe that whatever politically generated pressure there is, no matter how overrated, comes largely from the cooperative leaders and not the members. For years, since the enactment of the 1951 law, we have heard the cooperative spokesmen demand the strengthening of that law as a means of tightening the loophole. It is said that the Congress intended to tax either the cooperative corporation or the corporate member on patronage dividends. This may have been the intent of the Congress; it is not the intent of the cooperative spokesmen. They maintain a cynical determination to attempt to keep the cooperative corporation itself tax free.

There were grave doubts by many business leaders in 1951 that the law was not going to be workable. The court cases have proved them right. The Treasury recognized it and they are not pursuing litigation and have ceased attempting to levy a tax on a patron when he has received nothing of value.

Business has insisted that any attempt to make the 1951 law workable will only continue an unfair situation. It will do nothing to place cooperatives and publicly owned corporations engaged in the same businesses competitively, on an equal tax footing. Such a route is manifestly unfair to the patron.

Why should the Congress in the face of the court decisions want to place a tax burden on an individual which is not equitable nor just and as a taxpayer he does not owe? We think that ultimately such a route will develop serious resentment on the part of the member patrons and we think it is politically unwise.

In the hearings you have held in the past several years, extremely competent tax attorneys have sounded a note of caution with respect to strengthening, reenacting or modifying the 1951 law to tax the patron on paper allocations no matter what form they are issued in. It is the earnest belief of those of us that feel other solutions are more equitable, that other means than the reenactment of the 1951 law should be taken with its objective to tax the patron either by consent, by the reinvestment theory, or by whatever fiction is created. The present situation in which we find ourselves is more fantastic than Disneyland because of the existing state of the law due to the 1951 act. The decisions of the court and the Treasury regulations combined have laid down a set of rules whereby the cooperatives and their patrons may earnestly deny that they earn or receive any income from the enterprises. And so, we find literally hundreds of millions of dollars in earnings that are will-o'-the-wisps-without an admittable taxable owner custodian. We say that this money must belong to someone. How can it hang in limbo? Is it not someone's money? By what sort of manipulation are these unanchored earnings put to use in the building of grain elevators, warehouses, dairies, funeral parlors, oil refineries and enterprises too numerous to mention.

This money gives a strong basic structure for multimillion-dollar enterprises and so the economic benefits must have accrued to someone. So, we say that the taxes should at least fall where the economic benefits are. If the cooperative retains the money and uses it, there should be no fiction allowed that it is not their money. The existing archaic rules by which the exempt and the nonexempt cooperatives are able to eliminate all tax liability by the Simple Simon method of allocating their income to patrons must be changed. These allocations may be in the form of indebtedness certificates of no definite maturity, letters of advice, or similar pieces of paper which the courts know, we have said, have no ascertainable market value. Ironically, even though the patron may conceivably receive nothing of value, the cooperative is still granted a deduction on the fiction that it has allowed a contractual price rebate of price adjustment. These protoplasmic paper adjustments may be payable at the cooperative's board of directors discretion. And thus, the patron-paper rich, may get his money in 10, 20, or 50 years or if the cooperative is eventually liquidated. In the meantime, the cooperative has retained the money to purchase new equipment to buy out overtaxed businesses and to expand to new ventures with private enterprises.

We can only conclude that the earnings of the cooperatives are really not lost as it superficially appears. It is only to the tax collector that they are elusive. They remain in the till of the cooperatives and no person regardless of his status as patron member or shareholder has a right to demand cash distribution or equivalent value now or in the future.

We say that the committee should reject the cooperative's demand to make minor revisions of the existing law to insure the patrons will be taxed on allocations regardless of the form in which they are received. We do not believe that the recommendations of the Secretary of the Treasury as submitted to this committee on May 3 are either fair, equitable, or that they will ultimately result in the taxation of the

patron. Is it the wish of the committee that we take a route as legally uncertain as this would be and again have years spent in litigation by patrons who are indignant because of an unwarranted and indefensible tax burden being placed on them and finally have courts uphold the doctrines that have been enunciated in the previous decisions that have brought us to this situation? This will mean that business heavily taxed and competing with the cooperatives will attain no relief. It will mean, if we foresee the future right, that at the end of the period of litigation and uncertainty this committee and the Congress would again be faced with the same issue.

There is only one realistic answer to the tax treatment of the cooperatives as profitmaking corporations and that is to subject them to ordinary corporate taxes on all their earnings prior to their allocations to members or patrons. The tax must be imposed at the corporate level to eliminate a tax free build-up of capital and gross discrimination between competitive enterprises. I would like to make one thing clear, emphatically clear.

It is not my intention to, in any way, bring about the destruction or impunitive treatment of the cooperatives. The cooperative resolutions all speak about punitive taxation. Do they, by inference say that the regular taxload which corporate businesses must carry is punitive and they do not want it extended to their enterprises?

My sole purpose in appearing here today is to bring equality in tax treatment and eliminate any inequality in competition. Let's be realistic. The cooperative is not dependent on the tax privilege in order to grow just as it could hardly be contended that the corporate tax has prevented growth and prosperity of the ordinary business corporation in this country. The cooperatives have access to money from special sources designed to help them at extremely low interest rates in addition to the fact that they may build up retained earnings in the same manner that public corporations do. I could give you many instances of phenomenal cooperative growth in many commercial fields and certainly we could not say that these cooperatives would have been bankrupt or crippled by the fact that they would be made amenable to the same laws as other taxpayers.

We hope that this committee will not adopt a proposal which will only raise serious constitutional problems by shifting the tax burden to the member patrons. We concur in the view of the Fourth Circuit Court of Appeals when it said:

Apart from the question of constitutionality of such a requirement

it

is a safe assumption that Congress never intended to impose upon the patrons of cooperatives the hardship and burden which the taxability of these contingent credits would involve.

How plainly fair this position.

We

urge the Congress to listen to the courts and not the professional cooperative spokesmen.

We hope, gentlemen, that once and for all you will discard the theories that have led us through years of trouble and which have developed inequities mistakes only to develop inequities that should not exist in this country.

President Kennedy has pointed out the necessity for increased revenue even today at this period in our Nation's history. This revenue should, in our opinion, come consistently from all sources-with everyone treated equally. Allow all enterprises to play the game by the

same rules, to become strong competitively and continue to contribute to the building of this great economy.

We urge you gentlemen to take quick, equitable and just action in this matter.

Thank you, very much.

The CHAIRMAN. Thank you, Mr. Jackman, for bringing us this discussion of your viewpoint.

Are there some questions?

Mr. Mason.

Mr. MASON. Mrs. Mason tells me that I am very, very close on making or giving compliments. I have spent some 15 years or more in this effort to try to bring about some tax equality, and I would say that I envy you in the paper that you have presented to us because it is a great deal better than I could have done myself, and when I say that, that is the ultimate compliment.

Mr. JACKMAN. Thank you, sir.

Mr. BAKER. Mr. Chairman.

The CHAIRMAN. Mr. Baker.

Mr. BAKER. Mr. Jackman, I forget what the Treasury estimate was as to how much revenue we would get if the proposal of Secretary Dillon was put into effect, including 20 percent withholding. Do you remember?

Mr. JACKMAN. I do not know the exact figure.

Mr. BAKER. About what was it? Do you recall? I can get that from somebody. I wanted to make a comparison. Do you have any idea what revenue we could get if Mr. Mason's bill was passed with the 52 percent rate, the same as corporations?

Mr. JACKMAN. I think it would be considerable.

Mr. MASON. It would be over a billion dollars, a conservative estimate.

Mr. JACKMAN. I would say somewhere around that.

Mr. BAKER. Would somebody supply me with the figure on the Treasury? I want to get it in the record.

I now have the figure and it is between $25 and $30 million. Have you read the draft of a proposed bill attached to Mr. Lanahan's testimony of yesterday?

Mr. JACKMAN. No, I have not.

Mr. BAKER. I read a while ago and I missed Mr. Lanahan's testimony. That is all.

The CHAIRMAN. Are there any further questions of Mr. Jackman? We thank you, sir, again for coming to the committee.

Mr. JACKMAN. Thank you very much.

The CHAIRMAN. That completes the calendar for today, and without objection the committee adjourns until ten tomorrow morning. (The following material was filed for the record:)

HOUSE OF REPRESENTATIVES,
Washington, D.C., May 19, 1961.

Hon. WILBUR MILLS,

Chairman, Committee on Ways and Means,
House of Representatives, Washington, D.C.

DEAR MR. CHAIRMAN: I am pleased to forward the enclosed letter from Mr. J. D. Henderson for consideration in connection with hearings scheduled next week.

Sincerely,

HALE BOGGS,

Member of Congress.

Hon. HALE BOGGS,

AMERICAN ASSOCIATION OF SMALL BUSINESS,
New Orleans, La., May 18, 1961.

House Office Building, Washington, D.C.

DEAR HALE: I understand that the House Ways and Means Committee will hold hearings again on the proposition of taxing competitive cooperatives, on May 23, 24, and 25.

In the past you have cooperated with this organization in our efforts to make known our position to the members of the House Ways and Means Committee. The American Association of Small Business, Inc., has, for many years, supported legislation to require competitive tax-exempt cooperatives to pay the same rate of taxation as corporations are required to do. Any legislative action taken by the House Ways and Means Committee and the Members of Congress short of complete taxation on this basis is unfair, and should be considered class legislation.

Competitive cooperative corporations, as you know, are allowed to build up large reserves which are never actually distributed, and on which no tax is paid. On the other hand, corporations pay as much as 52 percent tax on all profits and are then required to withhold the tax on dividends paid to stockholders.

In all fairness, this is an unjust attitude because it places the cooperative corporation in a position of being tax exempt and in competition with taxpaying corporations engaged in the same industry. Such treatment of corporations removes the incentive to go into business, employ more people, create additional sources of income tax revenue, and in general discourages businessmen and robs them of their initiative.

Your presentation of this communication to the House Ways and Means Committee, so that it may be recorded in the records of the hearing will be very much appreciated.

Yours for keeping small business in business, and

Very sincerely,

J. D. HENDERSON, National Managing Director.

STATEMENT ON PRESIDENT KENNEDY'S TAX RECOMMENDATIONS SUBMITTED FOR AND IN BEHALF OF THE MEMBERS OF THE EASTERN FEDERATION OF FEED MERCHANTS, INC., SHERBURNE, N.Y.

The Eastern Federation of Feed Merchants, Inc., with an office at Sherburne, N.Y., is an industry trade group of 541 members engaged in the manufacture and distribution of livestock and poultry feeds and companion products with such operations scattered throughout the 11 Northeastern States, including New England, New York, Pennsylvania, New Jersey, Delaware, and Maryland.

TAX EXEMPTION TO COOPERATIVES SHOULD CEASE

The tax exemption which is enjoyed by farmer-cooperatives that engage in feed manufacturing and distribution in competition with taxpaying independent businesses in these fields is basically unfair and threatens the future survival of such independent businesses.

The competitive advantage which these cooperatives hold over independent competitors has existed for many years. In recent years it has become outstandingly more potent and troublesome. This is true because of a developing trend in the livestock, poultry, and feed business fields of integrated programs, under which the farmer-cooperative in the feed business finances the livestock and poultry functions of the customer and because of this makes the management decisions for the customer. The customer is required to buy the type of livestock or chickens chosen by the farmer-cooperative; he is required to secure his feed from the farmer-cooperative and his finished products are marketed when and where the cooperative directs. Thus, the users of feed who desire to select as the manufacturer thereof an independent operator are denied that privilege. In reality, the livestock and poultry farmer must, under an integrated contract, cease to do business with an independent operator. The independent operator pays Federal income tax. The farmer-cooperative operation does not.

Thousands of independent livestock and poultry people who insisted upon remaining independent have been completely forced out of business by these integrated programs widely used by farmer-cooperatives as a means of monopo