PACIFIC GAS & FUEL, INC., CHIEF COUNSEL, COMMITTEE ON WAYS AND MEANS, DEAR SIR: In regard to the President's recent recommendation on taxation, there is one item in particular on which we would like this opportunity to express our view, i.e., his proposal, that all earnings of cooperatives be taxable either to the cooperatives or to their patrons. In this we heartily concur, since like many dealers in Washington State, we recently have been hard hit with indiscriminate soliciting and pirating of our accounts by Western Farms Cooperative Association, this being made relatively easy by cutrate prices (0.045 lower) allowed by the tax advantages they enjoy. We particularly object to their being able to sell associate memberships at $3 apiece to nonfarmers. Obviously their activities have branched out far beyond that originally envisioned when Uncle Sam gave them this tax break. We feel hopeful this tax loophole will be plugged as we know the Small Business Administration, the Internal Revenue Service and now the President himself is concerned over this matter. We hope this information will be of value to your committee. Sincerely, THOS. D. ALLEN, Secretary-Treasurer. Hon. WILBUR D. MILLS, CHAMBER OF COMMERCE OF THE UNITED STATES, Chairman, House Ways and Means Committec, DEAR MB. MILLS: The Chamber of Commerce of the United States has long held that all forms of business enterprise should bear their fair share of the tax burden, and that no favoritism, based upon the form of organization, should be shown. In keeping with this principle, the chamber wishes to express its support for the recommendation made in the President's tax message for an effective tax upon the earnings of cooperative business organizations. As this committee well knows, the obvious intent of the Congress in the 1951 amendments was effectively nullified in the Carpenter case (219 F. 2d 635). We believe the President's proposals would correct this situation and restore the 1951 congressional intent. We urge that your committee consider favorably the President's recommendation. Cordially yours, CLARENCE R. MILES, Manager, Legislative Department. STATEMENT OF FRED V. HEINKEL, PRESIDENT, MISSOURI FARMERS ASSOCIATION, COLUMBIA, Mo., IN RE PROPOSED TAX TREATMENT OF COOPERATIVES Mr. Chairman and gentlemen of the committee, I would like to avail myself of this means of presenting to the committee our views concerning two proposals as contained in the President's tax message to the Congress. These two proposals are stated briefly as follows: (1) That the recipients of noncash patronage refunds from cooperative associations shall be required to include such noncash refunds in gross income, currently at the face amount thereof; and (2) That to insure the payment and collection of the tax thereof that there be withholding at the source of an amount equal to 20 percent of the face amount of both cash and noncash portions of the distribution. It should be recognized that the first recommendation involves the imposition of a tax upon the farmer-patron of farmers cooperatives which that farmerpatron does not now report currently. At the present time the farmer-patron reports such noncash distributions at the time of the redemption in cash. I have appeared before this committee several times over the past years to discuss with the committee this same problem. Each time I have made a presentation to the committee, I have emphasized one point and that is that the basic question before the committee is an economic question. I believe that the committee must answer this question before making a determination on the problem before it. This question is, "Has the time now come to speed up the payment of a tax by farmers in view of their economic problems?" I can appreciate that there can be many legal arguments advanced for taking this step now. Apparently it can be done with the idea of closing a "loophole.' It can also probably be justified on the basis of carrying out the intent of the 1951 act, but I would like to point out that there are many things that are different in 1961 than in 1951. For the year 1951 the parity ratio was 107. For October 1951, the month the 1951 act became effective, the parity ratio was 105. The April parity ratio, as announced by the U.S. Department of Agriculture on April 28, 1961, shows that now it stands at 79. With all due respect to thePresident's approach to this problem, the economics of the situation in the last 10 years have deteriorated so badly that advancing the payment of the tax by farmers today is premature and untimely. In 1951 farmers were enjoying rela-tive prosperity. In 1961 farmers are in desperate circumstances. With such. drastically changed conditions, it seems wholly impractical to implement an idea advanced 10 years ago under wholly different circumstances. I think the committee would be well advised to speculate on what the intent of Congress in 1951 might have been in regard to the payment of the tax by farmers currently if the parity ratio had at that time stood at 79. The Congress has pending before it in addition to these tax proposals, theAgricultural Act of 1961, and if this committee needs any justification for the continuance of the present law on farmers and their cooperatives in this field, I need only suggest to you that you read the testimony of the Secretary of Agriculture before the Committee on Agriculture in this House of Representatives, which was presented beginning on April 24, 1961. If you would but read the report of his testimony concerning the farm problem, I believe that this committee would hesitate before increasing the current tax burden of farmers. I would also like to refer you to the statement of the Under Secretary of Agriculture before this committee on May 8, 1961, in regard to these proposals, in which he refers to the continuance of the exemptions for rural electric coopera-tives: "The President's message recommends continuance of the exemption for rural electric cooperatives. The Treasury statement also makes clear that the proposal will not affect the present tax treatment of patrons of such exempt cooperatives. We believe this exemption is as important now as in the inception: of the program. The task of providing adequate electric and telephone services in rural areas at reasonable rates is not complete. Moreover, current emphasis on redevelopment of rural areas will require these cooperatives to further expand and improve their services. The basic reasons for governmental assistance to these programs support with equal force the continued tax treatment which has been proposed." It is our belief that the reasons for the treatment of farmers cooperatives and their farmer-patrons exists just as strongly today as ever before and perhaps the need today is more important than at any time in the history of farmers and their cooperatives. What is true about rural electric cooperatives, and it is certainly true herein, applies with equal force to other farmer cooperatives. serving the farmers of this Nation in ways other than the supplying of electric power. I am optimistic about the future. I believe that it is possible for farmers to achieve some degree of equality with the rest of the economy in the years ahead. To do this will require vigorous and courageous leadership on the part of our national administration and our National Congress. It will require understanding and support from the nonfarm segments of our economy. It will continue to require hard work, long hours, and intelligent and efficient management on the part of farmers. I think we can with all phases of our society working together, solve the farm problem and bring prosperity to our farmers. However, farming is not yet prosperous and success lies perhaps in the far distant future. But the impact of tax legislation is today. This will cause an immediate impact on farmers and the impact is adverse. I believe that first things should come first, and I think that before we put additional burdens on our farmers that we provide for them first some degree of prosperity, and, second, some time in which to restore the damage that has occurred over the past decade. You will all have noted well the President's recommendations in providing some incentives tax to American industry to make improvements in their industrial plants. It is obvious that the tax impact as it is applied to the American public relates directly to the condition of our economy. The same is exactly true for farmers, and the imposition of additional tax burdens now is, in my opinion, moving in the wrong direction. I respectfully submit that this committee should examine with greatest care what will be the economic impact of the adoption of these proposals. I can recognize that many Members of Congress and of this committee would like for this problem to go away. I am equally sure that they would like for the farm problem to go away. I am sure that most of the American people would like to see some of our international problems go away, but I feel confident that these problems just will not disappear. They need someone with courage who will deal with them, and I do not think that the imposition of a current tax now on farmers is going to get rid of the problem. Rather, I think it complicates the problem and I doubt seriously that an answer given in this form will, in the final analysis, please anyone. For these reasons, I request that the proposals relating to the imposition of a current tax on these items and that the application of the principle of withholding to them be tabled until such time as farmers can achieve some degree of economic equality and at least moderate prosperity. STATEMENT OF THE GRAIN AND FEED DEALERS NATIONAL ASSOCIATION TAXATION OF COOPERATIVE CORPORATIONS, WASHINGTON, D.C., MAY 25, 1961 The fact that corporation income taxation operates to give a competitive advantage to cooperative corporations in the grain and feed business has been documented in our association's previous testimony before the Ways and Means Committee. Mr. Roswell Magill's direct testimony in the 1958 and 1960 hearings, and the supporting statements he filed, showed clearly by specific example how the competitive growth of a cooperative corporation is enhanced by the enforcement of the income tax on competing corporations. Mr. S. Dean Evans, Sr., testifying before this committee on May 18 of this year on the matter of depreciation and investment credit, explained how the situation is made more urgent by the competitive tax-created advantage of the cooperative corporation in accumulating capital for modernization and growth. Mr. Evans entered into the record the official position of our association on this matter, as reaffirmed by our membership in March of this year. Cooperative growth has continued along the lines described in our previous testimony. One example cited earlier was the growth of the Farmers Union Grain Terminal Association, and this has continued with the acquisition of such competitors as the McCabe line of elevators and feed plants, the Archer-DanielsMidland line of elevators, and the Honeymead soybean processing business. It has been encouraging that one State, Montana, this year enacted legislation which has the effect of removing the exemption of cooperative corporations from that State's corporation license tax. It is hoped the Congress similarly will help restore truly fair competitive conditions to our industry by requiring the earnings of all corporate businesses to bear similar shares of the rising cost of government. Every step in the direction of equality will be constructive. Every such step will be gratefully appreciated by the broad base of individual and corporate income taxpayers who now have to pay more than their share because of the cooperative tax advantage. STATEMENT OF BEHALF OF THE U.S. INDEPENDENT TELEPHONE ASSOCIATION, BY MR. CLYDE MCFARLIN, MAY 9, 1961 WE FAVOR EQUAL TAXATION FOR COOPERATIVES My name is Clyde McFarlin and I am president of the Montezuma Mutual Telephone Co., of Montezuma, Iowa. This statement is on behalf of the U.S. Independent Telephone Association, the national trade organization representing the independent telephone companies of the country. There are 3,300 such companies which serve 10,705 cities, towns and rural communities. These companies are those which are not affiliated with the Bell System. Independent companies are responsible for rendering telephone service in more than one-half of the geographical area of the United States, and their telephones total approximately 11,500,000. With respect to the President's proposals for taxing the earnings of cooperatives, it is our opinion that they should be taxed equally and in the same manner as business corporations without special exemption for any cooperatives or other form of business activity. The principle of equal taxation of all business enterprises should not be excluded from the area of public utility operation or any other area. We see no justice in any distinction or exemption discriminating against private taxpaying business enterprise. STATEMENT BY THE NATIONAL RETAIL MERCHANTS ASSOCIATION IN REGARD TO THE PRESIDENT'S TAX PROPOSALS ON COOPERATIVES We heartily endorse the President's proposals to tax the earnings of cooperatives. For many years this association has viewed with growing concern the grossly inequitable and unfair situation existing under the Federal tax laws whereby its thousands of taxpaying members must compete with organizations who pay little or no Federal income taxes on the gains and profits derived from their vast operations conducted under the cooperative system. Our association is not unaware of the important role that the cooperative organizations have played and continue to play in our Nation's economic scheme, particularly in the field of agriculture. It has become alarmingly apparent, however, that the co-ops have extended their operations, under the protective tax umbrella given them under the Revenue Code as interpreted by court decisions, into many activities beyond their original purposes and activities. We now find co-ops engaged in such varied enterprises as manufacturing and distributing cosmetics, building materials, automobiles, toothbrushes, cigars and cigarettes, to name just a few. In addition, co-ops drill oil wells, sell insurance, run electric utilities, operate funeral homes, radio stations, and maintain retail outlets that form the most unfair and bitter type of largely tax-free competition, particularly for the small retailer who must pay taxes out of already modest profit margins. Common standards and justice and fairplay suggest that organizations which carry on a commercial enterprise not substantially dissimilar from other types of business, should pay their fair share of the taxes on the income they earn. It is suggested, however, that in lieu of the President's proposals for taxing cooperatives that such organizations be taxed in the same manner and to the same extent as corporations with the patrons of the cooperative in this context, occupying the status of a corporate shareholder. Under this arrangement, the co-ops would pay full corporation taxes on income without deduction for "patronage dividends." In turn, patrons would be paid on their dividends in the same manner that stockholders of corporations are taxed when dividends are paid. Hon. WILBUR D. MILLS, AGRICULTURAL COOPERATIVE COUNCIL OF OREGON, Chairman, House Ways and Means Committee, DEAR CONGRESSMAN MILLS: This letter relays Resolution B pertaining to taxation of cooperative retains adopted by the membership of the Agricultural Cooperative Council of Oregon at their 39th annual meeting in Portland, Oreg., December 6, 1960. Although this specific resolution was directed toward the drafting of State legislation pertaining to taxation of retains issued by cooperatives, the Agricultural Cooperative Council of Oregon strongly endorses identical principles for taxation of retains by the Federal Government. I hope that you will bring this resolution, abstracted from the minutes of the membership meeting, to the attention of the House Ways and Means Committee. Yours truly, BERNARD KIRSCH, President. ABSTRACT FROM MINUTES OF 39TH ANNUAL MEMBERSHIP MEETING OF AGRICUL TURAL COOPERATIVE COUNCIL OF OREGON, CORVALLIS, OREG. "Resolution adopted by unanimous vote: "RESOLUTION B-TAXATION OF COOPERATIVE RETAINS "1. We, the members of the Agricultural Cooperative Council of Oregon assembled in 39th annual meeting at Portland, Oreg., December 6, 1960, hereby reaffirm our long-maintained position on the taxability of accruals of value or accumulations from the operations of a farmer cooperative, being that such accruals "(a) be taxed to the patron, "(b) as of the year the evidence of accrual is received by him, and "2. We direct the board of directors to expedite the drafting of legislation, including the employment of legal counsel, to reach as nearly as may be possible the objectives of council position on accrual taxation, provided "3. Such legislative proposals shall be compatible, with the September 1960 decision of the Oregon Supreme Court in the case of Kuhns v. Commission, and with the objective that such proposals shall have the full approval and support of the State tax commission." STATEMENT OF COMMITTEE ON TAXATION, NEW YORK CHAMBER OF COMMERCE, ON THE PRESIDENT'S PROPOSALS RELATING TO THE TAXATION OF COOPERATIVES The President proposes a change in the tax law with respect to cooperatives "*** so that all earnings are taxable to either the cooperatives or to their patrons, assessing the patron on the earnings that are allocated to him as patronage dividends or refunds in scrip or in cash ***." It is understood that the President is here referring to the business type of cooperative, recognized in the tax law. We have long supported such a move in the interest of fairness and equity, both to cooperatives and competing businesses, and we endorse this recommendation of the President. NATIONAL SMALL BUSINESS MEN'S ASSOCIATION, Re taxation of cooperatives. Chairman, House Committee on Ways and Means, DEAR MR. CHAIRMAN: This association heartily endorses the statement of Brady O. Bryson, counsel for the Joint Committee on Taxation of the Milk Industry Foundaiton, and the International Association of Ice Cream Manufacturers. This association has on numerous occasions spoken out strongly against the tax discrimination in favor of cooperatives and we follow this course in order to avoid burdening the committee with repetitive testimony. Mr. Bryson's statement ably covers the points which need to be made, and we are thoroughly in accord with his conclusions. I would like to add that tax-free competition from cooperatives has been the subject of more bitter complaint from our broad membership of more than 35,000 small business firms than any other issue ever before this association. Cordially yours, JOHN A. GOSNELL, General Counsel. UNITED STATES WHOLESALE GROCERS' ASSOCIATION, INC., Hon. WILBUR D. MILLS, Chairman, Committee on Ways and Means, DEAR MR. CHAIRMAN: Members of the United States Wholesale Grocers' Association have for years expressed to the Congress their strong opposition to the unfair income tax exemption privileges enjoyed by competing cooperatives. The following statement of policy was adopted by the members during their 1961 annual meeting: |