"We urge Congress to pass legislation that will effectively eliminate the income tax exemption privileges which the law now allows to merchandising co-ops, in order that tax payments may be equalized between the co-op type of business and competing business and in order that the Government may obtain added revenue vital to the needs of the Nation at this time."

In the hearings on taxation of cooperatives just completed before your committee, this association endorsed the statement by Brady O. Bryson, counsel for the Joint Committee on Taxation of the Milk Industry Foundation and the International Association of Ice Cream Manufacturers.

Speaking in behalf of our independent food and grocery distributors throughout the United States, I wish to reiterate our position and urge that legislation be passed to correct the loophole in the tax laws that permit cooperative corporations to escape all or most of their rightful share of the Nation's tax burden. The Treasury proposal would, in effect, tax the patron, leaving the cooperative corporate tax free-thus permitting the use of retained earnings for expansion and growth. There will still remain the unfair competitive situation that now exists.

May we respectfully urge your committee to incorporate in your draft bill the principle that cooperative earnings be taxed where money is retained-by the patron if he receives cash-or by the cooperative corporation if it retains the earnings and receives the benefits of the business operation.

Sincerely,

HAROLD O. SMITH, Jr.,
Executive Vice President.

STATEMENT OF G. D. McENROE, TREASURER OF HALLIBURTON CO., DUNCAN, OKLA.

SUBJECT: COOPERATIVES

The unfair tax advantages enjoyed by cooperatives should be corrected immediately. There are many small towns in the United States which are almost completely dominated by cooperatives simply because individuals have not been able to compete (because of taxes) against cooperatives. All cooperatives, including rural electric cooperatives and credit unions, should be taxed as other businesses against whom they compete.

Hon. WILBUR D. MILLS,

CONSUMERS COOPERATIVE ASSOCIATION,
Kansas City, Mo., June 6, 1961.

Chairman, House Ways and Means Committee,
House Office Building, Washington, D.C.

DEAR MR. MILLS: Mr. W. B. Jennings, director of our tax division, attended the recent hearings of your committee on the taxation of cooperatives. I have just read his detailed report and want you to know that I am sincerely appreciative of your patience and understanding in the face of a well-organized assault on the rights of farmers to do business cooperatively.

Very briefly, I would like to comment on points made by some of the antagonistic witnesses:

The right of cooperatives to manufacture farm supplies came under serious attack, and our organization was specifically named in this connection. Consumers Cooperative Association, in the beginning, did not manufacture; it was strictly a distributing cooperative. But as we grew and developed services that farmers appreciated, manufacturers undertook to deprive us of sources of supply. They forced us to build an oil refinery. Then, when that was built, the big oil companies tried to deprive us of a source of crude oil. So we dug oil wells.

The story of our fertilizer business is much the same. It came about because farmers were dissatisfied with what private industry was doing for them-and doing to them. Our plant at Lawrence, Kans., was named specifically by some witnesses. The one simple fact that farmers understand is that the price of nitrogen fertilizer dropped sharply the year this plant went into production. There were witnesses who said that we built our refineries and our fertilizer plants from money that we would not have had if we had paid full corporate income taxes on all of our patrons' earnings. I am sending you a copy of our annual report. You will note that one of our big liability items is long-term debt. Most of this debt was incurred in the building of our major plants. We

told farmers what we planned to do to improve our services to them. We offered them opportunity to invest in long-term, 5% percent interest-bearing securities. They invested in certificates of indebtedness and preferred shares. The total of these two items in the balance sheet is almost $50 million. And they explain in large measure our ability to build and expand services during the past decade. Mr. Thomas Curtis of our own State of Missouri tried to make the point that manufacturing cooperatives are dominated by management and are so removed from the patrons as to lose their identity as cooperatives.

Mr. Curtis should have been in Kansas City last December, when some 5,000 persons came from 11 States to the annual meeting of Consumers Cooperative Association. Two full days were given to discussion of operations and policies, and then a third day was given over to the delegate meeting where each of our member associations, regardless of size, had an equal vote in acting on a great variety of issues that were up for consideration. They told us what to do with the money that had been saved for them through the past year's operations. They elected one-third of the members of our 21-man board. They were here on business-their business-a kind of business which exemplifies the spirit of democracy as much as any business in this Nation-and more than most.

Farmer cooperatives, as you well know, Mr. Mills, have proved themselves. They have demonstrated their ability to provide services and also to act as checks against excesses in other segments of business and industry. They have helped farmers keep their heads above water. They have given farmers a voice in the marketplace. They have helped protect the family farm. And the real reasons for what success they have enjoyed go far beyond their treatment under the tax laws.

Again, may I thank you for the fine manner in which you presided over a hearing which must at times have become frustrating and discouraging. Sincerely,

HOWARD A. COWDEN.

CONSUMERS COOPERATIVE ASSOCIATION 32D ANNUAL REPORT, 1960 Consolidated statement of operations, Consumers Cooperative Association and consolidated subsidiaries (note 1)

The Consumers Cooperative Association and consolidated subsidiaries (note 1) — Consolidated balance sheet Aug. 31, 1960 (with comparative figures for 1959)

NOTES TO FINANCIAL STATEMENTS

1. Principles of consolidation.-The consolidated financial statements include the accounts of the association; of the Cooperative Refinery Association, a wholly owned subsidiary except for preferred stock; of the Cooperative Farm Chem icals Association, a 75-percent-owned subsidiary; of Farmers Chemical Co. subsequent to June 30, 1959, a 75-percent-owned subsidiary since that date: and of Cooperative Processing Association, a 58.3-percent-owned subsidiary incorporated March 10, 1959.

The financial statements do not include the accounts of three wholly owned subsidiaries, the Cooperative Finance Association, Inc., Consumers Insurance Agency, Inc., and Farmbest, Inc., including its wholly owned subsidiary, Craw ford County Packing Co., and a 32-percent owned but controlled subsidiary, Consumer's Cooperative Services, Inc. Current amounts due from the subsidiaries (not consolidated) aggregating $74,190 have been included in other current assets.

2. Investments.-Investments in NCRA and other cooperatives, except for the investment in Central Farmers Fertilizer Co., are stated at cost plus the amount of patronage refunds allocated less distributions received. The investment in Central Farmers Fertilizer Co. is stated at $1,643,783, representing the associations' equity in the net assets of this company. By a charge of $444,000 to other deductions in the statement of operations, the associations have provided for the loss of equity resulting from CFFC's accumulated operating losses. In the aggregate, the amounts on the accompanying balance sheet are less than the associations' interest in the net assets of NCRA and other cooperatives as revealed by financial statements.

3. Assets subject to lien.—At August 31, 1960, under the terms of loan agree ments, property, plant, and equipment carried on the consolidated balance sheet at an aggregate cost of $34,903,000, inventories carried at $1,118,127, and se curities carried at $593,933 are pledged to secure the mortgage and other notes. 4. Mortgage and other notes.-At August 31, 1960, CCA and CRA were not indebted to the Wichita or St. Louis Banks for Cooperatives.

Mortgage and other notes due after 1 year and applicable to CFCA, FCC, and CPA only are payable during the fiscal years ended August 31, in the following approximate minimum amounts: 1962, $1,739,270; 1963, $1,724,806; 1964, $1,663,550; 1965, $1,650,000; 1966, $1,350,000; and 1967, $300,000.

5. Certificates of indebtedness.-The outstanding certificates of indebtedness at August 31, 1960, aggregating $21,442,375 ($361,175 included in current liabilities) range in original maturity from 42 percent 10-year certificates to 514 percent 25-year certificates. Of the outstanding certificates, $1,793,875 mature within 5 years and $19,648,500 beyond 5 years. Certificates of indebtedness in the amount of $13,870.000 are subordinated to any indebtedness of CCA to the Wichita Bank for Cooperatives. At August 31, 1960, CCA was not indebted to the Wichita Bank for Cooperatives.

Although the terms of each indenture under which the certificates were issued vary, in general the association will redeem to a limited extent certificates in advance of their maturity and will also redeem certificates upon the death of the holder, if requested.

6. Minority interests.-Minority interests include all of the preferred stock of CRA(14,336% shares, $10 par value) and the equities of other cooperatives in CFCA, FCC, and CPA represented by common stock, revolving capital and surplus.

7. Capital shares.-The outstanding preferred stock of CCA ($25 par value) at August 31, 1960, consisted of 3,287 shares of prior preferred stock, which was called for redemption on September 1, 1960, and was included in other current liabilities on the balance sheet, 658,596 shares of 5% percent preferred. 20,538 shares of second preferred stock, and 436,268 shares of third preferred stock, which for dividend payments and in liquidation would rank in that order. Dividends on the prior preferred stock were noncumulative and were paid at the rate of 4 percent of par value, but the stock is not entitled to dividends after August 31, 1960. Dividends on the 5% percent preferred, second preferred and third preferred are cumulative only to the extent earned within each year and are payable at the rates of 51⁄2 percent, 4 percent and 2 percent, respectively, of par value. Dividends may not be paid on any issue of preferred stock until divi- | dends are paid in full on issues having preference as to dividend payment.

8. Patrons' equity capital. Redemption of revolving capital certificates and patrons' equity reserve in cash is subject to authorization by majority vote of a meeting of the members.

9. Federal corporation income taxes.-Examination of the Federal income tax returns has been made through the fiscal year ended August 31, 1957, for CCA and CRA and through June 30, 1959, for FCC, and the liability disclosed thereby has been paid. Income tax returns of CFCA are subject to examination for the year ended August 31, 1957, and years subsequent thereto; and CPA, for the year ended August 31, 1960.

10. Contingent liabilities.-A. Capital stock subscriptions: A subscription of $375,000 for common stock of the International Cooperative Petroleum Association is not yet due, being subject to call by the board of directors, and has not been reflected in the balance sheet.

B. Guarantees: CCA has unconditionally guaranteed to CCA's employee retirement plan payment of principal and interest on $81,000, 5 percent certificates of indebtedness of Boone Valley Co-op Processing Association, Eagle Grove, Iowa. CCCA has guaranteed notes of $5,748,344 of local associations pledged as collateral by CFA on loans from banks and CPA's inventory loan of $448,846 with the St. Louis Bank for Cooperatives.

Under the terms of a pipeline transportation agreement, CRA has guaranteed the owner shipping revenues ranging from $370,000 to $431,000 annually for the period ending December 31, 1974.

Under the terms of a purchase agreement with a supplier, FCC is committed to purchase at market price 4,000 tons of phosphate annually for the period ending June 30, 1974.

C. Long-term leases: Under the terms of a 25-year lease dated October 27, 1956, with Commerce Trust Co. as trustee of CCA's retirement plan, CCA pays an approximate annual rental of $112,860 for an office building, together with all maintenance, taxes and insurance costs. CCA has the option, to renew this lease for three consecutive 5-year periods at an annual rental of $39,000 and also the option to purchase the property at any time after the primary term of the lease at the building's then fair market value as determined by disinterested appraisers.

D. Construction commitments: At August 31, 1960, CCA and subsidiaries were committed to additional expenditures for construction and acquisition of plant and equipment of approximately $5,200,000.

11. Retirement plan.-CCA's employee retirement plan is administered by a retirement committee and is funded by employer and employee contributions and may be terminated at the option of CCA. It provides for retirement of the employees at age 65 with annuity payments based on length of service and compensation, and also a monthly income for life at the time an employee with 3 years' service becomes totally and permanently disabled.

FCC participates in a separate plan which is similar to that administered by CCA's employee retirement plan without the disability benefit.

The associations' expense under the plans for the year amounted to $446,379. The maximum unpaid cost at August 31, 1960, for past service benefits under the plan is estimated at $434,000. Past service benefits are funded as units of future service to age 65 or over a period of 20 years, whichever is the lesser. To the Board of Directors, the Consumers Cooperative Association:

We have examined the consolidated balance sheet of the Consumers Cooperative Association and Consolidated Subsidiaries as of August 31, 1960, and the related statement of operations for the year then ended. Our examination was made in accordance with generally accepted auditing standards, and accordingly included such tests of the accounting records and such other auditing procedures as we considered necessary in the circumstances.

In our opinion, the accompanying consolidated balance sheet and the consolidated statement of operations present fairly the financial position of the Consumers Cooperative Association and Consolidated Subsidiaries at August 31, 1960, and the results of their operations for the year then ended, in conformity with generally accepted accounting principles applied on a basis consistent with that of the preceding year.

KANSAS CITY, Mo., October 19, 1960.

PEAT, MARWICK, MITCHELL & Co.

(Whereupon, at 3:10 p.m., the hearing in the above-entitled matter was recessed, to reconvene at 10 a.m., Friday, May 26, 1961.)

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