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taxed in the hands of the cooperative, even though 100 percent of it, say, is paid out that year as patronage refunds to the farmers.

Senator Young. Would that be before any part was used for plant expansion? Sometimes cooperatives, rather than pay dividends, use the money for plant expansion.

Mr. Davis. It would be before that. Your present law requires that money used for capital expansion be taxed in the hands of the farmer, even though it is not paid out.

Senator Young. It is taxed after the farmer gets it?

Mr. Davis. No, it is taxable to the farmer. It is his money. It amounts to a constructive payment and reinvestment.

Senator YOUNG. There is a way of getting around that, though, is there not?

Mr. Davis. How?
Senator AIKEN. No.
Mr. Davis. I do not know of any.

Senator Lucas. They want to tax the patronage dividends that go back to the farmer from these cooperatives.

Mr. Davis. That is right. They want to tax all the savings of cooperatives. That is the issue they raise.

Senator THYE. They want to tax, notwithstanding the fact that a certificate of indebtedness will be issued the patron who earns the dividend. Then if the cooperative should retain any part of that for plant expansion or for entering into new fields, it is still loaned back, you might say, to the association by the patron who accepted the certificate of indebtedness for his share of the patronage refund.

Mr. Davis. That is right. In most cases the contract between the patron and the grower is of such a nature that the retention of capital amounts to the

Senator THYE. Did you misspeak yourself when you said “patron and grower? They are the same.

Mr. DAVIS. I will state it again.

The contract is such that the money retained is, in effect, money that is received from the grower. It was paid out. The court would say it was a constructive payment and reinvestment.

Well, of course, no invested capital is taxable to a corporation.

Senator THYE. The use of the earnings of the members of the cooperative in this way is nothing more or less than partners agreeing to what they are going to do. It is not a corporate transaction because they are not in that sense a corporation.

Mr. Davis. That is right.

Senator THYE. It is just their agreeing, “We will leave this much in, and we will have a certificate of indebtedness that shows the proportionate share of refund each member left in there."

Mr. Davis. That is right. It would be taxable on that year to the farmer

Senator THYE. As the producer.
Mr. DAVIS. As the producer. So it does not escape taxation.

Senator BUSHFIELD. Is it true these dividends you mentioned are not paid to the farmers at all, but are held by the Association ?

Mr. Davis. Well, most of them are paid to the farmer, but a new cooperative, one that is expending, sometimes retains maybe all of it. However, it is the farmers that make the decision to retain it. They want the services of the cooperative for the same reason that they

want a new tractor or a new piece of machinery. They are willing to invest their money into it.

Senator AIKEN. It cannot be legally retained unless the agreement between the cooperative and its members provides for it. It has to be a contract proposition, and if it is retained, the member has to pay.

his tax on it. Senator BUSHFIELD. I heard someone say that these dividends were held by the Association and never were delivered to the farmers themselves.

Mr. Davis. I have heard that, too; but it is not true. If it is true, the farmers elect to do it that way, knowing it is their money.

Sanator Lucas. If these patronage dividends were taxed before they left the cooperative and got into the hands of the farmers, it would be a pretty serious blow to the cooperatives, would it not?

Mr. Davis. It would, and you would be setting up this new precedent, I think: You would be taxing as income that which was not income.

Senator Lucas. After the patronage dividend reaches the hands of the farmer, his income tax includes that income that he receives from the cooperative.

Mr. Davis. That is correct. Senator Lucas. I want to say that the cooperatives in my section of the country are very valuable institutions, in so far as the farmers and the public as a whole are concerned.

I do not quite understand why this attack is being made on them.

Senator AIKEN. You have the same thing in the case of the Federal Reserve Bank and its members. The earnings of the Federal Reserve Bank are not taxed before being distributed to their members, whatever is coming back to them; but the members themselves pay the taxes after they get it.

Senator Hory. Do the cooperatives, as a general proposition, follow the policy of handling the products of their members, confining their operations largely to either the things that are produced by their members, or to the things they furnish to them; or do they do business with the whole works?

Mr. Davis. All of them, I would say, almost universally do the big bulk of their business with members.

In the case of a purchasing cooperative, they are not entitled to exemptions under 101.12 if they do more than 15 percent with nonproducers. If they do not do 100 percent of their business with farmers, in the case of a marketing cooperative, they are not eligible for exemption.

Senator HOEY. I was interested in that phase of it. Mr. Davis. They cannot qualify under 101.12 if they are not bonafide nonprofit organizations.

While the business methods and physical operations of farmer cooperatives are very similar to those of competitors in the same field, there is one important difference. The third party who handles the farmers' products does so for the purpose of maximizing his income as a merchandizer. On the other hand, the farmers operate their cooperatives for the purpose of maximizing their incomes as farmers. The third party is primarily interested in fixed margins times large volumes, whereas the farmers are interested in minimum margins for handling farm supplies and products and maximum net returns to themselves as producers.

Senator Young. Is that always true? There are some cooperatives where the parent organization gets 5 percent of the profits for an educational fund which they can use in almost any way they want. They are not always interested in the lowest margins. I think that is where they sometimes get into a little trouble.

Mr. Davis. I think you have some State laws which complicate that picture. You have a few State laws where there is a required educational fund. I do not know whether your State is one of those or not.

Senator Young. It is at least optional.

Senator AIKEN. Maine has a law which provides for a deduction of so much a bushel of potatoes in publicizing Maine potatoes. I think that is true.

Senator Young. If it were always used that way, they would save themselves a lot of trouble; but sometimes the money can be used for politics or anything else.

Mr. Davis. I do not know that I am familiar with the case you have in mind. I think that is the exception rather than the rule.

Senator Young. I am sure it is.

Senator Lucas. Of course, these exceptions are what always get you into trouble.

Mr. Davis. That is true.

Senator AIKEN. Generally speaking, any deduction authorized by State Law, is intended to publicize the product. That pays the cost.

Mr. Davis. I think the farmers need to take a page from the history of the industrial merchandizing. In other words, they need to assume more responsibility for building demand for their own productcommodity by commodity. In the case of a few products, farmers have already demonstrated the feasibility of such a program, particularly in the case of citrus, nuts, cranberries and certain dairy products. What these producers have done is inspiring.

We believe that through their cooperatives, farmers can thus minimize the need for quotas, controls and the like.

Again I want to commend this committee for the constructive contribution it has made to long-range agriculture by preparing the bill under discussion.

The CHAIRMAN. Does that conclude your statement?
Mr. DAVIS. Yes.

The CHAIRMAN. We thank you. You have made a very interesting statement, and we are pleased to have it.

Mr. DAVIS. Thank you.

The CHAIRMAN. The committee will adjourn until tomorrow. We will have a statement tomorrow from the National Farmers Union.

(Thereupon, at 11:45 a. m. an adjournment was taken until Thursday, April 15, 1948, at 10 a. m.)

SUPPLEMENTARY STATEMENT. FILED BY JOHN H. DAVIS, EXECUTIVE SECRETARY,

NATIONAL COUNCIL OF FARMER COOPERATIVES, WASHINGTON, D. C.

APRIL 23, 1948. Hon. ARTHUR CAPPER, Chairman, Senate Committee on Agriculture,

United States Senate, Washington, D. C. MY DEAR SENATOR CAPPER: Since S. 2318, the bill to provide a coordinated agricultural program, was introduced in the Senate, our members who are engaged in marketing fruit and edible tree nuts, have been actively studying the price

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support features of the bill as it relates to the commodities which they market for their producer members.

They have now come to the conclusion that, in view of high investments and cost of operations, producers of these products cannot protect and stabilize their industries without a price-support floor as insurance such as other agricultural industries have against financial liquidation in case of price collapse.

Accordingly, on their behalf, I wish to amend the testimony I gave at the Senate Committee on Agriculture and Forestry hearing on April 14 on S. 2318, in behalf of the National Council of Farmer Cooperatives, to urge that price supports for citrus fruïts, fresh and dried deciduous fruits, and edible tree nuts be made mandatory within a range of 60 to 75 percent of parity, according to normal supply schedule,

Representatives of the commodities involved expect to be in Washington the week of April 26 to confer with members of the Senate Committee on Agriculture about specific details of a support program.

I request your approval of making this letter a part of the record of hearings on S. 2318. Sincerely yours,

John H. DAVIS, Executive Secretary.

AGRICULTURAL ACT OF 1948

THURSDAY, APRIL 15, 1948

UNITED STATES SENATE,
COMMITTEE ON AGRICULTURE AND FORESTRY,

Washington, D. C. The committee met, pursuant to adjournment, at 10 a. m., in room 324, Senate Office Building, Senator Arthur Capper (chairman) presiding

Present: Senators Capper, Aiken, Bushfield, Young, Thye, Thomas, and Ellender.

The CHAIRMAN. The committee will come to order.

We will resume the hearing on S. 2318, and our first witness this morning is one of the leaders of the farm organization groups. We call him Jim Patton out in Kansas where we know him pretty well. He has a pretty good organization out there.

STATEMENT OF JAMES G. PATTON, PRESIDENT, NATIONAL

FARMERS UNION, DENVER, COLO., AND RUSSELL SMITH, LEGISLATIVE SECRETARY, NATIONAL FARMERS UNION, WASHINGTON, D. C.

Mr. Patton, how long have you been president of the National Farmers Union?

Mr. PATTON. I was elected in 1940, Mr. Chairman. I have been in the organization work directly since 1932.

The CHAIRMAN. You make your home in Denver?
Mr. PATTON. That is right; yes, sir.

The CHAIRMAN. We shall be glad to have you make any statement you desire to make.

Mr. PATTON. Thank you, Senator. .

Mr. Chairman and members of the commitee, for the record my name is James G. Patton. I am president of the National Farmers Union. I reside in Denver, Colo.

For the National Farmers Union I am glad to endorse in general the bill before the committee and to express the gratification of our organization that Senator Aiken, co-sponsor of the bill, and this committee have tackled so energetically and courageously the problem of providing a new approach in the relationship between farmers and Government.

There is a substantial agreement among everyone interested in agriculture that the preparation of a long-range program ought to be undertaken now and completed within a reasonably short period. Most of the doubts that have been expressed on this score have been simply doubts as to the feasibility of obtaining approval by Congress

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