The CHAIRMAN. Gentlemen, it is 15 minutes of 4 and we have heard three witnesses. I would hope we can move more rapidly to hear the full list of witnesses. I would suggest unless there is objection that we limit each Senator to 3 minutes to examine witnesses. If he wants to interrogate them further he can have the witnesses come into the conference room here and he can interrogate them as long as he wants to there.

We have a former member of our committee who has been waiting for a chance to be heard. I believe he will find it very inconvenient stay over and I would like to hear him now if I may. I would like to call Senator Frank Carlson out of order to present what he has on his mind. We are proud to have you here with us, Senator. Many of us regret that you insisted on retiring last year.

STATEMENT OF HON. FRANK CARLSON ON BEHALF OF THE NATIONAL FEDERATION OF GRAIN COOPERATIVES; ACCOMPANIED BY BRUCE J. HENDRICKSON, VICE PRESIDENT, AND IRVING CLARK, GENERAL COUNSEL

Mr. CARLSON. Mr. Chairman, I would like very much if you have no objection to have Bruce Hendrickson who is executive vice president of the National Federation of Grain Cooperatives and Mr. Irving Clark who is their general counsel to sit with me.

Mr. Chairman, I appreciate very much the opportunity of appearing before this committee. As I sat here listening to this testimony I admire the committee. It was my privilege of serving for 14 years and it is a service I am going to cherish all the rest of my life.

I will appear here this afternoon I trust very briefly because I appreciate the problem you folks are meeting with. I come here this afternoon to express the views of the members of the National Federation of Grain Cooperatives on the proposals that are contained in section 531 of H.R. 13270.

This is a complex subject, and I thought it had been resolved. As the chairman well remembers, we spent much time on this hearing and discussion in the 1962 act. I thought we had written then and I still believe a very fair provision.

Appearing with me as I stated are Mr. Hendrickson and Mr. Clark. I have asked these men to sit with me because there may be some technical questions I am not familiar with.

I am afraid that as our farm marketing cooperatives have become more and more of an effective force in the selling and the processing for sale of grains and oil seeds for the mutual benefit of its members, opponents of this perfectly proper method of doing business have sought by a variety of extremely technical means to drive a "tax wedge" between member-patrons and the institutions they have tirelessly built and financed to further their own economic well-being. It has also been at considerable cost to these farmer-patrons, notwithstanding allegations to the contrary by those who have ceaselessly showered the Congress year after year with "co-op tax reform" schemes designed to deprive member-owners of these institutions of the full economic benefits which both the Congress and executive branches of our federal system have in their wisdom seen fit to encourage over many decades in the interests of sound public policy.

As I recall the many instances in the past when I was personally involved in judgments made with respect to cooperative taxation both in this distinguished committee and on the floor as a Senator from the great State of Kansas, the principle of the payment of a single tax upon the savings earnings of a farm cooperative at the investor level was never lost sight of despite the repeated attempts by opponents of these organizations to have them taxed otherwise under the guise of "reform." This has even included successive attempts to impose the "two-tier" system of levying taxes on the "profits" of these farmerowned and controlled associations.

Despite the repeated efforts of farmers and their cooperative leaders over the years to combat this divisive tactic we have seen successive encroachment by the Government into the conduct of the business affairs of both patrons and their cooperatives as regards tax matters. This involvement appears to be getting deeper too, judging from the proposals contained in section 531 of H.R. 13270.

Both the proposed phased-in cash payout requirements to 50 percent by 1970 and the statutory directive to treat future contributions of capital-investments-by patrons in their cooperatives as debts of the organization are perfect illustrations of this excessive tendency by some to submerge or sink well established public policies via the taxation route.

It might be pointed out too, that neither proposal serves the interests of the Government from the revenue standpoint since no additional taxes will be collected, according to estimates supplied by the Treasury Department.

Since this is to be the case, and I have no reason to disbelieve their estimates, I am at a loss to understand where any corresponding or redistribution of existing or future tax burdens-the object of tax reform-will come about as a result of the enactment of these proposals. On the other hand, irreparable harm will be done to both farmers and their cooperatives if section 531 is enacted into law. I can't believe that members of this committe want to see this happen.

This is especially true in the present context of the tremendous demands being put on our limited resources budgetwise, including the U.S. Department of Agriculture. Farmers recognize this hard fact of life even in cases involving our major programs for grains like wheat. Because of this, they are attempting through various means to devise their own programs. A major effort in this direction to eventually relieve the Government of its dominant role in this area is being spearheaded by cooperatives. Most certainly, any program ultimately developed will take time. But experience convinces me that the very institutions which would be destroyed by the enactment of these harsh proposals our grain marketing cooperatives-represent the most promising vehicle for eventually effecting the transfer of grain programs to the private sector sometime in the distant future. Now, as to the subject at hand, I well recall the days of service on this committee prior to the enactment into law of the Revenue Act of 1962 when we exhaustively studied this subject.

At that time I remember we were very careful to erect a set of "qualifications" to insure that all noncash patronage allocations would be taxed at their stated dollar value in the hands of the patron or his cooperative would be taxed. In order to be sure that the patron had

enough cash to pay the tax on these amounts we required that the cooperative include at least 20 percent of the savings in cash.

That seemed like a reasonable proposition then. It still does, I believe then and still do however, that the financial needs of these businesses is a matter which should be left more properly for them to determine by their own actions and not be impressed on them by some tax authority. This includes such jointly agreed-to decisions as those taken with respect to who is going to pay the tax on patronage distributions too, so long as the proper tax is paid by somebody.

The point which is often overlooked is the fact that these associations are voluntary as to membership. No one is under any compulsion to patronize them either, an item that those unfriendly to this form of business organization never bother to mention for self-serving

reasons.

Now, it seems to me that as this committee considers section 531 of H.R. 13270 it ought to weigh very carefully the fatal consequences which it would have on the future ability of local grain marketing cooperatives like my own back in Kansas-the Cloud County Cooperative Elevator Association at Concordia-to provide the badly needed and growing services which its farmer-owners demand and get right there in town.

Of equal, if not of more importance, is FAR-MAR-CO., Inc., headquartered in Hutchinson, Kans. This latter organization, a regional grain marketing cooperative, makes it possible for members of my local to play a significant role in the key terminal and export grain markets where forces of supply and demand operate to establish prices. Markets created day in and day out by this major regional along with markets created by the other 19 regionals comprising the membership of this federation constitute an indispensable service for the 1 million grain producers and 2,680 local cooperatives owning them.

Earnings derived from the activities of these regionals represent a major source of revenue for the locals. At the same time, the locals' major investments (and consequently, their member owners) are generally those made in their regional. These are substantial, too, relative to others in most cases.

With limited exceptions, the capital which has been provided by farmers to build and enlarge their sphere or marketing influence has come from reinvested earnings on which farmers have willingly paid taxes on in order to supply to themselves as a group many of the services they could not economically afford to individually do. This would include such things as building and maintaining grain elevators, plants for processing their grains into more valuable products, owning rail and barge equipment, and even acquiring their own lending institution-the banks for cooperatives through the systematic repayment of government capital from their own funds.

All of these have cost great sums of money, but they are providing their member owners with an important array of services which is the way they want it.

Thus, as you study and deliberate the pros and cons of section 531 of H.R. 13270 in the weeks and months ahead, I would urge you to ponder very carefully whether, by enacting this proposal you will be helping farmers or hurting them.

After it is all over, my inclination is that you will be disposed to agree with me that the wisest course is to have section 531 stricken from the bill.

The CHAIRMAN. Senator Carlson, I have a letter from the Department of Agriculture, not from the Secretary, signed by his Under Secretary but I am sure it represents the position of the Department as a whole. It couldn't be any stronger on your side than it is. It says that

This will not add a dime to revenue but it will seriously burden cooperatives. It will damage the cooperative's ability to meet members' demands for increased services with member-owned, internally-generated capital. It will hurt and seriously limit co-ops' ability to borrow money.

I will abbreviate the rest of it. It is discriminatory against farmers. I don't know of any letter that could be stronger in support of your position than that of the Under Secretary speaking for the Department of Agriculture. I would like to put that in the record, and also a statement that I have received from the executive vice president of the American Rice Growers Association who also states that the soybean farmers are in support of that. As far as I can see it is a case that cannot be refuted.

(The documents referred to follow :)

DEPARTMENT OF AGRICULTURE,

OFFICE OF THE SECRETARY, Washington, September 9, 1969.

Hon. RUSSELL B. LONG,

Chairman, Committee on Finance,
U.S. Senate, Washington, D.C.

DEAR SENATOR LONG: This Administration is deeply committed to helping farmers increase their net incomes and to bring equity to American agriculture. Section 531 of the proposed Tax Reform Act of 1969 provides for a gradual increase from the present 20 percent to 50 percent (3 percent per year for 10 years) in the amount of cash a cooperative must pay currently to “qualify" its refunds as non-taxable income. The proposed Act also would require that that part of the refund not paid currently in cash must be paid out within 15 years. This proposal would throttle one of the essential tools for maintaining farm income. If adopted, it will have these results:

1. It won't add a dime to tax revenue, but it will seriously burden cooperatives.

2. It will damage co-ops' ability to meet members' demands for increased services with member-owned, internally-generated capital.

3. It will seriously limit co-ops' ability to borrow. With a 15-year due date on deferred refunds, these become long-term liabilities and would take precedence over any later-issued promissory notes. This added debt would impair co-ops' ability to borrow for constructive purposes.

4. It is discriminatory. Congress doesn't tell other corporations to pay their dividends in cash. They may pay all or part of them in stock, and many do. Nor does Congress tell other corporations how to manage their financial affairs by indicating the nature, time, and form of distributing their annual net margins. If Congress required corporations generally to revolve their equity capital every 15 years, as this Act would require co-ops to do, it would disrupt the economy and destroy capitalism as we know it.

5. It will force co-ops into a tight mold. Some co-ops pay only the required 20% in cash. Others pay 60%, 75%, or 100%, depending on each co-op's plans and its members' preferences for financing facilities and services.

I respectfully urge that the Committee, when it considers H.R. 13270, eliminate this provision from the tax reform package.

Sincerely,

J. PHIL CAMPBELL, Under Secretary.

STATEMENT OF GEORGE B. BLAIR, EXECUTIVE VICE-PRESIDENT OF AMERICAN RICE GROWERS COOPERATIVE ASSOCIATION

My name is George B. Blair. I am the Executive Vice-President of American Rice Growers Cooperative Association, 211 Pioneer Building, Lake Charles, Louisiana. This association, with its predecessors, has been engaged in rough rice marketing for the producers of Louisiana and Texas for over 60 years. I am also the Executive Vice-President of American Rice Growers Exchange which has been supplying fertilizers and agricultural chemicals to rice producers since 1944 and the Executive Vice-President of American Grain Association which has been marketing soybeans for soybean producers in Texas and Louisiana for the past five years. The first two named cooperative associations serve about 2,400 rice producers in Texas and Louisiana and American Grain Association, which is also a cooperative, serves about 600 soybean producers in the two states. Most of the soybean producers are also rice producers.

Our members have seen fit to cause the formation of three different organizations, rather than to try to perform all of the services through one farmers Cooperative association simply because they believe that each organization should be of enough merit to "stand on its own feet" operationally and financially. We are vigorously opposed to Section 521 of H.R. 13270 which proposes to "reform" the tax treatment of cooperatives and their patrons with respect to patronage dividends earned and per unit retains made.

As we understand the present provisions of the bill, a farmer cooperative association would be required to increase its amount of cash paid out by 3% each year beginning in 1970 until the amount of cash paid out is increased from the present 20% each year to 50% each year. This provision would apply both to earnings retained for capital purposes and to per unit retains which went into capitalization of the organization. In addition, as we understand it, those items which were currently retained would have to be retired in not more than 15

years.

Such requirements, if enacted into law, would seriously jeopardize all farmer cooperatives in the United States and, in its final analysis, would result in such associations having to be substantially debt financed instead of equity financed. Since the legislation would not increase revenues nor speed up the payment of revenues to the United States Government, we cannot but consider that it is punitive legislation.

We have heard the argument made that farmers must be protected from the management of their cooperatives. Certainly in our area, and I am sure in most of the rest of the United States, there are enough business organizations with which a farmer can do business that he is under no compulsion whatsoever to do business with his cooperative association if it is not doing a better job for him than he can get done elsewhere or if he is dissatisfied in anyway with its activities.

As we would interpret the effect of the proposed law on our own cooperatives, the effect would be disadvantageous to our members. For many years we have followed a policy in all of our organizations of keeping our operating expenses and amounts retained for capital purposes to an absolute minimum. Those amounts which have been invested for capital purposes in our cooperative associations are permanent capital items and we do not follow a revolving plan of retiring capital. These retainages range from 5% of net earnings in the case of American Rice Growers Exchange to a 2% of gross sales retain in the case of American Grain Association. In the latter organization, this amounts to a little less than 54 per bushel of soybeans.

In the case of American Rice Growers Cooperative Association, our net earnings for 1968 were $6,666.38 on almost 17 million hundredweights of rice with a value 136 million dollars. For the preceding year of 1967 our earnings amounted to $3.371.05. The total of these earnings, less that required to be paid out, was retained as permanent operating capital.